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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For Fiscal Year Ended: December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
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FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 0-27580
.
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AVTEL COMMUNICATIONS, INC.
(Exact Name of Registrant in Its Charter)
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DELAWARE 87-0378021
(State or Other (I.R.S. Employer
Jurisdiction of Identification No.)
Incorporation or
Organization)
501 Bath Street, 93101
Santa Barbara, CA (Zip Code)
(Address of Principal
Executive Offices)
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(Issuer's Telephone Number, Including Area Code) (805) 884-6300
Securities registered under Section 12(b) of the Act: None.
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Securities registered under Section 12(g) of the Act:
Common Stock Par Value $0.01
(Title of class)
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Indicate by check mark whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes _X_ No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this form herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant was approximately $45,593,193, computed at the
last sale price of such Common Stock on The Nasdaq SmallCap Market as of March
17, 1999.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
As of March 17, 1999, there were 10,539,123 shares of the Registrant's
Common Stock, par value $0.01, issued and outstanding, excluding treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) of Form 10-K
is incorporated by reference to the Registrant's definitive Proxy Statement
relating to its annual meeting of stockholders to be held on or about May 27,
1999, which will be filed with the Commission within 120 days after the end of
the Registrant's fiscal year.
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TABLE OF CONTENTS
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ITEM NUMBER PAGE NUMBER
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PART I
1. Business................................................................................... 4
2. Properties................................................................................. 15
3. Legal Proceedings.......................................................................... 15
4. Submission of Matters to a Vote of Security Holders........................................ 16
PART II
5. Market for Common Equity and Related Stockholder Matters................................... 17
6. Selected Financial Data.................................................................... 18
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 19
7A. Quantitative and Qualitative Disclosures about Market Risk................................. 28
8. Financial Statements and Supplementary Data................................................ 28
9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure....... 29
PART III
10. Directors and Executive Officers of the Registrant......................................... 29
11. Executive Compensation..................................................................... 29
12. Security Ownership of Certain Beneficial Owners and Management............................. 29
13. Certain Relationships and Related Transactions............................................. 29
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................ 29
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PART I
ITEM 1. BUSINESS
INTRODUCTORY STATEMENT
THIS ANNUAL REPORT ON FORM 10-K CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT") AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED (THE "EXCHANGE ACT"). FORWARD-LOOKING STATEMENTS ARE STATEMENTS OTHER
THAN HISTORICAL INFORMATION OR STATEMENTS OF CURRENT CONDITION AND RELATE TO
FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY.
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS
OF THE COMPANY'S STRATEGIES, PLANS, OBJECTIVES, EXPECTATIONS, ESTIMATES AND
INTENTIONS. SOME FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY USE OF SUCH
TERMS AS "BELIEVES," "ANTICIPATES," "INTENDS" OR "EXPECTS." THE COMPANY'S ACTUAL
RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY
UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE. THE CAUTIONARY STATEMENTS MADE IN THIS
ANNUAL REPORT SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING
STATEMENTS WHEREVER THEY APPEAR IN THIS ANNUAL REPORT.
BACKGROUND
GENERAL
AvTel Communications, Inc. (the "Company" or "AvTel") is a provider of
broadband network services integrating voice, data and Internet solutions. The
Company sells and markets a broad range of telecommunications and advanced
network services through independent value added resellers, Affinity and agent
organizations, and internal direct sales professionals. The Company targets
mid-size corporations, small-office home-office professionals and select
residential market segments.
The Company 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.
HISTORY
The Company was incorporated on October 31, 1981, but did not commence its
current business until February, 1995. Prior to October 23, 1996, the Company
conducted operations under the name "Hi, Tiger International, Inc.". The name
change was effected in connection with the Company's acquisition of AvTel
Holdings, Inc., a California corporation ("AHI") on that date. As a result of
the acquisition of AHI, the Company implemented a complete change in its Board
of Directors and executive management, began to pursue several acquisitions and
strategic alliances and started development of a sales and operational strategy
to position the Company as a telecommunications carrier providing a
comprehensive array of broadband voice and data network services.
The acquisition of AHI was effected pursuant to the merger of a wholly-owned
subsidiary of the Company with and into AHI (the "AHI Merger") as a result of
which the Company acquired 100% of the
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issued and outstanding capital stock of AHI in exchange for 1,063,127 shares of
the Company Common Stock, representing approximately 61% of the issued and
outstanding Company Common Stock after giving effect to the AHI Merger, and
250,000 shares of newly authorized shares of the Company's Series A Convertible
Preferred Stock. For accounting purposes, the acquisition was treated as a
reverse acquisition with AHI as the acquirer.
In November, 1996, the Company acquired Silicon Beach Communications, Inc.
("SBC"), an Internet Service Provider ("ISP") and provider of software
development services. In February, 1997, the Company acquired all of the issued
and outstanding capital stock of WestNet Communications, Inc. ("WNI"), a
Ventura, California ISP. Following completion of this acquisition, the Company
began to integrate the customer bases, network facilities and other operations
of SBC and WNI in order to achieve desired efficiencies and economies of scale.
On December 1, 1997, the Company acquired Matrix Telecom, Inc., a
privately-held Texas corporation ("Matrix") by means of a share for share
exchange (the "Share Exchange"). Matrix is a provider of long distance telephone
services. See "Background--Acquisition of Matrix" below. The Reincorporation
Merger and the Reverse Stock Split were conditions to the closing of the Share
Exchange.
On September 25, 1998, the Company acquired all of the issued and
outstanding capital stock of Digital Media International, Inc. ("DMI"), a
privately-held corporation based in Santa Barbara, California, which develops
software for educational, entertainment and other applications.
In November, 1998, the Company acquired all of the issued and outstanding
capital stock of Remote Lojix/PCSI, Inc. ("RLI"), a privately-held corporation
based in New York, which is a provider of system integration and local area
network ("LAN") services to corporate customers in the eastern United States.
ACQUISITION OF MATRIX
AvTel and Matrix entered into a Stock Exchange Agreement dated April 29,
1997, and subsequently amended (the "Exchange Agreement"), pursuant to which the
persons or entities who owned the issued and outstanding common stock of Matrix
("Matrix Stockholders") would transfer to AvTel all of their Matrix stock and,
in exchange, AvTel would issue to the Matrix Stockholders shares of the
Company's Common Stock (the "Share Exchange"). The Share Exchange was completed
pursuant to the terms of the Exchange Agreement on December 1, 1997. For
accounting purposes, the acquisition was treated as a reverse acquisition with
Matrix as the acquirer.
In connection with the completion of the Share Exchange, the Matrix
Stockholders and the Company entered into a Registration Rights and Lockup
Agreement dated December 1, 1997 (the "Registration Rights and Lockup
Agreement"). Pursuant to the Registration Rights and Lockup Agreement, certain
persons and entities who held an aggregate of 85.2% of the outstanding Matrix
Common Stock agreed, for a two-year period commencing on the closing of the
Share Exchange, not to offer, pledge, sell, or otherwise dispose of any shares
of the Company issued to them pursuant to the terms of the Exchange Agreement.
As of March 17, 1999, this "lockup" provision relates to a total of 6,457,123
shares of AvTel stock held by the following shareholders: Ronald L. Jensen
(329,321 shares), Gladys Jensen (731,847 shares), James J. Jensen (851,738
shares), Jami J. Jensen (851,738 shares), Janet Jensen Krieger (961,939 shares),
Jeffrey J. Jensen (851,738 shares), Julie J. Jensen (851,738 shares), The RJ &
GJ Foundation (329,692 shares), The Janet Foundation (24,124 shares), The OUI
Foundation (24,124 shares), The Chasdrew Foundation (24,124 shares), John E.
Allen (125,000 shares), Anthony E. Papa (250,000 shares) and James P. Pisani
(250,000 shares)(together, the "Lockup Stockholders").
The Registration Rights and Lockup Agreement requires that the Company use
its best efforts to file a shelf registration statement providing for the sale
by the Lockup Stockholders of all securities issued to them in connection with
the Exchange Agreement, subject to the two-year holding restriction imposed on
the Lockup Stockholders described above. Under the Registration Rights and
Lockup Agreement, the Company is obliged to use its reasonable efforts to keep
the shelf registration statement effective on a
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continuous basis for a period described in the Registration Rights and Lockup
Agreement. The Lockup Stockholders may also require the Company to undertake up
to two additional demand registrations of their securities if the shelf
registration is not in place. All costs and expenses of both shelf and demand
registrations (excluding any underwriting discounts and fees of counsel to the
Lockup Stockholders) will be borne by the Company.
BUSINESS OF THE COMPANY
The Company is a provider of broadband network services integrating voice,
data and Internet solutions. The Company sells and markets a broad range of
telecommunications and advanced network services through independent value added
resellers and internal direct sales professionals. The Company targets mid-size
corporations, small-office home-office professionals and select residential
market segments through two primary business units; the Business Markets Group
("BMG") and the Channel Markets Group ("CMG").
BUSINESS MARKETS GROUP
BMG targets mid-size corporate customers for their broadband data, voice and
Internet networking needs. Following this sales strategy, the Company's
objective is to become the underlying telecommunications carrier for the
transport of data, voice and Internet traffic. Through a value-added sales
process, the Company designs, provisions and manages its customers' networks.
The Company will provide a host of additional value added services assisting its
customers to create enhanced intranet and extranet applications. The Company
believes its strategy to focus on the corporate customer for enterprise-wide
network services offers significant opportunity. BMG cross-markets to its
customer base a variety of traditional telecommunications products and services
such as long distance telephone service, executive calling cards and video/audio
conferencing.
INDUSTRY. Information technology has fast become a driving force in
telecommunications. The Company's BMG strategy is driven by corporate end users'
needs for network connectivity as a result of new software applications and
technology advancements developed in the information technology arena. This has
become a critical element in the ability of businesses, professional and other
organizations to improve productivity and lower costs. This can be accomplished
through the use of a variety of telecommunications services, including branch
office, remote office and telecommuter networking ("intranets") as well as
providing network access to customers, vendors, suppliers ("extranets") and the
Internet. While management expects these factors to continue to increase market
demand for these services, there are no assurances regarding the size of such
demand or that the Company will be selected to provide its services in response
to such demand.
INTERNETWORKING. At an increasing rate, business, professional and other
organizations are seeking to inter-network their LANs and WANs to share
information and computing resources for applications such as e-mail, transaction
processing, the sharing of databases, multi-site engineering and product
development and electronic image transfer. The communications traffic of many
organizations has grown steadily during the past two decades leading to
enterprise-wide networks facilitating rapid and efficient data communications
between work groups, departments and branch locations. Additionally, a shift to
enterprise-wide remote access has occurred due to increased business mobility,
increased telecommuting, reduced cost of WAN services and widespread adoption of
remote access standards. Internet and remote access devices extend the
organization network beyond the branch office, bringing remote users closer to
the enterprise and permitting connection to the corporate LAN so users can work
anywhere, any time. Users can access e-mail, databases and servers as if they
were in the corporate office. The recent availability of reliable IP voice
technology within an enterprise-wide data network has created additional
cost-saving incentives for businesses to implement advanced network solutions.
The Company believes that, as a result of these shifts, internetworking, the
method used for interconnecting networks, will continue to grow. This is
reflected in the growth in sales and distribution of
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routers, remote access servers, intranet software and other various components
that enable internetworking. As the computing paradigm continues to migrate to
network-centric architectures, enterprise-wide networks allow those technologies
to be implemented. The Company's strategy recognizes the opportunity to bridge
the gap between telecom and computer providers and simplify networking
complexities by becoming a single source for enterprise-wide services and
support.
CONNECTIVITY AND BANDWIDTH. The Company believes that communications
requirements such as bandwidth availability and network design are replacing
computer requirements such as processor speed, memory or operating systems as
the delimiting factors for business applications. Video conferencing, remote
patient diagnostics with medical imaging and telecommuting are all business
applications in which the success of the deployment is defined by the available
bandwidth. The ultimate realization of this trend is the Web and applications
developed with Internet-specific tools. Web-based applications are computer
platform and operating system independent but depend entirely upon connectivity
and bandwidth for successful deployment and execution.
As a result, connectivity is becoming one of the most important factors in
enhancing business productivity and customer service. Large corporations have
historically created private wide area networks through leased dedicated data
lines. However, dedicated point-to-point facilities have several deficiencies:
leased lines are very expensive; remote offices and telecommuters are omitted;
and leased lines are not suited for unscheduled and asynchronous communications.
Accordingly, small and medium size companies that have sought the benefits of
internetworking have been required to use modems and dial-up telephone lines
which are generally too slow to handle today's applications.
Growing demands for high speed capabilities have given way to the emergence
of new carrier-based data communication services to overcome the deficiencies of
both dedicated leased and dial-up lines. WAN solutions vary substantially
depending on an organization's size and communications needs. Traditionally,
wideband digital transmission circuits (such as T1 and DS-1) were leased from
public carriers to provide voice, fax and data communications links between
larger offices and low speed leased lines (such as DS-O) for branch office
connectivity. For some applications, however, this has proven expensive and
inefficient because the entire bandwidth capacity is dedicated 24 hours per day,
whether or not it is used.
Packet-based services were developed to address the issue of allocation and
utilization. Today, "fast packet" networking technologies such as Frame Relay
and Asynchronous Transfer Mode ("ATM") have emerged as an integrated,
cost-effective, flexible WAN solution. These networks allow for "bandwidth on
demand" between any two endpoints on a WAN.
STRATEGY. The implementation of the Company's BMG strategy involves the
marketing of products and services integrated into enterprise-wide network
solutions for business customers. These enterprise-wide solutions include
network design, system integration and service, WAN connectivity, voice
connectivity, Internet access and World-Wide Web ("Web") development. BMG's
sales and marketing activities result in monthly, recurring revenues from
networking customers under multi-year term agreements. The group's primary sales
strategy includes in-house direct sales professionals and an agent program
through which BMG distributes its services through value added resellers
("VARs") of information technology products. BMG leverages the existing customer
relationships of these VARs gaining more immediate access to a wider group of
prospective customers and greater credibility in the sales process.
Additionally, this VAR channel becomes the service organization for the
Company's business customers requiring on-site repair and maintenance visits.
CHANNEL MARKETS GROUP
CMG markets domestic and international long distance telephone services,
Internet access and related services through distribution companies, agents,
resellers and affinity groups ("Channel Partners") that maintain access to large
groups of individuals and small businesses through affinity relationships and
niche marketing strategies. Channel Partners include non-profit organizations
and for-profit distribution
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groups. The Company's Channel Partners generally require business-to-business
account management, have a large and somewhat captive audience of
members/customers and distribute information and services. Historically,
telecommunications companies have leveraged third party organizations to sell
long distance telephone service to their member/customers sharing a percentage
of the revenues generated by the group.
The Company has recognized that the Internet explosion has created an
"eBusiness Imperative" among these organizations that is generating new sales
opportunities for the Company. The Company assists these organizations in
designing and launching their Web presence and seeks to sell Internet access and
additional telecom services to the organization's member/customer base. In turn,
the Channel Partner participates in the revenue generated by their members' use
of the Company's services. The Company believes that it is one of a few
companies offering Channel Partners a turnkey-solution with private labeling and
total technical, billing and customer service support.
CMG provides Internet access, long distance telephone and other services to
customers in 49 states. The Company is fully certified or registered in all
states where required and operates under Section 214 authority from the Federal
Communications Commission ("FCC"). The Company, through a wholly owned
subsidiary has a national-deployed Carrier Identification Code ("CIC"). The CIC
provides the Company greater network flexibility and permits the Company to
market to subscribers of other carriers by having the customer dial the CIC
directly, a process, which is known in the industry as "casual calling." The
Company maintains its own convergent billing platform, rating system and
monitoring center.
The Company and various subsidiary companies market CMG's services under a
variety of brands, which include AvTel-TM-, Matrix
Telecom-Registered Trademark-, MatrixInet-TM-, Silicon Beach-TM-, WestNet
Communications-TM-, Remote Lojix-TM-, Addictive Media-TM- and Digital
Meteor-TM-. Channel Partners, at their expense, utilize a variety of marketing
strategies which include direct mail, outbound telemarketing and direct sales.
In November, 1998, the Company introduced its nationwide Internet access program
for dial-up connectivity. This program is provided by the Company to the public
under the MatrixInet-TM- brand, and is also available under a private label
arrangement for certain Channel Partners.
Channel Partners generally market to niche consumer segments such as
non-profit affinity membership groups, ethnic affinity groups and home based
business professionals. These independent distributor groups are provided with a
variety of value-added support services which include: an in-house multi-lingual
Customer Service department open 24 hours a day, 7 days a week; direct
electronic provisioning to local exchange carriers ("LECs"); and custom billing
and management reports available in paper format or on line through the
Company's eBill and NetAgent platforms. The Company believes that its agreements
with Channel Partners provides highly-leveraged access to large, loyal groups of
individuals. The Company also believes that accessing these individuals through
its Channel Partners enables lower marketing expenditures, lower customer churn
and a greater customer motivation to purchase additional services.
OPERATIONS AND SUPPORT
CUSTOMER SERVICE CENTER. The Company's inbound customer service center is
designed to provide the Company's customer base with a high-level of service and
support. Customer Service Representatives ("CSRs") are available 24 hours a day,
7 days a week in order to answer inquiries generated by the Company's marketing
campaigns, as well as to support existing customers. CSRs are trained to answer
a broad range of inquiries from prospective customers relating to service,
pricing, and optional features. In addition to competitive rates and a wide
variety of products, the Company is able to offer business customers a highly
specialized direct bill summary package that includes call summaries by account
code, department, employee, project, client, area code, country code, and
time-of-day. Customer call management reports are available in a variety of
media formats including electronic support via the Internet.
The Company's call center and technical support center are equipped with
state-of-the-art computer and telecommunications technology. Incoming calls are
managed with the help of an automatic call distributor and an automated
attendant. Such a system allows for management of call queue time, the
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formation of distinct work groups for different projects, and on-line monitoring
of customer service calls for quality assurance purposes. Bilingual CSRs are
available during day and evening shifts.
BILLING AND INFORMATION SYSTEMS. The Company has dedicated substantial
resources to its management information systems. The Company's information
systems enable the Company to (1) monitor and respond to the evolving needs of
its customers by developing new and customized services; (2) provide
sophisticated billing information that can be tailored to meet the requirements
of its customer base; (3) provide high quality customer service; (4) detect and
minimize fraud; (5) verify payables to suppliers; and (6) integrate additions to
its customer base. In addition, the Company has complete facilities for rating,
formatting and distributing direct bills to its larger commercial subscribers.
Small business customers and individuals may receive either a direct or a LEC
bill, depending upon the services provided to the customer. The Company provides
secure remote electronic access to certain activation, provision and billing
information to its customers through the Internet.
The Company has invested in call rating, billing, and customer service
infrastructure. In addition, the Company holds billing and collection agreements
with LECs, including all of the Regional Bell Operating Companies ("RBOCs"), and
independent local exchange companies ("ILECs"). These billing agreements permit
the Company to include its billing on the customer's local telephone bill. The
Company's billing information systems and services also allows it to provide
direct bills to customers in a paper format and electronically through the
Internet.
STRATEGIC ALLIANCES AND CARRIER AGREEMENTS. The Company has executed
strategic agreements with Sprint for its underlying voice carrier services,
Qwest and IXC for data carrier services and GST, GTE and PSINet for Internet
access services. As noted above, the Company holds billing and collection
agreements with all of the RBOCs and ILEC's. The Company developed with Prosoft
I-Net Solutions a specialized training program designed to educate value-added
resellers of the Company's services on the integration of data, voice and video
products.
ACE CERTIFIED ENGINEER TRAINING PROGRAM. On March 16, 1998 the Company
announced the availability of its ACE Certified Engineering training program.
The ACE program has been designed specifically for value added resellers in the
telecommunications industry. The ACE program provides a complete curriculum over
a broad range of courses. The program includes four tracks: 1) a general
overview of the telecommunications industry and technologies; 2) voice equipment
and network design; 3) data communications and network design; and 4) the
integration of voice, video and data, traffic design and network engineering.
Each track is a technical course focusing on how to use, engineer and integrate
proven and leading-edge voice, video and data networking technologies. The
complete program includes on-line and classroom training and course work
requiring 128 hours of in-depth course work and labs.
REGULATION
The services which the Company provides, either directly or through its
subsidiaries, are subject to varying degrees of federal, state and local
regulation. The FCC exercises jurisdiction over all facilities of, and services
offered by, telecommunications common carriers to the extent that they involve
the provision, origination or termination of jurisdictionally interstate or
international communications. The state public service commissions ("PSCs")
retain jurisdiction over jurisdictionally intrastate communications. The FCC and
relevant PSCs have the authority to regulate interstate and intrastate rates,
respectively, ownership of transmission facilities and the terms and conditions
under which the Company's services are provided.
In general, neither the FCC nor the relevant state PSCs exercise direct
oversight over cost justification for the Company's services or the Company's
profit levels, but either or both may do so in the future. However, the Company
is required by federal and state law and regulations to file tariffs listing the
rates, terms and conditions of services provided. The Company generally is also
required to obtain certification from the relevant state PSC prior to the
initiation of certain intrastate service, and is required to maintain a
certificate issued by the FCC in connection with the provision of certain
international services. Any
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failure to maintain proper federal and state tariffs or certification or any
difficulties or delays in obtaining required authorization could have a material
adverse effect on the Company.
COMPETITION
The telecommunications industry is highly competitive and affected by rapid
regulatory and technological change. The Company believes that the principal
competitive factors in its business include pricing, customer service, network
quality, service offerings and the flexibility to adapt to changing market
conditions. The Company's future success will depend in part upon its ability to
compete with AT&T, MCI Worldcom, Sprint and other carriers (including the RBOCs
when approved to enter the long distance market) and other long distance
providers, and America On-Line and other national and local ISPs, many of which
have considerably greater financial and other resources than the Company.
INTELLECTUAL PROPERTY
The Company has registered several trademarks for use in its marketing
materials. The Matrix Telecom name and logo, used by the Company to market
Internet access, long distance service, and calling card services is a
registered trademark. The Company also uses several unregistered trademarks as
part of its BMG and CMG businesses, including AvTel-TM-, MatrixInet-TM-, Silicon
Beach-TM-, Addictive Media-TM- and Digital Meteor-TM-, which it may seek to
register. While the Company believes these trademarks are important to its
business, the Company does not believe that failure to register these trademarks
poses any material risk of infringement on its rights to use such trademarks.
EMPLOYEES
As of March 15, 1999, the Company, including its subsidiaries, had
approximately 255 full-time employees. None of the employees of the Company are
represented by a union. The Company supplements its work force from time to time
with contractors, administrative personnel through employment agencies, and part
time employees. The Company believes that it has good relations with its
employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is information with respect to each executive officer of the
Company:
ANTHONY E. PAPA, age 36, has been the Chairman of the Board and Chief
Executive Officer of the Company since October 1996. Mr. Papa was also President
of the Company from October 1996 until February 1998. Prior to October, 1996,
Mr. Papa had served as President of ICS Communications, Inc.("ICS"), Richardson,
Texas, a national provider of cable television, wireless paging, local and
long-distance telephone services from December 1992. Before joining ICS, Mr.
Papa served as general manager for Spectradyne, Inc., the largest provider of
pay-per-view entertainment and interactive services to the hospitality industry.
Mr. Papa is a director of International School of Information Management, Inc.,
an accredited university and an electronic publisher and provider of electronic
services, and a director of ABC-Clio, Inc., an international publisher of
historical reference materials for institutions of higher education. Mr. Papa
received a B.S. in Management from Iona College, in New Rochelle, New York.
JAMES P. PISANI, age 34, has been the President of the Company since
February 1998, and has served as Chief Operating Officer, Chief Financial
Officer and Secretary of the Company since October 1996. Mr. Pisani has also
served as Chief Accounting Officer of the Company since October 1998. From
October 1996 to February 1998, Mr. Pisani was the Executive Vice President of
the Company. Prior to October 1996, he served as Vice President of Sales and
National Accounts for ICS. While at ICS, Mr. Pisani was responsible for that
firm's business-to-business and consumer sales activities. Prior to joining ICS,
from June 1989 to June 1994, Mr. Pisani served as Vice President of a national
mortgage banking firm serving, primarily, institutional accounts. Mr. Pisani
graduated from Princeton University in 1986, with a degree in Economics.
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M. SCOTT HALL, age 40, was appointed Senior Vice President of the Company's
Channel Markets Group in October 1998. From November 1994 to September 1998, Mr.
Hall was Vice President of One Call Communications, Inc., a long-distance and
Internet service provider. Prior to that time, Mr. Hall was Manager, Business
Development for Transnational Communications. Mr. Hall graduated from the
University of Hawaii in 1982, with a B.A. in Sociology.
FRANK A. LEONE, age 52, was appointed President of the Company's Business
Markets Group in November 1998. From November 1996 to July 1998, Mr. Leone was
Executive Vice President of Sales for First Image Management Company, a division
of First Data Corporation. From November 1994 to November 1996, Mr. Leone was
President of FAL Consultants, in which capacity he provided strategy and
marketing consulting to corporations. Prior to that time, Mr. Leone held an
executive management position with Recycled Paper Greetings, the fourth largest
greeting card manufacturer in the U.S., and executive management positions with
Baxter Healthcare Corporation and Xerox Corporation. Mr. Leone graduated from
Gannon University, Erie, Pennsylvania, with a B.S. in Business Administration.
JOE RENTERIA, JR., age 52, was appointed Vice President, Information Systems
of AvTel on February 25, 1999. Prior to that time, he had been employed for more
than five years by Matrix. During his tenure with Matrix, Mr. Renteria has
served as Manager of Data Processing, Director of Information Services and was
promoted to Vice President of Information Services in May of 1997. Prior to
joining Matrix, Mr. Renteria held various information technology management
positions, primarily in the manufacturing sector.
RECENT DEVELOPMENTS
BOARD OF DIRECTORS
On December 17, 1998, Gregory T. Mutz resigned from the Company's Board of
Directors. On April 9, 1999, the Board elected Anthony D. Martin to fill the
vacancy created by the resignation of Gregory T. Mutz.
STOCK REPURCHASE
In connection with a newly -established employee incentive plan, on January
29, 1999, AvTel commenced a small program to repurchase shares of its own Common
Stock on The Nasdaq SmallCap Market. In connection with this program, AvTel
spent approximately $77,400 to repurchase 11,075 shares of the Common Stock.
These shares will be held in treasury.
SALE OF SERIES B CONVERTIBLE PREFERRED STOCK
On April 13, 1999, the Company sold 1,500 shares of its newly -designated
Series B Convertible Preferred Stock (the "Series B Stock") to AMRO
International, S.A., an entity organized under the laws of Panama, Austinvest
Anstalt Balzers, an entity organized under the laws of Liechtenstein, and
Esquire Trade & Finance Inc., an entity organized under the laws of the British
Virgin Islands (the "Series B Investors") for $1,500,000. The Series B Stock has
a liquidation preference of $1,000 per share. The Series B Stock will be
entitled to an annual dividend of $30 per share, payable in cash or Common
Stock, at the Company's option. The annual dividend will increase to $60 per
share if the Company ever ceases to be listed on The Nasdaq Stock Market or any
national securities exchange. The Series B Stock is convertible into Common
Stock at the option of the Series B Investors at any time. The number of shares
of Common Stock to be received by a Series B Investor upon conversion will equal
the liquidation preference of the amount converted, divided by the conversion
price. The conversion price will be the lesser of (1) $6.875, or (2) 89% of the
low closing bid price for the Common Stock on The Nasdaq SmallCap Market at the
time of conversion. The conversion price will not be less than $3.00 for 180
days after the date of issuance of the Series B Stock. Thereafter the conversion
price will not be less than $2.00 as long as certain revenue and EBITDA
requirements are met. As a result, the Company could issue up to 750,000 shares
of Common Stock upon conversion if all of the Series B Stock were converted at
the lowest
11
<PAGE>
possible conversion price (assuming such revenue and EBITDA requirements
continue to be met). Unless the Company shall have obtained the approval of its
voting stockholders in accordance with the rules of The Nasdaq Stock Market, the
Company will not issue shares of Common Stock upon conversion of any shares of
Series B Stock if such issuance of Common Stock, when added to the number of
shares of Common Stock previously issued by the Company upon conversion of or as
dividends on shares of the Series B Stock, would exceed 19.9% of the number of
shares of Common Stock which were issued and outstanding on the original
issuance date of the Series B Stock. The Company will pay converting Series B
Investors in cash for any excess over such amount.
The Company also issued the Series B Investors warrants to purchase up to
20,000 shares of Common Stock at a price of $8.60 per share. The warrants may be
exercised beginning September 30, 1999, and terminate on March 31, 2002.
The Company and the Series B Investors entered into a Registration Rights
Agreement that requires the Company to file, and obtain and maintain the
effectiveness of, a Registration Statement with the Securities and Exchange
Commission (the "Commission") in order to register the public resale of all
shares of the Common Stock acquired by the Series B Investors (a) upon
conversion of the Series B Stock, (b) in payment of dividends on the Series B
Stock, and (c) upon exercise of the warrants. The Company will be subject to
significant monetary penalties if it fails to obtain or maintain the
effectiveness of such Registration Statement.
The Company paid Trinity Capital Advisors, Inc. $60,000 as compensation for
arranging the placement of the Series B Stock.
RISK FACTORS
IN EVALUATING THE COMPANY, ITS BUSINESS, OPERATIONS AND FINANCIAL POSITION,
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY, IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS FORM 10-K. THE FOLLOWING FACTORS, AMONG
OTHERS, COULD AFFECT THE COMPANY'S ACTUAL FUTURE OPERATING RESULTS AND COULD
CAUSE SUCH RESULTS TO DIFFER FROM THE RESULTS DISCUSSED IN ANY FORWARD-LOOKING
STATEMENTS MADE BY OR ON BEHALF OF THE COMPANY.
LOSSES; OPERATING RESULTS SUBJECT TO SIGNIFICANT FLUCTUATIONS
The Company has had significant recurring losses in its last four fiscal
quarters. The Company's future operating results are difficult to forecast with
any degree of accuracy because a number of factors (including those described
below) subject these results to significant fluctuations.
FACTORS INFLUENCING OPERATING RESULTS, INCLUDING REVENUES, COSTS AND MARGINS
The Company's revenues, costs and expenses have fluctuated significantly in
the past and are likely to continue to fluctuate significantly in the future as
a result of numerous factors. The Company's revenues in any given period can
vary due to factors such as call volume fluctuations; the addition or loss of
major customers, whether through competition, merger, consolidation or
otherwise; pricing pressure resulting from increased competition; and technical
difficulties with or failures of portions of the network used by the Company
that impact the Company's ability to provide service to or bill its customers.
The Company's cost of services and operating expenses in any given period can
vary due to factors such as fluctuations in rates charged by carriers to
terminate the Company's traffic; increases in bad debt expense and reserves;
compensation expense resulting from stock options granted by the Company;
changes in the Company's sales incentive plans; and costs associated with
changes in staffing levels of sales, marketing, technical support and
administrative personnel. In addition, the Company's operating results can vary
due to factors
12
<PAGE>
such as loss of favorable routing options; actions by regulatory entities; and
general economic and political conditions.
VOLATILITY OF STOCK PRICE
The Company's Common Stock has been traded on The Nasdaq SmallCap Market
since May 28, 1998. Trading in the Company's stock was halted by Nasdaq after
the close of trading on November 12, 1998, through the close of trading on
November 13, 1998, as a result of an unusual upsurge in its stock price and
trading volume. See "Legal Proceedings." The trading volume of the Common Stock
has been variable, but generally low. As a result, relatively small trades may
significantly affect the market price of the Common Stock. The market price of
the shares of Common Stock has been highly volatile and may be significantly
affected by factors such as actual or anticipated fluctuations in the Company's
operating results, the announcement of potential acquisitions by the Company,
changes in regulations, activities of the largest domestic providers, industry
consolidation and mergers, conditions and trends in the telecommunications
market, adoption of new accounting standards affecting the telecommunications
industry, changes in recommendations and estimates by securities analysts,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the shares of emerging growth
companies like the Company. These broad market fluctuations may adversely affect
the market price of the Company's Common Stock.
SECURITIES CLASS ACTION LITIGATION
As noted above, on November 12, 1998, the Company experienced an unusual
upsurge in its stock price and trading volume. This unusual event has triggered
the initiation of class action litigation under the federal securities laws. See
"Legal Proceedings." The Company believes that these claims are without merit
and intends to defend vigorously this litigation. However, it is not possible at
this time for the Company to predict with certainty the outcome of this
litigation. Even if the Company prevails in the litigation, the expenses of the
defense could have a material adverse effect on the Company's operating results
and financial condition.
RISKS INHERENT IN ACQUISITION STRATEGY
An important component of the Company's past growth has been to develop its
business through acquisitions. This growth strategy is dependent on the
continued availability of suitable acquisition candidates and subjects the
Company to a number of risks. Acquisitions may place significant demands on the
Company's financial and management resources, as the process for integrating
acquired operations presents a significant challenge to the Company's management
and may lead to unanticipated costs or a diversion of management's attention
from day-to-day operations. There can be no assurance that the Company will be
able to successfully integrate any acquisitions made by the Company in the
future into Company operations. Additionally, the Company may incur unknown
liabilities despite management's efforts to investigate the operations of the
acquired business.
POTENTIAL ADVERSE EFFECTS OF GOVERNMENT REGULATION
The Company's business is subject to various federal and state laws,
regulations, agency actions and court decisions. These laws, regulations,
actions and decisions may impose prior certification, notification, registration
and/or tariff requirements. Certificates of authority can generally be
conditioned, modified or revoked by state regulatory authorities for failure to
comply with state laws and regulations. Fines and other penalties, including
revocation of a certificate of authority, may be imposed. In addition, future
changes in any of these sources of regulation could have a material adverse
effect on the Company's business, operating results and financial condition.
13
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the efforts of
senior management personnel, in particular, Anthony E. Papa, the Company's
Chairman and Chief Executive Officer, and James P. Pisani, the Company's
President and Chief Operating Officer. The Company believes that its future
success will depend in large part upon its continuing ability to attract and
retain highly skilled personnel. Competition for qualified, high-level
telecommunications personnel is intense and there can be no assurance that the
Company will be successful in attracting and retaining such personnel. The loss
of the services of one or more of the Company's key individuals, or the failure
to attract and retain other key personnel, could materially adversely affect the
Company's business, operating results and financial condition.
SIGNIFICANT COMPETITION
The telecommunications industry is intensely competitive and subject to
rapid change. The Company's competitors include facilities-based and
non-facilities-based providers, many of which have substantially more resources
than the Company. Providers compete on the basis of price, customer service,
transmission quality, breadth of service offerings and value-added services.
Additionally, the telecommunications industry is in a period of rapid
technological evolution, marked by the introduction of competitive product and
service offerings, such as the utilization of the Internet for international
voice and data communications. The Company is unable to predict which
technological development will challenge its competitive position or the amount
of expenditures will be required to respond to a rapidly changing technological
environment. The Company believes that competition will continue to increase,
placing downward pressure on prices. Such pressure could adversely affect the
Company's gross margins if the Company is not able to reduce its costs
commensurate with such price reductions.
NEED FOR ADDITIONAL CAPITAL
In the past, the Company's cash flow from operations, together with its
secured borrowings, has been sufficient to meet its working capital and capital
expenditure requirements. The Company does not expect to generate sufficient
cash flow to fully implement its business strategy without raising additional
capital. The Company is actively pursuing an equity line of credit through
discussion with potential investors. If the Company is unable to obtain
financing in a timely manner and on acceptable terms, management is developing
and intends to implement a plan that would allow the Company to continue to
operate through 1999. This plan would include reducing the Company's workforce,
eliminating advertising expenditures, reducing professional services and
reducing or eliminating other discretionary expenditures.
YEAR 2000 COMPUTER PROGRAM FAILURE
A significant percentage of the software that runs most of the computers in
the United States relies on two-digit date codes to perform computations and
decision -making functions. Commencing on January 1, 2000, these computer
programs may fail from an inability to interpret date codes properly,
misinterpreting "00" as the year 1900 rather than 2000. In association with
Electronic Data Systems Corporation (the Company's principal software vendor for
such systems), the Company is in the process of upgrading the Company's billing,
credit and call tracking systems to become Year 2000 compliant, at a cost to the
Company of approximately $750,000. At the same time, a number of the computers
of the Company's vendors that interface with the Company's systems may run on
programs that have Year 2000 problems and may disrupt the Company's billing,
credit and tracking systems. Failure of any of the computer programs integral to
the Company's vendors could adversely affect the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
14
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K, including without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward - looking
statements" within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward - looking statements. Such factors include, among others, those set
forth above. GIVEN THESE UNCERTAINTIES, THE STOCKHOLDERS OF THE COMPANY ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS.
ITEM 2. PROPERTIES
The Company does not own any real property. The table below sets forth
certain information with respect to the material properties leased by the
Company, including the Company's executive offices in Santa Barbara, California.
All of such properties consist of office space. The Company and its subsidiaries
also operate points-of-presence for the purpose of creating local access points
to its network backbone.
<TABLE>
<CAPTION>
CURRENT
MONTHLY
LOCATION SQUARE FEET EXPIRATION DATE(2) RENT(1)
- ----------------------------------------------------------------- ----------- ------------------ --------------
<S> <C> <C> <C>
501 Bath Street.................................................. 6,798 March 2003 $ 11,863
Santa Barbara, CA
8721 Airport Freeway............................................. 24,500 June 2000 $ 23,050
Fort Worth, TX
104 West Anapamu................................................. 3,441 November 2001 $ 4,800
Suites C&D
Santa Barbara, CA
70 West 36(th) St., Suite 605.................................... 2,500 December 2002 $ 4,800
New York, NY
38 East 32(nd) St., 8(th) Floor.................................. 4,400 February 2004 $ 4,416
New York, NY
1600 Parkwood Circle............................................. 2,190 December 2001 $ 3,750
Suite 603
Atlanta, GA
2333 Mill Creek Drive............................................ 1,446 February 2001 $ 3,370
Suite 120
Laguna Hills, CA
</TABLE>
- ------------------------
(1) All amounts shown are on a "triple net" basis.
(2) Subject to certain renewal options held by the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company is the defendant in a class action under the federal securities
laws (IN RE AVTEL SECURITIES LITIGATION, Case No. 98-9236) currently pending in
the United States District Court for the Central District of California.
This litigation is the consolidation of five separate class action suits
that were filed against the Company and certain of its officers, alleging
securities fraud. The plaintiffs are members of the class of investors who
purchased shares of the Company's Common Stock on November 12, 1998. On that
day, the
15
<PAGE>
trading price for the Common Stock on The Nasdaq SmallCap Market rose from
$2.125 to $31 per share, with more than 3 million shares trading. The plaintiffs
allege that a press release issued by the Company on November 12, 1998,
announcing the launch of its subsidiaries' DSLink Service for high speed
Internet access, and an interview with AvTel Chief Executive Officer Anthony E.
Papa concerning that service, as reported by Bloomberg News, were misleading and
caused a fraud on the market for the Company's publicly-traded securities.
This matter is still in the early stages of litigation. The plaintiffs filed
a consolidated and amended complaint on March 15, 1999, and the Company is in
the process of responding to that complaint. The plaintiffs have yet to state
the amount of damages they seek.
The Company contends that its statements were not misleading, and intends to
defend vigorously this securities litigation. However, it is not possible to
predict at this time the likely outcome of this action or the cost the Company
will incur in defending the action.
The Company is not aware of any proceedings against the Company contemplated
by any governmental authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
16
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since May 28, 1998, the Company's Common Stock has been traded on The Nasdaq
SmallCap Market under the trading symbol "AVCO". Prior to its listing on The
Nasdaq SmallCap Market, the Common Stock traded on the Electronic Bulletin
Board. There is no established public trading market for the Company's Preferred
Stock. The following table sets forth, for the indicated periods, high and low
price information for the Company's Common Stock. High and low bid information
is provided with respect to periods prior to May 28, 1998. High and low prices
for periods after May 28, 1998, reflect high and low sales prices. Such
information was provided by Nasdaq, various market makers and on-line quote
reporting services. The quotations provided reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions. All prices have been adjusted to reflect the Reverse Stock Split.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, 1997 HIGH LOW
<S> <C> <C>
First Quarter $ 3.50 $ 2.00
Second Quarter $ 18.00 $ 3.13
Third Quarter $ 19.00 $ 9.75
Fourth Quarter $ 19.00 $ 7.00
<CAPTION>
YEAR ENDING DECEMBER 31, 1998
<S> <C> <C>
First Quarter $ 8.63 $ 4.94
Second Quarter $ 15.88 $ 7.67
Third Quarter $ 8.00 $ 1.75
Fourth Quarter $ 31.00 $ 2.00
</TABLE>
The number of shareholders of record of the Company Common Stock as of March
17, 1999, was 396. At that date there were two record holders of the Company's
Preferred Stock.
The Company has not paid any cash dividends on its Common Stock to date and
does not anticipate paying dividends in the foreseeable future. It is the
present intention of management to utilize all available funds for the
development of the Company's business. The terms of the Company's Series A
Convertible Preferred Stock prevent the payment of any dividend on the Company's
Common Stock unless (1) all cumulative dividends on the Series A Convertible
Preferred Stock have been fully paid, and (2) the holders of at least 50% of the
outstanding shares of the Series A Convertible Preferred Stock have approved
such dividend. The terms of the Company's Series B Convertible Preferred Stock
also prohibit payment of any dividends on the Common Stock prior to the holder
of the Series B Stock receiving their dividends. In addition, the terms of the
Company's secured credit agreement provide that the Company cannot declare a
dividend on any of its ownership interests without the secured lender's
approval.
In July 1997, New Best Connections, Inc. ("Best"), a subsidiary of Matrix,
issued options to purchase Matrix Common Stock to 41 individuals in recognition
of their past services to Best, Matrix and related companies (and in
satisfaction of certain obligations of Best to shareholders of Matrix who had
contributed shares of Matrix stock to Best for this purpose). As a result of the
Share Exchange, the shares of Matrix Common Stock subject to such options were
converted into shares of the Company's Common Stock. The exercise price for such
options was $1.50 per share. During the year ending December 31, 1998, (1)
options were exercised for 107,250 shares, (2) options for 67,250 shares were
cancelled in connection with the exercise of other options, and (3) options for
73,000 shares were forfeited or expired unexercised. At December 31, 1998, none
of such options remained outstanding. No underwriters were used in connection
with these option exercises and none of the shares issued upon exercise was
issued publicly. The Company
17
<PAGE>
has relied on the exemptions from registration provided by Section 4(2) of the
Securities Act and Rule 506 of Regulation D promulgated thereunder. The
optionees 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.
On November 19, 1998, the Company issued 650,000 shares of its Common Stock,
which were not registered under the Securities Act, in connection with the
acquisition of Remote Lojix/PCSI, Inc., a New York corporation ("RLI"). No
underwriters were used in this transaction and none of such shares were issued
publicly. The Company relied on the exemptions from registration provided by
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder. The persons receiving shares were the 20 shareholders of RLI. These
persons 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. Each such person signed a stock
purchase agreement containing appropriate investment representations and
covenants.
ITEM 6. SELECTED FINANCIAL DATA
For accounting purposes, the Share Exchange was treated as a reverse
acquisition of AvTel by Matrix. Accordingly, the Company's results of operations
reflect the operations of Matrix prior to December 1, 1997 and reflect the
combined operations of AvTel and Matrix subsequent to December 1, 1997. The
following selected operations data of the Company for the years ended December
31, 1998, 1997, 1996, 1995 and 1994 and balance sheet data as of December 31,
1998, 1997, 1996, 1995 and 1994 have been derived from the Company's (or
Matrix's) audited financial statements. These selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere herein.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 44,013,498 $ 51,389,080 $ 71,558,295 $ 64,289,718 $ 59,551,307
Operating income (loss)............. (7,423,753) (10,757,960) 4,091,034 2,422,393 604,109
Net income (loss)................... (7,127,318) (10,191,720) 2,566,734 (2,440,493) 643,200
Net loss per common share
--basic and diluted............... (0.74) (1.23) N/A N/A N/A
Cash dividends per
common share...................... -- -- -- -- --
</TABLE>
- ------------------------
N/A--Not applicable
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Working capital (deficit)............ $ (3,022,959) $ 5,570,657 $ 6,066,620 $ 206,071 $ (140,741)
Total Assets......................... 14,634,354 18,724,850 20,338,404 17,580,694 14,957,279
Long term borrowings................. 1,112,890 -- -- -- --
Stockholders' Equity................. 3,185,253 7,809,048 7,861,883 3,539,522 2,372,333
</TABLE>
- ------------------------
Notes to Selected Financial Data
18
<PAGE>
(1) Matrix was originally formed May 29, 1990 as a Texas general partnership.
The partners consisted of Matrix Communications, Limited ("MCL") a Texas
limited liability partnership and Onward and Upward, Inc. ("OUI"). Effective
January 1, 1994, the partnership was dissolved. Prior to the dissolution,
cash distributions were made to OUI in satisfaction of its partnership
interest. Concurrent with the dissolution, all remaining tangible and
intangible assets and liabilities of Matrix then owned by MCL were
transferred to Matrix Telecom, Inc., a Texas corporation. Effective June 30,
1995, MCL was liquidated and its sole asset (Matrix capital stock) was
distributed to MCL's partners in proportion to their ownership interests.
(2) Matrix's original stock issuance consisted of 100 common shares. Effective
December 31, 1994, a 10 for 1 stock split was declared. Concurrent with the
dissolution of MCL on June 30, 1995, Matrix's then outstanding 1,000 shares
of common stock were canceled and 100,000 shares were distributed to the
prior MCL partners in proportion to the ownership interest in MCL. Effective
March 10, 1997, an 18 for 1 stock split was declared resulting in 3,484,260
shares being then outstanding. On December 1, 1997, the Company effected the
Reverse Stock Split as part of the Reincorporation Merger, and then acquired
Matrix through the issuance of 9,582,493 shares of Common Stock (including
1,999,997 shares held as treasury stock after the Share Exchange which have
subsequently been cancelled). All share amounts have been restated to
reflect the stock splits and share exchanges.
(3) In October 1995, Matrix issued 2,405,499 shares of its common stock valued
at $3,607,682 in exchange for all of the outstanding common stock of DNS
Communications, Inc., a Houston based long distance reseller. Subsequent to
the acquisition, the operations of DNS generated substantial losses. DNS's
customer churn rate and bad debts as well as projected cash flows were
evaluated as of December 31, 1995, and it was determined that the remaining
investment in the DNS acquired customer base totaling approximately
$4,462,000 should be written off.
(4) Per share amounts are not reflected for 1996, 1995 and 1994 due to the
recapitalization of the Company as a result of the reverse acquisition in
1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
BACKGROUND
The following information should be read in connection with the consolidated
financial statements of the Company and related notes included elsewhere in this
report.
SHARE EXCHANGE
As described above under "Business--Background--Acquisition of Matrix," on
December 1, 1997, AvTel and Matrix completed the Share Exchange. For accounting
purposes, the Share Exchange was treated as a reverse acquisition of AvTel by
Matrix. 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. In addition, holders of Matrix outstanding
stock options received non-qualified stock options of AvTel. The following
discussion of results of operations reflects the operations of Matrix prior to
December 1, 1997 and reflects the combined operations of AvTel and Matrix
subsequent to December 1, 1997. Accordingly, references to the Company refer to
operations of Matrix prior to the Share Exchange and the combined operations of
Matrix and AvTel subsequent to the Share Exchange.
The reverse acquisition of AvTel by Matrix was accounted for using the
purchase method of accounting. In order to value the consideration given in the
Share Exchange, the market price of AvTel's Common Stock for a period
immediately preceding the announcement of the Share Exchange was used. As of the
date of acquisition, the Company determined the fair value of the net tangible
and intangible assets and liabilities acquired. The underlying fair value of
AvTel's net assets was substantially less than the indicated market value of
AvTel's common and preferred stock. Accordingly, the Company recorded a charge
to income of $9.1 million immediately subsequent to the reverse acquisition.
19
<PAGE>
ACQUISITION OF NEW BEST CONNECTIONS, INC.
Effective July 1, 1997, Matrix acquired New Best Connections, Inc., a Texas
corporation ("Best"), an affiliate of Matrix through substantially similar
common ownership, by means of a share-for-share exchange. Best's primary assets
were cash of $211,000, ownership of shares of Matrix common stock, and Best's
relationships with the field force of sales agents. The assets and liabilities
of Best were recorded at their historical cost, which approximated the fair
value of such assets as of July 1, 1997.
ACQUISITION AND DISPOSITION OF DNS COMMUNICATIONS, INC.
In October 1995, Matrix issued shares of its common stock valued at $3.6
million in exchange for all of the outstanding common stock of DNS
Communications, Inc. ("DNS"), a Houston-based long distance reseller. The
transaction was accounted for under the purchase method. The purchase price in
excess of the book value of DNS net assets was pushed down to DNS and was
allocated based upon the estimated fair value of the assets and liabilities
acquired at the date of acquisition.
Subsequent to the acquisition, the operations of DNS generated substantial
losses. DNS's customer churn rate and bad debts as well as projected cash flows
were evaluated and as of December 31, 1995 it was determined that the remaining
investment in the DNS acquired customer base totaling approximately $4.4 million
should be written off.
In June 1996, Matrix sold the customer base acquired in the DNS acquisition
in addition to certain blocks of customers acquired during 1995 and 1996
together with related assets to a former officer of Matrix and a former
shareholder of DNS for approximately $5.2 million. Matrix recorded a gain on
this sale of approximately $3.2 million.
Due to the timing of the acquisition and subsequent decision to sell the
operations of DNS, Matrix has recorded its interest in DNS operations using the
equity method of accounting.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
REVENUES
Revenues for the year ended December 31, 1998 decreased 14.4% or $7.4
million to $44.0 million from $51.4 million for the year ended December 31,
1997. The decrease in revenues resulted primarily from the reorganization and
repositioning of the Company's Channel Markets Group ("CMG"). The focus of the
Company is to be a provider of broadband network services integrating voice,
data and internet solutions to mid-size corporations, small-office home-office
professionals and select residential market segments. Historically, CMG has
focused on selling retail long distance telephone service through telemarketing,
direct mail, and distributors or agents. During the fourth quarter of 1998, CMG
implemented a new strategy to sell Internet access and additional voice services
exclusively through affinity groups, agents and distributors.
The primary source of revenues of the Company during 1998 continued to be
voice distribution channels. Factors similar in nature to those affecting all
resellers of long distance have continued to effect a decline in revenues. 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, terminated the direct
marketing of casual calling products and discontinued the telemarketing of
residential customers. Long distance revenue, excluding discontinued sales
channels, decreased 9.5% while the associated minutes of usage decreased only
3.8% for the year ended December 31, 1998 compared to the year ended December
31, 1997. Long distance revenue from affiliated companies was $4.6 million and
$3.6 million for the years ended December 31, 1998 and December 31, 1997,
respectively.
20
<PAGE>
Decreases in revenues were additionally affected by a continued attrition
and price reductions of a maturing customer. The effects of reduced revenue from
discontinued sales channels is expected to be offset by increasing revenues from
the Company's repositioning of CMG and the addition of new marketing
organizations. The effects of competitive lower pricing as well as the decline
of the customer base is expected to lessen dramatically as pricing decreases
within the industry and reaches its floor, and the Company increases its focus
on third party distributors, affinity groups and niche markets. Management
additionally anticipates that the revenue decrease will stabilize as the
continued integration of and revenue from the Business Markets Group ("BMG")
targeting corporate data networking, voice and Internet service needs continues
to expand and grow beyond the long distance portion.
Decreases in revenues resulting from the Share Exchange of AvTel and Matrix
effective December 1, 1997 were anticipated by the Company beginning in the
first quarter of 1998. At that time, the management team chose to discontinue
and reduce certain unprofitable distribution channels. Management continued
throughout 1998 to reduce the Company's dependence on low margin, high churn
segments and to focus its resources in the business markets with higher average
billing and retention rates, niche ethnic consumer markets, small office-home
office distributors and agents, and internet service providers. For the year
ended December 31, 1998, revenues generated from discontinued sales channels
decreased 43.4% or $8.2 million to $10.7 million from $18.9 million for the year
ended December 31, 1997. Long distance revenue generated from agents increased
3.5% or $665,000 to $19.5 million for the year ended December 31, 1998 from
$18.9 million for the year ended December 31, 1997.
Data networking needs of the corporate customer and the Internet 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 the Company's 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. With the
acquisition of RLI effective November 1, 1998, the Company recognized $1.0
million in technology systems integration and repair service revenues for the
two months ended December 31, 1998.
GROSS MARGIN
Gross margin decreased $3.0 million to $12.2 million for the year ended
December 31, 1998 from $15.2 million for the year ended December 31, 1997. As a
percentage of revenues, gross margin decreased by 1.9 percentage points to 27.6%
for the year ended December 31, 1998 from 29.5% for the year ended December 31,
1997. The decrease in gross margin as a percentage of revenues primarily
resulted from an increase in bad debt expenses, which was partially offset by
decreases of network cost from renegotiated contracts and leased facilities, all
of which are included in cost of sales.
Network cost as a percentage of revenues decreased by 1.3 percentage points
to 65.2% for the year ended December 31, 1998 from 66.5% for year ended December
31, 1997. The primary factor that effected this decrease was significantly lower
wholesale rates, which went into effect March and July of 1998, negotiated with
the Company's major underlying carriers.
Bad debt expense as a percentage of revenues increased by 2.6 percentage
points to 6.2% for the year ended December 31, 1998 compared to 3.6% for the
year ended December 31, 1997. The increased bad debt expense primarily resulted
from decreased collection percentages from the Local Exchange Carriers ("LECs")
in certain geographical regions, primarily the northeastern portion of the
United States. This related principally to the Company's now discontinued casual
calling business. 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 casual calling was
experienced in the northeastern portion of the United States in which the LECs'
collection percentages were considerably lower, and the
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<PAGE>
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 bad debt percentages experienced by
the Company's internal collection staff are significantly lower than those of
the LECs. For the fourth quarter of 1998, the Company experienced an average bad
debt percentage of 3.8% on direct billed products and 9.1% on LEC billed
products. 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 December 31, 1998, 58% of the Company's revenue was direct
billed compared to 23% as of December 31, 1997.
SELLING, GENERAL, AND ADMINISTRATIVE COSTS
Selling, general, and administrative costs increased $2.4 million to $18.5
million for the year ended December 31, 1998 from $16.1 million for the year
ended December 31, 1997. As a percentage of revenues, selling, general, and
administrative costs increased by 10.6 percentage points to 42.0% for the year
ended December 31, 1998 from 31.4% for the year ended December 31, 1997.
The primary reason for the increase to selling, general, and administrative
costs was the expanded sales force and related expenses including general office
expense, rent, utilities and travel expenditures. The remaining increase in cost
was attributable to the purchase of RLI by the Company, effective November 1,
1998. As of December 31, 1998, the Company had three primary business locations,
eight additional sales locations throughout the United States and 47 sales and
marketing related employees compared to two primary business locations, two
remote sales locations and 21 sales and marketing related employees as of
December 31, 1997.
The decrease in revenue as explained above resulted in a decrease in selling
expenses of $1.6 million for the year ended December 31, 1998. Stock
compensation expense for the year ended December 31, 1998 was $477,000 compared
to $749,000 for the year ended December 31, 1997. The change was due primarily
to two circumstances. First, during 1998, the Company caused certain options
previously granted to accelerate (and to expire if not exercised before December
13, 1998). As a result, fewer of such options were exercised than contemplated
in 1997, and the stock price used to calculate stock compensation expense for
such options was considerably lower than in 1997. The resulting decrease in
stock compensation expense was partially offset by additional expense recognized
in connection with the early vesting of a restricted stock grant to a departing
director. 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.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased $427,000 to $1,107,000 for the year
ended December 31, 1998 from $680,000 for the year ended December 31, 1997. The
increase primarily resulted from amortization of the acquired customer base
associated with the Share Exchange of AvTel and Matrix effective December 1,
1997. The customer base is amortized on a straight-line basis over five years.
Similarly, the acquisition and consolidation of assets related to the Share
Exchange resulted in some increases in depreciation expense. As a result of the
acquisitions of DMI and RLI in the fourth quarter of 1998, the company
recognized goodwill in the amount of $4.5 million. Goodwill is amortized on a
straight-line basis over fifteen years. RLI comprised $4.4 million of goodwill.
Goodwill was determined by the purchase price in excess of net liabilities
assumed. RLI provides service and installation of local area networks. Their
name and reputation in their existing geographical area is strong and
facilitates RLI's entry into other geographical markets. The service provided is
generally recurring and RLI's clientele is comprised of large, stable companies
that are loyal to their product and level of service provided.
22
<PAGE>
INTEREST EXPENSE AND OTHER INCOME, NET
Interest expense and other income net of other expenses decreased $195,000
to $95,000 for the year ended December 31, 1998 from $290,000 for the year ended
December 31, 1997. Interest expense increased $74,000 to $86,000 for the year
ended December 31, 1998 from $12,000 for the year ended December 31, 1997 due to
interest on the Coast Business Credit line of credit and leased equipment
acquired as the result of the Share Exchange of AvTel and Matrix. Other income
decreased $121,000 to $181,000 for the year ended December 31, 1998 from
$302,000 for the year ended December 31, 1997 primarily due to the decrease of
interest earned from cash investments.
INCOME TAXES
The Company recognized a tax benefit of $202,000 for the year ended December
31, 1998 compared to $276,000 for the year ended December 31, 1997. The tax
benefit in 1998 resulted from the loss from operations. As of December 31, 1998,
the Company has net operating loss carryforwards for federal tax purposes of
approximately $9.1 million which are available on a limited basis to offset
future federal taxable income, if any, through 2018.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
REVENUE
Revenue for the year ended December 31, 1997, decreased 28.1% or $20.2
million to $51.4 million from $71.6 million for the year ended December 31,
1996. The decrease in revenue resulted primarily from decreases in sales from
three significant sales channels, all of which were affiliated with the Company
through substantially common ownership prior to the Share Exchange of AvTel and
Matrix effective December 1, 1997. These sales channels were a distributor
selling via telemarketing, a distributor focusing on the casual or dial-around
customer, and a DNS distributor of long distance services. The relationship with
the DNS distributor was terminated resulting from the sale of the DNS customer
bases in June of 1996.
The Company in 1997 chose to reduce its focus on the promotion of the
dial-around customer due to the significant costs of direct mailing and bad debt
associated with this product. Reduced sales from the telemarketing distributor
resulted from the erosion of the retail pricing in the market for the
residential consumer. Pricing continued to decline during 1997, and attrition
from a maturing customer base resulted in losing customers on higher gross
margin products. Attrition rates associated with long distance products are a
normal industry occurrence; however, methods of calculation differ within the
industry.
The Company sought to reduce its risk from reliance on a small group of
distributors, and refocused to obtain multiple revenue sources external to the
Company. New distributors significantly contributed to the mix in 1997. 1997
sales from sources other than the Company's primary 1996 distributors increased
more than 20%.
GROSS MARGIN
Gross margin decreased $8.7 million in 1997, to $15.2 million for the year
ended December 31, 1997 from $23.9 million for the year ended December 31, 1996.
As a percentage of net sales gross margin decreased 3.9 percentage points to
29.5% for the year ended December 31, 1997 from 33.4% for the year ended
December 31, 1996. Two primary factors contributed to the decrease in gross
margin in 1997.
First, due to increasing competitive market demands, the Company was forced
to continue decreasing its retail rates in 1997 to meet the competitive rate
reductions; however, the underlying carrier costs to the Company did not change
due to contractual commitments. Accordingly, cost of network as a percentage of
revenue increased reflecting a lower gross margin in 1997 over 1996.
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<PAGE>
Second, bad debt as a percentage of revenue increased approximately 2% in
1997, primarily resulting from increased bad debt associated with the casual or
dial-around product. The majority of the Company's revenues were billed and
collected from the Local Exchange Carriers ("LECs"), with which the Company has
agreements. Collection policies and aggressiveness in collection procedures
differ among the LECs. The Company experienced significant sales growth in a
geographical location in which the LECs bad debt percentages were significantly
higher than other LECs.
SELLING, GENERAL, AND ADMINISTRATIVE COSTS
The Company's selling, general, and administrative costs decreased $2.7
million in 1997 from 1996. As a percentage of revenue, such costs increased 5.1
percentage points to 31.4% for the year ended December 31, 1997 compared to
26.3% for the year ended December 31, 1996. This increase resulted primarily
from the decrease in revenues causing the expense as a percentage of revenue to
increase. Certain changes are more fully described below.
Certain selling, general, and administrative costs related to the addition
of AvTel operations to Matrix subsequent to the effective date of the Share
Exchange, December 1, 1997, amounted to approximately $286,000, accounting for
.56% of the increase as a percentage of revenues in 1997 over 1996. Selling
costs related to direct mailing to the casual or dial-around customer (which
were absorbed by the sales distributor in 1996) were approximately $605,000 in
1997, accounting for 1.18% of the increase as a percentage of revenues in 1997
over 1996. Salary expenses increased approximately $651,000 between the years,
or 3.76% as a percentage of revenues in 1997 over 1996, resulting primarily from
integration of AvTel employees subsequent to the Share Exchange and the addition
of certain sales and marketing personnel in 1997.
Billing and collection fees and distributor commissions decreased
approximately $3.9 million, or 1.82% as a percentage of revenues. Most of the
new products sold in 1997 were direct billed. As the percentage of direct billed
customers increased, billing and collection fees have decreased. Similarly, as
sales of certain products having a higher commission structure have declined,
commission expense has also declined.
Certain regulatory and professional services increased approximately
$266,000, or 1.22% as a percentage of revenues in 1997 over 1996. Carrier fees
specific to telecommunication providers upon reaching certain thresholds of
customers were met in the last half of the year in 1996; therefore, increased
fees in 1997 resulted from being charged the lower volume based fees for a full
year. Professional fees increased in 1997 over 1996 for two primary reasons.
First, due to increased market demands for information systems programmers, the
Company was forced to secure external contractors. Second, certain telemarketing
and verification costs associated with the sales process increased in 1997
primarily resulting from the sales distributor absorbing these costs in 1996.
Other selling, general and administrative costs decreased approximately $213,000
in 1997. As a percentage of revenue, these costs increased .81% in 1997 over
1996 due to decreasing revenues.
ACQUISITION-RELATED WRITEOFF
The $9.1 million write off relates to the Share Exchange and is discussed
under "Background" above.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense decreased approximately $314,000 for
the year ended December 31, 1997, compared to the year ended December 31, 1996,
resulting primarily from older assets becoming fully depreciated.
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<PAGE>
INTEREST EXPENSE AND OTHER INCOME, NET
Interest expense decreased $219,000 to $12,000 for the year ended December
31, 1997 from $231,000 for the year ended December 31, 1996. The decrease
resulted from reduced borrowings in 1997 compared to 1996. The Company had
sufficient cash from operations to meet operating expenses and capital
expenditures. Other income net of other expenses increased more than 11% for
1997 over 1996 primarily resulting from increases in interest earned from cash
investments.
INCOME TAXES
The Company recognized a tax benefit of $276,000 for the year ended December
31, 1997 compared to a tax expense of $1.7 million for the year ended December
31, 1996. The tax benefit in 1997 resulted from the loss from operations for the
year 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements during the years ended December 31, 1998 and
1997, the Company reported net losses of $7,127,318 and $10,191,720,
respectively. In addition, as of December 31, 1998, the Company had a working
capital deficit of $3,022,959, and for the year ended December 31, 1998, net
cash used in operations totaled $5,978,797.
As a result, as of December 31, 1998, unless the Company effects substantial
changes in its operating methods, the Company does not have sufficient resources
to meet its anticipated operating requirements during 1999 without obtaining
additional financing. The Company is actively pursuing an equity line of credit
through discussion with potential investors. If the Company is unable to obtain
financing in a timely manner and on acceptable terms, management is developing
and intends to implement a plan that would allow the Company to continue to
operate through 1999. This plan would include significantly reducing the
Company's workforce, eliminating advertising expenditures, reducing professional
services and reducing or eliminating other discretionary expenditures.
On October 2, 1998, the Company entered into a secured credit facility with
Coast Business Credit. This credit facility consists of a line of credit of up
to $7.5 million. Under the line of credit, the Company may borrow up to 75% of
eligible receivables (as defined). In addition, the line of credit may be
utilized in connection with certain acquisitions and equipment purchases as well
as to provide a facility for issuing letters of credit. Borrowings under the
line of credit bear interest, payable monthly, based upon the prime rate of Bank
of America NT & SA plus 2% (9.75% at December 31, 1998). As of December 31,
1998, borrowing outstanding under the credit facility amounted to $1,113,000
with approximately $1,634,000 available for future borrowings. Borrowings under
the credit facility are secured by substantially all of the assets of the
Company. The credit facility expires on October 31, 2000.
Subsequent to the end of the year, the Company sold $1,500,000 of its Series
B Convertible Preferred Stock in a private placement. The Company is also
actively pursuing a private equity line of credit arrangement with potential
investors which may enable the Company to raise additional capital through
subsequent sales of its Common Stock. See "Business--Recent Developments."
The primary sources of operating cash flow for the Company are (1) revenues
derived from the sale of information technology and telecommunications services
to individuals and business, and (2) its secured credit facility. Minor sources
of revenues are received for the provision of back office support to affiliated
and non-affiliated companies and for earnings from investment income. The
primary uses of cash are payments to underlying network vendors for provisioning
telecommunications facilities, to sales distributors for soliciting long
distance sales, and to the major LECs for billing and collecting directly from
the end user. Net cash used in operations totaled $6.0 million for the year
ended December 31, 1998, and net cash
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provided by operations was $1.7 million for the year ended December 31, 1997,
and $1.0 million for the year ended December 31, 1996.
As of December 31, 1998, the Company had a working capital deficit of $3.0
million. The Company's accounts receivable decreased to $4.8 million at December
31, 1998 from $7.0 million at December 31, 1997. The decrease was primarily due
to a corresponding decrease in sales described elsewhere in this discussion.
Current liabilities increased to $10.2 million as of December 31, 1998 from $9.8
million as of December 31, 1997. The increase in current liabilities is due to
the additional liabilities acquired with the purchase of RLI, offset by the
decrease in accrued liabilities due to a corresponding decrease in sales. Sales
and excise taxes included in current liabilities increased to $1.4 million for
the year ended December 31, 1998 from $736,000 for the year ended December 31,
1997, as a result of the tax liabilities assumed with the purchase of RLI. Due
to affiliates decreased to $324,000 for the year ended December 31, 1998 from
$2.7 million for the year ended December 31, 1997. In 1998, Pacific Gateway
Exchange ("PGE") was no longer affiliated with the Company. As of December 31,
1997, $2.3 million was included in due to affiliates associated with PGE.
Prior to the Share Exchange, the Company loaned $2.0 million to an
affiliated company, Core Marketing, LLC, during 1997. Of such amount, $201,000
was repaid prior to December 31, 1997, and the remainder was repaid in 1998.
The Company has been able to finance its capital expenditures, which have
consisted primarily of property and equipment, from funds generated from
operations and, commencing in the last quarter of 1998, with the proceeds of its
secured credit facility. An important component of the Company's past growth has
been to develop its business through acquisitions, including the Share Exchange
and the acquisitions of RLI and DMI. The Company intends to continue this
strategy. In appropriate circumstances, the Company may utilize its capital
stock for acquisitions in addition to debt and equity financing.
YEAR 2000 COMPLIANCE
The Year 2000 issue concerns the inability of computer systems and certain
other equipment to properly recognize and process data that uses two digits
rather than four to designate particular years. The Company has initiated a Year
2000 Project Plan ("the Plan") to assess whether its systems that process date
sensitive information will perform satisfactorily leading up to and beyond
January 1, 2000. The goal of the Plan is to correct, prior to January 1, 2000,
any Year 2000-related problem with critical systems, the failure of which could
have a material adverse effect on the Company's operations. The Plan includes
steps to (1) identify each critical system element that requires date code
remediation, (2) establish a plan to remediate such systems, (3) implement all
required remediations and (4) selectively test the remediated systems.
Thus far, the identification phase has identified Year 2000 issues in the
following critical Company-owned and leased systems: rating and billing systems
used by the Company to process and prepare billing data for its customer base.
In addition, the Company receives critical services from providers of utilities
and other services to facilities that house employees and equipment. The Company
is also critically reliant upon the systems of other telecommunications
providers on which the Company depends to deliver services and invoices to its
customers. The identification and planning phases of the Plan are materially
complete as they relate to Company-owned systems. As they relate to third party
vendors and other telecommunications carriers, the identification and planning
phases are on-going and are expected to be materially complete during second
quarter 1999.
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Based on work completed under the Plan to date, the Company currently
intends to take the following additional steps under its Plan with respect to
Company-owned systems, third-party vendors and other telecommunications
carriers:
- The Company generally plans to remediate Company-owned rating, billing and
collection systems through the revision or replacement of current system
components. Necessary changes to Company-owned systems are in process and
are expected to be completed by third quarter 1999. The selective testing
and verification of such changes are expected to be completed in the third
quarter of 1999. Due to the large number of system components requiring
remediation, the Company does not intend to test every remediated system
but will rely upon the results of testing of the critical components of
such systems to determine the effectiveness of remediation efforts.
Components not tested are not considered critical to the Company's
business.
- With respect to critical services provided by utilities and other third
parties, the Company is in the process of contacting all such suppliers.
Thus far, a majority of those suppliers who have responded have indicated
that their systems and service delivery mechanisms are Year 2000 compliant
or can be made so through currently available modifications. The Company
plans to continue monitoring all third-party remediation efforts and to
develop contingency plans for the delivery of such services as necessary.
- The Year 2000 compliance status of other telecommunications providers with
which the Company's systems interact is not yet known. The Company is
making inquiries of these providers to determine their compliance status
and expects to obtain the results of compliance tests during second
quarter 1999, although there can be no assurance that providers will
supply this information.
While the Company currently believes that it will be able to remediate and
selectively test Company-owned systems in time to minimize any detrimental
effect on its operations, there can be no assurance that such steps will be
successful. Failure by the Company to timely and effectively remediate its
systems, or the failure of critical vendors and suppliers and other
telecommunications carriers to remediate affected systems, could have a material
adverse impact on the Company's business, financial condition, results of
operations and prospects. Because the impact of Year 2000 issues on the Company
is materially dependent on the mitigation efforts of parties outside the
Company's control, the Company cannot assess with certainty the magnitude of any
such potential adverse impact. However, based upon risk assessment work
conducted thus far, the Company believes that the worst case scenario of the
failure by the Company, its suppliers or other telecommunications carriers with
which the Company interacts to resolve Year 2000 issues would be an inability by
the Company to timely and accurately process service requests and to timely and
accurately bill its customers. In addition to lost earnings, these failures
could also result in loss of customers due to service interruptions and billing
errors, substantial claims by customers and increased expenses associated with
stabilizing operations and executing mitigation plans.
Contingency planning to maintain and restore service in the event of natural
disasters, power failures and systems-related problems is a routine part of the
Company's operations. The Company believes that such contingency plans will
assist the Company in responding to the failure by outside service providers to
successfully address Year 2000 issues. In addition, the Company is currently
identifying and considering various Year 2000-specific contingency plans,
including identification of alternate vendors and service providers and manual
alternatives to system operations. These Year 2000-specific contingency plans
are expected to be materially completed during the second quarter of 1999, but
their review and development will continue throughout 1999.
Although the total costs to implement the Plan cannot be precisely
estimated, the Company incurred minimal costs during 1998 (none of which was
related to hardware costs) and anticipates spending an aggregate of
approximately $750,000 during 1999 (which includes $250,000 of hardware costs).
These costs will be expensed as incurred, unless new systems or equipment are
purchased that should be capitalized in accordance with generally accepted
accounting principles. Some of the costs represent ongoing investment
27
<PAGE>
in systems upgrades, the timing of which is being accelerated in order to
facilitate Year 2000 compliance. In some instances, such upgrades will position
the Company to provide more and better-quality services to its customers than
they currently receive. The Company expects to fund these costs with a
combination of financing provided by the hardware vendor, cash provided by
operations, and other debt or equity financing. Cost estimates and statements of
the Company's plans discussed above are forward-looking statements that are
derived using numerous assumptions of future events, many of which are outside
the Company's control, including the availability and future cost of trained
personnel and various other resources, third party modification plans, the
absence of systems requiring remediation that have not yet been discovered, and
other factors.
INFLATION
The Company does not believe that the relatively moderate rates of inflation
over the past three years have had a significant effect on its net sales or its
profitability.
RECENTLY-ISSUED ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities and is presented in the consolidated
statements of stockholders' equity and comprehensive income. The statement
requires only additional disclosures in the consolidated financial statements;
it does not affect the Company's financial position or results of operations.
Comprehensive income (loss) for the years ended December 31, 1998, 1997 and 1996
is equal to net income (loss) reported for such periods.
In 1998, the Company adopted the provisions of SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. This statement supersedes SFAS No. 14, Financial Reporting for
Segments of a Business Enterprise, but retains the requirement to report
information about major customers. See Note 11 of the Notes To Consolidated
Financial Statements for segment disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. This statement is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. Management does not anticipate that
this statement will have a material impact on the Company's consolidated
financial statements.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not exposed to material future earnings or cash flow
fluctuations, from changes in interest rates on its long-term debt at December
31, 1998. A hypothetical increase of 97 basis points in interest rate (ten
percent of the Company's overall borrowing rate) would not result in a material
fluctuation in future earnings or cash flow. The Company had not entered into
any derivative financial instruments to manage interest rate risk or for
speculative purposes and is currently not evaluating the future use of such
financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company and supplementary data are included
beginning immediately following the signature page to this report.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under the
captions "Election of Directors" and "Compliance with Section 16(a) of the
Securities Exchange Act of 1934."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under the
caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under the
captions "Stock Ownership" and "Principal Shareholders."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be contained in the Company's
definitive Proxy Statement for its 1999 Annual Meeting of Stockholders under the
captions "Certain Relationships and Transactions."
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The index to the financial statements and financial statement schedules
filed as part of this report is set forth immediately following the
signature page.
(b) The Company did not file any Current Reports on Form 8-K during the
quarter ending December 31, 1998.
(c) The index to the exhibits filed as part of this report is set forth
immediately following the financial statements.
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has caused this report to be signed on it behalf by the undersigned, thereunto
duly authorized.
<TABLE>
<S> <C> <C>
AVTEL COMMUNICATIONS, INC.
Dated: April 14, 1999 By /s/ ANTHONY E. PAPA
-----------------------------------------
Anthony E. Papa,
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
</TABLE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant and in the capacities
indicated on this 13th day of April, 1999.
<TABLE>
<S> <C> <C>
AVTEL COMMUNICATIONS, INC.
By /s/ ANTHONY E. PAPA
-----------------------------------------
Anthony E. Papa,
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By /s/ JAMES P. PISANI
-----------------------------------------
James P. Pisani,
PRESIDENT, CHIEF OPERATING OFFICER AND
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
By /s/ JOHN E. ALLEN
-----------------------------------------
John E. Allen
DIRECTOR
By /s/ JEFFREY J. JENSEN
-----------------------------------------
Jeffrey J. Jensen
DIRECTOR
By
-----------------------------------------
Anthony D. Martin
DIRECTOR
</TABLE>
30
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets, December 31, 1998 and 1997.................................................... F-3
Consolidated Statements of Operations, Years ended December 31, 1998, 1997 and 1996........................ F-4
Consolidated Statements of Stockholders' Equity, Years ended December 31, 1998, 1997
and 1996................................................................................................. F-5
Consolidated Statements of Cash Flows, Years ended December 31, 1998, 1997 and 1996........................ F-6
Notes to Consolidated Financial Statements................................................................. F-7
Schedule II--Valuation and Qualifying Accounts, Years ended December 31, 1998, 1997,
and 1996................................................................................................. F-26
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AvTel Communications, Inc.:
We have audited the accompanying consolidated balance sheets of AvTel
Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998. In
connection with our audits of the consolidated financial statements, we also
have audited the accompanying financial statement schedule. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AvTel
Communications, Inc. and subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
KPMG LLP
Dallas, Texas
April 14, 1999
F-2
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 911,179 4,807,441
Accounts receivable, net......................................................... 4,804,532 6,961,953
Due from affiliates.............................................................. 501,858 2,127,771
Federal and state income tax receivable.......................................... -- 598,970
Other current assets............................................................. 921,435 861,950
------------- -------------
Total current assets........................................................... 7,139,004 15,358,085
Property and equipment, net........................................................ 1,684,707 1,791,682
Goodwill, net...................................................................... 4,463,747 --
Other assets, net.................................................................. 1,346,896 1,575,083
------------- -------------
Total assets................................................................... $ 14,634,354 18,724,850
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses...................................... $ 2,643,761 1,546,762
Accrued network service costs.................................................... 4,217,206 4,319,198
Sales and excise taxes payable................................................... 1,433,483 736,012
Unearned revenue................................................................. 954,101 --
Due to affiliates................................................................ 324,020 2,719,417
Other current liabilities........................................................ 589,392 466,039
------------- -------------
Total current liabilities...................................................... 10,161,963 9,787,428
Deferred income taxes.............................................................. -- 498,712
Long term borrowings............................................................... 1,112,890 --
Other liabilities.................................................................. 5,381 50,782
Common stock subject to put option (note 4)........................................ 168,867 578,880
------------- -------------
Total liabilities.............................................................. 11,449,101 10,915,802
------------- -------------
Stockholders' equity:
Preferred stock, authorized 750,000 shares, $0.01 par value...................... -- --
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 at December 31, 1998 and 1997 respectively. (Liquidation preference
of $704,032 December 31, 1998 including dividends in arrears.)................. 1,477 2,077
Common stock, Authorized 20,000,000 shares, $0.01 par value; issued 10,409,473
and 11,437,056 shares at December 31, 1998 and 1997 respectively, including
112,578 and 385,920 shares subject to put options on December 31, 1998 and 1997
respectively................................................................... 102,969 110,511
Additional paid in capital....................................................... 19,630,404 17,138,739
Accumulated deficit.............................................................. (16,549,597) (9,422,279)
Treasury stock, none at December 31, 1998 and 1,999,997 common shares at December
31, 1997....................................................................... -- (20,000)
------------- -------------
Total stockholders' equity..................................................... 3,185,253 7,809,048
------------- -------------
Commitments and contingencies
Total liabilities and stockholders' equity..................................... $ 14,634,354 18,724,850
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Revenues (note 6).................................................. $ 44,013,498 51,389,080 71,558,295
Cost of revenues (note 6).......................................... 31,849,354 36,227,507 47,674,396
------------- -------------- -------------
Gross margin................................................... 12,164,144 15,161,573 23,883,899
------------- -------------- -------------
Operating expenses:
Selling, general and administrative (note 6)..................... 18,480,576 16,141,132 18,798,925
Acquisition related write off (note 2)........................... -- 9,098,545 --
Depreciation and amortization.................................... 1,107,321 679,856 993,940
------------- -------------- -------------
19,587,897 25,919,533 19,792,865
------------- -------------- -------------
Operating income (loss)........................................ (7,423,753) (10,757,960) 4,091,034
Interest expense (note 6).......................................... (86,251) (11,692) (230,922)
Other income, net.................................................. 181,107 301,580 393,498
------------- -------------- -------------
Income (loss) before income tax expense........................ (7,328,897) (10,468,072) 4,253,610
------------- -------------- -------------
Income tax expense (benefit)....................................... (201,579) (276,352) 1,686,876
------------- -------------- -------------
------------- -------------- -------------
Net income (loss).............................................. $ (7,127,318) (10,191,720) 2,566,734
------------- -------------- -------------
------------- -------------- -------------
Net loss per common share--basic and diluted (note 8).............. $ (0.74) (1.23)
------------- --------------
------------- --------------
Weighted average number of common shares........................... 9,633,474 8,267,296
------------- --------------
------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
--------- -------- ------------ -------------
<S> <C> <C> <C> <C>
Balances at December 31, 1995........... -- -- 6,872,883 5,336,815
Purchase of common stock.............. -- -- -- --
Issuance of common stock.............. -- -- 1,463,771 2,195,211
Net income............................ -- -- -- --
--------- -------- ------------ -------------
Balances at December 31, 1996........... -- -- 8,336,654 7,532,026
Acquisition of Best (note 2).......... -- -- 934,987 3,361,208
Share for share exchange between AvTel
and Matrix (note 2):
Reverse acquisition of AvTel........ 207,700 2,077 1,839,563 18,396
Reflect new capitalization of
Company........................... -- -- (171,548) (10,802,234)
Issuance of common stock for exercise
of options.......................... -- -- 15,000 150
Expired put options (note 4).......... -- -- 96,480 965
Stock compensation earned (note 7).... -- -- -- --
Net loss.............................. -- -- -- --
--------- -------- ------------ -------------
Balances at December 31, 1997........... 207,700 $ 2,077 11,051,136 $ 110,511
Conversion of preferred stock (note
4).................................. (60,000) (600) 60,000 600
Issuance of common stock for exercise
of options and restricted common
stock............................... -- -- 473,326 4,733
Issuance of common stock for
acquisitions (note 2)............... -- -- 680,000 6,800
Expired put options (note 4).......... -- -- 48,187 482
Exercised put options (note 6)........ -- -- 185,847 1,859
Purchase of officer notes receivable
(note 6)............................ -- -- -- --
Stock compensation earned (note 7).... -- -- -- --
Retirement of treasury stock.......... -- -- (2,201,601) (22,016)
Net loss.............................. -- -- -- --
--------- -------- ------------ -------------
Balances at December 31, 1998........... 147,700 $ 1,477 10,296,895 $ 102,969
--------- -------- ------------ -------------
--------- -------- ------------ -------------
<CAPTION>
RETAINED
ADDITIONAL EARNINGS TREASURY STOCK
PAID IN (ACCUMULATED -----------------------
CAPITAL DEFICIT) SHARES AMOUNT TOTAL
---------- ------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995........... -- (1,797,293) -- -- 3,539,522
Purchase of common stock.............. -- -- (171,548) (439,584) (439,584)
Issuance of common stock.............. -- -- -- -- 2,195,211
Net income............................ -- 2,566,734 -- -- 2,566,734
---------- ------------ ---------- ----------- -----------
Balances at December 31, 1996........... -- 769,441 (171,548) (439,584) 7,861,883
Acquisition of Best (note 2).......... -- -- (1,999,997) (3,317,940) 43,268
Share for share exchange between AvTel
and Matrix (note 2):
Reverse acquisition of AvTel........ 9,129,040 -- -- -- 9,149,513
Reflect new capitalization of
Company........................... 7,064,710 -- 171,548 3,737,524 --
Issuance of common stock for exercise
of options.......................... 52,350 -- -- -- 52,500
Expired put options (note 4).......... 143,755 -- -- -- 144,720
Stock compensation earned (note 7).... 748,884 -- -- -- 748,884
Net loss.............................. -- (10,191,720) -- -- (10,191,720)
---------- ------------ ---------- ----------- -----------
Balances at December 31, 1997........... 17,138,739 (9,422,279) (1,999,997) $ (20,000) 7,809,048
Conversion of preferred stock (note
4).................................. -- -- -- -- --
Issuance of common stock for exercise
of options and restricted common
stock............................... 512,879 -- -- -- 517,612
Issuance of common stock for
acquisitions (note 2)............... 1,526,950 -- -- -- 1,533,750
Expired put options (note 4).......... 36,770 -- -- -- 37,252
Exercised put options (note 6)........ 372,918 -- (201,604) (2,016) 372,761
Purchase of officer notes receivable
(note 6)............................ (435,000 ) -- -- -- (435,000)
Stock compensation earned (note 7).... 477,148 -- -- -- 477,148
Retirement of treasury stock.......... -- -- 2,201,601 22,016 --
Net loss.............................. -- (7,127,318) -- -- (7,127,318)
---------- ------------ ---------- ----------- -----------
Balances at December 31, 1998........... 19,630,404 (16,549,597) -- $ -- 3,185,253
---------- ------------ ---------- ----------- -----------
---------- ------------ ---------- ----------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)..................................................................... $(7,127,318) $(10,191,720) 2,566,734
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization....................................................... 1,107,321 679,856 993,940
Amortization of advanced commissions................................................ 220,928 1,355,492 618,791
Acquisition related write off....................................................... -- 9,098,545 --
Gain on disposition of assets....................................................... (83,139) -- --
Provision for bad debts............................................................. 2,727,803 1,829,770 1,461,471
Deferred income taxes............................................................... (498,712) (80,377) (321,678)
Stock compensation earned........................................................... 477,148 748,884 --
Equity in income of DNS............................................................. -- -- (122,327)
Changes in certain operating assets and liabilities:
Accounts receivable............................................................... 374,477 1,969,332 (1,971,970)
Due from affiliates............................................................... (106,071) (915,357) 345,336
Federal and state income tax receivable........................................... 583,906 (598,970) --
Other current assets.............................................................. (224,820) 1,787,672 (393,781)
Accounts payable and accrued liabilities.......................................... (1,034,923) (2,876,789) (1,397,160)
Due to affiliates................................................................. (2,395,397) (1,138,568) (742,663)
----------- ------------ -----------
Net cash provided by (used in) operating activities............................. (5,978,797) 1,667,770 1,036,693
----------- ------------ -----------
Cash flows from investing activities:
Cash received (paid) in acquisitions (note 2)......................................... (474,082) 477,643 --
Loans to affiliate.................................................................... -- (2,000,000) --
Payments received on loans to affiliates.............................................. 1,798,889 201,111 --
Purchase of property and equipment.................................................... (473,089) (212,421) (701,718)
Repayments from DNS, net.............................................................. -- -- 1,577,432
Proceeds from sale of property and equipment.......................................... 94,370 2,749 (14,482)
----------- ------------ -----------
Net cash provided by (used in) investing activities............................. 946,088 (1,530,918) 861,232
----------- ------------ -----------
Cash flows from financing activities:
Principal payments on capital leases.................................................. (59,055) (4,306) --
Issuance of common stock for exercise of options...................................... 517,612 52,500 --
Borrowings on line of credit.......................................................... 9,753,467 -- --
Amounts paid on line of credit........................................................ (8,640,577) -- --
Purchase of officer notes receivable.................................................. (435,000) -- --
Purchase of common stock for treasury................................................. -- -- (439,583)
----------- ------------ -----------
Net cash provided by (used in) financing activities............................. 1,136,447 48,194 (439,583)
----------- ------------ -----------
Net increase (decrease) in cash and cash equivalents.................................... (3,896,262) 185,046 1,458,342
Cash and cash equivalents at beginning of year.......................................... 4,807,441 4,622,395 3,164,053
----------- ------------ -----------
Cash and cash equivalents at end of year................................................ $ 911,179 $ 4,807,441 4,622,395
----------- ------------ -----------
----------- ------------ -----------
Cash paid (received) during the year for:
Interest.............................................................................. $ 86,121 11,594 212,404
----------- ------------ -----------
----------- ------------ -----------
Income taxes, net of refunds.......................................................... $ (487,007) 925,161 1,482,103
Noncash financing activities:
Common stock issued for advanced commissions.......................................... $ -- -- 2,195,211
----------- ------------ -----------
----------- ------------ -----------
Common stock issued for receivable from major shareholder............................. $ -- -- 723,600
----------- ------------ -----------
----------- ------------ -----------
Common stock issued for Best acquisition.............................................. $ -- 3,361,208 --
----------- ------------ -----------
----------- ------------ -----------
Treasury stock acquired with Best acquisition......................................... $ -- (3,317,940) --
----------- ------------ -----------
----------- ------------ -----------
Common and preferred stock issued in AvTel reverse acquisition........................ $ -- 9,149,513 --
----------- ------------ -----------
----------- ------------ -----------
Common stock issued for DMI acquisition............................................... $ 30,000 -- --
----------- ------------ -----------
----------- ------------ -----------
Common stock issued for RLI acquisition............................................... $ 650,000 -- --
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BUSINESS AND BACKGROUND
On December 1, 1997, AvTel Communications, Inc. ("AvTel") and Matrix
Telecom, Inc. ("Matrix") completed a share for share exchange pursuant to a
stock exchange agreement dated April 29, 1997 as subsequently amended ("Share
Exchange"). For accounting purposes, the Share Exchange was treated as a reverse
acquisition of AvTel by Matrix. AvTel was the legal acquirer and accordingly,
the Share Exchange was effected by the issuance by AvTel of 9,582,493 shares of
common stock in exchange for all of the common stock then outstanding of Matrix.
In addition, holders of outstanding Matrix stock options received 22,338
non-qualified stock options of AvTel. The purchase method of accounting was
used, with Matrix being treated as the acquirer for accounting purposes. The
results of operations reported in the accompanying consolidated financial
statements reflect the operations of Matrix prior to December 1, 1997 and the
combined operations of AvTel and Matrix subsequent to December 1, 1997.
References to the "Company" refer to operations of Matrix prior to the Share
Exchange and the combined operations of Matrix and AvTel subsequent to the Share
Exchange. As a result of the Share Exchange, Matrix became a wholly owned
subsidiary of AvTel. (See note 2).
The Share Exchange provided that each Matrix shareholder would receive
2.4819 AvTel common shares for each common share of Matrix then issued including
treasury shares held by Matrix. For periods prior to the December 1, 1997 Share
Exchange, all share amounts have been restated to reflect the Share Exchange as
a 2.4819 for one stock split. In addition, on March 10, 1997 Matrix declared an
18 for one stock split. All share amounts have also been restated to reflect
this stock split.
AvTel was formed to be a provider of broadband network services integrating
voice, data and Internet solutions for individuals and corporate customers. The
Company sells and markets a broad range of telecommunications and advanced
network services through independent value added resellers, third party
marketing organizations and internal direct sales professionals. The Company
targets mid-size corporations, small-office home-office professionals and select
residential market segments through two primary business units, its Business
Markets Group ("BMG") and Channel Markets Group ("CMG").
BMG targets mid-size corporate customers for their broadband data, voice and
Internet networking needs. Following this sales strategy, the Company's
objective is to become the underlying telecommunications carrier for the
transport of data, voice and Internet traffic. Through a value-added sales
process, the Company designs, provisions and manages its customers' networks.
The Company will provide a host of additional value-added services assisting its
customers to create enhanced intranet and extranet applications. Additionally,
BMG markets to its customer base a variety of traditional communications
products and services such as long distance telephone service, executive calling
cards and video/audio conferencing.
CMG targets and markets to distribution companies, agents, resellers and
affinity groups that maintain access to large groups of individuals and small
businesses through affinity relationships and niche marketing strategies. CMG
provides Internet access, long distance telephone and other services to
customers in 49 states. The Company is fully certified or registered in all
states where required and operates under Section 214 authority from the Federal
Communications Commission ("FCC"). The Company, through a wholly owned
subsidiary, has a national-deployed Carrier Identification Code ("CIC"). The
Company maintains its own convergent billing platform, rating system and
monitoring center.
F-7
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(B) LIQUIDITY
The Company's consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
consolidated financial statements during the years ended December 31, 1998 and
1997, the Company reported net losses of $7,127,318 and $10,191,720,
respectively. In addition, as of December 31, 1998, the Company had a working
capital deficit of $3,022,959, and for the year ended December 31, 1998, net
cash used in operations totaled $5,978,797.
As a result, as of December 31, 1998, unless the Company effects substantial
changes in its operating methods, the Company does not have sufficient resources
to meet its anticipated operating requirements during 1999 without obtaining
additional financing. The Company is actively pursuing an equity line of credit
through discussion with potential investors. If the Company is unable to obtain
financing in a timely manner and on acceptable terms, management is developing
and intends to implement a plan that would allow the Company to continue to
operate through 1999. This plan would include significantly reducing the
Company's workforce, eliminating advertising expenditures, reducing professional
services and reducing or eliminating other discretionary expenditures.
(C) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(D) CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
demand deposits, time deposits, and other highly liquid investments with a
remaining maturity at date of purchase of less than ninety days to be cash
equivalents.
(E) COMMISSIONS
Commissions to sales agents are paid and expensed based on a percentage of
billings as incurred.
Commissions paid in advance of $221,000 as of December 31, 1997, included in
other current assets, were expensed over a period of eighteen months based on
estimated billings of the customers for which the commissions were paid. The
above advances were fully expensed during 1998 and no additional advance
commission payments were made.
(F) REVENUE RECOGNITION
Long distance, frame relay, Internet, systems integration and repair service
revenues are recognized as service is provided. Amounts paid in advance are
recorded as unearned revenue and recognized as services are provided.
(G) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Maintenance and repairs are
charged against income as incurred, while renewals and major replacements are
capitalized. The cost and related accumulated depreciation of assets sold or
retired are removed from the accounts, and any resulting gain or loss is
F-8
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reflected in operations. The Company provides depreciation on fixed assets using
the straight-line method over the estimated useful lives of the respective
assets.
(H) GOODWILL
Goodwill of $4.5 million, which is net of amortization of $19,000 as of
December 31, 1998, represents the excess of purchase price over fair value of
net assets acquired in the DMI and RLI acquisitions and is amortized on a
straight-line basis over fifteen years. The Company assesses the recoverability
of this intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted future
cash flows of the acquired operation. The amount of goodwill impairment, if any,
is measured based on expected undiscounted future operating cash flows expected
to be generated by the acquired business. The assessment of the recoverability
of goodwill will be impacted if estimated future operating cash flows are not
achieved.
(I) INCOME TAXES
The Company utilizes the asset and liability method for accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(J) USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(K) CONCENTRATIONS OF CREDIT RISK
The Company's subscribers are primarily small business owners and
residential subscribers and are not concentrated in any specific geographic
region of the United States. The Company has agreements with Local Exchange
Companies, which provide billing and collection services to the majority of the
Company's subscribers. A significant portion of the Company's accounts
receivable is due from these companies.
(L) ACCOUNTS RECEIVABLE
Accounts receivable are net of allowances for doubtful accounts and other
provisions of $935,000 and $982,000 as of December 31, 1998 and 1997,
respectively. The Company establishes an allowance for doubtful accounts based
upon factors surrounding the credit risk of subscribers, historical trends and
other information.
F-9
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(M) FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, receivables, payables, and
accrued expenses. The carrying amount of such financial instruments approximates
fair value because of the short maturity of these instruments.
(N) ACQUIRED CUSTOMER BASE
Acquired customer base of $1,240,000, which is net of accumulated
amortization of $343,000 at December 31, 1998, included in other assets, is
being amortized on a straight-line basis over five years. The Company assesses
the recoverability of this intangible asset by determining whether the acquired
customer base balance can be recovered through undiscounted future operating
cash flows of the acquired operations. The amount of impairment, if any, is
measured based on projected discounted cash flows. The assessment of the
recoverability of the acquired customer base will be impacted if estimated
future operating cash flows are not achieved.
(O) IMPAIRMENT OF LONG-LIVED ASSETS
In January, 1996, the Company adopted Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS No. 121 requires
that long-lived assets and certain intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the future net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the net asset exceeds the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(P) COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes
standards for reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive income includes
net income and other comprehensive income, which is generally composed of
changes in the fair value of available-for-sale marketable securities, foreign
currency translation adjustments and adjustments to recognize additional minimum
pension liabilities. The statement requires additional disclosures in the
consolidated financial statements; it does not affect the Company's financial
position or results of operations. Comprehensive income (loss) for the years
ended December 31, 1998, 1997 and 1996 is equal to net income (loss) reported
for such periods.
(Q) SEGMENT REPORTING
In 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information" (SFAS No. 131"). SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. (See Note
11).
F-10
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(R) RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts in order to
conform to current year presentation.
(2) ACQUISITIONS
MATRIX TELECOM, INC.-- On December 1, 1997, AvTel and Matrix completed the
Share Exchange. For accounting purposes the Share Exchange was treated as a
reverse acquisition of AvTel by Matrix. 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. In
addition, holders of outstanding Matrix stock options received non-qualified
stock options of the Company. Immediately after the Share Exchange the former
shareholders of Matrix held approximately 84% of the then outstanding common
stock of the Company.
The consummation of the Share Exchange was subject to the satisfaction of
several conditions by AvTel. These included the reincorporation of AvTel (then a
Utah corporation; "AvTel Utah") in Delaware by way of a merger (the
"Reincorporation Merger") with and into AvTel Communications, Inc., a Delaware
corporation, a wholly-owned subsidiary formed for the sole purpose of this
merger. As part of the merger, AvTel (the surviving Delaware corporation) issued
to its stockholders one share of new Delaware Common Stock for each four shares
of AvTel-Utah's Common Stock outstanding immediately prior to the
Reincorporation Merger. AvTel's Series A Convertible Preferred Stock and its
outstanding options were similarly adjusted. Accordingly, the Reincorporation
Merger essentially effected a one for four reverse stock split of AvTel's
shares.
The reverse acquisition of AvTel by Matrix was accounted for using the
purchase method of accounting. In order to value the consideration given in the
Share Exchange the market price of AvTel's common stock for a period immediately
preceding the announcement of the Share Exchange was used. As of the date of
acquisition, the Company determined the fair value of the net tangible and
intangible assets acquired and liabilities assumed. Concurrently, the Company
determined that the carrying amount of recorded goodwill was not recoverable.
Accordingly, the Company recorded a charge to income of $9,098,545 immediately
subsequent to the reverse acquisition.
In connection with the completion of the Share Exchange, the Company entered
into a Registration Rights and Lockup Agreement dated December 1, 1997 (the
"Registration Rights and Lockup Agreement"). The Registration Rights and Lockup
Agreement requires that the Company use its best efforts to file a shelf
registration statement providing for the sale by certain stockholders of all
securities issued to them in connection with the Exchange Agreement, subject to
a two-year holding restriction imposed on such stockholders. Under the
Registration Rights and Lockup Agreement, the Company is obliged to use its
reasonable efforts to keep the shelf registration statement effective on a
continuous basis for a period described in the Registration Rights and Lockup
Agreement. Such stockholders may also require the Company to undertake up to two
additional demand registrations of their securities if the shelf registration is
not in place. As of April 14, 1999, this registration obligation related to
6,457,123 shares held by 14 stockholders.
BEST CONNECTIONS, INC. ("BEST")-- Effective July 1, 1997, shareholders of
Best, an affiliate of Matrix through substantially common ownership, contributed
their ownership of Best to Matrix in exchange for
F-11
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(2) ACQUISITIONS (CONTINUED)
934,987 shares of Matrix common stock. Best's primary assets were 1,999,997
shares of Matrix common stock and cash of $211,000. The assets and liabilities
of Best were recorded at their historical cost which approximated the fair value
of such assets as of July 1, 1997. As a result of the combination, Matrix
assumed the obligation to grant up to 1,999,997 stock options to agents of Best
and certain employees of affiliated companies. Such option grants relate to
services, including sales promotion activities, to be performed by the
recipients on behalf of the Company. Accordingly, the fair value of such options
is being charged to expense by the Company as the related services are provided.
DIGITAL MEDIA, INC. ("DMI")-- Effective September 25, 1998, the Company
acquired all of the capital stock of DMI, a California based developer of
multimedia software. The Company exchanged 30,000 shares of its common stock
valued at $71,250 for all of the outstanding common stock of DMI. The
transaction was accounted for under the purchase method of accounting. The
assets and liabilities of DMI were recorded at their historical cost which
approximated their fair value at September 25, 1998. The Company recorded
goodwill of approximately $117,000, which represents the excess of the purchase
price over the fair value of the net assets received. The goodwill is being
amortized on a straight-line basis over fifteen years.
REMOTE LOJIX/PCSI, INC. ("RLI")-- Effective November 1, 1998, the Company
acquired all of the capital stock of RLI, a New York based provider of
information technology services to corporate customers. The Company exchanged
650,000 shares of its common stock valued at $1,462,500 and the outstanding
balance of a $500,000 loan from the Company for all of the outstanding common
stock of RLI. The transaction was accounted for under the purchase method of
accounting. The assets and liabilities of RLI were recorded at their historical
cost which approximated the fair value at November 1, 1998. The Company recorded
goodwill of approximately $4.4 million, which represents the excess of the
purchase price over the fair value of the assets received. The goodwill is being
amortized on a straight-line basis over fifteen years.
Unaudited pro forma results of operations of the Company as if the share
exchange of Matrix and the acquisitions of Best, DMI and RLI had occurred as of
the beginning of the periods presented is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Revenue......................................................... $ 49,711,440 $ 58,967,268
Loss from operations............................................ (8,909,490) (12,749,469)
Net loss........................................................ (9,124,180) (12,378,014)
Proforma net loss per share..................................... $ (0.89) $ (1.02)
</TABLE>
The pro forma financial information has been prepared for comparative
purposes only and does not purport to indicate the results of operations that
would have occurred had the acquisition been made at the beginning of the period
indicated, or which may occur in the future.
F-12
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(2) ACQUISITIONS (CONTINUED)
As of the date of acquisitions, the fair market value of the assets acquired
and liabilities assumed included the following:
<TABLE>
<CAPTION>
1998
-----------------------------------------
DMI RLI TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
Current assets other than cash........................ $ 50,105 1,034,803 1,084,908
Property and equipment................................ 44,313 132,169 176,482
Goodwill.............................................. 117,169 4,375,191 4,492,360
Current liabilities................................... (166,255) (3,579,663) (3,745,918)
Common stock issued................................... (71,250) (1,462,500) (1,533,750)
------------- ----------- -------------
Cash acquired (paid).................................. $ 25,918 (500,000) (474,082)
------------- ----------- -------------
------------- ----------- -------------
1997
-----------------------------------------
MATRIX BEST TOTAL
------------- ----------- -------------
Current assets other than cash........................ $ 258,041 -- 258,041
Property and equipment................................ 577,836 15,137 592,973
Customer base......................................... 1,583,000 -- 1,583,000
Goodwill.............................................. 9,098,545 -- 9,098,545
Current liabilities................................... (1,945,526) (183,041) (2,128,567)
Long-term liabilities................................. (688,854) -- (688,854)
Common and preferred stock issued..................... (9,149,513) (3,361,208) (12,510,721)
Treasury stock acquired............................... -- 3,317,940 3,317,940
------------- ----------- -------------
Cash acquired......................................... $ 266,471 211,172 477,643
------------- ----------- -------------
------------- ----------- -------------
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31
USEFUL ---------------------------
LIFE 1998 1997
---------- ------------ ------------
<S> <C> <C> <C>
Communications system................... 2-5 years $ 1,318,326 $ 1,318,326
Office furniture and equipment.......... 1-7 years 3,420,773 2,945,795
Leasehold improvements.................. lease term 521,319 416,220
------------ ------------
Total property and equipment............ 5,260,418 4,680,341
Accumulated depreciation and
amortization.......................... (3,575,711) (2,888,659)
------------ ------------
Property and equipment, net............. $ 1,684,707 $ 1,791,682
------------ ------------
------------ ------------
</TABLE>
Depreciation expense was $737,000, $632,000 and $877,000 for 1998, 1997 and
1996, respectively.
F-13
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(4) STOCKHOLDERS' EQUITY
The Series A convertible preferred shareholders are entitled to receive
cumulative annual dividends at a rate of 8% and are entitled to a preference in
liquidation in the amount of $4 per share plus unpaid dividends. There were
$137,000 cumulative Series A convertible preferred stock dividends in arrears at
December 31, 1998. The Series A preferred stock is convertible, on a one-for-one
basis, into shares of Company common stock. During 1998, a total of 60,000
shares of the Company's Series A convertible preferred stock was converted to
60,000 shares of the Company's common stock.
In December 1998, the Company retired all of its outstanding treasury stock.
In December 1996, the Company issued 1,463,771 shares of common stock for
future commissions due to affiliates as of October 31, 1996. A value of $1.50
per share was used in determining the number of shares to issue in settlement of
the $2,195,211 obligation. Of this amount, $221,000, $1,355,000 and $619,000 was
expensed as commission expense in 1998, 1997 and 1996, respectively.
During 1996, the Company sold to certain employees 482,400 shares of common
stock at $1.50 per share. As of December 31, 1996, the Company had recorded a
$723,600 receivable for such shares, which was subsequently collected. Proceeds
used to repay the $723,600 receivable were loaned to the employees by a major
shareholder of the Company. As of December 31, 1998 and 1997, the shares subject
to this agreement could be put to the Company at the option of the employee at
approximately $1.50 per share ($168,867 and $578,880), respectively. Such
amounts have been included in other liabilities. Under certain circumstances
(e.g. employee termination) the Company has a call at the same amounts. The call
and put rights vest over a period of five years. As of December 31, 1998, these
rights were forty percent vested. Activity in common stock outstanding related
to shares subject to put follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
---------- -----------
<S> <C> <C>
Sale of common shares subject to put................................. 482,400 $ 723,600
Increase in share value subject to put charged to expense............ -- 172,400
---------- -----------
Balance, December 31, 1996......................................... 482,400 896,000
Decrease in share value subject to put recorded as a reduction to
expense............................................................ -- (172,400)
Vested shares no longer subject to put............................... (96,480) (144,720)
---------- -----------
Balance, December 31, 1997......................................... 385,920 578,880
Vested shares no longer subject to put............................... (48,187) (37,253)
Called shares subject to put......................................... (225,155) (372,760)
---------- -----------
Balance, December 31, 1998......................................... 112,578 $ 168,867
---------- -----------
---------- -----------
</TABLE>
During May 1996, the Company purchased 171,548 shares of its common stock as
treasury stock for $439,584. As further discussed in note 8 in connection with
the Best and Matrix combination effective July 1, 1997, Matrix acquired an
additional 1,999,997 shares of its common stock as treasury stock. As a part of
the recapitalization done in connection with the AvTel reverse acquisition,
Matrix retired the 171,548 shares of its common stock discussed above and the
Company recorded the remaining treasury stock at par value.
F-14
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(5) FEDERAL AND STATE INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ------------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal............................................. $ -- $ (234,899) $ 1,751,047
State and local..................................... 7,531 (41,453) 257,507
----------- ----------- ------------
7,531 (276,352) 2,008,554
----------- ----------- ------------
Deferred tax expense (benefit):
Federal............................................. (209,110) -- (254,350)
State and local..................................... -- -- (67,328)
----------- ----------- ------------
(209,110) -- (321,678)
----------- ----------- ------------
$ (201,579) $ (276,352) $ 1,686,876
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34 percent to pretax income as a result of the
following:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)......... $ (2,491,825) $ (3,559,144) $ 1,404,637
State and local taxes, net of federal income tax
effect.......................................... (135,961) (27,359) 125,518
Other nondeductible items......................... 22,539 3,093,522 --
Losses not providing tax benefit.................. 2,594,289 330,190 --
Other............................................. (190,621) (113,561) 156,721
------------- ------------- ------------
$ (201,579) $ (276,352) $ 1,686,876
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
Deferred income taxes as of December 31, 1998 and 1997 reflect the impact of
temporary differences between financial statement carrying amounts and tax bases
of assets and liabilities. The tax effects of
F-15
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(5) FEDERAL AND STATE INCOME TAXES (CONTINUED)
temporary differences that give rise to significant portions of the net deferred
tax assets at December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryovers.................... $3,494,634 $ 814,425
Compensation related items....................... 480,137 299,554
Contingent liabilities and other................. 268,340 204,978
---------- ----------
Gross deferred tax asset......................... 4,243,111 1,318,957
Less valuation allowance......................... (3,778,958) (1,184,669)
---------- ----------
Net deferred tax asset......................... 464,153 134,288
Deferred tax liabilities:
Customer base intangible......................... (464,153) (633,000)
---------- ----------
Net deferred tax liability..................... $ -- $ (498,712)
---------- ----------
---------- ----------
</TABLE>
The valuation allowance for deferred tax assets increased $2,594,289 and
$1,184,669 during 1998 and 1997, respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income
and prior taxes paid in making this assessment. Based upon its evaluation of
these factors, management believes that it is more likely than not that the
Company will realize the benefits of these deductible differences, net of the
valuation allowance, at December 31, 1998. At December 31, 1998, the Company has
net operating loss carryforwards for federal tax purposes of approximately
$9,153,822 which are available on a limited basis to offset future federal
taxable income, if any, through 2018. When realized, such benefit will first be
utilized to reduce intangible assets recorded in the reverse acquisition of
AvTel by Matrix.
(6) RELATED PARTY TRANSACTIONS
The Company has had transactions in the normal course of business with
various companies which are affiliated with shareholders of the Company. Pacific
Gateway Exchange, Inc. ("PGE") provides the Company with significant domestic
and international transmission services. As of January 1, 1998, PGE was no
longer affiliated with the Company. During 1998, a director and several
significant holders of the Company's common stock divested themselves of a
substantial portion of their holdings of PGE common stock; they have advised the
Company that they no longer could be deemed to be in control of PGE. A
significant number of the Company's employees were leased from United Group
Service Center, an affiliate, which provides such services to a number of
affiliated companies. This lease agreement was terminated on December 31, 1998,
at which time these individuals became employees of the Company. The Company
provides long distance and data network service to a number of affiliated
companies.
F-16
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(6) RELATED PARTY TRANSACTIONS (CONTINUED)
Balances with affiliates related to operating activities are settled monthly. In
addition, the Company has made both interest bearing and non-interest bearing
advances to affiliated companies.
Due from affiliates consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Core Marketing--note receivable due September 1,
1998................................................ $ -- $1,798,889
UICI Administrators (long distance services).......... 308,346 94,417
Interactive Media Works (IMW) (long distance
services)........................................... 6,214 25,263
Core Marketing (long distance services)............... 82,695 111,280
AMLI Management Co. (long distance services).......... 10,695 --
Other receivables from various affiliates............. 93,908 97,922
--------- ---------
$ 501,858 $2,127,771
--------- ---------
--------- ---------
</TABLE>
Due to affiliates consists of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ------------
<S> <C> <C>
PGE (not considered an affiliate in 1998)........................... $ -- 2,335,787
Group Association (UGA) and Core Marketing (commissions)............ 5,339 134,618
Other payables to various affiliates................................ 318,681 249,012
---------- ------------
$ 324,020 2,719,417
---------- ------------
---------- ------------
</TABLE>
F-17
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(6) RELATED PARTY TRANSACTIONS (CONTINUED)
Significant services and transactions incurred in the normal course of
operations with affiliated companies are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
Revenues include the following:
U.S. Telco-billing and collection services, customer service and
accounting services............................................... $ -- $ 200,370 $ --
Long distance revenues from affiliates: UGA, UICI, IMW, Core
Marketing, and AMLI............................................... 4,592,040 3,351,375 5,445,903
------------ ------------ -------------
$ 4,592,040 $ 3,551,745 $ 5,445,903
------------ ------------ -------------
------------ ------------ -------------
Cost of revenues includes the following:
Network transmission services--PGE (not considered an affiliate in
1998)............................................................. $ -- 15,917,688 20,527,236
------------ ------------ -------------
------------ ------------ -------------
Selling, general and administrative expenses include the following:
Expenses paid on behalf of PGE (not considered an affiliate in 1998)
for access services, for which the Company was reimbursed......... $ -- 3,534,154 5,040,051
Expenses incurred for leasing employees from United Group Service
Center............................................................ 5,581,428 4,395,820 4,542,007
Sales commissions to affiliates:
Core Marketing, UICI, UGA, Best Connections and AMLI.............. 140,187 990,533 5,335,233
Overhead expenses reimbursed to/from UGA Divisions.................. 241,810 110,761 77,231
Core Marketing--casual mailings and telemarketing................... 21,425 603,742 --
------------ ------------ -------------
$ 5,984,850 $ 9,635,010 $ 14,994,522
------------ ------------ -------------
------------ ------------ -------------
Interest expense includes the following:
Interest paid to shareholder........................................ $ -- $ -- $ 173,380
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
During 1997, the Company loaned $2,000,000 to an affiliated company, Core
Marketing, LLC. Of such amount, $201,000 was repaid in 1997 and the remainder
was repaid in 1998.
In July 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 has the option (but no
obligation) 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 was $573,000. The Company purchased these
notes for $435,000.
F-18
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(6) RELATED PARTY TRANSACTIONS
In connection with the purchase of the notes receivable above, the Company
repurchased 240,912 shares of its common stock subject to the Buyback Agreement
from terminated employees. The Company exercised its right to repurchase 225,154
of such shares at a price range of $1.51 to $1.70 per share, and the former
employees used the $373,081 in proceeds to reduce the amount of their notes. The
Company repurchased an additional 15,758 shares in satisfaction of the remaining
balance of $116,085 on the former employees' notes.
(7) STOCK COMPENSATION
AVTEL OPTIONS--Prior to the Share Exchange AvTel adopted a 1997 Incentive
Stock Option Plan (the "AvTel 1997 Plan") for option grants to officers and key
employees. The AvTel 1997 Plan authorizes grants of options to purchase up to
250,000 shares of authorized but unissued common stock and 125,000 shares of
restricted common stock. Stock options are to be granted with an exercise price
greater than or equal to the stock's fair market value at the date of grant.
Options generally vest 25% after one year and 25% each year thereafter until
fully vested. Such options typically expire after ten years. In addition, AvTel
had other options which had been granted prior to the adoption of the AvTel 1997
Plan. After the Share Exchange all outstanding options became obligations of the
Company.
On January 1, 1998, the Company granted options to purchase 75,000 shares of
the Company's common stock at an exercise price of $1.50 per share. On March 1,
1998 the Company granted options to purchase 100,000 shares of the Company's
common stock 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. As
of December 31, 1998, 27,316 options are exercisable.
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. During 1998 one of the board members
resigned from the board and his 60,000 shares were vested immediately. As of
December 31, 1998, only those 60,000 shares of restricted common stock are
vested.
During 1998, the Company adopted the 1998 Stock Incentive Plan (the "AvTel
1998 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. Stock options are to be
granted with an exercise price greater than or equal to the stock's fair market
value at the date of grant. Options generally vest 25% after one year and 25%
each year thereafter until fully vested. Such options typically expire after ten
years. As of December 31, 1998, the Company granted 671,000 options under the
AvTel 1998 Plan. Exercise prices range from $2.375 to $4.00 per share.
MATRIX OPTIONS--Prior to the Share Exchange, the Board of Directors of
Matrix approved stock options for certain officers and employees. Stock option
transactions of Matrix are included in the table below. At the time of the Share
Exchange, Matrix had 22,338 options outstanding to purchase its common stock. In
connection with the Share Exchange, the Company reissued these stock options and
they vested immediately. These reissued options expire in December 2002.
F-19
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(7) STOCK COMPENSATION (CONTINUED)
The Company applies APB Opinion No. 25 in accounting for the AvTel 1997
Plan, 1998 Stock Incentive Plan and the Matrix options discussed above; and,
accordingly, no compensation cost has been recognized for its stock options
issued to employees in the financial statements. For stock options granted to
non-employees, the Company accounts for such options in accordance with the
requirements of SFAS No. 123. Had the Company determined compensation cost based
on the fair value at the grant date for stock options issued to employees under
SFAS No. 123, the Company's net loss in 1998 and 1997 would not have materially
changed.
BEST CONNECTIONS, INC. OPTIONS--As discussed in Note 2, as a result of the
Matrix combination with Best, Matrix assumed the obligation to issue stock
options to Best's agents under Best's 1997 Option Plan. Effective as of the date
of combination, July 1, 1997, 1,292,000 options to purchase Matrix common shares
were granted to Best agents at $1.50 per share, which will result in aggregate
commission expense of approximately $764,000 over the vesting period. The option
price per share was $1.50. The agents' options become exercisable no later than
December 31, 1999 and may be exercised earlier based on qualified billings of
long distance customers generated by the agents during six month measurement
periods. After the Share Exchange such options became obligations of the
Company. As of December 31, 1998, 641,532 options have been earned and 172,120
exercised under the Plan and the Company recorded expense totaling approximately
$132,000 and $249,000 related to such options based on qualified billings for
1998 and 1997, respectively. Options generally expire two years from the date
they become exercisable or sixty days subsequent to termination of employment.
The per share weighted average fair value of stock options granted on July
1, 1997 was $.59 on the date of the grant using the Black-Scholes
option--pricing model with the following weighted-average assumptions: expected
volatility of 30%, risk-free interest rate of 6.0%, and an expected life of 3.5
years.
BEST CONNECTIONS, INC. OPTIONS AND RESTRICTED STOCK AGREEMENTS--As discussed
in Note 2 as a result of the Matrix combination with Best, Matrix assumed the
obligation to issue stock options, consisting of Matrix common shares owned by
Best, to employees of affiliated companies. Effective July 15, 1997, the Company
issued 247,500 options to purchase an equal number of shares of its common
stock, at $1.50 per share subject to the provisions of a Restricted Stock
Agreement. The Restricted Stock Agreement includes a call provision by the
Company that lapses 10 percent each six months beginning December 15, 1997
through June 15, 2002 or fully lapses in the event of death or permanent
disability of the option holder. The call price is equal to the initial purchase
price of $1.50 plus the aggregate amount of net income or less the aggregate
amount of net losses per share for each fiscal quarter beginning after December
15, 1997; provided that the call price could not be less than $1.50 per share.
During 1998 AvTel relinquished its right to call the shares which caused the
options to vest immediately and to expire if not exercised before December 13,
1998. AvTel provided the holders the option of a "cashless" exercise by
purchasing up to one half the shares issuable at $3.00 The Company recognized
expense over the life of the options in accordance with the provisions of SFAS
No. 123 and recorded expense of $500,000 in 1997 and a reduction of expense of
$170,000 in 1998. At December 31, 1998, 107,250 options had been exercised,
67,250 were used for the cashless exercise, 45,500 expired, and 27,500 were
cancelled.
F-20
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(7) STOCK COMPENSATION (CONTINUED)
Stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE
OPTIONS PRICE
---------- -----------------
<S> <C> <C>
Outstanding at December 31, 1995............................... 53,607 $ 2.24
Canceled..................................................... (31,269) 2.24
----------
Outstanding at December 31, 1996............................... 22,338 2.24
AvTel options outstanding at time of Share Exchange.......... 255,109 4.52
Granted...................................................... 1,539,500 1.50
Exercised.................................................... (15,000) 3.50
----------
Outstanding at December 31, 1997............................... 1,801,947 1.78
Granted...................................................... 1,024,500 3.31
Expired...................................................... (46,750) 1.54
Forfeited.................................................... (106,999) 1.91
Exercised.................................................... (353,327) 1.81
----------
Outstanding at December 31, 1998............................... 2,319,371 2.45
---------- -----
---------- -----
Exercisable at December 31, 1995............................. -- $ --
Exercisable at December 31, 1996............................. 3,574 2.24
Exercisable at December 31, 1997............................. 349,972 2.21
Exercisable at December 31, 1998............................. 524,849 2.16
</TABLE>
Total expense recorded for stock based awards during 1998 and 1997 was
$477,148 and $748,884, respectively.
The following table summarizes certain information about the Company's stock
options at December 31, 1998.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------
WEIGHTED
AVERAGE WEIGHTED OPTIONS EXERCISABLE
REMAINING AVERAGE ------------------------------------
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF OPTIONS WEIGHTED AVERAGE
EXERCISE PRICES OPTIONS LIFE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ---------- -------------- ------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 1.50 - 2.25 1,427,218 2.5 years $ 1.57 462,334 $ 1.54
2.38 - 3.30 303,749 8.5 2.92 26,736 2.93
4.00 - 6.00 555,112 9.9 4.02 2,487 4.00
6.75 - 8.00 17,093 8.9 7.47 17,093 7.47
12.00 - 14.00 16,199 8.1 12.77 16,199 12.77
---------- -------------- ------ ------- ------
2,319,371 5.1 2.45 524,849 2.16
---------- -------
---------- -------
</TABLE>
F-21
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(8) 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.
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
Numerator:
Net loss..................................................... $ (7,127,318) (10,191,720)
Less preferred dividends..................................... 47,264 5,540
------------- --------------
Loss applicable to common shareholders..................... $ (7,174,582) (10,197,260)
------------- --------------
------------- --------------
Denominator:
Weighted average number of common shares used in basic and
diluted loss per common share.............................. 9,633,474 8,267,296
------------- --------------
------------- --------------
Basic and diluted loss per common share...................... $ (0.74) (1.23)
------------- --------------
------------- --------------
</TABLE>
Per share amounts are not reflected for 1996 due to the recapitalization of
the Company as a result of the reverse acquisition in 1997.
(9) LEASING ACTIVITIES AND OTHER COMMITMENTS
The Company leases office space and various equipment under operating leases
expiring in various years through 2004. In the normal course of business,
operating leases are generally renewed or replaced by other leases. Total rental
expenses were $546,000 in 1998, $245,000 in 1997, and $325,000 in 1996. Future
minimum lease payments under non-cancelable operating leases (with initial or
remaining lease terms in excess of one year) and future minimum capital lease
payments as of December 31, 1998 are: 1999--$731,000; 2000--$688,000;
2001--$426,000; 2002--$307,000; and 2003--$101,224.
Substantially all of the Company's switching and transmission facilities
have been provided by two suppliers under negotiated contractual agreements. The
Company purchases long distance services at certain per-minute rates, which vary
depending on the time and type of call. At December 31, 1998, there are
outstanding contractual agreements committing the Company to $18,570,000 minimum
usage through February 15, 2000.
(10) REVOLVING LINE OF CREDIT
In 1998, the Company entered into a Loan and Security Agreement with a bank,
which provides for an asset-based revolving credit line with a floating interest
rate of prime plus 2% (9.75% at December 31, 1998), payable monthly. 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. Borrowings are secured by substantially
all of the assets of the Company. The agreement also calls for a minimum
borrowing of $1,500,000 with a two-year term. At December 31, 1998, there was
$1,112,890 outstanding under the agreement, and an additional $1,655,000 was
eligible for borrowing under the revolving credit line.
The Loan and Security Agreement contains restrictions on net worth, future
acquisitions and other transactions.
F-22
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(11) SEGMENT REPORTING
In June 1997, the Financial Accounting Standards Board issued Statement No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which
the Company adopted in 1998. The Company identifies such segments based on
management responsibility. The Company's two primary business segments are
Business Markets Group ("BMG") and Channel Markets Group ("CMG").
BMG targets mid-size corporate customers for their broadband data, voice and
Internet networking needs. Through a value-added sales process, the Company
designs, provisions and manages its customers' networks. The Company provides a
host of additional value-added services assisting its customers to create
enhanced intranet and extranet applications. Additionally, BMG markets to its
customer base a variety of traditional communications products and services such
as long distance telephone service, executive calling cards and wireless paging.
CMG targets and markets to distribution companies, agents, resellers and
affinity groups ("Channel Partners") that maintain access to large groups of
individuals and small businesses through affinity relationships and niche
marketing strategies. Channel Partners include non-profit organizations and
for-profit distribution groups. CMG provides Internet access, long distance
telephone and other services to customers in 49 states.
During 1998, the Company measured and monitored the progress of BMG and CMG
based on revenues from external customers and gross margin. The results for the
year ended December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
- ---------------------------------------------------------------------------------------------
BMG CMG TOTAL
------------ ------------- -------------
<S> <C> <C> <C>
Revenue from external customers.................. $ 6,338,114 37,675,384 44,013,498
Gross margin..................................... 1,846,895 10,317,249 12,164,144
Total assets..................................... 8,079,998 6,554,356 14,634,354
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------
BMG CMG TOTAL
------------ ------------- -------------
<S> <C> <C> <C>
Revenue from external customers.................. $ 5,791,993 45,597,087 51,389,080
Gross margin..................................... 1,715,205 13,446,368 15,161,573
Total assets..................................... 2,241,825 16,483,025 18,724,850
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------
BMG CMG TOTAL
------------ ------------- -------------
<S> <C> <C> <C>
Revenue from external customers.................. $ 6,368,460 65,189,835 71,558,295
Gross margin..................................... 2,135,461 21,748,438 23,883,899
Total assets..................................... 705,964 19,632,440 20,338,404
</TABLE>
(12) CONTINGENCIES
The Company's common stock has been traded on The Nasdaq SmallCap Market
since May 28, 1998. Trading in the Company's stock was halted by Nasdaq after
the close of trading on November 12, 1998,
F-23
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(12) CONTINGENCIES (CONTINUED)
through the close of trading on November 13, 1998, as a result of an unusual
upsurge in its stock price and trading volume. This unusual event has triggered
the initiation of class action litigation under the federal securities laws. The
Company believes that these claims are without merit and intends to defend
vigorously this litigation. However, it is not possible at this time for the
Company to predict with certainty the outcome of this litigation. Even if the
Company prevails in the litigation, the expenses of the defense could have a
material adverse effect on the Company's operating results and financial
condition.
The Company presently has other contingent liabilities relating to various
lawsuits and other matters related to the conduct of its business. On the basis
of information furnished by counsel and others, management believes these
contingencies upon resolution will not materially affect the financial condition
or results of operations of the Company.
(13) SUBSEQUENT EVENTS
On April 13, 1999, the Company sold 1,500 shares of its newly-designated
Series B Convertible Preferred Stock (the "Series B Stock") to AMRO
International, S.A., an entity organized under the laws of Panama, Austinvest
Anstalt Balzers, an entity organized under the laws of Liechtenstein, and
Esquire Trade & Finance Inc., an entity organized under the laws of the British
Virgin Islands (the "Series B Investors") for $1,500,000. The Series B Stock has
a liquidation preference of $1,000 per share. The Series B Stock will be
entitled to an annual dividend of $30 per share, payable in cash or Common
Stock, at the Company's option. The annual dividend will increase to $60 per
share if the Company ever ceases to be listed on The Nasdaq Stock Market or any
national securities exchange. The Series B Stock is convertible into Common
Stock at the option of the Series B Investors at any time. The number of shares
of Common Stock to be received by a Series B Investor upon conversion will equal
the liquidation preference of the amount converted, divided by the conversion
price. The conversion price will be the lesser of (1) $6.875, or (2) 89% of the
low closing bid price for the Common Stock on The Nasdaq SmallCap Market at the
time of conversion. The conversion price will not be less than $3.00 for 180
days after the date of issuance of the Series B Stock. Thereafter the conversion
price will not be less than $2.00 as long as certain revenue and EBITDA
requirements are met. As a result, the Company could issue up to 750,000 shares
of Common Stock upon conversion if all of the Series B Stock were converted at
the lowest possible conversion price (assuming such revenue and EBITDA
requirements continue to be met). Unless the Company shall have obtained the
approval of its voting stockholders in accordance with the rules of The Nasdaq
Stock Market, the Company will not issue shares of Common Stock upon conversion
of any shares of Series B Stock if such issuance of Common Stock, when added to
the number of shares of Common Stock previously issued by the Company upon
conversion of or as dividends on shares of the Series B Stock, would exceed
19.9% of the number of shares of Common Stock which were issued and outstanding
on the original issuance date of the Series B Stock. The Company will pay
converting Series B Investors in cash for any excess over such amount.
The Company also issued the Series B Investors warrants to purchase up to
20,000 shares of Common Stock at a price of $8.60 per share. The warrants may be
exercised beginning September 30, 1999, and terminate on March 31, 2002.
The Company and the Series B Investors entered into a Registration Rights
Agreement that requires the Company to file, and obtain and maintain the
effectiveness of, a Registration Statement with the Securities and Exchange
Commission (the "Commission") in order to register the public resale of all
F-24
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997, AND 1996
(13) SUBSEQUENT EVENTS (CONTINUED)
shares of the Common Stock acquired by the Series B Investors (a) upon
conversion of the Series B Stock, (b) in payment of dividends on the Series B
Stock, and (c) upon exercise of the warrants. The Company will be subject to
significant monetary penalties if it fails to obtain or maintain the
effectiveness of such Registration Statement.
The Company paid Trinity Capital Advisors, Inc. $60,000 as compensation for
arranging the placement of the Series B Stock.
F-25
<PAGE>
AVTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD
- -------------------------------------------------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful
Accounts and other
Provisions--years ended:
December 31, 1998............................... $ 982,000 2,728,000(a) 2,775,000(b) 935,000
----------- ------------- ------------- ----------
----------- ------------- ------------- ----------
December 31, 1997............................... $ 627,000 1,830,000(a) 1,475,000(b) 982,000
----------- ------------- ------------- ----------
----------- ------------- ------------- ----------
December 31, 1996............................... $ 730,000 1,461,000(a) 1,564,000(b) 627,000
----------- ------------- ------------- ----------
----------- ------------- ------------- ----------
Valuation allowance for
deferred tax assets:
December 31, 1998............................... $ 1,185,000 2,594,000(c) -- 3,779,000
----------- ------------- ------------- ----------
----------- ------------- ------------- ----------
December 31, 1997............................... $ -- 1,185,000(c) -- 1,185,000
----------- ------------- ------------- ----------
----------- ------------- ------------- ----------
December 31, 1996............................... $ -- -- -- --
----------- ------------- ------------- ----------
----------- ------------- ------------- ----------
</TABLE>
- ------------------------
(a) Charged to cost of revenues.
(b) Amounts written off.
(c) Recognized as a component of deferred tax assets.
F-26
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE OF DOCUMENT
- ------ --------------------------------------------------------------------------
<C> <S>
2.1 Acquisition Agreement, dated as of August 30, 1996, by and among Hi-Tiger
International, Inc., a Utah corporation, AvTel Communications, Inc., a
Utah corporation, and AvTel Holdings, Inc., a California corporation.
(Incorporated by reference to Exhibit A to Registrant's Information
Statement on Schedule 14C dated October 2, 1996).
2.2 Amendment No. 1 to Acquisition Agreement, dated October 22, 1996, among
Hi-Tiger International, Inc., AvTel Communications, Inc. and AvTel
Holdings, Inc. (Incorporated by reference to Exhibit 2.2 to Registrant's
Current Report on Form 8-K dated October 23, 1996).
2.3 Stock Exchange Agreement, dated as of April 29, 1997, by and between the
Registrant and Matrix Telecom, Inc. (Incorporated by reference to
Exhibit 2 to Registrant's Current Report on Form 8-K dated April 30,
1997).
2.4 Amendment to Stock Exchange Agreement, dated as of August 25, 1997, by and
between the Registrant and Matrix Telecom, Inc. (Incorporated by
reference to Exhibit 2 to Registrant's Current Report on Form 8-K dated
August 25, 1997).
2.5 Agreement and Plan of Merger, dated as of October 3, 1997, between AvTel
Communications, Inc., a Delaware corporation and AvTel Communications,
Inc., a Utah corporation. (Incorporated by reference to Exhibit 2.7 to
Registrant's Annual Report on Form 10-KSB for the year ended September
30, 1997).
2.6 Stock Purchase Agreement, dated as of July 22, 1998, among the Registrant
and the shareholders of Remote Lojix/PCSI, Inc.
2.7 First Amendment to Stock Purchase Agreement, dated as of August 18, 1998,
among the Registrant and the shareholders of Remote Lojix/PCSI, Inc.
2.8 Earnout Agreement, dated as of October 30, 1998, among the Registrant and
certain shareholders of Remote Lojix/PCSI, Inc.
3.1 Certificate of Incorporation of the Registrant. (Incorporated by reference
to Exhibit 3.1 to Registrant's Annual Report on Form 10-KSB for the year
ended September 30, 1997).
3.2 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock.
3.3 Bylaws of the Registrant. (Incorporated by reference to Exhibit 3.2 to
Registrant's Annual Report on Form 10-KSB for the year ended September
30, 1997).
10.1 Rights Agreements dated October 23, 1996, between the Registrant and
holders of the Registrant's Series A Convertible Preferred Stock.
(Incorporated by reference to Exhibit 4.2 to Registrant's Current Report
on Form 8-K dated October 23, 1996).
10.2 1997 Stock Incentive Plan. (Incorporated by reference to Exhibit A to the
Registrant's definitive Proxy Statement on Schedule 14A dated January 8,
1997.)
10.3 1998 Stock Incentive Plan. (Incorporated by reference to Exhibit A to
Registrant's definitive Proxy Statement on Schedule 14A dated April 28,
1998).
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER TITLE OF DOCUMENT
- ------ --------------------------------------------------------------------------
<C> <S>
10.4 New Best Connections, Inc. Amended and Restated 1997 Option Plan.
(Incorporated by reference to Exhibit 4.2 to Registrant's Registration
Statement on Form S-8 dated May 22, 1998).
10.5 First Amendment to New Best Connections, Inc. Amended and Restated 1997
Option Plan.
10.6 Registration Rights and Lockup Agreement dated December 1, 1997, between
the Registrant and Matrix Telecom, Inc., on behalf of the stockholders
of Matrix, (Incorporated by reference to Exhibit 4 to Registrant's
Current Report on Form 8-K dated December 1, 1997).
10.7 Triple Net Real Property Lease (Multi-Tenant Building) dated as of
February 16, 1998, by and between Bath Street Partners, a California
limited partnership and the Company. (Incorporated by reference to
Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997).
10.8 Commercial Lease Agreement dated February 28, 1995, Matrix Telecom, Inc.
and Ameritas Life Insurance Corp., as amended by Lease Modification
Agreement dated March 2, 1995. (Incorporated by reference to Exhibit
10.9 to Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.9 Resale Solutions Switched Services Agreement dated March 12, 1998, between
Matrix Telecom, Inc. and Sprint Communications Company L.P.
(Incorporated by reference to Exhibit 10.10 to Registrant's Annual
Report on Form 10-K for the year ended December 31, 1997).
10.10 Amendment to Carrier Transport Switched Services Agreement dated October
15, 1998, between Matrix Telecom and Sprint Communications Company L.P.
(Incorporated by reference to Exhibit 10.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
10.11 Loan and Security Agreement dated October 2, 1998, among Registrant,
Matrix Telecom, Inc. and Coast Business Credit. (Incorporated by
reference to Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
10.12 License Agreement dated as of March 1, 1999, between Matrix Telecom, Inc.
and Electronic Data Systems Corporation.
10.13 Convertible Preferred Stock and Warrants Purchase Agreement dated as of
April 5, 1999, among Registrant, AMRO International, S.A., Austinvest
Anstalt Balzers, and Esquire Trade & Finance Inc.
10.14 Registration Rights Agreement dated as of April 5, 1999, among Registrant,
AMRO International, S.A., Austinvest Anstalt Balzers, and Esquire Trade
& Finance Inc.
10.15 Stock Purchase Warrants granted by Registrant to AMRO International, S.A.,
Austinvest Anstalt Balzers, and Esquire Trade & Finance Inc.
21 List of Subsidiaries.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
</TABLE>
I-2
<PAGE>
Exhibit 2.6
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of
July 22, 1998, between AVTEL COMMUNICATIONS, INC., a Delaware corporation
("AVTEL"), and the stockholders of REMOTE LOJIX/PCSI, INC., a New York
corporation ("RLI"), executing this Agreement (the "STOCKHOLDERS").
RECITALS
A. The Stockholders own the shares (the "STOCKHOLDER SHARES") of the
common stock, par value $.001 per share, of RLI ("RLI COMMON STOCK") in the
amounts set forth beside their respective names on Schedule 2.2 to this
Agreement.
B. RLI and its subsidiaries are engaged in the installation, service and
repair of computers and related equipment, accessories and supplies, the
maintenance of computer systems via maintenance contracts and the provision of
related consulting services (the "BUSINESS").
C. The Stockholders desire to sell, and AvTel desires to buy, the
Stockholder Shares on the terms and conditions set forth herein.
AGREEMENT
In consideration of the mutual promises contained herein and intending to
be legally bound the parties agree as follows:
<PAGE>
1. PURCHASE AND SALE; CLOSING.
1.1 TRANSFER OF STOCKHOLDER SHARES BY THE STOCKHOLDERS. Subject to the
terms and conditions of this Agreement, the Stockholders agree to sell the
Stockholder Shares and deliver the certificates evidencing the Stockholder
Shares to AvTel at the Closing (as defined below). The certificates will be
properly endorsed for transfer to or accompanied by a duly executed stock power
in favor of AvTel or its affiliate, as AvTel may have directed prior to the
Closing Date (as defined below), and otherwise in a form acceptable for transfer
on the books of RLI. If any stock certificate to be delivered to AvTel by the
Stockholders at Closing shall have been lost, stolen or destroyed, AvTel may, in
its reasonable discretion, require the owner of such lost, stolen or destroyed
stock certificate to provide an appropriate affidavit of ownership and indemnity
or other document(s) evidencing ownership of such Stockholder Shares
satisfactory to AvTel. The Stockholders will pay any transfer Taxes (as defined
in Section 2.4) payable with respect to the transfer of the Stockholder Shares.
1.2 PURCHASE OF THE STOCKHOLDER SHARES BY AVTEL; PURCHASE PRICE. Subject
to the terms and conditions of this Agreement, AvTel agrees to purchase the
Stockholder Shares from the Stockholders. The purchase price for the Stockholder
Shares and for the Covenants not to Compete set forth in Section 5.1 hereof (the
"PURCHASE PRICE") shall be paid as set forth below.
1.2.1 INITIAL EXCHANGE SHARES. At the Closing, AvTel shall issue a
total of 350,000 shares (the "INITIAL EXCHANGE SHARES") of its Common Stock, par
value $.01 per share (the "AVTEL COMMON STOCK") to the Stockholders, to be
divided among the Stockholders in the same proportion that the number of
Stockholder Shares owned by each Stockholder (as set forth on Schedule 2.2)
represents to the total number of Shares. For purposes of calculating the number
of Initial Exchange Shares to be received by each Stockholder, the numbers shall
be rounded to the nearest whole share as required to avoid issuance of
fractional shares. As of the Closing Date, the Initial Exchange Shares will not
be registered under any federal or state securities laws. At the Closing,
Jeffrey P. Leventhal shall deposit 65,000 of his Initial Exchange Shares into an
escrow account pursuant to an Escrow Agreement substantially in the form
attached hereto as Exhibit A (the "ESCROW AGREEMENT").
1.2.2 EARNOUT SHARES. If, and only if, RLI has met the performance
standards set forth in Section 1.2.2(B) below during the twelve-month period
commencing on the first day of the month following the Closing Date and ending
on the last day of the twelfth month thereafter (the "EARNOUT DATE"), then as
soon as practicable, but in no event later than sixty days after the Earnout
Date, AvTel shall issue that number of shares of AvTel Common Stock as
calculated below (the "EARNOUT SHARES") to the Stockholders, to be divided among
the Stockholders in the same proportion as the Initial Exchange Shares. For
purposes of calculating the number of Earnout Shares to be received by each
Stockholder, the numbers shall be rounded to the nearest whole share as required
to avoid issuance of fractional shares. As of the Closing Date, the Earnout
Shares will not be registered under any federal or state securities laws.
<PAGE>
1. The number of Earnout Shares to be issued, if any, shall be
as follows:
(1) The aggregate number of the Earnout Shares to be
issued, if any, upon satisfaction of the requirements contained in Section
1.2.2(B)(1) below shall be calculated by dividing the sum of $1,250,000 by the
Closing Share Price.
(2) The additional aggregate number of the Earnout
Shares to be issued, if any, if the requirements contained in Section
1.2.2(B)(2) below are satisfied shall be calculated by dividing the sum of
$250,000 by the Closing Share Price.
(3) The "CLOSING SHARE PRICE" shall mean the average
closing price as publicly reported by the Nasdaq Stock Market as of 4:00 p.m.
Eastern Time of AvTel Common Stock over the last sixty trading days ending with
(and including) the second business day prior to the Earnout Date.
2. The Earnout Shares shall be delivered only if the following
requirements are met:
(1) The Earnout Shares contemplated by Section
1.2.2(A)(1) shall be delivered if, and only if, during the twelve-month period
ending on the Earnout Date, RLI has had both (i) net revenues from operation of
not less than $6,500,000, and (ii) net income (net of non-recurring charges and
allocation of parent corporation overhead) greater than zero, in each case as
determined by AvTel's independent auditors (which shall be a
nationally-recognized accounting firm) in accordance with generally accepted
accounting principles ("GAAP"), and calculated prior to the effect of any other
acquisitions.
(2) The Earnout Shares contemplated by Section
1.2.2(A)(2) shall be delivered if, and only if, during the twelve-month period
ending on the Earnout Date, RLI has had both (i) net revenues from operation of
not less than $6,500,000, and (ii) net income (net of non-recurring charges and
allocation of parent corporation overhead) of at least $250,000, in each case as
determined by AvTel's independent auditors (which shall be a
nationally-recognized accounting firm) in accordance with GAAP, and calculated
prior to the effect of any other acquisitions.
1.2.3 PRO RATA REDUCTION. If the Stockholders who have signed this
Agreement by the Closing Date hold less than one hundred percent (100%) of the
shares of RLI Common Stock outstanding on the Closing Date, and AvTel waives the
condition precedent to its obligations to close contained in Section 6.2.14,
then the number of Initial Exchange Shares and Earnout Shares, if any, to be
delivered by AvTel shall be reduced pro rata.
1.2.4 RESTRICTIVE LEGEND. The Initial Exchange Shares and the
Earnout Shares, if any, to be issued pursuant to this Agreement shall be
characterized as "restricted securities" for purposes of Rule 144 under the
Securities Act of 1933, as amended (the "Securities Act") and
<PAGE>
each certificate representing any such shares shall bear a legend identical or
similar in effect to the following legend (together with any other legend or
legends required by applicable state securities laws or otherwise):
"THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE
ASSIGNED, PLEDGED, OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS
RECEIVED AN OPINION OF COUNSEL OR OTHER EVIDENCE,
SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH
REGISTRATION IS NOT REQUIRED."
1.2.5 ALLOCATION TO COVENANT NOT TO COMPETE. The parties agree that
$10,000 of the Purchase Price shall be allocated to the Covenant not to Compete
set forth in Section 5.1 of this Agreement. Such allocation shall be for
financial accounting and tax purposes only and shall not affect or limit in any
way the liability of the Stockholders for breach of such Covenant not to
Compete.
1.3 THE CLOSING. The closing of the transfer of the Stockholder Shares
(the "Closing") will take place at the offices of Seed, Mackall & Cole LLP, 1332
Anacapa Street, Suite 200, Santa Barbara, California (or such other place as the
parties may mutually agree), at such date and time as the parties shall mutually
agree. Such date and time are referred to as the "Closing Date". At the Closing,
AvTel shall be entered on the records of RLI as the sole shareholder of RLI
having the right to vote on all matters which the shareholders of RLI are
entitled to vote pursuant to the Certificate of Incorporation and the Bylaws of
RLI and applicable law, the right to receive dividends and such other rights
generally accruing to shareholders of RLI.
1.4 STOCKHOLDER REPRESENTATIVE. Each of the Stockholders hereby
constitutes and appoints Jeffrey P. Leventhal (the "STOCKHOLDER REPRESENTATIVE")
to execute and deliver any instruments or other documents, and to make such
decisions and to take such other action on behalf of such Stockholder as may be
necessary or appropriate in connection with such Stockholder's rights and
obligations under this Agreement, and each such Stockholder hereby agrees to be
bound by any such instrument or other document executed and delivered by the
Stockholder Representative, and any such decision made or other action taken by
the Stockholder Representative, pursuant to the terms of this Agreement. The
Stockholder Representative shall not be liable to the Stockholders for any
action taken or omitted by him in connection with the performance of his duties
and obligations hereunder, except for his own gross negligence or willful
misconduct.
2. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS. The Stockholders,
jointly and severally, hereby represent and warrant to AvTel, as of the
datehereof and as of the Closing Date, as follows:
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2.1 ORGANIZATION AND RELATED MATTERS.
2.1.1 RLI. RLI is a corporation duly organized, validly existing and
in good standing under the laws of the State of New York. Except as set forth in
Schedule 2.1 hereto, RLI is duly qualified or licensed to do business as a
foreign corporation in good standing in all jurisdictions in which the character
or the location of the assets owned or leased by it or the nature of the
Business conducted by it requires qualification or licensing. RLI's failure to
be qualified or licensed to do business in any jurisdiction or jurisdictions
where such qualification or licensing is required does not and will not have a
material adverse effect on RLI or the Business. A list of all jurisdictions
where RLI is qualified or licensed to do business is set forth in Schedule 2.1
hereto. RLI has all necessary corporate power and authority to own its
properties and assets and to carry on its Business as now conducted. Schedule
2.1 correctly lists the current directors and executive officers of RLI and sets
forth an organizational chart with respect to RLI's operations and employees.
True, correct and complete copies of the certificate of incorporation and bylaws
of RLI as in effect on the date hereof have been delivered to AvTel.
2.1.2 SUBSIDIARIES. Each of the direct and indirect subsidiaries of
RLI is set forth on Schedule 2.1 (the "SUBSIDIARIES"). Except for the
Subsidiaries, RLI has no subsidiaries, is not a partner or participant in any
partnerships or joint ventures, and does not own, directly or indirectly, any
interests in any other corporation, partnership, limited liability company or
other entity. Each of the Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction identified in
Schedule 2.1. Except as set forth in Schedule 2.1 hereto, each of the
Subsidiaries is duly qualified or licensed to do business as a foreign
corporation in good standing in all jurisdictions in which the character or the
location of the assets owned or leased by it or the nature of the Business
conducted by it requires qualification or licensing. A Subsidiary's failure to
be qualified or licensed to do business in any jurisdiction or jurisdictions
where such qualification or licensing is required does not and will not have a
material adverse effect on such Subsidiary or the Business. A list of all
jurisdictions where each Subsidiary is qualified or licensed to do business is
set forth in Schedule 2.1 hereto. Each of the Subsidiaries has all necessary
corporate power and authority to own its properties and assets and to carry on
its Business as now conducted. Schedule 2.1 correctly lists the current
directors and executive officers of each of the Subsidiaries and sets forth an
organizational chart with respect to each of the Subsidiaries's operations and
employees. True, correct and complete copies of the certificate or articles of
incorporation and bylaws of each of the Subsidiaries as in effect on the date
hereof have been delivered to AvTel. All references to RLI in this Agreement
shall be deemed to include RLI and its Subsidiaries.
2.1.3 THE STOCKHOLDERS. Each of the Stockholders is listed on
Schedule 2.1, together with such Stockholder's address and Social Security
Number or Tax Identification Number. Each of the Stockholders has all necessary
power and authority to execute, deliver and perform this Agreement and any
related agreements to which such Stockholder is a party.
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2.2 CAPITAL STOCK.
2.2.1 OWNERSHIP OF STOCKHOLDER SHARES. The Stockholders own the
Stockholder Shares beneficially and of record in the amounts set forth on
Schedule 2.2. Except as set forth on Schedule 2.2, the Stockholder Shares are
owned free and clear of any claim, charge, easement, encumbrance, lease,
covenant, security interest, lien, option, pledge, rights of others, or
restriction (whether on voting, sale, transfer, disposition or otherwise),
whether imposed by agreement, understanding, law, equity or otherwise, except
for any restrictions on transfer generally arising under any applicable federal
or state securities law (each an "Encumbrance"). At the Closing, AvTel will
acquire good and marketable title to and complete ownership of the Stockholder
Shares, free and clear of any Encumbrance. The representations of the
Stockholders in this Section 2.2.1 are made only as to the Stockholder Shares of
such Stockholder.
2.2.2 CAPITALIZATION. The authorized capital stock of RLI consists
of 10,000,000 shares of RLI Common Stock, of which 4,195,963 shares are issued
and outstanding on the date hereof. On the Closing Date, there will be 4,177,796
shares of RLI Common Stock issued and outstanding. The authorized, issued and
outstanding capital stock of each of the Subsidiaries is as set forth on
Schedule 2.2. RLI owns, beneficially and of record, of all of the capital stock
of each of the Subsidiaries, free and clear of any Encumbrances. Except as set
forth on Exhibit 2.2, there are no outstanding options, warrants or other rights
to subscribe for or purchase, or contracts or other obligations to issue or
grant any rights to ac quire, any stock or securities of RLI or the
Subsidiaries, or to restructure or recapitalize RLI or the Subsidiaries. On the
Closing Date, there will be no outstanding options, warrants or other rights to
subscribe for or purchase, or contracts or other obligations to issue or grant
any rights to acquire, any stock or securities of RLI or the Subsidiaries, or to
restructure or recapitalize RLI or the Subsidiaries. Except as set forth on
Schedule 2.2 hereto, there are no outstanding contracts of the Stockholders, RLI
or the Subsidiaries to repurchase, redeem or otherwise acquire any securities of
RLI or the Subsidiaries. The Stockholder Shares, and the shares of the capital
stock of each of the Subsidiaries, are duly authorized, validly issued and
outstanding and are fully paid and nonassessable and were issued in conformity
with applicable laws. There are no preemptive rights in respect of any equity
securities of RLI.
2.2.3 PCSI HOLDERS. The stock records of RLI reflect that, as of the
date hereof, 18,167 shares of the RLI Common Stock are held by unidentified
former shareholders of The Technical Services Group, Inc. ("PCSI"), a New York
corporation acquired by RLI as of January 1, 1997. Such holders are referred to
hereinafter as the "PCSI HOLDERS."
2.3 FINANCIAL STATEMENTS; CHANGES; CONTINGENCIES.
2.3.1 FINANCIAL STATEMENTS.
1. The Stockholders have delivered to AvTel consolidated and
consolidating balance sheets for RLI and its Subsidiaries at December 31, 1997
and the related
<PAGE>
consolidated and consolidating statements of operations, changes in
stockholder's equity and cash flow for the period then ended (the "Audited
Financial Statements"). The Audited Financial Statements have been audited by
Bloom & Company (the "Auditors") whose reports thereon are included with such
Audited Financial Statements. The Audited Financial Statements have been
prepared in conformity with GAAP. Such statements of operations and cash flow
present fairly the results of operations and cash flows of RLI and its
Subsidiaries for the respective periods covered, and the balance sheets present
fairly the financial condition of RLI and its Subsidiaries as of their
respective dates.
2. The Stockholders have delivered to AvTel consolidated and
consolidating balance sheets for RLI and its Subsidiaries at May 31, 1998 and
the related consolidated and consolidating statements of operations and cash
flows and changes in stockholder's equity for the period then ended (the
"INTERIM FINANCIAL STATEMENTS" and, together with the Audited Financial
Statements, the "RLI FINANCIAL STATEMENTS"). The Interim Financial Statements
have been certified by the chief executive officer of RLI. The Interim Financial
Statements have been prepared in conformity with GAAP applied on a basis
consistent with the Audited Financial Statements. The statements of operations
and cash flows present fairly the results of operations and cash flows of RLI
and its Subsidiaries for the period covered, and the balance sheets present
fairly the financial condition of RLI as of their date. The Interim Financial
Statements reflect all adjustments (which consist only of normal recurring
adjustments not material in amount and include but are not limited to estimated
provisions for year-end adjustments) necessary for a fair presentation.
3. At the dates of each such balance sheet, RLI had any no
material liability (actual, contingent or accrued) that, in accordance with GAAP
applied on a consistent basis, should have been shown or reflected therein but
was not. Since January 1, 1997, there has been no change in any of the
significant accounting policies, practices or procedures of RLI.
2.3.2 NO MATERIAL ADVERSE CHANGES. Except as set forth on Schedule
2.3, since January 1, 1998, whether or not in the ordinary course of business,
there has not been, occurred or arisen:
1. any change in or event affecting the Stockholders, RLI, the
Subsidiaries, the Business or the Stockholder Shares that has had or may
reasonably be expected to have a material adverse effect on the Stockholders,
RLI, the Business, or the Stockholder Shares,
2. any agreement, condition, action or omission which would be
pro scribed by (or require consent under) Section 4.3 had it existed, occurred
or arisen after the date of this Agreement,
3. any strike or other labor dispute, or
<PAGE>
4. any casualty, loss, damage or destruction (whether or not
covered by insurance) of any material property of RLI that is material or that
has involved or may involve a loss to RLI in excess of applicable insurance
coverage.
2.3.3 NO OTHER LIABILITIES OR CONTINGENCIES. Neither RLI nor any of
the Subsidiaries has any liabilities of any nature, whether accrued, absolute,
contingent or otherwise, and whether due or to become due, probable of assertion
or not, except liabilities that (i) are reflected or disclosed in the RLI
Financial Statements, (ii) were incurred after December 31, 1997, in the
ordinary course of business and in the aggregate do not exceed $10,000 or (iii)
are set forth in Schedule 2.3 hereto.
2.3.4 DIVIDENDS AND OTHER DISTRIBUTIONS. Except as set forth on
Schedule 2.3, there has been no dividend or other distribution of assets or
securities whether consisting of money, property or any other thing of value,
declared, issued or paid by RLI subsequent to December 31, 1997.
2.4 TAX AND OTHER RETURNS AND REPORTS. Except as set forth in Schedule
2.4, RLI has timely filed or will file prior to Closing all required Tax Returns
and has paid or will have paid by Closing all Taxes due for all periods ending
on or before the Closing Date. Adequate provision has been made in the books and
records of RLI, and to the extent required by GAAP, in the RLI Financial
Statements, for all Taxes whether or not due and payable and whether or not
disputed. Except as set forth on Schedule 2.4, RLI has withheld and paid all
Taxes required to be withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, customer, creditor, stockholder or
other third party. RLI has not elected to be treated as a consenting corporation
under Section 341(f) of the Internal Revenue Code of 1986, as amended (the
"Code"). Schedule 2.4 lists the date or dates through which the Internal Revenue
Service and any other government or any agency, bureau, board, commission,
court, department, official, political subdivision, tribunal or other
instrumentality of any government, whether federal, state or local, domestic or
foreign (a "GOVERNMENTAL ENTITY") have examined the United States federal income
Tax Returns and any other Tax Returns of RLI. All required Tax Returns,
including amendments to date, have been prepared in good faith without
negligence or willful misrepresentation and are complete and accurate in all
material respects. Except as set forth in the Schedule 2.4, no Governmental
Entity has, during the past three years, examined or is in the process of
examining any Tax Returns of RLI. Except as set forth on Schedule 2.4, no
Governmental Entity has proposed (tentatively or definitively), asserted or
assessed or, to the best knowledge of the Stockholders, threatened to propose or
assert, any deficiency, assessment or claim for Taxes and there would be no
basis for any such delinquency assessment or claim.
For the purposes of this Agreement, (i) "TAX" means any foreign,
federal, state, county or local income, sales and use, excise, franchise, real
and personal property, transfer, gross receipt, capital stock, production,
business and occupation, disability, employment, payroll, severance or
withholding tax or charge imposed by any Governmental Entity any interest and
penalties (civil or criminal) related thereto or to the nonpayment thereof, and
any losses or expenses in connection with the determination, settlement or
litigation of any
<PAGE>
Tax liability, and (ii) "Tax Return" means a report, return or other information
required to be supplied to a Governmental Entity with respect to Taxes
including, where permitted or required, combined or consolidated returns for any
group of entities that includes RLI.
2.5 MATERIAL CONTRACTS. Schedule 2.5 lists each agreement, arrangement,
bond, commitment, franchise, indemnity, indenture, instrument, lease, license or
understanding, whether or not in writing (each a "Contract") to which RLI or any
of its Subsidiaries is a party or to which any of them or any of their
respective properties is subject or by which any thereof is bound that (a) after
December 31, 1997, obligates such party to pay an amount of $25,000 or more, (b)
has an unexpired term as of December 31, 1997 in excess of one year, (c)
represents a Contract upon which the Business is substantially dependent or
which is otherwise material to such Business, (d) provides for an extension of
credit other than consistent with normal credit terms, (e) limits or restricts
the ability of RLI or any of the Subsidiaries to compete or otherwise to conduct
its business in any manner or place, (f) provides for a guaranty or indemnity by
RLI or any of the Subsidiaries, (g) grants a power of attorney, agency or
similar authority to another person or entity, (h) contains a right of first
refusal, (i) related to the possession or use of any real property, or (j) was
not made in the ordinary course of business. Each of the Contracts listed on
Schedule 2.5 shall be deemed to be a "MATERIAL CONTRACT." True copies of the
Material Contracts, including all amendments and supplements, have been
delivered to AvTel. Each Material Contract is valid and binding obligation of
the parties thereto; RLI and the Subsidiaries have duly performed all their
obligations thereunder to the extent that such obligations to perform have
accrued; and no breach or default, alleged breach or default, or event which
would (with the passage of time, notice or both) constitute a breach or default
thereunder by RLI or any Subsidiary, or, to the best knowledge of the
Stockholders, any other party or obligor with respect thereto, has occurred or
as a result of this Agreement or performance will occur. Except as set forth in
Schedule 2.8 hereto, consummation of the transactions contemplated by this
Agreement will not (and will not give any person a right to) terminate or modify
any rights of, or accelerate or augment any obligation of, RLI or any
Subsidiary.
2.6 REAL AND PERSONAL PROPERTY; TITLE TO PROPERTY; LEASES. Neither RLI nor
any Subsidiary owns, directly or indirectly, any interest whatsoever in any real
property, other than leasehold interests pursuant to office leases included in
the Material Contracts. Schedule 2.6 lists all tangible personal property of RLI
and the Subsidiaries material to the Business and designates any leasehold
interests therein. Except as set forth in Schedule 2.6, RLI or the relevant
Subsidiary has good and marketable title to, or a valid leasehold interest in
(as designated in Schedule 2.6), all such items of tangible personal property,
free and clear of any Encumbrances. All material tangible properties of RLI and
the Subsidiaries (excluding any inventory) are in a good state of maintenance
and repair (except for ordinary wear and tear) and are adequate for the
Business. All material leasehold properties held by RLI or any Subsidiary as
lessee are held under valid, binding and enforceable leases, subject only to
such exceptions as are not, individually or in the aggregate, material to the
Business.
<PAGE>
2.7 INTELLECTUAL PROPERTY. Schedule 2.7 lists any and all copyrights,
patents, service marks, trademarks, tradenames, and all registrations or
application for registration of any of the foregoing, used in the Business or in
which RLI or any Subsidiary has an interest and the nature of such interest,
including all licenses or other rights with respect to any of the foregoing. In
addition, RLI has previously provided in writing to AvTel descriptions of any
and all trade secrets or other confidential information or know-how used in the
Business or in which RLI or any Subsidiary has an interest. All of the foregoing
assets, properties and interests are referred to as the "Intellectual Property."
RLI has complete rights to and ownership of all Intellectual Property the
absence of which would have a material adverse effect on the Business. Neither
RLI nor any Subsidiary uses any Intellectual Property by consent of any other
person or is required to or makes any payments to others with respect thereto,
and, except as set forth in Schedule 2.7, the Intellectual Property of RLI and
the Subsidiaries is fully assignable free and clear of any Encumbrances. Neither
the Stockholders nor RLI nor any Subsidiary has received any notice to the
effect (or is otherwise aware) that the Intellectual Property or any use by RLI
or any Subsidiary of any such property conflicts with or allegedly conflicts
with or infringes the rights of any person or entity.
2.8 AUTHORIZATION; NO CONFLICTS. This Agreement and any related agreements
each constitutes the legally valid and binding obligation of the Stockholders,
enforceable against the Stockholders in accordance with its terms except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws and equitable principles relating to or
limiting creditors rights generally. The execution, delivery and performance of
this Agreement by the Stockholders and the execution, delivery and performance
of any related agreements or contemplated transactions by the Stockholders or
RLI will not violate, or constitute a breach or default (whether upon lapse of
time and/or the occurrence of any act or event or otherwise) under, the
certificate of incorporation or bylaws of RLI or any Contract of the
Stockholders, RLI or any Subsidiary, result in the imposition of any Encumbrance
against any material asset or properties of RLI or any Subsidiary, or violate
any statute or other law, rule, regulation, or interpretation of any
Governmental Entity (each a "LAW"). Schedule 2.8 lists all approvals,
authorizations, consents, qualifications or registrations, or any waivers of any
of the foregoing, required to be obtained from, or any notices, statements or
other communications required to be filed with or delivered to, any Governmental
Authority or any other person or entity ("APPROVALS") required to be obtained by
the Stockholders, RLI or any Subsidiary to consummate the transactions
contemplated by this Agreement. Except for matters identified in Schedule 2.8 as
requiring that certain actions be taken by or with respect to a third party or
Governmental Entity, the execution and delivery of this Agreement by the
Stockholders and the performance of this Agreement and any related or
contemplated transactions by the Stockholders or RLI will not require filing or
registration with, or the issuance of any Approval by, any other third party or
Governmental Entity.
<PAGE>
2.9 LEGAL PROCEEDINGS. Except as set forth in Schedule 2.9, there is no
decree, injunction, judgment, order, ruling, assessment or writ (each an
"ORDER") or any action, complaint, petition, investiga tion, suit or other
proceeding, whether civil or criminal, in law or in equity, or before any
arbitrator or Governmental Entity (each an "ACTION") pending, or, to the best
knowledge of the Stockholders, threatened, against or affecting the
Stockholders, RLI, any Subsidiary or any of their respective properties or
assets that individually or when aggregated with one or more other Orders or
Actions has or might reasonably be expected to have a material adverse effect on
the Business, on the Stockholders's ability to perform this Agreement, or on any
aspect of the transactions contemplated by this Agreement. Schedule 2.9 lists
each Order and each Action that involves a claim or potential claim against, or
that enjoins or seeks to enjoin any activity by, RLI or any Subsidiary. Except
as set forth in Schedule 2.9, there is no matter as to which RLI or any
Subsidiary has received any notice, claim or assertion, or, to the best
knowledge of the Stockholders, which otherwise has been threatened or is
reasonably expected to be threatened or initiated, against or affecting any
director, officer, employee, agent or representative of RLI or any other person
or entity, nor to the best knowledge of the Stockholders is there any reasonable
basis therefor, in connection with which any such person or entity has or may
reasonably be expected to have any right to be indemnified by RLI.
2.10 MINUTE BOOKS. The minute books of RLI and the Subsidiaries provided
to AvTel accurately reflect all actions and proceedings taken to date by the
shareholders, board of directors and committees of RLI and the Subsidiaries. The
stock record books of RLI and the Subsidiaries reflect accurately all
transactions in the capital stock of RLI and the Subsidiaries.
2.11 ACCOUNTING RECORDS; INTERNAL CONTROLS.
2.11.1 ACCOUNTING RECORDS. Since January 1, 1997, RLI and its
Subsidiaries have maintained records that accurately and validly reflect their
transactions, and accounting controls sufficient to insure that such
transactions are (i) executed in accordance with management's general or
specific authorization and (ii) recorded in conformity with GAAP so as to
maintain accountability for assets.
2.11.2 DATA PROCESSING; ACCESS. Such records, to the extent they
contain important information that is not easily and readily available
elsewhere, have been duplicated, and such duplicates are stored safely and
securely pursuant to procedures and techniques utilized by companies of
comparable size in similar lines of business. The data processing equipment,
data transmission equipment, related peripheral equipment and software used by
RLI in the operation of the Business (including any disaster recovery facility)
to generate and retrieve such records are comparable in performance, condition
and capacity with those utilized by companies of comparable size in similar
lines of business.
2.11.3 YEAR 2000 COMPLIANCE. Except as set forth in Schedule 2.11,
all software and systems (i) utilized by RLI and its Subsidiaries, and (ii) sold
to or maintained for customers by RLI, are Year 2000 compliant, and will
continue to function in the ordinary course of business on and after January 1,
2000.
<PAGE>
2.12 INSURANCE. RLI is, and at all times since inception has been,
insured with reputable insurers against all risks normally insured against by
companies in similar lines of business, and all of the insurance policies and
bonds maintained by RLI are in full force and effect. Schedule 2.12 lists all
insurance policies and bonds that are material to the Business. RLI is not in
default under any such policy or bond. RLI has timely filed claims with its
insurers with respect to all matters and occurrences for which it has coverage.
All insurance policies maintained by RLI will remain in full force and effect
and may reasonably be expected to be renewed on comparable terms following
consummation of the transactions contemplated by this Agreement (subject to
continuing compliance with the applicable terms thereof and any right of
insurers to terminate without cause), and RLI has received no notice or other
indication from any insurer or agent of any intent to cancel or not so renew any
of such insurance policies.
2.13 PERMITS. Except as set forth in Schedule 2.13, each of RLI and its
Subsidiaries holds all licenses, permits, franchises, certificates of authority,
or orders, or any waivers of the foregoing, required to be issued by any
Governmental Entity ("PERMITS") that are required by any Governmental Entity to
permit it to conduct its Business as now conducted, and the absence of which
would cause a material adverse effect on RLI, the relevant Subsidiary or its
Business. All such Permits are valid and in full force and effect and will
remain so upon consummation of the transactions contemplated by this Agreement.
No suspension, cancellation or termination of any of such Permits is threatened
or imminent.
2.14 COMPLIANCE WITH LAW. Each of RLI and its Subsidiaries conducts and
has conducted its business, in all material respects, in accordance with all
applicable Laws including, without limitation, those applicable to
discrimination in employment, the Americans with Disabilities Act, occupational
safety and health, trade practices, competition and pricing, employment,
retirement and labor relations. The forms, procedures and practices of RLI and
its Subsidiaries are in compliance with all such Laws, in all material respects.
2.15 EMPLOYEES. Schedule 2.15 contains a true and correct list of all
employees to whom RLI or any Subsidiary is paying compensation, including
bonuses and incentives for services rendered or otherwise, the annual salary,
average commission, or hourly wage compensation of each such employee, and any
bonus paid to each respective employee relating to services rendered during the
1997 fiscal year. AvTel has been provided a copy of all W-2 forms distributed to
each such employee in respect to compensation received from RLI or any
Subsidiary in the 1997 tax year. Since January 1, 1997, RLI has not experienced
any labor disputes, union organization attempts or any work stoppage due to
labor disagreements in connection with its business. There is no labor strike,
dispute, request for representation, slowdown or stoppage actually pending or
threatened against or affecting RLI or any of the Subsidiaries. All workers'
compensation and unemployment compensation insurance premiums due have been
fully paid or accrued in the RLI Financial Statements.
<PAGE>
2.16 EMPLOYEE BENEFITS.
2.16.1 EMPLOYEE BENEFIT PLANS, COLLECTIVE BARGAINING AND EMPLOYEE
AGREEMENTS, AND SIMILAR ARRANGEMENTS.
1. Schedule 2.16 lists all employee benefit plans and
collective bargaining, employment or severance agreements or other similar
arrangements to which RLI or any Subsidiary is or ever has been a party or by
which it is or ever has been bound, legally or otherwise, including, without
limitation, (a) any profit-sharing, deferred compensation, bonus, stock option,
stock purchase, pension, retainer, consulting, retirement, severance, welfare or
incentive plan, agreement or arrangement, (b) any plan, agreement or arrangement
providing for "fringe benefits" or perquisites to employees, officers, directors
or agents, including but not limited to benefits relating to automobiles, clubs,
vacation, child care, parenting, sabbatical, sick leave, medical, dental,
hospitalization, life insurance and other types of insurance, (c) any employment
agreement or (d) any other "employee benefit plan" (within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended,
and the related regulations and published interpretations ("ERISA")).
2. The Stockholders have delivered to AvTel true and complete
copies of all documents and summary plan descriptions with respect to such
plans, agreements and arrangements, or summary descriptions of any such plans,
agreements or arrangements not otherwise in writing.
3. There are no negotiations, demands or proposals that are
pending or have been made which concern matters now covered, or that would be
covered, by plans, agreements or arrangements of the type described in this
Section.
4. RLI is in full compliance with the applicable provisions of
ERISA (as amended through the date of this Agreement), the regulations and
published authorities thereunder, and all other Laws applicable with respect to
all such employee benefit plans, agreements and arrangements. RLI has performed
all of its obligations under all such plans, agreements and arrangements. To the
best knowledge of the Stockholders, there are no Actions (other than routine
claims for benefits) pending or threatened against such plans or their assets,
or arising out of such plans, agreements or arrangements, and, to the best
knowledge of the Stockholders, no facts exist which could give rise to any such
Actions.
5. Except as specified in Schedule 2.16, each of the plans,
agreements or arrangements can be terminated by RLI within a period of 30 days
following the Closing Date, without payment of any additional compensation or
amount or the additional vesting or acceleration of any such benefits.
<PAGE>
2.16.2 QUALIFIED PLANS. No plan listed in Schedule 2.16 is a stock
bonus, pension or profit-sharing plan within the meaning of Section 401(a) of
the Code. No plan listed in Schedule 2.16 is a "MULTIEMPLOYER PLAN" (within the
meaning of Section 3(37) of ERISA). RLI has never contributed to or had an
obligation to contribute to any multiemployer plan.
2.16.3 HEALTH PLANS. All group health plans of RLI and any
Subsidiary or Affiliate (as defined in Section 2.17) have been operated in
compliance with the group health plan continuation coverage requirements of
Section 162(k) of the Code to the extent such requirements are applicable.
2.16.4 FINES AND PENALTIES. There has been no act or omission by RLI
or any Subsidiary or Affiliate that has given rise to or may give rise to fines,
penalties, taxes, or related charges under Section 502(c) or (k) or Section 4071
of ERISA or Chapter 43 of the Code.
2.17 AFFILIATE INTERESTS AND TRANSACTIONS. Neither the Stockholders nor
any Affiliate of the Stockholders, RLI or any Subsidiary nor any officer or
director of any thereof, nor Associate of any such individual, has any material
interest in any property used in or pertaining to the Business. Except as set
forth in Schedule 2.17, no such person or entity has engaged in any Transaction
or entered into any Contract with RLI or any Subsidiary. No such person or
entity is indebted or otherwise obligated to RLI or any Subsidiary; and RLI is
not indebted or otherwise obligated to any such person or entity, except for
amounts due under normal arrangements applicable to all employees generally as
to salary or reimbursement of ordinary business expenses not unusual in amount
or significance. The consummation of the transactions contemplated by this
Agreement will not (either alone, or upon the occurrence of any act or event, or
with the lapse of time, or both) result in any benefit or payment (severance or
other) arising or becoming due from RLI to any person or entity.
For the purposes of this Agreement, (i) "AFFILIATE" means a person
or entity that directly, or indirectly through one or more intermediaries,
controls, or is controlled by, or is under common control with, a specified
person or entity, and (ii) an "ASSOCIATE" of a person means: (x) a corporation
or organization (other than RLI or a Subsidiary) of which such person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities; (ii) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar capacity; and (iii) any relative or spouse of
such person or any relative of such spouse.
2.18 BANK ACCOUNTS, POWERS, ETC. Schedule 2.18 ("BANK LIST") lists each
bank, trust company, savings institution, brokerage firm, mutual fund or other
financial institution with which RLI or any Subsidiary has an account or safe
deposit box and the names and identification of all persons authorized to draw
thereon or to have access thereto, and lists the names of each person or entity
holding powers of attorney or agency authority from RLI or any Subsidiary and a
summary of the terms thereof.
<PAGE>
2.19 NO BROKERS OR FINDERS. No agent, broker, finder, or investment or
commercial banker, or other person or firm engaged by or acting on behalf of the
Stockholders or RLI or any of their respective Affiliates in connection with the
negotiation, execution or performance of this Agreement or the transactions
contemplated by this Agreement, is or will be entitled to any brokerage or
finder's or similar fee or other commission as a result of this Agreement or
such transactions.
2.20 INVENTORIES. None of the inventories of RLI and its Subsidiaries
represent goods held on consignment, and such inventories are maintained on the
premises of RLI or its Subsidiaries. The Stockholders make no other
representations with respect to the inventories of RLI, which will be delivered
on an "as-is" basis.
2.21 RECEIVABLES. All receivables of RLI and its Subsidiaries, whether
reflected on the balance sheet or otherwise, represent sales actually made in
the ordinary course of business, and, to the best knowledge of the Stockholders,
are current and fully collectible net of any reserves shown on the balance sheet
(which reserves are adequate and were calculated on a basis consistent with GAAP
and past practices) within 120 days. The Stockholders have delivered to AvTel a
complete and accurate aging list of all receivables of RLI as of a date not more
than thirty days prior to the date hereof (and as of a date not more than thirty
days prior to the Closing Date).
2.22 CUSTOMERS AND SUPPLIERS. Schedule 2.22 lists the names of and
describes all Contracts with and the approximate percentage of Business
attributable to, the ten largest customers of and ten most significant suppliers
of the Business at the date of this Agreement, and any sole-source suppliers of
significant goods or services (other than electricity, gas, telephone or water)
to RLI with respect to which alternative sources of supply are not readily
available on comparable terms and conditions.
2.23 ENVIRONMENTAL COMPLIANCE. Except as set forth in Schedule 2.23
hereto, (i) RLI and its Subsidiaries have not generated, used, transported,
treated, stored, released or disposed of, and have not suffered or permitted
anyone else to generate, use, transport, treat, store, release or dispose of any
Hazardous Substance in violation of any Laws; (ii) there has not been any
generation, use, transportation, treatment, storage, release or disposal of any
Hazardous Substance in connection with the conduct of the Business of RLI or any
Subsidiary or the use of any property or facility of RLI or any Subsidiary or,
to the knowledge of the Stockholders, any nearby or adjacent properties or
facilities, which has created or might reasonably be expected to create any
liability under any Laws or which would require reporting to or notification of
any Governmental Entity; (iii) no asbestos or polychlorinated biphenyl or
underground storage tank is contained in or located at any facility of RLI or
any Subsidiary; and (iv) any Hazardous Substance handled or dealt with in any
way in connection with the Business of RLI, whether before or during the
Stockholders' ownership, has been and is being handled or dealt with in all
respects in compliance with applicable Laws.
<PAGE>
For the purposes of this Agreement, "HAZARDOUS SUBSTANCE" means (but
shall not be limited to) substances that are defined or listed in, or otherwise
classified pursuant to, any applicable Laws as "hazardous substances,"
"hazardous materials," "hazardous wastes" or "toxic substances," or any other
formulation intended to define, list or classify substances by reason of
deleterious properties such as ignitibility, corrosivity, reactivity,
radioactivity, carcinogenicity, reproductive toxicity or "EP toxicity," and
petroleum and drilling fluids, produced waters and other wastes associated with
the exploration, development, or production of crude oil, natural gas or
geothermal energy.
2.24 ACCURACY OF INFORMATION. None of the information supplied or to be
supplied in writing by or on behalf of the Stockholders or RLI to AvTel, its
agents or representatives in connection with these transactions, this Agreement
or the negotiations leading up to this Agreement did contain, or at the
respective times such information is delivered, will contain any untrue
statement of a material fact, or omitted or will omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. If any of such information at any time subsequent to delivery and
prior to Closing becomes untrue or misleading, in any material respect, the
Stockholders will promptly notify AvTel in writing of such fact and the reason
for such change.
2.25 PURCHASE FOR OWN ACCOUNT. Each of the Stockholders are acquiring the
Initial Exchange Shares and the Earnout Shares, if any, for investment and for
their own account, and not with a view to or for sale in connection with any
distribution of any part thereof.
2.26 INVESTMENT EXPERIENCE. Each Stockholder has such knowledge and
experience in financial and business matters that such Stockholder is capable of
evaluating the risks of such Stockholder's proposed investment in the Initial
Exchange Shares and the Earnout Shares, if any, and is able to bear the economic
risk of its proposed investment.
2.27 INFORMATION CONCERNING AVTEL. The Stockholders have received copies
of AvTel's Annual Report on Form 10-K for the year ended December 31, 1997,
Quarterly Report on Form 10-Q for the quarter ending March 31, 1998, and Proxy
Statement for its 1998 Annual Meeting of Stockholders, each as filed with the
Securities and Exchange Commission (the "SEC"). The Stockholders have heretofore
discussed AvTel and its plans, operations and financial condition with AvTel's
officers and have heretofore received all such information as the Stockholders
have deemed necessary and appropriate to enable the Stockholders to evaluate the
financial risk inherent in making an investment in the Initial Exchange Shares
and the Earnout Shares, if any, and the Stockholders have received satisfactory
and complete information concerning the business and financial condition of
AvTel in response to all inquiries in respect thereof.
2.28 RESTRICTED SECURITIES. The Stockholders understand and acknowledge
that:
2.28.1 NO REGISTRATION. The AvTel Common Stock to be issued pursuant
to Section 1.2 has not been registered under the Securities Act of 1933, as
amended (the "Act"), or
<PAGE>
any state securities laws and it must be held indefinitely unless such AvTel
Common Stock is subsequently registered under the Act and qualified under such
state laws or an exemption from such registration and qualification is available
and, except as set forth in Section 5.2, AvTel is under no obligation to
register any of such AvTel Common Stock.
2.28.2 LEGENDS. The share certificate representing such AvTel Common
Stock will be stamped with legends as set forth in Section 1.2.3.
2.28.3 STOP TRANSFER INSTRUCTIONS. AvTel will issue stop transfer
instructions in accordance with this Agreement to its transfer agent with
respect to such AvTel Common Stock.
3. REPRESENTATIONS AND WARRANTIES OF AVTEL. AvTel represents and warrants to
the Stockholders, as of the date hereof and as of the Closing Date, as follows:
3.1 ORGANIZATION AND RELATED MATTERS. AvTel is a corporation duly
organized, validly existing and in good standing under the laws of Delaware.
AvTel has all necessary corporate power and authority to carry on its business
as now being conducted. AvTel has the necessary corporate power and authority to
execute, deliver and perform this Agreement and any related agreements to which
it is a party. AvTel is duly qualified to transact business as a foreign
corporation in each jurisdiction where the failure to be so qualified would have
a material adverse effect on its business. AvTel's principal executive offices
are located in the State of California.
3.2 AUTHORIZATION. The execution, delivery and performance of this
Agreement and any related agreements by AvTel has been duly and validly
authorized by all necessary corporate action on the part of AvTel. This
Agreement constitutes the legal, valid and binding obligation of AvTel,
enforceable against AvTel in accordance with its terms except as such
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws and equitable principles relating to or
limiting creditors' rights generally.
3.3 NO CONFLICTS. Except as set forth on Schedule 3.3, the execution,
delivery and performance of this Agreement and any related agreements by AvTel
will not violate the provisions of, or constitute a breach or default whether
upon lapse of time and/or the occurrence of any act or event or otherwise under
(a) the certificate of incorporation or bylaws of AvTel, (b) any Law to which
AvTel is subject or (c) any Contract to which AvTel is a party that is material
to the financial condition, results of operations or conduct of the business of
AvTel.
3.4 VALID ISSUANCE OF AVTEL COMMON STOCK. Each of the Initial Exchange
Shares and the Earnout Shares, if any, when issued, sold and delivered in
accordance with the terms hereof, shall be duly and validly issued, fully paid
and nonassessable. The Initial Exchange Shares and the Earnout Shares, if any,
shall not be registered under the Securities Act of 1933, as amended.
<PAGE>
3.5 NO BROKERS OR FINDERS. No agent, broker, finder or investment or
commercial banker, or other person or firms engaged by or acting on behalf of
AvTel or its Affiliates in connection with the negotiation, execution or
performance of this Agreement or the transactions contemplated by this
Agreement, is or will be entitled to any broker's or finder's or similar fees or
other commissions as a result of this Agreement or such transactions.
3.6 LEGAL PROCEEDINGS. There is no Order or Action pending or to the best
knowledge of AvTel, threatened against AvTel that individually or when
aggregated with one or more other Actions has or might reasonably be expected to
have a material adverse effect on AvTel's ability to perform this Agreement.
3.7 NASDAQ LISTING. AvTel Common Stock is listed for trading on The Nasdaq
SmallCap MarketK of The Nasdaq Stock Market, Inc.
3.8 ACCURACY OF INFORMATION. None of the documents and reports filed by
AvTel with the SEC contained any untrue statement of material fact or omitted to
state any material fact necessary to make the information contained therein, in
light of the circumstances under which they were made, not misleading as of the
date of such document or report. None of the other information supplied or to be
supplied in writing by or on behalf of AvTel to the Stockholders, their agents
or representatives in connection with these transactions, this Agreement or the
negotiations leading up to this Agreement did contain, or at the respective
times such information is delivered, will contain any untrue statement of a
material fact, or omitted or will omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. If any of such
information at any time subsequent to delivery and prior to Closing becomes
untrue or misleading, in any material respect, AvTel will promptly notify the
Stockholders in writing of such fact and the reason for such change.
<PAGE>
4. COVENANTS TO BE PERFORMED PRIOR TO CLOSING
4.1 ACCESS. The Stockholders shall cause RLI and the Subsidiaries to
authorize and permit AvTel and its representatives (which term shall be deemed
to include its independent accountants and counsel) to have reasonable access
during normal business hours, upon reasonable notice and in such manner as will
not unreasonably interfere with the conduct of the Business, to all of their
respective properties, books, records, operating instructions and procedures,
Tax Returns and all other information with respect to the Business as AvTel may
from time to time request, and to make copies of such books, records and other
documents and to discuss its Business with such other persons, including,
without limitation, its directors, officers, employees, accountants, counsel,
suppliers, customers, and creditors, as AvTel considers necessary or appropriate
for the purposes of familiarizing itself with the Business, obtaining any
necessary Approvals of or Permits for the transactions contemplated by this
Agreement and conducting an evaluation of the organization and Business of RLI
and its Subsidiaries. Without limiting the generality of the foregoing, AvTel
shall be entitled to conduct or cause to be conducted such physical inspections
as AvTel shall deem necessary or useful in connection with its acquisition of
the Stockholder Shares.
4.2 MATERIAL ADVERSE CHANGES; REPORTS; FINANCIAL STATEMENTS. The
Stockholders will promptly notify AvTel of any event of which the Stockholders
obtain knowledge which has had or might reasonably be expected to have a
material adverse effect on the Business or which if known as of the date hereof
would have been required to be disclosed to AvTel. The Stockholders will cause
RLI to prepare additional interim financial statements as soon as practicable
after the end of each month to provide copies of such financial statements
promptly to AvTel.
4.3 CONDUCT OF BUSINESS. The Stockholders agree with and for the benefit
of AvTel that RLI and it Subsidiaries shall not, without the prior consent in
writing of AvTel, which may be withheld for any reason:
4.3.1 conduct the Business in any manner except in the ordinary
course consistent with prudent industry practice; or
4.3.2 amend, terminate, fail to renew or renegotiate any Material
Contract or default (or take or omit to take any action that, with or without
the giving of notice or passage of time, would constitute a default) in any of
its obligations under any Material Contract or enter into any new Material
Contract or take any action that would jeopardize the continuance of its
material supplier or customer relationships; or
4.3.3 terminate, amend or fail to renew any existing insurance
coverage; or
4.3.4 terminate or fail to renew or preserve any Permits; or
<PAGE>
4.3.5 except as contemplated by Section 4.10 or Section 4.12, incur
or agree to incur any obligation or liability (absolute or contingent) that
individually calls for payment by RLI or any Subsidiary of more than $5,000 in
any specific case or $25,000 in the aggregate; or
4.3.6 make any loan, guaranty or other extension of credit, or enter
into any commitment to make any loan, guaranty or other extension of credit, to
or for the benefit of any director, officer, employee, stockholder or any of
their respective associates or affiliates; or
4.3.7 grant any general or uniform increase in the rates of pay or
benefits to officers, directors or employees (or a class thereof) or any
increase in salary or benefits of any officer, director, employee or agent or
pay any bonus to any person, or enter into any new employment, collective
bargaining or severance agreement; or
4.3.8 sell, transfer, mortgage, encumber or otherwise dispose of any
assets or any liabilities, except in the ordinary course of business; or
4.3.9 except as contemplated by Section 4.12, issue, sell, redeem or
acquire for value, or agree to do so, any debt obligations or equity securities
of RLI or any of its Subsidiaries; or
4.3.10 except as contemplated by Section 4.12, declare, issue, make
or pay any dividend or other distribution of assets, whether consisting of
money, other personal property, real property or other thing of value, to its
shareholders, or split, combine, dividend, distribute or reclassify any shares
of its equity securities; or
4.3.11 change or amend its certificate of incorporation or bylaws;
or
4.3.12 make any capital expenditures or commitments with respect
thereto; or
4.3.13 except as contemplated by Section 4.10 or Section 4.12, make
special or extraordinary payments to any person; or
4.3.14 make any material investment, by purchase, contributions to
capital, property transfers, or otherwise, in any other person or entity; or
4.3.15 dispose of or permit to lapse any rights to the use of any
Intellectual Property or dispose of or disclose any Intellectual Property not a
matter of public knowledge; or
4.3.16 directly or indirectly terminate or reduce or commit to
terminate or reduce any bank line of credit or the availability of any funds
under any other agreement or understanding, other than through the use thereof
in the ordinary course; or
<PAGE>
4.3.17 except as contemplated by Section 4.10, compromise or
otherwise settle any claims, or adjust any assertion or claim of a deficiency in
Taxes (or interest thereon or penalties in connection therewith) or make any Tax
election or make any change in any method or period of accounting or in any
accounting policy, practice or procedure; or
4.3.18 introduce any new method of management or operation in
respect of the Business; or
4.3.19 agree to or make any commitment to take any actions
prohibited by this Section 4.3.
4.4 NOTIFICATION OF CERTAIN MATTERS. The Stockholders shall give prompt
notice to AvTel, and AvTel shall give prompt notice to the Stockholder
Representative, of (i) the occurrence, or failure to occur, of any event that
would be likely to cause any representation or warranty contained in this
Agreement to be untrue or inaccurate in any material respect at any time from
the date of this Agreement to the Closing Date and (ii) any failure of AvTel or
the Stockholders, as the case may be, to comply with or satisfy, in any material
respect, any covenant, condition or agreement to be complied with or satisfied
by it under this Agreement.
No such notification shall affect the representations or warranties
of the parties or the conditions to their respective obligations hereunder.
4.5 PERMITS AND APPROVALS.
4.5.1 The Stockholders and AvTel each agree to cooperate and use
their best efforts to obtain (and will immediately prepare all registrations,
filings and applications, requests and notices preliminary to all) Approvals and
Permits that may be necessary or which may be reasonably requested by AvTel to
consummate the transactions contemplated by this Agreement.
4.5.2 To the extent that the Approval of a third party with respect
to any Contract is required in connection with the transactions contemplated by
this Agreement, the Stockholders shall use their best efforts (and shall cause
RLI to use its best efforts) to obtain such Approval prior to the Closing Date
(but without limitation on AvTel's rights under Section 6.2).
4.6 NO TRANSFER OF STOCKHOLDER SHARES. Each of the Stockholders agrees
that such Stockholder will not sell, transfer, pledge, hypothecate or otherwise
encumber or dispose of any of the Stockholder Shares. Each Stockholder will
comply will all applicable securities and other laws and regulations relating to
this Agreement or the transactions contemplated hereby.
<PAGE>
4.7 PRESERVATION OF BUSINESS PRIOR TO CLOSING DATE. During the period
beginning on the date hereof and ending on the Closing Date, (a) the
Stockholders will use their best efforts to preserve the Business and to
preserve the goodwill of customers, suppliers and others having business
relations with RLI, and (b) the Stockholders and AvTel will consult with each
other concerning, and the Stockholders will cooperate to keep available to
AvTel, the services of the officers and employees of RLI that AvTel may wish to
have RLI retain. Nothing in this Section shall obligate AvTel or RLI after the
Closing to retain or offer employment to any officer or employee of RLI.
4.8 ELIMINATION OF AFFILIATE LIABILITIES. Prior to the Closing Date, the
Stockholders shall pur chase, cause to be repaid or (with respect to guarantees)
assume liability for (i) any and all loans or other extensions of credit made or
guaranteed by RLI or any Subsidiary to or for the benefit of any director,
officer, or employee of RLI, or any of their Associates and (ii) any and all
loans, guarantees or other extensions of credit of any amount made to or for the
benefit of the Stockholders or any Affiliate of the Stockholders, in each case
other than loans from RLI to Jeffrey P. Leventhal outstanding on the date hereof
and not in excess of $269,000 in the aggregate, including all accrued interest
thereon (the "LEVENTHAL ADVANCES"). Prior to the Closing, RLI will cancel the
obligation of Jeffrey P. Leventhal to repay the Leventhal Advances; provided,
however, that any Tax liability relating to such cancellation shall be borne
solely by Jeffrey P. Leventhal. At the Closing Date, neither AvTel nor RLI shall
have any continuing commitment, obligation or liability of any kind with respect
to the persons referred to in subsections (i) and (ii) above. The Stockholders
agree to indemnify AvTel and RLI for any Losses with respect to any such
commitment, obligation or liability not fully assumed or discharged as
contemplated, other than the Leventhal Advances. The Stockholders further
represent that the transactions contemplated by this Section will have no
adverse effect on the Business.
4.9 EXCLUSIVITY. Neither the Stockholders, RLI nor any of their respective
Affiliates shall, directly or indirectly, solicit, initiate or encourage any
offer or engage in any discussions or negotiations (other than with AvTel)
concerning any sale of the Stockholder Shares or of the Business or assets of
RLI or the Subsidiaries or any material part thereof, or any similar business
combination or transaction. Neither the Stockholders, RLI nor any of their
respective Affiliates shall furnish any information with respect to RLI or the
Business to any person in connection with any such offer or transaction. If the
Stockholders or RLI receive any offer or inquiry with respect to any of the
foregoing types of transactions, the Stockholders will promptly inform AvTel of
such offer or inquiry.
4.10 NEGOTIATION OF TAX LIABILITIES. RLI has outstanding certain Tax
liabilities to federal and state Tax authorities as set forth on the balance
sheet contained in the Interim Financial Statements and in Schedule 2.4 hereto.
Prior to Closing, the Stockholders hereby agree to cause RLI to use its best
efforts to negotiate with such Tax authorities for full and complete releases of
all such Taxes (together with all related interest, penalties and other claims
and charges), in form and substance satisfactory to AvTel (the "TAX RELEASES").
The payments to be made by RLI for the release of all federal Tax liabilities
shall not exceed $700,000 and shall
<PAGE>
consist of (i) a down payment not in excess of $500,000, and (ii) additional
post-Closing installment payments not in excess of $200,000 subject to terms and
conditions approved in advance by AvTel (such installment payments being
referred to as the "IRS Installment Payments"). The payments to be made by RLI
for the release of all other tax liabilities shall not exceed $250,000.
4.11 LINE OF CREDIT NOTE. AvTel agrees to make available to RLI a loan of
up to $500,000 pursuant to the terms of the Secured Promissory Note in
substantially the form attached hereto as Exhibit B (the "LINE OF CREDIT NOTE").
The proceeds of the Line of Credit Note shall be used only for the purpose of
obtaining the Tax Releases, and any advance on the Line of Credit Note may only
be made after RLI has presented AvTel with evidence satisfactory to AvTel that
such advance will enable RLI to obtain a particular Tax Release on appropriately
discounted terms. All advances under the Line of Credit Note will be personally
guaranteed by Jeffrey P. Leventhal and will be secured by all of the assets of
RLI, with such personal guaranty and security agreement to be in the form
contemplated in the Line of Credit Note.
4.12 BUYOUT OF PCSI HOLDERS. On or prior to the Closing Date, the
Stockholders will purchase, or will cause RLI to repurchase or otherwise
reacquire, all shares of the RLI Common Stock reflected on RLI's stock records
as being held by the PCSI Holders for an aggregate purchase price of not less
than $35,000. If such shares are repurchased by RLI, the aggregate purchase
price shall not exceed $40,000.
4.13 REASONABLE EFFORTS. The Stockholders agree that from the date hereof
to the Closing Date, they shall use their reasonable efforts, and cause RLI to
use its reasonable efforts, to satisfy the conditions precedent to the Closing
to the extent that such conditions are to be satisfied by the Stockholders.
5. ADDITIONAL CONTINUING COVENANTS
5.1 COVENANT NOT TO COMPETE.
<PAGE>
5.1.1 RESTRICTIONS ON COMPETITIVE ACTIVITIES. The Stockholders agree
that after the Closing AvTel and RLI shall be entitled to the goodwill and going
concern value of the Business and to protect and preserve the same to the
maximum extent permitted by law. The Stockholders also acknowledge that their
management contributions to the Business have been uniquely valuable and involve
proprietary information that would be competitively unfair to make available to
any competitor of RLI. For these and other reasons and as an inducement to AvTel
to enter into this Agreement, each of the Stockholders agrees that, for a period
of two years after the Closing Date, such Stockholder will not, directly or
indirectly, for its own benefit or as agent for another, carry on or participate
in the ownership, management or control of, or the financing of, or be employed
by, or consult for or otherwise render services to, or allow its name or
reputation to be used in or by any other present or future business enterprise
that is in competition with the Business as carried on by AvTel, RLI or any of
their present or future Affiliates. Subject to the two-year limitation set forth
above, this agreement of the Stockholders shall be effective in each separate
county and parish in each of the fifty states of the United States of America
(each a "Location") for so long as AvTel, RLI or any person entitled to or
acquiring ownership of the goodwill of the Business or the Stockholder Shares
through AvTel carries on a like business therein.
5.1.2 EXCEPTIONS. Nothing contained herein shall limit the right of
a Stockholder as an investor to hold and make investments in securities of any
corporation or limited partnership that is registered on a national securities
exchange or admitted to trading privileges thereon or actively traded in a
generally recognized over-the-counter market, provided the Stockholders's equity
interest therein does not exceed 5% of the outstanding shares or interests in
such corporation or partnership.
5.1.3 RESTRICTIONS ON SOLICITING EMPLOYEES. In addition, to protect
AvTel against any efforts by the Stockholders to cause employees of RLI to
terminate their employment, each of the Stockholders agrees that for a period of
two years following the Closing Date, the Stockholders will not directly or
indirectly (i) induce any employee of RLI or any Subsidiary (other than Steve
Leventhal and Richard Leventhal) to leave RLI or such Subsidiary or to accept
any other employment or position, or (ii) assist any other entity in hiring any
such employee.
5.1.4 SPECIAL REMEDIES AND ENFORCEMENT. The Stockholders recognize
and agree that a breach by a Stockholder of any of the covenants set forth in
this Section 5.1 could cause irreparable harm to AvTel, RLI and their respective
successors, that AvTel's remedies at law in the event of such breach would be
inadequate, and that, accordingly, in the event of such breach a restraining
order or injunction or both may be issued against the breaching Stockholder, in
addition to any other rights and remedies which are available to AvTel. If this
Section 5.1 is more restrictive than permitted by the Laws of the jurisdiction
in which AvTel seeks enforcement hereof, this Section 5.1 shall be limited to
the extent required to permit enforcement under such Laws. Without limiting the
generality of the foregoing, the parties intend that the covenants contained in
the preceding portions of this Section 5.1 shall be construed as a series of
separate covenants, one for each Location specified. Except for geographic
coverage, each such
<PAGE>
separate covenant shall be deemed identical in terms. It is the desire and
intent of the parties hereto that the provisions of this Section 5.1 shall be
enforced to the fullest extent (both geographical and temporal) permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. If the final judgment of a court of competent
jurisdiction declares that any term or provision of this Section 5.1 is invalid
or unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision that is valid and enforceable and that comes closest to expressing the
intention of the invalid or unenforceable term or provision, and this Agreement
shall be enforceable as so modified. If any particular provision or portion of
this Section 5.1 shall be adjudicated to be invalid or unenforceable, such
adjudication shall apply only with respect to the operation of this Section 5.1
in the particular jurisdiction in which such adjudication is made.
5.2 REGISTRATION RIGHTS
5.2.1 DEFINITIONS. For purposes of this Section 5.2, the terms
"register", "registered" and "registration" refer to a registration effected by
preparing and filing a registration statement or similar document in compliance
with the Securities Act, and the declaration or ordering of effectiveness of
such registration statement or document.
5.2.2 PIGGYBACK REGISTRATION. If at any time after the Closing Date
AvTel shall propose to register any of the AvTel Common Stock for sale or
disposition for its own account for cash under the Securities Act in a public
offering, other than a registration relating to stock options, employee benefit
plans (defined in accordance with SEC regulations) or acquisitions, AvTel shall:
1. Promptly give the Stockholder Representative at least
thirty (30) days' written notice prior to the filing thereof, which notice shall
include the proposed date on which the registration statement is to be filed,
the proposed price per share and a list of the jurisdictions in which AvTel
intends to attempt to qualify such securities under the applicable blue sky or
other state securities laws ("BLUE SKY LAWS"); and
2. Include in such registration (and any related qualification
under Blue Sky Laws), and in any underwriting involved therein, ten percent
(10%) of the Initial Exchange Shares and Earnout Shares, if any (the
"REGISTRABLE SHARES"), then held by each of the Stockholders which are specified
in a written request made by the Stockholder Representative within ten (10) days
after receipt of such written notice from AvTel by the Stockholder
Representative.
5.2.3 UNDERWRITING AGREEMENT. The right of the Stockholders to
registration pursuant to this Section 5.2 shall be conditioned upon the
Stockholders' participation in any underwriting relating to AvTel's registered
public offering. The Stockholders shall (together with AvTel) enter into an
underwriting agreement in customary form with the
<PAGE>
underwriter or underwriters selected by AvTel. Notwithstanding any provision of
this Section 5.2, if the underwriter in its reasonable judgment determines that
marketing factors require a limitation of the number of securities to be
underwritten, the underwriter may exclude some or all of the Registrable Shares
for which the Stockholders seek registration from inclusion in the registration
and underwriting; provided, however, that if AvTel proposes to include in such
registration shares of capital stock held by shareholders of AvTel other than
the Stockholders ("Other Holders"), then the number of shares to be so excluded
shall be allocated among the Stockholders and the Other Holders pro rata based
upon the number of shares of capital stock proposed to be included in the
registration by each of them.
5.2.4 EXPENSES OF REGISTRATION. AvTel shall bear all registration
costs and expenses related to any registration and underwriting contemplated by
this Article 5.2, except that the selling Stockholders shall bear (i) all
underwriting commissions relating to the Registrable Shares registered and (ii)
the fees and expenses of legal counsel to the Stockholders.
5.3 NONDISCLOSURE OF PROPRIETARY DATA. Neither the Stockholders nor any of
their representatives shall, at any time prior to the second anniversary of the
Closing Date, make use of, divulge or otherwise disclose, directly or
indirectly, any trade secret or other proprietary data (including, but not
limited to, any customer list, record or financial information) concerning the
business or policies of RLI or its Subsidiaries that the Stockholders or any
representative of the Stockholders may have learned as a shareholder, employee,
officer or director of RLI. In addition, for two years after the Closing Date,
neither the Stockholders nor any of their representatives shall make use of,
divulge or otherwise disclose, directly or indirectly, to persons other than
AvTel, any confidential information concerning the business or policies of RLI
or its Subsidiaries which may have been learned in any such capacity. Nothing in
this Section shall prevent a Stockholder who is employed by RLI or its
Subsidiaries from using such information in the proper course of his or her
employment. The Stockholders recognize and agree that a breach by a Stockholder
of any of the covenants set forth in this Section 5.3 could cause irreparable
harm to AvTel, RLI and their respective successors, that AvTel's remedies at law
in the event of such breach would be inadequate, and that, accordingly, in the
event of such breach a restraining order or injunction or both may be issued
against the breaching Stockholder, in addition to any other rights and remedies
which are available to AvTel.
5.4 TAX RETURNS; RESPONSIBILITY FOR CERTAIN TAX MATTERS. The following
provisions shall govern the allocation of responsibility as between AvTel, RLI,
and the Stockholders for certain Tax matters following the Closing Date:
5.4.1 TAX PERIODS ENDING ON OR BEFORE THE CLOSING DATE. RLI shall
prepare or cause to be prepared and file or cause to be filed all Tax Returns
for it for all Tax periods ending on or prior to the Closing Date which are
filed after the Closing Date. AvTel shall permit the Stockholder Representative
to review and comment on each such Tax Return described in the preceding
sentence prior to filing. The Stockholders shall reimburse AvTel for Taxes of
RLI with respect to such periods within fifteen (15) days after payment by AvTel
or RLI of such Taxes to the extent such Taxes are not reflected in the reserve
for Tax liability (rather than any
<PAGE>
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) set forth or included on the face of the RLI Financial
Statements.
5.4.2 TAX PERIODS BEGINNING BEFORE AND ENDING AFTER THE CLOSING
DATE. RLI shall prepare or cause to be prepared and file or cause to be filed
any Tax Returns of RLI for Tax periods which begin before the Closing Date and
end after the Closing Date.
5.4.3 COOPERATION ON TAX MATTERS.
1. The Stockholders shall, and shall cause their Affiliates
to, cooperate fully, as and to the extent reasonably requested by the other
party, in connection with the filing of Tax Returns pursuant to this Section and
any audit, litigation or other proceeding with respect to Taxes. Such
cooperation shall include the retention and (upon the other party's request) the
provision of records and information which are reasonably relevant to any such
audit, litigation or other proceeding and making employees available on a
mutually convenient basis to provide additional information and explanation of
any material provided hereunder.
2. AvTel and the Stockholders agree (i) to retain all books
and records with respect to Tax matters pertinent to RLI relating to any taxable
period beginning before the Closing Date until the expiration of the statute of
limitations (and, to the extent notified by AvTel or the Stockholder
Representative, any extensions thereof) of the respective taxable periods, and
to abide by all record retention agreements entered into with any taxing
authority, and (ii) to give the other party reasonable written notice prior to
transferring, destroying or discarding any such books and records and, if the
other party so requests, RLI or the Stockholder Representative, as the case may
be, shall allow the other party to take possession of such books and records.
Any information obtained pursuant to this Section or pursuant to any other
Section hereof providing for the sharing of information or the review of any Tax
Return or other Schedule relating to Taxes shall be subject to Section 9.9.
3. AvTel and the Stockholders further agree, upon request, to
use their best efforts to obtain any certificate or other document from any
governmental authority or any other person as may be necessary to mitigate,
reduce or eliminate any Tax that could be imposed (including, but not limited
to, with respect to the transactions contemplated hereby).
5.5 SECURITIES LAWS MATTERS. Each of the Stockholders agrees not to sell,
transfer, convey or otherwise distribute shares of AvTel Common Stock received
pursuant to this Agreement over which such Stockholder has direct or indirect
control without registration under the Securities Act and applicable federal and
state securities laws, except pursuant to an exemption from registration
thereunder. Each of the Stockholders will comply in all respects with such laws.
5.6 PAYMENT OF IRS INSTALLMENTS. AvTel will cause RLI to make the IRS
Installment Payments on the terms approved by AvTel pursuant to Section 4.10.
<PAGE>
6. CONDITIONS OF PURCHASE
6.1 GENERAL CONDITIONS. The obligations of the parties to effect the
Closing shall be subject to the following conditions unless waived in writing by
all parties:
6.1.1 NO ORDERS; LEGAL PROCEEDINGS. No Law or Order shall have been
enacted, entered, issued, promulgated or enforced by any Governmental Entity,
nor shall any Action have been instituted and remain pending at what would
otherwise be the Closing Date, which prohibits or restricts or would (if
successful) prohibit or restrict the transactions contemplated by this Agreement
or (with respect to obligations of AvTel only) which would not permit the
Business as presently conducted to continue unimpaired following the Closing
Date.
6.1.2 APPROVALS. All Permits and Approvals with respect to the
transactions contemplated hereby required to be obtained from any Governmental
Entity shall have been received or obtained on or prior to the Closing Date.
6.2 CONDITIONS TO OBLIGATIONS OF AVTEL. The obligations of AvTel to effect
the Closing shall be subject to the following additional conditions except to
the extent waived in writing by AvTel:
6.2.1 REPRESENTATIONS AND WARRANTIES AND COVENANTS OF THE
STOCKHOLDERS. The representations and warranties of the Stockholders herein
contained shall be true in all material respects at the Closing Date with the
same effect as though made at such time; the Stockholders shall have in all
material respects performed all obligations and complied with all covenants and
conditions required by this Agreement to be performed or complied with by them
at or prior to the Closing Date.
6.2.2 NO MATERIAL ADVERSE CHANGE. There shall not have been any
material adverse change in or affecting the Business subsequent to December 31,
1997.
6.2.3 LIMITATION ON TOTAL DEBT. As of the Closing Date, RLI and its
Subsidiaries shall not have outstanding more than an aggregate of $550,000 in
total debt, as determined in accordance with GAAP, excluding (i) the Line of
Credit Note to AvTel, (ii) the obligation to make the IRS Installment Payments,
and (iii) payment obligations to taxing authorities other than the Internal
Revenue Service of not more than $250,000.
6.2.4 REVENUES FOR INTERIM PERIOD. RLI and its Subsidiaries shall
have had net revenues for the period from January 1, 1998 to the Closing Date
greater than or equal to that amount which, if annualized on a proportional
basis for all of 1998, would equal $4,700,000.
6.2.5 CONSENTS. The Stockholders shall have obtained and provided to
AvTel all required Approvals and Permits listed on Schedule 2.8, each in form
and substance satisfactory to AvTel.
<PAGE>
6.2.6 CERTIFICATE OF STOCKHOLDER REPRESENTATIVE. The Stockholder
Representative shall have delivered to AvTel a certificate dated the Closing
Date, on behalf of all of the Stockholders, in form and substance satisfactory
to AvTel, certifying that the conditions set forth in Sections 6.2.1, 6.2.2,
6.2.3, 6.2.4, 6.2.5, 6.2.12 and 6.2.13 have been fully satisfied..
6.2.7 OPINION OF COUNSEL. AvTel shall receive at the Closing from
Rosen & Tetelman, counsel to the Stockholders, an opinion dated the Closing
Date, in form and substance substantially as set forth in Exhibit C.
6.2.8 COMFORT LETTER. AvTel shall receive at the Closing from the
Auditors a comfort letter dated not more than five business days prior to the
Closing Date substantially in form of Exhibit D hereto and in substance
reasonably satisfactory to AvTel.
6.2.9 RESIGNATION OF DIRECTORS AND OFFICERS. The directors of RLI
and each of the Subsidiaries and the officers of RLI and Subsidiaries (other
than those designated in writing by AvTel) shall have submitted their
resignations in writing to RLI and AvTel. Such resignations of officers and
direc tors (in such capacity) shall be effective upon the Closing.
6.2.10 DUE DILIGENCE. AvTel shall not, in the course of its on-going
business investigation, have discovered information not previously disclosed by
the Stockholders, RLI or its Subsidiaries, which AvTel reasonably believes has
or is likely to have a materially adverse effect on the Business or is
materially inconsistent with information disclosed to AvTel prior to the date
hereof.
<PAGE>
6.2.11 KEY EMPLOYEES. Jeffrey P. Leventhal shall have entered into
an employment agreement (the "EMPLOYMENT AGREEMENT") with RLI in a form
reasonably satisfactory to Jeffrey P. Leventhal and to AvTel, and containing the
terms set forth in of Exhibit E hereto. AvTel shall be reasonably satisfied that
the other significant employees of RLI and its Subsidiaries are willing to
remain employees of RLI or its Subsidiaries (or become employees of AvTel) on
terms reasonably satisfactory to AvTel following the consummation of the
transactions contemplated by this Agreement.
6.2.12 TAX RELEASES. RLI shall have obtained a Tax Release from the
Internal Revenue Service with respect to all federal Tax liabilities for
consideration consisting of a down payment not in excess of $500,000 and the IRS
Installment Payments not in excess of $200,000, on the terms contemplated by
Section 4.10 hereof.
6.2.13 BUYOUT OF PCSI HOLDERS. The Stockholders and/or RLI shall
have completed the acquisition of the shares of RLI Common Stock held by the
PCSI Holders on the terms contemplated by Section 4.11 hereof.
6.2.14 EXECUTION OF AGREEMENT BY STOCKHOLDERS. This Agreement shall
have been duly and validly executed by Stockholders holding one hundred percent
(100%) of the shares of RLI Common Stock outstanding as of the Closing.
6.3 CONDITIONS TO OBLIGATIONS OF THE STOCKHOLDERS. The obligations of the
Stockholders to effect the Closing shall be subject to the following conditions,
except to the extent waived in writing by the Stockholders:
6.3.1 REPRESENTATIONS AND WARRANTIES AND COVENANTS OF AVTEL. The
representations and warranties of AvTel herein contained shall be true in all
material respects at the Closing Date with the same effect as though made at
such time; AvTel shall have in all material respects performed all obligations
and complied with all covenants and conditions required by this Agreement to be
performed or complied with by it at or prior to the Closing Date, and AvTel
shall have delivered to the Stockholders an officers' certificate of AvTel in
form reasonably satisfactory to the Stockholders, dated the Closing Date, to
such effect.
6.3.2 CONSENTS. AvTel shall have obtained and provided to the
Stockholders all required Approvals and Permits listed on Schedule 3.3, each in
form and substance satisfactory to the Stockholders.
6.3.3 EMPLOYEE STOCK OPTIONS. Concurrently with the Closing, AvTel
shall have awarded 5,000 incentive stock options pursuant to its 1998 Stock
Incentive Plan (the "1998 PLAN") to each of Neil Brenner and Andy Denton, who
are employees of RLI or one or more of its Subsidiaries. Such options shall be
subject to all of the terms and conditions of the 1998 Plan and shall become
exercisable as to fifty percent (50%) of the shares to which they relate on the
first anniversary of the Closing Date, and shall be fully exercisable on the
second anniversary of
<PAGE>
the Closing Date, provided that such individuals remain employed by AvTel or one
of its Affiliates.
6.3.4 OPINION OF COUNSEL. The Stockholder Representative shall
receive at the Closing from Seed, Mackall & Cole LLP, counsel to AvTel, an
opinion dated the Closing Date, in form and substance substantially as set forth
in Exhibit F.
6.3.5 RELEASE OF PERSONAL GUARANTIES. The parties shall have
obtained releases of Jeffrey P. Leventhal's material personal guaranties of
RLI's obligations, in each case on terms reasonably satisfactory to Jeffrey P.
Leventhal and AvTel.
7. TERMINATION OF OBLIGATIONS; SURVIVAL
7.1 TERMINATION OF AGREEMENT. Anything herein to the contrary
notwithstanding, this Agreement and the transactions contemplated by this
Agreement shall terminate if the Closing does not occur on or before midnight on
August 31, 1998, unless extended by mutual consent in writing of AvTel and the
Stockholders and otherwise may be terminated at any time before the Closing as
follows and in no other manner:
7.1.1 MUTUAL CONSENT. By mutual consent in writing of AvTel and the
Stockholders.
7.1.2 MATERIAL BREACH. By AvTel or the Stockholders if there has
been a material misrepresentation or other material breach by the other party
(or, in the case of AvTel, by the Stockholders or RLI) in its representations,
warranties and covenants set forth herein; provided, however, that if such
breach is susceptible to cure, the breaching party shall have ten business days
in which to cure such breach after receipt of notice from the other party of its
intention to terminate this Agreement if such breach continues.
7.2 EFFECT OF TERMINATION. In the event that this Agreement shall be
terminated pursuant to Section 7.1, all further obligations of the parties under
this Agreement shall terminate without further liability of any party to
another; provided that the obligations of the parties contained in Section 9.9
and Section 9.11 shall survive any such termination. A termination under Section
7.1.2 shall not relieve any party of any liability for a breach of, or for any
misrepresentation under this Agreement, or be deemed to constitute a waiver of
any available remedy (including specific performance if available) for any such
breach or misrepresentation.
<PAGE>
7.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except as set forth
herein, the representations and warranties of the parties contained in or made
pursuant to this Agreement shall survive the Closing, without regard to any
investigation made by the other party hereto, for a period of one year after the
Closing Date. All covenants and agreements of the parties contained in this
Agreement shall survive the Closing in accordance with their stated terms or, if
no term is stated, then one year from the Closing Date. Notwithstanding anything
to the contrary herein, (a) the representations and warranties contained in
Section 2.2 shall survive the Closing for a period of six years after the
Closing Date; and (b) the representations and warranties contained in Section
2.4 shall survive for the period of time equal to the applicable statute of
limitations in respect of claims relating thereto, plus 90 days.
8. INDEMNIFICATION
8.1 OBLIGATIONS OF THE STOCKHOLDERS. Each of the Stockholders, severally
but not jointly, agrees to indemnify and hold harmless AvTel, RLI and their
respective directors, officers, employees, Affiliates, agents and assigns (the
"AVTEL PARTIES") from and against such Stockholder's Allocable Portion (as
defined in below) of any and all actions, costs, damages, disbursements,
expenses, liabilities, losses, deficiencies, obligations, penalties or
settlements of any kind or nature, whether foreseeable or unforeseeable,
including but not limited to, interest or other carrying costs, legal,
accounting and other professional fees and expenses incurred in the
investigation, collection, prosecution and defense of claims and amounts paid in
settlement (collectively, "Losses"), that may be imposed on or otherwise
incurred or suffered by any of such persons or entities, directly or indirectly,
as a result of, or based upon or arising from:
8.1.1 any inaccuracy in or breach or nonperformance of any of the
representations, warranties, covenants or agreements made by the Stockholders in
or pursuant to this Agreement (without giving effect to any materiality
qualifications contained in any such representation or warranty); or
8.1.2 any transactions among or involving the Stockholders, RLI and
the PCSI Holders including, without limitation, the acquisition of the shares of
RLI Common Stock held by the PCSI Holders on the terms contemplated by Section
4.11 hereof; or
8.1.3 any Order or Action pending or threatened on or prior to the
Closing Date which is not set forth in Schedule 2.9; or
8.1.4 any Order or Action (i) set forth in Schedule 2.9 (other than
the litigation with Thomas J. Ferrara described therein), but only to the extent
that the Losses (excluding attorneys' fees and expenses relating thereto)
therefrom exceed $50,000; or (ii) relating to Thomas J. Ferrara but only to the
extent that Losses (excluding attorneys' fees and expenses relating thereto)
therefrom exceed the aggregate amount of salary and commission owing to Thomas
J. Ferrara on the date hereof (provided, however, that any settlement or
judgment that requires the issuance of not more than 40,000 shares of AvTel
Common Stock to
<PAGE>
or on behalf of Thomas J. Ferrara shall be handled solely by means of the Escrow
Agreement); or
8.1.5 any indemnification required by Section 4.8.
The "Allocable Portion" of a Stockholder shall mean that fraction equal to the
number of Stockholder Shares held by such Stockholder on the Closing Date
divided by the total number of Stockholder Shares outstanding on the Closing
Date. Notwithstanding anything in this Agreement to the contrary, the
indemnification obligations of Jeffrey P. Leventhal under this Section 8 shall
be joint and several with the indemnification obligations of all of the
Stockholders as a group.
8.2 OBLIGATIONS OF AVTEL. AvTel agrees to indemnify and hold harmless the
Stockholders from and against any Losses of the Stockholders, directly or
indirectly, as a result of, or based upon or arising from, any inaccuracy in or
breach or nonperformance of any of the representations, warranties, covenants or
agreements made by AvTel in or pursuant to this Agreement (without giving effect
to any materiality qualifications contained in any such representation or
warranty).
8.3 CERTAIN TAX MATTERS.
8.3.1 THE STOCKHOLDERS INDEMNITY. The Stockholders agree to
indemnify, defend and hold harmless the AvTel Parties against (i) any Tax
payable by or on behalf of the Stockholders, RLI or any of their Affiliates for
any taxable period ending or treated by this Agreement as ending on or prior to
the Closing Date, (ii) any deficiencies in any Tax payable by or on behalf of
the Stockholders, RLI or any of their Affiliates arising from any audit by any
taxing agency or authority with respect to any period ending or treated by this
Agreement as ending on or prior to the Closing Date, (iii) any claim or demand
for reimbursement or indemnification resulting from any transfer by the
Stockholders or RLI prior to the Closing of any Tax benefits or credits to any
other person, or (iv) any transfer Tax liabilities arising out of the transfer
of the Stockholder Shares.
8.3.2 AUDIT MATTERS. AvTel shall have the responsibility for, and
the right to control, at its expense, the audit (and disposition thereof) of any
Tax Return of RLI relating to periods ending on or prior to the Closing Date.
The Stockholder Representative shall have the right directly or through its
designated representatives, to review in advance and comment upon all
submissions made in the course of audits or appeals thereof to any Governmental
Entity relating to periods ending or treated by this Agreement as ending on or
prior to the Closing Date.
8.4 LIMITATIONS ON INDEMNIFICATION.
<PAGE>
8.4.1 WITH RESPECT TO STOCKHOLDERS' OBLIGATIONS. The Stockholders'
obligation to indemnify the AvTel Parties for Losses under Section 8.1.1 (i)
shall accrue only if the aggregate of all such Losses exceeds $50,000, and (ii)
shall be limited in the aggregate to an amount equal to the aggregate value of
the Purchase Price actually delivered by AvTel as measured on the date (or
dates) received. The limitations set forth in this Section 8.4.1 shall not apply
to the indemnification obligations of the Stockholders with respect to any
Losses that have resulted from (i) a breach of the representations and
warranties contained in Section 2.2, Section 2.4 or Section 2.23, or (ii) a
breach of the covenant contained in Section 5.5. The limitations set forth in
this Section 8.4.1 shall not apply to the indemnification obligations of the
Stockholders under Section 8.1.4 and Section 8.3 of this Agreement.
8.4.2 WITH RESPECT TO AVTEL'S OBLIGATIONS. AvTel's obligation to
indemnify the Stockholders for Losses under Section 8.2 (i) shall accrue only if
the aggregate of all such Losses exceeds $50,000, and (ii) shall be limited in
the aggregate to an amount equal to the value of the Purchase Price actually
delivered by AvTel.
8.4.3 FRAUD OR WILLFUL BREACH. The parties hereby agree that the
limitations set forth in Section 8.4.1 and Section 8.4.2 shall not apply to the
indemnification obligations of any party with respect to any Losses that have
resulted proximately from the fraud or willful breach of such party.
8.4.4 APPLICATION TO OTHER REMEDIES. The limitations contained in
this Section 8.4 shall apply to the parties' liability for indemnification or
otherwise. Nothing herein shall limit a party's ability to obtain injunctive or
equitable relief if otherwise authorized by this Agreement.
8.5 PROCEDURE.
8.5.1 NOTICE. Any party seeking indemnification with respect to any
Loss (the "INDEMNIFIED PARTY") shall give notice to the party required to
provide indemnity hereunder (the "INDEMNIFYING PARTY").
8.5.2 DEFENSE. If any claim, demand or liability is asserted by any
third party against any Indemnified Party, the Indemnifying Party shall upon the
written request of the Indemnified Party, defend any actions or proceedings
brought against the Indemnified Party in respect of matters embraced by the
indemnity, but the Indemnified Party shall have the right to conduct and control
the defense, compromise or settlement of any indemnifiable claim if the
Indemnified Party chooses to do so, on behalf of and for the account and risk of
the Indemnifying Party who shall be bound by the result so obtained to the
extent provided herein. If, after a request to defend any action or proceeding,
the Indemnifying Party neglects to defend the Indemnified Party, a recovery
against the latter suffered by it in good faith, is conclusive in its favor
against the Indemnifying Party, provided however that, if the Indemnifying Party
has not received reasonable notice of the action or proceeding against the
Indemnified Party, or is not allowed to control its defense, judgment against
the Indemnified Party is only presumptive
<PAGE>
evidence against the Indemnifying Party. Each party hereto, to the extent that
it is or becomes an Indemnifying Party, hereby stipulates that a judgment
against the Indemnified Party shall be conclusive upon the Indemnifying Party.
The parties shall cooperate in the defense of all third party claims which may
give rise to indemnifiable claims hereunder.
8.5.3 TAX ADJUSTMENTS. Any amounts payable by the Indemnifying Party
to or on behalf of an Indemnified Party in respect of a Loss shall be adjusted
as follows:
1. If such Indemnified Party is liable for any additional
Taxes as a result of the payment of amounts in respect of an indemnifiable
claim, the Indemnifying Party will pay to the Indemnified Party in addition to
such amounts in respect of the Loss within 10 days after being notified by the
Indemnified Party of the payment of such liability (x) an amount equal to such
additional Taxes (the "TAX REIMBURSEMENT AMOUNT") plus (y) any additional
amounts required to pay additional Taxes imposed with respect to the Tax
Reimbursement Amount and with respect to amounts payable under this clause (y),
with the result that the Indemnified Party shall have received from the
Indemnifying Party, net of the payment of Taxes, an amount equal to the Loss.
2. The Indemnified Party shall reimburse the Indemnifying
Party an amount equal to the net reduction in any year in the liability for
Taxes (that are based upon or measured by income) of the Indemnified Party or
any member of a consolidated or combined tax group of which the Indemnified
Party is, or was at any time, part, which reduction is actually realized with
respect to any period after the Closing Date and which reduction would not have
been realized but for the amounts paid (or any audit adjustment or deficiency
with respect thereto, if applicable) in respect of a Loss, or amounts paid by
the Indemnified Party pursuant to this paragraph (a "NET TAX BENEFIT"). The
amount of any Net Tax Benefit shall be paid not later than 15 days after the
date on which such Net Tax Benefit shall be realized. Any expenses associated
with the realization of a Net Tax Benefit or any contest or proceeding with
respect to a Net Tax Benefit shall be deemed to reduce such Net Tax Benefit.
8.6 PAYMENTS BY STOCKHOLDERS. Subject to Section 8.9, if a Stockholder
owes any amount to AvTel pursuant to Section 8.1, such Stockholder may determine
to pay such amount either (i) in cash, or (ii) by delivery of shares of AvTel
Common Stock. If a Stockholder delivers shares of AvTel Common Stock, the value
of such shares shall be deemed to be equal to the average closing price as
publicly reported by the Nasdaq Stock Market as of 4:00 p.m. Eastern Time of
AvTel Common Stock over the last sixty trading days ending with (and including)
the second business day prior to the date such payment is to be made.
<PAGE>
8.7 SURVIVAL. This Section 8 shall survive any termination of this
Agreement. Any matter as to which a claim has been asserted by notice to the
other party that is pending or unresolved at the end of the survival period of
the applicable representation, warranty or covenant (as set forth in Section
7.3) shall continue to be covered by this Section 8 notwithstanding the
termination of such survival period until such matter is finally terminated or
otherwise resolved by the parties under this Agreement and any amounts payable
hereunder are finally determined and paid.
8.8 NOTICE OF CLAIMS. The Stockholders agree to notify AvTel and AvTel
agrees to notify the Stockholder Representative of any liabilities, claims or
misrepresentations, breaches or other matters covered by this Section 8 upon
discovery or receipt of notice thereof (other than from the other party hereto),
whether before or after Closing.
8.9 OFFSET. If any matter as to which AvTel may be able to assert a claim
hereunder is pending or unresolved at the time that AvTel is otherwise required
to deliver any Earnout Shares to the Stockholders under this Agreement, AvTel
shall have the right, in addition to other rights and remedies (whether under
this Agreement or applicable Law), to withhold from such delivery that number of
Earnout Shares determined by dividing the amount of the claim (provided it is
then asserted in accordance with the provisions hereof) by the Closing Share
Price. If it is finally determined that all or a portion of such amount claimed
was not due AvTel under this Section 8, then AvTel shall promptly deliver to the
Stockholders the Earnout Shares (or portion thereof) improperly retained.
9. GENERAL
9.1 AMENDMENTS; WAIVERS. This Agreement and any schedule or exhibit
attached hereto may be amended only by agreement in writing of all parties. No
waiver of any provision nor consent to any exception to the terms of this
Agreement or any agreement contemplated hereby shall be effective unless in
writing and signed by the party to be bound and then only to the specific
purpose, extent and instance so provided.
9.2 SCHEDULES; EXHIBITS; INTEGRATION. Each schedule and exhibit delivered
pursuant to the terms of this Agreement shall be in writing and shall constitute
a part of this Agreement, although schedules need not be attached to each copy
of this Agreement. This Agreement, together with such schedules and exhibits,
constitutes the entire agreement among the parties pertaining to the subject
matter hereof and supersedes all prior agreements and understandings of the
parties in connection therewith. If any matter is disclosed or described in one
schedule, and such disclosure or description would by its express terms serve as
sufficient disclosure of such matter for purposes of any other schedule in which
such matter is required to be disclosed, then such disclosure or description
shall automatically be deemed to have been disclosed or described in each such
other schedule.
<PAGE>
9.3 BEST EFFORTS; FURTHER ASSURANCES.
9.3.1 STANDARD. Each party will use its best efforts to cause all
conditions to its obligations to be timely satisfied and to perform and fulfill
all obligations on its part to be performed and fulfilled under this Agreement,
to the end that the transactions contemplated by this Agreement shall be
effected substantially in accordance with its terms as soon as reasonably
practicable. The parties shall cooperate with each other in such actions and in
securing requisite Approvals.
9.3.2 LIMITATION. As used in this Agreement, the term "best efforts"
shall not mean efforts which require the performing party to do any act that is
unreasonable under the circumstances, to make any capital contribution or to
expend any funds other than reasonable out-of-pocket expenses incurred in
satisfying its obligations hereunder, including but not limited to the fees,
expenses and disbursements of its accountants, actuaries, counsel and other
professionals.
9.4 GOVERNING LAW. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of New York applicable to contracts made and performed in such State and
without regard to conflicts of law doctrines except to the extent that certain
matters are preempted by federal law.
9.5 NO ASSIGNMENT. Neither this Agreement nor any rights or obligations
under it are assignable except that AvTel may assign its rights hereunder
(including but not limited to its rights under Section 8) to any subsidiary or
affiliate of AvTel or to any post-Closing purchaser of the Stockholder Shares or
of a substantial part of the assets of RLI. AvTel shall give the Stockholder
Representative ten days prior written notice of any such assignment; provided,
however, that any failure to give such notice shall not affect the rights of
AvTel (or its assignee) or the obligations of the Stockholders hereunder.
9.6 HEADINGS. The descriptive headings of the Sections and subsections of
this Agreement are for convenience only and do not constitute a part of this
Agreement.
9.7 COUNTERPARTS; BINDING EFFECT. This Agreement and any amendment hereto
or any other agreement (or document) delivered pursuant hereto may be executed
in one or more counterparts and by different parties in separate counterparts.
All of such counterparts shall constitute one and the same agreement (or other
document) and shall become effective (unless otherwise provided therein) when
one or more counterparts have been signed by each party and delivered to the
other party. This Agreement shall be binding upon the signatories hereto when
executed by AvTel and at least one Stockholder. Additional Stockholders
executing this Agreement after the date hereof and on or prior to the Closing
Date shall be bound as if they had executed this Agreement on the date hereof.
<PAGE>
9.8 PARTIES IN INTEREST. This Agreement shall be binding upon and inure to
the benefit of each party, and nothing in this Agreement, express or implied, is
intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement. Nothing in this Agreement is
intended to relieve or discharge the obligation of any third person to (or to
confer any right of subrogation or action over against) any party to this
Agreement.
9.9 CONFIDENTIALITY; PUBLICITY.. Each party agrees to protect the
confidentiality of all information that is furnished by the other party and
designated in writing as confidential by such other party or its representatives
in connection with the transactions contemplated by this Agreement. If for any
reason such transactions are not consummated, the receiving party shall, on
request, return or destroy all such written information. This Section shall not
apply to any information (i) already known to the receiving party or its
representatives or to others not bound by a duty of confidentiality or which
becomes publicly available through no fault of the receiving party or its
representatives, (ii) the use of which is necessary or appropriate in making any
filing or obtaining any financing, consent or approval required for the
consummation of such transactions, or (iii) the furnishing or use of which is
required by, or necessary or appropriate in connection, with legal proceedings.
Except as necessary to obtain required third party consents, or to the extent
required by law, without the prior written consent of the other party, neither
AvTel nor the Stockholders will make (and each will direct its Affiliates and
representatives not to make) directly or indirectly, any public comment,
statement, or communication with respect to, or otherwise to disclose or to
permit the disclosure of the existence of this Agreement, the transactions
contemplated hereby, or any of the terms, conditions, or other aspects hereof.
9.10 NOTICES. Any notice or other communication hereunder must be given in
writing and either (a) delivered in person, (b) transmitted by telex, telefax or
telecommunications mechanism provided that any notice so given is also mailed as
provided in clause (c) or (c) mailed by first class mail, postage prepaid, as
follows:
<PAGE>
If to AvTel addressed to: If to Stockholder Representative
addressed to:
AvTel Communications, Inc. Remote Lojix/PCSI, Inc.
501 Bath Street 38 East 32nd Street
Santa Barbara, CA 93101 New York, NY 10016
Attention: James P. Pisani Attention: Jeffrey P. Leventhal
Facsimile No. (805) 884-6311 Facsimile No.
With a copy to: With a copy to:
Seed, Mackall & Cole LLP Rosen & Tetelman
1332 Anacapa Street, Suite 200 501 Fifth Avenue, Suite 1404
Santa Barbara, CA 93101 New York, NY 10017
Attention: Thomas N. Harding, Attention: Ted D. Rosen, Esq.
Esq.
Facsimile No. (805) 962-1404 Facsimile No. (212) 972-3555
If to any individual Stockholder,
addressed to such Stockholder at
the address set forth for such
Stockholder in Schedule 2.1 hereto
or to such other address or to such other person as either party shall have last
designated by such notice to the other party. Each such notice or other
communication shall be effective (i) if given by telecommunication, when
transmitted to the applicable number so specified in (or pursuant to) this
Section 9.10 and an appropriate answerback is received, (ii) if given by mail,
three days after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other means,
when actually delivered at such address.
9.11 EXPENSES. The Stockholders and AvTel shall each pay their own
expenses incident to the negotiation, preparation and performance of this
Agreement and the transactions contemplated hereby, including but not limited to
the fees, expenses and disbursements of their respective counsel; provided that
RLI may pay not more than $25,000 of the expenses relating to the transactions
contemplated hereby.
9.12 WAIVER. No failure on the part of any party to exercise or delay in
exercising any right hereunder shall be deemed a waiver thereof, nor shall any
single or partial exercise preclude any further or other exercise of such or any
other right.
9.13 ATTORNEY FEES. In the event of any Action for the breach of this
Agreement or misrepresentation by any party, the prevailing party shall be
entitled to reasonable attorney's fees, costs and expenses incurred in
connection with such Action.
<PAGE>
9.14 REPRESENTATION BY COUNSEL; INTERPRETATION. The Stockholders and AvTel
each acknowledge that each party to this Agreement has been represented by
counsel in connection with this Agreement and the transactions contemplated by
this Agreement. Each of the Stockholders further acknowledges that Rosen &
Tetelman has acted as counsel only for RLI and Jeffrey P. Leventhal, and that
each of the other Stockholders has access to counsel other than Rosen &
Tetelman. Accordingly, any rule of Law or any legal decision that would require
interpretation of any claimed ambiguities in this Agreement against the party
that drafted it has no application and is expressly waived. The provisions of
this Agreement shall be interpreted in a reasonable manner to effect the intent
of AvTel and the Stockholders.
9.15 SEVERABILITY. If any provision of this Agreement is determined to be
invalid, illegal or unenforceable by any Governmental Entity, the remaining
provisions of this Agreement shall remain in full force and effect provided that
the essential terms and conditions of this Agreement for both parties remain
valid, binding and enforceable
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its duly authorized officers as of the day and year
first above written.
"AvTel"
AVTEL COMMUNICATIONS, INC.,
a Delaware corporation
By /S/ JAMES P. PISANI
-------------------
James P. Pisani
President
"STOCKHOLDERS"
/S/ MATTHEW BLUMENTHAL
-------------------
/S/ SARAH CHOI
-----------
/S/ KENNETH W. SCOTT
-----------------
/S/ MURRAY LEVRANT
---------------
/S/ SHEILA LEVRANT
---------------
/S/ JEFFREY LEVENTHAL
------------------
LEVENTHAL PAGET, LLC
By: /S/ JEFFREY LEVENTHAL
----------------------
Jeffrey Leventhal
/S/ RICHARD REICH
--------------
ROSEN & TETELMAN
By: /S/ TED D. ROSEN
------------------
Ted D. Rosen, Partner
/S/ NEIL BRENNER
-------------
<PAGE>
/S/ ANDY DENTON
------------
/S/ ANTHONY TUREL
--------------
/S/ DANIEL M. MURPHY
-----------------
ALLIANCE CAPITAL INVESTMENTS
CORP.
By: /S/ STACIE GREENE
------------------
Stacie Greene, President
/S/ ELMER DUWAYNE CARLSON
----------------------
/S/ KENNETH A. BARTON
------------------
/S/ MARK SACKSTEIN
---------------
HST PARTNERS
BY: /S/ LISA DAVIS
-----------------
Lisa Davis, Partner
[Exhibits and Schedules omitted]
<PAGE>
Exhibit 2.7
FIRST AMENDMENT
TO
STOCK PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO STOCK PURCHASE AGREEMENT (this "Amendment") is
entered into as of August 18, 1998, between AVTEL COMMUNICATIONS, INC., a
Delaware corporation ("AVTEL"), and the stockholders (the "STOCKHOLDERS") of
REMOTE LOJIX/PCSI, INC., a New York corporation ("RLI"), who have executed the
Stock Purchase Agreement dated July 22, 1998 (the "STOCK PURCHASE AGREEMENT").
RECITALS
A. The parties hereto have entered into the Stock Purchase Agreement
pursuant to which AvTel will acquire the capital stock of RLI.
B. The parties hereto have determined to amend the Stock Purchase
Agreement as set forth herein.
AGREEMENT
In consideration of the mutual promises contained herein and intending to
be legally bound, the parties agree as follows:
1. AMENDMENT OF SECTION 1.2.1.
Section 1.2.1 is hereby amended to read in its entirety as follows:
"1.2.1 INITIAL EXCHANGE SHARES. At the Closing, AvTel shall issue a
total of 500,000 shares (the "INITIAL EXCHANGE SHARES") of its Common Stock, par
value $.01 per share (the "AVTEL COMMON STOCK") to the Stockholders, to be
divided among the Stockholders in the same proportion that the number of
Stockholder Shares owned by each Stockholder (as set forth on Schedule 2.2)
represents to the total number of Stockholder Shares. For purposes of
calculating the number of Initial Exchange Shares to be received by each
Stockholder, the numbers shall be rounded to the nearest whole share as required
to avoid issuance of fractional shares. As of the Closing Date, the Initial
Exchange Shares will not be registered under any federal or state securities
laws. At the Closing, Jeffrey P. Leventhal shall deposit 95,000 of his
<PAGE>
Initial Exchange Shares into an escrow account pursuant to an Escrow Agreement
substantially in the form attached hereto as Exhibit A (the "ESCROW
AGREEMENT")."
2. AMENDMENT OF SECTION 1.2.2.
Section 1.2.2 is hereby amended by adding the following as Section
1.2.2(C):
"C. At the Closing, AvTel will issue a total of 9,535 shares of
AvTel Common Stock (the "DELIVERED EARNOUT SHARES") to the following
Stockholders: Dr. Kenneth A. Barton, Elmer DuWayne Carlson, HST Partners, Murray
& Sheila Levant - JTROS, Daniel M. Murphy, Kenneth W. Scott and Dr. Anthony
Turel. The Delivered Earnout Shares shall be divided among such named
Stockholders in the same proportion that the number of Stockholder Shares owned
by each such named Stockholder (as set forth on Schedule 2.2) represents to the
total number of Stockholder Shares held by such named Stockholders. For purposes
of calculating the number of Delivered Earnout Shares to be received by each
such named Stockholder, the numbers shall be rounded to the nearest whole share
as required to avoid issuance of fractional shares. The number of Delivered
Earnout Shares has been determined as if RLI had already met the requirements
set forth in Section 1.2.2(b)(2), using the average closing price of AvTel
Common Stock over the last seventy-five trading days ending on the second
business day prior to the date of this Amendment. The parties hereto agree that
the Delivered Earnout Shares are delivered to such named Stockholders in full
satisfaction of any and all obligations of AvTel to deliver Earnout Shares to
such named Stockholders."
3. AMENDMENT OF SECTION 2.2.2.
Section 2.2.2 is hereby amended to read in its entirety as follows:
"2.2.2 CAPITALIZATION. The authorized capital stock of RLI consists
of 10,000,000 shares of RLI Common Stock, of which 4,195,963 shares are issued
and outstanding on the date hereof. On the Closing Date, there will be 4,157,796
shares of RLI Common Stock issued and outstanding. The authorized, issued and
outstanding capital stock of each of the Subsidiaries is as set forth on
Schedule 2.2. RLI owns, beneficially and of record, of all of the capital stock
of each of the Subsidiaries, free and clear of any Encumbrances. Except as set
forth on Exhibit 2.2, there are no outstanding options, warrants or other rights
to subscribe for or purchase, or contracts or other obligations to issue or
grant any rights to acquire, any stock or securities of RLI or the Subsidiaries,
or to restructure or recapitalize RLI or the Subsidiaries. On the Closing Date,
there will be no outstanding options, warrants or other rights to subscribe for
or purchase, or contracts or other obligations to issue or grant any rights to
acquire, any stock or securities of RLI or the Subsidiaries, or to restructure
or recapitalize RLI or the Subsidiaries. Except as set forth on Schedule 2.2
hereto, there are no outstanding contracts of the Stockholders, RLI or the
Subsidiaries to repurchase, redeem or otherwise acquire any securities of RLI or
the Subsidiaries. The Stockholder Shares, and the shares of the capital stock of
each of the Subsidiaries, are duly authorized, validly issued and outstanding
and are fully paid and
<PAGE>
nonassessable and were issued in conformity with applicable laws. There are no
preemptive rights in respect of any equity securities of RLI. "
4. AMENDMENT OF SECTION 2.27.
Section 2.27 is hereby amended to read in its entirety as follows:
"2.27 INFORMATION CONCERNING AVTEL. The Stockholders have received
copies of AvTel's Annual Report on Form 10-K for the year ended December 31,
1997, Quarterly Reports on Form 10-Q for the quarters ending March 31 and June
30, 1998, and the Proxy Statement for AvTel's 1998 Annual Meeting of
Stockholders, each as filed with the Securities and Exchange Commission (the
"SEC"). The Stockholders have heretofore discussed AvTel and its plans,
operations and financial condition with AvTel's officers and have heretofore
received all such information as the Stockholders have deemed necessary and
appropriate to enable the Stockholders to evaluate the financial risk inherent
in making an investment in the Initial Exchange Shares and the Earnout Shares,
if any, and the Stockholders have received satisfactory and complete information
concerning the business and financial condition of AvTel in response to all
inquiries in respect thereof."
5. AMENDMENT OF SECTION 4.12.
Section 4.12 is hereby amended to read in its entirety as follows:
"4.12 BUYOUT OF PCSI HOLDERS. On or prior to the Closing Date, the
Stockholders will purchase, or will cause RLI to repurchase or otherwise
reacquire, all shares of the RLI Common Stock reflected on RLI's stock records
as being held by the PCSI Holders for an aggregate purchase price of not less
than $15,000. If such shares are repurchased by RLI, the aggregate purchase
price shall not exceed $15,200."
6. AMENDMENT OF SECTION 5.2.2.
Section 5.2.2(B) is hereby amended to read in its entirety as
follows:
"B. Include in such registration (and any related qualification
under Blue Sky Laws), and in any underwriting involved therein, the Initial
Exchange Shares and Earnout Shares, if any (the "REGISTRABLE SHARES"), then held
by each of the Stockholders which are specified in a written request made by the
Stockholder Representative within ten (10) days after receipt of such written
notice from AvTel by the Stockholder Representative; provided, however, that the
Registrable Shares shall include only ten percent (10%) of the Initial Exchange
Shares and Earnout Shares, if any, then held by each of Jeffrey P. Leventhal,
Sarah Choi, Rich Reich, Matt Blumenthal, Neil Brenner, Andy Denton and Leventhal
Paget LLC."
<PAGE>
7. AMENDMENT OF SECTION 8.1.4.
Section 8.1.4 is hereby amended to read in its entirety as follows:
"8.1.4 any Order or Action (i) set forth in Schedule 2.9 (other than
the litigation with Thomas J. Ferrara described therein), but only to the extent
that the Losses (excluding attorneys' fees and expenses relating thereto)
therefrom exceed $50,000; or (ii) relating to Thomas J. Ferrara but only to the
extent that Losses (excluding attorneys' fees and expenses relating thereto)
therefrom exceed the aggregate amount of salary and commission owing to Thomas
J. Ferrara on the date hereof (provided, however, that any settlement or
judgment that requires the issuance of not more than 58,500 shares of AvTel
Common Stock to or on behalf of Thomas J. Ferrara shall be handled solely by
means of the Escrow Agreement); or"
8. AMENDMENT OF SECTION 3 OF ESCROW AGREEMENT.
Section 3 of the Escrow Agreement attached as Exhibit A to the Stock
Purchase Agreement is hereby amended to read in its entirety as follows:
"3. DEPOSIT OF THE ESCROW SHARES. On the Closing Date, AvTel shall
deliver to Escrow Agent 95,000 shares of AvTel Common Stock (the "Escrow
Shares") to which Leventhal would otherwise be entitled (in his capacity as a
shareholder of RLI) under the Stock Purchase Agreement. The Escrow Shares shall
consist of (i) a certificate representing 58,500 shares (referred to herein as
the "Ferrara Shares"), and (ii) a certificate representing 36,500 shares
(referred to herein as the "General Shares")."
9. NO OTHER MODIFICATION.
Except as specifically amended hereby, the Stock Purchase Agreement
shall continue unchanged and in full force and effect. All of the provisions
contained in Section 9 of the Stock Purchase Agreement shall apply to this
Amendment.
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Amendment as of the day and year first above written.
"AVTEL"
AVTEL COMMUNICATIONS, INC.,
a Delaware corporation
By /S/ JAMES P. PISANI
--------------------
James P. Pisani
President
"STOCKHOLDERS"
/S/ JEFFREY LEVENTHAL
-------------------
Name: Jeffrey Leventhal
LEVENTHAL PAGET, LLC
By: /S/ JEFFREY LEVENTHAL
----------------------
Name : Jeffrey Leventhal
Title: Manager
/S/ MATTHEW BLUMENTHAL
----------------------
Name : Matthew Blumenthal
/S/ KENNETH W. SCOTT
--------------------
Name: Kenneth W. Scott
/S/ MURRAY LEVRANT
------------------
Name : Murray Levrant
<PAGE>
/S/ SHEILA LEVRANT
-----------------
Name: Sheila Levrant
/S/ SARAH CHOI
--------------
Name : Sarah Choi
/S/ RICHARD REICH
-----------------
Name : Richard Reich
Rosen & Tetelman
By: /S/ TED D. ROSEN
-----------------
Name : Ted D. Rosen
Title: Partner
/S/ NEIL BRENNER
----------------
Name : Neil Brenner
/S/ ANDY DENTON
---------------
Name : Andy Denton
/S/ ANTHONY TUREL
-----------------
Name : Anthony Turel
/S/ DANIEL M. MURPHY
--------------------
Name : Daniel M. Murphy
ALLIANCE CAPITAL INVESTMENTS CORP.
By: /S/ STACIE GREENE
------------------
Name : Stacie Greene
<PAGE>
Title: President
/S/ ELMER DUWAYNE CARLSON
-------------------------
Name : Elmer DuWayne Carlson
/S/ KENNETH A. BARTON
---------------------
Name : Kenneth A. Barton
/S/ MARK SACKSTEIN
------------------
Name : Mark Sackstein
HST PARTNERS
By: /S/ LISA DAVIS
-----------------
Name : Lisa Davis
Title: Partner
<PAGE>
Exhibit 2.8
EARNOUT AGREEMENT, dated as of October 30, 1998, to the Stock Purchase
Agreement, dated July 22, 1998 and the First Amendment to Stock Purchase
Agreement, dated as of August 18, 1998 (the "Stock Purchase Agreement") by and
between AvTel Communications, Inc., a Delaware corporation ("AvTel"), and
Jeffrey Leventhal, Sarah Choi, Richard Reich, Matthew Blumenthal, Mark
Sackstein, Neil Brenner, Andy Denton, Alliance Capital Investments Corp.
("Alliance Capital"), Leventhal Paget, LLC and Rosen & Tetelman.
1) Capitalized terms not otherwise defined herein are used herein as set
forth in the Stock Purchase Agreement.
2) Jeffrey Leventhal, Sarah Choi, Richard Reich, Matthew Blumenthal, Neil
Brenner and Andy Denton shall be defined herein as the "Employee Stockholders"
and Mark Sackstein, Alliance Capital, Leventhal Paget, LLC and Rosen & Tetelman
shall be defined herein as the "Non-Employee Stockholders".
3) At the Closing, AvTel will issue a total of 140,140 shares of AvTel Common
Stock (the "ALTERNATE DELIVERED EARNOUT SHARES") to the following Stockholders:
Jeffrey P. Leventhal, Sarah Choi, Rich Reich, Matt Blumenthal, Mark Sackstein,
Neil Brenner, Andy Denton, Alliance Capital, Leventhal Paget, LLC and Rosen &
Tetelman. The number of Alternate Delivered Earnout Shares has been determined
as if RLI had already met the requirements set forth in Section 1.2.2(b)(2),
using $10.00 as the divisor for the Employee Shareholders and $7.00 as the
divisor for the Non-Employee Shareholders. For purposes of calculating the
number of Alternate Delivered Earnout Shares to be received by each such named
Stockholder, the numbers shall be rounded to the nearest whole share as required
to avoid issuance of fractional shares. The parties hereto agree that the
Alternate Delivered Earnout Shares are delivered to such named Stockholders in
full satisfaction of any and all obligations of AvTel to deliver Earnout Shares
to such named Stockholders and such Shares shall not be refundable. Thus, the
Alternate Delivered Earnout Shares will be delivered at Closing as follows:
<PAGE>
<TABLE>
<CAPTION>
Stockholder Alternate Delivered Earnout Shares
- ----------- ----------------------------------
<S> <C>
Jeffrey Leventhal 93,224
Sarah Choi 5,215
Richard Reich 5,215
Matthew Blumenthal 5,215
Alliance Capital 8,241
Leventhal Paget 8,851
Mark Sackstein 7,450
Rosen & Tetelman 533
Neil Brenner 3,098
Andy Denton 3,098
</TABLE>
4) The Alternate Delivered Earnout Shares to be included in the definition of
"Registrable Shares" under Section 5.2.2 (B) of the First Amendment to the Stock
Purchase Agreement, dated as of August 18, 1998 (the "First Amendment") by and
between AvTel, the Stockholders and RLI.
5) Except as amended hereby, the Stock Purchase Agreement shall continue
unchanged and in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
AVTEL COMMUNICATIONS,INC.
By: /S/ JAMES P. PISANI
-------------------
James P. Pisani
Title: President
/S/ JEFFREY P. LEVENTHAL
------------------------
Jeffrey P. Leventhal
LEVENTHAL PAGET, LLC
By:/S/ JEFFREY LEVENTHAL
------------------------
Jeffrey Leventhal
<PAGE>
/S/ SARAH CHOI /S/ MARK SACKSTEIN
- -------------- ------------------
Sarah Choi Mark Sackstein
/S/ RICHARD REICH /S/ NEIL BRENNER
- ----------------- ----------------
Richard Reich Neil Brenner
/S/MATTHEW BLUMENTHAL /S/ ANDY DENTON
- --------------------- ---------------
Matthew Blumenthal Andy Denton
ALLIANCE CAPITAL INVESTMENTS CORP.
By: /S/ STACIE GREENE
-----------------
Stacie Greene
Title: President
ROSEN & TETELMAN
By: /S/ TED D. ROSEN
---------------------
Ted D. Rosen, Partner
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS OF
SERIES B CONVERTIBLE PREFERRED STOCK OF
AVTEL COMMUNICATIONS, INC.
PURSUANT TO SECTION 151 OF THE DELAWARE
GENERAL CORPORATION LAW
The undersigned, being the Chief Executive Officer of AvTel
Communications, Inc., a corporation organized and existing under and by virtue
of the laws of the State of Delaware (hereinafter the "Corporation"), DO HEREBY
CERTIFY:
FIRST: That pursuant to authority expressly granted and vested in the
Board of Directors of said Corporation by the provisions of Article IV of the
Corporation's Certificate of Incorporation, said Board of Directors adopted the
following resolution on March 31, 1999 determining the designations, preferences
and rights of its Series B Convertible Preferred Stock:
RESOLVED: That pursuant to the authority vested in the Board of Directors
of the Corporation by Article IV of the Corporation's Certificate of
Incorporation (the "Certificate of Incorporation"), a series of Preferred Stock
of the Corporation be, and it hereby is, created out of the authorized but
unissued shares of the capital stock of the Corporation, such series to be
designated Series B Convertible Preferred Stock (the "Series B Convertible
Preferred Stock"), to consist of 1,500 shares, par value $.01 per share, of
which the preferences and relative and other rights, and the qualifications,
limitations or restrictions thereof, shall be as set forth in the Certificate of
Designations annexed hereto:
1. NUMBER OF SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK. Of the
750,000 shares of authorized but undesignated Preferred Stock, $.01 par value
("Preferred Stock") of the Corporation, one thousand five hundred (1,500) shares
shall be designated and known as Series B Convertible Preferred Stock, par value
$.01 per share ("Series B Convertible Preferred Stock").
2. VOTING.
(a) Unless required by law, no holder of any shares of Series B
Convertible Preferred Stock shall be entitled to vote at any meeting of
stockholders of the Corporation (or
<PAGE>
any written actions of stockholders in lieu of meetings) with respect to any
matters presented to the stockholders of the Corporation for their action or
consideration. Notwithstanding the foregoing, the Corporation shall provide each
holder of record of Series B Convertible Preferred Stock with timely notice of
every meeting of stockholders of the Corporation and shall provide each holder
with copies of all proxy materials distributed in connection therewith.
(b) So long as shares of Series B Convertible Preferred Stock are
outstanding, the Corporation shall not, without first obtaining the approval (by
vote or written consent, as provided by the Delaware General Corporation Law) of
the holders of at least 85% in interest of the then outstanding shares of Series
B Convertible Preferred Stock:
(i) alter or change the rights, preferences or privileges of
the Series B Convertible Preferred Stock;
(ii) create any new class or series of capital stock having
parity with or a preference over the Series B Convertible Preferred Stock as to
distribution of assets upon liquidation, dissolution or winding up of the
Corporation ("Senior Securities") or alter or change the rights, preferences or
privileges of any Senior Securities so as to affect adversely the Series B
Convertible Preferred Stock;
(iii) increase the authorized number of shares of Series B
Convertible Preferred Stock; or
(iv) do any act or thing not authorized or contemplated by
this Certificate of Designations which would result in taxation of the holders
of shares of the Series B Convertible Preferred Stock under Section 305 of the
Internal Revenue Code of 1986, as amended (or any comparable provision of the
Internal Revenue Code as hereafter from time to time amended).
In the event holders of at least 85% in interest of the then
outstanding shares of Series B Convertible Preferred Stock agree to allow the
Corporation to alter or change the rights, preferences or privileges of the
shares of Series B Convertible Preferred Stock, pursuant to subsection (b)
above, so as to affect the Series B Convertible Preferred Stock, then the
Corporation will deliver notice of such approved change to the holders of the
Series B Convertible Preferred Stock that did not agree to such alteration or
change (the "Dissenting Holders") and Dissenting Holders shall have the right
for a period of thirty (30) days to convert any and all shares of then held
Series B Convertible Preferred Stock pursuant to the terms of this Certificate
of Designation as in effect prior to such alteration or change, or else to
continue to hold their shares of Series B Convertible Preferred Stock.
3. DIVIDENDS.
The holders of shares of Series B Convertible Preferred Stock shall
be entitled to receive, before any cash dividend shall be declared and paid upon
or set aside for the Common Stock in any fiscal year of the Corporation, out of
funds legally available for that purpose,
<PAGE>
cumulative dividends payable in cash in an amount per share for such fiscal year
equal to $30.00. Such dividends shall accrue daily and be payable quarterly on
March 31, June 30, September 30 and December 31 of each year, commencing June
30, 1999. In the event that the Corporation's Common Stock shall cease for any
reason to be listed on The Nasdaq Stock Market or any national securities
exchange, the cash dividend from such date forward shall be at the rate of
$60.00 per share. The Corporation may pay any such dividend in the form of
Common Stock, valued at the closing bid price for the Common Stock on the
Principal Market on the day prior to the dividend payment date.
4. LIQUIDATION. (a) If the Corporation shall commence a voluntary case
under the Federal bankruptcy laws or any other applicable Federal or State
bankruptcy, insolvency or similar law, or consent to the entry of an order for
relief in an involuntary case under any law or to the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or other similar
official) of the Corporation or of any substantial part of its property, or make
an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or order
for relief in respect of the Corporation shall be entered by a court having
jurisdiction in the premises in an involuntary case under the Federal bankruptcy
laws or any other applicable Federal or State bankruptcy, insolvency or similar
law resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up (each such event being considered a
"Liquidating Event"), no distribution shall be made to the holders of any shares
of capital stock of the Corporation other than Senior Securities (as defined
below) upon liquidation, dissolution or winding up unless prior thereto, the
holders of shares of Series B Convertible Preferred Stock shall have received
the Liquidation Preference (as defined in Section 4(c)) with respect to each
share. If upon the occurrence of a Liquidation Event, the assets and funds
available for distribution among the holders of the Series B Convertible
Preferred Stock and holders of securities ranking pari passu as to preference
upon liquidation with the Series B Convertible Preferred Stock shall be
insufficient to permit the payment to such holders of the preferential amounts
payable thereon, then the entire assets and funds of the Corporation legally
available for distribution to the Series B Convertible Preferred Stock and such
pari passu securities shall be distributed ratably among such shares in
proportion to the ratio that that Liquidation Preference payable on each such
share bears to the aggregate Liquidation Preference payable on all such shares.
(b) At the option of each holder, the sale, conveyance of
disposition of all or substantially all of the assets of the Corporation, the
effectuation by the Corporation of a transaction or series or related
transactions in which more than 50% of the voting power of the Corporation is
disposed of, or the consolidation, merger or other business combination of the
Corporation with or into any other person or persons when the Corporation is not
the survivor shall be deemed to be a liquidation, dissolution or winding up of
the Corporation pursuant to which the Corporation shall be required to
distribute, upon consummation of and as a condition to such transaction an
amount equal to the Liquidation Preference with respect to each
<PAGE>
outstanding share of Series B Convertible Preferred Stock held by such holder in
accordance with and subject to the terms of this Section 4.
(c) The Liquidation Preference shall be the Stated Value of $1,000
per share of Series B Convertible Preferred Stock plus all accrued but unpaid
dividends. The Corporation's Series A Preferred Stock shall constitute Senior
Securities and shall be ranked senior to the Series B Convertible Preferred
Stock in respect of the distribution of assets upon a Liquidating Event and for
purposes of receiving cash dividends.
5. OPTIONAL CONVERSION. The holders of shares of Series B Convertible
Preferred Stock shall have the following conversion rights:
(a) RIGHT TO CONVERT; CONVERSION PRICE. Subject to the terms,
conditions, and restrictions of this Section 5, the holder of any shares of
Series B Convertible Preferred Stock shall have the right to convert each such
share of Series B Convertible Preferred Stock (except that upon any liquidation
of the Corporation, the right of conversion shall terminate at the close of
business on the business day fixed for payment of the amount distributable on
the Series B Convertible Preferred Stock) into an amount of shares of Common
Stock equal to the Stated Value of such share or shares of Series B Convertible
Preferred Stock divided by (i) the lowest closing bid price, as reported by
Bloomberg L.P., on the principal market for the Corporation's Common Stock based
on trading volume (the "Principal Market") during the period of five consecutive
trading days ending with the last trading day prior to the date of conversion
(the "Conversion Date") (the "Market Price"), after (ii) discounting the Market
Price by 11% to determine the conversion price (the "Conversion Price"). To
illustrate, if the Market Price as of the Conversion Date is $1.00 and 100
shares of Series B Convertible Preferred Stock are being converted, the Stated
Value for which would be $100,000, then the Conversion Price shall be $0.89 per
share of Common Stock ($1.00 x .89), whereupon the Stated Value of $100,000 of
Series B Convertible Preferred Stock would entitle the holder thereof to convert
the 100 shares of Series B Convertible Preferred Stock into 112,359 shares of
Common Stock ($100,000 divided by $0.89 equals 112,359). However, in no event
shall the Conversion Price be greater than 100% of the closing bid price of the
Common Stock on the Principal Market on the Original Issuance Date, as defined
in the next paragraph (the "Maximum Conversion Price") nor less than three
dollars ($3.00) prior to 180 days from the Original Issuance Date, as defined in
the next paragraph, or less than two dollars ($2.00) at any time thereafter (the
"Minimum Conversion Price") except that there shall be no Minimum Conversion
Price if (i) the Corporation shall report on its Form 10-Q or QSB or 10-K or KSB
for the applicable quarter gross revenues of less than (w) $8,200,000 for the
quarter ended March 31, 1999, (x) $10,000,000 for the quarter ended June 30,
1999, (y) $12,000,000 for the quarter ended September 30, 1999 or (z)
$15,000,000 for the quarter ended December 31, 1999. In addition, there shall be
no Minimum Conversion Price if the Corporation shall report EBITDA for the month
ending December 31, 1999 of less than zero dollars. The Corporation covenants
that it shall report such month-end EBITDA on a Form 8-K report no later than
February 28, 2000. In addition, if the Conversion Price on any Conversion Date
is less than $4.00, then the Corporation shall have the option, prior to or
within two business hours (which may carry over to the next business day if
after 4:00 p.m. Eastern time at the Corporation) of receipt of a Conversion
Notice from a holder and upon prior written notice to the holder, to pay the
holder in shares of Common Stock as set forth above, or else in cash in an
amount equal to (i) the closing ask price on the Principal Market on the
Conversion
<PAGE>
Date multiplied by (ii) the number of shares of Common Stock which would
otherwise be issuable to the holder upon such conversion, or any combination of
cash and Common Stock. If notice of the Corporation's election to pay the holder
in cash is not received by the holder prior to or within two business hours of
the receipt by the Corporation of a Conversion Notice, the Corporation shall
issue the holder shares of Common Stock unless otherwise consented to by the
holder. Any conversion which is paid in cash shall be paid within three (3)
business days of the Conversion Date, or else the late delivery payments set
forth in Section 5(d)(ii) hereof shall apply to such late payment, and, upon
demand of the holder in such event of late delivery, the holder may require the
Corporation to deliver the shares otherwise issuable upon such conversion.
Unless the Corporation shall have obtained the approval of its voting
stockholders to such issuance in accordance with the applicable rules of the
Principal Market, if any, the Corporation shall not issue shares of Common Stock
upon conversion of any shares of Series B Convertible Preferred Stock if such
issuance of Common Stock, when added to the number of shares of Common Stock
previously issued by the Corporation upon conversion of or as dividends on
shares of the Series B Convertible Preferred Stock, or issued upon exercise of
the Stock Purchase Warrants issued in conjunction with the issuance of shares of
Series B Convertible Preferred Stock, would exceed 19.9% of the number of shares
of the Corporation's Common Stock which were issued and outstanding on the
Original Issuance Date. The right to convert shares of Series B Convertible
Preferred Stock shall be pro rated among the original purchasers of such shares
and their respective subsequent transferees, if any, in order to comply with the
aforesaid overall limitation. In the event that the Corporation has not obtained
stockholder approval of such issuance prior to receipt of a Conversion Notice
which would otherwise violate this provision, the Corporation shall honor such
conversion request (resulting in an issuance in excess of 19.9%) in cash in an
amount equal to (i) the closing ask price on the Principal Market on the day
prior to the Conversion Date multiplied by (ii) the number of shares of Common
Stock which would otherwise be issuable to the holder upon such conversion.
(b) CONVERSION DATE. (i) The holder of any shares of Series B
Convertible Preferred Stock may convert the shares of Series B Convertible
Preferred Stock purchased by such holder from the Company 90 days from the
Original Issuance Date, or if the holder accepts the Maximum Conversion Price at
the Conversion Price, then such shares shall be convertible at any time after
the Original Issuance Date; provided, that the Corporation shall have the right,
on no more than three (3) occasions during the life of the Series B Convertible
Preferred Stock, by at least three (3) trading days' prior written notice to the
holders, to refuse to honor any Exchange Notice delivered during any specified
seven (7) calendar day period.
(ii) In no event shall a holder be permitted to convert any shares
of Series B Convertible Preferred Stock in excess of the number of such
shares upon the conversion of which, (x) the number of shares of Common
Stock owned by such holder (other than shares of Common Stock issuable
upon conversion of shares of Series B Convertible Preferred Stock) plus
(y) the number of shares of Common Stock issuable upon such conversion of
such shares of Series B Convertible Preferred Stock, would be equal to or
exceed 9.9% of the number of shares of Common Stock then issued and
outstanding, including shares issuable upon conversion of the Series B
Convertible Preferred Stock held by such holder after application of this
Section 5(b)(ii). As used herein, beneficial ownership shall be determined
in accordance with Section 13(d) of the Securities
<PAGE>
Exchange Act of 1934, as amended, and the rules and regulations
thereunder. To the extent that the limitation contained in this Section
5(b)(ii) applies, the determination of whether shares of Series B
Convertible Preferred Stock are convertible (in relation to other
securities owned by holder) and of which shares of Series B Convertible
Preferred Stock are convertible shall be in the sole discretion of such
holder, and the submission of shares of Series B Convertible Preferred
Stock for conversion shall be deemed to be such holder's determination of
whether such shares of Series B Convertible Preferred Stock are
convertible (in relation to other securities owned by such holder) and of
which shares of Series B Convertible Preferred Stock are convertible, in
each case subject to such aggregate percentage limitation, and the
Corporation shall have no obligation to verify or confirm the accuracy of
such determination. Nothing contained herein shall be deemed to restrict
the right of a holder to convert such shares of Series B Convertible
Preferred Stock at such time as such conversion will not violate the
provisions of this paragraph. The provisions of this Section 5(b)(ii) may
be waived by a holder of Series B Convertible Preferred Stock as to itself
(and solely as to itself) upon not less than 75 days' prior notice to the
Corporation, and the provisions of this Section 5(b)(ii) shall continue to
apply until such 75th day (or such later date as may be specified in such
notice of waiver). No conversion in violation of this paragraph but
otherwise in accordance with this Certificate of Designation shall affect
the status of the Common Stock issued upon such conversion as validly
issued, fully-paid and nonassessable.
(c) NOTICE OF CONVERSION. The right of conversion shall be exercised
by the holder thereof by giving written notice (the "Conversion Notice") to the
Corporation, by facsimile or by registered mail or overnight delivery service,
with a copy by facsimile to the Corporation's then transfer agent for its Common
Stock, as designated by the Corporation from time to time, that the holder
elects to convert a specified number of shares of Series B Convertible Preferred
Stock representing a specified Stated Value thereof into Common Stock and, if
such conversion will result in the conversion of all of such holder's shares of
Series B Convertible Preferred Stock, by surrender of a certificate or
certificates for the shares so to be converted to the Corporation at its
principal office (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of the Series B
Convertible Preferred Stock) at any time during its usual business hours on the
date set forth in the Conversion Notice, together with a statement of the name
or names (with address) in which the certificate or certificates for shares of
Common Stock shall be issued. The Conversion Notice shall include therein the
Stated Value of shares of Series B Convertible Preferred Stock to be converted,
and a calculation (i) of the Market Price, (ii) the Conversion Price, and (iii)
the number of shares of Common Stock to be issued in connection with such
conversion.
(d) ISSUANCE OF CERTIFICATES; TIME CONVERSION EFFECTED. (i)
Promptly, but in no event more than three business days, after the receipt of
the Conversion Notice referred to in Section 5(c) and surrender of the
certificate or certificates for the share or shares of Series B Convertible
Preferred Stock to be converted (if required), the Corporation shall issue and
deliver, or cause to be issued and delivered, to the holder, registered in such
name or names as such holder may direct, a certificate or certificates for the
number of whole shares of Common Stock into which such shares of Series B
Convertible Preferred Stock are converted. To the extent permitted by law, such
conversion shall be deemed to have been effected on the date on which
<PAGE>
such Conversion Notice shall have been received by the Corporation and at the
time specified stated in such Conversion Notice, which must be during the
calendar day of such notice, and at such time the rights of the holder of such
share or shares of Series B Convertible Preferred Stock shall cease, and the
person or persons in whose name or names any certificate or certificates for
shares of Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of the shares represented thereby.
Issuance of shares of Common Stock issuable upon conversion which are requested
to be registered in a name other than that of the registered holder shall be
subject to compliance with all applicable federal and state securities laws.
(ii) The Corporation understands that a delay in the issuance
of the shares of Common Stock beyond three business days could result in
economic loss to the holder. As compensation to the holder for such loss, the
Corporation agrees to pay late payments to the holder for late issuance of
shares of Common Stock upon conversion in accordance with the following schedule
(where "NO. BUSINESS DAYS LATE" is defined as the number of business days beyond
three (3) business days from the date of receipt by the Corporation of the
Conversion Notice):
<TABLE>
<CAPTION>
Late Payment For Each
$5,000 of Stated Value
No. Business Days Late Amount Being Converted
- ----------------------------- ----------------------------------------------
<S> <C>
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
>10 $1,000 + $200 for each Business Day
Late beyond 10 days
</TABLE>
The Corporation shall pay any payments incurred under this Section in
immediately available funds upon demand. Nothing herein shall limit holder's
right to pursue injunctive relief and/or actual damages for the Corporation's
failure to issue and deliver Common Stock to the holder, including, without
limitation, the holder's actual losses occasioned by any "buy-in" of Common
Stock necessitated by such late delivery. Furthermore, in addition to any other
remedies which may be available to the holder, in the event that the Corporation
fails for any reason to effect delivery of such shares of Common Stock within
five business days the date of receipt of the Conversion Notice, the holder will
be entitled to revoke the relevant Conversion Notice by
<PAGE>
delivering a notice to such effect to the Corporation whereupon the Corporation
and the holder shall each be restored to their respective positions immediately
prior to delivery of such Conversion Notice.
(iii) If, at any time (a) the Corporation challenges, disputes
or denies the right of the holder to effect the conversion of the Series B
Convertible Preferred Stock into Common Shares or otherwise dishonors or rejects
any Conversion Notice delivered in accordance with this Section 5 or (b) any
third party who is not and has never been an Affiliate (as defined in Rule 405
under the Securities Act of 1933, as amended) of the holder obtains a judgment
or order from any court or public or governmental authority which denies,
enjoins, limits, modifies, or delays the right of the holder hereof to effect
the conversion of the Series B Convertible Preferred Stock into Common Shares,
then the holder shall have the right, by written notice to the Corporation, to
require the Corporation to promptly redeem the Series B Convertible Preferred
Stock for cash at a redemption price equal to one hundred twenty percent (120%)
of the Stated Value thereof (the "Mandatory Purchase Amount"). Under any of the
circumstances set forth above, the Corporation shall indemnify and hold harmless
the holder and be responsible for the payment of all costs and expenses of the
holder, including its reasonable legal fees and expenses, as and when incurred
in disputing any such action or pursuing its rights hereunder (in addition to
any other rights of the holder). The Corporation shall not refuse to honor any
Conversion Notice unless its has actually been enjoined by a court of competent
jurisdiction from doing so, and if so enjoined, the Corporation shall post with
such court a performance bond equal to 120% of the Stated Value of the shares
sought to be converted by the holder which are the subject of such injunction.
(iv) The holder shall be entitled to exercise its conversion
privilege notwithstanding the commencement of any case under 11 U.S.C. Section
101 ET SEQ. (the "Bankruptcy Code"). In the event the Corporation is a debtor
under the Bankruptcy Code, the Corporation hereby waives to the fullest extent
permitted any rights to relief it may have under 11 U.S.C. Section 362 in
respect of the holder's conversion privilege. The Corporation hereby waives to
the fullest extent permitted any rights to relief it may have under 11 U.S.C.
Section 362 in respect of the conversion of the Series B Convertible Preferred
Stock. The Corporation agrees, without cost or expense the holder, to take or
consent to any and all action necessary to effectuate relief under 11 U.S.C.
Section 362.
(e) FRACTIONAL SHARES. No fractional shares shall be issued upon
conversion of Series B Convertible Preferred Stock into Common Stock. All
fractional shares shall be rounded up to the nearest whole share.
(f) REORGANIZATION OR RECLASSIFICATION. If any capital
reorganization or reclassification of the capital stock of the Corporation shall
be effected in such a way that holders of Common Stock shall be entitled to
receive stock, securities or assets with respect to or in exchange for Common
Stock, or, in the case of any consolidation, merger or mandatory share exchange
of the Corporation into any other company, then, as a condition of such
reorganization, reclassification or exchange, lawful and adequate provisions
shall be made whereby each holder of a share or shares of Series B Convertible
Preferred Stock shall thereupon have the right to
<PAGE>
receive, upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock immediately theretofore receivable upon
the conversion of such share or shares of Series B Convertible Preferred Stock,
such shares of stock, securities or assets as may be issued or payable with
respect to or in exchange for a number of outstanding shares of such Common
Stock equal to the number of shares of such Common Stock immediately theretofore
receivable upon such conversion had such reorganization, reclassification or
exchange not taken place, and in any such case appropriate provisions shall be
made with respect to the rights and interests of such holder to the end that the
provisions hereof (including without limitation provisions for adjustments of
the conversion rights and the fixing of the Conversion Price) shall thereafter
be applicable, as nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise of such conversion
rights. For clarity, it is the intention of the Corporation that the conversion
rights of the holders of the Series B Convertible Preferred Stock shall survive
any consolidation, merger or mandatory share exchange and that the conversion
rights granted hereunder shall be exercisable against any such successor
corporation, and shall not be terminated or fixed upon the consummation of any
such transaction.
(g) ADJUSTMENTS FOR SPLITS, COMBINATIONS, ETC. The Conversion Price
and the number of shares of Common Stock into which the Series B Convertible
Preferred Stock shall be convertible shall be adjusted for stock splits, stock
dividends, combinations or other similar events. No adjustment to the Conversion
Price will be made for dividends (other than stock dividends), if any, paid on
the Common Stock or for securities issued pursuant to exercise for fair value of
options, warrants or restricted stock.
6. MANDATORY CONVERSION.
(a) MANDATORY CONVERSION DATE. If on or after March 31, 2002 (such
date as selected by the Corporation being the "Mandatory Conversion Date"),
there remain issued and outstanding any shares of Series B Convertible Preferred
Stock, then the Corporation shall be entitled to require all (but not less than
all) holders of shares of Series B Convertible Preferred Stock then outstanding
to convert their shares of Series B Convertible Preferred Stock into shares of
Common Stock or, at the option of the Corporation, to buy out all such holders
in cash, at the then effective Conversion Price pursuant to Section 5(a). The
Corporation shall provide written notice (the "Mandatory Conversion Notice") to
the holders of shares of Series B Convertible Preferred Stock of such mandatory
conversion or such mandatory buy-out. The Mandatory Conversion Notice shall
include (i) the Stated Value of the shares of Series B Convertible Preferred
Stock to be converted or bought out, (ii) the Conversion Price at the Mandatory
Conversion Date (which may refer to a formula for determining such price), and
(iii) the number of shares of the Corporation's Common Stock to be issued (or
the amount of cash to be paid in the event of a buy-out) upon such mandatory
conversion or such mandatory buy-out at the then applicable Conversion Price.
Notwithstanding the foregoing, in no event shall the Corporation convert that
portion of the Series B Convertible Preferred Stock to the extent that the
issuance of Common Stock upon the conversion of such Series B Convertible
Preferred Stock, when combined with shares of Common Stock received upon other
conversions of Series B Convertible Preferred Stock by such holder and any other
holders of Series B Convertible Preferred Stock or upon exercise of the Stock
Purchase Warrants referred to in Section 5(a), would exceed 19.9% of the Common
Stock outstanding on the Original Issuance Date (unless
<PAGE>
stockholder approval has been obtained as described in Section 5(a), if
necessary) , or as to any individual holder, make such holder the beneficial
owner of 9.9% or more of the Company's then-outstanding Common Stock.
(b) SURRENDER OF CERTIFICATES. On or before the Mandatory Conversion
Date, each holder of shares of Series B Convertible Preferred Stock shall
surrender his or its certificate or certificates for all such shares to the
Corporation at the place designated in such Mandatory Conversion Notice (or an
affidavit of lost certificate in form and content reasonably satisfactory to the
Corporation), and shall thereafter receive certificates for the number of shares
of Common Stock to which such holder is entitled or, in the event of a buy-out
by the Corporation, the amount of cash such holder is entitled within three
business days. On the Mandatory Conversion Date, all rights with respect to the
Series B Convertible Preferred Stock so converted, including the rights, if any,
to receive notices and vote, will terminate. All certificates evidencing shares
of Series B Convertible Preferred Stock that are required to be surrendered for
conversion in accordance with the provisions hereof, from and after the
Mandatory Conversion Date, shall be deemed to have been retired and cancelled,
notwithstanding the failure of the holder or holders thereof to surrender such
certificates on or prior to such date. The Corporation may thereafter take such
appropriate action as may be necessary to reduce the authorized Series B
Convertible Preferred Stock accordingly.
7. REDEMPTION OF SERIES B CONVERTIBLE PREFERRED STOCK.
(a) RIGHT TO REDEEM SERIES B CONVERTIBLE PREFERRED STOCK. At any
time after the earlier of (i) the closing of a firm-commitment underwritten
public offering of its Common Stock or (ii) the date which is six months after
the Original Issuance Date, the Corporation may, in its sole discretion, but
shall not be obligated to, redeem, in whole but not in part, the then issued and
outstanding shares of Series B Convertible Preferred Stock, at a price equal to
130% of the Stated Value, plus all accrued but unpaid dividends, provided that a
registration statement permitting resale of any shares of Common Stock issuable
upon conversion by the holder is then effective. Each holder shall have five (5)
business days after receipt of the Redemption Notice to elect instead to convert
such shares pursuant to Section 5 hereof, notwithstanding that less than 90 days
may have elapsed from the Original Issuance Date or that the registration
statement is not then effective. Any such conversions made pursuant to this
Section 7 shall be made at the Conversion Price established pursuant to Section
5(a).
(b) NOTICE OF REDEMPTION. The Corporation shall provide each holder
of record of the Series B Convertible Preferred Stock being redeemed with
written notice of redemption (the "Redemption Notice") not less than 10 days
prior to any date stipulated by the Corporation for the redemption of the Series
B Convertible Preferred Stock (the "Redemption Date"). The Redemption Notice
shall contain (i) the Redemption Date, (ii) the number of shares of Series B
Convertible Preferred Stock to be redeemed from the holder to whom the
Redemption Notice is delivered, and (iii) instructions for surrender to the
Corporation of the certificate or certificates representing the shares of Series
B Convertible Preferred Stock to be redeemed.
(c) SURRENDER OF CERTIFICATES; PAYMENT OF REDEMPTION PRICE. On or
before the Redemption Date, each holder of the shares of Series B Convertible
Preferred Stock to be redeemed shall surrender the required certificate or
certificates representing such shares to the
<PAGE>
Corporation, in the manner and at the place designated in the Redemption Notice,
and upon payment to the holder of the Redemption Price, each such surrendered
certificate shall be cancelled and retired. If payment of such redemption price
is not made in full by the Redemption Date the Holder shall again have the right
to convert the Series B Convertible Preferred Stock as provided in Section 5
hereof, and the Company shall thereafter be precluded from exercising its rights
under this Section 7. If a certificate is surrendered and all the shares
evidenced thereby are not being redeemed, the Corporation shall issue new
certificates to be registered in the names of the person(s) whose name(s)
appear(s) as the owners on the respective surrendered certificates and deliver
such certificate to such person(s).
8. NOTICES. In case at any time:
(a) the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other pro rata distribution to the holders
of its Common Stock; or
(b) the Corporation shall offer for subscription PRO RATA to the
holders of its Common Stock any additional shares of stock of any class or other
rights; or
(c) there shall be any capital reorganization or reclassification of
the capital stock of the Corporation, or a consolidation or merger of the
Corporation with or into, or a sale of all or substantially all its assets to,
another entity or entities; or
(d) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then, in any one or more of said cases, the Corporation shall give, by first
class mail, postage prepaid, or by telex or facsimile or by recognized overnight
delivery service to non-U.S. residents, addressed to each holder of any shares
of Series B Convertible Preferred Stock at the address of such holder as shown
on the books of the Corporation, (i) at least twenty (20) business days' prior
written notice of the date on which the books of the Corporation shall close or
a record shall be taken for such dividend, distribution or subscription rights
or for determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up and (ii) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at least
twenty (20) business days' prior written notice of the date when the same shall
take place. Such notice in accordance with the foregoing clause (i) shall also
specify, in the case of any such dividend, distribution or subscription rights,
the date on which the holders of Common Stock shall be entitled thereto and (ii)
shall also specify the date on which the holders of Common Stock shall be
entitled to exchange their Common Stock for securities or other property
deliverable upon such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, as the case may be.
9. STOCK TO BE RESERVED. The Corporation, upon the effective date of this
Certificate of Designations, has a sufficient number of shares of Common Stock
available to reserve for
<PAGE>
issuance upon the conversion of all outstanding shares of Series B Convertible
Preferred Stock, assuming immediate conversion. The Corporation will at all
times reserve and keep available out of its authorized Common Stock, solely for
the purpose of issuance upon the conversion of Series B Convertible Preferred
Stock as herein provided, such number of shares of Common Stock as shall then be
issuable upon the conversion of all outstanding shares of Series B Convertible
Preferred. The Corporation covenants that all shares of Common Stock which shall
be so issued shall be duly and validly issued, fully paid and non-assessable.
The Corporation will take all such action as may be so taken without violation
of any applicable law or regulation, or of any requirement of any national
securities exchange upon which the Common Stock may be listed to have a
sufficient number of authorized but unissued shares of Common Stock to issue
upon conversion of the Series B Convertible Preferred Stock. The Corporation
will not take any action which results in any adjustment of the conversion
rights if the total number of shares of Common Stock issued and issuable after
such action upon conversion of the Series B Convertible Preferred Stock would
exceed the total number of shares of Common Stock then authorized by the
Corporation's Certificate of Incorporation, as amended.
10. NO REISSUANCE OF SERIES B CONVERTIBLE PREFERRED STOCK. Shares of
Series B Convertible Preferred Stock which are converted into shares of Common
Stock as provided herein shall not be reissued.
11. ISSUE TAX. The issuance of certificates for shares of Common Stock
upon conversion of Series B Convertible Preferred Stock shall be made without
charge to the holder for any United States issuance tax in respect thereof,
provided that the Corporation shall not be required to pay any tax which may be
payable in respect of any transfer involved in the issuance and delivery of any
certificate in a name other than that of the holder of the Series B Convertible
Preferred Stock which is being converted.
12. CLOSING OF BOOKS. The Corporation will at no time close its transfer
books against the transfer of any Series B Convertible Preferred Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Series B Convertible Preferred Stock in any manner which interferes with the
timely conversion of such Series B Convertible Preferred Stock, except as may
otherwise be required to comply with applicable securities laws.
13. DEFINITIONS. As used in this Certificate of Designations, the term
"Common Stock" shall mean and include the Corporation's authorized Common Stock,
$0.01 par value, as constituted on the date of filing of these terms of the
Series B Convertible Preferred Stock, and shall also include any capital stock
of any class of the Corporation thereafter authorized which shall neither be
limited to a fixed sum or percentage of par value in respect of the rights of
the holders thereof to participate in dividends nor entitled to a preference in
the distribution of assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; provided that the shares of Common
Stock receivable upon conversion of shares of Series B Convertible Preferred
Stock shall include only shares designated as Common Stock of the Corporation on
the date of filing of this instrument, or in case of any reorganization,
reclassification, or stock split of the outstanding shares thereof, the stock,
securities or assets
<PAGE>
provided for in Subparagraph 5(f) and (g). Any capitalized terms used in this
Certificate of Designations but not defined herein shall have the meanings set
forth in that certain Convertible Preferred Stock and Warrant Purchase Agreement
dated as of April 5, 1999 among the Corporation and the other persons signatory
thereto, a copy of which will be provided to any stockholder of the Corporation
upon request to the Secretary of the Corporation, without charge.
14. LOSS, THEFT, DESTRUCTION OF PREFERRED STOCK. Upon receipt of evidence
satisfactory to the Corporation of the loss, theft, destruction or mutilation of
certificates representing shares of Series B Convertible Preferred Stock and, in
the case of any such loss, theft or destruction, upon receipt of indemnity or
security reasonably satisfactory to the Corporation, or, in the case of any such
mutilation, upon surrender and cancellation of the Series B Convertible
Preferred Stock certificate, the Corporation shall make, issue and deliver, in
lieu of such lost, stolen, destroyed or mutilated certificates for Series B
Convertible Preferred Stock, new certificates for Series B Convertible Preferred
Stock of like tenor. The Series B Convertible Preferred Stock shall be held and
owned upon the express condition that the provisions of this Section 14 are
exclusive with respect to the replacement of mutilated, destroyed, lost or
stolen shares of Series B Preferred Stock and shall preclude any and all other
rights and remedies notwithstanding any law or statue existing or hereafter
enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without the surrender thereof.
15. WHO DEEMED ABSOLUTE OWNER. The Corporation may deem the person in
whose name the Series B Convertible Preferred Stock shall be registered upon the
registry books of the Corporation to be, and may treat it as, the absolute owner
of the Series B Convertible Preferred Stock for the purpose of conversion of the
Series B Convertible Preferred Stock and for all other purposes, and the
Corporation shall not be affected by any notice to the contrary. All such
payments and such conversion shall be valid and effectual to satisfy and
discharge the liability upon the Series B Convertible Preferred Stock to the
extent of the sum or sums so paid or the conversion so made.
16. REGISTER. The Corporation shall maintain a transfer agent, which may
be the transfer agent for the Common Stock or the Corporation itself, for the
registration of the Series B Convertible Preferred Stock. Upon any transfer of
the Series B Convertible Preferred Stock in accordance with the provisions
hereof, the Corporation shall register or cause the transfer agent to register
such transfer on the Series B Convertible Preferred Stock register.
17. WITHHOLDING. To the extent required by applicable law, the Corporation
may withhold amounts for or on account of any taxes imposed or levied by or on
behalf of any taxing authority in the United States having jurisdiction over the
Corporation from any payments made pursuant to the Series B Convertible
Preferred Stock.
18. HEADINGS. The headings of the Sections of this Certificate of
Designations are inserted for convenience only and do not constitute a part of
this Certificate of Designations.
<PAGE>
IN WITNESS WHEREOF, Anthony E. Papa, Chief Executive Officer of the
Corporation, under penalties of perjury, does hereby declare and certify that
this is the act and deed of the Corporation and the facts stated herein are true
and accordingly has signed this Certificate of Designations as of this 13th day
of April, 1999.
AvTEL COMMUNICATIONS, INC.
By: /S/ ANTHONY E. PAPA
------------------------
Anthony E. Papa,
Chief Executive Officer
<PAGE>
Exhibit 10.5
AVTEL COMMUNICATIONS, INC.
FIRST AMENDMENT
TO
NEW BEST CONNECTIONS, INC.
AMENDED AND RESTATED
1997 OPTION PLAN
(NON-QUALIFIED)
THIS FIRST AMENDMENT (the "Amendment") to the New Best Connections, Inc.
Amended and Restated 1997 Option Plan (the "Plan") was approved effective
January 1, 1999, by the Board of Directors (the "Board") of AvTel
Communications, Inc. ("AvTel"), a Delaware corporation which has succeeded to
and assumed the rights and obligations of New Best Connections, Inc. pursuant to
Section 8.12 of the Plan.
RECITALS
A. Section 10 of the Plan states that the Plan may be amended or
discontinued at any time or from time to time by the Board. So long as such
amendment does not impair the rights of any holder of an option that has become
exercisable under the terms of the Plan, such amendment does not require the
consent of any holder.
B. The Board desires to amend the Plan to provide certain additional
incentives with respect to certain products and participants.
AMENDMENT
NOW, THEREFORE, the Plan is amended as follows:
1. ADDITIONAL DEFINITIONS. The following terms will have the meanings set
forth below:
1.1 "Qualified Billings Average" will mean the average monthly Qualified
Billings of a participant during the period commencing October 1, 1998, and
ending December 31, 1998, excluding any bonus Qualified Billings.
1.2 "Special Qualifying Period" will mean the period commencing January 1,
1999, and ending September 30, 1999.
1.3 "SuperAchiever" will mean a participant who has earned Exercisable
Options equal to the full amount of his or her Initial Options at or after the
date of this Amendment.
<PAGE>
1.4 Other capitalized terms used herein and not defined will have the
respective meanings ascribed to them in the Plan.
2. INCLUSION OF MULTIPLE OF MATRIXINET-TM- IN CALCULATION OF QUALIFIED
BILLINGS. For the purposes of Section 6.2 of the Plan, a participant's
Qualified Billings for a Qualifying Period will include the actual monthly
billing of each customer properly subscribed by the participant for AvTel's
MatrixInet-TM- Internet access services multiplied by 200%.
3. SUPERACHIEVER COMPONENT.
3.1 DESIGNATION OF ADDITIONAL INITIAL OPTIONS. The Board may determine to
designate additional Initial Options with respect to one or more SuperAchievers
("Additional Initial Options"), up to the maximum number of Initial Options
fixed by Section 6.1 of the Plan. Any and all Additional Initial Options that
have not become Exercisable Options as a result of Qualified Billings during the
Special Qualifying Period will terminate as of the end of the Special Qualifying
Period.
3.2 CONVERSION TO EXERCISABLE OPTIONS. A SuperAchiever's Additional
Initial Options will become Exercisable Options in accordance with Section 6.2
of the Plan; provided, however, that for such purposes (i) only the
SuperAchiever's Qualified Billings in excess of his or her Qualified Billings
Average in each month will be included, (ii) all computations will use the
Special Qualifying Period, rather than the Qualifying Periods specified in
Section 6.2 of the Plan, and (iii) the respective conversion factors used will
be one-third of the values set forth in Table 6.2.2(b) of the Plan.
4. EXTRA COMPONENT.
4.1 ELIGIBLE PARTICIPANTS. Participants in the Plan who are not
SuperAchievers ("Extra participants") may be selected by the Board to
participate in a separate mechanism to accelerate the conversion of their
Initial Options to Exercisable Options. Extra participants will continue to earn
Exercisable Options in accordance with Section 6.2 of the Plan, as well as the
Exercisable Options contemplated by this Section.
4.2 CALCULATION OF EXTRA COMPONENT. If an Extra participant's Qualified
Billings in any month during the Special Qualifying Period exceed his or her
Qualified Billings Average, then an additional amount equal to the excess will
be treated as separate and additional Qualified Billings for the purposes of
Section 6.2 of the Plan, resulting in additional Initial Options becoming
Exercisable Options.
5. EXAMPLES. Specific examples illustrating the amendments set forth in
Sections 2, 3 and 4 are attached hereto as exhibits to aid in the interpretation
of this Amendment.
6. EFFECTIVE DATE. This Amendment will be effective as of January 1, 1999.
<PAGE>
7. CONFIRMATION. Except as modified hereby, the provisions of the Plan will
remain unchanged and in full force and effect. All the provisions of the Plan
will apply to this Amendment.
<PAGE>
Exhibit 10.12
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "Agreement"), executed as of _March 1, 1999 (the
"Effective Date"), is between MATRIX Telecom, Inc. a Texas corporation
("Licensee"), and Electronic Data Systems Corporation, a Delaware corporation
("EDS").
ARTICLE I - GRANT
1.1 GRANT OF LICENSE TO THE LICENSED PROGRAMS. Subject to the terms and
conditions set forth in this Agreement, EDS grants to Licensee a
non-exclusive, non-transferable license:
(a) to use as provided in this ARTICLE I on the equipment
designated by type, model and serial number in SCHEDULE 1.1 (the
"Designated Equipment") and at the location designated in SCHEDULE
1.1 (the "Designated Location") one copy, in object code form, of
EDS' proprietary computer software programs more specifically
described in SCHEDULE 1.1 (such programs, including all new releases
thereof and modifications thereto which are provided to Licensee
under this Agreement, are referred to herein as the "Licensed
Programs"); and
(b) to use as provided in this ARTICLE I the documentation
relating to the Licensed Programs, including user manuals, narrative
descriptions, output reports, training materials and technical
manuals setting forth specifications for the Licensed Programs,
including all new releases thereof and modifications made thereto
which are provided to Licensee under this Agreement (collectively,
the "Documentation"). Such right of use will include Licensee's
reproduction of that number of copies of the Documentation
reasonably required in Licensee's operations.
1.2 DELIVERY AND TERM. EDS will deliver to Licensee the Licensed Programs and
the Documentation at the Designated Location on or before June 1, 1999 or
such other date agreed to by the parties in writing. The term of this
License will begin on the earlier of (a) the date EDS completes
installation of the Licensed Programs and furnishes Licensee written
notification of such completion, or (b) the date the Licensed Programs
first processes Licensee's Billable Messages to Licensee's reasonable
satisfaction (the "Installation Date"), and will continue for sixty (60)
months (the "License Term") unless earlier terminated pursuant to Article
VII. For purposes of this Agreement, a "Billable Message" means records of
those mutually agreed upon and legally permitted (i) telephone calls
originated by end-users through Licensee, or (ii) other services provided
by Licensee to Licensee's end-users. The original License Term will
automatically extend for successive one-year periods thereafter unless
either party notifies the other at least ninety days prior to the end of
the
<PAGE>
original License Term or prior to the end of any such one-year extension
period, as the case may be, that this Agreement will not be so extended.
1.3 OWNERSHIP. For purposes of Section 117 of the Copyright Act of 1976, as
amended, and for all other purposes, EDS will be considered the owner of
the Licensed Programs, the Documentation and any copies thereof and of all
copyright, trade secret, patent and other intellectual or industrial
property rights contained or evidenced therein. Physical copies of the
Licensed Programs (in diskette, tape or other form provided by EDS) and
the Documentation will remain the property of EDS, and all such copies
will be deemed to be on loan to Licensee during the License Term.
1.4 RESTRICTIONS ON USE. Licensee will comply with the provisions set forth in
this SECTION 1.4 during the License Term.
(a) The Licensed Programs and the Documentation will be utilized only
for the internal data processing requirements of Licensee and only
as specified in the Documentation.
(b) The Licensed Programs and the Documentation will be utilized (i)
only by Licensee employees and/or Licensee agents who are directly
involved in the use and operation of the Licensed Programs and who
are bound by written agreement to comply with the confidentiality
obligations set forth in this Agreement, and (ii) only on the
Designated Equipment at the Designated Location. EDS reserves the
right to prohibit such utilization by specific individuals to whom
EDS has reasonable objection.
(c) With thirty days prior written notification to EDS, Licensee may
change the Designated Location or the composition or configuration
of the Designated Equipment (including the manufacturer,
description, model number or serial number of the Designated
Equipment) during the License Term.
(d) Licensee may transfer its use of the Licensed Programs to a backup
system on a temporary basis for disaster recovery purposes. ARTICLES
II and III will not apply to any such temporary backup system usage
of the Licensed Programs. If the usage of the backup system must
exceed a reasonable temporary period, the backup system will be
considered the new Designated Equipment and the location of the
backup system will be considered the new Designated Location, and
Licensee will give EDS written notification thereof.
(e) Licensee may not cause or permit disclosure, display, loan,
publication, transfer of possession (whether by sale, exchange,
gift, operation of law or otherwise), sublicensing or other
dissemination of the Licensed Programs or the Documentation, in
whole or in part, to any third party without the prior written
consent of EDS.
<PAGE>
(f) Licensee will not, and will not permit any other person under
Licensee's control to, disassemble, decompile, reverse engineer or
otherwise recreate or modify the Licensed Programs. Licensee will
not, and will not permit any other person under Licensee's control
to, copy or reproduce the Licensed Programs or the Documentation,
except as may be necessary for backup and disaster recovery purposes
as specified in SECTION 1.4(D).
(g) Licensee will not alter or remove any copyright, trade secret,
patent, proprietary and/or other legal notices contained on or in
any EDS provided copies of the Licensed Programs or the
Documentation. Licensee will include on or in all copies authorized
hereunder of the Licensed Programs and the Documentation
designation(s) that EDS may reasonably require to indicate that such
material is the proprietary property of EDS.
(h) The Licensed Programs and the Documentation are being disclosed by
EDS to Licensee in confidence. Licensee will implement and maintain
precautions, no less rigorous than those Licensee uses to protect
its own confidential information, to safeguard the Licensed Programs
and the Documentation so that no unauthorized persons have access to
the Licensed Programs or the Documentation and that no persons
authorized to have such access will take any action which would
violate the confidentiality obligations set forth in this Agreement
if such action were taken by Licensee. Licensee will promptly report
to EDS any violation of such confidentiality obligations. Licensee
will, at its expense, take such steps as EDS may reasonably request
to remedy any such violation, including retrieving any portion of
the Licensed Programs or the Documentation that is being used or
otherwise possessed in breach of this Agreement, and will pay or
reimburse EDS for all reasonable expenses that EDS incurs which are
related to the remedy of any such violation.
(i) In using or possessing the Licensed Programs and the Documentation,
Licensee will not, by any action or inaction, violate laws or
regulations promulgated by governmental or quasi-governmental
authorities or cause EDS or its affiliates to violate any such laws
or regulations.
1.5 INJUNCTIVE RELIEF. Licensee acknowledges and agrees that the Licensed
Programs and the Documentation are the valuable property and trade secrets
of EDS, that any violation by Licensee of the confidentiality obligations
set forth in this Agreement would cause EDS irreparable injury for which
they would have no adequate remedy at law, and that, in addition to any
other remedies which EDS may have, it will be entitled to preliminary and
other injunctive relief against any such violation.
1.6 VERIFICATION. EDS may conduct, at EDS' expense, an investigation to
determine Licensee's compliance with the terms of this Agreement. No more
often than twice each year during the License Term, with reasonable notice
to Licensee, EDS or its designated representative
<PAGE>
may have access to the Designated Location, the Designated Equipment and
any records (in whatever form) related to this Agreement and Licensee's
use of the Licensed Programs and the Documentation. Licensee will
cooperate with EDS in any such investigation and, in particular, will take
all commercially reasonable actions to assist EDS in accurately
determining Licensee's compliance with the terms of this Agreement.
ARTICLE II - INSTALLATION, TRAINING, MAINTENANCE AND ADDITIONAL
SERVICES
2.1 INSTALLATION ASSISTANCE. EDS will provide to Licensee installation
assistance at EDS' then current time and material rates as Additional
Services in accordance with SECTION 2.4; provided, however, that EDS will
be relieved of its obligation to provide installation assistance unless
and until Licensee has fulfilled its obligation to acquire and install
required hardware and software pursuant to SECTIONS 5.2 and 5.3. EDS
estimates such assistance to take 1,600 hours.
2.2 TRAINING. EDS will provide to Licensee training with respect to the use
and operation of the Licensed Programs at EDS' then current time and
material rates as Additional Services in accordance with SECTION 2.4. EDS
estimates such training to take 40 hours.
2.3 MAINTENANCE.
(a) MAINTENANCE SERVICES. During the License Term, EDS will promptly
repair or replace the then current release of the Licensed Programs
if it is not performing in accordance with applicable Documentation
in all material respects upon receiving notice of the nonperformance
from Licensee as described below. The methods and techniques for
resolving nonperformance will be at the reasonable discretion of
EDS. If the Designated Equipment can be accessed remotely through
dial-up capability or otherwise, Licensee will make such remote
access capability available to EDS for use in performing maintenance
services. EDS will have no obligation to repair or replace the
Licensed Programs if the nonperformance is caused by computer
equipment malfunction, Licensee's negligence or fault, Licensee's
failure to follow instructions as set forth in the applicable
Documentation, improper or unauthorized use of the Licensed
Programs, hardware changes, changes in any software not provided by
EDS or any other cause beyond the control of EDS; provided, however,
that EDS will provide Licensee with assistance in resolving any
nonperformance resulting from such causes as Additional Services
pursuant to SECTION 2.4. As part of the maintenance to be provided
by EDS, EDS also will support, in the manner described in this
SECTION 2.3, one major release (such major releases to be made no
more frequently than semi-annually) of the Licensed Programs
previous to the then current major release of the Licensed Programs
in anticipation of Licensee eventually using the then current
release. Upgrades to a release will always be to the most recent
release. EDS may provide maintenance
<PAGE>
services for releases of the Licensed Programs older than those
described in the preceding sentence in accordance with SECTION
2.4 hereof, however Licensee will continue to be subject to the
maintenance service fees specified in SECTION 4.2.
(b) NOTICE; REMEDY. To obtain the maintenance services described above,
Licensee must provide EDS with the following: (i) notice of the
operating problem; (ii) a detailed description of the failure to
perform in accordance with the applicable Documentation in all
material respects; (iii) a detailed description of the operating
conditions, including the specific hardware/software configuration,
under which such failure to perform occurred; and (iv), if
applicable, a representative sample of inputs and outputs for
replicating and analyzing such failure to perform. If, after using
commercially reasonable efforts to repair or replace the then
current release of the Licensed Programs so that it performs in
accordance with the Documentation in all material respects, EDS is
unable to make such repairs or replacement, Licensee's sole remedy
will be the refund of the maintenance service fees paid to EDS by
Licensee for the twelve months immediately preceding EDS'
determination that it is unable to so repair or replace, and this
Agreement will terminate either, at Licensee's discretion, (i) in
its entirety, or (ii) as it pertains to the nonoperable module(s)
with an appropriate reduction in maintenance service fees, as
applicable. Such choice by Licensee will be made within sixty (60)
days of the determination that EDS is unable to so repair or
replace.
(c) NEW RELEASES. From time to time, EDS may, in its sole discretion,
make updates, improvements or changes to the Licensed Programs in
separate releases to the Licensed Programs which are designed to
enhance the functionality of the Licensed Programs; provided,
however, that EDS has no obligation to make any such updates,
improvements or changes. During the License Term and at no
additional charge, EDS will make all new releases available to
Licensee which are generally made available by EDS at no additional
charge to other licensees of the Licensed Programs. During the
License Term, any data conversions or site specific code developed
by EDS for Licensee that require retrofitting to any new releases to
the Licensed Programs will be provided by EDS as Additional Services
pursuant to SECTION 2.4.
2.4 ADDITIONAL SERVICES. Licensee may from time to time request that EDS
provide support or services which are beyond the scope or amount of
support or services required of EDS under this Agreement ("Additional
Services"). EDS will provide to Licensee such Additional Services for
which the parties have reached a written agreement regarding (a) the
nature and scope of the Additional Services, (b) the time period during
which EDS will provide the Additional Services, and (c) the basis upon
which EDS will be compensated therefor based upon commercially reasonable
rates. Any developments, improvements, modifications, additions or
enhancements made by or for EDS to the Licensed Programs will be and will
remain solely EDS' property. New software developed or created by EDS
<PAGE>
pursuant to this Agreement will be and will remain solely EDS' property
unless the parties otherwise agree in writing prior to such development or
creation being undertaken.
ARTICLE III - WARRANTY
3.1 RIGHTS IN LICENSED PROGRAMS. EDS warrants that it has all right, title,
ownership interest, marketing and/or sublicensing rights necessary to
grant the rights and license to Licensee set forth herein.
3.2 NONPERFORMANCE OF LICENSED PROGRAMS. EDS warrants that on the Installation
Date the Licensed Programs will be capable of performing in accordance
with the Documentation in all material respects. EDS will resolve any
failure of the Licensed Programs to perform in compliance with the
Documentation in all material respects in accordance with the terms and
conditions set forth in SECTION 2.3.
3.3 YEAR 2000. EDS represents that, when installed, the Licensed Programs will
be Year 2000 Compliant and that the Maintenance Services as specified in
SECTION 2.3 will include any updates, modifications or enhancements
necessary so that the Licensed Programs will continue to be Year 2000
Compliant. For purposes of this Agreement, "Year 2000 Compliant" means
that the Licensed Programs (i) will operate and produce data on and after
January 1, 2000 (including taking into effect that such year is a leap
year), accurately and without delay, interruption or error relating to the
fact that the time at which and the date on which the Licensed Programs is
operating is on or after 12:00 a.m. on January 1, 2000 (including taking
into effect that such year is a leap year), or (ii) will accept,
calculate, process, maintain, write and output, accurately and without
delay, interruption or error, all times or dates, or both, whether before,
on or after 12:00 a.m. on January 1, 2000 (including taking into effect
that such year is a leap year), and any time periods determined or to be
determined based on any such times or dates, or both. EDS will not be
responsible or penalized for any adverse impact on Licensee, services
performed hereunder or any service levels resulting from any software,
systems, hardware and related equipment, data, interfaces or processes of
Licensee or any third party not being Year 2000 compliant or from any
inaccuracies, delays, interruptions or errors as a result of receiving
data in two digit year date or other formats that are not Year 2000
Compliant from other software, systems, hardware and related equipment,
interfaces or processes or from third parties.
3.4 DISCLAIMER. EDS does not warrant that the functions contained in the
Licensed Programs will meet Licensee's requirements or, except as
otherwise specified in this ARTICLE III, that the operation of the
Licensed Programs will be uninterrupted or error free. Further, EDS will
have no responsibility with respect to the accuracy of Licensee's data
files. The remedy of Licensee under SECTION 2.3 is exclusive, and EDS'
liability for all matters relating to this ARTICLE III will be limited as
provided herein. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS ARTICLE
III, EDS MAKES NO REPRESENTATIONS OR WARRANTIES, EXPRESS OR IMPLIED, TO
LICENSEE OR TO ANY OTHER
<PAGE>
PERSON, INCLUDING ANY WARRANTIES REGARDING TITLE, THE MERCHANTABILITY,
SUITABILITY, ORIGINALITY, FITNESS FOR A PARTICULAR PURPOSE OR OTHERWISE
(IRRESPECTIVE OF ANY PREVIOUS COURSE OF DEALINGS BETWEEN THE PARTIES OR
CUSTOM OR USAGE OF TRADE) OF ANY SERVICES, SOFTWARE OR MATERIALS PROVIDED
UNDER THIS AGREEMENT.
ARTICLE IV - PAYMENTS TO EDS
4.1 LICENSE FEE. There will be no license fee payable by Licensee to EDS
hereunder.
4.2 MAINTENANCE SERVICE FEE: For the maintenance services provided pursuant to
Section 2.3, Licensee will pay to EDS monthly maintenance fees as follows:
from the Installation Date through December 31, 1999, $15,000.00; for
2000, $18,000.00; for 2001, $20,700.00; for 2002, $23,805.00; after 2002
EDS may increase such monthly maintenance fee on an annual basis, but in
an incremental amount not to exceed fifteen percent (15%). The foregoing
notwithstanding, in the event that Licensee's monthly processing of
Billable Messages exceed 150,000,000, EDS reserves the right to
renegotiate subsequent annual maintenance fees.
4.3 OUT-OF-POCKET EXPENSES. Licensee will pay, or reimburse EDS for, all
actual out-of-pocket costs and expenses incurred by EDS in connection with
EDS' performance of its obligations under this Agreement with the prior
written approval of Licensee, including the travel, meals and lodging
expenses incurred by EDS personnel performing the installation assistance,
training, maintenance services and any Additional Services hereunder.
4.4 TIME FOR PAYMENT. Except as otherwise expressly provided herein, any
amount due EDS pursuant to this Agreement will be due and payable by
Licensee within thirty days after the date of an invoice from EDS. Any
amount owing to EDS pursuant to this Agreement that is not paid when due
and payable will thereafter bear interest until paid at a rate of interest
equal to four percent per annum more than the prime rate established from
time to time by Citibank, N.A. in New York, New York; provided, however,
that in no event will such interest rate exceed the maximum rate of
interest allowed by applicable law.
4.5 TAXES. There will be added to any charges under this Agreement, or
separately billed, and Licensee will either pay to EDS, or reimburse EDS
for the payment of, any taxes, assessments, duties, permits, fees and
other charges of any kind, however designated, assessed, charged or
levied, with respect to or measured by (a) charges under this Agreement,
(b) this Agreement, or (c) the services, software, equipment, materials or
other property (tangible or intangible), or the use thereof or the
resources used therefor, that are provided under this Agreement. Taxes
payable under this Agreement include state and local sales taxes, use
taxes, property taxes, telecommunications taxes, privilege taxes, excise
taxes (including federal excise taxes), value added taxes and any taxes or
amounts in lieu thereof paid or payable by EDS in respect of the
foregoing, exclusive however, of taxes based on
<PAGE>
the net income of EDS. EDS and Licensee will cooperate to minimize and
properly calculate any applicable taxes, and in connection therewith,
Licensee will provide EDS any resale certificates, information regarding
out-of-state use of materials, services or sales or other exemption
certificates or information reasonably requested by EDS. EDS will have
sole control over the response to and settlement of any claims for taxes
that may be asserted by applicable taxing authorities. Licensee will be
entitled to any refunds or rebates of taxes granted to the extent such
refunds or rebates are of taxes that were paid by Licensee.
<PAGE>
ARTICLE V - OTHER LICENSEE OBLIGATIONS
5.1 SELECTION, USE AND RESULTS. Licensee accepts responsibility, financial and
otherwise, for (i) the selection of the Licensed Programs to achieve the
desired results, (ii) the installation of the Licensed Programs (with
assistance from EDS as provided in SECTION 2.1), (iii) the use of the
Licensed Programs, and (iv) the results obtained from the Licensed
Programs. The foregoing will in no way limit warranties made by EDS in
ARTICLE III.
5.2 Q-TEL 9000 SOFTWARE. Licensee will, at its expense, (i) acquire a license
from United Communication Group for the Q-TEL 9000 software, (ii) install
or cause to be installed such software prior to delivery of the Licensed
Programs , and (iii) thereafter arrange for the maintenance of such
software during the License Term or any extensions thereof.
5.3 OPERATING ENVIRONMENT. Licensee will, at its expense, (i) acquire hardware
and associated operating system software specified by EDS to support the
Licensed Programs, (ii) install or cause to be installed such hardware and
software prior to the delivery of the Licensed Programs, and (iii)
thereafter arrange for any required maintenance for such hardware and
software during the License Term or any extensions thereof.
5.4 LICENSEE REPRESENTATIVE. Licensee will designate an officer or employee of
Licensee (the "Licensee Representative") who will be authorized to act
generally as the primary point of contact for EDS in dealing with Licensee
with respect to the Licensed Programs and any services performed
hereunder. If Licensee fails to expressly designate a Licensee
Representative, the principal executive officer of Licensee will be the
Licensee Representative. The Licensee Representative will be responsible
for directing, insofar as EDS is concerned, all activities of Licensee
affecting the provision by EDS of the Licensed Programs and related
services, including working with EDS to establish Licensee's priorities
for any services to be performed hereunder.
5.5 RELIANCE ON INSTRUCTIONS. In performing its obligations under this
Agreement, EDS will be entitled to rely upon any routine instructions,
authorizations, approvals or other information provided to EDS by the
Licensee Representative or, as to areas of competency specifically
identified by the Licensee Representative, by any other Licensee personnel
identified by the Licensee Representative, from time to time, as having
authority to provide the same on behalf of Licensee in such person's area
of competency. Unless EDS knew of any error, incorrectness or inaccuracy
in such instructions, authorizations, approvals or other information, EDS
will incur no liability or responsibility of any kind in relying on or
complying with any such instructions, authorizations, approvals or other
information.
5.6 PRIORITIES AND COOPERATION. Licensee will cooperate with EDS in good faith
in the performance of Licensee's activities contemplated by this Agreement
through, but not limited to, (a) establishing priorities for the services
to be provided to Licensee, and (b) making available, as reasonably
requested by EDS, such information, facilities, management
<PAGE>
decisions, approvals, authorizations and acceptances so that EDS'
provision of the Licensed Programs and related services may be
accomplished in a proper, timely and efficient manner.
5.7 FACILITIES. Licensee will, at no cost to EDS, provide EDS personnel or
agents who are performing implementation, training or Additional Services
on-site at Licensee's facilities the following items or services to the
extent reasonably required for EDS to effectively provide such services or
Additional Services hereunder: space, office furnishings, janitorial
service, parking, computer hardware, computer software, voice
communication services, data communication services, utilities (including
heat and air conditioning), office-related equipment (such as telephones,
file cabinets and desks), supplies, duplicating and facsimile equipment,
training facilities and premises security services.
5.8 OTHER FINANCIAL OBLIGATIONS. In addition to any other financial
responsibilities of Licensee contemplated by this Agreement, Licensee will
pay all costs and expenses related to each item that is to be provided by
Licensee pursuant to this Agreement and for which the financial
responsibility has not been expressly assigned to EDS.
5.9 LICENSEE SPECIFIC SOFTWARE MODIFICATIONS. The parties acknowledge and
agree that Licensee will be responsible for (i) any retrofitting,
recoding, reengineering and ongoing maintenance of any and all Licensee
specific software modifications existing as of the Effective Date of this
Agreement as well as any such modifications made by Licensee subsequent to
the Effective Date of this Agreement, and (ii) any and all modifications
required to make such Licensee specific software modifications Year 2000
Compliant. Such modifications and retrofitting, recoding and reengineering
thereof will be done in such a way so as not to affect or impact the
source code or operations of the Licensed Programs.
ARTICLE VI - ARBITRATION
6.1 DISPUTE ESCALATION. In the event of any dispute, controversy or claim of
any kind or nature arising under or in connection with this Agreement
(including disputes as to the creation, validity, interpretation, breach
or termination of this Agreement) (a "Dispute"), then upon the written
request of either party, each of the parties will appoint a designated
senior business executive whose task it will be to meet for the purpose of
endeavoring to resolve the Dispute. The designated executives will meet as
often as the parties reasonably deem necessary in order to gather and
furnish to the other all information with respect to the matter in issue
which the parties believe to be appropriate and germane in connection with
its resolution. Such executives will discuss the Dispute and will
negotiate in good faith in an effort to resolve the Dispute without the
necessity of any formal proceeding relating thereto. The specific format
for such discussions will be left to the discretion of the designated
executives but may include the preparation of agreed upon statements of
fact or written statements of position furnished to the other party. No
formal proceedings for the resolution of the Dispute under SECTION 6.2 may
be commenced until the earlier to occur of (a) a good
<PAGE>
faith conclusion by the designated executives that amicable resolution
through continued negotiation of the matter in issue does not appear
likely, or (b) the fifteenth day after the initial request to negotiate
the Dispute.
6.2 ARBITRATION. Any Dispute that the parties are unable to resolve through
escalation pursuant to SECTION 6.1 will be submitted to arbitration in
accordance with the following procedures:
(a) DEMAND FOR ARBITRATION; LOCATION. Either party may demand
arbitration by giving the party written notice to such effect, which
notice will describe, in reasonable detail, the facts and legal
grounds forming the basis for the filing party's request for relief
and will include a statement of the total amount of damages claimed,
if any, and any other remedy sought by that party. The arbitration
will be held before one neutral arbitrator in Plano, Texas if the
proceedings are initiated by Licensee and in Fort Worth, Texas if
the proceedings are initiated by EDS.
(b) IDENTIFICATION OF ARBITRATOR. Within thirty days after the other
party's receipt of such demand, the parties will mutually determine
who the arbitrator will be. If the parties are unable to agree on
the arbitrator within that time period, the arbitrator will be
selected by the American Arbitration Association ("AAA"). In any
event, the arbitrator will have a background in, and knowledge of,
the information technology services industry and will be an
appropriate person based on the nature of the Dispute. If a person
with such industry experience is not available, the arbitrator will
be chosen from the large and complex case panel or, if an
appropriate person is not available from such panel, the retired
federal judges pool.
(c) CONDUCT OF ARBITRATION. The arbitration will be governed by the
Commercial Arbitration Rules of the AAA, except as expressly
provided in this SECTION 6.2 However, the arbitration will be
administered by any organization mutually agreed to in writing by
the parties. If the parties are unable to agree on the organization
to administer the arbitration, it will be administered by the AAA.
Pending the arbitrator's determination of the merits of the Dispute,
either party may apply to any court of competent jurisdiction to
seek injunctive or other extraordinary relief.
(d) SCOPE OF DISCOVERY. Discovery will be limited to the request for and
production of documents, depositions and interrogatories.
Interrogatories will be allowed only as follows: a party may request
the other party to identify by name, last known address and
telephone number (i) all persons having knowledge of facts relevant
to the Dispute and a brief description of that person's knowledge,
(ii) any experts who may be called as an expert witness, the subject
matter about which the expert is expected to testify, the mental
impressions and opinions held by the expert and the facts known by
the expert (regardless of when the factual information was acquired)
which relate to or form the basis for the mental impressions and
opinions held by the expert, and (iii) any experts who have been
used for consultation, but who are not expected to be called as an
expert witness, if such consulting expert's opinions or
<PAGE>
impressions have been reviewed by an expert witness. All discovery
will be guided by the Federal Rules of Civil Procedure. All issues
concerning discovery upon which the parties cannot agree will be
submitted to the arbitrator for determination.
(e) AUTHORITY OF ARBITRATOR. In rendering an award, the arbitrator will
determine the rights and obligations of the parties according to the
substantive and procedural laws of the State of Texas. The
arbitrator will not have authority to award damages in excess of the
amount or other than the types allowed by SECTION 8.2 and may not,
in any event, make any ruling, finding or award that does not
conform to the terms and conditions of this Agreement.
(f) JOINDER OF PARTIES. Each of EDS and Licensee agree that it will use
commercially reasonable efforts to join (and will allow the other
party to join) any third party that the parties have agreed is
indispensable to the arbitration. If any such third party does not
agree to be joined, the arbitration will proceed nonetheless.
(g) AWARD. The decision of, and award rendered by, the arbitrator will
be final and binding on the parties. Upon the request of a party,
the arbitrator's award will include written findings of fact and
conclusions of law. Judgment on the award may be entered in and
enforced by any court of competent jurisdiction. Each party will
bear its own costs and expenses (including filing fees) with respect
to the arbitration, including one-half of the fees and expenses of
the arbitrator.
6.3 EXCLUSIVE REMEDY. Other than those matters involving injunctive or other
extraordinary relief or any action necessary to enforce the award of the
arbitrator, the parties agree that the provisions of this ARTICLE VI are a
complete defense to any suit, action or other proceeding instituted in any
court or before any administrative tribunal with respect to any Dispute or
the provision of the Licensed Programs or related services by EDS. Nothing
in this ARTICLE VI prevents the parties from exercising their rights to
terminate this Agreement in accordance with ARTICLE VII.
6.4 CONTINUED PERFORMANCE. Unless (a) EDS has commenced a proceeding or has
presented a claim pursuant to this ARTICLE VI for nonpayment by Licensee
of amounts due under this Agreement, or (b) this Agreement has been
terminated in accordance with ARTICLE VII, EDS will continue to provide
services during any mediation or arbitration proceedings commenced
pursuant to this ARTICLE VI and Licensee will continue to perform its
obligations (including the making of payments to EDS) in accordance with
this Agreement.
ARTICLE VII - TERMINATION
7.1 TERMINATION FOR CAUSE. Subject to SECTION 9.12, if either party materially
defaults in the performance of any of its duties or obligations under this
Agreement (excluding a default in payments to be made to EDS, which will
be governed by SECTION 7.2), which default is not substantially cured
within fifteen days after written notice is given to the defaulting party
<PAGE>
specifying the default, or, with respect to those defaults that cannot
reasonably be cured within fifteen days, if the defaulting party fails to
proceed within fifteen days to commence curing said default and thereafter
to proceed with all reasonable diligence substantially to cure the same,
then the non-defaulting party may, by giving written notice thereof to the
defaulting party, terminate this Agreement as of the date of receipt by
the defaulting party of such notice or as of a future date specified in
such notice of termination.
7.2 TERMINATION FOR NONPAYMENT. If Licensee defaults in the payment when due
of any amount due to EDS pursuant to this Agreement and does not cure such
default within fifteen days after being given written notice of such
default, then EDS may, by giving written notice thereof to Licensee,
terminate this Agreement as of the date of receipt by Licensee of such
notice or as of a future date specified in such notice of termination.
7.3 TERMINATION FOR BANKRUPTCY AND RELATED EVENTS. Subject to Title 11, United
States Code, if either party becomes or is declared insolvent or bankrupt,
is the subject of any proceedings relating to its liquidation, insolvency
or for the appointment of a receiver or similar officer for it, makes an
assignment for the benefit of all or substantially all of its creditors or
enters into an agreement for the composition, extension or readjustment of
all or substantially of its obligations, then the other party may, by
giving written notice thereof to such party, terminate this Agreement as
of a date specified in such notice of termination.
7.4 TERMINATION FOR REGULATORY EVENT. Either party may terminate this
Agreement if any statute, rule, regulation, interpretation, judgment,
order or injunction will have been enacted, enforced, promulgated,
amended, issued or deemed applicable to (a) either party or any of its
affiliates or (b) this Agreement or the transactions contemplated by this
Agreement, by any Governmental Authority that renders illegal, or
materially inhibits the performance of this Agreement by EDS. To terminate
this Agreement pursuant to this SECTION 7.4, the party seeking such
termination will give written notice thereof to the other party at least
thirty days prior to the date on which such party desires to terminate
this Agreement.
7.5 Termination by Licensee Without Cause. At any time after the third
anniversary of the Installation Date, Licensee may terminate this
Agreement for any reason or no reason upon (i) ninety days prior written
notice to EDS, and (ii) payment of fifty percent (50%) of the maintenance
fees that would have been payable to EDS pursuant to Section 4.2 during
the twelve month period immediately following the effective date of such
termination.
7.6 RIGHTS UPON TERMINATION. Upon expiration or termination of the License
Term for any reason, then, in addition to any other rights which either
party may have, Licensee will promptly return to EDS all copies of the
Licensed Programs and the Documentation in Licensee's possession and
completely erase the Licensed Programs and all elements thereof from the
Designated Equipment and any other Licensee computer system, and upon EDS'
request, will execute and deliver to EDS a written certification that
Licensee has complied with the provisions of this SECTION 7.6 and no
longer retains any material relating to the Licensed Programs or the
Documentation. In addition, Licensee will pay EDS for all
<PAGE>
services provided and expenses incurred through the date of such
expiration or termination. Upon expiration or termination of this
Agreement, Licensee will retain all Licensee's data. The expiration or
termination of the License Term for any reason will not release either
party from any liabilities or obligations set forth herein which (a) the
parties have expressly agreed will survive any such expiration or
termination, or (b) remain to be performed or by their nature would be
intended to be applicable following any such expiration or termination.
Should Licensee require access to the Licensed Programs post termination,
EDS agrees to provide such access in good faith upon terms consistent with
the terms of this Agreement; provided, however, that such commitment by
EDS to provide such post termination access will is conditioned upon EDS'
commercially reasonable capability to do so.
ARTICLE VIII - INDEMNIFICATION, REMEDIES AND LIABILITY
8.1 INDEMNITIES.
(a) CLAIMS RELATING TO PERSONAL INJURY AND PROPERTY DAMAGE.
(i) GENERAL. EDS and Licensee each will be responsible for any and
all claims, actions, damages, liabilities, costs and expenses,
including reasonable attorneys' fees and expenses
(collectively, "Losses"), to their respective tangible
personal or real property (whether owned or leased), and each
party agrees to look only to its own insuring arrangements (if
any) with respect to such Losses. EDS and Licensee each will
be responsible for Losses for the death of or personal injury
to any person (including any employee of either party) and
Losses for damages to any third party's tangible personal or
real property (whether owned or leased), in accordance with
the law of the jurisdiction in which such Loss is alleged to
have occurred. Subject to SECTIONS 8.1(D) and 8.2, each party
will indemnify and defend the other party and hold the other
party harmless from any and all Losses arising out of, under
or in connection with claims for which the indemnitor is
responsible under the preceding sentence.
(ii) WAIVER OF SUBROGATION. EDS and Licensee waive all rights to
recover against each other for any Losses to their respective
tangible personal property (whether owned or leased) from any
cause covered by insurance maintained by each of them,
including their respective deductibles or self-insured
retentions. EDS and Licensee will cause their respective
insurers to issue appropriate waivers of subrogation rights
endorsements to all property insurance policies maintained by
each party. Each party will give the other written notice if a
waiver of subrogation is unobtainable or obtainable only at
additional expense. If the party receiving such notice agrees
to reimburse the other party for such additional expense, the
other party will obtain such
<PAGE>
waiver of subrogation. If a waiver is unobtainable or if a
party elects not to pay the additional expense of a waiver,
then neither party nor their insurers will waive such
subrogation rights.
(b) INFRINGEMENT CLAIMS.
(i) GENERAL. Subject to SECTIONS 8.1(D) and 8.2 and the
limitations set forth below in this SECTION 8.1(B), EDS and
Licensee each agree to defend the other party against any
action to the extent that such action is based upon a claim
that the software (other than third party software) or
confidential information provided by the indemnitor, or any
part thereof, (i) infringes a copyright perfected under United
States statute, (ii) infringes a patent granted under United
States law, or (iii) constitutes an unlawful disclosure, use
or misappropriation of another party's trade secret. The
indemnitor will bear the expense of such defense and pay any
damages and attorneys' fees that are attributable to such
claim finally awarded by a court of competent jurisdiction.
(ii) EXCLUSIONS. Neither EDS nor Licensee will be liable to the
other for claims of indirect or contributory infringement. In
particular, the indemnitor will have no liability to the
indemnitee hereunder if any claim of infringement is based
upon the use of software provided by the indemnitor hereunder
in a manner for which the software was not designed. Also, the
indemnitor will have no liability if the indemnitee modifies
any software provided by the indemnitor hereunder and such
infringement would not have occurred but for such
modification, or uses the software in the practice of a
patented process and there would be no infringement in the
absence of such practice, or such claim arises out of the
indemnitor's compliance with specifications provided by the
indemnitee and such infringement would not have occurred but
for such compliance.
(iii) ADDITIONAL REMEDY. If software or confidential information
becomes the subject of a claim under this SECTION 8.1(B), or
in the indemnitor's opinion is likely to become the subject of
such a claim, then, in addition to defending the claim and
paying any damages and attorneys' fees as required above in
this SECTION 8.1(B), the indemnitor will either (A) replace or
modify the software or confidential information to make it
noninfringing or cure any claimed misuse of another's trade
secret, or (B) procure for the indemnitee the right to
continue using the software or confidential information
pursuant to this Agreement. Any costs associated with
implementing either of the above alternatives will be borne by
the indemnitor but will be subject to SECTION 8.2. If neither
option is available to the indemnitor through the use of
reasonable, diligent efforts, (x) the indemnitee will return
such software or confidential information to the indemnitor
and (y) if requested by the
<PAGE>
indemnitee in good faith, the Parties will negotiate, pursuant
to ARTICLE VI but subject to SECTION 8.2, to reach a written
agreement on what, if any, monetary damages (in addition to
the indemnitor's obligation to defend the claim and pay any
damages and attorneys' fees as required above in this SECTION
8.1(B) are reasonably owed by the indemnitor to the indemnitee
as a result of the indemnitee no longer having use of such
software or confidential information.
(c) THIRD PARTY INDEMNIFICATION OF EDS. Without limiting EDS' liability
to Licensee under this Agreement, each of the parties acknowledge
that by entering into and performing its obligations under this
Agreement EDS will not assume and should not be exposed to the
business and operational risks associated with Licensee's business,
and Licensee therefore agrees, subject to SECTIONS 8.1(D), to
indemnify and defend EDS and hold EDS harmless from any and all
third party Losses arising out of the conduct of Licensee's
business.
(d) PROCEDURES. The indemnification obligations set forth in this
SECTION 8.1 will not apply unless the party claiming indemnification
(i) notifies the other promptly in writing of any matters in respect
of which the indemnity may apply and of which the notifying party
has knowledge in order to allow the indemnitor the opportunity to
investigate and defend the matter; provided, however, that the
failure to so notify will only relieve the indemnitor of its
obligations under this SECTION 8.1 if and to the extent that the
indemnitor is actually prejudiced thereby; and (ii) gives the other
party full opportunity to control the response thereto and the
defense thereof, including any agreement relating to the settlement
thereof; provided, however, that the indemnitee will have the right
to (i) participate in any legal proceeding to contest and defend a
claim for indemnification involving a third party, (ii) to be
represented by legal counsel of its choosing, and (iii) be party to
any settlement agreement of such a claim, all at the indemnitee's
cost and expense. However, if the indemnitor fails to promptly
assume the defense of the claim, the party entitled to
indemnification may assume the defense at the indemnitor's cost and
expense.
(e) The indemnitor will not be responsible for any settlement or
compromise made without its consent, unless the indemnitee has
tendered notice and the indemnitor has then refused to assume and
defend the claim and it is later determined that the indemnitor was
liable to assume and defend the claim. The indemnitee agrees to
cooperate in good faith with the indemnitor at the request and
expense of the indemnitor.
8.2 LIABILITY.
(a) GENERAL LIMITATION. EDS' liability for all damages arising out of or
related to this Agreement, regardless of the form of action that
imposes liability, whether in contract, equity, negligence, intended
conduct, tort or otherwise, will be limited to
<PAGE>
and will not exceed, in the aggregate for all claims, actions and
causes of action of every kind and nature, an amount equal to the
total amounts paid by Licensee to EDS in the twelve months
immediately preceding the event giving rise to such damages, then
divided by twelve, and then multiplied by three.
(b) EXCLUSIONS. Except for EDS' loss of income or profits related to
Licensee's breach of the provisions of SECTION 1.4, in no event will
the measure of damages payable by a party include, nor will either
party be liable for, any amounts for loss of income, profit or
savings or indirect, incidental, consequential, exemplary, punitive
or special damages of any party, including third parties, even if
such party has been advised of the possibility of such damages in
advance, and all such damages are expressly disclaimed.
(c) EXCEPTIONS TO LIMITATIONS. The limitation set forth in SECTIONS 8.2
(A) will not apply to EDS's liability to the extent such liability
results from a claim under SECTION 8.1(B), nor to amounts due
Licensee pursuant to SECTION 2.3(B).
(d) DUTY TO MITIGATE. Each party has a duty to mitigate the damages that
would otherwise be recoverable from the other pursuant to this
Agreement by taking appropriate and reasonable actions to reduce or
limit the amount of such damages.
(e) CONTRACTUAL STATUTE OF LIMITATIONS. No claim and demand for
mediation or arbitration or cause of action which arose out of an
event or events which occurred more than two years prior to the
filing of a demand for mediation or arbitration or suit alleging a
claim or cause of action may be asserted by either party against the
other.
(f) ACKNOWLEDGMENT. The Parties expressly acknowledge that the
limitations and exclusions set forth in this SECTION 8.2 have been
the subject of active and complete negotiation between the Parties
and represent the Parties' agreement taking into account each
party's level of risk associated with the performance or
nonperformance of its obligations under this Agreement and the
payments and other benefits to be derived by each party pursuant to
this Agreement. The provisions of this SECTION 8.2 will survive the
expiration or termination of this Agreement for any reason.
ARTICLE IX - MISCELLANEOUS
9.1 OTHER CONFIDENTIAL INFORMATION. In addition to the terms and conditions of
SECTION 1.4, the parties will comply with the confidentiality obligations
set forth in this SECTION 9.1.
(a) SCOPE OF OBLIGATION. Except as otherwise expressly provided in this
Agreement, EDS and Licensee each agree that (i) all information
communicated to it by the other
<PAGE>
and identified as confidential, whether before or after the date
hereof, (ii) all information identified as confidential to which it
has access in connection with this Agreement, whether before or
after the date hereof, and (iii) this Agreement and the parties'
rights and obligations hereunder, will be and will be deemed to have
been received in confidence and will be used only for purposes of
this Agreement, and each of EDS and Licensee agrees to use the same
means as it uses to protect its own confidential information, but in
no event less than reasonable means, to prevent the disclosure and
to protect the confidentiality thereof. No such information will be
disclosed by the recipient party without the prior written consent
of the other party; provided, however, that each party may disclose
this Agreement and the other party's confidential information to
those of the recipient party's attorneys, auditors (including the
Federal Communications Commission), insurers (if applicable), agents
and full time employees who have a need to have access to such
information in connection with their employment (or engagement, if
applicable) by the recipient party, so long as the recipient party
advises each such person of the confidentiality obligations set
forth in this SECTION 9.1. In any event, compliance by each of the
persons referenced in the preceding sentence with the
confidentiality obligations set forth in this SECTION 9.1 will
remain the responsibility of the party employing or engaging such
persons. The foregoing will not restrict either party from
disclosing this Agreement in a filing with the United States
Securities and Exchange Commission, if required to do so.
(b) EXCEPTIONS. The foregoing will not prevent either party from
disclosing information that belongs to such party or (i) is already
known by the recipient party without an obligation of
confidentiality other than under this Agreement, (ii) is publicly
known or becomes publicly known through no unauthorized act of the
recipient party, (iii) is rightfully received from a third party,
(iv) is independently developed without use of the other party's
confidential information or (v) is disclosed without similar
restrictions to a third party by the party owning the confidential
information. If confidential information is required to be disclosed
pursuant to a requirement of a governmental authority, such
confidential information may be disclosed pursuant to such
requirement so long as the party required to disclose the
confidential information, to the extent possible, provides the other
party with timely prior notice of such requirement and coordinates
with such other party in an effort to limit the nature and scope of
such required disclosure. If confidential information is required to
be disclosed in connection with the conduct of any mediation or
arbitration proceeding carried out pursuant to ARTICLE VI, such
confidential information may be disclosed pursuant to and in
accordance with the approval and at the direction of the mediator or
arbitrator, as the case may be, conducting such proceeding. Upon
written request at the expiration or termination of the License Term
for any reason, all documented confidential information (and all
copies thereof) owned by the requesting party will be returned to
the requesting party or will be destroyed, with written
certification thereof being given to the requesting party. The
provisions of this SECTION 9.1 will survive the expiration or
termination of the License Term for
<PAGE>
any reason.
9.2 RIGHT TO ENGAGE IN OTHER ACTIVITIES. Nothing in this Agreement will impair
EDS' right to acquire, license, market, distribute, develop for itself or
others or have others develop for EDS similar technology performing the
same or similar functions as the technology and services contemplated by
this Agreement.
9.3 INDEPENDENT CONTRACTORS. The parties are independent contractors, and this
Agreement will not be construed as constituting either party as partner,
joint venturer or fiduciary of the other or to create any other form of
legal association that would impose liability on one party for the act or
failure to act of the other or as providing either party with the right,
power or authority (express or implied) to create any duty or obligation
of the other. Except as otherwise expressly provided in this Agreement,
each party has the sole right and obligation to supervise, manage,
contract, direct, procure, perform or cause to be performed all work to be
performed by it pursuant to this Agreement.
9.4 HIRING OF EMPLOYEES. During the License Term and for a period of twelve
months thereafter, neither party will solicit, directly or indirectly, for
employment nor employ any employee of the other party actively involved in
the performance, consumption or evaluation of services under this
Agreement without the prior written consent of the other party.
9.5 ENTIRE AGREEMENT. This Agreement (including the Schedules and Exhibits
attached hereto, each of which is incorporated into this Agreement by this
reference) constitutes the full and complete statement of the agreement of
the parties with respect to the subject matter hereof and supersedes any
previous agreements, understandings or communications, whether written or
oral, relating to such subject matter. The foregoing notwithstanding,
Licensee agrees to continue payment of monthly maintenance fees to EDS in
accordance with the provisions of that certain IXPLUS License Agreement
(as amended) between the parties dated April 23, 1991 until the
Installation Date of the Licensed Programs hereunder.
9.6 AMENDMENTS; WAIVER. Changes or modifications to this Agreement may not be
made orally, but only by a written amendment or revision signed by the
parties. Any terms and conditions varying from this Agreement on any
order, invoice or other notification from either party are not binding on
the other unless specifically accepted by the other. Unless otherwise
expressly provided in this Agreement, a delay or omission by either party
to exercise any right or power under this Agreement will not be construed
to be a waiver thereof. No waiver of any breach of any provision of this
Agreement will constitute a waiver of any prior, concurrent or subsequent
breach of the same or any other provision hereof.
9.7 BINDING NATURE; ASSIGNMENT. This Agreement will be binding on the parties
and their successors and permitted assigns (it being understood and agreed
that nothing contained in this Agreement is intended to confer upon any
other person any rights, benefits or remedies
<PAGE>
of any kind or character whatsoever under or by reason of this Agreement).
Except in the event of the sale or transfer of all or substantially all of
a party's business or assets, neither party may, nor will it have the
power to, assign this Agreement, or any part hereof, without the consent
of the other. In the event of the sale or transfer of all or substantially
all of a party's business or assets, the parties may mutually agree to
terminate this Agreement. EDS may subcontract the performance of any
portion of this Agreement to a third party so long as EDS remains
responsible for such performance.
9.8 COMPLIANCE WITH LAWS. In performing its obligations under this Agreement,
neither party will be required to undertake any activity that would
conflict with the requirements of any applicable statute, rule,
regulation, interpretation, judgment, order or injunction of any
Governmental Authority.
<PAGE>
9.9 EXPORT REGULATIONS. This Agreement is expressly made subject to any United
States government laws, regulations, orders or other restrictions
regarding export from the United States of computer hardware, software,
technical data or derivatives of such hardware, software or technical
data. Notwithstanding anything to the contrary in this Agreement, Licensee
will not directly or indirectly export (or reexport) any computer
hardware, software, technical data or derivatives of such hardware,
software or technical data, or permit the shipment of same: (a) into (or
to a national or resident of) Cuba, North Korea, Iran, Iraq, Libya, Syria
or any other country to which the United States has embargoed goods; (b)
to anyone on the U.S. Treasury Department's List of Specially Designated
Nationals, List of Specially Designated Terrorists or List of Specially
Designated Narcotics Traffickers, or the U.S. Commerce Department's Denied
Parties List; or (c) to any country or destination for which the United
States government or a United States governmental agency requires an
export license or other approval for export without first having obtained
such license or other approval. Each party will reasonably cooperate with
the other and will provide to the other promptly upon request any end-user
certificates, affidavits regarding reexport or other certificates or
documents as are reasonably requested to obtain approvals, consents,
licenses and/or permits required for any payment or any export or import
of products or services under this Agreement. The provisions of this
SECTION 9.9 will survive the expiration or termination of the License Term
for any reason.
9.10 APPROVALS AND SIMILAR ACTIONS. Except as otherwise expressly provided in
this Agreement, where agreement, approval, acceptance, consent or similar
action is required of either party by any provision of this Agreement,
such action will not be unreasonably withheld or delayed. An approval or
consent given by a party under this Agreement will not relieve the other
party from responsibility for complying with the requirements of this
Agreement, nor will it be construed as a waiver of any rights under this
Agreement, except as and to the extent otherwise expressly provided in
such approval or consent.
9.11 NOTICES. Except as otherwise expressly provided in this Agreement, all
notices under this Agreement will be in writing and will be deemed to have
been duly given if delivered personally or by courier service, faxed or
mailed by registered or certified mail, return receipt requested, postage
prepaid, to the parties at the addresses set forth in SCHEDULE 9.11. All
notices under this Agreement that are addressed as provided in this
SECTION 9.11, (a) if delivered personally or by courier service, will be
deemed given upon delivery, (b) if delivered by facsimile, will be deemed
given when electronic confirmation is received by the sending party and
(c) if delivered by mail in the manner described above, will be deemed
given on the fifth business day after the day it is deposited in a regular
depository of the United States mail. Either party from time to time may
change its address or designee for notification purposes by giving the
other party notice of the new address or designee and the date upon which
such change will become effective.
9.12 EXCUSED PERFORMANCE. Neither party will be deemed to be in default
hereunder, or will be liable to the other, for failure to perform any of
its non-monetary obligations under this
<PAGE>
Agreement for any period and to the extent that such failure results from
acts or omissions of the other party or third parties, natural disasters,
riots, war, civil disorder, court order, labor dispute or any other causes
beyond that party's reasonable control (including failures or fluctuations
in electrical power, heat, light, air conditioning or telecommunications
equipment or lines) and which it could not have prevented by reasonable
precautions or could not have remedied by the exercise of reasonable
efforts.
9.13 MEDIA RELEASES. Each party will coordinate with the other regarding any
media release, public announcement or similar disclosure relating to this
Agreement or its subject matter and will give the other party a reasonable
opportunity to review and comment on the content of such release,
announcement or disclosure prior to its release. This provision does not
alter the restrictions on the disclosure of confidential information set
forth in SECTION 9.1 and, subject to SECTION 9.1, will not be construed so
as to delay or restrict either party from disclosing any information
required to be disclosed in order to comply with any applicable law, rule
or regulation. Notwithstanding the foregoing, EDS will have the right to
make general references to Licensee and the type of services being
provided by EDS to Licensee under this Agreement in EDS' promotional and
marketing materials as well as in EDS' oral and visual presentations to
prospects.
9.14 CONSTRUCTION RULES. The Article and Section headings used in this
Agreement are for convenience of reference only and will not enter into
the interpretation hereof. As used in this Agreement, unless otherwise
expressly provided to the contrary, (a) any reference to a "Section",
"Article" or "Schedule" is a reference to a Section or Article of this
Agreement or a Schedule attached to this Agreement, and (b) all references
to days, months or years are references to calendar days, months or years.
To the extent that the provisions of this Agreement and the Schedules are
inconsistent, to the extent possible such provisions will be interpreted
so as to make them consistent, and if that is not possible, the provisions
of the Schedules will prevail. If any provision of this Agreement is held
to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions will not in any way be affected
or impaired, and such provision will be deemed to be restated to reflect
the original intentions of the parties as nearly as possible in accordance
with applicable law. The parties agree that this Agreement is an executory
contract as contemplated by 11 U.S.C. Section 365. In performing its
obligations under this Agreement, neither party will be required to
undertake any activity that would conflict with the requirements of any
applicable law, rule, regulation, interpretation, judgment, order or
injunction of any governmental authority. The parties acknowledge and
agree that each has been represented by legal counsel of its choice
throughout the negotiation and drafting of this Agreement, that each has
participated in the drafting hereof and that this Agreement will not be
construed in favor of or against either party solely on the basis of a
party's drafting or participation in the drafting of any portion of this
Agreement.
9.15 COOPERATION. EDS will cooperate with Licensee in good faith in the
performance of EDS' activities contemplated by this Agreement in a proper,
timely and efficient manner.
<PAGE>
9.16 GOVERNING LAW. This Agreement will be governed by and construed in
accordance with the substantive laws of the State of Texas, without giving
effect to any choice-of-law rules that may require the application of the
laws of another jurisdiction.
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement to be
signed and delivered by its duly authorized officer or representative as of the
Effective Date.
ELECTRONIC DATA SYSTEMS CORPORATION
By: /S/WALTER SCHORTMANN
Typed Name: Walter Schortmann
Title: Vice President, Telecommunications Industry
Date: March 11, 1999
MATRIX TELECOM, INC.
By: /s/ JOE RENTERIA, JR.
Typed Name: Joe Renteria, Jr.
Title: Vice President, Information Services
Date: March 8, 1999
<PAGE>
EXHIBIT 10.13
CONVERTIBLE PREFERRED STOCK AND WARRANTS PURCHASE AGREEMENT
BETWEEN
AVTEL COMMUNICATIONS, INC.
AND
THE INVESTORS SIGNATORY HERETO
CONVERTIBLE PREFERRED STOCK AND WARRANTS PURCHASE AGREEMENT dated as of
April 5, 1999 (the "Agreement"), between the Investors signatory hereto (each an
"Investor" and together the "Investors"), and AvTel Communications, Inc., a
corporation organized and existing under the laws of the State of Delaware (the
"Company").
WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investors,
and the Investors shall purchase in the aggregate, (i) $1,500,000 liquidation
preference of Convertible Preferred Stock (as defined below) and (ii) Warrants
(as defined below) to purchase up to 20,000 shares of the Common Stock (as
defined below) at 125% of the Closing Date closing bid price for such Common
Stock.
WHEREAS, such investments will be made in reliance upon the provisions of
Section 4(2) ("Section 4(2)") and/or 4(6) of the United States Securities Act
and/or Regulation D ("Regulation D") and the other rules and regulations
promulgated thereunder (the "Securities Act"), and/or upon such other exemption
from the registration requirements of the Securities Act as may be available
with respect to any or all of the investments in securities to be made
hereunder.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
Section 1.1. "CAPITAL SHARES" shall mean the Common Stock and any shares of any
other class of common stock whether now or hereafter authorized, having the
right to participate in the distribution of earnings and assets of the Company.
Section 1.2. "CAPITAL SHARES EQUIVALENTS" shall mean any securities, rights, or
obligations that are convertible into or exchangeable for or give any right to
subscribe for any Capital Shares of the Company or any Warrants, options or
other rights to subscribe for or purchase Capital Shares or any such convertible
or exchangeable securities.
Section 1.3. "CLOSING" shall mean the closing of the purchase and sale of the
Convertible Preferred Stock and Warrants pursuant to Section 2.1.
Section 1.4. "CLOSING DATE" shall mean the date on which all conditions to the
Closing have been satisfied (as defined in Section 2.1 (b) hereto) and the
Closing shall have occurred.
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Section 1.5. "COMMON STOCK" shall mean the Company's common stock, $0.01 par
value per share.
Section 1.6. "CONVERSION SHARES" shall mean the shares of Common Stock issuable
upon conversion of the Convertible Preferred Stock and any shares of Common
Stock issued as dividends upon the Convertible Preferred Stock.
Section 1.7. "CONVERTIBLE PREFERRED STOCK" shall mean the $1,500,000 liquidation
preference amount of Series B Convertible Preferred Stock, as described in the
Certificate of Designations in the form of Exhibit A hereto, to be issued to the
Investors pursuant to this Agreement.
Section 1.8. "DAMAGES" shall mean any loss, claim, damage, judgment, penalty,
deficiency, liability, costs and expenses (including, without limitation,
reasonable attorney's fees and disbursements and reasonable costs and expenses
of expert witnesses and investigation).
Section 1.9. "EFFECTIVE DATE" shall mean the date on which the SEC first
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in the Registration Rights Agreement.
Section 1.10. "ESCROW AGENT" shall have the meaning set forth in the Escrow
Agreement.
Section 1.11. "ESCROW AGREEMENT" shall mean the Escrow Agreement in
substantially the form of Exhibit D hereto executed and delivered
contemporaneously with this Agreement.
Section 1.12. "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder.
Section 1.13. "LEGEND" shall mean the legend set forth in Section 9.1.
Section 1.14. "MARKET PRICE" on any given date shall mean the lowest closing bid
price on the Principal Market (as reported by Bloomberg L.P.) of the Common
Stock on any Trading Day during the five Trading Day period ending on the
Trading Day immediately prior to the date for which the Market Price is to be
determined.
Section 1.15. "MATERIAL ADVERSE EFFECT" shall mean any effect on the business,
operations, properties, prospects, or financial condition of the Company that is
material and adverse to the Company and its subsidiaries and affiliates, taken
as a whole, and/or any condition, circumstance, or situation that would prohibit
or otherwise interfere with the ability of the Company to enter into and perform
any of its obligations under this Agreement, the Registration Rights Agreement,
the Escrow Agreement, the Convertible Preferred Stock or the Warrants in any
material respect.
Section 1.16. "OUTSTANDING" when used with reference to shares of Common Stock
or Capital Shares (collectively the "Shares"), shall mean, at any date as of
which the number of such Shares is to be determined, all issued and outstanding
Shares, and shall include all such Shares issuable in respect of outstanding
scrip or any certificates representing fractional interests in such Shares;
PROVIDED, HOWEVER, that "Outstanding" shall not mean any such Shares then
directly or indirectly owned or held by or for the account of the Company.
Section 1.17. "PERSON" shall mean an individual, a corporation, a partnership,
an association, a trust or other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
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Section 1.18. "PRINCIPAL MARKET" shall mean the American Stock Exchange, the New
York Stock Exchange, the NASDAQ National Market, or the NASDAQ Small-Cap Market,
whichever is at the time the principal trading exchange or market for the Common
Stock, based upon share volume.
Section 1.19. "PURCHASE PRICE" shall mean one million five hundred thousand
dollars ($1,500,000).
Section 1.20. "REGISTRABLE SECURITIES" shall mean the Conversion Shares and the
Warrant Shares until (i) the Registration Statement has been declared effective
by the SEC, and all Conversion Shares and Warrant Shares have been disposed of
pursuant to the Registration Statement, (ii) all Conversion Shares and Warrant
Shares have been sold under circumstances under which all of the applicable
conditions of Rule 144 (or any similar provision then in force) under the
Securities Act ("Rule 144") are met, (iii) all Conversion Shares and Warrant
Shares have been otherwise transferred to holders who may trade such shares
without restriction under the Securities Act, and the Company has delivered a
new certificate or other evidence of ownership for such securities not bearing a
restrictive legend or (iv) such time as, in the opinion of counsel to the
Company, all Conversion Shares and Warrant Shares may be sold without any time,
volume or manner limitations pursuant to Rule 144(k) (or any similar provision
then in effect) under the Securities Act.
Section 1.21. "REGISTRATION RIGHTS AGREEMENT" shall mean the agreement regarding
the filing of the Registration Statement for the resale of the Registrable
Securities, entered into between the Company and the Investor as of the Closing
Date in the form annexed hereto as Exhibit C.
Section 1.22. "REGISTRATION STATEMENT" shall mean a registration statement on
Form S-3 (if use of such form is then available to the Company pursuant to the
rules of the SEC and, if not, on such other form promulgated by the SEC for
which the Company then qualifies and which counsel for the Company shall deem
appropriate, and which form shall be available for the resale of the Registrable
Securities to be registered thereunder in accordance with the provisions of this
Agreement, the Registration Rights Agreement and in accordance with the intended
method of distribution of such securities), for the registration of the resale
by the Investor of the Registrable Securities under the Securities Act.
Section 1.23. "REGULATION D" shall have the meaning set forth in the recitals of
this Agreement.
Section 1.24. "SEC" shall mean the Securities and Exchange Commission.
Section 1.25. "SECTION 4(2)" and "SECTION 4(6)" shall have the meanings set
forth in the recitals of this Agreement.
Section 1.26. "SECURITIES ACT" shall have the meaning set forth in the recitals
of this Agreement.
Section 1.27. "SEC DOCUMENTS" shall mean the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997 and each report, proxy
statement or registration statement filed by the Company with the SEC pursuant
to the Exchange Act or the Securities Act since the filing of such Annual Report
through the date hereof.
Section 1.28. "SHARES" shall have the meaning set forth in Section 1.16.
Section 1.29. "TRADING DAY" shall mean any day during which the Principal Market
at such day shall be open for business.
Section 1.30. "WARRANTS" shall mean the Warrants substantially in the form of
Exhibit B to be issued to the Investors hereunder.
Section 1.31. "WARRANT SHARES" shall mean all shares of Common Stock or other
securities issued or issuable pursuant to exercise of the Warrants.
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ARTICLE II
PURCHASE AND SALE OF CONVERTIBLE PREFERRED STOCK AND WARRANTS
Section 2.1. INVESTMENT.
(a) Upon the terms and subject to the conditions set forth herein, the
Company agrees to sell, and the Investors agree to purchase the Convertible
Preferred Stock and the Warrants at the Purchase Price on the Closing Date as
follows:
(i) Upon execution and delivery of this Agreement, each Investor shall
deliver to the Escrow Agent immediately available funds in their
proportionate amount of the Purchase Price as set forth on the
signature pages hereto, and the Company shall deliver the
Convertible Preferred Stock certificates and the Warrants to the
Escrow Agent, in each case to be held by the Escrow Agent pursuant
to the Escrow Agreement.
(ii) Upon satisfaction of the conditions set forth in Section 2.1(b), the
Closing ("Closing") shall occur at the offices of the Escrow Agent
at which the Escrow Agent (x) shall release the Convertible
Preferred Stock and the Warrants to the Investor and (y) shall
release the Purchase Price (after all fees have been paid as set
forth in the Escrow Agreement), pursuant to the terms of the Escrow
Agreement.
(b) The Closing is subject to the satisfaction of the following
conditions:
(i) acceptance and execution by the Company and by the Investors, of
this Agreement and all Exhibits hereto;
(ii) delivery into escrow by each Investor of immediately available funds
in the amount of the Purchase Price of the Convertible Preferred
Stock and the Warrants, as more fully set forth in the Escrow
Agreement;
(iii) all representations and warranties of the Investors contained herein
shall remain true and correct as of the Closing Date (as a condition
to the Company's obligations);
(iv) all representations and warranties of the Company contained herein
shall remain true and correct as of the Closing Date (as a condition
to the Investors' obligations);
(v) the Company shall have obtained all permits and qualifications
required by any state for the offer and sale of the Convertible
Preferred Stock and Warrants, or shall have the availability of
exemptions therefrom;
(vi) the sale and issuance of the Convertible Preferred Stock and the
Warrants hereunder, and the proposed issuance by the Company to the
Investors of the Common Stock underlying the Convertible Preferred
Stock and the Warrants upon the conversion or exercise thereof shall
be legally permitted by all laws and regulations to which the
Investors and the Company are subject and there shall be no ruling,
judgment or writ of any court prohibiting the transactions
contemplated by this Agreement;
(vii) delivery of the original fully executed Convertible Preferred Stock
certificates and Warrants certificates to the Escrow Agent;
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(viii) delivery to the Escrow Agent of an opinion of Seed, Mackall & Cole
LLP, counsel to the Company, in the form of Exhibit E hereto;
(ix) delivery to the Escrow Agent of the Irrevocable Instructions to
Transfer Agent in the form attached hereto as Exhibit F; and
(x) delivery to the Escrow Agent of the Registration Rights Agreement.
Section 2.2. Liquidated Damages. The parties hereto acknowledge and agree that
the sums payable pursuant to the Registration Rights Agreement shall constitute
liquidated damages and not penalties. The parties further acknowledge that (a)
the amount of loss or damages likely to be incurred is incapable or is difficult
to precisely estimate, (b) the amounts specified in such Sections bear a
reasonable proportion and are not plainly or grossly disproportionate to the
probable loss likely to be incurred by the Investors in connection with the
failure by the Company to timely cause the registration of the Registrable
Securities and (c) the parties are sophisticated business parties and have been
represented by sophisticated and able legal and financial counsel and negotiated
this Agreement at arm's length.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INVESTOR
Each Investor, severally and not jointly, represents and Warrants to the Company
that:
Section 3.1. INTENT. The Investor is entering into this Agreement for its own
account and not with a view to or for sale in connection with any distribution
of the Common Stock. The Investor has no present arrangement (whether or not
legally binding) at any time to sell the Convertible Preferred Stock, the
Warrants, any Conversion Shares or Warrant Shares to or through any person or
entity; provided, however, that by making the representations herein, the
Investor does not agree to hold such securities for any minimum or other
specific term and reserves the right to dispose of the Conversion Shares and
Warrant Shares at any time in accordance with federal and state securities laws
applicable to such disposition.
Section 3.2. SOPHISTICATED INVESTOR. The Investor is a sophisticated investor
(as described in Rule 506(b)(2)(ii) of Regulation D) and an accredited investor
(as defined in Rule 501 of Regulation D), and Investor has such experience in
business and financial matters that it has the capacity to protect its own
interests in connection with this transaction and is capable of evaluating the
merits and risks of an investment in the Convertible Preferred Stock, the
Warrants and the underlying Common Stock. The Investor acknowledges that an
investment in the Convertible Preferred Stock, the Warrants and the underlying
Common Stock is speculative and involves a high degree of risk.
Section 3.3. AUTHORITY. This Agreement and each agreement attached as an Exhibit
hereto which is required to be executed by Investor has been duly authorized and
validly executed and delivered by the Investor and is a valid and binding
agreement of the Investor enforceable against it in accordance with its terms,
subject to applicable bankruptcy, insolvency, or similar laws relating to, or
affecting generally the enforcement of, creditors' rights and remedies or by
other equitable principles of general application.
Section 3.4. NOT AN AFFILIATE. The Investor is not an officer, director or
"affiliate" (as that term is defined in Rule 405 of the Securities Act) of the
Company.
Section 3.5. ABSENCE OF CONFLICTS. The execution and delivery of this Agreement
and the agreements the forms of which are attached as Exhibits hereto and
executed in connection herewith, and the consummation of the transactions
contemplated hereby and thereby, and compliance with the requirements hereof and
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thereof, will not violate any law, rule, regulation, order, writ, judgment,
injunction, decree or award binding on Investor or (a) violate any provision of
any indenture, instrument or agreement to which Investor is a party or is
subject, or by which Investor or any of its assets is bound; (b) conflict with
or constitute a material default thereunder; (c) result in the creation or
imposition of any lien pursuant to the terms of any such indenture, instrument
or agreement, or constitute a breach of any fiduciary duty owed by Investor to
any third party; or (d) require the approval of any third-party (which has not
been obtained) pursuant to any material contract, agreement, instrument,
relationship or legal obligation to which Investor is subject or to which any of
its assets, operations or management may be subject.
Section 3.6. DISCLOSURE; ACCESS TO INFORMATION. The Investor has received all
documents, records, books and other publicly available information pertaining to
Investor's investment in the Company that have been requested by the Investor.
The Company is subject to the periodic reporting requirements of the Exchange
Act, and the Investor has reviewed copies of all SEC Documents deemed relevant
by Investor.
Section 3.7. MANNER OF SALE. At no time was Investor presented with or solicited
by or through any leaflet, public promotional meeting, television advertisement
or any other form of general solicitation or advertising.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and Warrants to the Investor that, except as set forth on
the Disclosure Schedule attached hereto:
Section 4.1. ORGANIZATION OF THE COMPANY. The Company is a corporation duly
incorporated and existing in good standing under the laws of the State of
Delaware and has all requisite corporate authority to own its properties and to
carry on its business as now being conducted. The Company does not have any
subsidiaries and does not own more that fifty percent (50%) of or control any
other business entity except as set forth in the SEC Documents. The Company is
duly qualified and is in good standing as a foreign corporation to do business
in every jurisdiction in which the nature of the business conducted or property
owned by it makes such qualification necessary, other than those in which the
failure so to qualify would not have a Material Adverse Effect.
Section 4.2. AUTHORITY. (i) The Company has the requisite corporate power and
corporate authority to enter into and perform its obligations under this
Agreement, the Registration Rights Agreement, the Escrow Agreement, and the
Warrants and to issue the Convertible Preferred Stock, the Conversion Shares,
the Warrants and the Warrant Shares pursuant to their respective terms, (ii) the
execution, issuance and delivery of this Agreement, the Registration Rights
Agreement, the Escrow Agreement, the Convertible Preferred Stock and the
Warrants by the Company and the consummation by it of the transactions
contemplated hereby have been duly authorized by all necessary corporate action
and no further consent or authorization of the Company or its Board of Directors
or stockholders is required, and (iii) this Agreement, the Registration Rights
Agreement, the Escrow Agreement, the Convertible Preferred Stock and the
Warrants have been duly executed and delivered by the Company and at the Closing
shall constitute valid and binding obligations of the Company enforceable
against the Company in accordance with their terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency, or similar
laws relating to, or affecting generally the enforcement of, creditors' rights
and remedies or by other equitable principles of general application. The
Company has duly and validly authorized and reserved for issuance shares of
Common Stock sufficient in number for the conversion of the Convertible
Preferred Stock and for the exercise of the Warrants. The Company understands
and acknowledges the potentially dilutive effect to the Common Stock of the
issuance of the Conversion Shares and, upon any redemption of the Warrants, the
Warrant Shares. The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of the Convertible Preferred Stock and Warrant
Shares upon exercise of the Warrants in accordance with this Agreement and the
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Convertible Preferred Stock is absolute and unconditional regardless of the
dilutive effect that such issuance may have on the ownership interests of other
stockholders of the Company and notwithstanding the commencement of any case
under 11 U.S.C. Section 101 et seq. (the "Bankruptcy Code"). The Company shall
not seek judicial relief from its obligations hereunder except pursuant to the
Bankruptcy Code. In the event the Company is a debtor under the Bankruptcy Code,
the Company hereby waives to the fullest extent permitted any rights to relief
it may have under 11 U.S.C. Section 362 in respect of the conversion of the
Convertible Preferred Stock and the exercise of the Warrants. The Company
agrees, without cost or expense to the Investor, to take or consent to any and
all action necessary to effectuate relief under 11 U.S.C. Section 362.
Section 4.3. CAPITALIZATION. The authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock, $0.01 par value per share, of
which 10,503,278 shares are issued and outstanding as of March 15, 1999 and
1,000,000 shares of preferred stock, par value $0.01 per share, of which 250,000
have been designated as Series A Convertible Preferred Stock, 147,700 of which
shares are issued and outstanding. The Company has duly designated 1,500 shares
of its preferred stock as Series B Convertible Preferred Stock. Except for (i)
the outstanding Series A Convertible Preferred Stock, (ii) outstanding options
and Warrants as set forth in the SEC Documents, (iii) stock options awarded
under the Company's 1998 Stock Incentive Plan after September 30, 1998, (iv)
stock options awarded under the Company's New Best Connections, Inc. 1997 Stock
Option Plan after September 30, 1998 and (v) as set forth in the Schedule of
Exceptions, there are no outstanding Capital Shares Equivalents. All of the
outstanding shares of Common Stock of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable.
Section 4.4. COMMON STOCK. The Company has registered its Common Stock pursuant
to Section 12(b) or (g) of the Exchange Act and is in full compliance with all
reporting requirements of the Exchange Act, and the Company is in compliance
with all requirements for the continued listing or quotation of its Common
Stock, and such Common Stock is currently listed or quoted on the Principal
Market. As of the date hereof, the Principal Market is the Nasdaq SmallCap
Market and the Company has not received any notice regarding, and to its
knowledge there is no threat, of the termination or discontinuance of the
eligibility of the Common Stock for such listing.
Section 4.5. SEC DOCUMENTS. The Company has delivered or made available to
the Investors true and complete copies of the SEC Documents. The Company has
not provided to the Investors any information that, according to applicable
law, rule or regulation, should have been disclosed publicly prior to the
date hereof by the Company, but which has not been so disclosed. As of their
respective dates, the SEC Documents complied in all material respects with
the requirements of the Exchange Act, and rules and regulations of the SEC
promulgated thereunder and the SEC Documents did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. The
financial statements of the Company included in the SEC Documents complied in
all material respects with applicable accounting requirements and the
published rules and regulations of the SEC or other applicable rules and
regulations with respect thereto at the time of such inclusion. Such
financial statements have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods
involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto or (ii) in the case of unaudited interim
statements, to the extent they exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of operations
and cash flows for the periods then ended (subject, in the case of unaudited
interim statements, to normal year-end audit adjustments). Neither the
Company nor any of its subsidiaries has any material indebtedness,
obligations or liabilities of any kind (whether accrued, absolute, contingent
or otherwise, and whether due or to become due) that would have been required
to be reflected in, reserved against or otherwise described in the financial
statements or in the notes thereto in accordance with GAAP, which was not
fully reflected in, reserved against or otherwise described
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in the financial statements or the notes thereto included in the SEC Documents
or was not incurred in the ordinary course of business consistent with the
Company's past practices since the last date of such financial statements.
Section 4.6. EXEMPTION FROM REGISTRATION; VALID ISSUANCES. Subject to the
accuracy of the Investors' representations in Article III, the sale of the
Convertible Preferred Stock, the Conversion Shares, the Warrants and the Warrant
Shares will not require registration under the Securities Act and/or any
applicable state securities law. When issued and paid for in accordance with the
Warrants and validly converted in accordance with the terms of the Convertible
Preferred Stock, the Conversion Shares and the Warrant Shares will be duly and
validly issued, fully paid, and non-assessable. Neither the sales of the
Convertible Preferred Stock, the Conversion Shares, the Warrants or the Warrant
Shares pursuant to, nor the Company's performance of its obligations under, this
Agreement, the Registration Rights Agreement, the Escrow Agreement, the
certificate of designation for the Convertible Preferred Stock, or the Warrants
will (i) result in the creation or imposition by the Company of any liens,
charges, claims or other encumbrances upon the Convertible Preferred Stock, the
Conversion Shares, the Warrants or the Warrant Shares or, except as contemplated
herein, any of the assets of the Company, or (ii) entitle the holders of
Outstanding Capital Shares to preemptive or other rights to subscribe to or
acquire the Capital Shares or other securities of the Company. The Convertible
Preferred Stock, the Conversion Shares, the Warrants and the Warrant Shares
shall not subject the Investors to personal liability to the Company or its
creditors by reason of the possession thereof.
Section 4.7. NO GENERAL SOLICITATION OR ADVERTISING IN REGARD TO THIS
TRANSACTION. Neither the Company nor any of its affiliates nor, to the knowledge
of the Company, any person acting on its or their behalf (i) has conducted or
will conduct any general solicitation (as that term is used in Rule 502(c) of
Regulation D) or general advertising with respect to any of the Convertible
Preferred Stock, the Conversion Shares, the Warrants or the Warrant Shares, or
(ii) made any offers or sales of any security or solicited any offers to buy any
security under any circumstances that would require registration of the
Convertible Preferred Stock, the Conversion Shares, the Warrants or the Warrant
Shares under the Securities Act.
Section 4.8. NO CONFLICTS. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby, including without limitation the issuance of the
Convertible Preferred Stock, the Conversion Shares, the Warrants and the Warrant
Shares, do not and will not (i) result in a violation of the Company's
Certificate of Incorporation or By-Laws or (ii) conflict with, or constitute a
material default (or an event that with notice or lapse of time or both would
become a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, indenture or
instrument, or any "lockup" or similar provision of any underwriting or similar
agreement to which the Company is a party, or (iii) result in a violation of any
federal, state or local law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations) applicable to the
Company or by which any material property or asset of the Company is bound or
affected, nor is the Company otherwise in violation of, conflict with or default
under any of the foregoing (except in each case for such conflicts, defaults,
terminations, amendments, accelerations, cancellations and violations as would
not have, individually or in the aggregate, a Material Adverse Effect). The
business of the Company is not being conducted in violation of any law,
ordinance or regulation of any governmental entity, except for possible
violations that either singly or in the aggregate would not have a Material
Adverse Effect. The Company is not required under federal, state or local law,
rule or regulation to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency in order for it to
execute, deliver or perform any of its obligations under this Agreement or issue
and sell the Convertible Preferred Stock or the Warrants in accordance with the
terms hereof (other than any SEC, Nasdaq or state securities filings that may be
required to be made by the Company subsequent to Closing, any registration
statement that may be filed pursuant hereto, and any shareholder approval
required by the rules applicable to companies whose common stock trades on the
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Nasdaq Stock Market); provided that, for purposes of the representation made in
this sentence, the Company is assuming and relying upon the accuracy of the
relevant representations and agreements of the Investors herein.
Section 4.9. NO MATERIAL ADVERSE CHANGE. Since September 30, 1998, no Material
Adverse Effect has occurred or exists with respect to the Company, except as
disclosed in the SEC Documents.
Section 4.10. NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. Since September 30, 1998,
no event or circumstance has occurred or exists with respect to the Company or
its businesses, properties, prospects, operations or financial condition, that,
under applicable law, rule or regulation, requires public disclosure or
announcement prior to the date hereof by the Company but which has not been so
publicly announced or disclosed in the SEC Documents.
Section 4.11. NO INTEGRATED OFFERING. Other than pursuant to an effective
registration statement under the Securities Act, or pursuant to the issuance or
exercise of employee stock options, or pursuant to its discussion with the
Investors in connection with the transactions contemplated hereby, the Company
has not issued, offered or sold the Convertible Preferred Stock, the Warrants or
any shares of Common Stock (including for this purpose any securities of the
same or a similar class as the Convertible Preferred Stock, the Warrants or
Common Stock, or any securities convertible into a exchangeable or exercisable
for the Convertible Preferred Stock or Common Stock or any such other
securities) within the six-month period next preceding the date hereof, and the
Company shall not permit any of its directors, officers or Affiliates directly
or indirectly to take, any action (including, without limitation, any offering
or sale to any person or entity of the Convertible Preferred, Warrants or shares
of Common Stock), so as to make unavailable the exemption from Securities Act
registration being relied upon by the Company for the offer and sale to
Investors of the Convertible Preferred Stock (and the Conversion Shares) or the
Warrants (and the Warrant Shares) as contemplated by this Agreement.
Section 4.12. LITIGATION AND OTHER PROCEEDINGS. Except as disclosed in the SEC
Documents, there are no lawsuits or proceedings pending or, to the knowledge of
the Company, threatened, against the Company, nor has the Company received any
written or oral notice of any such action, suit, proceeding or investigation,
which could reasonably be expected to have a Material Adverse Effect. Except as
set forth in the SEC Documents, no judgment, order, writ, injunction or decree
or award has been issued by or, to the knowledge of the Company, requested of
any court, arbitrator or governmental agency which could result in a Material
Adverse Effect.
Section 4.13. NO MISLEADING OR UNTRUE COMMUNICATION. The Company and, to the
knowledge of the Company, any person representing the Company, or any other
person selling or offering to sell the Convertible Preferred Stock or the
Warrants in connection with the transaction contemplated by this Agreement, have
not made, at any time, any oral communication in connection with the offer or
sale of the same which contained any untrue statement of a material fact or
omitted to state any material fact necessary in order to make the statements, in
the light of the circumstances under which they were made, not misleading.
Section 4.14. MATERIAL NON-PUBLIC INFORMATION. Except as set forth in the
Disclosure Schedule, the Company has not disclosed to the Investors any material
non-public information that (i) if disclosed, would reasonably be expected to
have a material effect on the price of the Common Stock or (ii) according to
applicable law, rule or regulation, should have been disclosed publicly by the
Company prior to the date hereof but which has not been so disclosed. The
Company has disclosed material non-public information to Trinity Capital
Advisors, Inc. subject to a confidentiality agreement, and makes no
representation as to Trinity's possible use or disclosure of any of such
information.
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Section 4.15. INSURANCE. The Company maintains property and casualty, general
liability, workers' compensation, environmental hazard, personal injury and
other similar types of insurance with financially sound and reputable insurers
that is adequate, consistent with industry standards and the Company's
historical claims experience. The Company has not received notice from, and has
no knowledge of any threat by, any insurer (that has issued any insurance policy
to the Company) that such insurer intends to deny coverage under or cancel,
discontinue or not renew any insurance policy presently in force.
Section 4.16. TAX MATTERS.
(a) The Company has filed all Tax Returns which it is required to file
under applicable laws; all such Tax Returns are true and accurate and have been
prepared in compliance with all applicable laws; the Company has paid all Taxes
due and owing by it (whether or not such Taxes are required to be shown on a Tax
Return) and have withheld and paid over to the appropriate taxing authorities
all Taxes which it is required to withhold from amounts paid or owing to any
employee, stockholder, creditor or other third parties; and since December 31,
1997, the charges, accruals and reserves for Taxes with respect to the Company
(including any provisions for deferred income taxes) reflected on the books of
the Company are adequate to cover any Tax liabilities of the Company if its
current tax year were treated as ending on the date hereof.
(b) No claim has been made by a taxing authority in a jurisdiction where
the Company does not file tax returns that such corporation is or may be subject
to taxation by that jurisdiction. There are no foreign, federal, state or local
tax audits or administrative or judicial proceedings pending or being conducted
with respect to the Company; no information related to Tax matters has been
requested by any foreign, federal, state or local taxing authority; and, except
as disclosed above, no written notice indicating an intent to open an audit or
other review has been received by the Company from any foreign, federal, state
or local taxing authority. There are no material unresolved questions or claims
concerning the Company's Tax liability. The Company (A) has not executed or
entered into a closing agreement pursuant to Section 7121 of the Internal
Revenue Code or any predecessor provision thereof or any similar provision of
state, local or foreign law; or (B) has not agreed to or is required to make any
adjustments pursuant to Section 481 (a) of the Internal Revenue Code or any
similar provision of state, local or foreign law by reason of a change in
accounting method initiated by the Company or any of its subsidiaries or has any
knowledge that the IRS has proposed any such adjustment or change in accounting
method, or has any application pending with any taxing authority requesting
permission for any changes in accounting methods that relate to the business or
operations of the Company. The Company has not been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the
Internal Revenue Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Internal Revenue Code.
(c) The Company has not made an election under Section 341(f) of the
Internal Revenue Code. The Company is not liable for the Taxes of another person
that is not a subsidiary of the Company under (A) Treas. Reg. Section 1.1502-6
(or comparable provisions of state, local or foreign law), (B) as a transferee
or successor, (C) by contract or indemnity or (D) otherwise. The Company is not
a party to any tax sharing agreement. The Company has not made any payments, is
obligated to make payments or is a party to an agreement that could obligate it
to make any payments that would not be deductible under Section 280G of the
Internal Revenue Code.
(d) For purposes of this Section 4.16:
"IRS" means the United States Internal Revenue Service.
"TAX" or "TAXES" means federal, state, county, local, foreign, or
other income, gross receipts, ad valorem, franchise, profits, sales
or use, transfer, registration, excise, utility, environmental,
communications, real or personal property, capital stock, license,
payroll,
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wage or other withholding, employment, social security, severance,
stamp, occupation, alternative or add-on minimum, estimated and
other taxes of any kind whatsoever (including, without limitation,
deficiencies, penalties, additions to tax, and interest attributable
thereto) whether disputed or not.
"TAX RETURN" means any return, information report or filing with
respect to Taxes, including any schedules attached thereto and
including any amendment thereof.
Section 4.17. PROPERTY. Neither the Company nor any of its subsidiaries owns any
real property. Each of the Company and its subsidiaries has good and marketable
title to all personal property owned by it, free and clear of all liens,
encumbrances and defects except such as do not materially affect the value of
such property and do not materially interfere with the use made and proposed to
be made of such property by the Company; and to the Company's knowledge any real
property, mineral or water rights, and buildings held under lease by the Company
as tenant are held by it under valid, subsisting and enforceable leases with
such exceptions as are not material and do not interfere with the use made and
intended to be made of such property, mineral or water rights, and buildings by
the Company.
Section 4.18. INTELLECTUAL PROPERTY. Each of the Company and its subsidiaries
owns or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, trademark applications, trade names, service marks,
copyrights, copyright applications, licenses, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and other similar rights and proprietary
knowledge (collectively, "Intangibles") necessary for the conduct of its
business as now being conducted. To the Company's knowledge, except as disclosed
in the SEC Documents neither the Company nor any of its subsidiaries is
infringing upon or in conflict with any right of any other person with respect
to any Intangibles. Except as disclosed in the SEC Documents, no claims have
been asserted by any person to the ownership or use of any Intangibles and the
Company has no knowledge of any basis for such claim.
Section 4.19. INTERNAL CONTROLS AND PROCEDURES. The Company maintains books and
records and internal accounting controls which provide reasonable assurance that
(i) all transactions to which the Company is a party or by which its properties
are bound are executed with management's authorization; (ii) the recorded
accounting of the Company's assets is compared with existing assets at regular
intervals; (iii) access to the Company's assets is permitted only in accordance
with management's authorization; and (iv) all transactions to which the Company
is a party or by which its properties are bound are recorded as necessary to
permit preparation of the financial statements of the Company in accordance with
U.S. generally accepted accounting principles.
Section 4.20. PAYMENTS AND CONTRIBUTIONS. Neither the Company nor any of its
directors, officers or, to its knowledge, other employees has (i) used any
Company funds for any unlawful contribution, endorsement, gift, entertainment or
other unlawful expense relating to political activity; (ii) made any direct or
indirect unlawful payment of Company funds to any foreign or domestic government
official or employee; (iii) violated or is in violation of any provision of the
Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any bribe,
rebate, payoff, influence payment, kickback or other similar payment to any
person with respect to Company matters.
Section 4.21. NO MISREPRESENTATION. Except as set forth in the Disclosure
Schedule, the representations and warranties of the Company contained in this
Agreement, any schedule, annex or exhibit hereto and any agreement, instrument
or certificate furnished by the Company to the Investors pursuant to this
Agreement, do not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
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ARTICLE V
COVENANTS OF THE INVESTORS
Section 5.1. COMPLIANCE WITH LAW. The Investor's trading activities with respect
to shares of the Company's Common Stock will be in compliance with all
applicable state and federal securities laws, rules and regulations and rules
and regulations of the Principal Market on which the Company's Common Stock is
listed.
Section 5.2. SHORT SALES. The Investor and its affiliates shall not engage in
short sales of the Company's Common Stock so long as the Investor holds any
unconverted shares of Convertible Preferred Stock, except that the Investor may
make short sales up to the amount of the number of shares of Common Stock to be
received upon any particular conversion of Convertible Preferred Stock upon
delivering the Notice of Conversion with respect thereto.
ARTICLE VI
COVENANTS OF THE COMPANY
Section 6.1. REGISTRATION RIGHTS. The Company shall cause the Registration
Rights Agreement to remain in full force and effect and the Company shall comply
in all material respects with the terms thereof.
Section 6.2. RESERVATION OF COMMON STOCK. As of the date hereof, the Company has
reserved and the Company shall continue to reserve and keep available at all
times, free of preemptive rights, shares of Common Stock for the purpose of
enabling the Company to issue the Conversion Shares and the Warrant Shares
pursuant to any conversion of the Convertible Preferred Stock or exercise of the
Warrants; such amount of shares of Common Stock to be reserved shall initially
be calculated based upon a Conversion Price for the Common Stock under the terms
of the Convertible Preferred Stock of $2.00. The number of shares so reserved
from time to time, as theretofore increased or reduced as hereinafter provided,
may be reduced by the number of shares actually delivered pursuant to any
conversion of the Convertible Preferred Stock or exercise of the Warrants and
the number of shares so reserved shall be increased or decreased to reflect
potential increases or decreases in the Common Stock that the Company may
thereafter be obligated to issue by reason of adjustments to the Warrants.
Section 6.3. LISTING OF COMMON STOCK. The Company hereby agrees to maintain the
listing of the Common Stock on a Principal Market, and as soon as reasonably
practicable following the Closing to list the Conversion Shares and the Warrant
Shares on the Principal Market. The Company further agrees, if the Company
applies to have the Common Stock traded on any other Principal Market, it will
include in such application the Conversion Shares and the Warrant Shares, and
will take such other action as is necessary or desirable in the opinion of the
Investors to cause the Common Stock to be listed on such other Principal Market
as promptly as possible. The Company will take all action to continue the
listing and trading of its Common Stock on a Principal Market (including,
without limitation, maintaining sufficient net tangible assets) and will comply
in all respects with the Company's reporting, filing and other obligations under
the bylaws or rules of the Principal Market and shall provide Investors with
copies of any correspondence to or from such Principal Market which questions or
threatens delisting of the Common Stock, within three (3) Trading Days of the
Company's receipt thereof, until the Investors have disposed of all of their
Registrable Securities.
Section 6.4. EXCHANGE ACT REGISTRATION. The Company will cause its Common Stock
to continue to be registered under Section 12(b) or (g) of the Exchange Act,
will use its best efforts to comply in all respects
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with its reporting and filing obligations under the Exchange Act, and will not
take any action or file any document (whether or not permitted by the Exchange
Act or the rules thereunder) to terminate or suspend such registration or to
terminate or suspend its reporting and filing obligations under said Act until
the Investors has disposed of all of its Registrable Securities.
Section 6.5. LEGENDS. The certificates evidencing the Registrable Securities
shall be free of legends, except as set forth in Article IX.
Section 6.6. CORPORATE EXISTENCE. The Company will take all steps necessary to
preserve and continue the corporate existence of the Company.
Section 6.7. CONSOLIDATION; MERGER. The Company shall not, at any time after the
date hereof, effect any merger or consolidation of the Company with or into, or
a transfer of all or substantially all of the assets of the Company to, another
entity (a "Consolidation Event") unless the resulting successor or acquiring
entity (if not the Company) assumes by written instrument or by operation of law
the obligation to deliver to the Investors such shares of stock and/or
securities as the Investors are entitled to receive pursuant to this Agreement.
Section 6.8. ISSUANCE OF CONVERTIBLE PREFERRED STOCK AND WARRANT SHARES. The
sale of the Convertible Preferred Stock and the issuance of the Warrant Shares
pursuant to exercise of the Warrants and the Conversion Shares upon conversion
of the Convertible Preferred Stock shall be made in accordance with the
provisions and requirements of Section 4(2), 4(6) or Regulation D and any
applicable state securities law. The Company shall make any necessary SEC and
"blue sky" filings required to be made by the Company in connection with the
sale of the Securities to the Investors as required by all applicable Laws, and
shall provide a copy thereof to the Investors promptly after such filing.
Section 6.9. LIMITATION ON FUTURE FINANCING. The Company agrees that it will not
enter into any sale of its securities for cash at a discount to Market Price
until 90 days after the effective date of the Registration Statement without
first offering such securities to the Investors on the same terms as are
proposed to others, and the Investors shall severally and not jointly have five
(5) Trading Days to accept such offer, except for any sales (i) pursuant to any
presently existing employee benefit plan which plan has been approved by the
Company's stockholders, (ii) pursuant to any compensatory plan for a full-time
employee or key consultant, (iii) pursuant to any repricing of any existing
Warrants or options outstanding on the Closing Date (but not to any exercise
price below the closing bid price of the Common Stock on the Principal Market on
the date of such repricing), (iv) with the prior approval of a majority in
interest of the Investors, which will not be unreasonably withheld, in
connection with a strategic partnership or other business transaction, the
principal purpose of which is not simply to raise money or (v) with the prior
approval of a majority in interest of the Investors, in connection with an
equity line of credit transaction in an amount not to exceed $15,000,000 with a
discount to market price not to exceed 15%.
Section 6.10. PRO-RATA REDEMPTION. The Company agrees that if it shall redeem
any of the Convertible Preferred Stock, that it shall make such redemption
pro-rata among all Investors in proportion their respective initial purchases of
such securities pursuant to this Agreement.
ARTICLE VII
SURVIVAL; INDEMNIFICATION
Section 7.1. SURVIVAL. The representations, warranties and covenants made by
each of the Company and each Investor in this Agreement, the annexes, schedules
and exhibits hereto and in each instrument, agreement and certificate entered
into and delivered by them pursuant to this Agreement, shall survive the
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Closing and the consummation of the transactions contemplated hereby. In the
event of a breach or violation of any of such representations, warranties or
covenants, the party to whom such representations, warranties or covenants have
been made shall have all rights and remedies for such breach or violation
available to it under the provisions of this Agreement, irrespective of any
investigation made by or on behalf of such party on or prior to the Closing
Date.
Section 7.2. INDEMNITY. (a) The Company hereby agrees to indemnify and hold
harmless the Investors, their respective Affiliates and their respective
officers, directors, partners and members (collectively, the "Investor
Indemnitees"), from and against any and all Damages, and agrees to reimburse the
Investor Indemnitees for all reasonable out-of-pocket expenses (including the
reasonable fees and expenses of legal counsel), in each case promptly as
incurred by the Investor Indemnitees and to the extent arising out of or in
connection with:
(i) any misrepresentation, omission of fact or breach of any of the
Company's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Company pursuant to this
Agreement; or
(ii) any failure by the Company to perform in any material respect
any of its covenants, agreements, undertakings or obligations set forth in
this Agreement, the annexes, schedules or exhibits hereto or any instru
ment, agreement or certificate entered into or delivered by the Company
pursuant to this Agreement.
(b) Each Investor, severally and not jointly hereby agrees to indemnify
and hold harmless the Company, its Affiliates and their respective officers,
directors, partners and members (collectively, the "Company Indemnitees"), from
and against any and all Damages, and agrees to reimburse the Company Indemnitees
for reasonable all out-of-pocket expenses (including the reasonable fees and
expenses of legal counsel), in each case promptly as incurred by the Company
Indemnitees and to the extent arising out of or in connection with:
(i) any misrepresentation, omission of fact, or breach of any of the
Investor's representations or warranties contained in this Agreement, the
annexes, schedules or exhibits hereto or any instrument, agreement or
certificate entered into or delivered by the Investor pursuant to this
Agreement; or
(ii) any failure by the Investor to perform in any material respect
any of its covenants, agreements, undertakings or obligations set forth in
this Agreement or any instrument, certificate or agreement entered into or
delivered by the Investor pursuant to this Agreement.
Section 7.3. NOTICE. Promptly after receipt by either party hereto seeking
indemnification pursuant to Section 7.2 (an "Indemnified Party") of written
notice of any investigation, claim, proceeding or other action in respect of
which indemnification is being sought (each, a "Claim"), the Indemnified Party
promptly shall notify the party against whom indemnification pursuant to Section
7.2 is being sought (the "Indemnifying Party") of the commencement thereof; but
the omission to so notify the Indemnifying Party shall not relieve it from any
liability that it otherwise may have to the Indemnified Party, except to the
extent that the Indemnifying Party is actually prejudiced. In connection with
any Claim as to which both the Indemnifying Party and the Indemnified Party are
parties, the Indemnifying Party shall be entitled to assume the defense thereof.
Notwithstanding the assumption of the defense of any Claim by the Indemnifying
Party, the Indemnified Party shall have the right to employ separate legal
counsel and to participate in the defense of such Claim, and the Indemnifying
Party shall bear the reasonable fees, out-of-pocket costs and expenses of such
separate legal counsel to the Indemnified Party if (and only if): (x) the
Indemnifying Party shall have agreed to pay such fees, out-of-pocket costs and
expenses, (y) the Indemnified Party and the Indemnifying
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Party reasonably shall have concluded that representation of the Indemnified
Party and the Indemnifying Party by the same legal counsel would not be
appropriate due to actual or, as reasonably determined by legal counsel to the
Indemnified Party, potentially differing interests between such parties in the
conduct of the defense of such Claim, or if there may be legal defenses
available to the Indemnified Party that are in addition to or disparate from
those available to the Indemnifying Party, or (z) the Indemnifying Party shall
have failed to employ legal counsel reasonably satisfactory to the Indemnified
Party within a reasonable period of time after notice of the commencement of
such Claim. If the Indemnified Party employs separate legal counsel in
circumstances other than as described in clauses (x), (y) or (z) above, the
fees, costs and expenses of such legal counsel shall be borne exclusively by the
Indemnified Party. Except as provided above, the Indemnifying Party shall not,
in connection with any Claim in the same jurisdiction, be liable for the fees
and expenses of more than one firm of legal counsel for the Indemnified Party
(together with appropriate local counsel). The Indemnifying Party shall not,
without the prior written consent of the Indemnified Party (which consent shall
not unreasonably be withheld), settle or compromise any Claim or consent to the
entry of any judgment that does not include an unconditional release of the
Indemnified Party from all liabilities with respect to such Claim or judgment.
Section 7.4. DIRECT CLAIMS. In the event one party hereunder should have a claim
for indemnification that does not involve a claim or demand being asserted by a
third party, the Indemnified Party promptly shall deliver notice of such claim
to the Indemnifying Party. If the Indemnified Party disputes the claim, such
dispute shall be resolved by mutual agreement of the Indemnified Party and the
Indemnifying Party or by binding arbitration conducted in accordance with the
procedures and rules of the American Arbitration Association as set forth in
Article X. Judgment upon any award rendered by any arbitrators may be entered in
any court having competent jurisdiction thereof.
ARTICLE VIII
DUE DILIGENCE REVIEW; NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
Section 8.1. DUE DILIGENCE REVIEW. Subject to Section 8.2, the Company shall
make available for inspection and review by the Investors, advisors to and
representatives of the Investors (who may or may not be affiliated with the
Investors and who are reasonably acceptable to the Company), any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investors pursuant to the Registration Statement, any such registration
statement or amendment or supplement thereto or any blue sky, Nasdaq or other
filing, all SEC Documents and other filings with the SEC, and all other publicly
available corporate documents and properties of the Company as may be reasonably
necessary for the purpose of such review, and cause the Company's officers,
directors and employees to supply all such publicly available information
reasonably requested by the Investors or any such representative, advisor or
underwriter in connection with such Registration Statement (including, without
limitation, in response to all questions and other inquiries reasonably made or
submitted by any of them), prior to and from time to time after the filing and
effectiveness of the Registration Statement for the sole purpose of enabling the
Investors and such representatives, advisors and underwriters and their
respective accountants and attorneys to conduct initial and ongoing due
diligence with respect to the Company and the accuracy of the Registration
Statement.
Section 8.2. NON-DISCLOSURE OF NON-PUBLIC INFORMATION.
(a) The Company shall not disclose material non-public information to the
Investors, advisors to or representatives of the Investors unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides the Investors, such advisors and
representatives with the opportunity to accept or refuse to accept such
non-public information for review. Other than disclosure of any comment letters
received from the SEC staff with respect to the Registration Statement, the
Company may, as a condition to disclosing any non-public information hereunder,
require the Investors'
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advisors and representatives to enter into a confidentiality agreement in form
reasonably satisfactory to the Company and the Investors.
(b) Nothing herein shall require the Company to disclose material
non-public information to the Investors or their advisors or representatives,
and the Company represents that it does not disseminate material non-public
information to any investors who purchase stock in the Company in a public
offering, to money managers or to securities analysts, provided, however, that
notwithstanding anything herein to the contrary, the Company will, as
hereinabove provided, promptly notify the advisors and representatives of the
Investors and, if any, underwriters, of any event or the existence of any
circumstance (without any obligation to disclose the specific event or
circumstance) of which it becomes aware, constituting material non-public
information (whether or not requested of the Company specifically or generally
during the course of due diligence by such persons or entities), which, if not
disclosed in the prospectus included in the Registration Statement would cause
such prospectus to include a material misstatement or to omit a material fact
required to be stated therein in order to make the statements, therein in light
of the circumstances in which they were made, not misleading. Nothing contained
in this Section 8.2 shall be construed to mean that such persons or entities
other than the Investors (without the written consent of the Investors prior to
disclosure of such information as set forth in Section 8.2(a)) may not obtain
non-public information in the course of conducting due diligence in accordance
with the terms of this Agreement and nothing herein shall prevent any such
persons or entities from notifying the Company of their opinion that based on
such due diligence by such persons or entities, that the Registration Statement
contains an untrue statement of a material fact or omits a material fact
required to be stated in the Registration Statement or necessary to make the
statements contained therein, in light of the circumstances in which they were
made, not misleading.
ARTICLE IX
LEGENDS; TRANSFER AGENT INSTRUCTIONS
Section 9.1. LEGENDS. Unless otherwise provided below, each certificate
representing Registrable Securities will bear the following legend or equivalent
(the "Legend"):
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY OTHER
APPLICABLE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON AN EXEMPTION
FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER
SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED, HYPOTHECATED
OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OR PURSUANT TO A TRANSACTION THAT IS EXEMPT FROM, OR
NOT SUBJECT TO, SUCH REGISTRATION.
Section 9.2. TRANSFER AGENT INSTRUCTIONS. Upon the execution and delivery
hereof, the Company is issuing to the transfer agent for its Common Stock (and
to any substitute or replacement transfer agent for its Common Stock upon the
Company's appointment of any such substitute or replacement transfer agent)
instructions in substantially the form of Exhibit F hereto. Such instructions
shall be irrevocable by the Company from and after the date hereof or from and
after the issuance thereof to any such substitute or replacement transfer agent,
as the case may be, except as otherwise expressly provided in the Registration
Rights Agreement.
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Section 9.3. NO OTHER LEGEND OR STOCK TRANSFER RESTRICTIONS. No legend other
than the one specified in Section 9.1 has been or shall be placed on the share
certificates representing the Registrable Securities and no instructions or
"stop transfer orders," so called, "stock transfer restrictions," or other
restrictions have been or shall be given to the Company's transfer agent with
respect thereto other than as expressly set forth in this Article IX.
Section 9.4. INVESTORS' Compliance. Nothing in this Article shall affect in any
way each Investor's obligations under any agreement to comply with all
applicable securities laws upon resale of the Common Stock.
ARTICLE X
CHOICE OF LAW
Section 10.1. GOVERNING LAW/ARBITRATION. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York applicable to
contracts made in New York by persons domiciled in New York City and without
regard to its principles of conflicts of laws. Any dispute under this Agreement
or any Exhibit attached hereto shall be submitted to arbitration under the
American Arbitration Association (the "AAA") in New York City, New York, and
shall be finally and conclusively determined by the decision of a board of
arbitration consisting of three (3) members (hereinafter referred to as the
"Board of Arbitration") selected as according to the rules governing the AAA.
The Board of Arbitration shall meet on consecutive business days in New York
City, New York, and shall reach and render a decision in writing (concurred in
by a majority of the members of the Board of Arbitration) with respect to the
amount, if any, which the losing party is required to pay to the other party in
respect of a claim filed. In connection with rendering its decisions, the Board
of Arbitration shall adopt and follow the laws of the State of New York. To the
extent practical, decisions of the Board of Arbitration shall be rendered no
more than thirty (30) calendar days following commencement of proceedings with
respect thereto. The Board of Arbitration shall cause its written decision to be
delivered to all parties involved in the dispute. Any decision made by the Board
of Arbitration (either prior to or after the expiration of such thirty (30)
calendar day period) shall be final, binding and conclusive on the parties to
the dispute, and entitled to be enforced to the fullest extent permitted by law
and entered in any court of competent jurisdiction. The Board of Arbitration
shall be authorized and is hereby directed to enter a default judgment against
any party failing to participate in any proceeding hereunder within the time
periods set forth in the AAA rules. The non-prevailing party to any arbitration
(as determined by the Board of Arbitration) shall pay the expenses of the
prevailing party including reasonable attorney's fees, in connection with such
arbitration. Any party shall be entitled to obtain injunctive relief from a
court in any case where such relief is available.
ARTICLE XI
ASSIGNMENT
Section 11.1. ASSIGNMENT. Neither this Agreement nor any rights of the Investors
or the Company hereunder may be assigned by either party to any other person.
Notwithstanding the foregoing, (a) the provisions of this Agreement shall inure
to the benefit of, and be enforceable by, any permitted transferee of any of the
Convertible Preferred Stock or Warrants purchased or acquired by any Investor
hereunder with respect to the Convertible Preferred Stock or Warrants held by
such person, and (b) upon the prior written consent of the Company, which
consent shall not unreasonably be withheld or delayed, each Investor's interest
in this Agreement may be assigned at any time, in whole or in part, to any other
person or entity (including any affiliate of the Investor) who agrees to make
the representations and Warranties contained in Article III and who agrees to be
bound by the terms of this Agreement.
17
<PAGE>
ARTICLE XII
NOTICES
Section 12.1. NOTICES. All notices, demands, requests, consents, approvals, and
other communications required or permitted hereunder shall be in writing and,
unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
If to the Company: AvTel Communications, Inc.
501 Bath Street
Santa Barbara, CA 93101
Attention: Anthony E. Papa, C.E.O.
Telephone: (805) 884-6300
Facsimile: (805) 884-6311
with a copy to (shall not constitute
notice):
Seed, Mackall & Cole LLP
1332 Anacapa Street, Suite 200
Santa Barbara, CA 93101
Attention: Thomas N. Harding, Esq.
Telephone: (805) 963-0669
Facsimile: (805) 962-1404
if to the Investors: As set forth on the signature pages hereto
with a copy to: Joseph A. Smith, Esq.
(shall not constitute notice) Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York
Telephone: (212) 351-4500
Facsimile: (212) 661-0989
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 12.1 by giving written notice of such changed
address or facsimile number to the other party hereto as provided in this
Section 12.1.
18
<PAGE>
ARTICLE XIII
MISCELLANEOUS
Section 13.1. COUNTERPARTS/ FACSIMILE/ AMENDMENTS. This Agreement may be
executed in multiple counterparts, each of which may be executed by less than
all of the parties and shall be deemed to be an original instrument which shall
be enforceable against the parties actually executing such counterparts and all
of which together shall constitute one and the same instrument. Except as
otherwise stated herein, in lieu of the original documents, a facsimile
transmission or copy of the original documents shall be as effective and
enforceable as the original. This Agreement may be amended only by a writing
executed by all parties.
Section 13.2. ENTIRE AGREEMENT. This Agreement, the agreements attached as
Exhibits hereto, which include, but are not limited to the Convertible Preferred
Stock, the Warrants, the Escrow Agreement, and the Registration Rights
Agreement, set forth the entire agreement and understanding of the parties
relating to the subject matter hereof and supersedes all prior and
contemporaneous agreements, negotiations and understandings between the parties,
both oral and written relating to the subject matter hereof. The terms and
conditions of all Exhibits to this Agreement are incorporated herein by this
reference and shall constitute part of this Agreement as is fully set forth
herein.
Section 13.3. SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that such severability shall be ineffective if
it materially changes the economic benefit of this Agreement to any party.
Section 13.4. HEADINGS. The headings used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting this
Agreement.
Section 13.5. REPORTING ENTITY FOR THE COMMON STOCK. The reporting entity relied
upon for the determination of the trading price or trading volume of the Common
Stock on any given Trading Day for the purposes of this Agreement shall be
Bloomberg, L.P. or any successor thereto. The written mutual consent of the
Investors and the Company shall be required to employ any other reporting
entity.
Section 13.6. REPLACEMENT OF CERTIFICATES. Upon (i) receipt of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of a certificate representing the Convertible Preferred Stock or any
Conversion Shares or Warrants or any Warrant Shares and (ii) in the case of any
such loss, theft or destruction of such certificate, upon delivery of an
indemnity agreement or security reasonably satisfactory in form and amount to
the Company (which shall not exceed that required by the Company's transfer
agent in the ordinary course) or (iii) in the case of any such mutilation, on
surrender and cancellation of such certificate, the Company at its expense will
execute and deliver, in lieu thereof, a new certificate of like tenor.
Section 13.7. FEES AND EXPENSES. Each of the Company and the Investors agrees to
pay its own expenses incident to the performance of its obligations hereunder,
except that the Company shall pay the fees, expenses and disbursements of
Epstein Becker & Green, P.C., counsel to the investors, in an amount equal to
$15,000, all as set forth in the Escrow Agreement.
19
<PAGE>
Section 13.8. BROKERAGE. Each of the parties hereto represents that it has had
no dealings in connection with this transaction with any finder or broker who
will demand payment of any fee or commission from the other party except for
Trinity Capital Advisors, Inc., whose fee shall be paid by the Company. The
Company on the one hand, and the Investors, on the other hand, agree to
indemnify the other against and hold the other harmless from any and all
liabilities to any person claiming brokerage commissions or finder's fees on
account of services purported to have been rendered on behalf of the
indemnifying party in connection with this Agreement or the transactions
contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by the undersigned, thereunto duly authorized, as of the date first set
forth above.
AVTEL COMMUNICATIONS, INC.
By: /s/ ANTHONY E. PAPA
-------------------
Anthony E. Papa
Chief Executive Officer
INVESTOR
AMRO INTERNATIONAL, S.A.
By: /s/ H.U. BACHOFEN
-------------------
H.U. Bachofen, Director
INVESTOR
AUSTINVEST ANSTALT BALZERS
By: /s/ W. GRILL
-------------------
W. Grill, Director
INVESTOR
ESQUIRE TRADE & FINANCE INC.
By: /s/ R. WINIGER
-------------------
R. Winiger, Director
[Exhibits and Schedules omitted]
20
<PAGE>
Exhibit 10.14
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of April 5, 1999,
between the investors signatory hereto (each an "Investor"), and AVTEL
COMMUNICATIONS, INC., a Delaware corporation (the "Company").
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Investor is purchasing from the Company, pursuant to an
Convertible Preferred Stock and Warrants Purchase Agreement dated the date
hereof (the "Purchase Agreement"), $1,500,000 liquidation preference amount of
Convertible Preferred Shares and Warrants to purchase up to 20,000 shares of the
Company's Common Stock (terms not defined herein shall have the meanings
ascribed to them in the Purchase Agreement); and
WHEREAS, the Company desires to grant to the Investor the
registration rights set forth herein with respect to the shares of Common Stock
issuable upon conversion of the Convertible Preferred Shares purchased from time
to time pursuant to the Purchase Agreement, shares of Common Stock issuable as
dividends on the Convertible Preferred Shares and shares of Common Stock
issuable upon exercise of the Warrants (hereinafter referred to as the "Stock"
or "Securities" of the Company).
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. REGISTRABLE SECURITIES. As used herein the term "Registrable
Security" means the Securities until (i) the Registration Statement has been
declared effective by the Commission, and all Securities have been disposed of
pursuant to the Registration Statement, (ii) all Securities have been sold under
circumstances under which all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Securities Act ("Rule 144") are met,
(iii) all Securities have been otherwise transferred to holders who may trade
such Securities without restriction under the Securities Act, and the Company
has delivered a new certificate or other evidence of ownership for such
Securities not bearing a restrictive legend or (iv) such time as, in the opinion
of counsel to the Company, all Securities may be sold without any time, volume
or manner limitations pursuant to Rule 144(k) (or any similar provision then in
effect) under the Securities Act. The term "Registrable Securities" means any
and/or all of the securities falling within the foregoing definition of a
"Registrable Security." In the event of any merger, reorganization,
consolidation, recapitalization or other change in corporate structure affecting
the Common Stock, such adjustment shall be deemed to be made in the definition
of "Registrable Security" as is appropriate in order to prevent any dilution or
enlargement of the rights granted pursuant to this Agreement.
Section 2. RESTRICTIONS ON TRANSFER. The Investor acknowledges and
understands that prior to the registration of the Securities as provided herein,
the Securities are "restricted securities" as defined in Rule 144 promulgated
under the Act. The Investor understands that no disposition or transfer of the
Securities may be made by Investor in the absence of (i) an opinion of counsel
to the Investor, in form and substance reasonably satisfactory to the Company,
that such transfer may be made without registration under the Securities Act or
(ii) such registration.
With a view to making available to the Investor the benefits of Rule
144 under the Securities Act or any other similar rule or regulation of the
Commission that may at any time permit the Investor to sell securities of the
Company to the public without registration ("Rule 144"), the Company agrees to:
(a) comply with the provisions of paragraph (c)(1) of Rule 144; and
<PAGE>
(b) file with the Commission in a timely manner all reports and
other documents required to be filed by the Company pursuant to Section 13 or
15(d) under the Conversion Act; and, if at any time it is not required to file
such reports but in the past had been required to or did file such reports, it
will, upon the request of any Investor, make available other information as
required by, and so long as necessary to permit sales of, its Registrable
Securities pursuant to Rule 144.
Section 3. REGISTRATION RIGHTS WITH RESPECT TO THE SECURITIES.
(a) The Company agrees that it will prepare and file with the
Securities and Conversion Commission ("Commission"), within forty-five (45) days
after the Closing Date a registration statement (on Form S-3, or other
appropriate registration statement form) under the Securities Act (the
"Registration Statement"), at the sole expense of the Company (except as
provided in Section 3(c) hereof), in respect of Investor, so as to permit a
public offering and resale of the Securities under the Act by the holders
thereof as selling stockholders and not as underwriters.
The Company shall use its best efforts to cause such Registration
Statement to become effective within ninety (90) days from the Closing Date (or
120 days if the SEC makes a "full review" of the Registration Statement), or, if
earlier, within five (5) days of SEC clearance to request acceleration of
effectiveness. The number of shares designated in the Registration Statement to
be registered shall include all the Warrant Shares, at least 750,000 shares
issuable upon conversion of the Convertible Preferred Shares, and such number of
shares as the Company deems prudent for the purpose of issuing shares of Common
Stock as dividends on the Convertible Preferred Shares, and shall include
appropriate language regarding reliance upon Rule 416 to the extent permitted by
the Commission. The Company will notify Investor of the effectiveness of the
Registration Statement within one Trading Day of such event. In the event that
the number of shares so registered shall be insufficient to register the resale
of all of the Securities, then the Company shall be obligated to file, within
thirty (30) days of notice from any Investor, a further Registration Statement
registering such remaining shares and shall use diligent best efforts to
prosecute such additional Registration Statement to effectiveness.
(b) The Company will maintain the Registration Statement or
post-effective amendment filed under this Section 3 hereof effective under the
Securities Act until the earlier of (i) the date that none of the Convertible
Preferred Shares, the Warrant or the Securities covered by such Registration
Statement are or may become issued and outstanding, (ii) the date that all of
the Securities have been sold pursuant to such Registration Statement, (iii) the
date the holders thereof receive an opinion of counsel to the Company, which
counsel shall be reasonably acceptable to the Investor, that the Securities may
be sold under the provisions of Rule 144 without limitation as to volume, (iv)
all Securities have been otherwise transferred to Investors who may trade such
shares without restriction under the Securities Act, and the Company has
delivered a new certificate or other evidence of ownership for such securities
not bearing a restrictive legend, or (v) all Securities may be sold without any
time, volume or manner limitations pursuant to Rule 144(k) or any similar
provision then in effect under the Securities Act in the opinion of counsel to
the Company, which counsel shall be reasonably acceptable to the Investor (the
"Effectiveness Period").
(c) All fees, disbursements and out-of-pocket expenses and costs
incurred by the Company in connection with the preparation and filing of the
Registration Statement under subparagraph 3(a) and in complying with applicable
securities and Blue Sky laws (including, without limitation, all attorneys' fees
of the Company) shall be borne by the Company. The Investor shall bear the cost
of underwriting and/or brokerage discounts, fees and commissions, if any,
applicable to the Securities being registered and the fees and expenses of its
counsel. The Investor and its counsel shall have a reasonable
<PAGE>
period, not to exceed three (3) Trading Days, to review the proposed
Registration Statement or any amendment thereto, prior to filing with the
Commission, and the Company shall provide each Investor with copies of any
comment letters received from the Commission with respect thereto within two (2)
Trading Days of receipt thereof. The Company shall make reasonably available for
inspection by Investor, any underwriter participating in any disposition
pursuant to the Registration Statement, and any attorney, accountant or other
agent retained by such Investor or any such underwriter all relevant financial
and other records, pertinent corporate documents and properties of the Company
and its subsidiaries, and cause the Company's officers, directors and employees
to supply all information reasonably requested by such Investor or any such
underwriter, attorney, accountant or agent in connection with the Registration
Statement, in each case, as is customary for similar due diligence examinations;
PROVIDED, HOWEVER, that all records, information and documents that are
designated in writing by the Company, in good faith, as confidential,
proprietary or containing any material non-public information shall be kept
confidential by such Investor and any such underwriter, attorney, accountant or
agent (pursuant to an appropriate confidentiality agreement in the case of any
such Investor or agent), unless such disclosure is made pursuant to judicial
process in a court proceeding (after first giving the Company an opportunity
promptly to seek a protective order or otherwise limit the scope of the
information sought to be disclosed) or is required by law, or such records,
information or documents become available to the public generally or through a
third party not in violation of an accompanying obligation of confidentiality;
and PROVIDED FURTHER that, if the foregoing inspection and information gathering
would otherwise disrupt the Company's conduct of its business, such inspection
and information gathering shall, to the maximum extent possible, be coordinated
on behalf of the Investors and the other parties entitled thereto by one firm of
counsel designated by and on behalf of the majority in interest of Investors and
other parties. The Company shall qualify any of the securities for sale in such
states as any Investor reasonably designates and shall furnish indemnification
in the manner provided in Section 6 hereof. However, the Company shall not be
required to qualify in any state which will require an escrow or other
restriction relating to the Company and/or the sellers, or which will require
the Company to qualify to do business in such state or require the Company to
file therein any general consent to service of process. The Company at its
expense will supply the Investors with copies of the applicable Registration
Statement and the prospectus included therein and other related documents in
such quantities as may be reasonably requested by the Investors.
(d) The Company shall not be required by this Section 3 to include a
Investor's Securities in any Registration Statement which is to be filed if, in
the opinion of counsel for both the Investor and the Company (or, should they
not agree, in the opinion of another counsel experienced in securities law
matters acceptable to counsel for the Investor and the Company) the proposed
offering or other transfer as to which such registration is requested is exempt
from applicable federal and state securities laws and would result in all
purchasers or transferees obtaining securities which are not "restricted
securities", as defined in Rule 144 under the Securities Act.
(e) In the event that (i) the Registration Statement to be filed by
the Company pursuant to Section 3(a) above is not filed with the Commission
within forty-five (45) days from the Closing Date, (ii) such Registration
Statement is not declared effective by the Commission within the earlier of
ninety (90) days from the Closing Date (or 120 days if the Commission makes a
"full review" of the Registration Statement) or five (5) days of clearance by
the Commission to request effectiveness, or (iii) such Registration Statement is
not maintained as effective by the Company for the period set forth in Section
3(b) above (each a "Registration Default") then the Company will pay Investor
(pro rated on a daily basis), as liquidated damages for such failure and not as
a penalty one percent (1%) of the aggregate market value of shares of Common
Stock purchased from the Company (including the Conversion Shares which would be
issuable upon conversion of the Convertible Preferred Shares on any date of
determination, and whether or not the Convertible Preferred Shares are then
Convertible pursuant to their terms) and held by the Investor for the first
month and two percent (2%) for every month thereafter until such Registration
Statement has been filed, and in the event of late effectiveness (in case of
clause (ii) above) or lapsed effectiveness (in the
<PAGE>
case of clause (iii) above), one percent (1%) of the aggregate market value of
shares of Common Stock purchased from the Company and held by the Investor
(including the Conversion Shares which would be issuable upon conversion of the
Convertible Preferred Shares on any date of determination, and whether or not
the Convertible Preferred Shares are then Convertible pursuant to their terms)
for the first month and two percent (2%) for every month thereafter (regardless
of whether one or more such Registration Defaults are then in existence) until
such Registration Statement has been declared effective. Such payment of the
liquidated damages shall be made to the Investor in cash, within five (5)
calendar days of demand, provided, however, that the payment of such liquidated
damages shall not relieve the Company from its obligations to register the
Securities pursuant to this Section. The market value of the Common Stock for
this purpose shall be the closing price (or last trade, if so reported) on the
Principal Market for each day during such Registration Default. Notwithstanding
anything to the contrary contained herein, a failure to maintain the
effectiveness of a filed Registration Statement or the ability of a Investor to
use an otherwise effective Registration Statement to effect resales of
Securities during the period after 45 days and within 90 days from the end of
the Company's fiscal year resulting solely from the need to update the Company's
financial statements contained or incorporated by reference in such Registration
Statement shall not constitute a Registration Default and shall not trigger the
accrual of liquidated damages hereunder.
If the Company does not remit the payment to the Investor as set
forth above, the Company will pay the Investor reasonable costs of collection,
including attorneys' fees, in addition to the liquidated damages. The
registration of the Securities pursuant to this provision shall not affect or
limit Investor's other rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the Company from
selling securities pursuant to any Registration Statement in which it is
required to include Securities pursuant to this Section 3.
(g) If at any time or from time to time after the effective date of
any Registration Statement, the Company notifies the Investor in writing of the
existence of a Potential Material Event (as defined in Section 3(h) below), the
Investor shall not offer or sell any Securities or engage in any other
transaction involving or relating to Securities, from the time of the giving of
notice with respect to a Potential Material Event until such Investor receives
written notice from the Company that such Potential Material Event either has
been disclosed to the public or no longer constitutes a Potential Material
Event; provided, however, that the Company may not so suspend the right to such
holders of Securities for more than thirty (30) days in the aggregate during any
twelve month period, during the periods any Registration Statement is required
to be in effect, and if such period is exceeded, such event shall be a
Registration Default. If a Potential Material Event shall occur prior to the
date a Registration Statement is required to be filed, then the Company's
obligation to file such Registration Statement shall be delayed without penalty
for not more than thirty (30) days, and such delay or delays shall not
constitute a Registration Default. The Company must, if lawful, give Investor
notice in writing at least two (2) Trading Days prior to the first day of the
blackout period.
(h) "Potential Material Event" means any of the following: (a) the
possession by the Company of material information not ripe for disclosure in a
registration statement, as determined in good faith by the Chief Executive
Officer, the Chief Financial Officer or the Board of Directors of the Company
that disclosure of such information in a Registration Statement would be
detrimental to the business and affairs of the Company; or (b) any material
engagement or activity by the Company which would, in the good faith
determination of the Chief Executive Officer, the Chief Financial Officer or the
Board of Directors of the Company, be adversely affected by disclosure in a
registration statement at such time, which determination shall be accompanied by
a good faith determination by the Chief Executive Officer, the Chief Financial
Officer or the Board of Directors of the Company that the applicable
Registration Statement would be materially misleading absent the inclusion of
such information.
<PAGE>
Section 4. COOPERATION WITH COMPANY. Investor will cooperate with the
Company in all respects in connection with this Agreement, including timely
supplying all information reasonably requested by the Company (which shall
include all information regarding the Investor and proposed manner of sale of
the Registrable Securities required to be disclosed in any Registration
Statement) and executing and returning all documents reasonably requested in
connection with the registration and sale of the Registrable Securities and
entering into and performing its obligations under any underwriting agreement,
if the offering is an underwritten offering, in usual and customary form, with
the managing underwriter or underwriters of such underwritten offering. Nothing
in this Agreement shall obligate the Investor to consent to be named as an
underwriter in any Registration Statement. The obligation of the Company to
register the Registrable Securities shall be absolute and unconditional as to
those Securities which the Commission will permit to be registered without
naming the Investor as an underwriter. Any delay or delays caused by the
Investor by failure to cooperate as required hereunder shall not constitute a
Registration Default.
Section 5. REGISTRATION PROCEDURES. If and whenever the Company is
required by any of the provisions of this Agreement to effect the registration
of any of the Registrable Securities under the Act, the Company shall (except as
otherwise provided in this Agreement), as expeditiously as possible, subject to
the Investor's assistance and cooperation as reasonably required with respect to
each Registration Statement:
(a) (i) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus used in connection
therewith as may be necessary to keep such Registration Statement effective and
to comply with the provisions of the Act with respect to the sale or other
disposition of all securities covered by such registration statement whenever
the Investor of such Registrable Securities shall desire to sell or otherwise
dispose of the same (including prospectus supplements with respect to the sales
of securities from time to time in connection with a registration statement
pursuant to Rule 415 promulgated under the Act) and (ii) take all lawful action
such that each of (A) the Registration Statement and any amendment thereto does
not, when it becomes effective, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading and (B) the Prospectus forming part of the Registration
Statement, and any amendment or supplement thereto, does not at any time during
the Registration Period include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(b) (i) prior to the filing with the Commission of any Registration
Statement (including any amendments thereto) and the distribution or delivery of
any prospectus (including any supplements thereto), provide draft copies thereof
to the Investors as required by Section 3(c) and reflect in such documents all
such comments as the Investors (and their counsel) reasonably may propose
respecting the Selling Shareholders and Plan of Distribution sections (or
equivalents) and (ii) furnish to each Investor such numbers of copies of a
prospectus including a preliminary prospectus or any amendment or supplement to
any prospectus, as applicable, in conformity with the requirements of the Act,
and such other documents, as such Investor may reasonably request in order to
facilitate the public sale or other disposition of the securities owned by such
Investor;
(c) register and qualify the Registrable Securities covered by the
Registration Statement under such other securities or blue sky laws of such
jurisdictions as the Investor shall reasonably request (subject to the
limitations set forth in Section 3(d) above), and do any and all other acts and
things which may be necessary or advisable to enable each Investor to consummate
the public sale or other disposition in such jurisdiction of the securities
owned by such Investor, except that the Company shall not for any such purpose
be required to qualify to do business as a foreign corporation in any
jurisdiction wherein it is not so qualified or to file therein any general
consent to service of process;
<PAGE>
(d) list such Registrable Securities on the Principal Market, if the
listing of such Registrable Securities is then permitted under the rules of such
Principal Market;
(e) notify each Investor at any time when a prospectus relating
thereto covered by the Registration Statement is required to be delivered under
the Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in the Registration Statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing, and the Company
shall prepare and file a curative amendment under Section 5(a) as quickly as
commercially possible;
(f) as promptly as practicable after becoming aware of such event,
notify each Investor who holds Registrable Securities being sold (or, in the
event of an underwritten offering, the managing underwriters) of the issuance by
the Commission of any stop order or other suspension of the effectiveness of the
Registration Statement at the earliest possible time and take all lawful action
to effect the withdrawal, recession or removal of such stop order or other
suspension;
(g) cooperate with the Investors to facilitate the timely
preparation and delivery of certificates for the Registrable Securities to be
offered pursuant to the Registration Statement and enable such certificates for
the Registrable Securities to be in such denominations or amounts, as the case
may be, as the Investors reasonably may request and registered in such names as
the Investor may request; and, within three business days after a Registration
Statement which includes Registrable Securities is declared effective by the
Commission, deliver and cause legal counsel selected by the Company to deliver
to the transfer agent for the Registrable Securities (with copies to the
Investors) an appropriate instruction and, to the extent necessary, an opinion
of such counsel;
(h) take all such other lawful actions reasonably necessary to
expedite and facilitate the disposition by the Investors of their Registrable
Securities in accordance with the intended methods therefor provided in the
prospectus which are customary for issuers to perform under the circumstances;
(i) in the event of an underwritten offering, promptly include or
incorporate in a Prospectus supplement or post-effective amendment to the
Registration Statement such information as the managers reasonably agree should
be included therein and to which the Company does not reasonably object and make
all required filings of such Prospectus supplement or post-effective amendment
as soon as practicable after it is notified of the matters to be included or
incorporated in such Prospectus supplement or post-effective amendment; and
(j) maintain a transfer agent and registrar for its Common Stock.
Section 6. INDEMNIFICATION.
(a) To the maximum extent permitted by law, the Company agrees to
indemnify and hold harmless the Investor and each person, if any, who controls
the Investor within the meaning of the Securities Act ("Distributing Investor")
against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
reasonable costs of defense and investigation and all reasonable attorneys'
fees), to which the Distributing Investor may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, or any related preliminary prospectus, final
<PAGE>
prospectus or amendment or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement, preliminary prospectus, final
prospectus or amendment or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by the
Distributing Investor, its counsel, affiliates or any underwriter, specifically
for use in the preparation thereof. This Section 6(a) shall not inure to the
benefit of any Distributing Investor with respect to any person asserting such
loss, claim, damage or liability who purchased the Registrable Securities which
are the subject thereof if the Distributing Investor failed to send or give (in
violation of the Securities Act or the rules and regulations promulgated
thereunder) a copy of the prospectus contained in such Registration Statement to
such person at or prior to the written confirmation to such person of the sale
of such Registrable Securities, where the Distributing Investor was obligated to
do so under the Securities Act or the rules and regulations promulgated
thereunder. This indemnity agreement will be in addition to any liability which
the Company may otherwise have.
(b) To the maximum extent permitted by law, each Distributing
Investor agrees that it will indemnify and hold harmless the Company, and each
officer, director of the Company or person, if any, who controls the Company
within the meaning of the Securities Act, against any losses, claims, damages or
liabilities (which shall, for all purposes of this Agreement, include, but not
be limited to, all reasonable costs of defense and investigation and all
reasonable attorneys' fees) to which the Company or any such officer, director
or controlling person may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement, or any
related preliminary prospectus, final prospectus or amendment or supplement
thereto, or arise out of or are based upon the omission or the alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, but in each case only to the extent
that such untrue statement or alleged untrue statement or omission or alleged
omission was made in such Registration Statement, preliminary prospectus, final
prospectus or amendment or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by such
Distributing Investor, its counsel, affiliates or any underwriter, specifically
for use in the preparation thereof. This indemnity agreement will be in addition
to any liability which the Distributing Investor may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 6, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve the indemnifying party from any liability which it may have to any
indemnified party except to the extent the failure of the indemnified party to
provide such written notification is prejudicial to the ability of the
indemnifying party to defend such action. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, assume the defense thereof, subject to the provisions herein
stated and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section 6 for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified parties as a group shall have the right to employ one separate
counsel in any such action and to participate in the defense thereof, but the
fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party unless (i)
the employment of such counsel has been
<PAGE>
specifically authorized in writing by the indemnifying party, or (ii) the named
parties to any such action (including any impleaded parties) include both the
indemnified party and the indemnifying party and the indemnified party shall
have been advised by its counsel that there may be one or more legal defenses
available to the indemnifying party different from or in conflict with any legal
defenses which may be available to the indemnified party or any other
indemnified party (in which case the indemnifying party shall not have the right
to assume the defense of such action on behalf of such indemnified party, it
being understood, however, that the indemnifying party shall, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable only for the reasonable fees and expenses of one
separate firm of attorneys for the indemnified party, which firm shall be
designated in writing by the indemnified party). No settlement of any action
against an indemnified party shall be made without the prior written consent of
the indemnified party, which consent shall not be unreasonably withheld.
Section 7. CONTRIBUTION. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the indemnified
party makes a claim for indemnification pursuant to Section 6 hereof but is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that the express provisions of Section 6 hereof provide
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any indemnified party, then the Company and the
applicable Distributing Investor shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (which shall, for
all purposes of this Agreement, include, but not be limited to, all reasonable
costs of defense and investigation and all reasonable attorneys' fees), in
either such case (after contribution from others) on the basis of relative fault
as well as any other relevant equitable considerations. The relative fault shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or the applicable Distributing Investor on the other hand, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the Distributing Investor
agree that it would not be just and equitable if contribution pursuant to this
Section 7 were determined by pro rata allocation or by any other method of
allocation which does not take account of the equitable considerations referred
to in this Section 7. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions in respect
thereof) referred to above in this Section 7 shall be deemed to include any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation.
Notwithstanding any other provision of this Section 7, in no event shall any (i)
Investor be required to undertake liability to any person under this Section 7
for any amounts in excess of the dollar amount of the proceeds to be received by
such Investor from the sale of such Investor's Registrable Securities (after
deducting any fees, discounts and commissions applicable thereto) pursuant to
any Registration Statement under which such Registrable Securities are to be
registered under the Securities Act and (ii) underwriter be required to
undertake liability to any person hereunder for any amounts in excess of the
aggregate discount, commission or other compensation payable to such underwriter
with respect to the Registrable Securities underwritten by it and distributed
pursuant to such Registration Statement.
Section 8. NOTICES. All notices, demands, requests, consents, approvals,
and other communications required or permitted hereunder shall be in writing
and, unless otherwise specified herein, shall be (i) personally served, (ii)
deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party
<PAGE>
shall have specified most recently by written notice. Any notice or other
communication required or permitted to be given hereunder shall be deemed
effective (a) upon hand delivery or delivery by facsimile, with accurate
confirmation generated by the transmitting facsimile machine, at the address or
number designated below (if delivered on a business day during normal business
hours where such notice is to be received), or the first business day following
such delivery (if delivered other than on a business day during normal business
hours where such notice is to be received) or (b) on the second business day
following the date of mailing by reputable courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications shall be as set forth
in the Purchase Agreement. Either party hereto may from time to time change its
address or facsimile number for notices under this Section 8 by giving at least
ten (10) days' prior written notice of such changed address or facsimile number
to the other party hereto.
Section 9. ASSIGNMENT. This Agreement is binding upon and inures to the
benefit of the parties hereto and their respective heirs, successors and
permitted assigns. THE RIGHTS GRANTED THE INVESTOR UNDER THIS AGREEMENT MAY BE
ASSIGNED TO ANY PURCHASER OF SUBSTANTIALLY ALL OF THE REGISTRABLE SECURITIES (OR
THE RIGHTS THERETO) FROM INVESTOR, AS OTHERWISE PERMITTED BY THE PURCHASE
AGREEMENT. IN THE EVENT OF A TRANSFER OF THE RIGHTS GRANTED UNDER THIS
AGREEMENT, THE INVESTOR AGREES THAT THE COMPANY MAY REQUIRE THAT THE TRANSFEREE
COMPLY WITH REASONABLE CONDITIONS AS DETERMINED IN THE DISCRETION OF THE
COMPANY.
Section 10. ADDITIONAL COVENANTS OF THE COMPANY. The Company agrees that
at such time as it meets all the requirements for the use of Securities Act
Registration Statement on Form S-3 it shall file all reports and information
required to be filed by it with the Commission in a timely manner and take all
such other action so as to maintain such eligibility for the use of such form.
Section 11. COUNTERPARTS/FACSIMILE. This Agreement may be executed in two
or more counterparts, each of which shall constitute an original, but all of
which, when together shall constitute but one and the same instrument, and shall
become effective when one or more counterparts have been signed by each party
hereto and delivered to the other party. In lieu of the original, a facsimile
transmission or copy of the original shall be as effective and enforceable as
the original.
SECTION 12. REMEDIES. The remedies provided in this Agreement are
cumulative and not exclusive of any remedies provided by law. If any term,
provision, covenant or restriction of this Agreement is held by a court of
competent jurisdiction to be invalid, illegal, void or unenforceable, the
remainder of the terms, provisions, covenants and restrictions set forth herein
shall remain in full force and effect and shall in no way be affected, impaired
or invalidated, and the parties hereto shall use their best efforts to find and
employ an alternative means to achieve the same or substantially the same result
as that contemplated by such term, provision, covenant or restriction. It is
hereby stipulated and declared to be the intention of the parties that they
would have executed the remaining terms, provisions, covenants and restrictions
without including any of such that may be hereafter declared invalid, illegal,
void or unenforceable.
Section 13. CONFLICTING AGREEMENTS. The Company shall not enter into any
agreement with respect to its securities that is inconsistent with the rights
granted to the holders of Registrable Securities in this Agreement or otherwise
prevents the Company from complying with all of its obligations hereunder.
Section 14. HEADINGS. The headings in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
Section 15. GOVERNING LAW, ARBITRATION. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York applicable
to contracts made in New York by persons domiciled in New York City and without
regard to its principles of conflicts of laws. Any dispute under this Agreement
shall be submitted to arbitration under the American Arbitration Association
(the "AAA")
<PAGE>
in New York City, New York, and shall be finally and conclusively determined by
the decision of a board of arbitration consisting of three (3) members
(hereinafter referred to as the "Board of Arbitration") selected as according to
the rules governing the AAA. The Board of Arbitration shall meet on consecutive
business days in New York City, New York, and shall reach and render a decision
in writing (concurred in by a majority of the members of the Board of
Arbitration) with respect to the amount, if any, which the losing party is
required to pay to the other party in respect of a claim filed. In connection
with rendering its decisions, the Board of Arbitration shall adopt and follow
the laws of the State of New York. To the extent practical, decisions of the
Board of Arbitration shall be rendered no more than thirty (30) calendar days
following commencement of proceedings with respect thereto. The Board of
Arbitration shall cause its written decision to be delivered to all parties
involved in the dispute. Any decision made by the Board of Arbitration (either
prior to or after the expiration of such thirty (30) calendar day period) shall
be final, binding and conclusive on the parties to the dispute, and entitled to
be enforced to the fullest extent permitted by law and entered in any court of
competent jurisdiction. The Board of Arbitration shall be authorized and is
hereby directed to enter a default judgment against any party failing to
participate in any proceeding hereunder within the time periods set forth in the
AAA rules. The non-prevailing party to any arbitration (as determined by the
Board of Arbitration) shall pay the expenses of the prevailing party, including
reasonable attorneys' fees, in connection with such arbitration. Any party shall
be entitled to obtain injunctive relief from a court in any case where such
relief is available.
Section 16. SEVERABILITY. If any provision of this Agreement shall for any
reason be held invalid or unenforceable, such invalidity or unenforceablity
shall not affect any other provision hereof and this Agreement shall be
construed as if such invalid or unenforceable provision had never been contained
herein.
<PAGE>
Section 17. CAPITALIZED TERMS. All capitalized terms not otherwise defined
herein shall have the meaning assigned to them in the Purchase Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, on the day and year first above written.
AVTEL COMMUNICATIONS, INC.
By: /S/ ANTHONY E. PAPA
--------------------
Anthony E. Papa
Chief Executive Officer
INVESTOR
AMRO INTERNATIONAL, S.A.
By: /S/ H.U. BACHOFEN
--------------------
H.U. Bachofen, Director
INVESTOR
AUSTINVEST ANSTALT BALZERS
By: /S/ W. GRILL
--------------------
W. Grill, Director
INVESTOR
ESQUIRE TRADE & FINANCE INC.
By: /S/ R. WINIGER
--------------------
R. Winiger, Director
<PAGE>
EXHIBIT 10.15
NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN
REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"). NEITHER THIS WARRANT NOR THE SHARES
ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT
FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS; AND IN THE CASE OF AN EXEMPTION,
ONLY IF THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL THAT SUCH TRANSACTION
DOES NOT REQUIRE REGISTRATION OF THE WARRANT OR SUCH SHARES, WHICH OPINION AND
WHICH COUNSEL SHALL BE SATISFACTORY TO THE COMPANY IN ITS SOLE DISCRETION.
STOCK PURCHASE WARRANT
To Purchase 10,000 Shares of Common Stock of
AVTEL COMMUNICATIONS, INC.
THIS CERTIFIES that, for value received, AMRO International, S.A. (the
"Holder"), is entitled, upon the terms and subject to the conditions hereinafter
set forth, at any time on or after September 30, 1999 (the "Initial Exercise
Date") and on or prior to the close of business on March 31, 2002 (the
"Termination Date") but not thereafter, to subscribe for and purchase from AVTEL
COMMUNICATION, INC., a corporation incorporated in Delaware (the "Company"), up
to Ten Thousand (10,000) shares (the "Warrant Shares") of Common Stock, $.01 par
value, of the Company (the "Common Stock"). The purchase price of one share of
Common Stock (the "Exercise Price") under this Warrant shall be 125% of the
closing bid price of the Common Stock on the Nasdaq SmallCap Market on the
Closing Date of the Convertible Preferred Stock and Warrants Purchase Agreement
dated as of April 5, 1999 pursuant to which this Warrant has been issued (the
"Purchase Agreement"). The Exercise Price and the number of shares for which the
Warrant is exercisable shall be subject to adjustment as provided herein. In the
event of any conflict between the terms of this Warrant and the Purchase
Agreement, the Purchase Agreement shall control. Capitalized terms used and not
otherwise defined herein shall have the meanings set forth for such terms in the
Purchase Agreement.
1. Title of Warrant. Prior to the expiration hereof and subject to compliance
with applicable laws, this Warrant and all rights hereunder are transferable, in
whole or in part, at the office or agency of the Company by the holder hereof in
person or by duly authorized attorney, upon surrender of this Warrant together
with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares of Common
Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Except as provided in Section 4 herein, exercise of the
purchase rights represented by this Warrant may be made at any time or times on
or after the Initial Exercise Date, and before the close
<PAGE>
of business on the Termination Date, or such earlier date on which this Warrant
may terminate as provided elsewhere in this Warrant, by the surrender of this
Warrant and the Notice of Exercise Form annexed hereto duly executed, at the
office of the Company (or such other office or agency of the Company as it may
designate by notice in writing to the registered holder hereof at the address of
such holder appearing on the books of the Company) and upon payment of the
Exercise Price of the shares thereby purchased by wire transfer or cashier's
check drawn on a United States bank, the holder of this Warrant shall be
entitled to receive a certificate for the number of shares of Common Stock so
purchased. Certificates for shares purchased hereunder shall be delivered to the
holder hereof within three (3) business days after the date on which this
Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to
have been exercised and such certificate or certificates shall be deemed to have
been issued, and Holder or any other person so designated to be named therein
shall be deemed to have become a holder of record of such shares for all
purposes, as of the date the Warrant has been exercised by payment to the
Company of the Exercise Price and all taxes required to be paid by Holder, if
any, pursuant to Section 5 prior to the issuance of such shares, have been paid.
If this Warrant shall have been exercised in part, the Company shall, at the
time of delivery of the certificate or certificates representing Warrant Shares,
deliver to Holder a new Warrant evidencing the rights of Holder to purchase the
unpurchased shares of Common Stock called for by this Warrant, which new Warrant
shall in all other respects be identical with this Warrant.
4. No Fractional Shares or Scrip. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. As to any
fraction of a share which Holder would otherwise be entitled to purchase upon
such exercise, the Company shall pay a cash adjustment in respect of such final
fraction in an amount equal to the Exercise Price.
5. Charges, Taxes and Expenses. Issuance of certificates for shares of Common
Stock upon the exercise of this Warrant shall be made without charge to the
holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involving in the issuance
or delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. Closing of Books. The Company will not close its shareholder books or records
in any manner which prevents the timely exercise of this Warrant.
7. Transfer, Division and Combination. (a) Subject to compliance with any
applicable securities laws, transfer of this Warrant and all rights hereunder,
in whole or in part, shall be registered on the books of the Company to be
maintained for such purpose, upon surrender of this Warrant at the principal
office of the Company, together with a written assignment of this Warrant
substantially in the form attached hereto duly executed by Holder or its agent
or attorney and funds sufficient to pay any transfer taxes payable upon the
making of such transfer. Upon such surrender and, if required, such payment, the
Company shall execute and deliver a new Warrant or Warrants in the name of the
assignee or assignees and in the denomination specified in such instrument of
assignment, and shall issue to the assignor a new Warrant evidencing the portion
of this Warrant not so assigned, and this Warrant shall promptly be cancelled. A
Warrant, if properly assigned, may be exercised by a new Holder for the purchase
of shares of Common Stock without having a new Warrant issued.
(b) This Warrant may be divided or combined with other Warrants upon
presentation hereof at the aforesaid office of the Company, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued, signed by Holder or its agent or attorney. Subject to compliance
with Section 7(a), as to any transfer which may be involved in such division or
combination, the Company
<PAGE>
shall execute and deliver a new Warrant or Warrants in exchange for the Warrant
or Warrants to be divided or combined in accordance with such notice.
(c) The Company shall prepare, issue and deliver at its own expense (other
than transfer taxes) the new Warrant or Warrants under this Section 7.
(d) The Company agrees to maintain, at its aforesaid office, books for the
registration and the registration of transfer of the Warrants.
8. No Rights as Shareholder until Exercise. This Warrant does not entitle the
holder hereof to any voting rights or other rights as a shareholder of the
Company prior to the exercise hereof. Upon the surrender of this Warrant and the
payment of the aggregate Exercise Price, the Warrant Shares so purchased shall
be and be deemed to be issued to such holder as the record owner of such shares
as of the close of business on the later of the date of such surrender or
payment.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company represents and
warrants that upon receipt by the Company of evidence reasonably satisfactory to
it of the loss, theft, destruction or mutilation of this Warrant certificate or
any stock certificate relating to the Warrant Shares, and in case of loss, theft
or destruction, of indemnity or security reasonably satisfactory to it, and upon
surrender and cancellation of such Warrant or stock certificate, if mutilated,
the Company will make and deliver a new Warrant or stock certificate of like
tenor and dated as of such cancellation, in lieu of such Warrant or stock
certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday, Sunday or a legal holiday, then such action may be taken or
such right may be exercised on the next succeeding day not a Saturday, Sunday or
legal holiday.
11. Adjustments of Exercise Price and Number of Warrant Shares. (a) Stock
Splits, etc. The number and kind of securities purchasable upon the exercise of
this Warrant and the Exercise Price shall be subject to adjustment from time to
time upon the happening of any of the following. In case the Company shall (i)
pay a dividend in shares of Common Stock or make a distribution in shares of
Common Stock to holders of its outstanding Common Stock, (ii) subdivide its
outstanding shares of Common Stock into a greater number of shares of Common
Stock, (iii) combine its outstanding shares of Common Stock into a smaller
number of shares of Common Stock or (iv) issue any shares of its capital stock
in a reclassification of the Common Stock, then the number of Warrant Shares
purchasable upon exercise of this Warrant immediately prior thereto shall be
adjusted so that the holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. Upon each such adjustment of the kind and number
of Warrant Shares or other securities of the Company which are purchasable
hereunder, the holder of this Warrant shall thereafter be entitled to purchase
the number of Warrant Shares or other securities resulting from such adjustment
at an Exercise Price per such Warrant Share or other security obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares purchasable pursuant hereto immediately prior to
such adjustment and dividing by the number of Warrant Shares or other securities
of the Company resulting from such adjustment. An adjustment made pursuant to
this paragraph shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event.
(b) Reorganization, Reclassification, Merger, Consolidation or Disposition of
Assets. In case the Company shall reorganize its capital, reclassify its capital
stock, consolidate or merge with or into another corporation (where the Company
is not the surviving corporation or where there is a change in or distribution
with respect to the Common Stock of the Company), or sell, transfer or otherwise
dispose of all or substantially
<PAGE>
all its property, assets or business to another corporation and, pursuant to the
terms of such reorganization, reclassification, merger, consolidation or
disposition of assets, shares of common stock of the successor or acquiring
corporation, or any cash, shares of stock or other securities or property of any
nature whatsoever (including warrants or other subscription or purchase rights)
in addition to or in lieu of common stock of the successor or acquiring
corporation ("Other Property"), are to be received by or distributed to the
holders of Common Stock of the Company, then Holder shall have the right
thereafter to receive, upon exercise of this Warrant, the number of shares of
common stock of the successor or acquiring corporation or of the Company, if it
is the surviving corporation, and Other Property receivable upon or as a result
of such reorganization, reclassification, merger, consolidation or disposition
of assets by a holder of the number of shares of Common Stock for which this
Warrant is exercisable immediately prior to such event. In case of any such
reorganization, reclassification, merger, consolidation or disposition of
assets, the successor or acquiring corporation (if other than the Company) shall
expressly assume the due and punctual observance and performance of each and
every covenant and condition of this Warrant to be performed and observed by the
Company and all the obligations and liabilities hereunder, subject to such
modifications as may be deemed appropriate (as determined by resolution of the
Board of Directors of the Company) in order to provide for adjustments of shares
of Common Stock for which this Warrant is exercisable which shall be as nearly
equivalent as practicable to the adjustments provided for in this Section 11.
For purposes of this Section 11, "common stock of the successor or acquiring
corporation" shall include stock of such corporation of any class which is not
preferred as to dividends or assets over any other class of stock of such
corporation and which is not subject to redemption and shall also include any
evidences of indebtedness, shares of stock or other securities which are
convertible into or exchangeable for any such stock, either immediately or upon
the arrival of a specified date or the happening of a specified event and any
warrants or other rights to subscribe for or purchase any such stock. The
foregoing provisions of this Section 11 shall similarly apply to successive
reorganizations, reclassifications, mergers, consolidations or disposition of
assets.
12. Voluntary Adjustment by the Company. The Company may at any time during the
term of this Warrant, reduce the then current Exercise Price to any amount and
for any period of time deemed appropriate by the Board of Directors of the
Company.
13. Notice of Adjustment. Whenever the number of Warrant Shares or number or
kind of securities or other property purchasable upon the exercise of this
Warrant or the Exercise Price is adjusted, as herein provided, the Company shall
promptly mail by registered or certified mail, return receipt requested, to the
holder of this Warrant notice of such adjustment or adjustments setting forth
the number of Warrant Shares (and other securities or property) purchasable upon
the exercise of this Warrant and the Exercise Price of such Warrant Shares (and
other securities or property) after such adjustment, setting forth a brief
statement of the facts requiring such adjustment and setting forth the
computation by which such adjustment was made. Such notice, in absence of
manifest error, shall be conclusive evidence of the correctness of such
adjustment.
14. Notice of Corporate Action. If at any time
(a) the Company shall take a record of the holders of its Common Stock for
the purpose of entitling them to receive a dividend or other distribution, or
any right to subscribe for or purchase any evidences of its indebtedness, any
shares of stock of any class or any other securities or property, or to receive
any other right, or
(b) there shall be any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
consolidation or merger of the Company with, or any sale, transfer or other
disposition of all or substantially all the property, assets or business of the
Company to, another corporation or,
<PAGE>
(c) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, in any one or more of such cases, the Company shall give to Holder (i) at
least 30 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, liquidation or winding up, and (ii)
in the case of any such reorganization, reclassification, merger, consolidation,
sale, transfer, disposition, dissolution, liquidation or winding up, at least 30
days' prior written notice of the date when the same shall take place. Such
notice in accordance with the foregoing clause also shall specify (i) the date
on which any such record is to be taken for the purpose of such dividend,
distribution or right, the date on which the holders of Common Stock shall be
entitled to any such dividend, distribution or right, and the amount and
character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of the Company and
delivered in accordance with Section 16(d).
15. Authorized Shares. The Company covenants that during the period the Warrant
is outstanding, it will reserve from its authorized and unissued Common Stock a
sufficient number of shares to provide for the issuance of the Warrant Shares
upon the exercise of any purchase rights under this Warrant. The Company further
covenants that its issuance of this Warrant shall constitute full authority to
its officers who are charged with the duty of executing stock certificates to
execute and issue the necessary certificates for the Warrant Shares upon the
exercise of the purchase rights under this Warrant. The Company will take all
such reasonable action as may be necessary to assure that such Warrant Shares
may be issued as provided herein without violation of any applicable law or
regulation, or of any requirements of NASDAQ or any domestic securities exchange
upon which the Common Stock may be listed.
The Company shall not by any action, including, without limitation,
amending its certificate of incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of this Warrant above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of this Warrant, and (c) use its best efforts to obtain all
such authorizations, exemptions or consents from any public regulatory body
having jurisdiction thereof as may be necessary to enable the Company to perform
its obligations under this Warrant.
Upon the request of Holder, the Company will at any time during the
period this Warrant is outstanding acknowledge in writing, in form reasonably
satisfactory to Holder, the continuing validity of this Warrant and the
obligations of the Company hereunder.
Before taking any action which would cause an adjustment reducing
the current Exercise Price below the then par value, if any, of the shares of
Common Stock issuable upon exercise of the
<PAGE>
Warrants, the Company shall take any corporate action which may be necessary in
order that the Company may validly and legally issue fully paid and
non-assessable shares of such Common Stock at such adjusted Exercise Price.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Exercise Price, the Company shall obtain all such authorizations or exemptions
thereof, or consents thereto, as may be necessary from any public regulatory
body or bodies having jurisdiction thereof.
16. Miscellaneous.
(a) Jurisdiction. This Warrant shall be binding upon any successors or assigns
of the Company. This Warrant shall constitute a contract under the laws of New
York without regard to its conflict of law, principles or rules, and be subject
to arbitration pursuant to the terms set forth in the Purchase Agreement.
(b) Restrictions. The holder hereof acknowledges that the Warrant Shares
acquired upon the exercise of this Warrant, if not registered, will have
restrictions upon resale imposed by state and federal securities laws and by the
Purchase Agreement.
(c) Nonwaiver and Expenses. No course of dealing or any delay or failure to
exercise any right hereunder on the part of Holder shall operate as a waiver of
such right or otherwise prejudice Holder's rights, powers or remedies,
notwithstanding all rights hereunder terminate on the Termination Date. If the
Company fails to comply with any provision of this Warrant, the Company shall
pay to Holder such amounts as shall be sufficient to cover any costs and
expenses including, but not limited to, reasonable attorneys' fees, including
those of appellate proceedings, incurred by Holder in collecting any amounts due
pursuant hereto or in otherwise enforcing any of its rights, powers or remedies
hereunder.
(d) Notices. Any notice, request or other document required or permitted to be
given or delivered to the holder hereof by the Company shall be delivered in
accordance with the notice provisions of the Purchase Agreement.
(e) Limitation of Liability. No provision hereof, in the absence of affirmative
action by Holder to purchase shares of Common Stock, and no enumeration herein
of the rights or privileges of Holder hereof, shall give rise to any liability
of Holder for the purchase price of any Common Stock or as a stockholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
(f) Remedies. Holder, in addition to being entitled to exercise all rights
granted by law, including recovery of damages, will be entitled to specific
performance of its rights under this Warrant. The Company agrees that monetary
damages would not be adequate compensation for any loss incurred by reason of a
breach by it of the provisions of this Warrant and hereby agrees to waive the
defense in any action for specific performance that a remedy at law would be
adequate.
(g) Successors and Assigns. Subject to applicable securities laws, this Warrant
and the rights and obligations evidenced hereby shall inure to the benefit of
and be binding upon the successors of the Company and the successors and
permitted assigns of Holder. The provisions of this Warrant are intended to be
for the benefit of all Holders from time to time of this Warrant and shall be
enforceable by any such Holder or holder of Warrant Stock.
(h) Cooperation. The Company shall cooperate with Holder in supplying such
information as may be reasonably necessary for Holder to complete and file any
information reporting forms presently or hereafter required by the SEC as a
condition to the availability of an exemption from the Securities Act for the
sale of any Warrant or Restricted Common Stock.
<PAGE>
(i) Indemnification. The Company agrees to indemnify and hold harmless Holder
from and against any liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, attorneys' fees, expenses and
disbursements of any kind which may be imposed upon, incurred by or asserted
against Holder in any manner relating to or arising out of any failure by the
Company to perform or observe in any material respect any of its covenants,
agreements, undertakings or obligations set forth in this Warrant; provided,
however, that the Company will not be liable hereunder to the extent that any
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
claims, costs, attorneys' fees, expenses or disbursements are found in a final
non-appealable judgment by a court to have resulted from Holder's negligence,
bad faith or willful misconduct in its capacity as a stockholder or
warrantholder of the Company.
(j) Amendment. This Warrant may be modified or amended or the provisions hereof
waived with the written consent of the Company and the Holder.
(k) Severability. Wherever possible, each provision of this Warrant shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Warrant shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provisions
or the remaining provisions of this Warrant.
(l) Headings. The headings used in this Warrant are for the convenience of
reference only and shall not, for any purpose, be deemed a part of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its
officer thereunto duly authorized.
Dated: April 13, 1999
AVTEL COMMUNICATIONS, INC.
By: /s/ ANTHONY E. PAPA
---------------------
Anthony E. Papa,
Chief Executive Officer
<PAGE>
The Registrant has issued Stock Purchase Warrants identical in form to the
following additional holders:
<TABLE>
<S> <C>
Austinvest Anstalt Balzers 2,333 shares
Esquire Trade & Finance Inc. 2,667 shares
</TABLE>
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- ---- -----------------------------
<S> <C>
AvTel Holdings, Inc. California
Best Connections, Inc. Texas
Digital Media International, Inc. Pennsylvania
Hi, Tiger, Inc. Utah
Matrix Telecom, Inc Texas
Remote Lojix/PCSI, Inc. New York
Remote Lojix of Connecticut, Inc. Connecticut
Remote Lojix Technology Partners, Inc. New York
Silicon Beach Communications, Inc. California
Westnet Communications, Inc. California
</TABLE>
<PAGE>
EXHIBIT 23
Independent Auditors' Consent
The Board of Directors
AvTel Communications, Inc.
We consent to incorporation by reference in the Registration Statements (No.
333-30725), (No. 333-53435), and (No. 333-64769) on Form S-8 of AvTel
Communications, Inc. of our report dated April 14, 1999, relating to the
consolidated balance sheets of AvTel Communications, Inc. and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity, and cash flows and related schedule, for each
of the years in the three-year period ended December 31, 1998, which report
appears in the December 31, 1998 annual report on Form 10-K of AvTel
Communications, Inc.
/s/ KPMG LLP
-------------
KPMG LLP
Dallas, Texas
April 14, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES F-3 AND F-4 OF THE COMPANY'S FORM 10-K FOR THE YEAR ENDED AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 911
<SECURITIES> 0
<RECEIVABLES> 4,805
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,139
<PP&E> 1,685
<DEPRECIATION> 0
<TOTAL-ASSETS> 14,634
<CURRENT-LIABILITIES> 10,162
<BONDS> 1,113
0
1
<COMMON> 103
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 14,634
<SALES> 0
<TOTAL-REVENUES> 44,013
<CGS> 0
<TOTAL-COSTS> 31,849
<OTHER-EXPENSES> 19,588
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86
<INCOME-PRETAX> (7,329)
<INCOME-TAX> (202)
<INCOME-CONTINUING> (7,127)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,127)
<EPS-PRIMARY> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
