<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____ to ______
Commission file number 0-18048
SA TELECOMMUNICATIONS, INC.
(Name of small business issuer in its charter)
DELAWARE 75-2258519
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 PROMENADE CENTER, 15TH FLOOR 75080
RICHARDSON, TEXAS (Zip Code)
(Address of principal executive offices)
Issuer's telephone number: (972) 690-5888
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
None N/A
Securities registered under Section 12(g) of the Exchange Act:
COMMON SHARES, $.0001 PAR VALUE PER SHARE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. [X]
Yes [ ]No
Check if there is no disclosure of delinquent filers in response to Section
405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for the fiscal year ended December 31, 1996 were
$35,668,502.
The aggregate market value of the voting stock held by non-affiliates of the
registrant computed by reference to the closing price of the registrant's common
stock at March 27, 1997 was $1.19.
There were 15,668,835 shares of the registrant's common stock outstanding as of
March 27, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report incorporates by reference information in the
definitive Proxy Statement for the Annual Meeting of Stockholders of SA
Telecommunications, Inc. to be held on May 29, 1997 to the extent indicated in
Part III, which definitive Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the registrant's fiscal year
end of December 31, 1996.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
<PAGE>
GLOSSARY
1996 Act Telecommunications Act of 1996, which became law on February 8,
1996.
AT&T AT&T Communications, Inc., an IXC wholly owned by American
Telephone and Telegraph Company which provides interexchange
services and facilities on a nationwide and international basis.
AT&T Decree AT&T Divestiture Decree entered into on August 24, 1982, by
the United States District Court for the District of
Columbia. The AT&T Decree, among other things, ordered AT&T
to divest its wholly owned BOCS from its long lines division
and manufacturing operations and generally prohibited BOCS
from providing long distance telephone service between
LATAs.
BOC Bell System Operating Company - A LEC owned by any of the seven
RBOCS.
Carrier A company engaged in carrying signals or messages for hire.
CLEC Competitive Local Exchange Carrier - a LEC other than a BOC or
GTE.
FCC Federal Communications Commission.
GTE GTE Corporation and its subsidiaries, the largest U.S. based LEC.
Inter-LATA
Service Telephone service originating and terminating between LATAs.
Intra-LATA
Service Telephone service originating and terminating within a single
LATA.
IXC Interexchange carrier - a carrier providing Inter-LATA,
interstate and/or international telecommunications services over
its own switch and transmission facilities or facilities provided
by other interexchange carriers or a combination of both.
LATAs Local Access and Transport Areas - the approximately 200
geographic areas defined pursuant to the AT&T Decree between
which the BOCs were generally prohibited from providing long
distance services prior to the 1996 Act.
Local Exchange A geographic area generally determined by a PUC, in which calls
generally are transmitted without toll charges to the calling or
called party.
LEC Local Exchange Carrier - a company providing local telephone
services. Each BOC is a LEC.
MCI MCI Communications Corp., an IXC which provides interexchange
services and facilities on a nationwide and international basis.
i
<PAGE>
PUC Public Utility Commission - a state regulatory body empowered to
establish and enforce rules and regulations governing public
utility companies and others, such as the companies engaging in
the provision of long distance services or local exchange
services.
RBOC Regional Bell Operating Company - any of the seven regional Bell
holding companies which the AT&T Decree established to serve as
parent companies for the BOCs--NYNEX, Bell Atlantic, Bell South,
Ameritech, US West, Southwestern Bell and Pacific Telesis Group.
SPCOA Service Provider Certificate of Authority.
Sprint Sprint Corporation, an IXC which provides interexchange
services and facilities on a nationwide and international
basis.
Tariff The schedule of rates and regulations set by the communications
common carriers and filed with the appropriate federal and
state regulatory agencies, the published official list of
charges, terms and conditions governing provision of a
specific communications service or facility, which functions
in lieu of a contract between the commercial or residential
customers or other user and the supplier or carrier.
Southwestern
Bell Southwestern Bell Telephone Company, a BOC owned by SBC
Communications, Inc. which provides local exchange services in
Texas, Missouri, Oklahoma, Kansas and Arkansas.
Switched
Reseller A long distance provider which resells the services of other
long distance providers and owns or leases switching
equipment but does not own or lease transmission facilities.
Switchless
Reseller A long distance provider which resells the services of other
long distance providers but does not own or lease any switching
equipment or transmission facilities.
Texas PUC Public Utility Commission of Texas.
WorldCom WorldCom, Inc., an IXC which provides interexchange services and
facilities on a nationwide and international basis.
ii
<PAGE>
SA TELECOMMUNICATIONS, INC. & SUBSIDIARIES
ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business...................................... 1
Item 2. Description of Property...................................... 19
Item 3. Legal Proceedings............................................ 19
Item 4. Submission of Matters to a Vote of Security Holders.......... 20
PART II
Item 5. Market for Common Equity and Related Stockholder Matters..... 20
Item 6. Management's Discussion and Analysis or Plan of Operation.... 23
Item 7. Financial Statements......................................... 34
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure..................................... 35
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange Act... 35
Item 10. Executive Compensation....................................... 35
Item 11. Security Ownership of Certain Beneficial Owners and
Management................................................... 35
Item 12. Certain Relationships and Related Transactions............... 36
PART IV
Item. 13. Exhibits and Reports on Form 8-K............................. 36
Index to Financial Statements............................................... F-1
iii
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION
REFORM ACT OF 1995
This report contains certain forward-looking statements regarding the
Company's business and future financial condition and results of operations
that involve risks and uncertainties, including but not limited to, those set
forth under the section entitled "BUSINESS - SPECIAL CONSIDERATIONS" and
elsewhere in this report and in the Company's other filings with the
Securities and Exchange Commission. Words or phrases such as "will
continue", "anticipate", "expect", "believe", "intend", "estimate", "project",
"plan" or similar expressions are intended to identify forward-looking
statements. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, the Company's actual
results may vary significantly from those indicated.
GENERAL
SA Telecommunications, Inc. is a publicly held holding company which,
through its operating subsidiaries, is a full-service regional interexchange
carrier providing a wide range of domestic telecommunications services
through its network of owned and leased transmission and switching
facilities. As used herein, the term "Company" refers to SA
Telecommunications, Inc. and its subsidiaries, unless the context otherwise
requires.
The Company primarily serves small and medium sized commercial accounts
in the west, southwest and south central United States. A vast majority of
the Company's commercial and residential customers are located in suburban,
secondary and rural markets. In addition to providing "1+" domestic long
distance services, the Company also offers international long distance,
wholesale long distance, operator and wireless services, and other products
such as voice and data private lines, "800/888" services, Internet access and
travel cards. The Company is also an authorized reseller of local telephone
service in Texas and California.
The Company entered the telecommunications business in 1991 through the
acquisition of North American Telecommunications Corporation ("NATC"), a
telecommunications provider offering international long distance
telecommunications services to foreign customers. In 1994 and 1995, the
Company acquired two Texas-based switchless resellers, Long Distance Network,
Inc. ("LDN") of Dallas, Texas, and U.S. Communications, Inc. ("USC") of
Levelland, Texas. During 1996, the Company purchased substantially all of the
assets of First Choice Long Distance, Inc. ("FCLD"), a switched reseller of
long distance telephone services located in Amarillo, Texas. Additionally, in
1996 the Company acquired Economy Communications, Inc. ("Economy"), a
switchless reseller located in McKinney, Texas, and acquired Uniquest
Communications, Inc., ("Uniquest") a corporation engaged in third party
customer verification services and outbound telemarketing.
Effective November 1, 1996, the Company purchased all of the issued and
outstanding capital stock of AddTel Communications, Inc. ("Addtel"), a
switchless reseller of long distance services based in Glendale, California.
At December 31, 1996, a majority of Addtel's revenue was derived from the
provision of wholesale long distance services while its retail customer base
primarily consisted of small and medium sized commercial accounts and
residential customers concentrated in the greater Los Angeles
1
<PAGE>
metropolitan area.
The growth in the Company's initial customer base has been largely the
result of these acquisitions. Also during late 1995 and early 1996, the
Company purchased and installed switches in Dallas, Texas and Phoenix,
Arizona and added leased transmission facilities between these switches and
the operator switch the Company acquired in the USC acquisition. The Company
expanded its network through the acquisition of switching equipment in
Amarillo and Lubbock in connection with the FCLD acquisition. During 1997,
the Company plans to upgrade and move the Amarillo switch to Los Angeles,
California to add leased transmission facilities between this switch and its
other switches.
The Company markets its services in areas in the west, southwest and
south central United States served by its network primarily under the trade
names "USC," "USI," "First Choice Long Distance" and "Southwest Long Distance
Network." The Company also markets its services under the trade name "Addtel"
through agents. The Company currently anticipates future growth will
primarily result from sales and marketing efforts of its direct sales force,
telemarketing, agent sales, mass marketing sales, and from continued
acquisitions of telecommunications companies within its market area or
adjacent thereto.
The Company's Common Stock is traded on the Nasdaq SmallCap Market tier
of The Nasdaq Stock Market ("SmallCap Market") under the symbol "STEL." The
executive offices of the Company are located at 1600 Promenade Center, 15th
Floor, Richardson, Texas 75080, and the telephone number of the executive
offices is (972) 690-5888. The Company was incorporated on December 23, 1988.
SERVICES
DOMESTIC LONG DISTANCE AND RELATED SERVICES. The Company provides its
customers with 24-hour long distance telephone services to all points in the
United States and to any foreign country. The Company's primary services are
switched "1+" domestic long distance service, in-bound domestic "800/888"
service, and domestic travel card service. The Company's "1+" domestic
service is provided through equal access to the network of the LEC with the
Company as the customer's primary long distance carrier. In-bound "800/888"
service allows a customer to receive calls at a specified number from the
general public at no cost to the caller. Travel card service allows an
individual to call another destination while outside of their office or home.
Other offerings include the ability to call foreign countries from domestic
locations (international calling), domestic long distance directory
assistance, the provision of voice and data private line services, dedicated
"1+" domestic long distance service, as well as a domestic operator
assistance service. Customer billing is generated internally for the
Company's "1+" business and is LEC billed through a third party service
provider with respect to operator service and certain mass marketing
programs. Domestic long distance and related services represented
approximately 76% of the Company's revenues in 1994, 92% in 1995 and 95% in
1996. This growth is a result of a primary focus on this segment due to
higher profit margins and network utilization.
The Company's customers can access the Company's network in several
ways. If a customer is located in an area that has been converted to equal
access (meaning that all long distance carriers are provided with equal
access to the respective LEC's network) and that customer has selected the
Company as its primary long distance carrier, access is gained by dialing "1"
plus the area code and number desired. Substantially all of the Company's
customers gain access to the Company's network in this manner. The Company
also provides access to its switches through dedicated access lines which are
private-leased lines
2
<PAGE>
dedicated to one customer. Finally, customers in both equal access areas and
non-equal access areas can access the Company's network by dialing a Company
provided access number. Under its service options, the Company charges its
customers on the basis of minutes of usage at rates that vary with the
distance, duration and/or time of day of the call.
OPERATOR SERVICES. The Company provides operator services to pay telephone
owners, hotels and other persons who provide telephone equipment that is
available to the public. These services consist of assistance in placing long
distance telephone calls, including collect calls or person-to-person calls.
Operator services represented approximately 46% of the Company's revenues in
1994, 22% in 1995, and 11% in 1996. The Company does not anticipate spending
significant additional capital or otherwise devoting the Company's resources
to expanding its operator service business unless an opportunity arises
whereby the margins for such line of business is comparable to the Company's
other products.
WHOLESALE SERVICES. The Company also provides transport and switch services
through its network to resellers of domestic long distance services.
Wholesale services constituted 9% of total revenue in 1994, 4% in 1995, and
increased to 13% in 1996 due to the Addtel acquisition. As a result of the
acquisition of Addtel, the Company presently derives a significant portion of
its revenue from the provision of wholesale long distance services to Star
Telecommunications, Inc. ("Star"). Although the Company believes its
relationship with Star is good, there can be no assurance that the
relationship will continue as presently in effect. Any termination or
significant disruption of the Company's relationship with Star would have a
material adverse effect on the Company's gross revenues but would likely
improve profit margins. In addition, a deterioration in the financial
condition of Star could possibly expose the Company to potentially large
accounts receivable write-offs which would adversely effect the Company's
financial condition and results of operations. The Company plans on phasing
out the wholesale business obtained in the Addtel acquisition by the end of
the second quarter of 1997. Management of the Company believes this seqment
of the business is substantially less profitable than the retail business and
bears a higher credit risk.
INTERNATIONAL CALL BACK. The Company also provides international service
under the GlobalCOM product name to individuals originating long distance
telephone calls from outside the United States. During the fourth quarter of
1996, management of the Company decided to offer the international call back
business for sale, and if such sale was not forthcoming during the second
quarter of 1997, to discontinue these international services by the end of the
second quarter. The revenues from international call back services as a
percentage of total revenues which was 8% in 1995 had already diminished to 5%
of total revenues in 1996 largely as a result of the Company's previous decision
in October 1994 to focus on higher margin domestic telecommunications services.
OTHER TELECOMMUNICATIONS SERVICES. In May 1996, the Company was granted an
SPCOA from the Texas PUC permitting the Company to offer Southwestern Bell
local services on a resale basis to customers within Texas. The Company is
currently test marketing such service in portions of Texas at rates specified
under Southwestern Bell's resale tariff and is negotiating an interconnection
agreement for resale of local services in Texas and other states within the
Company's and Southwestern Bell's overlapping service areas. The Company has
also applied for similar certification in seven of the other states where it
is currently providing long distance services. On February 23, 1996, Addtel
was granted authority to resell local exchange services in California, but is
currently not providing such service. Management of the Company believes that
the resale of local exchange services will be instrumental to the Company in
the future because it will permit the Company to offer local
telecommunications service, together with a variety of long distance
services, to its customers under one invoice.
3
<PAGE>
The Company has also entered into contractual relationships which permit
the Company to offer paging services, Internet access services and to provide
conference calling of other providers.
BUSINESS STRATEGY
The Company's objective is to become the leading regional provider of
domestic telecommunications services by expanding its customer base and
increasing the utilization of its network. The Company plans to achieve this
goal through the implementation of a four point strategy consisting of
acquisitions, internal growth, network expansion and strategic alliances.
ACQUISITIONS. An important part of the Company's growth strategy is to
continue to acquire and integrate telecommunications companies whose customer
base is located in areas contiguous to or overlapping with the Company's
existing service area. The Company will seek to achieve operating
efficiencies as a regional consolidator by increasing customers and
benefiting from compatible call traffic patterns within its targeted
expansion areas in the west, southwest and south central United States. The
Company's ability to effect such acquisitions may be limited by virtue of the
Company's liquidity, the covenants set forth in the Indenture ("Notes
Indenture") with respect to the Company's $27,200,000 principal amount of 10%
Convertible Notes Due 2006 (the "Notes"), the Company's $3,800,000 10%
Convertible Debenture Due 2006 (the "Debenture") and the Company's line of
credit arrangement (the "Greyrock Facility") with Greyrock Business Credit
("Greyrock"). See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
INTERNAL GROWTH. The Company will seek to increase its revenues through the
use of its direct sales force, telemarketing sales, agents and other
marketing techniques such as direct mail and mass marketing to achieve
internal growth. The Company's strategy also seeks to increase its customers'
utilization of its network by promoting the sale of additional or "bundled"
services, such as Internet access, local access and wireless services, and
enhanced services such as voice mail, broadcast fax, and conference calling.
NETWORK EXPANSION. The Company believes that expanding its network will
enable the Company to control the flow of its long distance traffic and to
increase its overall profit margin as well as improve the quality of its
network transmission. The Company monitors traffic patterns on its network,
allowing it to replace variable long distance transport costs with fixed
transport costs when call volumes to particular geographic areas dictate. The
Company's switches utilize software to reduce long distance transport costs
of individual calls.
STRATEGIC ALLIANCES. The Company's growth plans include the exploration of
strategic alliances with product and service providers in the
telecommunications industry primarily inside its present geographic area. The
Company believes that such strategic relationships may enable it to penetrate
new markets, enhance its product offerings or more efficiently utilize its
network. The Company has entered into contractual arrangements with PageMart
Wireless, Inc. to provide paging services to its customer base, Conference
Pros International, Inc. to provide conference call capabilites to its
customers, and Leapfrog Technologies, LLC to provide Internet access through
its "Bitstreet" software product.
PROCESSING OF A LONG DISTANCE TELEPHONE CALL
A long distance telephone call is processed in three basic phases:
origination, transport (long haul) and termination. A call is originated when
a customer first obtains a dial tone provided by such customer's
4
<PAGE>
LEC, either an RBOC or a CLEC. A customer who has chosen a primary long
distance provider may initiate a long distance telephone call by dialing "1"
(plus the area code when necessary) and the telephone number of the person
being called. If a customer has chosen a long distance provider which, like
the Company, is an IXC, or which is a switched reseller, the long distance
call is routed to the switching equipment maintained by that long distance
provider. If the customer has designated a long distance carrier which is a
switchless reseller, the call is routed to a switch owned by the IXC
providing switching service to the switchless reseller. The long distance
provider will pay access charges to the LECs originating and terminating the
call.
The IXC's switch, or point of presence ("POP"), deciphers the call and
switches it to the long distance transmission lines for transport to the
appropriate region of the country. Calls handled by the Company's switches
are routed to the Company's transmission lines, where available, or to the
transmission lines of others, depending upon the destination of the call.
Currently, the Company utilizes various telecommunications carriers to carry
long distance calls that cannot be carried by the Company's own network
facilities.
A long distance call leaves the transport process when it reaches a
switch owned by a LEC providing local access service to the termination
telephone. This switch routes the long distance call onto the LEC's local
access network for termination. For each long distance call, the originating
and terminating LECs receive an access fee from the switched reseller or IXC
providing long distance service to the local customer. A switched reseller or
IXC builds this fee and any termination fees into the fees it charges its
customers for long distance telephone service.
In order to complete a telephone call outside of the area covered by the
Company's network facilities, the Company must utilize transmission
facilities maintained by third parties. The Company pays a fee to these
companies on a usage basis. The Company's switches are capable of routing
calls to the provider of long distance transmission facilities for the call
in question with the least cost to the Company, based upon pre-coded
instructions.
THE COMPANY'S NETWORK
The Company currently operates switching equipment located in Dallas and
Lubbock, Texas and Phoenix, Arizona under capital lease arrangements and an
operator service switch located in Levelland, Texas. During 1997, the
Company plans to upgrade and move the switch formerly located in Amarillo,
Texas to Los Angeles, California. In addition, the Company leases local
access circuits and long distance transmission facilities from various
providers. The local access circuits and transmission facilities connect the
Company's switches with each other and with switching equipment owned by
third parties in other geographic areas. Together, the Company's switches,
local access circuits, and long distance transmission facilities comprise the
Company's network. The Company's transmission facilities between the
Company's switches and the LECs in its market area permit the routing of a
customer's telephone call directly from the LEC's switch to the Company's
switch and ultimately to the destination number. The call can be routed over
the Company's network, to the extent that the Company's long distance
transmission facilities originate and terminate in the appropriate geographic
region, or a combination of the Company's facilities and a third party
provider. Also, the call can be routed completely over a third party provider
based upon a contractual relationship with the Company. Calls which originate
and terminate on the Company's network have a higher gross margin than other
calls because the Company only has to pay origination and termination fees to
the serving LECs and not to another IXC for off-network coverage. The
Company's
5
<PAGE>
digital switches in Dallas, Lubbock and Phoenix and the switch to be
relocated in Los Angeles will permit the Company to route calls to the least
expensive alternative available to the Company.
The Company currently utilizes Siemens Stromberg Carlsen DCO Class
4/Class 5 switches for its network platform. These switches are connected
through leased fiber-optic transmission lines, which are connected to LEC's
tandem switches in LATAs in its target market. The Company's switches are
fully digital and utilize advanced routing systems for enhanced transmission
quality. Siemens switches are used extensively by RBOCs and IXCs because they
are modular, very flexible and easily adaptable.
SALES AND MARKETING
The Company markets its services primarily through four sales channels:
direct sales, agent sales, telemarketing and mass marketing sales. Currently,
the Company directly markets its services from 27 locations situated
throughout the Company's contiguous primary nine state region. The Company
believes it offers comparable products and services generally provided by
national carriers. The Company emphasizes local market representation in both
sales and service in the markets which it serves.
INDUSTRY BACKGROUND
The competitive long distance telecommunications industry in the United
States has evolved principally as the result of the court-ordered divesture
in 1984 by AT&T of its local exchange operations previously performed by
AT&T's 22 operating companies. The AT&T Decree divided the United States into
approximately 200 LATAs and combined these 22 companies into seven RBOCs.
These RBOCs (NYNEX, Bell Atlantic, Bell South, Ameritech, US West,
Southwestern Bell and Pacific Telesis Group) along with other entities such
as GTE and other smaller companies, were given the exclusive right to provide
intra-LATA telephone service, local access service to long distance carriers
and intra-LATA toll service. RBOCs were prohibited from transmitting
inter-LATA telephone calls, which services became the province of long
distance companies which own or lease and operate both switching equipment
and long distance transmission facilities, including AT&T, MCI, Sprint,
WorldCom and other IXCs such as the Company. Other companies offering long
distance service act as resellers for the services of long distance companies
as switchless resellers or switched resellers.
The AT&T Decree, together with a separate court decree ("GTE Decree")
entered in 1984, helped create the foundation for smaller companies, such as
the Company, to emerge as competitive alternatives to AT&T, MCI, Sprint and
WorldCom for long distance telecommunications services. The AT&T Decree
required that the RBOCs provide all IXCs with access to local exchange
service for the purpose of accepting and completing inter-LATA calls. The
access provided must be "equal in type, quality and price" to that provided
to AT&T. In addition, RBOCs are required to maintain a subscription process
that gives a telephone customer the right to select an IXC for carrying such
customer's inter-LATA telephone calls. These so-called "equal access" and
related provisions were intended to prevent preferential treatment of AT&T by
the RBOCs and to regulate charges that the RBOCs could charge the IXCs,
regardless of their volume of traffic. Similar access requirements have been
imposed upon the subsidiaries of GTE, which provide local telephone service,
and upon other independent LECs. Notwithstanding the AT&T Decree, the GTE
Decree and certain FCC regulations, there are limited "nonequal access" areas
in the United
6
<PAGE>
States where local access providers are not required to provide "equal
access" and where the competitive market in long distance services has not
developed to the degree it has elsewhere. Equal access is also not required
for wireless calls. The equal access rules have resulted in IXCs, such as the
Company, being able to offer "1+" dialing (i.e., by dialing "1" (plus the
area code when necessary) and the telephone number of the person being
called) rather than the customer dialing access codes or identification
numbers and codes in order to utilize the Company's long distance telephone
services.
1996 ACT. The 1996 Act is intended to foster additional competition in the
United States domestic telecommunications market. The legislation opened, for
the first time, the local access service market to competition, by requiring
that LECs permit interconnection to their networks and, among other things,
to provide unbundled access, resale, number portability, dialing parity,
access to rights of way and mutual compensation. In effect, the 1996 Act
seeks to foster competition in the local telephone market as the AT&T Decree
and GTE Decree did in the long distance market by requiring LECs to allow the
resale by third parties, of some or all of the services now being provided to
residential and business customers. The legislation also codifies the LECs'
equal access and non-discrimination obligations and preempts inconsistent
state regulation. Finally, the legislation also contains special provisions
which eliminate the AT&T Decree and the GTE Decree, which restrict the RBOCs
and GTE operating companies, respectively, from providing long distance
service and engaging in telecommunications equipment manufacturing. These new
provisions permit RBOCs to enter the long distance market under certain
conditions and to enter into business relationships with IXCs that were
previously prohibited. An RBOC will no longer be restricted from providing
inter-LATA long distance service outside of those markets in which it
provides local access service (referred to as "out-of-region" long distance
service). An RBOC may provide long distance service within the regions in
which it also provides local exchange service (referred to as "in-region"
service) if it satisfies several procedural and substantive requirements,
including obtaining FCC approval. FCC approval is to be granted upon a
showing that (1) facilities-based competition is present in the state in
question, (2) the RBOC has entered into interconnection agreements in those
states in which it seeks long distance relief and (3) the interconnection
agreements satisfy a 14-point "checklist" of competitive requirements, and if
the FCC is satisfied that the RBOC's entry into the long distance market in
question is in the public interest. Before making its ruling the FCC is
instructed to consult with the Department of Justice ("DOJ"), but the FCC is not
bound by recommendations of the DOJ.
The Company believes that the 1996 Act will result in substantial
changes in the marketplace that should be generally favorable for the
Company. Since the 1996 Act seeks to foster greater competition in the
telecommunications industry, the Company believes it will benefit by being
able to offer a wider array of potential products and services formerly not
sold by long distance providers. The Company also believes it will have the
ability to market a full range of local telecommunications services, and to
negotiate favorable agreements with a variety of products for local, long
distance and associated telecommunications services.
Recently, the FCC concluded many months of hearings based on the
implementation of the 1996 Act, and as a result, issued several sweeping
orders, of which the "interconnection" order is most significant. The
"interconnection" order outlined how companies desiring to enter into local
phone markets can "hook up" to RBOCs and GTE and the networks of other LECs.
It also set specific formulas to determine the charges associated with
leasing part of a local network. These formulas outline reductions to the
companies of 17% to 25% below the price of the RBOCs and GTE retail local
phone service for purposes of local resale. The RBOC's and GTE appealed this
order, and in October 1996, they were granted a temporary stay of the FCC
order by the U.S. Court of Appeals. Further, the court suspended key
provisions of the "interconnection" order such as pricing and contract rules.
Furthermore, the court's decision places the oversight of the 1996 Act
7
<PAGE>
back under the jurisdiction of the state PUCs, in which the RBOCs and GTE
have historically enjoyed a more favorable relationship. The FCC is appealing
these rulings to the U.S. Supreme Court, but industry estimates are that this
action will delay local telephone competition.
Also, the FCC has proposed rules to implement the 1996 Act's "universal
fund," which will replace subsidies associated with access charges, but be
paid for by all carriers, including the Company. Upon adoption of these
proposed rules in 1997, the Company currently expects a reduction in the
average per minute access charges it now pays the RBOCs and GTE in the
Company's region.
COMPETITION
The domestic long distance telecommunications industry is highly
competitive, and the Company expects it to remain so for the foreseeable
future. As a result of the AT&T Decree, numerous competitors entered the
domestic long distance telecommunications market, resulting in, among other
things, a significant drop in the consumer or retail price of long distance
service. The 1996 Act can be expected to increase competition in the domestic
long distance market as the RBOCs begin providing both in region and out of
region long distance service. The Company competes directly with other IXCs
and with resellers of long distance service, some of which have substantially
greater financial, marketing and product development resources than the
Company. The larger IXCs are obtaining financing from large foreign
telecommunications carriers seeking to enter the United States, such as
British Telecom's acquisition of MCI and the investments in Sprint by
Deutsche Telecom and France Telecom.
In recent years, increased competition among long distance carriers has
resulted in an overall reduction in the retail price of long distance
service. At the same time, technological change and the rapid expansion of
circuit capacity in the United States as a result of the installation of
fiber-optic transmission facilities have resulted in increased efficiency of
the long distance network, also contributing to the declining prices. The
Company's target market, primarily small and medium sized businesses, is
believed by the Company to be motivated by cost in its choice of a long
distance provider as well as such additional factors as local presence,
customer service and flexible billing programs.
The 1996 Act is expected to result in the entry of new competitors,
including some or all of the RBOCs, into the domestic long distance market.
It is not clear whether the RBOCs will build their own national networks,
lease facilities from others or acquire smaller domestic long distance
service providers. To the extent that the RBOCs enter the domestic long
distance market by acquiring other IXCs, the domestic long distance service
industry can be expected to consolidate, resulting in increased competition
for the Company from a relatively small number of very large, nationwide
providers. No assurance can be given that the Company will be able to
compete effectively with the RBOCs or other owners of nationwide long
distance networks.
The Company believes that customer attrition is common in the long
distance and operator services industries. Although the Company has not
experienced significant attrition in its various businesses, the Company's
historical levels of customer attrition may not be indicative of future
attrition levels, and there can be no assurance that any steps taken by the
Company to counter increased customer attrition would accomplish the
Company's objectives.
8
<PAGE>
EMPLOYEES
At December 31, 1996, the Company employed 265 individuals on a
full-time equivalent basis and 20 part-time employees. As of the date Addtel
was acquired, Addtel had 63 full time employees and one part time employee.
None of the Company's employees is represented by a labor union. The Company
considers its relations with its employees to be good and has not experienced
any interruption of operations as a result of labor disagreements. The
Company's future success will depend on its ability to attract, motivate and
retain highly skilled employees.
GOVERNMENT REGULATION
The Company's domestic long distance telephone business is subject to
regulation at the federal level by the FCC and at the state level by PUCs of
the various states in which the Company operates. Pursuant to regulation by
the FCC, the Company's international business must maintain compliance in
jurisdictions where the Company services foreign customers.
The FCC has regulatory jurisdiction over interstate and international
telecommunications common carriers, like the Company. Under Section 214 of
the Federal Communications Act, the FCC must certify a communications common
carrier before it may provide international services. The Company's
subsidiaries, Addtel, LDN, USC and NATC, have obtained Section 214
authorization to provide international switched services by means of resale.
The FCC has ruled that "non-dominant" common carriers, like the Company, need
not apply for Section 214 authorization for the provision of domestic U.S.
interstate services.
In addition to its certification as a long distance carrier, the Company
is an authorized reseller of local exchange service in Texas and California.
The Company has also filed application to offer local exchange services in
the seven other states in its service area.
Prior to November 1995, AT&T was classified as a "dominant" carrier for
certain domestic long distance and long distance related services. As a
result, AT&T was limited in its ability to change its pricing for these
services or to discriminate among customers other than by reasons of
specifically described volume levels and categories of service. In November
1995, the FCC terminated AT&T's status as a "dominant" carrier for the
following domestic services: commercial and residential, operator, "800,"
directory assistance, private line services. As a result, AT&T is on a level
playing field with other non-dominant carriers such as the Company with
respect to its ability to change prices quickly to meet competition. As a
non-dominant carrier, AT&T also will no longer have to submit cost support
data with certain of its tariff filings. In addition, AT&T will no longer
have to file carrier-to-carrier contracts and will be relieved of certain
annual reporting requirements and will automatically be authorized to extend
service to any domestic point. As a result of AT&T's new status as a
non-dominant carrier, AT&T will be able to more rapidly respond to
competitive conditions in the long distance market, including price and
service innovations implemented by other non-dominant carriers such as the
Company. AT&T will also be able to implement service agreements with other
long distance service providers, such as the Company and its competitors, on
a case by case basis, depending upon competitive conditions at the time of
negotiation. AT&T is also building a wireless local loop network to avoid
the payment of access charges which could result in the Company incurring
costs that AT&T can avoid.
An issue under consideration by the FCC which is of potential
significance to the Company is that of "Billed Party Preference," or BPP.
This term refers to a concept in which any long distance call outside
9
<PAGE>
the local telephone company's calling area carried from a publicly available
telephone would be completed over the long distance carrier network of the
billed party's previously expressed preference. If such a system were
implemented successfully, the market niche of operator services, such as that
of the Company, would be rendered ineffectual, because an owner of publicly
available telephones would be unable to direct operator assisted calls over
the network of such owner's desired carrier. The Company derives revenues
from such "payphone" business wherein the Company is the desired carrier of
the pay telephone owner. Under the 1996 Act, LECs are required to implement
local number portability in the 100 largest Metropolitan Statistical Areas
(MSA) between October 1, 1997 and December 31, 1998. Because the technology
necessary to implement local number portability is similar to that proposed
for implementation of BPP, the FCC has indicated that it considers the
incremental investment necessary to implement BPP after the commencement of
local number portability to be insignificant. Therefore, the Company believes
that if BPP is ever required, it is not likely to be implemented until some
point after December 31, 1998. As an interim measure, the FCC has proposed to
require operator service providers to verbally disclose the applicable
charges to consumers before connecting a call if they charge rates greater
than certain benchmarks. The FCC has ordered all long distance companies,
including the Company, to pay per call compensation to pay phone owners for
calls initiated by 800 numbers or access codes rather than by the depositing
of coins.
The regulation of the telecommunications industry is changing rapidly,
and the regulatory environment varies substantially from state to state. FCC
regulatory actions have had, and are expected to continue to have, both
positive and negative effects upon the Company. Decisions by the FCC with
respect to the permissible business activities or pricing practices of the
Company's dominant competitors, such as AT&T, may also have an adverse impact
on the Company's operations. Moreover, any significant change in regulations
by state governmental agencies could significantly increase the Company's
costs or otherwise have an adverse effect on the Company's activities and on
any future expansion efforts.
As a result of the 1996 Act, the RBOCs will be permitted to enter into
the out-of-region long distance market immediately and will be able to enter
the in-region long distance market subject to FCC approval. There is expected
to be no uniformity in the RBOCs' approach to entering in-region or
out-of-region service, although eventually it is likely that one or more of
the RBOCs will provide long distance service throughout their respective
in-region markets and nationally. Importantly for the Company, the 1996 Act
defines in-region service to include every state, in its entirety, in which
the RBOC provides local exchange service, even if the RBOC is not the
incumbent local service provider in all parts of that state. Southwestern
Bell (Texas, Oklahoma, Kansas and Arkansas), US West Communications (New
Mexico, Colorado and Arizona), Bell South (Louisiana) and Pacific Telesis
Group (California) are the principal RBOCs serving the states in which the
Company's customers are concentrated. Operating subsidiaries of GTE also
provide local exchange service in portions of Texas, New Mexico and Arkansas.
It can be anticipated that some or all of these RBOCs will establish switches
and transmission facilities competitive with those of the Company, to the
extent that they have not already done so in connection with other business
activities (such as cellular telephone services). Other RBOCs may seek to
enter out of region markets by entering into business relationships or
acquiring IXCs such as the Company. In addition, although the 1996 Act
provides for certain safeguards to protect against anti-competitive abuse by
the RBOCs, it is unknown whether these safeguards will provide adequate
protection and the impact of anti-competitive conduct on the Company, if such
conduct occurs, is uncertain.
In addition to the 1996 Act, a variety of other regulatory approaches
are being considered by state and federal authorities with regard to
deregulating local access services. Competitive access providers have
installed local networks in many parts of the country, primarily large urban
areas, that allow subscribers to route their long distance traffic directly
to a designated IXC, thereby bypassing the LEC. In certain
10
<PAGE>
instances, the LECs have been afforded a degree of pricing flexibility in
differentiating among markets and carriers in setting access charges and
other rates in areas where adequate competition has emerged. CLECs, which
exist in an expanding number of the Company's markets, are currently
providing more competitive access and termination charges to IXCs than LECs.
As LECs become free to set rates and to discriminate between customers, the
ability of IXCs which are larger than the Company to obtain volume discounts
for access and termination charges could adversely affect the Company by
reducing the operating costs of its larger competitors relative to those of
the Company. In particular, it is expected that the largest players in the
long distance market, such as AT&T, MCI, Sprint and WorldCom will be able to
guarantee substantially larger volumes to LECs than will the Company. As
deregulation of the local exchange market occurs, LECs may be willing to
grant large IXCs significant discounts in return for guarantees of volume.
There can be no assurance that the Company will be able to obtain similar
discounts.
The FCC is currently considering action on various proposals that may
have an impact on the Company. Recent developments include implementation of
the 1996 Act discussed above; action by the FCC or PUCs changing access rates
charged by LECs and making other related changes to access and
interconnection policies, certain of which could have material adverse
consequences for the Company; related FCC and state regulatory proceedings
considering additional deregulation of LEC access pricing; a pending FCC
rulemaking on BPP as described above that could adversely affect the
Company's provision of operator services; and various legislative and
regulatory proceedings that could result in new local exchange competition.
Under recently adopted regulations, the Company has the option to
maintain its domestic tariffs on file at the FCC. At the end of an
FCC-prescribed transition period ending September 22, 1997, non
dominant-carriers, such as the Company, are required by the FCC to cancel
their domestic tariffs. In February 1997, the U.S. Court of Appeals for the
District of Columbia Circuit stayed the FCC's order requiring mandatory
detariffing for domestic interstate long distance service. Management of the
Company believes that the Court's action will likely delay or alter the
impact of the FCC's order requiring long distance carriers to remove their
FCC tariffs for domestic interstate service by September 22, 1997. Mandatory
detariffing would require the Company and other carriers to enter into
individual contracts with long distance customers regarding the rates and
terms of its service, including limitations on liability.
The Company must contract with other IXCs providing long distance
service to the Company where the Company does not maintain its own network
facilities. High volume customers such as the Company, may be able to utilize
such IXCs, tariffs or contracts which provide discounted long distance rates.
These tariffs or contracts are generally available to any similarly situated
customer; however, since customer needs may vary substantially, contracts
created specifically for a customer may have little utility to others. The
Company believes that it has been successful in negotiating contracts with
IXCs to terminate calls outside of the areas covered by its network at
advantageous rates. These contracts generally have a term of one year or more
and can be extended by mutual agreement. No IXC is under any obligation to
structure tariffs or contracts specifically for the Company, and there can be
no assurance that tariffs or contracts created for other customers will meet
the Company's needs in the future.
The Company will need to comply with the applicable laws and obtain the
approval of the regulatory authority of each state and country in which it
provides or proposes to provide telecommunications services. The laws and
regulatory requirements vary in these jurisdictions. Some have
11
<PAGE>
substantially deregulated various communications services, while other
jurisdictions have maintained strict regulatory regimes. The application and
tariff procedures can be time-consuming and costly, and terms of licenses
vary for different jurisdictions.
SPECIAL CONSIDERATIONS
In addition to the other information contained in this report, readers are
urged to carefully consider the following factors related to the Company. See
"SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES LITIGATION
REFORM ACT OF 1995."
LOSSES FROM CONTINUING OPERATIONS; LIMITED HISTORY OF OPERATIONS
The Company has experienced significant losses from continuing
operations since its inception, with such losses of approximately $1,819,000,
$1,935,000 and $5,382,000 for the fiscal years ended December 31, 1994, 1995
and 1996, respectively. The Company expects to continue to incur losses from
continuing operations in the future as it pursues its plans to make
acquisitions and expand its network, customer base and product offerings.
There can be no assurance that such losses will not continue indefinitely.
The Company did not enter into the retail domestic telecommunications
business until 1994 and has since grown through a series of acquisitions
culminating with the latest acquisition of Addtel, effective November 1,
1996. In addition, the Company has transformed itself from a switchless
reseller to a switched and transmission facilities based IXC. As a result,
there is limited historical financial information about the Company's
business of providing domestic long distance telecommunications services upon
which to base an evaluation of the Company's performance. The development of
the Company's business and the expansion of its network, customer base and
product offerings will require significant expenditures. Certain of these
expenditures, including marketing, sales and general and administrative
costs, are expensed as incurred while other expenditures, including goodwill
associated with acquisitions, network design costs and costs to obtain legal
and regulatory approval, are deferred and expensed over a period of time. The
Company will continue to incur significant expenditures in connection with
the growth of its business, including expenses associated with acquisitions,
capital costs associated with expanding the Company's network, and sales,
marketing and other expenses associated with expanding the Company's customer
base and product offerings.
In light of the Company's limited history of operating as a regional
IXC, its history of losses from continuing operations and its expectation
that it will continue to incur significant expenses and such losses for the
foreseeable future, there can be no assurance that the Company will be able
to implement its growth strategy, achieve or sustain profitability or
generate sufficient cash flow to service its debt.
SUBSTANTIAL LEVERAGE
The Company has not, since its inception, generated earnings adequate to
cover its fixed charges. Semi-annual cash interest payments of $1.6 million
will be due on the Notes and the Debenture. As of December 31, 1996, the
Company's total amount of debt outstanding was $29.8 million (including the
Notes) and the Company had shareholders' equity of $6.3 million. As of March
26, 1997, the Company has outstanding an additional $1.9 million principal
amount of indebtedness under the Greyrock Facility and $3.8 million on the
Debenture issued on March 25, 1997. The Company expects to incur additional
indebtedness in the future. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION."
12
<PAGE>
Because the Company historically has experienced operating cash flow
deficits, its ability to make cash interest payments on the Notes and
Debenture and to repay its obligations on the Notes and the Debenture at
maturity will be dependent on developing one or more sources of significant
cash flow prior to the date on which cash interest obligations are due on the
Notes and Debenture. As a result, the Company may seek to (i) refinance all
or a portion of the Notes and Debenture, (ii) invest in companies or assets
that will provide substantial cash flow or (iii) sell equity through public
or private offerings or to strategic business partners willing to acquire an
interest in the Company or its businesses. There can be no assurance that (i)
the Company will be able to refinance the Notes and Debenture, (ii) there
will be a market for the debt or equity securities of the Company in the
future, or (iii) the Company will be able to locate and acquire companies or
assets that will generate substantial cash contributions to the Company prior
to the time that cash interest payments are due on the Notes and Debenture or
prior to maturity of the Notes and Debenture.
INDENTURE AND DEBENTURE COVENANTS RESTRICTING ADDITIONAL INDEBTEDNESS.
The Company's operating cash flow could be affected by provisions of the
Debenture and the Notes Indenture with respect to the Notes, which restrict
the Company and its subsidiaries from incurring (i) certain indebtedness
other than Additional Permitted Indebtedness (as herein defined), and (ii)
subordinated indebtedness that matures or requires any mandatory prepayment
of principal prior to 120 days after the final maturity of the Notes and
Debenture other than subordinated indebtedness incurred in acquisitions.
Under the Debenture and the Notes Indenture, "Additional Permitted
Indebtedness" means any indebtedness incurred by the Company or its
subsidiaries, as the same may be amended, modified, renewed, refunded,
replaced or refinanced from time to time, where the aggregate principal
amount of borrowings available or indebtedness outstanding thereunder does
not exceed (i) 85% of the consolidated inventory and accounts receivable
(excluding accounts receivable subject to third party accounts receivable
billing arrangements or overdue for more than 90 days) of the Company and its
subsidiaries determined on a pro forma basis as if any acquisition or
disposition of stock or assets to be made on or about the time of any
required calculation of Additional Permitted Indebtedness had occurred plus
(ii) the product of (a) consolidated revenues of the Company and its
subsidiaries for the most recent six-month period for which financial
statements are available, calculated in accordance with generally accepted
accounting principles (except for the absence of footnotes and subject to
normally recurring year-end audit adjustments) and determined on a pro forma
basis as if any acquisition or disposition of stock or assets had occurred at
the beginning of such six-month period and (b) 2/3. As of December 31, 1996,
the Company would have been entitled to incur $24.7 million Additional
Permitted Indebtedness, which amount would be reduced by indebtedness
outstanding from time to time under the Greyrock facility and the Debenture.
An Incurrence Event will occur if indebtedness other than Additional
Permitted Indebtedness is incurred when the average closing sale price of the
Common Stock is less than $2.00 per share for the twenty trading days prior
to the incurrence of such indebtedness (the "$2 Minimum Threshold") and the
Company's Pro Forma Interest Coverage (as defined in the Notes Indenture and
the Debenture) is less than 2.0 to 1. Upon an Incurrence Event, each holder
of Notes and the Debenture has the right, at the holder's option, to require
13
<PAGE>
the Company to repurchase all or a portion of such holder's Notes and
Debenture within a certain time period at a price equal to 100% of the
principal amount of the Notes and Debenture, respectively, plus accrued
interest to the repurchase date. The Company does not currently meet the Pro
Forma Interest Coverage test and since January 10, 1997 has not met the $2
Minimum Threshold. The Company does not anticipate meeting the Pro Forma
Interest Coverage test in the foreseeable future. There can be no assurances
that the price of the Company's Common Stock will increase to equal or exceed
the $2 Minimum Threshold permitting the Company to incur additional
indebtedness, or that if the price equals or exceeds such threshold, the
price will not again fail to meet such $2 Minimum Threshold. Moreover, should
the Company ever be required to repurchase the Notes and the Debenture, there
can be no assurance that the Company will have adequate liquidity to fulfill
such obligations. If the Company failed to pay the repurchase price on the
due date after triggering an Incurrence Event, such failure would result in
an event of default under the Greyrock Facility. SEE "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
AVAILABILITY OF GROWTH OPPORTUNITIES
The Company has in the past made certain acquisitions and contemplates
making additional acquisitions in connection with implementing its business
strategy. Execution of the Company's business strategy will involve locating
businesses meeting the Company's acquisition criteria, negotiating
commercially reasonable terms therefor and integrating those businesses with
operations of the Company following acquisition. The Company can be expected
to seek to acquire additional customers in its existing markets and in
adjacent or related markets. However, depending upon the circumstances and
the evolution of the telecommunications market, the Company may make
acquisitions in geographic areas or markets outside of the Company's
historical focus on suburban, secondary and rural markets in the west,
southwest and south central United States. The Company has made and may make
in the future acquisitions for cash, debt securities, equity securities
(including the Company's Common Stock) or combinations thereof. The Company's
ability to effect such acquisitions may be limited by availability of funds
and by virtue of the covenants set forth in the Debenture and the Notes
Indenture. There can be no assurance that the Company will be able to locate
a sufficient number of acquisition targets, that once located, the Company
will be able to acquire such entities on a commercially reasonable basis or
that upon acquisition the Company will be able to successfully integrate the
acquired entity's operations with its own. The issuance of equity to effect
or finance such acquisitions would have the effect of reducing the percentage
ownership of the Company held by each pre-acquisition stockholder, and the
incurrence of indebtedness in connection with such acquisitions could
adversely affect the liquidity, results of operations and financial condition
of the Company.
ACQUISITION INTEGRATION; MANAGEMENT OF GROWTH
As a result of implementing its strategy of growth through acquisitions
of regional telecommunications companies, a substantial portion of the
Company's growth in recent years has resulted, and in the future is
anticipated to result, from acquisitions, which involve certain significant
operational and financial risks. Operational risks include the possibility
that an acquisition may not ultimately or timely provide the benefits
originally anticipated by management, while resulting in operating expenses
relating to the acquired business. Financial risks involve the incurrence of
indebtedness and the subsequent need to service such indebtedness or the
utilization of cash or other assets to consummate the acquisition. There can
be no assurance that the Company will be able to accomplish such integration
with the Company's operations as planned, or that the efficiencies and growth
opportunities anticipated as a result of the combination of the
14
<PAGE>
Company and the acquired entities will ever materialize.
The Company has experienced rapid growth in the number of its employees
and the scope of its operations. This growth has resulted in an increased
level of responsibility for both existing and new management personnel. To
manage its growth effectively, the Company will be required to implement and
improve its operating and financial systems and controls and to expand, train
and manage its employee base. As a result, the Company will be dependent upon
its management to manage both the day-to-day operations of the Company as
well as any acquisitions the Company may make. There can be no assurance that
the management, systems and controls currently in place or any steps taken to
improve such management, systems or controls will be adequate for the
Company's needs.
HIGHLY COMPETITIVE INDUSTRY
The telecommunications industry is highly competitive. In addition, as a
result of changing economic and regulatory conditions, both the number and
type of competitors participating in the telecommunications business are
expected to change rapidly in the near future. Many of the Company's actual
competitors (such as AT&T, MCI, Sprint, WorldCom and others) and potential
competitors (such as RBOCs, electric and gas utilities, cable television
providers, large data processing companies and others) have financial,
personnel and other resources substantially greater than those possessed by
the Company. Many of these entities have or can be expected to acquire
telecommunications networks having greater geographic scope than the
Company's network. The continuing trend toward consolidation and strategic
alliances in the telecommunications industry, together with recent and
anticipated regulatory changes could give rise to significant new competitors
to the Company.
REGULATORY AND LEGISLATIVE UNCERTAINTY
The Company is currently subject to federal and state government
regulations relating to its long distance telephone service and local
exchange service. The Company's activities are regulated by the "FCC and the
PUCs of the various states in which the Company operates. FCC regulatory
actions have had, and are expected to continue to have, both positive and
negative effects on the Company. The Company's international service is also
regulated by the FCC and is further regulated by jurisdictions in which the
Company services foreign customers. Regulatory actions by applicable
authorities have had both positive and negative effects on the Company's
business and can be expected to continue to do so.
The Company is regulated at the federal level by the FCC and is
currently required to maintain domestic and international tariffs for its
services containing the rates, terms and conditions of service. The recent
FCC order not requiring maintenance of domestic tariffs at the federal level
has been stayed by court action. The Company is required to maintain a
certificate, issued by the FCC, in connection with its international
services. The intrastate telecommunications operations of the Company are
also subject to various state laws and regulations, including prior
certification, notification or registration requirements. The Company
generally must obtain and maintain certificates of public convenience and
necessity from regulatory authorities in those states in which it offers
service. In most of these jurisdictions, the Company must file and obtain
prior regulatory approval of tariffs for intrastate services. In addition,
the Company must update or amend its tariffs and, in some cases, the
certificates of public convenience and necessity when rates are adjusted or
new products are added to the long distance service offered by the Company.
Any failure to maintain proper certification or tariffing could have a
material adverse effect on the Company's results of operations and could
result in the Company losing the ability to conduct business in one or more
15
<PAGE>
jurisdictions. The FCC, the numerous state agencies and foreign governments
impose prior approval requirements on transfers of control and assignments of
regulatory authorizations. There can be no assurance that the FCC or any
other regulatory authority will not raise material issues with regard to the
Company's compliance with applicable regulations or that regulatory
authorities will not have a material adverse effect on the Company.
The 1996 Act is designed to increase competition in the domestic
telecommunications market by removing barriers previously imposed on
providers desiring to enter the local access service market. The 1996 Act
also removes restrictions to permit the RBOCs and GTE operating companies to
provide long distance service and engage in the manufacturing of
telecommunications equipment. As a result of the 1996 Act, the Company is
likely to face competition from RBOCs seeking to provide out-of-market
services within the portions of the west, southwest and south central United
States in which the Company operates. Bell Atlantic has already announced plans
to provide out of region long distance service within the state of Texas.
Depending on the exact nature and timing of entry by U.S. West, Southwestern
Bell and other LECs into the in-region long distance market, competition from
those companies could have a material adverse effect upon the Company's
results of operations. Southwestern Bell (Texas, Oklahoma, Kansas and
Arkansas), U.S. West Communications (New Mexico, Colorado and Arizona),
Pacific Telesis Group (California) and Bell South (Louisiana) are the
principal RBOCs serving the states in the Company's geographic area.
Operating subsidiaries of GTE also provide local exchange services in
portions of Texas, New Mexico and Arkansas. It can be anticipated that some
or all of these RBOCs will establish transmission facilities competitive with
those of the Company, to the extent that they have not already done so in
connection with other business activities (such as cellular telephone
services). Other RBOCs may seek to enter out-of-region markets by entering
into business relationships or acquiring IXCs such as the Company. In
addition, although the 1996 Act provides for certain safeguards to protect
against anti-competitive abuse by the RBOCs, it is unknown whether these
safeguards will provide adequate protection and the impact of
anti-competitive conduct on the Company, if such conduct occurs, is
necessarily uncertain.
The 1996 Act also addresses a wide range of other telecommunications
issues, some of which will potentially impact the Company's operations,
including the payment of surcharges for dial around calls, the payment of
universal service support discounts on long distance rates charged to
hospitals, schools and libraries; the elimination of equal access for all
wireless telephones; a sunset provision pertaining to when safeguards
designed to prevent the RBOCs from capitalizing on their local exchange
monopolies will cease to apply; provisions pertaining to regulatory
forbearance by the FCC; the imposition of liability for the unauthorized
switching of customers' long distance carriers; the creation of new
opportunities for competitive local service providers; and requirements
pertaining to the treatment and confidentiality of subscriber network
information. It is unknown at this time what impact such legislation and any
proposed or final regulations promulgated pursuant to such legislation will
have on the Company, if any.
In addition to the 1996 Act, a variety of other regulatory approaches
are being considered by state and federal authorities with regard to
deregulating local access services. CLECs have installed local networks in
many parts of the country, primarily large urban areas, that allow
subscribers to route their long distance traffic directly to a designated
IXC, thereby bypassing the LEC. In certain instances, the LECs have been
afforded a degree of pricing flexibility in differentiating among markets and
carriers in setting access charges and other rates in areas where adequate
competition has emerged. CLECs, which exist in an expanding number of the
Company's markets, are currently providing more competitive access and
termination charges to IXCs than LECs. As LECs become free to set rates and to
discriminate between customers, the ability of IXCs which are larger than the
16
<PAGE>
Company to obtain volume discounts for access and termination charges could
adversely affect the Company by reducing the operating costs of its larger
competitors relative to those of the Company. In particular, it is expected
that the largest players in the long distance market, such as AT&T, MCI,
Sprint and WorldCom will be able to guarantee substantially larger volumes to
LECs than will the Company. As deregulation of the local exchange market
occurs, LECs may be willing to grant large IXCs significant discounts in
return for guarantees of volume. There can be no assurance that the Company
will be able to obtain similar discounts.
TECHNOLOGICAL CHANGE AND NEW SERVICES
The telecommunications industry has been characterized by rapid
technological change, frequent new service introductions and evolving
industry standards. The Company believes that its future success will depend
on its ability to anticipate such changes and to offer market responsive
services that meet these evolving industry standards on a timely basis. The
effect of technological change upon the Company's business cannot be
predicted and there can be no assurance that the Company will have sufficient
resources to make the investments necessary to acquire new technology or to
introduce new services to satisfy an expanded range of customer needs.
RISKS RELATING TO DEVELOPMENT OF A LONG DISTANCE NETWORK
The Company's business strategy includes the continued development of
its long distance network. In connection with such development, the Company
expects to acquire or lease additional switching equipment and dedicated
transmission lines. There can be no assurance that the Company will be able
to continue developing its network, or, if it does so develop its network,
that such development will be beneficial to the Company. In acquiring or
leasing the switching equipment and dedicated transmission lines needed to
develop a long distance network, the Company may incur indebtedness or
utilize substantial portions of its cash. In addition, in acquiring such
equipment and lines, the Company will incur additional fixed operating costs.
There can be no assurance that the Company will be able to profitably utilize
additional equipment or transmission lines. The Company's success will
depend, in part, on its ability to manage the continued expansion of its long
distance network. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION."
CAPITAL INTENSIVE INDUSTRY; INCREASED EXPENDITURES FOR ANTICIPATED EXPANSION
The Company operates in a capital intensive industry and will require
substantial funds to expand its transmission network and to offset the
increased costs associated with anticipated expansion in the Company's
marketing and promotional efforts and the corresponding growth of its
business. The expansion and growth of the Company's business depends
substantially on the ability of the Company to secure sufficient capital
resources to finance its capital expenditures. There can be no assurance,
however, that such financing will be available or, if available, will be on
terms satisfactory to the Company. In addition, implementation of the
Company's expansion strategy may be limited by restrictions in the Debenture
and the Notes Indenture on the Company's ability to effect certain
acquisitions and incur certain indebtedness and certain liens. To the extent
that the Company is unable to increase network capacity to meet the
anticipated growth in demand for the Company's long distance telephone
service, or to maintain product quality and customer service standards while
experiencing such growth, the Company may experience higher levels of
customer attrition resulting in a loss of anticipated revenues. In addition,
due to the increases in the Company's overhead and operating expenses
resulting from the anticipated expansion of its business, the
17
<PAGE>
Company's operating results may be adversely affected if revenues do not
increase to the extent necessary to offset such increased costs. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION--LIQUIDITY AND
CAPITAL RESOURCES."
DEPENDENCE ON THIRD-PARTY TRANSMISSION LINES AND CIRCUITS
A significant factor in the future profitability of the Company is its
ability to transmit its customers' long distance telephone calls over
transmission facilities leased from others on a cost effective basis. The
Company leases substantially all of its transmission lines and circuits from
third parties. The Company's local and long distance telephone business is
dependent upon lease arrangements, both long-term and short-term, with
others. In addition, the Company's operator services, "800/888" service and
international business are also dependent to some extent upon contractual
arrangements with third parties.
During the quarter ended September 30, 1996 and a majority of the fourth
quarter ended December 31, 1996, the Company experienced delays in obtaining
circuits in New Mexico and, to a lesser extent, Arizona and Colorado. This
delay adversely impacted the Company's gross margins and related
profitability. The Company may in the future experience difficulties in
obtaining circuits as the demand for circuits increases. These circuits,
which must be obtained from the local RBOC, CLEC or a competitive access
provider, enable the Company's network to operate at optimum efficiency by
increasing the number of calls originating and terminating on its network.
Should the lack of available circuits recur, this condition will have a
negative impact on gross profit margin and related profitability because the
Company will be forced to terminate calls off its network at a higher cost
than if terminated on its network. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION." The Company presently believes it has ample access to
lines and circuits as well as additional facilities and services needed to
conduct its business. This ongoing availability cannot be assured.
SERVICE INTERRUPTIONS; EQUIPMENT FAILURES
The Company's business requires transmission and switching facilities
and other equipment to be operational 24 hours per day, 365 days per year.
Long distance telephone companies, including the Company, have on occasion
experienced and may in the future experience temporary service interruptions
or equipment failures, in some cases resulting from causes beyond their
control, including power failures, fires, floods or other natural disasters
at switching facilities, failures caused by unanticipated hardware or
software defects, work stoppages or other personnel related problems. Any
such event experienced by the Company would impair the Company's ability to
service customers and could have a material adverse effect on the Company's
business.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success depends, to a significant extent,
on the efforts and abilities of its senior management. In particular, the
loss of Jack W. Matz, Jr., the Company's Chairman and Chief Executive
Officer, or Paul R. Miller, the Company's President and Chief Operating
Officer, could have a material adverse effect on the Company. In addition,
the Company believes that its success will depend in large part upon its
ability to attract, retain and motivate skilled employees and other senior
management personnel. Although the Company expects to continue to attract
sufficient numbers of such persons for the foreseeable future, there can be
no assurance that the Company will be able to do so. In addition, because the
Company may acquire one or more businesses in the future, the Company's
success will be in part
18
<PAGE>
dependent upon its ability to retain and integrate into its own operations
personnel from acquired entities who are necessary to the continued success
or successful integration of the acquired business.
ITEM 2. DESCRIPTION OF PROPERTY.
The executive offices of the Company and its subsidiaries are located in
Richardson, Texas and are leased under a five year term expiring on February
28, 2001 and April 30, 2001. The Company owns its operator services and
customer service facilities in Levelland, Texas, which is subject to a deed
of trust and promissory note having a principal amount outstanding of $94,822
as of December 31, 1996. The Company also owns an office building in Midland,
Texas, which is subject to a deed of trust and vendor's lien note having
$99,376 in principal amount outstanding as of December 31, 1996. The Company
also leases space in Dallas and Lubbock, Texas, Phoenix, Arizona and Los
Angeles, California for the switches which route long distance calls. These
leases expire in September 1, 1997, September 2000, March 31, 1998, and
November 2000, respectively.
In addition, Addtel leases office space in Glendale, California and the
Company leases space for sales offices in Fort Smith, Fayetteville and Little
Rock, Arkansas, Phoenix and Tucson, Arizona, Longmont, Colorado, Topeka,
Kansas, Hammond, Louisiana, Albuquerque, Farmington, Hobbs, Las Cruces and
Roswell, New Mexico, Oklahoma City, Oklahoma, and Amarillo, Big Spring,
Brownfield, El Paso, Euless, Grand Prairie, Lamesa, Levelland, McKinney,
Odessa, Richardson, and Snyder, Texas.
The Company considers its owned and leased properties adequate to meet
its current and reasonably foreseeable needs. The Company believes that
additional or alternative space will be available as needed to accommodate
any expansion.
ITEM 3. LEGAL PROCEEDINGS.
On February 24, 1997, the parties reached a settlement with respect to
the lawsuit filed in the 101st Judicial District Court for Dallas County,
Texas, Cause No. 95-07136-E (SILVIO AVYAM V. SA HOLDINGS, INC. AND NORTH
AMERICAN TELECOMMUNICATIONS CORPORATION), the terms of which are not material
to the Company. As part of such settlement, the this lawsuit and the
criminal complaint filed by Mr. Avyam in Guatemala City, Guatemala against
NATC, Paul Miller and two other NATC employees is in the process of being
dismissed.
The Company filed suit on January 23, 1996 against Dickinson & Co., an
investment banking firm ("Dickinson"), its parent, Dickinson Holding Corp.
and Polish Telephone and Microwave Corporation ("PTMC") in the 298th Judicial
District Court for Dallas County, Texas, Cause No. 96-00768-M (SA
TELECOMMUNICATIONS, INC. F/K/A SA HOLDINGS V. DICKINSON CO. & DICKINSON
HOLDINGS CORP. AND POLISH TELEPHONE AND MICROWAVE CORPORATION). The Company
has alleged, among other claims, that Dickinson intentionally and willfully
breached its fiduciary duty to the Company under its financial consulting
agreement with the Company and that it interfered with the business
relationship between the Company and PTMC in conspiracy with the other two
defendants. The Company is seeking an unspecified amount of actual and
exemplary damages and recovery of attorneys fees. The matter is currently
scheduled for trial on July 1, 1997.
On December 19, 1996, a suit was filed in the Circuit Court of the 20th
Judicial Circuit, St. Clair County, Illinois (THE PEOPLE OF THE STATE OF
ILLINOIS VS. LONG DISTANCE NETWORK, INC.), Cause No. 96CH394.
19
<PAGE>
This is a suit by the Attorney General of the State of Illinois against LDN
alleging violations of Sections 2 and 2DD of the Illinois Consumer Fraud and
Deceptive Business Practices Act ("Consumer Fraud Act") arising out of LDN's
use of an independent agent to solicit long distance customers through the
use of the agent's sweepstakes promotion. The suit states that the Attorney
General has received approximately 26 consumer complaints through December
1996 and basically alleges that Illinois consumers have had their chosen long
distance carrier switched without valid authorization (through
misrepresentation and/or forgery), and that the sweepstakes promotion
constituted an illegal lottery. Plaintiff is seeking among other remedies:
(1) findings that LDN has violated such sections of the Consumer Fraud Act
and assessing a civil penalty in the amount of up to $50,000 per violation if
the court finds LDN engaged in such acts with intent to defraud, and if
without intent to defraud, a single penalty of up to $50,000, (2) a permanent
injunction against such acts and such sweepstakes promotion, (3) a
declaration that all contracts entered into between LDN and Illinois
consumers as a result of such acts be rescinded, (4) full restitution to all
Illinois consumers who paid for telephone charges billed by or on behalf of
LDN as a result of such actions and cancellation of any related charges
assessed against Illinois residents, and (5) costs of prosecution and
investigation. The parties have entered into a stipulation extending the time
for LDN's answer in such suit while the parties are engaged in negotiations
aimed at resolving these matters. The case has been set for trial on May 8,
1997.
The Company is a party, from time to time, in routine litigation
incident to its business. Management believes that it is unlikely that the
final outcome of any of these claims or proceedings to which the Company is
currently a party if determined adverse to the Company would have a material
adverse effect on the Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of fiscal 1996, no matter was submitted by the
Company to a vote of its shareholders through the solicitation of proxies or
otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR COMMON STOCK
The Company's Common Stock is traded on the SmallCap Market under the
symbol "STEL." The table below sets forth the high and low closing sale price
for the Common Stock on the SmallCap Market for the periods indicated. All
price quotations represent prices between dealers, without retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
20
<PAGE>
HIGH LOW
---- ---
CLOSING SALE PRICE
------------------
Fiscal Year Ended December 31, 1995:
First Quarter . . . . . . . . . . . . . . . . $2.32 $1.19
Second Quarter . . . . . . . . . . . . . . . . $2.50 $1.50
Third Quarter. . . . . . . . . . . . . . . . . $2.94 $1.56
Fourth Quarter . . . . . . . . . . . . . . . . $3.03 $1.81
Fiscal Year Ended December 31, 1996:
First Quarter. . . . . . . . . . . . . . . . . $2.59 $2.03
Second Quarter . . . . . . . . . . . . . . . . $3.84 $2.03
Third Quarter. . . . . . . . . . . . . . . . . $3.75 $2.38
Fourth Quarter . . . . . . . . . . . . . . . . $3.38 $1.48
On March 27, 1997, the last reported sale price of the Common Stock as
reported on the SmallCap Market was $1.19 per share and, according to the
Company's transfer agent, there were 463 holders of record of the Common Stock
on such date.
DIVIDENDS
The Company has not declared or paid cash dividends on its Common Stock
since inception. Dividends on the Company's outstanding Series A Stock accrue
at the rate of $.72 per share per annum and are payable in kind in the form
of Series A Cumulative Convertible Stock or in cash. On July 31, 1996, the
Company issued an additional 13,333 shares of Series A Stock to the holders
thereof in connection with the first annual dividend distribution. The
Company anticipates that any income generated in the foreseeable future will
be retained for the development and expansion of its business and the
repayment of indebtedness and therefore does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. The Debenture, the
Notes Indenture and the Greyrock Facility restrict the payment of dividends
in certain cases. Future borrowings, if any, obtained by the Company or any
of its subsidiaries may also prohibit or restrict the payment of dividends or
other distributions. Subject to the waiver of such prohibitions and
compliance with such limitations, the payment of cash dividends on shares of
the Common Stock will be within the discretion of the Company's Board of
Directors and will depend upon the earnings of the Company, the Company's
capital requirements, applicable requirements of the Delaware General
Corporation Law (the "DGCL") and other factors that are considered relevant
by the Company's Board of Directors.
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended December 31, 1996, the Company consummated the
following private placements under Section 4(2) of the Securities Act
of 1933, as amended (the "Securities Act"):
1. In January 1996, 2,942 shares of Common Stock were issued to an accredited
investor in payment of $3,825 of certain placement services rendered by
such accredited investor to the Company.
2. On March 14, 1996, Economy received 26,316 shares of Common Stock in
connection with the acquisition of such corporation's assets by the
Company.
3. On March 18, 1996, two accredited investors purchased an aggregate of
$100,000 principal amount of the Company's 9% Subordinated Convertible
Debentures Due March 18, 1997 (the "March 18 Debentures") for $100,000
cash. The March 18 Debentures were convertible after issuance into
21
<PAGE>
shares of Common Stock at a conversion price equal to the lower of (1) 75%
of the average closing price of the Company's Common Stock for the 5 days
immediately preceding conversion or (2) $1.75.
4. On March 7, 1996, a warrant to purchase 300,000 shares of Common Stock at
an exercise price of $1.40 per share exercisable until March 6, 1998 was
issued to an accredited investor in payment of services rendered by such
accredited investor to the Company. The Company estimates it received
approximately $169,770 of services from this purchaser.
5. On March 7, 1996, a warrant to exercisable into 250,000 shares of Common
Stock at an exercise price of $2.125 per share exercisable until March 6,
1998 was issued to an accredited investor in payment of services rendered
by such accredited investor to the Company. The Company estimates it
received approximately $92,025 of services from this purchaser.
6. On March 25, 1996, the Company entered into a Settlement Agreement with
JLCM pursuant to which the Company issued to JLCM 50,000 shares of Common
Stock in settlement of certain disputes between the Company and JLCM.
The aggregate market value of the Common Stock issued to JLCM on the date
of settlement was $107,812.50.
7. On April 11, 1996, the Company issued to Terry Houston 142,354 shares of
Common Stock in consideration of the early termination of his Employment
Agreement with the Company.
8. On April 25, 1996, the Company issued to Gary White 15,000 shares of Common
Stock of the Company in satisfaction of $25,050 services rendered to the
Company.
9. On May 7, 1996, six accredited investors who held warrants to purchase
Common Stock issued in a September 1995 private placement (the "1995
Warrants") exercised such 1995 Warrants for an aggregate of 1,070,000
shares and paid an aggregate exercise price of $1,337,500 cash. As
consideration for exercising such warrants early, the Company issued to
such holders new warrants exercisable into an aggregate of 1,337,500 shares
of Common Stock at an exercise price of $2.40 per share through May 7,
1998.
10. In June 1996, three accredited investors who held 1995 Warrants exercised
such 1995 Warrants for an aggregate of 20,000 shares and paid an aggregate
exercise price of $25,000.
11. On June 21, 1996, the Company repurchased the following securities for
aggregate consideration of $3,208,500, of which $308,500 was payable in
cash and the rest by the issuance of 843,203 shares of the Company's Common
Stock: (1) notes having an aggregate original principal amount of
$4,250,000, (2) 125,000 shares of Series B Cumulative Convertible Preferred
Stock, and (3) warrants exercisable into an aggregate of 1,050,000 shares
of Common Stock at $1.25 per share. As an incentive for the former USC
shareholders to accept the 843,023 shares of restricted Common Stock as
part of the consideration but to alleviate the concern over the market risk
in the price of the Company's Common Stock, the Company (1) granted demand
registration rights for these shares exercisable between August 31, 1996
and August 31, 1997, (2) retained a call option to purchase all such shares
during the period beginning August 1, 1996 through October 31, 1996 at
$3.44 per share (which if exercised would void the demand registration
obligations), (3) guaranteed that if these shares were sold on or before
June 24, 1997 in a bona fide sale transaction, USC shareholders were
22
<PAGE>
guaranteed to receive at least an aggregate of $2,900,000 of gross sales
proceeds for all such shares (with a limitation of the Company's liability
fixed at $1,213,954), and (4) required the USC Shareholders to return sale
proceeds in excess of $1,160,000 for such shares if so sold.
12. On June 21, 1996, warrants exercisable into an aggregate of 200,000 shares
of Common Stock at an exercise price of $2.00 per share exercisable until
June 21, 1998 were issued to two accredited investors in payment of
services rendered by such accredited investors to the Company. The
Company estimates it received approximately $107,132 of services from this
purchaser.
13. On July 31, 1996, the Company issued to JLCM an additional 13,333 shares
of the Company's Series A Cumulative Convertible Preferred Stock as payment
of the required dividend on the 166,667 shares of Series A Cumulative
Convertible Preferred Stock held by JLCM.
14. On August 7, 1996, the Company issued an aggregate of 4,706 shares of
Common Stock to the two holders of the March 18 Debentures pursuant to the
provisions of the March 18 Debentures in satisfaction of a registration
penalty.
15. On August 12, 1996, the Company sold $27,200,000 aggregate principal amount
of the Notes to Furman Selz LLC and Rauscher Pierce Refsnes, Inc. (the
"Initial Purchasers"). The Notes were simultaneously sold by the Initial
Purchasers in transactions exempt from the registration requirements of the
Securities Act, in the United States to persons reasonably believed by the
Initial Purchasers to be "qualified institutional buyers" (as defined in
Rule 144A under the Securities Act) and to institutional "accredited
investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act). The Notes mature on August 15, 2006. The Notes are
currently convertible at any time prior to maturity, unless previously
redeemed, into shares of Common Stock of the Company at an initial
conversion price of $2.55 per share (currently 10,666,667 shares of
Common Stock), subject to adjustment in certain circumstances.
16. On August 23, 1996, in connection with the redemption of the March 18
Debentures, the Company issued an aggregate of 28,000 shares of Common
Stock to the two holders under the redemption provisions for such
Debentures.
17. On March 25, 1997, the Company sold the Debenture to Northstar High Total
Return Fund for $3.2 million. The Debenture matures on August 15, 2006.
The Debenture is currently convertible at any time prior to maturity,
unless previously redeemed, into shares of Common Stock of the Company
at an initial conversion price of $2.55 per share (currently 1,490,196
shares of Common Stock), subject to adjustment in certain circumstances.
The transactions described above were unrelated private transactions
effected in reliance upon Section 4(2) of the Securities Act. The
securities were sold to a limited number of purchasers. Such purchasers
were provided with access to all relevant information regarding the
Company and/or represented to the Company that they were "accredited
investors," as defined under the Securities Act. In addition, each
purchaser represented to the Company that the shares were purchased
for investment purposes only and not with a view toward distribution.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following is a discussion of the consolidated financial condition and
results of operations of the Company for the three years ended December 31,
1994, 1995 and 1996. It should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto included elsewhere in
this report.
GENERAL
SA Telecommunications, Inc. is a publicly held holding company which,
through its operating subsidiaries, is a full-service regional interexchange
carrier providing a wide range of domestic
23
<PAGE>
telecommunications services through its network of owned and leased
transmission and switching facilities. The Company primarily serves small and
medium sized commercial accounts in the west, southwest and south central
United States. A vast majority of the Company's commercial and residential
customers are located in suburban, secondary and rural markets. In addition
to providing "1+" domestic long distance services, the Company also offers
international long distance, wholesale long distance, operator and wireless
services, and other products such as voice and data private lines, "800/888"
services, Internet access and travel cards. The Company is also an authorized
reseller of local telephone service in Texas and California.
The Company entered the telecommunications business in 1991 through the
acquisition of NATC, a telecommunications provider offering international
call back long distance service to foreign customers. In 1994 and 1995, the
Company acquired two Texas-based switchless resellers, LDN and USC. During
1996, the Company purchased substantially all of the assets of FCLD, a switched
reseller of long distance telephone services located in Amarillo, Texas. In
addition, effective in 1996, the Company acquired the assets of Economy, a
switchless reseller of long distance telephone services located in McKinney,
Texas, acquired Uniquest, a company engaged in third party customer
verification services and outbound telemarketing, and purchased all of the
stock of Addtel. Also during late 1995 and early 1996, the Company purchased
and installed switches in Dallas, Texas and Phoenix, Arizona and added leased
transmission facilities between these switches and the operator switch the
Company acquired in the USC acquisition. The Company expanded its network
through the acquisition of switching equipment in Amarillo and Lubbock in
connection with the FCLD acquisition.
The FCLD acquisition was effective September 1, 1996. The assets
acquired included FCLD's customer base of approximately 4,500 customers and
two Siemens Stromberg-Carlson DCO Central Office type switches, which will be
integrated into the Company's existing network.
Effective November 1, 1996, the Company purchased all of the issued and
outstanding capital stock of Addtel, a switchless reseller of long distance
services based in Glendale, California. The acquisition was consummated for
an aggregate purchase price of $9.5 million (including $2 million allocated
to nonsolicitation agreements) subject to potential downward adjustment.
The growth of the Company's initial customer base was largely the result
of its acquisitions. The Company anticipates future growth will result from
sales and marketing efforts of its various sales channels and from continued
acquisitions of telecommunications companies within its market area or
adjacent thereto.
The Company markets its services in areas in the west, southwest and
south central United States served by its network primarily under the "USC,"
"USI," "First Choice Long Distance," "Southwest Long Distance Network" and
"Addtel" trade names.
On August 12, 1996, the Company consummated a private placement of
$27,200,000 of the Notes. The Notes are currently convertible into the
Company's Common Stock at a conversion price of $2.55 per share. The net
proceeds from the sale of the Notes were approximately $25.4 million after
giving effect to the transaction related fees and expenses. The Company used
approximately $12.0 million of the net proceeds from the private placement to
repay certain indebtedness, and to repurchase or redeem certain shares of the
Company's Common Stock and outstanding debentures. The Company utilized the
balance of the proceeds (approximately $13.4 million) to effect the Addtel
and FCLD acquisitions and for network expansion and working capital.
24
<PAGE>
The geographic concentration of LDN's, USC's, Economy's, and FCLD's
customers has allowed the Company to add call volume to its network and has
provided the Company with the opportunity to expand its network into adjacent
geographic areas. Management of the Company presently anticipates expanding
its network into the Addtel service area.
Commencing October 1994, the Company modified its marketing efforts to
focus on building revenues derived from switched "1+" domestic long distance
and related services such as private line services, "800/888" service and
travel cards, and reduced its marketing of pay telephone operator assistance,
wholesale long distance services and international call back. During the
year ended December 31, 1996, the Company derived 95% of its revenues from the
provision of domestic long distance services.
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's Consolidated
Statements of Operations as a percentage of its revenues for the years ended
December 31, 1994, 1995 and 1996. For purposes of this Management's Discussion
and Analysis, the term "revenues" refers to the Company's telecommunications
revenues as reflected in the Company's Consolidated Statement of Operations,
exclusive of any revenues attributable to discontinued operations.
<TABLE>
YEARS ENDED DECEMBER 31,
---------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenue . . . . . . . . . . . . 100% 100% 100%
Cost of revenue . . . . . . . . . . . . . 85 68 63
----------- ----------- -----------
Gross profit. . . . . . . . . . . . . . . 15 32 37
Operating expenses:
General and administrative . . . . . . 30 32 31
Depreciation and amortization. . . . . 4 6 8
Nonrecurring network
reconfiguration costs. . . . . . . . - - 2
Nonrecurring restructuring and
integration costs. . . . . . . . . . - - 6
Loss from continuing operations
before other. . . . . . . . . . . . . . (19) (6) (10)
Other income (expense). . . . . . . . . . - (3) (5)
----------- ----------- -----------
Loss from continuing operations . . . . . (19) (9) (15)
Loss from discontinued operations . . . . (6) (22) -
Extraordinary net gain on extinguishment
of debt . . . . . . . . . . . . . . . . - - 4
----------- ----------- -----------
Net loss. . . . . . . . . . . . . . . . . (25)% (31)% (11)%
----------- ----------- -----------
----------- ----------- -----------
Net cash provided by (used in)
operating activities. . . . . . . . . . $(2,289,481) $(1,224,486) $ 635,390
Net cash used in investing activities . . $(1,743,558) $(7,141,820) $(3,172,528)
Net cash provided by financing
activities. . . . . . . . . . . . . . . $ 3,166,078 $ 8,858,613 $16,073,866
25
<PAGE>
EBITDA (loss), as defined herein(1) . . . $(1,397,324) $ 153,514 $ 1,751,374
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- -------------------
(1) Earnings (loss) before interest, taxes, depreciation, amortization,
certain nonrecurring items, and other income (expense) or "EBITDA," is a
commonly used measure of performance in the telecommunications industry.
As used herein, EBITDA is not intended as either a substitute or
replacement for operating income (as presented according to generally
accepted accounting principles ("GAAP")), as a measure of the financial
results of operations or for cash flows from operations (as presented
according to GAAP).
YEAR ENDED DECEMBER 31, 1996 VERSUS YEAR ENDED DECEMBER 31, 1995
Revenues increased $14,920,481, or 72%, from $20,748,021 in 1995 to
$35,668,502 in 1996. Revenue minutes increased approximately 82,000,000, or
85%, from approximately 97,000,000 in 1995 to approximately 179,000,000 in
1996.
On a pro forma basis, as though the acquisition of USC occurred at the
beginning of 1995, revenues and minutes for 1996 increased 24% and 29%,
respectively, compared with pro forma revenues of $28,694,683 or
approximately 139,000,000 revenue minutes for 1995. Revenue growth for 1996
was also impacted by the FCLD acquisition which contributed $1,049,504 and
the Addtel acquisition which contributed $2,057,176 in retail revenue and
$3,241,667 in wholesale revenue. Operator services, wholesale (excluding
Addtel) and international call back business revenues increased by $257,335
from 1995 to 1996; however, as a percentage of total revenues, declined from
35% in 1995 to 21% in 1996. The Company's marketing strategy continues to be
the aggressive marketing of its "1+" services, which have a higher gross
profit margin, and the de-emphasizing of operator services, wholesale
(excluding Addtel) and international call back business which are less
profitable product lines.
The Company plans on phasing out the wholesale business obtained in the
Addtel acquisition by the end of the second quarter of 1997. The wholesale
business is substantially less profitable than the retail business and bears
a higher credit risk.
Gross profit increased by $6,506,366 from $6,631,908 in 1995 to
$13,138,274 in 1996. The gross profit margin increased by 5% from 32% in 1995
to 37% in 1996. This increase was primarily attributable to the integration
and operation of the Company's network coupled with an increased number of
calls originating and terminating on the network more than offsetting the
unfavorable impact of the circuit availability problems experienced during
the third and fourth quarters of 1996, as discussed under "Liquidity and
Capital Resources." Additionally, there has been an overall improved call mix
with the higher margin "1+" traffic comprising a larger percentage of total
traffic than the lower margin operator service and wholesale traffic.
Negatively impacting the margin was the $3,241,667 of wholesale revenue from
the Addtel acquisition which has a 4% gross profit margin.
General and administrative expense increased by $4,449,496 from
$6,478,394 in 1995 to $10,927,890 in 1996, and as a percentage of revenues,
decreased from 32% in 1995 to 31% in 1996. The increase in total general and
administrative expense is attributable to additional growth and acquisitions
in 1996. However, the full impact of general and administrative expense
reductions from the integration of FCLD and Addtel will not be realized until
this process is completed in 1997. The decrease as a percentage of revenues
reflects management's continued focus on cost containment.
Depreciation and amortization expense increased by $1,574,675 from
$1,287,225 in 1995 to
26
<PAGE>
$2,861,900 in 1996, and as a percentage of revenues, increased from 6% in
1995 to 8% in 1996. This increase resulted from higher depreciation and
amortization charges arising from the acquisitions of USC, FCLD and Addtel,
and increased depreciation from the acquisition of switching and other
network equipment.
During the fourth quarter of 1996, the Company incurred an $806,436
nonrecurring charge to operations related to reconfiguring its network. This
reconfiguration included (i) the deployment of two additional switches to
enhance the efficiency of the network, (ii) the addition of a number of new
circuits throughout the Company's service area, and (iii) the planned
expansion of the network to the west coast. The combination of these factors
necessitated the Company to take its network down for a period of time, thus
increasing the volume of lower margin off-net traffic.
During 1996, the Company incurred a $2,015,506 nonrecurring
restructuring and integration charge to operations comprised of (i) $227,201
for restructuring the Company's sales organization, (ii) $1,244,511 for
discontinuing the Company's international call back product line, and (iii)
$543,794 for integration of the FCLD and Addtel acquisitions during 1996.
The $227,201 sales restructuring charge represents excess and duplicate
costs in the fourth quarter of 1996 arising from restructuring the Company's
sales organization from a predominant single sales channel of direct approach
to a more cost effective four channel approach consisting of (i) direct
sales, (ii) telemarketing, (iii) agents, and (iv) mass marketing. Major
customer accounts will continue to be solicited by direct sales efforts. The
preponderance of this charge is comprised of salary and benefit costs
associated with headcount reductions. The $1,244,511 charge for
discontinuing the Company's call back product line is principally comprised
of employee associated costs and reserves for uncollectible accounts
receivable. The $543,794 charge for integration of the FCLD and Addtel
acquisitions is principally comprised of costs associated with excess and
duplicate personnel reductions. The integrations of FCLD and Addtel are
expected to be completed by March 31, 1997 and June 30, 1997, respectively.
During 1995, the Company incurred a $143,558 nonrecurring charge to
operations related to the discontinuation of its non-telecommunications
Russian ventures. This charge was made for costs associated with winding down
the affairs of these ventures including termination costs, collectibility of
receivables, and write-down of certain assets.
The Company incurred a loss from continuing operations before other
income (expense) of $1,277,110 in 1995 versus a loss from continuing
operations before other income (expense) of $3,473,458 in 1996. This increase
was primarily attributable to the nonrecurring charges and increased
depreciation and amortization expense, partially offset by improved gross
profit margins.
The Company had net other expense of $658,111 in 1995 compared to net
other expense of $1,908,701 in 1996. This increase was primarily due to an
increase in interest expense from $682,796 to $2,129,876 related to the
offering of the Notes in August 1996.
The Company recorded a loss from discontinued operations before other
income (expense) of $4,530,742 in 1995. The provision for operating losses of
the discontinued operations during the phase-out period was increased by
$475,000 in 1995. The $150,000 reserve established at December 31, 1994
became inadequate due to unforeseen delays in the proposed spin-off of
Strategic Abstract & Title Corporation ("SATC") and the ultimate decision to
cancel the spin-off and sell the subsidiary after the death of SATC's
president in September 1995. On February 29, 1996, SATC was sold to a key
member of SATC management for a $500,000 note, payable over ten years bearing
interest at 7%
27
<PAGE>
per annum. At December 31, 1995, the Company recorded an impairment loss of
$4,055,742, including a reserve against the note, to reflect the net
realizable value of SATC. This amount was a noncash charge against earnings.
The Company recognized a net gain (made up of two components) on
extinguishment of debt of $1,327,644 for 1996. The first component was a
gain on extinguishment of debt of $2,149,191 relating to the Company's
redemption of securities issued in connection with the USC acquisition for an
aggregate of 843,023 shares of the Company's Common Stock and $308,500 of
cash. This gain was recognized in the second quarter of 1996. These
securities redeemed included (i) notes having an aggregate principal amount
of $3,150,000 and bearing interest at 11% per annum, (ii) an aggregate of
125,000 shares of Series B Cumulative Convertible Preferred Stock, and (iii)
a warrant which was exercisable into an aggregate of 1,050,000 shares of the
Company's Common Stock at any time prior to July 31, 2000 at a per share
price of $1.25. The second component was a loss on extinguishment of debt of
$821,547 relating to the Company's redemption of its $2,000,000 principal
amount of convertible debentures from the proceeds of the offering of the
Notes which was incurred in the third and fourth quarters of 1996.
The Company incurred a net loss of $6,465,963 in 1995 as compared to
$4,054,515 in 1996. This improvement is primarily attributable to the
one-time net extraordinary gain on extinguishment of debt, improved profit
margins, and the absence of a discontinued operations charge in 1996,
partially offset by the nonrecurring charges, increased interest expense and
increased depreciation and amortization expense.
YEAR ENDED DECEMBER 31, 1995 VERSUS YEAR ENDED DECEMBER 31, 1994
Revenues increased by $10,992,678 or 113%, from $9,755,343 in 1994 to
$20,748,021 in 1995. This $10,992,678 net increase in revenues was the result
of (i) the USC acquisition which contributed $10,452,248, (ii) a $1,911,489
increase in the Company's "1+" revenue primarily arising from new customers
(excluding the USC acquisition), (iii) a decline of $1,217,161 in revenue
relating to certain operator services, and the Company's wholesale and
international business, and (iv) a decline in other revenues of $153,898.
Gross profit increased by $5,174,995 from $1,456,913 in 1994 to
$6,631,908 in 1995 principally due to the USC acquisition. The gross profit
margin increased by 17% from 15% in 1994 to 32% in 1995. This increase was
principally due to the improved mix of call traffic provided by the USC
revenues which consisted of a higher percentage of "1+" calls. The percentage
of "1+" calls, which have a higher gross profit margin, has increased as
compared to the lower margin operator service and wholesale calls.
General and administrative expense increased by $3,624,157 from
$2,854,237 in 1994 to $6,478,394 in 1995, and, as a percentage of revenues,
increased from 30% in 1994 to 32% in 1995. The increase in total general and
administrative expense was primarily attributable to the USC acquisition. The
increase as a percentage of revenues was indicative of the duplicity of costs
experienced when USC was first acquired. These costs consisted primarily of
personnel related items. The Company focused on decreasing the relative
percentage of these costs and, in the fourth quarter of 1995, such costs
decreased to 28% of revenues.
Depreciation and amortization expense increased by $873,908 from
$413,317 in 1994 to $1,287,225 in 1995 and, as a percentage of revenues,
increased from 4% in 1994 to 6% in 1995. This increase resulted from higher
depreciation and amortization charges arising from the USC acquisition and
28
<PAGE>
increased depreciation from the acquisition of switching equipment in
December 1994.
The Company incurred a loss from continuing operations before other
income (expense) of $1,810,641 in 1994 versus a $1,277,110 loss in 1995. This
decrease was principally attributable to an improvement in gross profit
margins but was partially offset by small percentage increases in general and
administrative expense and depreciation and amortization expense.
The Company had net other expense of $8,429 in 1994 as compared to net
other expense of $658,111 in 1995. This increase was primarily due to an
increase in interest expense from $29,903 to $682,796 related to the
increased debt incurred in connection with the USC acquisition.
The loss from discontinued operations increased by $3,902,826 from
$627,916 in 1994 to $4,530,742 in 1995. The provision for operating losses of
the discontinued operations during the phase-out period was increased by
$475,000 in 1995. The $150,000 reserve established at December 31, 1994
became inadequate due to unforeseen delays in the proposed spin off of SATC
and the ultimate decision to cancel the spin-off and sell the subsidiary
after the death of SATC's president in September 1995. On February 29, 1996,
SATC was sold to a key member of SATC management for a $500,000 note, payable
over ten years bearing interest at 7% per annum. At December 31, 1995, the
Company recorded an impairment loss of $4,055,742, including a reserve
against the note, to reflect the net realizable value of SATC. This amount
was a noncash charge against earnings.
The Company incurred a net loss of $2,446,986 for 1994 as compared to
$6,465,963 in 1995. The increased net loss was principally attributable to
the loss from discontinued operations and increased interest expense related
to the debt incurred in connection with the USC acquisition.
LIQUIDITY AND CAPITAL RESOURCES
On August 12, 1996, the Company completed a $27.2 million private
placement of the Notes, which are generally convertible at any time prior to
maturity at a conversion price of $2.55 per share, subject to adjustments in
certain circumstances. The Notes are redeemable at the option of the Company
in whole or in part at any time on or after August 15, 1999 at annual
redemption prices starting at 107% of principal, plus accrued interest to the
redemption date. Each holder of the Notes has the right to require the
Company to repurchase the Notes in the event that all three of the following
events occur: (i) the Company incurs certain indebtedness, (ii) the Pro-Forma
Interest Coverage (as defined herein) is less than 2.0 to 1, and (iii) the
average closing price of the Company's Common Stock is less than $2.00 per
share for the preceding twenty trading days. Semi-annual cash interest
payments of $1.6 million will be due on the Notes and the Debenture in August
1997. As a result, a substantial portion of the Company's cash flow will be
devoted to debt service. The ability of the Company to make payments of
principal and interest will be largely dependent upon its future performance.
The Company has used the net proceeds received from the offering of the
Notes of approximately $25.4 million after deducting estimated transaction
related fees and expenses to (i) refinance existing bank debt to Norwest Bank
Minnesota, N.A. ("Norwest") of approximately $7 million, (ii) exercise the
Company's option to purchase 843,023 shares of the Company's Common Stock
from former USC shareholders for approximately $2.9 million, (iii) redeem or
repurchase certain of the Company's outstanding debentures for $2.1 million,
and (iv) approximately $13.4 million to effect the Addtel and FCLD
acquisitions and for network expansion and working capital.
Effective November 1, 1996, the Company purchased all of the issued and
outstanding capital stock of Addtel, a switchless reseller of long distance
services based in Glendale, California. The acquisition was
29
<PAGE>
consummated for an aggregate purchase price of $9.5 million (including $2
million allocated to nonsolicitation agreements) subject to potential
downward adjustment. At December 31, 1996, Addtel's revenue was primarily
derived from the provision of wholesale long distance services while its
retail customer base primarily consisted of small and medium sized commercial
accounts and residential customers concentrated in the greater Los Angeles
metropolitan area. Addtel's wholesale revenue produces a substantially lower
gross profit margin than its retail revenue. The Company plans on phasing out
the wholesale business by the end of the second quarter of 1997. The dollar
amount of the Company's consolidated gross margin is expected to increase as
a result of the acquisition; however, gross margin as a percentage of revenue
will be adversely affected by the blending of Addtel's lower margin wholesale
revenue into the Company's total revenue base.
On January 9, 1997, the Company completed a line of credit arrangement
with Greyrock Business Credit (Greyrock), a division of NationsCredit Commercial
Corporation. The line of credit has maximum availability of $10 million, with
borrowings based on 80% of eligible accounts receivable and inventory, other
than receivables arising from telecommunications services rendered to
customers which are billed to the customers by a RBOC, a BOC, a LEC, a credit
card company, or a provider of local telephone services. The borrowings are
secured by all of the assets of the Company and its subsidiaries and the
stock of the Company's subsidiaries. The line of credit matures December 31,
1997 and automatically renews for successive additional one year terms unless
either party elects to terminate by giving written notice to the other not
less than 60 days prior to the next maturity date.
The borrowings bear interest at a floating rate of 2.5% above the
reference rate of Bank of America NT & SA, provided that the interest rate is
not less than 9% per annum. Interest is payable monthly and to the extent
that accrued interest does not equal $10,000 per month, the Company is
required to pay an unused line of credit fee of such difference. The Company
initially borrowed $1.6 million principal amount on January 9, 1997 under
this facility.
The agreements regarding the line of credit contain covenants which,
among other matters, limit the ability of the Company and its subsidiaries to
take the following actions without the consent of Greyrock: (1) merge,
consolidate and acquire or sell assets, (2) incur indebtedness outside the
ordinary course of business which would have a material adverse effect on the
Company and its subsidiaries taken as a whole or on the prospect of repayment
of the obligations under the line of credit, (3) pay dividends other than
stock dividends and certain dividends with respect to the Company's Series A
Cumulative Convertible Preferred Stock, and (4) redeem, purchase or acquire
its capital stock.
On March 25, 1997, the Company completed a $3.8 million private
placement of the Debenture, which is generally convertible at any time prior
to maturity at a conversion price of $2.55 per share, subject to adjustments
in certain circumstances. The Debenture is redeemable at the option of the
Company in whole or in part at any time on or after August 15, 1999 at annual
redemption prices starting at 107% of principal, plus accrued interest to the
redemption date. Each holder has the right to require the Company to repurchase
the Debenture in the event that all three of the following events occur: (i)
the Company incurs certain indebtedness, (ii) the Pro-Forma Interest Coverage
is less than 2.0 to 1, and (iii) the average closing price of the Company's
Common Stock is less than $2.00 per share for the preceding twenty trading days.
The Company has used approximately $1.5 million of the $3.2 million of the net
proceeds received from the sale of the Debenture to reduce indebtedness
outstanding from time to time under the Greyrock
30
<PAGE>
Facility, and expects to use the remainder for general corporate purposes and
working capital.
Since January 10, 1997, the average closing price of the Company's Common
Stock has been less than $2.00 for the prior twenty trading days. Additionally,
the Company's Pro Forma Interest Coverage remains less than 2.0 to 1. Therefore,
if the Company incurs additional indebtedness (other than as permitted under the
Debenture and Notes Indenture), then the holders of the Notes and the Debenture
would have the right to require the Company to repurchase the Notes and the
Debenture. Management currently is of the opinion that this restriction on
additional borrowings will have no adverse effect on the Company's operations
but may restrict its acquisition program. Should holders of the Notes and the
Debenture ever have the ability to cause the Company to repurchase the Notes and
the Debenture, there can be no assurance that the Company would have sufficient
liquidity to effect such repurchase.
During the Company's third quarter ended September 30, 1996 and a
majority of the fourth quarter ended December 31, 1996, the Company
experienced delays in obtaining circuits primarily in New Mexico, and, to a
lesser extent, Arizona and Colorado. This delay in obtaining circuits, which
was corrected in December 1996, adversely impacted the Company's gross
margins and related profitability. The Company may in the future experience
difficulties in obtaining circuits as the demand for circuits increases.
These circuits, which must be obtained from the local RBOC, CLEC or a
competitive access provider, enable the Company's network to operate at its
optimum efficiency by increasing the number of calls originating and
terminating on the network. Should the lack of available circuits recur, this
condition will have a negative impact on gross profit margin and related
profitability because the Company will be forced to terminate calls off its
network at a higher cost than if terminated on its network.
The Company experienced negative cash flow from operating activities of
$2,289,481 and $1,224,486 in 1994 and 1995, respectively, and positive cash
flow from operating activities of $635,390 in 1996. The positive cash flow of
$635,390 in 1996 includes approximately $1.1 million of claims for
transmission and access charges which the Company has paid but believes were
overbilled by the Company's long line transmission carriers and several local
exchange carriers. The Company intends to vigorously pursue settlement of
these disputed charges by demanding cash repayment or credit against future
billings. The overall improvement in cash flow from operating activities in
1996 is attributable to improved cash management. The improvement in 1995
over 1994 is primarily due to the improvement in operations resulting from
the USC acquisition and subsequent integration of the combined operations.
In 1994, accounts receivable expanded due to a growth in revenues without
proportionate increases in accounts payable and accrued expenses, which caused
working capital to be expended. Domestic accounts receivable are generally
collected in 45 days and foreign accounts receivable are generally collected in
65 days. However, accounts payable for contracts with transmission carriers and
switched service providers must generally be paid in 30 days. As is customary in
the industry, the Company has entered into a contractual arrangement with one or
more third party billing and collection companies with respect to certain of its
receivables.
Cash used in investing activities was $1,743,558, $7,141,820 and
$3,172,528 in 1994, 1995 and 1996, respectively. Of the total in 1996,
$9,084,591 was utilized in the acquisition of Addtel, First Choice and
Economy. Of the total in 1995, $6,974,685 was utilized in the acquisition of
USC and of the total in 1994, $1,330,397 was utilized in the acquisition of
LDN. $3,588,786 of the total in 1996 was attributable to expenditures for
property and equipment primarily related to switching equipment and network
associated costs.
31
<PAGE>
Cash provided by financing activities was $3,166,078, $8,858,613 and
$16,073,866 respectively in 1994, 1995 and 1996, respectively. Net proceeds
of $25.4 million from issuance of the Notes in 1996 were utilized to (i)
repay existing bank debt of $7 million, (ii) repurchase 843,023 shares of the
Company's Common Stock from former USC shareholders for $2.9 million, (iii)
redeem the Company's outstanding debentures for $2.1 million, and (iv) the
remaining balance of approximately $13.4 million was utilized to effect the
Addtel and FCLD acquisitions and for network expansion and working capital.
Proceeds generated from the issuance of $7,000,000 of long term debt and
$1,000,000 of Series A Cumulative Convertible Preferred Stock ("Series A
Stock") were utilized in the 1995 acquisition of USC. Proceeds from private
placements of common stock were the principal source of the $1,330,397 of
cash used for the 1994 acquisition of LDN. The majority of the increase in
1996 is attributable to the sale of Notes in August 1996.
In connection with the USC acquisition, the Company (i) paid $6,500,000
in cash (including $2,400,000 paid in connection with certain agreements
pertaining to non-competition and confidentiality); (ii) issued the notes
having an aggregate principal amount of $4,250,000 and bearing interest at
the rate of 11% per annum (the "USC Notes"); (iii) issued an aggregate of
125,000 shares of Series B Cumulative Convertible Preferred Stock ("Series B
Stock"); and (iv) issued warrants exercisable into an aggregate of 1,050,000
shares of the Company's Common Stock at any time prior to July 31, 2000 at a
per share exercise price of $1.25. On June 21, 1996, the Company acquired all
of such securities for an aggregate of $308,500 of cash and the issuance of
an aggregate of 843,023 shares of the Company's Common Stock. On August 14,
1996, the Company used $2,900,000 of the net proceeds of the offering of the
Notes to exercise its option to purchase such 843,023 shares of the Company's
Common Stock for an exercise price of $3.44 per share.
In order to provide the cash portion of the purchase price to be paid to
the stockholders of USC, the Company entered into a series of related
transactions which were consummated concurrently with the closing of the USC
acquisition on July 31, 1995. The primary transaction was the $10,000,000 Credit
Agreement with Norwest under which $7,000,000 was advanced to fund a majority of
the cash proceeds utilized in the acquisition. On November 10, 1995 and March
13, 1996, the Company entered into amendments to its Credit Agreement with
Norwest, which, among other things: (i) amended certain definitions, agreements,
and covenants relating to operating cash flow, senior debt service coverage, and
prepayments on subordinated debt, and (ii) waived any breach of financial
covenants with respect to senior debt service coverage and with respect to
operating cash flow at September 30, 1995 and December 31, 1995. As part of such
amendments, the Company paid default fees of $35,000 and prepaid $150,000 of
indebtedness on November 30, 1995. In connection with obtaining the consent of
Norwest to the sale of the Notes, on July 17, 1996 the Company received a waiver
from Norwest with respect to any breach arising out of the computation of senior
debt service coverage and operating cash flow as of May 31, 1996 for the
preceding six months and paid a waiver fee of $20,000. These amendments and
waivers to the Credit Agreement were necessitated because (1) the general and
administrative expenses being incurred by USC exceeded those projected by the
Company and (2) the closing date of the acquisition was delayed beyond the
originally scheduled closing date. On August 12, 1996, the Company used
approximately $7,000,000 of the net proceeds from the offering of the Notes to
fully repay the principal and interest outstanding to the date of such repayment
under the Credit Agreement.
In addition, in consideration of the payment of $1,000,000 in cash and
services provided in connection with the USC acquisition by JLCM, the Company
privately placed with JLCM an aggregate of 166,667 shares of Series A
Redeemable Preferred Stock and issued to JLCM the JLCM Warrant entitling JLCM
to purchase an additional 500,000 shares of the Company's Common Stock at a
price of $1.125 per share. On July 31, 1996, the Company issued JLCM an
additional 13,333 shares of Series A Redeemable Preferred Stock in payment of
the annual dividend on such stock.
The terms and provisions relating to the Series A Redeemable Preferred
Stock provide for the conversion of such shares
32
<PAGE>
into an aggregate of 1,440,000 shares of Common Stock of the Company at any
time prior to redemption by the Company (either through optional redemption
at any time after July 31, 1997, or through mandatory redemption no later
than July 31, 2000), which number of shares was subject to adjustment in
certain circumstances, including the issuance by the Company of shares of
Common Stock at prices below the $1.125 stipulated conversion price.
In March, April and June 1996, the Company entered into private
placements whereby it sold an aggregate of $600,000 of its 9% Convertible
Subordinated Debentures in March 1996 (the "March Debentures") and $400,000
of its 9% Convertible Subordinated Debentures in April 1996 (the "April
Debentures"), and $1,000,000 of its 9% Convertible Subordinated Debentures in
June 1996. All such debentures were repurchased by the Company on September 6,
1996 with approximately $2,100,000 of the net proceeds of the offering of
the Notes. In connection with such private placements, the Company paid
$75,000 of finders fees and issued the Finder's Warrants exercisable into an
aggregate of 200,000 shares of Common Stock.
On May 7, 1996, six holders of the Common Stock Purchase Warrants issued in
the Company's September 20, 1995 private placement exercised such warrants for
an aggregate of 1,070,000 shares of Common Stock at an exercise price of $1.25
per share or $1,337,500. In connection with such early exercise, the Company
issued additional Common Stock Purchase Warrants to such holders exercisable
into an aggregate of 1,337,500 shares of Common stock at an exercise price of
$2.40 per share between November 7, 1996 and May 7, 1998.
At December 31, 1996, the Company had $29,048,762 of long term debt of
which $570,859 was the current portion. On January 7, 1997, the Company incurred
additional short-term indebtedness under the Greyrock Facility. The initial
borrowing was $1.6 million and the balance fluctuates with pay-downs and
additional borrowings on a daily basis. Although management believes that cash
flows generated from operations will improve with the integration of USC,
Economy, FCLD and Addtel, and expansion of the Company's telecommunications
network, the Company has put into place the Greyrock Facility to provide that
working capital is available. Also, in order for the Company to continue its
aggressive acquisition program, additional debt or equity must be raised. There
is no assurance that such capital will be available. In the past, the Company
has financed its operations and expansion needs from proceeds from private
placements of Common Stock and the exercise of stock options. There can be no
assurances that these or other sources of funds will continue to be available.
At December 31, 1996, the Company had a cash and cash equivalent balance of
$14,360,466 as compared to $823,738 at December 31, 1995. As of December 31,
1996, working capital was a negative $3,011,355 as compared to a negative
$2,841,834 at December 31, 1995. These working capital amounts are comparable
between the years.
CAPITAL EXPENDITURES
Capital expenditures in 1996 totaled $4,590,027, of which $1,001,241
were financed. Capital expenditures for 1995 totaled $693,977 of which
$500,701 were financed. The majority of these capital expenditures relate to
switching equipment acquired by means of capital leases and network costs.
Other than additional fixed facilities, such as switching equipment
requirements as the network expands and peripheral equipment such as billing
systems to support such expansion, future capital expenditures are expected to
be minimal. The Company's future capital
33
<PAGE>
expenditures related to network expansion will be made primarily to acquire
switches and related equipment. Additional switching equipment would require
significant capital expenditures by the Company.
DISCONTINUED OPERATIONS
In October 1994, the Company made the determination to focus its long-term
strategy and resources on the expansion of its domestic telecommunications
services business, ultimately resulting in the sale of all of the issued and
outstanding capital stock of SATC described below as well as the discontinuation
of the operations of Baltic States/CIS Ventures, Inc. ("BSCV").
Management of the Company determined to sell SATC in October 1995, after
the death of SATC's president, resulting in the cancellation of the previously
proposed spin-off and distribution of SATC to the Company's stockholders. A
corporation formed by a key member of SATC's management purchased SATC on
February 29, 1996. SATC had developed a proprietary information database for the
offering of on-line title abstracting and title insurance and reporting services
and operates title plants in Midland County and Ector County, Texas. The
consideration received by the Company for such sale was a promissory note in the
original principal amount of $500,000 with interest at 7% per annum payable over
10 years, secured by a pledge of the stock of and guaranty by SATC and a
security interest in the assets of SATC. The Company has retained the benefits
of certain net operating losses incurred by SATC.
HOLIDAY AND SEASONAL VARIATIONS IN REVENUES
The Company's revenues, and thus its potential earnings, are affected by
holiday and seasonal variations. A substantial portion of the Company's revenues
are generated by direct dial domestic long distance commercial customers, and,
accordingly, the Company experiences decreases in revenues around holidays (both
domestic and international) when commercial customers reduce their usage. The
Company's fourth fiscal quarter ending December 31, which includes the
Thanksgiving, Hanukkah, Christmas and New Year's Eve holidays, and the Company's
first fiscal quarter ending March 31, historically have been the slowest revenue
periods of the Company's fiscal year. The Company's fixed operating expenses,
however, do not decrease during these quarters. Accordingly, the Company will
likely experience lower revenues and earnings in its first and fourth fiscal
quarters when compared with the other fiscal quarters.
EFFECT 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 increased. General operating expenses such as salaries,
employee benefits and occupancy costs are, however, subject to normal
inflationary pressures. Management has been able to contain these expenses
through cost control measures.
NEW ACCOUNTING STANDARDS
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" (SFAS 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
34
<PAGE>
with the Company's 1996 fiscal year. The Company has adopted SFAS 123 on a
disclosure basis only. As such, implementation of SFAS 123 has not impacted
the Company's consolidated balance sheet or statement of operations.
ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements of the Company and its subsidiaries
and notes thereto are included elsewhere in this report on Form 10-KSB as
follows:
Page
----
Reports of Independent Public Accountants for the years ended
December 31, 1996, 1995 and 1994 F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years
ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994 F-7
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-9
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Information with respect to directors and executive officers of the Company
is incorporated herein
35
<PAGE>
by reference to the information under the caption "MANAGEMENT - Executive
Officers and Directors" and "Section 16(a) Reporting" contained in the
definitive Proxy Statement for the 1997 Annual Meeting of Stockholders of the
Company tentatively scheduled to be held on May 29, 1997. (the "Proxy
Statement").
ITEM 10. EXECUTIVE COMPENSATION.
Information with respect to compensation of directors and executive
officers of the Company is incorporated herein by reference to the
information under the captions "EXECUTIVE COMPENSATION" and "MANAGEMENT -
Committees, Meetings and Compensation of the Board of Directors" contained in
the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership by persons known to the
Company to beneficially own more than five percent of the Common Stock, by
each director of the Company and by all directors and executive officers as
a group is incorporated herein by reference to the information under the
captions "VOTING SECURITIES AND PRINCIPAL STOCKHOLDERS" and "PROPOSAL NO. 1 -
ITEM NO. 1 ON PROXY - Election of Directors" contained in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related
transactions is incorporated herein by reference to the information under the
caption "Certain Relationships and Related Transactions" contained in the
Proxy Statement.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B
EXHIBIT
NO. DESCRIPTION
3.1 Certificate of Incorporation of the Company, as amended through
December 31, 1994 (filed as Exhibit 3.1 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994 and incorporated herein
by reference)
3.2 Certificate of Designations, Preferences and Rights of Series A Cumulative
Convertible Preferred Stock (filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K/A for the event occurring July 31, 1995, filed with the
Commission on August 15, 1995 and incorporated herein by reference)
3.3 Certificate of Designations, Preferences and Rights of Series B Cumulative
Convertible Preferred Stock (filed as Exhibit 4.6 to the Company's Current
Report on Form 8-K/A for the event occurring July 31, 1995, filed with the
Commission on August 15, 1995 and incorporated herein by reference)
3.4 Certificate of Amendment filed with the Delaware Secretary of State on
August 3, 1995 (filed as Exhibit 3.4 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995 and incorporated herein
by reference)
3.5 Certificate of Amendment of Certificate of Incorporation of SA
Telecommunications, Inc. filed with the Delaware Secretary of State on
July 9, 1996 (filed as Exhibit 3.1 to the Company's Quarterly Report on
Form 10-QSB/A for the quarter ended June 30, 1996 filed with the
Commission on August 29, 1996 and incorporated herein by reference)
3.6 Certificate of Elimination of Series B Cumulative Preferred Stock of the
Company filed with the Delaware Secretary of State on July 9, 1996 (filed
as Exhibit 3.2 to the Company's Quarterly Report on Form 10-QSB/A for the
quarter ended June 30, 1996 filed with the Commission on August 29, 1996
and incorporated herein by reference)
3.7 Amended and Restated Bylaws of the Company (filed as Exhibit 3.5 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995 and incorporated herein by reference)
4.1 Indenture dated as of August 12, 1996 between the Company and United
States Trust Company of New York as Trustee (filed as Exhibit 4.1 to
the Company's Quarterly Report on Form 10-QSB/A for the quarter ended
June 30, 1996, filed with the Commission on August 29, 1996 and
incorporated herein by reference)
4.2 Purchase Agreement dated as of August 5, 1996 among the Company, Furman
Selz LLC and Rauscher Pierce Refsnes, Inc. (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB/A for the quarter ended June 30,
1996, filed with the Commission on August 29, 1996 and incorporated herein
by reference)
4.3 Registration Rights Agreement dated as of August 12, 1996 among the
Company, Furman Selz LLC and Rauscher Pierce Refsnes, Inc. (filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB/A for the
quarter ended June 30, 1996, filed with the Commission on August 29, 1996
and incorporated herein by reference)
4.4 Form of Series A Preferred Stock Certificate (filed as Exhibit 4.4 to the
Company's Current Report on Form 8-K/A for the event occurring July 31,
1995, filed with the Commission on August 15, 1995 and incorporated herein
by reference)
4.5 Form of Certificate Evidencing Common Stock (filed as Exhibit 4.19 to the
Company's Registration Statement on Form S-3 (Registration No. 33-64271)
and incorporated herein by reference)
9.1 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and ITEX
Corporation, dated June 30, 1992 (filed as Exhibit 9.1 to the Company's
Form 10-KSB for the year ended December 31, 1994 and incorporated herein
by reference)
9.2 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Terry
Houston, dated April 12, 1994 (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated May 16, 1994 and incorporated herein by
reference)
9.3 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Scott
Moster, dated April 12, 1994 (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated May 16, 1994 and incorporated herein
by reference)
9.4 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Roy D.
Duckworth, dated April 12, 1994 (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated May 16, 1994 and incorporated herein by
reference)
9.5 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Daniel J.
Dziuba, dated April 12, 1994 (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated May 16, 1994 and incorporated herein by
reference)
9.6 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Paul
R. Miller, dated April 12, 1994 (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated May 16, 1994 and incorporated herein
by reference)
9.7 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and David
L. Hover, dated April 12, 1994 (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated May 16, 1994 and incorporated herein
by reference)
9.8 Form of Voting Agreement, executed as of September 20, 1995 between
the Company, Jack W. Matz, Jr. and each of Seth Joseph Antine, Fred
Rudy, Jules Nordlicht, Moses Elias, Harry Adler, Dr. Seymour
Huberfeld, Connie Lerner, Mueller Trading L.P., Jack Ehrenhaus, Cong.
Ahavas Tzedach Vachsed and Laura Huberfeld/Naomi Bodner Partnership
(the "Investors") filed as Exhibit 4.15 to the Company's Registration
Statement on Form S-3 (Registration No. 33-64271) and incorporated
herein by reference)
9.9 Voting Agreement dated as of April 11, 1996 among the Company, Terry
R. Houston and Jack W. Matz, Jr. (filed as Exhibit 9.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1996 and incorporated herein by reference)
9.10 Form of Voting Agreement dated as of May 7, 1996 among the Company,
Jack W. Matz, Jr. and each of Laura Huberfeld/Naomi Bodner
Partnership, Fred Rudy, Seth Joseph Antine, Harry Adler, Dr. Seymour
Huberfeld and Jules Nordlicht (the "1996 Investors") and schedule of
differences thereto (filed as Exhibit 9.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1996 and
incorporated herein by reference)
9.11 Pledge Agreement dated January 10, 1997 between Charles Tony Lonstein,
Agent, U.S. Communications, Inc. and the Company (Filed as Exhibit B
to Exhibit 2.1 to the Company's Current Report on Form 8-K for the
event occurring on January 10, 1996, filed with the Commission on
January 22, 1997 and incorporated herein by reference)
10.1 Share Purchase Agreement, dated as of July 31, 1995, by and between
the Company and Jesup & Lamont Capital Markets, Inc. (filed as
Exhibit 4.3 to the Company's Current Report on Form 8-K/A for the
event occurring on July 31, 1995, filed with the Commission on
October 13, 1995 and incorporated herein by reference)
10.2 Warrant Purchase Agreement, dated as of July 31, 1995, be and between
the Company and Jesup and Lamont Capital Markets, Inc. (filed as
Exhibit 4.4 to the Company's Current Report on Form 8-K/A for the
event occurring on July 31, 1995, filed with the Commission on
August 15, 1995 and incorporated herein by reference)
10.3 Common Stock Purchase Warrant Certificate issued to Jesup & Lamont
Capital Markets, Inc. (filed as Exhibit 4.5 to the Company's Current
Report on Form 8-K/A for the event occurring on July 31, 1995, filed
with the Commission on August 15, 1995 and incorporated herein by
reference)
10.4 Agreement dated as of October 26, 1995 between the Company and Jesup &
Lamont Capital Markets, Inc. (filed as Exhibit 4.18 to the Company's
Registration Statement on Form S-3 (Registration No. 33-64271) and
incorporated herein by reference)
10.5 Agreement dated as of October 26, 1995 by and between the Company and
each of the Investors (filed as Exhibit 4.16 to the Company's
Registration Statement on Form S-3 (Registration No. 33-64271) and
incorporated herein by reference)
10.6 Form of Warrant Certificates issued to each of the Investors and
schedule of differences thereto pursuant to General Instructions to
Item 601 (filed as Exhibit 4.14 to the Company's Registration
Statement on Form S-3 (Registration No. 33-64271) and incorporated
herein by reference)
10.7 Form of Subscription Agreements executed as of September 20, 1995 by
and between the Company and each of the Investors and schedule of
differences thereto pursuant to General Instructions to Item 601
(filed as Exhibit 4.13 to the Company's Registration Statement on
Form S-3 (Registration No. 33-64271) and incorporated herein by
reference)
<PAGE>
10.8 Employment Agreement dated March 24, 1995 by and between the Company
and Jack Matz (filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
10.9 Amendment to Employment Contract dated as of March 13, 1996 by and
between the Company and Jack Matz (filed as Exhibit 10.19 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995 and incorporated herein by reference)
10.10 Employment Contract dated March 13, 1996 by and between the Company
and Paul R. Miller (filed as Exhibit 10.20 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995 and
incorporated herein by reference)
10.11 Employment Agreement dated April 1, 1994 by and between LDN and Terry
Houston (filed as Exhibit 2.2 to the Company's Current Report on
Form 8-K, dated May 16, 1994, and incorporated herein by reference)
10.12 Settlement Agreement dated April 11, 1996 by and between the Company
and Terry Houston (filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1996 and
incorporated herein by reference)
10.13 Amendment to Settlement Agreement dated June 10, 1996 between the
Company and Terry Houston (filed as Exhibit 10.13 to the Company's
Form S-2 Registration Statement (Registration No. 333-17547) and
incorporated herein by reference)
10.14 Severance Agreement dated as of March 18, 1996 by and between the
Company and J. David Darnell (filed as Exhibit 10.22 to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995 and
incorporated herein by reference)
10.15 1994 Stock Option Plan for Non-Employee Directors of the Company
(Non-Employee Director Plan")(filed as Item 2 of the Company's Proxy
Statement dated June 29, 1994 and incorporated herein by reference)
10.16 Form of Stock Option Agreement used in connection with Non-Employee
Director Plan (filed as Exhibit 10.12 to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
10.17 1994 Employee Stock Option Plan ("Employee Plan")(filed as Exhibit A
to the Company's Proxy Statement dated April 26, 1996 and incorporated
herein by reference)
10.18 Form of Non-Qualified Stock Option Agreement used in connection with
the Employee Plan (filed as Exhibit 10.15 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1994 and
incorporated herein by reference)
10.19 Form of Incentive Stock Option Agreement used in connection with the
Employee Plan (filed as Exhibit 10.14 to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
<PAGE>
10.20 Settlement Agreement dated March 25, 1996 between the Company and
Jesup & Lamont Capital Markets, Inc. (filed as Exhibit 10.38 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995 and incorporated herein by reference)
10.21 Form of Subscription Agreement dated as of May 7, 1996 between the
Company and each of the 1996 Investors and schedule of differences
thereto pursuant to General Instruction 601 (filed as Exhibit 10.4 to
the Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1996 and incorporated herein by reference)
10.22 Form of Common Stock Purchase Warrant dated as of May 7, 1996 issued
to each of the 1996 Investors and schedule of differences thereto
pursuant to General Instruction 601 (filed as Exhibit 10.5 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1996 and incorporated herein by reference)
10.23 Consulting Agreement dated as of June 21, 1996 between the Company and
John Nugent (Filed as Exhibit 10.23 to the Company's Form S-2
Registration Statement (Registration No. 333-17547) and incorporated
herein by reference)
10.24 Lease Agreement effective as of October 11, 1995 between
Telecommunications Finance Group and Long Distance Network, Inc.
(Filed as Exhibit 10.24 to the Company's Form S-2 Registration
Statement (Registration No. 333-17547) and incorporated herein by
reference)
10.25 Stock Purchase Agreement dated as of January 10, 1997 among the
Company, Addtel Communications, Inc., Charles Tony Lonstein, Aviram
Lonstein, Daniel G. Lonstein and David R. Lonstein (filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K, dated
January 10, 1997, and incorporated herein by reference)
10.26 Loan and Security Agreement dated December 26, 1996 among Greyrock
Business Credit and the Company, U.S. Communications, Inc., Long
Distance Network, Inc., and Southwest Long Distance Network, Inc.
(filed as Exhibit 10.1 to the Company's Current Report on Form 8-K,
dated January 10, 1997, and incorporated herein by reference)
10.27 Schedule to Loan and Security Agreement dated December 26, 1996 among
Greyrock Business Credit, the Company, U.S. Communications, Inc., Long
Distance Network, Inc. and Southwest Long Distance Network, Inc.
(filed as Exhibit 10.2 to the Company's Current Report on Form 8-K,
dated January 10, 1997, and incorporated herein by reference)
10.28 Cross-Corporate Continuing Guaranty dated December 26, 1996 of the
Company, U.S. Communications, Inc., Long Distance Network, Inc., and
Southwest Long Distance Network, Inc. (filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K, dated January 10, 1997, and
incorporated herein by reference)
10.29 Continuing Guaranty dated December 26, 1996 of North American
Telecommunications Corporation, Baltic States and CIS Ventures, Inc.,
CIS Intelligence Information Services, Inc. and Uniquest
Communications, Inc. (filed as Exhibit 10.4 to the Company's Current
Report on Form 8-K, dated January 10, 1997, and incorporated herein by
reference)
10.30 Pledge Agreement dated as of December 26, 1996 between Greyrock
Business Credit and the Company (filed as Exhibit 10.5 to the
Company's Current Report on Form 8-K, dated January 10, 1997, and
incorporated herein by reference)
10.31 Pledge Agreement dated as of December 26, 1996 between Greyrock
Business Credit and U.S. Communications, Inc. (filed as Exhibit 10.6
to the Company's Current Report on Form 8-K, dated January 10, 1997,
and incorporated herein by reference)
10.32 Security Agreement dated December 26, 1996 among Greyrock Business
Credit and North American Telecommunications Corporation, Baltic
States and CIS Ventures, Inc., CIS Intelligence Information Services,
Inc. and Uniquest Communications, Inc. (filed as Exhibit 10.7 to the
Company's Current Report on Form 8-K, dated January 10, 1997, and
incorporated herein by reference)
10.33 Severance Agreement dated as of March 18, 1996 by and between the
Company and Lynn H. Johnson (filed as Exhibit 10.33 to the Company's
Form S-2 Registration Statement (Registration No. 333-17547) and
incorporated herein by reference)
10.34 Assumption Agreement and Amendment to Loan Agreement dated February
12, 1997 between Greyrock Business Credit and AddTel Communications,
Inc., the Company, Long Distance Network, Inc., U.S. Communications,
Inc. and Southwest Long Distance Network, Inc.*
10.35 Pledge Agreement dated February 12, 1997 between Greyrock Business
Credit and the Company*
10.36 Cross-Corporate Continuing Guaranty dated February 12, 1997 of AddTel
Communications, Inc.*
10.37 Cross-Corporate Continuing Guaranty dated February 12, 1997 of the
Company, U.S. Communications, Inc., Long Distance Network, Inc., and
Southwest Long Distance Network, Inc.*
10.38 Continuing Guaranty dated February 12, 1997 of AddTel Communications,
Inc.*
10.39 Second Amendment to Employment Contract dated March 26, 1997 between
the Company and Jack W. Matz, Jr.*
10.40 Amendment to Employment Contract dated March 26, 1997 between the
Company and Paul R. Miller*
10.41 Purchase Agreement dated March 25, 1997 between the Company and
Northstar High Total Return Fund*
10.42 Registration Rights Agreement dated March 25, 1997 between the Company
and Northstar High Total Return Fund*
10.43 Severance Agreement dated March 26, 1997 between the Company and John
Nugent*
10.44 The Company's 10% Convertible Debenture Due 2006*
21.1 Subsidiaries of the Company*
23.1 Consent of Price Waterhouse LLP*
27.1 Financial Data Schedule*
- -----------------
* Filed herewith
(b) REPORTS ON FORM 8-K
On December 11, 1996, the Company filed a Form 8-K dated December 10,
1996, which reported the execution of a letter of intent between the Company
and Addtel to acquire all of the outstanding stock of Addtel.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SA TELECOMMUNICATIONS, INC.
By: /s/ Jack W. Matz, Jr.
------------------------------------
Jack W. Matz, Jr.
Chairman and Chief Executive Officer
Date: March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company in the capacities and on the date indicated:
Name Title Date
/s/ Jack W. Matz, Jr. Director, Chairman and Chief March 28, 1997
- ------------------------- Executive Officer
Jack W. Matz, Jr.
/s/ Paul R. Miller Director, President and March 28, 1997
- ------------------------- Chief Operating Officer
Paul R. Miller
/s/ J. David Darnell Director, Vice President- March 28, 1997
- ------------------------- Finance and Chief Financial
J. David Darnell Officer
/s/ John H. Nugent Director, Vice President March 28, 1997
- -------------------------
John H. Nugent
/s/ Thomas L. Cunningham Director March 28, 1997
- -------------------------
Thomas L. Cunningham
/s/ Pete W. Smith Director March 28, 1997
- -------------------------
Pete W. Smith
/s/ Barry J. Williams Director March 28, 1997
- -------------------------
Barry J. Williams
/s/ Howard F. Curd Director March 28, 1997
- -------------------------
Howard F. Curd
/s/ Reuben F. Richards Director March 28, 1997
- -------------------------
Reuben F. Richards
37
<PAGE>
/s/ Dean A. Thomas Director March 28, 1997
- -------------------------
Dean A. Thomas
/s/ John Q. Ebert Director March 28, 1997
- -------------------------
John Q. Ebert
/s/ Igor I. Mamantov Director March 28, 1997
- -------------------------
Igor I. Mamantov
38
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants for the years ended December 31, 1996,
1995 and 1994 F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994 F-7
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F-8
Notes to Consolidated Financial Statements F-9
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of SA Telecommunications, Inc.
In our opinion, the accompanying consolidated financial statements listed in
the accompanying index present fairly, in all material respects, the
financial position of SA Telecommunications, Inc. and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their 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 Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial 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
March 25, 1997
F-2
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
DECEMBER 31,
--------------------------
1996 1995
---- ----
ASSETS
Current assets:
Cash and cash equivalents $14,360,466 $ 823,738
Accounts and notes receivable:
Trade, net of allowance for doubtful
accounts of $2,796,946 and $475,845,
respectively 7,035,710 4,022,131
Other, net of allowance for doubtful accounts
of $31,479 and $46,122, respectively 1,481,072 407,550
Inventory 136,875 146,037
Prepaid expenses and other 594,081 292,439
----------- -----------
Total current assets 23,608,204 5,691,895
----------- -----------
Property and equipment 10,054,937 3,911,652
Less accumulated depreciation and amortization (1,380,307) (495,613)
----------- -----------
Net property and equipment 8,674,630 3,416,039
----------- -----------
Excess of cost over net assets acquired, net
of accumulated amortization 27,902,634 16,869,648
----------- -----------
Other assets:
Debt issuance cost 2,083,843 -
Other 409,758 63,221
----------- -----------
Total other assets 2,493,601 63,221
----------- -----------
Total assets $62,679,069 $26,040,803
----------- -----------
----------- -----------
(Continued)
The accompanying notes are an integral part
of these consolidated financial statements.
F-3
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
DECEMBER 31,
---------------------------
1996 1995
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
<C> <S> <S>
Current liabilities:
Accounts payable $ 2,023,955 $ 761,880
Accrued telecommunications expenses 11,360,002 2,337,420
Other accrued expenses 2,382,504 1,163,603
Acquisition obligation 9,500,000 -
Short-term notes payable 782,239 475,610
Current maturities of long-term obligations 570,859 3,795,216
------------ ------------
Total current liabilities 26,619,559 8,533,729
------------ ------------
Long-term obligations, less current maturities 28,477,903 7,398,670
------------ ------------
Commitments and contingencies
Series A Redeemable Preferred Stock, $.00001
par value, 250,000 shares authorized; 180,000 and
166,667 shares issued in 1996 and 1995,
respectively 1,330,303 1,129,459
------------ ------------
Shareholders' equity:
Series B Preferred Stock, $.00001 par value,
250,000 shares authorized; 125,000 shares
issued in 1995 - 575,280
Common Stock, $.0001 par value, 50,000,000
shares authorized; 16,858,053 and 13,462,120
issued, respectively 1,686 1,346
Additional paid-in capital 26,402,671 20,855,099
Retained deficit (16,299,038) (11,996,179)
Treasury stock (1,197,518 and 240,072 shares,
respectively) at cost (3,854,015) (456,601)
------------ ------------
Total shareholders' equity 6,251,304 8,978,945
------------ ------------
Total liabilities and shareholders' equity $ 62,679,069 $ 26,040,803
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-4
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
----------- ------------- -----------
<S> <C> <C> <C>
Telecommunications revenues $35,668,502 $ 20,748,021 $ 9,755,343
Cost of revenue 22,530,228 14,116,113 8,298,430
----------- ------------- -----------
Gross profit 13,138,274 6,631,908 1,456,913
----------- ------------- -----------
Operating expenses:
General and administrative 10,927,890 6,478,394 2,854,237
Depreciation and amortization 2,861,900 1,287,225 413,317
Nonrecurring network
reconfiguration costs 806,436 - -
Nonrecurring restructuring and
integration costs 2,015,506 143,399 -
----------- ------------- -----------
Total operating expenses 16,611,732 7,909,018 3,267,554
----------- ------------- -----------
Loss from continuing operations before
other income (expense) and extra-
ordinary item (3,473,458) (1,277,110) (1,810,641)
Other income (expense):
Interest expense (2,129,876) (682,796) (29,903)
Other, net 221,175 24,685 21,474
----------- ------------- -----------
Total other income (expense) (1,908,701) (658,111) (8,429)
----------- ------------- -----------
Loss from continuing operations before
extraordinary item (5,382,159) (1,935,221) (1,819,070)
</TABLE>
(Continued)
The accompanying notes are an integral part
of these consolidated financial statements.
F-5
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
<TABLE>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Discontinued operations:
Loss from title plant services operations - - (477,916)
Provision for operating losses during
phase-out period - (475,000) (150,000)
Loss from impairment - (4,055,742) -
----------- ----------- -----------
Loss from discontinued operations - (4,530,742) (627,916)
----------- ----------- -----------
Loss before extraordinary item (5,382,159) (6,465,963) (2,446,986)
Extraordinary item - net gain on
extinguishment of debts 1,327,644 - -
----------- ----------- -----------
Net loss (4,054,515) (6,465,963) (2,446,986)
Preferred dividend requirements,
including accretion (248,344) (125,352) -
----------- ----------- -----------
Net loss applicable to common shareholders $(4,302,859) $ (6,591,315) $(2,446,986)
----------- ----------- -----------
----------- ----------- -----------
Loss per weighted average common
share outstanding:
Continuing operations $ (0.35) $ (0.17) $ (0.20)
Discontinued operations - (0.39) (0.07)
----------- ----------- -----------
Loss before extraordinary item (0.35) (0.56) (0.27)
Extraordinary item 0.08 - -
----------- ----------- -----------
Net loss per share $ (0.27) $ (0.56) $ (0.27)
----------- ----------- -----------
----------- ----------- -----------
Net loss per share applicable to
common shareholders $ (0.28) $ (0.57) $ (0.27)
----------- ----------- -----------
----------- ----------- -----------
Weighted average number of
common shares outstanding 15,199,928 11,639,186 9,199,720
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-6
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
<TABLE>
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
-----------------------------------------------------------------------------------------------
SERIES B
PREFERRED STOCK COMMON STOCK ADDITIONAL
----------------- ----------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------ ------ --------- ------- --------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 - - 7,372,661 $ 737 $ 8,572,764 $ (2,957,878) $ (20,000) $ 5,595,623
Private placements of Common Stock - - 834,317 84 1,885,264 - - 1,885,348
Issuance of Common Stock for:
Exercise of options - - 1,057,075 106 1,421,216 - (220,950) 1,200,372
Acquisition of LDN - - 1,302,086 130 3,749,870 - - 3,750,000
Net loss for the year - - - - - (2,446,986) - (2,446,986)
-------- --------- ---------- ------ ----------- ------------ ----------- -----------
Balances at December 31, 1994 - - 10,566,139 1,057 15,629,114 (5,404,864) (240,950) 9,984,357
Private placements of Common Stock - - 1,981,120 197 2,379,464 - (44,057) 2,335,604
Issuance of Common Stock for
exercise of options - - 914,861 92 633,521 - (171,594) 462,019
Issuance of Series B Preferred
Stock for acquisition of USC 125,000 $ 575,280 - - - - - 575,280
Issuance of warrants for
acquisition and financing of USC - - - - 2,213,000 - - 2,213,000
Preferred dividend requirements,
including accretion - - - - - (125,352) - (125,352)
Net loss for the year - - - - - (6,465,963) - (6,465,963)
-------- --------- ---------- ------ ----------- ------------ ----------- -----------
Balances at December 31, 1995 125,000 575,280 13,462,120 1,346 20,855,099 (11,996,179) (456,601) 8,978,945
Private placements of Common Stock - - 251,700 25 369,975 - - 370,000
Issuance of Common Stock for:
Exercise of options - - 524,036 52 632,444 - (497,414) 135,082
Exercise of warrants - - 1,090,000 109 1,362,391 - - 1,362,500
Conversion of debt - - 267,856 27 449,973 - - 450,000
Other - - 419,318 42 750,633 - - 750,675
Issuance of Common Stock for
acquisition of USC securities (125,000) (575,280) 843,023 85 1,613,229 - (2,900,000) (1,861,966)
Issuance of warrants - - - - 368,927 - - 368,927
Preferred dividend requirements,
including accretion - - - - - (248,344) - (248,344)
Net loss for the year - - - - - (4,054,515) - (4,054,515)
-------- --------- ---------- ------ ----------- ------------ ----------- -----------
Balances at December 31, 1996 - $ - 16,858,053 $1,686 $26,402,671 $(16,299,038) $(3,854,015) $ 6,251,304
-------- --------- ---------- ------ ----------- ------------ ----------- -----------
-------- --------- ---------- ------ ----------- ------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-7
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,054,515) $(6,465,963) $(2,446,986)
Adjustments to reconcile net loss to net cash
used by operating activities:
Extraordinary net gain on extinguishment
of debts (1,327,644) - -
Loss from discontinued operations - - 477,916
Provision for discontinued operations - 4,530,742 150,000
Depreciation and amortization 2,861,900 1,287,225 413,317
Provision for losses on accounts receivable 2,197,083 455,793 318,583
Cash used for discontinued SATC business - (263,320) (441,864)
Other 17,946 (44,587) 15,280
(Increase) decrease, net of effect of acquisitions:
Accounts and notes receivable (925,570) (862,288) (150,480)
Prepaid expenses and other (280,481) 394,822 (63,759)
Other assets 9,162 320,990 (16,581)
Increase (decrease), net of effect of acquisitions:
Accounts payable and accrued expense 2,137,509 (577,900) (544,907)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 635,390 (1,224,486) (2,289,481)
----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (3,588,786) (193,276) (208,317)
Purchase of First Choice, net of cash acquired (2,244,110) - -
Purchase of Addtel, net of cash acquired (6,840,481) - -
Acquisition obligation - AddTel 9,500,000 - -
Purchase of USC, net of cash acquired - (6,974,685) -
Purchase of LDN, net of cash acquired - - (1,330,397)
Cash used for discontinued SATC business - (34,481) (195,393)
Sale of assets 2,557 60,622 -
Other (1,708) - (9,451)
----------- ----------- -----------
Net cash used in investing activities (3,172,528) (7,141 820) (1,743,558)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings 29,269,805 7,450,000 120,000
Debt issuance cost (2,174,799) - -
Principal payments on obligations (9,671,270) (1,971,510) (39,642)
Proceeds from private placements
of Common Stock - 2,073,104 1,885,348
Purchase of treasury stock (2,900,000) - -
Proceeds from exercise of options 187,630 307,019 1,200,372
Proceeds from exercise of warrants 1,362,500 - -
Proceeds from Series A Redeemable Preferred Stock - 1,000,000 -
----------- ----------- -----------
Net cash provided by financing activities 16,073,866 8,858,613 3,166,078
----------- ----------- -----------
Increase (decrease) in cash 13,536,728 492,307 (866,961)
Cash at beginning of year 823,738 331,431 1,198,392
----------- ----------- -----------
Cash at end of year $14,360,466 $ 823,738 $ 331,431
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-8
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND ORGANIZATION
SA Telecommunications, Inc. (STEL or the Company) is a full-service,
regional interexchange carrier that provides intrastate, interstate and
international service, as well as a variety of operator and other
services. In 1995, the Company changed its name to SA
Telecommunications, Inc. from SA Holdings, Inc. to better reflect the
focus on its core telecommunications business.
The Company conducts its domestic telecommunication operations through
U.S. Communications, Inc. (USC) (acquired effective June 1, 1995 - See
Note 5), Long Distance Network, Inc. (LDN) (acquired effective March 1,
1994 - See Note 6) and AddTel Communications, Inc. (Addtel) (acquired
effective November 1, 1996 - see Note 3). USC, LDN and Addtel provide
direct dial long distance services to small and medium-sized commercial
customers and, to a lesser extent, residential customers.
Additionally, operator services (telephone calling card, collect, third
party billing, and credit card calls requiring operator assistance) are
provided to hotels, motels, hospitals, universities, private pay
telephone owners, and residences. Domestic telecommunications revenue
comprised approximately 95%, 92% and 76% of consolidated revenues in
1996, 1995 and 1994, respectively.
The Company conducts its international call back telecommunications
operations mainly in Central and South America through North American
Telecommunications Corporation (NATC). NATC is a private telecommunications
carrier which provides various long distance telecommunications services to
its foreign customers, including interchange services, operator services,
international long distance, voice mail, conference calling, and facsimile
distribution. Foreign revenues comprised approximately 5%, 8% and 22% of
total consolidated revenues in 1996, 1995 and 1994, respectively. NATC
conducts business under the product name of "GlobalCOM." The Company is
discontinuing this product line in 1997.
Until September 1995, the Company participated in various joint
ventures in the Baltic States and Commonwealth of Independent States
(formerly the Soviet Union). At September 30, 1995, the Company
terminated its participation in these joint ventures to focus on its
telecommunications business. These operations had no significant
impact on the consolidated balance sheets at December 31, 1995 or the
consolidated statements of operations for the two years ended December
31, 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation. Certain prior
period amounts have been reclassified for comparative purposes.
F-9
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 approximate their recorded values.
BUSINESS AND CREDIT CONCENTRATIONS
In the normal course of business, the Company extends unsecured credit
to its customers. All international call back telecommunications services
are billed and principally paid in U.S. dollars. Management has provided
an allowance for doubtful accounts to provide for amounts which may
eventually become uncollectible and to provide for any disputed
charges. Two domestic telecommunications customers accounted for
approximately 31% and 8%, respectively, of total consolidated revenues
in 1994. No customers individually accounted for more than 10% of
consolidated revenues in 1996 or 1995.
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 $14 million of cash and cash equivalents in excess of
FDIC insured limits at December 31, 1996. The Company has not
experienced any losses on its cash and cash equivalents.
INVENTORY
Inventory is valued at the lower of cost or market with the cost
determined using the first-in, first-out method. Inventory consists of
automatic dialers for installation in customers' telephone equipment.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation and
amortization for financial statement purposes is 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.
GOODWILL AND RELATED INTANGIBLES
Goodwill and related intangibles reflect the acquired cost of goodwill,
customer lists, noncompete agreements, and related items. These
intangibles are amortized by the straight-line method over their
estimated useful lives. 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.
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-10
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
REVENUE RECOGNITION
The Company recognizes revenue as services are performed based on
customer usage, net of an estimate for uncollectible revenue. The
Company sells its services to its customers primarily on a measured
time basis.
ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation" (SFAS 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 SFAS 123 on a disclosure basis only.
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.
LOSS PER SHARE
Loss per share is computed by dividing the net loss by the weighted
average number of shares of common stock outstanding during the
periods. The effect of outstanding options and warrants on the
computation of net loss per share is antidilutive and, therefore, is
not included in the computation for the years ended December 31, 1996,
1995 and 1994.
FEDERAL INCOME TAXES
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.
STATEMENT OF CASH FLOWS
Cash paid for interest for the years ended December 31, 1996, 1995 and
1994 was $1,040,840, $374,249 and $21,896, respectively.
F-11
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
3. ACQUISITION OF ADDTEL COMMUNICATIONS, INC.
Effective November 1, 1996, the Company acquired all of the outstanding
common stock of Addtel, a switchless reseller of long distance services
located in Glendale, California. The aggregate purchase price of $9.5 million
(including $2 million allocated to nonsolicitation agreements) was paid $8
million in cash with the remaining $1.5 million held in escrow by the Company
to offset certain contractual adjustments or indemnity claims. The purchase
price was funded in January 1997 from the remaining proceeds of the Company's
10% Convertible Notes issued in August 1996. Accordingly, the Company recorded
an acquisition obligation of $9,500,000 at December 31, 1996.
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 values of the assets acquired and liabilities assumed. The initial
purchase price allocations are based on preliminary estimates and may change
based on the ultimate determination of fair value. As a result, the final
purchase price allocations may differ from the estimates. The Company's
consolidated statements of operations include the results of operations of
Addtel since November 1, 1996.
A summary of the Addtel excess of cost for financial reporting purposes
over net assets acquired is as follows:
December 31,
1996 Life
---- ----
Goodwill $ 7,916,825 25
Nonsolicitation agreements 2,000,000 5
Customer acquisition costs 878,673 10
-----------
10,795,498
Accumulated amortization (134,043)
-----------
$10,661,455
-----------
-----------
The following unaudited pro forma combined results of operations for the
Company assume that the acquisition of Addtel was completed at the beginning
of 1995. These pro forma amounts represent historical operating results of
Addtel combined with those of the Company with appropriate adjustments which
give effect to interest expense and amortization. These pro forma amounts
are not necessarily indicative of consolidated operating results which would
have occurred had Addtel been included in the operation 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 operations, 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.
F-12
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
For the years ended
December 31,
---------------------
1996 1995
---- ----
Revenues $56,832,328 $33,474,021
Net loss (6,210,115) (8,258,267)
Net loss per share outstanding (0.41) (0.71)
4. ACQUISITION OF FIRST CHOICE LONG DISTANCE, INC.
Effective September 1, 1996, the Company acquired substantially all of the
assets of First Choice Long Distance, Inc. (First Choice), a switch-based
reseller of long distance services located in Amarillo, Texas, for a total
consideration of $2,070,000 (including noncompete agreements). The assets
acquired included First Choice's customer base of approximately 4,500 customers
and two Siemens Stromberg-Carlson DCO Central Office type switches, which will
be integrated into the Company's existing network. The purchase price was
funded from proceeds of the Company's 10% Convertible Notes issued in August
1996.
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. The excess of
cost over net assets acquired of $741,757 and noncompete agreements of
$720,000 are being amortized on a straight-line basis over 25 and 2 years,
respectively. This allocation was based on preliminary estimates and may be
revised at a later date. The Company's consolidated statements of operations
include the results of operations of First Choice since September 1, 1996.
The following unaudited pro forma combined results of operations of the
Company assume that the acquisition of First Choice was completed at the
beginning of 1995. These pro forma amounts represent the historical
operating results of First Choice combined with those of the Company with
appropriate adjustments which give effect to interest expense 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.
For the years ended
December 31,
---------------------
1996 1995
---- ----
Revenues $37,836,495 $23,293,156
Net loss (4,457,212) (6,857,991)
Net loss per share outstanding (0.29) (0.59)
F-13
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
5. ACQUISITION OF U.S. COMMUNICATIONS, INC.
Effective June 1, 1995, the Company acquired all of the outstanding common
stock of U.S. Communications, Inc. (USC), a switchless reseller of long
distance services located in Levelland, Texas. The stated purchase price of
$12 million for the USC common stock and the covenants not to compete were
paid (i) $6.5 million in cash, (ii) $2.75 million in notes bearing 11%
interest per annum, (iii) $1.5 million in a separate group of notes also
bearing 11% interest per annum, (iv) 125,000 shares of Series B Preferred
Stock of the Company, and (v) common stock purchase warrants exercisable into
1,050,000 shares of stock at $1.25 per common share. The Company recorded
the Series B Preferred Stock and common stock purchase warrants at their
respective fair values as of the date of issuance. (See Note 10 regarding
the Company's 1996 acquisition of these securities.)
In order to fund the cash portion of the purchase price, the Company
borrowed an aggregate of $7.0 million from Norwest Bank Minnesota, N.A. and
privately placed 166,667 shares of its Series A Preferred Stock, along with a
common stock purchase warrant exercisable into 500,000 shares of stock at
$1.125 per share, with Jesup & Lamont Capital Markets, Inc. for $1.5 million.
The Company recorded the Series A Preferred Stock and common stock purchase
warrants at their respective fair values as of the date of issuance.
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 values of assets acquired and liabilities assumed. The Company's
consolidated statements of operations include the results of operations of
USC since June 1, 1995.
A summary of the USC excess of cost for financial reporting purposes over
net assets acquired is as follows:
December 31 December 31,
1996 1995 Life
---- ---- ----
Goodwill $ 9,399,153 $ 9,325,892 25
Covenants not to compete 2,400,000 2,400,000 5
Customer acquisition costs 1,036,946 1,036,946 10
----------- -----------
12,836,099 12,762,838
Accumulated amortization (1,519,464) (558,104)
----------- -----------
$11,316,635 $12,204,734
----------- -----------
----------- -----------
The following unaudited pro forma combined results of operations for the
Company assume that the acquisition of USC was completed at the beginning of
1994. These pro forma amounts represent the historical operating results of
USC combined with those of the Company with appropriate adjustments which
give effect to interest expense and amortization. These pro forma amounts
are not necessarily indicative of consolidated operating results which would
have occurred had USC 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
F-14
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
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.
For the years ended
December 31,
--------------------------
1995 1994
---- ----
Revenues $28,694,683 $26,173,431
Net loss (7,083,441) (3,864,545)
Net loss per share outstanding (0.61) (0.42)
6. ACQUISITION OF LONG DISTANCE NETWORK, INC.
Effective March 1, 1994, the Company acquired all of the outstanding
common stock of Long Distance Network, Inc. (LDN), a domestic interexchange
long distance carrier located in Dallas, Texas. The acquisition was
accomplished through the payment of $1,354,660 in cash and the issuance of
1,302,086 shares of unregistered, restricted Common Stock of the Company to
the shareholders of LDN. The Company utilized working capital and funds
generated from private placements of unregistered, restricted Common Stock to
complete the cash portion of the transaction. Of the total 1,302,086 shares
of unregistered, restricted Common Stock issued, 1,041,666 shares related to
the acquisition of LDN stock and 260,420 shares related to "Covenants Not to
Compete."
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 values of assets acquired and liabilities assumed. The fair value of
the stock issued in connection with the acquisition was estimated to be
approximately $3,750,000, which reflects a discount of approximately 25% from
the market price of the Company's publicly traded stock and, in management's
view, is reasonable given its restricted nature. The Company's consolidated
statements of operations include the results of operations of LDN since March
1, 1994.
A summary of the LDN excess of cost for financial reporting purposes over
net assets acquired is as follows:
December 31,
-------------------
1996 1995 Life
---- ---- ----
Goodwill $3,983,080 $3,983,080 25 Years
Covenants not to compete 750,000 750,000 10 Years
Customer acquisition costs 442,563 442,563 10 Years
---------- ----------
5,175,643 5,175,643
Accumulated amortization (789,307) (510,729)
---------- ----------
$4,386,336 $4,664,914
---------- ----------
---------- ----------
F-15
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following unaudited pro forma combined results of operations for the
Company assume that the acquisition of LDN was completed at the
beginning of 1994. These pro forma amounts represent the historical
operating results of LDN combined with those of the Company with
appropriate adjustments which give effect to amortization and shares of
Common Stock issued. These pro forma amounts are not necessarily
indicative of consolidated operating results which would have occurred
had LDN 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.
For the
year ended
December 31,
1994
------------
Revenues $ 11,136,615
Net loss (2,474,726)
Net loss per share outstanding (0.26)
7. DISCONTINUED OPERATIONS
On December 28, 1994, the Company's board of directors approved a
spinoff of the Company's title plant services subsidiary, Strategic
Abstract and Title Corporation (SATC), in the form of a stock dividend
to shareholders. During 1995, SATC filed a Form 10-SB registration
statement with the Securities and Exchange Commission to become a
publicly traded company prior to the distribution to shareholders.
Subsequent to this filing, a decision was made to cancel the spinoff and
sell 100% of the stock of the subsidiary, due in large part to the SATC
president's death in September 1995. As a result, an additional
$475,000 reserve was established for SATC losses until the expected date
of disposal.
On February 29, 1996, SATC was sold to a key member of SATC management
for a $500,000 note, payable over ten years, bearing interest at 7% per
annum. At December 31, 1995, the Company recorded an impairment loss of
$4,055,742, including a reserve against the note, to reflect the net
realizable value of SATC. Included among the SATC total assets are
other assets, primarily trade credits with a book value of $362,000, of
which the Company retained a minority portion at a de minimus value.
Revenues for SATC for the years ended December 31, 1995 and 1994 were
$354,892 and $142,212, respectively.
F-16
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
8. PROPERTY AND EQUIPMENT
Property and equipment consist of:
December 31,
-----------------------
1996 1995 Life
----------- ---------- ----------
Land $ 49,000 $ 49,000
Buildings 717,860 605,826 30-40 Years
Switching and other
network equipment 7,465,343 2,244,450 3-5 Years
Software 170,958 30,505 5 Years
Office equipment 1,421,646 779,116 5 Years
Furniture and fixtures 230,130 202,755 5-7 Years
----------- ----------
$10,054,937 $3,911,652
----------- ----------
----------- ----------
Switching equipment totaling $1,001,241 and $500,701 was acquired under
capital leases in 1996 and 1995, respectively. The Company has the
option to purchase the switching equipment upon the expiration of the
lease. Total depreciation expense, including amortization of equipment
under capital leases, charged to operations for the years ended December
31, 1996, 1995 and 1994 was $1,139,242, $449,402 and $158,612,
respectively.
9. SHORT-TERM NOTES PAYABLE
Short-term notes payable consist of:
December 31,
----------------------
1996 1995
-------- ---------
Note payable to Addtel investor group $772,743 $ -
Convertible subordinated debentures with
interest at 8% due in June 1996 - 450,000
Other 9,496 25,610
-------- --------
$782,239 $475,610
-------- --------
-------- --------
On February 9, 1996, the convertible, subordinated debentures were converted
into 267,856 shares of the Company's Common Stock.
F-17
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
10. LONG-TERM OBLIGATIONS
Long-term obligations consist of:
<TABLE>
December 31,
-------------------------
1996 1995
--------- ---------
<S> <C> <C>
Subordinated Convertible Notes due on August 15,
2006 with interest payable semi-annually at
10% per annum $ 27,200,000 $ -
Senior note payable to a bank - 6,850,000
Subordinated notes payable to former USC share-
holders due on October 1, 1996 with interest payable
quarterly at 11% per annum - 1,650,000
Subordinated notes payable to former USC share-
holders with $308,500 due on March 8, 1996,
$441,500 due on April 15, 1996 and $750,000 due
on July 31, 1996 plus interest at 11% per annum - 1,500,000
Notes payable to former USC shareholders due
in monthly installments of $1,732 including
interest at 8.5% with the balances due in 1997 6,791 32,638
Note payable to a trust (collateralized by land and
building) due in monthly installments of $1,586
including interest at 10% with the balance
due in 2004 99,376 107,994
Note payable to a bank (collateralized by land,
building and equipment) due in monthly install-
ments of $8,338 including interest at 9.75% with
the balance due in 1998 94,822 181,232
Note payable to a finance company (unsecured)
due in monthly installments of $752, including
interest at 7.5% with the balance due in 2000 26,237 33,019
Note payable to a bank (collateralized by vehicles)
due in monthly installments of $1,438 including
interest at 8.5% with the balance due in 2001 68,009 -
Note payable to a bank (collateralized by equipment)
due in monthly installments of $2,170 including
interest at 9.75% with the balance due in 1996 - 15,904
</TABLE>
F-18
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Note payable to an individual due in monthly
installments of $5,254 including interest at 8%
with the balance due in 1997 10,403 -
Capital lease obligations 1,543,124 823,099
----------- -----------
29,048,762 11,193,886
Less current maturities:
Long-term debt (133,392) (3,632,035)
Capital lease obligations (437,467) (163,181)
----------- -----------
Long-term portion $28,477,903 $ 7,398,670
----------- -----------
----------- -----------
</TABLE>
On August 12, 1996, the Company consummated a private placement of
$27,200,000 of its 10% Convertible Notes due 2006 (the Notes). The
Notes are currently convertible into the Company's Common Stock at a
conversion price of $2.55 per share, subject to adjustment under
certain circumstances. The net proceeds from the sale of the Notes
were approximately $25.4 million after giving effect to the transaction
related fees and expenses. The Company used approximately $12.0
million of the net proceeds from the private placement to repay certain
indebtedness, and to repurchase or redeem certain shares of the
Company's Common Stock and outstanding debentures. The Company
utilized the balance of the proceeds (approximately $13.4 million)
primarily to effect acquisitions and strategic alliances, to make
capital expenditures, and for general corporate purposes.
On March 25, 1997, the Company completed a private placement of a
$3,800,000 10% Convertible Debenture due 2006 (the Debenture) on terms
effectively identical to the terms of the Notes.
Interest on the Notes and Debenture is payable semi-annually on February 15
and August 15 of each year commencing February 15, 1997 at the rate of 10%
per annum. The Notes and Debenture are redeemable at the option of the
Company in whole or in part at any time on or after August 15, 1999 at
annual redemption price starting at 107% of principal, plus accrued interest
to the redemption date. Upon a Fundamental Change (as defined), each
holder of the Notes and Debenture will have the right to require the Company
to repurchase all of a portion of such holder's Notes and Debenture at a
price equal to 100% of the principal amount thereof, plus accrued interest
to the date of purchase. Each holder of the Notes and Debenture will have
the right to require the Company to repurchase all or a portion of such
holder's Notes and Debenture at a price equal to 100% of their principal
amount, plus accrued interest to the date of such repurchase, if any, in the
event that all three of the following events occur: (i) the Company or any
of its subsidiaries incurs certain indebtedness, (ii) the Pro Forma Interest
Coverage (as defined) is less than 2.0 to 1, and (iii) the average closing
sale price of the Common Stock is less than $2.00 for the twenty trading
days prior to the incurrence of such indebtedness. The Notes and Debenture
do not have the benefit of any sinking fund obligations. The Notes and
Debenture are senior unsecured obligations of the Company, and rank pari
passu in right of payment with all existing and future senior obligations of
the Company and senior in right of payment to any future subordinated
obligations of the Company. The Notes and Debenture are effectively
subordinated in right of payment to all existing and future liabilities,
including trade payables, of the Company's subsidiaries.
Since January 10, 1997, the average closing price of the Company's
Common Stock had been less than $2.00 for the prior twenty trading days
and the Company's Pro Forma Interest Coverage was less than 2.0 to 1.
Therefore, if the Company incurs additional indebtedness (other than as
permitted under the Note and Debenture Indenture) then the holder of the
Notes and Debenture would have the right to require the Company to
repurchase the Notes and Debenture.
F-19
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
On January 9, 1997, the Company completed a line of credit arrangement with
Greyrock Business Credit (Greyrock), a division of NationsCredit Commercial
Corporation. The line of credit has maximum availability of $10 million, with
borrowings based on 80% of eligible accounts receivable and inventory, other
than receivables arising from telecommunications services rendered to customers
which are billed to the customers by a regional Bell operating company, a Bell
operating company, a local exchange company, a credit card company, or a
provider of local telephone services. The borrowings are secured by all of the
assets of the Company and its subsidiaries and the stock of the Company's
subsidiaries. The line of credit matures December 31, 1997 and automatically
renews for successive additional one year terms unless either party elects to
terminate by giving written notice to the other not less than 60 days prior to
the next maturity date.
Borrowings under the line of credit bear interest at a floating rate of
2.5% above the reference rate of Bank of America NT & SA, provided that the
interest rate is not less than 9% per annum. Interest is payable monthly and
to the extent that accrued interest does not equal $10,000 per month, the
Company is required to pay an unused line of credit fee of such difference.
The Company initially borrowed $1.6 million principal amount on January 9,
1997 under this facility.
The agreements regarding the line of credit contain covenants which,
among other matters, limit the ability of the Company and its subsidiaries to
take the following actions without the consent of Greyrock: (1) merge,
consolidate and acquire or sell assets, (2) incur indebtedness outside the
ordinary course of business which would have a material adverse effect on the
Company and its subsidiaries taken as a whole or on the prospect of repayment
of the obligations under the line of credit, (3) pay dividends other than
stock dividends and certain dividends with respect to the Company's Series A
Cumulative Convertible Preferred Stock, and (4) redeem, purchase or acquire
its capital stock.
In September 1996, the Company redeemed its $2,000,000 principal amount of
convertible debentures which had been issued in March, April and June of
1996. A $821,547 extraordinary loss on extinguishment of debt was recorded
on this redemption. This loss was comprised of $406,813 in unamortized debt
issuance costs attributable to the debentures and 182,706 shares of Common
Stock (fair market value of $414,734) issued to the debenture holders as
consideration for an "in the money" convertible feature of the debentures.
On March 8, 1996, the Company entered into an agreement with the former
USC shareholders to purchase debt and equity securities of the Company issued
to the USC shareholders in connection with the acquisition of USC for a
$3,085,000 purchase price. The securities purchased by the Company consisted
of promissory notes of the Company in an aggregate principal amount of
$3,150,000, 125,000 shares of the Company's Series B Cumulative Convertible
Preferred Stock and warrants exercisable into 1,050,000 shares of the
Company's Common Stock. The purchase was effected through a two-step
integrated transaction whereby the Company (i) acquired the USC Securities
for an aggregate of $308,500 in cash and 843,023 shares of the Company's
Common Stock (fair market value of $2,320,000) on June 21, 1996 and (ii)
repurchased the Common Stock on August 14, 1996 for $2,900,000 using proceeds
of the Company's 10% Convertible Notes issued in August 1996. Pursuant to
this transaction, the Company recognized an extraordinary gain on the
extinguishment of the USC debt of $2,149,191.
11. CAPITAL STOCK
At December 31, 1996, the Chairman and Chief Executive Officer of the
Company voted an aggregate 4,257,309 shares of Common Stock (21.9% of voting
control) pursuant to various voting trust agreements. The agreements were
established in conjunction with the LDN acquisition, private placements and
other operating activities of the Company where terms of the transactions
included securities of the Company.
Each share of Series A Cumulative Convertible Preferred Stock entitles its
holder to receive an annual dividend of $.72 per share, payable at the option
of the Company in either cash or shares of Series A Preferred Stock; to
convert it into eight shares of Common Stock as adjusted in the event of
future dilution from stock dividends and recapitalizations; and to receive up
to $9.00 per share plus accrued and unpaid dividends in the event of
involuntary or voluntary liquidation. Subject to certain conditions in loan
agreements, the Series A Preferred Stock may be redeemed at the option of the
Company on or after July 31, 1997, but must be mandatorily redeemed no later
than July 31, 2000, at a price of $9.00 per share plus accrued and unpaid
dividends. Due to the mandatory redemption requirements, the Series A
Preferred Stock was recorded at its fair value at the date of issuance, with
increases to its carrying value via periodic accretions up to the mandatory
redemption date.
F-20
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
In September 1995, the Company sold 1,100,000 shares of unregistered,
restricted Common Stock in a private placement transaction for $1,374,890.
In conjunction with this transaction, the purchasers received common stock
purchase warrants exercisable into an aggregate of 1,100,000 shares of stock
at $1.25 per share.
12. STOCK OPTIONS
The Company has several stock option plans (the Plans) under which options to
acquire up to 8,000,000 shares may be granted to directors, officers and
employees of the Company. The options are nontransferable and forfeitable if
the holder resigns or leaves the Company for any reason. Options under the
Plans vest and may be exercised after six months from the dates of grant, but
the shares acquired upon exercise may only be sold after periods of from
eighteen to thirty months from the vesting date. Unexercised options generally
expire five years from the dates of grant. An aggregate of 5,398,750 options
had been granted under the Plans as of December 31, 1996.
The exercise price of options granted under the Plans is no less than the
market value of the stock on the dates the options are granted. Accordingly,
no compensation expense is recognized by the Company with respect to such
grants.
Pro forma information regarding net income (loss) and earnings (loss) per
share is required by SFAS No. 123, and has been determined as if the Company
had accounted for its director, officer and employee stock options under the
fair value method of that statement. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model
with the following weighted-average assumptions used for grants in 1996 and
1995, respectively: no dividend yield; expected volatility of 63.2% and 66.9%;
risk free interest rates of 6.1% and 7.0%; and expected lives of 5 years and
7.5 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
1996 1995
--------------------------- ---------------------------
As Reported Pro Forma As Reported Pro Forma
----------- ------------ ------------ ------------
Net loss $(4,054,515) $(5,209,618) $(6,465,963) $(7,768,359)
Net loss per common
share (0.27) (0.34) (0.56) (0.67)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts as SFAS No. 123 does not apply to awards prior
to 1995 and additional awards are anticipated in future years.
F-21
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
A summary of options granted and outstanding under the Plans is summarized
below:
<TABLE>
1996 1995 1994
----------------------- ------------------------------ ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ---- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 2,123,470 $1.60 2,114,800 $1.15 2,342,311 $ .70
Granted 827,000 2.20 994,250 1.76 1,089,500 2.64
Exercised (523,803) 1.21 (914,861) .69 (1,057,075) 1.46
Forfeited (198,617) 2.14 (70,719) 1.99 (259,936) 2.13
--------- ----- --------- ----- ---------- -----
Outstanding at
end of year 2,228,050 1.86 2,123,470 1.60 2,114,800 1.15
Exercisable at
end of year 2,173,050 1.87 2,123,470 1.60 1,701,800 .79
Weighted-average
fair value of
options granted
during the year $1.29 $1.15
The following table summarizes information about options outstanding under
the Plans at December 31, 1996:
Options Outstanding Options Exercisable
--------------------------------------- -----------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Exercisable Price
------ ----------- ---- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$ .43 - $ .80 418,000 1.2 $ .70 418,000 $ .70
1.56 - 2.63 1,642,550 3.1 1.99 1,587,550 2.01
3.47 - 3.50 167,500 3.9 3.50 167,500 3.50
</TABLE>
As further discussed in Note 15, on March 24, 1995 the Company granted
additional options outside of the Plans to the Chairman of the Board and Chief
Executive Officer to acquire up to 1,000,000 shares of unregistered, restricted
Common Stock. These options had a fair value of $0.54 per share on the grant
date and were unexercised at December 31, 1996.
13. FEDERAL INCOME TAXES
The components of the net deferred tax asset were as follows:
December 31,
-------------------
1996 1995
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 986,990 $ 126,210
Other reserves 140,233 123,931
Amortization on excess of cost over
net assets acquired 276,626 100,541
Net operating loss carryforwards 3,498,119 3,047,698
---------- -----------
Gross deferred tax asset 4,901,968 3,398,380
F-22
<PAGE>
SA TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation on other assets 723,214 40,235
Other deferred costs - 9,958
------------ -----------
Gross deferred tax liabilities 723,214 50,193
------------ -----------
4,178,754 3,348,187
Valuation allowance (4,178,754) (3,348,187)
------------ -----------
Net deferred tax asset $ - $ -
------------ -----------
------------ -----------
The following is a reconciliation of the provision for income taxes at
the U.S. federal income tax rate to the income taxes reflected in the
consolidated statements of operations:
For the years ended December 31,
------------------------------------
1996 1995 1994
---- ---- ----
Income tax benefit at federal
statutory rate $(1,285,221) $(657,975) $(618,484)
Net operating losses not benefited 867,509 657,975 611,117
Other 417,712 - 7,367
----------- --------- ---------
Income tax benefit provided $ - $ - $ -
---------- --------- ---------
---------- --------- ---------
At December 31, 1996, the Company had net operating loss carryforwards
aggregating approximately $10,288,000 which expire in various years between
2003 and 2011. Certain changes in the Company's ownership have occurred over
the prior 3 years as defined by Internal Revenue Code Section 382, which
would result in an annual limitation on the amount of tax carryforwards which
can be utilized. A fully reserved deferred tax asset of approximately
$350,000 was acquired in connection with the Addtel purchase. This benefit
when realized will be a reduction to goodwill.
14. NONRECURRING CHARGES
The Company incurred an $806,436 nonrecurring charge in the fourth quarter
of 1996 related to the Company's reconfiguration of a portion of its network
including (i) the deployment of two additional switches to enhance the
efficiency of the network, (ii) the addition of a number of new circuits
throughout the Company's service area, and (iii) the planned expansion of the
network to the west coast. As a result of this combination of factors, the
Company was required to take its network down for a period of time and incur
nonrecurring incremental expenses to carry traffic outside its network.
F-23
<PAGE>
SA TELELCOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
The Company incurred an aggregate of $2,015,506 in nonrecurring
restructuring and integration charges in 1996 comprised of (i) $227,201 in
payroll and related costs eliminated in a restructuring of the Company's sales
organization, (ii) $543,794 in principally payroll and related costs to be
eliminated on full integration of the First Choice and Addtel acquisitions,
and (iii) $1,244,511 in principally payroll and related costs and reserves
for uncollectible accounts receivable to be eliminated on the discontinuance
of the Company's international call back product line. 1996 revenues and
cost of revenue attributable to the Company's discontinuing international
call back product line where $1,937,807 and $1,478,797, respectively. While
such amounts are also nonrecurring, they have not been separately identified
as nonrecurring in the statement of operations.
The Company incurred $143,399 in nonrecurring costs in 1995 related to its
discontinued Russian ventures.
15. EMPLOYMENT CONTRACTS
Effective March 24, 1995, the Company entered into a new Employment
Agreement with the Chairman of the Board and Chief Executive Officer, Mr.
Jack W. Matz, Jr. In connection with this agreement, the parties agreed to
terminate Mr. Matz's previous Employment Agreement dated November 1, 1992.
The Employment Agreement with Mr. Matz, which was later amended, currently
expires on March 23, 2001, provides for an annual salary of $275,000 and
contains a bonus schedule ranging from 1% to 8% of audited consolidated net
income on an annual basis. In addition to the salary and cash bonuses, Mr.
Matz can earn an aggregate of 60,000 shares of unregistered, restricted Common
Stock for meeting certain earnings per share goals. As a condition for Mr.
Matz's agreement to release any and all claims under his previous Employment
Agreement, Mr. Matz was granted an option to acquire up to 1,000,000 shares of
unregistered, restricted Common Stock at an exercise price of $1.25 per share,
the fair market value of the underlying stock on the settlement date. This
stock option vested as to 200,000 shares on the date of grant, March 24, 1995,
160,000 on March 24, 1996 and vests as to an additional 160,000 shares on each
of the four anniversaries thereafter. Mr. Matz's stock option is exercisable
for up to five years after full vesting. However, if Mr. Matz is terminated
by the Company without cause, such stock option will become immediately
exercisable, and will remain exercisable for two years thereafter, with
respect to a number of shares equal to 500,000 plus all vested but unexercised
options then outstanding, but in no event in excess of 1,000,000 shares.
16. LEASES
The Company leases certain office facilities and equipment under capital
leases and noncancellable operating leases expiring through 2001. Minimum
annual rentals under these leases are as follows:
F-24
<PAGE>
SA TELELCOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
Years ending Capital Operating
December 31, Leases Leases
------------ ------ ------
1997 $ 581,464 $ 511,949
1998 581,464 350,264
1999 395,432 267,415
2000 308,077 228,519
2001 - 192,776
---------- ----------
Total minimum lease payments 1,866,437 $1,550,923
----------
----------
Amounts representing interest (323,313)
----------
Present value of net minimum lease
payments $1,543,124
----------
----------
The total rent expense incurred during the years ended December 31, 1996,
1995 and 1994 was $425,665, $319,758 and $165,429, respectively.
17. RELATED PARTY TRANSACTIONS
During 1993, five members of the board of directors individually made
loans to the Company in amounts ranging from $25,000 to $72,000. All loans
were repaid during the year ended December 31, 1993, including accrued
interest at 12% per annum. As an inducement for making the loans, each
director was granted an option at $.75 per share (fair market value of the
underlying stock at date of grant) and a warrant at $.94 per share to
purchase one share of the Company's unregistered, restricted Common Stock,
for each $.75 of principal loaned to the Company, representing an aggregate
of 552,030 shares. The options expire on April 1, 1998 and the warrants
expire on April 1, 2003. No options or warrants were exercised during 1996,
1995 or 1994.
In 1995, six members of the board of directors made loans to the Company
aggregating $293,610 with interest at 12% per annum. All loans were repaid
during the year with the exception of $25,610 outstanding at December 31,
1995. In connection with such loans, four directors accepted options to
purchase 54,287 shares of the Company's unregistered, restricted Common
Stock, all exercisable between June 17, 1995 and December 17, 1995 at $1.75
per share. All of such options expired unexercised.
A $195,904 note receivable due from an officer and director bearing
interest at 10% is reflected on the consolidated balance sheet in other notes
receivable at December 31, 1995. Effective April 11, 1996, the Company
entered into a settlement agreement with this officer under which (i) the
officer's employment was terminated, (ii) the officer entered a covenant not
to compete with the Company for three years, and (iii) the officer agreed to
provide ongoing consulting services to the Company through March 31, 1999.
In consideration for the agreement, the Company issued to the officer 142,534
shares of unregistered, restricted Common Stock (fair market value of
$249,120) and released the officer from his obligations to the Company under
the note receivable in a principal sum of $195,904, plus accrued but unpaid
interest of $39,179. The Company capitalized the consideration given for the
agreement and charges the amount to operating expenses on a straight line
basis over the term of the agreement. The unamortized balance of $394,888
related to the agreement is included in other noncurrent assets at December
31, 1996.
18. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary 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 materially adverse effect on the Company's financial
position or results of operations.
F-25
<PAGE>
SA TELELCOMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
19. BENEFIT PLAN
The Company adopted a 401K Retirement Plan (the 401K Plan) effective
January 1, 1996. Employees may elect to reduce their compensation and
contribute to the 401K Plan provided they are a full-time employee having
worked more than 1,000 hours in a six-month period and have attained the age
of twenty. Each employee may defer up to 10% of their salary not to exceed
the limit allowable by law in any one year. Vesting is 20% per year of
employment and the employee must be employed at December 31 to receive that
year's vesting. The Company may, at its option, make discretionary matching
contributions not to exceed a maximum of 5%. No Company contributions were
made during 1996. Distributions from the 401K Plan are not permitted before
the age of 59 1/2 except in the event of death, disability, termination of
employment or reason of proven financial hardship.
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
For the quarters ended
-----------------------------------------------
March 31, June 30,
-----------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues $7,027,391 $2,309,227 $7,210,554 $4,004,348
Income (loss)
from continuing
operations (432,130) (241,562) 87,384 (545,418)
Loss from
discontinued
operations - - - (250,000)
Net income (loss) (432,130) (241,562) 2,236,575 (795,418)
Income (loss)
per share (0.03) (0.02) 0.12 (0.07)
For the quarters ended
-----------------------------------------------
September 30, December 31,
-----------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenues $7,961,784 $ 7,459,367 $13,468,773 $ 6,975,079
Loss from
continuing
operations (835,405) (950,965) (4,202,008) (197,275)
Loss from
discontinued
operations - (225,000) - (4,055,742)
Net loss (1,167,218) (1,175,965) (4,691,742) (4,253,017)
Loss per share (0.07) (0.10) (0.30) (0.36)
F-26
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
3.1 Certificate of Incorporation of the Company, as amended through
December 31, 1994 (filed as Exhibit 3.1 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994 and incorporated herein
by reference)
3.2 Certificate of Designations, Preferences and Rights of Series A Cumulative
Convertible Preferred Stock (filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K/A for the event occurring July 31, 1995, filed with the
Commission on August 15, 1995 and incorporated herein by reference)
3.3 Certificate of Designations, Preferences and Rights of Series B Cumulative
Convertible Preferred Stock (filed as Exhibit 4.6 to the Company's Current
Report on Form 8-K/A for the event occurring July 31, 1995, filed with the
Commission on August 15, 1995 and incorporated herein by reference)
3.4 Certificate of Amendment filed with the Delaware Secretary of State on
August 3, 1995 (filed as Exhibit 3.4 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1995 and incorporated herein
by reference)
3.5 Certificate of Amendment of Certificate of Incorporation of SA
Telecommunications, Inc. filed with the Delaware Secretary of State on
July 9, 1996 (filed as Exhibit 3.1 to the Company's Quarterly Report on
Form 10-QSB/A for the quarter ended June 30, 1996 filed with the
Commission on August 29, 1996 and incorporated herein by reference)
3.6 Certificate of Elimination of Series B Cumulative Preferred Stock of the
Company filed with the Delaware Secretary of State on July 9, 1996 (filed
as Exhibit 3.2 to the Company's Quarterly Report on Form 10-QSB/A for the
quarter ended June 30, 1996 filed with the Commission on August 29, 1996
and incorporated herein by reference)
3.7 Amended and Restated Bylaws of the Company (filed as Exhibit 3.5 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995 and incorporated herein by reference)
4.1 Indenture dated as of August 12, 1996 between the Company and United
States Trust Company of New York as Trustee (filed as Exhibit 4.1 to
the Company's Quarterly Report on Form 10-QSB/A for the quarter ended
June 30, 1996, filed with the Commission on August 29, 1996 and
incorporated herein by reference)
4.2 Purchase Agreement dated as of August 5, 1996 among the Company, Furman
Selz LLC and Rauscher Pierce Refsnes, Inc. (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-QSB/A for the quarter ended June 30,
1996, filed with the Commission on August 29, 1996 and incorporated herein
by reference)
I-1
<PAGE>
4.3 Registration Rights Agreement dated as of August 12, 1996 among the
Company, Furman Selz LLC and Rauscher Pierce Refsnes, Inc. (filed as
Exhibit 10.2 to the Company's Quarterly Report on Form 10-QSB/A for the
quarter ended June 30, 1996, filed with the Commission on August 29, 1996
and incorporated herein by reference)
4.4 Form of Series A Preferred Stock Certificate (filed as Exhibit 4.4 to the
Company's Current Report on Form 8-K/A for the event occurring July 31,
1995, filed with the Commission on August 15, 1995 and incorporated herein
by reference)
4.5 Form of Certificate Evidencing Common Stock (filed as Exhibit 4.19 to the
Company's Registration Statement on Form S-3 (Registration No. 33-64271)
and incorporated herein by reference)
9.1 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and ITEX
Corporation, dated June 30, 1992 (filed as Exhibit 9.1 to the Company's
Form 10-KSB for the year ended December 31, 1994 and incorporated herein
by reference)
9.2 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Terry
Houston, dated April 12, 1994 (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated May 16, 1994 and incorporated herein by
reference)
9.3 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Scott
Moster, dated April 12, 1994 (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated May 16, 1994 and incorporated herein
by reference)
9.4 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Roy D.
Duckworth, dated April 12, 1994 (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated May 16, 1994 and incorporated herein by
reference)
9.5 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Daniel J.
Dziuba, dated April 12, 1994 (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated May 16, 1994 and incorporated herein by
reference)
9.6 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and Paul
R. Miller, dated April 12, 1994 (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated May 16, 1994 and incorporated herein
by reference)
9.7 Voting Trust Agreement between Jack W. Matz, Jr. as trustee and David
L. Hover, dated April 12, 1994 (filed as Exhibit 2.2 to the Company's
Current Report on Form 8-K dated May 16, 1994 and incorporated herein
by reference)
9.8 Form of Voting Agreement, executed as of September 20, 1995 between
the Company, Jack W. Matz, Jr. and each of Seth Joseph Antine, Fred
Rudy, Jules Nordlicht, Moses Elias, Harry Adler, Dr. Seymour
Huberfeld, Connie Lerner, Mueller Trading L.P., Jack Ehrenhaus, Cong.
Ahavas Tzedach Vachsed and Laura Huberfeld/Naomi Bodner Partnership
(the "Investors") filed as Exhibit 4.15 to the Company's Registration
Statement on Form S-3 (Registration No. 33-64271) and incorporated
herein by reference)
I-2
<PAGE>
9.9 Voting Agreement dated as of April 11, 1996 among the Company, Terry
R. Houston and Jack W. Matz, Jr. (filed as Exhibit 9.1 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended March
31, 1996 and incorporated herein by reference)
9.10 Form of Voting Agreement dated as of May 7, 1996 among the Company,
Jack W. Matz, Jr. and each of Laura Huberfeld/Naomi Bodner
Partnership, Fred Rudy, Seth Joseph Antine, Harry Adler, Dr. Seymour
Huberfeld and Jules Nordlicht (the "1996 Investors") and schedule of
differences thereto (filed as Exhibit 9.1 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1996 and
incorporated herein by reference)
9.11 Pledge Agreement dated January 10, 1997 between Charles Tony Lonstein,
Agent, U.S. Communications, Inc. and the Company (Filed as Exhibit B
to Exhibit 2.1 to the Company's Current Report on Form 8-K for the
event occurring on January 10, 1996, filed with the Commission on
January 22, 1997 and incorporated herein by reference)
10.1 Share Purchase Agreement, dated as of July 31, 1995, by and between
the Company and Jesup & Lamont Capital Markets, Inc. (filed as
Exhibit 4.3 to the Company's Current Report on Form 8-K/A for the
event occurring on July 31, 1995, filed with the Commission on
October 13, 1995 and incorporated herein by reference)
10.2 Warrant Purchase Agreement, dated as of July 31, 1995, be and between
the Company and Jesup and Lamont Capital Markets, Inc. (filed as
Exhibit 4.4 to the Company's Current Report on Form 8-K/A for the
event occurring on July 31, 1995, filed with the Commission on
August 15, 1995 and incorporated herein by reference)
10.3 Common Stock Purchase Warrant Certificate issued to Jesup & Lamont
Capital Markets, Inc. (filed as Exhibit 4.5 to the Company's Current
Report on Form 8-K/A for the event occurring on July 31, 1995, filed
with the Commission on August 15, 1995 and incorporated herein by
reference)
10.4 Agreement dated as of October 26, 1995 between the Company and Jesup &
Lamont Capital Markets, Inc. (filed as Exhibit 4.18 to the Company's
Registration Statement on Form S-3 (Registration No. 33-64271) and
incorporated herein by reference)
10.5 Agreement dated as of October 26, 1995 by and between the Company and
each of the Investors (filed as Exhibit 4.16 to the Company's
Registration Statement on Form S-3 (Registration No. 33-64271) and
incorporated herein by reference)
10.6 Form of Warrant Certificates issued to each of the Investors and
schedule of differences thereto pursuant to General Instructions to
Item 601 (filed as Exhibit 4.14 to the Company's Registration
Statement on Form S-3 (Registration No. 33-64271) and incorporated
herein by reference)
10.7 Form of Subscription Agreements executed as of September 20, 1995 by
and between the Company and each of the Investors and schedule of
differences thereto pursuant to General Instructions to Item 601
(filed as Exhibit 4.13 to the Company's Registration Statement on
Form S-3 (Registration No. 33-64271) and incorporated herein by
reference)
I-3
<PAGE>
10.8 Employment Agreement dated March 24, 1995 by and between the Company
and Jack Matz (filed as Exhibit 10.8 to the Company's Annual Report on
Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
10.9 Amendment to Employment Contract dated as of March 13, 1996 by and
between the Company and Jack Matz (filed as Exhibit 10.19 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995 and incorporated herein by reference)
10.10 Employment Contract dated March 13, 1996 by and between the Company
and Paul R. Miller (filed as Exhibit 10.20 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1995 and
incorporated herein by reference)
10.11 Employment Agreement dated April 1, 1994 by and between LDN and Terry
Houston (filed as Exhibit 2.2 to the Company's Current Report on
Form 8-K, dated May 16, 1994, and incorporated herein by reference)
10.12 Settlement Agreement dated April 11, 1996 by and between the Company
and Terry Houston (filed as Exhibit 10.3 to the Company's Quarterly
Report on Form 10-QSB for the quarter ended March 31, 1996 and
incorporated herein by reference)
10.13 Amendment to Settlement Agreement dated June 10, 1996 between the
Company and Terry Houston (filed as Exhibit 10.13 to the Company's
Form S-2 Registration Statement (Registration No. 333-17547) and
incorporated herein by reference)
10.14 Severance Agreement dated as of March 18, 1996 by and between the
Company and J. David Darnell (filed as Exhibit 10.22 to the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1995 and
incorporated herein by reference)
10.15 1994 Stock Option Plan for Non-Employee Directors of the Company
(Non-Employee Director Plan")(filed as Item 2 of the Company's Proxy
Statement dated June 29, 1994 and incorporated herein by reference)
10.16 Form of Stock Option Agreement used in connection with Non-Employee
Director Plan (filed as Exhibit 10.12 to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
10.17 1994 Employee Stock Option Plan ("Employee Plan")(filed as Exhibit A
to the Company's Proxy Statement dated April 26, 1996 and incorporated
herein by reference)
10.18 Form of Non-Qualified Stock Option Agreement used in connection with
the Employee Plan (filed as Exhibit 10.15 to the Company's Annual
Report on Form 10-KSB for the year ended December 31, 1994 and
incorporated herein by reference)
10.19 Form of Incentive Stock Option Agreement used in connection with the
Employee Plan (filed as Exhibit 10.14 to the Company's Annual Report
on Form 10-KSB for the year ended December 31, 1994 and incorporated
herein by reference)
I-4
<PAGE>
10.20 Settlement Agreement dated March 25, 1996 between the Company and
Jesup & Lamont Capital Markets, Inc. (filed as Exhibit 10.38 to the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1995 and incorporated herein by reference)
10.21 Form of Subscription Agreement dated as of May 7, 1996 between the
Company and each of the 1996 Investors and schedule of differences
thereto pursuant to General Instruction 601 (filed as Exhibit 10.4 to
the Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1996 and incorporated herein by reference)
10.22 Form of Common Stock Purchase Warrant dated as of May 7, 1996 issued
to each of the 1996 Investors and schedule of differences thereto
pursuant to General Instruction 601 (filed as Exhibit 10.5 to the
Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1996 and incorporated herein by reference)
10.23 Consulting Agreement dated as of June 21, 1996 between the Company and
John Nugent (Filed as Exhibit 10.23 to the Company's Form S-2
Registration Statement (Registration No. 333-17547) and incorporated
herein by reference)
10.24 Lease Agreement effective as of October 11, 1995 between
Telecommunications Finance Group and Long Distance Network, Inc.
(Filed as Exhibit 10.24 to the Company's Form S-2 Registration
Statement (Registration No. 333-17547) and incorporated herein by
reference)
10.25 Stock Purchase Agreement dated as of January 10, 1997 among the
Company, Addtel Communications, Inc., Charles Tony Lonstein, Aviram
Lonstein, Daniel G. Lonstein and David R. Lonstein (filed as
Exhibit 2.1 to the Company's Current Report on Form 8-K, dated
January 10, 1997, and incorporated herein by reference)
10.26 Loan and Security Agreement dated December 26, 1996 among Greyrock
Business Credit and the Company, U.S. Communications, Inc., Long
Distance Network, Inc., and Southwest Long Distance Network, Inc.
(filed as Exhibit 10.1 to the Company's Current Report on Form 8-K,
dated January 10, 1997, and incorporated herein by reference)
10.27 Schedule to Loan and Security Agreement dated December 26, 1996 among
Greyrock Business Credit, the Company, U.S. Communications, Inc., Long
Distance Network, Inc. and Southwest Long Distance Network, Inc.
(filed as Exhibit 10.2 to the Company's Current Report on Form 8-K,
dated January 10, 1997, and incorporated herein by reference)
10.28 Cross-Corporate Continuing Guaranty dated December 26, 1996 of the
Company, U.S. Communications, Inc., Long Distance Network, Inc., and
Southwest Long Distance Network, Inc. (filed as Exhibit 10.3 to the
Company's Current Report on Form 8-K, dated January 10, 1997, and
incorporated herein by reference)
10.29 Continuing Guaranty dated December 26, 1996 of North American
Telecommunications Corporation, Baltic States and CIS Ventures, Inc.,
CIS Intelligence Information Services, Inc. and Uniquest
Communications, Inc. (filed as Exhibit 10.4 to the Company's Current
Report on Form 8-K, dated January 10, 1997, and incorporated herein by
reference)
I-5
<PAGE>
10.30 Pledge Agreement dated as of December 26, 1996 between Greyrock
Business Credit and the Company (filed as Exhibit 10.5 to the
Company's Current Report on Form 8-K, dated January 10, 1997, and
incorporated herein by reference)
10.31 Pledge Agreement dated as of December 26, 1996 between Greyrock
Business Credit and U.S. Communications, Inc. (filed as Exhibit 10.6
to the Company's Current Report on Form 8-K, dated January 10, 1997,
and incorporated herein by reference)
10.32 Security Agreement dated December 26, 1996 among Greyrock Business
Credit and North American Telecommunications Corporation, Baltic
States and CIS Ventures, Inc., CIS Intelligence Information Services,
Inc. and Uniquest Communications, Inc. (filed as Exhibit 10.7 to the
Company's Current Report on Form 8-K, dated January 10, 1997, and
incorporated herein by reference)
10.33 Severance Agreement dated as of March 18, 1996 by and between the
Company and Lynn H. Johnson (filed as Exhibit 10.33 to the Company's
Form S-2 Registration Statement (Registration No. 333-17547) and
incorporated herein by reference)
10.34 Assumption Agreement and Amendment to Loan Agreement dated February
12, 1997 between Greyrock Business Credit and AddTel Communications,
Inc., the Company, Long Distance Network, Inc., U.S. Communications,
Inc. and Southwest Long Distance Network, Inc.*
10.35 Pledge Agreement dated February 12, 1997 between Greyrock Business
Credit and the Company*
10.36 Cross-Corporate Continuing Guaranty dated February 12, 1997 of AddTel
Communications, Inc.*
10.37 Cross-Corporate Continuing Guaranty dated February 12, 1997 of the
Company, U.S. Communications, Inc., Long Distance Network, Inc., and
Southwest Long Distance Network, Inc.*
10.38 Continuing Guaranty dated February 12, 1997 of AddTel Communications,
Inc.*
10.39 Second Amendment to Employment Contract dated March 26, 1997 between
the Company and Jack W. Matz, Jr.*
10.40 Amendment to Employment Contract dated March 26, 1997 between the
Company and Paul R. Miller*
10.41 Purchase Agreement dated March 25, 1997 between the Company and
Northstar High Total Return Fund*
10.42 Registration Rights Agreement dated March 25, 1997 between the Company
and Northstar High Total Return Fund*
10.43 Severance Agreement dated March 26, 1997 between the Company and John
Nugent*
10.44 The Company's 10% Convertible Debenture Due 2006*
I-6
<PAGE>
21.1 Subsidiaries of the Company*
23.1 Consent of Price Waterhouse LLP*
27.1 Financial Data Schedule*
- -----------------
* Filed herewith
I-7
<PAGE>
<PAGE>
ASSUMPTION AGREEMENT AND
AMENDMENT TO LOAN DOCUMENTS
THIS ASSUMPTION AGREEMENT AND AMENDMENT TO LOAN DOCUMENTS is
entered into on February 12, 1997 among SA Telecommunications,
Inc. ("STEL"), U.S. Communications, Inc. ("USCI"), Long Distance
Network, Inc. ("Long Distance"), Southwest Long Distance Network,
Inc. ("Southwest"), AddTel Communications, Inc., a California
corporation ("AddTel") and Greyrock Business Credit, a Division
of NationsCredit Commercial Corporation ("GBC"). STEL, USCI,
Long Distance and Southwest are referred to herein, jointly and
severally, as the "Existing Borrowers". AddTel and the Existing
Borrowers are referred to herein, jointly and severally, as the
"Borrowers".
This Agreement is entered into with reference to the
following facts:
A. GBC and the Existing Borrowers are parties to that
certain Loan and Security Agreement dated December 26, 1996 (the
"Loan Agreement"). (The Loan Agreement, and all present and
future documents and instruments relating thereto are herein
collectively referred to as the "Loan Documents." Capitalized
terms used in this Agreement, which are not defined, shall have
the meanings set forth in the Loan Agreement.)
B. AddTel is a corporate affiliate of the Existing
Borrowers, and desires to join with the Existing Borrowers as a
co-borrower under the Loan Documents.
C. The parties desire to amend the Loan Agreement as
herein set forth, all of which amendments shall be effective on
the date hereof.
The parties agree as follows:
1. ASSUMPTION.
(a) AddTel hereby joins with the Existing Borrowers as
a Borrower under the Loan Agreement and other Loan Documents, and
AddTel hereby assumes and agrees to pay and perform when due all
present and future indebtedness, liabilities and obligations of
the Existing Borrowers under, based upon, or arising out of the
Loan Agreement, and all other Loan Documents, including without
limitation all of the "Obligations" as defined in the Loan
Agreement.
(b) All references in the Loan Agreement and the other
Loan Documents to "Borrower" shall be deemed to refer, jointly
and severally, to AddTel and the Existing Borrowers, and without
limiting the foregoing, all references in the Loan Agreement, and
the other Loan Documents to "Collateral", "Inventory",
"Equipment", "Receivables", "General Intangibles" and "Deposit
Accounts" shall be deemed to include all present and future
"Collateral", "Inventory", "Equipment", "Receivables", "General
Intangibles" and "Deposit Accounts" of AddTel as well as the
"Collateral", "Inventory", "Equipment", "Receivables", "General
Intangibles" and "Deposit Accounts" of the Existing Borrowers.
2. GRANT OF SECURITY INTEREST. Without limiting the
generality of the provisions of Section 1 above, as security for
all of the Obligations, AddTel hereby grants GBC a continuing
security interest in all of AddTel's interest in the following,
whether now owned or hereafter acquired, and wherever located:
All "Receivables," "Inventory," "Equipment," and "General
Intangibles," (as defined in Exhibit A) including, without
limitation, all of AddTel's Deposit Accounts (as defined in
<PAGE>
Exhibit A), all money, all collateral in which GBC is granted a
security interest pursuant to any other present or future
agreement, all property now or at any time in the future in GBC's
possession, and all proceeds (including proceeds of any insurance
policies, proceeds of proceeds and claims against third parties),
all products of the foregoing, and all books and records related
to any of the foregoing.
3. ALLOCATION OF LOANS. Loans under the Loan Agreement
with respect to AddTel's Receivables shall, in GBC's discretion,
be made to AddTel. AddTel shall be liable for all Loans to all
Borrowers and all other Obligations of all Borrowers under the
Loan Agreement and other Loan Documents.
4. GUARANTIES, STOCK PLEDGE, DEPOSIT ACCOUNTS.
Concurrently herewith:
(a) The Existing Borrowers shall execute and deliver
to GBC a Continuing Guaranty with respect to AddTel.
(b) AddTel shall execute and deliver to GBC a
Continuing Guaranty with respect to each of the Existing
Borrowers.
(c) Borrower shall cause North American
Telecommunications Corporation, Baltic States and CIS Ventures,
Inc., CIS Intelligence Information Services, Inc., and Uniquest
Communications, Inc. to execute and deliver to GBC a Continuing
Guaranty with respect to AddTel.
(d) STEL shall execute and deliver to GBC a Stock
Pledge Agreement, on GBC's standard form, with respect to all of
the outstanding stock of AddTel.
(e) AddTel shall, concurrently, execute and deliver to
GBC a Notice of Security Interest with respect to the Deposit
Accounts listed on Exhibit B, which AddTel represents and
warrants are all of its Deposit Accounts.
5. REPRESENTATIONS TRUE; NO DEFAULTS. Without limiting
any of the terms or provisions of the Loan Documents, AddTel
represents and warrants to GBC that all representations and
warranties of the Borrowers in the Loan Documents are true and
correct with respect to AddTel as though it was named therein as
the Borrower, and that no Event of Default and no event which,
with notice or passage of time or both, would constitute an Event
of Default under any of the Loan Documents has occurred and is
continuing.
6. GENERAL PROVISIONS. This Agreement and the Loan
Documents and the documents referred to herein set forth in full
all of the representations and agreements of the parties with
respect to the subject matter hereof and supersedes all prior
discussions, representations, agreements and understandings
between the parties with respect to the subject hereof. This
Agreement may not be modified or amended, nor may any rights
hereunder be waived, except in a writing signed by the parties
hereto. As herein expressly amended, all of the terms and
provisions of the Loan Agreement, and all other Loan Documents
shall continue in full force and effect and the same are hereby
ratified and confirmed. This Agreement is being entered
-2-
<PAGE>
into, and shall be governed by the laws of the State of
California. This Agreement may be executed in counterparts,
which, together shall constitute one and the same agreement.
AddTel: GBC:
ADDTEL COMMUNICATIONS, INC. GREYROCK BUSINESS CREDIT,
a Division of NationsCredit
Commercial Corporation
By J. David Darnell
----------------------------
Vice President By Ian Schnider
--------------------------
Title Managing Director & COO
-----------------------
Existing Borrower: Existing Borrower:
SA TELECOMMUNICATIONS, INC. LONG DISTANCE NETWORK, INC.
By J. David Darnell By J. David Darnell
-------------------------- ---------------------------
Vice President Vice President
Existing Borrower: Existing Borrower:
U.S. COMMUNICATIONS, INC. SOUTHWEST LONG DISTANCE
NETWORK, INC.
By J. David Darnell By J. David Darnell
-------------------------- ----------------------------
Vice President Vice President
-3-
<PAGE>
CONSENT
The undersigned, guarantors, acknowledge that their consent
to the foregoing Agreement is not required, but the undersigned
nevertheless do hereby consent to the foregoing Agreement and to
the documents and agreements referred to therein. The Continuing
Guarantees, and all other documents and agreements of the
undersigned in favor of GBC shall continue in full force and
effect and the same are hereby ratified and affirmed. This
Consent may be executed in counterparts. The signature of the
undersigned shall be fully effective even if other persons named
below fail to sign this Consent.
North American CIS Intelligence Information
Telecommunications Corporation Services, Inc.
By /s/ J. DAVID DARNELL By /s/ J. DAVID DARNELL
---------------------------- ---------------------------
Title Vice President Title Vice President
Baltic States and CIS Uniquest Communications, Inc.
Ventures, Inc.
By /s/ J. DAVID DARNELL By /s/ J. DAVID DARNELL
---------------------------- ---------------------------
Title Vice President Title Vice President
-4-
<PAGE>
Exhibit A
Certain Defined Terms
"Deposit Account" has the meaning set forth in Section 9105 of
the California Uniform Commercial Code.
"Equipment" means all of AddTel's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment,
furnishings, fixtures, trade fixtures, motor vehicles, tools,
parts, dyes, jigs, goods and other tangible personal property
(other than Inventory) of every kind and description used in
AddTel's operations or owned by AddTel and any interest in any of
the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of
the foregoing, wherever located.
"General Intangibles" means all general intangibles of AddTel,
whether now owned or hereafter created or acquired by AddTel,
including, without limitation, all choses in action, causes of
action, corporate or other business records, Deposit Accounts,
inventions, designs, drawings, blueprints, patents, patent
applications, trademarks and the goodwill of the business
symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists,
security and other deposits, rights in all litigation presently
or hereafter pending for any cause or claim (whether in contract,
tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of AddTel against GBC, rights to purchase
or sell real or personal property, rights as a licensor or
licensee of any kind, royalties, telephone numbers, proprietary
information, purchase orders, and all insurance policies and
claims (including life insurance, key man insurance, credit
insurance, liability insurance, property insurance and other
insurance), tax refunds and claims, computer programs, discs,
tapes and tape files, claims under guaranties, security interests
or other security held by or granted to AddTel, all rights to
indemnification and all other intangible property of every kind
and nature (other than Receivables).
"Inventory" means all of AddTel's now owned and hereafter
acquired goods, merchandise or other personal property, wherever
located, to be furnished under any contract of service or held
for sale or lease (including all raw materials, work in process,
finished goods and goods in transit), and all materials and
supplies of every kind, nature and description which are or might
be used or consumed in AddTel's business or used in connection
with the manufacture, packing, shipping, advertising, selling or
finishing of such goods, merchandise or other personal property,
and all warehouse receipts, documents of title and other
documents representing any of the foregoing.
"Receivables" means all of AddTel's now owned and hereafter
acquired accounts (whether or not earned by performance), letters
of credit, contract rights, chattel paper, instruments,
securities, documents and all other forms of obligations at any
time owing to AddTel, all guaranties and other security therefor,
all merchandise returned to or repossessed by AddTel, and all
rights of stoppage in transit and all other rights or remedies of
an unpaid vendor, lienor or secured party.
-1-
<PAGE>
[LOGO]
PLEDGE AGREEMENT
(SECURITIES)
Pledgor: SA Telecommunications, Inc.
Address: 1600 Promenade Center, 15th Floor
Richardson, Texas 75080
Date: February 12, 1997
THIS PLEDGE AGREEMENT ("Pledge Agreement"), dated the above
date, is entered into at between GREYROCK BUSINESS CREDIT, a
Division of NationsCredit Commercial Corporation ("GBC"), whose
address is 10880 Wilshire Boulevard, Suite 950, Los Angeles, CA
90024, and the pledgor named above ("Pledgor"), whose address is
set forth above.
1. PLEDGE OF SECURITIES. Pledgor shall concurrently deliver to
GBC the stock certificates and other securities listed on Exhibit
A hereto, together with duly executed instruments of assignment
thereof to GBC (which, together with all replacements and
substitutions therefor are hereinafter referred to as the
"Securities"). Pledgor hereby pledges to GBC and grants GBC a
security interest in the Securities, and all rights and remedies
relating to, or arising out of, any and all of the foregoing, and
all proceeds thereof (collectively, the "Collateral") to secure
the payment and performance of all "Obligations" (collectively,
the "Obligations"), as defined in the Loan and Security Agreement
between GBC and Pledgor and others dated December 26, 1996, and
all extensions and renewals and modifications thereof (the "Loan
Agreement"). Any and all stock dividends, rights, warrants,
options, puts, calls, conversion rights and other securities and
any and all property and money distributed or delivered with
respect to the Securities or issued upon the exercise of any
puts, calls, conversion rights, options, warrants or other rights
included in or pertaining to the Securities shall be included in
the term "Securities" as used herein and shall be subject to this
Pledge Agreement, and Pledgor shall deliver the same to GBC
immediately upon receipt thereof together with any necessary
instruments of transfer; provided, however, that until an Event
of Default (as hereinafter defined) shall occur, Pledgor may
retain any dividends paid in cash or its equivalent, with respect
to any stock included in the Securities and any interest paid
with respect to any bonds, debentures or other evidences of
indebtedness included in the Securities. Pledgor hereby
acknowledges that the acceptance of the pledge of the Securities
by GBC shall not constitute a commitment of any kind by GBC to
permit Pledgor to incur Obligations.
2. VOTING AND OTHER RIGHTS. Pledgor shall have the right
to exercise all voting rights with respect to the Securities,
provided no Event of Default (as hereinafter defined) has
occurred. Upon the occurrence * of any Event of Default, GBC
shall have the right (but not any obligation) to exercise all
voting rights with respect to the Securities. Provided no Event
of Default has occurred, Pledgor shall have the right to exercise
all puts, calls, straddles, conversion rights, options, warrants,
and other rights and remedies with respect to the Securities,
provided Pledgor obtains the prior written consent of GBC
thereto. GBC shall have no responsibility or liability
whatsoever for the exercise of, or failure to exercise, any puts,
calls, straddles, conversion rights, options, warrants, rights to
vote or consent, or other rights with respect to any of the
Securities. **, GBC shall have the right from time to time to
transfer all or any part of the Securities to GBC's own name or
the name of its nominee.
*and during the continuance
**Upon the occurrence and during the continuance of an Event
of Default
-1-
<PAGE>
Greyrock Business Credit Pledge Agreement
- -----------------------------------------------------------------
3.REPRESENTATIONS AND WARRANTIES. Pledgor hereby represents
and warrants to GBC that Pledgor now has, and throughout the term
of this Agreement will at all times have, good title to the
Securities and the other Collateral, free and clear of any and
all security interests, liens and claims of any kind whatsoever.
4.EVENTS OF DEFAULT. If any one or more of the following
events shall occur, any such event shall constitute an Event of
Default and Pledgor shall provide GBC with immediate notice
thereof: (a) Any warranty, representation, statement, report or
certificate made or delivered to GBC by Pledgor or any of
Pledgor's officers, employees or agents now or hereafter is
incorrect, false, untrue or misleading in any material respect;
or (b) Pledgor shall fail to promptly pay or perform when due
part or all of any of the Obligations, or any default or event of
default shall occur under the Loan Agreement or any other present
or future instrument, document or agreement between GBC and
Pledgor.
5.REMEDIES. If an Event of Default shall occur, Pledgor shall
give immediate written notice thereof to GBC. Upon the
occurrence * of an Event of Default, and at any time thereafter,
GBC shall have the right, without notice to or demand upon
Pledgor, to exercise any one or more of the following remedies:
(a) accelerate and declare all or any part of the Obligations to
be immediately due, payable and performable, notwithstanding any
deferred or installment payments allowed by any agreement or
instrument evidencing or relating to any of the same; (b) sell or
otherwise dispose of the Securities, and other Collateral, at a
public or private sale, for cash, or other property, or on
credit, with the authority to adjourn or postpone any such sale
from time to time without notice other than oral announcement at
the time scheduled for sale. GBC may directly or through any
affiliate purchase the Securities, and other Collateral, at any
such public disposition, and if permissible under applicable law,
at any private disposition. Pledgor and GBC hereby agree that it
shall conclusively be deemed commercially reasonable for GBC, in
connection with any sale or disposition of the Securities, to
impose restrictions and conditions as to the investment intent of
a purchaser or bidder, the ability of a purchaser or bidder to
bear the economic risk of an investment in the Securities, the
knowledge and experience in business and financial matters of a
purchaser or bidder, the access of a purchaser or bidder to
information concerning the issuer of the Securities, as well as
legend conditions and stop transfer instructions restricting
subsequent transfer of the Securities, and any other restrictions
or conditions which GBC believes to be necessary or advisable in
order to comply with any state or federal securities or other
laws. Pledgor acknowledges that the foregoing restrictions may
result in fewer proceeds being received upon such sale then would
otherwise be the case. Pledgor hereby agrees to provide to GBC
any and all information ** required by GBC in connection with any
sales of Securities by GBC hereunder. If, after the occurrence
of any Event of Default, Rule 144 promulgated by the Securities
and Exchange Commission (or any other similar rule) is available
for use by GBC in connection with the sales of any Securities
hereunder, Pledgor agrees not to utilize Rule 144 in the sale of
any securities held by Pledgor of the same class as the
Securities, without the prior written consent of GBC. Any and
all attorneys' fees, expenses, costs, liabilities and obligations
incurred by GBC in connection with the foregoing shall be added
to and become a part of the Obligations and shall be due from
Pledgor to GBC upon demand.
*and during the continuance of
**reasonably
6. REMEDIES, CUMULATIVE; NO WAIVER. The failure of GBC to
enforce any of the provisions of this Agreement at any time or
for any period of time shall not be construed to be a waiver of
any such provision or the right thereafter to enforce the same.
All remedies hereunder shall be cumulative and shall be in
addition to all rights, powers and remedies given to GBC by law.
7. TERM. This Agreement and GBC's rights hereunder shall
continue in full force and effect until all of the Obligations
have been fully paid, performed and discharged and the Loan
Agreement and all other agreements between Borrower and GBC have
terminated. Upon termination, GBC shall * return the Collateral
to Pledgor, with any necessary instruments of transfer.
*promptly
8. REVIVOR. If any payment made on any of the Obligations
shall for any reason be required to be returned by GBC, whether
on the ground that such payment constituted a preference or for
any other reason, then for purposes of this Agreement, and
notwithstanding any prior termination of this Agreement, such
payment shall be treated as not having been made, and this
Agreement shall in all respects be effective with respect to the
Obligations as though such payment had not been made; and if any
of the Collateral has been released or returned to Pledgor, then
Pledgor shall return such Collateral to GBC, to be held and dealt
with in accordance with the terms of this Agreement.
9. GENERAL PROVISIONS. This Agreement and the documents
referred to herein are the entire and only agreements between
Pledgor and GBC with respect to the subject matter hereof, and
all representations, warranties, agreements, or undertakings
heretofore or
-2-
<PAGE>
Greyrock Business Credit Pledge Agreement
- -----------------------------------------------------------------
contemporaneously made, with respect to the subject matter
hereof, which are not set forth herein or therein, are superseded
hereby. The terms and provisions hereof may not be waived,
altered, modified, or amended except in a writing executed by
Pledgor and GBC. All rights, benefits and privileges hereunder
shall inure to the benefit of and be enforceable by GBC and its
successors and assigns and shall be binding upon Pledgor and its
successors and assigns; provided that Pledgor may not transfer
any of its rights hereunder without the prior written consent of
GBC. Paragraph headings are used herein for convenience only.
Pledgor acknowledges that the same may not describe completely
the subject matter of the applicable paragraph, and the same
shall not be used in any manner to construe, limit, define or
interpret any term or provision hereof. Pledgor shall upon
demand reimburse GBC for all reasonable costs, fees and expenses
(including without limitation * attorneys' fees, whether or not
suit be brought), which are incurred by GBC in connection with,
or arising out of, this Agreement. This Agreement and all acts
and transactions pursuant hereto and the rights and obligations
of the parties hereto shall be governed, construed, and
interpreted in accordance with the internal laws (and not
conflict of laws rules) of the State of California. Pledgor
hereby agrees that all actions or proceedings relating directly
or indirectly hereto may, at the option of GBC, be litigated in
courts located within said State, and Pledgor hereby expressly
consents to the jurisdiction of any such court and consents to
the service of process in any such action or proceeding by
personal delivery or by certified or registered mailing directed
to Pledgor at its last address known to GBC.
*reasonable
10. MUTUAL WAIVER OF RIGHT TO JURY TRIAL. GBC AND PLEDGOR
EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO:
(i) THIS AGREEMENT; OR (ii) ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN GBC AND PLEDGOR; OR (iii) ANY
CONDUCT, ACTS OR OMISSIONS OF GBC OR PLEDGOR OR ANY OF THEIR
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER
PERSONS AFFILIATED WITH GBC OR PLEDGOR; IN EACH OF THE FOREGOING
CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
PLEDGOR:
SA TELECOMMUNICATIONS, INC.
By /s/ J. David Darnell
-------------------------
Title Vice President - Finance
------------------------
GBC:
GREYROCK BUSINESS CREDIT
Division of NationsCredit Commercial Corporation
By /s/ Ian Schnider
---------------------------
Title Managing Director and COO
---------------------------
-3-
<PAGE>
Exhibit A
---------
500,000 shares of the Common Stock of
ADDTEL COMMUNICATIONS, INC.
which Pledgor represents and warrants represent 100% of the
issued and outstanding stock of said corporation. Pledgor shall
at all times during the term of this Agreement cause said stock
to continue to represent 100% of the issued and outstanding stock
of said corporation.
<PAGE>
[LOGO]
CROSS-CORPORATE CONTINUING GUARANTY
Borrower: AddTel Communications, Inc.
Guarantors: SA Telecommunications, Inc.
U.S. Communications, Inc.
Long Distance Network, Inc.
Southwest Long Distance Network, Inc.
Date: February 12, 1997
This Cross-Corporate Continuing Guaranty is executed by the
above-named guarantors (jointly and severally, the "Guarantor"),
as of the above date, in favor of GREYROCK BUSINESS CREDIT, a
Division of NationsCredit Commercial Corporation ("GBC"), whose
address is 10880 Wilshire Boulevard, Suite 950, Los Angeles, CA
90024 with respect to the Indebtedness of each and all of the
above-named borrowers (jointly and severally, the "Borrower").
1. CONTINUING GUARANTY. Guarantor hereby unconditionally
guarantees and promises to pay on demand to GBC in lawful money
of the United States, and to perform for the benefit of GBC, all
of the Borrower's present and future Indebtedness (as defined
below) to GBC.
2. "INDEBTEDNESS." As used in this Guaranty, the term
"Indebtedness" is used in its most comprehensive sense and shall
mean and include without limitation: (a) any and all debts,
duties, obligations, liabilities, representations, warranties and
guaranties of Borrower or any one or more of them, heretofore,
now, or hereafter made, incurred, or created, whether directly to
GBC or acquired by GBC by assignment or otherwise, or held by GBC
on behalf of others, however arising, whether voluntary or
involuntary, due or not due, absolute or contingent, liquidated
or unliquidated, certain or uncertain, determined or
undetermined, monetary or nonmonetary, written or oral, and
whether Borrower may be liable individually or jointly with
others, and regardless of whether recovery thereon may be or
hereafter become barred by any statute of limitations, discharged
or uncollectible in any bankruptcy, insolvency or other
proceeding, or otherwise unenforceable; and (b) any and all
amendments, modifications, renewals and extensions of any or all
of the foregoing, including without limitation amendments,
modifications, renewals and extensions which are evidenced by any
new or additional instrument, document or agreement; and (c) any
and all attorneys' fees, court costs, and collection charges
incurred in endeavoring to collect or enforce any of the
foregoing against Borrower, Guarantor, or any other person liable
thereon (whether or not suit be brought) and any other expenses
of, for or incidental to collection thereof.
3. WAIVERS. Guarantor hereby waives: (a) presentment for
payment, notice of dishonor, demand, protest, and notice thereof
as to any instrument, and all other notices and demands to which
Guarantor might be entitled, including without limitation notice
of all of the following: the acceptance hereof; the creation,
existence, or acquisition of any Indebtedness; the amount of the
Indebtedness from time to time outstanding; any foreclosure sale
or other disposition of any property which secures any or all of
the Indebtedness or which secures the obligations of any other
guarantor of any or all of the Indebtedness; any adverse change
in Borrower's financial position; any other fact which might
increase Guarantor's risk; any default, partial payment or non-
payment of all or any part of the Indebtedness; the occurrence of
any other Event of Default (as hereinafter defined); any and all
agreements and arrangements between GBC and Borrower and any
changes, modifications, or extensions thereof, and any
revocation, modification or release of any guaranty of any or all
of the Indebtedness by any person (including without limitation
any other person signing this Guaranty); (b) any right to require
GBC to institute suit against, or to exhaust its rights and
remedies against, Borrower or any other person, or to proceed
against any property of any kind
-1-
<PAGE>
Greyrock Business Credit Cross Corporate Continuing Guaranty
- -----------------------------------------------------------------
which secures all or any part of the Indebtedness, or to exercise
any right of offset or other right with respect to any reserves,
credits or deposit accounts held by or maintained with GBC or any
indebtedness of GBC to Borrower, or to exercise any other right
or power, or pursue any other remedy GBC may have; (c) any
defense arising by reason of any disability or other defense of
Borrower or any other guarantor or any endorser, co-maker or
other person, or by reason of the cessation from any cause
whatsoever of any liability of Borrower or any other guarantor or
any endorser, co-maker or other person, with respect to all or
any part of the Indebtedness, or by reason of any act or omission
of GBC or others which directly or indirectly results in the
discharge or release of Borrower or any other guarantor or any
other person or any Indebtedness or any security therefor,
whether by operation of law or otherwise; (d) any defense arising
by reason of any failure of GBC to obtain, perfect, maintain or
keep in force any security interest in, or lien or encumbrance
upon, any property of Borrower or any other person; (e) any
defense based upon any failure of GBC to give Guarantor notice of
any sale or other disposition of any property securing any or all
of the Indebtedness, or any defects in any such notice that may
be given, or any failure of GBC to comply with any provision of
applicable law in enforcing any security interest in or lien upon
any property securing any or all of the Indebtedness including,
but not limited to, any failure by GBC to dispose of any property
securing any or all of the Indebtedness in a commercially
reasonable manner; (f) any defense based upon or arising out of
any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, liquidation or dissolution proceeding
commenced by or against Borrower or any other guarantor or any
endorser, co-maker or other person, including without limitation
any discharge of, or bar against collecting, any of the
Indebtedness (including without limitation any interest thereon),
in or as a result of any such proceeding; and (g) the benefit of
any and all statutes of limitation with respect to any action
based upon, arising out of or related to this Guaranty. Until
all of the Indebtedness has been paid, performed, and discharged
in full, nothing shall discharge or satisfy the liability of
Guarantor hereunder except the full performance and payment of
all of the Indebtedness. If any claim is ever made upon GBC for
repayment or recovery of any amount or amounts received by GBC in
payment of or on account of any of the Indebtedness, because of
any claim that any such payment constituted a preferential
transfer or fraudulent conveyance, or for any other reason
whatsoever, and GBC repays all or part of said amount by reason
of any judgment, decree or order of any court or administrative
body having jurisdiction over GBC or any of its property, or by
reason of any settlement or compromise of any such claim effected
by GBC with any such claimant (including without limitation the
Borrower), then and in any such event, Guarantor agrees that any
such judgment, decree, order, settlement and compromise shall be
binding upon Guarantor, notwithstanding any revocation or release
of this Guaranty or the cancellation of any note or other
instrument evidencing any of the Indebtedness, or any release of
any of the Indebtedness, and the Guarantor shall be and remain
liable to GBC under this Guaranty for the amount so repaid or
recovered, to the same extent as if such amount had never
originally been received by GBC, and the provisions of this
sentence shall survive, and continue in effect, notwithstanding
any revocation or release of this Guaranty. Until all of the
Indebtedness has been irrevocably paid and performed in full,
Guarantor hereby expressly and unconditionally waives all rights
of subrogation, reimbursement and indemnity of every kind against
Borrower, and all rights of recourse to any assets or property of
Borrower, and all rights to any collateral or security held for
the payment and performance of any Indebtedness, including (but
not limited to) any of the foregoing rights which Guarantor may
have under any present or future document or agreement with any
Borrower or other person, and including (but not limited to) any
of the foregoing rights which Guarantor may have under any
equitable doctrine of subrogation, implied contract, or unjust
enrichment, or any other equitable or legal doctrine. Neither
GBC, nor any of its directors, officers, employees, agents,
attorneys or any other person affiliated with or representing GBC
shall be liable for any claims, demands, losses or damages, of
any kind whatsoever, made, claimed, incurred or suffered by
Guarantor or any other party through the ordinary negligence of
GBC, or any of its directors, officers, employees, agents,
attorneys or any other person affiliated with or representing
GBC.
4. CONSENTS. Guarantor hereby consents and agrees that, without
notice to or by Guarantor and without affecting or impairing in
any way the obligations or liability of Guarantor hereunder, GBC
may, from time to time before or after revocation of this
Guaranty, do any one or more of the following in GBC's sole and
absolute discretion: (a) accelerate, accept partial payments of,
compromise or settle, renew, extend the time for the payment,
discharge, or performance of, refuse to enforce, and release all
or any parties to, any or all of the Indebtedness; (b) grant any
other indulgence to Borrower or any other person in respect of
any or all of the Indebtedness or any other matter; (c) accept,
release, waive, surrender, enforce, exchange, modify, impair, or
extend the time for the performance, discharge, or payment of,
any and all property of any kind securing any or all of the
Indebtedness or any guaranty of any or all of the Indebtedness,
or on which GBC at any time may have a lien, or refuse to enforce
its rights or make any compromise or settlement or agreement
therefor in respect of any or all of such property; (d)
substitute or add, or take any action or omit to take any action
which results in the release of, any one or more endorsers or
guarantors of all or any part of the Indebtedness, including,
without limitation one or more parties to this
-2-
<PAGE>
Greyrock Business Credit Cross-Corporate Continuing Guaranty
- -----------------------------------------------------------------
Guaranty, regardless of any destruction or impairment of any
right of contribution or other right of Guarantor; (e) amend,
alter or change in any respect whatsoever any term or provision
relating to any or all of the Indebtedness, including the rate of
interest thereon; (f) apply any sums received from Borrower, any
other guarantor, endorser, or co-signer, or from the disposition
of any collateral or security, to any indebtedness whatsoever
owing from such person or secured by such collateral or security,
in such manner and order as GBC determines in its sole
discretion, and regardless of whether such indebtedness is part
of the Indebtedness, is secured, or is due and payable; (g) apply
any sums received from Guarantor or from the disposition of any
collateral or security securing the obligations of Guarantor, to
any of the Indebtedness in such manner and order as GBC
determines in its sole discretion, regardless of whether or not
such Indebtedness is secured or is due and payable. Guarantor
consents and agrees that GBC shall be under no obligation to
marshal any assets in favor of Guarantor, or against or in
payment of any or all of the Indebtedness. Guarantor further
consents and agrees that GBC shall have no duties or
responsibilities whatsoever with respect to any property securing
any or all of the Indebtedness. Without limiting the generality
of the foregoing, GBC shall have no obligation to monitor,
verify, audit, examine, or obtain or maintain any insurance with
respect to, any property securing any or all of the Indebtedness.
5. NO COMMITMENT. Guarantor acknowledges and agrees that
acceptance by GBC of this Guaranty shall not constitute a
commitment of any kind by GBC to extend such credit or other
financial accommodation to Borrower or to permit Borrower to
incur Indebtedness to GBC.
6. EXERCISE OF RIGHTS AND REMEDIES; FORECLOSURE OF TRUST DEEDS.
Guarantor consents and agrees that, without notice to or by
Guarantor and without affecting or impairing in any way the
obligations or liability of Guarantor hereunder, GBC may, from
time to time *, before or after revocation of this Guaranty,
exercise any right or remedy it may have with respect to any or
all of the Indebtedness or any property securing any or all of
the Indebtedness or any guaranty thereof, including without
limitation judicial foreclosure, nonjudicial foreclosure,
exercise of a power of sale, and taking a deed, assignment or
transfer in lieu of foreclosure as to any such property, and
Guarantor expressly waives any defense based upon the exercise of
any such right or remedy, notwithstanding the effect thereof upon
any of Guarantor's rights, including without limitation, any
destruction of Guarantor's right of subrogation against Borrower
and any destruction of Guarantor's right of contribution or other
right against any other guarantor of any or all of the
Indebtedness or against any other person, whether by operation of
Sections 580a, 580d or 726 of the California Code of Civil
Procedure, or any comparable provisions of the laws of any other
jurisdiction, or any other statutes or rules of law now or
hereafter in effect, or otherwise. Without limiting the
generality of the foregoing, (a) Guarantor waives all rights and
defenses arising out of an election of remedies by GBC, even
though that election of remedies, such as a nonjudicial
foreclosure with respect to security for any of the Indebtedness,
has destroyed the guarantor's rights of subrogation and
reimbursement against the principal by the operation of Section
580d of the Code of Civil Procedure or otherwise. (b) Guarantor
further waives all rights and defenses arising out of an election
of remedies by GBC, even though that election of remedies, such
as a nonjudicial foreclosure with respect to security for any of
the Indebtedness, has destroyed the guarantor's rights of
subrogation, reimbursement and contribution against any other
guarantor of the guaranteed obligation, by the operation of
Section 580d of the Code of Civil Procedure or otherwise. (c)
Guarantor understands that if GBC forecloses any present or
future trust deed, which secures any or all of the Indebtedness
or which secures any other guaranty of any or all of the
Indebtedness, by nonjudicial foreclosure, Guarantor may, as a
result, have a complete defense to liability under this Guaranty,
based on the legal doctrine of estoppel and Sections 580a, 580d
or 726 of the California Code of Civil Procedure, and GUARANTOR
HEREBY EXPRESSLY WAIVES ALL SUCH DEFENSES. (d) Guarantor
understands and agrees that, in the event GBC in its sole
discretion forecloses any trust deed now or hereafter securing
any or all of the Indebtedness, by nonjudicial foreclosure,
Guarantor will remain liable to GBC for any deficiency, even
though Guarantor will lose his right of subrogation against the
Borrower, and even though Guarantor will be unable to recover
from the Borrower the amount of the deficiency for which
Guarantor is liable, and even though Guarantor may have retained
his right of subrogation against Borrower if GBC had foreclosed
said trust deed by judicial foreclosure as opposed to nonjudicial
foreclosure, and even though absent the waivers set forth herein
Guarantor may have had a complete defense to any liability for
any deficiency hereunder. (e) Guarantor understands and agrees
that, in the event GBC in its sole discretion forecloses any
trust deed now or hereafter securing any other guaranty of any or
all of the Indebtedness, by nonjudicial foreclosure, Guarantor
will remain liable to GBC for any deficiency, even though
Guarantor will lose his right of subrogation or contribution
against the other guarantor, and even though Guarantor will be
unable to recover from the other guarantor any part of the
deficiency for which Guarantor is liable, and even though
Guarantor may have retained his right of subrogation or
contribution against the other guarantor if GBC had foreclosed
said trust deed by judicial foreclosure as opposed to nonjudicial
foreclosure, and even though absent the waivers set forth herein
Guarantor may have had a complete defense to any liability for
any deficiency hereunder.
*after an Event of Default which is continuing
-3-
<PAGE>
Greyrock Business Credit Cross-Corporate Continuing Guaranty
- -----------------------------------------------------------------
7. ACCELERATION. Notwithstanding the terms of all or any part of
the Indebtedness, the obligations of the Guarantor hereunder to
pay and perform all of the Indebtedness shall, at the option of
GBC, immediately become due and payable, without notice, and
without regard to the expressed maturity of any of the
Indebtedness, in the event: (a) Guarantor shall fail to pay or
perform when due any of its obligations under this Guaranty; or
(b) any event of default occurs under any present or future loan
agreement or other instrument, document, or agreement between GBC
and Borrower or between GBC and Guarantor. The foregoing are
referred to in this Guaranty as "Events of Default".
8. INDEMNITY. Guarantor hereby agrees to indemnify GBC and hold
GBC harmless from and against any and all claims, debts,
liabilities, demands, obligations, actions, causes of action,
penalties, costs and expenses (including without limitation *
attorneys' fees), of every nature, character and description,
which GBC may sustain or incur based upon or arising out of any
of the Indebtedness, any actual or alleged failure to collect and
pay over any withholding or other tax relating to Borrower or its
employees, any relationship or agreement between GBC and
Borrower, any actual or alleged failure of GBC to comply with any
writ of attachment or other legal process relating to Borrower or
any of its property, or any other matter, cause or thing
whatsoever occurred, done, omitted or suffered to be done by GBC
relating in any way to Borrower or the Indebtedness (except any
such amounts sustained or incurred as the result of the gross
negligence or willful misconduct of GBC or any of its directors,
officers, employees, agents, attorneys, or any other person
affiliated with or representing GBC). Notwithstanding any
provision in this Guaranty to the contrary, the indemnity
agreement set forth in this Section shall survive any termination
or revocation of this Guaranty and shall for all purposes
continue in full force and effect.
*reasonable
9. SUBORDINATION. *Any and all rights of Guarantor under any and
all debts, liabilities and obligations owing from Borrower to
Guarantor, including any security for and guaranties of any such
obligations, whether now existing or hereafter arising, are
hereby subordinated in right of payment to the prior payment in
full of all of the Indebtedness. If any Event of Default has
occurred, Borrower and any assignee, trustee in bankruptcy,
receiver, or any other person having custody or control over any
or all of Borrower's property are hereby authorized and directed
to pay to GBC the entire unpaid balance of the Indebtedness
before making any payments whatsoever to Guarantor, whether as a
creditor, shareholder, or otherwise; and insofar as may be
necessary for that purpose, Guarantor hereby assigns and
transfers to GBC all rights to any and all debts, liabilities and
obligations owing from Borrower to Guarantor, including any
security for and guaranties of any such obligations, whether now
existing or hereafter arising, including without limitation any
payments, dividends or distributions out of the business or
assets of Borrower. Any amounts received by Guarantor in
violation of the foregoing provisions shall be received and held
as trustee for the benefit of GBC and shall forthwith be paid
over to GBC to be applied to the Indebtedness in such order and
sequence as GBC shall in its sole discretion determine, without
limiting or affecting any other right or remedy which GBC may
have hereunder or otherwise and without otherwise affecting the
liability of Guarantor hereunder. Guarantor hereby expressly
waives any right to set-off or assert any counterclaim against
Borrower.
*After the occurrence and during the continuance of an Event of
Default
10. REVOCATION. This is a Continuing Guaranty relating to all
of the Indebtedness, including Indebtedness arising under
successive transactions which from time to time continue the
Indebtedness or renew it after it has been satisfied. The
obligations of Guarantor hereunder may be terminated only as to
future transactions and only by giving 90 days' advance written
notice thereof to GBC at its address above by registered first-
class U.S. mail, postage prepaid, return receipt requested. No
such revocation shall be effective until 90 days following the
date of actual receipt thereof by GBC. Notwithstanding such
revocation, this Guaranty and all consents, waivers and other
provisions hereof shall continue in full force and effect as to
any and all Indebtedness which is outstanding on the effective
date of revocation and all extensions, renewals and modifications
of said Indebtedness (including without limitation amendments,
extensions, renewals and modifications which are evidenced by new
or additional instruments, documents or agreements executed after
revocation), and all interest thereon, then and thereafter
accruing, and all * attorneys' fees, court costs and collection
charges theretofore and thereafter incurred in endeavoring to
collect or enforce any of the foregoing against Borrower,
Guarantor or any other person liable thereon (whether or not suit
be brought) and any other expenses of, for or incidental to
collection thereof.
*reasonable
11. INDEPENDENT LIABILITY. Guarantor hereby agrees that one or
more successive or concurrent actions may be brought hereon
against Guarantor, in the same action in which Borrower may be
sued or in separate actions, as often as deemed advisable by GBC.
The liability of Guarantor hereunder is exclusive and independent
of any other guaranty of any or all of the Indebtedness whether
-4-
<PAGE>
Greyrock Business Credit Cross-Corporate Continuing Guaranty
- -----------------------------------------------------------------
executed by Guarantor or by any other guarantor (including
without limitation any other persons signing this Guaranty). The
liability of Guarantor hereunder shall not be affected, revoked,
impaired, or reduced by any one or more of the following: (a)
the fact that the Indebtedness exceeds the maximum amount of
Guarantor's liability, if any, specified herein or elsewhere (and
no agreement specifying a maximum amount of Guarantor's liability
shall be enforceable unless set forth in a writing signed by GBC
or set forth in this Guaranty); or (b) any direction as to the
application of payment by Borrower or by any other party; or (c)
any other continuing or restrictive guaranty or undertaking or
any limitation on the liability of any other guarantor (whether
under this Guaranty or under any other agreement); or (d) any
payment on or reduction of any such other guaranty or
undertaking; or (e) any revocation, amendment, modification or
release of any such other guaranty or undertaking; or (f) any
dissolution or termination of, or increase, decrease, or change
in membership of any Guarantor which is a partnership. Guarantor
hereby expressly represents that it was not induced to give this
Guaranty by the fact that there are or may be other guarantors
either under this Guaranty or otherwise, and Guarantor agrees
that any release of any one or more of such other guarantors
shall not release Guarantor from its obligations hereunder either
in full or to any lesser extent.
12. FINANCIAL CONDITION OF BORROWER. Guarantor is fully aware
of the financial condition of Borrower and is executing and
delivering this Guaranty at Borrower's request and based solely
upon its own independent investigation of all matters pertinent
hereto, and Guarantor is not relying in any manner upon any
representation or statement of GBC with respect thereto.
Guarantor represents and warrants that it is in a position to
obtain, and Guarantor hereby assumes full responsibility for
obtaining, any additional information concerning Borrower's
financial condition and any other matter pertinent hereto as
Guarantor may desire, and Guarantor is not relying upon or
expecting GBC to furnish to him any information now or hereafter
in GBC's possession concerning the same or any other matter.
13. REPRESENTATIONS AND WARRANTIES. Guarantor hereby represents
and warrants that (i) it is in Guarantor's direct interest to
assist Borrower in procuring credit, because Borrower is an
affiliate of Guarantor, furnishes goods or services to Guarantor,
purchases or acquires goods or services from Guarantor, and/or
otherwise has a direct or indirect corporate or business
relationship with Guarantor, (ii) this Guaranty has been duly and
validly authorized, executed and delivered and constitutes the
valid and binding obligation of Guarantor, enforceable in
accordance with its terms, and (iii) the execution and delivery
of this Guaranty does not violate or constitute a default under
(with or without the giving of notice, the passage of time, or
both) any order, judgment, decree, instrument or agreement to
which Guarantor is a party or by which it or its assets are
affected or bound.
14. COSTS; INTEREST. Whether or not suit be instituted,
Guarantor agrees to reimburse GBC on demand for all reasonable
attorneys' fees and all other reasonable costs and expenses
incurred by GBC in enforcing this Guaranty, or arising out of or
relating in any way to this Guaranty, or in enforcing any of the
Indebtedness against Borrower, Guarantor, or any other person, or
in connection with any property of any kind securing all or any
part of the Indebtedness. Without limiting the generality of the
foregoing, and in addition thereto, Guarantor shall reimburse GBC
on demand for all reasonable attorneys' fees and costs GBC incurs
in any way relating to Guarantor, Borrower or the Indebtedness,
in order to: obtain legal advice; enforce or seek to enforce any
of its rights; commence, intervene in, respond to, or defend any
action or proceeding; file, prosecute or defend any claim or
cause of action in any action or proceeding (including without
limitation any probate claim, bankruptcy claim, third-party
claim, secured creditor claim, reclamation complaint, and
complaint for relief from any stay under the Bankruptcy Code or
otherwise); protect, obtain possession of, sell, lease, dispose
of or otherwise enforce any security interest in or lien on any
property of any kind securing any or all of the Indebtedness; or
represent GBC in any litigation with respect to Borrower's or
Guarantor's affairs. In the event either GBC or Guarantor files
any lawsuit against the other predicated on a breach of this
Guaranty, the prevailing party in such action shall be entitled
to recover its attorneys' fees and costs of suit from the non-
prevailing party. All sums due under this Guaranty shall bear
interest from the date due until the date paid at the highest
rate charged with respect to any of the Indebtedness.
15. NOTICES. Any notice which a party shall be required or
shall desire to give to the other hereunder (except for notice of
revocation, which shall be governed by Section 10 of this
Guaranty) shall be given by personal delivery or by telecopier or
by depositing the same in the United States mail, first class
postage pre-paid, addressed to GBC at its address set forth in
the heading of this Guaranty and to Guarantor at its address
provided by Guarantor to GBC in writing, and such notices shall
be deemed duly given on the date of personal delivery or one day
after the date telecopied or 3 business days after the date of
mailing as aforesaid. GBC and Guarantor may change their address
for purposes of receiving notices hereunder by giving written
notice thereof to the other party in accordance herewith.
Guarantor shall give GBC immediate written notice of any change
in its address.
16. CLAIMS. Guarantor agrees that any claim or cause of action
by Guarantor against GBC, or any of GBC's directors, officers,
employees, agents, accountants or attorneys, based upon, arising
from, or relating to this
-5-
<PAGE>
Greyrock Business Credit Cross-Corporate Continuing Guaranty
- -----------------------------------------------------------------
Guaranty, or any other present or future agreement between GBC
and Guarantor or between GBC and Borrower, or any other
transaction contemplated hereby or thereby or relating hereto or
thereto, or any other matter, cause or thing whatsoever, whether
or not relating hereto or thereto, occurred, done, omitted or
suffered to be done by GBC, or by GBC's directors, officers,
employees, agents, accountants or attorneys, whether sounding in
contract or in tort or otherwise, shall be barred unless asserted
by Guarantor by the commencement of an action or proceeding in a
court of competent jurisdiction within Los Angeles County,
California, by the filing of a complaint within one year after
the first act, occurrence or omission upon which such claim or
cause of action, or any part thereof, is based and service of a
summons and complaint on an officer of GBC or any other person
authorized to accept service of process on behalf of GBC, within
30 days thereafter. Guarantor agrees that such one year period
is a reasonable and sufficient time for Guarantor to investigate
and act upon any such claim or cause of action. The one year
period provided herein shall not be waived, tolled, or extended
except by a specific written agreement of GBC. This provision
shall survive any termination of this Guaranty or any other
agreement.
17. CONSTRUCTION; SEVERABILITY. The term "Guarantor" as used
herein shall be deemed to refer to all and any one or more such
persons and their obligations hereunder shall be joint and
several. As used in this Guaranty, the term "property" is used
in its most comprehensive sense and shall mean all property of
every kind and nature whatsoever, including without limitation
real property, personal property, mixed property, tangible
property and intangible property. If any provision of this
Guaranty or the application thereof to any party or circumstance
is held invalid, void, inoperative or unenforceable, the
remainder of this Guaranty and the application of such provision
to other parties or circumstances shall not be affected thereby,
the provisions of this Guaranty being severable in any such
instance.
18. GENERAL PROVISIONS. GBC shall have the right to seek
recourse against Guarantor to the full extent provided for herein
and in any other instrument or agreement evidencing obligations
of Guarantor to GBC, and against Borrower to the full extent of
the Indebtedness. No election in one form of action or
proceeding, or against any party, or on any obligation, shall
constitute a waiver of GBC's right to proceed in any other form
of action or proceeding or against any other party. The failure
of GBC to enforce any of the provisions of this Guaranty at any
time or for any period of time shall not be construed to be a
waiver of any such provision or the right thereafter to enforce
the same. All remedies hereunder shall be cumulative and shall
be in addition to all rights, powers and remedies given to GBC by
law or under any other instrument or agreement. Time is of the
essence in the performance by Guarantor of each and every
obligation under this Guaranty. GBC shall have no obligation to
inquire into the power or authority of Borrower or any of its
officers, directors, employees, or agents acting or purporting to
act on its behalf, and any Indebtedness made or created in
reliance upon the professed exercise of any such power or
authority shall be included in the Indebtedness guaranteed
hereby. This Guaranty is the entire and only agreement between
Guarantor and GBC with respect to the guaranty of the
Indebtedness of Borrower by Guarantor, and all representations,
warranties, agreements, or undertakings heretofore or
contemporaneously made, which are not set forth herein, are
superseded hereby. No course of dealings between the parties, no
usage of the trade, and no parol or extrinsic evidence of any
nature shall be used or be relevant to supplement or explain or
modify any term or provision of this Guaranty. There are no
conditions to the full effectiveness of this Guaranty. The terms
and provisions hereof may not be waived, altered, modified, or
amended except in a writing executed by Guarantor and a duly
authorized officer of GBC. All rights, benefits and privileges
hereunder shall inure to the benefit of and be enforceable by GBC
and its successors and assigns and shall be binding upon
Guarantor and its successors and assigns. Section headings are
used herein for convenience only. Guarantor acknowledges that
the same may not describe completely the subject matter of the
applicable Section, and the same shall not be used in any manner
to construe, limit, define or interpret any term or provision
hereof.
19. GOVERNING LAW; VENUE AND JURISDICTION. This instrument and
all acts and transactions pursuant or relating hereto and all
rights and obligations of the parties hereto shall be governed,
construed, and interpreted in accordance with the internal laws
of the State of California. In order to induce GBC to accept
this Guaranty, and as a material part of the consideration
therefor, Guarantor (I) agrees that all actions or proceedings
relating directly or indirectly hereto shall, at the option of
GBC, be litigated in courts located within Los Angeles County,
California, (ii) consents to the jurisdiction of any such court
and consents to the service of process in any such action or
proceeding by personal delivery or any other method permitted by
law; and (iii) waives any and all rights Guarantor may have to
transfer or change the venue of any such action or proceeding.
20. RECEIPT OF COPY. Guarantor acknowledges receipt of a copy
of this Guaranty.
21. MUTUAL WAIVER OF RIGHT TO JURY TRIAL. GBC AND GUARANTOR
HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION, CLAIM,
LAWSUIT OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY
RELATING TO: (i) THIS GUARANTEE OR ANY SUPPLEMENT
-6-
<PAGE>
Greyrock Business Credit Cross-Corporate Continuing Guaranty
- -----------------------------------------------------------------
OR AMENDMENT THERETO; OR (ii) ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN GBC AND GUARANTOR; OR (iii) ANY
BREACH, CONDUCT, ACTS OR OMISSIONS OF GBC OR GUARANTOR OR ANY OF
THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS,
ATTORNEYS OR ANY OTHER PERSON AFFILIATED WITH OR REPRESENTING GBC
OR GUARANTOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE.
Guarantor Signature:
SA Telecommunications, Inc.
By /s/ J. David Darnell
-------------------------
Title Vice President - Finance
-------------------------
Guarantor Signature:
U.S. Communications, Inc.
By /s/ J. David Darnell
-------------------------
Title Vice President
-------------------------
Guarantor Signature:
Long Distance Network, Inc.
By /s/ J. David Darnell
-------------------------
Title Vice President
------------------------
Guarantor Signature:
Southwest Long Distance Network, Inc.
By /s/ J. David Darnell
------------------------
Title Vice President
------------------------
-7-
<PAGE>
[LOGO]
CROSS-CORPORATE CONTINUING GUARANTY
Borrower(s): SA Telecommunications, Inc.
U.S. Communications, Inc.
Long Distance Network, Inc.
Southwest Long Distance Network, Inc.
Guarantor(s): AddTel Communications, Inc.
Date: February 12, 1997
This Cross-Corporate Continuing Guaranty is executed by the
above-named guarantors (jointly and severally, the "Guarantor"),
as of the above date, in favor of GREYROCK BUSINESS CREDIT, a
Division of NationsCredit Commercial Corporation ("GBC"), whose
address is 10880 Wilshire Boulevard, Suite 950, Los Angeles, CA
90024 with respect to the Indebtedness of each and all of the
above-named borrowers (jointly and severally, the "Borrower").
1. CONTINUING GUARANTY. Guarantor hereby unconditionally
guarantees and promises to pay on demand to GBC in lawful money
of the United States, and to perform for the benefit of GBC, all
of the Borrower's present and future Indebtedness (as defined
below) to GBC.
2. "INDEBTEDNESS." As used in this Guaranty, the term
"Indebtedness" is used in its most comprehensive sense and shall
mean and include without limitation: (a) any and all debts,
duties, obligations, liabilities, representations, warranties and
guaranties of Borrower or any one or more of them, heretofore,
now, or hereafter made, incurred, or created, whether directly to
GBC or acquired by GBC by assignment or otherwise, or held by GBC
on behalf of others, however arising, whether voluntary or
involuntary, due or not due, absolute or contingent, liquidated
or unliquidated, certain or uncertain, determined or
undetermined, monetary or nonmonetary, written or oral, and
whether Borrower may be liable individually or jointly with
others, and regardless of whether recovery thereon may be or
hereafter become barred by any statute of limitations, discharged
or uncollectible in any bankruptcy, insolvency or other
proceeding, or otherwise unenforceable; and (b) any and all
amendments, modifications, renewals and extensions of any or all
of the foregoing, including without limitation amendments,
modifications, renewals and extensions which are evidenced by any
new or additional instrument, document or agreement; and (c) any
and all attorneys' fees, court costs, and collection charges
incurred in endeavoring to collect or enforce any of the
foregoing against Borrower, Guarantor, or any other person liable
thereon (whether or not suit be brought) and any other expenses
of, for or incidental to collection thereof.
3. WAIVERS. Guarantor hereby waives: (a) presentment for
payment, notice of dishonor, demand, protest, and notice thereof
as to any instrument, and all other notices and demands to which
Guarantor might be entitled, including without limitation notice
of all of the following: the acceptance hereof; the creation,
existence, or acquisition of any Indebtedness; the amount of the
Indebtedness from time to time outstanding; any foreclosure sale
or other disposition of any property which secures any or all of
the Indebtedness or which secures the obligations of any other
guarantor of any or all of the Indebtedness; any adverse change
in Borrower's financial position; any other fact which might
increase Guarantor's risk; any default, partial payment or non-
payment of all or any part of the Indebtedness; the occurrence of
any other Event of Default (as hereinafter defined); any and all
agreements and arrangements between GBC and Borrower and any
changes, modifications, or extensions thereof, and any
revocation, modification or release of any guaranty of any or all
of the Indebtedness by any person (including without limitation
any other person signing this Guaranty); (b) any right to require
GBC to institute suit against, or to exhaust its rights and
remedies against, Borrower or any other person, or to proceed
against any property of any kind
-1-
<PAGE>
Greyrock Business Credit Cross Corporate Continuing Guaranty
- -----------------------------------------------------------------
which secures all or any part of the Indebtedness, or to exercise
any right of offset or other right with respect to any reserves,
credits or deposit accounts held by or maintained with GBC or any
indebtedness of GBC to Borrower, or to exercise any other right
or power, or pursue any other remedy GBC may have; (c) any
defense arising by reason of any disability or other defense of
Borrower or any other guarantor or any endorser, co-maker or
other person, or by reason of the cessation from any cause
whatsoever of any liability of Borrower or any other guarantor or
any endorser, co-maker or other person, with respect to all or
any part of the Indebtedness, or by reason of any act or omission
of GBC or others which directly or indirectly results in the
discharge or release of Borrower or any other guarantor or any
other person or any Indebtedness or any security therefor,
whether by operation of law or otherwise; (d) any defense arising
by reason of any failure of GBC to obtain, perfect, maintain or
keep in force any security interest in, or lien or encumbrance
upon, any property of Borrower or any other person; (e) any
defense based upon any failure of GBC to give Guarantor notice of
any sale or other disposition of any property securing any or all
of the Indebtedness, or any defects in any such notice that may
be given, or any failure of GBC to comply with any provision of
applicable law in enforcing any security interest in or lien upon
any property securing any or all of the Indebtedness including,
but not limited to, any failure by GBC to dispose of any property
securing any or all of the Indebtedness in a commercially
reasonable manner; (f) any defense based upon or arising out of
any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, liquidation or dissolution proceeding
commenced by or against Borrower or any other guarantor or any
endorser, co-maker or other person, including without limitation
any discharge of, or bar against collecting, any of the
Indebtedness (including without limitation any interest thereon),
in or as a result of any such proceeding; and (g) the benefit of
any and all statutes of limitation with respect to any action
based upon, arising out of or related to this Guaranty. Until
all of the Indebtedness has been paid, performed, and discharged
in full, nothing shall discharge or satisfy the liability of
Guarantor hereunder except the full performance and payment of
all of the Indebtedness. If any claim is ever made upon GBC for
repayment or recovery of any amount or amounts received by GBC in
payment of or on account of any of the Indebtedness, because of
any claim that any such payment constituted a preferential
transfer or fraudulent conveyance, or for any other reason
whatsoever, and GBC repays all or part of said amount by reason
of any judgment, decree or order of any court or administrative
body having jurisdiction over GBC or any of its property, or by
reason of any settlement or compromise of any such claim effected
by GBC with any such claimant (including without limitation the
Borrower), then and in any such event, Guarantor agrees that any
such judgment, decree, order, settlement and compromise shall be
binding upon Guarantor, notwithstanding any revocation or release
of this Guaranty or the cancellation of any note or other
instrument evidencing any of the Indebtedness, or any release of
any of the Indebtedness, and the Guarantor shall be and remain
liable to GBC under this Guaranty for the amount so repaid or
recovered, to the same extent as if such amount had never
originally been received by GBC, and the provisions of this
sentence shall survive, and continue in effect, notwithstanding
any revocation or release of this Guaranty. Until all of the
Indebtedness has been irrevocably paid and performed in full,
Guarantor hereby expressly and unconditionally waives all rights
of subrogation, reimbursement and indemnity of every kind against
Borrower, and all rights of recourse to any assets or property of
Borrower, and all rights to any collateral or security held for
the payment and performance of any Indebtedness, including (but
not limited to) any of the foregoing rights which Guarantor may
have under any present or future document or agreement with any
Borrower or other person, and including (but not limited to) any
of the foregoing rights which Guarantor may have under any
equitable doctrine of subrogation, implied contract, or unjust
enrichment, or any other equitable or legal doctrine. Neither
GBC, nor any of its directors, officers, employees, agents,
attorneys or any other person affiliated with or representing GBC
shall be liable for any claims, demands, losses or damages, of
any kind whatsoever, made, claimed, incurred or suffered by
Guarantor or any other party through the ordinary negligence of
GBC, or any of its directors, officers, employees, agents,
attorneys or any other person affiliated with or representing
GBC.
4. CONSENTS. Guarantor hereby consents and agrees that,
without notice to or by Guarantor and without affecting or
impairing in any way the obligations or liability of Guarantor
hereunder, GBC may, from time to time before or after revocation
of this Guaranty, do any one or more of the following in GBC's
sole and absolute discretion: (a) accelerate, accept partial
payments of, compromise or settle, renew, extend the time for the
payment, discharge, or performance of, refuse to enforce, and
release all or any parties to, any or all of the Indebtedness;
(b) grant any other indulgence to Borrower or any other person in
respect of any or all of the Indebtedness or any other matter;
(c) accept, release, waive, surrender, enforce, exchange, modify,
impair, or extend the time for the performance, discharge, or
payment of, any and all property of any kind securing any or all
of the Indebtedness or any guaranty of any or all of the
Indebtedness, or on which GBC at any time may have a lien, or
refuse to enforce its rights or make any compromise or settlement
or agreement therefor in respect of any or all of such property;
(d) substitute or add, or take any action or omit to take any
action which results in the release of, any one or more endorsers
or guarantors of all or any part of the Indebtedness, including,
without limitation one or more parties to this
-2-
<PAGE>
Greyrock Business Credit Cross-Corporate Continuing Guaranty
- -----------------------------------------------------------------
Guaranty, regardless of any destruction or impairment of any
right of contribution or other right of Guarantor; (e) amend,
alter or change in any respect whatsoever any term or provision
relating to any or all of the Indebtedness, including the rate of
interest thereon; (f) apply any sums received from Borrower, any
other guarantor, endorser, or co-signer, or from the disposition
of any collateral or security, to any indebtedness whatsoever
owing from such person or secured by such collateral or security,
in such manner and order as GBC determines in its sole
discretion, and regardless of whether such indebtedness is part
of the Indebtedness, is secured, or is due and payable; (g) apply
any sums received from Guarantor or from the disposition of any
collateral or security securing the obligations of Guarantor, to
any of the Indebtedness in such manner and order as GBC
determines in its sole discretion, regardless of whether or not
such Indebtedness is secured or is due and payable. Guarantor
consents and agrees that GBC shall be under no obligation to
marshal any assets in favor of Guarantor, or against or in
payment of any or all of the Indebtedness. Guarantor further
consents and agrees that GBC shall have no duties or
responsibilities whatsoever with respect to any property securing
any or all of the Indebtedness. Without limiting the generality
of the foregoing, GBC shall have no obligation to monitor,
verify, audit, examine, or obtain or maintain any insurance with
respect to, any property securing any or all of the Indebtedness.
5. NO COMMITMENT. Guarantor acknowledges and agrees that
acceptance by GBC of this Guaranty shall not constitute a
commitment of any kind by GBC to extend such credit or other
financial accommodation to Borrower or to permit Borrower to
incur Indebtedness to GBC.
6. EXERCISE OF RIGHTS AND REMEDIES; FORECLOSURE OF TRUST DEEDS.
Guarantor consents and agrees that, without notice to or by
Guarantor and without affecting or impairing in any way the
obligations or liability of Guarantor hereunder, GBC may, from
time to time *, before or after revocation of this Guaranty,
exercise any right or remedy it may have with respect to any or
all of the Indebtedness or any property securing any or all of
the Indebtedness or any guaranty thereof, including without
limitation judicial foreclosure, nonjudicial foreclosure,
exercise of a power of sale, and taking a deed, assignment or
transfer in lieu of foreclosure as to any such property, and
Guarantor expressly waives any defense based upon the exercise of
any such right or remedy, notwithstanding the effect thereof upon
any of Guarantor's rights, including without limitation, any
destruction of Guarantor's right of subrogation against Borrower
and any destruction of Guarantor's right of contribution or other
right against any other guarantor of any or all of the
Indebtedness or against any other person, whether by operation of
Sections 580a, 580d or 726 of the California Code of Civil
Procedure, or any comparable provisions of the laws of any other
jurisdiction, or any other statutes or rules of law now or
hereafter in effect, or otherwise. Without limiting the
generality of the foregoing, (a) Guarantor waives all rights and
defenses arising out of an election of remedies by GBC, even
though that election of remedies, such as a nonjudicial
foreclosure with respect to security for any of the Indebtedness,
has destroyed the guarantor's rights of subrogation and
reimbursement against the principal by the operation of Section
580d of the Code of Civil Procedure or otherwise. (b) Guarantor
further waives all rights and defenses arising out of an election
of remedies by GBC, even though that election of remedies, such
as a nonjudicial foreclosure with respect to security for any of
the Indebtedness, has destroyed the guarantor's rights of
subrogation, reimbursement and contribution against any other
guarantor of the guaranteed obligation, by the operation of
Section 580d of the Code of Civil Procedure or otherwise. (c)
Guarantor understands that if GBC forecloses any present or
future trust deed, which secures any or all of the Indebtedness
or which secures any other guaranty of any or all of the
Indebtedness, by nonjudicial foreclosure, Guarantor may, as a
result, have a complete defense to liability under this Guaranty,
based on the legal doctrine of estoppel and Sections 580a, 580d
or 726 of the California Code of Civil Procedure, AND GUARANTOR
HEREBY EXPRESSLY WAIVES ALL SUCH DEFENSES. (d) Guarantor
understands and agrees that, in the event GBC in its sole
discretion forecloses any trust deed now or hereafter securing
any or all of the Indebtedness, by nonjudicial foreclosure,
Guarantor will remain liable to GBC for any deficiency, even
though Guarantor will lose his right of subrogation against the
Borrower, and even though Guarantor will be unable to recover
from the Borrower the amount of the deficiency for which
Guarantor is liable, and even though Guarantor may have retained
his right of subrogation against Borrower if GBC had foreclosed
said trust deed by judicial foreclosure as opposed to nonjudicial
foreclosure, and even though absent the waivers set forth herein
Guarantor may have had a complete defense to any liability for
any deficiency hereunder. (e) Guarantor understands and agrees
that, in the event GBC in its sole discretion forecloses any
trust deed now or hereafter securing any other guaranty of any or
all of the Indebtedness, by nonjudicial foreclosure, Guarantor
will remain liable to GBC for any deficiency, even though
Guarantor will lose his right of subrogation or contribution
against the other guarantor, and even though Guarantor will be
unable to recover from the other guarantor any part of the
deficiency for which Guarantor is liable, and even though
Guarantor may have retained his right of subrogation or
contribution against the other guarantor if GBC had foreclosed
said trust deed by judicial foreclosure as opposed to nonjudicial
foreclosure, and even though absent the waivers set forth herein
Guarantor may have had a complete defense to any liability for
any deficiency hereunder.
*after an Event of Default which is continuing
-3-
<PAGE>
Greyrock Business Credit Cross-Corporate Continuing Guaranty
- -----------------------------------------------------------------
7. ACCELERATION. Notwithstanding the terms of all or any part of
the Indebtedness, the obligations of the Guarantor hereunder to
pay and perform all of the Indebtedness shall, at the option of
GBC, immediately become due and payable, without notice, and
without regard to the expressed maturity of any of the
Indebtedness, in the event: (a) Guarantor shall fail to pay or
perform when due any of its obligations under this Guaranty; or
(b) any event of default occurs under any present or future loan
agreement or other instrument, document, or agreement between GBC
and Borrower or between GBC and Guarantor. The foregoing are
referred to in this Guaranty as "Events of Default".
8. INDEMNITY. Guarantor hereby agrees to indemnify GBC and hold
GBC harmless from and against any and all claims, debts,
liabilities, demands, obligations, actions, causes of action,
penalties, costs and expenses (including without limitation *
attorneys' fees), of every nature, character and description,
which GBC may sustain or incur based upon or arising out of any
of the Indebtedness, any actual or alleged failure to collect and
pay over any withholding or other tax relating to Borrower or its
employees, any relationship or agreement between GBC and
Borrower, any actual or alleged failure of GBC to comply with any
writ of attachment or other legal process relating to Borrower or
any of its property, or any other matter, cause or thing
whatsoever occurred, done, omitted or suffered to be done by GBC
relating in any way to Borrower or the Indebtedness (except any
such amounts sustained or incurred as the result of the gross
negligence or willful misconduct of GBC or any of its directors,
officers, employees, agents, attorneys, or any other person
affiliated with or representing GBC). Notwithstanding any
provision in this Guaranty to the contrary, the indemnity
agreement set forth in this Section shall survive any termination
or revocation of this Guaranty and shall for all purposes
continue in full force and effect.
*reasonable
9. SUBORDINATION. *Any and all rights of Guarantor under any and
all debts, liabilities and obligations owing from Borrower to
Guarantor, including any security for and guaranties of any such
obligations, whether now existing or hereafter arising, are
hereby subordinated in right of payment to the prior payment in
full of all of the Indebtedness. If any Event of Default has
occurred, Borrower and any assignee, trustee in bankruptcy,
receiver, or any other person having custody or control over any
or all of Borrower's property are hereby authorized and directed
to pay to GBC the entire unpaid balance of the Indebtedness
before making any payments whatsoever to Guarantor, whether as a
creditor, shareholder, or otherwise; and insofar as may be
necessary for that purpose, Guarantor hereby assigns and
transfers to GBC all rights to any and all debts, liabilities and
obligations owing from Borrower to Guarantor, including any
security for and guaranties of any such obligations, whether now
existing or hereafter arising, including without limitation any
payments, dividends or distributions out of the business or
assets of Borrower. Any amounts received by Guarantor in
violation of the foregoing provisions shall be received and held
as trustee for the benefit of GBC and shall forthwith be paid
over to GBC to be applied to the Indebtedness in such order and
sequence as GBC shall in its sole discretion determine, without
limiting or affecting any other right or remedy which GBC may
have hereunder or otherwise and without otherwise affecting the
liability of Guarantor hereunder. Guarantor hereby expressly
waives any right to set-off or assert any counterclaim against
Borrower.
*After the occurrence and during the continuance of an Event of
Default
10. REVOCATION. This is a Continuing Guaranty relating to all
of the Indebtedness, including Indebtedness arising under
successive transactions which from time to time continue the
Indebtedness or renew it after it has been satisfied. The
obligations of Guarantor hereunder may be terminated only as to
future transactions and only by giving 90 days' advance written
notice thereof to GBC at its address above by registered first-
class U.S. mail, postage prepaid, return receipt requested. No
such revocation shall be effective until 90 days following the
date of actual receipt thereof by GBC. Notwithstanding such
revocation, this Guaranty and all consents, waivers and other
provisions hereof shall continue in full force and effect as to
any and all Indebtedness which is outstanding on the effective
date of revocation and all extensions, renewals and modifications
of said Indebtedness (including without limitation amendments,
extensions, renewals and modifications which are evidenced by new
or additional instruments, documents or agreements executed after
revocation), and all interest thereon, then and thereafter
accruing, and all * attorneys' fees, court costs and collection
charges theretofore and thereafter incurred in endeavoring to
collect or enforce any of the foregoing against Borrower,
Guarantor or any other person liable thereon (whether or not suit
be brought) and any other expenses of, for or incidental to
collection thereof.
*reasonable
11. INDEPENDENT LIABILITY. Guarantor hereby agrees that one or
more successive or concurrent actions may be brought hereon
against Guarantor, in the same action in which Borrower may be
sued or in separate actions, as often as deemed advisable by GBC.
The liability of Guarantor hereunder is exclusive and independent
of any other guaranty of any or all of the Indebtedness whether
-4-
<PAGE>
Greyrock Business Credit Cross-Corporate Continuing Guaranty
- -----------------------------------------------------------------
executed by Guarantor or by any other guarantor (including
without limitation any other persons signing this Guaranty). The
liability of Guarantor hereunder shall not be affected, revoked,
impaired, or reduced by any one or more of the following: (a)
the fact that the Indebtedness exceeds the maximum amount of
Guarantor's liability, if any, specified herein or elsewhere (and
no agreement specifying a maximum amount of Guarantor's liability
shall be enforceable unless set forth in a writing signed by GBC
or set forth in this Guaranty); or (b) any direction as to the
application of payment by Borrower or by any other party; or (c)
any other continuing or restrictive guaranty or undertaking or
any limitation on the liability of any other guarantor (whether
under this Guaranty or under any other agreement); or (d) any
payment on or reduction of any such other guaranty or
undertaking; or (e) any revocation, amendment, modification or
release of any such other guaranty or undertaking; or (f) any
dissolution or termination of, or increase, decrease, or change
in membership of any Guarantor which is a partnership. Guarantor
hereby expressly represents that it was not induced to give this
Guaranty by the fact that there are or may be other guarantors
either under this Guaranty or otherwise, and Guarantor agrees
that any release of any one or more of such other guarantors
shall not release Guarantor from its obligations hereunder either
in full or to any lesser extent.
12. FINANCIAL CONDITION OF BORROWER. Guarantor is fully aware
of the financial condition of Borrower and is executing and
delivering this Guaranty at Borrower's request and based solely
upon its own independent investigation of all matters pertinent
hereto, and Guarantor is not relying in any manner upon any
representation or statement of GBC with respect thereto.
Guarantor represents and warrants that it is in a position to
obtain, and Guarantor hereby assumes full responsibility for
obtaining, any additional information concerning Borrower's
financial condition and any other matter pertinent hereto as
Guarantor may desire, and Guarantor is not relying upon or
expecting GBC to furnish to him any information now or hereafter
in GBC's possession concerning the same or any other matter.
13. REPRESENTATIONS AND WARRANTIES. Guarantor hereby represents
and warrants that (I) it is in Guarantor's direct interest to
assist Borrower in procuring credit, because Borrower is an
affiliate of Guarantor, furnishes goods or services to Guarantor,
purchases or acquires goods or services from Guarantor, and/or
otherwise has a direct or indirect corporate or business
relationship with Guarantor, (ii) this Guaranty has been duly and
validly authorized, executed and delivered and constitutes the
valid and binding obligation of Guarantor, enforceable in
accordance with its terms, and (iii) the execution and delivery
of this Guaranty does not violate or constitute a default under
(with or without the giving of notice, the passage of time, or
both) any order, judgment, decree, instrument or agreement to
which Guarantor is a party or by which it or its assets are
affected or bound.
14. COSTS; INTEREST. Whether or not suit be instituted,
Guarantor agrees to reimburse GBC on demand for all reasonable
attorneys' fees and all other reasonable costs and expenses
incurred by GBC in enforcing this Guaranty, or arising out of or
relating in any way to this Guaranty, or in enforcing any of the
Indebtedness against Borrower, Guarantor, or any other person, or
in connection with any property of any kind securing all or any
part of the Indebtedness. Without limiting the generality of the
foregoing, and in addition thereto, Guarantor shall reimburse GBC
on demand for all reasonable attorneys' fees and costs GBC incurs
in any way relating to Guarantor, Borrower or the Indebtedness,
in order to: obtain legal advice; enforce or seek to enforce any
of its rights; commence, intervene in, respond to, or defend any
action or proceeding; file, prosecute or defend any claim or
cause of action in any action or proceeding (including without
limitation any probate claim, bankruptcy claim, third-party
claim, secured creditor claim, reclamation complaint, and
complaint for relief from any stay under the Bankruptcy Code or
otherwise); protect, obtain possession of, sell, lease, dispose
of or otherwise enforce any security interest in or lien on any
property of any kind securing any or all of the Indebtedness; or
represent GBC in any litigation with respect to Borrower's or
Guarantor's affairs. In the event either GBC or Guarantor files
any lawsuit against the other predicated on a breach of this
Guaranty, the prevailing party in such action shall be entitled
to recover its attorneys' fees and costs of suit from the non-
prevailing party. All sums due under this Guaranty shall bear
interest from the date due until the date paid at the highest
rate charged with respect to any of the Indebtedness.
15. NOTICES. Any notice which a party shall be required or
shall desire to give to the other hereunder (except for notice of
revocation, which shall be governed by Section 10 of this
Guaranty) shall be given by personal delivery or by telecopier or
by depositing the same in the United States mail, first class
postage pre-paid, addressed to GBC at its address set forth in
the heading of this Guaranty and to Guarantor at its address
provided by Guarantor to GBC in writing, and such notices shall
be deemed duly given on the date of personal delivery or one day
after the date telecopied or 3 business days after the date of
mailing as aforesaid. GBC and Guarantor may change their address
for purposes of receiving notices hereunder by giving written
notice thereof to the other party in accordance herewith.
Guarantor shall give GBC immediate written notice of any change
in its address.
16. CLAIMS. Guarantor agrees that any claim or cause of action
by Guarantor against GBC, or any of GBC's directors, officers,
employees, agents, accountants or attorneys, based upon, arising
from, or relating to this
-5-
<PAGE>
Greyrock Business Credit Cross-Corporate Continuing Guaranty
- -----------------------------------------------------------------
Guaranty, or any other present or future agreement between GBC
and Guarantor or between GBC and Borrower, or any other
transaction contemplated hereby or thereby or relating hereto or
thereto, or any other matter, cause or thing whatsoever, whether
or not relating hereto or thereto, occurred, done, omitted or
suffered to be done by GBC, or by GBC's directors, officers,
employees, agents, accountants or attorneys, whether sounding in
contract or in tort or otherwise, shall be barred unless asserted
by Guarantor by the commencement of an action or proceeding in a
court of competent jurisdiction within Los Angeles County,
California, by the filing of a complaint within one year after
the first act, occurrence or omission upon which such claim or
cause of action, or any part thereof, is based and service of a
summons and complaint on an officer of GBC or any other person
authorized to accept service of process on behalf of GBC, within
30 days thereafter. Guarantor agrees that such one year period
is a reasonable and sufficient time for Guarantor to investigate
and act upon any such claim or cause of action. The one year
period provided herein shall not be waived, tolled, or extended
except by a specific written agreement of GBC. This provision
shall survive any termination of this Guaranty or any other
agreement.
17. CONSTRUCTION; SEVERABILITY. The term "Guarantor" as used
herein shall be deemed to refer to all and any one or more such
persons and their obligations hereunder shall be joint and
several. As used in this Guaranty, the term "property" is used
in its most comprehensive sense and shall mean all property of
every kind and nature whatsoever, including without limitation
real property, personal property, mixed property, tangible
property and intangible property. If any provision of this
Guaranty or the application thereof to any party or circumstance
is held invalid, void, inoperative or unenforceable, the
remainder of this Guaranty and the application of such provision
to other parties or circumstances shall not be affected thereby,
the provisions of this Guaranty being severable in any such
instance.
18. GENERAL PROVISIONS. GBC shall have the right to seek
recourse against Guarantor to the full extent provided for herein
and in any other instrument or agreement evidencing obligations
of Guarantor to GBC, and against Borrower to the full extent of
the Indebtedness. No election in one form of action or
proceeding, or against any party, or on any obligation, shall
constitute a waiver of GBC's right to proceed in any other form
of action or proceeding or against any other party. The failure
of GBC to enforce any of the provisions of this Guaranty at any
time or for any period of time shall not be construed to be a
waiver of any such provision or the right thereafter to enforce
the same. All remedies hereunder shall be cumulative and shall
be in addition to all rights, powers and remedies given to GBC by
law or under any other instrument or agreement. Time is of the
essence in the performance by Guarantor of each and every
obligation under this Guaranty. GBC shall have no obligation to
inquire into the power or authority of Borrower or any of its
officers, directors, employees, or agents acting or purporting to
act on its behalf, and any Indebtedness made or created in
reliance upon the professed exercise of any such power or
authority shall be included in the Indebtedness guaranteed
hereby. This Guaranty is the entire and only agreement between
Guarantor and GBC with respect to the guaranty of the
Indebtedness of Borrower by Guarantor, and all representations,
warranties, agreements, or undertakings heretofore or
contemporaneously made, which are not set forth herein, are
superseded hereby. No course of dealings between the parties, no
usage of the trade, and no parol or extrinsic evidence of any
nature shall be used or be relevant to supplement or explain or
modify any term or provision of this Guaranty. There are no
conditions to the full effectiveness of this Guaranty. The terms
and provisions hereof may not be waived, altered, modified, or
amended except in a writing executed by Guarantor and a duly
authorized officer of GBC. All rights, benefits and privileges
hereunder shall inure to the benefit of and be enforceable by GBC
and its successors and assigns and shall be binding upon
Guarantor and its successors and assigns. Section headings are
used herein for convenience only. Guarantor acknowledges that
the same may not describe completely the subject matter of the
applicable Section, and the same shall not be used in any manner
to construe, limit, define or interpret any term or provision
hereof.
19. GOVERNING LAW; VENUE AND JURISDICTION. This
instrument and all acts and transactions pursuant or relating
hereto and all rights and obligations of the parties hereto shall
be governed, construed, and interpreted in accordance with the
internal laws of the State of California. In order to induce GBC
to accept this Guaranty, and as a material part of the
consideration therefor, Guarantor (i) agrees that all actions or
proceedings relating directly or indirectly hereto shall, at the
option of GBC, be litigated in courts located within Los Angeles
County, California, (ii) consents to the jurisdiction of any such
court and consents to the service of process in any such action
or proceeding by personal delivery or any other method permitted
by law; and (iii) waives any and all rights Guarantor may have to
transfer or change the venue of any such action or proceeding.
20. RECEIPT OF COPY. Guarantor acknowledges receipt of a copy
of this Guaranty.
21. MUTUAL WAIVER OF RIGHT TO JURY TRIAL. GBC AND GUARANTOR
HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION, CLAIM,
LAWSUIT OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY
RELATING TO: (i) THIS GUARANTEE OR ANY SUPPLEMENT OR AMENDMENT
THERETO; OR (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR
AGREEMENT BETWEEN GBC AND GUARANTOR; OR (iii) ANY BREACH,
CONDUCT, ACTS OR OMISSIONS OF GBC OR GUARANTOR OR ANY OF THEIR
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR
ANY OTHER PERSON AFFILIATED WITH OR REPRESENTING GBC OR
GUARANTOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE.
-6-
<PAGE>
Greyrock Business Credit Cross-Corporate Continuing Guaranty
- -----------------------------------------------------------------
Guarantor Signature:
AddTel Communications, Inc.
By /s/ J. David Darnell
------------------------------
Title Vice President
-----------------------------
<PAGE>
[LOGO]
Continuing Guaranty
Borrower: AddTel Communications, Inc.
Guarantors: North American Telecommunications Corporation
Baltic States and CIS Ventures, Inc.
CIS Intelligence Information Services, Inc.
Uniquest Communications, Inc.
Date: February 12, 1997
This Continuing Guaranty is executed by the above-named guarantor(s)
(jointly and severally, the "Guarantor"), as of the above date, in favor
of Greyrock Business Credit, a Division of NationsCredit Commercial
Corporation ("GBC"), whose address is 10880 Wilshire Boulevard, Suite
950, Los Angeles, CA 90024, with respect to the Indebtedness of the
above-named borrower ("Borrower").
1. CONTINUING GUARANTY. Guarantor hereby unconditionally guarantees
and promises to pay on demand to GBC, at the address indicated above,
or at such other address as GBC may direct, in lawful money of the
United States, and to perform for the benefit of GBC, all Indebtedness
of Borrower now or hereafter owing to or held by GBC. As used herein,
the term "Indebtedness" is used in its most comprehensive sense and
shall mean and include without limitation: (a) any and all debts,
duties, obligations, liabilities, representations, warranties and
guaranties of Borrower or any one or more of them, heretofore, now, or
hereafter made, incurred, or created, whether directly to GBC or
acquired by GBC by assignment or otherwise, or held by GBC on behalf of
others, however arising, whether voluntary or involuntary, due or not
due, absolute or contingent, liquidated or unliquidated, certain or
uncertain, determined or undetermined, monetary or nonmonetary, written
or oral, and whether Borrower may be liable individually or jointly with
others, and regardless of whether recovery thereon may be
or hereafter become barred by any statute of limitations, discharged
or uncollectible in any bankruptcy, insolvency or other proceeding, or
otherwise unenforceable; and (b) any and all amendments,
modifications, renewals and extensions of any or all of the foregoing,
including without limitation amendments, modifications, renewals and
extensions which are evidenced by any new or additional instrument,
document or agreement; and (c) any and all attorneys' fees, court
costs, and collection charges incurred in endeavoring to collect or
enforce any of the foregoing against Borrower, Guarantor, or any other
person liable thereon (whether or not suit be brought) and any other
expenses of, for or incidental to collection thereof. As used herein,
the term "Borrower" shall include any successor to the business and
assets of Borrower, and shall also include Borrower in its capacity as
a debtor or debtor in possession under the federal Bankruptcy Code,
and any trustee, custodian or receiver for Borrower or any of its
assets, should Borrower hereafter become the subject of any bankruptcy
or insolvency proceeding, voluntary or involuntary; and all
indebtedness, liabilities and obligations incurred by any such person
shall be included in the Indebtedness guaranteed hereby. This
Guaranty is given in consideration for credit and other financial
accommodations which may, from time to time, be given by GBC to
Borrower in GBC's sole discretion, but Guarantor acknowledges and
agrees that acceptance by GBC of this Guaranty shall not constitute a
commitment of any kind by GBC to extend such credit or other financial
accommodation to Borrower or to permit Borrower to incur Indebtedness
to GBC. All sums due under this Guaranty shall bear interest from the
date due until the date paid at the highest rate charged with respect
to any of the Indebtedness.
-1-
<PAGE>
Greyrock Business Credit Continuing Guaranty
- ---------------------------------------------------------------------
2. Waivers. Guarantor hereby waives: (a) presentment for payment,
notice of dishonor, demand, protest, and notice thereof as to any
instrument, and all other notices and demands to which Guarantor might
be entitled, including without limitation notice of all of the
following: the acceptance hereof; the creation, existence, or
acquisition of any Indebtedness; the amount of the Indebtedness from
time to time outstanding; any foreclosure sale or other disposition of
any property which secures any or all of the Indebtedness or which
secures the obligations of any other guarantor of any or all of the
Indebtedness; any adverse change in Borrower's financial position; any
other fact which might increase Guarantor's risk; any default, partial
payment or non-payment of all or any part of the Indebtedness; the
occurrence of any other Event of Default (as hereinafter defined); any
and all agreements and arrangements between GBC and Borrower and any
changes, modifications, or extensions thereof, and any revocation,
modification or release of any guaranty of any or all of the
Indebtedness by any person (including without limitation any other
person signing this Guaranty); (b) any right to require GBC to
institute suit against, or to exhaust its rights and remedies against,
Borrower or any other person, or to proceed against any property of
any kind which secures all or any part of the Indebtedness, or to
exercise any right of offset or other right with respect to any
reserves, credits or deposit accounts held by or maintained with GBC
or any indebtedness of GBC to Borrower, or to exercise any other right
or power, or pursue any other remedy GBC may have; (c) any defense
arising by reason of any disability or other defense of Borrower or
any other guarantor or any endorser, co-maker or other person, or by
reason of the cessation from any cause whatsoever of any liability of
Borrower or any other guarantor or any endorser, co-maker or other
person, with respect to all or any part of the Indebtedness, or by
reason of any act or omission of GBC or others which directly or
indirectly results in the discharge or release of Borrower or any
other guarantor or any other person or any Indebtedness or any
security therefor, whether by operation of law or otherwise; (d) any
defense arising by reason of any failure of GBC to obtain, perfect,
maintain or keep in force any security interest in, or lien or
encumbrance upon, any property of Borrower or any other person; (e)
any defense based upon any failure of GBC to give Guarantor notice of
any sale or other disposition of any property securing any or all of
the Indebtedness, or any defects in any such notice that may be given,
or any failure of GBC to comply with any provision of applicable law
in enforcing any security interest in or lien upon any property
securing any or all of the Indebtedness including, but not limited to,
any failure by GBC to dispose of any property securing any or all of
the Indebtedness in a commercially reasonable manner; (f) any defense
based upon or arising out of any bankruptcy, insolvency,
reorganization, arrangement, readjustment of debt, liquidation or
dissolution proceeding commenced by or against Borrower or any other
guarantor or any endorser, co-maker or other person, including without
limitation any discharge of, or bar against collecting, any of the
Indebtedness (including without limitation any interest thereon), in
or as a result of any such proceeding; and (g) the benefit of any and
all statutes of limitation with respect to any action based upon,
arising out of or related to this Guaranty. Until all of the
Indebtedness has been paid, performed, and discharged in full, nothing
shall discharge or satisfy the liability of Guarantor hereunder except
the full performance and payment of all of the Indebtedness. If any
claim is ever made upon GBC for repayment or recovery of any amount or
amounts received by GBC in payment of or on account of any of the
Indebtedness, because of any claim that any such payment constituted a
preferential transfer or fraudulent conveyance, or for any other
reason whatsoever, and GBC repays all or part of said amount by reason
of any judgment, decree or order of any court or administrative body
having jurisdiction over GBC or any of its property, or by reason of
any settlement or compromise of any such claim effected by GBC with
any such claimant (including without limitation the Borrower), then
and in any such event, Guarantor agrees that any such judgment,
decree, order, settlement and compromise shall be binding upon
Guarantor, notwithstanding any revocation or release of this Guaranty
or the cancellation of any note or other instrument evidencing any of
the Indebtedness, or any release of any of the Indebtedness, and the
Guarantor shall be and remain liable to GBC under this Guaranty for
the amount so repaid or recovered, to the same extent as if such
amount had never originally been received by GBC, and the provisions
of this sentence shall survive, and continue in effect,
notwithstanding any revocation or release of this Guaranty. Until all
of the Indebtedness has been irrevocably paid and performed in full,
Guarantor hereby expressly and unconditionally waives all rights of
subrogation, reimbursement and indemnity of every kind against
Borrower, and all rights of recourse to any assets or property of
Borrower, and all rights to any collateral or security held for the
payment and performance of any Indebtedness, including (but not
limited to) any of the foregoing rights which Guarantor may have under
any present or future document or agreement with any Borrower or other
person, and including (but not limited to) any of the foregoing rights
which Guarantor may have under any equitable doctrine of subrogation,
implied contract, or unjust enrichment, or any other equitable or
legal doctrine. Neither GBC, nor any of its directors, officers,
employees, agents, attorneys or any other person affiliated with or
representing GBC shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered
by Guarantor or any other party through the ordinary negligence of
GBC, or any of its directors, officers, employees, agents, attorneys
or any other person affiliated with or representing GBC.
-2-
<PAGE>
Greyrock Business Credit Continuing Guaranty
- ----------------------------------------------------------------------
3. Consents. Guarantor hereby consents and agrees that, without
notice to or by Guarantor and without affecting or impairing in any
way the obligations or liability of Guarantor hereunder, GBC may, from
time to time before or after revocation of this Guaranty, do any one
or more of the following in GBC's sole and absolute discretion: (a)
accelerate, accept partial payments of, compromise or settle, renew,
extend the time for the payment, discharge, or performance of, refuse
to enforce, and release all or any parties to, any or all of the
Indebtedness; (b) grant any other indulgence to Borrower or any other
person in respect of any or all of the Indebtedness or any other
matter; (c) accept, release, waive, surrender, enforce, exchange,
modify, impair, or extend the time for the performance, discharge, or
payment of, any and all property of any kind securing any or all of
the Indebtedness or any guaranty of any or all of the Indebtedness, or
on which GBC at any time may have a lien, or refuse to enforce its
rights or make any compromise or settlement or agreement therefor in
respect of any or all of such property; (d) substitute or add, or take
any action or omit to take any action which results in the release of,
any one or more endorsers or guarantors of all or any part of the
Indebtedness, including, without limitation one or more parties to
this Guaranty, regardless of any destruction or impairment of any
right of contribution or other right of Guarantor; (e) amend, alter or
change in any respect whatsoever any term or provision relating to any
or all of the Indebtedness, including the rate of interest thereon;
(f) apply any sums received from Borrower, any other guarantor,
endorser, or co-signer, or from the disposition of any collateral or
security, to any indebtedness whatsoever owing from such person or
secured by such collateral or security, in such manner and order as
GBC determines in its sole discretion, and regardless of whether such
indebtedness is part of the Indebtedness, is secured, or is due and
payable; (g) apply any sums received from Guarantor or from the
disposition of any collateral or security securing the obligations of
Guarantor, to any of the Indebtedness in such manner and order as GBC
determines in its sole discretion, regardless of whether or not such
Indebtedness is secured or is due and payable. Guarantor consents and
agrees that GBC shall be under no obligation to marshal any assets in
favor of Guarantor, or against or in payment of any or all of the
Indebtedness. Guarantor further consents and agrees that GBC shall
have no duties or responsibilities whatsoever with respect to any
property securing any or all of the Indebtedness. Without limiting
the generality of the foregoing, GBC shall have no obligation to
monitor, verify, audit, examine, or obtain or maintain any insurance
with respect to, any property securing any or all of the Indebtedness.
4. ACCOUNT STATED. GBC's books and records showing the account
between it and the Borrower shall be admissible in evidence in any
action or proceeding as prima facie proof of the items therein set
forth. GBC's monthly statements rendered to the Borrower shall be
binding upon the Guarantor (whether or not the Guarantor receives
copies thereof), and shall constitute an account stated between GBC
and the Borrower, unless GBC receives a written statement of the
Borrower's exceptions within 30 days after the statement was mailed to
the Borrower. The Guarantor assumes full responsibility for obtaining
copies of such monthly statements from the Borrower, if the Guarantor
desires such copies.
5. EXERCISE OF RIGHTS AND REMEDIES; FORECLOSURE OF TRUST DEEDS.
Guarantor consents and agrees that, without notice to or by Guarantor
and without affecting or impairing in any way the obligations or
liability of Guarantor hereunder, GBC may, from time to time*, before
or after revocation of this Guaranty, exercise any right or remedy it
may have with respect to any or all of the Indebtedness or any
property securing any or all of the Indebtedness or any guaranty
thereof, including without limitation judicial foreclosure,
nonjudicial foreclosure, exercise of a power of sale, and taking a
deed, assignment or transfer in lieu of foreclosure as to any such
property, and Guarantor expressly waives any defense based upon the
exercise of any such right or remedy, notwithstanding the effect
thereof upon any of Guarantor's rights, including without limitation,
any destruction of Guarantor's right of subrogation against Borrower
and any destruction of Guarantor's right of contribution or other
right against any other guarantor of any or all of the Indebtedness or
against any other person, whether by operation of Sections 580a, 580d
or 726 of the California Code of Civil Procedure, or any comparable
provisions of the laws of any other jurisdiction, or any other
statutes or rules of law now or hereafter in effect, or otherwise.
Without limiting the generality of the foregoing, (a) Guarantor waives
all rights and defenses arising out of an election of remedies by GBC,
even though that election of remedies, such as a nonjudicial
foreclosure with respect to security for any of the Indebtedness, has
destroyed the guarantor's rights of subrogation and reimbursement
against the principal by the operation of Section 580d of the Code of
Civil Procedure or otherwise. (b) Guarantor further waives all rights
and defenses arising out of an election of remedies by GBC, even
though that election of remedies, such as a nonjudicial foreclosure
with respect to security for any of the Indebtedness, has destroyed
the guarantor's rights of subrogation, reimbursement and contribution
against any other guarantor of the guaranteed obligation, by the
operation of Section 580d of the Code of Civil Procedure or otherwise.
(c) Guarantor understands that if GBC forecloses any present or
future trust deed, which secures any or all of the Indebtedness or
which secures any other guaranty of any or all of the Indebtedness, by
nonjudicial foreclosure, Guarantor may, as a result, have a complete
defense to liability under this Guaranty, based on the legal
-3-
<PAGE>
Greyrock Business Credit Continuing Guaranty
- ----------------------------------------------------------------------
doctrine of estoppel and Sections 580a, 580d or 726 of the California
Code of Civil Procedure, and GUARANTOR HEREBY EXPRESSLY WAIVES ALL
SUCH DEFENSES. (d) Guarantor understands and agrees that, in the
event GBC in its sole discretion forecloses any trust deed now or
hereafter securing any or all of the Indebtedness, by nonjudicial
foreclosure, Guarantor will remain liable to GBC for any deficiency,
even though Guarantor will lose his right of subrogation against the
Borrower, and even though Guarantor will be unable to recover from the
Borrower the amount of the deficiency for which Guarantor is liable,
and even though Guarantor may have retained his right of subrogation
against Borrower if GBC had foreclosed said trust deed by judicial
foreclosure as opposed to nonjudicial foreclosure, and even though
absent the waivers set forth herein Guarantor may have had a complete
defense to any liability for any deficiency hereunder. (e) Guarantor
understands and agrees that, in the event GBC in its sole discretion
forecloses any trust deed now or hereafter securing any other guaranty
of any or all of the Indebtedness, by nonjudicial foreclosure,
Guarantor will remain liable to GBC for any deficiency, even though
Guarantor will lose his right of subrogation or contribution against
the other guarantor, and even though Guarantor will be unable to
recover from the other guarantor any part of the deficiency for which
Guarantor is liable, and even though Guarantor may have retained his
right of subrogation or contribution against the other guarantor if
GBC had foreclosed said trust deed by judicial foreclosure as opposed
to nonjudicial foreclosure, and even though absent the waivers set
forth herein Guarantor may have had a complete defense to any
liability for any deficiency hereunder.
*after an Event of Default which is continuing
6. ACCELERATION. Notwithstanding the terms of all or any part of the
Indebtedness, the obligations of the Guarantor hereunder to pay and
perform all of the Indebtedness shall, at the option of GBC,
immediately become due and payable, without notice, and without regard
to the expressed maturity of any of the Indebtedness, in the event: *
Guarantor shall revoke this Guaranty or contest or deny liability
under this Guaranty. All of the foregoing are hereinafter referred to
as "Events of Default".
*Guarantor fails to pay any of the Indebtedness when due, or any Event
of Default occurs under any present or future loan or other agreement
between GBC and any Borrower, or any Event of Default occurs under the
Security Agreement dated December 26, 1996 between Guarantor and GBC,
or
-4-
<PAGE>
Greyrock Business Credit Continuing Guaranty
- ----------------------------------------------------------------------
7. RIGHT TO ATTACHMENT REMEDY. Guarantor agrees that,
notwithstanding the existence of any property securing any or all of
the Indebtedness, GBC shall have all of the rights of an unsecured
creditor of Guarantor, including without limitation the right to
obtain a temporary protective order and writ of attachment against
Guarantor with respect to any sums due under this Guaranty. Guarantor
further agrees that in the event any property secures the obligations
of Guarantor under this Guaranty, to the extent that GBC, in its sole
and absolute discretion, determines prior to the disposition of such
property that the amount to be realized by GBC therefrom may be less
than the indebtedness of the Guarantor under this Guaranty, GBC shall
have all the rights of an unsecured creditor against Guarantor,
including without limitation the right of GBC, prior to the
disposition of said property, to obtain a temporary protective order
and writ of attachment against Guarantor. Guarantor waives the
benefit of Section 483.010(b) of the California Code of Civil
Procedure and of any and all other statutes and rules of law now or
hereafter in effect requiring GBC to first resort to or exhaust all
such collateral before seeking or obtaining any attachment remedy
against Guarantor. GBC shall have no liability to Guarantor as a
result thereof, whether or not the actual deficiency realized by GBC
is less than the anticipated deficiency on the basis of which GBC
obtains a temporary protective order or writ of attachment.
8. INDEMNITY. Guarantor hereby agrees to indemnify GBC and hold GBC
harmless from and against any and all claims, debts, liabilities,
demands, obligations, actions, causes of action, penalties, costs and
expenses (including without limitation * attorneys' fees), of every
nature, character and description, which GBC may sustain or incur
based upon or arising out of any of the Indebtedness, any actual or
alleged failure to collect and pay over any withholding or other tax
relating to Borrower or its employees, any relationship or agreement
between GBC and Borrower, any actual or alleged failure of GBC to
comply with any writ of attachment or other legal process relating to
Borrower or any of its property, or any other matter, cause or thing
whatsoever occurred, done, omitted or suffered to be done by GBC
relating in any way to Borrower or the Indebtedness (except any such
amounts sustained or incurred as the result of the gross negligence or
willful misconduct of GBC or any of its directors, officers,
employees, agents, attorneys, or any other person affiliated with or
representing GBC). Notwithstanding any provision in this Guaranty to
the contrary, the indemnity agreement set forth in this Section shall
survive any termination or revocation of this Guaranty and shall for
all purposes continue in full force and effect.
*reasonable
9. SUBORDINATION. *Any and all rights of Guarantor under any and all
debts, liabilities and obligations owing from Borrower to Guarantor,
including any security for and guaranties of any such obligations,
whether now existing or hereafter arising, are hereby subordinated in
right of payment to the prior payment in full of all of the
Indebtedness. If any Event of Default has occurred, Borrower and any
assignee, trustee in bankruptcy, receiver, or any other person having
custody or control over any or all of Borrower's property are hereby
authorized and directed to pay to GBC the entire unpaid balance of the
Indebtedness before making any payments whatsoever to Guarantor,
whether as a creditor, shareholder, or otherwise; and insofar as may
be necessary for that purpose, Guarantor hereby assigns and transfers
to GBC all rights to any and all debts, liabilities and obligations
owing from Borrower to Guarantor, including any security for and
guaranties of any such obligations, whether now existing or hereafter
arising, including without limitation any payments, dividends or
distributions out of the business or assets of Borrower. Any amounts
received by Guarantor in violation of the foregoing provisions shall
be received and held as trustee for the benefit of GBC and shall
forthwith be paid over to GBC to be applied to the Indebtedness in
such order and sequence as GBC shall in its sole discretion determine,
without limiting or affecting any other right or remedy which GBC may
have hereunder or otherwise and without otherwise affecting the
liability of Guarantor hereunder. Guarantor hereby expressly waives
any right to set-off or assert any counterclaim against Borrower.
*After the occurrence and during the continuance of an Event of
Default
10. REVOCATION. This is a Continuing Guaranty relating to all of the
Indebtedness, including Indebtedness arising under successive
transactions which from time to time continue the Indebtedness or
renew it after it has been satisfied. Guarantor waives all benefits
of California Civil Code Section 2815, and agrees that the obligations
of Guarantor hereunder may not be terminated or revoked in any manner
except by giving 90 days' advance written notice of revocation to GBC
at its address above by registered first-class U.S. mail, postage
prepaid, return receipt requested, and only as to new loans made by
GBC to Borrower more than 90 days after actual receipt of such written
notice by GBC. No termination or revocation of this Guaranty shall be
effective until 90 days following the date of actual receipt of said
written notice of revocation by GBC. Notwithstanding such written
notice of revocation or any other act of Guarantor or any other event
or circumstance, Guarantor agrees that this Guaranty and all consents,
waivers and other provisions hereof shall continue in full force and
effect as to any and all Indebtedness which is outstanding on or
before the 90th day following actual receipt of said written notice of
-5-
<PAGE>
Greyrock Business Credit Continuing Guaranty
- ----------------------------------------------------------------------
revocation by GBC, and all extensions, renewals and modifications of
said Indebtedness (including without limitation amendments,
extensions, renewals and modifications which are evidenced by new or
additional instruments, documents or agreements executed before or
after expiration of said 90-day period), and all interest thereon,
accruing before or after expiration of said 90-day period, and all
attorneys' fees, court costs and collection charges, incurred before
or after expiration of said 90-day period, in endeavoring to collect
or enforce any of the foregoing against Borrower, Guarantor or any
other person liable thereon (whether or not suit be brought) and any
other expenses of, for or incidental to collection thereof.
11. INDEPENDENT LIABILITY. Guarantor hereby agrees that one or more
successive or concurrent actions may be brought hereon against
Guarantor, in the same action in which Borrower may be sued or in
separate actions, as often as deemed advisable by GBC. The liability
of Guarantor hereunder is exclusive and independent of any other
guaranty of any or all of the Indebtedness whether executed by
Guarantor or by any other guarantor (including without limitation any
other persons signing this Guaranty). The liability of Guarantor
hereunder shall not be affected, revoked, impaired, or reduced by any
one or more of the following: (a) the fact that the Indebtedness
exceeds the maximum amount of Guarantor's liability, if any, specified
herein or elsewhere (and no agreement specifying a maximum amount of
Guarantor's liability shall be enforceable unless set forth in a
writing signed by GBC or set forth in this Guaranty); or (b) any
direction as to the application of payment by Borrower or by any other
party; or (c) any other continuing or restrictive guaranty or
undertaking or any limitation on the liability of any other guarantor
(whether under this Guaranty or under any other agreement); or (d) any
payment on or reduction of any such other guaranty or undertaking; or
(e) any revocation, amendment, modification or release of any such
other guaranty or undertaking; or (f) any dissolution or termination
of, or increase, decrease, or change in membership of any Guarantor
which is a partnership. Guarantor hereby expressly represents that he
was not induced to give this Guaranty by the fact that there are or
may be other guarantors either under this Guaranty or otherwise, and
Guarantor agrees that any release of any one or more of such other
guarantors shall not release Guarantor from his obligations hereunder
either in full or to any lesser extent.
12. FINANCIAL CONDITION OF BORROWER. Guarantor is fully aware of the
financial condition of Borrower and is executing and delivering this
Guaranty at Borrower's request and based solely upon his own
independent investigation of all matters pertinent hereto, and
Guarantor is not relying in any manner upon any representation or
statement of GBC with respect thereto. Guarantor represents and
warrants that he is in a position to obtain, and Guarantor hereby
assumes full responsibility for obtaining, any additional information
concerning Borrower's financial condition and any other matter
pertinent hereto as Guarantor may desire, and Guarantor is not relying
upon or expecting GBC to furnish to him any information now or
hereafter in GBC's possession concerning the same or any other matter.
By executing this Guaranty, Guarantor knowingly accepts the full range
of risks encompassed within a contract of continuing guaranty, which
risks Guarantor acknowledges include without limitation the
possibility that Borrower will incur additional Indebtedness for which
Guarantor will be liable hereunder after Borrower's financial
condition or ability to pay such Indebtedness has deteriorated and/or
after bankruptcy or insolvency proceedings have been commenced by or
against Borrower. Guarantor shall have no right to require GBC to
obtain or disclose any information with respect to the Indebtedness,
the financial condition or character of Borrower, the existence of any
collateral or security for any or all of the Indebtedness, the filing
by or against Borrower of any bankruptcy or insolvency proceeding, the
existence of any other guaranties of all or any part of the
Indebtedness, any action or non-action on the part of GBC, Borrower,
or any other person, or any other matter, fact, or occurrence.
13. REPORTS AND FINANCIAL STATEMENTS OF GUARANTOR. Guarantor shall,
at its sole cost and expense, at any time and from time to time,
prepare or cause to be prepared, and provide to GBC upon GBC's request
(I) such * financial statements ** and reports concerning Guarantor
for such periods of time as GBC may designate, (ii) any other
information concerning Guarantor's business, financial condition or
affairs as GBC may request, and (iii) copies of any and all foreign,
federal, state and local tax returns and reports of or relating to
Guarantor as GBC may from time to time request. Guarantor hereby
intentionally and knowingly waives any and all rights and privileges
it may have not to divulge or deliver said tax returns, reports and
other information which are requested by GBC hereunder or in any
litigation in which GBC may be involved relating directly or
indirectly to Borrower or to Guarantor. Guarantor further agrees
immediately to give written notice to GBC of any adverse change in
Guarantor's financial condition and of any condition or event which
constitutes an Event of Default under this Guaranty. All reports and
information furnished to GBC hereunder shall be complete, accurate and
correct in all respects. Whenever requested, Guarantor shall further
deliver to GBC a certificate signed by Guarantor (and, if Guarantor is
a partnership, by all general partners of Guarantor, in their
individual capacities, and, if Guarantor is a corporation, by the
president and secretary of Guarantor, in their individual capacities)
warranting and representing that all reports,
-6-
<PAGE>
Greyrock Business Credit Continuing Guaranty
- ----------------------------------------------------------------------
financial statements and other documents and information delivered or
caused to be delivered to GBC under this Guaranty, are complete,
correct and thoroughly and accurately present the financial condition
of Guarantor, and that there exists on the date of delivery of said
certificate to GBC no condition or event which constitutes an Event of
Default under this Guaranty.
*consolidated and consolidating
**of Guarantor and Borrowers
14. REPRESENTATIONS AND WARRANTIES. Guarantor hereby represents and
warrants that (I) it is in Guarantor's direct interest to assist
Borrower in procuring credit, because Borrower is an affiliate of
Guarantor, furnishes goods or services to Guarantor, purchases or
acquires goods or services from Guarantor, and/or otherwise has a
direct or indirect corporate or business relationship with Guarantor,
(ii) this Guaranty has been duly and validly authorized, executed and
delivered and constitutes the valid and binding obligation of
Guarantor, enforceable in accordance with its terms, and (iii) the
execution and delivery of this Guaranty does not violate or constitute
a default under (with or without the giving of notice, the passage of
time, or both) any order, judgment, decree, instrument or agreement to
which Guarantor is a party or by which it or its assets are affected
or bound.
15. COSTS. Whether or not suit be instituted, Guarantor agrees to
reimburse GBC on demand for all reasonable attorneys' fees and all
other reasonable costs and expenses incurred by GBC in enforcing this
Guaranty, or arising out of or relating in any way to this Guaranty,
or in enforcing any of the Indebtedness against Borrower, Guarantor,
or any other person, or in connection with any property of any kind
securing all or any part of the Indebtedness. Without limiting the
generality of the foregoing, and in addition thereto, Guarantor shall
reimburse GBC on demand for all reasonable attorneys' fees and costs
GBC incurs in any way relating to Guarantor, Borrower or the
Indebtedness, in order to: obtain legal advice; enforce or seek to
enforce any of its rights; commence, intervene in, respond to, or de
fend any action or proceeding; file, prosecute or defend any claim or
cause of action in any action or proceeding (including without
limitation any probate claim, bankruptcy claim, third-party claim,
secured creditor claim, reclamation complaint, and complaint for
relief from any stay under the Bankruptcy Code or otherwise); protect,
obtain possession of, sell, lease, dispose of or otherwise enforce any
security interest in or lien on any property of any kind securing any
or all of the Indebtedness; or represent GBC in any litigation with
respect to Borrower's or Guarantor's affairs. In the event either GBC
or Guarantor files any lawsuit against the other predicated on a
breach of this Guaranty, the prevailing party in such action shall be
entitled to recover its * attorneys' fees and costs of suit from the
non-prevailing party.
*reasonable
16. NOTICES. Any notice which a party shall be required or shall
desire to give to the other hereunder (except for notice of
revocation, which shall be governed by Section 10 of this Guaranty)
shall be given by personal delivery or by telecopier or by depositing
the same in the United States mail, first class postage pre-paid,
addressed to GBC at its address set forth in the heading of this
Guaranty and to Guarantor at his address set forth under his signature
hereon, and such notices shall be deemed duly given on the date of
personal delivery or one day after the date telecopied or 3 business
days after the date of mailing as aforesaid. GBC and Guarantor may
change their address for purposes of receiving notices hereunder by
giving written notice thereof to the other party in accordance
herewith. Guarantor shall give GBC immediate written notice of any
change in his address.
17. CLAIMS. Guarantor agrees that any claim or cause of action by
Guarantor against GBC, or any of GBC's directors, officers, employees,
agents, accountants or attorneys, based upon, arising from, or
relating to this Guaranty, or any other present or future agreement
between GBC and Guarantor or between GBC and Borrower, or any other
transaction contemplated hereby or thereby or relating hereto or
thereto, or any other matter, cause or thing whatsoever, whether or
not relating hereto or thereto, occurred, done, omitted or suffered to
be done by GBC, or by GBC's directors, officers, employees, agents,
accountants or attorneys, whether sounding in contract or in tort or
otherwise, shall be barred unless asserted by Guarantor by the
commencement of an action or proceeding in a court of competent
jurisdiction within Los Angeles County, California, by the filing of a
complaint within one year after the first act, occurrence or omission
upon which such claim or cause of action, or any part thereof, is
based and service of a summons and complaint on an officer of GBC or
any other person authorized to accept service of process on behalf of
GBC, within 30 days thereafter. Guarantor agrees that such one year
period is a reasonable and sufficient time for Guarantor to
investigate and act upon any such claim or cause of action. The one
year period provided herein shall not be waived, tolled, or extended
except by a specific written agreement of GBC. This provision shall
survive any termination of this Guaranty or any other agreement.
18. CONSTRUCTION; SEVERABILITY. If more than one person has executed
this Guaranty, the term "Guarantor" as used herein shall be deemed to
refer to all and any one or more such persons and their obligations
hereunder shall be joint and several. Without limiting the generality
of the foregoing, if more than one person has executed this
-7-
<PAGE>
Greyrock Business Credit Continuing Guaranty
- ----------------------------------------------------------------------
Guaranty, this Guaranty shall in all respects be interpreted as though
each person signing this Guaranty had signed a separate Guaranty, and
references herein to "other guarantors" or words of similar effect
shall include without limitation other persons signing this Guaranty.
As used in this Guaranty, the term "property" is used in its most
comprehensive sense and shall mean all property of every kind and
nature whatsoever, including without limitation real property,
personal property, mixed property, tangible property and intangible
property. Words used herein in the masculine gender shall include the
neuter and feminine gender, words used herein in the neuter gender
shall include the masculine and feminine, words used herein in the
singular shall include the plural and words used in the plural shall
include the singular, wherever the context so reasonably requires. If
any provision of this Guaranty or the application thereof to any party
or circumstance is held invalid, void, inoperative or unenforceable,
the remainder of this Guaranty and the application of such provision
to other parties or circumstances shall not be affected thereby, the
provisions of this Guaranty being severable in any such instance.
19. GENERAL PROVISIONS. GBC shall have the right to seek recourse
against Guarantor to the full extent provided for herein and in any
other instrument or agreement evidencing obligations of Guarantor to
GBC, and against Borrower to the full extent of the Indebtedness. No
election in one form of action or proceeding, or against any party, or
on any obligation, shall constitute a waiver of GBC's right to proceed
in any other form of action or proceeding or against any other party.
The failure of GBC to enforce any of the provisions of this Guaranty
at any time or for any period of time shall not be construed to be a
waiver of any such provision or the right thereafter to enforce the
same. All remedies hereunder shall be cumulative and shall be in
addition to all rights, powers and remedies given to GBC by law or
under any other instrument or agreement. Time is of the essence in
the performance by Guarantor of each and every obligation under this
Guaranty. If Borrower is a corporation, partnership or other entity,
Guarantor hereby agrees that GBC shall have no obligation to inquire
into the power or authority of Borrower or any of its officers,
directors, partners, or agents acting or purporting to act on its
behalf, and any Indebtedness made or created in reliance upon the
professed exercise of any such power or authority shall be included in
the Indebtedness guaranteed hereby. This Guaranty is the entire and
only agreement between Guarantor and GBC with respect to the guaranty
of the Indebtedness of Borrower by Guarantor, and all representations,
warranties, agreements, or undertakings heretofore or
contemporaneously made, which are not set forth herein, are superseded
hereby. No course of dealings between the parties, no usage of the
trade, and no parol or extrinsic evidence of any nature shall be used
or be relevant to supplement or explain or modify any term or
provision of this Guaranty. There are no conditions to the full
effectiveness of this Guaranty. The terms and provisions hereof may
not be waived, altered, modified, or amended except in a writing
executed by Guarantor and a duly authorized officer of GBC. All
rights, benefits and privileges hereunder shall inure to the benefit
of and be enforceable by GBC and its successors and assigns and shall
be binding upon Guarantor and his heirs, executors, administrators,
personal representatives, successors and assigns. Neither the death
of Guarantor nor notice thereof to GBC shall terminate this Guaranty
as to his estate, and, notwithstanding the death of Guarantor or
notice thereof to GBC, this Guaranty shall continue in full force and
effect with respect to all Indebtedness, including without limitation
Indebtedness incurred or created after the death of Guarantor and
notice thereof to GBC. Section headings are used herein for
convenience only. Guarantor acknowledges that the same may not
describe completely the subject matter of the applicable Section, and
the same shall not be used in any manner to construe, limit, define or
interpret any term or provision hereof.
20. GOVERNING LAW; VENUE AND JURISDICTION. This instrument and all
acts and transactions pursuant or relating hereto and all rights and
obligations of the parties hereto shall be governed, construed, and
interpreted in accordance with the internal laws of the State of
California. In order to induce GBC to accept this Guaranty, and as a
material part of the consideration therefor, Guarantor (i) agrees that
all actions or proceedings relating directly or indirectly hereto
shall, at the option of GBC, be litigated in courts located within Los
Angeles County, California, (ii) consents to the jurisdiction of any
such court and consents to the service of process in any such action
or proceeding by personal delivery or any other method permitted by
law; and (iii) waives any and all rights Guarantor may have to
transfer or change the venue of any such action or proceeding.
21. MUTUAL WAIVER OF RIGHT TO JURY TRIAL. GBC AND GUARANTOR HEREBY
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION, CLAIM, LAWSUIT OR
PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (i)
THIS GUARANTEE OR ANY SUPPLEMENT OR AMENDMENT THERETO; OR (ii) ANY
OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN GBC AND
GUARANTOR; OR (iii) ANY BREACH, CONDUCT, ACTS OR OMISSIONS OF GBC OR
GUARANTOR OR ANY OF THEIR RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSON AFFILIATED WITH OR REPRESENTING
GBC OR GUARANTOR; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN
CONTRACT OR TORT OR OTHERWISE.
-8-
<PAGE>
Greyrock Business Credit Continuing Guaranty
- ----------------------------------------------------------------------
22. RECEIPT OF COPY. Guarantor acknowledges receipt of a copy of
this Guaranty.
Guarantor Signature:
North American Telecommunications Corporation
By /s/ J.David Darnell
--------------------
Title Vice President
-------------------
Address: 1600 Promenade Center, 15th Floor
Richardson, Texas 75080
Baltic States and CIS Ventures, Inc.
By /s/ J. David Darnell
---------------------
Title Vice President
--------------------
Address: 1600 Promenade Center, 15th Floor
Richardson, Texas 75080
Guarantor Signature:
CIS Intelligence Information Services, Inc.
By /s/ J. David Darnell
-----------------------
Title Vice President
-----------------------
Address: 1600 Promenade Center, 15th Floor
Richardson, Texas 75080
Guarantor Signature:
Uniquest Communications, Inc.
By /s/ J. David Darnell
--------------------
Title Vice President
-------------------
Address: 1600 Promenade Center, 15th Floor
Richardson, Texas 75080
<PAGE>
SECOND AMENDMENT TO
EMPLOYMENT CONTRACT
This Second Amendment to Employment Contract ("Amendment") is made and
entered into as of March 26, 1997 and is effective January 1, 1997 by and
between SA Telecommunications, Inc., a Delaware corporation with offices at 1600
Promenade Center, 15th Floor, Richardson, Texas 75080 (the "Company") and JACK
W. MATZ, JR., residing at 3612 Arbuckle, Plano, Texas 75075 (the "Executive")
and amends that Employment Contract dated as of March 24, 1995 by and between SA
Holdings, Inc. d/b/a SA Telecommunications, Inc. and the Executive as amended
effective January 1, 1996 ("Agreement"). In the event any provision of this
Amendment shall conflict with the Agreement, this Amendment shall control. In
consideration of the mutual covenants hereinafter set forth and intending to be
legally bound, the parties hereby agree as follows:
1. Except as otherwise stated, capitalized terms used herein have the same
meaning as set forth in the Agreement.
2. The first sentence of Section 1 of the Agreement is hereby deleted in its
entirety and the following is added in lieu thereof:
"The Company agrees to employ Executive, and the Executive agrees to
serve, on the terms and conditions of this Agreement for a period
commencing on January 1, 1997 and ending on March 23, 2001, or such
shorter period as may be provided for herein."
3. Section 3 of the Agreement is hereby deleted in its entirety and the
following is added in lieu thereof:
"As compensation for his services hereunder, the Company shall pay
Executive, during the Employment Period, a base salary payable in
equal semi-monthly installments at the annual rate of $275,000;
provided, however, that the Compensation Committee of the Board of
Directors of the Company may increase this annual amount at its
sole discretion. If, during the term of this Agreement any other
employee of the Company shall receive annual compensation in excess
of the compensation provided to Executive above, the Company shall
increase the base salary payable to the Executive to an amount
equal to that of such higher paid Employee (on a going forward
basis) upon the written request of the Executive. The Company
Executive will also be eligible to participate in the executive and
employee benefit programs now or hereafter established by the
Company."
4. The balance of the Agreement and any amendments or addenda thereto not
modified by this Amendment shall remain in full force and effect. This
Amendment shall be effective upon the signatures of an officer of the
Company and the Executive.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of
the date first above written.
SA TELECOMMUNICATIONS, INC. /s/ Jack W. Matz, Jr.
-------------------------------
Jack W. Matz, Jr.
By: /s/ Paul R. Miller
- -------------------------------
Paul R. Miller
President and Chief
Operating Officer
<PAGE>
AMENDMENT TO
EMPLOYMENT CONTRACT
This Amendment to Employment Contract ("Amendment") is made and entered
into as of March 26, 1997 and is effective January 1, 1997, by and between SA
Telecommunications, Inc., a Delaware corporation with offices at 1600 Promenade
Center, 15th Floor, Richardson, Texas 75080 (the "Company") and PAUL R. MILLER,
residing at 3140 Oakview Drive, Hurst, Texas 76054-2028 (the "Executive") and
amends that Employment Contract dated as of March 13, 1996 and effective as of
January 1, 1996 by and between the Company and the Executive ("Agreement"). In
the event any provision of this Amendment shall conflict with the Agreement,
this Amendment shall control. In consideration of the mutual covenants
hereinafter set forth and intending to be legally bound, the parties hereby
agree as follows:
1. Except as otherwise stated, capitalized terms used herein have the same
meaning as set forth in the Agreement.
2. The first two sentences of Section 1 of the Agreement is hereby deleted in
its entirety and the following is added in lieu thereof:
"The Company agrees to employ Executive, and the Executive agrees
to serve, on the terms and conditions of this Agreement for a
period commencing on January 1, 1997 and ending on December 31,
1998, or such shorter period as may be provided herein.
Notwithstanding the foregoing, on each December 31 (the "Renewal
Date") while this Agreement is in effect, the term of this
Agreement shall be automatically extended two (2) additional years
from the Renewal Date unless and until terminated by the Company or
Executive, upon notice on or prior to November 1 immediately
preceding the Renewal Date of the year following the year in which
the termination notice was given."
3. The balance of the Agreement and any amendments or addenda thereto not
modified by this Amendment shall remain in full force and effect. This
Amendment shall be effective upon the signatures of an officer of the
Company and the Executive.
SA TELECOMMUNICATIONS, INC. /s/ Paul R. Miller
-------------------------------
Paul R. Miller
By: /s/ Jack W. Matz, Jr.
-------------------------------
Jack W. Matz, Jr.
Chairman and Chief
Executive Officer
<PAGE>
PURCHASE AGREEMENT
This Purchase Agreement dated as of March, 25, 1997, is made by and between
SA Telecommunications, Inc., a Delaware corporation (the "COMPANY"), Northstar
High Total Return Fund ("PURCHASER").
WHEREAS, the Company is empowered to issue indebtedness for any of the
objects and purposes of the Company;
WHEREAS, for its lawful corporate purposes, the Company has duly authorized
the issuance of its 10% Convertible Debenture Due 2006 in the principal amount
of $3,800,000, convertible into Common Stock of the Company, to be issued under
and pursuant to the provisions of this Agreement;
WHEREAS, the Debenture is being offered and sold to the Purchaser without
being registered under the Securities Act of 1933, as amended; and
WHEREAS, upon and subject to the terms and conditions of this Agreement,
the Company has agreed to issue and sell the Debenture to the Purchaser, and the
Purchaser has agreed to purchase the Debenture from the Company;
NOW, THEREFORE, in consideration of the premises and the purchase of the
Debenture by the Purchaser, the Company and the Purchaser hereby agree as
follows:
1. DEFINITIONS The terms defined in this SECTION 1 shall have for all
purposes of this Agreement the respective meanings specified in this SECTION 1.
"1996 FINANCIAL STATEMENTS" means the Company's unaudited substantially
complete financial statements for the year ended December 31, 1996 attached
as EXHIBIT C hereto.
"ACT" means the Securities Act of 1933, as amended.
"AGREEMENT" means this Purchase Agreement as originally executed or, if
amended or supplemented as herein provided, as so amended or supplemented.
"CLOSING" means the closing of the purchase and sale of the Debenture.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock, $0.0001 par value, of the Company.
"COMPANY" means SA Telecommunications, Inc., a Delaware corporation.
1
<PAGE>
"CONFIDENTIAL DISCLOSURE STATEMENT" means the Confidential Disclosure
Statement dated March 25, 1997 attached as EXHIBIT D hereto.
"DEBENTURE" means that certain convertible debenture of the Company in the
form of EXHIBIT A hereto which shall be issued by the Company to the
Purchaser at the Closing.
"DEBENTURE AGREEMENTS" includes this Agreement, the Debenture, the
Registration Rights Agreement and any other documents required by this
Agreement as a condition to the Purchaser purchasing the Debenture or
executed or delivered by the Company and/or Purchaser at the Closing.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"INCORPORATED DOCUMENTS" means the documents which at the time are
incorporated by reference in the Memorandum or any amendment or supplement
thereto.
"MEMORANDUM" means (i) the Prior Prospectus, (ii) the First Prospectus
Supplement to the Prior Prospectus dated March 18, 1997, (iii) the
Confidential Disclosure Statement, and (iv) the 1996 Financial Statements.
Any reference to the Memorandum shall be deemed to include all amendments
and supplements thereto and any documents filed under the Exchange Act and
the rules and regulations of the Commission thereunder.
"PRIOR NOTES" means the Company's 10% Convertible Notes Due 2006 issued on
August 12, 1996.
"PRIOR PROSPECTUS" means the Prospectus dated February 11, 1997 with
respect to the Prior Notes.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement in
the form of EXHIBIT B hereto which will be executed by the Company and
Purchaser at the Closing.
"SUBSIDIARIES" means Long Distance Network, Inc., a Texas corporatioan,
U.S. Communications, Inc., a Texas corporatioan, AddTel Communicatons,
Inc., a California corporaiton, and North American Telecommunications
Corporation, a Texas corporation.
The terms subsequently defined in this Agreement shall have the respective
meanings assigned to them herein and shall include the singular as well as the
plural.
2. PURCHASE AND SALE OF DEBENTURE. On the basis of the
representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions set forth herein, at the Closing the
Company agrees to issue and sell to the Purchaser and, the Purchaser agrees
to purchase from the Company, the Debenture at a purchase price of
$3,230,000. The Closing shall be held on March 25, 1997 at 10:00 a.m.,
Dallas time, at the offices of Arter &
2
<PAGE>
Hadden, 1717 Main Street, Suite 4100, Dallas, Texas or at such other place
and time as may be mutually agreed to by the Company and the Purchaser. At
the Closing, the Company will execute and deliver this Agreement, the
Registration Rights Agreement, and the Debenture to the Purchaser against
payment of the aggregate purchase price of the Debenture specified in SECTION
2 hereof by wire transfer of immediately available funds and execution of
the Purchaser and the Subsidiaries of this Agreement and execution by the
Company of the Registration Rights Agreement. The Purchaser and its
transferees of the Debenture will be entitled to the benefits of the
Registration Rights Agreement pursuant to which the Company has granted,
among other things, certain piggyback registration rights with respect to
certain registration statements filed by the Company registering the shares
of Common Stock issuable upon conversion of the Debenture under the Act.
3. EXPENSES. The Company shall pay all expenses of the transactions
contemplated by this Agreement, and shall pay or reimburse the Purchaser for all
costs and expenses incurred by the Purchaser in connection with the preparation,
execution, delivery of this Agreement, including the fees, expenses and
disbursements of counsel to the Purchaser, provided such fees, expenses and
disbursements do not exceed $10,000.
4. THE DEBENTURE. The Debenture in the principal amount of $3,800,000
shall be in the form of EXHIBIT A hereto. The Debenture will be convertible at
the holder's option into shares of Common Stock at a conversion price of $2.55
per share, subject to adjustment in certain circumstances.
5. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to the Purchaser that:
(a) The Memorandum does not contain any untrue statement of a
material fact or omitted or omits to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(b) The Incorporated Documents heretofore filed were filed in a
timely manner and, when they were filed (or, if any amendment with respect
to any such document was filed, when such amendment was filed), conformed
in all material respects to the requirements of the Exchange Act and did
not contain an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and any further
Incorporated Documents will, when so filed, be filed in a timely manner and
conform in all material respects to the requirements of the Exchange Act
and will not contain an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(c) The Company has 50,000,000 shares of Common Stock authorized,
15,668,835 of which are issued and outstanding as of March 20, 1997; the
Company has
3
<PAGE>
15,000,000 shares of Preferred Stock authorized, of which the
Company has designated 250,000 shares as Series A Cumulative Convertible
Preferred Stock ("SERIES A PREFERRED STOCK"), which, as of the date hereof,
180,000 shares are outstanding; all of the outstanding shares of capital
stock of the Company and each of the Subsidiaries have been duly authorized
and validly issued, are fully paid and nonassessable and were not issued in
violation of any preemptive or similar rights; all of the outstanding
shares of capital stock of the Subsidiaries are owned, directly or
indirectly, by the Company, free and clear of all liens, encumbrances and
claims or restrictions on transferability (other than those imposed by the
Act and the securities or "Blue Sky" laws of certain jurisdictions) or
voting, other than the security interests in favor of Greyrock Business
Credit. Except for the Subsidiaries (or other subsidiaries of the Company
which are not material to the business of the Company) or as disclosed in
the Memorandum, the Company does not own, directly or indirectly, any
shares of capital stock or any other equity or long-term debt securities or
have any equity interest in any corporation, partnership, joint venture or
other entity.
(d) The shares of Common Stock issuable upon conversion of the
Debenture have been duly authorized for issuance upon conversion of the
Debenture and duly reserved for such issuance and, when issued upon such
conversion in accordance with the terms of the Indenture, will have been
validly issued and will be fully paid and nonassessable, and the issuance
of such shares of Common Stock is not subject to any preemptive or similar
rights.
(e) Each of the Company and the Subsidiaries is duly incorporated,
validly existing and in good standing under the laws of its respective
jurisdiction of incorporation and has all requisite corporate power and
corporate authority to own its properties and conduct its business as now
conducted and as described in the Memorandum; each of the Company and the
Subsidiaries is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions where the ownership or leasing of
its properties or the conduct of its business requires such qualification,
except where the failure to be so qualified would not, individually or in
the aggregate, have a material adverse effect on the business, financial
condition, prospects as described in the Memorandum or results of
operations of the Company and the Subsidiaries, taken as a whole (any such
event, a "MATERIAL ADVERSE EFFECT").
(f) The Company has all requisite corporate power and corporate
authority to execute, deliver and perform its obligations under the
Debenture. The Debenture has been duly and validly authorized by the
Company and, when executed by the Company and when issued and delivered to
and paid for by the Purchaser in accordance with the terms of this
Agreement, will constitute valid and legally binding obligations of the
Company, enforceable against the Company in accordance with its terms,
except that (A) the enforcement thereof may be subject to (i) bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights
generally, and (ii) general principles of equity and the
4
<PAGE>
discretion of the court before which any proceeding therefor may be brought
and (B) any rights to indemnity or contribution thereunder may be limited
by federal and state securities laws and public policy considerations.
(g) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under the Registration Rights
Agreement. The Registration Rights Agreement has been duly and validly
authorized by the Company and, when executed and delivered by the Company,
will constitute a valid and legally binding agreement of the Company
enforceable against the Company in accordance with its terms, except that
(A) the enforcement thereof may be subject to (i) bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium or other similar laws
now or hereafter in effect relating to creditors' rights generally and (ii)
general principles of equity and the discretion of the court before which
any proceeding therefor may be brought and (B) any rights to indemnity or
contribution thereunder may be limited by federal and state securities laws
and public policy considerations.
(h) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. This Agreement and the
consummation by the Company of the transactions contemplated hereby have
been duly and validly authorized by the Company. This Agreement has been
duly executed and delivered by the Company.
(i) Assuming the accuracy of the Purchaser's representations in
SECTION 6, no consent, approval, authorization or order of any court or
governmental agency or body, or third party is required for the issuance
and sale by the Company of the Debenture to the Purchaser, the issuance of
shares of Common Stock upon conversion of the Debenture or the consummation
by the Company of the other transactions contemplated hereby, except such
as have been obtained and such as may be required under state securities or
"Blue Sky" laws in connection with the purchase and resale of the Debenture
by the Purchaser. None of the Company or the Subsidiaries is (i) in
violation of its certificate of incorporation or bylaws (or similar
organizational document), (ii) in breach or violation of any statute,
judgment, decree, order, rule or regulation applicable to any of them or
any of their respective properties or assets, except for any such breach or
violation which would not, individually or in the aggregate, have a
Material Adverse Effect, or (iii) in breach of or default under (nor has
any event occurred which, with notice or passage of time or both, would
constitute a default under) or in violation of any of the terms or
provisions of any indenture, mortgage, deed of trust, loan agreement, note,
lease, license, franchise agreement, permit, certificate, contract or other
agreement or instrument to which any of them is a party or to which any of
them or their respective properties or assets is subject (collectively,
"CONTRACTS"), except for any such breach, default, violation or event which
would not, individually or in the aggregate, have a Material Adverse
Effect.
5
<PAGE>
(j) Neither the execution, delivery or performance by the Company of
this Agreement or the Registration Rights Agreement nor the consummation by
the Company of the transactions contemplated hereby and thereby (including,
without limitation, the issuance and sale of the Debenture to the Purchaser
and the issuance of shares of Common Stock upon conversion of the
Debenture) will conflict with or constitute or result in a breach of or a
default under (or an event which with notice or passage of time or both
would constitute a default under) or violation of any of (i) the terms or
provisions of any Contract, except for any such conflict, breach,
violation, default or event which would not, individually or in the
aggregate, have a Material Adverse Effect, (ii) the certificate of
incorporation or bylaws (or similar organizational document) of the
Company, or (iii) (assuming compliance with all applicable state securities
or "Blue Sky" laws and assuming the accuracy of the representations and
warranties of the Purchaser in SECTION 6 hereof) any statute, judgment,
decree, order, rule or regulation applicable to the Company or any of its
properties or assets, except for any such conflict, breach or violation
which would not, individually or in the aggregate, have a Material Adverse
Effect.
(k) The audited consolidated financial statements of the Company and
the Subsidiaries included in the Prior Prospectus and the 1996 Financial
Statements present fairly in all material respects the financial position,
results of operations and cash flows of the Company and the Subsidiaries at
the dates and for the periods to which they relate and have been prepared
in accordance with generally accepted accounting principles applied on a
consistent basis ("GAAP"), except as otherwise stated therein and except
that the 1996 Financial Statements do not include footnote presentations
required by GAAP. Price Waterhouse LLP is an independent public accounting
firm within the meaning of the Act and the rules and regulations
promulgated thereunder.
(l) The pro forma financial statements (including the notes thereto)
and the other pro forma financial information included in the Memorandum
(i) comply as to form in all material respects with the applicable
requirements of Regulation S-X promulgated under the Exchange Act, (ii)
have been prepared in accordance with the Commission's rules and guidelines
with respect to pro forma financial statements, and (iii) have been
properly computed on the bases described therein; the assumptions used in
the preparation of the pro forma financial data and other pro forma
financial information included in the Memorandum are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
or circumstances referred to therein.
(m) Except as set forth in the Memorandum, there is not pending or,
to the knowledge of the Company, threatened any action, suit, proceeding,
inquiry or investigation to which the Company or any of the Subsidiaries is
a party, or to which the property or assets of the Company or any of the
Subsidiaries are subject, before or brought by any court, arbitrator or
governmental agency or body which, if determined adversely to the Company
or any of the Subsidiaries, would, individually or in the aggregate, have a
Material Adverse Effect or which seeks to restrain, enjoin, prevent
6
<PAGE>
the consummation of or otherwise challenge the issuance or sale of the
Debenture to be sold hereunder or the consummation of the other
transactions described in the Memorandum.
(n) Each of the Company and the Subsidiaries possesses all licenses,
permits, certificates, consents, orders, approvals and other authorizations
from, and has made all declarations and filings with, all federal, state,
local and other governmental authorities, all self-regulatory organizations
and all courts and other tribunals, presently required or necessary to own
or lease, as the case may be, and to operate its respective properties and
to carry on its respective businesses as now conducted as set forth in the
Memorandum ("PERMITS"), except where the failure to obtain such Permits
would not, individually or in the aggregate, have a Material Adverse
Effect; each of the Company and the Subsidiaries has fulfilled and
performed all of its obligations with respect to such Permits except where
the failure to perform such obligations would not, individually or in the
aggregate, have a Material Adverse Effect; no event has occurred which
allows, or after notice or lapse of time would allow, revocation or
termination thereof or results in any other material impairment of the
rights of the holder of any such Permit except where such revocation or
modification would not, individually or in the aggregate, have a Material
Adverse Effect; and none of the Company or the Subsidiaries has received
any notice of any proceeding relating to revocation or modification of any
such Permit, except as described in the Memorandum or except where such
revocation or modification would not, individually or in the aggregate,
have a Material Adverse Effect.
(o) Since the date of the most recent financial statements appearing
in the Memorandum, except as described in the Memorandum, (i) none of the
Company or the Subsidiaries has incurred any liabilities or obligations,
direct or contingent, or entered into or agreed to enter into any
transactions or contracts (written or oral) not in the ordinary course of
business which liabilities, obligations, transactions or contracts would,
individually or in the aggregate, be material to the business, financial
condition, prospects as described in the Memorandum or results of
operations of the Companies and its Subsidiaries, taken as a whole, (ii)
none of the Company or the Subsidiaries has purchased any of its
outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock (other than with
respect to any of such Subsidiaries, the purchase of, or dividend or
distribution on, capital stock owned by the Company and other than (a) the
repurchase of shares of Common Stock pursuant to the provisions of employee
and incentive stock option plans and the related agreements thereunder and
(b) the payment of in-kind dividends to holders of the Company's Series A
Preferred Stock) and (iii) there shall not have been any change in the
capital stock or long-term indebtedness of the Company or the Subsidiaries.
(p) Each of the Company and the Subsidiaries has filed all necessary
federal, state and foreign income and franchise tax returns, except where
the failure to so file such returns would not, individually or in the
aggregate, have a Material Adverse Effect, and has paid all taxes shown as
due thereon; and other than tax deficiencies which
7
<PAGE>
the Company or any Subsidiary is contesting in good faith and for which
the Company or such Subsidiary has provided adequate reserves, there is no
tax deficiency that has been asserted against the Company or any of the
Subsidiaries that would have, individually or in the aggregate, a
Material Adverse Effect.
(q) None of the Company, the Subsidiaries or any agent acting on
their behalf has taken or will take any action that might cause this
Agreement or the sale of the Debenture to violate Regulation G, T, U or X
of the Board of Governors of the Federal Reserve System, in each case as in
effect, or as the same may hereafter be in effect, on the Closing Date.
(r) Each of the Company and the Subsidiaries has good and marketable
title to all real property and good title to all personal property
described in the Memorandum as being owned by it and good and marketable
title to a leasehold estate in the real and personal property described in
the Memorandum as being leased by it free and clear of all liens, charges,
encumbrances or restrictions (other than Permitted Liens (as defined in the
Debenture)), except as described in the Memorandum or to the extent the
failure to have such title or the existence of such liens, charges,
encumbrances or restrictions would not, individually or in the aggregate,
have a Material Adverse Effect. All leases, contracts and agreements to
which the Company or any of the Subsidiaries is a party or by which any of
them is bound are valid and enforceable against the Company or such
Subsidiary, and, to the knowledge of the Company, are valid and enforceable
against the other party or parties thereto and are in full force and effect
with only such exceptions as would not, individually or in the aggregate,
have a Material Adverse Effect and except that (A) the enforcement thereof
may be subject to (i) bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights generally and (ii) general principles of
equity and the discretion of the court before which any proceeding therefor
may be brought and (B) any rights to indemnity or contribution thereunder
may be limited by federal and state securities laws and public policy
considerations. The Company and the Subsidiaries own or possess adequate
licenses or other rights to use all patents, trademarks, service marks,
trade names, copyrights and know-how necessary to conduct the businesses
now operated by them as described in the Memorandum, and none of the
Company or the Subsidiaries has received any notice of infringement of or
conflict with (or knows of any such infringement of or conflict with)
asserted rights of others with respect to any patents, trademarks, service
marks, trade names, copyrights or know-how which, if such assertion of
infringement or conflict were sustained, would have a Material Adverse
Effect.
(s) There are no legal or governmental proceedings involving or
affecting the Company or any Subsidiary or any of their respective
properties or assets which would be required to be described in a
prospectus pursuant to the Act that are not described in the Memorandum,
nor are there any material contracts or other documents which would
8
<PAGE>
be required to be described in a prospectus pursuant to the Act that are
not described in the Memorandum.
(t) Except as would not, individually or in the aggregate, have a
Material Adverse Effect (A) each of the Company and the Subsidiaries is in
compliance with and not subject to liability under applicable Environmental
Laws (as defined below), (B) each of the Company and the Subsidiaries has
made all filings and provided all notices required under any applicable
Environmental Law, and has and is in compliance with all Permits required
under any applicable Environmental Laws and each of them is in full force
and effect, (C) there is no civil, criminal or administrative action, suit,
demand, claim, hearing, notice of violation, investigation, proceeding,
notice or demand letter or request for information pending or, to the
knowledge of the Company or any of the Subsidiaries, threatened against the
Company or any of the Subsidiaries under any Environmental Law, (D) no
lien, charge, encumbrance or restriction has been recorded under any
Environmental Law with respect to any assets, facility or property owned,
operated, leased or controlled by the Company or any of the Subsidiaries,
(E) none of the Company or the Subsidiaries has received notice that it
has been identified as a potentially responsible party under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), or any comparable state law, (F) no property
or facility of the Company or any of the Subsidiaries is (i) listed or
proposed for listing on the National Priorities List under CERCLA or is
(ii) listed in the Comprehensive Environmental Response, Compensation and
Liability Information System List promulgated pursuant to CERCLA, or on any
comparable list maintained by any state or local governmental authority.
For purposes of this Agreement, "ENVIRONMENTAL LAWS" means the common law
and all applicable federal, state and local laws or regulations, codes,
orders, decrees, judgments or injunctions issued, promulgated, approved or
entered thereunder, relating to pollution or protection of public or
employee health and safety or the environment, including, without
limitation, laws relating to (i) emissions, discharges, releases or
threatened releases of hazardous materials into the environment
(including, without limitation, ambient air, surface water, ground water,
land surface or subsurface strata), (ii) the manufacture, processing,
distribution, use, generation, treatment, storage, disposal, transport or
handling of hazardous materials, and (iii) underground and above ground
storage tanks and related piping, and emissions, discharges, releases or
threatened releases therefrom.
(u) There is no strike, labor dispute, slowdown or work stoppage with
the employees of the Company or any of the Subsidiaries which is pending
or, to the knowledge of the Company or any of the Subsidiaries, threatened.
(v) Each of the Company and the Subsidiaries has in effect, with
financially sound and reputable insurers, insurance with respect to its
business and properties and the business and properties of its Subsidiaries
against loss or damage of the kind
9
<PAGE>
customarily insured against by corporations of established reputation
engaged in the same or similar businesses and similarly situated, of such
type and in such amounts as are customarily carried under similar
circumstances by such other corporations.
(w) None of the Company or the Subsidiaries has any liability for any
prohibited transaction or funding deficiency or any complete or partial
withdrawal liability with respect to any pension, profit sharing or other
plan which is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), to which the Company or any of the Subsidiaries
makes or ever has made a contribution and in which any employee of the
Company or of any Subsidiary is or has ever been a participant. With
respect to such plans, the Company and each Subsidiary is in compliance in
all material respects with all applicable provisions of ERISA.
(x) The Company and the Subsidiaries, taken as a whole, (i) makes and
keeps accurate books and records and (ii) maintains internal accounting
controls which provide reasonable assurance that (A) transactions are
executed in accordance with management's authorization, (B) transactions
are recorded as necessary to permit preparation of the Company's financial
statements and to maintain accountability for its assets, (C) access to
assets is permitted only in accordance with management's authorization and
(D) the reported accountability for assets is compared with existing assets
at reasonable intervals.
(y) None of the Company or the Subsidiaries will be an "investment
company" or "promoter" or "principal underwriter" for an "investment
company," as such terms are defined in the Investment Company Act of 1940,
as amended, and the rules and regulations thereunder.
(z) Immediately after the consummation of the transactions
contemplated by this Agreement, the fair value and present fair saleable
value of the assets of the Company (on a consolidated basis) will exceed
the sum of its stated liabilities and identified contingent liabilities;
the Company (on a consolidated basis) is not, nor will the Company (on a
consolidated basis) be, after giving effect to the execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby, (a) left with unreasonably small capital with which to
carry on its business as it is proposed to be conducted, (b) unable to pay
any liability on a claim as it becomes due or (c) otherwise insolvent. For
the purposes of this paragraph, "FAIR VALUE" means the amount at which an
entity's aggregate assets would change hands between a willing buyer and a
willing seller, each having reasonable knowledge of the relevant facts,
with neither being under any compulsion to act, with equity to both, and
"PRESENT FAIR SALEABLE VALUE" means the amount that may be realized if an
entity's aggregate assets are sold with reasonable promptness in an
arm's-length transaction under present conditions for the sale of ongoing
comparable business enterprises.
(aa) None of the Company, the Subsidiaries or any of their respective
Affiliates (as defined in Rule 501(b) of Regulation D under the Act) has
directly, or through any
10
<PAGE>
agent, (i) sold, offered for sale, solicited offers to buy or otherwise
negotiated in respect of, any "security" (as defined in the Act) which
is or could be integrated with the sale of the Debenture in a manner
that would require the registration under the Act of the Debenture or
(ii) engaged in any form of general solicitation or general advertising
(as those terms are used in Regulation D under the Act) in connection
with the offering of the Debenture or in any manner involving a public
offering within the meaning of Section 4(2) of the Act.
(ab) No securities of the Company or any Subsidiary are of the same
class (within the meaning of Rule 144A under the Act) as the Debentures and
listed on a national securities exchange and registered under Section 6 of
the Exchange Act, or quoted in a U.S. automated inter-dealer quotation
system.
(ac) None of the Company or the Subsidiaries has taken, nor will any
of them take, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or manipulation
of the price of the Common Stock.
6. REPRESENTATIONS AND WARRANTIES OF PURCHASER. The Purchaser represents and
warrants that:
(a) The Purchaser represents and warrants that it is an Accredited
Investor, as such term is defined in Regulation D promulgated under the
Act. Furthermore, as a condition precedent to the Company's obligations to
consummate the transactions contemplated hereby, the Purchaser shall
execute that representation letter attached as EXHIBIT E hereto. The
Purchaser agrees with the Company that (i) it has not and will not solicit
offers for, or offer or sell, the Debenture by any form of general
solicitation or general advertising (as those terms are used in Regulation
D under the Act) or in any manner involving a public offering within the
meaning of Section 4(2) of the Act; and (ii) it has and will solicit offers
for the Debenture only from, and will offer the Debenture only (A) in the
case of offers inside the United States, to a limited number of other
institutional investors reasonably believed by the Purchaser to be
Accredited Investors that, prior to their purchase of the Debenture,
deliver to the Purchaser a letter containing the representations and
agreements substantially similar to those contained in EXHIBIT E hereto,
(B) in the case of offers outside the United States, to persons other than
U.S. persons ("FOREIGN PURCHASERS"), which term shall include dealers or
other professional fiduciaries in the United States acting on a
discretionary basis for foreign beneficial owners (other than an estate or
trust)); provided, however, that, in the case of this clause (B), in
purchasing such Debenture such persons are deemed to have represented and
agreed as provided under the caption "Transfer Restrictions" contained in
the Confidential Disclosure Statement or (C) in transactions otherwise
exempt or excluded from the registration provisions of the Act.
11
<PAGE>
7. CONDITIONS OF PURCHASER'S OBLIGATIONS. The Purchaser's obligation to
purchase and pay for the Debenture is subject to the satisfaction or waiver,
prior to or at the Closing, of each of the following conditions:
(a) On the Closing Date, the Purchaser shall have received the
opinion, dated as of such Closing Date and addressed to the Purchaser, of
Arter & Hadden, counsel for the Company, in form and substance reasonably
satisfactory to counsel for the Purchaser.
(b) The representations and warranties of the Company contained in
this Agreement shall be true and correct on and as of the date hereof and
on and as of the Closing Date as if made on and as of the Closing Date;
the statements of the Company's officers made pursuant to any certificate
delivered in accordance with the provisions hereof shall be true and
correct on and as of the date made and on and as of the Closing Date; the
Company shall have performed all covenants and agreements and satisfied all
conditions on their part to be performed or satisfied hereunder at or prior
to the Closing Date; and, except as described in the Memorandum (exclusive
of any amendment or supplement thereto after the date hereof), subsequent
to the date of the most recent financial statements in such Memorandum,
there shall have been no event or development, and no information shall
have become known, that, individually or in the aggregate, has or would be
reasonably likely to have a Material Adverse Effect.
(c) The sale of the Debenture hereunder shall not be enjoined
(temporarily or permanently) on the Closing Date.
(d) Subsequent to the date of the most recent financial statements in
the Memorandum (exclusive of any amendment or supplement thereto after the
date hereof), none of the Company or any of the Subsidiaries shall have
sustained any loss or interference with respect to its business or
properties from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any strike, labor dispute, slow down
or work stoppage or from any legal or governmental proceeding, order or
decree, which loss or interference, individually or in the aggregate, has
or would be reasonably likely to have a Material Adverse Effect.
(e) The Purchaser shall have received a certificate of the Company,
dated the Closing Date, signed on behalf of the Company by its Chairman of
the Board, President or any Vice President and the Chief Financial
Officer, to the effect that:
(i) The representations and warranties of the Company contained
in this Agreement are true and correct on and as of the date hereof
and on and as of the Closing Date, and the Company has performed all
covenants and agreements and satisfied all conditions on its part to
be performed or satisfied hereunder at or prior to the Closing Date;
12
<PAGE>
(ii) At the Closing Date, since the date hereof or since the
date of the most recent financial statements in the Memorandum
(exclusive of any amendment or supplement thereto after the date
hereof), except as described in the Memorandum no event or
development has occurred, and no information has become known,
that, individually or in the aggregate, has or would be reasonably
likely to have a Material Adverse Effect; and
(iii) The sale of the Debenture hereunder has not been
enjoined (temporarily or permanently).
(f) On the Closing Date, the Purchaser shall have received the
Registration Rights Agreement executed by the Company and such agreement
shall be in full force and effect at all times from and after the Closing
Date.
On or before the Closing Date, the Purchaser and counsel for the
Purchaser shall have received such further documents, opinions, certificates,
letters and schedules or instruments relating to the business, corporate, legal
and financial affairs of the Company and the Subsidiaries as they shall have
heretofore reasonably requested from the Company.
All such documents, opinions, certificates, letters, schedules or
instruments delivered pursuant to this Agreement will comply with the provisions
hereof only if they are reasonably satisfactory in all material respects to the
Purchaser and counsel for the Purchaser. The Company shall furnish to the
Purchaser such conformed copies of such documents, opinions, certificates,
letters, schedules and instruments in such quantities as the Purchaser shall
reasonably request.
8. COVENANTS OF THE COMPANY. The Company covenants and agrees with the
Purchaser that:
(a) The Company will cooperate with the Purchaser in attempting to
arrange for the qualification of the shares of Common Stock issuable upon
conversion of the Debenture for offering and sale under the securities or
"Blue Sky" laws of such jurisdictions as the Purchaser may designate and
will continue such qualifications in effect for as long as may be necessary
to complete the resale of the underlying shares of Common Stock; provided,
however, that in connection therewith, the Company shall not be required to
qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction or subject itself to taxation in excess of
a nominal dollar amount in any such jurisdiction where it is not then so
subject.
(b) The Company will apply the net proceeds from the sale of the
Debenture as set forth under "Use of Proceeds" in the Confidential
Disclosure Statement comprising a part of the Memorandum.
13
<PAGE>
(c) The Company will give the Purchaser prompt written notice of any
amendment to Sections 5.01 through 5.12 of the 1996 Indenture. The Company
will agree to make a substantially similar change in any conforming section
contained in the Debenture as a result of such amendment to the 1996
Indenture to the extent requested by the Purchaser.
(d) None of the Company or any of its Affiliates will sell, offer for
sale or solicit offers to buy or otherwise negotiate in respect of any
"security" (as defined in the Act) which could be integrated with the sale
of the Debenture in a manner which would require the registration under the
Act of the Debenture.
(e) The Company will not, and will not permit any of the Subsidiaries
to, engage in any form of general solicitation or general advertising (as
those terms are used in Regulation D under the Act) in connection with the
offering of the Debenture or in any manner involving a public offering
within the meaning of Section 4(2) of the Act.
(f) For so long as the Debentures remain outstanding, the Company
will make available at its expense, upon request, to any holder of such
Debentures and any prospective purchasers thereof, the information
specified in Rule 144A(d)(4) under the Act, unless the Company is then
subject to Section 13 or 15(d) of the Exchange Act.
(g) The Company will undertake whatever filings or other steps are
necessary to list the shares of Common Stock issuable upon conversion of
the Debentures on the Nasdaq SmallCap Market.
(h) As a post-closing matter only, and not as a condition precedent
or condition subsequent to the consummation of the transactions
contemplated hereby or the performance of any party's performance
hereunder, the Company agrees that it will make application for good
standing (tax-status) certificates of the following entities in the
following jurisdictions (collectively, the "CERTIFICATES"):
NAME JURISDICTION
------------------ ------------
SA Telecommunications, Inc. Delaware, Texas (foreign)
U.S. Communications, Inc. Texas
AddTel Communications, Inc. California
Long Distance Network, Inc. Texas
Southwest Long Distance Network, Inc. Arkansas
Uniquest Communications, Inc. Texas
The Company agrees to provide the Certificates to the Purchaser if and when
received.
9. MISCELLANEOUS.
14
<PAGE>
(a) SURVIVAL CLAUSE. The respective representations, warranties,
agreements, covenants, and other statements of the Company, its officers
and the Purchaser set forth in this Agreement or made by or on behalf of
them pursuant to this Agreement shall remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company,
any of its officers or directors, the Purchaser or any person who controls
the Company or the Purchaser within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act and (ii) delivery of and payment for the
Debenture. The respective agreements, covenants, and other statements set
forth in SECTIONS 3 AND 9(d) hereof shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement.
(b) NOTICES. All communications hereunder shall be in writing and,
if sent to the Purchaser, shall be mailed or delivered to (i) Northstar
High Total Return Fund, c/o Northstar Investment Management, 2 Pickwick
Plaza, 1st Floor, Greenwich, Connecticut 06830; if sent to the Company,
shall be mailed or delivered to the Company at 1600 Promenade Center, 15th
Floor, Richardson, Texas 75080, Attention: Lynn H. Johnson, Esq., Vice
President and General Counsel; with a copy to Arter & Hadden, 1717 Main
Street, Suite 4100, Dallas, Texas 75201, Attention: Mark S. Solomon, Esq.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; and one
business day after being timely delivered to a next-day air courier.
(c) SUCCESSORS. This Agreement shall inure to the benefit of and be
binding upon the Purchaser, the Company and their respective successors and
legal representatives, and nothing expressed or mentioned in this Agreement
is intended or shall be construed to give any other person any legal or
equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained; this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person. No
purchaser of Debenture from the Purchasers will be deemed a successor
because of such purchase.
(d) APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS
AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY THEREIN, WITHOUT
GIVING EFFECT TO ANY PROVISIONS THEREOF RELATING TO CONFLICTS OF LAW.
(e) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15
<PAGE>
(f) DESCRIPTIVE HEADINGS. The descriptive headings herein have been
inserted for convenience only and shall not be deemed to limit or otherwise
affect the construction of any provisions hereof.
16
<PAGE>
IN WITNESS WHEREOF, the Company and the Purchaser have caused this
Agreement to be executed as of the date first above written.
SA TELECOMMUNICATIONS, INC.
By: /S/ J. David Darnell
-----------------------------------
J. David Darnell
Vice President - Finance and
Chief Financial Officer
NORTHSTAR HIGH TOTAL RETURN
By: /s/ Michael A. Graves
-----------------------------------
Michael A. Graves
Vice President
17
<PAGE>
- ------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
DATED AS OF MARCH 25, 1997
BY AND BETWEEN
SA TELECOMMUNICATIONS, INC.
AND
NORTHSTAR HIGH TOTAL RETURN FUND
AS PURCHASER
- ------------------------------------------------------------------------------
$3,800,000
10% CONVERTIBLE DEBENTURE DUE 2006
<PAGE>
TABLE OF CONTENTS
Page
1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Piggyback Registration . . . . . . . . . . . . . . . . . . . 3
3. Registration Procedures. . . . . . . . . . . . . . . . . . . 4
4. Registration Expenses. . . . . . . . . . . . . . . . . . . . 9
5. Indemnification . . . . . . . . . . . . . . . . . . . . . . 10
6. Rule 144 and 144A . . . . . . . . . . . . . . . . . . . . . 13
7. Underwritten Registrations . . . . . . . . . . . . . . . . . 13
8. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . 13
(a) No Inconsistent Agreements. . . . . . . . . . . . . . . 13
(b) Adjustments Affecting Registrable Debenture . . . . . . 13
(c) Amendments and Waivers. . . . . . . . . . . . . . . . . 13
(d) Notices . . . . . . . . . . . . . . . . . . . . . . . . 14
(e) Successors and Assigns. . . . . . . . . . . . . . . . . 15
(f) Counterparts. . . . . . . . . . . . . . . . . . . . . . 15
(g) Headings. . . . . . . . . . . . . . . . . . . . . . . . 15
(h) Governing Law . . . . . . . . . . . . . . . . . . . . . 15
(i) Severability. . . . . . . . . . . . . . . . . . . . . . 15
(j) Securities Held by the Company or its Affiliates. . . . 15
(k) Third Party Beneficiaries . . . . . . . . . . . . . . . 16
<PAGE>
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "AGREEMENT"), dated as of March
25, 1997, is being entered into by and between SA Telecommunications Inc., a
Delaware corporation (the "COMPANY"), and Northstar High Total Return Fund
(the "PURCHASER").
This Agreement is being entered into in connection with the Purchase
Agreement, dated March 25, 1997, between the Company and the Purchaser (the
"PURCHASE AGREEMENT"), which provides for the sale by the Company to the
Purchaser of $3,800,000 aggregate principal amount of the Company's 10%
Convertible Debenture Due 2006 (the "DEBENTURE"). In order to induce the
Purchaser to enter into the Purchase Agreement, the Company has agreed to
provide the registration rights set forth in this Agreement for the benefit
of the Purchaser and its direct and indirect transferees. The execution and
delivery of this Agreement is a condition to the obligation of the Purchaser
to purchase the Debenture under the Purchase Agreement.
The parties hereby agree as follows:
1. DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
ADVICE: See the last paragraph of SECTION 3 hereof.
AGREEMENT: See the first introductory paragraph hereto.
CLOSING DATE: The Closing Date as defined in the Purchase Agreement.
COMMON STOCK: The common stock, par value $0.0001 per share, of the
Company.
COMPANY: See the first introductory paragraph hereto.
DEBENTURE: See the second introductory paragraph hereto.
EFFECTIVENESS PERIOD: See SECTION 2(b) hereof.
EXCHANGE ACT: The Securities Exchange Act of 1934, as amended, and the
rules and regulations of the SEC promulgated thereunder.
HOLDER: Any holder of a Registrable Security.
INDEMNIFIED PERSON: See SECTION 5(c) hereof.
INDEMNIFYING PERSON: See SECTION 5(c) hereof.
INSPECTORS: See SECTION 3(o) hereof.
1
<PAGE>
NASD: See SECTION 3(r) hereof.
OFFERING MEMORANDUM: The Offering Memorandum dated March 25, 1997 (and all
documents comprising a part thereof) pursuant to which the Debenture is being
offered to the Purchaser under the Purchase Agreement.
PARTICIPANT: See SECTION 5(a) hereof.
PERSON: An individual, trustee, corporation, partnership, limited liability
company, joint stock company, trust, unincorporated association, union, business
association, firm or other legal entity.
PIGGYBACK REGISTRATION: See SECTION 2(a) hereof.
PROSPECTUS: The prospectus included in any Registration Statement
(including, without limitation, any prospectus subject to completion and a
prospectus that includes any information previously omitted from a prospectus
filed as part of an effective registration statement in reliance upon Rule
430A promulgated under the Securities Act), as amended or supplemented by any
prospectus supplement, and all other amendments and supplements to the
Prospectus, with respect to the terms of the offering of any portion of the
Registrable Securities covered by such Registration Statement including
post-effective amendments, and all material incorporated by reference or
deemed to be incorporated by reference in such Prospectus.
PURCHASE AGREEMENT: See the second introductory paragraph hereto.
PURCHASER: See the first introductory paragraph hereto.
RECORDS: See SECTION 3(o) hereof.
REGISTRABLE SECURITIES: Each share of Common Stock of the Company issuable
upon conversion of the Debenture, until each such share (i) has been effectively
registered under the Securities Act and disposed of in accordance with the
Piggyback Registration Statement covering it or (ii) is distributed to the
public pursuant to Rule 144.
REGISTRATION STATEMENT: Any registration statement of the Company that
covers any of the Registrable Securities pursuant to the provisions of this
Agreement, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits, and
all material incorporated by reference or deemed to be incorporated by reference
in such registration statement.
RULE 144: Rule 144 promulgated under the Securities Act, as such Rule may
be amended from time to time, or any similar rule (other than Rule 144A) or
regulation hereafter adopted by the SEC providing for offers and sales of
securities made in compliance therewith resulting in offers and sales by
subsequent holders that are not affiliates of an issuer of such securities being
free of the registration and prospectus delivery requirements of the Securities
Act.
2
<PAGE>
RULE 144A: Rule 144A promulgated under the Securities Act, as such Rule
may be amended from time to time, or any similar rule (other than Rule 144) or
regulation hereafter adopted by the SEC.
SEC: The Securities and Exchange Commission.
SECURITIES ACT: The Securities Act of 1933, as amended, and the rules and
regulations of the SEC promulgated thereunder.
UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING: A registration in
which securities of the Company are sold to an underwriter for reoffering to the
public.
2. PIGGYBACK REGISTRATION
(a) RIGHT TO PIGGYBACK. Subject to SECTION 2(b) below, until March 25,
2000 whenever the Company proposes to register any of its securities other than
Registrable Securities under the Securities Act (a "PIGGYBACK REGISTRATION"),
either for the Company's own account or for the account of any of its security
holders (other than Holders in their capacity as Holders), the Company will give
prompt written notice to all Holders of its intention to effect such a
registration and will include in such Piggyback Registration all Registrable
Securities of Holders with respect to which the Company has received written
requests for inclusion therein within 20 days after receipt of the Company's
notice. Except as may otherwise be provided in this Agreement, Registrable
Securities with respect to which such request for registration has been received
will be registered by the Company and offered to the public pursuant to this
Agreement on the same terms and conditions as any similar securities of the
Company included in the proposed registration.
(b) RESTRICTIONS ON PIGGYBACK RIGHTS.
(i) Holders will not be entitled to include securities pursuant to
SECTION 2(a) in (A) a registration statement on Form S-4 or S-8 or similar
form, or (B) an exchange offer or an offering of securities solely to the
Company's existing securityholders.
(ii) If the managing underwriter or underwriters advise the Company
and the Holders in writing that in its or their opinion or, in the case of
a Piggyback Registration not being underwritten, the Company shall
reasonably determine after consultation with an investment banker of
nationally recognized standing that, the number of securities proposed to
be sold exceeds the number which can be effectively sold in, or would have
a material adverse effect on, such offering, the Company will include in
such registration the number of securities which, in the opinion of such
underwriter or underwriters, or the Company, as the case may be, can be
sold as follows: (A) first, any securities to be included in such
registration by a Person holding a demand registration right, and (B)
second, all other securities requested to be included in such registration
on a pro rata basis.
3
<PAGE>
The Company shall use its commercially reasonable efforts to cause the Piggyback
Registration to be declared effective under the Securities Act and to keep the
Piggyback Registration continuously effective under the Securities Act for the
Registrable Securities only so long as the Registration Statement giving the
Holders the Piggyback Registration right contained in this Section 2 would
otherwise remain effective in the absence of the Holders participation therein
(the "EFFECTIVENESS PERIOD").
(b) WITHDRAWAL OF STOP ORDERS. If the Piggyback Registration ceases to
be effective for any reason at any time during the Effectiveness Period (other
than because of the sale of all of the securities registered thereunder), the
Company shall use its commercially reasonable efforts to obtain the prompt
withdrawal of any order suspending the effectiveness thereof.
(c) SUPPLEMENTS AND AMENDMENTS. The Company shall promptly supplement
and amend the Piggyback Registration if required by the rules, regulations or
instructions applicable to the registration form used for such Piggyback
Registration, if required by the Securities Act, or if reasonably requested by
the Holders of a majority of the Registrable Securities covered by such
Registration Statement or by any underwriter of such Registrable Securities.
(d) CALCULATION OF MAJORITY OF THE REGISTRABLE SECURITIES. Unless the
context otherwise requires, whenever it is necessary pursuant to the terms of
this Agreement to determine the Holders of a majority of the Registrable
Securities covered by a Registration Statement, no distinction shall be made
between shares already issued and shares acquirable upon conversion of the
Debenture. Accordingly, all shares of Common Stock issued upon conversion of a
Debenture which constitute Registrable Securities shall be treated as if such
conversions have in fact taken place in making such calculation.
3. REGISTRATION PROCEDURES. In connection with the filing of any Registration
Statement pursuant to SECTION 2 hereof, the Company shall effect such
registration(s) to permit the sale of the securities covered thereby in
accordance with the intended method or methods of disposition thereof, and
pursuant thereto and in connection with any Registration Statement filed by the
Company hereunder, the Company shall:
(a) Before filing any Registration Statement or Prospectus or any
amendments or supplements thereto, the Company shall, if requested, furnish to
and afford the Holders of the Registrable Securities covered by such
Registration Statement, their counsel and the managing underwriters, if any, a
reasonable opportunity to review copies of all such documents (including copies
of any documents to be incorporated by reference therein and all exhibits
thereto) proposed to be filed (in each case at least five business days prior to
such filing). The Company shall not file any Registration Statement or
Prospectus or any amendments or supplements thereto in respect of which the
Holders must be afforded an opportunity to review prior to the filing of such
document, if the Holders of a majority of the Registrable Securities covered by
such Registration Statement, their counsel, or the managing underwriters, if
any, shall reasonably object.
(b) Prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement as may be necessary to keep such
Registration Statement continuously effective for the Effectiveness Period;
cause the related Prospectus to be supplemented by any
4
<PAGE>
Prospectus supplement required by applicable law, and as so supplemented to
be filed pursuant to Rule 424 (or any similar provisions then in force) under
the Securities Act; and comply with the provisions of the Securities Act and
the Exchange Act applicable to it with respect to the disposition of all
securities covered by such Registration Statement as so amended or in such
Prospectus as so supplemented.
(c) Notify the selling Holders of Registrable Securities, their counsel
and the managing underwriters, if any, promptly (but in any event within two
business days), and confirm such notice in writing, (i) when a Prospectus or any
Prospectus supplement or post-effective amendment has been filed, and, with
respect to a Registration Statement or any post-effective amendment, when the
same has become effective under the Securities Act (including in such notice a
written statement that any Holder may, upon request, obtain, at the sole expense
of the Company, one conformed copy of such Registration Statement or
post-effective amendment including financial statements and schedules, documents
incorporated or deemed to be incorporated by reference and exhibits), (ii) of
the issuance by the SEC of any stop order suspending the effectiveness of a
Registration Statement or of any order preventing or suspending the use of any
preliminary prospectus or the initiation of any proceedings for that purpose,
(iii) if at any time the representations and warranties of the Company contained
in any agreement (including any underwriting agreement), contemplated by SECTION
3(n) hereof cease to be true and correct in any material respect, (iv) of the
receipt by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of a Registration Statement or any
of the Registrable Securities in any jurisdiction, or the initiation or
threatening of any proceeding for such purpose, (v) of the happening of any
event, the existence of any condition or any information becoming known
(including pending corporate developments, acquisitions or public filings) that
requires the making of any changes in or amendments or supplements to such
Registration Statement, Prospectus or documents so that, in the case of the
Registration Statement, it 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 not misleading, and that in the case of
the Prospectus, it 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 light of the circumstances under which they were
made, not misleading, (vi) of the determination by the Company that a
post-effective amendment to a Registration Statement would be appropriate.
(d) Use its commercially reasonable efforts to prevent the issuance of
any order suspending the effectiveness of a Registration Statement or of any
order preventing or suspending the use of a Prospectus or suspending the
qualification (or exemption from qualification) of any of the Registrable
Securities for sale in any jurisdiction, and, if any such order is issued, to
use its commercially reasonable efforts to obtain the withdrawal of any such
order at the earliest possible moment.
(e) If reasonably requested by the managing underwriter or underwriters
(if any), or the Holders of a majority of the Registrable Securities being sold
in connection with an underwritten offering, (i) promptly incorporate in a
prospectus supplement or post-effective amendment such information as the
managing underwriter or underwriters (if any), such Holders, or counsel for any
of them reasonably request to be included therein, (ii) make all required
filings of such prospectus supplement or such post-effective amendment as soon
as practicable after the
5
<PAGE>
Company has received notification of the matters to be incorporated in such
prospectus supplement or post-effective amendment, and (iii) supplement or
make amendments to such Registration Statement.
(f) Furnish to each selling Holder of Registrable Securities who so
requests and to counsel and each managing underwriter, if any, at the sole
expense of the Company, one conformed copy of the Registration Statement or
Registration Statements and each post-effective amendment thereto, including
financial statements and schedules.
(g) Deliver to each selling Holder of Registrable Securities, their
respective counsel, and the underwriters, if any, at the sole expense of the
Company, as many copies of the Prospectus or Prospectuses (including each form
of preliminary prospectus) and each amendment or supplement thereto and any
documents incorporated by reference therein as such Persons may reasonably
request; and, subject to the last paragraph of this SECTION 3, the Company
hereby consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling Holders of Registrable Securities, and the
underwriters or agents, if any, and dealers (if any), in connection with the
offering and sale of the Registrable Securities covered by, such Prospectus and
any amendment or supplement thereto.
(h) The Company will cooperate with the Purchaser in attempting to
arrange for the qualification of the shares of Common Stock issuable upon
conversion of the Debenture for offering and sale under the securities or "Blue
Sky" laws of such jurisdictions as the Purchaser may designate and will continue
such qualifications in effect for as long as may be necessary to complete the
resale of the underlying shares of Common Stock; provided, however, that in
connection therewith, the Company shall not be required to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction or subject itself to taxation in excess of a nominal dollar amount
in any such jurisdiction where it is not then so subject.
(i) [intentionally omitted]
(j) Use its commercially reasonable efforts to cause the Registrable
Securities covered by the Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the Holders thereof or the underwriter or underwriters, if any, to
dispose of such Registrable Securities, except as may be required solely as a
consequence of the nature of a selling Holder's business, in which case the
Company will cooperate in all reasonable respects with the filing of such
Registration Statement and the granting of such approvals.
(k) Upon the occurrence of any event contemplated by paragraph 3(c)(v) or
3(c)(vi) hereof, as promptly as practicable prepare and (subject to SECTION 3(a)
hereof) file with the SEC, at the sole expense of the Company, a supplement or
post-effective amendment to the Registration Statement or a supplement to the
related Prospectus or any document incorporated or deemed to be incorporated
therein by reference, or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Securities being sold thereunder,
any such Prospectus will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
6
<PAGE>
(l) [intentionally omitted]
(m) [intentionally omitted]
(n) In connection with any underwritten offering of Registrable
Securities, enter into an underwriting agreement as is customary in underwritten
offerings of equity Securities similar to the Common Stock and to take all such
other actions as are reasonably requested by the managing underwriter or
underwriters in order to facilitate the registration or the disposition of such
Registrable Securities and, in such connection, (i) make such representations
and warranties to, and covenants with, the underwriters with respect to the
business of the Company and its subsidiaries and the Registration Statement,
Prospectus and documents, if any, incorporated or deemed to be incorporated by
reference therein, in each case, as are customarily made by issuers to
underwriters in underwritten offerings of equity securities similar to the
Common Stock and confirm the same in writing if and when requested; (ii) obtain
the written opinion of counsel to the Company and written updates thereof in
form, scope and substance reasonably satisfactory to the managing underwriter or
underwriters, addressed to the underwriters covering the matters customarily
covered in opinions provided in underwritten offerings of equity securities
similar to the Common Stock and such other customary matters as may be
reasonably requested by the managing underwriter or underwriters; (iii) obtain
"cold comfort" letters and updates thereof in form, scope and substance
reasonably satisfactory to the managing underwriter or underwriters from the
independent certified public accountants of the Company (and, if necessary, any
other independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements and
financial data are, or are required to be, included or incorporated by reference
in the Registration Statement), addressed to each of the underwriters, such
letters to be in customary form and covering matters of the type customarily
covered in "cold comfort" letters in connection with underwritten offerings of
equity securities similar to the Common Stock and such other customary matters
as reasonably requested by the managing underwriter or underwriters; and (iv) if
an underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable than those set forth
in SECTION 5 hereof (or such other provisions and procedures acceptable to
Holders of a majority of Registrable Securities covered by such Registration
Statement and the managing underwriter or underwriters or agents and the
Company) with respect to all parties to be indemnified pursuant to said Section.
The above shall be done at each closing under such underwriting agreement, or as
and to the extent required thereunder.
(o) Until such time as the Holders no longer have a Piggyback
Registration right as provided in SECTION 2 hereof, make available for
inspection by any selling Holder of such Registrable Securities being sold, any
underwriter participating in any such disposition of Registrable Securities, if
any, and any attorney, accountant or other agent retained by any such selling
Holder or underwriter (collectively, the "INSPECTORS"), at the offices where
normally kept, during reasonable business hours, all financial and other
records, pertinent corporate documents and instruments of the Company and its
subsidiaries (collectively, the "RECORDS") as shall be reasonably necessary to
enable them to exercise any applicable due diligence responsibilities, and cause
the officers, directors and employees of the Company and its subsidiaries to
supply all information reasonably requested by any such Inspector in connection
with such Registration Statement. Records which the Company determines, in good
faith, to be confidential and any Records which it notifies the Inspectors are
confidential shall not be disclosed by the Inspectors
7
<PAGE>
unless (i) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission of a material fact in such Registration Statement,
(ii) the release of such Records is ordered pursuant to a subpoena or other
order from a court of competent jurisdiction, (iii) disclosure of such
information is, in the opinion of counsel for any Inspector, necessary or
advisable in connection with any action, claim, suit or proceeding, directly
or indirectly, involving or potentially involving such Inspector and arising
out of, based upon, relating to, or involving this Agreement, or any
transactions contemplated hereby or arising hereunder, or (iv) the
information in such Records has been made generally available to the public.
Each selling Holder of such Registrable Securities will be required to agree
that information obtained by it as a result of such inspections shall be
deemed confidential and shall not be used by it as the basis for any market
transactions in the securities of the Company unless and until such
information is generally available to the public. Each selling Holder of
such Registrable Securities will be required to further agree that it will,
upon learning that disclosure of such Records is sought in a court of
competent jurisdiction, give notice to the Company and allow the Company to
undertake appropriate action to prevent disclosure of the Records deemed
confidential at the Company's sole expense.
(p) [intentionally omitted]
(q) Comply with all applicable rules and regulations of the SEC and make
generally available to its securityholders earnings statements satisfying the
provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or
any similar rule promulgated under the Securities Act) no later than 45 days
after the end of any 12-month period (or 90 days after the end of any 12-month
period if such period is a fiscal year) (i) commencing at the end of any fiscal
quarter in which Registrable Securities are sold to underwriters in a firm
commitment or best efforts underwritten offering and (ii) if not sold to
underwriters in such an offering, commencing on the first day of the first
fiscal quarter of the Company after the effective date of a Registration
Statement, which statements shall cover said 12-month periods.
(r) Cooperate with each seller of Registrable Securities covered by the
Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Securities and their respective counsel in
connection with any filings required to be made with the National Association of
Securities Dealers, Inc. (the "NASD").
(s) Use its commercially reasonable efforts to take all other steps
necessary or advisable to effect the registration of the Registrable Securities
covered by the Registration Statement contemplated hereby.
The Company may require each seller of Registrable Securities as to
which any registration is being effected to furnish to the Company such
information regarding such seller and the distribution of such Registrable
Securities as the Company may, from time to time, reasonably request. The
Company may exclude from such registration the Registrable Securities of any
seller who unreasonably fails to furnish such information within a reasonable
time after receiving such request. Each seller as to which any Piggyback
Registration is being effected agrees to furnish promptly to the Company all
information required to be disclosed in order to make the information previously
furnished to the Company by such seller not materially misleading.
8
<PAGE>
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon actual receipt of any notice from the Company
of the happening of any event of the kind described in SECTION 3(c)(ii),
3(c)(iv), 3(c)(v), OR 3(c)(vi) hereof, such Holder will forthwith discontinue
disposition of such Registrable Securities covered by such Registration
Statement until such Holder's receipt of the copies of the supplemented or
amended Prospectus contemplated by SECTION 3(k) hereof, or until it is advised
in writing (the "Advice") by the Company that the use of the applicable
Prospectus may be resumed, and has received copies of any amendments or
supplements thereto. In the event the Company shall give any such notice, the
Effectiveness Period shall be extended by the number of days during such periods
from and including the date of the giving of such notice to and including the
date when each seller of Registrable Securities covered by the Registration
Statement shall have received (x) the copies of the supplemented or amended
Prospectus contemplated by SECTION 3(k) hereof or (y) the Advice.
4. REGISTRATION EXPENSES
(a) All fees and expenses incident to the performance of or compliance
with this Agreement by the Company shall be borne by the Company whether or not
the Piggyback Registration is filed or becomes effective, including, without
limitation, (i) all registration and filing fees (including, without limitation,
(A) fees with respect to filings required to be made with the NASD in connection
with an underwritten offering and (B) fees and expenses of compliance with state
securities or Blue Sky laws (including, without limitation, reasonable fees and
disbursements of one counsel in connection with Blue Sky qualifications of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as provided in
SECTION 3(h) hereof)), (ii) printing expenses, including printing prospectuses
if the printing of prospectuses is reasonably requested by the managing
underwriter or underwriters, if any, or by the Holders of a majority of the
Registrable Securities included in the Registration Statement, (iii) messenger,
telephone and delivery expenses, (iv) reasonable fees and disbursements of
counsel for the Company and reasonable fees and disbursements of special counsel
for the sellers of Registrable Securities (subject to the provisions of SECTION
4(b) hereof), (v) fees and disbursements of all independent certified public
accountants referred to in SECTION 3(n)(iii) hereof (including, without
limitation, the expenses of any special audit and "cold comfort" letters
required by or incident to such performance), (vi) [intentionally omitted],
(vii) Securities Act liability insurance, if the Company desires such insurance,
(viii) fees and expenses of all other Persons retained by the Company, (ix)
internal expenses of the Company (including, without limitation, all salaries
and expenses of officers and employees of the Company performing legal or
accounting duties), (x) the expense of any annual audit, (xi) the fees and
expenses incurred in connection with the listing of the securities to be
registered on any securities exchange, if applicable, and (xii) the expenses
relating to printing, word processing and distributing all Registration
Statements, underwriting agreements, securities sales agreements, indentures and
any other documents necessary in order to comply with this Agreement.
(b) The Company shall (i) reimburse the Holders of the Registrable
Securities being registered in a Piggyback Registration for the reasonable fees
and disbursements, not to exceed $10,000, of not more than one counsel chosen by
the Holders of a majority of the Registrable Securities to be included in such
Registration Statement and (ii) reimburse out-of-pocket
9
<PAGE>
expenses (other than legal expenses) of Holders of Registrable Securities
incurred in connection with the registration and sale of the Registrable
Securities pursuant to a Piggyback Registration; PROVIDED, HOWEVER, that the
Company shall not be required to reimburse Holders for any underwriting
discounts or commissions, and any transfer fees or taxes.
5. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless each Holder of
Registrable Securities offered pursuant to the Registration Statement, the
affiliates, directors, officers, agents, representatives and employees of each
Holder or its affiliates, and each other Person, if any, who controls any such
Person or its affiliates within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act (each, a "PARTICIPANT"), from
and against any and all losses, claims, damages and liabilities (including,
without limitation, the reasonable legal fees and other expenses actually
incurred in connection with any suit, action or proceeding or any claim
asserted) caused by, arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in any Registration
Statement pursuant to which the offering of such Registrable Securities is
registered (or any amendment thereto) or related Prospectus (or any amendments
or supplements thereto) or any related preliminary prospectus, or caused by,
arising out of or based upon any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; PROVIDED, HOWEVER, that the Company will not be required to
indemnify a Participant if (i) such losses, claims, damages or liabilities are
caused by any untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with information relating to
any Participant furnished to the Company in writing by or on behalf of such
Participant expressly for use therein or (ii) if such Participant sold to the
person asserting the claim the Registrable Securities which are the subject of
such claim and such untrue statement or omission or alleged untrue statement or
omission was contained or made in any preliminary prospectus and corrected in
the Prospectus or any amendment or supplement thereto and the Prospectus does
not contain any other untrue statement or omission or alleged untrue statement
or omission of a material fact that was the subject matter of the related
proceeding and it is established by the Company in the related proceeding that
such Participant failed to deliver or provide a copy of the Prospectus (as
amended or supplemented) to such Person with or prior to the confirmation of the
sale of such Registrable Securities sold to such Person if required by
applicable law, unless such failure to deliver or provide a copy of the
Prospectus (as amended or supplemented) was a result of noncompliance by the
Company with SECTION 3 of this Agreement.
(b) Each Participant agrees, severally and not jointly, to indemnify and
hold harmless the Company, its affiliates, directors, officers, agents,
representatives and employees, and each other Person, if any, who controls the
Company within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act (each, a "COMPANY PARTICIPANT") to the same extent as the
foregoing indemnity from the Company to each Participant, but only (i) with
reference to information relating to such Participant furnished to the Company
in writing by or on behalf of such Participant expressly for use in any
Registration Statement or Prospectus, any amendment or supplement thereto, or
any preliminary prospectus or (ii) with respect to any untrue statement or
representation made by such Participant in writing to the Company. The
10
<PAGE>
liability of any Participant under this paragraph shall in no event exceed the
proceeds received by such Participant from sales of Registrable Securities
giving rise to such obligations.
(c) If any suit, action, proceeding (including any governmental or
regulatory investigation), claim or demand shall be brought or asserted against
any Person in respect of which indemnity or contribution may be sought pursuant
to either of the two preceding paragraphs or the next succeeding paragraph, such
Person (the "INDEMNIFIED PERSON") shall promptly notify the Person against whom
such indemnity or contribution may be sought (the "INDEMNIFYING PERSON") in
writing, and the Indemnifying Person, upon request of the Indemnified Person,
shall retain counsel reasonably satisfactory to the Indemnified Person to
represent the Indemnified Person and any others the Indemnifying Person may
reasonably designate in such proceeding and shall pay the reasonable fees and
expenses actually incurred by such counsel related to such proceeding; provided,
however, that the failure to so notify the Indemnifying Person shall not relieve
it of any obligation or liability which it may have hereunder or otherwise
(unless and only to the extent that such failure directly results in the loss or
compromise of any material rights or defenses by the Indemnifying Person and the
Indemnifying Person was not otherwise aware of such action or claim). In any
such proceeding, any Indemnified Person shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person unless (i) the Indemnifying Person and the Indemnified
Person shall have mutually agreed in writing to the contrary, (ii) the
Indemnifying Person shall have failed within a reasonable period of time to
retain counsel reasonably satisfactory to the Indemnified Person or (iii) the
named parties in any such proceeding (including any impleaded parties) include
both the Indemnifying Person and the Indemnified Person and representation of
both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that, unless there
exists a conflict among Indemnified Persons, the Indemnifying Person shall not,
in connection with any one such proceeding or separate but substantially similar
related proceeding in the same jurisdiction arising out of the same general
allegations, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all Indemnified Persons, and that all
such fees and expenses shall be reimbursed promptly as they are incurred. Any
such separate firm for the Participants shall be designated in writing by
Participants who sold a majority in interest shares of Common Stock sold by all
such Participants and any such separate firm for the Company Participants shall
be designated in writing by the Company. The Indemnifying Person shall not be
liable for any settlement of any proceeding effected without its prior written
consent, but if settled with such consent or if there be a final non-appealable
judgment for the plaintiff for which the Indemnified Person is entitled to
indemnification pursuant to this Agreement, the Indemnifying Person agrees to
indemnify and hold harmless each Indemnified Person from and against any loss or
liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an Indemnified Person shall have requested an
Indemnifying Person to reimburse the Indemnified Person for reasonable fees and
expenses actually incurred by counsel as contemplated by the third sentence of
this paragraph, the Indemnifying Person agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 60 days after receipt by such Indemnifying
Person of the aforesaid request and (ii) such Indemnifying Person shall not have
reimbursed the Indemnified Person in accordance with such request prior to the
date of such settlement; provided, however, that the Indemnifying Person shall
not be liable for any settlement effected without its consent pursuant to this
sentence if the
11
<PAGE>
Indemnifying Person is contesting, in good faith, the request for reimbursement.
No Indemnifying Person shall, without the prior written consent of the
Indemnified Person, effect any settlement or compromise of any pending or
threatened proceeding in respect of which any Indemnified Person is or could
have been a party, and indemnity could have been sought hereunder by such
Indemnified Person, unless such settlement (A) includes an unconditional
written release of such Indemnified Person, in form and substance reasonably
satisfactory to such Indemnified Person, from all liability on claims that
are the subject matter of such proceeding and (B) does not include any
statement as to an admission of fault, culpability or failure to act by or on
behalf of any Indemnified Person.
(d) If the indemnification provided for in the first and second
paragraphs of this SECTION 5 is for any reason unavailable to, or insufficient
to hold harmless, an Indemnified Person in respect of any losses, claims,
damages or liabilities referred to therein, then each Indemnifying Person under
such paragraphs, in lieu of indemnifying such Indemnified Person thereunder and
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such Indemnified Person as a result of such losses,
claims, damages or liabilities in such proportion as is appropriate to reflect
(i) the relative benefits received by the Indemnifying Person or Persons on the
one hand and the Indemnified Person or Persons on the other from the offering of
the Registrable Securities or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such relative benefits
but also the relative fault of the Indemnifying Person or Persons on the one
hand and the Indemnified Person or Persons on the other in connection with the
statements or omissions or alleged statements or omissions that resulted in such
losses, claims, damages or liabilities (or actions in respect thereof). The
relative fault of the parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or such Participant or such other
Indemnified Person, as the case may be, on the other, the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission, and any other equitable considerations appropriate
in the circumstances.
(e) The parties agree that it would not be just and equitable if
contribution pursuant to this SECTION 5 were determined by PRO RATA allocation
(even if the Participants were treated as one entity for such purpose) or by any
other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an Indemnified Person as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth above, any reasonable
legal or other expenses actually incurred by such Indemnified Person in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this SECTION 5, in no event shall a
Participant be required to contribute any amount in excess of the amount by
which proceeds received by such Participant from sales of Registrable Securities
exceeds the amount of any damages that such Participant has otherwise been
required to pay or has paid by reason of such untrue or alleged untrue statement
or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
12
<PAGE>
(f) The indemnity and contribution agreements contained in this SECTION 5
will be in addition to any liability which the Indemnifying Persons may
otherwise have to the Indemnified Persons referred to above.
6. RULE 144 AND 144A
The Company covenants that it will file the reports required to be filed by
it under the Securities Act and the Exchange Act and the rules and regulations
adopted by the SEC thereunder in a timely manner in accordance with the
requirements of the Securities Act and the Exchange Act and, if at any time the
Company is not required to file such reports, it will, upon the request of any
Holder of Registrable Securities, make publicly available annual reports and
such information, documents and other reports of the type specified in Section
13 and 15(d) of the Exchange Act. The Company further covenants for so long as
any Registrable Securities remain outstanding, make available to any Holder or
beneficial owner of Registrable Securities in connection with any sale thereof
and any prospective purchaser of such Registrable Securities from such Holder or
beneficial owner the information required by Rule 144A(d)(4) under the
Securities Act in order to permit resales of such Registrable Securities
pursuant to Rule 144A.
7. UNDERWRITTEN REGISTRATIONS
If any of the Registrable Securities are to be sold in an underwritten
offering, the investment banker or investment bankers and manager or managers
that will manage the offering will be selected by the Holders of a majority of
such Registrable Securities included in such offering and reasonably acceptable
to the Company.
No Holder of Registrable Securities may participate in any underwritten
registration hereunder unless such Holder (a) agrees to sell such Holder's
Registrable Securities on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
underwriting arrangements.
8. MISCELLANEOUS
(a) NO INCONSISTENT AGREEMENTS. The Company has not entered (except as
described in the Offering Memorandum), as of the date hereof, and the Company
will not, after the date of this Agreement, enter into any agreement with
respect to any of its securities that is inconsistent with the rights granted to
the Holders of Registrable Securities in this Agreement or otherwise conflicts
with the provisions hereof.
(b) ADJUSTMENTS AFFECTING REGISTRABLE SECURITIES. The Company will not,
directly or indirectly, take any action with respect to the Registrable
Securities as a class that would adversely affect the ability of the Holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement.
(c) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may
13
<PAGE>
not be given, otherwise than with the prior written consent of the Holders of
not less than a majority of the then outstanding Registrable Securities.
Notwithstanding the foregoing, a waiver or consent to depart from the
provisions hereof with respect to a matter that relates exclusively to the
rights of Holders of Registrable Securities whose securities are being sold
pursuant to a Registration Statement and that does not directly or indirectly
affect, impair, limit or compromise the rights of other Holders of
Registrable Securities may be given by Holders of at least a majority of the
Registrable Securities being sold by such Holders pursuant to such
Registration Statement; provided, however, that the provisions of this
sentence may not be amended, modified or supplemented except in accordance
with the provisions of the immediately preceding sentence.
(d) NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, next-day air courier or facsimile:
(i) if to a Holder of the Registrable Securities, at the
most current address of such Holder set forth on the records of the Company
as follows:
(ii) if to Purchaser, as follows:
Northstar High Total Return Fund
c/o Northstar Investment Management
2 Pickwick Plaza, First Floor
Greenwich, Connecticut 06830
Facsimile No.: (203) 862-8603
Attention: Thomas Ole Dial
with a copy to Michael A. Graves at the same address and
facsimile number
(iii) if to the Purchaser, at the address specified in SECTION
8(d)(i);
(iv) if to the Company, as follows:
SA Telecommunications, Inc.
1600 Promenade Center, 15th Floor
Richardson, Texas 75080
Facsimile No.: (972) 889-1543
Attention: Lynn H. Johnson, Esq.
Vice President and
General Counsel
14
<PAGE>
with copies to:
Arter & Hadden
1717 Main Street
Suite 4100
Dallas, Texas 75201
Facsimile No.: (214) 741-7139
Attention: Mark S. Solomon, Esq.
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; one business day
after being timely delivered to a next-day air courier; and when receipt is
acknowledged by the addressee, if sent by facsimile.
(e) SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the parties hereto;
provided, however, that this Agreement shall not inure to the benefit of or be
binding upon a successor or assign of a Holder unless and to the extent such
successor or assign holds Registrable Securities.
(f) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(h) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE
AND PERFORMED WHOLLY WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAW.
(i) SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their commercially reasonable efforts to find and employ an
alternative means to achieve the same or substantially the same result as that
contemplated by such term, provision, covenant or restriction. It is hereby
stipulated and declared to be the intention of the parties that they would have
executed the remaining terms, provisions, covenants and restrictions without
including any of such that may be hereafter declared invalid, illegal, void or
unenforceable.
(j) SECURITIES HELD BY THE COMPANY OR ITS AFFILIATES. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its affiliates (as such term is defined in Rule 405 under the
15
<PAGE>
Securities Act) shall not be counted in determining whether such consent or
approval was given by the Holders of such required percentage.
(k) THIRD PARTY BENEFICIARIES. Holders of Registrable Securities are
intended third party beneficiaries of this Agreement and this Agreement may be
enforced by such Persons.
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
SA TELECOMMUNICATIONS INC.
By: /s/ J. DAVID DARNELL
----------------------------------
Name: J. David Darnell
Title: Vice President-Finance
and Chief Financial Officer
NORTHSTAR HIGH TOTAL RETURN FUND
By: /s/ MICHAEL A. GRAVES
----------------------------------
Michael A. Graves
Vice President
17
<PAGE>
EXHIBIT 10.43
SEVERANCE AGREEMENT
This Severance Agreement ("Agreement") effective as of March 26, 1997 by
and between SA Telecommunications, Inc. (the "Company") and John H. Nugent
("Employee").
WHEREAS, Employee is employed by the Company on the date hereof and
considered to be a key employee of the Company;
WHEREAS, the Company desires to enter into this Agreement to provide for a
separately bargained for benefit to Employee not applicable to all employees of
the Company;
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms shall
have the meanings indicated:
BENEFICIAL OWNER shall have the meaning given such term in Rule 13D-3 of
the Exchange Act.
BOARD shall mean the Board of Directors of the Company.
CHANGE OF CONTROL OF THE COMPANY shall be deemed to have occurred if:
(a) there shall be consummated (i) any consolidation or merger of
the Company in which the Company is not the continuing or surviving
corporation or pursuant to which shares of the Common Stock would be
converted into cash, securities or other property, other than a merger of
the Company in which the holders of the Common Stock immediately prior to
the merger have the same proportionate ownership of Common Stock of the
surviving corporation immediately after the merger, or (ii) any sale,
lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Company; or
(b) the stockholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; or
(c) any Person shall become the Beneficial Owner of thirty percent
(30%) or more of the Company's outstanding Common Stock, except for any
Person who had such beneficial ownership prior to the date hereof; or
(d) during any period of two (2) consecutive years, individuals who
at the beginning of such period constitute the entire Board shall cease for
any reason to constitute a majority hereof;
PROVIDED, HOWEVER, that an event or series of events described in (a),
(b), (c) or (d) above shall not constitute a Change in Control if a
majority of the directors in office who were also directors on the date
which is three (3) years prior to the occurrence of such an event shall so
determine.
COMMON STOCK shall mean the Company's Common Stock, par value $.0001 per
share.
EXCHANGE ACT means the Securities Exchange Act of 1934, as it may be
amended from time to time.
1
<PAGE>
PERSON shall have the meaning for such term used in Section 13(d) and
Section 14(d) of the Exchange Act.
2. CHANGE OF CONTROL OF THE COMPANY. In the event of a Change of Control
of the Company, if Employee is terminated for any reason (other than by death,
voluntarily or termination due to a conviction of a felony involving a crime of
moral turpitude) within one year after such Change of Control of the Company,
Employee shall be entitled to receive as severance under this Agreement an
amount equal to one hundred fifty percent (150%) of Employee's annual salary in
effect on the date of such Change of Control of the Company (the "Severance
Amount"). The Severance Amount shall be payable, at the option of the Company,
in a lump sum or in accordance with payroll practices of the Company existing
on the date of such Change of Control of the Company. For purposes of this
SECTION 2, termination shall not be voluntary if (a) Employee is requested to
relocate more than 30 miles from the office of the Company in which such
Employee works on the date of such Change of Control of the Company, or (b)
Employee does not continue in a position or office with the Company with duties
substantially the same as Employee held before such Change of Control of the
Company.
3. TERMINATION PRIOR TO CHANGE OF CONTROL OF THE COMPANY. If Employee
ceases to be an employee of the Company prior to a Change of Control of the
Company, whether termination is as a result of termination by the Company with
or without cause, voluntary termination by Employee or death of Employee, the
severance arrangements provided in this Agreement shall automatically and
without notice terminate and become null and void on the date on which Employee
ceases to be an employee of the Company.
4. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Texas without regard to conflicts of
law principles.
5. 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 constitute one and the same instruments.
6. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the paries with respect to the subject matter hereof, and supersedes all
previously written or oral negotiations, commitments, representations and
agreements with respect thereto.
7. NO EVIDENCE OF EMPLOYMENT. Nothing contained in this Agreement shall
confer upon the Employee any right to continue in the employ of the Company or
any of its subsidiaries or to interfere in any way with the right of the Company
or its subsidiaries to terminate the Employee's employment or to increase or
decrease the Employee's compensation at any time.
SA TELECOMMUNICATIONS, INC. Employee:
By: /s/ JACK W. MATZ, JR. /s/ JOHN H. NUGENT
------------------------------- --------------------------------
Title: Jack W. Matz, Jr. (Signature)
Chairman & Chief Executive Officer /s/ JOHN H. NUGENT
--------------------------------
(Name Printed)
corporate/sevnugent
2
<PAGE>
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY
NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR
BENEFIT OF, U.S. PERSONS EXCEPT PURSUANT TO REGISTRATION UNDER THE SECURITIES
ACT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS
No. 1 $3,800,000
March 25, 1997
SA TELECOMMUNICATIONS, INC.
10% Convertible Debenture
Due August 15, 2006
FOR VALUE RECEIVED, SA TELECOMMUNICATIONS, INC., a Delaware corporation
(the "COMPANY"), promises to pay to NORTHSTAR HIGH TOTAL RETURN FUND or
registered assigns (the "HOLDER") the principal sum of Three Million Eight
Hundred Thousand Dollars on August 15, 2006 (the "Maturity Date") and to pay
interest on the unpaid principal amount hereof, in such amounts, at such times
and on such terms and conditions as are specified herein.
1. INTEREST.
The Company promises to pay interest on the unpaid principal amount of this
Debenture ("the SECURITY") at the rate of Ten Percent (10%) per annum, payable
in cash, and payable quarterly in arrears until the principal hereof is paid in
full or has been converted. The Company will pay interest semi-annually on
February 15 and August 15 each year, commencing on August 15, 1997 to Holders of
Securities at the close of business on the relevant record dates specified
below:
INTEREST PAYMENT DATE CORRESPONDING RECORD DATE
--------------------- -------------------------
February 15 February 1
August 15 August 1
Interest on the Securities will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from March 25, 1997.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
2. METHOD OF PAYMENT.
The Company will pay interest on the Securities (except defaulted interest) to
the Persons who are registered Holders of Securities at the close of business on
the February 1 or August 1 next
<PAGE>
-2-
preceding the interest payment date (including Securities that are canceled
after the record date and on or before the interest payment date). Holders
must surrender Securities to the Company to collect principal and any premium
payments. The Company will pay principal, premium, if any, and interest in
money of the United States that at the time of payment is legal tender for
payment of public and private debts. Interest and principal payments shall be
subject to withholding (if any) under applicable United States Federal
Internal Revenue Service Regulations.
3. REGISTERED DEBENTURES.
3.1 SERIES. This Security is one of a numbered series of debentures having
an aggregate principal amount of not more than $3,800,000 which are identical
except as to the principal amount and date of issuance thereof and as to any
restriction on the transfer thereof in order to comply with the Securities Act
of 1933, as amended (the "SECURITIES ACT"), and the regulations of the SEC
promulgated thereunder.
3.2 RECORD OWNERSHIP. The Company shall maintain a register of the Holders
of the Securities (the "REGISTER") showing their names and addresses and the
serial numbers and principal amounts of Securities issued to or transferred of
record by them from time to time. The Register may be maintained in electronic,
magnetic or other computerized form. The Company may treat the person named as
the Holder of this Security in the Register as the sole owner of this Security.
The Holder of this Security is the person exclusively entitled to receive
payments of interest on this Security, receive notifications with respect to
this Security, convert it into Common Stock and otherwise exercise all of the
rights and powers as the absolute owner hereof.
3.3 REGISTRATION OF TRANSFER. Transfers of this Security may be registered
on the books of the Company maintained for such purpose pursuant to SECTION 3.2
above (i.e., the Register); PROVIDED, HOWEVER, that the Company shall be under
no obligation to reflect a transfer of this Debenture unless such transfer is of
an amount equal to $100,000 or an integral multiple of $100,000. Transfers shall
be registered when this Security is presented to the Company with a request to
register the transfer hereof and the Security is duly endorsed or accompanied by
a written instrument of transfer in form satisfactory to the Company, duly
executed by the Holder thereof or his attorney duly authorized in writing,
reasonable assurances are given that the endorsements are genuine and effective,
and the Company has received evidence satisfactory to it that such transfer is
rightful and in compliance with this Security and all applicable laws, including
tax laws and state and federal securities laws. The Company may require payment
of a sum sufficient to cover any transfer tax or similar governmental charge
payable in connection therewith (other than such taxes or charges payable upon
transfers pursuant to SECTION 4.6, 5.3, 6.2 AND 8.4. When this Security is
presented for transfer and duly transferred hereunder, it shall be canceled and
a new Security showing the name of the transferee as the record holder thereof
shall be issued in lieu hereof. When this Security is presented to the Company
with a reasonable request to exchange it for an equal principal amount of
Securities of other denominations, the Company shall make such exchange and
shall cancel this Security and issue in lieu thereof Securities having a total
principal amount equal to this Security in the denominations requested by the
Holder; PROVIDED HOWEVER, no Holder shall request that the Company exchange this
Security in denominations of less than $100,000.
<PAGE>
-3-
3.4 RESTRICTION ON TRANSFER. The Company shall not be required: (i) to
issue, register the transfer of or exchange Securities during a period beginning
at the opening of business 15 days before the day of any selection of Securities
for redemption under SECTION 4.2 and ending at the close of business on the day
of selection or (ii) to register the transfer or exchange of any Security so
selected for redemption in whole or in part, except the unredeemed portion of
any Security being redeemed in part.
3.5 WORN AND LOST SECURITIES. If this Security becomes worn, defaced or
mutilated but is still substantially intact and recognizable, the Company or its
agent may issue a new Security in lieu hereof upon its surrender bearing a
number not contemporaneously outstanding. Where the Holder of this Security
claims that the Security has been lost, destroyed or wrongfully taken, the
Company shall issue a new Security in place of the original Security bearing a
number not contemporaneously outstanding if the Holder so requests by written
notice to the Company actually received by the Company before it is notified
that the Security has been acquired by a bona fide purchaser and the Holder has
delivered to the Company an indemnity bond in such amount and issued by such
surety as the Company deems satisfactory together with an affidavit of the
Holder setting forth the facts concerning such loss, destruction or wrongful
taking and such other information in such form with such proof or verification
as the Company may request.
3.6 SPECIAL TRANSFER PROVISIONS. The Company shall only register the
transfer of any Security if the transferee (1) executes and delivers to the
Company the Assignment Form attached hereto and (2) provides to the Company such
other information, opinion and certifications as reasonably requested by the
Company to ensure compliance with the terms of this Security and applicable law.
4. OPTIONAL REDEMPTION.
4.1 REDEMPTION; REDEMPTION PRICE. On and after August 15, 1999, the
Company may redeem all the Securities at any time or some of them from time to
time at the following redemption prices (expressed in percentages of principal
amount), plus accrued interest to, but not including, the redemption date, if
redeemed during the 12-month period beginning August 15 of the years indicated
below:
YEAR PERCENTAGE
---- ----------
1999.................................. 107%
2000.................................. 105.6
2001.................................. 104.2
2002.................................. 102.8
2003.................................. 101.4
2004 and thereafter................... 100.0
No sinking fund is provided for the Securities.
<PAGE>
-4-
4.2 SELECTION OF SECURITIES TO BE REDEEMED. If less than all the
Securities are to be redeemed, the Company may select the Securities to be
redeemed by lot or on a pro rata basis from Securities outstanding and not
previously called for redemption or in such manner as complies with applicable
legal and securities exchange requirements, if any. Securities selected for
redemption shall be in amounts of $1,000 or integral multiples of $1,000.
4.3 NOTICE OF REDEMPTION. At least 30 days but not more than 60 days
before a redemption date, the Company shall mail a notice of redemption to each
Holder whose Securities are to be redeemed.
The notice shall identify the Securities to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price;
(3) the conversion price;
(4) that Securities called for redemption may be converted at any
time before the close of business on the tenth (10th) calendar day
immediately preceding the redemption date, or if such day is not a Business
Day, then the close of business on the next succeeding day which is a
Business Day;
(5) that Holders who want to convert Securities must satisfy the
requirements set forth in ARTICLE 6 of this Security;
(6) that Securities called for redemption must be surrendered to the
Company in order to collect the redemption price;
(7) that interest on Securities called for redemption ceases to
accrue on and after the redemption date, and the amount of interest accrued
on the Securities called for redemption up to but not including the
redemption date; and
(8) if less than all of any Security is to be redeemed, the principal
amount of such Security to be redeemed.
4.4 EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is mailed,
Securities called for redemption, unless theretofore converted into Common Stock
pursuant to the terms of this Security, shall become due and payable on the
redemption date at the redemption price. Upon surrender to the Company, such
Securities shall be paid at the redemption price, plus accrued interest to the
redemption date; PROVIDED, HOWEVER, that any regular semi-annual payment of
interest becoming due on the redemption date shall be payable to the Holder of
any such Security as provided herein.
<PAGE>
-5-
4.5 EFFECT OF REDEMPTION DATE. Interest on the Securities to be redeemed
will cease to accrete or accrue, as the case may be, on and after the applicable
redemption date, whether or not such Securities are presented for payment. If
any Security called for redemption shall not be so paid upon surrender thereof
for redemption, the principal, premium, if any, and, to the extent lawful,
accreted or accrued interest thereon, as the case may be, shall, until paid,
bear interest from the redemption date at the rate provided in the Securities.
4.6 SECURITIES REDEEMED IN PART. Upon surrender to the Company of a
Security that is redeemed in part, the Company shall execute for the Holder a
new Security equal in principal amount to the unredeemed portion of the Security
surrendered.
5. REPURCHASE AT OPTION OF HOLDER UPON A FUNDAMENTAL CHANGE.
5.1 REPURCHASE UPON FUNDAMENTAL CHANGE. The Company covenants and agrees
that, in the event that there occurs a Fundamental Change (as defined below),
each Holder of Securities shall have the right, at the Holder's option, to
require the Company to repurchase all of such Holder's Securities, or any
portion thereof that is an integral multiple of $1,000, on the date (the
"REPURCHASE DATE") selected by the Company that is not less than 10 nor more
than 30 days after the Final Surrender Date (as defined below), at a price equal
to the principal amount thereof, plus accrued interest to the Repurchase Date
(the "REPURCHASE PRICE").
5.2 COMPANY NOTICE. Unless the Company shall have theretofore called for
redemption all the outstanding Securities, on or before the 30th day after the
occurrence of a Fundamental Change, the Company shall mail to all Holders of
record of the Securities (at such Holder's address appearing in the Securities
register) a written notice (the "COMPANY NOTICE") describing the occurrence of
such Fundamental Change and of the repurchase right arising as a result thereof
as well as stating the final date by which the Securities must be surrendered
for repurchase, the conversion price then in effect, the Repurchase Date, the
repurchase price and the procedure which the Holder must follow to elect
repurchase. The Company shall deliver a copy of the Company Notice at least once
to the Dow Jones News Service or similar business service in the United States.
No failure of the Company to give the foregoing notices or defect therein shall
limit any Holder's right to exercise a repurchase right or affect the validity
of the proceedings for the repurchase of Securities.
5.3 EXERCISING REPURCHASE RIGHT.
(a) To elect repurchase of any Securities or portion thereof, the
Holder will be required to surrender, on or before the Final Surrender Date
(as defined below), to the Company, such Security duly endorsed or assigned
to the Company or in blank, together with written notice of the Holder's
election to have the Company repurchase all or any $1,000 portion of such
Security specified in such notice. Election of repurchase by a Holder
shall be irrevocable. "FINAL SURRENDER DATE" shall mean the date which is,
subject to any contrary requirements of applicable law, 60 days after the
date of mailing of the Company Notice. "REPURCHASE DATE" shall mean the
date selected by the Company for the
<PAGE>
-6-
repurchase of the Securities that is not less than 10 and not more than
30 days after the Final Surrender Date.
(b) In the event a repurchase right shall be exercised in accordance
with the terms hereof, the Company shall pay or cause to be paid the
repurchase price in cash to the Holder on the Repurchase Date; PROVIDED,
HOWEVER, that installments of interest that mature on or prior to the
Repurchase Date shall be payable in cash to the Holders of such Securities,
registered as such at the close of business on the relevant record date
specified herein.
(c) If any Security surrendered for repurchase shall not be so paid
on the Repurchase Date, the principal amount which is payable at maturity
shall, until the repurchase price (as calculated at the date of payment) is
paid, continue to bear interest from the Repurchase Date at the rate borne
by the Security and each such Security shall continue to remain convertible
into Common Stock until said repurchase price shall have been paid to the
Holder.
(d) Any Security which is to be repurchased only in part shall be
surrendered to the Company (with, if the Company so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to
the Company, duly executed by the holder thereof or his attorney duly
authorized in writing), and the Company shall execute and deliver to the
Holder without service charge, a new Security or Securities, of any
authorized denomination as requested by such Holder in aggregate principal
amount equal to and in exchange for the unrepurchased portion of the
principal of the Security so surrendered.
5.4 CERTAIN DEFINITIONS. For purposes of this Article:
(a) The term "JUNIOR CAPITAL STOCK" shall mean capital stock of the
Company that does not rank prior, as to the payment of dividends or as to
the distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, to shares of capital stock of any
other class of the Company;
(b) The term "FUNDAMENTAL CHANGE" shall mean any of the following:
(i) a "Person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) other than a Permitted Holder, becoming the
"BENEFICIAL OWNER" (as defined in Rule l3d-3 under the Exchange Act) of
Voting Shares (as defined below) of the Company entitled to exercise more
than 50% of the total voting power of all outstanding Voting Shares of the
Company (including any Voting Shares that are not then outstanding of which
such Person or group is deemed the beneficial owner) for purposes of Rule
13d-3; or
(ii) a change in the Board of Directors in which the individuals who
constituted the Board of Directors at the beginning of the two-year period
<PAGE>
-7-
immediately preceding such change (together with any other director whose
election by the Board of Directors or whose nomination for election by the
shareholders of the Company was approved by a vote of at least a majority
of the directors then in office who either were directors at the beginning
of such period or whose election or nomination for election was previously
so approved) cease for any reason to constitute a majority of the directors
then in office; or
(iii) any consolidation of the Company with, or merger of the
Company into, any other Person, any merger of another Person into the
Company, or any sale or transfer of all or substantially all of the assets
of the Company to another Person in a single transaction or series of
related transactions (other than (x) a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding
shares of Common Stock, (y) a merger which is effected solely to change the
jurisdiction of incorporation of the Company or (z) any consolidation with
or merger of the Company into a wholly owned subsidiary of the Company, or
any sale or transfer by the Company of all or substantially all of its
assets to one or more of its wholly owned subsidiaries, in any one
transaction or a series of transactions, provided, in any such case, that
the resulting corporation or each such subsidiary assumes or guarantees the
Company's obligations under the Securities); PROVIDED, HOWEVER, that a
Fundamental Change shall not occur with respect to any such transaction if
either (i) the last sale price of the Common Stock for any five Trading
Days during the ten Trading Days immediately preceding the public
announcement by the Company of such transaction is at least equal to 105%
of the conversion price in effect on such Trading Day, (ii) the
consideration in such transaction to the holders of Common Stock consists
of cash, securities that are, or immediately upon issuance will be, listed
on a national securities exchange or quoted on the Nasdaq National Market,
or a combination of cash and such securities, and the aggregate fair market
value of such consideration (which, in the case of such securities, shall
be equal to the average of the last sale prices of such securities during
the ten consecutive Trading Days commencing with the sixth Trading Day
following consummation of the transaction) is at least 105% of the
conversion price in effect on the date immediately preceding the closing
date of such transaction, or (iii) in the case of a merger or
consolidation, the stockholders of the Company immediately prior to the
date of such transaction continue to beneficially own a majority of the
Voting Shares of the surviving entity;
(c) The term "PERSON" shall include any syndicate or group which
would be deemed to be a "Person" under Section 13(d)(3) of the Exchange Act
as in effect on the date of the original execution of this Indenture;
(d) The term "VOTING SHARES" shall mean all outstanding shares of any
class or classes (however designated) of Junior Capital Stock entitled to
vote generally in the election of members of the Board of Directors; and
<PAGE>
-8-
(e) The term "PERMITTED HOLDER" means Jack W. Matz, Jr. or his Affiliates.
5.5 COMPLIANCE WITH SECURITIES LAWS. The Company shall comply with the
requirements of Rule 13e-4 and Rule 14e-1 under the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT") and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of Securities pursuant to this ARTICLE 5. To the
extent the provisions of any securities laws or regulations conflict with the
provisions under this ARTICLE 5, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under this ARTICLE 5 by virtue thereof.
6. CONVERSION.
6.1 CONVERSION PRIVILEGE. A Holder of a Security may, subject to the terms
stated herein, convert it into fully paid and non-assessable shares of Common
Stock at any time prior to the close of Company business on August 15, 2006. If
the Security is called for redemption, the holder may convert such Security at
anytime before the close of business on the tenth (10th) calendar day
immediately preceding the redemption date, or, if such date is not a Business
Day, then the close of business on the next succeeding day which is a Business
Day. The number of shares issuable upon conversion of a Security is determined
by dividing the principal amount to be converted by the conversion price in
effect on the conversion date, and rounding the result to the nearest 1/100th of
a share.
The initial conversion price is $2.55 per share, subject to adjustment as
provided in this ARTICLE 6.
A Holder may convert a portion of a Security if the portion is $1,000 or a
whole multiple of $1,000.
6.2 CONVERSION PROCEDURE. To convert a Security a Holder must (1) complete
and sign the conversion notice on the back of the Security, (2) surrender the
Security to the Company, (3) furnish the endorsements and transfer documents
required by the Company and (4) pay any transfer or similar tax required. The
date on which the Holder satisfies all those requirements in respect of a
Security is the conversion date of that Security. As soon as is reasonably
practical on or after the conversion date, the Company shall deliver a
certificate for the number of full shares of Common Stock issuable upon the
conversion of that Security and a check for any fractional share. The Person in
whose name the certificate is registered shall be treated as a shareholder of
record on and after the conversion date.
No payment will be made for accrued interest on a converted Security (other
than the payment of interest to the Holder of a Security at the close of
business on a record date pursuant to ARTICLE 1 hereof) unless at the time of
conversion such Security has been called for redemption pursuant to ARTICLE 4
hereof, in which case the Holder of such Security shall be entitled to interest
<PAGE>
-9-
accrued thereon to the date of conversion. Upon conversion, no payment or
adjustment will be made for dividends or distributions on any Common Stock
issued upon conversion of any Security.
If a Holder converts more than one Security at the same time, the number of
full shares issuable upon the conversion shall be based on the total principal
amount of the Securities converted.
Upon surrender of a Security that is converted in part, the Company shall
execute for the Holder a new Security equal in principal amount to the
unconverted portion of the Security surrendered.
If the last day on which a Security may be converted is a Legal Holiday in
a place where the Company is located, the Security may be surrendered to the
Company on the next succeeding business day that is not a Legal Holiday with the
same force and effect as if surrendered on such last day.
6.3 FRACTIONAL SHARES. The Company will not issue a fractional share of
Common Stock upon conversion of a Security. Instead the Company will deliver to
the converting Securityholder its check for the current market value of the
fractional share. The current market value of a fraction of a share is
determined by multiplying the current market price of a full share by the
fraction, and rounding the result to the nearest cent.
For purposes of this Section, the current market price of a share of Common
Stock is the Quoted Price of the Common Stock on the last Trading Day prior to
the conversion date.
6.4 TAXES ON CONVERSION. If a Holder of a Security converts it, the
Company shall pay any documentary, stamp or similar issue or transfer tax due on
the issue of shares of Common Stock upon the conversion. However, the Holder
shall pay any such tax which is due because the shares are issued in a name
other than such Holder's.
6.5 COMPANY TO PROVIDE STOCK. The Company shall reserve at all times and
keep available, free from preemptive rights, out of its authorized but unissued
Common Stock, enough shares of Common Stock to permit the conversion of the
Securities.
All shares of Common Stock which may be issued upon conversion of the
Securities shall be fully paid and nonassessable.
The Company shall endeavor to comply with all applicable securities laws
regulating the offer and delivery of shares of Common Stock upon conversion of
Securities and shall endeavor to list such shares on each national securities
exchange on which the Common Stock is listed, or to have such shares approved
for quotation on the Nasdaq National Market or other over-the-counter market on
which the Common Stock is traded.
<PAGE>
-10-
6.6 ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If the Company:
(1) issues any shares of its capital stock as a dividend (or other
distribution) on its Common Stock;
(2) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(3) combines its outstanding shares of Common Stock into a smaller
number of shares; or
(4) issues by reclassification of its Common Stock any shares of its
capital stock,
then the conversion privilege and the conversion price in effect immediately
prior to such action shall be adjusted so that the Holder of a Security
thereafter converted will receive the number of shares of capital stock of the
Company which would have been received (and if there is more than one class of
such capital stock, then shares of each class in the same proportions that would
have been received) upon consummation of such action by a Holder of the number
of shares of Common Stock into which such Security might have been converted
immediately prior to such action.
The adjustment described in the preceding paragraph shall become effective
immediately after the record date in the case of a dividend or distribution and
immediately after the effective date in the case of a subdivision, combination
or reclassification.
If after an adjustment a Holder of a Security may receive shares of two or
more classes of capital stock of the Company upon conversion of such Security,
the Company shall determine the allocation of the adjusted conversion price
between or among those classes of capital stock. After such allocation, the
conversion privilege and the conversion price of each class of capital stock
shall thereafter be subject to adjustment on terms comparable to those
applicable to Common Stock in this Article.
6.7 ADJUSTMENT FOR RIGHTS ISSUE. If the Company distributes any rights or
warrants to all holders of its Common Stock entitling them to subscribe for or
purchase shares of Common Stock at a price per share less than the current
market price per share (as defined in SECTION 6.11) on the Rights Record Date
(as defined below), the conversion price shall be adjusted in accordance with
the following formula:
0 + (N x P)
-----------
AC = CC x M
-----------
0 + N
<PAGE>
-11-
where:
AC = the adjusted conversion price.
CC = the current conversion price.
0 = the number of shares of Common Stock outstanding on the
Rights Record Date.
N = the number of additional shares of Common Stock offered.
P = the offering price per share of the additional shares.
M = the current market price per share of Common Stock on the
Rights Record Date.
The adjustment shall become effective immediately after the record
date for the determination of shareholders entitled to receive such rights or
warrants (the "RIGHTS RECORD DATE").
6.8 ADJUSTMENT FOR CERTAIN DISTRIBUTIONS. Subject to the last paragraph of
this SECTION 6.8, if the Company distributes to all holders of its Common Stock
of cash, debt securities (or other evidences of indebtedness) or other assets
(excluding dividends or distributions for which adjustment is required to be
made under SECTION 6.9), the conversion price shall be reduced in accordance
with the following formula:
AC = CC x M - P
-----
M
where:
AC = the adjusted conversion price.
CC = the current conversion price.
M = the current market price per share of Common Stock on the
Relevant Record Date (as defined below).
P = the aggregate fair market value on the Relevant Record Date
(as determined in good faith by the Board of Directors) of
the cash, debt securities (or other evidences of
indebtedness) or other assets distributed applicable to one
share of Common Stock.
<PAGE>
-12-
The adjustment shall become effective immediately after the record date for
the determination of shareholders entitled to receive the distribution (the
"Relevant Record Date").
No adjustment will be made with respect to this SECTION 6.8 if, in lieu of
such adjustment, the holders of the Securities, upon conversion, will be
entitled to receive, in addition to the shares of Common Stock into which such
Securities are convertible, the kind and amount of debt securities (or other
evidences of indebtedness) or other assets comprising the distribution that such
holders would have received had they converted their Securities immediately
prior to the Record Date.
6.9 ADJUSTMENT FOR ALL CASH DISTRIBUTION. Subject to the last two
paragraphs of this SECTION 6.9, if the Company shall pay or make a dividend or
other distribution consisting exclusively of cash to all holders of its Common
Stock, the conversion price shall be reduced in accordance with the following
formula:
AC = CC x M - C
-----
M
where:
AC = the adjusted conversion price.
CC = the current conversion price.
M = the current market price per share of Common Stock on the
date fixed for payment of such distribution.
C = the amount of cash so distributed and not excluded (as
provided below) applicable to one share of Common Stock.
The adjustment shall become effective immediately prior to the opening of
business on the day following the date fixed for payment of such distribution.
6.10 ADJUSTMENT FOR TENDER OR EXCHANGE OFFER. Subject to the last paragraph
of this SECTION 6.10, in the event that a tender or exchange offer (other than
an odd-lot offer) made by the Company or any subsidiary of the Company for all
or a portion of the Common Stock shall expire and such tender or exchange offer
(as amended upon the expiration thereof) shall require the payment to
stockholders of consideration per share of Common Stock having a fair market
value (as determined in good faith by the Board of Directors) that, as of the
last time (the "Expiration Time") tenders or exchanges may be made pursuant to
such tender or exchange offer, exceeds 105% of the current market price per
share of Common Stock on the trading day next succeeding the Expiration Time,
the conversion price shall be reduced in accordance with the following formula:
<PAGE>
-13-
AC = CC x O X M
----------
P + (T x M)
where:
AC = the adjusted conversion price.
CC = the current conversion price.
O = the number of shares of Common Stock outstanding (including
any tendered or exchanged shares) at the Expiration Time.
P = the fair market value of the aggregate consideration payable
to shareholders of Common Stock based on the acceptance (up
to any maximum specified in the terms of the tender or
exchange offer) of all shares of Common Stock validly
tendered or exchanged and not withdrawn as of the Expiration
Time (the shares of Common Stock so accepted, up to any such
maximum, being referred to as the "PURCHASED SHARES").
T = the number of shares of Common Stock outstanding (less any
Purchased Shares) on the Expiration Time.
M = the current market price per share of Common Stock on the
trading day next succeeding the Expiration Time.
The adjustment shall become effective immediately prior to the opening of
business on the day following the Expiration Time.
In the event that the Company is permanently prevented by applicable law
from effecting any such purchases or all such purchases are rescinded, the
Conversion Price shall again be adjusted to be the Conversion Price which would
then be in effect if such tender or exchange offer had not been made.
6.11 CURRENT MARKET PRICE. For purposes of SECTIONS 6.7, 6.8, 6.9 AND 6.10,
the current market price per share of Common Stock on any date is the average of
the Quoted Prices of the Common Stock for five consecutive Trading Days selected
by the Company commencing not more than 20 Trading Days before, and ending not
later than, the earlier of the date in question and the Trading Day before the
"ex" date, if any, with respect to the issuance or distribution requiring such
computation. The term "'EX' DATE," when used with respect to any issuance or
distribution, means the first Trading Day on which the Common Stock trades
regular way in the market from which the Quoted Price is then to be determined
without the right to receive such issuance or distribution.
<PAGE>
-14-
6.12 WHEN ADJUSTMENT MAY BE DEFERRED. No adjustment in the conversion price
need be made unless the adjustment would require an increase or decrease of at
least 1% in the conversion price then in effect. Any adjustments which are not
made shall be carried forward and taken into account in any subsequent
adjustment.
All calculations under this Article shall be made to the nearest cent or to
the nearest 1/l00th of a share, as the case may be.
6.13 STOCKHOLDER RIGHTS PLAN. In the event the Company implements a
stockholder rights plan, such rights plan shall provide that upon conversion of
the Securities, the Holders will receive, in addition to the Common Stock
issuable upon such conversion, the rights issued under such rights plan
(notwithstanding the occurrence of an event causing such rights to separate from
the Common Stock at or prior to the time of conversion), PROVIDED, that such
Holder would not be an ineligible Person pursuant to such plan.
6.14 WHEN NO ADJUSTMENT REQUIRED. No adjustment need be made for (i) rights
to purchase Common Stock pursuant to a Company plan for reinvestment of
dividends or interest; (ii) a change in the par value (including a change to no
par value) of the Common Stock; (iii) the repurchase of shares of Common Stock
pursuant to the provisions of employee and incentive stock option plans; and
(iv) the payment of in-kind dividends to holders of the Company's Series A
Cumulative Convertible Preferred Stock.
To the extent the Securities become convertible into cash, no adjustment
need be made thereafter as to the cash. Interest will not accrue on the cash.
Notwithstanding any provision to the contrary in this Security, no
adjustment shall be made in the conversion price which would have the effect of
reducing the conversion price below the par value of the Common Stock.
6.15 NOTICE OF ADJUSTMENT. Whenever the conversion price is adjusted, the
Company shall promptly mail to Securityholders a notice of the adjustment
together with a statement of the facts requiring the adjustment and the manner
of computing it. In the absence of manifest error, such notice shall be
presumptive evidence that the adjustment is correct.
6.16 VOLUNTARY REDUCTION. The Company from time to time may reduce the
conversion price by any amount for any period of time if the period is at least
20 days and if the reduction is irrevocable during the period. Notwithstanding
any provision to the contrary in this Security, the reduction of the conversion
price pursuant to this SECTION 6.16 shall not require the consent of any
Securityholder.
Whenever the conversion price is reduced, the Company shall mail to
Securityholders a notice of the reduction. The Company shall mail the notice at
least 15 days before the date the reduced conversion price takes effect. The
notice shall state the reduced conversion price and the period during which it
will be in effect.
<PAGE>
-15-
A reduction of the conversion price does not change or adjust the
conversion price otherwise in effect for purposes of SECTIONS 6.6 THROUGH 6.10.
6.17 NOTICE OF CERTAIN TRANSACTIONS. If:
(1) the Company takes any action which would require an adjustment in
the conversion price pursuant to SECTION 6.08 and if the Securityholders
are, in lieu thereof, participants therein;
(2) the Company takes any action of the nature specified in SECTION
6.18; or
(3) there is a dissolution or liquidation of the Company,
the Company shall mail to Securityholders a notice stating the record date for
any such distribution or the effective date of any such subdivision,
combination, reclassification, consolidation, merger, transfer, lease,
liquidation or dissolution. The Company shall mail the notice at least 15 days
before such date. Failure to mail the notice or any defect in it shall not
affect the validity of any transaction referred to in clause (1), (2) or (3) of
this Section.
6.18 CONSOLIDATION, MERGER OF THE COMPANY OR TRANSFER OR LEASE. If the
Company is a party to a consolidation, merger or transfer or lease of assets
subject to SECTION 9.11 or a merger which reclassifies or changes its
outstanding Common Stock, the Person formed by such consolidation or resulting
from such merger or which assumes or leases such assets shall assume this
Security and the obligations hereunder.
As a condition of such consolidation, merger, transfer or lease, lawful and
adequate provisions shall be made whereby each Holder of a Security may convert
the Securities into the kind and amount of securities, cash or other assets
receivable upon the consolidation, merger, transfer or lease by a holder (other
than any party to such transaction or any of its affiliates) of the number of
shares of Common Stock into which such Security might have been converted
immediately before the effective date of such transaction, assuming such holder
of Common Stock failed to exercise his rights of election, if any, as to the
kind or amount of securities, cash or other property receivable upon such
consolidation, merger, transfer or lease (provided that, if the kind or amount
of securities, cash or other property receivable upon such consolidation,
merger, transfer or lease is not the same for each share of Common Stock held
immediately prior to such consolidation, merger, transfer or lease by others
than the parties to such transaction or their affiliates and in respect of which
such rights of election shall not have been exercised ("non-electing share"),
then for the purposes of this Section the kind and amount of securities, cash
and other property receivable upon such consolidation, merger, transfer or lease
by each non-electing share shall be deemed to be the kind and amount so
receivable per share by a plurality of the non-electing shares). The Company
will not effect any such consolidation, merger, transfer or lease, unless prior
to the consummation thereof the successor corporation (if other than the
Company) resulting from such consolidation or merger or the corporation assuming
or leasing such assets shall
<PAGE>
-16-
assume, by executed written instrument, a copy of which is mailed or
delivered to each Securityholder at the last address of such Holder appearing
on the books of the Company, the obligation to deliver to such Holder the
amount of securities, cash or other assets as, in accordance with the
foregoing provisions, such Holder would be entitled to receive upon
conversion of such Holders' Security. Such instrument shall provide for
adjustments which shall be as nearly equivalent as may be practical to the
adjustments provided for in this Article. If the issuer of securities
deliverable upon conversion of Securities is an affiliate of the surviving,
transferee or lessee corporation, that issuer shall also execute such
instrument. The successor Company shall mail to each Securityholder a notice
briefly describing the terms of such instrument.
If this Section applies to a particular event, SECTION 6.6 shall not apply
to such event.
6.19 COMPANY DETERMINATION FINAL. Subject to compliance with the terms of
the Securities, any determination which the Company or its Board of Directors
must make pursuant to SECTION 6.3, 6.6, 6.8, 6.10, 6.11 OR 6.12 shall be
conclusive.
7. REPURCHASE AT OPTION OF HOLDER UPON AN INCURRENCE EVENT.
7.1 REPURCHASE UPON AN INCURRENCE EVENT. The Company covenants and agrees
that, in the event that (i) the Company or any of its Subsidiaries incurs
Indebtedness (other than Additional Permitted Indebtedness or Indebtedness under
the Securities), (ii) the Pro Forma Interest Coverage of the Company and its
Subsidiaries on a consolidated basis, would be less than 2.0:1 and (iii) the
average closing sale price of the Common Stock is less than $2.00, adjusted for
splits, combinations, reclassifications or similar events, for the twenty
Trading Days prior to the incurrence of such Indebtedness (the occurrence of all
of (i), (ii) and (iii), an "INCURRENCE EVENT"), each Holder will have the right,
at such Holder's option, to require the Company to repurchase all, or any
portion that is an integral multiple of $1,000, of such Holder's Securities on
the Incurrence Repurchase Date (as defined in Section 7.3 below) selected as
provided below at a repurchase price which is equal to 100% of the principal
amount of such Securities plus accrued interest to the Incurrence Repurchase
Date.
The Company shall comply with the requirements of Rule 13e-4 and Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations are applicable in connection with the
repurchase of Securities pursuant to this ARTICLE 7. To the extent the
provisions of any securities laws or regulations conflict with the provisions
under this ARTICLE 7, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under this ARTICLE 7 by virtue thereof.
7.2 NOTICES, ETC. Unless the Company shall have theretofore called for
redemption all the outstanding Securities, on or before the 30th day after the
occurrence of an Incurrence Event, the Company shall mail to each Holder at such
Holder's address appearing in the Securities register a written notice (the
"COMPANY INCURRENCE NOTICE") describing the occurrence of the Incurrence Event
and of the repurchase right set forth herein arising as a result thereof, as
well as stating the final date by which the Securities must be surrendered for
repurchase, the conversion price then in
<PAGE>
-17-
effect, the Incurrence Repurchase Date, the repurchase price and the procedure
which the Holder must follow to elect repurchase. The Company shall cause a copy
of such notice of the repurchase right to be sent at least once to the Dow Jones
News Service or similar business service in the United States.
No failure of the Company to give the foregoing notices or defect therein
shall limit any Holder's right to exercise a repurchase right or affect the
validity of the proceedings for the repurchase of Securities.
7.3 EXERCISING REPURCHASE RIGHT. (a) To elect repurchase of any
Securities or portion thereof, the Holder will be required to surrender, on or
before the Final Incurrence Surrender Date (as defined below), to the Company,
such Security duly endorsed or assigned to the Company or in blank, together
with written notice of the Holder's election to have the Company repurchase all
or any $1,000 portion of such Security specified in such notice. Election of
repurchase by a Holder shall be irrevocable. "FINAL INCURRENCE SURRENDER DATE"
shall mean the date which is, subject to any contrary requirements of applicable
law, 60 days after the date of mailing of the Company Incurrence Notice.
"INCURRENCE REPURCHASE DATE" shall mean the date selected by the Company for the
repurchase of the Securities that is not less than 10 and not more than 30 days
after the Final Incurrence Surrender Date.
(b) In the event a repurchase right shall be exercised in accordance
with the terms hereof, the Company shall pay or cause to be paid the
repurchase price in cash to the Holder on the Incurrence Repurchase Date;
PROVIDED, HOWEVER, that installments of interest that mature on or prior to
the Incurrence Repurchase Date shall be payable in cash to the Holders of
such Securities, registered as such at the close of business on the
relevant record date specified in the Securities according to the terms and
provisions of ARTICLE 1.
(c) If any Security surrendered for repurchase shall not be so paid
on the Incurrence Repurchase Date, the principal amount which is payable at
maturity shall, until the repurchase price (as calculated at the date of
payment) is paid, continue to bear interest from the Incurrence Repurchase
Date at the rate borne by the Security and each such Security shall
continue to remain convertible into Common Stock until said repurchase
price shall have been paid to the Holder.
(d) Any Security which is to be repurchased only in part shall be
surrendered to the Company (with, if the Company so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to
the Company duly executed by, the holder thereof or his attorney duly
authorized in writing), and the Company shall execute and deliver to the
Holder without service charge, a new Security or Securities, of any
authorized denomination as requested by such Holder in aggregate principal
amount equal to and in exchange for the unrepurchased portion of the
principal of the Security so surrendered.
8. AMENDMENT, SUPPLEMENT, WAIVER.
<PAGE>
-18-
8.1 WITHOUT CONSENT OF HOLDERS. The Company may amend or supplement the
Securities without the consent of any Securityholder:
(1) to evidence the succession of another Person to the Company and
the assumption by any such successor of the covenants of the Company
herein; or
(2) to add to the covenants of the Company for the benefit of the
Holders of the Securities or to surrender any right or power herein
conferred upon the Company; or
(3) to permit or facilitate the issuance of Securities in
uncertificated form; or
(4) to cure any ambiguity or defect in and to correct or supplement
any provision in any Security that may be inconsistent with any other
provision in the Security; PROVIDED, HOWEVER, that any such action pursuant
to this clause (4) shall not adversely affect the interests of the Holders
of Securities in any material respect.
8.2 WITH CONSENT OF HOLDERS. The Company may amend or supplement the
Securities with the written consent of the Holders of at least a majority in
aggregate principal amount of the Securities, and the Holders of a majority in
aggregate principal amount of the Securities may waive compliance by the Company
with any provision of the Securities. However, without the consent of each
Securityholder affected, an amendment, supplement or waiver under this Section
may not:
(1) change the stated maturity date of the principal of, or interest
on, any Security or adversely affect the right of a Holder to convert any
Security;
(2) reduce the principal amount of, or premium, if any, or interest
on, any Security;
(3) change the currency for payment of principal of, or interest on,
any Security;
(4) impair the right to institute suit for the enforcement of any
payment on or with respect to any Security;
(5) reduce the amount of Securities whose Holders must consent to an
amendment or supplement hereto or the waiver of defaults or compliance
hereunder;
(6) make any change in SECTIONS 10.4, 10.5 OR THIS SECTION 8.2
(second sentence); or
(7) amend, modify or change in any material respect the obligation of
the Company to offer to repurchase the Securities in the event of a
Fundamental Change or an Incurrence Event or modify any of the provisions
or definitions with respect thereto after a Fundamental Change or an
Incurrence Event, as the case may be, has occurred.
<PAGE>
-19-
It shall not be necessary for the consent of the Holders under this Section
to approve the particular form of any proposed amendment, supplement or waiver,
but it shall be sufficient if such consent approves the substance thereof. The
Company may establish a record date for determining Securityholders of record
entitled to give any consent or waiver.
After an amendment or supplement under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing the amendment
or supplement. Any failure of the Company to mail each such notice, or any
defect therein, shall not, however, in any way impair or affect the validity of
any amendment or supplement.
8.3 REVOCATION AND EFFECT OF CONSENTS. Until an amendment, supplement or
waiver becomes effective, a consent to it by a Holder of a Security is a
continuing consent by the Holder and every subsequent Holder of a Security or
portion of a Security that evidences the same debt as the consenting Holder's
Security, even if notation of the consent is not made on any Security. An
amendment, supplement or waiver becomes effective in accordance with its terms
and thereafter binds every Securityholder. However, any Holder or subsequent
Holder may revoke the consent as to such Security or portion of a Security if
the Company receives the notice of revocation before the date on which it
receives the consent of the requisite principal amount of the Securities.
Notwithstanding the foregoing, if a record date has been established for the
purpose of determining Securityholders entitled to consent, such written notice
of revocation must be signed by the Securityholder of record as of the record
date or his duly appointed proxy.
8.4 NOTATION ON OR EXCHANGE OF SECURITIES. The Company may place an
appropriate notation relating to an amendment, supplement or waiver on any
Security thereafter executed. The Company in exchange for all Securities may
issue new Securities that reflect the amendment, supplement or waiver. Failure
to make such notation or issue such new Securities shall have no effect on such
amendment, supplement or waiver.
9. COVENANTS
9.1 PAYMENT OF SECURITIES. The Company shall pay the principal of and
premium, if any, and interest on, the Securities on the dates and in the manner
provided herein.
The Company shall pay interest on overdue principal and premium, if any, at
10% per annum; it shall pay interest on overdue installments of interest at the
same rate per annum to the extent lawful.
9.2 SEC REPORTS. Notwithstanding that the Company may not be subject to or
required to remain subject to, the reporting requirements of Section 13 or 15(d)
of the Exchange Act or otherwise report on an annual and quarterly basis on
forms provided for such annual and quarterly reporting pursuant to rules and
regulations promulgated by the Commission, the Company shall continue to file
with the Commission such annual and interim reports (each including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by the Company's certified
<PAGE>
-20-
independent accountants) on Forms 10-K and Q, respectively, as the Company
would be required to file were it subject to such reporting requirements
within the time periods prescribed under such rules and regulations, and all
reports that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. The Company shall not be
obligated to file any such reports with the Commission if the Commission does
not permit such filings but shall remain obligated to provide such reports to
the Holders within the periods of time referred to above. The Company shall
provide to any Holder of Securities any information reasonably requested by
the Holder concerning the Company (including financial statements) necessary
in order to permit such Holder to transfer Securities in accordance with Rule
144A promulgated under the Securities Act. In addition, the Company shall
cause its annual reports to shareholders and any quarterly or other financial
reports furnished by it to shareholders generally to be mailed at the expense
of the Company no later than the date such materials are mailed or made
available to the Company's shareholders, to the Holders at their addresses as
set forth in the register of Securities maintained by the Registrar.
9.2A COMPLIANCE CERTIFICATE. The Company shall deliver to each Holder
within 120 days after the end of each fiscal year of the Company, a brief
certificate from the principal executive officer, principal financial officer or
principal accounting officer as to his or her knowledge of the Company's
compliance with all conditions and covenants under this Security. For purposes
of this Section 9.2A, such compliance shall be determined without regard to any
period of grace or requirement of notice provided under this Security. The first
certificate pursuant to this Section shall be for the year ending December 31,
1997.
9.3 CORPORATE EXISTENCE. Subject to SECTION 9.11, the Company will do or
cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence, rights (charter and statutory) and franchise;
PROVIDED, HOWEVER, that the Company shall not be required to preserve any such
right or franchise if the Board of Directors shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Company and that the loss thereof is not disadvantageous in any material
respect to the Holders.
9.4 NOTICE OF DEFAULTS. In the event that indebtedness for borrowed money
of the Company in an amount in excess of $10,000,000 is accelerated because of
the occurrence of any default under such indebtedness, the Company will promptly
give written notice to the Holders of such failure or acceleration, as the case
may be, or of the occurrence of an event which, with the giving of notice or the
passage of time, or both, would entitle the holder or holders of such
indebtedness to declare such indebtedness due and payable before its maturity.
9.5 LIMITATION ON LIENS. The Company will not, and will not permit any
Subsidiary to, create, incur, assume or suffer to exist any Liens (other than
Permitted Liens) of any kind against or upon any of their respective property or
assets, or any proceeds therefrom, unless (i) in the case of Liens on property,
assets or proceeds securing Indebtedness that is expressly subordinate or junior
in right of payment to the Securities, the Securities are secured by a Lien on
such property, assets or proceeds that is senior in priority to such Liens and
(ii) in all other cases, the Securities are equally and ratably secured.
<PAGE>
-21-
9.6 LIMITATION ON ACQUISITIONS. The Company will not, and will not permit
any Subsidiary to, acquire (by merger, consolidation or acquisition of stock or
assets) any corporation, partnership or other business organization or any
division, operating unit, line of business or subdivision thereof (each an
"ENTITY"), in a single transaction or series of related transactions (an
"ACQUISITION"), for total consideration in excess of $2,000,000 unless the fair
market value at the time of entering into such transaction (as evidenced by, in
the case of consideration other than cash or Common Stock of the Company ("NON-
CASH CONSIDERATION"), (i) a resolution of the Board of Directors of the Company
if the fair market value of such Non-Cash Consideration is less than or equal to
$1,000,000 or (ii) an opinion issued by a nationally recognized investment
banking firm, nationally recognized telecommunications industry consultant or
nationally recognized independent public accounting firm if the fair market
value of such Non-Cash Consideration is greater than $1,000,000) of the total
consideration given for such Acquisition is less than 200% of the Annualized
Revenues of the Entity acquired. "ANNUALIZED REVENUES" for any such Entity
shall mean the product of (i) revenues of such Entity for the most recent fiscal
quarter for which financial statements are available, calculated on a basis
consistent with such Entity's most recent audited annual statements (except for
the absence of footnotes and subject to normally recurring year-end audit
adjustments) or, if not available, actual billings for such period, and
(ii) four.
9.7 LIMITATIONS ON RESTRICTED PAYMENTS. The Company will not, and will not
permit any Subsidiary to, directly or indirectly, make any Restricted Payment,
unless at the time of and immediately after giving effect to the proposed
Restricted Payment (with the value of any such Restricted Payment, if other than
cash, to be determined by the Board of Directors of the Company, whose
determination shall be conclusive and evidenced by a resolution of the Board of
Directors (including a majority of the Independent Directors), (i) no Default or
Event of Default (and no event that, after notice or lapse of time, or both,
would become an "event of default" under the terms of any Indebtedness of the
Company or its Subsidiaries) shall have occurred and be continuing or would
occur as a consequence thereof, and (ii) the aggregate amount of all Restricted
Payments made after the Issue Date shall not exceed the sum of (a) 50% of
cumulative Consolidated Net Income of the Company (or if cumulative Consolidated
Net Income is a loss, less 100% of such loss) from the Issue Date to the last
day of the full fiscal quarter for which financial information is available (but
in no event ending more than 135 days prior to the date of such proposed
Restricted Payment), plus (b) the aggregate amount of all net cash proceeds
received after the Issue Date by the Company from the issuance and sale (other
than to a Subsidiary) of Capital Stock (other than Disqualified Capital Stock).
The foregoing provisions will not prohibit (a) so long as there is no
Default or Event or Default continuing, the payment of any dividend within 60
days after the date of declaration thereof, if at such declaration date such
payment would have been permitted under the terms of this Security, and such
payment shall be deemed to have been paid on such date of declaration for
purposes of clause (ii) of the preceding paragraph, (b) the payment of dividends
on, or the redemption or repurchase of, the 180,000 shares of the Company's
Series A Cumulative Convertible Preferred Stock outstanding on December 31,
1996, and any additional shares of Series A Preferred Stock, issued as pay-in-
kind dividends thereon, (c) the repurchase at below then current
<PAGE>
-22-
fair market value (based on the average closing price of the Common Stock for
the twenty trading days preceding such repurchase) of employee and director
options or shares in accordance with the Company's stock option plans or
agreements related thereto, (d) pay cash in lieu of fractional shares for
stock splits, reverse stock splits and recapitalizations and upon conversions
of Capital Stock or the Securities or (e) redeem, repurchase of otherwise
prepay up to $300,000 of subordinated Indebtedness of the Company outstanding
as of the Issue Date.
9.8 LIMITATION OF TRANSACTIONS WITH AFFILIATES. The Company will not, and
will not permit any of its Subsidiaries to, directly or indirectly, enter into
or suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of the Company (other than the Company or a
Subsidiary of the Company) unless (i) such transaction or series of transactions
is on terms that are no less favorable to the Company or such Subsidiary, as the
case may be, than would be available in a comparable transaction in arm's-length
dealings with an unrelated third party, and (ii) with respect to any transaction
or series of transactions involving aggregate payments in excess of $500,000,
the Company delivers to the Holders an Officers' Certificate certifying that
such transaction or series of related transactions complies with clause
(i) above and that such transaction or series of related transactions has been
approved by a majority of the members of the Board of Directors of the Company
and approved by a majority of the Independent Directors. Notwithstanding the
foregoing, this provision will not apply to (i) employment agreements or
compensation or employee benefit arrangements with any officer, director or
employee of the Company entered into in the ordinary course of business on
customary terms (including customary benefits thereunder), (ii) any transaction
entered into by or among the Company or one of its subsidiaries with one or more
subsidiaries of the Company, (iii) payment of reasonable and customary fees to
directors of the Company who are not employees of the Company and the payment of
reasonable and customary compensation for director and Board of Director
observer fees, meeting expenses, insurance premiums and indemnities to the
extent permitted by law, and (iv) issuance and repurchase of stock options (and
shares of Capital Stock upon exercise thereof) pursuant to stock options plans
and agreements related thereto and loans or advances to employees for relocation
or travel expenses in the ordinary course of business on customary terms.
9.9 CONDUCT OF BUSINESS. The Company and its Subsidiaries will not engage
in any businesses which are not the same, similar, ancillary, complementary or
related to the businesses in which the Company and its Subsidiaries are engaged
on the Issue Date.
9.10 LIMITATION ON INCURRENCE OF SUBORDINATED INDEBTEDNESS. The Company
will not issue any Indebtedness subordinate or junior in right of payment to the
Securities that matures, or requires any mandatory payment of principal, prior
to 120 days after the final maturity of the Securities, other than any such
subordinate or junior Indebtedness which is issued by the Company as part of the
purchase consideration paid to the seller of any stock, assets or property to
the Company or any of its Subsidiaries.
<PAGE>
-23-
9.11 WHEN COMPANY MAY MERGE, ETC. The Company shall not consolidate or
merge with or into, or sell, lease, convey or otherwise dispose of all or
substantially all of its assets to, any Person unless:
(1) the Company is the surviving Person or that Person is a
corporation organized under the laws of the United States, any state
thereof or the District of Columbia or a corporation or comparable legal
entity organized under the laws of a foreign jurisdiction and whose equity
securities are listed on a national securities exchange in the United
States or authorized for quotation on the Nasdaq National Market;
(2) that Person assumes all the obligations of the Company under the
Securities, except that it need not assume the obligations of the Company
as to conversion of Securities if pursuant to SECTION 6.18, the Company or
another Person agrees to deliver securities, cash or other assets upon
conversion of Securities;
(3) immediately after giving effect to such transaction, no Default
shall have occurred and be continuing; and
(4) the Company has delivered to the Holders an Officers' Certificate
stating that such consolidation, merger, transfer or lease and such
assumption comply with this Article and that all conditions precedent
herein provided for related to such transaction have been complied with.
The surviving, transferee or lessee corporation shall be the successor
Company. Upon compliance with these provisions by a successor or transferee
corporation or entity, the Company shall be released from its obligations under
the Securities.
10. DEFAULTS AND REMEDIES.
10.1 EVENTS OF DEFAULT. An "Event of Default" occurs if:
(1) the Company defaults in the payment of interest on any Security
when the same becomes due and payable and the Default continues uncured for
a period of 30 days;
(2) the Company defaults in the payment of (A) principal of or
premium, if any, on any Security when the same becomes due and payable,
whether at maturity, upon redemption or otherwise, or (B) the Repurchase
Price in respect of any Security when due;
(3) the Company fails to comply with any of its other covenants or
agreements set forth in this Security and the Default continues for the
period and after the notice specified below;
<PAGE>
-24-
(4) the Company defaults with respect to any indebtedness for
borrowed money of the Company, which default results in acceleration of any
such indebtedness which is in an amount of in excess of $10,000,000;
(5) the Company pursuant to or within the meaning of any Bankruptcy
Law (as defined below):
(A) commences a voluntary case,
(B) consents to the entry of an order for relief against it in
an involuntary case,
(C) consents to the appointment of a Custodian (as defined
below) of it or for all or substantially all of its property, or
(D) makes a general assignment for the benefit of its creditors;
or
(6) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) is for relief against the Company in an involuntary case,
(B) appoints a Custodian of the Company or for all or
substantially all of its property, or
(C) orders the liquidation of the Company,
and the order or decree remains unstayed and in effect for 90 consecutive
days.
The term "BANKRUPTCY LAW" means Title 11, U.S. Code or any similar federal or
state law for the relief of debtors. The term "CUSTODIAN" means any receiver,
trustee, assignee, liquidator or similar official under any Bankruptcy Law.
A Default under clause (3) above is not an Event of Default until the
Holders of at least 25% in principal amount of the Securities notify the Company
in writing of the Default and the Company does not cure the Default within 60
days after receipt of the notice. The notice must specify the Default, demand
that it be remedied and state that the notice is a "Notice of Default". When a
Default is cured, it ceases to exist.
10.2 ACCELERATION. If any Event of Default described in SECTION 10.1(1)
THROUGH (4) occurs and is continuing, the Holders of at least 25% in aggregate
principal amount of the outstanding Securities, by written notice to the
Company, may declare the principal of and accrued interest on all Securities to
be due and payable. Upon such declaration such principal and interest shall be
due and payable immediately. If any Event of Default described in
SECTION 10.1(5) OR
<PAGE>
-25-
10.1(6) occurs the principal of and accrued interest on all Securities shall
automatically become due and payable, without any action required of the
Holders. The Holders of a majority in principal amount of the Securities by
written notice to the Company may rescind an acceleration and its
consequences if all existing Events of Default have been cured or waived
except nonpayment of principal or interest that has become due solely because
of the acceleration, if the rescission would not conflict with any judgment
or decree of a court of competent jurisdiction.
10.3 OTHER REMEDIES. A delay or omission by any Securityholder in
exercising any right or remedy accruing upon an Event of Default shall not
impair the right or remedy or constitute a waiver of or acquiescence in the
Event of Default. To the extent permitted by law, no remedy is exclusive of any
other remedy and all remedies are cumulative.
10.4 WAIVER OF PAST DEFAULTS. Subject to SECTIONS 8.2 AND 10.5, the Holders
of a majority in aggregate principal amount of the Securities by written notice
to the Company may waive an existing Default and its consequences except a
Default in the payment of the principal of or premium, if any, or interest on
any Security as specified in clauses (1) and (2) of SECTION 10.1 or a Default
under ARTICLE 6. When a Default is waived, it is cured and ceases to exist.
10.5 RIGHTS OF HOLDERS TO RECEIVE PAYMENT. [FROM 7.07 OF INDENTURE]
Notwithstanding any other provision hereof, the right of any Holder to receive
payment of the principal of and premium, if any, and interest on this Security
on or after the respective due dates expressed in this Security, and to convert
such Security in accordance with ARTICLE 6, or to bring suit for the enforcement
of any such payment on or after such respective due dates and such right to
convert, is absolute and unconditional and shall not be impaired or affected
without the consent of the Holder.
11. DEFINITIONS.
Capitalized terms used herein and not otherwise defined shall have the
following meanings:
"1996 Indenture" means the Indenture dated as of August 12, 1996
between the Company and U.S. Trust Company of New York in relation to the
issuance of the Company's $27,200,000 aggregate principal amount of 10%
Convertible Notes due 2006.
"1996 Securities" means the securities described in and issued,
authenticated and delivered under the 1996 Indenture.
"Additional Permitted Indebtedness" means any Indebtedness incurred by
the Company or its Subsidiaries, as the same may be amended, modified, renewed,
refunded, replaced or refinanced from time to time, where the aggregate
principal amount of borrowings available or Indebtedness outstanding thereunder
does not exceed (i) 85% of the consolidated inventory and accounts receivable
(excluding accounts receivable subject to third party accounts receivable
billing arrangements or overdue for more than 90 days) of the Company and its
Subsidiaries determined on
<PAGE>
-26-
a pro forma basis as if any acquisition or disposition of stock or assets to
be made on or about the time of any required calculation of Additional
Permitted Indebtedness had occurred plus (ii) the product of (a) consolidated
revenues of the Company and its Subsidiaries for the most recent six-month
period for which financial statements are available, calculated in accordance
with GAAP (except for the absence of footnotes and subject to normally
recurring year-end audit adjustments) and determined on a pro forma basis as
if any acquisition or disposition of stock or assets had occurred at the
beginning of such six-month period and (b) 2/3.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company.
For the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise, and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Board of Directors" or "Board" means the Board of Directors of the
Company or any duly authorized committee of the Board.
"Business Day" means any day that is not a Legal Holiday.
"Capital Lease Obligations" of any Person means, at the time any
determination thereof is to be made, the amount of the liability in respect
of a capital lease for property leased by such Person that would at such time
be required to be capitalized on the balance sheet of such Person in
accordance with GAAP.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of
or interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited,
of such Person, including any capital stock that has preferential rights to
any other capital stock with respect to dividends or redemption or upon
liquidation.
"Common Stock" means shares of the common stock, par value $.0001,
of the Company as it exists at the Issue Date or shares of any class or
classes resulting from any reclassification or reclassifications thereof and
which have no preference in respect of dividends or of amounts payable in the
event of any voluntary or involuntary liquidation, dissolution or winding up
of the Company and which are not subject to redemption by the Company.
"Consolidated Interest Expense" means, with respect to any period,
the sum, without duplication, of (i) the interest expense of the Company and
its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP consistently applied, including, without limitation, (a)
amortization of debt discount (other than debt discount in relation to
debentures to be redeemed from the proceeds of the Offering), (b) the net
payments, if any, under interest rate agreements (including amortization of
discounts), (c) the interest portion of any deferred payment obligation and
(d) accrued interest, plus (ii) the interest component of all Capital
<PAGE>
-27-
Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the
Company and its Subsidiaries during such period (other than the interest
component relating to up to $2 million of Capital Lease Obligations of the
Company and its Subsidiaries), and all capitalized interest of the Company
and its subsidiaries, in each case as determined on a consolidated basis in
accordance with GAAP consistently applied.
"Consolidated Net Income" means, with respect to any period, the
net income (or loss) of the Company and its Subsidiaries, on a consolidated
basis, determined in accordance with GAAP consistently applied, minus (i)
extraordinary net gains and net gains realized on any sale or disposition of
assets during such period, minus (ii) the portion of net income (or loss) of
the Company and its subsidiaries allocable to interests in unconsolidated
Persons, except to the extent of the amount of dividends or distributions
actually paid in cash to the Company or its subsidiaries by such Person
during such period, minus (iii) the net income of any Person combined with
the Company or any of its subsidiaries on a "pooling-of-interests" basis
attributable to any period prior to the date of combination.
"Default" means any event which is, or after notice or passage of
time would be, an Event of Default.
"Disqualified Capital Stock" means that portion of any Capital
Stock which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event (other than an event which would constitute a Fundamental Change),
matures (excluding any maturity as the result of an optional redemption by
the issuer thereof) or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the sole option of the holder
thereof (except, in each case, upon the occurrence of a Fundamental Change)
on or prior to the final maturity date of the Securities.
"GAAP" means, as of any date, generally accepted accounting
principles in the United States and not including any interpretations or
regulations that have been proposed but that have not become effective.
"Holder" or "Securityholder" means the Person in whose name a
Security is registered on the Company's books.
"Indebtedness" means, with respect to any Person, without
duplication, and whether or not contingent, (i) all indebtedness of such
Person for borrowed money or which is evidenced by a note, bond, debenture or
similar instrument, (ii) all obligations of such Person in respect of letters
of credit or bankers' acceptances issued or created for the account of such
Person, (iii) all liabilities secured by any consensual Lien (including
capital leases and Liens arising in connection with purchase money debt) on
any property owned by such Person even if such Person has not assumed or
otherwise become liable for the payment thereof to the extent of the lesser
of the amount of the debt secured thereby or the value of the property
subject to such Lien, (iv) all Disqualified Capital Stock issued by such
Person after the date hereof (other than any Series A Cumulative Convertible
Preferred Stock of the Company issued as a pay-in-kind dividend pursuant to
the terms of the
<PAGE>
-28-
Company's Series A Cumulative Convertible Preferred Stock outstanding on the
Issue Date), and (v) to the extent not otherwise included, any guarantee by
such Person of any other Person's indebtedness or other obligations described
in clauses (i) through (iv) above. "Indebtedness" of the Company and its
Subsidiaries shall not include trade payables (including, without limitation,
obligations under third party accounts receivable billing agreements)
incurred in the ordinary course of business and payable in accordance with
customary practices and non-interest bearing installment obligations and
accrued liabilities incurred in the ordinary course of business and any
current liability for federal, state, local or other taxes and inter-company
indebtedness among the Company and its Subsidiaries.
"Independent Director" means non-management directors of any Person.
"Issue Date" means March 25, 1997, the date of original issuance of
the Securities.
"Liens" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale
or other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"Officer" means the Chairman and Chief Executive Officer, the
President, any Vice President, the Chief Financial Officer, the Controller or
the Secretary or Assistant Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Operating Cash Flow" means, with respect to any period, the net
income (or loss) of the Company and its Subsidiaries on a consolidated basis,
determined in accordance with GAAP consistently applied, plus, without
duplication, (i) extraordinary net losses and net losses realized on any sale
or other disposition of assets during such period, to the extent such losses
were deducted in computing net income (or loss), plus (ii) provision for
taxes based on income or profits, to the extent such provision for taxes was
included in computing such net income (or loss), and any provision for taxes
utilized in computing the net losses under clause (i) hereof, plus (iii)
Consolidated Interest Expense of the Company and its subsidiaries for such
period, plus (iv) depreciation, amortization and all other non-cash charges,
to the extent such depreciation, amortization and other non-cash charges were
deducted in computing such net income (or loss) (including amortization of
goodwill and other intangibles).
"Permitted Liens" means (i) Liens securing purchase money debt;
(ii) Liens arising in connection with capital leases; (iii) Liens in favor of
the Company or any Subsidiary of the Company; (iv) Liens to secure debt of
any Person which merges with or into or consolidates with or is otherwise
acquired by the Company or any Subsidiary of the Company or debt encumbering
any asset acquired by the Company or any Subsidiary of the Company, in either
case which debt was not incurred in anticipation of, and was outstanding
prior to, such merger, consolidation or acquisition; (v) Liens outstanding on
the Issue Date; (vi) Liens in favor of the trustee under the 1996 Indenture
and any liens securing the 1996 Securities; (vii) Liens in connection with
any
<PAGE>
-29-
Additional Permitted Indebtedness, including interest rate agreements related
thereto; (viii) Liens for taxes, assessments, governmental charges or claims
which are not yet delinquent or which are being contested in good faith by
appropriate proceedings, if a reserve is maintained to the extent required by
GAAP; (ix) other Liens incidental to the conduct of the Company's and its
Subsidiaries' business or the ownership of its property and assets not
securing any debt for borrowed money, and which do not in the aggregate
materially detract from the value of the Company's and its Subsidiaries'
property or assets when taken as a whole, or materially impair the use
thereof in the operation of its business; (x) Liens incurred or pledges and
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of statutory obligations
(including to secure government contracts); (xi) Liens incurred or deposits
made to secure the performance of tenders, bids, leases, and other
obligations of like nature (including appeal, surety and performance bonds)
incurred in the ordinary course of business (exclusive of obligations for the
payment of borrowed money); (xii) zoning restrictions, servitudes, easements,
rights-of-way, restrictions and other similar charges or encumbrances
incurred in the ordinary course of business which, in the aggregate, do not
materially detract from the value of the property subject thereto or
interfere in any material respect with the ordinary conduct of the business
of the Company or its Subsidiaries; (xiii) Liens arising out of judgments or
awards against the Company or any of its Subsidiaries with respect to which
the Company or such Subsidiary is prosecuting an appeal or proceeding for
review and the Company or such Subsidiary is maintaining adequate reserves to
the extent required by GAAP; (xiv) any interest or title of a lessor in the
property subject to any lease other than a capital lease; and (xv) any
statutory warehousemen's, materialmen's, mechanic's, carrier's, supplier's,
vendor's or other similar Lien for sums not then due and payable (or which,
if due and payable, are being contested in good faith and with respect to
which adequate reserves are being maintained to the extent required by GAAP).
"Permitted Liens" shall also include the extension, renewal, amendment,
refinancing or refunding of debt secured by any Permitted Lien set forth
above, except that in the case of the extension, renewal, amendment,
refinancing or refunding of any debt secured by a Lien under clause (iv) or
(v) of this definition, such Lien does not extend to any other property not
contemplated by the terms of such existing Lien and the principal amount of
debt so secured is not increased.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization
or government or any agency or political subdivision thereof.
"Pro Forma Interest Coverage" means, with respect to any date of
determination, the ratio of (i) Operating Cash Flow for the most recent full
fiscal quarter ending on or immediately prior to such date, determined on a
pro forma basis as if any acquisition or disposition of stock or assets had
occurred at the beginning of such quarter, to (ii) Consolidated Interest
Expense for the most recent full fiscal quarter ending on or immediately
prior to such date, determined on a pro forma basis in the case of each of
clauses (i) and (ii) as if any obligations of the Company or its subsidiaries
incurred or repaid during such quarter had been incurred or repaid at the
beginning of such quarter, to the extent any such obligation gives rise to
Consolidated Interest Expense.
<PAGE>
-30-
"Quoted Prices" of the Common Stock means the last sale price
regular way or, in case no such sale takes place on such day, the average of
the closing bid and asked prices regular way, in either case on the national
securities exchange on which the Common Stock is listed or admitted to
trading, or if the Common Stock is not listed or admitted to trading on any
national securities exchange, the last sale price regular way or, in case no
such sale takes place on such day, the average of the highest reported bid
and lowest reported asked prices as furnished by the National Association of
Securities Dealers, Inc. through Nasdaq or a similar organization if Nasdaq
is no longer reporting such information, or if on any such Trading Day the
Common Stock is not quoted by any such organization, the average of the
highest reported bid and lowest reported asked prices as available in any
other over-the-counter market, or if on such Trading Day the Common Stock is
not reported in any such market, the fair value of a share of Common Stock on
such day, as determined in good faith by, and evidenced by a resolution of,
the Board of Directors.
"Restricted Payment" means (i) any dividend or other distribution
declared or paid on any Capital Stock of the Company (other than dividends or
distributions payable solely in Capital Stock of the Company); (ii) any
payment to purchase, redeem or otherwise acquire or retire for value any
Capital Stock of the Company, (iii) any principal payment on, purchase,
defeasance, redemption or other prepayment of any Indebtedness of the Company
that is subordinate or junior in right of payment to the Notes, other than
any such subordinate or junior Indebtedness which is issued by the Company as
part of the purchase consideration paid to the seller of any stock, assets or
property to the Company or any of its subsidiaries.
"SEC" means the Securities and Exchange Commission.
"Subsidiary" means a corporation, a majority of the voting stock of
which is owned, directly or indirectly, by the Company or by one or more
Subsidiaries, or by the Company and one or more other Subsidiaries.
"Trading Day" means each Monday, Tuesday, Wednesday, Thursday and
Friday other than any day on which securities are not traded on the principal
exchange or market on which the securities in question are traded.
Other terms shall have the meanings ascribed thereto herein.
Every effort has been made to include definitions herein for each capitalized
term used in this Security; however, to the extent any capitalized term is
not specifically defined herein, the parties expressly intend and do hereby
agree that if there is a corresponding term contained in the 1996 Indenture,
such definition shall apply as if it were contained herein.
12. MISCELLANEOUS.
12.1 NOTICES. Any notice or communication to the Company shall be duly
given if in writing and delivered in Person or mailed by first class mail or
nationally recognized overnight courier addressed as follows:
<PAGE>
-31-
If to the Company: SA Telecommunications, Inc.
1600 Promenade Center, 15th Floor
Richardson, Texas 75080
Attention: Vice President and
General Counsel,
with a copy to: the Chief Financial Officer
Any notice or communication to a Securityholder shall be mailed by
first-class mail to his address as shown on the register kept by the Company.
Failure to mail a notice or communication to a Securityholder or any defect in
it shall not affect its sufficiency with respect to other Securityholders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
12.2 LEGAL HOLIDAYS. A "Legal Holiday" is a Saturday, Sunday or a day on
which banking institutions in Dallas, Texas are not required to be open. If a
payment date is a Legal Holiday at a place of payment, payment may be made at
such place on the next succeeding day that is not a Legal Holiday, and no
interest shall accrue for the intervening period.
12.3 GOVERNING LAW. The laws of the State of New York shall govern the
Securities without regard to principles of conflicts of law.
12.4 NO RECOURSE AGAINST OTHERS. A director, officer, employee or
stockholder, as such, of the Company shall not have any liability for any
obligations of the Company under the Securities or for any claim based on, in
respect of or by reason of such obligations or their creation. Each
Securityholder by accepting a Security waives and releases all such liability.
12.5 SUCCESSORS. All agreements of the Company in the Securities shall bind
its successor.
12.6 SEVERABILITY. In case any provision in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby,
and a Holder shall have no claim therefor against any party hereto.
12.7 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS. This Security may not
be used to interpret another debenture, loan or debt agreement of the Company or
a Subsidiary. Any such debenture, indenture, loan or debt agreement may not be
used to interpret this Security.
12.8 ABBREVIATIONS. Customary abbreviations may be used in the name of a
Securityholder or an assignee, such as: TEN COM (= tenants in common), TEN ENT
(= tenants
<PAGE>
-32-
by the entireties), JT TEN (= joint tenants with right of survivorship and
not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
12.9 RULES OF CONSTRUCTION. Unless the context otherwise requires:
(1) A term has the meaning assigned to it;
(2) An accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles;
(3) "Or" is not exclusive;
(4) Words in the singular include the plural, and words in the plural
include the singular; and
(5) "herein," "hereof" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
subdivision.
(6) Provisions apply to successive events and transactions.
13. REGISTRATION RIGHTS.
Pursuant to the Registration Rights Agreement dated March 25, 1997, between
the Company and Northstar High Total Return Fund, the Company has agreed to
provide the Holders of the Securities certain limited piggy-back registration
rights with respect to offers and sales made by such Holders of the shares of
Common Stock acquirable upon conversion of the Securities.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-33-
IN WITNESS WHEREOF, the Company has duly executed this Debenture as of the
date first written above.
SA TELECOMMUNICATIONS, INC.
By: /s/ J. David Darnell
-----------------------------
Name: J. David Darnell
-----------------------------
Title: Vice President - Finance
-----------------------------
====================
<PAGE>
-34-
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint ______________________________________________________
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for him.
Date: Your Signature:
------------------ -----------------------------------
Sign exactly as your name appears
on the other side of this Security)
Signature Guaranteed:
---------------------------------------------------------
In connection with any transfer of this Security occurring prior to March
25, 1999, the undersigned confirms that it has not utilized any general
solicitation or general advertising in connection with the transfer and that
this Security is being transferred:
(CHECK ONE)
(1) / / To the Company or a subsidiary thereof; or
(2) / / Pursuant to and in compliance with Rule 144A under the
Securities Act; or
(3) / / To an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act) that has furnished to the Company a signed letter
containing certain representations and agreements (the
form of which letter can be obtained from the Company);
or
(4) / / Outside the United States to a "Foreign Person" in
compliance with Rule 904 of Regulation S under the
Securities Act; or
(5) / / pursuant to the exemption from registration provided by
Rule 144 under the Securities Act; or
(6) / / pursuant to an effective registration statement under the
Securities Act; or
(7) / / pursuant to another available exemption from the
registration requirements of the Securities Act.
<PAGE>
-35-
Unless one of the boxes is checked, the Company will refuse to register any
of the Securities evidenced by this certificate in the name of any Person
other than the registered Holder thereof; PROVIDED that if box (3), (4), (5)
or (7) is checked, the Company may require, prior to registering any such
transfer of the Securities, in its sole discretion, such legal opinions,
certifications (including an investment letter in the case of box (3) or (4))
and other information as the Company has reasonably requested to confirm that
such transfer is being made pursuant to an exemption from, or in a transaction
not subject to, the registration requirements of the Securities Act.
If none of the foregoing boxes is checked, the Registrar shall not be obligated
to register this Security in the name of any Person other than the Holder hereof
unless and until the conditions to any such transfer of registration set forth
herein have been satisfied.
Dated: Signed:
------------------ ----------------------------------
(Sign exactly as name appears on
the other side of this Security)
Signature Guarantee:
---------------------------------------------------------
TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing this
Debenture for its own account or an account with respect to which it exercises
sole investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act
and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Company as the
undersigned has requested pursuant to Rule 144A or has determined not to request
such information and that it is aware that the transferor is relying upon the
undersigned's foregoing representations in order to claim the exemption from
registration provided by Rule 144A.
Dated:
------------------ ----------------------------------------------
NOTICE: To be executed by an executive officer
<PAGE>
-36-
CONVERSION NOTICE
The undersigned owner of this Security hereby irrevocably exercises the
option to convert this Security, or the portion hereof (which is $1,000 or an
integral multiple thereof) below designated, into shares of Common Stock, and
directs that the shares issuable and deliverable upon conversion, together with
any check in payment for fractional shares and any Securities representing any
unconverted principal amount hereof, be issued and delivered to the registered
holder hereof unless a different name has been indicated below. If shares are to
be issued in the name of a Person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto.
To convert this Security into Common Stock of the Company, check the box:
/ /
To convert only part of this Security, state the amount (must be $1,000 or
any whole multiple thereof):
$
------------------
If you want the stock certificate made out in another Person's name, fill
in the form below:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
(Insert other Person's social security or tax identification number)
- ------------------------------------------------------------------------------
(Print or type other person's name, address and zip code)
Date: Your signature:
------------------- -----------------------------------
(Sign exactly as your name appears
on the other side of this Security)
Signature Guaranteed:
---------------------------------------------------------
In connection with any transfer of the Common Stock occurring prior to March 25,
1999, the undersigned confirms that it has not utilized any general solicitation
or general advertising in connection with the transfer and that the Common Stock
is being transferred:
<PAGE>
-37-
(CHECK ONE)
(1) / / to the Company or a subsidiary thereof; or
(2) / / pursuant to and in compliance with Rule 144A under the
Securities Act; or
(3) / / to an institutional "accredited investor" (as defined
in Rule 501(a)(1), (2), (3) or (7) under the Securities
Act) that has furnished to the Company a signed letter
containing certain representations and agreements (the
form of which letter can be obtained from the Company);
or
(4) / / outside the United States to a "Foreign Person" in
compliance with Rule 904 of Regulation S under the
Securities Act; or
(5) / / pursuant to the exemption from registration provided
by Rule 144 under the Securities Act; or
(6) / / pursuant to an effective registration statement under
the Securities Act; or
(7) / / pursuant to another available exemption from the
registration requirements of the Securities Act.
Unless one of the boxes is checked, the registrar for the Common Stock will
refuse to register the Common Stock in the name of any Person other than the
registered Holder thereof; PROVIDED that if box (3), (4), (5) or (7) is
checked, the Company or the Common Stock transfer agent may require, prior to
registering any such transfer of the Common Stock, in its sole discretion,
such legal opinions, certifications (including an investment letter in the
case of box (3) or (4)) and other information as the registrar for the Common
Stock or the Company has reasonably requested to confirm that such transfer
is being made pursuant to an exemption from, or in a transaction not subject
to, the registration requirements of the Securities Act.
If none of the foregoing boxes is checked, the Common Stock transfer agent
shall not be obligated to register Common Stock in the name of any Person
other than the Holder hereof unless and until the conditions to any such
transfer of registration set forth herein shall have been satisfied.
Dated: Signed:
---------------------- ------------------------------------
(Sign exactly as name appears on
the other side of this Security)
Signature Guarantee:
--------------------------------------------------------
TO BE COMPLETED BY PURCHASER IF (2) ABOVE IS CHECKED
The undersigned represents and warrants that it is purchasing Common Stock
issuable upon conversion of this Security for its own account or an account with
respect to which it exercises sole investment discretion and that it and any
such account is a "qualified institutional
<PAGE>
-38-
buyer" within the meaning of Rule 144A under the Securities Act and is aware
that the sale to it is being made in reliance on Rule 144A and acknowledges that
it has received such information regarding the Company as the undersigned has
requested pursuant to Rule 144A or has determined not to request such
information and that it is aware that the transferor is relying upon the
undersigned's foregoing representations in order to claim the exemption from
registration provided by Rule 144A.
Dated:
---------------------- ----------------------------------------------
NOTICE: To be executed by an executive officer
<PAGE>
-39-
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to the provisions hereof, check the box:
/ /
If you want to elect to have only part of this Security purchased by the
Company pursuant to the provisions hereof, state the amount:
$
--------------------
Date: Your signature:
---------------------- ----------------------------------
(Sign exactly as your name appears
on the other side of this Security)
Signature Guaranteed:
----------------------------------------------------------
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF SA TELECOMMUNICATIONS, INC.
<TABLE>
STATE OF
NAME INCORPORATION OTHER NAMES
- ---- ------------- -----------
<S> <C> <C>
U.S. Communications, Inc. Texas USC, USI, First Choice Long Distance
Southwest Long Distance Network, Inc.* Arkansas
Long Distance Network, Inc. Texas
North American Telecommunications Corporation Texas
Uniquest Communications, Inc. Texas
AddTel Communications, Inc. California Addtel, Addcom
</TABLE>
* Indirect Subsidiary
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 dated February 21, 1992 (No. 33-45911), December 3,
1992 (No. 33-55308), January 27, 1993 (No. 33-57712), June 10, 1993 (No.
33-64102), September 22, 1993 (No. 33-69196), March 7, 1996 (No. 333-01549)
and March 7, 1996 (No. 333-01547) and in the Registration Statement on Form
S-3 dated January 3, 1996 (No. 33-64271) of SA Telecommunications, Inc. of
our report dated March 25, 1997, which appears on page F-2 of this Form
10-KSB.
PRICE WATERHOUSE LLP
Dallas, Texas
March 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SA
TELECOMMUNICATIONS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 14,360,466
<SECURITIES> 0
<RECEIVABLES> 9,832,656
<ALLOWANCES> 2,796,946
<INVENTORY> 136,875
<CURRENT-ASSETS> 23,608,204
<PP&E> 10,054,937
<DEPRECIATION> 1,380,307
<TOTAL-ASSETS> 62,679,069
<CURRENT-LIABILITIES> 26,619,559
<BONDS> 28,477,903
1,330,303
0
<COMMON> 1,686
<OTHER-SE> 6,249,618
<TOTAL-LIABILITY-AND-EQUITY> 62,679,069
<SALES> 35,668,502
<TOTAL-REVENUES> 35,668,502
<CGS> 22,530,228
<TOTAL-COSTS> 41,050,661
<OTHER-EXPENSES> 1,908,701
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,129,876
<INCOME-PRETAX> (5,382,159)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,382,159)
<DISCONTINUED> 0
<EXTRAORDINARY> 1,327,644
<CHANGES> 0
<NET-INCOME> (4,054,515)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> 0.00
</TABLE>
