<PAGE> 1
________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Quarterly Period Ended September 30, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the Transition Period from __________ to ____________ .
Commission File Number: 000-26118
_____________________________
MIDCOM COMMUNICATIONS INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1438806
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1111 THIRD AVENUE, SEATTLE WA 98101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 628-8000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Class Outstanding at October 31, 1996
----------------------------------------------- -------------------------------
Common Stock, $0.0001 par value 15,799,515
</TABLE>
Page 1 of 25 pages.
Exhibit Index at Page 26.
<PAGE> 2
MIDCOM COMMUNICATIONS, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands) September 30, 1996 December 31, 1995
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 48,138 $ 1,083
Accounts receivable, less allowance for doubtful accounts
of $8,026 and $10,581, respectively 20,266 51,814
Due from related parties 71 502
Prepaid expenses and other current assets 2,266 2,510
--------- --------
Total current assets 70,741 55,909
Property, plant and equipment, net 10,130 13,719
Investments in joint venture -- 2,000
Intangible assets, less accumulated amortization
of $34,646 and $12,812, respectively 22,098 60,781
Other assets and deferred charges, net 3,795 922
--------- --------
$ 106,764 $133,331
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 6,222 $ 7,397
Carrier accounts payable 21,437 32,534
Accrued expenses and other current liabilities 9,299 9,613
Notes payable 10,963 14,576
Current portion of long-term obligations 2,962 41,721
--------- --------
Total current liabilities 50,883 105,841
Long-term obligations, less current portion 1,889 1,844
Convertible subordinated notes payable 97,743 --
Other long-term liabilities 5,948 1,847
Shareholders' equity (deficit)
Common stock 66,831 62,400
Deferred compensation (522) (13)
Accumulated deficit (116,008) (38,588)
--------- --------
(49,699) 23,799
--------- --------
$ 106,764 $133,331
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
MIDCOM COMMUNICATIONS INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- ------------------------
(In thousands, except per share data) 1996 1995 1996 1995
- ------------------------------------- -------- --------- --------- ---------
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue $ 30,730 $ 50,029 $ 124,590 $ 147,409
Cost of revenue 22,292 35,379 89,828 100,661
-------- --------- --------- ---------
Gross profit 8,438 14,650 34,762 46,748
Operating expenses:
Selling, general and administrative 15,734 15,171 48,048 42,654
Depreciation 1,653 1,242 4,327 3,180
Amortization 5,321 2,244 21,857 5,204
Settlement of contract dispute -- -- 8,800 --
Restructuring charges -- -- 2,220 --
Loss on impairment of assets 2,000 -- 20,765 --
-------- --------- --------- ---------
24,708 18,657 106,017 51,038
-------- --------- --------- ---------
Operating loss (16,270) (4,007) (71,255) (4,290)
Other income (expense)
Interest expense, net (2,049) (759) (5,959) (4,105)
Equity in loss of joint venture -- (113) -- (279)
Other income (expense), net 60 (24) (206) (252)
-------- --------- --------- ---------
(1,989) (896) (6,165) (4,636)
-------- --------- --------- ---------
Loss before provision for income taxes
and extraordinary item (18,259) (4,903) (77,420) (8,926)
Provision for income taxes -- 18 -- 18
-------- --------- --------- ---------
Loss before extraordinary item (18,259) (4,921) (77,420) (8,944)
Extraordinary item: loss on early redemption of debt -- (2,992) -- (2,992)
-------- --------- --------- ---------
Net loss $(18,259) $ (7,913) $ (77,420) $ (11,936)
======== ========= ========= =========
Per share amounts:
Loss before extraordinary item $ (1.16) $ (0.34) $ (5.01) $ (0.77)
Extraordinary item -- (0.21) -- (0.25)
-------- --------- --------- ---------
Net loss $ (1.16) $ (0.55) $ (5.01) $ (1.02)
======== ========= ========= =========
-------- --------- --------- ---------
Weighted average common
shares outstanding 15,681 14,373 15,442 11,648
======== ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
MIDCOM COMMUNICATIONS INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
(In thousands) 1996 1995
- -------------- -------- --------
(Restated)
<S> <C> <C>
Net cash provided by (used in) operating activities $ (6,591) $ 992
-------- --------
Investing activities:
Purchases of plant and equipment (1,729) (6,648)
Net assets acquired in business and customer base acquisitions -- (10,458)
Investment in and advances to joint venture -- (2,524)
Proceeds from sale of customer base 692 --
Other, net (19) --
-------- --------
Net cash used in investing activities (1,056) (19,630)
-------- --------
Financing activities:
Repayment of notes payable (3,946) (12,153)
Proceeds from notes payable 333 --
Proceeds from long-term obligations 15,000 8,695
Repayment of long-term obligations (53,687) (22,695)
Proceeds from issuance of convertible subordinated notes payable 97,743 --
Deferred financing costs (3,569) (80)
Proceeds from common stock issued for stock
purchase plan and stock options 2,828 329
Proceeds from issuance of common stock -- 53,986
Preferred stock redemption -- (8,597)
Distributions to shareholders of acquired companies -- (287)
-------- --------
Net cash provided by financing activities 54,702 19,198
-------- --------
Net increase in cash 47,055 560
Cash at beginning of period 1,083 960
-------- --------
Cash at end of period $ 48,138 $ 1,520
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of MIDCOM Communications Inc. and its wholly-owned subsidiaries,
collectively referred to as "Midcom" or the "Company." The unaudited interim
condensed consolidated financial statements and related notes have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "Commission"). Accordingly, certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. The accompanying condensed consolidated financial
statements and related notes should be read in conjunction with the consolidated
financial statements and related notes thereto included in the Company's Form
10-K as filed with the Securities and Exchange Commission on April 16, 1996, as
subsequently amended.
The information furnished reflects, in the opinion of management,
all adjustments, consisting of only normal recurring items, necessary for a fair
presentation of the results for the interim periods presented. Interim results
are not necessarily indicative of results for a full year.
The Company incurred operating losses during each of the three years
ended December 31, 1995 and, as of September 30, 1996, had an accumulated
deficit of $115.9. The report of the Company's independent auditors with respect
to the Company's Consolidated Financial Statements for the year ended December
31, 1995 states that the Company's recurring operating losses, working capital
deficiency and past credit facility defaults raise substantial doubt about the
Company's ability to continue as a going concern. The Company's condensed
consolidated financial statements have been prepared assuming that the Company
will continue as a going concern and do not include any adjustments that might
result from the outcome of this uncertainty. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
2. LOSS ON IMPAIRMENT OF ASSETS
The Company periodically reviews the carrying value of its long-term
assets in accordance with Statement of Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." To the extent that the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized. In connection with such a review, the Company
wrote-down certain acquired customer bases, equipment, and investment in a joint
venture, and recorded a loss on impairment of assets totaling $20.8 million
during 1996.
3. SETTLEMENT OF CONTRACT DISPUTE
As of September 30, 1996, Midcom's minimum volume commitment under
its supply contract with AT&T Corp. ("AT&T"), its largest supply contract, was
$117.0 million. The Company estimated that, as of the last measurement date on
September 30, 1996, it would have been in shortfall of its minimum commitments
to AT&T by approximately $27.6 million based on then current contract
requirements. However, on October 31, 1996, the Company and AT&T executed a
Release and Settlement Agreement pursuant to which substantially all disputes
between the Company and AT&T have been resolved. Also on October 31, 1996, the
Company and AT&T executed a new carrier contract pursuant to which the Company's
minimum commitment to AT&T was reduced to $13.3 million to be used over the
eighteen month period immediately following execution of the agreement. In
addition, the new carrier contract provides for more favorable pricing for
certain network services provided by AT&T. In consideration for the terms of the
settlement and the new rate structure, the Company is required to pay AT&T $8.8
million payable in two installments. The first payment of $5.0 million was made
on November 6, 1996, and the remaining balance of $3.8 million will be due
within 30 days of Midcom announcing quarterly gross revenue in excess of $75.0
million, or upon completion of a change in control.
6
<PAGE> 7
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. RESTRUCTURING CHARGES
In March and April 1996, the Company made announcements regarding
changes in senior management and the restructuring of its operations in order to
reduce expenses to the level of available capital. These actions included the
layoff of certain employees and contractors and the closure of 6 sales offices.
As a result, the Company recorded a charge of $1.6 million during the first
quarter 1996 and $0.6 million during the second quarter of 1996, the components
of which relate primarily to severance and lease cancellation charges. Included
in the first quarter restructuring charge is approximately $0.4 million relating
to the extension of the time period to exercise outstanding stock options. As of
September 30, 1996, $1.0 million of this restructuring charge remained in
accrued liabilities.
5. BUSINESS COMBINATIONS
In September 1995, the Company acquired all of the outstanding stock
of AdVal, Inc. ("AdVal") and in December 1995, the Company acquired all of the
outstanding stock of ADNET Telemanagement, Inc. ("Adnet") and its wholly-owned
subsidiary, Advanced Network Design in transactions accounted for as poolings of
interests. As a result, the consolidated financial statements for all periods
prior to the acquisitions have been restated to include the accounts and results
of operations of AdVal and Adnet. (See Note 7 below.)
In addition, since March 31, 1995, the Company has supplemented its
growth through several acquisitions of smaller providers of telecommunications
services. Certain of these acquisitions included the purchase of substantially
all of the operating assets of the acquired business including customer bases,
and in other situations, only specific customer bases were acquired. All such
acquisitions have been accounted for using the purchase method with the excess
of the purchase costs over the net tangible assets acquired being primarily
allocated to acquired customer bases, non-competition agreements and goodwill.
Financial results from the acquired operations have been included in the
Company's results from the respective dates of acquisition. As a result, the
financial results for the 1996 and 1995 periods presented are not directly
comparable.
In connection with several of the transactions described above, the
Company has an obligation to issue or release from escrow up to a maximum of
178,632 additional shares of its common stock upon the satisfaction of certain
contingencies. Such contingencies include, among other things, maintenance of
specified revenue levels for the acquired customer base, adjustment of
liabilities assumed and receivables purchased, and satisfaction of general
representations and warranties. The contingency periods range from six months to
two years. The Company was also obligated to pay additional cash pursuant to a
customer base purchase agreement, based upon revenue levels for such customer
base. In October 1996, $1.2 million was paid to satisfy this obligation. In
addition, in the event of the sale or transfer of the majority of the voting
stock of Cel-Tech International Corp. ("Cel-Tech), a subsidiary of the Company,
a payment of a maximum of $2.0 million would become payable to the former
shareholder.
In accordance with applicable accounting standards, the common stock
or other consideration payable under the contingency arrangements has not been
included in the determination of purchase price, nor have the shares been
considered outstanding for purposes of earnings per share calculations.
Additional consideration will be recorded when the outcome of a contingency is
determined.
7
<PAGE> 8
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company is also obligated in certain cases to issue additional
shares of its common stock in the event that the market price of such stock,
when the shares become registerable, is less than the price at the acquisition
dates. Based on a closing stock price of $10.75 as of November 8, 1996 for the
Company's common stock, approximately 198,577 additional shares would be
issuable as a result of these obligations.
6. NET LOSS PER SHARE
Net loss per share is based on the weighted average number of common
and equivalent shares outstanding using the treasury stock method and the number
of shares issued in the Company's initial public offering whose net proceeds
were used to redeem the Series A Redeemable Preferred Stock. Common stock
equivalents are excluded from the calculation of net loss per share due to their
antidilutive effect except that pursuant to the requirements of the Commission,
common and equivalent shares issued during the twelve month period prior to the
filing with the Commission of the registration statement with respect to the
Company's initial public offering have been included in the calculation as if
they were outstanding for all periods prior to the completion of the Company's
initial public offering in July 1995 using the treasury stock method.
7. DISPUTES AND LITIGATION
CLASS ACTION LAWSUIT. The Company, its Chairman of the Board of
Directors and largest shareholder, the Company's former President, Chief
Executive Officer and director, and the Company's former Chief Financial Officer
are named as defendants in a securities action filed in the U.S. District Court
for the Western District of Washington (the "Complaint"). The Complaint purports
to be filed on behalf of a class of purchasers of the Company's Common Stock
during the period beginning on July 6, 1995, the date of the Company's initial
public offering, and ending on March 4, 1996 (the "Class Period"). An amended
complaint (the "Amended Complaint") was filed on July 8, 1996. The Amended
Complaint alleges, among other things, that the registration statement and
prospectus relating to the Company's initial public offering contained false and
misleading statements concerning the Company's billing software and financial
condition. The Amended Complaint further alleges that, throughout the Class
Period, the defendants inflated the price of the Common Stock by intentionally
or recklessly making material misrepresentations or omissions which deceived the
public about the Company's financial condition and prospects. The Amended
Complaint alleges claims under the Securities Act and the Exchange Act as well
as various state laws, and seeks damages in an unstated amount. Defendants filed
a motion to dismiss on August 7, 1996 and filed a reply to plaintiffs'
opposition on September 18, 1996. Oral arguments were heard on November 1, 1996.
All discovery proceedings are stayed until defendants' motion to dismiss is
acted on by the Court. While the Company believes that it has substantive
defenses to the claims in the Amended Complaint and intends to vigorously defend
this lawsuit, it is unable to predict the outcome of this action.
SEC INVESTIGATION. The Company was informed in May 1996 that the
Commission was conducting an informal inquiry regarding the Company's initial
public offering and the restatement of its 1995 third quarter results. The
Company has voluntarily provided the documents requested by the Commission, but
has not been informed whether or not the Commission intends to commence a formal
action against the Company or any of its affiliates. The Company is, therefore,
unable to predict the ultimate outcome of the investigation. In the event that
the Commission elects to initiate a formal enforcement proceeding, the Company
and its officers could be subject to civil or criminal sanctions including
monetary penalties and injunctive measures. Any such enforcement proceeding
could have a material adverse effect on the Company's business, financial
condition and results of operations.
8
<PAGE> 9
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER LAWSUIT. On August 19, 1996 the Company was served with a
complaint filed in the U.S. District Court for the Eastern District of Michigan
by Frontier Corporation ("Frontier"). This complaint names as defendants the
Company and eleven individuals, all of whom are former employees of Frontier.
These individuals include William H. Oberlin, the President and Chief Executive
Officer and a director of the Company, Charles I. Gragg III, the Executive Vice
President of Marketing of the Company, and nine other employees of the Company.
The complaint alleges, among other things, that: (i) certain of the individual
defendants, with the acquiescence and active assistance of the Company, have
engaged in a systematic strategy to hire key employees and independent
contractors of Frontier in violation of various written agreements; (ii) the
individual defendants have used confidential information belonging to Frontier
in their new employment with Midcom in violation of written agreements and
fiduciary duties and (iii) Mr. Oberlin has breached fiduciary duties as a former
employee and officer of Frontier and breached obligations under an employment
agreement with Frontier. The complaint further alleges that: (i) Midcom is in
violation of a non-disclosure agreement between Frontier and Midcom by virtue of
its alleged use of confidential information of Frontier obtained through
employees hired from Frontier and otherwise; (ii) Midcom has aided and abetted
Mr. Oberlin's alleged breaches of fiduciary duties and (iii) Midcom and the
other defendants have tortuously interfered in Frontier's contractual
relationships with various Frontier employees and contractors. The complaint
seeks: (i) that the defendants be preliminarily and permanently enjoined from
breaching their respective agreements with Frontier; (ii) that Midcom be
enjoined from aiding and abetting certain alleged breaches of fiduciary duties;
(iii) an order that the defendants hold all profits which Midcom earns as a
result of its hiring of the individual defendants and other Frontier employees
as constructive trustees for the benefit of Frontier; (iv) an accounting of all
profits realized by Midcom as a result of its hiring of the defendants and other
Frontier employees; (v) a declaratory judgment on its various claims; (vi)
damages in an unspecified amount; (vii) Frontier's costs, including reasonable
attorney's fees, incurred in bringing the action; and (viii) other appropriate
relief. The Company intends to vigorously defend this action. Based on the
Company's review of the allegations in the complaint and the underlying facts,
the Company believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company's business, financial condition, results
of operations or liquidity.
ADNET LAWSUIT. On August 1, 1996, a lawsuit was filed in the
Superior Court of the State of California for the County of Orange against the
Company, the Company's former President and Chief Executive Officer and other
defendants to be named at a later date by David and Maria Wiegand, the former
shareholders of Adnet. The plaintiffs agreed to dismiss this action without
prejudice as described below. Adnet was acquired by the Company on December 29,
1995 in exchange for 453,250 shares of Common Stock, of which 45,325 shares (the
"Adnet Escrow Shares") were placed in escrow to be held until December 28, 1996
for satisfaction of certain contingencies. Adnet provides long distance services
to medium-to-large businesses. The acquisition was accomplished through the
merger of Adnet into the Company and has been accounted for as a pooling of
interests. On October 1, 1996, Mr. Wiegand resigned as vice president of the
Company. He had been in charge of the operations of the Adnet division since its
acquisition by Midcom. At the date of closing of this acquisition, the last
reported sale price for the Company's Common Stock as reported by Nasdaq
National Market was $18.25. During 1996 (through October 31, 1996), the Common
Stock has traded as low as $6.50 per share. The complaint alleged intentional
misrepresentations, intentional concealment of facts, negligent
misrepresentation, breach of contract, breach of implied covenant of good faith
and fair dealing and violation of California Securities Laws in connection with
the acquisition. The plaintiffs sought recovery of monetary damages in an amount
which the plaintiffs describe as "not yet ascertainable, but potentially [in
excess of] $10,000,000." The plaintiffs furthermore sought rescission of the
Merger Agreement, restoration of all consideration paid by the plaintiffs to the
Company pursuant to the Merger Agreement, an order enjoining the Company from
undertaking any acts which would further merge Adnet into the Company, and which
would prevent the plaintiffs from being accorded full relief upon rescission of
the Merger Agreement, punitive damages in an amount to be determined at trial
and attorneys' fees and other costs and expenses of suit.
9
<PAGE> 10
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The plaintiffs' claims are based in part on the restatement by the
Company of its financial results for the third quarter and the nine months ended
September 30, 1995 from those reported in its Quarterly Report on Form 10-Q for
the quarter ended September 30, 1995 as originally filed in November 1995. The
restated results, which were first announced in March 1996, reflected a $3.3
million reduction in revenue and $4.5 million reduction in accounts receivable
for the quarter and the nine months ended September 30, 1995. These and other
adjustments resulted in the Company's net loss for the quarter and the nine
months ended September 30, 1995 being increased from $3.8 million and $8.0
million, respectively, to $8.3 million and $12.5 million, respectively. The
Company had represented in the Merger Agreement with Adnet that the financial
statements included in its filings with the Commission "fairly present the . . .
financial position of MIDCOM . . . as of the dates thereof and its . . . results
of operations and cash flow for the periods then ended . . . are correct and
complete in all respects."
On August 8, 1996 the Company and the plaintiffs entered into an
agreement whereby the plaintiffs agreed to dismiss the complaint without
prejudice and not to re-file the complaint before August 31, 1996, and the
parties agreed to meet before August 31, 1996 to pursue a negotiated settlement
of the plaintiffs' claims. In connection with the execution of this agreement,
the Company agreed to release the Adnet Escrow Shares to the plaintiffs.
Although as of the date of this Quarterly Report, the plaintiffs have not
re-filed their complaint, the parties have not negotiated a settlement to the
plaintiffs' claims. If the Company is unable to reach an agreement with the
plaintiffs to settle their claims, it is likely that the complaint will be
re-filed. Although the Company would vigorously defend this action, it cannot
predict the outcome of these claims.
CHERRY COMMUNICATIONS LAWSUIT. In September and December 1995, the
Company acquired two significant customer bases from Cherry Communications
Incorporated ("Cherry Communications"). The first transaction ("Cherry I")
provided for the purchase of long distance customer accounts having monthly
revenue for the three months preceding the date of closing of $2.0 million, net
of taxes, customer credits and bad debt. The second transaction ("Cherry II")
provided for the purchase of long distance customer accounts having monthly
revenue which were to average $2.0 million per month over the 12 months
following the transaction, net of taxes, customer credits and bad debt. The
Company is responsible for the underlying carrier costs associated with the
customer traffic acquired from Cherry Communications at a rate which would yield
to the Company a gross profit on such traffic at an agreed rate. The purchase
price payable with respect to Cherry I was a total of $10.5 million, of which
$5.5 million was paid in cash and the balance was paid by the delivery of
317,460 shares of Common Stock (subject to a possible increase in such number
based on the future value of the Common Stock), of which 126,984 shares are held
in escrow to be applied to indemnity claims or to cover shortfalls in revenue
from the $2.0 million monthly average. The purchase price for Cherry II was
$18.0 million, of which $7.0 million has been paid in cash. Additional
installments of $3.4 million were due in February, March and April of 1996, of
which $400,000 of each installment was to be placed in an escrow account for
satisfaction of indemnity claims or to cover shortfalls in revenue from the $2.0
million monthly average. The parties later agreed that the Company could pay up
to $9.0 million of the Cherry II payments either in cash or by delivery of
shares of Common Stock, although the terms of the Revolving Credit Facility, as
described below, prohibit the Company from paying any portion of this obligation
in cash without the lenders' prior written consent. Separately, the Company also
agreed to pay Cherry Communications $40,000 per month per customer base for
servicing customer accounts on behalf of the Company. The acquired customer
bases have not generated the required minimum revenue levels and Cherry
Communications has failed to remit to the Company collections received by Cherry
Communications from a portion of the acquired customers. Accordingly, the
Company has withheld the final three installment payments for Cherry II (a total
of $9.0 million excluding escrowed sums), payment of invoices for carrier
service for the acquired bases (up to $11.4 million through September 30, 1996)
and accrued customer service charges through September 30, 1996 of $840,000.
Negotiations between Cherry Communications and the Company failed to produce a
settlement of these disputes.
10
<PAGE> 11
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cherry Communications filed a lawsuit against the Company in the
United States District Court for the Northern District of Illinois, Eastern
Division. In its First Amended Complaint filed on July 18, 1996, Cherry
Communications seeks recovery of (i) approximately $7.2 million plus interest
and attorneys' fees alleged to be due and owing under a Rebiller/Reseller
Agreement for Switched Services between Cherry Communications and the Company,
(ii) approximately $9.0 million plus interest and attorney's fees alleged to be
due and owing under the November 1, 1995 Customer Base Purchase and Sale
Agreement between Cherry Communications and the Company (the "Cherry II
Agreement"), and a Promissory Note executed in connection with the Cherry II
Agreement, (iii) customer service charges of $40,000 per month for each month of
customer service Cherry Communications has provided to the Company under the
September 1, 1995 Customer Base Purchase and Sale Agreement between Cherry
Communications and the Company (the "Cherry I Agreement"); and (iv) customer
service charges of $40,000 per month for each month of customer service Cherry
Communications has provided to the Company under the Cherry II Agreement. It is
the position of the Company that Cherry Communications has breached its
obligations under the Cherry I Agreement and the Cherry II Agreement by among
other breaches (i) failing to sell Midcom customer bases having the average
monthly revenues required by the customer base agreements, and (ii) failing to
remit to Midcom monies collected from the customer bases. It is also the
position of the Company that, as a result of Cherry Communication's breaches of
the Cherry I Agreement and the Cherry II Agreement, as amended by certain
addenda, that the Company has substantial offsets and counterclaims against
Cherry Communications. The Company is attempting to negotiate a resolution of
the disputes. In the event that a settlement is not reached, the Company intends
to vigorously defend the lawsuit filed by Cherry Communications. However, the
Company is unable to predict the outcome of this lawsuit.
CEL-TECH LAWSUIT. On April 30, 1996, a lawsuit was filed in the
Superior Court of the State of Washington, King County, against the Company and
certain of its officers and directors by the former owner of Cel-Tech seeking
rescission of his sale of Cel-Tech to the Company. The complaint alleged
misrepresentation of facts concerning the value of the Company's Common Stock
and breach of contract. In addition to rescission of the sale transaction,
plaintiff sought unspecified damages and an injunction placing Cel-Tech under
the plaintiff's control until resolution of the dispute. The Plaintiff has filed
a second amended complaint in order to seek damages in lieu of rescission. On
October 28, 1996, the Court dismissed without prejudice the plaintiff's claim
for rescission under the Washington Securities Act; however, the case continues
with respect to the plaintiff's breach of contract and fraud claims. The Company
believes there is no merit to the allegations in the portion of the amended
complaint which has not been dismissed, and plans to file a motion for summary
judgment with respect to the amended complaint and to otherwise vigorously
defend this lawsuit. However, the Company is unable to predict the outcome of
this lawsuit.
DISCOM LAWSUIT. On July 2, 1993, a complaint was filed in the
Superior Court of the State of New Jersey, Bergen County, Law Division, by
Discom Corporation ("Discom") against the Company, Paul Pfleger, who is the
largest shareholder and Chairman of the Board of Directors, and Pamcom, Inc., a
corporation wholly owned by Mr. Pfleger ("Pamcom"), alleging unjustified
customer provisioning delays, customer rejections, improper changes in pricing
policies and failure to deal in good faith causing a breach of contract with a
third party beneficiary. Discom seeks compensatory damages of $3.0 million for
lost profits and lost commissions. Claims against Mr. Pfleger were dismissed on
jurisdictional grounds. The Company has filed counterclaims against Discom for
unfair competition and trademark infringement. Discom was a distributor of
aggregation services under a contract between AT&T and Midcom Consultants, Inc.
("Consultants"). In exchange for the right to place its own aggregation
customers under Consultant's contract with AT&T, the Company provided
provisioning, billing and other support services
11
<PAGE> 12
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for all aggregation customers under Consultant's aggregation contract, including
Discom's customers. In January 1995, the Company acquired certain of the assets
and liabilities of Consultants. Pamcom, Inc., the sole remaining co-defendant in
this action, was the sole shareholder of Consultants at the time of the alleged
events that are the subject of this action. On October 25, 1995, Discom filed
notice for arbitration in New York against Consultants alleging breach of the
distributor agreement between the parties. The Company moved to consolidate the
pending litigation between Discom and the Company with Discom's claim in
arbitration against Consultants. Pursuant to an order of the Superior Court, the
entire case has been transferred to arbitration in New York for disposition of
the claims and counterclaims. A hearing by a panel of arbitrators has been
indefinitely post-poned. The Superior Court proceeding has been stayed with
jurisdiction reserved solely to resolve any discovery disputes. The Company has
deposited $645,000 in an interest-bearing escrow account, which the Company
believes exceeds the total of all commissions payable to Discom from August 1,
1993 through December 31, 1995. Although the outcome of any litigation or
arbitration is uncertain, the Company believes that it has significant defenses
to the claims of Discom and intends to vigorously defend itself in this matter
and believes that the outcome of this matter will not have a material adverse
effect on the Company's business, financial condition, results of operations or
liquidity.
The Company is also party to other routine litigation incident to
its business and to which its property is subject. The Company's management
believes the ultimate resolution of these matters will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
8. ISSUANCE OF CONVERTIBLE SUBORDINATED NOTES PAYABLE
In August and September of 1996, the Company completed a private
placement (the "Private Placement") of approximately $97.7 million in
aggregate principal amount of 8-1/4% Convertible Subordinated Notes due 2003
(the "Notes") pursuant to a Purchase Agreement, dated as of August 15, 1996
(the "Purchase Agreement"), among the Company, PaineWebber Incorporated
("PaineWebber") and Wheat, First Securities, Inc. ("Wheat, First," and
together with PaineWebber the "Initial Purchasers"). Interest on the Notes
will be paid semi-annually, on February 15 and August 15 of each year,
commencing February 15, 1997. The Notes are convertible into shares of the
Company's common stock, par value $.0001 per share (the "Common Stock"), at a
conversion price of $14.0875 per share (equivalent to a conversion rate of
70.985 shares per $1,000 principal amount of Notes), subject to adjustment in
certain events.
The net proceeds to Midcom from the Private Placement were
approximately $94.2 million, after deducting the discount to the Initial
Purchasers and expenses. The Company used the net proceeds as follows: (i) $15.0
million to repay in full a bridge loan (the "Bridge Loan") made by Transamerica
Business Credit Corporation ("Transamerica"), (ii) $19.0 million to repay in
full the revolving loans (the "Revolving Loans") under the Company's secured
revolving credit facility with Transamerica and certain other lenders (the
"Revolving Credit Facility"), (iii) $5.0 million to pay the
first installment of an $8.8 million payment in connection with the
satisfaction of past shortfalls and settlement of other obligations under the
Company's carrier supply contract with AT&T and (iv) $10.0 million to bring
current a number of payment obligations existing prior to the completion of
the Private Placement. In addition, the Company anticipates using
approximately $22.0 million of the net proceeds to acquire and install high
capacity switches. The balance of the net proceeds has been and will be used
for additional working capital, additional capital expenditures and general
corporate purposes.
The Notes were sold to qualified institutional buyers pursuant to
Securities and Exchange Commission Rule 144A under the Securities Act of 1933
(the "Securities Act"), certain "accredited investors" pursuant to Regulation D
under the Securities Act, and certain non-U.S. persons pursuant to Regulation S
under the Securities Act. The Notes have not been registered under the
Securities Act and may not be offered or sold in the United States absent
registration under the Securities Act or an
12
<PAGE> 13
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
exemption from such registration requirements. However, pursuant to a
Registration Rights Agreement, dated as of August 22, 1996 (the "Registration
Rights Agreement"), among the Company and the Initial Purchasers, the Company
has agreed to register the public offer and sale of the Notes and the shares of
Common Stock issuable upon conversion of the Notes (the "Conversion Shares").
Pursuant to the Registration Rights Agreement, the Company filed a shelf
registration statement (the "Shelf Registration Statement") with the Commission
on October 18, 1996 to register the public offer and sale of the Notes and the
Conversion Shares. The Company is required under the Registration Rights
Agreement to maintain the effectiveness of the Shelf Registration Statement for
a period of three years from the completion of the Private Placement or, if
shorter, when (i) all the Notes and Conversion Shares have been sold pursuant to
the Shelf Registration Statement or (ii) the date on which there ceases to be
outstanding any Notes or Conversion Shares.
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<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD-LOOKING STATEMENTS AND THE PRIVATE SECURITIES LITIGATION REFORM ACT
Statements in this report concerning expectations for the future
constitute forward-looking statements which are subject to a number of known and
unknown risks, uncertainties and other factors which might cause actual results
to differ materially from stated expectations. Forward-looking statements in
this report include those concerning anticipated growth in revenue, the
estimated costs of the deployment of a network of high capacity local and long
distance switching facilities, the availability of the Revolving Credit Facility
and the ability of the Company to renew the Revolving Credit Facility after its
expiration, the adequacy of available sources of working capital to implement
the Company's operating strategies and the impact on the Company's business,
results of operation and financial condition of certain litigation to which the
Company is party. Relevant risks and uncertainties include unanticipated actions
by competitors, regulatory or other obstacles which restrict the Company's
ability to implement local or other services, greater than expected costs to
open new offices, acquire switching equipment or execute other aspects of the
Company's growth strategy, greater than expected declines in sales, inability to
hire and retain key personnel, unfavorable determinations of pending lawsuits or
other disputes, inability to obtain more favorable pricing and other terms from
suppliers, inability to secure additional sources of working capital if and when
needed, inability to manage growth or integrate acquired operations and
regulatory changes and other risks and uncertainties identified elsewhere herein
in connection with such forward looking statements. Additional risks and
uncertainties include those described in the Company's Interim Report on Form
8-K as filed with the Commission on August 2, 1996, the Company's Annual
Report on Form 10-K for the year ended December 31, 1995 and those described
from time to time in the Company's other filings with the Securities and
Exchange Commission, press releases and other communications. Although the
Company believes that all forward-looking statements are reasonable, there
can be no assurance that actual results, achievements, performance or
developments will not differ materially from those expressed or implied by
such forward-looking statements.
14
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentages that certain items bear, except as noted, to total revenue:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------- --------------
1996 1995 1996 1995
----- ----- ----- ----
(Restated) (Restated)
<S> <C> <C> <C> <C>
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue 72.5 70.7 72.1 68.3
----- ----- ----- ----
Gross margin 27.5 29.3 27.9 31.7
Operating expenses:
Selling, general and administrative 51.2 30.3 38.6 28.9
Depreciation 5.4 2.5 3.5 2.2
Amortization 17.3 4.5 17.5 3.5
Settlement of contract dispute -- -- 7.0 --
Restructuring charges -- -- 1.8 --
Loss on impairment of assets 6.5 -- 16.7 --
----- ----- ----- ----
Operating loss (52.9) (8.0) (57.2) (2.9)
Other expense:
Interest expense (6.7) (1.5) (4.8) (2.8)
Other expense, net 0.2 (0.3) (0.1) (0.3)
----- ----- ----- ----
(6.5) (1.8) (4.9) (3.1)
Extraordinary item -- (6.0) -- (2.1)
----- ----- ----- ----
Net loss (59.4) (15.8) (62.1) (8.1)
===== ===== ===== =====
</TABLE>
REVENUE. For the third quarter of 1996, the Company reported a 38.6%
decrease in revenue to $30.7 million from $50.0 million reported in the third
quarter of 1995. Year-to-date revenue of $124.6 million represents a 15.5%
decrease from the $147.4 million reported for the same period in 1995. Third
quarter 1996 revenue decreased $10.1 million from the second quarter 1996
revenue of $40.8 million due to customer attrition, the sale of its low-end fax
broadcasting business, and a dispute with Cherry Communications, the seller of
another acquired customer base. As a result of the litigation between Cherry
Communications and the Company, as of September 1, 1996, the Company
discontinued booking revenue generated by the customer bases acquired from
Cherry Communications which accounted for $2.6 million of revenue during the
third quarter of 1996 down from $7.9 million of revenue during the second
quarter of 1996. In addition, the bankruptcy of the seller of a customer base
acquired by the Company has adversely affected the Company's ability to generate
revenue from that customer base. The decrease in 1996 periods as compared
to the year earlier periods is attributable to the above factors and the Company
expects that during the remainder of 1996 revenue will continue to decline due
to customer attrition, seasonality and other factors.
GROSS MARGIN. The Company's cost of revenue consists of the cost of
services provided by local and interexchange carriers. Gross margin was 27.5%
and 27.9% as a percent of total revenue for the third quarter and nine month
periods in 1996, respectively, versus 29.3% and 31.7%, respectively for the same
periods in 1995. The decline in gross margin is primarily attributable to
changes in the mix of customers. These factors were offset in part by
negotiation of price reductions with some of the Company's suppliers.
15
<PAGE> 16
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of payroll and related expenses for
administrative, customer support and marketing personnel, compensation costs for
direct sales personnel, commissions and other costs related to indirect
distribution and bad debt expense. Selling, general and administrative expenses
increased to $15.7 million for the third quarter of 1996 compared to $15.2
million for the same period in 1995. For the nine month period, selling, general
and administrative expenses increased $5.3 million to $48.0 million from $42.7
million in the same period of 1995. The increase is due to several factors,
including an increase in bad debt expense, an increase in legal, accounting and
other professional contractor fees, an increase in fees paid to third party
billing agents, and the addition of sales force personnel and related
recruiting, travel and training costs. These increases were offset, in part, by
reductions in commission expenses, and facilities-related costs. The Company
employed 452 and 428 persons on a full-time basis as of September 30, 1996 and
1995, respectively.
DEPRECIATION. Depreciation expense increased to $1.7 million in the
third quarter of 1996 from $1.2 million in the same period of 1995. For the nine
months ended September 30, 1996, depreciation was $4.3 million versus $3.2
million in the same period of 1995. The increase is primarily attributable to
the depreciation of computer systems and equipment related to the Company's
billing and management information system which was placed into service in the
second quarter of 1995. The increase was partially offset by the reduction in
depreciation of telephone switching equipment due to the partial write-off of
such equipment in the fourth quarter of 1995.
AMORTIZATION. Amortization expense increased to $5.3 million in the
third quarter of 1996 from $2.2 million in the same period of 1995. Year-to-date
amortization was $21.9 million in 1996 versus $5.2 million for the same period
of 1995. In conjunction with the preparation of the first quarter financial
statements, the Company completed a review of its accounting policies and
practices, including those relating to intangible assets. Based on certain
changes in circumstances that occurred in the first quarter of 1996, including
turnover in personnel, reduction in sales force and continuing attrition of
acquired customer bases, the Company determined that effective January 1, 1996,
a reduction in the estimated useful life of acquired customer bases from 5 years
to 3 years was appropriate. The increase in amortization expense is a result of
the change in the estimated useful life and amortization of customer bases,
non-competition agreements and goodwill resulting from acquisitions completed in
the second half of 1995.
CHARGE RELATED TO SETTLEMENT OF CONTRACT DISPUTE. On July 19, 1996,
the Company and AT&T Corp., executed a letter of intent to settle anticipated
shortfalls of minimum commitments under the Company's supply contract with AT&T
as well as all other pending disputes between the Company and AT&T and to
negotiate a new contract to reduce the Company's minimum commitment to AT&T
from approximately $117 million to $17 million. The letter of intent also
provided for the payment by the Company to AT&T of $8.8 million in two
installments. The Company recorded a charge of $8.8 million in the second
quarter of 1996 with respect to this settlement.
On October 31, 1996, the Company and AT&T executed a Release and
Settlement Agreement pursuant to which substantially all disputes between the
Company and AT&T have been resolved. Also on October 31, 1996, the Company and
AT&T executed a new carrier contract pursuant to which the Company's minimum
commitment to AT&T was reduced to $13.3 million to be used over the eighteen
month period immediately following the execution of the agreement. In addition,
the new carrier contract provides for more favorable pricing for certain network
services provided by AT&T. In consideration for the terms of the settlement and
the new rate structure, the Company is required to pay AT&T $8.8 million payable
in two installments. The first payment of $5.0 million was made on November 5,
1996, and the remaining balance of $3.8 million will be due within 30 days of
Midcom announcing quarterly gross revenue in excess of $75.0 million, or upon
completion of a change in control.
16
<PAGE> 17
RESTRUCTURING CHARGES. In March and April 1996, the Company made
announcements regarding changes in senior management and the restructuring of
its operations in order to reduce expenses to the level of available capital.
These actions included the layoff of certain employees and contractors and the
closure of 6 sales offices. As a result, the Company recorded a charge of $1.6
million during the first quarter 1996 and $0.6 million during the second quarter
of 1996, the major components of which relate to severance and lease
cancellation charges. Included in the restructuring charge is approximately $0.4
million relating to the extension of the time period to exercise outstanding
stock options. As of September 30, 1996, $1.0 million of this restructuring
charge remained in accrued liabilities to cover payments to be made in the
future.
LOSS ON IMPAIRMENT OF ASSETS. The Company periodically reviews the
carrying value of its long-term assets in accordance with Statement of
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of." To the extent that the
estimated future cash inflows attributable to the asset, less estimated future
cash outflows, is less than the carrying amount, an impairment loss is
recognized. In connection with such a review, the Company wrote-down certain
acquired customer bases, equipment, an investment in a joint venture, and
recorded a loss on long-term assets totaling $20.8 million during 1996.
OTHER EXPENSES. Interest expense increased over 1995 primarily due
to an increase in average borrowings outstanding, an increase in average
interest rates, and $1.1 million in fees paid in connection with a temporary
$15.0 million Bridge Loan. At September 30, and June 30, 1996, the Company had
outstanding interest-bearing obligations of $113.6 million and $58.0 million,
respectively, as compared to $58.1 million as of December 31, 1995. The increase
in debt at September 30, 1996 was primarily due to issuance of the $97.7 million
convertible subordinated notes, net of repayment of the Bridge Loan and the
revolving loans under the Company's Revolving Credit Facility.
The Company discontinued recording its share of the income or losses
of a Russian joint venture as of December 31, 1995, and during the third quarter
of 1996 the remaining investment of $2.0 million was written off to loss on
impairment of assets.
INCOME TAXES. The Company has incurred losses for all periods
presented. No tax benefit has been recorded with respect to these losses due to
the uncertainty as to the utilization of Company's net operating loss
carryforward.
EXTRAORDINARY ITEM. In July 1995, the Company completed an initial
public offering which resulted in net proceeds of $54.2 million to the Company.
The Company used the proceeds to pay down various obligations, including $15.0
million in principal amount of certain subordinated notes. As a result of early
extinguishment of these notes, the Company expensed as an extraordinary item in
the third quarter of 1995 the unamortized portion of original issue discount
which aggregated approximately $3.0 million.
NET LOSS. The substantial increase in net loss in 1996 periods over
the corresponding periods in 1995 is attributable to the declines in gross
margin, the increases in operating expenses, the $20.8 million loss on
impairment of assets related to acquired customer bases, equipment, and
investment in a joint venture, the restructuring charges and the settlement
payments described above.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has experienced rapid growth, which has
required substantial working capital to finance receivables, capital
expenditures and acquisitions and service indebtedness. Given the Company's
billing and collection cycle with its customers and suppliers, the Company
generally pays its underlying suppliers from thirty to forty-five days prior to
the time it is paid by its customers for the same services. The Company has
financed its growth with the proceeds from its July 1995 initial public
offering, bank borrowings, subordinated debt, capital leases, cash flow from
operations, and the issuance of Common Stock and assumption of indebtedness in
connection with acquisitions of businesses and customer bases.
The Company's cash balances were $48.1 million at September 30, 1996
versus $1.1 million at December 31, 1995. Net cash used in operations was $6.6
million for the first nine months of 1996 versus $992,000 generated by
operations in the same period of 1995. During the first nine months of 1996, the
Company experienced significant operating losses which resulted in a use of cash
in operating activities. The Company reduced its unbilled receivables balances
from $28.0 million as of December 31, 1995 to $9.9 million as of September 30,
1996. This was primarily attributable to a reduction in the backlog of billings
which built up during the second half of 1995, and a reduction in the run rate
of monthly revenue.
During the first nine months of 1996, the Company invested $1.7
million to purchase property, plant and equipment compared to $6.6 million for
the same period the prior year. During the first nine months of 1995, the
Company used $10.5 million in business and customer base acquisitions and $2.5
million in advances to a Russian joint venture. No similar investments were
made during the first nine months of 1996. For the first nine months of 1996,
the Company received $2.8 million in proceeds in connection with the exercise of
stock options and the purchase of shares under the Company's stock purchase
plan, compared to $329,000 received in connection with the exercise of stock
options during the first nine months of 1995. In addition, the Company received
$54.0 million in net proceeds from its initial public offering in July 1995,
paid $8.6 million to redeem outstanding preferred stock, and paid $287,000 to
shareholders of acquired companies.
The Company has experienced significant losses since its inception,
with net losses of approximately $3.0 million, $33.4 million and $77.4 million
for 1994, 1995 and the nine months ended September 30, 1996, respectively. As a
result of these losses, the billing and collection cycle with its customers,
prior acquisition strategy and other factors, the Company has required
substantial external working capital.
In August and September of 1996, the Company completed a private
placement (the "Private Placement") of approximately $97.7 million in aggregate
principal amount of 8-1/4% Convertible Subordinated Notes due 2003 (the "Notes")
pursuant to a Purchase Agreement, dated as of August 15, 1996 (the "Purchase
Agreement"), among the Company, PaineWebber Incorporated ("PaineWebber") and
Wheat, First Securities, Inc. ("Wheat, First," and together with PaineWebber the
"Initial Purchasers"). The Notes are convertible into shares of the Company's
common stock, par value $.0001 per share (the "Common Stock"), at a conversion
price of $14.0875 per share (equivalent to a conversion rate of 70.985 shares
per $1,000 principal amount of Notes), subject to adjustment in certain events.
The net proceeds to Midcom from the Private Placement were
approximately $94.2 million, after deducting the discount to the Initial
Purchasers and expenses. The Company used the net proceeds as follows: (i) $15.0
million to repay in full a bridge loan (the "Bridge Loan") made by Transamerica
Business Credit Corporation ("Transamerica"), (ii) $19.0 million to repay in
full the revolving loans (the "Revolving Loans") under the Company's secured
revolving credit facility with Transamerica and certain other lenders (the
"Revolving Credit Facility"), (iii) $5.0 million to pay the first installment of
an $8.8 million payment in connection with the satisfaction of past shortfalls
and settlement of other obligations under the Company's carrier supply contract
with AT&T and (iv) $10.0 million to bring current a number of payment
obligations existing prior to the completion of the
18
<PAGE> 19
Private Placement. In addition, the Company anticipates using approximately
$22.0 million of the net proceeds to acquire and install high capacity switches.
The balance of the net proceeds has been and will be used for additional
working capital, additional capital expenditures and general corporate purposes.
Interest on the Notes will be paid semi-annually, on February 15 and
August 15 of each year, commencing February 15, 1997, in the aggregate amount
of approximately $4.0 million per payment. Interest payments will adversely
affect the Company's liquidity. In addition, in the event of a "change of
control" of the Company, as defined in the indenture pursuant to which the Notes
were issued (the "Indenture"), holders of the Notes have the right to require
the Company to repurchase the Notes in whole or in part at a repurchase price
equal to 101% of the principal amount thereof, plus accrued interest, if any, to
the date of repurchase. If the Company is required to repurchase the Notes upon
a change of control, payment of the repurchase price may have a material adverse
effect on the Company's liquidity, results of operation and financial condition.
Also, if the Company is in default under the Indenture, holders of the Notes
have the right to demand immediate repayment of the Notes. If the Company were
required to repay the Notes upon default, such repayment may have a material
adverse effect on the Company's liquidity, results of operation and financial
condition.
In connection with the resignation of Ashok Rao, the Company's
former President and Chief Executive Officer, the Company has elected to
repurchase 885,360 shares of Common Stock held by Mr. Rao and certain trusts
established by Mr. Rao at a price equal to the fair market value of such Common
Stock on the date of Mr. Rao's resignation, as determined by arbitration, to be
paid ratably over a period of 36 months. The Company's election to repurchase
such shares of Common Stock will adversely affect the Company's liquidity. In
addition, the unpaid balance of a promissory note delivered to Cherry
Communications Incorporated ("Cherry Communications") in connection with the
acquisitions of two customer bases is approximately $10.2 million, of which $9.0
million may be paid in cash or by delivery of Common Stock, as the Company may
elect, and the remaining $1.2 million is subject to certain hold-back
arrangements. The acquired customer bases have not generated required minimum
revenue levels and Cherry Communications has failed to remit to the Company
collections received by Cherry Communications from a portion of the acquired
customers. Accordingly, the Company has withheld the final three installment
payments for the second of the two acquisitions, payment of invoices for carrier
services for the acquired bases (up to $11.4 million through September 30, 1996)
and accrued customer service charges through September 30, 1996 of $840,000.
Negotiations between Cherry Communications and the Company failed to produce a
settlement of these disputes and Cherry Communications has filed suit against
the Company seeking to recover alleged past due amounts. The Company was
obligated to pay additional cash pursuant to a customer base purchase agreement,
based upon revenue levels for such customer base. In October 1996, $1.2 million
was paid to satisfy this obligation. In addition, in the event of the sale or
transfer of the majority of the voting stock of Cel-Tech, a payment of a maximum
of $2.0 million would become payable to the former shareholder.
The Company's available sources of working capital consist of cash flows
from operations, approximately $48.1 million at September 30, 1996 in cash and
short-term, investment grade, interest-bearing securities, which funds represent
the remaining net proceeds from the Private Placement, and possible available
borrowings under the Revolving Credit Facility. Prior to completion of the
Private Placement, the Company had for several months experienced a severe
working capital short-fall which required the Company to seek extended payment
terms from certain of its suppliers, delay payments to many of its suppliers and
other vendors, delay or cancel purchases and take other steps to conserve
operating capital. As a result, a number of suppliers placed the Company on
credit hold and/or initiated collection actions. Also, for several months prior
to completion of the Private Placement, the Company was in default of certain
financial and other covenants under its Revolving Credit Facility, although the
lenders continued to permit borrowings under that facility. In addition, the
report of the Company's independent auditors with respect to the Company's
Consolidated Financial Statements for the year ended December 31, 1995 states
that the Company's recurring operating losses, working capital deficiency and
credit agreement defaults raise substantial doubt about the Company's ability to
continue as a going concern. The nature of this opinion itself constituted a
default under the Revolving Credit Facility. In
19
<PAGE> 20
connection with the completion of the Private Placement and the application of
the net proceeds therefrom to the repayment in full of the Bridge Loan and the
Revolving Loans, which aggregated approximately $34.0 million, the lenders under
the Revolving Credit Facility waived all existing defaults and amended the
financial covenants under the Revolving Credit Facility to levels forcasted to
be consistent with Midcom's revised business plan. The Company's maximum
borrowing availability under the Revolving Credit Facility, as amended, is
$43.0 million, subject to a borrowing base equal to 85% of the Company's
eligible accounts receivable less a minimum excess availability requirement of
$20.0 million for the months of August 1996 through February 1997, declining
in stages to $8.0 million for the months of September through November 1997.
As of September 30, 1996, after giving effect to the amendment, the Company's
borrowing base was less than the minimum excess availability.
The Company estimates that it will require between $40.0 million and
$50.0 million during 1996 and 1997 in order to fund (i) operating losses, (ii)
working capital requirements and (iii) capital expenditures, including an
estimated $22.0 million to acquire and install high capacity switches. The
Company expects that the remaining proceeds of the Private Placement, together
with funds available under the Revolving Credit Facility and cash flows from
operations, will be sufficient to fund these requirements during 1996 and 1997.
However, the exact amount and timing of these capital requirements will be
determined by numerous factors, including the level of, and gross margin on,
future sales, the outcome of outstanding contingencies and disputes such as
pending lawsuits and payment terms obtained from the Company's suppliers and the
timing of capital expenditures. The Revolving Credit Facility expires in
November 1997. There can be no assurance that the Company will be able to renew
the Revolving Credit Facility upon its expiration or that the Company will be
able to replace the Revolving Credit Facility on terms that the Company finds
acceptable. Further, there can be no assurance that the net proceeds of the
Private Placement together with funds available under the Revolving Credit
Facility and cash flows from operations will be sufficient to fully implement
the Company's operating strategy or meet its other capital requirements. If
(i) the Company experiences greater than anticipated capital requirements,
(ii) it is determined to be liable for, or otherwise agrees to settle or
compromise, any material claim against it, (iii) it is unable to make future
borrowings under the Revolving Credit Facility for any reason or (iv) the
Company is unable to produce anticipated cash flows from operations, the
Company may be required to refinance all or a portion of its existing debt,
sell assets or obtain additional equity or debt financing. There can be no
assurance that any such refinancing or asset sales would be possible or that
the Company will be able to obtain additional equity or debt financing, if and
when needed, on terms that the Company finds acceptable. Any additional
equity or debt financing may involve substantial dilution to the interests of
the Company's shareholders as well as the holders of the Notes. The failure of
the Company to complete one or more of such alternatives or otherwise obtain
sufficient funds to satisfy its cash requirements could prevent the Company from
implementing its operating strategy and, ultimately, could force the Company to
seek protection under the federal bankruptcy laws. Such events would materially
and adversely affect the value of the Company's debt and equity securities.
The report of the Company's independent auditors with respect to the
Company's consolidated financial statements for the year ended December 31,
1995 states that the Company's recurring operating losses, working capital
deficiency and past credit facility defaults raise substantial doubt about the
Company's ability to continue as a going concern. The Company's consolidated
financial statements have been prepared assuming that the Company will
continue as a going concern and do not include any adjustments that might
result from the outcome of this uncertainty.
20
<PAGE> 21
ADOPTION OF ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, "Accounting for Stock-Based Compensation." This pronouncement
establishes accounting and reporting standards for stock-based employee
compensation plans, including stock purchase plans, stock options and stock
appreciation rights. This standard defines a fair value based method of
accounting for these equity instruments. This method measures compensation cost
based on the value of the award and recognizes that cost over the service
period. Companies may elect to adopt this standard or to continue accounting for
these types of equity instruments under current guidance, APB Opinion No. 25,
"Accounting for Stock Issued to Employees." Companies which elect to continue
using the rules of APB Opinion No. 25 must make pro forma disclosures of net
income and earnings per share as if this new statement had been applied.
Effective January 1, 1996, the Company adopted Statement 123 and elected to
continue following the guidance of APB Opinion No. 25.
21
<PAGE> 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See the information contained in "Note 7 -- Disputes and Litigation"
in Item 1 of Part I above which information is, by this reference, incorporated
herein.
Item 3. Defaults Upon Senior Securities
Under the Revolving Credit Facility, the Company is subject to
certain operating and financial covenants. During 1996, the Company was in
default of several of these covenants, including the requirement that the
Company achieve EBITDA of at least $4.0 million for the quarter ended December
31, 1995. The report of the Company's independent auditors with respect to the
Company's consolidated financial statements states that the Company's recurring
operating losses, working capital deficiency and credit agreement defaults raise
substantial doubt about the Company's ability to continue as a going concern.
The nature of this opinion itself constituted a default under the Revolving
Credit Facility. In connection with the completion of the Private Placement and
the application of the net proceeds therefrom to the repayment in full of the
Bridge Loan and the Revolving Loans, the lenders under the Revolving Credit
Facility waived all existing defaults and amended the financial covenants under
the Revolving Credit Facility to levels forcasted to be consistent with the
Company's revised business plan.
The existence of defaults under the Revolving Credit Facility
constituted defaults under three of the Company's capital lease facilities.
Defaults under two of these leases were cured when the defaults under the
Revolving Credit Facility were cured. The Company is still in default under one
capital lease facility and is negotiating with the lessor to cure the remaining
defaults.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of MIDCOM Communications Inc.'s shareholders was held on
October 29, 1996. The following proposals were submitted to a vote:
a) To elect eight directors to hold office for initial terms ranging
between one to three years, or until their respective successors are
elected and qualified. The proposal passed with the following number of
votes:
<TABLE>
<CAPTION>
Affirmative Withheld
----------------------------
<S> <C> <C>
Class I for a One Year Term
Karl D. Guelich 12,916,181 177,264
Scott B. Perper 12,916,581 176,864
Class II for a Two Year Term
Daniel M. Dennis 12,916,181 177,264
Marvin Moses 12,916,381 177,264
John M. Orehek 12,916,781 176,664
Class III for a Three Year Term
William H. Oberlin 12,916,381 177,064
Paul Pfleger 12,916,381 177,064
John M. Zrno 12,916,381 177,064
</TABLE>
22
<PAGE> 23
b) To approve an amendment to the MIDCOM Communications, Inc. 1993 Stock
Option Plan ("the Plan") to increase the number of shares of Common
Stock authorized for issuance under the Plan by an additional 3,000,000
shares. This proposal passed with 9,524,598 affirmative votes, 1,569,710
negative votes, 135,504 withheld and 1,863,633 abstentions.
c) To approve an amendment to the Plan to permit and ratify the grant of
options to certain incumbent directors. This proposal passed with
11,557,147 affirmative votes, 1,144,350 negative votes, 138,584 withheld
and 253,364 abstentions.
d) To approve an amendment to the Plan to create a maximum number of
options that may be granted thereunder to any one employee in any three
consecutive fiscal years. This proposal passed with 12,621,500
affirmative votes, 80,780 negative votes, 137,804 withheld and 253,361
abstentions.
23
<PAGE> 24
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Second Amendment to Credit Agreement dated July 26, 1996 among
the Company, PacNet, AdVal, Cel-Tech, Advanced Network Design and
Transamerica Business Credit Corporation, as agent.
10.2 Third Amendment to Credit Agreement dated August 21, 1996 between
the Company, PacNet, AdVal, Cel-Tech and Advanced Network Design
and Transamerica Business Credit Corporation.
10.3 Distributor Agreement dated April 4, 1996 between the Company and
Tie Communications, Inc.
10.4 Employment Agreement dated May 24, 1996 between the Company and
William H. Oberlin. The company has requested that certain
portions of this exhibit be granted confidential treatment.
10.5 Consulting Agreement dated May 24, 1996 between the Company and
John M. Zrno.
10.6 Consulting Agreement dated May 24, 1996 between the Company and
Marvin C. Moses.
11.1 Statement re: computation of per share earnings.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
The following Current Reports on From 8-K were filed by the Company
during the quarter covered by this Quarterly Report on Form 10-Q.
1) Current report on Form 8-K filed with the Commission on August 2,
1996 reporting preliminary results for the quarter ended June 30,
1996 and other matters.
2) Current report on Form 8-K filed with the Commission on August 9,
1996 regarding the complaint filed by the former shareholders of
ADNET Telemanagement.
24
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MIDCOM Communications Inc.
(Registrant)
/s/ Robert J. Chamberlain
________________________________________
Date: November 11, 1996 Robert J. Chamberlain
Executive Vice President &
Chief Financial Officer
25
<PAGE> 26
MIDCOM COMMUNICATIONS INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO PAGINATION BY
ITEM 601 OF EXHIBIT SEQUENTIAL
REGULATION S-K) DESCRIPTION NUMBERING SYSTEM
--------------- ----------- ----------------
<S> <C> <C>
10.1 Second Amendment to Credit Agreement dated July 26, 1996 among
the Company, PacNet, AdVal, Cel-Tech, Advanced Network Design and
Transamerica Business Credit Corporation, as agent.
10.2 Third Amendment to Credit Agreement dated August 21, 1996 between
the Company, PacNet, AdVal, Cel-Tech and Advanced Network Design
and Transamerica Business Credit Corporation.
10.3 Distributor Agreement dated April 4, 1996 between the Company and
Tie Communications, Inc.
10.4 Employment Agreement dated May 24, 1996 between the Company and
William H. Oberlin. The company has requested that certain
portions of this exhibit be granted confidential treatment.
10.5 Consulting Agreement dated May 24, 1996 between the Company and
John M. Zrno.
10.6 Consulting Agreement dated May 24, 1996 between the Company and
Marvin C. Moses.
11.1 Statement re: computation of per share earnings.
27.1 Financial Data Schedule.
</TABLE>
26
<PAGE> 1
EXHIBIT 10.1
SECOND AMENDMENT TO CREDIT AGREEMENT
PREAMBLE: THIS AMENDMENT, dated as of July 26, 1996 (this "Amendment")
is made and entered into by and among MIDCOM COMMUNICATIONS INC., a Washington
corporation ("MIDCOM"), for itself as a Borrower and as agent for each other
Borrower now or hereafter party to this Agreement (MIDCOM, in such capacity,
herein called "Borrowers' Agent"); PACNET INC., a Washington corporation
("PacNet"), ADVAL, INC., an Oregon corporation ("AdVal"); ADVANCED NETWORK
DESIGN, a California corporation ("AND"); and CEL-TECH INTERNATIONAL CORP., a
Washington corporation ("Cel-Tech; Cel-Tech, AND, AdVal, PacNet and MIDCOM,
called a "Borrower" or, collectively, the "Borrowers"), each with its principal
place of business at MIDCOM Tower, 1111 Third Avenue, Seattle, Washington 98101;
TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware corporation (in its
individual capacity, called "Transamerica" or "TBCC"), with offices at Two
Ravinia Drive, Suite 700, Atlanta, Georgia 30346, for itself, as a Lender, and
as agent for each other Lender party to the Credit Agreement described below
(the term "Lender" and any other capitalized terms used in this Preamble or in
the Recitals, but not expressly defined herein or therein, defined in Section 1
of this Agreement); and each other Lender, which, as of the date hereof, is
limited to NATIONSBANK OF GEORGIA, N.A., a national banking association
("NationsBank").
RECITALS:
WHEREAS, the Borrower, the Lenders and the Agent are parties to a
certain Credit Agreement, dated as of November 8, 1995 (as amended, the "Credit
Agreement"), as amended to date by a certain First Amendment to Credit
Agreement, dated as of March 28, 1995 (the "First Amendment"); and
WHEREAS, the Borrowers have proposed to the Agent and the Lenders
certain modifications to the Credit Agreement, to which the Agent and the
Lenders have agreed, subject to the terms and conditions set forth below;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and conditions herein contained, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
1. DEFINITIONS. Any capitalized terms used hereinbelow, but not
expressly defined hereinbelow, shall have the meanings given to such terms in
the Credit Agreement.
2. FINANCIAL COVENANTS. Existing Sections 6.1, 6.2, 6.3, 6.4 and
6.5 of the Credit Agreement are hereby deleted (and, in connection therewith,
the words "permitted under subsection 6.2" in Section 7.1(D) are also deleted);
and any Event of Default heretofore existing as a result of Borrowers' failure
to comply with any term of said existing Sections 6.1, 6.2, 6.3, 6.4 or 6.5 is
hereby waived. In lieu of the foregoing, there shall be added to Article 6 of
the Credit Agreement new Sections 6.1 and 6.2, to read as follows:
<PAGE> 2
6.1 EBITDA
EBITDA for each Applicable Period set forth below shall not be less
than or, if negative (expressed by () around each number) shall not exceed, the
amount set forth below for such period.
<TABLE>
<CAPTION>
Applicable Period Amount (000)
----------------- ------------
<S> <C>
1 month ended 7/31/96 ($1,500)
2 months ended 8/31/96 ( 3,000)
3 months ended 9/30/96 ( 4,500)
4 months ended 10/31/96 ( 6,000)
5 months ended 11/30/96 ( 7,500)
6 months ended 12/31/96 ( 9,000)
1 month ended 1/31/97 ($1,500)
2 months ended 2/28/97 ( 3,000)
3 months ended 3/31/97 ( 4,500)
4 months ended 4/30/97 ( 6,000)
5 months ended 5/31/97 ( 7,000)
6 months ended 6/30/97 ( 8,000)
7 month ended 7/31/97 ( 9,000)
8 months ended 8/31/97 (10,000)
9 months ended 9/30/97 (10,000)
10 months ended 10/31/97 (10,000)
11 months ended 11/30/97 ( 9,500)
12 months ended 12/31/97 ( 9,000)
</TABLE>
6.2 Minimum Excess Availability.
The amount by which (i) the Borrowing Base, minus the sum of the
Conversion Reserve and the Other Lender Reserves, exceeds (ii) the total amount
of all Loans then outstanding, determined on a daily basis for each Business
Day within each Applicable Period described below, shall be at least the sum
prescribed opposite each such Applicable Period:
<TABLE>
<CAPTION>
Minimum Excess
Applicable Period Availability (000)
----------------- ------------------
<S> <C>
Month Ended August 31, 1996 $20,000
Month Ended September 30, 1996 20,000
Month Ended October 31, 1996 20,000
Month Ended November 30, 1996 20,000
</TABLE>
-2-
<PAGE> 3
<TABLE>
<S> <C>
Month Ended December 31, 1996 20,000
Month Ended January 31, 1997 20,000
Month Ended February 28, 1997 20,000
Month Ended March 31, 1997 17,000
Month Ended April 30, 1997 14,000
Month Ended May 31, 1997 13,000
Month Ended June 30, 1997 10,000
Month Ended July 31, 1997 10,000
Month Ended August 31, 1997 9,000
Month Ended September 30, 1997 8,000
Month Ended October 31, 1997 8,000
Month Ended November 30, 1997 8,000
Month Ended December 31, 1997 8,000
</TABLE>
The foregoing newly revised Sections 6.1 and 6.2 shall not become effective
unless and until (i) the "Condition" specified in Section 3 below is fulfilled
and (ii) then or at any time thereafter, a Loan is requested; but, once
effective, said Sections 6.1 and 6.2 shall remain effective at all times
thereafter regardless whether the initial Loan is repaid or any further Loans
are requested. The initial Notice of Borrowing made on or subsequent to the
Condition being fulfilled must contain MIDCOM's certification of Borrowers'
compliance with the terms of each Section as of the then most recently completed
"Applicable Period," in the case of Section 6.1, and for all days of the
calendar month in which such Notice of Borrowing is given, in the case of
Section 6.2.
3. CONDITION SUBSEQUENT. The waivers of Events of Default and the resetting
of financial covenants contained in Section 2 above have been granted by Lenders
on the condition that during the period between the date hereof and September
15, 1996, MIDCOM shall have received proceeds from the issuance of any Capital
Stock or the private placement of any Debt (subject, however, to the terms of
clause (iv) of Section 3 of the First Amendment in respect of Debt, except that
the limitation on Debt prescribed therein shall be deemed increased to
$100,000,000 from $25,000,000), or some combination thereof, totalling at least
$75,000,000, and applied the proceeds thereof (net of underwriting discounts and
commissions and other reasonable costs associated therewith), first, to the
Bridge Loan, until it is fully paid and satisfied, and, next, to the remaining
Obligations, until they are fully paid and satisfied, with any remainder of such
proceeds to be used for Borrowers' working capital (all of the foregoing actions
being called herein, collectively, the "Condition"). If, on September 15, 1996,
the Condition has not been fulfilled, the failure of MIDCOM to fulfill the
Condition shall constitute an Event of Default.
4. ASHOK RAO. The name "Ashok Rao," appearing in the definition of "Key Man
Insurance" and Sections 8.1(R), 8.1(S) and 10.5 of the Credit Agreement, is
hereby changed to "William Oberlin," in each instance; provided, however, that
MIDCOM shall have until August 26, 1996, within which to obtain Key Man
Insurance on William Oberlin in the required amount, if William Oberlin is
insurable in that amount.
-3-
<PAGE> 4
5. Waiver of Event of Default. Lenders waive any Event of Default
arising under Section 8.1(C) of the Credit Agreement due to the failure of
MIDCOM to a report with respect to its financial statements for its most
recently concluded Fiscal Year from a Big Six Accounting Firm without
Qualification, as required under Section 5.1(B) of the Credit Agreement.
6. MISCELLANEOUS
(a) Effect of Amendment. Except as set forth expressly herein,
all terms of the Credit Agreement and other Loan Documents, as amended hereby,
shall be and remain in full force and effect and shall constitute the legal,
valid, binding and enforceable obligations of Borrowers to Lenders and Agent.
To the extent any terms and conditions in any of the Loan Documents shall
contradict or be in conflict with any terms or conditions of the Credit
Agreement, after giving effect to this Amendment, such terms and conditions are
hereby deemed modified and amended accordingly to reflect the terms and
conditions of the Credit Agreement as modified and amended hereby.
(b) Ratification. Each Borrower hereby restates, ratifies and
reaffirms each and every term and conditions set forth in the Credit Agreement,
as amended hereby, and the Loan Documents effective as of the date hereof.
(c) Estoppel. To induce Lenders and Agent to enter into this
Amendment, each Borrower hereby acknowledges and agrees that, as of the date
hereof, and after giving effect to this Amendment, no Default or Event of
Default has occurred and is continuing and, in addition, there exists no right
of offset, defense, counterclaim or objection in favor of any Borrower with
respect to any Obligations.
(d) Governing Law. This Amendment shall be governed by, and
construed in accordance with, the internal laws (and not the laws of conflicts)
of the State of Illinois and all applicable federal laws of the United States
of America.
(e) Costs and Expenses. Borrowers agree to pay on demand all
costs and expenses of Lender in connection with the preparation, execution,
delivery and enforcement of this Amendment and all other Loan Documents
executed in connection herewith, the closing hereof, and any other transactions
contemplated hereby, including the fees and out-of-pocket expenses of Lender's
counsel.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed under seal by their respective officer or officers
thereunto duly authorized, as of the date first above written.
MIDCOM COMMUNICATIONS INC.,
Individually and as Borrowers' Agent
(SEAL)
By: /s/ Robert J. Chamberlain
----------------------------------
Name: Robert J. Chamberlain
-----------------------------
Title: Senior VP - CFO
----------------------------
Attest: Paul P. Senio
-----------------------------
Name: Paul P. Senio
-----------------------------
Title: Secretary
----------------------------
PACNET INC.
(SEAL)
By: /s/ William H. Oberlin
----------------------------------
Name: William H. Oberlin
-----------------------------
Title: President
----------------------------
Attest: Paul P. Senio
-----------------------------
Name: Paul P. Senio
-----------------------------
Title: Secretary
----------------------------
-5-
<PAGE> 6
ADVAL, INC.
(SEAL)
By: /s/ William H. Oberlin
----------------------------------
Name: William H. Oberlin
-----------------------------
Title: Sole Director
----------------------------
Attest: Paul P. Senio
-----------------------------
Name: Paul P. Senio
-----------------------------
Title: Secretary
----------------------------
ADVANCED NETWORK DESIGN
(SEAL)
By: /s/ William H. Oberlin
----------------------------------
Name: William H. Oberlin
-----------------------------
Title: President
----------------------------
Attest: Paul P. Senio
-----------------------------
Name: Paul P. Senio
-----------------------------
Title: Secretary
----------------------------
-6-
<PAGE> 7
CEL-TECH INTERNATIONAL CORP.
(SEAL)
By: /s/ William H. Oberlin
----------------------------------
Name: William H. Oberlin
-----------------------------
Title: Sole Director
----------------------------
Attest: Paul P. Senio
-----------------------------
Name: Paul P. Senio
-----------------------------
Title: Secretary
----------------------------
TRANSAMERICA BUSINESS CREDIT
CORPORATION, Individually and as Agent
(SEAL)
By:
----------------------------------
Susan M. Hall
Senior Account Executive
NATIONSBANK OF GEORGIA, N.A.
(SEAL)
By:
----------------------------------
Name:
-----------------------------
Title:
----------------------------
-7-
<PAGE> 8
CEL-TECH INTERNATIONAL CORP.
(SEAL)
By:
----------------------------------
Name:
-----------------------------
Title:
----------------------------
Attest:
-----------------------------
Name:
-----------------------------
Title:
----------------------------
TRANSAMERICA BUSINESS CREDIT
CORPORATION, Individually and as Agent
(SEAL)
By:
----------------------------------
Susan M. Hall
Senior Account Executive
NATIONSBANK OF GEORGIA, N.A.
n/k/a NationsBank, N.A. (SOUTH)
(SEAL)
By: /s/ Tina H. Lane
----------------------------------
Name: Tina H. Lane
-----------------------------
Title: Vice President
----------------------------
-7-
<PAGE> 9
CEL-TECH INTERNATIONAL CORP.
(SEAL)
By:
----------------------------------
Name:
-----------------------------
Title:
----------------------------
Attest:
-----------------------------
Name:
-----------------------------
Title:
----------------------------
TRANSAMERICA BUSINESS CREDIT
CORPORATION, Individually and as Agent
(SEAL)
By: /s/ Terrell W. Harris
----------------------------------
Terrell W. Harris
Region Credit Manager
NATIONSBANK OF GEORGIA, N.A.
(SEAL)
By:
----------------------------------
Name:
-----------------------------
Title:
----------------------------
-7-
<PAGE> 1
EXHIBIT 10.2
THIRD AMENDMENT TO CREDIT AGREEMENT
Preamble: THIS AMENDMENT, dated as of August 21, 1996 (this
"amendment") is made and entered into by and among MIDCOM COMMUNICATIONS INC.,
a Washington corporation ("MIDCOM"), for itself as a Borrower and as agent for
each other Borrower now or hereafter party to this Agreement (MIDCOM, in such
capacity, herein called "Borrowers' Agent"); PACNET INC., a Washington
corporation ("PacNet"), ADVAL, INC., an Oregon corporation ("AdVal"); ADVANCED
NETWORK DESIGN, a California corporation ("AND"); and CEL-TECH INTERNATIONAL
CORP., a Washington corporation ("Cel-Tech; Cel-Tech, AND, AdVal, PacNet and
MIDCOM, called a "Borrower" or, collectively, the "Borrowers"), each with its
principal place of business at MIDCOM Tower, 1111 Third Avenue, Seattle,
Washington 98101; TRANSAMERICA BUSINESS CREDIT CORPORATION, a Delaware
corporation (in its individual capacity, called "Transamerica" or "TBCC"), with
offices at Two Ravinia Drive, Suite 700, Atlanta, Georgia 30346, for itself, as
a Lender, and as agent for each other Lender party to the Credit Agreement
described below (the term "Lender" and any other capitalized terms used in this
Preamble or in the Recitals, but not expressly defined herein or therein,
defined in Section 1 of this Agreement); and each other such Lender, which, as
of the date hereof, is limited to NATIONSBANK OF GEORGIA, N.A., a national
banking association ("NationsBank").
RECITALS:
WHEREAS, the Borrowers, the Lenders and the Agent are parties to a
certain Credit Agreement, dated as of November 8, 1995 (as amended, the "Credit
Agreement"), as amended to date by a certain First Amendment to Credit
Agreement, dated as of March 28, 1995 (the "First Amendment") and a certain
Second Amendment to Credit Agreement, dated as of July 26, 1996 (the "Second
Amendment"); and
WHEREAS, the Borrowers, the Agent and the Lenders desire to amend the
Credit Agreement in certain respects as hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual
covenants and conditions herein contained, and for other good valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
1. DEFINITIONS
(a) Any capitalized terms used hereinbelow, but not
expressly defined hereinbelow, shall have the meanings given to such terms in
the Credit Agreement.
(b) Section 1.1 of the Credit Agreement is hereby amended
by adding therein, in appropriate alphabetical order, the following definition
of "Subordinated Indenture":
<PAGE> 2
"Subordinated Indenture" shall mean that certain
Indenture, to be dated as of August 22, 1996, between
Borrower and IBJ Schroder Bank & Trust Company, as
trustee, as amended or modified from time to time.
2. AMENDMENT TO SECTION 7.5 OF THE CREDIT AGREEMENT. Section 7.5
of the Credit Agreement is hereby amended by adding immediately before the
period at the end of such section a comma followed by the phrase "but, in any
event. MidCom will make no 'Change of Control Offer' (as defined in the
Subordinated Indenture) under the Subordinated Indenture."
3. ADDITION OF NEW SECTION 10.31 TO THE CREDIT AGREEMENT. The
following Section 10.31 is hereby added in Article 10 of the Credit Agreement:
10.31 Designated Senior Indebtedness. Borrowers, the
Agent and Lenders hereby acknowledge and agree that all
of the Obligations shall constitute "Designated Senior
Indebtedness" (as that term is defined in the
Subordinated Indenture) for all purposes of the
Subordinated Indenture for so long as either (i) the
aggregate principal amount of the Obligations exceeds
Ten Million Dollars or (ii) the aggregate amount of the
Commitments exceeds Ten Million Dollars ($10,000,000).
Borrowers further acknowledge and agree that all of
MidCom's obligations under the Subordinated Indenture
and under the "Notes" (as defined therein) issued
pursuant thereto, whether for payment of principal,
fees, interest or other amounts, shall constitute
"Subordinated Debt" for all purposes of the Credit
Agreement and the other Loan Documents.
4. Consent. In accordance with Section 3 of the First Amendment
and Section 3 of the Second Amendment, Lenders hereby consent to MidCom's
issuance of the Notes pursuant to the Subordinated Indenture; provided that the
proceeds thereof total at least $75,000,000 and such proceeds (net of
underwriting discounts and commissions and other reasonable costs associated
therewith) are applied, first, to the Bridge Loan, until it is fully paid and
satisfied, and, next, to the remaining Obligations, until they are fully paid
and satisfied, with any remainder of such proceeds to be used for Borrowers'
working capital.
5. MISCELLANEOUS
(a) Effect of Amendment. Except as set forth expressly
herein, all terms of the Credit Agreement and the other Loan Documents, as
amended hereby, shall be and remain in full force and effect and shall
constitute the legal, valid, binding and enforceable obligations of Borrowers
to Lenders and Agent. To the extent any terms and conditions in any of the Loan
Documents shall contradict or be in conflict with any terms or conditions of
the Credit Agreement, after giving effect to this Amendment, such terms and
conditions are hereby deemed modified and amended accordingly to reflect the
terms and conditions of the Credit Agreement as modified and amended hereby.
-2-
<PAGE> 3
(b) Ratification. Each Borrower hereby restates, ratifies and
reaffirms each and every term and condition set forth in the Credit Agreement,
as amended hereby, and the Loan Documents effective as of the date hereof.
(c) Estoppel. To induce Lenders and Agent to enter into this
Amendment, each Borrower hereby acknowledges and agrees that, as of the date
hereof, and after giving effect to the Second Amendment and this Amendment, no
Default or Event of Default has occurred and is continuing and, in addition,
there exists no right of offset, defense, counterclaim or objection in favor of
any Borrower with respect to any Obligations.
(d) Governing Law. This Amendment shall be governed by, and
construed in accordance with, the internal laws (and not the laws of conflicts)
of the State of Illinois and all applicable federal laws of the United States
of America.
(e) Costs and Expenses. Borrowers agree to pay on demand all
reasonable costs and expenses of Lender in connection with the preparation,
execution, delivery and enforcement of this Amendment and all other Loan
Documents executed in connection herewith, the closing hereof, and any other
transactions contemplated hereby, including the reasonable fees and
out-of-pocket expenses of Lender's counsel.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed under seal by their respective officer or officers thereunto duly
authorized, as of the date first above written.
MIDCOM COMMUNICATIONS INC.,
individually and as Borrowers' Agent
(SEAL)
By: /s/ Robert J. Chamberlain
----------------------------------
Name: Robert J. Chamberlain
Title: CFO - Senior Vice President
Attest: /s/ Paul P. Senio
------------------------------
Name: Paul P. Senio
Title: Secretary
-3-
<PAGE> 4
PACNET INC.
(SEAL)
By: /s/ Paul P. Senio
----------------------------------
Name: Paul P. Senio
Title: Secretary
Attest: /s/ Bradley D. Toney
------------------------------
Name: Bradley D. Toney
Title: Assistant Secretary
ADVAL, INC.
(SEAL)
By: /s/ Robert J. Chamberlain
----------------------------------
Name: Robert J. Chamberlain
Title: Treasurer
Attest: /s/ Paul P. Senio
------------------------------
Name: Paul P. Senio
Title: Secretary
-4-
<PAGE> 5
ADVANCED NETWORK DESIGN
(SEAL)
By: /s/ Paul P. Senio
----------------------------------
Name: Paul P. Senio
Title: Secretary
Attest: /s/ Bradley D. Toney
------------------------------
Name: Bradley D. Toney
Title: Assistant Secretary
CEL-TECH INTERNATIONAL CORP.
(SEAL)
By: /s/ Robert J. Chamberlain
----------------------------------
Name: Robert J. Chamberlain
Title: Treasurer
Attest: /s/ Paul P. Senio
------------------------------
Name: Paul P. Senio
Title: Secretary
-5-
<PAGE> 6
TRANSAMERICA BUSINESS CREDIT
CORPORATION, Individually and as Agent
(SEAL)
By: /s/ Jeffrey Carbery
----------------------------------
Jeffrey Carbery
Senior Account Executive
-6-
<PAGE> 7
NATIONSBANK OF GEORGIA, N.A.
(SEAL)
By: /s/ Tina H. Lane
--------------------------------
Name: Tina H. Lane
-------------------------
Title: Vice President
-------------------------
-7-
<PAGE> 1
EXHIBIT 10.3
MIDCOM COMMUNICATIONS INC., DBA ADNET TELEMANAGEMENT/DEALER
AGREEMENT
AGREEMENT made and entered into this 4th day of April, 1996, by and
between MIDCOM COMMUNICATIONS INC., DBA ADNET Telemanagement ("MIDCOM"), a
corporation organized and existing under the laws of the State of Washington,
having its principal place of business at 1600 MIDCOM Tower, 1111 Third Avenue,
Seattle, Washington 98101, and TIE COMMUNICATIONS, INC., a corporation
organized and existing under the laws of the State of Kansas, having its
principal place of business at 8500 West 110th Street, Overland Park, Kansas
66210 ("DEALER").
WHEREAS, MIDCOM, an interexchange carrier (IXC), is the holder of certain
reseller agreements with other IXCs offering telephone services, and MIDCOM is
desirous of granting to Dealer, and Dealer is desirous of accepting, the right
to solicit customer orders for telephone services through MIDCOM.
THEREFORE, in consideration of the foregoing and the mutual covenants
herein contained, the parties hereby agree as follows:
1. INDEPENDENT DEALER
MIDCOM hereby grants to Dealer the non-exclusive right to solicit orders
for the following MIDCOM Advantage services ("Listed Services"): switched
outbound, dedicated outbound, switched inbound, dedicated inbound, calling
card, private line and conference calling. Dealer's right to solicit order
extends to all jurisdictions where MIDCOM offers the Listed Services.
Dealer shall not offer services to a potential Customer which are not
specifically offered by MIDCOM pursuant to its applicable tariffs. Dealer
may market and sell telecommunications products or services of other
resellers and carriers. The customers that Dealer brings to MIDCOM through
its efforts will hereinafter be referred to as "Customers".
2. TERM
This Agreement shall be effective as of the date set forth in the preamble
and shall continue for a term of three (3) years unless terminated as
provided for in Section 9. If the parties wish to continue their
relationship beyond this three-year period, a new contract will be
negotiated and signed, otherwise this Agreement will convert to a
month-to-month relationship.
3. DUTIES OF DEALER
Dealer shall exert its best efforts to solicit and enroll new customers in
the Listed Services and to maintain its status as a qualified dealer.
Dealer shall be deemed to have maintained status as a "qualified dealer"
with respect to any month if, during the preceding three (3) month period,
Dealer has enrolled an average of three (3) Customers per month and Dealer
has made its best commercial efforts to retain Customers previously
enrolled in good standing. A Customer in good standing shall mean a
Customer who has paid MIDCOM all monthly service fees and/or usage invoices
on a timely basis. Dealer is not authorized to represent itself as an
agent, division or subsidiary of MIDCOM.
4. DEALER COMPENSATION
4.1 DETERMINATION OF COMMISSION. Subject to the terms and conditions of
this Agreement, Dealer shall be entitled to sales commissions on Customer
accounts.
(A) AMOUNTS SUBJECT TO COMMISSION. Commissions are payable on all
billed usage (not including taxes, customer adjustments, and other
non-usage charges) for international, interstate and intrastate calls
completed by Customers on the Listed Services. The commission rate
structure is specified in Exhibit 1. All other services are not
subject to a commission.
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(b) MONTHLY BILLING COMMITMENT. Dealer's commissions for interstate
traffic are based on the monthly billing commitment made by Dealer.
All other commissions are as specified in Exhibit 1 regardless of the
monthly billing commitment. The monthly billing commitment pertains to
the minimum amount of billings required by the Customers attributable
to Dealer per month. Dealer hereby agrees to one of the monthly
billing commitment levels specified below (please initial one of the
lines below):
X
---------- Standard: No monthly commitment
---------- Bronze: $25,000 monthly commitment
---------- Silver: $50,000 monthly commitment
---------- Gold: $100,000 monthly commitment
4.2 DEALER'S AGENTS. MIDCOM shall not be responsible for making
payments to any employee, agent or representative of Dealer, and Dealer
shall indemnify MIDCOM against and hold MIDCOM harmless from any and all
liability therefor.
4.3 TRAIL COMMISSIONS. Except for termination by MIDCOM for Dealer's
material breach of this Agreement under Section S. Dealer shall be entitled
to commissions after termination of this Agreement ("Trail Commissions") on
all Customers in good standing for the term specified in Section 9.4 or as
long as the Dealer is not in material breach of any continuing warranty,
promise or agreement.
4.4 CUSTOMER BAD DEBT. A Customer account sixty (60) days past due
shall be deemed to be Bad Debt and MIDCOM shall have the right to offset
such amounts from Dealer's commissions or other moneys payable to Dealer,
subject to the limitation that Dealer's maximum Bad Debt liability on any
particular account shall not exceed the total amount of commissions paid by
MIDCOM to Dealer for that account in the prior twelve (12) months. MIDCOM
will provide to Dealer the payment status of accounts on a regular basis.
Dealer shall assist MIDCOM in its efforts to collect overdue accounts and
Bad Debts of Customers.
4.5 UNAUTHORIZED PIC CHANGES. Dealer shall be responsible for, and
MIDCOM shall have the right to offset against any compensation payable to
Dealer hereunder, (i) any fines, charges and/or Customer adjustments
imposed by a Local Exchange Carrier (LEC) or by a federal or state agency
for unauthorized Primary Interexchange Carrier (PIC) changes, and (ii) an
amount equal to charges for Listed Services disputed by Customers on the
grounds that Dealer, or its employees, agents, or representatives,
misrepresented the MIDCOM services or MIDCOM's prices therefor, that the
LOA was forged or otherwise unethically obtained, that Dealer acted beyond
the scope of the rights granted pursuant to the Customer's LOA, or that the
Customer notified Dealer that it cancelled MIDCOM Services and Dealer
failed to notify MIDCOM.
4.6 TRANSFER OF CUSTOMER AND PROMOTIONS. In the event that a Customer
contacts MIDCOM to request cancellation and removal from the MIDCOM
network, MIDCOM reserves the right, in its sole discretion, to transfer the
Customer to another MIDCOM service. In such case, Dealer's commissions will
be adjusted to the commission schedule applicable to such service. MIDCOM
may, at its discretion, offer promotions to prevent attrition and Dealer
commission will be paid on the net amounts collected during such
promotional period.
5. ACCEPTANCE OF ORDERS AND PROVIDING SERVICE
5.1 SWITCHING CUSTOMER'S SERVICE. Customer Orders placed by Dealer with
MIDCOM shall be accompanied by a valid Letter of Agency (LOA) in a form
approved by MIDCOM. Dealer agrees to comply with MIDCOM's Standards Policy
for Switching Long Distance Service, attached hereto as Exhibit 3.
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5.2 ACCEPTANCE OR REJECTION OF ORDERS. All contracts, enrollments, and
potential customers recommended to MIDCOM by Dealer for enrollment must be
approved and authorized by a representative of MIDCOM. MIDCOM may, in the
reasonable exercise of its discretion, reject orders placed by Dealer on
the grounds that the Customer is not creditworthy or for any other
appropriate grounds. If an order is rejected by the LEC or the underlying
carrier because it is incomplete, it shall be Dealer's responsibility, and
not the responsibility of MIDCOM, to obtain all necessary information from
the Customer to complete the order. MIDCOM will provide Dealer with a
status on orders forwarded to the LEC or underlying carrier.
5.3 EXISTING MIDCOM CUSTOMERS. MIDCOM will not accept orders from Dealer
for Customers already using MIDCOM's services. MIDCOM and Dealer will
mutually cooperate to avoid account disputes with other MIDCOM dealers
and MIDCOM sales personnel.
5.4 PROVISIONING ORDERS. MIDCOM reserves the right to determine the
underlying carrier for the Customers attributable to Dealer. If MIDCOM
chooses to switch Dealer's existing Customers to another carrier, TIE and
MIDCOM must mutually agree on the change of underlying carrier.
5.5 CUSTOMER RATES. The available interstate rates depend upon Dealer's
monthly billing commitment as specified in Exhibit 1. All other rates are
specified in Exhibit 2. All rates, terms and conditions of service are set
forth in, and are subject to, the applicable MIDCOM tariffs. Both MIDCOM
and Dealer understand and agree that all rates are subject to prospective
change.
5.6 CONTROL AND OWNERSHIP OF CUSTOMER ACCOUNTS. Except as provided herein,
Dealer understands that MIDCOM has ultimate control and ownership over all
Customer accounts, as required under current regulatory practices. Service
is provided to Customers under the applicable MIDCOM tariffs. Dealer
understands that, pursuant to these tariffs, MIDCOM may disconnect a
Customer for non-payment or for the other reasons stated in its tariffs.
Upon Dealer's request and at such time as Dealer is certified and qualified
as an interexchange carrier or reseller by the FCC and the appropriate
Public Utility Commissions, MIDCOM agrees to convert and amend this Dealer
Agreement into a contract for resale (Reseller Agreement) whereby Dealer
shall be entitled to issue LOAs in its own name, stead, and behalf, and
that MIDCOM and Dealer will use their best efforts to transfer the existing
Customers previously enrolled hereunder to Dealer pursuant to such new
Reseller Agreement so that such Customer shall be classified as the
Customers of the Dealer, under its requisite authority to act as a carrier
of record.
6. SELLING AIDS, PROMOTION AND TRADE NAMES
6.1 SELLING AIDS, PROMOTION. MIDCOM may, at is election, assist Dealer in
its efforts to solicit orders, provide training, and/or assist in the
development of Dealer's promotional materials. All Dealer promotional
materials must adhere to MIDCOM standards and must receive prior approval
from MIDCOM.
6.2 TRADE NAMES. Dealer is authorized to refer to the full corporate name
of MIDCOM Communications Inc. and use the MIDCOM's service marks, including
its stylized logos, in combination with, but not separate from, the words
"Authorized Independent Dealer" on Dealer's business cards, business
stationary and promotional material. These written materials must display
both the complete name and identity of Dealer. In all cases, the use of
MIDCOM's name and marks shall require specific approval from MIDCOM prior
to use. MIDCOM reserves the right to terminate this right at any time upon
ten (10) days written notice to Dealer. Dealer agrees to furnish MIDCOM, on
a quarterly basis, with a current list of all sales persons in its employ
who are selling MIDCOM services.
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7. RELATIONSHIP
The parties acknowledge that Dealer is an independent contractor and is not
a legal representative or agent of MIDCOM for any purpose except as set
forth in this Agreement. MIDCOM and Dealer agree that their relationship
arising from this Agreement does not constitute or create a general agency,
joint venture, partnership, employment relationship or franchise between
them. Dealer is not authorized to, and agrees that it will not make any
warranties or representations, or assume or create any other obligations,
on MIDCOM's behalf, except with the prior written consent of MIDCOM. In
accordance herewith, Dealer shall maintain its own business offices, and
MIDCOM shall, in no respect, exercise any direct supervision of Dealer's
activities. Neither Dealer nor any employee or agent of Dealer who is
compensated for services paid by Dealer may directly or indirectly,
expressly or by implication, be construed as an employee of MIDCOM for any
purpose, including, but not limited to, insurance benefits or tax
withholdings, levied or fixed by any city, state or federal governmental
agency.
8. INDEMNIFICATION AND WARRANTY
8.1 DEALER INDEMNIFICATION. Dealer shall indemnify and hold MIDCOM
harmless from any and all claims, damages, or judgments and reasonable,
ordinary and necessary attorney fees or other costs of litigation,
including arbitration, for loss or injuries to person or property arising
from the actions or omissions of Dealer or any of its representatives or
subcontractors in connection with Dealer's obligations stated herein.
Except where solely caused by MIDCOM's willful acts. Dealer shall defend on
behalf of MIDCOM any suit brought against MIDCOM for any such judgment,
damage, expense, loss or injury, and Dealer shall reimburse MIDCOM, for all
attorney fees and expenses incurred in connection therewith promptly upon a
presentation of a statement therefor. If Dealer fails to pay such fees and
expenses as set forth in this Section, then MIDCOM shall have the right to
offset and recover said fees and expenses from Dealer's commissions or from
any other sums due to Dealer by MIDCOM.
8.2 MIDCOM INDEMNIFICATION. MIDCOM shall indemnify and hold Dealer
harmless from any and all claims, damages, or judgments and reasonable,
ordinary and necessary attorney fees or other costs of litigation,
including arbitration, for loss or injuries to person or property caused in
material part by MIDCOM in connection with MIDCOM's obligation stated
herein, as well as MIDCOM's material omissions or misrepresentations of
services provided herein.
8.3 DEALER WARRANTIES. Dealer warrants that it has the authority to
select MIDCOM to provide the services described herein and that this
selection does not and will not violate any other arrangement to which
Dealer is bound. This warranty will survive the execution of this
Agreement.
8.4 MIDCOM WARRANTY. MIDCOM WARRANTS THAT IT WILL USE ALL REASONABLE
EFFORTS TO MAINTAIN ITS OVERALL NETWORK QUALITY. THE QUALITY OF SERVICE
PROVIDED HEREUNDER SHALL BE CONSISTENT WITH TELECOMMUNICATIONS COMMON
CARRIER INDUSTRY STANDARDS, GOVERNMENT REGULATIONS, AND SOUND BUSINESS
PRACTICES. MIDCOM MAKES NO OTHER WARRANTY, WHETHER EXPRESS, IMPLIED OR
STATUTORY, AS TO THE DESCRIPTION, QUALITY, MERCHANTABILITY, COMPLETENESS OR
FITNESS FOR ANY PURPOSE OF THE SERVICE OR THE LOCAL ACCESS OR AS TO ANY
OTHER MATTER, ALL OF WHICH WARRANTIES BY MIDCOM ARE HEREBY EXCLUDED AND
DISCLAIMED.
8.5 LIMITATION OF DAMAGES. Any other provision notwithstanding,
neither party hereto shall be liable to the other for nay indirect,
consequential, special, incidental, punitive or any other similar damages
of any kind or nature, including lost profits, arising in any manner from
this Agreement and the performance or non-performance of obligations
hereunder.
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8.6 SPECIFIC PERFORMANCE. In the event of a breach of this Agreement,
Dealer and MIDCOM acknowledge and agree that each of them shall, in
addition to any other remedies available at law, have the right to seek
specific performance by the other party of its respective obligations
hereunder in a court of equity, notwithstanding Section 10.14.
8.7 CONFIDENTIAL INFORMATION. Dealer and MIDCOM hereby acknowledge and
agree that on and after the date of this Agreement and continuing for a
period of one (1) year following its termination, and provided that the
party seeking to enforce the provisions of this subsection is not then in
default of its obligations hereunder, each party shall hold in the
strictest confidence, and shall not use or disclose to any person, firm or
corporation (other than on a need-to-know basis), without the written
authorization of the other party, any Confidential Information in its
possession pertaining to the other party, including, without limitation,
Customer account data, except as may be ordered by a court of competent
jurisdiction of a claim involving the subject matter of such Confidential
Information. As used in this Agreement, "Confidential Information" means
the terms and conditions in this Agreement, including the consideration
payable hereunder, and all information, documents and materials not
generally available to the public which have been provided by one party to
the other in connection with the transactions contemplated hereby or which
otherwise relate to the Customers and Customer accounts. The parties
further acknowledge that they are entering into this Agreement in good
faith, that their relationship has been and is expected to continue to be
one of mutual respect and goodwill, and that they shall continue to
describe each other in a manner consistent with the tenor of their
relationship and shall at no time make any statement or remark to any
person, firm or entity inconsistent therewith. Dealer and MIDCOM each
acknowledge and agree that any breach of this Section would cause the other
party irreparable harm. Accordingly, the non-breaching party may seek and
obtain injunctive relief against the breach or threatened breach of this
subsection, in addition to any other remedies to which such party may be
entitled at law or in equity.
9. DEFAULT AND TERMINATION
9.1 TERMINATION FOR CAUSE. Except as provided below, either party to
this Agreement may, upon thirty (30) days prior written notice to the other
party, terminate this Agreement if such other party materially breaches or
fails to perform any obligation arising hereunder. During the thirty (30)
day period following notice of such termination, the party in breach shall
have the right to cure any such breach or default. The party in breach
shall have a longer time to cure the cause of any such notice if, by its
nature, the cause is such that it is not curable within the thirty (30) day
period, provided that the party in breach immediately initiates all
available substantial and continuing action to cure such cause(s).
9.2 TERMINATION UPON BANKRUPTCY. Notwithstanding any provision set
forth in Subsections 9.1 and 9.2 hereof, this Agreement shall be deemed to
have been breached and terminated immediately upon adjudication of either
party as bankrupt or insolvent; the assignment of a substantial part of the
assets of either party to or for the benefit of any creditor; the filing of
a petition of bankruptcy by or against either party which is not dismissed
within sixty (60) days from the filing thereof; the filing of a bill in
equity or other proceeding for the appointment of a receiver or other
custodian of the assets of either party which is not contested in the court
having jurisdiction thereof; or the dissolution or liquidation of either
party.
9.3 REMOVAL OF CUSTOMER UPON TERMINATION. Except for a termination by
Dealer for material breach by MIDCOM, and/or Dealer achieves reseller
status, Dealer shall not directly or indirectly remove any Customer
solicited by Dealer from MIDCOM's services, without MIDCOM's prior written
approval, during the term of this Agreement and for a period of six (6)
months thereafter. Any person or entity having any direct or beneficial
interest attributable to or from Dealer shall be bound by the provisions of
this covenant, including, without limitation, employees, agents,
representatives, directors, shareholders, partners, relatives of any of
these persons, or any other such related person or entity of Dealer
("Related Party"). In the event Dealer or a Related Party breaches this
Agreement by transferring Customers from MIDCOM's network to
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9.3 REMOVAL OF CUSTOMER UPON TERMINATION, CONT. another service, then
MIDCOM shall have no further obligation to pay Trail Commissions. Dealer
hereby consents to the entry of an injunction prohibiting the removal of
other Customers without the necessity of MIDCOM posting a bond or other
form of security therefor. Trail Commission on remaining Customers in good
standing will be paid provided that Dealer is not in breach of any other
material provision of this Agreement, including the Dealers continuing
warranties, promises and agreements.
9.4 TERMINATION FOR LACK OF PERFORMANCE. Notwithstanding the provisions of
Section 3, in the event the gross billings from Dealer's Customer accounts
do not equal or exceed $10,000 per month by the end of one (1) year after
the effective date of this Agreement. MIDCOM shall have the right to
terminate this Agreement. In addition, in the event the average monthly
billings for any three (3) month period after the first year fall below
$10,000, MIDCOM shall have the right to terminate this Agreement. In the
event the Agreement is terminated under the provisions of this subsection,
MIDCOM will be under no further obligation to pay Trail Commissions.
9.5 TERMINATION FOR REGULATORY VIOLATIONS. In the event that customer
complaints are filed with LECs or with federal or state agencies against
Dealer, or against MIDCOM as a result of Dealer's representations or
actions, MIDCOM reserves the right to terminate this Agreement immediately
upon written notice to Dealer. Additionally, if it is determined that
Dealer has knowingly submitted to MIDCOM names of Customers for which the
LOAs were either forged, unethically obtained, or for which Dealer was
acting outside of the rights granted under the Customer LOAs, then MIDCOM
may, at its sole discretion, either terminate this Agreement immediately
upon written notice to Dealer or suspend accepting any orders from Dealer
for a period until Dealer has taken action to correct its offending
marketing practices.
10. MISCELLANEOUS
10.1 WAIVER. No waiver by either party of any default by the other party
with respect to any term or provision contained herein shall be deemed to
be a waiver of such term or provision unless the waiver is in writing and
signed by the waiving party. The waiver by either party hereto of any
breach or violation of any provision of the Agreement shall not operate or
be construed as a waiver of any subsequent breach or violation.
10.2 ENTIRE AGREEMENT. This Agreement sets forth the entire understanding
between the parties concerning the subject matter hereof, and supersedes
all prior negotiations and understandings with respect thereto. There are
no covenants, promises, agreements, conditions or understandings, either
oral or written, between the parties and relating to the subject matter of
this Agreement other than those set forth herein. No alteration, amendment,
change or addition to this Agreement shall be binding upon either party
unless in writing and signed by a Vice President of MIDCOM and by Dealer's
authorized representative.
10.3 GOVERNING LAW. This Agreement shall be construed in accordance with
and be governed by the laws of the State of Washington, without recourse to
its conflict of laws principles. Venue for any action concerning this
Agreement shall be in the County of King, State of Washington, or the
federal courts located in King County, Washington.
10.4 OPPORTUNITY TO PARTICIPATE IN DRAFTING. The parties have been
furnished an equal opportunity to participate in drafting of this Agreement
and any schedules and exhibits attached. No ambiguity shall be construed
against any party based upon a claim that party drafted the applicable
language.
10.5 BENEFIT. This Agreement shall inure to the benefit of, and shall be
binding upon, the parties hereto and their respective successors and
assigns. This Agreement shall not be assigned, nor the performance
hereunder be delegated by either party without the prior written consent of
the other party hereto.
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10.6 NOTICES. All notices shall be in writing and shall be deemed to
have been given on the dates indicated below:
(a) OVERNIGHT COURIER. Business day following deposit of such notice
with such courier.
(b) TELEFAX. Business day of transmission if sent before 2:00 p.m.
recipient's time with receipt confirmed.
(c) PERSONAL DELIVERY. Business day of delivery.
(d) POSTAGE PREPAID MAIL. Third business day following date of
mailing (date of postmark).
(e) CERTIFIED MAIL. Eight business days following date of postmark.
If to MIDCOM, addressed to: With a copy to:
MIDCOM Communications Inc. MIDCOM Communications Inc.
Attn: George Rebensdorff Dave Wiegand
Senior Vice President Legal Affairs Vice President National Accounts
1800 MIDCOM Tower 1800 MIDCOM Tower
1111 Third Avenue 1111 Third Avenue
Seattle, WA 98101 Seattle, WA 98101
Phone: (206) 828-8000 Phone: (206) 628-8000
Fax: (206) 628-8172 Fax: (206) 628-8295
If to Dealer, addressed to:
TIE Communications, Inc.
Attention: Steve Ward
8500 West 110th Street
Overland Park, KS 68210
Phone: 913-344-0400
Fax: 913-344-0450
or to any such address as the party to receive the notice shall advise
by due notice given in accordance with this subsection.
10.7 PERFORMANCE. If performance by MIDCOM of any part of this Agreement is
prevented, hindered, delayed or otherwise made impractical by reason of any
flood, riot, fire, strike, explosion, power blackout, civil disturbance,
labor dispute, war, change in government regulation (including tariffs
governing the Listed Services), court action, failure of equipment, refusal
to provide or delay in providing service by an IXC or LEC, any act of God,
or any other cause beyond the direct control of MIDCOM, then MIDCOM shall
be excused from such performance. MIDCOM shall have no obligation to
provide alternative routing with respect to any transmission capacity
provided pursuant to this Agreement. In no event shall MIDCOM be liable to
Dealer or any other person, firm or entity in any other respect, including,
without limitation, for any damages, either direct or indirect,
consequential, special, incidental, actual, punitive, or any other damages,
or for any lost profits of any kind or nature whatsoever, arising out of
mistakes, accidents, errors, omissions, interruptions, or defects in
transmission, or delays, including those which may be caused by regulatory
or judicial authorities, arising out of or relating to this Agreement or
the obligations of MIDCOM pursuant to this Agreement.
10.8 NON-DISCLOSURE. The terms and conditions of this Agreement are
proprietary and confidential and shall not be disclosed to any third party
without written consent from MIDCOM.
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10.9 ASSIGNMENT. This Agreement shall be binding upon and shall move
to benefit the parties and their legal representatives, heirs and
successors. However, no interest of Dealer may be assigned, sub-contracted,
or otherwise transferred, either voluntarily, or involuntarily, without the
prior written consent of MIDCOM, which shall not be unreasonably withheld.
Any such attempted transfer shall be void and shall constitute a breach of
this Agreement. In the event of a dispute between partners and owners of a
Dealer-owned ownership of rights to Trail Commissions, MIDCOM shall have
the right to hold in an escrow account maintained by MIDCOM the disputed
commissions or it may interplead and deposit the funds with a court of
competent jurisdiction at the expense of the disputing parties.
10.10 SEVERABILITY. In the event any one or more immaterial provisions
is found to be invalid, the finding shall not affect the validity or
enforceability of the other provisions.
10.11 CAPTIONS. The captions and section numbers appearing in this
Agreement are inserted only as a matter of convenience, and shall not be
used to construe, define, limit or describe the scope or intent of the
provisions of this Agreement.
10.12 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which when executed by the parties hereto shall be deemed an
original and all of which together shall be deemed the same Agreement.
10.13 ATTORNEY FEES AND COSTS. In the event of any legal dispute
between the parties relating to the Agreement, including arbitration
provided for in Section 10.14, the most prevailing party shall be entitled
to all costs and legal expenses including, but not limited to, reasonable,
ordinary and necessary attorney fees, accounting fees, court costs, expert
witness and expenses, and investigation expenses.
10.14 ARBITRATION. Any dispute between MIDCOM and Dealer arising under
this Agreement shall be subject to arbitration in the City of Seattle,
State of Washington, pursuant to the rules then in effect of the American
Arbitration Association (or any other place or under any form or
arbitration mutually acceptable to MIDCOM and Dealer). The decision
rendered by the arbitrator shall be final and conclusive upon the parties
and a judgment thereon may be entered in the highest court of the forum so
having jurisdiction of the matter. The expenses of such arbitration shall
be borne equally by the parties to the arbitration provided that each party
shall pay for its own costs for experts, evidence and counsels' fees.
10.15 AUTHORITY TO EXECUTE. Each person executing this Agreement on
behalf of another person or organization represents and warrants to each
member of all other parties that he or she is fully authorized to execute
and deliver this Agreement on behalf of such person or organization. Each
member of each party represents and warrants to all members of all other
parties that no consent of any person not a party to this Agreement is
necessary in order for this Agreement to be fully and completely binding
upon each member of the parties hereto.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
MIDCOM COMMUNICATIONS INC.
DBA ADNET TELEMANAGEMENT DEALER: TIE COMMUNICATIONS, INC.
By: Dave Wiegand By: L. Stephen Ward
-------------------------------- -----------------------------------
Title: Vice President Title: Vice President Sales & Marketing
----------------------------- --------------------------------
Signature: Dave Wiegand Signature: L. Stephen Ward
------------------------- ----------------------------
Date: 4/10/96 Date: 5/17/96
------------------------------ ---------------------------------
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Dealer Contact Information: Tax ID # or SSN: _________________________
Primary Contact: ___________________________________ Phone: ___________________
FAX: _____________________
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EXHIBIT I
All services will be provisioned and billed by the ADNET division of Midcom.
Pricing and rates contained herein are predicated on TIE Communications sales
revenues of one million dollars monthly. For the purposes of computation, TIE's
own long distance usage will be included and will contribute to TIE's overall
volume.
There is no monthly or annual commitment associated with this AGREEMENT.
<PAGE> 11
EXHIBIT II
SIMPLICITY STANDARD
<TABLE>
<CAPTION>
ADNET WATS & 800
1 + SWITCHED OUTBOUND & 800 INBOUND
COST PER MINUTE % OF COMMISSION
- --------------- ---------------
<S> <C>
0.1650 27%
0.1550 25%
0.1450 20%
0.1350 15%
0.1250 10%
0.1150 4%
</TABLE>
<TABLE>
<CAPTION>
ADNET WATS PLUS ADNET 800 PLUS
DEDICATED T1 OUTBOUND DEDICATED T1 INBOUND
COST PER MINUTE % OF COMMISSION COST PER MINUTE % OF COMMISSION
- --------------- --------------- --------------- ---------------
<S> <C> <C> <C>
0.1199 30% 0.1199 30%
0.1099 27% 0.1099 27%
0.0999 20% 0.0999 20%
0.0949 18% 0.0949 16%
0.0899 15% 0.0899 12%
0.0849 11% 0.0849 7%
0.0799 7% 0.0799 4%
0.0749 4%
</TABLE>
SIMPLICITY PLUS (AT&T)
<TABLE>
<CAPTION>
ADNET/AT&T WATS ADNET/AT&T 800
1 + SWITCHED OUTBOUND SWITCHED 800 INBOUND
COST PER MINUTE % OF COMMISSION COST PER MINUTE % OF COMMISSION
- --------------- --------------- --------------- ---------------
<S> <C> <C> <C>
NOT AVAILABLE 0.2099 25%
0.1999 20%
0.1899 17%
0.1799 13%
0.1899 10%
0.1599 7%
0.1499 4%
</TABLE>
<TABLE>
<CAPTION>
ADNET/AT&T WATS PLUS ADNET/AT&T 800 PLUS
DEDICATED T1 OUTBOUND DEDICATED 800 INBOUND
COST PER MINUTE % OF COMMISSION COST PER MINUTE % OF COMMISSION
- --------------- --------------- --------------- ---------------
<S> <C> <C> <C>
0.1499 25% 0.1549 25%
0.1399 20% 0.1449 20%
0.1299 15% 0.1349 15%
0.1199 10% 0.1249 10%
0.1099 7% 0.1149 7%
0.0999 4% 0.1049 4%
</TABLE>
All IntraState calls will pay 10% commission.
All International calls will pay 8% commission.
- ------------------------ ------------------------
Dealer MIDCOM
<PAGE> 12
EXHIBIT II
SIMPLICITY STANDARD INTRASTATE RATES
<TABLE>
<CAPTION>
DEDICATED DEDICATED SWITCHED SWITCHED
OUTBOUND INBOUND (800) OUTBOUND INBOUND (800)
STATE RATE/MIN. RATE/MIN. RATE/MIN. RATE/MIN.
- ----- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
AK 0.1800 0.1827 0.2169 0.2421
AL 0.0846 0.1233 0.1377 0.1512
AR 0.1116 0.1683 0.1782 0.2178
AZ 0.1206 0.1485 0.2007 0.1800
CA (1) 0.0499 0.1049 0.0599 0.1449
CA (2) 0.0949 0.1049 0.1199 0.1449
CO 0.1269 0.1197 0.1809 0.1926
CT 0.1143 0.1368 0.1341 0.2034
DE 0.1053 0.1369 0.1575 0.2025
FL 0.1134 0.1242 0.1755 0.2025
GA 0.1082 0.1116 0.1755 0.1854
HI 0.1600 0.1827 0.2169 0.2421
IA 0.1008 0.1323 0.1845 0.2106
ID 0.1260 0.1260 0.1998 0.1998
IL 0.1116 0.1305 0.1197 0.1809
IN 0.1008 0.1215 0.1512 0.1755
KS 0.1413 0.1332 0.2115 0.2493
KY 0.1161 0.1719 0.1881 0.2106
LA 0.0945 0.1233 0.1377 0.1737
MA 0.0900 0.1017 0.1440 0.1467
MD 0.1062 0.1152 0.1467 0.1449
ME 0.1845 0.2700 0.2943 0.2745
MI 0.1080 0.1314 0.1899 0.1764
MN 0.1161 0.1251 0.1890 0.1944
MO 0.1296 0.1062 0.1944 0.2214
MS 0.1395 0.1485 0.1800 0.2079
MT 0.1080 0.1422 0.1755 0.2079
NC 0.1044 0.1062 0.1764 0.1872
ND 0.1116 0.1350 0.1863 0.2115
NE 0.1251 0.1395 0.1935 0.2340
NH 0.1341 0.1431 0.2313 0.2889
NJ 0.1071 0.1161 0.1089 0.1350
NM 0.1575 0.1584 0.1827 0.2169
NV 0.1098 0.1440 0.1647 0.1656
NY 0.1296 0.1368 0.1674 0.1872
OH 0.1215 0.1422 0.1503 0.2025
OK 0.1242 0.1656 0.1827 0.2745
OR 0.1062 0.1242 0.1719 0.2133
PA 0.1026 0.1296 0.1620 0.1647
RI 0.1096 0.1305 0.1908 0.1899
SC 0.1287 0.1368 0.1926 0.2367
SD 0.1170 0.1440 0.1654 0.2115
TN 0.1341 0.1485 0.1908 0.1998
TX 0.1098 0.1089 0.1890 0.1971
UT 0.1080 0.1323 0.1674 0.1764
VA 0.1116 0.1161 0.1629 0.1944
VT 0.1280 0.1440 0.1890 0.2043
WA 0.1071 0.1125 0.1917 0.1836
WI 0.1179 0.1280 0.1980 0.2115
WV 0.1098 0.1287 0.1980 0.2016
WY 0.1242 0.1242 0.1674 0.1719
</TABLE>
(1) - IntraLATA
(2) - Instrastate
10% agent commission on all intrastate rates.
<PAGE> 13
EXHIBIT II
SIMPLICITY PLUS (AT&T) INTRASTATE RATES
<TABLE>
<CAPTION>
DEDICATED DEDICATED SWITCHED SWITCHED
OUTBOUND INBOUND (800) OUTBOUND INBOUND (800)
STATE RATE/MIN. RATE/MIN. RATE/MIN. RATE/MIN.
- ------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C>
AL 0.0900 0.1253 0.1485 0.1578
AR 0.1280 0.1847 0.1917 0.2384
AZ 0.1305 0.1626 0.2160 0.1971
CA (1) 0.0866 0.1199 0.0702 0.1775
CA (2) 0.0999 0.1199 0.1278 0.1775
CO 0.1368 0.1479 0.1944 0.2120
CT 0.1224 0.1199 0.1440 0.1782
DE 0.1170 0.1508 0.1332 0.2051
FL 0.1215 0.1367 0.1998 0.2228
GA 0.1080 0.1137 0.1710 0.1883
HI 0.1890 0.1875 0.3033 0.2129
IA 0.1080 0.1449 0.1980 0.2310
ID 0.1575 0.1380 0.2790 0.2193
IL 0.1206 0.1430 0.1287 0.1991
IN 0.1143 0.1331 0.1620 0.1922
KS 0.1440 0.1454 0.2115 0.2738
KY 0.1280 0.1892 0.2025 0.2307
LA 0.1017 0.1350 0.1485 0.1902
MA 0.0972 0.1113 0.1548 0.1607
MD 0.1143 0.1269 0.1575 0.1587
ME 0.2052 0.2968 0.3357 0.3006
MI 0.1170 0.1482 0.2088 0.1932
MN 0.1143 0.1290 0.1881 0.2003
MO 0.1358 0.1166 0.2088 0.2429
MS 0.1530 0.1449 0.1980 0.2310
MT 0.1170 0.1557 0.2070 0.2307
NC 0.1179 0.1310 0.1935 0.2051
ND 0.1188 0.1479 0.2007 0.2316
NE 0.1350 0.1527 0.2088 0.2562
NH 0.0990 0.1588 0.2250 0.3165
NJ 0.1152 0.1190 0.1170 0.1442
NM 0.1883 0.1745 0.1935 0.2385
NV 0.1170 0.1577 0.1773 0.1814
NY 0.1395 0.1499 0.1800 0.2051
OH 0.1305 0.1588 0.1620 0.2217
OK 0.1260 0.1680 0.1917 0.2662
OR 0.1143 0.1361 0.1845 0.2338
PA 0.1098 0.1461 0.1728 0.1806
RI 0.0585 0.1430 0.0918 0.2090
SC 0.1323 0.1424 0.1960 0.2222
SD 0.1260 0.1587 0.1980 0.2316
TN 0.1206 0.1635 0.2052 0.2189
TX 0.1215 0.1238 0.2070 0.2159
UT 0.1179 0.1449 0.1872 0.1932
VA 0.1206 0.1241 0.1755 0.1989
VT 0.1215 0.1587 0.1890 0.2237
WA 0.1161 0.1232 0.2061 0.2010
WI 0.1260 0.1421 0.2142 0.2316
WV 0.1161 0.1410 0.2817 0.2198
WY 0.1350 0.1725 0.1800 0.2385
</TABLE>
(1)-IntraLATA
(2)-Intrastate 10% agent commission on all intrastate rates.
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
BETWEEN
MIDCOM COMMUNICATIONS INC.
AND
WILLIAM H. OBERLIN
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made effective the 24th day
of May, 1996 (the "Effective Date") between MIDCOM COMMUNICATIONS INC., a
Washington corporation (the "Company" or "Employer") and WILLIAM H. OBERLIN
("Oberlin" or "Employee").
RECITALS
A. The Company is desirous of retaining an experienced executive with
telecommunications background.
B. Oberlin has agreed to accept the positions and serve as the President
and Chief Executive Officer of the Company.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and for other good and valuable consideration, the parties
agree as follows:
1. EMPLOYMENT. The Company hereby agrees to provide employment to
Employee, and Employee agrees to be employed by the Company and to perform the
services and fulfill the duties of Employee all in accordance with the terms and
conditions of this Agreement.
2. TERM. This Agreement shall commence on the Effective Date and shall
terminate on May 31, 2001, subject to earlier termination as provided in Section
9. The fact that Employee is or may be a shareholder and/or director of the
Company shall not entitle him to any rights to employment by the Company.
3. DUTIES. Employee shall serve as the President and Chief Executive
Officer of the Company, and shall faithfully and diligently perform such duties
and exercise such powers as:
(i) Are set forth in the description of duties of officers in the
current Bylaws of the Company (which may be amended by the Company from time to
time);
(ii) Are customarily expected of the President and Chief Executive
Officer of business organizations which are similar to the Company; and
<PAGE> 2
(iii) May from time to time be properly assigned to him by the Board
of Directors of the Company. At the request of the Board of Directors of the
Company. Employee also shall serve as President and/or as a Director of any of
the Company's subsidiaries and affiliates without additional compensation.
4. EXTENT OF SERVICES. Employee shall devote his full working time,
attention and skill to the duties and responsibilities set forth in Section 3.
Employee may participate in other businesses as an investor, provided that:
(i) Employee shall not actively participate in the operation or
management of such businesses; provided, that this shall not prevent Employee
from serving as a member of the board of directors of another corporation if
the Board of Directors of the Company approves of his service in that position;
and
(ii) Employee shall not, without the prior approval of the Directors
of the Company, make or maintain any investment in any entity with which the
Company as a commercial relationship of any kind, including that of lessor,
partner, investor, vendor, supplier, consultant or otherwise, or which is in
competition with the Company; provided, that this shall not prevent Employee
from investing in the securities of any publicly traded companies so long as
such investments do not constitute more than five percent (5%) of the
outstanding voting securities of any such company. The Company acknowledges that
it shall not be a violation of this Agreement for Employee to invest in one or
more dealers which has a commercial relationship with the Company, subject to
compliance by Employee with the provisions of RCW 23B.08.700 through .730
(dealing with Employee's obligation to disclose conflicts of interest to
qualified directors).
(iii) Employee's activities and investments shall not be inconsistent
with the Company's Policy on Conflicts of Interest.
5. SALARY. In consideration for the performance of Employee's
obligations under this Agreement. Employee shall be paid a salary of
Twenty-Five Thousand Dollars ($25,000) per month, payable semi-monthly, during
the term of this Agreement. Employee's salary shall be paid in installments in
accordance with the Company's payroll policy for other employees. The Company
shall review Employee's salary and other compensation on an annual basis, and
may from time to time increase Employee's salary as it deems appropriate in its
sole discretion. For the year 1996, the Company may,in the sole discretion of
its Board of Directors, award bonuses to Employee based upon the performance of
the Employee and/or the Company, or create other Bonuses or benefit programs
for Employee. For each calendar year effective with the year starting January
1, 1997, based upon a business plan presented by Employee and approved by the
Company's Board of Directors in its discretion, the Company may from time to
time, award bonuses to Employee. Employee will present the business plan not
later than thirty (30) days prior to the commencement of the applicable
calendar year. The bonuses will be structured by the Board to provide Employee
one hundred percent (100%) of his then-current base salary if the Company meets
the targets set forth in the business plan, or a greater or lesser
2
<PAGE> 3
percentage of his base salary in proportion to the amount by which the Company
exceeds or falls short of the targets set forth in the business plan. The Board
of Directors of the Company will formulate and adopt a bonus plan for Employee
on or before August 30, 1996 for the calendar year ending December 31, 1996.
6. STOCK OPTIONS. As an incentive to Employee to use his best efforts to
enhance the value of the Company, the Company has granted Employee stock options
to purchase 1,214,724 shares of stock of the Company in accordance with that
certain MIDCOM Communications Inc. 1993 Stock Option Plan, as amended and
restated (the "Option Plan"), a copy of which is attached as Attachment A to
this Agreement, including vesting at twenty percent (20%) on May 25, 1997 and
20% per year for each of the next four (4) years at the option price equal to
the fair market value of the stock of $8 per share. The options are more
particularly described in the Option Plan and in the Stock Option Agreement
which shall be executed simultaneously with this Agreement, a form of which is
attached as Attachment B to this Agreement. The increase in the number of shares
authorized to be issued under the Option Plan is subject to the approval of the
shareholders of the Company at its next annual meeting. On or after August 15,
1996, such options may be issued by the Company directly to, or transferred by
Employee to, a family limited partnership entitled "Oberlin Family Limited
Partnership II," at Employee's election.
7. VACATION AND OTHER BENEFITS. Employee shall be entitled to four (4)
weeks of paid vacation each year, in addition to the holidays observed by the
Company for its employees in general. Vacation or holiday time that is not taken
shall be carried into the next calendar year, or upon termination, unused
vacation will be paid for in applicable salary. The Company shall also provide
Employee, without cost to Employee, with medical, life, disability and group
term life insurance benefits. Employee shall also be entitled to participate in
Employer's 401(k) profit sharing plan pursuant to the terms of such plan
attached hereto as Attachment C.
8. RELOCATION EXPENSES. Employee shall be reimbursed by Employer for all
reasonable relocation expenses in the event Employee relocates his domicile
within one (1) year of the date of this Agreement. To the extent such reasonable
relocation expenses exceed the amounts deductible as moving expenses, pursuant
to the Internal Revenue Code of 1987 as amended, the balance of such
reimbursements shall be paid as taxable compensation to Employee. Until such
time as Employee relocates his domicile, Employer shall reimburse Employee
and/or his spouse for all reasonable commuting expenses from his present
domicile to the principal offices of Employer.
9. TERMINATION PRIOR TO THE END OF TERM.
(a) The Company may terminate this Agreement for cause prior to the
end of the term. The term "for cause" shall mean a termination based on a
determination in good faith by the Board of Directors of the Company that
Employee has committed an act of dishonesty related to his employment, obtained
any benefit of money or other property in connection with his employment to
which he was not entitled or engaged in any willful misconduct with respect to
his duties or other obligations under this Agreement. In the event of any
termination of this
3
<PAGE> 4
Agreement for cause, Employee shall be paid all compensation and benefits earned
through the date of termination, but the Company shall not be obligated to
provide any further compensation or benefits to him under this Agreement.
(b) The Company may, at its option and at any time, terminate this
Agreement prior to the end of the term without cause. In the event that the
Company exercises this right, Employee shall be entitled to receive all
compensation (including salary and bonus) and benefits earned through the date
of termination, plus two years of "Severance," payable in twenty-four (24) equal
monthly installments, without interest, commencing on the last day of the month
following such termination. As used in this Agreement, a year of "Severance"
means an amount equal to the sum of (1) Employee's then-current annualized
salary, plus (2) either (i) Employee's average annual bonus for the fiscal years
preceding the termination or (ii) if no bonus has been established for or paid
to Employee during such years, then Employee's then-current annualized salary.
In addition, the Company shall continue for a period of twenty-four (24) months
following the date of termination to provide to Employee, without cost to
Employee, the same medical, life, disability and group term life insurance
benefits as would have been available to him had he remained employed by the
Company, or, if Employee is not eligible to participate in such plans because he
is no longer a full time employee of the Company, then the Company shall pay
Employee a monthly amount equal to the per-employee premium payable by the
Company for participants in the plan(s) for which Employee is ineligible. Should
Employee's employment be terminated under this Paragraph 9(b), however, any
vesting of stock options granted to Employee under Paragraph 6 of this Agreement
shall continue for the shorter of twenty-four (24) months or the remaining term
of the option following the date of termination, as if Employee had remained
employed during such period.
(c) This Agreement shall terminate in the event Employee dies, or is
unable to perform his duties as a result of a physical or mental disability at
any time during the term of this Agreement. In the event of a termination due to
Employee's inability to perform his duties as a result of a physical or mental
disability, Employee shall be paid all compensation and benefits earned through
the date of such termination. For purposes of this Agreement, Employee shall be
deemed to be disabled when each of the following conditions are met:
(i) The Employee shall become physically or mentally incapable
(excluding infrequent and temporary absences due to ordinary
illnesses) of properly performing the services required of him by this
Agreement;
(ii) Employee's physical or mental incapacity shall exist or
shall be reasonably expected to exist for more than ninety (90) days
in the aggregate during any period of twelve (12) consecutive calendar
months; and
(iii) Such physical or mental incapacity is independently
diagnosed by a qualified medical practitioner.
4
<PAGE> 5
In the event of termination due to the death of Employee, all compensation and
benefits accrued through the date of Employee's death shall be paid to
Employee's estate. In the event of Employee's death, any stock options granted
under Section 6 will immediately vest effective on the date of Employee's death,
but only to the extent such stock options would have vested if Employee's
employment had continued for a period of two (2) additional years following the
date of Employee's death. Employee's estate must exercise such stock options,
pursuant to the terms of the Option Plan, within one (1) year following the date
of Employee's death. If Employee's estate does not timely exercise the stock
options, they will automatically expire without further action by the Company.
(d) In the event of a "Change of Control Event" (as defined
below), the Employee may, at his option, terminate this Agreement prior to the
end of the term. The Employee must exercise this option by written notice
delivered to the Company within one hundred eighty (180) days of the Change of
Control Event. In the event Employee does not exercise such option to terminate
within such one hundred eighty (180) day period, this Agreement shall remain in
full force and effect subject to the same conditions for the balance of its
term. Employee shall be entitled to the same Severance, stock option vesting and
other benefits described in paragraph 9(b) in the event Employee makes the
election provided for in this paragraph 9(d). For purposes of this paragraph
9(d), a "Change of Control Event" means (1) an event or series of events by
which any Person or other entity or group (as such term is used in Section 13(d)
and Section 14(d) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act") of persons or other entities acting in concert as a partnership
or other group (a "Group of Persons") (other than persons who are, or groups of
persons entirely made up of, (i) management personnel or directors of the
Company or (ii) any affiliates or any such management personnel or directors)
shall, as a result of a tender or exchange offer or offers, an open market
purchase or purchases, a privately negotiated purchase or purchases or
otherwise, become the beneficial owner (within the meaning of Rule 13d-3 under
the Exchange Act, except that a Person shall be deemed to have a "beneficial
ownership" of all securities that such Person has the right to acquire, whether
such right is exercisable immediately or only after the passage of time),
directly or indirectly, of forty percent (40%) or more of the combined voting
power of the then outstanding voting stock of the Company; (2) the Company
consolidates with, or merges with or into, another Person, or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
its assets to any Person, or any Person consolidates with, or merges with or
into the Company, in any such event pursuant to a transaction in which the
outstanding voting stock of the Company is converted into or exchanged for cash,
securities or other Property; (3) during any consecutive two-year period,
individuals who at the beginning period constituted the Board of the Company
(together with any new directors whose appointment by such Board or whose
nomination for election by the stockholders of the Company was approved by a
vote of 66-2/3% of the directors then still in office who were either 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
Board of the Company then in office; or (4) any liquidation or dissolution of
the Company.
5
<PAGE> 6
(e) The parties may, by mutual agreement set forth in writing,
terminate this Agreement ("Termination by Mutual Agreement"). A Termination by
Mutual Agreement shall be deemed to apply in the event (i) Employee recommends
to the Board of Directors of the Company that the Company relocate its
headquarters to a location which is closer to Employee's personal residence,
(ii) Employee provides reasonable projections to the Board of Directors which
demonstrate that the Company will experience financial benefits from such
relocation (taking into account the expenses of such relocation), and (iii) the
Board of Directors votes against Employee's recommendation to relocate or
declines to vote such recommendation within ninety (90) days following the first
Board meeting at which Employee presents such recommendation in writing, then
Employee may, at his option, terminate this Agreement prior to the end of its
term. Employee must exercise this option by written notice delivered to the
Company within ninety (90) days of the vote of the Board of Directors, or, if
the Board takes no action on such recommendation, within one hundred eighty
(180) days following the first Board meeting at which Employee presented such
recommendation in writing. In the event Employee does not exercise such option
to terminate within the applicable time period, this Agreement shall remain in
full force and effect subject to the same conditions for the balance of its
term. In the case of any Termination by Mutual Agreement, Employee shall be
entitled to one year of Severance, payable in twelve (12) equal monthly
installments. In addition, the Company shall continue for a period of twelve
(12) months following the date of termination to provide the Employee, without
cost to Employee, the same medical, life, disability and group term life
insurance benefits as would have been available to him had he remained employed
by the Company, or, if Employee is not eligible to participate in such plans
because he is no longer a full time employee of the Company, then the Company
shall pay Employee a monthly amount equal to the per-employee premium payable by
the Company for participants in the Plan(s) for which Employee is ineligible.
Upon a Termination by Mutual Agreement, any vesting of stock granted to Employee
under paragraph 6 of this Agreement shall continue for the shorter of twelve
(12) months following the date of termination or the remaining term of the
option, as if Employee had remained employed during such period.
10. INDEMNIFICATION. The Company shall defend, indemnify and hold Employee
harmless from any and all liabilities, obligations, claims or expenses which
arise in connection with or as a result of Employee's service as an officer or
employee (or director if Employee is elected and serves as a director) of the
Company and/or any of its subsidiaries to the fullest extent allowed by law;
provided, that the Company shall not be obligated to defend, indemnify or hold
Employee harmless from any liabilities, obligations, claims or expenses which
result from Employee having committed an act of dishonesty, obtained any benefit
of money or other property to which he was not entitled or engaged in any wilful
misconduct.
11. NON-INTERFERENCE AND CONFIDENTIALITY.
(a) During the term of this Agreement, Employee shall comply with his
fiduciary obligations as an officer of the Company and the restrictions
contained in Section 4.
6
<PAGE> 7
(b) During the term of this Agreement, Employee shall not, directly
or indirectly, as a director, officer, employee, owner, partner, agent,
consultant, lessor, creditor or otherwise, for any person, firm or entity whose
business is the same as or similar to the business engaged in by the Company at
any time during the term of this Agreement: (1) solicit from any person or
entity that was a customer of the Company during the term of this Agreement, any
business of a type or nature similar to the Company's business with such
customer; (2) solicit or attempt to persuade any person or entity that was a
customer of the Company during the term of this Agreement to terminate or
rescind its business and contractual relationship with the Company; (3) solicit
for employment any employee of the Company who at the time of such solicitation
is employed in an executive or management capacity, or attempt to persuade or
entice any such employee to terminate his or her employment with the Company; or
(4) employ any person who was employed by the Company in an executive or
management capacity during the term of this Agreement; provided, however, that
the contact or solicitation of any MIDCOM customer by a subsequent employer of
Employee which was not originated or suggested by Employee to his subsequent
employer shall not be deemed to be a breach of this Section 12(b). The
provisions of this Section 12(b) shall continue for a period of six (6) months
following the expiration or earlier termination of this Agreement, unless
Employee's employment is terminated by the Company under Section 9(b) or by
Employee under Section 9(d) or 9(e), in which event Employee shall be released
from the restrictions set forth in clauses 12(b)(3) and 12(b)(4) upon the
effective date of such termination.
(c) Employee shall not, during his employment hereunder or at any
time thereafter, use for his own purposes or disclose to any other person or
entity any "Confidential Information" concerning the Company, its affiliates or
any other business operations, except as may be consistent with his duties
hereunder or as may be required by order of a court of competent jurisdiction.
"Confidential Information" means any information, formula, pattern, compilation,
program, device, method, technique, customer list or process concerning the
Company or its business or customers: (i) that derives independent economic
value, actual or potential, from not being generally known to, or not being
readily ascertainable by proper means by, other persons who can obtain economic
value from its disclosure or use; or (ii) the disclosure of which would be
harmful to the interests of the Company.
(d) Employee agrees that the provisions of this Section are
reasonable. However, if any court of competent jurisdiction determines that any
provision within this Section is unreasonable in any respect, the parties intend
that this Section shall be enforced to the fullest extent allowable by such
court.
12. NOTICES. All notices or other communications required or permitted by
this Agreement shall be in writing and shall be sufficiently given if sent by
certified mail, postage prepaid, addressed as follows:
If to Employee, to: William H. Oberlin
257 Chestnut Circle
Bloomfield Hills, MI 48304
7
<PAGE> 8
If to the Company: MIDCOM Communications Inc.
Attention: Legal Department
1600 MIDCOM Tower
1111 Third Avenue
Seattle, WA 98101
Any such notice or communication shall be deemed to have been given as of
the date mailed. Any address may be changed by giving written notice of such
change in the manner provided herein for giving notice.
13. WAIVER OF BREACH. The waiver by a party of a breach of any provision
of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
14. ASSIGNMENT. Neither party may assign its rights or delegate its
duties hereunder without the prior written consent of the other party.
15. ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties with regard to the subject matter of this Agreement and may only be
changed by written agreement signed by both parties. Any and all prior
discussions, negotiations, commitments and understandings related thereto are
merged herein.
16. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the respective parties, and their legal representatives, successors,
permitted assigns and heirs.
17. LAW. This Agreement shall be governed by, construed and enforced in
accordance with the laws of the State of Washington, without giving effect to
principles and provisions thereof relating to conflict or choice of laws and
irrespective of the fact that any one of the parties is now or may become a
resident of a different state.
18. VALIDITY. In case any term of this Agreement shall be invalid,
illegal, or unenforceable, in whole or in part, the validity of any of the
other terms of this Agreement shall not in any way be affected thereby.
"COMPANY" "EMPLOYEE"
MIDCOM COMMUNICATIONS INC. WILLIAM H. OBERLIN
/s/ William H. Oberlin
BY: /s/ Paul H. Pfleger -----------------------
-------------------
Paul H. Pfleger
ITS: Chairman, Board of Directors
Attachment A: Stock Option Plan
Attachment B: Stock Option Agreement
Attachment C: 401(k) Plan
8
<PAGE> 1
EXHIBIT 10.5
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is entered into effective as of
the 24th day of May, 1996, between MIDCOM COMMUNICATIONS INC. ("MIDCOM" or
"Company"), having its principal place of business at 1600 MIDCOM Tower, 1111
Third Avenue, Seattle, Washington 98101, and JOHN M. ZRNO ("Consultant"), whose
address is 5705 Imperial Court, Plano, Texas 75093.
WITNESSETH
WHEREAS, MIDCOM seeks experienced leadership and advice in its
telecommunications endeavors, particularly in the areas of mergers and
acquisitions, strategic and investor relationships as well as in regard to its
financial affairs; and
WHEREAS, Consultant has for a long period of time been principally
engaged in senior management of telecommunications services providers; and
WHEREAS, MIDCOM desires to obtain the services of Consultant as an
independent contractor to MIDCOM on the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the promises and the mutual
covenants herein contained and other good and valuable consideration, receipt of
which each of the parties hereto acknowledges, it is hereby agreed as follows:
AGREEMENT
1. Consulting Period. MIDCOM shall retain the Consultant and Consultant
hereby agrees to furnish consulting services to MIDCOM for a period of five (5)
years, commencing on June 1, 1996 ("Consulting Period").
2. Consultant's Duties and Obligations. During the Consulting Period,
Consultant will render advisory services as an independent contractor to MIDCOM
and any of its affiliates with respect to (a) identifying and assisting in the
renegotiating and closing of new business acquisitions, (b) establishing sound
investor and other strategic relationships, and (c) advising the Company's Board
of Directors on critical strategic financial matters.
2.2 Availability. Consultant shall make himself reasonably
available to the Board of Directors through the offices of the Company's Chief
Executive Officer, wherein on a quarterly basis it is anticipated Consultant
will devote approximately twenty-five percent (25%) of his time and efforts to
the affairs of the Company to furnish the consulting services as set forth in
this Agreement. Consultant shall make his reports to and receive assignments
from the Chief Executive Officer of MIDCOM for the benefit of the Board of
Directors. MIDCOM and Consultant shall schedule Consultant's consulting service
time in such manner so as to reasonably accommodate any other employment,
business or other activities or obligations Consultant may have.
<PAGE> 2
2.3 Termination. MIDCOM shall have the right to terminate this
consulting relationship at any time in the event of (a) willful and continuous
failure by the Consultant to perform his material obligations hereunder upon
thirty (30) days written notice and the failure by Consultant to cure the
default within thirty (30) days of such notice, or (b) without notice in the
event of the willful engaging by the Consultant in criminal misconduct that is
materially injurious to MIDCOM or any other affiliate of MIDCOM ("Termination
For Cause"). Upon a Termination For Cause, MIDCOM's obligation to pay the
Retainer, as defined hereafter, shall immediately cease.
Upon sixty (60) days prior notice, either party may
terminate this Agreement or reduce the amount of time Consultant shall be
required to devote to the Company. Upon such event, the Retainer and unvested
options shall also be reduced in the same proportion. Thus, for example, if
Consultant gives notice to MIDCOM effecting this Consulting Agreement for the
period commencing on May 25, 1998 that Consultant shall spend only ten percent
(10%) of his time rather than twenty-five percent (25%) on MIDCOM matters, then
the Retainer defined hereafter in Section 3.1 shall be reduced to forty (40%)
for the forthcoming period and sixty percent (60%) of unvested options,
determined as of May 25, 1998, shall be surrendered by Consultant for
cancellation.
3. Compensation.
3.1 Retainer. MIDCOM shall pay Consultant for services
rendered pursuant to this Agreement for approximately twenty-five percent (25%)
of his time at a retainer of $8,333 per month, payable on or before the fifth
day of the applicable month commencing on June 5, 1996, plus coverage under the
Company's qualified health care plan as a director of the Company, subject to
the same terms and conditions as are available to full-time employees of the
Company. Because Consultant is employed as an independent contractor, no
withholding of federal or state deductions shall be made. Consultant hereby
agrees to pay all federal and state taxes and other withholding required as a
result of compensation received pursuant to this Agreement. The compensation
payable under this paragraph shall not be subject to setoff or deduction for any
reason.
3.2 Stock Options. In addition to the Retainer, the Board of
Directors has approved the grant of a non-qualified stock option to Consultant
pursuant to the Company's Stock Option Plan on the effective date of this
Agreement of May 24, 1996, at the fair market value of the Company's stock of $8
per share for 253,681 shares vesting ratably over a 5-year period (20% per
year). A copy of the Company's Stock Option Plan is attached hereto as Exhibit A
and incorporated by this reference. Such grant is in addition to the grant made
to Consultant in his capacity serving as a director of the Company.
4. Litigation. If any suit or action (including any appeal therefrom)
is brought to enforce this Agreement, the most prevailing party shall be
entitled to receive from the other party ordinary, necessary and reasonable
attorney fees and costs incurred in such litigation.
5. Reimbursement of Expenses. MIDCOM shall reimburse Consultant for all
ordinary, necessary and reasonable travel expenses incurred by Consultant in
connection with providing consulting services under this Agreement; provided,
however, that all travel expenses
2
<PAGE> 3
exceeding $2,500 must be approved in writing by the Chief Executive Officer or
Chief Financial Officer of MIDCOM (or their designees) prior to the time such
expenses are incurred.
6. Hold Harmless. MIDCOM shall indemnify, protect and hold Consultant
harmless from and against all losses, liabilities, damages, and expenses
(including attorney's fees) of whatever nature, by or to any person or entity
regardless of the basis, arising from or any way relating to: (a) a failure by
MIDCOM to perform or observe any term, provision, covenant, agreement, or
condition to be performed or observed by it hereunder, (b) any action or
omission by Consultant if taken or omitted to be taken at MIDCOM's direction or
within the scope of his engagement hereunder. Consultant shall indemnify,
protect and hold MIDCOM harmless from and against all losses, liabilities,
damages, and expenses (including attorney's fees) of whatever nature, by or to
any person or entity regardless of the basis, arising from or any way relating
to: (a) a failure by Consultant to perform or observe any term, provision,
covenant, agreement, or condition to be performed or observed by him hereunder,
(b) any action or omission by Consultant if Consultant exceeds the scope of his
engagement hereunder or binds MIDCOM to any contractual obligation without
MIDCOM's consent. Nothing herein is intended to change the indemnification and
hold harmless provisions provided by the Company as it applies to its directors
and Consultant's position as a director.
7. Independent Contractor. MIDCOM appoints and Consultant agrees that
Consultant shall perform all services required hereunder in such manner as
Consultant deems appropriate and effective without the direct supervision by
MIDCOM as an independent contractor and not as an agent or employee of MIDCOM.
8. Proprietary Rights. Consultant agrees that any ideas, inventions,
processes, software designs or programs, improvements, technical information and
other data resulting from services being provided hereunder in the field of
enhanced facsimile services are works made for hire and shall be the sole
property of MIDCOM, whether or not subject to patent or copyright protection.
MIDCOM shall also be entitled to reduce any communication or material to a form
or medium eligible for copyright protection if such communication or material is
not so eligible in its original form. Consultant agrees to execute assignments
or other documents and do all things necessary to prosecute, perfect and enforce
such right, title and interest in MIDCOM and to allow MIDCOM to obtain patent,
trade name or service mark registration or copyright protection therefor.
Consultant agrees that the provisions of RCW 49.44.140 do not apply because
Consultant is not an employee of MIDCOM.
9. Entire Agreement. This writing represents the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes any and all prior negotiations, representations or understandings,
whether written or oral.
10. No Waiver. The forbearance of any party to this Agreement to pursue
any right or exercise any remedy hereunder shall not constitute a waiver of any
subsequent or similar right or remedy.
3
<PAGE> 4
11. Severability. If any non-material provision of this Agreement is
deemed to be illegal or otherwise void, invalid, or unenforceable, such
provision shall be disregarded and the remainder of this Agreement without such
non-material provision shall not be affected and shall remain in full force and
effect.
12. Binding Effect. This Agreement shall be binding upon and shall
inure to the benefit of all of the parties, as well as their respective
successors, representatives and assigns. This Agreement may not be assigned by
either party; provided, however, that Consultant may assign this Agreement to a
corporation, limited liability company or other entity in which he owns 100% of
the equity interests; provided, however, that the consulting relationship shall
always be based upon the personal services of Consultant, and the Agreement may
be assigned only if the consulting services to be rendered by him may not be
assigned to another individual, although the services may be rendered through
the assignee-entity.
13. Governing Law. This Agreement, including all matters of
construction, validity and performance, shall be governed by and construed and
enforced in accordance with the laws of the State of Washington, without regard
to its conflict of law provisions which might otherwise require the application
of the law of any other jurisdiction. The parties agree that the exclusive
jurisdiction and venue of any lawsuit between them arising under this Agreement
or out of the transactions contemplated herein shall be the Superior Court of
Washington for King County, or the United States District Court for the Western
District of Washington at Seattle, and each of the parties hereby irrevocably
agrees, acknowledges and submits itself to the exclusive jurisdiction and venue
of such courts for the purposes of such lawsuit. The terms of this Agreement are
deemed to have been mutually agreed upon by all parties hereto, and
interpretation will not be for or against any party if any ambiguity exists.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
MIDCOM COMMUNICATIONS INC. CONSULTANT
By: /s/ William H. Oberlin /s/ John M. Zrno
______________________ _________________________
William H. Oberlin JOHN M. ZRNO
Its: President & CEO
---------------------
Attachment: Exhibit A, MIDCOM Stock Option Plan
4
<PAGE> 1
EXHIBIT 10.6
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("Agreement") is entered into effective as of
the 24th day of May, 1996, between MIDCOM COMMUNICATIONS INC. ("MIDCOM" or
"Company"), having its principal place of business at 1600 MIDCOM Tower, 1111
Third Avenue, Seattle, Washington 98101, and MARVIN C. MOSES ("Consultant"),
whose address is 2942 Chestnut Run Drive, Bloomfield Hills, Michigan 48302.
WITNESSETH
WHEREAS, MIDCOM seeks experienced leadership and advice in its
telecommunications endeavors, particularly in the areas of mergers and
acquisitions, strategic and investor relationships as well as in regard to its
financial affairs; and
WHEREAS, Consultant has for a long period of time been principally
engaged in senior management of telecommunications services providers; and
WHEREAS, MIDCOM desires to obtain the services of Consultant as an
independent contractor to MIDCOM on the terms and conditions contained herein;
NOW, THEREFORE, in consideration of the promises and the mutual
covenants herein contained and other good and valuable consideration, receipt of
which each of the parties hereto acknowledges, it is hereby agreed as follows:
AGREEMENT
1. Consulting Period. MIDCOM shall retain the Consultant and Consultant
hereby agrees to furnish consulting services to MIDCOM for a period of five (5)
years, commencing on June 1, 1996 ("Consulting Period").
2. Consultant's Duties and Obligations. During the Consulting Period,
Consultant will render advisory services as an independent contractor to MIDCOM
and any of its affiliates with respect to (a) identifying and assisting in the
renegotiating and closing of new business acquisitions, (b) establishing sound
investor and other strategic relationships, and (c) advising the Company's Board
of Directors on critical strategic financial matters.
2.2 Availability. Commencing September 1, 1996, Consultant
shall make himself reasonably available to the Board of Directors through the
offices of the Company's Chief Executive Officer, wherein on a quarterly basis
it is anticipated Consultant will devote approximately twenty-five percent (25%)
of his time and efforts to the affairs of the Company to furnish the consulting
services as set forth in this Agreement. Consultant shall make his reports to
and receive assignments from the Chief Executive Officer of MIDCOM for the
benefit of the Board of Directors. MIDCOM and Consultant shall schedule
Consultant's consulting service time in such manner so as to reasonably
accommodate any other employment, business
<PAGE> 2
or other activities or obligations Consultant may have. Prior to September 1,
1996, Consultant shall make himself reasonably available for special projects.
2.3 Termination. MIDCOM shall have the right to terminate this
consulting relationship at any time in the event of (a) willful and continuous
failure by the Consultant to perform his material obligations hereunder upon
thirty (30) days written notice and the failure by Consultant to cure the
default within thirty (30) days of such notice, or (b) without notice in the
event of the willful engaging by the Consultant in criminal misconduct that is
materially injurious to MIDCOM or any other affiliate of MIDCOM ("Termination
For Cause"). Upon a Termination For Cause, MIDCOM's obligation to pay the
Retainer, as defined hereafter, shall immediately cease.
Upon sixty (60) days prior notice, either party may
terminate this Agreement or reduce the amount of time Consultant shall be
required to devote to the Company. Upon such event, the Retainer and unvested
options shall also be reduced in the same proportion. Thus, for example, if
Consultant gives notice to MIDCOM effecting this Consulting Agreement for the
period commencing on May 25, 1998 that Consultant shall be required to spend
only ten percent (10%) of his time rather than twenty-five percent (25%) on
MIDCOM matters, then the Retainer defined hereafter in Section 3.1 shall be
reduced to forty (40%) for the forthcoming period and sixty percent (60%) of
unvested options, determined as of May 25, 1998, shall be surrendered by
Consultant for cancellation.
3. Compensation.
3.1 Retainer. MIDCOM shall pay Consultant for services
rendered pursuant to this Agreement for approximately twenty-five percent (25%)
of his time at a retainer of $8,333 per month, payable on or before the fifth
day of the applicable month commencing on September 5, 1996, and at $1,000 per
month for June, July and August, 1996, payable on or before the fifth day of the
applicable month commencing on June 5, 1996, plus coverage under the Company's
qualified health care plan as a director of the Company, subject to the same
terms and conditions as are available to full-time employees of the Company.
Because Consultant is employed as an independent contractor, no withholding of
federal or state deductions shall be made. Consultant hereby agrees to pay all
federal and state taxes and other withholding required as a result of
compensation received pursuant to this Agreement. The compensation payable under
this paragraph shall not be subject to setoff or deduction for any reason.
3.2 Stock Options. In addition to the Retainer, the Board of
Directors has approved the grant of a non-qualified stock option to Consultant
pursuant to the Company's Stock Option Plan on the effective date of this
Agreement of May 24, 1996, at the fair market value of the Company's stock on
such date of $8 per share for 253,681 shares vesting ratably over a 5-year
period (20% per year). A copy of the Company's Stock Option Plan is attached
hereto as Exhibit A and incorporated by this reference.
4. Litigation. If any suit or action (including any appeal therefrom)
is brought to enforce this Agreement, the most prevailing party shall be
entitled to receive from the other party ordinary, necessary and reasonable
attorney fees and costs incurred in such litigation.
2
<PAGE> 3
5. Reimbursement of Expenses. MIDCOM shall reimburse Consultant for all
ordinary, necessary and reasonable travel expenses incurred by Consultant in
connection with providing consulting services under this Agreement; provided,
however, that all travel expenses exceeding $2,500 must be approved in writing
by the Chief Executive Officer or Chief Financial Officer of MIDCOM (or their
designees) prior to the time such expenses are incurred.
6. Hold Harmless. MIDCOM shall indemnify, protect and hold Consultant
harmless from and against all losses, liabilities, damages, and expenses
(including attorney's fees) of whatever nature, by or to any person or entity
regardless of the basis, arising from or any way relating to: (a) a failure by
MIDCOM to perform or observe any term, provision, covenant, agreement, or
condition to be performed or observed by it hereunder, (b) any action or
omission by Consultant if taken or omitted to be taken at MIDCOM's direction or
within the scope of his engagement hereunder. Consultant shall indemnify,
protect and hold MIDCOM harmless from and against all losses, liabilities,
damages, and expenses (including attorney's fees) of whatever nature, by or to
any person or entity regardless of the basis, arising from or any way relating
to: (a) a failure by Consultant to perform or observe any term, provision,
covenant, agreement, or condition to be performed or observed by him hereunder,
(b) any action or omission by Consultant if Consultant exceeds the scope of his
engagement hereunder or binds MIDCOM to any contractual obligation without
MIDCOM's consent. Nothing herein is intended to change the indemnification and
hold harmless provisions provided by the Company as it applies to its directors
and Consultant's position as a director.
7. Independent Contractor. MIDCOM appoints and Consultant agrees that
Consultant shall perform all services required hereunder in such manner as
Consultant deems appropriate and effective without the direct supervision by
MIDCOM as an independent contractor and not as an agent or employee of MIDCOM.
8. Proprietary Rights. Consultant agrees that any ideas, inventions,
processes, software designs or programs, improvements, technical information and
other data resulting from services being provided hereunder in the field of
enhanced facsimile services are works made for hire and shall be the sole
property of MIDCOM, whether or not subject to patent or copyright protection.
MIDCOM shall also be entitled to reduce any communication or material to a form
or medium eligible for copyright protection if such communication or material is
not so eligible in its original form. Consultant agrees to execute assignments
or other documents and do all things necessary to prosecute, perfect and enforce
such right, title and interest in MIDCOM and to allow MIDCOM to obtain patent,
trade name or service mark registration or copyright protection therefor.
Consultant agrees that the provisions of RCW 49.44.140 do not apply because
Consultant is not an employee of MIDCOM.
9. Entire Agreement. This writing represents the entire agreement
between the parties hereto with respect to the subject matter hereof and
supersedes any and all prior negotiations, representations or understandings,
whether written or oral.
10. No Waiver. The forbearance of any party to this Agreement to pursue
any right or exercise any remedy hereunder shall not constitute a waiver of any
subsequent or similar right or remedy.
3
<PAGE> 4
11. Severability. If any non-material provision of this Agreement is
deemed to be illegal or otherwise void, invalid, or unenforceable, such
provision shall be disregarded and the remainder of this Agreement without such
non-material provision shall not be affected and shall remain in full force and
effect.
12. Binding Effect. This Agreement shall be binding upon and shall
inure to the benefit of all of the parties, as well as their respective
successors, representatives and assigns. This Agreement may not be assigned by
either party; provided, however, that Consultant may assign this Agreement to a
corporation, limited liability company or other entity in which he owns 100% of
the equity interests; provided, however, that the consulting relationship shall
always be based upon the personal services of Consultant, and the Agreement may
be assigned only if the consulting services to be rendered by him may not be
assigned to another individual, although the services may be rendered through
the assignee-entity.
13. Governing Law. This Agreement, including all matters of
construction, validity and performance, shall be governed by and construed and
enforced in accordance with the laws of the State of Washington, without regard
to its conflict of law provisions which might otherwise require the application
of the law of any other jurisdiction. The parties agree that the exclusive
jurisdiction and venue of any lawsuit between them arising under this Agreement
or out of the transactions contemplated herein shall be the Superior Court of
Washington for King County, or the United States District Court for the Western
District of Washington at Seattle, and each of the parties hereby irrevocably
agrees, acknowledges and submits itself to the exclusive jurisdiction and venue
of such courts for the purposes of such lawsuit. The terms of this Agreement are
deemed to have been mutually agreed upon by all parties hereto, and
interpretation will not be for or against any party if any ambiguity exists.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
MIDCOM COMMUNICATIONS INC. CONSULTANT
By: /s/ William H. Oberlin /s/ Marvin C. Moses
__________________________ ___________________________________
William H. Oberlin MARVIN C. MOSES
Its: President & Chief
Executive Officer
_________________________
Attachment: Exhibit A, MIDCOM Stock Option Plan
4
<PAGE> 5
WITH COPY TO:
MIDCOM Communications Inc.
Attn: General Counsel
1600 MIDCOM Tower
1111 Third Avenue
Seattle, Washington 98101
TO: AT&T CORP.
Attn: Michael Oyster
Division Manager
Room 14D13
Bridgewater, New Jersey 08807
WITH COPY TO:
AT&T CORP.
Richard R. Meade, Esq.
Room 3250H3
205 North Maple Avenue
Basking Ridge, New Jersey 07920
17. Amendments
Any amendments, modifications or supplements to this Agreement shall be
valid only if all such amendments, modifications, or supplements are in writing
and are signed by an authorized representative of all parties.
18. Waiver
No waiver of any covenant, condition or limitation herein contained
shall be valid unless the same is made in writing and duly executed by the party
making the waiver. No waiver of any provision of this Agreement shall constitute
a waiver of any other provision, whether or not similar. The failure or neglect
of either party on any occasion to enforce any provision of this Agreement shall
not restrain or limit such party from enforcing such provisions upon any other
occasion or occasions if such party elects to do so, and no written waiver of
any breach of this Agreement shall be deemed to be a continuing waiver of such
breach unless so expressly stated. Any waiver shall be null and void if the
party requesting such waiver has not provided a full and complete disclosure of
all material facts relevant to the waiver requested.
19. Assignment
This Agreement is not assignable by any party.
7
AT&T/MIDCOM Confidential and Proprietary
<PAGE> 1
EXHIBIT 11.1
MIDCOM COMMUNICATIONS INC.
COMPUTATION OF NET LOSS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-----------------------------------------------
(In thousands, except per share data) 1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss before extraordinary item $(18,259) $(4,921) $(77,420) $ (8,944)
Extraordinary item: loss on early redemption of debt - (2,992) - (2,992)
------------------ --------------------
Net loss $(18,259) $(7,913) $(77,420) $(11,936)
------------------ --------------------
Weighted average common shares outstanding 15,681 12,558 15,442 9,833
Net effect of stock options and warrants granted during the
twelve months prior to the filing of the registration statement
with respect to the Company's initial public offering at less
than the $11.00 offering price calculated using the treasury stock
method and treated as outstanding for all periods prior to the
closing of the Company's initial public offering. - 975 - 975
Weighted average common shares giving effect to the
redemption of Series A Redeemable Preferred Stock, calculated
assuming net proceeds at the $11.00 offering price. - 840 - 840
------------------ --------------------
Weighted average shares outstanding 15,681 14,373 15,442 11,648
------------------ --------------------
Per share amounts:
Loss before extraordinary item $ (1.16) $ (0.34) $ (5.01) $ (0.77)
Extraordinary item - (0.21) - (0.25)
------------------ --------------------
Net loss per share $ (1.16$ $ (0.55) $ (5.01) $ (1.02)
------------------ --------------------
</TABLE>
37
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 48,138,000
<SECURITIES> 0
<RECEIVABLES> 29,322,000
<ALLOWANCES> 8,026,000
<INVENTORY> 0
<CURRENT-ASSETS> 70,741,000
<PP&E> 21,044,000
<DEPRECIATION> 10,914,000
<TOTAL-ASSETS> 106,764,000
<CURRENT-LIABILITIES> 50,883,000
<BONDS> 0
0
0
<COMMON> 66,831,000
<OTHER-SE> (116,530,000)
<TOTAL-LIABILITY-AND-EQUITY> 106,764,000
<SALES> 0
<TOTAL-REVENUES> 124,590,000
<CGS> 89,828,000
<TOTAL-COSTS> 195,845,000
<OTHER-EXPENSES> 206,000,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,959,000
<INCOME-PRETAX> 77,420,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 77,420,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 77,420,000
<EPS-PRIMARY> (5.01)
<EPS-DILUTED> (5.01)
</TABLE>
