<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 1, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ILD TELECOMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4899 59-3375165
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. employer
incorporation or organization) Classification Code Number) identification
number)
</TABLE>
14651 DALLAS PARKWAY
SUITE 905
DALLAS, TEXAS 75240
(972) 503-8700
(Address, including zip code, and telephone number, including area code, of the
registrant's principal executive offices)
--------------------------
DENNIS J. STOUTENBURGH
PRESIDENT
ILD TELECOMMUNICATIONS, INC.
14651 DALLAS PARKWAY
SUITE 905
DALLAS, TEXAS 75240
PHONE: (972) 503-8700
FACSIMILE: (972) 503-1919
(Name, address, including zip code and telephone number, including area code, of
agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C> <C>
M. HILL JEFFRIES, ESQ. C. READ MORTON, JR., ESQ. LEIGH P. RYAN, ESQ.
CHRISTOPHER W. HAFFKE, ESQ. D. TULLY HAZELL, ESQ. PAUL, HASTINGS, JANOFSKY & WALKER LLP
ALSTON & BIRD LLP CASHIN, MORTON & MULLINS THIRTY-FIRST FLOOR
ONE ATLANTIC CENTER TWO MIDTOWN PLAZA, SUITE 1900 399 PARK AVENUE
1201 WEST PEACHTREE STREET 1360 PEACHTREE STREET, N.E. NEW YORK, NEW YORK 10022-4697
ATLANTA, GEORGIA 30309-3424 ATLANTA, GEORGIA 30309-3214 TELEPHONE: (212) 318-6000
TELEPHONE: (404) 881-7000 TELEPHONE: (404) 870-1500 FACSIMILE: (212) 319-4090
FACSIMILE: (404) 881-4777 FACSIMILE: (404) 870-1529
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effectiveness of the Registration Statement.
--------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / / ________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / / ________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $.01 par value per share............................................ $60,000,000 $17,700
</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(o).
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 1, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SHARES
[NAME/LOGO]
COMMON STOCK
ALL OF THE SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE (THE
"COMMON STOCK"), OFFERED HEREBY (THE "OFFERING") ARE BEING OFFERED BY ILD
TELECOMMUNICATIONS, INC. (THE "COMPANY" OR "ILD"). PRIOR TO THE OFFERING, THERE
HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK. IT CURRENTLY IS ANTICIPATED THAT
THE INITIAL PUBLIC OFFERING PRICE OF THE COMMON STOCK WILL BE BETWEEN $ AND
$ PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF THE FACTORS TO BE
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE OF THE COMMON STOCK.
THE COMPANY HAS APPLIED FOR THE COMMON STOCK TO BE LISTED FOR QUOTATION ON THE
NASDAQ STOCK MARKET'S NATIONAL MARKET (THE "NASDAQ NATIONAL MARKET") UNDER THE
SYMBOL "ILDT."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
PER SHARE........................................... $ $ $
TOTAL (3)........................................... $ $ $
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $1.1 MILLION.
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER OVER-ALLOTMENTS, IF
ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO PUBLIC
WILL BE $ , THE UNDERWRITING DISCOUNT WILL BE $ , AND THE PROCEEDS
TO COMPANY WILL BE $ . SEE "UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN, SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFORE AT
THE OFFICE OF NATIONSBANC MONTGOMERY SECURITIES LLC ON OR ABOUT ,
1998.
-------------------
NationsBanc Montgomery Securities LLC
Raymond James & Associates, Inc.
Interstate/Johnson Lane
Corporation
, 1998
<PAGE>
[MAP OF LOCATIONS OF SALES OFFICES, SWITCHES, CALL CENTERS, AND BILLING AND
COLLECTIONS OPERATIONS]
[DIAGRAM OF COMPANY'S FACILITIES-BASED INFRASTRUCTURE
AND ITS CALL ROUTING CAPABILITIES]
[PHOTOGRAPH OF A CALL CENTER]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO THE
"COMPANY" OR "ILD" INCLUDE ILD TELECOMMUNICATIONS, INC. AND ITS SUBSIDIARIES.
ALL INFORMATION CONTAINED HEREIN (I) REFLECTS THE CONVERSION OF ALL OUTSTANDING
SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK AND THE CONVERSION OF CERTAIN
CONVERTIBLE SUBORDINATED INDEBTEDNESS INTO COMMON STOCK UPON CONSUMMATION OF THE
OFFERING (THE "CLOSING DATE"), (II) REFLECTS A FOR 1 STOCK SPLIT EFFECTED
CONTEMPORANEOUSLY WITH THIS OFFERING, AND (III) EXCEPT AS OTHERWISE NOTED,
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.
THE COMPANY
ILD is a rapidly growing independent facilities-based provider of prepaid
phone services and telecommunications outsourcing services. The Company offers
prepaid services through prepaid long distance calling cards and prepaid local
phone service to individual consumers nationwide through retail outlets and
direct response media. ILD offers a broad range of outsourcing services
including operator services, billing and collections services and traditional
long distance services. The Company's outsourcing services are provided
primarily to other telecommunications companies, including WorldCom, Inc.
("WorldCom"), which has a contract with ILD to provide all of WorldCom's
outsourced operator assisted and billing and collections services except in
certain limited circumstances. For the three months ended December 31, 1997, ILD
had revenues and EBITDA of $23.8 million and $1.2 million, respectively.
The Company began operations in May 1996 as a switchless provider of
operator assisted and long distance services. In September 1997, the Company
began its transition to a facilities-based provider with the acquisition of
certain network assets and customer contracts from WorldCom (the "WorldCom
Assets"). The Company currently provides its prepaid and outsourcing services
through an owned and operated network of long distance and enhanced switches,
call centers and billing and collections operations. The Company anticipates
that during the second half of 1998, virtually all of its traffic will be
carried over the Company's owned switches and that leased interexchange circuits
will connect its primary points of origination and termination. The Company
currently has significant excess capacity in its facilities-based network, and
as a result, has the opportunity to further leverage its infrastructure by
offering new services, cross-selling existing services to its diverse customer
base, and adding increased call traffic through strategic acquisitions.
PREPAID SERVICES
Prepaid services represent one of the fastest growing sectors of the
telecommunications industry. According to the International Telecard Association
("ITA"), prepaid long distance calling card revenues in the U.S. have grown from
an estimated $12.0 million in 1992 to an estimated $2.1 billion in 1997, and
they are projected to be at least $4.0 billion in 2001. The ability to offer
prepaid local phone service emerged in February 1996 when the Telecommunications
Act of 1996 (the "Telecommunications Act") was enacted. Although prepaid local
phone service accounted for an insignificant proportion of the $87 billion
domestic local exchange services market in 1997, growth in the prepaid local
market is expected to be driven by a large population of consumers such as
immigrants, students, temporary residents and lower-income individuals, commonly
known as "unbanked consumers," who in many instances do not have local phone
service due to credit or identification problems. The Federal Communications
Commission ("FCC") estimates that as of November 1997, 6.3 million U.S.
households did not have local phone service, representing 6.2% of the country's
total households. These households, as well as persons who are often not
included in the FCC's statistics such as immigrants, students, and temporary
residents, represent the target market for the Company's prepaid local services.
3
<PAGE>
The Company believes it is well positioned to consolidate the rapidly
growing markets for prepaid long distance and prepaid local phone services with
its state-of-the-art infrastructure and experienced management team. The Company
believes that the majority of the more than 400 prepaid service providers in the
United States are switchless resellers with high network costs, making the
prepaid market fragmented and inefficient. Since December 1997, the Company has
acquired and successfully integrated five prepaid service providers and is
actively in discussions with several other acquisition candidates. ILD believes
these and future acquisitions will lead to increased revenues and operating
efficiencies, which will include migrating call traffic onto a single nationwide
network, consolidating back office functions, increasing its customer base and
types of distribution channels, adding new features to its existing base of
products and selling additional products through its existing distribution
channels.
The Company distributes its prepaid services products to individual
consumers through over-the-counter sales, vending machines and direct response
media. Retail outlets through which the Company's services are distributed
include large mass merchants such as Fred Meyer, Goodings, Pathmark, and
PharMor, and gasoline and convenience stores such as Petro Shopping Centers,
Stop N Go, Diamond Shamrock, and Tom Thumb. The typical prepaid calling card is
sold in amounts ranging from $5 to $25, and the Company has the infrastructure
to recharge its cards generally at a lower per minute cost to the individual
consumer than the original per minute cost. Recharge minutes constituted
approximately 22% of the Company's total prepaid minutes for the three months
ended December 31, 1997 and are expected to represent an increasing proportion
of the Company's prepaid revenues in the future. ILD plans to invest in
marketing and infrastructure resources to rapidly expand its prepaid business
over the next several years.
OUTSOURCING SERVICES
The Company believes it is one of the major independent providers of
telecommunications outsourcing services in the United States. According to
industry analysts, the market for telecommunications outsourcing is in its early
stages of development and is growing as companies continue a strong trend of
outsourcing non-core business functions to enhance operating efficiency and
focus on core businesses. The Company's outsourcing services include operator
services, billing and collections services, traditional long distance services,
and repair services, and are offered either on a bundled or unbundled basis to
its customers. These outsourcing services are offered to aggregators of call
traffic, including private pay phone owners, hotels, condominiums, health care
institutions, educational institutions and correctional facilities as well as
other telecommunications companies, including Local Exchange Carriers ("LECs"),
Interexchange Carriers ("IXCs"), Regional Bell Operating Companies ("RBOCs") and
Competitive Local Exchange Carriers ("CLECs"). The Company believes that CLECs
in particular will depend significantly on third-party providers of
telecommunications services, and thus represent a major outsourcing opportunity
for the Company.
ILD offers a full range of live and automated operator services which are
handled primarily by ILD's full-service call centers in San Antonio, Texas and
Las Vegas, Nevada. The Company's call center infrastructure makes it one of the
leading independent providers of operator services in the U.S. The Company has
an agreement with WorldCom to handle the incidental operator services calls
generated from WorldCom's long distance subscriber base as well as for "dial
around" traffic on the WorldCom network generated from phones not subscribed to
WorldCom. Some of the Company's other customers for its operator services
business include Public Communications Services, Inc. ("PCS"), PhoneTel
Technologies, Inc. ("PhoneTel"), Ameritech Corporation ("Ameritech"), Digital
Access Communications ("Digital Access") and the MGM Grand Hotel. The Company
believes its broad customer base for operator services affords it the
opportunity to cross-sell its other outsourcing services to its customers.
ILD also operates a billing and collections operation that it acquired as
part of the WorldCom Assets in September 1997. This billing and collections
operation has been in existence since 1986 and is one of the major providers of
outsourced LEC billing and collections services in the United States. The
Company has agreements with most of the major RBOCs and LECs, allowing it to
bill individual consumers through the
4
<PAGE>
consumers' local phone bills. ILD's major billing and collections customers
include WorldCom, Davel Communications and Talton Holdings, Inc. The Company
believes the presence of an owned and operated billing and collections operation
enhances its ability to serve as a full-service outsourcing services provider.
The Company also provides traditional long distance products and services to
its customers, in most cases in combination with other service offerings. ILD's
long distance products and services for the commercial market include direct
dial domestic and international calling, T-1 voice and data services, inbound
800/888 services, calling card programs for corporate employees, and advanced
invoicing and reporting features.
STRATEGY
ILD's objective is to be one of the leading providers of enhanced
telecommunications services. Key elements of the Company's strategy include:
BECOME A LEADING INDEPENDENT PROVIDER OF PREPAID SERVICES. The domestic
prepaid services market is one of the fastest growing markets of the
telecommunications industry and is served by over 400 providers. The Company
believes a majority of these providers are small to mid-sized switchless
resellers with high network costs. ILD believes it is well positioned to
consolidate providers in this market and successfully integrate them into its
facilities-based network. In addition, the Company will seek to increase its
marketing and distribution of prepaid services by expanding its relationships
with retail outlets and other distribution partners such as private pay phone
owners and affinity groups. Through ongoing infrastructure upgrades, the Company
intends to offer enhanced calling card features, including conference calling,
store and forward messaging, voice mail broadcast, facsimile mail, facsimile
forwarding, facsimile broadcast and pager notification.
LEVERAGE ITS STRONG MARKET POSITION AS A FULL SERVICE PROVIDER OF
OUTSOURCING SERVICES. ILD offers a diverse menu of outsourcing services,
including operator services, traditional long distance and billing and
collections. The Company believes it can build on its strong market position in
outsourcing by growing its customer base and providing additional outsourcing
services to its customers. The Company plans to augment its outsourcing services
with the introduction in 1998 of primary inquiry (a billing inquiry service to
resolve billing inquiries for individual users), directory assistance, voice
mail messaging, and enhanced billing and collections services. In addition, the
Company expects to utilize its call centers as third party verifiers of Primary
Interstate Carrier ("PIC") modifications, a service which limits unauthorized
changes to an individual user's PIC, commonly known as "slamming."
UTILIZE NETWORK FACILITIES TO BE A LOW COST PROVIDER. The Company seeks to
be a low cost provider of prepaid and outsourcing services. ILD believes that it
can achieve this objective by leasing interexchange circuits, which are expected
to significantly decline in price as additional capacity becomes available, as
well as the least cost routing capabilities of its switching infrastructure. The
Company's facilities-based network also allows the Company to process traffic in
any of its call centers, providing redundancy and increasing call center
utilization and efficiency. The Company also seeks to increase efficiencies in
its call centers and other back office functions by expanding automation and
training its operators and customer service representatives to perform multiple
tasks.
CAPITALIZE ON SYNERGIES BETWEEN PREPAID SERVICES AND OUTSOURCING
SERVICES. The Company's infrastructure services both its prepaid and
outsourcing operations, creating scale and operating efficiencies not generally
available to its competitors. Additionally, the Company has the opportunity to
increase revenues by cross-selling its products and services to its diverse
customer base. The Company's outsourcing services customers are potential
customers for its prepaid services. For example, the Company recently introduced
a prepaid calling card vending machine option to its outsourcing customers that
aggregate traffic (such as private pay phone owners or hotels), which will
enable these customers to capture a share of call traffic
5
<PAGE>
otherwise lost to dial around traffic. Individual consumers of the Company's
prepaid local services are also ideal customers for ILD's prepaid long distance
and voice messaging services.
RECENT DEVELOPMENTS
The Company entered the prepaid long distance and local markets in December
1997 by acquiring Interlink Telecommunications, Inc. ("Interlink") and
significantly expanded its operations in the prepaid long distance market with
the acquisition of the prepaid operations of Intellicall, Inc. ("Intellicall")
as of January 1, 1998. On April 30, 1998, the Company signed an agreement to
acquire a contract covering approximately 1,600 Diamond Shamrock outlets
providing over-the-counter distribution of prepaid long distance services from a
subsidiary of TSC Communications Corp., a Texas based company. See "Unaudited
Pro Forma Consolidated Statements of Operations." To further expand its prepaid
long distance distribution channels, the Company recently entered into
non-binding letters of intent to acquire the capital stock or assets of three
companies. In the aggregate, these companies will provide the Company with
approximately 280 vending machine locations and contracts with 18 retail outlets
providing over-the-counter distribution of prepaid long distance services.
------------------------
The Company is led by a management team with many years of experience in
executing and integrating acquisitions in the telecommunications industry.
Michael F. Lewis, the Company's Chairman and Chief Executive Officer, was a
founder and president of two long distance companies, each of which acquired and
successfully integrated several related businesses prior to being acquired by
other telecommunications companies. In addition, Mr. Lewis served on the board
of directors of LDDS Communications, Inc. (now known as WorldCom) from 1988 to
1992. Dennis J. Stoutenburgh, the Company's President, has more than ten years
of experience in the long distance, operator services and prepaid calling
industries. Other members of the Company's senior management have significant
experience in telecommunications operations, network integration, marketing and
financing.
The Company (formerly known as ILD Teleservices, Inc.) was incorporated in
Delaware on April 18, 1996. The Company began operations on May 10, 1996 upon
its acquisition of (i) certain assets comprising the operator services and long
distance businesses of Intellicall and (ii) all of the stock of Intellicall
Operator Services, Inc. ("IOS"), a wholly owned subsidiary of Intellicall which
holds the regulatory licenses and permits required for the operation of the
business acquired from Intellicall. The operator services and long distance
business acquired from Intellicall and the regulatory licenses and permits held
by IOS are hereinafter referred to collectively as the "Predecessor." The
Company's corporate offices are located at 14651 Dallas Parkway, Suite 905,
Dallas, Texas 75240, and its telephone number is (972) 503-8700.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby............................. shares
Common Stock to be outstanding after the Offering....... shares(1)
Use of proceeds......................................... To repay certain indebtedness of
the Company, to redeem all of the
shares of the Company's Series B
Convertible Preferred Stock (the
"Series B Convertible Preferred
Stock"), and for general corporate
purposes, including the financing
of certain capital improvements,
possible purchases of network
equipment, and possible
acquisitions. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol.................. "ILDT"
</TABLE>
- ------------------------
(1) Reflects the conversion of all outstanding shares of Series A Convertible
Preferred Stock and certain convertible subordinated indebtedness into
Common Stock upon the consummation of the Offering. Excludes 63,889 shares
of Common Stock subject to outstanding options and warrants. See
"Management--Stock Option Plans," "Description of Capital Stock--Warrants to
Purchase Common Stock," "Shares Eligible for Future Sale" and Note 8 of
Notes to the Company's Consolidated Financial Statements.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
Set forth below is certain historical and pro forma consolidated financial
and operating data for the Company. Effective January 1, 1997, the Company
changed its fiscal year end to September 30. The summary consolidated statement
of operations data for the nine month period ended September 30, 1997 has been
derived from the consolidated financial statements of the Company included in
this Prospectus which have been audited by Price Waterhouse LLP, independent
accountants. The summary combined statements of operations data for the nine
months ended September 30, 1996 and the consolidated statements of operations
and operating data for the three months ended December 31, 1996 and 1997, and
the consolidated balance sheet data as of December 31, 1997, have been derived
from unaudited consolidated financial statements of the Company, and, in the
opinion of the Company, include all adjustments, consisting only of normal
recurring accruals, necessary for a fair presentation of such information.
Operating results for the three months ended December 31, 1997 are not
necessarily indicative of the results that may be expected for the entire fiscal
year. The pro forma consolidated statements of operations data have been derived
from the unaudited pro forma consolidated statements of operations information
included elsewhere in this Prospectus. The information below is qualified by
reference to, and should be read in conjunction with, "Unaudited Pro Forma
Consolidated Statements of Operations," "Selected Consolidated Financial and
Operating Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------- DECEMBER 31,
PREDECESSOR ------------------------
AND COMPANY PRO FORMA AS
COMBINED ADJUSTED
1996(1) 1997 1997(2) 1996 1997
-------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Telecommunications revenues:
Outsourcing services..................................... $ 19,576 $ 30,349 $ 85,095 $ 7,100 $ 23,333
Prepaid services......................................... -- -- 3,756 -- 449
------- ----------- ------------ ----------- -----------
Total revenues......................................... 19,576 30,349 88,851 7,100 23,782
Cost of revenues........................................... 17,574 26,298 69,503 6,431 19,129
------- ----------- ------------ ----------- -----------
Gross profit............................................. 2,002 4,051 19,348 669 4,653
Operating expenses......................................... 1,099 3,005 17,339 476 4,053
------- ----------- ------------ ----------- -----------
Income from operations..................................... 903 1,046 2,009 193 600
Other income (expense)..................................... (173) (387) 211 (106) (344)
------- ----------- ------------ ----------- -----------
Income before provision for income taxes................... 730 659 2,220 87 256
Provision for income taxes................................. 115 151 821 -- 93
------- ----------- ------------ ----------- -----------
Net income................................................. 615 508 1,399 87 163
Preferred dividend requirements............................ (18) (113) (803) (11) (254)
------- ----------- ------------ ----------- -----------
Net income (loss) applicable to common stockholders........ $ 597 $ 395 $ 596 $ 76 $ (91)
------- ----------- ------------ ----------- -----------
------- ----------- ------------ ----------- -----------
Net income (loss) per share applicable to common
stockholders(3):
Basic....................................................
Diluted..................................................
Shares used in computing net income (loss) per share
applicable to common stockholders(3):
Basic....................................................
Diluted..................................................
OPERATING DATA:
Gross profit margin........................................ 10.2% 13.3% 21.8% 9.4% 19.6%
EBITDA(4).................................................. $ 957 $ 1,289 5,275 $ 210 $ 1,204
EBITDA margin(5)........................................... 4.9% 4.2% 5.9% 3.0% 5.1%
<CAPTION>
PRO FORMA AS
ADJUSTED
1997(2)
-------------
<S> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Telecommunications revenues:
Outsourcing services..................................... $ 24,415
Prepaid services......................................... 1,707
-------------
Total revenues......................................... 26,122
Cost of revenues........................................... 20,260
-------------
Gross profit............................................. 5,862
Operating expenses......................................... 5,344
-------------
Income from operations..................................... 518
Other income (expense)..................................... (65)
-------------
Income before provision for income taxes................... 453
Provision for income taxes................................. 168
-------------
Net income................................................. 285
Preferred dividend requirements............................ (268)
-------------
Net income (loss) applicable to common stockholders........ $ 17
-------------
-------------
Net income (loss) per share applicable to common
stockholders(3):
Basic....................................................
Diluted..................................................
Shares used in computing net income (loss) per share
applicable to common stockholders(3):
Basic....................................................
Diluted..................................................
OPERATING DATA:
Gross profit margin........................................ 22.4%
EBITDA(4).................................................. 1,346
EBITDA margin(5)........................................... 5.2%
</TABLE>
See accompanying notes on the following page.
8
<PAGE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
--------------------------
ACTUAL AS ADJUSTED(6)
--------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................................................. $ 66 $ 30,352
Total assets.......................................................................................... 55,558 85,398
Long-term obligations, less current maturities........................................................ 13,381 1,611
Redeemable Preferred Stock............................................................................ 13,196 13,196
Convertible Preferred Stock........................................................................... 1 --
Total stockholders' equity............................................................................ 6,416 52,926
</TABLE>
- ------------------------------
(1) The Company acquired the Predecessor on May 10, 1996. Accordingly,
information for the period from January 1, 1996 through May 9, 1996 reflects
the operations of the Predecessor, and information for the period from May
10, 1996 (commencement of operations) through September 30, 1996 reflects
the operations of the Company. The information for these two periods has
been combined for purposes of this presentation. See "Summary--The Company"
and "Stock Ownership."
(2) The pro forma as adjusted consolidated statements of operations data and the
pro forma as adjusted operating data for the nine months ended September 30,
1997 and the three months ended December 31, 1997 give effect to the
following transactions as if they had occurred on January 1, 1997: (i) the
acquisition of Interlink and the issuance of 16,117 shares of Common Stock,
6,667 shares of the Company's Series B-3 Preferred Stock ("Series B-3
Redeemable Preferred Stock"), the incurrence of $5.7 million of indebtedness
and the entering into of a $850,000 consulting agreement in connection
therewith, (ii) with respect solely to the nine months ended September 30,
1997, the acquisition of the WorldCom Assets and the issuance of 4,587
shares of Common Stock, 111,960 shares of the Company's Series B-2 Preferred
Stock ("Series B-2 Redeemable Preferred Stock"), and the incurrence of $6.2
million of debt in connection therewith, and (iii) the conversion of all
issued and outstanding shares of Series A Convertible Preferred Stock into
shares of Common Stock, the conversion of $2.0 million of convertible
subordinated indebtedness into shares of Common Stock, the sale of
shares of Common Stock by the Company at an assumed price of $ per share
(the midpoint of the price range set forth on the cover page of this
Prospectus) after deducting the underwriting discount and estimated Offering
expenses, and the application of the estimated net proceeds therefrom to
repay indebtedness and redeem the Series B Convertible Preferred Stock. The
pro forma consolidated financial and operating data do not purport to
represent what the Company's consolidated results of operations or financial
position would have been if such transactions had in fact occurred on such
dates, nor does it purport to indicate the results of future operations or
the future financial position of the Company. The pro forma adjustments are
based on currently available information and certain assumptions that
management believes to be reasonable. See "Use of Proceeds" and "Unaudited
Pro Forma Consolidated Statements of Operations."
(3) See Note 10 of Notes to the Company's Consolidated Financial Statements for
the determination of the number of shares used in the basic and diluted per
share calculations.
(4) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is a measure of financial performance that is often
used in the telecommunications industry to compare companies on the basis of
liquidity, capital resources and leverage, and to determine a company's
ability to service debt. However, EBITDA should not be considered in
isolation or as an alternative to net income, income from operations, cash
flows from operating activities or any other measure of performance under
generally accepted accounting principles ("GAAP"). Further, the EBITDA
calculation may differ among companies within the telecommunications
industry. Thus, EBITDA as presented herein may not be comparable to EBITDA
or other similarly titled measures reported by other companies.
(5) EBITDA margin is calculated by dividing EBITDA by total revenues.
(6) Adjusted to reflect the conversion of all issued and outstanding shares of
Series A Convertible Preferred Stock into shares of Common Stock, the
conversion of $2.0 million of convertible subordinated indebtedness into
shares of Common Stock, the sale of shares of Common Stock by the
Company at an assumed price of $ per share (the midpoint of the price
range set forth on the cover page of this Prospectus) after deducting the
underwriting discount and estimated Offering expenses, and the application
of the estimated net proceeds therefrom to repay indebtedness and redeem the
Series B Convertible Preferred Stock as if all of the foregoing had occurred
on December 31, 1997. See "Use of Proceeds" and "Unaudited Pro Forma
Consolidated Statements of Operations."
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RISK FACTORS
AN INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS
CAREFULLY IN EVALUATING AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY. THIS
PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" RELATING TO, WITHOUT
LIMITATION, FUTURE ECONOMIC PERFORMANCE, PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, AND PROJECTIONS OF REVENUES AND OTHER FINANCIAL ITEMS THAT
ARE BASED ON THE BELIEFS OF, ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY
AVAILABLE TO THE COMPANY'S MANAGEMENT. THE WORDS "EXPECT," "ESTIMATE,"
"ANTICIPATE," "BELIEVE," "INTEND," "PLAN" AND SIMILAR EXPRESSIONS AND VARIATIONS
THEREOF ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE CAUTIONARY
STATEMENTS SET FORTH IN THIS "RISK FACTORS" SECTION AND ELSEWHERE IN THIS
PROSPECTUS IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS.
LIMITED OPERATING HISTORY
The Company was formed in April 1996 and commenced operations in May 1996
with its acquisition of the Predecessor. Accordingly, the Company has only a
limited operating history as a stand-alone company upon which an evaluation of
the Company and its prospects can be based. The Company's prospects must be
evaluated in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of their development. Furthermore,
the Company's historical financial results for periods prior to May 10, 1996
cover periods when the Company was not operating as a stand-alone company and
therefore may not be indicative of the Company's future operating results or
financial condition. Although the Company has experienced growth in revenues and
net income recently, there can be no assurance that growth and profitability can
be sustained.
ACQUISITION AND INTEGRATION RISKS
A key element of the Company's growth strategy is the pursuit of
acquisitions that either increase or enhance the services and products currently
offered by the Company or that provide the Company with an entry into new
geographic markets. The Company's acquisition of the WorldCom Assets in
September 1997, combined with five subsequent acquisitions since December 1997,
have significantly expanded the Company's operations. This growth has placed,
and will continue to place, significant demands on all aspects of the Company's
business, including its management, administrative, technical, operational,
financial, reporting and other systems and personnel. An inability to identify,
acquire and integrate additional businesses, products, services and technologies
may have a material adverse effect on the Company's business, financial
condition or results of operations. There can be no assurance that the Company
will be able to identify suitable acquisition candidates, negotiate agreements
to acquire any potential acquisition candidate on terms satisfactory to the
Company, arrange adequate financing on acceptable terms, consummate any
transaction, or successfully integrate the operations, products, personnel and
culture of any acquired business into those of the Company, nor can there be any
assurance that any acquired business would perform as anticipated or that the
Company will be able to expand its market share.
In addition, as a facilities-based provider, the success of the Company's
business is dependent on its ability to quickly and successfully integrate newly
acquired businesses into the Company's switching network by consolidating
additional traffic from new acquisitions into its network as well as by
integrating switching systems of acquired businesses into the Company's network,
some of which systems may not be compatible with the Company's existing network.
The inability to consolidate traffic or integrate switching systems, or network
outages or additional costs associated therewith, could have a material adverse
effect on the Company's business, financial condition or results of operations.
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Future acquisitions also may involve certain other risks, including, but not
limited to (i) the diversion of management's attention from normal operating
activities, (ii) risks associated with entry into markets or businesses in which
the Company has little or no prior experience, (iii) potential dilutive
issuances of equity securities, (iv) the incurrence of additional debt, (v) the
impairment of relationships with employees or customers as a result of a change
in management, (vi) costs associated with writing off in-process product
development and capitalized product costs, and integrating acquired businesses,
(vii) amortizing expenses related to goodwill and other intangible assets, and
(viii) the incurrence of unforeseen liabilities and contingencies, any of which
could have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, the Company competes for
acquisition candidates with other providers of enhanced telecommunications
services, and consolidation in the telecommunications industry in the United
States has resulted in fewer opportunities for acquisitions.
ABILITY TO MANAGE GROWTH
The Company has expanded, and intends to continue to expand, its operations
through both internal growth and acquisitions. The Company's ability to grow
will depend on a number of factors beyond its control, including the
availability of sufficient capital to fund future growth, general economic and
industry conditions, existing and emerging competition, the regulatory
environment and the demand for the Company's services and products. Additional
growth by the Company may further strain the Company's systems and resources,
and there can be no assurance that the Company's systems, resources, procedures,
controls and existing space will be adequate to support further expansion of the
Company's operations.
In connection with its audit of the Company's consolidated financial
statements for the fiscal year ended September 30, 1997, the Company's
independent accountants reported on a material weakness in the Company's system
of internal accounting and financial controls, which included certain accounting
system deficiencies and the absence of appropriate accounting and financial
review and approval procedures, segregation of duties and training of employees.
In response thereto, in late 1997, the Company hired an experienced chief
financial officer and additional accounting personnel, conducted a systems
review to identify measures to improve the system of internal controls,
implemented more rigorous internal accounting policies, procedures and controls,
and conducted accounting systems training. The Company believes these measures
corrected the noted weakness. There can be no assurance, however, that the
Company will not experience such deficiencies again in the future as it
continues to further expand its operations.
The Company's future operating results will depend substantially on the
ability of its officers and key employees to manage future growth, respond to
further changing business conditions and, in particular, to integrate acquired
businesses and to continue to maintain customer satisfaction. In addition, the
Company's future growth and operating results will depend on its ability to
attract, train and retain qualified technical, sales, financial, marketing and
management personnel. Failure to manage growth, to respond to changing business
conditions or to hire, train or retain qualified personnel necessary to keep
pace with the Company's growth could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Management."
POTENTIAL DELAYS OR FAILURES IN MIGRATION AND OPERATION OF SWITCHED NETWORK
Prior to acquiring the WorldCom Assets in September 1997, ILD was a
switchless provider. Accordingly, the Company has a limited operating history as
a facilities-based provider of enhanced network services, and there can be no
assurance that the Company will be able to successfully operate its newly
acquired facilities-based network or realize any cost savings associated with
being a facilities-based provider of telecommunications services. The failure by
the Company to successfully operate its facilities-based network or realize cost
savings associated therewith could have a material adverse effect on the
Company's business, financial condition or results of operations.
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The Company completed the installation of its network of enhanced multiple
call processing platforms in March 1998. Migration of call traffic from the
pre-network routing to the Company's switches commenced in early April 1998. As
of April 30, 1998, approximately 80% of the Company's total call traffic has
been migrated onto its network and has not resulted in any material problems
which threaten a successful migration of the traffic. The Company's network
programmers, working with WorldCom's network programmers, anticipate that
virtually all of the Company's traffic will be migrated over to its switches and
that leased circuits will connect its primary points of origination and
termination by the second half of 1998. However, because traffic will be routed
from many different locations, there can be no assurance that the Company will
not experience significant traffic routing difficulties in the future or that
the Company's network or switching platforms will be able to efficiently
consolidate all traffic by the second half of 1998. In addition, because the
Company is dependent on the cooperation of and assistance from WorldCom in
transferring call traffic to ILD's facilities-based network, there can be no
assurance that the Company will be able to consolidate all of its traffic by the
second half of 1998. Any failures or delays in transferring call traffic to its
facilities-based network could have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company's network service operations are dependent upon its ability to
protect the equipment and data at the Company's facilities against damage that
may be caused by fire, power loss, technical failures, unauthorized intrusion,
natural disasters, sabotage and other similar events. Although the Company has
taken precautions to protect itself and its customers from events that could
interrupt delivery of services, there can be no assurance that a fire, act of
sabotage, technical failure, human error, natural disaster or a similar event
would not cause the failure of a significant technical component of the
Company's network, thereby resulting in an outage. Such an outage could have a
material adverse effect on the Company's business, financial condition or
results of operations.
COMPETITION
The telecommunications services industry is highly competitive, rapidly
evolving and subject to constant technological change. In particular, there are
numerous companies selling prepaid calling cards and prepaid local services, and
the Company expects competition to increase in the future. Other providers
currently offer one or more of the services offered by the Company, and many
telecommunications companies operate generally in the same long distance
service, prepaid calls, or operator services markets as the Company. As a
service provider in the long distance telecommunications industry, the Company
competes with three dominant providers, AT&T Corp. ("AT&T"), MCI Communications
Corporation ("MCI") and Sprint Corporation ("Sprint"), all of which are
substantially larger and have longer operating histories, greater name
recognition, larger customer bases, more established relationships with federal
and state regulatory authorities, and substantially greater financial,
personnel, marketing, engineering, technical and other resources than the
Company. Other companies are entering the prepaid local business and are
expanding their service offerings to appeal to existing or potential customers
of the Company. Also, Billing Information Concepts Corp. ("BIC"), which was
recently spun off from U.S. Long Distance Corp. ("U.S. LD"), and OAN Services,
Inc. ("OAN") are the leading independent service providers for billing and
collections services, and each has substantially greater resources and billing
product offerings than the Company. Since 1994, the domestic operator services
industry has also experienced greater competition from the increasing number of
dial around programs being offered by telecommunications companies, such as
1-800-"CALL-ATT" and 1-800-"COLLECT." Alternative dialing plans such as carrier
proprietary calling cards and prepaid cards are expected to continue to erode
the number of the Company's operator assisted calls generated per phone.
The ability of the Company to compete effectively in the telecommunications
services industry will depend, among other things, upon the Company's continued
ability to provide high quality services at prices generally competitive with,
or lower than, those charged by its competitors. Certain of the Company's
competitors dominate particular segments of the telecommunications industry and
have the
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financial resources to withstand substantial price competition, which is
expected to increase significantly, and there can be no assurance that the
Company will be able to compete successfully in the future. Moreover, there can
be no assurance that certain of the Company's competitors will not be better
situated to negotiate contracts with suppliers of telecommunications services
which are more favorable than contracts negotiated by the Company. The
Telecommunications Act also allows RBOCs to offer long distance services
out-of-region and in-region under certain circumstances. The Telecommunications
Act is also intended to increase competition in the offering of local exchange
services and other intrastate services. A continuing trend toward combinations
and strategic alliances in the telecommunications industry could give rise to
significant new competitors. The regulatory environment in which the Company
operates is also undergoing significant change. Such changes could create
greater competitive advantages for all or some of the Company's current or
potential competitors or could make it easier for additional parties to provide
services. There can be no assurance that competition from existing or new
competitors, a decrease in the rates for telecommunications services by the
Company's competitors or regulatory changes would not have a material adverse
effect on the Company's business, financial condition or results of operations.
RELIANCE ON AND RETENTION OF MAJOR CUSTOMERS
Historically, the Company has relied on a limited number of customers for a
substantial portion of its revenues. PCS, PhoneTel and WorldCom accounted for
15%, 11% and 6%, respectively, of the Company's total revenues in the three
month period ended December 31, 1997. In addition, the Company had three
customers that collectively accounted for 5% of the Company's total revenues in
the three month period ended December 31, 1997. The Company has historically
depended on, and expects to continue to depend on, large contracts from
significant customers, which can cause its revenues and earnings to fluctuate
between quarters based on the timing of termination or renewal of such
contracts. Although the Company believes that it has good relationships with its
major customers and has in the past received a substantial portion of its
revenues from repeat business with established customers, in many cases the
Company's contracts with its outsourcing customers are short-term arrangements
and there can be no assurance that any of the Company's major customers will
continue to purchase the Company's services or enhancements of and services at a
level similar to previous periods. Contracts with certain of the Company's
largest customers will expire in the near future and there can be no assurance
that these customers will continue to purchase the Company's services. A
significant decrease in business from any of the Company's major customers could
have a material adverse effect on the Company's business, financial condition or
results of operations. Additionally, the acquisition by a third party of one of
the Company's major customers could result in the loss of that customer, which
could have a material adverse effect on the Company's business, financial
condition or results of operations.
ILD's prepaid calling cards are sold over-the-counter and through vending
machines at selected retail locations and vending machine sites throughout the
United States, including locations operated by large mass merchants such as Fred
Meyer, Goodings, Pathmark, and PharMor and such gasoline and convenience stores
as Petro Shopping Centers, Stop N Go, Diamond Shamrock, and Tom Thumb. The
Company's arrangements with retailers or owners of multiple vending sites are
often pursuant to short-term arrangements. If the Company is unsuccessful in
providing competitive pricing, meeting the requirements of its retailers or site
owners, developing attractive new products, or complying with the terms of its
arrangements with retailers or site owners, these customers may fail to market
aggressively the Company's services or may terminate their relationship with the
Company, either of which could have a material adverse effect on the Company's
business, financial condition or results of operations.
DEPENDENCE UPON TELECOMMUNICATIONS PROVIDERS; NO GUARANTEED SUPPLY
The Company, a facilities-based provider, does not own a transmission
network and depends on WorldCom and, to a lesser extent, other carriers for
transmission of its long distance calls. Furthermore,
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the Company is dependent upon LECs and IXCs for call origination and
termination. The Company's ability to maintain and expand its business depends
in part on its ability to continue to obtain telecommunications services on
favorable terms from long distance carriers and other such suppliers, as well as
the cooperation of both IXCs and LECs in originating and terminating service for
its consumers in a timely manner. Although the Company has not experienced
significant losses in the past because of interruptions of service at any of its
carriers, no assurance can be made in this regard with respect to the future. In
addition, no assurance can be given that the Company will be able to enter into
network arrangements or interconnection agreements in the future at favorable
prices, and a material increase in the price at which the Company obtains
services under such arrangements or agreements could have a material adverse
effect on the Company's business, financial condition or results of operations.
See "--Competition."
NEED FOR ADDITIONAL FINANCING
The Company anticipates that it may need additional debt or equity
financing, in addition to the proceeds of this Offering, in order to grow
through expansion and acquisitions. The amount and timing of financing that the
Company may need will vary, principally depending on the timing and size of any
expansion and acquisitions and sellers' willingness to provide financing. To the
extent that the Company requires additional financing in the future and is
unable to obtain such additional financing, it may not be able to implement
fully its growth strategy. Following the application of the net proceeds from
the Offering, the Company will have the ability to borrow up to $20.0 million
(of which $3.4 million is currently available) under its revolving loan with
NationsBank, N.A. ("NationsBank"). The Company believes this borrowing capacity,
together with cash flow from operations and the proceeds of this Offering, will
be sufficient to fully fund its capital expenditures, working capital, internal
growth, identified acquisition candidates and other currently known cash
requirements. If the Company's available funds are not adequate, however, there
can be no assurance that additional financing, whether debt or equity, will be
obtainable on terms favorable to or affordable by the Company, which could have
a material adverse effect on the Company's business, financial condition or
results of operation, and on the Company's growth and its ability to compete in
the telecommunications industry. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW SERVICES
The telecommunications services industry is characterized by rapid
technological change, new product introduction and evolving industry standards.
The Company's success will depend, in significant part, on its ability to make
timely and cost-effective enhancements and additions to its technology and
introduce new services that meet consumer demands. The Company expects new
products and services, and enhancements to existing products and services, to be
developed and introduced to compete with the Company's services. The
proliferation of new telecommunications technology, including personal
communication services and voice communication over the Internet, may reduce
demand for local and long distance services, including prepaid calling cards,
and related outsourcing services such as operator assisted services and billing
and collections services. There can be no assurance that the Company will be
successful in developing and marketing new services or enhancements to services
that respond to these or other technological changes or evolving industry
standards. In addition, there can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful development,
introduction or marketing of its existing services or that the Company's new
services or enhancements will adequately meet the requirements of the
marketplace and achieve market acceptance. Delay in the introduction of new
services or enhancements, the inability of the Company to develop such new
services or enhancements or the failure of such services or enhancements to
achieve market acceptance could have a material adverse effect on the Company's
business, financial condition or results of operations.
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FRAUD; THEFT OF SERVICES; UNCOLLECTIBLE ACCOUNTS
From time to time, callers have obtained services without rendering payment
to the Company by unlawfully using the Company's access numbers and personal
identification numbers ("PINs"). The Company attempts to manage these theft and
fraud risks through its internal controls and its monitoring and blocking
systems. Although the Company believes that its risk management practices are
adequate, and to date the Company has not experienced material losses due to
such unauthorized use of access numbers and PINs, there can be no assurance that
the Company's risk management practices will be sufficient to protect the
Company in the future from unauthorized transactions or thefts of services that
could have a material adverse effect on the Company's business, financial
condition or results of operations. In addition, the Company sells prepaid
calling cards to certain of its retail customers on credit. Although the Company
believes that it will be able to adequately evaluate the risk of uncollectible
accounts, there can be no assurance that the Company will collect all amounts
due for services rendered. There also can be no assurance that the Company will
collect all amounts due for local services if the applicable state tariff does
not permit the Company to promptly terminate local phone service when an
individual consumer fails to prepay for continued phone service.
DEPENDENCE ON KEY MANAGEMENT AND PERSONNEL
The Company's success is largely dependent upon its executive officers and
other key personnel, the loss of one or more of whom could have a material
adverse effect on the Company's business, financial condition or results of
operations. The Company believes that its continued success will depend to a
significant extent upon the efforts and abilities of Michael F. Lewis, Chairman
of the Board and Chief Executive Officer, Dennis J. Stoutenburgh, President, J.
David Darnell, Chief Financial Officer, Reginald P. McFarland, Senior Vice
President, Network Operations, and certain other key executives who have
substantial experience with the Company's business and the rapidly changing
telecommunications industry. The loss of services of any of these individuals
could have a material adverse effect upon the Company's business, financial
condition or results of operations. Messrs. Lewis, Stoutenburgh and Darnell have
received options which have vesting schedules relating to their continued
employment by the Company. Mr. McFarland has entered into an employment
agreement with the Company which expires on December 31, 1999. The Company also
believes that to be successful it must hire and retain highly qualified
engineering, product development and marketing personnel. Competition in the
recruitment of highly qualified engineering, marketing and product development
personnel in the telecommunications industry is intense. The inability of the
Company to locate, hire and retain such personnel may have a material adverse
effect on the Company's business, financial condition or results of operations.
No assurance can be given that the Company will be able to retain its key
employees or that it will be able to attract qualified personnel in the future.
See "Business--Employees" and "Management."
SUBSTANTIAL DISCRETION OF MANAGEMENT CONCERNING USE OF PROCEEDS
The Company has allocated approximately $ million of the net proceeds of
the Offering for specific identified purposes, with the remainder of
approximately $ million to be used for general corporate purposes, including
working capital, internal growth and possible acquisitions. Accordingly,
management will have substantial discretion in spending a large percentage of
the proceeds of the Offering to be received by the Company. See "Use of
Proceeds."
SEASONALITY; FACTORS AFFECTING OPERATING RESULTS; POTENTIAL FLUCTUATIONS IN
PERIOD-TO-PERIOD RESULTS
The Company's sales have been, and the Company expects that its sales will
continue to be, somewhat seasonal. In addition, the Company's operating results
have varied significantly in the past and may vary significantly in the future.
Traditional operator assisted long distance services generally produce peak
revenues during the summer months when, due to favorable weather conditions,
when people travel or are outdoors more often where they are more likely to use
pay phones.
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Factors that may cause the Company's operating results to vary include: (i)
changes in operating expenses; (ii) the timing of the introduction of services;
(iii) market acceptance of new and enhanced versions of services; (iv) potential
acquisitions; (v) changes in legislation and regulation that affect the
competitive environment for services; and (vi) general economic factors.
Moreover, for many of the Company's retailers and site owners, prepaid services
represent a new merchandising category and, in the case of certain retailers
requiring customized services, significant leadtime may be required to provide
such services following receipt of customer orders. As a result of these
factors, the Company believes that period-to-period comparisons of its results
of operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
UNCERTAINTY OF MARKET ACCEPTANCE
The prepaid long distance calling card and prepaid local markets of the
telecommunications industry are emerging businesses with an increasing and
substantial number of new market entrants. These entrants are seeking to market,
advertise and position other products and services as the preferred method for
accessing long distance and prepaid local phone services. Because the prepaid
long distance calling card and prepaid local markets are emerging markets,
demand for and market acceptance of newly introduced products and services is
uncertain. There can be no assurance that substantial markets will continue to
develop for prepaid long distance calling cards or prepaid local services, or
that the Company will be able to meet its current marketing objectives, succeed
in positioning services as a preferred method for accessing long distance and
local phone services, increase market acceptance of its existing services or
achieve significant market acceptance of its new products and services. See
"Business--The Industry."
RISKS RELATED TO GOODWILL
As of December 31, 1997, the Company's total assets were approximately $55.6
million, of which approximately $25.6 million, or approximately 46% of total
assets, was goodwill. Goodwill is the excess of cost over fair value of net
assets acquired. There can be no assurance that the value of such goodwill will
ever be realized by the Company. This goodwill is being amortized on a
straight-line basis over a period of 25 years, which will produce an annual
charge to operations of approximately $1.0 million, which will adversely impact
the Company's earnings. The Company will evaluate on a regular basis whether
events and circumstances have occurred that indicate that the carrying amount of
goodwill may warrant revision or may not be recoverable. Although as of December
31, 1997 the net unamortized balance of goodwill is not considered to be
impaired, any such future determination requiring the write-off of a significant
portion of unamortized goodwill could adversely affect the Company's financial
position.
GOVERNMENT REGULATION
The Telecommunications Act seeks to stimulate competition in both the local
exchange and interexchange markets. Although passage of the Telecommunications
Act has resulted in increased opportunities for companies competing with the
incumbent local exchange carriers ("ILECs"), it also reduced the level of
regulation that applies to the ILECs, increasing their ability to respond
quickly to competition from the Company and others and permits all LECs,
including the RBOCs upon compliance with certain conditions, to offer
interexchange service between local access and transport areas ("LATAs"), the
geographically defined areas in which LECs are authorized to provide local
switched services. No assurance can be given that changes in current or future
regulations adopted by the FCC or state regulators or other legislative or
judicial initiatives relating to the communications industry would not have a
material adverse effect on the Company's business, financial condition or
results of operations.
Section 276 of the Telecommunications Act further mandated that the FCC
promulgate rules to establish a per call compensation plan to insure that all
pay phone providers are fairly compensated for each completed intrastate and
interstate pay phone initiated call, including calls on which pay phone
providers had not heretofore received compensation. These rules also require
IXCs to develop tracking
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mechanisms to identify calls placed from pay phones which would require
compensation. Such calls include those placed to toll free numbers (800/888),
operator assisted and prepaid calling card calls, and calls placed through
network access codes, but do not include emergency calls and calls for hearing
disabled individuals. In September 1996, the FCC promulgated rules to implement
Section 276 of the Telecommunications Act. After initial litigation, in
September 1997 the FCC established a two-year "default" compensation rate of
$0.284 per pay phone-originated toll free or access code call. At the end of the
two-year interim period, the per call pay phone compensation rate will be the
deregulated market-based local coin rate less $0.066. This amount is payable by
IXCs and resellers such as IOS. The Company believes it has adequately accrued
for amounts payable under the revised FCC rules, but because the revised FCC
rules continue to be subject to regulatory and legal challenges, there can be no
assurance that the Company will not be required to pay amounts in excess of
amounts for which it has accrued, which could have a material adverse effect on
the Company's business, financial condition or results of operations.
On May 8, 1997, in compliance with the requirements of the
Telecommunications Act, the FCC released an order establishing a new Universal
Service support fund to provide communications service to high cost and rural
areas, and to bring new communications technologies to schools, libraries and
rural healthcare providers. Carriers, including the Company, are required to
contribute a portion of their revenues into the Universal Service support fund.
The new Universal Service rules will be administered jointly by the FCC and
state regulatory authorities, many of which are still in the process of
establishing their administrative rules. States are enacting, or already have in
place, similar programs, and other possible new assessments on carriers may be
imposed by federal or state authorities. Although the Company accrues Universal
Service contributions and remits such contributions when due, in the event that
the amount that the Company is required to contribute to the support fund is
substantially more than its accrual or the Company's ability to pass such
contributions through to its customers is restricted, the Universal Service
support fund could have a material adverse effect on the Company's business,
financial condition or results of operations.
The Company's prepaid long distance calling card operations are subject to
various state laws and regulations. To reduce the number of fraudulent or
misleading cards, certain states in which the Company operates are beginning to
require prepaid calling cards to clearly show such items as the cost-per-minute,
extra fees, expiration dates and toll-free customer service numbers. Although
the Company believes that it is able to comply with regulations currently
applicable to its operations, as additional states adopt regulations to prevent
fraudulent practices in the prepaid calling card industry, there can be no
assurance that such regulations will not have a material adverse effect on the
Company's business, financial condition or results of operations.
CONCENTRATION OF STOCK OWNERSHIP; VOTING CONTROL BY MANAGEMENT
Upon completion of the Offering, the present directors, executive officers
and their respective affiliates will beneficially own approximately of
the Common Stock. In addition to the shares and options included in such
calculation of beneficial ownership, the present directors, executive officers
and their respective affiliates hold options and warrants to acquire an
additional shares of Common Stock that are not exercisable within 60 days of
the calculation date, which together with shares currently beneficially owned
would represent approximately % of the Common Stock outstanding after
consummation of the Offering, after giving effect to the exercise of those
options and warrants. Intellicall also will beneficially own % of the
Common Stock after consummation of the Offering. As a result, by voting together
these stockholders will be able to control, or at a minimum to exercise
significant influence over all matters requiring stockholder approval, including
the election of directors and approval of significant corporate transactions.
Such concentration of ownership also may have the effect of delaying or
preventing a change in control of the Company. Purchasers in the Offering will
become minority stockholders of the Company and will be unable to control the
management or business policies of the
17
<PAGE>
Company. See "Management," "Certain Transactions," "Stock Ownership" and
"Description of Capital Stock."
ABSENCE OF PRIOR PUBLIC MARKET; OFFERING PRICE DETERMINED BY AGREEMENT;
POTENTIAL VOLATILITY OF MARKET PRICE
Prior to the Offering, there has been no public market for the Common Stock,
although the Company has applied for listing of the Common Stock on the Nasdaq
National Market in connection with the Offering. The initial public offering
price of the Common Stock will be determined solely by negotiations among the
Company and the Underwriters and will not necessarily be related to the
Company's book value, net worth or any other established criteria of value and
may not be indicative of the market price for shares of Common Stock after the
Offering. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price for the Common Stock. From time to
time after the Offering, there may be significant volatility in the market price
for the Common Stock, and there can be no assurance that the market price of the
Common Stock will not decline below the initial public offering price. The stock
market has from time to time experienced significant price and volume
fluctuations, which have particularly affected the market prices of the stocks
of high technology and telecommunications companies and which may be unrelated
to the operating performance of particular companies. Factors such as actual or
anticipated operating results, growth rates, changes in estimates by analysts,
market conditions in the industry, announcements by competitors, regulatory
actions and general economic conditions will vary from period to period. As a
result of the foregoing, the Company's operating results and prospects from time
to time may be below the expectations of public market analysts and investors.
Any such event would likely have a material adverse effect on the price of the
Common Stock.
POSSIBLE INABILITY TO RECOGNIZE A PORTION OF DEFERRED REVENUE
The sale of long distance telephone service through prepaid calling cards
may be subject to "escheat" laws in various states. These laws generally provide
that payments or deposits received in advance or in anticipation of the
provision of utility services (including telephone) that remain unclaimed for a
specific period of time after the termination of such services are deemed
"abandoned property" and must be submitted to the state. Although the Company is
not aware of any case in which such laws have been applied to the sale of
prepaid calling cards, in the event that such laws are deemed applicable, the
Company may be unable to recognize the portion of its deferred revenue remaining
upon the expiration of the cards with unused calling time. In such event, the
Company may be required to deliver such amounts to certain states in accordance
with these laws, which could have a material adverse effect on the Company's
business, financial condition or results of operations.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales, or the availability for future sale, of a significant number
of shares of Common Stock could adversely affect the prevailing market price of
the Common Stock. The shares offered hereby will be eligible for immediate
sale in the public market without restriction, except for any shares purchased
in the Offering by "affiliates" of the Company, as such term is defined in Rule
144 under the Securities Act of 1933, as amended (the "Securities Act"). All of
the remaining shares of Common Stock which will be outstanding upon the
completion of the Offering will be "restricted securities" as defined in Rule
144 and may be sold in the public market only if they are registered or if they
qualify for an exemption from registration under the Securities Act, such as
that provided by Rule 144 or Rule 701 promulgated thereunder. Beginning 90 days
after the date of this Prospectus, of such shares will become eligible for
immediate sale in the public market subject to the provisions of Rule 144 and
Rule 701. Beginning 180 days after the date of this Prospectus (or earlier with
the written consent of NationsBanc Montgomery Securities LLC in its discretion),
additional shares will be available for immediate sale in the public
market, subject to the provisions of Rule 144 and Rule 701, upon the expiration
of certain lock-up agreements between the Underwriters and the directors,
executive officers and certain other stockholders
18
<PAGE>
of the Company (the "Lock-Up Agreements"). Of the shares of Common Stock
that, as of the completion of the Offering, will be issuable upon the exercise
of outstanding options and warrants, will be eligible for sale in the
public market subject to the provisions of Rule 144 and Rule 701 beginning 90
days after the date of this Prospectus and of such shares will become
eligible for sale in the public market, subject to the provisions of Rule 144
and Rule 701, beginning 180 days after the date of this Prospectus (or earlier
with the written consent of NationsBanc Montgomery Securities LLC) upon the
expiration of the Lock-Up Agreements. Following the Offering, sales or potential
sales of a significant number of shares of Common Stock not only will have the
potential to cause a material decrease in the trading price of Common Stock but
also could impair the future ability of the Company to raise capital at prices
or on terms favorable to the Company.
The Company intends to file one or more registration statements on Form S-8
as soon as practicable after the completion of the Offering to register
shares of Common Stock that are issuable upon the exercise of outstanding
stock options and warrants or that are available for issuance pursuant to the
Company's stock option plans. Additionally, certain stockholders of the Company
who will beneficially own in the aggregate shares of Common Stock as of
the completion of the Offering are entitled to certain piggyback and demand
registration rights with respect to such shares. Upon the effectiveness of
registration statements covering such shares, all such registered shares
generally would then be eligible for immediate sale in the public market, other
than of such shares which are subject to Lock-Up Agreements. See "Shares
Eligible for Future Sale" and "Underwriting."
DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of the outstanding Common Stock. Investors
purchasing shares of Common Stock in the Offering therefore will incur immediate
and substantial dilution, and existing stockholders will receive a material
increase, in the net tangible book value per share of their shares of Common
Stock. At an initial public offering price of $ per share (the midpoint of
the price range set forth on the cover page of this Prospectus), the immediate
dilution to new investors would be $ per share. In addition, investors
purchasing shares of Common Stock in the Offering will incur additional dilution
to the extent outstanding options and warrants are exercised. See "Dilution."
ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION,
BYLAWS AND DELAWARE LAW
The Board of Directors of the Company is empowered to issue one or more
series of preferred stock without stockholder action. The existence of this
"blank check" preferred stock could render more difficult or discourage an
attempt to obtain control of the Company by means of a tender offer, merger,
proxy contest or otherwise. The Company is subject to certain provisions of the
Delaware General Corporation Law, as amended (the "Delaware Code"), which relate
to business combinations with interested stockholders. In addition to
considering the effects of any action on the Company and its stockholders, the
Company's Restated Certificate of Incorporation (the "Certificate of
Incorporation"), permits the Board of Directors to consider the interests of
various constituencies, including employees, customers, suppliers, and creditors
of the Company, communities in which the Company maintains offices or operations
and other factors which the directors deem pertinent, in carrying out and
discharging their duties and responsibilities as directors and in determining
what is believed to be in the best interests of the Company. See
"Management--Board of Directors" and "Description of Capital Stock--Certain
Provisions of Delaware Law."
YEAR 2000 RISKS
The Year 2000 issue is the result of potential problems with computer
systems or any equipment with computer chips that use dates that have been
stored as two digits rather than four (e.g., "98" for 1998). On January 1, 2000,
any clock or date recording mechanism, including date sensitive software, which
uses only
19
<PAGE>
two digits to represent the year may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failures or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, send invoices or perform similar
tasks.
The Company has assessed the Year 2000 issue with respect to the software
used by the Company in providing its services and with respect to its
computerized information and operating systems. The Company believes that it has
completed substantially all modifications to its affected software programs and
computerized systems and that minimal additional work is required to finalize
these modifications. The Company expects to complete all Year 2000 modifications
by early 1999, leaving adequate time to assess and correct any significant
issues that may materialize. Management does not believe that the costs to
resolve the Company's Year 2000 issues will be material to the Company. This
assessment is based on management's best estimates, which were derived utilizing
numerous assumptions of future events. However, there can be no assurance that
these estimates will prove to be accurate, and actual results could differ
materially from those that are anticipated. Specific factors that might cause
such material differences include, but are not limited to, the availability and
cost of personnel trained in this area, the ability to locate and correct all
relevant computer codes and similar uncertainties.
The Company is also discussing the Year 2000 issue with its significant
customers and suppliers to determine the extent to which the Company is
vulnerable to those third parties' failures to remediate their own Year 2000
issues. The Company is not yet certain as to the extent to which the computer
software and business systems of its customers and suppliers are Year 2000
compliant. If systems of third parties on which the Company's systems rely are
not timely converted or if such conversions are incompatible with the Company's
systems, or if the Company fails to timely complete the remaining modifications
to its own systems, the Year 2000 issue could have a material adverse effect on
the Company's business, financial condition or results of operations.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of
Common Stock offered hereby at an assumed initial public offering price of $
per share (the midpoint of the price range set forth on the cover page of this
Prospectus) are estimated to be approximately $ million (approximately $
million if the Underwriters' over-allotment option is exercised in full) after
deducting the estimated underwriting discount and Offering expenses payable by
the Company.
The Company anticipates that it will use the net proceeds of the Offering to
repay certain indebtedness of the Company in the aggregate amount of
approximately $22.1 million and to redeem the Series B Convertible Preferred
Stock at an aggregate redemption price of approximately $500,000. The Company
intends to use the remaining net proceeds of approximately $ million for
general corporate purposes, including the financing of certain capital
improvements, possible purchases of network equipment, and possible
acquisitions. See "Risk Factors--Substantial Discretion of Management Concerning
Use of Proceeds."
Of the approximately $22.1 million to be used to repay indebtedness, $10.4
million will be used to pay down the outstanding principal and accrued interest
under the Company's revolving credit facility (the "Revolving Loan") pursuant to
its credit agreement with NationsBank (the "Credit Agreement"), approximately
$4.2 million will be used to repay in full the outstanding principal and accrued
interest under the Company's term loan (the "Term Loan") under the Credit
Agreement, and approximately $7.5 million will be used to repay outstanding
indebtedness to 14 individuals or entities. The Revolving Loan was entered into
in August 1997 and currently bears interest at a rate ranging from the prime
rate to 0.5% above the prime rate (9.0% at December 31, 1997) depending upon the
ratio of senior funded debt to EBITDA. Borrowings under the Revolving Loan
mature in February 2001 and automatically renew for successive one-year periods
up to a maximum of 20 years unless either party elects to terminate by giving
written notice to the other not less than 60 days prior to the termination date.
The Term Loan was incurred in August 1997 to finance a portion of the purchase
price for the acquisition of the WorldCom Assets and currently bears interest at
prime plus 2.5% (11.0% at December 31, 1997) per year, payable monthly.
Borrowings under the Term Loan are payable quarterly and the Term Loan matures
on March 31, 2001.
General corporate purposes for which the remaining net proceeds may be used
include approximately $1.25 million to consolidate certain operations and
complete the build out of new leased facilities in Atlanta and San Antonio.
Additionally, the Company expects an undetermined amount of the Offering
proceeds likely will be used to acquire network equipment for the continued
development of the Company's infrastructure. Other general corporate purposes
include working capital, continued internal growth and possible acquisitions.
The Company has entered into a definitive agreement to acquire a contract
covering approximately 1,600 Diamond Shamrock outlets for a purchase price of
approximately $700,000, and non-binding letters of intent to acquire the capital
stock or assets of three companies for an aggregate purchase price of
approximately $5.7 million in cash and stock, and the Company intends to use
approximately $1.4 million of the remaining net Offering proceeds in connection
with the acquisition of these companies. See "Prospectus Summary--The
Company--Recent Developments" and "Risk Factors--Acquisition and Integration
Risks." In addition, the Company currently is engaged in preliminary discussions
with other potential acquisition candidates. Although it has no binding
commitments to acquire any other potential candidates, management believes that
the Company may acquire one or more of these candidates in the future utilizing
a portion of the remaining net proceeds of the Offering, cash generated from
operations or bank borrowings. Nevertheless, there can be no assurance that the
Company will complete any acquisitions on terms favorable to the Company, if at
all. To the extent that one or more of the acquisitions to be financed with net
proceeds from the Offering are not completed, the unused Offering proceeds may
be used to make other acquisitions or for other general corporate purposes as
determined by management in its discretion.
Pending the application of the net proceeds as described above, the Company
intends to invest the proceeds in short-term, interest-bearing obligations of
investment grade.
21
<PAGE>
DIVIDEND POLICY
The Company presently intends to employ all available funds for the
expansion of its business and therefore does not anticipate declaring or paying
cash dividends on the Common Stock in the foreseeable future. The Company has
paid no cash dividends on its Common Stock in the past, and the payment of cash
dividends, if any, in the future will depend upon the Company's earnings,
financial condition, capital requirements, cash flow, long range plans and such
other factors as the Board of Directors of the Company may deem relevant at that
time. Additionally, each of the Series B-2 Redeemable Preferred Stock and the
Series B-3 Redeemable Preferred Stock will restrict the ability of the Company
to declare or pay dividends or make any other distributions on any shares of
Common Stock, unless dividends or distributions are paid ratably to holders of
such Preferred Stock as well as holders of the Common Stock, in proportion to
the total amount of dividends or distributions paid. Under the terms of the
Credit Agreement, the Company may not pay dividends without the prior written
consent of the lender when dividends paid by the Company, together with interest
paid on the convertible subordinated debt, exceed $1.9 million in the aggregate
in any fiscal year.
22
<PAGE>
CAPITALIZATION
The following table sets forth the cash position, indebtedness and
capitalization of the Company (i) on a historical basis as of December 31, 1997,
and (ii) on a pro forma as adjusted basis to reflect the conversion of all
issued and outstanding shares of Series A Convertible Preferred Stock into
shares of Common Stock, the conversion of $2.0 million of convertible
subordinated indebtedness into shares of Common Stock, the sale of the
shares of the Common Stock offered hereby at an assumed initial public offering
price of $ per share (after deducting the estimated underwriting discount
and Offering expenses) and the application of the estimated net proceeds
therefrom to repay indebtedness and redeem the Series B Convertible Preferred
Stock as described in "Use of Proceeds" as if they had occurred on December 31,
1997. On the Closing Date, the Company will amend its Certificate of
Incorporation to eliminate the outstanding Series A and Series B Convertible
Preferred Stock. The following table should be read in conjunction with "Use of
Proceeds," "Unaudited Pro Forma Consolidated Statements of Operations,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
----------------------------
PRO FORMA
ACTUAL AS ADJUSTED
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 66 $ 30
Short-term debt (including current maturities of long-term
obligations)..................................................... 5,482 582
Long-term obligations (less current maturities).................... 13,381 1,611
Series B-2 Redeemable Preferred Stock, $0.01 par value; 150,000
shares authorized and 111,960 shares issued and outstanding,
actual and pro forma as adjusted................................. 11,196 11,196
Series B-3 Redeemable Preferred Stock, $0.01 par value; 10,000
shares authorized and 6,667 shares issued and outstanding, actual
and pro forma as adjusted........................................ 2,000 2,000
Stockholders' equity...............................................
Series A Convertible Preferred Stock, $0.01 par value; 100,000
shares authorized, issued and outstanding, actual; and 0 shares
authorized, issued and outstanding, pro forma as adjusted...... 1 --
Series B Convertible Preferred Stock, $0.01 par value; 5,000
shares authorized, issued and outstanding, actual; and 0 shares
authorized, issued and outstanding, pro forma as adjusted...... -- --
Common Stock, $.01 par value; 300,000 shares authorized; 71,004
shares issued and outstanding, actual; and shares issued
and outstanding, pro forma as adjusted (1)..................... 1 2
Additional paid-in capital....................................... 10,631 57,631
Retained deficit................................................. (2,217) (2,707)
Total stockholders' equity..................................... 6,416 52,926
Total capitalization........................................... 32,993 67,733
</TABLE>
- --------------------------
(1) Excludes 59,989 shares of Common Stock that were subject to outstanding
options and warrants at December 31, 1997 at a weighted average exercise
price of $75.74 per share. See "Management-- Stock Option Plans," "Shares
Eligible for Future Sale," "Description of Capital Stock" and Note 8 of
Notes to the Company's Consolidated Financial Statements.
23
<PAGE>
DILUTION
As of December 31, 1997, the net tangible book value of the Company was
approximately $ or $ per share of Common Stock. "Net tangible
book value per share" is defined as the book value of tangible assets of the
Company less all liabilities, divided by the number of issued and outstanding
shares of Common Stock. After the conversion of all issued and outstanding
shares of Series A Convertible Preferred Stock into Common Stock, the conversion
of $2.0 million of convertible subordinated indebtedness into shares of Common
Stock, the repayment of certain indebtedness and the redemption of the Series B
Convertible Preferred Stock and the sale by the Company of the
shares of Common Stock offered hereby at an assumed initial public offering
price of $ per share and after deducting the estimated underwriting discount
and Offering expenses payable by the Company, the pro forma as adjusted net
tangible book value of the Company as of December 31, 1997 would have been
approximately $ or $ per share. This represents an immediate
increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution in net tangible book value of $
per share to purchasers of shares of Common Stock in the Offering. The following
table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................................... $
---------
Net tangible book value per share before the Offering............................... $
Increase per share attributable to new stockholders.................................
---------
Pro forma as adjusted net tangible book value per share...............................
---------
Dilution per share to new stockholders................................................ $
---------
</TABLE>
The following table sets forth, as of December 31, 1997, on a pro forma as
adjusted basis giving effect to the conversion of the Series A Convertible
Preferred Stock, the conversion of $2.0 million of convertible subordinated
indebtedness into shares of Common Stock, the repayment of certain indebtedness
and the redemption of the Series B Convertible Preferred Stock, with respect to
the existing stockholders and the new investors in the Offering, a comparison of
the number of shares of Common Stock acquired from the Company, the total
consideration paid, and the average price per share:
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED
------------------------ ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........................................ % $ % $
New stockholders.............................................
----------- ----- ----------- ----- ------
Total...................................................... 100.0% $ 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
The foregoing tables do not take into account the exercise of outstanding
options and warrants to acquire shares of Common Stock. Assuming that
all such options and warrants were exercised and that the full amount of cash
consideration was received therefrom, dilution per share to new stockholders
would be $ . See Note 8 of Notes to the Company's Consolidated Financial
Statements and "Management--Stock Option Plans."
24
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The Unaudited Pro Forma Consolidated Statements of Operations for the nine
months ended September 30, 1997 and the three months ended December 31, 1997
have been prepared as if the WorldCom Assets and Interlink acquisitions and the
related financings had occurred on January 1, 1997. The acquisitions of the
WorldCom Assets and Interlink occurred on September 1, 1997 and December 15,
1997, respectively, and thus are included in the Company's unaudited
consolidated financial statements, commencing with the dates of acquisition.
The Unaudited Pro Forma Consolidated Statements of Operations for the nine
months ended September 30, 1997 are based upon the historical consolidated
financial statements of the Company for the nine months ended September 30,
1997, the historical financial statements of the WorldCom Assets for the eight
months ended August 31, 1997, and the historical financial statements of
Interlink for the nine months ended September 30, 1997.
The Unaudited Pro Forma Consolidated Statements of Operations for the three
months ended December 31, 1997 are based upon the historical consolidated
financial statements of the Company for the three months ended December 31, 1997
and the historical financial statements of Interlink for the period from October
1, 1997 through December 14, 1997.
The Unaudited Pro Forma Consolidated Statements of Operations and Notes
thereto are provided for informational purposes only and do not purport to be
indicative of the results of operations that might have occurred had such
transactions been completed on the indicated dates or that may be expected to
occur for any future period. The Unaudited Pro Forma Consolidated Statements of
Operations and Notes thereto should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus.
25
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------------
EIGHT MONTHS NINE MONTHS
NINE MONTHS ENDED AUGUST ENDED
ENDED 31, 1997 SEPTEMBER 30,
SEPTEMBER 30, WORLDCOM 1997
1997 COMPANY ASSETS INTERLINK
------------- ------------ -------------
<S> <C> <C> <C>
Telecommunications revenues:
Outsourcing services....................... $30,349 $51,876 $2,870
Prepaid services........................... -- -- 3,756
------------- ------------ ------
Total revenues........................... 30,349 51,876 6,626
Cost of revenues............................. 26,298 39,745 3,460
------------- ------------ ------
Gross profit............................... 4,051 12,131 3,166
Operating expenses........................... 3,005 9,343 3,156
------------- ------------ ------
Income (loss) from operations................ 1,046 2,788 10
Other income (expense):
Interest expense........................... (463) -- (21)
Interest and other income.................. 76 228 --
------------- ------------ ------
Total other income (expense)............. (387) 228 (21)
------------- ------------ ------
Income (loss) before provision for income
taxes....................................... 659 3,016 (11)
Provision (benefit) for income taxes......... 151 1,116 --
------------- ------------ ------
Net income (loss)............................ 508 1,900 (11)
Preferred dividend requirements.............. (113) -- --
------------- ------------ ------
Net income (loss) applicable to common
stockholders................................ $ 395 $ 1,900 $ (11)
------------- ------------ ------
------------- ------------ ------
Net income (loss) per share applicable to
common stockholders(7):
Basic......................................
Diluted....................................
Shares used in computing net income (loss)
per share applicable to common
stockholders(7):
Basic......................................
Diluted....................................
<CAPTION>
ADJUSTMENTS PRO FORMA
PRO FORMA PRO FORMA FOR AS ADJUSTED
ADJUSTMENTS COMPANY OFFERING COMPANY(8)
------------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Telecommunications revenues:
Outsourcing services....................... $ 85,095 $ 85,095
Prepaid services........................... 3,756 3,756
--------- -----------
Total revenues........................... 88,851 88,851
Cost of revenues............................. 69,503 69,503
--------- -----------
Gross profit............................... 19,348 19,348
Operating expenses........................... $ 1,428(1) 17,339 17,339
407(2)
--------- -----------
Income (loss) from operations................ (1,835) 2,009 2,009
Other income (expense):
Interest expense........................... (642)(3) (1,126) $ 1,033(4) (93)
Interest and other income.................. 304 304
------------- --------- ----------- -----------
Total other income (expense)............. (642) (822) 1,033 211
------------- --------- ----------- -----------
Income (loss) before provision for income
taxes....................................... (2,477) 1,187 1,033 2,220
Provision (benefit) for income taxes......... (828)(5) 439 382(5) 821
------------- --------- ----------- -----------
Net income (loss)............................ (1,649) 748 651 1,399
Preferred dividend requirements.............. (724)(6) (837) 34(6) (803)
------------- --------- ----------- -----------
Net income (loss) applicable to common
stockholders................................ $(2,373) $ (89) $ 685 $ 596
------------- --------- ----------- -----------
------------- --------- ----------- -----------
Net income (loss) per share applicable to
common stockholders(7):
Basic......................................
Diluted....................................
Shares used in computing net income (loss)
per share applicable to common
stockholders(7):
Basic......................................
Diluted....................................
</TABLE>
See accompanying notes on the following page.
26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------
PERIOD FROM
OCTOBER 1,
THREE MONTHS 1997 TO
ENDED DECEMBER 14, ADJUSTMENTS PRO FORMA
DECEMBER 31, 1997 PRO FORMA PRO FORMA FOR AS ADJUSTED
1997 COMPANY INTERLINK ADJUSTMENTS COMPANY OFFERING COMPANY(8)
------------ ------------ -------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Telecommunications revenues:
Outsourcing services....... $23,782 $ 633 $24,415 $24,415
Prepaid services........... -- 1,707 1,707 1,707
------------ ------ --------- -----------
Total revenues........... 23,782 2,340 26,122 26,122
Cost of revenues............. 19,129 1,131 20,260 20,260
------------ ------ --------- -----------
Gross profit............... 4,653 1,209 5,862 5,862
Operating expenses........... 4,053 1,079 $ 199(1) 5,344 5,344
13(2)
------------ ------ ----- --------- -----------
Income (loss) from
operations.................. 600 130 (212) 518 518
Other income (expense):
Interest expense........... (359) (4) (56)(3) (419) $388(4) (31)
Interest and other income
(expense)................ 15 (49) -- (34) (34)
------------ ------ ----- --------- ----- -----------
Total other income
(expense).............. (344) (53) (56) (453) 388 (65)
------------ ------ ----- --------- ----- -----------
Income (loss) before
provision for income
taxes....................... 256 77 (268) 65 388 453
Provision for income taxes... 93 -- (69)(5) 24 144(5) 168
------------ ------ ----- --------- ----- -----------
Net (loss) income............ 163 77 (199) 41 244 285
Preferred dividend
requirements................ (254) -- (25)(6) (279) 11(6) (268)
------------ ------ ----- --------- ----- -----------
Net income (loss) applicable
to common stockholders...... $ (91) $ 77 $ (224) $ (238) $255 $ 17
------------ ------ ----- --------- ----- -----------
------------ ------ ----- --------- ----- -----------
Net income (loss) per share
applicable to common
stockholders(7):
Basic......................
Diluted....................
Shares used in computing net
income (loss) per share
applicable to common
stockholders(7):
Basic......................
Diluted....................
</TABLE>
- ----------------------------------
(1) To record the related amortization expense of the goodwill, non-compete
agreements and other intangibles valued at $18.7 million and $12.5 million,
arising from the acquisitions of the WorldCom Assets and Interlink,
respectively.
(2) To record depreciation expense on the purchase accounting adjustments for
property and equipment of $2.7 million and $300,000 resulting from the
acquisitions of the WorldCom Assets and Interlink, respectively.
(3) To reflect interest expense ranging from 9.0% to 11.0% on the WorldCom pro
forma indebtedness of $6.2 million and 9.0% on the Interlink pro forma
indebtedness of $3.0 million.
(4) To reflect the conversion of all issued and outstanding shares of Series A
Convertible Preferred Stock into shares of Common Stock, the conversion of
$2.0 million of convertible subordinated indebtedness into shares of Common
Stock, the sale of shares of Common Stock by the Company at an assumed
price of $ per share (the midpoint of the price range set forth on the
cover page of this Prospectus) after deducting the underwriting discount and
estimated Offering expenses, and the application of the estimated net
proceeds therefrom to repay indebtedness and redeem the Series B Convertible
Preferred Stock as if all of the foregoing had occurred on January 1, 1997.
See "Use of Proceeds."
(5) To reflect the effect of federal and state income taxes.
(6) To reflect annual 8.5% dividends on the $11.2 million of Series B-2
Redeemable Preferred Stock issued in conjunction with the acquisition of the
WorldCom Assets and annual 6.0% dividends on the $2.0 million of Series B-3
Redeemable Preferred Stock issued in conjunction with the acquisition of
Interlink.
(7) See Note 10 of Notes to the Company's Consolidated Financial Statements and
Note 4 to the Company's Consolidated Interim Financial Statements for
information concerning the calculation of basic and diluted net income per
share.
(8) The pro forma as adjusted results of operations for the nine months ended
September 30, 1997 and the three months ended December 31, 1997 excludes the
estimated extraordinary loss on the early extinguishment of debt of
approximately $284,000, net of taxes.
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND PERCENTAGES)
The selected consolidated financial data for the fiscal year ended December
31, 1995 and for the period from January 1, 1996 to May 9, 1996 have been
derived from the financial statements of the Predecessor included in this
Prospectus which have been audited by Price Waterhouse LLP, independent
accountants. The selected consolidated financial data as of December 31, 1996
and for the period from May 10, 1996 (commencement of operations) to December
31, 1996 and as of and for the nine month period ended September 30, 1997 have
been derived from the consolidated financial statements of the Company included
in this Prospectus which have been audited by Price Waterhouse LLP, independent
accountants. The selected consolidated financial data as of and for the fiscal
years ended December 31, 1993 and 1994 and as of December 31, 1995 have been
derived from unaudited consolidated financial statements of the Predecessor, and
the selected consolidated financial data as of and for the nine months ended
September 30, 1996 and the three months ended December 31, 1996 and 1997 have
been derived from unaudited consolidated financial statements of the Company,
and in the opinion of the Company, include all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of such
information. Operating results for the three months ended December 31, 1997 are
not necessarily indicative of the results that may be expected for the entire
fiscal year. The selected consolidated financial data are qualified by reference
to, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus. Effective January 1, 1997, the Company changed its fiscal year end
to September 30.
<TABLE>
<CAPTION>
THE COMPANY(1)
THE PREDECESSOR(1) --------------------------------
---------------------------------------------- PERIOD FROM MAY NINE MONTHS
PERIOD FROM 10, 1996 ENDED
YEAR ENDED DECEMBER 31, JANUARY 1, (COMMENCEMENT OF SEPTEMBER 30,
------------------------------- 1996 TO MAY OPERATIONS) TO -------------
1993 1994 1995 9, 1996 DECEMBER 31, 1996 1997
--------- --------- --------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Telecommunications revenues:
Outsourcing services..................... $ 5,143 $ 9,101 $ 10,287 $ 6,333 $ 20,343 $ 30,349
Prepaid services......................... -- -- -- -- -- --
--------- --------- --------- ------ ------- -------------
Total revenues......................... 5,143 9,101 10,287 6,333 20,343 30,349
Cost of revenues........................... 4,199 7,527 8,418 5,639 18,366 26,298
--------- --------- --------- ------ ------- -------------
Gross profit............................. 944 1,574 1,869 694 1,977 4,051
Operating expenses:
Selling, general and administrative...... 523 498 488 267 684 1,450
Provision for doubtful accounts.......... -- 65 33 80 472 1,312
Depreciation and amortization............ 69 81 58 37 35 243
--------- --------- --------- ------ ------- -------------
Total operating expenses............... 592 644 579 384 1,191 3,005
--------- --------- --------- ------ ------- -------------
Income from operations..................... 352 930 1,290 310 786 1,046
Other expense.............................. -- -- -- -- (279) (387)
--------- --------- --------- ------ ------- -------------
Income before provision for income taxes... 352 930 1,290 310 507 659
Provision for income taxes................. 130 344 477 115 -- 151
--------- --------- --------- ------ ------- -------------
Net income................................. 222 586 813 195 507 508
Preferred dividend requirements............ -- -- -- -- (29) (113)
--------- --------- --------- ------ ------- -------------
Net income (loss) applicable to common
stockholders.............................. $ 222 $ 586 $ 813 $ 195 $ 478 $ 395
--------- --------- --------- ------ ------- -------------
--------- --------- --------- ------ ------- -------------
Net income (loss) per share applicable to
common stockholders(2):
Basic....................................
Diluted..................................
Shares used in computing net income (loss)
per share applicable to common
stockholders(2):
Basic....................................
Diluted..................................
See accompanying notes on the following page.
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Telecommunications revenues:
Outsourcing services..................... $ 7,100 $ 23,333
Prepaid services......................... -- 449
--------- ---------
Total revenues......................... 7,100 23,782
Cost of revenues........................... 6,431 19,129
--------- ---------
Gross profit............................. 669 4,653
Operating expenses:
Selling, general and administrative...... 283 1,853
Provision for doubtful accounts.......... 176 1,596
Depreciation and amortization............ 17 604
--------- ---------
Total operating expenses............... 476 4,053
--------- ---------
Income from operations..................... 193 600
Other expense.............................. (106) (344)
--------- ---------
Income before provision for income taxes... 87 256
Provision for income taxes................. -- 93
--------- ---------
Net income................................. 87 163
Preferred dividend requirements............ (11) (254)
--------- ---------
Net income (loss) applicable to common
stockholders.............................. $ 76 $ (91)
--------- ---------
--------- ---------
Net income (loss) per share applicable to
common stockholders(2):
Basic....................................
Diluted..................................
Shares used in computing net income (loss)
per share applicable to common
stockholders(2):
Basic....................................
Diluted..................................
See
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
THE COMPANY(1)
THE PREDECESSOR(1) --------------------------------
---------------------------------------------- PERIOD FROM MAY NINE MONTHS
PERIOD FROM 10, 1996 ENDED
YEAR ENDED DECEMBER 31, JANUARY 1, (COMMENCEMENT OF SEPTEMBER 30,
------------------------------- 1996 TO MAY OPERATIONS) TO -------------
1993 1994 1995 9, 1996 DECEMBER 31, 1996 1997
--------- --------- --------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Gross profit margin........................ 18.4% 17.3% 18.2% 11.0% 9.7% 13.3%
EBITDA(3).................................. $ 421 $ 1,011 $ 1,348 $ 347 $ 821 $ 1,289
EBITDA margin(4)........................... 8.2% 11.1% 13.1% 5.5% 4.0% 4.2%
Net cash provided by (used in) operating
activities................................ $ 65 $ 1,209 $ 811 $ (520) $ 20
Net cash provided by (used in) investing
activities................................ $ -- $ (2) $ 9 $ (2,016) $ (10,316)
Net cash provided by (used in) financing
activities................................ $ (65) $ (1,207) $ (820) $ 4,807 $ 8,383
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1996 1997
--------- ---------
<S> <C> <C>
OPERATING DATA:
Gross profit margin........................ 9.4% 19.6%
EBITDA(3).................................. $ 210 $ 1,204
EBITDA margin(4)........................... 3.0% 5.1%
Net cash provided by (used in) operating
activities................................ $ 445 $ (1,371)
Net cash provided by (used in) investing
activities................................ $ (1) $ (3,372)
Net cash provided by (used in) financing
activities................................ -- $ 4,451
</TABLE>
<TABLE>
<CAPTION>
THE PREDECESSOR(1) THE COMPANY(1)
--------------------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
AT DECEMBER 31, AT SEPTEMBER 30, AT DECEMBER 31,
--------------------------------------- --------------------- -------------------------
<CAPTION>
1993 1994 1995 1996 1997 1996 1997
----------- ----------- ----------- ----------- ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......... -$- $-- $-- $1,827 $ 358 $2,271 $ 66
Total assets....................... 886 1,647 1,380 5,799 34,496 6,420 55,558
Long-term obligations, less current
maturities........................ -- -- -- 3,914 8,375 3,922 13,381
Redeemable Preferred Stock......... -- -- -- -- 11,196 -- 13,196
Convertible Preferred Stock........ -- -- -- -- 1 1 1
Total stockholders' equity
(deficit)......................... 498 1,019 625 (555) 3,685 (479) 6,416
</TABLE>
- ------------------------------
(1) The Company acquired the Predecessor on May 10, 1996. Accordingly,
information for the period from January 1, 1993 through May 9, 1996 reflects
the operations of the Predecessor, and information for the period from May
10, 1996 (comencement of operations) through December 31, 1997 reflects the
operations of the Company. See "Summary--The Company" and "Stock Ownership."
(2) See Note 10 of Notes to the Company's Consolidated Financial Statements and
Note 4 of Notes to the Company's Interim Consolidated Financial Statements
for the determination of the number of shares used in the basic and diluted
per share calculations.
(3) EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is a measure of financial performance that is often
used in the telecommunications industry to compare companies on the basis of
liquidity, capital resources and leverage, and to determine a company's
ability to service debt. However, EBITDA should not be considered in
isolation or as an alternative to net income, income from operations, cash
flows from operating activities or any other measure of performance under
GAAP. Further, the EBITDA calculation may differ among companies within the
telecommunications industry. Thus, EBITDA as presented herein may not be
comparable to EBITDA or other similarly titled measures reported by other
companies.
(4) EBITDA margin is calculated by dividing EBITDA by total revenues.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" RELATING TO, WITHOUT
LIMITATION, FUTURE ECONOMIC PERFORMANCE, PLANS AND OBJECTIVES OF MANAGEMENT FOR
FUTURE OPERATIONS, AND PROJECTIONS OF REVENUES AND OTHER FINANCIAL ITEMS THAT
ARE BASED ON THE BELIEFS OF, ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY
AVAILABLE TO THE COMPANY'S MANAGEMENT. THE WORDS "EXPECT," "ESTIMATE,"
"ANTICIPATE," "BELIEVE," "INTEND," "PLAN" AND SIMILAR EXPRESSIONS AND VARIATIONS
THEREOF ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THE CAUTIONARY
STATEMENTS SET FORTH IN THE "RISK FACTORS" SECTION AND ELSEWHERE IN THIS
PROSPECTUS IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING
STATEMENTS, INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. THE FOLLOWING DISCUSSION SHOULD BE READ IN
CONNECTION WITH THE DISCUSSION SET FORTH IN "RISK FACTORS" AND WITH THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO INCLUDED
ELSEWHERE IN THIS PROSPECTUS.
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three months ended December 31,
1997 and 1996, for the nine months ended September 30, 1997 and 1996, and for
the two years ended December 31, 1996 and 1995. For periods prior to May 10,
1996 (commencement of operations), this discussion relates to the consolidated
financial position and results of operations of the Predecessor. Effective
January 1, 1997, ILD changed its fiscal year-end to September 30 from December
31. This discussion should be read in conjunction with the Company's and the
Predecessor's Financial Statements and Notes thereto included elsewhere in this
Prospectus.
OVERVIEW
ILD commenced operations in May 1996 with the acquisition of Intellicall's
operator services and long distance businesses. Intellicall is a manufacturer of
"smart" pay phones and had developed the business acquired by the Company as an
incidental part of its pay phone business. As of September 1, 1997, the Company
acquired the WorldCom Assets. The WorldCom Assets included customer contracts,
network call centers, switching facilities, billing and collections operations,
a contract to provide outsourced operator and billing services to WorldCom, and
a network agreement from WorldCom providing ILD with competitive rates for
network charges. This transaction began the Company's transition from a
switchless provider of enhanced network services into a facilities-based
provider with nationwide access.
Concurrently with the acquisition of the WorldCom Assets, the Company began
to aggressively focus on the growing markets for prepaid long distance and
prepaid local phone services. The Company's prepaid services are generally
offered using the same infrastructure utilized in connection with the Company's
outsourcing services. The Company has acquired and successfully integrated five
prepaid service providers since December 1997. The Company entered the prepaid
long distance and local service markets by acquiring Interlink in December 1997
and expanded its operations in the prepaid long distance market with the
acquisition of the prepaid operations of Intellicall as of January 1998. In
addition, the Company has entered into a definitive agreement and non-binding
letters of intent to acquire certain providers of prepaid services. ILD plans to
invest in the marketing and infrastructure resources to rapidly expand its
prepaid business over the next several years.
The Company expects prepaid long distance and prepaid local services to
increase as a percentage of revenues. The Company anticipates that the growth in
prepaid services will be driven by acquisitions and increased penetration in the
customer bases and markets it currently serves. The Company also expects
outsourcing revenues to continue to grow through acquisitions and internal
growth.
REVENUES are comprised of prepaid services revenues and outsourcing services
revenues. Prepaid services revenues include prepaid long distance, prepaid local
and any ancillary services such as voice mail and traditional long distance
services. Outsourcing services revenues include operator assisted services,
traditional long distance services and billing and collections services.
Revenues are recognized as services
30
<PAGE>
are performed based on end user usage, net of an estimate for uncollectible
revenues. The Company sells its services primarily on a measured time basis.
Prepaid long distance and prepaid local revenues are deferred and recognized as
calling services are used. Revenues from unbundled operator service offerings
consist of fees that are recognized as services are performed. Revenues from
billing and collections services consist of fees that are recognized upon
processing records to be billed and collected by the Company.
COST OF REVENUES consists of transmission costs, commissions and direct
operator center costs. Transmission costs consist of all direct costs associated
with originating and terminating a call, including local access charges, long
haul costs, fixed-cost facilities lease payments, and switching costs.
Commissions consist of monies owed to customers (primarily prepaid sales
outlets, private pay phone owners and hospitality facilities) for prepaid
services sold and calls processed and billed. Operator center costs include
operator salaries and benefits and costs directly related to the operator center
facilities.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES include direct selling expenses
and support services
required to maintain and grow the Company's operations. These costs are
principally comprised of non-operator salaries and related benefits, rent
expense, and other administrative expenses, including fees for professional
services.
PROVISION FOR DOUBTFUL ACCOUNTS consists of management's estimate of amounts
which may eventually become uncollectible and amounts necessary to settle
disputed charges. Provision for doubtful accounts in an outsourced switchless
environment is recorded as a component of the fees charged by the outsource
provider and is classified in cost of revenues. Provision for doubtful accounts
in a switched environment is recorded and classified in operating expenses by
the service provider. Provision for doubtful accounts with regard to prepaid
services consists of management's estimates of amounts which may eventually
become uncollectible.
DEPRECIATION AND AMORTIZATION includes depreciation of property and
equipment and amortization of intangible assets. The Company depreciates
property and equipment using the straight-line method over the estimated useful
lives of the depreciable assets, generally five years. The excess of cost over
net assets acquired reflects the acquired cost of goodwill, customer contracts,
other intangibles, and related items, and is amortized using the straight-line
method over their estimated useful lives, ranging from 5 to 25 years.
PROVISION FOR INCOME TAXES is a function of pretax earnings and the combined
effective rate of federal and state income taxes.
EBITDA represents earnings before interest, taxes, depreciation and
amortization. EBITDA is a measure of financial performance that is often used in
the telecommunications industry to compare companies on the basis of liquidity,
capital resources and leverage, and to determine a company's ability to service
debt. However, EBITDA should not be considered in isolation or as an alternative
to net income, income from operations, cash flows from operating activities or
any other measure of performance under GAAP. Further, the EBITDA calculation may
differ among companies within the telecommunications industry. Thus, EBITDA as
presented herein may not be comparable to EBITDA or other similarly titled
measures reported by other companies.
31
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship of certain statement of operations items to total revenues.
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
-------------------- -------------------- --------------------
1995 1996 1996 1997 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Telecommunications revenues:
Outsourcing services................................. 100% 100% 100% 100% 100% 98%
Prepaid services..................................... -- -- -- -- -- 2
--------- --------- --------- --------- --------- ---------
Total revenues..................................... 100 100 100 100 100 100
Cost of revenues....................................... 82 90 90 87 91 80
--------- --------- --------- --------- --------- ---------
Gross profit......................................... 18 10 10 13 9 20
Operating expenses:
Selling, general and administrative.................. 5 4 3 5 4 8
Provision for doubtful accounts...................... -- 2 2 4 3 7
Depreciation and amortization........................ -- -- -- 1 -- 2
--------- --------- --------- --------- --------- ---------
Total operating expenses........................... 5 6 5 10 7 17
--------- --------- --------- --------- --------- ---------
Income from operations................................. 13 4 5 3 2 3
Other expense.......................................... -- 1 1 1 1 2
--------- --------- --------- --------- --------- ---------
Income before provision for income taxes............... 13 3 4 2 1 1
Provision for income taxes............................. 5 -- 1 -- -- --
--------- --------- --------- --------- --------- ---------
Net income............................................. 8% 3% 3% 2% 1% 1%
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1996
REVENUES. Revenues increased by $16.7 million, or 235%, to $23.8 million
for the three months ended December 31, 1997 from $7.1 million for the three
months ended December 31, 1996. Of the total increase, $15.7 million was
attributable to the increase in revenues arising from the acquisition of the
WorldCom Assets as of September 1, 1997 and $596,000 was attributable to the
revenues arising from the Interlink acquisition as of December 15, 1997.
Subsequent to the acquisition of the WorldCom Assets, the Company has improved
its competitive pricing advantages due to lower network costs. Prepaid calling
services and outsourcing services accounted for 2% and 98%, respectively, of
total revenues for the three months ended December 31, 1997 compared to
outsourcing services revenues comprising 100% of total revenues for the same
quarter in 1996.
GROSS PROFIT. Gross profit increased by $4.0 million to $4.7 million for
the three months ended December 31, 1997 from $669,000 for the same quarter in
1996. The gross profit margin increased to 20% for the three months ended
December 31, 1997 from 9% for the three months ended December 31, 1996. The
increase in the dollar amount of gross profit was due to the acquisition of the
WorldCom Assets and, to a lesser extent, the Interlink acquisition. The increase
in gross profit margin was principally due to the lower cost of processing
traffic in 1997 in a switched environment over the WorldCom network as compared
to the processing of traffic in the 1996 quarter in an outsourced switchless
environment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased by $1.6 million to $1.9 million for the three
months ended December 31, 1997 from $283,000 for the same quarter in 1996 and as
a percentage of revenues increased to 8% in the 1997 quarter from 4% in the 1996
quarter. The increase in the dollar amount of selling, general and
administrative expense was primarily
32
<PAGE>
attributable to the acquistion of the WorldCom Assets and, to a lesser extent,
the Interlink acquisition. The increase as a percentage of revenues was
principally due to the additional infrastructure (billing, accounting, customer
service, management information systems, and fraud prevention) required in the
1997 quarter to operate and manage the business in a switched environment as
compared to outsourcing these functions in a switchless environment in the 1996
period.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
increased by $1.4 million to $1.6 million for the three months ended December
31, 1997 from $176,000 for the same quarter in 1996 and as a percentage of
revenues increased to 7% in the 1997 quarter from 3% in the 1996 quarter. The
increase in the dollar amount of the provision for doubtful accounts was
primarily due to the acquistion of the WorldCom Assets and, to a lesser extent,
the Interlink acquisition. The increase as a percentage of revenues was
principally attributable to the change to a switched environment in September
1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $587,000 to $604,000 for the three months ended December 31, 1997
from $17,000 for the same quarter in 1996 and as a percentage of revenues
increased to 2% in the 1997 quarter from less than 1% in the 1996 quarter. The
increases resulted from higher depreciation and amortization charges associated
with the acquisition of the WorldCom Assets and Interlink in 1997.
EBITDA. EBITDA increased by $994,000 to $1.2 million for the three months
ended December 31, 1997 from $210,000 for the same quarter in 1996 and as a
percentage of revenues increased to 5% in the 1997 quarter from 3% in the 1996
quarter. This increase was primarily attributable to the improved gross profit
margin, partially offset by the increased selling, general and administrative
expense and the increased provision for doubtful accounts.
INCOME FROM OPERATIONS. Income from operations increased by $407,000 to
$600,000 for the three months ended December 31, 1997 from $193,000 for the same
quarter in 1996 and as a percentage of revenues increased to 3% in the 1997
quarter from 2% in the 1996 quarter. The increase in income from operations was
primarily attributable to the acquistion of the WorldCom Assets and, to a lesser
extent, the Interlink acquisition.
OTHER INCOME (EXPENSE). The Company had other expense of $344,000 for the
three months ended December 31, 1997 as compared to other expense of $106,000
for the same quarter in 1996. This increase was primarily attributable to an
increase in interest expense to $359,000 from $137,000 related to increased
borrowings incurred in connection with acquisitions and business expansion.
PROVISION FOR INCOME TAXES. The Company recorded a provision for income
taxes of $93,000 for the three months ended December 31, 1997 compared to no
provision for income taxes for the same quarter in 1996. The provision in the
1997 quarter was due to the Company having insufficient net operating loss
carryforwards to shelter all taxable income in 1997.
NET INCOME. Net income increased by $76,000 to $163,000 for the three
months ended December 31, 1997 from $87,000 for the same quarter in 1996 and as
a percentage of revenues remained constant at 1%. The increase in the dollar
amount of net income was principally attributable to the improved gross profit
margin, partially offset by increased operating expenses, other expenses, and
the provision for income taxes in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
REVENUES. Revenues increased by $10.7 million, or 55%, to $30.3 million for
the nine months ended September 30, 1997 from $19.6 million for the nine months
ended September 30, 1996. The $10.7 million increase in revenues was the result
of (i) the acquisition of the WorldCom Assets which contributed $5.4 million of
outsourced services revenues and (ii) internal growth and new customers which
contributed $5.3 million of outsourced services revenues.
33
<PAGE>
GROSS PROFIT. Gross profit increased by $2.0 million to $4.0 million for
the nine months ended September 30, 1997 from $2.0 million for the same period
in 1996. The gross profit margin increased to 13% for the nine months ended
September 30, 1997 from 10% for the nine months ended September 30, 1996. The
increase in the dollar amount of gross profit was principally due to the
acquisition of the WorldCom Assets which contributed $1.3 million. The increase
in gross profit margin was primarily due to the WorldCom Assets traffic being
processed in a switched environment over the WorldCom network as compared to the
Company's traffic in the 1996 period being processed in an outsourced switchless
environment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased by $782,000 to $1.5 million for the nine months
ended September 30, 1997 from $668,000 for the nine months ended September 30,
1996 and as a percentage of revenues increased to 5% for the nine months ended
September 30, 1997 from 3% for the same period in 1996. The increase in the
dollar amount of selling, general and administrative expense was primarily
attributable to the acquistion of the WorldCom Assets. The increase as a
percentage of revenues was principally due to the additional infrastructure
(such as billing, accounting, customer service, management information systems,
and fraud prevention) required in the 1997 period after the acquisition of the
WorldCom Assets to operate and manage the business in a switched environment as
compared to outsourcing these functions in a switchless environment in the 1996
period.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
increased by $936,000 to $1.3 million for the nine months ended September 30,
1997 from $376,000 for the same period in 1996 and as a percentage of revenues
increased to 4% for the nine months ended September 30, 1997 from 2% for the
same period in 1996. The increase in the dollar amount of the provision was
primarily due to the acquisition of the WorldCom Assets. The increase as a
percentage of revenues was principally attributable to the change to a switched
environment in September 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $188,000 to $243,000 for the nine months ended September 30, 1997
from $55,000 for the same period in 1996 and as a percentage of revenues
increased to 1% for the nine months ended September 30, 1997 from less than 1%
for the same period in 1996. The increase resulted from higher depreciation and
amortization charges associated with the acquisition of the WorldCom Assets.
EBITDA. EBITDA increased by $331,000 to $1.3 million for the nine months
ended September 30, 1997 from $958,000 for the same period in 1996 and as a
percentage of revenues decreased to 4% for the nine months ended September 30,
1997 from 5% for the same period in 1996. The increase in the dollar amount was
primarily attributable to the acquisition of the WorldCom Assets. The decrease
as a percentage of revenues was principally attributable to the increased
selling, general and administrative expense and the increased provision for
doubtful accounts, partially offset by the improved gross profit margin.
INCOME FROM OPERATIONS. Income from operations increased by $143,000 to
$1.0 million for the nine months ended September 30, 1997 from $903,000 for the
same period in 1996 and as a percentage of revenues decreased to 3% for the nine
months ended September 30, 1997 from 5% for the same period in 1996. The
increase in the dollar amount of income from operations was primarily
attributable to the acquisition of the WorldCom Assets. The decrease as a
percentage of revenues was principally due to the increased operating expenses,
partially offset by the improved gross profit margin.
OTHER INCOME (EXPENSE). The Company had other expense of $387,000 for the
nine months ended September 30, 1997 as compared to other expense of $173,000
for the same period in 1996. This increase of $214,000 was primarily
attributable to an increase in interest expense to $463,000 for the nine months
ended September 30, 1997 from $217,000 for the same period in 1996 related to
borrowings incurred in
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connection with the formation of ILD in May 1996 being outstanding for the full
nine month period in 1997 and borrowings incurred in connection with the
acquisition of the WorldCom Assets in 1997.
PROVISION FOR INCOME TAXES. The Company had a provision for income taxes of
$151,000 for the nine months ended September 30, 1997 as compared to $115,000
for the same period in 1996. The increase in the provision for income taxes in
the 1997 period was due to the increase in the Company's taxable income in 1997.
NET INCOME. Net income decreased by $107,000 to $508,000 for the nine
months ended September 30, 1997 from $615,000 for the same period in 1996 and as
a percentage of revenues decreased to 2% for the nine months ended September 30,
1997 from 3% for the same period in 1996. The decrease in net income was
principally due to the increased operating expenses and interest expense,
partially offset by the improved gross profit margin.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Revenues increased by $16.4 million, or 159%, to $26.7 million in
the fiscal year ended December 31, 1996 from $10.3 million in the fiscal year
ended December 31, 1995. This $16.4 million increase was attributable to an
approximate $14.8 million growth in outsourced services revenues primarily
arising from new customers, of which one customer accounted for approximately
$5.9 million, partially offset by lower prices. In addition, on April 1, 1996,
the Company entered into a new operating arrangement with its third party
operator services provider. This new arrangement changed the method by which the
Company receives payment for call traffic from a "no risk" net commission basis
to an assumed risk basis whereby the Company owns the call traffic and records
the gross amount of revenues and associated cost of revenues. The effect of the
change in the fiscal year ended December 31, 1996 was to increase reported
revenues by approximately $4.1 million.
GROSS PROFIT. Gross profit increased by $802,000 to $2.7 million in the
fiscal year ended December 31, 1996 from $1.9 million in the fiscal year ended
December 31, 1995. The gross profit margin decreased to 10% in the fiscal year
ended December 31, 1996 from 18% in the fiscal year ended December 31, 1995. The
increase in the dollar amount of gross profit was due to the increase in
revenues from new customers. The decrease in gross profit margin was due to
competitive pricing required to secure new customers, particularly the one large
new customer which accounted for approximately $5.9 million of revenues in the
fiscal year ended December 31, 1996 and the contractual change with the third
party operator services provider.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased by $463,000 to $951,000 in the fiscal year
ended December 31, 1996 from $488,000 in the fiscal year ended December 31, 1995
and as a percentage of revenues decreased to 4% in the fiscal year ended
December 31, 1996 from 5% in the fiscal year ended December 31, 1995. The
increase in the dollar amount of selling, general and administrative expense was
commensurate with the increase in revenues. The decrease as a percentage of
revenues was principally due to the contractual change with the third party
operator services provider.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
increased by $519,000 to $552,000 in the fiscal year ended December 31, 1996
from $33,000 in the fiscal year ended December 31, 1995 and as a percentage of
revenues increased to 2% in the fiscal year ended December 31, 1996 from less
than 1% in the fiscal year ended December 31, 1995. The increases in both the
dollar amount of the provision and in the provision as a percentage of revenues
were attributable to all of the Company's revenues in the fiscal year ended
December 31, 1995 being billed through a third party billing agency whose fixed
fees included a component for bad debts and thus were categorized as cost of
revenues. In the fiscal year ended December 31, 1996, the new large customer
with approximately $5.9 million of revenues was billed through another third
party operator service provider whose agreement required the Company
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to absorb actual bad debts. Thus, the provision for doubtful accounts with
regard to this customer was recorded in operating expenses in the fiscal year
ended December 31, 1996, causing the disparity in comparability between years.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by $14,000 to $72,000 in the fiscal year ended December 31, 1996 from
$58,000 in the fiscal year ended December 31, 1995 and as a percentage of
revenues remained constant at less than 1%. The increase in the dollar amount of
depreciation and amortization reflects the additional property and equipment
required to manage the business and is commensurate with the increase in
revenues.
EBITDA. EBITDA decreased by $180,000 to $1.2 million in the fiscal year
ended December 31, 1996 from $1.4 million in the fiscal year ended December 31,
1995 and as a percentage of revenues decreased to 4% in the fiscal year ended
December 31, 1996 from 13% in the fiscal year ended December 31, 1995. These
decreases were primarily attributed to the decreased gross profit margin,
increased operating expenses and the contractual change with the third party
operator service provider.
INCOME FROM OPERATIONS. Income from operations decreased by $194,000 to
$1.1 million in the fiscal year ended December 31, 1996 from $1.3 million in the
fiscal year ended December 31, 1995 and as a percentage of revenues decreased to
4% in the fiscal year ended December 31, 1996 from 13% in the fiscal year ended
December 31, 1995. These decreases were primarily attributable to the decreased
gross profit margin, increased operating expenses and the contractual change
with the third party operator service provider.
OTHER INCOME (EXPENSE). The Company had other expense of $279,000 in the
fiscal year ended December 31, 1996 and $0 in the fiscal year ended December 31,
1995. This increase was primarily attributable to an increase in interest of
$354,000 in the fiscal year ended December 31, 1996 related to increased
borrowings incurred in connection with the formation of ILD in May 1996.
PROVISION FOR INCOME TAXES. The Company had a provision for income taxes of
$115,000 for the fiscal year ended December 31, 1996 as compared to $477,000 for
the fiscal year ended December 31, 1995. The decrease in the provision for
income taxes in the year ended December 31, 1996 was due to the decrease in the
Company's taxable income.
NET INCOME. Net income decreased by $111,000 to $702,000 in the fiscal year
ended December 31, 1996 from $813,000 in the fiscal year ended December 31, 1995
and as a percentage of revenues decreased to 3% in the fiscal year ended
December 31, 1996 from 8% in the fiscal year ended December 31, 1995. The
decrease in dollar amount was primarily attributable to the decreased gross
profit margin, increased operating expenses and increased interest expense. The
decrease as a percentage of revenues was principally due to increased costs and
the contractual change with the third party operator service provider.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its primary cash requirements from cash flows from
operations, issuances of equity and debt securities and borrowings pursuant to
the Term Loan and the Revolving Loan, all as described in greater detail below.
The Company's operating activities used net cash of $1.4 million for the
three months ended December 31, 1997, provided $20,000 for the nine months ended
September 30, 1997, provided $291,000 for the fiscal year ended December 31,
1996 and provided $1.2 million for the fiscal year ended December 31, 1995.
Since 1995, the Company's revenue growth has necessitated a significant
investment in working capital, particularly in accounts receivable. The
significant working capital investment to fund daily operations is caused by the
timing differences between the time the Company pays its suppliers and the time
it receives payments from its customers, either directly or through the LECs.
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The Company's investing activities used net cash of $2.4 million for the
three months ended December 31, 1997, $10.3 million for the nine months ended
September 30, 1997, $2.0 million for the fiscal year ended December 31, 1996 and
$2,000 for the fiscal year ended December 31, 1995. Of the total for the three
months ended December 31, 1997, $2.0 million was utilized in the acquisition of
Interlink; of the total for the nine months ended September 30, 1997, $10.1
million was utilized in the acquisition of the WorldCom Assets; and of the total
for the fiscal year ended December 31, 1996, $2.0 million was utilized in the
acquisition of the Predecessor.
The Company's financing activities provided net cash of $3.5 million for the
three months ended December 31, 1997, $8.4 million for the nine months ended
September 30, 1997, $4.0 million for the fiscal year ended December 31, 1996 and
used net cash of $1.2 million for the fiscal year ended December 31, 1995. Bank
borrowings of $2.0 million were used in the acquisition of Interlink in the
three months ended December 31, 1997, proceeds from $7.1 million of bank
borrowings and the issuance of $3.3 million of Common Stock were used in the
acquisition of the WorldCom Assets in the nine months ended September 30, 1997;
and proceeds from the issuance of $3.0 million of notes and $1.9 million of
Common Stock were used in the acquisition of the Predecessor in 1996.
As of December 31, 1997, the Company had cash balances of $66,000 as
compared to $358,000 at September 30, 1997. The Company's cash receipts from
accounts receivable and other sources are used on a daily basis to reduce the
Revolving Loan with NationsBank. Therefore, the Company's cash balances consist
only of unapplied cash receipts in transit. Restricted cash ($2.5 million at
December 31, 1997) represents collections from LECs which are contractually owed
to the Company's billing and collections customers but have not been remitted
due to timing. A corresponding liability is recorded in the Company's balance
sheet.
As of December 31, 1997, the Company had current liabilities in excess of
current assets of $5.0 million as compared to $428,000 as of September 30, 1997.
This increase was primarily due to $3.7 million of debt incurred in connection
with the Interlink acquisition and $2.2 million of Interlink negative working
capital assumed, partially offset by improved working capital of the Company.
In connection with its commencement of operations in May 1996, the Company
issued 100,000 shares of Series A Convertible Preferred Stock and 5,000 shares
of Series B Convertible Preferred Stock, together valued at a total of $1,000.
The Series A Convertible Preferred Stock will automatically be converted into an
aggregate of 100,000 shares of the Common Stock on the Closing Date. The Series
B Convertible Stock is convertible beginning in May 1999 but will be redeemed by
the Company using a portion of the net proceeds of the Offering for an aggregate
of approximately $500,000. See "Use of Proceeds" and "Capitalization."
In connection with the acquisition of the WorldCom Assets in September 1997,
the Company (i) paid $9.7 million of cash, (ii) issued 4,587 shares of the
Common Stock valued at $500,000, and (iii) issued 111,960 shares of the Series
B-2 Redeemable Preferred Stock valued at $11.2 million. The Series B-2
Redeemable Preferred Stock is not convertible, although each holder has the
right, beginning in September 2002, to require the Company to purchase all of
the Series B-2 Redeemable Preferred Stock held by such holder. The Company has
the right to redeem any or all of the Series B-2 Redeemable Preferred Stock at
any time. The purchase or redemption price, as applicable, is the stated value
of the shares to be purchased or redeemed plus the amount of any accrued but
unpaid dividends thereon.
In connection with the Interlink acquisition in December 1997, the Company
(i) paid $2.0 million of cash; (ii) issued a $2.7 million note, payable $1.8
million on December 31, 1997 and $900,000 on March 31, 1998 bearing no interest;
(iii) issued a $1.0 million note, payable $250,000 quarterly commencing
September 30, 1998 bearing interest at 9.0% per annum; (iv) issued 16,117 shares
of the Common Stock valued at $2.8 million; (v) issued 6,667 shares of the
Series B-3 Redeemable Preferred Stock valued at $2.0 million; and (vi) entered
into an $850,000 five-year consulting agreement payable $425,000 in June 1998
and 1999, respectively. The Series B-3 Redeemable Preferred Stock is not
convertible, although each holder has the
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right, beginning in December 2002, to require the Company to purchase all of the
Series B-3 Redeemable Preferred Stock held by such holder. The Company has the
right to redeem any or all of the Series B-3 Redeemable Preferred Stock
beginning in December 2002. The purchase or redemption price, as applicable, is
the stated value of the shares to be purchased or redeemed plus the amount of
any accrued but unpaid dividends thereon.
The Series B Convertible Preferred Stock ($500,000 stated amount), Series
B-2 Redeemable Preferred Stock ($11.2 million stated amount) and Series B-3
Redeemable Preferred Stock ($2.0 million stated amount) require annual dividends
of 9.0%, 8.5% and 6.0%, respectively, which totaled approximately $1.1 million
annually. Dividends on the Series B Convertible Preferred Stock and the Series
B-2 Redeemable Preferred Stock are payable semi-annually, and dividends on the
Series B-3 Redeemable Preferred Stock are payable quarterly.
In May 1996, the Company issued to Sirrom and Reedy River an aggregate of
$2.0 million of senior secured notes and Common Stock purchase warrants
exercisable for an aggregate of 7,239 shares of Common Stock at $0.01 per share.
These notes bear interest at 13.5% per year, which is payable monthly, and are
due on May 10, 2001. In August 1997, these notes were subordinated to the
Revolving Loan and the Term Loan.
In August 1997, the Company obtained the Revolving Loan and the Term Loan
from NationsBank to facilitate the acquisition of the WorldCom Assets and
Interlink and to provide working capital for operations and future acquisitions.
At December 31, 1997, the entire $5.0 million Term Loan was outstanding and $4.0
million of the $20.0 million Revolving Loan (subject to borrowing availability)
was outstanding. Unused borrowing availability under the Revolving Loan was
approximately $6.7 million at December 31, 1997. The borrowings under these
credit facilities are secured by principally all of the assets of the Company.
The Revolving Loan has a maximum availability of $20.0 million with
borrowings based on 85% of eligible receivables minus certain reserves. This
facility matures in August 2001 and automatically renews for successive one-year
periods up to a maximum of 20 years unless either party elects to terminate by
giving written notice to the other no less than 60 days prior to the termination
date. Borrowings under the Revolving Loan bear interest at a floating rate from
the bank's prime rate to 0.5% above the bank's prime rate (9.0% at December 31,
1997) depending upon the ratio of senior funded debt to EBITDA. At the Company's
option, the interest rate on additional advances may be fixed at a floating rate
ranging from 2.25% to 2.75% above the London Interbank Offered Rate ("LIBOR"),
subject to certain minimum amounts and duration of borrowings, which is also
dependent upon the ratio of senior funded debt to EBITDA. LIBOR rates must be
locked in for minimum periods of 30, 90 or 180 days. There were no LIBOR
borrowings outstanding at December 31, 1997.
The Term Loan bears interest at prime plus 2.5% (11.0% at December 31, 1997)
per annum and is payable monthly. Principal payments are due in one payment of
$500,000 by March 31, 1998, eight quarterly installments of $300,000 beginning
March 31, 1998, and five quarterly installments of $420,000 beginning March 31,
1999.
The Credit Agreement contains covenants which, among other restrictions, (i)
require the Company to satisfy certain financial ratios related to senior funded
debt to EBITDA, minimum net worth and minimum fixed charge coverage; (ii) limit
the Company's ability to incur indebtedness; (iii) limit investments and capital
expenditures; (iv) limit operating leases; (v) limit mergers, consolidations or
sales of assets; (vi) limit liens; (vii) require the Company to maintain minimum
availability under the Revolving Loan of not less than $500,000; (viii) restrict
the amount of dividend payments and interest paid on convertible subordinated
debt to an aggregate of $1.9 million in any fiscal year; and (ix) require the
Company to maintain a positive net income in the 1997 fiscal year. The Company
was in compliance with all debt covenant requirements at December 31, 1997.
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In connection with the organization of the Company, the Company in May 1996
issued an aggregate of $2.0 million of convertible subordinated debt which is
convertible into Common Stock at the rate of one share for each $90 of principal
then due the holder. The convertible subordinated debt bears interest at the
rate of 10.0% per year, is payable in quarterly installments of interest only
and matures on May 10, 2001.
The Company intends to repay substantially all of its indebtedness as well
as redeem all of the Series B Convertible Preferred Stock using a portion of the
net proceeds of the Offering. The Company intends to use approximately $1.25
million of the Offering proceeds to consolidate certain operations and complete
the build out of new leased facilities in Atlanta and San Antonio. Additionally,
the Company expects that an undetermined amount of the Offering proceeds likely
will be used to acquire network equipment for the continued development of the
Company's infrastructure, and additional Offering proceeds will be used for
working capital and to fund continued internal growth. The Company also may use
a portion of the net proceeds of the Offering for acquisitions, although no
assurance can be given that the Company will complete any acquisitions on terms
favorable to the Company, if at all. While there can be no assurance, the
Company estimates that the proceeds of the Offering, together with existing
sources of liquidity and anticipated funds from operations, will be sufficient
to fully fund its planned expenditures, including working capital, internal
growth, identified acquisition candidates, and other currently known cash
requirements. This estimate is a forward looking statement that is subject to
risks and uncertainties. Actual results and working capital needs could differ
materially from those estimated due to a number of factors, including the
factors discussed under "Risk Factors." In addition, the Company may require
additional debt and equity financing to fund further capital expenditures,
additional working capital needs and currently unidentified acquisitions. There
can be no assurance that additional financing will be available or, if
available, will be on terms acceptable to the Company. See "Risk
Factors--Substantial Discretion of Management Concerning Use of Proceeds."
SEASONALITY
The Company's operator service revenues are subject to some seasonal
variations due to the fact that pay phone usage is reduced during periods of
inclement weather such as toward the end of the quarter ending December 31 and
the beginning of the quarter ending March 31. This downturn in pay phone
revenues is somewhat mitigated by marginal increases of operator services
revenues generated from hospitality facilities during holidays throughout these
periods.
EFFECTS OF INFLATION
Inflation is not a material factor affecting the Company's business.
Historically, transmission and switched service costs per minute have decreased
as the volume of minutes has increased. However, general operating expenses such
as salaries, employee benefits and occupancy costs are subject to normal
inflationary pressures. Management has been able to contain these expenses
through cost control measures.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE
INCOME ("FAS 130"), which is effective for fiscal years beginning on or after
December 15, 1997. FAS 130 established standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Company believes that the adoption of this standard
will not have a material adverse effect on the Company's consolidated results of
operations or financial condition.
In February 1997, Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE ("FAS 128"), was issued. FAS 128 specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS") for
entities with publicly held common stock or potential common stock.
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FAS 128 simplifies the standards for computing EPS previously found in
Accounting Principles Board Opinion No. 15, "Earnings per Share" ("APB 15"), and
makes them comparable to international EPS standards. It replaces the
presentation of primary EPS with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the statement of
operations for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. FAS 128 is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods; earlier application is not permitted. FAS 128
requires restatement of all prior-period EPS data presented. The Company adopted
FAS 128 as of and for the year ended September 30, 1997.
In June 1997, Statement of Financial Accounting Standards No. 131,
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("FAS 131"),
was issued. FAS 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. FAS 131
is effective for financial statements for periods beginning after December 15,
1997. The Company will adopt FAS 131 in the year ending September 30, 1998. The
Company believes that the adoption of this standard will not have a material
effect on the Company's consolidated results of operations or financial
condition.
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BUSINESS
OVERVIEW
ILD is a rapidly growing independent facilities-based provider of prepaid
phone services and telecommunications outsourcing services. The Company offers
prepaid services through prepaid long distance calling cards and prepaid local
phone service to individual consumers nationwide through retail outlets and
direct response media. ILD offers a broad range of outsourcing services
including operator services, billing and collections services and traditional
long distance services. The Company's outsourcing services are provided
primarily to other telecommunications companies, including WorldCom, which has a
contract with ILD to provide all of WorldCom's outsourced operator assisted and
billing and collections services except in certain limited circumstances. For
the three months ended December 31, 1997, ILD had revenues and EBITDA of $23.8
million and $1.2 million, respectively.
ILD commenced operations in May 1996 with the acquisition of Intellicall's
operator services and long distance businesses. Intellicall is a manufacturer of
"smart" pay phones and had developed the business acquired by the Company as an
incidental part of its pay phone business. As of September 1, 1997, the Company
acquired the WorldCom Assets. The WorldCom Assets included customer contracts,
network call centers, switching facilities, billing and collections operations,
a contract to provide outsourced operator and billing services to WorldCom, and
a network agreement from WorldCom providing ILD with competitive rates for
network charges. This transaction began the Company's transition from a
switchless provider of enhanced network services into a facilities-based
provider with nationwide access.
Concurrently with the acquisition of the WorldCom Assets, the Company began
to aggressively focus on the growing markets for prepaid long distance and
prepaid local phone services. The Company's prepaid services are generally
offered using the same infrastructure utilized in connection with the Company's
outsourcing services. The Company has acquired and successfully integrated five
prepaid service providers since December 1997. The Company entered the prepaid
long distance and local service markets by acquiring Interlink in December 1997
and expanded its operations in the prepaid long distance market with the
acquisition of the prepaid operations of Intellicall as of January 1998. In
addition, the Company has entered into a definitive agreement and non-binding
letters of intent to acquire certain providers of prepaid services. ILD plans to
invest in marketing and infrastructure resources to rapidly expand its prepaid
business over the next several years.
THE INDUSTRY
OVERVIEW
The global telecommunications industry has undergone significant
transformation and growth in recent years due to continued deregulation and
technological innovation. The changing market for telecommunications services
created an opportunity for the growth of alternative long distance and enhanced
telecommunications services providers serving markets not adequately serviced by
the dominant IXCs. Some of the opportunities have arisen in markets such as
alternative long distance services (whether facilities-based or switchless
resellers), prepaid phone cards, alternative local exchange carriers, operator
services, billing and collections operations, enhanced integrated services such
as voicemail, and automated telemarketing and verification operations. The
Company believes there will be increased competition and downward pricing
pressures in the foreseeable future leading to consolidation among providers
offering enhanced telecommunications services. The Company believes it is well
positioned to take advantage of opportunities for such market consolidation.
DOMESTIC PREPAID LONG DISTANCE
The approximately $100 billion U.S. long distance industry is becoming more
competitive. While the nation's four largest IXCs, AT&T, MCI, WorldCom and
Sprint, generated approximately 83.1% of the
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aggregate revenues of all U.S. long distance IXCs in 1996, that percentage had
decreased from approximately 97.3% in 1984. Much of the growth of alternative
providers has arisen in markets of the telecommunications industry not
traditionally serviced by the dominant IXCs. According to the ITA, prepaid
calling card revenues in the U.S. have grown from an estimated $12.0 million in
1992 to an estimated $2.1 billion in 1997, and they are projected to be at least
$4.0 billion in 2001 according to ITA. Although prepaid phone cards are
relatively new in the U.S., prepaid phone cards have been a widely used and
accepted way of making telephone calls in Europe and Asia since the 1970s. The
Company believes the affordable pricing, convenience and enhanced features of
prepaid phone cards will attract a large number of customers who view
traditional telecommunications delivery systems as too expensive, impractical,
or unavailable. The Company believes that the majority of the more than 400
prepaid service providers in the United States are switchless resellers with
high network costs, making the prepaid market fragmented and inefficient.
DOMESTIC PREPAID LOCAL SERVICES
Another recent development in the telecommunications industry is the opening
up of competition in the approximately $87 billion domestic local
telecommunications market that had been traditionally the domain of the RBOCs
and GTE. The Telecommunications Act, which was enacted in large part to
increased competition in the local telecommunications industry, provided a
framework for other carriers to compete with LECs by reselling local telephone
service, leasing unbundled elements of the incumbent LEC networks or building
new local service facilities. This has created many opportunities for
alternative providers in the local services market. The Company believes that
one source of potential customers is the "unbanked consumer" presently not
served by the LECs. The FCC estimates that as of November 1997, 6.3 million U.S.
households did not have local telephone service, representing 6.2% of the
country's total households. Many of these people are immigrants, students,
temporary residents, and lower-income individuals who in many instances do not
have local telephone service due to credit or identification problems. Since the
enactment of the Telecommunications Act, many telecommunications companies with
CLEC authority have sought to lease local phone lines from the LECs and sell
service utilizing the leased lines to the "unbanked consumer" on a prepaid flat
monthly fee basis. The companies developing local prepaid operations have
generally advertised through direct response media advertising, and frequently
distribute their prepaid local services through payment centers such as check
cashing stores, pawn shops, beeper stores or cash transmission facilities.
OUTSOURCING SERVICES
Another market that has developed in the telecommunications industry is the
provision of telecommunications services to various entities who desire to
outsource certain of their telecommunications needs. These include
telecommunications companies such as LECs, IXCs, RBOCs and CLECs, as well as
aggregators of call traffic including private pay phone owners, hotels,
condominiums, health care institutions, educational institutions and
correctional facilities. The services provided include operator services,
billing and collections, voice mail, and traditional long distance bundled with
other services. According to industry analysts, the market for
telecommunications outsourcing is in its early stages of development and is
growing as companies continue a strong trend of outsourcing non-core business
functions to enhance operating efficiency and focus on core businesses. The
Company believes that CLECs, in particular, will depend significantly on
third-party providers of telecommunications services and thus represent a major
outsourcing opportunity for ILD.
Operator services is one of the services frequently outsourced by
telecommunications entities other than the dominant IXCs. The operator services
industry evolved principally as a result of the new competitive opportunities
created in 1984 by the court-ordered divestiture by AT&T of its RBOCs (the "AT&T
Divestiture"), and the advent of technology that allowed a zero-plus call
(automated calling card call) or zero-minus call (collect, third-party billing,
operator assisted calling card or person-to-person call)
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to be routed away from AT&T to a competitive long distance services provider.
Operator services are generally offered on a bundled (with long distance
services) or private-label unbundled basis. The U.S. operator services market
was estimated to be a $8.4 billion in 1996 according to Frost & Sullivan. The
domestic operator services industry has been impacted by market uncertainties
about possible additional federal regulation and increasing competition due to
dial around calling programs (the use of access numbers to reach a customer's
carrier of choice, rather than using an operator by dialing "0+") and
presubscription programs of long distance providers (in which the pay phone
owner preselects the long distance service provider). Alternative dialing plans
such as carrier proprietary calling cards and prepaid cards are expected to
continue to erode the number of operator assisted calls generated per phone.
Industry trends have reduced the number of major operator services providers,
thereby increasing outsourcing opportunities to such providers from carriers no
longer offering in-house operator services, but who need to provide these
services to their customers.
Billing and collections operations and directory assistance operations are
often bundled with operator services. Billing and collections services have
emerged in the telecommunications industry out of the AT&T Divestiture,
following which the RBOCs and other major LECs were required to provide billing
and collections services on a nondiscriminatory basis to all carriers that
provided telecommunications services to the LEC's customers. Due to the cost of
building the necessary infrastructure and the relatively high minimum charges
associated with many of the LEC billing and collections agreements, only the
largest long distance carriers, including AT&T, MCI, and Sprint, could afford
the option of billing directly through the local telephone companies. Several
companies, including WorldCom and its predecessors, entered into billing and
collections agreements with other providers of telecommunication services. This
enabled such companies to aggregate telephone call records for themselves, other
operator services providers and second and third tier long distance carriers,
thereby becoming billing and collections clearinghouses. Billing and collections
clearinghouses process telephone call records and other transactions and submit
them to the local telephone companies for inclusion in their monthly bills to
the LEC's customers. As the local telephone companies collect payments from
their customers, they remit them to the third-party clearinghouses who, in turn,
remit payments to their carrier customers.
Other outsourcing markets include directory assistance programs,
administrative services for PINs of other prepaid card providers or resellers,
third party verification services and automated rate quoting for operator
services. Directory assistance programs are operations which assist the
telecommunications consumer in obtaining data (traditionally phone or facsimile
numbers). Third party verification services arise both in the context of PIC
designations whereby states require independent verification of any consumer's
change of primary carriers and commercial applications such as verification of
orders from telemarketing activities. Rate quoting is a recently enacted mandate
by the FCC which will require consumers to be provided rate quotes for operator
services prior to the provision of such services. Other emerging outsourcing
services in the telecommunications industry include 800/888-based services,
voice messaging, enhanced document distribution (including e-mail and
facsimile), conference calling and Internet-based communication services.
STRATEGY
ILD's objective is to be one of the leading providers of enhanced
telecommunications services. Key elements of the Company's strategy include:
BECOME A LEADING INDEPENDENT PROVIDER OF PREPAID SERVICES. The domestic
prepaid services market is one of the fastest growing markets of the
telecommunications industry and is served by over 400 providers. The Company
believes a majority of these providers are small to mid-sized switchless
resellers with high network costs. ILD believes it is well positioned to
consolidate providers in this market and successfully integrate them into its
facilities-based network. In addition, the Company will seek to increase its
marketing and distribution of prepaid services by expanding its relationships
with retail outlets and other distribution partners such as private pay phone
owners and affinity groups. Through ongoing infrastructure
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upgrades, the Company intends to offer enhanced calling card features, including
conference calling, store and forward messaging, voice mail broadcast, facsimile
mail, facsimile forwarding, facsimile broadcast and pager notification.
LEVERAGE ITS STRONG MARKET POSITION AS A FULL SERVICE PROVIDER OF
OUTSOURCING SERVICES. ILD offers a diverse menu of outsourcing services,
including operator services, traditional long distance and billing and
collections. The Company believes it can build on its strong market position in
outsourcing by growing its customer base and providing additional outsourcing
services to its customers. The Company plans to augment its outsourcing services
with the introduction in 1998 of primary inquiry (a billing inquiry service to
resolve billing inquiries for individual users), directory assistance, voice
mail messaging, and enhanced billing and collections services. In addition, the
Company expects to utilize its call centers as third party verifiers of PIC
modifications, a service which limits unauthorized changes to an individual
user's PIC, commonly known as "slamming," and telemarketing.
UTILIZE NETWORK FACILITIES TO BE A LOW COST PROVIDER. The Company seeks to
be a low cost provider of prepaid and outsourcing services. ILD believes that it
can achieve this objective by leasing interexchange circuits, which are expected
to significantly decline in price as additional capacity becomes available, as
well as the least cost routing capabilities of its switching infrastructure. The
Company's facilities-based network also allows the Company to process traffic in
any of its call centers, providing redundancy and increasing call center
utilization and efficiency. The Company also seeks to increase efficiencies in
its call centers and other back office functions by expanding automation and
training its operators and customer service representatives to perform multiple
tasks.
CAPITALIZE ON SYNERGIES BETWEEN PREPAID SERVICES AND OUTSOURCING
SERVICES. The Company's infrastructure services both its prepaid and
outsourcing operations, creating scale and operating efficiencies not generally
available to its competitors. Additionally, the Company has the opportunity to
increase revenues by cross-selling its products and services to its diverse
customer base. The Company's outsourcing services customers are potential
customers for its prepaid services. For example, the Company recently introduced
a prepaid calling card vending machine option to its outsourcing customers that
aggregate traffic (such as private pay phone owners or hotels), which will
enable these customers to capture a share of call traffic otherwise lost to dial
around traffic. Individual consumers of the Company's prepaid local services are
also ideal customers for ILD's prepaid long distance and voice messaging
services.
PRODUCTS AND TELECOMMUNICATION SERVICES
PREPAID SERVICES
PREPAID LONG DISTANCE SERVICES. ILD provides convenient, cost-effective
long distance services to individual consumers through its prepaid calling card
services. The Company's calling card provides customers with a single point of
access to telecommunications services to destinations throughout the world on a
per minute prepaid basis. Individual consumers utilize the Company's calling
card by dialing a toll-free number at any telephone, then entering the PIN
assigned to each prepaid card and dialing the telephone number the consumer
wishes to reach. The Company's switches complete the call, and its debit card
platform reduces the prepaid card balance during the call. The Company's
software and information systems enable the Company to track real-time card
usage by its prepaid calling card customers. In addition, the Company has the
infrastructure to recharge its cards. The individual consumer may generally
recharge the card by calling ILD's toll-free number and using a major credit
card to add minutes as needed. Customers who recharge their prepaid calling
cards generally purchase minutes at a lower per minute cost than the original
per minute cost. The Company markets its various prepaid long distance calling
cards through a number of distribution channels, including (i) privately-branded
phone card sales through over-the-counter sales or on-site vending machines at
large retailers, (ii) sales of ILD branded phone cards using its trade name
"Call N Carry" through direct response media advertising, small retailers or
vending machines adjacent to pay phones, (iii) corporate sales to businesses for
their employees' use or
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in promotional marketing campaigns, (iv) trade shows, and (v) direct sales at
National Association for Stock Car Auto Racing ("NASCAR-Registered Trademark-")
events from its sponsorship of a race team and use of the likeness of
NASCAR-Registered Trademark- driver Ernie Irvan on the face of its prepaid
calling cards and in point of sale advertising.
Under sales agreements with the majority of its contracted over-the-counter
retailers, the Company sells cards to the retailer at a set price on customary
credit terms. For vending machine sales, the Company, either by itself or
through a bonded service provider, collects cash from the machines and supplies
additional cards on a periodic basis as prompted by its card monitoring software
program. The Company pays commissions to its retailers or owners of vending
machine sites based on the revenues from cards sold at such sites, and if
applicable, minutes recharged on the cards sold from the retailer's site.
The Company is expanding its prepaid long distance business through
acquisitions and internal growth initiatives. Since December 1997, the Company
has acquired five prepaid long distance businesses. The Company has also
undertaken several initiatives for continued internal growth. These initiatives
include expansion of the Company's recharge program for prepaid cards through
premium incentive programs, including rewards or discounts, and the addition of
a prepaid vending program option for customers of its operator services and
traditional long distance services. Many private pay phone owners, hospitality
entities and other Company customers have been faced with declining commission
revenues due to dial around activities of individual consumers. As a result,
these customers may choose to offer a prepaid card product (through an adjacent
vending machine or as part of the services otherwise available to individual
consumers) and recharge program to capture the traffic otherwise lost to dial
around programs. The Company expects that the prepaid calling card business will
remain the principal focus of ILD's acquisition activities and marketing efforts
in 1998. See "--Strategy."
PREPAID LOCAL SERVICES. ILD entered the business of providing prepaid local
phone services in connection with its acquisition of Interlink in December 1997.
Acting through its wholly-owned subsidiary IOS, the Company has CLEC authority
to provide local services in Georgia, Alabama, Florida, South Carolina, and
Tennessee. In addition, the Company has applied for CLEC authority in
California, Oregon, Washington, North Carolina, Texas, Arizona, Idaho, Utah, and
Connecticut. Under its CLEC authority, ILD leases phone lines from the local
LECs on a prepaid basis and sells prepaid local service to individual consumers.
The Company charges the individual consumer a one-time activation fee and
monthly fees, payable in advance. Because prepaid local customers cannot make
long distance calls using local lines, there may be an opportunity for the
Company to cross-sell its long distance calling card services to these
customers. To this end, upon activation, the Company provides the individual
consumer with one of the Company's prepaid long distance cards, free of charge.
The initial payment of the activation and monthly fee are made by the individual
consumer either directly to ILD or in retail outlets that ILD has contracted
with, and to which the Company pays a commission, such as check cashing stores,
pawn shops and cash transmission facilities. Once the initial payment is
received and credited, the Company arranges for the installation of the local
line by the local LEC to the designated location. The Company invoices the
consumer in advance for monthly charges. The Company also offers, both as part
of the initial service or as an additional service, enhanced calling features
such as call waiting, three way calling, caller identification, and call return
on a monthly fee basis.
ILD recently commenced a direct response media program whereby television,
radio and newspaper media (with reference to a customer service center "standing
by") are utilized to increase volume in targeted markets. The program is
initially being tested in the Macon, Georgia market. In other markets, the
program will be conducted on a bilingual basis to attract Hispanic customers.
The Company believes that although such marketing programs require additional
upfront capital, the programs will rapidly increase its subscriber base. ILD
plans to grow its prepaid local services business with direct response media
advertising and expansion of its geographic distribution, either through
internal growth or strategic acquisitions. The Company believes its network
infrastructure and ability to bundle prepaid local services with prepaid long
distance services provide it with a competitive advantage over many of the
existing participants in the prepaid local market.
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OUTSOURCING SERVICES
OPERATOR SERVICES. ILD offers a full range of operator services to
approximately 1,700 aggregators of call traffic, including private pay phone
owners, hotels, condominiums, health care institutions, educational institutions
and correctional facilities, and telecommunications companies such as LECs,
IXCs, RBOCs and CLECs. The Company provides operator services through a
combination of bundled and private-label unbundled service offerings through its
full-service, multilingual call centers. The Company processed a total of 6.9
million calls for the three months ended March 31, 1998. The Company's call
center in San Antonio has approximately 40 live positions with capacity to
double in size. The Company's call center in Las Vegas has 72 live positions
with additional capacity for growth. The Company also has a call center in
Atlanta for its prepaid operations, with additional capacity for operator
services personnel following the planned construction of a new call center in
Atlanta. The call center infrastructure makes ILD one of the leading operator
services entities in the United States. Management believes its broad customer
base for operator services affords it the opportunity to cross-sell its other
outsourcing services to its customers.
ILD has entered into a five-year contract with WorldCom to handle all of
WorldCom's operator services which are not required by regulation or prior
contractual arrangements to be handled by a third party. The agreement, which
expires in September 2002, contains provisions requiring ILD and WorldCom to
negotiate an extension beyond the expiration date in good faith, with ILD having
the right to match any bids made by other operator service providers. The
Company also handles WorldCom's incidental operator services calls generated
from WorldCom's IXCs long distance subscriber base as well as for dial around
traffic through the WorldCom network generated from phones not subscribed to
WorldCom. ILD's operator services agreement with WorldCom has accounted for an
average of 775,000 calls per month processed through the Company's call centers
since September 1, 1997, or 14% of the average monthly calls handled by ILD.
WorldCom's incidental operator services traffic has grown by over 20% per year
for the past three years, and the Company expects this growth to continue in the
immediate future due in large part to WorldCom's subscriber growth and increases
in international traffic. WorldCom offers a service for individuals in Cuba,
Mexico, Guatemala, Honduras and certain other Central and South American
countries to place a collect operator services call to the United States. In
addition, individuals in the United States can place a collect operator services
call to Mexico and certain other countries. These arrangements represented an
average of 60,000 calls processed each month in 1997. In addition, ILD serves as
the operator services provider for, among others, PCS, PhoneTel, Ameritech,
Digital Access and the MGM Grand Hotel.
ILD anticipates that its operator services business will focus on the demand
for enhanced outsourced telecommunications products and services by
telecommunications companies, including RBOCs, IXCs, independent LECs and CLECs.
In particular, the Company believes that its network infrastructure and its
multilingual call centers make it well positioned to obtain contracts for
enhanced operator services in international markets. As a significant revenue
generator with a strong corporate customer base that provides cross-selling
opportunities, the operator services business is one of the Company's principal
outsourcing business units. See "--Strategy." The Company markets its operator
services as well as its other outsourcing services through trade shows, industry
advertising, response to "requests for proposals" and direct sales efforts.
BILLING AND COLLECTIONS. ILD operates a billing and collections operation
which it acquired from WorldCom as of September 1, 1997. This billing and
collections operation has been in existence since 1986 and is one of the major
providers of outsourced LEC billing and collections services in the United
States. The Company's billing and collections customers submit telephone call
record data to the Company in batches on a periodic basis, typically in weekly
intervals. The Company processes the call record data to determine the validity
of each record, which includes applicable customer identification information
for each record, and sets up an account receivable for each batch of call
records processed. The Company then submits the relevant billable telephone call
records and other transactions electronically or via magnetic tape to the
appropriate local telephone company for billing and collections. As part of its
billing and
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collections operations, ILD also provides on a fee basis individual consumer
inquiry and service for billed telephone call records. The Company's customer
service representatives are authorized to resolve individual consumer disputes
regarding such calls. For selected customers, ILD serves as a "factor" by
purchasing the call records generated by such customers and advancing between
50% and 80% of the billed dollar amount of such traffic approximately one week
following the Company's receipt of the call records and paying the balance upon
receipt of payments from the LEC. The customer pays interest to ILD for the
period of time between the purchase of records by ILD and the time the LEC
submits payment for the call records.
ILD generally offers its billing and collections services bundled with other
outsourcing service offerings such as operator services and traditional long
distance services. In addition, ILD provides billing and collections services
internally for its own traffic for which it reports no revenues. ILD also offers
unbundled, "wholesale" billing and collections services for other long distance
or operator services companies providing services for aggregators of long
distance traffic such as private pay phone owners, hotels, hospitals, and
correctional institutions. The Company's major unbundled wholesale billing
customers include WorldCom, Talton Holdings, Inc., Davel Communications, Inc.,
Canon Telephone, and Computer Integrated Technologies. ILD anticipates continued
growth in its billing and collections business due to increased call traffic
from WorldCom and other customers, increased utilization of its factoring
program, as well as Company initiatives for incremental sales and marketing to
promote ILD's billing alternatives (such as a planned direct bill product for
resellers of long distance products and services) and to increase ILD's billing
customer base. In 1998, the Company also intends to complete an upgrade of its
fee-based primary inquiry customer service which will provide incremental
revenues to ILD while at the same time providing customers with improved
customer reporting and higher call sustain rates. ILD is able to provide its
primary inquiry customer service from its existing call centers, an example of
the synergies it obtains by making a call center a multi-purpose facility. The
Company believes the presence of an owned and operated billing and collections
operation enhances its ability to serve as a full-service provider of
outsourcing services.
TRADITIONAL LONG DISTANCE SERVICES. As part of its menu of outsourcing
services, ILD offers traditional long distance products and services to its
commercial customers. ILD's long distance products and services for the
commercial market include direct dial domestic and international calling, T-1
voice and data services, inbound 800/888 services, calling card programs for
corporate usage, and advanced invoicing and reporting features. The Company
provides such services to its commercial customers on a stand-alone basis or
bundled with other services. The ability of the Company to provide traditional
long distance services, made possible by its resale agreements with multiple
carriers, its existing infrastructure and 48-state regulatory authorization,
enhances the Company's mix of outsourcing products and services to entities
looking for a full-service provider of outsourcing services.
PIN ADMINISTRATION SERVICES. ILD's investments in enhanced card platforms
and switching facilities have enabled it to offer PIN administration services to
other prepaid long distance service providers and resellers. The Company charges
for its PIN administration services based on monthly usage.
PLANNED PRODUCTS AND SERVICES
ILD is implementing directory assistance as a new service offering. The
technology developed and acquired for ILD's directory assistance service
offering also allows the Company to provide other teleservices programs such as
outbound sales, inbound order processing and inbound and outbound customer
service. The Company's new directory assistance product will allow ILD to
discontinue outsourcing most of its directory assistance services and to
cross-sell current customers not using this service, thereby reducing costs and
increasing revenues. The Company's directory assistance product will offer both
national and international directories and will employ a system architecture
designed for high-speed search operations and management of databases. Using a
customized program, ILD's operators will be able to perform multiple search
types--viewing a single area code, a region consisting of multiple area codes,
or
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the entire country--as well as "versatile query methods" such as reverse search,
neighborhood search, search by first two letters of first or second name, or
search by Standard Industry Category codes. Enhanced features of ILD's directory
assistance service offering will include custom or private label branding,
standard call completion or call completion by LATA, multilingual capability,
and automatic return to operator.
ILD intends to provide a full range of enhanced features to its calling card
customers. The Company is developing service offerings for enhanced voice mail,
facsimile mail and pager notification. Voice mail allows the individual consumer
to receive messages to a preassigned number accessed by a toll-free call.
Facsimile mail allows the individual consumer to receive facsimiles and provides
notification of the receipt of such facsimiles. Pager notification allows the
individual consumer to receive text or numbers received and then transmitted by
the Company. In addition, the Company's infrastructure upgrades planned for 1998
will enable the Company to offer conference calling, store and forward
messaging, voice mail broadcast, facsimile forwarding, and facsimile broadcast.
CUSTOMER SERVICE
ILD believes that effective and convenient customer service is essential to
attracting and retaining customers. The Company's customer service department is
responsible for assisting customers, answering questions about usage and
resolving billing related issues and technical problems. The Company provides
on-line customer support 24 hours a day, seven days a week. In addition, the
Company can identify calling activity by the originating or destination phone
number or other parameters. Customer service representatives can access detailed
usage records through the Company's data retrieval system in order to
efficiently answer customers' questions or resolve customers' concerns. The
Company also maintains a general customer service department in its San Antonio
call center to handle general inquiries.
ILD NETWORK AND CALL CENTERS
On September 1, 1997, ILD acquired from WorldCom network call centers in San
Antonio and Las Vegas and switching centers in Dallas and Los Angeles. The
acquisition and substantial enhancement of this infrastructure, coupled with a
network agreement with WorldCom, transformed ILD from a switchless provider of
enhanced network services to a facilities-based provider with nationwide access.
The Company anticipates that virtually all of its operator services traffic will
be migrated onto its owned switches and network call centers during the second
half of 1998.
SWITCHING FACILITIES. ILD's network architecture is composed of two DEX 600
switches in Los Angeles and Dallas, two Harris switches in Atlanta, advanced
service platforms, and interconnection to national fiber optic networks. This
architecture is expected to expedite call completions and improve reliability
and maintain quality utilizing Signaling System 7 and Integrated Services
Digital Network ("ISDN") technology. ILD's DEX 600 switch configuration contains
automated positions by Cyberlog, Intelligent Peripheral ("IP"), DOSS frames and
in-switch Call Detail Record ("CDR") collection. ILD is building a network and
switching platform that the Company believes is scalable and capable of handling
the consolidation of acquired networks. For instance, in connection with the
Interlink acquisition in December 1997, the Company acquired one Harris switch
and consolidated it with another Harris switch acquired from WorldCom in
September 1997; shortly thereafter, Interlink's operator services and long
distance traffic were moved to ILD's DEX 600 switches and the prepaid calling
card traffic of ILD system-wide was routed to the two Harris switches in
Atlanta.
ILD's IP frames allow the Company to utilize the Integrated Services Digital
Network/Primary Rate Access ("ISDN/PRA") to interface with its Cyberlog
automated operator positions. The ISDN/PRA interface is faster and more reliable
than the analog connectivity previously used. This technology allows ILD to
introduce new features or enhancements such as pager notification and store and
forward messaging. The Company has moved its Cyberlog automated operator
positions to the two DEX 600
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switch sites, thus eliminating the network costs associated with transporting
its traffic between the switch sites and its network call centers. The
release-link has been removed between the WorldCom network and the Company's DEX
600 switches, allowing the Company to create and collect its own CDRs and track
real time usage for its customers. In addition to ILD's switching network, the
Company is building a Wide Area Network planned for completion in the second
half of 1998 that incorporates intelligence capable of monitoring and restoring,
through redundancy, all local area network segments and nodes.
CALL CENTERS. The Company's call center in San Antonio has approximately 40
live positions with capacity to double in size. The Company's call center in Las
Vegas has 72 live positions with additional capacity for growth. The Company
also has a call center in Atlanta for its prepaid operations, with additional
capacity for growth following the planned construction of a new call center in
Atlanta. ILD's call center infrastructure makes the Company one of the leading
operator services entities in the United States. The Company is also able to
provide its primary inquiry service for its billing and collections operations
and certain other customer service functions from its call centers, capitalizing
on the synergies from using a call center as a multi-purpose facility.
COMPETITION
ILD's strategy is to gain a competitive advantage by leveraging its
facilities-based network of switches and call centers and existing broad product
mix to cross-sell existing services to its diverse customer base, to offer new
products and services, and to add increased call traffic through an expanded
calling card recharge program or strategic acquisitions. The Company believes
that the principal competitive factors affecting the market for prepaid services
and outsourcing telecommunication services are price, quality of service,
reliability of service, degree of service integration, ease of use and service
features. The Company believes that it competes effectively in these areas.
The telecommunications services industry is intensely competitive, rapidly
evolving and subject to constant technological change. Many telecommunications
entities are entering the prepaid local and long distance markets and are likely
to continue to expand their service offerings to appeal to existing or potential
customers of the Company. Other providers currently offer one or more of the
outsourcing services offered by the Company. In particular, the billing and
collections industry is dominated by large IXCs, BIC and OAN, and each has
substantially greater resources and billing product mixes than the Company. As a
service provider in the long distance telecommunications industry, the Company
competes with three dominant providers, AT&T, MCI and Sprint, all of which are
substantially larger and have longer operating histories, greater name
recognition, larger customer bases, more established relationships with federal
and state regulatory authorities, and substantially greater financial,
personnel, marketing, engineering, technical and other resources than the
Company. Many other telecommunications companies operate generally in the same
prepaid services or outsourcing services markets as the Company. Moreover, since
there are reasonably low barriers to entry, the Company expects that new
competitors are likely to enter the telecommunications market and attempt to
market telecommunications services similar to the Company's services which would
result in greater competition.
Recent changes in the regulation of the telecommunications industry may
impact the Company's competitive position. The Telecommunications Act has
effectively opened the long distance and operator services market to competition
from the RBOCs. The entry of these well-capitalized and well-known entities will
likely increase competition for long distance and operator services customers.
The Telecommunications Act is also intended to increase competition in the
offering of local exchange and other intrastate services. The Telecommunications
Act also grants the FCC the authority to deregulate other aspects of the
telecommunications industry, which in the future may, if authorized by the FCC,
facilitate the offering of other telecommunications services by regulated
entities, including the RBOCs, in competition with the Company. See,
"--Government Regulation."
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GOVERNMENT REGULATION
THE FOLLOWING SUMMARY OF REGULATORY DEVELOPMENTS AND LEGISLATION DOES NOT
PURPORT TO DESCRIBE ALL PRESENT AND PROPOSED FEDERAL, STATE AND LOCAL
REGULATIONS AND LEGISLATION AFFECTING THE TELECOMMUNICATIONS INDUSTRY. OTHER
EXISTING FEDERAL AND STATE REGULATIONS ARE CURRENTLY THE SUBJECT OF JUDICIAL
PROCEEDINGS, LEGISLATIVE HEARINGS AND ADMINISTRATIVE PROPOSALS WHICH COULD
CHANGE, IN VARYING DEGREES, THE MANNER IN WHICH THIS INDUSTRY OPERATES. NEITHER
THE OUTCOME OF THESE PROCEEDINGS, NOR THEIR IMPACT UPON THE TELECOMMUNICATIONS
INDUSTRY OR THE COMPANY, CAN BE PREDICTED AT THIS TIME.
ILD is not itself a communications carrier and therefore is not directly
regulated by federal or state telecommunications authorities. ILD's wholly-owned
subsidiary, Intellicall Operator Services ("IOS") is a communications carrier
and its services are subject to varying degrees of federal, state and local
regulation. As used in this "Business--Government Regulation" section, unless
specified otherwise, the term "Company" refers primarily to IOS. Pursuant to the
Communications Act of 1934, as amended (the "Communications Act"), the FCC
generally exercises jurisdiction over the facilities of, and services offered
by, telecommunications common carriers that provide interstate or international
communications. The state regulatory authorities retain jurisdiction over the
same facilities and services to the extent they are used to provide intrastate
communications. Various international authorities may also seek to regulate the
services provided or to be provided by the Company.
FEDERAL REGULATION
The FCC does not require that wireline telecommunications carriers obtain
prior authorization to provide domestic interstate service, including operator
services, although such carriers currently must file tariffs at the FCC setting
forth the rates, terms and conditions for domestic interstate service. FCC
regulations require that carriers apply for and obtain certification from the
FCC prior to offering international services from the United States and to file
international tariffs with the FCC. The Company, acting through its subsidiary
IOS, has filed tariffs for domestic interstate services with the FCC. The
Company also holds an international authorization from the FCC. The FCC also
imposes certain prior approval requirements on transfers of control of entities
holding FCC issued authorizations and of corporate parents of such entities and
on assignments of operating authorizations.
The Company must comply with the requirements of common carriage under the
Communications Act, which include a duty to offer services upon request at
reasonable rates on non-discriminatory terms and conditions. Resale carriers
such as IOS also are subject to a variety of miscellaneous regulations that, for
instance, govern the documentation and verifications necessary to change a
consumer's long distance carrier, require the filing of periodic reports, limit
the use of "800" numbers for pay-per-call services, restrict interlocking
directors and management between carriers and require the payment of regulatory
fees. The FCC has enacted rules governing the provision of interstate operator
services that include, among other things, filing informational tariffs and
providing notices to end-users of the identity of the service provider in the
form of postings and verbal announcements. A verbal announcement identifying the
service provider also must be given to recipients of collect calls from pay
telephones and other aggregator locations. In addition, the FCC recently has
adopted a rule that all operator service providers, including the Company, must
audibly disclose during the call-setup for each interstate operator assisted
call that rates are available on request. The provider need not provide an exact
rate quote unless the caller specifically requests its. Operator services
providers, including IOS, have until July 1, 1998 to comply with this rule. The
Company believes that it will be able to comply with this rule.
The FCC generally has the authority to condition, modify, cancel, terminate
or revoke operating authority for failure to comply with federal laws or rules,
regulations or policies of the FCC. Fines or other penalties also may be imposed
by such violations. The FCC has jurisdiction to act upon complaints against any
common carrier for failure to comply with its statutory obligations. There can
be no assurance that the
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FCC or third parties may not raise issues with regard to the Company's
compliance with applicable laws and regulations.
Comprehensive amendments to the Communications Act were made by the
Telecommunications Act, which was signed into law on February 8, 1996. The
Telecommunications Act effected plenary changes in regulation at both the
federal and state levels that affect virtually every segment of the
communications industry. The stated purpose of the Telecommunications Act is to
promote competition in all areas of communications and to reduce unnecessary
regulation to the greatest extent possible. Among other things, the
Telecommunications Act preempts, with certain exceptions, any state or local
government statute or regulation prohibiting any entity from providing
telecommunications service.
The Telecommunications Act establishes a dual federal-state regulatory
scheme for eliminating barriers to competition faced by competitors to ILECs and
other new entrants into the local telephone market. Specifically, the
Telecommunications Act requires an ILEC to resell the ILEC's local exchange
service and to provide CLECs with access to the various network elements in the
ILEC's local exchange networks and imposes other obligations. Certain of the
obligations imposed on ILECs also apply to CLECs such as the Company. These
duties include making services available for resale, allowing number
portability, dialing parity, physical access to rights of way, and entering into
reciprocal compensation arrangements with other carriers for the transport and
termination of traffic on each other's facilities. These requirements may cause
the Company to incur additional administrative and regulatory expenses. Certain
aspects of the requirements continue to be subject to judicial review.
The Telecommunications Act further allows all LECs, including the RBOCs, to
provide long distance services. Although the Telecommunications Act conditions
RBOCs' provisioning of in-region long distance service by first demonstrating
that the local market has been opened to competition, a federal district court
has held these portions of the Telecommunications Act invalid. This decision has
been stayed pending appeal, but, if the decision is upheld, it could remove the
incentive RBOCs presently have to cooperate with new competitors to foster
competition within their service areas in order to qualify to offer in-region
long distance by allowing RBOCs to offer such in-region services immediately and
give the RBOCs the ability to offer "one-stop shopping" for both long distance
and local service more quickly than otherwise expected. The Company cannot
predict the outcome of this litigation or its impact on the industry generally
or on the Company specifically.
The Telecommunications Act also provides the FCC with the authority to
forebear from imposing any regulations it deems unnecessary, including requiring
non-dominant carriers to file tariffs. On November 1, 1996, in its first major
exercise of regulatory forebearance authority granted by the Telecommunications
Act, the FCC issued an order detariffing domestic interexchange services. The
order required mandatory detariffing and gave carriers such as the Company nine
months to withdraw federal tariffs and move to contractual relationships with
its customers. This order subsequently was stayed by the federal appeals court.
Until further action is taken by the FCC or the courts, the Company will
continue to maintain tariffs for these services.
On May 8, 1997, in compliance with the requirements of the
Telecommunications Act, the FCC released an order establishing a new Universal
Service support fund, to provide communications service in high cost and rural
areas, and to bring new communications technologies to schools, libraries and
rural healthcare providers. Carriers, including the Company, are required to
contribute a portion of their revenues into the Universal Service support fund.
The amount of these contributions may be adjusted from time to time. The new
Universal Service rules will be administered jointly by the FCC and state
regulatory authorities, many of which are still in the process of establishing
their administrative rules. States are enacting or already have in place similar
programs, and other possible new assessments on carriers such as the Company may
be imposed by federal or state authorities.
Section 276 of the Telecommunications Act further mandated that the FCC
promulgate rules to establish a per call compensation plan to insure that all
pay phone providers are fairly compensated for
51
<PAGE>
each completed intrastate and interstate pay phone initiated call, including
calls on which pay phone providers had not heretofore received compensation.
These rules also require IXCs to develop tracking mechanisms to identify calls
placed from pay phones which would require compensation. Such calls include
those placed to toll free numbers (800/888), operator assisted and prepaid
calling card calls, and calls placed through network access codes, but do not
include emergency calls and calls for hearing disabled individuals. In September
1996, the FCC promulgated rules to implement Section 276 of the
Telecommunications Act. After initial litigation, in September 1997 the FCC
established a two-year "default" compensation rate of $0.284 per pay
phone-originated toll free or access code call. At the end of the two-year
interim period, the per call pay phone compensation rate will be the deregulated
market-based local coin rate less $0.066. This amount is payable by IXCs
including resellers such as IOS. The Company believes it has adequately accrued
for amounts payable under the revised FCC rules, but because the revised FCC
rules continue to be subject to regulatory and legal challenges, there can be no
assurance that the Company will not be required to pay amounts in excess of
amounts for which it has accrued, which could have a material adverse effect on
the Company's business, financial condition or results of operations.
STATE REGULATION
The Company, acting through IOS, is currently subject to varying levels of
regulation in states in which it provides operator services, calling card
services (which are generally considered long distance services by the states),
CLEC services in the local market, and traditional direct-dialed long distance
services. The vast majority of states require IOS to apply for certifications to
provide telecommunications services, or at least to register or to be found
exempt from regulation, before the Company commences intrastate service
including local exchange services, intrastate long distance services and
operator services. This authorization process generally requires the carrier to
demonstrate that it has sufficient financial, technical and managerial
capabilities and that granting the authorization will serve the public interest.
Also, a majority of the states require IOS to file and maintain detailed tariffs
listing rates for intrastate service. Many states also impose various reporting
requirements which require compliance with service standards and consumer
protection rules and/or require prior approval for transfers of control of
certified carriers and assignments of carrier assets, including customer bases,
carrier stock offering and incurrence by carriers of significant debt
obligations. Certificates of authority can generally be conditioned, modified,
canceled terminated or revoked by state Public Utilities Commissions ("PUCs")
for failure to comply with state laws and/or the rules, regulations and policies
of the state PUCs. Fines and other penalties, including, for example, the return
of all monies received for intrastate traffic from residents of the state, may
be imposed for such violations.
Many states have regulations governing operator services providers which
parallel those of the FCC. In addition, many states impose a rate cap on charges
for operator services based on the charges of the dominant IXC in that state for
similar services. Most states have or are planning to have their own funds
similar to the federal Universal Service support fund and will require carriers
operating in the state to make contributions. Some states also require bonds or
other security from entities providing prepaid services, and some states have
initiated proceedings to determine if any additional regulations should be
applied to prepaid services. The Company is not aware of any existing rules or
proposals applicable to its service which which it could not comply, but there
can be no assurance that future state policies and regulations will not have
material adverse effect upon the Company's business, financial condition or
results of operations.
IOS has made the filings for and taken the actions it believes are necessary
for IOS to become certified or tariffed to provide intrastate services where it
is offering services, or where it currently intends to offer services throughout
the U.S. IOS is certified to do business as a foreign corporation in the 47
states in the mainland U.S. outside of its state of incorporation, and has
received authorization to provide intrastate operator and interexchange
telecommunications services in all states in the mainland U.S. where
52
<PAGE>
certification is required and where IOS is providing such services. However, the
Company has CLEC authority to provide local services only in the states of
Georgia, Alabama, Florida, South Carolina, and Tennessee. The Company has
applied for CLEC authority in California, Oregon, Washington, North Carolina,
Texas,, Arizona, Idaho, Utah, and Connecticut. There can be no assurance that
the Company will obtain all necessary authorities, and that the Company's
provision of services in states where it is not licensed or tariffed to provide
such services will not have a material adverse effect on ILD's business,
financial condition or results of operations.
EMPLOYEES
As of March 31, 1998, the Company employed 320 persons. Thirty-two of such
employees are managers (of which five are in the sales and marketing group). The
total sales staff consists of approximately 22 persons strategically located
throughout the United States in Washington, Oregon, California, New Mexico,
Texas, Colorado, Georgia, Florida and Massachusetts. The Company has 185
employees serving as operators or customer service representatives. None of the
Company's employees are members of a labor union or are covered by a collective
bargaining agreement.
FACILITIES
The Company leases certain office space under operating leases and
subleases, including the Company's principal headquarters in Dallas. The
Company's current facilities are as follows:
<TABLE>
<CAPTION>
SQUARE
LOCATION FOOTAGE FUNCTION
- --------------------------------------------- ----------- -------------------------
<S> <C> <C>
Dallas, TX 4,353 Corporate headquarters
Operations and office
Atlanta, GA 14,831 space
Operations and office
Boca Raton, FL 2,800 space
Operations and office
San Antonio, TX 26,260 space
San Antonio, TX 7,049 Call center
Las Vegas, NV 10,170 Call center
Ponte Vedra Beach, FL 800 Executive office
</TABLE>
The two San Antonio facilities will be merged into one approximately 20,000
square-foot facility in San Antonio once the build-out to commence in May 1998
is completed. The 14,831 square footage of facilities space in Atlanta is
currently divided among three locations. The Atlanta operations will merge into
one Atlanta facility in the second half of 1998. The Company's sales
organization is located in small leased or home offices located in Washington,
Oregon, California, New Mexico, Texas, Colorado, Georgia, Florida and
Massachusetts.
TRADE NAME
The Company has filed an application with the U.S. Patent and Trademark
office for federal registration of its trade name, "Call N Carry."
LEGAL PROCEEDINGS
The Company is subject to litigation in the ordinary course of its business.
While there can be no assurances as to the outcome of any litigation involving
the Company, management does not believe any pending legal proceeding, including
the pending legal proceeding described below, will result in a judgment or
settlement that will have a material adverse effect on the Company's business,
financial condition or results of operations. The Company and its subsidiary IOS
are, from time to time, involved in regulatory proceedings before various PUCs,
as well as before the FCC. These proceedings may have involved, or may involve,
the payment of penalties or the refunding of certain payments. However, to date,
53
<PAGE>
the Company does not believe any penalties or refunding have had a material
adverse effect on the Company's business, financial condition or results of
operations.
On October 24, 1996, U.S. LD filed a First Amended Complaint in the United
States District Court for the Western District in San Antonio, Texas, naming
PhoneTel, IOS and the Company in a lawsuit alleging tortious interference and
civil conspiracy in connection with an Operator Service Subscriber Agreement
between U.S. LD and PhoneTel. On April 24, 1997, U.S. LD filed a Second Amended
Complaint against the Company. The Complaint seeks actual damages of $4.0
million, exemplary damages of $8.0 million, attorney's fees and interest. The
Second Amended Complaint alleges that the Company and IOS interfered with U.S.
LD's existing contractual relationship with PhoneTel when PhoneTel executed an
operator services agreement with the Predecessor and IOS. The action has been
transferred by a federal court to a state court in Bexar County, San Antonio,
Texas and is scheduled for trial in July 1998. Although no assurance can be made
as to the outcome of such proceeding, the Company believes that the claim
against it is without merit and intends to vigorously contest the allegations.
If the outcome of such proceeding is adverse to the Company it could have a
material adverse effect on the Company's business, financial condition or
results of operations.
54
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company and their ages as of
April 24, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- ------------------------------------------------
<S> <C> <C>
Michael F. Lewis......................... 45 Chairman of the Board and Chief Executive
Officer
Dennis J. Stoutenburgh................... 35 President and Director
J. David Darnell......................... 52 Chief Financial Officer
Reginald P. McFarland.................... 48 Senior Vice President, Network Operations
Frederick W. Lloyd....................... 45 Vice President, Acquisitions and Strategic
Planning
Robert P. Gallagher...................... 55 Vice President, Sales and Marketing, Eastern
United States
Donald R. Scribner....................... 43 Vice President, Sales and Marketing, Western
United States
Daniel W. Kahrs.......................... 33 Vice President, Operations, Prepaid and Billing
Services
C. Read Morton, Jr....................... 55 Secretary and Director
H. Edward Brooks, Jr..................... 46 Director
John J. McDonald, Jr..................... 48 Director
William P. Payne......................... 50 Director
Patrick V. Stark......................... 43 Director
</TABLE>
MICHAEL F. LEWIS founded ILD in 1996 and has served as Chairman of the Board
and Chief Executive Officer of the Company since its formation. Prior to joining
the Company, Mr. Lewis served from 1988 to 1996 as President of Triad Capital
Partners, Inc. ("Triad"), a private equity investment company, where he was
involved in various management-led leveraged buyouts in the telecommunications
industry. Prior to 1988, Mr. Lewis was a founder of two long distance telephone
companies, TransTel Communications based in Salt Lake City, Utah, and Com-Link
21 based in St. Louis, Missouri. From 1988 until 1992, Mr. Lewis served as a
director of LDDS Communications, Inc. (now known as WorldCom). Additionally, in
1988 Mr. Lewis formed The Telecenter, a service bureau telemarketing firm, which
was sold in 1993.
DENNIS J. STOUTENBURGH has served as President of the Company since May 1997
and as a director since the Company began operations in 1996. Prior to joining
the Company, Mr. Stoutenburgh was President of the Communications Group of
Intellicall, a manufacturer of pay telephone equipment, from 1994 to April 1997.
While at Intellicall, Mr. Stoutenburgh oversaw Intellicall's launch into the
prepaid calling industry and coordinated the sale of its validation services
business as well as the purchase of a provider of prepaid calling services in
1995. Prior to his appointment as President of the Communications Group, Mr.
Stoutenburgh served from 1988 to 1994 in various positions at Intellicall,
including Group Vice President, Global Network Services; Vice President, Billing
Services; Director of Billing Services; and Director of Finance.
J. DAVID DARNELL has served as Chief Financial Officer of the Company since
November 1997. Prior to joining the Company, Mr. Darnell served from October
1993 to October 1997 as the Vice President, Finance and Chief Financial Officer
of SA Telecommunications, Inc., a publicly held, full-service regional IXC,
which, subsequent to his joining ILD, filed for corporate reorganization under
the U.S. bankruptcy laws in November 1997. From December 1989 to September 1993,
Mr. Darnell served as the Chief Financial Officer and as minority owner of
Messagephone, Inc., a privately held intellectual property
55
<PAGE>
company that develops, patents and licenses technology for the
telecommunications industry. Prior to joining Messagephone, Inc., Mr. Darnell
served from 1987 to November 1989 in various management positions with American
Equitable Financial Corporation, an insurance and investment holding company.
Mr. Darnell is a certified public accountant.
REGINALD P. MCFARLAND has served as Senior Vice President, Network
Operations of the Company since December 1997. Prior to joining the Company, Mr.
McFarland served from 1989 until December 1997 as President and majority
shareholder of Interlink, which he founded in 1989 as an enhanced
telecommunications services provider. Under his management, Interlink became a
fully certified direct dial long distance carrier in 1991, a certified operator
services provider in 1993 and a certified local service provider in Georgia,
Alabama, Florida, Tennessee and Kentucky in 1996. Prior to 1989, Mr. McFarland
served in various managerial positions with AT&T. While with AT&T, he worked
with Bell Laboratories to resolve problems associated with integrating a 4ESS
switch into the Bell switching network and was an Instructor in the Training
Center and Manager of the Atlanta and New Orleans switching offices.
FREDERICK W. LLOYD has served as Vice President, Acquisitions and Strategic
Planning of the Company since November 1997. Mr. Lloyd joined the Company on a
part-time basis in May 1996 as Treasurer. From March 1995 to November 1997, Mr.
Lloyd was a principal of Triad. From December 1993 to March 1995, Mr. Lloyd was
a private investor. From November 1987 to December 1993, he was a principal and
the Chief Operating Officer of Atlas Aircraft Corporation ("Atlas Aircraft")
where he was responsible for the successful completion of the acquisition and
combination of two operating companies through leveraged buyouts to form Atlas
Aircraft. From January 1981 to January 1988, Mr. Lloyd was President of Bay
Capital Corporation, a private equity investment company.
ROBERT P. GALLAGHER has served as the Company's Vice President, Sales and
Marketing, Eastern United States since November 1997. Mr. Gallagher joined the
Company in June 1996 as Vice President, 1+ Sales and Marketing. From October
1987 to May 1996, Mr. Gallagher held several key roles and marketing positions
at Intellicall, including most recently Vice President, Multinational Account
Sales.
DONALD R. SCRIBNER has served as the Company's Vice President, Sales and
Marketing, Western United States since November 1997. From 1994 until joining
the Company, Mr. Scribner served as a Vice President of Sales and Marketing for
WorldCom and from 1993 to 1994 as Vice President of Sales for Impact
Communications, Inc., a long distance telecommunications company that was
acquired by WorldCom in 1994. From December 1989 to January 1993, Mr. Scribner
served as a sales representative for Intellicall.
DANIEL W. KAHRS has served as Vice President, Operations, Prepaid and
Billing Services of the Company since March 1998. Mr. Kahrs joined the Company
in July 1997 as Vice President, Billing Operations. Prior to joining the
Company, from January 1996 to June 1997, Mr. Kahrs was Director, Billing
Services with Intellicall. While at Intellicall, Mr. Kahrs was responsible for
the operations of all service offerings related to Intellicall's Intelli*Star
store and forward technology. Prior to his appointment to Director, Billing
Services, from July 1990 to December 1995, Mr. Kahrs served in various positions
at Intellicall including Operations Manager, Intelli*Star Product Manager, and
Senior Financial Analyst. Prior to joining Intellicall, Mr. Kahrs served in
various positions at the public accounting firm of Ernst & Young from August
1987 to June 1990.
C. READ MORTON, JR. has served as Secretary and a director of the Company
since April 1998. Mr. Morton has been a senior partner of the law firm Cashin,
Morton & Mullins in Atlanta, Georgia since 1986, and he currently heads the
firm's Corporate Finance and Business practice group. Mr. Morton has served as
the President and a member of the board of directors of E. Dillon & Company
since 1969 and as a member of the boards of directors of Phillips &
Brooks/Gladwin, Inc. since 1976 and of Industrial Electric Mfg., Inc. since
1995. From 1988 until 1992, Mr. Morton also served as a director of LDDS
Communications, Inc. (now known as WorldCom).
56
<PAGE>
H. EDWARD BROOKS, JR. has served as a director of the Company since May
1996. Mr. Brooks has been Vice President and Chief Financial Officer of Morris
Newspaper Corporation since 1982. Mr. Brooks is a certified public accountant.
JOHN J. MCDONALD, JR. has served as a director of the Company since April
1998 and has been the President and Chief Operating Officer of Intellicall since
July 1997. From February 1997 to July 1997, Mr. McDonald served as the Senior
Vice President, Sales and Marketing of Intellicall. From June 1994 to January
1997, Mr. McDonald was the Senior Vice President of Intecom, Inc. ("Intecom"), a
telecommunications company. Prior to joining Intecom, Mr. McDonald served as the
Vice President, Business Communications of Ericsson Business Communications.
WILLIAM P. PAYNE has served as a director of the Company since April 1998.
Mr. Payne has been a director of Anheuser-Busch Companies, Inc. and Vice
Chairman of NationsBank Corporation since 1997. Mr. Payne was President and
Chief Executive Officer of the Atlanta Committee for the Olympic Games from 1991
to 1997. Mr. Payne is also a director of Cousins Properties, Inc.,
Jefferson-Pilot Corporation, and ACSYS, Inc.
PATRICK V. STARK has served as a director of the Company since April 1998.
Mr. Stark has served as General Counsel to Intellicall since August 1993, as a
director of ATC Communications Group, Inc. since December 1991 and as a
shareholder and director of the law firm of Kane, Russell, Coleman & Logan since
1993. Prior to joining such law firm, Mr. Stark was Executive Vice President and
General Counsel for Lifetime Automotive Products from 1991 to 1993.
BOARD OF DIRECTORS
The Company's Board of Directors is comprised of seven members. The
Company's Bylaws provide that the Board of Directors shall consist of not less
than one person, the precise number of directors to be determined from time to
time by the Board of Directors. The directors are elected annually by the
stockholders of the Company and serve until their successors are elected and
qualified, or until their earlier resignation, removal from office, or
incapacity to serve. Each of the directors of the Company was appointed by
certain stockholders of the Company pursuant to the Third Amended and Restated
Shareholders' Agreement (the "Stockholders' Agreement"). The Stockholders'
Agreement will terminate upon the consummation of the Offering. The individuals
currently serving on the Board of Directors will continue to serve until
thereafter reelected or replaced at the first annual meeting of stockholders of
the Company held after the Offering, or until their earlier resignation, removal
from office, or incapacity to serve. The executive officers of the Company serve
at the discretion of the Board of Directors.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company receives fees for each
meeting of the Board of Directors and each committee thereof attended in person.
Directors are reimbursed for their out-of-pocket expenses incurred in connection
with their service on the Board of Directors. In addition, non-employee
directors are eligible to receive discretionary grants of options to purchase
shares of Common Stock under the Company's Stock Option Plans. See "-- Stock
Option Plans." Pursuant to such plans, the Company has granted options to
purchase a total of 1,775 shares to H. Edward Brooks, Jr., 1,275 shares to C.
Read Morton, Jr., and 1,000 shares to William P. Payne. All of the options are
fully vested, and the exercise price of all options was the fair market value of
the Common Stock at the time the option was granted, as determined by the Board
of Directors. Directors who are also employees of the Company receive no
compensation for serving on the Board of Directors.
57
<PAGE>
MEETINGS AND COMMITTEES
The Board of Directors of the Company conducts its business through meetings
of the full Board of Directors and through committees of the Board of Directors,
including the Audit Committee and the Compensation Committee.
The Audit Committee is responsible for reviewing with the Company's
independent accountants their audit plan, the scope and results of their audit
engagement and the accompanying management letter, if any, reviewing the scope
and results of the Company's internal auditing procedures, consulting with the
independent accountants and management with regard to the Company's accounting
methods and the adequacy of its internal accounting controls, approving
professional services provided by the independent accountants, reviewing the
independence of the independent accountants, and reviewing the range of the
independent accountants' audit and non-audit fees. The Audit Committee is
comprised of H. Edward Brooks, Jr. and John J. McDonald, Jr.
The Compensation Committee is responsible for making relevant compensation
decisions of the Company and for administering and interpreting the Company's
employee benefit plans, which includes, among other things, determining which
directors, officers and employees will receive awards under the plans, when
awards will be granted, the type of awards to be granted, the number of
securities or cash involved in each award, the time or times when any options
granted will become exercisable and, subject to certain conditions, the price
and duration of such options.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee currently consists of C. Read Morton, Jr. and
Patrick V. Stark. From May 1996 until April 1998, the Compensation Committee
consisted of H. Edward Brooks, Jr. and Gregory F. Chapados, a former director of
the Company. Mr. Morton also serves as Secretary of the Company. In connection
with the Company's sponsorship of the "Skittles" NASCAR-Registered Trademark-
team, the Company has entered into an agreement with MB2 Motorsports, LLC (the
"Sponsorship Agreement"). Mr. Morton, the Secretary and a director of the
Company, owns one-third of the membership interests in MB2 Motorsports, LLC.
Under the terms of the Sponsorship Agreement, the Company has agreed to pay MB2
Motorsports, LLC an aggregate of $100,000 during 1998 to become an associate
sponsor of the "Skittles" NASCAR-Registered Trademark- team. Among other
benefits, the sponsorship allows for use of the likeness of
NASCAR-Registered Trademark- driver Ernie Irvan on the face of the Company's
prepaid calling cards and in point of sale advertising.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
The following table summarizes the compensation paid by the Company for
services rendered in all capacities to the Company during the nine month fiscal
year ended September 30, 1997 ("fiscal 1997") by the Company's Chief Executive
Officer and each of the Company's other executive officers whose total salary
and bonus for fiscal 1997 would have exceeded $100,000 had such executive
officer been employed by the Company for all of fiscal 1997 (the "Named
Executive Officers").
58
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ---------------
------------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION(1)
- ---------------------------------- ----------- ---------- --------- ------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Michael F. Lewis.................. 1997 $ 114,022 $ -- $ -- 7,000 $ 1,811
Chairman of the Board and
Chief Executive Officer
Dennis J. Stoutenburgh(2)......... 1997 131,250 -- -- 7,500 895
President and Director
J. David Darnell(3)............... 1997 93,750 -- -- -- --
Chief Financial Officer
Reginald P. McFarland(3).......... 1997 105,000 -- -- -- --
Senior Vice President, Network
Operations
</TABLE>
- ------------------------
(1) Represents 401(k) Plan matching contributions made by the Company.
(2) Because Mr. Stoutenburgh joined the Company in May 1997, the compensation
presented represents compensation payable to Mr. Stoutenburgh as if he
joined the Company on January 1, 1997.
(3) Because Mr. Darnell and Mr. McFarland each joined the Company subsequent to
September 30, 1997, the compensation presented represents compensation
payable to such individuals as if they had joined the Company on January 1,
1997.
STOCK OPTIONS
The following table sets forth information regarding grants of options to
purchase Common Stock made to the Named Executive Officers during fiscal 1997.
The Company did not grant any stock appreciation rights during fiscal 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OR OPTION TERM (2)
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME GRANTED(#) FISCAL YEAR ($/SH)(1) DATE 5%($) 10%($)
- ------------------------------------ ------------- --------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael F. Lewis.................... 2,000(3) 14% $ 90.00 6/29/2002 $ 49,750 $ 109,900
5,000(4) 34% 109.00 8/19/2002 150,550 332,750
Dennis J. Stoutenburgh.............. 7,500(3) 52% 90.00 6/29/2002 186,525 412,125
J. David Darnell.................... -- -- -- -- -- --
Reginald P. McFarland............... -- -- -- -- -- --
</TABLE>
- ------------------------
(1) The exercise price of the options granted was the fair market value of the
Common Stock on the date of grant as determined by the Board of Directors.
(2) The dollar amounts shown as potential realizable values assume that the
market price of the Common Stock appreciates at cumulative annual rates of
5% and 10% from the date of grant over the term of the option. The assumed
rates of 5% and 10% were established pursuant to rules of the Securities and
59
<PAGE>
Exchange Commission (the "Commission") and are not intended to forecast
possible future appreciation of the Common Stock.
(3) The options become exercisable with respect to one third of the shares of
Common Stock underlying the options on each of the first, second and third
anniversary of the date of grant.
(4) The options become exercisable if the Company undertakes an initial public
offering or a stock or asset sale at certain prices per share on or before
certain dates.
OPTION VALUES AS OF SEPTEMBER 30, 1997
The following table sets forth information concerning the option holdings at
September 30, 1997 of the Named Executive Officers. No options were exercised,
and no stock appreciation rights were held or exercised, by the Named Executive
Officers during fiscal 1997.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
SEPTEMBER 30, 1997 SEPTEMBER 30, 1997(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------------------- ----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Michael F. Lewis.......................................... 14,750 7,000
Dennis J. Stoutenburgh.................................... 775 7,500
J. David Darnell.......................................... -- -- -- --
Reginald P. McFarland..................................... -- -- -- --
</TABLE>
- ------------------------
(1) There was no public trading market for the Common Stock at September 30,
1997. Accordingly, these values have been calculated based on an assumed
initial public offering price of $ , less the applicable exercise price.
EMPLOYMENT AGREEMENT
On December 15, 1997, the Company and Reginald P. McFarland entered into an
Employment Agreement under which Mr. McFarland was named Senior Vice President,
Network Operations of the Company. The initial term of the agreement ends on
December 31, 1999, after which time the agreement will automatically renew for
successive one-year periods unless terminated as described below. Under the
terms of the Employment Agreement, during the initial term Mr. McFarland is
entitled to be paid a base salary of $140,000 and to receive other customary
executive benefits. The Board of Directors may increase the base salary after
the expiration of the initial term. Mr. McFarland is required to devote his full
professional and business related time, skills and efforts to the business of
the Company, although the Employment Agreement expressly provides that Mr.
McFarland may serve as owner and employee of Stratacom, Inc., which provides
telecommunications consulting services to the Company. During the initial term,
the Company may terminate the Employment Agreement only for cause, as defined in
the Employment Agreement. After the expiration of the initial term, either party
may terminate the Employment Agreement upon 90 days written notice. However, if
the Company at any time defaults under the outstanding promissory note issued by
it to Mr. McFarland, Mr. McFarland may terminate the agreement by giving written
notice to the Company. See "Certain Transactions."
STOCK OPTION PLANS
The Company's directors and stockholders have adopted five Stock Option
Plans (the "Plans") for employees, directors, consultants and others who have
contributed significantly to the business of the Company or its subsidiaries as
determined by the Compensation Committee. The Plans are identical
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<PAGE>
except for the dates the Plans were adopted and the number of shares reserved
for issuance under the Plans. The Plans presently provide for the grant of
incentive and non-qualified stock options to purchase up to an aggregate of
69,900 shares of Common Stock at the discretion of the Compensation Committee.
The option exercise price of an incentive stock option must be at least 100%
(110% in the case of a holder of 10% or more of the total combined voting power
of all classes of stock of the Company) of the fair market value of the stock on
the date the option is granted, and options are exercisable by the holder at any
time prior to their expiration in accordance with the terms of the Plans and the
option agreements granting the options. The option exercise price of a
non-qualified stock option is generally the fair market value of the stock on
the date the option is granted but is determined by the Compensation Committee
and may be more or less than fair market value. Stock options granted pursuant
to the Plans will expire on the date determined in each case by the Compensation
Committee, which date may be no later than the tenth anniversary of the date the
option is granted and typically is the fifth anniversary of the date the option
is granted. Options granted under the Plans typically vest over a period of one
to three years. As of April 30, 1998, options to purchase 50,650 shares of
Common Stock were outstanding pursuant to the Plans.
401(K) PLAN
The Company sponsors a defined contribution plan under Section 401(k) of the
Internal Revenue Code of 1986, as amended (the "401(k) Plan") for eligible
employees of the Company. Participants may contribute up to 15% of their annual
salaries to the 401(k) Plan, subject to certain limitations. All contributions
made by an employee are fully vested and are not subject to forfeiture. The
Company may make discretionary matching contributions to the 401(k) Plan on
behalf of all eligible employees. During the fiscal year ended September 30,
1997, the Company made matching contributions equal to 100% of the first 3% of
the annual salary contribution made by each employee to the 401(k) Plan.
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CERTAIN TRANSACTIONS
TRIAD TRANSACTIONS
Michael F. Lewis, the Company's Chairman of the Board and Chief Executive
Officer, is the principal stockholder, director and the President of Triad and
is the sole stockholder, sole director and the President of Triad-ILD Partners,
Inc. ("Triad Corporate G.P."). Triad is a venture capital and private equity
investment firm founded in 1988 which directly, or through various
Triad-sponsored investment entities, currently has investments in various
privately owned businesses including the Company. Triad Corporate G. P. serves
as the general partner for Triad-ILD Partners, L.P. ("Triad I"), Triad-ILD
Partners II, L.P. ("Triad II"), and Triad-ILD Partners III, L.P. ("Triad III",
together with Triad I and Triad II, the "Triad-ILD Partnerships"), each of which
partnerships is a stockholder of the Company.
Triad acted as the financial advisor for the Company in connection with its
acquisition of the Predecessor. As compensation for such services, the Company
issued Triad a warrant to purchase 6,000 shares of Common Stock at an exercise
price of $90 per share. In connection with the acquisition of the Predecessor on
May 10, 1996, Triad I purchased (i) 183 shares of Common Stock at a price of $10
per share, (ii) 18,333 shares of Series A Convertible Preferred Stock at a price
of $72.69 per share, and (iii) a convertible subordinated note in the principal
amount of $666,667. The convertible subordinated note has a five year term,
requires quarterly interest payments at a rate of 10% per year, and is
convertible into shares of Common Stock of the Company at the conversion rate of
one share for each $90 of principal. During the periods ended December 31, 1996
and September 30, 1997, the Company paid an aggregate of $31,825 and $50,000,
respectively, of interest to Triad I on the convertible subordinated note. The
convertible subordinated note will be converted into 7,407 shares of Common
Stock immediately prior to the consummation of the Offering and the Series A
Convertible Preferred Stock will be converted into 18,333 shares of Common Stock
on the Closing Date.
In connection with the Company's financing of the acquisition of the
WorldCom Assets, the Company sold 917 shares of Common Stock to Triad II on
August 31, 1997 at a price of $109 per share and on September 23, 1997, the
Company sold an additional 12,844 shares to Triad II at a price of $109 per
share and 917 shares of Common Stock directly to Mr. Lewis at a price of $109
per share.
On April 27, 1998, Triad III agreed to purchase a $208,559 convertible
subordinated note from the Company. The convertible subordinated note will bear
interest at the rate of 15.0% per year; provided, however, that the Company may
defer any interest payments due under the note until December 31, 1998. The
principal balance of this note, together with any accrued interest, will be
payable in full upon the successful completion of an initial public offering of
the Company's capital stock prior to December 31, 1998. In the event the Company
has not completed an initial public offering by December 31, 1998, the
convertible subordinated note will be converted into shares of Common Stock at
the conversion rate of one share for each $325 of principal. If the convertible
subordinated note is issued, the Company will use a portion of the net proceeds
from the Offering to repay in full the Company's outstanding principal and
accrued interest under the convertible subordinated note. See "Use of Proceeds."
INTELLICALL TRANSACTIONS
On May 10, 1996 the Company acquired the Predecessor from Intellicall.
Intellicall beneficially owns 54% of the Common Stock as of the date of this
Prospectus. As consideration for the Predecessor, the Company issued to
Intellicall (i) 725 shares of Common Stock valued at $10 per share, (ii) 72,500
shares of Series A Convertible Preferred Stock valued at $72.69 per share, (iii)
5,000 shares of Series B Convertible Preferred Stock with a stated value of $100
per share, which bears an annual dividend rate of 9.0%, payable quarterly, and
(iv) a convertible subordinated note in the principal amount of $1,000,000. The
convertible subordinated note has a five-year term, requires quarterly interest
payments at a rate of 10.0% per year, and is convertible into shares of Common
Stock at the conversion rate of one share for each $90 of principal. During the
periods ended December 31, 1996 and September 30, 1997, the Company paid an
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aggregate of $47,778 and $75,000, respectively, of interest on the convertible
subordinated note to Intellicall and paid dividends of $0 and $58,875,
respectively, on the Series B Convertible Preferred Stock to Intellicall. The
convertible subordinated note will be converted into 11,111 shares of Common
Stock immediately prior to the consummation of the Offering. The Company will
use a portion of the net proceeds from the Offering to redeem the Series B
Convertible Preferred Stock. See "Use of Proceeds."
Beginning in May 1996 with the Company's acquisition of the Predecessor
through May 1997, Intellicall provided the Company certain management and
administrative services. The services primarily related to accounting, human
resources, billing and collections, and management information functions as well
as the time and services of Dennis Stoutenburgh who was still employed by
Intellicall during this period. As consideration for such services, the Company
paid Intellicall $101,000 during the period ended December 31, 1996 and $51,918
during the nine months ended September 30, 1997. In connection with the
Company's financing of the acquisition of the WorldCom Assets, the Company sold
to Intellicall in September 1997 18,349 shares of Common Stock at a price of
$109 per share. In addition, effective January 1, 1998, ILD purchased the assets
of the prepaid calling card operations of Intellicall for an aggregate purchase
price of $5,000,000. Payment of $1,000,000 of the purchase price was deferred
until the earlier of (i) the closing of an initial public offering by the
Company or (ii) December 31, 1998. In connection with the acquisition, ILD also
assumed certain obligations of Intellicall under Intellicall's network agreement
with Sprint Communications Company, L.P. to provide certain minimum call traffic
thereunder.
MORRIS TELECOMMUNICATIONS, LLC TRANSACTIONS
In connection with the organization of the Company on May 10, 1996, Morris
Telecommunications, LLC ("Morris") purchased from the Company (i) 92 shares of
Common Stock at a price of $10 per share, (ii) 9,167 shares of Series A
Convertible Preferred Stock at a price of $72.63 per share, and (iii) a
convertible subordinated note in the principal amount of $333,333. The
convertible subordinated note has a five-year term, requires quarterly interest
payments at a rate of 10.0% per year, and is convertible into shares of Common
Stock at the conversion rate of one share of stock for each $90 of principal.
During the periods ended December 31, 1996 and September 30, 1997, respectively,
the Company paid an aggregate of $15,953 and $25,000, respectively, of interest
on the convertible note to Morris. The convertible subordinated note will be
converted into 3,704 shares of Common Stock immediately prior to the
consummation of the Offering. In connection with the Company's financing of the
acquisition of the WorldCom Assets, on September 1, 1997 the Company sold 13,761
shares of Common Stock to Morris at a price of $109 per share.
On April 27, 1998, Morris agreed to purchase a $507,304 convertible
subordinated note from the Company. The convertible subordinated note will bear
interest at the rate of 15.0% per year; provided, however, the Company may defer
any interest payments due under the note until December 31, 1998. The principal
balance of this note, together with any accrued interest, will be payable in
full upon the successful completion of an initial public offering of the
Company's capital stock prior to December 31, 1998. In the event the Company has
not completed an initial public offering by December 31, 1998, the convertible
subordinated note will be converted into shares of Common Stock at the
conversion rate of one share for each $325 of principal. If the convertible
subordinated note is issued, the Company will use a portion of the net proceeds
from the Offering to repay in full the Company's outstanding principal and
accrued interest under the convertible subordinated note. See "Use of Proceeds."
WORLDCOM TRANSACTION
In connection with the acquisition of the WorldCom Assets in September 1997
the Company paid WorldCom $9.7 million of cash and issued to WorldCom 4,587
shares of Common Stock valued at $500,000 and 111,960 shares of Series B-2
Redeemable Preferred Stock valued at $11.2 million. The Series B-2 Redeemable
Preferred Stock bears an annual dividend rate of 8.5%, payable semi-annually. As
of the date
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hereof, the Company has paid an aggregate of $475,831 of dividends on the Series
B-2 Redeemable Preferred Stock to WorldCom.
INTERLINK TRANSACTIONS
Reginald P. McFarland, the Senior Vice President, Network Operations of the
Company, served as President and was a majority stockholder of Interlink prior
to its merger into the Company on December 15, 1997. As consideration for his
capital stock of Interlink acquired by the Company in the merger, Mr. McFarland
received (i) $2,000,000 in cash, (ii) $2,700,000 in the form of a subordinated
promissory note from ILD, of which $1.8 million and $900,000 was paid by the
Company on January 2, 1998 and March 31, 1998, respectively, (iii) 16,117 shares
of Common Stock valued at $175 per share, (iv) $1,000,000 in the form of a
subordinated promissory note which bears interest on a quarterly basis at 9.0%
per year and provides for $250,000 quarterly principal payments commencing
September 30, 1998 and (v) 6,667 shares of Series B-3 Redeemable Preferred Stock
at a stated value of $300 per share which bears an annual dividend rate of 6.0%,
payable quarterly. As of the date hereof, the Company has paid an aggregate of
$35,000 of dividends on the Series B-3 Redeemable Preferred Stock to Mr.
McFarland. The Company will use a portion of the net proceeds from the Offering
to repay in full the $1,000,000 note due Mr. McFarland. See "Use of Proceeds."
In addition, in connection with the merger of Interlink into the Company,
ILD entered into a consulting agreement with Stratacom, Inc., which is owned by
Mr. McFarland. Pursuant to the consulting agreement, Stratacom agreed to provide
consulting services to assist the Company's telecommunications operations,
particularly in the development of the Company's local telephone operations, and
to assist in other technical, marketing and engineering issues in the ongoing
operations of ILD. For Stratacom's services, the Company is required to pay
Stratacom a consulting fee of $425,000 due and payable on each of June 1, 1998
and June 1, 1999.
SIRROM/REEDY LOAN
As part of the junior secured term loan (the "Sirrom/Reedy Loan") from
Sirrom Capital Corporation ("Sirrom") and Reedy River Ventures Limited
Partnership ("Reedy River"), the Company in May 1996 issued to Sirrom, which is
the beneficial owner of 7% of the Common Stock, a senior secured note in the
principal amount of $1.5 million and Common Stock purchase warrants exercisable
for 5,429 shares of Common Stock at a price of $.01 per share. The note bears
interest at 13.5% per year, is payable monthly, and is due on May 10, 2001. In
August 1997, the note was subordinated to the Revolving Loan and the Term Loan.
The Company will use a portion of the net proceeds from the Offering to repay in
full the Sirrom/Reedy Loan. The number of shares underlying the warrants issued
to Sirrom will increase to 7,239 shares, 9,085 shares, and 10,967 shares on each
of May 13, 1999, May 13, 2000, and May 13, 2001, respectively, if the
Sirrom/Reedy Loan is outstanding on such dates. See "Use of Proceeds," "Stock
Ownership" and "Description of Capital Stock--Warrants to Purchase Common
Stock."
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STOCK OWNERSHIP
The following table sets forth certain information regarding the beneficial
ownership of shares of the Company's Common Stock and non-convertible Preferred
Stock as of April 30, 1998, and as adjusted to reflect the sale of shares of
Common Stock offered hereby, by (i) each director of the Company, (ii) the Named
Executive Officers of the Company, (iii) all directors and executive officers of
the Company as a group, and (iv) each person known to the Company to
beneficially own more than 5.0% of the Common Stock or Preferred Stock. Unless
otherwise indicated, all shares of Common Stock and Preferred Stock are owned
directly and the indicated person has sole voting and investment power with
regard to such shares. All information assumes the automatic conversion of all
outstanding shares of Series A Convertible Preferred Stock to Common Stock upon
consummation of the Offering, the conversion of certain outstanding convertible
subordinated indebtedness to Common Stock upon consummation of the Offering, and
the redemption of all outstanding shares of Series B Convertible Preferred Stock
upon consummation of the Offering. See "Use of Proceeds" and "Description of
Capital Stock."
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP AFTER
BENEFICIAL OWNERSHIP PRIOR TO OFFERING(1) OFFERING(1)
--------------------------------------------- -----------------------------------
NON- NON-
CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED
COMMON STOCK STOCK COMMON STOCK STOCK
----------------------------- ------------- --------------------- -----------
NAME OF NUMBER OF PERCENT OF NUMBER OF NUMBER OF PERCENT OF NUMBER OF
BENEFICIAL OWNER(1) SHARES CLASS(1) SHARES SHARES CLASS(1) SHARES
- ---------------------------------------- -------------- ---------- ------------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Intellicall............................. 82,797(2) 54% 5,000(3) 82,797 --
Michael F. Lewis........................ 58,154(4) 51 -- 58,154 --
Morris.................................. 31,201(5) 36 -- 31,201 --
Reginald P. McFarland................... 16,077(6) 22 6,667(7) 16,077 6,667
Stephens Holding Company(8)............. 6,961 9 -- 6,961 --
Sirrom.................................. 5,429(9) 7 -- 5,429 --
WorldCom................................ 4,587 6 111,960(10) 4,587 111,960
Dennis J. Stoutenburgh.................. 4,564(11) 6 -- 4,564 --
H. Edwards Brooks, Jr................... 1,775(12) 2 -- 1,775 --
J. David Darnell........................ 88 -- -- 88 --
John J. McDonald, Jr.................... -- -- -- -- --
C. Read Morton, Jr...................... 1,275(12) 2 -- 1,275 --
William P. Payne........................ 1,000(12) 1 -- 1,000 --
Patrick V. Stark........................ 520 * -- 520 --
All directors and executive officers as
a group
(13 persons)(13)...................... 82,790 60 6,667 82,790 6,667
</TABLE>
- ------------------------
* Represents less than one percent.
(1) Pursuant to the rules of the Commission, a person or group of persons is
deemed to have "beneficial ownership" of any shares with regard to which
such person or group has or shares voting or investment power or has or
shares the right to acquire such shares or power within 60 days, such as
pursuant to the conversion or exchange of securities or the exercise of
stock options or warrants. For purposes of computing the percentage of
outstanding shares held by any person or group of persons, shares which such
person or group has the right to acquire within 60 days are deemed to be
outstanding for the purpose of computing the percentage ownership of such
person or group but are not deemed outstanding for the purpose of computing
the percentage ownership of any other person or group.
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(2) Includes 70,961 shares issuable upon the conversion of Series A Convertible
Preferred Stock and 11,111 shares issuable upon the conversion of
convertible subordinated indebtedness.
(3) Represents 100% of the Series B Convertible Preferred Stock prior to the
Offering. The business address of Intellicall, Inc. is 2155 Chenault, Suite
410, Carrollton, Texas 75006.
(4) Includes (i) 183 shares held by Triad I, 18,333 shares issuable to Triad I
upon the conversion of Series A Convertible Preferred Stock and 7,407 shares
issuable to Triad I upon the conversion of convertible subordinated
indebtedness; (ii) 13,761 shares held by Triad II and (iii) 1,635 shares
held by Triad III, over which Mr. Lewis has the power to vote as the sole
shareholder and president of Triad Corporate G.P., which, as the sole
general partner of each of Triad I, Triad II and Triad III, has the power to
vote such shares. See "Certain Transactions." Also includes 15,416.67 shares
issuable upon the exercise of stock options and 500 shares issuable upon
exercise of warrants. The business address of Mr. Lewis is 13000 Sawgrass
Village Circle, Suite 5, Ponte Vedra Beach, Florida 32082.
(5) Includes (i) 9,167 shares issuable upon the conversion of Series A
Convertible Preferred Stock, (ii) 3,703 shares issuable upon the conversion
of convertible subordinated indebtedness and (iii) 500 shares issuable upon
the exercise of warrants to purchase Common Stock. The business address of
Morris Telecommunications, LLC is c/o Morris Newspaper Corporation, 27
Abercorn Street, Savannah, Georgia 31401.
(6) Includes an aggregate of 111 shares of Common Stock owned by Mr.
McFarland's daughters over which Mr. McFarland exercises voting control. Mr.
McFarland's business address is 1480 Terrell Mill Road, Suite 1, Marietta,
Georgia 30067.
(7) Represents 100% of the Series B-3 Redeemable Preferred Stock prior to and
after the Offering.
(8) The business address of Stephens Holding Company is 111 Center Street,
Little Rock, Arkansas 72201.
(9) Represents shares issuable upon the exercise of warrants to purchase Common
Stock. The business address of Sirrom is 500 Church Street, Suite 200,
Nashville, Tennessee 37219.
(10) Represents 100% of the Series B-2 Redeemable Preferred Stock prior to and
after the Offering. The business address of WorldCom is 515 East Amite
Street, Jackson, Mississippi 39201-2702.
(11) Includes 3,275 shares issuable upon the exercise of stock options.
(12) Represents shares issuable upon the exercise of stock options.
(13) Includes 22,075 shares issuable upon the exercise of stock options, 18,333
shares issuable upon the conversion of Series A Convertible Preferred Stock
and 7,407 shares issuable upon the conversion of convertible subordinated
indebtedness.
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DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 300,000 shares of Common Stock, par value
$0.01 per share (the "Common Stock"), and 350,000 shares of Preferred Stock, par
value $0.01 per share (the "Preferred Stock"). The Board of Directors has
designated the terms of and has caused the Company to issue four separate series
of Preferred Stock, designated as Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series B-2 Redeemable Preferred Stock and Series
B-3 Redeemable Preferred Stock, respectively. As of the date hereof, there were
72,828 shares of Common Stock outstanding and held of record by 31 persons,
96,922 shares of Series A Convertible Preferred Stock outstanding and held of
record by three persons, 5,000 shares of Series B Convertible Preferred Stock
outstanding and held of record by one person, 111,960 shares of Series B-2
Redeemable Preferred Stock outstanding and held of record by one person, and
6,666 shares of Series B-3 Redeemable Preferred Stock outstanding and held of
record by one person.
The summaries of the terms of the Common Stock and Preferred Stock below and
elsewhere in this Prospectus are qualified in their entirety by reference to the
Certificate of Incorporation and the Bylaws of the Company, copies of which have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part, and to the applicable provisions of Delaware law.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Stockholders casting a plurality of votes of the stockholders entitled
to vote in an election of directors may elect each of the directors standing for
election, subject to terms of a Stockholders' Agreement which shall terminate on
the Closing Date. With regard to all other matters, the affirmative vote of the
holders of a majority of the shares present in person or represented by proxy
and entitled to vote generally is required to approve a proposal submitted to
the stockholders. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefore, subject to any preferential dividend rights of the
holders of any class or series of Preferred Stock that may then be issued and
outstanding. Upon the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive ratably the net assets of the
Company that may be available after the payment of all debts and other
liabilities and subject to the prior rights of the holders of any class or
series of Preferred Stock that may be issued and outstanding at such time.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares of
Common Stock offered in the Offering, when issued and paid for, will be fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to the rights of the holders of shares of any series of
Preferred Stock that the Company may designate and issue.
PREFERRED STOCK
Preferred Stock may be issued from time to time by the Board of Directors,
without stockholder approval, in one or more classes or series. Subject to the
provisions of the Certificate of Incorporation and the limitations prescribed by
applicable law, the Board of Directors is expressly authorized to adopt
resolutions to issue the shares of Preferred Stock, to fix the number of shares
and to change the number of shares constituting any series, and to provide for
or change the voting powers, designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including dividend rights (including whether dividends
are cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption prices, conversion rights and liquidation preferences of
the shares constituting any class or series of Preferred Stock, in each case
without any further action or vote by the stockholders, as long as such action
is taken prior to issuance of any shares in the applicable class.
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One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of the Preferred Stock pursuant to the Board of
Directors' authority described above may adversely affect the rights of the
holders of Common Stock. For example, Preferred Stock issued by the Company may
rank senior to the Common Stock as to dividend rights and liquidation
preference, may have full or limited voting rights and may be convertible into
shares of Common Stock. Accordingly, the issuance of shares of Preferred Stock
may discourage bids for the Common Stock at a premium or may otherwise adversely
affect the market price of the Common Stock.
SERIES A CONVERTIBLE PREFERRED STOCK
The Series A Convertible Preferred Stock consists of 100,000 shares having a
stated value of $72.69 per share. Holders of Series A Convertible Preferred
Stock are entitled to vote on all matters submitted to a vote of stockholders,
together as a single class with the holders of the Common Stock. With respect to
any such vote, each share of the Series A Convertible Preferred Stock shall
entitle the holder thereof to cast that number of votes per share as is equal to
the number of votes that such holder would be entitled to cast had such holder
converted shares of the Series A Convertible Preferred Stock into shares of
Common Stock (in the manner described below). Shares of the Series A Convertible
Preferred Stock shall be entitled to receive dividends or distributions if such
are declared by the Board of Directors and consented to by any secured lender to
the Company at the time of such dividend or distribution. Upon the liquidation,
dissolution or winding-up of the Company, each share of the Series A Convertible
Preferred Stock is entitled to a liquidation preference over the then
outstanding Common Stock and any other then outstanding series or class of stock
ranking junior to the Series A Convertible Preferred Stock upon liquidation in
an amount equal to the stated value of the Series A Convertible Preferred Stock
on the date of such liquidation, dissolution or winding-up of the Company.
Subject to certain restrictions, each share of Series A Convertible
Preferred Stock is convertible at any time, at the option of the holder, into
one share of Common Stock (subject to possible adjustment for certain stock
splits, stock dividends, reverse stock splits, recapitalizations and similar
events). Simultaneously with the consummation of an initial public offering of
the capital stock of the Company pursuant to an effective registration statement
under the Securities Act, and all applicable state securities laws such that the
Company receives at least $15,000,000 in proceeds from such offering, each share
of the Series A Convertible Preferred Stock shall automatically convert into one
share of Common Stock. The foregoing conversion rights shall terminate in the
event of a consolidation, merger or share exchange to which the Company is a
party, or sale of all or substantially all of the assets of the Company, which
transaction is effected in such a way that the holders of the Common Stock shall
be entitled to receive stock, cash, securities or other assets with respect to
or in exchange for shares of Common Stock. The Series A Convertible Preferred
Stock is not redeemable by the Company, except with the consent of all holders
of the Preferred Stock or pursuant to the Stockholders' Agreement.
The outstanding shares of Series A Convertible Preferred Stock are fully
paid and nonassessable. Such shares will be converted into shares of Common
Stock upon consummation of the Offering.
SERIES B CONVERTIBLE PREFERRED STOCK
The Series B Convertible Preferred Stock consists of 5,000 shares having a
stated value of $100 per share. Holders of Series B Convertible Preferred Stock
are not entitled to vote on any matters submitted to a vote of stockholders
except as required by applicable law. Subject to certain restrictions imposed by
Delaware law and the Company's senior secured lenders, shares of the Series B
Convertible Preferred Stock shall be entitled to receive cash dividends at an
annual rate equal to 9.0% of the stated value of such shares, calculated on the
basis of a 360-day year consisting of twelve 30-day months, accruing and payable
on a quarterly basis. In the event the foregoing dividends are not paid to the
holders of the Series B
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Convertible Preferred Stock, such dividends shall accumulate. No dividends may
be paid to the holders of any stock ranking junior to the Series B Convertible
Preferred Stock unless all accrued but unpaid dividends have been paid on the
Series B Convertible Preferred Stock. Further, whenever dividends payable on the
Series B Convertible Preferred Stock are not paid in full, the Company shall not
redeem, purchase or otherwise acquire for consideration any share of stock
junior to the Series B Convertible Preferred Stock or on parity with such stock,
subject to certain exceptions. Upon the liquidation, dissolution or winding-up
of the Company, each share of the Series B Convertible Preferred Stock is
entitled to a liquidation preference over the then outstanding Common Stock and
any other then outstanding series or class of stock ranking junior to the Series
B Convertible Preferred Stock upon liquidation (which includes the Series A
Convertible Preferred Stock) in an amount equal to the stated value of the
Series B Convertible Preferred Stock on the date of such liquidation,
dissolution or winding-up of the Company, plus the amount of any dividends
accrued and unpaid as of the date of liquidation, dissolution or winding up
(whether or not declared or currently payable) on the shares of the Series B
Convertible Preferred Stock. The holders of the Series B Convertible Preferred
Stock shall not be entitled to any other liquidation rights.
Subject to certain restrictions, each share of Series B Convertible
Preferred Stock shall be convertible into Common Stock at any time after the
third anniversary of the date that the first shares of the Series B Convertible
Preferred Stock were issued to any holder (i.e., May 10, 1999), at the option of
the holder thereof. The conversion rate for the Series B Convertible Preferred
Stock shall be computed on the basis of a $90 per share price for the Common
Stock such that the holder shall be entitled to that number of shares of Common
Stock upon conversion of any share of the Series B Convertible Preferred Stock
computed as follows: the result of the stated value for each share of the Series
B Convertible Preferred Stock, plus the amount of any dividends accrued and
unpaid as of the conversion date (whether or not currently payable) on such
share divided by $90 (subject to possible adjustment for certain stock splits,
stock dividends, reverse stock splits, recapitalizations and similar events).
The foregoing conversion rights shall terminate in the event of a consolidation,
merger or share exchange to which the Company is a party, or sale of all or
substantially all the assets of the Company, in such a way that the holders of
the Common Stock shall be entitled to receive stock, cash, securities or other
assets with respect to or in exchange for shares of Common Stock.
The Company shall have the right to call any number of the shares of the
Series B Convertible Preferred Stock, at its discretion, by giving five days
written notice to the holders of the shares of the Series B Convertible
Preferred Stock to be called. The purchase price for any shares called shall be
the stated value of such shares, plus the amount of any dividends accrued and
unpaid as of the call date (whether or not currently payable) on the shares
called. The shares of the Series B Convertible Preferred Stock shall be called
on a pro rata basis unless otherwise agreed by all holders of shares of the
Series B Convertible Preferred Stock. In the event that the Company makes a
public offering of its capital stock pursuant to a registration statement under
the Securities Act covering any of its debt or equity securities such that the
Company shall receive at least $5,000,000 in net proceeds, then each holder of
shares of the Series B Convertible Preferred Stock shall have the right, upon
written notice to the Company, to require the Company to purchase at the closing
of such public offering all of its shares of the Series B Convertible Preferred
Stock, subject to certain limitations provided under Delaware law. The purchase
price for any shares to be put to the Company pursuant to the foregoing shall
equal the sum of the stated value of such shares, plus the amount of any
dividends accrued and unpaid as of the put date (whether or not currently
payable) on the put shares.
The outstanding shares of Series B Convertible Preferred Stock are fully
paid and nonassessable. Such shares will be redeemed using a portion of the net
proceeds of the Offering.
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SERIES B-2 REDEEMABLE PREFERRED STOCK
The Series B-2 Redeemable Preferred Stock consists of 150,000 shares having
a stated value of $100 per share. Holders of Series B-2 Redeemable Preferred
Stock are not entitled to vote on any matters submitted to a vote of
stockholders except as required by law. Subject to certain restrictions imposed
by Delaware law and the Company's senior secured lenders, shares of the Series
B-2 Redeemable Preferred Stock shall be entitled to receive cash dividends at an
annual rate equal to 8.5% of the stated value of the shares of Series B-2
Redeemable Preferred Stock, calculated on the basis of a 360-day year consisting
of twelve 30-day months, accruing and payable on a semi-annual basis. In the
event the foregoing dividends are not paid to the holders of the Series B-2
Redeemable Preferred Stock, such dividends shall accumulate. No dividends may be
paid to the holders of any stock ranking junior to the Series B-2 Redeemable
Preferred Stock unless all accrued but unpaid dividends have been paid on the
Series B-2 Redeemable Preferred Stock. Further, whenever dividends payable on
the Series B-2 Redeemable Preferred Stock are not paid in full, the Company
shall not redeem, purchase or otherwise acquire for consideration any share of
stock junior to the Series B Preferred Stock or on parity with such stock,
subject to certain exceptions. Upon the liquidation, dissolution or winding-up
of the Company, each share of the Series B-2 Redeemable Preferred Stock is
entitled to a liquidation preference over the then outstanding Common Stock and
any other then outstanding series or class of stock ranking junior to the Series
B-2 Redeemable Preferred Stock upon liquidation in an amount equal to the stated
value of the Series B-2 Redeemable Preferred Stock on the date of such
liquidation, dissolution or winding-up of the Company, plus the amount of any
dividends accrued and unpaid as of the date of liquidation, dissolution or
winding up (whether or not declared or currently payable). The holders of the
Series B-2 Redeemable Preferred Stock shall not be entitled to any other
liquidation rights. The Series B-2 Redeemable Preferred Stock is not convertible
into any other security.
The Company shall have the right to call any number of the shares of the
Series B-2 Redeemable Preferred Stock, at its discretion, by giving five days
written notice to the holders of the shares of the Series B-2 Redeemable
Preferred Stock to be called. The purchase price for any shares called shall be
the stated value of such shares, plus the amount of any dividends accrued and
unpaid as of the call date (whether or not currently payable) on the shares
called. The shares of the Series B-2 Redeemable Preferred Stock shall be called
on a pro rata basis unless otherwise agreed by all holders of shares of the
Series B-2 Redeemable Preferred Stock. Each holder of shares of the Series B-2
Redeemable Preferred Stock has the right, commencing on the fifth anniversary of
the issuance of such shares to the holder, to require the Company to purchase
all of the shares of the Series B-2 Redeemable Preferred Stock held by such
holder, subject to certain limitations provided under Delaware law. The purchase
price for any shares to be put to the Company pursuant to the foregoing shall
equal the sum of the stated value of such shares, plus the amount of any
dividends accrued and unpaid as of the put date (whether or not currently
payable) on the put shares.
The outstanding shares of Series B-2 Redeemable Preferred Stock are fully
paid and nonassessable.
SERIES B-3 REDEEMABLE PREFERRED STOCK
The Series B-3 Redeemable Preferred Stock consists of 10,000 shares having a
stated value of $300 per share. Holders of Series B-3 Redeemable Preferred Stock
are not entitled to vote on any matters submitted to a vote of stockholders
except as required by law. Subject to certain restrictions imposed by Delaware
law and the Company's senior secured lenders, shares of the Series B-3
Redeemable Preferred Stock shall be entitled to receive cash dividends at an
annual rate equal to 6.0% of the stated value of such shares, calculated on the
basis of a 360-day year consisting of twelve 30-day months, accruing and payable
on a quarterly basis. In the event the foregoing dividends are not paid to the
holders of the Series B-3 Redeemable Preferred Stock, such dividends shall
accumulate. No dividends may be paid the holders of any stock ranking junior to
the Series B-3 Redeemable Preferred Stock unless all accrued but unpaid
dividends have been paid on the Series B-3 Redeemable Preferred Stock. Further,
whenever dividends
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payable on the Series B-3 Redeemable Preferred Stock are not paid in full, the
Company shall not redeem, purchase or otherwise acquire for consideration any
share of stock junior to the Series B-3 Redeemable Preferred Stock or on parity
with such stock, subject to certain exceptions. Upon the liquidation,
dissolution or winding-up of the Company, each share of the Series B-3
Redeemable Preferred Stock is entitled to a liquidation preference over the then
outstanding Common Stock and any other then outstanding series or class of stock
ranking junior to the Series B-3 Redeemable Preferred Stock upon liquidation in
an amount equal to the stated value of the Series B-3 Redeemable Preferred Stock
on the date of such liquidation, dissolution or winding-up of the Company, plus
the amount of dividends on a prorated basis accrued as of the effective date of
such liquidation, dissolution or winding up since the last dividend payment
(whether or not currently payable). The holders of the Series B-3 Preferred
Stock shall not be entitled to any other liquidation rights. The Series B-3
Redeemable Preferred Stock is not convertible into any other security.
The Company shall have the right to call any number of the shares of the
Series B-3 Redeemable Preferred Stock, at its discretion, by giving five days
written notice to the holders of the shares of the Series B-3 Redeemable
Preferred Stock to be called. The purchase price for any shares called shall be
the stated value of such shares, plus the amount of any dividends accrued and
unpaid as of the call date (whether or not currently payable) on the shares
called. The Company may not, however, exercise this call right before five years
from the date of issuance of the shares to the holder unless the holder consents
to such call. The purchase price shall be the stated value of such shares, plus
the amount of any dividends accrued and unpaid as of the call date (whether or
not currently payable) on the shares so called. The shares of the Series B-3
Redeemable Preferred Stock shall be called on a pro rata basis unless otherwise
agreed by all holders of shares of the Series B-3 Redeemable Preferred Stock.
Each holder of shares of the Series B-3 Redeemable Preferred Stock has the
right, commencing on the fifth anniversary of the issuance of such shares to the
holder, to require the Company to purchase all of the shares of the Series B-3
Redeemable Preferred Stock held by such holder, subject to certain limitations
provided under Delaware law. The purchase price for any shares to be put to the
Company pursuant to the foregoing shall equal the sum of the stated value of
such shares, plus the amount of any dividends accrued and unpaid as of the put
date (whether or not currently payable) on the put shares.
The outstanding shares of Series B-3 Redeemable Preferred Stock are fully
paid and nonassessable.
CERTAIN PROVISIONS OF DELAWARE LAW
Upon consummation of the Offering, as a publicly-held company, ILD will be
subject to the provisions of Section 203 of the Delaware Code ("Section 203").
Section 203 provides, with certain exceptions, that a Delaware corporation may
not engage in any of a broad range of business combinations with a person, or an
affiliate or associate of such person, who is an "interested stockholder" for a
period of three years from the date that such person became an interested
stockholder unless (i) prior to such date either the transaction which resulted
in the person becoming an interested stockholder, or the business combination,
is approved by the board of directors, (ii) upon consummation of the transaction
which resulted in such person becoming an interested stockholder, the interested
stockholder owned 85% or more of the outstanding voting stock of the corporation
(excluding shares owned by persons who are both officers and directors of the
corporation, and shares held by certain employee stock ownership plans) or (iii)
on or after the date the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and by the
holders of at least 66 2/3% of the corporation's outstanding voting stock at an
annual or special meeting, excluding shares owned by the interested stockholder.
Under Section 203, an "interested stockholder" is defined as any person who is
(i) the owner of 15% or more of the outstanding voting stock of the corporation
or (ii) an affiliate or associate of the corporation and who was the owner of
15% or more of the outstanding voting stock of the corporation at any time
within the three year period immediately prior to the date on which it is sought
to be determined whether such person is an interested stockholder.
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WARRANTS TO PURCHASE COMMON STOCK
In consideration of the Sirrom/Reedy Loan, the Company granted Sirrom and
Reedy River warrants to purchase 5,429 and 1,810 shares of Common Stock,
respectively, at an exercise price of $.01 per share. The number of shares of
Common Stock underlying the warrants issued to Sirrom will increase to 7,239
shares, 9,085 shares, and 10,967 shares on each of May 13, 1999, May 13, 2000,
and May 13, 2001, respectively, and the number of shares of Common Stock
underlying the warrants issued to Reedy River will increase to 2,413 shares,
3,028 shares and 3,656 shares on each of May 13, 1999, May 13, 2000 and May 13,
2001, respectively, in each case if the Sirrom/Reedy Loan is outstanding on such
dates. The warrants are exercisable any time on or prior to June 30, 2001.
Certain other individuals and entities also hold warrants to purchase an
aggregate of 6,000 shares of Common Stock at an exercise price of $90 per share,
which warrants are exercisable at any time prior to May 10, 2006. See "Certain
Transactions-- Sirrom/Reedy Loan."
INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATION OF MONETARY LIABILITY
Section 145 of the Delaware Code permits a Delaware corporation to indemnify
an officer, director, employee or agent in respect of claims made by reason of
his or her status with the corporation, including stockholder derivative suits,
provided he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interest of the corporation and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. Expenses actually and reasonably
incurred in the defense of any such action may be paid by the corporation in
advance of final disposition upon receipt of an undertaking from the officer or
director to repay the advances if there is an ultimate determination that he or
she is not entitled to be indemnified. Article 8 of the Certificate of
Incorporation provides such indemnification to the full extent permitted by law.
The Company intends to purchase directors' and officers' liability coverage to
insure its indemnification of the Company's directors and officers.
Pursuant to Section 102 of the Delaware Code, Article 6 of the Certificate
of Incorporation exonerates the Company's directors from personal liability to
the Company or its stockholders for monetary damages for breach of the fiduciary
duty of care as a director, provided that Article 6 does not eliminate or limit
liability for any breach of the directors' duty of loyalty, acts or omissions
not in good faith, intentional misconduct, knowing violations of law, improper
declarations of dividends, stock purchases or redemptions or for any transaction
from which a director derived an improper personal benefit. Article 6 does not
eliminate a stockholder's right to seek non-monetary equitable remedies, such as
an injunction or rescission, to redress an action taken by the directors.
However, as a practical matter, equitable remedies may not be available in all
situations, and there may be instances in which no effective remedy is
available.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is .
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common Stock.
Sales of substantial amounts of shares of the Common Stock in the public market
following the Offering, or the perception that such sales could occur, could
adversely affect the market price of the Common Stock prevailing from time to
time and could impair the Company's ability to raise capital in the future
through sales of its equity securities at a time and price which it deems
appropriate.
Upon completion of the Offering, assuming no exercise of outstanding options
or warrants, the Company will have outstanding shares of Common Stock and
immediately exercisable options and warrants to purchase additional shares
of Common Stock. Of the shares of Common Stock to be outstanding upon the
completion of the Offering, the shares of Common Stock sold in the
Offering will be freely tradeable without restriction or further registration
under the Securities Act, except that any shares purchased by "affiliates" of
the Company, as that term is defined in Rule 144 ("Affiliates"), may generally
only be sold in compliance with Rule 144. The remaining shares of Common
Stock are "restricted securities" as defined in Rule 144. Restricted securities
may be sold in the public market only if they are registered under the
Securities Act or if they qualify for an exemption from registration such as
that provided by Rule 144 or Rule 701.
SALES OF RESTRICTED SECURITIES
Upon completion of the Offering, subject to the provisions of Rule 144,
shares of Common Stock will be eligible for immediate sale in the public
market pursuant to Rule 144(k). Beginning 90 days after the date of this
Prospectus, an additional shares will become eligible for immediate sale
in the public market subject to the provisions of Rule 144 and Rule 701.
Beginning 180 days after the date of this Prospectus (or earlier with the
written consent of NationsBanc Montgomery Securities LLC in its discretion),
additional shares will be available for immediate sale in the public
market, subject to the provisions of Rule 144 and Rule 701, upon the expiration
of the Lock-Up Agreements between the Underwriters and the directors, executive
officers and certain other stockholders of the Company. See "--Lock-Up
Agreements."
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned restricted securities for at least one year,
including a person who may be deemed an Affiliate of the Company, is entitled to
sell, within any three-month period, a number of shares of Common Stock equal to
the greater of (i) 1% of the outstanding Common Stock (approximately
shares after giving effect to the Offering) and (ii) the average weekly reported
trading volume of the Common Stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are subject to certain restrictions relating to
manner of sale, notice and availability of current public information about the
Company. In addition, under Rule 144(k), a person who is not an Affiliate and
has not been an Affiliate at any time during the 90 days preceding a sale, and
who has beneficially owned shares for at least two years, would be entitled to
sell such shares immediately following the Offering without regard to the volume
limitations, manner of sale provisions or notice or other requirements of Rule
144.
Under Rule 701, subject to certain limitations, securities issued to
employees, directors, officers, consultants and advisors pursuant to a written
compensatory benefit plan by an issuer that is not subject to the reporting
requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), may be resold pursuant to Rule 144 by persons
other than Affiliates beginning 90 days after the date of this Prospectus
without compliance with the provisions of Rule 144 other than the manner of sale
provisions. Beginning 90 days after the date of this Prospectus, Affiliates may
sell securities issued pursuant to Rule 701 subject to all of the provisions of
Rule 144 except the one year holding period requirement.
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OPTIONS AND WARRANTS
Of the shares of Common Stock that, as of the completion of the Offering,
will be issuable pursuant to their terms upon the exercise of outstanding
options and warrants, will be eligible for sale in the public market
subject to the provisions of Rule 144 and Rule 701 beginning 90 days after the
date of this Prospectus. Beginning 180 days after the date of this Prospectus
(or earlier with the written consent of NationsBanc Montgomery Securities LLC),
an additional of these shares will become eligible for sale in the public
market subject to the provisions of Rule 144 and Rule 701 upon the expiration of
the Lock-Up Agreements. See "Management--Executive Compensation" and "--Lock-Up
Agreements."
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register shares of Common Stock issuable upon
the exercise of outstanding stock options and warrants or that are available for
issuance pursuant to the Company's stock option plans. Shares of Common Stock
covered by these registration statements will thereupon be eligible for sale in
the public markets subject to Lock-Up Agreements, if applicable, and compliance
with certain provisions of Rule 144 by Affiliates.
LOCK-UP AGREEMENTS
Certain stockholders and all executive officers and directors of the Company
have agreed, pursuant to the Lock-Up Agreements, that they will not, without the
prior written consent of NationsBanc Montgomery Securities LLC, directly or
indirectly sell, offer, contract or grant any option to sell, pledge, transfer,
establish an open put equivalent position or otherwise dispose of an aggregate
of shares of Common Stock, options and warrants to purchase an aggregate
of shares of Common Stock or any securities exchangeable or exercisable
for or convertible into shares of Common Stock beneficially owned by them or any
such securities hereafter acquired by them for a period of 180 days after the
date of this Prospectus. In addition, the Company has agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") by and between the Company
and the Underwriters, that it will not, without the prior written consent of
NationsBanc Montgomery Securities LLC, directly or indirectly sell, offer,
contract or grant any option to sell, pledge, transfer or establish an open put
equivalent position or otherwise dispose of or transfer, or announce the
offering of or file any registration statement under the Securities Act in
respect of, any shares of Common Stock, options or warrants to acquire shares of
Common Stock or securities exchangeable or exercisable for or convertible into
shares of Common Stock for a period of 180 days after the date of this
Prospectus other than options or shares pursuant to the Plans if the holders
thereof agree in writing not to sell, offer, dispose of or otherwise transfer
such options or shares during the 180-day lock-up period without the prior
written consent of NationsBanc Montgomery Securities LLC.
REGISTRATION RIGHTS
The Company has granted to 14 holders of an aggregate of 68,870 shares of
Common Stock, 6,000 shares of Common Stock issuable upon the exercise of
warrants to purchase Common Stock and 98,461 shares of Common Stock issuable
upon the conversion of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock (as well as any other shares of Common Stock
acquired by such holders) certain rights with respect to the registration under
the Securities Act of shares of Common Stock owned by them from time to time
(the "Registerable Securities"), pursuant to the Second Amended and Restated
Registration Rights Agreement (the "Registration Rights Agreement"). Each holder
of Registerable Securities that is a party to the Registration Rights Agreement
has demand registration rights during the period commencing not less than 180
days after the effective date of the first registration statement filed by the
Company in connection with the public offering of its capital stock and the
listing of such capital stock on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market and ending on that date when all
Registerable Securities held by such holder are eligible for resale pursuant to
Rule 144. The holder or holders of Registerable Securities who individually or
in the aggregate
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hold not less than 50,000 Registerable Securities are entitled to request one
registration of such number of Registerable Securities requested by the holder
for the sole purpose of distributing such Registerable Securities to the equity
owners of such holder, provided that such request shall not be for less than
25,000 Registerable Securities. In addition, each holder of Registerable
Securities, as well as WorldCom, Sirrom and Reedy, has piggyback registration
rights, subject to certain limitations, in the event the Company proposes to
register any sale of any of its Common Stock for its own account or for the
account of its stockholders. The Company is obligated to bear all expenses in
connection with the registration of the shares of Common Stock pursuant to its
demand and piggyback registration obligations except (i) all underwriting
expenses incurred by the holder of such shares, including underwriting discounts
and commissions (ii) all fees and disbursements of counsel for such holders and
(iii) certain additional expenses agreed to be paid by the holders of such
shares. Each party to the Registration Rights Agreement has agreed that during
the one-year period following completion of the Offering, such party will not
exercise any demand rights and, for the 180-day lock-up period, such party will
not exercise any other right with regard to the registration of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock without the prior written consent of NationsBanc Montgomery
Securities LLC.
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UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, Raymond James & Associates, Inc. and
Interstate/Johnson Lane Corporation (the "Representatives"), have severally
agreed, subject to the terms and conditions in the Underwriting Agreement to
purchase from the Company the number of shares of Common Stock indicated below
opposite its name, at the public offering price less the underwriting discount
set forth on the cover page of this Prospectus. The Underwriting Agreement
provides that the obligations of the Underwriters are subject to certain
conditions precedent and that the Underwriters are committed to purchase all of
the shares of Common Stock, if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
NationsBanc Montgomery Securities LLC............................................
Raymond James & Associates, Inc..................................................
Interstate/Johnson Lane Corporation..............................................
----------
Total........................................................................
----------
----------
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow selected
dealers a concession of not more than $ per share; and the Underwriters may
allow, and such dealers may reallow, a concession of not more than $ per
share to certain other dealers. After the public offering, the offering price
and other selling terms may be changed by the Representatives. The Common Stock
is offered subject to receipt and acceptance by the Underwriters and to certain
other conditions, including the right to reject orders in whole or in part.
The Company has granted to the Underwriters an over-allotment option,
exercisable for 30 days from the date of this Prospectus, to purchase up to a
maximum of additional shares of Common Stock to cover over-allotments, if
any, at the same price per share as the initial shares to be purchased by the
Underwriters. To the extent the Underwriters exercise such over-allotment
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may exercise this
over-allotment option only to cover over-allotments made in connection with the
Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the Underwriters may be required
to make in respect thereof.
Under the Conduct Rules of the National Association of Securities Dealers,
Inc. (the "NASD"), when more than 10% of the proceeds of a public offering of
equity securities, not including underwriting compensation, are to be paid to
members of the NASD participating in such public offering of equity securities
or affiliates of such members, the public offering price at which such
securities are distributed to the public must be no higher than that recommended
by a qualified independent underwriter meeting certain standards. NationsBanc
Montgomery Securities LLC is a member of the NASD and is an affiliate of
NationsBank, the lender under the Credit Agreement. Nationsbank will receive
more than 10% of the net proceeds from this Offering as a result of the use of
such proceeds to repay the borrowings under the Credit Agreement. See "Use of
Proceeds." As a result, this Offering is being made in compliance with paragraph
(8) of Rule 2710(c) the Conduct Rules of the NASD which relates to offerings
with respect to which net proceeds are directed to members of the NASD. Raymond
James & Associates, Inc. will act as a qualified independent underwriter in
connection with the Offering and assume the customary responsibilities of acting
as a qualified independent underwriter in pricing and conducting due diligence
for this Offering.
The Company's executive officers and directors and certain stockholders of
the Company have agreed that for a period of 180 days after the date of this
Prospectus they will not, without the prior written
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consent of NationsBanc Montgomery Securities LLC, directly or indirectly sell,
offer, contract or grant any option to sell, pledge, transfer, establish an open
put equivalent position or otherwise dispose of any share of Common Stock,
options or warrants to acquire shares of Common Stock or securities exchangeable
or exercisable for or convertible into shares of Common Stock, except for the
exercise of stock options and shares of Common Stock disposed of as bona fide
gifts, subject in each case to any remaining portion of the 180-day period
applying to shares issued or transferred. The Company has also agreed not to
issue, offer, sell, grant options to purchase or otherwise dispose of any of the
Company's equity securities for a period of 180 days after the effective date of
this Offering without the prior written consent of NationsBanc Montgomery
Securities LLC except for securities issued by the Company in connection with
acquisitions, for grants of stock options and for exercises of outstanding stock
options and warrants and conversions of outstanding convertible securities,
subject in each case to any remaining portion of the 180-day period applying to
shares issued or transferred. Each party to the Registration Rights Agreement
has agreed that during the one-year period following completion of the Offering,
such party will not exercise any demand rights and, for the 180-day lock-up
period, such party will not exercise any other right with regard to the
registration of any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock without the prior written consent
of NationsBanc Montgomery Securities LLC.
At the request of the Company, the Underwriters have reserved up to
shares of Common Stock for sale at the Price to Public set forth on the cover
page of this Prospectus to certain officers, directors, employees and other
persons designated by the Company. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased will
be offered by the Underwriters to the general public on the same basis as the
other shares offered hereby.
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M under the Exchange Act, pursuant to which such
persons may bid for or purchase Common Stock for the purpose of stabilizing its
market price. The Underwriters also may create a short position for the account
of the Underwriters by selling more Common Stock in connection with the Offering
than they are committed to purchase from the Company and, in such case, may
purchase Common Stock in the open market following completion of the Offering to
cover all or a portion of such short position. The Underwriters may also cover
all or a portion of such short position, up to shares of Common Stock, by
exercising the Underwriters' over-allotment option referred to above. In
addition, NationsBanc Montgomery Securities LLC on behalf of the Underwriters,
may impose "penalty bids" under contractual arrangements with the Underwriters
whereby it may reclaim from an Underwriter (or dealer participating in the
Offering), for the account of the other Underwriters, the selling concession
with respect to Common Stock that is distributed in the Offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Stock at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are undertaken, they may be discontinued at
any time.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of Common Stock offered by this Prospectus to accounts
over which they exercise discretionary authority in excess of 5% of the number
of shares of Common Stock offered hereby.
Prior to the Offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price was determined by
negotiations between the Company and the Representatives. Among the factors
considered in such negotiations were the history of and prospects for the
Company and the industries in which it operates, an assessment of the Company's
management, its past and present earnings and the trend of such earnings, the
prospects for future earnings of the Company, the present state of the Company's
development, the general condition of securities markets at the time of the
Offering and the market price of publicly traded stock of comparable companies
in recent periods.
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LEGAL MATTERS
The legality of the shares of Common Stock offered hereby and certain other
legal matters will be passed upon for the Company by Cashin, Morton & Mullins,
Atlanta, Georgia, and Alston & Bird LLP, Atlanta, Georgia. C. Read Morton, Jr.,
a partner in Cashin, Morton & Mullins, is a director of the Company and owns
options to acquire 1,275 shares of Common Stock. See "Management" and "Stock
Ownership." Certain legal matters related to the Offering will be passed upon
for the Underwriters by Paul, Hastings, Janofsky & Walker LLP, New York, New
York.
EXPERTS
The consolidated financial statements of the Predecessor for the fiscal year
ended December 31, 1995 and for the period from January 1, 1996 to May 9, 1996,
and the consolidated financial statements of the Company as of December 31, 1996
and September 30, 1997 and for the period from May 10, 1996 (date of
commencement of operations) to December 31, 1996 and for the nine month period
ended September 30, 1997 included in this Prospectus have been so included in
reliance on the reports of Price Waterhouse LLP, independent accountants, given
on the authority of said firm as experts in auditing and accounting.
The financial statements of WorldCom--San Antonio (as defined) as of
December 31, 1995 and 1996 and for each of the three years in the period ended
December 31, 1996 included in this Prospectus have been so included in reliance
on the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The financial statements of Interlink as of and for the year ended September
30, 1997 included in this Prospectus have been so included in reliance on the
report of Smith & Howard, P.C., independent accountants, given on the authority
of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act with respect to the securities offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto, as permitted by
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock, reference is hereby made to the
Registration Statement, including the exhibits and schedules filed or
incorporated as a part thereof. Statements contained herein concerning the
provisions of any document are necessarily summaries, and in each instance
reference is made to the copy of the document filed as an exhibit or schedule to
the Registration Statement. Each such statement is qualified in its entirety by
reference to the copy of the applicable documents filed with the Commission.
After effectiveness of the Registration Statement, the Company will file
periodic reports and other information with the Commission under the Exchange
Act. The Registration Statement, including the exhibits and schedules thereto,
and the periodic reports and other information filed in connection therewith,
may be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Seven World Trade Center, New
York, New York 10048 and Northwest Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. Such
reports, proxy and information statements and other information may be found on
the Commission's Web site address, http://www.sec.gov. Copies of such material
also can be obtained from the Company upon request.
78
<PAGE>
ILD TELECOMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
The financial statements of the Company and those of its acquirees and
Predecessor, notes to the respective financial statements and the related
respective reports of the independent accountants thereon are included in this
Prospectus at the page indicated and annexed hereto.
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS OF ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
Consolidated Balance Sheets as of December 31, 1996 and 1997............................................... F-3
Consolidated Statements of Income for the three months ended December 31, 1996 and 1997.................... F-4
Consolidated Statements of Cash Flows for the three months ended December 31, 1996 and 1997................ F-5
Notes to Consolidated Interim Financial Statements......................................................... F-6
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
Report of Independent Accountants.......................................................................... F-10
Consolidated Balance Sheets as of December 31, 1996 and September 30, 1997................................. F-11
Consolidated Statements of Income for the period from May 10, 1996 (inception) to December 31, 1996 and the
nine-month period ended September 30, 1997............................................................... F-12
Consolidated Statements of Stockholders' Equity (Deficit) for the period from May 10, 1996 (inception) to
December 31, 1996 and the nine-month period ended September 30, 1997..................................... F-13
Consolidated Statements of Cash Flows for the period from May 10, 1996 (inception) to December 31, 1996 and
the nine-month period ended September 30, 1997........................................................... F-14
Notes to Consolidated Financial Statements................................................................. F-15
AUDITED FINANCIAL STATEMENTS OF INTERLINK TELECOMMUNICATIONS, INC.
Independent Auditors' Report............................................................................... F-30
Balance Sheet as of September 30, 1997..................................................................... F-31
Statement of Operations and Accumulated Deficit for the year ended September 30, 1997...................... F-32
Statement of Cash Flows for the year ended September 30, 1997.............................................. F-33
Notes to Financial Statements.............................................................................. F-34
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FINANCIAL STATEMENTS OF WORLDCOM--SAN ANTONIO (AS DEFINED)
Report of Independent Accountants.......................................................................... F-38
Audited Balance Sheets as of December 31, 1995 and 1996 and Unaudited Balance Sheet as of June 30, 1997.... F-39
Audited Statements of Operations for the years ended December 31, 1994, 1995 and 1996 and Unaudited
Statements of Operations for the six months ended June 30, 1996 and 1997................................. F-40
Audited Statements of Changes in Equity for the years ended December 31, 1994, 1995 and 1996 and Unaudited
Statements of Changes in Equity for the six months ended June 30, 1996 and 1997.......................... F-41
Audited Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 and Unaudited
Statements of Cash Flows for the six months ended June 30, 1996 and 1997................................. F-42
Notes to Financial Statements.............................................................................. F-43
AUDITED FINANCIAL STATEMENTS OF INTELLICALL OPERATOR SERVICES BUSINESS
Report of Independent Accountants.......................................................................... F-48
Statements of Operations for the year ended December 31, 1995 and the period from January 1, 1996 to May 9,
1996..................................................................................................... F-49
Statements of Changes in Equity for the year ended December 31, 1995 and the period from January 1, 1996 to
May 9, 1996.............................................................................................. F-50
Statements of Cash Flows for the year ended December 31, 1995 and the period from January 1, 1996 to May 9,
1996..................................................................................................... F-51
Notes to Financial Statements.............................................................................. F-52
</TABLE>
F-2
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.......................................................... $ 2,271 $ 66
Restricted cash.................................................................... -- 2,476
Accounts receivable, net of allowance for doubtful accounts of $97 and $2,027,
respectively..................................................................... 3,210 12,561
Accounts receivable from affiliates................................................ -- 1,382
Other current assets............................................................... 507 1,105
------------ ------------
Total current assets............................................................. 5,988 17,590
Property and equipment, net.......................................................... 14 6,580
Excess of cost over net assets acquired, net......................................... -- 30,853
Other assets, net.................................................................... 418 535
------------ ------------
Total assets..................................................................... $ 6,420 $ 55,558
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Trade accounts payable and other accrued liabilities............................... $ 814 $ 5,913
Accrued transmission, customer commissions, and billing charges (includes $2,984
payable to affiliate in 1997).................................................... 2,163 10,515
Accrued salaries, wages and other employee expenses................................ -- 655
Acquisition obligation............................................................. -- 2,700
Current maturities of long-term obligations........................................ -- 2,782
------------ ------------
Total current liabilities........................................................ 2,977 22,565
Long-term obligations, less current maturities (including $4,000 face amount payable
to affiliates in 1996 and 1997).................................................... 3,922 13,381
Commitments and contingencies
Series B-2 Redeemable Preferred Stock, $.01 par value; $100 stated value; 150,000
shares authorized; 111,960 shares issued and outstanding in 1997................... -- 11,196
Series B-3 Redeemable Preferred Stock, $.01 par value; $300 stated value; 10,000
shares authorized; 6,667 shares issued and outstanding in 1997..................... -- 2,000
Stockholders' equity (deficit)
Series A and B Convertible Preferred Stock, $.01 par value; 105,000 shares
authorized, issued and outstanding, respectively................................. 1 1
Common Stock, $.01 par value; 300,000 shares authorized; 1,000 and 71,004 shares
issued and outstanding, respectively............................................. -- 1
Additional paid-in capital......................................................... 2,042 10,631
Stock subscription receivable from affiliate....................................... -- (2,000)
Retained deficit................................................................... (2,522) (2,217)
------------ ------------
Total stockholders' equity (deficit)............................................. (479) 6,416
------------ ------------
Total liabilities and stockholders' equity (deficit)............................. $ 6,420 $ 55,558
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
F-3
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------- -------------
<S> <C> <C>
Telecommunications revenues......................................................... $ 7,100 $ 23,782
Cost of revenues.................................................................... 6,431 19,129
------------- -------------
Gross profit...................................................................... 669 4,653
Operating expenses:
Selling, general and administrative............................................... 283 1,853
Provision for doubtful accounts................................................... 176 1,596
Depreciation and amortization..................................................... 17 604
------------- -------------
Total operating expenses........................................................ 476 4,053
------------- -------------
Income from operations.............................................................. 193 600
Other income (expense):
Interest expense.................................................................. (137) (359)
Interest income................................................................... 31 15
------------- -------------
Total other expense............................................................. (106) (344)
------------- -------------
Income before provision for income taxes............................................ 87 256
Provision for income taxes.......................................................... -- 93
------------- -------------
Net income.......................................................................... 87 163
Preferred dividend requirements..................................................... (11) (254)
------------- -------------
Net income (loss) applicable to common stockholders................................. $ 76 $ (91)
------------- -------------
------------- -------------
Net income (loss) per share applicable to common stockholders:
Basic............................................................................. $ 9.29 $ (1.40)
------------- -------------
------------- -------------
Diluted........................................................................... $ 0.65 $ (1.40)
------------- -------------
------------- -------------
Shares used in computing net income (loss) per share applicable to common
stockholders:
Basic............................................................................. 8,238 64,747
------------- -------------
------------- -------------
Diluted........................................................................... 118,510 64,747
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
F-4
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 87 $ 163
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization................................................... 17 604
Provision for doubtful accounts................................................. 176 1,596
Other........................................................................... 21 40
Changes in operating assets and liabilities, net of effect of acquisition:
Increase in restricted cash................................................... -- (2,476)
Increase in accounts receivable............................................... (356) (5,334)
Decrease in accounts receivable from affiliates............................... -- 247
Increase in other current assets.............................................. (22) (569)
(Increase) decrease in other assets........................................... (5) 136
Increase (decrease) in trade accounts payable and other accrued liabilities... (114) 1,311
Increase in accrued transmission, customer commissions and billing charges.... 641 2,942
Decrease in accrued salaries, wages, and other employee expenses.............. -- (31)
------ -------------
Net cash provided by (used in) operating activities......................... 445 (1,371)
------ -------------
Cash flows from investing activities:
Purchase of Interlink, net of cash................................................ -- (2,192)
Purchase of property and equipment................................................ (1) (1,180)
------ -------------
Net cash used in investing activities....................................... (1) (3,372)
------ -------------
Cash flows from financing activities:
Net borrowings on long-term debt.................................................. -- 3,451
Proceeds from sales-leaseback of equipment........................................ -- 1,000
------ -------------
Net cash provided by financing activities................................... -- 4,451
------ -------------
Net increase (decrease) in cash and cash equivalents................................ 444 (292)
Cash and cash equivalents at beginning of period.................................... 1,827 358
------ -------------
Cash and cash equivalents at end of period.......................................... $ 2,271 $ 66
------ -------------
------ -------------
Supplemental cash flow information:
Common Stock issued in acquisition of Interlink..................................... $ -- $ 2,820
------ -------------
------ -------------
Series B-3 Redeemable Preferred Stock issued in acquisition of Interlink............ $ -- $ 2,000
------ -------------
------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated interim
financial statements.
F-5
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements are those of ILD Teleservices,
Inc. and subsidiary (the "Company"). These interim consolidated financial
statements and notes thereto are prepared pursuant to the requirements for
reporting on Form 10-Q and should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto included in this
Prospectus. In the opinion of management, the interim consolidated financial
statements reflect all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the consolidated financial
position and consolidated results of operations for the interim periods. The
current period consolidated results of operations are not necessarily indicative
of results which ultimately will be reported for the full fiscal year ended
September 30, 1998.
2. RESTRICTED CASH
Restricted cash represents collections from LECs which are contractually
owed to the Company's billing and collections customers but have not been
remitted due to timing. A corresponding liability is recorded in the Company's
balance sheet.
3. ACQUISITION OF INTERLINK TELECOMMUNICATIONS, INC.
Effective December 15, 1997, the Company acquired all of the outstanding
common stock of Interlink Telecommunications, Inc. ("Interlink"), a
facilities-based reseller of long distance services and provider of enhanced
services including prepaid debit cards, prepaid local service and operator
services. Interlink is located in Atlanta, Georgia and principally serves the
southeastern United States.
The acquisition of Interlink common stock was accomplished by payment of the
following consideration: (i) $2,000,000 in cash, (ii) $2,700,000 in the form of
a promissory note payable due $1,800,000 on December 31, 1997 and $900,000 on
March 31, 1998 bearing no interest, (iii) $1,000,000 in the form of a promissory
note payable due $250,000 on a quarterly basis commencing September 30, 1998
with interest at 9% per annum also payable quarterly, (iv) 16,117 Shares of the
Company's Common Stock valued at $175 per share, (v) 6,667 shares of the
Company's Series B-3 Redeemable Preferred Stock which is mandatorily redeemable,
and (vi) a five year consulting agreement for $850,000 payable $425,000 on June
1, 1998 and $425,000 on June 1, 1999. The $1,800,000 payment due on December 31,
1997 was paid on January 2, 1998. The cash portion of the purchase price was
funded from the NationsBank revolving credit facility. Each share of the Series
B-3 Redeemable Preferred Stock has a stated value of $300 and entitles the
holder to receive an annual cumulative dividend of 6%, payable quarterly.
Subject to certain restrictions in loan agreements, each holder has the right,
commencing on the fifth anniversary date after issuance, to require the Company
to purchase the holder's shares at the stated value making it mandatorily
redeemable.
The acquisition was accounted for as a purchase whereby the purchase price
over the net assets acquired has been recorded based upon the fair values of the
assets acquired and liabilities assumed. This allocation was based on
preliminary estimates and may be revised at a later date. The Company's
consolidated statements of income include the results of operations of Interlink
since December 15, 1997.
F-6
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. ACQUISITION OF INTERLINK TELECOMMUNICATIONS, INC. (CONTINUED)
A summary of the Interlink excess of cost over net assets acquired for
financial reporting purposes is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1997 LIFE
----------------- ---------
<S> <C> <C>
Goodwill........................................................................... $ 9,678 25 years
Non-compete agreement.............................................................. 2,000 5 years
Other.............................................................................. 850 5 years
-------
12,528
Accumulated amortization........................................................... (40)
-------
$ 12,488
-------
-------
</TABLE>
The following unaudited pro forma combined results of operations of the
Company assume that the Interlink acquisition was completed on October 1, 1996.
These pro forma amounts represent historical operating results of Interlink
combined with those of the Company with appropriate adjustments to give effect
to interest expense and depreciation and amortization expense. These pro forma
amounts also include the results of operations of a business acquired from
WorldCom, Inc. on September 1, 1997 (see Note 3 of Notes to the Company's
Consolidated Financial Statements for the fiscal period ended September 30,
1997), as if such business had been acquired on October 1, 1996.
These pro forma amounts are not necessarily indicative of consolidated
operating results which would have been included in the operations of the
Company during the periods presented, or which may result in the future, because
those amounts do not reflect full transmission and switched service cost
optimization, and the synergistic effect on operating, selling, general and
administrative expenses nor do the amounts reflect any higher costs associated
with unanticipated integration or other organizational activities the Company
may be forced to undertake as a result of the acquisitions.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------- -------------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Revenues............................................................... $ 29,871 $ 26,122
Net loss applicable to common shareholders............................. (208) (238)
Net loss per share applicable to common stockholders:
Basic................................................................ $ (7.19) $ (3.06)
------- -------
------- -------
Diluted.............................................................. $ (7.19) $ (3.06)
------- -------
------- -------
Shares used in computing net loss per share applicable to common
stockholders:
Basic................................................................ 28,942 77,886
------- -------
------- -------
Diluted.............................................................. 28,942 77,886
------- -------
------- -------
</TABLE>
4. EARNINGS PER SHARE
Basic net income per share has been computed in accordance with FAS 128
using the weighted average number of common shares outstanding. The provision
and disclosure requirements for FAS 128
F-7
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. EARNINGS PER SHARE (CONTINUED)
were required to be adopted for interim and annual periods ending after December
15, 1997, with restatement of earnings per share (EPS) for all prior periods.
Diluted net income per share gives effect to all dilutive potential common
shares that were outstanding during the periods.
The following table sets forth a reconciliation of the numerator and
denominator used in the basic and diluted EPS computation for the three months
ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------------- -------------------
<S> <C> <C>
Net income (in thousands).............................................. $ 87 $ 163
Preferred dividend requirements...................................... (11) (254)
-------- -------
Net income (loss) applicable to common stockholders.................. $ 76 $ (91)
-------- -------
-------- -------
Basic:
Weighted average shares outstanding.................................. 1,000 57,508
Additional weighted average shares from assumed exercise of warrants
issued for nominal consideration, net of shares assumed to be
repurchased with exercise proceeds................................. 7,238 7,239
-------- -------
Weighted average number of shares outstanding used in the basic net
income (loss) per share applicable to common stockholders
calculation........................................................ 8,238 64,747
-------- -------
-------- -------
Net income (loss) per share applicable to common stockholders........ $ 9.29 $ (1.40)
-------- -------
-------- -------
Diluted:
Weighted average number of shares outstanding used in the basic net
income (loss) per share applicable to common stockholders
calculation........................................................ 8,238 64,747
Additional weighted average shares from assumed exercise of dilutive
stock options, net of shares assumed to be repurchased with
exercise proceeds.................................................. 10,272 --
Weighted average shares from assumed conversion of the Series A
Convertible Preferred Stock........................................ 100,000 --
-------- -------
Weighted average shares used in the diluted net income (loss) per
share applicable to common stockholders calculation................ 118,510 64,747
-------- -------
-------- -------
Net income (loss) per share applicable to common stockholders........ $ 0.65 $ (1.40)
-------- -------
-------- -------
</TABLE>
Options to purchase 21,675 shares of Common Stock at an exercise price of
$24.20 per share were outstanding during the three months ended December 31,
1996 but were not included in the computation of diluted EPS because such
exercise price was greater than the average fair value of the common shares.
Options to purchase 47,525 shares of Common Stock at exercise prices ranging
from $24.20 to $175.00 per
F-8
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. EARNINGS PER SHARE (CONTINUED)
share were outstanding during the three months ended December 31, 1997 but were
not included in the computation of diluted EPS because they were anti-dilutive.
Warrants issued at inception to purchase 6,000 shares of Common Stock at an
exercise price of $90 per share were outstanding during the periods but were not
included in the computation of diluted EPS because such warrants were
anti-dilutive. Additionally, $2,000,000 of subordinated notes convertible into
22,222 shares of Common Stock were excluded from the diluted calculation for the
three months ended December 31, 1996 and 1997, as such conversion would be
anti-dilutive.
5. SUBSEQUENT EVENT
Effective January 1, 1998, the Company acquired the prepaid service
operations of Intellicall, Inc. by payment of the following consideration: (i)
$2,000,000 in cash, (ii) cancellation of a note in the original principal amount
of $2,000,000 reflected as stock subscription receivable as of December 31,
1997, which amount was recorded upon the sale of 18,349 shares of Common Stock
at $109 per share in September 1997, and (iii) $1,000,000 in the form of a
promissory note due no later than December 31, 1998.
The acquisition will be accounted for as a purchase, whereby the excess
purchase price over the net assets acquired will be recorded based upon the fair
values of the assets acquired and liabilities assumed.
F-9
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of ILD Telecommunications, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity (deficit) and of cash
flows present fairly, in all material respects, the financial position of ILD
Telecommunications, Inc. and its subsidiary at December 31, 1996 and September
30, 1997, and the results of their operations and their cash flows for the
period from May 10, 1996 (inception) to December 31, 1996 and for the nine-month
period ended September 30, 1997 in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Dallas, Texas
January 29, 1998
F-10
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents......................................................... $ 2,271 $ 358
Accounts receivable, net of allowance for doubtful accounts of $97 and $828,
respectively.................................................................... 3,210 8,283
Accounts receivable from affiliates............................................... -- 1,629
Other current assets.............................................................. 507 542
------------ -------------
Total current assets............................................................ 5,988 10,812
Property and equipment, net......................................................... 14 5,603
Excess of cost over net assets acquired, net........................................ -- 17,410
Other assets, net................................................................... 418 671
------------ -------------
Total assets.................................................................... $ 6,420 $ 34,496
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities
Trade accounts payable and other accrued liabilities.............................. $ 814 $ 1,363
Accrued transmission, customer commissions and billing charges (includes $818
payable to affiliates in 1997).................................................. 2,163 7,374
Accrued salaries, wages and other employee expenses............................... -- 686
Accrued expenses payable to affiliates............................................ -- 417
Current maturities of long-term obligations....................................... -- 1,400
------------ -------------
Total current liabilities....................................................... 2,977 11,240
Long-term obligations, less current maturities (including $4,000 face amount payable
to affilates in 1996 and 1997).................................................... 3,922 8,375
Commitments and contingencies
Series B-2 Redeemable Preferred Stock, $.01 par value; $100 stated value; 150,000
shares authorized; 111,960 shares issued and outstanding in 1997.................. -- 11,196
Stockholders' equity (deficit)
Series A and B Convertible Preferred Stock, $.01 par value; 105,000 shares
authorized, issued and outstanding.............................................. 1 1
Common Stock, $.01 par value; 300,000 shares authorized; 1,000 and 54,887 shares
issued and outstanding, respectively............................................ -- 1
Additional paid-in capital........................................................ 2,042 7,810
Stock subscription receivable from affiliate...................................... -- (2,000)
Retained deficit.................................................................. (2,522) (2,127)
------------ -------------
Total stockholders' equity (deficit)............................................ (479) 3,685
------------ -------------
Total liabilities and stockholders' equity (deficit)............................ $ 6,420 $ 34,496
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 10, 1996 NINE MONTHS
(INCEPTION) ENDED
TO DECEMBER SEPTEMBER 30,
31, 1996 1997
------------ -------------
<S> <C> <C>
Telecommunications revenues......................................................... $ 20,343 $ 30,349
Cost of revenues.................................................................... 18,366 26,298
------------ -------------
Gross profit...................................................................... 1,977 4,051
Operating expenses:
Selling, general and administrative............................................... 684 1,450
Provision for doubtful accounts................................................... 472 1,312
Depreciation and amortization..................................................... 35 243
------------ -------------
Total operating expenses........................................................ 1,191 3,005
------------ -------------
Income from operations.............................................................. 786 1,046
Other income (expense):
Interest expense.................................................................. (354) (463)
Interest income................................................................... 75 76
------------ -------------
Total other expense............................................................. (279) (387)
------------ -------------
Income before provision for income taxes............................................ 507 659
Provision for income taxes:
Current........................................................................... -- 195
Deferred (benefit)................................................................ -- (44)
------------ -------------
Total provision for income taxes................................................ -- 151
------------ -------------
Net income.......................................................................... 507 508
Preferred dividend requirements..................................................... (29) (113)
------------ -------------
Net income applicable to common stockholders........................................ $ 478 $ 395
------------ -------------
------------ -------------
Net income per share applicable to common stockholders:
Basic............................................................................. $ 58.09 $ 27.57
------------ -------------
------------ -------------
Diluted........................................................................... $ 4.25 $ 3.08
------------ -------------
------------ -------------
Shares used in calculating net income per share applicable to common stockholders:
Basic............................................................................. 8,236 14,311
------------ -------------
------------ -------------
Diluted........................................................................... 112,640 128,031
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ------------------------ ------------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
May 10, 1996 (inception)......... -- $ -- -- $ -- -- $ -- $ --
Dividend to affiliate.............. -- -- -- -- -- -- --
Issuance of common stock........... -- -- -- -- 1 -- 1,942
Issuance of preferred stock........ 100 1 5 -- -- -- --
Preferred dividend requirements.... -- -- -- -- -- -- --
Issuance of warrants............... -- -- -- -- -- -- 100
Net income......................... -- -- -- -- -- -- --
--
--- ----- ----- --- ----- -----------
Balances at December 31, 1996...... 100 1 5 -- 1 -- 2,042
Issuance of common stock........... -- -- -- -- 54 1 5,768
Preferred dividend requirements.... -- -- -- -- -- -- --
Stock subscription receivable from
affiliate........................ -- -- -- -- -- -- --
Net income......................... -- -- -- -- -- -- --
--
--- ----- ----- --- ----- -----------
Balances at September 30, 1997..... 100 $ 1 5 $ -- 55 $ 1 $ 7,810
--
--
--- ----- ----- --- ----- -----------
--- ----- ----- --- ----- -----------
<CAPTION>
STOCK
SUBSCRIPTION RETAINED
RECEIVABLE DEFICIT TOTAL
------------- ----------- ---------
<S> <C> <C> <C>
Balances at
May 10, 1996 (inception)......... $ -- $ -- $ --
Dividend to affiliate.............. -- (3,000) (3,000)
Issuance of common stock........... -- -- 1,942
Issuance of preferred stock........ -- -- 1
Preferred dividend requirements.... -- (29) (29)
Issuance of warrants............... -- -- 100
Net income......................... -- 507 507
------------- ----------- ---------
Balances at December 31, 1996...... -- (2,522) (479)
Issuance of common stock........... -- -- 5,769
Preferred dividend requirements.... -- (113) (113)
Stock subscription receivable from
affiliate........................ (2,000) -- (2,000)
Net income......................... -- 508 508
------------- ----------- ---------
Balances at September 30, 1997..... $ (2,000) $ (2,127) $ 3,685
------------- ----------- ---------
------------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
MAY 10, 1996
(INCEPTION) NINE MONTHS
TO ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................................................... $ 507 $ 508
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization............................................................... 35 243
Provision for doubtful accounts............................................................. 472 1,312
Other....................................................................................... 52 54
Changes in operating assets and liabilities, net of effect of acquisition:
Increase in accounts receivable........................................................... (3,682) (6,385)
Increase in accounts receivable from affiliates........................................... -- (1,629)
Increase in other current assets.......................................................... (507) (35)
(Increase) decrease in other assets....................................................... (346) 91
Increase (decrease) in trade accounts payable and other accrued liabilities............... 786 (328)
Increase in accrued transmission, customer commissions and billing charges................ 2,163 5,211
Increase in accrued expenses payable to affiliates........................................ -- 292
Increase in accrued salaries, wages, and other employee expenses.......................... -- 686
------------- -------------
Net cash provided by (used in) operating activities..................................... (520) 20
------------- -------------
Cash flows from investing activities:
Purchase of WorldCom Assets................................................................... -- (10,117)
Purchases of property and equipment........................................................... (16) (199)
Purchase of IOS............................................................................... (2,000) --
------------- -------------
Net cash used in investing activities................................................... (2,016) (10,316)
------------- -------------
Cash flows from financing activities:
Payments for debt issuance costs.............................................................. (135) (414)
Proceeds from borrowings on long-term debt.................................................... 3,000 7,112
Repayments of borrowings on long-term debt.................................................... -- (1,524)
Proceeds from issuance of stock............................................................... 1,942 3,268
Dividends paid................................................................................ -- (59)
------------- -------------
Net cash provided by financing activities............................................... 4,807 8,383
------------- -------------
Net increase (decrease) in cash and cash equivalents............................................ 2,271 (1,913)
Cash and cash equivalents at beginning of period................................................ -- 2,271
------------- -------------
Cash and cash equivalents at end of period...................................................... $ 2,271 $ 358
------------- -------------
------------- -------------
Supplemental cash flow information:
Interest paid................................................................................... $ 318 $ 331
------------- -------------
------------- -------------
Income taxes paid............................................................................... $ -- $ 4
------------- -------------
------------- -------------
Common Stock issued in acquisition of WorldCom Assets........................................... $ -- $ 500
------------- -------------
------------- -------------
Series B-2 Redeemable Preferred Stock issued in acquisition of WorldCom Assets.................. $ -- $ 11,196
------------- -------------
------------- -------------
Stock subscription receivable from an affiliate for the issuance of Common Stock................ $ -- $ 2,000
------------- -------------
------------- -------------
Issuance of warrants............................................................................ $ 100 $ --
------------- -------------
------------- -------------
Issuance of note payable for purchase of IOS.................................................... $ 1,000 $ --
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
ILD Telecommunications, Inc. ("ILD" or the "Company") is a nationwide
provider of diversified telecommunications services. The Company changed its
name to ILD Telecommunications, Inc. to better reflect the focus on its prepaid
and outsourcing services. Effective January 1, 1997, the Company also changed
its fiscal year end to September 30 from December 31.
The core of ILD's current operations is operator assisted (auto and live)
calls and long-distance services that are processed through its state-of-the-art
call centers and switch-based network. Customers served are generally grouped in
the following categories: hospitality, payphone, correctional, interexchange
carriers ("IXCs"), Regional Bell Operating Companies ("RBOCs") and other
long-distance providers. The Company also offers billing and collections
services to IXCs and other long-distance providers.
In September 1997, the Company acquired certain network assets and customer
contracts (the "WorldCom Assets") from WorldCom, Inc. ("WorldCom") (see Note 3),
making ILD one of the largest independent, facilities-based telecommunications
service providers in the United States. WorldCom is one of the largest single
customers of ILD by virtue of its five-year agreement with ILD to process
specific types of call traffic.
The Company was formed in April 1996 and commenced operations on May 10,
1996 ("inception") when Intellicall, Inc. ("Intellicall") entered into an
agreement with certain investor groups to create ILD. Intellicall transferred
ownership in its wholly-owned subsidiary, Intellicall Operator Services, Inc.
("IOS") and the activities of the Long Distance Resale division of Intellicall,
to the Company in exchange for $2,000,000 cash, a $1,000,000 convertible
subordinated note, and preferred and common stock representing approximately
72.5% of the voting stock of the Company. The consideration was treated as a
dividend to Intellicall and is reflected as a reduction of retained earnings.
The other investor groups collectively purchased $2,000,000 of common stock,
representing approximately 27.5% of the voting stock of the Company, and
purchased $1,000,000 of the Company's subordinated convertible notes. Subsequent
to the acquisition of the WorldCom Assets in September 1997, Intellicall held
stock representing 59.37% of the voting stock of the Company (see Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany accounts and transactions have
been eliminated in consolidation.
FINANCIAL INSTRUMENTS
The fair market value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The Company
believes that the fair values of financial instruments at December 31, 1996 and
September 30, 1997 approximate their recorded values.
BUSINESS AND CREDIT CONCENTRATIONS
In the normal course of business, the Company extends unsecured credit to
its customers. Management has provided an allowance for doubtful accounts to
provide for amounts which may eventually become uncollectible and to provide for
any disputed charges. One customer accounted for approximately 31% and 27% of
total consolidated revenues in 1996 and 1997, respectively.
F-15
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and investments with
purchased original maturities of three months or less. The Company has
approximately $1,082,000 of cash and cash equivalents in excess of FDIC insured
limits at September 30, 1997. The Company has not experienced any losses on its
cash and cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and amortization for
financial statement purposes are provided by the straight-line method over the
estimated useful lives of the depreciable assets. Maintenance and repairs are
expensed as incurred while replacements and betterments are capitalized.
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired reflects the acquired cost of
goodwill, customer contracts, other intangibles and related items. These items
are being amortized by the straight-line method over their estimated useful
lives, ranging from 6 to 25 years. In accordance with the provisions of
Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
("FAS 121"), it is the Company's policy to review on an annual basis the net
realizable value of its intangible assets through an assessment of the estimated
future cash flows related to such assets. In the event that total assets
(including property and equipment) are found to be stated at amounts in excess
of estimated future cash flows, the assets are adjusted for impairment to a
level commensurate with a discounted cash flow analysis of the underlying
assets. Based on its most recent analysis, the Company believes no impairment of
such assets existed at September 30, 1997.
DEBT ISSUANCE COSTS
The Company defers costs incurred directly in connection with the issuance
of debt obligations and charges such costs to interest expense on a
straight-line basis over the terms of the respective debt agreements.
REVENUE RECOGNITION
The Company recognizes revenue as services are performed based on end user
usage, net of an estimate for uncollectible revenues. The Company sells its
services to its customers primarily on a measured time basis. The Company
recognizes revenue from its billing and collections services upon processing
records that are to be billed and collected by the Company.
CUSTOMER COMMISSIONS
Customer commissions consist of monies owed to customers (primarily payphone
owners and hospitality facilities) for calls processed and billed. Payments to
customers are generally made within thirty days of the end of the processing
month.
F-16
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, Statement of Financial Accounting Standards No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("FAS 123"), was issued. This statement
requires the fair value of stock options and other stock-based compensation
issued to employees to either be included as compensation expense in the income
statement, or the pro forma effect on net income and earnings per share of such
compensation expense to be disclosed in the footnotes to the Company's financial
statements commencing with the Company's 1996 fiscal year. The Company has
adopted FAS 123 on a disclosure basis only. The Company has elected to continue
to account for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board No. 25 ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES ("APB 25") and related Interpretations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
FEDERAL INCOME TAXES
In accordance with Statement of Financial Accounting Standards No. 109,
ACCOUNTING FOR INCOME TAXES ("FAS 109"), deferred income taxes are calculated
utilizing an asset and liability approach whereby deferred taxes are provided
for tax effects of basis differences for assets and liabilities arising from
differing treatments for financial and income tax reporting purposes. Valuation
allowances against deferred tax assets are provided where appropriate.
EARNINGS PER SHARE
In February 1997, Statement of Financial Accounting Standards No. 128,
EARNINGS PER SHARE, ("FAS 128") was issued. The Company has adopted FAS 128,
which establishes standards for computing and presenting earnings per share
("EPS"), for the nine months ended September 30, 1997. This statement requires
dual presentation of basic and diluted EPS on the face of the income statement
for entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation. Basic EPS excludes the effect of
potentially dilutive securities while diluted EPS reflects the potential
dilution that would occur if securities or other contracts to issue Common Stock
were exercised, converted into or resulted in the issuance of Common Stock. FAS
128 requires restatement of EPS for prior periods. Accordingly, EPS data for all
periods presented has been restated to reflect the computation of EPS in
accordance with the provisions of FAS 128.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards No. 130, REPORTING
COMPREHENSIVE INCOME ("FAS 130"), was issued and is effective for fiscal years
beginning after December 15, 1997. FAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of
F-17
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
general-purpose financial statements. The Company believes that the adoption of
this standard will not have a material effect on the Company's consolidated
results of operations or financial position.
In June 1997, Statement of Financial Accounting Standards No. 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("FAS 131"),
was issued and is effective for fiscal years beginning after December 15, 1997.
FAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements. The
Company believes that the adoption of this standard will not have a material
effect on the Company's consolidated results of operations or financial
position.
3. ACQUISITION OF WORLDCOM ASSETS
On September 1, 1997, the Company acquired certain network assets and
customer contracts from Worldcom, Inc. (the "WorldCom Assets"), headquartered in
San Antonio, Texas, for a total consideration of $21,392,040 (the
"Acquisition"). The assets acquired included all payphone, hospitality and
corrections customer contracts, an operator services agreement with another
service provider, associated billing and collections assets, leases on operator
call centers and office facilities, all intangibles including customer lists,
trade secrets, etc., miscellaneous equipment incident to the operations, and two
DEX switches which will be integrated into the Company's network.
The purchase price of $21,392,040 was paid (i) $9,696,020 in cash, (ii)
4,587 shares of the Company's Common Stock valued at $500,000, and (iii) 111,960
shares of the Company's Series B-2 Redeemable Preferred Stock valued at
$11,196,020. The cash portion of the purchase price was funded by the $5,000,000
term loan facility from NationsBank, N.A. ("NationsBank"), $1,221,000 from the
NationsBank revolving credit facility (see Note 6), $1,600,000 from the sale of
the Company's Common Stock, and $1,875,020 from operating cash. The Company
included $421,000 of costs related to the Acquisition in excess of cost over net
assets acquired.
The Acquisition was accounted for as a purchase whereby the excess purchase
price over the net assets acquired has been recorded based upon the fair market
values of assets acquired and liabilities assumed. This allocation was based on
preliminary estimates and may be revised at a later date. The Company's
consolidated statement of income includes the results of the operations of the
WorldCom Division since September 1, 1997.
The approximate fair value of property and equipment acquired and current
and long-term liabilities assumed at the date of the acquisition was $5,500,000,
$919,000 and $265,000, respectively. A summary of the WorldCom Assets excess of
cost over net assets acquired for financial reporting purposes is as follows (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997 LIFE
------------- ---------
<S> <C> <C>
Goodwill..................................................................... $ 14,983 25 years
Customer contracts........................................................... 2,510 6 years
-------------
17,493
Accumulated amortization..................................................... (83)
-------------
$ 17,410
-------------
-------------
</TABLE>
F-18
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION OF WORLDCOM ASSETS (CONTINUED)
The following unaudited pro forma combined results of operations of the
Company assume that the Acquisition was completed on May 10, 1996 (inception).
These pro forma amounts represent historical operating results of the WorldCom
Assets combined with those of the Company with appropriate adjustments which
give effect to interest expense and depreciation and amortization expense. These
pro forma amounts are not necessarily indicative of consolidated operating
results which would have been included in the operations of the Company during
the periods presented, or which may result in the future, because these amounts
do not reflect full transmission and switched service cost optimization, and the
synergistic effect on operating, selling, general and administrative expenses
nor do the amounts reflect any higher costs associated with unanticipated
integration or other organizational activities the Company may be forced to
undertake as a result of the Acquisition.
<TABLE>
<CAPTION>
PERIOD FROM
MAY 10, 1996
(INCEPTION) NINE MONTHS
TO ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Revenues.................................................................. $ 80,104 $ 82,225
Net income (loss) applicable to common stockholders....................... $ (716) $ 193
Net income (loss) per share applicable to common stockholders:
Basic................................................................... $ (55.84) $ 10.21
------------ -------------
------------ -------------
Diluted................................................................. $ (55.84) $ 1.46
------------ -------------
------------ -------------
Shares used in computing net income (loss) per share applicable to common
stockholders:
Basic................................................................... 12,823 18,898
------------ -------------
------------ -------------
Diluted................................................................. 12,823 132,618
------------ -------------
------------ -------------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997 LIFE
--------------- ------------- ---------
<S> <C> <C> <C>
Switching and other network equipment........................... $ -- $ 2,017 5 years
Computer equipment and software................................. 8 2,172 5 years
Furniture and fixtures.......................................... 8 1,526 5 years
----- ------
16 5,715
Accumulated depreciation and amortization....................... (2) (112)
----- ------
$ 14 $ 5,603
----- ------
----- ------
</TABLE>
Total depreciation and amortization expense related to property and
equipment charged to income for the period from May 10, 1996 (inception) to
December 31, 1996 and the nine months ended September 30, 1997 was $1,636 and
$110,271, respectively.
F-19
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACCRUED TRANSMISSION, CUSTOMER COMMISSIONS AND BILLING CHARGES
Accrued transmission, customer commissions and billing charges consist of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Transmission expenses..................................................... $ 656 $ 2,035
Customer commissions payable.............................................. 842 3,380
Billing charges........................................................... 665 1,959
------ ------
$ 2,163 $ 7,374
------ ------
------ ------
</TABLE>
6. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- -------------
<S> <C> <C>
Senior secured notes to investors due on May 10, 2001 with interest
payable monthly at 13.5% per annum...................................... $ 2,000 $ 2,000
Convertible subordinated notes to investors due on May 10, 2001 with
interest payable quarterly at 10% per annum............................. 2,000 2,000
Senior secured term note payable to a bank................................ -- 5,000
Senior secured revolving credit facility payable to a bank................ -- 564
Other..................................................................... -- 265
------ -------------
4,000 9,829
Less current maturities................................................... -- (1,400)
Less unamortized debt discount............................................ (78) (54)
------ -------------
Long-term portion......................................................... $ 3,922 $ 8,375
------ -------------
------ -------------
</TABLE>
In 1996, $2,000,000 of senior secured notes were issued with a Common Stock
purchase warrant exercisable into 7,239 shares of Common Stock at $0.01 per
share. In 1997, these notes were subordinated to the senior secured term loan
and senior secured revolving credit facility. Under the terms of the senior
secured notes, the Company may not pay dividends without the prior written
consent of the lenders, although dividends may be paid to the holders of the
Series B Convertible Preferred Stock as long as the Company is not in default
under the notes.
The $2,000,000 of convertible subordinated notes are convertible into Common
Stock at the rate of one share of Common Stock for each $90 of principal then
due the holder.
On August 29, 1997, the Company obtained a $5,000,000 senior secured term
loan facility and a $20,000,000 senior secured revolving credit facility
(subject to borrowing availability) from NationsBank to facilitate the
acquisition of the WorldCom Assets and to provide working capital for operations
and future acquisitions. At September 30, 1997, the entire $5,000,000 senior
secured term loan facility was outstanding and $564,000 of the $20,000,000
senior secured revolving credit facility was outstanding. Unused borrowing
F-20
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM OBLIGATIONS (CONTINUED)
availability under the senior secured revolving credit facility was
approximately $6,341,000 at September 30, 1997. The borrowings under these
credit facilities are secured by principally all of the assets of the Company.
The senior secured term loan facility bears interest at prime plus 2.5%
(11.0% at September 30, 1997) per annum and is payable monthly. Principal
payments are due in one payment of $500,000 by March 31, 1998, eight quarterly
installments of $300,000 beginning March 31, 1998, and five quarterly
installments of $420,000 beginning March 31, 1999.
The senior secured revolving credit facility has a maximum availability of
$20,000,000, with borrowings based on 85% of eligible receivables minus certain
reserves. This facility matures in February 2001 and automatically renews for
successive one-year periods up to a maximum of 20 years unless either party
elects to terminate by giving written notice to the other not less than 60 days
prior to the termination date. Borrowings under this facility bear interest at a
floating rate from the bank's prime rate to .5% above the bank's prime rate (9%
at September 30, 1997) depending upon the ratio of senior funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA"). At
the Company's option, the interest rate on additional advances may be fixed at a
floating rate ranging from 2.25% to 2.75% above the London Interbank Offered
Rate ("LIBOR"), subject to certain minimum amounts and duration of borrowings,
which is also dependent upon the ratio of senior funded debt to EBITDA. There
were no LIBOR borrowings outstanding at September 30, 1997.
The Company was required to pay a $300,000 closing fee for the credit
facilities. On the closing date and each subsequent anniversary date, the
Company is required to pay a $25,000 administration fee. Additionally, on a
monthly basis, the Company is required to pay an unused line fee of one-quarter
of one percent (0.25%) per annum of the difference between $20,000,000 and the
average outstanding borrowings under the senior secured revolving credit
facility.
The credit facilities agreement contains covenants which, among other
restrictions, (i) require the Company to satisfy certain financial ratios
related to senior funded debt to EBITDA, minimum net worth and minimum fixed
charge coverage; (ii) limit the Company's ability to incur indebtedness; (iii)
limit investments and capital expenditures; (iv) limit operating leases; (v)
limit mergers, consolidations or sales of assets; (vi) limit liens; (vii)
require the Company to maintain minimum availability under the revolving credit
facility of not less than $500,000; (viii) require the Company to maintain a
positive net income in the 1997 fiscal year; and (ix) prohibits the payment of
dividends without the prior written consent of the lender when dividends paid,
together with interest paid on the convertible subordinated debt, exceed
$1,500,000 in the aggregate in any fiscal year. Effective December 15, 1997, the
credit facilities agreement was amended to increase the restriction on the
payment of dividends and interest to $1,900,000. The Company is in compliance
with all debt covenant requirements at September 30, 1997. The aggregate
maturities of long-term obligations over the next five years are (in thousands)
$1,400, $1,465, $1,560, $5,404 and $0, respectively.
7. CAPITAL STOCK
Each share of the Series A Convertible Preferred Stock has a stated value of
$72.69 and entitles the holder to convert it into one share of Common Stock.
Voting rights are the same as for common stockholders, no preferences exist
except over Common Stock and holders are not entitled to receive dividends.
F-21
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. CAPITAL STOCK (CONTINUED)
Each share of the Series B Convertible Preferred Stock has a stated value of
$100 and entitles the holder to receive an annual cumulative dividend of $9,
payable quarterly. The Company has the right to call the Series B Convertible
Preferred Stock at its discretion and if not called within three years of
issuance, the shares are convertible at the option of the holder into Common
Stock at the rate of $90 per common share. The Series B Convertible Preferred
Stock has a put provision providing the holder the right to force repurchase at
the stated value plus any accrued but unpaid dividends if the Company raises at
least $5,000,000 through either a debt or equity public offering. Series B
Convertible Preferred Stock is nonvoting, but has preference over Common Stock
and Series A Convertible Preferred Stock with respect to liquidation and
dividends rights.
Each share of the Series B-2 Redeemable Preferred Stock has a stated value
of $100 and entitles the holder to receive an annual cumulative dividend of
$8.50, payable semi-annually. Subject to certain restrictions in loan
agreements, each holder has the right, commencing on the fifth anniversary date
after issuance, to require the Company to purchase the holder's shares at the
stated value of $100 per share, making it mandatorily redeemable. The Company,
at its discretion, has the right to purchase the holder's shares at the stated
value of $100 per share for all shares not previously purchased. The Series B-2
Redeemable Preferred Stock is nonvoting, but has preference over Common Stock
and Series A Convertible Preferred Stock with respect to liquidation and
dividend rights.
In 1996, the Company issued the holders of the convertible subordinated
notes a Common Stock purchase warrant exercisable into 7,239 shares of Common
Stock at $.01 per share. The Company also issued to a stockholder a common stock
purchase warrant exercisable into 6,000 shares of Common Stock at $90 per share.
The stock subscription receivable at September 30, 1997 is due from
Intellicall and represents the purchase price paid for 18,349 shares of Common
Stock at $109 per share.
8. STOCK OPTIONS
The Company maintains an Incentive Stock Option ("ISO") Plan and a
Nonincentive Stock Option ("NSO") Plan under which 49,500 options to purchase
shares of Common Stock may be granted to directors, officers and employees.
Options under the plans have a five-year term. Options granted in 1996 vested
immediately. Options granted in 1997 vest ratably over a three-year period. The
exercise price of the options granted under the plans was not less than the
market value of the stock on the dates the options were granted. Accordingly, no
compensation expense is recognized by the Company with respect to such grants.
Pro forma information regarding net income is required by FAS 123 and has
been determined as if the Company had accounted for its directors, officers and
employee stock options under the fair value method of that statement. The fair
value of each option grant is estimated on the date of grant using the Black-
Scholes option pricing model with the following weighted average assumptions
used for grants in 1996 and 1997, respectively: no dividend yield; expected
volatility of 39.1% and 43.8%; risk-free interest rates of 6.4% and 6.2%; and
expected lives of five years.
F-22
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM MAY 10, 1996
(INCEPTION) TO NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income applicable to common stockholders........ $ 478 $ 244 $ 395 $ 255
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per share applicable to common
stockholders:
Basic............................................. $ 58.09 $ 29.66 $ 27.57 $ 17.85
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted........................................... $ 4.25 $ 2.17 $ 3.08 $ 2.00
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in computing net income per share
applicable to common stockholders:
Basic............................................. 8,236 8,236 14,311 14,311
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted........................................... 112,640 112,640 128,031 128,031
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts as FAS 123 does not consider additional awards
anticipated in the future.
A summary of options granted and outstanding under the plans is summarized
below:
<TABLE>
<CAPTION>
PERIOD FROM MAY 10, 1996
(INCEPTION) TO NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------------ ------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of period............................. -- $ -- 21,675 $ 24.20
Granted...................................................... 21,675 24.20 14,500 96.55
Exercised.................................................... -- -- (775) 24.20
Forfeited.................................................... -- -- -- --
----------- ----------- ----------- -----------
Outstanding at end of period................................... 21,675 $ 24.20 35,400 $ 53.84
----------- -----------
----------- -----------
Exercisable at end of period................................... 21,675 $ 24.20 20,900 $ 24.20
----------- -----------
----------- -----------
Weighted average fair value of options granted during period... $ 10.80 $ 45.71
</TABLE>
F-23
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS (CONTINUED)
The following table summarizes information about options outstanding under
the plans at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ------------------------
WEIGHTED WEIGHTED
WEIGHTED AVERAGE AVERAGE AVERAGE
OPTIONS REMAINING EXERCISE OPTIONS EXERCISE
RANGE OF PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ------------------------------------------ ----------- ----------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 24.20 20,900 3.6 $ 24.20 20,900 $ 24.20
$ 90.00 - 109.00 14,500 4.8 $ 96.55 -- --
</TABLE>
9. INCOME TAXES
The components of the income tax provision were (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
MAY 10, 1996 NINE MONTHS
(INCEPTION) TO ENDED
DECEMBER 31 SEPTEMBER 30,
1996 1997
--------------- ---------------
<S> <C> <C>
Current provision:
Federal................................................................. $ -- $ 163
State................................................................... -- 32
----- -----
-- 195
Deferred (benefit):
Federal................................................................. -- (39)
State................................................................... -- (5)
----- -----
-- (44)
----- -----
Provision for income taxes................................................ $ -- $ 151
----- -----
----- -----
</TABLE>
The following is a reconciliation of the provision for income taxes at the
statutory federal income tax rate to the income taxes reflected in the
consolidated statements of income (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
MAY 10, 1996
(INCEPTION) NINE MONTHS
TO ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- ---------------
<S> <C> <C>
Income tax expense at the statutory rate (34%)............................ $ 172 $ 224
Valuation allowance....................................................... (172) (133)
Permanent differences..................................................... -- 45
State income taxes, net of federal income tax benefit..................... -- 7
Other..................................................................... -- 8
----- -----
Provision for income taxes................................................ $ -- $ 151
----- -----
----- -----
</TABLE>
F-24
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
The components of the net deferred tax asset were (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------- ---------------
<S> <C> <C>
Deferred tax assets:
Bad debt reserves....................................................... $ 13 $ 92
Other reserves and accruals............................................. 12 9
Depreciation and amortization........................................... 32 --
Net operating loss carryforwards........................................ 76 --
----- -----
Total gross deferred tax assets....................................... 133 101
----- -----
Deferred tax liabilities:
Depreciation and amortization........................................... -- 57
----- -----
Total gross deferred tax liabilities.................................... -- 57
----- -----
Less valuation allowance.................................................. (133) --
----- -----
Net deferred tax assets................................................... $ -- $ 44
----- -----
----- -----
</TABLE>
At December 31, 1996, there was a valuation allowance on the Company's net
deferred tax assets arising from the then uncertainty regarding future
realization. In 1997, the valuation allowance was reversed due to the subsequent
realization of the assets.
10. EARNINGS PER SHARE
Basic net income per share has been computed in accordance with FAS 128
using the weighted average number of common shares outstanding. The provision
and disclosure requirements for FAS 128 were required to be adopted for interim
and annual periods ending after December 15, 1997, with restatement of EPS for
all prior periods.
Diluted net income per share gives effect to all dilutive potential common
shares that were outstanding during the periods.
F-25
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EARNINGS PER SHARE (CONTINUED)
The following table sets forth a reconciliation of the numerator and
denominator used in the basic and diluted EPS computation for the period from
May 10, 1996 (inception) to December 31, 1996 and the nine months ended
September 30, 1997:
<TABLE>
<CAPTION>
PERIOD FROM
MAY 10, 1996
(INCEPTION) NINE MONTHS
TO ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Net income applicable to common stockholders........................................ $ 478 $ 395
------------ -------------
------------ -------------
Basic:
Weighted average number of shares outstanding..................................... 1,000 7,072
Weighted average shares from assumed exercise of warrants issued for nominal
consideration, net of shares assumed to be repurchased with exercise proceeds... 7,236 7,239
------------ -------------
Weighted average number of shares outstanding used in the basic net income per
share applicable to common stockholders calculation............................. 8,236 14,311
------------ -------------
------------ -------------
Diluted:
Weighted average number of shares outstanding used in the basic net income per
share applicable to common stockholders calculation............................. 8,236 14,311
Weighted average shares from assumed exercise of dilutive stock options and
warrants, net of shares assumed to be repurchased with exercise proceeds........ 4,404 13,720
Assumed conversion of Series A Preferred Stock at beginning of period............. 100,000 100,000
------------ -------------
Weighted average number of shares outstanding used in the diluted net income per
share applicable to common stockholders calculation............................. 112,640 128,031
------------ -------------
------------ -------------
</TABLE>
In accordance with FAS 128, options and warrants to purchase 34,914 and
49,414 shares, respectively, of Common Stock were included or excluded in the
diluted EPS calculation when they were dilutive or anti-dilutive, as applicable,
for the periods presented. Shares to be issued upon the conversion of the
$2,000,000 subordinated debt and the Series B Convertible Preferred Stock were
excluded in the computation of diluted EPS for both periods, as they were
anti-dilutive.
11. BENEFIT PLAN
The Company adopted a 401(k) Retirement Plan (the "401(k) Plan") effective
September 1, 1997. Employees may elect to reduce their compensation and
contribute to the 401(k) Plan provided they have completed six consecutive
months of employment and reached the age of twenty and one-half. Each employee
may defer up to 15% of their salary not to exceed the limit allowable by law in
any one year. The Company matches up to 100% of the first 3% of the employee's
annual compensation contributed to the 401(k) Plan. Vesting is 25% per year of
service and the employee is credited with a year of service if they have
completed at least 1,000 hours of service. Distributions from the 401(k) Plan
are not permitted before the age of 65 except in the event of death, disability,
or termination of employment, except in the case of early retirement.
F-26
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. LEASES
The Company leases office space and certain equipment under operating
leases. Future minimum rental commitments under noncancelable operating leases
are (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998................................................ $ 886
1999................................................ 749
2000................................................ 541
2001................................................ 329
2002................................................ 253
Thereafter.......................................... 367
---------
$ 3,125
---------
---------
</TABLE>
Total operating lease expense was $11,000 for the period from May 10, 1996
(inception) to December 31, 1996 and $66,247 for the nine months ended September
30, 1997.
13. COMMITMENTS AND CONTINGENCIES
The Company is included in various claims and legal actions arising in the
normal course of business. Management believes it is unlikely that the final
outcome of any of the claims or proceedings to which the Company is a party
would have a material adverse effect on the Company's financial position, or
results of operations or cash flows.
In October 1996, U.S. Long Distance, Inc. ("USLDI") filed a First Amended
Complaint naming the Company as additional defendants in a lawsuit against
Phonetel Technologies, Inc. ("PhoneTel"). The First Amended Complaint alleges
tortious interference and civil conspiracy in connection with an Operator
Service Subscriber Agreement between USLDI and PhoneTel.
In April 1997, USLDI filed a Second Amended Complaint against the Company.
The complaint seeks actual damages of $4.0 million, exemplary damages,
attorney's fees and interest for the Company's alleged tortious interference of
USLDI's existing and prospective contractual relationships with PhoneTel. The
Second Amended Complaint alleges the Company and its subsidiary, IOS, interfered
with USLDI's existing contractual relationship with PhoneTel, another defendant,
when PhoneTel executed an operator services agreement with the Company and its
subsidiary. The Company believes the suit has no merit and intends to vigorously
contest the allegations contained in the First and Second Amended Complaints.
F-27
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. CHANGE IN FISCAL YEAR END
Effective January 1, 1997, the Company changed its fiscal year end from
December 31 to September 30. The following table discloses certain unaudited
financial information for the period from May 10, 1996 (inception) to September
30, 1996 (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM MAY
10, 1996
(INCEPTION) TO
SEPTEMBER 30, 1996
------------------
<S> <C>
(UNAUDITED)
Total revenues................................................................................ $ 13,243
Gross profit.................................................................................. 1,308
Provision for income taxes.................................................................... --
Net income.................................................................................... 420
Preferred dividend requirement................................................................ 18
Net income applicable to common stockholders.................................................. 402
-------
Net income per share applicable to common stockholders:
Basic....................................................................................... $ 48.80
-------
-------
Diluted..................................................................................... $ 3.61
-------
-------
Shares used in computing net income per share applicable to common stockholders:
Basic....................................................................................... 8,235
-------
-------
Diluted..................................................................................... 137,893
-------
-------
</TABLE>
15. RELATED PARTY TRANSACTIONS
The Company had an agreement with Intellicall until May 1997 whereby
Intellicall would provide management and administrative services to the Company.
The cost of such services was based on actual costs incurred by Intellicall. The
types of services provided included, but were not limited to, such functions as
consulting, legal, accounting, human resources, senior management support,
billing and collections, and MIS support. Charges for consulting, accounting and
human resources were paid monthly in the total amount of $101,000 for the period
from May 10, 1996 (inception) to December 31, 1996 and $51,918 for the nine
months ended September 30, 1997. Legal services were billed based on the actual
cost incurred by Intellicall. The Company believes that all fees paid for such
services during the periods were equivalent to those that would be paid under an
arms-length transaction. The Company purchases switched transmission services
from Intellicall based on Intellicall's contract with a third party long
distance provider. The amounts purchased for the period from May 10, 1996
(inception) to December 31, 1996 and for the nine months ended September 30,
1997 under this agreement were approximately $3,400,000 and $3,300,000,
respectively. At September 30, 1997, the Company owed Intellicall $144,000,
primarily comprised of fees related to the Acquisition (see Note 3).
WorldCom, a switched service wholesale provider to the Company, owns 4,587
shares of the Common Stock and 111,960 shares of the Series B-2 Redeemable
Preferred Stock (see Note 3). The Company recorded revenues from WorldCom of
approximately $711,000 for the nine months ended September 30, 1997 for services
provided by the Company. At September 30, 1997, the Company owed WorldCom
approximately $1,091,000 for switched transmission services and various advances
and commissions paid by WorldCom. WorldCom owed ILD approximately $1,629,000 for
vacation earned by employees who
F-28
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. RELATED PARTY TRANSACTIONS (CONTINUED)
became ILD employees as stated in the WorldCom Asset Purchase Agreement (the
"Agreement"), a credit for line costs as stated in the Agreement, commissions
paid by ILD for WorldCom, a portion of a service contract as stated in the
Agreement, billing for nonrelated party customers, fees charged for billing and
collection services, and a percentage of international and casual traffic as
stated in the Agreement.
16. SUBSEQUENT EVENTS
Effective December 15, 1997, the Company acquired all of the outstanding
common stock of Interlink Telecommunications, Inc. ("Interlink"), a switch-based
reseller of long distance services and provider of enhanced services including
operator services, prepaid debit cards and prepaid local service. Interlink is
located in Atlanta, Georgia and principally serves the southeastern United
States.
The acquisition of the Interlink common stock was accomplished by payment of
the following consideration: (i) $2,000,000 in cash, (ii) $2,700,000 in the form
of a promissory note payable due $1,800,000 on December 31, 1997 and $900,000 on
March 31, 1998 bearing no interest, (iii) $1,000,000 in the form of a promissory
note payable due $250,000 on a quarterly basis commencing September 30, 1998
with interest at 9% per annum also payable quarterly, (iv) 16,117 shares of
Common Stock, (v) 6,667 shares of Series B-3 Redeemable Preferred Stock which is
mandatorily redeemable, and (vi) a five year consulting agreement for $850,000
payable $425,000 on June 1, 1998 and $425,000 on June 1, 1999. Each share of the
Series B-3 Redeemable Preferred Stock has a stated value of $300 and entitles
the holder to receive an annual cumulative dividend of 6%, payable quarterly.
Subject to certain restrictions in loan agreements, each holder has the right,
commencing on the fifth anniversary date after issuance, to require the Company
to purchase the holder's shares at the stated value, making it mandatorily
redeemable. The note payment of $1,800,000 due on December 31, 1997 was paid on
January 2, 1998. The acquisition will be accounted for as a purchase whereby the
excess purchase price over net assets acquired will be recorded based upon the
fair values of assets acquired and liabilities assumed.
Effective January 1, 1998, the Company acquired the prepaid service
operations of Intellicall by payment of the following consideration: (i)
$2,000,000 in cash, (ii) cancellation of a note in the original principal amount
of $2,000,000, reflected as a stock subscription receivable at September 30,
1997 which had been recorded upon the sale of 18,349 shares of Common Stock at
$109 per share, and reflected as a reduction to retained earnings, and (iii)
$1,000,000 in the form of a promissory note due no later than December 31, 1998.
The cash portion of the purchase price was funded from the NationsBank revolving
credit facility. The acquisition of the prepaid service operations of
Intellicall will be accounted for as a purchase whereby the excess purchase
price over the net assets acquired will be recorded based upon the fair market
values of assets acquired and liabilities assumed.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders
Interlink Telecommunications, Inc.
We have audited the accompanying balance sheet of Interlink
Telecommunications, Inc. as of September 30, 1997 and the related statements of
operations and accumulated deficit and of cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Interlink
Telecommunications, Inc. as of September 30, 1997 and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
SMITH & HOWARD, P.C.
ATLANTA, GEORGIA
NOVEMBER 7, 1997, EXCEPT FOR NOTE G AS
TO WHICH THE DATE IS DECEMBER 15, 1997
F-30
<PAGE>
INTERLINK TELECOMMUNICATIONS, INC.
BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS
Current Assets
Accounts receivable, net of allowance for doubtful accounts of $143,746....... $ 732,195
Inventories................................................................... 32,301
---------
Total Current Assets........................................................ 764,496
Property and Equipment, Net (Notes A, C, and F)................................. 568,913
Asset Held Under Capital Lease, Net (Note D).................................... 261,749
Deposits........................................................................ 10,000
---------
$1,605,158
---------
---------
LIABILITIES AND NET CAPITAL DEFICIENCY
Current Liabilities.............................................................
Bank overdraft, net (Note B).................................................. $ 73,114
Accounts payable.............................................................. 1,084,845
Accrued commissions........................................................... 193,379
Other accrued expenses........................................................ 51,698
Deferred revenue.............................................................. 237,576
Long-term obligations, current portion
Notes payable (Note C)...................................................... 15,100
Capital leases (Note D)..................................................... 91,920
---------
Total Current Liabilities................................................... 1,747,632
Long-Term Obligations, Net of Current Portion
Notes payable (Note C)...................................................... 39,538
Capital lease (Note D)...................................................... 15,693
---------
Total long-term obligations................................................. 55,231
Commitments (Note E)
Net Capital Deficiency
Common stock, no par value, 500 shares authorized, issued and outstanding..... 2,250
Additional paid in capital (Note F)........................................... 140,000
Accumulated deficit........................................................... (339,955)
---------
Net capital deficiency...................................................... (197,705)
---------
$1,605,158
---------
---------
</TABLE>
The accompany notes are an integral part of these financial statements.
F-31
<PAGE>
INTERLINK TELECOMMUNICATIONS, INC.
STATEMENT OF OPERATIONS AND ACCUMULATED DEFICIT
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C>
Revenues............................................................................................ $8,294,050
Costs of Revenues................................................................................... 4,331,344
----------
Gross Profit.................................................................................... 3,962,706
Operating Expenses
Commissions..................................................................................... 1,804,562
General and administrative...................................................................... 1,780,802
Depreciation.................................................................................... 189,007
Bad debts....................................................................................... 175,899
----------
3,950,270
----------
Income From Operations.......................................................................... 12,436
Other Expense
Interest expense................................................................................ 25,928
----------
25,928
----------
Net Loss........................................................................................ (13,492)
Accumulated Deficit at Beginning of Year............................................................ (149,812)
Distributions to Stockholders....................................................................... (176,651)
----------
Accumulated Deficit at End of Year.................................................................. $ (339,955)
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
INTERLINK TELECOMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C>
Cash Flow from Operating Activities
Net Loss....................................................................... $ (13,492)
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation............................................................... 189,007
Bad debts provision........................................................ 175,899
Increase in accounts receivable............................................ (641,204)
Increase in inventories.................................................... (24,177)
Increase in deposits....................................................... (10,000)
Increase in bank overdraft and accounts payable............................ 695,303
Increase in accrued commissions............................................ 3,862
Increase in other accrued expenses......................................... 27,962
Increase in deferred revenue............................................... 237,576
---------
654,228
---------
Net Cash Provided by Operating Activities.................................... 640,736
---------
Cash Flow from Investing Activities
Purchases of property and equipment............................................ (207,097)
---------
Net Cash Required by Investing Activities.................................... (207,097)
---------
Cash Flow from Financing Activities
Principal payments on notes payable............................................ (24,244)
Principal payments on capital leases........................................... (101,418)
Repayment of advances from stockholders........................................ (131,326)
Distributions to stockholders.................................................. (176,651)
---------
Net Cash Required by Financing Activities.................................... (433,639)
---------
Net Increase in Cash............................................................. --
Cash at Beginning of Year........................................................ --
---------
Cash at End of Year.............................................................. $ --
---------
---------
Schedule of Non-Cash Investing and Financing Activities:
During 1997, the Company financed in part the acquisition of a vehicle through
the issuance of a note payable to a financial institution in the amount of
$49,681. Further, a capital contribution in the form of equipment valued at
$140,000 was made by the Company's majority stockholder as discussed in Note F.
Interest Paid.................................................................... $ 21,487
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
INTERLINK TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Interlink Telecommunications, Inc. (the Company) is a publicly regulated,
fully certified long distance carrier, offering 1+ (direct dial) service to both
residential and business customers throughout the southeastern United States.
The Company also offers enhanced services such as 0+ (operator assisted) long
distance and prepaid calling card sales, including an over-the-counter product
and vended calling cards, all of which are rechargeable. During 1997, Interlink
became a local service carrier, providing "dial tone" to residential, business
and pay phone customers.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and other
disclosures at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
INVENTORIES
Inventories consist of phone cards on hand and located in various vending
machines and are valued at cost on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and consists of the following at
September 30, 1997:
<TABLE>
<S> <C>
Machinery and equipment......................................... $ 863,193
Furniture and fixtures.......................................... 39,382
Vehicles........................................................ 97,793
---------
1,000,368
Accumulated depreciation........................................ (431,455)
---------
$ 568,913
---------
---------
</TABLE>
Depreciation is provided for using the straight-line method over the
estimated useful lives of the assets which are 3-5 years for machinery and
equipment, 7 years for furniture and fixtures and 5 years for vehicles.
INCOME TAXES
The Company elected to be taxed under the S Corporation provisions of the
Internal Revenue Code of 1986. Under these provisions, the stockholders include
their respective shares of the Company's net income or loss in their individual
income tax returns. Accordingly, no liability or provision for income taxes is
reported in the accompanying financial statements.
F-34
<PAGE>
INTERLINK TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED SEPTEMBER 30, 1997
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The fair value of financial instruments is determined by reference to
various market data and other valuation techniques as appropriate. The Company
believes that the fair values of financial instruments approximate their
recorded costs.
BUSINESS AND CREDIT CONCENTRATIONS
In the normal course of business, the Company extends unsecured credit to
its customers. Management has provided an allowance for doubtful accounts to
provide for amounts which may eventually become uncollectible and to provide for
any disputed charges.
REVENUE RECOGNITION
Revenues relating to vending machine sales of phone cards are recognized
upon customer purchase of the card, as it has been the Company's experience that
the majority of actual card usage occurs less than 30 days after purchase. Long
distance service revenue is recognized when a call is placed, and monthly local
service revenue is deferred and recognized as calling services are used.
NOTE B--BANK OVERDRAFT, NET
The bank overdraft, net, consists of the following at September 30, 1997:
<TABLE>
<S> <C>
Operating checking account balance per financial institution..... $ 95,684
Outstanding checks............................................... (314,783)
Certificate of deposit........................................... 5,000
Cash in vending machines at September 30, 1997................... 140,985
---------
$ (73,114)
---------
---------
</TABLE>
NOTE C--NOTES PAYABLE
Notes payable consist of the following at September 30, 1997:
<TABLE>
<S> <C>
Installment note payable to a bank, payable in monthly
installments of $1,443 including principal and interest at 10.0%
through March 1998; secured by property owned by the Company's
stockholders..................................................... $ 8,354
Installment note payable to a bank, payable in monthly
installments of $928 including principal and interest at 10.15%
through February 2003; secured by a vehicle owned by the
Company.......................................................... 46,284
---------
54,638
Less short-term portion........................................... (15,100)
---------
$ 39,538
---------
---------
</TABLE>
F-35
<PAGE>
INTERLINK TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED SEPTEMBER 30, 1997
NOTE C--NOTES PAYABLE
Principal maturities of notes payable for the years ending September 30 are
as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 15,100
1999.............................................................. 7,464
2000.............................................................. 8,258
2001.............................................................. 9,136
2002.............................................................. 10,108
Thereafter........................................................ 4,572
---------
$ 54,638
---------
---------
</TABLE>
NOTE D--CAPITAL LEASE
The Company leases equipment under an agreement which includes a bargain
purchase option at the end of the lease. The lease is accounted for as a capital
lease. Asset held under capital lease at September 30, 1997 consists of the
following:
<TABLE>
<CAPTION>
Cost............................................................. $ 389,384
<S> <C>
Accumulated amortization......................................... (127,635)
---------
$ 261,749
---------
---------
</TABLE>
Future minimum annual lease payments under the capital lease for fiscal
years ending September 30 and the present value of future minimum lease payments
at September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998............................................................. $ 98,765
1999............................................................. 10,070
2000............................................................. 7,553
---------
Total minimum lease payments..................................... 116,388
Amount representing interest..................................... (8,775)
---------
Present value of minimum lease payments, including current
portion of $91,920.............................................. $ 107,613
---------
---------
</TABLE>
NOTE E--COMMITMENTS
The Company leases certain office facilities under noncancellable operating
leases. Rent expense under such leases for the year ended September 30, 1997 was
$45,261. Future rental commitments under the leases total $78,258, all to be
incurred during the year ended September 30, 1998.
NOTE F--RELATED PARTY TRANSACTIONS
Prior to 1997, the Company entered into a joint venture with an unrelated
party to investigate Internet business possibilities. The joint venture was
dissolved October 1996. The dissolution agreement between the partners provided
that the Company pay 20% of the profits from its local service division for a
period of eighteen months in exchange for equipment owned by the unrelated party
valued at $140,000. The Company's majority stockholder assumed the Company's
obligation under the dissolution agreement in
F-36
<PAGE>
INTERLINK TELECOMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED SEPTEMBER 30, 1997
NOTE F--RELATED PARTY TRANSACTIONS (CONTINUED)
exchange for the equipment. The Company's majority stockholder then made a
capital contribution of the equipment to the Company.
NOTE G--SUBSEQUENT EVENT
The Company entered into an agreement with ILD Telecommunications, Inc.
(ILD) whereby ILD purchased all of the outstanding common stock of the Company.
The acquisition closed December 15, 1997. These financial statements were
prepared on a historical basis and do not reflect any adjustments for the
acquisition.
F-37
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Management of Intellicall, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in equity and of cash flows present fairly, in all
material respects, the financial position of WorldCom--San Antonio as defined
and described in Note 1 (the Business) at December 31, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Business'
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Dallas, Texas
October 31, 1997
F-38
<PAGE>
WORLDCOM--SAN ANTONIO (AS DEFINED)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
---------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 220 $ 108 $ 253
Receivables, net of allowance for doubtful accounts......................... 23,194 11,051 10,162
Customer advances and other................................................. 1,804 2,060 2,809
---------- --------- -----------
Total current assets...................................................... 25,218 13,219 13,224
Fixed assets, net............................................................. 3,248 3,820 3,042
Goodwill, net................................................................. 211,087 -- --
Deferred income taxes......................................................... 2,438 1,689 2,114
Other assets.................................................................. 144 92 80
---------- --------- -----------
Total assets.............................................................. $ 242,135 $ 18,820 $ 18,460
---------- --------- -----------
---------- --------- -----------
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable............................................................ $ 312 $ 152 $ 71
Customer commissions payable................................................ 3,482 3,291 2,611
Accrued operator service provider costs..................................... 509 781 437
Accrued billing and collection costs........................................ 2,107 1,339 1,380
Accrued line costs.......................................................... 1,241 1,074 956
Other current liabilities................................................... 1,043 643 229
---------- --------- -----------
Total current liabilities................................................. 8,694 7,280 5,684
Commitments and contingencies................................................. -- -- --
Equity--WorldCom--San Antonio, as defined (Note 1)............................ 233,441 11,540 12,776
---------- --------- -----------
Total liabilities and equity.............................................. $ 242,135 $ 18,820 $ 18,460
---------- --------- -----------
---------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
WORLDCOM--SAN ANTONIO (AS DEFINED)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- ------------------------
1994 1995 1996 1996 1997
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Operator services revenue......................... $ 149,823 $ 119,322 $ 88,005 $ 45,799 $ 35,243
Operator services revenue from affiliate.......... 2,901 4,824 5,494 2,299 3,664
---------- ---------- ----------- ----------- -----------
Total operator services revenue................. 152,724 124,146 93,499 48,098 38,907
Cost of operator services revenue................. 110,999 94,003 72,838 38,134 29,809
---------- ---------- ----------- ----------- -----------
Gross profit.................................... 41,725 30,143 20,661 9,964 9,098
Selling, general and administrative expenses...... 12,963 12,455 9,142 4,678 4,146
Depreciation and amortization..................... 6,442 6,904 2,829 2,092 778
Provision to reduce carrying value of goodwill.... -- -- 209,635 209,635 --
Provision for doubtful accounts................... 6,554 12,482 6,099 3,017 2,083
---------- ---------- ----------- ----------- -----------
Operating income (loss)........................... 15,766 (1,698) (207,044) (209,458) 2,091
Interest income................................... (357) (295) (303) (162) (171)
---------- ---------- ----------- ----------- -----------
Income before provision for income taxes.......... 16,123 (1,403) (206,741) (209,296) 2,262
Income taxes...................................... 7,985 1,631 1,608 804 837
---------- ---------- ----------- ----------- -----------
Net income (loss)................................. $ 8,138 $ (3,034) $ (208,349) $ (210,100) $ 1,425
---------- ---------- ----------- ----------- -----------
---------- ---------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-40
<PAGE>
WORLDCOM--SAN ANTONIO (AS DEFINED)
STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- -----------
1994 1995 1996 1996
-------- -------- --------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
<CAPTION>
<S> <C> <C> <C> <C>
Balance, beginning of period.................................................... $244,458 $241,878 $ 233,441 $ 233,441
Net income (loss)............................................................... 8,138 (3,034) (208,349) (210,100)
Advances to affiliate, net...................................................... (10,718) (5,403) (13,552) (6,209)
-------- -------- --------- -----------
Balance, end of period.......................................................... $241,878 $233,441 $ 11,540 $ 17,132
-------- -------- --------- -----------
-------- -------- --------- -----------
<CAPTION>
1997
-----------
<S> <C>
(UNAUDITED)
<S> <C>
Balance, beginning of period.................................................... $11,540
Net income (loss)............................................................... 1,425
Advances to affiliate, net...................................................... (189)
-----------
Balance, end of period.......................................................... $12,776
-----------
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-41
<PAGE>
WORLDCOM--SAN ANTONIO (AS DEFINED)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
---------- --------- ----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).................................... $ 8,138 $ (3,034) $ (208,349) $ (210,100) $ 1,425
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization...................... 6,442 6,904 2,829 2,092 778
Provision to reduce carrying value of goodwill..... -- -- 209,635 209,635 --
Provision for doubtful accounts.................... 1,128 1,522 (2,469) (4,635) 1,011
Changes in operating assets and liabilities:
Decrease (increase) in receivables............... (4,792) 4,626 14,612 10,864 (122)
Increase in customer advances and other current
assets......................................... (813) (778) (256) (361) (749)
Decrease (increase) in deferred income taxes..... (305) (541) 749 375 (425)
Increase (decrease) in accounts payable.......... 80 (111) (160) (85) (81)
Increase (decrease) in customer commissions
payable........................................ 121 (2,208) (191) (119) (680)
Increase (decrease) in operator service provider
costs.......................................... 170 (62) 272 461 (344)
Increase (decrease) in accrued billing and
collection costs............................... 240 (390) (768) (835) 41
Increase (decrease) in accrued line costs........ 43 (829) (167) 118 (118)
Increase (decrease) in other current
liabilities.................................... 382 664 (400) (299) (414)
---------- --------- ----------- ----------- ---------
Net cash provided by operating activities........ 10,834 5,763 15,337 7,111 322
Cash flows from investing activities:
Capital expenditures................................. (422) (705) (1,948) (1,132) --
Decrease in other assets............................. 304 463 51 112 12
---------- --------- ----------- ----------- ---------
Net cash used in investing activities.......... (118) (242) (1,897) (1,020) 12
Cash flows from financing activities:
Advances to affiliate (net).......................... (10,718) (5,403) (13,552) (6,209) (189)
---------- --------- ----------- ----------- ---------
Net cash used in financing activities.......... (10,718) (5,403) (13,552) (6,209) (189)
---------- --------- ----------- ----------- ---------
Net increase (decrease) in cash and cash equivalents... (2) 118 (112) (118) 145
Cash and cash equivalents at beginning of period....... 104 102 220 220 108
---------- --------- ----------- ----------- ---------
Cash and cash equivalents at end of period............. $ 102 $ 220 $ 108 $ 102 $ 253
---------- --------- ----------- ----------- ---------
---------- --------- ----------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements
F-42
<PAGE>
WORLDCOM--SAN ANTONIO (AS DEFINED)
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying financial statements represent the activities of the
WorldCom, Inc. ("WorldCom" or affiliate) operator services business based in San
Antonio, Texas (the "Business") and exclude all other activities of WorldCom.
These financial statements represent the business acquired by ILD
Telecommunications, Inc. (formerly ILD Teleservices, Inc., a subsidiary of
Intellicall, Inc.) pursuant to a purchase agreement dated September 1, 1997 (the
"Acquisition").
The Business provides automated and live operator services for private
payphone providers, local exchange carrier ("LEC") payphones, and the
hospitality and inmate services industry. The Business also resells direct dial
long distance services principally to its hospitality customers and provides
billing and collections services to third party operator service and one plus
companies. Collectively, these revenues are classified as "operator services
revenue."
Throughout the period covered by the financial statements, the Business was
accounted for in several divisions within WorldCom. Financial statements have
not been previously prepared for the Business. These financial statements have
been prepared from WorldCom's historical accounting records and reflect no
adjustments arising from the Acquisition described above.
The Statements of Operations include all revenue and costs directly
attributable to the Business, including costs for facilities, functions and
services used by the Business at shared sites and costs for certain functions
and services performed by centralized WorldCom organizations outside the defined
scope of the Business and directly charged to the Business based on usage. The
results of operations also include allocations of costs for administrative
functions and services performed on behalf of the Business by centralized staff
groups within WorldCom and general corporate expenses. Current and deferred
income taxes and related tax expense have been allocated to the Business by
applying Statement of Financial Accounting Standards No. 109 ("SFAS 109") to the
Business as if it was a separate taxpayer.
All charges and allocations of cost for facilities, functions and services
performed by WorldCom organizations outside the defined scope of the Business
have been deemed to have been paid by the Business to WorldCom in cash, in the
period in which the cost was recorded in the financial statements.
All of the allocations and estimates in the financial statements are based
on assumptions that WorldCom management believes are reasonable under the
circumstances. However, these allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted if the Business
had been operated as a separate entity.
The financial information for the six months ended June 30, 1996 and 1997
presented herein reflects all adjustments (all of which are of a normal
recurring nature) which are, in the opinion of management, necessary for a fair
presentation of the results of the interim periods. The results for the interim
periods are not necessarily indicative of results to be expected for the year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires the Business to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-43
<PAGE>
WORLDCOM--SAN ANTONIO (AS DEFINED)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS--The Business participated in WorldCom's
centralized cash management system. In general, the cash funding requirements of
the Business were met by, and all cash generated by the Business was transferred
to, WorldCom. Accordingly, the cash and cash equivalents balances (cash
equivalents are highly liquid investments with maturities of three months or
less at time of purchase) shown on the balance sheets were allocated to these
financial statements based on management estimates.
REVENUE RECOGNITION--Call revenues are recognized at the time that calls are
placed. Call revenues from human operator services, Business-owned call
processing systems and switch-based services are recognized based on the amounts
charged to billed parties for calls processed and billed by the Business.
Revenues associated with the billing and collecting of other companies' call
records are recognized at the time the call records are billed and include
revenue associated with the provision of the service.
RECEIVABLES--Receivables consist of amounts owed by various telephone
companies for processed call traffic plus amounts due from the billing and
collection service customers. The Business believes it has provided adequate
reserves for potential uncollectible accounts. Accounts receivable were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Trade receivables.......................................... $ 30,359 $ 15,405 $ 15,580
Trade receivables from affiliate........................... 336 678 625
Less: Allowance for doubtful accounts...................... (7,501) (5,032) (6,043)
--------- --------- -----------
$ 23,194 $ 11,051 $ 10,162
--------- --------- -----------
--------- --------- -----------
</TABLE>
FIXED ASSETS--Fixed assets are recorded at original cost. Depreciation
expense is computed by the straight-line method over the estimated useful lives
of the related assets, where the useful lives approximate five years. Fixed
assets were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Office equipment............................................ $ 1,964 $ 2,003 $ 2,003
Switches and call processing equipment...................... 3,866 5,775 5,775
--------- --------- -----------
5,830 7,778 7,778
Less: Accumulated depreciation.............................. (2,582) (3,958) (4,736)
--------- --------- -----------
$ 3,248 $ 3,820 $ 3,042
--------- --------- -----------
--------- --------- -----------
</TABLE>
Depreciation expense for the years ended December 31, 1994, 1995 and 1996
(in thousands) was $983, $1,095 and $1,377, respectively. Depreciation expense
for the six months ended June 30, 1996 and 1997 (in thousands) was $640 and
$778, respectively.
GOODWILL--Goodwill, representing the cost in excess of net assets of
acquired businesses, is amortized using the straight-line method over 40 years.
In March 1995, FASB issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
F-44
<PAGE>
WORLDCOM--SAN ANTONIO (AS DEFINED)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Assets to Be Disposed Of" ("FAS 121"). Effective January 1, 1996, the Business
adopted FAS 121 which requires that long-lived assets (primarily goodwill) held
and used by an entity, or to be disposed of, be reviewed for impairment whenever
events or changes in circumstances indicate that the net book value of the asset
may not be recoverable. An impairment loss will be recognized if the sum of the
expected future cash flows (undiscounted and before interest) from the use of
the asset is less than the net book value of the asset. The amount of the
impairment loss will generally be measured as the difference between the net
book value of the assets and the estimated fair value of the related assets.
The goodwill recorded in these financial statements arose upon WorldCom's
acquisition of Metromedia Communications Corporation and Resurgens
Communications Group, Inc. in September 1993. The total amount of goodwill
recorded in the WorldCom financial statements was approximately $1.2 billion.
The amount of goodwill shown in these financial statements represents WorldCom
management's allocation of a portion of that total to the Business. The
allocation was primarily based on the Business' historical revenues in relation
to WorldCom's entire acquisition, which approximated management's evaluation of
fair value.
During June 1996, WorldCom incurred non-cash charges related to the
write-down in the carrying value of certain assets related to the operator
services business, including goodwill. WorldCom's estimates of the fair value of
these assets resulted in the write-down of operator services goodwill to zero.
In a manner consistent with the WorldCom assessment, these financial statements
of the Business reflect a write-down of goodwill in the amount of $209.6
million.
The balances of goodwill at each period end are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- JUNE 30,
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Goodwill............................................... $ 224,757 $ 224,757 $ --
Less: Accumulated amortization......................... (13,670) (15,122) --
Provision to reduce carrying value................ -- (209,635) --
---------- ----------- -----------
$ 211,087 $ -- $ --
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
Amortization expense for the years ended December 31, 1994, 1995 and 1996
(in thousands) was $5,459, $5,809 and $1,452, respectively. Amortization expense
for the six months ended June 30, 1996 and 1997 (in thousands) was $1,452 and
zero.
INCOME TAXES--The taxable income (loss) of the Business was included in
consolidated tax returns of WorldCom. As such, separate income tax returns were
not prepared or filed for the Business.
For all periods presented, deferred income taxes and the related tax
provision have been allocated to the Business by applying the asset and
liability approach set forth in SFAS 109 to the Business as if it were a
separate taxpayer. Under this approach, deferred tax assets and liabilities
represent the expected future tax consequences of carryforwards and temporary
differences between the carrying amounts and the tax basis of assets and
liabilities. SFAS 109 generally requires that all expected future events, other
than enactment of changes in tax law or tax rates, be considered in estimating
future tax consequences. Valuation allowances are established to reduce deferred
tax assets by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
F-45
<PAGE>
WORLDCOM--SAN ANTONIO (AS DEFINED)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS--The Business records
all financial instruments at cost. The fair values of accounts receivable and
accounts payable approximate such costs.
CREDIT CONCENTRATIONS--Certain financial instruments potentially subject the
Business to concentration of credit risk. These financial instruments consist
primarily of accounts receivable. The Business' customers range from small
payphone providers to large corporations, and reflect a large customer base with
much geographic diversity. The Company believes it has provided adequate
reserves for potential uncollectible accounts.
MAJOR CUSTOMERS--A single customer accounted for 36%, 31% and 22% or $55.2,
$38.2 and $20.9 million of the Business' revenues in 1994, 1995 and 1996,
respectively. This customer represented 24% and 18% or $11.7 and $7.0 million of
the Business revenues for the six month periods ending June 30, 1996 and 1997,
respectively.
3. RELATED PARTY TRANSACTIONS
The financial statements include significant transactions with WorldCom
involving functions and services (such as cash management, tax administration,
accounting, legal, and data processing) that were provided to the Business by
WorldCom outside the defined scope of the Business. The costs of these functions
and services have been directly charged and/or allocated to the Business using
methods that management believes are reasonable. Such charges and allocations
are not necessarily indicative of the costs that would have been incurred if the
Business had been a separate entity. Amounts charged and allocated to the
Business for these functions and services were $2.1, $2.2 and $1.9 million for
the years ended December 31, 1994, 1995 and 1996, respectively, and are
principally included in general and administrative expenses. For the six month
periods ended June 30, 1996 and 1997, the allocated charges (in thousands) were
$959 and $982, respectively.
Operator services revenue include amounts earned from the processing of
certain WorldCom call traffic. These revenues amounted to $2.9, $4.8, and $5.5
million for the years ended December 31, 1994, 1995, and 1996, respectively. The
same revenues were $2.3 and $3.7 million for the six month periods ending June
30, 1996 and 1997, respectively.
Costs of operator services revenue include amounts paid for services
rendered by WorldCom on behalf of the Business. These services, primarily line
costs (payments to local exchange carriers for access and transport charges),
amounted to $25.2, $19.0 and $14.9 million for the years ended December 31,
1994, 1995 and 1996, respectively, and were charged to the business on a per
minute basis. For the six months periods ended June 30, 1996 and 1997, the line
costs paid to WorldCom were $8.2 and $6.0 million, respectively. Also, accrued
line costs, at each period end, represent payables to WorldCom for those
services billed to the Business.
As discussed in Note 1, WorldCom operated the Business throughout the period
covered by these financial statements. As such, the balance of the equity of the
Business (shown as Equity-WorldCom-San Antonio on the Balance Sheet) represents
WorldCom's 100% owned equity in the operator services division, net of any
advances to or draws from the Business.
F-46
<PAGE>
WORLDCOM--SAN ANTONIO (AS DEFINED)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
Differences between the income tax benefit calculated using the statutory
federal income tax rate and the actual income tax benefit are (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- ---------------------
1994 1995 1996 1996 1997
--------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Income tax expense (benefit) at the statutory rate............. $ 5,482 $ (477) $ (70,292) $ (71,160) $ 769
Permanent differences between book and tax bases:
Goodwill amortization........................................ 1,856 1,975 494 494 --
Goodwill write-off........................................... -- -- 71,276 71,276 --
Other.......................................................... 647 133 130 194 68
--------- --------- ---------- ---------- ---------
Income tax expense............................................. $ 7,985 $ 1,631 $ 1,608 $ 804 $ 837
--------- --------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------
</TABLE>
The significant components of the Business' deferred tax assets and
liabilities under SFAS 109 result from differences in depreciation methods for
book and tax purposes and the deferred recognition of the allowance for doubtful
accounts for tax purposes.
5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS--The Business leases its office space under operating
leases. Future minimum rental commitments under noncancelable operating leases
are (in thousands):
<TABLE>
<S> <C>
1997................................................................ $ 911
1998................................................................ 865
1999................................................................ 294
2000................................................................ 270
2001 and later...................................................... 825
---------
$ 3,165
---------
---------
</TABLE>
Total operating lease expense (in thousands) was $741, $870 and $878 for the
years ended December 31, 1994, 1995 and 1996, respectively. For the six-month
periods ended June 30, 1996 and 1997, the total operating lease expense (in
thousands) was $439 and $456, respectively.
LITIGATION--The Business is subject to various legal proceedings arising out
of the ordinary course of its business. It is the opinion of the management of
the Business that the ultimate disposition of these proceedings will not have a
material adverse effect on the Business' financial condition, results of
operations or cash flows.
F-47
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of ILD Telecommunications, Inc.
In our opinion, the accompanying statements of operations, of changes in
equity and of cash flows present fairly, in all material respects, the results
of operations of the Intellicall Operator Services Business, as defined and
described in Note 1, and its cash flows for the year ended December 31, 1995 and
the period from January 1, 1996 to May 9, 1996 in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Business' management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Dallas, Texas
April 14, 1998
F-48
<PAGE>
INTELLICALL OPERATOR SERVICES BUSINESS
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31, 1996 TO MAY 9,
1995 1996
------------ ---------------
<S> <C> <C>
Telecommunications revenues......................................................... $ 10,287 $ 6,333
Cost of revenues.................................................................... 8,418 5,639
------------ ------
Gross profit...................................................................... 1,869 694
Operating expenses:
Selling, general and administrative............................................... 488 267
Provision for doubtful accounts................................................... 33 80
Depreciation and amortization..................................................... 58 37
------------ ------
Total operating expenses........................................................ 579 384
------------ ------
Income before provision for income taxes............................................ 1,290 310
Provision for income taxes.......................................................... 477 115
------------ ------
Net income.......................................................................... $ 813 $ 195
------------ ------
------------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
INTELLICALL OPERATOR SERVICES BUSINESS
STATEMENTS OF CHANGES IN EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31, 1996 TO MAY 9,
1995 1996
------------ ---------------
<S> <C> <C>
Balance, beginning of period........................................................ $ 1,019 $ 625
Net income.......................................................................... 813 195
Advances to affiliate, net.......................................................... (1,207) (820)
------------ -----
Balance, end of period.............................................................. $ 625 $ --
------------ -----
------------ -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
INTELLICALL OPERATOR SERVICES BUSINESS
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1, 1996
DECEMBER 31, TO MAY 9,
1995 1996
------------ ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 813 $ 195
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................ 58 37
Provision for doubtful accounts.............................................. 33 80
Changes in operating assets and liabilities:
Decrease in accounts receivable.............................................. 328 1,177
(Increase) decrease in other assets.......................................... (150) 77
Decrease in accrued transmission costs....................................... (16) (755)
Increase in customer commissions............................................. 143 --
------------ ------
Net cash provided by operating activities.................................. 1,209 811
------------ ------
Cash flows from investing activities:
Capital expenditures........................................................... (2) --
Disposition of property and equipment.......................................... -- 9
------------ ------
Net cash (used in) provided by investing activities.......................... (2) 9
------------ ------
Cash flows from financing activities:............................................
Advances to affiliates (net)................................................... (1,207) (820)
------------ ------
Net cash used in financing activities........................................ (1,207) (820)
------------ ------
Net increase (decrease) in cash and cash equivalents............................... -- --
Cash and cash equivalents at beginning of period................................... -- --
------------ ------
Cash and cash equivalents at end of period......................................... $ -- $ --
------------ ------
------------ ------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
INTELLICALL OPERATOR SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
The accompanying financial statements represent the activities of
Intellicall Operator Services, Inc. ("IOS"), a wholly owned-subsidiary of
Intellicall, Inc. ("Intellicall" or "affiliate") based in Dallas, Texas and the
activities of the Long Distance Resale division of Intellicall (collectively,
the "Intellicall Operator Services Business" or the "Business"), and exclude all
other activities of Intellicall. These financial statements represent the
predecessor business of ILD Telecommunications, Inc. ("ILD"), that was
incorporated on April 18, 1996 and commenced operations on May 10, 1996.
The Business provides live operator services for the independent payphone
provider, hospitality, international and inmate services industries, and resells
direct dial long distance services principally to the independent payphone
provider industry.
Throughout the period covered by the financial statements, the Business was
accounted for in more than one business unit within Intellicall. Financial
statements have not been previously prepared for the Business. These financial
statements have been prepared from Intellicall's historical accounting records
and reflect no adjustments arising from the creation of ILD on May 10, 1996
described above.
The Statements of Operations include all revenue and costs directly
attributable to the Business, including costs for facilities, functions and
services used by the Business at shared sites, and costs for certain functions
and services performed by centralized Intellicall organizations outside the
defined scope of the Business and directly charged to the Business based on
usage. The Statements of Operations also include allocations of costs for
general corporate expenses and administrative functions and services performed
on behalf of the Business by centralized personnel within Intellicall.
All charges and allocations of costs for facilities, functions and services
performed by Intellicall on behalf of the Business are deemed to have been paid
by the Business to Intellicall in the period in which the cost was recorded in
the financial statements.
All of the above allocations and estimates in the financial statements are
based on assumptions that Intellicall management believes are reasonable under
the circumstances. However, these allocations and estimates are not necessarily
indicative of the costs and expenses that would have resulted had the Business
been operated as a separate entity or that will actually occur in the future.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The presentation of financial statements in conformity with generally
accepted accounting principles requires the Business to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported periods.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Business participated in Intellicall's centralized cash management
system. All cash generated by the Business was presumed to be transferred to
Intellicall and is reflected as advances to affiliate. Accordingly, there are no
separate cash and cash equivalents balances of the Business in the financial
statements.
F-52
<PAGE>
INTELLICALL OPERATOR SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
The Business recognizes revenue from its direct dial long distance services
as such services are performed. Call revenues from live operator services are
recognized based on the amounts charged to billed parties for calls processed
and billed by the Business.
RECEIVABLES
Receivables consist of amounts owed by various local exchange carriers for
processed call traffic, and amounts due directly from customers for direct-dial
long-distance charges. The Business believes it has provided adequate reserves
for potential uncollectible amounts.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation for financial statement
purposes is provided by the straight-line method over the estimated useful lives
of the related assets, which lives collectively approximate five years.
Depreciation expense for the year ended December 31, 1995 and the period from
January 1, 1996 to May 9, 1996 was $13,196 and $8,412, respectively.
INCOME TAXES
The Business was included in consolidated tax returns of Intellicall.
Current and deferred income taxes and related tax expense have been allocated to
the Business by applying Statement of Financial Accounting Standards No. 109
("FAS 109") to the Business as if it was a separate taxpayer.
For all periods presented, deferred income taxes and the related provision
have been allocated to the Business by applying the asset and liability approach
set forth in FAS 109 as if it were a separate taxpayer. Under this approach,
deferred tax assets and liabilities represent the expected future tax
consequences of carryforwards and temporary differences between the carrying
amounts and the tax basis of assets and liabilities. FAS 109 generally requires
that all expected future events, other than enactment of changes in tax law or
tax rates, be considered in estimating future tax consequences. Valuation
allowances are established to reduce deferred tax assets by the amount of any
tax benefits that, based on available evidence, are not expected to be realized.
FINANCIAL INSTRUMENTS
Management believes the recorded values of financial instruments approximate
their current fair values at each period end.
CREDIT CONCENTRATIONS
Certain financial instruments potentially subject the Business to
concentration of credit risk. These financial instruments consist primarily of
accounts receivable. The Business' customers range from small pay phone
providers to large corporations, and reflect a large customer base with much
geographic diversity. The Business believes it has provided adequate reserves
for potential uncollectible accounts. A single customer accounted for 24% of the
Business' revenues in 1995. For the period ended May 9, 1996, two customers
accounted for 15% each of the Business' revenues.
F-53
<PAGE>
INTELLICALL OPERATOR SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS
The financial statements include significant transactions with Intellicall
involving functions and services (such as cash management, tax administration,
accounting, legal and data processing) that were provided by Intellicall on
behalf of the Business. The costs of these functions and services have been
directly charged and/or allocated to the Business using methods that management
believes are reasonable. Such charges and allocations are not necessarily
indicative of the costs that would have been incurred if the Business had been a
separate entity and are necessarily reflective of the costs to be incurred by
the Business in the future. Amounts charged and allocated to the Business for
these functions and services were $170,794 and $80,729 for the year ended
December 31, 1995 and the period ended May 9, 1996, respectively, and are
principally included in general and administrative expenses.
As discussed in Note 1, Intellicall operated the Business throughout the
period covered by these financial statements. As such, the balance of the equity
of the Business represents Intellicall's 100% owned equity in IOS and the Long
Distance Resale division of Intellicall, net of any advances to or draws from
the Business.
4. INCOME TAXES
The components of the income tax provision were (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31, 1996 TO MAY
1995 9, 1996
--------------- -------------
<S> <C> <C>
Current provision:
Federal................................................................... $ 418 $ 101
State..................................................................... 58 14
----- -----
476 115
----- -----
Deferred:
Federal................................................................... 1 --
State..................................................................... -- --
----- -----
Provision for income taxes.................................................. $ 477 $ 115
----- -----
----- -----
</TABLE>
F-54
<PAGE>
INTELLICALL OPERATOR SERVICES BUSINESS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The following is a reconciliation of the provision for income taxes at the
statutory federal income tax rate to the income tax expense reflected in the
consolidated statements of income (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1,
DECEMBER 31, 1996 TO MAY
1995 9, 1996
--------------- -------------
<S> <C> <C>
Income tax expense at the statutory rate (34%).............................. $ 439 $ 106
State income taxes, net of federal income tax benefit....................... 38 9
----- -----
Provision for income taxes.................................................. $ 477 $ 115
----- -----
----- -----
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
The Business is subject to various legal proceedings arising out of the
ordinary course of its business. It is the opinion of the management of the
Business that the ultimate disposition of these proceedings will not have a
material adverse effect on the Business' financial condition, results of
operations or cash flows.
F-55
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSONS MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 3
RISK FACTORS.............................................................. 10
USE OF PROCEEDS........................................................... 21
DIVIDEND POLICY........................................................... 22
CAPITALIZATION............................................................ 23
DILUTION.................................................................. 24
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS................. 25
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA........................ 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................. 30
BUSINESS.................................................................. 41
MANAGEMENT................................................................ 55
CERTAIN TRANSACTIONS...................................................... 62
STOCK OWNERSHIP........................................................... 65
DESCRIPTION OF CAPITAL STOCK.............................................. 67
SHARES ELIGIBLE FOR FUTURE SALE........................................... 73
UNDERWRITING.............................................................. 76
LEGAL MATTERS............................................................. 78
EXPERTS................................................................... 78
ADDITIONAL INFORMATION.................................................... 78
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1
</TABLE>
SHARES
[ILD TELECOMMUNICATIONS, INC.
NAME/LOGO APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
NationsBanc Montgomery
Securities LLC
Raymond James & Associates, Inc.
Interstate/Johnson Lane Corporation
, 1998
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth various expenses in connection with the
issuance and distribution of the securities being registered hereby, other than
underwriting discounts and commissions. All amounts except the SEC registration
fee and the NASD filing fee are estimated.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 17,700
NASD filing fee................................................. 6,500
Accounting fees and expenses.................................... 325,000
Nasdaq National Market listing fee.............................. 85,500
Legal fees and expenses......................................... 500,000
Printing and engraving expenses................................. 60,000
Blue sky fees and expenses...................................... 10,000
Directors' and officers' insurance.............................. 100,000
Transfer agent and registrar fees and expenses.................. 10,000
Miscellaneous................................................... 10,000
---------
Total....................................................... $1,124,700
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Bylaws and Certificate of Incorporation provide for
indemnification of directors and officers of the Company to the full extent
permitted by Delaware law.
Section 145 of the Delaware Code provides generally that a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to, any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at its request in such capacity in another corporation or business
association, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. In addition, pursuant to
the authority of Delaware law, the Certificate of Incorporation of the Company
also eliminates the monetary liability of directors to the fullest extent
permitted by Delaware law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
As consideration for the Predecessor, on May 10, 1996 the Company issued to
Intellicall (i) 725 shares of Common Stock valued at $10 per share, (ii) 72,500
shares of Class A Convertible Preferred Stock valued at $72.63 per share, (iii)
5,000 shares of Series B Convertible Preferred Stock with a stated value of $100
per share and (iv) a convertible subordinated note in the principal amount of
$1,000,000.
On May 10, 1996, the Company issued to Triad I (i) 183 shares of Common
Stock for cash consideration of $10 per share, (ii) 18,333 shares of Series A
Convertible Preferred Stock for cash consideration of $72.69 per share, and
(iii) a convertible subordinated note in the principal amount of $666,666.67.
Also on May 10, 1996, the Company issued to Morris (i) 92 shares of Common Stock
for cash consideration of $10 per share, (ii) 9,167 shares of Series A
Convertible Preferred Stock for cash consideration of $72.69 per share, and
(iii) a convertible subordinated note in the principal amount of $333,333.33.
II-1
<PAGE>
As consideration for certain financial services provided the Company in
connection with its acquisition of the Predecessor, on May 10, 1996, the Company
issued Triad Capital Partners, Inc. a warrant to purchase 6,000 shares of Common
Stock. At the time of issuance, the exercise price of the warrants exceeded the
fair market value of the Common Stock.
In connection with the execution of certain loan and credit agreements
between the Company and its lenders, on May 13, 1996 and August 31, 1996, the
Company issued promissory notes to its lenders with an aggregate principal
amount of up to $26.2 million. Also in connection with the execution of certain
loan and credit agreements between the Company and its lenders, on May 13, 1996
the Company issued warrants to certain of its lenders to purchase an aggregate
of 7,239 shares of Common Stock. No consideration was paid for the warrants
other than the agreement to enter into the respective loan and credit agreements
and the advance of the funds contemplated thereunder.
As consideration for the WorldCom Assets, on August 31, 1997 the Company
issued to WorldCom, 4,587 shares of Common Stock valued at $500,000 and 111,960
shares of Series B-2 Redeemable Preferred Stock valued at $11.2 million. In
connection therewith, on August 31, 1997 the Company also issued 917.43 shares
of Common Stock to Triad II and 13,761.47 shares of Common Stock to Morris for
cash consideration of $109 per share.
Upon exercise of an option to purchase Common Stock, on September 1, 1997,
the Company issued 775 shares of Common Stock for cash consideration of $24.20
share to a former director of the Company.
On September 23, 1997, the Company sold an aggregate of 33,845.09 shares of
Common Stock for cash consideration of $109 per share. The Common Stock was
offered and sold to a total of 10 investors, including Intellicall, Triad II,
and certain executive officers of the Company.
On December 15, 1997, as consideration for the capital stock of Interlink
owned by Reginald P. McFarland, an executive officer of the Company, the Company
issued to Mr. McFarland (i) 16,117 shares of Common Stock valued at $273 per
share, (ii) 6,666.67 shares of Series B-3 Redeemable Preferred Stock with a
stated value of $300 per share and (iii) a subordinated promissory note in the
principal amount of $1,000,000.
In connection with the conversion of 1,539 shares of Series A Convertible
Preferred Stock, on April 30, 1998 the Company issued 1,539 shares of Common
Stock to one stockholder of the Company. The Common Stock was issued in reliance
on the exemption from registration provided by Section 3(a)(9) of the Securities
Act of 1933, as amended, as securities exchanged by the issuer with its existing
security holders exclusively where no commissions or other remuneration is paid
or given directly or indirectly for soliciting such exchange.
Except as otherwise noted in the immediately preceding paragraph, all
issuances of securities described above were made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act as transactions
by an issuer not involving a public offering. All of the securities were
acquired by the recipients thereof for investment and with no view toward the
resale or distribution thereof. In each instance, the purchaser had a
pre-existing relationship with the Company or its founders, the offers and sales
were made without any public solicitation, the certificates bear restrictive
legends and appropriate stop transfer instructions have been or will be given to
the transfer agent. No underwriter was involved in the transactions, and no
commissions were paid.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as a part of this Registration
Statement:
<TABLE>
<S> <C>
1 --Underwriting Agreement*
3.1(a) --Restated Certificate of Incorporation*
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
3.2 --Bylaws
4.1 --Subordinated Convertible Note issued May 10, 1996 to Intellicall,
Inc. by ILD Communications, Inc.
4.2 --Subordinated Convertible Note issued May 10, 1996 to Triad-ILD
Partners, L.P. by ILD Communications, Inc.
4.3 --Subordinated Convertible Note issued May 10, 1996 to Morris
Telecommunications, LLC by ILD Communications, Inc.
4.4 --Warrant to Purchase Shares of Common Stock of ILD Teleservices,
Inc. issued to Triad Capital Partners, Inc.
4.5 --Warrant to Purchase Shares of Common Stock of ILD Communications,
Inc. issued to Morris Telecommunications, Inc.
4.6 --Warrant to Purchase Shares of Common Stock of ILD Communications,
Inc. issued to Michael F. Lewis
4.7 --Stock Purchase Warrant issued May 13, 1996 by ILD Communications,
Inc. to Sirrom Capital Corporation
4.8 --Stock Purchase Warrant issued May 13, 1996 by ILD Communications,
Inc. to Reedy River Ventures Limited Partnership
4.9 --Promissory Note issued December 15, 1997 to Reginald P. McFarland
by ILD Teleservices, Inc.
5 --Opinion of Cashin, Morton & Mullins regarding legality*
10.1 --ILD Communications, Inc. Stock Option Plan
10.2 --ILD Communications, Inc. Stock Option Plan 97-A
10.3 --ILD Teleservices, Inc. Stock Option Plan 97-B
10.4 --ILD Teleservices, Inc. Stock Option Plan 97-C
10.5 --ILD Teleservices, Inc. Stock Option Plan 97-D
10.5.1 --Form of Incentive Stock Option Agreement*
10.5.2 --Form of Non-qualified Stock Option Agreement*
10.6 --Organization Agreement dated May 10, 1996 by and among
Intellicall, Inc., Triad-ILD Partners, L.P., Morris
Telecommunications, LLC and ILD Communications, Inc.
10.7 --Loan and Security Agreement dated as of May 13, 1996 by and
between ILD Communications, Inc., Intellicall Operator Services,
Inc. and Sirrom Capital Corporation
10.7.1 --Secured Promissory Note issued May 13, 1996 to Sirrom Capital
Corporation*
10.7.2 --Secured Promissory Note issued May 13, 1996 to Reedy River
Ventures Limited Partnership.*
10.8 --Loan and Security Agreement dated as of August 29, 1997 among ILD
Teleservices, Inc., Intellicall Operator Services, Inc. and
NationsBank, N.A.
10.8.1 --First Amendment to Loan and Security Agreement dated December 15,
1997 by and between ILD Teleservices, Inc., Intellicall Operator
Services, Inc. and NationsBank, N.A.*
10.8.2 --Second Amendment to Loan and Security Agreement dated February 2,
1998 by and between ILD Teleservices, Inc., Intellicall Operator
Services, Inc. and NationsBank, N.A.*
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
10.8.3 --Third Amendment to Loan and Security Agreement dated April 30,
1998, by and between ILD Teleservices, Inc., Intellicall Operator
Services, Inc. and NationsBank, N.A.*
10.8.4 --Revolving Credit Note for $20,000,000 executed by ILD
Teleservices, Inc. and Intellicall Operator Services, Inc.
10.8.5 --Term Note for $5,000,000 executed by ILD Teleservices, Inc. and
Intellicall Operator Services, Inc.
10.9 --Asset Purchase Agreement dated as of February 27, 1997 by and
among WorldCom, Inc. and ILD Communications, Inc.*
10.9.1 --Amendment No. 1 to Asset Purchase Agreement dated as of August
29, 1997 by and among WorldCom, Inc. and ILD Teleservices, Inc.*
10.10 --Merger Agreement dated as of December 15, 1997 by and among ILD
Teleservices, Inc., Interlink Telecommunications, Inc., Interlink
Telecommunications of Florida, Inc. and Reginald P. McFarland
10.11 --Second Amended and Restated Registration Rights Agreement dated
December 15, 1997 by and among ILD Teleservices, Inc.,
Intellicall, Inc., Triad-ILD Partners, L.P., Triad-ILD Partners
II, L.P., Morris Telecommunications, LLC, WorldCom, Inc. and
Reginald P. McFarland*
10.12 --Employment Agreement dated December 15, 1997 by and between ILD
Teleservices, Inc. and Reginald P. McFarland
10.13 --Third Amended and Restated Shareholders' Agreement dated as of
April 3, 1998 by and among ILD Teleservices, Inc., Intellicall,
Inc., Triad-ILD Partners, L.P., Triad-ILD Partners II, L.P.,
Morris Telecommunications, Inc., Reginald P. McFarland, Stephens
Holding Company, Clark Enterprises, Inc., Nelson E. Bowers,
William K. Holmes and WorldCom, Inc.*
10.14 --Consulting Agreement dated December 15, 1997 by and between ILD
Teleservices, Inc. and Stratacom, Inc.
10.15 --Operator Service Agreement dated August 31, 1997 by and between
ILD Teleservices, Inc. and WorldCom, Inc.
21 --Subsidiaries
23.1 --Consent of Cashin, Morton & Mullins (included in Exhibit 5)*
23.2 --Consent of Price Waterhouse LLP (with respect to ILD
Telecommunications, Inc.)
23.3 --Consent of Price Waterhouse LLP (with respect to Intellicall
Operator Services, Inc.)
23.4 --Consent of Price Waterhouse LLP (with respect to WorldCom--San
Antonio)
23.5 --Consent of Smith & Howard, P.C.
24 --Power of Attorney (included in signature page of the Registration
Statement)
27.1 --Financial Data Schedule for nine months ended September 30, 1997
27.2 --Financial Data Schedule for three months ended December 31, 1997
</TABLE>
- ------------------------
* To be filed by amendment
(b) The following financial statement schedule of ILD Telecommunications,
Inc. is included in this Registration Statement:
Schedule IX: Valuation and Qualifying Accounts
II-4
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person of the registrant in connection with the
securities being registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes to provide to the
Representatives of the Underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in such names as
required by the Representatives of the Underwriters to permit prompt delivery to
each purchaser.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
State of Texas, on the 30th day of April, 1998.
<TABLE>
<S> <C> <C>
ILD TELECOMMUNICATIONS, INC.
By: /s/ MICHAEL F. LEWIS
-----------------------------------------
Michael F. Lewis
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael F. Lewis, Dennis J. Stoutenburgh and J.
David Darnell, or any of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including pre-effective and post-effective amendments) to this Registration
Statement and to sign any registration statement (and any post-effective
amendments thereto) effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or their substitutes may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities indicated on April 30, 1998.
SIGNATURE TITLE
- ------------------------------ --------------------------
Chairman of the Board and
/s/ MICHAEL F. LEWIS Chief Executive Officer
- ------------------------------ (Principal Executive
Michael F. Lewis Officer)
/s/ J. DAVID DARNELL Chief Financial Officer
- ------------------------------ (Principal Financial and
J. David Darnell Accounting Officer)
/s/ DENNIS J. STOUTENBURGH
- ------------------------------ President and Director
Dennis J. Stoutenburgh
- ------------------------------ Director
H. Edward Brooks, Jr.
II-6
<PAGE>
SIGNATURE TITLE
- ------------------------------ --------------------------
- ------------------------------ Director
John J. McDonald, Jr.
- ------------------------------ Director
William P. Payne
/s/ C. READ MORTON
- ------------------------------ Secretary and
C. Read Morton Director
/s/ PATRICK V. STARK
- ------------------------------ Director
Patrick V. Stark
II-7
<PAGE>
SCHEDULE IX: VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Period from May 10, 1996 to December 31, 1996............... $ -- $ 472 $ (375) $ 97
Nine months ended 9/30/97................................... $ 97 $ 1,312 $ (581) $ 828
TAX VALUATION ALLOWANCE:
Period From May 10, 1996 to December 31, 1996............... $ 305 $ -- $ (172) $ 133
Nine months ended 9/30/97................................... $ 133 $ -- $ (133) $ --
</TABLE>
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EXHIBIT 3.2
BYLAWS
OF
ILD COMMUNICATIONS, INC.
ARTICLE I
OFFICES
SECTION 1.1 REGISTERED OFFICE. The location of the Corporation's
registered office required by the Delaware General Corporation Law to be
maintained in the State of Delaware shall be determined from time to time by the
Board of Directors.
SECTION 1.2. ADDITIONAL OFFICES. The Corporation also may have offices at
such other places both within and without the State of Delaware as the Board of
Directors from time to time may determine or the business of the Corporation may
require.
ARTICLE II
STOCKHOLDERS
SECTION 2.1 DATE, TIME AND PLACE OF MEETINGS. All meetings of
stockholders shall be held on such date and at such time and place as may be
fixed from time to time by the Board of Directors. Meetings of the stockholders
may be held at such time and place, within or without the State of Delaware, as
shall be stated in the notice of the meeting or in a duly executed waiver of
notice thereof. If no designation is made, the place of meeting shall be the
principal business office of the Corporation.
SECTION 2.2 ANNUAL MEETINGS. Annual meetings of the stockholders of
the Corporation shall be held each year for the purposes of electing
directors and of transacting such other business as properly may be brought
before the meeting. To be properly brought before the meeting, business must
be either (a) specified in the notice of the meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors or (c) otherwise properly brought before the meeting by a
stockholder; provided, however, that in each case, such business proposed to
be conducted is, under the law, an appropriate subject for stockholder action.
SECTION 2.3. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by law or by the
Corporation's certificate of incorporation, may be called at any time by the
Board of Directors, the President or at the request in writing of stockholders
owning a at
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least twenty percent (20%) in amount of the entire issued and outstanding
capital stock of the Corporation entitled to vote. Such request shall state the
purposes of the proposed meeting. Business transacted at any special meeting of
stockholders shall be limited to the purposes stated in the notice.
SECTION 2.4 NOTICE OF MEETING. Written notice stating the date, time and
place of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered to each stockholder
entitled to vote at the meeting not less than ten (10) nor more than sixty (60)
days before the date of the meeting.
SECTION 2.5 RECORD DATE. The Board of Directors, in order to determine
the stockholders entitled to: (a) receive notice of or to vote at any meeting of
stockholders or any adjournment thereof; (b) receive payment of any dividend or
other distribution or allotment of any rights; or (c) exercise any rights in
respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, shall fix in advance a record date which shall not be
less than ten (10) nor more than sixty (60) days before the date of such
meeting, nor more than sixty (60) days prior to any other action, and in such
case only such stockholders as shall be stockholders of record on the date so
fixed shall be entitled to such notice of or to vote at such meeting or any
adjournment thereof, or be entitled to receive payment of any such dividend or
other distribution or allotment of any rights or be entitled to exercise any
such rights in respect of stock or to take any such other lawful action, as the
case may be, notwithstanding any transfer of any stock on the books of the
Corporation after any such record date fixed as aforesaid. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
SECTION 2.6 VOTING LIST. The officer who has responsibility for the
stock transfer records of the Corporation shall cause to be prepared and made,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical order
and showing the address of each stockholder and the number of shares registered
in the name of each stockholder. Such list shall be open to the examination of
any stockholder, for any purposes germane to the meeting, during ordinary
business hours for a period of at least ten (10) days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list also shall be produced and kept
at the time and place of the meeting during the whole time thereof and may be
inspected by any stockholder who is present.
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SECTION 2.7 QUORUM. Subject to any express provision of law, the
certificate of incorporation, or any Shareholders' Agreement in effect among the
Corporation and certain of its stockholders with respect to the vote required
for a specified action, the holders of a majority of the capital stock issued
and outstanding and entitled to vote, present in person or represented by proxy,
shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by law or by the
certificate of incorporation.
SECTION 2.8 ADJOURNMENT OF MEETINGS. In the absence of a quorum or for
any other reason, the stockholders entitled to vote at any meeting of the
stockholders, present in person or represented by proxy, or the Chairman of the
Board or the President, shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the adjourned meeting.
SECTION 2.9 VOTE REQUIRED. When a quorum is present at any meeting, the
vote of the holders of a majority of the capital stock having voting power,
present in person or represented by proxy, shall decide any questions brought
before such meeting, unless the question is one upon which by express provision
of law, the certificate of incorporation, these bylaws or any Shareholders'
Agreement in effect among the Corporation and certain of its stockholders a
different vote is required, in which case such express provision shall govern
and control the decision of such question. Directors shall be elected by a
plurality of votes case in the election for such directors.
SECTION 2.10 VOTING OF SHARES. Unless otherwise provided in the
certificate of incorporation, each stockholder, at every meeting of the
stockholders, shall be entitled to one vote, in person or by proxy, for each
share of stock having voting power held by such stockholder. A stockholder may
vote in person or by written proxy; provided, however, that no proxy shall be
voted or acted on after three years from its date, unless the proxy provides for
a longer period. Any proxy to be voted at a meeting of stockholders shall be
filed with the Secretary of the Corporation before or at the time of the
meeting. Except as otherwise expressly provided by statute, the vote on any
question need not be by written ballot.
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SECTION 2.11. VOTING OF SHARES BY CERTAIN HOLDERS. Shares of the
Corporation's voting stock standing in the name of another corporation may be
voted by such officer, agent or proxy as the bylaws of such corporation may
prescribe, or, in the absence of such provision, as the Board of Directors of
such corporation may determine.
Shares held by an administrator, executor, guardian or conservator may be
voted by him, either in person or by proxy, without a transfer of such shares
into his name. Shares standing in the name of a trustee may be voted by him,
either in person or by proxy, but no trustee shall be entitled to vote shares
held by him without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such receiver,
and shares held by or under the control of a receiver may be voted by such
receiver without the transfer thereof into his name if authority so to do be
contained in an appropriate order of the court by which such receiver was
appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares until the shares have been transferred into the name of the pledgee, and
thereafter the pledgee shall be entitled to vote the shares so transferred.
Shares of its own stock belonging to the Corporation or held by it in a
fiduciary capacity shall not be voted, directly or indirectly, at any meeting
and shall not be counted in determining the total number of outstanding shares
at any given time.
SECTION 2.12. ACTION BY STOCKHOLDERS WITHOUT A MEETING. Unless otherwise
provided in the certificate of incorporation, any action required to be taken or
which may be taken at any annual or special meeting of stockholders of the
Corporation may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing.
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ARTICLE III
DIRECTORS
SECTION 3.1. GENERAL POWERS. The business of the Corporation shall be
managed by or under the direction of its Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by law, by the certificate of incorporation or by these bylaws directed or
required to be exercised or done by the stockholders.
SECTION 3.2 NUMBER AND TENURE. The number of directors which shall
constitute the whole Board shall be not fewer than one. The exact number of
directors shall be determined from time to time by the affirmative vote of a
majority of the whole Board given at a regular or special meeting of the Board
of Directors, subject to any provision fixing such number of directors in a
Shareholders' Agreement in effect among the Corporation and certain of its
stockholders. Each director shall hold office until his successor is elected
and qualified, or until his earlier death, resignation, incapacity to serve or
removal. No decrease in the number of directors shall shorten the term of any
incumbent director. Directors need not be stockholders.
SECTION 3.3. VACANCIES. Subject to any provision providing for the fixing
such number of directors and providing procedures for the filling of vacancies
in a Shareholders' Agreement in effect among the Corporation and certain of its
stockholders, vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by the affirmative
vote of a majority of the directors then in office, though less than a quorum,
or by a sole remaining director. In the case of a vacancy in the office of a
director caused by an increase in the number of directors, the person so elected
shall hold office until the next annual meeting of stockholders or until his
successor is duly elected and qualified. In the case of a vacancy in the office
of a director resulting otherwise than from an increase in the number of
directors, the person so elected to fill such vacancy shall hold office for the
unexpired term of the director whose office has become vacant. If there are no
directors in office, then an election of directors may be held in the manner
provided by law. If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole Board (as constituted immediately prior to any such increase), the
Court of Chancery, upon application of any stockholder or stockholders holding
at least ten percent of the total number of the shares at the time outstanding
having the right to vote for such directors, may summarily order an election to
be held to fill any such vacancies or newly created directorships or to replace
the directors chosen by the directors then in office.
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SECTION 3.4 ANNUAL AND OTHER REGULAR MEETINGS. The annual meeting of the
Board of Directors shall be held without other notice than this bylaw
immediately after and at the same place as the annual meeting of stockholders.
Regular meetings of the Board of Directors may be held without notice at such
time and such place as from time to time shall be determined by the Board.
SECTION 3.5 SPECIAL MEETINGS. Special meetings of the Board may be called
by the Chairman of the Board or the President, and shall be called by the
Chairman of the Board, the President or the Secretary on the written request of
one-third or more of the directors.
SECTION 3.6. NOTICE. Notice of any special meeting of the Board shall be
given at least two (2) days prior thereto by written notice delivered personally
or mailed to each director at his business address or by telegram.
SECTION 3.7. QUORUM AND MANNER OF ACTING. At all meetings of the Board,
subject to any provisions in a Shareholders' Agreement in effect among the
Corporation and certain of its stockholders, a majority of the total number of
directors shall constitute a quorum for the transaction of business, except that
when a Board of one director is authorized under these bylaws, then one director
shall constitute a quorum. Subject to any provisions calling for supermajority
action in any Shareholders' Agreement in effect among the Corporation and
certain of its stockholders, the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the Board of
Directors, except as may be otherwise specifically provided by statute or by the
certificate of incorporation. If a quorum shall not be present at any meeting
of the Board of Directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
SECTION 3.8. ACTION WITHOUT MEETING. Unless otherwise restricted by the
certificate of incorporation or these bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or any committee designated
by the Board of Directors may be taken without a meeting if all members of the
Board or committee, as the case may be, consent thereto in writing and the
writing or writings are filed with the minutes of the proceedings of the Board
or committee.
SECTION 3.9. ACTION BY TELEPHONE CONFERENCE CALL. Unless otherwise
restricted by the certificate of incorporation or these bylaws, members of the
Board of Directors or any committee designated by the Board of Directors may
participate in a meeting of the Board of Directors or any committee by means of
conference telephone or similar communications equipment by means of which all
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persons participating in the meeting can hear each other, and such participation
in a meeting shall constitute presence in person at the meeting.
SECTION 3.10. COMPENSATION OF DIRECTORS. Unless otherwise restricted by
the certificate of incorporation or these bylaws, the Board of Directors shall
have the authority to fix the compensation of directors and members of any
committee of the Board of Directors. The directors and members of such
committees also may be paid their expenses, if any, of attendance at each
meeting of the Board of Directors or committee thereof. No provision of these
bylaws shall be construed to preclude any director from serving the Corporation
in any other capacity and receiving compensation therefor.
SECTION 3.11 REMOVAL. Unless otherwise restricted by the certificate of
incorporation, these bylaws or any Shareholders' Agreement in effect among the
Corporation and certain of its stockholders, any director or the entire Board of
directors may be removed, with or without cause, by the holders of a majority of
shares entitled to vote at an election of directors; provided, however, that if
there be classes of directors, stockholders may effect such removal only for
cause, or in the event the certificate of incorporation provides for cumulative
voting and less than the entire Board is to be removed, no director may be
removed without cause if the votes cast against his removal would be sufficient
to elect him if then cumulatively voted at an election of the entire Board of
Directors or, if there be classes of directors, at an election of the class of
directors of which he is a part. A removed director's successor may be elected
at the same meeting or time to serve the unexpired term.
ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
SECTION 4.1 APPOINTMENT AND POWERS OF COMMITTEES OF DIRECTORS. The Board
of Directors, by resolution passed by a majority of the whole Board, may
designate one or more committees, including an Executive Committee, and each
such committee shall consist of one or more of the directors of the Corporation
as determined from time to time by resolution of the Board of Directors. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of such
committee. Any such committee, to the extent provided in the resolution of the
Board of directors or in these bylaws, shall have and may exercise all of the
powers and authority of the Board of Directors in the management of the business
and affairs of the Corporation and may authorize the seal of the Corporation to
be affixed to all papers which may require it, but no such committee shall have
such power or authority in reference to amending the certificate of
incorporation, adopting an agreement of merger or consolidation, recommending to
the stockholders the sale,
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lease or exchange of all or substantially all of the Corporation's property and
assets, recommending to the stockholders a dissolution of the Corporation or a
revocation of a dissolution, or amending the bylaws of the Corporation, and
unless the resolution, the certificate of incorporation or these bylaws
expressly so provides, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock. Each committee of
directors shall keep regular minutes of its meetings and report the same to the
Board of Directors, and all action taken by a committee shall be subject to
approval and revision by the Board, provided that no legal rights of third
parties shall be affected by such revisions. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the Board of Directors.
SECTION 4.2. ELECTION OF COMMITTEE MEMBERS. The members of each committee
shall be elected by the Board of Directors and shall serve until the first
meeting of the Board of Directors after the annual meeting of stockholders and
until their successors are elected and qualified or until the members' earlier
resignation or removal. The Board of Directors may designate a chairman and a
vice chairman of each committee. Vacancies may be filled by the Board of
Directors at any meeting.
SECTION 4.3 PROCEDURE/QUORUM/NOTICE. The chairman, vice chairman or a
majority of any committee may call a meeting of that committee. A quorum of any
committee shall consist of a majority of its members unless otherwise provided
by a resolution of the Board of Directors. The majority vote of a quorum shall
be required for the transaction of business. The secretary of the committee or
the chairman of the committee shall give notice of all meetings of the committee
in the manner provided in these bylaws for giving notice to directors of special
meetings of the Board of Directors.
ARTICLE V
NOTICES
SECTION 5.1. NOTICE. Whenever, under the provisions of the certificate of
incorporation or of these bylaws or bylaw, notice is required to be given to any
director or stockholder, it shall not be construed to require personal notice,
but such notice may be given in writing, by facsimile or mail, addressed to such
director or stockholder at his address as it appears on the records of the
Corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
SECTION 5.2. WAIVER OF NOTICE. Whenever any notice is required to be
given under the provisions of the certificate of incorporation or of these
bylaws or
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by law, a waiver thereof, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of any regular or special meeting of the
stockholders, directors or a committee of directors need be specified in any
written waiver of notice.
ARTICLE VI
OFFICERS
SECTION 6.1 GENERAL. The Board of Directors at each annual meeting of
directors shall elect a President, a Secretary and a Treasurer. The Board of
Directors also may elect from time to time such other officers as it shall deem
necessary, including a Chairman of the Board, one or more Vice Presidents (one
or more of whom may be designated Executive Vice President or Senior Vice
President), Assistant Vice Presidents, Assistant Secretaries and Assistant
Treasurers, who shall exercise such powers and perform such duties as shall be
determined from time to time by the Board of Directors. Any number of offices
may be held by the same person unless the certificate of incorporation or these
bylaws otherwise provide.
SECTION 6.2. TERM AND REMOVAL. The officers of the Corporation shall hold
office until their successors are elected and qualified, or until their earlier
death, resignation, incapacity to serve or removal from office. Subject to any
provision calling for supermajority action in any Shareholders' Agreement in
effect among the Corporation and certain of its stockholders, any officer
elected or appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the directors. Such removal shall be without
prejudice to such person's contract rights, if any, but the election or
appointment of any person as an officer, agent or employee of the Corporation
shall not of itself create contract rights. If the office of any officer becomes
vacant, the President may appoint any qualified person to fill such vacancy
temporarily until the Board of Directors elects any qualified person for the
unexpired portion of the term. Such person shall hold office for the unexpired
term and until the officer's successor is duly elected and qualified.
SECTION 6.3. SALARIES. The salaries of all officers and agents of the
Corporation shall be fixed by the Board of Directors, except that the Board of
Directors may delegate to any officer of officers the power to fix the
compensation of any other officer or officers. The Board of Directors may
require any officer to give security for the faithful performance of his duties.
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SECTION 6.4. CHAIRMAN OF THE BOARD. A Chairman of the Board may be chosen
from among the Directors. He shall be ex officio a member of all standing
committees, unless otherwise provided in the resolution appointing the same.
The Chairman of the Board shall call meetings of the stockholders, the Board of
Directors and any committee to order and shall act as chairman of such meetings.
He shall also perform such other duties as may be assigned to him by the Board
of Directors.
SECTION 6.5. PRESIDENT. The President shall be the chief executive
officer of the Corporation and shall have general and active management
responsibility of the business of the Corporation and shall see that all orders
and resolutions of the Board of Directors are carried into effect. He shall
have the power to make and execute contracts on behalf of the Corporation and to
delegate such powers to others. He also shall have such powers and perform such
duties as are specifically imposed upon him by law and as may be assigned to him
by the Board of Directors. The President shall be ex officio a member of all
standing committees, unless otherwise provided in the resolution appointing the
same. In the absence of a Chairman of the Board, the President shall call
meetings of the stockholders, the Board of Directors and any committee to order
and shall act as chairman of such meetings.
SECTION 6.6. VICE PRESIDENTS. The Vice President, in the absence or
disability or at the direction of the President, shall perform the duties and
exercise the powers of the President. If the Corporation has more than one Vice
President, the one designated by the Board of Directors shall act in lieu of the
President. The Vice President shall perform such duties as are generally
performed by Vice Presidents and shall perform such other duties and exercise
such other powers as the Board of Directors or the President shall request or
delegate.
SECTION 6.7 SECRETARY. The Secretary shall attend all meetings of the
stockholders and all meetings of the Board of Directors and shall record all
votes and the minutes of all proceedings in books to be kept for that purpose,
and shall perform like duties for the standing committees when required. He
shall have custody of the corporate seal of the Corporation, shall have the
authority to affix the same to any instrument the execution of which on behalf
of the Corporation under its seal is duly authorized and shall attest the same
by his signature whenever required. The Board of Directors may give general
authority to any other officer to affix the seal of the Corporation and to
attest the same by his signature. The Secretary shall give, or cause to be
given, any notice required to be given of any meetings of the stockholders, of
the Board of Directors and of the standing committees when required. The
Secretary shall cause to be kept such books and records as the Board of
Directors, the Chairman of the Board or the
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President may require and shall cause to be prepared, recorded, transferred,
issued, sealed and canceled certificates of stock as required by the
transactions of the Company and its stockholders. The Secretary shall attend to
such correspondence and shall perform such other duties as may be incident to
the office of a Secretary of a corporation or as may be assigned to him by the
Board of Directors, the Chairman of the Board or the President.
SECTION 6.8. TREASURER. The Treasurer shall have charge of and be
responsible for all funds, securities, receipts and disbursements of the
Corporation and shall deposit, or cause to be deposited, in the name of the
Corporation all monies or other valuable effects in such banks, trust companies
or other depositories as, from time to time, shall be selected by the Board of
Directors. He shall render to the Chairman of the Board, the President and to
the Board of Directors, whenever requested, an account of the financial
condition of the Corporation and, in general, he shall perform all the duties
incident to the office of a Treasurer of a corporation, and such other duties as
may be assigned to him by the Board of Directors, the Chairman of the Board or
the President.
SECTION 6.9. ASSISTANT VICE PRESIDENT, ASSISTANT SECRETARY AND ASSISTANT
TREASURER. The Assistant Vice President, Assistant Secretary and Assistant
Treasurer, in the absence or disability of any Vice President, the Secretary or
the Treasurer, respectively, shall perform the duties and exercise the powers of
those offices, and, in general, they shall perform such other duties as shall be
assigned to them. Specifically the Assistant Secretary may affix the corporate
seal to all necessary documents and attest the signature of any officer of the
Corporation.
SECTION 6.10. DELEGATION OF AUTHORITY. In the case of the absence of any
officer of the Corporation or for any other reason that the Board of Directors
may deem sufficient, the Board of Directors may delegate, for the time being,
any or all of the powers or duties of such officer to any other officer or to
any director.
ARTICLE VII
CAPITAL STOCK
SECTION 7.1. FORM AND EXECUTION OF CERTIFICATES. The certificates
representing shares of the capital stock of the Corporation shall be in such
form as shall be approved by the Board of Directors. Each certificate of stock
shall certify the number of shares owned by the stockholder in the Corporation,
and the face or back of each certificate issued to represent any partly paid
shares shall set forth the total amount of the consideration to be paid
therefore and the amount paid thereon. The certificates shall be signed by the
Chairman of the Board, the President or a Vice President, and by the Secretary
or an Assistant Secretary or the Treasurer or an Assistant Treasurer. A
facsimile of the seal of the Corporation
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may be used in connection with the certificates of stock of the Corporation, and
facsimile signatures of the officers named in this section may be used in
connection with said certificates. In the event any officer whose facsimile
signature has been placed upon a certificate shall cease to be such officer
before the certificate is issued, the certificate may be issued with the same
effect as if such person were an officer at the date of issue.
If the Corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificates which the Corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the Delaware General Corporation Law, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the Corporation shall issue the represent such class or
series of stock, a statement that the Corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
SECTION 7.2. RECORD OWNERSHIP. All certificates shall be numbered
appropriately and the names of the owners, the number of shares and the date of
issue shall be entered in the books of the Corporation. The Corporation shall
be entitled to treat the holder of record of any share of stock as the holder in
fact thereof and accordingly shall not be bound to recognize any equitable or
other claim to or interest in any share on the part of any other person, whether
or not it shall have express or other notice thereof, except as required by law.
SECTION 7.3. TRANSFER OF SHARES. Upon surrender to the Corporation or to
a transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation, if it is satisfied that all
provisions of law or any provisions in any Shareholders' Agreement in effect
among the Corporation and certain of its stockholders regarding transfers of
shares have been duly complied with, to issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction upon its
books.
SECTION 7.4. LOST, STOLEN OR DESTROYED STOCK CERTIFICATES. Any person
claiming a stock certificate in lieu of one lost, stolen or destroyed shall give
the Corporation an affidavit as to such person's ownership of the certificate
and of the facts which prove that it was lost, stolen or destroyed. The person
shall also, if
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required by the Treasurer or Secretary of the Corporation, deliver to the
Corporation a bond, sufficient to indemnify the Corporation against any claims
that may be made against it on account of the alleged loss, theft or destruction
of any such certificate or the issuance of such new certificate. Any Vice
President or the Secretary or any Assistant Secretary of the Company is
authorized to issue such duplicate certificates or to authorize any of the
transfer agents and registrars to issue and register such duplicate
certificates.
SECTION 7.5. REGULATIONS. The Board of Directors from time to time may
make such rules and regulations as it may deem expedient concerning the issue,
transfer and registration of shares.
SECTION 7.6. TRANSFER AGENT AND REGISTRAR. The Board of Directors may
appoint such transfer agents and registrars of transfers as it may deem
necessary and may require all stock certificates to bear the signature of either
or both.
ARTICLE VIII
GENERAL PROVISIONS
SECTION 8.1. DIVIDENDS. Dividends upon the capital stock of the
Corporation, subject to the provisions of the certificate of incorporation or
any provisions in any Shareholders' Agreement among the Corporation and certain
of its stockholders, if any, may be declared by the Board of Directors at any
regular or special meeting either out of the surplus of the Corporation, as
defined in and computed in accordance with Sections 154 and 244 of the Delaware
General Corporation Law, or, if there be no surplus, out of the net profits of
the Corporation for the fiscal year in which the dividend is declared and/or the
preceding fiscal year . Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation. Before payment of any dividend, there may be set aside out of
any funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, determine to be
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the directors shall deem to be conducive to the
interest of the Corporation, and the directors may modify or abolish any such
reserve in the manner in which it was created.
SECTION 8.2. CHECKS. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors from time to time may designate.
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SECTION 8.3. SEAL. The corporate seal shall be circular in form and shall
have inscribed thereon the name of the Corporation. The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
SECTION 8.4. FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
SECTION 8.5. INDEMNIFICATION. The Corporation shall indemnify its
officers, directors, employees and agents to the fullest extent permitted by the
Delaware General Corporation Law. The indemnification expressly provided by law
shall not be deemed exclusive of any other rights, in respect of indemnification
or otherwise, to which any person indemnified or seeking indemnification may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity while holding
such office, and shall continue as to a person who ceased to be a director,
officer employee or agent of the Corporation and shall inure to the benefit of
heirs, executors and administrators of such a person.
SECTION 8.6. VOTING SHARES IN SUBSIDIARIES. In the absence of other
arrangements by the Board of Directors, shares of stock issued by another
corporation and owned or controlled by the Corporation may be voted by the
President of the Corporation or, in his absence or disability, by such other
person as the Board of Directors shall so designate, and such person may execute
the aforementioned powers by executing proxies and stockholder consents on
behalf of the Corporation.
SECTION 8.7. INSPECTION OF BOOKS. The Board of Directors shall have the
power to determine which account and books of the Corporation, if any, shall be
open to the inspection of stockholders, except such as may by law be
specifically open to inspection, and shall have power to fix reasonable rules
and regulations not in conflict with the applicable law for the inspection of
accounts and books which by law or by determination of the Board of Directors
shall be open to inspection, and the stockholders' rights in this respect are
and shall be restricted and limited accordingly.
SECTION 8.8. CONTRACTS. No contract or other transaction between the
Corporation and any other corporation shall be affected or invalidated by the
fact that a stockholder, director or officer of the Corporation is a
stockholder, director or officer of, or is interested in, such other
corporation, and no contract or other transaction between the Corporation and
any other person or firm shall be affected or invalidated by the fact that a
stockholder, director or officer of the Corporation is a party to, or interested
in, such contract or transaction; provided that, in each
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such case, the nature and extent of the interest of such stockholder, director
or officer in such contract or other transaction or the fact that such
stockholder, director or officer is a stockholder, director or officer of such
other corporation is known to the Board of Directors or is disclosed at the
meeting of the Board of Directors at which such contract or other transaction is
authorized.
SECTION 8.9. AMENDMENT OF BYLAWS. Subject to any provisions calling for
supermajority approval in a Shareholders' Agreement among the Corporation and
certain of its stockholders, these bylaws may be altered, amended or repealed
and new bylaws may be adopted by the Board of Directors at any regular or
special meeting of the Board of Directors, or by the stockholders entitled to
vote at any annual or special meeting of the stockholders.
Date of Adoption: April 26, 1996.
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EXHIBIT 4.1
SUBORDINATED CONVERTIBLE NOTE
NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK TO WHICH THIS NOTE MAY BE
CONVERTED HAVE BEEN REGISTERED UNDER ANY SECURITIES LAWS IN RELIANCE OF
EXEMPTION(S) THEREFROM AND NEITHER SUCH SECURITIES MAY BE SOLD OR TRANSFERRED
UNLESS SUCH TRANSFER OR SALE IS MADE IN COMPLIANCE WITH ALL FEDERAL AND
APPLICABLE STATE SECURITIES LAWS. THIS NOTE IS SUBORDINATE TO CERTAIN
INDEBTEDNESS OF THE MAKER TO CERTAIN SECURED LENDERS AS DESCRIBED BELOW.
SUBORDINATED CONVERTIBLE NOTE
$1,000,000.00 May 10, 1996
FOR VALUE RECEIVED, ILD COMMUNICATIONS, INC., a Delaware corporation (the
"Maker"), promises to pay to INTELLICALL, INC., a Delaware corporation (together
with any assigns or successors to this Note, the "Holder") at its address set
forth in Article VII hereof, lawful money of the United States at the principal
sum of One Million Dollars and No Cents ($1,000,000.00), together with interest
thereon at a rate of ten percent (10%) in accordance with the terms and
conditions herein set forth. This Note is being delivered pursuant to the terms
of that certain Organization Agreement (the "Organization Agreement") dated May
10, 1996 to which the Maker and the Holder are parties.
ARTICLE I
PAYMENT OF INTEREST AND PRINCIPAL; PREPAYMENT
Section 1.1 PAYMENTS; INTEREST RATE. From the date hereof until this Note
is paid in full and canceled: (a) interest accrued on this Note at a fixed,
simple interest rate of ten percent (10%) for the quarterly period then ending
shall be payable in arrears on July 31, October 31, January 31 and April 30 of
each year commencing with an stub interest payment on July 31, 1996; and (b) the
entire principal amount, together with any and all accrued interest thereon,
shall be due and payable in full in one lump sum on May 10, 2001; provided,
however, that if any of such payment dates above is a day on which federally
chartered banking institutions in the United States are not open for business,
then on the first business day next succeeding such date on which such
institutions are open for business. Notwithstanding the foregoing or any other
provision of this Note, the Holder shall not be entitled to receive, collect or
apply as interest on the principal of this Note any amount in excess of the
maximum rate permitted under applicable law.
Section 1.2 PREPAYMENTS.
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Section 1.2.1 PREPAYMENTS AT OPTION OF HOLDER. Subject to the
additional provisions in Section 3.1 (b) hereof, if while this Note remains
outstanding, the Maker shall propose to either (i) sell all or any substantial
portion of its assets, rights and properties or merge or consolidate with any
other corporation, partnership, or other business entity such that it is not the
surviving entity, or (ii) file a registration statement under the Securities Act
of 1933 covering any of its debt or equity securities, then the Holder shall
have the option, exercisable by notice given prior to the effective date of such
sale, merger consolidation or registration statement, to cause the Maker to
prepay the entire outstanding amount of and interest on this Note out of the
proceeds of such sale or public offering.
Section 1.2.2 PREPAYMENTS AT OPTION OF MAKER. Subject to the
provisions of Article IV hereof, this Note may be prepaid prior to maturity, in
whole or part, at any time subsequent to two years from the date hereof, without
premium or penalty. Prepayments shall be applied first to payments of all
accrued or unpaid interest on the unpaid principal of this Note and then to
principal of this Note.
Section 1.3 TRANSFER OF NOTE. Except for transfers to an Affiliate (as
such term is defined in the Shareholders Agreement of even date herewith to
which the Maker and Holder are parties) or transfer by the Holder via collateral
assignment to such Holder's senior lender (or successors thereto), this Note, or
any interest herein, may not be offered, sold, transferred, pledged, assigned or
otherwise disposed of by the Holder without the prior written consent of Maker.
Any attempted offer, sale, transfer, pledge, assignment or other disposition not
in compliance with this Section 1.3 will be invalid.
Section 1.4 PARI PASSU WITH OTHER NOTE. This Note is one of three Notes
in the aggregate amount of $2,000,000 dated of even date herewith issued
pursuant to the terms of the Organization Agreement. The three Notes shall rank
PARI PASSU in right of payment with each other and all payments made with
respect to this and other Note shall be made proportionately to all holders of
such Notes.
ARTICLE II
REMEDIES
Section 2.1 EVENTS OF DEFAULT. Upon the occurrence of any Event of
Default (as defined below), the Holder may declare the entire unpaid principal
of this Note, and all unpaid interest thereon, to be immediately due and
payable, and the Holder of this Note may thereupon proceed to protect and
enforce its rights either by suit in equity or by other appropriate proceedings,
whether for specific performance (to the extent permitted by law) of any
covenant or agreement contained herein or in aid or
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exercise of any power granted herein, or proceed to enforce the payment of this
Note or to enforce any other legal or equitable right of the Holder. If an
Event of Default shall occur or exist and this Note is placed in the hands of an
attorney for collection or suit is filed herein, or proceedings are had in
bankruptcy or similar proceedings for the establishment or collection of any
amount called for hereunder, the Maker agrees to pay the Holder hereof
reasonable attorneys or collection fees actually incurred. For the purposes
hereof, an "Event of Default" shall exist if any of the following occurs and is
continuing for the periods indicated:
(a) the Maker fails to pay when due on any payment hereunder when and as
such payment shall become due and payable, and shall fail to cure such default
within three (3) days after notice to the Maker by the Holder of written demand
for such payment; or
(b) the Maker pursuant to the meaning of any Bankruptcy Law: (i)
commences a voluntary case; (ii) consents to an involuntary case, (iii) consents
to the appointment of a Custodian for it or for all or substantially all of its
property or (iv) makes a general assignment for the benefit of its creditors; or
(c) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that: (i) is for relief against the Maker in an involuntary
case, (ii) appoints a Custodian for the Maker or for all or substantially all of
its property or (iii) orders the complete liquidation of the Maker in a
proceeding other than as described in clause (c), and the order or decree
remains unstayed and in effect for 60 consecutive days.
The term "Bankruptcy Law" means Title 11, U.S. Code or any other similar
Federal or state law for relief of creditors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under any Bankruptcy
Law.
Section 2.2 REMEDIES NON-EXCLUSIVE. The remedies provided to the Holder
herein shall be cumulative and non-exclusive, and not in lieu of any other
rights or remedies to which the Holder is entitled at law or equity for any
breach of, or non-compliance with, the provisions of this Note by the Maker.
Section 2.3 NO LIMITATION ON SUITS ON NOTE. Nothing contained in this
Note shall affect or impair the obligation of the Maker, which is absolute and
unconditional, to pay the principal of and accrued interest on this Note to the
Holder when and as the same become due and payable pursuant to the terms of this
Note, or affect or impair the right of action, which is also absolute and
unconditional, of the Holder to institute suit against the Maker to enforce such
payment by reason of contract embodied in this Note.
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Section 2.4 WAIVER OF RIGHTS. Maker hereby waives demand, presentment for
payment, notice of nonpayment, protest, notice of protest, filing of suit and
diligence in collecting this Note.
ARTICLE III
CONVERSION
Section 3.1 CONVERSION PROVISIONS.
Section 3.1.1 UNFETTERED CONVERSION AT THE OPTION OF THE HOLDER.
Subject to and upon compliance with the provisions of this Section 3.1, and
subject to compliance with any required notification or expiration or
termination of any notice or waiting periods under applicable laws or
regulations (including, without limitation, the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act")), including any extensions
thereof, Holder shall have the right, at Holder's option, at any time (and from
time to time) to convert any principal balance of this Note, in whole or part,
into that number of the fully paid and nonassessable shares of the Maker's
Common Stock equal to the then-applicable Conversion Rate (as defined in Section
3.1.3. hereof), which shall be calculated as to each conversion to the nearest
1/100th of a share but any fractional shares shall receive cash in lieu of the
issuance of a fractional share.
Section 3.1.2. CONVERSION PROCEDURES.
(a) In order to exercise the conversion privilege pursuant to
Section 3.1 hereof, the holder of this Note shall deliver to the
Maker, during normal business hours at its principal place of business
or at such other place as may be designated by the Maker, the Note
duly endorsed or assigned in blank, accompanied by written notice: (A)
that the holder elects to convert the Note; and (B) specifying the
name or names (with address) in which a certificate or certificates
for shares of Common Stock are to be issued and, if so required by the
Maker, by a written instrument or instruments of transfer in form
reasonably satisfactory to counsel for the Maker, duly executed by the
holder or his or its duly authorized legal representative.
(b) As promptly as practicable after the surrender of the Note
pursuant to this Section 3.1.2 for conversion pursuant to Section
3.1.1. hereof, the Maker shall deliver to or upon the written order of
the Holder of this Note when the Note is surrendered, a certificate or
certificates representing the number of fully paid and nonassessable
shares of Common Stock into which this Note may be or have been
converted in accordance with the provisions of this Section 3.1
together with a new Note, if applicable, in the
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principal amount not converted in substantially the form as this Note.
The Maker shall pay all expenses, taxes (other than stock transfer
taxes) and other charges required to be paid by the Maker in order to
issue the shares of Common Stock pursuant to this Section 6.
(c) Conversion shall be deemed to have been effected on the date
on which all of the conditions specified in Section 3.1.2.(a) have
been satisfied (the "Conversion Date"), and the person or persons in
whose name or names any certificate(s) 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 of Common Stock
represented by those certificates on and as of the Conversion Date,
and such conversion shall be at the Conversion Rate in effect on the
Conversion Date (unless the share transfer books of the Maker shall be
closed on the Conversion Date, in which case such person or persons
shall be deemed to have become the holder or holders of record at the
close of business on the next succeeding day on which such stock
transfer books are open, but such conversion shall be at the
Conversion Rate in effect on the Conversion Date). All shares of
Common Stock issued upon conversion of the this Note will, upon
delivery, be duly and validly issued, and fully paid and
nonassessable.
Section 3.1.3 CONVERSION RATE. The "Conversion Rate" shall be one
(1) share of Common Stock for each $90.00 of principal then due the Holder,
subject to adjustment from time to time as provided in Section 3.2. hereof.
Section 3.2. ANTI-DILUTION PROVISIONS AND ADJUSTMENT OF CONVERSION RATE.
Section 3.2.1. NO DILUTION. Subject to the provisions of Section
3.2.3. hereof, in the event the Maker shall, at any time or from time to
time while any principal balance of this Note is outstanding, (A) pay a
dividend or make a distribution in respect of Common Stock in shares of
Common Stock, or (B) subdivide or combine the outstanding shares of Common
Stock into a greater or lesser number of shares, in each case whether by
reclassification of shares, recapitalization of the Maker, or otherwise,
then in such event, the Note will automatically, without any action on the
part of the holder thereof or the Maker, become convertible into that
number of shares of Common Stock equal to the number of shares of Common
Stock into which this Note could be converted immediately prior to such
event, multiplied by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event, and the
denominator of which is the number of shares of Common Stock outstanding
immediately before
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such event. An adjustment pursuant to this Section 3.2.1. shall be
effective upon payment of such dividend or distribution in respect of the
Common Stock, and in the case of a subdivision or combination, shall become
effective immediately as of the effective date thereof.
Section 3.2.2. PRICE PROTECTION. Subject to the exceptions in
Section 3.2.3. below, in the event the Maker shall at any time or from time
to time while any principal balance of this Note is outstanding, sell or
issue shares of Common Stock (other than in a transaction subject to
Section 3.2.1. hereof), any security convertible into shares of Common
Stock or any option, right or warrant to purchase shares of Common Stock,
for no consideration or at a purchase price per share of Common Stock (or
conversion rate, in the case of a security convertible into Common Stock)
less than the Conversion Rate in effect on the date of sale or issuance of
such Common Stock, security convertible into Common Stock, option, right or
warrant, then, in such event (or in the event or any change in the terms of
any security convertible into Common Stock or option, right or warrant that
has a similar effect on the date of such change), this Note will
automatically, without any action on the part of the holder hereof or the
Maker, become convertible into that number of shares of Common Stock equal
to the number of shares of Common Stock into which this Note could be
converted immediately before such sale or issuance of Common Stock,
securities convertible into Common Stock, options, rights or warrants (or
change in terms), multiplied by a fraction, the numerator of which is the
number of shares of Common Stock outstanding immediately before such sale
or issuance of Common Stock, securities convertible into Common Stock,
options, rights or warrants (or change in terms) plus the maximum number of
shares of Common Stock that could be acquired upon the sale or issuance of
the Common Stock, or upon exercise in full of all such conversion rights,
options, rights and warrants, and the denominator of which is the number of
shares of Common Stock outstanding immediately before such sale or issuance
of Common Stock, securities convertible into Common Stock, options, rights
or warrants (or change in terms) plus the number of shares of Common Stock
that could be purchased at the Conversion Rate at the time of such sale or
issuance (or change in terms) for the maximum aggregate consideration
payable upon the sale or issuance of the Common Stock, or upon exercise in
full of all such conversion rights, options, rights or warrants. For
purposes of this Section 3.2.2., all shares of Common Stock issuable upon
the conversion of such convertible securities or upon exercise of such
options, rights or warrants shall be deemed to have been issued for the
purpose of computing the number of shares of Common Stock into which this
Note could be converted, as of the time such convertible securities,
options, rights or warrants are issued of sold (or the terms thereof are
changed). If any rights of conversion or
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exercise of such convertible securities, options, rights or warrants shall
expire without having been exercised (except in the case where the Maker
has redeemed such convertible security, option, right or warrant or made
any payment on account of the holder thereof not converting or exercising
such convertible security, option, right or warrant), the number of shares
of Common Stock into which this Note could be converted shall forthwith be
automatically adjusted to be the number of shares of Common Stock into
which this Note could be converted that would have been in effect had an
adjustment been made on the basis that the only shares of Common Stock
issued or sold were those actually issued upon the conversion or exercise
of such convertible securities, options, rights or warrants. For purposes
hereof, the date of issuance of options for shares of Common Stock shall
mean the date of their grant.
Section 3.2.3. EXCEPTIONS. Notwithstanding any other provisions
herein to the contrary, the following events shall not be deemed to
constitute an issuance of Common Stock or other security of the Maker for
purposes of this Article 3: (A) the issuance of any options for shares of
Common Stock, or the issuance of shares of Common Stock upon exercise
thereof, pursuant to a stock option plan for directors, officers, key
employees or consultants of the Maker, as approved by the Board of
Directors (or committee thereof) of the Maker, including the options to
Michael F. Lewis and certain key employees or consultants of the Maker for
27,500 shares at $24.20 per share to be approved by the Board; (B) the
issuance of any warrants, options or rights, or the issuance of shares of
Common Stock upon exercise thereof, as part of the terms of any borrowings,
direct or indirect, from financial institutions or other Persons (including
the warrants to be granted to Sirrom Capital Corporation and Reedy River
Ventures, L.P. in connection with a $2,000,000 loan) as approved by the
Board of Directors of the Company,; or (C) the issuance of the warrants by
the Company to Triad Capital Partners, Inc., or affiliates thereof, to
purchase up to 6,000 shares of Common Stock at $90.00 per share, and the
issuance of shares of Common Stock pursuant to the exercise of any such
warrant.
Section 3.2.4. EQUITABLE ADJUSTMENT. If the Maker shall make any
dividend or distribution on shares of Common Stock, sell or issue any
Common Stock, other capital stock or other security of the Maker or sell or
issue any rights or warrants to purchase or acquire any such security that
is not expressly addressed by the terms of this Article 3, and does not
result in an adjustment to the number of shares of Common Stock into which
this Note can be converted pursuant to this Section 6(d), the Board of
Directors of the Maker may, in its sole discretion, consider whether such
dividend, distribution, sale or issuance is of a nature that some type of
equitable adjustment should be made in respect of such dividend,
distribution, sale or issuance for the protection
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of the holders of the Notes. If in such case the Board of Directors
determines that some type of adjustment should be made, an equitable
adjustment not repugnant to applicable law and for the protection of the
holders of Notes shall be made effective as of the date of such dividend,
distribution, sale or issuance, as determined in good faith by the Board of
Directors in its sole discretion. The determination of the Board of
Directors as to whether some type of adjustment should be made pursuant to
the provision of this Section 3.2.4., and if so, as to what adjustment
should be made and when, shall be final and binding on the Maker and all
stockholders of the Maker. The Maker shall be entitled to make such
additional adjustments, in addition to those required by the provisions of
this Section 3.2.4., as shall be necessary so that any dividend or
distribution in shares of capital stock of the Maker shall not be taxable
to holders of Common Stock.
Section 3.3 TERMINATION OF RIGHT TO CONVERT IN CONNECTION WITH FUNDAMENTAL
CORPORATE CHANGES. Notwithstanding anything herein the contrary, and subject to
the notice requirements of this Section 3.3, if the Maker shall be a party to
any transaction that involves any consolidation, merger or share exchange of the
Maker with or into another Maker, or any sale of all or substantially all of the
assets of the Maker to another Person, and which is effected in such a way that
the holders of Common Stock shall be entitled to receive cash, stock, securities
or other assets with respect to or in exchange for Common Stock, then the right
to convert this Note shall terminate at the close of business on the date as of
which the holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for cash, securities or other assets deliverable upon
such consolidation, merger, share exchange or sale of all or substantially all
of the assets of the Maker. In case the Maker shall enter into any agreement or
understanding or the Board of Directors shall adopt any resolution authorizing
or proposing any transaction of the type described in this Section 3.3., then in
any such event the Maker promptly shall cause to be mailed, by registered or
certified mail, postage prepaid, to the holders of the Notes, at each such
holder's last address appearing on the records of the Maker, thirty (30) days
prior to the date on which the Maker closes its books or takes a record for
determining rights to vote with respect to any consolidation, merger, share
exchange or sale, a notice of such agreement, understanding or resolution
stating the expected record date for determining holders of Common Stock
entitled to exchange their shares with respect to a transaction described in
this Section 3.3.; PROVIDED, HOWEVER, that the Maker shall not be liable or
responsible if the actual dates of any such events shall be different for the
expected dates set forth in such notice.
3.4. SUFFICIENT AUTHORIZED SHARES OF COMMON STOCK. The Maker shall at all
times reserve and keep available out of its authorized and unissued Common
Stock, solely for the purpose of effecting the conversion of the Notes, such
number of shares of
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Common Stock as shall from time to time be sufficient to effect the conversion
of all then outstanding Notes. The Maker shall, from time to time, subject to
and in accordance with applicable law, increase the authorized shares of Common
Stock if at any time the number of authorized shares of Common Stock remaining
unissued shall not be sufficient to permit the conversion at such time of all
then outstanding Notes.
ARTICLE IV
SUBORDINATION
Section 4.1 AGREEMENT TO SUBORDINATE TO SENIOR DEBT. The Maker covenants
and agrees, and the Holder, by accepting this Note, covenants and agrees for
itself and its successors and assigns, that the indebtedness evidenced by this
Note shall be subordinate in right of payment to all Senior Debt (as defined
herein). As used in this Note, the term "Senior Debt" shall mean the principal
of and interest on the Maker's $2,000,000 indebtedness to Sirrom Capital
Corporation and Reedy River Ventures, L.P., as may exist from time to time (as
the same may be deferred, renewed, extended or refinanced) and any other secured
lending facilities of Maker hereinafter in effect from time to time while this
Note is outstanding; provided, however, that nothing herein shall be construed
to impair or restrict the payment of interest hereunder so long as the there
shall be no defaults under the terms of the Senior Debt.
ARTICLE V
LOST NOTE
Section 5.1 LOST NOTE. On receipt of evidence reasonably satisfactory to
the Maker of the loss, theft, destruction or mutilation of this Note, the Maker
will execute and deliver, in lieu of this Note, a new note of like tenor.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
Section 6.1 THE MAKER'S REPRESENTATIONS AND WARRANTIES. The Maker
represents and warrants to the Holder as follows:
(a) The Maker is a corporation, duly organized, validly existing and
in good standing under the laws of the State of Delaware with the requisite
corporate power and authority to execute and deliver this Note and perform its
obligations hereunder;
(b) The execution and delivery by the Maker of this Note and the
performance of its obligations hereunder has been
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duly authorized by all necessary corporate action and this Note constitutes a
valid and binding obligation of the Maker, enforceable in accordance with its
terms except (i) as the enforceability hereof may be limited by applicable
bankruptcy or other laws affecting the enforcement of creditors' rights
generally and (ii) as to equitable remedies, to the equitable discretion of the
courts; and
(c) The execution and delivery of this Note by the Maker and the
performance by the Maker of its obligations hereunder will not result in a
breach of any of the terms of, or constitute a default under, the Maker's
Certificate of Incorporation, or its By-laws or any indenture, mortgage, note or
other instrument or agreement of which the Maker is, as of the date hereof, a
party or by which the Maker is bound, or any order of any Governmental Entity
entered in any proceeding to which the Maker was or is, as of the date hereof, a
party or by which it is bound.
ARTICLE VII
NOTICES
Section 7.1 NOTICES. In any case where any notice or other communication
is required or permitted to be given hereunder, such notice or communication
shall be in writing and (i) personally delivered, (ii) sent by postage prepaid
registered airmail, or (iii) transmitted by telecopy as follows:
If to the Maker:
ILD Communications, Inc.
13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
Telecopy: (904) 285-3616
If to Holder:
INTELLICALL, INC.
2155 Chenault, Suite 410
Carrolton, Texas 75006
Attention: Chief Financial Officer
Telecopy: (214) 416-7213
All such notices or other communications shall be deemed to have been given or
received (i) upon receipt if personally delivered, (ii) on the third business
day following posting if by postage prepaid registered airmail, and (iii) when
sent with evidence of transmission if by telecopy.
Section 7.3 SUCCESSORS. All covenants, stipulations, promises and
agreements contained in this Note, by or on behalf
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of the Maker or the Holder, shall be binding upon and inure to the benefit of
their respective successors, assigns, heirs and personal representatives.
Section 7.4 HEADINGS; CONSTRUCTIONS. The article and sectional headings
herein are for convenience of reference only and shall not affect the meaning or
construction of the terms hereof. Whenever the context so requires, the
masculine gender herein shall include the feminine or neuter, and the singular
number shall include the plural. If any of the provisions of this Note shall be
unlawful, void or for any reason unenforceable, they shall be deemed separable
from, and shall in no way affect the validity or enforceability of, the
remaining provisions of this Note.
Section 7.6 GOVERNING LAW. This Note shall be governed by and construed
in accordance with the laws of the State of Delaware.
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IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed as
of the day and year first above written.
MAKER:
ILD COMMUNICATIONS, INC.
By:/s/ Michael F. Lewis
--------------------------------
Michael F. Lewis, President
and CEO
Accepted, Acknowledged and
Agreed to:
/s/ Secretary
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EXHIBIT 4.2
SUBORDINATED CONVERTIBLE NOTE
NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK TO WHICH THIS NOTE MAY BE
CONVERTED HAVE BEEN REGISTERED UNDER ANY SECURITIES LAWS IN RELIANCE OF
EXEMPTION(S) THEREFROM AND NEITHER SUCH SECURITIES MAY BE SOLD OR TRANSFERRED
UNLESS SUCH TRANSFER OR SALE IS MADE IN COMPLIANCE WITH ALL FEDERAL AND
APPLICABLE STATE SECURITIES LAWS. THIS NOTE IS SUBORDINATE TO CERTAIN
INDEBTEDNESS OF THE MAKER TO CERTAIN SECURED LENDERS AS DESCRIBED BELOW.
SUBORDINATED CONVERTIBLE NOTE
$666,666.67 May 10, 1996
FOR VALUE RECEIVED, ILD COMMUNICATIONS, INC., a Delaware corporation (the
"Maker"), promises to pay to TRIAD-ILD PARTNERS, L.P., a Georgia limited
partnership (together with any assigns or successors to this Note, the "Holder")
at its address set forth in Article VII hereof, lawful money of the United
States at the principal sum of Six Hundred and Sixty-Six Thousand Six Hundred
and Sixty-Six Dollars and Sixty-Seven Cents ($666,666.67), together with
interest thereon at a rate of ten percent (10%) in accordance with the terms and
conditions herein set forth. This Note is being delivered pursuant to the terms
of that certain Organization Agreement (the "Organization Agreement") dated May
10, 1996 to which the Maker and the Holder are parties.
ARTICLE I
PAYMENT OF INTEREST AND PRINCIPAL; PREPAYMENT
Section 1.1 PAYMENTS; INTEREST RATE. From the date hereof until this Note
is paid in full and canceled: (a) interest accrued on this Note at a fixed,
simple interest rate of ten percent (10%) for the quarterly period then ending
shall be payable in arrears on July 31, October 31, January 31 and April 30 of
each year commencing with an stub interest payment on July 31, 1996; and (b) the
entire principal amount, together with any and all accrued interest thereon,
shall be due and payable in full in one lump sum on May 10, 2001; provided,
however, that if any of such payment dates above is a day on which federally
chartered banking institutions in the United States are not open for business,
then on the first business day next succeeding such date on which such
institutions are open for business. Notwithstanding the foregoing or any other
provision of this Note, the Holder shall not be entitled to receive, collect or
apply as interest on the principal of this Note any amount in excess of the
maximum rate permitted under applicable law.
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Section 1.2 PREPAYMENTS.
Section 1.2.1 PREPAYMENTS AT OPTION OF HOLDER. Subject to the
additional provisions in Section 3.1 (b) hereof, if while this Note remains
outstanding, the Maker shall propose to either (i) sell all or any substantial
portion of its assets, rights and properties or merge or consolidate with any
other corporation, partnership, or other business entity such that it is not the
surviving entity, or (ii) file a registration statement under the Securities Act
of 1933 covering any of its debt or equity securities, then the Holder shall
have the option, exercisable by notice given prior to the effective date of such
sale, merger consolidation or registration statement, to cause the Maker to
prepay the entire outstanding amount of and interest on this Note out of the
proceeds of such sale or public offering.
Section 1.2.2 PREPAYMENTS AT OPTION OF MAKER. Subject to the
provisions of Article IV hereof, this Note may be prepaid prior to maturity, in
whole or part, at any time subsequent to two years from the date hereof, without
premium or penalty. Prepayments shall be applied first to payments of all
accrued or unpaid interest on the unpaid principal of this Note and then to
principal of this Note.
Section 1.3 TRANSFER OF NOTE. Except for transfers to an Affiliate (as
such term is defined in the Shareholders Agreement of even date herewith to
which the Maker and Holder are parties) or transfer by the Holder via collateral
assignment to such Holder's senior lender (or successors thereto), this Note, or
any interest herein, may not be offered, sold, transferred, pledged, assigned or
otherwise disposed of by the Holder without the prior written consent of Maker.
Any attempted offer, sale, transfer, pledge, assignment or other disposition not
in compliance with this Section 1.3 will be invalid.
Section 1.4 PARI PASSU WITH OTHER NOTE. This Note is one of three Notes in
the aggregate amount of $2,000,000 dated of even date herewith issued pursuant
to the terms of the Organization Agreement. The three Notes shall rank PARI
PASSU in right of payment with each other and all payments made with respect to
this and other Note shall be made proportionately to all holders of such Notes.
ARTICLE II
REMEDIES
Section 2.1 EVENTS OF DEFAULT. Upon the occurrence of any Event of
Default (as defined below), the Holder may declare the entire unpaid principal
of this Note, and all unpaid interest thereon, to be immediately due and
payable, and the Holder of this Note may thereupon proceed to protect and
enforce its rights either by suit in equity or by other appropriate proceedings,
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whether for specific performance (to the extent permitted by law) of any
covenant or agreement contained herein or in aid or exercise of any power
granted herein, or proceed to enforce the payment of this Note or to enforce any
other legal or equitable right of the Holder. If an Event of Default shall
occur or exist and this Note is placed in the hands of an attorney for
collection or suit is filed herein, or proceedings are had in bankruptcy or
similar proceedings for the establishment or collection of any amount called for
hereunder, the Maker agrees to pay the Holder hereof reasonable attorneys or
collection fees actually incurred. For the purposes hereof, an "Event of
Default" shall exist if any of the following occurs and is continuing for the
periods indicated:
(a) the Maker fails to pay when due on any payment hereunder when and as
such payment shall become due and payable, and shall fail to cure such default
within three (3) days after notice to the Maker by the Holder of written demand
for such payment; or
(b) the Maker pursuant to the meaning of any Bankruptcy Law: (i)
commences a voluntary case; (ii) consents to an involuntary case, (iii) consents
to the appointment of a Custodian for it or for all or substantially all of its
property or (iv) makes a general assignment for the benefit of its creditors; or
(c) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that: (i) is for relief against the Maker in an involuntary
case, (ii) appoints a Custodian for the Maker or for all or substantially all of
its property or (iii) orders the complete liquidation of the Maker in a
proceeding other than as described in clause (c), and the order or decree
remains unstayed and in effect for 60 consecutive days.
The term "Bankruptcy Law" means Title 11, U.S. Code or any other similar
Federal or state law for relief of creditors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under any Bankruptcy
Law.
Section 2.2 REMEDIES NON-EXCLUSIVE. The remedies provided to the Holder
herein shall be cumulative and non-exclusive, and not in lieu of any other
rights or remedies to which the Holder is entitled at law or equity for any
breach of, or non-compliance with, the provisions of this Note by the Maker.
Section 2.3 NO LIMITATION ON SUITS ON NOTE. Nothing contained in this
Note shall affect or impair the obligation of the Maker, which is absolute and
unconditional, to pay the principal of and accrued interest on this Note to the
Holder when and as the same become due and payable pursuant to the terms of this
Note, or affect or impair the right of action, which is also absolute and
unconditional, of the Holder to institute suit against the Maker to enforce such
payment by reason of contract embodied in this Note.
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Section 2.4 WAIVER OF RIGHTS. Maker hereby waives demand, presentment for
payment, notice of nonpayment, protest, notice of protest, filing of suit and
diligence in collecting this Note.
ARTICLE III
CONVERSION
Section 3.1 CONVERSION PROVISIONS.
Section 3.1.1 UNFETTERED CONVERSION AT THE OPTION OF THE HOLDER.
Subject to and upon compliance with the provisions of this Section 3.1, and
subject to compliance with any required notification or expiration or
termination of any notice or waiting periods under applicable laws or
regulations (including, without limitation, the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act")), including any extensions
thereof, Holder shall have the right, at Holder's option, at any time (and from
time to time) to convert any principal balance of this Note, in whole or part,
into that number of the fully paid and nonassessable shares of the Maker's
Common Stock equal to the then-applicable Conversion Rate (as defined in Section
3.1.3. hereof), which shall be calculated as to each conversion to the nearest
1/100th of a share but any fractional shares shall receive cash in lieu of the
issuance of a fractional share.
Section 3.1.2. CONVERSION PROCEDURES.
(a) In order to exercise the conversion privilege pursuant to
Section 3.1 hereof, the holder of this Note shall deliver to the
Maker, during normal business hours at its principal place of business
or at such other place as may be designated by the Maker, the Note
duly endorsed or assigned in blank, accompanied by written notice: (A)
that the holder elects to convert the Note; and (B) specifying the
name or names (with address) in which a certificate or certificates
for shares of Common Stock are to be issued and, if so required by the
Maker, by a written instrument or instruments of transfer in form
reasonably satisfactory to counsel for the Maker, duly executed by the
holder or his or its duly authorized legal representative.
(b) As promptly as practicable after the surrender of the Note
pursuant to this Section 3.1.2 for conversion pursuant to Section
3.1.1. hereof, the Maker shall deliver to or upon the written order of
the Holder of this Note when the Note is surrendered, a certificate or
certificates representing the number of fully paid and nonassessable
shares of Common Stock into which this Note may be or have been
converted in accordance with the provisions of this Section 3.1
together with a new Note, if applicable, in the
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principal amount not converted in substantially the form as this Note.
The Maker shall pay all expenses, taxes (other than stock transfer
taxes) and other charges required to be paid by the Maker in order to
issue the shares of Common Stock pursuant to this Section 6.
(c) Conversion shall be deemed to have been effected on the date
on which all of the conditions specified in Section 3.1.2.(a) have
been satisfied (the "Conversion Date"), and the person or persons in
whose name or names any certificate(s) 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 of Common Stock
represented by those certificates on and as of the Conversion Date,
and such conversion shall be at the Conversion Rate in effect on the
Conversion Date (unless the share transfer books of the Maker shall be
closed on the Conversion Date, in which case such person or persons
shall be deemed to have become the holder or holders of record at the
close of business on the next succeeding day on which such stock
transfer books are open, but such conversion shall be at the
Conversion Rate in effect on the Conversion Date). All shares of
Common Stock issued upon conversion of the this Note will, upon
delivery, be duly and validly issued, and fully paid and
nonassessable.
Section 3.2.3 CONVERSION RATE. The "Conversion Rate" shall be one
(1) share of Common Stock for each $90.00 of principal then due the Holder,
subject to adjustment from time to time as provided in Section 3.2. hereof.
Section 3.2. ANTI-DILUTION PROVISIONS AND ADJUSTMENT OF CONVERSION RATE.
Section 3.2.1. NO DILUTION. Subject to the provisions of Section 3.2.3.
hereof, in the event the Maker shall, at any time or from time to time while any
principal balance of this Note is outstanding, (A) pay a dividend or make a
distribution in respect of Common Stock in shares of Common Stock, or (B)
subdivide or combine the outstanding shares of Common Stock into a greater or
lesser number of shares, in each case whether by reclassification of shares,
recapitalization of the Maker, or otherwise, then in such event, the Note will
automatically, without any action on the part of the holder thereof or the
Maker, become convertible into that number of shares of Common Stock equal to
the number of shares of Common Stock into which this Note could be converted
immediately prior to such event, multiplied by a fraction, the numerator of
which is the number of shares of Common Stock outstanding immediately after such
event, and the denominator of which is the number of shares of Common Stock
outstanding immediately before such event. An adjustment pursuant to this
Section 3.2.1. shall be effective upon payment
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of such dividend or distribution in respect of the Common Stock, and in the case
of a subdivision or combination, shall become effective immediately as of the
effective date thereof.
Section 3.2.2. PRICE PROTECTION. Subject to the exceptions in Section
3.2.3. below, in the event the Maker shall at any time or from time to time
while any principal balance of this Note is outstanding, sell or issue shares of
Common Stock (other than in a transaction subject to Section 3.2.1. hereof), any
security convertible into shares of Common Stock or any option, right or warrant
to purchase shares of Common Stock, for no consideration or at a purchase price
per share of Common Stock (or conversion rate, in the case of a security
convertible into Common Stock) less than the Conversion Rate in effect on the
date of sale or issuance of such Common Stock, security convertible into Common
Stock, option, right or warrant, then, in such event (or in the event or any
change in the terms of any security convertible into Common Stock or option,
right or warrant that has a similar effect on the date of such change), this
Note will automatically, without any action on the part of the holder hereof or
the Maker, become convertible into that number of shares of Common Stock equal
to the number of shares of Common Stock into which this Note could be converted
immediately before such sale or issuance of Common Stock, securities convertible
into Common Stock, options, rights or warrants (or change in terms), multiplied
by a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately before such sale or issuance of Common Stock, securities
convertible into Common Stock, options, rights or warrants (or change in terms)
plus the maximum number of shares of Common Stock that could be acquired upon
the sale or issuance of the Common Stock, or upon exercise in full of all such
conversion rights, options, rights and warrants, and the denominator of which is
the number of shares of Common Stock outstanding immediately before such sale or
issuance of Common Stock, securities convertible into Common Stock, options,
rights or warrants (or change in terms) plus the number of shares of Common
Stock that could be purchased at the Conversion Rate at the time of such sale or
issuance (or change in terms) for the maximum aggregate consideration payable
upon the sale or issuance of the Common Stock, or upon exercise in full of all
such conversion rights, options, rights or warrants. For purposes of this
Section 3.2.2., all shares of Common Stock issuable upon the conversion of such
convertible securities or upon exercise of such options, rights or warrants
shall be deemed to have been issued for the purpose of computing the number of
shares of Common Stock into which this Note could be converted, as of the time
such convertible securities, options, rights or warrants are issued of sold (or
the terms thereof are changed). If any rights of conversion or exercise of such
convertible securities, options, rights or warrants shall expire without having
been exercised (except in the case where the Maker has redeemed such convertible
security, option, right or warrant or made any payment on account of the holder
thereof not converting or exercising such convertible security, option, right or
warrant), the number of shares of Common Stock into
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which this Note could be converted shall forthwith be automatically adjusted to
be the number of shares of Common Stock into which this Note could be converted
that would have been in effect had an adjustment been made on the basis that the
only shares of Common Stock issued or sold were those actually issued upon the
conversion or exercise of such convertible securities, options, rights or
warrants. For purposes hereof, the date of issuance of options for shares of
Common Stock shall mean the date of their grant.
Section 3.2.3. EXCEPTIONS. Notwithstanding any other provisions herein to
the contrary, the following events shall not be deemed to constitute an issuance
of Common Stock or other security of the Maker for purposes of this Article 3:
(A) the issuance of any options for shares of Common Stock, or the issuance of
shares of Common Stock upon exercise thereof, pursuant to a stock option plan
for directors, officers, key employees or consultants of the Maker, as approved
by the Board of Directors (or committee thereof) of the Maker, including the
options to Michael F. Lewis and certain key employees or consultants of the
Maker for 27,500 shares at $24.20 per share to be approved by the Board; (B) the
issuance of any warrants, options or rights, or the issuance of shares of Common
Stock upon exercise thereof, as part of the terms of any borrowings, direct or
indirect, from financial institutions or other Persons (including the warrants
to be granted to Sirrom Capital Corporation and Reedy River Ventures, L.P. in
connection with a $2,000,000 loan) as approved by the Board of Directors of the
Company,; or (C) the issuance of the warrants by the Company to Triad Capital
Partners, Inc., or affiliates thereof, to purchase up to 6,000 shares of Common
Stock at $90.00 per share, and the issuance of shares of Common Stock pursuant
to the exercise of any such warrant.
Section 3.2.4. EQUITABLE ADJUSTMENT. If the Maker shall make any dividend
or distribution on shares of Common Stock, sell or issue any Common Stock, other
capital stock or other security of the Maker or sell or issue any rights or
warrants to purchase or acquire any such security that is not expressly
addressed by the terms of this Article 3, and does not result in an adjustment
to the number of shares of Common Stock into which this Note can be converted
pursuant to this Section 6(d), the Board of Directors of the Maker may, in its
sole discretion, consider whether such dividend, distribution, sale or issuance
is of a nature that some type of equitable adjustment should be made in respect
of such dividend, distribution, sale or issuance for the protection of the
holders of the Notes. If in such case the Board of Directors determines that
some type of adjustment should be made, an equitable adjustment not repugnant to
applicable law and for the protection of the holders of Notes shall be made
effective as of the date of such dividend, distribution, sale or issuance, as
determined in good faith by the Board of Directors in its sole discretion. The
determination of the Board of Directors as to whether some type of adjustment
should be made pursuant to the provision of this Section 3.2.4., and if so, as
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to what adjustment should be made and when, shall be final and binding on the
Maker and all stockholders of the Maker. The Maker shall be entitled to make
such additional adjustments, in addition to those required by the provisions of
this Section 3.2.4., as shall be necessary so that any dividend or distribution
in shares of capital stock of the Maker shall not be taxable to holders of
Common Stock.
Section 3.3 TERMINATION OF RIGHT TO CONVERT IN CONNECTION WITH FUNDAMENTAL
CORPORATE CHANGES. Notwithstanding anything herein the contrary, and subject to
the notice requirements of this Section 3.3, if the Maker shall be a party to
any transaction that involves any consolidation, merger or share exchange of the
Maker with or into another Maker, or any sale of all or substantially all of the
assets of the Maker to another Person, and which is effected in such a way that
the holders of Common Stock shall be entitled to receive cash, stock, securities
or other assets with respect to or in exchange for Common Stock, then the right
to convert this Note shall terminate at the close of business on the date as of
which the holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for cash, securities or other assets deliverable upon
such consolidation, merger, share exchange or sale of all or substantially all
of the assets of the Maker. In case the Maker shall enter into any agreement or
understanding or the Board of Directors shall adopt any resolution authorizing
or proposing any transaction of the type described in this Section 3.3., then in
any such event the Maker promptly shall cause to be mailed, by registered or
certified mail, postage prepaid, to the holders of the Notes, at each such
holder's last address appearing on the records of the Maker, thirty (30) days
prior to the date on which the Maker closes its books or takes a record for
determining rights to vote with respect to any consolidation, merger, share
exchange or sale, a notice of such agreement, understanding or resolution
stating the expected record date for determining holders of Common Stock
entitled to exchange their shares with respect to a transaction described in
this Section 3.3.; PROVIDED, HOWEVER, that the Maker shall not be liable or
responsible if the actual dates of any such events shall be different for the
expected dates set forth in such notice.
3.4. SUFFICIENT AUTHORIZED SHARES OF COMMON STOCK. The Maker shall at all
times reserve and keep available out of its authorized and unissued Common
Stock, solely for the purpose of effecting the conversion of the Notes, such
number of shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all then outstanding Notes. The Maker shall, from time
to time, subject to and in accordance with applicable law, increase the
authorized shares of Common Stock if at any time the number of authorized shares
of Common Stock remaining unissued shall not be sufficient to permit the
conversion at such time of all then outstanding Notes.
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ARTICLE IV
SUBORDINATION
Section 4.1 AGREEMENT TO SUBORDINATE TO SENIOR DEBT. The Maker covenants
and agrees, and the Holder, by accepting this Note, covenants and agrees for
itself and its successors and assigns, that the indebtedness evidenced by this
Note shall be subordinate in right of payment to all Senior Debt (as defined
herein). As used in this Note, the term "Senior Debt" shall mean the principal
of and interest on the Maker's $2,000,000 indebtedness to Sirrom Capital
Corporation and Reedy River Ventures, L.P., as may exist from time to time (as
the same may be deferred, renewed, extended or refinanced) and any other secured
lending facilities of Maker hereinafter in effect from time to time while this
Note is outstanding; provided, however, that nothing herein shall be construed
to impair or restrict the payment of interest hereunder so long as the there
shall be no defaults under the terms of the Senior Debt.
ARTICLE V
LOST NOTE
Section 5.1 LOST NOTE. On receipt of evidence reasonably satisfactory to
the Maker of the loss, theft, destruction or mutilation of this Note, the Maker
will execute and deliver, in lieu of this Note, a new note of like tenor.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
Section 6.1 THE MAKER'S REPRESENTATIONS AND WARRANTIES. The Maker
represents and warrants to the Holder as follows:
(a) The Maker is a corporation, duly organized, validly existing and
in good standing under the laws of the State of Delaware with the requisite
corporate power and authority to execute and deliver this Note and perform its
obligations hereunder;
(b) The execution and delivery by the Maker of this Note and the
performance of its obligations hereunder has been duly authorized by all
necessary corporate action and this Note constitutes a valid and binding
obligation of the Maker, enforceable in accordance with its terms except (i) as
the enforceability hereof may be limited by applicable bankruptcy or other laws
affecting the enforcement of creditors' rights generally and (ii) as to
equitable remedies, to the equitable discretion of the courts; and
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(c) The execution and delivery of this Note by the Maker and the
performance by the Maker of its obligations hereunder will not result in a
breach of any of the terms of, or constitute a default under, the Maker's
Certificate of Incorporation, or its By-laws or any indenture, mortgage, note or
other instrument or agreement of which the Maker is, as of the date hereof, a
party or by which the Maker is bound, or any order of any Governmental Entity
entered in any proceeding to which the Maker was or is, as of the date hereof, a
party or by which it is bound.
ARTICLE VII
NOTICES
Section 7.1 NOTICES. In any case where any notice or other communication
is required or permitted to be given hereunder, such notice or communication
shall be in writing and (i) personally delivered, (ii) sent by postage prepaid
registered airmail, or (iii) transmitted by telecopy as follows:
If to the Maker:
ILD Communications, Inc.
13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
Fax: (904) 285-3616
If to Holder:
TRIAD-ILD PARTNERS, L.P.
13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
Telecopy: (904) 285-3616
All such notices or other communications shall be deemed to have been given or
received (i) upon receipt if personally delivered, (ii) on the third business
day following posting if by postage prepaid registered airmail, and (iii) when
sent with evidence of transmission if by telecopy.
Section 7.3 SUCCESSORS. All covenants, stipulations, promises and
agreements contained in this Note, by or on behalf of the Maker or the Holder,
shall be binding upon and inure to the benefit of their respective successors,
assigns, heirs and personal representatives.
Section 7.4 HEADINGS; CONSTRUCTIONS. The article and sectional headings
herein are for convenience of reference only and shall not affect the meaning or
construction of the terms hereof. Whenever the context so requires, the
masculine gender herein shall include the feminine or neuter, and the singular
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number shall include the plural. If any of the provisions of this Note shall be
unlawful, void or for any reason unenforceable, they shall be deemed separable
from, and shall in no way affect the validity or enforceability of, the
remaining provisions of this Note.
Section 7.6 GOVERNING LAW. This Note shall be governed by and construed
in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed as
of the day and year first above written.
MAKER:
ILD COMMUNICATIONS, INC.
By: /s/ Michael F. Lewis
-----------------------------------
Michael F. Lewis, President
and CEO
Accepted, Acknowledged and
Agreed to:
/s/ Michael F. Lewis
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EXHIBIT 4.3
SUBORDINATED CONVERTIBLE NOTE
NEITHER THIS NOTE NOR THE SHARES OF COMMON STOCK TO WHICH THIS NOTE MAY BE
CONVERTED HAVE BEEN REGISTERED UNDER ANY SECURITIES LAWS IN RELIANCE OF
EXEMPTION(S) THEREFROM AND NEITHER SUCH SECURITIES MAY BE SOLD OR TRANSFERRED
UNLESS SUCH TRANSFER OR SALE IS MADE IN COMPLIANCE WITH ALL FEDERAL AND
APPLICABLE STATE SECURITIES LAWS. THIS NOTE IS SUBORDINATE TO CERTAIN
INDEBTEDNESS OF THE MAKER TO CERTAIN SECURED LENDERS AS DESCRIBED BELOW.
SUBORDINATED CONVERTIBLE NOTE
$333,333.33 May 10, 1996
FOR VALUE RECEIVED, ILD COMMUNICATIONS, INC., a Delaware corporation(the
"Maker"), promises to pay to MORRIS TELECOMMUNICATIONS, LLC, a Georgia limited
liability company (together with any assigns or successors to this Note, the
"Holder") at its address set forth in Article VII hereof, lawful money of the
United States at the principal sum of Three Hundred and Thirty-Three Thousand
Three Hundred and Thirty-Three Dollars and Thirty-Three Cents ($333,333.33),
together with interest thereon at a rate of ten percent (10%) in accordance with
the terms and conditions herein set forth. This Note is being delivered
pursuant to the terms of that certain Organization Agreement (the "Organization
Agreement") dated May 10, 1996 to which the Maker and the Holder are parties.
ARTICLE I
PAYMENT OF INTEREST AND PRINCIPAL; PREPAYMENT
Section 1.1 PAYMENTS; INTEREST RATE. From the date hereof until this Note
is paid in full and canceled: (a) interest accrued on this Note at a fixed,
simple interest rate of ten percent (10%) for the quarterly period then ending
shall be payable in arrears on July 31, October 31, January 31 and April 30 of
each year commencing with an stub interest payment on July 31, 1996; and (b) the
entire principal amount, together with any and all accrued interest thereon,
shall be due and payable in full in one lump sum on May 10, 2001; provided,
however, that if any of such payment dates above is a day on which federally
chartered banking institutions in the United States are not open for business,
then on the first business day next succeeding such date on which such
institutions are open for business. Notwithstanding the foregoing or any other
provision of this Note, the Holder shall not be entitled to receive, collect or
apply as interest on the principal of this Note any amount in excess of the
maximum rate permitted under applicable law.
Section 1.2 PREPAYMENTS.
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Section 1.2.1 PREPAYMENTS AT OPTION OF HOLDER. Subject to the
additional provisions in Section 3.1 (b) hereof, if while this Note remains
outstanding, the Maker shall propose to either (i) sell all or any substantial
portion of its assets, rights and properties or merge or consolidate with any
other corporation, partnership, or other business entity such that it is not the
surviving entity, or (ii) file a registration statement under the Securities Act
of 1933 covering any of its debt or equity securities, then the Holder shall
have the option, exercisable by notice given prior to the effective date of such
sale, merger consolidation or registration statement, to cause the Maker to
prepay the entire outstanding amount of and interest on this Note out of the
proceeds of such sale or public offering.
Section 1.2.2 PREPAYMENTS AT OPTION OF MAKER. Subject to the
provisions of Article IV hereof, this Note may be prepaid prior to maturity, in
whole or part, at any time subsequent to two years from the date hereof, without
premium or penalty. Prepayments shall be applied first to payments of all
accrued or unpaid interest on the unpaid principal of this Note and then to
principal of this Note.
Section 1.3 TRANSFER OF NOTE. Except for transfers to an Affiliate (as
such term is defined in the Shareholders Agreement of even date herewith to
which the Maker and Holder are parties) or transfer by the Holder via collateral
assignment to such Holder's senior lender (or successors thereto), this Note, or
any interest herein, may not be offered, sold, transferred, pledged, assigned or
otherwise disposed of by the Holder without the prior written consent of Maker.
Any attempted offer, sale, transfer, pledge, assignment or other disposition not
in compliance with this Section 1.3 will be invalid.
Section 1.4 PARI PASSU WITH OTHER NOTE. This Note is one of three Notes
in the aggregate amount of $2,000,000 dated of even date herewith issued
pursuant to the terms of the Organization Agreement. The three Notes shall rank
PARI PASSU in right of payment with each other and all payments made with
respect to this and other Note shall be made proportionately to all holders of
such Notes.
ARTICLE II
REMEDIES
Section 2.1 EVENTS OF DEFAULT. Upon the occurrence of any Event of
Default (as defined below), the Holder may declare the entire unpaid principal
of this Note, and all unpaid interest thereon, to be immediately due and
payable, and the Holder of this Note may thereupon proceed to protect and
enforce its rights either by suit in equity or by other appropriate proceedings,
whether for specific performance (to the extent permitted by law) of any
covenant or agreement contained herein or in aid or exercise of any power
granted herein, or proceed to enforce the payment of this Note or to enforce any
other legal or equitable
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right of the Holder. If an Event of Default shall occur or exist and this Note
is placed in the hands of an attorney for collection or suit is filed herein, or
proceedings are had in bankruptcy or similar proceedings for the establishment
or collection of any amount called for hereunder, the Maker agrees to pay the
Holder hereof reasonable attorneys or collection fees actually incurred. For
the purposes hereof, an "Event of Default" shall exist if any of the following
occurs and is continuing for the periods indicated:
(a) the Maker fails to pay when due on any payment hereunder when and as
such payment shall become due and payable, and shall fail to cure such default
within three (3) days after notice to the Maker by the Holder of written demand
for such payment; or
(b) the Maker pursuant to the meaning of any Bankruptcy Law: (i)
commences a voluntary case; (ii) consents to an involuntary case, (iii) consents
to the appointment of a Custodian for it or for all or substantially all of its
property or (iv) makes a general assignment for the benefit of its creditors; or
(c) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that: (i) is for relief against the Maker in an involuntary
case, (ii) appoints a Custodian for the Maker or for all or substantially all of
its property or (iii) orders the complete liquidation of the Maker in a
proceeding other than as described in clause (c), and the order or decree
remains unstayed and in effect for 60 consecutive days.
The term "Bankruptcy Law" means Title 11, U.S. Code or any other similar
Federal or state law for relief of creditors. The term "Custodian" means any
receiver, trustee, assignee, liquidator or similar official under any Bankruptcy
Law.
Section 2.2 REMEDIES NON-EXCLUSIVE. The remedies provided to the Holder
herein shall be cumulative and non-exclusive, and not in lieu of any other
rights or remedies to which the Holder is entitled at law or equity for any
breach of, or non-compliance with, the provisions of this Note by the Maker.
Section 2.3 NO LIMITATION ON SUITS ON NOTE. Nothing contained in this
Note shall affect or impair the obligation of the Maker, which is absolute and
unconditional, to pay the principal of and accrued interest on this Note to the
Holder when and as the same become due and payable pursuant to the terms of this
Note, or affect or impair the right of action, which is also absolute and
unconditional, of the Holder to institute suit against the Maker to enforce such
payment by reason of contract embodied in this Note.
Section 2.4 WAIVER OF RIGHTS. Maker hereby waives demand, presentment for
payment, notice of nonpayment, protest, notice of protest, filing of suit and
diligence in collecting this Note.
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ARTICLE III
CONVERSION
Section 3.1 CONVERSION PROVISIONS.
Section 3.1.1 UNFETTERED CONVERSION AT THE OPTION OF THE HOLDER.
Subject to and upon compliance with the provisions of this Section 3.1, and
subject to compliance with any required notification or expiration or
termination of any notice or waiting periods under applicable laws or
regulations (including, without limitation, the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act")), including any extensions
thereof, Holder shall have the right, at Holder's option, at any time (and from
time to time) to convert any principal balance of this Note, in whole or part,
into that number of the fully paid and nonassessable shares of the Maker's
Common Stock equal to the then-applicable Conversion Rate (as defined in Section
3.1.3. hereof), which shall be calculated as to each conversion to the nearest
1/100th of a share but any fractional shares shall receive cash in lieu of the
issuance of a fractional share.
Section 3.1.2. CONVERSION PROCEDURES.
(a) In order to exercise the conversion privilege pursuant to
Section 3.1 hereof, the holder of this Note shall deliver to the
Maker, during normal business hours at its principal place of business
or at such other place as may be designated by the Maker, the Note
duly endorsed or assigned in blank, accompanied by written notice: (A)
that the holder elects to convert the Note; and (B) specifying the
name or names (with address) in which a certificate or certificates
for shares of Common Stock are to be issued and, if so required by the
Maker, by a written instrument or instruments of transfer in form
reasonably satisfactory to counsel for the Maker, duly executed by the
holder or his or its duly authorized legal representative.
(b) As promptly as practicable after the surrender of the Note
pursuant to this Section 3.1.2 for conversion pursuant to Section
3.1.1. hereof, the Maker shall deliver to or upon the written order of
the Holder of this Note when the Note is surrendered, a certificate or
certificates representing the number of fully paid and nonassessable
shares of Common Stock into which this Note may be or have been
converted in accordance with the provisions of this Section 3.1
together with a new Note, if applicable, in the principal amount not
converted in substantially the form as this Note. The Maker shall
pay all expenses, taxes (other than stock transfer taxes) and other
charges required to be paid by the Maker in order to issue the shares
of Common Stock pursuant to this Section 6.
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(c) Conversion shall be deemed to have been effected on the date
on which all of the conditions specified in Section 3.1.2.(a) have
been satisfied (the "Conversion Date"), and the person or persons in
whose name or names any certificate(s) 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 of Common Stock
represented by those certificates on and as of the Conversion Date,
and such conversion shall be at the Conversion Rate in effect on the
Conversion Date (unless the share transfer books of the Maker shall be
closed on the Conversion Date, in which case such person or persons
shall be deemed to have become the holder or holders of record at the
close of business on the next succeeding day on which such stock
transfer books are open, but such conversion shall be at the
Conversion Rate in effect on the Conversion Date). All shares of
Common Stock issued upon conversion of the this Note will, upon
delivery, be duly and validly issued, and fully paid and
nonassessable.
Section 3.2.3 CONVERSION RATE. The "Conversion Rate" shall be one
(1) share of Common Stock for each $90.00 of principal then due the Holder,
subject to adjustment from time to time as provided in Section 3.2. hereof.
Section 3.2. ANTI-DILUTION PROVISIONS AND ADJUSTMENT OF CONVERSION RATE.
Section 3.2.1. NO DILUTION. Subject to the provisions of
Section 3.2.3. hereof, in the event the Maker shall, at any time or
from time to time while any principal balance of this Note is
outstanding, (A) pay a dividend or make a distribution in respect of
Common Stock in shares of Common Stock, or (B) subdivide or combine
the outstanding shares of Common Stock into a greater or lesser number
of shares, in each case whether by reclassification of shares,
recapitalization of the Maker, or otherwise, then in such event, the
Note will automatically, without any action on the part of the holder
thereof or the Maker, become convertible into that number of shares of
Common Stock equal to the number of shares of Common Stock into which
this Note could be converted immediately prior to such event,
multiplied by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event, and
the denominator of which is the number of shares of Common Stock
outstanding immediately before such event. An adjustment pursuant to
this Section 3.2.1. shall be effective upon payment of such dividend
or distribution in respect of the Common Stock, and in the case of a
subdivision or combination, shall become effective immediately as of
the effective date thereof.
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Section 3.2.2. PRICE PROTECTION. Subject to the exceptions in
Section 3.2.3. below, in the event the Maker shall at any time or from
time to time while any principal balance of this Note is outstanding,
sell or issue shares of Common Stock (other than in a transaction
subject to Section 3.2.1. hereof), any security convertible into
shares of Common Stock or any option, right or warrant to purchase
shares of Common Stock, for no consideration or at a purchase price
per share of Common Stock (or conversion rate, in the case of a
security convertible into Common Stock) less than the Conversion Rate
in effect on the date of sale or issuance of such Common Stock,
security convertible into Common Stock, option, right or warrant,
then, in such event (or in the event or any change in the terms of any
security convertible into Common Stock or option, right or warrant
that has a similar effect on the date of such change), this Note will
automatically, without any action on the part of the holder hereof or
the Maker, become convertible into that number of shares of Common
Stock equal to the number of shares of Common Stock into which this
Note could be converted immediately before such sale or issuance of
Common Stock, securities convertible into Common Stock, options,
rights or warrants (or change in terms), multiplied by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately before such sale or issuance of Common Stock, securities
convertible into Common Stock, options, rights or warrants (or change
in terms) plus the maximum number of shares of Common Stock that could
be acquired upon the sale or issuance of the Common Stock, or upon
exercise in full of all such conversion rights, options, rights and
warrants, and the denominator of which is the number of shares of
Common Stock outstanding immediately before such sale or issuance of
Common Stock, securities convertible into Common Stock, options,
rights or warrants (or change in terms) plus the number of shares of
Common Stock that could be purchased at the Conversion Rate at the
time of such sale or issuance (or change in terms) for the maximum
aggregate consideration payable upon the sale or issuance of the
Common Stock, or upon exercise in full of all such conversion rights,
options, rights or warrants. For purposes of this Section 3.2.2., all
shares of Common Stock issuable upon the conversion of such
convertible securities or upon exercise of such options, rights or
warrants shall be deemed to have been issued for the purpose of
computing the number of shares of Common Stock into which this Note
could be converted, as of the time such convertible securities,
options, rights or warrants are issued of sold (or the terms thereof
are changed). If any rights of conversion or exercise of such
convertible securities, options, rights or warrants shall expire
without having been exercised (except in the case where the Maker has
redeemed such convertible security, option, right or warrant or made
any payment on account of the holder thereof not converting or
exercising such convertible security, option, right or
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warrant), the number of shares of Common Stock into which this Note
could be converted shall forthwith be automatically adjusted to be the
number of shares of Common Stock into which this Note could be
converted that would have been in effect had an adjustment been made
on the basis that the only shares of Common Stock issued or sold were
those actually issued upon the conversion or exercise of such
convertible securities, options, rights or warrants. For purposes
hereof, the date of issuance of options for shares of Common Stock
shall mean the date of their grant.
Section 3.2.3. EXCEPTIONS. Notwithstanding any other provisions
herein to the contrary, the following events shall not be deemed to
constitute an issuance of Common Stock or other security of the Maker
for purposes of this Article 3: (A) the issuance of any options for
shares of Common Stock, or the issuance of shares of Common Stock upon
exercise thereof, pursuant to a stock option plan for directors,
officers, key employees or consultants of the Maker, as approved by
the Board of Directors (or committee thereof) of the Maker, including
the options to Michael F. Lewis and certain key employees or
consultants of the Maker for 27,500 shares at $24.20 per share to be
approved by the Board; (B) the issuance of any warrants, options or
rights, or the issuance of shares of Common Stock upon exercise
thereof, as part of the terms of any borrowings, direct or indirect,
from financial institutions or other Persons (including the warrants
to be granted to Sirrom Capital Corporation and Reedy River Ventures,
L.P. in connection with a $2,000,000 loan) as approved by the Board of
Directors of the Company,; or (C) the issuance of the warrants by the
Company to Triad Capital Partners, Inc., or affiliates thereof, to
purchase up to 6,000 shares of Common Stock at $90.00 per share, and
the issuance of shares of Common Stock pursuant to the exercise of any
such warrant.
Section 3.2.4. EQUITABLE ADJUSTMENT. If the Maker shall make any
dividend or distribution on shares of Common Stock, sell or issue any
Common Stock, other capital stock or other security of the Maker or
sell or issue any rights or warrants to purchase or acquire any such
security that is not expressly addressed by the terms of this Article
3, and does not result in an adjustment to the number of shares of
Common Stock into which this Note can be converted pursuant to this
Section 6(d), the Board of Directors of the Maker may, in its sole
discretion, consider whether such dividend, distribution, sale or
issuance is of a nature that some type of equitable adjustment should
be made in respect of such dividend, distribution, sale or issuance
for
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the protection of the holders of the Notes. If in such case the Board
of Directors determines that some type of adjustment should be made,
an equitable adjustment not repugnant to applicable law and for the
protection of the holders of Notes shall be made effective as of the
date of such dividend, distribution, sale or issuance, as determined
in good faith by the Board of Directors in its sole discretion. The
determination of the Board of Directors as to whether some type of
adjustment should be made pursuant to the provision of this Section
3.2.4., and if so, as to what adjustment should be made and when,
shall be final and binding on the Maker and all stockholders of the
Maker. The Maker shall be entitled to make such additional
adjustments, in addition to those required by the provisions of this
Section 3.2.4., as shall be necessary so that any dividend or
distribution in shares of capital stock of the Maker shall not be
taxable to holders of Common Stock.
Section 3.3 TERMINATION OF RIGHT TO CONVERT IN CONNECTION WITH FUNDAMENTAL
CORPORATE CHANGES. Notwithstanding anything herein the contrary, and subject to
the notice requirements of this Section 3.3, if the Maker shall be a party to
any transaction that involves any consolidation, merger or share exchange of the
Maker with or into another Maker, or any sale of all or substantially all of the
assets of the Maker to another Person, and which is effected in such a way that
the holders of Common Stock shall be entitled to receive cash, stock, securities
or other assets with respect to or in exchange for Common Stock, then the right
to convert this Note shall terminate at the close of business on the date as of
which the holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for cash, securities or other assets deliverable upon
such consolidation, merger, share exchange or sale of all or substantially all
of the assets of the Maker. In case the Maker shall enter into any agreement or
understanding or the Board of Directors shall adopt any resolution authorizing
or proposing any transaction of the type described in this Section 3.3., then in
any such event the Maker promptly shall cause to be mailed, by registered or
certified mail, postage prepaid, to the holders of the Notes, at each such
holder's last address appearing on the records of the Maker, thirty (30) days
prior to the date on which the Maker closes its books or takes a record for
determining rights to vote with respect to any consolidation, merger, share
exchange or sale, a notice of such agreement, understanding or resolution
stating the expected record date for determining holders of Common Stock
entitled to exchange their shares with respect to a transaction described in
this Section 3.3.; PROVIDED, HOWEVER, that the Maker shall not be liable or
responsible if the actual dates of any such events shall be different for the
expected dates set forth in such notice.
3.4. SUFFICIENT AUTHORIZED SHARES OF COMMON STOCK. The Maker shall at all
times reserve and keep available out of its authorized and unissued Common
Stock, solely for the purpose of effecting the conversion of the Notes, such
number of shares of
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Common Stock as shall from time to time be sufficient to effect the conversion
of all then outstanding Notes. The Maker shall, from time to time, subject to
and in accordance with applicable law, increase the authorized shares of Common
Stock if at any time the number of authorized shares of Common Stock remaining
unissued shall not be sufficient to permit the conversion at such time of all
then outstanding Notes.
ARTICLE IV
SUBORDINATION
Section 4.1 AGREEMENT TO SUBORDINATE TO SENIOR DEBT. The Maker covenants
and agrees, and the Holder, by accepting this Note, covenants and agrees for
itself and its successors and assigns, that the indebtedness evidenced by this
Note shall be subordinate in right of payment to all Senior Debt (as defined
herein). As used in this Note, the term "Senior Debt" shall mean the principal
of and interest on the Maker's $2,000,000 indebtedness to Sirrom Capital
Corporation and Reedy River Ventures, L.P., as may exist from time to time (as
the same may be deferred, renewed, extended or refinanced) and any other secured
lending facilities of Maker hereinafter in effect from time to time while this
Note is outstanding; provided, however, that nothing herein shall be construed
to impair or restrict the payment of interest hereunder so long as the there
shall be no defaults under the terms of the Senior Debt.
ARTICLE V
LOST NOTE
Section 5.1 LOST NOTE. On receipt of evidence reasonably satisfactory to
the Maker of the loss, theft, destruction or mutilation of this Note, the Maker
will execute and deliver, in lieu of this Note, a new note of like tenor.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
Section 6.1 THE MAKER'S REPRESENTATIONS AND WARRANTIES. The Maker
represents and warrants to the Holder as follows:
(a) The Maker is a corporation, duly organized, validly existing and
in good standing under the laws of the State of Delaware with the requisite
corporate power and authority to execute and deliver this Note and perform its
obligations hereunder;
(b) The execution and delivery by the Maker of this Note and the
performance of its obligations hereunder has been duly authorized by all
necessary corporate action and this Note
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<PAGE>
constitutes a valid and binding obligation of the Maker, enforceable in
accordance with its terms except (i) as the enforceability hereof may be limited
by applicable bankruptcy or other laws affecting the enforcement of creditors'
rights generally and (ii) as to equitable remedies, to the equitable discretion
of the courts; and
(c) The execution and delivery of this Note by the Maker and the
performance by the Maker of its obligations hereunder will not result in a
breach of any of the terms of, or constitute a default under, the Maker's
Certificate of Incorporation, or its By-laws or any indenture, mortgage, note or
other instrument or agreement of which the Maker is, as of the date hereof, a
party or by which the Maker is bound, or any order of any Governmental Entity
entered in any proceeding to which the Maker was or is, as of the date hereof, a
party or by which it is bound.
ARTICLE VII
NOTICES
Section 7.1 NOTICES. In any case where any notice or other communication
is required or permitted to be given hereunder, such notice or communication
shall be in writing and (i) personally delivered, (ii) sent by postage prepaid
registered airmail, or (iii) transmitted by telecopy as follows:
If to the Maker:
ILD Communications, Inc.
13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
Fax: (904) 285-3616
If to Holder:
MORRIS TELECOMMUNICATIONS, LLC
27 Abercorn Street
Savannah, GA 31401
Attention: Mr. H. Edward Brooks
Telecopy: (912) 232-4639
All such notices or other communications shall be deemed to have been given or
received (i) upon receipt if personally delivered, (ii) on the third business
day following posting if by postage prepaid registered airmail, and (iii) when
sent with evidence of transmission if by telecopy.
Section 7.3 SUCCESSORS. All covenants, stipulations, promises and
agreements contained in this Note, by or on behalf of the Maker or the Holder,
shall be binding upon and inure to the benefit of their respective successors,
assigns, heirs and personal representatives.
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Section 7.4 HEADINGS; CONSTRUCTIONS. The article and sectional headings
herein are for convenience of reference only and shall not affect the meaning or
construction of the terms hereof. Whenever the context so requires, the
masculine gender herein shall include the feminine or neuter, and the singular
number shall include the plural. If any of the provisions of this Note shall be
unlawful, void or for any reason unenforceable, they shall be deemed separable
from, and shall in no way affect the validity or enforceability of, the
remaining provisions of this Note.
Section 7.6 GOVERNING LAW. This Note shall be governed by and construed
in accordance with the laws of the State of Delaware.
[No further text]
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IN WITNESS WHEREOF, the Maker has caused this Note to be duly executed as
of the day and year first above written.
MAKER:
ILD COMMUNICATIONS, INC.
By: /s/ Michael F. Lewis
---------------------------
Michael F. Lewis, President
and CEO
Accepted, Acknowledged and
Agreed to:
- --------------------------
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EXHIBIT 4.4
NEITHER THE WARRANT REPRESENTED BY THIS CERTIFICATE NOR ANY OF THE SECURITIES
ISSUABLE UPON EXERCISE THEREOF HAVE BEEN REGISTERED UNDER ANY SECURITIES LAWS IN
RELIANCE OF EXEMPTION(S) THEREFROM AND NEITHER SUCH SECURITIES MAY BE SOLD OR
TRANSFERRED UNLESS SUCH TRANSFER OR SALE IS MADE IN COMPLIANCE WITH ALL FEDERAL
AND APPLICABLE STATE SECURITIES LAWS.
No. of Shares of
Common Stock: 1,975 Warrant No. 6
(by partial assignment of
Warrant No. 2)
WARRANT
TO PURCHASE SHARES OF COMMON STOCK
OF
ILD TELESERVICES, INC.
THIS IS TO CERTIFY THAT TRIAD CAPITAL PARTNERS, INC. , a corporation
organized under the laws of the State of Missouri ("Triad" or any successor or
transferree, a "Holder"), is entitled to purchase from ILD TELESERVICES, INC., a
Delaware corporation (the "Corporation"), upon the terms, at the times and
subject to the conditions hereinafter set forth, up to 1,975 shares of $.01 par
value per share voting common stock of the Corporation (the "Common Stock"), at
a purchase price of Ninety Dollars ($90.00) per share (the shares of Common
Stock that are the subject of this Warrant hereinafter referred to collectively
as the "Shares"):
1. EXERCISE; TERM OF WARRANT. Except as otherwise provided herein, the
Holder may exercise this Warrant, in the manner set forth in Paragraph 2 hereof,
in whole or in any part from time to time, at any time on or after the date
hereof but prior to 5:00 p.m., Eastern Time, on the date that is the tenth
anniversary of the date of this Warrant.
2. MANNER OF EXERCISE. In order to exercise this Warrant,
<PAGE>
the Holder shall deliver to the Corporation at its principal office (with copies
by facsimile to each of the Corporation's board members), or at such other
office as shall be designated by the Corporation pursuant to Paragraph 9 hereof,
(i) a written notice of the Holder's election to exercise this Warrant, (ii) a
check in an amount equal to the aggregate purchase price for the Shares as to
which this Warrant is exercised, and (iii) this Warrant. Such notice shall be
in substantially the form of the Subscription Form appearing as Exhibit "A" to
this Warrant. Upon receipt thereof, the Corporation shall execute or cause to
be executed and deliver to the Holder a certificate representing the Shares,
together with, if appropriate, cash in lieu of any fraction of a share, as
hereinafter provided. If this Warrant shall be exercised in part, then the prior
warrant shall be provided to the Corporation for cancellation and a new warrant
in substantially the form as this Warrant shall be issued to the Holder with
respect to the shares not so exercised. All Shares issuable upon the exercise of
this Warrant shall, when issued, be validly issued, fully paid and
nonassessable.
3. WARRANT TRANSFERABLE. THIS WARRANT IS TRANSFERABLE BY THE HOLDER TO
ANY OF ITS EMPLOYEES, CONSULTANTS OR AFFILIATES CONSISTENT WITH ALL APPLICABLE
SECURITIES LAWS. If such warrant is transferred in part, then the prior warrant
shall be provided to the Corporation for cancellation and new warrants in
substantially the form as this Warrant shall be issued to all transferees, and
to the Holder, as the case may be. Any proposed transferee shall, prior to any
such transfer, acknowledge to the Corporation that it holds the warrant for
investment purposes (and not for resale).
4. RECAPITALIZATION.
a. In the event of a stock dividend, split-up or combination of
shares, recapitalization, consolidation, or other similar capital change
affecting the common stock of the Corporation, or if any shares of common
stock shall be changed into the same or a different number of shares of any
class or classes of stock or other securities, whether by capital
reorganization, reclassification, subdivision or combination of shares,
stock dividend or otherwise, then if all or any portion of this Warrant
shall be exercised subsequent to such event (i) the number and kind of
shares of stock or securities of the Corporation to be subject to this
Warrant, (ii) the number of shares of Common Stock or other stock or
securities which may be issued upon the exercise of this Warrant, and (iii)
all other relevant provisions hereof, shall be appropriately adjusted by
the Corporation.
b. This Warrant and the rights granted to the Holder hereunder shall
not affect in any way the right or power of the Corporation to make
adjustments, reclassifications, reorganizations or changes in its capital
or business structure or to merge, consolidate, dissolve,
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<PAGE>
liquidate or sell or transfer all or any part of its business or assets.
5. FRACTIONAL SHARES. The Corporation shall not be required to issue any
fractional Shares upon any exercise of all or any portion of the Warrant. As to
any final fraction of a Share which the Holder would otherwise be entitled to
purchase upon such exercise, the Corporation may pay in cash the fair value of
such fractional Share as determined in good faith by the Board of Directors of
the Corporation.
6. REPLACEMENT. Upon receipt by the Corporation of evidence satisfactory
to it (in the exercise of reasonable discretion) of the ownership of and the
loss, theft, destruction or mutilation of this Warrant and (i) in case of loss,
theft or destruction, also an indemnity satisfactory to it in the exercise of
its reasonable discretion and (ii) in case of mutilation upon surrender and
cancellation hereof, the Corporation will execute and deliver in lieu hereof a
new Warrant of like tenor.
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK. The Corporation shall
at all times reserve and keep available for issuance upon the exercise of this
Warrant such number of its authorized but unissued shares of Common Stock as
will be sufficient to permit the exercise in full of this Warrant. All shares
of Common Stock which shall be so issuable shall, when issued upon exercise of
all or any part of this Warrant, be validly issued and fully paid and
nonassessable.
8. RESTRICTIVE LEGEND. Each certificate for Common Stock issued upon the
exercise of this Warrant shall be stamped or otherwise imprinted with a legend
in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
ANY SECURITIES LAWS IN RELIANCE OF EXEMPTION(S) THEREFROM AND THE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH TRANSFER OR SALE IS
MADE IN COMPLIANCE WITH ALL FEDERAL AND APPLICABLE STATE SECURITIES LAWS.
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE HELD SUBJECT
TO, AND THEIR TRANSFER IS RESTRICTED UNDER, THE TERMS OF A
SHAREHOLDERS' AGREEMENT DATED AS OF MAY 10, 1996 BY AND AMONG THE
CORPORATION AND CERTAIN OF ITS SHAREHOLDERS, A COPY OF WHICH IS ON
FILE AND IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
CORPORATION."
9. NOTICE. Any notice, demand or delivery pursuant to the provisions
hereof shall be sufficiently given or made if sent by first class mail, postage
prepaid, addressed to the Holder at the address designated below, and to the
Corporation at its principal office as described in Paragraph 3 above or such
other address as
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shall have been furnished to the party giving or making such notice, demand or
delivery.
10. GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of Delaware.
4
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be duly
executed under seal this __ day of August, 1997.
ILD TELESERVICES, INC.
By: /s/ Michael F. Lewis
------------------------------
Michael F. Lewis
Its Chairman
[CORPORATE SEAL]
Acknowledgement of Receipt by Holder:
By:
------------------------------
Title:
---------------------------
Address:
-------------------------
-------------------------
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<PAGE>
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises this
Warrant for and purchases _____ shares of Common Stock, par value $.01 per
share, of ILD Communications, Inc., purchasable with this Warrant, and herewith
makes payment therefor, all at the price and on the terms and conditions
specified in this Warrant and requests that certificates for the shares of
Common Stock hereby purchased (and any securities or other property issuable
upon such exercise) be issued in the name of and delivered to ________________
whose address is _____________________________________________.
Dated:____________________, 19___.
[HOLDER]
By:
-----------------------------------
Title:
--------------------------------
6
<PAGE>
EXHIBIT 4.5
NEITHER THE WARRANT REPRESENTED BY THIS CERTIFICATE NOR ANY OF THE SECURITIES
ISSUABLE UPON EXERCISE THEREOF HAVE BEEN REGISTERED UNDER ANY SECURITIES LAWS IN
RELIANCE OF EXEMPTION(S) THEREFROM AND NEITHER SUCH SECURITIES MAY BE SOLD OR
TRANSFERRED UNLESS SUCH TRANSFER OR SALE IS MADE IN COMPLIANCE WITH ALL FEDERAL
AND APPLICABLE STATE SECURITIES LAWS.
THE SHARES OF STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT WILL BE HELD SUBJECT
TO AND THEIR TRANSFER IS RESTRICTED UNDER THE TERMS OF A SHAREHOLDERS'
AGREEMENT, DATED AS OF MAY 10, 1996, BY AND AMONG THE CORPORATION AND CERTAIN OF
ITS SHAREHOLDERS, A COPY OF WHICH IS ON FILE AND IS AVAILABLE FOR INSPECTION AT
THE PRINCIPAL OFFICE OF THE CORPORATION.
No. of Shares of
Common Stock: 500 Warrant No. 3
(by partial assignment of
Warrant No. 1)
WARRANT
TO PURCHASE SHARES OF COMMON STOCK
OF
ILD COMMUNICATIONS, INC.
THIS IS TO CERTIFY THAT MORRIS TELECOMMUNICATIONS, LLC , a limited
liability company organized under the laws of the State of Georgia ("Morris" or
any successor or transferree, a "Holder"), is entitled to purchase from ILD
COMMUNICATIONS, INC., a Delaware corporation (the "Corporation"), upon the
terms, at the times and subject to the conditions hereinafter set forth, up to
500 shares of $.01 par value per share voting common stock of the Corporation
(the "Common Stock"), at a purchase price of Ninety Dollars ($90.00) per share
(the shares of Common Stock that are the subject of this Warrant hereinafter
referred to collectively as the "Shares"):
1. EXERCISE; TERM OF WARRANT. Except as otherwise provided herein, the
Holder may exercise this Warrant, in the manner set forth in Paragraph 2 hereof,
in whole or in any part from time to time, at any time on or after the date
hereof but prior to 5:00 p.m., Eastern Time, on the date that is the tenth
anniversary of the date of this Warrant.
1
<PAGE>
2. MANNER OF EXERCISE. In order to exercise this Warrant,
the Holder shall deliver to the Corporation at its principal office (with copies
by facsimile to each of the Corporation's board members), or at such other
office as shall be designated by the Corporation pursuant to Paragraph 9 hereof,
(i) a written notice of the Holder's election to exercise this Warrant, (ii) a
check in an amount equal to the aggregate purchase price for the Shares as to
which this Warrant is exercised, and (iii) this Warrant. Such notice shall be
in substantially the form of the Subscription Form appearing as Exhibit "A" to
this Warrant. Upon receipt thereof, the Corporation shall execute or cause to
be executed and deliver to the Holder a certificate representing the Shares,
together with, if appropriate, cash in lieu of any fraction of a share, as
hereinafter provided. If this Warrant shall be exercised in part, then the prior
warrant shall be provided to the Corporation for cancellation and a new warrant
in substantially the form as this Warrant shall be issued to the Holder with
respect to the shares not so exercised. All Shares issuable upon the exercise of
this Warrant shall, when issued, be validly issued, fully paid and
nonassessable.
3. WARRANT TRANSFERABLE. THIS WARRANT IS TRANSFERABLE BY THE HOLDER TO
ANY OF ITS EMPLOYEES, CONSULTANTS OR AFFILIATES CONSISTENT WITH ALL APPLICABLE
SECURITIES LAWS. If such warrant is transferred in part, then the prior warrant
shall be provided to the Corporation for cancellation and new warrants in
substantially the form as this Warrant shall be issued to all transferees, and
to the Holder, as the case may be. Any proposed transferee shall, prior to any
such transfer, acknowledge to the Corporation that it holds the warrant for
investment purposes (and not for resale) and that shares of Common Stock that
would be issued upon the exercise of the warrant shall be subject to certain
transfer restrictions as set forth in the Shareholders Agreement dated as of May
10, 1996 among the Corporation and certain of its shareholders.
4. RECAPITALIZATION.
a. In the event of a stock dividend, split-up or combination of
shares, recapitalization, consolidation, or other similar capital change
affecting the common stock of the Corporation, or if any shares of common
stock shall be changed into the same or a different number of shares of any
class or classes of stock or other securities, whether by capital
reorganization, reclassification, subdivision or combination of shares,
stock dividend or otherwise, then if all or any portion of this Warrant
shall be exercised subsequent to such event (i) the number and kind of
shares of stock or securities of the Corporation to be subject to this
Warrant, (ii) the number of shares of Common Stock or other stock or
securities which may be issued upon the exercise of this Warrant, and (iii)
all other relevant provisions hereof, shall be appropriately adjusted by
the Corporation.
2
<PAGE>
b. This Warrant and the rights granted to the Holder hereunder shall
not affect in any way the right or power of the Corporation to make
adjustments, reclassifications, reorganizations or changes in its capital
or business structure or to merge, consolidate, dissolve, liquidate or sell
or transfer all or any part of its business or assets.
5. FRACTIONAL SHARES. The Corporation shall not be required to issue any
fractional Shares upon any exercise of all or any portion of the Warrant. As to
any final fraction of a Share which the Holder would otherwise be entitled to
purchase upon such exercise, the Corporation may pay in cash the fair value of
such fractional Share as determined in good faith by the Board of Directors of
the Corporation.
6. REPLACEMENT. Upon receipt by the Corporation of evidence satisfactory
to it (in the exercise of reasonable discretion) of the ownership of and the
loss, theft, destruction or mutilation of this Warrant and (i) in case of loss,
theft or destruction, also an indemnity satisfactory to it in the exercise of
its reasonable discretion and (ii) in case of mutilation upon surrender and
cancellation hereof, the Corporation will execute and deliver in lieu hereof a
new Warrant of like tenor.
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK. The Corporation shall
at all times reserve and keep available for issuance upon the exercise of this
Warrant such number of its authorized but unissued shares of Common Stock as
will be sufficient to permit the exercise in full of this Warrant. All shares
of Common Stock which shall be so issuable shall, when issued upon exercise of
all or any part of this Warrant, be validly issued and fully paid and
nonassessable.
8. RESTRICTIVE LEGEND. Each certificate for Common Stock issued upon the
exercise of this Warrant shall be stamped or otherwise imprinted with a legend
in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
ANY SECURITIES LAWS IN RELIANCE OF EXEMPTION(S) THEREFROM AND THE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH TRANSFER OR SALE IS
MADE IN COMPLIANCE WITH ALL FEDERAL AND APPLICABLE STATE SECURITIES LAWS.
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE HELD SUBJECT
TO, AND THEIR TRANSFER IS RESTRICTED UNDER, THE TERMS OF A
SHAREHOLDERS' AGREEMENT DATED AS OF MAY 10, 1996 BY AND AMONG THE
CORPORATION AND CERTAIN OF ITS SHAREHOLDERS, A COPY OF WHICH IS ON
FILE AND IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
CORPORATION."
3
<PAGE>
9. NOTICE. Any notice, demand or delivery pursuant to the provisions
hereof shall be sufficiently given or made if sent by first class mail, postage
prepaid, addressed to the Holder at the address designated below, and to the
Corporation at its principal office as described in Paragraph 3 above or such
other address as shall have been furnished to the party giving or making such
notice, demand or delivery.
10. GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of Delaware.
4
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be duly
executed under seal this 10th day of May, 1996.
ILD COMMUNICATIONS, INC.
By: /s/ Michael F. Lewis
-------------------------------
Michael F. Lewis
Its President
[CORPORATE SEAL]
Acknowledgement of Receipt by Holder:
By:
---------------------------
Title:
------------------------
Address:
----------------------
----------------------
5
<PAGE>
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises this
Warrant for and purchases _____ shares of Common Stock, par value $.01 per
share, of ILD Communications, Inc., purchasable with this Warrant, and herewith
makes payment therefor, all at the price and on the terms and conditions
specified in this Warrant and requests that certificates for the shares of
Common Stock hereby purchased (and any securities or other property issuable
upon such exercise) be issued in the name of and delivered to _________________
whose address is _________________________________________________.
Dated:____________________, 19___.
[HOLDER]
By:
--------------------------------
Title:
-----------------------------
6
<PAGE>
EXHIBIT 4.6
NEITHER THE WARRANT REPRESENTED BY THIS CERTIFICATE NOR ANY OF THE SECURITIES
ISSUABLE UPON EXERCISE THEREOF HAVE BEEN REGISTERED UNDER ANY SECURITIES LAWS IN
RELIANCE OF EXEMPTION(S) THEREFROM AND NEITHER SUCH SECURITIES MAY BE SOLD OR
TRANSFERRED UNLESS SUCH TRANSFER OR SALE IS MADE IN COMPLIANCE WITH ALL FEDERAL
AND APPLICABLE STATE SECURITIES LAWS.
THE SHARES OF STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT WILL BE HELD SUBJECT
TO AND THEIR TRANSFER IS RESTRICTED UNDER THE TERMS OF A SHAREHOLDERS'
AGREEMENT, DATED AS OF MAY 10, 1996, BY AND AMONG THE CORPORATION AND CERTAIN OF
ITS SHAREHOLDERS, A COPY OF WHICH IS ON FILE AND IS AVAILABLE FOR INSPECTION AT
THE PRINCIPAL OFFICE OF THE CORPORATION.
No. of Shares of
Common Stock: 500 Warrant No. 4
(by partial assignment of
Warrant No. 1)
WARRANT
TO PURCHASE SHARES OF COMMON STOCK
OF
ILD COMMUNICATIONS, INC.
THIS IS TO CERTIFY THAT MICHAEL F. LEWIS, a resident of the State of
Florida ("Lewis" or any successor or transferree, a "Holder"), is entitled to
purchase from ILD COMMUNICATIONS, INC., a Delaware corporation (the
"Corporation"), upon the terms, at the times and subject to the conditions
hereinafter set forth, up to 500 shares of $.01 par value per share voting
common stock of the Corporation (the "Common Stock"), at a purchase price of
Ninety Dollars ($90.00) per share (the shares of Common Stock that are the
subject of this Warrant hereinafter referred to collectively as the "Shares"):
1. EXERCISE; TERM OF WARRANT. Except as otherwise provided herein, the
Holder may exercise this Warrant, in the manner set forth in Paragraph 2 hereof,
in whole or in any part from time to time, at any time on or after the date
hereof but prior to 5:00 p.m., Eastern Time, on the date that is the tenth
anniversary of the date of this Warrant.
2. MANNER OF EXERCISE. In order to exercise this Warrant,
the Holder shall deliver to the Corporation at its principal office (with copies
by facsimile to each of the Corporation's board members), or at such other
office as shall be designated by the Corporation pursuant to Paragraph 9 hereof,
(i) a written notice of the Holder's election to exercise this Warrant, (ii) a
check in an amount equal to the aggregate purchase price for the Shares as to
which this Warrant is exercised, and (iii) this Warrant. Such notice shall be
in substantially the form of the Subscription Form appearing as Exhibit "A" to
this Warrant. Upon receipt thereof, the Corporation shall execute or cause to
be
1
<PAGE>
executed and deliver to the Holder a certificate representing the Shares,
together with, if appropriate, cash in lieu of any fraction of a share, as
hereinafter provided. If this Warrant shall be exercised in part, then the prior
warrant shall be provided to the Corporation for cancellation and a new warrant
in substantially the form as this Warrant shall be issued to the Holder with
respect to the shares not so exercised. All Shares issuable upon the exercise of
this Warrant shall, when issued, be validly issued, fully paid and
nonassessable.
3. WARRANT TRANSFERABLE. THIS WARRANT IS TRANSFERABLE BY THE HOLDER TO
ANY OF ITS EMPLOYEES, CONSULTANTS OR AFFILIATES CONSISTENT WITH ALL APPLICABLE
SECURITIES LAWS. If such warrant is transferred in part, then the prior warrant
shall be provided to the Corporation for cancellation and new warrants in
substantially the form as this Warrant shall be issued to all transferees, and
to the Holder, as the case may be. Any proposed transferee shall, prior to any
such transfer, acknowledge to the Corporation that it holds the warrant for
investment purposes (and not for resale) and that shares of Common Stock that
would be issued upon the exercise of the warrant shall be subject to certain
transfer restrictions as set forth in the Shareholders Agreement dated as of May
10, 1996 among the Corporation and certain of its shareholders.
4. RECAPITALIZATION.
a. In the event of a stock dividend, split-up or combination of
shares, recapitalization, consolidation, or other similar capital change
affecting the common stock of the Corporation, or if any shares of common
stock shall be changed into the same or a different number of shares of any
class or classes of stock or other securities, whether by capital
reorganization, reclassification, subdivision or combination of shares,
stock dividend or otherwise, then if all or any portion of this Warrant
shall be exercised subsequent to such event (i) the number and kind of
shares of stock or securities of the Corporation to be subject to this
Warrant, (ii) the number of shares of Common Stock or other stock or
securities which may be issued upon the exercise of this Warrant, and (iii)
all other relevant provisions hereof, shall be appropriately adjusted by
the Corporation.
b. This Warrant and the rights granted to the Holder hereunder shall
not affect in any way the right or power of the Corporation to make
adjustments, reclassifications, reorganizations or changes in its capital
or business structure or to merge, consolidate, dissolve, liquidate or sell
or transfer all or any part of its business or assets.
5. FRACTIONAL SHARES. The Corporation shall not be required to issue any
fractional Shares upon any exercise of all
2
<PAGE>
or any portion of the Warrant. As to any final fraction of a Share which the
Holder would otherwise be entitled to purchase upon such exercise, the
Corporation may pay in cash the fair value of such fractional Share as
determined in good faith by the Board of Directors of the Corporation.
6. REPLACEMENT. Upon receipt by the Corporation of evidence satisfactory
to it (in the exercise of reasonable discretion) of the ownership of and the
loss, theft, destruction or mutilation of this Warrant and (i) in case of loss,
theft or destruction, also an indemnity satisfactory to it in the exercise of
its reasonable discretion and (ii) in case of mutilation upon surrender and
cancellation hereof, the Corporation will execute and deliver in lieu hereof a
new Warrant of like tenor.
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK. The Corporation shall
at all times reserve and keep available for issuance upon the exercise of this
Warrant such number of its authorized but unissued shares of Common Stock as
will be sufficient to permit the exercise in full of this Warrant. All shares
of Common Stock which shall be so issuable shall, when issued upon exercise of
all or any part of this Warrant, be validly issued and fully paid and
nonassessable.
8. RESTRICTIVE LEGEND. Each certificate for Common Stock issued upon the
exercise of this Warrant shall be stamped or otherwise imprinted with a legend
in substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
ANY SECURITIES LAWS IN RELIANCE OF EXEMPTION(S) THEREFROM AND THE
SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH TRANSFER OR SALE IS
MADE IN COMPLIANCE WITH ALL FEDERAL AND APPLICABLE STATE SECURITIES LAWS.
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE HELD SUBJECT
TO, AND THEIR TRANSFER IS RESTRICTED UNDER, THE TERMS OF A
SHAREHOLDERS' AGREEMENT DATED AS OF MAY 10, 1996 BY AND AMONG THE
CORPORATION AND CERTAIN OF ITS SHAREHOLDERS, A COPY OF WHICH IS ON
FILE AND IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
CORPORATION."
9. NOTICE. Any notice, demand or delivery pursuant to the provisions
hereof shall be sufficiently given or made if sent by first class mail, postage
prepaid, addressed to the Holder at the address designated below, and to the
Corporation at its principal office as described in Paragraph 3 above or such
other address as shall have been furnished to the party giving or making such
notice, demand or delivery.
10. GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of Delaware.
3
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Warrant to be duly
executed under seal this 10th day of May, 1996.
ILD COMMUNICATIONS, INC.
By: /s/ Michael F. Lewis
-------------------------
Michael F. Lewis
Its President
[CORPORATE SEAL]
Acknowledgement of Receipt by Holder:
By:
---------------------------
Title:
------------------------
Address:
----------------------
----------------------
4
<PAGE>
SUBSCRIPTION FORM
(To be executed only upon exercise of Warrant)
The undersigned registered owner of this Warrant irrevocably exercises this
Warrant for and purchases _____ shares of Common Stock, par value $.01 per
share, of ILD Communications, Inc., purchasable with this Warrant, and herewith
makes payment therefor, all at the price and on the terms and conditions
specified in this Warrant and requests that certificates for the shares of
Common Stock hereby purchased (and any securities or other property issuable
upon such exercise) be issued in the name of and delivered to _________________
whose address is _________________________________________________.
Dated:____________________, 19___.
[HOLDER]
By:
--------------------------------
Title:
-----------------------------
5
<PAGE>
EXHIBIT 4.7
STOCK PURCHASE WARRANT
This Warrant is issued this 13th day of May, 1996, by ILD
COMMUNICATIONS, INC., a Delaware corporation (the "Company"), to SIRROM
CAPITAL CORPORATION, a Tennessee corporation (SIRROM CAPITAL CORPORATION and
any subsequent assignee or transferee hereof are hereinafter referred to
collectively as "Holder" or "Holders").
AGREEMENT:
1. ISSUANCE OF WARRANT; TERM. For and in consideration of SIRROM
CAPITAL CORPORATION making a loan to the Company in an amount of One Million
Five Hundred Thousand and no/100ths Dollars ($1,500,000) pursuant to the
terms of a secured promissory note of even date herewith (the "Note") and
related loan agreement of even date herewith (the "Loan Agreement"), and
other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Company hereby grants to Holder the right to
purchase 5,429 shares ("Base Amount") of the Company's common stock (the
"Common Stock"), provided that in the event that any portion of the
indebtedness evidenced by the Note is outstanding on the following dates, the
Base Amount shall be increased to the corresponding number set forth below:
<TABLE>
<CAPTION>
DATE BASE AMOUNT
-------------------- ---------------------
<S> <C> <C>
May 13, 1999 7,239 shares
May 13, 2000 9,085 shares
May 13, 2001 10,967 shares
</TABLE>
The shares of Common Stock issuable upon exercise of this Warrant are
hereinafter referred to as the "Shares." This Warrant shall be exercisable
at any time and from time to time from the date hereof until June 30, 2001.
2. EXERCISE PRICE. The exercise price (the "Exercise Price") per
share for which all or any of the Shares may be purchased pursuant to the
terms of this Warrant shall be One Cent ($.01).
3. EXERCISE. This Warrant may be exercised by the Holder hereof (but
only on the conditions hereinafter set forth) as to all or any increment or
increments of One Hundred (100) Shares (or the balance of the Shares if less
than such number), upon delivery of written notice of intent to exercise to
the Company at the following address: 13000 Sawgrass Village Circle, Suite 5,
Ponte Verdra Beach, Florida 32082 or such other address as the Company shall
designate in a written notice to the Holder hereof, together with this
Warrant and payment to the Company of the aggregate Exercise Price of the
Shares so purchased. The Exercise Price shall be payable, at the option of
the Holder, (i) by certified or bank check, (ii) by the surrender of the Note
or portion thereof having an outstanding principal balance equal to the
aggregate Exercise Price or (iii) by the surrender of a portion of this
Warrant where the Shares subject to the portion of this Warrant that
<PAGE>
is surrendered have a fair market value (as mutually agreed upon by the
parties hereto) equal to the aggregate Exercise Price. Upon exercise of this
Warrant as aforesaid, the Company shall as promptly as practicable, and in
any event within fifteen (15) days thereafter, execute and deliver to the
Holder of this Warrant a certificate or certificates for the total number of
whole Shares for which this Warrant is being exercised in such names and
denominations as are requested by such Holder. If this Warrant shall be
exercised with respect to less than all of the Shares, the Holder shall be
entitled to receive a new Warrant covering the number of Shares in respect of
which this Warrant shall not have been exercised, which new Warrant shall in
all other respects be identical to this Warrant. The Company covenants and
agrees that it will pay when due any and all state and federal issue taxes
which may be payable in respect of the issuance of this Warrant or the
issuance of any Shares upon exercise of this Warrant.
4. COVENANTS AND CONDITIONS. The above provisions are subject to the
following:
(a) Neither this Warrant nor the Shares have been registered under
the Securities Act of 1933, as amended ("Securities Act") or any state
securities laws ("Blue Sky Laws"). This Warrant has been acquired for
investment purposes and not with a view to distribution or resale and may
not be sold or otherwise transferred without (i) an effective registration
statement for such Warrant under the Securities Act and such applicable
Blue Sky Laws, or (ii) an opinion of counsel, which opinion and counsel
shall be reasonably satisfactory to the Company and its counsel, that
registration is not required under the Securities Act or under any
applicable Blue Sky Laws (the Company hereby acknowledges that Caldwell &
Caldwell, P.C. is acceptable counsel). Transfer of the shares issued upon
the exercise of this Warrant shall be restricted in the same manner and to
the same extent as the Warrant and the certificates representing such
Shares shall bear substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES
LAW AND MAY NOT BE TRANSFERRED UNTIL (I) A REGISTRATION
STATEMENT UNDER THE ACT AND SUCH APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR
(II) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY,
REGISTRATION UNDER SUCH SECURITIES ACTS AND SUCH APPLICABLE
STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH
SUCH PROPOSED TRANSFER.
The Holder hereof and the Company agree to execute such other documents and
instruments as counsel for the Company reasonably deems necessary to effect
the compliance of the issuance of this Warrant and any shares of Common
Stock issued upon exercise hereof with applicable federal and state
securities laws.
2
<PAGE>
(b) The Company covenants and agrees that all Shares which may be
issued upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid and
nonassessable, free from all taxes (other than income or an intangibles tax
owed by Holder), liens, charges and preemptive rights, if any, with respect
thereto or to the issuance thereof. The Company shall at all times reserve
and keep available for issuance upon the exercise of this Warrant such
number of authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of this Warrant.
(c) In the event the Company sells shares of the Company's voting
stock or options, warrants, or other securities exercisable into shares of
capital stock at a price per share (or exercise price per share) of less
than the higher of (i) $72.69 per share and (ii) the fair market value per
share of such shares as determined in good faith by the Board of Directors
of the Company (the "Trigger Price") (a "Dilutive Issuance"), then the
number of shares of Common Stock issuable upon exercise of this Warrant
shall be increased, without any action on the part of the holder(s) thereof
or the Company, into that number of shares of Common Stock which would have
been issued upon exercise of such Warrant if exercised immediately prior to
such Dilutive Issuance, multiplied by a fraction, the numerator of which is
the number of shares of Common Stock outstanding on a fully diluted basis
prior to such Dilutive Issuance plus the number of shares issued pursuant
to the Dilutive Issuance whether upon, the sale or issuance of the Common
Stock or upon exercise in full of all the conversion rights, options,
rights and warrants, and the denominator of which is the number of shares
of Common Stock outstanding on a fully diluted basis prior to such Dilutive
Issuance plus the number of shares that the gross proceeds of such Dilutive
Issuance could have purchased at the per share Trigger Price. If any
rights of conversion or exercise of convertible securities, options, rights
or warrants pursuant to a Dilutive Issuance shall expire without having
been exercised (except in the case where the Company has redeemed such
convertible security, option, right or warrant or made any payment on
account of the holder thereof not converting or exercising such convertible
security, option, right or warrant), the number of shares of Common Stock
to be issued upon exercise of the Warrant shall be equitably adjusted to be
the number of shares of Common Stock that would have been in effect had the
computation in this section 4(c) been made on the basis that the only
shares of Common Stock issued or sold pursuant to the Dilutive Issuance
were those actually issued upon the conversion or exercise of such
convertible securities, options, rights or warrants constituting the
Dilutive Issuance.
Notwithstanding any other provisions herein to the contrary, the
following events shall not be deemed to constitute a Dilutive Issuance for
purposes of this warrant: (A) the issuance of any options, rights or
warrants, or the issuance of shares of Common Stock upon exercise thereof,
pursuant to options, rights or warrants granted to key employees of the
Company pursuant to management warrants or option agreements, as approved
by the Board of Directors of the Company, in an amount not to exceed 27,500
shares, including
3
<PAGE>
the options to Michael F. Lewis and certain key employees or consultants
of the Company for 27,500 shares at $24.20 per share; (B) the issuance
of any warrants to be granted to Sirrom Capital Corporation and Reedy
River Ventures Limited Partnership in connection with a $2,000,000 loan
as approved by the Board of Directors of the Company; or (C) the
issuance of the warrants by the Company to Triad Capital Partners, Inc.,
or affiliates thereof, to purchase up to 6,000 shares of Common Stock at
$90.00 per share, and the issuance of shares of Common Stock pursuant to
the exercise of any such warrant.
5. TRANSFER OF WARRANT. Subject to the provisions of Section 4 hereof,
this Warrant may be transferred, in whole or in part, to any person or business
entity, by presentation of the Warrant to the Company with written instructions
for such transfer. Upon such presentation for transfer, the Company shall
promptly execute and deliver a new Warrant or Warrants in the form hereof in the
name of the assignee or assignees and in the denominations specified in such
instructions. The Company shall pay all expenses incurred by it in connection
with the preparation, issuance and delivery of Warrants under this Section.
Holder shall give the Company ten (10) days prior written notice of its
intention to transfer this Warrant to a shareholder of the Company.
6. WARRANT HOLDER NOT SHAREHOLDER; RIGHTS OFFERING; PREEMPTIVE RIGHTS.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder, as such, any right whatsoever as a shareholder of the Company.
Notwithstanding the foregoing, if the Company should offer to all of the
Company's shareholders the right to purchase any securities of the Company, then
all shares of Common Stock that are subject to this Warrant shall be deemed to
be outstanding and owned by the Holder and the Holder shall be entitled to
participate in such rights offering. The Company shall not grant any preemptive
rights with respect to any of its capital stock without the prior written
consent of the Holder.
7. OBSERVATION RIGHTS. The Holder of this Warrant shall receive notice
of and be entitled to attend or may send a representative (at Holder's expense)
to attend all meetings of the Company's Board of Directors in a non-voting
observation capacity and shall receive a copy of all correspondence and
information delivered to the Company's Board of Directors, from the date hereof
until such time as the indebtedness evidenced by the Note has been paid in full.
8. ADJUSTMENT UPON CHANGES IN STOCK.
(a) If all or any portion of this Warrant shall be exercised
subsequent to any stock split, stock dividend, recapitalization,
combination of shares of the Company, or other similar event, occurring
after the date hereof, then the Holder exercising this Warrant shall
receive, for the aggregate price paid upon such exercise, the aggregate
number and class of shares which such Holder would have received if this
Warrant had been exercised immediately prior to such stock split, stock
dividend, recapitalization, combination of shares, or other similar event.
If any adjustment under this Section 8(a), would create a fractional share
of Common Stock or a right to acquire a fractional share of Common Stock,
4
<PAGE>
such fractional share shall be disregarded and the number of shares subject
to this Warrant shall be the next higher number of shares, rounding all
fractions upward. Whenever there shall be an adjustment pursuant to this
Section 8(a), the Company shall forthwith notify the Holder or Holders of
this Warrant of such adjustment, setting forth in reasonable detail the
event requiring the adjustment and the method by which such adjustment was
calculated.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares, separation,
reorganization or liquidation of the Company, or other similar event,
occurring after the date hereof, as a result of which shares of Common
Stock shall be changed into the same or a different number of shares of
the same or another class or classes of securities of the Company or
another entity, or the holders of Common Stock are entitled to receive
cash or other property, then the Holder exercising this Warrant shall
receive, for the aggregate price paid upon such exercise, the aggregate
number and class of shares, cash or other property which such Holder
would have received if this Warrant had been exercised immediately prior
to such merger, consolidation, exchange of shares, separation,
reorganization or liquidation, or other similar event. If any
adjustment under this Section 8(b) would create a fractional share of
Common Stock or a right to acquire a fractional share of Common Stock,
such fractional share shall be disregarded and the number of shares
subject to this Warrant shall be the next higher number of shares,
rounding all fractions upward. Whenever there shall be an adjustment
pursuant to this Section 8(b), the Company shall forthwith notify the
Holder or Holders of this Warrant of such adjustment, setting forth in
reasonable detail the event requiring the adjustment and the method by
which such adjustment was calculated.
9. PUT AGREEMENT.
(a) The Company hereby irrevocably grants and issues to Holder the
right and option to sell to the Company (the "Put") this Warrant for a
period of 30 days immediately prior to the expiration thereof, at a
purchase price (the "Purchase Price") equal to the Fair Market Value (as
hereinafter defined) of the shares of Common Stock issuable to Holder
upon exercise of this Warrant.
(b) The Purchase Price shall be paid to Holder by the Company, as
follows:
(i) one third of the Purchase Price shall be paid in cash
within thirty (30) days of the receipt of written notice from Holder
of its intention to exercise the Put (the "Closing Date"),
(ii) On the Closing Date, the Company shall deliver a
promissory note to Holder, in substantially the form of the Note,
which evidences the remaining balance of the Purchase Price and
provides for: (A) two (2) equal installment payments of principal with
the first installment due on the six (6) month anniversary date of the
promissory note and the second installment due on the first
anniversary date of the promissory note; (B) interest to accrue on the
outstanding principal
5
<PAGE>
balance at thirteen and one half percent (13.5%) per annum and
payable monthly; (C) the promissory note to be secured by all of
the Shares transferred by the Holder pursuant to the Put; and (D)
the Company to have the right to prepay the promissory note in part
or in full at any time and from time to time.
The aggregate number of shares that may be sold to the Company
pursuant to this Section may be decreased to the extent that the
consideration to be paid by the Company for the shares would exceed
the "surplus" of the Company (as defined in Section 154 of the
Delaware General Corporation Law).
(c) The Fair Market Value of the shares of Common Stock of the
Company issuable pursuant to this Warrant shall be determined as follows:
(i) The Company and the Holder shall each appoint an
independent, experienced appraiser who is a member of a recognized
professional association of business appraisers. The two appraisers
shall determine the value of the shares of Common Stock which would be
issued upon the exercise of the Warrant, assuming that the sale would
be between a willing buyer and a willing seller, both of whom have
full knowledge of the financial and other affairs of the Company, and
neither of whom is under any compulsion to sell or to buy.
(ii) If the highest of the two appraisals is not more than
10% more than the lowest of the appraisals, the Fair Market Value
shall be the average of the two appraisals. If the highest of the two
appraisals is 10% or more than the lowest of the two appraisals, then
a third appraiser shall be appointed by the two appraisers, and if
they cannot agree on a third appraiser, the American Arbitration
Association shall appoint the third appraiser. The third appraiser,
regardless of who appoints him or her, shall have the same
qualifications as the first two appraisers.
(iii) The Fair Market Value after the appointment of the third
appraiser shall be the mean of the three appraisals.
(iv) The fees and expenses of the appraisers shall be paid
one-half by the Company and one-half by the Holder.
(d) Notwithstanding Section 9(a) hereof, in the event that any
shareholder of the Company exercises its right to require the Company to
redeem its shares pursuant to the Shareholder Agreement of even date
herewith by and among the Company and the Founding Shareholders (as
hereinafter defined).
10. REGISTRATION.
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(a) The Company and the holders of the Shares agree that if at any
time after the date hereof the Company shall propose to file a registration
statement with respect to any of its Common Stock on a form suitable for a
secondary offering, it will give notice in writing to such effect to the
registered holder(s) of the Shares at least thirty (30) days prior to such
filing, and, at the written request of any such registered holder, made
within ten (10) days after the receipt of such notice, will include therein
at the Company's cost and expense (including the fees and expenses of
counsel to such holder(s), but excluding underwriting discounts,
commissions and filing fees attributable to the Shares included therein)
such of the Shares as such holder(s) shall request; provided, however, that
if the offering being registered by the Company is underwritten and if the
representative of the underwriters certifies in writing that the inclusion
therein of the Shares would materially and adversely affect the sale of the
securities to be sold by the Company thereunder, then the Company shall be
required to include in the offering only that number of securities,
including the Shares, which the underwriters determine in their sole
discretion will not jeopardize the success of the offering (the securities
so included to be apportioned pro rata among all selling shareholders
according to the total amount of securities entitled to be included therein
owned by each selling shareholder, but in no event shall the total amount
of Shares included in the offering be less than the number of securities
included in the offering by any other single selling shareholder unless all
of the Shares are included in the offering).
(b) Whenever the Company undertakes to effect the registration of any
of the Shares, the Company shall, as expeditiously as reasonably possible:
(i) Prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement covering such
Shares and use its best efforts to cause such registration statement
to be declared effective by the Commission as expeditiously as
possible and to keep such registration effective until the earlier of
(A) the date when all Shares covered by the registration statement
have been sold or (B) a period of at least 90 days after the effective
date of such registration statement or for such longer period, not to
exceed 180 days, as may be required under the plan or plans of
distribution set forth in such registration statement; provided, that
before filing a registration statement or prospectus or any amendment
or supplements thereto, the Company will furnish to each Holder of
Shares covered by such registration statement and the underwriters, if
any, copies of all such documents proposed to be filed (excluding
exhibits, unless any such person shall specifically request exhibits),
which documents will be subject to the review of such Holders and
underwriters, and the Company will not file such registration
statement or any amendment thereto or any prospectus or any supplement
thereto (including any documents incorporated by reference therein)
with the Commission if (A) the underwriters, if any, shall reasonably
object to such filing or (B) if information in such registration
statement or prospectus concerning a particular selling Holder has
changed and such Holder or the underwriters, if any, shall reasonably
object.
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<PAGE>
(ii) Prepare and file with the Commission such amendments and
post-effective amendments to such registration statement as may be
necessary to keep such registration statement effective during the
period referred to in Section 10(b)(i) and to comply with the
provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement, and cause the
prospectus to be supplemented by any required prospectus supplement,
and as so supplemented to be filed with the Commission pursuant to
Rule 424 under the Securities Act.
(iii) Furnish to the selling Holder(s) such numbers of copies
of such registration statement, each amendment thereto, the prospectus
included in such registration statement (including each preliminary
prospectus), each supplement thereto and such other documents as they
may reasonably request in order to facilitate the disposition of the
Shares owned by them.
(iv) Use its best efforts to register and qualify under such
other securities laws of such jurisdictions as shall be reasonably
requested by any selling Holder and do any and all other acts and
things which may be reasonably necessary or advisable to enable such
selling Holder to consummate the disposition of the Shares owned by
such Holder, in such jurisdictions; provided, however, that the
Company shall not be required in connection therewith or as a
condition thereto to qualify to transact business or to file a general
consent to service of process in any such states or jurisdictions.
(v) Promptly notify each selling Holder of the happening of
any event as a result of which the prospectus included in such
registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not
misleading and, at the request of any such Holder, the Company will
prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Shares, such prospectus
will not contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein not
misleading.
(vi) Provide a transfer agent and registrar for all such
Shares not later than the effective date of such registration
statement.
(vii) Enter into such customary agreements (including
underwriting agreements in customary form for a primary offering) and
take all such other actions as the underwriters, if any, reasonably
request in order to expedite or facilitate the disposition of such
Shares (including, without limitation, effecting a stock split or a
combination of shares).
8
<PAGE>
(viii) Make available for inspection by any selling Holder or
any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent
retained by any such selling Holder or underwriter, all financial and
other records, pertinent corporate documents and properties of the
Company, and cause the officers, directors, employees and independent
accountants of the Company to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or
agent in connection with such registration statement.
(ix) Promptly notify the selling Holder(s) and the
underwriters, if any, of the following events and (if requested by any
such person) confirm such notification in writing: (A) the filing of
the prospectus or any prospectus supplement and the registration
statement and any amendment or post-effective amendment thereto and,
with respect to the registration statement or any post-effective
amendment thereto, the declaration of the effectiveness of such
documents, (B) any requests by the Commission for amendments or
supplements to the registration statement or the prospectus or for
additional information, (C) the issuance or threat of issuance by the
Commission of any stop order suspending the effectiveness of the
registration statement or the initiation of any proceedings for that
purpose and (D) the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale
in any jurisdiction or the initiation or threat of initiation of any
proceeding for such purposes.
(x) Make every reasonable effort to prevent the entry of any
order suspending the effectiveness of the registration statement and
obtain at the earliest possible moment the withdrawal of any such
order, if entered.
(xi) Cooperate with the selling Holder(s) and the
underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing the Shares to be sold and not
bearing any restrictive legends, and enable such Shares to be in such
lots and registered in such names as the underwriters may request at
least two (2) business days prior to any delivery of the Shares to the
underwriters.
(xii) Provide a CUSIP number for all the Shares not later than
the effective date of the registration statement.
(xiii) Prior to the effectiveness of the registration statement
and any post-effective amendment thereto and at each closing of an
underwritten offering, use its best efforts to satisfy all
requirements imposed on the Company (and its agents, attorneys, and
accountants) by the Underwriters as are customarily imposed on issuers
in primary underwritten offerings.
(xiv) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to its security holders
9
<PAGE>
earnings statements satisfying the provisions of Section 11(a) of
the Securities Act, no later than forty-five (45) days after the
end of any twelve-month period (or ninety (90) days, if such period
is a fiscal year) (A) commencing at the end of any fiscal quarter
in which the Shares are sold to underwriters in a firm or best
efforts underwritten offering, or (B) if not sold to underwriters
in such an offering, beginning with the first month of the first
fiscal quarter of the Company commencing after the effective date
of the registration statement, which statements shall cover such
twelve-month periods.
(c) After the date hereof, the Company shall not grant to any holder
of securities of the Company any registration rights which have a priority
greater than or equal to those granted to Holders pursuant to this Warrant
without the prior written consent of the Holder(s).
(d) The Company's obligations under Section 10(a) above with respect
to each holder of Shares are expressly conditioned upon such holder's
furnishing to the Company in writing such information concerning such
holder and the terms of such holder's proposed offering as the Company
shall reasonably request for inclusion in the registration statement. If
any registration statement including any of the Shares is filed, then the
Company shall indemnify each holder thereof (and each underwriter for such
holder and each person, if any, who controls such underwriter within the
meaning of the Securities Act) from any loss, claim, damage or liability
arising out of, based upon or in any way relating to any untrue statement
of a material fact contained in such registration statement or any omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, except for any such
statement or omission based on information furnished in writing by such
holder of the Shares expressly for use in connection with such registration
statement; and such holder shall indemnify the Company (and each of its
officers and directors who has signed such registration statement, each
director, each person, if any, who controls the Company within the meaning
of the Securities Act, each underwriter for the Company and each person, if
any, who controls such underwriter within the meaning of the Securities
Act) and each other such holder against any loss, claim, damage or
liability arising from any such statement or omission which was made in
reliance upon information furnished in writing to the Company by such
holder of the Shares expressly for use in connection with such registration
statement.
(e) For purposes of this Section 10, all of the Shares shall be
deemed to be issued and outstanding.
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<PAGE>
11. CERTAIN NOTICES. In case at any time the Company shall propose to:
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable in stock or
make any special dividend or other distribution to the holders of its
Common Stock;
(c) offer for subscription to the holders of any of its Common Stock
any additional shares of stock in any class or other rights;
(d) reorganize, or reclassify the capital stock of the Company, or
consolidate, merge or otherwise combine with, or sell of all or
substantially all of its assets to, another corporation;
(e) voluntarily or involuntarily dissolve, liquidate or wind up of
the affairs of the Company; or
(f) redeem or purchase any shares of its capital stock or securities
convertible into its capital stock;
then, in any one or more of said cases, the Company shall give to the
Holder of the Warrant, by certified or registered mail, (i) at least twenty
(20) days' prior written notice of the date on which the books of the
Company 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 such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, at least twenty (20) days' prior
written notice of the date when the same shall take place. Any notice
required by 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 any notice required
by clause (ii) shall 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.
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<PAGE>
12. RIGHTS OF CO-SALE.
(a) CO-SALE RIGHT. Neither Intellicall, Inc., Triad-ILD Partners,
nor Morris Telecommunications, LLC ("Morris")(collectively, the "Founding
Shareholders") shall enter into any transaction that would result in the
sale by it of any capital stock now or hereafter owned by it, unless prior
to such sale such Founding Shareholder shall give notice to Holder of its
intention to effect such sale in order that Holder may exercise its rights
under this Section 12 as hereinafter described. Such notice shall set
forth (i) the number of shares to be sold by such Founding Shareholder,
(ii) the principal terms of the sale, including the price at which the
shares are intended to be sold, and (iii) an offer by such Founding
Shareholder to use his best efforts to cause to be included with the shares
to be sold by it in the sale, that number of Shares designated by Holder on
the same terms and conditions.
(b) REJECTION OF CO-SALE OFFER. If Holder has not accepted such
offer in writing within a period of ten (10) days from the date of receipt
of the notice, then such Founding Shareholder shall thereafter be free for
a period of ninety (90) days to sell the number of shares specified in such
notice, at a price no greater than the price set forth in such notice and
on otherwise no more favorable terms to such Founding Shareholder than as
set forth in such notice, without any further obligation to Holder in
connection with such sale. In the event that such Founding Shareholder
fails to consummate such sale within such ninety-day period, the shares
specified in such notice shall continue to be subject to this Section.
(c) ACCEPTANCE OF CO-SALE OFFER. If Holder accepts such offer in
writing within ten (10) day period, such acceptance shall be irrevocable
unless such Founding Shareholder shall be unable to cause to be included
in its sale the number of Shares requested to be included by Holder and
set forth in the written acceptance. In that event, such Founding
Shareholder, Holder and each other person or entity possessing co-sale
rights with respect to such sale shall participate in the sale equally,
with such Founding Shareholder, Holder and each other person or entity
possessing co-sale rights with respect to such sale each selling an
equal number of the shares to be sold in the sale.
(d) EXCEPTION TO CO-SALE RIGHT. Notwithstanding anything to the
contrary contained herein, the right of co-sale set forth in this Section
12 shall not apply to sales of capital stock of the Company by Intellicall,
Inc. to Morris if following such sale Morris would not own more than 25% of
the outstanding capital stock of the Company.
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IN WITNESS WHEREOF, the parties hereto have set their hands as of the date
first above written.
COMPANY: ILD COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Michael F. Lewis
---------------------------------------
Title: President
---------------------------------
HOLDER: SIRROM CAPITAL CORPORATION, a Tennessee
corporation
By: /s/ Kathy A. Harris
---------------------------------------
Title: Vice President
---------------------------------
FOUNDING
SHAREHOLDERS: TRIAD-ILD PARTNERS
By: /s/ Michael F. Lewis
---------------------------------
Title: President
------------------------------
MORRIS TELECOMMUNICATIONS, LLC
By: /s/ Charles Morris
---------------------------------
Title: President
------------------------------
INTELLICALL, INC.
By: /s/ John M. Carradine
---------------------------------
Title: Vice President
------------------------------
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EXHIBIT 4.8
STOCK PURCHASE WARRANT
This Warrant is issued this 13th day of May, 1996, by ILD COMMUNICATIONS,
INC., a Delaware corporation (the "Company"), to REEDY RIVER VENTURES LIMITED
PARTNERSHIP, a South Carolina limited partnership (REEDY RIVER VENTURES LIMITED
PARTNERSHIP and any subsequent assignee or transferee hereof are hereinafter
referred to collectively as "Holder" or "Holders").
AGREEMENT:
1. ISSUANCE OF WARRANT; TERM. For and in consideration of REEDY RIVER
VENTURES LIMITED PARTNERSHIP, making a loan to the Company in an amount of Five
Hundred Thousand and no/100ths Dollars ($500,000) pursuant to the terms of a
secured promissory note of even date herewith (the "Note") and related loan
agreement of even date herewith (the "Loan Agreement"), and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company hereby grants to Holder the right to purchase 1,810
shares ("Base Amount") of the Company's common stock (the "Common Stock"),
provided that in the event that any portion of the indebtedness evidenced by the
Note is outstanding on the following dates, the Base Amount shall be increased
to the corresponding number set forth below:
DATE BASE AMOUNT
------------ -----------------
May 13, 1999 2,413 shares
May 13, 2000 3,028 shares
May 13, 2001 3,656 shares
The shares of Common Stock issuable upon exercise of this Warrant are
hereinafter referred to as the "Shares." This Warrant shall be exercisable at
any time and from time to time from the date hereof until June 30, 2001.
2. EXERCISE PRICE. The exercise price (the "Exercise Price") per share
for which all or any of the Shares may be purchased pursuant to the terms of
this Warrant shall be One Cent ($.01).
3. EXERCISE. This Warrant may be exercised by the Holder hereof (but
only on the conditions hereinafter set forth) as to all or any increment or
increments of One Hundred (100) Shares (or the balance of the Shares if less
than such number), upon delivery of written notice of intent to exercise to the
Company at the following address: 13000 Sawgrass Village Circle, Suite 5, Ponte
Verdra Beach, Florida 32082 or such other address as the Company shall designate
in a
<PAGE>
written notice to the Holder hereof, together with this Warrant and payment
to the Company of the aggregate Exercise Price of the Shares so purchased. The
Exercise Price shall be payable, at the option of the Holder, (i) by certified
or bank check, (ii) by the surrender of the Note or portion thereof having an
outstanding principal balance equal to the aggregate Exercise Price or (iii) by
the surrender of a portion of this Warrant where the Shares subject to the
portion of this Warrant that is surrendered have a fair market value (as
mutually agreed upon by the parties hereto) equal to the aggregate Exercise
Price. Upon exercise of this Warrant as aforesaid, the Company shall as
promptly as practicable, and in any event within fifteen (15) days thereafter,
execute and deliver to the Holder of this Warrant a certificate or certificates
for the total number of whole Shares for which this Warrant is being exercised
in such names and denominations as are requested by such Holder. If this
Warrant shall be exercised with respect to less than all of the Shares, the
Holder shall be entitled to receive a new Warrant covering the number of Shares
in respect of which this Warrant shall not have been exercised, which new
Warrant shall in all other respects be identical to this Warrant. The Company
covenants and agrees that it will pay when due any and all state and federal
issue taxes which may be payable in respect of the issuance of this Warrant or
the issuance of any Shares upon exercise of this Warrant.
4. COVENANTS AND CONDITIONS. The above provisions are subject to the
following:
(a) Neither this Warrant nor the Shares have been registered under
the Securities Act of 1933, as amended ("Securities Act") or any state
securities laws ("Blue Sky Laws"). This Warrant has been acquired for
investment purposes and not with a view to distribution or resale and may
not be sold or otherwise transferred without (i) an effective registration
statement for such Warrant under the Securities Act and such applicable
Blue Sky Laws, or (ii) an opinion of counsel, which opinion and counsel
shall be reasonably satisfactory to the Company and its counsel, that
registration is not required under the Securities Act or under any
applicable Blue Sky Laws (the Company hereby acknowledges that Wyche,
Burgess, Freeman & Parham, P.A. is acceptable counsel). Transfer of the
shares issued upon the exercise of this Warrant shall be restricted in the
same manner and to the same extent as the Warrant and the certificates
representing such Shares shall bear substantially the following legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR ANY APPLICABLE STATE SECURITIES
LAW AND MAY NOT BE TRANSFERRED UNTIL (I) A REGISTRATION
STATEMENT UNDER THE ACT AND SUCH APPLICABLE STATE SECURITIES
LAWS SHALL HAVE BECOME EFFECTIVE WITH REGARD THERETO, OR
(II) IN THE OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY,
REGISTRATION UNDER SUCH SECURITIES ACTS AND SUCH APPLICABLE
STATE
2
<PAGE>
SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH SUCH
PROPOSED TRANSFER.
The Holder hereof and the Company agree to execute such other documents and
instruments as counsel for the Company reasonably deems necessary to effect
the compliance of the issuance of this Warrant and any shares of Common
Stock issued upon exercise hereof with applicable federal and state
securities laws.
(b) The Company covenants and agrees that all Shares which may be
issued upon exercise of this Warrant will, upon issuance and payment
therefor, be legally and validly issued and outstanding, fully paid and
nonassessable, free from all taxes (other than income or an intangibles tax
owed by Holder), liens, charges and preemptive rights, if any, with respect
thereto or to the issuance thereof. The Company shall at all times reserve
and keep available for issuance upon the exercise of this Warrant such
number of authorized but unissued shares of Common Stock as will be
sufficient to permit the exercise in full of this Warrant.
(c) In the event the Company sells shares of the Company's voting
stock or options, warrants, or other securities exercisable into shares of
capital stock at a price per share (or exercise price per share) of less
than the higher of (i) $72.69 per share and (ii) the fair market value per
share of such shares as determined in good faith by the Board of Directors
of the Company (the "Trigger Price") (a "Dilutive Issuance"), then the
number of shares of Common Stock issuable upon exercise of this Warrant
shall be increased, without any action on the part of the holder(s) thereof
or the Company, into that number of shares of Common Stock which would have
been issued upon exercise of such Warrant if exercised immediately prior to
such Dilutive Issuance, multiplied by a fraction, the numerator of which is
the number of shares of Common Stock outstanding on a fully diluted basis
prior to such Dilutive Issuance plus the number of shares issued pursuant
to the Dilutive Issuance whether upon, the sale or issuance of the Common
Stock or upon exercise in full of all the conversion rights, options,
rights and warrants, and the denominator of which is the number of shares
of Common Stock outstanding on a fully diluted basis prior to such Dilutive
Issuance plus the number of shares that the gross proceeds of such Dilutive
Issuance could have purchased at the per share Trigger Price. If any
rights of conversion or exercise of convertible securities, options, rights
or warrants pursuant to a Dilutive Issuance shall expire without having
been exercised (except in the case where the Company has redeemed such
convertible security, option, right or warrant or made any payment on
account of the holder thereof not converting or exercising such convertible
security, option, right or warrant), the number of shares of Common Stock
to be issued upon exercise of the Warrant shall be equitably adjusted to be
the number of shares of Common Stock that would have been in effect had the
computation in this section 4(c) been made on the basis that the only
shares of Common Stock issued or sold pursuant to the Dilutive Issuance
were those actually issued upon the conversion or exercise of such
convertible securities, options, rights or warrants constituting the
Dilutive Issuance.
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<PAGE>
Notwithstanding any other provisions herein to the contrary, the
following events shall not be deemed to constitute a Dilutive Issuance for
purposes of this warrant: (A) the issuance of any options, rights or
warrants, or the issuance of shares of Common Stock upon exercise thereof,
pursuant to options, rights or warrants granted to key employees of the
Company pursuant to management warrants or option agreements, as approved
by the Board of Directors of the Company, in an amount not to exceed 27,500
shares, including the options to Michael F. Lewis and certain key employees
or consultants of the Company for 27,500 shares at $24.20 per share; (B)
the issuance of any warrants to be granted to Sirrom Capital Corporation
and Reedy River Ventures Limited Partnership in connection with a
$2,000,000 loan as approved by the Board of Directors of the Company; or
(C) the issuance of the warrants by the Company to Triad Capital Partners,
Inc., or affiliates thereof, to purchase up to 6,000 shares of Common Stock
at $90.00 per share, and the issuance of shares of Common Stock pursuant to
the exercise of any such warrant.
5. TRANSFER OF WARRANT. Subject to the provisions of Section 4 hereof,
this Warrant may be transferred, in whole or in part, to any person or business
entity, by presentation of the Warrant to the Company with written instructions
for such transfer. Upon such presentation for transfer, the Company shall
promptly execute and deliver a new Warrant or Warrants in the form hereof in the
name of the assignee or assignees and in the denominations specified in such
instructions. The Company shall pay all expenses incurred by it in connection
with the preparation, issuance and delivery of Warrants under this Section.
Holder shall give the Company ten (10) days prior written notice of its
intention to transfer this Warrant to a shareholder of the Company.
6. WARRANT HOLDER NOT SHAREHOLDER; RIGHTS OFFERING; PREEMPTIVE RIGHTS.
Except as otherwise provided herein, this Warrant does not confer upon the
Holder, as such, any right whatsoever as a shareholder of the Company.
Notwithstanding the foregoing, if the Company should offer to all of the
Company's shareholders the right to purchase any securities of the Company, then
all shares of Common Stock that are subject to this Warrant shall be deemed to
be outstanding and owned by the Holder and the Holder shall be entitled to
participate in such rights offering. The Company shall not grant any preemptive
rights with respect to any of its capital stock without the prior written
consent of the Holder.
7. OBSERVATION RIGHTS. The Holder of this Warrant shall receive
notice of and be entitled to attend or may send a representative (at Holder's
expense) to attend all meetings of the Company's Board of Directors in a
non-voting observation capacity and shall receive a copy of all
correspondence and information delivered to the Company's Board of Directors,
from the date hereof until such time as the indebtedness evidenced by the
Note has been paid in full.
8. ADJUSTMENT UPON CHANGES IN STOCK.
(a) If all or any portion of this Warrant shall be exercised
subsequent to any stock split, stock dividend, recapitalization,
combination of shares of the Company, or other
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similar event, occurring after the date hereof, then the Holder
exercising this Warrant shall receive, for the aggregate price paid upon
such exercise, the aggregate number and class of shares which such
Holder would have received if this Warrant had been exercised
immediately prior to such stock split, stock dividend, recapitalization,
combination of shares, or other similar event. If any adjustment under
this Section 8(a), would create a fractional share of Common Stock or a
right to acquire a fractional share of Common Stock, such fractional
share shall be disregarded and the number of shares subject to this
Warrant shall be the next higher number of shares, rounding all
fractions upward. Whenever there shall be an adjustment pursuant to
this Section 8(a), the Company shall forthwith notify the Holder or
Holders of this Warrant of such adjustment, setting forth in reasonable
detail the event requiring the adjustment and the method by which such
adjustment was calculated.
(b) If all or any portion of this Warrant shall be exercised
subsequent to any merger, consolidation, exchange of shares, separation,
reorganization or liquidation of the Company, or other similar event,
occurring after the date hereof, as a result of which shares of Common
Stock shall be changed into the same or a different number of shares of the
same or another class or classes of securities of the Company or another
entity, or the holders of Common Stock are entitled to receive cash or
other property, then the Holder exercising this Warrant shall receive, for
the aggregate price paid upon such exercise, the aggregate number and class
of shares, cash or other property which such Holder would have received if
this Warrant had been exercised immediately prior to such merger,
consolidation, exchange of shares, separation, reorganization or
liquidation, or other similar event. If any adjustment under this Section
8(b) would create a fractional share of Common Stock or a right to acquire
a fractional share of Common Stock, such fractional share shall be
disregarded and the number of shares subject to this Warrant shall be the
next higher number of shares, rounding all fractions upward. Whenever
there shall be an adjustment pursuant to this Section 8(b), the Company
shall forthwith notify the Holder or Holders of this Warrant of such
adjustment, setting forth in reasonable detail the event requiring the
adjustment and the method by which such adjustment was calculated.
9. PUT AGREEMENT.
(a) The Company hereby irrevocably grants and issues to Holder the
right and option to sell to the Company (the "Put") this Warrant for a
period of 30 days immediately prior to the expiration thereof, at a
purchase price (the "Purchase Price") equal to the Fair Market Value (as
hereinafter defined) of the shares of Common Stock issuable to Holder upon
exercise of this Warrant.
(b) The Purchase Price shall be paid to Holder by the Company, as
follows:
(i) one third of the Purchase Price shall be paid in cash
within thirty (30) days of the receipt of written notice from Holder
of its intention to exercise the Put (the "Closing Date"),
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(ii) On the Closing Date, the Company shall deliver a
promissory note to Holder, in substantially the form of the Note,
which evidences the remaining balance of the Purchase Price and
provides for: (A) two (2) equal installment payments of principal with
the first installment due on the six (6) month anniversary date of the
promissory note and the second installment due on the first
anniversary date of the promissory note; (B) interest to accrue on the
outstanding principal balance at thirteen and one half percent (13.5%)
per annum and payable monthly; (C) the promissory note to be secured
by all of the Shares transferred by the Holder pursuant to the Put;
and (D) the Company to have the right to prepay the promissory note in
part or in full at any time and from time to time.
The aggregate number of shares that may be sold to the Company
pursuant to this Section may be decreased to the extent that the
consideration to be paid by the Company for the shares would exceed
the "surplus" of the Company (as defined in Section 154 of the
Delaware General Corporation Law).
(c) The Fair Market Value of the shares of Common Stock of the
Company issuable pursuant to this Warrant shall be determined as follows:
(i) The Company and the Holder shall each appoint an
independent, experienced appraiser who is a member of a recognized
professional association of business appraisers. The two appraisers
shall determine the value of the shares of Common Stock which would be
issued upon the exercise of the Warrant, assuming that the sale would
be between a willing buyer and a willing seller, both of whom have
full knowledge of the financial and other affairs of the Company, and
neither of whom is under any compulsion to sell or to buy.
(ii) If the highest of the two appraisals is not more than
10% more than the lowest of the appraisals, the Fair Market Value
shall be the average of the two appraisals. If the highest of the two
appraisals is 10% or more than the lowest of the two appraisals, then
a third appraiser shall be appointed by the two appraisers, and if
they cannot agree on a third appraiser, the American Arbitration
Association shall appoint the third appraiser. The third appraiser,
regardless of who appoints him or her, shall have the same
qualifications as the first two appraisers.
(iii) The Fair Market Value after the appointment of the third
appraiser shall be the mean of the three appraisals.
(iv) The fees and expenses of the appraisers shall be paid
one-half by the Company and one-half by the Holder.
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(d) Notwithstanding Section 9(a) hereof, in the event that any
shareholder of the Company exercises its right to require the Company to
redeem its shares pursuant to the Shareholder Agreement of even date
herewith by and among the Company and the Founding Shareholders (as
hereinafter defined).
10. REGISTRATION.
(a) The Company and the holders of the Shares agree that if at any
time after the date hereof the Company shall propose to file a registration
statement with respect to any of its Common Stock on a form suitable for a
secondary offering, it will give notice in writing to such effect to the
registered holder(s) of the Shares at least thirty (30) days prior to such
filing, and, at the written request of any such registered holder, made
within ten (10) days after the receipt of such notice, will include therein
at the Company's cost and expense (including the fees and expenses of
counsel to such holder(s), but excluding underwriting discounts,
commissions and filing fees attributable to the Shares included therein)
such of the Shares as such holder(s) shall request; provided, however, that
if the offering being registered by the Company is underwritten and if the
representative of the underwriters certifies in writing that the inclusion
therein of the Shares would materially and adversely affect the sale of the
securities to be sold by the Company thereunder, then the Company shall be
required to include in the offering only that number of securities,
including the Shares, which the underwriters determine in their sole
discretion will not jeopardize the success of the offering (the securities
so included to be apportioned pro rata among all selling shareholders
according to the total amount of securities entitled to be included therein
owned by each selling shareholder, but in no event shall the total amount
of Shares included in the offering be less than the number of securities
included in the offering by any other single selling shareholder unless all
of the Shares are included in the offering).
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(b) Whenever the Company undertakes to effect the registration of any
of the Shares, the Company shall, as expeditiously as reasonably possible:
(i) Prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement covering such
Shares and use its best efforts to cause such registration statement
to be declared effective by the Commission as expeditiously as
possible and to keep such registration effective until the earlier of
(A) the date when all Shares covered by the registration statement
have been sold or (B) a period of at least 90 days after the effective
date of such registration statement or for such longer period, not to
exceed 180 days, as may be required under the plan or plans of
distribution set forth in such registration statement; provided, that
before filing a registration statement or prospectus or any amendment
or supplements thereto, the Company will furnish to each Holder of
Shares covered by such registration statement and the underwriters, if
any, copies of all such documents proposed to be filed (excluding
exhibits, unless any such person shall specifically request exhibits),
which documents will be subject to the review of such Holders and
underwriters, and the Company will not file such registration
statement or any amendment thereto or any prospectus or any supplement
thereto (including any documents incorporated by reference therein)
with the Commission if (A) the underwriters, if any, shall reasonably
object to such filing or (B) if information in such registration
statement or prospectus concerning a particular selling Holder has
changed and such Holder or the underwriters, if any, shall reasonably
object.
(ii) Prepare and file with the Commission such amendments and
post-effective amendments to such registration statement as may be
necessary to keep such registration statement effective during the
period referred to in Section 10(b)(i) and to comply with the
provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement, and cause the
prospectus to be supplemented by any required prospectus supplement,
and as so supplemented to be filed with the Commission pursuant to
Rule 424 under the Securities Act.
(iii) Furnish to the selling Holder(s) such numbers of copies
of such registration statement, each amendment thereto, the prospectus
included in such registration statement (including each preliminary
prospectus), each supplement thereto and such other documents as they
may reasonably request in order to facilitate the disposition of the
Shares owned by them.
(iv) Use its best efforts to register and qualify under such
other securities laws of such jurisdictions as shall be reasonably
requested by any selling Holder and do any and all other acts and
things which may be reasonably necessary or advisable to enable such
selling Holder to consummate the disposition of the Shares owned by
such Holder, in such jurisdictions; provided, however, that the
Company shall not
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<PAGE>
be required in connection therewith or as a condition thereto to
qualify to transact business or to file a general consent to service
of process in any such states or jurisdictions.
(v) Promptly notify each selling Holder of the happening of
any event as a result of which the prospectus included in such
registration statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not
misleading and, at the request of any such Holder, the Company will
prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Shares, such prospectus
will not contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein not
misleading.
(vi) Provide a transfer agent and registrar for all such
Shares not later than the effective date of such registration
statement.
(vii) Enter into such customary agreements (including
underwriting agreements in customary form for a primary offering) and
take all such other actions as the underwriters, if any, reasonably
request in order to expedite or facilitate the disposition of such
Shares (including, without limitation, effecting a stock split or a
combination of shares).
(viii) Make available for inspection by any selling Holder or
any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent
retained by any such selling Holder or underwriter, all financial and
other records, pertinent corporate documents and properties of the
Company, and cause the officers, directors, employees and independent
accountants of the Company to supply all information reasonably
requested by any such seller, underwriter, attorney, accountant or
agent in connection with such registration statement.
(ix) Promptly notify the selling Holder(s) and the
underwriters, if any, of the following events and (if requested by any
such person) confirm such notification in writing: (A) the filing of
the prospectus or any prospectus supplement and the registration
statement and any amendment or post-effective amendment thereto and,
with respect to the registration statement or any post-effective
amendment thereto, the declaration of the effectiveness of such
documents, (B) any requests by the Commission for amendments or
supplements to the registration statement or the prospectus or for
additional information, (C) the issuance or threat of issuance by the
Commission of any stop order suspending the effectiveness of the
registration statement or the initiation of any proceedings for that
purpose and (D) the receipt by the Company of any notification with
respect to the suspension of the qualification
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<PAGE>
of the Shares for sale in any jurisdiction or the initiation or
threat of initiation of any proceeding for such purposes.
(x) Make every reasonable effort to prevent the entry of any
order suspending the effectiveness of the registration statement and
obtain at the earliest possible moment the withdrawal of any such
order, if entered.
(xi) Cooperate with the selling Holder(s) and the
underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing the Shares to be sold and not
bearing any restrictive legends, and enable such Shares to be in such
lots and registered in such names as the underwriters may request at
least two (2) business days prior to any delivery of the Shares to the
underwriters.
(xii) Provide a CUSIP number for all the Shares not later than
the effective date of the registration statement.
(xiii) Prior to the effectiveness of the registration statement
and any post-effective amendment thereto and at each closing of an
underwritten offering, use its best efforts to satisfy all
requirements imposed on the Company (and its agents, attorneys, and
accountants) by the Underwriters as are customarily imposed on issuers
in primary underwritten offerings.
(xiv) Otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make generally
available to its security holders earnings statements satisfying the
provisions of Section 11(a) of the Securities Act, no later than
forty-five (45) days after the end of any twelve-month period (or
ninety (90) days, if such period is a fiscal year) (A) commencing at
the end of any fiscal quarter in which the Shares are sold to
underwriters in a firm or best efforts underwritten offering, or (B)
if not sold to underwriters in such an offering, beginning with the
first month of the first fiscal quarter of the Company commencing
after the effective date of the registration statement, which
statements shall cover such twelve-month periods.
(c) After the date hereof, the Company shall not grant to any holder
of securities of the Company any registration rights which have a priority
greater than or equal to those granted to Holders pursuant to this Warrant
without the prior written consent of the Holder(s).
(d) The Company's obligations under Section 10(a) above with respect
to each holder of Shares are expressly conditioned upon such holder's
furnishing to the Company in writing such information concerning such
holder and the terms of such holder's proposed offering as the Company
shall reasonably request for inclusion in the registration statement. If
any registration statement including any of the Shares is filed, then the
Company shall
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<PAGE>
indemnify each holder thereof (and each underwriter for such holder and
each person, if any, who controls such underwriter within the meaning of
the Securities Act) from any loss, claim, damage or liability arising
out of, based upon or in any way relating to any untrue statement of a
material fact contained in such registration statement or any omission
to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except for any
such statement or omission based on information furnished in writing by
such holder of the Shares expressly for use in connection with such
registration statement; and such holder shall indemnify the Company (and
each of its officers and directors who has signed such registration
statement, each director, each person, if any, who controls the Company
within the meaning of the Securities Act, each underwriter for the
Company and each person, if any, who controls such underwriter within
the meaning of the Securities Act) and each other such holder against
any loss, claim, damage or liability arising from any such statement or
omission which was made in reliance upon information furnished in
writing to the Company by such holder of the Shares expressly for use in
connection with such registration statement.
(e) For purposes of this Section 10, all of the Shares shall be
deemed to be issued and outstanding.
11. CERTAIN NOTICES. In case at any time the Company shall propose to:
(a) declare any cash dividend upon its Common Stock;
(b) declare any dividend upon its Common Stock payable in stock or
make any special dividend or other distribution to the holders of its
Common Stock;
(c) offer for subscription to the holders of any of its Common Stock
any additional shares of stock in any class or other rights;
(d) reorganize, or reclassify the capital stock of the Company, or
consolidate, merge or otherwise combine with, or sell of all or
substantially all of its assets to, another corporation;
(e) voluntarily or involuntarily dissolve, liquidate or wind up of
the affairs of the Company; or
(f) redeem or purchase any shares of its capital stock or securities
convertible into its capital stock;
then, in any one or more of said cases, the Company shall give to the
Holder of the Warrant, by certified or registered mail, (i) at least twenty
(20) days' prior written notice of the date on which the books of the
Company shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in
respect
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of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, and (ii) in the case of
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, at least twenty (20) days' prior
written notice of the date when the same shall take place. Any notice
required by 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 any notice
required by clause (ii) shall 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.
12. RIGHTS OF CO-SALE.
(a) CO-SALE RIGHT. Neither Intellicall, Inc., Triad-ILD Partners,
nor Morris Telecommunications, LLC ("Morris")(collectively, the "Founding
Shareholders") shall enter into any transaction that would result in the
sale by it of any capital stock now or hereafter owned by it, unless prior
to such sale such Founding Shareholder shall give notice to Holder of its
intention to effect such sale in order that Holder may exercise its rights
under this Section 12 as hereinafter described. Such notice shall set
forth (i) the number of shares to be sold by such Founding Shareholder,
(ii) the principal terms of the sale, including the price at which the
shares are intended to be sold, and (iii) an offer by such Founding
Shareholder to use his best efforts to cause to be included with the shares
to be sold by it in the sale, that number of Shares designated by Holder on
the same terms and conditions.
(b) REJECTION OF CO-SALE OFFER. If Holder has not accepted such
offer in writing within a period of ten (10) days from the date of receipt
of the notice, then such Founding Shareholder shall thereafter be free for
a period of ninety (90) days to sell the number of shares specified in such
notice, at a price no greater than the price set forth in such notice and
on otherwise no more favorable terms to such Founding Shareholder than as
set forth in such notice, without any further obligation to Holder in
connection with such sale. In the event that such Founding Shareholder
fails to consummate such sale within such ninety-day period, the shares
specified in such notice shall continue to be subject to this Section.
(c) ACCEPTANCE OF CO-SALE OFFER. If Holder accepts such offer in
writing within ten (10) day period, such acceptance shall be irrevocable
unless such Founding Shareholder shall be unable to cause to be included in
its sale the number of Shares requested to be included by Holder and set
forth in the written acceptance. In that event, such Founding Shareholder,
Holder and each other person or entity possessing co-sale rights with
respect to such sale shall participate in the sale equally, with such
Founding Shareholder, Holder and each other person or entity possessing
co-sale rights with respect to such sale each selling an equal number of
the shares to be sold in the sale.
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(d) EXCEPTION TO CO-SALE RIGHT. Notwithstanding anything to the
contrary contained herein, the right of co-sale set forth in this Section
12 shall not apply to sales of capital stock of the Company by Intellicall,
Inc. to Morris if following such sale Morris would not own more than 25% of
the outstanding capital stock of the Company.
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IN WITNESS WHEREOF, the parties hereto have set their hands as of the date
first above written.
COMPANY: ILD COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Michael F. Lewis
-------------------------------------
Title: President
--------------------------------
HOLDER: REEDY RIVER VENTURES LIMITED PARTNERSHIP, a
South Carolina limited partnership
By: Emergent Equity Advisors, Inc., its
general partner
By: /s/ Capers A. Easterby
-------------------------------------
Title: President
--------------------------------
FOUNDING
SHAREHOLDERS: TRIAD-ILD PARTNERS
By: /s/ Michael F. Lewis
------------------------------------
Title: President
---------------------------------
MORRIS TELECOMMUNICATIONS, LLC
By: /s/ Charles H. Morris
------------------------------------
Title: President
---------------------------------
INTELLICALL, INC.
By: /s/ John M. Carradine
------------------------------------
Title: Vice President
---------------------------------
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15
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EXHIBIT 4.9
THIS PROMISSORY NOTE IS SUBJECT TO THE TERMS AND CONDITIONS OF THAT CERTAIN
AGREEMENT OF SUBORDINATION, DATED AS OF DECEMBER 15, 1997, BY REGINALD P.
MCFARLAND IN FAVOR OF NATIONSBANK, N.A.
PROMISSORY NOTE
This Promissory Note may not be sold, transferred or assigned unless (i) a
Registration Statement under the Federal Securities Act of 1933, as amended, and
any applicable "Blue Sky" laws is then in effect with respect to this Promissory
Note; (ii) an opinion satisfactory to Maker has been obtained from counsel
satisfactory to Maker to the effect that an exemption from registration under
said Act and "Blue Sky" laws is available with respect to the proposed transfer
and that no such registration is required; or (iii) a no-action letter has been
obtained with respect to such transfer from the Staff of the Securities and
Exchange Commission and applicable state securities commissions.
PROMISSORY NOTE
$1,000,000.00 Atlanta, Georgia December 15,1997
FOR VALUE RECEIVED, ILD TELESERVICES, INC., a Delaware corporation
(hereinafter referred to as "Maker"), promises to pay to the order of
REGINALD P. MCFARLAND, a Georgia resident (together with any subsequent
holder of this Promissory Note, hereinafter referred to as "Holder"), the
principal sum of One Million Dollars ($1,000,000.00), together with interest
accrued thereon at the annual rate of nine percent (computed on the basis of
a year of 360 days and the actual number of days elapsed). Payments of all
interest accrued hereunder shall be payable to Holder quarterly beginning
with a stub interest payment on December 31, 1997 and continuing on each
March 31, June 30, September 30 and December 31 thereafter while this
Promissory Note is outstanding. Equal payments of principal on this
Promissory Note of Two Hundred Fifty Thousand Dollars ($250,000.00) each
shall be made to Holder on September 30, 1998, December 31, 1998, March 31,
1999, and June 30, 1999. All payments shall be made to Holder at his address
specified below, or at such other place (including by wire transfer) as
Holder may from time to time designate in writing.
This Promissory Note is made and delivered in Atlanta, Georgia and is one
of two Promissory Notes referred to in the Merger Agreement (the "Agreement"),
dated December 15, 1997, among Maker, Interlink Telecommunications, Inc.,
Interlink Telecommunications of Florida, Inc. and Reginald P. McFarland, and is
subject to the terms and conditions thereof, including, but not limited to, the
right to offset payments as described in Section 7.1.3 of the Agreement. Any
amounts so set off shall be attributed to the payments due under this Promissory
Note in their order of maturity starting with the earliest, and the provisions
concerning withholding of payment and the payments of amounts over withheld
shall apply. Under no
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circumstance will the withholding of payments permitted to be withheld under the
provisions of Section 7.1.3 of the Agreement constitute a default under this
Promissory Note, regardless of whether it is ultimately determined that the
amount withheld is greater than the amount finally set off.
If Maker shall: (A) default in any payment required hereunder on the date
when due, and shall fail to cure such default within three (3) business days
after receipt of written demand for cure by Holder (which notice shall also be
delivered to Ms. Angela P. Leake, NationsBank Business Credit, 600 Peachtree
Street, N.E., 13th Floor, Atlanta, Georgia 30308), (B) file a voluntary
petition in bankruptcy, be adjudicated as a bankrupt or insolvent, file any
petition or answer seeking or acquiescing in any reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar relief for Maker
under any Federal, state or other statute relating to bankruptcy, insolvency or
other similar relief for debtors, or shall seek, consent to or acquiesce in the
appointment of any trustee, receiver or liquidator of Maker or of all or any
substantial part of the assets of Maker, or shall make a general assignment for
the benefit of creditors, or shall admit in writing the inability to pay its
debts generally as they become due, and Maker shall fail to negate the effect of
any such action or proceeding not initiated by maker (whether by dismissal of
proceedings, discharge of trustees or receiver or otherwise) within sixty (60)
days from and after the occurrence thereof, (C) default under (after giving
effect to any notice requirement and applicable cure period) that certain
Promissory Note from Maker to Holder in the principal amount of $2,700,000.00
dated concurrent herewith, or (D) default under (after giving effect to any
notice requirement and applicable cure period) that certain Consulting
Agreement between Maker and Stratacom, Inc. dated concurrent herewith, then
Holder, at its option, shall be entitled to accelerate any and all of the
indebtedness evidenced by this Promissory Note and the same shall become
immediately due and payable, and to cumulatively exercise all other rights and
privileges provided by law.
Maker hereby reserves the right to prepay the principal indebtedness
evidenced by this Promissory Note in whole or in party, at any time without
penalty, premium or payment of unearned interest and Maker shall not be liable
hereunder for any further interest on any amounts so prepaid. Any partial
prepayment shall be attributed to the payments due under this Promissory Note in
their inverse order of maturity.
Time is of the essence with respect to this Promissory Note, and except as
otherwise provided herein, demand, protest, notice of demand and non-payment and
all other notices whatsoever, are hereby waived by Maker. In the event the
indebtedness evidenced by this Promissory Note shall not be paid when a payment
is due, thereafter the unpaid balance, principal of such indebtedness shall bear
interest at the rate of fifteen percent (15%) per annum (computed on the basis
of a year of 360 days) until the past due portion of the indebtedness (inclusive
of all accrued interest) is paid. Should this Promissory Note, or any part of
the indebtedness evidenced by this Promissory Note, be collected by or through
an attorney-at-law, Holder shall be entitled to collect reasonable attorneys'
fees and all other reasonable costs and expenses of collection from Maker.
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<PAGE>
If delivered personally, the date on which a notice or demand hereunder is
delivered shall be the date of receipt or delivery, and if delivered by mail,
such notice or demand shall be sent by registered or certified mail, return
receipt requested, postage prepaid, and shall be deemed to have been delivered
or received on the fifth day following the deposit of such notice or demand in
the United States mails. Notices and demands made hereunder shall be addressed
to Holder at its address set forth hereinabove and to Maker c/o ILD
Teleservices, Inc., 14651 Dallas Parkway, Suite 905, Dallas, Texas 75240.
This Promissory Note shall be governed by and construed in accordance with
the laws of the State of Georgia.
IN WITNESS WHEREOF, Maker has caused this Promissory Note to be executed
and its seal affixed hereunto by its duly authorized officers the day and year
first above written.
ATTEST: ILD TELESERVICES, INC.
/s/ C. Read Morton, Jr. /s/ Dennis J. Stoutenburgh
- ----------------------- ----------------------------
C. Read Morton, Jr. Dennis J. Stoutenburgh
Secretary President
[Corporate Seal]
ADDRESS TO WHICH PAYMENTS SHOULD BE SENT:
407 Highway 229
- -----------------------------------
Social Circle, GA 30023
- -----------------------------------
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EXHIBIT 10.1
ILD COMMUNICATIONS, INC.
STOCK OPTION PLAN
ARTICLE I
PURPOSE, SCOPE AND ADMINISTRATION OF THE PLAN
1.1 PURPOSE. The purpose of the Plan is to promote the long-term
success of ILD COMMUNICATIONS, INC. by providing financial incentives to
mangers, directors, key employees, consultants or others who are in positions
to make significant contributions toward such success. The Plan is designed
to attract individuals of outstanding ability for ILD COMMUNICATIONS, INC.
and to encourage such persons to acquire a proprietary interest in ILD
COMMUNICATIONS, INC., to continue relations with ILD COMMUNICATIONS, INC. and
to render superior performance during his association with the company.
1.2 DEFINITIONS. Unless the context clearly indicates otherwise, for
purposes of this Plan the following terms have the following meanings:
(a) "Board of Directors" means the Board of Directors of ILD
Communications, Inc.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means the Compensation Committee of the Board of
Directors appointed by the Board from among its members.
(d) "Common Stock" means the Common Stock, $.01 par value per share, of
ILD Communications, Inc.
(e) "Company" means ILD Communications, Inc., a Delaware corporation, and
also means any corporation of which a majority of the voting capital
stock is owned directly or indirectly by ILD Communications, Inc. and
any other corporation designated by the Board as being a company
hereunder (but only during the period of such ownership or
designation).
(f) "Eligible Persons" shall mean any person who is an employee, director,
or consultant who is determined by the Committee to be eligible for
the issuance of stock options hereunder.
(g) "Fair Market Value" of a share of Common Stock on any particular date
means: (1) if the Common Stock is then traded on a national stock
exchange, the closing price on such date of a share of Common Stock as
traded on the largest stock exchange on which it is then traded; (2)
if the Common Stock is not then traded on a national stock exchange,
but the price per share is regularly quoted by NASDAQ, the mean
<PAGE>
between the closing composite inter-dealer "bid" and "ask" price for
Common Stock, as quoted by NASDAQ (i) on such date, or (ii) if no
"bid" and "ask" prices are quoted on such date, then on the next
preceding date on which such prices were 7quoted; or (3) if neither
(1) nor (2) is applicable, then the value established by the Committee
in accordance with Section 422(b)(4) of the Code and the regulations
promulgated thereunder.
(h) "Grant Date" as used with respect to a particular Option, means the
date as of which such Option is granted by the Committee pursuant to
the Plan.
(i) "Grantee" means the Eligible Person to whom an Option is granted by
the Committee pursuant to the Plan.
(j) "Incentive Stock Option" means an option that qualifies as an
Incentive Stock Option under Section 422 of the Code.
(k) "Nonqualified Stock Option" means any Option granted under this Plan
other than an Incentive Stock Option.
(l) "Option" means an Option granted by the Committee pursuant to Article
II to purchase shares of Common Stock which shall be designated at the
time of grant as either an Incentive Stock Option or a Nonqualified
Stock Option, as provided in Section 2.1 hereof.
(m) "Option Agreement" means the agreement between the Company and a
Grantee under which the Grantee is granted an Option pursuant to the
Plan.
(n) "Option Period" means, subject to Article II hereof, with respect to
any Option, the period beginning on the date an Option first becomes
exercisable and ending at such time not later than the tenth annual
anniversary of the Grant Date, as the Committee, in its sole
discretion, shall determine and during which the Option may be
exercised.
(o) "Plan" means the ILD Communications, Inc. Stock Option Plan as set
forth herein and as amended from time to time.
(p) "Total and Permanent Disability" as applied to a Grantee, means that
the Grantee (1) has established to impairment which can be excepted to
result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months, and (2) has satisfied
any requirement imposed by the Committee in regard to evidencing such
disability.
1.3 AGGREGATE LIMITATION.
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(a) The aggregate number of shares of Common Stock with respect to which
Options may be granted shall not exceed 27,500 shares of Common Stock,
subject to possible adjustment in accordance with Section 3.1.
(b) Any shares of Common Stock to be delivered by the Company upon the
exercise of Options shall, at the discretion of the Board of
Directors, be issued from the Company's authorized and unissued shares
of Common Stock or transferred from any available Common Stock held in
treasury.
(c) In the event any Option expires or otherwise terminates prior to being
fully exercised, the Board may grant new Options hereunder to any
eligible Grantee for the shares with respect to which the expired or
terminated Option was not exercised.
1.4 ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Committee which shall have the
authority:
(1) To determine those key employees, directors, consultants or
others having relations with the Company to whom, and the times
at which, Options shall be granted and the number of shares of
Common Stock to be subject to each such Option, taking into
consideration the nature of the services rendered by the
particular persons, the person's potential contribution to the
long-term success of the Company and such other factors as the
Committee in its discretion shall deem relevant;
(2) To interpret and construe the provisions of the Plan and to
establish rules and regulations relating to it;
(3) To prescribe the terms and conditions of the Option Agreements
for the grant of Options in accordance and consistent with the
requirements of the Plan; and
(4) To make all other determinations necessary or advisable to
administer the Plan in a proper and effective manner.
(b) All decisions and determinations of the Committee in the
administration of the Plan and on questions or other matters
concerning the Plan or any Option shall be final, conclusive and
binding on all persons, including, without limitation, the Company,
the shareholders and directors of the Company and any persons having
any interest in any Options which may be granted under the Plan.
1.4 ELIGIBILITY FOR AWARDS. The Committee shall designate from time to
time any Eligible Person who are to be granted Options.
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1.5 EFFECTIVE DATE AND DURATION OF PLAN. The Plan shall become
effective upon its adoption by the Board of Directors; provided, that any
grant of Options under the Plan prior to approval of the Plan by the
shareholders of the Company is subject to such shareholder approval within
twelve months of adoption of the Plan by the Board of Directors. Unless
previously terminated by the Board of Directors, the Plan (but not any then
outstanding Options which have not yet expired or otherwise terminated) shall
terminate on the tenth annual anniversary of its adoption by the Board of
Directors.
ARTICLE II
STOCK OPTIONS
2.1 GRANT OF OPTIONS. The Committee may from time to time, subject to
the provisions of the Plan, grant Options to Eligible Persons under
appropriate Option Agreements to purchase shares of Common Stock up to the
aggregate number of shares of Common Stock set forth in Section 1.3(a). The
Committee may designate any Option which satisfies the requirements of
Section 2.3 hereof as an Incentive Stock Option and may designate any other
Option granted hereunder as a Nonqualified Stock Option, or the Committee may
designate a portion of an Option as an Incentive Stock Option (so long as
that portion satisfies the requirements of Section 2.3 hereof) and the
remaining portion as a Nonqualified Stock Option. Any portion of an Option
that is not designated as an Incentive Stock Option shall be a Nonqualified
Stock Option. A Nonqualified Stock Option must satisfy the requirements of
Section 2.2. hereof, but shall not be subject to the requirements of Section
2.3.
2.2 OPTION REQUIREMENTS.
(a) An Option shall be evidence by an Option Agreement specifying the
number of shares of Common Stock that may be purchased upon its
exercise and containing such other terms and conditions consistent
with the Plan as the Committee shall determine.
(b) No Option shall be granted under the Plan on or after the tenth annual
anniversary of the date upon which the Plan was adopted by the Board
of Directors.
(c) An Option shall not be exercisable during the first twelve months
commencing on the Grant Date except as may be specifically otherwise
allowed by the Committee, in its sole discretion, in an Option
Agreement providing that an Option is exercisable during the first
twelve months following its Grant Date. The Committee may specify a
vesting schedule providing for the exercise of the Option Period.
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(d) An Option shall expire by its terms at the expiration of the Option
Period and shall not be exercisable thereafter.
(e) The Committee may provide in the Option Agreement for the expiration
or termination of the Option prior to the expiration of the Option
Period, upon the occurrence of any event specified by the Committee.
(f) The option price per share of Common Stock for an Incentive Stock
Option shall be, in sole the discretion of the Committee, greater than
or equal to the Fair Market Value of the share of Common Stock on the
Grant Date. The option price per share of Common Stock for a
Nonqualified Stock Option generally shall be equal to the Fair Market
Value of a share of Common Stock on the Grant Date, but the Committee,
in its sole discretion, may specify an option price of more or less
than Fair Market Value.
(g) An Option shall not be transferable other than by will or the laws of
descent and distribution and, during the Grantee's lifetime, an Option
shall be exercisable only by the Grantee, or if the Grantee is
disabled and the Option remains exercisable, by his or her duly
appointed guardian or other legal representative.
(h) Notwithstanding the Option Period applicable to an Option granted
hereunder, any such Option granted to an employee , to the extent that
it has not previously been exercised, shall terminate upon the
earliest to occur of (1) the expiration of the applicable Option
Period as set forth in the Option Agreement granting such Option, (2)
the expiration of three (3) months after the Grantee's retirement or
termination from employment with the Company for any reason other than
Total and Permanent Disability or death, (3) the expiration of one (1)
year after the grantee ceases to be an employee of the Company due to
Total and Permanent Disability, or (4) the expiration of two (2)
years, or such later time as may be approved by the Committee, after
the Grantee ceases to be an employee of the Company due to the death
of the Grantee.
(i) A person electing to exercise an Option shall give written notice of
such election to the Company, in such form as the Committee may
require, accompanied by payment in the manner determined by the
Committee, of the full purchase price of the shares of Common Stock
for which the election is made. Payment of the purchase price shall
be made in cash or in such other form as the Committee may approve,
including shares of Common Stock valued at their Fair Market Value on
the date of exercise of the Option.
2.3 INCENTIVE STOCK OPTION REQUIREMENTS.
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(a) An option designated by the Committee as an Incentive Stock Option is
intended to qualify as an "incentive stock option" within the meaning
of Subsection (b) of Section 422 of the Code and shall satisfy, in
addition to the conditions of Section 2.2 set forth above, the
conditions set forth in this Section 2.3. Neither the Company, the
Committee, nor the Board of Directors guarantees that an Incentive
Stock Option granted under this Plan qualifies under Section 422(b) of
the Code.
(b) An Incentive Stock Option shall not be granted to an individual who,
on the Grant Date, owns stock possessing more than ten percent of the
total combined voting power of all classes of stock of the Company,
unless the Committee provides in the Option Agreement with any such
individual that the option price per share of Common Stock will not be
less than 110% of the Fair Market Value of a share of Common Stock on
the Grant Date and that the Option Period will not extend beyond five
years from the Grant Date.
(c) The aggregate Fair Market Value, determined on the Grant Date, of the
shares of Common Stock with respect to which Incentive Stock Options
under the Plan of incentive stock options (within the meaning of
Subsection (b) of Section 422 of the Code) under any other plan of the
company or any parent or subsidiary thereof, are exercisable for the
first time by an Eligible Person during any calendar year shall not
exceed $100,000.
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ARTICLE III
GENERAL PROVISIONS
3.1 ADJUSTMENT PROVISIONS.
(a) In the event of (1) any dividend payable in shares of Common Stock;
(2) any recapitalization, reclassification, split-up or consolidation
of, or other change in, the Common Stock; or (3) an exchange of the
outstanding shares of Common Stock, in connection with a merger,
consolidation or other reorganization of or involving the Company or a
sale by the Company of all of a portion of its assets, for a different
number or class of shares of stock or other securities of any other
corporation; then the Committee shall, in such manner as it shall
determine in its sole discretion, appropriately adjust the number and
class of shares or other securities which shall be subject to Options
and/or the purchase price per share which must be paid thereafter upon
exercise of any Option. Any such adjustments made by the Committee
shall be final, conclusive and binding upon all persons, including
without limitation, the Company, the shareholders and directors of the
Company and any person having any interest in any Options which may be
granted under the plan.
(b) Except as provided in paragraph (a) immediately above, issuance by the
Company of shares of stock of any class of securities or any
indebtedness convertible into shares of stock of any class, or the
issuance of any warrants for Common stock, shall not affect the
Options.
3.2 ADDITIONAL CONDITIONS. Any shares of Common Stock issued or
transferred under any provision of the Plan may be issued or transferred
subject to such conditions, in addition to those specifically provided in the
Plan, as the Committee or the Company may impose.
3.3 NO RIGHT AS SHAREHOLDER; SHAREHOLDERS AGREEMENT. No Grantee or any
other person authorized to purchase Common Stock upon exercise of any Option
shall have any interest in or shareholder rights with respect to any shares
of the Common Stock which are subject to any Options until such shares have
been issued, fully paid for and delivered to the Grantee or any other person
pursuant to the exercise of such Option. Furthermore, the Plan shall not
confer upon any Grantee any rights of employment with the Company, including
without limitation any right to continue in the employ of, or engagement, by
the Company, or affect the right of the Company to terminate the status of a
Grantee at any time, with or without cause. All shares of Common Stock when
issued shall be subject to certain transfer restrictions and
7
<PAGE>
other provisions of that certain Shareholders' Agreement dated as of May 3,
1996, as may be amended from time to time.
3.4 LEGAL RESTRICTIONS. If in the opinion of legal counsel for the
Company the issuance or sale of any shares of Common Stock pursuant to the
exercise of an Option would not be lawful for any reason, including without
limitation the inability of the Company to obtain from any governmental
authority or regulatory body having jurisdiction other authority deemed by
such counsel to be necessary to such issuance or sale, the Company shall not
be obligated to issue or sell any Common Stock pursuant to the exercise of an
Option to its Grantee or any other authorized person unless a registration
statement that complies with the provisions of the Securities Act of 1933, as
amended (the "Act") in respect of such shares is in effect at the time
thereof, or other appropriate action has been taken under and pursuant to the
terms and provisions of the Act, or the Company receives evidence
satisfactory to such counsel that the issuance and sale of such shares, in
the absence of an effective registration statement or other appropriate
action, would not constitute a violation of the Act or any applicable state
securities law. The Company is in no event obligated to register any such
shares, to comply with any exemption from registration requirements or to
take any other action which may be required in order to permit, or to remedy
or remove any prohibition or limitation on, the issuance or sale of such
shares to any Grantee or other authorized person.
3.5 RIGHTS UNAFFECTED. The existence of the Options shall not affect:
(i) the right or power of the Company or its shareholders to make
adjustments, recapitalization, reorganizations or other changes in the
Company's capital structure or its business; (ii) any issue of bonds,
debentures, preferred or prior preference stocks affecting the Common Stock
or the rights thereof; (iii) the dissolution or liquidation of the Company,
or sale or transfer of any part of its assets or business; (iv) or any other
corporate act, whether of a similar character or otherwise.
3.6 WITHHOLDING TAXES. As a condition of exercise of an Option, the
Company may, in its sole discretion, withhold or require the Grantee to pay
or reimburse the Company for any taxes which the Company determines are
required to be withheld in connection with the grant or any exercise of an
Option.
3.7 CHOICE OF LAW. The validity, interpretation and administration of
the Plan and any rules, regulations, determinations or decisions made
thereunder, and the rights of any and all persons having or claiming to have
any interest herein or thereunder, shall be determined exclusively in
accordance with the laws of the State of Delaware. Without limiting the
generality of the foregoing, the period within which any action in connection
with the Plan must be commenced shall be governed by the Laws of the State of
Georgia, without regard to the place where the act or omission complained of
took place, the
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<PAGE>
residence of any party to such action or the place where the action may be
brought or maintained.
3.8 AMENDMENT, SUSPENSION AND TERMINATION OF PLAN. The Plan may, from
time to time, be terminated, suspended or amended by the Board of Directors
in such respects as it shall deem advisable, including any amendment which
would cause the Incentive Stock Options granted hereunder to constitute
"incentive stock options" as such term is defined in Section 422 of the Code,
or any amendment to conform to any change in any law or regulation governing
same or in any other respect; provided, however, that no such amendment shall
change the following:
(a) The maximum aggregate number of shares for which Options may be
granted under the Plan, except as required under any adjustment
pursuant to Section 3.1 hereof;
(b) The Option exercise price, with the exception of any change in such
price required as a result of any adjustment pursuant to Section 3.1
hereof and with the further exception of changes in determining Fair
Market Value of shares of Common Stock to conform with any then
applicable provisions of the Code or regulations promulgated
thereunder;
(c) The maximum period during which Options may be exercised;
(d) The termination date of the Plan in any manner which would extend such
date; or
(e) The requirements as to eligibility for participation in the Plan in
any material respect.
Notwithstanding any other provision herein contained, the Plan shall
terminate and all Options previously granted shall terminate, in the event
and on the date of liquidation or dissolution of the Company.
[SIGNATUARE PAGE CONTINUED ON FOLLOWING PAGE]
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As approved by the Board of Directors of ILD Communications, Inc. on May
10, 1996.
ILD COMMUNICATIONS, INC.
By: /s/ Michael F. Lewis
------------------------------------
Title: President
---------------------------------
ATTEST:
By: /s/ C. Read Morton
-----------------------------------
Title: Secretary
--------------------------------
(Corporate Seal)
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EXHIBIT 10.2
ILD COMMUNICATIONS, INC.
STOCK OPTION PLAN
97-A
ARTICLE I
PURPOSE, SCOPE AND ADMINISTRATION OF THE PLAN
1.1 PURPOSE. The purpose of the Plan is to promote the long-term success
of ILD COMMUNICATIONS, Inc. by providing financial incentives to managers,
directors, key employees, consultants or others who are in positions to make
significant contributions toward such success. The Plan is designed to attract
individuals of outstanding ability for ILD Communications, Inc. and to
encourage such persons to acquire a proprietary interest in ILD Communications,
Inc., to continue relations with ILD Communications, Inc. and to render
superior performance during his association with the company.
1.2 DEFINITIONS. Unless the context clearly indicates otherwise, for
purposes of this Plan the following terms have the following meanings:
(a) "Board of Directors" means the Board of Directors of ILD
Communications, Inc.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means the Compensation Committee of the Board of Directors
appointed by the Board from among its members.
(d) "Common Stock" means the Common Stock, $.01 par value per share, of
ILD Communications, Inc.
(e) "Company" means ILD Communications, Inc., a Delaware corporation, and
also means any corporation of which a majority of the voting capital
stock is owned directly or indirectly by ILD Communications, Inc. and
any other corporation designated by the Committee as being a company
hereunder (but only during the period of such ownership or
designation).
(f) "Eligible Persons" shall mean any person who is an employee, director,
or consultant who is determined by the Committee to be eligible for
the issuance of stock options hereunder.
(g) "Fair Market Value" of a share of Common Stock on any particular date
means: (1) if the Common Stock is then traded on a national stock
exchange, the closing price on such date of a share of Common Stock as
traded on the largest stock exchange on which it is then traded; (2)
if the Common Stock is not then traded on a national stock exchange,
but the price per share is regularly quoted by NASDAQ, the mean
<PAGE>
between the closing composite inter-dealer "bid" and "ask" price for
Common Stock, as quoted by NASDAQ (i) on such date, or (ii) if no
"bid" and "ask" prices are quoted on such date, then on the next
preceding date on which such prices were quoted; or (3) if neither (1)
nor (2) is applicable, then the value established by the Committee in
accordance with Section 422(b)(4) of the Code and the regulations
promulgated thereunder.
(h) "Grant Date" as used with respect to a particular Option, means the
date as of which such Option is granted by the Committee pursuant to
the Plan.
(i) "Grantee" means the Eligible Person to whom an Option is granted by
the Committee pursuant to the Plan.
(j) "Incentive Stock Option" means an option that qualifies as an
Incentive Stock Option under Section 422 of the Code.
(k) "Nonqualified Stock Option" means any Option granted under this Plan
other than an Incentive Stock Option.
(l) "Option" means an Option granted by the Committee pursuant to Article
II to purchase shares of Common Stock which shall be designated at the
time of grant as either an Incentive Stock Option or a Nonqualified
Stock Option, as provided in Section 2.1 hereof.
(m) "Option Agreement" means the agreement between the Company and a
Grantee under which the Grantee is granted an Option pursuant to the
Plan.
(n) "Option Period" means, subject to Article II hereof, with respect to
any Option, the period beginning on the date an Option first becomes
exercisable and ending at such time not later than the tenth annual
anniversary of the Grant Date, as the Committee, in its sole
discretion, shall determine and during which the Option may be
exercised.
(o) "Plan" means the ILD Communications, Inc. Stock Option Plan as set
forth herein and as amended from time to time.
(p) "Total and Permanent Disability" as applied to a Grantee, means that
the Grantee (1) has established to impairment which can be excepted to
result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months, and (2) has satisfied
any requirement imposed by the Committee in regard to evidencing such
disability.
1.3 AGGREGATE LIMITATION.
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<PAGE>
(a) The aggregate number of shares of Common Stock with respect to which
Options may be granted shall not exceed 9,500 shares of Common Stock,
subject to possible adjustment in accordance with Section 3.1.
(b) Any shares of Common Stock to be delivered by the Company upon the
exercise of Options shall, at the discretion of the Board of
Directors, be issued from the Company's authorized and unissued shares
of Common Stock or transferred from any available Common Stock held in
treasury.
(c) In the event any Option expires or otherwise terminates prior to being
fully exercised, the Committee may grant new Options hereunder to any
eligible Grantee for the shares with respect to which the expired or
terminated Option was not exercised.
1.4 ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Committee which shall have the
authority:
(1) To determine those key employees, directors, consultants or
others having relations with the Company to whom, and the times
at which, Options shall be granted and the number of shares of
Common Stock to be subject to each such Option, taking into
consideration the nature of the services rendered by the
particular persons, the person's potential contribution to the
long-term success of the Company and such other factors as the
Committee in its discretion shall deem relevant;
(2) To interpret and construe the provisions of the Plan and to
establish rules and regulations relating to it;
(3) To prescribe the terms and conditions of the Option Agreements
for the grant of Options in accordance and consistent with the
requirements of the Plan; and
(4) To make all other determinations necessary or advisable to
administer the Plan in a proper and effective manner.
(b) All decisions and determinations of the Committee in the
administration of the Plan and on questions or other matters
concerning the Plan or any Option shall be final, conclusive and
binding on all persons, including, without limitation, the Company,
the shareholders and directors of the Company and any persons having
any interest in any Options which may be granted under the Plan.
1.4 ELIGIBILITY FOR AWARDS. The Committee shall designate from time to
time any Eligible Person who are to be granted Options.
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1.5 EFFECTIVE DATE AND DURATION OF PLAN. The Plan shall become effective
upon its adoption by the Board of Directors; provided, that any grant of Options
under the Plan prior to approval of the Plan by the shareholders of the Company
is subject to such shareholder approval within twelve months of adoption of the
Plan by the Board of Directors. Unless previously terminated by the Board of
Directors, the Plan (but not any then outstanding Options which have not yet
expired or otherwise terminated) shall terminate on the tenth annual anniversary
of its adoption by the Board of Directors.
ARTICLE II
STOCK OPTIONS
2.1 GRANT OF OPTIONS. The Committee may from time to time, subject to the
provisions of the Plan, grant Options to Eligible Persons under appropriate
Option Agreements to purchase shares of Common Stock up to the aggregate number
of shares of Common Stock set forth in Section 1.3(a). The Committee may
designate any Option which satisfies the requirements of Section 2.3 hereof as
an Incentive Stock Option and may designate any other Option granted hereunder
as a Nonqualified Stock Option, or the Committee may designate a portion of an
Option as an Incentive Stock Option (so long as that portion satisfies the
requirements of Section 2.3 hereof) and the remaining portion as a Nonqualified
Stock Option. Any portion of an Option that is not designated as an Incentive
Stock Option shall be a Nonqualified Stock Option. A Nonqualified Stock Option
must satisfy the requirements of Section 2.2. hereof, but shall not be subject
to the requirements of Section 2.3.
2.2 OPTION REQUIREMENTS.
(a) An Option shall be evidence by an Option Agreement specifying the
number of shares of Common Stock that may be purchased upon its
exercise and containing such other terms and conditions consistent
with the Plan as the Committee shall determine.
(b) No Option shall be granted under the Plan on or after the tenth
anniversary of the date upon which the Plan was adopted by the Board
of Directors.
(c) An Option shall not be exercisable during the first twelve (12) months
commencing on the Grant Date except as may be specifically otherwise
allowed by the Committee, in its sole discretion, in an Option
Agreement providing that an Option is exercisable during the first
twelve months following its Grant Date. The Committee may specify a
vesting schedule providing for the exercise of the Option Period.
(d) An Option shall expire by its terms at the expiration of the Option
Period and shall not be exercisable thereafter.
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<PAGE>
(e) The Committee may provide in the Option Agreement for the expiration
or termination of the Option prior to the expiration of the Option
Period, upon the occurrence of any event specified by the Committee.
(f) The option price per share of Common Stock for an Incentive Stock
Option shall be, in sole the discretion of the Committee, greater than
or equal to the Fair Market Value of the share of Common Stock on the
Grant Date. The option price per share of Common Stock for a
Nonqualified Stock Option generally shall be equal to the Fair Market
Value of a share of Common Stock on the Grant Date, but the Committee,
in its sole discretion, may specify an option price of more or less
than Fair Market Value.
(g) An Option shall not be transferable other than by will or the laws of
descent and distribution and, during the Grantee's lifetime, an Option
shall be exercisable only by the Grantee, or if the Grantee is
disabled and the Option remains exercisable, by his or her duly
appointed guardian or other legal representative.
(h) Notwithstanding the Option Period applicable to an Option granted
hereunder, any such Option granted to an employee, to the extent that
it has not previously been exercised, shall terminate upon the
earliest to occur of (1) the expiration of the applicable Option
Period as set forth in the Option Agreement granting such Option, (2)
the expiration of three (3) months after the Grantee's retirement or
termination from employment with the Company for any reason other than
Total and Permanent Disability or death, (3) the expiration of one (1)
year after the grantee ceases to be an employee of the Company due to
Total and Permanent Disability, or (4) the expiration of two (2)
years, or such later time as may be approved by the Committee, after
the Grantee ceases to be an employee of the Company due to the death
of the Grantee.
(i) A person electing to exercise an Option shall give written notice of
such election to the Company, in such form as the Committee may
require, accompanied by payment in the manner determined by the
Committee, of the full purchase price of the shares of Common Stock
for which the election is made. Payment of the purchase price shall
be made in cash or in such other form as the Committee may approve,
including shares of Common Stock valued at their Fair Market Value on
the date of exercise of the Option.
2.3 INCENTIVE STOCK OPTION REQUIREMENTS.
(a) An option designated by the Committee as an Incentive Stock Option is
intended to qualify as an "incentive stock option" within the meaning
of Subsection (b) of Section 422 of the
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Code and shall satisfy, in addition to the conditions of Section 2.2
set forth above, the conditions set forth in this Section 2.3.
Neither the Company, the Committee, nor the Board of Directors
guarantees that an Incentive Stock Option granted under this Plan
qualifies under Section 422(b) of the Code.
(b) An Incentive Stock Option shall not be granted to an individual who,
on the Grant Date, owns stock possessing more than ten percent of the
total combined voting power of all classes of stock of the Company,
unless the Committee provides in the Option Agreement with any such
individual that the option price per share of Common Stock will not be
less than 110% of the Fair Market Value of a share of Common Stock on
the Grant Date and that the Option Period will not extend beyond five
years from the Grant Date.
(c) The aggregate Fair Market Value, determined on the Grant Date, of the
shares of Common Stock with respect to which Incentive Stock Options
under the Plan of incentive stock options (within the meaning of
Subsection (b) of Section 422 of the Code) under any other plan of the
company or any parent or subsidiary thereof, are exercisable for the
first time by an Eligible Person during any calendar year shall not
exceed $100,000.
ARTICLE III
GENERAL PROVISIONS
3.1 ADJUSTMENT PROVISIONS.
(a) In the event of (1) any dividend payable in shares of Common Stock;
(2) any recapitalization, reclassification, split-up or consolidation
of, or other change in, the Common Stock; or (3) an exchange of the
outstanding shares of Common Stock, in connection with a merger,
consolidation or other reorganization of or involving the Company or a
sale by the Company of all of a portion of its assets, for a different
number or class of shares of stock or other securities of any other
corporation; then the Committee shall, in such manner as it shall
determine in its sole discretion, appropriately adjust the number and
class of shares or other securities which shall be subject to Options
and/or the purchase price per share which must be paid thereafter upon
exercise of any Option. Any such adjustments made by the Committee
shall be final, conclusive and binding upon all persons, including
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without limitation, the Company, the shareholders and directors of the
Company and any person having any interest in any Options which may be
granted under the plan.
(b) Except as provided in paragraph (a) immediately above, issuance by the
Company of shares of stock of any class of securities or any
indebtedness convertible into shares of stock of any class, or the
issuance of any warrants for Common stock, shall not affect the
Options.
3.2 ADDITIONAL CONDITIONS. Any shares of Common Stock issued or
transferred under any provision of the Plan may be issued or transferred subject
to such conditions, in addition to those specifically provided in the Plan, as
the Committee or the Company may impose.
3.3 NO RIGHT AS SHAREHOLDER; SHAREHOLDERS' AGREEMENT. No Grantee or any
other person authorized to purchase Common Stock upon exercise of any Option
shall have any interest in or shareholder rights with respect to any shares of
the Common Stock which are subject to any Options until such shares have been
issued, fully paid for and delivered to the Grantee or any other person pursuant
to the exercise of such Option. Furthermore, the Plan shall not confer upon any
Grantee any rights of employment with the Company, including without limitation
any right to continue in the employ of, or engagement, by the Company, or affect
the right of the Company to terminate the status of a Grantee at any time, with
or without cause. All shares of Common Stock when issued shall be subject to
certain transfer restrictions and other provisions of that certain Shareholders'
Agreement dated as of May 3, 1996, as the same has been and may be amended from
time to time.
3.4 LEGAL RESTRICTIONS. If in the opinion of legal counsel for the
Company the issuance or sale of any shares of Common Stock pursuant to the
exercise of an Option would not be lawful for any reason, including without
limitation the inability of the Company to obtain from any governmental
authority or regulatory body having jurisdiction other authority deemed by such
counsel to be necessary to such issuance or sale, the Company shall not be
obligated to issue or sell any Common Stock pursuant to the exercise of an
Option to its Grantee or any other authorized person unless a registration
statement that complies with the provisions of the Securities Act of 1933, as
amended (the "Act") in respect of such shares is in effect at the time thereof,
or other appropriate action has been taken under and pursuant to he terms and
provisions of the Act, or the Company receives evidence satisfactory to such
counsel that the issuance and sale of such shares, in the absence of an
effective registration statement or other appropriate action, would not
constitute a violation of the Act or any applicable state securities law. The
Company is in no event obligated to register any such shares, to comply with any
exemption from registration requirements or to take any other action which may
be required in order to permit, or to remedy or remove any prohibition or
limitation on, the
7
<PAGE>
issuance or sale of such shares to any Grantee or other authorized person.
3.5 RIGHTS UNAFFECTED. The existence of the Options shall not affect:
(i) the right or power of the Company or its shareholders to make adjustments,
recapitalization, reorganizations or other changes in the Company's capital
structure or its business; (ii) any issue of bonds, debentures, preferred or
prior preference stocks affecting the Common Stock or the rights thereof; (iii)
the dissolution or liquidation of the Company, or sale or transfer of any part
of its assets or business; (iv) or any other corporate act, whether of a
similar character or otherwise.
3.6 WITHHOLDING TAXES. As a condition of exercise of an Option, the
Company may, in its sole discretion, withhold or require the Grantee to pay or
reimburse the Company for any taxes which the Company determines are required to
be withheld in connection with the grant or any exercise of an Option.
3.7 CHOICE OF LAW. The validity, interpretation and administration of the
Plan and any rules, regulations, determinations or decisions made thereunder,
and the rights of any and all persons having or claiming to have any interest
herein or thereunder, shall be determined exclusively in accordance with the
laws of the State of Delaware. Without limiting the generality of the
foregoing, the period within which any action in connection with the Plan must
be commenced shall be governed by the Laws of the State of Georgia, without
regard to the place where the act or omission complained of took place, the
residence of any party to such action or the place where the action may be
brought or maintained.
3.8 AMENDMENT, SUSPENSION AND TERMINATION OF PLAN. The Plan may, from
time to time, be terminated, suspended or amended by the Board of Directors in
such respects as it shall deem advisable, including any amendment which would
cause the Incentive Stock Options granted hereunder to constitute "incentive
stock options" as such term is defined in Section 422 of the Code, or any
amendment to conform to any change in any law or regulation governing same or in
any other respect; provided, however, that no such amendment shall change the
following:
(a) The maximum aggregate number of shares for which Options may be
granted under the Plan, except as required under any adjustment
pursuant to Section 3.1 hereof;
(b) The Option exercise price, with the exception of any change in such
price required as a result of any adjustment pursuant to Section 3.1
hereof and with the further exception of changes in determining Fair
Market Value of shares of Common Stock to conform with any then
applicable provisions of the Code or regulations promulgated
thereunder;
(c) The maximum period during which Options may be exercised;
8
<PAGE>
(d) The termination date of the Plan in any manner which would extend such
date; or
(e) The requirements as to eligibility for participation in the Plan in
any material respect.
Notwithstanding any other provision herein contained, the Plan shall
terminate and all Options previously granted shall terminate, in the event and
on the date of liquidation or dissolution of the Company.
[SIGNATURES ON NEXT PAGE]
9
<PAGE>
As approved by the Board of Directors of ILD Communications, Inc.
effective June, 1997.
ILD COMMUNICATIONS, INC.
By: /s/Michael F. Lewis
-------------------------------
Title: Chairman
----------------------------
ATTEST:
By:
----------------------------
Title:
-------------------------
[CORPORATE SEAL]
10
<PAGE>
EXHIBIT 10.3
ILD TELESERVICES, INC.
STOCK OPTION PLAN
97-B
ARTICLE I
PURPOSE, SCOPE AND ADMINISTRATION OF THE PLAN
1.1 PURPOSE. The purpose of the Plan is to promote the long-term success
of ILD TELESERVICES, INC. by providing financial incentives to managers,
directors, key employees, consultants or others who are in positions to make
significant contributions toward such success. The Plan is designed to attract
individuals of outstanding ability for ILD TELESERVICES, INC. and to encourage
such persons to acquire a proprietary interest in ILD TELESERVICES, INC., to
continue relations with ILD TELESERVICES, INC. and to render superior
performance during his association with the company.
1.2 DEFINITIONS. Unless the context clearly indicates otherwise, for
purposes of this Plan the following terms have the following meanings:
(a) "Board of Directors" means the Board of Directors of ILD Teleservices,
Inc.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means the Compensation Committee of the Board of Directors
appointed by the Board from among its members.
(d) "Common Stock" means the Common Stock, $.01 par value per share, of
ILD Teleservices, Inc.
(e) "Company" means ILD Teleservices, Inc., a Delaware corporation, and
also means any corporation of which a majority of the voting capital
stock is owned directly or indirectly by ILD Teleservices, Inc. and
any other corporation designated by the Committee as being a company
hereunder (but only during the period of such ownership or
designation).
(f) "Eligible Persons" shall mean any person who is an employee, director,
or consultant who is determined by the Committee to be eligible for
the issuance of stock options hereunder.
(g) "Fair Market Value" of a share of Common Stock on any particular date
means: (1) if the Common Stock is then traded on a national stock
exchange, the closing price on such date of a share of Common Stock as
traded on the largest stock exchange on which it is then traded; (2)
if the Common Stock is not then traded on a national stock exchange,
but the price per share is regularly quoted by NASDAQ, the mean
<PAGE>
between the closing composite inter-dealer "bid" and "ask" price for
Common Stock, as quoted by NASDAQ (i) on such date, or (ii) if no
"bid" and "ask" prices are quoted on such date, then on the next
preceding date on which such prices were quoted; or (3) if neither (1)
nor (2) is applicable, then the value established by the Committee in
accordance with Section 422(b)(4) of the Code and the regulations
promulgated thereunder.
(h) "Grant Date" as used with respect to a particular Option, means the
date as of which such Option is granted by the Committee pursuant to
the Plan.
(i) "Grantee" means the Eligible Person to whom an Option is granted by
the Committee pursuant to the Plan.
(j) "Incentive Stock Option" means an option that qualifies as an
Incentive Stock Option under Section 422 of the Code.
(k) "Nonqualified Stock Option" means any Option granted under this Plan
other than an Incentive Stock Option.
(l) "Option" means an Option granted by the Committee pursuant to Article
II to purchase shares of Common Stock which shall be designated at the
time of grant as either an Incentive Stock Option or a Nonqualified
Stock Option, as provided in Section 2.1 hereof.
(m) "Option Agreement" means the agreement between the Company and a
Grantee under which the Grantee is granted an Option pursuant to the
Plan.
(n) "Option Period" means, subject to Article II hereof, with respect to
any Option, the period beginning on the date an Option first becomes
exercisable and ending at such time not later than the tenth annual
anniversary of the Grant Date, as the Committee, in its sole
discretion, shall determine and during which the Option may be
exercised.
(o) "Plan" means the ILD Teleservices, Inc. Stock Option Plan as set forth
herein and as amended from time to time.
(p) "Total and Permanent Disability" as applied to a Grantee, means that
the Grantee (1) has established to impairment which can be excepted to
result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months, and (2) has satisfied
any requirement imposed by the Committee in regard to evidencing such
disability.
1.3 AGGREGATE LIMITATION.
2
<PAGE>
(a) The aggregate number of shares of Common Stock with respect to which
Options may be granted shall not exceed 12,500 shares of Common Stock,
subject to possible adjustment in accordance with Section 3.1.
(b) Any shares of Common Stock to be delivered by the Company upon the
exercise of Options shall, at the discretion of the Board of
Directors, be issued from the Company's authorized and unissued shares
of Common Stock or transferred from any available Common Stock held in
treasury.
(c) In the event any Option expires or otherwise terminates prior to being
fully exercised, the Committee may grant new Options hereunder to any
eligible Grantee for the shares with respect to which the expired or
terminated Option was not exercised.
1.4 ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Committee which shall have the
authority:
(1) To determine those key employees, directors, consultants or
others having relations with the Company to whom, and the times
at which, Options shall be granted and the number of shares of
Common Stock to be subject to each such Option, taking into
consideration the nature of the services rendered by the
particular persons, the person's potential contribution to the
long-term success of the Company and such other factors as the
Committee in its discretion shall deem relevant;
(2) To interpret and construe the provisions of the Plan and to
establish rules and regulations relating to it;
(3) To prescribe the terms and conditions of the Option Agreements
for the grant of Options in accordance and consistent with the
requirements of the Plan; and
(4) To make all other determinations necessary or advisable to
administer the Plan in a proper and effective manner.
(b) All decisions and determinations of the Committee in the
administration of the Plan and on questions or other matters
concerning the Plan or any Option shall be final, conclusive and
binding on all persons, including, without limitation, the Company,
the shareholders and directors of the Company and any persons having
any interest in any Options which may be granted under the Plan.
1.4 ELIGIBILITY FOR AWARDS. The Committee shall designate from time to
time any Eligible Person who are to be granted Options.
3
<PAGE>
1.5 EFFECTIVE DATE AND DURATION OF PLAN. The Plan shall become effective
upon its adoption by the Board of Directors; provided, that any grant of Options
under the Plan prior to approval of the Plan by the shareholders of the Company
is subject to such shareholder approval within twelve months of adoption of the
Plan by the Board of Directors. Unless previously terminated by the Board of
Directors, the Plan (but not any then outstanding Options which have not yet
expired or otherwise terminated) shall terminate on the tenth annual anniversary
of its adoption by the Board of Directors.
ARTICLE II
STOCK OPTIONS
2.1 GRANT OF OPTIONS. The Committee may from time to time, subject to the
provisions of the Plan, grant Options to Eligible Persons under appropriate
Option Agreements to purchase shares of Common Stock up to the aggregate number
of shares of Common Stock set forth in Section 1.3(a). The Committee may
designate any Option which satisfies the requirements of Section 2.3 hereof as
an Incentive Stock Option and may designate any other Option granted hereunder
as a Nonqualified Stock Option, or the Committee may designate a portion of an
Option as an Incentive Stock Option (so long as that portion satisfies the
requirements of Section 2.3 hereof) and the remaining portion as a Nonqualified
Stock Option. Any portion of an Option that is not designated as an Incentive
Stock Option shall be a Nonqualified Stock Option. A Nonqualified Stock Option
must satisfy the requirements of Section 2.2. hereof, but shall not be subject
to the requirements of Section 2.3.
2.2 OPTION REQUIREMENTS.
(a) An Option shall be evidence by an Option Agreement specifying the
number of shares of Common Stock that may be purchased upon its
exercise and containing such other terms and conditions consistent
with the Plan as the Committee shall determine.
(b) No Option shall be granted under the Plan on or after the tenth
anniversary of the date upon which the Plan was adopted by the Board
of Directors.
(c) An Option shall not be exercisable during the first twelve (12) months
commencing on the Grant Date except as may be specifically otherwise
allowed by the Committee, in its sole discretion, in an Option
Agreement providing that an Option is exercisable during the first
twelve months following its Grant Date. The Committee may specify a
vesting schedule providing for the exercise of the Option Period.
(d) An Option shall expire by its terms at the expiration of the Option
Period and shall not be exercisable thereafter.
4
<PAGE>
(e) The Committee may provide in the Option Agreement for the expiration
or termination of the Option prior to the expiration of the Option
Period, upon the occurrence of any event specified by the Committee.
(f) The option price per share of Common Stock for an Incentive Stock
Option shall be, in sole the discretion of the Committee, greater than
or equal to the Fair Market Value of the share of Common Stock on the
Grant Date. The option price per share of Common Stock for a
Nonqualified Stock Option generally shall be equal to the Fair Market
Value of a share of Common Stock on the Grant Date, but the Committee,
in its sole discretion, may specify an option price of more or less
than Fair Market Value.
(g) An Option shall not be transferable other than by will or the laws of
descent and distribution and, during the Grantee's lifetime, an Option
shall be exercisable only by the Grantee, or if the Grantee is
disabled and the Option remains exercisable, by his or her duly
appointed guardian or other legal representative.
(h) Notwithstanding the Option Period applicable to an Option granted
hereunder, any such Option granted to an employee, to the extent that
it has not previously been exercised, shall terminate upon the
earliest to occur of (1) the expiration of the applicable Option
Period as set forth in the Option Agreement granting such Option, (2)
the expiration of three (3) months after the Grantee's retirement or
termination from employment with the Company for any reason other than
Total and Permanent Disability or death, (3) the expiration of one (1)
year after the grantee ceases to be an employee of the Company due to
Total and Permanent Disability, or (4) the expiration of two (2)
years, or such later time as may be approved by the Committee, after
the Grantee ceases to be an employee of the Company due to the death
of the Grantee.
(i) A person electing to exercise an Option shall give written notice of
such election to the Company, in such form as the Committee may
require, accompanied by payment in the manner determined by the
Committee, of the full purchase price of the shares of Common Stock
for which the election is made. Payment of the purchase price shall
be made in cash or in such other form as the Committee may approve,
including shares of Common Stock valued at their Fair Market Value on
the date of exercise of the Option.
2.3 INCENTIVE STOCK OPTION REQUIREMENTS.
(a) An option designated by the Committee as an Incentive Stock Option is
intended to qualify as an "incentive stock option" within the meaning
of Subsection (b) of Section 422 of the
5
<PAGE>
Code and shall satisfy, in addition to the conditions of Section 2.2
set forth above, the conditions set forth in this Section 2.3.
Neither the Company, the Committee, nor the Board of Directors
guarantees that an Incentive Stock Option granted under this Plan
qualifies under Section 422(b) of the Code.
(b) An Incentive Stock Option shall not be granted to an individual who,
on the Grant Date, owns stock possessing more than ten percent of the
total combined voting power of all classes of stock of the Company,
unless the Committee provides in the Option Agreement with any such
individual that the option price per share of Common Stock will not be
less than 110% of the Fair Market Value of a share of Common Stock on
the Grant Date and that the Option Period will not extend beyond five
years from the Grant Date.
(c) The aggregate Fair Market Value, determined on the Grant Date, of the
shares of Common Stock with respect to which Incentive Stock Options
under the Plan of incentive stock options (within the meaning of
Subsection (b) of Section 422 of the Code) under any other plan of the
company or any parent or subsidiary thereof, are exercisable for the
first time by an Eligible Person during any calendar year shall not
exceed $100,000.
ARTICLE III
GENERAL PROVISIONS
3.1 ADJUSTMENT PROVISIONS.
(a) In the event of (1) any dividend payable in shares of Common Stock;
(2) any recapitalization, reclassification, split-up or consolidation
of, or other change in, the Common Stock; or (3) an exchange of the
outstanding shares of Common Stock, in connection with a merger,
consolidation or other reorganization of or involving the Company or a
sale by the Company of all of a portion of its assets, for a different
number or class of shares of stock or other securities of any other
corporation; then the Committee shall, in such manner as it shall
determine in its sole discretion, appropriately adjust the number and
class of shares or other securities which shall be subject to Options
and/or the purchase price per share which must be paid thereafter upon
exercise of any Option. Any such adjustments made by the Committee
shall be final, conclusive and binding upon all persons, including
without limitation, the Company, the shareholders and directors of the
Company and any person having any interest in any Options which may be
granted under the plan.
6
<PAGE>
(b) Except as provided in paragraph (a) immediately above, issuance by the
Company of shares of stock of any class of securities or any
indebtedness convertible into shares of stock of any class, or the
issuance of any warrants for Common stock, shall not affect the
Options.
3.2 ADDITIONAL CONDITIONS. Any shares of Common Stock issued or
transferred under any provision of the Plan may be issued or transferred subject
to such conditions, in addition to those specifically provided in the Plan, as
the Committee or the Company may impose.
3.3 NO RIGHT AS SHAREHOLDER; SHAREHOLDERS AGREEMENT. No Grantee or any
other person authorized to purchase Common Stock upon exercise of any Option
shall have any interest in or shareholder rights with respect to any shares of
the Common Stock which are subject to any Options until such shares have been
issued, fully paid for and delivered to the Grantee or any other person pursuant
to the exercise of such Option. Furthermore, the Plan shall not confer upon any
Grantee any rights of employment with the Company, including without limitation
any right to continue in the employ of, or engagement, by the Company, or affect
the right of the Company to terminate the status of a Grantee at any time, with
or without cause. All shares of Common Stock when issued shall be subject to
certain transfer restrictions and other provisions of that certain Shareholders'
Agreement dated as of May 3, 1996, as the same has been and may be amended from
time to time.
3.4 LEGAL RESTRICTIONS. If in the opinion of legal counsel for the
Company the issuance or sale of any shares of Common Stock pursuant to the
exercise of an Option would not be lawful for any reason, including without
limitation the inability of the Company to obtain from any governmental
authority or regulatory body having jurisdiction other authority deemed by such
counsel to be necessary to such issuance or sale, the Company shall not be
obligated to issue or sell any Common Stock pursuant to the exercise of an
Option to its Grantee or any other authorized person unless a registration
statement that complies with the provisions of the Securities Act of 1933, as
amended (the "Act") in respect of such shares is in effect at the time thereof,
or other appropriate action has been taken under and pursuant to he terms and
provisions of the Act, or the Company receives evidence satisfactory to such
counsel that the issuance and sale of such shares, in the absence of an
effective registration statement or other appropriate action, would not
constitute a violation of the Act or any applicable state securities law. The
Company is in no event obligated to register any such shares, to comply with any
exemption from registration requirements or to take any other action which may
be required in order to permit, or to remedy or remove any prohibition or
limitation on, the issuance or sale of such shares to any Grantee or other
authorized person.
3.5 RIGHTS UNAFFECTED. The existence of the Options shall not affect:
(i) the right or power of the Company or its shareholders to
7
<PAGE>
make adjustments, recapitalization, reorganizations or other changes in the
Company's capital structure or its business; (ii) any issue of bonds,
debentures, preferred or prior preference stocks affecting the Common Stock or
the rights thereof; (iii) the dissolution or liquidation of the Company, or
sale or transfer of any part of its assets or business; (iv) or any other
corporate act, whether of a similar character or otherwise.
3.6 WITHHOLDING TAXES. As a condition of exercise of an Option, the
Company may, in its sole discretion, withhold or require the Grantee to pay or
reimburse the Company for any taxes which the Company determines are required to
be withheld in connection with the grant or any exercise of an Option.
3.7 CHOICE OF LAW. The validity, interpretation and administration of the
Plan and any rules, regulations, determinations or decisions made thereunder,
and the rights of any and all persons having or claiming to have any interest
herein or thereunder, shall be determined exclusively in accordance with the
laws of the State of Delaware. Without limiting the generality of the
foregoing, the period within which any action in connection with the Plan must
be commenced shall be governed by the Laws of the State of Georgia, without
regard to the place where the act or omission complained of took place, the
residence of any party to such action or the place where the action may be
brought or maintained.
3.8 AMENDMENT, SUSPENSION AND TERMINATION OF PLAN. The Plan may, from
time to time, be terminated, suspended or amended by the Board of Directors in
such respects as it shall deem advisable, including any amendment which would
cause the Incentive Stock Options granted hereunder to constitute "incentive
stock options" as such term is defined in Section 422 of the Code, or any
amendment to conform to any change in any law or regulation governing same or in
any other respect; provided, however, that no such amendment shall change the
following:
(a) The maximum aggregate number of shares for which Options may be
granted under the Plan, except as required under any adjustment
pursuant to Section 3.1 hereof;
(b) The Option exercise price, with the exception of any change in such
price required as a result of any adjustment pursuant to Section 3.1
hereof and with the further exception of changes in determining Fair
Market Value of shares of Common Stock to conform with any then
applicable provisions of the Code or regulations promulgated
thereunder;
(c) The maximum period during which Options may be exercised;
(d) The termination date of the Plan in any manner which would extend such
date; or
8
<PAGE>
(e) The requirements as to eligibility for participation in the Plan in
any material respect.
Notwithstanding any other provision herein contained, the Plan shall
terminate and all Options previously granted shall terminate, in the event and
on the date of liquidation or dissolution of the Company.
[SIGNATURES ON NEXT PAGE]
9
<PAGE>
As approved by the Board of Directors of ILD Teleservices, Inc. effective
August 20, 1997.
ILD TELESERVICES, INC.
By: /s/Dennis J. Stoutenburgh
--------------------------------
Title: President
-----------------------------
ATTEST:
By:
----------------------------
Title:
-------------------------
[CORPORATE SEAL]
10
<PAGE>
EXHIBIT 10.4
ILD TELESERVICES, INC.
STOCK OPTION PLAN
97-C
ARTICLE I
PURPOSE, SCOPE AND ADMINISTRATION OF THE PLAN
1.1 PURPOSE. The purpose of the Plan is to promote the long-term success
of ILD TELESERVICES, INC. by providing financial incentives to managers,
directors, key employees, consultants or others who are in positions to make
significant contributions toward such success. The Plan is designed to attract
individuals of outstanding ability for ILD TELESERVICES, INC. and to encourage
such persons to acquire a proprietary interest in ILD TELESERVICES, INC., to
continue relations with ILD TELESERVICES, INC. and to render superior
performance during his association with the company.
1.2 DEFINITIONS. Unless the context clearly indicates otherwise, for
purposes of this Plan the following terms have the following meanings:
(a) "Board of Directors" means the Board of Directors of ILD Teleservices,
Inc.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means the Compensation Committee of the Board of Directors
appointed by the Board from among its members.
(d) "Common Stock" means the Common Stock, $.01 par value per share, of
ILD Teleservices, Inc.
(e) "Company" means ILD Teleservices, Inc., a Delaware corporation, and
also means any corporation of which a majority of the voting capital
stock is owned directly or indirectly by ILD Teleservices, Inc. and
any other corporation designated by the Committee as being a company
hereunder (but only during the period of such ownership or
designation).
(f) "Eligible Persons" shall mean any person who is an employee, director,
or consultant who is determined by the Committee to be eligible for
the issuance of stock options hereunder.
(g) "Fair Market Value" of a share of Common Stock on any particular date
means: (1) if the Common Stock is then traded on a national stock
exchange, the closing price on such date of a share of Common Stock as
traded on the largest stock exchange on which it is then traded; (2)
if the Common Stock is not then traded on a national stock exchange,
but the price per share is regularly quoted by NASDAQ, the mean
between
<PAGE>
the closing composite inter-dealer "bid" and "ask" price for Common
Stock, as quoted by NASDAQ (i) on such date, or (ii) if no "bid" and
"ask" prices are quoted on such date, then on the next preceding date
on which such prices were quoted; or (3) if neither (1) nor (2) is
applicable, then the value established by the Committee in accordance
with Section 422(b)(4) of the Code and the regulations promulgated
thereunder.
(h) "Grant Date" as used with respect to a particular Option, means the
date as of which such Option is granted by the Committee pursuant to
the Plan.
(i) "Grantee" means the Eligible Person to whom an Option is granted by
the Committee pursuant to the Plan.
(j) "Incentive Stock Option" means an option that qualifies as an
Incentive Stock Option under Section 422 of the Code.
(k) "Nonqualified Stock Option" means any Option granted under this Plan
other than an Incentive Stock Option.
(l) "Option" means an Option granted by the Committee pursuant to Article
II to purchase shares of Common Stock which shall be designated at the
time of grant as either an Incentive Stock Option or a Nonqualified
Stock Option, as provided in Section 2.1 hereof.
(m) "Option Agreement" means the agreement between the Company and a
Grantee under which the Grantee is granted an Option pursuant to the
Plan.
(n) "Option Period" means, subject to Article II hereof, with respect to
any Option, the period beginning on the date an Option first becomes
exercisable and ending at such time not later than the tenth annual
anniversary of the Grant Date, as the Committee, in its sole
discretion, shall determine and during which the Option may be
exercised.
(o) "Plan" means the ILD Teleservices, Inc. Stock Option Plan 97-C as set
forth herein and as amended from time to time.
(p) "Total and Permanent Disability" as applied to a Grantee, means that
the Grantee (1) has established to impairment which can be excepted to
result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months, and (2) has satisfied
any requirement imposed by the Committee in regard to evidencing such
disability.
1.3 AGGREGATE LIMITATION.
2
<PAGE>
(a) The aggregate number of shares of Common Stock with respect to which
Options may be granted shall not exceed 14,650 shares of Common Stock,
subject to possible adjustment in accordance with Section 3.1.
(b) Any shares of Common Stock to be delivered by the Company upon the
exercise of Options shall, at the discretion of the Board of
Directors, be issued from the Company's authorized and unissued shares
of Common Stock or transferred from any available Common Stock held in
treasury.
(c) In the event any Option expires or otherwise terminates prior to being
fully exercised, the Committee may grant new Options hereunder to any
eligible Grantee for the shares with respect to which the expired or
terminated Option was not exercised.
1.4 ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Committee which shall have the
authority:
(1) To determine those key employees, directors, consultants or
others having relations with the Company to whom, and the times
at which, Options shall be granted and the number of shares of
Common Stock to be subject to each such Option, taking into
consideration the nature of the services rendered by the
particular persons, the person's potential contribution to the
long-term success of the Company and such other factors as the
Committee in its discretion shall deem relevant;
(2) To interpret and construe the provisions of the Plan and to
establish rules and regulations relating to it;
(3) To prescribe the terms and conditions of the Option Agreements
for the grant of Options in accordance and consistent with the
requirements of the Plan; and
(4) To make all other determinations necessary or advisable to
administer the Plan in a proper and effective manner.
(b) All decisions and determinations of the Committee in the
administration of the Plan and on questions or other matters
concerning the Plan or any Option shall be final, conclusive and
binding on all persons, including, without limitation, the Company,
the shareholders and directors of the Company and any persons having
any interest in any Options which may be granted under the Plan.
1.4 ELIGIBILITY FOR AWARDS. The Committee shall designate from time to
time any Eligible Person who are to be granted Options.
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1.5 EFFECTIVE DATE AND DURATION OF PLAN. The Plan shall become effective
upon its adoption by the Board of Directors; provided, that any grant of Options
under the Plan prior to approval of the Plan by the shareholders of the Company
is subject to such shareholder approval within twelve months of adoption of the
Plan by the Board of Directors. Unless previously terminated by the Board of
Directors, the Plan (but not any then outstanding Options which have not yet
expired or otherwise terminated) shall terminate on the tenth annual anniversary
of its adoption by the Board of Directors.
ARTICLE II
STOCK OPTIONS
2.1 GRANT OF OPTIONS. The Committee may from time to time, subject to the
provisions of the Plan, grant Options to Eligible Persons under appropriate
Option Agreements to purchase shares of Common Stock up to the aggregate number
of shares of Common Stock set forth in Section 1.3(a). The Committee may
designate any Option which satisfies the requirements of Section 2.3 hereof as
an Incentive Stock Option and may designate any other Option granted hereunder
as a Nonqualified Stock Option, or the Committee may designate a portion of an
Option as an Incentive Stock Option (so long as that portion satisfies the
requirements of Section 2.3 hereof) and the remaining portion as a Nonqualified
Stock Option. Any portion of an Option that is not designated as an Incentive
Stock Option shall be a Nonqualified Stock Option. A Nonqualified Stock Option
must satisfy the requirements of Section 2.2. hereof, but shall not be subject
to the requirements of Section 2.3.
2.2 OPTION REQUIREMENTS.
(a) An Option shall be evidence by an Option Agreement specifying the
number of shares of Common Stock that may be purchased upon its
exercise and containing such other terms and conditions consistent
with the Plan as the Committee shall determine.
(b) No Option shall be granted under the Plan on or after the tenth
anniversary of the date upon which the Plan was adopted by the Board
of Directors.
(c) An Option shall not be exercisable during the first twelve (12) months
commencing on the Grant Date except as may be specifically otherwise
allowed by the Committee, in its sole discretion, in an Option
Agreement providing that an Option is exercisable during the first
twelve (12) months following its Grant Date. The Committee may
specify a vesting schedule providing for the exercise of the Option
Period.
(d) An Option shall expire by its terms at the expiration of the Option
Period and shall not be exercisable thereafter.
(e) The Committee may provide in the Option Agreement for the expiration
or termination of the Option prior to the expiration of the Option
Period, upon the occurrence of any event specified by the Committee.
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(f) The option price per share of Common Stock for an Incentive Stock
Option shall be, in sole the discretion of the Committee, greater than
or equal to the Fair Market Value of the share of Common Stock on the
Grant Date. The option price per share of Common Stock for a
Nonqualified Stock Option generally shall be equal to the Fair Market
Value of a share of Common Stock on the Grant Date, but the Committee,
in its sole discretion, may specify an option price of more or less
than Fair Market Value.
(g) An Option shall not be transferable other than by will or the laws of
descent and distribution and, during the Grantee's lifetime, an Option
shall be exercisable only by the Grantee, or if the Grantee is
disabled and the Option remains exercisable, by his or her duly
appointed guardian or other legal representative.
(h) Notwithstanding the Option Period applicable to an Option granted
hereunder, any such Option granted to an employee, to the extent that
it has not previously been exercised, shall terminate upon the
earliest to occur of (1) the expiration of the applicable Option
Period as set forth in the Option Agreement granting such Option, (2)
the expiration of three (3) months after the Grantee's retirement or
termination from employment with the Company for any reason other than
Total and Permanent Disability or death, (3) the expiration of one (1)
year after the grantee ceases to be an employee of the Company due to
Total and Permanent Disability, or (4) the expiration of two (2)
years, or such later time as may be approved by the Committee, after
the Grantee ceases to be an employee of the Company due to the death
of the Grantee; provided, however, that the Committee may provide for
shorter expiration provisions as the Committee shall deem fit, and
such shorter expiration provisions shall be set forth in the documents
memorializing each Option granted hereunder.
(i) A person electing to exercise an Option shall give written notice of
such election to the Company, in such form as the Committee may
require, accompanied by payment in the manner determined by the
Committee, of the full purchase price of the shares of Common Stock
for which the election is made. Payment of the purchase price shall
be made in cash or in such other form as the Committee may approve,
including shares of Common Stock valued at their Fair Market Value on
the date of exercise of the Option.
2.3 INCENTIVE STOCK OPTION REQUIREMENTS.
(a) An option designated by the Committee as an Incentive Stock Option is
intended to qualify as an "incentive stock option" within the meaning
of Subsection (b) of Section 422 of the Code and shall satisfy, in
addition to the conditions of Section 2.2 set forth above, the
conditions set forth in this Section 2.3. Neither the Company, the
Committee, nor the Board of Directors guarantees that an Incentive
Stock Option granted under this Plan qualifies under Section 422(b) of
the Code.
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(b) An Incentive Stock Option shall not be granted to an individual who,
on the Grant Date, owns stock possessing more than ten percent of the
total combined voting power of all classes of stock of the Company,
unless the Committee provides in the Option Agreement with any such
individual that the option price per share of Common Stock will not be
less than 110% of the Fair Market Value of a share of Common Stock on
the Grant Date and that the Option Period will not extend beyond five
years from the Grant Date.
(c) The aggregate Fair Market Value, determined on the Grant Date, of the
shares of Common Stock with respect to which Incentive Stock Options
under the Plan of incentive stock options (within the meaning of
Subsection (b) of Section 422 of the Code) under any other plan of the
company or any parent or subsidiary thereof, are exercisable for the
first time by an Eligible Person during any calendar year shall not
exceed $100,000.
ARTICLE III
GENERAL PROVISIONS
3.1 ADJUSTMENT PROVISIONS.
(a) In the event of (1) any dividend payable in shares of Common Stock;
(2) any recapitalization, reclassification, split-up or consolidation
of, or other change in, the Common Stock; or (3) an exchange of the
outstanding shares of Common Stock, in connection with a merger,
consolidation or other reorganization of or involving the Company or a
sale by the Company of all of a portion of its assets, for a different
number or class of shares of stock or other securities of any other
corporation; then the Committee shall, in such manner as it shall
determine in its sole discretion, appropriately adjust the number and
class of shares or other securities which shall be subject to Options
and/or the purchase price per share which must be paid thereafter upon
exercise of any Option. Any such adjustments made by the Committee
shall be final, conclusive and binding upon all persons, including
without limitation, the Company, the shareholders and directors of the
Company and any person having any interest in any Options which may be
granted under the plan.
(b) Except as provided in paragraph (a) immediately above, issuance by the
Company of shares of stock of any class of securities or any
indebtedness convertible into shares of stock of any class, or the
issuance of any warrants for Common stock, shall not affect the
Options.
3.2 ADDITIONAL CONDITIONS. Any shares of Common Stock issued or
transferred under any provision of the Plan may be issued or transferred subject
to such conditions, in addition to those specifically provided in the Plan, as
the Committee or the Company may impose.
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3.3 NO RIGHT AS SHAREHOLDER; SHAREHOLDERS AGREEMENT. No Grantee or any
other person authorized to purchase Common Stock upon exercise of any Option
shall have any interest in or shareholder rights with respect to any shares of
the Common Stock which are subject to any Options until such shares have been
issued, fully paid for and delivered to the Grantee or any other person pursuant
to the exercise of such Option. Furthermore, the Plan shall not confer upon any
Grantee any rights of employment with the Company, including without limitation
any right to continue in the employ of, or engagement, by the Company, or affect
the right of the Company to terminate the status of a Grantee at any time, with
or without cause. All shares of Common Stock when issued shall be subject to
certain transfer restrictions and other provisions of that certain Shareholders'
Agreement dated as of May 3, 1996, as the same has been and may be amended from
time to time.
3.4 LEGAL RESTRICTIONS. If in the opinion of legal counsel for the
Company the issuance or sale of any shares of Common Stock pursuant to the
exercise of an Option would not be lawful for any reason, including without
limitation the inability of the Company to obtain from any governmental
authority or regulatory body having jurisdiction other authority deemed by such
counsel to be necessary to such issuance or sale, the Company shall not be
obligated to issue or sell any Common Stock pursuant to the exercise of an
Option to its Grantee or any other authorized person unless a registration
statement that complies with the provisions of the Securities Act of 1933, as
amended (the "Act") in respect of such shares is in effect at the time thereof,
or other appropriate action has been taken under and pursuant to he terms and
provisions of the Act, or the Company receives evidence satisfactory to such
counsel that the issuance and sale of such shares, in the absence of an
effective registration statement or other appropriate action, would not
constitute a violation of the Act or any applicable state securities law. The
Company is in no event obligated to register any such shares, to comply with any
exemption from registration requirements or to take any other action which may
be required in order to permit, or to remedy or remove any prohibition or
limitation on, the issuance or sale of such shares to any Grantee or other
authorized person.
3.5 RIGHTS UNAFFECTED. The existence of the Options shall not affect:
(i) the right or power of the Company or its shareholders to make adjustments,
recapitalization, reorganizations or other changes in the Company's capital
structure or its business; (ii) any issue of bonds, debentures, preferred or
prior preference stocks affecting the Common Stock or the rights thereof; (iii)
the dissolution or liquidation of the Company, or sale or transfer of any part
of its assets or business; (iv) or any other corporate act, whether of a
similar character or otherwise.
3.6 WITHHOLDING TAXES. As a condition of exercise of an Option, the
Company may, in its sole discretion, withhold or require the Grantee to pay or
reimburse the Company for any taxes which the Company determines are required to
be withheld in connection with the grant or any exercise of an Option.
3.7 CHOICE OF LAW. The validity, interpretation and administration of the
Plan and any rules, regulations, determinations or decisions made thereunder,
and the rights of any and all persons having or claiming to have any interest
herein or thereunder, shall be determined exclusively in accordance with the
laws of the State of Delaware. Without limiting the generality of the
foregoing, the period within which any action in connection with the Plan must
be commenced shall be governed
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by the Laws of the State of Georgia, without regard to the place where the act
or omission complained of took place, the residence of any party to such action
or the place where the action may be brought or maintained.
3.8 AMENDMENT, SUSPENSION AND TERMINATION OF PLAN. The Plan may, from
time to time, be terminated, suspended or amended by the Board of Directors in
such respects as it shall deem advisable, including any amendment which would
cause the Incentive Stock Options granted hereunder to constitute "incentive
stock options" as such term is defined in Section 422 of the Code, or any
amendment to conform to any change in any law or regulation governing same or in
any other respect; provided, however, that no such amendment shall change the
following:
(a) The maximum aggregate number of shares for which Options may be
granted under the Plan, except as required under any adjustment
pursuant to Section 3.1 hereof;
(b) The Option exercise price, with the exception of any change in such
price required as a result of any adjustment pursuant to Section 3.1
hereof and with the further exception of changes in determining Fair
Market Value of shares of Common Stock to conform with any then
applicable provisions of the Code or regulations promulgated
thereunder;
(c) The maximum period during which Options may be exercised;
(d) The termination date of the Plan in any manner which would extend such
date; or
(e) The requirements as to eligibility for participation in the Plan in
any material respect.
Notwithstanding any other provision herein contained, the Plan shall
terminate and all Options previously granted shall terminate, in the event and
on the date of liquidation or dissolution of the Company.
[SIGNATURES ON NEXT PAGE]
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As approved by the Board of Directors of ILD Teleservices, Inc. effective
November 6, 1997.
ILD TELESERVICES, INC.
By: /s/ Dennis J. Stoutenburgh
-----------------------------------
Title: President
--------------------------------
ATTEST:
By:
----------------------------
Title:
-------------------------
[CORPORATE SEAL]
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EXHIBIT 10.5
ILD TELESERVICES, INC.
STOCK OPTION PLAN
97-D
ARTICLE I
PURPOSE, SCOPE AND ADMINISTRATION OF THE PLAN
1.1 PURPOSE. The purpose of the Plan is to promote the long-term success
of ILD TELESERVICES, INC. by providing financial incentives to managers,
directors, key employees, consultants or others who are in positions to make
significant contributions toward such success. The Plan is designed to attract
individuals of outstanding ability for ILD TELESERVICES, INC. and to encourage
such persons to acquire a proprietary interest in ILD TELESERVICES, INC., to
continue relations with ILD TELESERVICES, INC. and to render superior
performance during his association with the company.
1.2 DEFINITIONS. Unless the context clearly indicates otherwise, for
purposes of this Plan the following terms have the following meanings:
(a) "Board of Directors" means the Board of Directors of ILD Teleservices,
Inc.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means the Compensation Committee of the Board of Directors
appointed by the Board from among its members.
(d) "Common Stock" means the Common Stock, $.01 par value per share, of
ILD Teleservices, Inc.
(e) "Company" means ILD Teleservices, Inc., a Delaware corporation, and
also means any corporation of which a majority of the voting capital
stock is owned directly or indirectly by ILD Teleservices, Inc. and
any other corporation designated by the Committee as being a company
hereunder (but only during the period of such ownership or
designation).
(f) "Eligible Persons" shall mean any person who is an employee, director,
or consultant who is determined by the Committee to be eligible for
the issuance of stock options hereunder.
(g) "Fair Market Value" of a share of Common Stock on any particular date
means: (1) if the Common Stock is then traded on a national stock
exchange, the closing price on such date of a share of Common Stock as
traded on the largest stock exchange on which it is then traded; (2)
if the Common Stock is not then traded on a national stock exchange,
but the price per share is regularly quoted by NASDAQ, the mean
between
<PAGE>
the closing composite inter-dealer "bid" and "ask" price for Common
Stock, as quoted by NASDAQ (i) on such date, or (ii) if no "bid" and
"ask" prices are quoted on such date, then on the next preceding date
on which such prices were quoted; or (3) if neither (1) nor (2) is
applicable, then the value established by the Committee in accordance
with Section 422(b)(4) of the Code and the regulations promulgated
thereunder.
(h) "Grant Date" as used with respect to a particular Option, means the
date as of which such Option is granted by the Committee pursuant to
the Plan.
(i) "Grantee" means the Eligible Person to whom an Option is granted by
the Committee pursuant to the Plan.
(j) "Incentive Stock Option" means an option that qualifies as an
Incentive Stock Option under Section 422 of the Code.
(k) "Nonqualified Stock Option" means any Option granted under this Plan
other than an Incentive Stock Option.
(l) "Option" means an Option granted by the Committee pursuant to Article
II to purchase shares of Common Stock which shall be designated at the
time of grant as either an Incentive Stock Option or a Nonqualified
Stock Option, as provided in Section 2.1 hereof.
(m) "Option Agreement" means the agreement between the Company and a
Grantee under which the Grantee is granted an Option pursuant to the
Plan.
(n) "Option Period" means, subject to Article II hereof, with respect to
any Option, the period beginning on the date an Option first becomes
exercisable and ending at such time not later than the tenth annual
anniversary of the Grant Date, as the Committee, in its sole
discretion, shall determine and during which the Option may be
exercised.
(o) "Plan" means the ILD Teleservices, Inc. Stock Option Plan 97-D as set
forth herein and as amended from time to time.
(p) "Total and Permanent Disability" as applied to a Grantee, means that
the Grantee (1) has established to impairment which can be excepted to
result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months, and (2) has satisfied
any requirement imposed by the Committee in regard to evidencing such
disability.
1.3 AGGREGATE LIMITATION.
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(a) The aggregate number of shares of Common Stock with respect to which
Options may be granted shall not exceed 5,750 shares of Common Stock,
subject to possible adjustment in accordance with Section 3.1.
(b) Any shares of Common Stock to be delivered by the Company upon the
exercise of Options shall, at the discretion of the Board of
Directors, be issued from the Company's authorized and unissued shares
of Common Stock or transferred from any available Common Stock held in
treasury.
(c) In the event any Option expires or otherwise terminates prior to being
fully exercised, the Committee may grant new Options hereunder to any
eligible Grantee for the shares with respect to which the expired or
terminated Option was not exercised.
1.4 ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Committee which shall have the
authority:
(1) To determine those key employees, directors, consultants or
others having relations with the Company to whom, and the times
at which, Options shall be granted and the number of shares of
Common Stock to be subject to each such Option, taking into
consideration the nature of the services rendered by the
particular persons, the person's potential contribution to the
long-term success of the Company and such other factors as the
Committee in its discretion shall deem relevant;
(2) To interpret and construe the provisions of the Plan and to
establish rules and regulations relating to it;
(3) To prescribe the terms and conditions of the Option Agreements
for the grant of Options in accordance and consistent with the
requirements of the Plan; and
(4) To make all other determinations necessary or advisable to
administer the Plan in a proper and effective manner.
(b) All decisions and determinations of the Committee in the
administration of the Plan and on questions or other matters
concerning the Plan or any Option shall be final, conclusive and
binding on all persons, including, without limitation, the Company,
the shareholders and directors of the Company and any persons having
any interest in any Options which may be granted under the Plan.
1.4 ELIGIBILITY FOR AWARDS. The Committee shall designate from time to
time any Eligible Person who are to be granted Options.
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1.5 EFFECTIVE DATE AND DURATION OF PLAN. The Plan shall become effective
upon its adoption by the Board of Directors; provided, that any grant of Options
under the Plan prior to approval of the Plan by the shareholders of the Company
is subject to such shareholder approval within twelve months of adoption of the
Plan by the Board of Directors. Unless previously terminated by the Board of
Directors, the Plan (but not any then outstanding Options which have not yet
expired or otherwise terminated) shall terminate on the tenth annual anniversary
of its adoption by the Board of Directors.
ARTICLE II
STOCK OPTIONS
2.1 GRANT OF OPTIONS. The Committee may from time to time, subject to the
provisions of the Plan, grant Options to Eligible Persons under appropriate
Option Agreements to purchase shares of Common Stock up to the aggregate number
of shares of Common Stock set forth in Section 1.3(a). The Committee may
designate any Option which satisfies the requirements of Section 2.3 hereof as
an Incentive Stock Option and may designate any other Option granted hereunder
as a Nonqualified Stock Option, or the Committee may designate a portion of an
Option as an Incentive Stock Option (so long as that portion satisfies the
requirements of Section 2.3 hereof) and the remaining portion as a Nonqualified
Stock Option. Any portion of an Option that is not designated as an Incentive
Stock Option shall be a Nonqualified Stock Option. A Nonqualified Stock Option
must satisfy the requirements of Section 2.2. hereof, but shall not be subject
to the requirements of Section 2.3.
2.2 OPTION REQUIREMENTS.
(a) An Option shall be evidence by an Option Agreement specifying the
number of shares of Common Stock that may be purchased upon its
exercise and containing such other terms and conditions consistent
with the Plan as the Committee shall determine.
(b) No Option shall be granted under the Plan on or after the tenth
anniversary of the date upon which the Plan was adopted by the Board
of Directors.
(c) An Option shall not be exercisable during the first twelve (12) months
commencing on the Grant Date except as may be specifically otherwise
allowed by the Committee, in its sole discretion, in an Option
Agreement providing that an Option is exercisable during the first
twelve (12) months following its Grant Date. The Committee may
specify a vesting schedule providing for the exercise of the Option
Period.
(d) An Option shall expire by its terms at the expiration of the Option
Period and shall not be exercisable thereafter.
(e) The Committee may provide in the Option Agreement for the expiration
or termination of the Option prior to the expiration of the Option
Period, upon the occurrence of any event specified by the Committee.
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(f) The option price per share of Common Stock for an Incentive Stock
Option shall be, in sole the discretion of the Committee, greater than
or equal to the Fair Market Value of the share of Common Stock on the
Grant Date. The option price per share of Common Stock for a
Nonqualified Stock Option generally shall be equal to the Fair Market
Value of a share of Common Stock on the Grant Date, but the Committee,
in its sole discretion, may specify an option price of more or less
than Fair Market Value.
(g) An Option shall not be transferable other than by will or the laws of
descent and distribution and, during the Grantee's lifetime, an Option
shall be exercisable only by the Grantee, or if the Grantee is
disabled and the Option remains exercisable, by his or her duly
appointed guardian or other legal representative.
(h) Notwithstanding the Option Period applicable to an Option granted
hereunder, any such Option granted to an employee, to the extent that
it has not previously been exercised, shall terminate upon the
earliest to occur of (1) the expiration of the applicable Option
Period as set forth in the Option Agreement granting such Option, (2)
the expiration of three (3) months after the Grantee's retirement or
termination from employment with the Company for any reason other than
Total and Permanent Disability or death, (3) the expiration of one (1)
year after the grantee ceases to be an employee of the Company due to
Total and Permanent Disability, or (4) the expiration of two (2)
years, or such later time as may be approved by the Committee, after
the Grantee ceases to be an employee of the Company due to the death
of the Grantee; provided, however, that the Committee may provide for
shorter expiration provisions as the Committee shall deem fit, and
such shorter expiration provisions shall be set forth in the documents
memorializing each Option granted hereunder.
(i) A person electing to exercise an Option shall give written notice of
such election to the Company, in such form as the Committee may
require, accompanied by payment in the manner determined by the
Committee, of the full purchase price of the shares of Common Stock
for which the election is made. Payment of the purchase price shall
be made in cash or in such other form as the Committee may approve,
including shares of Common Stock valued at their Fair Market Value on
the date of exercise of the Option.
2.3 INCENTIVE STOCK OPTION REQUIREMENTS.
(a) An option designated by the Committee as an Incentive Stock Option is
intended to qualify as an "incentive stock option" within the meaning
of Subsection (b) of Section 422 of the Code and shall satisfy, in
addition to the conditions of Section 2.2 set forth above, the
conditions set forth in this Section 2.3. Neither the Company, the
Committee, nor the Board of Directors guarantees that an Incentive
Stock Option granted under this Plan qualifies under Section 422(b) of
the Code.
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(b) An Incentive Stock Option shall not be granted to an individual who,
on the Grant Date, owns stock possessing more than ten percent of the
total combined voting power of all classes of stock of the Company,
unless the Committee provides in the Option Agreement with any such
individual that the option price per share of Common Stock will not be
less than 110% of the Fair Market Value of a share of Common Stock on
the Grant Date and that the Option Period will not extend beyond five
years from the Grant Date.
(c) The aggregate Fair Market Value, determined on the Grant Date, of the
shares of Common Stock with respect to which Incentive Stock Options
under the Plan of incentive stock options (within the meaning of
Subsection (b) of Section 422 of the Code) under any other plan of the
company or any parent or subsidiary thereof, are exercisable for the
first time by an Eligible Person during any calendar year shall not
exceed $100,000.
ARTICLE III
GENERAL PROVISIONS
3.1 ADJUSTMENT PROVISIONS.
(a) In the event of (1) any dividend payable in shares of Common Stock;
(2) any recapitalization, reclassification, split-up or consolidation
of, or other change in, the Common Stock; or (3) an exchange of the
outstanding shares of Common Stock, in connection with a merger,
consolidation or other reorganization of or involving the Company or a
sale by the Company of all of a portion of its assets, for a different
number or class of shares of stock or other securities of any other
corporation; then the Committee shall, in such manner as it shall
determine in its sole discretion, appropriately adjust the number and
class of shares or other securities which shall be subject to Options
and/or the purchase price per share which must be paid thereafter upon
exercise of any Option. Any such adjustments made by the Committee
shall be final, conclusive and binding upon all persons, including
without limitation, the Company, the shareholders and directors of the
Company and any person having any interest in any Options which may be
granted under the plan.
(b) Except as provided in paragraph (a) immediately above, issuance by the
Company of shares of stock of any class of securities or any
indebtedness convertible into shares of stock of any class, or the
issuance of any warrants for Common stock, shall not affect the
Options.
3.2 ADDITIONAL CONDITIONS. Any shares of Common Stock issued or
transferred under any provision of the Plan may be issued or transferred subject
to such conditions, in addition to those specifically provided in the Plan, as
the Committee or the Company may impose.
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3.3 NO RIGHT AS SHAREHOLDER; SHAREHOLDERS AGREEMENT. No Grantee or any
other person authorized to purchase Common Stock upon exercise of any Option
shall have any interest in or shareholder rights with respect to any shares of
the Common Stock which are subject to any Options until such shares have been
issued, fully paid for and delivered to the Grantee or any other person pursuant
to the exercise of such Option. Furthermore, the Plan shall not confer upon any
Grantee any rights of employment with the Company, including without limitation
any right to continue in the employ of, or engagement, by the Company, or affect
the right of the Company to terminate the status of a Grantee at any time, with
or without cause. All shares of Common Stock when issued shall be subject to
certain transfer restrictions and other provisions of that certain Shareholders'
Agreement dated as of May 3, 1996, as the same has been and may be amended from
time to time.
3.4 LEGAL RESTRICTIONS. If in the opinion of legal counsel for the
Company the issuance or sale of any shares of Common Stock pursuant to the
exercise of an Option would not be lawful for any reason, including without
limitation the inability of the Company to obtain from any governmental
authority or regulatory body having jurisdiction other authority deemed by such
counsel to be necessary to such issuance or sale, the Company shall not be
obligated to issue or sell any Common Stock pursuant to the exercise of an
Option to its Grantee or any other authorized person unless a registration
statement that complies with the provisions of the Securities Act of 1933, as
amended (the "Act") in respect of such shares is in effect at the time thereof,
or other appropriate action has been taken under and pursuant to he terms and
provisions of the Act, or the Company receives evidence satisfactory to such
counsel that the issuance and sale of such shares, in the absence of an
effective registration statement or other appropriate action, would not
constitute a violation of the Act or any applicable state securities law. The
Company is in no event obligated to register any such shares, to comply with any
exemption from registration requirements or to take any other action which may
be required in order to permit, or to remedy or remove any prohibition or
limitation on, the issuance or sale of such shares to any Grantee or other
authorized person.
3.5 RIGHTS UNAFFECTED. The existence of the Options shall not affect:
(i) the right or power of the Company or its shareholders to make adjustments,
recapitalization, reorganizations or other changes in the Company's capital
structure or its business; (ii) any issue of bonds, debentures, preferred or
prior preference stocks affecting the Common Stock or the rights thereof; (iii)
the dissolution or liquidation of the Company, or sale or transfer of any part
of its assets or business; (iv) or any other corporate act, whether of a
similar character or otherwise.
3.6 WITHHOLDING TAXES. As a condition of exercise of an Option, the
Company may, in its sole discretion, withhold or require the Grantee to pay or
reimburse the Company for any taxes which the Company determines are required to
be withheld in connection with the grant or any exercise of an Option.
3.7 CHOICE OF LAW. The validity, interpretation and administration of the
Plan and any rules, regulations, determinations or decisions made thereunder,
and the rights of any and all persons having or claiming to have any interest
herein or thereunder, shall be determined exclusively in accordance with the
laws of the State of Delaware. Without limiting the generality of the
foregoing, the period within which any action in connection with the Plan must
be commenced shall be governed
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<PAGE>
by the Laws of the State of Georgia, without regard to the place where the act
or omission complained of took place, the residence of any party to such action
or the place where the action may be brought or maintained.
3.8 AMENDMENT, SUSPENSION AND TERMINATION OF PLAN. The Plan may, from
time to time, be terminated, suspended or amended by the Board of Directors in
such respects as it shall deem advisable, including any amendment which would
cause the Incentive Stock Options granted hereunder to constitute "incentive
stock options" as such term is defined in Section 422 of the Code, or any
amendment to conform to any change in any law or regulation governing same or in
any other respect; provided, however, that no such amendment shall change the
following:
(a) The maximum aggregate number of shares for which Options may be
granted under the Plan, except as required under any adjustment
pursuant to Section 3.1 hereof;
(b) The Option exercise price, with the exception of any change in such
price required as a result of any adjustment pursuant to Section 3.1
hereof and with the further exception of changes in determining Fair
Market Value of shares of Common Stock to conform with any then
applicable provisions of the Code or regulations promulgated
thereunder;
(c) The maximum period during which Options may be exercised;
(d) The termination date of the Plan in any manner which would extend such
date; or
(e) The requirements as to eligibility for participation in the Plan in
any material respect.
Notwithstanding any other provision herein contained, the Plan shall
terminate and all Options previously granted shall terminate, in the event and
on the date of liquidation or dissolution of the Company.
[SIGNATURES ON NEXT PAGE]
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As approved by the Board of Directors of ILD Teleservices, Inc. effective
November 10, 1997.
ILD TELESERVICES, INC.
By: /s/ Dennis J. Stoutenburgh
----------------------------------
Title: President
-------------------------------
ATTEST:
By:
-----------------------------------
Title:
--------------------------------
[CORPORATE SEAL]
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EXHIBIT 10.6
ORGANIZATION AGREEMENT
This Organization Agreement is entered into this 10th day of May, 1996 by
and among Intellicall, Inc., a Delaware corporation ("Intellicall"), Triad-ILD
Partners, L.P, a Georgia limited partnership ("Triad"), Morris
Telecommunications LLC, a Georgia limited liability company ("Morris") and ILD
Communications, Inc., a Delaware corporation ("ILD").
WHEREAS, Intellicall is in the business, principally through its
wholly-owned subsidiary, Intellicall Operator Services, Inc., a Delaware
corporation ("IOS"), of providing long distance and operator assisted
telephone services (the "Business"); and
WHEREAS, the parties have formed ILD as a new company for the purpose of
acquiring IOS and raising additional capital to (i) pay the cash portion of the
Consideration (as hereinafter defined) to Intellicall and (ii) fund ILD's
initial working capital requirements; and
WHEREAS, the parties desire to set forth their understanding herein
regarding the establishment of ILD, the acquisition of IOS and the initial
capitalization and funding of ILD;
NOW, THEREFORE, for and in consideration of the mutual understandings and
covenants contained herein, the parties hereto agree as follows:
ARTICLE 1
ESTABLISHMENT OF ILD
1.1 ESTABLISHMENT OF ILD. Intellicall and Triad have caused the
establishment and incorporation of ILD as a Delaware corporation. ILD has an
initial capital structure of 300,000 shares of common stock, $.01 par value (the
"Common Stock") and 200,000 shares of preferred stock, $.01 par value (the
"Preferred Stock"), which Preferred Stock shall be issued in one or more series
as contemplated in this Agreement or as determined in accordance with the
General Corporation Law of the State of Delaware.
1.2 INITIAL STOCK ISSUANCES. The initial Common Stock of ILD shall be
issued as follows:
<TABLE>
<CAPTION>
Name Number of Shares
---- ----------------
<S> <C>
Intellicall 725
Triad 183
Morris 92
</TABLE>
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<PAGE>
The parties shall pay $10.00 per share for the initially issued Common
Stock, which Common Stock upon issuance will be fully paid and non-assessable.
1.3 DIRECTORS AND OFFICERS. The directors and officers of ILD as of the
Closing Date shall be as follows:
<TABLE>
<CAPTION>
Name Office
---- ------
<S> <C>
Dennis J. Stoutenburgh Director
John M. Carradine Director
Michael F. Lewis Director
H. Edward Brooks Director
Gregory F. Chapados Director
Michael F. Lewis Chairman of the Board,
Chief Executive Officer,
and President
C. Read Morton Secretary
</TABLE>
From and after the Closing Date all directors and officers of ILD shall be
elected in accordance with the Certificate of Incorporation and Bylaws of ILD
subject to any provisions related thereto in the Shareholders Agreement
described in Section 8.3.
ARTICLE 2
CAPITALIZATION OF ILD
2.1 CONTRIBUTION OF THE BUSINESS. On the Closing Date (as hereinafter
defined) and upon satisfaction of the conditions precedent set forth in Article
7 hereof, Intellicall shall contribute, transfer, sell and assign to ILD one
hundred (100) shares of common stock of IOS constituting all of the issued and
outstanding capital stock of IOS. Immediately prior to the Closing Date
Intellicall (i) shall have transferred to IOS all of Intellicall's rights and
obligations under those certain contracts and agreements relating to the
provision by Intellicall of long distance services through Sprint Communications
Company L.P. as more specifically identified on SCHEDULE "2.1A" attached hereto
and any other contracts relating to the Business (the "Contracts"), and (ii)
shall have caused IOS to distribute to Intellicall all cash, accounts receivable
and payables arising as a result of the operation of the Business prior to the
Closing Date. Intellicall agrees that it will be responsible for all accounts
payable of IOS generated as a result of the operation of the Business prior to
the Closing Date.
Notwithstanding any provision contained herein to the contrary
Intellicall is not selling, assigning or transferring any of its right, title
and interest in and to any of Intellicall's tradenames, trademarks,
servicenames, servicemarks or copyrights.
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<PAGE>
2.2 COLLECTION OF ACCOUNTS RECEIVABLE. As contemplated in Section 2.1
Intellicall is to retain all accounts receivable arising as a result of the
operation of the Business prior to the Closing Date (herein, "Retained Accounts
Receivable") and shall be responsible for payment of all accounts payable of IOS
generated as a result of the operation of the business prior to the Closing Date
(herein, "Retained Accounts Payable").
In the event ILD or IOS collects after the Closing Date any amounts,
in the form of cash, checks, wire transfers, offsets, deductions or otherwise,
comprising Retained Accounts Receivable, ILD or IOS shall promptly remit all
such amounts to Intellicall; provided, however, ILD or IOS, as applicable, may
hold for the benefit of Intellicall any such amounts less than $1,000 until such
amounts shall aggregate $1,000 or more at which time they shall be promptly
remitted. In the event Intellicall collects after the Closing Date any amounts
of IOS or ILD not representing Retained Accounts Receivable, Intellicall agrees
to promptly remit all such amounts to IOS subject to the same dollar
considerations set forth in the preceding sentence.
In the event ILD or IOS shall receive invoices from third parties
from and after the Closing Date representing Retained Accounts Payable, ILD
shall forward such invoices to Intellicall for payment in the ordinary course of
business.
2.3 CONSIDERATION. A.) The consideration (the "Consideration") to be
paid to Intellicall at the Closing shall be the following: (i) ILD will pay
Intellicall $2,000,000 in cash by wire transfer to an account designated in
writing by Intellicall; (ii) ILD will issue and deliver to Intellicall 72,500
shares of Series A Preferred Stock (the "Series A Preferred Stock") at a deemed
issue price of $72.627 per share which Series A Preferred Stock will contain the
powers, preferences and relative rights, qualifications, limitations and
restrictions as set forth on EXHIBIT "2.3A" attached hereto; (iii) ILD will
issue and deliver to Intellicall 5,000 shares of Series B Preferred Stock at a
deemed issue price of $100 per share which Series B Preferred Stock will contain
the powers, preferences and relative rights, qualifications, limitations and
restrictions as set forth on EXHIBIT "2.3B" attached hereto; and (iv) ILD will
execute and deliver to Intellicall a subordinated convertible note (the "Junior
Note") in the original principal amount of $1,000,000, such junior convertible
note to be substantially in the form attached hereto as EXHIBIT "2.3C". The
shares of Series A Preferred Stock and Series B Preferred Stock to be issued
under this Section 2.3 will be, upon issuance, fully paid and non-assessable.
B.) In addition to the Consideration as contemplated in subsection 2.3(A)
above, on the Closing Date ILD will pay to Intellicall such amounts as set forth
on SCHEDULE "2.3D" as reimbursements for performance bonds previously posted by
Intellicall for IOS for the operations of IOS in the states as set forth on such
SCHEDULE "2.3D".
2.4 EQUITY FINANCING ACTIVITIES. On the Closing Date and upon
satisfaction of the conditions precedent set forth in Article 8 hereof, Triad
and Morris shall collectively (i) purchase from ILD 27,500 shares of Series A
Preferred Stock at a purchase price of $72.627 per share or $1,997,250 in the
aggregate and (ii) loan $1,000,000 in exchange for the execution and delivery to
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<PAGE>
Triad and Morris of two Junior Notes in the aggregate original principal amount
of $1,000,000. The Junior Notes to be delivered to Triad and Morris shall
contain the same terms and conditions as the Junior Note to be delivered to
Intellicall pursuant to Section 2.3 above. The amounts purchased and loaned,
respectively, by Triad and Morris are set forth on SCHEDULE 2.4 hereto.
2.5 THIRD PARTY FINANCING ACTIVITIES. The parties anticipate that on
the Closing Date Sirrom Capital Corporation and Reedy River Ventures, L.P.
(collectively, "Sirrom") will loan $2,000,000 (the "Loan") to ILD effective as
of the Closing Date. The Loan will be on terms and conditions acceptable to
Intellicall and Triad. The proceeds of the Loan will be utilized to pay the
cash portion of the Consideration to Intellicall. The parties hereto agree to
use their collective best efforts to cause ILD to repay the Loan on or prior to
April 30, 1999.
2.6 INSTRUMENTS OF TRANSFER. The sale, conveyance, transfer, assignment
and delivery of the common stock of IOS from Intellicall to ILD, as provided in
Section 2.1 above, shall be effected by delivery to ILD on the Closing Date of
such bills of sale, endorsements, assignments, certificates or other instruments
of transfer and conveyance as counsel to Intellicall and Triad shall reasonably
deem necessary to vest in ILD good and marketable title to such common stock of
IOS. Such instruments of transfer and conveyance shall be in form reasonably
satisfactory to Intellicall and Triad and their respective counsel and shall
contain warranties as to marketable title and that such Common Stock free and
clear of all pledges, liens, options, security interests, mortgages, claims,
charges or other encumbrances of any kind whatsoever.
2.7 TRANSFER TAXES. Any and all transfer, stamp, recording and other
taxes (other than income taxes) payable upon or in connection with the sale,
transfer, conveyance, assignment and transfer of the hereunder or the
instruments of transfer in conveyance with utilized in connection therewith
and the issuance and delivery of the Series A Preferred Stock, the Series B
Preferred Stock, the junior convertible notes and the Loan shall be paid by
ILD.
2.8 FURTHER ASSURANCES. After the Closing (as hereinafter defined)
Intellicall, Triad and Morris shall take such other actions and execute and
deliver such other documents, and shall cause ILD to take such other actions and
execute and deliver such other documents, as may be reasonably requested by any
party hereto from time to time to effectuate, facilitate and confirm the
implementation of the agreements and covenants contemplated herein.
2.9 EXPENSES. The parties acknowledge that certain legal, accounting or
other expenses or fees have been incurred in connection with the transactions
contemplated by this Agreement. A description of certain of such expenses or
fees are set forth on SCHEDULE "2.9" hereto. Each of ILD, Intellicall, Triad
and Morris agree that except for the items described as "Shareholder Expenses"
set forth on SCHEDULE "2.9", all expenses and fees incident to the organization
of ILD and the transactions contemplated by this Agreement shall be paid for, or
reimbursed by, ILD in the normal course of its business.
2.10 RECAPITALIZATION OF ILD BASED ON SIRROM WARRANTS. In connection
with the loan from Sirrom described in Section 2.5 hereof, it is contemplated
that ILD will issue to Sirrom certain
4
<PAGE>
warrants (the "Sirrom Warrants") for an aggregate of 7,239 shares of Common
Stock of ILD. In the event that Sirrom Warrants are exercised on their terms
by the holders thereof then Intellicall shall return to ILD for redemption at
a redemption price of $.01 per share that number of the shares of Series A
Preferred Stock which are convertible into such number of shares of Common
Stock exercised by the holders of the Sirrom Warrant (or if such shares of
Series A Preferred Stock have been converted by Intellicall into shares of
Common Stock, then the shares of Common Stock thereby issued upon such
conversion); provided, however, such number shall not exceed 7,239 shares of
Common Stock. Intellicall agrees that the certificate representing 7,239
shares of Series A Preferred Stock to be issued to Intellicall shall bear a
legend satisfactory to ILD and Intellicall representing the redemption right
contained herein.
ARTICLE 3
CLOSING
3.1 TIME AND PLACE. The closing hereunder (the "Closing") shall be held
via exchange of documents through overnight carriers and shall be deemed
effective as of May 10, 1996 at 2:00 p.m. local time (Atlanta), or at such
other time and place as the parties may agree upon in writing (the "Closing
Date").
3.2 DELIVERIES OF INTELLICALL. At the Closing Intellicall will execute
and deliver or cause to be executed and delivered to ILD: (a) certificate or
certificates representing the shares of common stock of IOS endorsed over to ILD
or accompanied by duly executed stock powers; (b) a certificate of good standing
dated not more than fifteen (15) days prior to the Closing Date, with respect to
IOS; (c) a release and all appropriate UCC-3 termination statements from Nomura
America Holding Company, Inc. ("Nomura") relating to a release of Nomura's
security interest in and to the common stock of IOS; (d) all of the minute books
and similar corporate records of IOS; (e) an opinion of counsel in substantially
the form as set forth on EXHIBIT "3.2A"; (f) executed copies of all the
documents constituting Exhibits hereto which contemplate the signature of
Intellicall or IOS; and (g) such other documents and instruments as Triad and
ILD shall deem necessary to consummate the transactions contemplated hereby.
3.3 DELIVERIES OF ILD. At the Closing ILD will deliver to Intellicall
simultaneously with the delivery of the items referred to in Section 3.2 above:
(a) bank wire transfer of the cash portion of the Consideration as provided in
Section 2.3(i); (b) one or more certificates representing 72,500 shares of
Series A Preferred Stock as contemplated in Section 2.3(ii); (c) one or more
certificates representing 5,000 shares of Series B Preferred Stock as
contemplated in Section 2.3(iii); (d) one or more certificates representing 725
shares of Common Stock as contemplated in Section 1.2, (e) the Junior Note in
the original principal amount of $1,000,000 as contemplated in Section 2.3(iv);
and (f) such other documents and instruments as Intellicall shall deem necessary
to consummate the transactions contemplated hereby. Additionally, at the
Closing ILD will deliver to Triad and Morris simultaneously with the delivery of
the items referred to in Section 3.2 above (x) one or more certificates
representing 275 shares of Common Stock as contemplated in Section 1.2 and an
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<PAGE>
aggregate of 27,500 shares of Series A Preferred Stock as contemplated in
Section 2.4(i) against receipt of an aggregate of $2,000,000; and (y) one or
more Junior Notes in the aggregate principal amount of $1,000,000 as
contemplated in Section 2.4(ii) against receipt of an aggregate of $1,000,000.
ILD shall also deliver to Sirrom such agreements, promissory notes, warrants,
documents and instruments as may be necessary or advisable in connection with
obtaining the Loan as contemplated in Section 2.5.
3.4 DELIVERIES OF TRIAD OR MORRIS. At the Closing Triad and Morris
shall fund the payments contemplated in Sections 1.2 and 2.4 hereof and will
execute or cause to be executed and delivered to ILD: (a) executed copies of all
the documents constituting Exhibits hereto which contemplate the signature of
Triad or Morris and (b) such other documents as Intellicall or ILD shall deem
necessary to consummate the transactions contemplated hereby.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF INTELLICALL
Intellicall represents and warrants to Triad, Morris and ILD as follows:
4.1 CORPORATE STATUS. Each of Intellicall and IOS are corporations duly
organized, validly existing and in good standing under the laws of the state of
Delaware and has all necessary corporate power and authority to carry on its
business as now conducted and to own or lease and operate its properties, and to
execute, deliver and perform its obligations hereunder. Each of Intellicall and
IOS are duly qualified to do business in all jurisdictions in which the nature
of its business or the ownership or leasing of property requires such
qualification in order to avoid any material disadvantage or liability.
4.2 AUTHORITY FOR AGREEMENT. This Agreement constitutes the valid and
legally binding obligation of Intellicall. Intellicall's execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary action on the part of the board of
directors of Intellicall and will not conflict with or result in any violation
of or default under any provisions of the certificate of incorporation or bylaws
of Intellicall and, except as set forth on SCHEDULE "4.2", will not conflict
with or result in any violation of or default with respect to any mortgage,
indenture, lease, agreement or other instrument affecting the common stock of
IOS, or to which Intellicall, or any of its affiliates, is a party, or by which
Intellicall or any of its affiliates is bound. No consent, approval, order or
authorization of, or registration, declaration or filing with, any persons or
entities, or with any governmental authority is required in connection with the
execution and delivery of this Agreement or the consummation of the transactions
contemplated hereby by Intellicall or its affiliates, except (i) such approvals
or filings listed on SCHEDULE "4.2" hereto, (ii) such disclosures, filings,
statements and reports to be made by Intellicall under the Securities Exchange
Act of 1934, and (iii) such other consents, authorizations, filings, approvals
and registrations which if not obtained or made would not have a material
adverse effect on ILD or the Business or Intellicall's ability to consummate the
transactions hereunder.
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<PAGE>
4.3 PROPERTIES. Except as set forth in SCHEDULE "4.3" hereto,
Intellicall has good, valid and marketable title to the common stock of IOS
subject to no liens, encumbrances, security interests or mortgages. Except as
set forth in SCHEDULE "4.3", the legal and beneficial interests in the common
stock of IOS is owned exclusively by Intellicall. After the transfer of the
Contracts as contemplated in Section 2.1, IOS shall have all contracts and
agreements with third parties necessary for IOS to operate the Business (except
to the extent of services to be provided by Intellicall in the Operating
Agreement described in Section 7.6 hereof). The transfer of any such Contracts
from Intellicall to IOS as contemplated in Section 2.1 will not violate the
terms of, or cause a default under, any such Contracts except any such default
that will not materially affect the Business.
4.4 LITIGATION. There are no claims or judicial or administrative
actions, suits, judgments, proceedings or investigations pending or threatened
against Intellicall which might result in any material adverse change in the
financial condition, properties, assets, business or operations of Intellicall,
or which might interfere with any part of the business currently conducted by
Intellicall, or which question the validity of this Agreement or of any action
taken or to be taken pursuant to or in connection with the provisions of this
Agreement including the exhibits hereto.
4.5 BROKERS, FINDERS, ETC. All negotiations relating to this Agreement
and the transactions contemplated hereby (as they affect Intellicall and ILD)
have been carried on by Intellicall with representatives of Triad, Morris and
Sirrom without the intervention of any person (other than as disclosed on
SCHEDULE "4.5" ) acting on behalf of Intellicall in such manner as to give rise
to any valid claim against Triad or ILD for any brokerage or finder's
commission, fee or similar compensation.
4.6 OPERATING FEES. To the best knowledge of Intellicall, IOS has paid
or Intellicall has paid on behalf of IOS all fees and complied with all written
orders imposed on IOS by the public service commission of any state to whose
jurisdiction it is subject. IOS has paid or Intellicall has paid on behalf of
IOS all charges, fees, tariff rates, access charges and other amounts billed to
it by long distance suppliers due in the normal course of business, and, to the
best of Intellicall's knowledge, there does not exist any liability for back
billing for any such charges, other than for access charges which such long
distance suppliers are entitled to bill for but have not billed for.
4.7 NO LIABILITIES. As of the Closing, except its obligations as
co-borrower for the Loan described in Section 2.5 or in connection with
certain regulatory approvals in connection with the transactions contemplated
by this Agreement, IOS shall have no liabilities, obligations and
indebtedness of any kind and nature, including, without limitation, any
obligations to trade creditors, whether heretofore, now or hereafter owing,
arising, due or payable from IOS to any third party or and howsoever, now or
hereafter owing, arising, due or payable from IOS to any third party or and
howsoever evidenced, created, incurred, acquired or owing, whether primary,
secondary, direct, contingent, fixed, or otherwise. Without in any way
limiting the generality of the foregoing, obligations specifically include
the following: (a) all obligations or liabilities of any third party that are
secured by any lien, claim, encumbrance, or security interest upon property
owned by IOS, even
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<PAGE>
though IOS has not assumed or become liable for the payment thereof; (b) any
obligations or liabilities created or arising under any lease of real or
personal property, or conditional sale under any lease of real or personal
property, or conditional sale or other title retention agreement with respect
to property used and/or acquired by IOS, even though the rights and remedies
of the lessor, seller and/or lender thereunder are limited to repossession of
such property; (c) any unfunded pension fund obligations and liabilities; and
(d) any taxes.
4.8 CUSTOMERS. There exists no actual or threatened termination,
cancellation or limitation of, or any modification or change in, (i) the
proposed business relationship of IOS with any customer or group of customers of
the Business constituting, either individually or in the aggregate 1% of the
revenues of the Business, or (ii) the proposed business relationship of IOS with
any material supplier to the Business, including, without limitation, the long
distance suppliers, and Intellicall reasonably anticipates that all such
customers and suppliers will continue a business relationship with IOS on a
basis no less favorable to IOS than that heretofore conducted with Intellicall;
and there exists no other condition or state of facts or circumstances which
would materially adversely affect the businesses of IOS or prevent IOS from
conducting its businesses after the consummation of the transactions
contemplated by this Agreement.
4.9 INVESTMENT REPRESENTATIONS. In connection with the acquisition of
the Series A Preferred Stock, the Series B Preferred Stock and the Junior Note,
Intellicall represents and warrants that the Common Stock, the Series A
Preferred Stock, the Series B Preferred Stock and the Junior Note are being
purchased for investment purposes only and not with a view to distribution or
other transfer and will be held for its own individual account. Further, it is
understood that such Common Stock, the Series A Preferred Stock, the Series B
Preferred Stock and the Junior Note have not been registered under the Federal
Securities Act of 1933, as amended (the "1933 Act"), or under the state
securities acts or blue sky laws and regulations of the State of Delaware or any
other State (collectively, the "State Securities Laws"), in reliance upon
exemption from registration contained in those acts. Intellicall acknowledges
that ILD's reliance upon such exemptions is based in part on the
representations, warranties, and agreements of Intellicall contained in this
Agreement. Intellicall acknowledges and agrees that it may not sell, transfer,
assign or otherwise dispose of the Common Stock, the Series A Preferred Stock,
the Series B Preferred Stock or the Junior Note unless there is in effect a
registration statement under the 1933 Act and all applicable state securities
laws covering such transfer or unless such transfer is exempt from the
registration requirements of the 1933 Act and all applicable State Securities
Laws and subject to certain transfer restrictions in the Shareholders Agreement
described in Section 8.3..
It is further agreed and understood by Intellicall that
stop-transfer instructions will be noted on the appropriate records of ILD
and that a restrictive legend shall be affixed to the Common Stock, the
Series A Preferred Stock, the Series B Preferred Stock and the Junior Note,
reading as follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER ANY SECURITIES LAWS IN RELIANCE OF
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<PAGE>
EXEMPTION(S) THEREFROM AND THE SECURITIES MAY NOT BE SOLD OR
TRANSFERRED UNLESS SUCH TRANSFER OR SALE IS MADE IN COMPLIANCE WITH
ALL FEDERAL AND APPLICABLE STATE SECURITIES LAWS.
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE HELD SUBJECT
TO, AND THEIR TRANSFER IS RESTRICTED UNDER, THE TERMS OF A
SHAREHOLDERS' AGREEMENT DATED AS OF MAY ___, 1996 BY AND AMONG THE
CORPORATION AND CERTAIN OF ITS SHAREHOLDERS, A COPY OF WHICH IS ON
FILE AND IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
CORPORATION.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF TRIAD
Triad represents and warrants to Intellicall, Morris and ILD as follows:
5.1 CORPORATE STATUS. Triad is a limited partnership duly organized,
validly existing and in good standing under the laws of the State of Georgia.
Triad has full power and authority to execute and deliver this Agreement on
Triad's behalf and to perform its obligations hereunder.
5.2 AUTHORITY FOR AGREEMENT. Triad has all necessary power and
authority to execute and deliver this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by the
partnership agreement, and the Board of Directors of the general partner, of
Triad. No consent, approval, order or authorization of, or registration,
declaration or filing with, any governmental authority is required in connection
with the execution and delivery of this Agreement or the consummation by Triad
of the transactions contemplated hereby or thereby.
5.3 BROKERS, FINDERS, ETC. All negotiations relating to this Agreement
and the transactions contemplated hereby (as they affect Triad and ILD) have
been carried on by Triad without the intervention of any person (other than as
disclosed on SCHEDULE "4.5") acting on behalf of Triad in such manner as to give
rise to any valid claim against Intellicall or ILD for any brokerage or finder's
commission, fee or similar compensation.
5.4 LITIGATION. There are no judicial or administrative actions, suits,
proceedings or investigations pending against Triad which question the validity
of this Agreement or of any action taken pursuant to or in connection with the
provisions of this Agreement.
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5.5 INVESTMENT REPRESENTATIONS. In connection with the acquisition of
the Common Stock, the Series A Preferred Stock and the Junior Note, Triad
represents and warrants that the Common Stock, the Series A Preferred Stock and
the Junior Note are being purchased for investment purposes only and not with a
view to distribution or other transfer and will be held for its own individual
account. Further, it is understood that such Common Stock, the Series A
Preferred Stock and the Junior Note have not been registered under the Federal
Securities Act of 1933, as amended (the "1933 Act"), or under the State
Securities Laws, in reliance upon exemption from registration contained in those
acts. Triad acknowledges that ILD's reliance upon such exemptions is based in
part on the representations, warranties, and agreements of Triad contained in
this Agreement. Triad acknowledges and agrees that it may not sell, transfer,
assign or otherwise dispose of the Common Stock, the Series A Preferred Stock or
the Junior Note unless there is in effect a registration statement under the
1933 Act and all applicable state securities laws covering such transfer or
unless such transfer is exempt from the registration requirements of the 1933
Act and all applicable State Securities Laws.
Triad further represents and warrants to ILD that ILD has made
available to Triad, prior to the date hereof, the opportunity to ask questions
of and to receive answers from representatives of ILD and Intellicall and to
obtain any additional information to the extent ILD or Intellicall possesses
such information or could acquire it without unreasonable effort or expense: (i)
relative to ILD and an investment in the Common Stock, the Series A Preferred
Stock and the Junior Note; and (ii) necessary to verify the accuracy of any
information, documents, books or records furnished. All such materials and
information requested by Triad, including any information requested to verify
any information furnished, has been made available and examined.
Triad further represents and warrants to ILD that Triad, together
with such other persons, if any, with whom Triad has found it necessary to
consult, has sufficient knowledge and experience in business and financial
matters to evaluate ILD, and the risk of an investment in the Series A Preferred
Stock and the Junior Note, without need for the additional information which
would be required to be included in a registration statement effective under the
1933 Act or any other applicable State Securities Laws.
Triad further represents and warrants to ILD that Triad's investment
in the Common Stock, the Series A Preferred Stock and the Junior Note shall be
in accord with the nature and size of Triad's investments and net worth, and
Triad is and shall be financially able to bear the economic risk of its
investment, including the ability to afford holding the Series A Preferred Stock
and the Junior Note for an indefinite period or to afford a complete loss of
Triad's investment therein. Triad has sufficient liquid assets to pay the fully
purchase price of the Series A Preferred Stock and the Junior Note.
It is further agreed and understood by Triad that stop-transfer
instructions will be noted on the appropriate records of ILD and that a
restrictive legend shall be affixed to each Common Stock, the Series A Preferred
Stock and the Junior Note purchased in accordance with this Agreement, reading
as follows:
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THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER ANY SECURITIES LAWS IN RELIANCE OF EXEMPTION(S) THEREFROM AND
THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH TRANSFER
OR SALE IS MADE IN COMPLIANCE WITH ALL FEDERAL AND APPLICABLE STATE
SECURITIES LAWS.
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE HELD SUBJECT
TO, AND THEIR TRANSFER IS RESTRICTED UNDER, THE TERMS OF A
SHAREHOLDERS' AGREEMENT DATED AS OF MAY ___, 1996 BY AND AMONG THE
CORPORATION AND CERTAIN OF ITS SHAREHOLDERS, A COPY OF WHICH IS ON
FILE AND IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
CORPORATION.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF MORRIS
Morris represents and warrants to Intellicall, Triad and ILD as follows:
6.1 CORPORATE STATUS. Morris is a limited liability corporation duly
organized, validly existing and in good standing under the laws of the State of
Georgia. Morris has full power and authority to execute and deliver this
Agreement on Morris' behalf and to perform its obligations hereunder.
6.2 AUTHORITY FOR AGREEMENT. Morris has all necessary power and
authority to execute and deliver this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly authorized by the Manager
and Members of Morris. No consent, approval, order or authorization of, or
registration, declaration or filing with, any governmental authority is required
in connection with the execution and delivery of this Agreement or the
consummation by Morris of the transactions contemplated hereby or thereby.
6.3 BROKERS, FINDERS, ETC. All negotiations relating to this Agreement
and the transactions contemplated hereby (as they affect Morris and ILD) have
been carried on by Morris without the intervention of any person (other than as
disclosed on SCHEDULE "4.5") acting on behalf of Morris in such manner as to
give rise to any valid claim against Intellicall or ILD for any brokerage or
finder's commission, fee or similar compensation.
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<PAGE>
6.4 LITIGATION. There are no judicial or administrative actions, suits,
proceedings or investigations pending against Morris which question the validity
of this Agreement or of any action taken pursuant to or in connection with the
provisions of this Agreement.
6.5 INVESTMENT REPRESENTATION. In connection with the acquisition of
the Common Stock, the Series A Preferred Stock and the Junior Note, Morris
represents and warrants that the Common Stock, the Series A Preferred Stock and
the Junior Note are being purchased for investment purposes only and not with a
view to distribution or other transfer and will be held for its own individual
account. Further, it is understood that such Common Stock, the Series A
Preferred Stock and the Junior Note have not been registered under the Federal
Securities Act of 1933, as amended (the "1933 Act"), or under the State
Securities Laws, in reliance upon exemption from registration contained in those
acts. Morris acknowledges that ILD's reliance upon such exemptions is based in
part on the representations, warranties, and agreements of Morris contained in
this Agreement. Morris acknowledges and agrees that it may not sell, transfer,
assign or otherwise dispose of the Common Stock, the Series A Preferred Stock or
the Junior Note unless there is in effect a registration statement under the
1933 Act and all applicable state securities laws covering such transfer or
unless such transfer is exempt from the registration requirements of the 1933
Act and all applicable State Securities Laws.
Morris further represents and warrants to ILD that ILD has made
available to Morris, prior to the date hereof, the opportunity to ask questions
of and to receive answers from representatives of ILD and Intellicall and to
obtain any additional information to the extent ILD or Intellicall possesses
such information or could acquire it without unreasonable effort or expense: (i)
relative to ILD and an investment in the Common Stock, the Series A Preferred
Stock and the Junior Note; and (ii) necessary to verify the accuracy of any
information, documents, books or records furnished. All such materials and
information requested by Morris, including any information requested to verify
any information furnished, has been made available and examined.
Morris further represents and warrants to ILD that Morris, together
with such other persons, if any, with whom Morris has found it necessary to
consult, has sufficient knowledge and experience in business and financial
matters to evaluate ILD, and the risk of an investment in the Common Stock, the
Series A Preferred Stock and the Junior Note, without need for the additional
information which would be required to be included in a registration statement
effective under the 1933 Act or any other applicable State Securities Laws.
Morris further represents and warrants to ILD that Morris'
investment in the Common Stock, the Series A Preferred Stock and the Junior Note
shall be in accord with the nature and size of Morris' investments and net
worth, and Morris is and shall be financially able to bear the economic risk of
its investment, including the ability to afford holding the Series A Preferred
Stock and the Junior Note for an indefinite period or to afford a complete loss
of Morris' investment therein. Morris has sufficient liquid assets to pay the
fully purchase price of the Series A Preferred Stock and the Junior Note.
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It is further agreed and understood by Morris that stop-transfer
instructions will be noted on the appropriate records of ILD and that a
restrictive legend shall be affixed to each Common Stock, the Series A Preferred
Stock and the Junior Note purchased in accordance with this Agreement, reading
as follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER ANY SECURITIES LAWS IN RELIANCE OF EXEMPTION(S) THEREFROM AND
THE SECURITIES MAY NOT BE SOLD OR TRANSFERRED UNLESS SUCH TRANSFER
OR SALE IS MADE IN COMPLIANCE WITH ALL FEDERAL AND APPLICABLE STATE
SECURITIES LAWS.
THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE HELD SUBJECT
TO, AND THEIR TRANSFER IS RESTRICTED UNDER, THE TERMS OF A
SHAREHOLDERS' AGREEMENT DATED AS OF MAY ___, 1996 BY AND AMONG THE
CORPORATION AND CERTAIN OF ITS SHAREHOLDERS, A COPY OF WHICH IS ON
FILE AND IS AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE
CORPORATION.
ARTICLE 7
CONDITIONS PRECEDENT TO INTELLICALL'S OBLIGATIONS
All obligations of Intellicall under this Agreement are subject to the
fulfillment to the reasonable satisfaction of Intellicall prior to or at the
Closing of each of the following conditions, any of which may be waived in
writing by Intellicall:
7.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by Triad and Morris in this Agreement, or in any exhibit, schedule,
statement, list or certificate furnished pursuant hereto, shall be true and
correct when made and shall be true and correct at and as of the time of the
Closing.
7.2 PERFORMANCE BY OTHERS. Triad and Morris shall have performed and
complied with all agreements, conditions and covenants required by this
Agreement including the exhibits and schedules hereto to be performed or
complied with by it prior to or at the Closing.
7.3 CLAIMS, ETC. There shall not have been instituted or threatened in
writing any claim, suit, action, proceeding or investigation against or
involving Intellicall, Triad, Morris or ILD, the outcome of which would, in
Intellicall's judgment, have a material and adverse effect on the common stock
of IOS or the ability of the ILD to consummate the transactions contemplated by
this Agreement or to continue as an ongoing profitable enterprise, or
threatening the legality, validity or enforceability of this Agreement.
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<PAGE>
7.4 FULFILLMENT OF FINANCING OBLIGATIONS. Triad and Morris shall have
funded the amounts as contemplated by Section 2.4 of this Agreement.
Furthermore, Sirrom shall have funded the Loan in the original principal amount
of $2,000,000 as contemplated in Section 2.5 of this Agreement all on terms and
conditions satisfactory to Intellicall.
7.5 NOMURA APPROVAL. Intellicall shall have received all necessary
approvals and consents from Nomura to consummate the terms of this Agreement.
7.6 OPERATING AGREEMENT. Intellicall and ILD shall have executed and
delivered a Operating Agreement substantially in the form attached hereto as
EXHIBIT "7.6".
7.7 REGISTRATION RIGHTS AGREEMENT. Intellicall, Triad, Morris and ILD
shall have executed and delivered a Registration Rights Agreement substantially
in the form attached hereto as EXHIBIT "7.7".
ARTICLE 8
CONDITIONS PRECEDENT TO TRIAD'S AND MORRIS' OBLIGATIONS
All obligations of Triad and Morris under this Agreement are subject to the
fulfillment to the reasonable satisfaction of Triad and Morris prior to or at
the Closing of each of the following conditions, any of which may be waived in
writing by Triad and Morris:
8.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
made by Intellicall in this Agreement, or in any statement, list or certificate
furnished pursuant hereto, shall be true and correct when made and shall be true
and correct at and as of the time of Closing.
8.2 PERFORMANCE OF INTELLICALL. Intellicall shall have performed and
complied with all agreements and conditions required by this Agreement to be
performed or complied with by it prior to or at the Closing, including, without
limitation, the documents or instruments described on Schedule 3.2.
8.3 SHAREHOLDER AGREEMENTS. Intellicall, Triad, Morris and ILD will
have executed and delivered a Shareholder Agreement substantially in the form
attached hereto as EXHIBIT "8.3".
8.4 MANAGEMENT INCENTIVE STOCK OPTIONS. ILD shall have established and
adopted an employee stock option plan relating to the purchase of up to 27,500
shares of Common Stock at a purchase price of not less than $24.20 per share.
Such options will be subject to such performance objectives and other terms and
conditions as set forth on EXHIBIT "8.4" hereto.
8.5 WARRANTS. ILD shall have issued and delivered to Triad a warrant
(the "Triad Warrant") to purchase 6,000 shares of Common Stock at a purchase of
$90.00 per share, such Triad Warrant to be in the form substantially as attached
hereto as EXHIBIT "8.5".
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<PAGE>
8.6 CLAIMS, ETC. There shall not have been instituted or threatened in
writing any claim, suit, action, proceeding or investigation against or
involving Triad, Intellicall, Morris or ILD, the outcome of which would, in
Triad's judgment, have a material and adverse effect on the common stock of IOS
or the ability of the ILD to consummate the transactions contemplated by this
Agreement or to continue as an ongoing profitable enterprise, or threatening the
legality, validity or enforceability of this Agreement.
8.7 LOAN. Triad and Morris shall have funded the amounts as
contemplated by Section 2.4 of this Agreement. Furthermore, Sirrom shall have
Loan in the original principal amount of $2,000,000 as contemplated in Section
2.5 of this Agreement all on terms and conditions satisfactory to Triad.
8.8 FAIRNESS OPINION. ILD shall have received a written opinion from an
independent financial appraiser that the consideration to be paid to Intellicall
for the Business is fair to ILD from a financial point of view.
8.9 REGISTRATION RIGHTS AGREEMENT. Intellicall, Triad, Morris and ILD
shall have executed and delivered a Registration Rights Agreement substantially
in the form attached hereto as EXHIBIT "7.7".
ARTICLE 9
TERMINATION
9.1 TERMINATION BY INTELLICALL. This Agreement may be terminated and
canceled at any time prior to the Closing Date by Intellicall, upon written
notice to Triad and Morris, if (a) any of the representations and warranties of
Triad or Morris contained herein or in any exhibit or schedule hereto shall
prove to be inaccurate or untrue in any material respect and Triad or Morris
fails to cure within five (5) days of the written notice thereof but in no event
later than the Closing Date; (b) any obligation, term or condition to be
performed or observed hereunder by Triad or Morris has not been so performed or
observed in any material respect at or prior to the time specified herein; (c)
the conditions precedent to Intellicall's obligations hereunder as set forth in
Article 7 have not been satisfied or waived by Intellicall in writing; or (d) if
the Closing Date shall not have occurred on or before May 15, 1996.
9.2 TERMINATION BY TRIAD. This Agreement may be terminated and
canceled at any time prior to the Closing Date by Triad or Morris, upon
written notice to Intellicall, if (a) any of the representations and
warranties of Intellicall contained herein or in any exhibit or schedule
hereto shall prove to be inaccurate or untrue in any material respect and
Intellicall fails to cure within five (5) days of the written notice thereof
but in no event later than the Closing Date; (b) any obligation, term or
condition to be performed or observed by Intellicall hereunder has not been
so performed or observed in any material respect at or prior to the time
specified herein; (c) the conditions
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precedent to Triad's and Morris' obligations hereunder as set forth in Article 8
have not been satisfied or waived by Triad and Morris in writing; or (d) if the
Closing Date shall not have occurred on or before May 15, 1996.
9.3 TERMINATION BY AGREEMENT. This Agreement may also be terminated at
any time by mutual written agreement of Intellicall, Triad and Morris.
ARTICLE 10
MISCELLANEOUS
10.1 ENTIRE AGREEMENT. This Agreement, together with all the schedules
and exhibits hereto, constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior and
contemporaneous agreements, understandings, negotiations and discussions,
whether oral or written, of the parties, and there are no warranties,
representations or other agreements between the parties in connection with the
subject matter hereof except as specifically set forth herein.
10.2 AMENDMENT. This Agreement may be amended by the parties hereto at
any time, but only by an instrument in writing duly executed and delivered on
behalf of each of the parties hereto.
10.3 HEADINGS. The section headings are not to be considered part of
this Agreement and are included solely for convenience and are not intended to
be full or accurate descriptions of the contents thereof. References to
sections or articles are to portions of this Agreement unless the context
requires otherwise.
10.4 EXHIBITS, ETC. Exhibits and schedules referred to in this Agreement
are an integral part of and are incorporated in this Agreement by reference.
10.5 ASSIGNMENT; SUCCESSORS AND ASSIGNS. All of the terms and provisions
of this Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns.
10.6 NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
delivered or sent by reputable overnight courier, postage prepaid or by
certified mail, return receipt requested:
(a) if to Intellicall:
Intellicall, Inc.
2155 Chenault, Suite 410
Carrollton, Texas 75006
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Attn: Chief Financial Officer
(b) if to Triad:
Triad-ILD Partners, L.P.
c/o Triad-ILD Partners, Inc.
7 North Brentwood, Suite 306
St. Louis, Missouri 63105
(c) if to Morris:
Morris Telecommunications, LLC
27 Abercorn Street
Savannah, Georgia 31401
Attn: Chief Financial Officer
10.7 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
10.8 SEVERABILITY. The provisions of this Agreement are severable, and
in the event that any one or more provisions are deemed illegal or
unenforceable, the remaining provisions shall remain in full force and effect.
10.9 COUNTERPARTS. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereby have duly executed this Agreement as
of the day and year first above written.
INTELLICALL, INC.
By: /s/ John M. Carradine
-------------------------------------------
Its: Vice President of Finance
------------------------------------------
TRIAD-ILD PARTNERS, L.P.
By: Triad-ILD, Inc., general partner
By: /s/ Michael F. Lewis
-------------------------------------------
Its: President of the General Partner
------------------------------------------
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MORRIS TELECOMMUNICATIONS, LLC
By: /s/ Charles H. Morris
-------------------------------------------
Its: President
------------------------------------------
ILD COMMUNICATIONS, INC.
By: /s/ Michael F. Lewis
-------------------------------------------
Its: President
------------------------------------------
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SCHEDULES
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2.1A List of Contracts to be contributed to IOS by
Intellicall
2.3D Performance bonds posted by Intellicall to be
reimbursed by ILD
2.4 Investments by Triad and Morris
2.9 Expenses
4.2 Conflicting agreements; approvals required
4.3 Liens on IOS Common Stock
</TABLE>
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<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2.3A Series A Preferred Stock
2.3B Series B Preferred Stock
2.3C Form of Junior Convertible Note
3.2A Opinion of Counsel
7.6 Intellicall/ILD Operating Agreement
7.7 Registration Rights Agreement
8.3 Shareholder Agreement
8.4 Employee Stock Option Plan
8.5 Triad Warrant
</TABLE>
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<PAGE>
EXHIBIT 10.7
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement"), dated as of the 13th
day of May 1996, is made and entered into on the terms and conditions
hereinafter set forth, by and between ILD COMMUNICATIONS, INC., a Delaware
corporation ("ILD"), and INTELLICALL OPERATOR SERVICES, INC., a Delaware
corporation ("IOS") (individually, a "Borrower" and collectively, the
"Borrowers"), those entities set forth on Exhibit A attached hereto and
incorporated herein by reference (individually, a "Lender" and collectively,
the "Lenders"), and SIRROM CAPITAL CORPORATION, a Tennessee corporation, as
agent for itself and the other Lender ("Sirrom" or "Agent").
RECITALS:
WHEREAS, Borrowers have requested that Lenders make available to Borrowers
a loan in the original principal amount of Two Million Dollars ($2,000,000) (the
"Loan") on the terms and conditions hereinafter set forth, and for the
purpose(s) hereinafter set forth; and
WHEREAS, in order to induce Lenders to make the Loan to Borrowers,
Borrowers have made certain representations to Lenders; and
WHEREAS, Lenders, in reliance upon the representations and inducements of
Borrowers, have agreed to make the Loan upon the terms and conditions
hereinafter set forth.
AGREEMENT:
NOW, THEREFORE, in consideration of the agreement of Lenders to make the
Loan, the mutual covenants and agreements hereinafter set forth, and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Borrowers, Agent and Lenders hereby agree as follows:
ARTICLE 1
THE LOAN
1.1 EVIDENCE OF LOAN INDEBTEDNESS AND REPAYMENT. Subject to the terms and
conditions hereof, on the Closing Date (as hereinafter defined), Lenders agree
to loan to Borrowers the aggregate sum of Two Million Dollars ($2,000,000).
Each Lender's portion of the Loan shall be in the amount set forth opposite each
Lender's name on Exhibit A attached hereto. The Loan shall be evidenced by a
Secured Promissory Note, substantially in the form of Exhibit B attached hereto
and incorporated herein by this reference (individually, a "Note" and
collectively, the "Notes"), dated as of the date hereof, executed by Borrowers,
in the principal
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amount of each Lender's portion of the Loan. The Loan shall be payable in
accordance with the terms of the Notes. The Notes, this Agreement and any
other instruments and documents executed by Borrower, now or hereafter
evidencing, securing or in any way relating to the indebtednesses evidenced
by the Notes are herein individually referred to as a "Loan Document" and
collectively referred to as the "Loan Documents."
1.2 PREPAYMENT. The indebtedness evidenced by the Notes may be prepaid in
whole or in part, at any time and from time to time, without penalty.
1.3 PROCESSING FEE. Borrower shall pay Lenders a processing fee of Fifty
Thousand Dollars ($50,000) on a pro rata basis, $25,000 of which has already
been paid to Sirrom. On the date the Loan is funded, an additional $12,500
shall be paid to Sirrom and $12,500 shall be paid to Reedy River Ventures
Limited Partnership.
1.4 PURPOSE. The purpose of the Loan shall be to provide additional
working capital to Borrower.
ARTICLE 2
SECURITY
2.1 GRANT OF SECURITY INTEREST. Each Borrower hereby grants to Agent for
the benefit of each Lender a security interest in, and assigns to Agent for the
benefit of each Lender, all of such Borrower's right, title and interest in, to
or under the following described property, and any and all proceeds and products
thereof and accessions thereto (collectively the "Collateral"):
(a) EQUIPMENT. All equipment of Borrower of any kind and
description, whether now owned or hereafter acquired and wherever located,
together with all parts, accessories and attachments and all replacements
thereof and additions thereto;
(b) INVENTORY, ACCOUNTS, CONTRACT RIGHTS, CHATTEL PAPER AND GENERAL
INTANGIBLES. All of Borrower's inventory and any agreements for lease of
same and rentals therefrom, and all of Borrower's accounts, accounts
receivable, contract rights (including, without limitation, all customer
contracts, rights, lists, records, billing and all other information
relating to customers of Borrower), chattel paper and general intangibles
and the proceeds therefrom, whether now in existence or owned or hereafter
arising or acquired, entered into or created, and wherever located; and
whether held for lease or sale, or furnished or to be furnished under
contracts of service;
(c) TRADEMARKS, ETC. All trademarks and service marks now held or
hereafter acquired by Borrower, both those that are registered with the
United States Patent and Trademark Office and any unregistered marks used
by Borrower in the United States, and trade dress, including logos and
designs, in connection with which any such marks are
2
<PAGE>
used, together with all registrations regarding such marks and the rights
to renewals thereof, and the goodwill of the business of Borrower
symbolized by such marks;
(d) COPYRIGHTS. All copyrights now held or hereafter acquired by
Borrower and any applications for U.S. copyrights hereafter made by
Borrower;
(e) PROPRIETARY INFORMATION, COMPUTER DATA, ETC. All proprietary
information and trade secrets of Borrower with respect to Borrower's
business now held or hereafter acquired and all of Borrower's computer
programs and the information contained therein and all intellectual
property rights with respect thereto now held or hereafter acquired;
(f) OTHER PROPERTY. All other current and future-acquired property,
in whatever form, both tangible and intangible; and
(g) EXCLUDED PROPERTY. Notwithstanding anything to the contrary
contained herein, the term Collateral shall not include any call records
and rights pertaining thereto purchased for cash by Integritel, but shall
specifically include the proceeds received from Integritel pursuant to such
purchases.
2.2 SECURED OBLIGATIONS. The indebtedness and other obligations secured
(the "Obligations") hereby consist of the following:
(a) The full and timely payment of the indebtednesses evidenced by
the Notes, together with interest thereon (including interest accruing on
or after the filing of any petition in bankruptcy or the commencement of
any insolvency, reorganization or similar proceeding, relating to the
Borrowers, whether or not a claim for post-filing or post-petition interest
is allowed in such proceeding), and any extensions, modifications,
replacements, consolidations and/or renewals thereof and any notes given in
payment thereof;
(b) The full and prompt performance of all other obligations of
Borrowers to the Lenders and/or the Agent, as applicable, direct or
contingent (including but not limited to obligations incurred as indorser,
guarantor or surety), however evidenced or denominated, and however and
whenever incurred, including but not limited to indebtednesses incurred
pursuant to any present or future commitment of Lenders to Borrowers;
(c) The full and prompt repayment of all advances and other
expenditures made by the Lenders and/or Agent for taxes, levies, or the
preservation or protection of the Collateral; and
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<PAGE>
(d) The full and prompt payment of all court costs, expenses and
costs of whatever kind incident to the collection of the indebtednesses
evidenced by the Notes, the enforcement or protection of the security
interests or assignments granted herein, or the exercise by Agent or
Lenders of any rights or remedies of Agent or Lenders with respect to the
Notes or the Loan Documents, including without limitation reasonable
attorney's fees actually incurred by Lenders or Agent, all of which
Borrowers agree to pay to Lenders and/or the Agent, as applicable, upon
demand.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 BORROWER'S REPRESENTATIONS. Each Borrower hereby represents and
warrants to Lenders as follows:
(a) CORPORATE STATUS. Each Borrower is a corporation duly organized,
validly existing and in good standing under the laws of the State of
Delaware; and has the corporate power to own and operate its properties, to
carry on its business as now conducted and to enter into and to perform its
obligations under this Agreement and the other Loan Documents to which it
is a party. Each Borrower is duly qualified to do business and in good
standing in each state in which a failure to be so qualified would have a
material adverse effect on such Borrower's financial condition or its
ability to conduct its business in the manner now conducted.
(b) SUBSIDIARIES. Schedule 3.1(b) hereto is a complete list of each
corporation, partnership, joint venture or other business organization (the
"Subsidiary" or, with respect to all such organizations, the
"Subsidiaries") in which each Borrower or any Subsidiary owns, directly or
indirectly, any capital stock or other equity interest, or with respect to
which each Borrower or any Subsidiary, alone or in combination with others,
is in a control position, which list shows the jurisdiction of
incorporation or other organization and the percentage of stock or other
equity interest of each Subsidiary owned by each Borrower. Each Subsidiary
which is a corporation is duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and is
duly qualified to transact business as a foreign corporation and is in good
standing in the jurisdictions listed in Schedule 3.1(b), which are the only
jurisdictions where the properties owned or leased or the business
transacted by it makes such licensing or qualification to do business as a
foreign corporation necessary, and no other jurisdiction has demanded,
requested or otherwise indicated that (or inquired whether) it is required
so to qualify. Each Subsidiary which is not a corporation is duly
organized and validly existing under the laws of the jurisdiction of its
organization. The outstanding capital stock of each Subsidiary which is a
corporation is validly issued, fully paid and nonassessable. Each Borrower
and the Subsidiaries have good and valid title to the equity interests in
the Subsidiaries shown as owned by each of them on Schedule 3.1(b), free
and clear of all liens, claims, charges, restrictions, security interests,
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<PAGE>
equities, proxies, pledges or encumbrances of any kind. Except where
otherwise indicated herein or unless the context otherwise requires, any
reference to Borrowers herein shall include Borrowers and all of their
Subsidiaries.
(c) AUTHORIZATION. Each Borrower is only engaged in the business of
selling long distance telecommunications services and providing operator
services. Each Borrower has full legal right, power and authority to
conduct its business and affairs. Each Borrower has full legal right,
power and authority to enter into and perform its obligations hereunder,
without the consent or approval of any other person, firm, governmental
agency or other legal entity. The execution and delivery of this
Agreement, the borrowing hereunder, the execution and delivery of each Loan
Document to which each Borrower is a party, and the performance by each
Borrower of its obligations thereunder are within the corporate powers of
each Borrower and have been duly authorized by all necessary corporate
action properly taken, have received all necessary governmental approvals
except as set forth on Schedule 3.1(k), if any were required, and do not
and will not contravene or conflict with any provision of law, any
applicable judgment, ordinance, regulation or order of any court or
governmental agency, the charter or bylaws of each Borrower, or any
agreement binding upon each Borrower or its properties. The officer(s)
executing this Agreement, the Notes and all of the other Loan Documents to
which each Borrower is a party are duly authorized to act on behalf of each
Borrower.
(d) VALIDITY AND BINDING EFFECT. This Agreement and the other Loan
Documents are the legal, valid and binding obligations of each Borrower,
enforceable in accordance with their respective terms, subject to
limitations imposed by bankruptcy, insolvency, moratorium or other similar
laws affecting the rights of creditors generally or the application of
general equitable principles.
(e) CAPITALIZATION. The authorized capital stock of ILD consists
solely of 300,000 shares of common stock, $.01 par value per share ("Common
Stock"), of which 1,000 shares are issued and outstanding and 200,000
shares of preferred stock of which 100,000 shares are designated as Series
A Preferred Stock, all of which is outstanding and 5,000 shares are
designated as Series B Preferred Stock, all of which is outstanding
(collectively, the "ILD Shares). The authorized capital stock of IOS
consists solely of 10,000 shares of common stock, $0.01 par value per
share, all of the outstanding shares of which are owned by ILD
(collectively with the ILD shares, the "Shares"). All of the Shares are
duly authorized, validly issued and outstanding and fully paid and
nonassessable and free of preemptive rights. Except for the Shares, there
are no shares of capital stock or other securities of Borrowers issued or
outstanding. Except as set forth on Schedule 3.1(e), there are no
outstanding options, warrants or rights to purchase or acquire from
Borrowers any securities of either Borrower, and there are no contracts,
commitments, agreements, understandings, registration rights agreements,
arrangements or restrictions as to which any Borrower is a party or by
which it is bound relating to any shares of
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capital stock or other securities of any Borrower (including the Shares),
whether or not outstanding.
(f) TRADEMARKS, PATENTS, ETC. Schedule 3.1(f) is an accurate and
complete list of all patents, trademarks, tradenames, trademark
registrations, service names, service marks, copyrights, licenses, formulas
and applications therefor owned by each Borrower or used or required by
each Borrower in the operation of each Borrower's business, title to each
of which is, except as set forth in Schedule 3.1(f) hereto, held by each
Borrower free and clear of all adverse claims, liens, security agreements,
restrictions or other encumbrances. There is no infringement action,
lawsuit, claim or complaint which asserts that each Borrower's operations
violate or infringe the rights or the trade names, trademarks, trademark
registration, service name, service mark or copyright of others with
respect to any apparatus or method of each Borrower or any adversely held
trademark, trade name, trademark registration, service name, service mark
or copyright, and each Borrower is not in any way making use of any
confidential information or trade secrets of any person except with the
consent of such person.
(g) NO CONFLICTS. Consummation of the transactions hereby
contemplated and the performance of the obligations of each Borrower under
and by virtue of the Loan Documents will not result in any breach of, or
constitute a default under, any mortgage, security deed or agreement, deed
of trust, lease, bank loan or credit agreement, corporate charter or
bylaws, agreement or certificate of limited partnership, partnership
agreement, license, franchise or any other instrument or agreement to which
either Borrower is a party or by which Borrower or its properties may be
bound or affected or to which either Borrower has not obtained an effective
waiver.
(h) LITIGATION. There are no actions, suits or proceedings pending,
or, to the knowledge of either Borrower threatened, against or affecting
either Borrower or involving the validity or enforceability of any of the
Loan Documents at law or in equity, or before any governmental or
administrative agency; and to each Borrower's knowledge, neither Borrower
is in default with respect to any order, writ, injunction, decree or demand
of any court or any governmental authority.
(i) FINANCIAL STATEMENTS. The consolidated balance sheet of
Borrowers dated as of the date hereof and the income statements of IOS for
the year ended December 31, 1995 and the quarter ended March 31, 1996
(collectively, the "Financial Statements"), which are attached hereto as
Schedule 3.1(i)(A), are true and correct in all material respects have been
prepared on the basis of generally accepted accounting principles
consistently applied, and fairly present the financial condition of the
Borrower as of the date(s) thereof. No material adverse change has
occurred in the financial condition of Borrowers since the date(s) thereof,
and no additional borrowings have been made by Borrowers since the date(s)
thereof other than as set forth on Schedule 3.1(i)(B).
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(j) OTHER AGREEMENTS; NO DEFAULTS. Neither Borrower is a party to
any indenture, loan or credit agreement, lease or other agreement or
instrument, or subject to any charter or corporate restriction, that could
have a material adverse effect on the business, properties, assets,
operations or conditions, financial or otherwise, of the Borrowers, or the
ability of the Borrowers to carry out their obligations under the Loan
Documents to which they are a party. Neither Borrower is in default in any
respect in the performance, observance or fulfillment of any of the
obligations, covenants or conditions contained in any agreement or
instrument material to its business to which they are a party, including
but not limited to this Agreement and the other Loan Documents, and no
other default or event has occurred and is continuing that with notice or
the passage of time or both would constitute a default or event of default
under any of same.
(k) COMPLIANCE WITH LAW. Except as disclosed in Schedule 3.1(k),
each Borrower has obtained all necessary licenses, permits and approvals
and authorizations necessary or required in order to conduct its business
and affairs as heretofore conducted and as hereafter intended to be
conducted. Failure of Borrowers to obtain, within six (6) months of the
date hereof, all licenses, permits, approvals and authorizations necessary
or required to conduct its business and affairs, including those described
on Schedule 3.1(k), shall constitute an Event of Default hereunder. To
each Borrower's knowledge, each Borrower is in compliance with all laws,
regulations, decrees and orders applicable to it (including but not limited
to laws, regulations, decrees and orders relating to environmental,
occupational and health standards and controls, antitrust, monopoly,
restraint of trade or unfair competition), except to the extent that
noncompliance, in the aggregate, cannot reasonably be expected to have a
material adverse effect on its business, operations, property or financial
condition and will not materially adversely affect such Borrower's ability
to perform its obligations under the Loan Documents.
(l) DEBT. Schedule 3.1(l) is a complete and correct list of all
credit agreements, indentures, purchase agreements, promissory notes and
other evidences of indebtedness, guaranties, capital leases and other
instruments, agreements and arrangements presently in effect providing for
or relating to extensions of credit (including agreements and arrangements
for the issuance of letters of credit or for acceptance financing) in
respect of which each Borrower or any of the properties thereof is in any
manner directly or contingently obligated; and the maximum principal or
face amounts of the credit in question that are outstanding and that can be
outstanding are correctly stated, and all liens of any nature given or
agreed to be given as security therefore are correctly described or
indicated in such Schedule.
(m) TAXES. Each Borrower has filed or caused to be filed all tax
returns that to its knowledge are required to be filed (except for returns
that have been appropriately extended), and has paid, or will pay when due,
all taxes shown to be due and payable on said returns and all other taxes,
impositions, assessments, fees or other charges imposed on them by any
governmental authority, agency or instrumentality, prior to any
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delinquency with respect thereto (other than taxes, impositions,
assessments, fees and charges currently being contested in good faith by
appropriate proceedings, for which appropriate amounts have been reserved).
No tax liens have been filed against either Borrower or any of the property
thereof.
(n) SMALL BUSINESS CONCERN. Borrowers, together with their
"affiliates" (as that term is defined in Title 13, Code of Federal
Regulations, Section 121.103), is a "small business concern" within the
meaning of the Small Business Investment Act of 1958, as amended, and the
regulations promulgated thereunder. The information set forth in the Small
Business Administration Forms 480, 652 and Part A of Form 1031 regarding
Borrowers upon delivery, pursuant to Section 5.1 hereof, will be accurate
and complete. Borrowers do not presently engage in, and it will not
hereafter engage in, any activities, and Borrowers will not use directly or
indirectly, the proceeds from the Loan, for any purpose for which a Small
Business Investment Company is prohibited from providing funds by the Small
Business Investment Act and the regulations thereunder, including Title 13,
Code of Federal Regulations Section 107.720.
(o) CERTAIN TRANSACTIONS. Except as set forth on Schedule 3.1(o)
hereto, neither Borrower is indebted, directly or indirectly, to any of its
officers or directors or to their respective spouses or children, in any
amount whatsoever; none of said officers or directors or any members of
their immediate families, are indebted to either Borrower or have any
direct or indirect ownership interest in any firm or corporation with which
either Borrower has a business relationship, or any firm or corporation
which competes with either Borrower, except that officers and/or directors
of either Borrower may own no more than 4.9% of outstanding stock of
publicly traded companies which may compete with either Borrower. Except
as set forth on Schedule 3.1(o), no officer or director or any member of
their immediate families, is, directly or indirectly, interested in any
material contract with either Borrower. Neither Borrower is a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation.
(p) STATEMENTS NOT FALSE OR MISLEADING. No representation or
warranty given as of the date hereof by either Borrower contained in this
Agreement or any schedule attached hereto or any statement in any document,
certificate or other instrument furnished or to be furnished to Lenders
pursuant hereto, taken as a whole, contains or will (as of the time so
furnished) contain any untrue statement of a material fact, or omits or
will (as of the time so furnished) omit to state any material fact which is
necessary in order to make the statements contained therein not misleading.
(q) MARGIN REGULATIONS. Neither Borrower is engaged in the business
of extending credit for the purpose of purchasing or carrying margin stock.
No proceeds received pursuant to this Agreement will be used to purchase or
carry any equity security of a class which is registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended.
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(r) SIGNIFICANT CONTRACTS. Schedule 3.1(r) is a complete and correct
list of all contracts, agreements and other documents pursuant to which
each Borrower receives revenues in excess of $25,000 per annum. Each such
contract, agreement and other document is in full force and effect as of
the date hereof and each Borrower knows of no reason why such contracts,
agreements and other documents would not remain in full force and effect
pursuant to the terms thereof.
(s) ENVIRONMENT. Each Borrower has duly complied with, and its
business, operations, assets, equipment, property, leaseholds or other
facilities are in compliance with, the provisions of all federal, state and
local environmental, health, and safety laws, codes and ordinances, and all
rules and regulations promulgated thereunder. Each Borrower has been
issued and will maintain all required federal, state and local permits,
licenses, certificates and approvals relating to (1) air emissions;
(2) discharges to surface water or groundwater; (3) noise emissions;
(4) solid or liquid waste disposal; (5) the use, generation, storage,
transportation or disposal of toxic or hazardous substances or wastes
(which shall include any and all such materials listed in any federal,
state or local law, code or ordinance and all rules and regulations
promulgated thereunder as hazardous or potentially hazardous); or (6) other
environmental, health or safety matters. Neither Borrower has received
notice of, or knows of, or suspects facts which might constitute any
violations of any federal, state or local environmental, health or safety
laws, codes or ordinances, and any rules or regulations promulgated
thereunder with respect to its businesses, operations, assets, equipment,
property, leaseholds, or other facilities. Except in accordance with a
valid governmental permit, license, certificate or approval, there has been
no emission, spill, release or discharge into or upon (1) the air;
(2) soils, or any improvements located thereon; (3) surface water or
groundwater; or (4) the sewer, septic system or waste treatment, storage or
disposal system servicing the premises, of any toxic or hazardous
substances or wastes at or from the premises; and accordingly the premises
of each Borrower are free of all such toxic or hazardous substances or
wastes. There has been no complaint, order, directive, claim, citation or
notice by any governmental authority or any person or entity with respect
to (1) air emissions; (2) spills, releases or discharges to soils or
improvements located thereon, surface water, groundwater or the sewer,
septic system or waste treatment, storage or disposal systems servicing the
premises; (3) noise emissions; (4) solid or liquid waste disposal; (5) the
use, generation, storage, transportation or disposal of toxic or hazardous
substances or waste; or (6) other environmental, health or safety matters
affecting each Borrower or its business, operations, assets, equipment,
property, leaseholds or other facilities. Neither Borrower has any
indebtedness, obligation or liability (absolute or contingent, matured or
not matured), with respect to the storage, treatment, cleanup or disposal
of any solid wastes, hazardous wastes or other toxic or hazardous
substances (including without limitation any such indebtedness, obligation,
or liability with respect to any current regulation, law or statute
regarding such storage, treatment, cleanup or disposal).
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(t) COLLATERAL. Each Borrower is the lawful owner and holder of the
Collateral free and clear of any lien, charge, encumbrance or security
interest whatsoever in favor of any other person and has the full authority
to grant a security interest in the Collateral hereunder. The address set
forth in Section 9.9 of this Agreement is Borrowers' only place of business
and the location of all tangible Collateral and the place where the records
concerning all intangible Collateral are kept and/or maintained. This
Agreement, together with the filing of a UCC-1 with the Secretary of State
of Texas covering the Collateral creates a valid and perfected first
priority security interest in the Collateral. Neither Borrower has made
any further assignment of nor granted any further security interest in or
lien on, any of the Collateral.
(u) NO REAL PROPERTY. Borrowers do not own any real property.
(v) ACQUISITIONS. None of the revenues of IOS for the fiscal year
ended December 31, 1995 and subsequent periods were associated with
customer accounts which had been purchased by Intellicall, Inc. from a
third party.
ARTICLE 4
COVENANTS AND AGREEMENTS
Each Borrower covenants and agrees that during the term of this Agreement:
4.1 PAYMENT OF OBLIGATIONS. Borrowers shall pay the indebtedness
evidenced by the Notes according to the terms thereof, and shall timely pay or
perform, as the case may be, all of the other obligations of Borrowers to
Lenders, direct or contingent, however evidenced or denominated, and however and
whenever incurred, including but not limited to indebtedness incurred pursuant
to any present or future commitment of Lenders to Borrowers, together with
interest thereon, and any extensions, modifications, consolidations and/or
renewals thereof and any notes given in payment thereof.
4.2 FINANCIAL STATEMENTS AND REPORTS. ILD shall furnish to each of the
Lenders (i) as soon as practicable and in any event within one hundred twenty
(120) days after the end of each fiscal year of Borrowers, an audited
consolidated balance sheet of Borrowers as of the close of such fiscal year, an
audited consolidated statement of income and retained earnings of Borrower for
such fiscal year and an audited consolidated statement of cash flows for
Borrower for such fiscal year, prepared in accordance with generally accepted
accounting principles consistently applied and accompanied by a certificate of
the President of ILD, stating that to the best of the knowledge of such officer,
Borrowers have kept, observed, performed and fulfilled each covenant, term and
condition of this Agreement and the other Loan Documents during the preceding
fiscal year and that no Event of Default (as defined in Section 6.1 hereof) has
occurred and is continuing (or if an Event of Default has occurred and is
continuing, specifying the nature of same, the period of existence of same and
the action Borrowers propose to take in connection therewith),
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(ii) within thirty (30) days of the end of each calendar month, a status
report indicating the financial performance of Borrowers during such month
and the financial position of Borrowers as of the end of such month, (iii)
within forty-five (45) days of the end of each quarter, a consolidated
balance sheet of Borrowers as of the close of such quarter and a consolidated
statement of income and retained earnings of Borrowers as of the close of
such quarter, all in reasonable detail, and prepared substantially in
accordance with generally accepted accounting principles consistently applied
(except for the absence of footnotes and subject to year-end adjustments),
and (iv) with reasonable promptness, such other financial data as Lenders may
reasonably request.
4.3 MAINTENANCE OF BOOKS AND RECORDS; INSPECTION. Borrowers shall
maintain its books, accounts and records in accordance with generally accepted
accounting principles consistently applied, and upon reasonable notice permit
Lenders, its officers and employees and any professionals designated by Lenders
in writing, at Lenders's expense, to visit and inspect any of their properties,
corporate books and financial records, and to discuss its accounts, affairs and
finances with Borrowers or the principal officers of Borrowers during reasonable
business hours, all at such times as Lenders may reasonably request; provided
that no such inspection shall materially interfere with the conduct of
Borrowers' business.
4.4 INSURANCE. Without limiting any of the requirements of any of the
other Loan Documents, Borrowers shall maintain, in amounts customary for
entities engaged in comparable business activities, (i) to the extent required
by applicable law, worker's compensation insurance (or maintain a legally
sufficient amount of self insurance against worker's compensation liabilities,
with adequate reserves, under a plan approved by Lenders, such approval not to
be unreasonably withheld or delayed), and (ii) fire and "all risk" casualty
insurance on its properties against such hazards and in at least such amounts as
are customary in Borrowers' business. Borrowers will make reasonable efforts to
obtain and maintain public liability insurance in an amount, and at a cost,
deemed reasonable to the Borrower's Board of Directors. At the request of
Agent, Borrowers will deliver forthwith a certificate specifying the details of
such insurance in effect.
4.5 TAXES AND ASSESSMENTS. Borrowers shall (i) file all tax returns and
appropriate schedules thereto that are required to be filed under applicable
law, prior to the date of delinquency, (ii) pay and discharge all taxes,
assessments and governmental charges or levies imposed upon Borrowers upon their
income and profits or upon any properties belonging to them, prior to the date
on which penalties attach thereto, and (iii) pay all taxes, assessments and
governmental charges or levies that, if unpaid, might become a lien or charge
upon any of its properties; provided, however, that Borrowers in good faith may
contest any such tax, assessment, governmental charge or levy described in the
foregoing clauses (ii) and (iii) so long as appropriate reserves are maintained
with respect thereto.
4.6 CORPORATE EXISTENCE. Borrowers shall maintain its corporate existence
and good standing in the state of its incorporation, and its qualification and
good standing as a foreign
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corporation in each jurisdiction in which such qualification is necessary
pursuant to applicable law.
4.7 COMPLIANCE WITH LAW AND OTHER AGREEMENTS. Except where the failure to
do so would not materially adversely affect Borrowers' operations or their
ability to fulfill their obligations under the Loan Documents, Borrowers shall
maintain their business operations and property owned or used in connection
therewith in compliance with (i) all applicable federal, state and local laws,
regulations and ordinances governing such business operations and the use and
ownership of such property, and (ii) all agreements, licenses, franchises,
indentures and mortgages to which Borrowers are a party or by which Borrowers or
any of their properties are bound. Without limiting the foregoing, Borrowers
shall pay all of its indebtedness promptly in accordance with the terms thereof.
4.8 NOTICE OF DEFAULT. Borrowers shall give written notice to Lenders of
the occurrence of any default, event of default or Event of Default under this
Agreement or any other Loan Document promptly upon the occurrence thereof.
4.9 NOTICE OF LITIGATION. Borrowers shall give notice, in writing, to
Lenders of (i) any actions, suits or proceedings wherein the amount at issue is
in excess of Twenty-Five Thousand and No/100ths Dollars ($25,000.00) instituted
by any persons whomsoever against Borrowers or affecting any of the assets of
Borrowers, and (ii) any dispute, not resolved within sixty (60) days of the
commencement thereof, between Borrowers on the one hand and any governmental
regulatory body on the other hand, which dispute might materially interfere with
the normal operations of Borrowers.
4.10 CONDUCT OF BUSINESS. Borrowers will continue to engage in a business
of the same general type and manner as conducted by it on the date of this
Agreement.
4.11 ERISA PLAN. If either Borrower has in effect, or hereafter
institutes, a pension plan that is subject to the requirements of Title IV of
the Employee Retirement Income Security Act of 1974, Pub. L. No. 93-406,
September 2, 1974, 88 Stat. 829, 29 U.S.C.A. Section 1001 ET SEQ. (1975), as
amended from time to time ("ERISA"), then the following warranty and covenants
shall be applicable during such period as any such plan (the "Plan") shall be in
effect: (i) each Borrower hereby warrants that, to Borrower's knowledge, no
fact that might constitute grounds for the involuntary termination of the Plan,
or for the appointment by the appropriate United States District Court of a
trustee to administer the Plan, exists at the time of execution of this
Agreement, (ii) each Borrower hereby covenants that throughout the existence of
the Plan, Borrower's contributions under the Plan will meet the minimum funding
standards required by ERISA and Borrower will not institute a distress
termination of the Plan, and (iii) each Borrower covenants that it will send to
Lenders a copy of any notice of a reportable event (as defined in ERISA)
required by ERISA to be filed with the Labor Department or the Pension Benefit
Guaranty Corporation, at the time that such notice is so filed.
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4.12 DIVIDENDS, ETC. Neither Borrower shall declare or pay any dividend of
any kind (other than stock dividends payable to all holders of any class of
capital stock), in cash or in property, on any class of the capital stock of
Borrower, or purchase, redeem, retire or otherwise acquire for value any shares
of such stock, nor make any distribution of any kind in cash or property in
respect thereof, nor make any return of capital of shareholders, nor make any
payments in cash or property in respect of any stock options, stock bonus or
similar plan (except as required or permitted hereunder), without the prior
written consent of the holders of a majority of the principal amount of the Loan
outstanding at such time (the "Majority Lenders"). Notwithstanding anything to
the contrary contained herein, so long as an Event of Default hereunder has not
occurred and is not continuing, (i) ILD may make dividend payments to the
Holders of its Series B Preferred Stock as set forth in its Certificate of
Incorporation as amended as of the date hereof, and (ii) ILD may issue up to
27,500 shares of Common Stock pursuant to employee stock option plans.
4.13 GUARANTIES; LOANS; PAYMENT OF DEBT. Neither Borrower shall, without
the Majority Lenders' prior express written consent, guarantee nor be liable in
any manner, whether directly or indirectly, or become contingently liable after
the date of this Agreement in connection with the obligations or indebtedness of
any person or entity whatsoever, except for the endorsement of negotiable
instruments payable to such Borrower for deposit or collection in the ordinary
course of business. Neither Borrower shall, without the prior express written
consent of the Majority Lenders, (i) make any loan, advance or extension of
credit to any person other than in the ordinary course of business, or (ii) make
any payment on any subordinated debt (except ILD may make scheduled payments of
interest to the holders of the convertible debentures as of the date hereof in
the aggregate original principal amount of $2,000,000) other than trade payables
incurred in the ordinary course of business. Notwithstanding the foregoing,
Borrowers may make the payments to Intellicall, Inc. under the Operating
Agreement of even date herewith between ILD and Intellicall, Inc.
4.14 DEBT. Without the express prior written consent of the Majority
Lenders, neither Borrower shall create, incur, assume or suffer to exist
indebtedness of any description whatsoever, excluding:
(a) the indebtedness evidenced by the Note;
(b) the endorsement of negotiable instruments payable to Borrower for
deposit or collection in the ordinary course of business;
(c) trade payables;
(d) debts incurred in the ordinary course of business (each of which,
individually, does not exceed $25,000); and
(e) the indebtedness listed on Schedule 3.1(l) hereto.
(f) any indebtedness of Borrowers to Intellicall, Inc. under that certain
Operating Agreement dated as of the date hereof entered into by and
between Borrowers and Intellicall, Inc.;
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(g) indebtedness to any asset-based or working capital line lender that
bears interest at an annual rate not to exceed the prime rate of
interest plus 3%, to which Lenders agree to subordinate on such terms
and conditions as may be mutually acceptable to Borrowers, Lenders and
such senior lender;
(h) any operating and/or capitalized leases entered into in the ordinary
course of business; and
(i) any real estate lease entered into in the ordinary course of business.
4.15 NO LIENS. Without the prior written consent of Majority Lenders,
neither Borrower shall create, incur, assume or suffer to exist any lien,
security interest, security title, mortgage, deed of trust or other encumbrance
upon or with respect to any of its properties, now owned or hereafter acquired,
except:
(a) liens in favor of Lenders in connection with transactions
contemplated by this Agreement;
(b) liens for taxes or assessments or other governmental charges
or levies if not yet due and payable;
(c) liens in connection with the leasing of equipment in favor
of the lessor of such equipment;
(d) liens described on Schedule 3.1(l) hereto; and
(e) liens to secure the indebtedness described in Section 4.14(g).
4.16 MERGERS, CONSOLIDATIONS, ACQUISITIONS AND SALES. Each Borrower agrees
that in the event that it creates any subsidiaries, it shall pledge the stock of
such subsidiary to Lenders within 10 days of the date of creation of such
subsidiary pursuant to the terms of a Pledge and Security Agreement executed by
it in form and substance satisfactory to the Majority Lenders. Each Borrower
agrees not to transfer assets subject to this Agreement to a subsidiary without
the Majority Lenders' consent.
4.17 TRANSACTIONS WITH AFFILIATES. Neither Borrower shall enter into any
transaction, including, without limitation, the purchase, sale or exchange of
property or the rendering of any service, with any affiliate, except in the
ordinary course of and pursuant to the reasonable requirements of Borrower's
business and upon fair and reasonable terms no less favorable to Borrower than
Borrower would obtain in a comparable arm's length transaction with a person not
an affiliate. For the purposes of this Section 4.17, "affiliate" shall mean a
person, corporation, partnership or other entity controlling, controlled by or
under common control with such Borrower.
4.18 COLLATERAL.
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(a) Borrowers will not permit any of the Collateral to be removed
from the location specified herein, except for temporary periods in the
normal and customary use thereof, without the prior written consent of the
Majority Lenders, and will permit Lenders to inspect the Collateral at any
time; provided that no such inspection shall materially interfere with the
conduct of Borrowers' business.
(b) If any of the Collateral is or will be located outside Texas,
Borrowers will contemporaneously herewith furnish Lenders a list of the
states wherein such Collateral is or will be located, and hereafter will
notify Lenders in writing (i) of any other states in which such Collateral
is so used, and (ii) of any change in the location of Borrowers' chief
place of business.
(c) Borrowers will not sell, exchange, lease or otherwise dispose of
any of the Collateral or any interest therein without the prior written
consent of the Majority Lenders, except in the normal course of Borrowers'
business. Borrowers shall defend the Collateral against all claims and
demands of any or all persons claiming the Collateral or any interest
therein.
(d) Borrowers will keep the Collateral in good condition and repair
and will pay and discharge all taxes (subject to the provisions of Section
4.5 hereof), levies and other impositions levied thereon as well as the
cost of repairs to or maintenance of same, and will not permit anything to
be done that may impair the value of any of the Collateral. If Borrowers
fail to pay such sums, Agent may do so for Borrowers' account and add the
amount thereof to the other amounts secured hereby.
(e) Until default in any of the terms hereof, or the terms of any
indebtedness secured hereby, Borrowers shall be entitled to possession of
the Collateral and to use the same in any lawful manner, provided that such
use does not cause excessive wear and tear to the Collateral, cause it to
decline in value at an excessive rate, or violate the terms of any policy
of insurance thereon.
(f) Borrowers will not allow the Collateral to be attached to real
estate in such manner as to become a fixture or a part of any real estate.
(g) So long as Borrowers are not in default hereunder, Borrowers
shall have the right to process and sell their inventory in the regular
course of business. Lenders' security interest hereunder shall attach to
all proceeds of all sales or other dispositions of the Collateral. If at
any time any such proceeds shall be represented by any instruments, chattel
paper or documents of title, then such instruments, chattel paper or
documents of title shall be promptly delivered to Agent and subject to the
security interest granted hereby.
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If at any time any of Borrowers' inventory is represented by any document
of title, such document of title will be delivered promptly to Agent and
subject to the security interest granted hereby.
(h) By the execution of this Agreement, Lenders shall not be
obligated to do or perform any of the acts or things provided in any
contracts covered hereby that are to be done or performed by Borrowers, but
if there is a default by Borrowers in the payment of any amount due in
respect of any indebtedness secured hereby, then Agent may, at its
election, perform some or all of the obligations provided in said contracts
to be performed by Borrowers, and if Agent incurs any liability or expenses
by reason thereof, the same shall be payable by Borrowers upon demand and
shall also be secured by this Agreement.
(i) At any time after Borrowers are in default hereunder or under the
Loan Agreement, Agent shall have the right to notify the account debtors
obligated on any or all of Borrowers' accounts receivable to make payment
thereof directly to Agent, and to take control of all proceeds of any such
accounts receivable. Until such time as Agent elects to exercise such
right by mailing to Borrowers written notice thereof, Borrowers are
authorized, as agents of the Lenders, to collect and enforce said accounts
receivable.
4.19 ENVIRONMENT. Borrower shall be and remain in compliance with the
provisions of all federal, state, and local environmental, health, and safety
laws, codes and ordinances, and all rules and regulations issued thereunder;
notify each Lender immediately of any notice of a hazardous discharge or
environmental complaint received from any governmental agency or any other
party; notify each Lender immediately of any hazardous discharge from or
affecting its premises; immediately contain and remove the same, in compliance
with all applicable laws; promptly pay any fine or penalty assessed in
connection therewith subject to the right to reasonably contest same; permit any
Lender to inspect the premises, to conduct tests thereon, and to inspect all
books, correspondence, and records pertaining thereto at reasonable times; and
at such Lender's request, and at Borrowers' expense, provide a report of a
qualified environmental engineer, satisfactory in scope, form, and content to
such Lender, and such other and further assurances reasonably satisfactory to
such Lender that the condition has been corrected.
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4.20 FINANCING STATEMENTS; POWER OF ATTORNEY. Upon the request of Agent,
Borrowers shall execute any and all financing statements and other documents
which are deemed by Agent from time to time to be necessary or desirable in
perfecting the security interests granted herein or otherwise effectuating the
transactions contemplated herein. Borrowers hereby constitute the Agent or its
designee, as Borrowers' attorney-in-fact with power, upon the occurrence and
during the continuance of an Event of Default, to endorse Borrowers' name upon
any notes, acceptances, checks, drafts, money orders, or other evidences of
payment or Collateral that may come into either its or the Lenders' possession;
to sign the name of Borrowers on any invoice or bill of lading relating to any
of the accounts receivable, drafts against customers, assignments and
verifications of accounts receivable and notices to customers; to send
verifications of accounts receivable; to notify the Post Office authorities to
change the address for delivery of mail addressed to Borrowers to such address
as the Agent may designate; to execute any of the documents in order to perfect
and/or maintain the security interests and liens granted herein by Borrowers to
the Lenders; to do all other acts and things necessary to carry out this
Agreement. All acts of said attorney or designee are hereby ratified and
approved, and said attorney or designee shall not be liable for any acts of
commission or omission (other than acts of gross negligence or willful
misconduct), nor for any error of judgment or mistake of fact or law; this power
being coupled with an interest is irrevocable until all of the obligations
secured hereby are paid in full and any and all promissory notes executed in
connection therewith are terminated and satisfied.
ARTICLE 5
CONDITIONS TO CLOSING
5.1 CLOSING OF THE LOAN. The obligation of Lenders to fund the Loan on
the date hereof (the "Closing Date") is subject to the fulfillment, on or prior
to the Closing Date, of each of the following conditions:
(a) Borrowers shall have performed and complied in all material
respects with all of the covenants, agreements, obligations and conditions
required by this Agreement.
(b) Lenders shall have received an opinion of the Borrowers' counsel,
Cashin, Morton & Mullins, dated the Closing Date, in form and substance
satisfactory to Agent's counsel, Caldwell & Caldwell, P.C.
(c) Borrowers shall have delivered to each of the Lenders a Note
executed by Borrowers, substantially in the form of Exhibit B attached
hereto.
(d) Borrowers shall have delivered to each of the Lenders a Stock
Purchase Warrant executed by ILD, substantially in the form of Exhibit C
attached hereto.
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(e) Borrowers shall have delivered to Agent the Small Business
Administration Forms 480, 652 and 1031 (Part A) and the Economic Impact
Assessment completed by Borrowers.
(f) Lenders shall have received UCC-1 Financing Statements executed
by Borrowers.
(g) Lenders shall have received a Letter Agreement from Intellicall,
Inc. and certain shareholders of ILD stating their agreement not to pledge
their shares of ILD to another lender following the release of the pledge
to Nomura Holding America, Inc.; provided that Intellicall, Inc. may pledge
its shares of ILD to another asset-based lender as collateral for a loan
from such lender.
(h) Lenders shall have received copies of the corporate charter and
other publicly filed organizational documents of Borrowers, certified by
the Secretary of State or other appropriate public official in the
jurisdiction in which Borrowers are incorporated.
(i) Lenders shall have received certified (as of the date of this
Agreement) copies of all corporate action taken by the Borrowers, including
resolutions of its Board of Directors, authorizing the execution, delivery
and performance of the Loan Documents.
(j) Lenders shall have received a certificate as to the legal
existence and good standing of the Borrowers, issued by the Secretary of
State or other appropriate public official in the jurisdiction in which the
Borrowers are incorporated.
(k) Lenders shall have received certificates of the Secretaries of
State or other appropriate public officials as to Borrowers' qualification
to do business and good standing in each jurisdiction in which a failure to
be so qualified would have a material adverse effect on its financial
position or its ability to conduct its business in the manner now conducted
and as hereafter intended to be conducted.
(l) ILD shall have received a minimum capital equity and subordinated
debt contribution of $3 million from Triad-ILD Partners and Morris
Telecommunications, LLC.
ARTICLE 6
DEFAULT AND REMEDIES
6.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default hereunder:
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(a) Default in the payment of the principal of or interest on the
indebted nesses evidenced by the Notes in accordance with the terms of the
Notes, which default is not cured within five (5) days;
(b) Any misrepresentation by Borrowers as to any material matter
hereunder or under any of the other Loan Documents, or delivery by
Borrowers of any schedule, statement, resolution, report, certificate,
notice or writing to Lenders that is untrue in any material respect on the
date as of which the facts set forth therein are stated or certified;
(c) Failure of Borrowers to perform any of its obligations, covenants
or agreements under this Agreement, the Notes or any of the other Loan
Documents;
(d) Borrowers (i) shall generally not pay or shall be unable to pay
its debts as such debts become due; or (ii) shall make an assignment for
the benefit of creditors or petition or apply to any tribunal for the
appointment of a custodian, receiver or trustee for it or a substantial
part of its assets; or (iii) shall commence any proceeding under any
bankruptcy, reorganization, arrangement, readjustment of debt, dissolution
or liquidation law or statute of any jurisdiction, whether now or hereafter
in effect; or (iv) shall have had any such petition or application filed or
any such proceeding commenced against it in which an order for relief is
entered or an adjudication or appointment is made; or (v) shall indicate,
by any act or intentional and purposeful omission, its consent to, approval
of or acquiescence in any such petition, application, proceeding or order
for relief or the appointment of a custodian, receiver or trustee for it or
a substantial part of its assets; or (vi) shall suffer any such
custodianship, receivership or trusteeship to continue undischarged for a
period of sixty (60) days or more;
(e) Borrowers shall be liquidated, dissolved, partitioned or
terminated, or the charter thereof shall expire or be revoked;
(f) A default or event of default shall occur under any of the other
Loan Documents and, if subject to a cure right, such default or event of
default shall not be cured within the applicable cure period;
(g) Borrowers shall default in the timely payment or performance of
any obligation now or hereafter owed to Lenders in connection with any
other indebtedness of Borrowers now or hereafter owed to Lenders;
(h) Borrowers shall have defaulted and continue to be in default in
the timely payment or performance of any other indebtedness or obligation,
which in the aggregate exceeds One Hundred Thousand and No/100ths Dollars
($100,000.00) or materially adversely affects Borrowers' financial
condition, except for challenges made in good faith; or
(i) Michael Lewis is no longer employed as an executive officer of
ILD.
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With respect to any Event of Default described above that is capable of
being cured and that does not already provide its own cure procedure (a "Curable
Default"), the occurrence of such Curable Default shall not constitute an Event
of Default hereunder if such Curable Default is fully cured and/or corrected
within thirty (30) days (ten (10) days, if such Curable Default may be cured by
payment of a sum of money) of notice thereof to Borrowers given in accordance
with the provisions hereof; provided, however, that this provision shall not
require notice to Borrower and an opportunity to cure any Curable Default of
which Borrowers has had actual knowledge for the requisite number of days set
forth above.
6.2 ACCELERATION OF MATURITY; REMEDIES.
(a) Upon the occurrence of any Event of Default described in
subsection 6.1(d), the indebtedness evidenced by the Notes as well as any
and all other indebtednesses of Borrowers to Lenders shall be immediately
due and payable in full; and upon the occurrence of any other Event of
Default described above, Agent, upon the direction or consent of the
Majority Lenders, at any time thereafter may accelerate the maturity of the
indebtednesses evidenced by the Notes as well as any and all other
indebtedness of Borrowers to Lenders; all without notice of any kind. Upon
the occurrence of any such Event of Default and the acceleration of the
maturity of the indebtednesses evidenced by the Notes, and upon written
direction of the Majority Lenders, Agent shall:
(i) exercise any or all of its rights and remedies with
respect to the Collateral under the Tennessee Uniform Commercial Code,
and such additional rights and remedies to which a secured party is
entitled under the laws in effect in any jurisdiction where any rights
and remedies hereunder may be asserted, including, without limitation,
the right to exercise all powers of ownership pertaining to the
Collateral as if the Agent were the sole and absolute owner thereof
(and the Borrowers agree to take all such action as may be appropriate
to give effect to such right);
(ii) in its name, or in the name of the Borrowers or
otherwise, demand, sue for, collect or receive any money or property
at any time payable or receivable on account of or in exchange for any
of the Collateral;
(iii) upon ten (10) days' prior written notice to the
Borrowers, sell, assign or otherwise dispose of all or any portion of
the Collateral, at such place or places as the Agent deems best, for
cash or credit against the indebtednesses evidenced by the Notes, at
public or private sale, without demand or additional notice, and the
Agent may be the purchaser, assignee or recipient of any or all of the
Collateral so disposed of at any public sale (or, to the extent
permitted by law, at any private sale), and thereafter shall hold the
same absolutely free from any claim or right of any kind, including
any right or equity of redemption (statutory or otherwise) of the
Borrowers, any such demand, notice, right or equity being expressly
waived, disclaimed and released; and/or
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(iv) Exercise any other powers, rights or remedies conferred
to Agent under this Agreement or the other Loan Documents, or at law
or equity.
(b) In exercising any right or remedy that Agent may have with
respect to the Collateral, Agent shall act for the benefit of each of the
Lenders. Upon any foreclosure sale or disposition of the Collateral, Agent
shall be entitled to enter a bid that is for ratable credit upon each of
the Notes. Agent shall not be required to enter a cash bid unless all of
the Lenders have contributed a ratable portion of such cash to Agent. In
the event that Agent acquires title to any of the Collateral, it shall do
so on behalf of all of the Lenders.
(c) All proceeds from the liquidation, foreclosure, repossession, or
public or private sale of the Collateral, or enforcement of Agent's
security interest in the Collateral, or Agent's exercise of any rights or
remedies pursuant to this Section 6.2 or otherwise shall be applied first
to the costs and expenses (including reasonable and actual attorneys' fees
and disbursements) incurred by the Agent, acting as Agent, and thereafter
paid pro rata to the Lenders as hereinafter set forth. Specifically,
regardless of how each Lender may treat the payments for the purpose of its
own accounting, for the purposes of computing the Borrowers' obligations
hereunder and calculating distributions under this subsection (c), all such
proceeds shall be applied FIRST, to the costs and expenses incurred by the
Agent, acting as Agent, as set forth above; SECOND, to the ratable payment
of accrued and unpaid interest on the Notes (in the same proportion that
the then unpaid interest under each Note bears to the aggregate of the then
unpaid interest under all of the Notes); THIRD, to the ratable payment of
the unpaid principal of the Notes (in the same proportion that the then
unpaid principal under each Note bears to the aggregate of the then unpaid
principal under all of the Notes); FOURTH, to the payment of all other
amounts then owing to the Agent or the Lenders under the Loan Documents;
and FIFTH, the remainder, if any, to the Borrowers or any other person
legally entitled thereto. No application of the payments will cure any
Event of Default or prevent acceleration, or continued acceleration, of
amounts payable under the Loan Documents or prevent the exercise, or
continued exercise, of rights or remedies of the Lenders hereunder or under
applicable law. To the extent that any Lender receives any payment in
excess of that which it is entitled to receive hereunder, it shall promptly
repay such amount to Agent to be distributed to the party or parties
entitled thereto.
(d) No disbursements shall be made by the Agent pursuant to Section
6.2(c) unless and until the Agent has first determined (based upon written
notices provided by each Lender) the ratio that the principal and interest
evidenced by each Lender's Note bears to the aggregate of all principal and
interest evidenced by all of the Notes. As used herein, the term
"proceeds" of the Collateral shall mean cash, securities and other property
realized in respect of, and distributions in kind of, the Collateral.
(e) If the Agent is required at any time to return to Borrowers or to
a trustee, receiver, liquidator, custodian or similar official any portion
of any payment or distribution
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made by the Agent to any of the Lenders pursuant to this Section 6.2 or
otherwise, then such Lender(s) shall, upon demand, immediately return to
the Agent any such payments made or transferred to such Lender(s), but
without interest or penalty (unless the Agent is required to pay interest
or penalty on such amounts to the person recovering such payments). If,
however, any such Lender(s) shall fail to make such payment within ten (10)
days of Agent's demand, then the amount of such payment shall bear interest
at the prime rate of interest plus one percent.
6.3 REMEDIES CUMULATIVE; NO WAIVER. No right, power or remedy conferred
upon or reserved to Lenders and/or Agent by this Agreement or any of the other
Loan Documents is intended to be exclusive of any other right, power or remedy,
but each and every such right, power and remedy shall be cumulative and
concurrent and shall be in addition to any other right, power and remedy given
hereunder, under any of the other Loan Documents or now or hereafter existing at
law, in equity or by statute. No delay or omission by Lenders or Agent to
exercise any right, power or remedy accruing upon the occurrence of any Event of
Default shall exhaust or impair any such right, power or remedy or shall be
construed to be a waiver of any such Event of Default or an acquiescence
therein, and every right, power and remedy given by this Agreement and the other
Loan Documents to Lenders may be exercised from time to time and as often as may
be deemed expedient by Lenders or Agent.
ARTICLE 7
AGENCY PROVISIONS
7.1 AUTHORIZATION AND ACTION. Each Lender hereby irrevocably appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Agent by the terms
hereof, together with such powers as are reasonably incidental thereto. The
duties of the Agent shall be mechanical and administrative in nature and the
Agent shall not by reason of this Agreement be a trustee or fiduciary for any
Lender. The Agent shall have no duties or responsibilities except those
expressly set forth herein. As to any matters not expressly provided for by
this Agreement (including, without limitation, enforcement of Agent's security
interest in the Collateral), the Agent shall not be required to exercise any
discretion or take any action, but shall be required to act or to refrain from
acting (and shall be fully protected in so acting or so refraining from acting)
upon the instructions of the Majority Lenders, and such instructions shall be
binding upon all Lenders and all holders of Notes; provided, however, that the
Agent shall not be required to take any action which exposes the Agent to
personal liability or which is contrary to this Agreement or applicable law.
7.2 LIABILITY OF AGENT. Neither the Agent nor any of its partners,
officers, agents or employees shall be liable for any action taken or omitted to
be taken by it or them under or in connection with this Agreement in the absence
of its or their own gross negligence or willful misconduct. Without limitation
of the generality of the foregoing, the Agent (a) may treat the payee of any
Note as the holder thereof until the Agent receives written notice of the
assignment or transfer
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thereof signed by such payee, which notice must be in form satisfactory to
the Agent; (b) may consult with legal counsel (including counsel for the
Borrowers), independent public accountants and other experts selected by it
and shall not be liable for any action taken or omitted to be taken in good
faith by it in accordance with the advice of such counsel, accountants, or
experts; (c) makes no warranty or representation to any Lender and shall not
be responsible to any Lender for any statements, warranties, or
representations made in or in connection with this Agreement; (d) shall not
have any duty to ascertain or to inquire as to the performance or observance
of any of the terms, covenants, or conditions of this Agreement on the part
of the Borrowers, or to inspect the property (including the books and
records) of the Borrowers; (e) shall not be responsible to any Lender for the
due execution, legality, validity, enforceability, genuineness, perfection,
sufficiency, or value of this Agreement or any other instrument or document
furnished pursuant thereto; and (f) shall incur no liability under or in
respect of this Agreement by acting upon any notice, consent, certificate,
monthly billing statement or other instrument or writing (which may be sent
by telegram, telex, or facsimile transmission) believed by it to be genuine
and signed or sent by the proper party or parties.
7.3 RIGHTS OF AGENT AS A LENDER. With respect to the Loan made by it and
the Note issued to it, the Agent shall have the same rights and powers under
this Agreement as any other Lender and may exercise the same as though it were
not the Agent, and the term "Lender" shall, unless otherwise expressly
indicated, include the Agent in its individual capacity. The Agent and its
affiliates may accept deposits from, lend money to, act as trustee under
indentures of, and generally engage in any kind of business with, the Borrowers
and any person who may do business with or own securities of the Borrower or any
subsidiary, all as if the Agent were not the Agent and without any duty to
account therefor to the Lenders.
7.4 INDEPENDENT CREDIT AND COLLATERAL DECISIONS. Each Lender acknowledges
that it has, independently and without reliance upon the Agent or any other
Lender and based on such documents and information as it has deemed appropriate,
made its own credit and collateral analysis (including an analysis of the nature
and value of the Collateral, the enforceability of the Agent's security interest
therein and the perfection of such security interest) and decision to enter into
this Agreement. Each Lender also acknowledges that it will, independently and
without reliance upon the Agent or any other Lender and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement.
Except for notices, reports and other documents and information expressly
required to be furnished to the Lenders by the Agent hereunder, the Agent shall
have no duty or responsibility to provide any Lender with any credit or other
information concerning the affairs, financial condition or business of the
Borrowers or any of their subsidiaries (or any of their affiliates) which may
come into the possession of the Agent or any of its affiliates. Agent makes no
express or implied warranty concerning the value of the Collateral or the
perfection or enforceability of its security interest therein. Except for the
filing of continuation statements with the Texas Secretary of State when
required by applicable Texas laws, Agent shall have no duty to protect the
Collateral or the security interest granted therein.
7.5 INDEMNIFICATION. Lenders agree to indemnify the Agent (to the extent
not reimbursed by the Borrowers), ratably according to the respective amounts of
their portion of the Loan, from and
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against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements of any kind or
nature whatsoever which may be imposed on, incurred by, or asserted against
the Agent in any way relating to or arising out of this Agreement or any
action taken or omitted by the Agent under this Agreement, provided that no
Lender shall be liable for any portion of any of the foregoing resulting from
the Agent's gross negligence or willful misconduct. Without limitation of the
foregoing, each Lender agrees to reimburse the Agent (to the extent not
reimbursed by the Borrowers) promptly upon demand for its ratable share of
any reasonable out-of-pocket expenses (including reasonable counsel fees)
incurred by the Agent in connection with the preparation, administration, or
enforcement of, or legal advice in respect of rights or responsibilities
under, this Agreement.
7.6 SUCCESSOR AGENT. The Agent may resign at any time by giving at least
60 days' prior notice thereof to the Lenders and the Borrowers and the Majority
Lenders may remove the Agent at any time, with or without cause. Upon any such
resignation or removal, the Majority Lenders shall have the right to appoint a
successor Agent. In the case of a retiring Agent, if no successor Agent shall
have been so appointed by the Majority Lenders and shall have accepted such
appointment within 30 days after the retiring Agent's giving of notice of
resignation, then the retiring Agent may, on behalf of the Lenders, appoint a
successor Agent. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the Agent, and the
retiring or removed Agent shall be discharged from its duties and obligations
under this Agreement. After any retiring Agent's resignation or removal
hereunder as Agent, the provisions of this Article 7 shall inure to its benefit
as to any actions taken or omitted to be taken by it while it was Agent under
this Agreement. Any Agent may be removed by a majority of the remaining Lenders
in the event the Agent is convicted of a crime, engages in any act of moral
turpitude which has an adverse effect upon the Borrowers or their business
reputation, or fails to perform its duties as required by this Agreement.
7.7 SHARING OF PAYMENTS, ETC. If any Lender shall obtain any payment
(whether voluntary, involuntary, through the exercise of any right or setoff, or
otherwise) on account of the Note held by it in excess of its ratable share of
payments on account of the Notes obtained by all the Lenders, such Lender shall
purchase from the other Lenders such participations in the Notes held by them as
shall be necessary to cause such purchasing Lender to share the excess payment
ratably with each of the other Lenders, provided, however, that if all or any
portion of such excess payment is thereafter recovered from such purchasing
Lender, such purchase from each Lender shall be rescinded and each Lender shall
repay to the purchasing Lender the purchase price to the extent of such recovery
together with an amount equal to such Lender's ratable share (according to the
proportion of (1) the amount of such Lender's required repayment to (2) the
total amount so recovered from the purchasing Lender) of any interest or other
amount paid or payable by the purchasing Lender in respect of the total amount
so recovered. The Borrower agrees that any Lender so purchasing a participation
from another Lender pursuant to this Section 7.7 may, to the fullest extent
permitted by law, exercise all its rights of payment (including the right of
setoff) with respect to such participation as fully as if such Lender were the
direct creditor of the Borrower in the amount of such participation. Each
Lender
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shall give the Agent written notice within five (5) days of any payments or
other recoveries described above.
7.8 ENFORCEMENT BY AGENT. All rights of action under this Agreement, the
Notes and the other Loan Documents shall be instituted, maintained, pursued
and/or enforced by Agent. Any suit or proceeding instituted by Agent in
furtherance of such enforcement shall be brought in Agent's name without the
necessity of joining any of the other Lenders. In any event, the recovery of
any judgment by Agent shall be for the ratable benefit of all of the Lenders,
subject to the reimbursement of expenses and costs of Agent. When acting
pursuant to consent of Majority Lenders, Agent shall provide notice of any such
action to any Lenders whose consent was not sought within three business days
after such action.
7.9 PRO RATA TREATMENT. Except as specifically provided to the contrary
herein, the rights and obligations of the Lenders shall be prorata on the basis
of their percentage interests of the Loan as set forth on Exhibit A.
ARTICLE 8
TERMINATION
8.1 TERMINATION OF THIS AGREEMENT. This Agreement shall remain in full
force and effect until the later of (i) the Maturity Date (as defined in the
Notes), or (ii) the payment by Borrowers of all amounts owed to Lenders
hereunder and upon repayment of all amounts owned under the Notes, at which time
Lenders shall cancel the Notes and deliver them to Borrowers and do all things
and deliver all documents necessary to release the Collateral from the liens of
Lenders including UCC-3 financing statements and such other documents as
Borrowers may reasonably request; provided, however, that if at any time
Borrowers have satisfied all obligations to Lenders, Borrowers may terminate
this Agreement by providing written notice to each Lender.
ARTICLE 9
MISCELLANEOUS
9.1 PERFORMANCE BY AGENT. If Borrowers shall default in the payment,
performance or observance of any covenant, term or condition of this Agreement,
which default is not cured within the applicable cure period, then Agent may, at
the option of the Majority Lenders, pay, perform or observe the same, and all
payments made or costs or expenses incurred by Lenders and/or Agent in
connection therewith (including but not limited to reasonable and actual
attorney's fees), with interest thereon at the highest default rate provided in
the Notes (if none, then at the maximum rate from time to time allowed by
applicable law), shall be immediately repaid to Lenders and/or Agent by
Borrowers and shall constitute a part of the Obligations. The Majority Lenders
shall be the sole judge of the necessity for any such actions and of the amounts
to be paid.
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9.2 SUCCESSORS AND ASSIGNS INCLUDED IN PARTIES. Whenever in this
Agreement one of the parties hereto is named or referred to, the heirs, legal
representatives, successors, successors-in-title and assigns of such parties
shall be included, and all covenants and agreements contained in this Agreement
by or on behalf of Borrowers or by or on behalf of Lenders or Agent shall bind
and inure to the benefit of their respective heirs, legal representatives,
successors-in-title and assigns, whether so expressed or not.
9.3 COSTS, EXPENSES, AND TAXES. Borrowers agree to pay on demand all
reasonable costs and expenses (not to exceed $25,000) incurred by any Lender in
connection with the preparation, execution, delivery and filing of the Loan
Documents, and of any amendment, modification, or supplement to the Loan
Documents, including without limitation, the fees and out-of-pocket expenses of
counsel for any Lender, incurred in connection with advising the Agent or any of
the Lenders as to their rights and responsibilities hereunder. Borrowers also
agrees to pay all such costs and expenses, including reasonable attorneys' fees
and court costs, incurred by the Agent and/or the Lenders in connection with
enforcement of the Loan Documents, or any amendment, modification, or supplement
thereto, whether by negotiation, legal proceedings, or otherwise. In addition,
Borrowers shall pay any and all stamp and other taxes and fees payable or
determined to be payable in connection with the execution, delivery, filing and
recording of any of the Loan Documents and the other documents to be delivered
under any such Loan Documents, and agrees to hold the Agent and each of the
Lenders harmless from and against any and all liabilities with respect to or
resulting from any delay in paying or failing to pay such taxes and fees.
9.4 ASSIGNMENT. The Notes, this Agreement and the other Loan Documents
may be endorsed, assigned and/or transferred in whole or in part by Lenders with
consent of Borrowers, which shall not be unreasonably withheld; provided that no
consent shall be required for an assignment to an affiliate of the assigning
Lender. Any such holder and/or assignee of the same shall succeed to and be
possessed of the rights and powers of Lenders under all of the same to the
extent transferred and assigned. Lenders may grant participations in all or any
portion of its interest in the indebtedness evidenced by the Notes, and in such
event Borrowers shall continue to make payments due under the Loan Documents to
Lenders and Lenders shall have the sole responsibility of allocating and
forwarding such payments in the appropriate manner and amounts. Borrowers shall
not assign any of its rights nor delegate any of its duties hereunder or under
any of the other Loan Documents without the prior express written consent of
Majority Lenders.
9.5 TIME OF THE ESSENCE. Time is of the essence with respect to each and
every covenant, agreement and obligation of Borrowers hereunder and under all of
the other Loan Documents.
9.6 SEVERABILITY. If any provision(s) of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
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9.7 INTEREST AND LOAN CHARGES NOT TO EXCEED MAXIMUM ALLOWED BY LAW.
Anything in this Agreement, the Notes or any of the other Loan Documents to the
contrary notwithstanding, in no event whatsoever, whether by reason of
advancement of proceeds of the Loan, acceleration of the maturity of the unpaid
balance of the Loan or otherwise, shall the interest and loan charges agreed to
be paid to Lenders for the use of the money advanced or to be advanced hereunder
exceed the maximum amounts collectible under applicable laws in effect from time
to time. It is understood and agreed by the parties that, if for any reason
whatsoever the interest or loan charges paid or contracted to be paid by
Borrowers in respect of the indebtedness evidenced by the Note shall exceed the
maximum amounts collectible under applicable laws in effect from time to time,
then IPSO FACTO, the obligation to pay such interest and/or loan charges shall
be reduced to the maximum amounts collectible under applicable laws in effect
from time to time, and any amounts collected by Lenders that exceed such maximum
amounts shall be applied to the reduction of the principal balance of the
indebtedness evidenced by the Notes and/or refunded to Borrowers so that at no
time shall the interest or loan charges paid or payable in respect of the
indebtedness evidenced by the Notes exceed the maximum amounts permitted from
time to time by applicable law.
9.8 ARTICLE AND SECTION HEADINGS; DEFINED TERMS. Numbered and titled
article and section headings and defined terms are for convenience only and
shall not be construed as amplifying or limiting any of the provisions of this
Agreement.
9.9 NOTICES. Any and all notices, elections or demands permitted or
required to be made under this Agreement shall be in writing, signed by the
party giving such notice, election or demand and shall be delivered personally,
telecopied, telexed, or sent by certified mail or overnight via nationally
recognized courier service (such as Federal Express), to the other party at the
address set forth below, or at such other address as may be supplied in writing
and of which receipt has been acknowledged in writing. The date of personal
delivery, telecopy or telex or two (2) business days after the date of mailing
(or the next business day after delivery to such courier service), as the case
may be, shall be the date of such notice, election or demand. For the purposes
of this Agreement:
The Address of Agent is: Sirrom Capital Corporation
500 Church Street
Suite 200
Nashville, TN 37219
Attention: Kathy Harris
with a copy to: Caldwell & Caldwell, P.C.
500 Church Street, Suite 200
Nashville, TN 37219
Attention: Maria-Lisa Caldwell, Esq.
27
<PAGE>
The Addresses of Borrowers
are: ILD Communications, Inc.
2155 Chenault, Suite 140
Carrollton, TX 75006-5023
Attention: Michael F. Lewis
ILD Communications, Inc.
13000 Sawgrass Village Circle
Suite 5
Ponte Verdra Beach, FL 32082
with a copy to: Cashin, Morton & Mullins
Two Midtown Plaza
1360 Peachtree Street, NE, Suite 1900
Atlanta, GA 30309
Attention: C. Read Morton, Esq.
The Address of the Lenders
are: As set forth on Exhibit A hereto
9.10 ENTIRE AGREEMENT. This Agreement and the other Loan Documents dated
as of the date hereof between Borrowers, Agent and Lenders represent the entire
agreement between the parties concerning the subject matter hereof, and all oral
discussions and prior agreements are merged herein; provided, if there is a
conflict between this Agreement and any other document executed
contemporaneously herewith with respect to the Obligations, the provision of
this Agreement shall control. The execution and delivery of this Agreement and
the other Loan Documents by the Borrowers were not based upon any fact or
material provided by Lenders, nor were the Borrowers induced or influenced to
enter into this Agreement or the other Loan Documents by any representation,
statement, analysis or promise by Lenders.
9.11 GOVERNING LAW AND AMENDMENTS. This Agreement shall be construed and
enforced under the laws of the State of Tennessee applicable to contracts to be
wholly performed in such State. No amendment, modification, termination or
waiver of any provision of any Loan Document to which Borrowers are a party, nor
consent to any departure by Borrowers from any Loan Document to which it is a
party, shall in any event be effective unless the same shall be in writing and
signed by the Majority Lenders. The terms of the Notes may only be modified by
the unanimous written consent of Lenders.
9.12 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and
warranties contained herein or made by or furnished on behalf of the Borrowers
in connection herewith shall survive the execution and delivery of this
Agreement and all other Loan Documents.
28
<PAGE>
9.13 JURISDICTION AND VENUE. Borrowers hereby consents to the jurisdiction
of the courts of the State of Tennessee and the United States District Court for
the Middle District of Tennessee, as well as to the jurisdiction of all courts
from which an appeal may be taken from such courts, for the purpose of any suit,
action or other proceeding arising out of any of its obligations arising under
this Agreement or any other Loan Documents or with respect to the transactions
contemplated hereby, and expressly waives any and all objections it may have as
to venue in any of such courts.
9.14 WAIVER OF TRIAL BY JURY. LENDERS, AGENT AND BORROWER HEREBY WAIVE
TRIAL BY JURY IN ANY ACTION, PROCEEDINGS, CLAIMS OR COUNTER-CLAIMS, WHETHER IN
CONTRACT OR TORT, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATING TO
THIS AGREEMENT OR THE LOAN DOCUMENTS.
9.15 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties to this Agreement in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same Agreement.
9.16 CONSTRUCTION AND INTERPRETATION. Should any provision of this
Agreement require judicial interpretation, the parties hereto agree that the
court interpreting or construing the same shall not apply a presumption that the
terms hereof shall be more strictly construed against one party by reason of the
rule of construction that a document is to be more strictly construed against
the party that itself or through its agent prepared the same, it being agreed
that the Borrowers, Agent, Lenders and their respective agents have participated
in the preparation hereof.
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized officers, as
of the day and year first above written.
AGENT:
SIRROM CAPITAL CORPORATION, a Tennessee
corporation, as Agent
By: /s/ Kathy Harris
----------------------------------
Title: Vice President
-------------------------------
BORROWERS:
ILD COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Michael F. Lewis
----------------------------------
Title: President
-------------------------------
INTELLICALL OPERATOR SERVICES, INC.,
a Delaware corporation
By: /s/ Dennis Stoutenburgh
----------------------------------
Title: Vice President
-------------------------------
LENDERS:
SIRROM CAPITAL CORPORATION, a Tennessee
corporation
By: /s/ Kathy Harris
----------------------------------
Title: Vice President
-------------------------------
30
<PAGE>
REEDY RIVER VENTURES LIMITED PARTNERSHIP, a
South Carolina limited partnership
By: Emergent Equity Advisors, Inc.,
its general partner
By: /s/ Capers A. Easterby
----------------------------------
Title: President
-------------------------------
31
<PAGE>
INDEX OF SCHEDULES AND ATTACHMENTS
Exhibit A - List of Lenders
Exhibit B - Form of Note
Exhibit C - Stock Purchase Warrant
Schedule 3.1(b) - Subsidiaries
Schedule 3.1(e) - Capitalization
Schedule 3.1(e) - Shareholders
Schedule 3.1(f) - Trademarks and Patents
Schedule 3.1(i)(A) - Financial Statements
Schedule 3.1(i)(B) - Additional Borrowings
Schedule 3.1(k) - Compliance with Law
Schedule 3.1(l) - Debt and Liens
Schedule 3.1(o) - Certain Transactions
Schedule 3.1(r) - Significant Contracts
Schedule 4.17 - Transactions with Affiliates
<PAGE>
EXHIBIT A
LIST OF LENDERS
Amount of
Name and Address Loan
- --------------------------------------- -----------
Sirrom Capital Corporation $1,500,000
500 Church Street
Suite 200
Nashville, TN 37219
Reedy River Ventures Limited $ 500,000
Partnership
15 South Main Street, Suite 750
Greenville, SC 29601
-----------
$2,000,000
<PAGE>
EXHIBIT 10.8
- --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
Dated as of August 29, 1997
among
ILD TELESERVICES, INC.
and
INTELLICALL OPERATOR SERVICES, INC.
(the Borrowers)
and
NATIONSBANK, N.A.
(the Lender)
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS(1)
<TABLE>
PAGE
----
<S> <C> <C>
ARTICLE 1 - DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.01 Definitions . . . . . . . . . . . . . . . . . . . . 1
Section 1.02 Other Referential Provisions. . . . . . . . . . . .21
Section 1.03 Exhibits and Schedules. . . . . . . . . . . . . . .23
ARTICLE 2 - REVOLVING CREDIT FACILITY. . . . . . . . . . . . . . . . . . . .23
A. REVOLVING CREDIT FACILITY . . . . . . . . . . . . . . . . . . . . .23
Section 2A.1 Revolving Credit Loans. . . . . . . . . . . . .23
Section 2A.2 Manner of Borrowing Revolving Credit Loans. . .23
Section 2A.3 Repayment of Revolving Credit Loans . . . . . .24
Section 2A.4 Revolving Credit Note . . . . . . . . . . . . .24
Section 2A.5 Extension of Facility . . . . . . . . . . . . .24
B. TERM LOAN FACILITY. . . . . . . . . . . . . . . . . . . . . . . . .25
Section 2B.1 Term Loan . . . . . . . . . . . . . . . . . . .25
Section 2B.2 Manner of Borrower and Disbursing Term Loan . .25
Section 2B.3 Repayment of Term Loan; Required Prepayments. .25
Section 2B.4 Term Note . . . . . . . . . . . . . . . . . . .25
ARTICLE 3 - GENERAL LOAN PROVISIONS. . . . . . . . . . . . . . . . . . . . .25
Section 3.01 Interest. . . . . . . . . . . . . . . . . . . . . .25
Section 3.02 Choice of Interest Rate; LIBOR Provisions . . . . .27
Section 3.03 Fees. . . . . . . . . . . . . . . . . . . . . . . .29
Section 3.04 Manner of Payment . . . . . . . . . . . . . . . . .30
Section 3.05 Statements of Account . . . . . . . . . . . . . . .30
Section 3.06 Termination of Agreement. . . . . . . . . . . . . .30
Section 3.07 Increased Costs and Reduced Returns . . . . . . . .31
Section 3.08 Joint and Several Liability . . . . . . . . . . . .31
Section 3.09 Obligations Absolute. . . . . . . . . . . . . . . .32
Section 3.10 Waiver of Suretyship Defenses . . . . . . . . . . .32
ARTICLE 4 - CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . .33
Section 4.01 Conditions Precedent to Initial Loan. . . . . . . .33
Section 4.02 All Loans . . . . . . . . . . . . . . . . . . . . .37
ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF THE BORROWER . . . . . . . . .38
- -------------------
(1) This Table of Contents is included for reference purposes only and does
not constitute part of the Loan and Security Agreement.
i
<PAGE>
Section 5.01 Representations and Warranties. . . . . . . . . . .38
Section 5.02 Survival of Representations and Warranties, Etc . .44
ARTICLE 6 - SECURITY INTEREST. . . . . . . . . . . . . . . . . . . . . . . .44
Section 6.01 Security Interest . . . . . . . . . . . . . . . . .44
Section 6.02 Continued Priority of Security Interest . . . . . .45
ARTICLE 7 - COLLATERAL COVENANTS . . . . . . . . . . . . . . . . . . . . . .46
Section 7.01 Collection of Receivables . . . . . . . . . . . . .46
Section 7.02 Verification and Notification . . . . . . . . . . .46
Section 7.03 Disputes, Returns and Adjustments . . . . . . . . .47
Section 7.04 Invoices. . . . . . . . . . . . . . . . . . . . . .47
Section 7.05 Delivery of Instruments . . . . . . . . . . . . . .47
Section 7.06 Sales of Inventory. . . . . . . . . . . . . . . . .47
Section 7.07 Returned Goods. . . . . . . . . . . . . . . . . . .47
Section 7.08 Ownership and Defense of Title. . . . . . . . . . .47
Section 7.09 Insurance . . . . . . . . . . . . . . . . . . . . .48
Section 7.10 Location of Offices and Collateral. . . . . . . . .49
Section 7.11 Records Relating to Collateral. . . . . . . . . . .49
Section 7.12 Inspection. . . . . . . . . . . . . . . . . . . . .49
Section 7.13 Information and Reports . . . . . . . . . . . . . .50
Section 7.14 Power of Attorney . . . . . . . . . . . . . . . . .51
Section 7.15 Equipment . . . . . . . . . . . . . . . . . . . . .51
Section 7.16 Billing and Collection Agreements . . . . . . . . .51
ARTICLE 8 - AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . .51
Section 8.01 Preservation of Corporate Existence
and Similar Matters . . . . . . . . . . . . . . . .51
Section 8.02 Compliance with Applicable Law. . . . . . . . . . .51
Section 8.03 Conduct of Business . . . . . . . . . . . . . . . .52
Section 8.04 Payment of Taxes and Claims . . . . . . . . . . . .52
Section 8.05 Accounting Methods and Financial Records. . . . . .52
Section 8.06 Use of Proceeds . . . . . . . . . . . . . . . . . .52
Section 8.07 Hazardous Waste and Substances; Environmental
Requirements . . . . . . . . . . . . . . . . . . . 52
Section 8.08 Accuracy of Information . . . . . . . . . . . . . .53
Section 8.09 Revisions or Updates to Schedules . . . . . . . . .53
Section 8.10 Covenants in WorldCom Acquisition Documents . . . .53
ARTICLE 9 - INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . .53
Section 9.01 Financial Statements. . . . . . . . . . . . . . . .54
Section 9.02 Accountants' Certificate. . . . . . . . . . . . . .54
Section 9.03 Officer's Certificate . . . . . . . . . . . . . . .55
Section 9.04 Management Reports. . . . . . . . . . . . . . . . .55
Section 9.05 Copies of Other Reports . . . . . . . . . . . . . .55
ii
<PAGE>
Section 9.06 Notice of Litigation and Other Matters. . . . . . .55
Section 9.07 ERISA . . . . . . . . . . . . . . . . . . . . . . .56
ARTICLE 10 - NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . .57
Section 10.01 Financial Ratios. . . . . . . . . . . . . . . . . .57
Section 10.02 Indebtedness. . . . . . . . . . . . . . . . . . . .58
Section 10.03 Guaranties. . . . . . . . . . . . . . . . . . . . .58
Section 10.04 Investments . . . . . . . . . . . . . . . . . . . .58
Section 10.05 Capital Expenditures. . . . . . . . . . . . . . . .58
Section 10.06 Restricted Distributions and Payments . . . . . . .58
Section 10.07 Merger, Consolidation and Sale of Assets. . . . . .58
Section 10.08 Affiliate Transactions. . . . . . . . . . . . . . .58
Section 10.09 Liens . . . . . . . . . . . . . . . . . . . . . . .58
Section 10.10 No Negative Pledges . . . . . . . . . . . . . . . .59
Section 10.11 Operating Leases. . . . . . . . . . . . . . . . . .59
Section 10.12 Benefit Plans . . . . . . . . . . . . . . . . . . .59
Section 10.13 Sales and Leasebacks. . . . . . . . . . . . . . . .59
Section 10.14 Amendments of Other Agreements. . . . . . . . . . .59
Section 10.15 Minimum Availability. . . . . . . . . . . . . . . .59
Section 10.16 Net Income. . . . . . . . . . . . . . . . . . . . .59
ARTICLE 11 - DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . .59
Section 11.01 Events of Default . . . . . . . . . . . . . . . . .59
Section 11.02 Remedies. . . . . . . . . . . . . . . . . . . . . .63
Section 11.03 Application of Proceeds . . . . . . . . . . . . . .65
Section 11.04 Power of Attorney . . . . . . . . . . . . . . . . .66
Section 11.05 Miscellaneous Provisions Concerning Remedies. . . .66
Section 11.06 Trademark License . . . . . . . . . . . . . . . . .67
ARTICLE 12 - MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . .67
Section 12.01 Notices . . . . . . . . . . . . . . . . . . . . . .67
Section 12.02 Expenses. . . . . . . . . . . . . . . . . . . . . .69
Section 12.03 Stamp and Other Taxes . . . . . . . . . . . . . . .70
Section 12.04 Setoff. . . . . . . . . . . . . . . . . . . . . . .70
Section 12.05 Litigation. . . . . . . . . . . . . . . . . . . . .70
Section 12.06 Waiver of Rights. . . . . . . . . . . . . . . . . .71
Section 12.07 Reversal of Payments. . . . . . . . . . . . . . . .71
Section 12.08 Injunctive Relief . . . . . . . . . . . . . . . . .72
Section 12.09 Accounting Matters. . . . . . . . . . . . . . . . .72
Section 12.10 Assignment; Participation . . . . . . . . . . . . .72
Section 12.11 Amendments. . . . . . . . . . . . . . . . . . . . .72
Section 12.12 Performance of Borrowers' Duties. . . . . . . . . .72
Section 12.13 Indemnification . . . . . . . . . . . . . . . . . .72
Section 12.14 All Powers Coupled with Interest. . . . . . . . . .73
iii
<PAGE>
Section 12.15 Survival. . . . . . . . . . . . . . . . . . . . . .73
Section 12.16 Severability of Provisions. . . . . . . . . . . . .73
Section 12.17 Governing Law . . . . . . . . . . . . . . . . . . .73
Section 12.18 Counterparts. . . . . . . . . . . . . . . . . . . .73
Section 12.19 Reproduction of Documents . . . . . . . . . . . . .73
Section 12.20 Funds Transfer Services . . . . . . . . . . . . . .74
</TABLE>
iv
<PAGE>
EXHIBITS AND SCHEDULES
EXHIBIT A FORM OF REVOLVING CREDIT NOTE
EXHIBIT B FORM OF TERM NOTE
EXHIBIT C FORM OF BORROWING BASE CERTIFICATE
SCHEDULE 5.01(a) JURISDICTIONS IN WHICH EITHER BORROWER IS QUALIFIED AS
A FOREIGN CORPORATION
SCHEDULE 5.01(b) BORROWERS' CAPITAL STOCK
SCHEDULE 5.01(e) BORROWERS' BUSINESS
SCHEDULE 5.01(f) EXCEPTIONS TO GOVERNMENTAL APPROVALS
SCHEDULE 5.01(g) NON LIEN TITLE EXCEPTIONS AND DEFECTS AND PROPERTY
DISPOSED OF OUT OF ORDINARY COURSE OF BUSINESS
SCHEDULE 5.01(h) LIENS
SCHEDULE 5.01(i) INDEBTEDNESS FOR MONEY BORROWED AND GUARANTIES
SCHEDULE 5.01(j) LITIGATION
SCHEDULE 5.01(k) TAX RETURNS AND PAYMENTS
SCHEDULE 5.01(o) ERISA
SCHEDULE 5.01(t) LOCATION OF CHIEF EXECUTIVE OFFICE(S)
SCHEDULE 5.01(u) LOCATIONS OF INVENTORY
SCHEDULE 5.01(v)(I) CORPORATE AND FICTITIOUS NAMES OF BORROWERS
SCHEDULE 5.01(v)(II) CORPORATE AND FICTITIOUS NAMES TRANSFERRED TO BORROWERS
SCHEDULE 5.01(v)(III) NAMES UNDER WHICH BORROWERS CREATE RECEIVABLES
SCHEDULE 5.01(z) EMPLOYEE RELATIONS
SCHEDULE 5.01(aa) INTELLECTUAL PROPERTY
SCHEDULE 5.01(bb) BANK ACCOUNTS
SCHEDULE 5.01(dd) BROKER'S FEES
SCHEDULE 8.06 USE OF PROCEEDS
v
<PAGE>
LOAN AND SECURITY AGREEMENT
Dated as of August 29, 1997
ILD TELESERVICES, INC., a Delaware corporation ("ILD"), INTELLICALL
OPERATOR SERVICES, INC. ("IOS") (ILD and IOS are each referred to herein
individually as a "BORROWER" and collectively as the "BORROWERS"), and
NATIONSBANK, N.A., a national banking association ("LENDER"), agree as follows:
RECITALS: ILD has entered into that certain Asset Purchase Agreement, dated as
of February 27, 1997, with WorldCom, Inc., as amended by that certain Amendment
No. 1 dated August 29, 1997 (as so amended, the "WORLDCOM AGREEMENT"), pursuant
to which ILD will purchase certain assets and contracts relating to the operator
services business of WorldCom, Inc. (the "WORLDCOM ACQUISITION") to be utilized,
in part, in connection with the WorldCom Acquisition.
The Borrowers have requested that Lender make a revolving credit facility
available to the Borrowers in an amount up to $20,000,000 and make a $5,000,000
term loan to the Borrowers. The Borrowers' business is a mutual and collective
enterprise, and the Borrowers believe that the consolidation of all loans and
other accommodations under this Agreement will enhance the Borrowers' aggregate
borrowing power, simplify and facilitate the process of allocating certain
resources between the Borrowers to the mutual advantage of both Borrowers and
the distinct individual advantage of each Borrower, and enhance the
administration of their individual and collective relationships with the Lender,
all to the Borrowers' individual and mutual advantage.
ARTICLE 1 - DEFINITIONS
Section 1.01 DEFINITIONS. For the purposes of this Agreement:
"ACCOUNT DEBTOR" means a Person who is obligated on a Receivable.
"ACQUIRE" or "ACQUISITION", as applied to any Business Unit or Investment,
means the acquisition of such Business Unit or Investment by purchase, exchange,
issuance of stock or other securities, or by merger, reorganization or any other
method.
"ADVANCE(S)" means any and all Prime Rate Advances and LIBOR Advances.
"AFFILIATE" means, with respect to a Person, (a) any officer, director,
employee or managing agent of such Person, (b) any spouse, parents, brothers,
sisters, children and grandchildren of such Person, (c) any association,
partnership, trust, entity or enterprise in which such Person is a director,
officer or general partner, (d) any other Person that, (i) directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with, such given Person, (ii) directly or indirectly
beneficially owns or holds 10% or more of any class of voting stock or
partnership or other interest of such Person or any Subsidiary of such Person,
or (iii) 10% or more of the voting stock or partnership or other interest of
which is directly or indirectly beneficially owned or held by such Person or a
Subsidiary of such Person. The term "control" means the
<PAGE>
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through
ownership of voting securities or partnership or other interests, by contract
or otherwise.
"AGREEMENT" means this Agreement, including the Exhibits and Schedules
hereto, and all amendments, modifications and supplements hereto and thereto and
restatements hereof and thereof.
"AGREEMENT DATE" means the date as of which this Agreement is dated.
"APPLICABLE LAW" means all applicable provisions of constitutions,
statutes, rules, regulations and orders of all governmental bodies and of all
order and decrees of all courts and arbitrators, including without limitation,
Environmental Laws.
"APPLICABLE MARGIN" shall mean with respect to the Revolving Credit
Facility, the percentage per annum set forth below opposite the ratio of Senior
Funded Debt/EBITDA, to be determined as of the last business day of each year,
commencing with the financial results reflected in the audited financial
statements delivered to Lender with respect to Borrower's 1998 fiscal year:
<TABLE>
APPLICABLE MARGIN
-----------------
SENIOR FUNDED DEBT/EBITDA PRIME RATE ADVANCE(S) LIBOR ADVANCE(S)
------------------------- --------------------- ----------------
<S> <C> <C>
Greater than 3.25 to
1.0 .50% 2.75%
Greater than or equal to
2.75 to 1.0 and less than
3.25 to 1.0 .25% 2.50%
Less than 2.75 to 1.0 .00% 2.25%
</TABLE>
"APPLICABLE SPREAD" shall mean with respect to the Revolving Credit
Facility, .50% per annum in the case of Prime Rate Advance(s), and, 2.75% per
annum in the case of LIBOR Advance(s).
"ASSET DISPOSITION" means the disposition of any or all assets of either of
the Borrowers, whether by sale, lease, transfer, loss, damage, destruction,
condemnation or otherwise, other than sales of Inventory in the ordinary course
of business.
"AVAILABILITY" means as of the date of determination, the amount of
Revolving Credit Loans available to be borrowed collectively by the Borrowers
hereunder in accordance with SECTION 2.A1, LESS the sum of the outstanding
principal balance of all Revolving Credit Loans hereunder as of such date.
"BENEFIT PLAN" means an employee benefit plan as defined in Section 3(35)
of ERISA (other
2
<PAGE>
than a Multiemployer Plan) in respect of which a Person or any Related
Company is, or within the immediately preceding 6 years was, an "employer" as
defined in Section 3(5) of ERISA, including such plans as may be established
after the Agreement Date.
"BORROWERS" means, collectively, ILD and IOS, and "BORROWER" means any such
person individually, and its or their respective successors and permitted
assignees.
"BORROWING BASE" means at any time an amount equal to the sum of:
(a) 85% (or such lesser percentage as the Lender may in its reasonable
credit judgment determine from time to time) of the face value of Eligible
Receivables due and owing at such time, MINUS
(b) $250,000, held as a concentration reserve until and unless Receivables
billed by Network Operator Services, Inc. as of the Effective Date are billed
directly by a Borrower, MINUS
(c) $250,000, held as a reserve until and unless Receivables currently
billed on behalf of Borrowers by Integretel, Incorporated are converted to ILD's
billing system, MINUS
(d) a reserve to be calculated by Lender, in its sole discretion, from
time to time upon notice from a Borrower that such Borrower owes any Wholesale
Billing and Collection Customer (including, without limitation, WorldCom) more
money than that Borrower currently is holding in its possession on behalf of
such Wholesale Billing and Collection Customer, MINUS
(e) beginning November 1, 1997, a dilution reserve in an amount equal to
two and one-half percent (2.5%) of Eligible Receivables; MINUS
(f) such other reserves as Lender may determine from time to time in the
exercise of its reasonable credit judgment.
"BORROWING BASE CERTIFICATE" means a certificate duly executed by an
authorized officer of ILD appropriately completed and in the form of EXHIBIT C
attached hereto.
"BUSINESS DAY" means (a) any day other than a Saturday, Sunday or other day
on which banks in the city in which the principal office of the Lender is
located are authorized to close, and (b) with respect to all notices,
determinations, fundings and payments in connection with a LIBOR Advance, any
day that is a Business Day described in CLAUSE(a) and that is also a day for
trading by and between banks in Dollar deposits in the applicable interbank
market.
"BUSINESS UNIT" means the assets constituting the business, or a division
or operating unit thereof, of any Person.
"CAPITAL EXPENDITURES" means, with respect to any Person, all expenditures
made and liabilities incurred for the acquisition of assets (other than assets
which constitute a Business Unit)
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which are not, in accordance with GAAP, treated as expense items for such
Person in the year made or incurred or as a prepaid expense applicable to a
future year or years.
"CAPITALIZED LEASE" means a lease that is required to be capitalized for
financial reporting purposes in accordance with GAAP.
"CAPITALIZED LEASE OBLIGATION" means Indebtedness represented by
obligations under a Capitalized Lease, and the amount of such Indebtedness shall
be the capitalized amount of such obligations determined in accordance with
GAAP.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
"COLLATERAL" means and includes the total of all of each Borrower's right,
title and interest in and to each of the following, wherever located and whether
now or hereafter existing or now owned or hereafter acquired or arising:
(a) all Receivables,
(b) all Inventory,
(c) all Contract Rights,
(d) all General Intangibles,
(e) all Equipment,
(f) all Deposit Accounts,
(g) all Real Estate,
(h) all goods and other property, whether or not delivered, (i) the sale
or lease of which gives or purports to give rise to any Receivable, including,
but not limited to, all merchandise returned or rejected by or repossessed from
customers, or (ii) securing any Receivable, including, without limitation, all
rights as an unpaid vendor or lienor (including, without limitation, stoppage in
transit, replevin and reclamation) with respect to such goods and other
properties,
(i) all services which have been performed, the performance of which gives
or purports to give rise to any Receivable, whether or not invoiced by or on
behalf of any Person,
(j) all mortgages, deeds to secure debt and deeds of trust on personal
property, guaranties, leases, security agreements and other agreements and
property which secure or relate to any Receivable or other Collateral or are
acquired for the purpose of securing and enforcing any item thereof,
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(k) all documents of title, policies and certificates of insurance,
securities, chattel paper and other documents and instruments evidencing or
pertaining to any and all items of Collateral,
(l) all files, correspondence, computer programs, tapes, disks and related
data processing software which contain information identifying or pertaining to
any of the Collateral or any Account Debtor or showing the amounts thereof or
payments thereon or otherwise necessary or helpful in the realization thereon or
the collection thereof,
(m) all cash deposited with the Lender or any Affiliate thereof or which
the Lender is entitled to retain or otherwise possess as collateral pursuant to
the provisions of this Agreement or any of the Security Documents, and
(n) any and all products and cash and non-cash proceeds of the foregoing
(including, but not limited to, any claims to any items referred to in this
definition and any claims against third parties for loss of, damage to or
destruction of any or all of the Collateral or for proceeds payable under or
unearned premiums with respect to policies of insurance) in whatever form,
including, but not limited to, cash, negotiable instruments and other
instruments for the payment of money, chattel paper, security agreements and
other documents.
"CONTRACT RIGHTS" means and includes, as to any Person, all of such
Person's then owned or existing and future acquired or arising rights under
contracts not yet earned by performance and not evidenced by an instrument or
chattel paper, to the extent that the same may lawfully be assigned.
"CONTRIBUTION DOCUMENTS" means (a) collectively all stock certificates or
other documentation evidencing the Contributions, and (b) collectively all of
the agreements, instruments and documents executed in connection with the
Contributions.
"CONTRIBUTIONS" means the contribution as of the Effective Date by certain
new or existing shareholders of ILD of not less than $1,600,000 to the capital
of ILD, at least $500,000 of which shall be contributed to the capital of ILD by
WorldCom.
"DEFAULT" means any of the events specified in SECTION 11.01 that, with the
passage of time or giving of notice or both, would constitute an Event of
Default.
"DEFAULT MARGIN" means two percent (2%) per annum.
"DEPOSIT ACCOUNTS" means any demand, time, savings, passbook or like
account maintained with a bank, savings and loan association, credit union or
like organization, other than an account evidenced by a certificate of deposit
that is an instrument under the UCC.
"DISBURSEMENT ACCOUNT" means the account maintained by and in the name of
the Borrowers (or in the name of either Borrower designated by the Borrowers)
with the Lender for the purpose of disbursing Revolving Credit Loan proceeds and
amounts credited thereto pursuant to SECTIONS 2.A2(b)(i) and the cash management
system maintained by the Borrowers pursuant to
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7.01.
"DOLLAR" and "$" means freely transferable United States dollars.
"EBITDA" means, for any period, the Borrowers' and their consolidated
Subsidiaries' Net Income for such period before deduction of interest, taxes
depreciation and amortization expense, all on a consolidated basis, determined
in accordance with GAAP, LESS (a) non-cash credits increasing Borrowers' Net
Income, LESS (b) cash dividends or distributions made by Borrowers.
"ERISA" means the Employee Retirement Income Security Act of 1974 and all
regulations promulgated thereunder, as in effect from time to time, and any
successor statute or regulations.
"EFFECTIVE DATE" means the later of (a) the Agreement Date, and (b) the
first date on which all of the conditions set forth in SECTION 4.01 shall have
been fulfilled or waived by the Lender.
"EFFECTIVE INTEREST RATE" means the rate of interest per annum on the Loans
in effect from time to time pursuant to the provisions of SECTION 3.01(a), (b)
and(c).
"ELIGIBLE RECEIVABLES" means the total of all of the unpaid portions of any
Receivables (other than Wholesale Billing and Collection Receivables) payable in
Dollars to a Borrower by a Person whose principal place of business is in the
United States of America or Canada, net of any taxes, holdbacks, returns,
discounts, claims, credits, charges or other allowances, commissions, offsets,
deductions, counterclaims, disputes or other defenses and reduced by the
aggregate amount of all reserves, limits and deductions provided for in this
definition and elsewhere in this Agreement which is deemed by the Lender in the
exercise of its reasonable credit judgment to be eligible for inclusion in the
calculation of the Borrowing Base. Unless otherwise approved in writing by the
Lender, no Receivable of either Borrower shall be deemed an Eligible Receivable
unless it also meets all of the following requirements: (a) such Receivable is
owned by a Borrower and represents a complete BONA FIDE transaction which
requires no further act under any circumstances on the part of such Borrower to
make such Receivable payable by the Account Debtor; (b) such Receivable is not
unpaid more than 90 days after the date of creation of the original call detail
record with respect to such call or past due more than 44 days after its invoice
due date, which shall not be later than 45 days after the creation of the
original call detail record with respect to such call; (c) such Receivable does
not arise out of any transaction with any Subsidiary, Affiliate (excluding
WorldCom), creditor, lessor or supplier of such Borrower; (d) such Receivable is
not owing by an Account Debtor more than fifty percent (50%) of whose
then-existing accounts owing to either of the Borrowers do not meet the
requirements set forth in CLAUSE (b) above; (e) Accounts due from an Account
Debtor which Lender has notified Borrowers has an unsatisfactory credit
standing as determined by Lender in its reasonable credit judgment; (f) such
Receivable is not subject to the Assignment of Claims Act of 1940, as amended
from time to time, or any applicable law now or hereafter existing similar in
effect thereto, as determined in the sole discretion of the Lender, or to any
provision prohibiting its assignment or requiring notice of or consent to
such assignment; (g) such Borrower is not in breach of any express or implied
representation or warranty with respect to the goods or services the sale or
performance of which
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gave rise to such Receivable; (h) the Account Debtor with respect to such
Receivable is not insolvent or the subject of any bankruptcy or insolvency
proceedings of any kind or of any other proceeding or action, threatened or
pending, which might, in the Lender's sole judgment, have a Materially Adverse
Effect on such Account Debtor; (i) the goods or services the sale or performance
of which gave rise to such Receivable were shipped, delivered or provided to the
Account Debtor on an absolute sale basis and not on a bill and hold sale basis,
a consignment sale basis, a guaranteed sale basis, a sale or return basis or on
the basis of any other similar understanding, and such goods or services have
not been returned or rejected; (j) such Receivable is not owing by an Account
Debtor who individually or together with a group of affiliated Account Debtors
has then-existing accounts owing to such Borrower which exceed in face amount
twenty-five percent (25%) of such Borrower's total Eligible Receivables (other
than as to WorldCom); (k) such Receivable is evidenced by call detail record or
other documentation in form acceptable to the Lender containing only terms
normally offered by such Borrower, and dated no later than 45 days after
completion of the services giving rise to such Receivable; (l) such Receivable
is a valid, legally enforceable obligation of the Account Debtor with respect
thereto and is not subject to any present, or contingent (and no facts exist
which are the basis for any future), offset, deduction or counterclaim, dispute
or other defense on the part of such Account Debtor; (m) such Receivable is not
evidenced by chattel paper or an instrument of any kind, unless such chattel
paper or instrument has been delivered and endorsed and/or assigned to the
Lender; (n) if such Receivable arises from the performance of services, such
services have been fully performed, and if the billing and collection for such
service is being undertaken by a third party, all required verification, rating
and processing has been performed and the call detail records have been received
by the billing and collection agent (other than in the case of otherwise
Eligible Receivables to be processed by Sprint Communications or Network
Operator Services, Inc. (collectively, "SPRINT/NOS RECEIVABLES"), in which case
the eligible portion of such Receivables shall equal ILD's good faith estimate,
based on historical traffic patterns and as specifically identified in the
Borrowing Base Certificate including such Receivables, of the amount of such
Receivables, provided that such call detail records shall have been transmitted
for collection within twenty (20) days after the last day of the immediately
preceding month); (o) such Receivable, if it arises in connection with a LEC
Payment, (i) is the subject of an agreement between the applicable LEC and
WorldCom, which agreement has been validly assigned to ILD by WorldCom (such
assignment having been acknowledged by the applicable LEC), or (ii) is the
subject of a valid, first priority Lien granted by WorldCom in favor of ILD and
assigned to Lender; (p) such Receivable is subject to the Security Interest,
which is perfected as to such Receivable, and is subject to no other Lien
whatsoever other than a Permitted Lien and the goods giving rise to such
Receivable were not, at the time of the sale thereof, subject to any Lien other
than a Permitted Lien; (q) such Receivable is not a duplicate billing; and (r)
such Receivable, if billed on behalf of Borrower by a third-party, has been
confirmed by or on behalf of the billing agent (other than Sprint/NOS
Receivables which shall not be subject to this condition).
"ENVIRONMENTAL LAWS" means all federal, state, local and foreign laws now
or hereafter in effect relating to pollution or protection of the environment,
including laws relating to emissions, discharges, releases or threatened
releases of pollutants, contaminants, chemicals or industrial, toxic or
hazardous substances or wastes into the environment (including, without
limitation, ambient air, surface water, ground water or land) or otherwise
relating to the manufacture, processing,
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distribution, use, treatment, storage, disposal, removal, transport or
handling of pollutants, contaminants, chemicals or industrial, toxic or
hazardous substances or wastes, and any and all regulations, notices or
demand letters issued, entered, promulgated or approved thereunder.
"EQUIPMENT" means and includes, as to any Person, all of such Person's then
owned or existing and future acquired or arising machinery, apparatus,
equipment, motor vehicles, tractors, trailers and other tangible personal
property (other than Inventory) of every kind and description used in such
Person's business operations or owned by such Person or in which such Person has
an interest and all parts, accessories and special tools and all increases and
accessions thereto and substitutions and replacements therefor.
"EVENT OF DEFAULT" means any of the events specified in SECTION 11.01.
"FINANCING STATEMENTS" means the Uniform Commercial Code financing
statements executed and delivered by each of the Borrowers to the Lender, naming
the Lender as secured party and each such Borrower as debtor, in connection with
this Agreement.
"FIXED CHARGE COVERAGE RATIO" means, for any period, (a) EBITDA, MINUS
unfunded Capital Expenditures and income taxes actually paid DIVIDED BY (b)
Fixed Charges.
"FIXED CHARGES" means, for any period, (a) Interest Expense, PLUS (b)
scheduled payments of principal due with respect to Indebtedness, including,
without limitation, scheduled principal payments under the Term Loan, the Sirrom
Subordinated Indebtedness and payments with respect to Capitalized Leases.
"GAAP" means generally accepted accounting principles consistently applied
and maintained throughout the period indicated and consistent with the prior
financial practice of the Person referred to.
"GENERAL INTANGIBLES" means, as to any Person, all of such Person's then
owned or existing and future acquired or arising general intangibles, chooses in
action and causes of action and all other intangible personal property of such
Person of every kind and nature (other than Receivables), including, without
limitation, Intellectual Property, corporate or other business records,
inventions, designs, blueprints, plans, specifications, trade secrets, goodwill,
computer software, customer lists, registrations, licenses, franchises, tax
refund claims, reversions or any rights thereto and any other amounts payable to
such Person from any Benefit Plan, Multiemployer Plan or other employee benefit
plan, rights and claims against carriers and shippers, rights to
indemnification, business interruption insurance and proceeds thereof, property,
casualty or any similar type of insurance and any proceeds thereof, proceeds of
insurance covering the lives of key employees on which such Person is
beneficiary and any letter of credit, guarantee, claims, security interest or
other security held by or granted to such Person to secure payment by an Account
Debtor of any of the Receivables.
"GOVERNMENTAL APPROVALS" means all authorizations, consents, approvals,
licenses and
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exemptions of, registrations and filings with, and reports to, all
governmental bodies, whether federal, state, local, foreign national or
provincial, and all agencies thereof.
"GOVERNMENTAL AUTHORITY" means any government or political subdivision or
any agency, authority, bureau, central bank, commission, department or
instrumentality of either, or any court, tribunal, grand jury or arbitrator, in
each case whether foreign or domestic.
"GUARANTY", "GUARANTEED" or to "GUARANTEE," as applied to any obligation of
another Person shall mean and include
(a) a guaranty (other than by endorsement of negotiable instruments for
collection in the ordinary course of business), directly or indirectly, in any
manner, of any part or all of such obligation of such other Person, and
(b) an agreement, direct or indirect, contingent or otherwise, and whether
or not constituting a guaranty, the practical effect of which is to assure the
payment or performance (or payment of damages in the event of nonperformance) of
any part or all of such obligation of such other Person whether by (i) the
purchase of securities or obligations, (ii) the purchase, sale or lease (as
lessee or lessor) of property or the purchase or sale of services primarily for
the purpose of enabling the obligor with respect to such obligation to make any
payment or performance (or payment of damages in the event of nonperformance) of
or on account of any part or all of such obligation or to assure the owner of
such obligation against loss, (iii) the supplying of funds to, or in any other
manner investing in, the obligor with respect to such obligation, (iv) repayment
of amounts drawn down by beneficiaries of letters of credit, or (v) the
supplying of funds to or investing in a Person on account of all or any part of
such Person's obligation under a guaranty of any obligation or indemnifying or
holding harmless, in any way, such Person against any part or all of such
obligation.
"INDEBTEDNESS" of any Person means, without duplication, (a) Liabilities,
(b) all obligations for money borrowed or for the deferred purchase price of
property or services or in respect of reimbursement obligations under letters of
credit, (c) all obligations represented by bonds, debentures, notes and accepted
drafts that represent extensions of credit, (d) Capitalized Lease Obligations,
(e) all obligations (including, during the noncancellable term of any lease in
the nature of a title retention agreement, all future payment obligations under
such lease discounted to their present value in accordance with GAAP) secured by
any Lien to which any property or asset owned or held by such Person is subject,
whether or not the obligation secured thereby shall have been assumed by such
Person, (f) all obligations of other Persons which such Person has Guaranteed,
including, but not limited to, all obligations of such Person consisting of
recourse liability with respect to accounts receivable sold or otherwise
disposed of by such Person, and (g) without duplication of any of the foregoing,
in the case of any Borrower, any Loan.
"INITIAL LOAN" means the Revolving Credit Loan and the Term Loan made to
the Borrowers on the Effective Date.
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"INTELLECTUAL PROPERTY" means, as to any Person, all of such Person's then
owned existing and future acquired or arising patents, patent rights,
copyrights, works which are the subject of copyrights, trademarks, service
marks, trade names, trade styles, patent, trademark and service mark
applications, and all licenses and rights related to any of the foregoing and
all other rights under any of the foregoing, all extensions, renewals, reissues,
divisions, continuations and continuations-in-part of any of the foregoing and
all rights to sue for past, present and future infringements of any of the
foregoing.
"INTEREST EXPENSE" means interest on Indebtedness, including the interest
portion of Capitalized Leases, during the period for which computation is being
made, all as determined in accordance with GAAP, excluding (a) the amortization
of fees and costs incurred with respect to the closing of loans which may be
capitalized as transaction costs in accordance with GAAP, and (b) interest paid
in kind.
"INTERBANK OFFERED RATE" means, with respect to any LIBOR Advance for the
Interest Period applicable thereto, the average (rounded upward to the nearest
one-sixteenth of one percent) per annum rate of interest determined by the
office of the Lender then determining such rate (each such determination to be
conclusive and binding) as of two (2) Business Days prior to the first day of
such Interest Period, as the effective rate at which deposits in immediately
available funds in Dollars are being, have been, or would be offered or quoted
by the Lender to major banks in the applicable interbank market for LIBOR
deposits at any time during the Business Day which is the second (2nd) Business
Day immediately preceding the first day of such Interest Period, for a term
comparable to such Interest Period and in the amount of the requested Advance.
If no such offers or quotes are generally available for such amount, then the
Lender shall be entitled to determine the LIBOR by estimating in its reasonable
judgment the per annum rate (as described above) that would be applicable if
such quotes or offers were generally available.
"INTEREST PERIOD" means, in connection with any LIBOR Advance, the term
selected by the Borrowers or otherwise determined in accordance with this
Agreement, which may have a duration of one (1), three (3) or six (6) months.
Notwithstanding the foregoing, however, (a) any applicable Interest Period which
would otherwise end on a day which is not a Business Day shall end on the next
succeeding Business Day unless such Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding
Business Day, (b) any applicable Interest Period which begins on a day for which
there is no numerically corresponding day in the calendar month during which
such Interest Period is to end shall (subject to CLAUSE (a) above) end on the
last day of such calendar month, and (c) no Interest Period shall extend beyond
the Termination Date, or such earlier date as would interfere hereunder with the
repayment obligations of the Borrowers.
"INVENTORY" means and includes, as to any Person, all of such Person's then
owned or existing and future acquired or arising (a) goods intended for sale or
lease or for display or demonstration, (b) work in process, (c) raw materials
and other materials and supplies of every nature and description used or which
might be used in connection with the manufacture, packing, shipping,
advertising, selling, leasing or furnishing of goods or otherwise used or
consumed in the conduct of business, and (d) documents evidencing and general
intangibles relating to any of the
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foregoing.
"INVESTMENT" means, with respect to any Person: (a) the direct or indirect
purchase or acquisition of any beneficial interest in, including stock,
partnership interests or other securities of, evidence of Indebtedness of or
other security issued by any other Person, (b) any loan, advance or extension of
credit to, or contribution to the capital of, any other Person, excluding
advances to employees in the ordinary course of business for business expenses,
(c) any Guaranty of the obligations of any other Person, or (d) any commitment
or option to take any of the actions described in CLAUSES (a), (b) or(c) above.
"LEC" means any Regional Bell Operating Company, independent local exchange
company, credit card company or provider of local telephone service which is a
party to (whether by assignment or otherwise) a billing and collection
agreement.
"LEC PAYMENT" means all amounts received from a LEC in connection with any
billing and collection agreement.
"LENDER" means NationsBank, N.A., a national banking association, and its
successors and assigns.
"LENDER'S OFFICE" means the office of the Lender specified in or determined
in accordance with the provisions of SECTION 12.01(c).
"LIABILITIES" means all liabilities of a Person determined in accordance
with GAAP and includable on a balance sheet of such Person prepared in
accordance with GAAP.
"LIBOR" means, with respect to the Interest Period applicable thereto, a
simple per annum interest rate determined pursuant to the following formula:
LIBOR = INTERBANK OFFERED RATE
-----------------------------------
1 - LIBOR Reserve Percentage
The LIBOR shall be adjusted automatically as of the effective date of any change
in the LIBOR Reserve Percentage.
"LIBOR ADVANCE" means any Loan which bears interest at the time in question
based on LIBOR.
"LIBOR RESERVE PERCENTAGE" means, for any day, that percentage (expressed
as a decimal) which is in effect from time to time under Regulation D of the
Board of Governors of the Federal Reserve System, as such regulation may be
amended from time to time, or any successor regulation, as the maximum reserve
requirement (including, without limitation, any basic, supplemental, emergency,
special, or marginal reserves) applicable to any member bank with respect to
Eurocurrency liabilities as that term is defined in Regulation D (or against any
other
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category of liabilities that includes deposits by reference to which the
interest rate of the LIBOR Advances is determined), whether or not Lender has
any Eurocurrency liabilities subject to such reserve requirement at that time.
The LIBOR Advances shall be deemed to constitute Eurocurrency liabilities and as
such shall be deemed subject to reserve requirements without the benefit of
credits for proration, exceptions or offsets that may be available from time to
time to Lender.
"LIEN" as applied to the property of any Person means: (a) any mortgage,
deed to secure debt, deed of trust, lien, pledge, charge, lease constituting a
Capitalized Lease Obligation, conditional sale or other title retention
agreement, or other security interest, security title or encumbrance of any kind
in respect of any property of such Person or upon the income or profits
therefrom, (b) any arrangement, express or implied, under which any property of
such Person is transferred, sequestered or otherwise identified for the purpose
of subjecting the same to the payment of Indebtedness or performance of any
other obligation in priority to the payment of the general, unsecured creditors
of such Person, (c) any Indebtedness which is unpaid more than 30 days after the
same shall have become due and payable and which if unpaid might by law
(including, but not limited to, bankruptcy and insolvency laws) or otherwise be
given any priority whatsoever over general unsecured creditors of such Person,
and (d) the filing of, or any agreement to give, any financing statement under
the UCC or its equivalent in any jurisdiction.
"LOAN" means any Revolving Credit Loan or the Term Loan, as well as all
such Loans collectively, and shall include, without, limitation Prime Rate
Advances and LIBOR Advances.
"LOAN DOCUMENTS" means, collectively, this Agreement, the Notes, the
Security Documents and each other instrument, agreement and document executed
and delivered by either Borrower in connection with this Agreement and each
other instrument, agreement or document referred to herein or therein or
contemplated hereby or thereby.
"MATERIALLY ADVERSE EFFECT" means any act, omission, event or undertaking
which would, singly or in the aggregate, have a materially adverse effect upon
(a) the business, assets, properties, liabilities, condition (financial or
otherwise), results of operations or business prospects of either Borrower or
any of their respective Subsidiaries, (b) the respective ability of either
Borrower or any of their respective Subsidiaries to perform any obligations
under this Agreement or any other Loan Document to which it is a party, or (c)
the legality, validity, binding effect, enforceability or admissibility into
evidence of any Loan Document or the ability of Lender to enforce any rights or
remedies under or in connection with any Loan Document; in any case, whether
resulting from any single act, omission, situation, status, event, or
undertaking, together with other such acts, omissions, situations, statuses,
events, or undertakings.
"MONEY BORROWED" means, as applied to Indebtedness, (a) Indebtedness for
money borrowed, (b) Indebtedness, whether or not in any such case the same was
for money borrowed, (i) represented by notes payable and drafts accepted, that
represent extensions of credit, (ii) constituting obligations evidenced by
bonds, debentures, notes or similar instruments, or (iii) upon which interest
charges are customarily paid (other than trade Indebtedness) or that was issued
or assumed as full or partial payment for property, (c) Indebtedness that
constitutes a Capitalized
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Lease Obligation, and (d) Indebtedness that is such by virtue of CLAUSE (f)
of the definition thereof, but only to the extent that the obligations
Guaranteed are obligations that would constitute Indebtedness for Money
Borrowed.
"MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA to which a Borrower or a Related Company is required to
contribute or has contributed within the immediately preceding 6 years.
"NET INCOME" or "NET LOSS" means, as applied to any Person, the net income
(or net loss) of such Person for the period in question after giving effect to
deduction of or provision for all operating expenses, all taxes and reserves
(including reserves for deferred taxes and all other proper deductions), all
determined in accordance with GAAP, provided that there shall be excluded: (a)
the net income (or net loss) of any Person accrued prior to the date it becomes
a Subsidiary of, or is merged into or consolidated with, the Person whose Net
Income is being determined or a Subsidiary of such Person, (b) the net income
(or net loss) of any Person in which the Person whose Net Income is being
determined or any Subsidiary of such Person has an ownership interest, except,
in the case of net income, to the extent that any such income has actually been
received by such Person or such Subsidiary in the form of cash dividends or
similar distributions, (c) any restoration of any contingency reserve, except to
the extent that provision for such reserve was made out of income during such
period, (d) any net gains or losses on the sale or other disposition, not in the
ordinary course of business, of Investments, Business Units and other capital
assets, provided that there shall also be excluded any related charges for taxes
thereon, (e) any net gain arising from the collection of the proceeds of any
insurance policy, (f) any write-up of any asset, and (g) any other extraordinary
item.
"NET PROCEEDS" means proceeds received by either of the Borrowers or any of
their respective Subsidiaries in cash from any Asset Disposition (including
payments under notes or other debt securities received in connection with any
Asset Disposition as and when received and insurance proceeds and awards of
condemnation), NET OF (a) the costs of such sale, lease, transfer or other
disposition (including customary costs incurred in anticipation of the sale and
reasonable legal, advisory and other fees and expenses including mortgage title
and recording expenses associated therewith) and (b) amounts applied to
repayment of Indebtedness (other than the Secured Obligations) secured by a
lien, security interest, claim or encumbrance on the asset or property disposed.
"NET WORTH" of any Person means, as of any date of determination, the total
shareholders' equity (including capital stock, additional paid-in capital and
retained earnings, after deducting treasury stock) which would appear as such on
a balance sheet of such Person prepared in accordance with GAAP.
"NOTES" means collectively the Revolving Credit Note and the Term Note.
"OBLIGOR" means both of the Borrowers, each party to the Security Documents
(other than the Lender), and each other party at any time primarily or
secondarily, directly or indirectly, liable
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on any of the Secured Obligations.
"OPERATING LEASE" means any lease (other than a lease constituting a
Capitalized Lease Obligation) of real or personal property.
"PBGC" means the Pension Benefit Guaranty Corporation or any successor
agency.
"PERMITTED ASSET DISPOSITIONS" shall mean and include the sale by ILD of
its operations associated with prisons and correctional facilities for not less
than $1,000,000, which sale shall only be permitted hereunder in the event that
no Event of Default has occurred hereunder and that after giving effect to the
consummation of such a sale an Event of Default shall not occur hereunder;
PROVIDED, HOWEVER, that the first $500,000 of the Net Proceeds of such sale
shall be applied to the outstanding principal and interest due under the Term
Note and the second $500,000 of the Net Proceeds of such sale shall be applied
to the Sirrom Subordinated Indebtedness, with the remainder of such Net Proceeds
being applied to the outstanding principal and interest due under the Revolving
Credit Note.
"PERMITTED DISTRIBUTIONS" means dividends declared by Borrowers with
respect to such Borrower's capital stock together with scheduled payments of
interest due in connection with the Shareholder Subordinated Indebtedness, in
the aggregate, in an amount not to exceed $700,000 for fiscal year 1997, and in
an amount not to exceed $1,500,000 in any fiscal year thereafter.
"PERMITTED GUARANTIES" means only such guaranties, if any, as are set forth
and disclosed in SCHEDULE 5.01(i) attached hereto and incorporated herein.
"PERMITTED INDEBTEDNESS FOR MONEY BORROWED" means Indebtedness for Money
Borrowed which is not secured by a Lien other than a Permitted Lien and which,
in an aggregate amount as to both Borrowers, does not at any time exceed
$250,000.
"PERMITTED INVESTMENTS" means Investments of either of the Borrowers in:
(a) negotiable certificates of deposit, time deposits and banker's acceptances
issued by the Lender or any Affiliate of the Lender or by any United States bank
or trust company having capital, surplus and undivided profits in excess of
$250,000,000, (b) any direct obligation of the United States of America or any
agency or instrumentality thereof which has a remaining maturity at the time of
purchase of not more than one year and repurchase agreements relating to the
same, (c) sales on credit in the ordinary course of business on terms customary
in the industry, and (d) notes, accepted in the ordinary course of business,
evidencing overdue accounts receivable arising in the ordinary course of
business.
"PERMITTED LIENS" means: (a) Liens securing taxes, assessments and other
governmental charges or levies (excluding any Lien imposed pursuant to any of
the provisions of ERISA) or the claims of materialmen, mechanics, carriers,
warehousemen or landlords for labor, materials, supplies or rentals incurred in
the ordinary course of business, but (i) in all cases, only if payment shall not
at the time be required to be made in accordance with SECTION 8.04, and (ii) in
the case of
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warehousemen or landlords controlling locations where Inventory is located,
only if such liens have been waived or subordinated to the Security Interest
in a manner satisfactory to the Lender; (b) Liens consisting of deposits or
pledges made in the ordinary course of business in connection with, or to
secure payment of, obligations under workers' compensation, unemployment
insurance or similar legislation or under surety or performance bonds, in
each case arising in the ordinary course of business; (c) Liens constituting
encumbrances in the nature of zoning restrictions, easements and rights or
restrictions of record on the use of the Real Estate, which in the sole
judgment of the Lender do not materially detract from the value of such Real
Estate or impair the use thereof in the business of the Borrower which owns
such Real Estate; (d) Purchase Money Liens securing Permitted Purchase Money
Indebtedness; (e) Liens of the Lender arising under this Agreement and the
other Loan Documents; (f) Liens arising out of or resulting from any judgment
or award, the time for the appeal or petition for rehearing of which shall
not have expired, or in respect of which any subject Borrower is fully
protected by insurance or in respect of which any such Borrower shall in good
faith be prosecuting an appeal or proceeding for a review and in respect of
which a stay of execution pending such appeal or proceeding for review shall
have been secured, and as to which appropriate reserves have been established
on the books of any such Borrower; and (g) Liens under the Sirrom
Subordinated Indebtedness.
"PERMITTED PURCHASE MONEY INDEBTEDNESS" means Purchase Money Indebtedness
secured only by Purchase Money Liens and Capitalized Lease Obligations, incurred
by either or both Borrowers after the Agreement Date, up to an aggregate amount
outstanding (as to both Borrowers) at any time equal to $1,000,000.
"PERSON" means an individual, corporation, partnership, association, trust
or unincorporated organization or a government or any agency or political
subdivision thereof.
"PREPAYMENT PREMIUM" means an amount equal to (i) $750,000, in the event
Borrowers terminate the Revolving Credit Facility during the twelve (12) month
period immediately following the Effective Date, (ii) $300,000, in the event
Borrowers terminate the Revolving Credit Facility during the twelve (12) month
period following the first (1st) anniversary of the Effective Date, or (iii)
$100,000, in the event Borrowers terminate the Revolving Credit Facility at any
time thereafter other than on the Termination Date; PROVIDED, HOWEVER, that no
amount will be due under this subclause (iii) in the event the Revolving Credit
Facility is terminated by Borrowers and replaced by a facility with NationsBank
Capital Markets, Inc.
"PRIME RATE" means during the period from the Effective Date through the
last day of the month in which the Effective Date falls, the per annum rate of
interest publicly announced by the Lender at its principal office as its "prime
rate" as in effect on the Effective Date, and thereafter during each succeeding
calendar month, means such "prime rate" as in effect on the last Business Day of
the immediately preceding calendar month. Any change in an interest rate
resulting from a change in the Prime Rate shall become effective as of 12:01
a.m. on the first day of the month following the month in which such change was
announced. The Prime Rate is a reference used by the Lender in determining
interest rates on certain loans and is not intended to be the lowest rate of
interest charged on any extension of credit to any debtor.
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"PRIME RATE ADVANCE" means any Loan which bears interest at the time in
question based on the Prime Rate.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness created to finance the
payment of all or any part of the purchase price (not in excess of the fair
market value thereof) of any tangible asset (other than Inventory) and incurred
at the time of or within 10 days prior to or after the acquisition of such
tangible asset.
"PURCHASE MONEY LIEN" means any Lien securing Purchase Money Indebtedness,
but only if such Lien shall at all times be confined solely to the tangible
asset (other than Inventory) the purchase price of which was financed through
the incurrence of the Purchase Money Indebtedness secured by such Lien.
"REAL ESTATE" means all of each Borrower's now-owned and hereafter acquired
interests in real property.
"RECEIVABLES" means and includes, as to any Person, all of such Person's
then owned or existing and future acquired or arising (a) rights to the payment
of money or other forms of consideration of any kind (whether classified under
the UCC as accounts, contract rights, chattel paper, general intangibles or
otherwise) including, but not limited to, accounts receivable, letters of credit
and the right to receive payment thereunder, chattel paper, tax refunds,
insurance proceeds, Contract Rights, notes, drafts, instruments, documents,
acceptances and all other debts, obligations and liabilities in whatever form
from any Person and guaranties, security and Liens securing payment thereof, (b)
goods, whether now owned or hereafter acquired, and whether sold, delivered,
undelivered, in transit or returned, which may be represented by, or the sale or
lease of which may have given rise to, any such right to payment or other debt,
obligation or liability, including, without limitation, call detail records
(whether or not validated, rated or otherwise processed in form for delivery to
a billing and collection agent), and (c) cash and non-cash proceeds of any of
the foregoing.
"RELATED COMPANY" means, as to any Person, any (a) corporation which is a
member of the same controlled group of corporations (within the meaning of
Section 414(b) of the Code) as such Person, (b) partnership or other trade or
business (whether or not incorporated) under common control (within the meaning
of Section 414(c) of the Code) with such Person, or (c) member of the same
affiliated service group (within the meaning of Section 414(m) of the Code) as
such Person or any corporation described in CLAUSE (a) above or any partnership,
trade or business described in CLAUSE (b) above.
"RELATED TRANSACTION DOCUMENTS" means the WorldCom Acquisition Documents,
the Contribution Documents, the Subordination Documents and the Loan Documents.
"RELATED TRANSACTIONS" means the WorldCom Acquisition, the Contributions
and the issuance of ILD capital stock in connection therewith, the execution and
delivery of the Related
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Transactions Documents, the performance of the other transactions
contemplated thereby, the funding of the Term Loan and each borrowing under
the Revolving Loan on the Effective Date.
"RESTRICTED DISTRIBUTION" by any Person means (a) its retirement,
redemption, purchase, or other acquisition for value of any capital stock or
other equity securities or partnership interests issued by such Person, (b) the
declaration or payment of any dividend or distribution on or with respect to any
such securities or partnership interests, (c) any loan or advance by such Person
to, or other investment by such Person in, the holder of any of such securities
or partnership interests, (d) any other payment by such Person in respect of
such securities or partnership interests, and (e) any payment made to retire, or
to obtain the surrender of, any outstanding warrants, options or rights to
acquire any shares of capital stock of such Person now or hereafter outstanding.
"RESTRICTED PAYMENT" means (a) any redemption, repurchase or prepayment or
other retirement, prior to the stated maturity thereof or prior to the due date
of any regularly scheduled installment or amortization payment with respect
thereto, of any Indebtedness of a Person (other than the Secured Obligations and
trade debt), and (b) the payment by any Person of the principal amount of or
interest on any Indebtedness (other than trade debt) owing to an Affiliate of
such Person.
"REVOLVING CREDIT FACILITY" means the facility for the Revolving Credit
Loans in the principal sum of up to $20,000,000.
"REVOLVING CREDIT LOAN" means any loan made to the Borrowers pursuant to
SECTION 2A.1. Each and all Revolving Credit Loans made to one or more Borrowers
shall be deemed made to both Borrowers, irrespective of whether the proceeds of
same are initially or ultimately distributed to a single Borrower or to more
than one Borrower.
"REVOLVING CREDIT NOTE" means the Revolving Credit Note made by the
Borrowers payable to the order of the Lender evidencing the joint and several
obligation of the Borrowers to pay the aggregate unpaid principal amount of all
Revolving Credit Loans made to them by the Lender (and any promissory note or
notes that may be issued from time to time in substitution, renewal, extension,
replacement or exchange therefor, whether payable to the Lender or a different
lender, whether issued in connection with a Person becoming a lender after the
Effective Date or otherwise), substantially in the form of EXHIBIT A hereto,
with all blanks properly completed.
"SCHEDULE OF RECEIVABLES" means the schedule delivered by each Borrower to
the Lender pursuant to the provisions of SECTION 7.13(a).
"SECURED OBLIGATIONS" means, in each case whether now in existence or
hereafter arising, (a) the principal of and interest and premium, if any, on the
Loans, and (b) all indebtedness, liabilities, obligations, overdrafts, covenants
and duties of both of the Borrowers or either of the Borrowers to the Lender or
any Affiliate of the Lender of every kind, nature and description, direct or
indirect, absolute or contingent, due or not due, contractual or tortious,
liquidated or unliquidated and whether or not evidenced by any note and whether
or not for the payment of money under or in
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respect of this Agreement, any Note or any of the other Loan Documents.
"SECURITY DOCUMENTS" means each of (a) the Financing Statements, and (b)
each other writing executed and delivered by any Person securing the Secured
Obligations or evidencing such security.
"SECURITY INTEREST" means the Liens of the Lender on and in the Collateral
effected hereby or by any of the Security Documents or pursuant to the terms
hereof or thereof.
"SENIOR FUNDED DEBT" means collectively, the Secured Obligations,
Capitalized Leases and all other senior Indebtedness of the Borrowers.
"SHAREHOLDER SUBORDINATED INDEBTEDNESS" means the Indebtedness (not to
exceed $2,000,000 in the aggregate) owed by ILD to each of Intellicall, Inc.,
Triad-ILD Partners, L.P. and Morris Telecommunications, LLC.
"SIRROM SUBORDINATED INDEBTEDNESS" means the Indebtedness (not to exceed
$7,000,000) owed by Borrowers to Sirrom Capital Corporation and Reedy River
Ventures Limited Partnership, pursuant to that certain Loan and Security
Agreement, dated May 13, 1996, among Sirrom Capital Corporation, Reedy River
Ventures Limited Partnership and the Borrowers.
"SIRROM SUBORDINATION AGREEMENT" means a Subordination Agreement in form
and substance satisfactory to Lender in its sole discretion whereby Sirrom
Capital Corporation and Reedy River Ventures Limited Partnership agrees to
subordinate the Sirrom Subordinated Indebtedness to the Secured Obligations.
"SUBORDINATED INDEBTEDNESS" means any Indebtedness for money borrowed of a
Borrower which is subordinated to the Secured Obligations on terms and
conditions acceptable to the Lender in its sole discretion, including, without
limitation, the Sirrom Subordinated Indebtedness and the Shareholder
Subordinated Indebtedness.
"SUBORDINATION DOCUMENTS" shall mean and include the Sirrom Subordination
Agreement and the subordination agreements, in form and substance satisfactory
to Lender in its sole discretion, wherein each of Intellicall, Inc., Triad-ILD
Partners, L.P. and Morris Telecommunications, LLC have subordinated any and all
Indebtedness owing by ILD to each of them to the Secured Obligations.
"SUBSIDIARY" when used to determine the relationship of a Person to another
Person, means a Person of which an aggregate of 50% or more of the stock of any
class or classes or 50% or more of other ownership interests is owned of record
or beneficially by such other Person or by one or more Subsidiaries of such
other Person or by such other Person and one or more Subsidiaries of such
Person, (i) if the holders of such stock or other ownership interests (A) are
ordinarily, in the absence of contingencies, entitled to vote for the election
of a majority of the directors (or other individuals performing similar
functions) of such Person, even though the right so to vote has been
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suspended by the happening of such a contingency, or (B) are entitled, as
such holders, to vote for the election of a majority of the directors (or
individuals performing similar functions) of such Person, whether or not the
right so to vote exists by reason of the happening of a contingency, or (ii)
in the case of such other ownership interests, if such ownership interests
constitute a majority voting interest.
"SWITCHES" shall refer to those two (2) certain DEX 600 telecom switches
and those two (2) certain Harris switches, which may be subject to a
sale-leaseback transaction, which transaction shall be acceptable in form and
substance to Lender in its sole discretion.
"TERM LOAN" means the term loan made to the Borrowers pursuant to SECTION
2B.1 hereof in an amount not to exceed $5,000,000.
"TERM NOTE" means the Term Note made by the Borrowers payable to the order
of the Lender evidencing the joint and several obligation of the Borrowers to
pay the aggregate unpaid principal amount of the Term Loan made to them by the
Lender (and any promissory note or notes that may be issued from time to time in
substitution, renewal, extension, replacement or exchange therefor, whether
payable to the Lender or a different Lender, whether issued in connection with a
Person becoming a Lender after the Effective Date or otherwise), substantially
in the form of EXHIBIT B hereto.
"TERMINATION DATE" means the earliest of (i) February 13, 2001, or (ii)
such later date to which the termination of the Revolving Credit Facility shall
be extended pursuant to SECTION 2A.5.
"TERMINATION EVENT" means (a) a "Reportable Event" as defined in Section
4043(b) of ERISA, but excluding any such event as to which the provision for 30
days' notice to the PBGC is waived under applicable regulations, (b) the filing
of a notice of intent to terminate a Benefit Plan or the treatment of a Benefit
Plan amendment as a termination under Section 4041 of ERISA, or (c) the
institution of proceedings to terminate a Benefit Plan by the PBGC under Section
4042 of ERISA or the appointment of a trustee to administer any Benefit Plan.
"TOTAL LIABILITIES" means the aggregate of both Borrower's Liabilities
(excluding Subordinated Indebtedness).
"UCC" means the Uniform Commercial Code as in effect from time to time in
the State of Georgia.
"UNFUNDED CAPITAL EXPENDITURES" means Capital Expenditures which are paid
for by a Person other than with the proceeds of Indebtedness for Money Borrowed
(other than the Loans) incurred to finance such Capital Expenditures and other
than those represented by Capitalized Lease Obligations.
"UNFUNDED VESTED ACCRUED BENEFITS" means, with respect to any Benefit Plan
at any time, the amount (if any) by which (a) the present value of all vested
nonforfeitable benefits under such
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Benefit Plan exceeds (b) the fair market value of all Benefit Plan assets
allocable to such benefits, as determined using such reasonable actuarial
assumptions and methods as are specified in the Schedule B (Actuarial
Information) to the most recent Annual Report (Form 5500) filed with respect
to such Benefit Plan.
"WHOLESALE BILLING AND COLLECTION CUSTOMER" shall mean and refer to those
customers of each Borrower for whom such Borrower solely provides billing and
collection services and shall not include those customers of a Borrower that,
pursuant to the agreement between such Borrower and such customer, a Borrower
purchases title to the Receivables that are being collected in connection
therewith.
"WHOLESALE BILLING AND COLLECTION RECEIVABLE(S)" shall mean and include all
Receivables for which a Borrower acts as collection and billing agent for a
Wholesale Billing and Collection Customer, other than that portion of such
Receivable that is due and owing to such Borrower by such Wholesale Billing and
Collection Customer for services rendered by such Borrower pursuant to the terms
of the agreement between such Borrower and such Wholesale Billing and Collection
Customer.
"WORLDCOM" means WorldCom, Inc.
"WORLDCOM ACQUISITION" has the meaning ascribed to that term in the
Recitals hereof.
"WORLDCOM ACQUISITION DOCUMENTS" means collectively the WorldCom Agreement
and all other agreements, instruments and documents executed in connection with
the WorldCom Acquisition, excluding the Loan Documents, the Contribution
Documents and documents which address only the Switches or the premises for the
Switches.
"WORLDCOM AGREEMENT" has the meaning ascribed to that term in the Recitals.
Section 1.02 OTHER REFERENTIAL PROVISIONS.
(a) All terms in this Agreement, the Exhibits and Schedules hereto shall
have the same defined meanings when used in any other Loan Documents, unless the
context shall require otherwise.
(b) Except as otherwise expressly provided herein, all accounting terms
not specifically defined or specified herein shall have the meanings generally
attributed to such terms under GAAP including, without limitation, applicable
statements and interpretations issued by the Financial Accounting Standards
Board and bulletins, opinions, interpretations and statements issued by the
American Institute of Certified Public Accountants or its committees.
(c) All personal pronouns used in this Agreement, whether used in the
masculine, feminine or neuter gender, shall include all other genders; the
singular shall include the plural, and the plural shall include the singular.
In any circumstance where use of the term "Borrower" as
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opposed to the term "Borrowers," or vice versa, would limit, diminish or
otherwise impair or negatively affect any of Lender's rights hereunder, the
plural shall be substituted for the singular, or vice versa, in such manner
as will result in the maintenance or enlargement of Lender's rights hereunder
or pursuant hereto. By way of example, but not in limitation, if a reference
to "Borrowers' property" would otherwise be construed as referring only to
property which is jointly owned by both Borrowers, such reference shall
instead be construed as referring to the aggregate total of all of each
Borrower's property.
(d) The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provisions of this Agreement.
(e) Titles of Articles and Sections in this Agreement are for convenience
only, do not constitute part of this Agreement and neither limit nor amplify the
provisions of this Agreement, and all references in this Agreement to Articles,
Sections, Subsections, paragraphs, clauses, subclauses, Schedules or Exhibits
shall refer to the corresponding Article, Section, Subsection, paragraph, clause
or subclause of, or Schedule or Exhibit attached to, this Agreement, unless
specific reference is made to the articles, sections or other subdivisions or
divisions of, or to schedules or exhibits to, another document or instrument.
(f) Each definition of a document in this Agreement shall include such
document as amended, modified, supplemented or restated from time to time in
accordance with the terms of this Agreement.
(g) Except where specifically restricted, reference to a party to a Loan
Document includes that party and its successors and assigns permitted hereunder
or under such Loan Document.
(h) Unless otherwise specifically stated, whenever a time is referred to
in this Agreement or in any other Loan Document, such time shall be the local
time in the city in which the principal office of Lender is located.
(i) Whenever the phrase "to the knowledge of the Borrower" or words of
similar import relating to the knowledge of either Borrower are used herein,
such phrase shall mean and refer to (i) the actual knowledge of the Chairman,
President or chief financial officer of a Borrower or (ii) the knowledge that
such officers would have obtained if they had engaged in good faith in the
diligent performance of their duties, including the making of such reasonable
specific inquiries as may be necessary of the appropriate persons in a good
faith attempt to ascertain the accuracy of the matter to which such phrase
relates.
(j) The terms accounts, chattel paper, documents, equipment, instruments,
general intangibles and inventory, as and when used (without being capitalized)
in this Agreement or the Security Documents, shall have the meanings given those
terms in the UCC.
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(k) All references herein to specific times of day shall refer to Eastern
Standard Time, whether during daylight savings time or otherwise.
Section 1.03 EXHIBITS AND SCHEDULES. All Exhibits and Schedules attached
hereto are by reference made a part hereof.
ARTICLE 2 - REVOLVING CREDIT FACILITY
A. REVOLVING CREDIT FACILITY
Section 2A.1 REVOLVING CREDIT LOANS. Upon the terms and subject to the
conditions of, and in reliance upon the representations and warranties made
under, this Agreement, the Lender shall make Revolving Credit Loans to the
Borrowers from time to time from the Effective Date to the Termination Date, as
requested by the Borrowers in accordance with the terms of SECTION 2A.2, in an
aggregate principal amount outstanding not to exceed at any time the LESSER OF
(a) the Revolving Credit Facility AND (b) the Borrowing Base, MINUS, in each
case, the outstanding principal amount of all outstanding Revolving Credit
Loans. It is expressly understood and agreed that the Lender may and at present
intends to use the lesser of the amounts referred to in the foregoing SUBCLAUSES
(a) and(b) as a maximum ceiling on Revolving Credit Loans; PROVIDED, HOWEVER,
that it is agreed that should Revolving Credit Loans exceed the ceiling so
determined or any other limitation set forth in this Agreement, such Revolving
Credit Loans shall nevertheless constitute Secured Obligations and, as such,
shall be entitled to all benefits thereof and security therefor. The principal
amount of any Revolving Credit Loan which is repaid may be reborrowed by the
Borrowers in accordance with the terms of this ARTICLE 2A. The Lender is hereby
authorized to record each repayment of principal of the Revolving Credit Loans
in its books and records, such books and records constituting PRIMA FACIE
evidence of the accuracy of the information contained therein.
Section 2A.2 MANNER OF BORROWING REVOLVING CREDIT LOANS. Borrowings of
the Revolving Credit Loans shall be made as follows:
(a) REQUESTS FOR BORROWING. A request for a borrowing shall be made, or
shall be deemed to be made, in the following manner:
(i) with respect to the Revolving Credit Loan to be made to the
Borrowers on the Effective Date, the Borrowers shall give the Lender at
least two Business Days' prior written notice of the Effective Date, which
notice shall be irrevocable, and, as to subsequent Revolving Credit Loans,
the Borrowers may give the Lender notice, before 1:00 p.m. on the proposed
borrowing date (unless the proposed borrowing date is the last Business Day
of the month, in which case notice shall be given before 12:00 noon) of its
intention to borrow specifying the amount of the proposed borrowing and the
proposed borrowing date; PROVIDED, HOWEVER, that if any notice referred to
in this CLAUSE (a)(i) is received after 1:00 p.m. or 12:00 noon, as
applicable, the proposed borrowing will be postponed automatically
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to the next Business Day;
(ii) whenever a check is presented to the Lender for payment against
the Disbursement Account in an amount greater than the then available
balance in such account, such presentation shall be deemed to be a request
for a borrowing on the date of such notice in an amount equal to the excess
of such check over such available balance; and
(iii) unless payment is otherwise made by the Borrowers, the
maturity of any Secured Obligation required to be paid shall be deemed to
be a request for a borrowing on the due date in the amount required to pay
such Secured Obligation.
(b) DISBURSEMENT OF LOANS. The Borrowers hereby irrevocably authorize the
Lender to disburse the proceeds of each borrowing requested, or deemed to be
requested, pursuant to this SECTION 2A.2 as follows: (i) the proceeds of each
borrowing requested under SECTION 2A.2(a)(i) or (ii) shall be disbursed by the
Lender in lawful money of the United States of America in immediately available
funds, (A) in the case of the initial borrowing, in accordance with the terms of
the letter from the Borrowers to the Lender referred to in SECTION 4.01(a)(12),
and (B) in the case of each subsequent borrowing, by credit to the Disbursement
Account or to such other account as may be agreed upon by the Borrowers and the
Lender from time to time; and (ii) the proceeds of each borrowing requested
under SECTION 2A.2(a)(iii) shall be disbursed by the Lender by way of direct
payment of the relevant principal, interest or other Secured Obligation, as the
case may be.
Section 2A.3 REPAYMENT OF REVOLVING CREDIT LOANS. The Revolving Credit
Loans will be repaid as follows: (a) whether or not any Default or Event of
Default has occurred, the outstanding principal amount of all the Revolving
Credit Loans is due and payable, and shall be repaid by the Borrowers in full
together with accrued and unpaid interest on the amount repaid to the date of
repayment, on the Termination Date; (b) if at any time the aggregate unpaid
principal amount of the Revolving Credit Loans then outstanding exceeds the
lesser of the amounts referred to in CLAUSES (a) and (b) of SECTION 2.A1, the
Borrowers shall repay the Revolving Credit Loans in an amount sufficient to
reduce the aggregate unpaid principal amount of such Loans by an amount equal to
such excess, together with accrued and unpaid interest on the amount repaid to
the date of repayment; and (c) the Borrowers hereby instruct the Lender to repay
the Revolving Credit Loans outstanding on any day in an amount equal to the
amount received by the Lender on such day pursuant to the cash management system
maintained by Borrower pursuant to SECTION 7.01.
Section 2A.4 REVOLVING CREDIT NOTE. The Lender's Revolving Credit Loans
and the obligation of the Borrowers to repay such Loans shall also be evidenced
by a single Revolving Credit Note payable to the order of the Lender. Such Note
shall be dated the Effective Date and be duly and validly executed and delivered
by the Borrowers.
Section 2A.5 EXTENSION OF FACILITY. The Termination Date shall be
automatically extended for successive one-year periods (up to a maximum
cumulative term of up to twenty (20) years) unless either the Lender or the
Borrowers provides to the other written notice of termination not less than 60
days prior to the then effective Termination Date.
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B. TERM LOAN FACILITY
Section 2B.1 TERM LOAN. Upon the terms and subject to the conditions of,
and in reliance upon the representations and warranties made under, this
Agreement, the Lender agrees to make the Term Loan to the Borrowers on the
Effective Date in the amount of $5,000,000.
Section 2B.2 MANNER OF BORROWER AND DISBURSING TERM LOAN. Provided that
the Borrowers have given the Lender at least two (2) Business Days' prior
written notice of the occurrence of the Effective Date, upon satisfaction of the
applicable conditions set forth in ARTICLE 4, the Lender shall make the amount
of the Term Loan available to the Borrowers on the Effective Date in same day
funds in accordance with the instructions set forth in the letter from the
Borrowers to the Lender referred to in SECTION 4.01(a)(12).
Section 2B.3 REPAYMENT OF TERM LOAN; REQUIRED PREPAYMENTS. In addition to
the mandatory reduction of the Term Note required pursuant to SECTION 11.01(t),
the outstanding principal balance of the Term Loan is due and payable in (i)
eight (8) consecutive quarterly installments in an amount equal to $300,000
each, commencing on the last day of the first (1st) fiscal quarter of 1998 and
continuing on the last day of each and every fiscal quarter thereafter through
and including the last fiscal quarter in 1999, and (ii) four (4) consecutive
quarterly installments in an amount equal to $420,000 each, commencing on the
last day of the first (1st) fiscal quarter of 2000 through and including the
last fiscal quarter of 2000 and (iii) one (1) final installment in an amount
equal to $420,000 on the earlier to occur of (A) the Termination Date or (B) the
last day of the first (1st) fiscal quarter of 2001. Any portion of the Term
Loan repaid may not be reborrowed.
Section 2B.4 TERM NOTE. The Term Loan and the joint and several
obligation of the Borrowers to repay such Loan shall be evidenced by a single
Term Note payable to the order of the Lender. Such Note shall be dated the
Effective Date and be duly and validly executed and delivered by the Borrowers.
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ARTICLE 3 - GENERAL LOAN PROVISIONS
Section 3.01 INTEREST. (a) The Borrowers shall pay interest on the unpaid
principal amount of each Loan for each day from the day such Loan is made until
the date on which such Loan is due (whether at maturity, by reason of
acceleration or otherwise) (i) at a rate per annum equal, (w) in the case of
Prime Rate Advances made prior to December 30, 1998, to the sum of the Prime
Rate PLUS the Applicable Spread, (x) in the case of Prime Rate Advances made on
or after December 31, 1998, to the sum of the Prime Rate PLUS the Applicable
Margin, (y) in the case of LIBOR Advances made prior to December 30, 1998, to
the sum of LIBOR PLUS the Applicable Spread, and (z) in the case of LIBOR
Advances made on or after December 31, 1998, to the sum of LIBOR PLUS the
Applicable Margin, and (ii) at a rate per annum equal, in the case of the Term
Loan, (as identified pursuant to SECTION 3.02(b)) either (y) to a fixed rate
equal to 11.5% per annum, or (z) to the Prime Rate PLUS 2.5% per annum.
(b) The Borrowers shall pay interest on the unpaid principal amount of
each Secured Obligation other than a Loan for each day from the day such Secured
Obligation becomes due and payable until such Secured Obligation is paid at the
rate per annum applicable to Revolving Credit Loans and the Term Loan, payable
monthly in arrears on the first (1st) day of each month following the Effective
Date.
(c) From and after the occurrence of an Event of Default, the unpaid
principal amount of each Secured Obligation shall bear interest until paid in
full (or, if earlier, until such Event of Default is cured, or waived in writing
by the Lender) at a rate per annum equal to the Default Margin plus the rate
otherwise in effect under SECTION 3.01(a) or (b), payable on demand. The
interest rate provided for in this SECTION 3.01(c) shall to the extent permitted
by applicable law apply to and accrue on the amount of any judgment entered with
respect to any Secured Obligation and shall continue to accrue at such rate
during any proceeding described in SECTION 11.01(g) or (h).
(d) The interest rates provided for in SECTIONS 3.01(a), (b) and (c) shall
be computed on the basis of a year of 360 days and the actual number of days
elapsed.
(e) It is not intended by the Lender, and nothing contained in this
Agreement or any Note shall be deemed, to establish or require the payment of a
rate of interest in excess of the maximum rate permitted by applicable law (the
"MAXIMUM RATE"). If, in any month, the Effective Interest Rate, absent such
limitation, would have exceeded the Maximum Rate, then the Effective Interest
Rate for that month shall be the Maximum Rate, and if, in future months, the
Effective Interest Rate would otherwise be less than the Maximum Rate, then the
Effective Interest Rate shall remain at the Maximum Rate until such time as the
amount of interest paid hereunder equals the amount of interest which would have
been paid if the same had not been limited by the Maximum Rate. In this
connection, in the event that, upon payment in full of the Secured Obligations,
the total amount of interest paid or accrued under the terms of this Agreement
is less than the total amount of interest which would have been paid or accrued
if the Effective Interest Rate had at all times been in effect, then the
Borrowers shall, to the extent permitted by applicable law, pay to the
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Lender an amount equal to the difference between (i) the LESSER OF (A) the
amount of interest which would have been charged if the Maximum Rate had, at
all times, been in effect and (B) the amount of interest which would have
accrued had the Effective Interest Rate, at all times, been in effect, and
(ii) the amount of interest actually paid or accrued under this Agreement.
In the event the Lender receives, collects or applies as interest any sum in
excess of the Maximum Rate, such excess amount shall be applied to the
reduction of the principal balance of the applicable Secured Obligation, and,
if no such principal is then outstanding, such excess or part thereof
remaining shall be paid to the Borrowers.
Section 3.02 CHOICE OF INTEREST RATE; LIBOR PROVISIONS.
(a) REVOLVING CREDIT LOANS.
(i) CHOICE OF INTEREST RATE. Each Advance shall, at the option of
the Borrowers, be made as a Prime Rate Advance or a LIBOR Advance. Any
notice given to the Lenders in connection with a requested Advance
hereunder shall be given prior to 12:00 noon in order for such Business Day
to count toward the minimum number of Business Days required. If the
Borrowers fail to give the Lender timely notice of their selection of a
LIBOR Advance, or if for any reason a determination of LIBOR for any
advance is not timely concluded, the Prime Rate shall apply to such
Advance.
(ii) PRIME RATE ADVANCES.
(A) INITIAL ADVANCES. The Borrowers shall give the Lender, in the
case of Prime Rate Advances, irrevocable written notice (or telephonic
notice from an officer of ILD confirmed immediately in writing) of their
election of a Prime Rate Advance; PROVIDED, HOWEVER, that the failure by
the Borrowers to confirm any telephonic notice with a written notice shall
not invalidate any telephonic notice so given. Lender shall not incur any
liability to Borrowers in acting upon any telephonic notice referred to
above that Lender believes in good faith to have been given by a duly
authorized officer or other person authorized to act on behalf of
Borrowers.
(B) REPAYMENTS AND REBORROWINGS. The Borrowers may repay a Prime
Rate Advance at any time and (a) reborrow all or a portion of the principal
amount thereof as one or more Prime Rate Advances or LIBOR Advances, or (b)
not reborrow all or any portion of such Prime Rate Advance.
(C) PREPAYMENT. The principal amount of any Prime Rate Advance may
be repaid in full or in part at any time without penalty.
(iii) LIBOR ADVANCES.
(A) INITIAL ADVANCES. The Borrowers shall give the Lender, in the
case of LIBOR Advances, at least two (2) Business Days irrevocable written
notice (or telephonic
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notice from an officer of ILD confirmed immediately in writing) of their
election of a LIBOR Advance; PROVIDED, HOWEVER, that the failure by the
Borrowers to confirm any telephonic notice with a written notice shall
not invalidate any telephonic notice so given. The Lender, whose
determination shall be conclusive, shall determine the available LIBOR
and shall notify the Borrowers of such LIBOR. Lender shall not incur
any liability to Borrowers in acting upon any telephonic notice referred
to above that Lender believes in good faith to have been given by a duly
authorized officer or other person authorized to act on behalf of
Borrowers.
(B) REPAYMENT AND REBORROWINGS. At least two (2) Business Days prior
to the end of the Interest Period for a LIBOR Advance, the Borrowers shall
give the Lender written notice (or telephonic notice from a Borrower
Representative confirmed immediately in writing) specifying whether all or
a portion of any LIBOR Advance outstanding on such maturity date (a) is to
be repaid and then reborrowed in whole or in part as a Prime Rate Advance,
or (c) is to be repaid and not reborrowed; PROVIDED, HOWEVER, that the
failure by the Borrowers to confirm any telephonic notice with a written
notice shall not invalidate any telephonic notice so given. The Borrowers'
failure to give a proper notice shall be deemed a request to reborrow the
entire maturing amount as a Prime Rate Advance. Upon the end of such
Interest Period such LIBOR Advance will, subject to the provisions hereof,
be so repaid and, as applicable, reborrowed.
(C) LIMITATION ON LIBOR ADVANCES. Each LIBOR Advance shall be in an
amount of $500,000 or an integral multiple thereof. Notwithstanding
anything to the contrary contained herein, the Borrowers shall not request,
and the Lender shall not make, additional LIBOR Advances so long as there
remains outstanding more than two (2) prior LIBOR Advances under this
Agreement. It is the express intent of the parties hereto that no more
than three (3) LIBOR Advances may be outstanding under this Agreement at
any one time.
(D) PREPAYMENT. LIBOR Advances may be prepaid prior to the
applicable maturity date upon four (4) Business Days prior written notice
to the Lender, provided that the Borrowers shall reimburse the Lender, on
the earlier of demand or the Termination Date, for any loss or out-of-
pocket expenses incurred by the Lender in connection with such prepayment.
Any notice of prepayment of a LIBOR Advance shall be irrevocable.
(b) TERM LOAN. The Borrowers shall give the Lender at least two (2)
Business Days' prior to the Effective Date, irrevocable written notice (or
telephonic notice from a Borrower Representative confirmed immediately in
writing) of the applicable interest rate for the Term Loan.
(c) PREPAYMENT OF TERM LOAN. Immediately upon receipt by either Borrower
or any Subsidiary of the Net Proceeds of any Permitted Asset Disposition, such
Borrower or Subsidiary shall pay such the first $500,000 of the Net Proceeds to
Lender.
(d) LIBOR
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(i) DETERMINED INADEQUATE OR UNFAIR. Notwithstanding anything
contained herein to the contrary, if with respect to any proposed LIBOR
Advance for any Interest Period the Lender determines that deposits in
Dollars (in the applicable amount) are not being offered to the Lender in
the relevant market for such Interest Period on a basis sufficient to
permit a fair establishment of LIBOR, the Lender shall forthwith give
notice to the Borrowers, whereupon until the Lender notifies the Borrowers
that the circumstances giving rise to such situation no longer exist, and
the obligation of the Lender to make LIBOR Advances shall be suspended.
(ii) ILLEGALITY. If any Applicable Law, or any change therein, or any
interpretation or change in interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by the Lender with
any request or directive (whether or not having the force of law) of any
such authority, central bank or comparable agency, shall make it unlawful
or impossible for the Lender to make, maintain or fund the LIBOR Advances,
the Lender shall so notify the Borrowers. Upon receipt of such notice,
notwithstanding anything contained in SECTION 3.01 hereof, Borrowers shall
repay in full the then outstanding principal amount of each affected LIBOR
Advance, together with accrued interest thereon, either (y) on the last day
of the then current Interest Period applicable to such LIBOR Advance if the
Lender may lawfully continue to maintain and fund such LIBOR Advance to
such day, or (z) immediately if the Lender may not lawfully continue to
fund and maintain such LIBOR Advance, whereupon the Borrowers shall borrow
a Prime Rate Advance from the Lender, and the Lender shall make such
Advance, in the amount of the LIBOR Advances to be repaid.
(e) EARLY TERMINATION OF THE REVOLVING CREDIT FACILITY. Borrowers may
terminate the Revolving Credit Facility and prepay the Term Loan at any time
prior to the Termination Date or any renewal thereof; PROVIDED, HOWEVER, (i) if
the Borrowers choose to terminate the Revolving Credit Facility, Borrowers must
pay in full all amounts due and owing pursuant to the Term Loan, and (ii) any
due and owing Prepayment Premium.
Section 3.03 FEES.
(a) CLOSING FEE. On the Effective Date, the Borrowers shall pay to the
Lender a closing fee in the amount of $300,000 in connection with the
establishment of the Revolving Credit Facility, the making of the Term Loan and
in consideration of the making of Loans under this Agreement and in order to
compensate the Lender for the costs associated with structuring, processing,
approving and closing the Revolving Credit Facility and the Loans, but excluding
expenses for which the Borrowers have agreed elsewhere in this Agreement to
reimburse the Lender.
(b) ADMINISTRATIVE FEE. On the Effective Date and on each anniversary
thereof for so long as the Loans are outstanding, the Borrowers shall pay to
Lender an annual servicing fee of
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$25,000 in consideration of the Lender's administration of the Revolving
Credit Facility and the Term Loan.
(c) UNUSED LINE FEE. As additional compensation for the costs and risks
in making the Loans available to Borrowers, the Borrowers agree, jointly and
severally, to pay to Lender, in arrears, on the first (1st) Business Day of each
month with respect to the immediately prior month, prior to the Termination Date
and on the Termination Date, a fee for Borrowers' non-use of available funds in
an amount equal to one-quarter of one percent (0.25%) per annum of the
difference between (i) $20,000,000 and (ii) the average daily outstanding
balances of the Revolving Credit Loans during the period for which the unused
line fee is due.
(d) GENERAL. All fees shall be fully earned by the Lender when due and
payable and, except as otherwise set forth herein, shall not be subject to
refund or rebate. All fees are for compensation for services and are not, and
shall not be deemed to be, interest or a charge for the use of money.
Section 3.04 MANNER OF PAYMENT. (a) Each payment (including prepayments)
by the Borrowers on account of the principal of or interest on the Loans or of
any fee or other amounts payable to the Lender under this Agreement or any Note
shall be made not later than 1:30 p.m. on the date specified for payment under
this Agreement (or if such day is not a Business Day, the next succeeding
Business Day) to the Lender at the Lender's Office, in Dollars, in immediately
available funds and shall be made without any setoff, counterclaim or deduction
whatsoever.
(b) Each of the Borrowers hereby irrevocably authorizes the Lender and
each Affiliate of the Lender to charge any account of such Borrower maintained
with the Lender or such Affiliate with such amounts as may be necessary from
time to time to pay any Secured Obligations which are not paid when due.
Section 3.05 STATEMENTS OF ACCOUNT. The Lender will account to the
Borrowers within 30 days after the end of each calendar month with a statement
of Loans, charges and payments made pursuant to this Agreement during such
calendar month, and such account rendered by the Lender shall be deemed an
account stated as between the Borrowers and the Lender and shall be deemed
final, binding and conclusive unless the Lender is notified by the Borrowers in
writing to the contrary within 90 days after the date such account is delivered
to the Borrowers, save for manifest error. Any such notice shall be deemed an
objection only to those items specifically objected to therein. Failure of the
Lender to render such account shall in no way affect its rights hereunder.
Section 3.06 TERMINATION OF AGREEMENT. On the Termination Date the
Borrowers shall pay to the Lender, in same day funds, an amount equal to the
aggregate amount of all Loans outstanding on such date, together with accrued
interest thereon, the Prepayment Premium, if any, all fees payable pursuant to
SECTION 3.03 accrued from the date last paid through the effective date of
termination, any amounts payable to the Lender pursuant to the other provisions
of this Agreement, including, without limitation, SECTIONS 11.02, 12.12 and
12.13, any and all other Secured Obligations then outstanding, and provide the
Lender with an indemnification agreement
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in form and substance reasonably satisfactory to the Lender with respect
to returned and dishonored items and such other matters as the Lender
shall require, and Lender shall promptly deliver to the Borrowers the
Notes marked "canceled" and shall prepare for filing and execute
appropriate Lien releases.
Section 3.07 INCREASED COSTS AND REDUCED RETURNS. The Borrowers agree
that if any law now or hereafter in effect and whether or not presently
applicable to Lender or any request, guideline or directive of any Governmental
Authority (whether or not having the force of law and whether or not failure to
comply therewith would be unlawful) or the interpretation or administration
thereof by any Governmental Authority, shall either (a)(i) impose, affect,
modify or deem applicable any reserve, special deposit, capital maintenance or
similar requirement against any Loan, (ii) impose on the Lender any other
condition regarding any Loan, this Agreement, the Notes or the facilities
provided hereunder, or (iii) result in any requirement regarding capital
adequacy (including any risk-based capital guidelines) affecting Lender being
imposed or modified or deemed applicable to Lender or (b) subject Lender to any
taxes on the recording, registration, notarization or other formalization of the
Loans or the Notes, and the result of any event referred to in CLAUSE (a) or (b)
above shall be to increase the cost to the Lender of making, funding or
maintaining any Loan or to reduce the amount of any sum receivable by Lender or
Lender's rate of return on capital with respect to any Loan to a level below
that which the Lender could have achieved but for such imposition, modification
or deemed applicability (taking into consideration Lender's policies with
respect to capital adequacy) by an amount deemed by Lender (in the exercise of
its discretion) to be material, then, upon demand by the Lender, Borrowers shall
immediately pay to the Lender additional amounts which shall be sufficient to
compensate the Lender for such increased cost, tax or reduced rate of return. A
certificate of the Lender to the Borrowers claiming compensation under this
SECTION 3.07 shall be final, conclusive and binding on all parties for all
purposes in the absence of manifest error. Such certificate shall set forth the
nature of the occurrence giving rise to such compensation, the additional amount
or amounts to be paid to it hereunder and the method by which such amounts were
determined. In determining such amount, the Lender may use any reasonable
averaging and attribution methods. In the event such compensation is required
to be paid by Borrowers pursuant to this SECTION 3.07, Lender shall give the
Borrowers thirty (30) days notice thereof and Lender shall at all times act in a
commercially reasonable manner.
Section 3.08 JOINT AND SEVERAL LIABILITY. Each of the Borrowers shall be
jointly and severally liable with the other Borrower for the Secured Obligations
and each of the Secured Obligations shall be secured by all of the Collateral.
Each Borrower acknowledges that it is a co-borrower hereunder and is jointly and
severally liable under this Agreement. All loan advances made hereunder through
a Borrower or requested by a Borrower shall be deemed to be a borrowing by each
of the Borrowers, and each Borrower hereby authorizes the other Borrower to
effectuate borrowings on such Borrower's behalf hereunder. Notwithstanding
anything to the contrary contained in this Agreement, the Lender shall be
entitled to rely upon any telephonic request for borrowings received by it from
either Borrower on behalf of both Borrowers, shall be entitled to rely upon any
other request, notice or other communication received by it from either Borrower
on behalf of both Borrowers, and shall be entitled to treat its giving of any
notice hereunder pursuant
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to SECTION 12.01 hereof as notice to each and all Borrowers.
Section 3.09 OBLIGATIONS ABSOLUTE. Each Borrower agrees that the Secured
Obligations will be paid strictly in accordance with the terms of the Loan
Documents, regardless of any law, regulation or order now or hereafter in effect
in any jurisdiction affecting any of such terms or the rights of the Lender with
respect thereto. All Secured Obligations shall be conclusively presumed to have
been created in reliance hereon. The liabilities of each Borrower under this
Agreement shall be absolute and unconditional irrespective of:
(a) any change in the time, manner or place of payment of, or in any other
term of, all or any part of the Secured Obligations, or any other amendment or
waiver thereof or any consent to departure therefrom, including, but not limited
to, any increase in the Secured Obligations resulting from the extension of
additional credit to either Borrower or otherwise;
(b) any taking, exchange, release or non-perfection of any Collateral or
any other collateral securing the Secured Obligations, or any release, amendment
or waiver of, or consent to or departure from, any guaranty for all or any of
the Secured Obligations;
(c) any change, restructuring or termination of the corporate structure or
existence of either Borrower; or
(d) any other circumstance which might otherwise constitute a defense
available to, or a discharge of, either Borrower or any Obligor, other than
payment or satisfaction of the Secured Obligations or the gross negligence or
willful misconduct of the Lender.
Section 3.10 WAIVER OF SURETYSHIP DEFENSES. Each Borrower agrees that
the joint and several liability of the Borrowers provided for in SECTION 3.08
shall not be impaired or affected by any modification, supplement, extension or
amendment or any contract or Agreement to which the other Borrower may hereafter
agree (other than an Agreement signed by the Lender specifically releasing such
liability), nor by any delay, extension of time, renewal, compromise or the
indulgence granted by the Lender with respect to any of the Secured Obligations,
nor by any other agreements or arrangements whatever with the other Borrower or
with anyone else, and each Borrower hereby waives all notice of such delay,
extension, release, substitution, renewal, compromise or other indulgence,
hereby consenting to be bound thereby as fully and effectually as if it had
expressly agreed thereto in advance. The liability of each Borrower is direct
and unconditional as to all of the Secured Obligations, and may be enforced
without requiring the Lender first to resort to any other right, remedy or
security. Each Borrower hereby expressly waives promptness, diligence, notice
of acceptance and any other notice with respect to any of the Secured
Obligations, the Revolving Credit Note, the Term Note, this Agreement, or any
other Loan Document, and any requirement that the Lender protect, secure,
marshall, perfect or insure any lien or any property subject thereto (except to
the extent required by Applicable Law) or exhaust any right or take any action
against either Borrower or any other Person or any collateral, including any
rights either Borrower may otherwise have under O.C.G.A. Section 10-7-24.
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ARTICLE 4 - CONDITIONS PRECEDENT
Section 4.01 CONDITIONS PRECEDENT TO INITIAL LOAN. Notwithstanding any
other provision of this Agreement, the Lender's obligation to make the Initial
Loan is subject to the fulfillment of each of the following conditions prior to
or contemporaneously with the making of such Loan:
(a) CLOSING DOCUMENTS. The Lender shall have received each of the
following documents, all of which shall be satisfactory in form and substance to
the Lender and its counsel:
(1) this Agreement, duly executed and delivered by the Borrowers;
(2) the Notes, dated the Effective Date and duly executed and
delivered by the Borrowers;
(3) certified copies of the articles of incorporation and by-laws of
each Borrower as in effect on the Effective Date;
(4) certified copies of all corporate action, including stockholder
approval, if necessary, taken by each Borrower to authorize the execution,
delivery and performance of this Agreement and the other Loan Documents and
the borrowings under this Agreement;
(5) certificates of incumbency and specimen signatures with respect
to each of the officers of each Borrower who is authorized to execute and
deliver this Agreement or any other Loan Document on behalf of such
Borrower or any document, certificate or instrument to be delivered in
connection with this Agreement or the other Loan Documents and to request
borrowings under this Agreement;
(6) a certificate evidencing the good standing of each Borrower in
the jurisdiction of its incorporation and in each other jurisdiction in
which it is qualified as a foreign corporation to transact business;
(7) the Financing Statements duly executed and delivered by the
respective Borrowers, and evidence satisfactory to the Lender that the
Financing Statements have been filed in each jurisdiction where such filing
may be necessary or appropriate to perfect the Security Interest prior to
any other interest other than Permitted Liens;
(8) all landlord's waiver and consent agreements duly executed on
behalf of each landlord of real property (other than that in Las Vegas,
Nevada) on which any Collateral is located that can be obtained by
Borrowers through the exercise of their reasonable best efforts and
sublandlord's waiver and consent agreements duly executed on behalf of
WorldCom for each sublease between a Borrower and WorldCom;
(9) Schedule of Receivables from and for each of the Borrowers each
prepared
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as of a recent date not earlier than June 30, 1997;
(10) certificates or binders of insurance relating to each of the
policies of insurance covering any of the Collateral together with loss
payable clauses which comply with the terms of SECTION 7.09(b);
(11) a Borrowing Base Certificate prepared as of the Effective Date
duly executed and delivered by the Chairman or President of ILD;
(12) a letter from ILD, on behalf of the Borrowers, to the Lender
requesting the Initial Loan and specifying the method of disbursement;
(13) copies of all the financial statements referred to in SECTION
5.01(m) and meeting the requirements thereof;
(14) a balance sheet of the Borrowers, on a consolidated and
consolidating basis, as at June 30, 1997, prepared by the Borrowers on a
pro forma basis, giving effect to the transactions contemplated by this
Agreement and setting forth the assumptions on which such balance sheet was
prepared; forecasted consolidated financial statements consisting of
balance sheets, cash flow statements and income statements of the
Borrowers, giving effect to the transactions contemplated by this Agreement
and reflecting projected borrowings hereunder and setting forth the
assumptions on which such forecasted financial statements were prepared,
covering the three-year period commencing on January 1, 1998, and prepared
on a quarterly basis for the first 12 months and on an annual basis for
each year thereafter; and such other evidence as the Lender shall require
supporting the representation and warranty of the Borrowers set forth in
SECTION 5.01(r);
(15) a certificate of the President of each Borrower stating that, to
the best of his knowledge and based on an examination sufficient to enable
him to make an informed statement, (a) all of the representations and
warranties made or deemed to be made under this Agreement are true and
correct as of the Effective Date, both with and without giving effect to
the Loans to be made at such time and the application of the proceeds
thereof, and (b) no Default or Event of Default exists;
(16) an executed Sirrom Subordination Agreement, in form and substance
satisfactory to Lender, in its sole discretion, pursuant to which Sirrom
Capital Corporation and Reedy River Ventures Limited Partnership
subordinate the Sirrom Subordinated Indebtedness to the Secured
Obligations;
(17) the balance sheet delivered to Lender pursuant to Section
4.01(a)(14) shall reflect (i) not less than $2,100,000 of shareholders'
equity ($500,000 of which shall be contributed by WorldCom), and (ii) not
less than $2,000,000 in cash, held by ILD;
(18) a signed opinion of Cashin, Morton & Mullins, counsel for the
Borrowers,
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and such local counsel as the Lender shall deem necessary or desirable,
opining as to such matters in connection with this Agreement as the Lender
or its counsel may reasonably request;
(19) within twenty (20) days after the Effective Date, an executed
original of a Letter Agreement from First Union National Bank of North
Carolina, in form and substance satisfactory to Lender, wherein First Union
agrees to discontinue sweeping of the account into which all LEC Payments
are received on behalf of WorldCom and agrees that beginning October 1,
1997 all monies received into such account shall be swept into an account
with Lender;
(20) evidence satisfactory to Lender that a notice has been sent to
each LEC instructing each LEC that, beginning no later than November 1,
1997, all LEC Payments will be directed to that Borrowers' account with
Lender;
(21) executed subordination agreements, in form and substance
satisfactory to Lender in its sole discretion, pursuant to which each of
Intellicall, Inc., Triad-ILD Partners, L.P. and Morris Telecommunications,
LLC subordinate any and all Indebtedness owed by ILD to each of them to the
Secured Obligations;
(22) no later than thirty (30) days after the Effective Date,
forecasted financial statements for the fiscal year 2000, prepared by the
Borrowers, consisting of balance sheets, cash flow statements and income
statements of the Borrowers, reflecting projected borrowings hereunder and
setting forth the assumptions upon which such forecasted financial
statements were prepared;
(23) no later than thirty (30) days after the Effective Date, a
landlord's waiver for the leased premises located in Las Vegas, Nevada;
(24) no later than thirty (30) days following the Effective Date, ILD
shall have entered into a customer service agreement, in form and substance
satisfactory to Lender, with WorldCom; and
(25) copies of each of the other Loan Documents duly executed by the
parties thereto with evidence satisfactory to the Lender and its counsel of
the due authorization, binding effect and enforceability of each such Loan
Document on each such party and such other documents and instruments as the
Lender may reasonably request.
(b) WORLDCOM ACQUISITION DOCUMENTS, CONTRIBUTION DOCUMENTS, SIRROM
SUBORDINATION DOCUMENTS. On the Effective Date: (1) Lender shall have received
executed or conformed copies of the WorldCom Acquisition Documents, the
Contribution Documents and Subordination Documents; (2) each of the WorldCom
Acquisition Documents, the Contribution Documents and the Subordination
Documents shall be in full force and effect and no material representation,
warranty, covenant or condition thereof shall have been amended, modified or
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waived after the execution thereof except with the prior written consent of
Lender which consent shall not be unreasonably withheld, conditioned or delayed;
(3) none of the parties to the WorldCom Acquisition Documents, the Contribution
Documents or the Subordination Documents shall have failed to perform any
material obligation or covenant required by the WorldCom Acquisition Documents,
the Contribution Documents or the Subordination Documents to be performed or
complied with by it on or before the Effective Date; (4) all representation and
warranties of all parties to the WorldCom Acquisition Documents and the
Contribution Documents shall be true and correct in all material respects,
except to the extent such representations and warranties relate specifically to
another date; (5) Lender shall receive assignments of the WorldCom Acquisition
Documents in favor of Lender, as Lender shall request in its sole discretion;
and (6) Lender shall have received a certificate from the President of ILD
certifying to the compliance with the conditions set forth in CLAUSES (1), (2)
and (3) above and, with respect to CLAUSE (4), certifying that, to the best
knowledge of Borrowers, such condition has been satisfied. In addition, all
legal opinions delivered in connection with the WorldCom Acquisition Documents
and the Contribution Documents shall be addressed to Lender or accompanied by a
written authorization from the Person delivering such legal opinion stating that
Lender may rely on such opinions as though it were addressed to Lender.
(c) AVAILABILITY. The Lender shall be provided with evidence satisfactory
to it that, as of the Effective Date, after giving effect to the Initial Loan,
Availability will be not less than $1,000,000.
(d) FEES. Borrowers shall have paid the fees payable on the Closing Date
referred to in SECTION 3.03.
(e) NO INJUNCTIONS, ETC. No action, proceeding, investigation, regulation
or legislation shall have been instituted, threatened or proposed before any
court, governmental agency or legislative body to enjoin, restrain or prohibit
or to obtain substantial damages in respect of or which is related to or arises
out of this Agreement or the consummation of the transactions contemplated
hereby or which, in the Lender's sole discretion, would make it inadvisable to
consummate the transactions contemplated by this Agreement.
(f) MATERIAL ADVERSE CHANGE. As of the Effective Date, there shall not
have occurred any change which, in the Lender's sole discretion, has had or may
have a Materially Adverse Effect as compared to the condition of the Borrowers
presented by the most recent unaudited financial statements of the Borrowers
described in SECTION 5.01(m).
(g) SOLVENCY. The Lender shall have received evidence satisfactory to it
that, after giving effect to consummation of the transaction contemplated by the
WorldCom Acquisition Documents and the Initial Loan (i) each Borrower has assets
(excluding goodwill and other intangible assets not capable of valuation) having
value, both at fair value and at present fair saleable value, greater than the
amount of liabilities, and (ii) each Borrower's assets are sufficient in value
to provide such Borrower with sufficient aggregate working capital to enable it
to profitably operate its business and to meet its obligations as they become
due, and (iii) each Borrower has
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capital to conduct the business in which it is and proposes to be engaged.
(h) RELEASE OF SECURITY INTERESTS. The Lender shall have received
evidence satisfactory to it of the release and termination of all Liens other
than Permitted Liens.
(i) CERTAIN AGREEMENTS. Lender shall have received (i) an agreement, in
form and substance acceptable to Lender, executed by WorldCom irrevocably
agreeing for the period any Secured Obligation remains outstanding that the
Borrowers may affect any offsets, deductions, charges or other allowances with
respect to (A) any Receivable due and owing from either Borrower to WorldCom and
(B) any sums held by either Borrower for or on behalf of WorldCom, (ii) the
Billing and Collection Agreement, in form and substance acceptable to Lender,
between ILD and WorldCom, as referenced in the WorldCom Agreement, (iii) an
agreement, in form and substance acceptable to Lender, executed by WorldCom,
wherein WorldCom agrees in the event that the assignment of one or more of the
LEC billing and collection agreements from WorldCom to ILD is not accepted by
the applicable LEC that WorldCom will continue to provide such services to
Borrowers in a manner which provides Borrowers with substantially the same
economic benefit as if such assignment had been accepted by the applicable LEC
and wherein WorldCom grants to ILD a first priority security interest in all
Receivables processed pursuant to such agreements, and (iv) a letter, in form
and substance satisfactory to Lender, from WorldCom to each LEC, wherein
WorldCom informs each LEC that the redirection of funds from WorldCom's account
with First Union National Bank of North Carolina to the Borrowers' account with
Lender is irrevocable.
Section 4.02 ALL LOANS. At the time of making of each Loan, including
the Initial Loan:
(a) all of the representations and warranties made or deemed to be made
under this Agreement shall be true and correct at such time both with and
without giving effect to the Loans to be made at such time and the application
of the proceeds thereof, except that representations and warranties which, by
their terms, are applicable only to the Effective Date shall be required to be
true and correct only as of the Effective Date,
(b) the corporate actions of the Borrowers referred to in SECTION
4.01(a)(4) shall remain in full force and effect and the incumbency of officers
shall be as stated in the certificates of incumbency delivered pursuant to
Section 4.01(a)(5) or as subsequently modified and reflected in a certificate of
incumbency delivered to the Lender, and
(c) the Lender may, without waiving either condition, consider the
conditions specified in SECTIONS 4.02(a) and (b) fulfilled and a representation
by the Borrowers to such effect made if no written notice to the contrary is
received by the Lender from the Borrowers prior to the making of the Loans then
to be made.
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ARTICLE 5 - REPRESENTATIONS AND WARRANTIES OF THE BORROWER
Section 5.01 REPRESENTATIONS AND WARRANTIES. Each Borrower represents
and warrants to the Lender (each of which representations and warranties is
hereby deemed material and upon which Lender is entitled to rely) as follows:
(a) ORGANIZATION; POWER; QUALIFICATION. Each Borrower is a corporation,
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its properties and to carry on its business as now being and hereafter proposed
to be conducted and is duly qualified and authorized to do business in each
jurisdiction in which failure to be so qualified and authorized would have a
Materially Adverse Effect. The jurisdictions in which each Borrower is
qualified to do business as a foreign corporation are listed on SCHEDULE
5.01(a).
(b) SUBSIDIARIES AND OWNERSHIP OF THE BORROWERS. Except as disclosed on
SCHEDULE 5.01(b), neither Borrower has any Subsidiaries. The outstanding
capital stock of Borrower has been duly and validly issued and is fully paid and
nonassessable by each Borrower and the number and owners of such shares of
capital stock of each Borrower are set forth on SCHEDULE 5.01(b).
(c) AUTHORIZATION OF AGREEMENT, NOTE, LOAN DOCUMENTS AND BORROWING. Each
Borrower has the right and power and has taken all necessary action to authorize
it to execute, deliver and perform this Agreement and each of the other Loan
Documents to which it is a party in accordance with their respective terms and
to borrow hereunder. This Agreement and each of the other Loan Documents to
which it is a party have been duly executed and delivered by the duly authorized
officers of each Borrower and each is, or when executed and delivered in
accordance with this Agreement will be, a legal, valid and binding obligation of
each Borrower, enforceable in accordance with its terms.
(d) COMPLIANCE OF AGREEMENT, NOTE, LOAN DOCUMENTS AND BORROWING WITH LAWS,
ETC. The execution, delivery and performance of this Agreement and each of the
other Loan Documents to which each Borrower is a party in accordance with their
respective terms and the borrowings hereunder do not and will not, by the
passage of time, the giving of notice or otherwise,
(i) require any Governmental Approval or violate any Applicable Law
relating to such Borrower or any of its Affiliates,
(ii) conflict with, result in a breach of or constitute a default
under (A) the articles or certificate of incorporation or by-laws of such
Borrower, (B) any indenture, agreement or other instrument to which such
Borrower is a party or by which any of its property may be bound or (C) any
Governmental Approval relating to such Borrower, or,
(iii) result in or require the creation or imposition of any Lien
upon or with respect to any property now owned or hereafter acquired by
such Borrower other than the Security Interest.
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(e) BUSINESS. The Borrowers are engaged principally in the business
described in SCHEDULE 5.01(e).
(f) COMPLIANCE WITH LAW; GOVERNMENTAL APPROVALS. Except as set forth in
SCHEDULE 5.01(f), each Borrower (i) has all Governmental Approvals, including
permits relating to federal, state and local Environmental Laws, ordinances and
regulations required by any applicable law for it to conduct its business, each
of which is in full force and effect, is final and not subject to review on
appeal and is not the subject of any pending or, to the knowledge of such
Borrower, threatened attack by direct or collateral proceeding, and (ii) is in
compliance with each Governmental Approval applicable to it and in compliance
with all other applicable laws relating to it, including, without being limited
to, all Environmental Laws and all occupational health and safety laws
applicable to such Borrower or its properties, except for instances of
noncompliance which would not, singly or in the aggregate, cause a Default or
Event of Default or have a Materially Adverse Effect and in respect of which
adequate reserves have been established on the books of such Borrower.
(g) TITLES TO PROPERTIES. Except as set forth in SCHEDULE 5.01(g), each
Borrower has good and marketable title to or a valid leasehold interest in all
its Real Estate and valid and legal title to or a valid leasehold interest in
all personal property and assets used in or necessary to the conduct of such
Borrower's business, including, but not limited to, those reflected on the
balance sheet of the Borrowers delivered pursuant to SECTION 5.01(m)(ii).
(h) LIENS. Except as set forth in SCHEDULE 5.01(h), none of the
properties and assets of either Borrower is subject to any Lien, except
Permitted Liens. Other than the Financing Statements, no financing statement
under the Uniform Commercial Code of any state which names such Borrower as
debtor and which has not been terminated has been filed in any state or other
jurisdiction, and such Borrower has not signed any such financing statement or
any security agreement authorizing any secured party thereunder to file any such
financing statement, except to perfect those Liens listed in SCHEDULE 5.01(h)
and Permitted Liens.
(i) INDEBTEDNESS AND GUARANTIES. Set forth in SCHEDULE 5.01(i) is a
complete and correct listing of all of each Borrower's (i) Indebtedness for
Money Borrowed and (ii) Guaranties. No Borrower is in default of any material
provision of any agreement evidencing or relating to such any such Indebtedness
or Guaranty.
(j) LITIGATION. Except as set forth in SCHEDULE 5.01(j), there are no
actions, suits or proceedings pending (nor, to the knowledge of either Borrower,
are there any actions, suits or proceedings threatened, nor is there any basis
therefor) against or in any other way relating adversely to or affecting either
Borrower or any of its property in any court or before any arbitrator of any
kind or before or by any governmental body, which individually is in excess of
$250,000 or, when combined with all other such actions, suits or proceedings
against both Borrowers, is in excess of $500,000 in the aggregate.
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(k) TAX RETURNS AND PAYMENTS. Except as set forth in SCHEDULE 5.01(k),
all United States federal, state and local and foreign national, provincial and
local and all other tax returns of each Borrower required by applicable law to
be filed have been duly filed, and all United States federal, state and local
and foreign national, provincial and local and all other taxes, assessments and
other governmental charges or levies, including without limitation, excise taxes
charged in connection the with provision of telecommunications services, upon
such Borrower and its property, income, profits and assets which are due and
payable have been paid, except any such nonpayment which is at the time
permitted under SECTION 8.04. The charges, accruals and reserves on the books of
each Borrower in respect of United States federal, state and local taxes and
foreign national, provincial and local taxes for all fiscal years and portions
thereof since the organization of each Borrower are in the judgment of the
Borrowers adequate, and the Borrowers know of no reason to anticipate any
additional assessments for any of such years which, singly or in the aggregate,
might have a Materially Adverse Effect.
(l) BURDENSOME PROVISIONS. No Borrower is a party to any indenture,
agreement, lease or other instrument, or subject to any charter or corporate
restriction, Governmental Approval or applicable law, compliance with the terms
of which might have a Materially Adverse Effect.
(m) FINANCIAL STATEMENTS. The Borrowers have furnished to the Lender a
copy of (i) their audited balance sheet as at December 31, 1996, and the related
statements of income, cash flow and retained earnings for the year then ended
and (ii) their unaudited consolidated and consolidating balance sheet as at June
30, 1997, and the related statement of income for the six-month period then
ended. Such financial statements are complete and correct and present fairly and
in all material respects in accordance with GAAP (except the financial
statements in subparagraph (ii) have no footnotes and are subject to normal
year-end audit adjustments which will not deviate materially from such
statements), the financial position of the Borrowers as at the dates thereof and
the results of operations of the Borrowers for the periods then ended. Except
as disclosed or reflected in such financial statements, the Borrowers had no
material liabilities, contingent or otherwise, and there were no material
unrealized or anticipated losses of the Borrowers.
(n) ADVERSE CHANGE. Since the date of the financial statements described
in CLAUSE (i) of SECTION 5.01(m), (i) no change in the business, assets,
liabilities, condition (financial or otherwise), results of operations or
business prospects of the Borrowers has occurred that has had, or may have, a
Materially Adverse Effect, and (ii) no event has occurred or failed to occur
which has had or may have, a Materially Adverse Effect.
(o) ERISA. No Borrower nor any Related Company maintains or contributes
to any Benefit Plan other than those listed in SCHEDULE 5.01(o). Each Benefit
Plan is in substantial compliance with ERISA, and no Borrower nor any Related
Company has received any notice asserting that a Benefit Plan is not in
compliance with ERISA. No material liability to the PBGC or to a Multiemployer
Plan has been, or is expected by the Borrowers to be, incurred by the Borrowers
or any Related Company.
(p) ABSENCE OF DEFAULTS. No Borrower is in default under its articles or
certificate of
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incorporation or by-laws, and no event has occurred which has not been
remedied, cured or waived (i) that constitutes a Default or an Event of
Default or (ii) that constitutes or that, with the passage of time or giving
of notice, or both, would constitute a default or event of default by such
Borrower under any material agreement (other than this Agreement) or
judgment, decree or order to which such Borrower is a party or by which such
Borrower or any of its properties may be bound or which would require such
Borrower to make any payment thereunder prior to the scheduled maturity date
therefor.
(q) ACCURACY AND COMPLETENESS OF INFORMATION. All written information,
reports and other papers and data produced by or on behalf of the Borrowers and
furnished to the Lender were, at the time the same were so furnished, complete
and correct in all material respects to the extent necessary to give the
recipient a true and accurate knowledge of the subject matter, no fact is known
to any Borrower which has had, or may in the future have (so far as any Borrower
can foresee), a Materially Adverse Effect which has not been set forth in the
financial statements or disclosure delivered prior to the Effective Date, in
each case referred to in SECTION 5.01(m), or in such written information,
reports or other papers or data or otherwise disclosed in writing to the Lender
prior to the Effective Date. No document furnished or written statement made to
the Lender by either Borrower in connection with the negotiation, preparation or
execution of this Agreement or any of the Loan Documents contains or will
contain any untrue statement of a fact material to the creditworthiness of
either Borrower or omits or will omit to state a material fact necessary in
order to make the statements contained therein not misleading.
(r) SOLVENCY. In each case after giving effect to the Indebtedness
represented by the Loans outstanding and to be incurred and the transactions
contemplated by this Agreement, (i) each Borrower has assets (excluding goodwill
and other intangible assets not capable of valuation) having value, both at fair
value and at present fair saleable value, greater than the amount of
liabilities, and (ii) each Borrower's assets are sufficient in value to provide
such Borrower with sufficient aggregate working capital to enable it to
profitably operate its business and to meet its obligations as they become due,
and (iii) each Borrower has capital to conduct the business in which it is and
proposes to be engaged.
(s) STATUS OF RECEIVABLES. Each Receivable reflected in the computations
included in any Borrowing Base Certificate meets the criteria enumerated in
CLAUSES (a) through (o) of the definition of Eligible Receivables, except as
disclosed in such Borrowing Base Certificate or as disclosed in a timely manner
in a subsequent Borrowing Base Certificate or otherwise in writing to the
Lender.
(t) CHIEF EXECUTIVE OFFICE. The respective chief executive offices of the
Borrowers and the books and records relating to the Receivables are located at
the address or addresses set forth on SCHEDULE 5.01(t); except as set forth in
SCHEDULE 5.01(t), no Borrower has maintained its chief executive office or the
books and records relating to any Receivables at any other address at any time
during the five years immediately preceding the Agreement Date.
(u) STATUS OF INVENTORY. All Inventory is in good condition, meets all
standards imposed
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by any governmental agency or department or division thereof having
regulatory authority over such goods, their use or sale, and is currently
either usable or saleable in the normal course of the Borrowers' business,
except to the extent reserved against in the financial statements delivered
pursuant to ARTICLE 9. Set forth in SCHEDULE 5.01(u) is the (i) address
(including street, city, county and state) of each facility at which
Inventory is located, (ii) the approximate quantity in Dollars of the
Inventory customarily located at each such facility, and (iii) if the
facility is leased or is a third party warehouse or processor location, the
name of the landlord or such third party warehouseman or processor. All
Inventory is located on the premises set forth in SCHEDULE 5.01(u) or is in
transit to one of such locations, except as otherwise disclosed in writing to
the Lender; the Borrowers have not located Inventory at premises other than
those set forth in SCHEDULE 5.01(u) at any time during the four months
immediately preceding the Agreement Date.
(v) CORPORATE AND FICTITIOUS NAMES; TRADE NAMES. Except as otherwise
disclosed in SCHEDULE 5.01(v)(I), during the one-year period preceding the
Agreement Date, no Borrower has been known as or used any corporate or
fictitious name other than the corporate name of such Borrower on the Effective
Date. SCHEDULE 5.01(v)(II) sets for the identity, including any corporate or
fictitious names, of any entity owning or having an interest in any assets
transferred to Borrowers pursuant to the WorldCom Acquisition Documents. All
trade names or styles under which such Borrower sells Inventory or creates
Receivables, or to which instruments in payment of Receivables are made payable,
are listed in SCHEDULE 5.01(v)(III).
(w) FEDERAL REGULATIONS. No Borrower is engaged, principally or as one of
its important activities, in the business of extending credit for the purpose of
"purchasing" or "carrying" any "margin stock" (as each of the quoted terms is
defined or used in Regulations G and U of the Board of Governors of the Federal
Reserve System).
(x) INVESTMENT COMPANY ACT. No Borrower is an "investment company" or a
company "controlled" by an "investment company" (as each of the quoted terms is
defined or used in the Investment Company Act of 1940, as amended).
(y) PUBLIC UTILITY HOLDING COMPANY ACT. No Borrower is a "holding
company" or a "subsidiary company" of a "holding company" or an affiliate of a
"holding company" (as each of the quoted terms is defined or used in the Public
Utility Holding Company Act of 1935, as amended).
(z) EMPLOYEE RELATIONS. No Borrower is, except as set forth in SCHEDULE
5.01(z), party to any collective bargaining agreement nor has any labor union
been recognized as the representative of its employees; no Borrower knows of
pending, threatened or contemplated strikes, work stoppage or other labor
disputes involving its employees or those of its Subsidiaries.
(aa) INTELLECTUAL PROPERTY. Each Borrower owns or possesses all
Intellectual Property required to conduct its business as now and presently
planned to be conducted without, to its knowledge, conflict with the rights of
others, and SCHEDULE 5.01(aa) lists all Intellectual Property owned by such
Borrower.
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(bb) BANK ACCOUNTS. As of the Closing Date and after giving effect to the
consummation of the WorldCom Acquisition, SCHEDULE 5.01(bb) sets forth the
account numbers and location of all bank accounts of the Borrowers. Each
Borrower shall give Lender prompt notice of any new accounts established by any
Borrowers.
(cc) REPRESENTATIONS AND WARRANTIES FROM THE RELATED TRANSACTION DOCUMENTS
(i) Each of the representations and warranties given by such Borrower in
the Related Transaction Documents is true and correct in all material respects
as of the date hereof, and such representations and warranties are hereby
incorporated herein by this reference as of such date with the same effect as
though set forth in their entirety herein.
(ii) Notwithstanding anything in the Related Transaction Documents to the
contrary, the representations and warranties of each Borrower in the Related
Transaction Documents incorporated in this Agreement by SECTION 5.01(cc)(i)
shall, solely for the purposes of this Agreement, survive the execution and
delivery of the Related Transaction Documents, the execution and delivery of
this Agreement, the making of the Loans hereunder, and the execution and
delivery of the Notes.
(dd) BROKER'S FEES. Except as set forth in SCHEDULE 5.01(dd), no broker's
or finder's fee or commission will be payable by Borrowers with respect to the
issuance and sale of the ILD capital stock, or otherwise in connection with the
WorldCom Transactions or any of the other transactions contemplated hereby or by
the Related Transaction Documents. Borrowers shall indemnify, pay and hold
Lender harmless from and against any claim, demand or liability for broker's or
finder's fees alleged to have been incurred in connection with any such offer,
issuance and sale or any of the other transactions contemplated hereby or by the
Related Transaction Documents and any expenses, including reasonable attorneys'
fees, arising in connection with any such claim, demand or liability. No other
similar fees or commission will be payable for any other services rendered to
Borrowers ancillary to the transactions contemplated hereby including the
WorldCom Transactions.
Section 5.02 SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All
representations and warranties set forth in this ARTICLE 5 and all statements
contained in any certificate, financial statement or other instrument delivered
by or on behalf of the Borrowers pursuant to or in connection with this
Agreement or any of the Loan Documents (including, but not limited to, any such
representation, warranty or statement made in or in connection with any
amendment thereto) shall constitute representations and warranties made under
this Agreement. All representations and warranties made under this Agreement
shall be made or deemed to be made at and as of the Agreement Date, at and as of
the Effective Date and at and as of the date of each Loan, except that
representations and warranties which, by their terms are applicable only to one
such date shall be deemed to be made only at and as of such date. All
representations and warranties made or deemed to be made under this Agreement
shall survive and not be waived by the execution and delivery of this Agreement,
any investigation made by or on behalf of the Lender or any borrowing hereunder.
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ARTICLE 6 - SECURITY INTEREST
Section 6.01 SECURITY INTEREST. (a) To secure the payment, observance
and performance of the Secured Obligations, the Borrowers hereby mortgage,
pledge and assign all of the Collateral to the Lender for itself and as agent
for any Affiliate of the Lender and grant to the Lender for itself and as agent
for any Affiliate of the Lender a continuing security interest in, and a
continuing Lien upon, all of the Collateral; PROVIDED, HOWEVER, that the Lien
created hereby shall not apply to those Receivables and call detail records that
are sold to and accepted by a LEC pursuant to billing and collection agreement
that has been approved by Lender, in its sole discretion, from and after the
time such a sale occurs.
(b) As additional security for all of the Secured Obligations, the
Borrowers grant to the Lender for itself and as agent for any Affiliate of the
Lender a security interest in, and assigns to the Lender for itself and as agent
for any Affiliate of the Lender all of the Borrowers' right, title and interest
in and to, any deposits or other sums at any time credited by or due from the
Lender and each Affiliate of the Lender to the Borrowers, with the same rights
therein as if the deposits or other sums were credited by or due from the
Lender.
(c) In the event the Switches become the subject of a sale-leaseback
transaction on or prior to October 2, 1997, which sale is in form and substance
reasonably acceptable to Lender, Lender will release its security interest in
and to the Switches.
Section 6.02 CONTINUED PRIORITY OF SECURITY INTEREST. (a) The Security
Interest granted by the Borrowers shall at all times be a valid, perfected,
first-priority, enforceable Security Interest against the Borrowers and all
third parties in accordance with the terms of this Agreement, as security for
the Secured Obligations, and the Collateral shall not at any time be subject to
any Liens that are prior to, on a parity with or junior to the Security
Interest, other than Permitted Liens.
(b) The Borrowers shall, at their sole cost and expense, take all action
that may be necessary or desirable, or that the Lender may request, so as at all
times to maintain the validity, perfection, enforceability and rank of the
Security Interest in the Collateral in conformity with the requirements of this
SECTION 6.02(b) or to enable the Lender to exercise or enforce its rights
hereunder, including, but not limited to: (i) paying all taxes, assessments and
other claims lawfully levied or assessed on any of the Collateral, except to the
extent that such taxes, assessments and other claims constitute Permitted Liens,
(ii) diligently seeking to obtain, after the Agreement Date, landlords',
mortgagees' or mechanics' releases, subordinations or waivers, (iii) delivering
to the Lender, endorsed or accompanied by such instruments of assignment as the
Lender may specify, and stamping or marking in such manner as the Lender may
specify, any and all chattel paper, instruments, letters and advices of guaranty
and documents evidencing or forming a part of the Collateral, and (iv) executing
and delivering financing statements, ledgers, designations, hypothecations,
notices and assignments, in each case in form and substance satisfactory to the
Lender, relating to the creation, validity, perfection, maintenance or
continuation of the Security
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Interest under the UCC or other applicable law.
(c) The Lender is hereby authorized to file one or more financing or
continuation statements or amendments thereto without the signature of or in the
name of the Borrowers for any purpose described in SECTION 6.02(b). A carbon,
photographic or other reproduction of this Agreement or of any of the Security
Documents or of any financing statement filed in connection with this Agreement
is sufficient as a financing statement, to the extent permitted by applicable
law.
(d) Upon the specific request of Lender, the Borrowers shall mark their
books and records as may be necessary or appropriate to evidence, protect and
perfect the Security Interest and shall cause its financial statements to
reflect the Security Interest.
ARTICLE 7 - COLLATERAL COVENANTS
Until the Revolving Credit Facility has been terminated and all the Secured
Obligations have been indefeasibly paid in full, unless the Lender shall
otherwise consent in the manner provided in SECTION 12.11:
Section 7.01 COLLECTION OF RECEIVABLES. The Borrowers will cause all
moneys, checks, notes, drafts and other payments relating to or constituting
proceeds of Receivables, or of any other Collateral, to be collected in
accordance with a cash management system, acceptable to Lender in its sole
discretion (the "CASH MANAGEMENT SYSTEM"). The Cash Management System shall
include a mechanism, acceptable to Lender in its sole discretion, whereby
immediately upon each receipt by Lender, on behalf of a Borrower, of a LEC
Payment, Borrowers shall provide Lender a good faith written estimate of the
amount of such LEC Payment believed in its reasonable judgment to be owed to
Wholesale Billing and Collection Customers (the "WHOLESALE PORTION"), which
Wholesale Portion PLUS an additional percentage of the Wholesale Portion (to be
determined in Lender's sole discretion), shall be transferred to an investment
account with Lender, held in the name of a Borrower (the "INVESTMENT ACCOUNT").
For the twelve (12) months following the Effective Date, no later than thirty
(30) days after the receipt of each LEC Payment, and at all times thereafter, no
later than five (5) days after the receipt of each LEC Payment, Borrowers shall
provide to Lender the back-up data evidencing the exact amount of each such LEC
Payment which is owed to Wholesale Billing and Collection Customers. In the
event such amount is less than that which was transferred to the Investment
Account, Lender agrees to transfer the excess for application to the Revolving
Loans. Borrowers hereby covenant and agree that the only disbursements that
will be made from the Investment Account will be to Wholesale Billing and
Collection Customers for sums owed by Borrowers to such entity in accordance
with any written billing and collection agreement (and the distribution of any
sums shall be deemed a representation and warranty of Borrowers that such
disbursement has been made in accordance with this SECTION 7.01); PROVIDED,
HOWEVER, that if an Event of Default has occurred hereunder, Borrowers hereby
covenant and agree that no disbursements of any kind will be made from the
Investment Account without the prior written consent of Lender.
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Section 7.02 VERIFICATION AND NOTIFICATION. The Lender shall have the
right (a) at any time and from time to time, in the name of the Lender or in the
name of either of the Borrowers, to verify the validity, amount or any other
matter relating to any Receivables by mail, telephone, telegraph or otherwise,
and (b) after an Event of Default, to notify the Account Debtors or obligors
under any Receivables of the assignment of such Receivables to the Lender and to
direct such Account Debtor or obligors to make payment of all amounts due or to
become due thereunder directly to the Lender and, upon such notification and at
the expense of the Borrowers, to enforce collection of any such Receivables and
to adjust, settle or compromise the amount or payment thereof, in the same
manner and to the same extent as the Borrowers might have done.
Section 7.03 DISPUTES, RETURNS AND ADJUSTMENTS. (a) In the event amounts
due and owing under any Receivable in excess of $300,000 are in dispute between
the Account Debtor and the Borrowers, the Borrowers shall provide the Lender
with prompt written notice thereof.
(b) The Borrowers shall notify the Lender promptly of all material
returns, credits, offsets or charges in excess of $250,000 in respect of any
Receivable, which notice shall specify the Receivables affected.
(c) The Borrowers may, in the ordinary course of business and prior to a
Default or an Event of Default, grant any extension of time for payment of any
Receivable or compromise, compound or settle the same for less than the full
amount thereof or release wholly or partly any Person liable for the payment
thereof or allow any credit or discount whatsoever thereon; PROVIDED that (i) no
such action results in the reduction of more than $100,000 in the amount payable
with respect to any Receivable of more than $300,000 with respect to all
Receivables in any fiscal year of the Borrowers, and (ii) the Lender is promptly
notified of the amount of such adjustments and the Receivable(s) affected
thereby.
Section 7.04 INVOICES. Upon the request of the Lender, the Borrowers
shall deliver to the Lender, at the Borrowers' expense, copies of customers'
invoices or the equivalent, original call detail records, the original copy of
all documents, including, without limitation, repayment histories and present
status reports, relating to Receivables and such other documents and information
relating to the Receivables as the Lender shall specify.
Section 7.05 DELIVERY OF INSTRUMENTS. In the event any Receivable in an
amount in excess of $100,000 is, or Receivables in excess of $250,000 in the
aggregate are, at any time evidenced by a promissory note or notes, trade
acceptance or any other instrument for the payment of money, the Borrowers will
immediately thereafter deliver such instruments to the Lender, appropriately
endorsed to the Lender.
Section 7.06 SALES OF INVENTORY. All sales of Inventory will be made in
compliance with all requirements of applicable law.
Section 7.07 RETURNED GOODS. The Security Interest in the Inventory
shall, without
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further act, attach to the cash and non-cash proceeds resulting from the sale
or other disposition thereof and to all Inventory which is returned to the
Borrowers by customers or is otherwise recovered.
Section 7.08 OWNERSHIP AND DEFENSE OF TITLE. (a) Except for Permitted
Liens, the Borrowers shall at all times be the sole owner of each and every item
of Collateral and shall not create any Lien on, or sell, lease, exchange,
assign, transfer, pledge, hypothecate, grant a security interest or security
title in or otherwise dispose of, any of the Collateral or any interest therein,
except for sales of Inventory in the ordinary course of business, for cash or on
open account or on terms of payment ordinarily extended to its customers and
except as otherwise expressly contemplated herein. The inclusion of "proceeds"
of the Collateral under the Security Interest shall not be deemed a consent by
the Lender to any other sale or other disposition of any part or all of the
Collateral.
(b) The Borrowers shall defend their title in and to the Collateral and
shall defend the Security Interest in the Collateral against the claims and
demands of all Persons.
(c) In addition to, and not in derogation of, the foregoing and the
requirements of any of the Security Documents, the Borrowers shall (i) protect
and preserve all properties material to its business, including Intellectual
Property and maintain all tangible property in good and workable condition in
all material respects, with reasonable allowance for wear and tear, and (ii)
from time to time make or cause to be made all needed and appropriate repairs,
renewals, replacements and additions to such properties necessary for the
conduct of its business, so that the business carried on in connection therewith
may be properly and advantageously conducted at all times.
Section 7.09 INSURANCE. (a) The Borrowers shall at all times maintain
insurance on the Collateral against loss or damage by fire, theft, burglary,
pilferage, loss in transit and such other hazards as the Lender shall reasonably
specify, in amounts and under policies issued by insurers acceptable to the
Lender. All premiums on such insurance shall be paid by the Borrowers and
copies of the policies delivered to the Lender. The Borrowers will not use or
permit the Collateral to be used in violation of any applicable law or in any
manner which might render inapplicable any insurance coverage.
(b) All insurance policies required under SECTION 7.09(a) shall name the
Lender as an additional named insured and shall contain "New York standard" loss
payable clauses in the form submitted to the Borrowers by the Lender, or
otherwise in form and substance satisfactory to the Lender, naming the Lender as
loss payee as its interests may appear, and providing that (i) all proceeds
thereunder shall be payable to the Lender, (ii) no such insurance shall be
affected by any act or neglect of the insured or owner of the property described
in such policy, and (iii) such policy and loss payable clauses may not be
canceled, amended or terminated unless at least 30 days' prior written notice is
given to the Lender.
(c) Any proceeds of insurance referred to in this SECTION 7.09 which are
paid to the Lender shall be, at the option of the Lender in its sole discretion,
either (i) applied to rebuild, restore
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or replace the damaged or destroyed Collateral, or (ii) applied to the
payment or prepayment of the Secured Obligations.
(d) The Borrowers shall at all times maintain, in addition to the
insurance required by SECTION 7.09(a) or any of the Security Documents,
insurance with responsible insurance companies against such risks and in such
amounts as is customarily maintained by similar businesses or as may be required
by applicable law, including such public liability, products liability, third
party property damage and business interruption insurance as is consistent with
reasonable industry practices, and from time to time deliver to the Lender upon
its request a detailed list of the insurance then in effect, stating the names
of the insurance companies, the amounts and rates of the insurance, the dates of
the expiration thereof and the properties and risks covered thereby.
Section 7.10 LOCATION OF OFFICES AND COLLATERAL. (a) The Borrowers will
not change the location of either of their respective chief executive offices or
the place where they keep their respective books and records relating to the
Collateral or change their respective names, identity or corporate structure
without giving the Lender 30 days' prior written notice thereof.
All Collateral, other than Inventory in transit to any such location, will at
all times be kept by the Borrowers at one of the locations set forth in
SCHEDULES 5.01(t) and 5.01(u), respectively, and shall not, without the prior
written consent of the Lender, be removed therefrom except, so long as no Event
of Default shall have occurred and be continuing, for sales of Inventory
permitted under SECTION 7.06.
(b) If any Collateral is in the possession or control of any of the
Borrowers' agents or processors, the Borrowers shall notify such agents or
processors of the Security Interest and, upon the occurrence of an Event of
Default, shall instruct them (and cause them to acknowledge such instruction) to
hold all such Collateral for the account of the Lender, subject to the
instructions of the Lender.
Section 7.11 RECORDS RELATING TO COLLATERAL. (a) The Borrowers will at
all times keep complete and accurate records of Collateral on a basis consistent
with past practices of the Borrowers, itemizing and describing the kind, type
and quantity of Collateral and the Borrowers' cost therefor and a current price
list for such Collateral.
(b) Upon the request of Lender, the Borrowers will take a physical listing
of all Inventory and Equipment, wherever located.
Section 7.12 INSPECTION. The Lender (by any of its officers, employees
or agents shall have the right, to the extent that the exercise of such right
shall be within the control of the Borrowers, at any time or times to (a) visit
the properties of the Borrowers, inspect the Collateral and the other assets of
the Borrowers and their Subsidiaries and inspect and make extracts from the
books and records of the Borrowers and their Subsidiaries, including, but not
limited to, management letters prepared by independent accountants, all during
customary business hours at such premises, (b) discuss the Borrowers' business,
assets, liabilities, financial condition, results of
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operations and business prospects, insofar as the same are reasonably related
to the rights of the Lender hereunder or under any of the Loan Documents,
with the Borrowers' and their Subsidiaries' (i) principal officers, (ii)
independent accountants and other professionals providing services to the
Borrowers, and (iii) any other Person (except that any such discussion with
any third parties shall be conducted only in accordance with the Lender's
standard operating procedures relating to the maintenance of confidentiality
of confidential information of borrowers), and (c) verify the amount,
quantity, value and condition of, or any other matter relating to, any of the
Collateral and in this connection to review, audit and make extracts from all
records and files related to any of the Collateral. The Borrowers will
deliver to the Lender any instrument necessary to authorize an independent
accountant or other professional to have discussions of the type outlined
above with the Lender or for the Lender to obtain records from any service
bureau maintaining records on behalf of the Borrowers.
Section 7.13 INFORMATION AND REPORTS.
(a) SCHEDULE OF RECEIVABLES. Each Borrower shall deliver to the Lender
(i) on or before the Effective Date, a Schedule of Receivables as of a date not
more than three (3) Business Days prior to the Effective Date setting forth a
detailed aged trial balance of all of its then existing Receivables, specifying
the name of and the balance due from (and any rebate due to) each Account Debtor
obligated on a Receivable so listed, and (ii) no later than 20 Business Days
after the end of each accounting month of such Borrower for the months beginning
with the month during which the Effective Date occurs and continuing through and
including March, 1998 and no later than 10 Business Days after the end of each
accounting month of such Borrower for all subsequent months, a Schedule of
Receivables as of the last Business Day of such Borrower's immediately preceding
accounting month setting forth (A) a detailed aged trial balance of all such
Borrower's then existing Receivables, specifying the name of and the balance due
from (and any rebate due to) each Account Debtor obligated on a Receivable so
listed and (B) a reconciliation to the Schedule of Receivables delivered in
respect of the next preceding accounting month.
(b) BORROWING BASE CERTIFICATE. The Borrowers shall deliver to the Lender
not later than two (2) Business Days after the last day of each accounting week
of the Borrowers a Borrowing Base Certificate prepared as of the close of
business on the last Business Day of such accounting week.
(c) NOTICE OF DIMINUTION OF VALUE. The Borrowers shall give prompt notice
to the Lender of any matter or event which has resulted in, or may result in,
the actual or potential diminution in excess of $400,000 in the value of any of
its Collateral, except for any diminution in the value of any Receivables or
Inventory in the ordinary course of business which has been appropriately
reserved against, as reflected in the financial statements previously delivered
to the Lender pursuant to ARTICLE 9.
(d) CERTIFICATION. Each of the schedules delivered to the Lender pursuant
to this SECTION 7.14 shall be certified by the Chairman, President, Vice
President, Treasurer or Secretary of ILD to be true, correct and complete as of
the date indicated thereon.
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(e) OTHER INFORMATION. The Lender may, in its discretion, from time to
time require the Borrowers to deliver the schedules described in SECTION
7.14(a), (b) AND (c) more or less often and on different schedules than
specified in such Section, and the Borrower will comply with such requests. The
Borrowers shall also furnish to the Lender such other information with respect
to the Collateral as the Lender may from time to time reasonably request.
Section 7.14 POWER OF ATTORNEY. The Borrowers hereby individually and
jointly appoint the Lender as their respective and collective attorney, with
power (a) to endorse the name of any Borrower on any checks, notes, acceptances,
money orders, drafts or other forms of payment or security that may come into
the Lender's possession, and (b) to sign the name of either Borrower on any
invoice or bill of lading relating to any Receivables, Inventory, Equipment or
other Collateral, on any drafts against customers related to letters of credit,
on schedules and assignments of Receivables furnished to the Lender by such
Borrower, on notices of assignment, financing statements and other public
records relating to the perfection or priority of the Security Interest or
verifications of account and on notices to or from customers.
Section 7.15 EQUIPMENT. Each Borrower shall keep its Equipment in good,
working order, ordinary wear and tear excepted.
Section 7.16 BILLING AND COLLECTION AGREEMENTS. Borrowers will submit
(i) any and all proposed billing and collection agreements (other than as
related to Wholesale Billing and Collection Customers) to Lender for Lender's
written approval prior to the execution of any such agreement by Borrowers and
(ii) for each month, no later than the tenth (10th) day of the following month,
a list of all Wholesale Billing and Collection Customers.
ARTICLE 8 - AFFIRMATIVE COVENANTS
Until the Revolving Credit Facility has been terminated and all the Secured
Obligations have been indefeasibly paid in full, unless the Lender shall
otherwise consent in the manner provided for in SECTION 12.11, each Borrower
will:
Section 8.01 PRESERVATION OF CORPORATE EXISTENCE AND SIMILAR MATTERS.
Preserve and maintain its corporate existence, rights, franchises, licenses and
privileges in the jurisdiction of its incorporation and qualify and remain
qualified as a foreign corporation and authorized to do business in each
jurisdiction in which the character of its properties or the nature of its
business requires such qualification or authorization.
Section 8.02 COMPLIANCE WITH APPLICABLE LAW. Comply with all Applicable
Laws relating to such Borrower.
Section 8.03 CONDUCT OF BUSINESS. Engage only in businesses in
substantially the same fields as the businesses conducted on the Effective Date.
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Section 8.04 PAYMENT OF TAXES AND CLAIMS. Pay or discharge when due (a)
all taxes, assessments and governmental charges or levies imposed upon it or
upon its income or profits or upon any properties belonging to it, and (b) all
lawful claims of materialmen, mechanics, carriers, warehousemen and landlords
for labor, materials, supplies and rentals which, if unpaid, might become a Lien
on any properties of such Borrower or any Subsidiary, except that this SECTION
8.04 shall not require the payment or discharge of any such tax, assessment,
charge, levy or claim which is being contested in good faith by appropriate
proceedings and for which adequate reserves have been established on the
appropriate books.
Section 8.05 ACCOUNTING METHODS AND FINANCIAL RECORDS. Maintain a system
of accounting, and keep such books, records and accounts (which shall be true
and complete), as may be required or as may be necessary to permit the
preparation of financial statements in accordance with GAAP consistently
applied.
Section 8.06 USE OF PROCEEDS. (a) Use the proceeds of (i) the Initial
Loan to consummate the WorldCom Acquisition, and (ii) all subsequent Revolving
Credit Loans only for working capital and general business purposes, and
(b) not use any part of such proceeds to purchase or carry, or to reduce
or retire or refinance any credit incurred to purchase or carry, any margin
stock (within the meaning of Regulation G or U of the Board of Governors of the
Federal Reserve System) or for any other purpose which would involve a violation
of such Regulation G or U or Regulation T or X of such Board of Governors or for
any other purpose prohibited by law or by the terms and conditions of this
Agreement.
Section 8.07 HAZARDOUS WASTE AND SUBSTANCES; ENVIRONMENTAL REQUIREMENTS.
(a) In addition to, and not in derogation of, the requirements of SECTION 8.02
hereof, comply with all laws, governmental standards and regulations applicable
to the Borrowers or to any of their assets in respect of occupational health and
safety laws, rules and regulations and Environmental Laws, promptly notify the
Lender of its receipt of any notice of a violation of any such law, rule,
standard or regulation and indemnify and hold the Lender harmless from all loss,
cost, damage, liability, claim and expense incurred by or imposed upon the
Lender on account of the Borrowers' failure to perform its obligations under
this SECTION 8.07.
(b) Whenever the Borrowers give notice to the Lender pursuant to this
SECTION 8.07 with respect to a matter that reasonably could be expected to
result in liability to the Borrowers in excess of $250,000 in the aggregate, the
Borrowers shall, at the Lender's request and the Borrowers' expense, (i) cause
an independent environmental engineer acceptable to the Lender to conduct such
tests of the site where the noncompliance or alleged noncompliance with
Environmental Laws has occurred and prepare and deliver to the Lender a report
setting forth the results of such tests, a proposed plan to bring the Borrowers
into compliance with such Environmental Laws and an estimate of the costs
thereof, and (ii) provide to the Lender a supplemental report of such engineer
whenever the scope of the noncompliance or the response thereto or the estimated
costs thereof
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shall materially change.
Section 8.08 ACCURACY OF INFORMATION. All written information, reports,
statements and other papers and data furnished to the Lender, whether pursuant
to ARTICLE 9 or any other provision of this Agreement or any of the other Loan
Documents, shall be, at the time the same is so furnished, complete and correct
in all material respects to the extent necessary to give the Lender true and
accurate knowledge of the subject matter.
Section 8.09 REVISIONS OR UPDATES TO SCHEDULES. Should any of the
information or disclosures provided on any of the Schedules originally attached
hereto become outdated or incorrect in any material respect (other than in the
case of SCHEDULE 5.01(h), with respect to liens which constitute Permitted
Liens pursuant to this Agreement), the Borrowers shall provide promptly to the
Lender such revisions or updates to such Schedule(s) as may be necessary or
appropriate to update or correct such Schedule(s); PROVIDED that no such
revisions or updates to any Schedule(s) shall be deemed to have cured any breach
of warranty or representation resulting from the inaccuracy or incompleteness of
any such Schedule(s) unless and until the Lender, in its sole discretion, shall
have accepted in writing such revisions or updates to such Schedule(s).
Section 8.10 COVENANTS IN WORLDCOM ACQUISITION DOCUMENTS. At all times
prior to the effective date of the WorldCom Acquisition, ILD shall comply with
its covenants under the WorldCom Acquisition Documents in all material respects.
ILD shall not amend, supplement or otherwise modify or waive rights under, and
shall not consent to or permit the amendment, supplement or other modification
or waiver of rights under, any WorldCom Acquisition Documents without the
consent of Lender (which consent shall not be unreasonably withheld, conditioned
or delayed) if the effect of such amendment, supplement or other modification or
waiver of right would materially and adversely affect the rights and claims of
any party under any WorldCom Acquisition Documents. ILD shall at all times
diligently pursue and enforce all material rights and material claims (after
taking into account any applicable deductibles) under any WorldCom Acquisition
Documents (including, without limitation, any material right to any
indemnification).
ARTICLE 9 - INFORMATION
Until the Revolving Credit Facility has been terminated and the Term Loan
and all the Secured Obligations have been indefeasibly paid in full, unless the
Lender shall otherwise consent in the manner set forth in SECTION 12.11, the
Borrowers will furnish to the Lender at the Lender's Office:
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Section 9.01 FINANCIAL STATEMENTS.
(a) AUDITED YEAR-END STATEMENTS. As soon as available, but in any event
within 120 days after the end of each fiscal year of the Borrowers, copies of
the consolidated balance sheet of the Borrowers at the end of such fiscal year
and the related statements of income, shareholders' equity and cash flow for
such fiscal year, in each case setting forth in comparative form the figures for
the previous year of the Borrowers and reported on, without qualification, by
Price Waterhouse LLP or other independent certified public accountants selected
by the Borrowers and acceptable to the Lender.
(b) MONTHLY FINANCIAL STATEMENTS. As soon as available, but in any event
within 30 days after the end of each accounting month of the Borrowers, copies
of the unaudited consolidated balance sheet of the Borrowers as at the end of
such month and the related unaudited income statement for the Borrowers for such
month and for the portion of the fiscal year of the Borrowers through such
month, certified by the Chairman, President or chief financial officer of the
ILD to the best of his knowledge as presenting fairly the financial condition
and results of operations of the Borrowers as at the date thereof and for the
periods ended on such date, subject to normal year end adjustments.
(c) PROJECTED FINANCIAL STATEMENTS. As soon as available, but in any
event within 30 days prior to the end of each fiscal year of the Borrowers,
forecasted financial statements, prepared by the Borrowers, consisting of
balance sheets, cash flow statements and income statements of the Borrowers,
reflecting projected borrowings hereunder and setting forth the assumptions on
which such forecasted financial statements were prepared, covering the one-year
period until the next fiscal year end.
All such financial statements shall be complete and correct in all material
respects and all such financial statements referred to in CLAUSES (a) and (b)
shall be prepared in accordance with GAAP (except, with respect to interim
financial statements, for the omission of footnotes) applied consistently
throughout the periods reflected therein.
Section 9.02 ACCOUNTANTS' CERTIFICATE. Together with each delivery of
financial statements required by SECTION 9.01(a), a certificate of the
accountants who performed the audit in connection with such statements (a)
stating that they have reviewed this Agreement and that, in making the audit
necessary to the issuance of a report on such financial statements, they have
obtained no knowledge of any Default or Event of Default or, if such accountants
have obtained knowledge of a Default or Event of Default, specifying the nature
and period of existence thereof, and (b) setting forth the calculations
necessary to establish whether or not the Borrowers were in compliance with the
covenants contained in SECTIONS 10.01, 10.02, and 10.05 as of the date of such
statements.
The Borrowers authorize the Lender to discuss the financial condition of the
Borrowers with the Borrowers' independent certified public accountants and
agrees that such discussion or communication shall be without liability to
either the Lender or the Borrowers' independent
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certified public accountants. The Borrowers shall deliver a letter addressed
to such accountants authorizing them to comply with the provisions of this
SECTION 9.02.
Section 9.03 OFFICER'S CERTIFICATE. Together with each delivery of
financial statements required by SECTION 9.01(a) and (b), a certificate of the
ILD's Chairman, President or chief financial officer (a) stating that, based on
an examination sufficient to enable him to make an informed statement, no
Default or Event of Default exists or, if such is not the case, specifying such
Default or Event of Default and its nature, when it occurred, whether it is
continuing and the steps being taken by the Borrowers with respect to such
Default or Event of Default, and (b) setting forth the calculations necessary to
establish whether or not the Borrowers were in compliance with the covenants
contained in SECTIONS 10.01, 10.02, and 10.05 as of the date of such statements.
Section 9.04 MANAGEMENT REPORTS. Together with each delivery of
financial statements required pursuant to SECTION 9.01(a) or on a quarterly
basis with respect to those required under SECTION 9.01(b), Borrower will
deliver a management report (a) describing the operations and financial
condition of Borrowers for the quarter then ended and the portion of the current
fiscal year then elapsed; (b) setting forth in comparative form the
corresponding figures in the most recently delivered projection for the current
fiscal year delivered to Lender pursuant to SECTION 9.01(c); and (c) discussing
the reasons for any significant variations. The information above shall be
presented in reasonable detail and shall be certified by the chief financial
officer of ILD to the effect that such information fairly presents the results
of operations and financial condition of Borrowers as at the dates and for the
periods indicated.
Section 9.05 COPIES OF OTHER REPORTS. (a) Promptly upon receipt thereof,
copies of all reports, if any, submitted to the Borrowers or their Board of
Directors by its independent public accountants, including, without limitation,
all management reports.
(b) From time to time and promptly upon each request, such forecasts,
data, certificates, reports, statements, opinions of counsel, documents or
further information regarding the business, assets, liabilities, financial
condition, results of operations or business prospects of the Borrowers as the
Lender may reasonably request. The rights of the Lender under this SECTION
9.04(b) are in addition to and not in derogation of its rights under any other
provision of this Agreement or any Loan Document.
(c) If requested by the Lender, statements in conformity with the
requirements of Federal Reserve Form G-1 or U-1 referred to in Regulations G and
U, respectively, of the Board of Governors of the Federal Reserve System.
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Section 9.06 NOTICE OF LITIGATION AND OTHER MATTERS. Prompt notice of:
(a) the commencement, to the extent that either of the Borrowers are aware
of the same, of all proceedings and investigations by or before any governmental
or nongovernmental body and all actions and proceedings in any court or before
any arbitrator against or in any other way relating adversely to, or adversely
affecting, the Borrowers or any Affiliate of the Borrowers or any of their
respective property, assets or businesses which might, singly or in the
aggregate, cause a Default or an Event of Default or have a Materially Adverse
Effect,
(b) any amendment of the articles of incorporation or by-laws of the
Borrowers,
(c) the cancellation or termination of any LEC billing and collection
agreement,
(d) any change in the business, assets, liabilities, financial condition,
results of operations or business prospects of either of the Borrowers or any
Affiliate of either of the Borrowers which has had or may have any Materially
Adverse Effect and any change in the executive officers of either of the
Borrowers, and
(e) any (i) Default or Event of Default, or (ii) event that constitutes or
that, with the passage of time or giving of notice or both, would constitute a
default or event of default by the Borrowers under any material agreement (other
than this Agreement) to which either Borrower is a party or by which either
Borrower or any of its property may be bound if the exercise of remedies
thereunder by the other party to such agreement would have, either individually
or in the aggregate, a Materially Adverse Effect.
Section 9.07 ERISA. As soon as possible and in any event within 30 days
after either of the Borrowers know, or have reason to know, that:
(a) any Termination Event with respect to a Benefit Plan has occurred or
will occur,
(b) the aggregate present value of the Unfunded Vested Accrued Benefits
under all plans has increased to an amount in excess of $0, or
(c) either of the Borrowers are in "default" (as defined in Section
4219(c)(5) of ERISA) with respect to payments to a Multiemployer Plan required
by reason of its complete or partial withdrawal (as described in Section 4203 or
4205 of ERISA) from such Multiemployer Plan,
a certificate of the Chairman, President or the chief financial officer of ILD
setting forth the details of such of the events described in CLAUSES (a)
through(c) as applicable and the action which is proposed to be taken with
respect thereto and, simultaneously with the filing thereof, copies of any
notice or filing which may be required by the PBGC or other agency of the United
States government with respect to such of the events described in CLAUSES (a)
through(c) as applicable.
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ARTICLE 10 - NEGATIVE COVENANTS
Until the Revolving Credit Facility has been terminated and the Term Loan
and all the Secured Obligations have been indefeasibly paid in full, unless the
Lender shall otherwise consent in the manner set forth in SECTION 12.11, the
Borrowers will not directly or indirectly:
Section 10.01 FINANCIAL RATIOS.
(a) SENIOR FUNDED DEBT TO EBITDA. Permit the ratio of the Borrowers
Senior Funded Debt to their aggregate EBITDA for the four (4) most recently
completed fiscal quarters, as measured quarterly, at any time:
(i) from December 31, 1997 through and including June 30, 1998, to be
greater than 6.5 to 1.0;
(ii) from July 1, 1998 through and including March 30, 1999, to be
greater than 5.0 to 1.0;
(iii) from March 31, 1999 through and including March 30, 2000, to
be greater than 3.5 to 1.0;
(iv) from March 31, 2000 and at all times thereafter, to be greater
than 3.0 to 1.0.
(b) MINIMUM NET WORTH. Permit the aggregate Net Worth of the Borrowers,
as measured quarterly, at any time:
(i) from the Effective Date through and including the date which is
six (6) months after the Effective Date, to be less than $15,500,000;
(ii) for each six (6) month period thereafter, to be less than the
minimum Net Worth as required hereunder for the immediately preceding six
(6) month period PLUS seventy-five percent (75%) of the Net Income of
Borrowers during such period.
(c) MINIMUM FIXED CHARGE COVERAGE RATIO. Permit the Fixed Charge Coverage
Ratio, as measured quarterly for the four (4) most recently completed fiscal
quarters, as measured quarterly, at any time:
(i) from December 31, 1997 through and including June 29, 1998, to
be less than 1.05 to 1.0;
(ii) from June 30, 1998 through and including December 30, 1998, to
be less than 1.10 to 1.0;
(iii) from December 31, 998 through and including December 30,
1999, to be
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less than 1.20 to 1.0; and
(iv) from December 31, 1999 and at all times thereafter, to be less
than 1.35 to 1.0.
Section 10.02 INDEBTEDNESS. Create, assume, or otherwise become or remain
obligated in respect of, or permit or suffer to exist or to be created, assumed
or incurred or to be outstanding any Indebtedness for Money Borrowed, except for
Permitted Indebtedness for Money Borrowed and the Sirrom Subordinated
Indebtedness.
Section 10.03 GUARANTIES. Become or remain liable with respect to any
Guaranty of any obligation of any other Person, except for Permitted Guaranties.
Section 10.04 INVESTMENTS. Acquire, after the Agreement Date, any
Business Unit or Investment or, after such date, permit any Investment to be
outstanding, other than Permitted Investments; PROVIDED, HOWEVER, that in the
event there is not Event of Default hereunder, either Borrower may (i)
acquire, through an asset purchase transaction, the assets of another entity
for a total purchase price (whether consisting of cash, notes or other
consideration) equal to or less than $2,000,000, and (ii) acquire, through an
equity or pooling basis, an interest in another entity for an amount not to
exceed $4,000,000; PROVIDED, FURTHER, HOWEVER, that (i) any such acquisition
shall be consummated by a Borrower or another entity which shall, prior to
any such acquisition, become a Borrower hereunder, and (ii) after giving
effect to any such transaction there must be no Event of Default hereunder
and Borrowers must have Availability of at least $1,500,000.
Section 10.05 CAPITAL EXPENDITURES. Make or incur any Capital
Expenditures, except that the Borrowers may make or incur Capital Expenditures
in an amount not to exceed, in the aggregate, $2,500,000 for fiscal year 1997,
and $1,500,000, for each other fiscal year during the term hereof.
Section 10.06 RESTRICTED DISTRIBUTIONS AND PAYMENTS. Declare or make any
Restricted Distribution or Restricted Payment, other than Permitted Dividends.
Section 10.07 MERGER, CONSOLIDATION AND SALE OF ASSETS. Merge or
consolidate with any other Person or sell, lease or transfer or otherwise
dispose of all or a substantial portion of their assets to any Person other than
the Permitted Distributions and Permitted Asset Dispositions.
Section 10.08 AFFILIATE TRANSACTIONS. Effect any transaction with any
Affiliate on a basis less favorable to the Borrowers or their Subsidiaries than
would be the case if such transaction had been effected with a Person not an
Affiliate.
Section 10.09 LIENS. Create, assume or permit or suffer to exist or to be
created or assumed any Lien on any of the property or assets of the Borrowers,
real, personal or mixed, tangible or intangible, except for Permitted Liens.
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Section 10.10 NO NEGATIVE PLEDGES. Enter into or assume any agreement
(other than the documents evidencing the Sirrom Subordinated Indebtedness, as
unamended, and the Loan Documents) prohibiting the creation or assumption of any
Lien upon its properties or assets, whether nor owned or hereafter acquired
other than in connection with the Purchase Money Indebtedness, provided any such
agreement prohibiting the creation or assumption of any Lien entered into in
connection with any purchase shall extend only to the assets so purchased and
shall in no event extend to the Collateral.
Section 10.11 OPERATING LEASES. Enter into any lease other than a
Capitalized Lease (excluding the leases for the Switches) which would cause the
annual aggregate payment obligations of the Borrowers under all leases (other
than leases of real property in effect on the Effective Date (and renewals and
substitutions therefor)) to exceed $750,000 in the aggregate.
Section 10.12 BENEFIT PLANS. Permit, or take any action which would
result in, the aggregate present value of the Unfunded Vested Accrued Benefits
under all Benefit Plans of the Borrowers to exceed $0.
Section 10.13 SALES AND LEASEBACKS. Except for the leases for the
Switches, enter into any arrangement with any Person providing for the leasing
from such Person of real or personal property which has been or is to be sold or
transferred, directly or indirectly, by the Borrowers to such Person.
Section 10.14 AMENDMENTS OF OTHER AGREEMENTS. Amend in any way the
interest rate or principal amount or schedule of payments of principal and
interest with respect to any Indebtedness (other than the Secured Obligations)
other than to reduce the interest rate or extend the schedule of payments with
respect thereto.
Section 10.15 MINIMUM AVAILABILITY. Permit Availability to be less than
$500,000 at any time.
Section 10.16 NET INCOME. Incur aggregate pre-tax Net Income in the
Borrowers' 1997 fiscal year of less than $1.00.
ARTICLE 11 - DEFAULT
Section 11.01 EVENTS OF DEFAULT. Each of the following shall constitute
an Event of Default, whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment or order of any court or any order, rule or regulation of any
governmental or nongovernmental body:
(a) DEFAULT IN PAYMENT OF LOANS. Either Borrower shall default in any
payment of principal of, or interest on any Loan or either Note when and as due
(whether at maturity, by reason of acceleration or otherwise).
(b) OTHER PAYMENT DEFAULT. Either Borrower shall default in the payment,
as and when
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due, of principal of or interest on, any other Secured Obligation, and such
default shall continue for five days after written notice thereof has been
given to either Borrower by the Lender.
(c) MISREPRESENTATION. Any representation or warranty made or deemed to
be made by either Borrower under this Agreement or any other Loan Document or
any amendment hereto or thereto shall at any time prove to have been incorrect
or misleading in any material respect when made.
(d) DEFAULT IN PERFORMANCE. Either Borrower shall default in the
performance or observance of any term, covenant, condition or agreement
contained in (i) ARTICLES 6, 7, 8, 9 or 10 or (ii) any other provision of this
Agreement (other than as specifically provided for otherwise in this SECTION
11.01) and such default shall continue for a period of 30 days after written
notice thereof has been given to either Borrower by the Lender.
(e) INDEBTEDNESS CROSS-DEFAULT. (i) A Borrower shall fail to pay when due
and payable the principal of or interest on the Sirrom Subordinated
Indebtedness, the Shareholder Subordinated Indebtedness or any other
Indebtedness (other than the Loans or Notes) where the principal amount of such
Indebtedness is in excess of $50,000, or (ii) the maturity of any such
Indebtedness shall have (A) been accelerated in accordance with the provisions
of any indenture, contract or instrument providing for the creation of or
concerning such Indebtedness, or (B) been required to be prepaid prior to the
stated maturity thereof, or (iii) any event shall have occurred and be
continuing which, with or without the passage of time or the giving of notice,
or both, would permit any holder or holders of such Indebtedness, any trustee or
agent acting on behalf of such holder or holders or any other Person so to
accelerate such maturity.
(f) OTHER CROSS-DEFAULTS. A Borrower shall default in the payment when
due or in the performance or observance of any material obligation or condition
of any agreement, contract or lease (other than the Security Documents or any
such agreement, contract or lease relating to Indebtedness), if the exercise of
remedies thereunder by the other party to such agreement could have a Materially
Adverse Effect.
(g) VOLUNTARY BANKRUPTCY PROCEEDING. Any Obligor shall (i) commence a
voluntary case under the federal bankruptcy laws (as now or hereafter in
effect), (ii) commence a proceeding seeking to take advantage of any other laws,
domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding
up or composition for adjustment of debts, (iii) consent to or fail to contest
in a timely and appropriate manner any petition filed against it in an
involuntary case under such bankruptcy laws or other laws, (iv) apply for or
consent to, or fail to contest in a timely and appropriate manner, the
appointment of, or the taking of possession by, a receiver, custodian, trustee
or liquidator of itself or of a substantial part of its property, domestic or
foreign, (v) admit in writing its inability to pay its debts as they become due,
(vi) make a general assignment for the benefit of creditors, or (vii) take any
corporate action for the purpose of authorizing any of the foregoing.
(h) INVOLUNTARY BANKRUPTCY PROCEEDING. A case or other proceeding shall
be commenced against any Obligor in any court of competent jurisdiction seeking
(i) relief under the federal bankruptcy laws (as now or hereafter in effect) or
under any other laws, domestic or foreign,
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relating to bankruptcy, insolvency, reorganization, winding up or adjustment
of debts, or (ii) the appointment of a trustee, receiver, custodian,
liquidator or the like of any Obligor or of all or any substantial part of
the assets, domestic or foreign, of any Obligor, and such case or proceeding
shall continue undismissed or unstayed for a period of 60 consecutive
calendar days, or an order granting the relief requested in such case or
proceeding against any Obligor (including, but not limited to, an order for
relief under such federal bankruptcy laws) shall be entered.
(i) LOAN DOCUMENTS. Any default or Event of Default (or similar term
representing a default with no right to cure) under any other Loan Document
shall occur or any Obligor shall default in the performance or observance of any
material term, covenant, condition or agreement contained in, or the payment of
any other sum covenanted to be paid by any Obligor under, any such Loan Document
(which continues after any applicable cure period); or any provision of this
Agreement, or of any other Loan Document after delivery thereof hereunder, shall
for any reason cease to be valid and binding, other than a nonmaterial provision
rendered unenforceable by operation of law, or any Obligor or other party
thereto (other than the Lender) shall so state in writing; or this Agreement or
any other Loan Document, after delivery thereof hereunder, shall for any reason
(other than any action taken independently by the Lender and except to the
extent permitted by the terms thereof) cease to create a valid, perfected and,
except as otherwise expressly permitted herein, first priority Lien on, or
security interest in, any of the Collateral purported to be covered thereby.
(j) JUDGMENT. One or more judgments or orders for the payment of money
which individually or in the aggregate exceed $250,000 in amount shall be
entered against any Obligor by any court and any such judgment or order shall
continue undischarged or unstayed for 30 days, unless bonded for appeal.
(k) ATTACHMENT. One or more warrants or writs of attachment or execution
or similar process which individually or in the aggregate exceed $250,000 in
value shall be issued against any property of any Obligor and any such warrant
or process shall continue undischarged or unstayed for 30 days.
(l) ERISA. (i) Any Termination Event with respect to a Benefit Plan shall
occur that, after taking into account the excess, if any, of (A) the fair market
value of the assets of any other Benefit Plan with respect to which a
Termination Event occurs on the same day (but only to the extent that such
excess is the property of a Borrower) over (B) the present value on such day of
all vested nonforfeitable benefits under such other Benefit Plan, results in an
Unfunded Vested Accrued Benefit in excess of $0, (ii) any Benefit Plan shall
incur an "accumulated funding deficiency" (as defined in Section 412 of the Code
or Section 302 of ERISA) for which a waiver has not been obtained in accordance
with the applicable provisions of the Code and ERISA, or (iii) a Borrower is in
"default" (as defined in Section 4219(c)(5) of ERISA) with respect to payments
to a Multiemployer Plan resulting from a Borrower's complete or partial
withdrawal (as described in Section 4203 or 4205 of ERISA) from such
Multiemployer Plan.
(m) QUALIFIED AUDITS. The independent certified public accountants
retained by the Borrowers shall refuse to deliver an opinion in accordance with
SECTION 9.01(a) with respect to the annual financial statements of the
Borrowers.
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(n) CHANGE OF CONTROL. If (i) any one Person or group of Persons has
"beneficial ownership" (within the meaning Section 13(d) of the Securities
Exchange Act of 1934, as amended), of 49% (on a fully-diluted basis) of all
classes of capital stock of ILD entitled to vote in elections of directors of
ILD, (ii) ILD shall cease to own, beneficially and of record, at least 55% of
the outstanding capital stock of IOS or such ownership shall cease to vest in
ILD voting control of IOS or (iii) there shall be any amendment to Article III
of that certain Amended and Restated Shareholders' Agreement to be dated as of
August 31, 1997, by and among ILD and the shareholders of ILD as of the date
hereof.
(o) MATERIAL ADVERSE CHANGE. There occurs any act, omission, event,
undertaking or circumstance or series of acts, omissions, events, undertakings
or circumstances which have a Materially Adverse Effect.
(p) CHANGE IN MANAGEMENT. Mr. Michael F. Lewis shall for any reason cease
to be the Chairman of ILD and/or Mr. Dennis J. Stoutenburgh shall for any reason
cease to be the President of ILD and 120 days shall have elapsed during which
time no replacement(s) satisfactory to the Lender shall have been appointed.
(q) INVALIDITY OF RELATED TRANSACTIONS DOCUMENTS. Any of the Related
Transactions Documents for any reason, other than a partial or full release or
termination in accordance with the terms thereof, ceases to be in full force and
effect or is declared to be null and void, or the validity or enforceability
thereof or any Related Transaction shall be contested or challenged by any party
thereto or any of such parties' respective shareholders or any Governmental
Authority, or any Obligor denies that it has any further liability under any
Loan Documents to which it is party, or gives notice to such effect.
(r) LEC PAYMENTS. If on or before November 1, 1997, any and all LEC
Payments to be received by a Borrower have not been redirected from a WorldCom
account with First Union National Bank of North Carolina (or another similar
account of a party other than a Borrower with a lending institution other than
Lender) to Borrowers' account with Lender.
(s) ILD PREFERRED STOCK. WorldCom, for any reason, exercises its right to
require ILD to repurchase the Preferred Stock Portion (as that term is defined
in the Related Transactions Documents) of the consideration it receives in
connection with the Related Transactions at any time prior to the Termination
Date.
(t) REDUCTION OF TERM NOTE. If on or before March 31, 1998, the Term Note
shall not have been reduced by at least $500,000 from (a) the payment to Lender
of the Net Proceeds of a Permitted Asset Disposition or (b) the proceeds of
certain additional capital contribution by the existing shareholders of ILD in
addition to those contributions required pursuant to SUBSECTION (u) of this
Section.
(u) ILD CAPITAL. If on or before September 16, 1997, there shall not have
been a contribution (in addition to the Contributions) by certain new or
existing shareholders of ILD of not less than $1,650,000 to the capital of ILD.
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(v) SALE-LEASEBACK. If on or prior to October 2, 1997, Borrower shall not
have (i) consummated a sale-leaseback of the Switches, and/or (ii) a
contribution by certain new or existing shareholders of ILD to the capital of
ILD which, in the aggregate, total at least $1,000,000.
(w) NETWORK SERVICES AGREEMENT. If on or prior to the date which is
seventy-five (75) days following the Effective Date, Borrowers shall not have
entered into a Network Services Agreement, in form and substance satisfactory to
Lender in its sole discretion, with WorldCom.
Section 11.02 REMEDIES.
(a) AUTOMATIC ACCELERATION AND TERMINATION OF FACILITIES. Upon the
occurrence of an Event of Default specified in SECTION 11.01(g) or (h),(i) the
principal of and the interest on the Loans and the Notes at the time
outstanding, and all other amounts owed to the Lender under this Agreement or
any of the Loan Documents and all other Secured Obligations, shall thereupon
become due and payable without presentment, demand, protest or other notice of
any kind, all of which are expressly waived, anything in this Agreement or any
of the Loan Documents to the contrary notwithstanding, and (ii) the Revolving
Credit Facility, the Term Loan and the commitment of the Lender to make advances
thereunder or under this Agreement shall immediately terminate.
(b) OTHER REMEDIES. If any Event of Default (other than as specified in
SECTION 11.01(g) or(h)) shall have occurred and be continuing, the Lender, in
its sole and absolute discretion, may do any of the following:
(i) declare the principal of and interest on the Loans and the Notes
at the time outstanding, and all other amounts owed to the Lender under
this Agreement or any of the Loan Documents and all other Secured
Obligations, to be forthwith due and payable, whereupon the same shall
immediately become due and payable without presentment, demand, protest or
other notice of any kind, all of which are expressly waived, anything in
this Agreement or the Loan Documents to the contrary notwithstanding;
(ii) terminate the Revolving Credit Facility, the Term Loan and any
commitment of the Lender to make advances hereunder;
(c) FURTHER REMEDIES. If any Event of Default shall have occurred and be
continuing, the Lender, in its sole and absolute discretion, may do any of the
following:
(i) notify, or request both of the Borrowers to notify, in writing or
otherwise, any Account Debtor or obligor with respect to any one or more of
the Receivables to make payment to the Lender or any agent or designee of
the Lender, at such address as may be specified by the Lender, and, if,
notwithstanding the giving of any notice, any Account Debtor or other such
obligor shall make payments either Borrower, such Borrower shall hold all
such payments it receives in trust for the Lender, without commingling the
same with other funds or property of, or held by, such Borrower and shall
deliver the same to the Lender or any such agent or designee immediately
upon receipt by such Borrower in the
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identical form received, together with any necessary endorsements;
(ii) settle or adjust disputes and claims directly with Account
Debtors and other obligors on Receivables for amounts and on terms which
the Lender considers advisable and in all such cases only the net amounts
received by the Lender in payment of such amounts, after deductions of
costs and attorneys' fees, shall constitute Collateral, and the Borrowers
shall have no further right to make any such settlements or adjustments or
to accept any returns of merchandise;
(iii) enter upon any premises on which Collateral may be located
and, without resistance or interference by the Borrowers, take physical
possession of any or all thereof and maintain such possession on such
premises or move the same or any part thereof to such other place or places
as the Lender shall choose, without being liable to the Borrowers on
account of any loss, damage or depreciation that may occur as a result
thereof, so long as the Lender shall act reasonably and in good faith;
(iv) require the Borrowers to and the Borrowers shall, without
charge to the Lender, assemble the Collateral and maintain or deliver it
into the possession of the Lender or any agent or representative of the
Lender at such place or places as the Lender may designate;
(v) at the expense of the Borrowers, cause any of the Collateral to
be placed in a public or field warehouse, and the Lender shall not be
liable to the Borrowers on account of any loss, damage or depreciation that
may occur as a result thereof, so long as the Lender shall act reasonably
and in good faith;
(vi) without notice, demand or other process, and without payment of
any rent or any other charge, enter any of the Borrowers' premises and,
without breach of the peace, until the Lender completes the enforcement of
its rights in the Collateral, take possession of such premises or place
custodians in exclusive control thereof, remain on such premises and use
the same and any of the Equipment, for the purpose of (A) completing any
work in process, preparing any Collateral for disposition and disposing
thereof, and (B) collecting any Receivable, and the Lender is hereby
granted a license or sublicense and all other rights as may be necessary,
appropriate or desirable to use the Intellectual Property in connection
with the foregoing, and the rights of the Borrowers under all licenses and
franchise agreements shall inure to the Lender's benefit (provided,
however, that any use of any federally registered trademarks as to any
goods shall be subject to the control as to the quality of such goods of
the owner of such trademarks and the goodwill of the business symbolized
thereby);
(vii) exercise any and all of its rights hereunder and under any
and all of the Security Documents;
(viii) apply any cash Collateral to the payment of the Secured
Obligations in any order in which the Lender may elect or use such cash in
connection with the exercise of any of its other rights hereunder or under
any of the Security Documents;
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(ix) establish or cause to be established one or more Lockboxes or
other arrangement for the deposit of proceeds of Receivables, and, in such
case, the Borrowers shall cause to be forwarded to the Lender at the
Lender's Office, on a daily basis, copies of all checks and other items of
payment and deposit slips related thereto deposited in such Lockboxes,
together with collection reports in form and substance satisfactory to the
Lender; and
(x) exercise all of the rights and remedies of a secured party under
the UCC (whether or not the UCC is applicable) and under any other
applicable law, including, without limitation, the right, without notice
except as specified below and with or without taking the possession
thereof, to sell the Collateral or any part thereof in one or more parcels
at public or private sale, at any location chosen by the Lender, for cash,
on credit or for future delivery and at such price or prices and upon such
other terms as the Lender may deem commercially reasonable. The Borrowers
agree that, to the extent notice of sale shall be required by law, at least
10 days' notice to the Borrowers of the time and place of any public sale
or the time after which any private sale is to be made shall constitute
reasonable notice, but notice given in any other reasonable manner or at
any other reasonable time shall also constitute reasonable notification.
The Lender shall not be obligated to make any sale of Collateral regardless
of notice of sale having been given. The Lender may adjourn any public or
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time
and place to which it was so adjourned.
Section 11.03 APPLICATION OF PROCEEDS. All proceeds from each sale of, or
other realization upon, all or any part of the Collateral following an Event of
Default shall be applied or paid over as follows:
(a) FIRST: to the payment of all costs and expenses incurred in connection
with such sale or other realization, including reasonable attorneys' fees
actually incurred,
(b) SECOND: to the payment of the Secured Obligations (with the Borrowers
remaining liable for any deficiency) in any order which the Lender may elect,
and
(c) THIRD: the balance (if any) of such proceeds shall be paid to the
Borrowers or, subject to any duty imposed by law or otherwise, to whomsoever is
entitled thereto.
THE BORROWERS SHALL REMAIN LIABLE AND WILL PAY, ON DEMAND, ANY DEFICIENCY
REMAINING IN RESPECT OF THE SECURED OBLIGATIONS, TOGETHER WITH INTEREST THEREON
AT A RATE PER ANNUM EQUAL TO THE HIGHEST RATE THEN PAYABLE HEREUNDER ON SUCH
SECURED OBLIGATIONS, WHICH INTEREST SHALL CONSTITUTE PART OF THE SECURED
OBLIGATIONS.
Section 11.04 POWER OF ATTORNEY. In addition to the authorizations
granted to the Lender under SECTION 7.15 or under any other provision of this
Agreement or any of the Loan Documents, upon and after an Event of Default, each
Borrower hereby irrevocably designates, makes, constitutes and appoints the
Lender (and all Persons designated by the Lender from time to time) as
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such Borrower's true and lawful attorney and agent in fact, and the Lender or
any agent of the Lender may, without notice to such Borrower, and at such
time or times as the Lender or any such agent in its sole discretion may
determine, in the name of such Borrower or the Lender,
(a) demand payment of the Receivables, enforce payment thereof by legal
proceedings or otherwise, settle, adjust, compromise, extend or renew any or all
of the Receivables or any legal proceedings brought to collect the Receivables,
discharge and release the Receivables or any of them and exercise all of the
Borrowers' individual or collective rights and remedies with respect to the
collection of Receivables,
(b) prepare, file and sign the name of either of the Borrowers on any
proof of claim in bankruptcy or any similar document against any Account Debtor
or any notice of Lien, assignment or satisfaction of Lien or similar document in
connection with any of the Collateral,
(c) endorse the name of either of the Borrowers upon any chattel paper,
document, instrument, notice, freight bill, bill of lading or similar document
or agreement relating to the Receivables, the Inventory or any other Collateral,
(d) use the stationery of either of the Borrowers, open either of the
Borrowers' mail, notify the post office authorities to change the address for
delivery of either of the Borrowers' mail to an address designated by the Lender
and sign the name of either of the Borrowers to verifications of the Receivables
and on any notice to the Account Debtors,
(e) use the information recorded on or contained in any data processing
equipment and computer hardware and software relating to the Receivables,
Inventory, Equipment or other Collateral to which either of the Borrowers or any
Subsidiary of the Borrowers has access.
Section 11.05 MISCELLANEOUS PROVISIONS CONCERNING REMEDIES.
(a) RIGHTS CUMULATIVE. The rights and remedies of the Lender under this
Agreement, the Notes and each of the Loan Documents shall be cumulative and not
exclusive of any rights or remedies which it or they would otherwise have. In
exercising such rights and remedies, the Lender may be selective and no failure
or delay by the Lender in exercising any right shall operate as a waiver of such
right nor shall any single or partial exercise of any power or right preclude
its other or further exercise or the exercise of any other power or right.
(b) WAIVER OF MARSHALING. The Borrowers hereby waive any right to require
any marshaling of assets and any similar right.
(c) LIMITATION OF LIABILITY. Nothing contained in this ARTICLE 11 or
elsewhere in this Agreement or in any of the Loan Documents shall be construed
as requiring or obligating the Lender or any agent or designee of the Lender to
make any demand or to make any inquiry as to the nature or sufficiency of any
payment received by it or to present or file any claim or notice or take any
action with respect to any Receivable or any other Collateral or the moneys due
or to become due thereunder or in connection therewith or to take any steps
necessary to preserve any rights against prior parties, and neither the Lender
nor any of its agents or designees shall have any
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liability to either of the Borrowers for actions taken pursuant to this
ARTICLE 11, any other provision of this Agreement or any of the Loan
Documents, so long as the Lender or such agent or designee shall act
reasonably and in good faith.
(d) APPOINTMENT OF RECEIVER. In any action under this ARTICLE 11, the
Lender shall be entitled to the appointment of a receiver, without notice of any
kind whatsoever, to take possession of all or any portion of the Collateral and
to exercise such power as the court shall confer upon such receiver.
Section 11.06 TRADEMARK LICENSE. Each of the Borrowers hereby grants to
the Lender the nonexclusive right and license to use any trademark then used by
either of the Borrowers, for the purposes set forth in SECTION 11.02(c)(vi) and
for the purpose of enabling the Lender to realize on the Collateral and to
permit any purchaser of any portion of the Collateral through a foreclosure sale
or any other exercise of the Lender's rights and remedies under the Loan
Documents to use, sell or otherwise dispose of the Collateral bearing any such
trademark. Such right and license is granted free of charge, without the
requirement that any monetary payment whatsoever be made to either of the
Borrowers or any other Person by the Lender. The Borrowers hereby represent,
warrant, covenant and agree that it presently has, and shall continue to have,
the right, without the approval or consent of others, to grant the license set
forth in this SECTION 11.06.
ARTICLE 12 - MISCELLANEOUS
Section 12.01 NOTICES.
(a) METHOD OF COMMUNICATION. Except as specifically provided in this
Agreement or in any of the Loan Documents, all notices and the communications
hereunder and thereunder shall be in writing or by telephone subsequently
confirmed in writing. Notices in writing shall be delivered personally or sent
by overnight courier service, by certified or registered mail, postage pre-paid,
or by facsimile transmission and shall be deemed received, in the case of
personal delivery, when delivered, in the case of overnight courier service, on
the next Business Day after delivery to such service, in the case of mailing, on
the third day after mailing (or, if such day is a day on which deliveries of
mail are not made, on the next succeeding day on which deliveries of mail are
made) and, in the case of facsimile transmission, upon transmittal; provided
that in the case of notices to the Lender, the Lender shall be charged with
knowledge of the contents thereof only when such notice is actually received by
the Lender. A telephonic notice to the Lender as understood by the Lender will
be deemed to be the controlling and proper notice in the event of a discrepancy
with or failure to receive a confirming written notice.
(b) ADDRESSES FOR NOTICES. Notices to any party shall be sent to it at
the following addresses, or any other address of which all the other parties are
notified in writing.
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If to the Borrowers: ILD Teleservices, Inc.
14651 Dallas Parkway, Suite 905
Dallas, Texas 75240
Attn: Mr. Dennis Stoutenburgh
Facsimile No.: (972) 503-1919
and
ILD Teleservices, Inc.
13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
Attention: Mr. Michael F. Lewis
Facsimile No.: (904) 285-3616
with a copy to Cashin, Morton & Mullins
Two Midtown Plaza, Suite 1900
1360 Peachtree Street, N.E.
Atlanta, Georgia 30309-3214
Attn: C. Read Morton, Jr.
Facsimile No.: (404) 870-1529
If to the Lender: NationsBank, N.A.
c/o NationsBank Business Credit
600 Peachtree Street, 13th Floor
Atlanta, GA 30308
Attention: Ms. Angela Peterson Leake
Facsimile No.: (404) 607-6437
with a copy to: Smith, Gambrell & Russell, LLP
Promenade II, Suite 3100
1230 Peachtree Street, N.E.
Atlanta, Georgia 30309
Attention: Bruce W. Moorhead, Jr., Esq.
Facsimile No.: (404) 815-3509
(c) LENDER'S OFFICE. The Lender hereby designates its office located at
600 Peachtree Street, 13th Floor, Atlanta, Georgia 30308, or any subsequent
office which shall have been specified for such purpose by written notice to the
Borrowers, as the office to which payments due are to be made and at which Loans
will be disbursed.
Section 12.02 EXPENSES. The Borrowers agree to pay or reimburse on demand
all costs and expenses incurred by the Lender, including, without limitation,
the reasonable and actual fees and disbursements of counsel, in connection with
(a) the negotiation, preparation, execution, delivery, administration,
enforcement and termination of this Agreement and each of the other Loan
Documents, whenever the same shall be executed and delivered, including, without
limitation, (i)
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the out-of-pocket costs and expenses incurred in connection with the
administration and interpretation of this Agreement and the other Loan
Documents, (ii) the costs and expenses of appraisals of the Collateral, (iii)
taxes, fees and other charges of filing the Financing Statements and
continuations and the costs and expenses of taking other actions to perfect,
protect, and continue the Security Interest; (b) the preparation, execution
and delivery of any waiver, amendment, supplement or consent by the Lender
relating to this Agreement or any of the Loan Documents; (c) sums paid or
obligations incurred in connection with the payment of any amount or taking
any action required of the Borrowers under the Loan Documents that the
Borrowers fail to pay or take; (d) costs of inspections and verifications of
the Collateral, including, without limitation, standard per diem fees charged
by the Lender, travel, lodging, and meals for inspections of the Collateral
and the Borrowers' operations and books and records by the Lender's agents
whenever an Event of Default exists; (e) costs and expenses of forwarding
loan proceeds, collecting checks and other items of payment, and establishing
and maintaining the cash management system; (f) costs and expenses of
preserving and protecting the Collateral; (g) after the occurrence of a
Default, consulting with and obtaining opinions and appraisals from one or
more Persons, including real estate and personal property appraisers,
accountants and lawyers, concerning the value of any Collateral for the
Secured Obligations or related to the nature, scope or value of any right or
remedy of the Lender hereunder or under any of the Loan Documents, including
any review of factual matters in connection therewith, which expenses shall
include the fees and disbursements of such Persons; and (h) costs and
expenses paid or incurred to obtain payment of the Secured Obligations,
enforce the Security Interest, sell or otherwise realize upon the Collateral,
and otherwise enforce the provisions of the Loan Documents, or to prosecute
or defend any claim in any way arising out of, related to or connected with,
this Agreement or any of the Loan Documents, which expenses shall include the
reasonable fees and disbursements of counsel and of experts and other
consultants retained by the Lender.
The foregoing shall not be construed to limit any other provisions of the Loan
Documents regarding costs and expenses to be paid by the Borrowers. The
Borrowers hereby authorize the Lender to debit the Borrowers' loan accounts (by
increasing the principal amount of the Revolving Credit Loan) in the amount of
any such costs and expenses owed by the Borrowers when due.
Section 12.03 STAMP AND OTHER TAXES. The Borrowers will pay any and all
stamp, registration, recordation and similar taxes, fees or charges and shall
indemnify the Lender against any and all liabilities with respect to or
resulting from any delay in the payment or omission to pay any such taxes, fees
or charges, which may be payable or determined to be payable in connection with
the execution, delivery, performance or enforcement of this Agreement and any of
the Loan Documents or the perfection of any rights or security interest
thereunder.
Section 12.04 SETOFF. In addition to any rights now or hereafter granted
under applicable law, and not by way of limitation of any such rights, upon and
after the occurrence of any Default or Event of Default, the Lender and any
participant with the Lender in the Loans are hereby authorized by the Borrowers
at any time or from time to time, without notice to the Borrowers or to any
other Person, any such notice being hereby expressly waived, to set off and to
appropriate and to apply any and all deposits (general or special, time or
demand, including, but not limited to, indebtedness evidenced by certificates of
deposit, whether matured or unmatured) and any other indebtedness at any time
held or owing by the Lender or any participant to or for the credit or the
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account of the Borrowers against and on account of the Secured Obligations
irrespective or whether or not (a) the Lender shall have made any demand under
this Agreement or any of the Loan Documents, or (b) the Lender shall have
declared any or all of the Secured Obligations to be due and payable as
permitted by SECTION 11.02 and although such Secured Obligations shall be
contingent or unmatured.
Section 12.05 LITIGATION. EACH OF THE LENDER AND THE BORROWERS HEREBY
KNOWINGLY, INTENTIONALLY AND VOLUNTARILY WAIVES TRIAL BY JURY IN ANY ACTION
OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT IN WHICH AN ACTION MAY BE
COMMENCED BY OR AGAINST EITHER OF THE BORROWERS OR THE LENDER ARISING OUT OF
THIS AGREEMENT, THE COLLATERAL OR ANY ASSIGNMENT THEREOF OR BY REASON OF ANY
OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN EITHER OF THE BORROWERS AND THE
LENDER OF ANY KIND OR NATURE. THE BORROWERS AND THE LENDER HEREBY AGREE THAT
THE FEDERAL COURT OF THE NORTHERN DISTRICT OF GEORGIA OR, AT THE OPTION OF
THE LENDER, ANY COURT IN WHICH THE LENDER SHALL INITIATE LEGAL OR EQUITABLE
PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN
CONTROVERSY AND WHICH SITS IN A JURISDICTION IN WHICH EITHER OF THE BORROWERS
TRANSACT BUSINESS SHALL HAVE NON-EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE
ANY CLAIMS OR DISPUTES BETWEEN EITHER OF THE BORROWERS AND THE LENDER,
PERTAINING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT OR THE LOAN DOCUMENTS OR
TO ANY MATTER ARISING THEREFROM. BOTH OF THE BORROWERS EXPRESSLY SUBMIT AND
CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED
IN SUCH COURTS, HEREBY WAIVING PERSONAL SERVICE OF THE SUMMONS AND COMPLAINT
OR OTHER PROCESS OR PAPERS ISSUED THEREIN AND AGREEING THAT SERVICE OF SUCH
SUMMONS AND COMPLAINT OR OTHER PROCESS OR PAPERS MAY BE MADE BY REGISTERED OR
CERTIFIED MAIL ADDRESSED TO BOTH OF THE BORROWERS AT THE ADDRESS SET FORTH IN
SECTION 12.01(b), WHICH SERVICE SHALL BE DEEMED MADE UPON RECEIPT THEREOF.
THE NON-EXCLUSIVE CHOICE OF FORUM SET FORTH IN THIS SECTION SHALL NOT BE
DEEMED TO PRECLUDE THE ENFORCEMENT OF ANY JUDGMENT OBTAINED IN SUCH FORUM OR
THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE THE SAME IN ANY
APPROPRIATE JURISDICTION.
Section 12.06 WAIVER OF RIGHTS. BOTH OF THE BORROWERS HEREBY KNOWINGLY,
INTENTIONALLY AND VOLUNTARILY WAIVE ALL RIGHTS WHICH EITHER OF THE BORROWERS
HAVE UNDER CHAPTER 14 OF TITLE 44 OF THE OFFICIAL CODE OF GEORGIA OR UNDER ANY
SIMILAR PROVISION OF APPLICABLE LAW TO NOTICE AND TO A JUDICIAL HEARING PRIOR TO
THE ISSUANCE OF A WRIT OF POSSESSION ENTITLING THE LENDER, ITS SUCCESSORS AND
ASSIGNS TO POSSESSION OF THE COLLATERAL UPON DEFAULT OR EVENT OF DEFAULT.
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING AND WITHOUT LIMITING ANY OTHER
RIGHT WHICH THE LENDER MAY HAVE, BOTH OF THE BORROWERS CONSENT THAT, IF THE
LENDER FILES A PETITION FOR AN
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IMMEDIATE WRIT OF POSSESSION IN COMPLIANCE WITH SECTIONS 44-14-261 AND
44-14-262 OF THE OFFICIAL CODE OF GEORGIA OR UNDER ANY SIMILAR PROVISION OF
APPLICABLE LAW AND THIS WAIVER OR A COPY HEREOF IS ALLEGED IN SUCH PETITION
AND ATTACHED THERETO, THE COURT BEFORE WHICH SUCH PETITION IS FILED MAY
DISPENSE WITH ALL RIGHTS AND PROCEDURES HEREIN WAIVED AND MAY ISSUE FORTHWITH
AN IMMEDIATE WRIT OF POSSESSION IN ACCORDANCE WITH CHAPTER 14 OF TITLE 44 OF
THE OFFICIAL CODE OF GEORGIA OR IN ACCORDANCE WITH ANY SIMILAR PROVISION OF
APPLICABLE LAW, WITHOUT THE NECESSITY OF AN ACCOMPANYING BOND AS OTHERWISE
REQUIRED BY SECTION 44-14-263 OF THE OFFICIAL CODE OF GEORGIA OR IN
ACCORDANCE WITH ANY SIMILAR PROVISION OF APPLICABLE LAW. EACH OF THE
BORROWERS HEREBY ACKNOWLEDGES THAT IT HAS READ AND FULLY UNDERSTANDS THE
TERMS OF THIS WAIVER AND THE EFFECT HEREOF.
Section 12.07 REVERSAL OF PAYMENTS. To the extent the Borrowers make a
payment or payments to the Lender or the Lender receives any payment or proceeds
of the Collateral for the Borrowers' benefit, which payment(s) or proceeds or
any part thereof are subsequently invalidated, declared to be fraudulent or
preferential, set aside and/or required to be repaid to a trustee, receiver or
any other party under any bankruptcy law, state or federal law, common law or
equitable cause, then, the Lender shall have the continuing and exclusive right
to apply, reverse and re-apply any and all payments to any portion of the
Secured Obligations, and, to the extent of such payment or proceeds received,
the Secured Obligations or part thereof intended to be satisfied shall be
revived and continued in full force and effect, as if such payment or proceeds
had not been received by the Lender.
Section 12.08 INJUNCTIVE RELIEF. The Borrowers recognize that, in the
event the Borrowers fail to perform, observe or discharge any of its obligations
or liabilities under this Agreement, any remedy of law may prove to be
inadequate relief to the Lender; therefore, the Borrowers agree that the Lender,
at the Lender's option, shall be entitled to temporary and permanent injunctive
relief in any such case without the necessity of proving actual damages.
Section 12.09 ACCOUNTING MATTERS. All financial and accounting
calculations, measurements and computations made for any purpose relating to
this Agreement, including, without limitation, all computations utilized by the
Borrowers to determine whether they are in compliance with any covenant
contained herein, shall, unless there is an express written direction or consent
by the Lender to the contrary, be performed in accordance with GAAP.
Section 12.10 ASSIGNMENT; PARTICIPATION. All the provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns, except that neither of the
Borrowers may assign or transfer any of its or their rights under this
Agreement. The Lender may assign to one or more Persons, or sell participations
to one or more Persons in, all or a portion of its rights and obligations
hereunder and under the Notes and, in connection with any such assignment or
sale of a participation, may assign its rights and obligations under the
Security Documents. The Lender may, in connection with any assignment or
proposed assignment or sale or proposed sale of a participation, disclose to the
assignee or proposed assignee or participant or proposed participant any
information relating to the Borrowers furnished to the
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Lender by or on behalf of the Borrowers.
Section 12.11 AMENDMENTS. Any term, covenant, agreement or condition of
this Agreement or any of the other Loan Documents may be amended or waived and
any departure therefrom may be consented to if, but only if, such amendment,
waiver or consent is in writing signed by the Lender and, in the case of an
amendment, by the Borrowers. Unless otherwise specified in such waiver or
consent, a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
Section 12.12 PERFORMANCE OF BORROWERS' DUTIES. The Borrowers'
obligations under this Agreement and each of the Loan Documents shall be
performed by the Borrowers at their sole cost and expense. If one or more of
the Borrowers shall fail to do any act or thing which it or they have covenanted
to do under this Agreement or any of the Loan Documents, the Lender may (but
shall not be obligated to) do the same or cause it to be done either in the name
of the Lender or in the name and on behalf of one or more of the Borrowers, and
the Borrowers hereby irrevocably authorize the Lender so to act.
Section 12.13 INDEMNIFICATION. The Borrowers agree to reimburse the
Lender for all reasonable costs and expenses, including reasonable counsel fees
actually incurred and disbursements, incurred and to indemnify and hold the
Lender harmless from and against all losses suffered by the Lender, other than
losses resulting from the Lender's gross negligence or willful misconduct, in
connection with (a) the exercise by the Lender of any right or remedy granted to
it under this Agreement or any of the Loan Documents, (b) any claim, and the
prosecution or defense thereof, arising out of or in any way connected with this
Agreement or any of the Loan Documents, except in the case of a dispute between
the Borrowers and the Lender in which the Borrowers prevail in a final
unappealed or unappealable judgment, and (c) the collection or enforcement of
the Secured Obligations or any of them.
Section 12.14 ALL POWERS COUPLED WITH INTEREST. All powers of attorney
and other authorizations granted to the Lender and any Persons designated by the
Lender pursuant to any provisions of this Agreement or any of the Loan Documents
shall be deemed coupled with an interest and shall be irrevocable so long as any
of the Secured Obligations or the Term Loan remain unpaid or unsatisfied or the
Revolving Credit Facility has not been terminated.
Section 12.15 SURVIVAL. Notwithstanding any termination of this
Agreement, (a) until the Term Loan and all Secured Obligations have been paid in
full and the Revolving Credit Facility terminated, the Lender shall retain its
Security Interest and shall retain all rights under this Agreement and each of
the Security Documents with respect to the Collateral as fully as though this
Agreement had not been terminated, and (b) the indemnities to which the Lender
is entitled under the provisions of this ARTICLE 12 and any other provision of
this Agreement and the Loan Documents shall continue in full force and effect
and shall protect the Lender against events arising after such termination as
well as before.
Section 12.16 SEVERABILITY OF PROVISIONS. Any provision of this Agreement
or any other Loan Document which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective only to the extent
of such prohibition or unenforceability without
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invalidating the remainder of such provision or the remaining provisions
hereof or thereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
Section 12.17 GOVERNING LAW. This Agreement and the Notes shall be
construed in accordance with and governed by the law of the State of Georgia.
Section 12.18 COUNTERPARTS. This Agreement may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and shall be binding
upon all parties, their successors and assigns, and all of which taken together
shall constitute one and the same agreement.
Section 12.19 REPRODUCTION OF DOCUMENTS. This Agreement, each of the Loan
Documents and all documents relating thereto, including, without limitation, (a)
consents, waivers and modifications that may hereafter be executed, (b)
documents received by the Lender, and (c) financial statements, certificates and
other information previously or hereafter furnished to the Lender, may be
reproduced by the Lender by any photographic, photostatic, microcard, microfilm,
miniature photographic or other similar process, and the Lender may destroy any
original document so reproduced. Each party hereto stipulates that, to the
extent permitted by applicable laws any such reproduction shall be as admissible
in evidence as the original itself in any judicial or administrative proceeding
(whether or not the original shall be in existence and whether or not such
reproduction was made by such Lender in the regular course of business), and any
enlargement, facsimile or further reproduction of such reproduction shall
likewise be admissible in evidence.
Section 12.20 FUNDS TRANSFER SERVICES.
(a) Each Borrower acknowledges that the Lender has made available to it a
description of security procedures regarding funds transfers executed by the
Lender or an affiliate bank at the request of such Borrower (the "Security
Procedures"). Each Borrower and the Lender agree that the Security Procedures
are commercially reasonable. Each Borrower further acknowledges that the full
scope of the Security Procedures which the Lender or such affiliate bank offers
and strongly recommends for funds transfers is available only if such Borrower
communicates directly with the Lender or such affiliate bank as applicable in
accordance with said procedures. If either Borrower attempts to communicate by
any other method or otherwise not in accordance with the Security Procedures,
the Lender or such affiliate bank, as applicable, shall not be required to
execute such instructions, but if the Lender or such affiliate bank, as
applicable, does so, such Borrower will be deemed to have refused the Security
Procedures that the Lender or such affiliate bank, as applicable, offers and
strongly recommends, and such Borrower will be bound by any funds transfer,
whether or not authorized, which is issued in such Borrower's name and accepted
by the Lender or such affiliate bank, as applicable, in good faith. The Lender
or such affiliate bank, as applicable, may modify the Security Procedures at
such time or times and in such manner as the Lender or such affiliate bank, as
applicable, in its sole discretion, deems appropriate to meet prevailing
standards of good banking practice. By continuing to use the Lender's or such
affiliate bank's, as applicable, wire transfer services after receipt of any
modification of the Security Procedures, each Borrower agrees that the Security
Procedures, as modified, are likewise commercially reasonable. Each Borrower
further agrees to establish and maintain procedures to safeguard the Security
Procedures and any information related thereto.
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(b) The Lender or such affiliate bank, as applicable, will generally use
the Fedwire funds transfer system for domestic funds transfers, and the funds
transfer system operated by the Society for Worldwide International Financial
Telecommunication (SWIFT) for international funds transfers. International
funds transfers may also be initiated through the Clearing House InterBank
Payment System (CHIP) or international cable. However, the Lender or such
affiliate bank, as applicable, may use any means and routes that the Lender or
such affiliate bank, as applicable, in its sole discretion, may consider
suitable for the transmission of funds. Each payment order, or cancellation
thereof, carried out through a funds transfer system or a clearing house will be
governed by all applicable funds transfer system rules and clearing house rules
and clearing arrangements, whether or not the Lender or such affiliate bank, as
applicable, is a member of the system, clearing house or arrangement and each
Borrower acknowledges that the Lender's or such affiliate bank's, as applicable,
right to reverse, adjust, stop payment or delay posting of an executed payment
order is subject to the laws, regulations, rules, circulars and arrangements
described herein.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers in several counterparts all as of the
day and year first written above.
BORROWERS:
ILD TELESERVICES, INC.
Attest: By: /s/ Dennis J. Stoutenburgh
---------------------------------
Name:
-------------------------------
Title:
------------------------------
Name: /s/ C. Read Morton
--------------------------------
Title: Secretary
-------------------------------
[CORPORATE SEAL]
INTELLICALL OPERATOR SERVICES, INC.
Attest: By: /s/ Dennis J. Stoutenburgh
---------------------------------
Name: /s/ C. Read Morton
--------------------------------
Title: Asst. Secretary
-------------------------------
Name:
--------------------------------
Title:
-------------------------------
[CORPORATE SEAL]
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LENDER:
NATIONSBANK, N.A.
Attest: By: /s/ Paul P. Warley
---------------------------------
Name: /s/ Paul P. Warley
-------------------------------
Title: Vice President
------------------------------
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EXHIBIT 10.8.4
REVOLVING CREDIT NOTE
$20,000,000.00 August 29, 1997
FOR VALUE RECEIVED, on February 13, 2001, each of the undersigned
promises to pay to the order of NationsBank, N.A. (hereinafter, together with
any holder hereof, called "Holder") at Atlanta, Georgia (or at such other
place as the Holder may designate in writing to the undersigned) the
principal amount of $20,000,000.00 or so much thereof as has been advanced
hereunder.
Each of the undersigned shall pay interest as provided in that
certain Loan and Security Agreement between the undersigned and Holder dated
August 29, 1997 (the "Loan Agreement;" capitalized terms used herein but not
otherwise defined herein shall have the meanings ascribed to such terms in
the Loan Agreement).
It is contemplated that the principal sum evidenced by this Note may
be reduced from time to time and that additional advances may be made from
time to time, as provided in the Loan Agreement; provided, however, that the
outstanding principal amount evidenced by this Note shall not exceed the
maximum amount provided in the Loan Agreement.
This Note is subject to the terms and conditions to the Loan
Agreement.
No delay or failure on the part of the Holder in the exercise of any
right or remedy hereunder, under the Loan Agreement, the Security Documents
or at law or in equity, shall operate as a waiver thereof, and no single or
partial exercise by the Holder of any right or remedy hereunder, under the
Loan Agreement, the Security Documents, or at law or in equity shall preclude
or estop another or further exercise thereof or the exercise of any other
right or remedy.
Principal and interest on this Note shall be payable and paid in
lawful money of the United States of America
Time is of the essence of this Note and, in case this Note is
collected by law or through an attorney at law, or under advice therefrom,
the undersigned agrees to pay all costs of collection, including reasonable
attorneys' fees actually incurred if collected by or through an attorney.
The provisions of this Note shall be construed and interpreted and
all rights and obligations of the parties hereunder determined in accordance
with the laws of the State of Georgia.
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IN WITNESS WHEREOF, the undersigned have caused this Note to be
executed, sealed and delivered in Atlanta, Georgia, in their corporate names,
by and through their respective duly authorized officers, as of the day and
year first above written.
ILD TELESERVICES, INC.
Attest: By: /s/ Dennis Stoutenburgh
-------------------------------
Name:
-------------------------------
Title:
-------------------------------
Name: /s/ C. Read Morton
-------------------------------
Title: Secretary
-------------------------------
[CORPORATE SEAL]
INTELLICALL OPERATOR SERVICES, INC.
Attest: By: /s/ Dennis Stoutenburgh
-------------------------------
Name:
-------------------------------
Title:
-------------------------------
Name: /s/ C. Read Morton
-------------------------------
Title: Secretary
-------------------------------
[CORPORATE SEAL]
2
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EXHIBIT 10.8.5
TERM NOTE
$5,000,000.00 August 29, 1997
FOR VALUE RECEIVED, on February 13, 2001, the undersigned promise to
pay to the order of NationsBank, N.A. (hereinafter, together with any holder
hereof, called "Holder") at Atlanta, Georgia (or at such other place as the
Holder may designate in writing to the undersigned) the principal amount of
$5,000,000.00 or so much thereof as has been advanced hereunder.
Each of the undersigned shall pay principal and interest as provided
in that certain Loan and Security Agreement between the undersigned and Holder
dated August 29, 1997 (the "Loan Agreement" capitalized terms used herein and
not otherwise defined herein shall have the meanings ascribed to such terms in
the Loan Agreement).
It is contemplated that the principal sum evidenced by this Note shall
be reduced from time to time, as provided in the Loan Agreement.
This Note is subject to the terms and conditions to the Loan Agreement.
No delay or failure on the part of the Holder in the exercise of any
right or remedy hereunder, under the Loan Agreement, the Security Documents or
at law or in equity, shall operate as a waiver thereof, and no single or partial
exercise by the Holder of any right or remedy hereunder, under the Loan
Agreement, the Security Documents, or at law or in equity shall preclude or
estop another or further exercise thereof or the exercise of any other right or
remedy.
Principal and interest on this Note shall be payable and paid in lawful
money of the United States of America
Time is of the essence of this Note and, in case this Note is collected
by law or through an attorney at law, or under advice therefrom, the undersigned
agrees to pay all costs of collection, including reasonable attorneys' fees
actually incurred if collected by or through an attorney.
The provisions of this Note shall be construed and interpreted and all
rights and obligations of the parties hereunder determined in accordance with
the laws of the State of Georgia.
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Note to be
executed, sealed and delivered in Atlanta, Georgia, in their corporate names, by
and through their respective duly authorized officers, as of the day and year
first above written.
ILD TELESERVICES, INC.
Attest: By: /s/ Dennis Stoutenburgh
--------------------------------
Name:
------------------------------
Title:
-----------------------------
Name: /s/ C. Read Morton
----------------------------
Title: Secretary
----------------------------
[CORPORATE SEAL]
INTELLICALL OPERATOR SERVICES, INC.
Attest: By: /s/ Dennis Stoutenburgh
-----------------------------
Name: /s/ C. Read Morton Name:
----------------------------- --------------------------
Title: Secretary Title:
----------------------------- --------------------------
[CORPORATE SEAL]
2
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EXHIBIT 10.10
THIS MERGER AGREEMENT is dated as of December 15, 1997 by and among ILD
TELESERVICES, INC., a Delaware corporation ("ILD"), on the one hand; and
INTERLINK TELECOMMUNICATIONS, INC., a Georgia corporation ("Interlink");
INTERLINK TELECOMMUNICATIONS OF FLORIDA, INC., a Georgia corporation
("Interlink-Fla.") (Interlink and Interlink-Fla. may be individually referred to
as an "Interlink Co." and collectively referred to as "Interlink Cos.") and
REGINALD P. MCFARLAND, a Georgia resident (the "Shareholder"), on the other
hand, with reference to the following.
W I T N E S S E T H:
WHEREAS, the Interlink Cos. conduct telecommunications operations, and
the Shareholder is the owner of all of the issued and outstanding capital stock
of the Interlink Cos.; and
WHEREAS, the parties wish to provide for the merger of the Interlink
Cos. with and into ILD, as well as to provide for certain additional matters
described herein, subject to the terms and conditions of this Agreement
(including the definitions contained in Section 8.7 hereof).
NOW, THEREFORE, in consideration of the respective premises and the
mutual promises and agreements contained herein, the parties hereto, intending
to be legally bound, hereby agree as follows:
ARTICLE I
MERGER OF INTERLINK COS. WITH AND INTO ILD
1.1 THE MERGER. Subject to the terms and conditions hereof, the
parties hereto agree that the Interlink Cos. shall be merged with and into ILD
by virtue of the Merger and the separate existence of each Interlink Co. shall
thereupon cease. ILD shall be the surviving corporation in the Merger and
shall continue to be governed by the laws of the State of Delaware, and the
separate corporate existence of ILD with all its purposes, rights, privileges,
powers, immunities, and franchises shall continue unaffected by the Merger.
Subject to the terms and conditions hereof, the parties hereto shall take all
actions necessary in accordance with applicable law and the respective charter
documents of ILD and the Interlink Cos. to cause the Merger to be consummated.
1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective
upon the filing of a Certificate of Merger in substantially the form as EXHIBIT
H hereto with both the Secretary of State of Delaware (in accordance with the
applicable provisions of the Delaware Code) and the Secretary of State of
Georgia (in accordance with the applicable provisions of the Georgia Code). For
purposes hereof, the time at which the Merger shall become effective shall be
referred to as the "Effective Time".
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1.3 TAX-FREE REORGANIZATION. The parties intend that the Merger
qualify as a reorganization within the meeting of Section 368(a)(1)(A) of the
Code. ILD shall not take any action that would cause the Merger to fail to
qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the
Code.
1.4 ALL NECESSARY ACTION. From time to time after the Effective
Time, as and when requested by ILD, the Shareholder shall execute and deliver
all such documents and assurances and to take and do, in the name and on behalf
of either Interlink Co. or otherwise, all such other actions as may be
reasonably necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets of the
Interlink Cos. in ILD or otherwise to carry out this Agreement, including
without limitation, removing the name "Interlink" from that of any other entity
owned by the Shareholder. The Shareholder shall assist ILD officials in the
delivery of access rights to any source codes forming part of the Intellectual
Property (as described in Section 3.8 hereof).
1.5 EFFECT OF MERGER.
1.5.1 Upon the Effective Time, the certificates which theretofore
represent issued and outstanding shares of capital stock of the Interlink Cos.
shall cease to represent any rights with respect thereto, and subject to the
Delaware Code and the Georgia Code, shall only represent the right to receive
the Merger Consideration described in Article II hereof. The Shareholder hereby
covenants that he shall not assert appraisal rights under the Georgia Code and
shall tender his certificates representing outstanding shares of capital stock
of either Interlink Co. in connection with the Merger subject to the terms and
conditions of this Agreement.
1.5.2 The Certificate of Incorporation of ILD in effect immediately
prior to the Effective Time (subject to Section 6.2 (g) hereof) shall be the
Certificate of Incorporation of ILD as of the Effective Time, until duly amended
in accordance with its terms and the Delaware Code. The corporate name of ILD
shall remain "ILD Teleservices, Inc."
1.5.3 The bylaws of ILD in effect immediately prior to the Effective
Time shall be the bylaws of ILD as of the Effective Time, until duly amended in
accordance with their terms and the Delaware Code.
1.5.4. The officers and directors of ILD immediately prior to Effective
Time shall be and remain the officers and directors of ILD as of the Effective
Time until their successors have been duly elected or appointed and qualified or
until their earlier death, resignation and removal in accordance with ILD's
Certificate of Incorporation and bylaws.
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ARTICLE II
MERGER CONSIDERATION.
2.1 TERMS AND CONDITIONS OF THE MERGER.
2.1.1 At the Effective Time, by virtue of the Merger, each share of
Interlink Stock shall be retired and converted into its pro rata share (based
on the percentage determined by dividing such one share by the total number of
outstanding shares of Interlink Stock) of the following:
(1) Two Million Dollars ($2,000,000) in cash in immediately
available funds (which at the option of the Shareholder, may be by
cashier's check or by wire transfer);
(2) Two Million Seven Hundred Thousand Dollars ($2,700,000) in the
form of a subordinated promissory note from ILD in substantially the
form attached as EXHIBIT A-1;
(3) 6,117 Shares of common stock of ILD determined by dividing Four
Million Four Hundred Thousand Dollars ($4,400,000) by a deemed per
share price of $273;
(4) One Million Dollars ($1,000,000) in the form of a subordinated
promissory note from ILD in substantially the form attached as EXHIBIT
A-2; and
(5) 6,666.67 shares of Series B-3 Preferred Stock of ILD, which
stock shall have the rights and preferences shown in EXHIBIT B attached
hereto which rights and preferences include a stated value of $300 per
share, shall bear an annual dividend rate of six percent (6%) payable
quarterly, and shall be subject to a put right at any time after the
expiration of five years from the issue date.
2.1.2 At the Effective Time, by virtue of the Merger, each share of
Interlink-Fla. Stock shall be retired and converted into its pro rata share
(based on the percentage determined by dividing such one share by the total
number of outstanding shares of Interlink-Fla. Stock) of Ten Dollars ($10.00).
2.2 EXCHANGE PROCEDURE. The secretary for each of Interlink and
Interlink-Fla. shall deliver to ILD at the Closing a shareholder ledger,
certified under oath, showing the number of shares of capital stock of the
respective Interlink Co. held by any shareholders of either of the Interlink
Cos., and the numbered certificates represented thereby. At the Closing, ILD
shall deliver to the Shareholder, as set forth in Section 2.1, cash, notes and
stock certificates (which may include fractional shares) sufficient in the
aggregate to pay the Merger Consideration and the Shareholder shall thereupon
surrender his certificates of shares of capital stock of the Interlink Cos.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF INTERLINK COS.
AND THE SHAREHOLDER
Each of Interlink, Interlink-Fla. and the Shareholder, jointly and
severally, represent and warrant to ILD as follows:
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3.1 ORGANIZATION, CORPORATE POWER AND AUTHORIZATION. Each Interlink
Co. is a corporation duly organized, validly existing and in good standing under
the laws of the State of Georgia, and has all requisite corporate power and
authority to own, lease, and operate its properties and to carry on its
business as currently conducted. Except as set forth on SCHEDULE 3.1, each
Interlink Co. is duly qualified and in good standing to do business in each
jurisdiction in which the character of the property owned, leased or operated by
it and the nature of the business conducted by it makes such qualification or
licensing necessary. SCHEDULE 3.1 hereto contains a complete and accurate list
of the jurisdictions of qualification of the Interlink Cos. Each Interlink Co.
has all requisite right, power and capacity to execute, deliver and perform this
Agreement and to consummate the transactions contemplated hereby. The
execution, delivery and performance by each Interlink Co. of this Agreement have
been duly authorized by all requisite corporate action on the part of such
Interlink Co. This Agreement has been duly and validly executed and delivered
by each Interlink Co. and constitutes the valid and binding obligation of each
such Interlink Co., enforceable in accordance with its terms, subject, as to
enforcement of remedies, to general equity principles and to applicable
bankruptcy, insolvency, and similar laws and moratorium laws from time to time
in effect. Correct and complete copies of the Articles of Incorporation and
bylaws of each Interlink Co. are attached as part of SCHEDULE 3.1, and such
copies reflect all amendments made thereto at any time prior to the date of this
Agreement.
3.2 OWNERSHIP OF THE SHARES, SUBSIDIARIES. The authorized capital
stock for each Interlink Co. consists solely of 500 shares of common stock, no
par value per share. SCHEDULE 3.2 hereto contains a complete and correct list as
the date hereof of the name of all shareholders of each Interlink Co. and the
number of issued and outstanding shares of capital stock of either Interlink Co.
owned of record by each shareholder. All such shares of capital stock of the
Interlink Cos. reflected on such schedule are validly issued, fully paid and
non-assessable, and are free and clear of any liens, restrictions, claims,
equities, charges, options, rights of first refusal, or encumbrances, with no
defects of title whatsoever. Other than the shareholders shown on SCHEDULE 3.2,
no other person or entity owns any shares of capital stock of either Interlink
Co. or any rights to the revenues (except for commissions due in the ordinary
course of business) or profits thereof. Except as set forth on SCHEDULE 3.2,
there are no outstanding rights, subscriptions, options, warrants, calls,
commitments or agreements relating to any capital stock or other security of
either Interlink Co., and there is no authorized or outstanding instrument or
security of any kind convertible into or exchangeable for any such capital stock
or other security. There are no restrictions on the transfer pertaining to the
capital stock of either Interlink Co. or the ownership thereof other than those
imposed by securities laws or the Georgia Code. Neither of the Interlink Cos.
has any subsidiaries or holds any stock or equity interests in any other
corporation, partnership, limited liability company or other entity. The
Shareholder does not hold any equity interests in any privately-held entity in
the telecommunications business other than Stratacom, Inc.
3.3 CONSENTS AND APPROVALS. SCHEDULE 3.3 attached hereto contains a
complete and correct list of all consents, waivers or approvals required for the
Interlink Cos. or the Shareholder to consummate this Agreement whether resulting
from a requirement under, or possible occurrence of default or breach of: (i)
any provision of law, statute, rule or regulation to which
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either Interlink Co. is subject, including without limitation, the rules and
regulations of state public service commissions, (ii) any term or condition of
any charter provision or bylaw of either Interlink Co. or any shareholder
agreement in effect among the shareholders of either Interlink Co., or (iii)
any lease, contract, mortgage, note, billing and collection agreement, operator
services agreement, vending arrangement for prepaid calling cards, or other
agreement or instrument to which either Interlink Co. is a party or to which
either Interlink Co. or any of its properties is subject.
3.4 TITLE AND CONDITION OF PROPERTIES. SCHEDULE 3.4 attached hereto
contains a complete list of all items of real property and material items of
tangible personal property used by, or otherwise owned by, the Interlink Cos. in
their businesses and operations, reflecting in each instance, whether such
property is owned or leased. The Interlink Cos. have good and marketable title
to the assets owned by them, free and clear of any mortgage, pledge, security
interest, lien, title retention agreement or other charge or encumbrance of any
kind except as otherwise set forth on SCHEDULE 3.4. No items of personal
property have been disposed, sold or transferred by either Interlink Co. since
June 15, 1997 except in the ordinary course of business. Except for the property
separately listed under the heading "Excluded Personal Property" on SCHEDULE
3.4, there are no items of personal property used in the business and operations
of the Interlink Cos. which are not owned by the Interlink Cos. or held by
either of them under a written license or lease. SCHEDULE 3.4 also separately
contains a list of spare parts inventory, grouped in general categories.
3.4.1 Except for the spare parts inventory reflected on SCHEDULE 3.4
or as otherwise disclosed therein, each item of network switching and call
processing equipment, computer hardware, dialing boards or other
telecommunications hardware used in the business of the Interlink Cos. is in
good operating condition and repair, subject only to ordinary wear and tear, and
is suitable for use in the business of the Interlink Cos. as currently
conducted. Except as otherwise disclosed on SCHEDULE 3.4, the Interlink Cos.
conduct their own maintenance on the network switching equipment used in the
business of the Interlink Cos., and none of such equipment is, as of the date
hereof under repair, or in possession of vendor or outsourced maintenance
contractor.
3.4.2. SCHEDULE 3.4.2 separately contains a list of the vending
machines or retail outlets from which prepaid calling cards of the Interlink
Cos. are dispensed, whether such machines are owned or leased by the Interlink
Cos., and the location of such machines or retail outlets. Except as disclosed
in SCHEDULE 3.4.2, each vending machine used in the business of the Interlink
Co. is in good operating condition and repair, subject only to ordinary wear and
tear, and is suitable for use in the business of the Interlink Cos. as
currently conducted. The Interlink Cos. maintain the vending machines and,
except as otherwise disclosed on SCHEDULE 3.4.2, none of such machines are, as
of the date hereof, under repair, or in possession of vendor or outsourced
maintenance contractor. Except as disclosed on SCHEDULE 3.4.2, none of the cards
in the vending machines or at the retail outlets as of the date hereof are owned
by any person or entity other than either Interlink Co. There has not been any
damage, printing or encoding problems, or other circumstances which has rendered
more than $5,000 in retail value of the prepaid calling cards
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<PAGE>
inoperable or obsolete in the last 24 months. The prepaid calling card inventory
shall consist of items of a quality useable or saleable in the ordinary course
of business.
3.4.3. SCHEDULE 3.4.3 separately discloses an accounts receivables
aging for the Interlink Cos. as of November 15, 1997. The accounts receivable
shown thereon shall in all respects be true and genuine and represent bona fide
obligations of the respective persons or parties shown to be owing the same, and
shall be collected in the normal course of business subject to (i) reserves
consistent with the reserves set forth in the Interlink Audited Financial
Statements described in Section 3.11 or (ii) holdbacks by OAN Services, Inc.
3.5. NO VIOLATIONS OF LAW; LICENSES AND PERMITS. Except with respect
to the ongoing regulatory compliance activities listed on SCHEDULE 3.5, each
Interlink Co. is in compliance with laws, statutes, ordinances, rules and
regulations of the Federal Communications Commission or state public service
commissions applicable to the operation of their businesses and operations as a
telecommunication service provider or with respect to which compliance is a
condition to engaging in business as a telecommunication service provider.
Except with respect to the ongoing regulatory compliance activities listed on
SCHEDULE 3.5, each Interlink Co. is in compliance in all material respects with
other laws, statutes, ordinances, rules and regulations applicable to the
operation of its businesses and operations, including without limitation, laws
and regulations relating to antitrust compliance, pollution and environmental
control, equal employment opportunity, ERISA, and employee safety. Except with
respect to the ongoing regulatory compliance activities listed on SCHEDULE 3.5,
the facilities used by the Interlink Cos. comply with, conform to and obey all
requirements specified in any hazard insurance policy covering such facilities,
and the local zoning classifications permit the use of such facilities for the
purposes and in the manner that the business is being conducted. Except with
respect to the ongoing regulatory compliance activities listed on SCHEDULE 3.5,
the Interlink Cos. have all licenses, permits or other authorizations of
governmental authorities necessary for the conduct of their business and
operations as currently conducted, and all such licenses or permits are
described on SCHEDULE 3.5. The business of each Interlink Co. has been operated
in compliance with all tariffs, rules and regulations applicable to local
exchange carriers and inter-exchange carriers except with respect to any
noncompliance which will not have an economic impact (either in fines, remedial
action or filings, or in lost revenue) exceeding $25,000.
3.6. LITIGATION. Except as set forth on SCHEDULE 3.6, there is no
claim, suit, action, governmental investigation or litigation, or legal,
administrative, arbitration or other proceeding, of any kind pending or, to the
knowledge of the Shareholder, overtly threatened against, relating to or
involving either Interlink Co. or the Shareholder (whether as plaintiff or
defendant) at law or in equity, before or by any governmental department,
commission, board, bureau, agency, or instrumentality, nor does the Shareholder
know of any ground for any such claim, suit, action, investigation, litigation
or proceeding.
3.7. LEASES AND CONTRACTS. SCHEDULE 3.7 contains a true and complete
list of (i) all agreements, leases or arrangements for vending machines or
written customer contracts to which either Interlink Co. or the Shareholder is a
party and (ii) other written contracts, agreements,
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leases, or other instruments to which either Interlink Co. or the Shareholder is
a party which will have resulted, or is likely to result, in an expenditure by
the Interlink Cos. of more than $10,000 in calender year 1997, in each case with
information as to the term of the agreement (the items disclosed, or that should
have been disclosed, on such schedule are referred to as "Contracts"). The
Interlink Cos. have delivered to ILD or its counsel true and complete copies of
all written Contracts (unless otherwise noted in the correspondence delivering
such Contracts or, in the case of subscriber agreements for the local telephone
business, sales representative agreements with sales representatives, standard
agent agreements with agents, non-exclusive consultant agreements with
consultants, and public pay telephone agreements with customers, a form of the
agreement along with a current list of the parties thereto other than an
Interlink Co). Except as otherwise provided on SCHEDULE 3.7, each of the
Contracts is valid and in full force and effect, and neither Interlink Co. nor,
to the knowledge of the Shareholder, the other party thereto, is in default
thereunder. Also set forth on SCHEDULE 3.7 are the customers of the Interlink
Cos. which have averaged more than $5,000 in gross revenues to the Interlink
Cos. for the first ten calender months of 1997. Neither of the Interlink Cos.
has received notice that any of the customers to the Contracts intends to cancel
or terminate the same, nor does either Interlink Co. have knowledge of any
pending or threatened bankruptcy, insolvency or similar proceeding with respect
to any party to the Contracts. Neither the Interlink Cos. nor the Shareholder
has any knowledge that any of the customers of the Interlink Cos. which
average more than $5,000 in gross revenues per month in 1997 will terminate, or
seek to alter or modify, its existing relationship with the Interlink Cos.,
whether in the normal course of business or upon the consummation of the
transactions contemplated by this Agreement. Except as provided in SCHEDULE
3.3, no consent of any person is needed in order that each such Contract shall
continue in full force and effect in accordance with its terms without penalty,
acceleration or rights of early termination by reason of the consummation of the
Merger.
3.7.1 The billing and collections agreement between Interlink, Harris
Corporation, and OAN Services, Inc. dated as of August 14, 1993 is terminable
at will by Interlink upon written notice to OAN Services, Inc. and Harris
Corporation. The Interlink Cos. have qualified for the prepayment program
offered by OAN Services, Inc. and such program is in effect as of the date
hereof.
3.7.2 The vending machines for prepaid calling cards are in the
locations shown on SCHEDULE 3.4.2 and agreements of the Interlink Cos. for the
sale of prepaid calling cards (whether out of machines or in retail outlets)
constitute valid, legal and binding agreements with the parties in possession of
such locations, and neither of the Interlink Cos. nor the Shareholder know of
any reason why such agreements will not continue in full force and effect after
the Effective Time in accordance with the terms of the agreements. Copies of
written site contracts for the sale of prepaid vending cards have been delivered
to ILD as contemplated in Section 3.7 above. Also provided on SCHEDULE 3.10 is a
summary of the commission structure payable to the owner/lessor for each
location.
3.7.3. There are, as of the date hereof, approximately six months
remaining on the lease on the principal office of the Interlink Cos. in
Marietta, Georgia (the "Interlink Premises Lease").
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The use of the premises as currently conducted is in compliance with all terms
of the Interlink Premises Lease and Interlink has not received any notices of
defaults under such Interlink Premises Lease nor is aware of disputes between
Interlink and the landlord under the Interlink Premises Lease in the 24 months
prior to the date hereof except as set forth on SCHEDULE 3.7.3.
3.7.4 Except as set forth on SCHEDULE 3.7.4, the Interlink Cos. have
delivered to ILD true and correct copies of all policies of fire, casualty,
general liability, use and occupancy, and other forms of insurance covering
their properties, assets and business. The general liability is on a claims
made basis. Neither Interlink Co. has received notice of default under, or
intended cancellation or nonrenewal of, any policies of insurance which insure
the properties, business or liability of the Interlink Cos., nor has either
Interlink Co. been refused any insurance for coverage by an insurance carrier to
which it has applied for insurance. SCHEDULE 3.7.4 separately discloses any
claims made under the insurance policies of the Interlink Cos. in the 24 months
of operation prior to the date hereof.
3.8. INTELLECTUAL PROPERTY. SCHEDULE 3.8 hereto contains a complete
list and brief description of all patents, patent applications, copyrights,
source codes, trademarks, trademarks applications, service marks, designs,
proprietary processes or other intellectual property owned or licensed by the
Interlink Cos. and used in their business and operations (collectively, the
"Intellectual Property"). All Intellectual Property developed, enhanced,
modified or exploited by the Interlink Cos. or the Shareholder in the conduct
of the business of the Interlink Cos. is beneficially owned or licensed by
either Interlink Co., and to the extent that an Interlink Co. has registered
with the U.S. Patent and Trademark Office any Intellectual Property, then such
Interlink Co. has undertaken all necessary renewals and paid all required fees
to perfect its ownership rights in such Intellectual Property. Neither
Interlink nor the Shareholder has undertaken any action to diminish or otherwise
adversely affect the Intellectual Property. Neither Interlink Co. nor the
Shareholder has knowledge of any existing infringing use by any third party of
the Intellectual Property. The use of the Intellectual Property by either
Interlink Co., whether directly by it in its operations or through its
operations with the Harris Corporation in the vending machines for the prepaid
calling cards, has not infringed any intellectual property rights of any third
parties, including without limitation, other persons who have developed and
exploited vending systems for prepaid calling cards. No past or present
shareholder, consultant, officer, director or employee of either Interlink Co.
has any ownership rights to any of the Intellectual Property, including, without
limitation, the network software or customer reporting system used in the
business and operations of the Interlink Cos. With respect to any Intellectual
Property used by the Interlink Cos. under a license: (i) the license agreement
is described on SCHEDULE 3.7 (except a listing of the software is sufficient for
any "pre-wrapped, off-the-shelf" software), (ii) the rights of the Interlink
Cos. to the Intellectual Property thereunder is, subject to the rights of any
licensor thereof, free and clear of any liens and encumbrances, and (iii) the
license agreement permits the use of the Intellectual Property licensed thereby
in the manner currently used by the Interlink Cos. To Shareholder's knowledge,
and except for the payments required in connection with the Intellectual
Property, neither Interlink Co. is obligated or under any liability whatsoever
to make any payments by way of royalties, fees or otherwise to any owner or
licensee of, or other
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claimant to, any patent, trademark, service mark, trade name, copyright or other
intangible asset, with respect to the use thereof or in connection with the
conduct of their business or otherwise.
3.9. TAXES. Except as set forth on SCHEDULE 3.9, each Interlink Co.
has timely filed, or caused to be timely filed, all Taxes required to be paid
or withheld by such Interlink Co. There is not and there will not be any
liability of ILD for any Taxes arising out of or affecting the assets of the
Interlink Cos. relating to a period prior to the Closing Date other than such
Taxes for which adequate reserves are expressly set forth on the Interlink
Audited Financial Statements described in Section 3.11 below and excise, sales,
payroll and other Taxes arising since the date thereof in the normal course of
business. There are no claims or assessments pending against either Interlink
Co. for any alleged deficiency in any Tax, and the Shareholder does not know of
any threatened Tax claims or assessments against either Interlink Co. There are
no outstanding requests by either Interlink Co. for any extension of time within
which to file any return or within which to pay any Taxes shown to be due on any
return. As of the date of this Agreement, no taxing authority is conducting or
has notified either Interlink Co. or the Shareholder that it intends to conduct
an audit of any prior tax period of either Interlink Co. or the Shareholder.
All income tax liabilities of either Interlink Co., if any, arising from the
termination of the "S" corporation status under the Code shall be borne by the
Shareholder as the sole shareholder of such Interlink Co.
3.10. EMPLOYEE MATTERS. SCHEDULE 3.10 hereto contains a true and
complete list of all employees of either Interlink Co. with the job title,
current salary or wage per hour, age, sex, and date of commencement noted for
each such employee. Except as disclosed on such schedule, none of such
employees have been subject to any formal disciplinary proceedings within the
last 12 months. Neither Interlink Co. nor the Shareholder are aware of any
labor strike, dispute, work stoppages or slowdowns occurring or threatened
against the Interlink Cos. in the last 3 years and there are no present
circumstances which are likely to give rise to any such dispute or stoppage.
Except as specified on SCHEDULE 3.10, neither Interlink Co. has any employment
agreement or other contract with any of its employees not terminable at will nor
any bonus or commission arrangements with any of its employees, consultants or
joint venture partners. Neither Interlink Co. is subject to, nor has any
obligation under, any employment, consulting or collective bargaining contracts,
deferred compensation, pension (as defined in Section 3(2) of ERISA),
profit-sharing, bonus, stock option, stock appreciation, stock purchase or other
non-qualified benefit or compensation commitments, benefit plans, arrangements
or plans, including any welfare plans (as defined in Section 3(1) of ERISA),
fringe benefit arrangements, or multi-employer plans (as defined in Section 337A
of ERISA) of or pertaining to the present or former employees of the Interlink
Cos. ILD shall not incur any liability associated with the employee benefit
plans of the Interlink Cos. except to be expressly reserved on the Interlink
Audited Financial Statements. As of the date of this Agreement, there is no
unfair labor practice complaint against either Interlink Co. pending or, to the
knowledge of the Shareholder, threatened before the National Labor Relations
Board. Except as set forth on SCHEDULE 3.10, neither Interlink Co. nor the
Shareholder know of any current health problems (other than pregnancies) of the
current Interlink employees (or their spouses or dependents) which is likely to
cause in any single case more than $10,000 in medical expenses in the 6 months
following the Closing.
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3.11 FINANCIAL INFORMATION.
3.11.1 The Interlink Cos. had monthly consolidated revenues (as defined
in accordance with generally accepted accounting principles) exceeding the
respective figures specified below for each of the months of July, August,
September and October 1997:
<TABLE>
<CAPTION>
<S> <C>
Operator Services Revenue $160,000
Debit Card $390,000
One Plus $ 60,000
</TABLE>
3.11.2 Attached as SCHEDULE 3.11 are audited financial statements of
the Interlink Cos. as of September 30, 1997 with the report of Smith & Howard
(the "Interlink Audited Financial Statements"). The Interlink Audited Financial
Statements have been prepared in accordance with generally accepted accounting
principles, and present fairly the assets, liabilities and financial condition
of the Interlink Cos. as of September 30, 1997, and disclose all liabilities of
the Interlink Cos., whether absolute, contingent, accrued or otherwise, existing
as of the date thereof which are required to be reflected in financial
statements prepared in accordance with generally accepted accounting principles.
Neither Interlink Co. has incurred any liability or obligation related to its
operations (whether accrued, contingent or otherwise) since the date of the
Interlink Audited Financial Statements which, as measured as of the date hereof
and as of the Closing Date, will cause the liabilities and obligations of the
Interlink Cos. which are set forth on the balance sheet in the Interlink Audited
Financial Statements to be exceeded by more than $25,000 except for the
liabilities of the Interlink Cos. separately disclosed on SCHEDULE 3.11 as
"Post-Audit Liabilities". The Shareholder has disclosed all information known
to him to its auditors relevant for the proper accounting of revenues and
liabilities of the Interlink Cos.
3.12 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in
SCHEDULE 3.12, since June 15, 1997: (i) each Interlink Co. has conducted its
business only in the ordinary course; (ii) there has not been any material
adverse change in the business, financial condition, operations, assets or
prospects of the Interlink Cos.; (iii) no Interlink Co. has made any dividends,
distributions or redemptions on its capital stock; (iv) no Interlink Co. has
increased the salary or wages of any employee or officer of the Interlink Cos.
more than 20% of that salary or wages existing as of June 15, 1997; (v) there
has not been any damage, destruction, or loss, whether covered by insurance or
not materially adversely affecting the properties or business of the Interlink
Cos.; (vi) there has not been any sale or transfer by either Interlink Co. of
any tangible or intangible asset other than in the ordinary course of business,
any mortgage or pledge or the creation of any security interest, lien, or
encumbrance on any such asset, or any lease of property, including equipment,
other than tax liens with respect to taxes not yet due and contract rights of
customers in inventory; (vii) no Interlink Co. has incurred any lapse of any
trademark, assumed name, trade name, service mark, copyright or license or any
application with respect to the foregoing; (viii) no Interlink Co. has permitted
any discharge or satisfaction of any lien or encumbrance or the payment of any
liability other than current liabilities in the ordinary course of business;
(ix) neither Interlink Co. has made any loan, advance, or guaranty to or for
the benefit
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of any person except the creation of accounts receivable in the ordinary course
of business; or (x) there has not been an agreement by either Interlink Co. to
do any of the foregoing.
3.13 BANK ACCOUNTS. SCHEDULE 3.13 sets forth a complete and
accurate list of each bank or financial institution in which either Interlink
Co. has an account or safe deposit box (giving the address and account numbers)
and the names of the persons authorized to draw thereon or to have access
thereto.
3.14. NO OMISSIONS OR MISLEADING INFORMATION. No statement of the
Interlink Cos. or the Shareholder contained herein or in any certificate,
schedule, exhibit or other instrument furnished to ILD pursuant to the
provisions hereof contains or will contain any false or misleading statement of
material fact or omits or will omit any material fact required to be stated to
make any of the statements therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF ILD
ILD represents and warrants to the Shareholder, Interlink and
Interlink-Fla. as follows:
4.1 ORGANIZATION. ILD is a corporation duly organized, validly
existing and in good standing under the laws of Delaware, and has all requisite
power and authority and all material licenses, permits, and authorizations
necessary to carry on and conduct its business as it is now being conducted and
to own or lease its properties and assets, and is duly qualified and in good
standing to do business in each jurisdiction in which the character of the
property owned, leased or operated by it and the nature of the business
conducted by it makes such qualification or licensing necessary. ILD has all
requisite right, power and capacity to execute, deliver and perform this
Agreement and to consummate the transactions contemplated hereby. The execution
and delivery of this Agreement by ILD, the performance by ILD of its covenants
and agreements hereunder, and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of ILD. This Agreement has been duly and validly executed and delivered by ILD
and constitutes its valid and binding obligation, enforceable in accordance with
its terms, subject, as to enforcement of remedies, to general equity principles
and to applicable bankruptcy, insolvency and similar laws and moratorium laws
from time to time in effect. Copies of ILD's Second Restated and Amended
Certificate of Incorporation and bylaws are attached as SCHEDULE 4.1 hereof
and such copies reflect all amendments made thereto at any time prior to the
date of this Agreement and such copies are correct and complete.
4.2 CAPITALIZATION OF ILD. SCHEDULE 4.2 hereto contains a complete
and correct list of all authorized capital stock of ILD, the name of all
shareholders of ILD and the number of issued and outstanding shares of capital
stock of ILD owned of record by each shareholder (on a Fully-Diluted Basis). All
of the outstanding shares of capital stock of ILD reflected on SCHEDULE 4.2 are
validly issued, fully paid and non-assessable, and are free and clear of any
liens, restrictions,
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claims, equities, charges, options, rights of first refusal, or encumbrances,
with no defects of title whatsoever (except for restrictions under that certain
Restated and Amended Shareholders Agreement dated as of August 31, 1997 and
except that shares held by Intellicall, Inc. have been pledged to its senior
lender). Other than the agreements separately disclosed on SCHEDULE 4.2, no
other person or entity owns any shares of capital stock of ILD nor are there any
shareholders agreement, voting trust agreements or registration rights
agreements to which ILD is a party, or the knowledge of ILD after due inquiry,
any of its shareholders are a party. No stockholder of ILD has exercised any
registration rights with respect to the capital stock of ILD held by such
stockholder. Except as set forth on SCHEDULE 4.2, there are no outstanding
rights, subscriptions, options, warrants, calls, commitments or agreements
relating to any capital stock or other security of ILD or any subsidiary of ILD,
and there is no authorized or outstanding instrument or security of any kind
convertible into or exchangeable for any such capital stock or other security of
ILD or any subsidiary of ILD. There is no outstanding preferred stock of ILD
which has greater or equal priority, either as to preference in liquidation,
winding up or dissolution or as to dividend rights, than the Series B-3
preferred stock to be issued to Shareholder as part of the Merger Consideration
other than the Series B preferred stock and the Series B-2 preferred stock which
is PARI PASSU to the Series B-3 preferred stock. The registration rights to be
afforded the Shareholder pursuant to the Registration Rights Agreement
referenced in Section 5.8.3 hereof are at least as favorable as registration
rights held by any other shareholder of ILD other than the limited mandatory
registration rights provided in section 1(b) of such agreement. All dividends
which may be payable on preferred stock of ILD have been paid in full. Neither
ILD nor IOS have any treasury shares of capital stock. IOS is the only
subsidiary of ILD and all 1,000 shares of the issued and outstanding stock of
IOS is owned by ILD, has been validly issued, fully paid and non-assessable, and
are free and clear of any liens, restrictions, claims, equities, charges,
options, rights of first refusal, or encumbrances, with no defects of title
whatsoever. ILD does not hold any equity interests in any other corporation,
partnership, limited liability company or other entity. There are no preemptive
rights applicable to the sale or issuance of capital stock by ILD.
4.3 CONSENTS AND APPROVALS. SCHEDULE 4.3 attached hereto contains a
complete and correct list of all consents, waivers or approvals required for ILD
to consummate this Agreement whether resulting from a requirement under, or
possible occurrence of default or breach of: (i) any provision of law, statute,
rule or regulation to which ILD is subject, including without limitation, the
rules and regulations of state public service commissions, (ii) any term or
condition of any charter or bylaw of ILD or any shareholder agreement in effect
among the shareholders of ILD, or (iii) any lease, contract, mortgage, note,
billing and collection agreement, operator services agreement, or other
arrangement or instrument to which ILD is a party or to which ILD or any of
their respective properties is subject.
4.4 ILD SHARES ISSUED TO INTERLINK. The shares of capital stock of
ILD constituting part of the Merger Consideration, when issued and delivered to
the Shareholder in accordance with the terms of this Agreement, will be duly
authorized, validly issued, fully paid and non-assessable shares of the
respective class to which such are issued, and shall be free of any liens or
encumbrances whatsoever (other than liens or encumbrances resulting from the
actions of the Shareholder). The issuance, sale and delivery of shares of
capital stock by ILD as part of the
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Merger Consideration is not subject to any preemptive rights of stockholders of
ILD or to any right of first refusal or other similar right in favor of any
person. The common stock of ILD to be issued to the Shareholder as part of the
Merger Consideration will constitute 6.409% of all the common stock of ILD
issued and outstanding as of the Effective Time on a Fully-Diluted Basis.
4.5 FINANCIAL INFORMATION. The audited financial statements of ILD
as of December 31, 1996, the unaudited balance sheet of ILD as of September 30,
1997 and unaudited income statements of ILD as of October 31, 1997
(collectively, the "ILD Financial Statements"), are attached hereto as SCHEDULE
4.5 hereto. The ILD Financial Statements have been prepared in accordance with
generally accepted accounting principles, consistently applied and in a manner
substantially consistent with prior financial statements of ILD, and present
fairly the assets, liabilities and financial condition of ILD as of the
respective dates thereof and the related results of operations and changes in
financial position for the periods then ended (except the unaudited statements
do not have any notes thereto and are subject to normal year end audit
adjustments which will not adversely deviate in any material respect from the
unaudited statements), and disclose all liabilities of ILD, whether absolute,
contingent, accrued or otherwise, existing as of the dates thereof which is
required to be reflected in financial statements prepared in accordance with
generally accepted accounting principles. Except as set forth in ILD Financial
Statements, or in SCHEDULE 4.5 attached hereto, ILD had no obligations or
liabilities, absolute, contingent, accrued or unaccrued which would be required
to be disclosed on a balance sheet as of the date hereof or on the Closing Date
prepared in accordance with generally accepted accounting principles,
consistently applied, other than liabilities in the ordinary course of business.
4.6 NO VIOLATIONS OF LAW; LICENSES AND PERMITS. Except with respect
to the ongoing regulatory compliance activities listed on SCHEDULE 4.6, ILD is
in compliance with laws, statutes, ordinances, rules and regulations of the
Federal Communications Commission or state public service commissions
applicable to the operation of their businesses and operations as a
telecommunication service provider or with respect to which compliance is a
condition to engaging in business as a telecommunication service provider.
Except with respect to the ongoing regulatory compliance activities listed on
SCHEDULE 4.6, ILD is in compliance in all material respects with other laws,
statutes, ordinances, rules and regulations applicable to the operation of its
businesses and operations, including without limitation, laws and regulations
relating to antitrust compliance, pollution and environmental control, equal
employment opportunity, ERISA, and employee safety. The facilities used by ILD
comply with, conform to and obey all requirements specified in any hazard
insurance policy covering such facilities, and the local zoning classifications
permit the use of such facilities for the purposes and in the manner that the
business is being conducted. Except with respect to the ongoing regulatory
compliance activities listed on SCHEDULE 4.6, ILD has all licenses, permits or
other authorizations of governmental authorities necessary for the conduct of
its business and operations as currently conducted, and all such licenses or
permits are described on SCHEDULE 4.6. The business of ILD has been operated in
compliance with all tariffs, rules and regulations applicable to local exchange
carriers and inter-exchange carriers except with respect to any noncompliance
which will not have an economic impact (either in fines, remedial action or
filings, or in lost revenue) exceeding $25,000.
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4.7 ABSENCE OF CERTAIN CHANGES AND EVENTS. Except as set forth in
SCHEDULE 4.7, since June 15, 1997: (i) ILD has conducted its business only in
the ordinary course; (ii) there has not been any material adverse change in the
business, financial condition, operations, assets or prospects of ILD; (iii) ILD
has not made any dividends, distributions or redemptions on its capital stock;
(iv) ILD has not increased the salary or wages of any employee or officer of
ILD more than 20% of that salary or wages existing as of June 15, 1997; (v)
there has not been any damage, destruction, or loss, whether covered by
insurance or not materially adversely affecting the properties or business of
ILD; (vi) there has not been any sale or transfer by ILD of any tangible or
intangible asset other than in the ordinary course of business, any mortgage or
pledge or the creation of any security interest, lien, or encumbrance on any
such asset, or any lease of property, including equipment, other than tax liens
with respect to taxes not yet due and contract rights of customers in inventory;
(vii) ILD has not incurred any lapse of any trademark, assumed name, trade
name, service mark, copyright or license or any application with respect to the
foregoing; (viii) ILD has not permitted any discharge or satisfaction of any
lien or encumbrance or the payment of any liability other than current
liabilities in the ordinary course of business; (ix) ILD has not made any loan,
advance, or guaranty to or for the benefit of any person except the creation of
accounts receivable in the ordinary course of business; or (x) there has not
been an agreement by ILD to do any of the foregoing.
4.8 LITIGATION. Except as set forth on SCHEDULE 4.8, there is no
claim, suit, action, governmental investigation or litigation, or legal,
administrative, arbitration or other proceeding, of any kind pending or, to the
knowledge of ILD, overtly threatened against, relating to or involving ILD
(whether as plaintiff or defendant) at law or in equity, before or by any
governmental department, commission, board, bureau, agency, or instrumentality,
nor does ILD know of any ground for any such claim, suit, action, investigation,
litigation or proceeding.
4.9 TAXES. ILD has timely filed, or caused to be timely filed, all
Taxes required to be paid or withheld by ILD. There is not and there will not be
any liability of ILD for any Taxes arising out of or affecting the assets of ILD
relating to a period prior to the Closing other than such Taxes for which
adequate reserves are expressly set forth on the ILD Financial Statements
described in Section 4.5 above and taxes arising since the date thereof in the
normal course of business. There are no claims or assessments pending against
ILD for any alleged deficiency in any Tax, and ILD does not know of any
threatened Tax claims or assessments against ILD. There are no outstanding
requests by ILD for any extension of time within which to file any return or
within which to pay any Taxes shown to be due on any return. As of the date of
this Agreement, no taxing authority is conducting or has threatened or notified
ILD that it intends to conduct an audit of any prior tax period of ILD.
4.10 INTELLECTUAL PROPERTY. SCHEDULE 4.10 hereto contains a list and
brief description of all patents, patent applications, copyrights, source codes,
trademarks, trademarks applications, service marks, designs, proprietary
processes or other intellectual property owned or licensed by ILD and used in
its business and operations (collectively, the "ILD Intellectual Property").
All ILD Intellectual Property developed, enhanced, modified or exploited by
ILD is beneficially owned or licensed by ILD, and to the extent that ILD has
registered with the U.S. Patent and
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Trademark Office any ILD Intellectual Property, ILD has undertaken all necessary
applications or renewals and paid all required fees to perfect its ownership
rights in the ILD Intellectual Property. ILD has not undertaken any action to
diminish or otherwise adversely affect the ILD Intellectual Property. ILD has
no knowledge of any existing infringing use by any third party of the ILD
Intellectual Property. The use of the ILD Intellectual Property by ILD has not
infringed any intellectual property rights of any third parties. No past or
present shareholder, consultant, officer, director or employee of ILD has any
ownership rights to any of the ILD Intellectual Property, including, without
limitation, the network software used in the business and operations of ILD.
With respect to any Intellectual Property used by ILD under a license: (i) the
license agreement is described on SCHEDULE 4.10 (except a listing of the
software is sufficient for any "pre-wrapped, off-the-shelf" software), (ii) the
rights of such ILD to the Intellectual Property thereunder is, subject to the
rights of any licensor thereof, free and clear of any liens and encumbrances,
and (iii) the license agreement permits the use of the ILD Intellectual Property
licensed thereby in the manner currently used by ILD. To ILD's knowledge, and
except for the payments required in connection with the ILD Intellectual
Property, ILD is not obligated or under any liability whatsoever to make any
payments by way of royalties, fees or otherwise to any owner or licensee of, or
other claimant to, any patent, trademark, service mark, trade name, copyright or
other intangible asset, with respect to the use thereof or in connection with
the conduct of its business or otherwise.
4.11. NO OMISSIONS OR MISLEADING INFORMATION. No statement of ILD
contained herein or in any certificate, schedule, exhibit or other instrument
furnished to the Interlink Cos. or the Shareholder pursuant to the provisions
hereof contains or will contain any false or misleading statement of material
fact or omits or will omit any material fact required to be stated to make any
of the statements therein not misleading.
ARTICLE V
COVENANTS AND AGREEMENTS
5.1 MUTUAL ACCESS.
5.1.1 Until the Closing, at the request of ILD, the Interlink Cos.
will give the officers, attorneys, accountants and other authorized
representatives of ILD access, during normal business hours and upon reasonable
notice, to all of the offices, facilities, properties and personnel of the
Interlink Cos. The Interlink Cos. shall furnish the representatives of ILD
during such period with all such information as such representatives may
reasonably request and cause the employees, accountants and attorneys of the
Interlink Cos. to cooperate fully with such representatives in connection with
such review and examination and to make full disclosure to ILD of all material
facts affecting the Interlink Cos. Any investigation shall be conducted in such
a manner so as not to interfere unreasonably with the operation or business of
the Interlink Cos.
5.1.2 Until the Closing, at the request of the Interlink Cos., ILD
will give the officers, attorneys, accountants and other authorized
representatives of the Interlink Cos. access, during
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[6~
normal business hours and upon reasonable notice, to all of the offices,
facilities, properties and personnel of ILD. ILD shall furnish the
representatives of the Interlink Cos. during such period with all such
information as such representatives may reasonably request and cause the
employees, accountants and attorneys of ILD to cooperate fully with such
representatives in connection with such review and examination and to make full
disclosure to the Interlink Cos. of all material facts affecting ILD. Any
investigation shall be conducted in such a manner so as not to interfere
unreasonably with the operation or business of ILD.
5.2 INTERIM OPERATIONS
5.2.1 INTERIM OPERATIONS OF THE INTERLINK COS. Except as
contemplated hereby, during the period from the date of this Agreement to the
Effective Time, each Interlink Co. will conduct its business only in the
ordinary course, and neither Interlink Co. will, unless ILD gives its prior
written approval: (i) undertake any action that would be or result in a
violation of the representation in Section 3.12, (ii) amend or otherwise change
either of its Articles of Incorporation or bylaws, as each such document is in
effect on the date hereof; (iii) issue or sell, or authorize for issuance or
sale, additional shares of any class of capital stock; (iv) sell or agree to
sell any material assets, except in the ordinary course of business; or (v)
authorize or make a capital expenditure exceeding $50,000.
5.2.2 INTERIM OPERATIONS OF ILD Except as contemplated hereby,
during the period from the date of this Agreement to the Effective Time, ILD
will conduct its business only in the ordinary course, and ILD will not, unless
the Interlink Cos. give their prior written approval: (i) undertake any action
that would be or result in a violation of the representation in Section 4.7,
(ii) amend or otherwise change its Second Amended and Restated Certificate of
Incorporation or bylaws, as each such document is in effect on the date hereof,
except as contemplated by Section 6.2(g) ; (iii) issue or sell, or authorize for
issuance or sale, additional shares of any class of capital stock or issue or
sell, or agree to issue or sell, any instrument or security convertible into any
share of capital stock of ILD; or (iv) sell or agree to sell any material
assets, except in the ordinary course of business.
5.3 MEETINGS OF SHAREHOLDERS. Each Interlink Co. will take all
action necessary in accordance with applicable law, its Articles of
Incorporation and bylaws, to convene a meeting of holders of capital stock
whose vote is entitled or required as promptly as practicable to consider and
vote upon the approval of this Agreement. The Shareholder covenants to vote in
favor of the Merger.
5.4 REGULATORY FILINGS; OTHER ACTION. ILD, the Interlink Cos.
and the Shareholder each acknowledge and agree that, due to exigent business and
operational reasons, the Merger will be consummated prior to the receipt of
formal approvals that may be necessitated by various states as specified on
SCHEDULE 3.3 but that the Merger is in the public interest to: (i) bolster the
capital structure, management staff and customer service operations of the
Interlink Cos. and (ii) insure that uninterrupted service is available to the
existing customers of the Interlink Cos. ILD shall be responsible for all
regulatory filings, actions and expenses incurred after the Effective
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Time in connection with the consummation of the transactions hereby, and in
connection therewith, ILD shall use its best efforts to promptly file after the
date hereof in all jurisdictions that require it requests for approval for
change of ownership or control of the Interlink Cos.' regulatory permits or
applications listed on SCHEDULE 3.3. The Shareholder and the Interlink Cos.
shall cooperate with ILD and IOS in such efforts (provided that the fees and
expenses of the Interlink Cos.' counsel in assisting ILD in regulatory efforts
after the Effective Date shall be borne by ILD). Subject to the terms and
conditions herein provided, each Interlink Co. and the Shareholder shall: (a)
use all reasonable efforts to promptly take, or cause to be taken, all other
action and do, or cause to be done, all other things necessary, proper or
appropriate under applicable laws and regulations, rules or orders to consummate
and make effective the transactions contemplated by this Agreement, and (b) use
all reasonable efforts to obtain all other consents, waivers and approvals
listed on SCHEDULE 3.3 hereto prior to the Closing. Subject to the terms and
conditions herein provided, ILD shall: (a) use all reasonable efforts to
promptly take, or cause to be taken, all other action and do, or cause to be
done, all other things necessary, proper or appropriate under applicable laws
and regulations, rules or orders to consummate and make effective the
transactions contemplated by this Agreement, and (b) use all reasonable efforts
to obtain the consents, waivers and approvals listed on SCHEDULE 4.3 hereto
prior to the Closing.
5.5 NOTIFICATION OF CERTAIN MATTERS. Prior to the Effective Time,
neither of the Interlink Cos. nor the Shareholder shall, directly or indirectly,
solicit or encourage inquiries or proposals with respect to, furnish any
information relating to, or participate in or enter into any negotiations or
discussions concerning, any acquisition, business combination or purchase of all
or a portion of the assets (except in the ordinary course of business) of, or
any equity interest in, the Interlink Cos., other than as contemplated by this
Agreement. The Interlink Cos. will notify ILD immediately if any such inquiries
or proposals were received by, any such information is requested from, or any
such negotiations or discussions are sought to be initiated; and the Interlink
Cos. shall instruct any officer, director, agent or affiliate of the Interlink
Cos. to refrain from doing any of the above. The Interlink Cos. shall also give
prompt notice to ILD of: (a) any notice of, or other communication relating to,
a default or event which, with notice or lapse of time or both, would become a
default, received by the Interlink Cos. subsequent to the date of this Agreement
and prior to the Closing Date, under any Contract; (b) any material adverse
changes in the financial conditions, properties, businesses or results of
operations of the Interlink Cos. or the occurrence of any event which, so far as
reasonably can be foreseen at the time of its occurrence, would result in any
such change. Likewise, ILD shall give prompt notice to the Interlink Cos. of:
(a) any notice of, or other communication relating to, a default or event which,
with notice or lapse of time or both, would become a default, received by ILD
subsequent to the date of this Agreement and prior to the Closing Date, under
any of its loan agreements, material contracts, or vendor relations; (b) any
material adverse change in the financial condition, properties, businesses or
results of operations of ILD or the occurrence of any event which, so far as
reasonably can be foreseen at the time of its occurrence, would result in any
such change.
5.6 PUBLICITY. The Interlink Cos., the Shareholder and ILD shall
consult with each other in issuing any press releases or otherwise making public
statements with respect to the transactions contemplated hereby.
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5.7 EXPENSES. ILD and the Interlink Cos. shall each pay its own
expenses incurred in connection with this Agreement and the transactions
contemplated hereunder; provided, however, in the event the closing occurs, the
Shareholder shall bear any fees and expenses incurred by the Interlink Cos. or
the Shareholder (excluding any legal fees for regulatory compliance but
including fees and expenses for the tax opinion, the audit or for legal
services) incurred in connection with this transaction which exceed in the
aggregate $100,000.
5.8 AGREEMENTS REGARDING THE ILD SHARES.
5.8.1 The Shareholder acknowledges that the capital stock or notes
forming part of the Merger Consideration have not been registered under any
state securities laws, or under the Securities Act of 1933, as amended (the
"Federal Act") and agree that he will not transfer any of capital stock or the
Notes received as part of the Merger Consideration, or any interest therein,
except pursuant to an effective registration statement under the applicable
state securities laws and the Federal Act or in a transaction which is exempt
under any such applicable state securities laws and the Federal Act, or make any
transfer which will cause the distribution of capital stock or notes by ILD to
be unlawful or violative of any statute or regulation.
5.8.2 The Shareholder and ILD shall enter into at Closing a
shareholders agreement in the form of EXHIBIT C hereto.
5.8.3 The Shareholder and ILD shall enter into at Closing a
Registration Rights Agreement in the form of EXHIBIT D hereto.
5.8.4 ILD shall file with the Secretary of State of Delaware on or
prior to the Closing Date certificate of designations, preferences and other
rights for the Series B-3 preferred stock of ILD in the form of EXHIBIT B
hereto.
5.9 SHAREHOLDER NOTES. The Interlink Cos. shall cause any
indebtedness owed to the Interlink Cos. by the Shareholder to be written off or
paid prior to the Effective Time, and the Shareholder shall be financially
responsible for any payroll taxes owed by the Interlink Cos. in connection
therewith.
5.10 CONSULTING AGREEMENT. ILD shall enter into at Closing a
consulting agreement in substantially the form of EXHIBIT E hereto.
5.11 EMPLOYMENT OF MCFARLAND; NON-COMPETITION. ILD and the
Shareholder shall enter into at Closing an employment agreement in substantially
the form of EXHIBIT F hereto. In addition, the Shareholder shall enter into at
Closing a Non-Competition Agreement in substantially the form as EXHIBIT G
attached hereto.
5.12 RELEASE. The Shareholder shall use reasonable efforts to obtain
a general release from Evanver Schmidt in customary form in favor of the
Interlink Cos.
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5.13 ACKNOWLEDGMENT FROM PROGRAMMERS. The Interlink Cos. and the
Shareholder shall use their best efforts to obtain an acknowledgment from the
contracted computer programmers who assisted in the formulation of the
Intellectual Property of the Interlink Cos. that such programmer was "work for
hire" and that the Interlink Cos. possess full and absolute title to any and all
software code or enhancements forming part of the Intellectual Property
generated by such programmers.
ARTICLE VI
CLOSING MATTERS
6.1 CONDITIONS TO THE OBLIGATIONS OF ILD. The obligations of ILD to
consummate the Merger shall be subject to the satisfaction or waiver, on or
before the Closing Date, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TO BE TRUE AND CORRECT;
BRING-DOWN CERTIFICATE. The representations and warranties contained in
Articles III hereof (as supplemented by the schedules) shall be true and
correct on and as of the Closing Date with the same effect as though
such representations and warranties have been made on and as of such
date (except as to such representations and warranties that speak as to
a different date), and the Interlink Cos. and the Shareholder shall
have complied in all material respects with the covenants and agreements
to be performed by it or him hereunder on or before the Closing, and the
Interlink Cos. and the Shareholder shall have certified to such effect
to ILD in writing; provided, however, that ILD acknowledges and agrees
that should such certificate include any supplements, alterations or
amendments to the representations or warranties contained in Article III
hereof or the disclosure schedules thereto, then ILD shall either (i)
accept such supplements, alterations or amendments and consummate the
Merger transaction whereby the representations and warranties in Article
III shall be so amended, altered or supplemented or (ii) not accept such
supplements, alterations or amendments and terminate this Agreement
whereupon no party shall have any further lability to the other.
(b) OPINION OF COUNSEL. ILD shall have received from Gerry,
Friend & Sapronov, LLP, counsel for the Interlink Cos., an opinion
dated as of the Closing Date, as to the matters described in Section
3.1, 3.2, 3.3 (knowledge), 3.5 (knowledge) and 3.6 (knowledge).
(c) SUPPORTING DOCUMENTS. On or prior to the Closing Date,
ILD shall have received copies of the Articles of Incorporation of each
Interlink Co., and all amendments thereto, certified as of a recent date
by the Secretary of State of the State of Georgia; good standing
certificates from the Secretary of State of Georgia; and a certificate
of the secretary or an assistant secretary of each Interlink Co. as to
incumbency, resolutions and bylaws in form and substance to the
reasonable satisfaction of ILD and its counsel.
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(d) REQUIRED CONSENTS AND WAIVERS. ILD shall have received
the approvals, consents and waivers set forth on SCHEDULE 4.3,
including the consent of NationsBank, N.A. as its senior secured lender,
and copies from the Interlink Cos. of the consents and waivers set forth
on SCHEDULE 3.3. (other than the regulatory approvals or actions).
(e) DOCUMENTS SATISFACTORY IN FORM AND SUBSTANCE. Executed
originals of the documents set forth as exhibits hereto to which either
Interlink Co. or the Shareholder is a party, and all other agreements,
certificates, opinions and other documents delivered by the the
Interlink Cos. or the Shareholders hereunder shall be in form and
substance satisfactory to counsel for ILD, in the exercise of such
counsel's reasonable judgment.
(f) NO MATERIAL ADVERSE CHANGE. There shall not have been
any material adverse change since the date hereof in any of the assets,
business, financial condition, results of operations or prospects of the
Interlink Cos.
6.2 CONDITIONS TO THE OBLIGATIONS OF THE INTERLINK COS. AND THE
SHAREHOLDER. The obligations of the Interlink Cos. and the Shareholder to
consummate the Merger shall be subject to the satisfaction or waiver, on or
before the Closing Date, of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TO BE TRUE AND CORRECT;
BRING-DOWN CERTIFICATE. The representations and warranties contained in
Articles IV hereof (as supplemented by the schedules) shall be true and
correct on and as of the Closing Date with the same effect as though
such representations and warranties have been made on and as of such
date (except as to such representations and warranties that speak as to
a different date), and ILD shall have complied in all material respects
with the covenants and agreements to be performed by it hereunder on or
before the Closing, and ILD shall have certified to such effect to the
Interlink Cos. and the Shareholder in writing; provided, however, that
the Interlink Cos. and the Shareholder acknowledge and agree that should
such certificate include any supplements, alterations or amendments to
the representations or warranties contained in Article IV hereof or the
disclosure schedules thereto, then the Interlink Cos. and the
Shareholder shall either (i) accept such supplements, alterations or
amendments and consummate the Merger transaction whereby the
representations and warranties in Article IV shall be so amended,
altered or supplemented or (ii) not accept such supplements, alterations
or amendments and terminate this Agreement whereupon no party shall have
any further lability to the other.
(b) OPINION OF COUNSEL. The Shareholder shall have received
from Cashin, Morton & Mullins, counsel to ILD, an opinion, dated as of
the Closing Date, as to the matters in Sections 4.1, 4.2, 4.3
(knowledge), 4.4, 4.6 (knowledge), and 4.8 (knowledge).
(c) SUPPORTING DOCUMENTS. On or prior to the Closing Date,
the Interlink Cos. and the Shareholder shall have received copies of
the Certificate of Incorporation of ILD, and all amendments thereto,
certified as of a recent date by the Secretary of State of the
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State of Delaware; a good standing certificate from the Secretary of
State of Delaware; and a certificate of the secretary or an assistant
secretary of ILD as to incumbency, resolutions and bylaws in form and
substance to the reasonably satisfaction of the Interlink Cos., the
Shareholder and their counsel.
(d) DOCUMENTS SATISFACTORY IN FORM AND SUBSTANCE. Executed
originals of the documents set forth as exhibits hereto to which ILD is
a party and all other agreements, certificates, opinions, and other
documents delivered by ILD hereunder shall be in form and substance
reasonably satisfactory to counsel for the Interlink Cos. and the
Shareholder, in the exercise of such counsel's reasonable judgment.
(e) REQUIRED CONSENTS AND WAIVERS. The Interlink Cos. shall
have received copies of all required approvals, consents and waivers,
including those set forth on SCHEDULE 3.3 (other than regulatory
approvals or consents); provided, however, in the case of any consent
to the transfer of an Contract or other asset of the Interlink Cos., if
not otherwise waived by ILD, as well as copies from ILD of the consents
and waivers set forth on SCHEDULE 4.3.
(f) TAX OPINION. The Shareholder shall have received a tax
opinion from Smith & Howard, in form and substance reasonably acceptable
to the Shareholder, that the Merger qualifies as a reorganization
within the meeting of Section 368(a)(1)(A) of the Code.
(g) AMENDMENT OF ILD'S CERTIFICATE OF INCORPORATION. The
Series B-3 preferred stock designations in the form of EXHIBIT B hereto
shall have been filed with the Secretary of State of Delaware.
(h) NO MATERIAL ADVERSE CHANGE. There shall not have been
any material adverse change since the date hereof in any of the assets,
business, financial condition, results of operations or prospects of
ILD.
6.3 CLOSING AND CLOSING DATE; TERMINATION OF AGREEMENT. The closing
of the transactions contemplated hereby (the "Closing") shall occur on or before
December 15, 1997, or as soon thereafter as all closing conditions are satisfied
or waived (the actual date, the "Closing Date"). The parties shall use their
best effort to close as soon as practical after the date hereof.
6.4 TERMINATION OF AGREEMENT. This Agreement may only be terminated
as follows:
(a) by the mutual written consent of the parties, by ILD
pursuant to Section 6.1(a) hereof, or by the Interlink Cos. or the
Shareholder pursuant to Section 6.2(a); or
(b) or after January 15, 1998 if any of the conditions set
forth in Section 6.1 have not been fulfilled or waived, unless such
fulfillment has been frustrated or made impossible by any act or failure
to act of ILD; or
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(c) or after January 15, 1998 if any of the conditions set
forth in Section 6.2 have not been fulfilled or waived, unless such
fulfillment has been frustrated or made impossible by any act or failure
to act of any of them; or
(d) by either party after March 31, 1997;
provided, however, that in the event of (b), (c) or (d), such termination shall
not extinguish any rights or actions of a party for breaches, if any, by the
other parties of this Agreement; and provided, further, that nothing herein
shall limit a party in seeking specific performance of this Agreement. Upon
termination, each party shall pay the costs and expenses previously incurred by
it in connection with this Agreement.
6.5 DELIVERIES AT CLOSING.
6.5.1 At the Closing, the Interlink Cos. or the Shareholder
shall deliver to ILD the following:
[6~
(i) certificates representing Interlink Stock and
Interlink-Fla. Stock;
(ii) the certificate of the Interlink Cos. and the
Shareholder described in Section 6.1(a);
(iii) copies of all consents, approvals,
acknowledgments and waivers described in Section 3.3 which have
been obtained as of the Closing;
(iv) an officer's certificate with the following
attachments: (a) copies of resolutions of the Board of Directors
and shareholders of each Interlink Co. approving the
transactions set forth in this Agreement, (b) certificate of
compliance of each Interlink Co. as of the most recent
practicable date, from the appropriate governmental authority of
the jurisdiction of its incorporation; and (c) certificates of
incumbency for the officers of the Interlink Cos. who are
executing this Agreement and the other documents contemplated
hereunder;
(v) a shareholders agreement executed by the
Shareholder in substantially the form as EXHIBIT C;
(vi) a stock registration agreement executed by the
Shareholder in substantially the form as EXHIBIT D;
(vii) a consulting agreement executed by Stratacom,
Inc. in substantially the form as EXHIBIT E;
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(viii) an Employment Agreement executed by the
Shareholder in substantially the form as EXHIBIT F;
(ix) Non-Competition Agreement executed by the
Shareholder in substantially the form of EXHIBIT G;
(x) If necessary, a Certificate of Merger executed
by an officer of each Interlink Co. in substantially the form of
EXHIBIT H;
(xi) A copy of the tax opinion referenced in Section
6.2(f) (if not otherwise waived by the Shareholder);
(xii) signature cards for the bank accounts or safety
deposit boxes described on SCHEDULE 3.13;
(xiii) opinion of counsel described in Section 6.1(b);
(xiv) means of access to the assets of Interlink of
the Purchased Assets where located; and
(xv) such other documents, instruments or agreements
from Interlink or the Shareholder, at or prior to the Closing,
as ILD or its counsel may reasonably require.
6.5.2 At the Closing, ILD shall deliver to the
Interlink Cos. and the Shareholder the following:
(i) the Merger Consideration;
(ii) the certificate of ILD described in Section
6.2(a);
(iii) copies of all consents, approvals,
acknowledgments and waivers described in Section 4.3 which have
been obtained as of the Closing;
(iv) an officer's certificate with the following
attachments: (a) copies of resolutions of the Board of Directors
and, if necessary, the shareholders of ILD approving the
transactions set forth in this Agreement, (b) certificate of
compliance of ILD as of the most recent practicable date, from
the appropriate governmental authority of the jurisdiction of
its incorporation; and (c) certificates of incumbency for the
officers of ILD who are executing this Agreement and the other
documents contemplated hereunder;
(v) a shareholders agreement executed by ILD and
other shareholders of ILD referenced therein in substantially
the form as EXHIBIT C;
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(vi) a stock registration agreement executed by ILD
and the other shareholders of ILD referenced therein in
substantially the form as EXHIBIT D;
(vii) a consulting agreement executed by ILD in
substantially the form as EXHIBIT E;
(viii) an Employment Agreement executed by ILD in
substantially the form as EXHIBIT F;
(ix) Non-Competetion Agreement executed by ILD in
substantially the form of EXHIBIT G;
(x) a Certificate of Merger executed by an officer
of ILD in substantially the form of EXHIBIT H;
(xi) Evidence of the filing of the Series B-3
preferred stock designations attached as EXHIBIT B;
(xii) opinion of counsel described in Section 6.2(b);
and
(xiii) such other documents, instruments or agreements
from ILD, at or prior to the Closing, as Interlink, the
Shareholder or their counsel may reasonably require.
ARTICLE VII
INDEMNIFICATION
7.1. INDEMNIFICATION BY SHAREHOLDER. All representations, warranties,
covenants, agreements, and obligations made or undertaken by the Interlink Cos.
or the Shareholder in this Agreement or and or in any document or instrument
executed and delivered pursuant hereto are material, have been relied on by ILD
and shall not merge in the performance of any obligation by any party hereto.
The Shareholder shall defend and indemnify ILD and hold ILD harmless from,
against and in respect of any and all claims, losses (including diminution in
value of an asset), liabilities and damages (including, without limitation,
attorneys' fees, interest, penalties, court costs and accounting fees) incurred
by ILD ("ILD Losses") which arise out of or result from:
(a) Any inaccuracy in or breach of any representation,
warranty, covenant or agreement made by the Interlink Cos. or the
Shareholder under this Agreement or contained in any certificate or
document executed by or on behalf of the Interlink Cos. or the
Shareholder and delivered to ILD under or in connection with this
Agreement or the transactions contemplated herein;
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(b) Any liability of ILD for any Taxes arising out of or
affecting the assets of the Interlink Cos. relating to a period prior to
the Closing other than such Taxes for which adequate reserves are
expressly set forth on the Interlink Audited Financial Statements
described in Section 3.11 above and excise, sales, payroll and other
Taxes arising since the date thereof in the normal course of business;
(c) Any tort claim by a third party against either Interlink
Co. arising from circumstances occurring prior to Closing to the extent
not covered by insurance proceeds or unless otherwise set forth on
SCHEDULE 3.6; and
(d) Any claim by any person or entity claiming that such
person or entity held any security of either Interlink Co. (whether
capital stock or any instrument convertible into capital stock) or
rights to revenues (except for commissions due in the ordinary course of
business) or profits of the Interlink Cos. as of the Effective Time.
7.1.1 For purposes of this Section 7.1, the representations and
warranties contained in Article III of this Agreement shall survive the Merger
for a period of fourteen months (except for sections 3.1, 3.2, and 3.9 which
shall survive or the period of the applicable statute of limitations); PROVIDED,
HOWEVER, that no such termination of any such representation or warranty shall
terminate, limit or otherwise affect any claim(s) made by any party hereto for
breach of such representation and warranty which claim was made prior to the
date of such termination; AND PROVIDED, FURTHER, that ILD shall be entitled to
indemnification hereunder for matters arising under Section 7.1 (a) or (c) above
only at such time as the aggregate amount of all of such ILD Losses exceeds
$75,000 and then only to the extent of the excess over such amount (the
"Minimum Aggregate Liability Amount"). Should the Merger be consummated, the
indemnification procedures set forth in this Section 7.1 shall be the sole and
exclusive remedy of ILD for any breaches of representations, warranties and
covenants of the Interlink Cos. and the Shareholder hereunder.
7.1.2 In the event that ILD undertakes an initial public offering of
its capital stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended, and applicable state securities laws, so
that ILD receives at least $15,000,000 in proceeds from the sale of its capital
stock, then the indemnification obligations of the Shareholder pursuant to this
Article VII shall be limited to the principal amount of the promissory note
described in Section 2.1(4) hereunder as of such date and from time to time
thereafter; PROVIDED, HOWEVER, that such limitation shall not serve to limit or
otherwise affect any claim(s) made by ILD for breach of such representation and
warranty which claim was made prior to the date of such initial public offering.
7.1.3 As part of its indemnification rights hereunder, ILD shall be
entitled to (i) withhold from the payments under the Note described in
Section 2.1(4), the amount of ILD Losses which it has sustained or which it
reasonably believes may be sustained in accordance with this Section 7.1
provided in a written notice to the Shareholder and (ii) offset from such
withheld amount any amount ultimately determined to be due and owing to ILD by
way of indemnification pursuant to
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this Section 7.1, and ILD shall not be liable for any amounts so set off. If
the withholding of payments then due under this section has been based on a
reasonable belief of such a future claim, ILD shall pay said amount withheld
(plus interest at the rate of nine percent) which has not been offset pursuant
to the preceding sentence, within the earlier of (i) the resolution of the claim
or (ii) six months of the giving of the written notification of such claim to
the Shareholder, unless a lawsuit, arbitration or administrative proceeding
based on such claim shall have been commenced within said period. If such a
lawsuit, arbitration or administrative proceeding has commenced within said
six-month period, ILD shall pay within thirty days after a final determination
under such lawsuit, arbitration or administrative proceeding, the difference, if
any, (plus interest at the rate of nine percent) between said withheld amount
and the amount of ILD Losses, if the withheld amount is larger.
7.2. INDEMNIFICATION BY ILD. All representations, warranties,
covenants, agreements, and obligations made or undertaken by ILD in this
Agreement or and or in any document or instrument executed and delivered
pursuant hereto are material, have been relied on by the Interlink Cos. and the
Shareholder and shall not merge in the performance of any obligation by any
party hereto. ILD shall defend and indemnify the Interlink Cos. and the
Shareholder, and hold each Interlink Co. and the Shareholder harmless from,
against and in respect of any and all losses (including diminution in value of
the Merger Consideration), liabilities and damages (including, without
limitation, attorneys' fees, interest, penalties, court costs and accounting
fees) incurred by the Shareholder or the Interlink Cos. (the "Shareholder
Losses") which arise out of or result from:
(a) Any inaccuracy in or breach of any representation,
warranty, covenant or agreement made by ILD under this Agreement or
contained in any certificate or document executed by or on behalf of ILD
and delivered to the Interlink Cos. or the Shareholder under or in
connection with this Agreement or the transactions contemplated herein;
and
(b) Any claim by a third party against the Shareholder
arising from circumstances at ILD (as successor to the Interlink Cos.)
occurring subsequent to Closing to the extent not covered by insurance
For purposes of this Section 7.2, the representations and warranties
contained in Article IV of this Agreement shall survive the Merger for a period
the earlier of (i) fourteen months (except for sections 4.1, 4.2, 4.4 and 4.8
which shall survive for the period of the applicable statute of limitations) or
(ii) the date ILD undertakes an initial public offering of its capital stock
pursuant to an effective registration statement under the Securities Act of
1933, as amended, and applicable state securities laws, such that ILD receives
at least $15,000,000 in proceeds from the sale of its capital stock of an
initial public offering of the capital stock of ILD; PROVIDED, HOWEVER, that no
such termination of any such representation or warranty shall terminate, limit
or otherwise affect any claim(s) made by any party hereto for breach of such
representation and warranty which claim was made prior to the date of such
termination; AND PROVIDED, FURTHER, that the Interlink Cos. and the Shareholder
shall be entitled to indemnification hereunder for matters arising under Section
7.2 above only at such time as the aggregate amount of all of Shareholder
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Losses exceeds the Minimum Aggregate Liability Amount and then only to the
extent of the excess over such amount. Should the Merger be consummated, the
indemnification procedures set forth in this Section 7.2 shall be the sole and
exclusive remedy of the Shareholder for any breaches of representations,
warranties and covenants of ILD hereunder.
ARTICLE VIII
MISCELLANEOUS
8.1 ENTIRE AGREEMENT. This Agreement (including the Schedules and
Exhibits) constitutes the sole understanding of the parties with respect to the
subject matter hereof; provided, however, that this provision is not intended to
abrogate any other written agreements between the parties executed with or after
this Agreement. No amendment, modification or alteration of the terms or
provisions of this Agreement shall be binding unless the same shall be in
writing and duly executed by the parties hereto.
8.2. PARTIES BOUND BY AGREEMENT; SUCCESSORS AND ASSIGNS. The terms,
conditions and obligations of this Agreement shall inure to the benefit of and
be binding on the parties hereto and the respective successors and assigns
thereof.
8.3. FORMALITIES OF AGREEMENT AND SIGNATURES. The titles, table of
contents and headings of the Sections and paragraphs of this Agreement are
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction hereof This Agreement may be executed in
one or more counterparts, each of which shall for all purposes be deemed to be
an original and all of which shall constitute the same instrument. Any of the
terms or conditions of this Agreement may be waived in writing at any time by
the party which is entitled to the benefit thereof. No waiver of any of the
provisions of this Agreement shall be deemed to or shall constitute a waiver of
any other provision hereof (whether or not similar).
8.4. NOTICES. Any notice, request, instruction or other document to
be given hereunder by any party hereto to any other party hereto shall be in
writing and delivered personally or sent by facsimile (with confirmed
transmission), registered or certified mail or by any express mail or courier
service, postage or fees prepaid,
if to ILD to:
14651 Dallas Parkway, Suite 905
Dallas, Texas 75240
Fax: (972) 503-1919
Attn: Dennis Stoutenburgh
AND
13000 Sawgrass Village Circle
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Suite 5
Ponte Vedra Beach, Florida 32082
Fax: (904) 285-3616
Attn: Michael Lewis
with a copy to:
Cashin, Morton & Mullins
Two Midtown Plaza, Suite 1900
1360 Peachtree Street, N.E.
Atlanta, Georgia 30309
Fax: (404) 870-1529
Attention: C. Read Morton, Jr., Esq.
if to the Interlink Cos. or the Shareholder:
c/o Mr. Reginald P. McFarland
407 Highway 229
Social Circle, Ga . 30025
with a copy to:
GERRY, FRIEND & SAPRONOV, LLP
Three Ravinia Drive
Suite 1450
Atlanta, Georgia 30346
Fax: (770) 395-0000
Attn: William Friend, Esq.
or at such other address or facsimile number for a party as shall be specified
by like notice. Any notice which is delivered personally in the manner provided
herein shall be deemed to have been duly given to the party to whom it is
directed upon actual receipt by such party (or its agent for notice hereunder).
Any notice which is addressed and mailed in the manner herein provided shall be
conclusively presumed to have been duly given to the party to which it is
addressed at the close of business, local time of the recipient, on the fourth
business day after the day it is so placed in the mail. Any notice given by
facsimile shall be conclusively presumed to have been duly given to the party to
which it is sent at the close of business, local time of the recipient, on the
next following business day after the day it is sent by confirmed facsimile.
8.5. GOOD FAITH; FURTHER ASSURANCES; COOPERATION. The parties to
this Agreement shall in good faith undertake to perform their obligations in
this Agreement to satisfy all conditions and to cause the transactions
contemplated by this Agreement to be carried out promptly in accordance with the
terms of this Agreement. Upon the execution of this Agreement and
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thereafter, each party shall do such things as may be reasonably requested by
another party hereto in order more effectively to consummate or to document the
transactions contemplated by this Agreement. The parties shall cooperate fully
with each other and their respective counsel and accountant or designees in
connection with any steps required to be taken under this Agreement.
8.6 BROKERS. Interstate/Johnson Lane has acted as financial advisor
for ILD in this transaction and are to be paid a fee by ILD. Interstate/Johnson
Lane has not acted as financial advisor or broker for the Interink Cos. or the
Shareholder in this transaction. ILD represents and warrants to the Interlink
Cos. and the Shareholder that except for such entity, ILD has not retained the
services of any broker, finder or investment banker in connection with this
Agreement or the transactions contemplated hereby and ILD shall indemnify and
hold the Interlink Co. and the Shareholder harmless from and against any and all
claims, liabilities or obligations that may result from any brokers engaged by
ILD. Neither the Interlink Cos. nor the Shareholder has retained the services
of a broker, finder or investment bankers in connection with this Agreement or
the transactions contemplated hereby and the Shareholder shall indemnify and
hold ILD harmless from and against any and all claims, liabilities or
obligations that may result from any broker engaged by, or claiming through, the
Interlink Cos. or the Shareholder.
8.7 DEFINITIONS. As used herein, the following capitalized terms
shall have the following meanings:
"Agreement" shall mean this Merger Agreement as finally executed and
dated.
"Certificates" shall mean share certificate representing issued and
outstanding shares of capital stock of Interlink and Interlink-Fla.
"Certificate of Merger" shall mean the certificate of merger in
substantially the form as EXHIBIT H to the Agreement.
"Closing" or "Closing Date" shall have the meanings set forth in
Section 6.3 of this Agreement.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Contracts" shall have the meaning set forth in Section 3.7 of this
Agreement.
"Delaware Code" shall mean the Delaware General Corporation Law in
effect as of the Effective Time.
"Effective Time" shall mean the date of the filing of the duly
executed Certificate of Merger with both the Secretary of State of Delaware
and the Secretary of State of Georgia.
"ERISA" shall mean the Employment Retirement Income Security Act, as
amended.
"Federal Act" shall mean the Securities Act of 1933, as amended.
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"Fully-Diluted Basis" means the aggregate number of shares of common
stock that have been or can be issued by the corporation assuming that all
conditions precedent to the issuance of shares of common stock under any
instrument or security convertible into, exchangeable for, or with option rights
to, shares of such common stock would have been satisfied and such common stock
would have been issued to the maximum extent possible.
"Georgia Code" shall mean the Georgia Business Corporations Code in
effect as of the Effective Time.
"ILD" shall mean ILD Teleservices, Inc., a Delaware corporation.
"ILD Financial Statements" shall have the meaning set forth in
Section 4.5 of the Agreement.
"ILD Intellectual Property" shall have the meaning set forth in
Section 4.10 of this Agreement.
"ILD Losses" shall have the meaning set forth in Section 7.1.
"Intellectual Property" shall have the meaning set forth in Section 3.8
of this Agreement.
"Interlink" shall mean Interlink Telecommunications, Inc., a Georgia
corporation.
"Interlink Audited Financial Statements" shall mean Interlink's audited
financial statements as of September 30, 1997 with the report of Smith & Howard
thereon.
"Interlink Stock" shall mean the capital stock of Interlink issued and
outstanding immediately prior to the Effective Time other than treasury shares.
"Interlink-Fla. Stock" shall mean the capital stock of Interlink-Fla.
issued and outstanding immediately prior to the Effective Time other than
treasury shares.
"Interlink Premises Lease" shall have the meaning set forth in
Section 3.7.3 of this Agreement.
"IOS" shall mean Intellicall Operator Services, Inc., a Delaware
corporation which is an wholly-owned subsidiary of ILD.
"Merger" shall mean the merger of the Interlink Cos. with and into ILD
as of the Effective Time.
"Merger Consideration" shall mean the items (1) through (5) inclusive
set forth in Section 2.1.1 of this Agreement as well as the $10.00 set forth in
Section 2.1.2.
"Shareholder" shall mean Reginald P. McFarland, a Georgia resident.
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"Shareholder Losses" shall have the meaning set forth in Section 7.2
"Tax" or "Taxes" shall mean federal, state, local and foreign income,
gross receipts, sales, use, property, production, payroll, franchise,
withholding, employment, social security, license, excise, transfer, gains, and
other taxes of any nature whatsoever, including any related penalties, interest
and liabilities.
8.8 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Georgia.
[REST OF PAGE INTENTIONALLY BLANK]
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IN WITNESS WHEREOF, each of ILD, Interlink, Interlink-Fla. and the
Shareholder have executed this Agreement as of the day and year first above
written.
("Interlink")
INTERLINK TELECOMMUNICATIONS, INC.
By: /s/ Reginald P. McFarland
-----------------------------------
Name: Reginald P. McFarland
Its: President
("Interlink-Fla")
INTERLINK TELECOMMUNICATIONS OF FLORIDA., INC.
By: /s/ Reginald P. McFarland
-----------------------------------
Name: Reginald P. McFarland
Title: President
("Shareholder")
/s/ Reginald P. McFarland
-----------------------------------
REGINALD P. MCFARLAND
("ILD")
ILD TELESERVICES, INC.
By: /s/ Dennis J. Stoutenburgh
-----------------------------------
Name: Dennis J. Stoutenburgh
Title: President
32
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EXHIBIT 10.12
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the "Agreement"), made and entered into this 15th day
of December, 1997 by and between ILD TELESERVICES, INC., a Delaware
corporation (hereinafter referred to as the "ILD" or the "Corporation") and
REGINALD P. MCFARLAND, an individual resident of the State of Georgia
("Executive").
STATEMENT OF BACKGROUND
A. The Corporation is engaged in the telecommunications business,
and Executive has unique experience as an executive in the telecommunications
business.
B. ILD desires to employ Executive to assist in its
telecommunications operations as Senior Vice President of Network Operations.
C. Executive is willing and able to provide services to ILD on the
terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
ARTICLE I
EMPLOYMENT
1.01 JOB TITLE AND DESCRIPTION. Executive shall serve the
Corporation in an executive capacity in the management of the operations of the
Corporation. Executive shall be formally designated Senior Vice President --
Network Operations for the Corporation and shall have such powers and perform
such duties as may be designated by the Board of Directors of the Corporation.
Executive's duties are expected to focus on managing and enhancing all network
operations of the Corporation and participating as a senior executive in
strategic management issues. Executive agrees, during the term of this Agreement
(as described in section 1.02 below), to devote Executive's full professional
and business-related time, skills and best efforts to the business of the
Corporation. Executive shall not, during his employment, unless otherwise
agreed to in advance in writing by the Chairman of the Board of the
Corporation, accept other employment, become self-employed in any other capacity
during the term of Executive's employment, or engage in any activities that are
detrimental to the Corporation; provided, however, that nothing herein shall
prohibit or affect Executive's capacity as owner or employee in Stratacom, Inc.
and to supervise the conduct of the consulting activities contemplated by that
certain Consulting Agreement dated even date herewith by and between such entity
and ILD.
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Executive shall at all times while this Agreement is in effect be based in the
metropolitan Atlanta area unless otherwise agreed to by Executive.
1.02 TERM. The term of employment of Executive hereunder shall
commence on the date hereof and terminate on December 31, 1999 (the "Initial
Term") and shall automatically renew for successive one (1) year periods as of
January 1 of each year commencing with January 1, 2000 (subject of Section 1.04
hereof).
1.03 COMPENSATION.
(a) SALARY. The Corporation shall pay to Executive, as
compensation for Executive's services hereunder during the Initial Term, a
salary of $140,000.00 per annum, payable in accordance with the Corporations's
standard payroll practices. It is understood that the Corporation may, in the
discretion of the Board of Directors of the Corporation, increase the
aforementioned salary , and the Corporation shall provide, prior to September 1
of each year this Agreement is in effect commencing with September 1, 1999 , the
proposed compensation for Executive for the following year.
(b) REASONABLE EXPENSES. The Corporation shall reimburse
Executive for all ordinary and necessary expenses incurred by Executive that the
Corporation determines are reasonable business expenses in the performance of
his services hereunder, upon presentation of appropriate documentation therefor
to the Corporation.
(c) OTHER BENEFITS. Executive shall be eligible to
participate in: (i) benefits and perquisites available at the Corporation from
time to time, including group health, vacation (at 4 paid weeks per year),
pension, disability, group life, sickness, accident and health insurance
programs and (ii) incentive compensation plans (including without limitation
stock option plans or bonus plans) instituted after the date hereof for the
benefit of management of the Corporation, in each instance on terms at least as
favorable as that available to any Vice President of the Corporation; provided,
however, that Executive agrees and acknowledges that: (A) the Corporation has
in effect certain incentive compensation plans instituted prior to the date
hereof as described on ATTACHMENT A hereto in which Executive shall not be
entitled to participate, (B) certain of the incentive compensation plans to be
made available to management of the Corporation may be based on performance
criteria tailored to the responsibilities of each such manager (as reasonably
determined by the Board of Directors or Compensation Committee thereof with
the expectation that any performance criteria designated for Executive shall be
those provided for the Chairman and the President of the Corporation such as
EBITDA thresholds or stock price set by an initial public offering) which could
result in disparate results among management, and (C) the Corporation may make
available incentive compensation to persons who become managers or consultants
to the Corporation in connection with the consummation of an acquisition or
merger which incentive compensation may be more favorable than made available to
similarly situated members of management (possibly including Executive).
2
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1.04 TERMINATION OF EMPLOYMENT. This Agreement may be terminated
with respect to the obligations due hereunder as follows:
(a) In the event that Executive dies, Executive's employment is
terminated for "Cause" (as defined in (c) below), Executive suffers a
"Disability" (as defined in (d) below), or Executive exercises his right to
terminate this Agreement for certain payment defaults as described in (e) below,
then the Corporation shall pay to Executive (or the estate of Executive) the
compensation that would otherwise be payable to Executive up to the end of the
calender month following the month in which such event occurs or is effective.
(b) During any year after the Initial Term (years commencing on or
after January 1, 2000), the Agreement may be terminated by any party upon ninety
(90) days prior written notice (with the earliest date such may given being
October 2, 1999). In the event that Executive is at least sixty-two years old
and retires from active employment or Executive voluntarily terminates his
employment in accordance with the above sentence, then the Corporation shall pay
to Executive the compensation that would otherwise be payable to Executive up to
the end of the third calender month following the month in which such event
occurs.
(c) During the Initial Term, the Board of Directors of the
Corporation shall have the right to terminate the employment relationship only
for "Cause". For the purposes of this Agreement, the term "Cause" shall mean:
(a) dishonesty of Executive detrimental to the best interests of the Corporation
or conviction of Executive of a crime that constitutes a felony or involves
moral turpitude; (b) alcohol or substance abuse dependency which adversely
impacts the performance of Executive's duties; (c) reasonable dissatisfaction
with the efforts or diligence of Executive's performance which continues after
notice from the Company, and (d) any material act or omission by Executive
involving malfeasance or negligence or substantial deviation from any of the
written policies or directives of the Corporation; provided that as to
subparagraph (c) and (d) hereof the Board of Directors of the Corporation shall
have first provided Executive written notice stating with specificity the
duties, policy or directive Executive has failed to perform and Executive shall
not have, in the reasonable opinion of the Chairman of the Board of the
Corporation, corrected the acts or omissions complained of within thirty (30)
days of delivery of such notice. The termination of the employment relationship
for Cause shall be the sole and exclusive remedy of ILD under this Agreement for
an event constituting "Cause" hereunder.
(d) In the event Executive has been absent from his duties hereunder
for a period of sixty (60) consecutive days ("Disability Period") as a result of
Executive's bona fide incapacity due to illness or accident ("Disability") prior
to the expiration of this Agreement, then either the Corporation or Executive
may terminate the employment of Executive hereunder and the provisions of
subsection (a) of this Section 1.04 shall govern compensation due.
(e) In the event that the Corporation at any time from time to time
defaults (after giving effect to any notice requirement and applicable cure
period) under either of those certain Promissory Notes issued as of the date
hereof by ILD to Executive in the respective principal
3
<PAGE>
amounts of $1,000,000 and $2,700,000, then for so long as such default is
continuing Executive shall have the option, exercisable by written notice to
the Corporation, to terminate this Agreement, effective as of the date thereof
or as otherwise provided by Executive in such notice. This provision shall not
be construed, affected or limited in any manner by the terms of that certain
Subordination Agreement dated as of the date hereof made by Executive in favor
of NationsBank, N.A.
(f) Any salary or payments due under this Section 1.04 shall be
payable at times and in installments consistent with the Corporation's payroll
practices at the rate of Executive's then base salary.
ARTICLE II
COVENANTS AND AGREEMENTS OF EXECUTIVE
2.01 ACTIVITIES DURING EMPLOYMENT. Executive covenants and agrees
that he will perform his duties faithfully, competently, diligently and to the
best of his ability and subject to all of the Corporation's policies, rules, and
regulations from time to time applicable to him.
2.02 NON-DISCLOSURE & NON-USE OF TRADE SECRETS OR CONFIDENTIAL
INFORMATION.
(a) Executive covenants and agrees, which covenants and
agreements are of the essence of this Agreement, that upon termination of his
employment, for any reason whatsoever, he will immediately deliver to the
Corporation all property, formulas, customer lists, manuals, records, sales
information, memoranda, notes and other documents pertaining to the performance
of Executive's services for the Corporation or containing Trade Secrets or
Confidential Information of the Corporation (as such terms are defined below),
and all other property belonging to the Corporation whether made or compiled by
Executive or furnished to him from any source by virtue of his employment with
the Corporation.
(b) Executive further covenants and agrees, which covenants
and agreements are of the essence of this Agreement, that he will not, either
during the term of this Agreement or for a period of twenty-four (24) months
after termination of this Agreement, for any reason whatsoever, either use for
his own benefit or for the benefit of others or divulge or disclose to any
person, firm, corporation, partnership, association or any other entity, the
Corporation's Confidential Information. "Confidential Information" shall be
defined as the Corporation's methods of operation, personnel data, customer
lists, customer information, survey records or files, sources of supply, and
other confidential business and customer information.
(c) Executive further agrees that he shall not, either
during the term of this Agreement or at any time thereafter either use for his
own benefit or for the benefit of others or
4
<PAGE>
disclose or divulge to any person, firm, corporation, partnership, association
or other entity, any Trade Secrets of the Corporation. "Trade Secrets" shall be
defined as any technical information, design, process, procedure, formula,
computer program or improvement that is valuable to the Corporation and not
publicly known.
2.03 NO INTERFERENCE WITH PERSONNEL RELATIONS. During his term of
employment with the Corporation and for a period of twenty-four (24) months
thereafter, Executive will not knowingly solicit, entice, or persuade any other
employees of the Corporation to leave the service of the Corporation for any
reason.
2.04 SEVERABILITY OF PROVISIONS; REMEDIES. The covenants of
Executive contained in this Article II are severable and separate. The
unenforceability of any specific covenants therein shall not affect the validity
of any other covenants set forth therein. Each of these covenants on the part of
Executive shall be construed as an agreement independent of any other provision
in this Agreement. The parties agree that any breach of this Agreement by
Executive may result in irreparable injury to the Corporation, and therefore, in
addition to all other remedies provided by law, Executive agrees and consents
that the Corporation shall be entitled to an injunction to prevent a breach or
contemplated breach of any of the covenants of Executive contained herein.
ARTICLE III
MISCELLANEOUS
3.01 NOTICES. All notices or other communications required or
permitted to be given hereunder shall be (as elected by the person giving such
notice) (a) personally delivered, (b) transmitted by postage prepaid registered
mail, or (c) transmitted by telex or telecopy (with appropriate confirmation) to
the parties as follows:
if to ILD to:
14651 Dallas Parkway, Suite 905
Dallas, Texas 75240
Fax: (972) 503-1919
Attn: Dennis Stoutenburgh
AND
13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
Fax: (904) 285-3616
Attn: Michael Lewis
5
<PAGE>
with a copy to:
Cashin, Morton & Mullins
Two Midtown Plaza, Suite 1900
1360 Peachtree Street, N.E.
Atlanta, Georgia 30309
Fax: (404) 870-1529
Attention: C. Read Morton, Jr., Esq.
if to Executive:
Mr. Reginald P. McFarland
407 Highway 229
Social Circle, Georgia 30025
with a copy to:
GERRY, FRIEND & SAPRONOV, LLP
Three Ravinia Drive
Suite 1450
Atlanta, Georgia 30346
Fax: (770) 395-0000
Attn: William Friend, Esq.
Except as otherwise specified herein, all notices and other
communications shall be deemed to have been duly given on (a) the date of
receipt if delivered personally, (b) five days after posting if transmitted by
mail, or (c) the next business day after the date of transmission if transmitted
by telex or telecopy, whichever shall first occur. Any party hereto may change
its address by notice to all other parties.
3.02 BINDING EFFECT. This Agreement shall inure to the benefit of
and shall be binding upon Executive, his executor, administrator, heirs,
personal representatives and assigns, and the Corporation and its successors and
assigns.
3.03 ASSIGNMENT. The Assignment by Executive of this Agreement or
any interest herein, or of any money due or to become due by reason of the terms
hereof, without the prior written consent of the Corporation shall be void. This
Agreement may be assigned by the Corporation only to any successor in interest.
3.04 ENTIRE AGREEMENT. This Agreement embodies the entire agreement
of the parties hereto relating to the subject matter hereof and supersedes all
prior agreements and understandings concerning Executive's employment by the
Corporation. No amendment or modification of this Agreement shall be valid or
binding upon the Corporation unless made in
6
<PAGE>
writing and signed by a duly authorized officer of the Corporation, or upon
Executive unless made in writing and signed by him.
3.05 GOVERNING LAW. This Agreement shall be deemed to be made in,
and in all respects shall be interpreted, construed and governed by and in
accordance with the laws of, the State of Georgia.
3.06 WAIVER OF BREACH. The waiver by the Corporation of a breach of
any provision of this Agreement by Executive shall not operate or be construed
as a waiver of any subsequent breach of the same or any other provision by
Executive.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
have affixed their seals the day and year first above written.
"EXECUTIVE"
/s/ Reginald P. McFarland
-----------------------------
REGINALD P. MCFARLAND
("ILD")
ILD TELESERVICES, INC.
BY: /s/ Dennis J. Stoutenburgh
---------------------------
NAME: DENNIS J. STOUTENBURGH
TITLE: PRESIDENT
7
<PAGE>
EXHIBIT 10.14
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is made as of this 15th day of
December, 1997 by and between ILD TELESERVICES, INC., a Delaware corporation
(hereinafter referred to as the "ILD" or the "Corporation") and STRATACOM, INC.,
a Georgia corporation (hereinafter referred to as "Consultant").
W I T N E S S E T H:
WHEREAS, Consultant has unique experience in the telecommunications
business;
WHEREAS, ILD desires to engage Consultant to assist in its
telecommunications operations, particularly in the development of its local
telephone operations; and
WHEREAS, Consultant is willing and able to provide consulting assistance to
ILD on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, for and in consideration of the mutual promises and
covenants contained herein, the parties hereto, intending to be legally bound,
do hereby agree as follows:
1. CONSULTING SERVICES. ILD hereby retains Consultant as a consultant,
and Consultant hereby agrees to be retained by ILD, for part-time consulting
services relating to development of its local telephone operations and to assist
in other technical, marketing and engineering issues in the ongoing operations
of ILD. Consultant shall not be involved with ILD's management or financial
decisions.
2. TERM AND TERMINATION. The engagement of Consultant hereunder shall
commence as of the date hereof and shall continue until September 30, 2002. ILD
shall have no rights to terminate the consulting relationship represented
hereby.
3. FEES AND EXPENSES.
a. FEES. ILD shall pay to Consultant, as remuneration for
Consultant's consulting services hereunder, a consulting fee of $425,000
due and payable on June 1, 1998 and $425,000 due and payable on June 1,
1999.
<PAGE>
b. EXPENSES. Consultant is expected to incur its own expenses, to
be reimbursed from the fees specified in a. above.
c. DELINQUENCY IN PAYMENTS. In the event that the aforesaid
consulting fees shall not be remitted when a payment is due, thereafter
the unpaid consulting fee installment shall bear interest at the rate of
fifteen percent (15%) per annum until the past due remuneration is paid.
4. TRADE SECRETS AND CONFIDENTIAL INFORMATION. Consultant acknowledges
that pursuant to this Consulting Agreement, Consultant may receive and be
exposed to certain confidential and proprietary information and materials of
ILD, including but not limited to, technical and nontechnical data, patterns,
compilations, programs, devices, methods, techniques, drawings, processes,
financial data, financial plans, products plans, and lists of actual or
potential customers and suppliers, from which ILD derives economic value, actual
or potential, from the same not being known to, and not readily ascertainable by
proper means by, persons who can obtain economic value from its disclosure or
use (hereinafter, "Trade Secrets"). Consultant also acknowledges that it may
receive and be exposed to certain confidential and proprietary information and
materials of ILD, other than Trade Secrets, that is material and not generally
known to the public, such as selling and pricing information and marketing
strategies (hereinafter, "Confidential Information"). Consultant hereby agrees
that all materials, data and information disclosed to it, or that will be
disclosed to it, during the consulting arrangement that are considered Trade
Secrets or Confidential Information of the Corporation are and have been
disclosed on a confidential basis solely in connection with and as a result of
his consulting arrangement, for use solely in connection therewith. Consultant
agrees to refrain from any disclosure or further use of: (a) any Trade Secrets
of ILD for so long as they remain a Trade Secret; and (b) any Confidential
Information of ILD for so long as it remains Confidential Information but for no
longer than seven years from the effective date hereof. Upon the termination of
this Agreement for any reason, Consultant shall return to ILD any and all
materials or property (together with any copies, abstracts, digests or summaries
thereof) that are in its possession or under his control that belong to ILD or
contain any Trade Secrets or Confidential Information of ILD. Consultant hereby
cknowledges and agrees that the prohibitions against disclosure of Trade Secrets
or Confidential Data recited herein are in addition to and not in lieu of, any
rights or remedies that ILD may have available pursuant to the laws of any
jurisdiction or at common law to prevent the disclosure of trade secrets, and
the enforcement by any such corporation of its rights and remedies pursuant to
this Agreement shall not be construed as a waiver of any other rights or
available remedies that it may possess in law or equity absent this Agreement.
5. INDEPENDENT CONTRACTOR. It is the intention of the parties that
Consultant be an independent contractor and not an employee, agent, joint
venturer, or partner of ILD. Nothing in this Agreement shall be interpreted or
construed as creating or establishing the relationship of employer
-2-
<PAGE>
and employee between ILD and Consultant. Anything herein to the contrary
notwithstanding, the parties hereby acknowledge and agree that ILD shall have
no right to control the manner, means, or method by which Consultant performs
the services called for by this Agreement. Rather, ILD shall be entitled
only to direct Consultant with respect to the elements of services to be
performed by Consultant.
6. MISCELLANEOUS.
a. NOTICES. All communications provided for hereunder shall be in
notices and shall be deemed to be given when delivered in person or
deposited in the United States mail, first class, certified or registered,
return receipt requested, with proper postage prepaid and,
i) If to Consultant, addressed to:
STRATACOM, INC.
407 Highway 229
Social Circle, Georgia 30025
with a copy to:
GERRY, FRIEND & SAPRONOV, LLP
Three Ravinia Drive
Suite 1450
Atlanta, Georgia 30346
Fax: (770) 395-0000
Attn: William Friend, Esq.
b) If to ILD:
14651 Dallas Parkway, Suite 905
Dallas, Texas 75240
Fax: (972) 503-1919
Attn: Dennis Stoutenburgh
AND
-3-
<PAGE>
13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
Fax: (904) 285-3616
Attn: Michael Lewis
with a copy to:
CASHIN, MORTON & MULLINS
Two Midtown Plaza, Suite 1900
1360 Peachtree Street, N. E.
Atlanta, Georgia 30309
Fax: (404) 870-1529
Attn: C. Read Morton, Jr., Esq.
or at such other place or places or to such other person or persons as shall be
designated in writing by the parties hereto.
c. NO ASSIGNMENT; BINDING EFFECT. Consultant may not assign any
rights or obligations under this Agreement without the prior written
consent of ILD. This Agreement shall inure to the benefit of and shall be
binding upon Consultant, its successors and assigns, and ILD and its
successors and assigns.
d. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
of the parties hereto relating to the subject matter hereof and supersedes
all prior agreements and understandings concerning Consultant's consulting
relationship with ILD.
e. GOVERNING LAW; REMEDIES. This Agreement shall be deemed to be
made in, and in all respects shall be interpreted, construed and governed
by and in accordance with, the laws of the State of Georgia. Should ILD
default on any payment due Consultant hereunder, Consultant shall be
entitled to collect reasonable attorneys' fees and all other reasonable
costs and expenses from ILD. ILD must assert any alleged default by
Consultant hereunder within one year of the date of such alleged default or
ILD is forever estopped from asserting such claim. Should ILD allege any
default by Consultant hereunder within the one-year time frame, then ILD
shall provide written notice of such alleged default and Consultant shall
thereby have a ninety-day period to cure such alleged default.
-4-
<PAGE>
f. DISPUTE AND ARBITRATION. The parties agree that any dispute
hereunder shall be submitted to arbitration in accordance with the rules
then in effect of the American Arbitration Association (the "AAA").
Arbitration shall be conducted by one arbitrator acting under the rules of
commercial arbitration of the AAA in Atlanta, Georgia, U.S.A., or such
other place as the parties shall mutually agree upon. ILD shall bear all
costs of arbitration except as otherwise allocated by the arbitrator. Any
decision, judgment or ruling rising out of arbitration shall be final and
binding upon the parties.
g. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which together shall constitute one and the same instrument.
[SIGNATURES ON FOLLOWING PAGE]
-5-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
"CONSULTANT"
By: /s/ R. P. McFarland
---------------------------------
Title: President
------------------------------
"ILD"
ILD TELESERVICES, INC.
By: /s/ Dennis J. Stoutenburgh
--------------------------------
Name: Dennis J. Stoutenburgh
Title: President
-6-
<PAGE>
EXHIBIT 10.15
ILD TELESERVICES, INC.
UNBUNDLED OPERATOR SERVICE AGREEMENT
This OPERATOR SERVICE AGREEMENT (the "Agreement") is made this 31st day of
August, 1997, effective (the "Effective Date") by and between ILD
TELESERVICES, INC., a Delaware corporation ("ILD"), having its principal
place of business at 14651 Dallas Parkway, Suite 905, Dallas, TX 75240, and
WORLDCOM, INC., a Georgia corporation ("Customer"), having its principal
place of business at 515 East Amite Street, Jackson, MS 39201.
TERMS
Subject to the terms and conditions set forth in this Agreement, ILD agrees
to provide Operator Services, as herein defined, to Customer's subscribers.
For the purposes of this Agreement, Operator Services shall constitute
international and domestic: (i) live operator assisted and automated
operator assisted calls which are charged to major commercial credit cards or
to billable calling cards, are collect calls, or are billed to a third-party
("Traffic"), (ii) call rating, and (iii) bill outclearing services. Operator
Services specifically exclude any costs of originating and terminating
transmission, billing services handled by a Local Exchange Carrier ("LEC") or
other external billing entity. Customer shall be responsible for all LEC or
external billing costs and all bad debt or unbillables associated with
billing such Traffic and shall be responsible for providing originating and
terminating transmission for such Traffic. Traffic shall be rated and billed
by ILD at the rates provided by Customer. The Traffic shall be delivered to
ILD in a format reasonably designated by ILD.
1. BILLING OPTIONS.
Customer will be responsible for submitting Traffic to ILD which Traffic
may be billed by Customer's subscribers under any of the following billing
options:
(a) Billing to approved telephone company calling cards as to which
ILD or its agents have a billing and collection and validation
agreement;
(b) Collect billing (domestic and international locations selected by
Customer);
(c) Third-party billing;
(d) Billing to approved credit cards (AMEX, Visa, MC, etc.) with
which ILD or its agents have a billing and collection agreement;
or
1
<PAGE>
(e) Other billing arrangements as may be mutually agreed to by ILD and
WorldCom.
2. TERM OF AGREEMENT; RIGHT OF FIRST REFUSAL.
(a) The term of this Agreement shall commence on the date set forth
above and shall continue in full force and effect for a period of
sixty (60) months (the "Original Term") unless otherwise
terminated pursuant to this Agreement.
(b) Prior to expiration of the Original Term, the parties agree to
negotiate in good faith concerning the extension of the Agreement
and/or modification of the terms and conditions contained herein.
In the event the parties do not arrive at a mutually acceptable
agreement, Customer may solicit competitive offers for such
Traffic. Upon Customer's receipt of a bona fide competitive
offer for Operator Services substantially similar to those
provided for under this Agreement to commence after the
expiration of the Original Term or any extensions thereto
("Offer"), Customer will present such Offer to ILD in written
form and provide ILD five (5) business days to match the terms
and conditions of such Offer. In the event ILD agrees to match
the terms and conditions of such Offer, Customer and ILD will
modify this Agreement to take into account the terms and
conditions of such Offer. In the event ILD fails to match such
Offer within five (5) business days, Customer may obtain such
Operator Services from such third party on the terms of such
Offer upon expiration of this Agreement.
(c) Upon expiration of the Original Term, or any extensions thereto
unless otherwise agreed to in writing by the parties, this
Agreement shall automatically renew on a month to month basis
(terminable by either party upon 30 days written notice) under
the same terms and conditions as set forth herein.
3. TRAFFIC REQUIREMENTS.
While this Agreement is in effect, Customer agrees to route all Available
Calls, as herein defined, to ILD. For purposes of this Agreement,
Available Calls shall be defined as all Traffic generated from Customer's
international and domestic subscribers except the following:
(a) Traffic which state regulations require to be routed to the local
exchange carrier;
2
<PAGE>
(b) Traffic which is required by existing contract (i.e., existing as of
the Effective Date) to be routed to another carrier or operator
services provider as listed on EXHIBIT A;
(c) Any other Traffic mutually agreed upon in writing between the parties
as listed on EXHIBIT B which may be modified from time to time by
mutual written consent.
(d) Traffic of businesses acquired by Customer (whether by merger,
purchase of stock or purchase of assets) which is under contract
to be routed to another carrier or operator services provider.
4. COMPENSATION AND PAYMENT
(a) COMPENSATION.
(i) In consideration for the Domestic Operator Services provided by
ILD to Customer, Customer agrees to pay ILD the following amount for
each completed call processed by ILD in the respective months listed:
<TABLE>
Monthly Period Percentage of Call Value (as defined below)
-------------- -------------------------------------------
<S> <C>
1 - 12 ***%
13 - 60 As shown in * below
</TABLE>
For the purposes of this Agreement, Call Value shall be defined as the
actual rate charged to Customer's subscribers, excluding applicable taxes,
for each completed call.
<TABLE>
<S> <C>
* Live Operator Attempt $***
Automated Operator Attempt $***
Validation Attempt $***
Outclearing Services (Completed Call) $***
Call Rating $***
LEC and other External Billing Costs ***
</TABLE>
(ii) In consideration for the International Operator Services provided
by ILD to Customer, Customer agrees to pay ILD the following amount for
each service:
*** Confidential information ommitted
3
<PAGE>
<TABLE>
<S> <C>
Live Operator Attempt (Cuba) $***
Live Operator Attempt (Mexico) $***
Automated Operator Attempt $***
Validation Attempt $***
Call Processing (call rating, call record formatting $***
and editing and bill outclearing services)
LEC and other External Billing Costs ***
</TABLE>
The parties agree that services to be provided by ILD to any new
countries added to Customer's existing international customer base of
Cuba and Mexico shall be priced by mutual agreement of Customer and
ILD determined in good faith on the facts and circumstances of
servicing such countries.
(b) TIMING OF PAYMENT. Charges for the Operator Services shall be due
and payable within thirty (30) days following the end of the month
in which such Operator Services were rendered (the "Due Date"). ILD
will utilize its best efforts to invoice such Operator Services
within fifteen (15) days following the end of the month in which such
Operator Services were rendered. In no event will the Due Date for
Operator Services be extended beyond thirty (30) days following the
month in which such Operator Services were rendered without prior
written authorization by ILD.
In the event Customer does not pay for such Operator Services with
fifteen (15) days from the Due Date, ILD will assess a finance charge
equal to the amount of such delinquent payment multiplied by a monthly
interest factor of one and one-half percent (1.5%) for each month or
portion of a month in which such amount remains unpaid past the Due
Date, unless such interest factor is in excess of the amount allowable
by law, in which case ILD will assess the greatest interest factor
allowable by law.
5. WARRANTIES OF CUSTOMER.
(a) Customer represents and warrants the following related to casual and
international operator services:
(1) Monthly average call volume and call value for November 1996,
December 1996, and January, 1997, were as follows:
*** Confidential information ommitted
4
<PAGE>
<TABLE>
Average Call Volume/
Month Average Call Value
------- ------------------
<S> <C> <C>
Domestic 750,000 $***
International 50,000 $***
</TABLE>
(2) As of March 1, 1997, Customer was not aware of any fact or
circumstance in existence, or with substantial likelihood of
occurrence, which would cause the average call volume or call
value to materially decline over the next two (2) years.
(b) Customer warrants that the undersigned has the full authority to
execute this Agreement and bind Customer to the terms and provisions
hereof.
(c) Customer agrees to use its best commercial efforts to only route
traffic to ILD that ILD is allowed to complete by the appropriate
regulatory bodies. Customer agrees that it will abide by all
applicable state and federal rules and regulations.
6. WARRANTIES OF ILD.
ILD agrees to use its best efforts to provide Operator Services in
accordance with industry standards (including the standards set forth on
Exhibit C) and to provide a high degree of operator skills in the provision
of those Operator Services including but not limited to, reasonable work
time, courtesy of operators and accuracy of information provided by ILD
operators. ILD agrees that all Operator Services shall be provided in
accordance with all applicable laws, requirements and standards established
by federal, state and local laws. Customer acknowledges that the standards
set forth on Exhibit C are consistent with standards of the existing
business and, with respect to calls provisioned and maintained at call
centers handled by EDS, consistent with the standards of the EDS Services
Agreement assumed by ILD.
7. PROPRIETARY INFORMATION.
Except as required by law or governmental authority, both parties to this
Agreement agree that all information acquired, directly and indirectly, by
either party during the Original Term of this Agreement or any extension or
renewal period, concerning the business affairs and operations of the other
party, is deemed confidential and proprietary to such party and will be
held in trust and confidence by the receiving
*** Confidential information ommitted
5
<PAGE>
party, its successors and assigns, and the receiving party shall have an
absolute duty to maintain in confidence such information and prevent
disclosure to other parties. Both parties further agree to take reasonable
steps necessary to ensure that all of its agents, servants, and/or
employees, who have access to such information, shall adhere to the
provisions of this Section. Each party agrees that any violation of this
Section shall cause immediate and irreparable harm to the other party and,
in such event, an injunction restraining such party from such violation may
be entered against it by the other party, in addition to any other relief
available to such other party.
8. INDEMNIFICATION AND RELEASE.
(a) Customer agrees to indemnify and hold harmless ILD from and
against, any and all expenses (including reasonable attorney's
fees), claims and damages of every kind whatsoever, including,
but not limited to, damages for injury to or death of any person
or persons and for damage to or loss of any property, arising out
of or attributed, directly or indirectly, to the Operator
Services provided by ILD unless such claim or damages are due to
ILD's gross negligence.
(b) IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR
ANY INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE LOSS
OR DAMAGE OF ANY KIND, INCLUDING LOST PROFITS WHETHER OR NOT SUCH
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE,
BY REASON OF ANY ACT OR OMISSION IN ITS PERFORMANCE UNDER THIS
AGREEMENT.
9. DEFAULT OF CUSTOMER.
Customer shall be in default under this Agreement upon the occurrence of
any one or more of the following events:
(a) Customer breaches any obligation or warranty under this
Agreement, and such breach continues for a period of fifteen (15)
days after written notice from ILD unless such breach relates to
Section 4(b) in which case the breach continues for a period of
five (5) days after written notice from ILD;
(b) Customer makes a general assignment for the benefit of creditors;
6
<PAGE>
(c) Customer terminates this Agreement other than pursuant to Section
2 prior to the expiration of the Original Term or renewal period,
if any; or
(d) Bankruptcy, reorganization, liquidation, or receivership
proceedings are instituted by or against Customer and Customer
consents thereto or fails to cause such proceedings to be
discharged within thirty (30) days.
Upon default as described in this Section 9, ILD may terminate this
Agreement; provided, however, if such default in this Section 9 arises by
Customer's breach of its covenant in Section 3 hereof, then ILD may pursue
any remedies available to it as contemplated herein or by law.
10. DEFAULT BY ILD.
ILD shall be in default under this Agreement upon the occurrence of any of
the following events:
(a) ILD breaches any obligation under this Agreement (including failure to
provide the Operator Services in accordance with the standards
described in Section 6) and such breach continues following receipt by
ILD of written notice from Customer thereof for ten (10) days unless
ILD has taken reasonable steps within such period to correct such
breach;
(b) ILD makes a general assignment for the benefit of creditors, suspends
business, or commits any act amounting to business failure; or
(c) Bankruptcy, reorganization, liquidation, or receivership proceedings
are instituted by or against ILD and ILD consents thereto or fails to
cause such proceedings to be discharged within thirty (30) days.
Upon default as described in this Section 10, Customer may terminate
this Agreement without further liability except for payment for
Operator Services up to the date of termination.
11. MISCELLANEOUS.
(a) The parties acknowledge that concurrent herewith the parties are
executing a Billing Services Agreement.
7
<PAGE>
(b) All rights and remedies under this Agreement are cumulative and
not exclusive. Failure to exercise any right or remedy shall not
be construed as waiver thereof or as excusing the other party
from future performance in accordance with the terms of this
Agreement.
(c) In the event the performance by either party of any of its
respective obligations or undertakings hereunder shall be
interrupted or delayed by any occurrence and not occasioned by
the conduct of such party, whether such occurrence be an act of
God or the common enemy or the result of war, riot, civil
commotion, sovereign conduct, or the act or conduct of any person
or persons not party or privy hereto, then such party shall be
excused from such performance for such a period of time as is
reasonably necessary after such occurrence to remedy the effects
thereof.
(d) If any legal action is brought by either of the parties hereto,
it is expressly agreed that the party in whose favor final
judgment shall be entered shall be entitled to recover from the
other party reasonable attorneys' fees in addition to any other
relief which may be awarded.
(e) The obligations and undertakings of each of the parties to this
Agreement shall be performable in Dallas County, Texas and it is
therefore agreed that any cause of action or suit based upon this
Agreement may be brought in Dallas County, Texas.
(f) This Agreement may be modified in a writing signed by both
parties.
(g) If any clause or provision of this Agreement is illegal, invalid
or unenforceable under present or future laws, it is the
intention of the parties hereto that the remainder of this
Agreement shall not be affected thereby. It is also the
intention of the parties to this Agreement that in lieu of each
clause or provision of this Agreement that is illegal, invalid or
unenforceable, there shall be added as a part of this Agreement a
clause or provision as similar in terms to such illegal, invalid
or unenforceable clause or provision as may be possible and be
legal, valid and enforceable.
(h) This Agreement shall be governed by and construed in accordance
with the law of the State of Texas.
8
<PAGE>
(i) ILD may not assign its rights or delegate its obligations
hereunder, without the prior written consent of the Customer,
which consent shall not be unreasonably withheld.
Notwithstanding anything in this Section 11(i) to the contrary,
ILD may assign its rights and obligations under this Agreement to
its senior secured lender or to its wholly-owned subsidiary
without the prior written approval of Customer provided such
assignment shall not relieve ILD from its duties and obligations
hereunder..
(j) This Agreement shall be binding upon and inure to the benefit of
the successors and assigns, if permitted, of the respective
parties hereto.
(k) Any notices required by this Agreement shall be in writing and
may be sent by registered or certified mail, return receipt
requested or by facsimile. Notice to ILD shall be sufficient if
made and addressed to the parties at the respective addresses
listed:
ILD: and to Customer:
ILD Communications, Inc. WorldCom, Inc.
13000 Sawgrass Village Circle 515 East Amite Street
Suite 5 Jackson, MS 39201
Ponte Vedra Beach, FL 32082
Attn: Michael F. Lewis Attn: K. William Grothe, Jr.
Chairman Vice President, Corporate Development
Fax: (904) 285-3616 Fax: (601) 974-8233
Dennis Stoutenburgh
President
Fax: (972) 503-1919
Any such notice shall be effective on receipt by the sending
party of confirmation of such facsimile, or three days following
the deposit of such notice with the United States Postal Service.
Each party may change the address for notice to it by giving
notice of such change in accordance with the provisions of this
Section.
9
<PAGE>
(l) It is expressly understood and agreed that Customer is not an
agent, employee, nor legal representative of ILD and, unless
specifically authorized in writing to do so, may not incur any
obligations on behalf of or in the name of ILD.
[SIGNATURES ON NEXT PAGE]
ILD TELESERVICES, INC. WORLDCOM, INC.
BY: /s/ Dennis Stoutenburgh BY: /s/ K. William Grothe
----------------------------------- ---------------------------------
TITLE: President TITLE: Vice President
-------------------------------- ------------------------------
DATE: 8/31/97 DATE: 8/31/97
--------------------------------- -------------------------------
10
<PAGE>
EXHIBIT 21
- -- Intellicall Operator Services, Inc., a corporation organized under the laws
of the State of Delaware.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated January 29, 1998 relating
to the financial statements of ILD Telecommunications, Inc., which appears in
such Prospectus. We also consent to the application of such report to the
Financial Statement Schedule for the period from May 10, 1996 (Inception, as
defined) to December 31, 1996, and for the nine months ended September 30, 1997
listed under Item 16(b) of this Registration Statement when such schedule is
read in conjunction with the financial statements referred to in our report. The
audits referred to in such report also included this schedule. We also consent
to the references to us under the headings "Experts" and "Selected Financial
Data" in such Prospectus. However, it should be noted that Price Waterhouse LLP
has not prepared or certified such "Selected Financial Data."
PRICE WATERHOUSE LLP
Dallas, Texas
May 1, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 14, 1998 relating
to the financial statements of Intellicall Operator Services, Inc.
(Predecessor), which appears in such Prospectus.
PRICE WATERHOUSE LLP
Dallas, Texas
May 1, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated October 31, 1997 relating
to the financial statements of WorldCom--San Antonio (as defined), which appears
in such Prospectus.
PRICE WATERHOUSE LLP
Dallas, Texas
May 1, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated November 7, 1997, except
as to Note G as to which the date is December 15, 1997, relating to the
financial statements of Interlink Telecommunications, Inc., which appears in
such Prospectus. We also consent to the reference to us under the heading
"Experts" in such Prospectus.
SMITH & HOWARD, P.C.
Atlanta, Georgia
April 30, 1998
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FISCAL PERIOD ENDED SEPTEMBER 30, 1997 FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<SECURITIES> 0
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<ALLOWANCES> 828
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<CURRENT-ASSETS> 10,812
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<TOTAL-ASSETS> 34,496
<CURRENT-LIABILITIES> 11,240
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11,196
1
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<OTHER-SE> 3,683
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<LOSS-PROVISION> 1,312
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<EPS-DILUTED> 3.08
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTER ENDED DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
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13,196
1
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<EPS-PRIMARY> (1.40)
<EPS-DILUTED> (1.40)
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