-----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, OHROKySK19hVJ/g8nkGCp9DP/0yjUv7qCaXfcXMh0vDkxs0KgTaTwwEM9YcIDaNi Oz/LlBwDzuvRF4NoFs5UvA== 0000912057-00-025506.txt : 20000519 0000912057-00-025506.hdr.sgml : 20000519 ACCESSION NUMBER: 0000912057-00-025506 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000518 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STAR TELECOMMUNICATIONS INC CENTRAL INDEX KEY: 0001026486 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 770362681 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22581 FILM NUMBER: 639674 BUSINESS ADDRESS: STREET 1: 223 EAST DE LA GUERRA STREET STREET 2: STE 202 CITY: SANTA BARBARA STATE: CA ZIP: 93101 BUSINESS PHONE: 8058991962 MAIL ADDRESS: STREET 1: 223 EAST DE LA GUERRA STREET CITY: SANTA BARBARA STATE: CA ZIP: 93101 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q (MARK ONE) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 000-22581 ------------------------ STAR TELECOMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE 77-0362681 (State of incorporation) (I.R.S. Employer Identification Number) 223 EAST DE LA GUERRA, 93101 SANTA BARBARA, CALIFORNIA (Zip Code) (Address of Principal Executive Offices)
(805) 899-1962 (Registrant's telephone number, including area code) NONE (Former name, former address and former fiscal year if changed since last report) ------------------------ Indicate by check mark whether the registrant (1) has filed all reports 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 / / As of May 5, 2000, the number of shares of the registrant's Common Stock outstanding was 58,631,802 shares. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES TABLE OF CONTENTS
PAGE ---- PART I - FINANCIAL INFORMATION: Item 1: Financial Statements Condensed Consolidated Balance Sheets As Of December 31, 1999 And March 31, 2000 (unaudited).............................. 3 Condensed Consolidated Statements Of Operations For The Three Month Periods Ended March 31, 1999 And 2000 (unaudited)................... 4 Condensed Consolidated Statements Of Cash Flows For The Three Month Periods Ended March 31, 1999 And 2000 (unaudited)................................................. 5 Notes To Condensed Consolidated Financial Statements........ 7 Item 2: Management's Discussion And Analysis Of Financial Condition And Results Of Operations................................... 12 Item 3: Quantitative And Qualitative Disclosures About Market Risks....................................................... 16 PART II - OTHER INFORMATION......................................................... 17
2 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE DATA)
DECEMBER 31, MARCH 31, 1999 2000 ------------ ----------- (UNAUDITED) Current Assets: Cash and cash equivalents................................. $ 25,561 $ 14,170 Short-term investments.................................... 1,482 1,316 Accounts and notes receivable, net........................ 167,403 164,935 Receivable from related parties........................... 1,390 845 Other current assets...................................... 39,250 45,745 -------- -------- Total current assets.................................... 235,086 227,011 -------- -------- Long-Term Assets: Property and equipment, net............................... 363,089 309,734 Intangible assets, net.................................... 200,582 197,518 Other..................................................... 8,997 7,621 -------- -------- Total assets............................................ $807,754 $741,884 ======== ======== Current Liabilities: Revolving lines of credit................................. $ 43,540 $ 25,970 Current portion of long-term obligations.................. 18,528 18,314 Accounts payable.......................................... 159,920 162,758 Accrued network costs..................................... 147,672 118,165 Related party payable..................................... 1,133 1,329 Other accrued expenses.................................... 25,840 23,334 Deferred revenue.......................................... 36,374 37,886 -------- -------- Total current liabilities............................... 433,007 387,756 -------- -------- Long-Term Liabilities: Long-term obligations, net of current portion............. 49,324 43,096 Other long-term liabilities............................... 47,369 40,964 -------- -------- Total long-term liabilities............................. 96,693 84,060 -------- -------- Stockholders' Equity: Common stock $.001 par value: Authorized - 100,000,000 shares........................... 58 58 Additional paid-in capital................................ 365,845 365,903 Deferred compensation..................................... (2,160) (1,985) Note receivable from stockholder.......................... (3,714) (3,785) Accumulated other comprehensive loss...................... (6,022) (7,646) Accumulated deficit....................................... (75,953) (82,477) -------- -------- Total stockholders' equity.............................. 278,054 270,068 -------- -------- Total liabilities and stockholders' equity.............. $807,754 $741,884 ======== ========
See accompanying notes to the condensed consolidated financial statements. 3 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, -------------------- 1999 2000 -------- --------- (UNAUDITED) Revenue..................................................... $228,209 $ 255,105 Operating expenses: Cost of services.......................................... 192,914 225,840 Selling, general and administrative expenses.............. 31,465 33,329 Depreciation and amortization............................. 8,730 13,050 Merger expense............................................ 1,442 -- -------- --------- 234,551 272,219 -------- --------- Loss from operations...................................... (6,342) (17,114) -------- --------- Other income (expense): Interest income........................................... 729 189 Interest expense.......................................... (1,213) (2,924) Other..................................................... (2,021) 10,696 -------- --------- (2,505) 7,961 -------- --------- Loss before benefit for income taxes...................... (8,847) (9,153) Benefit for income taxes.................................... (1,295) (2,629) -------- --------- Net loss.................................................... $ (7,552) $ (6,524) ======== ========= Basic and diluted loss per share............................ $ (0.14) $ (0.11) ======== =========
See accompanying notes to the condensed consolidated financial statements. 4 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------- 1999 2000 -------- -------- (UNAUDITED) Cash Flows From Operating Activities: Net loss.................................................. $ (7,552) $ (6,524) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization........................... 8,730 13,050 Loss (Gain) on investment............................... 46 (12,898) Loss on disposal of equipment........................... -- 1,508 Provision for doubtful accounts......................... 2,283 6,708 Deferred income taxes................................... (1,315) (95) Deferred compensation................................... -- (68) Change in assets and liabilities net of effects from purchase of PT-1: Accounts and notes receivable, net.................... (20,448) (20,310) Receivable from related parties....................... 104 474 Other assets.......................................... 2,853 (1,558) Accounts payable...................................... 10,685 53,355 Related party payable................................. (1,739) 196 Accrued network cost.................................. 16,027 (28,504) Other accrued expenses................................ 11,407 (866) Deferred revenue...................................... (2,160) 1,533 Other liabilities..................................... (328) (1,669) -------- -------- Net cash provided by operating activities......... 18,593 4,332 -------- -------- Cash Flows From Investing Activities: Capital expenditures...................................... (32,021) (7,612) Short-term investments.................................... 920 102 Purchase of PT-1, net of cash acquired.................... 13,898 -- Payment to former shareholder of PT-1..................... (2,000) -- Sale of investments....................................... -- 13,830 Other long term assets.................................... (3,475) (838) -------- -------- Net cash (used) provided by investing activities...................................... (22,678) 5,482 -------- --------
See accompanying notes to the condensed consolidated financial statements. 5 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, -------------------- 1999 2000 -------- --------- (UNAUDITED) Cash Flows From Financing Activities: Borrowings under line of credit........................... -- 94,526 Repayments under lines of credit.......................... (15,230) (112,096) Borrowings under long-term debt and capital lease obligations............................................. 271 -- Payments under long-term debt and capital lease obligations............................................. (6,264) (4,597) Stock options exercised................................... 145 58 Other financing activities................................ (45) -- -------- --------- Net cash used in financing activities............. (21,123) (22,109) -------- --------- Effects Of Foreign Currency Translation..................... (724) 904 Decrease in cash and cash equivalents....................... (25,932) (11,391) Cash and cash equivalents, beginning of period.............. 47,297 25,561 -------- --------- Cash and cash equivalents, end of period.................... $ 21,365 $ 14,170 ======== =========
See accompanying notes to the condensed consolidated financial statements. 6 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) GENERAL The financial statements included herein are unaudited and have been prepared in accordance with generally accepted accounting principles for interim financial reporting and Securities Exchange Commission ("SEC") regulations. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In management's opinion, the financial statements reflect all adjustments (of a normal and recurring nature) which are necessary to present fairly the financial position, results of operations, stockholders' equity and cash flows for the interim periods. These financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 1999, as set forth in our Annual Report on Form 10-K. Certain prior year balances have been reclassified to conform to the current year presentation. The results for the three months ended March 31, 2000, are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. (2) BUSINESS AND PURPOSE We are a multinational telecommunications services company focused primarily on the international long distance market. We offer low-cost switched voice services on a wholesale basis primarily to U.S. based long distance carriers. We provide international long distance services through a flexible network comprised of foreign termination relationships, international gateway switches, leased and owned transmission facilities and resale arrangements with other long distance providers. We operate several wholly-owned foreign subsidiaries to further expand our international network. We have made substantial investments to install switch facilities in four of our subsidiaries, Star Europe Limited ("SEL") which is located in London, England, Star Telecommunications Deutschland Holding, GmbH and affiliates ("GmbH") which is located in Frankfurt, Germany, Star Telecommunications Switzerland which is located in Geneva, Switzerland, and Star Telecommunications Austria GmbH, which is located in Vienna, Austria. We use these switching facilities to decrease international traffic termination costs and to initiate outbound calls from these local markets. We provide domestic commercial long distance services throughout the United States through our subsidiaries, CEO Telecommunications, Inc. ("CEO"), and CEO California Telecommunications, Inc. ("CEO CA"), and AS Telecommunications, Inc. ("ALLSTAR Telecom"). Prepaid calling cards and dial around service are provided through our subsidiary, PT-1 Communications, Inc. ("PT-1"). (3) NET LOSS PER COMMON SHARE The following schedule summarizes the information used to compute basic and diluted net loss per common share for the three month periods ended March 31, 1999 and 2000. No common share 7 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (3) NET LOSS PER COMMON SHARE (CONTINUED) equivalents will be considered in the computation of diluted earnings per share for 1999 and 2000, as the effect would be anti-dilutive (in thousands):
THREE MONTHS ENDED MARCH 31, ------------------- 1999 2000 -------- -------- Weighted number of common shares used to compute basic and diluted loss per share.................................... 52,628 58,601 ====== ======
For the three month periods ended March 31, 1999 and 2000, stock options to purchase 3,683,000 and 3,722,415 shares, respectively, of common stock were outstanding, but were excluded from the computation of diluted earnings per share, as such options were anti-dilutive. (4) COMPREHENSIVE INCOME (LOSS) On January 1, 1998, we adopted SFAS No. 130, "Reporting Comprehensive Income". For year end financial statements, SFAS 130 requires us to display comprehensive income (which is the total of net income and all other non-owner changes in equity) with the same prominence as other consolidated financial statements. For the year end financial statements, we display the components of other comprehensive loss in the consolidated statements of stockholders' equity. During the three-month periods ended March 31, 1999 and 2000, comprehensive loss consisting of foreign currency translation adjustments of $2,122,000 and $1,624,000, respectively, resulted in total comprehensive loss of $9,674,000 and $8,148,000, respectively. (5) SIGNIFICANT EVENTS On January 18, 2000, we were notified that our capacity on the China-US Undersea Cable System would be reclaimed, unless we made a payment of approximately $47.2 million by February 1, 2000. The $47.2 million represents the total amount of liabilities owed to the China-US Undersea Cable System as of December 31, 1999. We allowed reclamation of the capacity to take place. As a result, we removed the capitalized cost of $48.7 million, which is included in operating equipment at December 31, 1999, and the related accounts payable balance of $47.2 million in the first quarter of 2000. The remaining balance of the capitalized cost of $1.5 million was expensed and included in other income for the three months ended March 31, 2000. On February 11, 2000, we entered into a definitive agreement to merge with and into World Access, Inc. ("World Access"). Under the terms of the agreement, each share of our common stock will be converted into 0.3905 shares of World Access common stock. World Access may, at its election, pay up to 40% of the merger consideration in cash. The merger is subject to, among other things, certain regulatory approvals, the approval of the shareholders of World Access and STAR, and the divestiture of our prepaid calling card and dial around business for minimum net cash proceeds of $150 million. Any net proceeds in excess of $150 million would be added to the merger consideration. The merger will be accounted for as a purchase transaction. The transaction is expected to close in the third quarter of 2000. 8 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (5) SIGNIFICANT EVENTS (CONTINUED) In connection with the acquisition of PT-1 on February 4, 1999, PT-1 and STAR placed 500,000 shares of STAR common stock into escrow for issuance to certain PT-1 distributors for no consideration. After further negotiations, we entered into a distribution agreement with NY Phone Card Distributors LLC ("Distribution Co."), a partnership of distributors, on March 1, 2000. The agreement provides for a total of 400,000 shares of our common stock to be issued to Distribution Co. as follows: (i) 228,750 shares at the date of execution, (ii) 31,250 shares at the end of May 2000, provided that the agreement is still in effect, and (iii) 140,000 shares contingently issuable based on certain minimum purchase requirements. Under the agreement, we converted our accounts receivable balances totaling $1.2 million as of March 1, 2000 into interest free notes receivable due in monthly installments through January 2001. The agreement requires Distribution Co. to purchase a minimum of approximately $121 million of prepaid calling cards from PT-1 during the period from March 2000 through May 2001, with additional quarterly increases of three percent from June 2001 through May 2002. On March 29, 2000, we entered into a letter of intent to sell the assets of PT-1 to a third party ("PT-1 Acquiror") for cash proceeds of $150 million less certain liabilities. The proceeds are subject to a purchase price adjustment based on an audit of PT-1 after the sale is closed. Due diligence is currently in process by PT-1 Acquiror and a definitive acquisition agreement is expected to be completed by May 31, 2000. Upon obtaining shareholder approval of this transaction we will record a loss of approximately $90 million. On February 14, 2000, an individual shareholder of STAR filed a lawsuit in Santa Barbara Superior Court seeking to block our pending merger with World Access. The suit alleged that we and our board of directors failed to take actions necessary to attain a higher valuation for STAR than as provided for in the merger agreement. We filed demurrers on the grounds that the complaints were legally deficient. On May 5, 2000, during a hearing to address the demurrers, the Superior Court granted our demurrers without the opportunity to amend, effectively dismissing the lawsuit. (6) STATEMENTS OF CASH FLOWS During the three month periods ended March 31, 1999 and 2000, cash paid for interest was approximately $1,381,000 and $2,668,000, respectively. For the same periods, cash paid for income taxes amounted to approximately $1,684,000 and $239,000, respectively. 9 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (6) STATEMENTS OF CASH FLOWS (CONTINUED) Non-cash investing and financing activities, which are excluded from the consolidated statements of cash flows, are as follows (in thousands):
THREE MONTHS ENDED MARCH 31, -------------------- 1999 2000 --------- -------- Equipment purchased through capital leases.................. $ -- $ 294 Assets acquired through a vendor financing arrangement...... -- 2,481 Disposition of cable systems................................ -- 47,200 Other non-cash transactions................................. -- 11,906 Detail of acquisition: Fair value of assets acquired............................. 303,743 -- Liabilities assumed....................................... (144,563) -- Common stock issued....................................... (153,578) -- Notes payable issued...................................... (19,500) -- --------- ------- $ (13,898) $61,881 ========= =======
10 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) (7) SEGMENT INFORMATION At March 31, 2000, we have three separately managed business segments, North American Wholesale, North American Commercial and European long distance telecommunications.
NORTH NORTH AMERICAN AMERICAN THREE MONTHS ENDED, MARCH 31, 1999 (IN THOUSANDS) WHOLESALE COMMERCIAL EUROPEAN TOTAL - ------------------------------------------------- --------- ---------- -------- -------- Revenues from external customers........................... $127,702 $ 75,016 $25,491 $228,209 Revenues from other segments............................... 34,819 1,107 9,216 45,142 Interest income............................................ 643 75 11 729 Interest expense........................................... 479 418 316 1,213 Depreciation and amortization.............................. 3,595 3,003 2,132 8,730 Segment net income (loss) before provision (benefit) for income taxes............................................. 5,378 (11,140) (3,085) (8,847) Segment assets............................................. 195,037 318,608 125,029 638,674
NORTH NORTH AMERICAN AMERICAN THREE MONTHS ENDED, MARCH 31, 2000 (IN THOUSANDS) WHOLESALE COMMERCIAL EUROPEAN TOTAL - ------------------------------------------------- --------- ---------- -------- -------- Revenues from external customers........................... $ 81,297 $135,150 $38,658 $255,105 Revenues from other segments............................... 103,885 -- 6,623 110,508 Interest income............................................ 6 62 121 189 Interest expense........................................... 1,859 296 769 2,924 Depreciation and amortization.............................. 5,059 4,337 3,654 13,050 Segment net income (loss) before provision (benefit) for income taxes............................................. (5,538) (3,179) (436) (9,153) Segment assets............................................. 232,298 339,737 169,849 741,884
(8) RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998 and June 1999, the AICPA issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 137, which delayed the effective date of SFAS No. 133. We will adopt SFAS No. 133 in January 2001. We are currently analyzing the statement to determine the impact, if any, on our financial position or results of operations. (9) SUBSEQUENT EVENTS On April 12, 2000, we signed a note agreement, which converted $56.0 million of trade payables we owed to MCI WorldCom Network Services, Inc. ("WorldCom") into a note payable. The note is secured by substantially all of our assets, bears interest at 16% per annum and is payable at the earlier of (i) termination of the merger agreement with World Access, (ii) the close of the World Access merger or (iii) August 1, 2000. Management believes that the World Access merger will close as planned and the WorldCom note will be satisfied at maturity. On April 18, 2000, Samer Tawfik resigned as a director of STAR. 11 STAR TELECOMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are statements other than historical information or statements of current condition. Some forward looking statements may be identified by use of such terms as "believes", "anticipates", "intends", or "expects". These forward-looking statements relate to the plans, objectives and expectations of our future operations. In light of the risks and uncertainties inherent in all such projected operation matters, the inclusion of forward-looking statements in this report should not be regarded as a representation by us or any other person that our objectives or plans will be achieved or that any of our operating expectations will be realized. Our revenues and results of operations are difficult to forecast and could differ materially from those projected in the forward-looking statements contained in this report as a result of numerous factors including among others, the following: (i) changes in customer rates per minute; (ii) foreign currency fluctuations; (iii) termination of certain service agreements or inability to enter into additional service agreements; (iv) inaccuracies in our forecast of traffic growth; (v) changes in or developments under domestic or foreign laws, regulations, licensing requirements or telecommunications standards; (vi) foreign political or economic instability; (vii) changes in the availability of transmission facilities; (viii) loss of the services of key officers; (ix) loss of a customer which provides us with significant revenues; (x) highly competitive market conditions in the industry; (xi) concentration of credit risk; and (xii) availability of long term financing. The foregoing review of the important factors should not be considered as exhaustive; we undertake no obligation to release publicly the results of any future revisions we may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following table sets forth income statement data as a percentage of revenues for the periods indicated.
THREE MONTHS ENDED MARCH 31, --------------------- 1999 2000 -------- -------- Revenues.................................................... 100% 100% Operating expenses: Cost of services.......................................... 84.5 88.5 Selling, general and administrative....................... 13.8 13.1 Depreciation and amortization............................. 3.8 5.1 Merger expense............................................ 0.6 -- ----- ----- 102.8 106.7 ----- ----- Loss from operations...................................... (2.8) (6.7) ----- ----- Other income (expense): Interest income........................................... 0.3 0.1 Interest expense.......................................... (0.5) (1.1) Other..................................................... (0.9) 4.2 ----- ----- (1.1) 3.1 ----- ----- Loss before benefit for income taxes........................ (3.9) (3.6) Benefit for income taxes.................................... (0.6) (1.0) ----- ----- Net loss.................................................... (3.3)% (2.6)% ===== =====
12 THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH, 31, 2000 REVENUES: Total revenues increased 11.8% to $255.1 million in the first quarter of 2000 from $228.2 million in the first quarter of 1999. The increase is primarily a result of the continued growth in the North American commercial operations, which contributed revenues from prepaid calling card and dial around programs, and the European operations. Revenues from North American wholesale customers decreased 36.3% to $81.3 million in the current quarter from $127.7 million in the prior year's first quarter. Minutes of use generated by North American wholesale customers decreased 7.0% to 481.1 million in the first quarter of 2000, as compared to 517.3 million in the comparable quarter of the prior year. This decrease in revenues and minutes is partially the result of our purchase of PT-1 on February 4, 1999, which was a significant wholesale customer. Revenues related to sales to PT-1 prior to the acquisition and included in first quarter 1999 revenues were $14.4 million generated by 45.1 million minutes of use. We continue to experience growth in the number of North American wholesale customers, which increased to 226 at March 31, 2000, up from 179 customers at March 31, 1999. Potential growth in revenue for the first quarter of 2000 from the increase in customers was substantially offset by a decline in rates per minute and increased competition. The average North American wholesale rate per minute of use declined 32.0% to $0.17 for the current quarter as compared to $0.25 for the quarter ended March 31, 1999, reflecting continued pricing pressures on competitive routes. North American commercial revenues increased 80.2% to $135.2 million in the first quarter of 2000 from $75.0 million in the first quarter of 1999. The increase is due primarily to the consummation of the PT-1 acquisition in the first quarter of 1999 which diversified our revenue base with both prepaid calling cards and dial around programs. Minutes of use generated by North American commercial customers increased 132.1% to 986.9 million in the first quarter of 2000, as compared to 425.2 million in the comparable quarter of 1999. The average North American commercial rate per minute decreased 22.2% to $0.14 cents per minute in the first quarter of 2000 from $0.18 cents per minute in the first quarter of 1999, primarily due to continued competition on competitive routes. The first quarter of 2000 also included revenues generated from the European operations, which increased 51.7% to $38.6 million, as compared to approximately $25.5 million in the first quarter of 1999. The increase is due primarily to an increase in the minutes of use of 146.3% from 385.2 million in the first quarter of 1999 to 948.7 million in the first quarter of 2000. The growth in revenue is primarily the result of an increase in wholesale customers from March 31, 1999 to March 31, 2000 from approximately 67 to approximately 520. Management believes that the prospects for growth in Europe remain strong as STAR Telecommunications Deutschland GmbH is fully utilizing its interconnect with Deutsche Telekom AG, as well as with other European PTTs. In addition, management expects continued growth in European revenues due to continued development of the Austrian and Swiss markets. COST OF SERVICES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION): Total cost of services (exclusive of depreciation and amortization) increased 17.1% to $225.8 million in the first quarter of 2000 from $192.9 million in the first quarter of 1999 and increased as a percentage of revenues for the same periods to 88.5% from 84.5%. Cost of services (exclusive of depreciation and amortization) from North American vendors increased 8.5% to $189.4 million in the first quarter of 2000 from $174.6 million in the first quarter of 1999 and increased as a percentage of North American revenues to 87.5% from 86.1%, respectively. The growth in cost of services (exclusive of depreciation and amortization) reflects the increase in minutes of use from the commercial usage generated from prepaid calling card and dial around programs offset by an overall declining average cost per minute. The average cost per minute declined as a result of competitive pricing pressures, a larger proportion of lower cost per minute countries, as well as an increasing proportion of traffic routed on our proprietary network. Management believes 13 that the average cost per minute will continue to decline as we expand our domestic and international network. The first quarter of 2000 also includes cost of services (exclusive of depreciation and amortization) from the European operations, which increased over 98.9% to $36.4 million, compared to $18.3 million in the first quarter of 1999. The increase in cost of services (exclusive of depreciation and amortization) from the European operations was attributable to increased usage and private line costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: For the first quarter of 2000, total selling, general and administrative expenses, exclusive of merger expenses, increased 5.9% to $33.3 million from $31.5 million in the first quarter of 1999 and decreased as a percentage of revenues to 13.1% from 13.8% over the comparable 1999 period. This compares to total selling, general and administrative expenses, exclusive of merger expenses for the fourth quarter of 1999 of $41.7 million, representing a decrease of $8.4 million or 20.0% from the fourth quarter of 1999 to the first quarter of 2000. This significant improvement represents our continued cost saving efforts throughout our North American operations. North American selling, general and administrative expenses decreased 9.4% to $23.1 million in the first quarter of 2000 from $25.5 million in the first quarter of 1999. For the first quarter of 2000, North American selling, general and administrative expenses decreased as a percentage of North American revenues to 10.7% from 12.6% in the first quarter of 1999. The decrease is primarily a result of the elimination of redundant staff positions during the third quarter of 1999 after the PT-1 and United Digital Network, Inc. ("UDN") mergers, and decreased commission, advertising and promotion expenses during the first quarter of 2000 as compared to the first quarter of 1999. Had the entire first quarter of PT-1's operating results been included in the first quarter of 1999, selling, general and administrative expenses, exclusive of merger expenses, would have decreased $6.8 million dollars in the first quarter of 2000 or approximately 22.6% as compared to the first quarter of 1999. Selling, general and administrative expenses related to the European operations increased 70.0% to $10.2 million in the first quarter of 2000 from approximately $6.0 million in the first quarter of 1999. The increase is primarily a result of increases in compensation, advertising and promotion expenses during the first quarter of 2000, as compared to the first quarter of 1999. This reflects our commitment during 1999 to expand our commercial sales force and back office support personnel in Germany. DEPRECIATION AND AMORTIZATION: Depreciation and amortization expense increased over 49.5% to $13.1 million for the first quarter of 2000 from $8.7 million for the first quarter of 1999, and increased as a percentage of revenues to 5.1% from 3.8% over the comparable period in the prior year. The increase is due primarily to significant asset additions in Europe and the inclusion of the depreciation expense for PT-1 assets. Depreciation expense also increased as a result of our investment in domestic broadband capacity during 1999. Depreciation and amortization expense attributable to North American assets amounted to $9.4 million in the first quarter of 2000. European operations realized total depreciation and amortization expense of $3.7 million in the first quarter of 2000. We expect depreciation and amortization expense to continue to increase as a percentage of revenues as we continue to expand our global telecommunications network. LOSS FROM OPERATIONS: In the first quarter of 2000, loss from operations was $17.1 million compared to loss from operations of $6.3 million in the first quarter of 1999. Operating margin in the first quarter of 2000 was a negative 6.7% as compared to a negative 2.8% in the first quarter of 1999. Operating margin decreased in the first quarter of 2000 primarily due to rate compression in the wholesale market, the increase in depreciation and amortization expense, and increased expenses due to our continued European expansion. OTHER INCOME (EXPENSE): We reported other income, net, of approximately $8.0 million in the first quarter of 2000, as compared to other expense, net, of approximately $2.5 million for the first 14 quarter of 1999. This is primarily due to a gain of approximately $12.9 million on the sale of a foreign investment by our German subsidiary. This gain was offset by interest expense of $2.9 million on our line of credit and capital lease obligations for switches and a $1.5 million loss on the disposal of our cable systems. BENEFIT FOR INCOME TAXES: We recorded a tax benefit of $2.6 million in the first quarter of 2000 due to operating losses compared to a tax benefit of $1.3 million in the first quarter of 1999. LIQUIDITY AND CAPITAL RESOURCES. We have incurred significant operating and net losses over the past fifteen months. Several factors have contributed to this situation. We experienced significant pricing pressures in the wholesale market, with deteriorating wholesale gross margins during the last fifteen months. We continue to deploy new international direct circuits in an effort to increase the number of on-net countries which historically have provided higher wholesale margins. As of March 31, 2000, we had cash and cash equivalents of approximately $14.2 million, short-term investments of $1.3 million, and a working capital deficit of $160.7 million. Cash provided by operating activities for the three months ended March 31, 2000, totaled $4.3 million as compared with cash provided by operating activities of $18.6 million for the same period in 1999 reflecting increases in accounts payable offset by the use of cash to fund operating losses, increases in accounts receivables, and decreases in accrued network cost. Cash provided by investing activities for the three months ended March 31, 2000, totaled $5.5 million primarily as a result of sale of investments of approximately $13.8 million. Cash received from the sale of investments was offset by capital expenditures of $7.6 million. Capital expenditures for the same period last year totaled $32.0 million. These capital expenditures for the three months ended March 31, 2000 related primarily to the continued development of our network, which included switch expansion, and the replacement of leased line facilities with IRU's and ownership interests on both domestic and international cable systems. Cash used by financing activities for the three months ended March 31, 2000, totaled $22.1 million primarily reflecting additional borrowings under our line of credit offset by repayments on the line of credit, long-term debt and capital lease obligations. Our indebtedness at March 31, 2000 was approximately $87.4 million, of which $43.1 million was long-term debt and $44.3 million was short- term debt. Our debt is currently a combination of credit facility borrowings and capital leases for operating equipment. As of March 31, 2000, we had $26.0 million outstanding on our receivables financing agreement. The facility allows us to borrow up to $75 million based upon our eligible accounts receivable, bears interest at prime plus 2.0% and expires on November 30, 2001. On April 12, 2000, we signed a note agreement, which converted $56.0 million of trade payables we owed to MCI WorldCom Network Services, Inc. ("WorldCom") into a note payable. The note is secured by substantially all of our assets, bears interest at 16% per annum and is payable at the earlier of (i) termination of the merger agreement with World Access, (ii) the close of the World Access merger or (iii) August 1, 2000. Management believes that the World Access merger will close as planned and the WorldCom note will be satisfied at maturity. On February 11, 2000, we entered into a merger agreement with World Access. The agreement calls for World Access to infuse cash in the form of a bridge loan of up to $35 million with $25 million for U.S. operations and $10 million for GmbH. The anticipated financing agreement with World Access will provide for predetermined initial advances with additional advances to be made solely in World Access's discretion. 15 On March 29, 2000, we entered into a letter of intent to sell the assets of PT-1 to a third party ("PT-1 Acquiror") for cash proceeds of $150 million less certain liabilities. The proceeds are subject to a purchase price adjustment based on an audit of PT-1 after the sale is closed. Due diligence is currently in process by PT-1 Acquiror and a definitive acquisition agreement is expected to be completed by May 31, 2000. Upon obtaining shareholder approval of this transaction we will record a loss of approximately $90 million. We believe that the PT-1 sale and the merger with World Access will be completed as scheduled and that the WorldCom note payable will be satisfied at maturity. We believe that our operating cash flow, World Access line of credit availability and the proceeds from the PT-1 sale will be adequate to meet our operating requirements for at least fiscal 2000. Nevertheless, as we continue to expand our network facilities as needed, our liquidity needs may increase, perhaps significantly, which could require us to seek additional financing, such as capital leases, or the expansion of our borrowing capacity under current or new lines of credit. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS FOREIGN CURRENCY RISK. As a global enterprise, we face exposure to adverse movements in foreign currency exchange rates. Our foreign currency exposures may change over time as the level of activity in foreign markets grows and could have a material adverse impact upon our financial results. No material changes have occurred in the quarter that would impact our exposure to foreign currency risk. INTEREST RATE RISK. We have borrowings under our purchase of receivable facility and long-term debt for capital equipment. Some of these agreements are based on variable interest rates. At any time, a sharp rise in interest rates could have a material adverse impact upon our cost of working capital and interest expense. No material changes have occurred in the quarter that would impact our exposure to interest rate risk. The following table presents the hypothetical impact on our financial results for changes in interest rates for the variable rate obligations we held at March 31, 2000. The modeling technique used measures the change in our results arising from selected potential changes in interest rates. Market rate changes reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points ("BPS"), 100 BPS, and 150 BPS over a twelve month time horizon. INTEREST RATE EXPOSURE ANALYSIS INCREASE OR (DECREASE) IN ANNUAL INTEREST EXPENSE DUE TO CHANGES IN INTEREST RATES (DOLLARS IN THOUSANDS)
DESCRIPTION 50 BPS 100 BPS 150 BPS (50) BPS (100) BPS (150) BPS - ----------- -------- -------- -------- -------- --------- --------- Line of Credit.......................... $130 $260 $390 $ (130) $ (260) $ (390) Long Term Debt.......................... $307 $615 $922 $ (307) $ (615) $ (922)
16 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On February 14, 2000 and March 1, 2000, identical class action complaints were filed against us and directors Christopher E. Edgecomb, Mary A. Casey, Mark Gershein, Gordon Hutchins, Jr., John R. Snedegar, Arunas A. Chesonis and Samer Tawfik. The complaints alleged causes of action for breach of fiduciary duty arising from approval of the merger with World Access and sought both injunctive relief and damages. We filed demurrers on the grounds that the complaints were legally deficient. On May 5, 2000, during a hearing to address our demurrers, the Superior Court granted our demurrers without the opportunity to amend, effectively dismissing the lawsuit. ITEM 3. DEFAULTS UPON SENIOR SECURITIES At March 31, 2000, we were in compliance with all covenants under the receivables financing agreement with RFC. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBIT DESCRIPTION 10.75 Workout Agreement, dated April 12, 2000, between STAR, MCI WorldCom Network Services, Inc. ("WorldCom") and certain of STAR's subsidiaries. 10.76 Promissory Note, dated April 12, 2000, between STAR and WorldCom. 10.77 Security Agreement, dated April 12, 2000, between STAR and WorldCom and certain of STAR's subsidiaries. 10.78 Pledge Agreement, dated April 12, 2000, between STAR and WorldCom and certain of STAR's subsidiaries. 10.79 Guaranty, dated April 12, 2000, between WorldCom and certain of STAR's subsidiaries. 27.1 Financial Data Schedule.
17 SIGNATURES Pursuant to the requirements 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. STAR TELECOMMUNICATIONS, INC. Dated: May 18, 2000 By: /s/ CHRISTOPHER E. EDGECOMB ----------------------------------------- Christopher E. Edgecomb CHIEF EXECUTIVE OFFICER AND DIRECTOR (PRINCIPAL EXECUTIVE OFFICER) By: /s/ JOHN J. PASINI ----------------------------------------- John J. Pasini VICE PRESIDENT OF FINANCE (PRINCIPAL ACCOUNTING OFFICER)
18 EX-10.75 2 EXHIBIT 10.75 EXHIBIT 10.75 WORKOUT AGREEMENT THIS WORKOUT AGREEMENT (this "AGREEMENT") is entered into as of this 12th day of April, 2000, by and between STAR Telecommunications, Inc., a Delaware corporation ("DEBTOR"), PT-1 Communications, Inc. ("PT-1"), Helvey Com, LLC ("HELVEY"), CEO California Telecommunications, Inc., CEO Telecommunications, Inc., Lucius Enterprises, Inc., AS Telecommunications, Inc.; PT-1 Long Distance, Inc., PT-1 Holdings I, Inc., Phonetime Technologies, Inc., PT-1 Holdings II, Inc., Nationwide Distributors, Inc., Technology Leasing, Inc., Investment Services, Inc., and PT-1 Communications Puerto Rico, Inc. (collectively, the "DEBTOR ENTITIES") and MCI WORLDCOM NETWORK SERVICES, INC., a Delaware corporation having a place of business located at 6929 North Lakewood Avenue, M.D. 5.2-510, Tulsa, Oklahoma 74117 ("WORLDCOM"). W I T N E S S E T H: WHEREAS, WorldCom provides telecommunications services to Debtor pursuant to certain services contracts now existing or hereafter executed between such parties including, but not limited to, those carrier and other agreements set forth on SCHEDULE A attached hereto as the same may have been heretofore or may hereafter be amended, modified or supplemented from time to time (collectively, the "Service Agreements"), pursuant to which WorldCom has provided and continues to provide various switched telecommunications services to and for the benefit of the Debtor, the Guarantors and their respective Subsidiaries; and WHEREAS, Debtor is in default to WorldCom for, INTER ALIA, failure to pay its obligations to WorldCom in a timely manner (the "Past Due Indebtedness"); and WHEREAS, Debtor and WorldCom have agreed to restructure certain of the Past Due Indebtedness due to WorldCom as of February 3, 2000, in the form of a Promissory Note in the principal amount of $56,017,698.87 (the "Workout Indebtedness"), of even date herewith (the "Note"), which has been executed and delivered by Debtor to WorldCom; and WHEREAS, Debtor has agreed to secure its performance and payment of (a) all obligations for the provision of services by WorldCom to Debtor pursuant to any, and all related notes, instruments, documents, or agreements and any amendments, extensions, renewals or replacements to or of any of the foregoing; and (b) all other obligations and indebtedness of Debtor to WorldCom of whatever kind and however created, whether presently existing or hereafter arising; and WHEREAS, the Guarantors have agreed to guaranty and act as surety for such obligations of the Debtor to WorldCom and to secure such guaranty. NOW THEREFORE, the parties hereto, in consideration of the promises contained herein and intending to be legally bound hereby, agree as follows: 1. INCORPORATION OF RECITALS. The parties affirm and acknowledge that the recitals set forth above are true and correct and are incorporated into this Agreement by reference. 2. WORLDCOM DOCUMENTS. Unless and until (if ever) WorldCom and Debtor shall enter into a written modification agreement, the WorldCom Documents, as currently in effect, shall remain in full force and effect, without change, and each party shall be responsible and liable for the performance of its respective agreements and obligations in accordance with the WorldCom Documents. 3. EXISTING EVENTS OF DEFAULT AND FORBEARANCE WITH RESPECT THERETO. Debtor agrees that the Service Agreements are currently in default in various respects, including, but not limited to, those Events of Default listed in EXHIBIT A (the "Existing Defaults") attached hereto and made a part hereof. WorldCom agrees that it shall forbear from exercising its rights and remedies with respect to the Existing Defaults until the earlier to occur of (a) termination of the Agreement and Plan of Merger dated February 11, 2000, by and between the Debtor, STI Merger Co. and World Access, Inc. (the "Merger Agreement"); (b) consummation of the merger transaction contemplated by the Merger Agreement; or (c) August 1, 2000, 4. ACKNOWLEDGMENT OF INDEBTEDNESS. Debtor acknowledges that the Workout Indebtedness is fully due and owing under the Service Agreements, without setoff, recoupment, counterclaims or defenses. 5. PAYMENT FOR USAGE OF WORLDCOM'S NETWORK. Debtor shall pay for usage of WorldCom's telecommunications network for usage incurred after February 3, 2000 (collectively, the "Ongoing Usage") in accordance with the terms and conditions of the Service Agreements. 6. CONDITIONS PRECEDENT. Debtor shall execute and deliver (or cause to be executed and delivered) the following documents to WorldCom on or before April 14, 2000: (i) Security Agreement; (ii) the Note; (iii) Pledge Agreement and pledge of 100% of the outstanding Capital Stock of CEO California Telecommunications, Inc., CEO Telecommunications, Inc., PT-1 Communications, Inc. ("PT-1"), Helvey Com, LLC ("Helvey"), Lucius Enterprises, Inc., AS Telecommunications, Inc.; PT-1 Long Distance, Inc., PT-1 Holdings I, Inc., Phonetime Technologies, Inc., PT-1 Holdings II, Inc., Nationwide Distributors, Inc., Technology Leasing, Inc., Investment Services, Inc., and PT-1 Communications Puerto Rico, Inc. (iv) a Guaranty by each of PT-1 and Helvey (collectively, the "Guarantors"); (v) stock or membership assignments, executed in blank, and certificates representing the equity interests in the foregoing entities; (vi) Security Agreements of each of the Guarantors; and (vii) UCC-1 financing statements related to the foregoing. 2 7. DEFAULT. A "DEFAULT" means the occurrence or existence of one or more of the following events or conditions (whatever the reason for such Default and whether voluntary, involuntary or effected by operation of law): (a) Debtor's or any Guarantor's breach of any of its respective covenants, obligations or agreements contained in this Agreement, including, without limitation, the covenants set forth in this Agreement; or (b) The occurrence, existence or continuance of any default or event of default under any of the WorldCom Documents, or the Credit Agreement, other than the Debtor's failure to pay the Past Due Indebtedness in a timely manner heretofore; or (c) Any material representation or warranty made by Debtor or any Guarantor in this Agreement, or any material statement made by Debtor in any plan, certificate, report, document, exhibit or budget, as the case may be, provided to WorldCom pursuant to this Agreement or the WorldCom Documents proves to have been false or misleading in any material respect as of the time when made; or (d) Failure of Debtor to remain current with respect to its Ongoing Usage; or (e) Any material adverse change in the financial condition, business, assets or operations of the Debtor or any of the Guarantors occurs; or (f) A proceeding shall be instituted in respect of the Debtor or any Guarantor: (i) seeking to have an order for relief entered in respect of the Debtor or such Guarantor, or seeking a declaration or entailing a finding that such entity is insolvent or a similar declaration or finding, or seeking dissolution, winding-up, charter revocation or forfeiture, liquidation, reorganization, arrangement, adjustment, composition or other similar relief with respect to such entity, its assets or its debts under any law relating to bankruptcy, insolvency, relief of debtors or protection of creditors, termination of legal entities or any other similar law now or in the future in effect; or (ii) seeking appointment of a receiver, trustee, custodian, liquidator, assignee, sequestrator or other similar official for the Debtor or any Guarantor, or for all or any substantial part of its property; or (g) Debtor or Guarantor, as the case may be, shall become insolvent, shall become generally unable to pay its debts as they become due, shall voluntarily suspend transaction of its business, shall make a general assignment for the benefit of creditors, shall institute a proceeding described in Section 7(f)(i) of this Agreement or shall consent to any order for relief, 3 declaration, finding or relief described in Section 7(f)(i) of this Agreement, shall institute a proceeding described in Section 7(f)(ii) of this Agreement or shall consent to the appointment or to the taking of possession by any such official of all or any substantial part of its property whether or not any proceeding is instituted, dissolves, winds-up or liquidates itself or any substantial part of its property, or shall take any action in furtherance of any of the foregoing. 8. CONSEQUENCES OF A DEFAULT. (a) If a Default specified in subsections (a) through (e) of Section 7 of this Agreement occurs and continues or exists, WorldCom may demand the principal balance due under the Note, interest accrued on the unpaid principal amount and all other amounts owing by Debtor under this Agreement and the other WorldCom Documents to be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are expressly waived, and an action for any amounts due shall accrue immediately. (c) If a Default specified in subsections (f) or (g) of Section 7 of this Agreement occurs and continues or exists, WorldCom will be under no further obligation to provide telecommunications services to Debtor, the outstanding principal and all unpaid interest and all other amounts owing by Debtor under this Agreement, and the other WorldCom Documents shall become immediately due and payable without presentment, demand, protest or notice of any kind, all of which are expressly waived, and an action for any amounts due shall accrue immediately. (d) Notwithstanding anything in this Agreement to the contrary, upon the occurrence of a Default, WorldCom shall be permitted to exercise all of its rights under any one or more of the WorldCom Documents at law or in equity against Debtor. 9. WRITTEN AMENDMENT ONLY. No modifications to the WorldCom Documents shall be deemed to have been entered into until () the parties to such WorldCom Documents shall have reached agreement on all issues, and () such agreement has been reduced to a written agreement signed by each of the parties to each such WorldCom Document in question. 10. RELEASE OF WORLDCOM. Each of the Debtor Entities forever releases and discharges WorldCom, its agents, servants, employees, directors, officers, attorneys, branches, parent, affiliates, subsidiaries, successors and assigns and all persons, firms, corporations, and organizations acting on WorldCom's behalf (collectively referred to as the "WORLDCOM RELEASED ENTITIES") of and from any and all losses, damages, claims, demands, liabilities, obligations, actions and causes of action, of any nature whatsoever in law or in equity, including, without limitation, any claims or joinders for sole liability, contribution or indemnity (collectively, the "CLAIMS"), which one or more of the Debtor Entities may have or claim to have against WorldCom or any one or more of the WorldCom Released Entities, as of the date of this Agreement, whether presently known or unknown, and of every nature and extent whatsoever, on account of or in any way touching, concerning, arising out of, founded upon or relating to (i) the WorldCom Documents, (ii) the obligations of one or more the Debtor Entities under the WorldCom Documents, (iii) this 4 Agreement, (iv) enforcement or negotiation of any of the foregoing WorldCom Documents or this Agreement, and (v) the dealings of the parties to this Agreement with respect to the obligations of the Debtor Entities to WorldCom under the WorldCom Documents or one or more of them. 11. EFFECTUATION OF RELEASES. Each of the Debtor Entities agrees to execute all appropriate and necessary documents to enable WorldCom or any of the WorldCom Entities, to plead the effect of the releases contained in Section 10 of this Agreement in any lawsuit. Each of the Debtor Entities also understands and agrees that the covenants and consideration referred to in this Agreement are in consideration for the continued forbearance by the parties in enforcing their respective rights, including, without limitation, WorldCom's forbearance in collecting or otherwise enforcing the Obligations owed to WorldCom, and said forbearance by WorldCom shall not be construed as an admission of any liability on the part of WorldCom or any WorldCom Released Entity, and the Debtor's have not claimed any such liability. 12. CUMULATIVE NATURE OF RELEASE. Nothing contained in this Agreement shall impair or be construed to impair the security of WorldCom or any of the WorldCom Released Entities under the WorldCom Documents, nor affect nor impair any rights or powers that WorldCom or any of the WorldCom Released Entities may have under the WorldCom Documents for the recovery of the indebtedness of the Debtor Entities to WorldCom in case of breach of the terms, provisions and releases contained in this Agreement or breach or nonfulfillment of the terms, agreements and covenants set forth in the WorldCom Documents. All rights, powers and remedies of WorldCom or any of the WorldCom Released Entities under any other agreement or release now or at any time in the future in force between WorldCom and the Debtor with respect to the Obligations shall be cumulative and not alternative and shall be in addition to all rights, powers and remedies given to WorldCom or any of the WorldCom Released Entities by law. 13. BINDING RELEASE. The releases contained in Section 11 of this Agreement shall be binding upon each of the Debtor Entities and shall inure to the benefit of WorldCom and the WorldCom Released Entities, and any of their respective successors and assigns. 14. CONSENT BY WORLDCOM TO SALE OF PT-1 OR ITS ASSETS. Notwithstanding any provision in the WorldCom Documents to the contrary, WorldCom consents to the sale of all of PT-1's stock or substantially all of its assets. Notwithstanding the foregoing, WorldCom reserves any and all rights it may have to the proceeds of any such sale and the Debtor Entities agree that an aggregate amount of such proceeds equal to the obligations evidenced by the Note shall not be disbursed, without WorldCom's consent, such consent not to be unreasonably withheld. 15. REPRESENTATIONS AND WARRANTIES OF DEBTOR ENTITIES. To induce WorldCom to agree to the financial restructuring of the Debtor's obligations to WorldCom, each of the Debtor Entities hereby represents and warrants to WorldCom that: 5 (a) WorldCom has acted in good faith in the performance and enforcement of its rights under the WorldCom Documents, the Obligations and the negotiation of this Agreement; and (b) Each of the Debtor Entities is a corporation, limited liability company, partnership, or limited partnership that (i) is duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation or formation, as applicable; (ii) is qualified to do business in all jurisdictions where the nature of its business or properties require such qualification; and (iii) is in compliance in all material respects with all requirements under applicable laws, rules and regulations. Set forth on SCHEDULE 15 hereto is a complete and accurate listing with respect to Debtor, each of the Obligors and their respective Subsidiaries, showing (1) the jurisdiction of its organization, and its mailing address, which is the principal place of business and chief executive office of each unless otherwise indicated; (2) the classes of Capital Stock and shares of Capital Stock issued and outstanding in Debtor, and in each such Subsidiary; and (3) with respect to Debtor's Subsidiaries, each record and beneficial owner of outstanding Capital Stock on the date hereof, indicating the ownership percentage. (c) The board of directors (or group of similar authority) of Debtor and each of its Subsidiaries that is an Obligor (or its general partners or managing members, as applicable), have duly authorized the execution, delivery, and performance of the WorldCom Documents to be executed by Debtor and each such Subsidiary, as appropriate. Debtor and each such Obligor has the full legal right, power, and authority to execute, deliver, and perform the WorldCom Documents to which they are parties. The WorldCom Documents constitute the legal, valid, and binding obligations of Debtor and each such Obligor, as appropriate, enforceable in accordance with their terms (subject as to enforcement of remedies to any applicable Debtor Relief Laws). This Agreement and each other WorldCom Document have been duly executed and delivered on behalf of Debtor or Subsidiaries of Debtor or any other Obligor, as the case may be. This Agreement and each other WorldCom Document constitutes a legal, valid, and binding obligation of Debtor and/or Subsidiaries of Debtor and/or any other Obligor, as the case may be, enforceable against such Person in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). (d) The execution, delivery, and performance of the WorldCom Documents, does not and will not (i) violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award presently in effect having applicability to Debtor or any Subsidiary of Debtor or any other Obligor or the articles of incorporation, bylaws or other organic documents of Debtor or any Subsidiary of Debtor or any other Obligor; (ii) result in, or require, the creation or imposition of any Lien on any of the properties or revenues of Borrower or any Subsidiary of Debtor or any other Obligor pursuant to any such law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award; or (iii) result in a breach or constitute or cause a default under any indenture, agreement, lease, or instrument to which Debtor or any 6 Subsidiary of Debtor or any other Obligor is a party. Neither Debtor nor any Subsidiary of Debtor nor any other Obligor is in default under any such law, rule, regulation, order, writ, judgment, injunction, decree, determination, or award or any such indenture, agreement, lease, or instrument. (e) No statement contained in this Workout Agreement or any of the other WorldCom Documents, or in any certificate or other document delivered to WorldCom by Debtor, any Obligor, or by any of Debtor's Subsidiaries (or by any of their respective representatives) or any other Obligor in connection with this Agreement or the transactions contemplated hereby, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained therein or herein not misleading. 16. REPRESENTATIONS AND WARRANTIES OF WORLDCOM. WorldCom represents and warrants to each of the other parties to this Agreement as follows: (a) each of the Debtor Entities have acted in good faith in the performance of their duties under the WorldCom Documents, the Obligations and the negotiation of this Agreement; (b) it is duly incorporated, validly existing and in good standing under the laws of its state of incorporation or organization, and it is duly qualified to do business as a foreign corporation or entity and in good standing in all jurisdictions in which the failure to do so would have a material adverse effect on such party; (c) it has corporate power, and each has authority to execute, deliver and perform the provisions of this Agreement and all such action has been duly and validly authorized by all necessary corporate or other proceedings on its part; (d) this Agreement has been duly and validly executed by it and constitutes a legal, valid and binding obligation of it, enforceable in accordance with the terms of this Agreement; and (e) neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated in this Agreement nor the performance of or compliance with the terms and conditions of this Agreement will violate any law or court order. 17. RECORDS. The unpaid obligations of Debtor to WorldCom, the unpaid interest accrued thereon, the interest rate or rates applicable to such unpaid principal amounts and the duration of such applicability shall at all times be ascertained from the records of WorldCom, which shall be conclusive absent manifest error. 18. NO IMPLIED WAIVER; CUMULATIVE REMEDIES. No course of dealing and no delay or failure of WorldCom in exercising any right, power or privilege under this Agreement or any of the other WorldCom Documents will affect any other or future exercise of any such right, power or privilege or exercise of any other right, power or privilege except as and to the extent that 7 the assertion of any such right, power or privilege shall be barred by an applicable statute of limitations; nor shall any single or partial exercise of any such right, power or privilege or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise of such right, power or privilege or of any other right, power or privilege. The rights and remedies of WorldCom under this Agreement or any of the other WorldCom Documents are cumulative and not exclusive of any rights or remedies which WorldCom would otherwise have. 19. SEVERABILITY. The provisions of this Agreement are intended to be severable. If any provision of this Agreement shall be held invalid or unenforceable in whole or in part in any jurisdiction, such provision shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without in any manner affecting the validity or enforceability of such provision in any other jurisdiction or the remaining provisions of this Agreement in any jurisdiction. 20. GOVERNING LAW, ETC. This agreement shall be governed by Oklahoma law, without giving effect to principles of conflicts of laws. Each party agrees that service of process may be duly effected by service in accordance with the provisions of the Uniform Interstate and International Procedure Act. 21. EFFECT OF RECOVERY OF PAYMENTS MADE TO WORLDCOM. If any settlement, discharge, payment, fees, grant of security or transfer of property relating to discharging any duty or liability to WorldCom created under this Agreement or the WorldCom Documents is rescinded or avoided by virtue of any provision of any bankruptcy, insolvency, or other similar law affecting creditors' rights, WorldCom will be entitled to recover the value or amount of any such settlement, discharge, payment, fees, grant of security or transfer of property from the Debtor Entities under the WorldCom Documents or this Agreement, as if such settlement, discharge, payment, grant of security or transfer of property had not occurred, but only to the extent permitted by applicable law. 22. CHOICE OF VENUE AND WAIVER OF JURY TRIAL. THE PARTIES AGREE THAT ALL DISPUTES OF EVERY KIND AND NATURE ARISING UNDER OR IN CONNECTION WITH THIS AGREEMENT SHALL BE RESOLVED EXCLUSIVELY IN THE STATE OR FEDERAL COURTS LOCATED IN TULSA, OKLAHOMA. THE PARTIES EACH WAIVE THEIR RIGHTS TO A JURY TRIAL WITH RESPECT TO ANY SUCH DISPUTE AND CONSENT TO THOSE COURTS EXERCISING SUBJECT MATTER AND PERSONAL JURISDICTION WITH RESPECT TO ANY SUCH DISPUTE. 23. EXECUTION OF RELEASE AND WAIVER. EACH OF THE PARTIES REPRESENTS AND WARRANTS TO THE OTHER THAT IT HAS CAREFULLY READ THE FOREGOING TERMS AND CONDITIONS OF THIS AGREEMENT, THAT IT KNOWS AND UNDERSTANDS THE CONTENTS AND EFFECT OF THIS AGREEMENT, THAT THE LEGAL EFFECT OF THIS AGREEMENT, INCLUDING, WITHOUT LIMITATION, THE RELEASE AND WAIVER OF JURY TRIAL PROVISIONS CONTAINED IN THIS 8 AGREEMENT, HAVE BEEN FULLY EXPLAINED TO ITS SATISFACTION BY ITS COUNSEL, AND EXECUTION OF THIS AGREEMENT IS A VOLUNTARY ACT. 24. INTERPRETATION. Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular, the singular includes the plural, the part includes the whole, "including" is not limiting, and "or" has the inclusive meaning represented by the phrase "and/or." The words "hereof," "herein," "hereby," "hereunder," and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. 25. MERGER. This Agreement and the WorldCom Documents are intended by the parties as a final expression of their agreement and is intended as a complete statement of the terms and conditions of their agreement and supersedes all prior understandings and agreements, whether written or oral, among the parties relating to the transactions provided for in this Agreement, the Workout Note and the other WorldCom Documents. To the extent that this Agreement conflicts with any of the WorldCom Documents, this Agreement shall control. 26. DURATION; SURVIVAL. All representations and warranties of Debtor contained in this Agreement or made in connection with this Agreement or any of the other WorldCom Documents shall survive the making of and will not be waived by the execution and delivery of this Agreement, the Note or any of the other WorldCom Documents, or by any investigation by WorldCom. Notwithstanding termination of this Agreement or a Default, all covenants and agreements of the Debtor Entities will continue in full force and effect from and after the date of this Agreement so long as any of the WorldCom Documents are in force, and until payment in full of the Obligations, interest thereon, and all fees and other obligations of the Debtor Entities under this Agreement and the other WorldCom Documents. Without limitation, it is understood that all obligations of Debtor to make payments to or indemnify WorldCom will survive the payment in full of the Obligations and of all other obligations of the Debtor under this Agreement and the other WorldCom Documents. 27. TERM OF AGREEMENT. This Agreement will terminate when all indebtedness of the Debtor Entities to WorldCom is paid in full, and Debtor no longer purchases telecommunications services from WorldCom, it being understood that WorldCom has no obligation to continue providing telecommunications services to Debtor under this Agreement after a Default. 28. NO WAIVER. No failure or delay on the part of any party in exercising any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof or of any other right, remedy, power or privilege of such party under this Agreement; nor shall any single or partial exercise of any such right, remedy, power or privilege preclude any other right, remedy, power or privilege or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges of the parties under this Agreement are cumulative and not exclusive of any rights or remedies which it may otherwise have. 9 29. HEADINGS. The headings of the sections in this Agreement are for purposes of reference only, and shall not limit or affect the meaning of such section. 30. DEFINITIONS. In addition to other words and terms defined elsewhere in this Agreement, the following words and terms have the following meanings, respectively, unless the context otherwise clearly requires: "BUSINESS DAY" means any day other than a Saturday, Sunday, public holiday under the laws of the State of Oklahoma or other day on which the banks are authorized or obligated to close in Tulsa, Oklahoma. "CAPITAL STOCK" means, as to any Person, the equity interests in such Person, including, without limitation, the shares of each class of capital stock of any Person that is a corporation; each class of partnership interests (including, without limitation, general, limited, and preference units) in any Person that is a partnership; and membership interests in limited liability companies. "COLLATERAL" means all real and personal property, accounts, accounts receivable, contract rights, indefeasible rights of use in telecommunications cable systems, equipment, inventory, chattel paper, general intangibles, Capital Stock and other assets of Debtor and/or any of Debtor's affiliates or Subsidiaries which may be pledged as collateral for the Obligations from time to time pursuant to any security agreement, guaranty, pledge agreement or any such other security documents as may be executed and delivered to WorldCom by or on behalf of Debtor and/or any of Debtor's affiliates or Subsidiaries or any other Obligor from time to time, including, without limitation, any property or assets referred to in any of the WorldCom Documents as securing the Obligations. "CREDIT AGREEMENT" means the Credit Agreement by and between Debtor and World Access, Inc., dated as of April ___, 2000. "DEBTOR RELIEF LAWS" means applicable bankruptcy, reorganization, moratorium, or similar laws, or principles of equity, affecting the enforcement of creditors' rights generally. "LAW" means any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body. "LIEN" means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), claim, title defect, restriction, easement, charge of any kind, or other security interest or any preference, priority, or other security agreement of any kind or nature whatsoever. "OBLIGATIONS" means all present and future obligations, indebtedness, and liabilities (whether such obligations, indebtedness, and liabilities are direct, indirect, fixed, or contingent), and 10 all renewals and extensions of all or any part thereof, of Debtor and each other Obligor to MCI WorldCom, Inc., its subsidiaries and affiliates arising from, by virtue of, or pursuant to this Agreement, any of the other WorldCom Documents, and any and all renewals and extensions thereof or any part thereof or future amendments thereto; all interest accruing on all or any part thereof; and reasonable attorneys' fees incurred by WorldCom for the administration of all or any part thereof, the execution of waivers, amendments, and consents in connection with any part thereof, and in connection with any restructuring, workouts, or in the enforcement or the collection of all or any part thereof. Without limiting the generality of the foregoing, "Obligations" includes all amounts which would be owed by Debtor, each other Obligor and any other Person (other than WorldCom) to WorldCom under any WorldCom Document but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization, or similar proceeding involving Debtor, any other Obligor, or any other Person (including all such amounts which would become due or would be secured but for the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization, or like proceeding of the Debtor, any other Obligor, or any other Person under any Debtor Relief Law). "OBLIGOR" means Debtor and any other Person liable to the WorldCom under any of the WorldCom Documents. "OFFICIAL BODY" means any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic. "PERSON" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, any supranational, national, state, municipal, local, or non-U.S. government, any instrumentality, subdivision, court, administrative agency, or commission or other authority thereof, or any quasi-governmental or private body exercising any regulatory, taxing, importing, or other governmental or quasi-governmental authority, or other entity or group of whatever nature. "SUBSIDIARY" and "SUBSIDIARIES" of any Person means any corporation, partnership, limited liability company, joint venture, trust, or estate of which (or in which) more than fifty percent (50%) of: (a) the outstanding Capital Stock having voting power to elect a majority of the Board of Directors of such corporation (or other Persons performing similar functions of such entity, and irrespective of whether at the time Capital Stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership or joint venture, or (c) the beneficial interest of such trust or estate 11 is at the time directly or indirectly owned by (i) such Person, (ii) such Person and one or more of its Subsidiaries, or (iii) one or more of such Person's Subsidiaries. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of Debtor. "WORLDCOM DOCUMENTS" means, as each such document may be amended, revised, renewed, extended, substituted, or replaced from time to time: this Agreement, the Service Agreement, the Note, the Security Agreement, the Pledge Agreement, all other guarantys executed by any Person guaranteeing payment of any portion of the Obligations; all security agreements and pledge agreements granting any interest in any of the Collateral, stock certificates and partnership agreements constituting part of the Collateral; mortgages, deeds of trust, financing statements, collateral assignments, and other documents and instruments granting WorldCom an interest in any portion of the Collateral or related to the perfection of WorldCom's interest in any portion of the Collateral and/or the transfer to WorldCom of an interest in any portion of the Collateral; all collateral assignments or other agreements granting to WorldCom a lien on any intercompany note, including without limitation, all other documents, instruments, agreements, or certificates executed or delivered by Debtor or any other Obligor as security for Debtor's obligations under the Note, the Service Agreements, or otherwise. 31. NO PARTNERSHIP OR JOINT VENTURE. It is understood by the parties that this Agreement shall not in any way be construed as an agreement of partnership, general or limited, or of creating a joint venture between WorldCom and any other party to this Agreement, or any one or more of them, or of creating any relationship other than that of debtor and creditor. 32. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which shall constitute one and the same Agreement. 33. JOINT PREPARATION. The preparation of this Agreement has been a joint effort of the parties and the resulting document shall not, solely as a matter of judicial construction, be construed more severely against one of the parties than the other. 34. NOTICES. Except as otherwise provided herein, whenever it is provided in this Agreement, that any notice, demand, request, consent, approval, declaration or other communication shall or may be given to or served upon any of the parties by another, or whenever any of the parties desires to give or serve upon another any communication with respect to this Agreement, each such notice, demand, request, consent, approval, declaration or other communication shall be in writing and shall be delivered either in person, with receipt acknowledged, or by certified or registered mail, postage prepaid, or by telecopy and confirmed by telecopy answerback or sent by a nationally recognized overnight air delivery service, shipping charges prepaid, addressed as follows: If to Debtor or STAR Telecommunications, Inc. any Debtor Entity: 223 East De La Guerra 12 Santa Barbara, California 93101 Facsimile No.: (805) 884-1137 Attention: Christopher E. Edgecomb with a copy to: Riordan & McKinzie Twenty-Ninth Floor 300 South Grand Avenue Los Angeles, California 90071 Facsimile No.: (213) 229-8550 Attention: Richard J. Welch If to WorldCom: MCI WorldCom Network Services, Inc. 6929 N. Lakewood Mail Drop: 5.2-510 Tulsa, Oklahoma 74117 Attn: Robert S. Vetera, Vice President Corporate Credit Facsimile No.: (918) 590-0366 with copy to: Klett Rooney Lieber & Schorling, P.C. One Oxford Centre, 40th Floor Pittsburgh, Pennsylvania 15219-6498 Attn: Many Emamzadeh, Esq. Facsimile No. (412) 392-2128 35. THIRD PARTY BENEFICIARIES. The terms and conditions of this Agreement are not intended to affect or benefit in any way any third parties other than the WorldCom Entities, all of which are explicitly intended to be third party beneficiaries under this Agreement. 36. SUCCESSORS AND ASSIGNS. This Agreement will be binding upon and inure to the benefit of the respective parties, and their respective successors and assigns, including any bankruptcy trustee, except that neither party may assign or transfer any of its rights or delegate any of its duties under this Agreement without the prior written consent of the other party. IN WITNESS WHEREOF, the parties hereto by their authorized representatives have executed this Workout Agreement as of the day and year first above written. STAR TELECOMMUNICATIONS, INC. By:__________________________ Name: _______________________ By:_________________________ Title:_______________________ Name:_______________________ Title:______________________ HELVEY COM, LLC PT-1 COMMUNICATIONS, INC. By:__________________________ 13 Name:_______________________ PT-1 HOLDINGS II, INC. Title:______________________ CEO TELECOMMUNICATIONS, INC. By:___________________________ Name:_________________________ Title:________________________ By:_________________________ Name:_______________________ NATIONWIDE DISTRIBUTORS, INC. Title:______________________ TECHNOLOGY LEASING, INC. CEO CALIFORNIA TELECOMMUNICATIONS, INC. By:___________________________ By:_________________________ Name:_________________________ Name:_______________________ Title:________________________ Title: INVESTMENT SERVICES, INC. LUCIUS ENTERPRISES, INC. By:___________________________ Name:_________________________ By:_________________________ Title:________________________ Name:_______________________ Title:______________________ PT-1 COMMUNICATIONS PUERTO RICO, INC. AS TELECOMMUNICATIONS, INC. By:___________________________ Name:_________________________ By:_________________________ Title:________________________ Name:_______________________ Title:______________________ PHONETIME TECHNOLOGIES, INC. PT-1 LONG DISTANCE, INC. By:___________________________ Name:_________________________ Title:________________________ By:_________________________ Name:_______________________ Title:______________________ PT-1 HOLDINGS I, INC. By:_________________________ Name:_______________________ Title:______________________ 14 MCI WORLDCOM NETWORK SERVICES, INC. By:__________________________ Thomas Tracey Director of Workouts
EXHIBIT A WORLDCOM DOCUMENTS - ------------------------------------------------- ----------------- ------------------------------------------------ Document Date Parties - ------------------------------------------------- ----------------- ------------------------------------------------ Wiltel, Inc. Carrier Digital Services Contract 8/1/95 Star Vending, Inc. dba Star Telecommunications - ------------------------------------------------- ----------------- ------------------------------------------------ Assignment Agreement 2/18/95 PT-1 Communications, Inc. Assignor to Star Telecommunications, Inc. - ------------------------------------------------- ----------------- ------------------------------------------------ Digital Services Agreement 8/1/95 - ------------------------------------------------- ----------------- ------------------------------------------------ Wilmax, Inc Universal Telecom Services Agreement 1/27/97 Star Vending, Inc. dba Star Telecommunications, Inc. Amendment 3 Amendment 4 2/24/98 Amendment 5 2/18/98 Amendment 6- 3/5/98 Amendment 7 4/6/98 Amendment 10 4/22/98 Amendment 26 8/6/98 Amendment 46 3/29/99 Amendment 50 8/10/99 8/31/99 - ------------------------------------------------- ----------------- ------------------------------------------------ Transcend Telecommunications Services Agreement 2/21/96 CTN - Custom Telecommunications Network of Arizona, Inc. - ------------------------------------------------- ----------------- ------------------------------------------------ Wilmax, Inc. Telecommunications Service 10/28/94 Agreement - ------------------------------------------------- ----------------- ------------------------------------------------ Digital Network Services, Inc - ------------------------------------------------- ----------------- ------------------------------------------------
The parties acknowledge that this Exhibit A may be replaced by a completed Exhibit A, without amending the Workout Agreement, and such replacement, to the extent it is provided to WorldCom within ten (10) Business Days of the date of this Agreement, shall be effective as of the date of this Agreement. 2 SCHEDULE 15 INFORMATION RELATING TO DEBTOR, OBLIGORS AND SUBSIDIARIES THEREOF EX-10.76 3 EXHIBIT 10.76 EXHIBIT 10.76 PROMISSORY NOTE $56,017,698.87 April 12, 2000 FOR VALUE RECEIVED on February 3, 2000 (the "Effective Date"), the undersigned, STAR TELECOMMUNICATIONS, INC., with its chief executive offices located at 223 East De La Guerra, Santa Barbara, California, 93101, a Delaware corporation (together with its successors and assigns, the "Maker"), promises to pay to the order of MCI WORLDCOM NETWORK SERVICES, INC., with offices located at 6929 N. Lakewood Avenue, Mail Drop 5.2- 510, Tulsa, Oklahoma 74117 ("Holder"), the principal sum of FIFTY-SIX MILLION, SEVENTEEN THOUSAND, SIX HUNDRED AND NINETY-EIGHT AND 87/100 DOLLARS ($56,017,698.87), together with interest on the unpaid principal amount of this Note from the Effective Date, accruing at a rate of sixteen percent (16%) PER ANNUM, based on a year of 365 or 366 days, as the case may be, and actual days elapsed, on or before the earlier to occur of (such date being referred to herein as the ("Maturity Date"): (a) termination of the Agreement and Plan of Merger dated February 11, 2000, by and between the Maker, STI Merger Co. and World Access, Inc. (the "Merger Agreement"); (b) consummation of the merger transaction contemplated by the Merger Agreement; or (c) August 1, 2000, without notice, demand or presentment. Notwithstanding any provision in this Note to the contrary, upon an Event of Default, as defined below, interest on the outstanding obligations evidenced hereby shall accrue at the rate of eighteen percent (18%) PER ANNUM. Maker shall be permitted to make voluntary prepayments of principal under this Note, without penalty on any such payment date. The acceptance by Holder of any payment hereunder that is less than payment in full of all amounts due and payable at the time of such payment shall not constitute a waiver of the right to exercise any of Holder's rights and remedies hereunder at that time, or at any subsequent time, or nullify any prior exercise of any such right or remedy without the express written consent of Holder. All payments and prepayments to be made in respect of principal, interest or other amounts due from the Maker under this Note shall be payable on or before 12:00 noon, Tulsa time, on the day when due, and shall be payable to Holder at the address set forth above for Holder, and directed to the attention of Robert S. Vetera, Vice President of Corporate Credit, or at such other place as Holder may designate in writing, in lawful money of the United States of America in immediately available funds without setoff, counterclaim or other deduction of any nature. The Maker expressly waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, and an action for any amounts due and unpaid shall therefore accrue immediately. If any payment of principal or interest under this Note becomes due on a day which is a Saturday, Sunday or other day on which lending institutions are authorized or obligated to close in Tulsa, Oklahoma, such payment shall be made on the next following business day on which such lending institutions are open for business and such extension of time will be included in computing interest in connection with such payment. All notices and other communications required or permitted to be made to the Maker or Holder, as the case may be, hereunder shall be made in writing and will be deemed delivered when received by the other party by messenger, telex, telecopier, overnight courier, or mail, which notice shall be delivered to the respective addresses of Maker and Holder, as the case may be, set forth in the Workout Agreement of even date herewith by and between Maker and Holder (the "Workout Agreement"), or such other address as each party may notify the other party in writing from time to time. Upon the occurrence of any one of the following events (each an "Event of Default"), the entire principal amount outstanding hereunder together with accrued interest, shall (i) at the option of Holder in the case of the "Events of Default" set forth in (a) through (c), below, or (ii) without the necessity for any demand, notice or action by Holder in the case of the "Events of Default" set forth in (d) through (f), below, become immediately due and payable in full and Holder may, without further delay, undertake any one or more of the actions and become entitled to any of the remedies specified in this Note or any other WorldCom Document, as defined below, or which are otherwise available at law or in equity: (a) Failure of Maker to pay any installment of principal or interest or any other sum on the date when it is due under this Note; or (b) Maker fails to perform or observe any of its other covenants or agreements under this Note, the Workout Agreement, or any of the WorldCom Documents, as defined in the Workout Agreement, or otherwise fails to perform or observe any of its covenants or agreements under any agreement, contract, instrument, note, and any amendments, extensions, renewals or replacements to or of any of the foregoing, whether presently existing or hereafter arising, and such default continues beyond any applicable grace, waiver or cure period set forth therein, if any; or (c) Any representation or warranty made by the Maker pursuant to this Note or any other WorldCom Document shall prove to have been false or misleading in any material respect as of the time when made; or (d) If Maker, or any guarantor or surety of the obligations evidenced by this Note, shall make a general assignment for the benefit of its respective creditors, or shall admit in writing its inability to pay its debts as they become due, or shall file a petition in bankruptcy, or shall be adjudicated bankrupt or insolvent, or shall file a petition seeking any relief under any present or future statute, law or regulation relating to bankruptcy or insolvency or shall file an answer admitting or not contesting the material allegations of a petition filed against it in any such proceeding or shall seek or consent to or acquiesce in the appointment of any trustee or receiver of itself or any material part of its respective properties; or 2 (e) If any proceeding against Maker seeking any relief under any present or future statute, law or regulation relating to bankruptcy or insolvency shall have been filed or shall be prosecuted or if an appointment shall have been made without the consent or acquiescence of Maker or of any material part of their respective properties and such appointment shall not have been vacated; or (f) A writ or warrant of attachment, garnishment, execution, distraint or similar process shall have been issued against Maker or any of its properties involving a sum in excess of $50,000 which shall have remained undischarged or unstayed for a period of thirty (30) days. If an Event of Default occurs, then, Maker agrees to indemnify and hold Holder harmless from any and all reasonable fees and expenses of Holder's attorneys, accountants, appraisers, consultants, engineers and other professional, paraprofessional or non-professional fees and expenses incurred by Holder in collecting the obligations evidenced hereby, or in protecting or otherwise enforcing any of its rights under this Note or any of the other WorldCom Documents, or in the prosecution or defense of any action related to this Note or any of the WorldCom Documents, or the preservation, maintenance, disposition or liquidation of any collateral securing the Maker's obligations evidenced by this Note, or any portion thereof. The exercise of any remedy hereunder or under any other WorldCom Document shall not be construed as a waiver by Holder of any remedy available to Holder under any other agreement, document, or applicable law. Holder hereby expressly reserves all of its rights under applicable law. In the event the rate of interest provided for in this Note is finally determined by any government or political subdivision or any agency, authority, bureau, central bank, commission, department or instrumentality of either, or any court, tribunal, grand jury or arbitrator, in each case whether foreign or domestic (each as "Official Body"), to exceed the maximum rate of interest permitted by applicable usury or similar law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body ("Law"), their or its application will be suspended and there will be charged instead the maximum rate of interest permitted by such Laws. Interest at the rates applicable to the Note as set forth herein shall continue to accrue on any judgment entered on this Note until the judgment together with interest and costs has been paid in full. This Note is governed by, and will be construed and enforced in accordance with, the laws of the State of Oklahoma without regard to principles of conflicts of law in the State of Oklahoma. The Maker consents to the exclusive jurisdiction and venue of the Federal and State courts located in Tulsa, Oklahoma with respect to any suit arising out of, relating to, or mentioning this Note. The terms of this Note shall be binding upon and inure to the benefit of the successors and assigns of Holder, and shall not be assignable by Maker, unless Holder has provided its prior, written consent to such assignment. 3 EACH OF MAKER AND HOLDER EXPRESSLY, KNOWINGLY AND VOLUNTARILY WAIVES ALL BENEFIT AND ADVANTAGE OF ANY RIGHT TO A TRIAL BY JURY, AND NEITHER WILL AT ANY TIME INSIST UPON, OR PLEAD OR IN ANY MANNER WHATSOEVER CLAIM OR TAKE THE BENEFIT OR ADVANTAGE OF A TRIAL BY JURY IN ANY ACTION ARISING IN CONNECTION HEREWITH OR THE OTHER WORLDCOM DOCUMENTS. INITIAL: ____ MAKER ____ HOLDER IN WITNESS WHEREOF, and intending to be legally bound, the Maker has executed, issued and delivered this Workout Note as of the day and year first above written, effective as of February 3, 2000. ATTEST: By: _______________________ Name: _______________________ Title: _______________________ STAR TELECOMMUNICATIONS, INC. By: _______________________ Name: _______________________ Title: _______________________ EX-10.77 4 EXHIBIT 10.77 EXHIBIT 10.77 SECURITY AGREEMENT THIS SECURITY AGREEMENT (as amended, restated, or otherwise modified from time to time, this "Agreement"), dated as of April 12, 2000, is made by ______________________ ("Debtor"), in favor of MCI WORLDCOM NETWORK SERVICES, INC., a Delaware corporation ("Agent"), for itself and as collateral agent for MCI WorldCom, Inc., and its subsidiaries and affiliates, with its principal office at 6929 North Lakewood, Mail Drop 5.2-510, Tulsa, Oklahoma 74117, (collectively, "WorldCom"). W I T N E S S E T H: WHEREAS, WorldCom provides telecommunications services to Debtor pursuant to the Service Agreements; and WHEREAS, Debtor is in default to WorldCom for, INTER ALIA, failure to pay its obligations to WorldCom in a timely manner (the "Past Due Indebtedness"); and WHEREAS, Debtor and WorldCom have agreed to restructure certain of the Past Due Indebtedness due to MCI WorldCom Network Services, Inc., as of February 3, 2000, pursuant to the terms and conditions of the Workout Agreement between the parties of even date herewith (the "Workout Agreement"); and WHEREAS, specifically, Debtor and WorldCom have agreed to restructure Debtor's outstanding trade payables due WorldCom as of February 3, 2000 in the aggregate amount of $56,017,698.87 into a Promissory Note, of even date herewith (the "Note"), which contemporaneously herewith will be executed and delivered by Debtor to WorldCom; and WHEREAS, Debtor has agreed to secure its performance and payment of (a) all obligations for the provision of services by WorldCom to Debtor pursuant to any, and all related notes, instruments, documents, or agreements and any amendments, extensions, renewals or replacements to or of any of the foregoing; and (b) all other obligations and indebtedness of Debtor to WorldCom of whatever kind and however created, whether presently existing or hereafter arising. NOW, THEREFORE, for and in consideration of the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Debtor hereby agrees with Agent, for WorldCom's benefit, as follows: ARTICLE I DEFINITIONS 1.1 DEFINITIONS. Unless otherwise defined in this Agreement, terms used herein shall have the meanings set forth in the Workout Agreement, or Credit Agreement, in that order. Unless the context indicates otherwise or the terms are otherwise defined herein, definitions in the Uniform Commercial Code as enacted in the State of Oklahoma (the "UCC") apply to words and phrases in this Agreement. "Debtor" includes, without limitation, such Person, such Person's heirs, successors and assigns, such Person as a debtor-in-possession, and any receiver, trustee, liquidator, conservator, custodian, or similar party appointed for such Person or all or substantially all of its assets under any law. ARTICLE II GRANT OF SECURITY INTEREST 2.1 ASSIGNMENT AND GRANT OF SECURITY INTEREST. Debtor hereby, in partial consideration for WorldCom's agreement to restructure the Past Due Obligations and to induce WorldCom to enter into such restructuring which will facilitate the pending merger between the Debtor and World Access, Inc., assigns and pledges to Agent, for the benefit of WorldCom, a security interest in the entire right, title, and interest of Debtor in and to all assets of Debtor, whether now owned or hereafter acquired, including, but not limited to, the following property, wherever located, whether now owned or hereafter acquired by the Debtor (collectively, the "Pledged Collateral")1, to secure payment of the Obligations and performance by the Debtor of its obligations hereunder, under the WorldCom Documents, and all other obligations and indebtedness of Debtor to WorldCom of whatever kind and however created, whether now existing or hereafter arising: (a) all equipment in all of its forms, wherever located, now or hereafter existing, all parts thereof and all accessions thereto, including, but not limited to, all machinery, satellite receivers, antennas, headend electronics, cables, telecommunications cable systems switches, telecommunications switching systems, computers, computer systems, furniture, motor vehicles, aircraft, rolling stock, operating equipment, and office equipment, including specifically, but without limitation, those certain items of equipment listed on Schedule 1 attached hereto and made a part _________________ (1) The security interest in the Pledged Collateral described herein is governed by that (i) certain Intercreditor Agreement dated as of April 12, 2000, by and between World Access, Inc., a Delaware corporation, and MCI WorldCom Network Services, Inc., a Delaware corporation and (ii) certain Intercreditor Agreement dated as of April 12, 2000, by and between World Access, Inc., MCI WorldCom Network Services, Inc., and RFC Capital Corporation, a Delaware corporation. -2- hereof (any and all such equipment, parts, and accessions being referred to herein as the "Equipment"); (b) all inventory in all of its forms, wherever located, now or hereafter existing, including, but not limited to, (i) all raw materials and work in process therefor, finished goods thereof, and materials used or consumed in the manufacture or production thereof; (ii) goods in which Debtor has an interest in mass or a joint or other interest or right of any kind (including, without limitation, goods in which Debtor has an interest or right as consignee); and (iii) goods which are returned to or repossessed by Debtor and all accessions thereto and products thereof and documents therefor (any and all such inventory, accessions, products, and documents being referred to herein as the "Inventory"); (c) all accounts, accounts receivable, contract rights, chattel paper, documents, instruments, deposit accounts, general intangibles, tax refunds and other obligations of any kind owing to Debtor, now or hereafter existing, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights now or hereafter existing in and to all security agreements, leases, subleases, and other contracts securing or otherwise relating to any such accounts, contract rights, chattel paper, documents, instruments, deposit accounts, general intangibles, or obligations (any and all such accounts, contract rights, chattel paper, documents, instruments, deposit accounts, general intangibles, and obligations, including those described in Section 2.1(e) hereto being referred to herein as the "Receivables"); (d) all end user and wholesale customer accounts, end user and wholesale customer bases, end user and wholesale letters of authorization, end user and wholesale service agreements, end user and wholesale customer lists, all documents containing the names, addresses, telephone numbers, and other information regarding Debtor's end users, subscribers, and wholesale customers, billing records, third-party verification records, call detail records, tapes, programs, printouts, disks, and other material and documents (in whatever media) relating to the recording, billing, or analyzing of any of the foregoing, and any other right to payment (collectively, the "Customer Base", "End User Base", or "Wholesale Base"); (e) all other general intangibles, whether now existing or hereafter arising and wherever arising, including, but not limited to, all (i) partnership, corporate, and other interests in and to any Person; (ii) letters of authorization, permits, licenses, consents, contract rights, franchises, documents, certificates, records, customer lists, customer and supplier contracts, easements, variances, certifications and approvals of tribunals, bills of lading (negotiable and non-negotiable), warehouse receipts, any claim of Debtor against WorldCom, liquidated or unliquidated, and other rights, privileges and goodwill obtained or used in connection with any property described in this Section 2.1; (iii) rights of Debtor under any equipment leases; and (iv) tax refunds and other refunds or rights to receive payment from U. S. federal, state or local governments or foreign governments or other tribunals; -3- (f) all bank accounts, deposit accounts, and margin accounts, maintained by Debtor with financial institutions, brokers, dealers, and all other persons or entities relating to commodities and/or securities, including all funds held therein and all certificates and instruments, if any, from time to time representing or evidencing such accounts; (g) all investment property (as defined in Section 9-115 of the Uniform Commercial Code) ("Investment Property"); (h) to the extent it is possible to create a security interest or perfect a security interest in such Pledged Collateral by filing a UCC-1 financing statement centrally, or in the case of dual filing states, centrally and at the county level, as applicable, all of Debtor's fixtures now existing or hereafter acquired, all substitutes and replacements therefor, all accessions and attachments thereto, and all tools, parts, and equipment now or hereafter added to or used in connection with the fixtures on or above all real property now owned or hereafter acquired by Debtor; (i) all Indefeasible Rights of Use in telecommunications cables and cable systems ("IRU's"), including but not limited to the IRU's described on Schedule 1 attached hereto and made a part hereof; (j) all records and documents relating to any and all of the foregoing, including, without limitation, records of account, whether in the form of writing, microfilm, microfiche, tape, or electronic media; (k) all obligations that support, and liens that secure, any of Debtor's foregoing rights to payment, whether now in existence or hereafter arising; and (l) all substitutes and replacements for, accessions, attachments, and other additions to tools, parts, and equipment used in connection with, and all proceeds, products, and increases of, any and all of the foregoing Pledged Collateral (including, without limitation, proceeds which constitute property of the types described in this Section 2.1), in whatever form, whether cash or non-cash; interest, premium, and principal payments, redemption proceeds and subscription rights, and shares or other proceeds of conversions or splits of any securities in Pledged Collateral, and returned or repossessed Pledged Collateral; and, to the extent not otherwise included, all (i) payments under insurance, or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Pledged Collateral, (ii) cash and (iii) security for the payment of any of the Pledged Collateral, and all goods which gave or will give rise to any of the Pledged Collateral or are evidenced, identified, or represented therein or thereby; provided, however, that the Pledged Collateral shall not include, and shall specifically exclude, any right, title or interest in, to or under any "Receivable", whether or not any such Receivable is a "Purchased Receivable," or the "Lockbox Account", as such terms are defined by that certain Receivables Sale Agreement, dated as of November 30, 1999, as may be amended from time to time, by and among Debtor and certain of its affiliates, individually and collectively as seller and -4- subservicer thereunder, and RFC Capital Corporation, a Delaware corporation, located at 130 E. Chestnut Street, Suite 400, Columbus, Ohio 43215, as purchaser thereunder (the "Receivables Sale Agreement"). The inclusion of proceeds in this Agreement does not authorize Debtor to sell, dispose of or otherwise use the Pledged Collateral in any manner not specifically authorized by this Agreement. 2.2 SECURITY FOR OBLIGATIONS. This Agreement creates a second-priority security interest, securing the payment and performance of any and all of the Obligations, junior only to the liens and security interests of World Access, Inc. ("World Access"). Without limiting the generality of the foregoing, this Agreement secures the payment of all amounts which constitute part of the Obligations and would be owed by Debtor, each Subsidiary, or any other Person to WorldCom under any WorldCom Document, but for the fact that they are unenforceable or not allowable due to the existence of a bankruptcy, reorganization or similar proceeding under any Debtor Relief Law involving Debtor, any Subsidiary, or any other Person (including, however, all such amounts which would become due or would be secured but for the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization, or like proceeding of Debtor, any Subsidiary or any other Person under any Debtor Relief Law). 2.3 DEBTOR REMAINS LIABLE. Anything herein to the contrary notwithstanding, (a) Debtor shall remain liable under the contracts and agreements included in the Pledged Collateral to the extent set forth therein to perform all of its duties and obligations thereunder to the same extent as if this Agreement had not been executed, (b) the exercise by Agent of any of the rights hereunder shall not release Debtor from any of its duties or obligations under the contracts and agreements included in the Pledged Collateral, and (c) neither Agent nor WorldCom shall have any obligation or liability under the contracts and agreements included in the Pledged Collateral by reason of this Agreement, nor shall Agent or WorldCom be obligated to perform any of the obligations or duties of Debtor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. 2.4 AGREEMENT WITH RESPECT TO PLEDGED COLLATERAL. Debtor and Agent agree that to the extent that any of the Pledged Collateral may be deemed to be a Fixture as opposed to Equipment, Inventory or any other form of Pledged Collateral that may be perfected by the filing of a UCC financing statement, it is the intention of each of these parties that such Pledged Collateral be deemed to be Equipment, Inventory or any other form of Pledged Collateral that may be perfected by the filing of a UCC financing statement and such Pledged Collateral not be deemed to be a Fixture. -5- ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1 REPRESENTATIONS AND WARRANTIES. Debtor represents and warrants, with respect to itself and the Pledged Collateral, as follows: (a) All of the Equipment and Inventory pledged by Debtor hereunder is located at the places specified on SCHEDULE 2 hereto (as supplemented from time to time by Debtor by written notice to Agent) or in transit to a place specified on SCHEDULE 2 hereto (as supplemented from time to time by Debtor by written notice to Agent) or in transit (i) for sale to a third-party purchaser that, upon such sale, will become the obligor under a Receivable or (ii) in the ordinary course of Debtor's business. The chief place of business and chief executive office of Debtor and the office where Debtor keeps all of its records concerning the Receivables are set forth on SCHEDULE 15 of the Workout Agreement. (b) All chattel paper, promissory notes, or other instruments evidencing the Receivables, and all Investment Property have been delivered and pledged to Agent or World Access, on behalf of Agent, as the case may be, duly endorsed and accompanied by such duly executed instruments of transfer or assignment as are necessary for such pledge to be held as Pledged Collateral. (c) Debtor is the legal and beneficial owner of, or has valid leasehold title to, the Pledged Collateral pledged by it free and clear of any Lien, security interest, option or other charge or encumbrance except for the security interest created by this Agreement (other than Permitted Liens, as defined in the Credit Agreement. No effective financing statement or other similar document used to perfect and preserve a security interest under the laws of any jurisdiction covering all or any part of the Pledged Collateral is on file in any recording office, except such as may have been filed (i) in respect of Permitted Liens and (ii) in favor of Agent relating to this Agreement. As of the date hereof, Debtor (including any corporate or partnership predecessor) has not existed or operated under any name other than as stated in the preamble to this Agreement. (d) Debtor has possession and/or control of the Equipment and Inventory pledged by it hereunder. (d) This Agreement and the pledge of the Pledged Collateral pursuant hereto creates a valid security interest in the Pledged Collateral senior to all other liens and encumbrances, other than the Permitted Liens, securing the payment of the Obligations which upon filings and other necessary actions to perfect such security interest will create a perfected, security interest in such collateral, junior only to the Permitted Liens, to the extent that such security interest can be perfected by filing a UCC financing statement. -6- (e) Except as described on SCHEDULE 3 hereto, no consent of any other Person and no authorization, approval, or other action by, and no notice to or filing with, any tribunal is required (i) for the pledge by Debtor of the Pledged Collateral pledged by it hereunder, for the grant by Debtor of the security interest granted hereby or for the execution, delivery, or performance of this Agreement by Debtor, (ii) for maintenance of the pledge, assignment, and security interest created hereby or for the perfection of the pledge, assignment, and security interest created hereby by filing a UCC- I financing statement centrally, or in the case of dual filing states, centrally and at the county level, as applicable (including the first priority nature of such pledge, assignment, and security interest except for Permitted Liens) or (iii) except as otherwise provided by law, for the exercise by Agent of the rights provided for in this Agreement or the remedies in respect of the Pledged Collateral pursuant to this Agreement, except for consents, authorizations, filings, notices, actions, and approvals by or with the FCC or any applicable PUC ("FCC and PUC Consents"). (f) Debtor possesses all material licenses and permits, including but not limited to all applicable certificates of occupancy, licenses, and permits and all health and sanitation permits, required for the operations of its business. (g) Debtor has made no contract or arrangement of any kind or type whatsoever (whether oral or written, formal, or informal), the performance of which by the other party thereto could give rise to a lien on the Pledged Collateral (other than Permitted Liens), except for its contracts (all of which have been disclosed in writing to Agent) made by Debtor with parties who have executed and delivered lien waivers to Debtor, and which, in the opinion of Agent's counsel, will not create rights in existing or future lien claimants which may be superior to this Agreement. ARTICLE IV COVENANTS 4.1 FURTHER ASSURANCES. (a) Debtor agrees to obtain the necessary consent to or waiver of any restriction from any Person so as to enable Debtor to effectively grant to Agent the security interests contemplated under this Agreement. (b) Debtor agrees that from time to time, at the expense of Debtor, Debtor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that Agent may reasonably request, in order to perfect and protect any pledge, assignment, or security interest granted or purported to be granted hereby, and the priority thereof, or to enable Agent to exercise and enforce its rights and remedies hereunder with respect to any Pledged Collateral. Without limiting the generality of the foregoing, upon written request by Agent, Debtor will: (i) mark conspicuously each chattel paper included in the Receivables, and, at the request of Agent, each of its records pertaining to the Pledged Collateral with the following legend: -7- THIS INSTRUMENT IS SUBJECT TO A SECURITY INTEREST AND LIEN PURSUANT TO A SECURITY AGREEMENT DATED AS OF APRIL 12, 2000, MADE BY DEBTOR, IN FAVOR OF MCI WORLDCOM NETWORK SERVICES, INC., AS AGENT FOR MCI WORLDCOM, INC. AND ITS SUBSIDIARIES AND AFFILIATES. or such other legend, in form and substance satisfactory to and as specified by Agent, indicating that such chattel paper or Pledged Collateral is subject to the pledge, assignment, and security interest granted hereby; (ii) if any Pledged Collateral shall be evidenced by a promissory note or other instrument or be chattel paper, deliver and pledge to Agent hereunder such note, instrument, or chattel paper duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Agent; and (iii) execute and file such financing or continuation statements, or amendments thereto and such other instruments or notices, as may be necessary or desirable, or as Agent may request, in order to perfect and preserve the pledge, assignment, and security interest granted or purported to be granted hereby. (c) Debtor hereby authorizes Agent to file one or more financing or continuation statements, and amendments thereto, relating to all or any part of the Pledged Collateral without the signature of Debtor where permitted by applicable law. A photocopy or other reproduction of this Agreement or any financing statement covering the Pledged Collateral or any part thereof shall be sufficient as a financing statement where permitted by applicable law. (d) Debtor will furnish to Agent from time to time statements and schedules (including schedules to this Agreement) further identifying and describing the Pledged Collateral and such other reports in connection with the Pledged Collateral as Agent may reasonably request, all in reasonable detail. Debtor will promptly furnish to Agent a copy of each new or renewal, restatement, or modification of any agreement included in Pledged Collateral or otherwise described in Section 2.1 herein. (e) From and after the date hereof, Debtor shall not establish or maintain any deposit or similar bank account unless Agent receives prior written notice thereof, Debtor executes and delivers to Agent assignments of such account in such form as Agent may request, and the financial institution in which such account will be maintained delivers to Agent acknowledgments of the assignment of such account in form and substance satisfactory to Agent. (f) In addition to such other information as shall be specifically provided for herein, Debtor and each of Debtor's Subsidiaries shall permit such site visitations and inspections and furnish to Agent such other information with respect to the Pledged Collateral as Agent may reasonably request from time to time in connection with the Pledged Collateral, or the protection, preservation, maintenance or enforcement of the security interest or the Pledged Collateral as provided pursuant to the terms of the Credit Agreement. -8- (g) Debtor shall not sell, lease, exchange, or otherwise dispose of any of the Pledged Collateral without the prior written consent of Agent. (h) Debtor shall not suffer to exist any loss, theft, damage, destruction, levy, seizure, or attachment of any of the Pledged Collateral. (i) Debtor shall diligently and in good faith use its best efforts to protect the value of the Pledged Collateral and to prevent any action from being taken that would or could, in the exercise of reasonable business judgment, jeopardize or diminish the security afforded to Agent by this Agreement or in any way diminish the value of the Pledged Collateral. 4.2 EQUIPMENT, FIXTURES AND INVENTORY. (a) Debtor shall keep the Equipment, Fixtures, and Inventory pledged by it hereunder (other than Inventory sold in the ordinary course of business) at the places therefor specified in Section 3.1(a) herein or, upon thirty days' prior written notice to Agent, at such other places in such jurisdiction where all action required by Section 4.1 herein shall have been taken with respect to the Equipment and Inventory. (b) Debtor shall, and shall cause each Subsidiary of Debtor to, maintain or cause to be maintained all their material properties necessary to the conduct of their business (whether owned or held under lease) in reasonably good repair, working order, and condition, taken as a whole, and from time to time make or cause to be made all appropriate repairs, renewals, replacements, additions, betterments, and improvements thereto. (c) Debtor shall, and shall cause each Subsidiary of Debtor to, pay and discharge all taxes, assessments, and governmental charges or levies imposed upon it or its income or properties prior to the date on which penalties attach thereto, and all lawful material claims for labor, materials, and supplies which, if unpaid, might become a Lien upon any of their properties, except those taxes, assessments, and charges contested by Debtor diligently in good faith, and for which adequate reserves have been established in accordance with GAAP. Debtor shall, and shall cause each Subsidiary of Debtor to, timely file all information returns required by federal, state, or local tax authorities. 4.3 INSURANCE. Debtor shall, and shall cause each Subsidiary of Debtor to, maintain insurance from responsible companies in such amounts and against such risks as shall be customary and usual in the industry for companies of similar size and capability, but in no event less than the amount and types insured as of the date hereof. Debtor shall promptly furnish to Agent evidence of such insurance in form and content satisfactory to Agent. If Debtor fails to perform or observe any applicable covenants as to insurance on any of such Pledged Collateral, Agent may at its own option obtain insurance on only Agent's interest in such Pledged Collateral, any premium thereby paid by Agent to become part of the Obligations and bear interest as provided in the Note. In the event Agent maintains such substitute insurance, the additional premium for such insurance shall be due on -9- demand and payable by Debtor to Agent in accordance with any notice delivered to Debtor by Agent. Debtor hereby grants Agent a security interest in any refunds of unearned premiums in connection with any cancellation, adjustment, or termination of any policy of insurance required by Agent and in all proceeds of such insurance and hereby appoints Agent its attorney-in-fact to endorse any check or draft that may be payable to Debtor in order to collect such refunds or proceeds. Any such sums collected by Agent shall be credited, except to the extent applied to the purchase by Agent of similar insurance, to any amounts then owing on the Obligations in accordance with the Note. 4.4 PLACE OF PERFECTION; RECORDS; COLLECTION OF RECEIVABLES. (a) Debtor shall keep its chief place of business and chief executive office and the office where it keeps its records concerning the Receivables, and the originals of all chattel paper (until delivered to Agent), at the location therefor specified in Section 3.1(a) herein. Debtor shall have given written notice thereof to Agent no later than thirty (30) days prior to the moving thereto. Debtor will hold and preserve such records and chattel paper and will permit representatives of Agent to inspect and make abstracts from and copies of such records and chattel paper as provided in the Credit Agreement. Debtor shall deliver to Agent or World Access, as the case may be, all instruments and Investment Property to be held by Agent or World Access, as the case may be, as collateral. (b) Except as otherwise provided in this Section 4.4(b), Debtor shall continue to collect, at its own expense, all amounts due or to become due Debtor under the Receivables. In connection with such collections, Debtor may take (and, at Agent's direction, shall take) such action as Debtor or Agent may deem reasonably necessary or advisable to enforce collection of the Receivables; PROVIDED, however, that Agent shall have the right (upon an Event of Default which is continuing) (without notice to Debtor) to notify the account debtors or obligors under any Receivables of the assignment of such Receivables to Agent and to direct such account debtors or obligors to make payment of all amounts due or to become due to Debtor thereunder directly to Agent and, at the expense of Debtor, to enforce collection of any such Receivables and to adjust, settle, or compromise the amount or payment thereof, in the same manner and to the same extent as Debtor might have done. Upon and after the occurrence of a Default or Event of Default that is continuing, all amounts and proceeds (including instruments) received by Debtor in respect of the Receivables shall be received in trust for the benefit of Agent hereunder, shall be segregated from other funds of Debtor, and shall be forthwith paid over to Agent in the same form as so received (with any necessary indorsement) to be held as cash collateral and either (a) released to Debtor so long as no Default or Event of Default shall have occurred and be continuing or (b) if any Default or Event of Default shall have occurred and be continuing, applied as provided herein. Debtor shall not adjust, settle, or compromise the amount or payment of any Receivable, release wholly or partly any account debtor or obligor thereof, or allow any credit or discount thereon. 4.5 TRANSFERS AND OTHER LIENS. Debtor shall not (a) sell, assign (by operation of law or otherwise), or otherwise dispose of, or grant any option with respect to, any of the Pledged Collateral, except for sales of Inventory in the ordinary course of business, or (b) create or permit -10- to exist any Lien, security interest, option or other charge or encumbrance upon or with respect to any of the Pledged Collateral, except for Permitted Liens and the security interest under this Agreement. 4.6 AGENT APPOINTED ATTORNEY-IN-FACT. Debtor hereby irrevocably appoints Agent as Debtor's attorney-in-fact, with full authority in the place and stead of Debtor and in the name of Debtor or otherwise to take any action and to execute any instrument which Agent may deem necessary or advisable to accomplish the purposes of this Agreement, including, without limitation (provided that the actions listed in each clause below, other than the obtainment and adjustment of insurance, may only be taken or exercised after the occurrence of an Event of Default): (a) to obtain and adjust insurance required to be paid to Agent pursuant to Section 4.3 herein; (b) to ask, demand, collect, sue for, recover, compromise, receive, and give acquittance and receipts for moneys due and to become due under or in connection with the Pledged Collateral; (c) to endorse and collect any drafts or other instruments, documents, and chattel paper; and (d) to file any claims or take any action or institute any proceedings which Agent may deem necessary or desirable for the collection of any of the Pledged Collateral or otherwise to enforce compliance with the terms and conditions of any Pledged Collateral or the rights of Agent with respect to any of the Pledged Collateral. UPON AND AFTER THE OCCURRENCE OF A DEFAULT OR EVENT OF DEFAULT, DEBTOR HEREBY IRREVOCABLY GRANTS TO AGENT DEBTOR'S PROXY (EXERCISABLE FROM AND AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT) TO VOTE ANY SECURITIES COLLATERAL AND APPOINTS AGENT DEBTOR'S ATTORNEY-IN-FACT TO PERFORM ALL OBLIGATIONS OF DEBTOR UNDER THIS AGREEMENT AND TO EXERCISE ALL OF AGENT'S RIGHTS HEREUNDER. THE PROXY AND POWER OF ATTORNEY HEREIN GRANTED, AND EACH STOCK POWER AND SIMILAR POWER NOW OR HEREAFTER GRANTED (INCLUDING ANY EVIDENCED BY A SEPARATE WRITING), ARE COUPLED WITH AN INTEREST AND ARE IRREVOCABLE PRIOR TO FINAL PAYMENT IN FULL OF THE OBLIGATIONS. ARTICLE V RIGHTS AND POWERS OF AGENT 5.1 AGENT MAY PERFORM. If Debtor fails to perform any agreement contained herein, Agent may itself perform, or cause performance of, such agreement, and the expenses of Agent incurred in connection therewith shall be payable by Debtor under Section 5.4 herein. -11- 5.2 AGENT'S DUTIES. The powers conferred on Agent hereunder are solely to protect its interest in the Pledged Collateral and shall not impose any duty upon Agent to exercise any such powers. Except for the safe custody of any Pledged Collateral in its possession and the accounting for moneys actually received by it hereunder, Agent shall have no duty as to any Pledged Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders, or other matters relative to any Pledged Collateral, whether or not Agent has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any reasonable care in the custody and preservation of any Pledged Collateral in its possession if such Pledged Collateral is accorded treatment substantially equal to that which Agent accords its own property. Except as provided in this Section 5.2, Agent shall not have any duty or liability to protect or preserve any Pledged Collateral or to preserve rights pertaining thereto. Nothing contained in this Agreement shall be construed as requiring or obligating Agent, and Agent shall not be required or obligated, to (a) present or file any claim or notice or take any action with respect to any Pledged Collateral or in connection therewith or (b) notify Debtor of any decline in the value of any Pledged Collateral. 5.3 REMEDIES. If any Event of Default shall have occurred and be continuing: (a) Agent may exercise in respect of the Pledged Collateral, in addition to other rights and remedies provided for herein or otherwise available to Agent, all the rights and remedies of a secured party on default under the Uniform Commercial Code in effect in the state in which the Pledged Collateral is located at that time (whether or not the Uniform Commercial Code applies to the affected Pledged Collateral), and also may (i) require Debtor to, and Debtor hereby agrees that it will at its expense and upon request of Agent forthwith, assemble all or part of the Pledged Collateral as directed by Agent and make it available to Agent at a place to be designated by Agent which is reasonably convenient to both parties or (ii) without notice, except as specified below, sell the Pledged Collateral or any portion thereof in one or more parcels at public or private sale, at any of Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as Agent may deem commercially reasonable. Debtor agrees that, to the extent notice of sale shall be required by law, ten (10) days' notice to Debtor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. Agent shall not be obligated to make any sale of Pledged Collateral regardless of notice of sale having been given. Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) All cash proceeds received by Agent upon any sale of, collection of, or other realization upon, all or any part of the Pledged Collateral shall be applied as follows: FIRST: To the payment of all out-of-pocket costs and expenses incurred in connection with the sale of, collection of, or other realization upon Pledged Collateral, including reasonable attorneys' fees and disbursements; -12- SECOND: To the payment of the Obligations as provided in the Credit Agreement and in such order and in such manner consistent with applicable laws as Agent in its reasonable discretion shall decide (with Debtor remaining liable for any deficiency); and THIRD: To the extent of the balance (if any) of such proceeds,to the payment of the balance (if any) of such proceeds to Debtor or other Person legally entitled thereto. (c) All payments received by Debtor under or in connection with any Pledged Collateral shall be received in trust for the benefit of Agent, shall be segregated from other funds of Debtor, and shall be forthwith paid over to Agent in the same form as so received (with any necessary indorsement). 5.4 INDEMNITY AND EXPENSES. (a) Debtor agrees to indemnify Agent from and against any and all claims, losses, and liabilities (including reasonable attorneys' fees) growing out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), expressly including such claims, losses, or liabilities arising out of mere negligence of Agent, except claims, losses, or liabilities resulting from Agent's gross negligence or willful misconduct. (b) Debtor will upon demand pay to Agent the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which Agent may incur in connection with (i) the administration of this Agreement, (ii) the custody, preservation, use, or operation of, or the sale of, collection from, or other realization upon, any of the Pledged Collateral, (iii) the exercise or enforcement of any of the rights of Agent hereunder, or (iv) the failure by Debtor to perform or observe any of the provisions hereof. Any payments so made shall be a part of the Obligations, shall be payable upon demand, and shall bear interest as provided in Section 2 of the Credit Agreement. 5.5 FURTHER APPROVALS REQUIRED. In connection with the exercise by Agent of its rights hereunder that affects the disposition of or use of any Pledged Collateral, it may be necessary to obtain the prior consent or approval of tribunals and other Persons to a transfer or assignment of Pledged Collateral, including, without limitation, the FCC and any applicable public utility commission or similar commission ("PUC"). In connection with the exercise by Agent of its rights hereunder relating to the disposition of or operation under any license issued by the FCC or any applicable PUC or any other authorizations, agreements, permits, licenses, and franchises constituting property of Debtor, it may be necessary to obtain the prior consent or approval of the FCC or any applicable PUC, other governmental authority, or other Persons to the exercise of rights with respect to the Pledged Collateral. Debtor hereby agrees to execute, deliver, and file, and hereby appoints (to the extent permitted under applicable law) Agent as its attorney upon the occurrence and during the continuation of an Event of Default to execute, deliver, and file on Debtor's behalf and -13- in Debtor's name, all applications, certificates, filings, instruments, and other documents (including, but not limited to, any application for an assignment or transfer of control or ownership) that may be necessary or appropriate, in Agent's opinion, to obtain such consents or approvals. Debtor further agrees to use its best efforts to obtain such consents or approvals upon and after the occurrence of a Default or Event of Default that is continuing. Debtor acknowledges that there is no adequate remedy at law for failure by Debtor to comply with the provisions of this section and that such failure would not be adequately compensable in damages and therefore agrees that this Section 5.5 may be specifically enforced. ARTICLE IV MISCELLANEOUS 6.1 CUMULATIVE RIGHTS. All rights of Agent under the Loan Documents are cumulative of each other and of every other Right which Agent may otherwise have at law or in equity or under any other contract or other writing for the enforcement of the security interest granted hereby or the collection of the Obligations. The exercise of one or more rights shall not prejudice or impair the concurrent or subsequent exercise of other rights. 6.2 MODIFICATION, AMENDMENTS, ETC. No amendment or waiver of any provision of this Agreement, and no consent to any departure by Debtor herefrom, shall in any event be effective unless the same shall be in writing and signed by Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 6.3 CONTINUING SECURITY INTEREST. This Agreement shall create a continuing security interest in the Pledged Collateral and shall (a) remain in full force and effect until final payment in full of the Obligations and all amounts payable under this Agreement, (b) be binding upon Debtor, its successors, and assigns, and (c) inure to the benefit of and be enforceable by Agent and its successors, transferees, and assigns. 6.4 GOVERNING LAW; WAIVER OF JURY TRIAL; SERVICE OF PROCESS. (a) THIS AGREEMENT SHALL BE DEEMED TO BE A CONTRACT MADE IN TULSA, OKLAHOMA, AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OKLAHOMA AND THE UNITED STATES OF AMERICA, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST GRANTED HEREBY, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF OKLAHOMA. WITHOUT EXCLUDING ANY OTHER JURISDICTION AND NOT AS A LIMITATION OF THIS SECTION 6.4, DEBTOR AGREES THAT THE STATE AND FEDERAL COURTS OF OKLAHOMA LOCATED IN TULSA, OKLAHOMA, WILL HAVE JURISDICTION OVER ALL PROCEEDINGS IN CONNECTION HEREWITH. TO THE -14- MAXIMUM EXTENT PERMITTED BY LAW, DEBTOR AND AGENT HEREBY WAIVE ANY RIGHT THAT EITHER MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS AGREEMENT, THE OTHER WORLDCOM DOCUMENTS, OR ANY RELATED MATTERS, AND AGREE THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. (b) DEBTOR HEREBY WAIVES PERSONAL SERVICE OF ANY LEGAL PROCESS UPON IT. DEBTOR AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO DEBTOR AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THIS AGREEMENT AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE DAYS AFTER DEPOSIT IN THE UNITED STATES MAIL. NOTHING IN THIS SECTION 6.4 SHALL AFFECT THE RIGHT OF AGENT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 6.5 NO AGENCY. Neither Agent nor WorldCom is an agent or representative of Debtor, and Debtor is not an agent or representative of Agent or WorldCom, and nothing in this Agreement shall be construed to make Agent or WorldCom liable to anyone for debts or claims accruing against Debtor. 6.6 NO PARTNERSHIP OR JOINT VENTURE. This Agreement shall not in any respect be interpreted, deemed, or construed as making Agent a partner or joint venturer with Debtor or with any Subsidiary of Debtor or as creating any similar relationship or entity, and Debtor agrees that Debtor will not make any contrary assertion, contention, claim, or counterclaim in any action, suit, or other legal proceeding involving Agent and Debtor. 6.7 AGENT'S RIGHT TO USE AGENTS. Agent may exercise its rights under this Agreement through an agent or other designee. 6.8 NO INTERFERENCE, COMPENSATION, OR EXPENSE. Agent may exercise its rights under this Agreement (a) without resistance or interference by Debtor and (b) without payment of any rent, license fee, or compensation of any kind to Debtor. 6.9 WAIVER. No waiver of any Event of Default shall be deemed to be a waiver of any other subsequent Event of Default, nor shall any such waiver be deemed to be a continuing waiver. No delay or omission by Agent in exercising any Right hereunder, or under any other Loan Documents, shall impair any such Right or be construed as a waiver thereof or any acquiescence therein, nor shall any single or partial exercise of any such Right preclude other or further exercise thereof, or the exercise of any other Right of Agent hereunder or under such other agreements. 6.10 WAIVERS BY DEBTOR. Debtor waives notice of the creation, advance, increase, existence, extension, or renewal of, or of any indulgence with respect to, the Obligations; waives -15- presentment, demand, notice of dishonor, and protest; and waives notice of the amount of the Obligations outstanding at any time, notice of any change in financial condition of any Subsidiary. Debtor waives (a) any claim that, as to any part of the Pledged Collateral, a public sale, should Agent elect so to proceed, is, in and of itself, not a commercially reasonable method of sale for such Pledged Collateral, (b) except as otherwise provided in this Agreement, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE OR JUDICIAL HEARING IN CONNECTION WITH AGENT'S DISPOSITION OF ANY OF THE PLEDGED COLLATERAL, INCLUDING ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT THAT DEBTOR WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE, AND ALL OTHER REQUIREMENTS AS TO THE TIME, PLACE, AND TERMS OF SALE OR OTHER REQUIREMENTS WITH RESPECT TO THE ENFORCEMENT OF AGENT'S RIGHTS HEREUNDER, and (c) all rights of redemption, appraisal, or valuation. 6.11 OTHER PARTIES AND OTHER COLLATERAL. No renewal, increase, or extension of, or any other indulgence with respect to, the Obligations or any part thereof, no release, exchange, or taking of any security, no release of any Person (including any Subsidiary, maker, endorser, guarantor, or surety) liable on the Obligations, no delay in enforcement of payment, no delay or omission or lack of diligence or care in exercising any Right or power with respect to the Obligations or any security therefor or guaranty thereof or under this Agreement, and no other circumstance or event which might constitute a defense available to or discharge of Debtor, any Subsidiary, or any other Person, shall in any manner impair or affect the rights of Agent hereunder, under any other of the Loan Documents, at law, or in equity. Agent need not file suit or assert a claim for personal judgment against any Person for any part of the Obligations or seek to realize upon any other security for the Obligations before foreclosing upon the Pledged Collateral for the purpose of paying the Obligations. Debtor waives any Right to the benefit of or to require or control application of any other security or proceeds thereof and agrees that Agent shall have no duty or obligation to Debtor to apply any such other security or proceeds thereof to the Obligations. Debtor hereby waives all rights by which it might be entitled to require suit on an accrued right of action in respect of any of the Obligations or require suit against Debtor, any Subsidiary, or others, whether arising pursuant to any statutory or case law of any jurisdiction or otherwise. 6.12 NOTICES. All notices, communications, and materials to be given or delivered pursuant to this Agreement shall be given or delivered in the manner provided in, and shall be deemed the effective in accordance with, the provisions of the Credit Agreement. For purposes of notices, communications, and materials to be given or delivered pursuant to this Agreement, addresses and facsimile numbers and the individuals or departments to whose attention the same shall be directed are, for Agent, as set forth in the Credit Agreement and are, for Debtor, as follows: -16- If to Debtor: ____________________________ ____________________________ ____________________________ ____________________________ ____________________________ with a copy to: Riordan & McKinzie Twenty-Ninth Floor 300 South Grand Avenue Los Angeles, California 90071 Facsimile No.: (213) 229-8550 Attention: Richard J. Welch or at such other addresses or facsimile numbers or to the attention of such other individuals or departments as Debtor may hereafter specify in a notice to the other party specifically captioned "Notice of Change of Address." 6.13 PARTIES BOUND. This Agreement shall be binding on Debtor and its successors, assigns, and other legal representatives and shall inure to the benefit of Agent and its successors and assigns; PROVIDED, however, that Debtor may not assign its rights or obligations hereunder without the prior written consent of Agent. The rights, powers, and interests held by Agent hereunder may be transferred or assigned, in whole or in part. 6.14 SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part hereof, and the remaining provisions hereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Agreement a legal, valid, and enforceable provision as similar in terms to the illegal, invalid, or unenforceable provision as may be possible. 6.15 CONTROL. Notwithstanding anything herein to the contrary, this Agreement and the transactions contemplated hereby do not and shall not constitute, create, or have the effect of constituting or creating, directly or indirectly, actual or practical ownership by Agent of Debtor or any issuer of the Pledged Collateral, or control, affirmative or negative, direct or indirect, by Agent or WorldCom over the management or any aspect of the day-to-day operation of Debtor or any such issuer, which control remains in Debtor, each such issuer, and their respective boards of directors, partners, and officers (as appropriate); PROVIDED, however, that if Agent becomes the owner of any partnership interest, or other equity or ownership interest in any issuer whether through foreclosure or otherwise, Agent shall be entitled to exercise such legal rights as it may have by being an owner of such partnership interest or other equity or ownership interest. -17- 6.16 HEADINGS; CONSTRUCTION. The headings of the articles, sections, and subsections of this Agreement are for the convenience of reference only, are not to be considered a part hereof or thereof, and shall not limit or otherwise affect any of the terms hereof. Whenever the singular or plural number, or the masculine, feminine, or neuter gender is used herein, each shall equally include the other. 6.17 WORLDCOM DOCUMENT. This Agreement is a WorldCom Document executed pursuant to the Workout Agreement and shall (unless otherwise expressly indicated herein) be construed, administered, and applied in accordance with the terms and provisions thereof. 6.18 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. 6.19 ENTIRE AGREEMENT. THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES HERETO REGARDING THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES HERETO REGARDING THE SUBJECT MATTER HEREOF. THERE ARE NO CONTEMPORANEOUS ORAL AGREEMENTS WITH RESPECT TO THE SUBJECT MATTER HEREOF. 6.20 TIME. Time is of the essence of this Agreement. -18- IN WITNESS WHEREOF, Debtor and Agent, for the benefit of WorldCom, have caused this Agreement to be duly executed and delivered as of the date first above written. DEBTOR: By:________________________ By:_________________________ Its:________________________ Attest:_________________________________ Name: __________________________________ Title:__________________________________ (CORPORATE SEAL) AGENT: MCI WORLDCOM NETWORK SERVICES, INC. By:_____________________________________ Name:___________________________________ -19- EX-10.78 5 EXHIBIT 10.78 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT dated as of April 12, 2000 (this "Agreement"), by ____________________________ ("Pledgor" or "Debtor"), is made in favor of MCI WORLDCOM NETWORK SERVICES, INC., a Delaware corporation (the "Agent"), for the benefit of MCI WORLDCOM, INC., its subsidiaries and affiliates (collectively, "WorldCom"). W I T N E S S E T H: WHEREAS, WorldCom provides telecommunications services to Debtor pursuant to the Service Agreements; and WHEREAS, Debtor is in default to WorldCom for, INTER ALIA, failure to pay its obligations to WorldCom in a timely manner (the "Past Due Indebtedness"); and WHEREAS, Debtor and WorldCom have agreed to restructure certain of the Past Due Indebtedness due to MCI WorldCom Network Services, Inc., as of February 3, 2000, pursuant to the terms and conditions of the Workout Agreement between the parties of even date herewith (the "Workout Agreement"); and WHEREAS, Debtor and WorldCom have agreed to restructure certain of the Past Due Indebtedness due to MCI WorldCom Network Services, Inc., as of February 3, 2000, in the form of a Promissory Note in the principal amount of $56,017,698.87, of even date herewith (the "Note"), which has been executed and delivered by Debtor to MCI WorldCom Network Services, Inc.; and WHEREAS, Pledgor has agreed to secure its performance and payment of (a) all obligations for the provision of services by WorldCom to Debtor pursuant to any, and all related notes, instruments, documents, or agreements and any amendments, extensions, renewals or replacements to or of any of the foregoing; and (b) all other obligations and indebtedness of Debtor to WorldCom of whatever kind and however created, whether presently existing or hereafter arising; and WHEREAS, Pledgor has determined that the execution, delivery, and performance of this Agreement is necessary and convenient to the conduct, promotion, and attainment of Pledgor's business; and WHEREAS, Pledgor desires to induce WorldCom to enter into the financial restructuring with the Debtor, to extend the term of the Past Due Obligations, and to facilitate the pending merger between Debtor and World Access, Inc. ("WAXS"), all of which are reasonably expected to benefit, directly or indirectly, Pledgor. NOW, THEREFORE, in consideration of the premises set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and in order to induce WorldCom, as set forth above, Pledgor hereby agrees with Agent for its benefit as follows: ARTICLE I PLEDGE 1.01. PLEDGE. Pledgor hereby grants, pledges, assigns, hypothecates, and transfers to Agent, a first and prior pledge and security interest in 100% of all Capital Stock owned by Pledgor in all domestic Persons (specifically excluding all Persons organized or existing under the laws of any jurisdiction other than the United States of America or any state thereof) and each other Person which is a successor to such Persons (singly, "Issuer" and collectively, "Issuers"), now or hereafter owned beneficially or of record by Pledgor, and any certificate or instrument evidencing such interest, including, without limitation, the interests listed on Schedule 1 hereto, and, without affecting the obligation of Pledgor or Issuer under any agreement prohibiting such action, in the event of any consolidation or merger in which each Issuer is not the surviving entity, or in the event of any sale, lease, transfer, or other disposition of all or substantially all of the assets of such Issuer, all Capital Stock, equity, partnership, limited liability company ("LLC"), or other interest of the successor entity formed by or resulting from such consolidation or merger, or of the Person to which such sale, lease, transfer, or other disposition shall have been made, owned by Pledgor, and all proceeds and products of the foregoing (collectively, the "Capital Stock Collateral"), to secure the payment and performance of all of the Obligations. ARTICLE II REPRESENTATIONS AND WARRANTIES 2.01. REPRESENTATIONS AND WARRANTIES CONCERNING PLEDGOR. Pledgor represents and warrants to Agent that (a) the chief place of business and chief executive office of Pledgor is located at 223 E. De La Guerra, Santa Barbara, California 93101, and (b) no consent of any other Person and no authorization, approval, or other action by, and no notice to or filing with, any tribunal is required (i) for the pledge by Pledgor of the Capital Stock Collateral pledged by it hereunder, for the grant by Pledgor of the security interest granted hereby or for the execution, delivery or performance of this Agreement by Pledgor, (ii) for the perfection or maintenance of the pledge, assignment and security interest created hereby (including the first-priority nature of such pledge, assignment and security interest), or (iii) for the exercise by Agent of the rights provided for in this Agreement or the remedies in respect of the Capital Stock Collateral pursuant to this Agreement. 2.02. REPRESENTATIONS AND WARRANTIES CONCERNING CAPITAL STOCK COLLATERAL. Pledgor represents and warrants to Agent that (a) Pledgor is the sole legal and beneficial owner of the Capital Stock Collateral pledged by it free and clear of any Lien, other than the Lien in favor of WAXS, security interest, option or other charge or encumbrance except for the security interest created by this Agreement or Permitted Liens; (b) no effective financing statement or other similar document used to perfect and preserve a security interest under the laws of any jurisdiction covering all or any part of the Capital Stock Collateral is on file in any recording office, except such as may have been filed in favor of WAXS or in favor of Agent relating to this Agreement; (c) Schedule 1 is a complete and correct description of all interest of Pledgor in each of its Subsidiaries, including each class of interest and number of units or percentage of ownership owned by Pledgor; (d) the pledge, assignment, and delivery of the Capital Stock Collateral hereunder, and filing of an appropriate financing statement, create a valid first and prior perfected security interest in the Capital Stock Collateral, securing the Obligations; (e) the Capital Stock pledged hereunder is duly authorized, validly issued, fully paid, and non-assessable and was not issued in violation of the rights of any Person; (f) no unpaid capital call or dispute exists with respect to any of the Capital Stock Collateral; (g) none of the Capital Stock Collateral is evidenced by a certificate, instrument, or other writing that has not been delivered to Agent; (h) the interest of Pledgor in each of its Subsidiaries is a 100% interest of all Capital Stock of Pledgor's Subsidiaries specified on Schedule 1 unless otherwise indicated on Schedule 1; (i) none of the Capital Stock Collateral is subject to any buy-sell, voting trust, transfer restriction (other than transfer restrictions arising under the Exchange Act), preferential right to purchase, or similar agreement or any option, warrant, put or call or similar agreement, which would restrict Pledgor's ability to pledge same hereunder; and (j) Pledgor's federal taxpayer identification number is 77-0362681. The delivery at any time by Pledgor to Agent or WAXS, as the case may be, of the Capital Stock Collateral shall constitute a representation and warranty by Pledgor under this Agreement that, with respect to such Capital Stock Collateral, Pledgor is the sole legal and beneficial owner of the Capital Stock Collateral, and that the matters set forth in this Section 2.02 are true and correct with respect to such Capital Stock Collateral. 2.03. REPRESENTATIONS AND WARRANTIES CONCERNING BENEFIT. Pledgor represents and warrants to Agent that (a) the value of the consideration received and to be received by Pledgor is reasonably worth at least as much as the liability and obligation of Pledgor hereunder, and such liability and obligation may reasonably be expected to benefit Pledgor directly or indirectly; and (b) neither Agent nor any other Person has made any representation, warranty, or statement to Pledgor (other than as set forth in the Loan Documents) in order to induce Pledgor to execute this Agreement. ARTICLE III COVENANTS 3.01. AFFIRMATIVE COVENANTS. Pledgor covenants and agrees (a) promptly to deliver to WAXS, on behalf of Agent, all instruments, certificates, documents, or agreements evidencing any of the Capital Stock Collateral; (b) promptly to notify Agent of any material change in any fact or circumstances warranted or represented by Pledgor in this Agreement or in any other WorldCom Document; (c) promptly to notify Agent of any claim, action, or proceeding affecting Pledgor's title to the Capital Stock Collateral, or any part thereof, or the security interest therein granted hereunder, and, at the request of Agent, appear in and defend, at Pledgor's expense, any such action or proceeding; (d) promptly to pay to Agent the amount of all court costs and reasonable attorney's fees incurred by Agent hereunder; and (e) promptly notate the lien and security interest of Agent on its books and records related to the Capital Stock Collateral. 3.02. NEGATIVE COVENANTS. Pledgor covenants and agrees that it shall not (a) transfer or seek to transfer directly, or create any other security interest or pledge in, mortgage, or otherwise encumber the Capital Stock Collateral or any part thereof, or permit the same to be or become subject to any lien, attachment, execution, sequestration, other legal or equitable process, or any encumbrance of any kind or character, or grant any option, warrant, or other rights in the Capital Stock Collateral in favor of any Person other than Agent; (b) cause or permit any Issuer to authorize and issue any additional Capital Stock or take any other action that would otherwise dilute any of the Capital Stock Collateral; (c) approve any amendment to the articles of incorporation, partnership agreement, LLC agreement, by-laws, or other organizational or governance document of any Issuer; (d) permit the merger, consolidation or dissolution of any Issuer, or the sale by any Issuer of any material portion of its assets other than in the ordinary course of business; or (e) sell, lease, transfer or otherwise dispose of any Capital Stock Collateral in any manner. 3.03. RIGHT TO DISTRIBUTIONS. With respect to any certificates, bonds, or other instruments or securities constituting a part of the Capital Stock Collateral, Agent, shall have authority during the continuance of an Event of Default, without notice to Pledgor, either to have the same registered in Agent's name, or in the name of a nominee, and, with or without such registration, to demand of the Issuer thereof, and to receive and receipt for, any and all distributions (including any stock or similar dividend or distribution) payable in respect thereof, whether they be ordinary or extraordinary. Subject to the next sentence hereof, if Pledgor shall become entitled to receive or shall receive any interest in or certificate (including, without limitation, any interest in or certificate representing a distribution in connection with any reclassification, increase, or reduction of capital or issued in connection with any reorganization), or any option or rights arising from or relating to any of the Capital Stock Collateral, whether as an addition to, in substitution of, as a conversion of, or in exchange for any of the Capital Stock Collateral, or otherwise, Pledgor agrees to accept the same as Agent's agent and to hold the same in trust on behalf of and for the benefit of Agent, and to deliver the same immediately to Agent, in the exact form received, with appropriate undated stock, partnership interest, LLC membership interest, or similar powers, duly executed in blank, to be held by Agent, subject to the terms hereof, as Capital Stock Collateral. Unless an Event of Default is in existence or would occur as a result thereof, Pledgor shall be entitled to receive and utilize for its own purposes, all cash distributions (other than distributions constituting a return of capital) paid in respect of any of the Capital Stock Collateral. Agent shall be entitled to all distributions, and to any sums paid upon or in respect of any Capital Stock Collateral, upon the liquidation, dissolution, or reorganization of the Issuer thereof or which constitute a return of capital, which distribution shall be paid to Agent, to be held by it as additional Capital Stock Collateral security for the Obligations, or for application to the Obligations at the discretion of Agent. All distributions paid or distributed in respect of the Capital Stock Collateral which are received by Pledgor in violation of this Agreement shall, until paid or delivered to Agent, be held by Pledgor in trust as additional Capital Stock Collateral for the Obligations. 3.04. RECORDS OF CAPITAL STOCK COLLATERAL. Pledgor at all times shall maintain accurate books and records concerning the Capital Stock Collateral. Pledgor shall cause all Issuers of the Capital Stock Collateral to mark immediately all books and records of issue, registration, and transfer relating to the Capital Stock Collateral with an entry showing the Capital Stock Collateral assignment of the Capital Stock Collateral to Agent. 3.05. INFORMATION AND INSPECTION. Pledgor shall, and shall cause each Issuer to, (a) allow Agent to inspect and copy, or at the option of Agent, furnish copies of, all records relating to the Capital Stock Collateral and the Obligations; and (b) furnish Agent such information as it may request with respect to the Capital Stock Collateral, any distributions thereon, and any proceeds thereof, at the time and in the form requested by Agent. 3.06. INDEMNITY AND EXPENSES. (a) Pledgor shall indemnify Agent from and against any and all claims, losses, and liabilities (including reasonable attorneys' fees) growing out of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), expressly including such claims, losses, or liabilities arising out of mere negligence of Agent, except claims, losses, or liabilities resulting from Agent's gross negligence or willful misconduct. (b) Pledgor will upon demand pay to Agent, as the case may be, the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which Agent may incur in connection with (i) the sale of, collection from, or other realization upon, any of the Capital Stock Collateral; (ii) the exercise or enforcement of any of the rights of Agent hereunder; or (iii) the failure by Pledgor to perform or observe any of the provisions hereof. (c) Any payment made or cost borne by Agent (or incurred on Agent's behalf) shall be a part of the Obligations, shall be payable upon demand, and shall bear interest as provided in the Credit Agreement. 3.07. ADDITIONAL DOCUMENTS. Pledgor, at its expense, shall take all actions and execute and deliver such further instruments, agreements, blank stock, partnership interest, LLC membership interest, or similar powers, and assignments as Agent shall deem necessary or appropriate to obtain, maintain, and perfect the security interest granted hereunder, including the security interest in after-acquired Capital Stock Collateral granted herein, and to enable Agent to comply with all applicable federal or state laws in order to obtain or perfect Agent's interest in the Capital Stock Collateral, to effect its rights hereunder, or to obtain distributions and other proceeds of the Capital Stock Collateral as provided herein. 3.08. ADDITIONAL CAPITAL STOCK COLLATERAL. Upon acquisition by Pledgor of any additional interest in any Issuer, Pledgor shall be deemed to grant hereunder, and shall cause to be granted, Liens and security interests on such interest to Agent, as security for the Obligations. Pledgor agrees to take, and to cause to be taken, at its own cost and expense, such actions as Agent shall deem necessary or appropriate to create, evidence, and perfect such Liens and assure the priority of such Liens, which may only be junior to the prior security interests, if any, of World Access, Inc. ARTICLE V RIGHTS AND POWERS OF AGENT 4.01. REMEDIES UPON DEFAULT. Agent, during the continuance of an Event of Default and without liability to Pledgor, may without notice or demand: obtain from any Person information regarding Pledgor, any Issuer of the Capital Stock Collateral, or any of their businesses, which information any such Person also may furnish without liability to Pledgor or any other Person; require Pledgor to give possession or control of any of the Capital Stock Collateral to Agent; endorse as Pledgor's agent or attorney-in-fact any instruments or documents representing proceeds of the Capital Stock Collateral; unless earlier permitted hereunder, take control of funds generated by the Capital Stock Collateral and any other proceeds, and exercise all other rights which an owner of such Capital Stock Collateral may exercise; at any time transfer any of the Capital Stock Collateral or evidence thereof into its own name or that of its nominee; vote any Capital Stock Collateral and exercise any rights with respect thereto; and demand, collect, convert, redeem, receipt for, settle, compromise, adjust, sue for, foreclose, or realize upon the Capital Stock Collateral, in its own name or in the name of Pledgor as Agent may determine. Agent shall not be liable for failure to collect any distribution or other proceeds or for any act or omission on the part of Agent, its officers, agents, employees, or other representatives, except willful misconduct and gross negligence. The foregoing rights of Agent shall be in addition to, and not a limitation upon, any right of Agent given by law, elsewhere in this Agreement or any other Loan Documents, or otherwise. 4.02. RIGHT OF AGENT TO NOTIFY ISSUERS. At any time during the continuance of an Event of Default and at such other times as Agent is entitled to receive distributions and other property constituting Capital Stock Collateral pursuant to the terms of this Agreement, Agent may notify Issuers of the Capital Stock Collateral to make payments of the applicable distributions directly to Agent, and Agent may take control of all applicable proceeds of any Capital Stock Collateral. Until Agent elects to exercise such right, during the continuance of an Event of Default, Pledgor, as agent of Agent, shall collect and segregate all distributions and other amounts paid or distributed with respect to the Capital Stock Collateral. 4.03. DELIVERY OF RECEIPTS TO AGENT. Upon Agent's demand during the continuance of an Event of Default, Pledgor shall deposit, upon receipt and in the form received, with any necessary endorsement, all payments received as proceeds of or otherwise in connection with the Capital Stock Collateral, in a special bank account in a bank of Agent's choice over which Agent alone shall have power of withdrawal. The funds in such account shall secure the Obligations. Agent is authorized, and is hereby appointed during the continuance of an Event of Default as Pledgor's attorney-in-fact, to make any endorsement in Pledgor's name and behalf. Pending such deposit, Pledgor shall not mingle any such payments with any of Pledgor's other funds or property but shall hold them separate and upon an express trust for Agent. During the continuance of an Event of Default, Agent may from time to time apply the whole or any part of the funds in the special account against the Obligations. 4.04. VOTING RIGHTS. It is expressly understood and agreed that Pledgor shall retain all voting or management rights to the Capital Stock Collateral unless an Event of Default shall occur, at which time such voting rights shall transfer to or be exercised as directed by, at its sole discretion; PROVIDED, however, that no voting or management rights shall be exercised, vote cast, consent, waiver, or ratification given, or action taken by Pledgor which would be inconsistent with or violate any provision of this Agreement or any other WorldCom Document. 4.05. REALIZATION UPON CAPITAL STOCK COLLATERAL. During the continuance of an Event of Default, Agent, without notice or demand, but subject to any limitations or restrictions imposed by applicable law, may exercise any right of a secured party under the Uniform Commercial Code of Oklahoma or any other applicable jurisdiction ("UCC"), under this Agreement, under any other WorldCom Documents, or otherwise and also may (i) require Pledgor to, and Pledgor hereby agrees that it will at its expense and upon request of Agent, forthwith, assemble all or part of the Capital Stock Collateral as directed by Agent, and make it available to Agent, at a place to be designated by Agent, which is reasonably convenient to both parties or (ii) without notice, except as specified below, sell the Capital Stock Collateral or any portion thereof in one or more parcels at public or private sale, at any of Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as Agent may deem commercially reasonable. Unless the Capital Stock Collateral is of a type customarily sold on a recognized market, Agent shall give Pledgor reasonable written notice of the time and place of any public sale thereof or of the time after which any private sale or other intended disposition thereof is to be made. Pledgor agrees that ten days advance written notice thereof shall constitute reasonable notice. Agent shall not be obligated to make any sale of Capital Stock Collateral, regardless of notice of sale having been given. Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. Expenses of retaking, holding, preparing for sale, selling, or the like shall include Agent's reasonable attorneys' fees and legal expenses and constitute a portion of the Obligations. During the continuance of an Event of Default, Agent shall be entitled to immediate possession of all books and records maintained by Pledgor with respect to the Capital Stock Collateral, and shall have the authority to enter upon any premises upon which any of the same may be situated and remove the same therefrom without liability. Upon disposition of Capital Stock Collateral during an Event of Default, Pledgor shall be entitled to any surplus with respect to the Capital Stock Collateral following payment in full of the Obligations and termination hereof and shall be liable to Agent for any deficiency with respect thereto. All cash proceeds received by Agent upon any sale of, collection of, or other realization upon all or any part of the Capital Stock Collateral shall be applied as follows: FIRST: To the payment of all out-of-pocket expenses incurred in connection with the sale of, collection of, or other realization upon the Capital Stock Collateral, including reasonable attorneys' fees and disbursements; SECOND: To the payment of the Obligations, in such order and in such manner consistent with applicable law as Agent in its discretion and in accordance with its agreements shall decide; and THIRD: To the extent of the balance (if any) of such proceeds, to the payment of such balance (if any) of such proceeds to Pledgor or other Person legally entitled thereto. Non-cash proceeds of any disposition of the Capital Stock Collateral available to satisfy the Obligations shall be applied to the Obligations in such order and in such manner consistent with applicable law as Agent in its discretion shall decide. 4.06. SECURITIES AND OTHER LAWS; CONTRACTUAL RESTRICTIONS; REGISTRATION. (a) Because of the Securities Act of 1933, as amended (the "Securities Act"), and other laws, including, without limitation, state "blue sky" laws, or contractual restrictions or agreements imposed upon certain Persons, there may be legal restrictions or limitations affecting Agent in any attempts to dispose of the Capital Stock Collateral and the enforcement of its rights hereunder. For these reasons, Agent is hereby authorized by Pledgor, but not obligated, during the continuance of any Event of Default to sell or otherwise dispose of any of the Capital Stock Collateral at private sale, subject to an investment letter, or in any other manner which will not require the Capital Stock Collateral, or any part thereof, to be registered in accordance with the Securities Act, or the rules and regulations promulgated thereunder, or any other law. Agent is also hereby authorized by Pledgor, but not obligated, to take such actions, give such notices, obtain such consents, and do such other things as Agent may deem required or appropriate under the Securities Act or other securities laws or other laws or contractual restrictions or agreements in the event of a sale or disposition of any of the Capital Stock Collateral. Pledgor clearly understands that Agent may in its discretion approach a restricted number of potential purchasers and that a sale under such circumstances may yield a lower price for the Capital Stock Collateral than would otherwise be obtainable if the same were registered and sold in the open market. No sale so made in good faith by Agent shall be deemed to be not "commercially reasonable" because so made. Pledgor agrees that in the event Agent shall, during the continuance of an Event of Default, sell the Capital Stock Collateral or any portion thereof at any private sale or sales, Agent shall have the right to rely upon the advice and opinion of appraisers and other Persons, which appraisers and other Persons are acceptable to Agent, as to the best price reasonably obtainable upon such a private sale thereof. In the absence of fraud, such reliance shall be evidence that Agent handled such matter in a commercially reasonable manner under applicable law. (b) If Agent shall determine to exercise its right to sell any or all of the Capital Stock Collateral, and if in the opinion of counsel for Agent it is necessary, or if in the opinion of Agent it is advisable, to have the Capital Stock Collateral (or that portion thereof to be sold) registered under the provisions of the Securities Act, Pledgor will, to the fullest extent it has the capability to do so, cause the Issuer or Issuers of the Capital Stock Collateral contemplated to be sold to execute and deliver, and cause the directors and officers of each thereof to execute and deliver, all at Pledgor's expense, all such instruments and documents, and to do or cause to be done all such other acts and things, as may be necessary or, in the opinion of Agent, advisable to register the Capital Stock Collateral (or that portion thereof to be sold) under the provisions of the Securities Act and to cause the registration statement relating thereto to become effective and to remain effective for such period as Agent may deem appropriate to facilitate the sale or other disposition of such Capital Stock Collateral from the date of the first public offering of the Capital Stock Collateral (or that portion thereof to be sold) and to make all amendments thereto and/or to the related prospectus which, in the opinion of Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act. Pledgor shall use its best efforts to cause each Issuer to comply with the provisions of the securities or "blue sky" laws of any jurisdiction which Agent shall designate and to cause each Issuer to make available to its security holders, as soon as practicable, an earnings statement which will satisfy the provisions of the Securities Act and applicable "blue sky" laws. 4.07 FURTHER APPROVALS REQUIRED. (a) In connection with the exercise by Agent of its rights hereunder that effects the disposition of or use of any Capital Stock Collateral, it may be necessary to obtain the prior consent, waiver, or approval of tribunals and other Persons to a transfer or assignment of Capital Stock Collateral, including, without limitation, the FCC. (b) Pledgor hereby agrees, upon the occurrence of an Event of Default, to execute, deliver, and file, and hereby appoints (to the extent permitted under applicable law) Agent, as its attorney-in-fact, upon the occurrence of an Event of Default, to execute, deliver, and file on Pledgor's behalf and in Pledgor's name, all applications, certificates, filings, instruments, and other documents (including without limitation any application for an assignment or transfer of control or ownership) that may be necessary or appropriate, in Agent's opinion, to obtain such consents, waivers, or approvals. Pledgor acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Section 4.07 and that such failure would not be adequately compensable in damages and therefore agrees that this Section 4.07 may be specifically enforced. 4.08 CONVERTIBLE SECURITIES. Upon the occurrence of an Event of Default, Agent may present for conversion any Capital Stock Collateral which is convertible into any other instrument, investment security, or cash. Agent shall not have any duty, however, to present for conversion any of the Capital Stock Collateral, unless it shall have received from Pledgor detailed written instructions to that effect at a time reasonably far in advance of the final conversion date to make such conversion possible and such conversion does not violate any provisions of any WorldCom Document. 4.09. ISSUER LIABILITIES. By taking a security interest in the Capital Stock Collateral pursuant to this Agreement, Agent does not assume, accept, or become liable with respect to any debts, liabilities, or obligations of or owed to any Issuer of any Capital Stock Collateral. 4.10. POWER OF ATTORNEY. PLEDGOR HEREBY IRREVOCABLY GRANTS TO AGENT PLEDGOR'S PROXY (EXERCISABLE FROM AND AFTER THE OCCURRENCE OF AN EVENT OF DEFAULT) TO VOTE ANY CAPITAL STOCK COLLATERAL AND, UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, APPOINTS AGENT, AS PLEDGOR'S ATTORNEY-IN-FACT TO PERFORM ALL OBLIGATIONS OF PLEDGOR UNDER THIS AGREEMENT AND TO EXERCISE ALL OF AGENT'S RIGHTS HEREUNDER. THE PROXY AND POWER OF ATTORNEY HEREIN GRANTED, AND EACH STOCK, PARTNERSHIP INTEREST, OR LLC MEMBERSHIP INTEREST POWER AND SIMILAR POWER NOW OR HEREAFTER GRANTED (INCLUDING ANY EVIDENCED BY A SEPARATE WRITING), ARE COUPLED WITH AN INTEREST AND ARE IRREVOCABLE PRIOR TO FINAL PAYMENT IN FULL OF THE OBLIGATIONS. ARTICLE II MISCELLANEOUS 5.01. CUMULATIVE RIGHTS. All rights of Agent under the WorldCom Documents are cumulative of each other and of every other right which Agent may otherwise have at law or in equity or under any other contract or other writing for the enforcement of the security interest granted hereunder or the collection of the Obligations. The exercise of one or more rights shall not prejudice or impair the concurrent or subsequent exercise of any other right. 5.02. AGENT'S DUTIES. The powers conferred on Agent hereunder are intended solely to protect Agent's interest in the Capital Stock Collateral and shall not impose any duty upon Agent to exercise any such powers. Except for the safe custody of any Capital Stock Collateral in its possession and the accounting for moneys actually received by it hereunder, Agent shall have no duty as to any Capital Stock Collateral, as to ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders, or other matters relative to any Capital Stock Collateral, whether or not Agent has or is deemed to have knowledge of such matters, or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any reasonable care in the custody and preservation of any Capital Stock Collateral in its possession if such Capital Stock Collateral is accorded treatment substantially equal to that which Agent accords its own property. Except as provided in this Section 5.02, Agent shall not have any duty or liability to protect or preserve any Capital Stock Collateral or to preserve rights pertaining thereto. Nothing contained in this Agreement shall be construed as requiring or obligating Agent, and Agent shall not be required or obligated, to (a) present or file any claim or notice or take any action with respect to any Capital Stock Collateral or in connection therewith or (b) notify Pledgor of any decline in the value of any Capital Stock Collateral. 5.03. WAIVER. No waiver of any Event of Default shall be deemed to be a waiver of any other subsequent Event of Default, nor shall any such waiver be deemed to be a continuing waiver. No delay or omission by Agent in exercising any right hereunder, or under any other of the Loan Documents, shall impair any such right or be construed as a waiver thereof or any acquiescence therein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or the exercise of any other right of Agent hereunder or under any other of the Loan Documents. 5.04. WAIVERS BY PLEDGOR. Pledgor waives notice of the creation, advance, increase, existence, extension, or renewal of, or of any indulgence with respect to, the Obligations; waives presentment, demand, notice of dishonor, and protest; waives notice of the amount of the Obligations outstanding at any time, notice of any Default or Event of Default, and all other notices respecting the Obligations; and agrees that maturity of the Obligations and any part thereof may be accelerated, extended, or renewed one or more times by Agent, in its sole discretion, without notice to Pledgor. Pledgor waives (a) any claim that, as to any part of the Capital Stock Collateral, a public sale, should Agent elect so to proceed, is, in and of itself, not a commercially reasonable method of sale for such Capital Stock Collateral; (b) except as otherwise provided in this Agreement, TO THE EXTENT PERMITTED BY APPLICABLE LAW, NOTICE OR JUDICIAL HEARING IN CONNECTION WITH AGENT'S DISPOSITION OF ANY OF THE CAPITAL STOCK COLLATERAL, INCLUDING ANY AND ALL PRIOR NOTICE AND HEARING FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT THAT PLEDGOR WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES OR OF ANY STATE AND ALL OTHER REQUIREMENTS AS TO THE TIME, PLACE, AND TERMS OF SALE OR OTHER REQUIREMENTS WITH RESPECT TO THE ENFORCEMENT OF AGENT'S RIGHTS HEREUNDER; AND (C) ALL RIGHTS OF REDEMPTION, APPRAISAL, OR VALUATION. 5.05. OTHER PARTIES AND OTHER CAPITAL STOCK COLLATERAL. No renewal, increase, or extension of or any other indulgence with respect to the Obligations or any part thereof, no release, exchange, or taking of any security, no release of any Person (including Pledgor, any of Pledgor's Subsidiaries, maker, endorser, guarantor, or surety) liable on the Obligations, no delay in enforcement of payment, no delay or omission or lack of diligence or care in exercising any right or power with respect to the Obligations or any security therefor or guaranty thereof or under this Agreement, and no other circumstance or event which might constitute a defense available to or discharge of Pledgor, any of Pledgor's Subsidiaries, or any other Person shall in any manner impair or affect the rights of Agent hereunder, under any other of the Loan Documents, at law, or in equity. Agent need not file suit or assert a claim for personal judgment against any Person for any part of the Obligations or seek to realize upon any other security for the Obligations before foreclosing upon the Capital Stock Collateral for the purpose of paying the Obligations. Pledgor waives any right to the benefit of or to require or control application of any other security or proceeds thereof and agrees that Agent shall have no duty or obligation to Pledgor to apply any such other security or proceeds thereof to the Obligations. Pledgor hereby waives all rights by which it might be entitled to require suit on an accrued right of action in respect of any of the Obligations or require suit against any of Pledgor's Subsidiaries, or others, whether arising pursuant to Oklahoma statutory or case law or otherwise. 5.06. CONTINUING SECURITY INTEREST. This Agreement constitutes a continuing security interest in the Capital Stock Collateral and shall remain in full force and effect until final payment and performance in full of the Obligations. 5.07. PARTIES BOUND. This Agreement shall be binding on Pledgor and its successors, assigns, and other legal representatives and shall inure to the benefit of Agent and its successors and assigns; PROVIDED, however, that Pledgor may not assign its rights or obligations hereunder without the prior written consent of Agent. The rights, powers, and interests held by Agent hereunder may be transferred or assigned, in whole or in part, in accordance with the Credit Agreement, without the consent of Pledgor. 5.08. NOTICES AND DELIVERIES. All notices, communications, and materials to be given or delivered pursuant to this Agreement shall be given or delivered in the manner provided in, and shall be deemed effective in accordance with, the provisions of the Note. For purposes of notices, communications, and materials to be given or delivered pursuant to this Agreement, addresses and facsimile numbers and the individuals or departments to whose attention the same shall be directed are, for Agent, as set forth in the Note and are, for Pledgor, as follows: If to Pledgor: ---------------------------- ---------------------------- ---------------------------- ---------------------------- ---------------------------- with a copy to: Riordan & McKinzie Twenty-Ninth Floor 300 South Grand Avenue Los Angeles, California 90071 Attention: Richard J. Welch Facsimile No.: (213) 229-8550 or at such other addresses or facsimile numbers or to the attention of such other individuals or departments as Pledgor may hereafter specify in a notice to the other party specifically captioned "Notice of Change of Address." 5.09. MODIFICATIONS, AMENDMENTS, ETC. No amendment or waiver of any provision of this Agreement, and no consent to any departure by Pledgor herefrom, shall in any event be effective unless the same shall be in writing and signed by Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 5.10. FINANCING STATEMENT. A carbon, photographic, or other reproduction of this Agreement or any financing statement covering the Capital Stock Collateral shall be sufficient as a financing statement. Pledgor hereby authorizes Agent to file one or more financing or continuation statements, and amendments thereto, relating to any Capital Stock Collateral, without the signature of Pledgor where permitted by law. 5.11. DEFINITIONS. Unless otherwise defined in this Agreement, terms used herein shall have the meanings set forth in the Workout Agreement, or Credit Agreement, in that order. Unless the context indicates otherwise or the terms are otherwise defined herein, definitions in the Uniform Commercial Code as enacted in the State of Oklahoma (the "UCC") apply to words and phrases in this Agreement. The terms "Pledgor" and "Issuer" shall include, without limitation, such Person, such Person's heirs, successors and assigns, such Person as a debtor-in-possession, and any receiver, trustee, liquidator, conservator, custodian, or similar party appointed for such Person or all or substantially all of its assets under any law. 5.12. SEVERABILITY. If any provision of this Agreement is held to be illegal, invalid, or unenforceable under present or future laws, such provision shall be fully severable, this Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part thereof, and the remaining provisions thereof shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance therefrom. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Agreement a legal, valid, and enforceable provision as similar in terms to the illegal, invalid, or unenforceable provision as may be possible. 5.13. COUNTERPARTS. This Agreement and the other Loan Documents may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument. In making proof of any such agreement, it shall not be necessary to produce or account for any counterpart other than one signed by the party against which enforcement is sought. 5.14. CONTROL. (a) Notwithstanding anything herein to the contrary, this Agreement, the other Loan Documents, and the transactions contemplated hereby and thereby (i) prior to a foreclosure of the Liens granted under this Agreement and the other Loan Documents, do not and will not constitute, create, or have the effect of constituting or creating, directly or indirectly, actual or practical ownership of Pledgor, any Issuer of any Capital Stock Collateral, or any Subsidiary of Pledgor by Agent or control, affirmative or negative, direct or indirect, by Agent over the management or any other aspect of the operation of Pledgor, any Issuer of Capital Stock Collateral, or any Subsidiary of Pledgor, which ownership and control remains exclusively and at all times in Pledgor, such Subsidiary of Pledgor, or such Issuer of Capital Stock Collateral; and (ii) do not and will not constitute the transfer, assignment, or disposition in any manner, voluntarily or involuntarily, directly or indirectly, of any license or certificate at any time issued by the FCC or other applicable tribunal to Pledgor, any Issuer of Capital Stock Collateral, or any Subsidiary of Pledgor ("License") or the transfer of control of Pledgor, any Issuer of Capital Stock Collateral, or any Subsidiary of Pledgor within the meaning of Section 310(d) of the Communications Act of 1934, as amended, or any other applicable laws. (b) Notwithstanding any other provision of this Agreement, any foreclosure on, sale, transfer, or other disposition of, or the exercise of any right to vote or consent with respect to, any of the Capital Stock Collateral as provided herein or any other action taken or proposed to be taken by Agent hereunder which would affect the operational, voting, or other control of Pledgor, any Subsidiary of Pledgor, any Issuer of Capital Stock Collateral, or any Subsidiary of any Issuer of Capital Stock Collateral shall be in accordance with applicable law. (c) If an Event of Default shall have occurred, Pledgor shall take any action which Agent may reasonably require in order to transfer and assign to Agent, or to such one or more third parties as Agent may designate or to a combination of the foregoing, each License of the Pledgor, each Subsidiary, or any Issuer of the Capital Stock Collateral. To enforce the provisions of this Section 5.14, Agent is empowered, upon the occurrence during the continuance of an Event of Default, to require the appointment of a receiver from any court of competent jurisdiction. Such receiver shall be instructed to seek from the FCC or other applicable tribunal an involuntary transfer of control of each such License for the purpose of seeking a bona fide purchaser to whom control will ultimately be transferred. Pledgor hereby agrees to authorize such an involuntary transfer of control upon the request of the receiver so appointed and, if Pledgor shall refuse to authorize the transfer, its approval may be required by the court. Upon the occurrence of an Event of Default, Pledgor shall further use its best efforts to assist in obtaining approval of the FCC or other applicable tribunal, if required, for any action or transactions contemplated by this Agreement, including, without limitation, the preparation, execution, and filing with the FCC or other applicable tribunal of the assignor's or transferor's portion of any application or applications for consent to the assignment of any License or transfer of control necessary or appropriate under the rules and regulations of the FCC or other applicable tribunal for approval of the transfer or assignment of any portion of the Capital Stock Collateral, together with any License. (d) Pledgor acknowledges that the assignment or transfer of each License of Pledgor, each Subsidiary of Pledgor, and Issuer of the Capital Stock Collateral is integral to Agent's realization of the value of the Capital Stock Collateral pledged by Pledgor, that there is no adequate remedy at law for failure by Pledgor to comply with the provisions of this Section 5.14, and that such failure would not be adequately compensable in damages and therefore agrees, without limiting the right of Agent to seek and obtain specific performance of other obligations of Pledgor contained in this Agreement, that the agreements contained in this Section 5.15 may be specifically enforced. 5.15. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OKLAHOMA (OTHER THAN THE CONFLICT OF LAWS RULES THEREOF AND EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR CAPITAL STOCK COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF OKLAHOMA). 5.16. WAIVER OF JURY TRIAL. AGENT AND PLEDGOR HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDINGS INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER IN TORT, CONTRACT, OR OTHERWISE) IN ANYWAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER. 5.17. AGENT'S RIGHT TO USE AGENTS. Agent may exercise its rights under this Agreement through an agent or other designee. 5.18. NO INTERFERENCE, COMPENSATION, OR EXPENSE. Agent may exercise its rights under this Agreement (a) without resistance or interference by Pledgor and (b) without payment of any rent, license fee, or compensation of any kind to Pledgor. 5.19. WAIVER OF SUBROGATION. Pledgor shall not assert, enforce, or otherwise exercise (a) any right of subrogation to any of the rights or Liens of Agent or any other Person against Pledgor, any of Pledgor's Subsidiaries, or any other Person on all or any part of the Obligations or any Capital Stock Collateral or other security, or (b) any right of recourse, reimbursement, contribution, indemnification, or similar right against Pledgor, any of Pledgor's Subsidiaries, or any other Person on all or any part of the Obligations or any Capital Stock Collateral or any security, and Pledgor hereby agrees not to exercise any and all of the foregoing rights and any right to participate in any collateral or other security given to Agent to secure payment of the Obligations, however any such rights arise, whether hereunder or any other Loan Document or by operation of law. If any amount shall be paid to Pledgor in violation of the immediately preceding sentence, such amount shall be deemed to have been paid to Pledgor for the benefit of, and held in trust for the benefit of, Agent and shall forthwith be paid to Agent to be credited and applied against the Obligations, whether matured or unmatured, in accordance with the terms of the Credit Agreement. The provisions of this Section 5.20 shall survive the termination of this Agreement, and any satisfaction and discharge of Pledgor and each other Person by virtue of any payment, court order, or law. 5.20. LOAN DOCUMENT. This Agreement is a Loan Document executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered, and applied in accordance with the terms and provisions thereof. 5.21. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. 5.22. ENTIRE AGREEMENT. THIS AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN PLEDGOR AND AGENT REGARDING THE SUBJECT MATTER HEREOF AND MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR ORAL, CONTEMPORANEOUS, OR SUBSEQUENT AGREEMENTS OF THE PARTIES HERETO. PLEDGOR ACKNOWLEDGES THAT THERE ARE NO CONTEMPORANEOUS ORAL AGREEMENTS BETWEEN PLEDGOR AND AGENT REGARDING THE SUBJECT MATTER HEREOF. ================================================================================ THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK ================================================================================ IN WITNESS WHEREOF, Pledgor has executed this Pledge Agreement as of the date first set forth above. PLEDGOR: ---------------------------------------- By: ------------------------------------- Its: ------------------------------------ Attest: --------------------------------- Name: -------------------------- Title: ------------------------- (CORPORATE SEAL) EX-10.79 6 EXHIBIT 10.79 EXHIBIT 10.79 GUARANTY THIS GUARANTY, dated as of April 12, 2000 (as amended, restated, and otherwise modified from time to time, this "Guaranty"), is made by ___________________________ ("Guarantor"), of the obligations of STAR Telecommunications, Inc. ("Debtor"), under the WorldCom Documents, as defined below, by and between Debtor and MCI WORLDCOM NETWORK SERVICES, INC., a Delaware corporation ("WorldCom"), as agent for itself and MCI WORLDCOM, INC., its affiliates and subsidiaries (collectively, the "WorldCom Entities"). W I T N E S S E T H: WHEREAS, WorldCom provides telecommunications services to Debtor, Guarantor and certain of their respective Subsidiaries pursuant to the Service Agreements; and WHEREAS, Debtor is in default to WorldCom for, INTER ALIA, failure to pay its obligations to WorldCom in a timely manner (the "Past Due Indebtedness"); and WHEREAS, Debtor and WorldCom have agreed to restructure certain of the Past Due Indebtedness due to WorldCom as of February 3, 2000, in the form of a Promissory Note in the principal amount of $56,017,698.87, of even date herewith (the "Note"), which has been executed and delivered by Debtor to WorldCom; and WHEREAS, Guarantor has determined that the execution, delivery, and performance of this Guaranty is necessary and convenient to the conduct, promotion, and attainment of Guarantor's business; and WHEREAS, Guarantor desires to induce WorldCom to accept delivery of the Note, extend the term of the obligations evidenced by the Note, and otherwise restructure the credit relationship between Debtor and WorldCom to facilitate the potential merger between Debtor and World Access, Inc., all of which are reasonably expected to benefit, directly or indirectly, Guarantor. NOW, THEREFORE, in consideration of the foregoing premises and in order to, INTER ALIA, induce WorldCom to agree to the financial restructuring with the Debtor, Guarantor hereby agrees as follows: 1. DEFINITIONS. Unless otherwise defined in this Agreement, terms used herein shall have the meanings set forth in the Workout Agreement, or Credit Agreement, in that order. Unless the context indicates otherwise or the terms are otherwise defined herein, definitions in the Uniform Commercial Code as enacted in the State of Oklahoma (the "UCC") apply to words and phrases in this Agreement. "Debtor" includes, without limitation, such Person, such Person's heirs, successors and assigns, such Person as a debtor-in-possession, and any receiver, trustee, liquidator, conservator, custodian, or similar party appointed for such Person or all or substantially all of its assets under any law. 2. GUARANTY. (a) Guarantor hereby unconditionally guarantees to WorldCom the punctual payment and performance of, and promises to pay and perform when due, whether at stated maturity, by acceleration, or otherwise, all of the Obligations, and agrees to pay any and all reasonable expenses (including reasonable attorneys' fees and expenses) incurred in enforcement or collection of all or any part thereof, whether such obligations, indebtedness, and liabilities are direct, indirect, fixed, contingent, joint, several, or joint and several, and in enforcement of any rights under this Guaranty. (b) Anything contained in this Guaranty to the contrary notwithstanding, the obligations of Guarantor hereunder shall be limited to a maximum aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the United States Code or any applicable provisions of comparable state law (collectively, the "Fraudulent Transfer Laws"), in each case after giving effect to all other liabilities of Guarantor, contingent or otherwise, that are relevant under the Fraudulent Transfer Laws (specifically excluding, however, any liabilities of Guarantor in respect of intercompany indebtedness to Debtor or other affiliates of Debtor to the extent that such indebtedness would be discharged in an amount equal to the amount paid by Guarantor hereunder) and after giving effect as assets, subject to Paragraph 5(a) hereof, to the value (as determined under the applicable provisions of the Fraudulent Transfer Laws) of any rights to subrogation or contribution of Guarantor pursuant to (i) applicable law or (ii) any agreement providing for an equitable allocation among Guarantor and other affiliates of Debtor of obligations arising under guaranties by such parties. 3. GUARANTY ABSOLUTE. This is a guaranty of payment and performance and not of collection. The liability of Guarantor hereunder shall be joint and several with any other guarantors of the Obligations guaranteed hereby. Guarantor guarantees that the Obligations will be paid strictly in accordance with the terms of the WorldCom Documents, regardless of any applicable law, regulation, or order now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of WorldCom with respect thereto. The obligations and liabilities of Guarantor hereunder are independent of the obligations of Debtor under the WorldCom Documents and any applicable law, to the extent that Guarantor's obligations to make such payments are not in violation of any applicable law. The liability of Guarantor under this Guaranty shall be absolute and unconditional irrespective of: (a) the taking or accepting of any other security or guaranty for any or all of the Obligations; (b) any increase, reduction, or payment in full at any time or from time to time of any part of the Obligations; (c) any lack of validity or enforceability of the any of the WorldCom Documents or any other agreement or instrument relating thereto, including but not limited to the 2 unenforceability of all or any part of the Obligations by reason of the fact that (i) the act of creating the Obligations, or any part thereof, is ULTRA VIRES, (ii) the officers creating same acted in excess of their authority, or (iii) for any other reason; (d) any lack of corporate power of Debtor or any other Person at any time liable for the payment of any or all of the Obligations; (e) any Debtor Relief Laws affecting the rights of creditors generally involving Debtor, Guarantor, or any other Person obligated on any of the Obligations; (f) any renewal, compromise, extension, acceleration, or other change in the time, manner, or place of payment of, or in any other term of, all or any of the Obligations; any adjustment, indulgence, forbearance, or compromise that may be granted or given by WorldCom to Debtor, Guarantor, or any Person at any time liable for the payment of any or all of the Obligations; or any other modification, amendment, or waiver of or any consent to departure from any of the WorldCom Documents or any other agreement or instrument relating thereto without notification of Guarantor (the right to such notification being herein specifically waived by Guarantor); (g) any exchange, release, sale, subordination, or non-perfection of any Collateral or Lien thereon or any lack of validity or enforceability or change in priority, destruction, reduction, or loss or impairment of value of any Collateral or Lien thereon; (h) any release or amendment or waiver of or consent to departure from any other guaranty for all or any of the Obligations; (i) the failure by WorldCom to make any demand upon or to bring any legal, equitable, or other action against Debtor or any other Person (including, without limitation, Guarantor), or the failure or delay by WorldCom to, or the manner in which WorldCom shall, proceed to exhaust rights against any direct or indirect security for the Obligations; (j) the existence of any claim, defense, set-off, or other rights which Debtor or Guarantor may have at any time against Debtor, WorldCom, or Guarantor, or any other Person, whether in connection with this Guaranty, the other WorldCom Documents, the transactions contemplated thereby, or any other transaction; (k) any failure of WorldCom to notify Guarantor of any renewal, extension, or assignment of the Obligations or any part thereof, or the release of any security, or of any other action taken or refrained from being taken by WorldCom, it being understood that WorldCom shall not be required to give Guarantor any notice of any kind under any circumstances whatsoever with respect to or in connection with the Obligations; (l) any payment by Debtor to WorldCom is held to constitute a preference under any Debtor Relief Law or if for any other reason WorldCom is required to refund such payment or pay the amount thereof to another Person; or 3 (m) any other circumstance which might otherwise constitute a defense available to, or a discharge of, Debtor, Guarantor, any other guarantor or other Person liable on the Obligations, including, without limitation, any defense by reason of any disability or other defense of Debtor, or the cessation from any cause whatsoever of the liability of Debtor, or any claim that Guarantor's obligations hereunder exceed or are more burdensome than those of Debtor. This Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Obligations is rescinded or must otherwise be returned by WorldCom or any other Person as a result of the insolvency, bankruptcy, or reorganization of Debtor or Guarantor or otherwise, all as though such payment had not been made. 4. WAIVER. Guarantor hereby waives: (a) any incapacity, lack of authority, death, or disability of Guarantor or any other Person or entity; (b) any failure of WorldCom to commence an action against Debtor or any other Person or entity (including, without limitation, other guarantors, if any), or to file or enforce a claim against the estate (either in administration, bankruptcy, or any other proceeding) of Debtor or any other Person or entity, whether or not demand is made upon WorldCom to file or enforce such claim; (c) any failure of WorldCom to give notice of the existence, creation, or incurring of any new or additional indebtedness or other obligation or of any action or nonaction on the part of any other Person or entity in connection with any of the WorldCom Documents or any obligation hereby guaranteed; (d) any failure on the part of WorldCom to ascertain the extent or nature of the Collateral or any insurance or other rights with respect thereto, or the liability of any party liable for the WorldCom Documents or the obligations evidenced or secured thereby, or any failure on the part of WorldCom to disclose to Guarantor any facts it may now or hereafter know regarding Debtor, the Collateral, or such other parties; (e) any lack of acceptance or notice of acceptance of this Guaranty by WorldCom; (f) any lack of presentment, demand, protest, or notice of demand, protest, dishonor or nonpayment with respect to any indebtedness or obligations under any of the WorldCom Documents; (g) any lack of notice of disposition or of manner of disposition of any Collateral; (h) any lack of other notices to which Guarantor might otherwise be entitled; (i) failure to properly record any document or any other lack of due diligence by WorldCom in creating or perfecting a security interest in or collection, protection, or realization upon any Collateral or in obtaining reimbursement or performance from any Person or entity now or hereafter liable for the WorldCom Documents or any obligation secured thereby; (j) any invalidity, irregularity, or unenforceability, in whole or in part, of any one or more of the WorldCom Documents; (k) the inaccuracy of any representation or other provision contained in any WorldCom Document; (l) any sale or assignment of the WorldCom Documents, in whole or in part; (m) any sale or assignment by Debtor of the Collateral, or any portion thereof, whether or not consented to by WorldCom; (n) any lack of commercial reasonableness in dealing with Collateral; (o) any deficiencies in the Collateral or any deficiency in the ability of WorldCom to collect or obtain performance from any Persons or entities now or hereafter liable for the payment or performance of any obligation hereby guaranteed; (p) an assertion or claim that the automatic stay provided by 11 U.S.C. ss. 362 (arising upon the voluntary or involuntarY bankruptcy proceeding of Debtor), or any other stay provided under any other Debtor Relief Law (whether statutory, common law, case law, or otherwise) of any jurisdiction whatsoever, now or hereafter in effect, which may be or become applicable, shall operate or be interpreted to stay, interdict, condition, reduce or inhibit the ability 4 of WorldCom to enforce any of its rights, whether now or hereafter acquired, which WorldCom may have against Guarantor or the Collateral; (q) any modifications of the WorldCom Documents or any of the Obligations by operation of law or by action of any court, whether pursuant to the Bankruptcy Reform Act of 1978, as amended, or any other Debtor Relief Law (whether statutory, common law, case law, or otherwise) of any jurisdiction whatsoever, now or hereafter in effect, or otherwise; (r) notices of any of the events described in Paragraph 3 hereof and of any other occurrence or matter with respect to any of the Obligations, this Guaranty, or any of the other of the WorldCom Documents (s) any right to assert against WorldCom as a counterclaim, set-off or cross-claim, any counterclaim, set-off, or claim which it may now or hereafter have against Debtor or other Person liable on the Obligations; (t) any right to participate in any collateral or any right benefitting WorldCom in respect of the Obligations; and (u) any right by which Guarantor might be entitled to require suit on an accrued right of action in respect of any of the Obligations or require suit against Debtor or any other Person, whether arising pursuant to any provision of statutory or case law or otherwise. 5. SUBROGATION AND SUBORDINATION. (a) Notwithstanding any reference to subrogation contained herein to the contrary, Guarantor hereby irrevocably waives any claim or other rights which it may have or hereafter acquire against Debtor that arise from the existence, payment, performance, or enforcement of Guarantor's obligations under this Guaranty, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution, indemnification, any right to participate in any claim or remedy of WorldCom against Debtor, or any other Person at any time liable for the payment of any or all of the Obligations, or any Collateral, which WorldCom now has or hereafter acquires, whether or not such claim, remedy or right arises in equity, or under contract, statutes or common law, including, without limitation, the right to take or receive from Debtor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim or other rights. If any amount shall be paid to Guarantor in violation of the immediately preceding sentence, such amount shall be deemed to have been paid to Guarantor for the benefit of, and held in trust for the benefit of, WorldCom, and shall forthwith be paid to WorldCom to be credited and applied against the Obligations, whether matured or unmatured, in accordance with the terms of the Note or the other WorldCom Documents. Guarantor acknowledges that it will receive direct and indirect benefits from the financing arrangements contemplated by the Note and the restructuring of the Debtor's obligations to WorldCom and that the waiver set forth in this Paragraph 5(a) is knowingly made in contemplation of such benefits. (b) If Guarantor becomes the holder of any indebtedness payable by Debtor, Guarantor hereby subordinates all indebtedness owing to it from Debtor to all indebtedness of Debtor to WorldCom and agrees that upon the occurrence and continuance of a Default or an Event of Default, it shall not accept any payment on the same until payment in full of the Obligations of Debtor under the Note, and all other WorldCom Documents and shall in no circumstance whatsoever attempt to set-off or reduce any obligations hereunder because of such indebtedness. If any amount shall nevertheless be paid to Guarantor by Debtor or on behalf of Debtor prior to payment in full of 5 the Obligations, such amount shall be held in trust for the benefit of WorldCom and shall forthwith be paid to WorldCom to be credited and applied to the Obligations, whether matured or unmatured. 6. INTENTIONALLY OMITTED. 7. COVENANTS. Guarantor covenants and agrees (a) punctually and properly to perform all of Guarantor's covenants and duties under any other of the WorldCom Documents; (b) from time to time promptly to furnish WorldCom with any information or writings which WorldCom may request concerning this Guaranty; and (c) promptly to notify WorldCom of any claim, action, or proceeding affecting this Guaranty. 8. AMENDMENTS, ETC. No amendment or waiver of any provision of this Guaranty nor consent to any departure by Guarantor therefrom shall in any event be effective unless the same shall be in writing and signed by Guarantor and WorldCom, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 9. NOTICES. All notices, communications, and materials to be given or delivered pursuant to this Agreement shall be given or delivered in the manner provided in, and shall be deemed to be effective in accordance with, the provisions of the Workout Agreement. For purposes of notices, communications, and materials to be given or delivered pursuant to this Agreement, addresses and facsimile numbers and the individuals or departments to whose attention the same shall be directed are, for WorldCom, as set forth in the Security Agreement and are, for Guarantor, as follows: If to Guarantor: -------------------------- -------------------------- -------------------------- Facsimile No.: ------------ Attention: ---------------- with a copy to: Riordan & McKinzie Twenty-Ninth Floor 300 South Grand Avenue Los Angeles, California 90071 Attention: Ronn S. Davids Facsimile No.: (213) 229-8550 or at such other addresses or facsimile numbers or to the attention of such other individuals or departments as Guarantor may hereafter specify in a notice to the other party specifically captioned "Notice of Change of Address." 10. NO WAIVER; REMEDIES. No failure on the part of WorldCom to exercise, and no delay in exercising, any right hereunder or under any of the WorldCom Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder or under any of the 6 WorldCom Documents preclude any other or further exercise thereof or the exercise of any other right. WorldCom shall not be required to (a) prosecute collection or seek to enforce or resort to any remedies against Debtor or any other Person liable on any of the Obligations, (b) join Debtor or any other Person liable on any of the Obligations in any action in which WorldCom prosecutes collection or seeks to enforce or resort to any remedies against Debtor or other Person liable on any of the Obligations, or (c) seek to enforce or resort to any remedies with respect to any Liens granted to (or benefitting, directly or indirectly) WorldCom by Debtor or any other Person liable on any of the Obligations. WorldCom shall not have any obligation to protect, secure, or insure any of the Collateral or any of the Liens or the properties or interests in properties subject thereto. The remedies herein provided are cumulative and not exclusive of any remedies provided by applicable law. 11. RIGHT OF SET OFF. Upon the occurrence and during the continuance of any Event of Default, WorldCom is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by WorldCom to or for the credit or the account of Guarantor against any and all of the obligations of Guarantor now or hereafter existing under this Guaranty, irrespective of whether or not WorldCom shall have made any demand under this Guaranty. The rights of WorldCom under this Paragraph 11 are in addition to other rights and remedies (including, without limitation, other rights of set off) which WorldCom or any other WorldCom Entity may have. 12. LIENS. Guarantor agrees that WorldCom, in its discretion, without notice or demand to or upon Guarantor and without affecting either the liability of Guarantor, Debtor or any other Person liable on any of the Obligations under, or the Liens and security interests created by, the Note, or the other WorldCom Documents, or this Guaranty, or any security interest or other Lien, may foreclose any deed of trust or mortgage or similar Lien covering interests in real or personal property, and the interests in real or personal property secured thereby, by nonjudicial sale; and Guarantor hereby waives any defense to the recovery by WorldCom hereunder against Debtor, Guarantor, or any collateral of any deficiency after a nonjudicial sale, and Guarantor expressly waives any defense or benefits that may be derived from any statute or case law in effect in any jurisdiction. Without limiting the foregoing, Guarantor waives any defense arising out of any such nonjudicial sale even though such sale operates to impair or extinguish any right of reimbursement or subrogation or any other right or remedy of Guarantor against Debtor or any other Person or any Collateral or any other collateral. Guarantor hereby agrees that Guarantor shall be liable, subject to the limitations of Paragraph 2(b) hereof, for any part of the Obligations remaining unpaid after any foreclosure. 13. CONTINUING GUARANTY; TRANSFER OF NOTE. This Guaranty is an irrevocable continuing guaranty of payment and shall (a) remain in full force and effect until payment in full of all of the Obligations and all other amounts payable under this Guaranty, (b) be binding upon Guarantor, its successors and assigns, and (c) inure to the benefit of and be enforceable by WorldCom and its successors, transferees, and assigns. Without limiting the generality of the foregoing clause, (c) WorldCom may assign or otherwise transfer its rights under the any of the WorldCom Documents or any interest therein to any other Person, and such other Person shall thereupon become vested with 7 all the rights or any interest therein, as appropriate, in respect thereof granted to WorldCom herein or otherwise. 14. INFORMATION. Guarantor acknowledges and agrees that it shall have the sole responsibility for obtaining from Debtor such information concerning Debtor's financial condition or business operations as Guarantor may require and that WorldCom has no duty at any time to disclose to Guarantor any information relating to the business operations or financial conditions of Debtor. 15. GOVERNING LAW; SERVICE OF PROCESS. (a) THIS GUARANTY SHALL BE DEEMED A CONTRACT MADE UNDER THE LAWS OF THE STATE OF OKLAHOMA AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF OKLAHOMA, EXCEPT TO THE EXTENT THAT FEDERAL LAWS MAY GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT, AND INTERPRETATION OF ALL OR ANY PART OF THIS GUARANTY. GUARANTOR AGREES THAT THE FEDERAL AND STATE COURTS LOCATED IN TULSA COUNTY, OKLAHOMA, WILL HAVE JURISDICTION OVER ALL PROCEEDINGS IN CONNECTION HEREWITH. (b) GUARANTOR HEREBY WAIVES PERSONAL SERVICE OF ANY LEGAL PROCESS UPON IT. IN ADDITION, GUARANTOR AGREES THAT SERVICE OF PROCESS MAY BE MADE UPON IT BY REGISTERED MAIL (RETURN RECEIPT REQUESTED) DIRECTED TO GUARANTOR AT ITS ADDRESS DESIGNATED FOR NOTICE UNDER THIS GUARANTY AND THAT SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED UPON RECEIPT BY GUARANTOR. NOTHING IN THIS PARAGRAPH 15 SHALL AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. 16. WAIVER OF JURY TRIAL. TO THE MAXIMUM EXTENT PERMITTED BY LAW, GUARANTOR AND WORLDCOM HEREBY WAIVE ANY RIGHT THAT EITHER MAY HAVE TO A TRIAL BY JURY OF ANY DISPUTE (WHETHER A CLAIM IN TORT, CONTRACT, EQUITY, OR OTHERWISE) ARISING UNDER OR RELATING TO THIS GUARANTY, THE OTHER WORLDCOM DOCUMENTS, OR ANY RELATED MATTERS AND AGREE THAT ANY SUCH DISPUTE SHALL BE TRIED BEFORE A JUDGE SITTING WITHOUT A JURY. 17. WAIVER OF RIGHTS. Guarantor hereby waives and renounces, to the fullest extent permitted by law, all rights to the benefits of any statute of limitations and any moratorium, reinstatement, marshaling, forbearance, valuation, stay, extension, redemption, appraisement, exemption and homestead law or principle of law now or hereafter provided by the Constitution and laws of the United States of America and of each state thereof, both as to itself and in and to all of 8 its property, real and personal, against the enforcement and collection of the Obligations evidenced by this Guaranty. 18. LIMIT OF VALIDITY. If from any circumstances whatsoever fulfillment of any provisions of this Guaranty, at the time performance of such provision shall be due, shall involve transcending the limit of validity presently prescribed by any applicable usury statute or any other applicable law, with regard to obligations of like character and amount, then IPSO FACTO the obligation to be fulfilled shall be reduced to the limit of such validity, so that in no event shall any exaction be possible under this Guaranty that is in excess of the current limit of such validity, but such obligation shall be fulfilled to the limit of such validity. The provisions of this section shall control every other provision of this Guaranty. 19. GUARANTOR INSOLVENCY. Should Guarantor become insolvent, fail to pay its debts generally as they become due, voluntarily seek, consent to, or acquiesce in the benefits of any Debtor Relief Laws, or become a party to or be made the subject of any proceeding provided for by any Debtor Relief Laws (other than as a creditor or claimant) that could suspend or otherwise adversely affect the rights of WorldCom granted hereunder, then the obligations of Guarantor under this Guaranty shall be, as between Guarantor and WorldCom, fully matured, due, and payable obligations of Guarantor to WorldCom (without regard to whether Debtor is then in default under any of the WorldCom Documents or whether any of the Obligations may then be due and owing by Debtor to WorldCom), payable in full by Guarantor to WorldCom upon demand, which shall be the estimated amount owing in respect of the contingent claim created hereunder. 20. ENTIRE AGREEMENT. THIS GUARANTY REPRESENTS THE FINAL AGREEMENT BETWEEN GUARANTOR AND WORLDCOM REGARDING THE GUARANTYING OF THE OBLIGATIONS AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS WITH RESPECT THERETO. GUARANTOR ACKNOWLEDGES THAT THERE ARE NO CONTEMPORANEOUS ORAL AGREEMENTS WITH RESPECT TO THE SUBJECT MATTER HEREOF. 21. MISCELLANEOUS. Time is of the essence with respect to all obligations of Guarantor hereunder. This Guaranty shall in no event be impaired by any change which may arise by reason of the dissolution of Debtor or Guarantor. Guarantor expressly waives notice of transfer or assignment of this Guaranty and acknowledges that the failure by WorldCom to give any such notice shall not affect the liabilities of Guarantor hereunder. Notwithstanding the foregoing, Guarantor shall not assign any of its rights or obligations under this Guaranty. All personal pronouns used herein, whether used in the masculine, feminine, or neuter gender, shall include all other genders; and the singular shall include the plural and vice versa. Titles of articles and sections are for convenience only and in no way define, limit, amplify, or describe the scope or intent of any provisions hereof. If Guarantor is a partnership, all of the provisions hereof referring to Guarantor shall be construed to apply to each of the general partners of Guarantor and of any and all further tiers of general partners in the structure of Guarantor. 9. IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed and delivered by its respective officers thereunto duly authorized as of the date first above written. GUARANTOR: BY: --------------------------- By: ----------------------- Its: ---------------------- Attest: ----------------------- Name: ------------------ Title: ----------------- (CORPORATE SEAL) 10 EX-27 7 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONDENSED CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 14,170 1,316 205,960 41,025 0 227,011 370,716 60,982 741,884 387,756 61,410 0 0 58 270,010 741,884 255,105 255,105 0 272,219 (10,696) 6,708 2,924 (9,153) (2,629) 0 0 0 0 (6,524) (.11) (.11)
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