United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-QSB
{ X } Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Period Ended September 30, 1996. 0r
{ } 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 33-92894
Preferred/telecom, Inc.
Delaware 75-2440201
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12655 N. Central Expwy, Suite 800
Dallas, TX 75243
(Address of Principal Executive (Zip Code)
Offices)
(214) 458-9950
(Registrant's Telephone Number, including area code.)
Not Applicable
(Former name, Former Address and Former Fiscal year, if changed since last
report.)
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 periods 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
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the Court. Yes No
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practical date.
Common Stock, $ 0.001 Par Value - 10,851,142 Shares as of October 31, 1996.
Transitional Small Business Format Yes X No
<PAGE>
INDEX
Preferred/telecom, Inc.
PAGE
Part I. Financial Information F-1
Item 1. Financial Statements
Balance Sheets-September 30, 1996, September 30, 1995,
and March 31, 1996.
Statements of Operations- Three Months Ended September
30, 1996, and 1995, Six Months Ended September 30, 1996
and 1995, and for the Year Ended March 31, 1996.
Statements of Cash Flows- Six Months Ended September 30,
1996, and 1995 and for the Year Ended March 31, 1996.
Notes to Financial Statements - September 30, 1996.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 1
Part II. Other Information
Item 1. Legal Proceedings 3
Item 2. Changes in Securities 3
Item 3. Defaults upon Senior Securities 3
Item 4. Submission of Matters to a Vote of Security Holders 3
Item 5. Other Information 3
Item 6. Exhibits and Reports on Form 8-K 3
Signatures 5
<PAGE>
PREFERRED/TELECOM, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995 AND MARCH 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1995 1996
ASSETS (UNAUDITED) (UNAUDITED) (AUDITED)
CURRENT ASSETS:
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ 18,250 $ 75,096 $ 42,574
ACCOUNTS RECEIVABLE, NET OF
ALLOWANCE 206,205 13,130 57,475
FOR DOUBTFUL ACCOUNTS OF $ 2,474,
$-0- AND $2,474 RESPECTIVELY
EMPLOYEE RECEIVABLES
1,507 3,500 13,185
PREPAID EXPENSES
198,810 24,595 30,917
------------------- ------------------- -------------------
TOTAL CURRENT ASSETS $ 424,772 116,321 144,151
------------------- ------------------- -------------------
PROPERTY AND EQUIPMENT:
COMPUTER EQUIPMENT $ 103,663 57,466
99,979
FURNITURE AND FIXTURES
25,143 18,075 24,550
OFFICE EQUIPMENT
6,082 2,184 6,082
LEASEHOLD IMPROVEMENTS
6,248 2,553 6,248
CALL VALIDATION SYSTEM
127,682 -O- 112,520
LESS: ACCUMULATED DEPRECIATION
(50,250) (8,836) (23,419)
------------------- ------------------- -------------------
NET PROPERTY AND EQUIPMENT $ 218,568 71,442 225,960
------------------- ------------------- -------------------
OTHER ASSETS:
DEPOSITS $ 103,624 4,199 14,852
PREPAID EXPENSES 640,000 -O- -O-
DEFERRED CONTRACT COSTS
107,327 156,938 121,576
DEFERRED DEBT ISSUE COSTS-NET 4,387 37,913 4,333
PATENTS AND TRADEMARKS-NET
21,751 -O- 16,208
CERTIFICATE OF DEPOSIT
50,445 -O- 50,445
DEFERRED STOCK ISSUE COSTS
68,241 -O- -O-
------------------- ------------------- -------------------
TOTAL OTHER ASSETS $ 995,775 $ 199,050 $ 207,414
------------------- ------------------- -------------------
TOTAL ASSETS $ 1,639,115 $ 386,813 $ 577,525
=================== =================== ===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1995 1996
LIABILITIES AND STOCKHOLDER'S DEFICIT (UNAUDITED) (UNAUDITED) (AUDITED)
CURENT LIABILITIES:
<S> <C> <C> <C>
ACCOUNTS PAYABLE $ 769,420 $ 224,642 $ 526,162
ACCRUED OPERATING & VACATION EXPENSES
72,077 42,603 56,567
ACCRUED PAYROLL AND RELATED TAX
397,263 145,561 162,411
ACCRUED INTEREST PAYABLE
81,290 48,481 20,866
NOTES PAYABLE
1,197,446 1,197,500 985,000
NOTES PAYABLE-OFFICERS
57,500 57,500 57,500
------------------- ------------------- -------------------
TOTAL CURRENT LIABILITIES $ 2,574,996 $ 1,716,287 $ 1,808,506
------------------- ------------------- -------------------
LONG TERM DEBT $ 875,000 $ -O- $ -O-
------------------- ------------------- -------------------
COMMITMENTS AND CONTINGENCIES (NOTE G)
STOCKHOLDERS DEFICIT:
COMMON STOCK, $0.001 PAR VALUE
20,000,000 SHARES AUTHORIZED;
SHARES ISSUED 10,851,142, 7,370,000
AND 8,949,942 RESPECTIVELY $ 10,851 $ 7,370 $ 8,950
ADDITIONAL PAID IN CAPITAL 2,898,934
35,480 1,916,632
ACCUMULATED DEFICIT (4,718,798) (1,360,724) (3,156,428)
TREASURY STOCK - AT COST
(1,868) -O- (135)
STOCK SUBSCRIPTIONS RECEIVABLE
-O- (11,600) -O-
------------------- ------------------- -------------------
TOTAL STOCKHOLDER DEFICIT $ (1,810,881) $ (1,329,474) $ (1,230,981)
------------------- ------------------- -------------------
TOTAL LIABILITIES AND STOCKHOLDER DEFICIT $ 1,639,115 $ 386,813 $ 577,525
=================== =================== ===================
</TABLE>
<PAGE>
PREFERRED/TELECOM, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
AND FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
AND FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- ----------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1995 1996 1995 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED)
------------------- ------------------- ------------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
SALES $ 269,496 $ 13,265 $ 478,910 $ 14,450 $ 159,004
COST OF SALES 293,771 93,081 583,896 93,851 344,310
------------------- ------------------- ------------------- ------------------- ----------------
GROSS PROFIT (LOSS) $ (24,275) $(79,816) $ (104,986) $ (79,401) $ (185,306)
------------------- ------------------- ------------------- ------------------- ----------------
COSTS AND EXPENSES:
SALES & MARKETING $ 388,811 $ 227,938 $ 752,237 $ 307,955 $ 1,091,453
GENERAL & ADMINISTRATIVE 330785 333,778 619,076 501,089 1,360,693
INTEREST EXPENSE 57968 35,521 86,071 86,469 39,772
------------------- ------------------- ------------------- ------------------- ----------------
TOTAL COSTS AND EXPENSES $ 777,564 $ 597,237 $ 1,457,384 $ 848,816 $ 2,538,615
------------------- ------------------- ------------------- ------------------- ----------------
LOSS BEFORE INCOME TAX $ (801,839) (677,053) (1,562,370) $(928,217) $ (2,723,921)
PROVISION FOR INCOME TAX -O- -O- -O- -O- -O-
------------------- ------------------- ------------------- ------------------- ----------------
NET LOSS $ (801,839) (677,053) (1,562,370) $(928,217) $ (2,723,921)
=================== =================== =================== =================== ================
NET LOSS PER SHARE $ (0.07) (0.10) (0.16) (0.14) (0.35)
=================== =================== =================== =================== ================
</TABLE>
<PAGE>
PREFERRED/TELECOM, INC.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
AND FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1995 1996
(UNAUDITED) (UNAUDITED) (AUDITED)
------------------- ------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
CASH RECEIVED FROM CUSTOMERS $ 330,180 $ 1,320 $ 101,529
CASH PAID TO SUPPLIERS AND EMPLOYEES (1,522,190) (832,889) (2,359,786)
INTEREST PAID
-O- -O- (75,916)
------------------- ------------------- -------------------
NET CASH USED BY OPERATING $ (1,192,012) $ (831,569) $ (2,334,173)
ACTIVITIES
------------------- ------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES $ (33,988) $ (54,178) $ (246,459)
PURCHASE OF CERTIFICATE OF DEPOSIT
-O- -O- (50,000)
PROCEEDS FROM SALE OF FIXED ASSETS
-O- -O- 3,056
------------------- ------------------- -------------------
NET CASH USED BY INVESTING ACTIVITIES $ (33,988) $ (54,178) $ (293,403)
------------------- ------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM SALE OF STOCK $ 150 $ 25,100 $ 1,938,332
PROCEEDS FROM NOTES PAYABLE
1,271,500 900,000 687,500
INCREASE IN DEFERRED OFFERING COST
(68,241) (7,610) -O-
PURCHASE OF TREASURY STOCK
(1,733) -O- (135)
DECREASE IN STOCK SUBSCRIPTION
RECEIVABLE -O- -O- 1,100
------------------- ------------------- -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 1,201,676 $ 917,490 $ 2,626,797
------------------- ------------------- -------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ (24,324) $ 31,743 $ (779)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD
42,574 43,353 43,353
------------------- ------------------- -------------------
END OF PERIOD $ 18,250 $ 75,096 $ 42,574
=================== =================== ===================
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING
AND FINANCING
ACTIVITIES:
ISSUANCE OF COMMON STOCK IN EXCHANGE FOR
BARTERING CREDITS $ 800,000
CONVERSION OF DEBENTURE TO COMMON STOCK
75,000
-------------------
TOTAL NON-CASH INVESTING ACTIVITIES $ 875,000
===================
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, MARCH 31,
1996 1995 1996
(UNAUDITED) (UNAUDITED) (AUDITED)
------------------- ------------------- -------------------
RECONCILIATION OF NET LOSS TO NET CASH
USED BY OPERATING ACTIVITIES:
<S> <C> <C> <C>
NET LOSS $ (1,562,370) $ (928,217) $ (2,723,921)
------------------- ------------------- -------------------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED BY OPERATING
ACTIVITIES:
DEPRECIATION $ 26,830 $ 6,440 $ 25,017
AMORTIZATION 23,201 8,714 29,604
(GAIN) LOSS ON SALE OF FIXED ASSETS
-O- -O- (636)
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE
(148,730) (13,130) (57,475)
(INCREASE) DECREASE IN EMPLOYEE RECEIVABLES
11,678 (3,500) (13,185)
(INCREASE) DECREASE IN CERTIFICATE OF DEPOSIT
-O- -O- (445)
(INCREASE) DECREASE IN DEPOSITS
(88,772) (1,354) (12,007)
(INCREASE) DECREASE IN PREPAID
EXPENSES (7,893) (23,404) (29,726)
(INCREASE) DECREASE IN DEFERRED CONTRACT COSTS
-O- (135,500) (114,500)
INCREASE (DECREASE) IN ACCOUNTS
PAYABLE 243,258 224,642 526,162
INCREASE (DECREASE) IN ACCRUED
EXPENSES 310,786 33,740 36,939
------------------- ------------------- -------------------
$ 370,358.0 $ 96,648 $ 389,748
------------------- ------------------- -------------------
NET CASH USED BY OPERATING ACTIVITIES $ (1,192,012.0) $ (831,569) $ (2,334,173)
=================== =================== ===================
</TABLE>
<PAGE>
PREFERRED/TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - GENERAL ORGANIZATION
Preferred/telecom, Inc. (the "Company") is a Delaware corporation incorporated
in 1992. The Company commenced business on May 13, 1994, and was in the
development stage until August 1, 1995. The Company provides long distance
telecommunications services throughout the United States and maintains its
principal offices in Dallas, Texas. The Company has not presented financial
statements for the period from incorporation in 1992 through May 14, 1994, as
the Company did not begin its planning and organizational activities until May
13, 1994. In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) that are necessary for a fair presentation of the financial
position of the Company at September 30, 1996, the results of its operations for
the three and six months ended September 30, 1996 and 1995 and the results of
the cash flows for the six months ended September 30, 1996 and 1995. These
financial statements should be read in conjunction with the notes to the
Company's annual financial statements that were included in the Company's Annual
Report on Form 10-KSB for the year ended March 31, 1996 filed with the
Securities and Exchange Commission (the "Commission") on August 2, 1996.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
amounts due from banks.
ACCOUNTS RECEIVABLE
In the normal course of business, the Company extends unsecured credit
to its customers with payment terms generally 30 days. Because of the credit
risk involved, management has provided an allowance for doubtful accounts which
reflects its opinion of amounts which will eventually become uncollectible. In
the event of complete nonperformance by the Company's customers, the maximum
exposure to the Company is the outstanding accounts receivable balance at the
date of nonperformance.
DEPRECIATION
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. Depreciation is computed on the
straight-line method for financial reporting purposes and the double declining
method for income tax purposes.
Maintenance and repairs are charged to operations when incurred. Betterments and
renewals are capitalized.
The useful lives of property and equipment for purposes of computing
depreciation are as follows:
Computer Equipment 5 years
Furniture and Fixtures 5 years
Office Equipment 5 years
Leasehold Improvements 6 years
INCOME TAXES
Income taxes are accounted for using the liability method under the provisions
of SFAS 109 "Accounting for Income Taxes".
LOSS PER SHARE
Loss per share is based on the weighted average number of shares outstanding of
10,745,544 and 9,936,904 for the three months and six months ending September
30, 1996, respectively; 7,172,391 and 6,926,448 for the three months and six
months ending September 30, 1995, respectively and 7,769,708 for the period
ending March 31, 1996.
AMORTIZATION
Fees and other expenses associated with the issuance of subordinated convertible
debentures are being amortized on the straight-line method over the term of the
debentures beginning in April, 1995. Amortization expense was $18,634 and $8,888
for the six months and three months ended September, 1996, respectively; and
$5,152 and $ 2,576 for the six months and three months ended September, 1995,
respectively; and $ 10,303 for the fiscal year ended March 31, 1996.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
AMORTIZATION (CONTINUED)
The cost of patents and trademarks are being amortized on the straight line over
a period of 15 years. Amortization expense charged to operations as of September
30, 1996 was $ 2,308, $ 4,628 and $ 559 for the three months and six months and
for the fiscal year ended March 31, 1996, respectively.
NOTE C-NOTES PAYABLE-RELATED PARTIES
Notes payable to related parties consist of the following:
<TABLE>
<CAPTION>
SEPT. 30, SEPT. 30, MARCH 31,
1996 1995 1996
---------- -------- --------
Notes payable to a director and officer, dated Sept. 1,1994
and June 12, 1996, due on Oct. 1, 1996 and June 12, 1998,
and unsecured, interest payable semi-annually at a rate of
prime + 2% (8.25% at Sept. 30, 1996 and March 31, 1996
<S> <C> <C> <C> <C>
and 7% per annum). $ 67,500 $ 7,500 $ 7,500
Notes payable to a director and officer, dated June 5,1994
due on Oct. 1, 1996 and unsecured, interest payable semi-
annually at a rate of prime + 2% (8.25% at Sept. 30, 1996
and March 31, 1996). 50,000 50,000 50,000
Notes Payable to Pegasus Settlement Trust (PST), a stockholder
of the Company. The beneficiary and a trustee of PST are officers
of the Company. The notes are unsecured and bear interest at
rates ranging from prime rate(8.25% and 9% at September, 1996
and March, 1996) with the principal and accrued interest payable
at maturity on various dates through January 31, 1997 590,946 550,000 650,000
Notes payable to a stockholder of the Company and several
affiliated trusts of which the stockholder is the trustee.
The notes are unsecured and bear interest at rates of 9% and
10% per annum and prime (8.25% at September 30, 1996 and
March 1996) with principal and accrued interest payable at
various dates through November 26, 1996 325,000 225,000 225,000
---------- --------- ---------
Total related party notes payable $ 1,033,446 $ 832,500 $ 932,500
</TABLE>
Interest expense charged to operations related to the related party notes
payable was $48,246 and $24,945 for the six months and three months ended
September, 1996, respectively; and $24,780 and $ 16,098 for the six months and
three months ended September, 1995, respectively; and $ 78,943 for the fiscal
year ended March 31, 1996.
NOTE D-LONG TERM DEBT
Long-term debt consisted of the following at September 30, 1996 and 1995 and
March 31, 1996:
<TABLE>
<CAPTION>
SEPT. 30, SEPT. 30, MARCH 31,
1996 1995 1996
---------- -------- ----------
1996
Notes payable dated various dates from May 20, 1996 through September 24, 1996,
secured by common stock with principal and accrued interest due at maturity on
various dates through September 24, 1998. 437,500 warrants to purchase shares of
common stock at $ 1.50 per share expiring from dates in May
<S> <C> <C> <C> <C> <C> <C>
through September, 1998 were issued to the note holders $ 875,000** $ -0- $ -0-
--------- --------- ----------
Total 875,000 $ -0- $ -0-
</TABLE>
**Includes $ 60,000 in related party participation.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
The following are maturities of long term debt for each of the next three years:
YEAR ENDING
MARCH 31, AMOUNT
1997 $ 0
1998 $ 0
1999 $ 875,000
----------
Total $ 875,000
NOTE E - COMMON STOCK:
STOCK PURCHASE WARRANTS
At September 30, 1996, the Company had outstanding warrants to purchase
1,950,400 shares of the Company's common stock at prices which ranged from $0.04
per share to $2.44 per share. The warrants are exercisable at any time and
expire on dates ranging from January 27, 1997 to June 3, 2001. At September 30,
1996, 1,950,400 shares of common stock were reserved for that purpose.
CHANGE IN AUTHORIZED SHARES
On March 15, 1995, the Company's stockholders approved an amendment to increase
the number of authorized shares of common stock from 10,000,000 to 15,000,000.
On July 25, 1995, the Company's stockholders approved an amendment to increase
the number of authorized shares of common stock from 15,000,000 to 20,000,000.
COMMON STOCK RESERVED
At September 30, 1996, shares of common stock were reserved for the following
purposes:
Exercise of stock warrants 1,950,400
Conversion of convertible debentures 23,333
Exercise and future grants of stock options
and stock appreciation rights 405,000
Total 2,378,733
NOTE F - STOCK OPTION PLAN:
On November 1, 1994, the Company adopted a stock award and incentive plan which
permits the issuance of options and stock appreciation rights to selected
employees and independent contractors of the Company. The plan originally
reserved 450,000 shares of common stock for grant, of which 45,000 shares have
been purchased, leaving 405,000 shares of common stock for grant and provides
that the term of each award be determined by the committee of the Board of
Directors (Committee) charged with administering the plan.
Under the terms of the plan, options granted may be either nonqualified or
incentive stock option, and the exercise price, determined by the Committee, may
not be less than the fair market value of a share on the date of the grant.
Stock appreciation rights granted in tandem with an option shall be exercisable
only to the extent the underlying option is exercisable and the grant price
shall be equal to the exercise price of the underlying option. At September 30,
1996, options to purchase 164,500 shares at exercise prices of $0.0031/3 to
$1.50 per share have been granted. No stock appreciation rights have been
granted at September 30, 1996.
NOTE G - COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENT
The Company has entered into a non-cancelable operating lease for office
facilities under a lease agreement which commenced on February 1, 1996 and
expires on August 31, 2002. Minimum future rental to be paid on non-cancelable
leases as of September 30, 1996 for each of the next five years in the aggregate
are:
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE G - COMMITMENTS AND CONTINGENCIES: (CONTINUED)
LEASE COMMITMENT (CONTINUED)
YEAR ENDING
MARCH 31, AMOUNT
1997 $ 127,836
1998 127,836
1999 131,708
2000 151,608
2001 151,608
Thereafter 214,013
$ 904,609
Total rent expense charged to operations $64,560 and $32,602 for the six months
and three months ended September, 1996, respectively; and $16,571 and $ 8,852
for the six months and three months ended September, 1995, respectively; and $
49,661 for the fiscal year ended March 31, 1996.
LETTER OF CREDIT
At September 30, 1996, the Company had a $50,000 outstanding letter of credit
expiring February 1, 1998. The letter of credit is for the benefit of the lessor
of office space facilities and may be drawn in the event of default. The letter
of credit is secured by a certificate of deposit in the amount of $50,445.
CARRIER AGREEMENT
The Company is obligated for minimum monthly service payments under the terms of
a carrier services agreement with MCI Telecommunications Corporation (MCI)
expiring in October 1998. The minimum annual commitments under the MCI agreement
are:
YEAR ENDING
MARCH 31, AMOUNT
1997 $ 9,725,000
1998 12,000,000
1999 12,000,000
2000 7,000,000
-----------------
$ 40,725,000
The MCI agreement is for a period of 46 months. The Company has a liability
equal to fifteen (15) percent of the remaining minimum payments in the event of
termination prior to expiration by the Company or MCI under certain conditions.
The remaining liability amounts to a maximum of $ 6,000,000. Initially, 60% of
the Company's revenues will be paid to MCI, subject to subsequent adjustments
for over and underpayments.
OTHER COMMITMENTS
On April 19, 1995, the Company entered into an equipment and services agreement
with Brite Voice Systems, Inc. (BVS). Under the terms of this agreement, the
Company paid BVS an initial fee of $89,500 and minimum monthly payments are due,
starting at $ 20,000 per month, for a period of three years. The total minimum
monthly commitments amount to $900,000, over the term of the agreement. In
return, BVS will provide access to its technology used in providing
voice-activated calling card services.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE H - BARTER TRANSACTION
On June 3, 1996, the Company entered into a media purchase agreement for the
promotion of its products and services with Proxhill Marketing, Ltd. (Proxhill).
Under the terms of the agreement, the Company committed to purchase $1,200,000
of media advertising time in exchange for 400,000 shares of common stock at a
value of $ 2.00 per share, and $400,000 in cash. The agreement is for a period
of five years. For each purchase of media advertising time, the Company will
receive a barter credit equal to 66.67% of the transaction value with the
remaining balance payable in cash. In connection with this agreement, the
Company issued to Proxhill 100,000 options to purchase the Company's common
stock at a price of $2.00 per share. The options expire June 3, 2001.
NOTE I - GOING CONCERN
The Company has incurred substantial operating losses to date. In June, 1995,
the Company issued 600,000 shares of its common stock to Star Resources, Inc.
(Star), a public company, for $ 24,000. The Company then filed a registration
statement with the Securities and Exchange Commission to allow Star to
distribute to its stockholders the 600,000 shares of common stock. Upon
completion of the Star distribution, the Company became a separate public
company. The Company has raised, and intends to continue to raise, additional
capital through subsequent offerings of its common stock.
In the quarter ended September 30, 1996, the Company received total proceeds of
$875,000 in connection with a private offering of $10,000 notes bearing interest
at 7% and warrants to purchase 5,000 shares of common stock at a price of $1.50.
The offering was closed on September 30, 1996. This amount, however, was
insufficient to fund the Company's operations. The Company has been forced to
significantly curtail its operations and made drastic cuts in its overhead. The
Company has borrowed $100,00 from a lender and has a commitment from that same
lender for an additional advance of $50,000. This short term funding should
allow the Company to continue its curtailed operations only through December 31,
1996. The Company intends to make a private placement in the form of common
stock and warrants in the maximum amount of $1.8 million. If this maximum amount
is raised, the Company should be able to resume operations beyond December 31,
1996.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations. Management
believes that actions presently being taken to meet the Company's financial
requirements will provide the Company the opportunity to continue as a going
concern.
<PAGE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the
Financial Statements of the Company and related notes thereto appearing
elsewhere in this filing.
Results of Operations
Preferred/telecom, Inc. (the Company) commenced business on May 13, 1994, and
was in the development stage through August 1, 1995. During the period from its
inception until March 31, 1995, the end of the fiscal year, the Company's
activities consisted entirely of developing and implementing its business plan,
including developing its product service offerings, formulating its marketing
strategies and operations, negotiation of agreements necessary to its proposed
operations and hiring personnel. The Company began its sales activities in April
1995 and had no revenues during the period of May 13, 1994 through March 31,
1995. The initial sales activity involved introducing the Company's proposed
services to prospective customers to gauge consumer response with respect to
pricing , features and viability of the services. The Company began enrolling
SecureCard customers in August 1995 and has been providing long distance
services, including SecureCard and traditional 1+ and 800 services since that
time.
In the six months period ended September 30, 1995 the Company booked revenues of
$ 14,450 for services, and the direct costs associated with generating sales was
$ 93,851. During the six months ended September 30, 1996, the Company booked
revenues of $ 478,910. Of this amount, 19% was attributed to the SecureCard
product. The remainder of the Company's revenue was derived from 1+ and 800
service. Direct cost of sales for the six month period ending September 30, 1996
was $583,896 or 121.9% of sales. Of that amount, $ 127,500 related to
contractual minimums, very little of which represented payment for actual
services. In part, this is due to the costs of the basic infrastructure that the
Company has put in place and is required regardless of the level of sales.
During the fiscal year ended March 31, 1996, the Company booked $ 159,004 in
revenue and $ 344,310 in direct expenses associated with the sale of SecureCard
and other telecommunication services. Of these direct expenses, $ 140,000
related to paying contractual minimums. For the six months ended September 30,
1996, sales and marketing expenses were 113% of sales, and general and
administrative expenses were 147% of sales. Each of these ratios are
considerably less than the equivalent ratios for the fiscal year ended March 31,
1996, down from 722.1% and 697.2% respectively.
The Company has reevaluated its marketing efforts and product strategies as
expenses continue to exceed revenues. The Company now recognizes that the
services it pioneered are applicable not only in the long distance markets but
also in the newly-competitive local calling arena and the realm of wireless
communications. The Company plans on divesting itself of its long distance
business. The strategic focus will be on providing its technology to domestic
and international interexchange carriers and other telecommunications service
providers who wish to offer speech recognition-enhanced services as a
value-added product to their customers, and to corporations who wish to make the
convenience of speech recognition available to its employees.
Liquidity and Capital Resources
The Company's cash and cash equivalents at September 30, 1996 were $ 18,250.
During the period from inception , May 1994 through September 30, 1995, the
Company's operations were funded primarily through loans of $ 1,255,000 of which
an aggregate of $ 822,500 was borrowed from the Company's officers, directors
and a greater than 5% beneficial owner. In March, 1995 the Company conducted a
private offering of convertible debentures in which debentures due in September
1996 with an aggregate principal amount of $ 122,500 were sold. In October, 1995
$ 12,500 of those debentures were converted to stock. In July, 1996, $ 15,000 of
those debentures were converted to stock. By terms of the debenture , when the
debenture came due on September 27, 1996 the holder was due principal, interest
and penalties for a sum due of $ 125,000. Of this amount $60,000 was converted
to 40,000 shares of the Company's common stock (the "Common Stock"), $0.001 par
value per share, and $65,000 of the debenture was replaced by a convertible note
due March 27, 1997 bearing interest at a rate of 8.5% per annum and convertible
into shares of Common Stock at a rate of $1.50 per share. In October, 1995 the
Company conducted a Regulation S offering and sold 1,000,000 shares of Common
Stock at $ 1.50 per share, generating $ 1,500,000 in capital. In addition, in
October and
-1-
<PAGE>
November, 1995, in accordance with Regulation D under the Securities Act of 1933
(the "Securities Act"), the Company conducted an offering of eight percent (8%)
convertible debentures due March 31, 1997 with interest payable quarterly
commencing December 31, 1995. Under the terms of the debenture offering the $
375,000 generated was converted to Common Stock in November, 1995. From
this $ 1,875,000 generated, notes due to non-affiliates in the amount of
$300,000. were repaid with associated interest. The remainder was available for
working capital and payment of vendor payables.
In April 1996 the Company commenced a private offering of notes and warrants
("Units") with maximum proceeds to the Company of $800,000 with each Unit
consisting of (i) a note in principal face amount of $10,000 bearing interest at
a rate of 7% per annum, with principal and interest payable two years from the
date of issue and (ii) warrants to purchase 5,000 shares of Common Stock, at
$1.50 per share at any time within two (2) years after issuance of the warrants.
On June 3, 1996, the terms of the offering were amended to increase the size of
the offering from 80 Units to a maximum of 150 Units or proceeds to the Company
of $1,500,000. Also in this amendment the Company altered the repayment terms to
the promissory note by means of an addendum to the note stating that the Company
contemplated raising capital in an underwritten public offering and after
payment of expenses of the underwriting would apply proceeds of such offering to
repayment of the notes issued in the private offering. The funds being sought in
the offering were only intended to permit the Company to continue operations and
meet its material operating obligations while it sought additional funding
sufficient for long term implementation of its business plan. The offering was
closed on September 30, 1996, after the Company had raised $ 875,000 in the
private placement.
The Company entered into a letter of intent with an investment banking firm to
underwrite on a firm commitment basis, a proposed Four Million Dollar ($
4,000,000) public offering of the Company's securities. The underwriting was
subject to numerous conditions upon which ultimately the Company and the
investment banking firm were unable to agree. Therefore, the Company has
terminated its plans to conduct a public offering at this time. Although the
provisions of the letter of intent relating to the public offering have
terminated, the letter of intent grants to the investment banking firm a right
of first refusal to act as the Company's investment banker with regard to future
offerings, and certain acquisition/disposition transactions and provides for the
payment of a substantial fee to the investment banking firm for a breach of
these provisions. The Company requested a general termination and mutual release
in order to move forward with other means of financing. To date, the investment
banking firm has agreed to waive compensation on the near term financing
requirements of the Company but has not provided a release with respect to other
transactions.
The Company has acquired short term funding which will allow it to continue
operations through December 31, 1996. In October, 1996, a greater than 5%
shareholder lent the Company $ 60,000 at 10% per annum and is secured by office
furniture and equipment. Principal and interest is due on this note on November
25, 1996. Additional funding of $150,000. has been negotiated with another
shareholder which bears interest at 12% and is due February 10, 1997. This note
is secured by warrants to purchase 600,000 shares of Common Stock, at a purchase
price of $0.50 per share. The Company has been forced to significantly curtail
its operations and has made drastic cuts in its overhead. The Company's
operations consist principally of servicing existing customers. It has suspended
its marketing operations and is not acquiring additional platforms until
additional financing is in place. The Company intends to offer a combination of
Common Stock and warrants in a Regulation D offering for maximum proceeds of $
1,800,000. If all such proceeds are raised, the Company will have sufficient
funds to operate while it continues to develop a long term financial structure.
The timing of the proposed offering is subject to a number of factors, certain
of which are beyond the Company's control; however, the Company intends to
commence this offering in early December 1996.
Future Obligations. During the next twelve months, the Company plans, subject to
raising adequate capital, to sell platforms which provide the technology
necessary to utilize its Preferred SecureCard, VIP800 and Preferred Collect
Service technology, to introduce new products, and to continue refining this
technology. Subject to the Company's ability to fund the cost, Management
expects the Company to hire or contract with approximately 20 additional persons
during the next 12 months, primarily to support its expanded marketing
activities.
The ability of the Company to raise capital is, in the opinion of Management,
the primary constraint on such business plan. Management estimates that, during
the next twelve (12) months, the Company will require approximately
-2-
<PAGE>
$ 3,500,000 of equity and/or long term debt to finance its costs of marketing
and the continued refinement of its services at anticipated levels, with most of
these funds being needed to support marketing efforts. In addition, the Company
will be required to renegotiate or obtain extensions of its current debt or
raise additional funds of approximately $ 1,300,000 to retire its debt. There is
no assurance however, that the Company will be able to secure any such
renegotiations, financing or extensions of its current debt. In addition, the
Company will continue to seek a general termination and mutual release of the
provisions of the letter of intent with its investment banking firm relating to
future offerings.
The Company was obligated under its agreement with MCI Telecommunications
Corporation (MCI) to pay at least $ 1,000,000 per month for transmission
services beginning January, 1996. Throughout 1996, negotiations for a mutually
beneficial revised agreement took place, but no final revised contract was
executed. With the Company's new focus on sales of technology, the need for a
carrier agreement is no longer necessary. The Company is currently negotiating
with MCI to eliminate its agreement completely and provide its services through
traditional long distance service agreements which would be based upon much
lower traffic volume requirements. The Company may be obligated to make a
substantial payment of previously submitted invoices to terminate its agreement
with MCI.
The Company's agreement with Brite Voice Systems, Inc. ("Brite") calls for
minimum monthly usage fees of at least $ 20,000 per month through August 15,
1996, $ 25,000 per month through August 15, 1997, and $ 30,000 per month through
August 15, 1998 in SecureCard charges. The Company's obligation to Brite is
based upon the Company's billable minutes through the Brite system and paid out
of revenues as they are received. To the extent that the monthly usage
obligation is less than the minimum amounts specified in the governing
agreements, the Company would be required to pay Brite the difference between
the actual usage charges and these minimums at those times specified in the
agreements. At present, the Company's monthly usage is less than the minimum
amount. The Company and Brite have executed an agreement to convert monthly
minimums of $216,500 which represent minimum payments from January through
October into a promissory note bearing interest at prime +2% per annum which was
due November 1, 1996 and warrants to purchase 60,000 shares of common stock at a
price of $2.44 per share exercisable three years from the date of the note. At
this time, the Company is in default of this note.
Certain of the information contained in Parts I and II of this form 10-QSB
constitutes forward looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934. Although
the Company believes that the expectations reflected in such forward looking
statements are based upon reasonable assumptions, it can give no assurance that
its expectations will be achieved. Important factors that could cause the actual
results to differ from the Company's expectations are set forth and herein under
the caption "Risk Factors" in the Company's prospectus dated August 15, 1995. In
addition, an important factor is the Company's ability to raise sufficient
capital to execute its business plan and meet its obligations. Therefore, the
actual results that are achieved may differ materially from any such forward
looking information.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not involved in any material legal proceedings.
Item 2. Changes in Securities.
There have been no material changes in securities during the period.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-3-
<PAGE>
Item 5. Other Information.
Subsequent Events. On October 2, 1996, Brite Voice Systems, Inc. (Brite)
executed a Reseller Agreement with the Company which grants a License to the
Company to market, on a worldwide basis with two local exceptions, the
technology housed on Brite's platform which was jointly developed by the two
companies. This agreement was vital to the Company's new strategic focus.
Item 6. Exhibits and Reports on Form 8-K.
EXHIBIT
NUMBER DESCRIPTION
10.1 Promissory Note to Patrik Carlens, in renewal principal amount of
$ 65,000, dated as of September 27, 1996.
10.2 Promissory Note and Security Agreement to Lawrence E. Steinberg,
in original principal amount of $ 40,000, dated as of October 11,
1996
10.3 Promissory Note to Lawrence E. Steinberg, in original principal
amount of $ 20,000, dated as of October 14, 1996.
10.4 Loan Agreement and Promissory note to Bisbro Investments Company,
Ltd., in original principal amount of $ 100,000, dated
November 12, 1996.
10.5 Warrant Certificate to purchase 600,000 shares of Common Stock
issued to Bisbro Investments Company, Ltd.
27.0 Financial Data Schedule
The Company did not file any reports on Form 8-K during the three months ended
September 30, 1996.
-4-
<PAGE>
SIGNATURES
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.
PREFERRED/TELECOM, INC.
November 19, 1996 \S\Dennis L. Gundy
----------------- ------------------
Date Dennis L. Gundy, President
(Principal Executive Officer)
November 19, 1996 \S\Mary G. Merritt
----------------- ------------------
Date Mary G. Merritt, Secretary/Treasurer
(Principal Financial Officer)
-5-
EXHIBIT 10.1
PROMISSORY NOTE
Date: Effective September 27, 1996
Maker: Preferred/Telecom, Inc.
Maker's Mailing Address: 12655 North Central Expressway
Suite 800
Dallas, Texas 75243
Payee: Patrik Carlens
Place for Payment: c/o Hoge, Evans, Holmes, Carter &
Ledbetter, PLLC
13455 Noel Road
Suite 400
Dallas Texas 75240
Principal Amount: $65,000.00
Annual Interest Rate: 8.5% per annum
Annual Interest Rate: Highest rate allowed by law
on Matured, Unpaid
Amounts
Termsof Payment: All principal and interest due under this Note shall be due
and payable on or before March 27, 1997 (the "Payment Date"). Holder may,
at any time poor to the Payment Date on five days written notice to the
Company or its successor, convert all or part of the unpaid principal
balance hereof into fully paid and nonassessable shares of Common Stock of
the Maker or its successor on the basis of $1.50 per share. The price shall
not be subject to adjustment under any circumstances, including, without
limitation, any stock split, merger of recapitalization. In the event
Holder decides to convert all or part of the principal amount into common
stock, within five days of the receipt of such notice of conversion, Maker
shall surrender this Note to Maker, Maker shall issue to Holder certificate
representing the shares into which the principal has been converted and the
Maker shall execute a new note, if applicable, representing the balance, if
any, of the principal of this Note that remains due, after taking into
effect the conversion of part of the principal hereof.
PROMISSORY NOTE - Page 1
CORPDAL:58180.1 26287-00001
<PAGE>
Maker promises to pay to the order of Payee at the place for payment
and according to the terrns of payment the principal amount plus interest at the
rates stated above. All unpaid amounts shall be due by the final scheduled
payment date. The payment of the principal of this note shall be performable in
Dallas County, Texas; any conversion of this Note into Common Stock of the Maker
shall only occur outside the Unfted States and be made in compliance with
Regulation S promulgated under the Securities Act of 1933, as amended.
If Maker defaults in the payment of this note, then Payee may declare
the unpaid principal balance and earned interest on this note immediately due.
Maker and each surety, endorser, and guarantor waive all demands for payment,
presentations for payment, notices of intention to accelerate maturity, notices
of acceleration of maturity, protests, and notices of protest, to the extent
permitted by law.
If this note is given to an attorney for collection, or if suit is
brought for collection, or if it is collected through probate, bankruptcy, or
other judicial proceeding, then Maker shall pay Payee all costs of collection,
including reasonable attorney's fees and court costs, in addition to other
amounts due.
Interest on the debt evidenced by this note shall not exceed the
maximum amount of nonusurious interest that may be contracted for, taken,
reserved, charged, or received under law; any interest in excess of that maximum
amount shall be credited on the principal of the debt or, if that has been paid,
refunded. On any acceleration or required or permitted prepayment, any such
excess shall be canceled automatically as of the acceleration or prepayment or,
if already paid, credited on the principal of the debt or, if the principal of
the debt has been paid, refunded. This provision overrides other provisions in
this and all other instruments concerning the debt.
This Note is given in renewal and extension of that original 8.5%
Convertible Subordinated Debenture (the "Debenture") dated March 27, 1995, in
the original principal amount of $110,000.00 from Maker to Payee. Reference is
made to the Debenture for all purposes. To the extent the terms and provisions
of this Note conflict with those of the Debenture for all purposes. To the
extent the terms and provisions of this Note conflict with those of the
Debenture, the terms and provisions of this Note shall prevail. This Note is
also given in connection with that certain Settlement Agreement and Offshore
Securities Conversion Agreement, both of which are dated effective September 27,
1996, between Maker and Payee, to which Settlement Agreement and Offshore
Securities Conversion Agreement refer is made for all purposes.
MAKER:
PREFERRED/TELECOM, INC.
By:
Dennis Lee Gundy
President
PROMISSORY NOTE - Page 2
CORPDAL:58180.1 26287-00001
EXHIBIT 10.2
PROMISSORY NOTE
$40,000.00 Dallas, Texas October 11, 1996
FOR VALUE RECEIVED, Preferred/Telecom, Inc., a Delaware corporation
promises to pay to the order of Lawrence E. Steinberg, at 5420 LBJ Freeway,
Suite 540, LB 56, Dallas, Texas 75240, or at such other address as the holder
hereof may designate, the principal sum of Forty Thousand Dollars ($40,000.00),
together with interest on the unpaid principal balance from the date hereof
until this note is paid in full at a rate of 10% per annum.
Principal and interest shall be payable in one installment on November
25, 1996.
All payments received shall be applied first to the payment of accrued
interest and then to the payment of principal.
Maker shall have the right to prepay any and all amounts due hereunder
without penalty for the privilege of doing so.
No payment shall be considered in default unless it is not paid within
ten (10) days after delivery of written notice of nonpayment.
In the event default is made in the payment of this Note, the unpaid
balance on this Note shall at once become due and payable, without notice, at
the option of the Holder. Failure to exercise this option shall not constitute a
waiver of the right to declare the entire principal due and payable at once at
any subsequent time.
If, after default, this Note is placed in the hands of an attorney for
collection, or if collected through judicial proceeding, Maker shall pay, in
addition to the sums referred to above, a reasonable sum as a collection or
attorneys' fee and all other costs incurred by Holder in collection of the
unpaid amounts due hereunder.
This note is secured evidenced by a Security Agreement of even date
herewith between maker and payee.
Each maker, surety, guarantor, endorser or other party liable for the
payment of this Note, in whole or in part, hereby expressly waives presentment
and demand for payment, notice of intention to accelerate maturity, notice of
acceleration of maturity, protest and notice of protest and nonpayment, bringing
of suit and diligence in taking any action to collect sums owing hereon, and
agree that this Note, and any payment hereunder, may be extended from time to
time without in any way affecting such liability.
PROMISSORY NOTE - Page 1
CORPDAL:58181.1 26287-00001
<PAGE>
MAKER:
PREFERRED/TELECOM, INC.
By:
G. Ray Miller
Its: Chairman
PROMISSORY NOTE - Page 2
CORPDAL:58181.1 26287-00001
<PAGE>
SECURITY AGREEMENT
Date: October 11, 1996
A. PARTIES
1. Debtor: Preferred/telecom, Inc.
2. Address: 12655 N. Central Expressway, Suite 800
Dallas, Texas 75243
3. Secured Party: Lawrence E. Steinberg
4. Address: 5420 LBJ Freeway, Suite 450
Dallas, Texas 75240
(Information concerning this security interest may be obtained at the office
of the secured party shown above.)
B. AGREEMENT
Subject to the applicable terms of this security agreement, debtor
grants secured party a security interest in the collateral to secure
the payment of the obligation.
C. OBLIGATION
The following is the obligation secured by this agreement:
1. Debtor's note to secured party, dated October 11, 1996 in the
amount of $40,000, and extension and renewals thereof.
2. All costs incurred by secured party to obtain, preserve, and
enforce this security interest, collect the obligation, and
maintain and preserve the collateral, and including (but not
limited to) taxes, assessments, insurance premium, repairs,
reasonable attorney's fees and legal expenses, rent, storage
costs, and expense of sale.
3. Interest on the above amounts, as agreed between secured party
and debtor, or, if no such agreement, at the maximum rate
permitted by law.
D. COLLATERAL
1. The security is granted in the collateral described on the
page, headed "DESCRIPTION OF COLLATERAL," initialed by the
parties for identification.
2. The collateral includes all substitutes and replacements for,
accessions, attachments, and other additions to it.
3. The collateral will be kept at: 12655 N. Central Expressway,
Suite 800
Dallas, Dallas County, Texas
4. The collateral is classified under (one or more of) the
following Uniform Commercial Code categories:
CORPDAL:58189.1 26287-00001
1
<PAGE>
( ) Consumer goods (personal, family, household) ( ) Equipment (farm use)
( ) Equipment (business use other than farming) ( ) Farm products
( ) Account or contract rights ( ) Inventory
( )Fixture attached or to be attached to land described on the page, headed
"DESCRIPTION OF COLLATERAL"
5. ( ) If this block is checked, this is a purchase money
security interest and debtor will use funds advanced to
purchase the collateral, or secured party may disburse funds
direct to the seller of the collateral.
6. If any of the collateral is accounts or contract rights, the
location of the office where the records concerning them are
kept is:
--------------------------------------------------------------
7. If this security agreement is to be filed as a financing
statement, check the appropriate block if
( ) Proceeds ( ) Products
are covered for financing statement purposes. Coverage of
proceeds for financing statement purposes is not to be
construed as giving debtor any additional rights with respect
to the collateral, and debtor is not authorized to sell,
lease, otherwise transfer, furnish under contracts of service,
manufacture, process, or assemble the collateral except in
accordance with the provisions on the back of this security
agreement.
(ADDITIONAL TERMS ON BACK)
SECURED PARTY: DEBTOR:
By: By:
Lawrence E. Steinberg G. Ray Miller, Chief Executive Officer
ATTEST: (If corporation) ATTEST: (If corporation)
DEBTOR WARRANTS, COVENANTS AND AGREES:
1. TITLE - Except for the security interest hereby granted, Debtor has, or
upon acquisition will have, full fee simple title to Collateral free
from any lien, security interest, encumbrance, or claim, and Debtor
will, at Debtor's cost and expense defined any action which may affect
Secured Party's security interest in or Debtor's title to Collateral.
2. FINANCING STATEMENT - No Financing Statement covering Collateral or any
part thereof or any proceeds thereof is on file in any public office
and at Secured Party's request Debtor will join in executing all
necessary
CORPDAL:58189.1 26287-00001
2
<PAGE>
Financing Statements in forms satisfactory to Secured Party and will
pay the cost of filing same and will further execute all other
necessary instruments deemed by Secured Party to be required and pay
the cost of filing same.
3. SALE, LEASE, OR DISPOSITION OF COLLATERAL - Debtor will not, without
written consent of Secured Party sell, contract to sell, lease,
encumber or dispose of collateral or any interest therein until this
Security Agreement and all debts secured thereby have been fully
satisfied.
4. INSURANCE - Debtor will insure the Collateral with companies acceptable
to Secured Party against such casualties and in such amounts as Secured
Party shall require with a standard mortgage clause in favor of Secured
Party and Secured Party is hereby authorized to collect sums which may
become due under any of said policies and apply same to the obligations
hereby secured.
5. PROTECTION OF COLLATERAL - Debtor will keep the Collateral in good
order and repair and will not waste or destroy Collateral or any part
thereof. Debtor will not use the Collateral in violation of any statute
or ordinance and Secured Party will have the right to examine and
inspect Collateral at any reason time.
6. TAXES - Debtor will pay promptly when due all taxes and assessments
upon the Collateral or for its use and operation.
7. LOCATION AND IDENTIFICATION - Debtor will keep the Collateral separate
and identifiable and at the address shown on the front page hereof and
will not remove the Collateral from said address without Secured
Party's written consent.
8. ADDITIONAL SECURITY INTEREST - Debtor hereby grants to Secured Party a
security interest in and to all proceeds, increases, substitutions,
replacements, additions, and accessions to the Collateral. This
provision will not be construed to mean that Debtor is authorized to
sell, lease, or dispose of Collateral without Secured Party's consent.
9. FUTURE INDEBTEDNESS - The security interest hereby granted secures the
indebtedness described on the front page hereof and all other
obligations of Debtor to Secured Party, direct or indirect, absolute or
contingent, due or to become due, whether existing or hereafter
arising.
10. Intentionally deleted.
11. REIMBURSEMENT OF EXPENSES - At Secured Party's option, Secured Party
may discharge taxes, lien, interest, or perform or cause to be
performed for and in behalf of Debtor any actions and conditions,
obligations or covenants which Debtor has failed or refused to perform
and may pay for the repair, maintenance and preservation of Collateral
and all sums so expended, including (but not limited to) attorney's
fees, court costs, agent's fees, or commissions, or any other costs or
expenses shall bear interest from the date of payment at the rate of
10% per annum and shall be payable at the place designated in the above
described note and shall be secured by this Security Agreement.
12. PAYMENT - Debtor will pay the note secured by this Security Agreement
or any renewal or extension thereof and any other indebtedness hereby
secured in accordance with the terms and provisions thereof and will
repay immediately all sums expended by Secured Party in accordance with
the terms and provisions of this Security Agreement.
13. CHANGE OF RESIDENCE OR PLACE OF BUSINESS - Debtor will promptly notify
Secured Party of any change of Debtor's residence, chief place of
business or place where records concerning accounts and contract rights
are kept.
14. ATTORNEY-IN-FACT -Debtor hereby appoints Secured Party Debtor's
Attorney-in-fact to do any and every act which Debtor is obligated by
this Security Agreement to do and to exercise all rights of Debtor in
Collateral and to make collections and to execute any and all papers
and instruments and to do all other things necessary to preserve and
protect Collateral and to protect Secured Party's security interest in
said Collateral.
15. TIME WAIVER - Debtor agrees that in performing any act under this
Security Agreement and the note secured thereby that time shall be of
the essence and that Secured Party's acceptance of partial or
delinquent payments, or failure of Secured Party to exercise any right
or remedy shall not be a waiver of any obligation of Debtor or right of
Secured Party or constitute a waiver of any other similar default
subsequently occurring.
16. DEFAULT - Debtor shall be in default under this Security Agreement upon
the happening of any of the following events or conditions:
a. Default in the payment or performance of any note obligation,
covenant or liability contained or referred to herein after
expiration of any cure period provided in the Note.
CORPDAL:58189.1 26287-00001
3
<PAGE>
b. Any warranty, representation or statement made or furnished to
Secured Party by or on behalf of Debtor proves to have been false
in any material respect when made or furnished.
c. Any event which results in the acceleration of the maturity of the
indebtedness of Debtor or others under any indenture, agreement or
undertaking.
d. Loss, theft, substantial damages, destruction, sale or encumbrance
to or of any of the Collateral, or the making of any levy, seizure
or attachment thereof or thereon.
e. Substantial change in any fact warranted or represented in this
agreement.
f. Intentionally deleted.
g. Merger or consolidation of Debtor with another.
h. Death, dissolution, termination of existence, insolvency, business
failure, appointment of a receiver for any part of the Collateral,
assignment for the benefit of creditors or the commencement of any
proceeding under any bankruptcy or insolvency law by or against
debtor or any guarantor or surety for Debtor.
i. Filing any financing statement with regard to the Collateral,
other than relating to the security interest.
j. Intentionally deleted.
17. REMEDIES - Upon the occurrence of any such event of default, and at any
time thereafter Secured Party may declare all obligations secured
hereby immediately due and payable and may proceed to enforce payment
of the same and exercise any and all of the rights and remedies
provided by the Uniform Commercial Code as well as all other rights and
remedies possessed by Secured Party. Secured Party may require Debtor
to assemble the Collateral and make it available to Secured Party at
any place to be designated by Secured Party which is reasonably
convenient to both parties. Unless the Collateral is perishable or
threatens to decline speedily in value or is of a type customarily sold
on a recognized market, Secured Party will give Debtor reasonable
notice of the time and place of any public sale thereof or of the time
after which any private sale or any other intended disposition thereof
is to be made. The requirements of reasonable notice shall be met
if such notice is mailed, postage prepaid, to the address of Debtor
shown at the beginning of this Security Agreement at least five (5)
days before the time of the sale or disposition. Expenses of re-taking,
holding, preparing for sale, selling or the like shall include Secured
Party's reasonable attorney's fees and legal expenses.
18. MISCELLANEOUS - The rights and privileges of Secured Party shall inure
to its successors and assigns. All representations, warranties and
agreements of Debtor are joint and several if Debtor is more than one
and shall bind Debtor's personal representatives, heirs, successors and
assigns. Definitions in the Uniform Commercial Code apply to words and
phrases in this Agreement. If Code definitions conflict, Article 9
definitions apply. Debtor waives presentment, demand, notice of
dishonor, protest, and extension of time without notice as to any
instruments and chattel paper in the Collateral, if any.
DESCRIPTION OF COLLATERAL
NOTE: The following information must be included:
1. For crops, oil, gas or other minerals to e extracted, timber to be cut,
and fixtures (goods to be affixed to real estate), A DESCRIPTION OF THE
REAL ESTATE concerned and the name of the record owner.
2. If Debtor's residence is outside of the State: give location of
consumer goods, farm products and farm equipment, and, if Collateral
includes accounts arising from the sale of farm products, give location
of products sold.
3. If this is a purchase money security interest in farm equipment, give
purchase price of each item.
CORPDAL:58189.1 26287-00001
4
EXHIBIT 10.3
PROMISSORY NOTE
$20,000.00 Dallas, Texas October 14, 1996
FOR VALUE RECEIVED, Preferred/Telecom, Inc., a Delaware corporation
promises to pay to the order of Lawrence E. Steinberg, at 5420 LBJ Freeway,
Suite 540, LB 56, Dallas, Texas 75240, or at such other address as the holder
hereof may designate, the principal sum of Twenty Thousand Dollars ($20,000.00),
together with interest on the unpaid principal balance from the date hereof
until this note is paid in full at a rate of 10% per annum.
Principal and interest shall be payable in one installment on November
25, 1996.
All payments received shall be applied first to the payment of accrued
interest and then to the payment of principal.
Maker shall have the right to prepay any and all amounts due hereunder
without penalty for the privilege of doing so.
No payment shall be considered in default unless it is not paid within
ten (10) days after delivery of written notice of nonpayment.
In the event default is made in the payment of this Note, the unpaid
balance on this Note shall at once become due and payable, without notice, at
the option of the Holder. Failure to exercise this option shall not constitute a
waiver of the right to declare the entire principal due and payable at once at
any subsequent time.
If, after default, this Note is placed in the hands of an attorney for
collection, or if collected through judicial proceeding, Maker shall pay, in
addition to the sums referred to above, a reasonable sum as a collection or
attorneys' fee and all other costs incurred by Holder in collection of the
unpaid amounts due hereunder.
This note is secured evidenced by a security interest granted under a
Security Agreement of even date herewith between maker and payee.
Each maker, surety, guarantor, endorser or other party liable for the
payment of this Note, in whole or in part, hereby expressly waives presentment
and demand for payment, notice of intention to accelerate maturity, notice of
acceleration of maturity, protest and notice of protest and nonpayment, bringing
of suit and diligence in taking any action to collect sums owing hereon, and
agree that this Note, and any payment hereunder, may be extended from time to
time without in any way affecting such liability.
PROMISSORY NOTE - Page 1
CORPDAL:58183.1 26287-00001
<PAGE>
MAKER:
PREFERRED/TELECOM, INC.
By:
G. Ray Miller
Its: Chairman
PROMISSORY NOTE - Page 2
CORPDAL:58183.1 26287-00001
EXHIBIT 10.4
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement"), dated this 11th day of November
1996, by and between Bisbro Investments Company Ltd., with an address of P.O.
Box 3216, Safat 13033, Kuwait City, Kuwait, and maintains offices in care of
T.R. Winston & Company Incorporated, 1999 Avenue of the Stars, Suite 1950, Los
Angeles, CA 90067 ("Bisbro" or "Lender") and Preferred Telecom, Inc., a publicly
owned Delaware corporation with principal offices at 12655 N. Central
Expressway, Suite 800, Dallas, Texas 75243 ("Preferred" or "Borrower"). Lender
and Preferred are sometimes hereinafter collectively referred to as the
"Parties."
WITNESSETH:
WHEREAS, Borrower desires to borrow up to $150,000 from Leader for the
business purposes hereinafter set forth and in anticipation of a fully defined
business plan which it is formulating with the cooperation and assistance of
First Capital Financial Services Corporation; and
WHEREAS, Lender is willing to lend up to $150,000 to Borrower on the
terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein continued, the receipt and adequacy of which are
hereby jointly and severally acknowledged and accepted by Lender and Borrower,
the parties hereby agree as follows:
1. GENERAL DEFINITIONS. When used herein, the following have the
following meanings:
(a) "Affiliates" shall mean any Person (as that term is hereinafter
defined) directly or indirectly controlled by or under common control with
Borrower. For the purpose of this definition, "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of
management and policies of the Person, whether through the ownership of voting
securities, by contract or otherwise.
(b) "Business Day" shall mean a day other than a Saturday, Sunday or
legal holiday on which banking institutions are authorized or required by law to
close.
(c) "Closing" shall mean the date, time and place where Lender shall
advance the Loan proceeds to Borrower in exchange for the Note (as that term is
hereinafter defined).
(d) "Default" shall mean the occurrence or existence of any one or
more of the events described in Section 7.1 of this Agreement.
(e) "Governmental Authority" shall mean any federal, provincial, state,
local, foreign or other court, administrative agency or commission, other
governmental authority or regulatory body.
CORPDAL:58186.1 26287-00001
1
<PAGE>
(f) "Lien" shall mean any lien, mortgage, pledge, security interest,
right of first refusal or other limitation on transfer or other encumbrance.
(g) "Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, entity, party, or, government (whether national, provincial,
federal, state, county, city, municipal or otherwise, including, without
limitation, any instrumentality, division, agency, body or department thereof)
or any quasi governmental entity formed pursuant to any authorization by any of
the above entities.
(h) "Subsidiary" shall mean with respect to any Person (a) any
corporation of which the outstanding stock having at least a majority of votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or by such
Person and its Subsidiaries or (b) any entity other than a corporation of which
at least a majority of voting or policy directing interest, under ordinary
circumstances, is at the time, directly or indirectly, owned or controlled by
such Person or by such Person and its Subsidiaries.
2. TERMS OF THE LOAN.
2.1 The Loan. Lender hereby covenants and agrees to lend to Borrower,
and Borrower hereby accepts from Lender, such sums up to a maximum of One
Hundred Fifty Thousand ($150,000) United States Dollars. The Loan shall be
evidenced by a $150,000, 12% Secured Promissory Note in the form annexed hereto
as Exhibit "A" (the text of which is hereby incorporated herein by this
reference) duly executed by Borrower, and delivered to Lender at the Closing
(the "Note"), and secured by a Collateral Assignment of Media Credits in the
form annexed hereto as Exhibit "B" (hereby incorporated by reference) and duly
executed by Borrower. Upon execution of this Agreement, Borrower shall
immediately be funded by Lender by wire transfer to Borrower's banking
institution to benefit Preferred/Telecom, Inc.) with One Hundred Thousand
Dollars ($100,000). Lender further agrees to make available to Borrower an
additional Fifty Thousand Dollars ($50,000) on December 1, 1996 by the same wire
transfer method, unless (a) Borrower is affected by unforseen circumstances
which materially affect its requirement for this portion of the Loan; or (b)
Borrower's business is materially affected by unforseen circumstances which
affect its ability to repay the Loan; or (c) Borrower defaults pursuant to
Section 7.1 of this Agreement. If Borrower draws down additional sums against
the Loan subject to the terms of this Agreement, Borrower shall execute and
deliver additional notes to Lender in form and substance exactly the same as the
Note, but for the amount and the date of execution (the "Additional Notes), the
maturity date and other terms and conditions remaining the same. Any and all
Additional Notes shall be annexed to this Agreement and the same, if and when
annexed, are hereby incorporated herein by reference. The Note and the
Additional Notes are hereinafter collectively referred to as the "Notes".
2.2 Interest Rate. Borrower hereby agrees to pay to Lender and
Lender hereby accepts as interest on the Loan an amount equal to twelve (12%)
percent per annum, payable upon
CORPDAL:58186.1 26287-00001
2
<PAGE>
maturity of the Loan as set forth below under Section 2.4 Term. Interest shall
be computed on the basis of a year of 360 days and actual days elapsed. From and
after the occurrence of a Default under this Agreement, and for so long, as the
Default is continuing, the Loan shall bear interest at a rate equal to eighteen
(18%) per annum computed as provided above and payable on demand. All sums paid,
or agreed to be paid by Borrower which either are or may be construed to be
compensation for the making of the Loan shall, to the extent permitted by
applicable law, be amortized, prorated, spread and allocated throughout the full
term of this Agreement or until the Loan is paid in full.
2.3 Options. As further consideration for the Loan, Borrower hereby
grants Lender or its assignee the option to purchase up to 300,000 shares of
Borrower's common stock, at $1.00 per share post-split (based on an anticipated
2:1 reverse split), for a period of three (3) years from the date of this
Agreement, as set forth on the attached Option Agreement, marked Exhibit "C" and
incorporated herein by this reference.
2.4 Term. This Agreement shall remain in effect until the Loan is fully
repaid. The Loan shall mature and be repaid upon, the earlier of: a) ninety (90)
days from the Closing date hereof or b) the date of the funding of Borrower's
anticipated private placement or otherwise is reasonably deemed financially
capable of repaying the Loan. Borrower shall have the right to terminate this
Agreement at any time by prepaying the Loan without penalty, however, any
interest or other incentives such as the Options paid to the date of prepayment
shall not be affected (i.e., they shall not be refunded).
Upon full repayment of the Loan, Lender shall return to Borrower,
within ten (10) business days, all material documents including the Media Credit
as described in the Collateral Assignment of Media Credit and the Prepaid
Purchase Order.
At the option of Lender, all rights of Borrower under this Agreement
may be terminated by Lender upon the occurrence of a Default as provided in
Section 7.1 of this Agreement. If this Agreement is terminated by Lender based
upon such a default, then upon the effective date of termination, the entire
unpaid principal amount of the Loan shall become immediately due and payable
without further notice or demand. Notwithstanding any termination, and until all
sums due hereunder shall have been paid and satisfied, Borrower shall pay
accrued interest to Lender beginning on the lst of the month following the 90
day maturity date, and continue such payments on or before the lst of each month
thereafter, and Lender shall continue to have all of the other rights and
remedies set forth by law and in this Agreement.
2.5 Exercise of Prepayment Option. Borrower shall have the exclusive
right and option at any time and from time to time prior to the end of the Term
to prepay, without penalty, all or any portion of the Loan (the "Prepayment
Option"), as set forth in Section 2.4 above. The Prepayment Option shall be
exercisable by Borrower giving Lender twenty (20) days advance written notice of
its intent to exercise the Prepayment Option (the "Prepayment Notice"). The
Prepayment Notice shall specify a closing date, time and place not less than
twenty (20) days thereafter where the Loan shall be repaid and the Agreement
terminated (the "Prepayment Closing"). At the Prepayment Closing, Borrower shall
deliver to Lender a certified, cashier's or
CORPDAL:58186.1 26287-00001
3
<PAGE>
bank check payable to the order of Lender in the amount of the entire unpaid
principal and accrued interest due under the Notes and representing the Loan
against satisfaction documents including a form of general release to Borrower
duly executed by Lender.
2.6 Transfer of the Notes. The Notes shall not be sold, assigned,
pledged or hypothecated by Lender without the prior written consent of Borrower,
which consent shall not be unreasonably withheld.
3. UTILIZATION OF THE LOAN PROCEEDS
3.1 Borrower hereby agrees, acknowledges and accepts that Borrower
shall use the proceeds from the Loan: (i) to meet Borrower's general minimum
operating obligations and expenses in accordance with the Application of Loan
Proceeds annexed hereto as Exhibit "D" and hereby incorporated herein by this
reference. Any deviation from said use shall require the prior written approval
of First Capital Financial Services Corporation, which approval shall not
unreasonably be withheld.
4. COLLATERAL.
4.1 Security Interest First Lien. To secure the payment to Lender of
the interest and principal on the Loan, Borrower hereby grants to Lender and
Lender hereby accepts, the media credit as described in the Collateral
Assignment of Media Credit and the Prepaid Purchase Order, attached together
hereto as Exhibit "B" and incorporated herein by this reference.
4.2 Deposit of the Collateral. Borrower shall deposit with Lender the
Prepaid Purchase Order for Media Credit upon the closing of this Agreement, the
title to which shall be transferred to Lender upon default of the terms of the
Notes in accordance with the Collateral Assignment of Media Credits as set forth
above.
4.3 Security Documents. At Lender's request, Borrower shall execute
and/or deliver to Lender, at any time or times hereafter, all security documents
including but not limited to UCC-1 financing statements that Lender may
reasonably request, in form and substance acceptable to Lender to evidence
Lender's security interest in the Collateral, and Borrower shall pay the costs
of any recording or filing of the same. Borrower will cooperate with and deliver
any security documents to such persons as Lender, in its sole discretion may
deem appropriate. Borrower hereby specifically agrees and consents that a copy
of this Agreement or of a financing statement is sufficient as a financing
statement as may be filed with any governmental clerk as evidence of Lender's
security interest in the Collateral.
5. REPRESENTATIONS AND WARRANTIES OF BORROWER
Borrower hereby represents and warrants to Lender as follows:
(a) Authorization, Validity and Enforceability of this Agreement.
Borrower has the power and authority (corporate and otherwise) to
execute, deliver and perform this Agreement.
CORPDAL:58186.1 26287-00001
4
<PAGE>
Borrower has takes all necessary corporate action to authorize its execution,
delivery and performance of this Agreement. The Board of Directors of Borrower
(the "Board") has approved this Agreement, and the transactions contemplated
hereby and herein. This Agreement has been duly executed and delivered by
Borrower and constitutes the legal, valid and binding obligation of Borrower, in
accordance with its terms, subject to bankruptcy, insolvency and other similar
laws affecting the enforcement of creditors' rights generally and the
availability of injunctive relief and other equitable remedies. Borrower's
execution, delivery and performance of this Agreement does not conflict with,
constitute a violation or breach of, constitute a default, or give rise to any
right of termination or acceleration of any right or obligation of Borrower
under any other outstanding loans or agreements, or result in the creation or
imposition of any Lien accept for the First Lien and security interest granted
to Lender with respect to the Collateral described herein.
(b) Organization and Qualification. Borrower is duly incorporated,
validly existing and in good standing under the laws of its jurisdiction of
incorporation and is qualified to do business and is in good standing in every
jurisdiction where the failure to be so qualified and in good standing would
have a material adverse effect on its business.
(c) Consents and Approvals. No consent, approval, authorization,
license or order of registration or filing with, or notice to, any Governmental
Authority or other third party (such consents, approvals, authorizations,
licenses, orders, registrations, filings or notices being referred to
collectively as "Consents") is necessary to be obtained, made or given by
Borrower in connection with the execution, delivery and performance by Borrower
of this Agreement or the consummation by Borrower of the transactions
contemplated hereunder.
(d) Title to Media Credit. On the date and to the extent Borrower
delivers the Media Credit comprising the Collateral to the Escrow Agent,
Borrower will own the same free and clear of any and all liens, claims or
encumbrance of any nature or description. Delivery of the Prepaid Purchase Order
representing the Collateral pursuant to the Escrow Agreement will convey to
Lender and to the Escrow Agent good and valid title to such Credit, free and
clear of any Liens, and will entitle Lender to all the rights of a holder of
such Credit, subject in each case to the restrictions and obligations set forth
in the Media Purchase Agreement between Borrower and Proxhill Marketing Ltd.
dated June 3, 1996.
(e) Brokers. No broker, finder, investment banker or other intermediary
has been retained by or is authorized to act on behalf of Borrower which might
be entitled to any brokerage, finder's or other fee or commission from Lender or
any of its affiliates in connection with the transactions contemplated by this
Agreement.
(f) Disclosure of Actual and Contingent Liabilities. No other actual or
contingent liabilities exist or other legal actions of any kind or nature are
pending or anticipated, with the exception of those contingent liabilities and
pending actions set forth on Exhibit E, attached and incorporated herein by this
reference.
6. REPRESENTATIONS AND WARRANTIES OF LENDER
CORPDAL:58186.1 26287-00001
5
<PAGE>
6.1 Consents. No consents of governmental and other regulatory
agencies, foreign or domestic, or of other parties are required to be received
by or on the part of Lender to enable it to enter into and carry out this
Agreement in all material respects.
6.2 Binding Nature of Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly reviewed and approved by Lender Board of Directors and no other proceedings
on the part of Lender are necessary to authorize the execution and delivery of
this Agreement and the consummation of the transactions contemplated herein.
6.3 Litigation Compliance with Law. Lender hereby warrants that it is
not aware of any litigation, pending or other, that would prohibit it from
entering into this Agreement making the Loan or implementing the same as
provided herein.
6.4 Brokers. With the exception of First Capital Investments, Inc.,
neither Lender nor any of its affiliates have engaged, consented to or
authorized any broker, finder, investment banker or other third party to act on
his behalf, directly or indirectly, as a broker or finder in connection with the
transactions contemplated by this Agreement.
6.5 Available Information. By virtue of its execution of this
Agreement, Lender hereby acknowledges and accepts that it has been furnished
with any and all information concerning the business and financial condition of
Borrower and each entity with regard to the Collateral, its corporate status as
well as all other related matters, which Lender's management deemed reasonable
and/or necessary to its decision to proceed with the Loan.
7. DEFAULT: RIGHTS AND REMEDIES ON DEFAULT.
7.1 Default. The occurrence of any one or more of the following
events shall constitute a Default;
(a) Borrower's failure to repay the Loan in accordance with the
terms and condition of the Notes; or
(b) Borrower's failure or neglect to perform, keep or observe any other
term, provision, condition or covenant contained in this Agreement which is
required to be performed, kept or observed by Borrower and the same is not cured
to Lender's satisfaction within ten (10) days after Lender gives Borrower notice
identifying such event; or
(c) An event shall occur, and any applicable cure period shall have
expired, under any agreement, document or instrument, other than this Agreement,
now or hereafter existing, to which Borrower is a party, such that the same
shall constitute a default or breach under such agreement, document or
instrument, but only if that default or breach has a material adverse effect
upon Borrower's ability to repay the Loan; or
CORPDAL:58186.1 26287-00001
6
<PAGE>
(d) The Collateral or any of Borrower's other assets are attached,
seized, levied upon or subjected to a writ or distress warrant, or come within
the possession of any receiver, trustee, custodian or assignee for the benefit
of creditors and the same is not cured within thirty (30) days thereafter, an
application is made by any individual, firm or entity other than Borrower for
the appointment of a receiver, trustee, or custodian for the Collateral or any
of Borrower's other assets and the same is not dismissed within thirty (30) days
after the application therefor; or
(e) A petition in bankruptcy is filed against Borrower or any guarantor
of its liabilities; Borrower or any guarantor makes an authorized assignment for
the benefit of its creditors; a receiver, receiver-manager or trustee for
Borrower is appointed; any case or proceeding is filed by or against Borrower
for its dissolution, liquidation or termination; Borrower ceases to conduct its
business as now conducted or is enjoined, restrained or in any way prevented by
court order from conducting all or any material part of its business affairs; or
(f) A notice of lien, levy or assessment is filed of record with
respect to all or any substantial portion of Borrower's assets by the United
States, or by any state, county, municipal, provincial, federal or other
government agency, or any taxes or debts owing to any of the foregoing become a
lien or encumbrance upon the Collateral or any of Borrower's assets and such
lien or encumbrance is not released within thirty (30) days after its creation;
or
(g) Judgment is rendered against Borrower on an uninsured claim of
$50,000.00 or more and Borrower fails either to commence appropriate proceedings
to appeal such judgement within the applicable appeal period or, after such
appeal is filed, Borrower fails to diligently prosecute such appeal or such
appeal is denied.
7.2 Acceleration of the Liabilities. Upon and after the occurrence of a
Default, all of the monies due and payable under the Loan may, at the option of
Lender and without demand, notice of legal process of any kind (including,
without limitation, notice of acceleration, notice of intent to acceleration,
notice of intent to accelerate or notice of intent to demand), be declared, and
immediately shall become due and payable; provided, however, that upon the
occurrence of a Default under Sections 7.1 hereof, all of the monies due any
payable under the Loan shall automatically and immediately become due and
payable without demand, notice or legal process of any kind.
7.3 Remedies. Upon and after the occurrence of a Default, Lender
shall have the following rights and remedies:
(a) All of the rights and remedies of a secured party under the Uniform
Commercial Code, or other applicable law, all of which rights and remedies shall
be cumulative, and none exclusive, to the extent permitted by law, in addition
to any other rights and remedies contained in the Agreement;
(b) The right to sell, use, or to otherwise dispose of the Collateral
as set forth in the Collateral Assignment of Media Credits (Exhibit "B"). The
proceeds realized from the sale of any Collateral shall be applied first to the
reasonable costs and expenses attendant upon such sale;
CORPDAL:58186.1 26287-00001
7
<PAGE>
second to interest due upon the Loan; and third to the principal of the Loan. If
any deficiency shall arise, Borrower shall remain liable to Lender therefor.
(c) An additional 20% administrative transaction fee in order to cover
Lender's costs of disposition of the Collateral upon Default, which fee the
Parties agree is a reasonable administrative disposition cost.
7.4 Notice. Any notice required to be given by Lender of a sale, lease,
other disposition of the Collateral or any other intended action by Lender,
which is deposited in the United States mail, postage prepaid and duly addressed
to Borrower, at the address set forth in this Agreement, twenty (20) days prior
to such proposed action, shall constitute commercially reasonable and fair
notice thereof to Borrower.
8. CONDITIONS TO CLOSING
8.1 Mutual Conditions to Closing. The obligation of Lender to make the
Loan to Borrower at the Closing and the obligation of Borrower to issue and
deliver the Notes and related document and give the Assignment of Collateral to
Lender at the Closing, and the obligations of the parties to otherwise perform
their respective obligations hereunder shall be subject to the satisfaction of
the following mutual conditions on or prior to the Closing:
(a) No order, decree, judgment or injunction shall have been issued by
any Governmental Authority of competent jurisdiction and shall be in effect
which restrains or prohibits the consummation of the Loan and/or the issuance of
the first Lien; and
(b) No material litigation shall have commenced against Borrower in any
court of competent jurisdiction which, in the reasonable opinion of Lender's
litigation counsel shall jeopardize the consummation of the Loan and/or the
issuance of the Assignment.
8.2 Additional Conditions to the Obligations of Lender. The obligation
of Lender to make the Loan shall be subject to the satisfaction of the following
conditions which Borrower hereby covenants to perform (in addition to those
specified in Section 8.1) on or prior to the Closing:
(a) The execution and delivery to Lender of the Notes in the
initial amount of $100,000;
(b) The execution and delivery to Lender of the Notes in the
subsequent amount of $50,000;
(c) The execution and delivery of the Assignment, and related
exhibits and documents;
8.3 Transaction Fee. A transaction fee payable to First Capital
Investments, Inc. in the amount of ten percent (10%) of the total sum conferred
to Borrower shall be deferred until the Closing of the anticipated subsequent
financing as set forth in Section 2.4 Term.
CORPDAL:58186.1 26287-00001
8
<PAGE>
9. TERMINATION
9.1 Termination. This Agreement may be terminated at any time
prior to the Closing
-----------
Date:
(a) by mutual agreement in writing of Borrower and Lender; and
(b) by either Borrower or Lender by written notice to the other party
(i) if the Closing shall not have occurred by November 11, 1996, provided,
however, that the right to terminate this Agreement pursuant to clause (i) shall
not be available to any party whose failure to fulfill any of its obligations
under this Agreement resulted in the Closing not occurring by such date; or (ii)
if any Governmental Authority of competent jurisdiction shall have issued an
injunction, decree or order or taken any other action permanently enjoining,
restraining or otherwise prohibiting the Closing and such injunction, decree or
order, or other action shall have become final and nonappealable.
9.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 9.1, this Agreement shall thereafter become void
and have no effect, and no party hereto shall have any liability to the other
party hereto in respect thereof, except that nothing herein will relieve any
party from liability for any breach of any of its representation, warranties,
covenants or agreements contained in this Agreement prior to such termination.
10. MISCELLANEOUS
10.1 Representations and Warranties to Survive Closing. All
representations and warranties contained herein or in any schedule or
certificate delivered pursuant hereto or any writing signed by the parties on
the date hereof she survive consummation of the transactions contemplated under
this Agreement, except that each representation and warranty shall expire on the
earlier of (i) one year from the date that the party for whose benefit such
representation or warranty is made his actual knowledge of the inaccuracy of any
representation or the breach of any warranty and (ii) the first anniversary of
the Closing Date.
10.2 Entire Agreement; Severability. This Agreement contains the entire
understanding of the parties with respect to the subject matter hereof and
thereof and supersedes all prior agreements and understandings, oral or written
with respect to such matters and any writing signed by the parties on the date
hereof. There are no representations and warranties other than those set forth
herein. This Agreement shall be binding upon the respective successors of the
parties, but the restrictions contained herein applicable to Lender shall not be
binding on any transferee of the Conversion Shares unless such transferee is
required by the terms hereof to execute and deliver a written instrument
agreeing to be so bound. In the event that any provision of this Agreement shall
be declared unenforceable by a court of competent jurisdiction, such provision,
to the extent declared unenforceable, shall be stricken and the remainder of
this Agreement shall remain binding on the parties hereto. However, in the event
any such provision shall be declared unenforceable due to its scope, breadth or
duration, then it shall be modified to
CORPDAL:58186.1 26287-00001
9
<PAGE>
the scope, breadth or duration permitted by law and shall continue to be fully
enforceable as so modified.
10.3 Amendments; Waivers. This Agreement may not be modified or amended
except by a written instrument signed by authorized representatives of each
party hereto and referring specifically to this Agreement. Any term, provision
or condition of this Agreement may be waived in writing at any time by the party
which is entitled to the benefit thereof.
10.4 Notification of Certain Matters. Each party (the "First Party")
shall give prompt notice to the other party of (i) the occurrence or
nonoccurrence of any event, the occurrence of nonoccurrence of which would be
likely to cause any representation or warranty of the First Party contained in
this Agreement to be untrue or inaccurate in any material respect at or prior to
the Closing and (ii) any material failure of the First Party to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
Section 10.6 shall not limit or otherwise affect the remedies available
hereunder to the other party.
10.5 Public Announcements. Each party hereto agrees that it will not
disseminate any press release or public announcement concerning the transaction
contemplated hereby to any party, without the other party's prior written
consent which shall not be unreasonably withheld; except that Borrower will in
any event have the right to issue any such reports, statements or releases upon
advice of its counsel that such issuance is required in order to comply with the
requirements of the federal laws or the requirements of any applicable
regulatory agency. Each party agrees to cause any of its advisors, whether
financial, accounting, legal or otherwise, not to disseminate any of such
information to any other party without the other party's prior written which
shall not be unreasonably withheld.
10.6 Notices. Unless otherwise specifically provided for elsewhere in
this Agreement, any notices and other communications required to be given
pursuant to this Agreement shall be in writing and shall be effective upon
delivery by hand or upon receipt if sent by mail (registered or certified mail,
postage prepaid, return receipt requested) or upon transmission if sent by telex
or facsimile (with request for confirmation of receipt in a manner customary for
communications of such respective type), except that if notice is received by
telex or facsimile after 5:00 P.M. local time on a business day at the place of
receipt, it shall be effective as of the following business day.
10.7 Counterparts. This Agreement may be executed in two or more
counterparts by facsimile which together shall be considered one and the same
Agreement and each of which shall be deemed an original.
10.8 Governing Law; Consent to Jurisdiction.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of Colorado.
CORPDAL:58186.1 26287-00001
10
<PAGE>
(b) Any action or proceeding seeking to enforce any provision of, or
based on any arising out of this Agreement must be brought against any of the
parties in the United States District Court for the applicable District in
Colorado, and each of the parties hereby irrevocably submits to the jurisdiction
of such court in any such action or proceeding and waives any objection to venue
laid therein. Furthermore, Borrower and Lender hereby irrevocably consent to the
service of any and all process in any such action, suit or proceeding by the
mailing of copies of such process to them in the manner specified in Section
10.6 for the giving of notices. Nothing in this section shall affect the right
of Borrower or Lender to serve legal process in any other manner permitted by
law.
10.9 Specific Performance. This Agreement is for the benefit of
the parties hereto and is not intended to confer upon any other Person any
rights or remedies hereunder.
10.10 Specific Performance. Each of the parties hereto agrees that any
breach by it of any provision of this Agreement would irreparably injure the
other party and that money damages would be an inadequate remedy therefor.
Accordingly, each of the parties hereto agrees that the other shall be entitled
to one or more injunctions enjoining any such breach or requiring specific
performance of this Agreement and consents to the entry thereof this being in
addition to any other remedy to which the non-breaching party is entitled at law
or equity. The prevailing party in any action to enforce the terms herein shall
be entitled to in related costs and attorney fees.
10.11 Captions. The captions herein are included for convenience of
reference and shall be ignored in the construction or interpretation hereof.
10.12 Access and Information. Each party hereto shall afford to other
party's accountants, counsel and other duly authorized representatives access,
during normal business hours and on reasonable advance notice, during the period
after execution of this Agreement and prior to the Closing, the right to make
copies of all properties, books, contracts, commitments and records (including
but not limited to tax returns). In addition, each party shall furnish promptly
to the other party: a copy of each report, schedule and other document file
received by it pursuant to the requirements of Canadian, provincial, federal or
state securities laws; a copy of any summons, complaint, petition, notice of
hearing or notice of the commencement of any governmental or administrative
investigation; and all other information concerning its business, properties and
personnel as may reasonably be requested; provided, however, that no
investigation pursuant to this section shall affect any representations or
warranties or the conditions to the obligations of the parties to consummate a
transaction referenced herein.
10.13 Expenses. Regardless of whether or not the transaction
contemplated herein is consummated, each party shall promptly pay, shall be
responsible for, and account for on its respective financial statements all
costs and expenses incurred by it in connection with this Agreement.
CORPDAL:58186.1 26287-00001
11
<PAGE>
IN WITNESS WHEREOF, each of the authorized parties have executed this
Agreement on the date first written above.
Preferred Telecom, Inc., Borrower
By:
G. Ray Miller, Chairman, CEO
By:
Dennis L. Gundy, President
ATTEST:
By:
Mary G. Merritt, Secretary
Bisbro Investments Company, Ltd., Lender
By:
Bader Al-Rezaiban
ATTEST:
By:
, Secretary
CORPDAL:58186.1 26287-00001
12
<PAGE>
SECURED PROMISSORY NOTE
$100,000.00 Dallas, Texas
FOR VALUE RECEIVED, Preferred Telecom, Inc., a publicly-held owned
Delaware corporation with offices at 12655 N. Central Expressway, Suite 800,
Dallas, Texas 75243 (hereinafter referred to as the "Maker") promises to pay to
the order of Bisbro Investments Company Ltd., with an address of P.O. Box 3216,
Safat 13033, Kuwait City, Kuwait, and maintains offices in care of T.R. Winston
& Company Incorporated, 1999 Avenue of the Stars, Suite 1950, Los Angeles, CA
90067 (hereinafter referred to as the "Holder"), in lawful money of the United
States, the principal sum of One Hundred Thousand and 00/100 ($100,000) Dollars
with interest at the rate of twelve percent (12%) per annum and payable ninety
(90) days following the execution and delivery of the loan proceeds from Lender
to Borrower, unless sooner repaid as provided in a Loan Agreement of even date
herewith between the Maker and the Holder to which this Note is attached as an
exhibit, the text of which is hereby incorporated herein by reference (the "Loan
Agreement"). The full principal amount of this Note shall be due and payable at
the offices of the Holder within ninety (90) days of the execufion and delivery
of this Note (the "Due Date").
1. DEFINITION OF SECURITY USED AS COLLATERAL. Maker acknowledges this
Note as a general corporate obligation secured by the Collateral. As used in
this Note, the term "Collateral" shall mean the Prepaid Purchase Order
representing the media credit owned by Maker as shall be conveyed upon default
of this Note by the Collateral Assignment of Media Credit as set forth on
Exhibit "B" annexed to the Loan Agreement and hereby incorporated herein by
reference. The Collateral shall either be registered in of the name of the Maker
or have been duly assigned to the Maker, and owned by the Maker free and clear
of any and all claims or encumbrances of any nature or description.
2. WAIVER OF PRESENTMENT, ETC. The Maker ofthisnote hereby waives
presentment for payment, demand, notice of nonpayment and dishonor, protest and
notice of protest; and waives trial by jury in any action or proceeding arising
on, out of, under or by reason of this Note. The rights and remedies of the
Holder under this Note shall be deemed cumulative, and exercise of any right or
remedy shall not be regarded as barring any other remedy or remedies. The
institution of any action to recover or the recovery of any portion of the
indebtedness evidenced by this Note shall not be deemed a waiver of any other
right of the Holder hereof. If applicable, in the event that any installment of
the principal and accrued interest shall not be paid when due, and shall remain
unpaid for a period of twenty (20) days or more, then a late charge of two (2%)
percent of the amount then due shall also be due and owing for each month or any
portion thereof that such payment shall remain unpaid. The Maker hereby
irrevocably authorizes and empowers any attorney or attorneys, to appear for the
Maker in any court in any appropriate action there brought or to be brought
against the Maker by the Holder on this Note, with or without declaration filed
as of any term or time, and then and there to confess judgment against
SECURED PROMISSORY NOTE - Page 1
CORPDAL:58188.1 26287-00001
<PAGE>
the Maker for all sums due herein, together with costs of suit and attorneys'
fee for collection as aforesaid.
3. STATUS OF REGISTERED HOLDER. The Maker may treat the holder
of this Note as the absolute owner of this Note for the purpose of making
payments of interest and/or principal and for all other purposes and shall not
be affected by any notice co the contrary.
4. DEFAULT. If Maker Defaults (as that term is defined in the
Loan Agreement) under any of the terms set forth in the Loan Agreement, the
Holder of this Note may declare the entire principal and unpaid accrued interest
hereon immediately due and payable, by notice in writing to the Maker.
a. The rights and remedies of the holder Hereof under this
Note shall be deemed cumulative and the exercise of any right or remedy shall
not be regarded as barring any other remedy or remedies. The institution of any
action to recover or recovery of any portion of the indebtedness evidenced by
this Note shall not be deemed a waiver of and other right of the Holder hereto.
b. The acceptance of any installments or payments by the
Holder hereof after the due date herein, or the waiver of any other subsequent
default shall not prevent the Holder hereof from immediately pursuing any or all
of its remedies afforded under the law or the Loan Agreement.
5. PREPAYMENT. The Maker shall have the right to prepay the
entire Loan without penalty, in accordance with the terms and conditions of the
Prepayment Option (as that term is defined in the Loan Agreement).
6. NOTICES OF RECORD DATE, ETC. IN THE EVENT OF CERTAIN EVENTS.
The Maker shall furnish the Holder with 30 days advance written notice of any of
the following action:
a. Any capital reorganization of the Maker, any
reclassification or recapitalization of the capital stock of the Maker or any
transfer of or substantially all of the assets of the Maker to any other person
or any consolidation or merger involving the Maker; or
b. Any voluntary or involuntary dissolution, liquidation or
winding-up of the Maker. In such event, the Maker will mail to the Holder at
least 30 days prior to the earliest date specified in the legal document filed
with a court of competent jurisdiction and/or any government authority, a notice
specifying:
(i) The date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right; and
SECURED PROMISSORY NOTE - Page 2
CORPDAL:58188.1 26287-00001
<PAGE>
(ii) The date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation
or winding-up is expected to become effective and the record date for
determining stockholders entitled to
vote thereon; or
c. Any taking by the Maker of a record of the holders of any
class of securities of the Maker for the purpose of determining the holders
thereof who are entitled to receive any dividend (other than a cash dividend
payable out of earned surplus at the same rate as that of the last such cash
dividend theretofore paid) or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right.
7. ASSIGNMENT AND BINDING EFFECT. This Note is binding upon and shall
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, representatives and/or successors and assigns.
Notwithstanding the foregoing, neither the Maker nor the Holder shall assign or
transfer any rights or obligations hereunder, except that: (a) the Maker may
assign or transfer this Note to a successor corporation in the event of a
merger, consolidation or transfer or sale of all or substantially all of the
assets of the Maker, provided (i) that no such assignment shall relieve the
Maker from liability for the obligations assumed by it hereunder and (ii) the
assignee or transferee shall specifically assume in writing all of the
obligations of the Maker set forth in this Note; and (b) on ten days advance
written notice to the Maker, the Holder may assign this Note to an entity
controlled by or under common control of the Holder or any parent or affiliate
thereof.
8. NO STOCKHOLDER RIGHTS. Nothing contained in this Note shall be
construed as conferring upon the Holder or any other person the right to vote or
to consent or to receive notice as a stockholder in respect of meetings of
stockholders for the election of directors of the Maker or any other matters or
any rights whatsoever as a stockholder of the Maker; and no dividends or
interest shall be payable or accrued in respect of this Note or the interest
represented hereby.
9. LOSS, THEFT, DESTRUCTION OR MUTILATION. In case this Note shall
become mutilated or defaced or be destroyed, lost or stolen, the Maker shall
execute and deliver a new Note in exchange for and upon surrender and
cancellation of such mutilated or defaced Note or in lieu of and in substitution
for such Note so destroyed, lost or stolen upon the Holder of such Note filing
with the Maker evidence reasonably satisfactory to the Maker that such Note has
been so mutilated, defaced, destroyed, lost or stolen and of the ownership
thereof by the Holder as may be necessary, provided, however, that the Maker
shall be entitled, as a condition to the execution and delivery of such new
Note, to demand indemnity satisfactory to it and payment of reasonable expenses
and charges incurred in connection with the delivery of such new Note.
10. GOVERNING LAW; CONSENT TO JURISDICTION. This Note shall be governed
by and construed in accordance with the laws of the State of Colorado, without
giving effect to the principles of conflicts of law thereof. Any action or
proceeding seeking to enforce any provision of, or based on any right arising
out of this Note must be brought against any of the parties in the United States
District Court for the District of Colorado, and each of the parties hereby
SECURED PROMISSORY NOTE - Page 3
CORPDAL:58188.1 26287-00001
<PAGE>
irrevocably submits to the jurisdiction of such court in any such action or
proceeding and waives any objection to venue laid therein. Furthermore, the
Maker and the Holder hereby irrevocably consent to the service of any and all
process in any such action, suit or proceeding by the mailing of such copies of
such process to them in the manner specified in the section concerning giving of
notice. Nothing in this section shall affect the right of Maker and the Holder
to serve legal process in any other manner permitted by law.
11. CAPTIONS. The captions herein are included for convenience of
reference and shall be ignored in the construction or interpretation hereof.
12. NOTICES. Any notices and other communications required to be
given pursuant to this Note shall be in writing and shall be effective upon
delivery by hand or upon receipt if sent by mail (registered or certified mail,
postage prepaid, return receipt requested), overnight package delivery service
or upon transmission if sent by telex or facsimile (with request for
confirmation of receipt in a manner customary for communications of such
respective type), except that if notice is received by telex or facsimile after
5:00 P.M. local time on a business day at the place of receipt, it shall be
effective as of the following business day. Notices are to be addressed as
follows:
If to the Maker: Preferred Telecom
12655 N. Central Expressway, Suite 800
Dallas, Texas 75243
If to the Holder: Bisbro Investments Company Ltd.
c/o T. R. Winston & Company Incorporated
1999 Avenue of the Stars, Suite 1950
Los Angeles, CA 90067
or to such other respective addresses as either the Maker or the Holder shall
designate to the other by notice in writing provided that notice of a change of
address shall be effective only upon receipt.
IN WITNESS WHEREOF, the Maker by its duly authorized officer, has
executed this Note on this 12th day of November, 1996.
Preferred Telecom, Inc.
By:
G. Ray Miller, Chairman, CEO
By:
Dennis Gundy, President
SECURED PROMISSORY NOTE - Page 4
CORPDAL:58188.1 26287-00001
EXHIBIT 10.5
These Warrants have not been registered under the Securities
Act of 1933, as amended (the "Act"), and may not be sold, transferred,
assigned or otherwise disposed of unless the person requesting the
transfer of the Warrants shall provide an opinion of counsel to
Preferred/telecom, Inc. (the "Company") (both counsel and opinion to be
satisfactory to the Company) to the effect that such sale, transfer,
assignment or disposition will not involve any violation of the
registration provisions of the Act or any similar or superseding
statute.
No. 62 600,000 Warrants
PREFERRED/TELECOM, INC.
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies that for
value received Bisbro Investments Company, Ltd. (the "Initial Warrant Holder")
or registered assigns is the owner of the number of warrants specified above,
each of which entitles the holder thereof to purchase, at any time on or before
the Expiration Date hereinafter provided, one fully paid and non-assessable
share of Common Stock, $0.001 par value per share, of Preferred/telecom, Inc., a
Delaware corporation (the "Company"), at a purchase price of $.50 per share of
Common Stock payable in lawful money of the United States of America, in cash,
by official bank or certified check, or by wire transfer ("Warrants").
1. Warrant; Purchase Price
Each Warrant shall entitle the holder thereof to purchase one share of
Common Stock, $0.001 par value per share, of the Company ("Common Stock") during
the period commencing on the date hereof and ending on the Expiration Date. The
purchase price payable upon exercise of a Warrant shall be $.50 (the "Purchase
Price"). The Purchase Price and number of Warrants evidenced by this Warrant
Certificate are subject to adjustment as provided in Article 7. Common Stock
purchased pursuant to the Warrants shall be called "Warrant Shares" herein.
2. Exercise; Expiration Date
2.1 Each Warrant is exercisable, at the option of the holder, at any
time after issuance and on or before the Expiration Date. In the case of
exercise of less than all the Warrants represented by a Warrant Certificate, the
Company shall cancel the Warrant Certificate upon the surrender thereof and
shall execute and deliver a new Warrant Certificate for the balance of such
Warrants.
2.2 The term "Expiration Date" shall mean 5:00 p.m. Dallas time on
November 12, 1999, or if such date shall in the State of Texas be a holiday or
a day on which banks are
CORPDAL:58187.1 26287-00001
1
<PAGE>
authorized to close, then 5:00 p.m. Dallas time the next following day which in
the State of Texas is not a holiday or a day on which banks are authorized to
close.
3. Registration and Transfer on Company Books
3.1 The Company shall maintain books for the registration and
transfer of Warrant Certificates.
3.2 Prior to due presentment for registration of transfer of this
Warrant Certificate, the Company may deem and treat the registered holder as the
absolute owner thereof.
3.3 The Company shall register upon its books any transfer of a Warrant
Certificate upon surrender of same to the Company accompanied (if so required by
the Company) by a written instrument of transfer duly executed by the registered
holder or by a duly authorized attorney. Upon any such registration of transfer,
new Warrant Certificate(s) shall be issued to the transferees and the
surrendered Warrant Certificate shall be cancelled by the Company. A Warrant
Certificate may also be exchanged, at the option of the holder, for new Warrant
Certificates representing in the aggregate the number of Warrants evidenced by
the Warrant Certificate surrendered.
4. Securities Law Registration
4.1 The provisions of this Section 4 will apply to the Warrants, the
Warrant Shares and 600,000 shares of Common Stock of the Company, being issued
to the Initial Warrant Holder this date, which together will be referred to as
the "Securities", and "Holder" shall mean a holder of Securities.
4.2 The Securities will not be registered under the Securities Act or
any state securities law and shall not be transferable unless registered or an
exemption from registration is available. A legend to the foregoing effect will
be placed on any certificate representing the Securities.
4.3 If, at any time within three (3) years of the date of this Warrant
Certificate, the Company proposes for any reason to register any of its
securities under the Securities Act other than a registration on Form S-8
related solely to employee stock option or purchase plans, on Form S-4 relating
solely to an SEC Rule 145 transaction or on any other form which does not
include substantially the same information as would be required to be included
in a registration statement covering the sale of the Securities, it shall each
such time give written notice to the Holder of the Securities of the Company's
intention to register such securities, and, upon the written request, given
within fifteen (15) days after receipt of any such notice, of the Holder, to
register any of the Securities, the Company shall cause the Securities so
requested by the Holder, to be registered under the Securities Act, all to the
extent requisite to permit the sale or other disposition by the Holder of the
Securities so registered; provided, however, that the Securities as to which
registration had been requested need not be included in such registration if in
the
CORPDAL:58187.1 26287-00001
2
<PAGE>
opinion of counsel for the Company and counsel for the Holder the proposed
transfer by the Holder may be effected without registration under the Securities
Act and any certificate evidencing the Securities need not bear any restrictive
legend. In the event that any registration pursuant to this Section 4.3 shall
be, in whole or in part, an underwritten offering of securities of the Company,
then (i) any request pursuant to this Section 4.3 to register Securities may
specify that such shares are to be included in the underwriting on the same
terms and conditions as the shares of the Company's capital stock otherwise
being sold through underwriters under such registration, and (ii) if the
managing underwriter of such offering determines that the number of shares to be
offered by all selling shareholders must be reduced, then the Company shall have
the right to reduce the number of shares registered on behalf of the Holder,
provided that the number of shares to be registered on behalf of the Holder
shall not be reduced to such an extent that the ratio of the shares which the
Holder is permitted to register to the total number of shares the Holder owns is
less than that ratio for any other selling shareholder.
4.4 If and whenever the Company is under an obligation pursuant to the
provisions of this Warrant Certificate to register any Securities, the Company
shall, as expeditiously as practicable:
(a) prepare and file with the Securities and Exchange
Commission (the "Commission") a registration statement with respect to such
shares and use its best efforts to cause such registration statement to become
and remain effective for at least nine (9) months;
(b) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective for
at least nine months and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all Securities covered by such
registration statement;
(c) furnish to the Holder a suitable number of copies of all
preliminary and final prospectuses to enable the Holder to comply with the
requirements of the Securities Act, and such other documents as the Holder may
reasonably request in order to facilitate the public sale or other disposition
of the Securities;
(d) use its best efforts to register or qualify the Securities
covered by such registration statement under such securities or blue sky laws of
such jurisdiction as the Holder shall reasonably request and where registration
or qualification not involve unreasonable expense or delay and provided,
however, that the Company will not have to register or qualify in any state in
which solely because of such registration or qualification it would have to
qualify to do business; and the Company shall do any and all other reasonable
acts and things which may be necessary or advisable to enable the Holder to
consummate the public sale or other disposition of the Securities in such
jurisdictions; and
CORPDAL:58187.1 26287-00001
3
<PAGE>
(e) notify the Holder, at any time when a prospectus relating
to the Securities is required to be delivered under the Securities Act within
the appropriate period mentioned in clause (b) of this Section 4.4, of the
happening of any event as a result of which the prospectus included in such
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances then existing, and at the request of the Holder prepare and
furnish to the Holder a reasonable number of copies of a supplement to or an
amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of the Securities, such prospectus shall not include
an untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
in the light of the circumstances then existing.
If the Holder exercises its rights to have the Securities registered,
it is understood that the Holder shall furnish to the Company such information
regarding the Securities held by it and the intended method of disposition
thereof as the Company shall reasonably request and as shall be required in
connection with the action to be taken by the Company.
4.5 In the event of any registration of any Securities under the
Securities Act pursuant to this Warrant Certificate, the Company shall indemnify
and hold harmless the Holder, each underwriter of such shares, if any, each
broker, and any other person, if any, who controls any of the foregoing persons
within the meaning of the Securities Act, against any losses, claims, damages or
liabilities, joint or several, to which any of the foregoing persons may become
subject under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
on an untrue statement or alleged untrue statement of a material fact contained
in any registration statement under which the Securities were registered under
the Securities Act, any preliminary prospectus or final prospectus contained
therein, or any amendment or supplement thereto, or any document incident to
registration or qualification of any Securities pursuant to paragraph 4.4(d)
above, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading or, with respect to any prospectus,
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or any violation by the Company of
the Securities Act or state securities or blue sky laws applicable to the
Company and relating to action or inaction required of the Company in connection
with such registration or registration or qualification under such state
securities or blue sky laws; and shall reimburse the Holder and such
underwriter, broker or other person acting on behalf of the Holder and each such
controlling person for any legal or any other expenses reasonably incurred by
any of them in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the Company shall not be
liable in any such case to the extent that any such loss, claim, damage, or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company in an instrument
duly executed by the Holder or such underwriter specifically for use in the
preparation thereof. The indemnity agreement set forth in this Section 4.5,
insofar as it relates
CORPDAL:58187.1 26287-00001
4
<PAGE>
to any such omission, alleged omission, untrue statement or alleged untrue
statement made in a preliminary prospectus but eliminated or remedied in the
final prospectus, shall not inure to the benefit of any of the beneficiaries
named in this Section 4.5 whose responsibility it was to send, furnish or give a
copy of the final prospectus to a person asserting a claim for which
indemnification is sought (the "Claimant") unless a copy of the final prospectus
was so sent, furnished or given to the Claimant at or prior to the time such
action is required by the Act.
Before Securities held or purchasable by the Holder shall be included
in any registration pursuant to this Warrant Certificate, the Holder and any
underwriter acting on its behalf shall have agreed to indemnity and hold
harmless (in the same manner and to the same extent as set forth in the
preceding paragraph) the Company, each director of the Company, each officer of
the Company who shall sign such registration statement and any person who
controls the Company within the meaning of the Securities Act, with respect to
any failure of the Holder or such underwriter to comply with all laws, rules and
regulations in connection with the offer and sale or any statement or omission
from such registration statement, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, if such statement or
omission was made in reliance upon and in conformity with written information
furnished to the Company in an instrument duly executed by the Holder or such
underwriter specifically for use in the preparation of such registration
statement, preliminary prospectus, final prospectus or amendment or supplement.
Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the proceeding
paragraphs of this Section 4.5, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party, give written notice
to the indemnifying party of the commencement of such action. In case any such
action is brought against an indemnified party, the indemnifying party will be
entitled to participate in and to assume the defense thereof, jointly with any
other indemnifying party similarly notified to the extent that it 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 will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof.
5. Reservation of Warrant Shares
The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock, solely for the purpose of issue
upon exercise of the Warrants, such number of shares of Common Stock as shall
then be usable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be usable upon exercise of
the Warrants shall be duly and validly issued and fully paid and non-assessable
and free from all taxes, liens and charges with respect to the issue thereof.
6. Loss or Mutilation
CORPDAL:58187.1 26287-00001
5
<PAGE>
Upon receipt by the Company of reasonable evidence of the ownership of
and the loss, theft, destruction or mutilation or any Warrant Certificate and,
in the case of loss, theft or destruction, of indemnity reasonably satisfactory
to the Company, or, in the case of mutilation, upon surrender and cancellation
of the mutilated Warrant Certificate, the Company shall execute and deliver in
lieu thereof a new Warrant Certificate representing an equal number of warrants.
7. Adjustment of Purchase Price and Number of Warrant Shares Deliverable
7.1 The Purchase Price and the number of shares of Common Stock
purchasable pursuant to this Warrant shall be subject to adjustment from time to
time as hereinafter set forth in this Article 7. Whenever reference is made in
this Article 7 to the issue or sale of shares of Common Stock, or simply shares,
such term shall mean any stock of any class of the Company other than preferred
stock with a fixed limit on dividends and a fixed amount payable in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
Company. The shares usable upon exercise of the Warrants shall however be shares
of Common Stock of the Company, par value $0.001 per share, as constituted at
the date hereof, except as otherwise provided in Sections 7.3 and 7.4.
7.2 In case the Company shall at any time change as a whole, by
subdivision or combination in any manner or by the making of a stock dividend,
the number of outstanding shares into a different number of shares, with or
without par value, (i) the number of shares which immediately prior to such
change the holder of each warrant shall have been entitled to purchase pursuant
to this Warrant shall be increased or decreased in direct proportion to the
increase or decrease, respectively, in the number of shares outstanding
immediately prior to such change, and (ii) the Purchase Price in effect
immediately prior to such change shall be increased or decreased in inverse
proportion to such increase or decrease in the number of such shares outstanding
immediately prior to such change. For the purpose of this Section 7.2, the
number of shares outstanding at any given time shall not include shares in the
treasury of the Company.
7.3 In case of any capital reorganization or any reclassification of
the capital stock of the Company or in case of the consolidation or merger of
the Company with another corporation, or in case of any sale, transfer or other
disposition to another corporation of all or substantially all the property,
assets, business and good will of the Company, the holder of each Warrant shall
thereafter be entitled to purchase (and it shall be a condition to the
consummation of any such reorganization, reclassification, consolidation,
merger, sale, transfer or other disposition that appropriate provision shall be
made so that such holder shall thereafter be entitled to purchase) the kind and
amount of shares of stock and other securities and property receivable in such
transaction which a shareholder receives who holds the number of shares which
the Warrant entitled the holder to purchase immediately prior to such capital
reorganization, reclassification of capital stock, consolidation, merger, sale,
transfer or other disposition; and in any such case appropriate adjustments
shall be made in the application of the provisions of this Article 7 with
respect to rights and interests thereafter of the holder of the Warrants to the
end that the
CORPDAL:58187.1 26287-00001
6
<PAGE>
provisions of this Article 7 shall thereafter be applicable, as nearly as
reasonably may be, in relation to any shares or other property thereafter
purchasable upon the exercise of the Warrants.
7.4 In the event the Company shall declare a dividend upon the Common
Stock payable otherwise than out of earnings or earned surplus or otherwise than
in shares of Common Stock or in stock or obligations directly or indirectly
convertible into or exchangeable for such shares, the holder of each Warrant
shall, upon exercise of the Warrant, be entitled to purchase, in addition to the
number of shares deliverable upon such exercise, against payment of the Warrant
Price therefor but without further consideration, the cash, stock or other
securities or property which the holder of the Warrant would have received as
dividends (otherwise than out of such earnings or earned surplus and otherwise
than in shares or in obligations convertible into or exchangeable for Common
Stock) if continuously since the date hereof such holder (i) had been the holder
of record of the number of shares deliverable upon such exercise and (ii) had
retained all dividends in stock or other securities (other than shares or such
convertible or exchangeable stock or obligations) paid or payable in respect of
said number of shares or in respect of any such stock or other securities so
paid or payable as such dividends.
7.5 No certificate for fractional shares shall be issued upon the
exercise of the warrants, but in lieu thereof the Company shall purchase any
such fractional interest calculated to the nearest cent.
7.6 Whenever the Purchase Price is adjusted as herein provided, the
Company shall forthwith deliver to each Warrant holder a statement signed by the
President of the Company and by its Treasurer or Secretary stating the adjusted
Purchase Price and number of shares determined as herein specified. Such
statement shall show in detail the facts requiring such adjustment, including a
statement of the consideration received by the Company for any additional stock
issued.
7.7 In the event at any time:
(i) The Company shall pay any dividend payable in stock upon
its Common Stock or make any distribution (other than cash
dividends) to the holders of its Common Stock; or
(ii) The Company shall offer for subscription pro rata to
the holders of its Common Stock any additional shares of stock
of any class or any other rights; or
(iii) The Company shall effect any capital reorganization or
any reclassification of or change in the outstanding capital
stock of the Company (other than a change in par value, or a
change f rom par value to no par value, or a change f rom no
par value to par value, or a change resulting solely from a
subdivision or combination of outstanding shares), or any
consolidation or merger, or any sale, transfer or other
disposition of all or substantially all its property, assets,
business and good
CORPDAL:58187.1 26287-00001
7
<PAGE>
will as an entirety, or the liquidation, dissolution or
winding up of the Company; or
(iv) The Company shall declare a dividend upon its Common
Stock payable otherwise than out of earnings or earned surplus
or otherwise than in Common Stock or any stock or obligations
directly or indirectly convertible into or exchangeable for
Common Stock;
then, in any such case, the Company shall cause at least thirty days, prior
notice to be mailed to the registered holder of each Warrant at the address of
such holder shown on the books of the Company. Such notice shall also specify
the date on which the books of the Company shall close, or a record be taken,
for such stock dividend, distribution or subscription rights, or the date on
which such reclassification, reorganization, consolidation, merger, sale,
transfer, disposition, liquidation, dissolution, winding up or dividend, as the
case may be, shall take place, and the date of participation therein by the
holders of shares if any such date is to be fixed, and shall also set forth such
facts with respect thereto as shall be reasonably necessary to indicate the
effect of such action on the rights of the holders of the Warrants.
8. Governing Law
8.1 This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed by its officers thereunto duly authorized and its corporate
seal to be affixed hereon as of the _____ day of _______, 1996.
PREFERRED/TELECOM, INC.
By:
Chairman of the Board
Attest:
Secretary
CORPDAL:58187.1 26287-00001
8
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
fds
</LEGEND>
<CIK> 0000946822
<NAME> @dfsy5eu
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 18,250
<SECURITIES> 0
<RECEIVABLES> 208,738
<ALLOWANCES> 2,474
<INVENTORY> 0
<CURRENT-ASSETS> 840,702
<PP&E> 268,819
<DEPRECIATION> 50,251
<TOTAL-ASSETS> 1,639,115
<CURRENT-LIABILITIES> 2,509,995
<BONDS> 0
0
0
<COMMON> 10,941
<OTHER-SE> (1,819,953)
<TOTAL-LIABILITY-AND-EQUITY> 1,639,115
<SALES> 269,496
<TOTAL-REVENUES> 269,496
<CGS> 293,771
<TOTAL-COSTS> 720,142
<OTHER-EXPENSES> 82
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 57,968
<INCOME-PRETAX> (801,839)
<INCOME-TAX> 0
<INCOME-CONTINUING> (801,839)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (801,839)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
