<PAGE> 1
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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 June 30, 1997.
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>
<CAPTION>
Class Outstanding at July 31, 1997
---------------------------- ----------------------------
<S> <C>
Common Stock, $0.0001 par value 15,101,436
</TABLE>
Page 1 of pages.
Exhibit Index at Page 20.
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<PAGE> 2
MIDCOM COMMUNICATIONS INC.
FORM 10-Q
For the Quarterly Period Ended June 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE
<TABLE>
<CAPTION>
June 30, December 31,
(In thousands) 1997 1996
--------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 573 $ 30,962
Accounts receivable, less allowance for
doubtful accounts of $5,658 and $7,802,
respectively 17,762 16,969
Prepaid expenses and other current assets 1,493 1,548
--------- ---------
Total current assets 19,828 49,479
Furniture, equipment and leasehold
improvements, net 19,078 11,045
Intangible assets, less accumulated
amortization of $48,274 and $39,532 8,331 15,547
Other assets and deferred charges, net 3,851 3,852
--------- ---------
$ 51,088 $ 79,923
========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable $ 12,732 $ 9,680
Current portion of long-term obligations 3,017 3,314
Accounts payable 4,675 3,179
Carrier accounts payable 22,382 17,143
Accrued expenses and other current liabilities 12,342 10,006
Interest payable 3,087 2,932
--------- ---------
Total current liabilities 58,235 46,254
Long-term obligations, less current portion 109,372 99,153
Other long-term liabilities 3,800 3,800
Shareholders' deficit:
Common stock 62,997 68,330
Deferred compensation (1,449) (1,707)
Accumulated deficit (181,867) (135,907)
--------- ---------
Total shareholders' deficit (120,319) (69,284)
--------- ---------
$ 51,088 $ 79,923
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
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MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------------------------------
(In thousands, except per share data) 1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 25,113 $40,805 $49,419 $93,860
Cost of revenue 18,246 29,589 36,223 67,536
--------------------------------------------------------
Gross profit 6,867 11,216 13,196 26,324
Operating expenses:
Selling, general and administrative 22,522 15,843 40,835 32,314
Depreciation 1,379 1,323 2,785 2,674
Amortization 4,283 7,858 8,600 16,536
Settlement of contract dispute - 8,800 - 8,800
Restructuring charge 2,451 600 2,451 2,220
Loss on impairment of assets - 18,765 - 18,765
--------------------------------------------------------
30,635 53,189 54,671 81,309
--------------------------------------------------------
Operating loss (23,768) (41,973) (41,475) (54,985)
Other expense (income):
Interest expense, net 2,430 2,544 4,737 3,910
Other expense (income), net 31 144 (252) 266
--------------------------------------------------------
Loss before provision for income taxes (26,229) (44,661) (45,960) $(59,161)
Provision for income taxes - - - -
--------------------------------------------------------
Net loss $(26,229) $(44,661) $(45,960) $(59,161)
========================================================
Net loss per share $ (1.71) $ (2.89) $ (2.95) $ (3.86)
========================================================
- ------------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding 15,340 15,445 15,596 15,321
========================================================
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
(in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net cash used in operating activities $ (23,450) $ (240)
-------------------------
Investing activities:
Purchases of furniture, equipment and leasehold improvements (6,228) (1,063)
Net assets acquired in acquisition (291) --
Proceeds from sale of assets 33 --
-------------------------
Net cash used in investing activities (6,486) (1,063)
Financing activities:
Proceeds from notes payable, net 871 --
Repayment of notes payable -- (3,200)
Proceeds from long-term obligations 6,544 20,920
Repayment of long-term obligations (1,122) (18,239)
Deferred financing costs (320) (129)
Repurchase of common shares (6,544) --
Proceeds from common stock issued for stock
purchase plan and stock options 118 2,302
-------------------------
Net cash (used in) provided by financing activities (453) 1,654
-------------------------
Net (decrease) increase in cash (30,389) 351
Cash and cash equivalents at beginning of period 30,962 1,083
-------------------------
Cash and cash equivalents at end of period $ 573 $ 1,434
=========================
</TABLE>
See notes to condensed consolidated financial statements.
5
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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 March 31, 1997.
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, 1996 and, as of June 30, 1997, had an accumulated deficit of
$181.9 million. The report of the Company's independent auditors with respect to
the Company's Consolidated Financial Statements for the year ended December 31,
1996 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. BUSINESS COMBINATIONS
In connection with acquisitions of smaller providers of
telecommunications services in 1995, the Company has an obligation to issue or
release from escrow up to a maximum of 151,675 additional shares of its common
stock upon the satisfaction of certain contingencies. Such contingencies
include, maintenance of specified revenue levels for the acquired customer base,
and satisfaction of general representations and warranties.
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 the contingency is
determined.
On January 27, 1997, the Company issued to the assignee of
Communications Services of America, Inc. ("CSA") 10,522 shares of common stock
valued at $10.38 per share, and in April 1997, the Company issued an additional
18,536 additional shares to compensate for the decrease in value of the common
stock since the closing of the acquisition. The Company believes that the
issuance of these shares was exempt from the registration by virtue of Section
4(2) of the Securities Act as a transaction not involving a public offering. The
Company has committed to register these shares under the Securities Act under
certain circumstances.
On January 22, 1997, the Company issued to the shareholders of Fairfield
County Telephone Corporation ("Fairfield") 38,711 shares of common stock valued
at $10.25, and in April 1997 the Company issued an additional 59,631 shares to
compensate for the decrease in value of the common stock since the closing of
the acquisition. The Company believes that the issuance of these shares was
exempt from the registration by virtue of Section 4(2) of the Securities Act as
a transaction not involving a public offering. The Company has committed to
register these shares under the Securities Act under certain circumstances.
6
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MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In January 1997, the Company issued to Richard John 9,457 shares of
common stock valued at $9.38 per share in connection with the acquisition of
Cel-Tech International Corp. The Company believes that the issuance of these
shares was exempt from the registration by virtue of Section 4(2) of the
Securities Act as a transaction not involving a public offering. The Company has
committed to register these shares under the Securities Act under certain
circumstances.
The Company is also obligated as the result of another transaction 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 $8.25 as of August 7,
1997 for the Company's common stock, approximately 309,364 additional shares
would be issuable as a result of these obligations.
3. STOCK REPURCHASE
In connection with the resignation of Ashok Rao, the Company's former
President and Chief Executive Officer, the Company redeemed, in April 1997,
885,360 shares of Common Stock held by Mr. Rao and certain trusts established by
Mr. Rao at a price of $6.80 per share (plus interest at 8% from April 1996), to
be paid ratably over a period of 36 months, beginning May 1997.
4. LOSS ON IMPAIRMENT OF ASSETS
The Company periodically reviews the carrying value of its intangible
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 and recorded a loss on impairment of
assets totaling $18.8 million during the second quarter of 1996.
5. SETTLEMENT OF CONTRACT DISPUTE
On July 19, 1996, the Company and AT&T 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 pursuant to which the Company's minimum
commitment to AT&T will be reduced from approximately $117.0 million to $17.0
million. The letter of intent also provides for the payment by the Company to
AT&T of $8.8 million in two installments.
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.
6. RESTRUCTURING CHARGES
In May 1997, the Company announced that it will begin to transition its
Seattle-based corporate headquarters to Southfield, Michigan, with primary
completion during the fourth quarter of 1997. Corporate support functions
currently located in Seattle include human resources, legal, finance and
information services. Of the Company's total employee base, the relocation plan
will affect approximately 130 employees. In June 1997, the Company
7
<PAGE> 8
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
recorded a restructuring charge of $2.5 million, consisting primarily of the
cost of severance and loss on disposal of assets. In addition to this
restructuring charge, approximately $3.0 to $5.0 million of additional
expenditures are expected to be incurred over the next several years. Although
these additional expenditures relate to the relocation of the Company's
headquarters to Southfield, Michigan, they do not qualify as restructuring costs
under current accounting guidelines.
In March 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
of 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
June 30, 1997, $0.4 million of this restructuring charge remained in accrued
liabilities.
7. 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. Common stock
equivalents are excluded from the calculation of net loss per share due to their
antidilutive effect.
8. DISPUTES AND LITIGATION
CLASS ACTION LAWSUIT. The Company, its Vice 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
were named as defendants in a securities action filed in the U.S. District Court
for the Western District of Washington (the "Complaint"). The Complaint was
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"). In April 1997, the
Board of Directors of the Company unanimously approved the terms of a settlement
of all claims against the Company and all of the individual defendants. The
settlement, which is subject to Court approval and which admits no liability or
fault, provides for the payment of $1.0 million in cash by the Company's
insurance carrier, and the issuance of approximately 420,000 shares of the
Company's common stock, subject to adjustments depending upon the fair market
value of the stock on the date that the settlement is approved by the Court.
SEC INVESTIGATION. The Company was informed in May 1996 that the
Commission was conducting an informal inquiry regarding the Company. In May 1997
the Company learned that a formal order of investigation had been entered by the
Commission. The Company believes that the focus of the investigation is on (i)
the accuracy of disclosures in certain documents filed by the Company with the
SEC; (ii) whether the Company had maintained adequate books and records and had
adequate internal controls; and (iii) whether records had been falsified. The
Company has voluntarily provided documents requested by the Commission, is in
the process of furnishing additional requested documents, and has cooperated
with the Commission in scheduling interviews with certain former Company
personnel. The Company is unable to predict the ultimate outcome of the
investigation. The Company and certain of its former employees could be subject
to civil or criminal sanctions including monetary penalties and injunctive
measures. If imposed on the Company, such penalties and injunctive measures
could have a material adverse effect on the Company's business, financial
condition and results of operation.
FRONTIER LAWSUITS. 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"). The complaint named as defendants the
Company and eleven individuals, all of whom are former employees of Frontier who
resigned their positions with Frontier. Frontier has recently agreed to dismiss
all of the individual defendants in the case except William H. Oberlin,
8
<PAGE> 9
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
the Company's President and CEO and it dropped certain of its causes of action
against Midcom. The surviving claims are that: (i) Mr. Oberlin breached
fiduciary duties as a former employee and officer of Frontier and breached
obligations under an employment agreement with Frontier, (ii) 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; (iii) Midcom aided and abetted Mr.
Oberlin's alleged breaches of fiduciary duties and (iv) Midcom and Mr. Oberlin
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 Midcom hold
all profits which it earns as a result of its hiring of the individual defendant
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 defendant 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 has recently filed a
motion to dismiss the action and it awaits a hearing on this motion. The Company
intends to continue to defend this action and seek dismissal of all remaining
claims.
An affiliate of Frontier has also filed a complaint in the same U.S.
Federal District Court claiming $515,000 for unpaid amounts under a supply
agreement. The Company believes this claim to be without substantial merit and
is vigorously defending it. Frontier has filed a motion to transfer the case to
the FCC as a matter of primary jurisdiction. The Company has filed a motion to
dismiss and it awaits a hearing on the matter and has opposed a transfer of the
case to the FCC because there is no technical issue that its present court is
not capable of answering.
CHERRY COMMUNICATIONS LAWSUIT. In September and December 1995, the
Company purchased two significant customer bases from 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 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 indemnify 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. Separately, the Company also
agreed to pay Cherry Communications 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 $11.0
million) and accrued customer service charges of $840,000. Negotiations between
Cherry Communications and the Company failed to produce a settlement of these
disputes.
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,
9
<PAGE> 10
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(iii) customer service charges of $840,000. 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 accounts. 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 offsets
and counterclaims against Cherry Communications in excess of the sums it has
withheld from 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. As a
result of this litigation, as of September 1, 1996, the Company discontinued
booking revenue generated by the customer bases purchased from Cherry
Communications.
DISCOM LAWSUIT. Discom Corporation ("Discom"), a former distributor of
the Company, in an arbitration proceeding in New York against the Company has
filed to increase the amount of its claim against the Company to approximately
$8.0 million purportedly based upon a lost profit and damage analysis of its
expert. The Company has not yet had an opportunity to depose Discom's expert,
but preliminary indications are that the evaluation is seriously flawed and that
the Company's own expert testimony will more accurately reflect the maximum
possible damage claim of $250,000 to $500,000, which amount has been escrowed by
the Company. The Company disputes that any amounts are owed to Discom and it is
vigorously defending the case. Arbitration dates are scheduled in August,
September and October 1997 with a decision by the arbitration panel expected
near year end.
OTHER LITIGATION. The Company is also party to other routine litigation
incidental 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.
9. LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced significant losses since its inception, with
net losses of approximately $46.0 million, $97.3 million and $33.4 million for
the six months ended June 30, 1997 and for the years ended December 31, 1996,
and 1995, respectively. As a result of these losses, the billing and collection
cycle with its customers, prior acquisition strategy, investments in business
expansion and other factors, the Company has required substantial external
working capital. Given the Company's billing and collection cycle with its
customers and the timing of its payments to its suppliers, the Company generally
pays its 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.
As a result of operating losses and other factors, the Company has
required substantial working capital to fund its operations. To date, the
Company has financed its operations principally through bank borrowings,
subordinated debt, a capital lease facility and the net proceeds from its July
1995 initial public offering of common stock. The Company's currently available
sources of working capital consist of cash flow from operations and available
borrowings under a revolving credit facility with Foothill Capital Corporation
(the "Foothill Credit Facility"). Working capital requirements presently exceed
cash flows from operations and available borrowings. Accordingly, the Company
has sought extended payment terms from certain of its suppliers, delayed
payments to many of its suppliers and other vendors, and has taken other steps
to conserve operating capital. As a result, suppliers and other vendors may
place the Company on credit hold or take other actions, including the
termination of their supply relationship with the Company or the initiation of
collection actions. The report of the Company's independent auditors' with
respect to the Company's Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996 states
that the Company's recurring operating losses and working capital deficiency
raise substantial doubt about the Company's ability to continue as a going
concern.
In February 1997, the Company entered into a revolving credit facility
with Foothill Capital Corporation which permits borrowings of up to $30.0
million subject to a borrowing base limitation of 85% of eligible billed and 75%
of eligible unbilled receivables. Borrowings under this facility bear interest
at a prime rate, plus one percent, and will be secured by substantially all of
the assets of the Company. Under the terms of the Foothill Credit Facility, the
Company is required to maintain minimum levels of adjusted net worth and is
subject to a number of negative covenants which place limitations on, among
other things, capital expenditures, investments and additional debt. Other
covenants preclude payment of cash dividends and require the Company to obtain
the lenders' consent prior to making any acquisitions. Borrowings under the
Foothill Credit Facility approximate $0.9 million at June 30, 1997. In addition,
in February 1997 the Company entered into a lease facility under which
approximately $13.0 million is available for purchases of capital equipment,
which the Company has used primarily to finance the purchase of its high
capacity switching equipment.
As of August 12, 1997, the Company estimated that, in addition to
borrowings available under the Foothill Credit Facility and funding available
under its capital lease facilities, it will require financing of between $20.0
million and $30.0 million in order to fund operating losses, working capital
requirements and capital expenditures during the remainder of 1997. The Company
is currently reviewing proposed financing terms from several different financing
sources and believes that it will be able to secure additional financing. There
can be no assurance, however, that the terms of any of these proposed financings
will be acceptable to the Company. Further, the Company's estimated capital
requirements are based on the assumption that the maximum borrowing availability
under the Foothill Credit Facility will be increased from $30.0 million to $50.0
million through 1998. The lender under the Foothill Credit Facility is under no
obligation to increase the maximum borrowing availability thereunder and,
therefore, there can be no assurance that this increase will occur.
The Company believes that it has sufficient borrowing under the
Foothill Credit Facility to fund a $4.0 million interest payment on the
Convertible Notes due August 15, 1997. The Company expects, however, that as a
result of borrowing base limitations, borrowing availability under the Foothill
Credit Agreement will not be sufficient to fund short term working capital
needs. Accordingly, the Company is in discussions with its lender under the
Foothill Credit Facility to obtain bridge financing of between $6.0 million and
$8.0 million to fund these short term working capital requirements until it is
able to obtain long term financing. There can be no assurance that the Company
will be able to secure this bridge financing on terms that the Company finds
acceptable.
There can be no assurance that borrowings available under the Foothill
Credit Facility together with the Company's other anticipated and ultimately
available sources of working capital will be sufficient to implement the
Company's operating strategy or meet the Company's other working capital
requirements. The exact amount and timing of the Company's working capital
requirements, and the Company's ability to continue as a going concern, depend
on numerous factors, including the amount of additional financing the Company is
able to obtain, the level of, and gross margin on, future sales, the outcome of
outstanding contingencies and disputes, the payment terms obtained from the
Company's suppliers and the amount and timing of capital expenditures. If (i)
the Company experiences greater than anticipated capital requirements, (ii) the
Company is determined to be liable for, or otherwise agrees to settle or
compromise, any material claim against it, (iii) the Company is unable to make
future borrowings under any of its credit facilities for any reason, (iv) the
Company is unable to increase the maximum available borrowings under the
Foothill credit Facility when, and to the extent necessary, (v) the
implementation of the Company's operating strategy fails to produce the
anticipated revenue growth and cash flows or (vi) additional working capital is
required for any other reason, the Company will be required to refinance all or
a portion of its existing debt, sell assets, curtail operations 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 would 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. If the Company is unable to obtain sufficient
funds to satisfy its cash requirements, it will be forced to curtail operations,
dispose of assets or seek extended payment terms from its vendors. There can be
no assurance that the Company would be able to reduce expenses or successfully
complete other steps necessary to continue as a going concern. Such events would
materially and adversely affect the value of the Company's debt and equity
securities. The failure of the Company to obtain sufficient funds to satisfy its
cash requirements could force the Company to seek protection under the federal
bankruptcy laws.
10
<PAGE> 11
MIDCOM COMMUNICATIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
refinance all or a portion of its existing debt, sell assets or seek extended
payment terms from its vendors. There can be no assurance that the Company's
lenders will continue to make borrowings available under the Foothill Credit
Facility, that additional financing will be available on acceptable terms or,
that the Company will be able to obtain payment terms from vendors or
successfully complete other steps necessary to continue as a going concern. Any
additional financing may involve substantial dilution to the interest of the
Company's shareholders. The failure of the Company to obtain sufficient funds to
satisfy its cash requirements could force the Company to seek protection under
the federal bankruptcy laws.
10. SUBSEQUENT EVENTS
On June 24, 1997, the Company announced that it had received
notification from Nasdaq that a hearing had been scheduled to determine whether
the Company's common stock would continue to be listed on the Nasdaq National
Market. The basis for the hearing was the Company's failure to meet Nasdaq net
tangible asset requirement for listed companies. The hearing was held at Nasdaq
headquarters in Washington, D.C. on July 17, 1997. On July 18, 1997, the Nasdaq
review panel granted the Company a waiver of the Nasdaq net tangible asset
requirement. The waiver is for an indefinite period but is subject to review for
material deviations from the Company's financial plan.
On August 13, 1997, the Company announced that it had entered into a
definitive agreement to merge with Phoenix Network, Inc. ("Phoenix"), a provider
of long distance and other telecommunications services. Under the agreement,
Phoenix shareholders will receive 9.1 million shares of Midcom stock. Completion
of the transaction is expected by year-end and is conditioned upon obtaining
governmental and shareholder approval as well as MIDCOM obtaining $20.0 million
in financing. In addition, it was announced on August 13, 1997 that Phoenix had
entered into an agreement to purchase Trans National Communications subject to
Midcom's due diligence. If that transaction is completed Midcom will provide
Phoenix shareholders approximately 1.5 million additional shares of Midcom stock
and will assume approximately $15.7 million of debt.
11
<PAGE> 12
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 herein 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 those expressed or implied by such forward-looking
statements. Forward-looking statements herein include, but are not limited to,
those concerning anticipated growth in sales and profitability; ability to
successfully relocate the Company's headquarters and the impact of such
relocation on operations; and adequacy of available sources of working capital
to implement strategies. Relevant risks and uncertainties include, but are not
limited to, 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 relocate the Company's executive offices, 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 secure
additional sources of working capital if and when needed, inability to manage
growth or integrate acquired operations and regulatory changes. Additional risks
and uncertainties include those described in the Company's Form 10-K and other
filings with the Securities and Exchange Commission, press releases and other
communications.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------
(In millions) June 30, 1997 Mar 31, 1997 Dec 31, 1996 June 30, 1996
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 25.1 $ 24.3 $ 24.2 $ 40.8
Gross profit 6.9 6.3 6.1 11.2
Selling, general and administrative 22.5 18.3 17.0 15.8
Depreciation and amortization 5.7 5.7 6.5 9.2
Operating loss (23.8) (17.7) (17.4) (42.0)
Net loss ($26.2) ($19.7) ($19.9) ($44.7)
Net loss per share ($1.71) ($1.24) ($1.26) ($2.89)
--------------------------------------------------------------------------------------------------------------
</TABLE>
REVENUE. Revenue for the quarter ended June 30, 1997 decreased by 38.5%
from $40.8 million in the second quarter of 1996 to $25.1 million. Year-to-date
revenue of $49.4 million represents a 47.3% decrease from the $93.9 million
reported for the same period in 1996. The decrease is attributable to customer
attrition in acquired customer bases and loss of revenue from a customer base
which is the subject of a dispute, offset by an increase in revenue generated by
the Company's internal sales force. Revenue increased in the quarter compared to
the $24.3 for the first quarter of 1997 and $24.2 reported for the fourth
quarter of 1996. The Company expects that succeeding quarterly revenue will
continue to increase due to sales generated by its direct sales force.
GROSS MARGIN. The Company's cost of revenue consists of the cost of
service provided by local and interexchange carriers. Gross margin was 27.3% and
26.7% for the quarter and six month periods ended June 30, 1997, respectively,
versus 27.5% and 28.0% for the same periods in 1996, respectively. The decline
in gross margin from 1996 is the result of changes in the mix of customers, and
an increase in fixed costs as a percentage of overall costs due to the decline
in revenue. These factors were offset in part by negotiation of price reductions
with some of the Company's major suppliers. Gross margin improved from 26.0% for
the quarter ended March 31, 1997 due to changes in customer mix. In future
periods, the Company expects gross margin to improve with the installation of
its nationwide switch network.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of payroll and related expenses for
administrative, customer support and marketing personnel,
12
<PAGE> 13
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 $22.5 million for the quarter ended June
30, 1997 compared to $15.8 million in June 1996 and $18.3 million for the
quarter ended March 31, 1997. For the six month period ended June 30, 1997,
selling, general and administrative expenses increased from $32.3 million in
1996 to $40.8 million in 1997. The increase over 1996 is due to several factors,
including an increase in payroll, contractors, travel and entertainment, and
commissions expense, and expenses related to the hiring of additional personnel,
primarily to expand the Company's sales efforts. These increases were offset by
decreases in billing fees and bad debt expense. The increase in selling, general
and administrative expenses over the three months ended March 31, 1997 is due to
increases in payroll, contractors, commissions expense, professional fees and
bad debt expense. The Company employed 683 and 335 persons on a full-time basis
as of June 30, 1997 and 1996, respectively.
DEPRECIATION. Depreciation expense remained relatively constant at $1.4
million for the quarter ended June 30, 1997 compared to $1.3 million for the
same quarter in 1996. For the six months ended June 30, 1997, depreciation was
$2.8 million versus $2.7 million in the same period of 1996. The Company is
currently installing six state-of-the-art high capacity switches at an estimated
aggregate cost of $15.0 million. The Company expects that, as a result of the
deployment of its switches, depreciation expense will increase.
AMORTIZATION. Amortization expense decreased to $4.3 million for the
quarter ended June 30, 1997 from $7.9 million in 1996. Year-to-date amortization
was $8.6 million in 1997 versus $16.5 million for the same period in 1996. The
decrease is due to the write-down of customer bases in June 1996 due to an
impairment loss and certain other customer bases becoming fully amortized. The
Company expects that as a result of these factors, amortization expense will
continue to decrease.
SETTLEMENT OF CONTRACT DISPUTE. On July 19, 1996, the Company and AT&T
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
pursuant to which the Company's minimum commitment to AT&T will be reduced from
approximately $117.0 million to $17.0 million. The letter of intent also
provides for the payment by the Company to AT&T of $8.8 million in two
installments.
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.
RESTRUCTURING CHARGE. In April 1997, the Company announced that it will
begin to transition its Seattle-based corporate headquarters to Southfield,
Michigan, with primary completion during the fourth quarter of 1997. Corporate
support functions located in Seattle include human resources, legal, finance and
information services. Of the Company's total employee base, the relocation plan
is expected to affect approximately 130 employees. In June 1997, the Company
recorded a restructuring charge of $2.5 million which consists primarily of the
estimated cost of severance and loss on disposal of assets. In addition to this
restructuring charge, approximately $3.0 to $5.0 million of additional
expenditures are expected to be incurred over the next several years. Although
these additional expenditures relate to the relocation of the Company's
headquarters to Southfield Michigan, they do not qualify as restructuring costs
under current accounting guidelines.
In March 1996, the Company made announcements regarding changes in
senior management and the restructuring of its operations in order to reduce
expenses. 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 of 1996 and $0.6 million during the
second quarter of 1996, the major components of which relate
13
<PAGE> 14
to severance and lease cancellation charges. As of June 30, 1997, $0.4 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 intangible 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." Based on certain changes in
circumstances that occurred in 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.
Additionally, 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 and recorded a loss on
impairment of assets totaling $18.8 million during the second quarter of 1996.
OTHER EXPENSES. Interest expense increased over 1996 primarily due to an
increase in average borrowings outstanding. At June 30, 1997, December 31, 1996
and June 30, 1996, the Company had outstanding interest-bearing obligations of
$125.1 million, $112.1 million and $58.0 million, respectively.
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.
NET LOSS. For the quarter ended June 30, 1997, the Company reported a
net loss of $26.2 million ($1.71 per share) compared to a loss of $44.7 million
($2.89 per share) for the same period in 1996. For the six months ended June 30,
1997, the Company reported a net loss of $46.0 million ($2.95 per share) versus
a loss of $59.2 million ($3.86 per share.) The substantial increase in net loss
for the quarter and six month periods ended June 30, 1997 over the corresponding
periods in 1996 is attributable to the declines in revenue and gross margin, as
well as increases in operating expenses. The loss in the current quarter
includes a non-recurring charge of $2.5 million (or $0.16 per share) related to
the relocation of the Company's headquarters from Seattle, Washington to
Southfield, Michigan. Results in the second quarter 1996 included a one-time
charge of $18.8 million related to a loss on impairment of assets.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced significant losses since its inception, with
net losses of approximately $46.0 million, $97.3 million and $33.4 million for
the six months ended June 30, 1997 and for the years ended December 31, 1996,
and 1995, respectively. As a result of these losses, the billing and collection
cycle with its customers, prior acquisition strategy, investments in business
expansion and other factors, the Company has required substantial external
working capital. Given the Company's billing and collection cycle with its
customers and the timing of its payments to its suppliers, the Company generally
pays its 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 and cash equivalents balance were $0.6 million at
June 30, 1997 versus $31.0 million at December 31, 1996. During the six months
ended June 30, 1997, the Company used $23.5 million of cash in operations
compared to $0.2 during the same period in 1996. In February 1997, the Company
made a $3.9 million interest payment in connection with the convertible
subordinated notes payable. During 1997 and 1996, the Company experienced
significant operating losses which resulted in a use of cash in operating
activities.
The Company invested $6.2 million in cash for equipment and leasehold
improvements during the first six months of 1997, compared to $1.1 million for
the same period of 1996. The increase is due primarily to
14
<PAGE> 15
expenditures related to the purchase and installation of the high-capacity
switches. During 1997, the Company used $0.3 million in connection with a prior
business acquisition.
During the first six months of 1997, the Company received $0.9 million
in net proceeds in the form of borrowings under the Company's revolving credit
facility. During the first six months of 1997, the Company received $0.1 million
in proceeds in connection with the exercise of stock options, compared to $2.3
million received during the same period in 1996.
In connection with the resignation of Ashok Rao, the Company's former
President and Chief Executive Officer, the Company redeemed, in April 1997,
885,360 shares of Common Stock held by Mr. Rao and certain trusts established by
Mr. Rao at a price of $6.80 per share (plus interest at 8% from April 1996), to
be paid in equal monthly installments over a period of 36 months, beginning May
1997. The Company's election to redeem such shares of Common Stock will
adversely affect the Company's liquidity.
In August and September of 1996, the Company completed a private
placement (the "Private Placement") of $97.7 million in aggregate principal
amount of 8 1/4% Convertible Subordinated Notes due 2003 (the "Notes"). Interest
on the Notes is due 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. On February 15, 1997, the Company made an interest payment in the
aggregate amount of $3.9 million, and is required to make a $4.0 million
interest payment on August 15, 1997. 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 would 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 would have
a material adverse effect on the Company's liquidity, results of operation and
financial condition.
The unpaid balance of a promissory note delivered to 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 purchased 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) and accrued customer service charges of $0.8
million. Negotiations between Cherry Communications and the Company failed to
produce a settlement of these disputes which are now the subject of litigation.
As of September 1, 1996, the Company discontinued booking revenue generated by
the customer bases acquired from Cherry Communications. See "Note 8 --Disputes
and Litigation" in Item 1 of Part I above.
15
<PAGE> 16
In February 1997, the Company entered into a revolving credit facility
with Foothill Capital Corporation which permits borrowings of up to $30.0
million subject to a borrowing base limitation of 85% of eligible billed and 75%
of eligible unbilled receivables. Borrowings under this facility bear interest
at a prime rate, plus one percent, and will be secured by substantially all of
the assets of the Company. Under the terms of the Foothill Credit Facility, the
Company is required to maintain minimum levels of adjusted net worth and is
subject to a number of negative covenants which place limitations on, among
other things, capital expenditures, investments and additional debt. Other
covenants preclude payment of cash dividends and require the Company to obtain
the lenders' consent prior to making any acquisitions. Borrowings under the
Foothill Credit Facility approximate $0.9 million at June 30, 1997. In addition,
in February 1997 the Company entered into a lease facility under which
approximately $13.0 million is available for purchases of capital equipment,
which the Company has used primarily to finance the purchase of its high
capacity switching equipment.
As of August 12, 1997, the Company estimated that, in addition to
borrowings available under the Foothill Credit Facility and funding available
under its capital lease facilities, it will require financing of between $20.0
million and $30.0 million in order to fund operating losses, working capital
requirements and capital expenditures during the remainder of 1997. The Company
is currently reviewing proposed financing terms from several different financing
sources and believes that it will be able to secure additional financing. There
can be no assurance, however, that the terms of any of these proposed financings
will be acceptable to the Company. Further, the Company's estimated capital
requirements are based on the assumption that the maximum borrowing availability
under the Foothill Credit Facility will be increased from $30.0 million to $50.0
million through 1998. The lender under the Foothill Credit Facility is under no
obligation to increase the maximum borrowing availability thereunder and,
therefore, there can be no assurance that this increase will occur.
The Company believes that it has sufficient borrowing under the
Foothill Credit Facility to fund a $4.0 million interest payment on the
Convertible Notes due August 15, 1997. The Company expects, however, that as a
result of borrowing base limitations, borrowing availability under the Foothill
Credit Agreement will not be sufficient to fund short term working capital
needs. Accordingly, the Company is in discussions with its lender under the
Foothill Credit Facility to obtain bridge financing of between $6.0 million and
$8.0 million to fund these short term working capital requirements until it is
able to obtain long term financing. There can be no assurance that the Company
will be able to secure this bridge financing on terms that the Company finds
acceptable.
There can be no assurance that borrowings available under the Foothill
Credit Facility together with the Company's other anticipated and ultimately
available sources of working capital will be sufficient to implement the
Company's operating strategy or meet the Company's other working capital
requirements. The exact amount and timing of the Company's working capital
requirements, and the Company's ability to continue as a going concern, depend
on numerous factors, including the amount of additional financing the Company is
able to obtain, the level of, and gross margin on, future sales, the outcome of
outstanding contingencies and disputes, the payment terms obtained from the
Company's suppliers and the amount and timing of capital expenditures. If (i)
the Company experiences greater than anticipated capital requirements, (ii) the
Company is determined to be liable for, or otherwise agrees to settle or
compromise, any material claim against it, (iii) the Company is unable to make
future borrowings under any of its credit facilities for any reason, (iv) the
Company is unable to increase the maximum available borrowings under the
Foothill credit Facility when, and to the extent necessary, (v) the
implementation of the Company's operating strategy fails to produce the
anticipated revenue growth and cash flows or (vi) additional working capital is
required for any other reason, the Company will be required to refinance all or
a portion of its existing debt, sell assets, curtail operations 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 would 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. If the Company is unable to obtain sufficient
funds to satisfy its cash requirements, it will be forced to curtail operations,
dispose of assets or seek extended payment terms from its vendors. There can be
no assurance that the Company would be able to reduce expenses or successfully
complete other steps necessary to continue as a going concern. Such events would
materially and adversely affect the value of the Company's debt and equity
securities. The failure of the Company to obtain sufficient funds to satisfy its
cash requirements could force the Company to seek protection under the federal
bankruptcy laws.
The report of the Company's independent auditors with respect to the
Company's 1996 Consolidated Financial Statements states that the Company's
recurring operating losses and shareholders' deficit raise substantial doubt
about the Company's ability to continue as a going concern. Similar going
concern disclosure was included in the report of the Company's independent
auditors with respect to the Company's 1995 Consolidated Financial Statements.
The Consolidated Financial Statements included with this Report have been
prepared assuming the Company would continue as a going concern and do not
include any adjustments to reflect the possible future effects on the
recoverability and classification of assets and liabilities that may result from
this uncertainty.
ADOPTION OF ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per share,
the dilutive effect of stock options will be excluded. There is no expected
impact on primary earnings per share. The Company has not yet determined what
the impact of Statement 128 will be on the calculation of fully diluted earnings
per share.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See the information contained in "Note 8 -- Disputes and Litigation" in
Item 1 of Part I above which information is, by this reference, incorporated
herein.
ITEM 5. OTHER INFORMATION
10. SUBSEQUENT EVENTS
On June 24, 1997, the Company announced that it had received
notification from Nasdaq that a hearing had been scheduled to determine whether
the Company's common stock would continue to be listed on the Nasdaq National
Market. The basis for the hearing was the Company's failure to meet Nasdaq net
tangible asset requirement for listed companies. The hearing was held at Nasdaq
headquarters in Washington, D.C. on July 17, 1997. On July 18, 1997, the Nasdaq
review panel granted the Company a waiver of the Nasdaq net tangible asset
requirement. The waiver is for an indefinite period but is subject to review for
material deviations from the Company's financial plan.
On August 13, 1997, the Company announced that it had entered into a
definitive agreement to merge with Phoenix Network, Inc. ("Phoenix"), a provider
of long distance and other telecommunications services. Under the agreement,
Phoenix shareholders will receive 9.1 million shares of Midcom stock. Completion
of the transaction is expected by year-end and is conditioned upon obtaining
governmental and shareholder approval as well as MIDCOM obtaining $20.0 million
in financing. In addition, it was announced on August 13, 1997 that Phoenix had
entered into an agreement to purchase Trans National Communications subject to
Midcom's due diligence. If that transaction is completed Midcom will provide
Phoenix shareholders approximately 1.5 million additional shares of Midcom stock
and will assume approximately $15.7 million of debt.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<S> <C>
*10.1 Master Lease Agreement, dated January 15, 1997 (the "Comdisco
Lease Agreement"), between the Company and Comdisco, Inc.
("Comdisco"), together with Schedule No. 1 through Schedule No. 7
thereto, filed in replacement of Exhibit 10.2 to the Company's
Quarterly Report on Form 10Q for the fiscal quarter ended March
31, 1997 filed with the Commission on May 15, 1997 (SEC File No.
000-26118).
*10.2 Addendum to Comdisco Lease Agreement, dated as of January 15,
1997, between the Company and Comdisco.
*10.3 Amendment Number One, dated as of April 1, 1997, to Loan and
Security Agreement by and among Midcom Communications Inc.,
Adval, Inc., Adval Data Corporation, Advanced Network Design,
Cel-Tech International Corp. and PacNet, Inc., as borrowers, and
Foothill Capital Corporation, as lender.
*10.4 Amendment Number Two, dated as of May 29, 1997, to Loan and
Security Agreement by and among Midcom Communications Inc.,
Adval, Inc., Adval Data Corporation, Advanced Network Design,
Cel-Tech International Corp. and PacNet, Inc., as borrowers, and
Foothill Capital Corporation, as lender.
*11.1 Statement re: computation of net loss per share.
*27.1 Financial Data Schedule.
</TABLE>
- -------------------
* Exhibit filed herewith.
(b) Reports on Form 8-K
17
<PAGE> 18
The following Current Reports on From 8-K were filed by the
Company during the period covered by this Quarterly Report on
Form 10-Q.
1) Current report on Form 8-K filed with the Commission on May 1,
1997 reporting the issuance of a press release disclosing an
agreement in principal to settle a class action lawsuit and
arbitration decision related to the repurchase of shares of
the Company's common stock from the Company's former
President.
2) Current report on Form 8-K filed with the Commission on May 2,
1997 reporting the issuance of a press release disclosing
additional steps to restructure the Company's operations.
3) Current report on Form 8-K filed with the Commission on June
24, 1997 reporting the issuance of a press release disclosing
that it had received notice from the Nasdaq Stock Market, Inc.
that a hearing had been scheduled to determine whether the
Company's common stock will continue to be listed on the
Nasdaq National Market.
18
<PAGE> 19
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/ WILLIAM H. OBERLIN
----------------------------------------
Date: August 13, 1997 William H. Oberlin
President &
Chief Executive Officer
/s/ JAYNE DIORKA
----------------------------------------
Vice President &
Corporate Controller
(Principal Financial Officer)
19
<PAGE> 20
MIDCOM COMMUNICATIONS INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF EXHIBIT
REGULATION S-K) DESCRIPTION
--------------- -----------
<S> <C>
10.1 Master Lease Agreement, dated January 15, 1997 (the
"Comdisco Lease Agreement"), between the Company and
Comdisco, Inc. ("Comdisco"), together with Schedule No. 1
through Schedule No. 7 thereto, filed in replacement of
Exhibit 10.2 to the Company's Quarterly Report on Form 10Q
for the fiscal quarter ended March 31, 1997 filed with the
Commission on May 15, 1997 (SEC File No. 000-26118).
10.2 Addendum to Comdisco Lease Agreement, dated as of January
15, 1997, between the Company and Comdisco.
10.3 Amendment Number One, dated as of April 1, 1997, to Loan and
Security Agreement by and among Midcom Communications Inc.,
Adval, Inc., Adval Data Corporation, Advanced Network
Design, Cel-Tech International Corp. and PacNet, Inc., as
borrowers, and Foothill Capital Corporation, as lender.
10.4 Amendment Number Two, dated as of May 29, 1997, to Loan and
Security Agreement by and among Midcom Communications Inc.,
Adval, Inc., Adval Data Corporation, Advanced Network
Design, Cel-Tech International Corp. and PacNet, Inc., as
borrowers, and Foothill Capital Corporation, as lender.
11.1 Statement re: computation of net loss per share.
27.1 Financial Data Schedule.
</TABLE>
20
<PAGE> 1
EXHIBIT 10.1
[MIDCOM LOGO]
MASTER LEASE AGREEMENT dated January 15, 1997 by and between COMDISCO, INC.
("Lessor") and MIDCOM Communications Inc. ("Lessee").
IN CONSIDERATION of the mutual agreements described below, the parties agree as
follows (all capitalized terms are defined in Section 14.13):
1. Property Leased.
Lessor leases to Lessee all of the Equipment described on each
Schedule. In the event of a conflict, the terms of a Schedule prevail over this
Master Lease.
2. Term.
On the Commencement Date Lessee will be deemed to accept the Equipment,
will be bound to its rental obligations for each item of Equipment and the term
of a Schedule will begin and continue through the Initial Term and thereafter
until terminated by either party upon prior written notice received during the
Notice Period. No termination may be effective prior to the expiration of the
initial Term.
3. Rent and Payment.
Rent is due and payable in advance, in immediately available funds, on
the first day of each Rent Interval to the payee and at the location specified
in Lessor's invoice. Interim Rent is due and payable when invoiced. If any
payment is not made when due, Lessee will pay interest at the Overdue Rate.
4. Selection: Warranty and Disclaimer of Warranties.
4.1 Selection. Lessee acknowledges that it has selected the Equipment
and disclaims any reliance upon statements made by the Lessor.
4.2 Warranty and Disclaimer of Warranties. Lessor warrants to Lessee
that, so long as Lessee is not in default, Lessor will not disturb Lessee's
quiet and peaceful possession, and unrestricted use of the Equipment. To the
extent permitted by the manufacturer, Lessor assigns to Lessee during the term
of the Schedule any manufacturer's warranties for the Equipment. Lessor MAKES
NO OTHER WARRANTY, EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER, INCLUDING,
WITHOUT LIMITATION, THE MERCHANTABILITY OF THE EQUIPMENT OR ITS FITNESS FOR A
PARTICULAR PURPOSE. Lessor is not responsible for any liability, claim, loss,
damage or expense of any kind (including strict liability in tort) caused by
the Equipment except for any loss or damage caused by the negligent acts of
Lessor. In no event is Lessor responsible for special, incidental or
consequential damages.
5. Title and Assignment.
5.1 Title. Lessee holds the Equipment subject and subordinate to the
rights of the Owner, Lessor, any Assignee and any Secured Party. Lessee
authorizes Lessor, as Lessee's agent, to prepare, execute and file in Lessee's
name precautionary Uniform Commercial Code financing statements showing the
interest of the Owner. Lessor, and any Assignee or Secured Party in the
Equipment and to insert serial numbers in Schedules as appropriate. Except as
provided in Sections 5.2 and 7.2, Lessee will, at its expense, keep the
Equipment free and clear from any liens or encumbrances of any kind (except any
caused by Lessor) and will indemnify and hold Lessor, Owner, any Assignee and
Secured Party harmless from and against any loss caused by Lessee's failure to
do so.
5.2 Relocation or Sublease. Upon prior written notice, Lessee may
relocate Equipment to any location within the continental United States provided
(i) the Equipment will not be used by an entity exempt from federal income tax,
(ii) all additional costs (including any administrative fees, additional taxes
and insurance coverage) are reconciled and promptly paid by Lessee.
Lessee may sublease the Equipment upon the reasonable consent of the
Lessor and the Secured Party. Such consent to sublease will be granted if (i)
Lessee meets the relocation requirements set out above, (ii) the sublease is
expressly subject and subordinate to the terms of the Schedule., (iii) Lessee
assigns its rights in the sublease to Lessor and the Secured Party as
additional collateral and security, (iv) Lessee's obligation to maintain and
insure the Equipment is not altered, (v) all financing statements required to
continue the Secured Party's prior perfected security interest are filed, and
(vi) the sublease is not to a leasing entity affiliated with the manufacturer
of the Equipment described on the Schedule. Lessor acknowledges Lessee's right
to sublease for a term which extends beyond the expiration of the Initial Term.
If Lessee subleases the Equipment for a term extending beyond the expiration of
such Initial Term of the applicable Schedule, Lessee shall remain obligated
upon the expiration of the Initial Term to return such Equipment, or, at
Lessor's option to (i) return Like Equipment or (ii) negotiate a mutually
acceptable lease extension or purchase. If the parties cannot mutually agree
upon the terms of an extension or purchase, the term of the Schedule will
extend upon the original terms and conditions until terminated pursuant to
Section 2.
No relocation or sublease will relieve Lessee from any of its obligations under
this Master Lease and the applicable Schedule.
5.3 Assignment by Lessor. The terms and conditions of each Schedule
have been fixed by Lessor in order to permit Lessor to sell and/or assign or
transfer its interest or grant a security interest in each Schedule and/or the
Equipment to a Secured Party or Assignee. In that event the term Lessor will
mean the Assignee and any Secured Party. However, any assignment, sale, or
other transfer by Lessor will not relieve Lessor of its obligations to Lessee
and will not materially change Lessee's duties or materially increase the
burdens or risks imposed on Lessee. The Lessee consents to and will acknowledge
such assignments in a written notice given to Lessee. Lessee also agrees that:
(a) The Secured Party will be entitled to exercise all of Lessor's
rights, but will not be obligated to perform any of the
obligations of Lessor. The Secured Party will not disturb
Lessee's quiet and peaceful possession and unrestricted use of
the Equipment so long as Lessee is not in default and the
Secured Party continues to receive all Rent payable under the
Schedule:
(b) Lessee will pay all Rent and all other amounts payable to the
Secured Party, despite any defense or claim which it has against
Lessor. Lessee reserves its right to have recourse directly
against Lessor for any defense or claim; and
(c) Subject to and without impairment of Lessee's leasehold rights
in the Equipment, Lessee holds the Equipment for the Secured
Party to the extent of the Secured Party's rights in that
Equipment.
6. Net Lease, Taxes and Forms.
6.1 Net Lease.
Each Schedule constitutes a net lease. Lessee's obligation to pay Rent
and all other amounts is absolute and unconditional and is not subject to any
abatement, reduction, set-off, defense, counterclaim, interruption, deferment
or recoupment for any reason whatsoever.
6.2 Taxes and Fees. Lessee will pay when due or reimburse Lessor for
all taxes, fees or any other charges (together with any retained interest or
penalties not arising from the negligence of Lessor) accrued for or arising
during the term of each Schedule against Lessor, Lessee or the Equipment by any
governmental authority (except only Federal, state and local taxes on the
capital or the net income of Lessor). Lessor will file all personal property
tax returns for the Equipment and pay all property taxes due. Lessee will
reimburse Lessor for property taxes within thirty (30) days of receipt of an
invoice.
7. Care, Use, Maintenance, Attachments, Reconfigurations and inspections
by Lessor.
7.1 Care, Use and Maintenance. Lessee will maintain the Equipment in
good operating order and appearance, protect the Equipment from deterioration,
other than normal wear and tear, and will not use the Equipment for any purpose
other than that for which it was designed. If commercially available, Lessee
will maintain in force a standard maintenance contract with the manufacturer of
the Equipment, or another party acceptable to Lessor, and upon request will
provide Lessor with a complete copy of that contract. If Lessee has the
Equipment maintained by a party other than the manufacturer, Lessee agrees to
pay any costs necessary for the manufacturer to bring the Equipment to then
current release, revision and engineering change levels, and to re-certify the
Equipment as eligible for manufacturer's maintenance at the expiration of the
lease term. The lease term will continue upon the same terms and conditions
until recertification has been obtained.
7.2 Attachments and Reconfigurations. Upon prior written notice to
Lessor, Lessee may reconfigure and install Attachments on the Equipment. In the
event of such a Reconfiguration or Attachment, Lessee shall, upon return of the
Equipment, at its expense, restore the Equipment to the original configuration
specified on the Schedule in accordance with the manufacturer's specifications
and in the same operating order, repair and appearance as when installed
(normal wear and tear excluded). If any parts are removed from the Equipment
during the Reconfiguration or Attachment, the restoration will include, at
Lessee's option, the installation of either the original removed parts or like
parts. Alternatively, with Lessors prior written consent which will not be
unreasonably withheld, Lessee may return the Equipment with any Attachment or
upgrade. If any parts of the Equipment are removed during a Reconfiguration or
Attachment, Lessor may require Lessee to provide additional security,
satisfactory to the Lessor, in order to ensure performance of Lessee's
obligations set forth in this subsection. Neither Attachments nor parts
installed on Equipment in the course of Reconfiguration shall be accessions to
the Equipment.
However, if the Reconfiguration or Attachment (i) adversely affects
Lessor's tax benefits relating to the Equipment: (ii) is not capable of being
removed without causing material damage to the Equipment; or (iii) if at the
time of the reconfiguration or attachment the manufacturer does not offer on a
commercial
<PAGE> 2
basis a means for the removal of the additional items: then such Reconfiguration
or Attachment is subject to the prior written consent of Lessor.
7.3 Inspection by Lessor. Upon request, Lessee, during reasonable
business hours and subject to Lessee's security requirements, will make the
Equipment and its related log and maintenance records available to Lessor for
inspection.
8. Representations and Warranties of Lessee.
Lessee represents and warrants that for the Master Lease and each
Schedule:
(a) The execution, delivery and performance of the Lessee have been
duly authorized by all necessary corporate action;
(b) The individual executing was duly authorized to do so;
(c) The Master Lease and each Schedule constitute legal, valid and
binding agreements of the Lessee enforceable in accordance with
their terms;
(d) The Equipment is personal property and when subjected to use by
the Lessee will not be or become fixtures under applicable law.
9. Delivery and Return of Equipment.
Lessee assumes the full expense of transportation and in-transit
insurance to Lessee's premises and for installation of the Equipment. Upon
expiration or termination of each Schedule, Lessee will, at Lessor's
instructions and at Lessee's expense (including transportation and in-transit
insurance), have the Equipment deinstalled, audited by the manufacturer, packed
and shipped in accordance with the manufacturer's specifications and returned
to Lessor in the same operating order, repair and appearance as when installed
(ordinary wear and tear excluded), to a location within the continental United
States as directed by Lessor. All items returned to Lessor in addition to the
Equipment become property of Lessor.
10. Labeling.
Upon request, Lessee will mark the Equipment indicating Lessor's
interest. Lessee will keep all Equipment free from any other marking or labeling
which might be interpreted as a claim of ownership.
11. Indemnity.
Lessee will indemnify and hold Lessor, any Assignee and any Secured
Party harmless from and against any and all claims, costs, expenses, damages
and liabilities, including reasonable attorney's fees, arising out of the
ownership (for strict liability in tort only), selection, possession, leasing,
operation, control, use, maintenance, delivery, return or other disposition of
the Equipment. However, Lessee is not responsible to a party indemnified
hereunder for any claims, costs, expenses, damages and liabilities occasioned
by the negligent acts of such indemnified party. Lessee agrees to carry bodily
injury and property damage liability insurance during the term of the Master
Lease in amounts and against risks customarily insured against by the Lessee on
equipment owned by it. Any amounts received by Lessor under that insurance will
be credited against Lessee's obligations under this Section.
12. Risk of Loss.
12.1 Lessee's Risk of Loss. If the Schedule indicates that the Lessee
has responsibility for the risk of loss of the Equipment, then the following
terms will apply:
Effective upon delivery and until the Equipment is returned, Lessee
relieves Lessor of responsibility for all risks of physical damage to or loss
or destruction of the Equipment. Lessee will carry casualty insurance for
each item of Equipment in an amount not less than the Casualty Value. All
policies for such insurance will name the Lessor and any Secured Party as
additional insured and as loss payee, and will provide for at least thirty (30)
days prior written notice to the Lessor of cancellation or expiration. The
Lessee will furnish appropriate evidence of such insurance.
Lessee shall promptly repair any damaged item of Equipment unless such
Equipment has suffered a Casualty Loss. Within fifteen (15) days of a Casualty
Loss, Lessee will provide written notice of that loss to Lessor and Lessee
will, at Lessor's option, either (a) replace the item of Equipment with Like
Equipment and marketable title to the Like Equipment will automatically vest in
Lessor or (b) pay the Casualty Value and after that payment and the payment of
all other amounts due and owing, Lessee's obligation to pay further rent for
the item of Equipment will cease.
12.2 Lessor's Risk of Loss. If the Schedule indicates that the Lessor
has responsibility for the risk of loss of the Equipment, then the following
terms will apply:
Effective upon delivery and throughout the Initial Term of a Schedule
and any extension, Lessor agrees to insure the Equipment against physical
damage to or loss or destruction due to external cause as specified by the
terms of the Lessor's then current insurance policy. Lessor relieves Lessee of
responsibility for physical damage to or loss or destruction of Equipment
reimbursed by that insurance. Lessee will give Lessor prompt notice of any
damage, loss or destruction to any item of Equipment and Lessor will determine
within fifteen (15) days of its receipt of that notice whether the item has
suffered a Casualty Loss.
If any item of Equipment suffers damage or a Casualty Loss which is
reimbursable under Lessor's insurance, upon payment by Lessee of Lessor's
deductible, Lessor will: (i) (for damaged equipment) arrange and pay for the
repair of any damaged item of Equipment or (ii) for any Casualty Loss) at
Lessor's option either replace the item of Equipment with Like Equipment, or
upon payment of all other amounts due by Lessee terminate the relevant Schedule
as it relates to that item of Equipment.
If any item of Equipment suffers damage or a Casualty Loss which is not
reimbursable under Lessor's insurance, then Lessee will comply with the
provisions of the last paragraph of Section 12.1 regarding repair, replacement
or payment of Casualty Value.
If Lessor fails to maintain insurance coverage as required by this
subsection 12.2, Lessee will assume such risk of loss and, at the request of
any Assignee or Secured Party, will promptly provide insurance coverage. This
paragraph does not relieve Lessor of its obligations to maintain coverage of
the Equipment.
13. Default, Remedies and Mitigation.
13.1 Default. The occurrence of any one or more of the following
Events of Default constitutes a default under a Schedule:
(a) Lessee's failure to pay Rent or other amounts payable by Lessee
when due if that failure continues for ten (10) days after written
notice; or
(b) Lessee's failure to perform any other term or condition of the
Schedule or the material inaccuracy of any representation or
warranty made by the Lessee in the Schedule or in any document or
certificate furnished to the Lessor hereunder if that failure or
inaccuracy continues for fifteen (15) days after written notice; or
(c) An assignment by Lessee for the benefit of its creditors, the
failure by Lessee to pay its debts when due, the insolvency of
Lessee, the filing by Lessee or the filing against Lessee of any
petition under any bankruptcy or insolvency law or for the
appointment of a trustee or other officer with similar powers, the
adjudication of Lessee as insolvent, the liquidation of Lessee, or
the making of any action for the purpose of the foregoing; or
(d) The occurrence of an Event of Default under any Schedule or other
agreement between Lessee and Lessor or its Assignee or Secured
Party.
13.2 Remedies. Upon the occurrence of any of the above Events of
Default, Lessor, at its option, may:
(a) enforce Lessee's performance of the provisions of the applicable
Schedule by appropriate court action in law or in equity;
(b) recover from Lessee any damages and or expenses, including Default
Costs;
(c) with notice and demand, recover all sums due and accelerate and
recover the present value of the remaining payment stream of all
Rent due under the defaulted Schedule (discounted at the same rate
of interest at which such defaulted Schedule was discounted with a
Secured Party plus any prepayment fees charged to Lessor by the
Secured Party of, if there is no Secured Party, then discounted at
6%) together with all Rent and other amounts currently due as
liquidated damages and not as a penalty;
(d) with notice and process of law and in compliance with Lessee's
security requirements, Lessor may enter Lessee's premises to remove
and repossess the Equipment without being liable to Lessee for
damages due to the repossession, except those resulting from
Lessor's, its assignees', agents' or representatives' negligence;
(e) Lessor may pursue any other remedy permitted by law or equity.
The above remedies, in Lessor's discretion and to the extent permitted
by law, are cumulative and may be exercised successively or concurrently.
13.3 Mitigation. Upon return of the Equipment pursuant to the terms
of Section 13.2, Lessor will use its best efforts in accordance with its normal
business procedures (and without obligation to give any priority to such
Equipment) to mitigate Lessor's damages as described below. EXCEPT AS SET
FORTH IN THIS SECTION, LESSEE HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER
CONFERRED BY STATUTE OR OTHERWISE WHICH MAY REQUIRE LESSOR TO MITIGATE ITS
DAMAGES OR MODIFY ANY OF LESSOR'S RIGHTS OR REMEDIES STATED HEREIN. Lessor may
sell, lease or otherwise dispose of all or any part of the Equipment at a
public or private sale for cash or credit with the privilege of purchasing the
Equipment. The proceeds from any sale, lease or other disposition of the
Equipment are defined as either:
(a) if sold or otherwise disposed of, the cash proceeds less the Fair
Market Value of the Equipment at the expiration of the Initial Term
less the Default Costs;
(b) if leased, the present value (discounted at three points over the
prime rate as referenced in the Wall Street Journal at the time
of the mitigation) of the rentals for a term not to exceed the
Initial Term, less the Default Costs.
Any proceeds will be applied against liquidated damages and any other
sums due to Lessor from Lessee. However, Lessee is liable to Lessor for, and
Lessor may recover, the amount by which the proceeds are less than the
liquidated damages and other sums due to Lessor from Lessee.
<PAGE> 3
14. Agreement provisions.
14.1 Entire Agreement. This Master Lease and associated Schedules
supersede all other oral or written agreements or understandings between the
parties concerning the Equipment including, for example, purchase orders. ANY
AMENDMENT OF THIS MASTER LEASE OR A SCHEDULE MAY ONLY BE ACCOMPLISHED BY A
WRITING SIGNED BY THE PARTY AGAINST WHOM THE AMENDMENT IS SOUGHT TO BE ENFORCED.
14.2 No Waiver. No action taken by Lessor or Lessee shall be deemed to
constitute a waiver of compliance with any representation, warranty or
covenant contained in this Master Lease or a Schedule. The waiver by Lessor or
Lessee of a breach of any provision of this Master Lease or a Schedule will not
operate or be construed as a waiver of any subsequent breach.
14.3 Binding Nature. Each Schedule is binding upon, and inures to the
benefit of Lessor and its assigns. LESSEE MAY NOT ASSIGN ITS RIGHTS OR
OBLIGATIONS.
14.4 Survival of Obligations. All agreements, obligations including,
but not limited to those arising under Section 6.2, representations and
warranties contained in this Master Lease, any Schedule or in any document
delivered in connection with those agreements are for the benefit of Lessor and
any Assignee or Secured Party and survive the execution, delivery, expiration
or termination of this Master Lease.
14.5 Notices. Any notice, request or other communication to either
party by the other will be given in writing and deemed received upon the
earlier of actual receipt or three days after mailing if mailed postage
prepaid by regular or airmail to Lessor (to the attention of "Lease
Administrator") or Lessee, at the address set out in the Schedule or, one day
after it is sent by courier or facsimile transmission if receipt is verified
by the receiving party.
14.6 Applicable Law. THIS MASTER LEASE HAS BEEN, AND EACH SCHEDULE WILL
HAVE BEEN MADE, EXECUTED AND DELIVERED IN THE STATE OF ILLINOIS AND WILL BE
GOVERNED AND CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS OF THE STATE
OF ILLINOIS WITHOUT GIVING EFFECT TO CONFLICT OF LAW PROVISIONS. NO RIGHTS OR
REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE WILL BE
CONFERRED ON LESSEE UNLESS EXPRESSLY GRANTED IN THIS MASTER LEASE OR A SCHEDULE.
14.7 Severability. If any one or more of the provisions of this Master
Lease or and Schedule is for any reason held invalid, illegal or unenforceable,
the remaining provisions of this Master Lease and any such Schedule will be
unimpaired, and the invalid, illegal or unenforceable provision replaced by a
mutually acceptable valid, legal and enforceable provision that is closest to
the original intention of the parties.
14.8 Counterparts. This Master Lease and any Schedule may be executed
in any number of counterparts, each of which will be deemed an original, but all
such counterparts together constitute one and the same instrument. If Lessor
grants a security interest in all or any part of a Schedule, the Equipment or
sums payable thereunder, only that counterpart Schedule marked "Secured
Party's Original" can transfer Lessor's rights and all other counterparts will
be marked "Duplicate".
14.9 Nonspecified Features and Licensed Products. If the Equipment is
supplied from Lessor's inventory and contains any features not specified in the
Schedule, Lessee grants Lessor the right to remove any such features. Any
removal will be performed by the manufacturer or another party acceptable to
Lessee, upon the request of Lessor, at a time convenient to Lessee, provided
that Lessee will not unreasonably delay the removal of such features.
Lessee shall obtain no title to Licensed Products which will at all
times remain the property of the owner of the Licensed Products. A license from
the owner may be required and it is Lessee's responsibility to obtain any
required license before the use of the Licensed Products. Lessee agrees to treat
the Licensed Products as confidential information of the owner, to observe all
copyright restrictions, and not to reproduce or sell the Licensed Products.
14.10 Additional Documents. Lessee will, upon execution of this Master
Lease and as may be requested thereafter, provide Lessor with a secretary's
certificate of incumbency and authority and any other documents reasonably
requested by Lessor. Upon the execution of each Schedule with an aggregate Rent
in excess of $2,000,000, Lessee will provide Lessor with an opinion from
Lessee's counsel regarding the representations and warranties in Section 9.
Lessee will furnish, upon request, audited financial statements for the most
recent period.
14.11 Electronic Communications. Each of the parties may communicate
with the other by electronic means under mutually agreeable terms.
14.12 Lessor's Right to Match. Lessee's rights under Section 5.2 and
7.2 are subject to Lessor's right to match any sublease or upgrade proposed by
a third party. Lessee will provide Lessor with the terms of the third party
offer and Lessor will have three (3) business days to match the offer. Lessee
shall obtain such upgrade from or sublease the Equipment to Lessor if Lessor
has timely matched the third party offer.
14.13 Definitions.
ASSIGNEE - means an entity to whom Lessor has sold or assigned its rights as
owner and Lessor of Equipment.
ATTACHMENT - means any accessory, equipment or device and the installation
thereof that does not impair the original function or use of the Equipment and
is capable of being removed without causing material damage to the Equipment
and is not an accession to the Equipment.
CASUALTY LOSS - means the irreparable loss or destruction of Equipment.
CASUALTY VALUE - means the greater of the aggregate Rent remaining to be paid
for the balance of the lease term or the Fair Market Value of the Equipment
immediately prior to the Casualty Loss. However, if a Casualty Value Table is
attached to the relevant Schedule its terms will control.
COMMENCEMENT CERTIFICATE - means the Lessor provided certificate which must be
signed by Lessee within ten days of the Commencement Date as requested by
Lessor.
COMMENCEMENT DATE - is defined in each Schedule.
DEFAULT COSTS - means reasonable attorney's fees and remarketing costs
resulting from a Lessee default or Lessor's enforcement of its remedies.
EQUIPMENT - means the property described on a Schedule and any replacement for
that property required or permitted by this Master Lease or a Schedule but not
including any Attachment.
EVENT OF DEFAULT - means the events described in Subsection 13.1.
FAIR MARKET VALUE - means the aggregate amount which would be obtainable in an
arm's-length transaction between an informed and willing buyer/user and an
informed and willing seller under no compulsion to sell.
INITIAL TERM - means the period of time beginning on the first day of the first
full Rent Interval following the Commencement Date for all items of Equipment
and continuing for the number of Rent intervals indicated on a Schedule.
INSTALLATION DATE - means the day on which Equipment is installed and
qualified for a commercially available manufacturer's standard maintenance
contract or warranty coverage, if available.
INTERIM RENT - means the pro-rata portion of Rent due for the period from the
Commencement Date through but not including the first day of the first full
Rent Interval included in the initial Term.
LICENSED PRODUCTS - means any software or other licensed products attached to
the Equipment.
LIKE EQUIPMENT - means replacement Equipment which is lien free and of the same
model, type, configuration and manufacture as Equipment.
LIKE PART - means a substituted part which is lien free and of the same
manufacturer and part number as the removed part, and which when installed on
the Equipment will be eligible for maintenance coverage with the manufacturer of
the Equipment
NOTICE PERIOD - means the time period described in a Schedule during which
Lessee may give Lessor notice of the termination of the term of that Schedule.
OVERDUE RATE - means the lessor of 18% per year of the maximum rate permitted
by the law of the state where the Equipment is located.
OWNER - means the owner of Equipment.
RECONFIGURATION - means any change to Equipment that would upgrade or downgrade
the performance capabilities of the Equipment in any way.
RENT - means the ret, including interim Rent. Lessee will pay for each item of
Equipment expressed in a Schedule either as a specific amount or an amount
equal to the amount which Lessor pays for an item of Equipment multiplied by a
lease rate factor plus all other amounts due to Lessor under this Master Lease
or a Schedule.
RENT INTERVAL - means a full calendar month or quarter as indicated on a
Schedule.
SCHEDULE - means an Equipment Schedule which incorporates all of the terms and
conditions of this Master Lease and, for purposes of Section 14.8, its
associated Commencement Certificate(s).
SECURED PARTY - means an entity to whom Lessor has granted a security
interest in a Schedule and related Equipment for the purpose of securing a loan.
IN WITNESS WHEREOF, the parties hereto have executed this Master Lease on or as
of the day and year first above written.
MIDCOM COMMUNICATIONS INC. COMDISCO INC.
as Lessee as Lessor
By: /s/ ROBERT J. CHAMBERLAIN By: /s/ DANIEL J. SKUDDLER
Title: Executive V.P. and CFO Title: Director
<PAGE> 4
EQUIPMENT SCHEDULE NO. 1 01-SL78387-00
DATED JANUARY 15, 1997
TO MASTER LEASE AGREEMENT DATED JANUARY 15, 1997 ("Master Lease")
<TABLE>
<S> <C>
LESSEE: MIDCOM COMMUNICATIONS INC. LESSOR: COMDISCO, INC.
Address for Legal Notices: Address for All Notices:
1111 Third Ave. 6111 North River Road
Seattle, WA 98101 Rosemont, Illinois 60018
Attn: Corporate Secretary Attn: Communication Products Group
Address for Administrative Correspondence: Central Billing Location:
Same As Above Same As Administrative Correspondence
Attn: Mr. Robert Nitschke Attn: Mr. Robert L. Nitschke
Phone: 206-628-4361 Phone: 206-628-4361
Fax: 206-628-8295
Lessee Reference No.:
Location of Equipment:
(24 digits maximum)
Same As Above
Initial Term/
Rent Interval: 36 months
Attn: Mr. Robert Nitschke
Phone: 206-628-4361 Rent: $10,663.28
</TABLE>
<TABLE>
<CAPTION>
EQUIPMENT (as defined below):
Item Machine Model/ Serial
No. Qty. Mfg. Type Feature Description Number
- ---- ---- ---- ------- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
1 1 Cisco 7513
2 2 Cisco WS C5001
3 10 Cisco 2524
</TABLE>
<PAGE> 5
RISK OF LOSS: Pursuant to the Master Lease, Lessor and Lessee agree that the
net of loss is the responsibility of the Lessee.
NOTICE OF PERIOD: not less than ninety (90) days nor more than twelve (12)
months prior to the expiration of the lease term. If Lessee gives proper
written notice of termination but fails to return the Equipment on the
expiration date of the Initial Term, the Lease will be reinstated and an
additional sixty (60) days written notice of termination will be required,
which termination will be effective at the end of the month following the 60
day notice requirement. The periodic Rent will continue at the current rate
until the effective date of the written notice of termination and the Equipment
is returned.
SPECIAL TERMS: The following additional terms are a part of this Equipment
Schedule. The terms and conditions of the Master Lease Agreement as they
pertain to this Equipment Schedule are modified and amended as follows:
I. COMMENCEMENT DATE
-----------------
The Commencement Date for each item of Equipment will be the day on
which that item is installed and qualified for a commercially available
manufacturer's standard maintenance contract or warranty coverage, if
applicable, or the seventh (7th) day after delivery if Lessee delays the
installation. The initial Term will begin on the first day of the
calendar quarter following the Commencement Date.
II. INTEREST RATE CHANGE
--------------------
The Lease Rate Factors or the periodic Rent described in this Equipment
Schedule have been calculated using an interest rate based on the 3-year
U.S. Treasury Constant Maturity of 6.07% as described in the Federal
Reserve Statistical Release H.15 ("Treasury Rate"). If on the
Commencement Date for the last item of Equipment prior to the beginning
of the Initial Term, the Treasury Rate is greater or there is an adverse
change in Lessee's credit standing, Lessor may adjust the Lease Rate
Factors or the periodic Rent accordingly.
III. LETTER OF CREDIT CONTINGENCY
----------------------------
This Schedule is contingent upon Lessee providing to Lessor an approved
Irrevocable Standby Letter of Credit ("Letter of Credit"), in the form
attached hereto as Exhibit A, from a United States bank acceptable to
Lessor for the amount of $120,000.00 for Year 1 of the Initial Term,
$85,000.00 for Year 2 of the Initial Term and $70,000.00 for Year 3 of
the Initial Term prior to the Commencement Date of this Schedule.
Lessee further understands that if Lessor does not receive the approved
Letter of Credit and the signed Master Lease Agreement prior to the
Commencement Date, or if the Letter of Credit is unacceptable to Lessor,
Lessor may at its discretion cancel this Schedule with no further
obligation to either party.
MASTER LEASE: This Equipment Schedule is issued pursuant to the Master Lease
identified on page 1 of this Equipment Schedule. All of the terms and
conditions of the Master Lease are incorporated in and made a part of this
Equipment Schedule as if expressly described in this Equipment Schedule, and
this Equipment Schedule constitutes a separate lease for the Equipment. The
parties reaffirm all of the terms and conditions of the Master, Lease
(including without limitation, the representations and warranties set forth in
the Master Lease) except as modified by this Equipment Schedule. This
Equipment Schedule may not be amended or rescinded except by a writing signed
by both parties.
MIDCOM COMMUNICATIONS INC. COMDISCO, INC.
as Lessee as Lessor
By: /s/ ROBERT J. CHAMBERLAIN By: JEFFERY T. WOLINSKI
------------------------------ ---------------------------
Jeffery T. Wolinski
Title: Executive VP-CFO Title: Vice President
--------------------------- ------------------------
Date: 2/17/97 Date: 2/18/97
---------------------------- -------------------------
<PAGE> 6
01-SL78683-00
EQUIPMENT SCHEDULE NO. 2
DATED FEBRUARY 17, 1997
TO MASTER LEASE AGREEMENT DATED JANUARY 15, 1997 ("MASTER LEASE")
<TABLE>
<CAPTION>
LESSEE: MIDCOM COMMUNICATIONS INC. LESSOR: COMDISCO, INC.
<S> <C>
ADDRESS FOR LEGAL NOTICES: ADDRESS FOR ALL NOTICES:
1111 Third Avenue 6111 North River Road
Seattle, WA 98101 Rosemont, Illinois 60018
Attn: Communications Product Group
ATTN: General Counsel
PHONE: (206) 628-8000
FAX: (206) 628-8295
ADDRESS FOR ADMINISTRATIVE CORRESPONDENCE: ADDRESS FOR INVOICES:
Same as Above Same as Administrative Correspondence
ATTN: Chief Financial Officer ATTN: Chief Financial Officer
PHONE: (206) 628-8000
FAX: (206) 628-8295 LESSEE REFERENCE NO:
NY Office
(24 digits maximum)
INITIAL TERM/
</TABLE>
1
<PAGE> 7
<TABLE>
<S> <C>
RENT INTERVAL: 60
Months
LOCATION OF EQUIPMENT:
LEASE RATE FACTOR:
32 Old Slip, 4th Floor
New York, NY 10005 Hardware: .0198213
Softcosts: .021976
ATTN: Mr. Mike Pirot
PHONE: (212) 797-9840
</TABLE>
EQUIPMENT (AS DEFINED BELOW):
<TABLE>
ITEM MACHINE MODEL/ SERIAL
NO. QTY. MFG. TYPE FEATURE DESCRIPTION NUMBER
- --- ---- ---- ---- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
1. 1 NTEL DMS 500 PBX System
</TABLE>
2
<PAGE> 8
RISK OF LOSS: Pursuant to the Master Lease, Lessor and Lessee agree that the
risk of loss is the responsibility of the Lessee.
NOTICE PERIOD: Not less than ninety (90) days nor more than twelve (12) months
prior to the expiration of the lease term. If Lessee gives written notice of
termination, in accordance with the terms of the preceding sentence, but fails
to return the Equipment on the expiration date of the Initial Term, the Lease
will be reinstated and an additional sixty (60) days written notice of
termination will be required, which termination will be effective at the end of
the month following the 60 day notice requirement. The periodic Rent will
continue at the current rate until the effective date of the written notice of
termination and the Equipment is returned.
SPECIAL TERMS: The following additional terms are a part of this Equipment
Schedule. The terms and conditions of the Master Lease Agreement as they pertain
to this Equipment Schedule are modified and amended as follows:
1. SOFTWARE
In addition to leasing the Equipment described herein, Lessor agrees to
finance software license fees ("License Fees") of approximately
$746,291.00, for the Software described in this Equipment Schedule (the
"Software").The Software is licensed by Northern Telecom Inc., the
vendor of the Software (the "Vendor") directly to the Lessee pursuant to
the terms and conditions of the license agreement between Vendor and
Lessee (the "LicenseAgreement"). Lessor is not a party to nor has any
obligations under the License Agreement and has no interest in the
Software except as described in this Equipment Schedule.
2 ADDITIONAL SOFT COSTS
Lessee and Lessor acknowledge that the Equipment Schedule contains
approximate softcosts of $444,591.00 for labor, freight and handling
costs, and OEM charges charged by Vendor.
3. COMMENCEMENT DATE
The Commencement Date for each item of Equipment and/or Software (as
applicable) will be the day on which that item of Equipment and/or
Software (as applicable) is installed and qualified for a commercially
available manufacturer's standard maintenance contract or warranty
coverage, if available. Lessee agrees to confirm theCommencement Date by
providing Lessor with either a Commencement Certificate in the form
provided by Lessor or the Vendor's invoice
3
<PAGE> 9
containing the Equipment and/or Software location (as applicable),
description, serial number (if applicable), cost, the Commencement Date
and Lessee's signature, within ten (10) days of the Commencement Date.
For purposes of this Equipment Schedule, the Initial Term will begin on
July 1, 1997 for all items of Equipment and Software.
Lessee's obligations under this Equipment Schedule and the periodic Rent
described in this Equipment Schedule are contingent upon Lessor
purchasing the Equipment, including the softcosts for an aggregate
amount of $1,798,025.00 in addition to financing the Software License
Fees of approximately $746,291.00 pursuant to satisfactory purchase
documentation. Lessee acknowledges that it has either received or
approved Lessor's purchase documentation for the Equipment and/or
Software. If the Commencement Date occurs later than June 30, 1997
("Outside Date"), if the Commencement Certificate or Vendor invoices are
not provided within ten (10) days of the Commencement Date, or if the
cost or configuration of the Equipment and/or Software or actual
softcosts changes, Lessor may adjust the Lease Rate Factors or the
periodic Rent to reflect any additional costs or expenses resulting from
those changes.
4
<PAGE> 10
4. RENT AND PAYMENT
Lessee acknowledges that in addition to its obligations under Section
6.1 of the Master Lease, Lessee's obligation to pay the periodic Rent
described in this Equipment Schedule will not be affected by any
representations made by the Vendor, or by any discontinuance, return,
destruction or failure of the Software. If the Software is
unsatisfactory for any reason, Lessee will make any claims solely
against the Vendor and will continue to pay Lessor all amounts payable
under this Equipment Schedule.
5. DEFAULT
Any violation by Lessee of any of its covenants or representations in
the License Agreement or any failure by Lessee to perform any provision
of the License Agreement will also be an Event of Default under this
Equipment Schedule.
6. MISCELLANEOUS
Upon an Event of Default, expiration or termination of this Equipment
Schedule, Lessee will assign to Lessor all of Lessee's rights and
interests in the Software subject to the prior consent of the Vendor if
required by the License Agreement.
7. EQUIPMENT PROCUREMENT CHARGES (PROGRESS PAYMENTS-LEASE RATE FACTOR)
Because items of Equipment and/or Software will be delivered to Lessee
prior to the Commencement Date, progress payments will be required to be
paid to the Vendor prior to the Commencement Date ("Progress Payments").
With respect to any items of Equipment and/or Software delivered prior
to the Commencement Date, all terms and conditions of this Equipment
Schedule will be applicable except the Lessee's rental obligations
However, Lessee agrees to pay Lessor "Equipment Procurement Charges"
equal to a daily lease rate factor of .0208298 multiplied by the
aggregate of the Progress Payments paid by Lessor for each day from the
date Progress Payments are made until the Commencement Date. Accrued
Equipment Procurement Charges are payable when invoiced.
If the Commencement Date occurs after the Outside Date, the daily lease
rate factor applicable from the Outside Date until the Commencement Date
will be equal to .0208298. If Lessee rejects the Equipment and/or
Software prior to the Commencement Date pursuant to the purchase
agreement with the Equipment vendor or if Lessee is in default of this
Equipment Schedule, then this Equipment Schedule will terminate and
Lessee will (i) reimburse Lessor for all amounts paid
5
<PAGE> 11
by Lessor for the purchase of the Equipment and/or Software and (ii) pay
all Equipment Procurement Charges due through the date of termination.
Upon payment of all amounts due and owing by Lessee, Lessor will
transfer to Lessee all of Lessor's interest in the Equipment and/or
Software and under any purchase agreement including any remedies that
Lessor may have against Vendor with respect to said Equipment and/or
Software.
8. INTEREST RATE CHANGE
The Lease Rate Factors or the periodic Rent described in this Equipment
Schedule have been calculated using an interest rate based on the 5-year
U.S. Treasury Constant Maturity of 6.37% as described in the Federal
Reserve Statistical Release H.15 ("Treasury Rate"). If on the
Commencement Date for the last item of Equipment and/or Software prior
to the beginning of the Initial Term, the Treasury Rate is greater or
there is an adverse change in Lessee's credit standing, Lessor may
adjust the Lease Rate Factors or the periodic Rent accordingly.
6
<PAGE> 12
9. GENERAL UPGRADE PROVISION
If Lessee is not in default, there has been no material adverse change
in Lessee's credit standing at the time and assuming all required third
party consents are obtained, Lessor will, on Lessee's request enter into
negotiation of a contract in which Lessor would on mutually agreeable
terms and conditions lease to Lessee standard feature and/or equipment
model upgrades to the Equipment and/or Software (as applicable) offered
either by the Equipment manufacturer or by another manufacturer (the
"Upgrade"), provided, however, that (a) the Initial Term for the Upgrade
will be coterminous with the Initial Term of this Equipment Schedule;
and (b) the periodic Rent for the Upgrade will be equal to 100% of the
present value of the acquisition cost of the Upgrade amortized over the
remaining Initial Term of this Equipment Schedule using then prevailing
interest rates for similar transactions and with Lessees of similar
credit rating. If the parties cannot mutually agree upon terms and
conditions with respect to the Upgrade, this Equipment Schedule will
continue in full force and effect.
10. EARLY TERMINATION
As long as Lessee is not in default and upon not less than ninety (90)
days prior written notice to Lessor, Lessee may terminate this Equipment
Schedule with respect to all, but not less than all, of the Equipment
and/or Software (as applicable) effective upon the expiration of the
12th month of the Initial Term or upon the expiration of any month of
the Initial Term thereafter as specified in the termination notice (the
"Termination Date"), provided that on or before the Termination Date
Lessee pays to Lessor an amount equal to (i) (a) the remaining Rent for
the balance of the Initial Term, (determined as of the Termination
Date), and (b) $966,840.08 which equals thirty-eight percent (38%) of
the original acquisition cost, each discounted to present value in
accordance with the formula set below, plus an amount which would be
obtainable in an arm's-length transaction between an informed and
willing lessee/user and an informed and willing lessor/dealer under no
compulsion to lease as determined by Lessor (as of the Termination Date)
in its reasonable discretion, exercised in good faith, for any upgrades
or additions with respect to such Equipment and/or Software (as
applicable), and (ii) all other outstanding amounts due and owing on the
Termination Date (collectively, the "Termination Amount").
For purposes of calculating the Termination Amount, any amounts
discounted shall be discounted at the lesser of:
7
<PAGE> 13
(a) the Secured Party's interest rate, if any, (b) the then current U.S.
Treasury Rate for a term which most closely approximates the Initial
Term, or (c) six percent (6%).
11. END OF TERM OPTIONS
If Lessee is not in default and gives Lessor at least ninety (90) days
prior written notice, Lessee will have the option at the expiration of
the Initial Term to (a) purchase all, but not less than all, Equipment
and/or Software (as applicable) for an amount equal to thirty-eight
percent (38%) of the original acquisition cost, plus an amount which
would be obtainable at the end of the Initial Term in an arm's-length
transaction between an informed and willing buyer/user and an informed
and willing seller under no compulsion to sell as determined by Lessor
in its reasonable discretion, exercised in good faith, for any upgrades
or additions with respect to such Equipment and/or Software (as
applicable), plus taxes or (b) extend the Initial Term for all, but not
less than all, Equipment and/or Software (as applicable) for a mutually
agreed upon renewal period at a periodic Rent equal to an amount which
would be obtainable at the commencement of the extended Initial Term in
an arm's-length transaction between an informed and willing lessee/user
and an informed and willing lessor/dealer under no compulsion to lease,
plus taxes amortized over the renewal period , or (c) return the
Equipment and/or Software (as applicable) in accordance with the terms
and conditions of the Master Lease. If Lessee fails to provide written
notice then the Equipment Schedule will continue in full force and
effect until terminated in accordance with its terms.
12. STOCK WARRANT CONTINGENCY
This Equipment Schedule is contingent upon receipt by Lessor of a
Warrant Agreement in form and substance satisfactory to Lessor for
117,000 shares of Common Stock of the Lessee at an exercise price of
$10.00 per share, exercisable for ten (10) years from the date of
issuance by (i) cash or check, or (ii) net issuance and containing
anti-dilution and registration rights in parity with those provided to
other investors.
MASTER LEASE: This Equipment Schedule is issued pursuant to the Master Lease
identified on page 1 of this Equipment Schedule. All of the terms and conditions
of the Master Lease are incorporated in and made a part of this Equipment
Schedule as if expressly described in this Equipment Schedule, and this
Equipment Schedule constitutes a separate lease for the Equipment. The parties
reaffirm all of the terms and conditions of the Master Lease (including, without
limitation, the representations and warranties set forth in the Master Lease)
except as modified by this Equipment Schedule. This
8
<PAGE> 14
Equipment Schedule may not be amended or rescinded except by a writing signed by
both parties.
MIDCOM COMMUNICATIONS INC. COMDISCO, INC.
as Lessee as Lessor
By: By:
---------------------------- -------------------------------
Title: Title:
---------------------------- -------------------------------
Date: Date:
---------------------------- -------------------------------
9
<PAGE> 15
01-SL78684-00
EQUIPMENT SCHEDULE NO. 3
DATED FEBRUARY 17, 1997
TO MASTER LEASE AGREEMENT DATED JANUARY 15, 1997 ("MASTER LEASE")
<TABLE>
<CAPTION>
LESSEE: MIDCOM COMMUNICATIONS INC. LESSOR: COMDISCO, INC.
<S> <C>
ADDRESS FOR LEGAL NOTICES: ADDRESS FOR ALL NOTICES:
1111 Third Avenue 6111 North River Road
Seattle, WA 98101 Rosemont, Illinois 60018
Attn: Communications Product Group
ATTN: General Counsel
PHONE: (206) 628-8000
FAX: (206) 628-8295
ADDRESS FOR ADMINISTRATIVE CORRESPONDENCE: ADDRESS FOR INVOICES:
Same as Above Same as Administrative Correspondence
ATTN: Chief Financial Officer ATTN: Chief Financial Officer
PHONE: (206) 628-8000
FAX: (206) 628-8295 LESSEE REFERENCE NO:
Chicago Office
(24 digits maximum)
INITIAL TERM/
</TABLE>
1
<PAGE> 16
<TABLE>
<S> <C>
Months RENT INTERVAL: 60
LOCATION OF EQUIPMENT:
LEASE RATE FACTOR:
600 S. Federal Street
Chicago, IL 60605 Hardware: .0198213
Softcosts: .021976
ATTN: Mr. John Jachna
PHONE: (630) 932-5700
</TABLE>
EQUIPMENT (AS DEFINED BELOW):
<TABLE>
<CAPTION>
ITEM MACHINE MODEL/ SERIAL
NO. QTY. MFG. TYPE FEATURE DESCRIPTION NUMBER
- --- ---- ---- ---- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
1. 1 NTEL DMS 500 PBX System
</TABLE>
2
<PAGE> 17
RISK OF LOSS: Pursuant to the Master Lease, Lessor and Lessee agree that the
risk of loss is the responsibility of the Lessee.
NOTICE PERIOD: Not less than ninety (90) days nor more than twelve (12) months
prior to the expiration of the lease term. If Lessee gives written notice of
termination, in accordance with the terms of the preceding sentence, but fails
to return the Equipment on the expiration date of the Initial Term, the Lease
will be reinstated and an additional sixty (60) days written notice of
termination will be required, which termination will be effective at the end of
the month following the 60 day notice requirement. The periodic Rent will
continue at the current rate until the effective date of the written notice of
termination and the Equipment is returned.
SPECIAL TERMS: The following additional terms are a part of this Equipment
Schedule. The terms and conditions of the Master Lease Agreement as they pertain
to this Equipment Schedule are modified and amended as follows:
1. SOFTWARE
In addition to leasing the Equipment described herein, Lessor agrees to
finance software license fees ("License Fees") of approximately
$740,330.00, for the Software described in this Equipment Schedule (the
"Software").The Software is licensed by Northern Telecom Inc., the
vendor of the Software (the "Vendor") directly to the Lessee pursuant to
the terms and conditions of the license agreement between Vendor and
Lessee (the "LicenseAgreement"). Lessor is not a party to nor has any
obligations under the License Agreement and has no interest in the
Software except as described in this Equipment Schedule.
2 ADDITIONAL SOFT COSTS
Lessee and Lessor acknowledge that the Equipment Schedule contains
approximate softcosts of $437,746.00 for labor, freight and handling
costs, and OEM charges charged by Vendor.
3. COMMENCEMENT DATE
The Commencement Date for each item of Equipment and/or Software (as
applicable) will be the day on which that item of Equipment and/or
Software (as applicable) is installed and qualified for a commercially
available manufacturer's standard maintenance contract or warranty
coverage, if available. Lessee agrees to confirm the Commencement Date
by providing Lessor with either a Commencement Certificate in the form
provided by Lessor or the Vendor's invoice
3
<PAGE> 18
containing the Equipment and/or Software location (as applicable),
description, serial number (if applicable), cost, the Commencement Date
and Lessee's signature, within ten (10) days of the Commencement Date.
For purposes of this Equipment Schedule, the Initial Term will begin on
July 1, 1997 for all items of Equipment and Software.
Lessee's obligations under this Equipment Schedule and the periodic Rent
described in this Equipment Schedule are contingent upon Lessor
purchasing the Equipment, including the softcosts for an aggregate
amount of $1,755,026.00 in addition to financing the Software License
Fees of approximately $740,330.00 pursuant to satisfactory purchase
documentation. Lessee acknowledges that it has either received or
approved Lessor's purchase documentation for the Equipment and/or
Software. If the Commencement Date occurs later than June 30, 1997
("Outside Date"), if the Commencement Certificate or Vendor invoices are
not provided within ten (10) days of the Commencement Date, or if the
cost or configuration of the Equipment and/or Software or actual
softcosts changes, Lessor may adjust the Lease Rate Factors or the
periodic Rent to reflect any additional costs or expenses resulting from
those changes.
4
<PAGE> 19
4. RENT AND PAYMENT
Lessee acknowledges that in addition to its obligations under Section
6.1 of the Master Lease, Lessee's obligation to pay the periodic Rent
described in this Equipment Schedule will not be affected by any
representations made by the Vendor, or by any discontinuance, return,
destruction or failure of the Software. If the Software is
unsatisfactory for any reason, Lessee will make any claims solely
against the Vendor and will continue to pay Lessor all amounts payable
under this Equipment Schedule.
5. DEFAULT
Any violation by Lessee of any of its covenants or representations in
the License Agreement or any failure by Lessee to perform any provision
of the License Agreement will also be an Event of Default under this
Equipment Schedule.
6. MISCELLANEOUS
Upon an Event of Default, expiration or termination of this Equipment
Schedule, Lessee will assign to Lessor all of Lessee's rights and
interests in the Software subject to the prior consent of the Vendor if
required by the License Agreement.
7. EQUIPMENT PROCUREMENT CHARGES (PROGRESS PAYMENTS-LEASE RATE FACTOR)
Because items of Equipment and/or Software will be delivered to Lessee
prior to the Commencement Date, progress payments will be required to be
paid to the Vendor prior to the Commencement Date ("Progress Payments").
With respect to any items of Equipment and/or Software delivered prior
to the Commencement Date, all terms and conditions of this Equipment
Schedule will be applicable except the Lessee's rental obligations
However, Lessee agrees to pay Lessor "Equipment Procurement Charges"
equal to a daily lease rate factor of .0208298 multiplied by the
aggregate of the Progress Payments paid by Lessor for each day from the
date Progress Payments are made until the Commencement Date. Accrued
Equipment Procurement Charges are payable when invoiced.
If the Commencement Date occurs after the Outside Date, the daily lease
rate factor applicable from the Outside Date until the Commencement Date
will be equal to .0208298. If Lessee rejects the Equipment and/or
Software prior to the Commencement Date pursuant to the purchase
agreement with the Equipment vendor or if Lessee is in default of this
Equipment Schedule, then this Equipment Schedule will terminate and
Lessee will (i) reimburse Lessor for all amounts paid
5
<PAGE> 20
by Lessor for the purchase of the Equipment and/or Software and (ii) pay
all Equipment Procurement Charges due through the date of termination.
Upon payment of all amounts due and owing by Lessee, Lessor will
transfer to Lessee all of Lessor's interest in the Equipment and/or
Software and under any purchase agreement including any remedies that
Lessor may have against Vendor with respect to said Equipment and/or
Software.
8. INTEREST RATE CHANGE
The Lease Rate Factors or the periodic Rent described in this Equipment
Schedule have been calculated using an interest rate based on the 5-year
U.S. Treasury Constant Maturity of 6.37% as described in the Federal
Reserve Statistical Release H.15 ("Treasury Rate"). If on the
Commencement Date for the last item of Equipment and/or Software prior
to the beginning of the Initial Term, the Treasury Rate is greater or
there is an adverse change in Lessee's credit standing, Lessor may
adjust the Lease Rate Factors or the periodic Rent accordingly.
6
<PAGE> 21
9. GENERAL UPGRADE PROVISION
If Lessee is not in default, there has been no material adverse change
in Lessee's credit standing at the time and assuming all required third
party consents are obtained, Lessor will, on Lessee's request enter into
negotiation of a contract in which Lessor would on mutually agreeable
terms and conditions lease to Lessee standard feature and/or equipment
model upgrades to the Equipment and/or Software (as applicable) offered
either by the Equipment manufacturer or by another manufacturer (the
"Upgrade"), provided, however, that (a) the Initial Term for the Upgrade
will be coterminous with the Initial Term of this Equipment Schedule;
and (b) the periodic Rent for the Upgrade will be equal to 100% of the
present value of the acquisition cost of the Upgrade amortized over the
remaining Initial Term of this Equipment Schedule using then prevailing
interest rates for similar transactions and with Lessees of similar
credit rating. If the parties cannot mutually agree upon terms and
conditions with respect to the Upgrade, this Equipment Schedule will
continue in full force and effect.
10. EARLY TERMINATION
As long as Lessee is not in default and upon not less than ninety (90)
days prior written notice to Lessor, Lessee may terminate this Equipment
Schedule with respect to all, but not less than all, of the Equipment
and/or Software (as applicable) effective upon the expiration of the
12th month of the Initial Term or upon the expiration of any month of
the Initial Term thereafter as specified in the termination notice (the
"Termination Date"), provided that on or before the Termination Date
Lessee pays to Lessor an amount equal to (i) (a) the remaining Rent for
the balance of the Initial Term, (determined as of the Termination
Date), and (b) $948,235.28 which equals thirty-eight percent (38%) of
the original acquisition cost, each discounted to present value in
accordance with the formula set below, plus an amount which would be
obtainable in an arm's-length transaction between an informed and
willing lessee/user and an informed and willing lessor/dealer under no
compulsion to lease as determined by Lessor (as of the Termination Date)
in its reasonable discretion, exercised in good faith, for any upgrades
or additions with respect to such Equipment and/or Software (as
applicable), and (ii) all other outstanding amounts due and owing on the
Termination Date (collectively, the "Termination Amount").
For purposes of calculating the Termination Amount, any amounts
discounted shall be discounted at the lesser of:
7
<PAGE> 22
(a) the Secured Party's interest rate, if any, (b) the then current U.S.
Treasury Rate for a term which most closely approximates the Initial
Term, or (c) six percent (6%).
11. END OF TERM OPTIONS
If Lessee is not in default and gives Lessor at least ninety (90) days
prior written notice, Lessee will have the option at the expiration of
the Initial Term to (a) purchase all, but not less than all, Equipment
and/or Software (as applicable) for an amount equal to thirty-eight
percent (38%) of the original acquisition cost, plus an amount which
would be obtainable at the end of the Initial Term in an arm's-length
transaction between an informed and willing buyer/user and an informed
and willing seller under no compulsion to sell as determined by Lessor
in its reasonable discretion, exercised in good faith, for any upgrades
or additions with respect to such Equipment and/or Software (as
applicable), plus taxes or (b) extend the Initial Term for all, but not
less than all, Equipment and/or Software (as applicable) for a mutually
agreed upon renewal period at a periodic Rent equal to an amount which
would be obtainable at the commencement of the extended Initial Term in
an arm's-length transaction between an informed and willing lessee/user
and an informed and willing lessor/dealer under no compulsion to lease,
plus taxes amortized over the renewal period , or (c) return the
Equipment and/or Software (as applicable) in accordance with the terms
and conditions of the Master Lease. If Lessee fails to provide written
notice then the Equipment Schedule will continue in full force and
effect until terminated in accordance with its terms.
8
<PAGE> 23
MASTER LEASE: This Equipment Schedule is issued pursuant to the Master Lease
identified on page 1 of this Equipment Schedule. All of the terms and conditions
of the Master Lease are incorporated in and made a part of this Equipment
Schedule as if expressly described in this Equipment Schedule, and this
Equipment Schedule constitutes a separate lease for the Equipment. The parties
reaffirm all of the terms and conditions of the Master Lease (including, without
limitation, the representations and warranties set forth in the Master Lease)
except as modified by this Equipment Schedule. This Equipment Schedule may not
be amended or rescinded except by a writing signed by both parties.
MIDCOM COMMUNICATIONS INC. COMDISCO, INC.
as Lessee as Lessor
By: By:
------------------------------- ------------------------------
Title: Title:
------------------------------- ------------------------------
Date: Date:
------------------------------- ------------------------------
9
<PAGE> 24
01-SL78685-00
EQUIPMENT SCHEDULE NO. 4
DATED FEBRUARY 17, 1997
TO MASTER LEASE AGREEMENT DATED JANUARY 15, 1997 ("MASTER LEASE")
<TABLE>
<CAPTION>
LESSEE: MIDCOM COMMUNICATIONS INC. LESSOR: COMDISCO, INC.
<S> <C>
ADDRESS FOR LEGAL NOTICES: ADDRESS FOR ALL NOTICES:
1111 Third Avenue 6111 North River Road
Seattle, WA 98101 Rosemont, Illinois 60018
Attn: Communications Product Group
ATTN: General Counsel
PHONE: (206) 628-8000
FAX: (206) 628-8295
ADDRESS FOR ADMINISTRATIVE CORRESPONDENCE: ADDRESS FOR INVOICES:
Same as Above Same as Administrative Correspondence
ATTN: Chief Financial Officer ATTN: Chief Financial Officer
PHONE: (206) 628-8000
FAX: (206) 628-8295 LESSEE REFERENCE NO:
CA Office
(24 digits maximum)
INITIAL TERM/
</TABLE>
1
<PAGE> 25
<TABLE>
<S> <C>
RENT INTERVAL: 60
Months
LOCATION OF EQUIPMENT:
LEASE RATE FACTOR:
624 S. Grand Ave - Suite 2800
Los Angeles, CA 90017 Hardware: .0198213
Softcosts: .021976
ATTN: Mr. Mark Messana
PHONE: (213) 629-4831
</TABLE>
EQUIPMENT (AS DEFINED BELOW):
<TABLE>
<CAPTION>
ITEM MACHINE MODEL/ SERIAL
NO. QTY. MFG. TYPE FEATURE DESCRIPTION NUMBER
- --- ---- ---- ---- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
1. 1 NTEL DMS 500 PBX System
</TABLE>
2
<PAGE> 26
RISK OF LOSS: Pursuant to the Master Lease, Lessor and Lessee agree that the
risk of loss is the responsibility of the Lessee.
NOTICE PERIOD: Not less than ninety (90) days nor more than twelve (12) months
prior to the expiration of the lease term. If Lessee gives written notice of
termination, in accordance with the terms of the preceding sentence, but fails
to return the Equipment on the expiration date of the Initial Term, the Lease
will be reinstated and an additional sixty (60) days written notice of
termination will be required, which termination will be effective at the end of
the month following the 60 day notice requirement. The periodic Rent will
continue at the current rate until the effective date of the written notice of
termination and the Equipment is returned.
SPECIAL TERMS: The following additional terms are a part of this Equipment
Schedule. The terms and conditions of the Master Lease Agreement as they pertain
to this Equipment Schedule are modified and amended as follows:
1. SOFTWARE
In addition to leasing the Equipment described herein, Lessor agrees to
finance software license fees ("License Fees") of approximately
$760,539.00, for the Software described in this Equipment Schedule (the
"Software"). The Software is licensed by Northern Telecom Inc., the
vendor of the Software (the "Vendor") directly to the Lessee pursuant to
the terms and conditions of the license agreement between Vendor and
Lessee (the "LicenseAgreement"). Lessor is not a party to nor has any
obligations under the License Agreement and has no interest in the
Software except as described in this Equipment Schedule.
2 ADDITIONAL SOFT COSTS
Lessee and Lessor acknowledge that the Equipment Schedule contains
approximate softcosts of $448,936.00 for labor, freight and handling
costs, and OEM charges charged by Vendor.
3. COMMENCEMENT DATE
The Commencement Date for each item of Equipment and/or Software (as
applicable) will be the day on which that item of Equipment and/or
Software (as applicable) is installed and qualified for a commercially
available manufacturer's standard maintenance contract or warranty
coverage, if available. Lessee agrees to confirm the Commencement Date
by providing Lessor with either a Commencement Certificate in the form
provided by Lessor or the Vendor's invoice
3
<PAGE> 27
containing the Equipment and/or Software location (as applicable),
description, serial number (if applicable), cost, the Commencement Date
and Lessee's signature, within ten (10) days of the Commencement Date.
For purposes of this Equipment Schedule, the Initial Term will begin on
July 1, 1997 for all items of Equipment and Software.
Lessee's obligations under this Equipment Schedule and the periodic Rent
described in this Equipment Schedule are contingent upon Lessor
purchasing the Equipment, including the softcosts for an aggregate
amount of $1,889,175.30 in addition to financing the Software License
Fees of approximately $760,539.00 pursuant to satisfactory purchase
documentation. Lessee acknowledges that it has either received or
approved Lessor's purchase documentation for the Equipment and/or
Software. If the Commencement Date occurs later than June 30, 1997
("Outside Date"), if the Commencement Certificate or Vendor invoices are
not provided within ten (10) days of the Commencement Date, or if the
cost or configuration of the Equipment and/or Software or actual
softcosts changes, Lessor may adjust the Lease Rate Factors or the
periodic Rent to reflect any additional costs or expenses resulting from
those changes.
4
<PAGE> 28
4. RENT AND PAYMENT
Lessee acknowledges that in addition to its obligations under Section
6.1 of the Master Lease, Lessee's obligation to pay the periodic Rent
described in this Equipment Schedule will not be affected by any
representations made by the Vendor, or by any discontinuance, return,
destruction or failure of the Software. If the Software is
unsatisfactory for any reason, Lessee will make any claims solely
against the Vendor and will continue to pay Lessor all amounts payable
under this Equipment Schedule.
5. DEFAULT
Any violation by Lessee of any of its covenants or representations in
the License Agreement or any failure by Lessee to perform any provision
of the License Agreement will also be an Event of Default under this
Equipment Schedule.
6. MISCELLANEOUS
Upon an Event of Default, expiration or termination of this Equipment
Schedule, Lessee will assign to Lessor all of Lessee's rights and
interests in the Software subject to the prior consent of the Vendor if
required by the License Agreement.
7. EQUIPMENT PROCUREMENT CHARGES (PROGRESS PAYMENTS-LEASE RATE FACTOR)
Because items of Equipment and/or Software will be delivered to Lessee
prior to the Commencement Date, progress payments will be required to be
paid to the Vendor prior to the Commencement Date ("Progress Payments").
With respect to any items of Equipment and/or Software delivered prior
to the Commencement Date, all terms and conditions of this Equipment
Schedule will be applicable except the Lessee's rental obligations
However, Lessee agrees to pay Lessor "Equipment Procurement Charges"
equal to a daily lease rate factor of .0208298 multiplied by the
aggregate of the Progress Payments paid by Lessor for each day from the
date Progress Payments are made until the Commencement Date. Accrued
Equipment Procurement Charges are payable when invoiced.
If the Commencement Date occurs after the Outside Date, the daily lease
rate factor applicable from the Outside Date until the Commencement Date
will be equal to .0208298. If Lessee rejects the Equipment and/or
Software prior to the Commencement Date pursuant to the purchase
agreement with the Equipment vendor or if Lessee is in default of this
Equipment Schedule, then this Equipment Schedule will terminate and
Lessee will (i) reimburse Lessor for all amounts paid
5
<PAGE> 29
by Lessor for the purchase of the Equipment and/or Software and (ii) pay
all Equipment Procurement Charges due through the date of termination.
Upon payment of all amounts due and owing by Lessee, Lessor will
transfer to Lessee all of Lessor's interest in the Equipment and/or
Software and under any purchase agreement including any remedies that
Lessor may have against Vendor with respect to said Equipment and/or
Software.
8. INTEREST RATE CHANGE
The Lease Rate Factors or the periodic Rent described in this Equipment
Schedule have been calculated using an interest rate based on the 5-year
U.S. Treasury Constant Maturity of 6.37% as described in the Federal
Reserve Statistical Release H.15 ("Treasury Rate"). If on the
Commencement Date for the last item of Equipment and/or Software prior
to the beginning of the Initial Term, the Treasury Rate is greater or
there is an adverse change in Lessee's credit standing, Lessor may
adjust the Lease Rate Factors or the periodic Rent accordingly.
6
<PAGE> 30
9. GENERAL UPGRADE PROVISION
If Lessee is not in default, there has been no material adverse change
in Lessee's credit standing at the time and assuming all required third
party consents are obtained, Lessor will, on Lessee's request enter into
negotiation of a contract in which Lessor would on mutually agreeable
terms and conditions lease to Lessee standard feature and/or equipment
model upgrades to the Equipment and/or Software (as applicable) offered
either by the Equipment manufacturer or by another manufacturer (the
"Upgrade"), provided, however, that (a) the Initial Term for the Upgrade
will be coterminous with the Initial Term of this Equipment Schedule;
and (b) the periodic Rent for the Upgrade will be equal to 100% of the
present value of the acquisition cost of the Upgrade amortized over the
remaining Initial Term of this Equipment Schedule using then prevailing
interest rates for similar transactions and with Lessees of similar
credit rating. If the parties cannot mutually agree upon terms and
conditions with respect to the Upgrade, this Equipment Schedule will
continue in full force and effect.
10. EARLY TERMINATION
As long as Lessee is not in default and upon not less than ninety (90)
days prior written notice to Lessor, Lessee may terminate this Equipment
Schedule with respect to all, but not less than all, of the Equipment
and/or Software (as applicable) effective upon the expiration of the
12th month of the Initial Term or upon the expiration of any month of
the Initial Term thereafter as specified in the termination notice (the
"Termination Date"), provided that on or before the Termination Date
Lessee pays to Lessor an amount equal to (i) (a) the remaining Rent for
the balance of the Initial Term, (determined as of the Termination
Date), and (b) $1,006,891.40 which equals thirty-eight percent (38%) of
the original acquisition cost, each discounted to present value in
accordance with the formula set below, plus an amount which would be
obtainable in an arm's-length transaction between an informed and
willing lessee/user and an informed and willing lessor/dealer under no
compulsion to lease as determined by Lessor (as of the Termination Date)
in its reasonable discretion, exercised in good faith, for any upgrades
or additions with respect to such Equipment and/or Software (as
applicable), and (ii) all other outstanding amounts due and owing on the
Termination Date (collectively, the "Termination Amount").
For purposes of calculating the Termination Amount, any amounts
discounted shall be discounted at the lesser of:
7
<PAGE> 31
(a) the Secured Party's interest rate, if any, (b) the then current U.S.
Treasury Rate for a term which most closely approximates the Initial
Term, or (c) six percent (6%).
11. END OF TERM OPTIONS
If Lessee is not in default and gives Lessor at least ninety (90) days
prior written notice, Lessee will have the option at the expiration of
the Initial Term to (a) purchase all, but not less than all, Equipment
and/or Software (as applicable) for an amount equal to thirty-eight
percent (38%) of the original acquisition cost, plus an amount which
would be obtainable at the end of the Initial Term in an arm's-length
transaction between an informed and willing buyer/user and an informed
and willing seller under no compulsion to sell as determined by Lessor
in its reasonable discretion, exercised in good faith, for any upgrades
or additions with respect to such Equipment and/or Software (as
applicable), plus taxes or (b) extend the Initial Term for all, but not
less than all, Equipment and/or Software (as applicable) for a mutually
agreed upon renewal period at a periodic Rent equal to an amount which
would be obtainable at the commencement of the extended Initial Term in
an arm's-length transaction between an informed and willing lessee/user
and an informed and willing lessor/dealer under no compulsion to lease,
plus taxes amortized over the renewal period , or (c) return the
Equipment and/or Software (as applicable) in accordance with the terms
and conditions of the Master Lease. If Lessee fails to provide written
notice then the Equipment Schedule will continue in full force and
effect until terminated in accordance with its terms.
8
<PAGE> 32
MASTER LEASE: This Equipment Schedule is issued pursuant to the Master Lease
identified on page 1 of this Equipment Schedule. All of the terms and conditions
of the Master Lease are incorporated in and made a part of this Equipment
Schedule as if expressly described in this Equipment Schedule, and this
Equipment Schedule constitutes a separate lease for the Equipment. The parties
reaffirm all of the terms and conditions of the Master Lease (including, without
limitation, the representations and warranties set forth in the Master Lease)
except as modified by this Equipment Schedule. This Equipment Schedule may not
be amended or rescinded except by a writing signed by both parties.
MIDCOM COMMUNICATIONS INC. COMDISCO, INC.
as Lessee as Lessor
By: By:
------------------------------- ------------------------------
Title: Title:
------------------------------- ------------------------------
Date: Date:
------------------------------- ------------------------------
9
<PAGE> 33
01-SL78686-00
EQUIPMENT SCHEDULE NO. 5
DATED FEBRUARY 17, 1997
TO MASTER LEASE AGREEMENT DATED JANUARY 15, 1997 ("MASTER LEASE")
<TABLE>
<CAPTION>
LESSEE: MIDCOM COMMUNICATIONS INC. LESSOR: COMDISCO, INC.
<S> <C>
ADDRESS FOR LEGAL NOTICES: ADDRESS FOR ALL NOTICES:
1111 Third Avenue 6111 North River Road
Seattle, WA 98101 Rosemont, Illinois 60018
Attn: Communications Product Group
ATTN: General Counsel
PHONE: (206) 628-8000
FAX: (206) 628-8295
ADDRESS FOR ADMINISTRATIVE CORRESPONDENCE: ADDRESS FOR INVOICES:
Same as Above Same as Administrative Correspondence
ATTN: Chief Financial Officer ATTN: Chief Financial Officer
PHONE: (206) 628-8000
FAX: (206) 628-8295 LESSEE REFERENCE NO:
Atlanta Office
(24 digits maximum)
INITIAL TERM/
</TABLE>
1
<PAGE> 34
Months
<TABLE>
<S> <C>
RENT INTERVAL: 60 Months
LOCATION OF EQUIPMENT:
LEASE RATE FACTOR:
55 Marietta Street NW - Suite 1665
Atlanta, GA 30303 Hardware: .0198213
Softcosts: .021976
ATTN: Mr. Gene Lorette
PHONE: (404) 222-0050
</TABLE>
EQUIPMENT (AS DEFINED BELOW):
<TABLE>
<CAPTION>
ITEM MACHINE MODEL/ SERIAL
NO. QTY. MFG. TYPE FEATURE DESCRIPTION NUMBER
- --- ---- ---- ---- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
1. 1 NTEL DMS 250 PBX System
</TABLE>
2
<PAGE> 35
RISK OF LOSS: Pursuant to the Master Lease, Lessor and Lessee agree that the
risk of loss is the responsibility of the Lessee.
NOTICE PERIOD: Not less than ninety (90) days nor more than twelve (12) months
prior to the expiration of the lease term. If Lessee gives written notice of
termination, in accordance with the terms of the preceding sentence, but fails
to return the Equipment on the expiration date of the Initial Term, the Lease
will be reinstated and an additional sixty (60) days written notice of
termination will be required, which termination will be effective at the end of
the month following the 60 day notice requirement. The periodic Rent will
continue at the current rate until the effective date of the written notice of
termination and the Equipment is returned.
SPECIAL TERMS: The following additional terms are a part of this Equipment
Schedule. The terms and conditions of the Master Lease Agreement as they pertain
to this Equipment Schedule are modified and amended as follows:
1. SOFTWARE
In addition to leasing the Equipment described herein, Lessor agrees to
finance software license fees ("License Fees") of approximately
$225,204.00, for the Software described in this Equipment Schedule (the
"Software"). The Software is licensed by Northern Telecom Inc., the
vendor of the Software (the "Vendor") directly to the Lessee pursuant to
the terms and conditions of the license agreement between Vendor and
Lessee (the "LicenseAgreement"). Lessor is not a party to nor has any
obligations under the License Agreement and has no interest in the
Software except as described in this Equipment Schedule.
2 ADDITIONAL SOFT COSTS
Lessee and Lessor acknowledge that the Equipment Schedule contains
approximate softcosts of $347,112.00 for labor, freight and handling
costs, and OEM charges charged by Vendor.
3. COMMENCEMENT DATE
The Commencement Date for each item of Equipment and/or Software (as
applicable) will be the day on which that item of Equipment and/or
Software (as applicable) is installed and qualified for a commercially
available manufacturer's standard maintenance contract or warranty
coverage, if available. Lessee agrees to confirm the Commencement Date
by providing Lessor with either a Commencement Certificate in the form
provided by Lessor or the Vendor's invoice
3
<PAGE> 36
containing the Equipment and/or Software location (as applicable),
description, serial number (if applicable), cost, the Commencement Date
and Lessee's signature, within ten (10) days of the Commencement Date.
For purposes of this Equipment Schedule, the Initial Term will begin on
July 1, 1997 for all items of Equipment and Software.
Lessee's obligations under this Equipment Schedule and the periodic Rent
described in this Equipment Schedule are contingent upon Lessor
purchasing the Equipment, including the softcosts for an aggregate
amount of $1,356,490.50 in addition to financing the Software License
Fees of approximately $225,204.00 pursuant to satisfactory purchase
documentation. Lessee acknowledges that it has either received or
approved Lessor's purchase documentation for the Equipment and/or
Software. If the Commencement Date occurs later than June 30, 1997
("Outside Date"), if the Commencement Certificate or Vendor invoices are
not provided within ten (10) days of the Commencement Date, or if the
cost or configuration of the Equipment and/or Software or actual
softcosts changes, Lessor may adjust the Lease Rate Factors or the
periodic Rent to reflect any additional costs or expenses resulting from
those changes.
4
<PAGE> 37
4. RENT AND PAYMENT
Lessee acknowledges that in addition to its obligations under Section
6.1 of the Master Lease, Lessee's obligation to pay the periodic Rent
described in this Equipment Schedule will not be affected by any
representations made by the Vendor, or by any discontinuance, return,
destruction or failure of the Software. If the Software is
unsatisfactory for any reason, Lessee will make any claims solely
against the Vendor and will continue to pay Lessor all amounts payable
under this Equipment Schedule.
5. DEFAULT
Any violation by Lessee of any of its covenants or representations in
the License Agreement or any failure by Lessee to perform any provision
of the License Agreement will also be an Event of Default under this
Equipment Schedule.
6. MISCELLANEOUS
Upon an Event of Default, expiration or termination of this Equipment
Schedule, Lessee will assign to Lessor all of Lessee's rights and
interests in the Software subject to the prior consent of the Vendor if
required by the License Agreement.
7. EQUIPMENT PROCUREMENT CHARGES (PROGRESS PAYMENTS-LEASE RATE FACTOR)
Because items of Equipment and/or Software will be delivered to Lessee
prior to the Commencement Date, progress payments will be required to be
paid to the Vendor prior to the Commencement Date ("Progress Payments").
With respect to any items of Equipment and/or Software delivered prior
to the Commencement Date, all terms and conditions of this Equipment
Schedule will be applicable except the Lessee's rental obligations
However, Lessee agrees to pay Lessor "Equipment Procurement Charges"
equal to a daily lease rate factor of .0208298 multiplied by the
aggregate of the Progress Payments paid by Lessor for each day from the
date Progress Payments are made until the Commencement Date. Accrued
Equipment Procurement Charges are payable when invoiced.
If the Commencement Date occurs after the Outside Date, the daily lease
rate factor applicable from the Outside Date until the Commencement Date
will be equal to .0208298. If Lessee rejects the Equipment and/or
Software prior to the Commencement Date pursuant to the purchase
agreement with the Equipment vendor or if Lessee is in default of this
Equipment Schedule, then this Equipment Schedule will terminate and
Lessee will (i) reimburse Lessor for all amounts paid
5
<PAGE> 38
by Lessor for the purchase of the Equipment and/or Software and (ii) pay
all Equipment Procurement Charges due through the date of termination.
Upon payment of all amounts due and owing by Lessee, Lessor will
transfer to Lessee all of Lessor's interest in the Equipment and/or
Software and under any purchase agreement including any remedies that
Lessor may have against Vendor with respect to said Equipment and/or
Software.
8. INTEREST RATE CHANGE
The Lease Rate Factors or the periodic Rent described in this Equipment
Schedule have been calculated using an interest rate based on the 5-year
U.S. Treasury Constant Maturity of 6.37% as described in the Federal
Reserve Statistical Release H.15 ("Treasury Rate"). If on the
Commencement Date for the last item of Equipment and/or Software prior
to the beginning of the Initial Term, the Treasury Rate is greater or
there is an adverse change in Lessee's credit standing, Lessor may
adjust the Lease Rate Factors or the periodic Rent accordingly.
6
<PAGE> 39
9. GENERAL UPGRADE PROVISION
If Lessee is not in default, there has been no material adverse change
in Lessee's credit standing at the time and assuming all required third
party consents are obtained, Lessor will, on Lessee's request enter into
negotiation of a contract in which Lessor would on mutually agreeable
terms and conditions lease to Lessee standard feature and/or equipment
model upgrades to the Equipment and/or Software (as applicable) offered
either by the Equipment manufacturer or by another manufacturer (the
"Upgrade"), provided, however, that (a) the Initial Term for the Upgrade
will be coterminous with the Initial Term of this Equipment Schedule;
and (b) the periodic Rent for the Upgrade will be equal to 100% of the
present value of the acquisition cost of the Upgrade amortized over the
remaining Initial Term of this Equipment Schedule using then prevailing
interest rates for similar transactions and with Lessees of similar
credit rating. If the parties cannot mutually agree upon terms and
conditions with respect to the Upgrade, this Equipment Schedule will
continue in full force and effect.
10. EARLY TERMINATION
As long as Lessee is not in default and upon not less than ninety (90)
days prior written notice to Lessor, Lessee may terminate this Equipment
Schedule with respect to all, but not less than all, of the Equipment
and/or Software (as applicable) effective upon the expiration of the
12th month of the Initial Term or upon the expiration of any month of
the Initial Term thereafter as specified in the termination notice (the
"Termination Date"), provided that on or before the Termination Date
Lessee pays to Lessor an amount equal to (i) (a) the remaining Rent for
the balance of the Initial Term, (determined as of the Termination
Date), and (b) $601,043.91 which equals thirty-eight percent (38%) of
the original acquisition cost, each discounted to present value in
accordance with the formula set below, plus an amount which would be
obtainable in an arm's-length transaction between an informed and
willing lessee/user and an informed and willing lessor/dealer under no
compulsion to lease as determined by Lessor (as of the Termination Date)
in its reasonable discretion, exercised in good faith, for any upgrades
or additions with respect to such Equipment and/or Software (as
applicable), and (ii) all other outstanding amounts due and owing on the
Termination Date (collectively, the "Termination Amount").
For purposes of calculating the Termination Amount, any amounts
discounted shall be discounted at the lesser of:
7
<PAGE> 40
(a) the Secured Party's interest rate, if any, (b) the then current U.S.
Treasury Rate for a term which most closely approximates the Initial
Term, or (c) six percent (6%).
11. END OF TERM OPTIONS
If Lessee is not in default and gives Lessor at least ninety (90) days
prior written notice, Lessee will have the option at the expiration of
the Initial Term to (a) purchase all, but not less than all, Equipment
and/or Software (as applicable) for an amount equal to thirty-eight
percent (38%) of the original acquisition cost, plus an amount which
would be obtainable at the end of the Initial Term in an arm's-length
transaction between an informed and willing buyer/user and an informed
and willing seller under no compulsion to sell as determined by Lessor
in its reasonable discretion, exercised in good faith, for any upgrades
or additions with respect to such Equipment and/or Software (as
applicable), plus taxes or (b) extend the Initial Term for all, but not
less than all, Equipment and/or Software (as applicable) for a mutually
agreed upon renewal period at a periodic Rent equal to an amount which
would be obtainable at the commencement of the extended Initial Term in
an arm's-length transaction between an informed and willing lessee/user
and an informed and willing lessor/dealer under no compulsion to lease,
plus taxes amortized over the renewal period, or (c) return the
Equipment and/or Software (as applicable) in accordance with the terms
and conditions of the Master Lease. If Lessee fails to provide written
notice then the Equipment Schedule will continue in full force and
effect until terminated in accordance with its terms.
8
<PAGE> 41
MASTER LEASE: This Equipment Schedule is issued pursuant to the Master Lease
identified on page 1 of this Equipment Schedule. All of the terms and conditions
of the Master Lease are incorporated in and made a part of this Equipment
Schedule as if expressly described in this Equipment Schedule, and this
Equipment Schedule constitutes a separate lease for the Equipment. The parties
reaffirm all of the terms and conditions of the Master Lease (including, without
limitation, the representations and warranties set forth in the Master Lease)
except as modified by this Equipment Schedule. This Equipment Schedule may not
be amended or rescinded except by a writing signed by both parties.
MIDCOM COMMUNICATIONS INC. COMDISCO, INC.
as Lessee as Lessor
By: By:
------------------------------- ------------------------------
Title: Title:
------------------------------- ------------------------------
Date: Date:
------------------------------- ------------------------------
9
<PAGE> 42
01-SL78687-00
EQUIPMENT SCHEDULE NO. 6
DATED FEBRUARY 17, 1997
TO MASTER LEASE AGREEMENT DATED JANUARY 15, 1997 ("MASTER LEASE")
<TABLE>
<CAPTION>
LESSEE: MIDCOM COMMUNICATIONS INC. LESSOR: COMDISCO, INC.
<S> <C>
ADDRESS FOR LEGAL NOTICES: ADDRESS FOR ALL NOTICES:
1111 Third Avenue 6111 North River Road
Seattle, WA 98101 Rosemont, Illinois 60018
Attn: Communications
Product Group
ATTN: General Counsel
PHONE: (206) 628-8000
FAX: (206) 628-8295
ADDRESS FOR ADMINISTRATIVE CORRESPONDENCE: ADDRESS FOR INVOICES:
Same as Above Same as Administrative
Correspondence
ATTN: Chief Financial Officer ATTN: Chief Financial Officer
PHONE: (206) 628-8000
FAX: (206) 628-8295 LESSEE REFERENCE NO:
Dallas Office
(24 digits maximum)
INITIAL TERM/
</TABLE>
1
<PAGE> 43
<TABLE>
<S> <C>
RENT INTERVAL: 60 Months
LOCATION OF EQUIPMENT:
LEASE RATE FACTOR:
2323 Bryan Street - 6th Floor
Dallas, TX 75201 Hardware: .0198213
Softcosts: .021976
ATTN: Ms. Debbie MacDonald
PHONE: (214) 880-0450
</TABLE>
EQUIPMENT (AS DEFINED BELOW):
<TABLE>
<CAPTION>
ITEM MACHINE MODEL/ SERIAL
NO. QTY. MFG. TYPE FEATURE DESCRIPTION NUMBER
- --- ---- ---- ---- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
1. 1 NTEL DMS 250 PBX System
</TABLE>
2
<PAGE> 44
RISK OF LOSS: Pursuant to the Master Lease, Lessor and Lessee agree that the
risk of loss is the responsibility of the Lessee.
NOTICE PERIOD: Not less than ninety (90) days nor more than twelve (12) months
prior to the expiration of the lease term. If Lessee gives written notice of
termination, in accordance with the terms of the preceding sentence, but fails
to return the Equipment on the expiration date of the Initial Term, the Lease
will be reinstated and an additional sixty (60) days written notice of
termination will be required, which termination will be effective at the end of
the month following the 60 day notice requirement. The periodic Rent will
continue at the current rate until the effective date of the written notice of
termination and the Equipment is returned.
SPECIAL TERMS: The following additional terms are a part of this Equipment
Schedule. The terms and conditions of the Master Lease Agreement as they pertain
to this Equipment Schedule are modified and amended as follows:
1. SOFTWARE
In addition to leasing the Equipment described herein, Lessor agrees to
finance software license fees ("License Fees") of approximately
$203,232.00, for the Software described in this Equipment Schedule (the
"Software"). The Software is licensed by Northern Telecom Inc., the
vendor of the Software (the "Vendor") directly to the Lessee pursuant to
the terms and conditions of the license agreement between Vendor and
Lessee (the "LicenseAgreement"). Lessor is not a party to nor has any
obligations under the License Agreement and has no interest in the
Software except as described in this Equipment Schedule.
2 ADDITIONAL SOFT COSTS
Lessee and Lessor acknowledge that the Equipment Schedule contains
approximate softcosts of $334,881.00 for labor, freight and handling
costs, and OEM charges charged by Vendor.
3. COMMENCEMENT DATE
The Commencement Date for each item of Equipment and/or Software (as
applicable) will be the day on which that item of Equipment and/or
Software (as applicable) is installed and qualified for a commercially
available manufacturer's standard maintenance contract or warranty
coverage, if available. Lessee agrees to confirm the Commencement Date
by providing Lessor with either a Commencement Certificate in the form
provided by Lessor or the Vendor's invoice
3
<PAGE> 45
containing the Equipment and/or Software location (as applicable),
description, serial number (if applicable), cost, the Commencement Date
and Lessee's signature, within ten (10) days of the Commencement Date.
For purposes of this Equipment Schedule, the Initial Term will begin on
July 1, 1997 for all items of Equipment and Software.
Lessee's obligations under this Equipment Schedule and the periodic Rent
described in this Equipment Schedule are contingent upon Lessor
purchasing the Equipment, including the softcosts for an aggregate
amount of $1,111,227.60 in addition to financing the Software License
Fees of approximately $203,232.00 pursuant to satisfactory purchase
documentation. Lessee acknowledges that it has either received or
approved Lessor's purchase documentation for the Equipment and/or
Software. If the Commencement Date occurs later than June 30, 1997
("Outside Date"), if the Commencement Certificate or Vendor invoices are
not provided within ten (10) days of the Commencement Date, or if the
cost or configuration of the Equipment and/or Software or actual
softcosts changes, Lessor may adjust the Lease Rate Factors or the
periodic Rent to reflect any additional costs or expenses resulting from
those changes.
4
<PAGE> 46
4. RENT AND PAYMENT
Lessee acknowledges that in addition to its obligations under Section
6.1 of the Master Lease, Lessee's obligation to pay the periodic Rent
described in this Equipment Schedule will not be affected by any
representations made by the Vendor, or by any discontinuance, return,
destruction or failure of the Software. If the Software is
unsatisfactory for any reason, Lessee will make any claims solely
against the Vendor and will continue to pay Lessor all amounts payable
under this Equipment Schedule.
5. DEFAULT
Any violation by Lessee of any of its covenants or representations in
the License Agreement or any failure by Lessee to perform any provision
of the License Agreement will also be an Event of Default under this
Equipment Schedule.
6. MISCELLANEOUS
Upon an Event of Default, expiration or termination of this Equipment
Schedule, Lessee will assign to Lessor all of Lessee's rights and
interests in the Software subject to the prior consent of the Vendor if
required by the License Agreement.
7. EQUIPMENT PROCUREMENT CHARGES (PROGRESS PAYMENTS-LEASE RATE FACTOR)
Because items of Equipment and/or Software will be delivered to Lessee
prior to the Commencement Date, progress payments will be required to be
paid to the Vendor prior to the Commencement Date ("Progress Payments").
With respect to any items of Equipment and/or Software delivered prior
to the Commencement Date, all terms and conditions of this Equipment
Schedule will be applicable except the Lessee's rental obligations.
However, Lessee agrees to pay Lessor "Equipment Procurement Charges"
equal to a daily lease rate factor of .0208298 multiplied by the
aggregate of the Progress Payments paid by Lessor for each day from the
date Progress Payments are made until the Commencement Date. Accrued
Equipment Procurement Charges are payable when invoiced.
If the Commencement Date occurs after the Outside Date, the daily lease
rate factor applicable from the Outside Date until the Commencement Date
will be equal to .0208298. If Lessee rejects the Equipment and/or
Software prior to the Commencement Date pursuant to the purchase
agreement with the Equipment vendor or if Lessee is in default of this
Equipment Schedule, then this Equipment Schedule will terminate and
Lessee will (i) reimburse Lessor for all amounts paid
5
<PAGE> 47
by Lessor for the purchase of the Equipment and/or Software and (ii) pay
all Equipment Procurement Charges due through the date of termination.
Upon payment of all amounts due and owing by Lessee, Lessor will
transfer to Lessee all of Lessor's interest in the Equipment and/or
Software and under any purchase agreement including any remedies that
Lessor may have against Vendor with respect to said Equipment and/or
Software.
8. INTEREST RATE CHANGE
The Lease Rate Factors or the periodic Rent described in this Equipment
Schedule have been calculated using an interest rate based on the 5-year
U.S. Treasury Constant Maturity of 6.37% as described in the Federal
Reserve Statistical Release H.15 ("Treasury Rate"). If on the
Commencement Date for the last item of Equipment and/or Software prior
to the beginning of the Initial Term, the Treasury Rate is greater or
there is an adverse change in Lessee's credit standing, Lessor may
adjust the Lease Rate Factors or the periodic Rent accordingly.
6
<PAGE> 48
9. GENERAL UPGRADE PROVISION
If Lessee is not in default, there has been no material adverse change
in Lessee's credit standing at the time and assuming all required third
party consents are obtained, Lessor will, on Lessee's request enter into
negotiation of a contract in which Lessor would on mutually agreeable
terms and conditions lease to Lessee standard feature and/or equipment
model upgrades to the Equipment and/or Software (as applicable) offered
either by the Equipment manufacturer or by another manufacturer (the
"Upgrade"), provided, however, that (a) the Initial Term for the Upgrade
will be coterminous with the Initial Term of this Equipment Schedule;
and (b) the periodic Rent for the Upgrade will be equal to 100% of the
present value of the acquisition cost of the Upgrade amortized over the
remaining Initial Term of this Equipment Schedule using then prevailing
interest rates for similar transactions and with Lessees of similar
credit rating. If the parties cannot mutually agree upon terms and
conditions with respect to the Upgrade, this Equipment Schedule will
continue in full force and effect.
10. EARLY TERMINATION
As long as Lessee is not in default and upon not less than ninety (90)
days prior written notice to Lessor, Lessee may terminate this Equipment
Schedule with respect to all, but not less than all, of the Equipment
and/or Software (as applicable) effective upon the expiration of the
12th month of the Initial Term or upon the expiration of any month of
the Initial Term thereafter as specified in the termination notice (the
"Termination Date"), provided that on or before the Termination Date
Lessee pays to Lessor an amount equal to (i) (a) the remaining Rent for
the balance of the Initial Term, (determined as of the Termination
Date), and (b) $499,494.64 which equals thirty-eight percent (38%) of
the original acquisition cost, each discounted to present value in
accordance with the formula set below, plus an amount which would be
obtainable in an arm's-length transaction between an informed and
willing lessee/user and an informed and willing lessor/dealer under no
compulsion to lease as determined by Lessor (as of the Termination Date)
in its reasonable discretion, exercised in good faith, for any upgrades
or additions with respect to such Equipment and/or Software (as
applicable), and (ii) all other outstanding amounts due and owing on the
Termination Date (collectively, the "Termination Amount").
For purposes of calculating the Termination Amount, any amounts
discounted shall be discounted at the lesser of:
7
<PAGE> 49
(a) the Secured Party's interest rate, if any, (b) the then current U.S.
Treasury Rate for a term which most closely approximates the Initial
Term, or (c) six percent (6%).
11. END OF TERM OPTIONS
If Lessee is not in default and gives Lessor at least ninety (90) days
prior written notice, Lessee will have the option at the expiration of
the Initial Term to (a) purchase all, but not less than all, Equipment
and/or Software (as applicable) for an amount equal to thirty-eight
percent (38%) of the original acquisition cost, plus an amount which
would be obtainable at the end of the Initial Term in an arm's-length
transaction between an informed and willing buyer/user and an informed
and willing seller under no compulsion to sell as determined by Lessor
in its reasonable discretion, exercised in good faith, for any upgrades
or additions with respect to such Equipment and/or Software (as
applicable), plus taxes or (b) extend the Initial Term for all, but not
less than all, Equipment and/or Software (as applicable) for a mutually
agreed upon renewal period at a periodic Rent equal to an amount which
would be obtainable at the commencement of the extended Initial Term in
an arm's-length transaction between an informed and willing lessee/user
and an informed and willing lessor/dealer under no compulsion to lease,
plus taxes amortized over the renewal period , or (c) return the
Equipment and/or Software (as applicable) in accordance with the terms
and conditions of the Master Lease. If Lessee fails to provide written
notice then the Equipment Schedule will continue in full force and
effect until terminated in accordance with its terms.
8
<PAGE> 50
MASTER LEASE: This Equipment Schedule is issued pursuant to the Master Lease
identified on page 1 of this Equipment Schedule. All of the terms and conditions
of the Master Lease are incorporated in and made a part of this Equipment
Schedule as if expressly described in this Equipment Schedule, and this
Equipment Schedule constitutes a separate lease for the Equipment. The parties
reaffirm all of the terms and conditions of the Master Lease (including, without
limitation, the representations and warranties set forth in the Master Lease)
except as modified by this Equipment Schedule. This Equipment Schedule may not
be amended or rescinded except by a writing signed by both parties.
MIDCOM COMMUNICATIONS INC. COMDISCO, INC.
as Lessee as Lessor
By: By:
------------------------------- ------------------------------
Title: Title:
------------------------------- ------------------------------
Date: Date:
------------------------------- ------------------------------
9
<PAGE> 51
01-SL78688-00
EQUIPMENT SCHEDULE NO. 7
DATED FEBRUARY 17, 1997
TO MASTER LEASE AGREEMENT DATED JANUARY 15, 1997 ("MASTER LEASE")
<TABLE>
<CAPTION>
LESSEE: MIDCOM COMMUNICATIONS INC. LESSOR: COMDISCO, INC.
<S> <C>
ADDRESS FOR LEGAL NOTICES: ADDRESS FOR ALL NOTICES:
1111 Third Avenue 6111 North River Road
Seattle, WA 98101 Rosemont, Illinois 60018
Attn: Communications
Product Group
ATTN: General Counsel
PHONE: (206) 628-8000
FAX: (206) 628-8295
ADDRESS FOR ADMINISTRATIVE CORRESPONDENCE: ADDRESS FOR INVOICES:
Same as Above Same as Administrative
Correspondence
ATTN: Chief Financial Officer ATTN: Chief Financial Officer
PHONE: (206) 628-8000
FAX: (206) 628-8295 LESSEE REFERENCE NO:
Seattle Office
(24 digits maximum)
INITIAL TERM/
</TABLE>
1
<PAGE> 52
<TABLE>
<S> <C>
RENT INTERVAL: 60 Months
LOCATION OF EQUIPMENT:
LEASE RATE FACTOR:
2001 6th Ave. - 9th floor
Seattle, WA 98121 Hardware: .0198213
Softcosts: .021976
ATTN: Mr. Ed Doyne
PHONE: (206) 443-1699
</TABLE>
EQUIPMENT (AS DEFINED BELOW):
<TABLE>
<CAPTION>
ITEM MACHINE MODEL/ SERIAL
NO. QTY. MFG. TYPE FEATURE DESCRIPTION NUMBER
- --- ---- ---- ---- ------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
1. 1 NTEL DMS 250 PBX System
</TABLE>
2
<PAGE> 53
RISK OF LOSS: Pursuant to the Master Lease, Lessor and Lessee agree that the
risk of loss is the responsibility of the Lessee.
NOTICE PERIOD: Not less than ninety (90) days nor more than twelve (12) months
prior to the expiration of the lease term. If Lessee gives written notice of
termination, in accordance with the terms of the preceding sentence, but fails
to return the Equipment on the expiration date of the Initial Term, the Lease
will be reinstated and an additional sixty (60) days written notice of
termination will be required, which termination will be effective at the end of
the month following the 60 day notice requirement. The periodic Rent will
continue at the current rate until the effective date of the written notice of
termination and the Equipment is returned.
SPECIAL TERMS: The following additional terms are a part of this Equipment
Schedule. The terms and conditions of the Master Lease Agreement as they pertain
to this Equipment Schedule are modified and amended as follows:
1. SOFTWARE
In addition to leasing the Equipment described herein, Lessor agrees to
finance software license fees ("License Fees") of approximately
$203,232.00, for the Software described in this Equipment Schedule (the
"Software"). The Software is licensed by Northern Telecom Inc., the
vendor of the Software (the "Vendor") directly to the Lessee pursuant to
the terms and conditions of the license agreement between Vendor and
Lessee (the "LicenseAgreement"). Lessor is not a party to nor has any
obligations under the License Agreement and has no interest in the
Software except as described in this Equipment Schedule.
2 ADDITIONAL SOFT COSTS
Lessee and Lessor acknowledge that the Equipment Schedule contains
approximate softcosts of $334,881.00 for labor, freight and handling
costs, and OEM charges charged by Vendor.
3. COMMENCEMENT DATE
The Commencement Date for each item of Equipment and/or Software (as
applicable) will be the day on which that item of Equipment and/or
Software (as applicable) is installed and qualified for a commercially
available manufacturer's standard maintenance contract or warranty
coverage, if available. Lessee agrees to confirm the Commencement Date
by providing Lessor with either a Commencement Certificate in the form
provided by Lessor or the Vendor's invoice
3
<PAGE> 54
containing the Equipment and/or Software location (as applicable),
description, serial number (if applicable), cost, the Commencement Date
and Lessee's signature, within ten (10) days of the Commencement Date.
For purposes of this Equipment Schedule, the Initial Term will begin on
July 1, 1997 for all items of Equipment and Software.
Lessee's obligations under this Equipment Schedule and the periodic Rent
described in this Equipment Schedule are contingent upon Lessor
purchasing the Equipment, including the softcosts for an aggregate
amount of $1,111,227.60 in addition to financing the Software License
Fees of approximately $203,232.00 pursuant to satisfactory purchase
documentation. Lessee acknowledges that it has either received or
approved Lessor's purchase documentation for the Equipment and/or
Software. If the Commencement Date occurs later than June 30, 1997
("Outside Date"), if the Commencement Certificate or Vendor invoices are
not provided within ten (10) days of the Commencement Date, or if the
cost or configuration of the Equipment and/or Software or actual
softcosts changes, Lessor may adjust the Lease Rate Factors or the
periodic Rent to reflect any additional costs or expenses resulting from
those changes.
4
<PAGE> 55
4. RENT AND PAYMENT
Lessee acknowledges that in addition to its obligations under Section
6.1 of the Master Lease, Lessee's obligation to pay the periodic Rent
described in this Equipment Schedule will not be affected by any
representations made by the Vendor, or by any discontinuance, return,
destruction or failure of the Software. If the Software is
unsatisfactory for any reason, Lessee will make any claims solely
against the Vendor and will continue to pay Lessor all amounts payable
under this Equipment Schedule.
5. DEFAULT
Any violation by Lessee of any of its covenants or representations in
the License Agreement or any failure by Lessee to perform any provision
of the License Agreement will also be an Event of Default under this
Equipment Schedule.
6. MISCELLANEOUS
Upon an Event of Default, expiration or termination of this Equipment
Schedule, Lessee will assign to Lessor all of Lessee's rights and
interests in the Software subject to the prior consent of the Vendor if
required by the License Agreement.
7. EQUIPMENT PROCUREMENT CHARGES (PROGRESS PAYMENTS-LEASE RATE FACTOR)
Because items of Equipment and/or Software will be delivered to Lessee
prior to the Commencement Date, progress payments will be required to be
paid to the Vendor prior to the Commencement Date ("Progress Payments").
With respect to any items of Equipment and/or Software delivered prior
to the Commencement Date, all terms and conditions of this Equipment
Schedule will be applicable except the Lessee's rental obligations.
However, Lessee agrees to pay Lessor "Equipment Procurement Charges"
equal to a daily lease rate factor of .0208298 multiplied by the
aggregate of the Progress Payments paid by Lessor for each day from the
date Progress Payments are made until the Commencement Date. Accrued
Equipment Procurement Charges are payable when invoiced.
If the Commencement Date occurs after the Outside Date, the daily lease
rate factor applicable from the Outside Date until the Commencement Date
will be equal to .0208298. If Lessee rejects the Equipment and/or
Software prior to the Commencement Date pursuant to the purchase
agreement with the Equipment vendor or if Lessee is in default of this
Equipment Schedule, then this Equipment Schedule will terminate and
Lessee will (i) reimburse Lessor for all amounts paid
5
<PAGE> 56
by Lessor for the purchase of the Equipment and/or Software and (ii) pay
all Equipment Procurement Charges due through the date of termination.
Upon payment of all amounts due and owing by Lessee, Lessor will
transfer to Lessee all of Lessor's interest in the Equipment and/or
Software and under any purchase agreement including any remedies that
Lessor may have against Vendor with respect to said Equipment and/or
Software.
8. INTEREST RATE CHANGE
The Lease Rate Factors or the periodic Rent described in this Equipment
Schedule have been calculated using an interest rate based on the 5-year
U.S. Treasury Constant Maturity of 6.37% as described in the Federal
Reserve Statistical Release H.15 ("Treasury Rate"). If on the
Commencement Date for the last item of Equipment and/or Software prior
to the beginning of the Initial Term, the Treasury Rate is greater or
there is an adverse change in Lessee's credit standing, Lessor may
adjust the Lease Rate Factors or the periodic Rent accordingly.
6
<PAGE> 57
9. GENERAL UPGRADE PROVISION
If Lessee is not in default, there has been no material adverse change
in Lessee's credit standing at the time and assuming all required third
party consents are obtained, Lessor will, on Lessee's request enter into
negotiation of a contract in which Lessor would on mutually agreeable
terms and conditions lease to Lessee standard feature and/or equipment
model upgrades to the Equipment and/or Software (as applicable) offered
either by the Equipment manufacturer or by another manufacturer (the
"Upgrade"), provided, however, that (a) the Initial Term for the Upgrade
will be coterminous with the Initial Term of this Equipment Schedule;
and (b) the periodic Rent for the Upgrade will be equal to 100% of the
present value of the acquisition cost of the Upgrade amortized over the
remaining Initial Term of this Equipment Schedule using then prevailing
interest rates for similar transactions and with Lessees of similar
credit rating. If the parties cannot mutually agree upon terms and
conditions with respect to the Upgrade, this Equipment Schedule will
continue in full force and effect.
10. EARLY TERMINATION
As long as Lessee is not in default and upon not less than ninety (90)
days prior written notice to Lessor, Lessee may terminate this Equipment
Schedule with respect to all, but not less than all, of the Equipment
and/or Software (as applicable) effective upon the expiration of the
12th month of the Initial Term or upon the expiration of any month of
the Initial Term thereafter as specified in the termination notice (the
"Termination Date"), provided that on or before the Termination Date
Lessee pays to Lessor an amount equal to (i) (a) the remaining Rent for
the balance of the Initial Term, (determined as of the Termination
Date), and (b) $499,494.64 which equals thirty-eight percent (38%) of
the original acquisition cost, each discounted to present value in
accordance with the formula set below, plus an amount which would be
obtainable in an arm's-length transaction between an informed and
willing lessee/user and an informed and willing lessor/dealer under no
compulsion to lease as determined by Lessor (as of the Termination Date)
in its reasonable discretion, exercised in good faith, for any upgrades
or additions with respect to such Equipment and/or Software (as
applicable), and (ii) all other outstanding amounts due and owing on the
Termination Date (collectively, the "Termination Amount").
For purposes of calculating the Termination Amount, any amounts
discounted shall be discounted at the lesser of:
7
<PAGE> 58
(a) the Secured Party's interest rate, if any, (b) the then current U.S.
Treasury Rate for a term which most closely approximates the Initial
Term, or (c) six percent (6%).
11. END OF TERM OPTIONS
If Lessee is not in default and gives Lessor at least ninety (90) days
prior written notice, Lessee will have the option at the expiration of
the Initial Term to (a) purchase all, but not less than all, Equipment
and/or Software (as applicable) for an amount equal to thirty-eight
percent (38%) of the original acquisition cost, plus an amount which
would be obtainable at the end of the Initial Term in an arm's-length
transaction between an informed and willing buyer/user and an informed
and willing seller under no compulsion to sell as determined by Lessor
in its reasonable discretion, exercised in good faith, for any upgrades
or additions with respect to such Equipment and/or Software (as
applicable), plus taxes or (b) extend the Initial Term for all, but not
less than all, Equipment and/or Software (as applicable) for a mutually
agreed upon renewal period at a periodic Rent equal to an amount which
would be obtainable at the commencement of the extended Initial Term in
an arm's-length transaction between an informed and willing lessee/user
and an informed and willing lessor/dealer under no compulsion to lease,
plus taxes amortized over the renewal period , or (c) return the
Equipment and/or Software (as applicable) in accordance with the terms
and conditions of the Master Lease. If Lessee fails to provide written
notice then the Equipment Schedule will continue in full force and
effect until terminated in accordance with its terms.
8
<PAGE> 59
MASTER LEASE: This Equipment Schedule is issued pursuant to the Master Lease
identified on page 1 of this Equipment Schedule. All of the terms and conditions
of the Master Lease are incorporated in and made a part of this Equipment
Schedule as if expressly described in this Equipment Schedule, and this
Equipment Schedule constitutes a separate lease for the Equipment. The parties
reaffirm all of the terms and conditions of the Master Lease (including, without
limitation, the representations and warranties set forth in the Master Lease)
except as modified by this Equipment Schedule. This Equipment Schedule may not
be amended or rescinded except by a writing signed by both parties.
MIDCOM COMMUNICATIONS INC. COMDISCO, INC.
as Lessee as Lessor
By: By:
------------------------------- ------------------------------
Title: Title:
------------------------------- ------------------------------
Date: Date:
------------------------------- ------------------------------
9
<PAGE> 1
ADDENDUM
TO MASTER LEASE AGREEMENT DATED JANUARY 15, 1997
BETWEEN MIDCOM COMMUNICATIONS INC., AS LESSEE,
AND COMDISCO, INC., AS LESSOR
The terms and conditions of the above referenced Agreement are modified as
follows:
1) Section 3, "Rent and Payment"
Delete the last sentence of this section and replace with the following:
"Lessee shall pay interest at the "Overdue Rate" on the amount of any
payment (rent or otherwise) which is more than ten (10) days overdue.
Such interest shall be payable from the date ten 910) days after such
payment was due until the date payment is received by Lessor."
2) Section 4.2, "Warranty and Disclaimer of Warranties"
After the word "Lessor" add the words "or its agents" at the end of the
fourth sentence.
In the fifth sentence delete the word "Lessor" and replace with the
words "either party or any of its agents."
3) Section 5.2, "Relocation or Sublease"
In paragraph two, delete the word "reasonable" before the word "consent"
in the first sentence and add the words "which consent shall not be
unreasonably withheld." at the end of that sentence.
4) Section 53., "Assignment by Lessor"
In line five of subsection (a) after the words "Secured Party" add the
words "designated as payee in the invoice".
5) Section 6.1, "Net Lease"
Add the following language at the beginning of sentence two:
"So long as Lessor has not violated its warrant of quiet enjoyment as
per Section 4.2 and so long as Lessor has assigned the applicable
Schedule to a Secured Party as per Section 5.3,"
6) Section 8, Change the title of this section to read "Representations and
Warranties of Lessee and Lessor"
Add paragraph two at the end of this section to read:
"Lessor represents and warrants that for the Master Lease and each
Schedule:
<PAGE> 2
(a) The execution, delivery and performance of the Lessor have been
duly authorized by all necessary corporate action,
(b) The individual executing was duly authorized to do so; and
(c) The Master Lease and each Schedule constitute legal, valid and
binding agreements of the Lessor enforceable in accordance with
their terms.
7) Section 12.2, "Lessor's Risk of Loss"
Add the following language at the end of the first sentence in
paragraph four:
"in accordance with, and to the extent required by, Section 12.1."
8) Section 13.1, "Default"
Add the following language at the end of this section:
"In addition, a default by Lessor in the performance of any term,
covenant or condition of the Master Lease or any Schedule or the
inaccuracy in any material respect of any representation or warranty
made by the Lessor therein or in any document or certificate furnished
to Lessee in connection therewith which default or inaccuracy shall
continue for a period of fifteen (15) days after notice shall constitute
a default under a Schedule."
9) Section 13.2, "Remedies"
In subsection (c) after the word "sums" add the word "then" and after
the word "due" add the words "and not yet paid."
Add the following language at the end of this section:
Lessee's Remedies. Upon the occurrence of a default by the Lessor, the
Lessee may proceed by appropriate court action or actions either at law
or in equity to enforce performance by Lessor of the applicable
covenants and terms of the specified Schedule or to recover from Lessor
any and all damages or expenses including reasonable attorney(s)' fees
which Lessee shall have sustained by reason of Lessor's default in the
covenants of the applicable Schedule or on account of Lessee's
enforcements of its remedies thereunder, provided, however that it is
the understanding of the parties that, except as provided in Section
6.1, no default by the Lessor or the exercise of the remedies provided
herein by the Lessee shall in any way relieve the Lessee of its
obligations to make any payments arising under the applicable Schedule
including but not limited to the Rent.
10) Section 13.3, "Mitigation"
In line one of subsection (b) delete the word "three" after the words
"discounted at" and replace with the word "two".
In the last paragraph of this section after the words "liquidated
damages" in lines one and three, insert the words, "pursuant to
Section 13.2(c)."
<PAGE> 3
11) Section 14.3, "Binding Nature"
Add the following language after the word "OBLIGATIONS" at the end of
sentence two:
"WITHOUT CONSENT OF LESSOR WHICH SUCH CONSENT SHALL NOT BE UNREASONABLY
WITHHELD."
12) Section 14.4, "Survival of Obligations"
In line four after the words "benefit of" delete the words "Lessor and
any Assignee or Secured Party" and replace with the words "appropriate
party".
13) Section 14.6, "Applicable Law"
Delete sentence two in its entirety and replace with the following:
"IN THE EVENT OF A CONFLICT BETWEEN THE PROVISIONS OF ARTICLE 2A OF THE
UNIFORM COMMERCIAL CODE AND THE TERMS AND CONDITIONS OF THIS MASTER
LEASE OR ANY SCHEDULE, THE TERMS AND CONDITIONS OF THIS MASTER LEASE OR
SUCH SCHEDULE WILL CONTROL."
14) Section 14.10, "Additional Documents"
Delete the second sentence in its entirety and replace with the
following:
"Upon the execution of each Schedule with an aggregate Rent in excess of
$2,000,000.00, Lessee will provide Lessor with an opinion from Lessee's
counsel regarding the representations and warranties made in subsections
(a), (b) and (c) of Section 8 of this Master Lease."
Insert the following language at the end of the last sentence:
At the end of the last sentence, delete "period" and replace with
"fiscal year and unaudited financial statements for the most recent
fiscal period that is currently available upon Lessor's reasonable
request at any other time during the fiscal year."
15) Section 14.13, "Definitions"
Delete the definition of "Casualty Value" in its entirety and replace
with the following:
Casualty Value - means an amount equal to the greater of (i) the
aggregate Rent remaining to be paid for the balance of the lease term,
(discounted to present value at the same rate of interest at which the
Lease was discounted, or if the Lease was not discounted, then
discounted at six percent (6%) plus an amount sufficient to reimburse
Lessor for its lost residual value in the Equipment having suffered a
Casualty Loss), or (ii) the Fair Market Value of the Equipment
immediately prior to the Casualty Loss. However, if a Casualty Value
Table is attached to the relevant Schedule its terms will control.
Modify the definition of Fair Market Value to include the words "buy or"
before the word "sell" at the end of the sentence.
<PAGE> 4
Except as amended hereby, all other terms and conditions of the Master Lease
Agreement remain unchanged.
IN WITNESS WHEREOF, the parties have duly executed this Addendum to the Master
Lease Agreement on or as of the day and year first above written.
MIDCOM COMMUNICATIONS, INC. COMDISCO, INC.
AS LESSEE AS LESSOR
By: /s/ ROBERT J. CHAMBERLAIN By: /s/ DAVID J. SCUDLER
------------------------------- ----------------------------------
Title: EXECUTIVE VP-CFO Title: Director
---------------------------- -------------------------------
Date: 2/17/97 Date: 2/20/97
---------------------------- -------------------------------
<PAGE> 1
============================================================================
AMENDMENT NUMBER ONE TO
LOAN AND SECURITY AGREEMENT
by and between
MIDCOM COMMUNICATIONS INC.,
ADVAL, INC.,
ADVAL DATA CORPORATION,
ADVANCED NETWORK DESIGN,
CEL-TECH INTERNATIONAL CORP.,
and
PACNET INC.
and
FOOTHILL CAPITAL CORPORATION
Dated as of April 1, 1997
============================================================================
<PAGE> 2
AMENDMENT NUMBER ONE TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER ONE TO LOAN AND SECURITY AGREEMENT (THIS
"AMENDMENT"), is entered into as of April 1, 1997, by and among FOOTHILL CAPITAL
CORPORATION, a California corporation ("Foothill"), with a place of business
located at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California
90025-3333, MIDCOM COMMUNICATIONS INC., a Washington corporation ("Midcom"),
with its chief executive office located at 1111 Third Avenue, Suite 1600,
Seattle, Washington 98101, ADVAL, INC., an Oregon corporation ("AdVal"), with
its chief executive office located at 200 Galeria Office Center, Southfield,
Michigan 48034, ADVAL DATA CORPORATION, an Oregon corporation ("AdVal Data"),
with its chief executive office located at 200 Galeria Office Center,
Southfield, Michigan 48034, ADVANCED NETWORK DESIGN, a California corporation
("A.N.D."), with its chief executive office located at 14849 Firestone
Boulevard, La Mirada, California 90638, CEL-TECH INTERNATIONAL CORP., a
Washington corporation ("Cel-Tech"), with its chief executive office located at
12826 SE 40th Lane, Factoria, Washington 98004, and PACNET INC., a Washington
corporation ("PacNet"), with its chief executive office located at 1111 Third
Avenue, Suite 1600, Seattle, Washington 98101 (collectively, and jointly and
severally, the "Borrowers").
This Amendment is entered into with reference to the following facts:
A. Foothill, as lender, Midcom, AdVal, AdVal Data, A.N.D.,
Cel-Tech, and PacNet, collectively, and jointly and severally
as borrowers, heretofore entered into that certain Loan and
Security Agreement, dated as of February 27, 1997 (herein the
"Agreement");
B. The Borrowers have requested Foothill to amend the Agreement as
set forth in this Amendment, (i) to extend the date on which
the Closing Date shall have occurred under Section 3.1(d), (ii)
to modify the terms of the Amended Net Worth covenant contained
in Section 7.22, and (iii) to amend Schedule 3.1(u) to the
Agreement to eliminate any reference to the Borrowers' La
Mirada location.
C. Foothill is willing to so amend the Agreement in accordance
with the terms and conditions hereof; and
D. All capitalized terms used herein and not defined herein shall
have the meanings ascribed to them in the Agreement, as amended
hereby.
-1-
<PAGE> 3
NOW, THEREFORE, in consideration of the above recitals and the mutual
promises contained herein, Foothill and the Borrowers hereby agree as follows:
1. Amendments to the Agreement.
a. The following specified provisions of the Agreement
hereby are amended and restated in their entirety as follows:
(1) Section 3.1(d) of the Agreement:
the Closing Date shall occur on or before May 15, 1997;
(2) Section 7.22 of the Agreement:
7.22 FINANCIAL COVENANT. Maintain a consolidated Adjusted Net
Worth determined in accordance with GAAP of Midcom and its Subsidiaries of
less than the relevant amount set forth in the following table, measured on
a fiscal quarter-end basis:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
Period Ending Minimum Consolidated Adjusted Net Worth
- ---------------------------------------------------------------
<S> <C>
6/30/97 <$19,730,000>
9/30/97 <$37,621,000>
12/31/97 <$48,710,000>
03/31/98 <$52,023,000>
6/30/98 <$55,557,000>
9/30/98 <$56,111,000>
12/31/98 <$54,396,000>
03/31/99 <$50,370,000>
06/30/99 <$44,208,000>
09/30/99 <$36,051,000>
12/31/99 <$26,096,000>
- ---------------------------------------------------------------
</TABLE>
-2-
<PAGE> 4
b. Schedule 3.1(u) (Collateral Access Agreements) is
hereby amended and replaced in its entirety with the attached revised Schedule
3.1(u), attached hereto as Exhibit 1 to this Amendment, that eliminates any
reference to the location at 14849 Firestone Boulevard, La Mirada, California,
90638.
2. Representations and Warranties. Borrower hereby represents and
warrants to Foothill that (a) the execution, delivery, and performance of this
Amendment and of the Agreement, as amended by this Amendment, are within its
corporate powers, have been duly authorized by all necessary corporate action,
and are not in contravention of any law, rule, or regulation, or any order,
judgment, decree, writ, injunction, or award of any arbitrator, court, or
governmental authority, or of the terms of its charter or bylaws, or of any
contract or undertaking to which it is a party or by which any of its
properties may be bound or affected, and (b) this Amendment and the Agreement,
as amended by this Amendment, constitute Borrower's legal, valid, and binding
obligation, enforceable against Borrower in accordance with its terms.
3. Conditions Precedent to Amendment. The satisfaction of each of
the following, on or before the First Amendment Closing Deadline, unless waived
or deferred by Foothill in its sole discretion, shall constitute conditions
precedent to the effectiveness of this Amendment:
a. The representations and warranties in this Amendment,
the Agreement as amended by this Amendment, and the other Loan Documents shall
be true and correct in all respect on and as of the date hereof, as though made
on such date (except to the extent that such representations and warranties
relate solely to an earlier date);
b. No Event of Default or event which with the giving of
notice or passage of time would constitute an Event of Default shall have
occurred and be continuing on the date hereof, nor shall result from the
consummation of the transactions contemplated herein;
c. No injunction, writ, restraining order, or other order
of any nature prohibiting, directly or indirectly, the consummation of the
transactions contemplated herein shall have been issued and remain in force by
any governmental authority against Borrower or Foothill; and
d. All other documents and legal matters in connection
with the transactions contemplated by this Amendment shall have been delivered
or executed or recorded and shall be in form and substance satisfactory to
Foothill and its counsel.
-3-
<PAGE> 5
4. Further Assurances. Borrower shall execute and deliver all
agreements, documents, and instruments, in form and substance satisfactory to
Foothill, and take all actions as Foothill may reasonably request from time to
time fully to consummate the transactions contemplated under this Amendment and
the Agreement, as amended by this Amendment.
5. Miscellaneous.
a. Upon the effectiveness of this Amendment, each
reference in the Agreement to "this Agreement", "hereunder", "herein",
"hereof" or words of like import referring to the Agreement shall mean and
refer to the Agreement as amended by this Amendment.
b. Upon the effectiveness of this Amendment, each
reference in the Loan Documents to the "Loan Agreement", "thereunder",
"therein", "thereof" or words of like import referring to the Agreement shall
mean and refer to the Agreement as amended by this Amendment.
c. As used in this Amendment, "First Amendment Closing
Deadline" means April 25, 1997.
d. This Amendment shall be governed by and construed in
accordance with the laws of the State of California.
e. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart.
[Remainder of page intentionally left blank]
-4-
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first written above.
MIDCOM COMMUNICATIONS INC.,
a Washington corporation
By /s/ ROBERT J. CHAMBERLAIN
---------------------------------
Title: Executive Vice President-CFO
-----------------------------
ADVAL, INC.,
an Oregon corporation
By /s/ ROBERT J. CHAMBERLAIN
---------------------------------
Title: Treasurer
-----------------------------
ADVAL DATA CORPORATION,
an Oregon corporation
By /s/ ROBERT J. CHAMBERLAIN
---------------------------------
Title: Treasurer
-----------------------------
ADVANCED NETWORK DESIGN,
a California corporation
By /s/ ROBERT J. CHAMBERLAIN
---------------------------------
Title: Treasurer
-----------------------------
-5-
<PAGE> 7
CEL-TECH INTERNATIONAL CORP.,
a Washington corporation
By /s/ ROBERT J. CHAMBERLAIN
-----------------------------
Title: Treasurer
-------------------------
PACNET INC.,
a Washington corporation
By /s/ ROBERT J. CHAMBERLAIN
-----------------------------
Title: Treasurer
-------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ BEN SILVER
-----------------------------
Title:
-------------------------
-6-
<PAGE> 8
REVISED SCHEDULE 3.1(u)
TO THE
FOOTHILL LOAN AND SECURITY AGREEMENT
COLLATERAL ACCESS AGREEMENTS
1. 1111 Third Avenue, Suite 1600, Seattle, WA 98101
2. 200 Galeria Officentre, Southfield, MI 48034
3. 12826 SE 40th Lane, Factoria, WA 98004
4. The Westing Building, 2001 Sixth Avenue, Suite 2800, Seattle, WA
5. 624 S. Grand Avenue, Suite 2800, Los Angeles, CA
6. Printers' Square, 600 S. Federal Street, 7th Floor, New York, NY
7. Financial Square, 32 Old Slip, 4th Floor, New York, NY
8. Allianz Financial Center, 2323 Bryan Street, 6th Floor, Dallas, TX
9. 55 Marietta Street, 16th Floor, Atlanta, GA
<PAGE> 1
- -------------------------------------------------------------------------------
AMENDMENT NUMBER TWO TO
LOAN AND SECURITY AGREEMENT
by and between
MIDCOM COMMUNICATIONS INC.,
ADVAL, INC.,
ADVAL DATA CORPORATION,
ADVANCED NETWORK DESIGN,
CEL-TECH INTERNATIONAL CORP.,
and
PACNET, INC.
and
FOOTHILL CAPITAL CORPORATION
Dated as of May 29, 1997
- -------------------------------------------------------------------------------
<PAGE> 2
AMENDMENT NUMBER TWO TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NUMBER TWO TO LOAN AND SECURITY AGREEMENT (this
"Amendment"), is entered into as of May 29, 1997, by and among FOOTHILL CAPITAL
CORPORATION, a California corporation ("Foothill"), with a place of business
located at 11111 Santa Monica Boulevard, Suite 1500, Los Angeles, California
90025-3333, MIDCOM COMMUNICATIONS INC., a Washington corporation ("Midcom"),
with its chief executive office located at 1111 Third Avenue, Suite 1600,
Seattle, Washington 98101, ADVAL, INC., an Oregon corporation ("AdVal"), with
its chief executive office located at 200 Galeria Office Center, Southfield,
Michigan 48034, ADVAL DATA CORPORATION, an Oregon corporation ("AdVal Data"),
with its chief executive office located at 200 Galeria Office Center,
Southfield, Michigan 48034, ADVANCED NETWORK DESIGN, a California corporation
("A.N.D."), with its chief executive office located at 14849 Firestone
Boulevard, La Mirada, California 90638, CEL-TECH INTERNATIONAL CORP., a
Washington corporation ("Cel-Tech"), with its chief executive office located at
12826 SE 40th Lane, Factoria, Washington 98004, and PACNET INC., a Washington
corporation ("PacNet"), with its chief executive office located at 1111 Third
Avenue, Suite 1600, Seattle, Washington 98101 (collectively, and jointly and
severally, the "Borrowers").
This Amendment is entered into with reference to the following facts:
A. Foothill and the Borrowers have entered into that certain Loan
and Security Agreement, dated as of February 27, 1997 (the
"Original Agreement");
B. Foothill and the Borrowers have entered into that certain
Amendment Number One to Loan and Security Agreement (the "First
Amendment"), dated as of April 1, 1997, inter alia, to amend the
Original Agreement to extend the Closing Date as set forth in
the First Amendment (the Original Agreement, as amended by the
First Amendment, is referred to herein as the "Agreement");
C. The Borrowers have requested Foothill to make certain
amendments to the Agreement, inter alia, to extend the Closing
Date from May 15, 1997 to May 31, 1997, as set forth in this
Amendment.
D. Foothill is willing to so amend the Agreement in accordance
with the terms and conditions hereof; and
-1-
<PAGE> 3
E. All capitalized terms used herein and not defined herein shall
have the meanings ascribed to them in the Agreement, as
amended hereby.
NOW, THEREFORE, in consideration of the above recitals and the mutual
promises contained herein, Foothill and the Borrowers hereby agree as follows:
1. Amendments to the Agreement.
a. Section 1.1 of the Agreement hereby is amended
by adding the following new defined terms in alphabetical order:
"First Amendment" means that certain Amendment Number
One to Loan and Security Agreement, dated as of April 1, 1997, between Foothill
and the Borrowers.
"Second Amendment" means that certain Amendment Number
Two to Loan and Security Agreement, dated as of May 29, 1997, between Foothill
and the Borrowers.
b. The following definitions contained in Section
1.1 of the Agreement hereby are deleted in their entirety and the following
hereby are substituted in lieu thereof:
"Borrowers' Designated Account Bank" means Key Bank,
whose office is located at 700 Fifth Avenue, 48th Floor, Seattle, Washington
98111-0090, and whose ABA number is 125-000-574.
"Key Bank" means KeyBank National Association, formerly
known as Key Bank of Washington, Inc.
"Loan Documents" means this Agreement, the First
Amendment, the Second Amendment, the Disbursement Letter, the Lockbox
Agreements, the Pledge Agreement, the Trademark Security Agreement, any
Mortgages hereafter delivered by any one or more of the Borrowers to Foothill,
the Suretyship Agreement, the Intercreditor Agreements, the Control Agreements,
any note or notes executed by any one or more of the Borrowers and payable to
Foothill, and any other agreement entered into, now or in the future, in
connection with this Agreement.
C. The following specified provisions of the
Agreement hereby are amended and restated in their entirety as follows:
-2-
<PAGE> 4
(1) Section 3.1(d) of the Agreement:
(d) the Closing Date shall occur on or before May 31, 1997;
(2) Section 3.1(g)(viii) of the Agreement:
viii) the Intercreditor Agreement with respect to Key Bank;
(3) Section 3.1(l) of the Agreement:
(l) Foothill shall have received, within 15 days before the Closing
Date, certificates of status with respect to each Borrower, each dated
on or after April 1, 1997, such certificates to be issued by the
appropriate officer of the jurisdictions in which its failure to be duly
qualified or licensed would have a Material Adverse Change, which
certificates shall indicate that such Borrower is in good standing in
such jurisdictions;
(4) Section 3.1(s) of the Agreement:
(s) Foothill shall have received written notice from the Borrowers
specifying the requested date of such initial Advance, which requested
date shall not be less than 1 day after the date Foothill receives such
notice;
(5) Section 3.1(u) of the Agreement:
(u) [Intentionally Omitted];
(6) Section 3.1(v) of the Agreement:
(v) Foothill shall have received a Certificate of the Chief
Financial Officer of Midcom certifying that all tax returns required to
be filed by each Borrower have been timely filed and all taxes upon each
Borrower or its properties, assets, income, and franchises (including
payroll taxes) have been paid prior to delinquency, except such taxes
that are the subject of a Permitted Protest and as except as disclosed
in, or on an attachment to, such Certificate, the form and substance of
which shall be satisfactory to Foothill and its counsel;
d. Section 3.3 of the Agreement hereby is amended by
adding the following new subsections as follows:
-3-
<PAGE> 5
(b) On a best efforts basis, Borrower will deliver to Foothill such
Collateral Access Agreements in respect of each of the locations set
forth on Schedule 3.1(u) for which a Collateral Access Agreement is
required; and
(c) Within 10 days after the Closing Date, Foothill shall have
received the Intercreditor Agreement with respect to Comdisco, and in
the event that after such 10 day period such Intercreditor Agreement is
not received, Foothill shall create such reserves as it deems
appropriate in its sole discretion;
(d) Within 30 days after the Closing Date, Foothill shall have
received a Certificate of the General Counsel of Midcom and the Chief
Financial Officer of Midcom setting forth its detailed analysis,
calculation, and management's opinion of the taxes identified in Exhibit
A to the Certificate delivered to Foothill pursuant to Section 3.1(v)
which represents liens which now, or with the passage of time may
become, liens which have or may in the future have priority over the
security interests granted to Foothill under the Loan Documents;
e. The first sentence of Section 5.6 of the Agreement is
amended and restated in its entirety as follows:
The chief executive office of such Borrower is located at the
addresses indicated in the introductory paragraph of this Agreement, or
at such other location as set forth in any notice which may from time to
time be delivered to Foothill pursuant to Section 7.19 of this
Agreement, and in respect of which such Borrower has complied with all
applicable requirements of this Agreement.
f. The introductory language preceding the first clause of
the first sentence of the third paragraph of Section 6.3 of the Agreement is
amended and restated in its entirety as follows:
Within 30 Business Days of the end of each month, together with
the financial statements provided in accordance with Section 6.3(a),
such Borrower shall deliver to Foothill
g. The first sentence of Section 6.9 of the Agreement is
amended and restated in its entirety as follows:
Except as disclosed in the Certificate delivered to Foothill
pursuant to Section 3.1(v), all assessments and taxes, whether real,
personal, or otherwise, due or payable by, or imposed, levied, or
assessed against any Borrower or any of its
-4-
<PAGE> 6
property shall be paid in full, before delinquency or before the expiration
of any extension period.
h. Section 7.1 of the Agreement hereby is amended by adding the
following new subsection as follows:
(g) Indebtedness incurred in connection with the Permitted Stock
Redemption.
i. Section 7.8 of the Agreement is amended and restated in its
entirety as follows:
(a) Except in connection with a refinancing permitted by Section
7.1(f), prepay, redeem, retire (except for payments of Indebtedness, to the
extent that such Indebtedness is permitted under Section 7.1 hereto, as
such payments become due, whether upon final scheduled maturity or upon
scheduled installment payment dates), defease, purchase, or otherwise
acquire any Indebtedness owing to any third Person, other than the
Obligations in accordance with this Agreement, and (b) directly or
indirectly, amend, modify, alter, increase, or change any of the terms or
conditions of any agreement, instrument, document, indenture, or other
writing evidencing or concerning Indebtedness permitted under Sections
7.1(b), (c), (d), (e), (f) or (g).
j. Schedule 3.1(u) (Collateral Access Agreements) hereby is
amended and replaced in its entirety with the attached revised Schedule 3.1(u),
attached hereto an Exhibit 1 to this Amendment, setting forth each locations
for which a Collateral Access Agreement shall be delivered to Foothill and the
date by which such Collateral Access Agreement shall be delivered.
k. Schedule 6.13 (Inventory and Equipment Locations) hereby is
amended by the addition of the Addendum to Schedule 6.13 which is made a part
thereof and incorporated therein, attached hereto as Exhibit 2 to this
Amendment, setting forth Borrower's new Seattle office location.
2. Representations and Warranties. Borrower hereby represents and
warrants to Foothill that (a) the execution, delivery, and performance of this
Amendment and of the Agreement, as amended by this Amendment, are within its
corporate powers, have been duly authorized by all necessary corporate action,
and are not in contravention of any law, rule, or regulation, or any order,
judgment, decree, writ, injunction, or award or any arbitrator, court, or
governmental authority, or of the terms of its charter or bylaws, or of any
contract or undertaking to which it is a party or by which any of its
properties may be bound or affected, and (b) this Amendment and the Agreement,
as amended by this
-5-
<PAGE> 7
Amendment, constitute Borrower's legal, valid, and binding obligation,
enforceable against Borrower in accordance with its terms.
3. Conditions Precedent to Amendment. The satisfaction of each of the
following, on or before the Second Amendment Closing Deadline, unless waived or
deferred by Foothill in its sole discretion, shall constitute conditions
precedent to the effectiveness of this Amendment:
a. The representations and warranties in this Amendment, the
Agreement as amended by this Amendment, and the other Loan Documents shall be
true and correct in all respects on and as of the date hereof, as though made
on such date (except to the extent that such representations and warranties
relate solely to an earlier date);
b. No Event of Default or event which with the giving of notice or
passage of time would constitute an Event of Default shall have occurred and be
continuing on the date hereof, nor shall result from the consummation of the
transactions contemplated herein;
c. No injunction, writ, restraining order, or other order of any
nature prohibiting, directly or indirectly, the consummation of the
transactions contemplated herein shall have been issued and remain in force by
any governmental authority against Borrower or Foothill; and
d. All other documents and legal matters in connection with the
transactions contemplated by this Amendment shall have been delivered or
executed or recorded and shall be in form and substance satisfactory to
Foothill and its counsel.
4. Further Assurances. Borrower shall execute and deliver all
agreements, documents, and instruments, in form and substance satisfactory to
Foothill, and take all actions as Foothill may reasonably request from time to
time fully to consummate the transactions contemplated under this Amendment and
the Agreement, as amended by this Amendment.
5. Miscellaneous.
a. Upon the effectiveness of this Amendment, each reference in the
Agreement to "this Agreement", "hereunder", "herein", "hereof" or words of like
import referring to the Agreement shall mean and refer to the Agreement as
amended by this Amendment.
-6-
<PAGE> 8
b. Upon the effectiveness of this Amendment, each reference in the
Loan Documents to the "Loan Agreement", "thereunder", "therein", "thereof" or
words of like import referring to the Agreement shall mean and refer to the
Agreement as amended by this Amendment.
c. As used in this Amendment, "Second Amendment Closing Deadline"
means May 30, 1997.
d. This Amendment shall be governed by and construed in accordance
with the laws of the State of California.
e. This Amendment may be executed in any number of counterparts, all
of which taken together shall constitute one and the same instrument and any of
the parties hereto may execute this Amendment by signing any such counterpart.
[Remainder of page intentionally left blank.]
-7-
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first written above.
MIDCOM COMMUNICATIONS INC.
a Washington corporation
By /s/ ROBERT J. CHAMBERLAIN
------------------------------------
Title: Executive Vice President-CFO
--------------------------------
ADVAL, INC.,
an Oregon corporation
By
------------------------------------
Title: Treasurer
--------------------------------
ADVAL DATA CORPORATION,
an Oregon corporation
By
------------------------------------
Title: Treasurer
--------------------------------
ADVANCED NETWORK DESIGN,
a California corporation
By
------------------------------------
Title: Treasurer
--------------------------------
- S-1 -
<PAGE> 10
CEL-TECH INTERNATIONAL CORP.,
a Washington corporation
By
------------------------------------
Title: Treasurer
--------------------------------
PACNET INC.,
a Washington corporation
By
------------------------------------
Title: Treasurer
--------------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ BEN SILVER
------------------------------------
Title: Assistant Vice President
--------------------------------
- S-2 -
<PAGE> 11
EXHIBIT 1
REVISED SCHEDULE 3.1(u)
TO THE
FOOTHILL LOAN AND SECURITY AGREEMENT
COLLATERAL ACCESS AGREEMENTS
<TABLE>
<CAPTION>
No. Location
- -------------------------------------------------------------------------------
<C> <S>
1. 1111 Third Avenue, Suite 1600, Seattle, WA 98101
2. 200 Galeria Officentre, Southfield, MI 48034
3. 12826 SE 40th Lane, Factoria, WA 98004
4. The Westin Building, 2001 Sixth Avenue, Suite 2800, Seattle, WA
5. 624 S. Grand Avenue, Suite 2800, Los Angeles, CA
6. Printers' Square, 600 S. Federal Street, 7th Floor, New York, NY
7. Financial Square, 32 Old Slip, 4th Floor, New York, NY
8. Allianz Financial Center, 2323 Bryan Street, 6th Floor, Dallas, TX
9. 55 Marietta Street, 16th Floor, Atlanta, GA
- -------------------------------------------------------------------------------
</TABLE>
<PAGE> 12
EXHIBIT 2
ADDENDUM TO SCHEDULE 6.13
TO THE
FOOTHILL LOAN AND SECURITY AGREEMENT
LOCATIONS OF INVENTORY AND EQUIPMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Name of Company Locations Comments
- ------------------------------------------------------------------------------
<S> <C> <C>
Midcom Communications, Inc. 1420 Fifth Avenue, Suite 2050
Seattle, WA 98101
- ------------------------------------------------------------------------------
</TABLE>
- S-5 -
<PAGE> 1
EXHIBIT 11.1
MIDCOM COMMUNICATIONS INC.
EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------- ------------------------
(In thousands, except per share data) 1997 1996 1997 1996
- ------------------------------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net loss $(26,229) $(44,661) $(45,960) $(59,161)
-------- -------- -------- --------
Weighted average shares outstanding 15,340 15,445 15,596 15,321
-------- -------- -------- --------
Net loss per share $ (1.71) $ (2.89) $ (2.95) $ (3.86)
-------- -------- -------- --------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 23,420,000
<ALLOWANCES> (5,658,000)
<INVENTORY> 0
<CURRENT-ASSETS> 19,828,000
<PP&E> 33,780,000
<DEPRECIATION> (14,702,000)
<TOTAL-ASSETS> 51,088,000
<CURRENT-LIABILITIES> 58,236,000
<BONDS> 0
0
0
<COMMON> 62,997,000
<OTHER-SE> (183,316,000)
<TOTAL-LIABILITY-AND-EQUITY> 51,088,000
<SALES> 49,419,000
<TOTAL-REVENUES> 49,419,000
<CGS> 36,223,000
<TOTAL-COSTS> 30,635,00
<OTHER-EXPENSES> 31,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,430,000
<INCOME-PRETAX> (26,464,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,464,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,464,000)
<EPS-PRIMARY> (1.73)
<EPS-DILUTED> (1.73)
</TABLE>
