<PAGE>
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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 September 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.)
26899 Northwestern Hwy, Suite 120 48034
Southfield, Michigan
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (248) 304-1780
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 registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1997
- ------------------------------- -------------------------------
Common Stock, $0.0001 par value 16,193,546
Page 1 of 16 pages.
Exhibit Index at Page 16.
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<PAGE>
MIDCOM COMMUNICATIONS INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statments 3
ITEM 2. Management's Discussion and Analyais of Financial Condition
and Results of Operations 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 3. Defaults Upon Senior Securities 14
ITEM 5. Other Information 14
ITEM 6. Exhibits and Reports on Form 8-K 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(IN THOUSANDS) SEPTEMBER 30, DECEMBER 31,
1997 1996
- --------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,532 $ 30,962
Accounts receivable, less allowance for doubtful
accounts of $6,184 and $7,802, respectively 20,421 16,969
Prepaid expenses and other current assets 1,820 1,548
-------- --------
Total current assets 23,773 49,479
Furniture, equipment and leasehold improvements, net 24,126 11,045
Intangible assets, less accumulated amortization of
$49,199 and $39,532, respectively 6,402 15,547
Other assets and deferred charges, net 3,891 3,852
-------- --------
$ 58,192 $ 79,923
======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Notes payable $113,872 $ 9,680
Line of credit 20,734 -
Current portion of capital lease obligations 14,501 3,314
Accounts payable 8,524 3,179
Carrier accounts payable 25,316 17,143
Accrued expenses and other current liabilities 16,160 12,938
-------- --------
Total current liabilities 199,107 46,254
Long-term obligations, less current portion - 99,153
Other long-term liabilities 3,800 3,800
Shareholders' deficit:
Common stock 62,063 68,330
Deferred compensation (1,321) (1,707)
Accumulated deficit (205,457) (135,907)
-------- ---------
Total shareholders' deficit (144,715) (69,284)
-------- --------
$ 58,192 $ 79,923
======== ========
- --------------------------------------------------------------------------------
</TABLE>
See Notes to Unaudited Condensed Consolidated Financial Statements.
3
<PAGE>
MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
(In thousands, except per share data)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue $ 24,920 $ 30,730 $ 74,339 $124,590
Cost of revenue 18,586 22,292 54,809 89,828
-------- -------- -------- --------
Gross profit 6,334 8,438 19,530 34,762
Operating expenses:
Selling, general and
administrative 22,090 15,734 62,646 48,048
Depreciation 1,348 1,653 4,133 4,327
Amortization 924 5,321 9,524 21,857
Settlement of contract dispute -- -- -- 8,800
Relocation of corporate
headquarters 2,136 -- 4,866 --
Restucturing charge -- -- -- 2,220
Loss on impairment of assets -- 2,000 -- 20,765
-------- -------- -------- --------
26,498 24,708 81,169 106,017
-------- -------- -------- --------
Operating loss (20,164) (16,270) (61,639) (71,255)
Other expense (income):
Interest expense, net 3,600 2,049 8,337 5,959
Other expense (income), net (175) (60) (427) 206
-------- -------- -------- --------
Loss before provision for income
taxes (23,589) (18,259) (69,549) (77,420)
Provision for income taxes -- -- -- --
-------- -------- -------- --------
Net loss $(23,589) $(18,259) $(69,549) $(77,420)
-------- -------- -------- --------
Net loss per share $ (1.56) $ (1.16) $ (4.51) $ (5.01)
-------- -------- -------- --------
Weighted average common
shares outstanding 15,125 15,681 15,438 15,442
-------- -------- -------- --------
===============================================================================
See Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
4
<PAGE>
MIDCOM COMMUNICATIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1996
(In thousands)
- --------------------------------------------------------------------------------
<S> <C> <C>
Net cash used in operating activities $(40,150) $ (6,591)
-------- --------
Investing activities:
Purchases of furniture, equipment and leasehold
improvements (7,370) (1,729)
Net assets acquired in acquisition (291) --
Proceeds from sale of assets 33 673
-------- --------
Net cash used in investing activities (7,628) (1,056)
-------- --------
Financing activities:
Borrowings under line of credit 43,735 --
Repayments of line of credit (23,001) --
Proceeds from issuance of convertible subordinated
notes payable -- 97,743
Proceeds from notes payable -- 333
Repayment of notes payable (921) (3,946)
Proceeds from long-term obligations 6,544 15,000
Repayment of long-term obligations,
including capital leases (1,165) (53,687)
Deferred financing costs (480) (3,569)
Repurchase of common shares (6,544) --
Proceeds from common stock issued for stock purchase
plan and stock options 180 2,828
-------- -------
Net cash provided by financing activities 18,348 54,702
-------- -------
Net (decrease) increase in cash (29,430) 47,055
Cash and cash equivalents at beginning of period 30,962 1,083
-------- -------
Cash and cash equivalents at end of period $ 1,532 $48,138
======== =======
================================================================================
See Notes to Unaudited Condensed Consolidated Financial Statements.
</TABLE>
5
<PAGE>
1. BASIS OF PRESENTATION
The accompanying unaudited 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 unaudited
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.
On November 7, 1997, Midcom and three of its wholly-owned subsidiaries,
PacNet Inc. ("PacNet"), Ad Val, Inc. ("Adval") and Cel-Tech International Corp.
("Cel-Tech"), each filed a petition (collectively, the "Petitions") for relief
under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code")
in the United States Bankruptcy Court for the Eastern District of Michigan (the
"Bankruptcy Court"), Case Nos. 97-59044-S, 59052-G, 59064-G and 59057-S,
respectively, with such cases to be jointly administered by the Bankruptcy
Court under Case No. 97-59044-S, and are currently operating their respective
businesses as debtors-in-possession pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code and subject to the jurisdiction of the Bankruptcy Court. The
accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the filing under Chapter 11 of the Bankruptcy
Code and related circumstances, including the Company's leveraged financial
structure and losses from operations, such realization of assets and liquidation
of liabilities is subject to significant uncertainty. While under the protection
of Chapter 11 of the Bankruptcy Code, the Company may sell or otherwise dispose
of assets, and liquidate or settle liabilities, for amounts other than those
reflected in the accompanying unaudited condensed consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts reported in such financial statements, which do not give effect to all
adjustments of the carrying value of assets or liabilities that might be
necessary as a consequence of a plan of reorganization. The appropriateness of
using the going concern basis depends upon, among other things, confirmation of
a plan of reorganization, future profitable operations, the ability to comply
with the terms of any debtor-in-possession credit facility and the ability to
generate sufficient cash from operations and financing arrangements to meet
obligations.
The information furnished in the accompanying unaudited condensed
consolidated financial statements 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.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131
establishes standards for the reporting of operating segment information by
publicly held companies in interim financial reports and annual financial
statements. It also establishes standards for related disclosures about products
and services, geographic areas, and major customers. SFAS No. 131 is effective
for financial statements for fiscal years beginning after December 15, 1997. The
adoption of SFAS 131 will have no impact on the Company's consolidated results
of operations, financial position or cash flows.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 is effective for financial statements for years ending
after December 15, 1997. As of December 31, 1997, 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 (referred to in SFAS No. 128 as basic earnings per share), the
dilutive stock options will be excluded. There is no expected impact on primary
earnings per share. The Company has not yet determined the impact of SFAS 128 on
the calculation of fully diluted earnings per share (referred to in SFAS No. 128
as diluted earnings per share).
2. LIQUIDITY, CAPITAL RESOURCES, BANKRUPTCY FILING AND OTHER SUBSEQUENT EVENTS
The Company has operated at substantial losses since its inception. Net
losses were approximately $69.5 million, $97.3 million and $33.4 million for the
nine months ended September 30, 1997 and the years ended December 31, 1996 and
1995, respectively. As a result of these losses, significant attrition in
certain acquired customer bases, investments in business expansion and various
other factors, the Company has required substantial external working capital. As
of September 30, 1997, the book value of the Company's assets was approximately
$58.2 million, total debt outstanding was approximately $149.1 million, and the
Company had a negative net worth of approximately $144.7 million.
In its Quarterly Report on Form 10-Q for the quarter ended June 30,1997,
the Company disclosed that, in addition to borrowings available under its
revolving credit facility (the "Foothill Credit Facility") with Foothill Capital
Corporation ("Foothill"), and financing available under its capital lease
facilities, the Company would require between $20 million and $30 million of
additional capital in order to fund operating losses, working capital
requirements and capital expenditures during the remainder of 1997. In August
1997, the Company obtained an $8 million bridge loan from Foothill (the
"Foothill Bridge Loan"). The Foothill Bridge Loan had an interest rate of 15%
per annum and was payable in full on November 1, 1997. In addition, on October
10, 1997, the Company completed a private placement of 875,000 shares of Common
Stock. The Company received net proceeds from the private placement of
approximately $5.5 million which were used for working capital purposes in
October 1997.
In early September 1997, the Company received a term sheet from a major
financial institution for an equity financing ranging from $40 million to $50
million. Due diligence with respect to the proposed equity financing commenced
immediately with the goal of closing the financing by October 31, 1997. In
addition, throughout September and October 1997, the Company continued to pursue
other short-term financing. However, at the end of October 1997, the Company had
not been successful in its efforts to close the proposed equity financing or
obtain additional financing.
On November 4, 1997, as a result of the Company's failure to repay the
Foothill Bridge Loan in full when due, Foothill gave notice of a default under
the Foothill Credit Facility and ceased making any further advances to the
Company or any of its subsidiaries. In addition to the repayment of the Foothill
Bridge Loan, the Company was required to make substantial payments to Sprint
Communications Company ("Sprint"), and several of the Company's suppliers
threatened termination of services.
Faced with the imminent termination of service by the Company's principal
long-distance carriers, on November 7, 1997, the Company and three of its
wholly-owned subsidiaries, PacNet, Adval and Cel-Tech, filed the Petitions and
are currently operating their respective businesses as debtors-in-possession
pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code and subject to the
jurisdiction of the Bankruptcy Court. The Petitions were filed in order to allow
the Company and its subsidiaries to continue operations while obtaining relief
from the immediate collection of obligations owed to Foothill, Sprint and other
creditors.
The voluntary filing of a petition for relief under the Bankruptcy Code
constitutes a default under the Foothill Credit Facility, the Company's
equipment lease facilities, the Indenture relating to the Company's $97.7
aggregate principal amount of 8 1/4% Subordinated Convertible Notes due 2003 and
the note payable to Ashok Rao in connection with the redemption of certain
shares of Common Stock (see Note 6, "Stock Repurchase," below). Accordingly,
approximately $112.1 million of long-term indebtedness has been reclassified as
current liabilities as of September 30, 1997. Since it is not possible to
predict the impact of a sale or liquidation of the Company, no other adjustments
have been made to the historical carrying values of the assets and liabilities.
The Company has arranged for debtor-in-possession financing (the "Foothill
DIP Facility") from Foothill. In connection with the Foothill DIP Financing, the
Company incurred a loan fee of $250,000. The Foothill DIP Facility consists of a
revolving credit facility with borrowing availability of up to $8.5 million,
subject to the Company's satisfaction of various terms and conditions, bears
interest at prime plus 4% on receivable based advances and 18% on overadvances
and expires on January 15, 1997. There can be no assurance that borrowings
available under the Foothill DIP Facility will be adequate to meet the Company's
working capital needs or that the Company will not require additional debt or
equity financing in the future, and there can be no assurance that any such
additional debt or equity financing, if needed, would be available to the
Company on acceptable terms or at all. In addition, the Company is currently
attempting to solicit offers to purchase all or portions of its assets. There
can be no assurance that any such transaction will be available to the Company
on acceptable terms or at all. The Company is also undertaking aggressive cost-
cutting measures, including the lay-off on November 7, 1997 of 170 of its 790
employees. Further cost-cutting measures will be required if the Company is
unable to complete a sale of all or part of its business or obtain additional
sources of working capital in the near-term. Cost-cutting measures, particularly
those affecting the Company's sales and service functions, could have a material
adverse effect on the Company's ability to generate revenue.
The Company is required to submit a plan of reorganization to the
Bankruptcy Court. The Company is in the process of developing a plan of
reorganization, which the Company expects will involve the sale of all or part
of its business. There can be no assurance that the Company will be successful
in completing a sale of all or part of its business. In addition, there can be
no assurance that the Bankruptcy Court will approve the Company's reorganization
plan. If the Company is unable to find a buyer for all or part of its business,
or if the Company's reorganization plan is not approved, the Company may be
forced to liquidate.
3. ACQUISITION OF PHOENIX NETWORK, INC. AND TRANS NATIONAL COMMUNICATIONS
On November 10, 1997, the Company announced that the August 13, 1997 merger
agreements with Phoenix Network, Inc. ("Phoenix") and Trans National
Communications ("TNC") had been terminated. On October 31, 1997, Phoenix
notified the Company of its intent to terminate the merger agreement, effective
November 5, 1997, due to alleged material breaches by the Company, including the
Company's termination of its agreement with Sprint and the deterioration of the
Company's financial condition. In addition, on November 6, 1997, TNC notified
the Company of its intent to terminate its purchase agreements with Phoenix that
Phoenix had assigned to the Company.
4. RELOCATION OF CORPORATE HEADQUARTERS AND RESTRUCTURING CHARGES
In May 1997, the Company announced its intention to relocate its corporate
headquarter functions based in Seattle, Washington to Southfield, Michigan,
where the Company's Chief Executive Officer and other key executives maintained
offices. During the third quarter of 1997, the Company completed the relocation
of various corporate support functions, including human resources, legal,
finance and information services, affecting approximately 130 employees, to
temporary office space in Southfield. The Company had originally planned to move
these corporate support functions to permanent office space in Southfield when
it became available in December 1997; however, in light of the recent
deterioration of the Company's financial condition, those plans are being re-
evaluated.
In June 1997, the Company recorded a restructuring charge of $2.5 million,
consisting primarily of the cost of severance and loss on disposal of assets in
connection with the corporate headquarters relocation. This restructuring charge
is included in the corporate headquarters relocation expenses reported on the
accompanying unaudited condensed consolidated statement of operations for the
nine-month period ended September 30, 1997. As of September 30, 1997, $0.4
million of this restructuring charge remained in accrued liabilities.
During the third quarter of 1997, the Company incurred approximately $2.1
million of expenses related to the corporate headquarters relocation. If the
corporate headquarters relocation is completed as originally planned, the
Company now estimates that an additional $0.8 million of expenses would be
incurred in the fourth quarter of 1997.
5. BUSINESS COMBINATIONS COMPLETED IN PRIOR YEARS
On January 27, 1997, in connection with a customer base acquisition
completed on July 31, 1995, 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
6
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
additional 18,536 additional shares to compensate for the decrease in value of
the common stock since the closing of the acquisition.
On January 22, 1997, in connection with a customer base acquisition
completed in September 30, 1995, 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.
In January 1997, the Company issued to Richard John 9,457 shares of common
stock valued at $9.38 per share, and in August 1997, the Company issued to
Richard John 60,000 shares of common stock valued at $8.56 per share in
connection with the acquisition of Cel-Tech International Corp.
6. 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 in equal monthly installments over a period of 36 months, beginning May
1997.
7. STOCK OPTION PLAN
In July 1997, the Company reduced the exercise price of 1.344 million
employee stock options with a weighted average exercise price of approximately
$8.85 per share to $5.19 per share.
7
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. 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.
9. DISPUTES AND LITIGATION
BANKRUPTCY FILING. On November 7, 1997, Midcom and three of its wholly-
owned subsidiaries, PacNet, Adval and Cel-Tech, filed the Petitions and are
currently operating their respective businesses as debtors-in-possession
pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code and subject to the
jurisdiction of the Bankruptcy Court. See Note 1, "Basis of Presentation,"
above.
SPRINT SETTLEMENT. The Company has had a series of ongoing disputes
relating to service and billing with Sprint Communications Company ("Sprint"),
one of its primary suppliers. For this and other reasons, on September 18, 1997,
the Company discontinued its payments to Sprint and, on October 10, 1997, the
Company received a notice of default from Sprint. On October 29, 1997, the
Company entered into a settlement with Sprint whereby it agreed to pay Sprint
$1,250,000 on October 31, 1997, November 7, 1997 and November 14, 1997;
$4,000,000 on November 21, 1997; and thereafter, so long as Sprint continues to
provide service to the Company, weekly payments equal to the lesser of
$2,000,000 or the current amount outstanding. Sprint and the Company agreed to
arbitrate the Company's claims against Sprint up to an aggregate of $5,000,000
and the parties agreed that the Company would transition its traffic to its own
or other networks over the ninety day period ending January 29, 1998.
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
8
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Frontier. Frontier agreed to dismiss all of the individual defendants in the
case except William H. Oberlin, the Company's President and CEO. Moreover, in
September 1997, the Court dismissed certain causes of action in the context of a
summary judgment hearing. The surviving claims are that: (i) Midcom is in
violation of a non-disclosure agreement between Frontier and Midcom by virtue of
its alleged use of confidential information of Frontier obtained through
employees hired from Frontier and otherwise; and (ii) 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.
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. The Company's motion to dismiss on statute of
limitations grounds was granted in part and remaining matters have been
transferred to the FCC as a matter of primary jurisdiction.
On November 6, 1997, the Company and Frontier agreed to enter into a
settlement pursuant to which Frontier would dismiss all claims against the
Company and Mr. Oberlin. The settlement would provide, among other things, that,
over the next three years, Midcom will transfer approximately $40.5 million of
long distance traffic to Frontier and Frontier will transfer approximately
$20.25 million of long distance traffic to Midcom. There is some uncertainty as
to whether the settlement creates a pre-petition or post-petition claim, which
issue is to be decided by the District Court.
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
9
<PAGE>
MIDCOM COMMUNICATIONS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(the "Cherry II Agreement"), and a Promissory Note executed in connection with
the Cherry II Agreement, (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. In October 1997, Cherry filed a petition for relief under
Chapter 11 of the Bankruptcy Code.
DISCOM ARBITRATION. 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 were scheduled in August,
September and October 1997 with a decision by the arbitration panel expected by
the end of fiscal 1997.
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.
10
<PAGE>
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 the Company's ability to successfully relocate its headquarters
and the impact of such relocation on operations; the Company's ability to
improve its provisioning process and reduce customer attrition; adequacy of
available sources of working capital; the confirmation of a plan of
reorganization by the Bankruptcy Court and the Company's ability to continue its
operations as a going concern. 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, 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 and regulatory
changes. Additional risks and uncertainties include those described in the
Company's Annual Report on Form 10-K and other filings with the Securities and
Exchange Commission, press releases and other communications.
BANKRUPTCY FILINGS AND PROCEEDINGS
On November 7, 1997, Midcom and three of its wholly-owned subsidiaries,
PacNet Inc. ("PacNet"), Ad Val, Inc. ("Adval") and Cel-Tech International Corp.
("Cel-Tech"), each filed a petition (collectively, the "Petitions") for relief
under Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code")
in the United States Bankruptcy Court for the Eastern District of Michigan (the
"Bankruptcy Court"), Case Nos. 97-59044-S, 59052-G, 59064-G and 59057-S,
respectively, with such cases to be jointly administered by the Bankruptcy
Court under Case No. 97-59044-S, and are currently operating their respective
businesses as debtors-in-possession pursuant to Sections 1107(a) and 1108 of the
Bankruptcy Code and subject to the jurisdiction of the Bankruptcy Court. The
Petitions were filed in order to allow the Company and its subsidiaries to
continue operations while obtaining relief from the immediate collection of
obligations owed to creditors. The Company's unaudited condensed consolidated
financial statements included in this Report have been prepared on a going
concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the filing under Chapter 11 of the Bankruptcy Code and
related circumstances, including the Company's leveraged financial structure and
losses from operations, such realization of assets and liquidation of
liabilities is subject to significant uncertainty. While under the protection of
Chapter 11 of the Bankruptcy Code, the Company may sell or otherwise dispose of
assets, and liquidate or settle liabilities, for amounts other than those
reflected in the Company's unaudited condensed consolidated financial statements
included in this Report. Further, a plan of reorganization could materially
change the amounts reported in such financial statements, which do not give
effect to all adjustments of the carrying value of assets or liabilities that
might be necessary as a consequence of a plan of reorganization. The
appropriateness of using the going concern basis depends upon, among other
things, confirmation of a plan of reorganization, future profitable operations,
the ability to comply with the terms of any debtor-in-possession credit facility
and the ability to generate sufficient cash from operations and financing
arrangements to meet obligations.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
---------------------------------------------
September 30, June 30, September 30,
(In millions) 1997 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue $ 24.9 $25.1 $30.7
Gross profit 6.3 6.9 8.4
Selling, general and 22.1 22.5 15.7
administrative
Depreciation and amortization 2.3 5.7 7.0
Operating loss (20.2) (23.8) (16.3)
Net loss ($23.6) ($26.2) ($18.3)
Net loss per share ($1.56) ($1.71) ($1.16)
- -----------------------------------------------------------------------------
</TABLE>
REVENUE. Revenue for the quarter ended September 30, 1997 decreased by
18.9% from $30.7 million in the third quarter of 1996 to $24.9 million. Year-
to-date revenue of $74.3 million represents a 40.3% decrease from the $124.6
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 for the third
quarter of 1997 decreased slightly compared to the $25.1 for the second quarter
of 1997. This decrease is attributable to pricing pressure on long distance
service as well as continued provisioning problems. Due to Midcom's position as
a switchless reseller, it has historically been dependent upon its underlying
carriers for provisioning of end-user services. Midcom has experienced
difficulties in provisioning, in a timely manner, all orders for services that
it receives. This has resulted in the loss of revenue and customers. At times,
the Company has been unable to provision as many as half of the orders for
service it receives. There are a number of potential causes for failing to
correctly provision an order in a timely manner--many of which affect other
telecommunications carriers to a greater or lesser degree. Such causes include
weaknesses in Midcom's own internal systems and procedures relating to order
entry and credit; the internal systems and procedures used by underlying
carriers, the LECs and others; the nature and time of interactions between
Midcom, the underlying carriers, the LECs and others; and the use of PIC
restrictions which may make it more difficult to change from one long distance
company to another. Midcom continues to improve its own systems and procedures
and to work with its underlying carriers, the LECs and others to reduce
incidences of provisioning problems. In addition, Midcom believes that the
implementation of its network strategy will substantially improve its ability to
correctly provision its orders in a timely manner by giving it better visibility
and more control of the entire provisioning process. However, there can be no
assurance that the Company will be successful in its efforts to improve its
provisioning process.
GROSS MARGIN. The Company's cost of revenue primarily consists of the cost
of service provided by local and interexchange carriers. Gross margin was 25.4%
and 26.3% for the quarter and nine month periods ended September 30, 1997,
respectively, versus 27.5% and 27.9% for the same periods in 1996, respectively.
The decline in gross margin is the result of changes in the mix of customers,
and pricing pressure on long distance services. These factors were offset in
part by negotiation of price reductions with some of the Company's major
suppliers. Gross margin decreased from the second quarter 1997 level of 27.3%.
This decrease is mainly attributable to decreased margins experienced in the
frame relay segment of the business resulting from capacity build out to
accommodate future sales as well as increased dependence on off-net services due
to the expansion of the geographic area serviced by the Company. As new sales
utilize network capacity and services are interconnected to the Midcom network,
it is expected that margins will improve.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses consist primarily of payroll and related expenses for
administrative, customer support, marketing and direct sales personnel;
commissions; professional fees; and bad debt expense. Selling, general and
administrative expenses increased to $22.1 million for the third quarter of 1997
compared to $15.7 million for the third quarter of 1996. For the nine-month
period ended September 30, 1997, selling, general and administrative expenses
increased to $62.6 million from $48.0 million for the same period in 1996. At
September 30, 1997 and September 30, 1996, the Company employed 728 and 452
persons on a full-time basis, respectively. The increase in selling, general and
administrative expenses is due to the increase in payroll, commissions, travel
and other costs relating to the Company's significantly expanded sales and
marketing efforts. The Company also increased customer support staffing in
anticipation of higher call volume resulting from the expanded sales efforts and
also to improve service quality.
DEPRECIATION. Depreciation decreased to $1.3 million for the quarter ended
September 30, 1997 from $1.7 million for the quarter ended September 30, 1996.
For the nine-month period ended September 30, 1997, depreciation decreased to
$4.1 million from $4.3 million for the same period in 1996. The decrease in
depreciation is a result of the Company's write-off, by means of a June 1997
restructuring charge, of certain assets disposed of in connection with the
relocation of the Company's corporate headquarters from Seattle, Washington to
Southfield, Michigan. The Company is
11
<PAGE>
finalizing the installation of six state-of-the-art high capacity switches at an
aggregate estimated cost of $15.0 million. The Company expects that, as a
result of the deployment of these switches, depreciation will increase.
AMORTIZATION. Amortization decreased to $0.9 million for the quarter ended
September 30, 1997 from $5.3 million for the quarter ended September 30, 1996.
For the nine-month period ended September 30, 1997, amortization decreased to
$9.5 million from $21.9 million for the same period in 1996. The decrease in
amortization is primarily a result of the Company's decision in June 1996 to
reduce the estimated useful life of acquired customer bases from 5 years to 3
years, which increased amortization in 1996. In addition, certain of these
acquired customer bases became fully amortized in June 1996 and again in July
1997, which reduced amortization in 1997.
RELOCATION OF CORPORATE HEADQUARTERS AND RESTRUCTURING CHARGES. In May
1997, the Company announced its intention to relocate its corporate headquarter
functions based in Seattle, Washington to Southfield, Michigan, where the
Company's Chief Executive Officer and other key executives maintained offices.
During the third quarter of 1997, the Company completed the relocation of
various support functions, including human resources, legal, finance and
information services, affecting approximately 130 employees, to temporary office
space in Southfield. The Company originally planned to move these corporate
support functions to permanent office space in Southfield when it became
available in December 1997; however, in light of the recent deterioration of the
Company's financial condition, those plans are being re-evaluated.
In June 1997, the Company recorded a restructuring charge of $2.5 million,
consisting primarily of the cost of severance and loss on disposal of assets in
connection with the corporate headquarters relocation. This restructuring charge
is included in the corporate headquarters relocation expense reported on the
Company's unaudited condensed consolidated operations included with this Report
for the nine-month period ended September 30, 1997. As of September 30, 1997,
$0.4 million of this restructuring charge remained in accrued liabilities.
During the third quarter of 1997, the Company incurred approximately $2.1
million of expenses related to the corporate headquarters relocation. If the
corporate headquarters relocation is completed as originally planned, the
Company now estimates that an additional $0.8 million of expenses would be
incurred in the fourth quarter of 1997.
OTHER EXPENSES. Interest expense for the quarter and nine months ended
September 30, 1997 increased over the corresponding periods in 1996 primarily
due to an increase in average borrowings outstanding. At September 30, 1997,
June 30, 1997, December 31, 1996 and September 30, 1996, the Company had
outstanding interest-bearing obligations of $149.1 million, $125.1 million,
$112.1 million and $112.4 million, respectively. The increase from December 31,
1996 to September 30, 1997 was due primarily to increased borrowings under the
Company's revolving credit facility and bridge loan; the note payable to Ashok
Rao, the Company's former President and Chief Executive Officer, executed in
connection with the redemption of 885,360 shares of the Company's common stock
held by Mr. Rao and certain trusts established by Mr. Rao; and increased capital
lease obligations incurred in connection with the acquisition of furniture and
equipment, including the installation of the Company's new high-capacity
switches and other network enhancements.
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 September 30, 1997, the Company reported a
net loss of $23.6 million ($1.56 per share) compared to a net loss of $18.3
million ($1.16 per share) for the same period in 1996. For the nine
12
<PAGE>
months ended September 30, 1997, the Company reported a net loss of $ 69.5
million ($ 4.51 per share) versus a net loss of $ 77.4 million ($ 5.01 per
share) for the same period in 1996. The substantial increase in net loss for the
quarter ended September 30, 1997 over the corresponding period in 1996 is
attributable to the declines in revenue and gross margin, as well as increases
in selling, general and administrative expenses, the relocation of the Company's
corporate headquarters, and the increase in interest expense, offset by the
reduction of amortization. The decrease in net loss for the nine months ended
September 30, 1997 compared to the corresponding period in 1996 is a result of
the impairment losses, restructuring charges, contract dispute settlement and
higher amortization expense recognized in 1996, offset by higher revenue in 1996
and the increases in selling, general and administrative expenses, the
relocation of the Company's corporate headquarters and the increase in interest
expense in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has operated at substantial losses since its inception. Net
losses were approximately $69.5 million, $97.3 million and $33.4 million for the
nine months ended September 30, 1997 and the years ended December 31, 1996 and
1995, respectively. As a result of these losses, significant attrition in
certain acquired customer bases, investments in business expansion and various
other factors, the Company has required substantial external working capital. As
of September 30, 1997, the book value of the Company's assets was approximately
$58.2 million, total debt outstanding was approximately $149.1 million, and the
Company had a negative net worth of approximately $144.7 million.
In its Quarterly Report on Form 10-Q for the quarter ended June 30, 1997,
the Company disclosed that, in addition to borrowings available under its
revolving credit facility (the "Foothill Credit Facility") with Foothill Capital
Corporation ("Foothill"), and financing available under its capital lease
facilities, the Company would require between $20 million and $30 million of
additional capital in order to fund operating losses, working capital
requirements and capital expenditures during the remainder of 1997. In August
1997, the Company obtained an $8 million bridge loan from Foothill (the
"Foothill Bridge Loan"). The Foothill Bridge Loan had an interest rate of 15%
per annum and was payable in full on November 1, 1997. In addition, on October
10, 1997, the Company completed a private placement of 875,000 shares of Common
Stock. The Company received net proceeds from the private placement of
approximately $5.5 million which were used for working capital purposes in
October 1997.
In early September 1997, the Company received a term sheet from a major
financial institution for an equity financing ranging from $40 million to $50
million. Due diligence with respect to the proposed equity financing commenced
immediately with the goal of closing the financing by October 31, 1997. In
addition, throughout September and October 1997, the Company continued to pursue
other short-term financing. However, at the end of October 1997, the Company had
not been successful in its efforts to close the proposed equity financing or
obtain additional financing.
On November 4, 1997, as a result of the Company's failure to repay the
Foothill Bridge Loan in full when due, Foothill gave notice of a default under
the Foothill Credit Facility and ceased making any further advances to the
Company or any of its subsidiaries. In addition to the repayment of the Foothill
Bridge Loan, the Company was required to make substantial payments to Sprint
Communications Company ("Sprint"), and several of the Company's suppliers
threatened termination of services.
Faced with the imminent termination of service by the Company's principal
long-distance carriers, on November 7, 1997, the Company and three of its
wholly-owned subsidiaries, PacNet, Adval and Cel-Tech, filed the Petitions and
are currently operating their respective businesses as debtors-in-possession
pursuant to Sections 1107(a) and 1108 of the Bankruptcy Code and subject to the
jurisdiction of the Bankruptcy Court. The Petitions were filed in order to allow
the Company and its subsidiaries to continue operations while obtaining relief
from the immediate collection of obligations owed to Foothill, Sprint and other
creditors.
The voluntary filing of a petition for relief under the Bankruptcy Code
constitutes a default under the Foothill Credit Facility, the Company's
equipment lease facilities, the Indenture relating to the Company's $97.7
aggregate principal amount of 8 1/4% Subordinated Convertible Notes due 2003 and
the note payable to Ashok Rao in connection with the redemption of certain
shares of Common Stock (see Note 6 to the Company's Unaudited Condensed
Consolidated Interim Financial Statements included in this Report). Accordingly,
approximately $112.1 million of long-term indebtedness has been reclassified as
current liabilities as of September 30, 1997. Since it is not possible to
predict the impact of a sale or liquidation of the Company, no other adjustments
have been made to the historical carrying values of the assets and liabilities.
The Company has arranged for debtor-in-possession financing (the "Foothill
DIP Facility") from Foothill. In connection with the Foothill DIP Financing, the
Company incurred a loan fee of $250,000. The Foothill DIP Facility consists of a
revolving credit facility with borrowing availability of up to $8.5 million,
subject to the Company's satisfaction of various terms and conditions, bears
interest at prime plus 4% on receivable based advances and 18% on overadvances
and expires on January 15, 1997. There can be no assurance that borrowings
available under the Foothill DIP Facility will be adequate to meet the Company's
working capital needs or that the Company will not require additional debt or
equity financing in the future, and there can be no assurance that any such
additional debt or equity financing, if needed, would be available to the
Company on acceptable terms or at all. In addition, the Company is currently
attempting to solicit offers to purchase all or portions of its assets. There
can be no assurance that any such transaction will be available to the Company
on acceptable terms or at all. The Company is also undertaking aggressive cost-
cutting measures, including the lay-off on November 7, 1997 of 170 of its 790
employees. Further cost-cutting measures will be required if the Company is
unable to complete a sale of all or part of its business or obtain additional
sources of working capital in the near-term. Cost-cutting measures, particularly
those affecting the Company's sales and service functions, could have a material
adverse effect on the Company's ability to generate revenue.
The Company is required to submit a plan of reorganization to the
Bankruptcy Court. The Company is in the process of developing a plan of
reorganization, which the Company expects will involve the sale of all or part
of its business. There can be no assurance that the Company will be successful
in completing a sale of all or part of its business. In addition, there can be
no assurance that the Bankruptcy Court will approve the Company's reorganization
plan. If the Company is unable to find a buyer for all or part of its business,
or if the Company's reorganization plan is not approved, the Company may be
forced to liquidate.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by Part II, Item 1, of Form 10-Q is incorporated
herein by reference to Note 9 to the Company's Unaudited Condensed Consolidated
Financial Statements included in Part I, Item 1 of this Report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The information required by Part II, Item 3,of Form 10-Q is incorporated
herein by reference to Note 2 to the Company's Unaudited Condensed Consolidated
Financial Statements included in Part I, Item 1 of this Report and Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources included in Part I, Item 2 of this Report.
ITEM 5. OTHER INFORMATION
On November 10, 1997, the Company announced that the August 13, 1997 merger
agreements with Phoenix Network, Inc. ("Phoenix") and Trans National
Communications ("TNC") had been terminated. On October 31, 1997, Phoenix
notified the Company of its intent to terminate the merger agreement, effective
November 5, 1997, due to alleged material breaches by the Company, including the
Company's termination of its agreement with Sprint and the deterioration of the
Company's financial condition. In addition, on November 6, 1997, TNC notified
the Company of its intent to terminate its purchase agreements with Phoenix that
Phoenix had assigned to the Company.
The Company's Common Stock is currently listed on the Nasdaq Stock Market.
On November 7, 1997, Nasdaq notified the Company that the Common Stock would be
de-listed from the Nasdaq Stock Market effective November 17, 1997. The notice
also stated that, because the Company had filed a petition for relief under
Chapter 11 of the Bankruptcy Code, the letter "Q" would be appended to the
Company's trading symbol effective November 12, 1997. Although the Company
intends to pursue available procedural remedies, there can be no assurance that
the Common Stock will continue to be listed on the Nasdaq Stock Market after
November 17, 1997. If the Common Stock were de-listed from the Nasdaq Stock
Market, the liquidity of the Common Stock would be significantly diminished
which would likely result in a material decrease in the market price for the
Common Stock. These events would materially and adversely affect the Company's
ability to obtain financing through the sale of Common Stock or securities
convertible into Common Stock and, ultimately, could have a material adverse
effect on the Company's business, financial condition and results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
<S> <C>
10.1 Amendment Number Three, dated as of September 17, 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.
10.2 Warrant to Purchase 100,000 Shares of Common Stock by Foothill Capital Corporation.
11.1 Statement re: computation of net loss per share.
27.1 Financial Data Schedule.
</TABLE>
___________________
(b) Reports on Form 8-K
The Company filed Current Reports on Form 8-K on September 12, 1997
and on September 24, 1997. There were no other Current Reports on Form
8-K filed by the Company during the period covered by this Report.
14
<PAGE>
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)
- -----------------------------
Date: November 14, 1997
/s/ Kevin Smith
--------------------------------
Executive Vice President &
Chief Financial Officer
(Principal Financial Officer)
15
<PAGE>
MIDCOM COMMUNICATIONS INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
(REFERENCED TO
ITEM 601 OF EXHIBIT
Regulation S-K) DESCRIPTION
- --------------- -----------
<S> <C>
10.1 Amendment Number Three, dated as of September 17, 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.
10.2 Warrant to Purchase 100,000 Shares of Common Stock by Foothill Capital Corporation.
11.1 Statement re: computation of net loss per share.
27.1 Financial Data Schedule.
</TABLE>
16
<PAGE>
Exhibit 10.1
================================================================================
AMENDMENT NUMBER THREE 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 SEPTEMBER 17, 1997
================================================================================
<PAGE>
AMENDMENT NUMBER THREE TO
LOAN AND SECURITY AGREEMENT
---------------------------
THIS AMENDMENT NUMBER THREE TO LOAN AND SECURITY AGREEMENT (THIS
"AMENDMENT"), is entered into as of September 17, 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 90025-33333, MIDCOM COMMUNICATIONS INC., a Washington corporation
("Midcom"), with its chief executive office located at 26899 Northwest Highway,
Suite 418, Southfield, Michigan 46034, 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 offices located
at 12826 SE 40th Lane, Factoria, Washington 98004, and PACNET INC., a Washington
corporation ("PacNet"), with its chief executive office located at 26899
Northwest Highway, Suite 418, Southfield, Michigan 46034 (collectively, and
jointly and severally, the "Borrowers").
This Amendment is entered into with reference to the following facts:
A. Foothill and the Borrowers have previously entered into that certain
Loan and Security Agreement, dated as of February 27, 1997 (the
"Original Agreement");
B. Foothill and the Borrowers have previously entered into that certain
Amendment Number One to Loan and Security Agreement (the "First
Amendment"), dated as of April 1, 1997 and that certain Amendment
Number Two to Loan and Security Agreement (the "Second Amendment"),
dated as of May 29, 1997 (the Original Agreement, as amended by the
First Amendment and the Second Amendment, is referred to herein as the
"Agreement");
C. The Borrowers have requested that Foothill make certain additional
amendments to the Agreement, inter alia, to extend additional
financing in the amount of up to $8,000,000, 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>
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:
"Gross Accounts" means 100% of the gross amount of all Accounts,
including any unbilled Accounts as calculated in accordance with generally
accepted accounting principles, excluding, however, all credit insurance,
guaranties, or security therefore.
"Line Block Amount" means (a) from the date on which the Term
Loan is first made and until such date as all amounts outstanding under the
Term Loan are repaid in full in cash, the lesser of (i) $10,000,000 and
(ii) the sum of $10,000,000 minus an amount, if any, equal to that portion
of the Borrowing Base composed of Borrowers' Eligible Accounts (and only
that portion of the Borrowing Base composed of Eligible Accounts) in excess
of $12,000,000, and (b) from and after the date on which all amounts
outstanding under the Term Loan are repaid in full in cash, $0.
"Term Loan" means the term loan made pursuant to, and defined in
Section 2.1A hereof.
"Term Loan Commitment Letter" means that certain letter agreement
dated as of August 14, 1997 from Foothill to Borrower concerning the
provision of certain additional financing to Borrower.
"Third Amendment" means that certain Amendment Number Three to
Loan and Security Agreement, dated as of September 17, 1997, between
Foothill and the Borrowers.
"Warrants" means those certain warrants, in form and substance
satisfactory to Foothill and its counsel in their sole discretion,
convertible into and exercisable for 100,000 shares of Midcom's common
stock, par value $.0001 per share, issued to Foothill by Midcom pursuant to
the Term Loan Commitment Letter, and any related documents required by
Foothill and its Counsel.
2
<PAGE>
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:
"Advances" means the advances, made pursuant to, and defined in
Section 2.1(a)
"Average Unused Portion of Facility" means, as of the first day
of any month, the non-negative amount equal to (a) the then Maximum Amount
(giving effect to any increases thereof, if any, that have become effective
before, or that become effective on, such day), minus (b) the sum of (x)
the average Daily Balance of Advances that were outstanding during the
immediately preceding month and (y) the outstanding principal amount of the
Term Loan on such day.
"Loan Documents" means this Agreement, the First Amendment, the
Second Amendment, the Third 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, the Term Loan Commitment Letter, the
Warrants, and any other agreement entered into, now or in the future, in
connection with this Agreement.
"Maximum Amount" means, subject to increase as set forth below,
$30,000,000 minus the Line Block Amount. From time to time after the date
on which all amounts outstanding under the Term Loan are repaid in full, in
cash, Borrower may request an increase in the Maximum Amount, on one or
more occasions, in increments of $5,000,000 or an integral multiple
thereof, to an amount not to exceed $50,000,000, such increases to become
effective in each instance, prospectively, subject to the prior or
concurrent satisfaction of the Maximum Amount Increase Conditions.
"Maximum Foothill Amount" means that portion of the Maximum
Amount for which Foothill shall be responsible, exclusive of any
participations with Participants. The Maximum Foothill Amount shall be
equal to the Maximum Amount until such time as Foothill shall obtain one or
more Participants satisfactory to Foothill to provide commitments in
respect hereof on terms and conditions satisfactory to Foothill, at which
time the Maximum Foothill Amount shall be reduced Dollar-for-Dollar by the
amount of commitments so provided by such Participants; provided, however,
that in no event shall the Maximum Foothill Amount be less than the lower
of $15,000,000 and 50% of the Maximum Amount.
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"Obligations" means the Term Loan, the Advances, and all other
loans, debts, principal, interest (including any interest that, but for the
provisions of the Bankruptcy Code, would have accrued), contingent
reimbursement obligations owing to Foothill, premiums (including Early
Termination Premiums), liabilities (including all amounts charged to the
Loan Account pursuant hereto), obligations, fees or Foothill Expenses
(including any fees or expenses that, but for the provisions of the
Bankruptcy Code, would have accrued) lease payments, guaranties, covenants,
and duties owing by Midcom or any other Borrower to Foothill of any kind
description (whether pursuant to or evidenced by the Loan Documents or
pursuant to any other agreement between Foothill and any Borrower, and
irrespective of whether for the payment of money), whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including any debt, liability, or obligation owing
from any Borrower to others that Foothill may have obtained by assignment
or otherwise, and further including all interest not paid when due and all
Foothill Expenses that any Borrower is required to pay or reimburse by the
Loan Documents, by law, or otherwise.
c. The following new Section 2.1A is added to the Agreement as
follows:
2.1A TERM LOAN. Foothill has agreed to convert the Overadvance
made pursuant to the Term Loan Commitment Letter to a term loan (the "Term
Loan") to Borrower in the original principal amount of $8,000,000 effective
upon the satisfaction of the conditions set forth in the Third Amendment.
The outstanding principal balance and all accrued and unpaid interest under
the Term Loan shall be due and payable on the earlier or (i) November 1,
1997 or (ii) upon the termination of this Agreement, whether by its terms,
by prepayment, by acceleration, or otherwise. The unpaid principal balance
of the Term Loan may be prepaid in whole or in part without penalty or
premium at any time during the term of this Agreement upon 30 days prior
written notice by Borrower to Foothill. Without limiting anything in the
forgoing, there shall be no Early Termination Premium payable with respect
to the Term Loan at any time.
d. Section 2.1(c) of the Agreement is hereby amended and
restated in its entirety as follows:
(1) Section 2.1(c) of the Agreement:
(c) Foothill shall have no obligation to make Advances hereunder to the
extent they would cause the outstanding Obligations to exceed the lesser of
(i) the Maximum Amount and (ii) the Gross Accounts. In addition, Foothill
shall have no obligation to make Advances hereunder to the extent they
would cause the
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outstanding Obligations to exceed the lesser of (x) the Maximum Foothill
Amount plus the Syndicated Amount and (y) the Gross Accounts.
e. Section 2.2 of the Agreement is amended and restated in its
entirety as follows:
2.2 OVERADVANCES.
(a) If, at any time or for any reason, the aggregate amount
of Obligations with respect to Advances owed by Borrower to Foothill
pursuant to Section 2.1 is greater than either the dollar or percentage
limitations set forth in Section 2.1 (an "Overadvance"), Borrower
immediately shall pay to Foothill, in cash, the amount of such excess to be
used by Foothill to repay Advances outstanding under Section 2.1.
(b) If, at any time or for any reason, the aggregate amount
of all Obligations owed by Borrower to Foothill exceeds the lesser of (i)
the Maximum Amount and (ii) the Gross Accounts, Borrower immediately shall
pay to Foothill, in cash, the amount of such excess to be used by Foothill
to repay Advances outstanding under Section 2.1.
f. Sections 2.3(a), 2.3(b), and 2.3(d) of the Agreement are
hereby amended and restated in their entirety as follows:
(a) Except as provided in Section 2.3(b), (i) the Term Loan shall bear
interest at a per annum rate of 15.00 percent, and (ii) all other
Obligations (except for the Term Loan) shall bear interest at a per annum
rate of the Reference Rate plus 1.00 percentage points.
(b) Default Rate. From and after the occurrence and during the
continuation of an Event of Default, (i) the Term Loan shall bear interest
at a per annum rate equal to 18.00 percent, and (ii) all other Obligations
(except for the Term Loan) shall bear interest at a per annum rate equal to
Reference Rate plus 4.00 percentage points.
(d) Payments. Interest hereunder shall be due and payable, in arrears, on
the first day of each month during the term hereof. Each Borrower hereby
authorizes Foothill to charge, and (unless Foothill receives instructions
from an Authorized Officer regarding alternative means of payment
acceptable to Foothill in respect thereof), Foothill shall charge, without
prior notice to Borrower, such interest, all Foothill Expenses (as and when
incurred), and all installments or other payments due under the Term Loan
or any Loan Document to the Loan Account, which amounts thereafter shall
accrue interest at the rate then applicable to Advances
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hereunder. Any interest not paid when due shall be compounded and shall
thereafter accrue interest at the rate then applicable to Advances
hereunder.
g. The first sentence of Section 2.7 of the Agreement is
amended and restated in its entirety as follows:
Foothill shall maintain an account on its books in the name of
the Borrowers (the "Loan Account") on which the Borrowers will be charged
with all Advances and the Term Loan made by Foothill to the Borrowers or
for the Borrowers' account, including, accrued interest, Foothill Expenses,
and any other payment Obligations of the Borrowers, in accordance with
Section 2.5 and on which the Borrowers will be credited with all payments
received by Foothill from any Borrower or for the Borrower's account,
including all amounts received in the Foothill Account from any Lockbox
Bank.
h. The following new Section 2.8(f) is added to the Agreement
as follows:
(f) Term Loan Commitment Fee. A one time commitment fee of One Hundred
Sixty Thousand Dollars ($160,000), which is earned, in full, upon
Foothill's receipt of a duly executed counterpart to the Term Loan
Commitment Letter.
i. The introductory phrase to Section 3.2 of the Agreement is
amended and restated in its entirety as follows:
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES AND THE TERM LOAN. The
following shall be conditions precedent to all Advances and the Term Loan
hereunder:
j. The introductory phrase to Article 5 of the Agreement is
amended and restated in its entirety as follows:
In order to induce Foothill to enter into this Agreement, each
Borrower makes the following representations and warranties with respect to
such Borrower or its assets, which shall be true, correct, and complete in
all respects as of the Effective Date, and at and as of the date of making
of each Advance or the Term Loan made thereafter, as though made on and as
of the date of such Advance or the Term Loan, (except to the extent that
such representations and warranties relate solely to an earlier date) and
such representations and warranties shall survive the execution and
delivery of this Agreement:
k. Section 7.18 of the Agreement is hereby amended and restated
in its entirety as follows:
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<PAGE>
7.18 USE OF PROCEEDS. Use the proceeds of the Advances and the Term
Loan made hereunder for any purpose other than (a) to pay transactional
costs and expenses incurred in connection with this Agreement, and (b)
thereafter, consistent with the terms and conditions hereof, for its lawful and
permitted corporate purposes.
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, except as enforcement
may be limited by equitable principles or by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or limiting creditors
rights generally.
3. CONDITIONS PRECEDENT TO AMENDMENT. The satisfaction of each of
the following, on or before the Third Amendment Closing Deadline, unless waived
or deferred by Foothill in its sole discretion, shall constitute conditions
precedent to the effectiveness of this Amendment:
a. Foothill shall have received each of the following
documents, in form and substance satisfactory to Foothill and its counsel, duly
executed, and each such document shall be in full force and effect:
(1) this Amendment; and
(2) the Warrants.
b. Foothill shall have received an opinion of counsel from
counsel to the Borrowers acceptable to Foothill and its counsel.
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<PAGE>
c. 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);
d. 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, no shall result from the consummation of the
transactions contemplated herein;
e. 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 the Borrowers or Foothill; and
f. No material adverse change shall have occurred in the
financial condition of the Borrowers, any guarantor, or in the value of the
Collateral;
g. 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. PAYMENT OF TERM LOAN COMMITMENT FEE.
a. The Borrowers and Foothill hereby acknowledge that (i) the
Borrower's have executed and delivered a counterpart of the Term Loan Commitment
Letter to Foothill on August 14, 1997, and (ii) Foothill has received such
counterpart and has charged the term loan commitment fee specified therein and
in Section 2.8(f) of the Agreement, as amended by this Amendment, to Borrower's
Loan Account on that date.
6. 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
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<PAGE>
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, "Third Amendment Closing
Deadline" means September 17, 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
and by different parties on separate counterparts, each of which, when executed
and delivered, shall be deemed to be an original, and all of which, when taken
together, shall constitute but one and the same Amendment. Delivery of an
executed counterpart of this Amendment by telefacsimile shall be equally as
effective as delivery of an original executed counterpart of this Amendment. Any
party delivering an executed counterpart of this Amendment by telefacsimile
also shall deliver an original executed counterpart of this Amendment but the
failure to deliver an original executed counterpart shall not affect the
validity, enforceability, and binding effect of this Amendment.
[Remainder of page intentionally left blank.]
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<PAGE>
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
----------------------------------
Title: President and CEO
------------------------------
ADVAL, INC.,
an Oregon corporation
By
----------------------------------
Title: President and CEO
------------------------------
ADVAL DATA CORPORATION,
an Oregon corporation
By
----------------------------------
Title: President and CEO
------------------------------
ADVANCED NETWORK DESIGN,
a California corporation
By
----------------------------------
Title: President and CEO
------------------------------
CEL-TECH INTERNATIONAL CORP.,
a Washington corporation
By
----------------------------------
Title: President and CEO
------------------------------
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PACNET INC.,
a Washington corporation
By
----------------------------------
Title: President and CEO
------------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By
----------------------------------
Title:
------------------------------
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PACNET INC.,
a Washington corporation
By
----------------------------------
Title:
------------------------------
FOOTHILL CAPITAL CORPORATION,
a California corporation
By
----------------------------------
Title: Senior Vice President
------------------------------
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EXHIBIT 10.2
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED OR ANY STATE SECURITIES LAWS. NO SALE OR DISPOSITION MAY BE EFFECTED
WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION
OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH
REGISTRATION IS NOT REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER(S) FROM THE
APPROPRIATE GOVERNMENTAL AUTHORITY(IES), OR (iv) OTHERWISE COMPLYING WITH THE
PROVISIONS OF SECTION 7 OF THIS WARRANT.
MIDCOM COMMUNICATIONS INC.
--------------------------
WARRANT TO PURCHASE 100,000 SHARES
OF COMMON STOCK (this "Warrant")
MIDCOM COMMUNICATIONS INC., a Washington corporation (the "Company"),
hereby certifies that, for value received, Foothill Capital Corporation, a
California corporation, or registered assigns, is the registered holder of
warrants (the "Warrants") to subscribe for and purchase One Hundred Thousand
(100,000) shares of the fully paid and nonassessable Common Stock (as adjusted
pursuant to Section 4 hereof, the "Shares") of the Company, at the price of
$8.75 per share (such price and such other prices as shall result, from time to
time, from the adjustments specified in Section 4 hereof is herein referred to
as the "Warrant Price"), subject to the provisions and upon the terms and
conditions hereinafter set forth. As used herein, (a) the term "Common Stock"
shall mean the Company's presently authorized Common Stock, par value $.0001 per
share, and any stock into or for which such Common Stock may hereafter be
converted or exchanged, (b) the term "Date of Grant" shall mean September 17,
1997, and (c) the term "Other Warrants" shall mean any warrant issued upon
transfer or partial exercise of this Warrant. The term "Warrant" as used herein
shall be deemed to include Other Warrants unless the context hereof or thereof
clearly requires otherwise.
1. Term. The purchase right represented by this Warrant is
exercisable, in whole or in part, at any time and from time to time from the
Date of Grant through and including September 17, 2002.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
Section 1 hereof, the purchase right represented by this Warrant may be
exercised by the holder hereof, in whole or in part and from time to time, by
the surrender of this Warrant (with the notice of exercise form attached hereto
as Exhibit A duly executed) at the principal office of the Company and by the
payment to the Company of an amount equal to the then applicable Warrant Price
multiplied by the number of Shares then being purchased. The person or persons
in whose name(s) any certificate(s) representing shares of Common Stock shall be
issuable upon exercise of this Warrant shall be deemed to have become the
holder(s) of record of, and shall be treated
<PAGE>
for all purposes as the record holder(s) of the shares represented thereby (and
such shares shall be deemed to have been issued) immediately prior to the close
of business on the date or dates upon which this Warrant is exercised. In the
event of any exercise of the rights represented by this Warrant, certificates
for the shares of stock so purchased shall be delivered to the holder hereof as
soon as possible and in any event within thirty (30) days after such exercise
and, unless this Warrant has been fully exercised or expired, a new Warrant
representing the portion of the Shares, if any, with respect to which this
Warrant shall not then have been exercised shall also be issued to the holder
thereof as soon as possible and in any event within such thirty-day period.
3. Stock Fully Paid; Reservation of Shares. All Shares that my be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance pursuant to the terms and conditions herein, be fully paid and
nonassessable, and free from all taxes, liens, charges, and pre-emptive rights
with respect to the issue thereof. The Company shall pay all transfer taxes, if
any, attributable to the issuance of Shares upon the exercise of the Warrants.
During the period within which the rights represented by this Warrant may be
exercised, the Company will at all times have authorized, and reserved for the
purpose of the issue upon exercise of the purchase rights evidence by this
Warrant, a sufficient number of shares of its Common Stock to provide for the
exercise of the rights represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number and
kind of securities purchasable upon the exercise of the Warrant and the Warrant
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
a. Reclassification or Merger. In case of any reclassification,
change or conversion of securities of the class issuable upon exercise of this
Warrant (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision or combination),
or in case of any merger of the Company with or into another corporation (other
than a merger with another corporation in which the Company is the acquiring and
the surviving corporation and which does not result in any reclassification or
change of outstanding securities issuable upon exercise of this Warrant), or in
case of any sale of all or substantially all of the assets of the Company, the
Company, or such successor or purchasing corporation, as the case may be, shall
duly execute and deliver to the holder of this Warrant a new Warrant (in form
and substance satisfactory to the holder of this Warrant), so that the holder of
this Warrant shall have the right to receive, at a total purchase price not to
exceed that payable upon the exercise of the unexercised portions of this
Warrant, and in lieu of the shares of Common Stock theretofore issuable upon
exercise of this Warrant, the kind and amount of shares of stock, other
securities, money and property receivable upon such reclassification, change or
merger by a holder of the number of shares of Common Stock then purchasable
under this Warrant. Such new Warrant shall provide for adjustments that shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Section 4. The provisions of this subparagraph (a) shall similarly apply to
successive reclassifications, changes, mergers and transfers.
b. Subdivision or Combination of Shares. If the Company at any
time while this Warrant remains outstanding and unexpired shall subdivide or
combine its outstanding
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shares of Common Stock, the Warrant Price shall be proportionately decreased in
the case of a subdivision or increased in the case of a combination, effective
at the close of business on the date the subdivision or combination becomes
effective.
c. Stock Dividends and Other Distributions. If the Company at
any time while this Warrant is outstanding and unexpired shall (i) pay a
dividend with respect to Common Stock payable in Common Stock, or (ii) make any
other distribution with respect to Common Stock (except any distribution
specifically provided for in the foregoing sub-paragraphs (a) and (b)) of Common
Stock, then the Warrant Price shall be adjusted, from and after the date of
determination of shareholders entitled to receive such dividend or distribution,
to that price determined by multiplying the Warrant Price in effect immediately
prior to such date of determination by a fraction (i) the numerator of which
shall be the total number of shares of Common Stock outstanding immediately
prior to such dividend or distribution, and (ii) the denominator of which shall
be the total number of shares of Common stock outstanding immediately after such
dividend or distribution.
d. Rights Offerings. In case the Company shall, at any time
after the Date of Grant, issue rights, options or warrants to any person or
persons who are at the time of such issuance the holders of equity securities of
the Company, entitling them to subscribe for or purchase shares of Common Stock
(or securities convertible or exchangeable into Common Stock) at a price per
share of Common Stock (or having a conversion or exchange price per share of
Common Stock if a security convertible or exchangeable into Common Stock) less
than the fair market value per share of Common Stock on the record date for such
issuance (or the date of issuance, if there is no record date), the Warrant
Price to be in effect on and after such record date (or issuance date, as the
case may be) shall be determined by multiplying the Warrant Price in effect
immediately prior to such record date (or issuance date, as the case may be) by
a fraction (i) the numerator of which shall be the number of shares of Common
Stock outstanding on such record date (or issuance date, as the case may be)
plus the number of shares of Common Stock which the aggregate offering price of
the total number of shares of such Common Stock so to be offered (or the
aggregate initial exchange or conversion price of the exchangeable or
convertible securities so to be offered) would purchase at such fair market
value on such record date (or issuance date, as the case may be) and (ii) the
denominator of which shall be the number of shares of Common Stock outstanding
on such record date (or issuance date, as the case may be) plus the number of
additional shares of Common Stock to be offered for subscription or purchase (or
into which the convertible securities to be offered are initially exchangeable
or convertible). In case such subscription price may be paid in part or in whole
in a form other than cash, the fair value of such consideration shall be
determined by the Board of Directors of the Company in good faith as set forth
in a duly adopted board resolution certified by the Company's Secretary or
Assistant Secretary. Such adjustment shall be made successively whenever such an
issuance occurs; and in the event that such rights, options, warrants, or
convertible or exchangeable securities are not so issued or expire or cease to
be convertible or exchangeable before they are exercised, converted, or
exchanged (as the case may be), then the Warrant Price shall again be adjusted
to be the Warrant Price that would then be in effect if such issuance had not
occurred, but such subsequent adjustment shall not affect the number of Shares
issued upon any exercise of Warrants prior to the date such subsequent
adjustment is made.
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<PAGE>
e. Special Distributions. In case the Company shall fix a
record date for the making of a distribution to all holders of shares of Common
Stock (including any such distribution made in connection with a consolidation
or merger in which the Company is the surviving corporation) or evidences of
indebtedness or assets (other than dividends and distributions referred to in
subparagraphs (b) and (c) above and other than cash dividends) or of
subscription rights, options, warrants, or exchangeable or convertible
securities containing the right to subscribe for or purchase shares of any class
of equity securities of the Company (excluding those referred to in subparagraph
(d) above), the Warrant Price to be in effect on and after such record date
shall be adjusted by multiplying the Warrant Price in effect immediately prior
to such record date by a fraction (i) the numerator of which shall be the fair
market value per share of Common Stock on such record date, less the fair value
(as determined by the Board of Directors of the Company in good faith as set
forth in a duly adopted board resolution certified by the Company's Secretary or
Assistant Secretary) of the portion of the assets or evidences of indebtedness
so to be distributed or of such subscription rights, options, warrants, or
exchangeable or convertible securities applicable to one (1) share of the Common
Stock outstanding as of such record date, and (ii) the denominator of which
shall be such fair market value per share of Common Stock. Such adjustment shall
be made successively whenever such a record date is fixed; and in the event that
such distribution is not so made, the Warrant Price shall again be adjusted to
be the Warrant Price which would then be in effect if such record date had not
been fixed, but such subsequent adjustment shall not affect the number of Shares
issued upon any exercise of Warrants prior to the date such subsequent
adjustment was made.
f. Other Issuances of Securities. In case the Company or any
subsidiary shall, at any time after the Date of Grant, issue shares of Common
Stock, or rights, options, warrants or convertible or exchangeable securities
containing the right to subscribe for or purchase shares of Common Stock
(excluding (i) shares, rights, options, warrants, or convertible or exchangeable
securities described in subparagraphs (f) or (g) of Section 11 hereof or issued
in any of the transactions described in subparagraphs (b), (c), (d) or (e)
above, (ii) shares issued upon the exercise of such rights, options or warrants
or upon conversion or exchange of such convertible or exchangeable securities,
(iii) the Warrants and any shares issued upon exercise thereof, and (iv) stock
options, and shares of Common Stock issued upon exercise of such options,
pursuant to any stock option plan existing as of the Date of Grant), at a price
per share of Common Stock (determined in the case of such rights, options,
warrants, or convertible or exchangeable securities by dividing (x) the total
amount receivable by the Company in consideration of the sale and issuance of
such rights, options, warrants, or convertible or exchangeable securities, plus
the total minimum consideration payable to the Company upon exercise,
conversion, or exchange thereof by (y) the total maximum number of shares of
Common Stock covered by such rights, options, warrants, or convertible or
exchangeable securities) lower than the fair market value per share of Common
Stock on the date the Company fixes the offering price of such shares, rights,
options, warrants, or convertible or exchangeable securities, then the Warrant
Price shall be adjusted so that it shall equal the price determined by
multiplying the Warrant Price in effect immediately prior thereto by a fraction
(i) the numerator of which shall be the sum of (A) the number of shares of
Common Stock outstanding immediately prior to such sale and issuance plus (B)
the number of shares of Common Stock which the aggregate consideration received
(determined as provided below) for such sale or issuance would purchase at such
fair market value per share, and (ii) the
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<PAGE>
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such sale and issuance. Such adjustment shall be
made successively whenever such an issuance is made. For the purposes of such
adjustment, the maximum number of shares of Common Stock which the holder of any
such rights, options, warrants or convertible or exchangeable securities shall
be entitled to subscribe for or purchase shall be deemed to be issued and
outstanding as of the date of such sale and issuance and the consideration
received by the Company therefor shall be deemed to be the consideration
received by the Company for such rights, options, warrants, or convertible or
exchangeable securities, plus the minimum consideration or premium stated in
such rights, options, warrants, or convertible or exchangeable securities to be
paid for the shares of Common Stock covered thereby. In case the Company shall
sell and issue shares of Common Stock, or rights, options, warrants, or
convertible or exchangeable securities containing the right to subscribe for or
purchase shares of Common Stock for a consideration consisting, in whole or in
part, of property other than cash or its equivalent, then in determining the
price per share of Common Stock and the consideration received by the Company
for purposes of the first sentence of this subparagraph (f), the Board of
Directors of the Company shall determine, in good faith, the fair value of said
property, and such determination shall be described in a duly adopted board
resolution certified by the Company's Secretary or Assistant Secretary. In case
the Company shall sell and issue rights, options, warrants, or convertible or
exchangeable securities containing the right to subscribe for or purchase shares
of Common Stock together with one or more other securities as a part of a unit
at a price per unit, then in determining the price per share of Common Stock and
the consideration received by the Company for purposes of the first sentence of
this subparagraph (f), the Board of Directors of the Company shall determine, in
good faith, which determination shall be described in a duly adopted board
resolution certified by the Company's Secretary or Assistant Secretary, the fair
value of the rights, options, warrants, or convertible or exchangeable
securities then being sold as part of such unit. Such adjustment shall be made
successively whenever such an issuance occurs, and in the event that such
rights, options, warrants, or convertible or exchangeable securities expire or
cease to be convertible or exchangeable before they are exercised, converted, or
exchanged (as the case may be), then the Warrant Price shall again be adjusted
to the Warrant Price that would then be in effect if such sale and issuance had
not occurred, but such subsequent adjustment shall not affect the number of
Shares issued upon any exercise of Warrants prior to the date such subsequent
adjustment is made.
g. Adjustment of Number of Shares. Upon each adjustment in the
Warrant Price, the number of Shares of Common Stock purchasable hereunder shall
be adjusted, to the nearest whole share, to the product obtained by multiplying
the number of Shares purchasable immediately prior to such adjustment in the
Warrant Price by a fraction, the numerator of which shall be the Warrant Price
immediately prior to such adjustment and the denominator of which shall be the
Warrant Price immediately thereafter.
h. Determination of Fair Market Value. For purposes of this
Section 4, "fair market value" of a share of Common Stock as of a particular
date (the "Determination date") shall mean (i) if shares of Common Stock are
traded on a national securities exchange (an "Exchange"), the weighted average
of the closing prices of a share of the Common Stock of the Company on the last
five (5) trading days prior to the Determination
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Date reported on such Exchange as reported in The Wall Street Journal (weighted
with Respect to the trading volume with respect to each such day), or (ii) if
shares of Common Stock are not traded on an Exchange but trade in the
over-the-counter market and such shares are quoted on the National Association
of Securities Dealers Automated Quotations System ("NASDAQ"), (A) the average of
the last sale prices reported on NASDAQ or (B) if such shares are an issue for
which last sale prices are not reported on NASDAQ, the average of the closing
bid and ask prices, in each case on the last five (5) trading days (or if the
relevant price or quotation did not exist on any of such days, the relevant
price or quotation on the next preceding business day on which there was such a
price or quotation) prior to the Determination Date as reported in The Wall
Street Journal.
5. Notice of Adjustments. Whenever the Warrant Price or the number
of Shares purchasable hereunder shall be adjusted pursuant to Section 4 hereof,
the Company shall make a certificate signed by its chief financial officer
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated,
and the Warrant Price and the number of Shares purchasable hereunder after
giving effect to such adjustment, which shall be mailed (without regard to
Section 13 hereof, by first class mail, postage prepaid) to the holder of this
Warrant .
6. Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment therefor based on the fair market
value (as determined in accordance with Section 4(h) above) of a share of Common
Stock on the date of exercise.
7. Compliance with Securities Act; Disposition of Warrant or Shares
of Common Stock.
a. Compliance with Securities Act. The holder of this Warrant,
by acceptance hereof, agrees that this Warrant and the shares of Common Stock to
be issued upon exercise hereof are being acquired for investment and that such
holder will not offer, sell or otherwise dispose of this Warrant, or any shares
of Common Stock to be issued upon exercise hereof except under circumstances
which will not result in a violation of the Securities Act of 1933, as amended
(the "Act"). Upon exercise of this Warrant, the holder hereof shall confirm in
writing, by executing the form attached as Schedule 1 to Exhibit A hereto, that
the shares of Common Stock so purchased are being acquired for investment and
not with a view toward distribution or resale. This Warrant and all shares of
Common Stock issued upon exercise of this Warrant (unless registered under the
Act) shall be stamped or imprinted with a legend in substantially the following
form:
"THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. NO SALE
OR DISPOSITION MAY BE EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO, (ii) AN OPINION OF COUNSEL FOR THE HOLDER,
REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT
REQUIRED, (iii) RECEIPT OF A NO-ACTION LETTER(S) FROM THE APPROPRIATE
GOVERNMENTAL
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AUTHORITY(IES), OR (iv) OTHERWISE COMPLYING WITH THE PROVISIONS OF SECTION
7 OF THE WARRANT UNDER WHICH THESE SECURITIES WERE ISSUED DIRECTLY OR
INDIRECTLY."
In addition, in connection with the issuance of this Warrant, the
holder specifically represents to the Company by acceptance of this Warrant as
follows :
(1) The holder is aware of the Company's business affairs
and financial condition, and has acquired information about the Company
sufficient to reach an informed and knowledgeable decision to acquire this
Warrant. The holder is acquiring this Warrant for its own account for investment
purposes only and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Act.
(2) The holder understands that this Warrant and the Shares
have not been registered under the Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of the holder's investment intent as expressed herein. In this
connection, the holder understands that, in the view of the Securities and
Exchange commission (the "SEC"), the statutory basis for such exemption may be
unavailable if the holder's representation was predicated solely upon a present
intention to hold the Warrant and the Shares for the minimum capital gains
period specified under applicable tax laws, for a deferred sale, for or until an
increase or decrease in the market price of the Warrant and the Shares, or for a
prior of one (1) year or any other fixed period in the future.
(3) The holder further understands that this Warrant and
the Shares must be held indefinitely unless subsequently registered under the
Act and any applicable state securities laws, or unless exemptions from
registration are otherwise available.
(4) The holder is aware of the provisions of Rule 144 and
144A, promulgated under the Act, which in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly, from the
issuer thereof (or from an affiliate of such issuer), in a non-public offering
subject to the satisfaction of certain conditions, if applicable, including,
among other things: the availability of certain public information about the
Company, the resale occurring not less than one (1) year after the party has
purchased and paid for the securities to be sold; the sale being made through a
broker in an unsolicited "broker's transaction" or in transactions directly with
a market maker (as said term is defined under the Securities Exchange Act of
1934, as amended) and the amount of securities being sold during any three-month
period not exceeding the specified limitations stated therein.
(5) The holder further understands that at the time it
wishes to sell this Warrant and the Shares there may be no public market upon
which to make such a sale, and that, even if such a public market then exists,
the Company may not be satisfying the current public information requirements of
Rule 144 and 144A, and that, in such event, the holder may be precluded from
selling this Warrant and the Shares under Rule 144 and 144A even if the one(1)-
year minimum holding period had been satisfied.
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(6) The holder further understands that in the event all of
the requirements of Rule 144 and 144A are not satisfied, registration under the
Act, compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rule 144 and 144A is not
exclusive, the Staff of the SEC has expressed its opinion that persons proposing
to sell private placement securities other than in a registered offering and
otherwise than pursuant to Rule 144 and 144A will have a substantial burden of
proof in establishing that an exemption from registration is available for such
offers or sales, and that such persons and their respective brokers who
participate in such transactions do so at their own risk.
b. Disposition of Warrant or Shares. With respect to any offer,
sale or other disposition of this Warrant, or any Shares acquired pursuant to
the exercise of this Warrant prior to registration of such Warrant or Shares,
the holder hereof and each subsequent holder of this Warrant agrees to give
written notice to the Company prior thereto, describing briefly the manner
thereof, together with a written opinion of such holder's counsel, if reasonably
requested by the Company, to the effect that such offer, sale or other
disposition may be effected without registration or qualification (under the Act
as then in effect or any federal or state law then in effect) of this Warrant or
such Shares and indicating whether or not under the Act certificates for this
Warrant or such Shares to be sold or otherwise disposed of require any
restrictive legend as to applicable restrictions on transferability in order to
ensure compliance with applicable law. Promptly upon receiving such written
notice and reasonably satisfactory opinion, if so requested, the Company, as
promptly as practicable, shall notify such holder that such holder may sell or
otherwise dispose of this Warrant or such Shares, all in accordance with the
terms of the notice delivered to the Company. If a determination has been made
pursuant to this subsection (b) that the opinion of counsel for the holder is
not reasonably satisfactory to the Company, the Company shall so notify the
holder promptly after such determination has been made. The foregoing
notwithstanding, this Warrant or such Shares may, as to such federal laws, be
offered, sold or otherwise disposed of in accordance with Rule 144 and 144A
under the Act, provided that the Company shall have been furnished with such
information as the Company may reasonably request to provide a reasonable
assurance that the provisions of Rule 144 and 144A have been satisfied. Each
certificate representing this Warrant or the Shares thus transferred (except a
transfer pursuant to Rule 144) shall bear a legend as to the applicable
restrictions on transferability in order to ensure compliance with such laws,
unless in the aforesaid opinion of counsel for the holder, such legend is not
required in order to ensure compliance with such laws. The Company may issue
stop transfer instructions to its transfer agent or, if acting as its own
transfer agent the Company may stop transfer on its corporate books, in
connection with such restrictions.
8. Rights as Shareholders; Information. No holder of this Warrant,
as such, shall be entitled to vote or receive dividends or be deemed the holder
of Common Stock or any other securities of the Company which may at any time be
issuable on the exercise hereof for any purpose, no shall anything contained
herein be construed to confer upon the holder of this Warrant, as such, any of
the rights of a shareholder of the Company or any right to vote for the election
of the directors or upon any matter submitted to shareholders at any meeting
thereof, or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until this Warrant shall have been exercised
and the Shares purchasable upon the exercise hereof shall
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have become deliverable, as provided herein. The foregoing notwithstanding, the
Company will transmit to the holder of this Warrant such information, documents
and reports as are generally distributed to the holders of any class or series
of the securities of the Company concurrently with the distribution thereof to
the shareholders.
9. Registraton Rights.
9.1.a. The Company covenants and agrees that at any time after
receipt of a written request (a "Demand Registration Request") from the holders
of this Warrant and the Other Warrants and/or holders of Shares (this Warrant,
the Other Warrants, and the Shares are referred to herein, collectively, as the
"Securities") (hereinafter, the "Securityholders") constituting at least fifty
percent (50%) of the Securities on such date (determined on an as-exercised
basis) and then eligible for inclusion in a registration pursuant to this
Section 9.1, stating that the Initiating Securityholders (as defined below)
desire and Intend to transfer all or a portion of the Securities held by them
under such circumstances, the Company shall give notice (the "Registration
Notice") to all of the Security holders within thirty (30) days of the Company's
receipt of such registration request, and the Company shall cause to be included
in such registration all Securities requested to be included therein by any such
Securityholder within fifteen (15) days after such Registration Notice is
effective (subject to the provisions of the final sentence of this Section
9.1(a)). After such fifteen (15)-day period, the Company shall file as promptly
as practicable a registration statement and use its reasonable best efforts to
cause such registration statement to become effective under the Act and remain
effective for one hundred and twenty (120) days or such shorter period as may be
required if all such Securities covered by such registration statement are sold
prior to the expiration of such one hundred twenty (120)-day period; provided
that the Company shall not be obligated to effect any such registration pursuant
to this Section 9.1 after the Company has effected one (1) such registraton
pursuant to this Section 9.1; provided further that to the extent that any
Securities requested to be included in the initial registration requested under
this Section 9.1(a) are not so included as the result of the provisions of the
final sentence of this Section 9.1(a), the Company shall be obligated to effect
one (1) additional registration pursuant to this Section 9.1. Each
Securityholder making a demand for registration under this Section 9.1 is
referred to herein as an "Initiating Securityholder." For purposes of this
Section 9, a registration shall not be deemed to have been effected unless a
registration statement with regard thereto has been declared effective and,
subject to Section 9.3(b) hereof, remained effective for a period of one hundred
and twenty (120) days (or such shorter period as is permitted in the second
sentence of this Section 9.1). The foregoing notwithstanding, in the event of an
underwritten offering pursuant to this Section 9.1, if the managing underwriter
of such offering shall advise the Securityholders in writing that, in its
opinion, the disbursement of a specified portion of the securities requested to
be included in the registration would materially adversely affect the
distribution of such securities by increasing the aggregate amount of the
offering in excess of the maximum amount of securities which such managing
underwriter believes can reasonably be sold in the contemplated distribution,
then the securities to be included in the registration shall be included in the
following order: (i) first, pro rata among all of the Securities requested to be
included therein by the Initiating Securityholder, (ii) second, the Securities
requested to be included therin by the other Security holder, pro rata among
such Securityholders according to the number of Securities requested by be
included by each such Security holder requesting inclusion
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<PAGE>
therein, and (iii) third, such other securities requested to be included therein
by the Company and the holders of such other securities, pro --- among the
Company and the holders of such other securities according to the number of
securities requested to be included by the Company and each such holder
requesting inclusion therein.
b. For purposes of this Section 9.1 the Securityholders
who have requested registration of Shares to be acquired upon the exercise of
Warrants not theretofore exercised shall furnish the Company with an undertaking
that they or the underwriters or other persons to whom such Warrants will be
transferred have undertaken to exercise such Warrants and to sell, transfer or
otherwise dispose of the shares received upon exercise of such Warrants in such
registration.
c. In the event of an underwritten offering pursuant to
this Section 9.1, the Company shall be entitled to select the underwriter;
provided, that the underwriter so selected shall be subject to approval by the
Securityholders requesting registration of the Securities being registered,
which approval shall not be withheld unreasonably.
d. Notwithstanding the terms of Section 9.1(a), the
Company shall not be required to register the Securities of Securityholders
pursuant to Section 9.1, if the Company elects, at its sold option and to the
extent that it may legally do so, to purchase such Securities and completes such
purchase pursuant to the provisions of this Section 9.1(d). Within fifteen (15)
days after receipt of a Demand Registration Request, the Company may elect to
purchase all and not less than all of the Securities that would otherwise be
subject to registration pursuant to Section 9.1(a) by providing written notice
(the "Purchase Notice") to all of the Securityholders setting forth (i) its
election to purchase such Securities, (ii) the purchase price of the Securities,
and (iii) the closing date for such purchase. The Company shall thereafter
purchase all of the Securities requested to be included in such purchase by the
Securityholders within fifteen (15) days after the Purchase Notice becomes
effective. The purchase price for each Share shall be the fair market value (as
defined in Section 4) of a share of Common Stock on the date of the Demand
Registration Request; the purchase price for each Warrant shall be (x) the fair
market value (as defined in Section 4) of a share of Common Stock on the4e date
of the Demand Registration Request less (y) the Warrant Price. The closing of
the purchase of the Securities shall take place on the date set forth in the
Purchase Notice, which date shall be not less than fifteen (15) nor more than
forty-five (45) days after the date of the Purchase Notice. At the closing, the
Company shall deliver to each Securityholder, in cash, the purchase price for
the Securities surrendered by such Securityholder.
9.2.a. The Company covenants and agrees with the Securityholders
that in the event that the Company proposes after the Date of Grant to file a
registration statement under the Act with respect to any of its equity
securities (other than pursuant to registration statements on Form S-4 or
Form S-8 or any successor or similar forms), whether or not for its own account,
then the Company shall give written notice of such proposed filing to all
Securityhbolders promptly (and in any event at least twenty(20) days before the
anticipated filing date). Such notice shall offer to such Security holders,
together with others who have similar rights, the opportunity to include in such
registration statement such number of Securities as they may request. The
Company shall direct and use its reasonable best efforts to cause the
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<PAGE>
managing underwriter of a proposed underwritten offering (unless the offering is
an underwritten offering of a class of the Company's equity securities other
than Common Stock and the managing underwriter has advised the Company in
writing that, in its opinion, the inclusion in such offering of Common Stock
would materially adversely affect the distribution of such offering) to permit
the holders of Securities requested to be included in the registration to
include such Securities in the proposed offering and the Company shall use its
reasonable best efforts to include such Securities in such proposed offering on
the same terms and conditions as any similar securities of the Company included
therin. If the offering of which the Company gives notice is a public offering
involving an underwriter, the right of a Securityholder to registration pursuant
to this Section 9.2 shall be conditioned upon such Securityholder's
participation in such underwriting and the inclusion of the Securities to be
sold by such Securityholder in the underwriting. All Securityholders proposing
to distribute Securities through such underwriting shall enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters. The foregoing notwithstanding, in the case of a
firm commitment offering on underwriting terms appropriate for such a
transaction, other than a registration requested by Securityholders pursuant to
Section 9.1, if any such managing underwriter of recognized standing shall
advise the Company and the Securityholders in writing that, in its opinion, the
distribution of all or a specified portion of the Securities requested to be
included in the registration concurrently with the securities being registered
by the Company would materially adversely affect the distribution of such
securities by increasing the aggregate amount of the offering in excess of the
maximum amount of securities which such managing underwriter believes can
reasonably be sold in the contemplated distribution, then the securities to be
included in a registration which is a primary underwritten offering on behalf of
the Company shall be included in the following order: (i) first, the securities
the Company proposes to include therein and (ii) second, such other securities
(including the Securities) requested to be included, pro rata among the holders
(including the Securityholders) of such other securities according to the number
of securities requested to be included by each such holder requesting inclusion
therein.
b. In the event that a holder or holders of the Company's
securities (other than a Securityholder or Securityholders) requests, pursuant
to rights granted to such holder or holders, that the Company file a
registration statement for the public offering of securities and the Company and
the other holders of the Company's securities (including the Securityholders)
who have rights to be included in such registration, request to be included in
such registration and the managing underwriter of such offering shall advise the
Company and the holders requesting inclusion in the offering that, in its
opinion, the distribution of a specified portion of the securities requested to
be included in the registration would materially adversely affect the
distribution of such securities by increasing the aggregate amount of the
offering in excess of the maximum amount of securities which such managing
underwriter believes can reasonably be sold in the contemplated distribution
then, the securities to be included in the registration shall be included in the
following order: (i) first, all of the securities requested to be included
therein by the holder or holders making the initial request for the
registration, and (ii) second, such other securities requested to be included
therein by the Company and the holders of such other securities, pro rata among
the Company and the holders of such other securities according to the number of
securities requested to be included by the Company and each such holder
requesting inclusion therein. For purposes of this Section 9.2(b), the Company
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agrees to request for inclusion in the registration only that number of
securities that the Company intends, in good faith, to sell, if all such
securities so requested by the Company were permitted to be included by the
managing underwriter in such registration and sold pursuant thereto.
9.3.a. In connection with the registration of Securities on
behalf of the holders thereof (such Securityholders being referred to herein as
"Sellers") in accordance with Section 9.1 or Section 9.2 above, the Company
agrees to:
(i) enter into a cross-indemnity agreement, in customary
form, with each underwriter, if any, and each Seller;
(ii) subject to the provisions of Section 9.1(a) and Section
9.2(a) regarding reductions by the managing underwriter, include in the
registration statement filed with the SEC, the Securities for which requests for
registration have been made; provided, however, that promptly after filing a
registration statement or prospectus or any amendments or supplements thereto,
the Company shall furnish to each Seller copies of all such documents filed
including, if requested, documents incorporated by reference in the registration
statement; and notify each Seller of any stop order issued or threatened by the
SEC and use its best efforts to prevent the entry of such stop order or to
remove it if entered;
(iii) prepare and file with the SEC such amendments of and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective (A)
in the case of a registration pursuant to Section 9.1, for a period of one
hundred and twenty (120) days, or, in the case of a registration pursuant to
Section 9.2, for a period of ninety (90) days, or, in the case of a registration
pursuant to Section 9.2, for a period of ninety (90) days or (B) such shorter
period as may be required if all such Securities covered by such registration
statement are sold prior to the expiration of such periods, and comply with the
provisions of the Act with respect to the disposition of all securities covered
by such registration statement during such period in accordance with the
intended methods of disposition by the Sellers set forth in such registration
statement;
(iv) furnish to each Seller and each underwriter, if any,
without charge, such number of copies of the registration statement, each
amendment and supplement thereto (in each case including all exhibits thereto),
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such Seller may reasonably
request in order to facilitate the disposition of the Securities proposed to be
sold by such Seller;
(v) use its reasonable best efforts to register or qualify
such Securities under such other securities or Blue Sky laws of such
jurisdictions as any Seller or any such underwriter reasonably requests in
writing and keep such registrations or qualifications in effect for so long as
such registration statement remains in effect and do any and all acts and things
which may be reasonably necessary or advisable to enable such Seller to
consummate the disposition in such jurisdictions of the Securities owned by such
Seller;
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provided, however, that the Company shall not be required to (A) qualify
generally to do business in any jurisdiction where it would not otherwise be
required to qualify but for this subsection (v). (B) subject itself to taxation
in any such jurisdiction, or (C) consent to general service of process in any
jurisdiction;
(vi) notify each Seller, at any time when a prospectus
relating to such Seller's Securities is required to be delivered under the Act,
of the occurrence of any event as a result of which the prospectus included in
such registration statement contains an untrue statement of a material fact or
omits to state any material fact necessary to make the statements therein not
misleading, and as soon as practicable prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Securities, such prospectus will not contain an untrue statement of a material
fact or omit to state any material fact necessary to make the statements therein
not misleading;
(vii) cause all such Securities to be listed on any Exchange
or NASDAQ on which similar securities issued by the Company are then listed;
(viii) provide a transfer agent, registrar and CUSIP number
for all such Securities not later than the effective date of such registration
statement;
(ix) enter into such customary agreements (including an
underwriting agreement in customary form) and take all such other actions that
the Sellers or the underwriters, if any, reasonably request in order to expedite
or facilitate the disposition of such Securities;
(x) make available for inspection by the Sellers and their
counsel, any underwriter participating in any disposition pursuant to such
registration statement, and any counsel retained by any such underwriter, all
pertinent financial and other information and corporate documents of the
Company, and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such Seller, underwriter or counsel in
connection with such registration statement;
(xi) with respect to an underwritten offering, use its
reasonable best efforts to obtain a "cold comfort" letter from the Company's
independent public accountants in customary form and covering such matters of
the type customarily covered by "cold comfort" letters as the sellers or any
underwriter may reasonably request;
(xii) with respect to an underwritten offering, obtain an
opinion of counsel to the Company, addressed to the Sellers and any underwriter,
in customary form and including such matters as are customarily covered by such
opinions in underwritten registered offerings of equity securities as the
Sellers or any underwriter reasonably request, such opinion to be reasonably
satisfactory in form and substance to each Seller; and
(xiii) otherwise use its best efforts to comply with all
applicable as rules and regulations of the SEC, and make available to its
securityholders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve (12)
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months subsequent to the effective date of the registration statement, which
earnings statement shall satisfy the provisions of Section 11(a) of the Act and
Rule 158 thereunder.
b. Any other provisions of this Section 9 notwithstanding,
upon receipt by the Securityholders of a written noticed signed by the chief
executive officer, chief operating officer or chief financial officer of the
Company to the effect set forth below, the Company shall not be obligated during
a reasonable period of time thereafter to effect any registrations pursuant to
this Section 9, and the Securityholders agree that they will immediately suspend
sales of shares under any effective registration statement for a reasonable
period of time, in either case not to exceed ninety (90) days, at any time at
which, in the Company's reasonable judgment, (i) there is a development
involving the Company or any of its affiliates which is material but which has
not yet been publicly disclosed or (ii) sales pursuant to the registration
statement would materially and adversely affect an underwritten public offering
for the account of the Company or any other material financing project or a
proposed or pending material merger or other material acquisition or material
business combination or material disposition of the Company's assets, to which
the Company or any of its affiliates is, or is expected to be, a party. In the
event a registration is postponed or sales by the Securityholders pursuant to an
effective registration statement are suspended in accordance with this Section
9.3(b), there shall be added to the period during which the Company is obligated
to keep a registration effective the number of days for which the registration
was postponed or sales were suspended pursuant to this Section 9.3(b).
c. The Company may require that each Seller, as a
condition registering his, her or its Securities pursuant hereto, to furnish to
the Company such information regarding the distribution of the Securities
proposed to be sold by such Seller as the Company may from time to time
reasonably request in writing.
d. Each Seller agrees that, upon receipt of any notice
from the Company of the occurrence of any event of the kind described in
subsection (vi) of Section 9.3(a) above, such Seller shall forthwith discontinue
disposition of Securities pursuant to the registration statement covering such
Securities until such Seller's receipt of copies of the supplemented or amended
prospectus contemplated by Section 9.3(a)(vi) above and, if so directed by the
Company, such Seller will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies in such Seller's possession, of the
prospectus covering such Securities current at the time of receipt of such
notice. In the event the Company shall give any such notice, the period
mentioned in Section 9.3(a)(iii) above shall be extended by the number of days
during the period from and including the date of giving of such notice to and
including the date when each Seller shall have received the copies of the
supplemented or amended prospectus contemplated by Section 9.3(a)(vi) above.
e. The Company shall not file or permit the filing of any
registration or comparable statement which refers to any Seller by name or
otherwise as the Seller of any securities of the Company unless such reference
to such Seller is specifically required by the Act or any similar federal
statute then in force.
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9.4 All expenses incident to the Company's performance of or
compliance with this Warrant, including without limitation all registration and
filing fees, fees and expenses relating to filings with any Exchange, fees and
expenses of compliance with securities or Blue Sky laws in jurisdictions
reasonably requested by any Seller or underwriter pursuant to Section 9.3(a)(v)
(including reasonable fees and disbursements of counsel in connection with Blue
Sky qualifications of the Securities), all word processing, duplicating and
printing expenses, messenger and delivery expenses, fees and disbursements of
counsel for the Company and one (1) counsel for the Sellers, independent public
accountants (including the expenses of any special audit or "cold comfort"
letters required by or incident to such performance) and underwriters (excluding
discounts, commissions or fees of underwriters, selling brokers, dealer managers
or similar securities industry professionals attributable to the securities
being registered, which discounts, commissions or fees with respect to any
Seller's respective shares shall be paid by such Seller, and legal expenses of
any person other than the Company and the Sellers, but including liability
insurance if the Company so desires), all the Company's internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), the expense of any annual
audit, the expense of any liability insurance (if the Company determines to
obtain such insurance) and the fees and expenses incurred in connection with the
listing of the securities to be registered on any Exchange and/or NASDAQ on
which such securities issued by the Company are then listed, the reasonable fees
and expenses of any special experts (including attorneys) retained by the
Company (if it so desires) in connection with such registration and fees and
expenses of other persons retained by the Company (all such expenses being
herein called "Registration Expenses"), shall be borne by the Company.
9.5 In connection with the preparation and filing of each
registration statement under the Act pursuant to this Section 9, the Company
shall give the Sellers under such registration statement, their underwriters, if
any, and their respective counsel and accountants, the opportunity to
participate in the preparation of such registration statement, each prospectus
included therein or filed with the Commission, and each amendment thereof or
supplement thereto, and will give each of them such access to its books and
records and such opportunities to discuss the business of the Company with its
officers and the independent public accountants who have certified its financial
statements as shall be necessary, in the opinion of such Sellers' and such
underwriters' respective counsel, to conduct a reasonable investigation within
the meaning of the Act.
9.6.a. In the event of any registration of any securities of the
Company under the Act, the Company shall, and hereby does, indemnify and hold
harmless in the case of any registration statement filed pursuant to Section 9.1
or Section 9.2, the Seller of any Securities covered by such registration
statement, its directors, officers, employees and agents, each other person who
participates as an underwriter in the offering or sale of such Securities and
each other person, if any, who controls such Seller or any such underwriter
within the meaning of the Act against any losses, claims, damages, or
liabilities (or actions or proceedings whether commenced or threatened in
respect thereof), joint or several, to which such Seller or any such director or
officer or employee or agent or underwriter or controlling person may become
subject under the Act or otherwise transfer as such losses, claims, damages, or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of
15
<PAGE>
or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
Securities were registered under the Act, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and the Company shall reimburse such Seller and each
such director, officer, employee, agent, underwriter and controlling person for
any legal or any other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, liability, action, or
proceeding; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability (or action or
proceeding, whether commenced or threatened in respect thereof), or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment, or
supplement in reliance upon and in conformity with written information furnished
to the Company by such Seller for the express purpose of use in the preparation
thereof and, provided, further, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage, liability (or action or
proceeding, whether commenced or threatened, in respect thereof), or expense
arises out of such person's failure to send or give a copy of the final
prospectus, as the same may be then supplemented or amended, within the time
required by the Act to the person asserting an untrue statement or alleged
untrue statement or omission or alleged omission if such statement or omission
was corrected in such final prospectus. Such indemnity shall remain in full
force and effect regardless of any investigation made by or on behalf of such
Seller or any such director, officer, employee, agent, underwriter or
controlling person and shall survive the transfer of such Securities by such
Seller.
b. In the event that the Company includes any Securities
of a prospective Seller in any registration statement filed pursuant to Section
9.3, such prospective Seller shall, and hereby does, indemnify and hold harmless
the Company, its directors, officers, employees and agent, each other person who
participates as an underwriter in the offering or sale of such Securities and
each other person, if any, who controls the Company or any such underwriter
within the meaning of the Act against any losses, claims, damages, or
liabilities (or actions or proceedings whether commenced or threatened in
respect thereof), joint or several, to which the Company or any such director or
officer or employee or underwriter or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages, or
liabilities (or actions or proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any registration statement
under which such Securities were registered under the Act, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, or any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and such prospective Seller shall reimburse
the Company and such director, officer, employee, agent, underwriter or
controlling person for any legal or any other expenses reasonably incurred by
them in connection with investigating or defending any such loss, claim,
liability, action, or proceeding, if, and only if, such statement or alleged
statement or omission or alleged omission was made in reliance upon and in
conformity with written information furnished to the Company through an
instrument duly executed by such Seller specifically stating
16
<PAGE>
that it is for use in the preparation of such registration statement,
preliminary prospectus, final prospectus, summary prospectus, amendment, or
supplement. In no event shall the liability of any Seller hereunder be greater
in amount that the dollar amount of the proceeds received by such Seller upon
the sale of the Securities giving rise to such indemnification obligation. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Company or any such director, officer, employee,
agent, underwriter or controlling person and shall survive the transfer of such
Securities by such Seller.
c. The Company shall be entitled to receive indemnities
from underwriters, selling brokers, dealer managers, and similar securities
industry professionals participating in the distribution to the same extent as
provided above with respect to information so furnished in writing by such
persons specifically for inclusion in any prospectus or registration statement.
d. Promptly after receipt by an indemnified party of
notice of the commencement of any action or proceeding involving a claim
referred to in this Section 9.6, such indemnified party shall, if a claim in
respect thereof is to be made against an indemnifying party, give written notice
to the latter of the commencement of such action; provided, however, that the
failure of any indemnified party to give notice as provided herein shall not
relieve the indemnifying party of its obligations under the preceding
subdivisions of this Section 9.6, except to the extent that the indemnifying
party is actually prejudiced by such failure to give notice. In case any such
action is brought against an indemnified party, unless in such indemnified
party's reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, the indemnifying party
shall be entitled to participate in and to assume the defense thereof, jointly
with any other indemnifying party similarly notified, to the extent that the
indemnifying party may wish, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party for any legal
or other expenses subsequently incurred by the latter in connection with the
defense thereof other than reasonable costs of investigation. If, in the
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist in respect of such claim, the
indemnified party may assume the defense of such claim, jointly with any other
indemnified party that reasonably determines such conflict of interest to exist,
and the indemnifying party shall be liable to such indemnified parties for the
reasonable legal fees and expenses of one counsel for all such indemnified
parties and for other expenses reasonable incurred in connection with the
defense thereof incurred by the indemnified party. No indemnifying party shall,
without the consent of the indemnified party, consent to entry of any judgment
or enter into any settlement of any such action which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability, or a covenant not to sue, in
respect of such claim or litigation. No indemnified party shall consent to entry
of any judgment or enter into any settlement of any such action the defense of
which has been assumed by an indemnifying party without the consent of such
indemnifying party.
e. Indemnification and contribution similar to that
specified in this Section 9.6 (with appropriate modifications) shall be given by
the Company and each Seller
17
<PAGE>
with respect to any required registration or other qualification of Securities
under any Federal or state law or regulation of any governmental authority,
other than the Act.
f. The indemnification required by this Section 9.6 shall
be made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or expense, loss,
damage or liability is incurred.
g. If the indemnification provided for in this Section 9.6
from the indemnifying party is unavailable to an indemnified party hereunder in
respect of any losses, claims, damages, liabilities, or expenses referred to
herein, then the indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of losses, claims, damages, liabilities, or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified party in connection with the actions which resulted in
such losses, claims, damages, liabilities, or expenses, as well as any other
relevant equitable considerations. The relative fault of such indemnifying party
and indemnified party shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, such indemnifying party or
indemnified party, and the parties' relative intent, knowledge, access to
information, and opportunity to correct or prevent such action. The amount paid
or payable by a party as a result of the losses, claims, damages, liabilities,
and expenses referred to above shall be deemed to include any legal or other
fees or expenses reasonably incurred by such party in connection with any
investigation or proceeding. In no event shall the liability of any Seller
hereunder be greater in amount than the dollar amount of the proceeds received
by such Seller upon the sale of the Securities giving rise to such contribution
obligation. The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 9.6(g) were determined by pro rata
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in this Section 9.6(g). No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person or entity who was not
guilty of such fraudulent misrepresentation.
9.7 If requested by the managing underwriter of an offering for
which Shares of such Securityholder have been registered, a Securityholder shall
not sell or otherwise transfer or dispose of any Securities held by such
Securityholder (other than those included in the registration) during such
period following the effective date of such registration as is usual and
customary at such time in similar public offerings of similar securities;
provided, however, that the Company shall use its reasonable best efforts to
cause each holder of a material number of shares of Common Stock to enter into
similar "lock-up" agreements in respect of such offering. The obligations
described in this Section 9.7 shall not apply to offerings pursuant to a
registration statement on Form S-4 or Form S-8 or any successor or similar form.
10. Additional Rights.
10.1 Secondary Sales. The Company agrees that it will cooperate
with the holder of this Warrant in obtaining liquidity if opportunities to make
secondary sales of the
18
<PAGE>
Company's securities become available. To this end, the Company will promptly
provide the holder of this Warrant with notice of any offer to acquire from the
Company's security holders more than five percent (5%) of the total voting power
of the Company and will cooperate with the holder in arranging the sale of this
Warrant to the person or persons making such offer.
10.2. Mergers. In the event that the Company undertakes to (i)
sell, lease, exchange, convey or otherwise dispose of all or substantially all
of its property or business, or (ii) merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary of the Company), or effect any
transaction (including a merger or other reorganization) or series of related
transactions, in which more than 50% of the voting owner of the company is
disposed of, the Company will use its best efforts to provide at lease thirty
(30) days notice of the terms and conditions of the proposed transaction. The
Company will cooperate with the holder in consummating the sale of this Warrant
in connection with any such transaction.
10.3. Right to Convert Warrant into Common Stock; Net Issuance.
a. Right to Convert. In addition to and without limiting
the rights of the holder under the terms of this Warrant, the holder shall have
the right to convert this Warrant or any portion thereof (the "Conversion
Right") into shares of Common Stock as provided in this Section 10.3 at any time
or from time to time during the term of this Warrant. Upon exercise of the
Conversion Right with respect to a particular number of shares subject to this
Warrant (the "Converted Warrant Shares"), the Company shall deliver to the
holder (without payment by the holder of any exercise price or any cash or other
consideration) that number of shares of fully paid and nonassessable Common
Stock equal to the quotient obtained by dividing (i) the value of this Warrant
(or the specified portion hereof) on the Conversion Date (as defined in
subsection (b) hereof), which value shall be equal to (A) the aggregate fair
market value of the Converted Warrant Shares issuable upon exercise of this
Warrant (or the specified portion hereof) on the Conversion Date less (B) the
aggregate Warrant Price of the Converted Warrant Shares immediately prior to the
exercise of the Conversion Right by (ii) the fair market value of one share of
Common Stock on the Conversion Date.
19
<PAGE>
Expressed as a formula, such conversion shall be computed as follows:
X= A - B
-----
Y
Where: X = the number of shares of Common Stock that may be
issued to holder
Y = the fair market value (FMV) of one share of Common
Stock
A = the aggregate FMV (i.e., FMV x Converted Warrant
Shares)
B = the aggregate Warrant Price (i.e., Converted
Warrant Shares x Warrant Price)
No fractional shares shall be issuable upon exercise of the Conversion
Right, and, if the number of shares to be issued determined in accordance with
the foregoing formula is other than a whole number, the Company shall pay to the
holder an amount in cash equal to the fair market value of the resulting
fractional share on the Conversion Date. For purposes of Section 9 of this
Warrant, shares issued pursuant to the Conversion Right shall be treated as if
they were issued upon the exercise of this Warrant.
b. Method of Exercise. The Conversion Right may be exercised by
the holder by the surrender of this Warrant at the principal office of the
Company together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of shares
subject to this Warrant which are being surrendered (referred to in subsection
(a) hereof as the Converted Warrant Shares) in exercise of the Conversion Right.
Such conversion shall be effective upon receipt by the Company of this Warrant
together with the aforesaid written statement, or on such later date as is
specified therein (the "Conversion Date"). Certificates for the shares issuable
upon exercise of the Conversion Right and, if applicable, a new warrant
evidencing the balance of the shares remaining subject to this Warrant, shall be
issued as of the Conversion Date and shall be delivered to the holder within
thirty (30) days following the Conversion Date.
c. Determination of Fair Market Value. For purposes of this
Section 10.3, "fair market value" of a share of Common Stock shall have the
meaning set forth in Section 4(h) above.
11. Representations and Warranties. The Company represents and
warrants to the holder of this Warrant as follows:
a. This Warrant has been duly authorized and executed by the
Company and is a valid and binding obligation of the Company enforceable in
accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief
20
<PAGE>
of debtors and the rules of law or principles at equity governing specific
performance, injunctive relief and other equitable remedies;
b. The Shares have been duly authorized and reserved for
issuance by the Company and, when issued in accordance with the terms hereof,
will be validly issued, fully paid and nonassessable;
c. The rights, preferences, privileges and restrictions granted
to or imposed upon the Common Stock and the holders thereof are as set forth in
the articles or certificate of incorporation of the Company, as amended to the
Date of Grant (as so amended, the "Charter"), a true and complete copy of which
has been delivered to the original holder of this Warrant;
d. The execution and delivery of this Warrant are not, and the
issuance of the Shares upon exercise of this Warrant in accordance with the
terms hereof will not be, inconsistent with the Charter or by-laws of the
Company, do not and will not contravene, in any material respect, any
governmental rule or regulation, judgment or order applicable to the Company,
and do not and will not conflict with or contravene any provision of, or
constitute a default under, any indenture, mortgage, contract or other
instrument of which the Company is a party or by which it is bound or require
the consent or approval of, the giving of notice to, the registration or filing
with or the taking of any action in respect of or by, any Federal, state or
local government authority or agency or other person, except for the filing of
notices pursuant to federal and state securities laws, which filings will be
effected by the time required thereby;
e. There are no actions, suits, audits, investigations or
proceedings pending or, to the knowledge of the Company, threatened against the
Company in any court or before any governmental commission, board or authority
which, if adversely determined, will have a material adverse effect on the
ability of the Company to perform its obligations under this Warrant;
f. The authorized capital stock of the Company consists of
ninety million (90,000,000) shares of Common Stock par value $.0001 per Share,
and 10,000,000 Shares of Preferred Stock, par value $.0001 per Share, of which
approximately 15,161,936 shares of Common Stock, and no shares of Preferred
Stock, were issued and outstanding as of the close of business on August 31,
1996. All such outstanding shares have been validly issued and are fully paid,
nonassessable shares free of preemptive rights;
g. Except for the Warrants and as set forth on Schedule 11(g)
attached hereto and incorporated herein, there are no subscriptions, rights,
options, warrants, or calls relating to any shares of the Company's capital
stock, including any right of conversion or exchange under any outstanding
security or other instrument; and
h. Except as disclosed in the Company's most recent Proxy
Statement and Form 10-K, the Company is not subject to any obligation
(contingent or otherwise) to repurchase or otherwise acquire or retire any
shares of its capital stock or any security convertible into or exchangeable for
any of its capital stock.
21
<PAGE>
12. Modification and Waiver. This Warrant and any provision hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
13. Notices. Any notice, request, communication or other document
required or permitted to be given or delivered to the holder hereof or the
Company shall be delivered, or shall be sent by private courier or certified or
registered mail, postage prepaid, to each such holder at its address as shown on
the books of the Company or to the Company at the address indicated therefor on
the signature page of this Warrant.
14. Binding Effect on Successors. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or acquisition
of all or substantially all of the Company's assets, and all of the obligations
of the Company relating to the Common Stock issuable upon the exercise or
conversion of this Warrant shall survive the exercise, conversion and
termination of this Warrant and all of the covenants and agreements of the
Company shall inure to the benefit of the successors and assigns of the holder
hereof. The Company will, at the time of the exercise or conversion of this
Warrant, in whole or in part, upon request of the holder hereof in respect of
any rights to which the holder hereof shall continue to be entitled after such
exercise or conversion in accordance with this Warrant; provided, that the
failure of the holder hereof to make any such request shall not affect the
continuing obligation of the Company to the holder hereof in respect of such
rights.
15. Lost Warrants or Stock Certificates. The Company covenants to the
holder hereof that, upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant or any
stock certificate and, in the case of any loss, theft or destruction, upon
receipt of an executed lost securities bond or indemnity reasonably satisfactory
to the Company, or in the case of any such mutilation upon surrender and
cancellation of such Warrant or stock certificate, the Company will make and
deliver a new Warrant or stock certificate, of like tenor, in lieu of the lost,
stolen, destroyed or mutilated Warrant or stock certificate.
16. Descriptive Headings. The descriptive heading of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
17. Governing Law. This Warrant shall be construed and enforced in
accordance with, and the rights of the parties shall be governed by, the laws of
the State of Washington.
18. Survival of Representations, Warranties and Agreements. All
representations and warranties of the Company and the holder hereof contained
herein shall survive the Date of Grant, the exercise or conversion of this
Warrant (or any part hereof) or the termination or expiration of rights
hereunder. All agreements of the Company and the holder hereof contained herein
shall survive indefinitely until, by their respective terms, they are no longer
operative.
22
<PAGE>
19. Remedies. In case any one or more of the covenants and agreements
contained in this Warrant shall have been breached by holders hereof (in the
case of a breach by the Company), or the Company (in the case of a breach by a
holder), may proceed to protect and enforce their or its rights either by suit
in equity and/or by action at law, including, but not limited to, an action for
damages as a result of any such breach and/or an action for specific performance
of any such covenant or agreement contained this Warrant.
20. Acceptance. Receipt of this Warrant by the holder hereof shall
constitute acceptance of and agreement to the foregoing terms and conditions.
21. No Impairment of Rights. The Company will not, by amendment of
its Charter or through any other means, avoid or seek to avoid the observance or
performance of any of the terms of this Warrant, but will at all times in good
faith assist in the carrying out of all such terms and in the taking of all such
action as may be necessary or appropriate in order to protect the rights of the
holder of this Warrant against impairment.
MIDCOM COMMUNICATIONS INC.
By: /s/ William H. Oberlin
---------------------------------------
Title: President and CEO
------------------------------------
Address: 26899 Northwestern Hwy, Suite 121
----------------------------------
Southfield, MI 48034
----------------------------------
Dated: as of September 17, 1997
23
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
To: MIDCOM COMMUNICATIONS INC.
1. The undersigned hereby elects to purchase ___ shares of Common
Stock of MIDCOM COMMUNICATIONS INC. pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
2. Please issue a certificate or certificates representing said
shares in the name of the undersigned or in such other name or names as are
specified below:
______________________
(Name)
______________________
______________________
(Address)
3. The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing or reselling such shares.
In support thereof, the undersigned has executed and Investment Representation
Statement attached hereto as Schedule 1.
______________________
(Signature)
_________________
(Date)
<PAGE>
Schedule 1
INVESTMENT REPRESENTATION STATEMENT
Purchaser:
Company: MIDCOM COMMUNICATIONS INC.
Security: Common Stock
Amount:
Date:
In connection with the purchase of the above-listed securities (the
"Securities"), the undersigned (the "Purchaser") represents to the Company as
follows:
(a) The Purchaser is aware of the Company's business affairs and
financial condition, and has acquired sufficient information about the Company
to reach an informed and knowledgeable decision to acquire the Securities. The
Purchaser is purchasing the Securities for its own account for investment
purposes only and not with a view to, or for the resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933, as amended
(the "Act").
(b) The Purchaser understands that the Securities have not been
registered under the Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of the
Purchaser's investment intent as expressed herein. In this connection, the
Purchaser understands that, in the view of the Securities and Exchange
Commission ("SEC"), the statutory basis for such exemption may be unavailable if
the Purchaser's representation was predicated solely upon a present intention to
hold these Securities for the minimum capital gains period specified under
applicable tax laws, for a deferred sale, for or until an increase or decrease
in the market price of the Securities, or for a period of one year or any other
fixed period in the future.
(c) The Purchaser further understands that the Securities must be
held indefinitely unless subsequently registered under the Act or unless an
exemption from registration is otherwise available. In addition, the Purchaser
understands that the certificate evidencing the Securities will be imprinted
with the legend referred to in the Warrant under which the Securities are being
purchased.
<PAGE>
(d) The Purchaser is aware of the provisions of Rule 144 and 144A,
promulgated under the Act, which, in substance, permit limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions, if applicable, including, among other
things: The availability of certain public information about the Company, the
resale occurring not less than one (1) year after the party has purchased and
paid for the securities to be sold; the sale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934, as
amended) and the amount of securities being sold during any three-month period
not exceeding the specified limitations stated therein.
(e) The purchaser further understands that at the time it wishes to
sell the Securities there may be no public market upon which to make such a
sale, and that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144 and 144A, and
that, in such event, the Purchaser may be precluded from selling the Securities
under Rule 144 and 144A even if the one-year minimum holding period had been
satisfied.
(f) The Purchaser further understands that in the event all of the
requirements of Rule 144 and 144A are not satisfied, registration under the Act,
compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact Rule 144 is not exclusive, the
Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
Purchaser:
______________________________________
Date: ________________________________
<PAGE>
EXHIBIT 11.1
<TABLE>
<CAPTION>
MIDCOM COMMUNICATIONS INC.
EXHIBIT 11.1 STATEMENT RE: COMPUTATION OF NET LOSS PER SHARE
Three months Nine months
ended ended
September 30, September 30,
-------------------- -------------------
(In thousands, except per share data) 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss ($23,589) ($18,259) ($69,549) ($77,420)
-------- -------- -------- --------
Weighted average shares outstanding 15,125 15,681 15,438 15,442
-------- -------- -------- --------
Net loss per share ($1.56) ($1.16) ($4.51) ($5.01)
-------- -------- -------- --------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,532,000
<SECURITIES> 0
<RECEIVABLES> 26,605,000
<ALLOWANCES> (6,184,000)
<INVENTORY> 0
<CURRENT-ASSETS> 23,773,000
<PP&E> 35,825,000
<DEPRECIATION> (11,699,000)
<TOTAL-ASSETS> 58,192,000
<CURRENT-LIABILITIES> 199,107,000
<BONDS> 0
0
0
<COMMON> 62,063,000
<OTHER-SE> (206,778,000)
<TOTAL-LIABILITY-AND-EQUITY> 58,192,000
<SALES> 24,920,000
<TOTAL-REVENUES> 24,920,000
<CGS> 18,586,000
<TOTAL-COSTS> 26,498,000
<OTHER-EXPENSES> (175,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,600,000
<INCOME-PRETAX> (23,589,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (23,589,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (23,589,000)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (1.56)
</TABLE>
