<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1998
REGISTRATION NO. 333-51663
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
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, 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(2)
</TABLE>
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457(o).
(2) Previously paid in connection with the initial filing of this Registration
Statement.
--------------------------
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 JUNE 24, 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 $1.2 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]
[PHOTOGRAPH OF THE COMPANY'S PRODUCTS AND INFRASTRUCTURE]
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.
CERTAIN CAPITALIZED TELECOMMUNICATIONS TERMS USED IN THIS PROSPECTUS WHICH ARE
NOT OTHERWISE DEFINED HEREIN HAVE THE MEANINGS ASCRIBED TO THEM IN THE GLOSSARY
OF SELECTED TELECOMMUNICATIONS TERMS INCLUDED IN THIS PROSPECTUS. REFERENCES
HEREIN TO "EBITDA" REFER TO EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND
AMORTIZATION. 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"), with which ILD has a contract to provide all of WorldCom's
outsourced operator and billing and collections services except in certain
limited circumstances. During the six months ended March 31, 1998, 8% of the
Company's outsourcing revenues were generated from services provided to
WorldCom. For the nine months ended September 30, 1997, ILD had revenues and
EBITDA of $30.3 million and $1.3 million, respectively, and for the six months
ended March 31, 1998, the Company's revenues and EBITDA increased to $51.7
million and $2.4 million, respectively.
The Company began operations in May 1996 as a switchless provider of
operator 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. Upon completion of
the migration of call traffic to its switching network, the Company's switches
are expected to operate at 50% or less of their full capacity, with availability
for expansion. As a result, the Company 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 industry sources, 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 1996, 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
3
<PAGE>
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.
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 seven 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 25% of the Company's total prepaid minutes for the six months
ended March 31, 1998 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
NationsBanc Montgomery Securities LLC 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 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
4
<PAGE>
Grand Hotel. The Company believes its broad customer base for operator services
affords it the opportunity to cross-sell its other outsourcing and prepaid
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 the Company believes it is one
of only four nationwide providers of outsourced LEC billing and collections
services in the United States. The Company has agreements with all of the RBOCs
and most of the larger LECs, including Ameritech, Bell Atlantic and its recent
merger partner NYNEX, Bell South, Cincinnati Bell, GTE, Sprint United Companies,
U.S. West, Southern New England Telephone and Southwestern Bell (which has
acquired the operations of Pacific Bell and Nevada Bell), allowing ILD to bill
individual consumers through the 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, which in most cases are combined 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 for third party verification 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
5
<PAGE>
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.
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, as of
January 1, 1998, with the acquisition of the prepaid operations of Intellicall,
Inc. ("Intellicall"), a manufacturer of "smart" pay phones. Since January 1,
1998, the Company has acquired five prepaid long distance calling card
providers, which have provided the Company with approximately 230 vending
machines and over 1,600 retail outlets providing over-the-counter distribution
of prepaid long distance services. 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 two companies. If these
acquisitions are completed, these companies in the aggregate will provide the
Company with approximately 230 additional vending machine locations and
contracts with 18 additional 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 65,139 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 six months ended March 31, 1997 and 1998, and the
consolidated balance sheet data as of March 31, 1998, 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 six months ended March 31, 1998 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>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------- SIX MONTHS ENDED MARCH 31,
PREDECESSOR -----------------------------------
AND COMPANY PRO FORMA AS PRO FORMA AS
COMBINED ADJUSTED ADJUSTED
1996(1) 1997 1997(2) 1997 1998 1998(2)
-------------- --------- ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Telecommunications revenues:
Outsourcing services............................ $ 19,576 $ 30,349 $ 85,095 $ 14,538 $ 47,419 $ 48,052
Prepaid services................................ -- -- 3,756 -- 4,324 6,031
-------------- --------- ------------- --------- --------- -------------
Total revenues................................ 19,576 30,349 88,851 14,538 51,743 54,083
Cost of revenues.................................. 17,574 26,298 69,503 13,191 40,424 41,555
-------------- --------- ------------- --------- --------- -------------
Gross profit.................................... 2,002 4,051 19,348 1,347 11,319 12,528
Operating expenses................................ 1,099 3,005 17,339 938 10,359 11,650
-------------- --------- ------------- --------- --------- -------------
Income from operations............................ 903 1,046 2,009 409 960 878
Other income (expense)............................ (173) (387) 211 (214) (796) (25)
-------------- --------- ------------- --------- --------- -------------
Income before provision for income taxes.......... 730 659 2,220 195 164 853
Provision for income taxes........................ 115 151 821 -- 103 316
-------------- --------- ------------- --------- --------- -------------
Net income........................................ 615 508 1,399 195 61 537
Preferred dividend requirements................... (18) (113) (803) (23) (533) (535)
-------------- --------- ------------- --------- --------- -------------
Net income (loss) applicable to common
stockholders.................................... $ 597 $ 395 $ 596 $ 172 $ (472) $ 2
-------------- --------- ------------- --------- --------- -------------
-------------- --------- ------------- --------- --------- -------------
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% 9.3% 21.9% 23.2%
EBITDA(4)......................................... $ 958 $ 1,289 $ 5,275 $ 441 $ 2,422 $ 2,564
EBITDA margin(5).................................. 4.9% 4.2% 5.9% 3.0% 4.7% 4.7%
Net cash provided by (used in) operating
activities...................................... $ (154) $ 20 N/A $ 715 $ (2,894) N/A
Net cash used in investing activities............. $ (2,006) $ (10,316) N/A $ (63) $ (7,717) N/A
Net cash provided by financing activities......... $ 3,987 $ 8,383 N/A $ -- $ 10,495 N/A
</TABLE>
See accompanying notes on the following page.
8
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31, 1998
--------------------------
ACTUAL AS ADJUSTED(6)
--------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................................................. $ 242 $ 25,154
Total assets.......................................................................................... 67,911 92,422
Long-term obligations, less current maturities........................................................ 20,096 2,720
Redeemable Preferred Stock............................................................................ 13,196 13,196
Convertible Preferred Stock........................................................................... 1 --
Total stockholders' equity............................................................................ 8,036 54,396
</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 six months ended March 31, 1998 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 indebtedness 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 and
Note 5 to the Company's Consolidated Interim 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 March 31, 1998. See "Use of Proceeds" and "Unaudited Pro Forma
Consolidated Statements of Operations."
9
<PAGE>
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 seven 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.
10
<PAGE>
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.
11
<PAGE>
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 June 12, 1998, approximately 80% of the Company's total call traffic had 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 during 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 during 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 during
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. Further, as the prepaid long distance market expands, it is possible
that certain of the Company's present outsourcing customers, including WorldCom,
may enter the prepaid long distance market and compete with the Company. Some of
these customers, including WorldCom, have 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.
12
<PAGE>
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 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
approximately 14%, 10% and 8%, respectively, of the Company's total revenues in
the six month period ended March 31, 1998. In addition, the Company had two
other customers that collectively accounted for approximately 6% of the
Company's total revenues in the six month period ended March 31, 1998. 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.
13
<PAGE>
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, 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 $2.7 million was available as of June 12, 1998) under its revolving
loan with NationsBank, N.A. ("NationsBank"), with borrowings based on 85% of
eligible receivables minus certain reserves. 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 during the next 12 months. 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 using Internet protocol
technologies, may reduce demand for local and long distance services, including
prepaid calling cards, and related outsourcing services such as operator
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
14
<PAGE>
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.
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 $22.7 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."
15
<PAGE>
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.
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 its 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 March 31, 1998, the Company's total assets were approximately $67.9
million, of which approximately $33.1 million, or approximately 49% 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 $1.3 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 March
31, 1998 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
16
<PAGE>
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 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, including % which will be beneficially owned by
Intellicall. 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
17
<PAGE>
the exercise of those options and warrants. 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 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
18
<PAGE>
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 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 their shares. Upon the effectiveness of
registration statements covering any of these 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."
19
<PAGE>
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 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 $22.2 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 $22.2 million to be used to repay indebtedness, $11.2
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, approximately $6.5 million will be used to repay outstanding
indebtedness to 14 individuals or entities and approximately $250,000 will be
used to repay indebtedness incurred in connection with the Company's recent
acquisition of the assets of a prepaid calling card business. 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 June 12, 1998)
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 June 12, 1998) per year,
payable monthly. Borrowings under the Term Loan are payable quarterly and the
Term Loan matures on March 31, 2001. The indebtedness incurred in connection
with the recently acquired assets of a prepaid calling card business bears
interest at the rate of 8% per annum, payable monthly, with the principal and
any accrued interest due on January 1, 1999.
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 non-binding letters of intent to acquire the
capital stock or assets of two other prepaid service providers for an aggregate
purchase price of approximately $5.2 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 other 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.
21
<PAGE>
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.
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 March 31, 1998,
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 March 31,
1998. Promptly after 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 MARCH 31, 1998
------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.......................................... $ 242 $ 25,154
Short-term debt (including current maturities of long-term
obligations)..................................................... 2,992 292
Long-term obligations (less current maturities).................... 20,096 2,720
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 57,431
Retained deficit................................................. (2,597) (3,037)
Total stockholders' equity..................................... 8,036 54,396
Total capitalization........................................... 41,328 70,312
</TABLE>
- --------------------------
(1) Excludes 59,989 shares of Common Stock that were subject to outstanding
options and warrants at March 31, 1998 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 March 31, 1998, 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, 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 March 31, 1998 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 March 31, 1998, 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 six months ended March 31, 1998 have
been prepared as if the Interlink acquisition and the related financing and,
with respect solely to the nine months ended September 30, 1997, the WorldCom
Assets acquisition and related financing, 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 six
months ended March 31, 1998 are based upon the historical consolidated financial
statements of the Company for the six months ended March 31, 1998 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(8):
Basic......................................
Diluted....................................
Shares used in computing net income (loss)
per share applicable to common
stockholders(8):
Basic......................................
Diluted....................................
<CAPTION>
ADJUSTMENTS PRO FORMA
PRO FORMA PRO FORMA FOR AS ADJUSTED
ADJUSTMENTS COMPANY OFFERING COMPANY(1)
------------- --------- ----------- -----------
<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(2) 17,339 17,339
407(3)
------------- --------- -----------
Income (loss) from operations................ (1,835) 2,009 2,009
Other income (expense):
Interest expense........................... (642)(4) (1,126) $ 1,118(5) (8)
Interest and other income.................. 304 304
------------- --------- ----------- -----------
Total other income (expense)............. (642) (822) 1,118 296
------------- --------- ----------- -----------
Income (loss) before provision for income
taxes....................................... (2,477) 1,187 1,118 2,305
Provision (benefit) for income taxes......... (828)(6) 439 414(6) 853
------------- --------- ----------- -----------
Net income (loss)............................ (1,649) 748 704 1,452
Preferred dividend requirements.............. (724)(7) (837) 34(5) (803)
------------- --------- ----------- -----------
Net income (loss) applicable to common
stockholders................................ $(2,373) $ (89) $ 738 $ 649
------------- --------- ----------- -----------
------------- --------- ----------- -----------
Net income (loss) per share applicable to
common stockholders(8):
Basic......................................
Diluted....................................
Shares used in computing net income (loss)
per share applicable to common
stockholders(8):
Basic......................................
Diluted....................................
</TABLE>
See accompanying notes on the following page.
26
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
---------------------------
PERIOD FROM
OCTOBER 1,
SIX MONTHS 1997 TO
ENDED MARCH DECEMBER 14, ADJUSTMENTS PRO FORMA
31, 1998 1997 PRO FORMA PRO FORMA FOR AS ADJUSTED
COMPANY INTERLINK ADJUSTMENTS COMPANY OFFERING COMPANY(1)
------------ ------------ -------------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Telecommunications revenues:
Outsourcing services....... $47,419 $ 633 $48,052 $48,052
Prepaid services........... 4,324 1,707 6,031 6,031
------------ ------ --------- -----------
Total revenues........... 51,743 2,340 54,083 54,083
Cost of revenues............. 40,424 1,131 41,555 41,555
------------ ------ --------- -----------
Gross profit............... 11,319 1,209 12,528 12,528
Operating expenses........... 10,359 1,079 $ 199(2) 11,650 11,650
13(3)
------------ ------ ----- --------- -----------
Income (loss) from
operations.................. 960 130 (212) 878 878
Other income (expense):
Interest expense........... (867) (4) (56)(4) (927) $880(5) (47)
Interest and other income
(expense)................ 71 (49) -- 22 22
------------ ------ ----- --------- ----- -----------
Total other income
(expense).............. (796) (53) (56) (905) 880 (25)
------------ ------ ----- --------- ----- -----------
Income (loss) before
provision for income
taxes....................... 164 77 (268) (27) 880 853
Provision for income taxes... 103 -- (103)(6) -- 316(6) 316
------------ ------ ----- --------- ----- -----------
Net income (loss)............ 61 77 (165) (27) 564 537
Preferred dividend
requirements................ (533) -- (25)(7) (558) 23(5) (535)
------------ ------ ----- --------- ----- -----------
Net income (loss) applicable
to common stockholders...... $ (472) $ 77 $ (190) $ (585) $587 $ 2
------------ ------ ----- --------- ----- -----------
------------ ------ ----- --------- ----- -----------
Net income (loss) per share
applicable to common
stockholders(8):
Basic......................
Diluted....................
Shares used in computing net
income (loss) per share
applicable to common
stockholders(8):
Basic......................
Diluted....................
</TABLE>
- ----------------------------------
(1) The pro forma as adjusted results of operations for the nine months ended
September 30, 1997 and the six months ended March 31, 1998 exclude the
estimated extraordinary loss on the early extinguishment of debt of
approximately $309,000, net of taxes.
(2) To record the related amortization expense of the goodwill, non-compete
agreements, consulting agreement, and other intangibles valued at $18.7
million and $12.9 million, arising from the acquisitions of the WorldCom
Assets and Interlink, respectively.
(3) 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.
(4) 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.
(5) 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."
(6) To reflect the effect of federal and state income taxes.
(7) 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.
(8) See Note 10 of Notes to the Company's Consolidated Financial Statements and
Note 5 to the Company's Consolidated Interim Financial Statements for
information concerning the calculation of basic and diluted net income per
share.
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 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 September 30, 1996 and March 31, 1998 and for
the six months ended March 31, 1997 and 1998 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
six months ended March 31, 1998 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
PERIOD FROM 10, 1996
YEAR ENDED DECEMBER 31, JANUARY 1, (COMMENCEMENT OF
------------------------------- 1996 TO MAY OPERATIONS) TO
1993 1994 1995 9, 1996 DECEMBER 31, 1996
--------- --------- --------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Telecommunications revenues:
Outsourcing services............................ $ 5,143 $ 9,101 $ 10,287 $ 6,333 $ 20,343
Prepaid services................................ -- -- -- -- --
--------- --------- --------- ------ -------
Total revenues................................ 5,143 9,101 10,287 6,333 20,343
Cost of revenues.................................. 4,199 7,527 8,418 5,639 18,366
--------- --------- --------- ------ -------
Gross profit.................................... 944 1,574 1,869 694 1,977
Operating expenses:
Selling, general and administrative............. 523 498 488 267 684
Provision for doubtful accounts................. -- 65 33 80 472
Depreciation and amortization................... 69 81 58 37 35
--------- --------- --------- ------ -------
Total operating expenses...................... 592 644 579 384 1,191
--------- --------- --------- ------ -------
Income from operations............................ 352 930 1,290 310 786
Other expense..................................... -- -- -- -- (279)
--------- --------- --------- ------ -------
Income before provision for income taxes.......... 352 930 1,290 310 507
Provision for income taxes........................ 130 344 477 115 --
--------- --------- --------- ------ -------
Net income........................................ 222 586 813 195 507
Preferred dividend requirements................... -- -- -- -- (29)
--------- --------- --------- ------ -------
Net income (loss) applicable to common
stockholders.................................... $ 222 $ 586 $ 813 $ 195 $ 478
--------- --------- --------- ------ -------
--------- --------- --------- ------ -------
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.........................................
<CAPTION>
NINE MONTHS SIX MONTHS ENDED
ENDED
SEPTEMBER 30, MARCH 31,
-------------- --------------------
1997 1997 1998
-------------- --------- ---------
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Telecommunications revenues:
Outsourcing services............................ $ 30,349 $ 14,538 $ 47,419
Prepaid services................................ -- -- 4,324
-------------- --------- ---------
Total revenues................................ 30,349 14,538 51,743
Cost of revenues.................................. 26,298 13,191 40,424
-------------- --------- ---------
Gross profit.................................... 4,051 1,347 11,319
Operating expenses:
Selling, general and administrative............. 1,450 547 5,207
Provision for doubtful accounts................. 1,312 359 3,690
Depreciation and amortization................... 243 32 1,462
-------------- --------- ---------
Total operating expenses...................... 3,005 938 10,359
-------------- --------- ---------
Income from operations............................ 1,046 409 960
Other expense..................................... (387) (214) (796)
-------------- --------- ---------
Income before provision for income taxes.......... 659 195 164
Provision for income taxes........................ 151 -- 103
-------------- --------- ---------
Net income........................................ 508 195 61
Preferred dividend requirements................... (113) (23) (533)
-------------- --------- ---------
Net income (loss) applicable to common
stockholders.................................... $ 395 $ 172 $ (472)
-------------- --------- ---------
-------------- --------- ---------
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.........................................
</TABLE>
See accompanying notes on the following page.
28
<PAGE>
<TABLE>
<CAPTION>
THE PREDECESSOR(1) THE COMPANY(1)
--------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
AT MARCH
AT DECEMBER 31, AT SEPTEMBER 30, 31,
--------------------------------------- --------------------- -----------
<CAPTION>
1993 1994 1995 1996 1997 1998
----------- ----------- ----------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......... -$- $-- $-- $1,827 $ 358 $ 242
Total assets....................... 886 1,647 1,380 5,799 34,496 67,911
Long-term obligations, less current
maturities....................... -- -- -- 3,914 8,375 20,152
Redeemable Preferred Stock......... -- -- -- -- 11,196 13,196
Convertible Preferred Stock........ -- -- -- -- 1 1
Total stockholders' equity
(deficit)........................ 498 1,019 625 (555) 3,685 8,036
</TABLE>
<TABLE>
<CAPTION>
THE COMPANY(1)
THE PREDECESSOR(1) ---------------------------------
-------------------------------------------------- PERIOD FROM MAY NINE MONTHS
10, 1996 ENDED
YEAR ENDED DECEMBER 31, PERIOD FROM (COMMENCEMENT OF SEPTEMBER 30,
--------------------------------- JANUARY 1, 1996 OPERATIONS) TO --------------
1993(3) 1994 1995 TO MAY 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(4).................................. $ 1,011 $ 1,348 $ 347 $ 821 $ 1,289
EBITDA margin(5)........................... 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>
SIX MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
OPERATING DATA:
Gross profit margin........................ 9.3% 21.9%
EBITDA(4).................................. $ 441 $ 2,422
EBITDA margin(5)........................... 3.0% 4.7%
Net cash provided by (used in) operating
activities................................ $ 715 $ (2,894)
Net cash provided by (used in) investing
activities................................ $ (63) $ (7,717)
Net cash provided by (used in) financing
activities................................ $ -- $ 10,495
</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 5 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 and cash flow financial information for the year ended December 31,
1993 is not provided because such information relates to the Predecessor and
cannot be obtained.
(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
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.
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 six months ended March 31, 1998 and
1997, 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 seven
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 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 due to 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 but not as rapidly as the expected growth in prepaid revenues.
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 services, traditional
long distance services and billing and collections services. Revenues are
recognized as services are performed based on end user usage, net of an estimate
for uncollectible revenues. The Company sells its
30
<PAGE>
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
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Telecommunications revenues:
Outsourcing services.............................................. 100% 100% 100% 100%
Prepaid services.................................................. -- -- -- --
--- --- --- ---
Total revenues.................................................. 100 100 100 100
Cost of revenues.................................................... 82 90 90 87
--- --- --- ---
Gross profit...................................................... 18 10 10 13
Operating expenses:
Selling, general and administrative............................... 5 4 3 5
Provision for doubtful accounts................................... -- 2 2 4
Depreciation and amortization..................................... -- -- -- 1
--- --- --- ---
Total operating expenses........................................ 5 6 5 10
--- --- --- ---
Income from operations.............................................. 13 4 5 3
Other expense....................................................... -- 1 1 1
--- --- --- ---
Income before provision for income taxes............................ 13 3 4 2
Provision for income taxes.......................................... 5 -- 1 --
--- --- --- ---
Net income.......................................................... 8% 3% 3% 2%
--- --- --- ---
--- --- --- ---
<CAPTION>
SIX MONTHS
ENDED
MARCH 31,
------------------------
1997 1998
----------- -----------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Telecommunications revenues:
Outsourcing services.............................................. 100% 92%
Prepaid services.................................................. -- 8
--- ---
Total revenues.................................................. 100 100
Cost of revenues.................................................... 91 78
--- ---
Gross profit...................................................... 9 22
Operating expenses:
Selling, general and administrative............................... 4 10
Provision for doubtful accounts................................... 2 7
Depreciation and amortization..................................... -- 3
--- ---
Total operating expenses........................................ 6 20
--- ---
Income from operations.............................................. 3 2
Other expense....................................................... (2) (2)
--- ---
Income before provision for income taxes............................ 1 --
Provision for income taxes.......................................... -- --
--- ---
Net income.......................................................... 1% -- %
--- ---
--- ---
</TABLE>
SIX MONTHS ENDED MARCH 31, 1998 COMPARED TO SIX MONTHS ENDED MARCH 31, 1997
REVENUES. Revenues increased by $37.2 million, or 256%, to $51.7 million
for the six months ended March 31, 1998 from $14.5 million for the six months
ended March 31, 1997. The increase in total revenues is primarily attributable
to revenues arising from the acquisitions of (i) the WorldCom Assets as of
September 1, 1997, (ii) Interlink as of December 15, 1997 and (iii) the
Intellicall prepaid operations as of January 1, 1998. 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 8% and 92%, respectively, of total revenues
for the six months ended March 31, 1998 compared to outsourcing services
revenues comprising 100% of total revenues for the same period in 1997.
GROSS PROFIT. Gross profit increased by $10.0 million to $11.3 million for
the six months ended March 31, 1998 from $1.3 million for the same period in
1997. The gross profit margin increased to 22% for the six months ended March
31, 1998 from 9% for the six months ended March 31, 1997. The increase in the
dollar amount of gross profit was due to the acquisitions of the WorldCom
Assets, Interlink, and the Intellicall prepaid operations. The increase in gross
profit margin was principally due to the lower cost of processing traffic in
1998 in a switched environment over the WorldCom network as compared to the
processing of traffic in the 1997 period in an outsourced switchless
environment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense increased by $4.7 million to $5.2 million for the six
months ended March 31, 1998 from $547,000 for the same period in 1997 and as a
percentage of revenues increased to 10% in the 1998 period from 4% in the 1997
period. The increase in the dollar amount of selling, general and administrative
expense was primarily attributable
32
<PAGE>
to the acquisitions of the WorldCom Assets, Interlink and the Intellicall
prepaid operations. 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 1998 period
to operate and manage the Company's business in a switched environment as
compared to outsourcing these functions in a switchless environment in the 1997
period.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
increased by $3.3 million to $3.7 million for the six months ended March 31,
1998 from $359,000 for the same period in 1997 and as a percentage of revenues
increased to 7% in the 1998 period from 2% in the 1997 period. The increase in
the dollar amount of the provision for doubtful accounts was primarily due to
the acquisitions of the WorldCom Assets, Interlink and the Intellicall prepaid
operations. 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 $1.4 million to $1.5 million for the six months ended March 31,
1998 from $32,000 for the same period in 1997 and as a percentage of revenues
increased to 3% in the 1998 period from less than 1% in the 1997 period. The
increases resulted from higher depreciation and amortization charges associated
with the acquisition of the WorldCom Assets, Interlink and the Intellicall
prepaid operations.
EBITDA. EBITDA increased by $2.0 million to $2.4 million for the six months
ended March 31, 1998 from $441,000 for the same period in 1997 and as a
percentage of revenues increased to 5% in the 1998 period from 3% in the 1997
period. 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 $551,000 to
$960,000 for the six months ended March 31, 1998 from $409,000 for the same
period in 1997 and as a percentage of revenues decreased to 2% in the 1998
period from 3% in the 1997 period. The increase in the dollar amount of income
from operations was primarily attributable to the acquisitions of the WorldCom
Assets, Interlink and the Intellicall prepaid operations. The decrease as a
percentage of revenues was principally due to increased operating expenses.
OTHER INCOME (EXPENSE). The Company had other expense of $796,000 for the
six months ended March 31, 1998 as compared to other expense of $214,000 for the
same period in 1997. This increase was primarily attributable to an increase in
interest expense to $867,000 from $274,000 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 $103,000 for the six months ended March 31, 1998 compared to $0 for the
same period in 1997. The provision in the 1998 period was due to the Company
having insufficient net operating loss carryforwards to shelter all taxable
income in 1998.
NET INCOME. Net income decreased by $134,000 to $61,000 for the six months
ended March 31, 1998 from $195,000 for the same period in 1997 and as a
percentage of revenues decreased to less than 1% in the 1998 period from 1% in
the 1997 period. The decreases were principally attributable to the increased
operating expenses, other expenses and the provision for income taxes in 1998
partially offset by the improved gross profit margin.
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
33
<PAGE>
$5.4 million of outsourced services revenues and (ii) internal growth and new
customers which contributed $5.3 million of outsourced services revenues.
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
34
<PAGE>
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 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 operator 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
35
<PAGE>
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 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 $2.9 million for the six
months ended March 31, 1998, 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
36
<PAGE>
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.
The Company's investing activities used net cash of $7.7 million for the six
months ended March 31, 1998, $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 six months
ended March 31, 1998, $5.3 million and $2.0 million were utilized in the
acquisitions of Interlink and the Intellicall prepaid operations, respectively;
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 $10.5 million for
the six months ended March 31, 1998, $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 $5.3 million and $2.0 million were used in the acquisitions of
Interlink and the Intellicall prepaid operations, respectively, in the six
months ended March 31, 1998; 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 March 31, 1998, the Company had cash balances of $242,000 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 ($1.1 million at March 31,
1998) 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 March 31, 1998, the Company had current liabilities in excess of
current assets of $4.4 million as compared to $428,000 as of September 30, 1997.
This increase was primarily due to $3.3 million of current debt incurred in
connection with acquisitions 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 with a stated
value of $7.3 million and 5,000 shares of Series B Convertible Preferred Stock
with a stated value of $500,000. The Series A Convertible Preferred Stock will
automatically be converted into an aggregate of 100,000 shares of the Common
Stock upon the consummation of the Offering. The Series B Convertible Preferred
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,
37
<PAGE>
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 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 Capital Corporation ("Sirrom") and
Reedy River Ventures Limited Partnership ("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 March 31, 1998, $4.5 million of the $5.0 million Term Loan was outstanding
and $9.6 million of the $20.0 million Revolving Loan (subject to borrowing
availability) was outstanding. Unused borrowing availability under the Revolving
Loan was approximately $5.8 million at March 31, 1998. 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 March 31,
1998) 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% (8.3% at March 31, 1998) 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. Interest rates based on LIBOR must be locked in for minimum periods of
30, 90 or 180 days. At March 31, 1998, $3.0 million of the Company's $9.6
million of outstanding borrowings under the Revolving Loan were advanced under
its LIBOR option.
The Term Loan bears interest at prime plus 2.5% (11.0% at March 31, 1998)
per annum and is payable monthly. Principal payments are due in 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
38
<PAGE>
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 March 31, 1998.
In connection with its commencement of operations, 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 during the next 12 months. 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
39
<PAGE>
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. 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.
40
<PAGE>
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, with which
ILD has a contract to provide all of WorldCom's outsourced operator and billing
and collections services except in certain limited circumstances. During the six
months ended March 31, 1998, 8% of the Company's outsourcing revenues were
generated from services provided to WorldCom. For the nine months ended
September 30, 1997, ILD had revenues and EBITDA of $30.3 million and $1.3
million, respectively, and for the six months ended March 31, 1998, the
Company's revenues and EBITDA increased to $51.7 million and $2.4 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 seven
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.
41
<PAGE>
DOMESTIC PREPAID LONG DISTANCE
The approximately $100 billion U.S. long distance industry is becoming
increasingly more competitive. While the nation's four largest IXCs, AT&T, MCI,
WorldCom and Sprint, generated approximately 83.1% of the 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 industry sources, 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. 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, rent-to-own 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 NationsBanc Montgomery Securities LLC 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
42
<PAGE>
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) 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, a market research publishing and corporate training firm. 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 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
43
<PAGE>
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 for third party verification of 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 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
44
<PAGE>
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 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 seven 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, Kentucky
and Tennessee. In addition, the Company has applied for CLEC authority in
California, Oregon, Washington, North Carolina, Texas, Arizona, Idaho, Utah,
Alaska, Louisiana 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, rent-to-own stores 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 has recently undertaken a number of marketing initiatives for its
prepaid local operations. The Company has commenced a direct response program
whereby television, radio and newspaper media (with reference to customer
service personnel "standing by") are utilized to increase the customer base for
prepaid local services in targeted markets. This program has been tested with
positive results in Macon, Georgia, and the Company plans to utilize it in other
markets in tandem with its retail outlets located in such markets. The Company
recently signed an agreement with Thorn Americas, Inc., ("Thorn") an entity
operating over 1,000 rent-to-own stores, which allows the Company to utilize
Thorn's approximately 110
45
<PAGE>
stores in Georgia and Florida to serve as retail centers for the Company's
prepaid local operations. The majority of the Company's prepaid local services
programs are conducted on a bilingual basis to attract Hispanic customers. ILD
plans to grow its prepaid local services business through internal growth and
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.
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,
46
<PAGE>
and the Company believes it is one of only four nationwide 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
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
47
<PAGE>
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 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
48
<PAGE>
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 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.
The Company estimates that when all of its call traffic is migrated to its
switching network, its two DEX switches will operate at approximately 30% of
existing full capacity and the Company will be able to increase capacity in
these switches from 6,000 ports to 30,000 ports. In addition, the Company's two
Harris switches in Atlanta currently operate at approximately 50% of existing
full capacity with availability for expansion. An additional, more advanced
Harris switch also is expected to become operational by August 1998 and is
estimated to increase the capacity of the Company's existing Harris switches by
approximately 400%. As a result, the Company 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.
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
49
<PAGE>
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."
GOVERNMENT REGULATION
THE FOLLOWING SUMMARY OF MATERIAL 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
50
<PAGE>
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 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
51
<PAGE>
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 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.
52
<PAGE>
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
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 June 12, 1998, the Company employed 352 persons. Forty-four of ILD's
employees are managers (of which five are in the sales and marketing group). The
total sales staff consists of approximately 24 persons strategically located
throughout the United States in Washington, Oregon, California, New Mexico,
Texas, Colorado, Georgia, Florida and Massachusetts. The Company has 216
employees serving as operators or customer service representatives. None of the
Company's employees is a member of a labor union or 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 space among three
Atlanta, GA 14,831 locations
Boca Raton, FL 2,800 Operations and office space
Operations and office space between two
San Antonio, TX 26,260 locations
San Antonio, TX 7,049 Call center
Las Vegas, NV 10,170 Call center
Ponte Vedra Beach, FL 800 Executive office
</TABLE>
The three San Antonio facilities will be merged into one approximately
22,000 square-foot facility in San Antonio once the build-out commenced in June
1998 is completed. The 14,831 square footage of facilities space in Atlanta is
currently divided among three locations. Two of the Atlanta operations will
merge into one Atlanta facility in the second half of 1998. The Boca Raton
operation will be relocated to
53
<PAGE>
Ft. Lauderdale, Florida in August 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, Alaska 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,
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
June 12, 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....................... 44 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 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 company that
develops, patents and licenses technology for the telecommunications industry.
Prior to
55
<PAGE>
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 served as Chairman of the Orchestrate.com division of Premiere
Technologies, Inc. since June 1998. Mr. Payne was Vice Chairman of NationsBank
Corporation from February 1997 to June 1998, and 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 Anheuser-Busch Companies, Inc., 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 250 shares to John J. McDonald, Jr., 2,025 shares to H.
Edward Brooks, Jr., 1,525 shares to C. Read Morton, Jr., 1,250 shares to William
P. Payne and 250 shares to Patrick V. Stark. 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 12 month period
ended September 30, 1997 (the "1997 Period") by the Company's Chief Executive
Officer and each of the Company's other executive officers whose total salary
and bonus for the 1997 Period would have exceeded $100,000 had such executive
officer been employed by the Company for all of the 1997 Period (the "Named
Executive Officers").
58
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------------------------- ---------------
12 MONTH SECURITIES
PERIOD ENDED OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SEPTEMBER 30, SALARY BONUS COMPENSATION OPTIONS(#) COMPENSATION(1)
- -------------------------------- --------------- --------- --------- ------------- --------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Michael F. Lewis................ 1997 $ 151,522 $ -- $ -- 7,000 $ 1,811
Chairman of the Board and
Chief Executive Officer
Dennis J. Stoutenburgh(2)....... 1997 133,590 -- -- 7,500 895
President and Director
J. David Darnell(3)............. 1997 125,000 -- -- -- --
Chief Financial Officer
Reginald P. McFarland(3)........ 1997 140,000 -- -- -- --
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 October 1, 1996.
(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 October 1,
1996.
STOCK OPTIONS
The following table sets forth information regarding grants of options to
purchase Common Stock made to the Named Executive Officers during the 1997
Period. The Company did not grant any stock appreciation rights during the 1997
Period.
OPTION GRANTS IN THE 1997 PERIOD
<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(#) 1997 PERIOD ($/SH)(1) DATE 5%($) 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
Exchange Commission (the "Commission") and are not intended to forecast
possible future appreciation of the Common Stock.
59
<PAGE>
(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 the 1997 Period.
1997 PERIOD 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 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.
60
<PAGE>
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 June 12, 1998, options to purchase 51,900 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 makes matching contributions equal to 100% of the first 3% of the annual
salary contribution made by each employee to the 401(k) Plan.
61
<PAGE>
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. Mr. Lewis beneficially owns 14.5%,
10.5%, and 13.6% of the partnership interests of Triad I, Triad II, and Triad II
and owns 42% of the capital stock of Triad.
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
upon the consummation of the Offering.
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 12,845 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, although 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 and interest. 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%
62
<PAGE>
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 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,
and continuing through May 1997, Intellicall provided certain management and
administrative services to the Company. 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, in September
1997, the Company sold to Intellicall 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 $72.69 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 13,762
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, although 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 and interest. 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
63
<PAGE>
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 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 and 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."
MB2 MOTORSPORTS SPONSORSHIP AGREEMENT
In connection with the Company's sponsorship of the "Skittles" NASCAR team,
the Company has entered into the Sponsorship Agreement with MB2 Motorsports,
LLC. Mr. Morton, the Secretary and a director of the Company, owns one-third of
the membership interests in MB2 Motorsports, LLC. See "Management--Compensation
Committee Interlocks and Insider Participation."
64
<PAGE>
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 June 12, 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 the 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, Inc........................ 82,797(2) 54% 5,000(3) 82,797 --
Michael F. Lewis........................ 58,154(4) 51 -- 58,154 --
Morris Telecommunications, LLC.......... 31,201(5) 36 -- 31,201 --
Reginald P. McFarland................... 16,077(6) 22 6,667(7) 16,077 6,667(7)
Stephens Holding Company(8)............. 6,961 9 -- 6,961 --
Sirrom Capital Corporation.............. 5,429(9) 7 -- 5,429 --
WorldCom, Inc........................... 4,587 6 111,960(10) 4,587 111,960(10)
Dennis J. Stoutenburgh.................. 4,564(11) 6 -- 4,564 --
H. Edwards Brooks, Jr................... 2,025(12) 3 -- 1,775 --
J. David Darnell........................ 88 * -- 88 --
John J. McDonald, Jr.................... 250 * -- -- --
C. Read Morton, Jr...................... 1,525(12) 2 -- 1,275 --
William P. Payne........................ 1,250(12) 2 -- 1,000 --
Patrick V. Stark........................ 770(13) 1 -- 520 --
All directors and executive officers as
a group
(13 persons)(14)...................... 84,040 69 6,667(7) 84,040 6,667(7)
</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.
65
<PAGE>
(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 (i) an aggregate of 111 shares of Common Stock owned by Mr.
McFarland's daughters over which Mr. McFarland exercises voting control and
(ii) 8,000 shares of Common Stock owned by McFarland Partners L.P. over
which Mr. McFarland has the power to vote as the sole beneficial owner of
the entity which serves as the general partner of McFarland Partners, L.P.
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 Capital Corporation 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, Inc. 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 250 shares issuable upon the exercise of stock options.
(14) Includes 23,325 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.
66
<PAGE>
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,
98,461 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
6,667 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.
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
upon the consummation of the Offering. 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.
67
<PAGE>
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 are 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
the Company's senior secured lenders and the Company's right to decrease or
defer the payment of dividends to the extent that the amount of such dividends
would exceed the Company's capital surplus, shares of the Series B Convertible
Preferred Stock are 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
68
<PAGE>
months, accruing and payable on a quarterly basis. In the event the foregoing
dividends are not paid to the holders of the Series B 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 are not 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 has 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, although
the number of shares to be repurchased may be decreased, on a pro rata basis, to
the extent that the consideration to be paid by the Company for the shares would
exceed the Company's capital surplus. 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.
69
<PAGE>
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 the Company's senior secured lenders and the Company's right to decrease or
defer the payment of dividends to the extent that the amount of such dividends
would exceed the Company's capital surplus, shares of the Series B-2 Redeemable
Preferred Stock are 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 are not entitled to any other liquidation rights. The Series B-2
Redeemable Preferred Stock is not convertible into any other security.
The Company has 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, although the
Company will not be obligated to retire such shares to the extent that the
consideration to be paid by the Company for the shares would exceed the
Company's capital surplus. 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 the
Company's senior secured lenders and the Company's right to decrease or defer
the payment of dividends to the extent that the amount of such dividends would
exceed the Company's capital surplus, shares of the Series B-3 Redeemable
Preferred Stock are 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
70
<PAGE>
to the holders of the Series B-3 Redeemable Preferred Stock, such dividends
shall accumulate. No dividends may be paid to 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 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 are not entitled to any other liquidation
rights. The Series B-3 Redeemable Preferred Stock is not convertible into any
other security.
The Company has 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, although the Company will not be obligated
to retire such shares to the extent that the consideration to be paid by the
Company for the shares would exceed the Company's capital surplus. 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
71
<PAGE>
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.
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 Wachovia Bank, N.A.
72
<PAGE>
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, 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 without compliance with the provisions of Rule 144 other
than the manner of sale provisions. 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.
73
<PAGE>
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
74
<PAGE>
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.
75
<PAGE>
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.
76
<PAGE>
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 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
77
<PAGE>
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.
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 certain other legal matters related to the Offering will
be passed upon for the Company by 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>
GLOSSARY OF SELECTED TELECOMMUNICATIONS TERMS
AT&T DIVESTITURE -- The court-ordered divestiture by AT&T Corp. of its
RBOCs.
CDR -- Call Detail Record.
CLECS -- Competitive Local Exchange Carriers.
COMMUNICATIONS ACT -- Communications Act of 1934, as amended.
CYBERLOG -- Refers to a provider of automated operator equipment.
DEX 600 SWITCH -- A switch manufactured by Digital Switch Corporation. A
switch is a device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is the
process of interconnecting circuits to form a transmission path between
users. Switching also captures information for billing.
DOSS -- Digital Switch Corporation Operator Services Subsystem.
FCC -- The Federal Communications Commission.
HARRIS SWITCH -- A switch manufactured by Harris Corporation.
ILECS -- Incumbent Local Exchange Carriers.
IP -- Intelligent Peripheral.
ISDN -- Integrated Services Digital Network, a technology used in switches
to expedite call completions, improve reliability and maintain quality.
ISDN/PRA -- Integrated Services Digital Network/Primary Rate Access.
IXCS -- Interexchange Carriers.
LATAS -- Local access and transport areas, approximately 200 local
geographic areas in the United States within which a local telephone company
may offer telecommunications services.
LECS -- Local Exchange Carriers.
PIC -- Primary Interstate Carrier.
PINS -- Personal identification numbers.
PUCS -- Public Utilities Commissions.
RBOCS -- Regional Bell Operating Companies.
SIGNALING SYSTEM 7 -- A non-facilities based signaling system used in
advanced telecommunications networks.
TELECOMMUNICATIONS ACT -- Telecommunications Act of 1996.
WIDE AREA NETWORK -- A data network connecting sites and offices.
79
<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 September 30, 1997 and March 31, 1998.................................... F-3
Consolidated Statements of Income for the six months ended March 31, 1997 and 1998......................... F-4
Consolidated Statements of Cash Flows for the six months ended March 31, 1997 and 1998..................... 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-31
Balance Sheet as of September 30, 1997..................................................................... F-32
Statement of Operations and Accumulated Deficit for the year ended September 30, 1997...................... F-33
Statement of Cash Flows for the year ended September 30, 1997.............................................. F-34
Notes to Financial Statements.............................................................................. F-35
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
FINANCIAL STATEMENTS OF WORLDCOM--SAN ANTONIO (AS DEFINED)
Report of Independent Accountants.......................................................................... F-39
Audited Balance Sheets as of December 31, 1995 and 1996 and Unaudited Balance Sheet as of June 30, 1997.... F-40
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-41
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-42
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-43
Notes to Financial Statements.............................................................................. F-44
AUDITED FINANCIAL STATEMENTS OF INTELLICALL OPERATOR SERVICES BUSINESS
Report of Independent Accountants.......................................................................... F-49
Statements of Operations for the year ended December 31, 1995 and the period from January 1, 1996 to May 9,
1996..................................................................................................... F-50
Statements of Changes in Equity for the year ended December 31, 1995 and the period from January 1, 1996 to
May 9, 1996.............................................................................................. F-51
Statements of Cash Flows for the year ended December 31, 1995 and the period from January 1, 1996 to May 9,
1996..................................................................................................... F-52
Notes to Financial Statements.............................................................................. F-53
</TABLE>
F-2
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................................................ $ 358 $ 242
Restricted cash...................................................................... -- 1,128
Accounts receivable, net of allowance for doubtful accounts of $828 and $2,409,
respectively....................................................................... 8,283 17,087
Accounts receivable from affiliates.................................................. 1,629 1,848
Other current assets................................................................. 542 1,840
------------- -----------
Total current assets............................................................... 10,812 22,145
Property and equipment, net............................................................ 5,603 6,828
Excess of cost over net assets acquired, net........................................... 17,410 38,076
Other assets, net...................................................................... 671 862
------------- -----------
Total assets....................................................................... $ 34,496 $ 67,911
------------- -----------
------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable and other accrued liabilities................................. $ 1,363 $ 9,899
Accrued transmission, customer commissions, and billing charges (includes $818 and
$4,301 payable to affiliate in 1997 and 1998, respectively)........................ 7,374 11,249
Accrued salaries, wages and other employee expenses.................................. 686 670
Accrued expenses payable to affiliates............................................... 417 --
Acquisition obligation............................................................... -- 1,773
Current maturities of long-term obligations.......................................... 1,400 2,992
------------- -----------
Total current liabilities.......................................................... 11,240 26,583
Long-term obligations, less current maturities (including $4,000 face amount payable to
affiliates in 1997 and 1998)......................................................... 8,375 20,096
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............................. 11,196 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 1998.............................. -- 2,000
Stockholders' equity
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; 54,887 and 71,004 shares
issued and outstanding, respectively............................................... 1 1
Additional paid-in capital........................................................... 7,810 10,631
Stock subscription receivable from affiliate......................................... (2,000) --
Retained deficit..................................................................... (2,127) (2,597)
------------- -----------
Total stockholders' equity......................................................... 3,685 8,036
------------- -----------
Total liabilities and stockholders' equity......................................... $ 34,496 $ 67,911
------------- -----------
------------- -----------
</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>
SIX MONTHS SIX MONTHS
ENDED MARCH ENDED MARCH
31, 1997 31, 1998
------------- -------------
<S> <C> <C>
Telecommunications revenues......................................................... $ 14,538 $ 51,743
Cost of revenues.................................................................... 13,191 40,424
------------- -------------
Gross profit...................................................................... 1,347 11,319
Operating expenses:
Selling, general and administrative............................................... 547 5,207
Provision for doubtful accounts................................................... 359 3,690
Depreciation and amortization..................................................... 32 1,462
------------- -------------
Total operating expenses........................................................ 938 10,359
------------- -------------
Income from operations.............................................................. 409 960
Other income (expense):
Interest expense.................................................................. (274) (867)
Interest income................................................................... 60 71
------------- -------------
Total other expense............................................................. (214) (796)
------------- -------------
Income before provision for income taxes............................................ 195 164
Provision for income taxes.......................................................... -- 103
------------- -------------
Net income.......................................................................... 195 61
Preferred dividend requirements..................................................... (23) (533)
------------- -------------
Net income (loss) applicable to common stockholders................................. $ 172 $ (472)
------------- -------------
------------- -------------
Net income (loss) per share applicable to common stockholders:
Basic............................................................................. $ 172.29 $ (7.36)
------------- -------------
------------- -------------
Diluted........................................................................... $ 1.45 $ (7.36)
------------- -------------
------------- -------------
Shares used in computing net income (loss) per share applicable to common
stockholders:
Basic............................................................................. 1,000 64,182
------------- -------------
------------- -------------
Diluted........................................................................... 119,223 64,182
------------- -------------
------------- -------------
</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>
SIX MONTHS SIX MONTHS
ENDED MARCH ENDED MARCH
31, 1997 31, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 195 $ 61
Adjustments to reconcile net income to cash provided by (used in)
operating activities:
Depreciation and amortization................................................... 32 1,462
Provision for doubtful accounts................................................. 359 3,690
Other........................................................................... 41 122
Changes in operating assets and liabilities, net of effect of acquisition:
Increase in restricted cash................................................... -- (1,128)
Increase in accounts receivable............................................... (406) (11,032)
Increase in accounts receivable from affiliates............................... -- (320)
Increase in other current assets.............................................. (117) (1,127)
(Increase) decrease in other assets........................................... 76 (242)
Increase in trade accounts payable and other accrued liabilities.............. 284 4,166
Increase in accrued transmission, customer commissions and billing charges.... 276 1,887
Increase (decrease) in accrued salaries, wages, and other employee expenses... 2 (16)
(Decrease) in accrued expenses to affiliates.................................. -- (417)
------ -------------
Net cash provided by (used in) operating activities......................... 742 (2,894)
------ -------------
Cash flows from investing activities:
Purchase of Interlink, net of cash................................................ -- (5,263)
Purchase of Intellicall prepaid operations........................................ -- (2,000)
Purchase of other prepaid operations.............................................. -- (983)
Purchase of property and equipment................................................ (90) (2,221)
Sale of assets.................................................................... -- 2,750
------ -------------
Net cash used in investing activities....................................... (90) (7,717)
------ -------------
Cash flows from financing activities:
Net borrowings on long-term debt.................................................. -- 8,551
Proceeds from sales-leaseback of equipment........................................ -- 2,023
Payments on capital leases........................................................ -- (79)
------ -------------
Net cash provided by financing activities................................... -- 10,495
------ -------------
Net increase (decrease) in cash and cash equivalents................................ 652 (116)
Cash and cash equivalents at beginning of period.................................... 1,827 358
------ -------------
Cash and cash equivalents at end of period.......................................... $ 2,479 $ 242
------ -------------
------ -------------
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
------ -------------
------ -------------
Cancellation of stock subscription receivable in acquisistion of Intellicall prepaid
operations........................................................................ $ -- $ (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
Telecommunications, 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 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. The
redemption amount of the Series B-3 Redeemable Preferred Stock is equivalent to
the stated value plus any additional dividends accrued at the date of the
redemption. 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, although management of
the Company does not expect such adjustments to be material in nature. 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>
MARCH 31, 1998 LIFE
-------------- ---------
<S> <C> <C>
Goodwill.............................................................................. $ 10,049 25 years
Non-compete agreement................................................................. 2,000 5 years
Other................................................................................. 850 5 years
-------
12,899
Accumulated amortization.............................................................. (281)
-------
$ 12,618
-------
-------
</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>
SIX MONTHS ENDED SIX MONTHS ENDED
MARCH 31, 1997 MARCH 31, 1998
----------------- -----------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C>
Revenues.................................................................... $ 60,105 $ 54,083
Net loss applicable to common shareholders.................................. (41) (619)
Net loss per share applicable to common stockholders:
Basic..................................................................... $ (2.40) $ (8.72)
------- -------
------- -------
Diluted................................................................... $ (2.40) $ (8.72)
------- -------
------- -------
Shares used in computing net loss per share applicable to common
stockholders:
Basic..................................................................... 17,117 71,004
------- -------
------- -------
Diluted................................................................... 17,117 71,004
------- -------
------- -------
</TABLE>
4. ACQUISITION OF INTELLICALL PREPAID OPERATIONS
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
F-7
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. ACQUISITION OF INTELLICALL PREPAID OPERATIONS (CONTINUED)
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 was accounted for as a purchase, whereby the excess purchase
price over the net assets acquired was recorded based upon the fair values of
the assets acquired and liabilities assumed. The acquisition is not significant
to the Company's operations.
5. 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 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 six months
ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
1997
------------------
<S> <C>
Net income (in thousands).................................................................... $ 195
Preferred dividend requirements............................................................ (23)
--------
Net income (loss) applicable to common stockholders........................................ $ 172
--------
--------
Basic:
Weighted average number of shares outstanding used in the basic net income (loss) per share
applicable to common stockholders calculation............................................ 1,000
--------
--------
Net income (loss) per share applicable to common stockholders.............................. $ 172.29
--------
--------
Diluted:
Weighted average number of shares outstanding used in the basic net income (loss) per share
applicable to common stockholders calculation............................................ 1,000
Additional weighted average shares from assumed exercise of warrants, net of shares assumed
to be repurchased with exercise proceeds................................................. 7,238
Additional weighted average shares from assumed exercise of dilutive stock options, net of
shares assumed to be repurchased with exercise proceeds.................................. 10,985
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.......................................................... 119,223
--------
--------
Net income (loss) per share applicable to common stockholders.............................. $ 1.45
--------
--------
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
1998
------------------
<S> <C>
Net income (in thousands).................................................................... $ 61
Preferred dividend requirements............................................................ (533)
-------
Net income (loss) applicable to common stockholders........................................ $ (472)
-------
-------
Basic:
Weighted average number of shares outstanding used in the basic net income (loss) per share
applicable to common stockholders calculation............................................ 64,182
-------
-------
Net income (loss) per share applicable to common stockholders.............................. $ (7.36)
-------
-------
Diluted:
Weighted average number of shares outstanding used in the basic net income (loss) per share
applicable to common stockholders calculation............................................ 64,182
Additional weighted average shares from assumed exercise of warrants, net of shares assumed
to be repurchased with exercise proceeds................................................. --
Additional weighted average shares from assumed exercise of dilutive stock options, net of
shares assumed to be repurchased with exercise proceeds.................................. --
Weighted average shares from assumed conversion of the Series A Convertible Preferred
Stock.................................................................................... --
-------
Weighted average shares used in the diluted net income (loss) per share applicable to
common stockholders calculation.......................................................... 64,182
-------
-------
Net income (loss) per share applicable to common stockholders.............................. $ (7.36)
-------
-------
</TABLE>
F-8
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. EARNINGS PER SHARE (CONTINUED)
Options to purchase 46,750 shares of Common Stock at exercise prices ranging
from $24.20 to $175.00 per share were outstanding during the six months ended
March 31, 1998 but were not included in the computation of diluted EPS because
they were anti-dilutive. Warrants issued at inception to purchase 7,239 and
6,000 shares of Common Stock at an exercise price of $0.01 and $90 per share,
respectively, were outstanding during the periods but were not included in the
computation of diluted EPS when such warrants were anti-dilutive. Additionally,
$2,000,000 of subordinated notes convertible into 22,222 shares of Common Stock
were excluded from the computation of diluted EPS for the six months ended March
31, 1997 and 1998, as such conversion would be anti-dilutive.
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............................................................................. $ 478.41 $ 55.80
------------ -------------
------------ -------------
Diluted........................................................................... $ 4.25 $ 3.08
------------ -------------
------------ -------------
Shares used in calculating net income per share applicable to common stockholders:
Basic............................................................................. 1,000 7,072
------------ -------------
------------ -------------
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. The fair values of cash
and cash equivalents, accounts receivable, trade accounts payable, accrued
transmission, customer commissions and billing charges, accrued salaries, wages
and other employee expenses, and accrued expenses payable to affiliates
approximate cost because of the immediate or short-term maturity of these
financial instruments. The fair value of long-term obligations, including
current maturities, with no quoted market prices has been estimated based on the
current rates offered to the Company for similar types of borrowing arrangements
with comparable terms and maturities. The fair values of the Series B-2
Redeemable Preferred Stock and the Series A and B Convertible Preferred Stock
are estimated at the
F-15
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
related carrying values as such stock is not traded in the open market and
market prices are not readily available.
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.
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.
The Company's policy with respect to intangible assets, including goodwill,
is to compare the carrying value of such assets to the estimated fair market
value of those assets. In cases where the carrying value exceeds the estimated
fair market value, impairment charges are taken.
Based on its most recent analyses, the Company believes no impairments 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.
F-16
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
The Company pays commissions based on call traffic to payphone owners and
hospitality facilities (referred to by the Company as "customers", although such
persons are not the end users of the service) for call traffic originating at
such customers' phones that is processed by the Company. Such commissions are
included in cost of revenues in the period the traffic originates, and such
payments are generally made within thirty days of the end of the processing
month.
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
F-17
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
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, although management of
the Company does not expect such adjustments to be material in nature. The
Company's
F-18
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITION OF WORLDCOM ASSETS (CONTINUED)
consolidated statement of income includes the results of the operations of the
WorldCom Assets since September 1, 1997.
The approximate fair values of property and equipment acquired and current
and long-term liabilities assumed at the date of the acquisition were
$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>
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, EXCEPT SHARE
INFORMATION)
<S> <C> <C>
Revenues.................................................................. $ 80,104 $ 82,225
Net income (loss) applicable to common stockholders....................... $ (47) $ 635
Net income (loss) per share applicable to common stockholders:
Basic................................................................... $ (8.41) $ 54.46
------------ -------------
------------ -------------
Diluted................................................................. $ (8.41) $ 4.79
------------ -------------
------------ -------------
Shares used in computing net income (loss) per share applicable to common
stockholders:
Basic................................................................... 5,587 11,659
------------ -------------
------------ -------------
Diluted................................................................. 5,587 132,618
------------ -------------
------------ -------------
</TABLE>
F-19
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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>
F-20
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM OBLIGATIONS (CONTINUED)
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
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
F-21
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM OBLIGATIONS (CONTINUED)
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.
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
dividend 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. The redemption amount of the Series B-2 Redeemable
Preferred Stock is equivalent to the stated value plus any additional dividends
accrued at the date of the redemption. 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
F-22
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS (CONTINUED)
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
employees 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.
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, except share information):
<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............................................. $ 478.41 $ 244.29 $ 55.80 $ 36.12
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Diluted........................................... $ 4.25 $ 2.17 $ 3.08 $ 2.00
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Shares used in computing net income per share
applicable to common stockholders:
Basic............................................. 1,000 1,000 7,072 7,072
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
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.
F-23
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTIONS (CONTINUED)
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>
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>
F-24
<PAGE>
ILD TELECOMMUNICATIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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-25
<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-26
<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 (in thousands)......................... $ 478 $ 395
------------ -------------
------------ -------------
Basic:
Weighted average number of shares outstanding used in the basic net income per
share applicable to common stockholders calculation............................. 1,000 7,072
------------ -------------
------------ -------------
Diluted:
Weighted average number of shares outstanding used in the basic net income per
share applicable to common stockholders calculation............................. 1,000 7,072
Weighted average shares from assumed exercise of dilutive stock options and
warrants, net of shares assumed to be repurchased with exercise proceeds........ 11,640 20,959
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-27
<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-28
<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....................................................................................... $ 401.89
-------
-------
Diluted..................................................................................... $ 3.60
-------
-------
Shares used in computing net income per share applicable to common stockholders:
Basic....................................................................................... 1,000
-------
-------
Diluted..................................................................................... 137,993
-------
-------
</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-29
<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. The consulting
agreement will be amortized on a straight-line basis over a period of five
years. 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 stockholders' equity, 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-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
Stockholders of
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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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, 1995 and 1996, 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-39
<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-40
<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-41
<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)
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)
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-42
<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
---------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
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-43
<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 a
billing and collections service 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-44
<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-45
<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 Company's policy with respect to intangible assets, including goodwill,
is to compare the carrying value of such assets to the estimated fair market
value of those assets. In cases where the carrying value exceeds the estimated
fair market value, impairment charges are taken.
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
F-46
<PAGE>
WORLDCOM--SAN ANTONIO (AS DEFINED)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 or are necessarily reflective of the costs
to be incurred going forward. 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. The revenues earned represent a percentage of the
call revenue billed to third parties by WorldCom and 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.
F-47
<PAGE>
WORLDCOM--SAN ANTONIO (AS DEFINED)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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
GLOSSARY OF SELECTED TELECOMMUNICATIONS TERMS............................. 79
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................................. 110,000
Blue sky fees and expenses...................................... 10,000
Directors' and officers' insurance.............................. 100,000
Transfer agent and registrar fees and expenses.................. 10,000
Miscellaneous................................................... 10,300
---------
Total....................................................... $1,175,000
---------
---------
</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 Series A Convertible Preferred Stock with a stated value of $72.69 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 by the Company
at $175 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.
On April 24, 1998, as consideration for certain assets acquired from U.S.
Telecard, Inc., the Company issued 286 shares of Common Stock valued at $325 per
share to the sole shareholder of U.S. Telecard, Inc.
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.
II-2
<PAGE>
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*
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**
10.6 --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.+
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
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.+
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
April 3, 1998 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 six months ended March 31, 1998+
</TABLE>
- ------------------------
* To be filed by amendment
** Previously filed.
+ Filed herewith.
II-4
<PAGE>
(b) The following financial statement schedule of ILD Telecommunications,
Inc. is included in this Registration Statement:
Schedule IX: Valuation and Qualifying Accounts
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 Amendment to Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, on the 24th day of June, 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
Amendment to Registration Statement has been signed below by the following
persons in the capacities indicated on June 24, 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
/s/ H. EDWARD BROOKS, JR.
- ------------------------------ Director
H. Edward Brooks, Jr.
II-6
<PAGE>
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ JOHN J. MCDONALD, JR.
- ------------------------------ Director
John J. McDonald, Jr.
/s/ WILLIAM P. PAYNE
- ------------------------------ Director
William P. Payne
/s/ C. READ MORTON*
- ------------------------------ Secretary and
C. Read Morton Director
/s/ PATRICK V. STARK*
- ------------------------------ Director
Patrick V. Stark
*By: /s/ J. DAVID DARNELL
-------------------------
J. David Darnell,
AS ATTORNEY-IN-FACT
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>
S-1
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----- -------------------------------------------------------------------
<S> <C>
1 --Underwriting Agreement*
3.1(a) --Restated Certificate of Incorporation*
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**
10.6 --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>
<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
April 3, 1998 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 six months ended March 31, 1998+
</TABLE>
- ------------------------
* To be filed by amendment
** Previously filed.
+ Filed herewith.
<PAGE>
SECURED PROMISSORY NOTE
$1,500,000.00 May 13, 1996
FOR VALUE RECEIVED, the undersigned, ILD COMMUNICATIONS, INC., a Delaware
corporation, and INTELLICALL OPERATOR SERVICES, INC., a Delaware corporation
(collectively "Maker"), jointly and severally promise to pay to the order of
SIRROM CAPITAL CORPORATION, a Tennessee corporation ("Payee"; Payee and any
subsequent holder[s] hereof are hereinafter referred to collectively as
"Holder"), at the office of Payee at First American Trust Company, Custody
Department, 800 First American Center, Nashville, Tennessee 37237,
Attn: Jeff Eubanks, or at such other place as Holder may designate to Maker in
writing from time to time, the principal sum of ONE MILLION FIVE HUNDRED
THOUSAND AND NO/100THS DOLLARS ($1,500,000.00), together with interest on the
outstanding principal balance hereof from the date hereof at the rate of
thirteen and one-half percent (13.5%) per annum (computed on the basis of a
360-day year).
Interest only on the outstanding principal balance hereof shall be due and
payable monthly, in arrears, with the first installment being payable on the
first (1st) day of July, 1996, and subsequent installments being payable on the
first (1st) day of each succeeding month thereafter until May ___, 2001 (the
"Maturity Date"), at which time the entire outstanding principal balance,
together with all accrued and unpaid interest, shall be immediately due and
payable in full.
The indebtedness evidenced hereby may be prepaid in whole or in part, at
any time and from time to time, without penalty. Any such prepayments shall be
credited first to any accrued and unpaid interest and then to the outstanding
principal balance hereof.
Time is of the essence of this Note. It is hereby expressly agreed that in
the event that any Event of Default (as defined in the Loan Agreement) shall
occur under that certain Loan Agreement of even date herewith, between Maker,
Payee and the other Lenders named therein (the "Loan Agreement"), which Event of
Default is not cured following the giving of any applicable notice and within
any applicable cure period set forth in said Loan Agreement; or should any
default by Maker be made in the performance or observance of any covenants or
conditions contained in any other instrument or document now or hereafter
evidencing, securing or otherwise relating to the indebtedness evidenced hereby
(subject to any applicable notice and cure period provisions that may be set
forth therein); then, and in such event, the entire outstanding principal
balance of the indebtedness evidenced hereby, together with any other sums
advanced hereunder, under the Loan Agreement and/or under any other instrument
or document now or hereafter evidencing, securing or in any way relating to the
indebtedness evidenced hereby, together with all unpaid interest accrued
thereon, shall, at the option of the Agent (as defined in the Loan Agreement)
and without notice to Maker, at once become due and payable and may
<PAGE>
be collected forthwith, regardless of the stipulated date of maturity. Upon
the occurrence of any default as set forth herein, at the option of Holder
and without notice to Maker, all accrued and unpaid interest, if any, shall
be added to the outstanding principal balance hereof, and the entire
outstanding principal balance, as so adjusted, shall bear interest thereafter
until paid at an annual rate (the "Default Rate") equal to the lesser of (i)
the rate that is seven percentage points (7.0%) in excess of the
above-specified interest rate, or (ii) the maximum rate of interest allowed
to be charged under applicable law (the "Maximum Rate"), regardless of
whether or not there has been an acceleration of the payment of principal as
set forth herein. All such interest shall be paid at the time of and as a
condition precedent to the curing of any such default.
In the event this Note is placed in the hands of an attorney for
collection, or if Holder incurs any costs incident to the collection of the
indebtedness evidenced hereby, Maker and any endorsers hereof agree to pay to
Holder an amount equal to all such costs, including without limitation all
actual reasonable attorney's fees and all court costs.
Presentment for payment, demand, protest and notice of demand, protest and
nonpayment are hereby waived by Maker and all other parties hereto. No failure
to accelerate the indebtedness evidenced hereby by reason of default hereunder,
acceptance of a past-due installment or other indulgences granted from time to
time, shall be construed as a novation of this Note or as a waiver of such right
of acceleration or of the right of Holder thereafter to insist upon strict
compliance with the terms of this Note or to prevent the exercise of such right
of acceleration or any other right granted hereunder or by applicable laws. No
extension of the time for payment of the indebtedness evidenced hereby or any
installment due hereunder, made by agreement with any person now or hereafter
liable for payment of the indebtedness evidenced hereby, shall operate to
release, discharge, modify, change or affect the original liability of Maker
hereunder or that of any other person now or hereafter liable for payment of the
indebtedness evidenced hereby, either in whole or in part, unless Holder agrees
otherwise in writing. This Note may not be changed orally, but only by an
agreement in writing signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
The indebtedness and other obligations evidenced by this Note are further
evidenced by (i) the Loan Agreement and (ii) certain other instruments and
documents, as may be required to protect and preserve the rights of Maker and
Payee as more specifically described in the Loan Agreement.
All agreements herein made are expressly limited so that in no event
whatsoever, whether by reason of advancement of proceeds hereof, acceleration of
maturity of the unpaid balance hereof or otherwise, shall the amount paid or
agreed to be paid to Holder for the use of the money advanced or to be advanced
hereunder exceed the Maximum Rate. If, from any circumstances whatsoever, the
fulfillment of any provision of this Note or any other agreement or instrument
now or hereafter evidencing, securing or in any way relating to the indebtedness
evidenced hereby shall involve the payment of interest in excess of the Maximum
Rate, then, IPSO FACTO, the obligation to pay interest hereunder
- 2 -
<PAGE>
shall be reduced to the Maximum Rate; and if from any circumstance
whatsoever, Holder shall ever receive interest, the amount of which would
exceed the amount collectible at the Maximum Rate, such amount as would be
excessive interest shall be applied to the reduction of the principal balance
remaining unpaid hereunder and not to the payment of interest. This
provision shall control every other provision in any and all other agreements
and instruments existing or hereafter arising between Maker and Holder with
respect to the indebtedness evidenced hereby.
This Note is intended as a contract under and shall be construed and
enforceable in accordance with the laws of the State of Tennessee, except to the
extent that federal law may be applicable to the determination of the Maximum
Rate.
As used herein, the terms "Maker" and "Holder" shall be deemed to include
their respective successors, legal representatives and assigns, whether by
voluntary action of the parties or by operation of law.
MAKERS:
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: V.P.
----------------------------
- 3 -
<PAGE>
SECURED PROMISSORY NOTE
$500,000.00 May 13, 1996
FOR VALUE RECEIVED, the undersigned, ILD COMMUNICATIONS, INC., a Delaware
corporation, and INTELLICALL OPERATOR SERVICES, INC., a Delaware corporation
(collectively "Maker"), jointly and severally promise to pay to the order of
REEDY RIVER VENTURES, LIMITED PARTNERSHIP, a South Carolina limited partnership
("Payee"; Payee and any subsequent holder[s] hereof are hereinafter referred to
collectively as "Holder"), at the office of Payee at P.O. Box 17526, Greenville,
SC, 29606 Attn: Administrative Director, or at such other place as Holder may
designate to Maker in writing from time to time, the principal sum of FIVE
HUNDRED THOUSAND AND NO/100THS DOLLARS ($500,000.00), together with interest on
the outstanding principal balance hereof from the date hereof at the rate of
thirteen and one-half percent (13.5%) per annum (computed on the basis of a
360-day year).
Interest only on the outstanding principal balance hereof shall be due and
payable monthly, in arrears, with the first installment being payable on the
first (1st) day of July, 1996, and subsequent installments being payable on the
first (1st) day of each succeeding month thereafter until May 2001 (the
"Maturity Date"), at which time the entire outstanding principal balance,
together with all accrued and unpaid interest, shall be immediately due and
payable in full.
The indebtedness evidenced hereby may be prepaid in whole or in part, at
any time and from time to time, without penalty. Any such prepayments shall be
credited first to any accrued and unpaid interest and then to the outstanding
principal balance hereof.
Time is of the essence of this Note. It is hereby expressly agreed that in
the event that any Event of Default (as defined in the Loan Agreement) shall
occur under that certain Loan Agreement of even date herewith, between Maker,
Payee and the other Lenders named therein (the "Loan Agreement"), which Event of
Default is not cured following the giving of any applicable notice and within
any applicable cure period set forth in said Loan Agreement; or should any
default by Maker be made in the performance or observance of any covenants or
conditions contained in any other instrument or document now or hereafter
evidencing, securing or otherwise relating to the indebtedness evidenced hereby
(subject to any applicable notice and cure period provisions that may be set
forth therein); then, and in such event, the entire outstanding principal
balance of the indebtedness evidenced hereby, together with any other sums
advanced hereunder, under the Loan Agreement and/or under any other instrument
or document now or hereafter evidencing, securing or in any way relating to the
indebtedness evidenced hereby, together with all unpaid interest accrued
thereon, shall, at the option of the Agent (as defined in the Loan Agreement)
and without notice to Maker, at once become due and payable and may
<PAGE>
be collected forthwith, regardless of the stipulated date of maturity. Upon
the occurrence of any default as set forth herein, at the option of Holder
and without notice to Maker, all accrued and unpaid interest, if any, shall
be added to the outstanding principal balance hereof and the entire
outstanding principal balance, as so adjusted, shall bear interest thereafter
until paid at an annual rate (the "Default Rate") equal to the lesser of (i)
the rate that is seven percentage points (7.0%) in excess of the
above-specified interest rate, or (ii) the maximum rate of interest allowed
to be charged under applicable law (the "Maximum Rate"), regardless of
whether or not there has been an acceleration of the payment of principal as
set forth herein. All such interest shall be paid at the time of and as a
condition precedent to the curing of any such default.
In the event this Note is placed in the hands of an attorney for
collection, or if Holder incurs any costs incident to the collection of the
indebtedness evidenced hereby, Maker and any endorsers hereof agree to pay to
Holder an amount equal to all such costs, including without limitation all
actual reasonable attorney's fees and all court costs.
Presentment for payment, demand, protest and notice of demand, protest and
nonpayment are hereby waived by Maker and all other parties hereto. No failure
to accelerate the indebtedness evidenced hereby by reason of default hereunder,
acceptance of a past-due installment or other indulgences granted from time to
time, shall be construed as a novation of this Note or as a waiver of such right
of acceleration or of the right of Holder thereafter to insist upon strict
compliance with the terms of this Note or to prevent the exercise of such right
of acceleration or any other right granted hereunder or by applicable laws. No
extension of the time for payment of the indebtedness evidenced hereby or any
installment due hereunder, made by agreement with any person now or hereafter
liable for payment of the indebtedness evidenced hereby, shall operate to
release, discharge, modify, change or affect the original liability of Maker
hereunder or that of any other person now or hereafter liable for payment of the
indebtedness evidenced hereby, either in whole or in part, unless Holder agrees
otherwise in writing. This Note may not be changed orally, but only by an
agreement in writing signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
The indebtedness and other obligations evidenced by this Note are further
evidenced by (i) the Loan Agreement and (ii) certain other instruments and
documents, as may be required to protect and preserve the rights of Maker and
Payee as more specifically described in the Loan Agreement.
All agreements herein made are expressly limited so that in no event
whatsoever, whether by reason of advancement of proceeds hereof, acceleration of
maturity of the unpaid balance hereof or otherwise, shall the amount paid or
agreed to be paid to Holder for the use of the money advanced or to be advanced
hereunder exceed the Maximum Rate. If, from any circumstances whatsoever, the
fulfillment of any provision of this Note or any other agreement or instrument
now or hereafter evidencing, securing or in any way relating to the indebtedness
evidenced hereby shall involve the payment of interest in excess of the Maximum
Rate, then, IPSO FACTO, the obligation to pay interest hereunder
- 2 -
<PAGE>
shall be reduced to the Maximum Rate; and if from any circumstance
whatsoever, Holder shall ever receive interest, the amount of which would
exceed the amount collectible at the Maximum Rate, such amount as would be
excessive interest shall be applied to the reduction of the principal balance
remaining unpaid hereunder and not to the payment of interest. This
provision shall control every other provision in any and all other agreements
and instruments existing or hereafter arising between Maker and Holder with
respect to the indebtedness evidenced hereby.
This Note is intended as a contract under and shall be construed and
enforceable in accordance with the laws of the State of Tennessee, except to the
extent that federal law may be applicable to the determination of the Maximum
Rate.
As used herein, the terms "Maker" and "Holder" shall be deemed to include
their respective successors, legal representatives and assigns, whether by
voluntary action of the parties or by operation of law.
MAKERS:
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: V.P.
----------------------------
- 3 -
<PAGE>
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
This FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Amendment") is
made and entered into as of the 15th day of December, 1997, among
NATIONSBANK, N.A. ("Lender"), ILD TELESERVICES, INC. ("ILD") and INTELLICALL
OPERATOR SERVICES, INC. ("IOS") (ILD and IOS are sometimes collectively
referred to herein as the "Borrowers").
W I T N E S S E T H:
WHEREAS, Lender and Borrowers are party to that certain Loan and
Security Agreement dated as of August 29, 1997 (the "Loan Agreement"); and
WHEREAS, Lender and Borrowers desire to amend the Loan Agreement as set
forth herein;
NOW, THEREFORE, in consideration of the foregoing premises, and other
good and valuable consideration, the receipt and legal sufficiency of which
is hereby acknowledged, the parties hereby agree as follows:
1. All capitalized terms used herein and not otherwise expressly
defined herein shall have the respective meanings given to such terms in the
Loan Agreement.
2. The Loan Agreement is amended as follows:
A. Section 1.01 of the Loan Agreement is hereby amended by adding the
following definition for "MCFARLAND SUBORDINATED INDEBTEDNESS" in the correct
alphabetical order thereto:
"MCFARLAND SUBORDINATED INDEBTEDNESS" shall mean and include
Indebtedness (not to exceed $4,000,000.00) owed by Borrowers to R.P.
McFarland pursuant to those certain Promissory Notes, dated as of December
___, 1997, made by ILD in favor of R.P. McFarland in the original principal
amounts of $2,700,000.00 and $1,000,000.00, respectively, which Indebtedness
shall be subordinated to the Secured Obligations on terms satisfactory to
Lender, in its sole discretion.
B. Section 1.01 of the Loan Agreement is hereby further amended by
deleting from the definition of "PERMITTED DISTRIBUTIONS" the number
"$1,500,000.00" and inserting in lieu thereof the number "$1,900,000.00."
C. Section 1.01 of the Loan Agreement is hereby further amended by
adding the phrase "and scheduled payments of principal and interest due in
connection with the McFarland Subordinated Indebtedness permitted pursuant to
the terms of the subordination agreement among R.P. McFarland, Lender and
ILD" immediately after the phrase "Shareholder Subordinated Indebtedness" in
the definition of "PERMITTED DISTRIBUTIONS."
<PAGE>
D. Section 10.06 of the Loan Agreement is hereby amended by deleting
therefrom the phrase "Permitted Dividends" and inserting in lieu thereof the
phrase "Permitted Distributions."
3. Except as expressly set forth herein, the Loan Agreement shall be
and remain in full force and effect as originally written, and shall
constitute the legal, valid, binding and enforceable obligations of Borrowers
to Lender.
4. Each of the Borrowers agrees, jointly and severally, to pay on
demand all reasonable costs and expenses of Lender in connection with the
preparation, execution, delivery and enforcement of this Amendment and all
other Loan Documents and any other transactions contemplated hereby,
including, without limitation, the reasonable fees and out-of -pocket
expenses of legal counsel to Lender.
5. To induce Lender to enter into this Amendment, each of the
Borrowers hereby (i) represents and warrants that, as of the date hereof, and
after giving effect to the terms hereof, there exists no Default or Event of
Default under the Loan Agreement or any of the Loan Documents, and (ii)
acknowledges and agrees that no right of offset, defense, counterclaim, claim
or objection in favor of Borrowers against Lender exists arising out of or
with respect to any of the Loan Documents, the Secured Obligations or the
administration thereof.
6. This Amendment may be executed in any number of counterparts and
by different parties hereto in separate counterparts, each of which, when so
executed and delivered, shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same
instrument.
7. This Amendment shall be binding upon and inure to the benefit of
the successors and permitted assigns of the parties hereto.
8. This Amendment and the other Loan Documents shall be governed by,
and construed in accordance with, the laws and decisions of the State of
Georgia, excluding laws and decisions regarding conflicts of law.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, Borrowers and Lender have caused this Amendment to
be duly executed, all as of the date first above written.
ILD TELESERVICES, INC.
By: /s/ Dennis J. Stoutenburgh
---------------------------------
Its: President
---------------------------------
INTELLICALL OPERATOR SERVICES, INC.
By: /s/ Dennis J. Stoutenburgh
---------------------------------
Its: President
---------------------------------
NATIONSBANK, N.A.
By: /s/ Angela P. Leake
---------------------------------
Its: Vice President
---------------------------------
<PAGE>
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
This SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Amendment")
is made and entered into as of the 2nd day of February, 1998, among
NATIONSBANK, N.A. ("Lender"), ILD TELESERVICES, INC. ("ILD") and INTELLICALL
OPERATOR SERVICES, INC. ("IOS") (ILD and IOS are sometimes collectively
referred to herein as the "Borrowers").
W I T N E S S E T H:
WHEREAS, Lender and Borrowers are party to that certain Loan and
Security Agreement dated as of August 29, 1997 (as the same has been amended
from time to time, the "Loan Agreement"); and
WHEREAS, Lender and Borrowers desire to amend the Loan Agreement as set
forth herein;
NOW, THEREFORE, in consideration of the foregoing premises, and other
good and valuable consideration, the receipt and legal sufficiency of which
is hereby acknowledged, the parties hereby agree as follows:
1. All capitalized terms used herein and not otherwise expressly
defined herein shall have the respective meanings given to such terms in the
Loan Agreement.
2. The Loan Agreement is amended as follows:
A. Section 1.01 of the Loan Agreement is hereby amended by adding
the following definition for "INTELLICALL SUBORDINATED INDEBTEDNESS" in the
correct alphabetical order thereto:
"INTELLICALL SUBORDINATED INDEBTEDNESS" shall mean and include
Indebtedness (not to exceed the principal amount of $1,000,000.00) owed by
Borrowers to Intellicall, Inc. pursuant to that certain Promissory Note,
dated as of February 2, 1998, made by ILD in favor of Intellicall, Inc. in
the original principal amount of $1,000,000.00, which Indebtedness shall be
subordinated to the Secured Obligations on terms satisfactory to Lender, in
its sole discretion.
B. Section 1.01 of the Loan Agreement is hereby further amended
by adding to the definition of "SHAREHOLDER SUBORDINATED INDEBTEDNESS,"
following the words "Morris Telecommunications, LLC" the phrase "; PROVIDED,
HOWEVER, the term "Shareholder Subordinated Indebtedness" shall not include
the Intellicall Subordinated Indebtedness."
C. Section 1.01 of the Loan Agreement is hereby further amended
by renaming the defined term "ELIGIBLE RECEIVABLES" as "ELIGIBLE TELECOM
RECEIVABLES" and moving the renamed definition to the appropriate
alphabetical order.
<PAGE>
D. Section 1.01 of the Loan Agreement is hereby further amended
by adding the following definition for "ELIGIBLE PREPAID RECEIVABLES" in the
correct alphabetical order thereto:
"ELIGIBLE PREPAID RECEIVABLES" means the total of all of the unpaid
portions of any Receivables payable in Dollars to a Borrower for the purchase
of a prepaid calling card by a Person whose principal place of business or
residence is in the United States of America, net of any returns, discounts,
claims, credits, charges or other allowances, 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 are deemed by the Lender in the exercise of
its sole and absolute discretion 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
Prepaid 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 the
original invoice or past due more than 60 days after its due date, which
shall not be later than 30 days after the invoice date; (c) such Receivable
does not arise out of any transaction with any Subsidiary, Affiliate,
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 any of the Borrowers do not meet the
requirements set forth in CLAUSE (b) above; (e) if the Account Debtor with
respect thereto is located outside of the United States of America, the goods
which gave rise to such Receivable were shipped after receipt by a Borrower
from the Account Debtor of an irrevocable documentary or standby letter of
credit that has been confirmed by a financial institution acceptable to the
Lender and is in form and substance acceptable to the Lender, payable in the
full face amount of the face value of the Receivable in Dollars at a place of
payment located within the United States and has been duly delivered to the
Lender; (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 the sale of which 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) such Receivable
is evidenced by an invoice or other documentation in form acceptable to the
Lender containing only terms normally offered by such Borrower, and dated no
later than required pursuant to the terms and conditions of the agreement(s)
between such Borrower and its Account Debtor; provided, however, if such
documentation constitutes a consignment, bill and hold, conditional sale or
other similar arrangement, no Receivables shall be deemed created until such
time as the Account Debtor has an irrevocable obligation to pay such Borrower
for any goods being sold pursuant to such an arrangement; (j) 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
2
<PAGE>
the basis for any future), offset, deduction or counterclaim, dispute or
other defense on the part of such Account Debtor; (k) 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; (l) if such Receivable arises from the performance of services, such
services have been fully performed; and (m) 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.
E. Section 1.01 of the Loan Agreement is hereby further amended
by adding the following definition of "ELIGIBLE RECEIVABLES" in the correct
alphabetical order thereto:
"ELIGIBLE RECEIVABLES" shall refer collectively to the Eligible
Prepaid Receivables and the Eligible Telecom Receivables.
F. Section 10.06 of the Loan Agreement is hereby amended by
adding thereto, after the phrase "Permitted Distributions," the phrase "and
payments of principal and interest on the Intellicall Subordinated
Indebtedness, as permitted by the Subordination Agreement among ILD, Lender
and Intellicall, Inc. related to the Intellicall Subordinated Indebtedness."
3. Except as expressly set forth herein, the Loan Agreement shall be
and remain in full force and effect as originally written, and shall
constitute the legal, valid, binding and enforceable obligations of Borrowers
to Lender.
4. Each of the Borrowers agrees, jointly and severally, to pay on
demand all reasonable costs and expenses of Lender in connection with the
preparation, execution, delivery and enforcement of this Amendment and all
other Loan Documents and any other transactions contemplated hereby,
including, without limitation, the reasonable fees and out-of -pocket
expenses of legal counsel to Lender.
5. To induce Lender to enter into this Amendment, each of the
Borrowers hereby (i) represents and warrants that, as of the date hereof, and
after giving effect to the terms hereof, there exists no Default or Event of
Default under the Loan Agreement or any of the Loan Documents, and (ii)
acknowledges and agrees that no right of offset, defense, counterclaim, claim
or objection in favor of Borrowers against Lender exists arising out of or
with respect to any of the Loan Documents, the Secured Obligations or the
administration thereof.
6. This Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which, when so
executed and delivered, shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same
instrument.
7. This Amendment shall be binding upon and inure to the benefit of
the successors and permitted assigns of the parties hereto.
3
<PAGE>
8. This Amendment and the other Loan Documents shall be governed by,
and construed in accordance with, the laws and decisions of the State of
Georgia, excluding laws and decisions regarding conflicts of law.
IN WITNESS WHEREOF, Borrowers and Lender have caused this Amendment to
be duly executed, all as of the date first above written.
ILD TELESERVICES, INC.
By: /s/ Dennis J. Stoutenburgh
---------------------------------
Its: President
---------------------------------
INTELLICALL OPERATOR SERVICES, INC.
By: /s/ Dennis J. Stoutenburgh
---------------------------------
Its: President
---------------------------------
NATIONSBANK, N.A.
By: /s/ Angela P. Leake
---------------------------------
Its: Vice President
---------------------------------
4
<PAGE>
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT
This THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT (the "Amendment") is
made and entered into as of the 30th day of April, 1998, among NATIONSBANK,
N.A. ("Lender"), ILD TELESERVICES, INC. ("ILD") and INTELLICALL OPERATOR
SERVICES, INC. ("IOS") (ILD and IOS are sometimes collectively referred to
herein as the "Borrowers").
W I T N E S S E T H:
WHEREAS, Lender and Borrowers are party to that certain Loan and
Security Agreement dated as of August 29, 1997 (as the same has been amended
from time to time, the "Loan Agreement"); and
WHEREAS, Lender and Borrowers desire to amend the Loan Agreement as set
forth herein;
NOW, THEREFORE, in consideration of the foregoing premises, and other
good and valuable consideration, the receipt and legal sufficiency of which
is hereby acknowledged, the parties hereby agree as follows:
1. All capitalized terms used herein and not otherwise expressly
defined herein shall have the respective meanings given to such terms in the
Loan Agreement.
2. The Loan Agreement is amended as follows:
A. Section 1.01 of the Loan Agreement is hereby amended by adding
the following phrase to the definition of "FIXED CHARGES" after the phrase
"Capitalized Leases:"
;PROVIDED, HOWEVER, that the principal payments related to
the McFarland Subordinated Indebtedness due on December 31,
1997 and March 31, 1998 shall not be deemed Fixed Charges
hereunder.
B. Section 10.01(b)(i) is hereby amended by deleting therefrom
the number "15,500,000" and inserting in lieu thereof the number "14,800,000."
C. Section 10.01(b)(ii) is hereby amended by deleting therefrom
the phrase "for each six month period thereafter" and inserting in lieu
thereof the phrase "for each six month period ending on either September 30
or March 31 of each fiscal year thereafter."
D. Section 10.1(b)(ii) is hereby further amended by deleting
therefrom the phrase "for the immediately preceding six (6) month period" and
inserting in lieu thereof the phrase "for the immediately preceding
measurement period."
<PAGE>
E. Section 11.01(v) of the Loan Agreement is hereby amended by
deleting therefrom the reference to the date "October 2, 1997" and inserting
in lieu thereof the date "November 25, 1997."
F. Section 11.01(w) of the Loan Agreement is hereby amended by
deleting therefrom the phrase "the date which is seventy-five (75) days
following the Effective Date," and inserting in lieu thereof the date "March
31, 1998."
3. Lender hereby acknowledges that the end of each Borrower's fiscal
year has changed from December 31 to September 30.
4. Except as expressly set forth herein, the Loan Agreement shall be
and remain in full force and effect as originally written, and shall
constitute the legal, valid, binding and enforceable obligations of Borrowers
to Lender.
5. Each of the Borrowers agrees, jointly and severally, to pay on
demand all reasonable costs and expenses of Lender in connection with the
preparation, execution, delivery and enforcement of this Amendment and all
other Loan Documents and any other transactions contemplated hereby,
including, without limitation, the reasonable fees and out-of -pocket
expenses of legal counsel to Lender.
6. To induce Lender to enter into this Amendment, each of the
Borrowers hereby (i) represents and warrants that, as of the date hereof, and
after giving effect to the terms hereof, there exists no Default or Event of
Default under the Loan Agreement or any of the Loan Documents, and (ii)
acknowledges and agrees that no right of offset, defense, counterclaim, claim
or objection in favor of Borrowers against Lender exists arising out of or
with respect to any of the Loan Documents, the Secured Obligations or the
administration thereof.
7. This Amendment may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which, when so
executed and delivered, shall be deemed to be an original and all of which
counterparts, taken together, shall constitute but one and the same
instrument.
8. This Amendment shall be binding upon and inure to the benefit of
the successors and permitted assigns of the parties hereto.
9. This Amendment and the other Loan Documents shall be governed by,
and construed in accordance with, the laws and decisions of the State of
Georgia, excluding laws and decisions regarding conflicts of law.
2
<PAGE>
IN WITNESS WHEREOF, Borrowers and Lender have caused this Amendment to be
duly executed, all as of the date first above written.
ILD TELESERVICES, INC.
By: /s/ J. David Darnell
---------------------------------
Its: Chief Financial Officer
---------------------------------
INTELLICALL OPERATOR SERVICES, INC.
By: /s/ J. David Darnell
---------------------------------
Its: Chief Financial Officer
---------------------------------
NATIONSBANK, N.A.
By: /s/ Angela P. Leake
---------------------------------
Its: Vice President
---------------------------------
3
<PAGE>
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement (the "Agreement") is made as of February 27,
1997, by and among WORLDCOM, INC., a Georgia corporation ("WorldCom"), and ILD
COMMUNICATIONS, INC., a Delaware corporation ("ILD").
WITNESSETH:
In consideration of the premises and the mutual covenants and agreements
hereinafter set forth, the parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF ASSETS
I.1 PURCHASE AND SALE; PURCHASE PRICE; PAYMENT TERMS; LIABILITIES.
A. Subject to the satisfaction or waiver of the conditions set forth in
this Agreement, on the Closing Date (as hereinafter defined), WorldCom shall
sell, convey, transfer, assign and deliver to ILD free and clear of all liens,
claims, charges and encumbrances (except as expressly disclosed on EXHIBIT
3.3(a) attached hereto), and ILD will purchase, all right, title and interest in
and to those assets of WorldCom's Operator Services U.S. division (hereinafter
referred to as "WorldCom's Operator Services Business") including without
limitation the following assets (collectively, the "Assets"):
(i) all corrections contracts with attendant 1+ and 0+ traffic and
associated hardware, including without limitation the contracts,
listed by customer, set forth on Exhibit 1.1(a)(i) (the "Corrections
Contracts");
(ii) all payphone and hospitality contracts and traffic, including
the pay phone and hospitality 1+ contracts and traffic as well as the
hotel 0+ traffic, including without limitation the contracts, listed
by customer, set forth on Exhibit 1.1(a)(ii) which Exhibit 1.1(a) (ii)
shows the top one hundred (100) customers under this Subsection (ii)
(the "Other Contracts");
(iii) the EDS Operator Services Agreement dated July 6, 1992, as
amended;
(iv) associated billing and collection assets, operations and
customer contracts, including a non-exclusive limited license to the
OPUS software for a period of twenty-five (25) years from the Closing
Date with access to the source code and rights to make proprietary
modifications and enhancements;
<PAGE>
(v) leases on Operator Call Center facilities with associated
leasehold improvements described on Exhibit 1.1(a)(iv), as well as the
furniture, fixtures and equipment therein;
(vi) premises leases for offices solely dedicated to WorldCom's
Operator Services Business described on Exhibit 1.1(g)(y), as well as
the furniture, fixtures and equipment therein;
(vii) all trade secrets, customer lists and all other rights and
documents owned, required or incident to the operations of WorldCom's
Operator Services Business, including a three-month limited license to
the trade or service name ""WorldCom's Operator Services";
(viii) any other miscellaneous assets (excluding tandem network
switching equipment) of WorldCom used primarily in WorldCom's Operator
Services Business including without limitation computer equipment,
computer software, telephone hardware, electrical equipment, wiring,
supplies, copiers, postage machines, vehicles and other current and
fixed assets of WorldCom's Operator Services Business (certain of such
property is listed on EXHIBIT 3.3); and
(ix) WorldCom's DEX Switches (600E) located in Los Angeles,
California and Dallas, Texas (subject to Section 8.3 below).
At Closing (as hereinafter defined) WorldCom shall provide ILD an OPUS
software license agreement and such good and sufficient bills of sale,
assignments, deeds or other documentation as shall be required to effectively
vest in ILD good and marketable title to the Assets (including without
limitation, the Switches described in Subpart (ix) above). At the Closing, ILD
shall assume and agree to pay, perform or otherwise discharge all non-delinquent
liabilities or obligations of WorldCom's Operator Services Business in respect
of the Assets accruing or relating to the period after the Closing Date pursuant
to the agreements, arrangements or commitments assumed by ILD, including without
limitation the EDS Operator Services Agreement described in Subsection (iii)
above (including any take-or-pay revenue commitments, minute commitments or
other similar commitments contained therein), the premises leases described on
EXHIBIT 1.1(a) (iv) or EXHIBIT 1.1(a)(v) and the operating leases described on
EXHIBIT 3.3(b). In the event WorldCom is unable to assign any lease described
herein, WorldCom agrees to sublease to ILD such space or equipment under the
same terms and conditions existing under WorldCom's lease. Notwithstanding
anything in this Agreement to the contrary, ILD shall in no event purchase or
receive or be under any obligation with respect to (i) any, assets, equipment or
contracts which are described as "Excluded Operator Services Assets" on EXHIBIT
3.3 hereof, (ii) any employee benefit programs, plans or policies of WorldCom
except as otherwise expressly provided in Section 4.8 hereof, or (iii) any
commissions due third parties relating to the period up through the Closing
Date. Further, WorldCom will provide ILD a list of all accounts receivable
existing as of the date of Closing. ILD agrees
- 2 -
<PAGE>
to use its best efforts in collecting the accounts receivable (taking into
account the terms and conditions contained in any billing and collection
agreements relative to such accounts receivable which are being assumed by
ILD hereunder) and remitting to WorldCom all amounts it collects within a
reasonable time but in no event later than five (5) business days of receipt
of such funds. WorldCom shall be solely responsible for the remittance of
all taxes that may be due which are associated with such accounts receivable.
B. In full payment for the Assets and in consideration of the Other
Agreements described in Article VIII below, and also in consideration of the
representations, covenants, warranties, agreements and indemnities of WorldCom
contained in this Agreement and the other agreements and documents contemplated
hereby, Seller will pay to WorldCom, and WorldCom will accept at Closing the
following, subject to adjustment as provided in this Agreement:
(i) An amount equal to three (3) times the average monthly
"Correctional Net Revenues" (as defined herein) generated by
WorldCom's Operator Services Business in the three (3) full calendar
months preceding the Closing, PLUS
(ii) An amount equal to four (4) times the average monthly "Other
Net Revenues" (as defined herein) generated by WorldCom's Operator
Services Business in the three (3) full calendar months preceding the
Closing, PLUS
(iii) Other amounts as agreed to by the parties ("Adjustments for
Prepaids") with respect to prepaid commissions, deposits or similar
type payments under agreements, if any, entered into by WorldCom
pursuant to Section 4.1(d) or Section 4.1(e); PLUS
(iv) $2,000,000 (the "Fixed Purchase Price").
The Correctional Net Revenues, Other Net Revenues and Adjustments for
Prepaids described above are collectively referred to as the "Adjustable
Purchase Price" and the Fixed Purchase Price and Adjustable Purchase Price are
sometimes collectively referred to as the "Purchase Price". Further, for
purposes hereof, (x) "Correctional Net Revenues" shall be the amount of gross
revenues from Correction Contracts validly assigned to ILD at Closing LESS
associated unbillables and LESS any revenues during such period related to
Correction Contracts lost or not renewed by the Closing Date, and (y) "Other Net
Revenues" shall be the amount of all gross revenues (which, in addition to
operator services and 1+ revenues, shall include billing and collection data
processing charges of the Operator Services Business) from the Other Contracts
validly assigned to ILD at Closing LESS associated unbillables and LESS any
revenues during such period related to Other Contracts lost or not renewed by
the Closing Date. With respect to any customer contracts entered into by
WorldCom on or after December 1, 1996, ILD and WorldCom shall discuss in good
faith such contract's impact on the Purchase Price as follows: (a) customer
contracts entered into between December 1, 1996 and the date of
- 3 -
<PAGE>
this Agreement shall be separately listed on EXHIBIT 1.1(a)(i) [Corrections
Contracts] or EXHIBIT 1.1(a)(ii) [Other Contracts], as the case may be, and
the parties shall stipulate to the extent of any adjustment to Correctional
Net Revenues, Other Net Revenues or Adjustments for Prepaids, and (b) any
customer contracts after the date hereof shall be subject to the consent of
ILD as provided for in Section 4.1 hereof, and in connection with the consent
process, the parties shall in good faith seek to agree if and to the extent
of any adjustment to Correctional Net Revenues, Other Net Revenues or
Adjustments for Prepaids.
The Adjustable Purchase Price shall be calculated by WorldCom and submitted
to ILD for review at least fourteen (14) days prior to the Closing Date. Any
dispute as to the Adjustable Purchase Price shall be settled in good faith by
the parties hereto. In the event the parties are unable to resolve any dispute
relative to the amount of the Adjustable Purchase Price by the Closing Date,
then such dispute shall be resolved after the Closing by a certified public
accounting firm selected by WorldCom's accounting firm and ILD's accounting firm
and the Adjustable Purchase Price shall be set for the purpose of Closing at the
midpoint between the Adjustable Purchase Price calculated by WorldCom and the
Adjustable Purchase Price designated by ILD. The determination of the
independent certified public accounting firm shall be binding. The costs for
such independent certified public accounting firm shall be borne by the party
whose initial calculation of the Adjustable Purchase Price bears the greatest
disparity to the Adjustable Purchase Price finally designated by the independent
certified public accounting firm.
C. The parties acknowledge that the formula for computing the Purchase
Price set forth in Section 1.1.B. above is the result of extended negotiations
between the parties and the revenue multiples set forth therein are not intended
to constitute a designation by the parties as to the fair market value of the
underlying contracts or assets from which such revenues arise.
D. The Purchase Price shall be payable by ILD as follows:
(i) One-half of the Adjustable Purchase Price shall be payable in
cash at closing (the "Cash Portion"); provided, however, if the Cash
Portion due at Closing is greater than $12,500,000, then such overage
amount shall be paid on or before 180 days from the Closing Date; and
(ii) The lesser of (a) one-half (1/2) of the Adjustable Purchase
Price, or (b) $10,500,000 of the Adjustable Purchase Price shall be
payable by the issuance of up to 105,000 shares of ILD's redeemable
preferred stock (in parity to the highest ranking preferred stock of
ILD; the "Preferred Stock Portion") which stock shall have the rights
and preferences shown in Exhibit 1.1(d) attached hereto which rights
and preferences shall include a stated value of $100 per share, shall
bear an annual dividend rate of eight and one-half percent (81/2%),
and shall be subject to a put right by WorldCom at any time after the
expiration of five (5) years following the
- 4 -
<PAGE>
Closing Date upon at least one hundred and twenty (120) days prior
written notice (which notice may be given prior to the end of the
five (5) years following the Closing Date); with
(iii) The balance of the Adjustable Purchase Price payable by the
issuance of ILD's Common Stock (the "Common Stock Portion"), the
number of shares of which will be based upon the "Share Value" (as
hereinafter defined) at the Closing. For purposes hereof, the Share
Value of each share of ILD's Common Stock for purposes of determining
the number of shares constituting the Common Stock Portion shall be
based on the price per share for any common stock sold or issued by
ILD to any founder or insider (excluding any common stock issued
pursuant to any options, warrants or convertible securities of ILD
outstanding as of September 1, 1996; "Founders' Shares") and common
stock sold in connection with raising any capital necessary to pay the
Cash Portion of the Adjustable Purchase Price ("Investor Shares")
(determined on a pro rata basis based on the number of shares
outstanding and the number of Founders' Shares and the number of
Investor Shares); and
(iv) $1,500,000 of the Fixed Purchase Price shall be payable by the
issuance of ILD's Preferred Stock described in Subsection (ii) above;
and
(v) $500,000 of the Fixed Purchase Price shall be payable by the
issuance of ILD's Common Stock, the Share Value of which shall be
determined as described in Subsection (iii) above.
(vi) In the event there are any "true-ups" after the date of
Closing relative to amounts outcleared to the local exchange companies
for billing and collecting which relate to amounts for Operator
Services or billing services provided by WorldCom prior to the Closing
(the "True-Up Amounts"), ILD may offset the True-Up Amounts against
any amount it may owe under (a) the WorldCom Services Agreement
described in Section 8.2 below (but in no event less than zero), or
(b) the B&C Agreement described in Section 8.5 below.
E. The parties acknowledge that WorldCom agrees to provide the Exhibits
required under this Agreement within thirty (30) days of the date of this
Agreement. ILD shall have five (5) business days upon receipt from WorldCom of
each Exhibit required hereunder in which to notify WorldCom, in writing, of its
objections to such Exhibit, which notice will specify the reason(s) for ILD's
objections. In such case, the parties shall work together to resolve any such
disputes.
I.2 TIME AND PLACE OF CLOSING. The closing (the "Closing") shall occur on
such date (the "Closing Date") at such time and at such place as the parties may
determine as soon as practicable after all of the conditions to the obligations
of the parties hereto
- 5 -
<PAGE>
shall have been satisfied or waived. The target Closing Date shall be June 1,
1997; provided, however, nothing shall be construed to require WorldCom to
close prior to satisfaction or waiver of all of the conditions to the
obligations of the parties.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF ILD
ILD represents and warrants to WorldCom as follows, which representations
and warranties are made as of the date hereof and as of the Closing Date and
shall survive the Closing:
II.1 ORGANIZATION. ILD is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware.
II.2 AUTHORIZATION. ILD has full legal right, power and authority to
enter into this Agreement and to carry out the transactions contemplated by this
Agreement. The execution, delivery and performance by ILD of this Agreement
have been duly and validly authorized by the Board of Directors of ILD and this
Agreement constitutes the valid and binding agreement of ILD, enforceable in
accordance with its terms, subject to (i) general principles of equity,
regardless of whether enforcement is sought in a proceeding in equity or at law,
and (ii) bankruptcy, reorganization, insolvency, fraudulent conveyance,
moratorium, receivership or other similar laws relating to or affecting
creditors' rights generally.
II.3 NON-CONTRAVENTION. Neither the execution or delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
result in the breach of any term or provision of, or constitute a default under,
the Articles of Incorporation (as to be amended by the Closing) or Bylaws of
ILD.
II.4. VALID SHARES. The issuance, sale and delivery of the Preferred
Stock Portion and the Common Stock Portion will have been duly authorized by the
Closing Date by all necessary corporate action on the part of ILD. ILD's
Preferred Stock and Common Stock, when issued pursuant to this Agreement, will
have been duly and validly authorized and issued, will be fully paid and
nonassessable and will not have been issued in violation of the preemptive
rights of any person.
II.5 CAPITAL STRUCTURE AND OWNERSHIP. ILD has authorized, issued and
outstanding the number of shares of stock and other securities so indicated in
Exhibit 2.5 attached hereto. All such outstanding securities have been duly and
validly issued, are fully paid and nonassessable and have not been issued in
violation of the preemptive rights of any person or applicable federal or state
securities laws. No shares of any other class of capital stock of Seller are
outstanding. There are no outstanding options, warrants or other rights to
acquire securities of ILD, nor are there securities outstanding which are
convertible into securities of Seller, except as set forth in said EXHIBIT 2.5.
The name and residence address of each of the holders of the securities of ILD
and the respective number
- 6 -
<PAGE>
and percentage of outstanding shares held by each holder are set forth in
EXHIBIT 2.5. ILD shall provide to WorldCom as update of EXHIBIT 2.5 as of
the Closing Date based on securities issued to pay the Cash Portion of the
Purchase Price.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF WORLDCOM
WorldCom represents and warrants to ILD as follows, which representations
and warranties are made as of the date hereof and as of the Closing Date and
shall survive the Closing:
III.1 ORGANIZATION. WorldCom is a corporation duly organized, validly
existing and in good standing under the laws of the State of Georgia, is duly
qualified and in good standing as a foreign corporation in the states set forth
in EXHIBIT 3.1 attached hereto with full power and authority to own its
properties and assets and to carry on lawfully its Operator Services Business as
conducted, and is not required to be qualified to do business as a foreign
corporation in any other jurisdiction.
III.2 AUTHORIZATION. WorldCom has full legal right, power and authority
to enter into this Agreement and to carry out the transactions contemplated by
this Agreement. The execution, delivery and performance by WorldCom of this
Agreement and the other agreements and documents referred to herein and the
actions contemplated hereby and thereby have been duly and validly authorized by
all necessary corporate action, and this Agreement and such other agreements and
documents constitute valid and binding obligations of WorldCom, enforceable in
accordance with their terms, subject to (i) general principles of equity,
regardless of whether enforcement is sought in a proceeding in equity or at law,
and (ii) bankruptcy, reorganization, insolvency, fraudulent conveyance,
moratorium, receivership or other similar laws relating to or affecting
creditors' rights generally.
III.3 TITLE TO AND CONDITION OF ASSETS AND PROPERTY. Set forth on
EXHIBIT 3.3(a) is a list or brief description as of the date of this Agreement
of all real property and material items of personal property owned by WorldCom
in connection with its Operator Services Business. WorldCom has good and
marketable title to the Assets, free and clear of all liens, claims, charges,
security interests, options, or other title defects or encumbrances, except as
set forth in EXHIBIT 3.6 attached hereto. EXHIBIT 3.3(b) attached hereto sets
forth a description of all real and personal property currently leased or
otherwise occupied or used but not owned by WorldCom in connection with the
Assets, true, correct and complete copies of which leases and other agreements
have previously been delivered to ILD. All personal property comprising the
Assets is owned by WorldCom and all property owned or leased by WorldCom is in
good operating condition and repair, is suitable for the use to which the same
is customarily put, is free from defects (other than minor defects which do not
interfere with the use or operation thereof) and is merchantable and is of a
quality and quantity presently usable in the ordinary course of the operation of
WorldCom's Operator Services business and is all of the assets currently used
- 7 -
<PAGE>
or needed in said business. The buildings, assets and operations of WorldCom
associated with the Assets conform with all applicable restrictive covenants,
deeds, leases, and restrictions and all applicable federal, state and local
laws, ordinances, rules and regulations (including but not limited to those
relating to zoning and working conditions). Upon consummation of the
transactions at the Closing as contemplated by this Agreement, ILD will
acquire title to the Assets free and clear of any liens, claims, charges,
security interests, options or other title defects or encumbrances, except as
expressly disclosed on EXHIBIT 3.6 attached hereto.
III.4 ENVIRONMENTAL MATTERS. WorldCom's business, operations, assets,
equipment, leaseholds and other facilities associated with the Assets 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, governing (i) air emissions, (ii) discharges to surface
water or ground water, (iii) solid or liquid waste disposal, (iv) the use,
storage, generation, handling, transport, discharge, release, or disposal of
toxic or hazardous substances or wastes, or (v) other environmental health or
safety matters, including without limitation, the Comprehensive Environmental
Response Compensation and Liability Act, the Resource Conservation and Recovery
Act, the Federal Water Pollution Control Act, the Toxic Substance Control Act
and the Clean Air Act. There are no investigations, administrative proceedings,
judicial actions, orders, claims or notices which are pending, anticipated or,
to the knowledge of WorldCom, threatened against WorldCom relating to the
environment. WorldCom has not received a notice and neither knows of nor
suspects, any facts which might constitute a violation of any federal, state or
local environmental, health or safety laws, codes or ordinances, and any rules
or regulations promulgated thereunder, which relate to the use, ownership or
occupancy of the property or the operation of WorldCom's Operator Services
Business.
III.5 INTELLECTUAL PROPERTY. Except as set forth in EXHIBIT 3.5(a)
attached hereto, WorldCom does not have any patents, copyrights, trade names,
trademarks, service marks, other such names or marks or applications therefor
and has not conducted its Operator Services business under any corporate, trade
or fictitious name other than its current corporate name. There are no pending
or, to WorldCom's knowledge, threatened claims of infringement upon the rights
to any intellectual property of others or, except as set forth in EXHIBIT 3.5(b)
attached hereto, any agreements or undertakings with respect to any such rights.
III.6 LIABILITIES. WorldCom does not have any liabilities or obligations
as of the dates thereof, secured or unsecured (whether accrued, absolute,
contingent or otherwise), including, without limitation, tax liabilities due or
to become due, and WorldCom has not incurred, nor will incur, any liabilities or
obligations since the date of the most recent of the Financial Statements,
except liabilities permitted by this Agreement. Except as set forth in EXHIBIT
3.6 attached hereto, WorldCom does not have any obligations or liabilities,
whether direct or indirect, joint or several, absolute or contingent, matured or
unmatured, secured or unsecured, which could be affected by the execution and
delivery of this
- 8 -
<PAGE>
Agreement or consummation of the transactions contemplated by this Agreement
or which could affect the same.
III.7 CONTRACTS. Except as set forth in EXHIBIT 3.7 attached hereto or
in any other Exhibit attached hereto and referenced below, true, correct and
complete copies of which referenced items have previously been delivered to ILD
(such items are referred to collectively as the "'Contracts" and individually as
"Contract") WorldCom is not a party to or bound by any of the following with
respect to its Operator Services Business.
(a) contract for the purchase or sale of services, equipment,
inventory, materials, supplies, or any capital item or items with a value,
cost or payments during the term thereof in excess of $25,000 individually
or $200,000 in the aggregate, or supply agreements with the federal
government or any state or local government or any agency thereof;
(b) collective bargaining agreement or other agreement with any labor
union or labor organization or any employment consulting, severance, bonus,
deferred compensation or similar agreement;
(c) tenancy, lease, license or similar agreement relating to property
except as set forth in EXHIBIT 3.7 or EXHIBIT 1.1(a)(iv) or EXHIBIT
1.1(a)(v) attached hereto;
(d) license, lease or other agreement to provide or acquire
telecommunications or other services or equipment of any kind;
(e) any instrument or agreement relating to indebtedness by way of
lease-purchase arrangements, conditional sale, guarantee or other
undertakings on which others rely in extending credit, any joint venture
agreements or any chattel mortgages or other security arrangements;
(f) confidentiality, secrecy, standstill or noncompete agreement to
which Seller is bound or which is in its favor; or
(g) any other plans, agreements, contracts, powers of attorney, bids or
proposals.
Except as set forth in EXHIBIT 3.10(b) attached hereto, WorldCom has not
breached any provisions of, nor is in violation or default under the terms of,
or has caused or permitted to exist any event that with or without due notice or
lapse of time or both would constitute a default or event of default under, any
such Contract. All such Contracts are valid, binding and in full force and
effect and any such Contract to which WorldCom is a party will continue in full
force and effect to the benefit of ILD, if ILD so elects, without change
following the consummation of the transactions contemplated by this Agreement
without obtaining the consent of any other party thereto, except as set forth in
EXHIBIT 3.10(b) attached hereto, and the execution and delivery of this
Agreement by WorldCom
- 9 -
<PAGE>
and the consummation of the transactions contemplated by this Agreement will
not violate or cause a default or event of default under any provision of, or
result in the acceleration of any obligation under, or the termination of,
any such Contract.
III.8 LITIGATION AND COMPLIANCE. Except as set forth in EXHIBIT 3.8
attached hereto, there is no pending or, to WorldCom's knowledge, threatened,
claim, investigation, lawsuit or administrative proceeding by or against
WorldCom or the operation of its Operator Services business or any of the
Assets including without limitation any claims from, or disputes with, any of
the landlords (or their management companies) with respect to the real
property leases described in EXHIBIT 1.1(a)(iv) or EXHIBIT 1,1(a)(v).
WorldCom's Operator Services business is not affected by any pending or, to
WorldCom's knowledge, threatened strike or other labor disturbance.
WorldCom's operation of its Operator Services business is in compliance with
all federal, state and local laws and regulations and administrative orders
and all tariffs, rules and regulations of local exchange carriers and
inter-exchange carriers applicable thereto. There is no order, writ,
injunction or decree relating to or affecting the operations or the Operator
Service Business of WorldCom or the transactions contemplated by this
Agreement.
III.9 NON-CONTRAVENTION. Neither the execution of this Agreement nor
the consummation of the transactions contemplated hereby will result in the
breach of any term or provision of, constitute a default under, or accelerate
or augment the performance otherwise required under, any provision of the
Certificate and/or Articles of Incorporation or Bylaws of WorldCom, or any
agreement (including without limitation any loan agreement or promissory
note), indenture, instrument, order, law or regulation to which WorldCom is a
party or by which it is bound, or will result in the creation of any lien or
encumbrance upon the Assets.
III.10 LICENSES. PERMITS AND REQUIRED CONSENTS. WorldCom has all
federal, state and local franchises, tariffs, licenses, ordinances,
certifications, approvals, authorizations and permits necessary to the
conduct of its business as currently conducted. A list of such franchises,
tariffs, licenses, ordinances, certifications, approvals, authorizations and
permits is set forth in EXHIBIT 3,10(a) attached hereto, true, correct and
complete copies of which have previously been delivered to ILD. All
franchises, tariffs, licenses, ordinances, certifications, approvals,
authorizations and permits relating to WorldCom's Operator Services business
are in full force and effect, no violations have been made in respect
thereof, and no proceeding is pending or, to WorldCom's knowledge, threatened
which could have the effect of revoking or limiting any such franchises,
tariffs, licenses, ordinances, certifications, approvals, authorizations or
permits and the same will not cease to remain in full force and effect by
reason of the transactions contemplated by this Agreement.
EXHIBIT 3.10(b) attached hereto sets forth all registrations, filings,
applications, notices, transfers, consents, approvals, orders, qualifications,
authorizations, certifications, waivers or other actions of any kind required to
be made, filed, given or obtained by or on
- 10 -
<PAGE>
behalf of WorldCom to or from any persons, governmental authorities or other
entities in connection with the consummation of the transactions contemplated
by this Agreement.
III.11 CHANGES. Except as otherwise expressly disclosed on the Exhibits
hereto, since December 13, 1996, there has not been:
(a) any damage, destruction, other casualty loss or other occurrence
that could, individually or in the aggregate, have an adverse effect on the
value of the Assets or WorldCom's Operator Services Business, conditions or
prospects of WorldCom,
(b) any disposition of any asset of WorldCom's Operator Services
business other than in the ordinary course of business;
(c) any amendment, modification or termination of any existing, or
entering into any new, contract, agreement, lease, license, permit or
franchise that could, individually or in the aggregate, have an adverse
effect on the value of the Assets or WorldCom's Operator Services business,
condition or prospects of WorldCom;
(d) any other adverse change in the Assets, WorldCom's Operator
Services Business, condition or prospects of WorldCom.
III.12 ACCOUNTS RECEIVABLE. The accounts receivable of WorldCom's
Operator Services Business were or will be, as the case may be, validly obtained
in the ordinary course of WorldCom' s Operator Services Business.
III.13 NO ADVERSE ACTIONS. Except as set forth on EXHIBIT 3.13, there is
no existing, pending or, to WorldCom' s knowledge, threatened termination,
cancellation, limitation, modification or change in the business relationship of
WorldCom with any supplier, customer or other person or entity except as are
immaterial individually and in the aggregate and which are in the ordinary
course of WorldCom's Operator Services Business. For purposes of this Section
3.13, with respect to customers, "material" will be deemed to be any customer
whose annualized revenue is in excess of $200,000.
III.14 LABOR MATTERS. WorldCom does not have any obligations, contingent
or otherwise, under any employment or consulting agreement (except if and as set
forth in Exhibit 3.7 attached hereto), collective bargaining agreement or other
contract with a labor union or other labor or employee group, and WorldCom will
not incur any liability or obligation with respect to any employee, consultant
or agent as a result of or arising out of the consummation of the transactions
contemplated by this Agreement. There are no efforts presently being made or,
to WorldCom's knowledge, threatened by or on behalf of any labor union with
respect to employees in WorldCom's Operator Services business. WorldCom is in
compliance with all federal, state or other applicable laws, domestic or
foreign, respecting employment and employment practices, terms and conditions of
employment and wages and hours, and have not and are not engaged in any unfair
labor
- 11 -
<PAGE>
practice; no unfair labor practice complaint against WorldCom is pending or,
to WorldCom's knowledge, threatened before the National Labor Relations
Board; there is no labor strike, dispute, slowdown or stoppage pending or
threatened against or involving WorldCom's Operator Services Business; no
representation question exists respecting employees in WorldCom's Operator
Services employees; no grievance or internal or informal complaint which
might have an adverse effect upon WorldCom or the conduct of its Operator
Services business exists; no arbitration proceeding arising out of or under
any collective bargaining agreement is pending and no claim therefor has been
asserted; no collective bargaining agreement is currently being negotiated by
WorldCom; and WorldCom has not experienced any labor difficulty. There has
not been, and will not be, to WorldCom's knowledge, any adverse change in
relations, with employees in WorldCom's Operator Services Business as a
result of any announcement or consummation of the transactions contemplated
by this Agreement.
III.15 INVESTMENT REPRESENTATIONS. WorldCom represents and warrants to
ILD that WorldCom is acquiring ILD's Stock for investment for its own account
and not, with a view to dividing ILD's Stock with others or participating
directly or indirectly in any resale, distribution or underwriting thereof and
will not offer or sell ILD's Stock in violation of the Securities Act of 1933,
as amended (the "Securities Act") or applicable state securities laws. Unless
the shares of ILD's Stock have been registered under the Securities Act and
applicable state securities laws and are freely tradeable, certificates
representing such shares shall bear an appropriate legend regarding the
restrictions on transfer and WorldCom shall order any transfer agent it may
appoint to stop the transfer thereof absent compliance with such restrictions.
WorldCom shall provide such information and execute such documents as ILD may
reasonably request in order to verify the foregoing. WorldCom acknowledges that
it (a) has been provided an opportunity to ask questions and receive answers
from ILD concerning the terms and conditions of the offering of ILD's Stock and
to obtain any additional information which ILD possesses or can acquire without
unreasonable effort or expense that is necessary to verify the accuracy of any
information furnished in connection with said offering, (b) understands the
businesses and operations of ILD and is making an informed investment decision,
and (c) is an "accredited investor" as defined in the rules and regulations of
the Securities Act.
III.16 NETWORK PERFORMANCE. The equipment, leasehold improvements,
facilities, software and related telecommunications network comprising a portion
of the Assets to be purchased by ILD hereunder are properly designed to perform
as an integrated network, meet all applicable federal, state, local and industry
promulgated laws, requirements and standards and perform substantially in
conformance with industry averages of parties owning similar networks.
III.17 BULK TRANSFER APPLICABILITY AND PAYMENT OF OBLIGATIONS. The
consummation of the transactions contemplated by this Agreement is not subject
to the provisions of the bulk transfer law, bulk transfer tax law or any similar
law of any jurisdiction. WorldCom will pay all its obligations and liabilities
as and when the same become due and payable.
- 12 -
<PAGE>
III.18 DISCLOSURE. No representation, warranty or statement made by or on
behalf of WorldCom in this Agreement or the Exhibits attached hereto or in the
certificates or other materials furnished or to be furnished to ILD or its
representatives or lenders in connection with this Agreement and the
transactions contemplated hereby or thereby, contains or will contain any
materially untrue statement of fact or omits or will omit to state a fact
required to be stated herein or therein or necessary to make the statements
contained herein or therein not materially misleading. All information and
documents provided prior to the date of this Agreement and all information and
documents subsequently provided, to ILD or its representatives or lenders by or
on behalf of WorldCom are or contain, or will be or will contain as to
subsequently provided information or documents, true, accurate and complete
information with respect to the subject matter thereof and are, or will be as to
subsequently provided information or documents, fully responsive to any specific
request made by or on behalf of ILD or its representatives or lenders. Prior to
the Closing, full disclosure shall have been made to ILD of all material facts
with respect to WorldCom's Operator Service Business, assets, operations,
condition and prospects and the transactions contemplated by this Agreement
which a reasonable purchaser would deem relevant. WorldCom shall promptly
notify ILD of any change or event which could adversely affect the Assets or the
operations, business, conditions or prospects of WorldCom's operator Services
business.
ARTICLE IV
ADDITIONAL AGREEMENTS OF THE PARTIES
IV.1 ORDINARY COURSE. Prior to the Closing, without ILD's written
consent, WorldCom covenants, represents and warrants that it shall not have:
(a) sold, assigned, transferred, leased, mortgaged, pledged or
subjected to lien, or otherwise encumbered, any of the Assets;
(b) managed customer accounts, equipment inventories and other supplies
other than in the ordinary course of WorldCom's Operator Services Business;
(c) directly or indirectly through any investment banker or other
representative or otherwise, solicited, entertained or negotiated with
respect to any inquiries or proposals from any person relating to the
merger or consolidation of WorldCom's Operator Services business with any
person, or entity, or the direct or indirect acquisition by any person of
any of the Assets;
(d) entered into any agreement or transaction in connection with the
Operator Services Business pursuant to which (1) ILD shall bear any
financial obligation with respect to the Operator Services Business after
the Closing Date; (2) a prepaid commission or deposit may exist as of the
Closing Date; or (3) which is not terminable by WorldCom without penalty
upon no more than 30 days' notice;
- 13 -
<PAGE>
(e) entered into any contracts with customers of WorldCom's Operator
Services Business other than renewals or new agreements with a customer (or
an affiliate entity to such customer) of WorldCom's Operator Services
Business on substantially similar terms as the agreement now in effect with
such customer;
(f) made or authorized any material compensation increase for, or
entered into any employment consulting or similar agreement with, any
employee in WorldCom's Operator Services Business whether such increase
relates to base compensation, commissions, bonuses or benefits, or
otherwise (other than in the ordinary course of business); or
(g) otherwise entered into any transaction or taken other action not in
the ordinary course of WorldCom's Operator Services business.
IV.2 ACCESS PRIOR TO CLOSING. Upon reasonable notice, WorldCom shall
afford ILD and its representatives (including, without limitation, its
independent public accountants, attorneys and banks' or other lenders'
representatives) reasonable access to, and opportunity to examine, any and all
of the premises, properties, contracts, books, records, business, data,
personnel, customers and vendors of or relating to the Assets or WorldCom's
Operator Services Business. WorldCom shall reasonably cooperate in connection
with the foregoing.
IV.3 REGULATORY AND OTHER AUTHORIZATIONS.
A. WorldCom shall (at no expense to ILD other than WorldCom's direct,
out-of-pocket expenses which have been prior approved by ILD) cooperate fully
with ILD in obtaining or making, all governmental, regulatory and third-party
approvals, orders, qualifications, waivers, consents, filings, authorizations or
certifications or other actions necessary in order to consummate the
transactions contemplated hereby. The parties hereto will not take any action
that will have the effect of delaying, impairing or impeding the receipt of any
of the foregoing and will use all reasonable efforts to secure the same as
promptly as possible. Provided, all external, third party costs (including
ILD's internal costs) of obtaining any approvals, orders, qualifications,
waivers, consents, authorizations or certifications as described herein will be
borne solely by ILD.
B. ILD and WorldCom shall file as soon as practical after the date
hereof, the notifications required under the Hart-Scott-Rodeno Act (together
with the Rules of the Federal Trade Commission of C.F.R. Parts 800-803, the "HSR
Act"). The filing fee required under the HSR Act shall be paid by WorldCom.
ILD and WorldCom shall cooperate with one another and exchange all information
reasonably necessary for completion of such notifications. In the event the
Federal Trade Commission or the Assistant Attorney General of the United States
requires the submission of additional information or documentary material (a
"'Second Request") pursuant to Section 7A(e) of the HSR Act, ILD and WorldCom
shall promptly furnish all such information and
- 14 -
<PAGE>
material, and shall cooperate with one another and exchange all information
reasonably necessary for the completion of such Second Request.
IV.4 FURTHER ASSURANCES. At any time and from time to time at or after
the Closing the parties agree to cooperate with each other, to execute and
deliver such other documents, instruments of transfer or assignment, files,
books and records and do all such further acts and things as may be reasonably
required to carry out the transactions contemplated hereby. In furtherance of
the foregoing, WorldCom shall allow, and shall cause Arthur Andersen to allow,
access to all financial records and accounting materials (including work papers)
with respect to WorldCom's Operator Services Business solely for the purposes of
allowing ILD's accounting firm, at ILD's sole cost and expense, to reconstruct
and issue such audited financial statements for WorldCom's Operator Services
Business as may be necessary for ILD to undertake an initial public offering of
its securities or for other financing activities.
IV.5 PAYMENT OF TAXES. WorldCom shall pay all sales taxes, other
property transfer taxes, all documentary or other stamp taxes and all similar
taxes, including but not limited to income taxes, if any, arising out of or
related to the transactions contemplated by this Agreement.
IV.6 DELIVERY. The parties shall cause the delivery of the respective
documents required to be delivered or caused to be delivered by them pursuant to
Article VI below.
IV.7 INDEMNITY.
A. WorldCom agrees to indemnify ILD and its directors, officers,
shareholders, employees, agents, successors and assigns against, and hold each
and every one of the foregoing harmless from any and all damages, losses,
claims, liabilities, demands, charges, suits, penalties, costs or expenses,
whether accrued, absolute, contingent or otherwise, including but not limited to
court costs and attorneys' fees ("Claims"), which any of the foregoing may incur
or to which any of the foregoing may be subjected, arising out of or otherwise,
based upon any of the following:
(i) Any misrepresentation or breach of warranty or
representation by WorldCom or any breach or default by WorldCom of
or under any of the covenants or other provisions of this Agreement
or agreements the forms for which are attached as exhibits hereto;
(ii) All liabilities, obligations, and commitments of or claims
against, ILD, including but not limited to those which may accrue
by operation of law or otherwise to ILD or its respective assigns
except to the extent such liability relates to the period after the
Closing and has been assumed expressly by ILD hereunder;
- 15 -
<PAGE>
(iii) Any act or omission of WorldCom or any of its agents,
servants or employees in connection with any services performed,
any products sold, delivered or furnished or any contracts or
claimed contracts with third parties;
(iv) Failure to comply with any bulk transfer law, bulk transfer
tax law or similar statute of any state or jurisdiction in
connection with the transactions contemplated by this Agreement; or
(v) Any claim or cause of action asserted or commenced by any
WorldCom employee based on or arising out of any of the
transactions contemplated by this Agreement (except to the extent
specified as an obligation of ILD under Section 4.8 below).
(vi) Notwithstanding anything to the contrary contained herein,
WorldCom's obligation to indemnify ILD under subsections (i) or
(iii) of this Section 4.7 will only be for the amount of any
Claim(s) which in the aggregate are in excess of $100,000.
B. Any person or entity seeking or intending to, seek indemnification
(the "Indemnified Party") from another person or entity (the "Indemnified
Party") pursuant to this Agreement shall give the Indemnifying Party prompt
written notice thereof. The failure of the Indemnified Party to give such
notice shall not relieve the Indemnifying Party of any indemnity obligation
pursuant to this Agreement except to the extent such failure prejudices the
rights of the Indemnifying Party. If such matter involves the assertion of a
claim by a third party, the Indemnified Party shall give the Indemnifying Party
the opportunity to undertake the defense thereof pursuant to the provisions
hereof at the expense of the Indemnifying Party through reputable legal counsel
selected by the Indemnifying Party which is reasonably satisfactory to the
Indemnified Party. The Indemnifying Party shall have the right to so assume the
defense of such matter by (a) giving the Indemnified Party written notice
thereof within twenty (20) days after the giving of notice of the matter by the
Indemnified Party or such shorter period as may be reasonably required to avoid
any prejudice to the rights of the Indemnified Party, and (b) thereafter
diligently and timely defending the same. Such a matter may be settled with the
claimant on terms and conditions acceptable to the Indemnifying Party and the
Indemnified Party, which acceptance shall not be unreasonably withheld or
delayed. If the Indemnifying Party so assumes the defense of such matter, the
Indemnified Party shall have the right to employ his, her or its own counsel at
his, her or its expense, and participate in the defense or settlement thereof
provided if the Indemnifying Party does not provide assurances satisfactory to
the Indemnified Party as to the defense and payment of any indemnity obligation,
then the counsel of the Indemnified Party shall have the right to assume the
defense at the expense of the Indemnifying Party. In the event the Indemnifying
Party does not so assume the defense of such matter, the Indemnified Party may
engage counsel and defend or settle the same on such terms and conditions as the
Indemnified Party may determine in his, her or its reasonable discretion. The
Indemnifying
- 16 -
<PAGE>
Party and the Indemnified Party shall cooperate in good faith with each other
in connection with the defense of any such matter and shall make available
all information necessary or useful to the defense of any such matter.
C. The foregoing obligations of this Section 4.7 shall survive any
termination of this Agreement. The obligations of this Section 4.7 shall expire
at midnight on the date one (1) year after the Closing Date other than with
respect to the following, as to which said obligations shall survive the Closing
without time limitation other than as provided by applicable law:
(i) matters as to which no notice has been given to the
Indemnifying Party on or before said expiration date; or
(ii) matters relating to the provisions of Section 1.1 (Purchase,
and Sale; Purchase Price; Payment Terms; Liabilities), the second
sentence in Section 3.3 (Title to and Condition of Assets and
Property), Section 4.4 (Further Assurances), Section 4.5 (Payment
of Taxes), Section 4.7 (Indemnity) to the extent relative to any
provision referenced in this clause (ii), Section 4.10
(Confidentiality).
IV.8 EMPLOYEES. WorldCom hereby acknowledges that ILD has no obligation
to employ any of WorldCom's employees in its Operator Services Business.
WorldCom shall not make any representation to the contrary to any of such
employees; provided, however, ILD may interview or otherwise contact such
employees regarding any future employment. If and to the extent ILD so
requests, WorldCom will use reasonable efforts to cause employees designated by
ILD to become employees or consultants of ILD with it being understood and
agreed that such employment or engagement shall be with no contractual
obligation on the part of ILD to continue any such employment or engagement,
which employment or engagement shall be upon terms and conditions satisfactory
to ILD. WorldCom agrees to provide ILD a list of the "key" employees of
WorldCom's Operator Services Business. As soon as possible after ILD's receipt
of such list (but in no event later than April 1, 1997), ILD agrees to identify
employees from such list that ILD intends to contact concerning employment with
ILD.
ILD agrees not to send any notices or announcements to WorldCom's Operator
Services employees without WorldCom's prior written consent. Further, ILD
agrees to allow a WorldCom representative to be present at any meeting(s) ILD
may have with such employees as a group prior to the date of Closing. ILD
agrees to count the years of service such employees have been with WorldCom in
determining vacation time, plan participation and other employment related
matters which take into account an employee's years of service. WorldCom shall
be responsible for the payment of any severance or accrued vacation due any
employees upon termination of employment prior to the Closing; provided,
however, that amounts accrued for vacation pay to employees of the Operator
Services Business who become employees of ILD as of the Closing, shall be paid
by WorldCom to ILD and ILD shall thereupon honor the accrual for vacation pay to
such
- 17 -
<PAGE>
employee. With respect to those employees who are subsequently employed by
ILD, WorldCom will only be responsible for paying such employees any
employment benefits which may otherwise be due as of the date of Closing;
provided, ILD will be responsible for all employment benefits due such
employees after the date of Closing. ILD agrees to indemnify and hold
harmless WorldCom from any damages, losses, claims, liabilities, demands,
charges, suits, penalties, costs or expenses, including but not limited to
court costs and attorneys' fees, which WorldCom may incur or to which
WorldCom may be subjected, arising out of or otherwise based upon ILD's
failure to comply with the Worker Adjustment and Retraining Notification Act
(WARN), if applicable.
IV.9 CONTINUED RELATIONSHIPS. WorldCom shall preserve intact its
Operator Services business and keep available the services of its officers and
employees and maintain good relationships with suppliers, customers and others
having business relations with WorldCom, and shall cause to be taken no change
in the business, condition or results of operations of WorldCom's Operator
Services business which may have an adverse effect on the Assets or the
business, condition or prospects of WorldCom's Operator Services Business.
IV.10 CONFIDENTIALITY. Except as contemplated by this Agreement, as
required by law or otherwise expressly consented to in writing by WorldCom and
ILD, all information or documents furnished hereunder by any party shall be kept
strictly confidential by the party or parties to whom furnished at all times
prior to the Closing Date, and in the event such transactions are not
consummated, each shall return to the other all documents furnished hereunder
and copies thereof upon request and shall continue to keep confidential all
information furnished hereunder and shall not thereafter use the same for its
advantage. Notwithstanding the foregoing, (a) ILD (or its affiliates) may issue
or make a press release, announcement or other disclosure regarding this
Agreement and the transactions contemplated hereby which it reasonably
determines necessary or desirable under applicable law, and (b) ILD (or its
affiliates) may, at any time after the date of this Agreement, file with the
Securities and Exchange Commission (the ""Commission") a Form 8-K pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act") which
filing may include a copy of this Agreement and certain of its exhibits, with
respect to the transactions contemplated by this Agreement and/or file with the
Commission a registration statement under the Securities Act which includes a
prospectus containing any information required to be included therein with
respect to the transactions contemplated by this Agreement and thereafter
distribute said prospectus in connection with the offer and sale of securities
of ILD. WorldCom shall cooperate with ILD and provide such information and
documents as may be required in connection with any such filings.
In the event the Closing is not consummated, each party hereto will hold in
absolute confidence any information obtained from another party except to the
extent (a) such party is required to disclose such information by law or
regulation, (b) disclosure of such information is necessary in connection with
the pursuit or defense of a claim, (c) such information was known by such party
prior to such disclosure or was thereafter
- 18 -
<PAGE>
developed or obtained by such party independent of such disclosure, or (d)
such information becomes generally available to the public or is otherwise no
longer confidential. Prior to any disclosure of information pursuant to the
exception in clause (a) or (b) of the preceding sentence, the party intending
to disclose the same shall so notify the party which provided the same in
order that such party may seek a protective order or other appropriate remedy
should it choose to do so.
ARTICLE V
REGISTRATION OF ILD STOCK
V.1 REGISTRATION.
A. For purpose of this Section 5.1, "the Company" shall mean ILD,
"Shares" shall mean the Common Stock Portion of the Purchase Price; and "the
holders of the Shares" shall mean WorldCom and/or its permitted assigns or
successors. 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
- 19 -
<PAGE>
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 number 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
- 20 -
<PAGE>
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 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.
- 21 -
<PAGE>
(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 those granted to Holders pursuant to this Warrant without the prior written
consent of the Holder(s).
D. The Company's obligations under Article 4.1 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
- 22 -
<PAGE>
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.
V.2 FEES AND EXPENSES. Except as otherwise prohibited by applicable
law, ILD will pay all fees and expenses in connection with the registration of
the ILD Stock requested pursuant to this Article V except for any underwriting
commissions, transfer taxes, fees and expenses of counsel for WorldCom and the
underwriters' expense allowance, if any, attributable to the sale of WorldCom's
ILD Stock, which shall be borne by WorldCom.
ARTICLE VI
RIGHT OF FIRST REFUSAL
VI.1 OFFERS. If WorldCom at any time and from time to time should
desire to sell the Preferred Stock Portion or the Common Stock Portion, it shall
give ILD notice of such intention setting forth the terms upon which it proposes
to make such sale and give ILD the first right to purchase all of such
securities or such lesser portion as may be selected by ILD. Such purchase
shall be made on the same terms as WorldCom is willing to sell such securities
from any other person. If within twenty (20) days after WorldCom gives its
aforesaid notice, WorldCom does not notify ILD that it desires to purchase all
of the securities which are to be offered, WorldCom may, during a period of
sixty (60) days following the end of such twenty-day period, sell such
securities as to which ILD does not indicate a desire to purchase to another
person upon the same terms and conditions as those set forth in the notice to
ILD.
VI.2 PAYMENT. If ILD gives WorldCom notice of its desire to purchase
any of the securities, ILD shall pay for the securities by check against
delivery of the securities at WorldCom's executive offices within fifteen (15)
days after the expiration of such twenty-day period referred to above.
ARTICLE VII
SHAREHOLDERS AGREEMENT
The parties agree that WorldCom and all holders of ILD common stock will
execute a Shareholders Agreement which will provide, among other things, that
the Board of Directors shall consist of no more than 9 members, one of which
shall be designated by WorldCom and that WorldCom shall provide to ILD and the
other holders of ILD common stock a right of first refusal (with customary
procedures) which would be
- 23 -
<PAGE>
triggered in connection with the disposition or assignment by WorldCom of the
Common Stock Portion of the Purchase Price.
ARTICLE VIII
OTHER AGREEMENTS
VIII.1 ILD SERVICE AGREEMENT. At Closing, the parties shall execute a
services agreement (the "ILD Services Agreement") whereby ILD (or a qualified
subsidiary) shall continue to provide those services which are currently
provided by WorldCom (including without limitation, the processing, completing,
rating, billing and collecting; collectively, "Unbundled Operator Services")
relative to WorldCom's casual 0+ traffic pursuant to WorldCom's applicable
tariffs for a period of five (5) years (the "'Operator Services Term") in
substantially the form as that attached as EXHIBIT 8.1.
By Closing, WorldCom agrees to have transitioned all of WorldCom's operator
services traffic being handled by Century Telephone's operator services center
to one of WorldCom's operator call centers.
VIII.2 WORLDCOM SERVICE AGREEMENT. At Closing, the parties shall execute
a services agreement (the "WorldCom Services Agreement") whereby WorldCom (or a
qualified subsidiary) shall provide certain switched telecommunications services
relative to traffic originated or terminated ILD ("Network Services"). The
rates for Network Services will be mutually agreed to by the parties with each
party's understanding that all such traffic will be converted to WorldCom's DMS
Platform. It is the intent of the parties that the rates for Network Services
billed through WorldCom's existing platform (i.e., the DEX platform) will be at
blended postalized rates per used minute (which domestic Services, i.e.,
excluding international traffic, will be billed in six (6) second increments and
subject to a six (6) second minimum charge (i) utilizing Hardware Answer
Supervision where available, and (ii) with respect to 800 Services, commencing
with Customer's switch wink or answer back), and that the rates will not exceed
$0.081 per minute prior to the effect of any credit mentioned herein. As soon
as possible, WorldCom will convert all of the Network Services to its DMS
Platform and such traffic will be billed at the rates and charges as described
in the TRANSCEND-TM- Telecommunications Services Agreement offered by WorldCom
Network Services, Inc., a wholly owned subsidiary of WorldCom (or any agreement
which supersedes or replaces such TRANSCEND-TM- agreement), in substantially the
form as that attached as EXHIBIT 8.2. WorldCom agrees to provide ILD a credit
(the "Credit") of $85,000 per month during the first twenty-four (24) months of
the WorldCom Services Agreement. Provided ILD is not in material default of the
WorldCom Services Agreement, the Credit will be applied to ILD's invoices from
WorldCom to offset ILD's charges thereunder.
VIII.3 SWITCHES. At Closing, (i) WorldCom agrees to assign and transfer
all of its rights, title and interest in and to WorldCom's DEX switches which
are currently located in Los Angeles, California and Dallas, Texas (the
"'Switches"), and (ii) ILD agrees to grant an exclusive license (the "ILD
License") to WorldCom to operate the Switches for
- 24 -
<PAGE>
and on behalf of ILD and WorldCom until such time as WorldCom is able to
migrate its own, direct traffic off of such Switches. During the term of the
ILD License, WorldCom will maintain the Switches and continue (at WorldCom's
cost) the Maintenance and Service Agreement currently in effect with DSC. As
soon as WorldCom has completed such migration (which is anticipated to be on
or before March 1, 1998), WorldCom will give ILD thirty (30) days' prior
notice of the termination date of the ILD License. Upon the effective date
of the termination of the ILD License (the "License Termination Date"), ILD
will assume complete operational control of the Switches, at which time
WorldCom warrants that each of the Switches will be configured with 5,000
ports and muxes and transmission equipment necessary for ILD to maintain such
Switches in the ordinary course of ILD's business. WorldCom warrants that
the Switches are currently being maintained under DSC maintenance
specifications and agrees to continue maintaining the Switches under such
specifications up through and including the License Termination Date.
WorldCom agrees to reasonably assist ILD in obtaining maintenance and
services agreements directly with DSC. Further, as of the License
Termination Date, ILD will assume the premise leases applicable to each
Switch and WorldCom will assign all of its rights, title and interest under
such leases to ILD and WorldCom will have no further liability or
responsibility with respect to such Switches (including any maintenance with
respect to such Switches). ILD will receive the premises "As Is" and will
not be required to reimburse WorldCom for any build-out or other construction
expenses associated with either premise.
VIII.4 BILLING AND COLLECTION AGREEMENT. At Closing, the parties shall
execute a Billing and Collection Agreement (the "B&C Agreement") which B&C
Agreement will provide terms and conditions pursuant to which ILD will perform
certain billing and collection services for WorldCom through ILD's arrangements
with the various local exchange companies and WorldCom will pay for such
services.
VIII.5 LICENSING AGREEMENT. At Closing, the parties shall execute a
Licensing Agreement whereby WorldCom will grant a non-exclusive limited license
to WorldCom's Opus Software for a period of twenty-five (25) years following the
Closing Date. Such Licensing Agreement will state that ILD shall have access to
the source code attributable to the OPUS Software as well as rights to make
proprietary modifications and enhancements.
VIII.6 CUSTOMER SERVICE AGREEMENT. At Closing, the parties shall execute
a Customer Service Agreement whereby ILD will perform certain customer service
operations and functions for WorldCom at the rates and charges to be mutually
agreed to by the parties.
ARTICLE IX
CONDITIONS TO CLOSING
IX.1 CLOSING CONDITIONS OF WORLDCOM. The obligations of WorldCom under
this Agreement are subject to the satisfaction at or prior to the Closing of
each of the
- 25 -
<PAGE>
following conditions, but compliance with any or all of such conditions may
be waived, in writing, by WorldCom:
(a) The representations and warranties of ILD contained in this
Agreement shall be true and correct in all material respects on the date
hereof and on the Closing Date;
(b) ILD shall have performed and complied with all of the covenants and
agreements in all material respects and satisfied all of the conditions
required by this Agreement to be performed or complied with or satisfied by
ILD at or prior to the Closing;
(c) All required governmental and regulatory approvals, consents and/or
waiting periods shall have been obtained or shall have expired, including
but not limited to those of applicable state public utility or service
commissions;
(d) On the Closing Date, there shall be no injunction, restraining
order or decree of any nature of any court or governmental agency or body
in effect that restrains or prohibits the consummation of the transactions
contemplated by this Agreement;
(e) WorldCom's lenders shall have consented to the transactions
contemplated by this Agreement if and as required;
(f) WorldCom's lenders shall have received such documents and
agreements as WorldCom's lenders may require, provided WorldCom shall use
reasonable efforts to obtain the same; and
(g) WorldCom and WorldCom's lenders shall be satisfied as to all
matters disclosed in or pursuant to this Agreement and the Exhibits hereto
or obtained pursuant to the right of access of WorldCom and its
representatives granted in this Agreement or otherwise and all matters
referenced in any document or instrument so disclosed or obtained; and
(h) All ancillary agreements (including those described in Article 8
above) are approved by the parties on or before March 31, 1997; and
(i) ILD has obtained the necessary funds (or commitments therefor)
described in Subsection 9.2(f) below on or before May 15, 1997.
IX.2 CLOSING CONDITIONS OF ILD. The obligations of ILD under this
Agreement are subject to the satisfaction at or prior to the Closing of each of
the following conditions, but compliance with any or all of such conditions may
be waived, in writing, by ILD:
- 26 -
<PAGE>
(a) The representations and warranties of WorldCom contained in this
Agreement shall be true and correct in all material respects on the date
hereof and on the Closing Date;
(b) WorldCom shall have performed and complied with all the covenants
and agreements in all material respects and satisfied all the conditions
required by this Agreement to be performed or complied with or satisfied by
it at or prior to the Closing;
(c) All required governmental, regulatory and third-party approvals,
consents and/or waiting periods shall have been obtained or shall have
expired, including but not limited to those of applicable state public
utility or service commissions; which regulatory approvals shall include,
without limitation authority to provide Operator Services in the states and
in the manner currently provided by WorldCom;
(d) WorldCom shall have arranged for the continuation and/or provision
of such services, products or facilities provided to or by WorldCom and
contractual arrangements or amendments thereto as ILD reasonably desires,
all on terms and conditions reasonably acceptable to ILD;
(e) ILD shall have reasonable access to applicable books and records
pertaining to WorldCom's Operator Services Business during the thirty (30)
days immediately following the execution of this Agreement;
(f) ILD shall have raised funds in an amount reasonably acceptable to
ILD to consummate the purchase of WorldCom's Operator Services Business as
described herein; provided, ILD agrees to (1) provide WorldCom with status
reports (at least every other week) concerning ILD's fund raising efforts,
and (2) immediately notify WorldCom, in the event of any occurrence which
materially impairs ILD's ability to raise funds necessary to consummate the
purchase as described herein;
(g) The receipt of reasonably adequate assurances from key employees
designated by ILD with respect to their continued employment in the
Operator Services Business following the Closing Date;
(h) No action, suit or proceeding shall have been instituted by any
person or entity, or threatened by any governmental agency or body, before
a court or governmental body, to restrain or prevent the carrying out of
the transactions contemplated by this Agreement or that seeks other
material relief with respect to any of such transactions or that could,
individually or in the aggregate, have a material adverse effect on the
Assets or the Operator Services business or prospects of WorldCom on the
Closing Date, there shall be no injunction, restraining order or decree of
any nature of any court or governmental agency or body in effect that
restrains or prohibits the consummation of the transactions contemplated by
this Agreement;
- 27 -
<PAGE>
(i) There shall not have occurred any material adverse change in the
Assets or the business, condition or prospects of WorldCom's Operator
Services Business; and
(j) ILD's Board of Directors shall have consented to the transactions
contemplated by this Agreement.
ARTICLE X
THE CLOSING
X.1 DELIVERIES BY WORLDCOM. At the Closing, ILD shall receive from
WorldCom the following and WorldCom shall cause the same to be delivered to ILD:
(a) A certificate, dated as of the Closing, signed by a WorldCom
officer to the effect that the conditions specified in Article 8.2. above
(except for clauses (e) through (j) thereof, have been satisfied;
(b) Instruments of transfer and assignment, consents, certificates,
estoppel letters and all other documents and agreements including the AVION
software license in form and substance satisfactory to ILD which ILD may
deem necessary to transfer to and vest in ILD title to and ownership of the
Assets as provided in this Agreement;
(c) An original or photostatic copy duly certified as accurate and
complete of all requisite governmental or regulatory approvals of the
transactions contemplated hereby;
(d) Such other documents and instruments as ILD may reasonably request;
(e) Possession of all the Assets; and
(f) Executed originals of the Other Agreements described in Article
VIII.
X.2 DELIVERIES BY ILD. At the Closing, WorldCom shall receive from ILD
the following and ILD shall cause the same to be delivered to WorldCom:
(a) Certificate of existence from the Secretary of State of the State
of Delaware stating that ILD is a validly existing corporation in good
standing;
(b) A certificate, dated as of the Closing, signed by an officer of ILD
to the effect that the conditions specified in Article 8.1(a) - (b) above,
have been satisfied;
- 28 -
<PAGE>
(c) Copies of duly adopted resolutions of ILD's Board of Directors
approving the execution, delivery and performance of this Agreement
certified by its Secretary;
(d) Payment of the Cash Portion of the Purchase Price pursuant to
Article 1.1(c) above;
(e) Certificates representing the ILD Preferred Stock and ILD Common
Stock registered in the name of WorldCom pursuant to Article 1.1(C) above;
and
(f) Executed originals of the Other Agreements described in Article
VIII.
ARTICLE XI
TERMINATION
XI.1 TERMINATION. Notwithstanding anything in this Agreement to the
contrary, this Agreement may be terminated only (a) by the mutual written
consent of WorldCom and ILD, or (b) by WorldCom or ILD if, for any reason, the
Closing has not occurred on or before July 31, 1997 through no fault of such
party unless said date is mutually extended by the parties in the event one or
more conditions to the obligations of the parties hereunder has not been
satisfied or waived.
XI.2 EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to the preceding Article of this
Agreement, this Agreement shall thereafter become void and have no effect, and
without any liability on the part of any party or its shareholders, directors or
officers in respect thereof, except as otherwise provided in this Agreement and
except that nothing herein will relieve any party from liability for any breach
of this Agreement.
ARTICLE XII
MISCELLANEOUS
XII.1 EXPENSES. Except as otherwise provided in this Agreement, WorldCom
and ILD shall bear their own respective expenses, fees and commissions
(including but not limited to, all compensation and expenses of counsel,
financial advisors, brokers, consultants, actuaries and accountants) incurred in
connection with the preparation, negotiation and execution of this Agreement and
consummation of the transactions contemplated hereby. WorldCom represents and
warrants to ILD and ILD represents and warrants to WorldCom that no broker,
agent or other person acting on their or its, respectively, behalf is or will be
entitled to a fee, commission or other payment as a result of or arising out of
this Agreement or the transactions contemplated hereby.
XII.2 GOVERNING LAW AND CONSENT TO JURISDICTION. 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 internal laws of the State of Mississippi
and the parties hereto
- 29 -
<PAGE>
consent to the jurisdiction of the U.S. District Courts with respect to any
dispute, controversy or other matter relating to or arising out of this
Agreement.
XII.3 NOTICES. Any notices or other communications required under this
Agreement shall be in writing and shall be deemed to have been given when
delivered in person, by telex or telecopier, when delivered to a recognized next
business day courier, or, if mailed, when deposited in the United States mail,
first class, registered or certified, return receipt requested, proper postage
prepaid, addressed as follows or to such other address as notice shall have been
given pursuant hereto:
If to WorldCom: WorldCom, Inc.
Attn: K. William Grothe, Jr.
515 East Amite Street
Jackson, MS 39201-2702
Telecopy: (601) 974-8295
If to ILD: ILD Communications, Inc.
Attn: Michael F. Lewis
13000 Sawgrass Village Circle, Suite 5
Ponte Vedra Beach, Florida 32082
Telecopy: (904) 285-3616
XII.4 ASSIGNMENT. This Agreement may not be assigned, by operation of
law or otherwise, without the prior written consent of the nonassigning party
which consent may be withheld in such party's sole discretion.
XII.5 SECTION HEADINGS. The section headings contained in this Agreement
are for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
XII.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
XII.7 AMENDMENT. Except as herein provided, this Agreement may not be
amended except by, a writing signed by the party to be charged.
XII.8 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
and supersedes all prior agreements and understandings, both written and oral
among the parties with respect to the subject matter hereof.
XII.9 BINDING EFFECT. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs, personal
representatives, successors and permitted assigns.
- 30 -
<PAGE>
XII.10 SURVIVAL. The covenants, agreements, indemnities, representations
and warranties of WorldCom and ILD made in or pursuant to this Agreement shall
survive the Closing notwithstanding any investigation made or information
obtained by or on behalf of another party.
XII.11 SEVERABILITY. In case any provision in this Agreement shall be
held invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions hereof shall not in any way be
affected or impaired thereby unless WorldCom elects otherwise.
XII.12 THIRD PARTIES. Nothing contained in this Agreement or in any
instrument or document executed by any party in connection with the transactions
contemplated hereby shall create any rights in, or be deemed to have been
executed for the benefit of any person or entity that is not a party hereto, a
successor or permitted assign of such a party or a person entitled to
indemnification hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
WORLDCOM, INC. ILD COMMUNICATIONS, INC.
By: /s/ K. William Grothe, Jr. By: /s/ Michael F. Lewis
------------------------------- ------------------------------
Name: K. William Grothe, Jr. Name: Michael F. Lewis
----------------------------- ----------------------------
Title: VP Corporate Development Title: President
---------------------------- ---------------------------
- 31 -
<PAGE>
AMENDMENT NO. 1
This Amendment No. 1 (the "AMENDMENT") is made this 29th day of August,
1997, to that certain Asset Purchase Agreement made by and between WorldCom,
Inc. ("WORLDCOM") and ILD Teleservices, Inc. (f/k/a ILD Communications, Inc.;
"ILD"), dated as of February 27, 1997 (the "AGREEMENT"). In the event of any
conflict between the terms of the Agreement and the terms of this Amendment No.
1, the terms of this Amendment No. 1 shall control. All capitalized terms not
defined herein shall have the meaning ascribed to them in the Agreement.
1. CLOSING DATE. The parties agree that the Closing described in
Subsection 1.2 shall be no later than August 31, 1997, and that the Closing Date
for accounting purposes shall be as of September 1, 1997. Upon the execution of
this Amendment and transmittal of signature pages to the other party (facsimile
copies acceptable), the parties agree to execute and deliver into escrow with
NationsBank, N.A. (the "ESCROW AGENT"), all documents required to be delivered
at Closing except as otherwise described herein, copies of which are attached
hereto (collectively, the "ESCROWED DOCUMENTS"). The parties agree to instruct
the Escrow Agent to (i) hold the Escrowed Documents in escrow until WorldCom has
received confirmation of the transmission by wire transfer evidenced by a
Federal Reserve reference number from the wire department of NationsBank, N.A.
("NATIONSBANK") of the Cash Portion of the Purchase Price and certificates
representing shares of ILD's preferred stock and common stock equal to the
Preferred Stock Portion and the Common Stock Portion as described in Section
1.1.D. of the Agreement at which time the Escrowed Documents may be released to
ILD, and (ii) if WorldCom does not receive such confirmation of the Cash Portion
described herein by 3:00 p.m. CST, Tuesday, September 2, 1997, the Escrow Agent
will release the Bill of Sale, Assignment and Assumption Agreement back to
WorldCom and WorldCom will not have any further liability with respect to the
sale of its Operator Services Business to ILD.
2. ASSIGNMENT OF PREMISE LEASES. Notwithstanding anything to the
contrary contained in Section 1.1 of the Agreement, the parties acknowledge and
agree that at the Closing, WorldCom will assign to ILD (i) that certain lease
held by WorldCom for space located in San Antonio, Texas, used by WorldCom for
an Operator Call Center, and (ii) its rights under that certain Office Lease
Agreement for approximately 17,000 square feet located in San Antonio, Texas
(the "OFFICE SPACE"), as well as WorldCom's right to receive a build-out
allowance of $75,000 for the Office Space. However, premise leases for offices
(including any additional office space requested by ILD after the date of the
Agreement) will be assigned by WorldCom after the Closing on a date mutually
agreed to by the parties. With respect to the space located in Las Vegas,
Nevada, used by WorldCom for an Operator Call Center, the parties acknowledge
that ILD has executed directly with the landlord a lease effective as of the
Closing which lease contains terms and conditions similar to the terms and
conditions contained in WorldCom's prior lease with such landlord. Further,
notwithstanding anything to the contrary contained in Section 8.3 of the
Agreement, the parties acknowledge and agree that the premise leases applicable
to
<PAGE>
each of the Switches (as described therein) will be assigned to ILD upon the
earlier of (i) the migration of WorldCom's traffic off of the switches as
described in Section 8.3, or (ii) April 1, 1998. Notwithstanding anything to
the contrary contained in the Agreement, WorldCom acknowledges that ILD will
only assume approximately 3,000 square feet of the lease premises relating to
the Switch in Los Angeles, California.
3. COMPUTER UPGRADES. WorldCom acknowledges that it has commenced
upgrading the personal computers located in the Office Space described in
Section 2 of this Amendment. WorldCom agrees to bear all costs up to $100,000
in finalizing such upgrade project.
4. SALE AND TRANSFER OF SWITCHES. At Closing, WorldCom agrees to
assign and transfer to ILD, at no cost to ILD, a 20/20L Harris Switch (i.e., in
addition to the 20/20H Harris Switch already used in WorldCom's Operator
Services Business and which is being assigned to ILD at Closing); both of which
Harris Switches will be shown on EXHIBIT 3.3. In consideration for such
additional Harris Switch, ILD acknowledges that the Switches and switch sites
are being delivered "AS IS, WHERE IS" and that all improvements and
modifications requested by ILD (including those requests and modifications
contained in that certain memo from Mr. Bob Jones) are hereby waived by ILD.
WorldCom agrees to perform any maintenance or improvements to the Switches that
are requested by ILD in writing; provided, however, any maintenance or
improvements will be at ILD's sole expense. Further, WorldCom warrants that the
Switches will be "certifiable" to DSC upon delivery to ILD unless ILD requests
maintenance or improvements to the Switches in which case any necessary
"recertification" to DSC will be at ILD's sole expense.
5. CIC CODE 266. At Closing, WorldCom agrees to assign to ILD all of
its rights, title and interest in carrier identification code 266 (the "CIC
CODE"). Provided, WorldCom makes no representations or warranties with respect
to whether or not the CIC Code is active in any tandem. Further, the costs of
translating the CIC Code in any tandems will be at ILD's sole expense.
6. LOCAL AREA NETWORK. WorldCom agrees to partition its local area
network and wide band network (collectively, the "INTERNAL NETWORK") in order to
allow ILD to use such Internal Network for a period not to exceed ninety (90)
days following the Closing Date ("INTERNAL NETWORK TRANSITION PERIOD"). During
the first thirty (30) days of the Internal Network Transition Period, WorldCom
agrees to provide the Internal Network for ILD's use at no cost to ILD.
Thereafter, WorldCom will charge and ILD agrees to pay $5,000 per month for each
month or partial month in which WorldCom provides, at the request of ILD, the
Internal Network for ILD's use. Provided, however, WorldCom will not be under
any duty or obligation to let ILD use the Internal Network after ninety (90)
days following the Closing Date.
7. ADJUSTABLE PURCHASE PRICE. In determining the Correctional Net
Revenues and Other Net Revenues as described in 1.1.B.(i) and (ii) of the
Agreement, the
- 2 -
<PAGE>
parties agree to use the applicable gross revenues during the period March,
April and May, 1997. In the event a customer contract was entered into prior
to the Closing Date for which WorldCom did not receive revenues in all such
months, the parties agree to negotiate in good faith concerning the impact of
such contracts on the Adjustable Purchase Price taking into account a full
three (3) months' revenues (i.e., excluding any "ramp up" revenues)
("ADDITIONAL CONTRACTS"). Provided, the determination made hereunder with
respect to such Additional Contracts will be made on February 15, 1998, and
any amounts owed WorldCom by ILD will be paid on or before March 1, 1998.
Notwithstanding anything to the contrary contained in the Agreement including
without limitation Section 1.1.B., WorldCom has prepared and ILD has accepted
that certain Purchase Price Payment Summary (the "SUMMARY") dated
concurrently herewith and attached hereto, which includes among other
information, WorldCom's calculation of the Purchase Price as well as the
following list of cash payments which will, subject to Section 9 below, be
due and owing to WorldCom by ILD after the Closing (the "TRUE-UP AMOUNT"):
(i) Accounts Receivable as of August 31, 1997, (ii) Outstanding B&C Advances
as of August 31, 1997, (iii) Operating Expenses subsequent to 8/31/97, and
(iv) Commission Payments on certain specified accounts. Further, the True-Up
Amount may be offset by the amount of the Accrued Vacation Pay which is also
shown on the Summary. Provided, further, in the event (i) any agreement for
which WorldCom does not have a written agreement, or (ii) any agreement
requiring a customer's consent to the assignment of such agreement which
consent has not been obtained by WorldCom (collectively, the "SPECIAL
AGREEMENTS"), is terminated by the customer on or before March 1, 1998,
WorldCom agrees to transfer shares of ILD's redeemable preferred stock
received by it pursuant to Section 1.1(D) in an amount equal to three (3)
times the average monthly Correctional Net Revenues (or four (4) times the
average monthly Other Net Revenues, whichever is applicable) attributable to
such terminated Special Agreement. Further, ILD agrees to pay WorldCom a
Commission (as described in Section 8 of this Amendment) for those revenues
attributable to such terminated Special Agreement for the period of time
between Closing and the effective date of termination.
8. COMMISSIONS. ILD agrees to pay WorldCom a two and one-half percent
(2 1/2%) commission per month (the "COMMISSION") commencing as of September 1,
1997, on the billed revenue attributable to the following agreements (which
agreements will not be used in calculating the Adjustable Purchase Price): (i)
that certain Payphone InterLATA Services and Commission Agreement entered into
between WorldCom and Ameritech Payphone Services, or (ii) any agreement for 0+
services with US West, Ameritech, Nynex or Bell Atlantic. Further, ILD agrees
to negotiate with WorldCom concerning future Commissions to be paid to WorldCom
on any other 0+ agreements executed by ILD after the date of the Closing with
which WorldCom reasonably assisted ILD in obtaining or which reflects a business
opportunity brought to ILD by WorldCom.
9. REVENUES; ACCOUNTS RECEIVABLE; B&C ADVANCES; EXPENSES. WorldCom
acknowledges that ILD is entitled to all revenues from and ILD acknowledges that
it is responsible for all expenses attributable to the Operator Services U.S.
division commencing September 1, 1997. In the event WorldCom receives any
- 3 -
<PAGE>
payments attributable to the time period on or after September 1, 1997 which
relate to operator services and which do not correspond or relate to WorldCom's
Accounts Receivable described herein, WorldCom agrees to remit such monies to
ILD. WorldCom will provide ILD with a final list of accounts receivable
outstanding as of August 31, 1997 (the "WORLDCOM ACCOUNTS RECEIVABLE"), and a
final fist of outstanding B&C advances as of August 31, 1997 (the "OUTSTANDING
B&C ADVANCES") as soon as possible after Closing but in no event later than
September 30, 1997. ILD agrees to remit to WorldCom all amounts received by it
after September 1, 1997, which are attributable to WorldCom's Accounts
Receivable and remit to WorldCom the final amount of Outstanding B&C Advances
made by WorldCom. ILD agrees to reimburse WorldCom for any expenses actually
paid by WorldCom on or after the Closing Date relating to its Operator Services
U.S. division (i.e., expenses that made be paid inadvertently by WorldCom after
the Closing Date). ILD agrees to reimburse WorldCom for such expenses within ten
(10) business days after receipt of an invoice from WorldCom.
10. EXHIBITS. ILD acknowledges that WorldCom has provided the Exhibits
required under the Agreement. The parties agree to work together, in good
faith, to resolve any such disputes that may exist in the Exhibits.
Notwithstanding anything to the contrary contained in the Agreement, the parties
acknowledge that any Exhibit(s) requiring information as of August 31, 1997
(e.g., WorldCom's Accounts Receivable described in Section 9 above), may be
incomplete as of the Closing. In such case, WorldCom agrees to provide true and
accurate copies of such Exhibit(s) on the date otherwise specified herein or as
soon as commercially practicable.
11. EMPLOYEES. ILD acknowledges that WorldCom has provided a list of
employees in its Operator Services U.S. division as required under Section 4.8
and ILD has identified employees from such list that ILD intends to contact
concerning employment with ILD. To the extent legally permissible, WorldCom
agrees to allow ILD to "piggyback" its employee health and dental insurance
plans for a period not to exceed sixty (60) days following the Closing Date (the
"Coverage Period"). In such case, ILD agrees to reimburse WorldCom for all
expenses associated with such plans, including without limitation, the cost of
any premiums and catastrophic payments, if any, made by WorldCom in the ordinary
course of WorldCom's business for such employees during such Coverage Period.
12. ANCILLARY AGREEMENTS. The parties acknowledge that certain
ancillary agreements, including without limitation the WorldCom Services
Agreement and other agreements described in Section 8.2 of the Agreement and
other agreements contemplated by the parties) but excluding those agreements
required to be delivered at Closing as described in Section 1 above, may not be
finalized and/or executed by or at the Closing in which case the parties agree
to negotiate in good faith concerning any such agreements and shall work
together to finalize such agreements or other arrangements mutually acceptable
to the parties as soon as possible. Provided, however, ILD acknowledges that
nothing contained herein shall in any way alter or limit WorldCom's right to
charge ILD for all of ILD's minutes (i.e., all minutes whether or not billed by
ILD
- 4 -
<PAGE>
to its end users) which me (i) will not exceed $0.081 per minute prior to the
effect of the Credit described in Section 8.2 while such traffic is on
WorldCom's DEX Platform, and (ii) will be the rate as determined under the
TRANSCEND Telecommunications Services Agreement as soon as such traffic is
migrated to WorldCom's DMS Platform as contemplated by Section 8.2. Further,
nothing contained herein shall affect WorldCom's right to retroactively
charge ILD at any time for all such minutes originated or terminated by ILD
on WorldCom's network on or after September 1, 1997. In the event WorldCom
is unable to determine the exact number of minutes to be billed to ILD, ILD
agrees in good faith to work with WorldCom in developing a method for billing
such minutes, including a reasonable estimation of such minutes and a true-up
based on actual minutes, if possible.
13. ASSIGNMENT. Notwithstanding anything to the contrary contained in
Section 12.4 of the Agreement, WorldCom hereby consents to the assignment by ILD
of (i) its rights to acquire certain of the assets to its wholly-owned
subsidiary Intellicall Operator Services, Inc. if necessary for the purpose of
expediting or simplifying the regulatory approval process, and (ii) the
Agreement, either by collateral assignment or foreclosure, to ILD's senior
lender. WorldCom covenants and agrees to execute and deliver at Closing all
documents requested by ILD's senior lender to further evidence such assignment,
including without limitation that certain Collateral Assignment of Documents, a
form of which is attached hereto. Provided, any assignment shall not modify,
alter or otherwise affect the obligations and duties of ILD under the Agreement.
14. OTHER PROVISIONS. Except to the extent specifically modified by
this Amendment No. 1, all terms and conditions contained in the Agreement shall
remain in full force and effect and shall not be altered, modified, amended or
changed.
15. TRANSITIONING OF TRAFFIC. Notwithstanding anything to the contrary
contained in Section 8.1 of the Agreement, if WorldCom has not transitioned all
of its operator services traffic being handled by Century Telephone's operator
services center to one of WorldCom's operator call centers by the Closing Date,
and ILD pays a deficiency charge as described in that certain EDS Operator
Services Agreement dated July 6, 1992, as amended, as described in Subsection
1.1.A(iii) above, WorldCom agrees to reimburse ILD to the extent of such
deficiency charge but only until such traffic is completely transitioned. Upon
request, ILD agrees to provide WorldCom reasonable documentation to support such
deficiency charge and ILD's payment to EDS. WorldCom agrees that ILD may net
any amount it owes WorldCom for Expenses as described in Section 6 against the
amount of any deficiency WorldCom may owe ILD under this Section 12.
16. CONSENTS. WorldCom agrees and covenants that to the extent that any
contracts constituting part of WorldCom's operator services business, including
without limitation billing and collection agreements ("LEC AGREEMENTS") with
various local exchange carriers (the "LECS"), but excluding those Special
Agreements described in Section 7 above and the DSC maintenance agreement
described in Section 8.3 of the
- 5 -
<PAGE>
Agreement, require the consent of the party to the agreement other than
WorldCom and such consent has not been obtained by the Closing, then (i) ILD
shall not assume such agreements, (ii) WorldCom-shall use its best efforts to
obtain such consents as soon as possible, and (iii) ILD shall not assume such
agreements and the parties agree that to the extent permitted by law,
WorldCom shall act as ILD's agent as of the Closing Date with respect to the
administration of such agreements and shall cooperate with ILD in any
additional arrangements so as to provide ILD with the full benefits,
including without limitation all economic benefits, with respect to such
agreements in a manner consistent with the benefit to be received by ILD had
such agreements been assigned. In the event consent is obtained after the
Closing, such agreement(s) shall be deemed to be immediately assigned by
WorldCom and assumed by ILD without any further action by the parties. In
the event consent is not obtained, then WorldCom agrees to (i) indemnify ILD
for any Claims (as defined in Section 4.7.A. of the Agreement) incurred by
ILD for the failure to obtain such consent if such failure materially affects
WorldCom's Operator Services Business which is being sold to ILD, and (ii)
use reasonable efforts to mitigate any such Claims by assisting ILD in
obtaining any goods, products or services contemplated under such agreements.
Provided, further, WorldCom's obligation to indemnify ILD for any Claims
arising under this Section 16 shall be limited to the amount of any
obligations or liabilities in excess of the obligations or liabilities which
would otherwise arise under such agreements (i.e., for which ILD is liable as
if the consent was obtained), and shall be further limited as described in
Section 4.7.A.(vi) and Section 4.7.C. of the Agreement.
With respect to the LEC Agreements, WorldCom further agrees and covenants
that:
i. it shall cooperate with ILD and its lenders in transmitting a notice
to the LEC within a reasonable time after the Closing Date from WorldCom's
Director of Billing Services for WorldCom's Operator Services Business which
notice will provide that (i) ILD has purchased WorldCom's Operator Services
Business and that payments due with respect to call records submitted after the
Closing Date shall be forwarded to a bank account designated by ILD, (ii) such
designation can not be revoked, altered or revised without the written consent
or acknowledgment of an officer of ILD, and (iii) NationsBank will serve as
ILD's senior lender and NationsBank will have a lien on all of ILD's receivables
but such lien will be automatically released upon any sale of the receivables
represented by the call records submitted for billing and collection. WorldCom
covenants and agrees to promptly deliver to ILD copies of any correspondence
received by it with respect to any such notices.
ii. it shall not contact the LECs after the Closing Date to revoke,
alter or revise the instructions on the payments due with respect to call
records submitted after the Closing Date as described in Subpart i. above unless
such action is otherwise agreed in writing by an officer of ILD.
- 6 -
<PAGE>
iii. to the extent, if any, that as of Closing the proposed assignment of
any LEC Agreement from WorldCom to ILD has not been consented to by the
applicable LEC, then with respect to each such LEC Agreement, and until such
time as the consent of the applicable LEC has been received, WorldCom shall, on
behalf of ILD and without additional consideration, continue to process all
billing and collection tapes submitted by ILD in the same manner previously
performed. In addition, WorldCom hereby grants unto ILD a first priority
security interest in all receivables and the proceeds thereof which are
processed by WorldCom in accordance with the previous sentence (which security
interest shall be fully assignable to ILD's senior lender) and shall execute and
deliver any and all additional documents, instruments or filings reasonably
requested by ILD or ILD's senior lender (including without limitation, that
certain Uniform Commercial Code-Financing Statement-UCC 1 attached hereto) to
further evidence the foregoing grant or to provide for protections customarily
available to a senior secured lender, including without limitation, segregation
of proceeds.
iv. it will execute a letter of instruction to First Union National Bank
of North Carolina, a form of which is attached hereto, whereby (i) WorldCom's
instructions relative to it deposit account (the "FIRST UNION ACCOUNT")
associated with deposits pursuant to the LEC Agreements will be rescinded and
canceled effective October 1, 1997, (ii) all deposits to the First Union Account
will be transferred to a NationsBank-designated account, and (iii) transfers
from the account during the period October 1, 1997 through and including October
31, 1997 will be at the mutual directions of WorldCom and ILD.
Any breach or default by WorldCom of the foregoing covenants shall be
subject to indemnification in accordance with Section 4.7 of the Agreement.
17. RIGHTS OF SETOFF. ILD and WorldCom hereby mutually agree and
acknowledge, in addition to any rights granted under the Agreement (as amended
by this Amendment), the Other Agreements (as described in Article VIII of the
Agreement), or any agreement, instrument or certificate delivered to the other
party in connection with the Closing or as otherwise contemplated by the
Agreement (collectively, the "ILD-WORLDCOM DOCUMENTS") and not by way of
limitation of such rights, and notwithstanding any provisions to the contrary in
the ILD-WorldCom Documents, to mutual set-off provisions as follows:
A. WorldCom shall be authorized by ILD at any time and from time to
time to set off and to appropriate and to apply any and all funds or monies held
by WorldCom owed to, or held for the benefit of ILD, against any indebtedness
(including any claims for indemnification) at any time owed by ILD to WorldCom;
provided, however, that any such set off may be undertaken only if a default has
occurred which default has not been cured within any applicable cure period, or
if no cure period is provided, then after the expiration of two (2) business
days following the provision of written notice to ILD.
B. ILD shall be authorized by WorldCom at any time and from time to
time to set off and to appropriate and to apply any and all funds or monies held
by ILD owed to,
- 7 -
<PAGE>
or held for the benefit of WorldCom, against any indebtedness (including any
claims for indemnification) at any time owed by WorldCom to ILD; provided,
however, that any such set off may be undertaken only if a default has
occurred which default has not been cured within any applicable cure period,
or if no cure period is provided, then after the expiration of two (2)
business days following the provision of written notice to WorldCom.
18. MIGRATION OF TRAFFIC. Notwithstanding anything to the contrary
contained in Section 8.3 of the Agreement, in the event WorldCom fails to
migrate all of its traffic off of the Switches and migrate the traffic being
acquired by ILD hereunder ("WORLDCOM'S OS TRAFFIC") onto WorldCom's DMS Platform
on or before April 1, 1998, WorldCom agrees to "re-rate" WorldCom's OS Traffic
and charge ILD the rates for such traffic which would otherwise be incurred by
MD if such traffic was on the DMS Platform. In such case, WorldCom agrees to
give ILD a credit (or ILD agrees to pay WorldCom) the amount determined owed or
owing based on such "true-up".
19. BILLING AND COLLECTION OF 1+ TRAFFIC. Commencing with the Closing
Date and continuing through March, 1998, WorldCom agrees to bill and collect
ILD's 1+ traffic being acquired hereunder which is currently on WorldCom's
IXplus billing platform. WorldCom will charge and ILD agrees to pay WorldCom a
rate equal to one and three-fourths percent (1 3/4%) of the revenue billed by
WorldCom subject to a minimum monthly charge of $5,000. ILD agrees to pay such
amount within thirty (30) days following receipt of a WorldCom invoice.
IN WITNESS WHEREOF the parties have executed this Amendment No. 1 as of the
date first written above.
WORLDCOM, INC. ILD TELESERVICES, INC.
By: /s/ K. William Grothe, Jr. By: /s/ Dennis Stoutenburgh
K. William Grothe, Jr. Dennis Stoutenburgh
Vice President President
- 8 -
<PAGE>
Exhibit 10.11
SECOND AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (this
"Agreement") is dated this 3rd day of April, 1998, by and among ILD
TELESERVICES, INC., a Delaware corporation (the "Company"), INTELLICALL,
INC., a Delaware corporation ("Intellicall"), TRIAD-ILD PARTNERS, L.P., a
Georgia limited partnership ("Triad I"), TRIAD-ILD PARTNERS II, L.P., a
Georgia limited partnership ("Triad II"), TRIAD-ILD PARTNERS III, L.P., a
Georgia limited partnership ("Triad III")(Triad I, Triad II and Triad III
shall collectively be referred to as "Triad-ILD"), MORRIS TELECOMMUNICATIONS,
LLC, a Georgia limited liability company ("Morris"), REGINALD P. MCFARLAND, a
Georgia resident ("McFarland"); STEPHENS HOLDING COMPANY ("Stephens"), CLARK
ENTERPRISES, INC. ("Clark"), NELSON E. BOWERS, a Tennessee resident
("Bowers"), and WILLIAM K. HOLMES, a Georgia resident; as stockholders of the
Company (collectively, the "Stockholders");
W I T N E S S E T H:
WHEREAS, the Company and certain of the Stockholders are parties to that
certain Amended and Restated Registration Rights Agreement dated December 15,
1997 (the "Current Rights Agreement"), pursuant to which such Stockholders
were afforded certain rights to participate in the registration of their
shares of common stock of the Company;
WHEREAS, in connection with the transfer of certain stock of the Company
from Intellicall to certain of the Stockholders, the parties desire to
restate this agreement to add such other stockholders; and
WHEREAS, the parties desire to execute this Second Amended and Restated
Registration Rights Agreement to provide for registration, under the
Securities Act of 1933, as amended (together with any successor federal
statute, the "Securities Act"), of the shares of the Company's common stock
owned by the Stockholders, including shares of the Company's common stock
issued upon conversion of Series A preferred stock ("Series A Shares"),
Series B convertible preferred stock or other convertible securities or
convertible instruments, together with any other shares of common stock of
the Company hereafter acquired by any Stockholder (the "Shares").
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
<PAGE>
1. REGISTRATION RIGHTS.
(a) INCIDENTAL RIGHTS. If at any time or from time to time the
Company proposes to file with the United States Securities and Exchange
Commission (the "Commission"), a registration statement for the
registration under the Securities Act of any shares of common stock of the
Company for sale to the public by the Company or on behalf of stockholders
of the Company, including any Stockholder, for cash (excluding any shares
of common stock issuable by the Company upon the exercise of employee stock
options or in connection with the merger or consolidation of the Company
with one or more other corporations if the Company is the surviving
corporation), the Company shall give all Stockholders who then hold any
Shares at least ten (10) days, but not more than ninety (90) days, prior
written notice of the filing of the proposed registration statement. The
notice shall include a list of the states and foreign jurisdictions, if
any, in which the Company intends to qualify such shares and the stock
exchange or service on which the Company proposes to list the common stock.
Upon the written request of one or more of the Stockholders received by the
Company within twenty-one (21) days of the date the Company notified the
Stockholders of its intention to file such registration statement, the
Company shall, subject to the conditions and in accordance with the
procedures set forth in paragraphs (c) and (d) of this Section 1, and at
its own expense as provided in Section 3 of this Agreement, use its best
efforts to include in the coverage of such registration statement and to
qualify for sale under the blue sky or securities laws of the various
states, the number of Shares (herein called the "Specified Shares") held by
and requested to be registered by such Stockholders; provided, that if the
managing underwriter for the Company indicates in writing that the effect
of including all or part of the Specified Shares in the coverage of such
registration statement will materially and adversely affect the sale of the
shares of common stock proposed to be sold by the Company (which statement
of the managing underwriter shall also state the maximum number of shares
of common stock (herein called the "Maximum Shares", if any, which can be
sold by stockholders of the Company without materially adversely affecting
the sale of the shares of common stock proposed to be sold by the Company),
then each such Stockholder shall have the right, subject to the incidental
registration rights existing as of the date hereof issued by the Company to
Sirrom Capital Corporation and Reedy River Ventures, L.P. (as warrant
holders or holders of convertible notes)(which the Company represents and
warrants to the Stockholders are identical in all material respects and
PARI PASSU to the rights herein), to include in such registration statement
its respective pro rata portion of the Maximum Shares, determined by
dividing the number of Shares held by such Stockholder by the total number
of Shares held by all stockholders requesting their Shares to be
registered. In the event that: (i) any Stockholder (an "Overalloted
Stockholder") requesting registration has requested registration of more
shares than that Stockholder's pro rata portion of the Maximum Shares and
(ii) any other Stockholder (an "Underalloted Stockholder") requesting such
registration has requested registration of fewer shares than such
Stockholder's pro rata portion of the Maximum Shares, then each Overalloted
Stockholder shall have the right, subject to the rights of Sirrom Capital
Corporation and Reedy River Ventures, L.P., to include in such
registration statement its pro rata portion of the Maximum Shares with
respect to which the Underalloted Stockholders shall not have
<PAGE>
requested registration, determined by dividing the number of shares of
common stock held by such Overalloted Stockholder by the total number of
shares of common stock owned by all stockholders requesting registration.
Notwithstanding the foregoing, each of the Stockholders hereby agrees and
acknowledges that it shall not exercise any of its rights hereunder in
connection with the initial public offering of shares of common stock by
the Company effected pursuant to the approved terms for an initial public
offering adopted by at least 80% of the board of directors of the Company.
Subject to the foregoing and without in any way limiting the types of
registrations to which this paragraph (a) applies, if the Company at any
time or from time to time effects any "shelf registrations" under Rule 415
promulgated under the Securities Act ("Rule 415"), or any other similar
rule or regulation, then for each shelf registration effected by the
Company, the Company shall take all necessary action, including, without
limitation, the filing of post-effective amendments, to permit the
Stockholders to include their shares in such registrations in accordance
with this paragraph (a), provided that the Company shall not be required to
include any shares in such registration by post-effective amendment to the
extent that the amount of such shares, when added to the number of shares
of common stock theretofore or contemporaneously to be sold by the Company
under such Registration Statement, would exceed the total number of shares
of common stock registered thereunder.
Other than as provided in this Agreement, in no event shall the
Company be required to amend any registration statement filed pursuant to
this Section 1(a) after it has become effective or to amend or supplement
any prospectus to permit the continued disposition of Shares registered
under any registration except in connection with a registration statement
complying with Rule 415. The Stockholders agree not to sell under a
registration statement complying with Rule 415 during any period in which
the Company is engaged in a stock repurchase program.
The Company shall have the right to select any underwriters, including
the managing underwriter, of any public offering of shares of common stock
subject to the provisions of this paragraph (a). Nothing in this paragraph
(a) shall create any liability on the part of the Company to any
Stockholder if the Company for any reason should decide not to file such a
registration statement.
(b) MANDATORY RIGHTS. On not more than one occasion during the
period commencing at least one hundred and eighty (180) days after the
Company has undertaken an initial public offering of its capital stock and
such stock becomes listed on a National Stock Exchange (the "Commencement
Date") and ending on that date when all Shares held by the Stockholders are
eligible for resale pursuant to Rule 144 (the "Ending Date") (the period
between the Commencement Date and Ending Date, the "Stockholder Demand
Period"), any Stockholder, or a group of Stockholders, who hold
individually or in the aggregate not less than 50,000 Shares, shall have
the right (but only one right), upon written request, to cause the Company
to prepare and file, promptly after receipt of such request and in any case
within 90 days thereof, and thereafter use its best efforts to cause
<PAGE>
to become effective, a registration statement under and complying in all
material respects with the Securities Act covering such number of Shares
constituting common stock of the Company as shall be specified in the
request of such Stockholder(s) for the sole purpose of distributing such
stock to the equity holders of such Stockholder(s), which request shall not
be less than 25,000 Shares, as may be adjusted by a stock recapitalization
(the "Stockholder Registration Statement"). For purposes hereof, National
Stock Exchange shall mean the New York Stock Exchange, the American Stock
Exchange or the NASDAQ National Market System. Notwithstanding the
foregoing:
(i) The Company may delay the filing of a Stockholder
Registration Statement for a reasonable period if, in the reasonable
judgment of the Company, the Company would be required to include in
such registration statement material information which at that time
has not been disclosed publicly and cannot be disclosed publicly
without a risk of a material disruption of a major corporate
development or transactions then pending or in progress or without a
risk of other material consequence to the Company or an affiliate of
the Company; provided, however, that the duration of the delay shall
not exceed one hundred twenty (120) days from the date the Company
receives written registration request from the requesting
Stockholder(s); and further provided, that in the event of any such
deferral, any requesting Stockholder(s) shall have the right to
withdraw the request for registration by delivering written notice of
such withdrawal to the Company and such withdrawn request shall not be
considered such Stockholder's permitted request for registration under
this Section 1(b);
(ii) If the effective date of the Stockholder Registration
Period would otherwise be forty-five (45) days after, but prior to
ninety (90) days after, the end of the Company's most recently
completed fiscal year, and if the Securities Act requires the Company
to include audited financial statements (as of the end such fiscal
years), then the Company may delay the filing of the Stockholder
Registration Statement for such period as is reasonably necessary to
include therein its audited financial statements for such fiscal year.
In no event shall such Stockholder Registration Statement be filed
later than the ninety-first (91st) day after the end of such recently
completed calendar years; and provided further, under no event shall
the Company be obligated to effect any registration under this Section
1(b) if such registration would require the Company to: (x) furnish
any financial statements other than as of the end of a fiscal quarter,
(y) furnish any audited financial statements of the Company other than
as of the end of the fiscal year unless the Stockholder agrees to bear
the expense of preparing such financial statements, or (z) furnish any
audited financial statements of any other entity not otherwise
available unless the Stockholder agrees to bear the expense of
preparing such financial statements; and
(iii) The Company shall have no obligation to prepare and file a
Stockholder Registration Statement if at the time of the Company's
receipt of the Stockholder's registration request the Company is
contractually committed not to
<PAGE>
register securities for a specified period but in such event the
Stockholder's request shall be withdrawn and not be considered such
Stockholder's permitted request for registration under this Section
1(b).
(iv) In the event of the filing of any registration statement
under the Securities Act pursuant to this Section 1(b) which covers at
least 25,000 Shares (as may be adjusted upwards by a stock
recapitalization), the Company shall have the right to require the
Stockholder to make such distribution pursuant to procedures mutually
acceptable to the Company and the Stockholder.
(c) DISTRIBUTION ARRANGEMENTS. The Stockholders agree that, in
disposing of the Shares owned by them, they will comply with Rules 10b-2,
l0b-6 and 10b-7 and any other applicable rules promulgated by the
Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended.
(d) COVENANTS AND PROCEDURES. The Stockholders understand that they
have certain registration rights pursuant to this Section 1 with respect to
the Shares, but other than as specifically set forth in this Section 1, the
Company has not covenanted and is not obligated to furnish a registration
statement under the Securities Act covering the Shares, to file a
notification with respect to the Shares or to take any other action that
would make available an exemption from registration. If the Company
becomes obligated under the provisions of paragraph (a) or (b) of this
Section 1 to effect registration of shares of common stock on behalf of a
Stockholder, the Company, at its own expense as provided in Section 3,
shall prepare and file with the Commission a registration statement
covering such shares of common stock and use its best efforts to cause such
registration statement to become effective; and the Company will file such
post-effective amendments to such registration statement (and use its best
efforts to cause them to become effective) and such supplements as are
necessary so that current prospectuses are at all times available for 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. Each Stockholder shall promptly provide the
Company with such information with respect to such Stockholder's shares of
common stock to be so registered and, if applicable, the proposed terms of
the offering or distribution thereof as is required for such registration.
Further, if the shares of common stock to be covered by the registration
statement are not to be sold to or through underwriters acting for the
Company, the Company shall (i) deliver to the Stockholders as promptly as
practicable as many copies of preliminary prospectuses as the Stockholders
may reasonably request, and such Stockholders shall keep a written record
of the distribution of such preliminary prospectuses and shall refrain from
delivery of such preliminary prospectuses in any manner or under any
circumstances which would violate the Securities Act or the securities laws
of any other jurisdiction, including the various states of the United
States, (ii) deliver to the respective Stockholders, as soon as practicable
after the effective date of the registration statement, and from time to
time thereafter during such 90-day period, or such longer period as is
herein provided, as many copies of the prospectuses required to be
delivered in connection with the registration of
<PAGE>
shares of common stock to be sold or distributed under the registration
statement as the Selling Stockholders may reasonably request, and (iii) in
case of the happening, after the effective date of such registration
statement and during such 90-day period, or such longer period as is
herein provided, of any event or occurrence which would be set forth in an
amendment of or supplement to such prospectus to make any statements
therein not misleading, give the Stockholders written notice thereof and
prepare and furnish to the Stockholders, in such quantities as they may
reasonably request, copies of such amended prospectus or of such supplement
to be attached to the prospectus in order that the prospectus, as so
amended or supplemented, will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(e) In connection with the offering of any Shares pursuant to this
Agreement, the Company shall take such action as may be necessary to: (i)
qualify or register the Shares to be sold under the securities or "blue
sky" laws of such jurisdictions as may be reasonable requested by the
Stockholders; provided, however, that the Company shall not be obligated to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction in which it is not then qualified, (ii) list the Shares to be
subject to the registration statement on a National Stock Exchange, and
(iii) provide a CUSIP number for the Shares not later than the effective
date of the registration statement.
2. INDEMNIFICATION. In the event of any registration under the
Securities Act pursuant to this Agreement of shares of common stock held by
any Selling Stockholder, the Company will hold harmless such Selling
Stockholder and each underwriter of such securities and each other person, if
any, who controls, such Selling Stockholder or such underwriter, against any
losses, claims, damages or liabilities, joint or several, to which such
Selling Stockholder or such underwriter or controlling person may become
subject under the Securities Act or otherwise, insofar as such losses,
claims, damages or liabilities (actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any
material fact contained, on the effective date thereof, in any registration
statement under which such securities were registered under the Securities
Act, any preliminary prospectus or final prospectus contained therein, or any
amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
and will reimburse such Selling Stockholders and each such underwriter and
each such controlling person for any legal or any other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage or liability unless such arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, preliminary prospectus or final
prospectus or such amendment or supplement in reliance upon and in conformity
with written information furnished to the Company through an instrument duly
executed by such Selling Stockholder or such underwriter specifically for use
in the preparation thereafter.
<PAGE>
It shall be a condition precedent to the obligation of the Company to
include in any registration statement any shares of common stock then held by
a Selling Stockholder that the Company shall have received an undertaking
satisfactory to it and its counsel from each Selling Stockholder, to
indemnify and hold harmless (in the same manner and to the same extent as set
forth in the preceding paragraph of this Section 2) the Company, each
director of the Company, each officer of the Company who shall sign such
registration statement and any person who controls the Company within the
meaning of the Securities Act, (i) with respect to any statement or omission
from such registration statement, any preliminary prospectus or final
prospectus contained therein, or any amendment or supplement thereto, if such
statement or omission was made in reliance upon and in conformity with
information furnished to the Company through an instrument duly executed by
such Selling Stockholder specifically for use in the preparation of such
registration statement, preliminary prospectus or final prospectus or such
amendment or supplement thereto, and (ii) with respect to compliance by such
Selling Stockholder with applicable laws in effecting the sale or other
disposition of the shares of common stock covered by such registration
statement.
Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the preceding
paragraphs of this Section 2, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party, give written
notice to the latter of the commencement of such action. In case any such
action is brought against an indemnified party, the indemnifying party will
be entitled to participate in and to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses incurred by the latter in
connection with the defense thereof.
3. EXPENSES. All expenses incurred by the Company in connection with
any registration statement covering Shares offered by any Selling
Stockholder, including, without limitation, all registration and filing fees,
printing expenses, fees and disbursements of counsel for the Company and the
expense of qualifying such Shares under state blue sky laws, shall be borne
by the Company; provided, however, that (i) all underwriting expenses to be
incurred by the Selling Stockholders, including underwriter's discounts and
commissions, (ii) all fees and disbursements of counsel for any of the
Selling Stockholders, and (iii) all expenses which are to be paid by the
Selling Stockholders under Section 1(b)(ii) or Section 1(d)(ii) hereof, shall
be borne by such Selling Stockholders with each Selling Stockholder bearing
that portion of such expenses that the Shares held by such Selling
Stockholder and being registered bears to the total number of shares being
registered by the Stockholders as a group. It shall be a condition precedent
to the obligations of the Company to take any action to include Shares of any
Selling Stockholder in any registration statement that the Company shall have
received an undertaking satisfactory to the Company from such Selling
Stockholder to pay all expenses required to be paid by such Selling
Stockholder pursuant to this Section 3.
4. DISPOSITIONS DURING REGISTRATION. If so requested by the Company,
each Selling Stockholder will agree, upon the registration of any of such
Selling Stockholder's shares of common stock at any time during the period to
which this Agreement applies, not to sell or
<PAGE>
otherwise dispose of any Shares (other than common stock covered by such
registration, which may be sold in accordance with the plan or plans of
distribution described in the registration statement) owned by such Selling
Stockholder for a period of 30 days following the effective date of such
registration statement, or for such longer period as may be required under
the plan or plans of distribution set forth in such registration statement.
5. RIGHTS TRANSFERABLE. All registration rights and benefits set
forth in this Agreement, including indemnification by the Company, shall be
transferable in connection with the transfer of Shares owned by any
Stockholder otherwise than pursuant to a registration statement of the
Company in connection with a public offering of common stock.
6. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
hand delivered or sent by overnight delivery by a reputable courier company
with confirmation of receipt, or by first class registered or certified mail
(return receipt requested), postage prepaid, to the Company at 14651 Dallas
Parkway, Suite 905, Dallas, Texas 75240 and to the Stockholders at the
address set forth below, unless subsequently changed by written notice. Any
notice shall be deemed to be effective when it is received.
7. ENTIRE AGREEMENT. This Agreement expressly supersedes the
Registration Rights Agreement dated as of May 10, 1996 and represents the
entire agreement of the parties with respect to the subject matter hereof,
and shall not be amended, modified or changed except by written instrument
executed by all other parties hereto.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
THE COMPANY:
ILD TELESERVICES, INC.
By: /s/ Dennis J. Stoutenburgh
------------------------------------
Dennis J. Stoutenburgh
Title: President
ADDRESS:
--------------------------------
--------------------------------
STOCKHOLDERS:
INTELLICALL, INC.
By: /s/ John Carradine
------------------------------------
Title: Chief Financial Officer
ADDRESS:
--------------------------------
--------------------------------
TRIAD-ILD PARTNERS, L.P.
By: Triad-ILD, Inc.
Its General Partner
/s/ Michael F. Lewis
----------------------------------------
Michael F. Lewis, President
ADDRESS: 13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
<PAGE>
MORRIS TELECOMMUNICATIONS, LLC
By: /s/ Edward Brooks
-------------------------------------
Title: VP/CFO
----------------------------------
ADDRESS: 27 Abercorn St.
-------------------------------
Savannah, Ga. 31401
-------------------------------
TRIAD-ILD PARTNERS II, L.P.
By: Triad-ILD, Inc.
Its General Partner
/s/ Michael F. Lewis
-----------------------------------------
Michael F. Lewis, President
ADDRESS: 13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
MCFARLAND
By: /s/ Reginald P. McFarland
-------------------------------------
Reginald P. McFarland
ADDRESS:
---------------------------------
---------------------------------
TRIAD-ILD PARTNERS III, L.P.
By:Triad-ILD, Inc., Its General Partner
/s/ Michael F. Lewis
-----------------------------------------
Michael F. Lewis, President
ADDRESS: 13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
<PAGE>
STEPHENS HOLDING COMPANY
By: /s/ C. Ray Gash
-------------------------------------
Title: Vice President
----------------------------------
[CORPORATE SEAL]
ADDRESS:
---------------------------------
---------------------------------
CLARK ENTERPRISES, INC.
By: /s/ Robert Flanagan
-------------------------------------
Title: Executive Vice President
----------------------------------
ADDRESS:
---------------------------------
---------------------------------
BOWERS
By: /s/ Nelson E. Bowers
-------------------------------------
Nelson E. Bowers
ADDRESS: 217 Colmore Cir.
-------------------------------
Lookout Mtn., TN 38300
-------------------------------
HOLMES
By: /s/ William K. Holmes
-------------------------------------
William K. Holmes
ADDRESS: 760 Fieldstone Dr.
-------------------------------
Macon, Georgia 31210
-------------------------------
<PAGE>
BEARD
By: /s/ Tom Beard
-------------------------------------
Thomas V. Beard
ADDRESS:
---------------------------------
---------------------------------
STOUTENBURGH
By: /s/ Dennis J. Stoutenburgh
-------------------------------------
Dennis J. Stoutenburgh
ADDRESS: 2804 Rosedale Ave.
-------------------------------
Dallas, TX 75205
-------------------------------
DARNELL
By: /s/ J. David Darnell
-------------------------------------
J. David Darnell
ADDRESS: 4303 Brattan Bay.
-------------------------------
Dallas, TX 75287
-------------------------------
KAHRS
By: /s/ Daniel W. Kahrs
-------------------------------------
Daniel W. Kahrs
ADDRESS: 6906 Waggoner Place
-------------------------------
Dallas, TX 75230
-------------------------------
<PAGE>
THIRD AMENDED AND RESTATED
SHAREHOLDERS' AGREEMENT
THIS THIRD AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT is entered into as
of this 3rd day of April, 1998, by and among ILD TELESERVICES, INC., a Delaware
corporation formerly known as ILD Communications, Inc. (the "Corporation"); and
INTELLICALL, INC., a Delaware corporation ("Intellicall"), TRIAD-ILD PARTNERS,
L.P., a Georgia limited partnership ("Triad I"), TRIAD-ILD PARTNERS II, L.P., a
Georgia limited partnership ("Triad II"); TRIAD-ILD PARTNERS III, L.P., a
Georgia limited partnership ("Triad III")(Triad I, Triad II and Triad III shall
collectively be referred to as "Triad-ILD"), MORRIS TELECOMMUNICATIONS, LLC, a
Georgia limited liability company ("Morris"); REGINALD P. MCFARLAND, a Georgia
resident ("McFarland"); STEPHENS HOLDING COMPANY ("Stephens"); CLARK
ENTERPRISES, INC. ("Clark"); NELSON E. BOWERS, a Tennessee resident ("Bowers");
WILLIAM K. HOLMES, a Georgia resident ("Holmes"); and WORLDCOM, INC., a Georgia
corporation ("WorldCom"), as shareholders of the Corporation.
W I T N E S S E T H:
WHEREAS, Intellicall, Triad I and Morris (sometimes referred to as the
"Original Signatories") and the Corporation are parties to that certain
Shareholders' Agreement dated May 10, 1996; WorldCom, Inc. and Triad II became a
signatory upon the execution of the Amended and Restated Shareholders' Agreement
dated as of August 31, 1997; and McFarland became a signatory upon execution of
the Second Amended and Restated Shareholders' Agreement dated as of December 15,
1997;
WHEREAS, Stephens, Clark, Bowers and Holmes have become shareholders as of
April 3, 1998 by virtue of the purchase of certain shares of capital stock of
the Corporation from Intellicall;
WHEREAS, the Shareholders own as of the date hereof the issued and
outstanding capital stock of the Corporation in the amounts and in the classes
set forth on Exhibit "A" which is expected to change to the amounts and classes
referenced on Exhibit "A-1 by the end of April, 1998 in connection with the
consummation of the "Intellicall Permitted Transaction" referenced in Section
1.04 f. hereof; and
WHEREAS, the Shareholders believe it is in the best interest of the
Shareholders and the. Corporation to make provisions for the future disposition
of the Shares, and to enter into certain agreements respecting the Corporation's
affairs;
<PAGE>
NOW, THEREFORE, in consideration of the premises and mutual obligations
contained herein, and for other good and valuable consideration, the receipt and
sufficiency of which are acknowledged, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following terms have the respective
meaning set forth below:
1.01. "AFFILIATE" of any Shareholder that is an entity shall mean any
shareholder, manager or general partner of such Shareholder, or any shareholder,
manager or general partner of an entity that indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
such Shareholder.
1.02. "AGREEMENT" means this Agreement together with any amendments made
in the manner described in this Agreement.
1.03. "CORPORATION" means ILD Teleservices, Inc., a Delaware corporation.
1.04. "PERMITTED TRANSFER" means:
a. Any Transfer by a Shareholder to an Affiliate provided that
such Affiliate did not become an Affiliate for the purpose of the Transfer, or
in the event that any individual becomes a Shareholder hereunder, any Transfer
by such individual during his lifetime to his spouse, children and/or
grandchildren, or to a trust or similar instrument for the benefit of one or
more of the foregoing, or any testamentary disposition of Shares by such
individual to his spouse, children and/or grandchildren;
b. Any Transfer to any other Shareholder whether or not an
original signatory hereto, or any Affiliate of such other Shareholder provided
that such Affiliate did not become an Affiliate for the purpose of the Transfer;
c. Any Transfer from a Shareholder to the Corporation as
permitted or contemplated pursuant to the operative instrument or corporate
governance document, such as redemption of preferred stock pursuant to the
Corporation's Second Amended and Restated Certificate of Incorporation;
d. Any Transfer by pledge or collateral assignment by
Intellicall to its senior secured lender; or
e. A Transfer by McFarland of up to 1,100 Shares to the persons
on Exhibit B hereto (hereinafter a "McFarland Permitted Transfer").
- 2 -
<PAGE>
f. A Transfer by Intellicall of up to 1539 shares of Series A
stock pursuant to that Stock Purchase Agreement between Intellicall and SMCO
Investments, LLC. to the members or assignees of SMCO Investments, LLC.
1.05. "SHAREHOLDER" means Triad I, Triad II, Triad III, Morris,
Intellicall, Stephens, Clark, Bowers, Holmes, WorldCom, and McFarland, and any
other person or entity to whom any shares of capital stock are transferred by
the Corporation or any of the foregoing (except for issuance of shares, whether
upon sale by the Corporation or pursuant to the exercise of warrants or options,
whereby such person or entity, and such person's or entities' Affiliates, would
thereby hold less than 2,500 shares of capital stock in the aggregate on a
fully-diluted basis), it being recognized that any such transfer must not
violate any of the provisions of this Agreement and that all successive
transferees will be bound by the terms hereof as fully and completely as if such
transferees were original parties of this Agreement; provided, however, that the
entities "Sirrom Capital Corporation" or "Reedy River Ventures Limited
Partnership", or their successors or assigns, in their capacity as shareholders
of the Corporation upon exercise of certain warrants, or conversion of certain
notes, granted to them by the Corporation shall not be considered a Shareholder
hereunder and the shares of common stock to be issued under such warrants shall
not be subject to any of the terms, conditions or restrictions of this
Agreement.
1.06. "SHARES" means the shares of capital stock of the Corporation, of
whatever class, series or designation, held by any Shareholder, together with
any and all shares of capital stock hereinafter acquired by any Shareholder.
The term Shares shall be deemed to also include any shares of capital stock
which any Shareholder has or may receive the right to receive by virtue of the
exercise of any warrants, options or other rights to acquire Shares or
securities convertible in Shares, either presently or in the future.
1.07. "TRANSFER" means any sale, assignment, pledge or other transfer or
encumbrance, whether outright or as security, whether with or without
consideration, and whether voluntary, involuntary, or by operation of law
(including, but not limited to, any sale, exchange, gift, or assignment), of all
or any part of any right, title or interest (including, but not limited to,
voting rights) in or to any Shares.
1.08. "VOTING STOCK" means the $.01 par value common stock of the
Corporation and the $.01 par value Series A Preferred Stock of the Corporation.
ARTICLE II
RESTRICTIONS ON TRANSFER OF SHARES
2.01. RESTRICTIONS ON TRANSFER. No Shareholder shall Transfer any
interest in, or any part of, its Shares, and any such attempted Transfer shall
be null and void and of no force and effect unless all of the following
conditions are met:
- 3 -
<PAGE>
(a) All transferees proposing to receive a Transfer of Shares
(other than a transferee who is already a party hereto or transferees by virtue
of a McFarland Permitted Transfer) shall agree in writing (as a condition to
such Transfer) that it or he will, if so requested by the Corporation, be bound
by and will receive and hold such Shares or interest therein subject to this
Agreement. Upon such transfer, such transferee shall be a Shareholder hereunder
and shall be subject to the rights and obligations of the transferring
Shareholder set forth in this Agreement;
(b) Such Transfer of Shares is effected pursuant to registration
requirements (or an exemption therefrom) under the Securities Act of 1933 (and
regulations thereunder) or SEC Rule 144, as well as any applicable state
securities laws, and if in the reasonable judgment of counsel for the Company
some question exists as to the applicability of such exemption(s), then such
Transfer shall also include an opinion of counsel for the transferring
Shareholder stating that such exemption(s) are applicable;
(c) Such Transfer is either a Permitted Transfer or the
transferring Shareholder shall have first complied with any of the procedures
applicable to the proposed transaction described in Section 2.02 or Section 2.03
and such offer(s) shall have expired or been rejected as provided herein;
(d) Such Transfer (other than a Permitted Transfer) is to be
effected after May 10, 1998 on the basis that the parties desire to preclude any
Transfer (other than a Permitted Transfer) during the first two years of the
Corporation to stabilize the Corporation's ownership structure; and
(e) If not already so required by the applicable provisions
hereof and except for any McFarland Permitted Transfer or Intellicall Permitted
Transfer, the transferring Shareholder gives the Corporation at least 10 days
prior written notice of such proposed Transfer.
2.02. RIGHT OF FIRST REFUSAL.
(a) OFFER TO SELL. In the event that any Shareholder proposes
to Transfer its Shares after May 10, 1998 pursuant to a bona fide third party
offer or otherwise other than by a Permitted Transfer (such Shareholder is
hereinafter referred to as a "Selling Shareholder"), it shall make a written
offer to sell first to the Corporation and second to the other Shareholder(s)
all the Shares the Selling Shareholder proposes to so Transfer (the "Offered
Shares"). The Selling Shareholder shall attach to the offer to sell a copy of
the bona fide offer ("Offer") received which shall specify the type of Transfer,
the number of Offered Shares, the name and address of any prospective
transferee(s), the proposed purchase price per share, the terms of payment and
any other material terms of the Transfer.
- 4 -
<PAGE>
(b) OPTIONS TO PURCHASE OFFERED SHARES. The Corporation shall
have the first option to purchase all of the Offered Shares for the purchase
price and upon the terms set forth in the Offer, exercisable by giving written
notice to the Selling Shareholder and to the nonselling shareholder(s) within
five (5) business days after receipt of the Offer, which notice shall set forth
the Corporation's intent to purchase the Offered Shares. In the event of such
notice, the sale shall be effected as set forth in Section 2.04 below.
If the Corporation elects not to purchase the Offered Shares, each
of the nonselling shareholder(s) (in that proportion which the Shares owned by
each nonselling shareholder electing to purchase Shares of the Selling
Shareholder bears to the Shares owned by all nonselling shareholder(s) electing
to purchase Shares of the Selling Shareholder) shall have the second option to
purchase all of the Offered Shares, for the purchase price and upon the terms
set forth in the Offer, exercisable by giving written notice to the Selling
Shareholder and the Corporation within five (5) business days after the
expiration date of the Corporation's option. Notwithstanding anything contained
herein to the contrary, in the event the nonselling shareholder(s) who desire to
purchase the Offered Shares purchase less than all of the Offered Shares, the
provisions of Section 2.02 (c) hereof shall apply.
(c) FAILURE TO EXERCISE OPTION TO PURCHASE. If the options to
purchase the Offered Shares are not timely exercised by the Corporation and/or
the nonselling shareholder(s), or if such options are exercised but not timely
consummated, or if the Corporation or the nonselling shareholder(s) do not elect
to purchase all of the Offered Shares, all through no fault of the Selling
Shareholder, then the Selling Shareholder may promptly make a bona fide Transfer
of the Offered Shares to the prospective transferee(s) named in the Offer, at
the price and on the terms and conditions and strictly in accordance with the
Offer; provided, that any transferee's right in and to any of the Shares shall
be subject to the conditions and restrictions set forth in this Agreement.
Notwithstanding the foregoing, if the Selling Shareholder shall fail to
consummate such Transfer within thirty (30) days after expiration of the time
provided for the exercise of the options of the nonselling shareholder(s) and
the Corporation, the Selling Shareholder's right to Transfer in accordance with
the Offer shall expire and the Selling Shareholder shall be required to re-offer
any Offered Shares in accordance with this Article II prior to any subsequent
Transfer of its Shares.
2.03. TAG ALONG RIGHT. No Shareholder or group of Shareholders shall
Transfer any shares of Voting Stock other than by a Permitted Transfer if, upon
such Transfer, the acquiror together with the acquiror's Affiliates would
thereby hold more than 50% of aggregate number of issued and outstanding Shares
of Voting Stock of the Company, as determined on the date of such sale or
conveyance, unless it or they shall have given all other Shareholder(s) holding
Voting Stock not less than thirty (30) days written notice of the proposed sale
or conveyance and the terms and conditions thereof ("Notice of Control
Transfer"). Upon receipt of such Notice of Control Transfer, the other
Shareholder(s) holding Voting Stock shall each have the right, exercisable on
written notice within twenty (20) days after the date of receipt of such notice
("Notice of Tag Along"), to preclude
- 5 -
<PAGE>
such proposed Transfer unless the acquiror also agreed to purchase from each
such electing Shareholder that number of Shares designated by the electing
Shareholder to be sold to the acquiror at a price equal to the greater of (i)
the price per share specified in the Notice of Control Transfer or (ii) the
highest price per share paid by acquiror or its Affiliates for any of its
Shares. If all Shareholders fail to provide a Notice of Tag Along Right
within the time required, the Shareholder(s) providing the notice of the
proposed transfer, for a period of thirty (30) days from the date on which
the nonparticipating Shareholders' rights to exercise the foregoing tag along
right terminates, shall be free to sell the Offered Shares to the same
transferee on the same terms and conditions specified in the Notice of
Control Transfer; provided, however, that any transferee's right in and to
any of the Shares of Voting Stock shall be subject to the conditions and
restrictions set forth in this Agreement; and provided further, that if the
transfer shall not be made within said 30-day period, the right to transfer
in accordance with the notice will expire, and all provisions of this
Agreement (including the provisions of this Section 2.03) will remain in full
force and effect. In the event that any Shareholder provides Notice of Tag
Along Right, the sale shall be effected as set forth in Section 2.04 below.
2.04. CLOSING: EFFECT OF DELIVERY. The closing of any transfer pursuant
to this Article II shall take place at the offices of the Corporation. The
Selling Shareholder, the Corporation and/or the nonselling shareholder(s) who
together are to participate in a transaction pursuant to this Article II shall
mutually agree upon a date of closing that is either within the prescribed
period for such Transfer, or if no period is prescribed for such Transfer
hereunder, then within thirty (30) days following the last date all notices of
exercise are permitted. At the closing, the transferee(s) shall deliver the
purchase price in the manner set forth in this Article II, and the Selling
Shareholder shall deliver the Shares to be transferred duly endorsed for
transfer, free and clear of all security interests, liens, encumbrances, and
restrictions. Upon the Transfer of all of its Shares in compliance with this
Article II, the Selling Shareholder shall no longer be a party to this
Agreement, and all of his rights and obligations hereunder shall terminate.
ARTICLE III
AGREEMENTS WITH RESPECT TO THE AFFAIRS
AND MANAGEMENT OF THE CORPORATION
3.01. BOARD OF DIRECTORS. So long as this Agreement shall remain in
effect, each of the Shareholders covenants and agrees to vote or cause to be
voted all shares of Voting Stock with respect to which it has the power to vote
or direct the vote in favor of: (a) fixing the number of directors at eight (8)
or such other number as agreed by the Supermajority Vote of the directors of the
Corporation; and (b) electing to the Board of Directors of the Corporation two
persons designated by Intellicall (acknowledged to be John J. McDonald, Jr. and
Patrick V. Stark as of the date of the next board meeting), two persons
designated by Triad-ILD (acknowledged to be Michael F. Lewis and F. Edward
Brooks as of the date hereof), one person nominated by Stephens (expected to be
William Porter Payne), one person nominated by Clark, Holmes and Bowers
- 6 -
<PAGE>
(acknowledged to be C. Read Morton, Jr.) and one independent director (currently
Dennis Stoutenburgh) nominated by Intellicall but subject to the approval of a
majority of the directors; provided, however, that (a) in the event that
Triad-ILD, Intellicall, Stephens or Clark/Bowers/Holmes shall elect, in its sole
discretion, not to nominate a person or persons to serve as designated directors
on the Board of Directors of the Corporation, then and in such event said
director or directors shall be elected in the manner provided by the bylaws of
the Corporation and (b) the right of Triad-ILD, Intellicall, Stephens or
Clark/Bowers/Holmes, as the case may be, to designate or consent to any person
to serve on the Board of Directors of the Corporation shall (i) with respect to
Triad-ILD or Intellicall, be reduced to one designated board seat if such party
had, in one or more transactions, Transferred (other than by a Permitted
Transfer) shares of Voting Stock constituting at least 50% of the shares of
Voting Stock held by such party as of the date of this Agreement or
(ii) terminate if such party (or parties in the case of Clark/Bowers/Holmes)
had, in one or more transactions, Transferred (other than by a Permitted
Transfer) shares of Voting Stock constituting at least 75% of the shares of
Voting Stock held by such party as of the date of this Agreement.
Notwithstanding the foregoing, if either of the above parties does not nominate
a person to serve as a director, such party shall nonetheless be permitted to
designate a representative to receive notice of all meetings or actions and to
attend all meetings of the Board of Directors of the Corporation. The parties
also stipulate and agree that counsel to the Corporation shall be invited to
each board meeting to serve as secretary of the meeting unless otherwise agreed
by all directors. For the purposes of this Section 3.01, Intellicall shall mean
Intellicall, Inc. or any secured lender to Intellicall who takes title to
Intellicall's shares of Voting Stock.
3.02. EVENTS REQUIRING SUPERMAJORITY APPROVAL. The Shareholders and the
Corporation hereby agree and covenant that the following actions (and any
agreements to effect any of the following actions) may be undertaken by the
Corporation only with the affirmative approval of 80% of such directors or, if
to be undertaken on the basis of action by the shareholders, by the affirmative
vote of shareholders holding not less than 80% of shares entitled to vote on
such action, in each case only to the extent otherwise permitted by the Delaware
General Corporation Law (for the purposes hereof, "Corporation" shall mean the
Corporation or any of its subsidiaries):
a. BANKRUPTCY, INSOLVENCY OR LIQUIDATION. Institution of any
proceedings under bankruptcy laws or other laws of general application to
debtors seeking relief from claims of creditors, or having a receiver or
trustee appointed for the benefit of the Corporation, the undertaking of
any action that would render the Corporation insolvent or unable to pay its
debts as they become due, making a general assignment for the benefit of
creditors, or causing a dissolution, liquidation or winding-up of the
Corporation.
b. AMENDMENTS OR CHANGES TO ORGANIZATIONAL DOCUMENTS. The
amendment, modification, supplementation or repeal of the Corporation's
Second Amended and Restated Certificate of Incorporation or bylaws, or any
issuance of Shares to any third parties which third party is or will be a
Shareholder hereunder.
- 7 -
<PAGE>
c. MERGER, CONSOLIDATION OR SALE OF ASSETS. The sale of the
Corporation to an unaffiliated third party in an arm's-length transaction
(whether by merger, consolidation, sale of all or substantially all of its
assets or sale of all of the outstanding shares of capital stock).
d. REMOVAL OR HIRING OF PRINCIPAL OFFICER OF THE CORPORATION.
The hiring or removal by the Corporation of the Corporation's chief
executive officer (or chief operating officer or like officer if such
serves as the principal executive officer of the Corporation).
e. APPROVAL OF ANNUAL BUDGETS. The approval of any annual
budget or operating plan for the Corporation.
f. INCREASING NUMBER OF DIRECTORS. Increasing the number of
directors of the Corporation or specifying any director seats other than
which may be designated by any Shareholder as contemplated in Section 3.01
hereof
ARTICLE IV
TERM AND TERMINATION OF AGREEMENT
4.01. TERM. The term of this Agreement shall commence with the date
hereof and shall continue thereafter for a period of ten (10) years, subject to
renewal by the parties.
4.02. TERMINATION. This Agreement shall terminate prior to the end of
its term upon the occurrence of any of the following events:
a. Bankruptcy, receivership or dissolution of the Corporation;
b. The voluntary agreement of all parties to this Agreement; or
c. An initial public offering the Common Stock pursuant to an
effective registration statement under the Securities Act of 1933, as
amended, and applicable state securities laws so that the Corporation
receives at least $15,000,000 in proceeds from the sale of its capital
stock.
ARTICLE V
STOCK LEGEND; ADDITIONAL SHARES
5.01. LEGEND. Upon the execution of this Agreement, the parties hereto
shall cause all certificates for Shares now or hereafter issued to a party
(other than the Shares
- 8 -
<PAGE>
of McFarland to be transferred pursuant to a McFarland Permitted Transfer)
hereunder to be endorsed as follows:
"THE SHARES OF STOCK REPRESENTED BY THIS CERTIFICATE ARE HELD SUBJECT
TO AND THEIR TRANSFER IS RESTRICTED UNDER THE TERMS OF A THIRD AMENDED
AND RESTATED SHAREHOLDERS' AGREEMENT DATED AS OF APRIL 3, 1998 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."
5.02. ADDITIONAL SHARES. The parties hereto agree that any additional
Shares to be issued by the Corporation to any Shareholder shall be subject to
this Agreement (subject to the procedure for exceptions set forth in
Section 3.02(b)) and shall have endorsed thereon the appropriate notice
contained in this Article V.
ARTICLE VI
IMPROPER TRANSFER; REMEDIES
6.01. IMPROPER TRANSFER. No Transfer of any of the Shares, or any
interest therein (whether voluntarily, by operation of law, or pursuant to any
order or decree of any court) shall be effective unless made pursuant to the
provisions of this Agreement.
6.02. REMEDIES.
a. Shares subject to this Agreement are not readily marketable,
and, for that reason and other reasons, the parties will be irreparably
damaged if this Agreement is not specifically enforced. In this regard,
the parties declare that it is impossible to measure in money the damages
that will accrue to a person having rights under this Agreement by reason
of a failure of another to perform any obligation under this Agreement.
Therefore, this Agreement shall be enforceable by specific performance or
any other equitable remedy. If any person shall institute any action or
proceeding to enforce the provisions of this Agreement, any person subject
to this Agreement against whom such action or proceeding is brought hereby
waives the claim or defense that the person instituting the action or
proceeding has an adequate remedy at law, and no person shall in any action
or proceeding put forward the claim or defense that an adequate remedy at
law exists. Should any dispute concerning the transfer of Shares arise
under this Agreement, an injunction may be issued restraining the transfer
of such Shares pending the determination of such dispute.
b. Should any Shareholder Transfer any of its Shares contrary
to the terms of this Agreement but the transferee is a bona fide purchaser
without notice
- 9 -
<PAGE>
of the restrictions on the Shares, then the other Shareholders shall
have the option, exercisable pro rata by written notice within one year
after such other Shareholders receive actual notice of such transfer, to
purchase such Shares from the holder thereof at the price and on the
terms at which the same were sold or otherwise transferred.
ARTICLE VII
MISCELLANEOUS
7.01. FURTHER ASSURANCES. Any Shareholder or estate of a deceased
Shareholder shall execute such evidences of transfer, receipts and/or releases
as shall reasonably be required by for the protection of all parties concerned
and to carry out the intent of this Agreement.
7.02. NOTICES. Any and all notices, offers, demands or elections
required or permitted to be made under this Agreement or by law shall be in
writing, signed by the party giving such notice, and delivered personally or
sent by overnight delivery by a reputable courier system with proof of delivery,
or by registered or certified mail, to the other party at the address set forth
on the signature page(s) hereof, or at such other address as the other party may
hereafter designate in writing. The date of personal delivery or five (5) days
following the date of mailing, as the case may be, shall be the date of such
notice. Any notice to the Corporation shall be conspicuously marked on the face
thereof: "Attention: President."
7.03. BINDING EFFECT/ASSIGNMENT. This Agreement shall be binding upon
the parties, their heirs, legal representatives, successors and assigns. No
party to this Agreement shall have the right to assign this Agreement or any
interest herein or under this Agreement, without the prior written consent of
the other party.
7.04. GOVERNING LAW. This Agreement shall be construed and governed
under and by the laws of the State of Delaware.
7.05. SEVERABILITY. In the event any provision, clause, sentence, phrase
or word hereof, or the application thereof in any circumstances, is held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
the validity or enforceability of the remainder hereof, or of the application of
any such provision, sentence, clause, phrase or word in any other circumstance.
7.06. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
and all such counterparts together shall constitute one and the same contract,
which shall be sufficiently evidenced by any such original counterparts.
- 10 -
<PAGE>
7.07. HEADINGS; GENDER. The paragraph headings hereof are for
convenience of reference only and shall not be construed as being a part of this
Agreement. All pronouns and any variations thereof refer to the masculine,
feminine or neuter gender, and the singular or plural number, as the context
requires.
7.08. ENTIRE AGREEMENT. This Agreement expressly supersedes the Second
Amended and Restated Shareholders' Agreement dated as of December 15, 1997 and
represents the entire agreement of the parties with respect to the subject
matter hereof, and shall not be amended, modified or changed except by written
instrument executed by all other parties hereto.
IN WITNESS WHEREOF, each of the Corporation and the Shareholders has caused
this Agreement to be executed by its duly authorized representative, as of the
date and year first above written.
CORPORATION:
ILD TELESERVICES, INC.
By: /s/ Dennis J. Stoutenburgh
--------------------------------------
Dennis J. Stoutenburgh
Title: President
[CORPORATE SEAL]
SHAREHOLDERS:
INTELLICALL, INC.
By: /s/ John Carradine
--------------------------------------
Title: Chief Financial Officer
-----------------------------------
[CORPORATE SEAL]
ADDRESS:
---------------------------------
------------------------------------------
[Signatures Continued on Following Page]
- 11 -
<PAGE>
TRIAD-ILD PARTNERS, L.P.
By: Triad-ILD, Inc., Its General Partner
/s/ Michael F. Lewis
--------------------------------------------
Michael F. Lewis, President
[CORPORATE SEAL]
ADDRESS: 13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
MORRIS TELECOMMUNICATIONS, LLC
By: /s/ Edward Brooks
-----------------------------------------
Title: VP/CFO
--------------------------------------
[CORPORATE SEAL]
ADDRESS: 27 Abercorn St.
------------------------------------
Savannah, Ga. 31401
---------------------------------------------
TRIAD-ILD PARTNERS II, L.P.
By: Triad-ILD, Inc., Its General Partner
/s/ Michael F. Lewis
---------------------------------------------
Michael F. Lewis, President
ADDRESS: 13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
[Signatures Continued on Following Page]
- 12 -
<PAGE>
MCFARLAND
By: /s/ Reginald P. McFarland
--------------------------------------
Reginald P. McFarland
ADDRESS:
---------------------------------
------------------------------------------
TRIAD-ILD PARTNERS III, L.P.
By: Triad-ILD, Inc., Its General Partner
/s/ Michael F. Lewis
------------------------------------------
Michael F. Lewis, President
ADDRESS: 13000 Sawgrass Village Circle
Suite 5
Ponte Vedra Beach, Florida 32082
STEPHENS HOLDING COMPANY
By: /s/ C. Ray Gash
--------------------------------------
Title: Vice President
-----------------------------------
[CORPORATE SEAL]
ADDRESS:
---------------------------------
------------------------------------------
CLARK ENTERPRISES, INC.
By: /s/ Robert Flanagan
--------------------------------------
Title: Executive Vice President
-----------------------------------
ADDRESS:
---------------------------------
------------------------------------------
[Signatures Continued on Following Page]
- 13 -
<PAGE>
BOWERS
By: /s/ Nelson E. Bowers
--------------------------------------
Nelson E. Bowers
ADDRESS:
---------------------------------
------------------------------------------
WORLDCOM, INC.
By: /s/ K. William Grothe, Jr.
--------------------------------------
Title: Vice President
-----------------------------------
[CORPORATE SEAL]
ADDRESS:
---------------------------------
------------------------------------------
HOLMES
By: /s/ William K. Holmes
--------------------------------------
William K. Holmes
ADDRESS: 760 Fieldstone Drive
---------------------------------
Macon, Georgia 31210
------------------------------------------
- 14 -
<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 Consolidated
Financial and Operating Data" in such Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected
Consolidated Financial and Operating Data."
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Dallas, Texas
June 23, 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.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Dallas, Texas
June 23, 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.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Dallas, Texas
June 23, 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.
/s/ Smith & Howard, P.C.
SMITH & HOWARD, P.C.
Atlanta, Georgia
June 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 358
<SECURITIES> 0
<RECEIVABLES> 9,111
<ALLOWANCES> 828
<INVENTORY> 0
<CURRENT-ASSETS> 10,812
<PP&E> 5,715
<DEPRECIATION> 112
<TOTAL-ASSETS> 34,496
<CURRENT-LIABILITIES> 11,240
<BONDS> 0
11,196
1
<COMMON> 1
<OTHER-SE> 3,683
<TOTAL-LIABILITY-AND-EQUITY> 34,496
<SALES> 30,349
<TOTAL-REVENUES> 30,349
<CGS> 26,298
<TOTAL-COSTS> 29,227
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,312
<INTEREST-EXPENSE> 463
<INCOME-PRETAX> 659
<INCOME-TAX> 151
<INCOME-CONTINUING> 508
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 508
<EPS-PRIMARY> 55.80
<EPS-DILUTED> 3.08
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S SIX MONTHS ENDED MARCH 31, 1998 FINANCIAL STATEMENTS AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 242
<SECURITIES> 0
<RECEIVABLES> 19,496
<ALLOWANCES> 2,409
<INVENTORY> 0
<CURRENT-ASSETS> 22,145
<PP&E> 7,487
<DEPRECIATION> 659
<TOTAL-ASSETS> 67,911
<CURRENT-LIABILITIES> 26,583
<BONDS> 0
13,196
1
<COMMON> 1
<OTHER-SE> 8,034
<TOTAL-LIABILITY-AND-EQUITY> 67,911
<SALES> 51,743
<TOTAL-REVENUES> 51,743
<CGS> 40,424
<TOTAL-COSTS> 50,712
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,690
<INTEREST-EXPENSE> 867
<INCOME-PRETAX> 164
<INCOME-TAX> 103
<INCOME-CONTINUING> 61
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61
<EPS-PRIMARY> (7.36)
<EPS-DILUTED> (7.36)
</TABLE>
