-----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, TkvPE3raxxtXdQEslYF481NWn3UtYqg3ikqMCJa38rG1AiKw+7L43IwBGeQIejpD OAG5j8o/n5ZfDktf0ScNWA== 0001005150-97-000164.txt : 19970319 0001005150-97-000164.hdr.sgml : 19970319 ACCESSION NUMBER: 0001005150-97-000164 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970318 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEL SAVE HOLDINGS INC CENTRAL INDEX KEY: 0000948545 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 232827736 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-26728 FILM NUMBER: 97558357 BUSINESS ADDRESS: STREET 1: 6805 ROUTE 202 CITY: NEW HOPE STATE: PA ZIP: 18938 BUSINESS PHONE: 2158621500 MAIL ADDRESS: STREET 1: 6805 RIYTE 202 CITY: NEW HOPE STATE: PA ZIP: 18938 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO. 0 - 26728 Tel-Save Holdings, Inc. (Exact name of registrant as specified in its charter) Delaware 23-2827736 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 6805 Route 202 New Hope, Pennsylvania 18938 (215) 862-1500 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ------------------- ----------------------------------------- None Not applicable Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Indicate by check mark whether the Registrant (1) has filed all documents and reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant as of March 13, 1997 was approximately $681,467,000 based on the average of the high and low prices of the Common Stock on March 13, 1997 of $17.19 per share as reported on the Nasdaq National Market. As of March 13, 1997, the Registrant had outstanding 62,887,998 shares of its Common Stock, par value $.01 per share. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Tel-Save Holdings, Inc. definitive proxy statement for the 1997 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. TEL-SAVE HOLDINGS, INC. INDEX TO FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 ITEM PAGE NO. NO. --- --- Part I 1 Business.............................................. 1 2 Properties............................................ 27 3 Legal Proceedings..................................... 27 4 Submission of Matters to a Vote of Security Holders... 27 Part II 5 Market for the Registrant's Common Equity and Related Stockholder Matters........................... 29 6 Selected Financial Data............................... 30 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................... 31 8 Financial Statements and Supplementary Data........... 39 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................. 57 Part III 10 Directors and Executive Officers of the Registrant.... 57 11 Executive Compensation................................ 57 12 Security Ownership of Certain Beneficial Owners and Management........................................ 57 13 Certain Relationships and Related Transactions........ 57 Part IV 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................... 58 PART I ITEM 1. BUSINESS For the definition of certain terms used in this Form 10-K, see "Glossary." OVERVIEW Tel-Save Holdings, Inc. ("Company") provides long distance services primarily to small and medium-sized businesses located throughout the United States. The Company's long distance service offerings include outbound service; inbound toll-free 800 service; and dedicated private line services for data. Prior to the fourth quarter of 1996, the Company operated solely as a switchless, nonfacilities-based reseller of AT&T long distance services. By purchasing large usage volumes from AT&T pursuant to contract tariffs, the Company has been able to procure substantial discounts and offer low cost, high quality long distance services to its customers at rates generally more favorable than those offered directly by AT&T. In order to reduce its dependence on AT&T contract tariffs and increase its growth opportunities, the Company in 1996 deployed its own nationwide telecommunications network, One Better Net ("OBN"). OBN features five Company-owned, AT&T (now Lucent Technologies, Inc. hereinafter "Lucent") manufactured 5ESS-2000 switches connected with AT&T digital transmission facilities. OBN's reduced cost structure allows the Company to offer rates competitive with those of non-AT&T resellers while continuing to provide the quality of AT&T (now Lucent) manufactured switches and AT&T-provided transmission facilities and billing services. OBN allows the Company to pursue the non-AT&T based switchless resale market, which represents the majority of the switchless resale long distance market. The Company's strategy for expanding its business is to market services directly to business and residential end users, to continue to support existing partitions and to attract additional partitions (including those now in the non-AT&T resale market). The Company intends to attract new partitions and support existing partitions by, among other things, continuing its current practice of offering advances to new partitions to enable such partitions to pay outstanding balances due to their existing long distance providers in order for such partitions to transfer their end users to the Company's service, and to existing partitions to support their marketing efforts. The Company also intends to approach residential customers through its telemarketing operations as well as new marketing and advertising media, such as the Company's recently announced arrangement with America Online, Inc. ("AOL") pursuant to 1 which the Company will be the exclusive provider of long distance telecommunications services to AOL subscribers. Tel-Save, Inc., the Company's predecessor ("Predecessor Corporation") and now its operating subsidiary, was incorporated in Pennsylvania in May 1989. The Company was incorporated in Delaware in June 1995. The address of the Company's principal executive offices is 6805 Route 202, New Hope, Pennsylvania 18938, and its telephone number is (215) 862-1500. Unless the context otherwise requires, "Company" includes the Predecessor Corporation and the Company's other subsidiaries. DEVELOPMENT OF THE COMPANY The Company, originally incorporated in 1989 as Tel-Save, Inc., was formed to capitalize on the FCC mandate allowing the resale of AT&T services. The Company initially marketed AT&T's multi-location calling plan ("MLCP"), which provided incremental discounts earned by inclusion of the usage volume of diverse end user locations under a single service plan. The Company was successful in marketing MLCP, but realized that there were significant barriers to growth associated with the product, primarily the lack of reporting from AT&T, product inflexibility and the lack of control over end user accounts. In late 1989, the Company successfully obtained an additional AT&T service plan developed by AT&T and marketed as Software Defined Network Service ("SDN"), an AT&T product designed for larger business customers. SDN provided the Company with higher margins, network controls, advanced features and the ability to rebill its end users through AT&T and AT&T's College and University Systems ("ACUS"), thus enabling the Company to have more control over the end user account. As a result of SDN, the Company began to offer services on a wholesale basis through partitions. The Company thereby outsourced its marketing and end user service expenses to partitions, allowing it to focus on managing the AT&T relationship and to further develop its billing and information systems. In December 1992, the Company obtained the first contract tariff created by AT&T specifically for the Company. The contract tariff provided the Company with significant additional price advantages at stabilized rates and the ability to absorb the traffic of competitors' plans into the contract tariff. The Company subsequently obtained other contract tariffs, which also provide AT&T inbound 800 services and AT&T private line services, in order to diversify its service offerings. This in turn has further enabled the Company to increase the number of its partitions and end users. To date, the Company has primarily operated as a "switchless" and nonfacilities-based provider of long distance services by reselling AT&T services. The Company offers its partitions and end 2 users nationwide access to AT&T long distance network services through contract tariffs, including outbound long distance, 800 service and private line service. Outbound long distance service accommodates voice, data and video transmissions. The Company's 800 service is currently provided by reselling AT&T's 800 Service (Readyline, Megacom 800, etc.), which is AT&T's inbound, toll-free (recipient of the call pays the charges) long distance service. The Company's private line service is currently provided by reselling AT&T Private Line Service, which includes dedicated transmission lines connecting pairs of sites. The Company successfully established its position as a switchless reseller of AT&T long distance services as a result of its ability to negotiate with and obtain favorable contract tariffs from AT&T, manage and distribute data, bill accurately and provide partition support. Contract tariff subscriptions do not impose restrictions on the rates the Company may charge its partitions and end users. By purchasing large usage volumes from AT&T pursuant to such contract tariffs, the Company is able to procure substantial volume discounts and offer long distance services to its partitions and end users at rates generally more favorable than those offered directly by AT&T. With its information systems, the Company is able to manage and distribute to partitions information such as data about end user usage and payment history. Prior to 1995, substantially all of the Company's services consisted of reselling AT&T outbound or SDN long distance services. In 1994, the Company began to offer 800 services, which accounted for 30.9% of 1995 sales, and private line service, which accounted for 10.2% of 1995 sales. The Company's 800 services and private line service accounted for 32.4% and 7.9%, respectively, of 1996 sales. In order to reduce its dependence on the AT&T contract tariffs and increase its growth opportunities, the Company began to develop its own network, OBN, in late 1995. In 1996, the Company deployed five 5ESS-2000 switches in Chicago, Dallas, Jacksonville, New York and San Francisco and installed new 5E11 software. The Company began testing new customer calls over its network in the third quarter of 1996. In the fourth quarter of 1996, the Company began provisioning on a test basis new customer orders on OBN. To date, the Company has provisioned approximately 50,000 end users to OBN. OBN enables the Company to offer its end users and partitions more competitive rates than in the past and to improve customer provisioning, as well as to improve reporting to existing and new partitions. Currently the Company is continuing to provision new customers on OBN while completing the final testing of OBN. The Company expects final testing of OBN to be completed in April 1997, and at that time there will be a general release of OBN. Thereafter, the Company expects to provision a large majority of its new customer orders on OBN. 3 STRATEGY The Company has historically expanded its business primarily through the addition of partitions and by providing new and existing partitions with operational, financing, marketing and management support. The Company's strategy for future business growth is to market its services directly to business end users, broaden the Company's target market to include residential customers, continue to support existing partitions, attract additional partitions and introduce new services. Increase Direct Marketing Efforts. By marketing its services directly to end users, the Company expects to increase its profit margins by taking advantage of the difference between the reduced costs of offering services on OBN and the rates charged directly to end users. Broaden Target Market to Include Residential Customers. The Company intends to expand its service offerings to attract the residential segment of the long distance market. New services may include new features relating to customers reporting and billing as well as improved rates. The Company will use direct marketing and new marketing and advertising media, such as online services, to attract the end users in this customer segment. Recently, the Company announced its arrangement with AOL pursuant to which the Company will be the exclusive provider of long distance telecommunications services to AOL's subscribers. See "SALES AND MARKETING -- Residential." Provide Operational, Financing, Marketing and Management Support to Partitions. The Company will continue to sell its services through partitions. To do so, the Company will continue to provide existing and new partitions with low rates and operational, marketing and management support. The operational, marketing and management support includes financing, training in customer service and use of the data base, collection services, lists of prospective end users and a business management system designed and developed by the Company exclusively for its use and its partitions' use. The Company's basic strategy for business growth is based on the deployment of OBN. OBN is expected to lower the Company's costs, to maintain its access to AT&T services and AT&T (now Lucent) equipment, to improve provisioning of new accounts, and to provide a network that can be expanded to add new products and services. Provide Low Cost, High Quality Alternative to Other Carriers. The Company's deployment of OBN will reduce its costs and allow it to offer pricing to its partitions and end users competitive with or below that typically offered by major long distance carriers and their resellers. OBN's cost structure is expected 4 to allow the Company to expand its target market beyond the current AT&T resale market to include the balance of the switchless long distance market (i.e., the non-AT&T long distance resale market), which currently represents the majority of the long distance resale market. The Company also intends to market to AT&T's end users, as well as other end users including residential and larger commercial accounts. Emphasize Quality and Functionality of AT&T (now Lucent) Manufactured Switches, and AT&T-Provided Transmission Facilities and Billing. The Company offers products and services on OBN similar to those that it offers as a switchless reseller of AT&T services. OBN has been built using AT&T (now Lucent) manufactured switches in conjunction with leased AT&T transmission facilities. The 5ESS-2000 switch is generally considered the most reliable switch in the telecommunications industry. In addition to offering services using AT&T as the underlying facilities-based carrier, the Company will continue to use the billing services of AT&T and ACUS. Improve Provisioning of End User Accounts. OBN allows the Company to establish service directly for or activate end user accounts. The Company will provide new end user account data directly to the local exchange carrier ("LEC"), which will then change the end user account to the service provided by the Company or its partition. This is expected to increase the timeliness and the acceptance rate of the establishment of service, or provisioning, and will allow lists of end users to be maintained confidentially. Expandable Network With Capability to Support New Products and Services. The AT&T (now Lucent) 5ESS-2000 switches can be expanded to increase capacity significantly and can at the same time accommodate local, long distance, private line and wireless services. OBN thus enables the Company to provide new products and services beyond those currently possible as a switchless reseller. The Company also intends to continue to explore strategic alliances with other channels of distribution, partitions and nonfacilities-based and other providers of long distance services. SALES AND MARKETING Partitions ---------- To date, the Company has primarily marketed its services to small and medium-sized business end users (i.e., generally businesses with fewer than 200 employees) throughout the United States through independent long distance and marketing companies known as "partitions." Partitions resell and market the Company's products, 5 allowing the Company to minimize its marketing and end user overhead. Partitions offer end users a variety of services and rates. As compensation for their services, partitions generally receive the difference between the amount received by the Company from end users and the amount charged by the Company to the partition for providing such services. One partition, The Furst Group, Inc., accounted for approximately 11% of the Company's sales in 1996; however, the Company does not expect that any partition will account for 10% or more of the Company's sales in 1997. A substantial number of the Company's partitions have executed partition agreements with the Company pursuant to which the Company agrees to provide services utilizing the AT&T network service and end user billing services at agreed upon prices or discounts. The Company requires that the partitions adhere to certain Company established guidelines in marketing the Company's services and comply with federal and state regulations. These requirements include certain representations by each organization that it is acting as an independent contractor with regard to the sale of the Company's services, and not as a joint venture partner, agent or employee of the Company, along with provisions for the proper completion of forms and other sales procedures. In addition, most of the payments made by end users are paid directly into a lock-box controlled by the Company. The Company's partition agreements typically run for three years or for the term of the applicable tariffs, whichever is less. The partitions generally make no minimum use or revenue commitments to the Company under these agreements with respect to the resale of AT&T services. The agreements also are generally non-exclusive. If the Company were to lose access to services on the AT&T network or AT&T billing services or experience difficulties with OBN, the Company's agreements with partitions could be adversely affected. The Company believes that the discounts it will be able to offer partitions and end users using OBN, together with the functionality and quality of OBN operating in conjunction with AT&T-provided transmission facilities and the accuracy of billing services obtained from AT&T and ACUS, will enable it to attract current and future partitions to OBN. The Company will continue its policy of advancing funds to most partitions to support their marketing efforts. Historically, partitions of the Company have continued to do business under their partition agreements following changes in the Company's service offerings. The Company intends to continue to promote increased marketing activities of certain of its partitions through advances collateralized by assets of such partitions. In return for providing such marketing advances, the Company seeks long-term arrangements with such partitions. In 1996, the Company entered into long term arrangements with several existing and new partitions. Current marketing practices, including the methods and means to convert a customer's long distance telephone service from one carrier to another, have recently been subject to increased regulatory review at both the federal and state levels. This increased regulatory 6 review could affect possible future acquisition of new business from new partitions or other resellers. Provisions in the Company's partition agreements mandate compliance by the partitions with applicable state and federal regulations. Because the Company's partitions are independent carriers and marketing companies, the Company is unable to control such partitions' activities. The Company is also unable to predict the extent of its partitions' compliance with applicable regulations or the effect of such increased regulatory review. Direct Marketing ---------------- The Company began to actively market its telecommunication services directly to end users in 1996. Through its direct marketing efforts, the Company expects to increase its profit margins by taking advantage of the difference between the reduced costs of providing services over OBN and the rates charged to end users. The Company began its direct marketing in the first quarter of 1996 with a telemarketing operation based in Clearwater, Florida. In December 1996, in connection with the settlement of certain disagreements among the Company, American Business Alliance, Inc. ("ABA"), a switchless reseller of long distance telecommunications services and a partition of the Company, and ABA's shareholders, the Company acquired substantially all of ABA's assets and hired substantially all of ABA's employees. These actions significantly increased the Company's capabilities for direct marketing of telecommunication services. The Company expects that in 1997 a large majority of the Company's new orders will be generated from direct marketing. The Company currently has 260 employees involved in its direct marketing operations. Direct marketing efforts have focused initially on inbound and outbound services to small and medium-sized businesses and may expand to include residential customers. Operation of its own direct marketing will require the Company to incur additional costs above levels historically experienced by the Company. There can be no assurance that any cost savings will be realized utilizing direct marketing. Direct marketing by the Company also may adversely affect the Company's relationships with its partitions as both the Company and the partitions will be competing to provide similar services. The Company is required to comply with additional regulatory standards for direct marketing of telecommunications services, and is subject to increased risk of customer complaints or federal or state enforcement actions with respect to its marketing and order verification practices. Actions have been brought against many carriers based on allegations of "slamming" or the unauthorized conversion of a customer's chosen long distance carrier. 7 Residential ----------- On February 25, 1997, the Company announced that it had entered into a Telecommunications Marketing Agreement (the "AOL Agreement"), dated as of February 22, 1997 and effective as of February 25, 1997, with AOL, under which the Company will be the exclusive provider of long-distance telecommunications services under a distinctive brand name to be used exclusively for the Company's services. The services will include provision for online sign-up, call detail and reports and credit card payment. Under the AOL Agreement, AOL will provide millions of dollars of online advertising and promotion of the services and provide all of its subscribers with access to a dedicated service area online for the Company. AOL subscribers who sign-up for the telecommunications services will be customers of the Company, as the carrier providing such services. The Company also has certain rights under the AOL Agreement to offer, on a comparably exclusive basis, local and wireless telecommunications services when such services become available to the Company through a contract for resale or otherwise. It is anticipated that the services will be tested in the early summer and offered generally to AOL subscribers in the fall of 1997. The AOL Agreement has an initial term of three years and can be extended by AOL on an annual basis thereafter. Under the AOL Agreement, the Company made an initial payment of $100 million to AOL at signing and agreed to provide marketing payments to AOL based on a percentage of the Company's profits from the services (between 50% and 70%, depending on the number of subscribers to the services). The AOL Agreement provides that $43 million of the initial payment will be offset and recoverable by the Company through reduction of such profit-based marketing payments during the initial term of the AOL Agreement or, subject to certain monthly reductions by offset of the amount thereof, directly by AOL upon certain earlier terminations of the AOL Agreement. The $57 million balance of the initial payment will be offset and is recoverable through a percentage of such profit-based marketing payments made after the first five years of the AOL Agreement (when extended beyond the initial term) and by offset against a percentage of AOL's share of the profits from the services after termination or expiration of the AOL Agreement. Any portion of the $43 million not previously recovered or reduced in amount would be added to the $57 million and would be recoverable similarly. Also under the AOL Agreement, the Company issued to AOL at signing two warrants to purchase shares of the Company's common stock at a premium over the market value of such stock on the issuance date. One warrant is for 5 million shares, at an exercise price of $15.50 per share, one-half of which shares will vest at the time the service is first made generally available to AOL online network subscribers in accordance with the AOL Agreement or the first 8 anniversary of the warrant issuance, whichever is earlier, and the balance of which will vest on the first anniversary of issuance if the AOL Agreement has not terminated. The other warrant is for up to 7 million shares, at an exercise price of $14.00 per share, which will vest, commencing December 31, 1997, based on the number of subscribers to the services and would vest fully if there are at least 3.5 million such subscribers at any one time. The Company also agreed to issue to AOL an additional warrant to purchase 1 million shares of its common stock, at market value at the time of issuance, upon each of the first two annual extensions by AOL of the term of the AOL Agreement, which warrants also will vest based on the number of subscribers to the services. In connection with the AOL Agreement, the Company and AOL will jointly develop the online marketing and advertising for the services. The Company will provide online customer service as well as inbound calling customer service to the AOL subscriber base in connection with the services. While the Company expects to utilize its Clearwater, Florida facility to provide customer service support to AOL subscribers, the Company may need to increase staffing and purchase equipment to support this activity. The Company anticipates that it will incur expenses for the start-up and development of the services contemplated in the AOL Agreement during 1997, including expenses for the expansion of the Clearwater operation, for software programming and for software and hardware additions to the Company's network, OBN, to expand its capacity for the traffic. The Company believes that the increased revenues to the Company resulting from the AOL Agreement and the services offered pursuant thereto will be limited in 1997, but could be significant in 1998, although there can be no assurance that these results can be achieved in light of a number of uncertainties, including the following: the Company's ability to timely develop the online ordering, call detail, billing and customer services for the AOL subscribers, which will require, among other things, being able to identify and employ sufficient personnel qualified to provide necessary programming; the Company's and AOL's ability to work effectively together to jointly develop the online marketing contemplated by the AOL Agreement; the response rate to online promotions of AOL's online subscribers, most of whom are expected to be residential rather than businesses, which have historically been the Company's customer base; the Company's ability to expand OBN to accommodate increased traffic levels; and AOL's ability to successfully execute its publicly stated business plan and implement its announced network changes to improve subscriber access to its online service. SERVICES Partitions ---------- The Company offers operational, financing, marketing and management support to partitions, which provides the partitions with 9 the ability to operate and manage their businesses and attract and maintain end users. Such support includes financial resources, low long distance rates, collection services, prospective customer lists and a management information system designed and developed by the Company exclusively for use by the Company and its partitions ("Business Management System" or "BMS"). The Company offers start-up financing as well as financing to its existing partitions and expects to increase such financing in the future. The Company's Business Management System provides a link between the Company's operations center and each partition, including information relating to billing, collections, provisioning, network usage and other end user information. The Company also compiles, evaluates and distributes prospective customer lists. Service on a long distance network is activated by a process called provisioning. On a daily basis, through the Business Management System provided by the Company, the Company's partitions transmit required end user information to the Company. Orders for AT&T network services resold by the Company as a switchless reseller are formatted by the Company in the manner required by AT&T and transmitted to AT&T's information management system, where AT&T processes the information and sends status updates on orders to the Company which, in turn, reports such status to the partitions. Orders for OBN services are processed and controlled by the Company. By controlling the provisioning process with OBN, the Company believes it can increase acceptance rates of new end users and reduce the time required to initiate service provided through the Company. The Company promotes increased marketing activities by certain of its partitions and attracts new partitions through advances. Such advances are made in installments subject to the success of marketing efforts by the applicable partition. As a condition to such advances, the Company generally requires a partition to agree to utilize the Company's Business Management System, to accept the Company's billing services and lock-box procedures pursuant to which sales generated by a partition are paid directly to the Company's lock-box account and to grant the Company a security interest in such sales. In return for providing such marketing advances, the Company seeks long-term arrangements with such partitions. The Company believes that such long-term arrangements benefit the Company and its partitions as such arrangements foster increases in the Company's end user base resulting in increases in minutes of traffic. End Users --------- The Company offers customer service to end users marketed by its telemarketing operations as well as to end users of certain partitions. Customer service representatives are located in the Company's facilities in Clearwater, Florida and New Hope and 10 Kingston, Pennsylvania. The Company plans to provide online customer service as well as inbound calling customer service in connection with the services offered to AOL subscribers. INFORMATION AND BILLING SERVICES The Company utilizes the billing services of AT&T and ACUS, a wholly owned strategic business unit of AT&T. As a result, the Company's end users benefit from the reliability and accuracy associated with AT&T billing. Detailed call information on the usage of each end user is produced by AT&T (in the case the of switchless resale business) and by the Company (in the case of OBN business). In both cases, AT&T then processes the information and provides billing information to the Company. ACUS bills the end users pursuant to a custom billing format bearing the names of either the Company or the applicable partition in the bill heading. AT&T has removed the "AT&T" name from the heading of the bills, although the text of the bills or bill inserts may still refer to the fact that an AT&T unit provides billing services. AT&T could further obscure its role in providing billing services altogether, which could have an adverse impact on the Company. The Company is developing its own information systems in order to have its own billing capacity, although the Company has not provided such direct billing services to end users in the past. BMS is provided to each partition. BMS resides at the partitions' locations and communicates with the Network Management System ("NMS") located at the Company's headquarters. NMS allows direct interface with the LECs and the Company's network to perform functions historically handled by AT&T. These computerized management systems control order processing, accounts receivable, billing and status information in a streamlined fashion between the Company and its partitions. Furthermore, when applicable, the systems interface with the AT&T Provisioning System and ACUS for order processing and billing services, respectively. Enhancements and additional features are provided as needed. Electronic processing and feature activation are designed to maintain the Company's goal of minimizing overhead. The Company has developed its own new information systems through the use of client/server technology. The Company purchased symmetrical multi-processing ("SMP") hardware in conjunction with SQL Database software from Informix Corporation. This system is now operational and has the capacity to process the Company's current volume of information services and exceeds the Company's needs for the foreseeable future, except with respect to the information and billing systems that the Company will need to develop in connection with the AOL Agreement, including online sign-up, call detail and billing reports and credit card billing. 11 The information functions of the system are designed to provide easy access to all information about an end user, including volume and patterns of use, which will help the Company and partitions identify value-added services that might be well suited for that end user. The Company also expects to use such information to identify emerging end user trends and respond with services to meet end users' changing needs. Such information should also allow the Company and its partitions to identify unusual or declining use by an individual end user, which frequently indicates that an end user is switching its service to a competitor. In addition, in connection with the AOL Agreement, the Company will need to develop systems for online sign-up, call detail and billing reports and credit card payments. Any delay or difficulties in developing systems or hiring personnel could adversely affect the timing of the implementation of this service offering to AOL subscribers and, in turn, the success of this service offering. ONE BETTER NET In order to reduce its dependence on AT&T contract tariffs and to increase its growth opportunities, the Company developed its own telecommunications network, OBN, which utilizes AT&T (now Lucent) manufactured switches owned by the Company in conjunction with AT&T-provided lines and digital cross-connect equipment (herein referred to as "transmission facilities") and AT&T-provided billing systems that the Company uses pursuant to agreements with AT&T and ACUS. OBN includes five AT&T (now Lucent) 5ESS-2000 switches, which are generally considered the most reliable switches in the telecommunications industry. The Company was one of the first installation site for AT&T's 5ESS-2000 switching equipment featuring the new Digital Networking Unit -- SONET technology, a switching interface designed to increase the reliability of the 5ESS-2000 and to provide much greater capacity in a significantly smaller footprint. The five switches -- in Jacksonville, New York, Chicago, Dallas and San Francisco -- were initially deployed with AT&T 5E10 software and were recently upgraded to 5E11 software, increasing the Company's trunk capacity by approximately 33%. OBN allows the Company to offer long distance services directly to its end users and partitions throughout the continental United States at rates that are competitive with or below those offered by the major long distance providers. OBN also allows the Company to control provisioning of end user accounts. The Company's current contract tariffs under which it resells AT&T services require the Company to pay one all-inclusive "bundled" charge to AT&T for the delivery of services, including switching and transmission services and the payment of LEC access fees. As a result of the deployment of OBN, the Company will pay "unbundled" charges consisting of charges paid directly to the LECs for access 12 charges and, under AT&T contract tariffs, charges paid to AT&T for use of its network transmission facilities. The Company will pay AT&T "bundled" charges for use of its international facilities to handle the international portion of a call on OBN. The total cost per call to the Company for the LEC access fees, the charges for use of AT&T's transmission facilities and the overhead cost for calls using OBN is expected to be less than the "bundled" charge currently paid under AT&T contract tariffs. LEC access fees represent a substantial portion of the total cost of providing long distance services. As a result of the Telecommunications Act, it is generally expected that the entry over time of competitors into LEC markets will result in lowering of access fees, but there is no assurance that this will occur. To the extent it does occur, the Company, by using OBN, will receive the benefit of any future reduction in LEC access fees, which it would not automatically receive under contract tariffs. In October 1996, the Company subscribed to a new AT&T contract tariff, which permits the Company to continue to resell through mid- 1998 AT&T long distance services, including AT&T SDN service and other services, at rates which are more favorable to the Company than prior tariffs. As a result, the Company decided only to provision new end users on OBN and to leave existing end users on AT&T service. The new AT&T contract has enabled the Company to earn higher margins on existing traffic, minimize possible attrition that might result from moving existing end users from the AT&T network to OBN. This has permitted a more gradual introduction of OBN, which has reduced the expense of providing the capacity required in a more rapid phase-in of OBN and lessened the impact of any technical difficulties during the phase-in of OBN. In 1997, the Company will continue to offer private line service through contract tariffs with AT&T. Although the Company will continue to provide such private line service through AT&T, the Company also will begin to offer private line service using OBN to new and existing customers. In order for the Company to provide service over OBN, the Company has installed and operates, and is responsible for the maintenance of, its own switching equipment. The Company also has installed lines to connect its OBN switches to LEC switches and is responsible for maintaining these lines. The Company entered into a contract with GTE with respect to the monitoring, servicing and maintenance of the switching equipment purchased from AT&T. There can be no assurance that the Company will be successful in operating as a switch-based carrier. Additional management personnel and information systems are required to support OBN, the costs of which have increased the Company's overhead. Moreover, operation as a switch-based provider subjects the Company to risk of significant interruption in the provision of services on OBN in the event of 13 damage to the Company's facilities (switching equipment or connections to AT&T transmission facilities) such as could be caused by fire or natural disaster. Such interruption could have a material adverse impact on the Company's financial condition and results of operations. The Company began testing new customer calls over OBN in the third quarter of 1996. In the fourth quarter of 1996, the Company began provisioning on a test basis new customer orders on OBN. To date, the Company has provisioned approximately 50,000 end users to OBN. Currently the Company is continuing to provision new customers on OBN while completing the final testing of OBN. The Company expects final testing of OBN to be completed in April 1997, and at that time there will be a general release of OBN. Thereafter, the Company expects to provision a large majority of its new customer orders on OBN. The 5ESS-2000 switches make it possible for the Company in the future to offer a number of additional or enhanced services. For example, the Company's 5ESS-2000 switches could support the offering of Centrex features, such as call waiting, conference calling, distinctive ringing and least cost routing, that traditionally were available only to end users with their own equipment or through purchase from the end users' local exchange carrier ("LEC"). The 5ESS-2000 switches could support Advanced Intelligent Network ("AIN"), which provides an open network architecture allowing for interconnections of inexpensive peripheral equipment and databases and the deployment of such services as calling cards, debit cards, voice recognition and caller identification, without the involvement of switch manufacturers. The 5ESS-2000 switches could help the Company to provide competitive telecommunications services to tenants of multi-tenant office and residential buildings and complexes. The 5ESS-2000 switch also has the capacity to direct local service as well as long distance service. AT&T CONTRACT TARIFFS The Company historically has obtained services from AT&T through contract tariffs and has been able to obtain the services it seeks and to do so at increasingly favorable contract tariff rates. The deployment of OBN decreases the Company's dependence on AT&T contract tariffs. To the extent the Company will need future contract tariffs, there is no guarantee the Company will be able to obtain favorable contract tariffs, although the Company has been successful in the past in obtaining such contract tariffs. On October 1996, the Company subscribed to a new AT&T contract tariff, which was further revised in December 1996 and permits the Company to continue to resell AT&T long distance services, including AT&T-SDN service, through mid-1998. The new AT&T contract tariff also includes other AT&T services (such as international long 14 distance, inbound and outbound services) that will be used in the Company's new nationwide telecommunications network, OBN. The rates that the Company will pay under the new AT&T contract tariff are more favorable to the Company than under previous tariffs. During its term, the new AT&T contract tariff will enable the Company to minimize possible attrition that might result from moving exiting end users from the AT&T network to OBN. The new AT&T contract tariff also permits a more gradual introduction of OBN, which should reduce the expense of providing the capacity required in a more rapid phase-in of OBN and lessen the impact of any technical difficulties during the phase-in of OBN. The more gradual introduction of OBN, however, will postpone the Company's realization of the anticipated benefit of the more favorable margins for OBN service, and the new AT&T contract tariff requires the Company to commit to purchase $300 million of service from AT&T over the next 4 years, including at least $1 million per month of international service. If minimum usage requirements are not met, the Company is obligated to pay shortfall fees to AT&T based on a percentage of the difference between the minimum requirement and the actual billed usage. In addition, if the contract tariffs with AT&T are terminated prior to the end of the contract tariff term, either by the Company or by AT&T for non-payment, the Company may be liable for "termination with liability" or "termination charges" and subject to material monetary penalties. This commitment is larger than any previous commitment that the Company has made, but the Company believes that it can be met based on its current purchases of long distance service from AT&T which are in execess of $10 million per month. Further the Company can terminate the new contract tariff without liability to AT&T at the end of 18 months if the Company has generated at least $120 million in usage charges, including at least $15 million in international usage charges. The Company also may discontinue the new contract tariff without liability prior to the 18th month if the Company and AT&T enter into a new contract tariff or another contract with a revenue commitment of at least $7.5 million per month and a term of at least the difference between 18 months and the number of months that the Company subscribed to the contract tariff, provided that the Company must purchase or pay for AT&T services under the contract tariff of at least $6.7 million per month for the months prior to such termination, including $1 million per month of international usage. COMPETITION The long distance telecommunications industry is highly competitive and affected by the introduction of new services by, and the market activities of, major industry participants. Competition in the long distance business is based upon pricing, customer service, billing services and perceived quality. The Company competes against various national and regional long distance carriers composed of both facilities-based providers and switchless resellers offering essentially the same services as the Company. 15 Several of the Company's competitors are substantially larger and have greater financial, technical and marketing resources. Although the Company believes it has the human and technical resources to pursue its strategy and compete effectively in this competitive environment, its success will depend upon its continued ability to provide profitably high quality, high value services at prices generally competitive with, or lower than, those charged by its competitors. End users are not obligated to purchase any minimum usage amount and can discontinue service, without penalty, at any time. There can be no assurance that end users will continue to buy their long distance telephone service through the Company or through partitions that purchase service from the Company. In the event that a significant portion of the Company's end users decides to purchase long distance service from another long distance service provider, there can be no assurance that the Company will be able to replace its end user base from other sources. A high level of attrition is inherent in the long distance industry, and the Company's revenues are affected by such attrition. Attrition is attributable to a variety of factors, including termination of customers by the Company for non-payment and the initiatives of existing and new competitors as they engage in, among other things, national advertising campaigns, telemarketing programs and cash payments and other incentives. Although the basic rates of the three largest long distance carriers - -- AT&T, MCI Communications Corp. and Sprint Corporation -- have consistently increased over the past three years and remained generally unchanged through the third quarter of 1996, AT&T and other carriers have announced new price plans aimed at residential customers (the Company's primary target audience under he AOL Contract) with significantly simplified rate structures, which may have the impact of lowering overall long distance prices. There can be no assurance that AT&T or other carriers will not make similar offerings available to the small to medium-sized businesses that the Company serves. Although OBN makes the Company more price competitive, a reduction in long distance prices still may have a material adverse impact on the Company's profitability. AT&T has split itself into three separate and independently-owned and operated companies ("AT&T breakup"). One company, which retains the AT&T name provides, among other services, long distance, wireless and other telecommunications services. Another, Lucent, manufactures and sells communications equipment. A third, NCR, includes AT&T's computer operations and will focus on the financial, retail and communications industries. AT&T has stated that the breakup will allow it to compete more effectively with providers of telecommunications services. 16 The Company will link its switching equipment with transmission facilities and services purchased or leased from AT&T and will continue to resell services obtained from AT&T, which will remain a competitor of the Company for the provision of telecommunications services. The Company also utilizes AT&T and ACUS to provide billing services. There can be no assurance that either AT&T or ACUS will continue to offer billing services to the Company at competitive rates or attractive terms. In October, 1995, the FCC reclassified AT&T as a nondominant interexchange carrier. The FCC stated that AT&T would have greater incentives to cut its prices and offer innovative new services. Nondominant carriers are not subject to price cap regulation and could file tariffs (and tariff changes) under streamlined procedures that will be presumed lawful on one day's notice. The Company will therefore no longer be able to file Petitions to Reject or to Suspend and Investigate AT&T tariff proposals with the FCC before those offerings take effect. The FCC's reclassification of AT&T as a nondominant carrier eliminated certain pricing restrictions and regulatory oversight and may allow AT&T to compete more aggressively with the Company. As a nondominant carrier, AT&T will be subject to the same regulations as other long distance service providers. AT&T remains subject to Title II of the Communications Act (47 U.S.C. Section 151, et seq.) and is required to offer service under rates, terms and conditions that are just, reasonable and not unreasonably discriminatory. AT&T is also subject to the FCC's complaint process and was required to file tariffs, though under streamlined procedures. In addition, AT&T is also required to give notice to the FCC and to affected customers prior to discontinuing, reducing, or impairing any services. In seeking FCC approval of its motion, AT&T made a series of "voluntary commitments" to the FCC as a transitional mechanism to govern its conduct. With respect to business term plans and long-term contracts with customers, including resellers, AT&T agreed for a 12 month period to provide advance notice to the customer of proposed changes that might affect a customer's reliance on its contract with AT&T and to file any such changes with advance notice and time for action by the FCC. AT&T also stated that it was willing to enter into mutually agreeable private party arbitration agreements with its reseller customers and was willing to develop a model agreement in negotiations with the Telecommunications Resellers Association Executive Board. The FCC accepted all of the "voluntary commitments" offered by AT&T and ordered AT&T's compliance with those commitments. The Telecommunications Act of 1996 was intended to introduce more competition to U.S. telecommunications markets. The legislation opens the local services market by requiring LECs to permit interconnection to their networks and establishing, among other 17 things, LEC obligations with respect to access, resale, number portability, dialing parity, access to rights-of-way, and mutual compensation. The legislation also codifies the LECs' equal access and nondiscrimination obligations and preempts most inconsistent state regulation. The legislation also contains special provisions that eliminate restrictions on the RBOCs providing long distance services, which means that the Company will face competition for providing long distance services from well-capitalized, well-known companies that prior to this time could not compete in long distance service. The RBOCs have been prohibited from providing interLATA interexchange telecommunications services under the terms of the AT&T decree. The Telecommunications Act authorizes the RBOCs to provide certain interLATA interexchange telecommunications services immediately and others upon the satisfaction of certain conditions. Such legislation includes certain safeguards against anticompetitive conduct by the RBOCs in the provision of interLATA service. Anticompetitive conduct could result, among other things, from a RBOC's access to all subscribers on its existing network as well as its potentially lower costs related to the termination and origination of calls within its territory. It is impossible to predict whether such safeguards will be adequate to protect against anticompetitive conduct by the RBOCs and the impact that any anticompetitive conduct would have on the Company's business and prospects. Because of the name recognition that the RBOCs have in their existing markets and the established relationships that they have with their existing local service customers, and their ability to take advantage of those relationships, as well as the possibility of favorable interpretations of the Telecommunications Act by the RBOCs, it may be more difficult for other providers of long distance services, such as the Company, to compete to provide long distance services to RBOC customers. At the same time, as a result of the Telecommunications Act, RBOCs have become potential customers for the Company's long distance services. Consolidation and alliances across geographic regions (e.g., Bell Atlantic/Nynex and SBC Communications Inc./Pacific Telesis Group domestically and BT/MCI and France Telecom/Deutsche Telekom/Sprint internationally) and across industry segments (e.g., WorldCom/MFS/UUNet) may also intensify competition in the telecommunications market from significantly larger, well-capitalized carriers and materially adversely affect the position of the Company. INDUSTRY BACKGROUND The $72.5 billion U.S. long distance industry is dominated by the nation's three largest long distance providers, AT&T, MCI and Sprint, which together generated approximately 80.9% of the aggregate revenues of all U.S. long distance interexchange carriers in 1995. Other long distance companies, some with national capabilities, accounted for the remainder of the market. Based on published 18 Federal Communications Commission ("FCC") estimates, toll service revenues of U.S. long distance interexchange carriers have grown from $38.8 billion in 1984 to $72.5 billion in 1995. The aggregate market share of all interexchange carriers other than AT&T, MCI and Sprint has grown from 2.6% in 1984 to 17.13% in 1995. During the same period, the market share of AT&T declined from 90.1% to 53%. Prior to the Telecommunications Act, the long distance telecommunications industry had been principally shaped by a court decree between AT&T and the United States Department of Justice, known as the Modification of Final Judgment (the "Consent Decree") that in 1984 required the divestiture by AT&T of its 22 Bell operating companies and divided the country into some 200 Local Access and Transport Areas ("LATAs"). The 22 operating companies, which were combined into the RBOCs, were given the right to provide local telephone service, local access service to long distance carriers and intraLATA toll service (service within LATAs), but were prohibited from providing interLATA service (service between LATAs). The right to provide interLATA service was maintained by AT&T and other carriers. To encourage the development of competition in the long distance market, the Consent Decree and the FCC require most LECs to provide all carriers with access to local exchange services that is "equal in type, quality and price" to that provided to AT&T and with the opportunity to be selected by customers as their preferred long distance carrier. These so-called "equal access" and related provisions are intended to prevent preferential treatment of AT&T. Regulatory, judicial and technological factors have helped to create the foundation for smaller companies to emerge as competitive alternatives to AT&T, MCI, and Sprint for long distance telecommunication services. The FCC requires that AT&T not restrict the resale of its services, and the Consent Decree and regulatory proceedings have ensured that access to LEC networks is, in most cases, available to all long distance carriers. Long distance companies that have their own transmission facilities and switches, such as AT&T, are referred to as facilities-based carriers. Facilities-based carriers are switch-based carriers, meaning that they have at least one switch to direct their long distance traffic. Nonfacilities-based carriers either (i) depend upon facilities-based carriers for switching and transmission facilities ("switchless resellers") or (ii) install and operate their own switches but depend on facilities-based carriers for transmission facilities ("switch-based resellers"). The relationship between resellers and the major long distance carriers is predicated primarily upon the fact that the pricing strategies and cost structures of the major long distance carriers have resulted historically in their charging higher rates to the 19 small to medium business customer. Small to medium business customers typically are not able to make the volume commitments necessary to negotiate reduced rates under individualized contracts. By committing to large volumes of traffic, the reseller is guaranteeing traffic to the major long distance carrier but the major long distance carrier is relieved of the administrative burden of qualifying and servicing large numbers of medium to small accounts. The successful reseller has lower overhead costs and is able to market efficiently the long distance product, process orders, verify credit and provide customer service to large numbers of accounts. With its own switches, the Company will be significantly less dependent on AT&T for switching services, although it will continue to be dependent on AT&T for transmission services. In recent years, national and regional network providers have substantially upgraded the quality and capacity of their domestic long distance networks, resulting in significant excess transmission capacity for voice and data communications. Due to anticipated advances in the technology involved in digital fiber optic transmission, excess capacity is expected to persist and may result in decreasing prices for use of transmission facilities. By deploying its own switches, the Company expects to be able to continue to provide long distance services using the quality of AT&T transmission facilities but at lower rates than it has historically charged, with the Company in control of establishing service or activating new end user accounts ("provisioning") and maintaining confidential end user lists REGULATION The Company's provision of communications services is subject to government regulation. Federal law regulates interstate and international telecommunications, while states have jurisdiction over telecommunications that originate and terminate within the same state. Changes in existing policies or regulations in any state or by the FCC could materially adversely affect the Company's financial condition or results of operations, particularly if those policies make it more difficult for the Company to obtain service from AT&T or other long distance companies at competitive rates, or otherwise increase the cost and regulatory burdens of marketing and providing service. There can be no assurance that the regulatory authorities in one or more states or the FCC will not take action having an adverse effect on the business or financial condition or results of operations of the Company. Regulatory action by the FCC or the states also could adversely affect the partitions, or otherwise increase the partitions' cost and regulatory burdens of marketing and providing long distance services. The Company is classified by the FCC as a nondominant carrier. After the recent reclassification of AT&T as nondominant, only the LECs are classified as dominant carriers among domestic carriers. As a consequence, the FCC regulates many of the rates, charges, and 20 services of the LECs to a greater degree than the Company's. Because AT&T is no longer classified as a dominant carrier, certain pricing restrictions that formerly applied to AT&T have been eliminated, which could make it easier for AT&T to compete with the Company for low volume long distance subscribers. The FCC generally does not exercise direct oversight over charges for service of nondominant carriers, although it has the statutory power to do so. Nondominant carriers are required by statute to offer interstate services under rates, terms, and conditions that are just, reasonable and not unreasonably discriminatory. The FCC has the jurisdiction to act upon complaints filed by third parties, or brought on the FCC's own motion, against any common carrier, including nondominant carriers, for failure to comply with its statutory obligations. Nondominant carriers have been required to file tariffs listing the rates, terms and conditions of service, which were filed pursuant to streamlined tariffing procedures. The FCC also has the authority to impose more stringent regulatory requirements on the Company and change its regulatory classification from nondominant to dominant. In the current regulatory atmosphere, the Company believes, however, that the FCC is unlikely to do so. The FCC imposes only minimal reporting, accounting and record-keeping obligations. International nondominant carriers, including the Company, must maintain international tariffs on file with the FCC. The FCC has issued an order requiring non-dominant carriers to withdraw their domestic tariffs, but as of the date hereof, a court has stayed the FCC's order. The Company currently has two tariffs on file with the FCC. Although the tariffs of nondominant carriers, and the rates and charges they specify, are subject to FCC review, they are presumed to be lawful and are seldom contested. The Company is permitted to make tariff filings on a single day's notice and without cost support to justify specific rates. IXCs are also subject to a variety of miscellaneous regulations that, for instance, govern the documentation and verifications necessary to change a subscriber's long distance carrier, limit the use of 800 numbers for pay-per-call services, require disclosure of certain information if operator assisted services are provided and govern interlocking directors and management. The Telecommunications Act grants explicit authority to the FCC to "forbear" from regulating any telecommunications services provider in response to a petition and if the agency determines that enforcement is unnecessary and the public interest will be served. At present, the FCC exercises its regulatory authority to set rates primarily with respect to the rates of dominant carriers, and it has increasingly relaxed its control in this area. Even when AT&T was classified as a dominant carrier, the FCC most recently employed a "price cap" system, which essentially exempted most of AT&T's services, including virtually all of its commercial and 800 services, from traditional rate of return regulation because the FCC believes 21 that these services were subject to adequate competition. Similarly, the FCC is in the process of changing the regulation and pricing of the local transport component of access charges (i.e., the fee for use of the LEC transmission facilities connecting the LEC's central offices and the IXC's access points). In addition, the LECs have been afforded a degree of pricing flexibility in setting interstate access charges where adequate competition exists. The impact of such repricing and pricing flexibility on IXCs, such as the Company, cannot be determined at this time. The Company is subject to varying levels of regulation in the states in which it is currently authorized to provide intrastate telecommunications services. The vast majority of the states require the Company to apply for certification to provide intrastate telecommunications services, or at least to register or to be found exempt from regulation, before commencing intrastate service. The vast majority of states also require the Company to file and maintain detailed tariffs listing its rates for intrastate service. Many states also impose various reporting requirements and/or require prior approval for transfers of control of certified carriers, corporate reorganizations, acquisitions of telecommunications operations, assignments of carrier assets, including subscriber bases, carrier stock offerings and incurrence by carriers of significant debt obligations. Certificates of authority can generally be conditioned, modified, canceled, terminated or revoked by state regulatory authorities for failure to comply with state law and the rules, regulations and policies of the state regulatory authorities. Fines and other penalties, including the return of all monies received for intrastate traffic from residents of a state, may be imposed for such violations. In certain states, prior regulatory approval may be required for acquisitions of telecommunications operations. Currently, the Company is certificated and tariffed to provide intrastate interLATA service in substantially all states where such authorization can be obtained. The Company's expansion of its direct marketing efforts, makes the Company subject to and requires compliance with relevant federal and state regulations that govern direct sales of telecommunications services. FCC rules prohibit switching a customer from one long distance carrier to another without the customer's consent and specify how that consent can be obtained. Most states have consumer protection laws that further define the framework within which the Company's marketing activities must be conducted. The constraints of federal and state restrictions could impact the success of the Company's direct marketing efforts. To the extent that the Company makes additional telecommunications service offerings, the Company may encounter additional regulatory constraints. 22 EMPLOYEES As of December 31, 1996, the Company employed 313 persons, of whom 260 were engaged in marketing and sales, 26 were engaged in partition and end user support, and 27 were engaged in systems development, finance, administration and management. None of the Company's employees is covered by collective bargaining agreements. The Company considers relations with its employees to be good. PRINCIPAL STOCKHOLDER Daniel Borislow, the Company's Chairman and Chief Executive Officer, owns beneficially approximately 38.4% of the Company's outstanding Common Stock, as of the date hereof. Accordingly, Mr. Borislow effectively has the ability to control the election of all of the members of the Company's Board of Directors and the outcome of corporate actions requiring majority stockholder approval. Even as to corporate actions for which super-majority approval may be required, such as certain fundamental corporate transactions, Mr. Borislow effectively will control the outcome. Future sales of substantial amounts of the Company's Common Stock by Mr. Borislow or others could adversely affect the market price of the Common Stock. Of the Company's 62,887,998 shares of Common Stock, 35,737,998 shares are freely tradeable by persons other than "affiliates" of the Company. Of the remaining 27,150,000 shares of Common Stock, none are eligible for public resale until after the expiration of the holding period pursuant to Rule 144 under the Securities Act. On March 10, 1997, Mr. Borislow sold 3,911,000 shares of Common Stock in a private sale (the "Private Sale"), and placed an additional 1,546,400 shares in escrow to be held for the benefit of the purchasers in the Private Sale and for distribution thereto (in part or in full), if the average current market price of the Common Stock in the 20 days prior to the fifth business day after the date on which the Company announces its financial results for the third quarter of 1997 shall be lower than $16.50 per share. In connection with the Private Sale. Mr. Borislow agreed that, except for a contribution of up to 2,000,000 shares of Common Stock to a charitable foundation, he will not sell, assign, transfer or otherwise dispose of any shares of Common Stock for a period of 12 months from March 10, 1997 (the "Lock-up Period"); provided, however, that if the current market price of the Common Stock shall increase by an amount greater than 20% from $16.50 per share for a period of 20 consecutive trading days, the Lock-up Period shall be reduced to 90 days. Also on March 10, 1997, Mr. Borislow donated 1,200,000 shares of Common Stock to the Daniel Borislow Charitable Foundation. 23 GLOSSARY ACUS: AT&T College and University Systems, a wholly owned strategic business unit of AT&T. AIN: Advanced Intelligent Network. AOL: America Online, Inc. AT&T: AT&T Corp. BMS: The Company's database, which it provides to each of its partitions. Consent Decree: A 1984 U.S. Department of Justice decree that, among other things, ordered AT&T to divest its wholly-owned local Bell operating subsidiaries. End Users: Customers that utilize long distance telephone services. Equal Access: Connection provided by a LEC permitting a customer to be automatically connected to the IXC of the customer's choice when the customer dials "1." Facilities-based provider: Long distance service providers who own transmission facilities. 5ESS-2000: The switching equipment manufactured by AT&T, which the Company acquired from AT&T. 5E10 Software: AT&T software that enables switches to combine simultaneously wireline and wireless, local, long distance, voice, video and data services. FCC: Federal Communications Commission. Inbound "800" Service: A service that bills long distance telephone charges to the called party. IXC: Interexchange carrier, a long distance carrier providing services between local exchanges. LATA: Local Access and Transport Areas, the approximately 200 geographic areas defined pursuant to the AT&T Consent Decree between which the RBOCs are generally prohibited from providing long distance service. LEC: Local Exchange Carrier, a company providing local telephone services. 24 MEGACOM: An outbound long distance service offering by AT&T that requires dedicated access. MEGACOM 800: An inbound 800 service offering provided by AT&T that requires dedicated access. MCI: MCI Communications Corporation. MLCP: AT&T's multi-location calling plan (a discounted long distance program). Network: An integrated system composed of switching equipment and transmission facilities designed to provide for the direction, transport and recording of telecommunications traffic. NMS: The Company's computerized internal management information system. Nonfacilities-based provider: Long distance service providers that do not own transmission facilities. OBN: One Better Net, the Company's nationwide long distance network. Partition: An independent long distance and marketing company that contracts with the Company to purchase or otherwise provide to end users the long distance services provided by the Company. Private Line: A full-time leased line directly connecting two points. Provisioning: The process of initiating a carrier's service to an end user. PUC: A state regulatory body empowered to establish and enforce rules and regulations governing public utility companies and others, such as the Company in many of its state jurisdictions. RBOC: Regional Bell Operating Company -- Any of seven regional Bell holding companies that the Consent Decree established to serve as parent companies for the Bell operating companies. Readyline: An Inbound 800 service offering provided by AT&T. SDN: The AT&T Software Defined Network. Sprint: Sprint Corporation. 25 Switching Equipment: A computer that directs telecommunication traffic in accordance with programmed instructions. Tariff: The schedule of rates and regulations set by communications common carriers and filed with the appropriate Federal and state regulatory agencies; the published official list of charges, terms and conditions governing provision of a specific communication service or facility, which functions in lieu of a contract between the user and the supplier or carrier. 26 ITEM 2. PROPERTIES The Company owns the 24,000 square foot facility in New Hope, Pennsylvania which serves as the Company's headquarters. The Company leases properties in the cities in which OBN switches have been installed. With respect to the Company's retail telemarketing operations, the Company owns the 32,000 square foot facility located in Clearwater, Florida and leases the 11,725 square foot facility in Kingston, Pennsylvania. ITEM 3. LEGAL PROCEEDINGS The Company is a party to certain legal actions arising in the ordinary course of business. The Company believes that the ultimate outcome of these actions will not result in any liability that would have a material adverse effect on the Company's financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1996. 27 EXECUTIVE OFFICERS OF THE COMPANY The executive officers of the Company are as follows: NAME AGE POSITION ---- --- -------- Daniel Borislow 35 Chairman of the Board, Chief Executive Officer and Director Gary W. McCulla 37 President and Director of Sales and Marketing and Director Emanuel J. DeMaio 38 Chief Operations Officer and Director Joseph A. Schenk 38 Chief Financial Officer, Treasurer and Director of Investor Relations and Director Edward B. Meyercord, III 31 Executive Vice President, Marketing and Corporate Development Mary Kennon 38 Director of Customer Care and Human Resources Aloysius T. Lawn, IV 38 General Counsel and Secretary Kevin R. Kelly 32 Controller Daniel Borislow. Mr. Borislow founded the Company and has served as a director and as Chief Executive Officer of the Company since its inception in 1989. Prior to founding the Company, Mr. Borislow formed and managed a cable construction company. Gary W. McCulla. Mr. McCulla currently serves as President and Director of Sales and Marketing. In 1991, Mr. McCulla founded GNC and was its President. Until March 1994, GNC was a privately-held independent marketing company and one of the Company's partitions. At that time, the Company acquired certain assets of GNC. Emanuel J. DeMaio. Mr. DeMaio joined the Company in February 1992 and currently serves as Chief Operations Officer. Prior to joining the Company, from 1981 through 1992, Mr. DeMaio held various technical and managerial positions with AT&T. Joseph A. Schenk. Mr. Schenk joined the Company in January 1996 and currently serves as Chief Financial Officer and Treasurer. He is a certified public accountant. From September 1993 to January 1996, Mr. Schenk was Vice President, Capital Markets Group, with Jefferies & Co. Previously, Mr. Schenk was Vice President of Transcap Associates, a venture capital firm, and held various roles with Price Waterhouse and Deloitte & Touche. Edward B. Meyercord, III. Mr. Meyercord joined the Company in September 1996 and currently serves as Executive Vice President, Marketing and Corporate Development. From 1993 until joining the Company, Mr. Meyercord worked in the corporate finance department of Salomon Brothers, where he held various positions, the most recent of which was Vice President. Prior to joining Salomon Brothers, Mr. Meyercord worked in the corporate finance department at Paine Webber Incorporated. Mary Kennon. Ms. Kennon joined the Company in October 1994 and currently serves as Director of Customer Care and Human Resources. Prior to joining the Company, from 1984 through 1994, Ms. Kennon held various managerial positions with AT&T. Aloysius T. Lawn, IV. Mr. Lawn joined the Company in January 1996 and currently serves as General Counsel and Secretary of the Company. Prior to joining the Company, from 1985 through 1995, Mr. Lawn was an attorney in private practice. Kevin R. Kelly. Mr. Kelly joined the Company in April 1994 and currently serves as Controller. From 1987 to 1994, Mr. Kelly held various managerial positions with a major public accounting firm. Mr. Kelly is a certified public accountant. 28 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock, $.01 par value per share ("Common Stock"), is traded on the Nasdaq National Market, and high and low quotations listed below are actual sales prices as quoted in the Nasdaq National Market under the symbol "TALK." All of the following quotations have been adjusted to reflect the two-for-one stock split of the Common Stock in the form of a 100% stock dividend that occurred on January 31, 1997. PRICE RANGE OF COMMON STOCK ------------------------------ HIGH LOW ---- --- 1995 ---- Fourth Quarter (from September 20, 1995) $ 5 1/2 $ 4 1996 ---- First Quarter 8 1/2 4 Second Quarter 12 8 1/4 Third Quarter 15 1/16 8 1/8 Fourth Quarter 14 3/4 10 1/8 1997 ---- First Quarter through (March 13, 1997) 21 1/2 12 1/4 As of March 6, 1997, there were approximately 57 record holders of Common Stock. The Company currently intends to retain all future earnings for use in the operation of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. The declaration and payment in the future of any cash dividends will be at the election of the Company's Board of Directors and will depend upon, among other things, the earnings, capital requirements and financial position of the Company, existing and/or future loan covenants and general economic conditions. 29 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements included elsewhere in this Form 10-K.
Year ended December 31, ------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ----------- ------------ ------------- ------------ ------------ (In thousands, except per share amounts) Consolidated Statements of Income Data: Sales $232,424 $180,102 $ 82,835 $ 31,940 $ 17,668 Cost of sales 200,597 156,121 70,104 26,715 14,803 -------- -------- -------- -------- -------- Gross profit 31,827 23,981 12,731 5,225 2,865 Selling, general and administrative expenses 10,039 6,280 3,442 2,060 1,476 -------- -------- -------- -------- -------- Operating income 21,788 17,701 9,289 3,165 1,389 Investment and other income, net 10,585 331 66 108 32 -------- -------- -------- -------- -------- Income before income taxes 32,373 18,032 9,355 3,273 1,421 Provision for income taxes(1) 12,205 7,213 3,742 1,309 568 -------- -------- -------- -------- -------- Net income(1) $ 20,168 $ 10,819 $ 5,613 $ 1,964 $ 853 ======== ======== ======== ======== ======== Net income per share - Primary (1) $ 0.35 $ 0.32 $ 0.18 $ 0.07 $ 0.03 ======== ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding - Primary 57,002 33,605 30,663 29,452 28,750 ======== ======== ======== ======== ======== Net income per share - Fully Diluted(1) $ 0.35 $ 0.32 $ 0.18 $ 0.07 $ 0.03 ======== ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding - Fully Diluted 58,027 33,605 30,663 29,452 28,750 ======== ======== ======== ======== ========
At December 31, ----------------------------------------------------------------------------- 1996 1995 1994 1993 1992 ------------ ------------ ------------- ------------ ----------- (In thousands) Consolidated Balance Sheets Data: Working capital $175,597 $38,171 $12,265 $4,502 $1,312 Total assets 257,008 71,388 21,435 6,694 2,178 Long-term debt -- -- -- -- -- Total stockholders' equity 230,720 41,314 14,042 4,687 1,414
- ---------- (1) For the years and period ended December 31, 1992, 1993, 1994 and September 19, 1995, the Predecessor Corporation elected to report as an S corporation for federal and state income tax purposes. Accordingly, the Predecessor Corporation's stockholders included their respective shares of the Company's taxable income in their individual income tax returns. The pro forma income taxes reflect the taxes that would have been accrued if the Company had elected to report as a C corporation. See Note 10 to the Consolidated Financial Statements. 30 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements included elsewhere in this Form 10-K. INTRODUCTION The Company was founded in 1989 as a switchless reseller of AT&T long distance services to small and medium sized businesses and currently has over 500,000 end users. The Company is currently in the process of completing the deployment of its own nationwide telecommunications network, OBN consisting of five Company-owned, AT&T (now Lucent) manufactured 5ESS-2000 switches connected by AT&T transmission facilities. As more fully described below, the Company believes that gross margins for OBN long distance service will be higher than those for AT&T long distance service. The majority of the Company's new orders are now being placed on OBN which now has over 50,000 end users. Historically, the Company has marketed the majority of its services through independent carriers and marketing companies known as "partitions", which allowed the Company to minimize overhead expenses. The Company expanded its business by adding partitions and providing existing and new partitions with operational, financing, marketing and management support. Beginning in 1996, the Company initiated and subsequently expanded through an acquisition in December 1996, a direct marketing effort. Direct marketing requires the Company to incur costs of marketing, including personnel, occupancy, marketing support and additional customer service - costs which were historically borne by partitions. Currently, a large majority of the Company's new sales are generated via direct marketing. The Company believes that gross margins for OBN long distance service will be higher than those for AT&T long distance service. AT&T long distance service is "bundled," which means that the Company pays a single, all-inclusive price to AT&T for switching, transmission, and LEC access. OBN long distance service is "unbundled," which means that the Company provides its own switching, pays AT&T for transmission, and pays access fees directly to LECs. The "unbundled" charges per call on OBN are expected to be less than the "bundled" charge paid to AT&T. In February 1997 the Company announced a multi-year agreement with America Online, Inc. ("AOL") under which the Company will be the exclusive provider of long distance services to be marketed by AOL to all of its approximate 8 million online subscribers (the "AOL Agreement"). See "RECENT DEVELOPMENTS." -31- The following table presents the Company's sales, operating income and net income by quarter since the first quarter of 1994. Operating Net Quarter Ended Sales Income Income - ------------- ------- ------------- ---------- (In thousands) 1996: March 31 $ 51,065 $ 4,546 $ 3,377 June 30 57,015 4,882 4,058 September 30 60,079 5,871 7,032 December 31 64,265 6,489 5,701 -------- -------- --------- Total $232,424 $ 21,788 $ 20,168 ======== ======== ======== 1995: March 31 (A) $ 36,617 $ 4,213 $ 2,555 June 30 (A) 44,728 4,855 2,897 September 30 (A) 48,366 4,008 2,519 December 31 50,391 4,625 2,848 -------- -------- --------- Total (A) $180,102 $ 17,701 $ 10,819 ======== ======== ======== 1994: March 31 (A) $ 14,413 $ 1,806 $ 1,092 June 30 (A) 14,705 1,846 1,102 September 30 (A) 22,521 2,608 1,573 December 31 (A) 31,196 3,029 1,846 -------- -------- --------- Total (A) $ 82,835 $ 9,289 $ 5,613 ======== ======== ======== (A) Pro forma tax provisions have been calculated as if the Company's results of operations were taxable as a C corporation (the Company's current tax status) for this period. Prior to September 20, 1995, the Company was an S Corporation with all earnings taxed directly to its shareholders. -32- RESULTS OF OPERATIONS The following table sets forth for the periods indicated certain financial data as a percentage of sales:
Percentage of Sales, Year Ended December 31, --------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Sales 100.0% 100.0% 100.0% Cost of sales 86.3 86.7 84.6 ----------- ----------- ----------- Gross profits 13.7 13.3 15.4 Selling, general and administrative expenses 4.3 3.5 4.2 ----------- ----------- ----------- Operating income 9.4 9.8 11.2 Investment and other income, net 4.5 0.2 0.1 ----------- ----------- ----------- Income before income taxes 13.9 10.0 11.3 Provision for income taxes 5.2 4.0(A) 4.5(A) ----------- ----------- ----------- Net income 8.7% 6.0% 6.8% =========== =========== ===========
(A) Pro forma tax provisions have been calculated as if the Company's results of operations were taxable as a C corporation (the Company's current tax status) for the years ended December 31, 1995 and 1994. Prior to September 20, 1995, the Company was an S Corporation with all earnings taxed directly to its shareholders. -33- YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Sales. Sales increased by 29.1% to $232.4 million in 1996 from $180.1 million in 1995. The increase in sales related primarily to the continued expansion of the Company's distribution network of partitions, as well as increases in the number of orders submitted by the Company's existing partitions. One partition, The Furst Group, Inc. accounted for approximately 11% of the Company's sales in 1996 versus zero in 1995. In addition, significant partition marketing efforts focused on inbound 800 service resulted in sales of $75.3 million for the year ended December 31, 1996 versus $55.6 million for the year ended December 31, 1995. Although the Company expects sales to increase through the Company's direct marketing efforts, the AOL Agreement, the addition of new partitions, the growth of end user business through existing partitions and possible future acquisitions, there can be no assurance that the Company will continue to increase sales on a quarter-to-quarter or year-to-year basis. Cost of Sales. The Company's cost of sales, consisting primarily of network usage charges for AT&T long distance services, increased by 28.5% to $200.6 million in 1996 from $156.1 million in 1995 and is directly related to the 29.1% increase in sales. As a switchless reseller of AT&T long distance services and in order to provide its OBN services, the Company subscribes to contract tariffs. The ability of the Company to negotiate competitive terms of these tariffs has been an important reason for the Company's success. In October 1996, the Company subscribed to a new AT&T contract tariff, which was further revised in December 1996 and permits the Company to continue to resell AT&T long distance services, including AT&T-SDN service, through mid-1998. The new AT&T contract tariff also includes other AT&T services (such as international long distance, inbound and outbound services) that will be used in the Company's nationwide telecommunications network, OBN. The rates that the Company will pay under the new AT&T contract tariff are more favorable to the Company than under previous tariffs. During its term, the new AT&T contract tariff will enable the Company to minimize possible attrition that might result from moving existing end users from the AT&T network to OBN. The new AT&T contact tariff also permits a more gradual introduction of OBN, which should reduce the expense of providing the capacity required in a more rapid phase-in of OBN and lessen the impact of any technical difficulties during the phase-in of OBN. The more gradual introduction of OBN, however, will postpone the Company's realization of the anticipated benefit of the more favorable margins for OBN service, and the new AT&T contract tariff requires the Company to commit to purchase $300 million of service from A&T over the next 4 years, including at least $1 million per month of international service. This commitment is larger than any previous commitment that the Company has made, but the Company believes that it can be met based on its current purchases of long distance service from AT&T which are in excess of $10 million per month. Further, the Company can terminate the new contract tariff without liability to AT&T at the end of 18 months if the Company has generated at least $120 million in usage charges, including at least $15 million in international usage charges. The Company also may discontinue the new contract tariff without liability prior to the 18th month if the Company and AT&T enter into a new contract tariff or another contract with a revenue commitment of at least $7.5 million per month and a term of at least the difference between 18 months and the number of months that the Company subscribed to the contract tariff, provided that the Company must purchase or pay for AT&T services under the contract tariff of at least $6.7 million per month for the months prior to such termination, including $1 million per month of international usage. OBN and the operation of the Company's own switches and network will require the Company to incur systems and equipment maintenance, lease, and network personnel expenses significantly above the levels historically experienced by the Company as a switchless reseller of AT&T services. However, these per call costs, in combination with "unbundled" charges paid to LECs and AT&T, are expected to be less than the per call cost currently incurred by the Company as a switchless reseller paying "bundled" charges to AT&T. In December 1996, the Company, in connection with the settlement of certain disagreements among the Company, America Business Alliance, Inc. ("ABA"), an independent long distance and marketing company, and the shareholders of ABA, acquired substantially all of the assets of ABA. Operations of its own direct marketing will require the Company to incur additional costs including personnel, occupancy, and marketing support, which may be significantly above levels historically experienced by the Company. There can be no assurance that any cost savings will be realized utilizing direct marketing when compared to the costs historically incurred by the Company utilizing its partitions. -34- The AOL Agreement will initially require the Company to provide competitively priced residential long distance service along with various on-line capabilities including on-line sign-up, call detail and reports and credit card payment. The Company may incur significant expenses for the start-up and development of the services contemplated in the agreement particularly during the second and third quarters of 1997. These costs may result in higher costs of sales in 1997 than historically experienced by the Company. Gross Margin. Gross margin, the gross profit as a percentage of sales, increased to 13.7% for the year ended December 31, 1996 from 13.3% for the year ended December 31, 1995. The increase in gross margin was due to greater discounts obtained from AT&T on network usage partially offset by direct marketing expenses and higher volume discounts granted to certain partitions. To the extent that the Company may incur additional costs associated with OBN, direct marketing and the AOL Agreement (see Cost of Sales above) gross margin may decline in 1997. The Company believes that gross margins for OBN long distance service will be higher than those for AT&T long distance service. AT&T long distance service is "bundled," which means that the Company pays a single, all-inclusive price to AT&T for switching, transmission, and LEC access. OBN long distance service is "unbundled," which means that the Company provides its own switching, pays AT&T for transmission, and pays access fees directly to LECs. The "unbundled" charges per call on OBN are expected to be less than the "bundled" charge paid to AT&T . Although the basic rates of the three largest long distance carriers- AT&T, MCI and Sprint-have consistently increased over the past three years, AT&T and other carriers have announced new price plans and significantly simplified rate structures aimed at residential customers, the Company's primary target audience under the AOL Agreement, which may have the impact of lowering overall long distance prices. There can be no assurance that AT&T or other carriers will not make similar offerings available to the small to medium sized businesses that the Company currently serves. Although OBN is expected to make the Company more price competitive, further reductions in long distance prices charged by competitors still may have a material adverse impact on the Company's gross margin in future periods. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by 59.9% to $10.0 million in 1996 from $6.3 million in 1995. The increase in selling, general and administrative expenses was due primarily to the costs associated with hiring additional management personnel to support the Company's continuing growth and increased fees for professional services. The Company expects selling, general and administrative expenses to increase as it implements, operates and maintains OBN, its direct marketing efforts and the rollout of the AOL service offering. These efforts will require additional personnel, equipment and support. The additional selling, general and administrative expenses may be offset by the increased sales and profit gained as a result of the implementation of the components of the Company's strategic plan, but increased costs may have an adverse impact on results of operations. Investment and Other Income. Investment and other income was $10.6 million in 1996 versus $331,000 in 1995. Investment and other income for the year ended December 31, 1996 includes two nonrecurring gains : a $1.4 million gain on the sale of securities of another long distance company and a $1.5 million gain on the sale of short term U.S. Treasury securities. The remainder of investment and other income consists primarily of interest income earned on the Company's cash balances resulting primarily from the unapplied proceeds of the Company's public offering in April and May 1996 and excess cash from operations. As a result of the Company's purchase of ABA for approximately $21.4 million in total consideration and the $100 million initial payment to AOL, interest income for future periods is expected to be significantly less than amounts realized in 1996. Provision for income taxes. The Company's effective tax rate declined to 37.7% in 1996 from the pro forma effective tax rate of 40.0% in 1995 due to the lower effective state tax rate in 1996. -35- YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Sales. Sales increased by 117.4% to $180.1 million in 1995 from $82.8 million in 1994. The increase in sales related primarily to the continued expansion of the Company's distribution network of partitions, as well as increases in the number of end users obtained by the Company's existing partitions. As a result of the favorable contract tariffs obtained from AT&T, which took effect in July 1994, revenue from marketing inbound 800 service increased significantly in 1995, totaling $55.6 million for the year ended December 31, 1995 and accounting for approximately 30.9% of 1995 sales compared to $7.9 million, or 9.5% of sales, for the year ended December 31, 1994. The Company's revenues for private line services represented approximately 10.2% of 1995 sales compared to an insignificant amount from such services in 1994. Cost of Sales. The Company's cost of sales increased by 122.7% to $156.1 million in 1995 from $70.1 million in 1994, primarily as a result of the increase in sales by 117.4%. Cost of sales as a percentage of revenues increased at a higher rate than sales because the Company offered higher volume discounts to certain partitions. Gross Margin. Gross margin decreased to 13.3% for the year ended December 31, 1995 from 15.4% for the year ended December 31, 1994. The decrease in gross margin was attributable primarily to the addition of new partitions who received higher volume discounts. Billing costs remained relatively constant as a percentage of sales during both of these periods. Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by 82.5%, to $6.3 million in 1995 from $3.4 million in 1994, but decreased as a percentage of sales to 3.5% from 4.2%. Selling, general and administrative expenses decreased as a percentage of sales due to the Company's ability to spread its overhead expenses over a larger sales base. The increase in selling, general and administrative expenses was due primarily to the increase in personnel from 27 to 37 employees, resulting from the increased administrative and management demands on the Company as it has grown, and an increase in fees for professional services. Pro Forma Income Taxes. On June 1, 1991, the Company, with the consent of its stockholders, elected to be taxed as an S Corporation. As a result of the election, all earnings of the Predecessor Corporation were taxed directly to the stockholders. Accordingly, the statements of income, prior to the termination of the S Corporation status on September 19, 1995, did not include provisions for income taxes. Pro forma income tax provisions have been calculated as if the Company's results of operations were taxable as a C Corporation under the Internal Revenue Code for all periods presented. See Note 10 to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES The Company consummated its initial public offering of 10,350,000 shares of Common Stock in September and October of 1995. The Company received net proceeds from such offering of $42.8 million, of which $4.5 million was used to pay the minority stockholder. The Company consummated a public offering of 17,068,000 shares of Common Stock in April and May, 1996. The Company received net proceeds from such offering of approximately $139.1 million. In addition, during 1996, certain options and warrants to purchase shares of the Company's Common Stock were exercised and the Company received net proceeds of approximately $4.9 million and $7.4 million, respectively. The tax benefit realized from the exercise of options and warrants was approximately $21.3 million and is reflected as an adjustment to additional paid-in capital and taxes payable. At December 31, 1996, the Company had cash, cash equivalents and marketable securities of approximately $157.3 million. -36- Since its inception, the Company has funded its operations primarily from cash generated by operations and, to a lesser extent, advances from stockholders and bank borrowings. The Company's net cash flow provided by operations was $10.7 million, $24.5 million and $1.6 million for the years ended December 31, 1996, 1995 and 1994, respectively. Cash provided was $43.9 million, $10.5 million and $10.2 million for the years ended December 31, 1996, 1995 and 1994, respectively, resulting from net income plus reconciling items. The primary reconciling item for the year ended December 31, 1996 was the tax benefit associated with the exercise of stock options and warrants. Cash was used for accounts receivable, advances to partitions and note receivables increases. Increases in advances to partitions and note receivables are due to the Company's increased assistance to new and existing partitions to support their marketing efforts. The Company's working capital was $175.6 million and $38.2 million at December 31, 1996 and 1995, respectively. The significant increase in working capital is primarily a result of the completion of the Company's public offering in April and May, 1996. The Company invested $27.7 million in capital equipment during the year ended December 31, 1996, of which $22.7 million was used for the acquisition of capital equipment and installation costs relating to the deployment of OBN. To date, through December 31, 1996, the Company has invested $24.9 million for the acquisition of capital equipment and installation costs relating to the deployment of OBN . In June 1996, the Company purchased a new headquarters building in New Hope, Pennsylvania for approximately $1.5 million. In July 1996, the Company also purchased a building in Clearwater, Florida which is used for direct marketing and customer service for approximately $900,000. In March 1996, the Company negotiated an unsecured, committed line of credit with PNC Bank, N.A. ("Credit Facility") under which borrowings of up to $50.0 million are available. The Company is required to pay an availability fee of $62,500 per annum, or 0.125% of the total available borrowings. Interest on borrowings is payable monthly at PNC Bank's prime rate less 0.5% or LIBOR plus 0.875%, at the Company's option. Principal is payable upon demand by PNC Bank. Under the terms of the Credit Facility, the Company must maintain certain financial covenants and adhere to certain restrictions. At December 31, 1996, the Company had no borrowings outstanding under the Credit Facility. During February 1997, the bank provided a temporary increase in the amount available under the agreement to $60.0 million under similar terms to the existing credit facility. See "RECENT DEVELOPMENTS". The Company has used a portion of the proceeds from its 1996 stock offering for: (i) advances to new and existing partitions to support their marketing efforts, (ii) procurement of additional hardware and software for OBN, (iii) direct marketing efforts, including the ABA transaction, and a direct marketing center in Clearwater, Florida, and (iv) the purchase of a new headquarters building in New Hope, Pennsylvania. In February 1997, the Company made an initial payment of $100 million to AOL in conjunction with the AOL Agreement more fully described in Recent Developments. The Company intends to use the remaining proceeds: (i) to further fund new and existing partitions, (ii) to expand direct marketing efforts, and (iii) to take advantage of growth opportunities, including but not limited to, possible acquisitions. At December 31, 1996, excess cash was invested primarily in a U.S. Treasury Bill. Generally, excess cash is invested primarily in short term government securities and cash equivalents consisting of money market accounts with major international brokerage firms. The Company has had to spend less of the proceeds of the 1996 stock offering to start up OBN than originally planned because of the new AT&T contract tariff, which allows the Company to avoid some of the costs associated with moving existing end users to OBN and permits the Company to phase in OBN more cost effectively by not leasing transmission facilities before traffic levels are sufficient to fill them. The Company does not have a significant concentration of credit risk with respect to accounts receivable due to the large number of partitions and end users comprising the Company's customer base and their dispersion across different geographic regions. The Company maintains reserves for potential credit losses and, to date, such losses have been within the Company's expectations. The Company believes that its current cash position, marketable securities, the Credit Facility and the cash flow expected to be generated from operations, will be sufficient to fund its capital expenditures, working capital and other cash requirements for at least the next twelve months. RECENT DEVELOPMENTS On February 25, 1997, the Company announced that it had entered into a Telecommunications Marketing Agreement (the "AOL Agreement"), dated as of February 22, 1997 and effective as of February 25, 1997, with America Online, Inc. ("AOL"), under which the Company will be the exclusive provider of long-distance telecommunications services to be marketed by AOL to all of the subscribers to AOL's online network under a distinctive brand name to be used exclusively for the Company's services. The services will include provision for online sign-up, call detail and reports and credit card payment. Under the AOL Agreement, AOL will provide millions of dollars of online advertising and promotion of the services and provide -37- all of its subscribers with access to a dedicated service area online for the Company. AOL subscribers who sign-up for the telecommunications services will be customers of the Company, as the carrier providing such services. The Company also has certain rights under the AOL Agreement to offer, on a comparably exclusive basis, local and wireless telecommunications services when available. It is anticipated that the services will be tested in the early summer and offered generally to AOL subscribers in the fall of 1997. The AOL Agreement has an initial term of three years and can be extended by AOL on an annual basis thereafter. Under the AOL Agreement, the Company made an initial payment of $100 million to AOL at signing and agreed to provide marketing payments to AOL based on a percentage of the Company's profits from the services (between 50% and 70%, depending on the number of subscribers to the services). The AOL Agreement provides that $43 million of the initial payment will be offset and recoverable by the Company through reduction of such profit-based marketing payments during the initial term of the AOL Agreement or, subject to certain monthly reductions by offset of the amount thereof, directly by AOL upon certain earlier terminations of the AOL Agreement. The $57 million balance of the initial payment will be offset and is recoverable through a percentage of such profit-based marketing payments made after the first five years of the AOL Agreement (when extended beyond the initial term) and by offset against a percentage of AOL's share of the profits from the services after termination or expiration of the AOL Agreement. Any portion of the $43 million not previously recovered or reduced in amount would be added to the $57 million and would be recoverable similarly. Also under the AOL Agreement, the Company issued to AOL at signing two warrants to purchase shares of the Company's common stock at a premium over the market value of such stock on the issuance date. One warrant is for 5 million shares, at an exercise price of $15.50 per share, one-half of which shares will vest at the time the service is first made generally available to AOL online network subscribers in accordance with the AOL Agreement or the first anniversary of the warrant issuance, whichever is earlier, and the balance of which will vest on the first anniversary of issuance if the AOL Agreement has not terminated. The other warrant is for up to 7 million shares, at an exercise price of $14.00 per share, which will vest, commencing December 31, 1997, based on the number of subscribers to the services and would vest fully if there are at least 3.5 million such subscribers at any one time. The Company also agreed to issue to AOL an additional warrant to purchase 1 million shares of its common stock, at market value at the time of issuance, upon each of the first two annual extensions by AOL of the term of the AOL Agreement, which warrants also will vest based on the number of subscribers to the services. In connection with the AOL Agreement, the Company and AOL will jointly develop the online marketing and advertising for the services. The Company will provide online customer service as well as inbound calling customer service to the AOL subscribers in connection with the services. While the Company expects to utilize its Clearwater, Florida facility to provide customer service support to AOL subscribers, the Company may need to increase staffing and purchase equipment to support this activity. The Company anticipates that it will incur expenses for the start-up and development of the services contemplated in the AOL Agreement during 1997, including expenses for the expansion of the Clearwater operation, for software programming and for software and hardware additions to the Company's network, OBN, to expand its capacity for the traffic. The Company believes that the increased revenues to the Company resulting from the AOL Agreement and the services offered pursuant thereto will be limited in 1997, but could be significant in 1998, although there can be no assurance that these results can be achieved in light of a number of uncertainties, including the following: the Company's ability to timely develop the online ordering, call detail, billing and customer services for the AOL subscribers, which will require, among other things, being able to identify and employ sufficient personnel qualified to provide necessary programming; the Company's and AOL's ability to work effectively together to jointly develop the online marketing contemplated by the AOL Agreement; the response rate to online promotions of AOL's online subscribers, most of whom are expected to be residential rather than businesses, which have historically been the Company's customer base; the Company's ability to expand OBN to accommodate increased traffic levels; and AOL's ability to successfully execute its publicly stated business plan and implement its announced network changes to improve subscriber access to its online service. The Company funded the $100 million initial payment by borrowing $50 million under its Credit Facility under a temporary increase in the facility to $60 million, and an additional $50 million as a margin advance from one of its brokers. Currently, the Company holds a U.S. Treasury Bill with a face value of $150 million, which matures in November 1997, as security for the advance. -38- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Certified Public Accountants 40 Consolidated balance sheets as of December 31, 1996 and 1995 41 Consolidated statements of income for the years ended December 31, 1996, 1995, and 1994 42 Consolidated statements of stockholders' equity for the years ended December 31, 1996, 1995 and 1994 43 Consolidated statements of cash flows for the years ended December 31, 1996, 1995 and 1994 44 Notes to consolidated financial statements 45 -39- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Tel-Save Holdings, Inc. We have audited the accompanying consolidated balance sheets of Tel-Save Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tel-Save Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP BDO Seidman, LLP New York, New York January 29, 1997 -40- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except for share data)
December 31, --------------------------------------- 1996 1995 ---------------------------------------------------------------------------- --------------------- ----------------- ASSETS CURRENT: Cash and cash equivalents $ 8,023 $41,211 Marketable securities 149,237 - Accounts receivable, trade net of allowance for 19,971 19,088 uncollectible accounts of $987 and $804, respectively Advances to partitions and note receivables 13,410 3,563 Due from broker 867 1,100 Prepaid expenses and other current assets 10,377 194 ---------------------------------------------------------------------------- --------------------- ----------------- TOTAL CURRENT ASSETS 201,885 65,156 Property and equipment, net 30,097 2,667 Intangibles, net 21,102 1,490 Note receivable from stockholder - 2,075 Other assets 3,924 - ---------------------------------------------------------------------------- --------------------- ----------------- TOTAL ASSETS $257,008 $71,388 ---------------------------------------------------------------------------- --------------------- ----------------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT: Accounts payable and accrued expenses: Trade and other $ 17,812 $12,622 Partitions 4,398 3,047 Sales and excise taxes payable 1,592 1,406 Other 1,619 514 Securities sold short, at cost to purchase 867 1,100 Income taxes payable - 2,375 Note payable to stockholder - 5,921 ---------------------------------------------------------------------------- --------------------- ----------------- TOTAL CURRENT LIABILITIES 26,288 26,985 Deferred credits - 280 Deferred income taxes payable - 2,809 ---------------------------------------------------------------------------- --------------------- ----------------- TOTAL LIABILITIES 26,288 30,074 ---------------------------------------------------------------------------- --------------------- ----------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 5,000,000 shares - - authorized; no shares outstanding Common stock - $.01 par value, 100,000,000 shares 622 195 authorized; 62,237,998 and 19,500,000 issued and outstanding, respectively Additional paid-in capital 210,616 37,245 Retained earnings 24,042 3,874 Treasury stock (4,560) - ---------------------------------------------------------------------------- --------------------- ----------------- TOTAL STOCKHOLDERS' EQUITY 230,720 41,314 ---------------------------------------------------------------------------- --------------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $257,008 $71,388 ---------------------------------------------------------------------------- --------------------- ----------------- See accompanying notes to consolidated financial statements.
-41- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except for per share data)
Year Ended December 31, ----------------------- 1996 1995 1994 ---- ---- ---- Sales $232,424 $180,102 $ 82,835 Cost of sales 200,597 156,121 70,104 - -------------------------------------------- ------------------ -------------------- ----------------- Gross profit 31,827 23,981 12,731 Selling, general and administrative expenses 10,039 6,280 3,442 - -------------------------------------------- ------------------ -------------------- ----------------- Operating income 21,788 17,701 9,289 Investment and other income, net 10,585 331 66 - -------------------------------------------- ------------------ -------------------- ----------------- Income before provision for income taxes 32,373 18,032 9,355 Provision for income taxes 12,205 8,997 - - -------------------------------------------- ------------------ -------------------- ----------------- Net income $ 20,168 $ 9,035 $ 9,355 ============================================ ================== ==================== ================== Pro forma: Income before provision for income taxes $ 18,032 $ 9,355 Pro forma provision for income taxes 7,213 3,742 - -------------------------------------------- ------------------ -------------------- ----------------- Pro forma net income $ 10,819 $ 5,613 - -------------------------------------------- ------------------ -------------------- ----------------- Net income per share - Primary $ .35 $ .32 $ .18 - -------------------------------------------- ------------------ -------------------- ----------------- Weighted average common and common equivalent shares outstanding - Primary 57,002 33,605 30,663 - -------------------------------------------- ------------------ -------------------- ----------------- Net income per share - Fully Diluted $ .35 $ .32 $ .18 - -------------------------------------------- ------------------ -------------------- ----------------- Weighted average common and common equivalent shares outstanding - Fully Diluted 58,027 33, 605 30,663 - -------------------------------------------- ------------------ -------------------- ----------------- See accompanying notes to consolidated financial statements.
-42- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Common Stock Additional --------------------- Paid-in Retained Treasury Shares Amount Capital Earnings Stock Total - -------------------------------------------------------------------------------------------------------------------------- Balance, January 1, 1994 9,550 $ 95 $ -- $ 4,592 $ -- $ 4,687 Net income -- -- -- 9,355 -- 9,355 ------- -------- -------- -------- -------- --------- Balance, December 31, 1994 9,550 95 -- 13,947 -- 14,042 Net income -- -- -- 9,035 -- 9,035 Cash distributions -- -- -- (13,200) -- (13,200) Stock redemption -- -- -- (11,400) -- (11,400) Reclassification of S Corporation deficit -- -- (5,492) 5,492 -- -- Sale of common stock 3,450 35 42,802 -- -- 42,837 Three-for-two stock split 6,500 65 (65) -- -- -- ------- -------- -------- -------- -------- --------- Balance, December 31, 1995 19,500 195 37,245 3,874 -- 41,314 Net income -- -- -- 20,168 -- 20,168 Issuance of warrants to partitions -- -- 1,077 -- -- 1,077 Sale of common stock 8,534 85 138,984 -- -- 139,069 Exercise of common stock options 1,079 11 4,927 -- -- 4,938 Exercise of warrants 2,006 20 7,383 -- -- 7,403 Income tax benefit related to exercise of common stock options and warrants -- -- 21,311 -- -- 21,311 Acquisition of treasury stock -- -- -- -- (4,560) (4,560) Two-for-one stock split 31,119 311 (311) -- -- -- ------- -------- -------- -------- -------- --------- Balance, December 31, 1996 62,238 $ 622 $ 210,616 $ 24,042 $(4,560) $ 230,720 - -------------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
-43- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended December 31, ----------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 20,168 $ 9,035 $ 9,355 Adjustment to reconcile net income to net cash provided by operating activities: Unrealized loss on securities 179 234 -- Provision for bad debts 38 (28) 52 Depreciation and amortization 2,462 1,287 477 Deferred credits (280) -- 280 Income tax benefit related to exercise of options and warrants 21,311 -- -- (Increase) decrease in: Accounts receivable, trade (1,065) (2,996) (10,899) Advances to partitions and note receivables (20,797) (1,700) (1,862) Prepaid expenses and other current assets (10,183) 1,400 (804) Other assets (3,924) -- -- Increase (decrease) in: Accounts and partition payables and accrued expenses 7,978 12,047 5,023 Income taxes payable (5,184) 5,184 -- - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 10,703 24,463 1,622 - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Acquisition of intangibles (9,800) (1,057) (2,007) Capital expenditures, net (27,679) (2,330) (343) Securities sold short (411) 866 -- Due from broker 233 (1,100) -- Loans to stockholder (3,034) (2,075) -- Repayments of stockholder loan 5,109 -- -- Purchase of marketable securities (149,238) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (184,820) (5,696) (2,350) - ------------------------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Proceeds from related party transactions -- -- 7,767 Payments to related parties -- (1,725) (7,038) Payment of note payable to stockholder (5,921) (979) -- Proceeds from sale of common stock 139,069 42,837 -- Proceeds from exercise of options and warrants 12,341 -- -- Acquisition of treasury stock (4,560) -- -- Distributions to stockholders -- (13,200) -- Stock redemption -- (4,500) -- - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 140,929 22,433 729 - ------------------------------------------------------------------------------------------------------------------------------------ Net (decrease) increase in cash and cash equivalents (33,188) 41,200 1 Cash and cash equivalents, at beginning of period 41,211 11 10 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, at end of period $ 8,023 $ 41,211 $ 11 - ------------------------------------------------------------------------------------------------------------------------------------ See accompanying notes to consolidated financial statements.
-44- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- SUMMARY OF ACCOUNTING POLICIES (a) Business Tel-Save Holdings, Inc. (the "Company"), which is incorporated in Delaware, provides long distance services to small and medium-sized businesses located throughout the United States. The Company's long distance service offerings include outbound service, inbound toll-free 800 service and dedicated private line services for data. The Company markets these services nationally primarily through direct marketing and an established distribution network of independent long distance and marketing companies known as "partitions". (b) Reorganization On September 21, 1995, the Company consummated its initial public offering ("IPO") (Note 8(b)). The shares of Tel-Save, Inc., a Pennsylvania corporation (the "Predecessor Corporation"), owned by the two founding stockholders were contributed to the Company as of the date of the IPO. The majority stockholder exchanged all of his shares of the Predecessor Corporation for 21,060,000 shares of the common stock of the Company plus loans of up to $5,000,000. The majority stockholder repaid his outstanding indebtedness, including interest, using a portion of his proceeds from the sale of 1,500,000 shares of common stock in connection with the Company's public offering in April 1996 (Note 8(a)). The minority stockholder exchanged all his shares of the Predecessor Corporation for 7,590,000 shares of the common stock of the Company, $4,500,000 in cash plus a note (the "Cash Flow Note") in the original principal amount of $6,900,000 bearing interest at 10% per annum which was guaranteed by the majority stockholder. The payment and the issuance of the Cash Flow Note to the minority stockholder are accounted for as a distribution of capital. In January 1996, the Company paid the remaining balance of $5,921,000 due under the Cash Flow Note. The transactions described above are collectively referred to as the "Reorganization." (c) Basis of financial statements presentation The consolidated financial statements include the accounts of Tel-Save Holdings, Inc. and its two wholly-owned subsidiaries and have been prepared as if the entities had operated as a single consolidated group since their respective dates of incorporation. All intercompany balances and transactions have been eliminated. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. (d) Recognition of revenue The Company recognizes revenue upon completion of telephone calls by end users. Allowances are provided for estimated uncollectible usage. (e) Cash and cash equivalents The Company considers all temporary cash investments purchased with a maturity of three months or less to be cash equivalents. -45- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (f) Marketable securities The Company buys and holds securities principally for the purpose of selling them in the near term and therefore, they are classified as trading securities and carried at market. Unrealized holding gains and losses (determined by specific identification) on investments classified as trading securities are included in earnings. (g) Prepaid marketing costs Certain costs associated with direct marketing to end users are amortized over a six month period. (h) Property and equipment and depreciation Property and equipment are recorded at cost. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets, which range from three to thirty-nine years. (i) Intangibles and amortization Intangibles include the costs to acquire billing bases of customer accounts, long-distance service contract pricing plans and goodwill arising from business acquisitions. Amortization is computed on a straight-line basis over the estimated useful lives of the intangibles which range from 1 to 40 years. (j) Long-lived assets The Company adopted SFAS No. 121, "Accounting For the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" as of January 1, 1996 and its implementation did not have a material effect on the consolidated financial statements. (k) Income taxes Deferred tax assets and liabilities are recorded for the estimated future tax effects attributable to temporary differences between the basis of assets and liabilities recorded for financial and tax reporting purposes (Note 10). (l) Net income per share The computation of net income per share is based on the weighted average number of common shares outstanding during the period plus the effect of common shares issuable upon exercise of stock options and warrants. Fully diluted earnings per share also reflect additional dilution related to stock options and warrants due to the use of the market price at the end of the period when this price is higher than the average price for the period. Net income per share for the years ended December 31, 1995 and 1994 is based on pro forma net income. All references in the consolidated financial statements with regard to average number of common stock and related per share amounts have been calculated giving retroactive effect to the exchange of shares in the Reorganization and the stock splits. -46- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (m) Financial instruments and risk concentration Financial instruments which potentially subject the Company to concentrations of credit risk are cash investments and marketable securities. At December 31, 1996, a large majority of the Company's cash investments and marketable securities were invested in U.S. government securities and money market funds. The carrying amount of these cash investments approximates the fair value due to their short maturity. The Company believes no significant concentration of credit risk exists with respect to these cash investments and marketable securities. (n) Securities sold short/financial investments with off-balance sheet risk At December 31, 1996, securities sold short by the Company, which consist of equity securities valued at market, resulted in an obligation to purchase such securities at a future date. The short position was closed in March 1997 and the Company recorded a loss of $54,000. NOTE 2 -- MAJOR PARTITIONS Partitions who provided end user accounts, which in the aggregate account for more than 10% of sales, are as follows: Number Of Total Percentage Partitions Of Sales ----------- --------------- Year ended December 31, 1996 1 11% Year ended December 31, 1995 -- -- Year ended December 31, 1994 1 13% NOTE 3 -- PROPERTY AND EQUIPMENT December 31, ------------------------- 1996 1995 ---- ---- (In thousands) Land $ 220 $ -- Buildings and building improvements 3,398 -- Switching equipment under construction 24,861 2,126 Equipment, vehicles and other 2,117 791 -------- -------- 30,596 2,917 Less: Accumulated depreciation (499) (250) -------- -------- $ 30,097 $ 2,667 ======== ======== Switching equipment under construction represents the costs associated with the purchase of AT&T switching equipment and the related installation costs incurred through December 31, 1996 for the deployment of the Company's telecommunications network -- One Better Net ("OBN"). -47- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - INTANGIBLES Year ended December 31, -------------------------- 1996 1995 ---- ---- (In thousands) Goodwill $18,356 $ - Other 6,533 3,064 ------- ----- 24,889 3,064 Less: Accumulated amortization 3,787 1,574 ------- ----- $21,102 $1,490 ======= ====== Amortization expense was $2,213,000, $1,157,000 and $417,000 for the years ended December 31, 1996, 1995 and 1994. NOTE 5 - ACQUISITION On December 13, 1996, in connection with the settlement of certain disagreements among the Company, American Business Alliance, Inc. ("ABA") and the shareholders of ABA, the Company acquired substantially all of the assets of ABA, an independent long distance and marketing company which was previously a partition of the Company, for a total purchase price of $21,369,000, comprised of: (1) cash payment of $9,450,000, (2) assumption of $970,000 of liabilities and (3) the release of ABA's outstanding obligations to the Company of $10,949,000. This transaction was accounted for as a purchase with the results of ABA included in the consolidated financial statements from the acquisition date. The cost in excess of the net assets acquired (goodwill) was approximately $18,356,000 and is being amortized over forty years using the straight-line method. The following pro forma consolidated financial information has been prepared to reflect the acquisition of the assets of ABA. The pro forma financial information is based on the historical financial statements of the Company and ABA. The pro forma financial information is unaudited and is not necessarily indicative of what the actual results of operations of the Company would have been assuming the transaction had been completed as of January 1, 1995 and neither is it necessarily indicative of the results of operations for future periods. Year ended December 31, ---------------------------- 1996 1995 ------------ ----------- (unaudited) (unaudited) (In thousands) Net sales $233,067 $181,220 Net income 13,778 10,269 Net income per share .24 .31 The above pro forma operating results include each company's results of operations for the indicated years and have been adjusted to adopt the Company's accounting policy for ABA's marketing costs (amortization of certain direct marketing costs over a six month period), reflect the amortization of the goodwill, as generated by the acquisition, over a 40 year period, elimination of the interest income on the $9,450,000 cash payment in connection with the acquisition and reduction of provision for income taxes resulting from the utilization of ABA's net operating losses. -48- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 -- REVOLVING LOAN AGREEMENT In March 1996, the Company entered into a revolving loan agreement with an unsecured, committed line of credit with a bank under which borrowings of $50 million are available through March 18, 1997. The Company is required to pay an availability fee per annum of 0.125% of the total available borrowings. Principal is payable upon demand by the bank. Interest is payable monthly at the bank's prime rate less 0.5% or LIBOR plus 0.875%, at the Company's option. Under the terms of the agreement, the Company must maintain certain financial covenants and adhere to certain restrictions. At December 31, 1996, the Company had no borrowings outstanding under the agreement. During February 1997, the bank provided a temporary increase in the amount available under the agreement to $60 million. NOTE 7 -- RELATED PARTY TRANSACTIONS In connection with the Reorganization (Note 1(b)), the Company made distributions of the Company's 1995 taxable income through September 19, 1995 of approximately $13,200,000 in 1995 to its two founding stockholders. NOTE 8 -- STOCKHOLDERS' EQUITY (a) 1996 Public Offering The Company consummated a public offering (the "1996 Offering") of 18,568,000 shares of common stock (adjusted to reflect the most recent stock split, Note 8(c)), including the underwriter's over-allotment, at a price of $8.75 per share in April and May, 1996. Of the 18,568,000 shares offered, 17,068,000 were sold by the Company and 1,500,000 were sold by the majority stockholder. Proceeds of the 1996 Offering to the Company, less underwriting discounts of approximately $9,302,000, were approximately $140,043,000. Expenses for the 1996 Offering were approximately $974,000 resulting in net proceeds to the Company of approximately $139,069,000. The majority stockholder used a portion of his proceeds to repay his outstanding indebtedness, including interest, to the Company. (b) Initial Public Offering In September and October, 1995, the Company consummated its IPO of 10,350,000 shares of common stock (adjusted to reflect stock splits, Note 8(c)), including the underwriter's overallotment option, at a price of $4.59 per share. Proceeds of the offering less underwriting discounts of approximately $3,151,000 were $44,287,000. Expenses for the IPO totaled approximately $1,450,000, resulting in net proceeds to the Company of approximately $42,837,000. In connection with the IPO, the Company issued warrants to purchase 900,000 shares of common stock to the underwriter. The exercise price of the warrants is $5.73 per share of common stock and such warrants expire on September 21, 2000. (c) Stock Splits On January 3, 1997, the Company's Board of Directors approved a two-for-one split of the common stock in the form of a 100% stock dividend. The additional shares resulting from the stock split were distributed on January 31, 1997 to all stockholders of record at the close of business on January 17, 1997. The consolidated balance sheet as of December 31, 1996 and the consolidated statement of stockholders' equity for the year ended December 31, 1996 reflect the recording of the stock split as if it had occurred on December 31, 1996. -49- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On February 16, 1996, the Company's Board of Directors approved a three-for-two split of the common stock in the form of a 50% stock dividend. The additional shares resulting from the stock split were distributed on March 15, 1996, to all stockholders of record at the close of business on February 29, 1996. The consolidated balance sheet as of December 31, 1995 and the consolidated statement of stockholders' equity for the year ended December 31, 1995 reflect the recording of the stock split as if it had occurred on December 31, 1995. Further, all references in the consolidated financial statements to average number of shares outstanding and related prices, per share amounts, warrant and stock option data have been restated for all periods to reflect the stock splits. (d) Authorized Shares During 1996, the Board of Directors and stockholders approved the increase in the number of authorized shares of the Company's $0.01 par value common stock to 100,000,000 shares. NOTE 9 - STOCK OPTIONS AND WARRANTS (a) Stock Options At December 31, 1996, the Company had option agreements with most of its key employees and had one stock option plan. The agreements and plan are more fully described below. The Company applies Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and related Interpretations in accounting for the agreement and the plan. Under APB No. 25, when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation cost is recognized. The following is a summary of the agreements and the option plan: Prior to the Company's Initial Public Offering in September, 1995, the Company granted ten key employees options to purchase shares of the Company's common stock. The options, which were valued based on the fair market value of the Company at the date of grant, vest 22 months from the date of issuance and expire five years from the date of grant. All options were vested as of December 31, 1996. In September 1995 and March 1996, the Company granted options to purchase a total of 70,000 shares of common stock to each of the two nonemployee directors of the Company. In September 1995, the Company's Board of Directors and stockholders adopted the Company's 1995 Employee Stock Option Plan (the "Option Plan") which provided for the granting of up to 1,950,00 shares of common stock. An amendment to the Option Plan was approved by the Board of Directors and stockholders in April 1996 increasing the authorized number of options which can be granted under the Option Plan to 5,000,000 shares of common stock. As of December 31, 1996, 4,985,000 options had been granted under the Option Plan. In 1996 the Company granted certain employees 3,561,000 non-qualified options to purchase shares of the Company's common stock. The exercise price of all stock options granted under the agreements and Option Plan is at least equal to the fair market value of such shares on the date of the grant. Options become exercisable from one to three years from the date of the grant. -50- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company to provide pro forma information regarding net income and earnings per share as if compensation cost for the Company's stock options had been determined in accordance with the fair value-based method prescribed in SFAS No. 123. The Company estimates the fair value of each stock option at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1995 and 1996, respectively: no dividends paid for all years; expected volatility of 40.4% for all years (due to the Company's limited trading history, average volatility of several similar telecommunication companies was used); weighted average risk-free interest rates of 5.8% and 5.7%, respectively; and expected lives of 1 to 4 years. Under the accounting provisions of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below. 1996 1995 ---- ---- Net income (in thousands) As reported $ 20,168 $ 10,819 Pro forma $ 16,521 $ 10,436 Primary earnings As reported $ .35 $ .32 Pro forma $ .29 $ .31 Fully diluted earnings per share As reported $ .35 $ .32 Pro forma $ .28 $ .31 -51- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables contain information on stock options for the three year period ended December 31, 1996:
Exercise Weighted price range average Option Shares per share exercise price - ------------------------------------------------------------------------------------------------------------- Outstanding, January 1, 1994 1,515,600 $.32 $.32 Granted 940,200 $.59-$1.57 $.75 - ------------------------------------------------------------------------------------------------------------- Outstanding, December 31, 1994 2,455,800 $.32-$1.57 $.48 Granted 1,950,000 $4.58 $4.58 - ------------------------------------------------------------------------------------------------------------- Outstanding, December 31, 1995 4,405,800 $.32-$4.58 $2.30 Granted 6,736,000 $4.09-$12.00 $7.96 Exercised (2,158,000) $.32-$5.67 $2.28 - ------------------------------------------------------------------------------------------------------------- Outstanding, December 31, 1996 8,983,800 $.32-$12.00 $6.54 - ------------------------------------------------------------------------------------------------------------- Exercise Weighted price range average Exercisable at year-end Option Shares per share exercise price - ------------------------------------------------------------------------------------------------------------- 1994 - - - 1995 1,515,600 $.32 $.32 1996 2,649,800 $.32-$4.58 $2.82 - ------------------------------------------------------------------------------------------------------------- Options granted in Weighted-average fair value - ------------------------------------------------------------------------------------------------------------- 1995 $1.14 1996 $2.39 - -------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding at December 31, 1996:
Range of exercise prices - ------------------------------------------------------------------------------------------------------------- $.32-$1.57 $4.09-$5.92 $8.25-$9.63 $10.50-$12.00 $.32-$12.00 -------------- -------------- ------------- --------------- ------------- Outstanding Options Number outstanding at December 31, 1996 1,114,800 4,308,000 505,000 3,056,000 8,983,800 Weighted-average remaining contractual life (years) 1.64 2.07 2.42 2.59 2.21 Weighted-average exercise price $.38 $4.74 $8.68 $10.98 $6.54 Exercisable options Number outstanding at December 31, 1996 1,114,800 1,535,000 - - 2,649,800 Weighted-average exercise price $.38 $4.58 - - $2.82
-52- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (b) Warrants At December 31, 1996, the Company had warrant agreements with certain partitions and the underwriter for its IPO (Note 8(b)). All warrants were issued with exercise prices equal to or above the market price of the underlying stock at the date of the grant. These warrants are accounted for based on their fair value. At December 31, 1996, 1,900,000 warrants were outstanding with exercise prices ranging from $4.67 to $5.73 and an average weighted exercise price of $5.00 and 600,000 which were currently exercisable at a weighted exercise price of $5.73. The remaining warrants are exercisable over a one to two year period beginning in January 1997. Further, at December 31, 1996, an additional 1,812,000 warrants were outstanding although the Company currently does not believe that the performance criteria associated with these warrants will be satisfied. In January 1997, 800,000 of the warrants were purchased by the Company and recorded as a reduction in additional paid-in capital. See also Note 13. NOTE 10 -- INCOME TAXES On June 1, 1991, the Company, with the consent of its stockholders, elected to be taxed as an S Corporation. As a result of the election, all earnings of the Predecessor Corporation were taxed directly to the stockholders. Accordingly, the statements of income prior to September 20, 1995 did not include provisions for income taxes. In connection with the Company's IPO, as described in Note 8(b), on September 19, 1995, the Company terminated its S Corporation status. Pro forma tax provisions have been calculated as if the Company's results of operations were taxable as a C Corporation under the Internal Revenue Code for the years ended December 31, 1995 and 1994. The following summarizes the provision for pro forma income taxes: Year ended December 31, ----------------------- 1995 1994 ---- ---- (In thousands) Current: Federal $5,574 $2,892 State and local 1,639 850 ----- --- Pro forma provision for income taxes $7,213 $3,742 ====== ====== The provision for pro forma income taxes on adjusted historical income for the two years in the period December 31, 1995 differs from the amounts computed by applying the applicable Federal statutory rates due to the following:
Year ended December 31, ------------------------- 1995 1994 ---- ---- (In thousands) Provision for Federal income taxes at the statutory rate $6,311 $3,274 State and local income taxes, net of Federal benefit 1,082 561 Other (180) (93) -------- --------- Pro forma provision for income taxes $7,213 $3,742 ======== =========
-53- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As a result of the termination, the Company was required to provide for taxes on income for the period subsequent to September 19, 1995 and for the previously earned and untaxed S Corporation income which has been deferred primarily as a result of reporting on a cash basis. The provision for income taxes for the years ended December 31, 1996 and 1995 consisted of the following: Year ended December 31, ------------------------------- 1996 1995 ---- ---- (In thousands) Current: Federal $10,995 $4,379 State and local 1,817 1,809 --------- ------- Total current 12,812 6,188 Deferred: Federal (607) 2,201 State and local - 608 --------- ------- Total deferred (607) 2,809 --------- ------ $12,205 $8,997 ========= ======= A reconciliation of the Federal statutory rate to the provision for income taxes is as follows:
Year ended December 31, -------------------------------------------------------------------- 1996 1995 -------------------------------- -------------------------------- (In thousands) (In thousands) Federal income taxes computed at the statutory rate $11,331 35.0% $6,311 35.0% Increase (decrease): Federal income taxes at the statutory rate from January 1, 1995 to September 19, 1995 - - (4,086) (22.7) Federal and state taxes resulting from cash to accrual basis for tax reporting - - 6,399 35.5 State income taxes less Federal benefit 1,199 3.7 373 2.1 Other (325) (1.0) - - ------------- -------------- ------------- --------------- Total provision for income taxes $12,205 37.7% $8,997 49.9% ============= ============== ============= ==============
Deferred tax (assets) liabilities at December 31, 1996 and 1995 are comprised of the following elements:
Year ended December 31, ----------------------------------- 1996 1995 ------------- -------------- (In thousands) Taxable loss carryforwards $(3,705) $ - Federal and state taxes resulting from cash to accrual basis for tax reporting 2,342 3,130 Amortization of certain intangibles (85) (227) Other (55) (94) -------------- -------------- Deferred tax (assets) liabilities (included in other assets for 1996) $(1,503) $2,809 ============== ==============
-54- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 -- STATEMENTS OF CASH FLOWS
Year ended December 31, ---------------------------------- 1996 1995 1994 ---- ---- ---- (In thousands) Supplemental disclosure of cash flow information: Cash paid for: Interest $ 47 $ 24 $ 55 ======== ======== ===== Income taxes $1,090 $3,813 $ -- ======== ======== =====
In connection with the acquisition of the assets of ABA, the Company released ABA of its outstanding obligations to the Company of $10,949,000 (Note 5). During 1996, the Company recorded an intangible of $1,077,000 in connection with the issuance of warrants to certain partitions (Note 9(b)). During 1995, the Company issued the Cash Flow Note in the amount of $6,900,000 to the minority stockholder of the Predecessor Corporation in connection with the IPO and Reorganization (Note 1(b)). NOTE 12 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands, except for share data) 1996 Sales $51,065 $57,015 $60,079 $64,265 Gross profit 6,832 7,387 8,323 9,285 Operating income 4,546 4,882 5,871 6,489 Net income 3,377 4,058 7,032 5,701 Net income per share - Primary 0.08 0.07 0.11 0.09 Net income per share - Fully Diluted 0.07 0.07 0.11 0.09 1995 Sales $36,617 $44,728 $48,366 $50,391 Gross profit 5,374 6,113 5,670 6,824 Operating income 4,213 4,855 4,008 4,625 Net income 2,555 2,897 2,519 2,848 Net income per share - Primary 0.08 0.09 0.08 0.07 Net income per share-Fully Diluted 0.08 0.09 0.08 0.07
-55- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - SUBSEQUENT EVENT On February 25, 1997, the Company announced that it had entered into a Telecommunications Marketing Agreement (the "AOL Agreement"), dated as of February 22, 1997 and effective as of February 25, 1997, with America Online, Inc. ("AOL"), under which the Company will be the exclusive provider of long-distance telecommunications services to be marketed by AOL to all of the subscribers to AOL's online network under a distinctive brand name to be used exclusively for the Company's services. The services will include provision for online sign-up, call detail and reports and credit card payment. Under the AOL Agreement, AOL will provide millions of dollars of online advertising and promotion of the services and provide all of its subscribers with access to a dedicated service area online for the Company. AOL subscribers who sign-up for the telecommunications services will be customers of the Company, as the carrier providing such services. The Company also has certain rights under the AOL Agreement to offer, on a comparably exclusive basis, local and wireless telecommunications services when available. It is anticipated that the services will be tested in the early summer and offered generally to AOL subscribers in the fall of 1997. The AOL Agreement has an initial term of three years and can be extended by AOL on an annual basis thereafter. Under the AOL Agreement, the Company made an initial payment of $100,000,000 to AOL at signing and agreed to provide marketing payments to AOL based on a percentage of the Company's profits from the services (between 50% and 70%, depending on the number of subscribers to the services). The AOL Agreement provides that $43 million of the initial payment will be offset and recoverable by the Company through reduction of such profit-based marketing payments during the initial term of the AOL Agreement or, subject to certain monthly reductions by offset of the amount thereof, directly by AOL upon certain earlier terminations of the AOL Agreement. The $57 million balance of the initial payment will be offset and is recoverable through a percentage of such profit-based marketing payments made after the first five years of the AOL Agreement (when extended beyond the initial term) and by offset against a percentage of AOL's share of the profits from the services after termination or expiration of the AOL Agreement. Any portion of the $43 million not previously recovered or reduced in amount would be added to the $57 million and would be recoverable similarly. Also under the AOL Agreement, the Company issued to AOL at signing two warrants to purchase shares of the Company's common stock at a premium over the market value of such stock on the issuance date. One warrant is for 5 million shares, at an exercise price of $15.50 per share, one-half of which shares will vest at the time the service is first made generally available to AOL online network subscribers in accordance with the AOL Agreement or the first anniversary of the warrant issuance, whichever is earlier, and the balance of which will vest on the first anniversary of issuance if the AOL Agreement has not terminated. The other warrant is for up to 7 million shares, at an exercise price of $14.00 per share, which will vest, commencing December 31, 1997, based on the number of subscribers to the services and would vest fully if there are at least 3.5 million such subscribers at any one time. The Company also agreed to issue to AOL an additional warrant to purchase 1 million shares of its common stock, at market value at the time of issuance, upon each of the first two annual extensions by AOL of the term of the AOL Agreement, which warrants also will vest based on the number of subscribers to the services. The Company funded the $100 million initial payment by borrowing $50 million under its revolving loan agreement under a temporary increase in the agreement to $60 million (Note 6), and an additional $50 million as a margin advance from one of its brokers. Currently, the Company holds a U.S. Treasury Bill with a face value of $150 million, which matures in November 1997, as security for the advance. -56- ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE Not applicable. PART III ITEMS 10 THROUGH 13. Information required by Part III (Items 10 through 13) of this Form 10-K is incorporated by reference to the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held in April or May of 1997, which will be filed with the Securities and Exchange Commission not later than 120 days after the end of the fiscal year to which this Form 10-K relates. -57- PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this annual Report on Form 10-K. 1. Consolidated Financial Statements: The Consolidated Financial Statements filed as part of this Form 10-K are listed in the "Index to Consolidated Financial Statements" in Item 8. 2. Consolidated Financial Statement Schedule: The Consolidated Financial Statement Schedule filed as part of this report is listed in the "Index to S-X Schedule." Schedules other than those listed in the accompanying Index to S-X Schedule are omitted for the reason that they are either not required, not applicable, or the required information is included in the Consolidated Financial Statements or notes thereto. -58- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES INDEX TO S-X SCHEDULE PAGE ---- Report of Independent Certified Public Accountants 60 Schedule II -- Valuation & Qualifying Accounts 61 -59- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Tel-Save Holdings, Inc. The audits referred to in our report dated January 29, 1997 relating to the consolidated financial statements of Tel-Save Holdings, Inc. and subsidiaries, which is contained in Item 8 of this Form 10-K, included the audits of the financial statement schedule listed in the accompanying index for each of the three years in the period ended December 31, 1996. This financial statement schedule is the responsibility of management. Our responsibility is to express an opinion on this schedule based on our audits. In our opinion, the financial statement Schedule II -- Valuation and Qualifying Accounts, presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP BDO Seidman, LLP New York, New York January 29, 1997 -60- TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
Charged Balance at to Costs Beginning of and Other Balance at Description Period Expenses Changes Deductions End of Period - ----------- ------ -------- ------- ---------- ------------- Year ended December 31, 1996: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts $804 $38 $145(a) $ -- $987 ==== === ======= ==== ==== Year ended December 31, 1995: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts $987 $(13) $(170)(a) $ -- $804 ==== ===== ========= ====== ==== Year ended December 31, 1994: Reserves and allowances deducted from asset accounts: Allowance for uncollectible accounts $287 $53 $647(a) $ -- $987 ==== === ======= ======= ==== (a) Amount represents portion of change in allowance for uncollectible accounts applied against Accounts Payable - Partitions.
-61- (3) Exhibits:
EXHIBIT NO. DESCRIPTION - ---------- ---------------------------------------------------------------------------------------------- 2.1 Plan of Reorganization Between and among Tel-Save Holdings, Inc., a Delaware Corporation, Tel-Save, Inc., a Pennsylvania Corporation, Daniel Borislow and Paul Rosenberg, and Exhibits Thereto (Incorporated by reference to Exhibit 2.1 to the Company's registration statement on Form S-1 (File No. 33-94940)). 3.1 Amended and Restated Certificate of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's registration statement on Form S-1 (File No. 33-94940)). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's registration statement on Form S-1 (File No. 33-94940)). 9.1 Voting Trust Agreement between Daniel Borislow and Paul Rosenberg (included as part of Exhibit 2.1). 10.1* Employment Agreement between the Company and Daniel Borislow and related Agreement (incorporated by reference to Exhibit 10.1 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.2* Employment Agreement between the Company and Emanuel J. DeMaio (incorporated by reference to Exhibit 10.2 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.3* Employment Agreement between the Company and Gary W. McCulla (incorporated by reference to Exhibit 10.3 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.4* Employment Agreement between the Company and Joseph A. Schenk (incorporated by reference to Exhibit 10.4 to the Company's registration statement on Form S-1 (File No. 333-2738)). 10.5* Employment Agreement between the Company and Aloysius T. Lawn, IV(incorporated by reference to Exhibit 10.5 to the Company's registration statement on Form S-1 (File No. 333-2738)). 10.6* Employment Agreement between the Company and Edward B. Meyercord, III. 10.7 Indemnification Agreement between the Company and Daniel Borislow (incorporated by reference to Exhibit 10.4 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.8 Indemnification Agreement between the Company and Emanuel J. DeMaio (incorporated by reference to Exhibit 10.5 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.9 Indemnification Agreement between the Company and Gary W. McCulla (incorporated by reference to Exhibit 10.6 to the Company's registration statement on Form S-1 (File No. 33-94940)). -62- 10.10 Indemnification Agreement between the Company and Joseph M. Morena (incorporated by reference to Exhibit 10.7 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.11 Indemnification Agreement between the Company and Peter K. Morrison (incorporated by reference to Exhibit 10.8 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.12 Indemnification Agreement between the Company and Kevin R. Kelly (incorporated by reference to Exhibit 10.9 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.13 Indemnification Agreement between the Company and Aloysius T. Lawn, IV (incorporated by reference to Exhibit 10.12 to the Company's Form 10-K for the Fiscal year ended December 31, 1995). 10.14 Indemnification Agreement between the Company and Edward B. Meyercord, III. 10.15 Agreement dated as of March 15, 1994 between the Company and Global Network Communications (incorporated by reference to Exhibit 10.10 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.16 AT&T Contract Tariff No. 516 (incorporated by reference to Exhibit 10.11 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.17 AT&T Contract Tariff No. 1715 (incorporated by reference to Exhibit 10.15 to the Company's registration statement on Form S-1 (File No. 333-2738)). 10.18 AT&T Contract Tariff No. 2039 (incorporated by reference to Exhibit 10.16 to the Company's registration statement on Form S-1 (File No. 333-2738)). 10.19 AT&T Contract Tariff No. 2432 (incorporated by reference to Exhibit 10.17 to the Company's registration statement on Form S-1 (File No. 333-2738)). 10.20 AT&T Contract Tariff No. 3628 (incorporated by reference to Exhibit 10.18 to the Company's registration statement on Form S-1 (File No. 333-2738)). 10.21 AT&T Contract Tariff No. 5776. 10.22 $50,000,000 line of credit from PNC Bank, N.A., dated March 22, 1996 (incorporated by reference to Exhibit 10.19 to the Company's registration statement on Form S-1 (File No. 333-2738)). 10.23 Modification Agreement between the Company and PNC Bank, N.A. dated February 24, 1997. 10.24+ General Agreement between Tel-Save, Inc. and AT&T Corp. dated June 26, 1995 (incorporated by reference to Exhibit 10.14 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.25* Tel-Save Holdings, Inc. 1995 Employee Stock Option Plan (incorporated by reference to Exhibit 10.15 to the Company's registration statement on Form S-1 (File No. 33-94940)). -63- 10.26* Tel-Save Holdings, Inc. Employee Bonus Plan (incorporated by reference to page 13 of the Company's Proxy Statement for the Company's 1996 Annual Meeting of Stockholders dated April 3, 1996). 10.27* Non-Qualified Stock Option Agreement between the Company and Daniel Borislow (incorporated by reference to Exhibit 10.17 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.28* Non-Qualified Stock Option Agreement between the Company and Emanuel J. DeMaio (incorporated by reference to Exhibit 10.18 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.29* Non-Qualified Stock Option Agreement between the Company and Mary Kennon (incorporated by reference to Exhibit 10.19 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.30* Non-Qualified Stock Option Agreement between the Company and Gary W. McCulla (incorporated by reference to Exhibit 10.20 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.31* Non-Qualified Stock Option Agreement between the Company and Peter K. Morrison (incorporated by reference to Exhibit 10.22 to the Company's registration statement on Form S-1 (File No. 33-94940)). 10.32++ Telecommunications Marketing Agreement by and among the Company, Tel-Save, Inc. and America Online, Inc., dated February 22, 1997. 11.1 Net Income Per Share Calculation. 21.1 Subsidiaries of the Company. 23.1 Consent of BDO Seidman, LLP. 27 Financial Data Schedule. - ---------- * Management contract or compensatory plan or arrangement. + Confidential treatment previously has been granted for a portion of this exhibit. ++ Confidential treatment has been requested for a portion of this exhibit. (b) Reports on Form 8-K. The following Current Reports on Form 8-K were filed by the Company during the three months ended December 31, 1996: 1. Current Report on Form 8-K dated December 30, 1996. 2. Current Report on Form 8-K dated November 18, 1996.
-64- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: TEL-SAVE HOLDINGS, INC. March 18, 1997 By: /s/ Daniel Borislow ---------------------------- Daniel Borislow Chairman of the Board, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. March 18, 1997 By: /s/ Daniel Borislow ------------------- Daniel Borislow Chairman of the Board, Chief Executive Officer and Director By: ------------------- Gary W. McCulla President, Director of Sales and Marketing and Director March 18, 1997 By: /s/ Emanuel J. DeMaio --------------------- Emanuel J. DeMaio Chief Operations Officer and Director March 18, 1997 By: /s/ Joseph A. Schenk -------------------- Joseph A. Schenk Chief Financial Officer, Treasurer and Director March 18, 1997 By: /s/ Kevin R. Kelly ------------------ Kevin R. Kelly Controller March 18, 1997 By: /s/ George Farley ----------------- George Farley Director March 18, 1997 By: /s/ Harold First ---------------- Harold First Director March 18, 1997 By: /s/ Ronald R. Thoma ------------------- Ronald R. Thoma Director -65- EX-10.6 2 EXHIBIT 10.6 EMPLOYMENT AGREEMENT ---------- --------- THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of the 5th day of September, 1996 between Tel-Save, Inc. ("Company"), a Pennsylvania corporation and a wholly-owned subsidiary of Tel-Save Holdings, Inc. ("Holdings"), and Edward B. Meyercord, III ("Employee"). Preliminary Statement ----------- --------- WHEREAS, Company desires to employ Employee, and Employee desires to be employed by Company; and WHEREAS, Company and Employee desire to enter into this Agreement which sets forth the terms and conditions of said employment. 1. Employment. Company agrees to employ Employee, and Employee accepts such employment and agrees to serve Company, on the terms and conditions set forth herein. Except as otherwise specifically provided herein, Employee's employment shall be subject to the employment policies and practices of Company in effect from time to time during the Term of Employee's employment hereunder (including without limitation its practices as to reporting and withholding). 2. Term of Agreement. The term of Employee's employment hereunder shall commence on October 1, 1996 (the "Effective Date") and shall continue in effect for a period of five years thereafter, except as hereinafter provided ("Term"). 3. Position and Duties. Except as may otherwise be agreed upon between Company and Employee, Employee shall perform such duties and responsibilities of Executive Vice President-Marketing and Corporate Developments or such duties and responsibilities as may be reasonably assigned or delegated to him from time to time, including without limitation service as an employee, officer or director of Company and affiliates of Company without additional compensation. References in this Agreement to Employee's employment with Company shall be deemed to refer to employment with Company or an affiliate. Employee shall perform his duties and responsibilities to the best of his abilities in a diligent, trustworthy, businesslike and efficient manner. Employee shall devote substantially all of his working time and efforts to the business and affairs of Company; provided, however, that nothing in this Agreement shall preclude the Employee from (i) engaging in charitable activities and community affairs and (ii) managing his personal investments and affairs. 4. Compensation and Related Matters. 4.1 Base Salary. During the Term of his employment hereunder, Company shall pay to Employee an annualized base salary of not less than $210,000, subject to review from time to time by Company's Board of Directors ("Base Salary"). Base Salary shall be paid in accordance with Company's usual and customary payroll practices. 4.2 Benefit Plans and Arrangements. Employee shall be entitled to participate in and to receive benefits under Company's employee benefit plans and arrangements (including bonus plans) as are made available to the Company's senior executives in effect during the Term of his employment hereunder, which may be altered from time to time at the discretion of Company. 4.3 Perquisites. During the Term of his employment hereunder, Employee shall be entitled to receive fringe benefits as are made available to the Company's senior executives. 4.4 Expenses. Company shall promptly reimburse Employee for all normal out-of-pocket expenses related to Company's business that are actually paid or incurred by him in the performance of his services under this Agreement and that are incurred, reported and documented in accordance with Company's policies. In addition, during the Term of his employment hereunder, the Company agrees to provide Employee with an automobile, as the Company shall determine, and the Company shall keep such automobile fully insured in accordance with the Company's practices for similarly situated employees. 4.5 Relocation of Employee. (a) The Company shall pay Employee's reasonable moving expenses incurred in connection with Employee's move from his current residence in Ridgewood, New Jersey ("Old Residence") to a new residence in either the Princeton, New Jersey or New Hope, Pennsylvania areas ("New Residence"). Employee shall obtain the Company's prior approval for any single moving expenditure in excess of $1,000. (b) (i) Subject to the limitation in Section 4.5(b)(iv), upon the consummation of the sale of Employee's Old Residence, the Company agrees to pay Employee the amount of money equal to the difference between the purchase price that Employee paid for such residence and the sale price that Employee received in connection with the sale of such residence. (ii) Subject to the limitation in Section 4.5(b)(iv), in the event that and so long as the Employee owns both a New Residence and his Old Residence during the period commencing on the date hereof and terminating nine months thereafter ("Transition Period"), the Company shall reimburse the Employee for the greater of (i) his monthly mortgage for his New Residence and (ii) his monthly mortgage payment for his Old Residence, provided, however, that the Company shall reimburse the Employee only for one such mortgage payment each month during the Transition Period. (iii) Subject to the limitation of Section 4.5(b)(iv), to the extent that Employee has not purchased the New Residence, the Company shall provide the Employee with a two-bedroom rental residence, as the Company shall determine during the Transition Period. (iv) Notwithstanding the foregoing, the Company's aggregate liability to Employee pursuant to this Section 4.5(b) shall not exceed fifty thousand dollars ($50,000.00). 4.6 Stock Options. (a) Employee shall be granted an option to purchase 400,000 shares of common stock of Holdings (the "Option") in accordance with the Stock Option Agreement attached hereto as Exhibit A. The Option shall have an exercise price equal to $22.25 which is equal to the fair market value of the common stock of Holdings on the date hereof. The Option shall be subject to and conditional upon the Option receiving (i) the approval of the Board of Directors of Holdings and (ii) the affirmative vote of a majority of all outstanding shares of Holdings at the next annual meeting of the stockholders of Holdings ("Stockholder Approval") and the Option shall be null and void if such approval is not obtained. The Option shall be exercisable in installments, as follows: (i) 133,333 shares of common stock may be purchased on the first anniversary of the date hereof, (ii) 133,333 shares of common stock may be purchased on the second anniversary of the date hereof and (iii) 133,334 shares of common stock may be purchased on the third anniversary of the date hereof. (b) Company agrees to file with the Securities and Exchange Commission a Registration Statement on Form S-8 (or if unavailable, a registration statement on Form S-3) to register the shares issuable upon exercise of the Option under the Securities Act of 1933 ("Securities Act") and any applicable state securities or "Blue Sky" laws on or before the first anniversary of the date hereof. Notwithstanding the foregoing, the Company shall be entitled to postpone for a reasonable period of time the filing or the effectiveness of such registration statement if the Board of Directors of the Company shall determine in good faith that such filing or effectiveness would be materially detrimental to the Company's business interest. 4.7 Signing Bonus. In consideration of Employee's Agreement to become employed by Company, Company shall pay Employee $400,000 at the signing hereof. 4.8 Change of Control. In the event of a "change in control" of Holdings occurs, Employer shall pay Employee an amount equal to the difference between $2,000,000 and the sum of (a) the aggregate "spread" upon the Employee's prior exercise(s) of the Option, if any, and (b) the amount of the spread on the Option on the date of the change in control, if any, assuming Employee exercised the Option. For purposes of this paragraph 4.8: (A) "change in control" of Holdings shall have been deemed to occur if (z) Daniel Borislow ceases for any reason to be Chairman of the Board and Chief Executive Officer of Holdings and the Company or (y) any of the events listed in paragraph 2(a) of the Option shall have occurred; provided, however, that the foregoing shall not apply to a change in status of Daniel Borislow in connection with any transaction or series of transactions currently referred to by the Company as "Project Vineyard" so long as Daniel Borislow retains the title of either Chairman of the Board or Chief Executive Officer of Holdings and the Company thereafter; and (B) "spread" means the difference between the fair market value (which shall be deemed to be the closing price of the common stock of Holdings on the relevant date) of the shares with respect to which the Option is exercised and the aggregate exercise price paid. 5. Termination. The Term of Employee's employment hereunder may be terminated under the following circumstances: 5.1 Death. The Term of Employee's employment hereunder shall terminate upon his death. 5.2 Disability. Company may terminate the Term of Employee's employment hereunder as a result of Employee's physical or mental incapacity in accordance with Company's disability policy. 5.3 Cause. (a) Upon written notice, Company may terminate the Term of Employee's employment hereunder for Cause. For purposes of this Agreement, Company shall have "Cause" to terminate Employee's employment hereunder upon (i) material breach of any material provision of this Agreement; (ii) willful misconduct as an employee of Company in connection with misappropriating any funds or property of Company or attempting to willfully obtain any personal profit from any transaction in which Employee has an interest which is adverse to the interests of Company; or (iii) gross neglect or unreasonable refusal to perform the duties assigned to Employee under or pursuant to this Agreement. 5.4 By Employee. (i) Employee may terminate the Term of his employment hereunder upon sixty days prior written notice to Company, provided that, upon the giving of such notice by Employee, Company may establish an earlier date for the termination of the Term and such termination under this Section 5.4. (ii) Employee may terminate employment hereunder for Good Reason immediately and with notice to Company. "Good reason" for termination by Employee shall include, but is not limited to, the following: (a) Material breach of any provision of this Agreement by Company, which breach shall not have been cured by Company within thirty (30) days of receipt of written notice of said material breach; (b) Failure to maintain Employee in a position commensurate with that referred to in Section 3 of this Agreement; or (c) The assignment to Employee of any duties inconsistent with the Employee's position, authority, duties or responsibilities as contemplated by Section 3 of this Agreement, or any other action by Company which results in a diminution of such position, authority, duties or responsibilities. 5.5 Without Cause. Company may otherwise terminate the Term of Employee's employment at any time upon written notice to Employee. 6. Compensation In the Event of Termination. In the event that the Employee's employment pursuant to this Agreement terminates prior to the end of the Term of this Agreement, the Company shall pay the Employee compensation as set forth below: 6.1 By Employee for Good Reason; By Company Without Cause. In the event that the Employee's employment hereunder is terminated: (i) by the Employee for good reason or (ii) by the Company without Cause, then (A) the Company shall continue to pay and provide Employee his compensation and benefits as set forth in Section 4 in the same manner as before termination, and for a period of time ending on the earlier of the date when the Term of this Agreement would otherwise have expired in accordance with Section 2 of this Agreement and the second anniversary of the date of such termination and (B) fifty percent (50%) of the outstanding stock options granted to Employee which are unvested shall immediately vest and Employee shall have the right to exercise any vested stock options during the period ending on the second anniversary of the date of such termination or for the remainder of the exercise period; if less. 6.2 By Company for Cause; By Employee Without Cause. In the event that the Company shall terminate the Employee's employment hereunder for Cause pursuant to Section 5.3 hereof or Employee shall terminate his employment hereunder without Good Reason, all compensation and benefits, as specified in Section 4 of this Agreement, heretofore payable or provided to the Employee shall cease to be payable or provided, except for salary and benefits which may have been earned and are due and payable but which have not been paid as of the date of termination and reimbursements for expenses which may have been incurred, reported and documented but which have not been paid as of the date of termination. 6.3 Death. In the event of Employee's death the Company shall not be obligated to pay Employee or his estate or beneficiaries any compensation except for salary and benefits which may have been earned and are due and payable but which have not been paid as of the date of termination and reimbursements for expenses which may have been incurred, reported and documented but which have not been paid as of the date of termination; provided, however, that upon termination due to death, all outstanding stock options granted to the Employee which are unvested shall immediately vest and the Employee's estate or beneficiaries as the case may be, shall have the right to exercise any vested stock options during the period ending on the second anniversary of the date of such termination or, for the remainder of the exercise period, if less. 6.4 Disability. In the event of Employee's disability, the Company shall not be obligated to pay Employee or his estate or beneficiaries any compensation except for: (a) salary and benefits which may have been earned and are due and payable but which have not been paid as of the date of termination; (b) reimbursement for expenses which may have been incurred, reported and documented but which have not been paid as of the date of termination; and (c) the Company, at its option, either will pay Employee (i) $36,000 per year until Employee reaches the age of 65 or (ii) a lump sum equal to the present value of the amount to be paid pursuant to Section 6.4(c)(i) above. Upon termination due to disability fifty percent (50%) of the outstanding stock options granted to the Employee which are unvested shall immediately vest and the Employee or his estate or beneficiaries, as the case may be shall have the right to exercise any vested stock options during the period ending on the second anniversary of the date of such termination or for the remainder of the exercise period, if less. 6.5 No Mitigation. In the event of any termination of employment under Section 5, the Employee shall be under no obligation to seek other employment; provided, however, to the extent that Employee does obtain other employment subsequent to the termination of Employee's employment hereunder, Company's obligations under this Agreement shall terminate. 7. Unauthorized Disclosure. Employee shall not, without the prior written consent of Company, disclose or use in any way, either during the Employee's employment with Company or thereafter, except as required in the course of such employment, any confidential business or technical information or trade secret acquired in the course of such employment, whether or not conceived of or prepared by him, which is related to any service or business of Company or any Company affiliate; provided, that the foregoing shall not apply to (i) information which is not unique to the Company or which is generally known to the industry or the public other than as a result of Employee's breach of this covenant, (ii) information known to the Employee prior to the Effective Date, or (iii) information which Employee is required to disclose to or by any governmental or judicial authority; provided, however, if Employee should be required in the course of judicial or administrative proceedings to disclose any information Employee shall give Company prompt written notice thereof so that Company may seek an appropriate protective order and/or waive in writing compliance with the confidentiality provisions of this Agreement. If, in the absence of a protective order or the receipt of a waiver by the Company, Employee is nonetheless, in the written opinion of its counsel, compelled to disclose information to a court or tribunal or otherwise stand liable for contempt or suffer other serious censure or penalty, Employee may disclose such information to such court or tribunal without liability to any other party hereto. 8. Tangible Items. All files, records, documents, manuals, books, forms, reports, memoranda, studies, data, calculations, recordings, correspondence, in whatever form they may exist, and all copies, abstracts and summaries of the foregoing and all physical items related to the business of Company and its affiliates, other than merely personal items, whether of a public nature or not, and whether prepared by Employee or not, are and shall remain the exclusive property of Company and its affiliates and shall not be removed from their premises, except as required in the course of employment by Company, without the prior written consent of Company, and the same shall be promptly returned by Employee on the termination of Employee's employment with Company or at any time prior thereto upon the request of Company. 9. Inventions and Patents. Employee agrees that all inventions, innovations, improvements, developments, methods, designs, analyses, drawings, reports, and all similar or related information which relates to Company's actual or anticipated business, research and development or existing or future products or services and which are conceived, developed or made by or at the direction of Employee while employed by Company will be owned by Company. Employee also agrees to promptly perform all reasonable actions (whether before, during or after the Term) necessary to establish and confirm such ownership (to the extent of such ownership). 10. Certain Restrictive Covenants. For a period ending six (6) months after the earlier of the Employee's termination of employment hereunder or the Term Employee agrees that, he will not act either directly or indirectly as a partner, officer, director, substantial stockholder or employee, or render advisory or other services for, or in connection with, or become interested in, or make any substantial financial investment in any firm, corporation, business entity or business enterprise competitive with the business of Company, except with the express written consent of the Board of Directors of Company. Employee further agrees that in the event of the termination of his employment under Section 5, for a period of one year thereafter, he will not employ or offer to employ, call on, solicit, actively interfere with Company's or any Company affiliate's relationship with, or attempt to divert or entice away, any employee of Company or any Company affiliate. 11. Employee Representations. Employee hereby represents and warrants to Company that (i) the execution, delivery and performance of this Agreement by Employee does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which Employee is a party or by which he is bound, (ii) except as disclosed to Company in writing prior to the execution of this Agreement, Employee is not a party to or bound by any employment agreement, noncompete agreement or confidentiality agreement with any other person or entity, and (iii) upon the execution and delivery of this Agreement by Company, this Agreement shall be the valid and binding obligation of Employee, enforceable in accordance with its terms. 12. Company Representations. The Company represents and warrants (i) that it is duly authorized and empowered to enter into this Agreement, (ii) that the performance of its obligations under this Agreement will not violate any agreement between it and any other person, firm or organization and (iii) upon the execution and delivery of this Agreement by the Employee, this Agreement shall be the valid and binding obligation of the Company, enforceable in accordance in accordance with its terms. 13. Remedies. Employee acknowledges that the restrictions and agreements contained in this Agreement are reasonable and necessary to protect that legitimate interests of Company, and that any violation of this Agreement will cause substantial and irreparable injury to Company that would not be quantifiable and for which no adequate remedy would exist at law and agrees that injunctive relief, in addition to all other remedies, shall be available therefor. 14. Effect of Agreement on Other Benefits. Except as specifically provided in this Agreement, the existence of this Agreement shall not be interpreted to preclude, prohibit or restrict the Employee's participation in any other employee benefit or other plans or programs in which he currently participates. 15. Rights of Executive's Estate. If the Employee dies prior to the payment of all amounts due and owing to him under the terms of this Agreement, such amounts shall be paid to such beneficiary or beneficiaries as the Employee may have last designated in writing filed with the Secretary of the Company or, if the Employee has made no beneficiary designation, to the Employee's estate. Such designated beneficiary or the executor of his estate, as the case my be, may exercise all of the Employee's rights hereunder. If any beneficiary designated by the Employee shall predecease the Employee, the designation of such beneficiary shall be deemed revoked, and any amounts which would have been payable to such beneficiary shall be paid to the Employee's estate. If any designated beneficiary survives the Employee, but dies before payment of all amounts due hereunder, such payments shall, unless the Employee has designated otherwise, be made to such beneficiary's estate. In the event of the Employee's death or judicial determination of his incompetence, reference in this Agreement to the Employee shall be deemed where appropriate, to refer to his beneficiary, estate or other legal representative. 16. Severability. It is the intent and understanding of the parties hereto that if, in any action before any court or agency legally empowered to enforce this Agreement, any term, restriction, covenant, or promise is found to be unreasonable and for that reason unenforceable, then such term, restriction, covenant, or promise shall not thereby be terminated but that it shall be deemed modified to the extent necessary to make it enforceable by such Court or agency and, if it cannot be so modified, that it shall be deemed amended to delete therefrom such provision or portion adjudicated to be invalid or unenforceable, such modification or amendment in any event to apply only with respect to the operation of this Agreement in the particular jurisdiction in which such adjudication is made. 17. Notice. For the purposes of this Agreement, notices, demands and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when received if delivered in person or by overnight courier or if mailed by United States registered mail, return receipt requested, postage prepaid, to the following addresses: If to Employee: Mr. Edward B. Meyercord, III 202 Mountain Avenue Ridgewood, New Jersey 07450 If to Company: Tel-Save, Inc. 6805 Route 202 New Hope, Pennsylvania 18938 Attn: President Either party may change its address for notices by written notice to the other party in accordance with this Section 17. 18. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by Employee and Company. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of Pennsylvania relating to contracts made and to be performed entirely therein. 19. Headings. The headings in this Agreement are inserted for convenience only and shall have no significance in the interpretation of this Agreement. 20. Successors. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, personal representatives and successors, including without limitation any affiliate to which Company may assign this Agreement. Employee may not assign or transfer his rights to compensation and benefits, except by will or operation of law and, except as provided in Section 15 above. 21. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. IN WITNESS WHEREOF, each of the parties hereto has executed this Agreement as of the day and year first written above. Tel-Save, Inc. By: ------------------------------ Daniel Borislow Chairman and Chief Executive Officer - --------------------------------- Edward B. Meyercord, III EX-10.14 3 EXHIBIT 10.14 TEL-SAVE HOLDINGS, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is made as of _________, by and between Tel-Save Holdings, Inc., a Delaware corporation (the "Company"), and Edward B. Meyercord, III ("Indemnitee"). WHEREAS, Indemnitee is an officer of the Company and performs a valuable service in such capacity for the Company; WHEREAS, the Company and Indemnitee recognize the difficulty in obtaining liability insurance for its directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; WHEREAS, Indemnitee does not regard the current protection available as adequate under the present circumstances, and the Indemnitee and other directors, officers, employees, agents and fiduciaries of the Company may not be willing to continue to serve in such capacities without additional protection; and WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve the Company and, in part, in order to induce Indemnitee to continue to provide services to the Company, wishes to provide for the indemnification and advancing of expenses to Indemnitee to the maximum extent permitted by law. NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. Indemnification. --------------- (a) Indemnification of Expenses. The Company shall indemnify Indemnitee to the fullest extent - 2 - permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other (hereinafter a "Claim") by reason of (or arising in part out of) any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company or any subsidiary of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity whether or not the basis of the Claim is the alleged action in an official capacity as a director, officer, employee, agent or fiduciary of the Company or any subsidiary, or in any other capacity while serving as a director, officer, employee, agent or fiduciary of the Company or any subsidiary, as described above (hereinafter an "Indemnifiable Event") against any and all expenses actually and reasonably incurred or paid (including attorneys' fees and all other costs, expenses and obligations actually and reasonably incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation, and amounts actually and reasonably incurred or paid in settlement of any such action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), and judgments, fines, penalties and amounts incurred or paid, in connection with the defense or settlement of such Claim and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (collectively, hereinafter "Expenses"), including all interest, assessments and other charges paid or payable by the Indemnitee in connection with or in respect of such Expenses. Such payment of Expenses shall be made by the Company as soon as practicable but in any event no later than thirty (30) days after -3- written demand by Indemnitee therefor is presented to the Company. (b) Reviewing Party. Notwithstanding the foregoing, (i) the obligations of the Company under Section 1(a) shall be subject to the condition that the Reviewing Party (as described in Section 10(e) hereof) shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 10(d) hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) the obligation of the Company to make an advance payment of Expenses to Indemnitee pursuant to Section 2(a) (an "Expense Advance") shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expense Advance shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control (as defined in Section 10(c) hereof), the Reviewing Party shall be selected by members of the Board of Directors who are not or were not a party to the Claim in respect of which indemnification is sought, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), the Reviewing Party shall be the Independent Legal Counsel referred to in Section 1(c) hereof. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, or if Indemnitee shall not have received full indemnification from the Company within thirty (30) days after the Company's receipt of written notice by the -4- Indemnitee demanding such indemnification, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination (or lack thereof) by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor or the failure of the Company to fully indemnify the Indemnitee, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party not otherwise so challenged shall be conclusive and binding on the Company and Indemnitee. (c) Change in Control. The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), then with respect to all matters thereafter arising concerning the rights of Indemnitee to payments of Expenses and Expense Advances under this Agreement or any other agreement or under the Company's Articles of Incorporation or Bylaws as now or hereafter in effect, the Company shall seek legal advice only from Independent Legal Counsel (as defined in Section 10(d) hereof) selected by the Company and approved in writing by the Indemnitee (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. (d) Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in connection with any Claim, Indemnitee shall be indemnified against all Expenses actually and reasonably incurred by Indemnitee in connection therewith. 2. Expenses; Indemnification Procedure. ----------------------------------- (a) Advancement of Expenses. The Company shall advance all Expenses incurred by Indemnitee. The -5- advances to be made hereunder shall be paid by the Company to Indemnitee as soon as practicable but in any event no later than five (5) days after written demand by Indemnitee therefor to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement; but the Indemnitee's failure to so notify the Company shall not relieve the Company from any liability that it may have to Indemnitee under this Agreement, except to the extent that the Company is able to establish that its ability to avoid such liability was prejudiced in a material respect by such failure and except as provided in Section 2(f). Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. Any costs or expenses (including attorneys' fees and disbursements) actually and reasonably incurred by Indemnitee in so cooperating shall be borne by the Company (irrespective of the determination as to Indemnitee's entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. (c) No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any claim, action, suit or proceeding, by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under applicable law, shall be a defense to Indemnitee's claim or create a -6- presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by the Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. (d) Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such action, suit, proceeding, inquiry or investigation in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated hereunder to pay the Expenses of any action, suit, proceeding, inquiry or investigation, the Company, except as otherwise provided below, shall be entitled to assume the defense of such action, suit, proceeding, inquiry or investigation at its own expense with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election so to do. After delivery of such notice, approval of such counsel by Indemnitee, and the retention of such counsel by the Company, the Company will not be liable to the Indemnitee under this Agreement for any fees of counsel subsequently incurred by the Indemnitee with respect to the same action, suit, proceeding, inquiry or investigation, other than as provided below. The Company shall not settle any Proceeding in any manner which would impose any penalty or limitation on the Indemnitee without the Indemnitee's written consent (which approval shall not be unreasonably withheld). The Indemnitee shall have the right to employ Indemnitee's own counsel in any such action, suit, proceeding, inquiry or investigation, but the fees and expenses of such counsel incurred after written notice from the Company of its assumption of the defense thereof shall be at the expense of the Indemnitee, unless (i) the employment of counsel by the Indemnitee has been previously authorized by the Company, or, following a Change in Control (other than a Change in Control approved by a majority of the members -7- of the Board of Directors who were directors immediately prior to such Change in Control), the employment of counsel by the Indemnitee has been approved by the Independent Legal Counsel, (ii) the Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and the Indemnitee in the conduct of any such defense, or (iii) the Company shall not in fact have employed or retained or shall not in fact continue to employ or retain counsel to assume the defense of such action, suit, proceeding, inquiry or investigation, in each of which cases the fees and expenses of the Indemnitee's counsel shall be at the expense of the Company. The Company shall not be entitled to assume or control the defense of any action, suit, proceeding, inquiry or investigation brought by or on behalf of the Company or as to which the Indemnitee has made the conclusion that there may be a conflict of interest between the Company and the Indemnitee. (f) Settlement of Claims. The Company shall not be liable to indemnify Indemnitee under this Agreement for any amounts paid in settlement of any Claim effected without the Company's written consent, such consent not to be unreasonably withheld; provided, however, that if a Change in Control has occurred (other than a Change in Control approved by a majority of the members of the Board of Directors who were directors immediately prior to such Change in Control), the Company shall be liable for indemnification of Indemnitee for amounts paid in settlement if the Independent Legal Counsel has approved the settlement. 3. Additional Indemnification Rights; Nonexclusivity. ------------------------------------------------- (a) Scope. The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Articles of Incorporation, the Company's Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of the Company to indemnify the Indemnitee, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of the Company to indemnify the Indemnitee, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no -8- effect on this Agreement or the parties' rights and obligations hereunder. (b) Nonexclusivity. The indemnification provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Articles of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity. 4. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any action, suit, proceeding, inquiry or investigation made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, Articles of Incorporation, Bylaw or otherwise) of the amounts otherwise indemnifiable hereunder. 5. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses in the investigation, defense, appeal or settlement of any civil or criminal action, suit, proceeding, inquiry or investigation, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 6. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 7. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a -9- manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 8. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Action or Omissions. To indemnify Indemnitee for any Expenses resulting from acts, omissions or transactions from which Indemnitee may not be relieved of liability under applicable law, or for any Expenses resulting from Indemnitee's conduct with is finally adjudged to have been willful misconduct or knowingly fraudulent; (b) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be, except (i) with respect to proceedings brought to establish or enforce a right to or for advances of Expenses and/or indemnification under this Agreement or any other agreement or insurance policy or under the Company's Articles of Incorporation or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such suit, or (iii) as otherwise required under the General Corporation Law of the State of Delaware; (c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of -10- profits arising from the purchase and sale or, sale and purchase, by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 9. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 10. Construction of Certain Phrases. ------------------------------- (a) For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. (b) For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its -11- participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (c) For purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 20% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Company's assets. (d) For purposes of this Agreement, "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the -12- provisions of Section 1(c) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). Notwithstanding the foregoing, the term "Independent Legal Counsel" shall not include any firm or person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's right to indemnification under this Agreement. (e) For purposes of this Agreement, a "Reviewing Party" shall mean any appropriate person or body consisting of a member or members of the Company's Board of Directors or any other person or body appointed by the Board of Directors who is not a party to the particular Claim for which Indemnitee is seeking indemnification, or Independent Legal Counsel. (f) For purposes of this Agreement, "Voting Securities" shall mean any securities of the Company that vote generally in the election of directors. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director of the Company or of any other enterprise at the Company's request. -13- 13. Attorneys' Fees. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be paid all Expenses actually and reasonably incurred by Indemnitee with respect to such action, regardless of whether Indemnitee is ultimately successful in such action, and shall be entitled to the advancement of Expenses with respect to such action, unless as a part of such action the court of competent jurisdiction over such action determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses actually and reasonably incurred by Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), and shall be entitled to the advancement Expenses with respect to such action, unless as a part of such action the court having jurisdiction over such action determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. 14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the Commonwealth of Pennsylvania for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the court of the Commonwealth of Pennsylvania in and for the County of Philadelphia, which shall be the exclusive and only proper forum for adjudicating such a claim. -14- 16. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 17. Choice of Law. This Agreement shall be governed by and its provisions construed and enforced in accordance with the laws of the State of Delaware, without regard to the conflict of laws principles thereof. 18. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 19. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. Except as specifically set forth herein, no failure to exercise or any delay in exercising any right or remedy hereunder shall constitute a waiver thereof. 20. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 21. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed -15- as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. TEL-SAVE HOLDINGS, INC. By: ------------------------ Title: --------------------- 22 Village Square New Hope, Pennsylvania 18938 AGREED TO AND ACCEPTED INDEMNITEE: - ----------------------- (indemnitee) - ----------------------- (address) EX-10.21 4 EXHIBIT 10.21 AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Title Page Bridgewater, NJ 08807 Cancels Original Title Page Issued: December 20, 1996 Effective: December 21, 1996 Original Tariff Effective: November 1, 1996 CONTRACT TARIFF NO. 5776 TITLE PAGE This Contract Tariff applies to AT&T Software Defined Network Services consisting of: AT&T Custom Software Defined Network Service and Global Software Defined Network Service; AT&T Distributed Network Service; AT&T MEGACOM Service; AT&T 800 Services consisting of: AT&T 800 Service-Domestic, AT&T 800 Service-Canada, AT&T MEGACOM 800 Service-Domestic, AT&T MEGACOM 800 Service-Canada, AT&T MEGACOM 800 Service-Mexico, AT&T MEGACOM 800 Service-Overseas, AT&T 800 READYLINE Service-Domestic, AT&T 800 READYLINE Service-Canada, AT&T 800 READYLINE Service-Mexico, AT&T 800 READYLINE Service-Overseas, AT&T 800 READYLINE Service-Puerto Rico and the U.S. Virgin Islands; AT&T ACCUNET T1.5 Service Access Connections; AT&T Primary Rate Interface Office Functions and AT&T Terrestrial 1.544 Mbps Local Channel Services for interstate or foreign communications in accordance with the Communications Act of 1934, as amended. Telecommunication services provided under this Contract Tariff are furnished by means of wire, radio, satellite, fiber optics or any suitable technology or combination of technologies. Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 1 Bridgewater, NJ 08807 Cancels Original Page 1 Issued: December 20, 1996 Effective: December 21, 1996 CONTRACT TARIFF NO. 5776 CHECK SHEET The Title Page and Pages 1 through 26 inclusive of this tariff are effective as of the date shown. Original and revised pages as named below contain all changes from the original tariff that are in effect on the date shown. Number of Revision Number of Revision Page Except as Indicated Page Except as Indicated ---- ------------------- ---- ------------------- Title 1st* 7 1st* 1 1st* 8 1st* 3 1st* 9 1st* 3.1 Original 10 1st* 4 1st* 11 1st* 5 1st* 11.1 Original* 6 1st* 12 1st* 6.1 Original* 13 1st* * New or Revised Page TABLE OF CONTENTS Page ---- Check Sheet. ........................................... 1 List of Concurring, Connecting and Other Participating Carriers.............................................. 1 Explanation of Symbols - Coding of Tariff Revisions..... 1 Trademarks and Service Marks............................ 2 Explanation of Abbreviations............................ 2 Contract Summary........................................ 3 LIST OF CONCURRING, CONNECTING AND OTHER PARTICIPATING CARRIERS Concurring Carriers - NONE Connecting Carriers - NONE Other Participating Carriers - NONE EXPLANATION OF SYMBOLS - CODING OF TARIFF REVISIONS Revisions to this tariff are coded through the use of symbols. These symbols appear in the right margin of the page. The symbols and their meanings are: R - to signify reduction. I - to signify increase. C - to signify changed regulation. T - to signify a change in text but no change in rate or regulation. S - to signify reissued matter. M - to signify matter relocated without change. N - to signify new rate or regulation. D - to signify discontinued rate or regulation. Z - to signify a correction. Other marginal codes are used to direct the tariff reader to a footnote for specific information. Codes used for this purpose are lower case letters of the alphabet, e.g., x, y and z. These codes may appear beside the page revision number in the page header or in the right margin opposite specific text. Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm Rates and Tariffs Original Page 2 Bridgewater, NJ 08807 Issued: October 31, 1996 Effective: November 1, 1996 ** All material on this page is new.** TRADEMARKS AND SERVICE MARKS - The following marks, to the extent, if any, used throughout this tariff, are trademarks and service marks of AT&T Corp. Trademarks Service Marks ---------- ------------- None ACCUNET MEGACOM READYLINE EXPLANATION OF ABBREVIATIONS Adm. - Administrator Mbps - Megabits per second Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 3 Bridgewater, NJ 08807 Cancels Original Page 3 Issued: December 20, 1996 Effective: December 21, 1996 CONTRACT TARIFF NO. 5776 1. Services Provided: A. AT&T Software Defined Network (SDN) Services (AT&T Tariff F.C.C. No. 1) con- sisting of: 1. Custom SDN 2. Global Software Defined Network (GSDN) Service B. AT&T Distributed Network Service (DNS) (AT&T Tariff F.C.C. No. 1) N C. AT&T MEGACOM Service (AT&T Tariff F.C.C. No. 1) D. AT&T 800 Services (AT&T Tariff F.C.C. Nos. 2 and 14) consisting of: 1. AT&T 800 Service-Domestic 2. AT&T 800 Service-Canada 3. AT&T MEGACOM 800 Service-Domestic 4. AT&T MEGACOM 800 Service-Canada 5. AT&T MEGACOM 800 Service-Mexico 6. AT&T MEGACOM 800 Service-Overseas 7. AT&T 800 READYLINE Service-Domestic 8. AT&T 800 READYLINE Service-Canada 9. AT&T 800 READYLINE Service-Mexico 10. AT&T 800 READYLINE Service-Overseas 11. AT&T 800 READYLINE Service-Puerto Rico and the U.S. Virgin Islands E. AT&T ACCUNET T1.5 Service Access Connections and the AT&T Primary Rate Interface Office Functions (AT&T Tariff F.C.C. No. 9) F. AT&T Terrestrial 1.544 Mbps Local Channel Services (AT&T Tariff F.C.C. No. 11) Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs Original Page 3.1 Bridgewater, NJ 08807 Issued: December 20, 1996 Effective: December 21, 1996 ** All material on this page is reissued except as otherwise noted. ** CONTRACT TARIFF NO. 5776 2. CONTRACT TERM; RENEWAL OPTIONS - For the AT&T SDN Services and associated AT&T ACCUNET T1.5 Service Access Connections and AT&T Terrestrial 1.544 Mbps Local Channel Services, the AT&T DNS Services and associated ACCUNET T1.5 N Service Access Connections and Terrestrial 1.544 Mbps Local Channel Services, the AT&T MEGACOM Services and the AT&T 800 Services and associated AT&T ACCUNET T1.5 Service Access Connections, AT&T Primary Rate Interface Office Functions N and AT&T Terrestrial 1.544 Mbps Local Channel Services provided under this Contract Tariff, the date on which the term of this Contract Tariff begins is referred to as the Customer's Initial Service Date (CISD). For the AT&T SDN Services and associated AT&T ACCUNET T1.5 Service Access Connections, and AT&T Terrestrial 1.544 Mbps Local Channel Services and the AT&T DNS Services and associated ACCUNET T1.5 Service Access Connections and Terrestrial 1.544 Mbps Local Channel Services provided under this Contract Tariff, the term is 18 months and the CISD is the first day of the Customer's first full billing month under this Contract Tariff. For the AT&T MEGACOM Services and associated AT&T N ACCUNET T1.5 Service Access Connections and AT&T Terrestrial 1.544 Mbps Local Channel Services, the term is 4 years and the CISD is the first day of the Customer's first full billing month under this Contract Tariff. For the AT&T 800 Services and associated AT&T ACCUNET T1.5 Service Access Connections, the AT&T N Primary Rate Interface Office Functions and AT&T Terrestrial 1.544 Mbps Local Channel Services, the term is 4 years and the CISD is the first day of the Customer's first full billing month under this Contract Tariff. No renewal option is available for this Contract Tariff.
Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 4 Bridgewater, NJ 08807 Cancels Original Page 4 Issued: December 20, 1996 Effective: December 21, 1996 3. MINIMUM COMMITMENTS/CHARGES
A. MINIMUM REVENUE COMMITMENTS - The Minimum Revenue Commitments (MRCs) for the AT&T SDN Services, the AT&T DNS Service, AT&T MEGACOM Service including the International Calling Capability and the AT&T 800 Services provided under this N Contract Tariff, after the application of the Discounts as specified in Section 5., following, have been applied, are as follows. The Domestic/International MRC will be satisfied by the usage charges for the AT&T SDN Services, the AT&T DNS Service, AT&T MEGACOM Service including the International Calling Capability and the AT&T 800 Services. Of the Domestic/International MRC, a portion, the International MRC, must be satisfied by usage charges for the combined total of AT&T 800 Service-Canada, AT&T MEGACOM 800 Service-Canada, AT&T MEGACOM 800 Service-Mexico, AT&T MEGACOM 800 Service-Overseas, AT&T 800 READYLINE Service-Canada, AT&T 800 READYLINE Service-Mexico, AT&T 800 READYLINE Service-Overseas, AT&T 800 READYLINE Service-Puerto Rico and the U.S. Virgin Islands, AT&T MEGACOM Service International Calling Capability, AT&T DNS International Calling Capability and AT&T GSDN Service. 1. INTERNATIONAL MRC Commitment Period MRC N Each Month $1,000,000 If in any month, the Customer has failed to satisfy the International MRC the Customer will be billed a shortfall charge equal to the difference of the MRC and the actual usage charges for that month for the combined total of AT&T 800 Service-Canada, AT&T MEGACOM 800 Service-Canada, AT&T MEGACOM 800 Service-Mexico, AT&T MEGACOM 800 Service-Overseas, AT&T 800 READYLINE Service-Canada, AT&T 800 READYLINE Service-Mexico, AT&T 800 READYLINE Service-Overseas, AT&T 800 READYLINE Service-Puerto Rico and the U.S. Virgin Islands, AT&T MEGACOM Service International Calling Capability, AT&T DNS International Calling Capability and AT&T GSDN Service after the application of all discounts as specified in Section 5., following. 2. DOMESTIC/INTERNATIONAL MRC Commitment Period MRC C Months 1-18 $120,000,000 Months 19-24 $40,000,000 Months 25-36 $70,000,000 Months 37-48 $70,000,000 C If, at the end of any Commitment Period, the Customer has failed to satisfy the Domestic/International MRC applicable for that Commitment Period, the Customer will be billed a shortfall charge equal to the difference between the Domestic/International MRC for that Commitment Period and the actual usage charges, for that Commitment Period, for the combined total of AT&T SDN Services, AT&T DNS Service, AT&T MEGACOM Service including the International Calling Capability and the AT&T 800 Services provided under this Contract Tariff, after the application of the Discounts as specified in Section 5., N following, including any shortfall charge(s) paid by the Customer pursuant to Section 3.A.1., preceding during the same months of such Commitment Period. The shortfall charge shall be calculated after the completion of each Commitment Period and billed the following month. Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 5 Bridgewater, NJ 08807 Cancels Original Page 5 Issued: December 20, 1996 Effective: December 21, 1996 4. Contract Price - AT&T reserves the right to increase from time to time the rates for the Services Provided under this Contract Tariff, regardless of any provisions in this Contract Tariff that would otherwise stabilize rates or limit rate increases, as a result of charges imposed on AT&T stemming from an order, rule or regulation of the Federal Communications Commission or a court having competent jurisdiction relating to compensation of payphone service providers. If necessary, revisions will be filed in this Contract Tariff to reflect the actual rates. A. AT&T SDN Services - The Contract Price for the AT&T SDN Services provided under this Contract Tariff is the same as the undiscounted Recurring and Nonrecurring Rates and Charges specified in AT&T Tariff F.C.C. No. 1, as amended from time to time, except for those Usage Rates as specified in Section 7., following. B. AT&T DNS Service - The Contract Price for the AT&T DNS Service provided under N this Contract Tariff is the same as the undiscounted Recurring and Nonrecurring Rates and Charges specified in AT&T Tariff F.C.C. No. 1, as amended from time to time. N C. AT&T MEGACOM Service - The Contract Price for the AT&T MEGACOM Service provided under this Contract Tariff is the same as the undiscounted Recurring and Nonrecurring Rates and Charges specified in AT&T Tariff F.C.C. No. 1, as amended from time to time, except for those Usage Rates as specified in Section 7., following, which apply for AT&T MEGACOM Service calls that originate at no more than 15 Customer Switches, and at no more than 2 Customer Premises (not a Customer Switch) designated by the Customer prior to the CISD. A Customer Switch is a telecommunications switch (including all remote switching modules under common control of the same central switch) with the following characteristics: (a) it is owned and operated by the Customer or an Affiliate of the Customer, or by an entity in which the Customer or an Affiliate of the Customer holds an ownership interest of at least 33%, or by an entity that holds an ownership interest in Customer or Affiliate of the Customer of at least 33%; (b) it is used for the transmission of calls that are routed by a Local Exchange Carrier to the Customer Switch using Feature Group D Access or a functional equivalent; (c) it is capable of interconnecting circuits or transferring calling between circuits; (d) it has a maximum capacity of at least 100,000 access lines and 16,000 trunk lines; (e) it is predominantly used to provide switched telecommunications service on a Common Carrier basis; and (f) it has the capability to provide signaling interfaces at CCITT standards of SS7 signaling. Provided the Customer Switch meets the foregoing definition, it is not necessary that all calls routed through the Customer Switch satisfy characteristic (b). D. AT&T 800 Services - The Contract Price for the AT&T 800 Services provided under this Contract Tariff is the same as the undiscounted Recurring and Nonrecurring Rates and Charges specified in AT&T Tariff F.C.C. Nos. 2 and 14, as amended from time to time, except for those Usage Rates as specified in Section 7., following. Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 6 Bridgewater, NJ 08807 Cancels Original Page 6 Issued: December 20, 1996 Effective: December 21, 1996 4. Contract Price (continued) D. AT&T ACCUNET T1.5 Service Access Connections and the AT&T Primary Rate Interface - The Contract Price for the AT&T ACCUNET T1.5 Service Access Connections and the AT&T Primary Rate Interface provided under this Contract Tariff is the same as the undiscounted Recurring and Nonrecurring Rates and Charges specified in AT&T Tariff F.C.C. No. 9, as amended from time to time, except for those Rates for the AT&T Primary Rate Interface as specified in Section 7., following. E. AT&T Terrestrial 1.544 Mbps Local Channel Services - The Contract Price for the AT&T Terrestrial 1.544 Mbps Local Channel Services provided under this Contract Tariff is the same as the undiscounted Recurring and Nonrecurring Rates and Charges specified in AT&T Tariff F.C.C. No. 11, as amended from time to time. 5. Discounts - The following discounts are the only discounts that apply to the Services Provided under this Contract Tariff. No other discounts apply. A. AT&T SDN Services 1. Base Discounts - The Customer will receive the following discounts, each month, in lieu of those specified for the SDN Term and Volume Plan (TVP) in AT&T Tariff F.C.C. No. 1. These discounts will be applied in the same manner as the SDN TVP as specified in AT&T Tariff F.C.C. No. 1, as amended from time to time. For Gross Monthly Domestic SDN Services Usage on Amounts: Discount ----------------- -------- Between $0 up to $13,000,000 46.5% No discount will apply for any Gross Monthly Domestic SDN Services Usage in excess of $13,000,000. D 2. Additional Discounts - The Customer will receive an additional 32% discount, N each month, in lieu of the discounts specified for the AT&T SDN International Term Plan (ITP) in AT&T Tariff F.C.C. No. 1. This discount will be applied in the same manner as the ITP as specified in AT&T Tariff F.C.C. No. 1, as amended from time to time. No discount will apply for any Gross Monthly International SDN Services Usage in excess of $2,400,000. N Printed in U.S.A.
AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs Original Page 6.1 Bridgewater, NJ 08807 Issued: December 20, 1996 Effective: December 21, 1996 ** All material on this page is new. ** 5. Discounts (continued) B. AT&T DNS Discounts - The following discounts for AT&T DNS are applied to AT&T DNS usage charges in the billing month in which the AT&T DNS charges are billed. 1. Base Discounts - The following discounts will be applied monthly using the same method as specified in Section 6.12. of AT&T Tariff F.C.C. No. 1 (Method Of Determining Discount). (a) The Customer will receive the following discounts, each month, on all domestic direct dialed (1+) AT&T DNS monthly usage charges. 0% discount on the amounts over $0 up to $10,000.00 10% discount on the amounts over $10,000.00 up to $20,000.00 9% discount on the amounts over $20,000.00 (b) The Customer will receive the following discounts, each month, on international direct dialed (1+) AT&T DNS monthly usage charges: 0% discount on the amounts over $0 up to $5,000.00 12% discount on the amounts over $5,000.00 up to $15,000.00 16% discount on the amounts over $15,000.00 up to $60,000.00 18% discount on the amounts over $60,000.00 up to $200,000.00 20% discount on the amounts over $200,000.00 2. Additional Discounts - None. Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 7 Bridgewater NJ, 08807 Cancels Original Page 7 Issued: December 20, 1996 Effective: December 21, 1996 5. Discounts (continued) C. AT&T MEGACOM Service T 1. Base Discounts (a) The Customer will receive a 35.1% discount, each month, on domestic AT&T MEGACOM Service usage. (b) The Customer will receive one of the following discounts, each month, on all AT&T MEGACOM Service International Calling Capability usage charges for that month, based on the total Gross Monthly Usage Charges for AT&T MEGACOM Service International Calling Capability, AT&T 800 Service-Canada, AT&T MEGACOM 800 Service-Canada, AT&T MEGACOM 800 Service-Mexico, AT&T MEGACOM 800 Service-Overseas, AT&T 800 READYLINE Service-Canada, AT&T 800 READYLINE Service-Mexico, AT&T 800 READYLINE Service-Overseas, AT&T SDN International Calling Capability, and AT&T GSDN Service. Gross Monthly Usage Charges Discount --------------------------- -------- At least $0 up to $1,500,000 5.0% At least $1,500,000 up to $2,000,000 7.5% At least $2,000,000 up to $3,000,000 10.0% No discount will apply to any Gross Monthly Usage Charges in excess of $3,000,000. 2. Additional Discounts - None. D. AT&T 800 Services T 1. Base Discounts - The Customer will receive the following discounts as specified below, each month, in lieu of those specified for the Customer Specific Term Plan II (CSTP II) and the Revenue Volume Pricing Plan (RVPP) in AT&T Tariff F.C.C. No. 2. These discounts will be applied in the same manner as the CSTP II as specified in AT&T Tariff F.C.C. No. 2, as amended from time to time. (a) The Customer will receive one of the following discounts, each month, on all AT&T 800 Services usage charges. Gross Monthly AT&T MEGACOM 800 Service-Domestic, AT&T 800 READYLINE Service-Domestic, and AT&T 800 Service-Domestic Usage Charges Discount ------------- -------- At least $0 up to $2,000,000 0.0% At least $2,000,000 up to $15,000,000 45.0% No discount will apply to any Gross Monthly AT&T MEGACOM 800 Service-Domestic, AT&T 800 READYLINE Service-Domestic and AT&T 800 Service-Domestic Usage Charges in excess of $15,000,000. 2. Additional Discounts - None. Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 8 Bridgewater, NJ 08807 Cancels Original Page 8 Issued: December 20, 1996 Effective: December 21, 1996 6. Classifications, Practices and Regulations ------------------------------------------ A. Except as otherwise provided in this Contract Tariff, the rates and regulations that apply to the Services Provided specified in Section 1., preceding, are as set forth in the AT&T tariffs that are referenced in Section 1., preceding, as such tariffs are amended from time to time. B. Monitoring Conditions - The Customer must satisfy the following Service Requirements. The Service Requirement in 6.B.1.(e), 6.B.1.(f) and 6.B.1.(g) will be monitored on each monthly anniversary of the CISD and the Monitoring Period is the billing month immediately preceding each monthly anniversary of the CISD. The Service Requirements in 6.B.1.(a), 6.B.1.(b), 6.B.1.(c) and 6.B.1.(d) will be monitored at each six-month anniversary of the CISD, and the Monitoring Period is the six billing months immediately preceding each six-month anniversary of the CISD. The Service Requirement in 6.B.1.(h) will be monitored at the six-month anniversary of the CISD, and the Monitoring Period is the first six months of the Contract Tariff term. 1. AT&T SDN, AT&T DNS, AT&T MEGACOM and AT&T 800 Services N (a) At least 95% of the total inbound and outbound interLATA services obtained by the Customer and its Affiliates from common carriers (not including Customer or its Affiliates) must be obtained by the Customer directly from AT&T, including any future inbound and outbound interLATA services the Customer obtains as a result of a merger or acquisition for which the Customer directly or indirectly controls the choice of Interexchange Carrier. Services under commitment to another Interexchange Carrier at the time of such merger or acquisition shall not be subject to this provision for the term of such commitment, unless the charges the Customer would incur to terminate such commitment would be less than $10,000. (b) No more than 40% of the Customer's total AT&T MEGACOM Service-International Calling Capability minutes of use provided under this Contract Tariff may terminate in Argentina. (c) At least 60% of the Customer's AT&T MEGACOM Service minutes of use from Customer Switches and Customer Premises at which AT&T MEGACOM Service is provided under this Contract Tariff must be interstate. Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 9 Bridgewater, NJ 08807 Cancels Original Page 9 Issued: December 20, 1996 Effective: December 21, 1996 6.B.1. AT&T SDN, AT&T DNS, AT&T MEGACOM and AT&T 800 Services (continued) N (d) At least 50% of the Customer's AT&T SDN Services minutes of use from Customer Switches and Customer Premises at which AT&T SDN Service is provided under this Contract Tariff must be interstate. (e) No more than 20% of the Customer's total Intrastate AT&T SDN Services minutes of use from Customer Switches and Customer Premises at which AT&T SDN Services are provided under this Contract Tariff may be generated in any one state. (f) No more than 13% of the Customer's total Intrastate AT&T SDN Services minutes of use from Customer Switches and Customer Premises at which AT&T SDN Services are provided under this Contract Tariff may be from the following group of states: Colorado, Idaho, Maine, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, South Dakota, Utah and Vermont. (g) At least 20% of the Customer's total Intrastate AT&T SDN Services minutes of use from Customer Switches and Customer Premises at which AT&T SDN Services are provided under this Contract Tariff must be from the following group of states: California, Illinois, Michigan, Massachusetts and New Jersey. (h) By the end of the sixth month of the Contract Tariff term, the Customer must have placed service orders for the installation of service under this Contract Tariff at locations not currently served by AT&T that the Customer demonstrates will generate monthly charges under this Contract Tariff of at least $333,333. If the Customer, during the Monitoring Period, has failed to satisfy the Service Requirement in 6.B.1.(a), the Customer will be billed an amount equal to 15% of the Customer's total billed usage charges for the AT&T SDN, AT&T DNS, AT&T MEGACOM and AT&T 800 Services, after the application of the Discounts in Section 5., preceding, for that Monitoring Period. If the Customer, during the N Monitoring Period, has failed to satisfy the Service Requirement in 6.B.1.(b), the Customer will be billed an amount equal to $0.08 per minute for each minute of such use above the 40%. If the Customer, during the Monitoring Period, has failed to satisfy the Service Requirement in 6.B.1.(c), the Customer will be billed an amount equal to .351 multiplied by the total undiscounted usage charges for AT&T MEGACOM service for that Monitoring Period in excess of the 60% threshold. If the Customer, during the Monitoring Period has failed to satisfy the Service Requirement in 6.B.1.(d), the Customer will be billed an amount equal to .465 multiplied by the total undiscounted usage charges for AT&T SDN services for that Monitoring Period in excess of the 50% threshold. If the Customer has failed to satisfy the Service Requirement in 6.B.1.(e) for any two consecutive Monitoring Periods, the Customer will be billed, for each state Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 10 Bridgewater, NJ 08807 Cancels Original Page 10 Issued: December 20, 1996 Effective: December 21, 1996 6.B.1. AT&T SDN, AT&T DNS, AT&T MEGACOM and AT&T 800 Services (continued) N for which the 20% threshold is exceeded, an amount equal to $0.20 multiplied by the Customer's total Intrastate AT&T SDN Services minutes of use from Customer Switches and Customer Premises at which AT&T SDN Services are provided under this Contract Tariff generated in that state in excess of the 20% threshold. If the Customer has failed to satisfy the Service Requirement in 6.B.1.(f) for any two consecutive Monitoring Periods, the Customer will be billed an amount equal to $0.20 multiplied by the Customer's total Intrastate AT&T SDN Services minutes of use from Customer Switches and Customer Premises at which AT&T SDN Services are provided under this Contract Tariff from the specified group of states in excess of the 13% threshold. If the Customer has failed to satisfy the Service Requirement in 6.B.1.(g) for any two consecutive Monitoring Periods, the Customer will be billed an amount equal to $0.20 multiplied by the Customer's total Intrastate AT&T SDN Services minutes of use from Customer Switches and Customer Premises at which AT&T SDN Services are provided under this Contract Tariff from the specified group of states by which the Customer failed to meet the 20% minimum requirement. In calculating any charges due for failure to meet the Service Requirements 6.B.1.(e), 6.B.1.(f), and 6.B.1.(g), the Customer will not be required to pay more than once for a failure to meet any one such Service Requirement in a given Monitoring Period (i.e., it the Customer fails to meet a Service Requirement for three consecutive Monitoring Periods, the Customer will be billed only once with respect to the failure to meet the Service Requirement in the second month). If the Customer, during the Monitoring Period, has failed to satisfy the Service Requirement in 6.B.1.(h), the AT&T MEGACOM 800 Service and AT&T 800 READYLINE Service base discount pursuant to section 5.C.1.(a), preceding, for Gross Monthly AT&T MEGACOM 800 Service-Domestic and AT&T 800 READYLINE Service-Domestic usage on amounts of at least $2,000,000 up to $15,000,000 will be decreased from 45% to 42% for the remainder of the Contract Tariff Term. Any charge for amounts billed under this section must be paid by the Customer within 30 days. C. Promotions, Credits and Waivers The Customer is ineligible for any promotions, credits or waivers for the Services Provided under this Contract Tariff, which are filed or which may be filed in the AT&T tariffs specified in Section 1., preceding. The following credits and waivers will be applied to the Customer's bill for the Services Provided under this Contract Tariff. If the sum of all credits applied in the final month of service under this Contract Tariff exceeds the amount of the Customer's final bill, the amount in excess will be refunded to the Customer. If at the end of the Contract Tariff Term the Customer has not fully used any or all of the waiver(s) specified in this Section, the residual value of any such waiver(s) will be set to zero and will not be applied to any other AT&T services. Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 11 Bridgewater, NJ 08807 Cancels Original Page 11 Issued: December 20, 1996 Effective: December 21, 1996 ** All material on this page is new. ** 6.C. Promotions, Credits and Waivers (continued) 1. AT&T MEGACOM Service, AT&T SDN Service and AT&T 800 Services N
(a) AT&T will waive the Nonrecurring Installation Charges for AT&T Primary Rate Interface (PRI) Office Functions; AT&T Terrestrial 1.544 Mbps Local Channels, associated AT&T ACCUNET T1.5 Service Access Connections, and Access Coordination Functions (ACF). Also, AT&T will reimburse the Customer for any other vendor's Nonrecurring Charges for obtaining access comparable to Terrestrial 1.544 Mbps Local Channels (not to exceed charges specified in AT&T Tariff F.C.C. No. 11), and waive the Nonrecurring Charge for the ACF and the AT&T Tariff F.C.C. No. 9 Access Connection Charge. Such Local Channels and AT&T PRI must: (1) be used with the AT&T MEGACOM Service, AT&T SDN Service and/or the AT&T MEGACOM 800 Service-Domestic provided under this Contract Tariff (2) for the Local Channels, not be connected to an Office Function (except for AT&T PRI Office Functions). If any of these Local Channels are connected to an Office Function, AT&T will bill the Customer for the amount of the Installation Charges N that had been waived under this section for each Local Channel connected to an Office Function (except for AT&T PRI Office Functions). The maximum amount of waived Nonrecurring Installation Charges shall not exceed $200,000. (b) AT&T will reimburse the Customer the local exchange company Carrier Change N Charge up to a maximum of $5.00 for each local exchange service access line converted, subject to a maximum reimbursement of $750,000 in any billing month; any excess may not be carried into following months and the Customer must provide evidence of all charges incurred in order to qualify for the reimbursement. There is an allowance of two reimbursements per local exchange company service access line for SDN. The reimbursed charge(s) will be a credit applied to the Customer's future SDN usage charges. (c) AT&T will provide a monthly credit in the amount of $200 per AT&T PRI Office Function utilized by the Customer. The maximum amount of the monthly credit will be $10,000. N (d) AT&T will waive the Service Establishment Charge, not to exceed a total of $10,000 for the Contract Tariff Term for the AT&T MEGACOM Service provided under this Contract Tariff and AT&T will waive the Service Establishment Charges for new AT&T MEGACOM 800 Service-Domestic Routing Arrangements.
2. AT&T MEGACOM Service (a) For the first through eighteenth months of the term, AT&T will apply a monthly credit, not to exceed $250,000 per month, equal to: (1) the total billed usage charges for AT&T MEGACOM Service International Calling Capability which terminates in Mexico, after the application of the Discounts in Section 5.B., preceding, in the month for which the credit is to be applied, minus (2) $0.475 multiplied by the Customer's total minutes of use for AT&T MEGACOM Service International Calling Capability which terminates in Mexico for that same month. Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs Original Page 11.1 Bridgewater, NJ 08807 Issued: December 20, 1996 Effective: December 21, 1996 ** All material on this page is new. ** 6.C. Promotions, Credits and Waivers (continued) 3. AT&T DNS Service (a) AT&T will reimburse the Customer the local exchange company Carrier Change Charge up to a maximum of $5.00 for each local exchange service access line converted, subject to a maximum reimbursement of $5,000 in any billing month; any excess may not be carried into following months and the Customer must provide evidence of all charges incurred in order to qualify for the reimbursement. There is an allowance of two reimbursements per local exchange company service access line for SDN. The reimbursed charge(s) will be a credit applied to the Customer's future SDN or DNS usage charges. (b) AT&T will apply a credit to the Customer's DNS bill, each month, for all domestic DNS Direct Dial (1+) usage charges in the billing month following the initial application of the discounts in Section 5.B.1.(a), preceding, in an amount, not less than zero, equal to: (a) the Customer's total undiscounted domestic DNS Direct Dial (1+) usage charges from such locations for the preceding month multiplied by 43%, minus (b) the previously applied DNS discounts under Section 5.B.1.(a), preceding, for such usage in that month. (c) AT&T will apply a credit, each month, in an amount not less than zero, equal to (a) the Customer?s total billed interstate usage charges during the preceding month, after the application of the previously applied DNS discounts under Section 5.B.1.(a), preceding, and the credit specified in Section 6.3.C (b), preceding, minus (b) the number of minutes for AT&T DNS interstate service usage during the preceding month multiplied by (c) $0.105. (d) AT&T will apply a credit, each month, equal to 38% of the Customer's international direct dial (1+) AT&T DNS billed usage charges, after the discount specified in Section 5.B.1.(b), preceding. This credit will be applied to the Customer's DNS bill in the 1st billing month following the month in which the international direct dial (1+) AT&T DNS usage charges, after the discount specified in Section 5.B.1.(b), preceding, has been applied, were incurred. Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 12 Bridgewater, NJ 08807 Cancels Original Page 12 Issued: December 20, 1996 Effective: December 21, 1996 6. Classifications, Practices and Regulations (continued) D. Discontinuance - In lieu of any Discontinuance With or Without Liability provisions that are specified in AT&T Tariff F.C.C. Nos. 1 and 2, the following provisions shall apply. 1. The Customer may discontinue this Contract Tariff: (a) effective at the end of the 18th month following the CISD, provided the Customer provides at least 30 days prior written notice of discontinuance; is current in payment to AT&T for all telecommunication services; and has generated at least $120,000,000 in usage charges, after the application of the Discounts as specified in Section 5., preceding, for the AT&T SDN Services, AT&T DNS C Service, AT&T MEGACOM Service including the International Calling Capability and the AT&T 800 Services provided under this Contract Tariff (including at least N $15,000,000 in usage charges for the AT&T 800 Service-Canada, AT&T MEGACOM 800 Service-Canada, AT&T MEGACOM 800 Service-Mexico, AT&T MEGACOM 800 Service-Overseas, AT&T 800 READYLINE Service-Canada, AT&T 800 READYLINE Service-Mexico, AT&T 800 READYLINE Service-Overseas, AT&T 800 READYLINE Service-Puerto Rico and the U.S. Virgin Islands, AT&T MEGACOM Service International Calling Capability, AT&T SDN International Calling Capability, and AT&T GSDN Service provided under this Contract Tariff); or (b) prior to the 18th month following the CISD, provided the Customer replaces the Services Provided under this Contract Tariff: I. with service under a new AT&T Contract Tariff having all of the following characteristics: (i) revenue commitment(s) equal to or greater than an average of at least $7,500,000 per month; (ii) a new term of at least the difference between 18 months and the number of months the Customer was in this Contract C Tariff; and (iii) having the same Service Requirement as specified in Section 6.B.1.(a), preceding, or II. with service under a new contract entered into between AT&T and the Customer for the provision of telecommunications service by AT&T to the Customer having all of the following characteristics: (i) revenue commitment(s) equal to or greater than an average of at least $7,500,000 per month; (ii) a new term of at least the difference between 18 months and the number of months the Customer was in this Contract Tariff; and (iii) having the same Service Requirement as C specified in Section 6.B.1.(a), preceding. If the Customer discontinues this Contract Tariff pursuant to this Section 6.D.1.(b), the Customer will also be billed an amount equal to the difference between: (i) the MRC for the Commitment Period in which the Customer discontinues divided by the number of months in the Commitment Period, times the number of months the Customer was in this Contract Tariff for that Commitment Period and (ii) the actual usage charges, after the application of the Discounts as specified in Section 5., preceding, incurred in that Commitment Period for the AT&T SDN Services, AT&T DNS Service, AT&T MEGACOM Service including the International Calling Capability and the AT&T 800 Services, provided the amount in (ii) is less than the amount in (i). N N
Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 13 Bridgewater, NJ 08807 Cancels Original Page 13 Issued: December 20, 1996 Effective: December 21, 1996 6.D. Discontinuance (continued) If the Customer discontinues this Contract Tariff for any reason other than specified above, prior to the expiration of the Contract Tariff Term, Termination Charges will apply. The Termination Charge for the AT&T SDN Services, AT&T DNS Service, AT&T MEGACOM Service including the International Calling Capability and the AT&T 800 Services will be an amount equal to: (1) the MRC for the Commitment Period in which the Customer discontinues minus the N actual usage charges, after the application of the Discounts as specified in Section 5., preceding, incurred in that Commitment Period for the AT&T SDN Services, AT&T MEGACOM Service including the International Calling Capability and the AT&T 800 Services, provided the actual usage charges, are less than the MRC for that Commitment Period and (2) 100% of the MRCs for each remaining year of the Contract Tariff Term.
E. Other Requirements 1. Use of Services Provided for Resale or Shared Use - When the Services Provided under this Contract Tariff are resold or shared, the Customer may advise its User that a portion of the Customer's service is provided by AT&T. However, the Customer shall not publish or use any advertising, sales promotions, press releases or other publicity matters which use AT&T's corporate or trade names, logos, trademarks, service marks, trade dress, or other symbols that serve to identify and distinguish AT&T from its competitors (or which use confusingly similar corporate or trade names, logos, trademarks, service marks, trade dress or other symbols), and the Customer may not conduct business under AT&T's corporate or trade names, logos, trademarks, service marks, trade dress, or other symbols that serve to identify and distinguish AT&T from its competitors (or under any confusingly similar corporate or trade names, logos, trademarks, service marks, trade dress or other symbols), except to the limited extent as is permissible under contract or applicable law. If AT&T finds that the Customer, in connection with its resale of the Services Provided under this Contract Tariff, is using AT&T's corporate or trade names, logos, trademarks, service marks, trade dress or other symbols that serve to identify and distinguish AT&T from its competitors, in a manner inconsistent with the provisions specified above, AT&T shall provide reasonable notice of such inconsistent use to the Customer. If the Customer fails, within 30 days after the receipt of such notice, to substantiate to AT&T that such inconsistent use has ended or has been corrected, the Discounts specified in Section 5., preceding, will not apply until such time as the inconsistent use has ended or has been corrected and substantiated to AT&T. Any such suspension of the Discounts specified in Section 5., preceding, shall not relieve the Customer from its obligations to comply with any other conditions contained in this Contract Tariff, including the Minimum Revenue Commitments. If it is finally determined by adjudication (or, if agreed by AT&T and the Customer, by arbitration) that AT&T's initial finding of an inconsistent use was in error, then the Customer shall receive a credit equal to the amount of the discounts that were not applied as a result of AT&T's initial finding, and AT&T's initial finding will have no further effect. Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs Original Page 14 Bridgewater, NJ 08807 Issued: October 31, 1996 Effective: November 1, 1996 **All material on this page is new** 6.E.1. USE OF SERVICES PROVIDED FOR RESALE OR SHARED USE (CONTINUED) The Customer shall take such steps as are reasonably possible to ensure that no other Carrier to which the Customer directly or indirectly resells the Services Provided under this Contract Tariff, takes any action that, if done directly by Customer, would violate this Section 6.E.1., and if such other Carrier does take such actionm the Customer shall take such steps as are reasonbly possible to cause the inconsistent use by such other Carrier to be ended or corrected, to AT&T's reasonable satisfaction. If AT&T finds that the Customer has failed to take such action as is required pursuant to the preceding paragraph, AT&T shall provide reasonable notice of such failure to the Customer. If the Customer fails, within 30 days after the receipt of such notice, to substantiate to AT&T that the inconsistent use by the other Carrier has ended or has been corrected or the Customer has taken the steps required under the preceding paragraph. The Discounts specified in Section 5., preceding, will not apply, with respect to the billing partition that includes such other Carrier, until such time as the Customer has substantiated to AT&T that it has taken the required steps. Any such suspension of the Discounts specified in Section 5., preceding, shall not relieve the Customer from its obligations to comply with any other conditions contained in this Contract Tariff, including the Minimum Revenue Commitments. If it is finally determined by adjudication (or, if agreed by AT&T and the Customer, by arbitration) that AT&T's initial finding of a failure by Customer to take required steps was in error, then the Customer shall receive a credit equal to the amount of the discounts that were not applied as a result of AT&T's initial finding, and AT&T's initial finding will have no further effect. 2. The Vertical Features of AT&T Tariff F.C.C. No. 2, Section 3.3.2.L are not available for use with the Services Provided under this Contract Tariff when an entity other than AT&T is the Resp Org. 3. Beginning February 1, 1997, the bills for the Services Provided under this Contract Tariff will be sent to one Customer Premises designated by the Customer. Printed in U.S.A. AT&T COMMUNICATIONS CONTRACT TARIFF NO. 5776 Adm. Rates and Tariffs 1st Revised Page 15 Bridgewater, NJ 08807 Cancels Original Page 15 Issued: December 20, 1996 Effective: December 21, 1996 6. Classifications, Practices and Regulations (continued) F. Availability - This Contract Tariff was developed pursuant to a contract with an Interexchange Carrier Customer who: (1) will order this Contract Tariff only once, either by the Customer or any Affiliate of the Customer, which is any entity that owns a controlling interest in either the Customer or an Affiliate of the Customer, or any entity in which a controlling interest is owned by either the Customer or an Affiliate of the Customer; (2) as of the time the Customer orders service, has obtained required operating authority in the states in which it conducts business and files tariffs, when required by law, with state and federal authorities; (3) as of the time the Customer orders service, has been assigned its own Carrier Identification Code by the code administrator, which code is used by one or more Local Exchange Carriers to route calls originated by an end user on a 1+ basis to each Customer Switch as defined in Section 4.B., preceding; (4) has incurred at least $10,000,000 in AT&T Private Line Services, applicable to Contract Tariffs, during the 12-months immediately preceding the date the Customer orders this Contract Tariff; (5) has incurred at least $55,000,000 in AT&T SDN Services and AT&T 800 Services, applicable to Contract Tariffs, during the 12-months immediately preceding the date the Customer orders this Contract Tariff; and (6) provides service as a Common Carrier to at least 300,000 locations. This Contract Tariff is available to any similarly situated Customer who ordered service in a previous availability period or who orders service within 30 days after December 21, 1996 for initial installation of the Services Provided under this Contract Tariff within 30 days after the date ordered. G. Abuse of the Services - Willfully using the Services to carry calls that originate on the network of a facilities-based Interexchange carrier other than AT&T or the Customer or an Affiliate of the Customer and terminate disproportionately to locations for which the incumbent Local Exchange Carrier?s rate for terminating switched access is higher than $0.049 per minute constitutes abuse of service. In the event that AT&T believes in good faith that C such abuse is occurring, AT&T will provide written notice of such abuse to Customer, including as much detail as is reasonably sufficient to enable Customer to investigate the matter. If, within five (5) business days after its C receipt of such notice, the abuse has not ended, or Customer has not demonstrated to AT&T?s reasonable satisfaction that the abuse is not in fact occurring, AT&T may terminate, restrict, or suspend Service to the location(s), and only the location(s) at which such abuse is occurring. This section applies in addition to any other provision of the tariffs referenced in Section 1., preceding, that may apply with respect to abuse of service.
Printed in U.S.A. EX-10.23 5 EXHIBIT 10.23 MODIFICATION AGREEMENT THIS AGREEMENT is made as of the 24TH day of February, 1997, by and among PNC BANK, NATIONAL ASSOCIATION, a national banking association with offices at 1600 Market Street, Philadelphia, Pennsylvania 19103 (the "Bank") , and TEL-SAVE HOLDINGS, INC., TS INVESTMENT CORPORATION and TEL-SAVE, INC. (the "Borrower") BACKGROUND Bank agreed to make available to Borrower a line of credit in the principal amount of $50,000,000 (the "Line of Credit") pursuant to a letter loan agreement dated March 22, 1996 (the "Loan Agreement"). The Line of Credit is evidenced by Borrower's promissory note dated March 22, 1996 (the "Note") . Bank and Borrower desire to amend the Note and Loan Agreement to increase the amount of the Line of Credit and to make certain other modifications thereto, upon the terms and conditions set forth herein. NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, agree as follows: AGREEMENT 1. Terms. Capitalized terms used herein and not otherwise defined herein shall have the meanings given to such terms in the Loan Agreement. 2. Restated Note. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Bank a restated note (the "Restated Note") , evidencing the Line of Credit in the principal amount of $60,000,000 in the form of Exhibit A attached hereto. Upon receipt by Bank of the Restated Note, the original Note shall be cancelled and returned to the Borrower; the Line of Credit and all accrued and unpaid interest on the original Note shall thereafter be evidenced by the Restated Note; and all references to the "Note," evidencing the Line of Credit in any documents relating thereto shall thereafter be deemed to refer to the Restated Note. Without duplication, the Restated Note shall in no way extinguish the Borrower's unconditional obligation to repay all indebtedness, including accrued and unpaid interest, evidenced by the original Note. 3. Amendments to Loan Agreement. The Loan Agreement is hereby amended as follows: (a) Paragraph 1 of the Loan Agreement is hereby amended such that the maximum amount of the Line of Credit is hereby increased from $50,000,000 to $60,000,000. (b) The first sentence of Paragraph 5(b) of the Loan Agreement is hereby amended and restated to read in full as follows: (b) Euro-Rate Option. A rate of interest per annum (computed on the basis of a year of 360 days and the actual number of days elapsed) equal to the sum of (i) the Euro-Rate plus (ii) (A) eighty-seven and one-half (87.5) basis points (7/8%) per annum, for Loans up to and including $50,000,000, and (B) one hundred (100) basis points (1%) per annum, for Loans over $50,000,000, in each case, for the Euro-Rate Interest Period in an amount equal to the Loan bearing interest under the Euro-Rate option and having a comparable maturity as determined at or about 11 a.m. (eastern time) two (2) Business Days prior to the commencement of the Euro-Rate Interest Period. 3. Loan Documents. Except where the context clearly requires otherwise, all references to the Loan Agreement in the Note or any other document delivered to Bank in connection therewith shall be to the Loan Agreement as amended by this Agreement. 4. Borrower's Ratification. Borrower agrees that it has no defenses or set-offs against the Bank, its officers, directors, employees, agents or attorneys with respect to the Note and the Loan Agreement, all of which are in full force and effect and shall remain in full force and effect unless and until modified or amended in writing in accordance with their terms. Borrower hereby ratifies and confirms its obligations under the Note and the Loan Agreement and agrees that the execution and the delivery of this Agreement does not in any way diminish or invalidate any of its obligations thereunder. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, BORROWER HEREBY RATIFIES AND CONFIRMS THE WARRANT OF ATTORNEY GIVEN IN THE NOTE. 5. Renresentations and Warranties. Borrower hereby certifies that: (a) except as otherwise previously disclosed to Bank, the representations and warranties made in the Note and the Loan Agreement are true and correct as of the date hereof. 2 (b) no Event of Default under the Note or the Loan Agreement and no event which with the passage of time or the giving of notice or both could become an Event of Default, exists on the date hereof; and (c) this Agreement has been duly authorized, executed and delivered so as to constitute the legal, valid and binding obligation of Borrower, enforceable in accordance with its terms. All of the above representations and warranties shall survive the making of this Agreement. 6. No Waiver. This Agreement does not and shall not be deemed to constitute a waiver by Bank of any Event of Default under the Note or Loan Agreement, or of any event which with the passage of time or the giving of notice or both would constitute an Event of Default, nor does it obligate Bank to agree to any further modifications of the terms of the Note and Loan Agreement or constitute a waiver of any of Bank's other rights or remedies. 7. Conditions to Effectiveness of Agreement. Bank's willingness to agree to the increase and modifications contained herein are subject to the prior satisfaction of the following conditions: (a) execution of this Agreement, the Restated Note and a Disclosure of Confession of Judgment, each in form and substance satisfactory to the Bank; and (b) delivery of resolutions of Borrowers authorizing execution and delivery of this Agreement and the Restated Note. 8. Miscellaneous (a) All terms, conditions, provisions and covenants in the Note, the Loan Agreement, and all other documents delivered to Bank in connection therewith shall remain unaltered and in full force and effect except as modified or amended hereby. To the extent that any term or provision of this Agreement is or may be deemed expressly inconsistent with any term or provision in the Loan Agreement, the Note or any other document executed in connection therewith, the terms and provisions hereof shall control. (b) This Agreement shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania. 3 (c) This Agreement shall inure to the benefit of, and be binding upon, the parties hereto and their respective successors and assigns and may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. BORROWER [SEAL] TEL-SAVE HOLDINGS, INC. Attest: /s/ Aloysius T. Lawn IV By: /s/ Joseph A. Schenk ----------------------------- ------------------------------ Title: Secretary Title: CFO ------------------------------ --------------------------- [SEAL] TS INVESTMENT CORPORATION Attest: /s/ Aloysius T. Lawn IV By: /s/ Joseph A. Schenk ----------------------------- ------------------------------ Title: Secretary Title: CFO ------------------------------ --------------------------- [SEAL] TEL-SAVE, INC. Attest: /s/ Aloysius T. Lawn IV By: /s/ Joseph A. Schenk ----------------------------- ------------------------------ Title: Secretary Title: CFO ------------------------------ --------------------------- BANK PNC BANK, NATIONAL ASSOCIATION By: /s/ David E. Hopkins ---------------------------- Title: Vice President ------------------------- 4 EX-10.32 6 EXHIBIT 10.32 [" * * * " indicates that material has been deleted pursuant to a confidential treatment request and filed separately with the Commission] CONFIDENTIAL TELECOMMUNICATIONS MARKETING AGREEMENT by and among TEL-SAVE, INC. TEL-SAVE HOLDINGS, INC. and AMERICA ONLINE, INC. February 22, 1997 CONFIDENTIAL TELECOMMUNICATIONS MARKETING AGREEMENT This TELECOMMUNICATIONS MARKETING AGREEMENT, dated as of February 22, 1997, is made by and among: (i) America Online, Inc., a Delaware corporation ("AOL"), on the one hand, and (ii) Tel-Save, Inc., a Pennsylvania corporation ("TS"), and Tel-Save Holdings, Inc., a Delaware corporation ("Holdings"), on the other hand (each, a "party" and, collectively, the "parties"), with respect to the following: WHEREAS, AOL is in the business of providing online services to consumers in the United States; WHEREAS, TS is in the business of providing telecommunications services and is a wholly owned subsidiary of Holdings; WHEREAS, AOL and TS wish to enter into this Agreement whereby AOL will market telecommunications services to customers of AOL's online service under one or more brand names to be owned by it and TS will provide such services on the terms and subject to the conditions herein set forth; and WHEREAS, Holdings has agreed to guarantee all of the obligations of TS hereunder. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: ARTICLE I DEFINITIONS A. Definitions. For purposes of this Agreement and in addition to the terms defined elsewhere in this Agreement, the following terms shall have the meanings set forth below: 1. "Actual Services Costs" for any calendar quarter means the aggregate of the respective costs set forth in, and calculated in accordance with, Schedule A hereto in respect of the provision of Services during such calendar quarter. CONFIDENTIAL 2. "Additional Warrant" shall have the meaning set forth in Section X.B.2 hereof. 3. "Ad Values" at any time shall mean * * * 4. "affiliate" means, with respect to a specified person, any other person that directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified person, provided that, for purposes of this Agreement, "affiliate" shall not include natural persons. 5. "Agreement" means this Telecommunications Marketing Agreement. 6. "AOL" has the meaning set forth in the preamble to this Agreement. 7. "AOL Marks" means the service marks to be owned by AOL under which the Services will be marketed, which are presently contemplated by the parties to include a reference to AOL's name and shall be as mutually agreed to in writing by the parties hereto. 8. "AOL Performance List" has the meaning set forth in Section II.B.1. 9. "AOL Service" means AOL's online service provided to subscribers (including, without limitation, individuals and businesses) in the United States under the America Online(R) brand name, including, without limitation, electronic mail, conferencing, news, sports, weather and stock quotes, accessed by consumers through computers using AOL's proprietary software, as it exists on the date hereof and any online service provided by AOL or any of its affiliates that is a successor thereto or substitute therefor. 10. "Applicable Profit Percentage" for any calendar quarter means the percentage of Pre-Tax Profit for such calendar quarter equal to: (a) for each quarter in which * * *, 50%; and (b) for each quarter in which * * *, 50% plus 2 an additional 2% for each * * *; provided that in no event will the Applicable Profit Percentage exceed 70%. 11. "AT&T" means AT&T Corporation. 12. "Checklist Items" are the items set forth in the list attached as Schedule B hereto. 13. "Commercial Launch Date" means the date upon which AOL makes the Services generally available to subscribers of the AOL Service (i.e., to at least * * * % of the subscribers to the AOL Service). 14. "Commercial Mobile Radio Services" means the services defined as such, from time to time, by the Federal Communications Commission, including related features, functions and services. 15. "Dedicated CIC" means the carrier identification code (CIC) to be made available by TS for use in respect of the Services as provided herein. 16. "Effective Date" has the meaning set forth in Section IX.A.1. hereof. 17. "End User" means, during the Term, any customer of the Services or any part thereof and, after the Term, any such customer as of the last day of the Term so long as such customer continues as a customer of such Services. 18. "Extension Period" shall have the meaning set forth in Section X.B.1 hereof. 19. "Gross Revenues" for any calendar quarter shall mean * * *. 20. "Holdings" has the meaning set forth in the first paragraph of this Agreement. 21. "Initial Launch Period" means the period beginning at the end of the Test Launch Period and ending on the Commercial Launch Date. 22. "Initial Payment" has the meaning set forth in Section V.A.1. 3 23. "Internet Telephony" means voice service provided or initiated over one or more data networks where the end user initiates a voice call to, or receives a voice call from, another party over one or more data networks using a modem or CODEC or over a data network interfacing with the public switched telephone network using a modem or CODEC. 24. "Introductory Period" means the * * * period starting a mutually agreed number of days prior to the anticipated Commercial Launch Date. The parties currently anticipate that the Commercial Launch Date will be no later than * * * , subject to adjustment from time to time upon the mutual consent of the parties or as otherwise provided herein. 25. "Local Telecommunications Services" means the provision of telephone exchange service or exchange access, including related features, functions and services. 26. "Long Distance Telecommunications Services" means intrastate telephone toll service, interstate telephone service and international telephone service, including private line service, and including related features, functions and services, as well as: Calling Card calls, meaning those calls billed to the customer account which has been established to allow for the use of an authorization code for direct dialed calls using any toll free number, 0+ access, or operator assisted calls using a service provider's calling card authorization platform for billing to the customer account at a later date. Operator Handled calls, meaning all calls where an operator or automated mechanized system provides the end user with the ability to place collect calls, calls billed to a third party, person to person, conference calling and operator assisted directory assistance, but not including party lines and off-line chat. Toll Free services, meaning inbound residential or business telephone services where the subscriber/recipient pays for all calls placed by callers dialing their subscribed number, and such calls are billed to the subscribing customer. Directory Assistance calls, meaning calls made by the customer to obtain names, addresses or phone numbers from a long distance directory assistance service. 27. "Marginable Revenues" means * * * . 4 28. "Multiplier Adjustment Date" has the meaning set forth in Section IV.E.1. 29. "OBN" means One Better Net or OBN, TS's long distance telecommunications network based on telecommunications switches owned or leased by TS or its affiliates. 30. "Performance Lists" has the meaning set forth in Section II.B.I. 31. "Pop-Up Ads" means * * * . 32. "Pre-Launch Period" means the period beginning on the Effective Date and ending on the date AOL and TS begin testing the Services with approximately * * * testers. 33. "Pre-Tax Profit" for any calendar quarter means * * * . 34. "Quarterly Payment Amount" as to any calendar quarter means the Applicable Profit Percentage of the Pre-Tax Profit for such quarter. 35. "Quarterly Shortfall Amount" has the meaning set forth in Section V.B.1(b). 36. "Restricted Services" means, collectively, (a) Long Distance Telecommunications Services, (b) Local Telecommunications Services and (c) Commercial Mobile Radio Services, and, each, a "Restricted Service". 37. "RMG" means the remote managed gateway between TS and AOL and related systems (or any similar system agreed to by the parties), including a high speed dedicated telecommunications line, developed by the parties pursuant to Section II.B hereof, for the purpose of providing End Users the ability, through screens and/or other functionality on the AOL Service, to access monthly and historical billing information and to transmit order information to TS. 38. * * * . 39. "Services" means the telecommunications services, including the Restricted Services, provided, from time to time, 5 pursuant to this Agreement by TS, as the carrier, and marketed by AOL as herein provided under the AOL Marks; * * * . 40. "Supplemental Warrant" has the meaning set forth in Section VI.A. hereof. 41. "Term" means the period commencing on the date hereof and ending on June 30, 2000, unless such period is extended or sooner terminated pursuant to Article X, in which event such period shall end at the termination date or the last day of the final extension, as the case may be. 42. "Test Launch Period" means the period beginning at the end of the Pre-Launch Period and ending on the date AOL begins marketing the Services to approximately * * * of its subscribers. 43. "TS" has the meaning set forth in the preamble of this Agreement. 44. "TS Performance List" has the meaning set forth in Section II.B.1. 45. "Unamortized Amount" as of any date means * * * . 46. "Warrants" has the meaning set forth in Section VI.A. hereof. AI ROLLOUT SCHEDULE; PERFORMANCE LISTS A. Description of Rollout. This Article II sets out the process by which the parties will roll out the Long Distance Telecommunications Services described on Schedule C. With respect to such Long Distance Telecommunications Services, the parties will proceed through the following sequence of periods, leading to an anticipated Commercial Launch Date of * * * : 6 1. Pre-Launch Period -- completion of initial Checklist Item tasks and initial development of the Performance Lists (as further described below). 2. Test Launch Period -- testing of the Long Distance Telecommunications Services with approximately * * * testers. 3. Initial Launch Period -- marketing of the Long Distance Telecommunications Services to approximately * * * % of AOL Service subscribers (with incremental ramp-up to * * * % of AOL Service subscribers). 4. Commercial Launch Date -- general availability of the Long Distance Telecommunications Services to AOL Service subscribers (i.e., to at least * * * % of the subscribers to the AOL Service). In addition, prior to the Commercial Launch Date, the parties will mutually establish the date for commencement of AOL's marketing obligations, (i.e., the beginning of the Introductory Period), which are further described in Article III. B. Pre-Launch Period. 1. During the Pre-Launch Period, each of the parties shall perform all of the Checklist Item tasks designated on Schedule B as being its responsibility during the Pre-Launch Period with respect to the Long Distance Telecommunications Services described in Schedule C. With respect to each task involving the development of a definition, procedure or standard, the responsible party shall generate a detailed written guideline that will be applicable to the appropriate party and will be set forth in a list of standards, procedures and/or obligations to be observed by such party (the "AOL Performance List" and the "TS Performance List", respectively, and together, the "Performance Lists"). Each such guideline set forth in the Performance Lists shall be subject to the mutual agreement of the parties, not to be unreasonably withheld. With respect to Checklist Item tasks that are designated on Schedule B as the joint responsibility of TS and AOL during the Pre-Launch Period, TS and AOL shall work jointly in good faith to develop the appropriate guidelines and to allocate responsibilities thereunder to the appropriate Performance List. 2. The Pre-Launch Period shall commence promptly following the Effective Date and shall not end until completion of all of the Checklist Item tasks designated for completion during the Pre-Launch Period on Schedule B. If any such Checklist Item task remains uncompleted or if any guideline has not been agreed to as of * * * , the anticipated date therefor, the period for such completion may be extended by up to * * * at the request of either party. 7 C. Test Launch Period. 1. During the Test Launch Period, each of the parties shall perform all of the Checklist Item tasks designated on Schedule B as being its responsibility during the Test Launch Period with respect to the Long Distance Telecommunications Services described in Schedule C. With respect to each task involving the development of a definition, procedure or standard, the responsible party shall generate a detailed written guideline that will be applicable to the appropriate party and will be added to its respective Performance List. Each such guideline shall be subject to the mutual agreement of the parties, not to be unreasonably withheld. With respect to Checklist Item tasks that are designated on Schedule B as the joint responsibility of TS and AOL during the Test Launch Period, TS and AOL shall work jointly in good faith to develop the appropriate guidelines and to allocate responsibilities thereunder to the appropriate Performance List. 2. The Test Launch Period shall commence upon completion of the Pre-Launch Period and shall not end until completion of all of the Checklist Item tasks designated for completion during the Test Launch Period on Schedule B. If any such Checklist Item tasks remain uncompleted as of the date that is * * * after the commencement of the Test Launch Period, the period for such completion may be extended by up to * * * at the request of either party. D. Initial Launch Period. 1. During the Initial Launch Period, the parties will commence marketing and make the Services available to approximately * * * % of the AOL Service subscribers (or such higher number as AOL may determine, subject to TS's reasonable capacity limitations) during * * * of the Initial Launch Period; approximately * * * % of the AOL Service subscribers (or such higher number as AOL may determine subject to TS's reasonable capacity limitations) during * * * of the Initial Launch Period; and approximately * * * % of the AOL Service subscribers (or such higher number as AOL may determine subject to TS's reasonable capacity limitations) during the remainder of the Initial Launch Period. AOL shall determine the specific roll-out plan for the Initial Launch Period in consultation with TS in order to efficiently and effectively perform the Initial Launch Period Checklist Item tasks listed on Schedule B. Notwithstanding the anticipated * * * periods above, AOL may, in each such case, delay marketing to a larger portion of the AOL Service subscriber base until AOL is satisfied, in its reasonable discretion, that the guidelines included in the parties' respective Performance Lists are met or are likely to be met during any such period. 8 2. During the Initial Launch Period, each of the parties shall perform all of the Checklist Item tasks designated on Schedule B as being its responsibility during the Initial Launch Period with respect to the Long Distance Telecommunications Services described in Schedule C. With respect to tasks involving the development of a definition, procedure or standard, the responsible party shall generate a detailed written guideline that will be applicable to the appropriate party and will be added to its respective Performance List. Each such guideline shall be subject to the mutual agreement of the parties, not to be unreasonably withheld. With respect to Checklist Item tasks that are designated on Schedule B as the joint responsibility of TS and AOL, TS and AOL shall work jointly in good faith to develop the appropriate guidelines and to allocate responsibilities thereunder to the appropriate Performance List. 3. The Initial Launch Period shall commence upon completion of the Test Launch Period. The Initial Launch Period shall not end until completion of all of the Checklist Item tasks designated for completion during the Initial Launch Period on Schedule B. If any such Checklist Item task remains uncompleted or if any guideline has not been agreed to as of the date that is * * * after the commencement of the Initial Launch Period, the period for such completion may be extended by up to * * * at the request of either party. E. Performance Lists. 1. The Performance Lists may be modified at any time during the Term as mutually agreed by the parties. 2. The parties shall reasonably cooperate with one another in facilitating the preparation of the Performance Lists and the guidelines included therein and the completion of the Checklist Item tasks. 3. Each party shall be responsible for performing substantially in accordance with the guidelines contained in its respective Performance List from time to time. F. New Services. As new Services are added under this Agreement, the procedures set forth in this Article II, as may be reasonably applicable to such new Services, shall be followed with respect to such Services. G. Failure to Agree on Guidelines. If the parties are unable to reach agreement with respect to any guideline to be included in a party's Performance List, the matter shall be submitted for resolution pursuant to XI.D. 9 AI AOL MARKETING A. Services Marketing. On and after the first day of the Introductory Period, AOL shall have the sole right to, and shall, market the Services generally across the AOL Service in the United States, through online advertising and marketing on the AOL Service and otherwise as the parties may agree, through mass media and direct marketing media, as follows: 1. During each of the months during the Introductory Period, AOL shall include for subscribers to the AOL Service on-screen promotions and advertisements for the Long Distance Telecommunications Services, including Pop-Up Ads, (a) in substance (the specific Long Distance Telecommunications Services to be offered and the terms thereof and the terms on which they are offered) developed and prepared by TS in consultation with AOL, and (b) in form (how the offered Services are packaged and presented) developed and prepared by AOL in consultation with TS and subject to the mutual agreement of the parties, with an Ad Value of at least $ * * * . Such promotions and advertisements shall include * * * . Such promotions and advertisements shall be spaced as evenly as practicable over each such month, provided that TS and AOL shall consult as to the manner in which such online advertising will be included in such advertising opportunities. The parties recognize that in some months, a $ * * * promotion and advertising campaign may not represent the best allocation of promotion and advertising resources. Accordingly, the foregoing notwithstanding, subject to the mutual agreement of the parties, some of the promotional and advertising resources, * * *, allocated to the Introductory Period may be reallocated among the months occurring during the Introductory Period and among the * * * months following the Introductory Period and shall be in addition to the resources required otherwise to be provided in such months. 2. During each of the months subsequent to the Introductory Period and during the Term, AOL shall include for subscribers to the AOL Service on-screen promotions and advertisements for the Long Distance Telecommunications Services, including, at AOL's option (subject to the requirements of 10 Section III.A.4 hereof), Pop-Up Ads, (a) in substance (the specific Long Distance Telecommunications Services to be offered and the terms thereof and the terms on which they are offered) developed and prepared by TS in consultation with AOL, and (b) in form (how the offered Services are packaged and presented) developed and prepared by AOL in consultation with TS and subject to the mutual agreement of the parties, with an Ad Value of at least $ * * * . Any Pop-Up Ads included by AOL subsequent to the Introductory Period and during the Term in excess of * * * per month shall not be counted toward meeting this $ * * * requirement. AOL will work cooperatively with TS during this period to develop strategies for targeting the Services to new subscribers to the AOL Service most effectively. Such promotions and advertisements shall be spaced as evenly as practicable over each such month, provided that TS and AOL shall consult as to the manner in which such online advertising will be included in such advertising opportunities. 3. During the Term, AOL may also include advertisements and promotions for the Long Distance Telecommunications Services, in substance (the specific Long Distance Telecommunications Services to be offered and the terms thereof and the terms on which they are offered) developed and prepared by TS in consultation with AOL, and form (how the offered Services are packaged and presented) developed and prepared by AOL in consultation with TS and subject to the mutual agreement of the parties, in or with any of AOL's mass media advertising of any of its services or with any of AOL's direct marketing efforts, including, without limitation, mail solicitations of customers for any of its services and any joint advertising or marketing programs with other companies and any other advertisements and solicitations done in conjunction with other companies; provided that, unless TS shall have specifically agreed with AOL to share responsibility for any such advertising and promotions, TS shall have no responsibility for any part of the costs thereof. 4. With respect to Pop-Up Ads: (a) Any Pop-Up Ad * * * to be included or provided by AOL shall contain * * * . (b) * * * . 11 (c) * * * . 5. During the Term, the parties shall also, in consultation with each other, explore additional marketing and promotional opportunities related to the Services, including utilizing new advertising techniques and mechanisms, as they are developed by AOL and utilizing TS's existing marketing channels. The parties also will, in good faith, explore the following additional marketing opportunities (the more specific terms and conditions of which to be as set forth in writing between the parties): (a) Online marketing of bundled offerings of the Services and the AOL Service by AOL, with mutually agreed revenue sharing; (b) Telemarketing and direct marketing by TS of the AOL Service to TS's business customers, with a mutually agreed bounty paid to TS; and (c) Telemarketing and direct marketing by TS of bundled offerings of the Services and the AOL Service, with generally mutually agreed revenue sharing. 6. AOL shall make available to End Users who obtain services from TS other than the Services in accordance with this Agreement, a hyper-text internet link in the Dedicated Area (as defined below) solely to a billing area on a TS-hosted web site for billing of such services other than Services, which such site shall not include any links or other traffic out to other areas other than a return link to the AOL Service. 7. AOL commits to provide, in connection with its activities described in Sections III.A.1, 2, 4, 5 and 6, III.C and III.D hereof, in addition to AOL key words on the AOL Service and E-mail (including a monthly reminder sent to End-Users concerning their statement and a hyperlink to the Dedicated Area described below), links throughout the AOL Service, including the 12 possibility of a small telephone icon that pervasively appears on the tool bar, welcome screen, channel page or similarly-viewed pages, to a dedicated area on the AOL Service (the "Dedicated Area") in order to facilitate ease of location and access to this area for End Users and prospective customers. B. AOL Reports. 1. During the Term, AOL shall provide summary monthly reports to TS evidencing compliance with the foregoing advertising and marketing requirements, including information concerning the type and volume of advertising and marketing on the AOL Service, and concerning AOL's mass media and direct marketing activities, if any, during such month. 2. AOL shall keep for two (2) years from the date of each advertising and marketing expenditure made pursuant to Sections III.A.1 and 2 above complete and accurate records in sufficient detail to allow TS to determine if AOL has made the expenditures required thereunder. TS shall have the right for a period of two (2) years after receiving any report provided pursuant to Section III.B.1 above to inspect such records. AOL shall make such records available for inspection during regular business hours at its principal place of business, upon reasonable notice from TS. Such inspection right shall not be exercised more than once in any calendar year and shall not be exercised more than once with respect to any particular records furnished by AOL to TS. TS agrees to hold in strict confidence all information learned in the course of any such inspection, except to the extent necessary for TS to reveal such information in order to enforce its rights under this Agreement or if disclosure is required by law. TS shall pay for such inspections, except that in the event any such inspection reveals that AOL expended less than * * *% of what it was required to expend in any quarter, AOL shall pay the reasonable costs of such inspection. If AOL and TS are unable to agree on the amount AOL expended, then the dispute shall be resolved by arbitration pursuant to Section XI.D hereof. This Section shall survive expiration or termination of this Agreement. 3. Within one quarter after it has been determined as a result of an inspection pursuant to Section III.B.2 above or otherwise that AOL failed to expend the minimum commitment for advertising and marketing in a given month, and such failure is not attributable to TS's unreasonable failure to agree to the marketing program proposed by AOL, AOL shall, in addition to any other advertising and marketing expenditure commitments it has under this Agreement, expend an additional amount for advertising and marketing equal to * * * % of the shortfall from such commitment. 4. AOL shall advise TS in writing or by electronic means of any End User that ceases to be a subscriber of the AOL Service as promptly as reasonably practicable after receiving notice thereof. TS shall continue servicing each such End User 13 according to a service plan that TS deems appropriate, subject to such End User's continued credit-worthiness, in TS's sole discretion. To the extent that TS incurs incremental costs associated with the billing of such End Users, TS shall, at its sole discretion, either (i) pass such costs through to such End Users or (ii) adjust payments to AOL under Section V.B or X.D.2, as the case may be, to put AOL in the same economic position as if such incremental costs had not been incurred. C. Offering of Services. 1. AOL shall include on the AOL Service such materials and opportunities as TS shall reasonably request to permit users of the AOL Service who wish to become End Users to elect so to become End Users, including, without limitation, any agreements by any such user to (i) switch from their existing telecommunications carrier, (ii) charge their payments for the Services to credit, charge or debit cards and/or (iii) verify such arrangements. D. Services Billings; Credit Card Agreements. 1. For so long as any End User is a customer of the AOL Service (and notwithstanding the termination of this Agreement, it being understood that this obligation shall survive such termination if AOL is receiving payments pursuant to Section X.D.2), AOL shall provide for the inclusion online in the AOL Service to such End User of such End User's billing information provided by TS and any necessary opportunity for such End User to authorize any payment and to dispute any charges for Services with TS (all as mutually agreed to with respect to the RMG developed by TS and AOL hereunder); provided that AOL shall not be required to incur material costs after termination to alter its inclusion of such information due to material changes made to the RMG by TS. 2. AOL shall use all reasonable efforts to cause the credit, charge and debit card companies through which AOL bills its customers for the AOL Service to charge the same rates for Services billings as they charge for billings for the AOL Service. 3. AOL shall use all reasonable efforts to cause the credit, charge and debit card companies through which AOL bills its customers for the AOL Service to enter into direct arrangements with TS with respect to the billing for the Services, including provision for continuation thereof with respect to any End Users that cease to be subscribers of the AOL Service or any other services billed to such End User by AOL. 4. With respect to any End Users who do not pay their bills for the AOL Service through a credit, charge or debit card, AOL shall, subject to applicable law and AOL's terms of service with its subscribers, provide to TS all information available to 14 AOL with respect to such End Users as TS may reasonably request to permit TS to bill such End Users for the Services. E. Use of AOL Marks. 1. AOL hereby grants to TS an exclusive license (subject to the right of AOL and its affiliates to use the AOL Marks in connection with the Services) for TS to use the AOL Marks solely in connection with its operation of the Services for which TS is then the exclusive provider under this Agreement; and AOL hereby grants to TS an exclusive license (subject to the right of AOL and its affiliates to use the AOL Marks in connection with the Services) for TS to use the AOL Marks solely in connection with its operation of the Services for which TS is then the provider under this Agreement on a non-exclusive basis, unless the parties mutually agree (such agreement not to be unreasonably withheld) that the license with respect to those non-exclusive Services should itself be non-exclusive; provided that in both cases TS (i) does not create a unitary composite mark involving the AOL Marks without the prior written approval of AOL and (ii) displays symbols and notices clearly and sufficiently indicating the trademark status and ownership of the AOL Marks in accordance with applicable trademark law and practice; and provided further that AOL retains the right to use the AOL Marks in connection with the services provided as part of the core business of ANS CO+RE Systems, Inc. as of the date hereof. The foregoing license is personal to TS and may not be sublicensed, assigned or otherwise transferred except as provided by Section XII.F. TS acknowledges that: (i) the AOL Marks are and shall remain the sole property of AOL; (ii) nothing in this Agreement shall confer in TS, and TS shall not represent that it has, any right of ownership in the AOL Marks; and (iii) TS shall not now or in the future contest the validity of the AOL Marks. 2. TS further acknowledges and agrees that no use of the AOL Marks by TS shall impair the rights of AOL in the AOL Marks. TS agrees to reasonably assist AOL, at AOL's expense, to the extent necessary in the enforcement and protection of AOL's rights in the AOL Marks. If a senior executive officer of TS learns of any infringements or uses of marks similar to the AOL Marks, such officer shall inform AOL as soon as reasonably practicable and TS shall cooperate with AOL as AOL reasonably requests, at AOL's expense, to protect AOL's rights in the AOL Marks. 3. AOL agrees to take all reasonable steps necessary to register and protect the AOL Marks. 4. Use by TS of the AOL Marks with respect to form and appearance shall be subject to the prior written approval of AOL, not to be unreasonably withheld. 15 5. TS acknowledges that, except as provided herein, it is not authorized hereunder to use the AOL name or logo. Any such use shall require the prior written consent of AOL and shall be subject to such conditions and restrictions as AOL deems appropriate. F. TS Trademarks and Service Marks. This Agreement shall not convey a license to AOL to use any trademarks, service marks, trade names or logos owned or otherwise used by TS. Nothing herein shall give AOL any right, title and interest in and to any such trademarks, service marks, trade names or logos owned or otherwise used by TS, other than the right to display such trademarks, service marks, trade names or logos in connection with the marketing of the Services. G. Expenses. Except as otherwise provided herein or agreed by the parties in writing, all costs and expenses of providing the marketing and advertising services referred to in Section III.A. shall be borne exclusively by AOL. H. Representatives. AOL shall appoint a technical representative, a marketing representative, a billing and customer service representative and a project manager to interface with their respective TS counterparts. If TS is dissatisfied with any of the foregoing representatives or manager, it shall so inform AOL and AOL shall replace him/her as soon as reasonably practicable, consistent with a smooth transition and AOL's staffing commitments. TS shall not be entitled to have more than one representative or manager replaced in any six-month period. Except as may be the case pursuant to Section XII.H, no AOL manager or representative appointed hereunder shall have any right, power or authority to enter into any agreement for or on behalf of, or incur any obligation or liability of, or to otherwise bind, AOL. I. Limitation on AOL Authority. AOL shall have no right, authority or power, and shall not hold itself out as having the right, power or authority, to create any contract or obligation, express or implied, binding upon TS, including, but not limited to, accepting orders for Services or agreeing to or offering prices, terms or conditions of sale that are not in compliance with the prices and terms and conditions that TS, or TS and AOL, as the case may be, have developed and prepared as provided elsewhere herein. J. Insurance. So long as AOL shall have executory obligations under this Agreement, AOL shall maintain insurance in amounts and types customary within its industry for companies of comparable size. 16 ARTICLE IV TS SERVICES A. Services. 1. The telecommunications services to be provided by TS hereunder initially shall be the Long Distance Telecommunications Services. Such Long Distance Telecommunications Services initially will include the services described in Schedule C. Subject to Article VII, the Services to be provided by TS hereunder will be expanded to include Local Telecommunications Services and Commercial Mobile Radio Services as and to the extent offered by TS. B. Provision of Services. 1. TS shall provide the Services to all subscribers to the AOL Service that elect to become End Users, provided that the initial and continued provisioning of any such customer will be subject to such credit approvals as TS may, in its sole discretion, apply. C. Terms of Services. 1. The Services will be offered by TS, as the carrier, under the AOL Marks. 2. Notwithstanding anything to the contrary set forth in this Agreement, the quality, timeliness and efficiency of Services provided hereunder and the performance by TS of its other obligations hereunder shall, at a minimum, be consistent with telecommunications common carrier industry standards, government regulations and sound business practices and generally of no lesser quality than the best comparable services provided by TS to other customers. 3. The specific types of Services other than Long Distance Telecommunications Services, Local Telecommunications Services and Commercial Mobile Radio Services shall be determined from time to time by mutual agreement of the parties. 4. The rates to be charged by TS for Services subject to telecommunications regulation shall be determined from time to time by TS, in its sole discretion. TS shall give AOL reasonable prior notice of prospective rate changes and a reasonable opportunity to consult with respect to such prospective rate changes. TS's current intention is that its initial rates for Long Distance Telecommunications Services will be as set forth in Schedule D hereto. To the extent the parties reasonably agree that it is legally permissible to do so with respect to any 17 specific Services, the rates for those Services shall be determined from time to time by mutual agreement of the parties. 5. Customer Service. a. TS shall provide customer service 24 hours per day, 7 days per week. b. TS shall comply with the applicable customer service provisions of the TS Performance List developed pursuant to Article II. c. If TS fails to conform to the customer service standards set forth in this Section IV.C.5. above within thirty (30) days following notice of such non-conformance from AOL, AOL shall have the right, at its discretion and as one of its available remedies, either to assume the customer service function itself or to outsource it to a third party provider. In that event, (a) TS shall, at TS's expense, assist AOL in the transition of the customer service function as AOL may reasonably request, and (b) TS shall reimburse AOL for AOL's reasonable costs and expenses associated with providing the customer service function. Notwithstanding the foregoing, if, at any time, AOL shall have assumed the customer service function or outsourced it to a third party provider and TS shall thereafter demonstrate to AOL's reasonable satisfaction that it can conform to the applicable customer service standards, TS shall have the right to resume the provision of the customer service function and AOL shall cause the transition of the customer service function back to TS. 6. AT&T Reseller Services. It is anticipated by the parties that the Services will include initially, and TS initially shall provide as part thereof, AT&T-based operator services, directory assistance, calling card services and international. In the event TS replaces such AT&T-based services, TS shall ensure that the replacement services are of substantially equivalent or better quality and price. 7. Network Integrity. TS shall comply with the applicable network integrity provisions of the TS Performance List developed pursuant to Article II. 18 8. Billing. a. TS shall comply with the applicable billing provisions of the TS Performance List developed pursuant to Article II. b. If TS fails to conform to the billing services guidelines developed as part of the applicable Performance List pursuant to Article II within thirty (30) days following notice of such non-conformance from AOL, AOL shall have the right, at its discretion and as one of its available remedies, either to assume the billing services function itself or to outsource it to a third provider. In that event, (a) TS shall, at TS's expense, assist AOL in the transition of the billing service function as AOL may reasonably request, and (b) TS shall reimburse AOL for AOL's reasonable costs and expenses associated with providing the billing service function. Notwithstanding the foregoing, if, at any time, AOL shall have assumed the billing services function or outsourced it to a third party provider and TS shall thereafter demonstrate to AOL's reasonable satisfaction that it can conform to the applicable billing services standards, TS shall have the right to resume the provision of the billing services function and AOL shall cause the transition of the billing services function back to TS. 9. TS shall provide to AOL as promptly as reasonably practicable after the end of each month an updated roster of End Users at such month-end in order to facilitate performance by AOL of its obligations under Section III.B.4. 10. TS shall, where possible, make available the Dedicated CIC and shall route all Services to End Users thereunder and shall not route any other customers of its telecommunications services based thereon (excluding customers (i) in Alaska, Hawaii, Puerto Rico and the Virgin Islands, (ii) in other areas in the 48 contiguous states of the United States where OBN is not loaded and (iii) in overflow situations where required to manage capacity). All non-OBN traffic shall be carried on the AT&T network. TS shall use its best efforts to at all times have the capability to route the Dedicated CIC over a redundant network. D. Regulatory. 1. TS shall be responsible for obtaining and maintaining all federal, state and local consents, approvals and licenses required to be obtained or maintained by TS for TS's provision of the Services hereunder other than any consents and approvals or licenses required by applicable law to be obtained or maintained by AOL by reason of its performance of its obligations hereunder or otherwise, for all of which AOL shall be responsible, and all expenses of obtaining and maintaining such, including all tariffs, taxes, filings and fees with respect thereto, shall be 19 borne exclusively by the party so responsible for obtaining or maintaining such. 2. TS shall file any required state and federal tariffs in accordance with applicable law and regulations. 3. TS shall pay all federal, state and local taxes required by applicable law or tariff. E. AT&T. 1. * * * . 2. TS shall notify AOL as promptly as reasonably practicable of any changes in its relationship with AT&T that could have a material adverse effect on the performance of the parties' obligations under this Agreement and/or the provision of the Services to End Users. F. LOAs. 1. TS shall be the contracting party to the telecommunication letters of agency (and any other contracts and agreements with the customers for the provision of telecommunications services to the End Users, collectively, "LOAs") and thereby be entitled to all rights deriving therefrom. Except in connection with an assignment of this Agreement permitted by Section XII.F, TS shall not assign any of the LOAs, i.e., not sell any of the End Users. G. Representatives. 1. TS shall appoint a technical representative, a marketing representative, a billing and customer service representative and a project manager to interface with their respective AOL counterparts. If AOL is dissatisfied with any of the foregoing representatives or manager, it shall so inform TS and TS shall replace him/her as soon as reasonably practicable, consistent with a smooth transition and TS's staffing commitments. AOL shall not be entitled to have more than one representative or manager replaced in any six month period. Except as may be the 20 case pursuant to Section XII.H, no TS manager or representative appointed hereunder shall have any right, power or authority to enter into any agreement for or on behalf of, or incur any obligation or liability of, or to otherwise bind, TS. H. Limitation on TS Authority. TS shall have no right, authority or power, and shall not hold itself out as having the right, power or authority, to create any contract or obligation, express or implied, binding upon AOL. I. Insurance. So long as TS shall have executory obligations under this Agreement, TS shall maintain insurance in amounts and types customary within its industry for companies of comparable size. ARTICLE V PAYMENTS TO AOL A. Initial Payment to AOL. 1. On the date hereof, TS shall pay to AOL an initial payment in the amount of $100,000,000 (the "Initial Payment"). Up to $57,000,000 of the Initial Payment shall be earned by AOL over time in increments in accordance with the performance milestones set forth in Schedule E. B. Marketing Payments to AOL. 1. In partial consideration of AOL providing marketing services and exclusivity commitments hereunder, TS shall make the following payments in immediately available funds wired to AOL's account pursuant to the wiring instructions attached as Schedule F (which instructions may be modified in writing by AOL on five (5) days notice): a. For each calendar quarter ending on March 31, June 30, September 30 and December 31, commencing with the Effective Date and so long as this Agreement shall not have terminated or been terminated, TS shall pay to AOL, in accordance with the procedures set forth in Section V.B.3, the Quarterly Payment Amount for such quarter. b. Against the amount of each such payment to be made to AOL for any calendar quarter after December 31, 1997 and through (and including) the calendar quarter ending June 30, 2000, there shall be credited to TS, as of the last day of such quarter, a portion of the Initial Payment equal to the lesser of (a) the Quarterly Payment Amount for such quarter and (b) $ * * *, and such amount so credited shall, for all purposes, be deemed to have been paid by TS to AOL and to have satisfied TS's obligation to AOL in such amount. The amount, if any, by which $ * * * 21 exceeds the Quarterly Payment Amount in any such calendar quarter is called a "Quarterly Shortfall Amount". 2. If this Agreement shall be terminated by either party prior to the end of the Term, TS' only obligation to pay AOL hereunder (exclusive of any damages to which AOL may be entitled as a result of such termination) shall be as set forth in Articles X and XI hereof. 3. Within thirty (30) days after the end of any period for which payment is to be made pursuant to Section V.B.1 or V.B.2 hereof, TS shall deliver to AOL a statement of the Applicable Profit Percentage (for periods prior to any termination hereof) and Pre-Tax Profit for such period and the amount, if any, payable to AOL with respect to such period, showing the manner in which it was determined and certified as correct by the Chief Financial Officer of TS. Such statement shall be accompanied by a payment of any such amount. This Section V.B.3 shall survive the termination or expiration of this Agreement. 4. TS shall keep for two (2) years from the date of each payment to AOL pursuant to Section V.B.1 complete and accurate records in sufficient detail to allow AOL to determine if TS has computed Gross Revenues, Actual Services Costs and Pre-Tax Profit accurately. AOL shall have the right for a period of two (2) years after receiving any report or statement with respect to payment due to inspect such records. TS shall make such records available for inspection during regular business hours at its principal place of business, upon reasonable notice from AOL. Such inspection right shall not be exercised more than once in any calendar year and shall not be exercised more than once with respect to any particular records furnished by TS to AOL. AOL agrees to hold in strict confidence all information learned in the course of any such inspection, except to the extent necessary for AOL to reveal such information in order to enforce its rights under this Agreement or if disclosure is required by law. AOL shall pay for such inspections, except that in the event there is any upward adjustment in payments owed for any quarter shown by such inspection of more than two percent (2%) of the amount paid, TS shall pay the reasonable costs of such inspection. If AOL and TS are unable to agree on the amount owed, then the dispute shall be resolved by arbitration pursuant to Section XI.D hereof. Payments not made within the time period set forth in Section V.B.3 hereof shall bear interest at a rate of one percent (1%) per month or the highest rate permitted by law, whichever is lower, from the due date until paid in full. This Section V.B.4 shall survive the termination or expiration of this Agreement. 5. It is understood and agreed that the foregoing payment terms and conditions in this Section V.B. are in respect of the provision of Long Distance Telecommunications Services only and that the parties are to mutually agree as to payment terms and conditions in respect of the provision of Services of any other 22 nature at the time such other Services are to be offered hereunder. ARTICLE VI WARRANTS; WARRANT HOLDER AND STOCKHOLDERS AGREEMENT A. Warrants. On the date hereof and to induce AOL to enter into the ongoing business relationship represented by this Agreement and as partial consideration therefor, Holdings is entering into two Warrant Agreements, each dated as of the date hereof (collectively, the "Warrants"), one giving AOL the right to acquire 5,000,000 shares of Holdings Common Stock (the "Holdings Common Stock") on the terms and subject to the conditions thereof, and the other (the "Supplemental Warrant") giving AOL the right to acquire up to 7,000,000 shares of Holdings Common Stock on the terms and subject to the conditions thereof. B. Warrantholder and Stockholders Agreement. On the date hereof, AOL, TS and Holdings are entering into the Warrantholder and Stockholders Agreement, dated as of the date hereof (the "Warrantholders and Stockholders Agreement"). ARTICLE VII EXCLUSIVITY; NON-COMPETITION A. Exclusive Arrangement. 1. * * * . 2. * * * . 23 3. * * * . 4. * * * . 5. * * * . 6. * * * . 24 7. * * * . 8. * * * . 9. * * * . 25 B. Confidentiality. 1. Each party hereto shall treat, and shall cause its respective directors, officers, employees, agents, representatives and consultants to treat, as the other party's confidential property and not use or disclose to others or permit its directors, officers, employees, agents, representatives and consultants to use or disclose to others, without the prior written consent of such other party, any non-publicly available information or data of such other party (including, but not limited to, the identity of End Users or subscribers to the AOL Service from time to time hereunder or any information with respect thereto or any technical information or data provided by such other party) that may have heretofore or hereafter been provided or disclosed by such other party in connection with this Agreement, any negotiations pertaining thereto or to any of the transactions contemplated hereby. 2. The foregoing Section VII.B.1 shall not prevent any party hereto from using or disclosing to others information: (i) which such party can show has become part of the public domain other than by acts or omissions of such party, its directors, officers, employees, agents, representatives and consultants; (ii) which has been furnished to such party by third parties as a matter of right, without restriction on disclosure or use known to such party; (iii) which was lawfully in such party's possession prior to the time AOL and TS first entered into discussions relating to the subject matter of this Agreement and that was not acquired by such party, its directors, officers, employees, agents, representatives and consultants directly or indirectly from the other party, its employees or agents; (iv) which a party can prove was developed by it independently of any information received from such other party, its directors, officers, employees, agents, representatives and consultants, either directly or indirectly; (v) that such party is required to disclose by applicable law or regulation, in which case the party so required to disclose shall give the other party prompt notice of such requirement in all cases with sufficient time for such other party to seek a protective order or other limit on disclosure (unless the party subject to the disclosure requirement would suffer penalties or sanctions for failure to immediately disclose such information). It is further understood and agreed that specific information shall not be deemed available to the public or in any party's prior possession merely because it is embraced by more general information available to the public or in such party's prior possession; or (vi) as necessary for the enforcement of this Agreement. In addition, (1) either party may disclose the terms of this Agreement to the extent it deems such disclosure reasonably necessary under applicable federal and state securities laws, regulations and policies in connection with its (or Holdings') status as a public company and with transactions involving the offering of its (or Holdings') securities and (2) either party may disclose the terms of this Agreement to third 26 parties as necessary in connection with other financing or merger and acquisition activities, provided that, in the case of clauses (1) and (2) above it seeks to protect the confidentiality of such confidential information in the same manner and to the same degree as its own confidential information, to the full extent that such confidential treatment is consistent with the purpose of the disclosure. If either party becomes aware of any motion or other regulatory or court proceeding that might require it to disclose any of the terms of this Agreement, that party will give immediate written notice of such motion or proceeding to the other and both parties shall act cooperatively to retain the confidentiality of the terms hereof. For purposes of this paragraph, "third party", does not include a person (other than a direct competitor of AOL or TS or their respective affiliates) retained by either party to provide advice, consultation, analysis, legal counsel or any other services in connection with this Agreement, if such person agrees to be bound by the confidentiality obligations of this Agreement. 3. In the event that this Agreement is terminated, any and all notes, memoranda, records, drawings, tracings, specifications, sketches, reports or other documents, including, without implied limitation, all copies, excerpts or reproductions thereof, furnished or made available by TS to AOL, or AOL to TS, as the case may be, their respective directors, officers, employees, agents, representatives and consultants or developed thereby (except, in any case, for information necessary to complete the performance of such party's obligations under this Agreement and, in the case of TS, for any information relating to any End User hereunder with respect to the Services, and, in the case of AOL, any information relating to any subscriber to the AOL Service with respect to the AOL Service) shall be promptly destroyed by such party at such other party's request and such party shall advise such other party in writing that such destruction has been completed. This Section shall survive any termination of this Agreement. C. Public Announcement. 1. No press release, public announcement, confirmation or other information regarding this Agreement or the Warrants or the contents hereof or thereof shall be made by any party without the prior written consent of the other party, which consent shall not be unreasonably withheld. It is agreed and understood that the parties shall work together to prepare any such press release or public announcement. The foregoing notwithstanding, if a party is required pursuant to applicable securities laws to make such a public announcement or press release, such party shall be permitted to do so provided that such party has furnished the other party with the text of such public announcement or press release sufficiently in advance of such public announcement or press release as to afford the receiving party a reasonable opportunity to review such public announcement or press release 27 and such party, to the extent consistent with its legal disclosure obligations, modifies such public announcement or press release as reasonably requested by the other party. ARTICLE VIII REPRESENTATIONS AND WARRANTIES A. AOL Representations and Warranties. AOL hereby represents and warrants to TS as follows: 1. Due Organization; Etc. AOL (a) is a corporation duly organized, validly existing and in good standing under the laws of the state of its organization; (b) is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which its ownership or lease of property or its conduct of business requires it so to be qualified or licensed; (c) has all licenses, authorizations, consents, orders, approvals and qualifications necessary to conduct its business; and (d) has the corporate power and authority to own its properties and assets and to carry on its business as now conducted. 2. Authorization. The execution, delivery and performance by AOL of this Agreement are within its corporate powers and have been duly authorized by all necessary corporate action. 3. No Conflict. The execution, delivery and performance by AOL of this Agreement (i) do not contravene any provision of its charter or by-laws; and (ii) do not violate or conflict with any law, regulation or contractual restriction to which it is subject or result in a violation of or conflict with any other agreement to which it is a party or by which it is bound. 4. Enforceability. This Agreement is the legal, valid and binding obligation of AOL, enforceable against AOL in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, or other laws affecting creditors' rights generally or by the availability of equitable remedies. 5. Acquisition for Investment. AOL is an "accredited investor" within the meaning of Rule 501 of Regulation D promulgated under the Securities Act. AOL is acquiring the Warrants and the Holdings Common Stock issuable upon exercise thereof for its own account for investment and not for the account of others or with a view to the distribution or resale of such Warrants or Holdings Common Stock. AOL has such knowledge and experience in financial and business matters generally that AOL is capable of evaluating the merits and risks of an investment in the 28 Warrants and Holdings Common Stock. AOL is aware that neither the Warrants nor the Holdings Common Stock issuable upon exercise thereof may be sold or otherwise transferred absent registration under the Securities Act or an exemption therefrom. AOL acknowledges that it has received from Holdings all financial and other information regarding its investment in the Warrants and the Holdings Common Stock issuable upon exercise thereof that it has requested and has been afforded the opportunity to discuss such investment with Holdings. The only representations and warranties that have been made with respect to Holdings, its subsidiaries, including TS, or their respective businesses and assets or otherwise in connection with the transactions herein contemplated are those contained in this Agreement and in the Warrants. B. TS Representations and Warranties. TS hereby represents and warrants to AOL as follows: 1. Due Organization; Etc. TS (a) is a corporation duly organized, validly existing and in good standing under the laws of the state of its organization; (b) is duly qualified or licensed to do business as a foreign corporation and is in good standing in each jurisdiction in which its ownership or lease of property or its conduct of business requires it so to be qualified or licensed; (c) has all licenses, authorizations, consents, orders, approvals and qualifications necessary to conduct its business; and (d) has the corporate power and authority to own its properties and assets and to carry on its business as now conducted. 2. Authorization. The execution, delivery and performance by TS of this Agreement are within its corporate powers and have been duly authorized by all necessary corporate action. 3. No Conflict. The execution, delivery and performance by TS of this Agreement (i) do not contravene any provision of its charter or by-laws; and (ii) do not violate or conflict with any law, regulation or contractual restriction to which it is subject or result in a violation of or conflict with any other agreement to which it is a party or by which it is bound. 4. Enforceability. This Agreement is the legal, valid and binding obligation of TS, enforceable against TS in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, moratorium, reorganization, or other laws affecting creditors' rights generally or by the availability of equitable remedies. 5. AOL Representations. The only representations and warranties that have been made with respect to AOL, its subsidiaries or their respective businesses and assets or 29 otherwise in connection with the transactions herein contemplated are those contained in this Agreement. ARTICLE IX THE EFFECTIVE DATE A. The Effective Date 1. * * * . This Agreement and the obligations of the parties shall become effective for all purposes at 5:00 p.m., EST, on February 27, 1997 if, on or before such time on such date, AOL shall not have given written notice to TS that it had elected not to proceed with this Agreement, accompanied by the return of the full amount of the Initial Payment to TS and of the Warrants to Holdings and (ii) TS has provided to AOL a legal opinion reasonably acceptable to AOL with respect to the valid issuance and due authorization of the Warrants and (iii) the check representing the Initial Payment delivered to AOL on the date hereof shall have cleared so long as it was deposited in a bank on Monday, February 24, 1997. Such time on such date that this Agreement so becomes effective, or such earlier time as the parties shall agree in writing that this Agreement shall be effective, is called the "Effective Date." 2. If AOL shall elect, as provided above, not to proceed and shall, on or before 5:00 p.m., EST, on February 27, 1997, have returned the full amount of the Initial Payment to TS and the Warrants to Holdings, this Agreement and the Warrants shall be void and of no further force and effect, without any further obligation on the part of any party hereto. B. Announcement. Immediately following the Effective Date, if it shall occur, TS and AOL shall publicly announce the entering into the relationship contemplated by this Agreement, subject to the parties' mutual agreements on the content of such announcement and the procedures for the same pursuant to Section VII.C. 30 ARTICLE X TERM AND TERMINATION A. Term of Agreement. 1. The term of this Agreement shall be for the Term; provided that, notwithstanding anything set forth in this Agreement to the contrary, so long as any End User shall be using any Service, each of TS and AOL shall continue to perform its obligations under Article IV and Section III.D.1, respectively, with respect to End Users post such Term as well as any other obligations that survive termination or expiration of this Agreement pursuant to Section XI.K. B. Extension of the Term. 1. * * * . 2. In connection with each of the first two Extension Periods, if any, elected by AOL, and in consideration thereof and to induce AOL so to extend, Holdings shall deliver to AOL, on or before the first day of the applicable Extension Period, a warrant (each, an "Additional Warrant" and the Additional Warrant that is issued with respect to the first Extension Period, the "First Additional Warrant" and the Additional Warrant that is issued with respect to the second Extension Period, the "Second Additional Warrant") to purchase up to 1,000,000 shares (as such number would have been adjusted after the date hereof pursuant to the terms of the Supplemental Warrant, the "Additional Warrant Number") of Holdings Common Stock, at an exercise price equal to the average of the closing prices of such Common Stock for the ten (10) consecutive business days before the issuance of such Additional Warrant, and substantially in the form of the Supplemental Warrant, 31 except that (a) the "Vesting Multiplier" thereunder shall be 1 (as such number would have been adjusted after the date hereof pursuant to the terms of the Supplemental Warrant), (b) the "Termination Date" shall be the fifth anniversary of the issuance date of such Additional Warrant and (c) the "Warrant Shares" thereunder shall mean at any time such number of shares of Common Stock as shall have vested as of such time as follows: (i) such number of shares of Common Stock as shall equal the product of the "Vesting Multiplier" times the amount by which (x) the number (the "First Quarter Number") of End Users for whom TS is providing Services as of the last day of the first full calendar quarter of such Extension Period (the "First Vesting Date") exceeds (y) the number of End Users (the "Starting Number") for whom TS was providing services as of the last day of the calendar quarter next preceding such Extension Period, shall vest and shall be Warrant Shares thereunder as of such First Vesting Date; and (ii) such number of shares of Common Stock as shall equal the product of the "Vesting Multiplier" times the amount by which (x) the number of End Users (each, a "Subsequent Quarter Number") for whom TS is providing Services as of the last day of each full calendar quarter (each, a "Subsequent Vesting Date") after the First Vesting Date and on or before the last day of the full calendar quarter in which this Agreement is terminated, exceeds (y) the greatest of the Starting Number, the First Quarter Number and any prior Subsequent Quarter Number, shall vest and shall be Warrant Shares thereunder as of such Subsequent Vesting Date; provided that in no event will the aggregate number of Warrant Shares exceed the Additional Warrant Number, subject to further adjustment as provided in Paragraph 6 of such Additional Warrant and to successive reduction upon any exercise of such Additional Warrant as provided in such Additional Warrant and provided, further, that no Warrant Shares under the Second Additional Warrant shall vest until all Warrant Shares have vested under the First Additional Warrant (and no Warrant Shares shall vest under any Additional Warrant on account of any End User that was the basis of any Warrant Share vesting under the other Additional Warrant). C. Termination of Agreement. 1. This Agreement may be terminated as follows: a. TS and AOL may terminate this Agreement at any time by mutual written consent. 32 b. Either TS or AOL may terminate this Agreement at any time upon 30 days prior written notice to the other upon a material breach by the other in the performance of its agreements and obligations hereunder and such other party's failure to cure such breach within 30 days after written notice thereof, provided that the party giving notice pursuant to this clause (b) is not in such breach of this Agreement as would permit the other party to give a notice pursuant to this clause (b). c. * * * . d. If, at any time during the Term, AT&T ceases to provide long distance telecommunications services to TS, TS shall promptly inform AOL in writing and AOL may, upon thirty (30) days written notice to TS given within fourteen (14) days after AOL receives notice of such AT&T termination from TS, plus payment by AOL to TS of an amount equal to the aggregate of all amounts theretofore paid to AOL by TS pursuant to Section V.B. hereof, if any (i.e., not including the Initial Payment), terminate this Agreement; provided, however, that AOL shall have no obligation to make the foregoing payment if TS shall not have contracted for viable substitute services to replace those formerly provided by AT&T. e. If, as the result, direct or indirect, of an event described in Section XII.O, which event is either incurable or has continued for at least 60 days, the performance of this Agreement substantially as contemplated hereby is rendered impracticable, either AOL or TS may terminate this Agreement by 30 days prior written notice to the other. D. Effects of Termination. 1. Except as otherwise provided below, upon termination or expiration of this Agreement, neither party shall have any further liability or obligation to the other, other than for amounts accrued but unpaid as of the date of expiration on termination, liabilities for any damages to which a party may be entitled in connection with a termination pursuant to Section X.C.1(b), obligations contemplated to be performed or observed subsequent to any termination or expiration of this Agreement and obligations that are specifically described herein as surviving termination of this Agreement. 33 2. Upon the expiration or any termination of this Agreement after the first day of the Test Launch Period, and provided that AOL elects to continue to provide to TS online billing services of the types described in Section III.D. hereof, TS shall pay to AOL, for each subsequent calendar quarter, in arrears at the time and in accordance with the procedures set forth in Section V.B.3 hereof, an amount equal to * * * % of the Pre-Tax Profit for such quarter derived by TS, or any successor to TS, or any third party to which TS may assign customers who were End Users as of the date of expiration or termination of this Agreement, from telecommunication services in the nature of the Services provided to customers who were End Users as of the date of expiration or termination of this Agreement. Such election shall be made not less than 30 days prior to expiration or 10 days prior to the effective date of termination, as the case may be, by written notice to TS. Against the amount of each payment to be made to AOL by TS pursuant to this Section for any calendar quarter, there shall be credited to TS, as of the last day of such quarter, in accordance with the terms of this Agreement, an amount equal to the lesser of (a) * * * of the amount that, but for this provision, was to be paid to AOL in respect of such quarter pursuant to this Section X.D.2 and (b) the amount of* * * . 3. If this Agreement shall have been terminated by TS pursuant to Section X.C.1(b) hereof by reason of a material breach by AOL or by AOL pursuant to Section X.C.1(c) hereof or by either party pursuant to Section X.C.1(e) hereof, AOL shall, within 10 days after such termination, pay to TS in immediately available funds, the amount, if any, equal to the Unamortized Amount at the time of such termination. 4. * * * . 34 5. If at any time subsequent to the expiration or termination of this Agreement, TS shall make or receive any offer to transfer or assign, directly or indirectly, all or any portion of its rights to provide Services to End Users, which shall in any event include assumption by the offeror of TS's responsibilities to End Users and obligations to AOL hereunder, TS shall give AOL written notice of such offer, stating the name of the third party and describing the offer's material terms. If AOL shall not, within thirty (30) days after receiving such notice, offer to acquire such rights on terms and conditions substantially similar to those offered by or to such third party (it being understood that if the offer to or from the third party includes securities of such third party, AOL shall have no obligation to provide such securities as part of its offer but shall be required to provide equivalent value), TS shall be free to transfer or assign such 35 rights to such third party, provided that any such transaction is completed within a period of ninety (90) days after expiration of the foregoing thirty (30) day period. Otherwise, AOL shall have the right, exercisable for thirty (30) days, to acquire such rights upon the terms set forth in AOL's offer. 6. Termination without Cause. Notwithstanding anything provided in this Section X.D.6 or otherwise in this Agreement, neither TS nor AOL has the right to terminate this Agreement without cause. a. If AOL should nonetheless terminate this Agreement without cause, TS may elect as its sole remedy, in lieu of its other remedies in law and equity, to be awarded liquidated compensatory damages in an amount of * * * less amounts previously credited to AOL pursuant to Section V.B.1(b). The parties have agreed to this liquidated damage clause because of the difficulty of ascertaining with accuracy, in advance, the amount of damages that TS would suffer if AOL were to terminate this contract without cause. The parties further agree that (i) these liquidated damage payments are wholly compensatory in nature and constitute a reasonable approximation of the damages TS would actually suffer in the event of a termination by AOL, and (ii) as a result of a termination by AOL, TS would lose funds that it had invested in its arrangement with AOL and these liquidated damages would provide the funds necessary for TS to establish and finance a comparable arrangement with another online service if it elects to do so. b. If TS should nonetheless terminate this Agreement without cause, AOL, as a remedy in addition to those it already possesses in equity and in law, shall be able to require TS to provide 180 days of Service under this Agreement from the date of termination or notice of termination, whichever is earlier. The purpose of this 180-day period is to provide AOL with the time necessary reasonably to transfer End Users to other comparable telecommunications carrier(s) with a minimum of disruption. c. For purposes of this Section X.D.6 only, the parties further agree that a termination made by either party with a good faith belief that such party has a right to terminate pursuant to a provision of this Agreement (a "Permitted Termination"), which is ultimately determined not to have been effected pursuant to a provision of this Agreement, will not constitute a termination without cause for purposes of this Section. A termination without cause shall be any termination other than a Permitted Termination. 36 ARTICLE XI REMEDIES A. Indemnification. 1. Subject to the terms and conditions of this Article XI, AOL hereby indemnifies and agrees to defend and hold harmless TS from and against all losses, costs, damages and expenses, including, without limitation, reasonable attorneys' fees (collectively "Damages"), incurred by TS resulting from or relating to (i) a breach of any representation or warranty of AOL contained in this Agreement, (ii) the non-performance of any obligation to be performed by AOL under this Agreement or (iii) any claim that the AOL Marks that are authorized by this Agreement infringe the intellectual property rights of any third party. 2. Subject to the terms and conditions of this Article XI, TS hereby indemnifies and agrees to defend and hold harmless AOL from and against all Damages incurred by AOL resulting from or relating to (i) a breach of any representation or warranty of TS contained in this Agreement, (ii) the non-performance of any covenant or obligation to be performed by TS under this Agreement or (iii) any claim that any TS trademarks, service marks, trade names or logos displayed in connection with the marketing of the Services infringe the intellectual property rights of any third party. B. Conditions of Indemnification. 1. The party seeking indemnification under this Agreement (the "Indemnified Party") shall promptly notify the party expected to provide indemnification under this Agreement (the "Indemnifying Party") of the facts and circumstances upon which the Indemnified Party intends to base a claim for indemnification hereunder ("Notice of Claim"). Notice shall in all events be considered prompt if given (a) no later than thirty (30) days after the Indemnified Party learns of such facts and circumstances, or (b) if later, in sufficient time to allow the Indemnifying Party to exercise its rights pursuant to this subpart 3 without any material impairment of, or prejudice to, the Indemnifying Party in the exercise of such rights. C. Defense of Third-Party Claims. 1. Subject to subsection (b) below, if Damages arise out of a third party claim seeking recovery of money damages (a "Money Claim"), the Indemnifying Party shall have the right and obligation, at its expense, to assume sole control of the defense of such Money Claim with counsel reasonably acceptable to the Indemnified Party. Notwithstanding the foregoing, the Indemnified Party shall have the right to employ its own counsel in any such 37 case, but the fees and expenses of such counsel shall be at the expense of the Indemnified Party unless (x) the employment of such counsel shall have been authorized in writing by the Indemnifying Party in connection with the defense of such action at the expense of the Indemnifying Party, or (y) the Indemnifying Party shall not have employed counsel to have charge of the defense of such action within a reasonable time after the Notice of Claim is given, or having assumed such defense, fails to pursue it within reasonable time, or (z) the named parties to such claim include both the Indemnified and the Indemnifying Parties and the Indemnified Party shall have been advised by counsel that counsel employed by the Indemnifying Party would, under applicable professional standards, have a conflict in representing both the Indemnifying Party and the Indemnified Party, in any of which events such fees and expenses of one additional counsel for the Indemnified Party shall be borne by the Indemnifying Party. The Indemnified Party shall have the right to settle or compromise any Money Claim and recover the amount paid in such settlement from the Indemnifying Party without the consent of the Indemnifying Party if the Indemnified Party has given written notice thereof to the Indemnifying Party and the Indemnifying Party has failed to assume the defense of the Money Claim or, having assumed the defense, has failed to pursue it diligently within a reasonable length of time. The Indemnifying Party shall have the right to settle or compromise any Money Claim against the Indemnified Party without the consent of the Indemnified Party provided that the terms of such settlement or compromise provide for the unconditional release of the Indemnified Party and require the payment of money damages only by the Indemnifying Party. 2. If Damages arise out of a third party claim seeking equitable relief alone or in addition to monetary damages and, if such equitable relief, standing alone, if obtained, would materially and adversely affect the business, operations, assets or financial condition of the Indemnified Party (an "Equitable Claim"), the Indemnified Party shall be entitled to defend such Equitable Claim with counsel reasonably acceptable to the Indemnifying Party in a reasonable manner under the circumstances and at the reasonable expense of the Indemnifying Party. The Indemnifying Party shall be provided by counsel to the Indemnified Party with regular information regarding the costs of such defense. The Indemnifying Party shall be entitled to participate at its own expense in the defense of any such Equitable Claim. The Indemnified Party shall make no settlement, compromise, admission, or acknowledgment which would give rise to liability on the part of the Indemnifying Party without the prior written consent of the Indemnifying Party, which shall not be unreasonably withheld or delayed. 3. The parties shall extend reasonable cooperation to one another in connection with the defense of any third-party claim pursuant to this Article XI and, in connection therewith, shall furnish such records, information, and testimony and attend 38 such conferences, discovery proceedings, hearings, trials, and appeals as may be reasonably requested. 4. Notwithstanding anything else in this Agreement or elsewhere contained, IT IS EXPRESSLY UNDERSTOOD AND AGREED THAT EXCEPT FOR LIABILITY AMONG THE PARTIES HERETO ARISING UNDER SECTIONS IIIE, IIIF, VIIB AND VIIC HEREOF, NO PARTY SHALL BE LIABLE TO ANY OTHER PARTY OR ANY OTHER PERSON FOR ANY INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES, INCLUDING, WITHOUT LIMITATION, LOSS OF GOODWILL OR LOSS OF PROFITS, ARISING IN ANY MANNER FROM THIS AGREEMENT OR THE PERFORMANCE OR NONPERFORMANCE OF ITS OBLIGATIONS HEREUNDER. D. Arbitration. 1. If the parties are unable to resolve any dispute, controversy or claim arising under this Agreement (excluding, any disputes relating to intellectual property rights or confidentiality) (each a "Dispute"), such Dispute will be submitted to senior executive officers of each of the parties for resolution. If such officers are unable to resolve the Dispute within ten (10) days after submission to them, the dispute shall be solely and finally settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA") then obtaining; provided that the Federal Rules of Evidence shall apply in toto to any such Dispute and, subject to the arbitrators' limiting the time for and scope of discovery to comply with the time limit set forth in Section XI.D.4, the Federal Rules of Civil Procedure shall apply with respect to discovery. 2. The arbitration panel shall be composed of three arbitrators, one of whom shall be chosen by AOL, one by TS and the third by the two so chosen. If both or either of AOL or TS fails to choose an arbitrator or arbitrators within seven (7) days after receiving notice of commencement of arbitration or if the two arbitrators fail to choose a third arbitrator within seven (7) days after their appointment, the then director of the office of the American Arbitration Association in the District of Columbia shall, upon the request of both or either of the parties to the arbitration, appoint the arbitrator or arbitrators required to complete the board. 3. Unless the parties to the arbitration shall otherwise agree to a place of arbitration, the place of arbitration shall be in the District of Columbia. 4. The arbitration panel shall commence proceedings no later than sixty (60) days after the appointment of the third arbitrator. All discovery shall be completed prior to commencement of proceedings. Such proceedings shall be conducted for no less than three (3) full days per week until completed. 39 5. The arbitration panel is empowered to render the following awards in accordance with the terms and conditions of this Agreement: (i) enjoining a party from performing any act prohibited, or compelling a party to perform any act required, by the terms of this Agreement and any order entered pursuant to this Agreement or deemed necessary by the arbitration panel to resolve disputes arising under or relating to this Agreement or any order; (ii) where, and only where, violations of this Agreement have been found, shortening or lengthening any period established by this Agreement or any order; (iii) monetary awards and (iv) ordering such other legal or equitable relief, including any provisional legal or equitable relief, or specifying such procedures as the arbitrators deem appropriate, to resolve any Dispute submitted to it for arbitration. The arbitration panel shall not be empowered to award consequential or punitive damages and shall not be empowered to award specific performance in the event that such performance would have a materially detrimental effect on aspects of the party's business that are not directly related hereto. 6. When resolving a Dispute arising under Article II hereof and resulting from the failure of the parties to mutually agree on a guideline to be included on the Performance List of one of the parties, each party shall submit to the arbitrators a form of the particular guideline proposed by such party. The arbitrators' decision in any such instance shall be limited to designating one of the proposals as being the most consistent with generally accepted industry practice in the context of comparable business arrangements. The proposed guideline so designated by the arbitrators shall be included in the Performance List of the appropriate party. 7. The arbitrators shall render their decision within thirty (30) days after submission of all evidence and the conclusion of all testimony. The decision of the arbitrators shall be by majority vote and, at the request of either party, the arbitration panel shall issue to both parties a written explanation of the reasons for the award and a full statement of the facts as found and the rules of law applied in reaching its decision. 8. Any monetary awards shall be made and shall be payable in U.S. dollars free of any tax or any other deduction (except as may be required by law). Monetary awards shall include interest from the date of breach or other violation of this Agreement to the date when the award is paid in full. The interest rate or rates applied during such period shall be the lower of 12% per annum or the maximum rate permitted by applicable law (the "Interest Rate"). 9. The award of the arbitration panel will be the sole and exclusive remedy between the parties regarding any and all claims and counterclaims with respect to the subject matter of the arbitrated dispute. An award rendered in connection with an 40 arbitration shall be final and binding upon the parties, and any judgment upon such an award may be entered and enforced in any court of competent jurisdiction. The parties hereby waive all jurisdictional defenses in connection with any arbitration hereunder or the enforcement of an order or award rendered pursuant thereto (assuming that the terms and conditions of this arbitration clause have been complied with), defenses based on the general invalidity of this Agreement or this arbitration clause. With respect to any order issued by the arbitration panel pursuant to this Agreement, the parties expressly agree and consent (i) to the bringing of an action by one party against the other in the federal courts of the forum state agreed to above to enforce and confirm such order; and (ii) that any federal court sitting in such state may enter judgment and enforce such order, whether pursuant to the U.S. Arbitration Act or otherwise. 10. Neither party shall be excused from performing its obligations hereunder during the pendency of such arbitration. E. Reservation of Remedies. Except where otherwise expressly specified, the rights and remedies granted to a party under this Agreement are cumulative and in addition to, and not in lieu of, any other rights or remedies which the party may possess at law or in equity. F. Survival. This Article XI shall survive termination of this Agreement. ARTICLE XII GENERAL A. Regulatory Filings. Each of TS and AOL will cooperate to the extent reasonably practicable in the preparation and filing of any other regulatory filings necessary or advisable to permit the proposed transactions and the provision of the Services hereunder, including, without limitation, the provision of any information as may reasonably be necessary therefor. B. Notices. All notices and other communications hereunder shall be given by telephone and immediately confirmed in writing and shall be deemed given if delivered personally or mailed by registered or certified mail (return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): 41 1. if to TS or Holdings: Tel-Save Holdings, Inc. Law Department 6805 Route 202 New Hope, Pennsylvania 18938 Attention: General Counsel Telephone Number: (215) 862-1500 Facsimile Number: (215) 862-1515 2. if to AOL: America Online Inc. 22000 AOL Way Dulles, Virginia 20166-9323 Attention: General Counsel Telephone Number: (703) 265-2739 Facsimile Number: (703) 265-2208 with a copy to: Head of Business Affairs AOL Networks 22000 AOL Way Dulles, Virginia 20166-9323 Telephone Number: (703) 265-2365 Facsimile Number: (703) 265-1206 C. Interpretation. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. References to Sections, Articles and Schedules refer to sections, articles and exhibits of this Agreement unless otherwise stated. D. Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants, and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated and the parties shall negotiate in good faith to modify this Agreement to preserve, to the fullest extent legally permitted, each party's anticipated benefits and obligations under this Agreement. If the parties are unable to so agree, the matter shall be resolved pursuant to Article XI.D hereof. E. Entire Agreement. This Agreement, together with the other agreements referred to herein and the schedules attached hereto, constitutes the entire agreement, and supersedes all other prior agreements and undertakings, both written and oral, among the parties with respect to the subject matter hereof. 42 F. Assignments. This Agreement (i) is not intended to confer upon any other person any rights or remedies hereunder; and (ii) shall not be assigned by operation of law or otherwise except (a) to a wholly owned subsidiary (provided such subsidiary becomes a party to this Agreement and that the transferring party agrees and acknowledges that it is not released from its obligations hereunder), or (b) to any entity that may acquire all or substantially all of the assets of a party hereto. This Agreement, together with the other agreements referred to herein and the schedules attached hereto, shall inure to the benefit of and be binding upon the parties' respective successors and permitted assigns. G. Governing Law. This Agreement shall be governed in all respects, including validity, interpretation and effect, by the internal laws of the State of New York, without giving effect to the principles of conflict of laws thereof. H. Amendments. No provision of this Agreement may be amended, modified or waived except by written agreement duly executed by each of the parties, by, in the case of AOL, an officer of at least equal standing to that officer who signed this Agreement on behalf of AOL. I. Independent Contractors. The parties to this Agreement are independent contractors. Neither party is an agent, representative, or partner of the other party. Neither party shall have any right, power or authority to enter into any agreement for or on behalf of, or incur any obligation or liability of, or to otherwise bind, the other party. This Agreement shall not be interpreted or construed to create an association, agency, joint venture or partnership between the parties or to impose any liability attributable to such a relationship upon either party. J. No Waiver. The failure of either party to insist upon or enforce strict performance by the other party of any provision of this Agreement or to exercise any right under this Agreement shall not be construed as a waiver or relinquishment to any extent of such part's right to assert or rely upon any such provision or right in that or any other instance; rather, the same shall be and remain in full force and effect. K. Survival. Any provision of this Agreement which contemplates performance or observance subsequent to, or otherwise states that it would survive, any termination or expiration of this Agreement will survive the termination or expiration of this Agreement. This Article XII shall survive termination of this Agreement. L. Third Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and thereto, as the case may be, and their respective successors and permitted assigns, and are 43 not for the benefit of nor may any provision hereof be enforced by, any other person, including, without limitation, any End User (such End Users having no rights whatsoever herein). M. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall constitute an original, but together shall be construed as one document. N. Nonsolicitation. Neither party, for itself, or through any third party shall, directly or indirectly, solicit or attempt to solicit, entice or persuade any employee of or consultant to the other party to leave the services of such other party. O. Force Majeure. Neither Party shall be held liable for failure to perform any of its obligations hereunder if such failure is (i) due to an Act of God, fire, explosion, accident, flood, landslide, lightning, earthquake, storm, civil disturbance, power failure, strike or other labor disturbance affecting a party other than TS or AOL, act of war (whether war be declared or not), national defense requirement, failure of a non-party telecommunications carrier, failure or disruption of machinery, apparatus or systems; acts, injunction, or restraint of government (whether or not now threatened) and (ii) beyond the reasonable control of such party. For purposes of this Section XII.O, a failure shall not be deemed to be beyond the reasonable control of the party affected if (i) such failure would not have occurred had the affected party been performing in accordance with the provisions of this Agreement, including its Performance List, or in accordance with generally accepted industry practice; or (ii) with respect to acts, injunctions or restraints of governments, such failure results from the unlawful act or omission of the affected party (other than actions contemplated by the parties in furtherance of this Agreement). Upon such an occurrence, the party whose performance is affected shall immediately give written notice of the occurrence to the other party, and shall thereafter exert all reasonable efforts to overcome the occurrence and resume performance of this Agreement. If, despite such efforts, the affected party cannot overcome the occurrence and resume performance within 90 days following notification given hereunder, then unless either party has terminated this Agreement in accordance with Section X.C.1(e), the parties shall mutually agree on an equitable resolution. If the parties are unable to reach mutual agreement, the matter shall be submitted for resolution in accordance with Section XI.D. 44 ARTICLE XIII HOLDINGS GUARANTEE Holdings hereby unconditionally guarantees to AOL (i) the full and prompt payment of all amounts which may become due and owing to AOL from TS pursuant to this Agreement and (ii) the due performance by TS of all of its obligations under this Agreement, (all of the foregoing, collectively, are hereinafter referred to as the "Guaranteed Obligations"). The obligations of Holdings under this Article shall not be impaired by any modification, supplement, extension or amendment of any contract or agreement between AOL and TS, whether now existing or hereafter arising, including, without limitation, this Agreement, nor by any modification, release or other alteration of any of the Guaranteed Obligations or of any security therefor, and the liability of Holdings shall apply to the Guaranteed Obligations as so altered, modified, supplemented, extended or amended. No invalidity, irregularity or unenforceability of all or any part of the Guaranteed Obligations or of any security therefor (including, without limitation, as a result of the bankruptcy, reorganization or insolvency of the TS, or pursuant to any assignment for the benefit of creditors, receivership, or similar proceeding) shall affect, impair or be a defense to the obligations of Holdings under this Article XIII which are a primary obligations of Holdings, and nothing shall discharge or satisfy the liability of Holdings hereunder except the full payment and performance of the Guaranteed Obligations. This Article XIII shall survive termination of this Agreement. 45 IN WITNESS WHEREOF, the undersigned have caused this Agreement to be signed on their behalf as of the day and year first written above. AMERICA ONLINE INC. By ------------------------ Name: David M. Colburn Title: Senior Vice-President TEL-SAVE, INC. By ------------------------ Name: Daniel Borislow Title: Chairman & CEO TEL-SAVE HOLDINGS, INC. By ------------------------ Name: Daniel Borislow Title: Chairman & CEO 46 CONFIDENTIAL Schedule A Services Costs * * * CONFIDENTIAL Schedule B Checklist Items Schedule * * * CONFIDENTIAL SCHEDULE C Initial Long Distance Services 1. Outbound and inbound long distance, including but not limited to interlata, intralata, intrastate, international and toll-free services. 2. Calling cards, including but not limited to domestic and international, credit and debit cards 3. Operator services, including but not limited to, collect calling, etc. 4. Directory assistance. 5. Conference calling. 6. Private line and dedicated services. 7. Online Billing and paper Billing Services for all telecom services. CONFIDENTIAL Schedule D Rate Schedule * * * CONFIDENTIAL Schedule E Performance Milestones * * * EX-11.1 7 EXHIBIT 11.1 Exhibit 11.1 TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES COMPUTATION OF NET INCOME PER SHARE (In thousands, except per share amounts)
Year ended December 31, ------------------------------------------ 1996 1995(A) 1994(A) ------------------------------------------ Net income $ 20,168 $10,819 $ 5,613 ======== ======= ======= PRIMARY Weighted average common and common equivalent shares outstanding - Primary: Weighted average shares 52,650 31,422 28,650 Weighted average equivalent shares 4,352 2,183 2,013 -------- --------- ------- Weighted average common and common equivalent shares - Primary 57,002 33,605 30,663 ======== ======== ======= Net income per share - Primary $ .35 $ .32 $ .18 ======== ========= ======= FULLY DILUTED Weighted average common and common equivalent shares outstanding - Fully Diluted: Weighted average shares 52,650 31,422 28,650 Weighted average equivalent shares 5,377 2,183 2,013 --------- ------- -------- Weighted average common and common equivalent shares - Fully Diluted 58,027 33,605 30,663 ======== ======= ======= Net income per share - Fully Diluted $ .35 $ .32 $ .18 ========= ======== ========
(A) Pro forma tax provisions have been calculated as if the Company's results of operations were taxable as a C corporation (the Company's current tax status) for the years ended December 1995 and 1994. Prior to September 20, 1995, the Company was an S corporation with all earnings taxed directly to its shareholders. EX-21.1 8 EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT The companies listed below are wholly owned by Tel-Save Holdings, Inc. and are included in its consolidated financial statements. NAME JURISIDICTION OF INCORPORATION Tel-Save, Inc. Pennsylvania Emergency Transport Corp. Delaware (formerly TS Investment Corporation) In addition to doing business under its own name, Tel-Save, Inc. also does business under the names Tel-Save, Inc. of Pennsylvania, Pennsylvania Tel-Save, Inc., The Phone Company, The Phone Company of New Hope, Network Services of New Hope, Group Network Services, Inc. and Network Services of Pennsylvania. EX-23.1 9 EXHIBIT 23.1 CONSENT OF BDO SEIDMAN, LLP Tel-Save Holdings, Inc. New Hope, Pennsylvania We hereby consent to the incorporation by reference in the respective Prospectuses constituting a part of the Registration Statements on Forms S-8 Nos. 333-04479 and 333-05923 and Forms S-3 Nos. 333-14549 and 333-23193 of our reports dated January 29, 1997, relating to the consolidated financial statements and schedule of Tel-Save Holdings, Inc. and subsidiaries, appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. We also consent to the reference to us under the caption "Experts" in the Prospectuses. /s/ BDO Seidman, LLP New York, New York March 17, 1997 EX-27 10 FDS --
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER, 1996 OF TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 US DOLLARS YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 8,023,000 149,237,000 20,958,000 987,000 0 201,885,000 30,596,000 499,000 257,008,000 26,288,000 0 622,000 0 0 230,098,000 257,008,000 0 232,424,000 0 200,597,000 0 0 0 32,373,000 12,205,000 20,168,000 0 0 0 20,168,000 0.35 0.35
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