SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
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 0-27580
---------
AVTEL COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
---------
DELAWARE 87-0378021
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
501 BATH STREET
SANTA BARBARA, CALIFORNIA 93101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(805) 884-6300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
As of October 22, 1998, there were 9,541,063 shares of the Registrant's Common
Stock, par value $0.01 per share, issued and outstanding, excluding treasury
stock.
1
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AVTEL COMMUNICATIONS, INC.
QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30,
1998 (Unaudited) and December 31, 1997 .................. 3
Consolidated Statements of Operations for the
Three Month and Nine Month Periods Ended September 30,
1998 and 1997 (Unaudited) ...................... 4
Consolidated Statements of Cash Flows for the
Nine Month Periods Ended September 30, 1998 and 1997
(Unaudited) ....................................... 5
Notes to Consolidated Financial Statements
(Unaudited) ............................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..................... 9
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ................. 17
Item 5. Other Information ......................................... 17
Item 6. Exhibits and Reports on Form 8-K .......................... 17
Signature Page ............................................................ 18
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................... $ 2,520,357 4,807,441
Accounts receivable, net .................... 5,559,788 6,961,953
Due from affiliates ......................... 515,314 2,127,771
Federal and state income tax receivable ..... 97,190 598,970
Other current assets ........................ 1,170,727 861,950
------------ ------------
Total current assets .................. 9,863,376 15,358,085
------------ ------------
Property and equipment, net ................... 1,563,961 1,791,682
Other assets, net ............................. 1,470,088 1,575,083
------------ ------------
Total assets ........................... $ 12,897,425 18,724,850
============ ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and other
accrued expenses ......................... $ 1,535,231 1,546,762
Accrued network services costs .............. 3,757,901 4,319,198
Sales and excise tax payable ................ 1,081,565 736,012
Due to affiliates ........................... 1,627,102 2,719,417
Other current liabilities ................... 590,519 466,039
------------ ------------
Total current liabilities .............. 8,592,318 9,787,428
------------ ------------
Deferred income taxes ......................... 498,712 498,712
Common stock subject to put option ............ 217,114 578,880
Other liabilities ............................. 8,149 50,782
------------ ------------
Total liabilities ...................... 9,316,293 10,915,802
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, authorized 1,000,000
shares, $0.01 par value, including
Series A convertible preferred stock,
authorized 250,000 shares, $0.01 par
value, cumulative as to 8% dividends,
147,700 and 207,700 shares issued and
outstanding September 30, 1998 and
December 31, 1997 respectively
(Liquidation preference of $727,664
and $910,800 at September 30, 1998 and
December 31, 1997 respectively,
including dividends accrued) ............... 1,477 2,077
Common stock, authorized 20,000,000
shares, $0.01 par value, 11,726,852
and 11,437,056 shares issued at
September 30, 1998 and December 31, 1997
respectively, including 144,743 and
385,920 shares subject to put options
on September 30, 1998 and December 31,
1997 respectively ........................... 115,821 110,511
Additional paid in capital .................... 17,902,105 17,138,739
Retained earnings (accumulated deficit) ....... (14,416,255) (9,422,279)
Treasury stock, 2,201,601 and 1,999,997
shares at September 30, 1998 and
December 31, 1997 respectively .............. (22,016) (20,000)
------------ ------------
Total stockholders' equity ............. 3,581,132 7,809,048
------------ ------------
Commitments and contingencies ................. -- --
------------ ------------
Total liabilities and stockholder's equity $ 12,897,425 18,724,850
============ ============
See accompanying Notes to Consolidated Financial Statements.
3
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AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues .................... $ 10,589,137 12,403,290 34,328,842 39,244,448
Cost of revenues ............ 7,252,847 8,911,113 24,896,860 27,304,366
------------ ------------ ------------ ------------
Gross margin ................ 3,336,290 3,492,177 9,431,982 11,940,082
Operating expenses
Selling, general & admin .. 4,297,879 3,725,137 13,682,911 11,622,850
Depreciation & amortization 261,449 150,837 805,687 515,037
------------ ------------ ------------ ------------
Total operating expenses 4,559,328 3,875,974 14,488,598 12,137,887
------------ ------------ ------------ ------------
Operating loss .............. (1,223,038) (383,797) (5,056,616) (197,805)
Interest expense ............ (6,367) (2,140) (35,669) (9,026)
Other income, net ........... 20,866 99,577 98,309 219,099
------------ ------------ ------------ ------------
Income(loss) before income .. (1,208,539) (286,360) (4,993,976) 12,268
Income tax expense (benefit) 0 (120,274) 0 5,152
------------ ------------ ------------ ------------
Net income (loss) ........... $ (1,208,539) (166,086) (4,993,976) 7,116
============ ============ ============ ============
Net loss per share
- basic and diluted ...... $ (0.13) (0.02)* (0.53) (0.01)*
============ ============ ============ ============
Weighted average number of
common shares .............. 9,526,410 9,366,667* 9,518,132 9,366,522*
============ ============ ============ ============
</TABLE>
* The 1997 per share and share amounts are presented on a pro forma basis.
(Note 7)
See accompanying Notes to Consolidated Financial Statements.
4
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AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months
Ended September 30,
--------------------------
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................. $(4,993,976) 7,116
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization ............ 805,687 515,037
Amortization of advanced commissions ..... 220,928 1,130,762
Provision for bad debts .................. 2,128,608 1,220,265
Loss on disposition of assets ......... 4,232 0
Stock compensation earned ................ 674,169 0
Changes in assets and liabilities:
Accounts receivable ...................... (678,393) 1,433,859
Due from affiliates ...................... (114,144) (104,061)
Other current assets ..................... 445,340 (351,479)
Accounts payable and accrued liabilities . (265,724) (1,700,141)
Due to affiliate ......................... (1,092,315) 213,167
----------- -----------
Net cash provided by (used in)
operating activities ..................... (2,865,588) 2,364,525
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............. (282,114) (158,412)
Loans to affiliates ............................ 0 (2,000,000)
Loan to Remote Lojix/PCSI ...................... (500,000) 0
Payments on loans to affiliates ................ 1,726,601 145,567
Cash received in acquisition ................... 25,917 211,172
Other, net ..................................... (6,850) 2,748
----------- -----------
Net cash provided by (used in)
investing activities ..................... 963,554 (1,798,925)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on capital leases ........... (43,926) 0
Issuance of common stock for exercise of
options .................................... 93,876 0
Purchase of notes receivable ................... (435,000) 0
----------- -----------
Net cash used in financing activities (385,050) 0
----------- -----------
Net increase (decrease) in cash and cash
equivalents .................................. (2,287,084) 565,600
Cash and cash equivalents at beginning of period . 4,807,441 4,622,395
----------- -----------
Cash and cash equivalents at end of period ....... $ 2,520,357 5,187,995
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
5
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AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998 and 1997
(1) Basis of Presentation
---------------------
The unaudited consolidated financial statements of AvTel Communications,
Inc. and Subsidiaries (the "Company") for the three month and nine month periods
ended September 30, 1998 and 1997 have been prepared in accordance with
generally accepted accounting principles for interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 1997. All significant intercompany balances and transactions
have been eliminated in consolidation. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the interim financial information have been
included. The results of operations for any interim period are not necessarily
indicative of the results of operations for a full year.
(2) Earnings Per Common Share
-------------------------
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"), in the fourth quarter of
1997 which required companies to present basic earnings per share and diluted
earnings per share. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock. The Company has restated its
September 30, 1997 earnings per share calculations to reflect the adoption of
SFAS 128.
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net Income (Loss) (1,208,539) (166,086) (4,993,976) 7,116
Less preferred dividends 11,816 20,000 35,448 60,000
---------- ---------- ---------- ----------
Income (Loss) applicable
to common shareholders (1,220,355) (186,086) (5,029,424) (52,884)
========== ========== ========== ==========
Weighted average number of
common shares 9,526,410 9,366,667* 9,518,132 9,366,522*
========== ========== ========== ==========
Net income (loss) per common
share - basic and diluted (0.13) (0.02)* (0.53) (0.01)*
========== ========== ========== ==========
* The 1997 amounts are presented on a pro forma basis. (see Note 7)
(3) Stock Compensation
------------------
On January 1, 1998 the Company granted options to purchase 75,000 of the
Company's common shares at an exercise price of $1.50 per share. On March 1,
1998 the Company granted options to purchase 100,000 of the Company's common
shares at an exercise price of $1.50 per share. These options become exercisable
based on qualified billings of long distance customers generated by the
optionees from the respective dates of grant through December 31, 2000.
On February 24, 1998 the Company's Board of Directors approved the grant of
a total of 120,000 shares of restricted common stock to two board members
pursuant to the Company's 1997 Stock Incentive Plan. The restricted stock
provisions will lapse over four years or fully lapse in the event of death or
permanent disability of the grantees.
6
<PAGE>
On February 26, 1998 the Company granted incentive stock options to purchase
11,250 of the Company's common shares at an exercise price of $6.00 per share.
The options were granted pursuant to the Company's 1997 Stock Incentive Plan and
vest at the rate of 50% per year over two years.
On May 22, 1998 the Company registered 1,292,000 shares of its common stock
with the Securities and Exchange Commission with respect to stock options under
The New BestConnections, Inc. Amended and Restated 1997 Stock Option Plan.
On May 28, 1998 the Shareholder's approved the 1998 Stock Incentive Plan
which provides for the issuance of up to 1,500,000 shares of AvTel common stock
pursuant to stock options and issuances of restricted stock, as well as for the
grant of stock appreciation rights. On September 30, 1998 the Company registered
the 1,500,000 shares with the Securities and Exchange Commission.
On August 10, 1998 the Company relinquished its rights to repurchase common
stock shares issuable under option agreements awarded to individuals in 1997 by
New BestConnections, Inc., a subsidiary of the Company (the "SOES Options"). In
accordance with the terms of such option agreements, as a result of such
relinquishment, the SOES Options will terminate on December 9, 1998, to the
extent they have not been exercised by that date. Compensation expense of
$298,000 was recognized in 1998 and $499,000 in 1997 for the SOES Options. As of
September 30, 1998, none of these options had been exercised. As of October 31,
1998, 5,000 options were exercised by cash purchases and 32,500 options were
exercised through a cashless exercise offer whereas the Company agreed to
purchase up to one-half of the shares issuable at a price of $3.00 per share.
Pursuant to the Company's 1998 Stock Incentive Plan, in September 1998 the
Company granted incentive stock options to purchase the Company's common shares
as follows:
10,000 shares exercisable at a price of $2.75 per share, vesting over
three years at a rate of 33 1/3% per year.
20,000 shares exercisable at a price of $2.75 per share, vesting over
two years at a rate of 50% per year.
50,000 shares exercisable at a price of $2.75 per share, vesting over
four years at a rate of 25% per year.
2,000 shares exercisable at a price of $3.00 per share, vesting over
four years at a rate of 25% per year.
15,000 shares exercisable at a price of $2.375 per share, vesting over
four years at a rate of 25% per year.
On September 14, 1998 the Company granted nonstatutory stock options to
purchase 50,000 shares at a exercise price of the lesser of $6.00 or the fair
market value of the common stock on October 1, 1998, vesting over four years at
a rate of 25% per year
On September 25, 1998 the Company granted 20,000 shares of restricted stock
under the 1998 Stock Incentive Plan that vest based on the net revenues of a
segment of the Company as of December 31, 1999.
(4) Comprehensive Income (Loss)
---------------------------
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," ("SFAS No. 130") was issued. SFAS No. 130
establishes standards for reporting and displaying comprehensive income and its
components in an annual financial statement that is displayed with the same
prominence as other annual financial statements. Reclassification of financial
statements for earlier periods, provided for comparative purposes, is required.
The statement also requires the accumulated balance of other comprehensive
income to be displayed separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial position. SFAS No.
130 is effective for fiscal years beginning after December 15, 1997.
Comprehensive income (loss) for the three month and nine month periods ended
September 30, 1998 and 1997 is equal to net income (loss) reported for such
periods.
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(5) Conversion of Preferred Stock
-----------------------------
On January 22, 1998, and February 26, 1998, a total of 60,000 shares of the
Company's preferred stock was converted to 60,000 shares of the Company's common
stock.
(6) Acquisition
-----------
On September 25, 1998 the Company acquired all of the capital stock of
Digital Media International, Inc. ("DMI"). The Company exchanged 30,000 shares
of its common stock valued at $71,250 for all the outstanding common stock of
DMI. The transaction was accounted for under the purchase method of accounting.
The following assets were acquired, liabilities assumed and common stock issued:
Current assets $ 50,105
Fixed assets 44,313
Goodwill 117,169
Accounts payable and accrued expenses (166,254)
Common stock issued (71,250)
--------
Cash acquired $ 25,917
========
Pro forma results of operations are not materially different from historical
results.
(7) Pro Forma Results of Operations
-------------------------------
Pro forma results of operations of the Company as if the reverse
acquisition of AvTel by Matrix, and the acquisitions of WestNet Communications,
Inc. and BestConnections, Inc. had occurred as of January 1, 1997, are as
follows:
Three Months Nine Months
Ended September 30, 1997 Ended September 30, 1997
Revenue $13,133,122 41,444,847
Net loss (512,285) (9,858,423)
Pro forma net loss
per share - basic and dilute (0.05) (1.05)
(8) Note Receivable
---------------
On July 22, 1998 the Company, as part of the consideration for the
acquisition of a company, loaned Remote Lojix/PCSI, Inc. ("RLI") $500,000,
evidenced by a promissory note. The interest rate is at 15% per annum with a
maturity date of November 1, 1998. The note is secured by a Security Agreement
granting the Company interest in all assets of RLI and a guaranty executed by
the majority shareholder and President of RLI. The Company and RLI are currently
discussing an extension of the Note.
(9) Related Party Transactions
--------------------------
On July 2, 1998 the Company purchased notes receivable from one of the
Company's significant shareholders at a discount. The notes receivable evidenced
loans made by the significant shareholder in 1996 to Matrix employees to finance
their purchases of Matrix common stock (which was subsequently converted to
shares of the Company's common stock). Each of the employees who delivered a
note receivable also entered into a Buyback Agreement dated October 6, 1996 (the
"Buyback Agreement"), pursuant to which the Company is entitled to repurchase a
portion of such employee's stock upon the termination of his or her employment.
The original notes, plus accrued interest, at the date of purchase by the
Company evidenced a total amount of $573,000. The Company purchased these notes
for $435,000.
On July 6, 1998 the Company repurchased 23,170 shares of its common stock
subject to the Buyback Agreement from a terminated employee. The Company
exercised its right to purchase 21,443 of such shares at a price of $1.51 per
share, and the former employee used the $32,379 in proceeds to reduce the amount
of his note. The Company repurchased an additional 1,727 shares in satisfaction
of the remaining balance of $12,088 on the former employee's note.
On July 11, 1998 the Company repurchased 178,434 shares of its common stock
subject to the Buyback Agreement from a terminated employee. The Company
exercised its right to purchase 171,547 of such shares at a price of $1.70 per
8
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share, and the former employee used the $292,134 in proceeds to reduce the
amount of his note. The Company repurchased an additional 6,887 shares in
satisfaction of the remaining balance of $63,630 on the former employee's note.
(10) Contingencies
-------------
The Company is a party to legal proceedings incidental to its business
which, in the opinion of management, are not expected to have a material adverse
effect on the Company's consolidated financial position or operating results.
(11) Subsequent Events
-----------------
The Company entered into a Loan and Security Agreement with Coast Business
Credit, a division of Southern Pacific Bank ("Coast"), a California corporation
on October 2, 1998. It provides for an asset based revolving credit line with a
floating interest rate equal to prime plus 2%. The credit limit is the lesser of
$7,500,000 or a percentage of the amount of the Company's eligible receivables
and other items. As of the date of the agreement the percentage of the amount of
eligible receivables was 75%. The agreement calls for a minimum borrowing of
$1,500,000 with a two year term.
On August 18, 1998, the Company entered into an Amended Stock Purchase
Agreement with the shareholders of Remote Lojix/PCSI, Inc. ("RLI") to acquire
100% of RLI's stock. The transaction will be accounted for under the purchase
method of accounting. The agreement provides that AvTel common stock will be
issued for all the then outstanding shares of RLI, and certain earnout shares
will be issued contingent upon future earnings of RLI. The parties are currently
negotiating the satisfaction of certain of the conditions to closing. The
Company expects the transaction will be completed in the fourth quarter of 1998.
Subsequent to September 30, 1998, the Company entered into a Letter of
Intent to sell the assets of The Friendly Net, LLC, a wholly subsidiary of the
Company. The Company expects the transaction will be completed in the fourth
quarter of 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS DOCUMENT THAT
ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, INCLUDING WITHOUT LIMITATION STATEMENTS REGARDING THE
COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE.
ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ARE BASED ON
INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES
NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. ACTUAL EVENTS AND
OUTCOMES COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF MANY FACTORS, INCLUDING THOSE DESCRIBED HEREIN AND
THOSE SET FORTH IN THE RISK FACTORS DESCRIBED IN ITEM 1 OF THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL
14, 1998.
The following discussion and analysis should be read in connection with the
unaudited consolidated financial statements for the three month and nine month
periods ended September 30, 1998 and 1997 of the Registrant and related notes
included elsewhere in this report and the consolidated financial statements and
related management discussion and analysis included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997.
Overview
AvTel Communications, Inc. (the "Company," the "Registrant" or "AvTel")
was formerly a Utah corporation. On December 1, 1997, the Company merged with
and into its wholly-owned Delaware subsidiary, thus effecting the Company's
reincorporation in Delaware (the "Reincorporation Merger"). The conversion of
the Company's stock in the Reincorporation Merger resulted in an effective
one-for-four reverse stock split, which was effective on December 1, 1997 (the
"Reverse Stock Split"). All share and option numbers and prices set forth herein
have been adjusted to reflect the Reverse Stock Split.
9
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On December 1, 1997, the Company acquired Matrix Telecom, Inc., a
privately-held Texas corporation ("Matrix Telecom") by means of a share for
share exchange (the "Share Exchange"). Matrix Telecom was a provider of long
distance telephone services and subsequently provides a bundled service
including internet. The Reincorporation Merger and the Reverse Stock Split were
conditions to the closing of the Share Exchange.
The Share Exchange was effected pursuant to a Stock Exchange Agreement
dated April 29, 1997, and subsequently amended, pursuant to which the persons
and entities who owned the issued and outstanding common stock of Matrix Telecom
("Matrix Telecom Stockholders") transferred to AvTel all of their Matrix Telecom
stock and, in exchange, AvTel issued to the Matrix Telecom Stockholders shares
of AvTel's Common Stock. Following the Share Exchange, the former Matrix Telecom
Stockholders owned approximately 81% of the issued and outstanding Common Stock
of the Company.
For accounting purposes, the Share Exchange was treated as a reverse
acquisition of AvTel by Matrix Telecom. AvTel was the legal acquirer and
accordingly, the Share Exchange was effected by the issuance of AvTel Common
Stock in exchange for all of the common stock then outstanding of Matrix
Telecom. In addition, holders of Matrix Telecom outstanding stock options
received non-qualified stock options of AvTel. The following discussion of
results of operations reflects the operations of Matrix Telecom prior to
December 1, 1997 and reflects the combined operations of AvTel and Matrix
Telecom subsequent to December 1, 1997. Accordingly, references to the Company
refer to operations of Matrix Telecom prior to the Share Exchange and the
combined operations of AvTel and Matrix Telecom subsequent to the Share
Exchange. The reverse acquisition of AvTel by Matrix Telecom was accounted for
using the purchase method of accounting.
Results of Operations
Consolidated Statements of Operations as a Percent of Revenue
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES ........................... 100.00% 100.00% 100.00% 100.00%
COST OF REVENUES ................... 68.49% 71.84% 72.52% 69.58%
-------- -------- ------- -------
GROSS MARGIN ....................... 31.51% 28.16% 27.48% 30.42%
Operating expenses
Selling, general and administrative 40.59% 30.03% 39.86% 29.62%
Depreciation and amortization .... 2.47% 1.22% 2.35% 1.31%
-------- -------- ------- -------
Total operating expenses ...... 43.06% 31.25% 42.21% 30.93%
------- -------- ------- -------
OPERATING INCOME (LOSS) ............ (11.55%) (3.09%) (14.73%) (0.50%)
Interest expense ................... (0.06%) (0.02%) (0.10%) (0.02%)
Other income, net .................. 0.20% 0.80% 0.29% 0.56%
-------- -------- ------- -------
Income (loss) before income taxes .. (11.41%) (2.31%) (14.55%) 0.03%
Income tax expense (benefit) ....... 0.00% (0.97%) 0.00% 0.01%
-------- -------- ------- -------
NET INCOME (LOSS) .................. (11.41%) (1.34%) (14.55%) 0.02%
======== ======== ======= =======
</TABLE>
Three Months Ended September 30,1998 compared with Three Months Ended September
30, 1997
Revenues
Revenues for the three months ended September 30, 1998 were $10.6 million,
a decline of 14.6% or $1.8 million from $12.4 million for the three months ended
September 30, 1997.
10
<PAGE>
The focus of the Company is to be a fully integrated provider of
telecommunications and data networking services. The merger of AvTel
Communications and Matrix Telecom, effective December 1, 1997, provided the
Company with substantial growth opportunities. By acquiring Matrix, the Company
integrated a large voice customer base supported by a sophisticated back office
and information technology group into AvTel's highly skilled data networking
services group which provided broadband network services of voice, data and
video to the mid-size corporate customers.
The primary source of revenues of the Company during the period continued
to be voice distribution channels of the Company's wholly owned subsidiary,
Matrix Telecom. Factors similar in nature to those affecting all resellers of
long distance have continued to effect a decline in revenues for the three
months ended September 30, 1998 compared to the three months ended September 30,
1997. Due to pricing pressures within the industry and the competitive
reductions by the first tier carriers, the Company similarly continued to reduce
retail pricing of long distance products to meet consumer expectations.
Decreases in revenues were additionally affected by a continued attrition
of a maturing customer base primarily in the areas of telemarketing and direct
mail which in the opinion of management was not cost effective. Even though the
Company's volume discounts are passed through to the long distance end user,
higher customer attrition rates have continued. The effects of competitive lower
pricing as well as the decline of the customer base is expected to lessen
dramatically as pricing within the industry slows and reaches its floor, and the
Company increases its focus on third party distributors. Management additionally
anticipates that the revenue decrease will stabilize as the continued
integration of and revenue from the corporate data networking and internet
services of the Company continues to expand and grow beyond the long distance
portion.
Decreases in revenues were anticipated by the Company beginning in the
first quarter of 1998. At that time, the new management team chose to
discontinue and reduce certain unprofitable distribution channels of its
subsidiary. Revenue from these channels has decreased 41.4% or $6.3 million for
the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. Management continued in third quarter of 1998 to reduce the
Company's dependence on low margin, high churn segments and to increase its
resources in the business markets with higher average billing and retention
rates, niche ethnic consumer markets, small office-home office ("SOHO")
distributors and agents, and internet service providers. With emphasis on
maintaining and increasing certain segments, revenues in these areas have
increased 48.9% or $4.0 million for the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997.
Data networking needs of the corporate customer have continued to drive and
change the telecom industry. The future focus of the Company continues to move
toward incorporating voice and data networking solutions into the construction
of corporate Intranets and Wide Area Networks which will decrease its dependence
on traditional long distance services of the residential consumer. The primary
focus of the Company has been to move quickly and efficiently towards becoming a
viable resource to the corporate world having few options in this new wave of
technology. Excluding consumer voice traffic, the Company's revenues generated
by the data needs of its customers as a percentage of total revenues increased
18.6% or $160,965 for the third quarter of 1998 compared to the first quarter of
1998. This percentage is expected to increase as the Company completes its
continued integration of its corporate broadband network and its growth counters
the decline of the long distance business.
Gross Margin
Gross margin decreased $155,887 to $3.3 million for the three months ended
September 30, 1998 from $3.5 million for the three months ended September 30,
1997. As a percentage of revenues, gross margin increased by 3.4 percentage
points to 31.51% for the three months ended September 30, 1998 from 28.16% for
the three months ended September 30, 1997. The increase in gross margin as a
percentage of revenues primarily resulted from decreases of network and leased
facilities that outweighed increases in the bad debt and fraud expenses, all of
which are included in cost of sales.
Network cost as a percentage of revenues decreased by 7.5 percentage points
to 60.0% for the three months ended September 30, 1998 from 67.4% for three
months ended September 30, 1997. The primary factor that effected this decrease
as a percentage was significantly lower rates, which went into effect July of
1998, negotiated with one of the Company's major underlying carriers. Network
cost as a percentage of revenue decreased by 7.3 percentage points to 60.0% for
11
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the three months ended September 30, 1998 from 67.3% for the three months ended
June 30, 1998.
Bad debt expense as a percentage of revenues increased by 2.4 percentage
points to 6.2% for the three months ended September 30, 1998 compared to 3.8%
for the three months ended September 30, 1997. The increased bad debt expense
primarily resulted from decreased collection percentages from the Local Exchange
Carriers ("LECs") in certain geographical regions. The majority of the Company's
revenues are billed by the LECs and the Company's bad debt expense was affected
by the lower collection percentages of the LECs. Collection policies and
aggressiveness in collection procedures among the LECs vary. A significant
amount of new sales growth was experienced in a particular geographic location
in which the LECs collection percentages were considerably lower, and the
Company's bad debt expense as a percentage of revenues increased. The majority
of new products being sold by the Company have been designed as direct billed or
electronic internet billed products, and the collection percentages experienced
by the Company's internal collection staff are significantly higher than those
of the LECs. Therefore, as the number of customers being billed by the LEC
decreases, and the Company implements its policy of moving away from the LEC
billing services, bad debt expense as a percentage of revenue is anticipated to
decrease. As of September 30, 1998, 48% of the Company's revenue was direct
billed compared to 20% as of September 30, 1997.
Fraud expense as a percentage of revenues increased by 1.7 percentage
points to 2.3% for the three months ended September 30, 1998 compared to 0.6%
for the three months ended September 30, 1997. This increase is primarily
associated with travel card fraud. During the third quarter the Company
restricted the issuance of travel cards with international calling ability. In
addition, the Company's major international carrier provided the Company greater
flexibility to monitor and suspend travel card activity suspected as fraudulent.
The Company expects that this will help limit fraud expense in future quarters.
Selling, General, and Administrative Costs
Selling, general, and administrative costs increased $572,742 to $4.3
million for the three months ended September 30, 1998 from $3.7 million for the
three months ended September 30, 1997. As a percentage of revenues, selling,
general, and administrative costs increased by 10.55 percentage points to 40.59%
for the three months ended September 30, 1998 from 30.03% for the three months
ended September 30, 1997. Decreased revenues contributed to 2.35 percentage
points increase as a percentage of revenues. 1.05% or $110,659 was expensed for
stock compensation expense for the three months ended September 30, 1998
compared to $0 for the three months ended September 30, 1997. Certain
non-employee agents were granted options for participation in the generation of
new business for the Company. Accordingly, stock compensation was expensed under
the requirements of SFAS No. 123. The remaining increase in cost was
attributable to selling, general, and administrative costs associated with the
merger of AvTel and Matrix, effective December 1, 1997. As of September 30,
1998, the Company had three operating divisions, two primary business locations
and remote employees in several states compared to one operating division and
one location with no remote employees as of September 30, 1997. Additionally, a
more comprehensive corporate structure was required for a public company.
Depreciation and Amortization
Depreciation and amortization increased $110,612 to $261,449 for the three
months ended September 30, 1998 from $150,837 for the three months September 30,
1997. The increase primarily resulted from amortization of intangibles
associated with the merger of AvTel and Matrix. Similarly, the acquisition and
consolidation of assets related to the merger resulted in some increases in
depreciation expense.
Interest Expense and Other Income, Net
Interest expense and other income net of other expenses decreased $82,938
to $14,499 for the three months ended September 30, 1998 from $97,437 for the
three months ended September 30, 1997. Interest expense continued to be
insignificant in amount since the Company has had sufficient cash to meet
operations and capital expenditures. Interest income was lower in 1998 compared
to 1997 primarily from a decrease in cash reserves. Included in other income for
1997 was $52,555 for the reimbursement of expenses incurred in prior years from
an affiliated company. Due to the Loan and Security Agreement entered into with
Coast Business Credit, the Company has a minimum commitment of $10,000 per month
in interest expense starting in October 1998.
12
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Income Taxes
Income tax expense has not been recorded for the three months ended
September 30, 1998 compared to the three months ended September 30, 1997 since
there has been a loss from operations for the three months ended September 30,
1998.
Nine Months Ended September 30, 1998 compared with Nine Months Ended September
30, 1997
Revenues
Revenues for the nine months ended September 30, 1998 were $34.3 million, a
decline of 12.5% or $4.9 million from $39.2 million for the nine months ended
September 30, 1997.
See Results of Operations for the three months ended September 30, 1998
compared with the three months ended September 30, 1997. The decline in revenues
is fully described above in the section, Revenues. All of the reasons discussed
above are applicable for the nine months ended September 30, 1998 compared to
the nine months ended September 30, 1997.
Gross Margin
Gross margin decreased $2.5 million to $9.4 million for the nine months
ended September 30, 1998 from $11.9 million for the nine months ended September
30. 1997. As a percentage of revenues, gross margin decreased by 2.95 percentage
points to 27.48% for the nine months ended September 30, 1998 from 30.42% for
the nine months ended September 30, 1997. The decrease in gross margin as a
percentage of revenues primarily resulted from an increase in bad debt expense.
Network cost as a percentage of revenues changed by immaterial amounts for
the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. Significantly lower rates, which went into effect July of
1998, negotiated with one of the Company's major underlying carriers allowed the
Company to attain the same percentage for the nine months ended September 30,
1998 as it had for the nine months ended September 30, 1997.
Bad debt expense as a percentage of revenues increased by 3.1 percentage
points to 6.2% for the nine months ended September 30, 1998 from 3.1% for the
nine months ended September 30, 1997. Reasons for the increase in bad debt
expense as a percentage of revenue are comparable and fully explained above in
the Gross Margin section. See Results of Operations for the three months ended
September 30, 1998 compared to the three months ended September 30, 1997.
Selling, General, and Administrative Costs
Selling, general, and administrative costs increased approximately $2.1
million for the nine months ended September 30, 1998 compared to the nine months
ended September 30, 1997. As a percentage of revenues, selling, general, and
administrative costs increased by 10.24 percentage points to 39.86% for the nine
months ended September 30, 1998 from 29.62% for the nine months ended September
30, 1997. 1.96% or $674,169 was expensed for stock compensation expense for the
nine months ended September 30, 1998 compared to $0 for the nine months ended
September 30, 1997. Certain non-employee agents were granted options for
participation in the generation of new business for the Company. Accordingly,
stock compensation was expensed under the requirements of SFAS No. 123. $588,640
was incurred for solicitation of new marketing and sales channels for the nine
months ended September 30, 1998 compared to $51,795 for the nine months ended
September 30, 1997. The remaining increase in cost was attributable to selling,
general, and administrative costs associated with the merger of AvTel and
Matrix, effective December 1, 1997. See Results of Operations for the three
months ended September 30, 1998 compared with the three months ended September
30, 1997. The merger related costs are fully described above in the section,
Selling, General, and Administrative Costs. All of the reasons discussed above
are applicable for the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997.
Depreciation and Amortization
Depreciation and amortization increased $290,650 to $805,687 for the nine
months ended September 30, 1998 from $515,037 for the nine months ended
13
<PAGE>
September 30, 1997. $263,833 of the increase was due to amortization of
intangibles associated with the merger of AvTel and Matrix.
Interest Expense and Other Income, Net
Interest expense and other income net of other expenses decreased $147,433
to $62,640 for the nine months ended September 30, 1998 from $210,073 for the
nine months ended September 30, 1997. Interest expense continued to be
insignificant in amount since the Company has had sufficient cash to meet
operations and capital expenditures. Interest income decreased $53,601 to
$96,281 for the nine months ended September 30, 1998 from $149,882 for the nine
months ended September 30, 1997 primarily from a decrease in cash reserves.
Included in other expense for 1997 was $52,555 for the reimbursement of expenses
incurred in prior years from an affiliated company. Due to the Loan and Security
Agreement entered into with Coast Business Credit, the Company has a minimum
commitment of $10,000 per month in interest expense starting in October 1998.
Income Taxes
Income tax expense has not been recorded for the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997 since
there has been a loss from operations for the nine months ended September 30,
1998.
Liquidity and Capital Resources
The primary source of operating cash flow for the Company has been revenues
derived from the resale of domestic and international long distance
telecommunications services. Providing data networking solutions for the
construction of corporate Intranets and Wide Area Networks has become a growing
source of revenues. Minor sources of revenues include the provision of back
office support and earnings from investment income.
The primary uses of cash are payments to underlying network vendors for
provisioning long distance facilities, commission payments to sales
distributors, and payments to the major LECs for billing and collecting services
directly from end users.
Net cash used in operating activities is $2.9 million for the nine months
ended September 30, 1998, compared to net cash provided by operating activities
of $2.4 million for the nine months ended September 30, 1997. Primarily, the
change resulted from the Company's net loss of $5.0 million reported for the
nine months ended September 30, 1998 compared to net income of $7,116 reported
for the nine months ended September 30, 1997.
For reasons more fully described above under the heading Results of
Operations, the Company's net loss resulted from declining revenues of the
Company's wholly-owned subsidiary, Matrix Telecom, increased bad debt and fraud,
and increased expenditures in sales and marketing. Declining revenues have been
caused in part by industry competition, changes in certain marketing channels
and management's decision to discontinue relationships with certain unprofitable
sales distributors, which have in the past contributed a significant share of
revenues. Similarly, the increase in bad debt expense for the nine months ended
September 30, 1998 associated with decreased collection percentages from the
LEC's has affected margins.
Net cash provided by investing activities for the nine months ended
September 30, 1998 was $963,554 compared to net cash used in investing
activities of approximately $1.8 million for the nine months ended September 30,
1997. The Company loaned $2.0 million to an affiliated company, Core Marketing,
LLC ("Core") during the nine months ended September 30, 1997. $1,726,601 was
paid by Core on its loan during the nine months ended September 30, 1998. The
Company loaned $500,000 to a company to be acquired, RLI, (Note 8), during the
nine months ended September 30, 1998. Approximately $282,114 was paid to
purchase equipment during the nine months ended September 30, 1998. The majority
of equipment purchases were for computer and computer related assets. The
company anticipates significant disbursements for the Year 2000 compliance
requirements that will be financed through equipment leases and the Coast
Business Credit loan agreement.
Working capital at September 30, 1998 is $1.3 million compared to $5.6
million at December 31, 1997, a decrease of $4.3 million. Cash balances at
September 30, 1998 are $2.5 million compared to $4.8 million at December 31,
1997, a decrease of approximately $2.3 million. As discussed above, the Company
received $1.7 million on an outstanding loan.
14
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The Company entered into a Loan and Security Agreement with Coast Business
Credit, a division of Southern Pacific Bank ("Coast"), a California corporation
on October 2, 1998. The agreement provides for an asset based revolving credit
line with a floating interest rate equal to prime plus 2%, subject to a minimum
interest rate of 8% per annum. The credit limit is the lesser of $7,500,000 or a
percentage of the amount of the Company's eligible receivables and other items.
The agreement calls for a minimum borrowing of $1,500,000, a $2,000,000 minimum
net worth requirement and a two year term, subject to extension.
The Company in the past has been able to finance its operations from net
cash provided by operating activities without the need to borrow on a long-term
basis. Since December 31, 1997, the Company has continued to be able to finance
its operations and capital expenditures, which have consisted primarily of
property and equipment, from cash and cash equivalents at the beginning of the
year.
The Company anticipates that future operations and growth strategies
(including possible acquisitions) of the Company will require funding from other
sources. The Company entered into the Coast agreement to help meet this need, as
well as operating and capital expenditure needs, for the next twelve months. In
addition to debt financing, the Company may utilize its capital stock as a
source of financing.
Year 2000
The Year 2000 problem is the inability of a meaningful proportion of the
world's computers, software applications and embedded semiconductor chips to
cope with the change of the year from 1999 to 2000. This issue can be traced to
the infancy of computing, when computer data and programs were designed to save
memory space by truncating the date field to just six digits (two for the day,
two for the month, and two for the year). Therefore, information applications
automatically assumed that the two-digit year field represented a year within
the 20th century. As a result of this, systems could fail to operate or fail to
produce correct results at the start of the 21st century.
Assessment
The Year 2000 problem affects computers, software, and other equipment used,
operated, or maintained by the Company for itself and its customers.
Accordingly, the Company is currently assessing the potential impact of, and the
costs of remediating, the Year 2000 problem for its internal systems and on
facilities systems and equipment.
The Company's business is substantially dependent upon the operation of
computer systems including the billing system that is utilized to rate and
format calls for billing. In addition, the Company is relying on the systems of
third parties to originate and terminate calls, transmit calls to the Company,
and process bills to end users. The Company has launched efforts involving
leaders from the operational areas of the Company which could be affected by the
Year 2000 problem. This effort was initiated pursuant to the direction of the
Board of Directors and has the involvement of top management and its objectives
are top priority.
The Company is in the process of identifying the computers, software
applications, and related equipment used in connection with its operations that
must be modified, upgraded, or replaced to minimize the possibility of a
material disruption of its business. The Company has commenced the process of
modifying, upgrading, and replacing systems which have already been assessed as
adversely affected by the Year 2000 problem, and expects to have all other major
systems assessed, and if need be, modified, before the occurrence of any
material disruption of its business. The Company expects to complete this
process by the middle of 1999.
In addition to computers and related systems, the operation of office and
facilities equipment, such as fax machines, copiers, telephone switches,
security systems and other common devices may be affected by the Year 2000
problem. The Company is currently assessing the potential effect of, and costs
of remediating, the Year 2000 problem on its office and facilities systems and
equipment.
The Company has initiated communications with third party suppliers of
products/services used, operated, or maintained by the Company to identify and,
to the extent possible, to resolve issues involving the Year 2000 problem.
However,
15
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the Company has limited or no control over the actions of these third party
suppliers. Thus, while the Company expects that it will be able to resolve any
significant Year 2000 problems with these systems, there can be no assurance
that these suppliers will resolve any or all Year 2000 problems with these
systems before the occurrence of a material disruption to the business of the
Company or any of its customers. Any failure of these third parties to timely
resolve Year 2000 problems with their systems could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
Impact of Year 2000 Problems
Because the Company's assessment is not complete, the Company has not yet
estimated the total cost to the Company of completing any required
modifications, upgrades, or replacements of either the operational systems, or
facilities systems and equipment. The Company does anticipate significant
disbursements for the year 2000 compliance requirements that will be financed
through equipment leases and the Coast Business Credit loan agreement.
The Company expects to identify and resolve all Year 2000 problems that
could materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 problems affecting the Company or its customers and suppliers have
been identified or corrected. The number of devices that could be affected and
the interactions among these devices are simply too numerous. In addition, no
one can accurately predict how many Year 2000 problem-related failures will
occur or the severity, duration, or financial consequences of these perhaps
inevitable failures. As a result, management expects that the Company will
likely suffer the following consequences:
A number of operational inconveniences and inefficiencies for the
Company and its customers and will divert management's time and
attention and financial and human resources from its ordinary business
activities;
A lesser number of serious system failures that will require
significant efforts by the Company or its customers to prevent or
alleviate material business disruptions;
Several routine business disputes and claims for pricing adjustments or
penalties due to Year 2000 problems by customers, which will be
resolved in the ordinary course of business; and
A few serious business disputes alleging that the Company failed to
comply with the terms of its contracts or industry standards of
performance, some of which could result in litigation or contract
termination.
Contingency Plans
The Company will develop contingency plans to be implemented if its efforts
to identify and correct Year 2000 problems affecting its operational systems and
facilities systems and equipment are not effective. The Company expects to
complete its contingency plans by the middle of 1999. Depending on the systems
affected, any contingency plans developed by the Company, if implemented, could
have a material adverse effect on the Company's financial condition and results
of operation.
Disclaimer
The discussion of the Company's efforts, and management's expectations
relating to Year 2000 compliance are forward-looking statements. The Company's
ability to achieve Year 2000 compliance and the level of incremental costs
associated therewith, could be adversely impacted by, among other things, the
availability and cost of programming and testing resources, vendors' ability to
modify proprietary software, and unanticipated problems identified in the
ongoing compliance review.
16
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On September 25, 1998, the Company issued 30,000 shares of its common
stock, which were not registered under the Securities Act, in connection with
the acquisition of Digital Media International, Inc., a Pennsylvania corporation
("DMI"), by means of a stock-for-stock exchange. No underwriters were used in
the transaction and none of such shares were issued publicly. The Company relied
on the exemptions from registration provided by Sections 3(a) (11) and 4(2) of
the Securities Act and Rule 505 of Regulation D promulgated thereunder. The
persons receiving shares were the three former DMI shareholders. These persons
were and are believed by the Company to possess the requisite level of financial
sophistication and experience in order to qualify for such exemptions. The
Company made available to the recipients of such Common Stock all material
information with respect to the Company and the share exchange. Each such person
signed an exchange agreement containing appropriate investment representations
and covenants.
ITEM 5. OTHER INFORMATION
On October 1, 1998, M. Scott Hall joined the Company as Senior Vice
President, Consumer Markets.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Admendment To Carrier Transport Switched Services Agreement dated
October 15, 1998, between Matrix Telecom and Sprint
Communications Company L.P.
10.2 Loan and Security Agreement dated October 2, 1998, among
registrant, Matrix Telecom and Coast Business Credit
27.1 Financial Data Schedule - Nine Months Ended September 30, 1998
27.2 Restated Financial Data Schedule - Nine Months Ended September
30, 1997
(b) Reports on Form 8-K
The registrant filed no reports on Form 8-K during the quarter ended
September 30, 1998.
17
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SIGNATURE
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.
AVTEL COMMUNICATIONS, INC.,
a Delaware corporation
By: /S/ JAMES P. PISANI
------------------------------------
JAMES P. PISANI
PRESIDENT, CHIEF OPERATING OFFICER,
CHIEF FINANCIAL OFFICER AND
SECRETARY (Duly Authorized Officer and
Principal Financial Officer)
November 11, 1998
18
<PAGE>
Exhibit Index
Exhibit
Number Exhibit Description
- ------- -------------------
10.1 Admendment To Carrier Transport Switched Services Agreement dated October
15, 1998, between Matrix Telecom and Sprint Communications Company L.P.
10.2 Loan and Security Agreement dated October 2, 1998, among registrant, Matrix
Telecom and Coast Business Credit
27.1 Financial Data Schedule - Nine Months Ended September 30, 1998
27.2 Restated Financial Data Schedule - Nine Months Ended September 30, 1997
Exhibit 10.1
AMENDMENT TO CARRIER TRANSPORT SWITCHED SERVICES AGREEMENT
THIS AMENDMENT (the "Amendment") is made by SPRINT COMMUNICATIONS COMPANY L.P.
("Sprint") and MATRIX TELECOM, INC. ("Customer"), to that certain Carrier
Transport Switched Services Agreement which was executed on or about April 6,
1998 (the "Agreement"). Sprint and Customer are "Parties" hereto.
In consideration of the mutual promises contained herein, the Parties amend the
Agreement as follows:
1. The following Attachments, or parts of an Attachment, are stricken from the
Agreement in their entirety. Each Attachment, or part of an Attachment, so
stricken shall be replaced as part of the Agreement with the attachment to this
Amendment that bears the same title or heading.
Attachment A shall be amended by adding the following paragraphs:
SEPARATE PRODUCT HIERARCHY
The entire Attachment C-1 (a) shall be added to the executed contract.
Attachment C-1(a) is applicable only to all domestic interstate traffic of new
ANI's only. All international and interstate traffic shall be priced according
to the contract rates contained on Attachments C-16a-g and D-1a, respectively.
Attachment C-1a shall be added to the Agreement in its entirety, and is
applicable for all domestic interstate traffic of new ANI's only.
Attachment C-16a-g shall be added to the Agreement in their entirety, and
is applicable for all international traffic of new ANI's only.
Attachment D-1a shall be added to the Agreement in its entirety, and is
applicable for all domestic intrastate traffic of new ANI's only.
2. Effective upon execution by Matrix Telecom.
3. All other terms and conditions of this Agreement shall remain in full force
and effect.
4. Sprint's offer to amend the Agreement shall be withdrawn if this Amendment is
not executed by both Parties within 45 days after October 14, 1998.
EXECUTED and made effective as provided herein.
MATRIX TELECOM, INC. SPRINT COMMUNICATIONS COMPANY L.P.
By: ------------------------ By: --------------------------
Title: ------------------------ Title: --------------------------
Date: ------------------------ Date: --------------------------
Exhibit 10.2
LOAN AND SECURITY AGREEMENT
by and between
AVTEL COMMUNICATIONS, INC.,
a Delaware corporation,
MATRIX TELECOM, INC.,
a Texas corporation
and
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
Dated as of October 2, 1998
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS..........................................................1
Account Debtor..............................................1
Affiliate...................................................1
Audit.......................................................1
Availability................................................1
Billed Receivables..........................................1
Borrower....................................................1
Borrower's Address..........................................2
Business Day................................................2
Change of Control...........................................2
Closing Date................................................2
Coast.......................................................2
Code........................................................2
Collateral..................................................2
Credit Limit................................................2
Default.....................................................2
Deposit Account.............................................2
Dilution Percentage.........................................2
Dollars or $................................................2
Early Termination Fee.......................................2
EBIT........................................................2
EBITDA......................................................2
Eligible Receivables........................................2
Equipment...................................................3
Equipment Acquisition Loans.................................4
Event of Default............................................4
GAAP........................................................4
General Intangibles.........................................4
Inventory...................................................4
Letter of Credit............................................4
Letter of Credit Sublimit...................................4
Loan Documents..............................................4
Loans.......................................................4
Material Adverse Effect.....................................4
Maturity Date...............................................4
Maximum Dollar Amount.......................................4
Minimum Monthly Interest....................................5
Net Worth...................................................5
Obligations.................................................5
Permitted Liens.............................................5
Person......................................................5
Prime Rate..................................................5
Receivable Loans............................................5
Receivables.................................................5
Renewal Date................................................6
Renewal Fee.................................................6
Solvent.....................................................6
Unbilled Receivables........................................6
Term Loan...................................................6
Year or Yearly..............................................6
Year 2000 Problem...........................................6
Other Terms.................................................6
<PAGE>
2. CREDIT FACILITIES....................................................6
2.1 Loans.......................................................6
2.2 Letters of Credit...........................................6
3. INTEREST AND FEES....................................................7
3.1 Interest....................................................7
3.2 Fees........................................................7
4. SECURITY INTEREST....................................................7
5. CONDITIONS PRECEDENT.................................................7
5.1 Status of Accounts at Closing...............................7
5.2 Minimum Availability........................................7
5.3 Landlord Waiver.............................................8
5.4 Executed Agreement..........................................8
5.5 Opinion of Borrower's Counsel...............................8
5.6 Priority of Coast's Liens...................................8
5.7 Insurance...................................................8
5.8 Borrower's Existence........................................8
5.9 Organizational Documents....................................8
5.10 Taxes.......................................................8
5.11 Year 2000 Problem Assessment Certificate....................8
5.12 Due Diligence...............................................8
5.13 Management Background Checks................................8
5.14 Lockbox/Triparty/Blocked Account Agreements.................8
5.15 Net Worth...................................................8
5.16 Other Documents and Agreements..............................9
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER............9
6.1 Existence and Authority.....................................9
6.2 Name; Trade Names and Styles................................9
6.3 Place of Business; Location of Collateral...................9
6.4 Title to Collateral; Permitted Liens........................9
6.5 Maintenance of Collateral..................................10
6.6 Books and Records..........................................10
6.7 Financial Condition, Statements and Reports................10
6.8 Tax Returns and Payments; Pension Contributions............10
6.9 Compliance with Law........................................10
6.10 Litigation.................................................10
6.11 Use of Proceeds............................................10
6.12 Year 2000 Compliance.......................................10
7. RECEIVABLES.........................................................11
7.1 Representations Relating to Receivables....................11
7.2 Representations Relating to Documents and Legal Compliance.11
7.3 Schedules and Documents relating to Receivables............11
7.4 Collection of Receivables..................................11
7.5 Remittance of Proceeds.....................................11
7.6 Disputes...................................................12
7.7 Returns....................................................12
7.8 Verification...............................................12
7.9 No Liability...............................................12
<PAGE>
8. ADDITIONAL DUTIES OF THE BORROWER...................................12
8.1 Financial and Other Covenants..............................12
8.2 Insurance..................................................12
8.3 Reports....................................................13
8.4 Access to Collateral, Books and Records....................13
8.5 Negative Covenants.........................................13
8.6 Litigation Cooperation.....................................14
8.7 Further Assurances.........................................14
9. TERM................................................................14
9.1 Maturity Date..............................................14
9.2 Early Termination..........................................14
9.3 Payment of Obligations.....................................14
10. EVENTS OF DEFAULT AND REMEDIES......................................14
10.1 Events of Default..........................................14
10.2 Remedies...................................................16
10.3 Standards for Determining Commercial Reasonableness........17
10.4 Power of Attorney..........................................17
10.5 Application of Proceeds....................................18
10.6 Remedies Cumulative........................................18
11. GENERAL PROVISIONS..................................................19
11.1 Interest Computation.......................................19
11.2 Application of Payments....................................19
11.3 Charges to Accounts........................................19
11.4 Monthly Accountings........................................19
11.5 Notices....................................................19
11.6 Severability...............................................19
11.7 Integration................................................19
11.8 Waivers....................................................19
11.9 No Liability for Ordinary Negligence.......................20
11.10 Amendment.....................................................20
11.11 Time of Essence...............................................20
11.12 Attorneys Fees, Costs and Charges.............................20
11.13 Benefit of Agreement..........................................20
11.14 Publicity.....................................................21
11.15 Paragraph Headings; Construction..............................21
11.16 Governing Law; Jurisdiction; Venue............................21
11.17 Mutual Waiver of Jury Trial...................................21
11.18 Confidentiality...............................................21
<PAGE>
Coast
Loan and Security Agreement
Borrower: AVTEL COMMUNICATIONS, INC.,
a Delaware corporation
Address: 501 Bath Street
Santa Barbara, California 93101
Borrower: MATRIX TELECOM, INC.,
a Texas corporation
Address: 8721 Airport Freeway
Fort Worth, Texas 76180
Date: October 2, 1998
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), a California
corporation, with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California 90025, and the borrowers named above (jointly and severally, the
ABorrower@), whose chief executive offices are located at the above addresses
(ABorrower=s Address@). The Schedule to this Agreement (the ASchedule@) shall
for all purposes be deemed to be a part of this Agreement, and the same is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 1 below.)
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable or General Intangible.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Audit" means to inspect, audit and copy Borrower's books and records and
the Collateral.
<PAGE>
Coast Business Credit
Loan and Security Agreement
"Availability" means the amount of Eligible Receivables multiplied by the
advance percentage described in the Schedule net of Borrower's outstanding
Obligations.
"Billed Receivables" means Receivables that have been invoiced and sent to
an Account Debtor for payment, by Borrower, by a local exchange carrier
(including, Bell Atlantic, SBC Communications, Ameritech and US West), or by a
third party billing company (including, OAN and GTE Choicebilling).
"Borrower" has the meaning set forth in the introduction to this Agreement.
"Borrower's Address" has the meaning set forth in the introduction to this
Agreement.
"Business Day" means a day on which Coast is open for business.
"Change of Control" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the current holders of the
ownership interests in any Borrower) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, as a result of any single transaction, of more than twenty-five
percent (25%) of the total voting power of all classes of stock or other
ownership interests then outstanding of any Borrower normally entitled to vote
in the election of directors or analogous governing body.
"Closing Date" date of the initial funding under this Agreement.
"Coast" has the meaning set forth in the introduction to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"Collateral" has the meaning set forth in Section 4 hereof.
"Credit Limit" means the maximum amount of Loans that Coast may make to
Borrower pursuant to the amounts and percentages shown on the Schedule.
"Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Dilution Percentage" shall mean the total amount of chargebacks, discounts
and other items reducing the outstanding amounts of Receivables, calculated as a
percentage of the total amount of outstanding Receivables.
"Dollars or $" means United States dollars.
"Early Termination Fee" means the amount set forth on the Schedule that
Borrower must pay Coast if this Agreement is terminated by Borrower or Coast
pursuant to Section 9.2 hereof.
<PAGE>
"EBIT" means, in any fiscal period, Borrower's consolidated net income
(other than extraordinary or non-recurring items of Borrower for such period),
plus (i) the amount of all interest expense and income tax expense of Borrower
for such period, on a consolidated basis, and plus or minus (as the case may be)
(ii) any other non-cash charges which have been added or subtracted, as the case
may be, in calculating Borrower's consolidated net income for such period.
"EBITDA" means, in any fiscal period, Borrower's consolidated net
income (other than extraordinary or non-recurring items of Borrower for such
period), plus (i) the amount of all interest expense, income tax expense,
depreciation expense, and amortization expense of Borrower for such period, on a
consolidated basis, and plus or minus (as the case may be) (ii) any other
non-cash charges (including non-cash expenses for the amortization of stock
options) which have been added or subtracted, as the case may be, in calculating
Borrower's consolidated net income for such period.
"Eligible Receivables" means Billed Receivables and Unbilled
Receivables arising in the ordinary course of Borrower's business from the sale
of goods or rendition of services, which Coast, in its sole reasonable credit
judgment, shall deem eligible for borrowing, based on such considerations as
Coast may from time to time deem appropriate. Eligible Receivables shall not
include the following:
(a) Billed Receivables that the Account Debtor has failed to pay within 90
days of invoice date or Accounts with selling terms of more than 30
days;
(b) Unbilled Receivables that have not been invoiced and sent to an
Account Debtor for payment within 45 days of Account Debtor's
incurring of the obligation to be invoiced;
(c) Receivables owed by an Account Debtor or its Affiliates where
twenty-five percent (25%) or more of all Receivables owed by that
Account Debtor (or its Affiliates) are deemed ineligible under clause
(a) above;
(d) Receivables with respect to which the Account Debtor is an employee,
or agent of Borrower;
(e) Receivables with respect to an Account Debtor who is an Affiliate of
Borrower whose total obligations owing to Borrower exceed ten percent
(10%) of all Eligible Receivables, to the extent of the obligation
owing by such Account Debtor in excess of such percentage.
(f) Receivables with respect to which goods are placed on consignment,
guaranteed sale, sale or return, sale on approval, bill and hold, or
other terms by reason of which the payment by the Account Debtor may
be conditional;
(g) Receivables that are not payable in Dollars or with respect to which
the Account Debtor: (i) does not maintain its chief executive office
in the United States, or (ii) is not organized under the laws of the
United States or any State thereof, or (iii) is the government of any
foreign country or sovereign state, or of any state, province,
municipality, or other political subdivision thereof, or of any
department, agency, public corporation, or other instrumentality
thereof;
(h) Receivables with respect to which the Account Debtor is either (i) the
United States or any department, agency, or instrumentality of the
United States (exclusive, however, of Accounts with respect to which
Borrower has complied, to the satisfaction of Coast, with the
Assignment of Claims Act, 31 U.S.C. ' 3727), or (ii) any State of the
United States (exclusive, however, of Receivables owed by any State
that does not have a statutory counterpart to the Assignment of Claims
Act);
<PAGE>
(i) Receivables with respect to which the Account Debtor is a creditor of
Borrower: (1) who has a right of setoff or who has asserted a right of
setoff, but only to the extent of the setoff, or (2) who has disputed
its liability, or has made any claim with respect to the Receivables,
provided, however, that Coast, on a case-by-case basis and in its sole
discretion, may limit this provision to the extent of the obligations
in dispute;
(j) Receivables with respect to an Account Debtor whose total obligations
owing to Borrower exceed twenty percent (20%) of all Eligible
Receivables, to the extent of the obligations owing by such Account
Debtor in excess of such percentage;
(k) Receivables with respect to which the Account Debtor is subject to any
reorganization, bankruptcy, insolvency, arrangement, readjustment of
debt, dissolution or liquidation proceeding, or becomes insolvent, or
goes out of business;
(l) Receivables the collection of which Coast, in its reasonable credit
judgment, believes to be uncollectible by reason of the Account
Debtor's financial condition;
(m) Receivables with respect to which the goods giving rise to such
Receivable have not been shipped and billed to the Account Debtor, the
services giving rise to such Receivable have not been performed and
accepted by the Account Debtor, or the Receivable otherwise does not
represent a final sale except for those Receivables in which the
Account Debtor has entered into an agreement with Borrower, in form
and substance acceptable to Coast, whereby Borrower is contractually
bound to pay the Receivables and/or estopped from contesting the
Receivables;
(n) Receivables with respect to which the Account Debtor is located in the
states of New Jersey, Minnesota, Indiana, or West Virginia (or any
other state that requires a creditor to file a Business Activity
Report or similar document in order to bring suit or otherwise enforce
its remedies against such Account Debtor in the courts or through any
judicial process of such state), unless Borrower has qualified to do
business in New Jersey, Minnesota, Indiana, West Virginia, or such
other states, or has filed a Notice of Business Activities Report with
the applicable division of taxation, the department of revenue, or
with such other state offices, as appropriate, for the then-current
year, or is exempt from such filing requirement; and
(o) Receivables that represent progress payments or other advance billings
that are due prior to the completion of performance by Borrower of the
subject contract for goods or services except for those Receivables in
which the Account Debtor has entered into an agreement with Borrower
in form and substance acceptable to Coast, whereby Borrower is
contractually bound to pay the Receivables and/or estopped from
contesting the Receivables.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and
other goods (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Equipment Acquisition Loans" means the Loans described in Section [2(b)]
of the Schedule.
"Event of Default" means any of the events set forth in Section 10.1 of
this Agreement.
<PAGE>
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.
"General Intangibles" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, investment property, inventions, designs, drawings,
blueprints, patents, patent applications, trademarks and the goodwill of the
business symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, security and
other deposits, rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract, tort or otherwise), and all judgments now
or hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit, and
including without limitation all farm products), and all materials and supplies
of every kind, nature and description which are or might be used or consumed in
Borrower's business or used in connection with the manufacture, packing,
shipping, advertising, selling or finishing of such goods, merchandise or other
personal property, and all warehouse receipts, documents of title and other
documents representing any of the foregoing.
"Investment Property" has the meaning set forth in Section 9115 of the Code
as in effect as of the date hereof.
"Letter of Credit" has the meaning set forth in Section 2.2 hereof.
"Letter of Credit Sublimit" has the meaning set forth in Section 2.2
hereof.
"Loan Documents" means this Agreement, the agreements and documents listed
on Section 5 of the Schedule, and any other agreement, instrument or document
executed in connection herewith or therewith.
"Loans" has the meaning set forth in Section 2.1 hereof.
"Material Adverse Effect" means a material adverse effect on (i) the
business, assets, financial condition or results of operations of Borrower or
any subsidiary of Borrower or any guarantor of any of the Obligations, (ii) the
ability of Borrower or any guarantor of any of the Obligations to perform its
obligations under this Agreement (including, without limitation, repayment of
the Obligations as they come due) or (iii) the validity or enforceability of
this Agreement or any other agreement or document entered into by any party in
connection herewith, or the rights or remedies of Coast hereunder or thereunder.
"Maturity Date" means the date that this Agreement shall cease to be
effective, as set forth on the Schedule, subject to the provisions of Section
9.1 and 9.2 hereof.
"Maximum Dollar Amount" has the meaning set forth in Section 2 of the
Schedule.
<PAGE>
"Minimum Monthly Interest" has the meaning set forth in Section 3 of the
Schedule.
"Net Worth" means consolidated shareholders's equity of a Person at any
date determined in accordance with GAAP, plus subordinated debt.
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Coast in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorneys'
fees (including attorneys' fees and expenses incurred in bankruptcy), expert
witness fees, audit fees, letter of credit fees, collateral monitoring fees,
closing fees, facility fees, termination fees, minimum interest charges and any
other sums chargeable to Borrower under this Agreement or under any other
present or future instrument or agreement between Borrower and Coast.
"Permitted Liens" means the following:
(1) purchase money security interests in specific items of Equipment;
(2) leases of specific items of Equipment;
(3) liens for taxes not yet payable;
(4) additional security interests and liens consented to in writing
by Coast, which consent shall not be unreasonably withheld;
(5) security interests being terminated substantially concurrently
with this Agreement;
(6) liens of materialmen, mechanics, warehousemen, carriers, or other
similar liens arising in the ordinary course of business and
securing obligations which are not delinquent;
(7) liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by liens of the type
described above in clauses (1) or (2) above, provided that any
extension, renewal or replacement lien is limited to the property
encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not
increase; or
(8) liens in favor of customs and revenue authorities which secure
payment of customs duties in connection with the importation of
goods.
Coast will have the right to require, as a condition to its consent under
subparagraph (4) above, that the holder of the additional security interest or
lien sign an intercreditor agreement on Coast=s then standard form, acknowledge
that the security interest is subordinate to the security interest in favor of
Coast, and agree not to take any action to enforce its subordinate security
interest so long as any Obligations remain outstanding, and that Borrower agree
that any uncured default in any obligation secured by the subordinate security
interest, subject to any applicable notice and cure period applicable thereto,
shall also constitute an Event of Default under this Agreement.
<PAGE>
"Person" means any individual, sole proprietorship, general partnership,
limited partnership, limited liability partnership, limited liability company,
joint venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Prime Rate" means the actual "Reference Rate" or the substitute therefor
of the Bank of America NT & SA, or its successor, whether or not that rate is
the lowest interest rate charged by said bank. If the Prime Rate, as defined, is
unavailable, "Prime Rate" shall mean the highest of the prime rates published in
the Wall Street Journal on the first business day of the applicable month, as
the base rate on corporate loans at large U.S. money center commercial banks.
"Receivable Loans" means the Loans described in Section 2(a) of the
Schedule.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents, securities accounts,
security entitlements, commodity contracts, commodity accounts, investment
property and all other forms of obligations at any time owing to Borrower, all
guaranties and other security therefor, all merchandise returned to or
repossessed by Borrower, and all rights of stoppage in transit and all other
rights or remedies of an unpaid vendor, lienor or secured party.
"Renewal Date" shall mean the Maturity Date if this Agreement is renewed
pursuant to Section 9.1 hereof, and each anniversary thereafter that this
Agreement is renewed pursuant to Section 9.1 hereof.
"Renewal Fee" means the fee that Borrower must pay Coast upon renewal of
this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the
Schedule.
"Solvent" means, with respect to any Person on a particular date, that on
such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in business or a transaction, and is not about to engage in business or a
transaction, for which such Person's properties and assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that reasonably can
be expected to become an actual or matured liability.
"Unbilled Receivables" means Receivables that have not been invoiced and
sent to an Account Debtor for payment, by Borrower, by a local exchange carrier
(including Bell Atlantic, SBC Communications, Ameritech and US West) or by a
third party billing company (including, OAN and GTE Choicebilling).
"Term Loan" means the Loans described in Section 2(c) of the Schedule.
"Year or Yearly" shall mean a calendar year unless as otherwise set forth.
<PAGE>
"Year 2000 Problem" means the risk that computer systems, software and
applications used by a Person may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any dates after
December 31, 1999.
"Other Terms." All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. CREDIT FACILITIES.
2.1 Loans. Coast will make loans to Borrower (the "Loans"), in amounts
and in percentages to be determined by Coast in its good faith discretion, up to
the Credit Limit, provided no Default or Event of Default has occurred and is
continuing. In addition, Coast may create reserves against or reduce its advance
rates based upon Eligible Receivables without declaring a Default or an Event of
Default if it determines that there has occurred a Material Adverse Effect.
Notwithstanding the foregoing, Coast shall establish a reserve in an amount
equal to 45% of all recurring telecommunication collections or such amount,
determined by Coast in its sole discretion, which will ensure the monthly
payment in full to the local exchange carriers but in no event will the reserve
exceed the outstanding local exchange carrier obligations. Said reserve will be
released upon Coast's: (1) receipt of satisfactory evidence of the wire transfer
payments, or (2) the monthly payments by Coast, with the authorization of
Borrower, to the local exchange carriers from established availability reserves.
2.2 Letters of Credit. At the request of Borrower, Coast may, in its
sole discretion, arrange for the issuance of letters of credit for the account
of Borrower (collectively, "Letters of Credit"), by issuing guarantees to the
issuer of the letter of credit or by other means. All Letters of Credit shall be
in form and substance satisfactory to Coast in its sole discretion. The
aggregate face amount of all outstanding Letters of Credit from time to time
shall not exceed the amount shown on the Schedule (the ALetter of Credit
Sublimit@), and shall be reserved against Loans which would otherwise be
available hereunder. Borrower shall pay all bank charges for the issuance of
Letters of Credit. Any payment by Coast under or in connection with a Letter of
Credit shall constitute a Loan hereunder on the date such payment is made. Each
Letter of Credit shall have an expiry date no later than thirty (30) days prior
to the Maturity Date. Borrower hereby agrees to indemnify, save, and hold Coast
harmless from any loss, cost, expense, or liability, including payments made by
Coast, expenses, and reasonable attorneys' fees incurred by Coast arising out of
or in connection with any Letters of Credit. Borrower agrees to be bound by the
regulations and interpretations of the issuer of any Letters of Credit
guarantied by Coast and opened for Borrower's account or by Coast's
interpretations of any Letter of Credit issued by Coast for Borrower's account,
and Borrower understands and agrees that Coast shall not be liable for any
error, negligence, or mistake, whether of omission or commission, in following
Borrower's instructions or those contained in the Letters of Credit or any
modifications, amendments, or supplements thereto. Borrower understands that
Letters of Credit may require Coast to indemnify the issuing bank for certain
costs or liabilities arising out of claims by Borrower against such issuing
bank. Borrower hereby agrees to indemnify and hold Coast harmless with respect
to any loss, cost, expense, or liability incurred by Coast under any Letter of
Credit as a result of Coast's indemnification of any such issuing bank. The
provisions of this Agreement, as it pertains to Letters of Credit, and any other
present or future documents or agreements between Borrower and Coast relating to
Letters of Credit are cumulative.
<PAGE>
30 INTEREST AND FEES.
3.1 Interest. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Coast=s discretion, be charged to Borrower=s
loan account, and the same shall thereafter bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be outstanding
from time to time, Borrower shall pay Coast Minimum Monthly Interest during the
term of this Agreement with respect to the Receivable Loans in the amount set
forth on the Schedule.
3.2 Fees. Borrower shall pay Coast the fee(s) shown on the Schedule,
which are in addition to all interest and other sums payable to Coast under the
Loan Documents and are deemed fully earned and are nonrefundable.
40 SECURITY INTEREST.
To secure the payment and performance of all of the Obligations when
due, Borrower hereby grants to Coast a security interest in all of Borrower's
interest in the following, whether now owned or hereafter acquired, and wherever
located: All Receivables, Inventory, Equipment, Investment Property, and General
Intangibles, including, without limitation, all of Borrower's Deposit Accounts,
and all money, and all property now or at any time in the future in Coast's
possession (including claims and credit balances), and all proceeds of any of
the foregoing (including proceeds of any insurance policies, proceeds of
proceeds, and claims against third parties), all products of any of the
foregoing, and all books and records related to any of the foregoing (all of the
foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral")
50 CONDITIONS PRECEDENT.
The obligation of Coast to make the Loans is subject to the
satisfaction, in the sole discretion of Coast, at or prior to the first advance
of funds hereunder, of each, every and all of the following conditions:
5.1 Status of Accounts at Closing. No accounts payable shall be due and
unpaid sixty (60) days past its due date except for such accounts payable being
contested in good faith in appropriate proceedings and for which adequate
reserves have been provided.
5.2 Minimum Availability. Borrower shall have minimum Availability,
which shall include Borrower's cash on hand, immediately following the initial
funding in the amount set forth on the Schedule.
5.3 Landlord Waiver. Coast shall have received duly executed landlord
waivers and access agreements in form and substance satisfactory to Coast, in
Coast's sole and absolute discretion, and, when deemed appropriate by Coast, in
form for recording in the appropriate recording office, with respect to all
leased locations where Borrower maintains any inventory or equipment.
5.4 Executed Agreement. Coast shall have received this Agreement duly
executed and in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.5 Opinion of Borrower's Counsel. Coast shall have received an opinion
of Borrower's counsel, in form and substance satisfactory to Coast in its sole
and absolute discretion.
<PAGE>
5.6 Priority of Coast's Liens. Coast shall have received the results of "of
record" searches satisfactory to Coast in its sole and absolute discretion,
reflecting its Uniform Commercial Code filings against Borrower indicating that
Coast has a perfected, first priority lien in and upon all of the Collateral,
subject only to Permitted Liens.
5.7 Insurance. Coast shall have received copies of the insurance binders or
certificates evidencing Borrower's compliance with Section 8.2 hereof, including
lender's loss payee endorsements.
5.8 Borrower's Existence. Coast shall have received copies of Borrower's
articles or certificate of incorporation and all amendments thereto, and a
Certificate of Good Standing, each certified by the Secretary of State of the
state of Borrower's organization, and dated a recent date prior to the Closing
Date, and Coast shall have received Certificates of Foreign Qualification for
Borrower from the Secretary of State of each state wherein the failure to be so
qualified could have a Material Adverse Effect.
5.9 Organizational Documents. Coast shall have received copies of
Borrower's By-laws and all amendments thereto, and Coast shall have received
copies of the resolutions of the board of directors of Borrower, authorizing the
execution and delivery of this Agreement and the other documents contemplated
hereby, and authorizing the transactions contemplated hereunder and thereunder,
and authorizing specific officers of Borrower to execute the same on behalf of
Borrower, in each case certified by the Secretary or other acceptable officer of
Borrower as of the Closing Date.
5.10 Taxes. Coast shall have received evidence from Borrower that Borrower
has complied with all tax withholding and Internal Revenue Service regulations
and that Borrower has paid and is current on all taxes, whether federal, state
or other applicable taxing body, in form and substance satisfactory to Coast in
its sole and absolute discretion.
5.11 Year 2000 Problem Assessment Certificate. Coast shall have received a
certificate from the relevant officer of Borrower to the effect that, as the
result of a comprehensive assessment undertaken by Borrower of Borrower's
computer systems, software and applications and after due inquiry made to
Borrower's material suppliers, vendors and customers, Borrower knows of no facts
that would cause Borrower to reasonably believe that the Year 2000 Problem will
cause a Material Adverse Effect.
5.12 Due Diligence. Coast shall have completed its due diligence with
respect to Borrower.
5.13 Management Background Checks. Coast shall have received the results of
management background checks, including, without limitation, TRWs, tax lien and
other litigation searches, LEXIS/NEXIS searches and such other due diligence as
Coast may deem necessary, on certain key officers of Borrower selected by Coast
in Coast's sole and absolute discretion.
<PAGE>
5.14 Lockbox/Triparty/Blocked Account Agreements. Coast shall have
received evidence that all cash remittances of Borrower shall be collected
pursuant to one or more lockbox/triparty agreements or blocked account
agreements, in form and substance acceptable to Coast. The agreements shall
provide, without limitation, that remittances resulting from Borrower's
invoicing of Receivables are to be remitted through a lockbox and remittances
resulting from the invoicing of Receivables by a local exchange carrier or a
third party billing company are to be remitted by wire transfer. The provisions
of this paragraph which provide for agreements from the local exchange carriers
and the third party billing companies (collectively, "third parties"), will be
satisfied when Coast has received agreements from third parties whose
collections on Receivables represent 80% of all collections on Receivables by
third parties. The initial advance percentage against Receivables invoiced by
third parties will be in an amount equal to the percentage of collections of
those third parties who have provided signed agreements to Coast. Any remaining
agreements from third parties are to be obtained subsequent to the initial
advance of funds hereunder and will result in a commensurate percentage increase
in the advance of funds.
5.15 Net Worth. Coast shall have received evidence satisfactory to
Coast in its sole and absolute discretion that Borrower's Net Worth is equal to
or greater than ($2,000,000).
5.16 Other Documents and Agreements. Coast shall have received such
other agreements, instruments and documents as Coast may require in connection
with the transactions contemplated hereby, all in form and substance
satisfactory to Coast in Coast's sole and absolute discretion, and in form for
filing in the appropriate filing office, including, but not limited to, those
documents listed in Section 5 of the Schedule.
60 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make
Loans, Borrower represents and warrants to Coast as follows, and Borrower
covenants that the following representations will continue to be true during the
term hereof, and that Borrower will at all times during the term hereof comply
with all of the following covenants:
6.1 Existence and Authority. Borrower is and will continue to be, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Borrower is and will continue to be qualified
and licensed to do business in all jurisdictions in which any failure to do so
would have a Material Adverse Effect. The execution, delivery and performance by
Borrower of this Agreement, and all other documents contemplated hereby (a) have
been duly and validly authorized, (b) are enforceable against Borrower in
accordance with their terms (except as enforcement may be limited by equitable
principles and by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to creditors' rights generally), and (c) do not violate Borrower=s
articles or certificate of incorporation or Borrower=s by-laws, or any law or
any material agreement or instrument which is binding upon Borrower or its
property, and (d) do not constitute grounds for acceleration of any material
indebtedness or obligation under any material agreement or instrument which is
binding upon Borrower or its property.
6.2 Name; Trade Names and Styles. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower=s present and prior trade names.
Borrower shall give Coast thirty (30) days' prior written notice before changing
its name or doing business under any other name. Borrower has complied, and will
in the future comply, with all laws relating to the conduct of business under a
fictitious business name.
6.3 Place of Business; Location of Collateral. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Coast at least thirty (30) days'
prior written notice before opening any additional place of business, changing
its chief executive office, or moving any of the Collateral to a location other
than Borrower=s Address or one of the locations set forth on the Schedule.
<PAGE>
6.4 Title to Collateral; Permitted Liens. Borrower is now, and will at
all times in the future be, the sole owner of all the Collateral, except for
items of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Coast now has, and
will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Coast and the Collateral against all claims of
others. None of the Collateral now is or will be affixed to any real property in
such a manner, or with such intent, as to become a fixture. Borrower is not and
will not become a lessee under any real property lease pursuant to which the
lessor may obtain any rights in any of the Collateral and no such lease now
prohibits, restrains, impairs or will prohibit, restrain or impair Borrower's
right to remove any Collateral from the leased premises. Whenever any Collateral
is located upon premises in which any third party has an interest (whether as
owner, mortgagee, beneficiary under a deed of trust, lien or otherwise),
Borrower shall, whenever requested by Coast, use its best efforts to cause such
third party to execute and deliver to Coast, in form acceptable to Coast, such
waivers and subordinations as Coast shall reasonably specify, so as to ensure
that Coast's rights in the Collateral are, and will continue to be, superior to
the rights of any such third party. Borrower will keep in full force and effect,
and will comply with all the terms of, any lease of real property where any of
the Collateral now or in the future may be located. Coast agrees that its
default rights resulting from Borrower's noncompliance with this paragraph are
subject to the existence of a Material Adverse Effect.
6.5 Maintenance of Collateral. Borrower will maintain the Inventory and
Equipment in good working condition, and Borrower will not use the Collateral
for any unlawful purpose. Borrower will immediately advise Coast in writing of
any material loss or damage to the Collateral.
6.6 Books and Records. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with GAAP.
6.7 Financial Condition, Statements and Reports. All financial
statements now or in the future delivered to Coast have been, and will be,
prepared in conformity with GAAP (except, in the case of unaudited financial
statements, for the absence of footnotes and subject to normal year-end
adjustments) and now and in the future will fairly reflect the financial
condition of Borrower in all material respects, at the times and for the periods
therein stated. Between the last date covered by any such statement provided to
Coast and the date hereof, there has been no Material Adverse Effect. Borrower
is now and will continue to be Solvent.
6.8 Tax Returns and Payments; Pension Contributions. Borrower has
timely filed, and will timely file, all tax returns and reports required by
foreign, federal, state and local law, and Borrower has timely paid, and will
timely pay, all foreign, federal, state and local taxes, assessments, deposits
and contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Coast in writing
of the commencement of, and any material development in, the proceedings, and
(iii) posts bonds or takes any other steps required to keep the contested taxes
from becoming a lien upon any of the Collateral. As of the date hereof, Borrower
is unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
<PAGE>
6.9 Compliance with Law. Borrower has complied, and will comply, in all
material respects, with all provisions of all material foreign, federal, state
and local laws and regulations relating to Borrower, including, but not limited
to, the Fair Labor Standards Act, and those relating to Borrower's ownership of
real or personal property, the conduct and licensing of Borrower's business, and
environmental matters.
6.10 Litigation. Except as disclosed in the Schedule, there is no
claim, suit, litigation, proceeding or investigation pending or (to best of
Borrower=s knowledge) threatened by or against or affecting Borrower in any
court or before any governmental agency (or any basis therefor known to
Borrower) which may result, either separately or in the aggregate, in a Material
Adverse Effect. Borrower will promptly inform Coast in writing, upon discovery
by Borrower, of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving an amount set forth on
the Schedule.
6.11 Use of Proceeds. All proceeds of all Loans shall be used solely
for lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation G of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
6.12 Year 2000 Compliance. As the result of a comprehensive review and
assessment undertaken by Borrower of Borrower's computer systems, software and
applications and after due inquiry made of Borrower's material suppliers,
vendors and customers Borrower represents and warrants that the Year 2000
problem will not result in a Material Adverse Effect.
70 RECEIVABLES.
7.1 Representations Relating to Receivables. Borrower represents and
warrants to Coast as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business.
7.2 Representations Relating to Documents and Legal Compliance.
Borrower represents and warrants to Coast as follows: All statements made and
all unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records are and shall be genuine and in all respects what they purport to be.
All sales and other transactions underlying or giving rise to each Receivable
shall fully comply with all applicable laws and governmental rules and
regulations. All signatures and indorsements on all documents, instruments, and
agreements relating to all Receivables are and shall be genuine, and all such
documents, instruments and agreements are and shall be legally enforceable in
accordance with their terms (except as enforcement may be limited by equitable
principles and by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to creditors' rights generally).
<PAGE>
7.3 Schedules and Documents relating to Receivables. Borrower shall
deliver to Coast via facsimile, unless otherwise directed by Coast, at such
locations and at such intervals as Coast may request, transaction reports and
loan requests, schedules of Receivables, and schedules of collections, all on
Coast's standard forms; provided, however, that Borrower's failure to execute
and deliver the same shall not affect or limit Coast's security interest and
other rights in all of Borrower's Receivables, nor shall Coast's failure to
advance or lend against a specific Receivable affect or limit Coast's security
interest and other rights therein. Loan requests received after 10:30 A.M. Los
Angeles, California time, will not be considered by Coast until the next
Business Day. Together with each such schedule, or later if requested by Coast,
Borrower shall furnish Coast with copies (or, at Coast's request, originals) of
all contracts, orders, invoices, and other similar documents, and all original
shipping instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to Coast an aged accounts receivable trial balance
in such form and at such intervals as Coast shall request. In addition, Borrower
shall deliver to Coast the originals, as and when requested by Coast, of all
instruments, chattel paper, security agreements, guarantees and other documents
and property evidencing or securing any Receivables, upon receipt thereof and in
the same form as received, with all necessary indorsements, all of which shall
be with recourse. Borrower shall also provide Coast with copies of all credit
memos as and when requested by Coast.
7.4 Collection of Receivables. Borrower shall have the right to collect
all Receivables, unless and until an Event of Default has occurred. Borrower
shall hold all payments on, and proceeds of, Receivables in trust for Coast, and
Borrower shall deliver all such payments and proceeds to Coast within one (1)
Business Day after receipt by Borrower, in their original form, duly endorsed to
Coast, to be applied to the Obligations in such order as Coast shall determine.
Coast may, in its discretion, require that all proceeds of Collateral be
deposited by Borrower into a lockbox account, or such other "blocked account" as
Coast may specify, pursuant to a blocked account agreement in such form as Coast
may specify. Coast or its designee may, at any time, notify Account Debtors that
Coast has been granted a security interest in the Receivables.
7.5 Remittance of Proceeds. All proceeds arising from the disposition
of any Collateral shall be delivered to Coast within one (1) Business Day after
receipt by Borrower, in their original form, duly endorsed to Coast, to be
applied to the Obligations in such order as Coast shall determine. Borrower
agrees that it will not commingle proceeds of Collateral with any of Borrower's
other funds or property, but will hold such proceeds separate and apart from
such other funds and property and in an express trust for Coast. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
7.6 Disputes. Borrower shall notify Coast promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (a) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm=s length transactions, which are
reported to Coast on the regular reports provided to Coast; (b) no Default or
Event of Default has occurred and is continuing; and (c) taking into account all
such discounts settlements and forgiveness, the total outstanding Loans will not
exceed the Credit Limit. Coast may, at any time after the occurrence of an Event
of Default, settle or adjust disputes or claims directly with Account Debtors
for amounts and upon terms which Coast considers advisable in its reasonable
credit judgment and, in all cases, Coast shall credit Borrower's Loan account
with only the net amounts received by Coast in payment of any Receivables.
7.7 Returns. Provided no Event of Default has occurred and is
continuing, if any Account Debtor returns any Inventory to Borrower in the
ordinary course of its business, Borrower shall promptly determine the reason
for such return and promptly issue a credit memorandum to the Account Debtor in
the appropriate amount. In the event any attempted return occurs after the
occurrence of any Event of Default, Borrower shall (a) hold the returned
Inventory in trust for Coast, (b) segregate all returned Inventory from all of
Borrower=s other property, (c) conspicuously label the returned Inventory as
subject to Coast's security interest, and (d) immediately notify Coast of the
return of any Inventory, specifying the reason for such return, the location and
condition of the returned Inventory, and on Coast's request deliver such
returned Inventory to Coast.
7.8 Verification. Coast may, from time to time, verify directly with
the respective Account Debtors the validity, amount and other matters relating
to the Receivables, by means of mail, telephone or otherwise, either in the name
of Borrower or Coast or such other name as Coast may choose.
<PAGE>
7.9 No Liability. Coast shall not under any circumstances be
responsible or liable for any shortage or discrepancy in, damage to, or loss or
destruction of, any goods, the sale or other disposition of which gives rise to
a Receivable, or for any error, act, omission or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Coast be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Coast from liability for the
gross negligence or willful misconduct of Coast, or its directors, officers,
employees, agents or contractors.
80 ADDITIONAL DUTIES OF THE BORROWER.
8.1 Financial and Other Covenants. Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule.
8.2 Insurance. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast may
reasonably require, and Borrower shall provide evidence of such insurance to
Coast, so that Coast is satisfied that such insurance is, at all times, in full
force and effect. All liability insurance policies of Borrower shall name Coast
as an additional insured, and all property casualty and related insurance
policies of Borrower shall name Coast as a loss payee thereon and Borrower shall
cause a lender's loss payee endorsement in form reasonably acceptable to Coast.
Upon receipt of the proceeds of any such insurance, Coast shall apply such
proceeds in reduction of the Obligations as Coast shall determine in its sole
discretion, except that, provided no Default or Event of Default has occurred
and is continuing, Coast shall release to Borrower insurance proceeds with
respect to Equipment totaling less than the amount set forth in Section 8 of the
Schedule, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Coast may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Coast may, but is
not obligated to, obtain the same at Borrower's expense. Borrower shall promptly
deliver to Coast copies of all reports made to insurance companies.
8.3 Reports. Borrower, at its expense, shall provide Coast with the
written reports set forth in Section 8 of the Schedule, and such other written
reports with respect to Borrower (including budgets, sales projections,
operating plans and other financial documentation), as Coast shall from time to
time reasonably specify.
<PAGE>
8.4 Access to Collateral, Books and Records. At reasonable times but not
less frequently than quarterly and on one (1) Business Day=s notice, Coast, or
its agents, shall have the right to perform Audits. Coast shall take reasonable
steps to keep confidential all confidential information obtained in any Audit,
but Coast shall have the right to disclose any such information to its auditors,
regulatory agencies, and attorneys, and pursuant to any subpoena or other legal
process. The Audits shall be at Borrower=s expense and the charge for the Audits
shall be Seven Hundred Fifty Dollars ($750) per person per day (or such higher
amount as shall represent Coast's then current standard charge for the same),
plus reasonable out-of-pocket expenses. Borrower will not enter into any
agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
without first notifying Coast of the same and obtaining the written agreement
from such accounting firm, service bureau or other third party to give Coast the
same rights with respect to access to books and records and related rights as
Coast has under this Loan Agreement. Borrower shall also take all necessary
steps to assure that this material accounting and software, systems and
applications, and those of its accounting firm, service bureau or any other
third party vendor or supplier, will, on a timely basis, adequately and
completely address the Year 2000 Problem in all material respects.
8.5 Negative Covenants. Borrower shall not, without Coast's prior written
consent, do any of the following:
(a) merge or consolidate with another entity, except in a transaction
in which (i) the owners of the Borrower hold at least fifty percent (50%)
of the ownership interest in the surviving entity immediately after such
merger or consolidation, and (ii) the Borrower is the surviving entity;
(b) acquire any assets, except (i) in the ordinary course of business,
or (ii) in a transaction or a series of transactions not involving the
payment of an aggregate amount in excess of the amount set forth in Section
8 of the Schedule;
(c) enter into any other transaction outside the ordinary course of
business;
(d) sell or transfer any Collateral, except for the sale of finished
Inventory in the ordinary course of Borrower's business, and except for the
sale of obsolete or unneeded Equipment in the ordinary course of business;
(e) store any Inventory or other Collateral with any warehouseman or
other third party;
(f) sell any Inventory on a sale-or-return, guaranteed sale,
consignment, or other contingent basis;
(g) make any loans of any money or other assets, except (i) advances
to customers or suppliers in the ordinary course of business, (ii) travel
advances, employee relocation loans and other employee loans and advances
in the ordinary course of business, and (iii) loans to employees, officers
and directors for the purpose of purchasing equity securities of the
Borrower;
(h) incur any debts, outside the ordinary course of business, which
would have a Material Adverse Effect;
(i) guarantee or otherwise become liable with respect to the
obligations of another party or entity;
(j) pay or declare any dividends or distributions on the ownership
interests in Borrower (except for dividends or distributions payable solely
in stock form of ownership interests in Borrower);
(k) make any change in Borrower's capital structure which would have a
Material Adverse Effect;
(l) transfer or sidestream any funds to any Affiliate other than
transfers between Borrowers; or
(m) dissolve or elect to dissolve.
<PAGE>
Transactions permitted by the foregoing provisions of this Section are
only permitted in the ordinary course of business as indicated and if no Default
or Event of Default is continuing or would occur as a result of such
transaction.
8.6 Litigation Cooperation. Should any third-party suit or proceeding
be instituted by or against Coast with respect to any Collateral or relating to
Borrower, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
8.7 Further Assurances. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
90 TERM.
9.1 Maturity Date. This Agreement shall continue in effect until the
Maturity Date; provided that the Maturity Date shall automatically be extended,
and this Agreement shall automatically and continuously renew, for successive
additional terms of one year each, unless one party gives written notice to the
other, not less than one hundred twenty (120) days prior to the Maturity Date or
the next Renewal Date, that such party elects to terminate this Agreement
effective on the Maturity Date or such next Renewal Date. If this Agreement is
renewed under this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the
amount shown in Section 3 of the Schedule. The Renewal Fee shall be due and
payable on the Renewal Date and thereafter shall bear interest at a rate equal
to the rate applicable to the Receivable Loans.
9.2 Early Termination. This Agreement may be terminated prior to the
Maturity Date as follows: (a) by Borrower, effective on the last Business Day of
the first full month following the calendar month in which written notice of
termination is given to Coast; or (b) by Coast at any time after the occurrence
of an Event of Default, without notice, effective immediately. If this Agreement
is terminated by Borrower or by Coast under this Section 9.2, Borrower shall pay
to Coast an Early Termination Fee in the amount shown in Section 3 of the
Schedule. The Early Termination Fee shall be due and payable on the effective
date of termination and thereafter shall bear interest until paid at a rate
equal to the rate applicable to the Receivable Loans.
9.3 Payment of Obligations. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Notwithstanding any termination of this Agreement, all of Coast's security
interests in all of the Collateral and all of the terms and provisions of this
Agreement shall continue in full force and effect until all Obligations have
been paid and performed in full; provided that, without limiting the fact that
Loans are subject to the discretion of Coast, Coast may, in its sole discretion,
refuse to make any further Loans after termination. No termination shall in any
way affect or impair any right or remedy of Coast, nor shall any such
termination relieve Borrower of any Obligation to Coast, until all of the
Obligations have been paid and performed in full. Upon payment and performance
in full of all the Obligations and termination of this Agreement, Coast shall
promptly deliver to Borrower termination statements, requests for reconveyances
and such other documents as may be required to fully terminate Coast's security
interests.
<PAGE>
100 EVENTS OF DEFAULT AND REMEDIES.
10.1 Events of Default. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Coast immediate written notice thereof:
(a) Any warranty, representation, statement, report or certificate
made or delivered to Coast by Borrower or any of Borrower's officers,
employees or agents, now or in the future, shall be untrue or misleading
and results in a Material Adverse Effect; or
(b) Borrower shall fail to pay when due any Loan or any interest
thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time
shall exceed the Credit Limit; or
(d) Borrower shall fail to deliver the proceeds of Collateral to Coast
as provided in Section 7.5 above, or shall fail to give Coast access to its
books and records or Collateral as provided in Section 8.4 above, or shall
breach any negative covenant set forth in Section 8.5 above; or
(e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other
non-monetary Obligation which by its nature cannot be cured; or
(f) Borrower shall fail to perform any other non-monetary Obligation,
which failure is not cured within ten (10) days after the date due; or
(g) Any levy, assessment, attachment, seizure, lien or encumbrance
(other than a Permitted Lien) is made on all or any part of the Collateral
which is not cured within ten (10) days after the occurrence of the same;
or
(h) any default or event of default occurs under any obligation
secured by a Permitted Lien that results in a Material Adverse Effect,
which is not cured within any applicable cure period or waived in writing
by the holder of the Permitted Lien; or
(i) Borrower breaches any material contract or obligation, which has
or may reasonably be expected to have a Material Adverse Effect; or
(j) Dissolution, termination of existence, insolvency or business
failure of Borrower or any guarantor of any of the Obligations; or
appointment of a receiver, trustee or custodian, for all or any part of the
property of, assignment for the benefit of creditors by, or the
commencement of any proceeding by Borrower or any guarantor of any of the
Obligations under any reorganization, bankruptcy, insolvency, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, now or in the future in effect; or
(k) the commencement of any proceeding against Borrower or any
guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation
law or statute of any jurisdiction, now or in the future in effect, which
is (i) not timely controverted, or (ii) not cured by the dismissal thereof
within thirty (30) days after the date commenced; or
<PAGE>
(l) revocation or termination of, or limitation or denial of liability
upon, any guaranty of the Obligations or any attempt to do any of the
foregoing, or commencement of proceedings by any guarantor of any of the
Obligations under any bankruptcy or insolvency law; or
(m) revocation or termination of, or limitation or denial of liability
upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or
all of the Obligations, or any attempt to do any of the foregoing, or
commencement of proceedings by or against any such third party under any
bankruptcy or insolvency law; or
(n) Borrower or any guarantor of any of the Obligations makes any
payment on account of any indebtedness or obligation which has been
subordinated to the Obligations, other than as permitted in the applicable
subordination agreement, or if any Person who has subordinated such
indebtedness or obligations terminates or in any way limits his
subordination agreement; or
(o) Except as permitted under Section 8.5(a), Borrower shall suffer or
experience any Change of Control without Coast's prior written consent,
which consent shall be in the discretion of Coast in the exercise of its
reasonable business judgment; or
(p) Borrower shall generally not pay its debts as they become due, or
Borrower shall conceal, remove or transfer any part of its property, with
intent to hinder, delay or defraud its creditors, or make or suffer any
transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or
(q) there shall be any Material Adverse Effect.
Coast may cease making any Loans or extending any credit hereunder during any of
the above cure periods.
10.2 Remedies. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following:
(a) Cease making Loans or otherwise extending credit to Borrower under
this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to
any Obligation;
(c) Take possession of any or all of the Collateral wherever it may be
found, and for that purpose Borrower hereby authorizes Coast without
judicial process to enter onto any of Borrower's premises without
interference to search for, take possession of, keep, store or remove any
of the Collateral, and remain on the premises or cause a custodian to
remain on the premises in exclusive control thereof, without charge for so
long as Coast deems it reasonably necessary in order to complete the
enforcement of its rights under this Agreement or any other agreement;
provided, however, that should Coast seek to take possession of any of the
Collateral by Court process, Borrower hereby irrevocably waives:
(i) any bond and any surety or security relating thereto required
by any statute, court rule or otherwise as an incident to such
possession;
<PAGE>
(ii) any demand for possession prior to the commencement of any
suit or action to recover possession thereof; and
(iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final judgment;
(d) Require Borrower to assemble any or all of the Collateral and make
it available to Coast at places designated by Coast which are reasonably
convenient to Coast and Borrower, and to remove the Collateral to such
locations as Coast may reasonably deem advisable;
(e) Complete the processing, manufacturing or repair of any Collateral
prior to a disposition thereof and, for such purpose and for the purpose of
removal, Coast shall have the right to use Borrower's premises, vehicles,
hoists, lifts, cranes, equipment and all other property without charge.
Coast is hereby granted a license or other right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or
any property of a similar nature, as it pertains to the Collateral, in
completing production of, advertising for sale, and selling any Collateral
and Borrower's rights under all licenses and all franchise agreements shall
inure to Coast's benefit;
(f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private
sales, in lots or in bulk, for cash, exchange or other property, or on
credit, and to adjourn any such sale from time to time without notice other
than oral announcement at the time scheduled for sale. Coast shall have the
right to conduct such disposition on Borrower's premises without charge,
for such time or times as Coast deems reasonable, or on Coast's premises,
or elsewhere and the Collateral need not be located at the place of
disposition. Coast may directly or through any affiliated company purchase
or lease any Collateral at any such public disposition, and if permissible
under applicable law, at any private disposition. Any sale or other
disposition of Collateral shall not relieve Borrower of any liability
Borrower may have if any Collateral is defective as to title or physical
condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Coast to endorse or sign Borrower's name on all
collections, receipts, instruments and other documents, to take possession
of and open mail addressed to Borrower and remove therefrom payments made
with respect to any item of the Collateral or proceeds thereof, and, in
Coast's reasonable discretion, to grant extensions of time to pay,
compromise claims and settle Receivables and the like for less than face
value; and
(h) Demand and receive possession of any of Borrower's federal and
state income tax returns and the books and records utilized in the
preparation thereof or referring thereto.
All attorneys' fees, expenses, costs, liabilities and obligations
incurred by Coast (including attorneys' fees and expenses incurred in connection
with bankruptcy) with respect to the foregoing shall be due from the Borrower to
Coast on demand. Coast may charge the same to Borrower=s loan account, and the
same shall thereafter bear interest at the same rate as is applicable to the
Receivable Loans. Without limiting any of Coast's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional three percent per annum.
<PAGE>
10.3 Standards for Determining Commercial Reasonableness. Borrower and
Coast agree that a sale or other disposition (collectively, Asale@) of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable:
(a) Notice of the sale is given to Borrower at least seven (7) days
prior to the sale, and, in the case of a public sale, notice of the sale is
published at least seven (7) days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted;
(b) Notice of the sale describes the collateral in general,
non-specific terms;
(c) The sale is conducted at a place designated by Coast, with or
without the Collateral being present;
(d) The sale commences at any time between 8:00 a.m. and 6:00 p.m Los
Angeles, California time;
(e) Payment of the purchase price in cash or by cashier=s check or
wire transfer is required; and
(f) With respect to any sale of any of the Collateral, Coast may (but
is not obligated to) direct any prospective purchaser to ascertain directly
from Borrower any and all information concerning the same.
Coast shall be free to employ other methods of noticing and selling the
Collateral, in its discretion, if they are commercially reasonable.
10.4 Power of Attorney. Borrower grants to Coast an irrevocable power
of attorney coupled with an interest, authorizing and permitting Coast (acting
through any of its employees, attorneys or agents) at any time, at its option,
but without obligation, with or without notice to Borrower, and at Borrower's
expense, to do any or all of the following, in Borrower's name or otherwise, but
Coast agrees to exercise the following powers in a commercially reasonable
manner:
(a) Execute on behalf of Borrower any documents that Coast may, in its
sole discretion, deem advisable in order to perfect and maintain Coast's
security interest in the Collateral, or in order to exercise a right of
Borrower or Coast, or in order to fully consummate all the transactions
contemplated under this Agreement, and all other present and future
agreements relating to the Obligations;
(b) After the occurrence of an Event of Default, execute on behalf of
Borrower any document exercising, transferring or assigning any option to
purchase, sell or otherwise dispose of or to lease (as lessor or lessee)
any real or personal property which is part of Coast's Collateral or in
which Coast has an interest;
(c) After the occurrence of an Event of Default, execute on behalf of
Borrower, any invoices relating to any Receivable, any draft against any
Account Debtor and any notice to any Account Debtor, any proof of claim in
bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other
lien, or assignment or satisfaction of mechanic's, materialman's or other
lien;
<PAGE>
(d) Take control in any manner of any cash or non-cash items of
payment or proceeds of Collateral; endorse the name of Borrower upon any
instruments, or documents, evidence of payment or Collateral that may come
into Coast's possession;
(e) Endorse all checks and other forms of remittances received by
Coast;
(f) After the occurrence of an Event of Default, pay, contest or
settle any lien, charge, encumbrance, security interest and adverse claim
in or to any of the Collateral, or any judgment based thereon, or otherwise
take any action to terminate or discharge the same;
(g After the occurrence of an Event of Default, grant extensions of
time to pay, compromise claims and settle Receivables and General
Intangibles for less than face value and execute all releases and other
documents in connection therewith;
(h After the occurrence of an Event of Default, pay any sums required
on account of Borrower's taxes or to secure the release of any liens
therefor, or both;
(i After the occurrence of an Event of Default, settle and adjust, and
give releases of, any insurance claim that relates to any of the Collateral
and obtain payment therefor;
(j Instruct any third party having custody or control of any books or
records belonging to, or relating to, Borrower to give Coast the same
rights of access and other rights with respect thereto as Coast has under
this Agreement; and
(k After the occurrence of an Event of Default, take any action or pay
any sum required of Borrower pursuant to this Agreement and any other
present or future agreements.
Any and all sums paid and any and all costs, expenses, liabilities,
obligations and attorneys' fees incurred by Coast (including attorneys' fees and
expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be
added to and become part of the Obligations, and shall be payable on demand.
Coast may charge the foregoing to Borrower=s loan account and the foregoing
shall thereafter bear interest at the same rate applicable to the Receivable
Loans. In no event shall Coast's rights under the foregoing power of attorney or
any of Coast's other rights under this Agreement be deemed to indicate that
Coast is in control of the business, management or properties of Borrower.
Borrower shall pay, indemnify, defend, and hold Coast and each of its officers,
directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from and
against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all attorneys fees and disbursements and other
costs and expenses actually incurred in connection therewith (as and when they
are incurred and irrespective of whether suit is brought), at any time asserted
against, imposed upon, or incurred by any of them in connection with or as a
result of or related to the execution, delivery, enforcement, performance, and
administration of this Agreement and any other Loan Documents or the
transactions contemplated herein, and with respect to any investigation,
litigation, or proceeding related to this Agreement, any other Loan Document, or
the use of the proceeds of the credit provided hereunder (irrespective of
whether any Indemnified Person is a party thereto), or any act, omission, event
or circumstance in any manner related thereto (all the foregoing, collectively,
the "Indemnified Liabilities"). Borrower shall have no obligation to any
Indemnified Person hereunder with respect to any Indemnified Liability resulting
from the gross negligence or willful misconduct of any Indemnified Person or any
contractor of any Indemnified Person. This provision shall survive the
termination of this Agreement and the repayment of the Obligations.
<PAGE>
10.5 Application of Proceeds. All proceeds realized as the result of
any sale of the Collateral shall be applied by Coast first to the costs,
expenses, liabilities, obligations and attorneys' fees incurred by Coast in the
exercise of its rights under this Agreement, second to the interest due upon any
of the Obligations, and third to the principal of the Obligations, in such order
as Coast shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any deficiency. If, Coast, in its sole discretion, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Coast shall have the option, exercisable at
any time, in its sole discretion, of either reducing the Obligations by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Coast of the cash therefor.
10.6 Remedies Cumulative. In addition to the rights and remedies set
forth in this Agreement, Coast shall have all the other rights and remedies
accorded a secured party in equity, under the Code, and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Coast and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Coast of one or more of its rights or remedies shall not be deemed an election,
nor bar Coast from subsequent exercise or partial exercise of any other rights
or remedies. The failure or delay of Coast to exercise any rights or remedies
shall not operate as a waiver thereof, but all rights and remedies shall
continue in full force and effect until all of the Obligations have been
indefeasibly paid and performed.
11. GENERAL PROVISIONS.
11.1 Interest Computation. In computing interest on the Obligations,
all checks, wire transfers and other items of payment received by Coast
(including proceeds of Receivables and payment of the Obligations in full) shall
be deemed applied by Coast on account of the Obligations two (2) Business Days
after receipt by Coast of immediately available funds, and, for purposes of the
foregoing, any such funds received after 10:30 AM Los Angeles, California time,
on any day shall be deemed received on the next Business Day. Coast shall be
entitled to charge Borrower's account for such two (2) Business Days of
"clearance" or "float" at the rate(s) set forth in Section 3 of the Schedule on
all checks, wire transfers and other items received by Coast, regardless of
whether such two (2) Business Days of "clearance" or "float" actually occur, and
shall be deemed to be the equivalent of charging two (2) Business Days of
interest on such collections. This across-the-board two (2) Business Day
clearance or float charge on all collections is acknowledged by the parties to
constitute an integral aspect of the pricing of Coast's financing of Borrower.
Coast shall not, however, be required to credit Borrower's account for the
amount of any item of payment which is unsatisfactory to Coast in its reasonable
credit judgment, and Coast may charge Borrower's loan account for the amount of
any item of payment which is returned to Coast unpaid only if Coast previously
shall have applied such item of payment.
11.2 Application of Payments. Subject to Section 7.5 hereof, all
payments with respect to the Obligations may be applied, and in Coast's sole
discretion reversed and re-applied, to the Obligations, in such order and manner
as Coast shall determine in its sole discretion.
11.3 Charges to Accounts. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower=s
Loan account, in which event they will bear interest from the date due to the
date paid at the same rate applicable to the Loans.
<PAGE>
11.4 Monthly Accountings. Coast shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Coast), unless Borrower
notifies Coast in writing to the contrary within thirty (30) days after each
account is rendered, describing the nature of any alleged errors or omissions.
11.5 Notices. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, facsimile or certified mail return
receipt requested, addressed to Coast or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Coast shall be directed to the Commercial
Finance Division, to the attention of the Division Manager or the Division
Credit Manager. All notices shall be deemed to have been given upon delivery in
the case of notices personally delivered, faxed (at time of confirmation of
transmission), or at the expiration of one (1) Business Day following delivery
to the private delivery service, or two (2) Business Days following the deposit
thereof in the United States mail, with postage prepaid.
11.6 Severability. Should any provision of this Agreement be held by
any court of competent jurisdiction to be void or unenforceable, such defect
shall not affect the remainder of this Agreement, which shall continue in full
force and effect.
11.7 Integration. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
no oral understandings, representations or agreements between the parties which
are not set forth in this Agreement or in other written agreements signed by the
parties in connection herewith.
11.8 Waivers. The failure of Coast at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between Borrower and Coast shall not waive or
diminish any right of Coast later to demand and receive strict compliance
therewith. Any waiver of any Default shall not waive or affect any other
Default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand, protest, notice of protest and notice of
default or dishonor, notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper, instrument, account,
General Intangible, document or guaranty at any time held by Coast on which
Borrower is or may in any way be liable, and notice of any action taken by
Coast, unless expressly required by this Agreement.
11.9 No Liability for Ordinary Negligence. Neither Coast, nor any of
its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Coast shall be liable for any claims, demands,
losses or damages, of any kind whatsoever, made, claimed, incurred or suffered
by Borrower or any other party through the ordinary negligence of Coast, or any
of its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Coast, but nothing herein shall relieve Coast
from liability for the gross negligence or willful misconduct of Coast or its
directors, officers, employees, agents or contractors.
11.10 Amendment. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by a duly authorized officer of
Borrower and a duly authorized officer of Coast.
<PAGE>
11.11 Time of Essence. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
11.12 Attorneys Fees, Costs and Charges. Borrower shall reimburse Coast
for all attorneys' fees (including attorneys' fees and expenses incurred
pursuant to bankruptcy) and all filing, recording, search, title insurance,
appraisal, audit, and other costs incurred by Coast, pursuant to, or in
connection with, or relating to this Agreement (whether or not a lawsuit is
filed), including, but not limited to, any attorneys' fees and costs (including
attorneys' fees and expenses incurred pursuant to bankruptcy) Coast incurs in
order to do the following: prepare and negotiate this Agreement and the
documents relating to this Agreement; obtain legal advice in connection with
this Agreement or Borrower; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, Account Debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of Borrower's books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce Coast=s
security interest in, the Collateral; and otherwise represent Coast in any
litigation relating to Borrower. If either Coast or Borrower files any lawsuit
against the other predicated on a breach of this Agreement, the prevailing party
in such action shall be entitled to recover its costs and attorneys' fees
(including attorneys' fees and expenses incurred pursuant to bankruptcy),
including (but not limited to) attorneys' fees and costs incurred in the
enforcement of, execution upon or defense of any order, decree, award or
judgment. Borrower shall also pay Coast=s standard charges for returned checks
and for wire transfers, in effect from time to time. All attorneys' fees, costs
and charges (including attorneys' fees and expenses incurred pursuant to
bankruptcy) and other fees, costs and charges to which Coast may be entitled
pursuant to this Agreement may be charged by Coast to Borrower=s loan account
and shall thereafter bear interest at the same rate as the Receivable Loans.
11.13 Benefit of Agreement. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Coast; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Coast, and any prohibited
assignment shall be void. No consent by Coast to any assignment shall release
Borrower from its liability for the Obligations. Coast may assign its rights and
delegate its duties hereunder without the consent of Borrower and, so long as
Coast remains the Agent under this Agreement, Coast may assign and delegate its
duties hereunder without notice to Borrower. Coast reserves the right to
syndicate all or a portion of the transaction created herein or sell, assign,
transfer, negotiate, or grant participations in all or any part of, or any
interest in Coast's rights and benefits hereunder. In connection with any such
syndication, assignment or participation, Coast may, subject to the
confidentiality provisions of Section 11.18 disclose all documents and
information which Coast now or hereafter may have relating to Borrower or
Borrower's business. To the extent that Coast assigns its rights and obligations
hereunder to a third Person, Coast thereafter shall be released from such
assigned obligations to Borrower to the extent arising after the date of the
assignment, provided that the third Person assumes Coast's obligations
hereunder.
11.14 Publicity. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published announcing
the consummation of this transaction and the aggregate amount thereof.
<PAGE>
11.15 Paragraph Headings; Construction. Paragraph headings are only
used in this Agreement for convenience. Borrower and Coast acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
Aincluding@, whenever used in this Agreement, shall mean Aincluding (but not
limited to)@. This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Coast or Borrower under any rule
of construction or otherwise.
11.16 Governing Law; Jurisdiction; Venue. This Agreement and all acts
and transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the internal laws of the State of California, without
regard to its conflicts of law principles. As a material part of the
consideration to Coast to enter into this Agreement, Borrower (a) agrees that
all actions and proceedings relating directly or indirectly to this Agreement
shall, at Coast's option, be litigated in courts located within California, and
that the exclusive venue therefor shall be Los Angeles County; (b) consents to
the jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (c) waives any and all rights Borrower may have to object
to the jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.
11.17 Mutual Waiver of Jury Trial. BORROWER AND COAST EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
<PAGE>
11.18 Confidentiality. Coast will maintain the confidentiality of any
non public information marked as confidential and relating to the business
operations and methodology of Borrower and financial performance of Borrower
("Borrower Information") provided to Coast solely by the Borrower as required
under the terms of this Agreement, and will not disclose Borrower Information to
any person, other than employees, agents, attorneys or accountants of Coast.
Coast will not disclose Borrower information to any other party unless, prior to
such disclosure, Coast obtains an executed acknowledgment binding such party to
maintain the confidentiality of the information, prohibiting its disclosure
except for the purposes permitted under this Agreement, and agreeing that the
information may not be used to compete with the Borrower in any way. In the
event Coast receives a subpoena or other process for any Borrower Information,
it will immediately give notice in writing of the subpoena or other process,
including a copy thereof, to Borrower.
BORROWER:
AVTEL COMMUNICATIONS, INC.,
a Delaware corporation
By
---------------------------------
President or Vice President
By
---------------------------------
Secretary or Ass't Secretary
MATRIX TELECOM, INC.,
a Texas corporation
By
---------------------------------
President or Vice President
By
---------------------------------
Secretary or Ass't Secretary
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
By
-------------------------------
Title:
-------------------------------
<PAGE>
Coast
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
Borrower: AVTEL COMMUNICATIONS, INC.,
a Delaware corporation
Address: 501 Bath Street
Santa Barbara, California 93101
Borrower: MATRIX TELECOM, INC.,
a Texas corporation
Address: 8721 Airport Freeway
Fort Worth, Texas 76180
Date: October 2, 1998
This Schedule forms an integral part of the Loan and Security Agreement between
Coast Business Credit, a division of Southern Pacific Bank, and the
above-borrower of even date.
SECTION 2 - CREDIT FACILITIES
Section 2.1 - Credit Limit:
Loans in a total amount at any time outstanding not to exceed the lesser of
a total of Seven Million Five Hundred Thousand Dollars ($7,500,000) at any
one time outstanding (the AMaximum Dollar Amount@), or the sum of (a), (b)
and (c) below:
(a) Receivable Loans in an amount not to exceed 75% of the amount of
Borrower=s Eligible Receivables (as defined in Section 1 of the
Agreement), however, if the Dilution Percentage on the Billed Eligible
Receivables and Unbilled Eligible Receivables is less than 5%, this
advance rate will be increased to 85%, plus
When Borrower attains a consolidated positive EBITDA, Borrower may
convert the structure for obtaining Receivable Loans to the following:
Advances up to three (3) times recurring monthly collections received
by Coast measured on a trailing three-month moving average provided,
however that the advances may not exceed either: (a) Eighty percent
(80%) of the orderly liquidation value of Borrower's subscriber base,
as determined by yearly appraisals (or, if an Event of Default exists,
as frequently as required by Coast), to be conducted by an appraiser
acceptable to Coast in its sole and absolute discretion; or (b) Four
(4) times annualized trailing EBITDA based on a rolling six (6)
months.
(b) Equipment Acquisition Loans, to be drawn within eighteen (18) month(s)
from the date hereof, in minimum advances of One Hundred Thousand
Dollars ($100,000), commencing on the day such advance is made by
Coast, and amortized pursuant to a thirty-six (36) month monthly
amortization of principal plus interest, in a total amount not to
exceed the lesser of:
<PAGE>
(1) Eighty percent (80%) of the cost of new Equipment (after
subtracting taxes and installation charges) excluding furniture,
fixtures, and computer equipment; and
(2) Seven Hundred and Fifty Thousand Dollars ($750,000), plus
Drawsunder this facility are subject to Borrower's attaining
of EBIT/interest ratio equal to or greater than 1.25
measured on a quarterly rolling basis.
(b) Coast may fund, subject to the Maximum Dollar Amount,
Acquisitions from time to time, so long as an Event of
Default will not result from the consummation of the
proposed acquisition and so long as the assets being
acquired, or the Corporation whose capital stock is being
acquired, have reasonable business synergies with Borrower's
business activities. Coast's decision to fund Acquisitions
will be at Coast's sole and absolute discretion and will be
subject to the completion of Coast's due diligence into the
company to be acquired with the due diligence review to be
acceptable to Coast in its sole and absolute discretion.
Coast agrees that it will act in a reasonably prompt manner
in deciding whether to fund Acquisitions;
Section 2.2 - Letter of Credit Sublimit:
One Million Dollars ($1,000,000) for Standby Letters of Credit.
SECTION 3 - INTEREST AND FEES
<PAGE>
Section 3.1 - Interest Rate:
A rate equal to the Prime Rate plus 2% per annum, calculated on the basis
of a 360-day year for the actual number of days elapsed. The interest rate
applicable to all Loans shall be adjusted monthly as of the first day of
each month, and the interest to be charged for each month shall be based on
the highest Prime Rate in effect during the prior month, but in no event
shall the rate of interest charged on any Loans in any month be less than
9% per annum.
Section 3.1 - Minimum Monthly Interest:
The product of 20% of the Maximum Dollar Amount and the Interest Rate
enumerated in Section 3.1 of the Schedule for the actual days in the month
on the basis of a 360-day year.
Section 3.2 - Loan Fee:
One percent (1.0%) of the Maximum Dollar Amount, such amount being fully
earned on the Closing Date, and payable: (1) one-half of one percent (.5%)
on the Closing Date, with said one-half of one percent to apportioned by
payment to Coast of .433% and payment to an intermediary of .067%, and (2)
one-half of one percent (.5%) payable to Coast on the first anniversary of
the Closing Date.
Section 3.2 - Facility Fee:
$1,500, per quarter, payable on the Closing Date (prorated for any partial
quarter at the beginning of the term of this Agreement).
Section 3.2 - Letter of Credit Fees:
Two percent (2%) guarantee fee for all outstanding Letters of Credit per
calendar month, plus bank charges and fees.
Section 9.1 - Renewal Fee:
.50% of the Maximum Dollar Amount per year.
Section 9.2 - Early TerminationAn amount equal to two percent (2%) of the
Maximum Dollar Fee:
Amount (as defined in the Schedule), if termination occurs on or before the
first anniversary of the effective date of this Agreement; and one percent
(1%) of the Maximum Dollar Amount, if termination occurs after the first
anniversary and before the Maturity Date. Notwithstanding the foregoing, if
there is a public debt or equity funding that results in the Obligations
being repaid in full, then the Early Termination Fee will be an amount
equal to two percent (2%) of the Maximum Dollar Amount (as defined in the
Schedule), if termination occurs during the first eleven (11) months
immediately following the effective date of this Agreement; one percent
(1%) if termination occurs during months twelve (12) through twenty-three
(23); and there will be no early termination fee if termination occurs
thereafter.
SECTION 5 - CONDITIONS PRECEDENT
Section 5.2 - Minimum Availability:
$4,000,000
Section 5.13 - Other Documents and Agreements:
1. Joint and Several Borrower Rider; 2. UCC-1 financing statements, fixture
filings and termination statements; 3. Intellectual Property Security
Agreement; 4. Tri-Party Agreements with local exchange carriers and billing
services; 5. Landlord Waivers; and 6. Lockbox Agreements.
SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 6.2 - Prior Names of Borrower:
None.
Section 6.2 - Prior Trade Names of Borrower:
None.
<PAGE>
Section 6.2 - Existing Trade Names of Borrower:
AvTel AvTel Communications Matrix Matrix Telecom
Section 6.3 - Other Locations and Addresses:
Borrower - AvTel Communications, Inc. 23046 Avenida de la Carlota,
Suite 600, Laguna Hills, CA 92653 350 W. Broadway, Suite 111, Salt
Lake City, UT 84101 901 S. Orem Blvd., Orem, UT 84058
Borrower - Matrix Telecom, Inc. None.
Section 6.10 - Material Adverse Litigation:
Matrix Telecom, Inc. ("MTI") received a letter dated August 20, 1998
from O'Donnell, Ramis, Crew, Corrigan & Bacharach, LLP ("ORCCB"), as
counsel to Matrix Communications Corporation ("MCC") which is located
in Milwaukie, Oregon, alleging that Matrix's use of the name "MATRIX"
or "MATRIX TELECOM" infringes on MCC's rights to the service mark
"MATRIX COMMUNICATIONS." The ORCCB letter indicated that MCC had used
the mark in Oregon and Southwest Washington since January 24, 1994 and
the mark was registered by MCC in Oregon on June 23, 1993.
Seed, Mackall & Cole ("SMC"), as counsel to MTI, responded to MCC's
claim in SMC's September 3, 1998 letter to ORCCB. In SMC's letter, SMC
advised MCC of the following:
1. MTI registered the service mark "MATRIX TELECOM" on the Principal
Register of the United States Patent and Trademark Office on August 1,
1995.
<PAGE>
2. MTI qualified to transact business in Oregon as a foreign
corporation on February 24, 1992, and has been engaged in business in
Oregon since at least that date.
3. MTI's predecessor entity, Matrix Telecom, a Texas partnership, has
provided telecommunications services in Oregon since at least March
27, 1991.
4. MTI qualified to transact business as a foreign corporation in
Washington on June 3, 1994 and has been engaged in providing
telecommunications services in Washington since at least that date.
As a result of the above, MTI believes that its rights to the mark are
superior to the rights of MCC. SMC's letter to ORCCB demands that MCC
immediately cease and desist further use of the mark and provide to
SMC written assurance that MCC has complied with this demand no later
than September 10, 1998. As of September 9, 1998, neither SMC nor MTI
has received a response from ORCCB or MCC.
MTI makes no representations or warranties about the outcome of the
above claim.
Section 6.10 - Future Claims and Litigation:
<PAGE>
Borrower will promptly inform Coast in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or
against Borrower involving any single claim of Fifty Thousand Dollars
($50,000) or more, or involving One Hundred Thousand Dollars ($100,000) or
more in the aggregate.
SECTION 8 - ADDITIONAL DUTIES OF BORROWER
Section 8.1 - Other Provisions:
1. Borrower shall at all times maintain a minimum Net Worth equal to or
greater than Two Million Dollars ($2,000,000).
2. Borrower shall at all times maintain a Minimum Availability equal to or
greater than One Million Dollars ($1,000,000) until a positive EBITDA has
been achieved for three consecutive months and until the ratio of
EBIT/interest is equal to or greater than 1.25.
3. Each carrier accounts payable of Borrower shall be kept current during
the term of this Agreement.
Section 8.2 - Insurance:
Subject to the limitations set forth in Section 8.2 of the Agreement, Coast
shall release to Borrower insurance proceeds with respect to Equipment
totaling less than One Hundred Thousand Dollars ($100,000) in a single
transaction subject to a yearly limitation of Two Hundred and Fifty
Thousand Dollars ($250,000).
Section 8.3 - Reporting:
Borrower shall provide Coast with the following:
1. Monthly Receivable agings, aged by invoice date, within ten (10) days
after the end of each month.
2. Monthly accounts payable agings, aged by invoice date, and outstanding
or held check registers within ten (10) days after the end of each month.
3. Monthly internally prepared financial statements, on a consolidating to
consolidated basis, as soon as available, and in any event within thirty
(30) days after the end of each month.
4. Quarterly internally prepared financial statements, as soon as
available, and in any event within forty-five (45) days after the end of
each fiscal quarter of Borrower.
5. Quarterly customer lists, including customer name, address, and phone
number.
6. Annual financial statements, as soon as available, and in any event
within ninety (90) days following the end of Borrower's fiscal year,
containing the unqualified opinion of, and certified by, (a) an independent
certified public accountant from a "Big Six" accounting firm or (b) an
independent certified public accountant reasonably acceptable to Coast.
7. Monthly collateral/reserves roll forward with General Ledger
reconciliation, in form and substance satisfactory to Coast, within ten
(10) days after the end of each month.
8. Reports for Unbilled Receivables as frequently as Coast shall require,
in form and substance satisfactory to Coast.
9. Monthly Atlantax, Inc. tax payment report, in form and substance
satisfactory to Coast, within ten (10) days after the end of each month.
10. Annual projections, on a month-to-month basis, in form and substance
satisfactory to Coast, are to be provided to Coast before each anniversary
date of the effective date of this Agreement.
11. Weekly Borrowing Base reporting which includes sales, collections and
credits, in form and substance satisfactory to Coast, within three (3)
business days after the end of each week.
Section 8.5 - Negative Covenants (Acquired Assets):
Seven Hundred and Fifty Thousand Dollars ($750,000) in the aggregate for
all acquisitions during a calendar year, or a proportionate amount for a
partial year, but in no event will any single acquisition amount to over
One Hundred Thousand Dollars ($100,000).
SECTION 9 - TERM
Section 9.1 - Maturity Date:
The last Business Day of the month two (2) years from the Closing Date,
subject to automatic renewal as provided in Section 9.1 of the Agreement,
and early termination as provided in Section 9.2 of the Agreement.
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES AS OF
SEPTEMBER 30, 1998 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS AND
CASH FLOWS FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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SEPTEMBER 30, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS AND
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