United States
Securities and Exchange Commission
Washington, D. C. 20549
Form 10-KSB
{ X } Annual Report Pursuant to Section 13
or 15 (d) of the Securities Exchange Act
of 1934 for the Fiscal Year Ended March
31, 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 Offices) (Zip Code)
(214) 458-9950
(Registrant's Telephone Number, including area code.)
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Exchange on which Registered
NONE
Securities registered under Section 12(g) of the Exchange Act:
Title of Each Class Name of Exchange on which Registered
NONE
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
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of the Form 10-KSB or any amendment to this Form 10-KSB. Yes___X_____
No__________.
State issuer's revenues for its most recent fiscal year. $ 159,004.
As of July 25, 1996, there were 10,766,142 shares of common stock, $0.001 par
value, of the registrant issued and outstanding. The aggregate market value of
the voting stock held by non-affiliates of the registrant as of July 25, 1996
was $ 3,266,000 based upon the average bid and ask price of the common stock on
such date of $ 2.125 per share on the OTC Bulletin Board. For purposes of this
computation, all executive officers, directors and 10% shareholders were deemed
affiliates. Such a determination should not be an admission that such executive
officers, directors or 10% shareholders are affiliates.
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<TABLE>
<CAPTION>
INDEX
Preferred/telecom, Inc.
PART I Page Number
<S> <C> <C>
Item 1. Description of Business................................................................1
Item 2. Description of Property................................................................7
Item 3. Legal Proceedings......................................................................7
Item 4. Submission of Matters to a Vote of Security Holders...................................7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...............................7
Item 6. Management's Discussion and Analysis of Financial Condition and Results................8
of Operations or Plan of Operation.
Item 7. Financial Statements..................................................................10
Index to Financial Statements.................................................................F-I
Independent Auditor's Report..................................................................F-1
Balance Sheets-March 31, 1996 and March 31, 1995..............................................F-2
Statements of Operations-Fiscal Year ended March 31, 1996 and Inception
through March 31, 1995......................................................................F-3
Statements of Stockholders' Deficit - May 13, 1994 (Date of Incorporation)....................F-4
Statements of Cash Flows-Fiscal Year Ended March 31, 1996; and
May 13, 1994 (Date of Inception ) through March 31, 1995...................................F-5
Notes to Financial statements - March 31, 1996................................................F-6
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure......................................................................10
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16 (a) of the Exchange Act.....................................................11
Item 10. Executive Compensation...............................................................12
Item 11. Security Ownership of Certain Beneficial Owners and Management........................13
Item 12. Certain Relationships and Related Transactions........................................14
Item 13. Exhibits and Reports on Form 8-K......................................................17
Signatures..............................................................................................22
</TABLE>
CORPDAL:53434.1 26287-00001
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PART I
Item 1. Description of Business
The Company is a long distance telecommunications carrier which provides
domestic and international voice services to businesses, affinity groups and the
traveling consumer. The Company pursues two strategies in seeking customers. It
provides low-cost long distance services and it provides technology-augmented
long distance services. The Company was incorporated as a Delaware corporation
in 1992. It first issued stock in 1994 at which time it began planning and
organizing activities. It also negotiated and executed critical agreements for
its operations which included MCI for provision of transmission services, Brite
Voice Systems, Inc. for the provision of its Preferred SecureCardSM, a voice
recognition based calling card service, VIP800SM , a voice recognition based
limited termination calling card, and Preferred CollectSM, a voice recognition
based service for making collect calls, and with Voice Control Systems, Inc. for
provision of the voice recognition technology necessary for its Preferred
SecureCard, VIP800 and Preferred Collect.
In June, 1995, the Company sold 600,000 of its common stock, par value $ 0.001
per share, to Star Resources, Inc. ("Star"), a publicly held company. Star
distributed these shares (the "Dividend Shares") to its stockholders, and the
Company became a public company. In October, 1995, the Company's common stock
began to trade on the OTC Bulletin Board.
The Company began marketing its services in April, 1995 initially offering
no-frills, low-cost , bulk-packaged long distance services to business customers
in selected cities in Texas and Oklahoma. Development continued on the Preferred
SecureCard, which is a totally voice activated calling card and Preferred
Collect which permits origination and termination worldwide. These products were
ready for offering in August, 1995 at which time the Company went from a
developmental company to an operational company.
The Company provides a broad array of long distance telecommunications services
to its customers. It offers long distance services to meet demands of two
different types of consumers - consumers seeking low cost of service and
consumers seeking technology augmented services. Although A T & T and Sprint
have advertising campaigns that take a different view and seek to attract
customers based upon the clarity of the connection, the Company believes that
quality of transmission is no longer a substantial competitive advantage due to
the almost universal use of high quality digital transmission facilities. The
Company seeks to attract and retain customers through provision of high quality
service with add-on technological features or with a low-cost, no-frills
approach.
The bulk of the Company's revenues has been derived from standard long distance
products. For 1+ service, the customer will presubscribe his telephone number to
the Company's service so that whenever he picks up his telephone and dials 1 + a
long distance number he will use the Company's service. For U. S. calls, the
Company currently uses postalized per minute rates so the customer pays a set
fee for each minute he is connected to the network regardless of the distance he
is calling in the United States. The Company also intends to make a voice dialer
available for certain 1 + customers. The voice dialer will enable the customer
to program frequently called numbers and associated code words - - - just as he
uses SecureCard and VIP800 while traveling.
Preferred SecureCardSM
The Preferred SecureCard, the Company's voice activated calling card, was the
first of the Company's technology augmented services. The SecureCard concept
originated with Voice Control Systems, Inc. (VCS), a Dallas based voice
recognition company. VCS developed proprietary technology for utilizing voice
recognition in initiating a call over a switched network and using
speaker-dependent voice verification to provide security. In addition, VCS has
developed a second level of screening that it calls Posi-Ident; this offers an
additional level of security to compensate for irregularities in the telephone
switching network. When enrolling in Posi-Ident, the customer is asked to input
a four digit PIN (Personal Identification Number) known only to the caller.
During a telephone call, if the Posi-Ident platform has difficulty recognizing a
caller's voice, it may ask the caller to enter the four digit PIN to verify the
caller's identity, thus offering an additional level of security to compensate
for irregularities in the telephone switching network. The Company has a
non-exclusive license until 1998 to use VCS' technology.
CORPDAL:53434.1 26287-00001
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The hardware and software application for the VCS technology is incorporated in
a switching platform developed by Brite Voice Systems, Inc. (Brite) of Wichita,
Kansas. This technology enables the Company to offer what it believes to be a
user-friendly, security-enhanced, 100% voice recognition activated calling card
service, SecureCard. The term of the Company's agreement with Brite ends in
1998. Should the Company be unable to renegotiate a mutually beneficial
agreement in 1998, there are numerous other platform manufacturers which could
incorporate VCS technology and provide this service.
To use Preferred SecureCard, the user dials an 800 number to access the
platform; the user is then prompted to speak his authorization code. The
Preferred SecureCard system then queries the database to determine if that
authorization code has made a previous call to the system. If the authorization
code has been previously entered and a voice template exists, the system
recognizes the caller as one who has already completed enrollment and prompts
the caller to speak his password. The system then utilizes voice print
technology to verify the password and validate the caller as being the owner of
that password. At that point, call processing can occur. He may speak a
telephone number he wishes to call, or he may speak a word which he has
previously programmed for speed dialing a number. The caller may also change his
speed dialing program.
If the system determines that a caller is making his first call and no template
exists, it routes the caller to the enrollment portion of the menu. During the
enrollment process, the caller will be asked to speak his password. The system
will store the password and the voice print of the caller speaking the password.
Each time the caller uses Preferred SecureCard, the systems will update the
caller's voice print record. This updating feature enables Preferred SecureCard
to adapt to variations in telephones, calling environments, vocal patterns, and
inconsistencies in the voice of the caller due to nasal, throat or sinus
difficulties. To guard against fraud, only voice print entries which are below
the threshold but high enough to be a possible match and are confirmed, are
included in the adaptive verification update.
Industry experts estimate that calling card fraud in America exceeds $ 1 billion
annually, primarily because of the ease of acquiring a subscriber's calling card
number and then selling it. Due to the inherent fraud problem, the cost of
calling card service is the highest non-operator assisted rate of any long
distance product. The use of Voice Print and Posi-Ident to reduce fraud enables
the Company to offer this service to its subscriber at competitive rates.
The Company retrieves call message data on a real time basis from the SecureCard
system platform. The subscriber selects a level of dollar usage per password and
the system terminates usage at that prescribed level.
Alternatively, the password can be refreshed upon the subscriber's request.
The Company offers three SecureCard product offerings. The SecureCard World and
SecureCard America are currently used to offer a North America English version
with the ability to originate in the fifty states, Puerto Rico, the U. S. Virgin
Islands, Canada and other foreign markets where the Company has secured 1-800
service through its underlying carrier. This enables customers to use the World
Card while traveling. Calls may be placed worldwide without operator
intervention using VCS' voice recognition speaker-dependent technology used for
SecureCard. The SecureCard Language card is currently available in North
American English and North American Spanish. Additional languages will be added
to the system as the market develops and demand requires. The Company offers
SecureCard to corporations to market specifically under their company name. The
Company will also market SecureCard jointly with corporations, labeling the card
as a service offering of both companies. All of the above options, SecureCard
World, SecureCard America, and SecureCard Language as well as VIP-800 will be
available to the private label participant.
VIP800SM
The VIP800 service offering is an expansion of the SecureCard product
capabilities. The telephone call processing method is such that subscribers and
persons authorized by the subscribers may place calls over a telephone network
through a voice recognition call processing system which requires dialing a toll
free number, entering a password or access code by enunciating a five digit
code, or using a telephone keypad, to gain access to a limited number of
callable telephone numbers in a directory and speaking the directory listing
whereby the spoken listing is automatically dialed to connect the caller with
the called party.
CORPDAL:53434.1 26287-00001
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The development of the calling card where fees are charged to the
subscriber/calling party has given rise to substantial fraud by persons using
stolen "cards" or PINs. The proliferation of different telephone numbers which
are desired to be called by an individual or are required to be called has given
rise to an inconvenience factor in remembering a substantial list of phone
numbers or carrying a directory of telephone numbers at all times. The
complexities and cost associated with long distance or toll calling has also
risen as a result of the need in many instances for operator assistance in
making calls and as a result of the needs to use private telephone systems which
charge a fee for each call operation, regardless of whether or not it is a
local, long distance or a "toll free" number. VIP800 addresses these challenges
by making the call process simple, controllable and fraud resistant.
Characteristics:
o Caller Access-general 800 number assigned by Preferred Telecom
o Security-unique five digit authorization code can be touch-tone or
speaker independent voice spoken by caller
o Call termination is driven by preprogrammed unique user directories -
Maximum 10 numbers
o Call origination: Intrastate, Interstate and International
o Termination: Intrastate, Interstate and International
o Speaker independent voice recognition used to access call-to directory
o Subscriber pays for all completed calls
The product has performed well in certain local test markets and because of its
versatility is expected to exceed SecureCard acceptance and generate revenues in
domestic and international markets.
Preferred Collect
The Company's Preferred Collect service allows a caller, using a toll free
number or internationally a local access number, to place a call if the called
party accepts responsibility for charges associated with the call. Preferred
Collect utilizes voice-recognition and does not require operator intervention.
Based upon preliminary test results, Management believes that Preferred Collect
is a viable service which it will sell as its own product as well as make
available to resellers as additional funding becomes available.
International Division
Preferred VIP800 and SecureCard offer an opportunity for emerging foreign
telecommunications providers to tap new sources of revenue by marketing the
Company's voice products. Using a VIP800 number, companies and customers
overseas can offer their extended families and others in the U. S. an 800 number
that rings to various locations all over the world. SecureCard enables foreign
carriers to offer calling cards to native as well as expatriot populations that
travel the world or reside in the U. S. In addition, in the Dial Access
Countries the voice capabilities create a new competitive opportunity for
cellular products.
The SecureCard product line, by design, has no language barrier limitations. As
interest is developed in foreign countries, vocabularies for those countries can
be added. The primary objectives of the Company's international division are to
develop a global market for the Company's services in the long term and to
generate revenue through Hispanic ethnic groups throughout the United States in
the near term. This approach was a logical progression since the North American
Spanish development on the SecureCard and VIP-800 has been tested and performed
well. Initiative is being directed to develop contacts in the countries listed
below:
The Caribbean Basin including Puerto Rico Mexico
Spain Brazil
Chile Central America
Panama Colombia
Venezuela Argentina
Kuwait
Letters of Intent have been executed with interested parties in the Dominican
Republic and Puerto Rico to market the Company's products. However, at this
time, the Company has made no international sales. The Company's international
division plan is based upon the sale of franchises, distributorships and
agencies which will require,
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in addition to an initial investment, the development of a mutually beneficial
business plan. The market plan for each target country will be developed on a
case by case basis within these guidelines.
Traditional Long Distance
The Company offers a mix of long distance service offerings in addition to its
SecureCard, VIP800, and Preferred Collect services. These include standard long
distance (1+), 1-800 services, and T-1's, a long distance service which provides
dedicated access from the customer's location directly to the Company's
underlying carrier's switch. For 1+ service, the customer will presubscribe his
telephone number to the Company's service so that whenever he picks up his
telephone and dials 1+ a long distance number he will use the Company's service.
For U. S. Calls, the Company uses postalized per minute rates so the customer
pays a set fee for each minute he is connected to the network, regardless of the
distance he is calling in the United States.
Platform Program
The Company plans to offer Preferred VoiceCard software applications (VIP800,
SecureCard and Collect) using Voice Control System's enabling technology
residing on a Brite Voice telephony platform. The Company intends to make these
platforms available for sale as well as making them available to the customer
for an annual marketing license fee, a monthly minimum payment and a per minute
fee ($0.0X/min). In addition to the international opportunities mentioned above,
the platform program is directed at one venue domestically, Reseller Accounts.
The Reseller venue includes Interexchange Carriers (IXCs), Local Exchange
Carriers (LECs), Regional Bell Operating Companies (RBOCs), Switched and
Switchless Resellers, Paging Companies, Competitive Access Providers, Shared
Tenant Services and any company that has an installed base of telecommunications
users and does its own billing.
The total industry calling card market is a $13 billion a year business. The
smaller Resellers market represents a $ 2.6 billion annualized calling card
opportunity. Management believes that a portion of the Resellers are prospects
for Preferred's platform because Preferred's VoiceCard products create new
sources of revenue and prevent fraud. The Preferred platform helps the Reseller
retain customers. Management believes, in the first year, it can capture a small
portion of this market representing a total sales opportunity up to $ 76
million. This does not include additional license fees or migratory platform
revenues that could be up to $ 10 million.
Billing and Collection
To date all billing has been direct billed or billed through credit card
merchant agreements. The Company still anticipates billing through Local
Exchange Carriers (LECs) but it has not found it necessary to do so yet and,
therefore, has not activated any LEC billing agreements which has eliminated a
substantial cash disbursement. However, the Company has entered into a billing
and collection agreement with International Telemedia Associates (ITA), a
clearing house, that will process the Company's billing records and deliver them
in bulk to LECs for billing to end users as a part of their local telephone
bill. Under the terms of the agreement with ITA, the Company will be required to
pay a monthly minimum fee of $ 1,500.
Competition.
Current. The Long distance telecommunications market is highly competitive and
significantly influenced by the marketing and pricing practices of the major
industry participants including AT&T, MCI And Sprint. The principal competitive
factors affecting the Company's market share are pricing and customer support.
The Company's ability to compete effectively will depend upon its ability to
provide innovative, high quality services and its ability to raise sufficient
capital to support its marketing efforts.
Most of the Company's competitors are substantially larger and have raised
substantially greater financial, technical and marketing resources. In addition
to AT&T, MCI and Sprint, the Company competes with regional interexchange
carriers and resellers for interLATA long distance services and with local
exchange carriers for intraLATA long distance services. As the Company grows, it
expects to face increased competition. The
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Company's pricing strategy is to keep its effective charges generally below
those of its competitors, so these competitors cannot offer the customer an
economic incentive to terminate the Company's service.
Deregulation of AT & T. Historically, the Company and the interexchange carriers
with which it competes were subject to less regulation and had greater pricing
flexibility than AT&T. However, the difference in the level of regulation
between AT&T and its competitors has recently been narrowed. In October, 1995,
the FCC determined that AT&T was a non-dominant carrier for its domestic
business. Accordingly, it will be regulated on the same basis as the Company.
AT&T can be expected to offer and price its business services more
competitively, which, in turn, may affect the Company's pricing policies and
gross margin.
Competition from BOCs. In 1984, pursuant to a Modified Final Judgment entered by
a United States District Court in Washington, D. C. , AT&T divested its 22
wholly-owned Bell Operating Companies. Under that decree, the Bell Operating
Companies were prohibited, among other things, from providing interLATA long
distance. Under recently enacted legislation, the Modified Final Judgment was
superseded. The BOCs are allowed to provide interLATA long distance service as
part of their cellular service offerings and from areas in which they do not
provide local exchange service. In addition, they will be allowed to provide
interLATA long distance service from the areas in which they provide local
exchange service once they meet certain tests intended to confirm there is
competition for the local exchange and exchange access service. When the Bell
Operating Companies begin to provide interLATA long distance telecommunications
services, the Company will face substantial additional competition.
In addition, the FCC has proposed that the Bell Operating Companies (BOCs)
offering out-of-region interstate interexchange services be regulated as
non-dominant, as long as such services are offered by an affiliate of the BOC
that complies with certain structural separation requirements, which may make it
easier for the BOCs to compete directly with the Company for long distance
customers. These would be the same separation requirements that currently are
applicable to independent local exchange carriers that provide interstate
interexchange services, although the FCC on March 21, 1996, initiated a
rulemaking proceeding in which it is considering whether to modify or eliminate
these separation requirements. This rulemaking proceeding also initiates a
review of other FCC regulations currently applicable to domestic interstate
interexchange telecommunications services to determine how such regulations
should be changed consistent to eliminate the deregulatory goals of the 1996
Telecommunications Act. It is not known when the FCC will take final action in
this proceeding or whether any or all of the proposed rules will be finally
adopted.
Regulation
The terms and conditions under which the Company provides telecommunications
services are subject to government regulation. Federal laws and the Federal
Communications Commission (FCC) regulations apply to interstate
telecommunications services, while state regulatory authorities have
jurisdiction over telecommunications services that originate and terminate
within the same state.
Federal Regulation. The FCC regulates the interstate telecommunications industry
pursuant to the Communications Act. The Company is required to obtain FCC
approval to provide international service and to file tariffs with the FCC
regarding its interstate and international service. The tariffs are subject to
review by the FCC. The Company does not anticipate any action by the FCC which
would impair its service offerings.
Although in the past the FCC had extensively regulated interstate
communications, the trend during the 1980s was toward lessened regulation.
Nondominant interexchange carriers were not required by the FCC to file tariffs
with the FCC other than with respect to international calls and operator
services. This resulted in a proliferation of switchless resellers and brokers
offering individualized pricing to attract customers. The FCC retained general
regulatory jurisdiction over the sale of interstate telecommunications services
by interexchange carriers, including the requirement that calls be charged on a
nondiscriminatory, just and reasonable basis, but no enforcement actions were
brought to the knowledge of the Company.
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In 1992, the United States Court of Appeals for the District of Columbia Circuit
(the "Court of Appeals") ruled that the FCC lacks authority to waive the
statutory requirement that nondominant interexchange carriers file tariffs.
As a result of another proceeding, the Supreme Court upheld the position of the
Court of Appeals in June, 1994.
In response to the initial Court of Appeals ruling, the FCC promulgated new
rules for nondominant interexchange carriers' tariff filings to give substantial
pricing flexibility to the Company and similarly situated competitors. The new
rules permitted nondominant carriers to file a range of rates, thereby avoiding
the need to offer identically priced services to all customers or to have all
price differences reflected in tariff filings with the FCC. The Court of Appeals
struck down those rules in January 1995. The recently enacted legislation
authorizes the FCC to forbear from requiring the filing of tariffs, the FCC has
begun a rulemaking proceeding that would eliminate the need for the Company to
file tariffs. Until a rule is enacted, the Company's business plans anticipate
compliance by the Company with current tariff filing requirements.
State Regulation. The Company's intrastate long distance telecommunications
operations are subject to various state laws and regulations. The Company must
obtain and maintain certificates of public convenience and necessity from
regulatory authorities in most states in which it will offer intrastate long
distance services. Many state regulatory authorities also require carriers to
file tariffs which set forth their rates and conditions of service. While the
Company does not anticipate significant problems in obtaining certificates or
filing tariffs for its service in the key states in which it plans to expand,
the state commissions may impose unanticipated requirements on the Company.
The Company has been granted intrastate regulatory authority in 41 states.
Certification applications are pending in Alabama, Connecticut, Maine,
Minnesota, Nebraska, New Mexico and New Hampshire. The regulatory
responsibilities of the Company are ongoing and do not end once operating
authority is obtained. States have different requirements concerning the filing
of annual reports, regulatory assessments and fees, and other periodic reports,
some of which may vary depending on the type of telecommunications services
being provided. The Company continuously monitors regulatory developments in all
50 states in order to ensure regulatory compliance.
State regulatory authorities also regulate access charges and other pricing for
telecommunications services within each state. The Bell Operating Companies and
other local exchange carriers have been seeking reduction of state regulatory
requirements and greater pricing flexibility. Increased pricing flexibility for
the Bell Operating Companies and other local exchange carriers could adversely
affect the Company primarily in two ways. First, the regulated prices for
intrastate access charges that the Company must pay could increase; second, the
Company could face increased price competition from the Bell Operating Companies
for intraLATA interexchange traffic.
Employees
At July 25, 1996, the Company employed twenty-eight (28) individuals. The
Company is not subject to any collective bargaining agreements. The Board of
Directors and Shareholders have approved an incentive stock option plan for its
employees, and 450,000 shares have been reserved for issuance under the plan.
Item 2. Description of Property
The Company currently subleases approximately 11,600 square feet of office space
in Dallas, Texas at a monthly rental of $ 10,653 through 01/31/99 at which time
the rent increases to $ 12,589 per month to the end of the sublease in 8/31/02.
Due to the availability of office space in Dallas, the Company does not foresee
problems in securing additional office space as required.
Item 3. Legal Proceedings
The Company is not involved in any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
None
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is listed on the OTC Electronic Bulletin Board, but
there is not active market for the Company's Common Stock. While the Company has
obtained exemption from registration for secondary trading under several state
blue sky laws, it has not secured such exemption in all states. The following
table indicates the quarterly high and low bid price for the Company's Common
Stock on the OTC Electronic Bulletin Board since its initial listing in October
1995. Such inter-dealer quotations do not necessarily represent actual
transactions, and do not reflect mark-ups, mark-downs or commissions.
OTC ELECTRONIC
BULLETIN BOARD
BID PRICE
HIGH LOW
Calendar 1995
4th Quarter $4.25 $ .35
Calendar 1996
1st Quarter $2.875 $1.50
2nd Quarter $1.875 $1.50
On July 25, 1996 the bid price of the Company's Common Stock as reported on the
OTC Electronic Bulletin Board was $ 1.75.
As of June 30, 1996, there were 794 holders of record of Common Stock of the
Company.
The Company has not declared or paid any cash or other dividends on its Common
Stock to date and has no intention of doing so in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations or Plan of Operation.
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, and 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. To date approximately 4700
applications have been taken for Preferred SecureCard and 4682 have completed
the Company's enrollment process and have been activated. Of those cards, 1480
have been canceled leaving approximately 3200 cards active.
The Company is still in the early stages of its marketing efforts and
accordingly expenses have exceeded revenues. 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. For the fiscal year ended March 31, 1996,
sales and marketing expenses were 722.1% of sales and general and administrative
expenses were 697.2% of sales. Each of these ratios are less than
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the equivalent ratios for the nine months ended December 31, 1995 and can be
expected to improve as sales increase. Future comparisons will be as an
operational company for the entire period while approximately one-half of fiscal
1996 the Company was in the developmental stage.
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 this revenue, 51% was attributed to the
Company's 1+ and 800 Service and the remainder of the Company's revenue was
attributed to the SecureCard product. Cost of sales amounted to 216.5% of sales
for the fiscal year ended March 31, 1996. Of that amount, $ 150,108 represented
payments on contractual minimums, very little of which represented payment for
services. As revenues increase fees for services are expected to exceed the
contractual minimum, which will reduce the ratio of cost of sales to sales.
During the three months ended March 31, 1996, the Company booked revenues of $
104,484 in comparison with $ 54,520 in the nine months ended December 31, 1995
and with $ 40,070 revenue booked in the quarter ended December 31, 1995. Of this
revenue 48% was attributed to the SecureCard offering. The remainder of the
Company's revenue was derived from 1+ and 800 service. As noted in Item 2.
Description of Property, the Company has entered into a new operating sub-lease
agreement for office facilities, which has increased monthly rental expenses
during 1996 from $ 2,946 per month to $ 10,653 per month.
Liquidity and Capital Resources
The Company's cash and cash equivalents at March 31, 1996 were $ 42,574. 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 $ 832,500 was borrowed from the Company's officers, directors, and
a more 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 common stock. In July, 1996, $
15,000 of those debentures were converted to common stock. 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 November, 1995, pursuant to 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 stock in November, 1995. From this $
1,875,000 generated, notes due to non-affiliates in the amount of $ 300,000 were
paid with associated interest. The remainder was available for working capital
and payment of vendor payables.
The Company requires additional capital to meet its current and future
obligations. In April 1996 the Company commenced a private offering of notes and
warrants ("Units") with maximum proceeds to the Company of $800,000. Each unit
consists 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, $.001
par value per share, 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 contemplates raising capital in an
underwritten public offering and after payment of expenses of the underwriting
will apply proceeds of such offering to repayment of the notes issued in the
private offering. The funds being sought in this offering are only intended to
permit the Company to continue operations and meet its material operating
obligations while it seeks additional funding sufficient for long term
implementation of its business plan. As of July 31, 1996, the Company had raised
$ 750,000 in the private placement. If at least $ 250,000 additional funds are
not raised in this private offering by August 31, 1996, the Company will likely
have to significantly curtail its operations and would be forced to make drastic
cuts in its overhead, to down size its business operations, and to take other
actions, including seeking additional financing or considering strategic
alternatives. There is no assurance that such additional financing or strategic
alternatives would be viable or available on terms acceptable to the Company.
The Company currently has a letter of intent with a New York investment banking
firm, to underwrite on a firm commitment basis, for a proposed Four Million
Dollar
CORPDAL:53434.1 26287-00001
8
<PAGE>
($4,000,000) public offering of the Company's securities. . The underwriting of
the proposed public offering is subject to a number of conditions, including the
raising of at least an additional $250,000 in the private offering The public
offering, if made will be made only by means of a prospectus pursuant to a
registration statement filed with the SEC pursuant to the Securities Act. The
timing of the proposed public offering is subject to a number of factors,
certain of which are beyond the Company's control; however, the Company intends
to complete the public offering by October 15, 1996.
Future Obligations. During the next twelve months, the Company plans, subject to
raising adequate capital, to increase substantially the marketing of its
Preferred SecureCard, VIP800 and Preferred Collect Services, to introduce new
products, and to continue refining these services. Subject to the Company's
ability to fund the cost, Management expects the Company to hire or contract
with approximately 35 additional persons during the next 12 months, primarily to
support its expanded marketing activities. At July 25, 1996, the Company
employed twenty-eight (28) individuals.
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 $ 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 obtain extensions of its current debt or raise additional funds
of approximately $ 1,100,000 to retire its debt. There is no assurance however,
that the Company will be able to secure any such financing or extensions of its
current debt.
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. In June, 1996, the Company and MCI reached an
agreement more reflective of the Company's operations, which adjusts the monthly
commitment to a $ 200,000 monthly minimum and grants concessions and relief from
previously agreed to minimums. The agreement is retroactive to April 1, 1996 and
ramps to the $ 200,000 minimum in September, 1996 and then continues for a
period of forty one (41) months which expires on August 31, 1999. If the Company
does not meet these minimums, then it must pay MCI the difference between actual
usage and the minimum. The new agreement has been proposed to the Company by MCI
for ratification. As there were verbal agreements, confirmed in correspondence,
to the terms outlined above, the Company anticipates no material changes in the
above outlined carrier services agreements when executed.
The Company expects to fund this obligation through customer revenues. Sixty
percent of the customer revenue is paid through an escrow account to MCI. To the
extent the Company's revenues are not sufficient to meet this obligation, the
Company will be required to fund this obligation from other sources.
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 expects actual usage charges to equal or exceed these
minimums in late 1996. If the Company were to default in its payment to Brite,
its ability to utilize the Brite platform would terminate. 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 is due November 1, 1996 and
warrants to purchase 60,000 shares of common stock at a price of $2.44 per share
exercisable for three years from the date of the note.
Certain of the information contained in Parts I and II of this Form 10-KSB
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
CORPDAL:53434.1 26287-00001
9
<PAGE>
cause the actual results to differ from the Company's expectations are set forth
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.
Item 7. Financial Statements
The Company's independent public accountants have noted in their Independent
Auditor's Report accompanying the Financial Statements as of and for the period
ending March 31, 1996, that the Company has incurred substantial losses from
operations that raise substantial doubt about the Company's ability to continue
as a going concern. See "Financial Statements" beginning on page F-I.
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The Board of Directors currently consists of three (3) persons, G. Ray Miller,
H. David Friedman, and Mary G. Merritt. The following table sets forth
information about the present directors and the executive officers of the
Company:
NAME AGE OFFICE
G. Ray Miller 56 Director and Chief Executive Officer
H. David Friedman 50 Vice Chairman of the Board of Directors
Mary G. Merritt 39 Director, Vice President - Finance and
Secretary/Treasurer
Dennis Gundy 52 President, Chief Operating Officer
Tom Hunse 46 Vice President - Marketing and Investor Relations
Jane D. Hufstedler 51 Vice President - Operations
Mr. Miller is a founder of the Company. He has served as an Officer and Director
of the Company since May, 1994; he has been Chief Executive Officer since June,
1994. Prior to the founding of the Company, Mr. Miller founded United Medicorp
Inc. in 1989 and served through February, 1992 as Chairman of the Board and
Chief Executive Officer. United Medicorp is a publicly-held corporation which
manages medical insurance claims. Prior to that time, Mr. Miller served in
executive capacities with International Telecharge, Inc., an operator services
company; Automatic Radius Management, Inc. ("ARM"), a security alarm service
company; and U.S. Telephone, Inc., a long distance carrier. After leaving United
Medicorp, Mr. Miller managed personal investments until he began work at the
Company.
Mr. Friedman is a founder of the Company and has served as director since
June, 1994. He served as President and Chief Operating Officer of the Company
until July, 1996 at which time he became Vice Chairman of the Board of
Directors. Mr. Friedman served from 1988 to 1992 as President of the Commercial
Division of Value-Added Communications ("VAC"), a supplier of services and
equipment to hotels for use in conjunction with the provision of telephone
operator services. Mr. Friedman served as President and Chief Executive officer
of Friedman and
CORPDAL:53434.1 26287-00001
10
<PAGE>
Associates, a consulting firm from 1986 to 1988. Prior to that, Mr. Friedman
served in various executive capacities with American Telecommunications Corp,
which provided long distance and operator services to hotels, KTI Corporation, a
manufacturer of telecommunications equipment, and U.S. Telephone, Inc. After
leaving VAC, Mr.
Friedman managed personal investments until he began work at the Company.
Ms. Merritt is a founder of the Company and has been a director since May,
1994. She serves as Vice President - Finance, Treasurer and Secretary. She has
served as President of Star of Texas, Inc., a trust management account service
since 1989. She served as Controller of United Medicorp, Inc. for several months
during 1992. Ms. Merritt is a certified public accountant and was employed by
Ernst & Whinney from 1981 to 1989, her last position being senior manager for
entrepreneurial services.
Mr. Gundy joined the Company in July, 1996 bringing thirty-four years
experience in management, engineering, construction and operations of domestic
and international telecommunications companies. Mr. Gundy has served as an
independent consultant since 1993. During that time he was instrumental in the
technical planning and implementation of switched satellite services in Russia,
the Ukraine and Mexico. Prior to that, he served as Executive Vice President of
the St. Thomas and San Juan Telephone Company from 1990 through 1992. From 1986
to 1990, Mr. Gundy was Vice President, Operations and Engineering at
International Telecharge, Inc. in Dallas, TX. Mr. Gundy was a Vice President,
Operations-Western United States for U. S. Sprint from 1980 to 1986.
Mr. Hunse joined the Company is September, 1995 after serving as a
consultant since May, 1995. Mr. Hunse has been involved in the voice automation
business for eight years. Prior to joining the Company, Mr. Hunse was Vice
President of Corporate Communication, Business Development and Investor
Relations for InterVoice, Inc. Of Dallas from 1993 to 1995, and was Vice
President of Marketing for Tigon Corporation of Dallas, Texas from 1987 to 1992.
Ms. Hufstedler joined the Company in September, 1995. Prior to joining the
Company, Ms. Hufstedler was employed by Tandem Computers, Inc., where she served
as Marketing Director responsible for the marketing strategy for the telecom
division's customer service system. She was employed with Tandem Computers from
1993 until 1995. From 1983 to 1993, Ms. Hufstedler managed various customer
service operations at Sprint Communications, L.P. and its predecessors.
The Company is not aware of any "family relationships" (as defined in Item
401(c) of Regulation S-B promulgated by the Securities and Exchange Commission)
between any of the directors, and/or any of the executive officers.
Item 10. Executive Compensation
The following table sets forth the compensation paid by the Company to its Chief
Executive Officer during the fiscal year ended March 31, 1996; no executive
officer earned in excess of $ 100,000. The Company has no employment contract
with its Chief Executive Officer. At this time, however, the Company is
negotiating an employment agreement with Mr. Gundy, the President and Chief
Operating Officer.
<TABLE>
<CAPTION>
Annual Compensation
Year
Name/Principal Ending All Other
Position March 31 Salary Bonus Compensation
<S> <C> <C> <C> <C>
G. Ray Miller, Chief Executive 1994 -0- -0- -0-
Officer 1995 $47,500. -0- $28,000. (1)
1996 $79,333. -0- -0-
</TABLE>
(1) Fees for Consulting Services. During period, Mr. Miller assisted the
Company in negotiating agreements, analyzing service offerings and developing
business strategies. To date, the directors have received no compensation for
their services as such. No plans are made to pay any other compensation to the
directors.
CORPDAL:53434.1 26287-00001
11
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners
and Management
The following table sets forth certain information concerning the beneficial
ownership of the Company's Common Stock, as of July 15, 1996:
Shares of Common Stock
Beneficially Owned
<TABLE>
<CAPTION>
Name Number Shares Percentage
<S> <C> <C>
Pegasus Settlement Trust 3,855,476 35.8%
% Hambros Channel Islands
Trust Corporation Limited
7 The Espanade, St. Helier
Jersey, Channel Islands (1)
G. Ray Miller 814,899 (2) 8.7%
12655 N. Central Expressway
Suite 800
Dallas, Texas 75243 (7)
H. David Friedman 2,015,767 (3) 21.1%
12655 N. Central Expressway
Suite 800
Dallas, Texas 75243
Mary G. Merritt 4,689,825 (4) 43.3%
12655 N. Central Expressway
Suite 800
Dallas, Texas 75243
Lawrence E. Steinberg 1,297,315 (5) 12.5%
5420 LBJ Freeway, LB 56
Dallas, Texas 75240
All directors, and executive 7,815,491 (6) 70.4%
officers as a group (Five Persons)
</TABLE>
1. Pegasus Settlement Trust is a Channel Islands Trust of which Hambros
Channel Islands Trust Corporation Limited, of 7 The Esplanade, St. Helier,
Jersey, Channel Islands is trustee, and Mary Merritt is protector, with
shared voting and dispositive power. G. Ray Miller is the sole beneficiary
of the trust.
2. Includes 60,000 shares issuable upon exercise of warrants.
3. Includes 199,950 shares issuable upon exercise of warrants.
4. Includes 72,950 shares issuable upon exercise of warrants and 3,855,476
shares held by Pegasus Settlement Trust. 5. Includes 900,000 shares
issuable upon the exercise of warrants held by Mr. Steinberg and three
trusts of which he is the trustee, two of which his children are
beneficiaries and an option for 100,000 shares granted to Mr.
Steinberg by Mr. Friedman from his personal holdings.
6. Includes the shares described in footnotes 2, 3, and 4.
7. Mr. Miller is the sole beneficiary of the Pegasus Settlement Trust but
is not the beneficial owner of the Common stock owned by the Trust, as SEC
Regulations define beneficial ownership.
CORPDAL:53434.1 26287-00001
12
<PAGE>
Item 12. Certain Relationships and Related Transactions
All shares and per share information relating to the Common Stock of the Company
has been adjusted to reflect a three-for-one stock split of the Common Stock
effected on March 21, 1995.
In May 1994, the Company issued 2,400,000 shares of Common Stock to Pegasus
Settlement Trust, a Channel Island trust, of which is G. Ray Miller is the sole
beneficiary, the Chief Executive Officer and a director of the Company, and of
which Mary Merritt, a vice president and a director of the Company, is a
protector ("Pegasus") for a purchase price of $2,400 ($0.001 cents per share).
In addition, in May 1994, the Company issued 600,000 shares of Common Stock to
G. Ray Miller for the purchase price of $600 ($0.001 cents per share). In June
1994, the Company issued 2,100,000 shares of Common Stock to H. David Friedman,
at that time the President and a director of the Company, for a purchase price
of $2,100 ($0.001 cents per share); 750,000 shares of Common Stock to Mary
Merritt for a purchase price of $750 ($0.001 cents per share); and an additional
150,000 shares of Common Stock to G. Ray Miller for a purchase price of $1.50
($0.001 cents per share). In each case, cash for one-third of the consideration
was paid at the time of the initial issuance and the remainder of the
consideration was contributed to capital by converting debt the Company owed the
stockholders at the time of the three-for-one stock split in order to maintain
the Company's stated capital.
In 1994, the Company borrowed $50,000 from H. David Friedman and $7,500 from G.
Ray Miller. The proceeds from these borrowings were used to cover expenses
incurred while preparing the Company's business plan and negotiating
transmission, billing and collection, and data processing agreements. This
indebtedness was evidenced by promissory notes due upon demand made on or after
December 31, 1994, which bear interest at a floating rate equal to the prime
rate being charged by NationsBank Texas, plus two percent (2%). In February
1995, these notes were extended through May 31, 1995. In June 1995, these notes
were extended through December 12, 1995. In conjunction with the extension, Mr.
Friedman was issued warrants to purchase 199,950 shares of Common Stock at $0.16
per share and Mr. Miller was issued warrants to purchase 30,000 shares of Common
Stock at $0.16 per share. These notes have been further extended to October 1,
1996.
In January 1995, the Company borrowed $75,000 from Lawrence E. Steinberg, a
beneficial owner of 5% or more of the Company's stock, and issued Mr. Steinberg
its note in such amount due May 27, 1995, bearing interest at a floating rate
equal to the prime rate as reflected in the Wall Street Journal and warrants to
purchase 300,000 shares of Common Stock at a price of $0.16 per share. The
proceeds of this loan were used to fund operations of the Company as it sought
financing. Mr. Steinberg agreed to extend this note until December 12, 1995 in
exchange for. the Company's agreement to reduce the purchase price for shares
under those warrants to $0.04 in connection with the extension of Mr.
Steinberg's note until December 12, 1995. This note was further extended until
October 1, 1996.
In January 1995, the Company issued Mary Merritt warrants to purchase 67,950
shares of Common Stock at a price of $0.16 per share in consideration of her
paying expenses on behalf of the Company.
In March 1995, the Company issued 90,000 shares of Common Stock to Jacques
Hoppus, Vice President-Sales of the Company, for $300. The Company had an option
to repurchase all of these shares if Mr. Hoppus ceased to be an employee of the
Company during the first year of his employment, and half of these shares if he
ceased to be an employee of the Company during the second year of his
employment. Mr. Hoppus resigned from the Company in February, 1996 and returned
45,000 shares of common stock under the terms of his separation agreement.
In March 1995, the Company issued 240,000 shares of Common Stock to Jerry L.
Gimnich, Vice President-MIS of the Company, for $800. The Company had an option
to repurchase all of these shares if Mr. Gimnich ceased to be an employee of the
Company during the first year of his employment, two-thirds of the shares if he
ceased employment during the second year of his employment, and one- third of
these shares if he ceased to be an employee of the Company during the third year
of his employment. Mr. Gimnich resigned in April, 1996 and two-thirds of his
stock was repurchased.
In April 1995, the Company borrowed $200,000 from Pegasus and issued Pegasus a
note in such amount
CORPDAL:53434.1 26287-00001
13
<PAGE>
due July 21, 1995, bearing interest at a floating rate equal to the prime rate
reflected in the Wall Street Journal, and warrants to purchase 406,200 shares of
Common Stock at a price of $0.17 per share. These monies were used to fund
operations pending a debt or equity offering. On June 28, 1996 this note was
submitted to the Company in payment of $109,054 for the exercise of 1,406,200
warrants and a new note for $ 90,946 was issued.
On May 18, 1995, Pegasus lent the Company $75,000. In return, the Company issued
Pegasus its promissory note in the amount of $75,000 bearing interest at a rate
of 9% per annum due on November 18, 1995, and warrants to purchase 300,000
shares of Common Stock at a price of $.04 per share. This note has been extended
to October 1, 1996.
On May 26, 1995, Lawrence E. Steinberg lent the Company $20,000. In return, the
Company issued Mr. Steinberg its promissory note in the amount of $20,000 due
November 26, 1995, bearing interest at a rate of 9% per annum and warrants to
purchase 80,000 shares of Common Stock at a price of $.04 per share on or before
November 26, 1998. This note has been extended to October 1, 1996.
On May 26, 1995, the Company borrowed $35,000 from the Lawrence E. Steinberg
Charitable Remainder Trust, a Texas trust of which Lawrence E. Steinberg is a
trustee, and issued its $35,000 promissory note due November 26, 1995, bearing
interest at a rate of 9% per annum and warrants to purchase 140,000 shares of
Common Stock at a price of $.04 per share on or before November 26, 1998. This
note has been extended to October 1, 1996.
On May 26, 1995, the Company borrowed $10,000 from the Adam J. Steinberg Trust
A, a Texas trust for the benefit of one of Lawrence E. Steinberg's children of
which Mr. Steinberg is trustee, and issued its $10,000 promissory note due
November 26, 1995, bearing interest at a rate of 9% per annum and warrants to
purchase 40,000 shares of Common Stock at a price of $.04 per share on or before
November 26, 1998. This note has been extended to October 1, 1996.
On May 26, 1995, the Company borrowed $10,000 from the Ilana S. Steinberg Trust
A, a Texas trust for the benefit of one of Lawrence E. Steinberg's children of
which Mr. Steinberg is trustee, and issued its $10,000 promissory note due
December 26, 1995, bearing interest at a rate of 9% per annum and warrants to
purchase 40,000 shares of Common Stock at a price of $.04 per share. This note
has been extended to October 1, 1996.
In June 1995, the Company issued 600,000 shares of Common Stock to Star
Resources, a publicly held corporation of which Lawrence E. Steinberg is
principal shareholder, president and chief executive officer, for $24,000. In
connection therewith, the Company agreed to purchase advertising in the amount
of $24,000 from a television station owned by a former subsidiary of Star which
is now owned by Mr. Steinberg.
In June 1995, Mr. Steinberg agreed to sell to Pegasus, G. Ray Miller, H.
David Friedman and Mary Merritt an aggregate of 8,500,000 shares of his Star
Common Stock for an aggregate of $5,000, or approximately $.006 per share. Of
such shares, Pegasus acquired 3,400,000 shares of Star for $2,000; Mr. Miller
and Ms. Merritt each acquired 1,062,500 shares of Star for $625; and Mr.
Friedman acquired 2,975,000 shares of Star for $1,750. This transaction
permitted Pegasus to receive 19,756 Dividend Shares, permitted Mr. Miller and
Ms. Merritt each to receive 15,549 Dividend Shares, and permitted Mr. Friedman
to receive 45,537 Dividend Shares. Together, Pegasus, Mr. Miller, Ms. Merritt
and Mr. Friedman received an aggregate of 124,391 Dividend Shares in the
Distribution, or 20.7% of the Dividend Shares. Pegasus, Mr. Miller, Mr. Friedman
and Ms. Merritt have each granted to Mr. Steinberg an option to repurchase the
shares of Star Common Stock he sold to them for approximately $.0065 per share,
or an aggregate total of $5,500 for all such shares. Mr. Steinberg repurchased
all such shares of the Star Common Stock in December of 1995.
On June 12, 1995, Pegasus lent the Company $75,000. In return, the Company
issued Pegasus its promissory note in the amount of $75,000 bearing interest at
a rate of 9% per annum due on December 12, 1995, and warrants to purchase
300,000 shares of Common Stock at a price of $.04 per share. This note was
extended to October 1, 1996.
On June 12, 1995, Lawrence E. Steinberg lent the Company $75,000. In return, the
Company issued Mr. Steinberg its promissory note in the amount of $75,000 due
December 12, 1995, bearing interest at a rate of 9% per annum
CORPDAL:53434.1 26287-00001
14
<PAGE>
and warrants to purchase 300,000 shares of Common Stock at a price of $.04 per
share on or before December 12, 1998. This note was extended to October 1, 1996.
On July 21, 1995, the Company borrowed $100,000 from Pegasus Settlement Trust
and issued a promissory note in the amount of $100,000 bearing interest at a
rate of 9% per annum due January 21, 1996, and warrants to purchase 300,000
shares of Common Stock at a price of $.04 per share on or before January 21,
1998. This note was extended to October 1, 1996.
On September 26, 1995, Pegasus lent the Company $100,000. In return, the Company
issued Pegasus its promissory note in the amount of $100,000 bearing interest at
a rate of 9% per annum which is due on March 26, 1996, and warrants to purchase
300,000 shares of Common Stock at a price of $.04 per share. This note was
extended to October 1, 1996.
On March 14, 1996, Pegasus lent the Company $50,000. In return, the Company
issued Pegasus its promissory note in the amount of $50,000 bearing interest at
a rate of 8% per annum which is due on September 16, 1996.
On March 28, 1996, Pegasus lent the Company $50,000. In return, the Company
issued Pegasus its promissory note in the amount of $50,000 bearing interest at
a rate of 8% per annum which is due on September 30, 1996
On April 16, 1996, Pegasus lent the Company $50,000. In return, the Company
issued Pegasus its promissory note in the amount of $50,000 bearing interest at
a rate of 8% per annum which is due on October 16, 1996.
On April 29, 1996, Lawrence E. Steinberg lent the Company $100,000. In
return, the Company issued Mr. Steinberg its promissory note in the amount of
$100,000 bearing interest at a rate of 10% per annum which was due on May 31,
1996. This note was extended to October 1, 1996. In addition, Mr. Friedman
granted Mr. Steinberg 100,000 shares at $0.10 per share from his personal
holdings.
On May 21, 1996, Mary Merritt purchased one unit for $10,000 in the current
private placement. Each unit consists of a two-year $10,000 note at 7% and
warrants to purchase 5,000 shares of common stock at $1.50 per share for that
same period.
On May 21, 1996, Jane Hufstedler purchased one unit for $10,000 in the current
private placement. Each unit consists of a two-year $10,000 note at 7% and
warrants to purchase 5,000 shares of common stock at $1.50 per share for that
same period.
On June 12, 1996, G. Ray Miller purchased six units for $60,000 in the current
private placement. Each unit consists of a two-year $10,000 note at 7% and
warrants to purchase 5,000 shares of common stock at $1.50 per share for that
same period.
On June 28, 1996 Pegasus exercised warrants to purchase 1,406,200 shares of the
Company's Common Stock, $.001 par value per share. Pegasus tendered a $200,000
promissory note from the Company in payment and received a newly issued
promissory note of $90,946.
Item 13. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
Exhibit
Number Description
<S>
<C> <C>
3.1 Certificate of Incorporation of Preferred/telecom, Inc. filed on August 3,
1992 with the Secretary of State of Delaware (Incorporated by reference to
CORPDAL:53434.1 26287-00001
15
<PAGE>
Exhibit 3.1 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
3.2 Certificate of Amendment, filed on May 2, 1994 with the Secretary of State
of Delaware (Incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
3.3 Certificate of Amendment, filed on March 21, 1995 with the Secretary of
State of Delaware (Incorporated by reference to Exhibit 3.3 to the
Company's Registration Statement on Form S-1, registration no. 33-92894)
3.4 Certificate of Amendment, filed on July 27, 1995 with the Secretary of
State of Delaware (Incorporated by reference to Exhibit 3.5 to Amendment
No. 1 to the Company's Registration Statement on Form S-1, registration
no. 33-92894
3.5 Bylaws of Preferred/telecom, Inc. (Incorporated by reference to Exhibit 3.4
to the Company's Registration Statement on Form S-1, registration no. 33-
92894)
4.1 Specimen Certificate evidencing Common Stock of Preferred/telecom, Inc.
(Incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-1, registration no. 33-92894)
10.1# MCI Carrier Services Agreement between MCI Telecommunications
Corporation and Preferred/telecom, Inc.(Incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.2# SecureCard Agreement between Brite Voice Systems, Inc. and
Preferred/telecom, Inc. (Incorporated by reference to Exhibit 10.2 to the
Company's Registration Statement on Form S-1, registration no. 33-92894)
10.3# Preferred Collect Agreement between Brite Voice Systems, Inc. and
Preferred Telecom, Inc. (Incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1, registration no. 33-92894)
10.4# Enhanced Technology Use Agreement between Voice Control System, Inc.
and Preferred/telecom, Inc. (Incorporated by reference to Exhibit 10.4 to
Amendment No. 1 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.5+ Preferred/telecom, Inc. 1994 Stock Plan for Incentive and Non-
Qualified Stock Options (Incorporated by reference to Exhibit 10.5
to the Company's Registration Statement on Form S-1, registration
no. 33-92894)
CORPDAL:53434.1 26287-00001
16
<PAGE>
10.6 Promissory Note to H. David Friedman, in original principal amount of
$50,000, dated as of July 5, 1994 (Incorporated by reference to Exhibit
10.6 to the Company's Registration Statement on Form S-1, registration
no. 33-92894)
10.7 Promissory Note to G. Ray Miller, in original principal amount of $7,500,
dated as of September 1, 1994 (Incorporated by reference to Exhibit 10.7
to the Company's Registration Statement on Form S-1, registration no. 33-
92894)
10.8 Promissory Note to Lawrence E. Steinberg, in original principal amount of
$75,000, dated as of January 27, 1995 (Incorporated by reference to
Exhibit 10.8 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.9 Promissory Note to Pegasus Settlement Trust, in original principal amount
of $200,000, dated as of April 21, 1995 (Incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.10 Promissory Note to Pegasus Settlement, in original principal amount of
$75,000, dated as of May 18, 1995 (Incorporated by reference to Exhibit
10.10 to the Company's Registration Statement on Form S-1, registration
no. 33-92894)
10.11 Promissory Note to Lawrence E. Steinberg Charitable Remainder Trust, in
the original principal amount of $35,000, dated as of May 26, 1995
(Incorporated by reference to Exhibit 10.11 to the Company's Registration
Statement on Form S-1, registration no. 33-92894)
10.12 Promissory Note to Adam J. Steinberg Trust A, in the original principal
amount of $10,000, dated as of May 26, 1995 (Incorporated by reference
to Exhibit 10.12 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.13 Promissory Note to Ilana S. Steinberg Trust A, in the original principal
amount of $10,000, dated as of May 26, 1995 (Incorporated by reference
to Exhibit 10.13 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.14 Promissory Note to Lawrence E. Steinberg, in the original principal
amount of $20,000, dated as of May 26, 1995 (Incorporated by reference
to Exhibit 10.14 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
CORPDAL:53434.1 26287-00001
17
<PAGE>
10.15 Warrant to purchase 406,200 shares of Common Stock issued to Pegasus
Settlement Trust (Incorporated by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-1, registration no. 33-92894)
10.16 Warrant to purchase 30,000 shares (as adjusted for three-for-one stock
split) of Common Stock issued to G. Ray Miller (Incorporated by reference
to Exhibit 10.16 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.17 Warrant to purchase 199,950 shares (as adjusted for three-for-one stock
split) of Common Stock issued to H. David Friedman (Incorporated by
reference to Exhibit 10.17 to the Company's Registration Statement on
Form S-1, registration no. 33-92894)
10.18 Warrant to purchase 67,950 shares (as adjusted for three-for-one stock
split) of Common Stock issued to Mary Merritt (Incorporated by reference
to Exhibit 10.18 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.19 Purchase Agreement dated June 1, 1995, between Preferred/telecom and
Star Resources, Inc. (Incorporated by reference to Exhibit 10.19 to the
Company's Registration Statement on Form S-1, registration no. 33-92894)
10.20 Warrant to purchase 300,000 shares (as adjusted for three-for-one stock
split) of Common Stock issued to Lawrence E. Steinberg (Incorporated by
reference to Exhibit 10.20 to the Company's Registration Statement on
Form S-1, registration no. 33-92894)
10.21 Warrant to purchase 300,000 Shares of Common Stock issued to Pegasus
Settlement Trust (Incorporated by reference to Exhibit 10.21 to the
Company's Registration Statement on Form S-1, registration no. 33-92894)
10.22 Warrant to purchase 140,000 Shares of Common Stock issued to Lawrence
E. Steinberg Charitable Remainder Trust (Incorporated by reference to
Exhibit 10.22 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.23 Warrant to purchase 40,000 Shares of Common Stock issued to Adam J.
Steinberg Trust A (Incorporated by reference to Exhibit 10.23 to the
Company's Registration Statement on Form S-1, registration no. 33-92894)
10.24 Warrant to purchase 40,000 Shares of Common Stock issued to Ilana S.
Steinberg Trust A (Incorporated by reference to Exhibit 10.24 to the
Company's Registration Statement on Form S-1, registration no. 33-92894)
CORPDAL:53434.1 26287-00001
18
<PAGE>
10.25 Warrant to purchase 80,000 Shares of Common Stock issued to Lawrence
E. Steinberg (Incorporated by reference to Exhibit 10.25 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
10.26+ Stock Purchase Agreement with Repurchase Option dated March 1,
1995 between Preferred/telecom, Inc. and Jerry L. Gimnich
(Incorporated by reference to Exhibit 10.26 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
10.27+ Stock Purchase Agreement with Repurchase Option dated March 1,
1995 between Preferred/telecom, Inc. and Jacques L. Hoppus
(Incorporated by reference to Exhibit 10.27 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
10.28 Promissory Note to Pegasus Settlement Trust in the original principal
amount of $75,000, dated as of June 12, 1995 (Incorporated by reference
to Exhibit 10.28 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, registration no. 33-92894)
10.29 Promissory Note to Lawrence E. Steinberg in the original principal amount
of $75,000, dated as of June 12, 1995 (Incorporated by reference to Exhibit
10.29 to Amendment No. 1 to the Company's Registration Statement on
Form S-1, registration no. 33-92894)
10.30 Promissory Note to Pegasus Settlement Trust in the original principal
amount of $100,000, dated as of July 21, 1995 (Incorporated by reference
to Exhibit 10.30 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, registration no. 33-92894)
10.31 Warrant to Purchase 300,000 shares of Common Stock issued to Pegasus
Settlement Trust (Incorporated by reference to Exhibit 10.31 to Amendment
No. 1 to the Company's Registration Statement on Form S-1, registration
no. 33-92894)
10.32 Warrant to Purchase 300,000 shares of Common Stock issued to Lawrence
E. Steinberg (Incorporated by reference to Exhibit 10.32 to Amendment
No. 1 to the Company's Registration Statement on Form S-1, registration
no. 33-92894)
10.33 Warrant to Purchase 300,000 shares of Common Stock issued to Pegasus
Settlement Trust (Incorporated by reference to Exhibit 10.33 to Amendment
No. 1 to the Company's Registration Statement on Form S-1, registration
no. 33-92894)
CORPDAL:53434.1 26287-00001
19
<PAGE>
10.34 Promissory Note to Pegasus Settlement Trust in the original
principal amount of $100,000, dated as of September 26, 1995
(Incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10- QSB for the quarter ended
September 30, 1995)
10.35 Warrant to Purchase 300,000 shares of Common Stock issued to
Pegasus Settlement Trust (Incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1995)
10.36+ Stock Purchase Agreement with Repurchase Option dated
September 1, 1995 between Preferred/telecom, Inc. and Tom S.
Hunse (Incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1995)
10.37+ Stock Purchase Agreement with Repurchase Option dated
September 5, 1995 between Preferred/telecom, Inc. and Jane D.
Hufstedler (Incorporated by reference to Exhibit 10.6 to the
Company's Quarterly Report on Form 10-QSB for the quarter
ended September 30, 1995)
10.38* Promissory Note to Pegasus Settlement Trust in the original
principal amount of $50,000, dated as of March 14, 1996
10.39* Promissory Note to Pegasus Settlement Trust in the original
principal amount of $50,000, dated as of March 28, 1996
10.40* Promissory Note to Pegasus Settlement Trust in the original
principal amount of $50,000, dated as of April 16, 1996
10.41* Promissory Note to Lawrence E. Steinberg in the original principal
amount of $100,000, dated as of April 29, 1996
10.42 Specimen Eight and One-Half Percent Convertible Subordinate
Debenture of Preferred/telecom, Inc. (Incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.43* Media Purchase Agreement, dated as of June 3, 1996 by and among
Preferred Telecom, Inc., Source Corp., ADEX Corp., and GRO
Enterprises.
10.44* Specimen of 2-year, 7% 10,000 Note being issued in bridge
financing.
CORPDAL:53434.1 26287-00001
20
<PAGE>
10.45* Specimen of Warrants to Purchase 5,000 shares of Common Stock
being issued in bridge financing
10.46* Sublease Agreement, dated January 11, 1996, between Felts,
Muller & Fuos and Preferred/telecom, Inc.
10.47* Agreement of Subtenant, dated January 16, 1996, by and between
Unum Life Insurance Company of America, and Preferred
Telecom, Inc.
10.48* Promissory Note to Brite Voice Systems, Inc. in the original
principal amount of $216,500, dated as of July 31, 1996.
10.49* Warrant Certificate to purchase 60,000 shares of
Common Stock issued to Brite Voice Systems, Inc.
<FN>
*Filed herewith
#Confidential Treatment has been requested for a portion of this Exhibit
+Stock Option Plan or compensatory arrangement
</FN>
</TABLE>
(b) Form 8-K
The Company did not file any reports on Form 8-K during the Fiscal Year ended
March 31, 1996.
CORPDAL:53434.1 26287-00001
21
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this Annual Report on Form 10-KSB to be signed on
its behalf by the undersigned thereto duly authorized.
Preferred/telecom, Inc.
(Registrant)
Date: August 2, 1996 By: /s/ G. Ray Miller
---------------------------
G. Ray Miller, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual
Report on Form 10-KSB has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
SIGNATURE OFFICE DATE
/s/ G. Ray Miller Chief Executive Officer August 2, 1996
G. Ray Miller and a Director (Principal
Executive Officer)
/s/ H. David Friedman Vice Chairman of the August 2, 1996
H. David Friedman Board and a Director
/s/ Mary G. Merritt Vice-President-Finance, August 2, 1996
Mary G. Merritt Secretary, Treasurer and a
Director (Principal Financial
Officer and Principal Accounting
Officer)
CORPDAL:53434.1 26287-00001
22
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<C> <C>
3.1 Certificate of Incorporation of Preferred/telecom, Inc. filed on
August 3, 1992 with the Secretary of State of Delaware
(Incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
3.2 Certificate of Amendment, filed on May 2, 1994 with the Secretary
of State of Delaware (Incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, registration no. 33-
92894)
3.3 Certificate of Amendment, filed on March 21, 1995 with the
Secretary of State of Delaware (Incorporated by reference to Exhibit
3.3 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
3.4 Certificate of Amendment, filed on July 27, 1995 with the Secretary
of State of Delaware (Incorporated by reference to Exhibit 3.5 to
Amendment No. 1 to the Company's Registration Statement on
Form S-1, registration no. 33-92894
3.5 Bylaws of Preferred/telecom, Inc. (Incorporated by reference to
Exhibit 3.4 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
4.1 Specimen Certificate evidencing Common Stock of
Preferred/telecom, Inc. (Incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement on Form S-1, registration no.
33-92894)
10.1# MCI Carrier Services Agreement between MCI Telecommunications
Corporation and Preferred/telecom, Inc.(Incorporated by reference
to Exhibit 10.1 to the Company's Registration Statement on Form
S-1, registration no. 33-92894)
10.2# SecureCard Agreement between Brite Voice Systems, Inc. and
Preferred/telecom, Inc. (Incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1, registration
no. 33-92894)
10.3# Preferred Collect Agreement between Brite Voice Systems, Inc. and
Preferred Telecom, Inc. (Incorporated by reference to Exhibit 10.3
to the Company's Registration Statement on Form S-1, registration
no. 33-92894)
CORPDAL:53434.1 26287-00001
23
<PAGE>
10.4# Enhanced Technology Use Agreement between Voice Control
System, Inc. and Preferred/telecom, Inc. (Incorporated by reference
to Exhibit 10.4 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, registration no. 33-92894)
10.5+ Preferred/telecom, Inc. 1994 Stock Plan for Incentive and Non-
Qualified Stock Options (Incorporated by reference to Exhibit 10.5
to the Company's Registration Statement on Form S-1, registration
no. 33-92894)
10.6 Promissory Note to H. David Friedman, in original principal
amount of $50,000, dated as of July 5, 1994 (Incorporated by
reference to Exhibit 10.6 to the Company's Registration Statement
on Form S-1, registration no. 33-92894)
10.7 Promissory Note to G. Ray Miller, in original principal amount of
$7,500, dated as of September 1, 1994 (Incorporated by reference
to Exhibit 10.7 to the Company's Registration Statement on Form
S-1, registration no. 33-92894)
10.8 Promissory Note to Lawrence E. Steinberg, in original principal
amount of $75,000, dated as of January 27, 1995 (Incorporated by
reference to Exhibit 10.8 to the Company's Registration Statement
on Form S-1, registration no. 33-92894)
10.9 Promissory Note to Pegasus Settlement Trust, in original principal
amount of $200,000, dated as of April 21, 1995 (Incorporated by
reference to Exhibit 10.9 to the Company's Registration Statement
on Form S-1, registration no. 33-92894)
10.10 Promissory Note to Pegasus Settlement, in original principal amount
of $75,000, dated as of May 18, 1995 (Incorporated by reference to
Exhibit 10.10 to the Company's Registration Statement on Form S-
1, registration no. 33-92894)
10.11 Promissory Note to Lawrence E. Steinberg Charitable Remainder
Trust, in the original principal amount of $35,000, dated as of May
26, 1995 (Incorporated by reference to Exhibit 10.11 to the
Company's Registration Statement on Form S-1, registration no. 33-
92894)
10.12 Promissory Note to Adam J. Steinberg Trust A, in the original
principal amount of $10,000, dated as of May 26, 1995
(Incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
CORPDAL:53434.1 26287-00001
24
<PAGE>
10.13 Promissory Note to Ilana S. Steinberg Trust A, in the original
principal amount of $10,000, dated as of May 26, 1995
(Incorporated by reference to Exhibit 10.13 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
10.14 Promissory Note to Lawrence E. Steinberg, in the original principal
amount of $20,000, dated as of May 26, 1995 (Incorporated by
reference to Exhibit 10.14 to the Company's Registration Statement
on Form S-1, registration no. 33-92894)
10.15 Warrant to purchase 406,200 shares of Common Stock issued to
Pegasus Settlement Trust (Incorporated by reference to Exhibit
10.15 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.16 Warrant to purchase 30,000 shares (as adjusted for three-for-one
stock split) of Common Stock issued to G. Ray Miller (Incorporated
by reference to Exhibit 10.16 to the Company's Registration
Statement on Form S-1, registration no. 33-92894)
10.17 Warrant to purchase 199,950 shares (as adjusted for three-for-one
stock split) of Common Stock issued to H. David Friedman
(Incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
10.18 Warrant to purchase 67,950 shares (as adjusted for three-for-one
stock split) of Common Stock issued to Mary Merritt (Incorporated
by reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1, registration no. 33-92894)
10.19 Purchase Agreement dated June 1, 1995, between Preferred/telecom
and Star Resources, Inc. (Incorporated by reference to Exhibit 10.19
to the Company's Registration Statement on Form S-1, registration
no. 33-92894)
10.20 Warrant to purchase 300,000 shares (as adjusted for three-for-one
stock split) of Common Stock issued to Lawrence E. Steinberg
(Incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
10.21 Warrant to purchase 300,000 Shares of Common Stock issued to
Pegasus Settlement Trust (Incorporated by reference to Exhibit
10.21 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
CORPDAL:53434.1 26287-00001
25
<PAGE>
10.22 Warrant to purchase 140,000 Shares of Common Stock issued to
Lawrence E. Steinberg Charitable Remainder Trust (Incorporated by
reference to Exhibit 10.22 to the Company's Registration Statement
on Form S-1, registration no. 33-92894)
10.23 Warrant to purchase 40,000 Shares of Common Stock issued to
Adam J. Steinberg Trust A (Incorporated by reference to Exhibit
10.23 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.24 Warrant to purchase 40,000 Shares of Common Stock issued to
Ilana S. Steinberg Trust A (Incorporated by reference to Exhibit
10.24 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.25 Warrant to purchase 80,000 Shares of Common Stock issued to
Lawrence E. Steinberg (Incorporated by reference to Exhibit 10.25
to the Company's Registration Statement on Form S-1, registration
no. 33-92894)
10.26+ Stock Purchase Agreement with Repurchase Option dated March 1,
1995 between Preferred/telecom, Inc. and Jerry L. Gimnich
(Incorporated by reference to Exhibit 10.26 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
10.27+ Stock Purchase Agreement with Repurchase Option dated March 1,
1995 between Preferred/telecom, Inc. and Jacques L. Hoppus
(Incorporated by reference to Exhibit 10.27 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
10.28 Promissory Note to Pegasus Settlement Trust in the original
principal amount of $75,000, dated as of June 12, 1995
(Incorporated by reference to Exhibit 10.28 to Amendment No. 1 to
the Company's Registration Statement on Form S-1, registration no.
33-92894)
10.29 Promissory Note to Lawrence E. Steinberg in the original principal
amount of $75,000, dated as of June 12, 1995 (Incorporated by
reference to Exhibit 10.29 to Amendment No. 1 to the Company's
Registration Statement on Form S-1, registration no. 33-92894)
10.30 Promissory Note to Pegasus Settlement Trust in the original
principal amount of $100,000, dated as of July 21, 1995
(Incorporated by reference to Exhibit 10.30 to Amendment No. 1 to
the Company's Registration Statement on Form S-1, registration no.
33-92894)
CORPDAL:53434.1 26287-00001
26
<PAGE>
10.31 Warrant to Purchase 300,000 shares of Common Stock issued to
Pegasus Settlement Trust (Incorporated by reference to Exhibit
10.31 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, registration no. 33-92894)
10.32 Warrant to Purchase 300,000 shares of Common Stock issued to
Lawrence E. Steinberg (Incorporated by reference to Exhibit 10.32
to Amendment No. 1 to the Company's Registration Statement on
Form S-1, registration no. 33-92894)
10.33 Warrant to Purchase 300,000 shares of Common Stock issued to
Pegasus Settlement Trust (Incorporated by reference to Exhibit
10.33 to Amendment No. 1 to the Company's Registration
Statement on Form S-1, registration no. 33-92894)
10.34 Promissory Note to Pegasus Settlement Trust in the original
principal amount of $100,000, dated as of September 26, 1995
(Incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1995)
10.35 Warrant to Purchase 300,000 shares of Common Stock issued to
Pegasus Settlement Trust (Incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-QSB for the
quarter ended September 30, 1995)
10.36+ Stock Purchase Agreement with Repurchase Option dated September
1, 1995 between Preferred/telecom, Inc. and Tom S. Hunse
(Incorporated by reference to Exhibit 10.5 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1995)
10.37+ Stock Purchase Agreement with Repurchase Option dated September
5, 1995 between Preferred/telecom, Inc. and Jane D. Hufstedler
(Incorporated by reference to Exhibit 10.6 to the Company's
Quarterly Report on Form 10-QSB for the quarter ended September
30, 1995)
10.38* Promissory Note to Pegasus Settlement Trust in the original
principal amount of $50,000, dated as of March 14, 1996
10.39* Promissory Note to Pegasus Settlement Trust in the original
principal amount of $50,000, dated as of March 28, 1996
10.40* Promissory Note to Pegasus Settlement Trust in the original
principal amount of $50,000, dated as of April 16, 1996
CORPDAL:53434.1 26287-00001
27
<PAGE>
10.41* Promissory Note to Lawrence E. Steinberg in the original principal
amount of $100,000, dated as of April 29, 1996
10.42 Specimen Eight and One-Half Percent Convertible Subordinate
Debenture of Preferred/telecom, Inc. (Incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on Form S-1,
registration no. 33-92894)
10.43* Media Purchase Agreement, dated as of June 3, 1996 by and among
Preferred Telecom, Inc., Source Corp., ADEX Corp., and GRO
Enterprises.
10.44* Specimen of 2-year, 7% 10,000 Note being issued in bridge
financing.
10.45* Specimen of Warrants to Purchase 5,000 shares of Common Stock
being issued in bridge financing
10.46* Sublease Agreement, dated January 11, 1996, between Felts, Muller
& Fuos and Preferred/telecom, Inc.
10.47* Agreement of Subtenant, dated January 16, 1996, by and between
Unum Life Insurance Company of America, and Preferred Telecom,
Inc.
10.48* Promissory Note to Brite Voice Systems, Inc. in the original
principal amount of $216,500, dated as of July 31, 1996.
10.49* Warrant Certificate to purchase 60,000 shares of Common Stock
issued to Brite Voice Systems, Inc.
<FN>
*Filed herewith
#Confidential Treatment has been requested for a portion of this Exhibit
+Stock Option Plan or compensatory arrangement
</FN>
</TABLE>
CORPDAL:53434.1 26287-00001
28
<PAGE>
PREFERRED/TELECOM, INC.
FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
<PAGE>
PREFERRED/TELECOM, INC.
FINANCIAL STATEMENTS
MARCH 31, 1996 AND 1995
C O N T E N T S Page
Independent Auditors' Report................................................ 1
Financial Statements:
Balance Sheets ......................................................... 2
Statements of Operations ............................................... 3
Statement of Stockholders' Deficit...................................... 4
Statements of Cash Flows................................................ 5
Notes to Financial Statements..........................................6-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Preferred/telecom, Inc.
We have audited the accompanying balance sheets of Preferred/telecom, Inc. as of
March 31, 1996 and 1995, and the related statements of operations, stockholders'
deficit and cash flows for the year ended March 31, 1996 and the period from May
13, 1994 (date of inception) through March 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Preferred/telecom, Inc. as of
March 31, 1996 and 1995, and the results of its operations and cash flows for
the periods then ended, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note I to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note I. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PHILIP VOGEL & CO. PC
Certified Public Accountants
Dallas, Texas
April 23, 1996
<PAGE>
2
<TABLE>
<CAPTION>
PREFERRED/TELECOM, INC.
BALANCE SHEETS
MARCH 31, 1996 AND 1995
1996 1995
-------------- ---------------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $ 42,574 $ 43,353
Accounts receivable, net of allowance
for doubtful accounts of $2,474 in 1996 57,475 0
Employee receivables 13,185 0
Prepaid expenses 30,917 1,191
-------------- ---------------
Total current$assets144,151 $ 44,544
-------------- ---------------
Property and equipment:
Computer equipment $ 99,979 $ 7,875
Furniture and fixtures 24,550 18,225
Office equipment 6,082 0
Leasehold improvements 6,248 0
Call validation system 112,520 0
-------------- ---------------
$ 249,379 $ 26,100
Less accumulated depreciation 23,419 2,396
-------------- ---------------
Net property $nd equ225,960 $ 23,704
-------------- ---------------
Other assets:
Deposits $ 14,852 $ 2,845
Deferred contract costs 121,576 25,000
Deferred debt issue costs - net 4,333 15,454
Deferred stock issuance costs 0 20,000
Certificate of deposit 50,445 0
Patents and trademarks - net 16,208 0
-------------- ---------------
Total other a$sets 207,414 $ 63,299
-------------- ---------------
$ 577,525 $ 131,547
The accompanying notes are an integral part of these statements.
<PAGE>
3
1996 1995
-------------- ---------------
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable $ 526,162 $ 0
Accrued payroll and payroll taxes 162,411 102,745
Accrued interest payable 20,866 10,313
Accrued professional fees 0 47,766
Accrued operating expenses 29,538 42,080
Accrued vacation 27,029 0
Current maturities of long-term debt 110,000 0
Notes payable 0 100,000
Notes payable - related parties 932,500 132,500
-------------- ---------------
Total current$liab1,808,506 $ 435,404
-------------- ---------------
Long-term debt $ 0 $ 122,500
-------------- ---------------
Commitments and contingencies (Note H)
Stockholders' deficit:
Common stock, $0.001 par value;
20,000,000 shares authorized; shares
issued 8,949,942 and 6,480,000,
respectively $ 8,950 $ 6,480
Additional paid-in capital 1,916,632 770
Accumulated deficit (3,156,428) (432,507)
Stock subscriptions receivable 0 (1,100)
-------------- ---------------
$ (1,230,846) $ (426,357)
Treasury stock - 45,000 shares at cost 135 0
-------------- ---------------
Total stockho$der(1,230,981) $ (426,357)
-------------- ---------------
$ 577,525 $ 131,547
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
4
PREFERRED/TELECOM, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1996 AND
FOR THE PERIOD FROM MAY 13, 1994 (DATE OF INCEPTION)
THROUGH MARCH 31, 1995
From May 13,
1994 (date
of inception)
through
March 31, March 31,
1996 1995
--------------- ----------------
<S> <C> <C>
Sales $ 159,004 $ 0
Cost of sales 344,310 0
--------------- ----------------
Gross prof$t (los(185,306) $ 0
--------------- ----------------
Costs and expenses:
Sales and marketing expenses $ 1,091,453 $ 14,800
General and administrative expenses 1,360,693 407,394
Interest expense 86,469 10,313
--------------- ----------------
Total cost$ and 2,538,615 $ 432,507
--------------- ----------------
Loss before income taxes $ (2,723,921) $ (432,507)
Provision for income taxes 0 0
--------------- ----------------
Net loss $ (2,723,921) $ (432,507)
Net loss per share $ (0.35) $ (0.08)
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5
PREFERRED/TELECOM, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM MAY 13, 1994 (DATE OF INCEPTION)
THROUGH MARCH 31, 1996
Shares of common stock
-----------------------------------------------------------------
Authorized Issued Outstanding In treasury
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance May 13, 1994 10,000,000 0 0 0
Issuance of common stock - May 13, 1994 0 1,000,000 1,000,000 0
Issuance of common stock - July 1, 1994 0 250,000 250,000 0
Issuance of common stock - July 11, 1994 0 700,000 700,000 0
Issuance of common stock - July 26, 1994 0 50,000 50,000 0
Issuance of common stock - August 1, 1994 0 50,000 50,000 0
Common stock subscribed - March 1, 1995 0 110,000 110,000 0
Increase in authorized shares - March 15, 1995 5,000,000 0 0 0
Three-for-one stock split - March 15, 1995 0 4,320,000 4,320,000 0
Net loss for the period 0 0 0 0
------------- -------------- -------------- -------------
Balance - March 31, 1995 15,000,000 6,480,000 6,480,000 0
Common stock subscriptions received - May 31, 1995 0 0 0 0
Issuance of common stock - June 1, 1995 0 600,000 600,000 0
Increase in authorized shares - July 25, 1995 5,000,000 0 0 0
Common stock subscribed - September 1, 1995 0 240,000 240,000 0
Common stock subscribed - September 5, 1995 0 50,000 50,000 0
Exercise of stock warrants - October 13, 1995 0 200,000 200,000 0
Common stock subscriptions received - October 18, 0 0 0 0
1995
Issuance of common stock - October 26, 1995
(net of issuance costs of $42,610) 0 1,000,000 1,000,000 0
Exercise of stock warrants - November 1, 1995 0 15,300 15,300 0
Conversion of 8.5% debentures - November 3, 1995 0 8,333 8,333 0
Conversion of 8% debentures - November 21, 1995 0 27,624 27,624 0
Conversion of 8% debentures - November 23, 1995 0 178,685 178,685 0
Exercise of stock options - December 5, 1995 0 150,000 150,000 0
Purchase of treasury stock 0 0 (45,000) 45,000
Net loss for the period 0 0 0 0
------------- -------------- -------------- -------------
Balance - March 31, 1996 20,000,000 8,949,942 8,904,942 45,000
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
6
<TABLE>
<CAPTION>
Amounts
- ----------------------------------------------------------------------------------------------------------
Common Additional Stock Total
stock $0.01 Treasury paid-in Accumulated subscriptions stockholders'
par value stock capital deficit receivable deficit
- ------------- ----------- ------------- -------------- --------------- ----------------
<C> <C> <C> <C> <C> <C>
$ 0 $ 0 $ 0 $ 0 $ 0 $ 0
1,000 0 0 0 0 1,000
250 0 0 0 0 250
700 0 0 0 0 700
50 0 0 0 0 50
50 0 0 0 0 50
110 0 990 0 (1,100) 0
0 0 0 0 0 0
4,320 0 (220) 0 0 4,100
0 0 0 (432,507) 0 (432,507)
- ------------- ----------- ------------- -------------- --------------- ----------------
$ 6,480 $ 0 $ 770 $ (432,507) $ (1,100) $ (426,357)
0 0 0 0 1,100 1,100
600 0 23,400 0 0 24,000
0 0 0 0 0 0
240 0 9,360 0 (9,600) 0
50 0 1,950 0 (2,000) 0
200 0 7,800 0 0 8,000
0 0 0 0 11,600 11,600
1,000 0 1,456,390 0 0 1,457,390
15 0 2,524 0 0 2,539
8 0 12,492 0 0 12,500
28 0 49,972 0 0 50,000
179 0 327,124 0 0 327,303
150 0 24,850 0 0 25,000
0 (135) 0 0 0 (135)
0 0 0 (2,723,921) 0 (2,723,921)
- ------------- ----------- ------------- -------------- --------------- ----------------
$ 8,950 $ (135) $ 1,916,632 $ (3,156,428) $ 0 $ (1,230,981)
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
7
PREFERRED/TELECOM, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1996 AND
FOR THE PERIOD FROM MAY 13, 1994 (DATE OF INCEPTION)
THROUGH MARCH 31, 1995
From May 13,
1994 (date
of inception)
through
March 31, March 31,
1996 1995
-------------- ----------------
Cash flows from operating activities:
<S> <C> <C>
Cash received from customers $ 101,529 $ 0
Cash paid to suppliers and employees (2,359,786) (276,446)
Interest received 0 203
Interest paid (75,916) 0
-------------- ----------------
Net cash used$by (2,334,173)cti$ities (276,243)
-------------- ----------------
Cash flows from investing activities:
Capital expenditures $ (246,459) $ (26,100)
Purchase of certificate of deposit (50,000) 0
Proceeds from sale of fixed assets 3,056 0
-------------- ----------------
Net cash used$by in(293,403)cti$ities (26,100)
-------------- ----------------
Cash flows from financing activities:
Proceeds from sale of stock $ 1,938,332 $ 6,150
Proceeds from notes payable 687,500 355,000
Increase in loan costs 0 (15,454)
Purchase of treasury stock (135) 0
Decrease in stock subscriptions receivable 1,100 0
-------------- ----------------
Net cash prov$ded 2,626,797ing $ctivitie345,696
-------------- ----------------
Net increase (decrease) in cash and cash equivalents $ (779) $ 43,353
Cash and cash equivalents:
Beginning of period 43,353 0
-------------- ----------------
End of period $ 42,574 $ 43,353
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
8
From May 13,
1994 (date
of inception)
through
March 31, March 31,
1996 1995
-------------- ----------------
Reconciliation of net loss to net cash used
by operating activities:
<S> <C> <C>
Net loss $ (2,723,921) $ (432,507)
-------------- ----------------
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation $ 25,017 $ 2,396
Amortization 29,604 0
Gain on sale of fixed assets (636) 0
Changes in assets and liabilities:
Increase in accounts receivable (57,475) 0
Increase in employee receivables (13,185) 0
Increase in certificate of deposit (445) 0
Increase in deposits (12,007) (2,845)
Increase in prepaid expenses (29,726) (21,191)
Increase in deferred contract costs (114,500) (25,000)
Increase in accounts payable 526,162 0
Increase in accrued expenses 36,939 202,904
-------------- ----------------
$ 389,748 $ 156,264
-------------- ----------------
Net cash used by operating activities $ (2,334,173) $ (276,243)
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
9
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 13, 1994, as
the Company did not begin its planning and organizational activities until May
13, 1994. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates. Certain
prior year amounts have been reclassified for comparison purposes.
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 7,769,708 and 5,538,483 for the periods ended March 31, 1996
and 1995, respectively.
<PAGE>
10
PREFERRED/TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
Note B - Summary of significant accounting policies (continued):
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
$10,303 and $-0- for the periods ended March 31, 1996 and 1995, respectively.
The cost of patents and trademarks are being amortized on the
straight-line method over a period of 15 years. Amortization expense charged
to operations in 1996 and 1995 was $559 and $-0-, respectively.
Note C - Notes payable:
Short-term notes payable consist of the following at March 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Outside interests $ 0 $ 100,000
Related parties 932,500 132,500
------------ ------------
$ 932,500 $ 232,500
Notes payable to outside interests at March 31, 1995, include $100,000 in
unsecured promissory notes bearing interest at 12% per annum. On December 5,
1995, the promissory notes were paid in full.
Notes payable to related parties include:
1996 1995
------------ -----------
Note payable to a director and officer, dated September 1, 1994, due on June 12,
1996 and unsecured, interest is payable semi-annually at the rate of prime +2
(8.25% and 9% at
March 31, 1996 and 1995, respectively). $ 7,500 $ 7,500
Note payable to a director and officer, dated June 5, 1994, due on June 12, 1996
and unsecured, interest is payable semi-annually at the rate of prime + 2 (8.25%
and 9%
at March 31, 1996 and 1995, respectively). 50,000 50,000
Notes payable to a 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
March 31, 1996 and 1995, respectively) with the principal and accrued interest
payable at maturity on
various dates through July 21, 1996. 650,000 0
Notes payable to a director nominee of the Company and several affiliated trusts
of which the director nominee is the trustee. The notes are unsecured and bear
interest at rates of 9% per annum and prime (8.25% and 9% at March 31, 1996 and
1995, respectively) with principal and accrued
interest payable at various dates through May 26, 1996. 225,000 75,000
------------ -----------
Total related party notes payable $ 932,500 $ 132,500
</TABLE>
<PAGE>
11
PREFERRED/TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
Note C - Notes payable (continued):
Accrued interest payable on related party notes has been paid through
December 31, 1995.
Interest expense charged to operations related to the related party notes
payable was $76,943 and $4,188 for the periods ended March 31, 1996 and 1995,
respectively.
Note D - Long-term debt:
At March 31, 1996 and 1995, the Company's long-term debt consists of
subordinated convertible debentures. The 8.5% debentures, which are due
September 27, 1996, are subordinated in the right of payment to the Company's
existing and future senior indebtedness. These debentures are convertible into
shares of common stock of the Company at a conversion price of $1.50 per share,
subject to adjustment under certain circumstances and are unsecured. Interest is
payable on December 27, 1995, and at maturity. On November 3, 1995, $12,500 of
8.5% convertible debentures were converted into 8,333 shares of common stock.
Note E - Common stock:
Stock purchase warrants
At March 31, 1996, the Company had outstanding warrants to purchase
2,759,100 shares of the Company's common stock at prices which ranged from
$0.04 per share to $1.00 per share. The warrants are exercisable at any time
and expire on dates ranging from January 27, 1998 to October 6, 1998. At
March 31, 1996, 2,759,100 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 March 31, 1996, shares of common stock were reserved for the following
purposes:
Exercise of stock warrants 2,759,100
Conversion of convertible debentures 73,334
Exercise and future grants of stock
options and stock appreciation rights 450,000
-------------
3,282,434
Note F - Income taxes:
The Company uses the liability method of accounting for income taxes under
the provisions of Statement of Financial Accounting Standards No. 109. Under the
liability method, a provision for income taxes is recorded based on taxes
currently payable on income as reported for federal income tax purposes, plus an
amount which represents the change in deferred income taxes for the year.
<PAGE>
12
PREFERRED/TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
Note F - Income taxes (continued):
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax reporting basis of the Company's assets
and liabilities. The major areas in which temporary differences give rise to
deferred taxes are accrued liabilities, start-up expenditures, and net operating
loss carryforwards. Deferred income taxes are classified as current or
noncurrent depending on the classification of the assets and liabilities to
which they relate. Deferred income taxes arising from temporary differences that
are not related to an asset or liability are classified as current or noncurrent
depending on the periods in which the temporary differences are expected to
reverse.
The provision for income taxes consists of:
<TABLE>
<CAPTION>
Period ended Period ended
March 31, 1996 March 31, 1995
----------------- -----------------
<S> <C> <C>
Current income taxes $ 0 $ 0
Change in deferred income taxes due
to temporary differences 0 0
----------------- -----------------
$ 0 $ 0
Deferred tax (liabilities) assets consist of the following:
Period ended Period ended
March 31, 1996 March 31, 1995
----------------- -----------------
Accumulated depreciation $ (5,000) $ 0
----------------- -----------------
Gross deferred tax liabilities $ (5,000) $ 0
----------------- -----------------
Accrued liabilities $ (9,000) $ 1,500
Start-up expenditures 39,000 143,000
Net operating loss carryforward 1,017,000 1,500
----------------- -----------------
Gross deferred tax assets $ 1,047,000 $ 146,000
Valuation allowance (1,042,000) (146,000)
----------------- -----------------
Net deferred tax assets $ 5,000 $ 0
----------------- -----------------
$ 0 $ 0
The Company has available at March 31, 1996, a net operating loss
carryforward of approximately $2,992,000 which can be used to offset future
taxable income through the year 2009.
</TABLE>
<PAGE>
13
PREFERRED/TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
Note G - 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 reserves 450,000
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 options, and the exercise price, determined by the Committee,
may not be less than the fair market value of a share on the date of 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 March 31,
1996, options to purchase 262,500 shares at an exercise prices of $0.0031/3 to
$1.50 per share had been granted. No stock appreciation rights had been granted
at March 31, 1996.
Note H - Commitments and contingencies:
Lease commitment
The company has entered into a non-cancelable operating lease for office
facilities under a lease arrangement commencing on February 1, 1996 and
expiring on August 31, 2002.
Minimum future rentals to be paid on non-cancelable leases as of March
31, 1996 for each of the next five years and in the aggregate are:
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 was $49,661 and $22,882 for the
periods ended March 31, 1996 and 1995, respectively.
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 as follows:
Year ending
March 31, Amount
- -------------- --------------
1997 $ 9,725,000
1998 12,000,000
1999 12,000,000
2000 7,000,000
--------------
$ 40,725,000
Note H - Commitments and contingencies (continued):
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.
Billing and collection agreement
The Company was obligated for minimum annual payments under the terms of a
billing and collection services agreement with Southwestern Bell Corporation
(SW Bell) expiring in November, 1999. The SW Bell agreement was for a period
of five years with minimum annual commitments of $80,000. This agreement was
terminated on March 27, 1996.
Letter of credit
At March 31, 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.
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 the
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 payment 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.
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 over-the-counter
securities markets.
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>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
</LEGEND>
<CIK> 0000946822
<NAME> Preferred/Telecom Inc.
<S> <C>
<PERIOD-TYPE> 12-Mos
<FISCAL-YEAR-END> Mar-31-1996
<PERIOD-START> Apr-1-1996
<PERIOD-END> Mar-31-1996
<CASH> 42,574
<SECURITIES> 0
<RECEIVABLES> 59,949
<ALLOWANCES> 2,474
<INVENTORY> 0
<CURRENT-ASSETS> 144,151
<PP&E> 249,379
<DEPRECIATION> 23,419
<TOTAL-ASSETS> 577,525
<CURRENT-LIABILITIES> 1,808,506
<BONDS> 0
0
0
<COMMON> 8,950
<OTHER-SE> (1,239,931)
<TOTAL-LIABILITY-AND-EQUITY> 577,525
<SALES> 159,004
<TOTAL-REVENUES> 159,004
<CGS> 344,310
<TOTAL-COSTS> 2,452,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,469
<INCOME-PRETAX> (2,723,921)
<INCOME-TAX> (2,723,921)
<INCOME-CONTINUING> (2,723,921)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,723,921)
<EPS-PRIMARY> (.35)
<EPS-DILUTED> (.35)
</TABLE>
PROMISSORY NOTE
$50,000 Dallas, Texas March 14, 1996
FOR VALUE RECEIVED, Preferred/telecom, Inc., a Delaware corporation
promises to pay to the order of , Pegasus Settlement Trust, at
________________________________, or at such other address as the holder hereof
may designate, the principal sum of Fifty Thousand Dollars ($50,000.00),
together with interest on the unpaid principal balance from the date hereof
until this note is paid in full at a rate of 8% per annum.
Principal and interest shall be payable in one installment on September
16, 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.
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.
MAKER:
PREFERRED/TELECOM, INC.
By:__________________________________
H. DAVID FRIEDMAN
Its: President
PROMISSORY NOTE
$50,000 Dallas, Texas March 28, 1996
FOR VALUE RECEIVED, Preferred/telecom, Inc., a Delaware corporation
promises to pay to the order of , Pegasus Settlement Trust, at
________________________________, or at such other address as the holder hereof
may designate, the principal sum of Fifty Thousand Dollars ($50,000.00),
together with interest on the unpaid principal balance from the date hereof
until this note is paid in full at a rate of 8% per annum.
Principal and interest shall be payable in one installment on September
30, 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.
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.
MAKER:
PREFERRED/TELECOM, INC.
By:__________________________________
H. DAVID FRIEDMAN
Its: President
PROMISSORY NOTE
$50,000 Dallas, Texas April 16, 1996
FOR VALUE RECEIVED, Preferred/telecom, Inc., a Delaware corporation
promises to pay to the order of , Pegasus Settlement Trust, at
________________________________, or at such other address as the holder hereof
may designate, the principal sum of Fifty Thousand Dollars ($50,000.00),
together with interest on the unpaid principal balance from the date hereof
until this note is paid in full at a rate of 8% per annum.
Principal and interest shall be payable in one installment on October
16, 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.
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.
MAKER:
PREFERRED/TELECOM, INC.
By:__________________________________
H. DAVID FRIEDMAN
Its: President
PROMISSORY NOTE
$100,000 Dallas, Texas April 29, 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 One Hundred Thousand Dollars
($100,000.00), 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 May 31,
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.
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.
MAKER:
PREFERRED/TELECOM, INC.
By:__________________________________
H. DAVID FRIEDMAN
Its: President
MEDIA PURCHASE AGREEMENT
THIS AGREEMENT is made this 3rd day of June, 1996 by and among
Preferred Telecom, Inc., a publicly owned Delaware corporation with principal
offices at 12655 N. Central Expressway, Suite 800, Dallas, Texas 75243 and its
subsidiaries and affiliates (the "Company"), Source Corp. ("Source") and ADEX
("ADEX"), affiliated companies of GRO Enterprises ("GRO"), each Illinois
corporations, with principal offices at 18 West 100 22nd Street, Oakbrook
Terrace, Illinois 60181 (hereinafter sometimes collectively referred to as
"SC"), and Proxhill Marketing, Ltd., a Colorado corporation with principal
offices at 9250 East Costilla Avenue, Suite 650, Englewood, Colorado 80112
("Proxhill").
W I T N E S S E T H:
WHEREAS, the Company, its subsidiaries and affiliates, is engaged in
the business of, but not limited to, offering telecommunication and related
products and/or services to both consumers and to businesses; and
WHEREAS, the Company desires to obtain advertising time and space
(Media, as this term is hereinafter defined), for itself, its subsidiaries and
affiliates, for promotion of, but not limited to, its products and/or services;
and
WHEREAS, Proxhill is engaged in the business of providing media
services, including the purchasing, selling, loaning, trading and reselling of
Media and Media-related services to and for emerging and mid-sized growth
companies and in connection therewith issues Partially Prepaid Purchase Orders
(as these terms are hereinafter defined); and
WHEREAS, SC is engaged in the business of offering Media and other
services, including the purchasing, selling, trading and reselling of Media, the
performance of Media Research, Media Plan preparation and Media Plan Execution
(as these terms are hereinafter defined) from conventional and unconventional
sources to and for participating individuals, firms, and entities located
throughout the United States; and
WHEREAS, the Company desires to acquire a specified amount of Partially
Prepaid Purchase Orders from Proxhill, and the Company understands that if the
Company, its subsidiaries, affiliates or representatives have established a
prior relationship (written or verbal) or Communication (as that term is
hereafter defined) with a particular Media Source or Media Vendor, then that
Media Source or Media Vendor is not and will not be subject to the terms of this
agreement, unless otherwise agreed to by the SC and Proxhill; and
WHEREAS, Proxhill is willing to issue to the Company a Partially
Prepaid Purchase Order (as that term is hereinafter defined) entitling the
Company to purchase Media as agreed and approved by Proxhill on the terms and
subject to the conditions hereinafter set forth; and
WHEREAS, SC is willing to honor the Partially Prepaid Purchase Order
and recognize, accept, and utilize the same as payment for a portion of the
transactions enumerated herein and which otherwise would be paid by the Company
by means of cash.
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NOW, THEREFORE, in consideration of the mutual benefits to be derived
hereby and the representations, warranties, covenants, and agreements herein
contained, the parties hereby incorporate the foregoing recitals into this
agreement (the "Agreement") by reference and hereby covenant and agree as
follows:
ARTICLE I
DEFINITIONS
When used herein, the following terms shall have the meaning ascribed hereto in
this Article:
1.1 "Affiliate" shall have the meaning ascribed thereto under the rules
and regulations adopted by the Securities and Exchange Commission (the "SEC")
under the Securities Act of 1933, as amended (the "33 Act") and the Securities
Exchange Act of 1934 (the "34 Act").
1.2 "Aid and Assistance" shall mean customer support services offered
by SC to the Company in connection with any transaction made the subject of this
Agreement in conformity with those historically rendered by SC's customer
service department. These services shall include but not be limited to telephone
and fax cooperation and support in planning and executing Media transactions,
furnishing of quotes in a timely manner, furnishing information concerning
competitive rates and terms and generally affording the Company the benefit of
the expertise, knowledge and experience of SC's staff.
1.3 "Closing" shall mean the date on which this Agreement shall be
executed by all parties hereto, and as otherwise provided herein.
1.4 "Commercials" shall mean 10, 15, 30, 60, 90 or 120 second
advertisements for use on television and/or radio that promote the products of
the Company and which shall be produced by the Company or by SC for and on
behalf of the Company at the Company's expense.
1.5 "Cost Per Point" shall mean the estimated amount of Dollars
required to deliver one rating point (or one percent) of the designated
demographic audience within a given spot, television or radio market, as
established by a Recognized Industry Source.
1.6 "Cost Per Thousand" shall mean the cost for every 1,000 units of
audience exposed to a Media vehicle.
1.7 "Media" shall mean 10, 15, 30, 60, 90 or 120-second advertising
spot time on television and/or radio stations or cable systems, 10, 15, 30, 60,
90 or-120 second spot time on syndicated or non-syndicated programs and shows
broadcast on television and/or radio stations, advertising space on outdoor or
indoor billboards, advertising space in local, regional or national magazines,
newspapers or other publications of mass appeal, and time and/or space on or in
such cross-promotional combination of the foregoing as shall be available from
SC's sources.
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Recognizing that every media purchasing service (such as SC) has its
specific resources to secure and purchase media, which is generally governed
under contractual arrangements and/or purchasing mechanisms, Media will be
purchased exclusively on a subject-to-availability basis. If for any reason SC
cannot provide the specific Media requested, or confirmation of its
availability, within ten (10) business days from the request thereof as more
fully described in Sections 1.7, 3.4 and 3.6, then the Company will be notified
in writing from SC of the lack of availability and that specific Media will not
be governed by the terms of this Agreement, and the Company is free to negotiate
or utilize any service of its own choosing.
1.8 "Media Plan" shall mean the written proposal prepared by SC on the
basis of the Media Research (hereinafter defined) and submitted to the Company
for approval. The Media Plan will detail the terms and objectives of a given
advertising Campaign (as described herein), or series of Campaigns, based on the
budget and duration parameters stated to SC by the Company. The Media Plan will
delineate: (i) the Media Sources, dates and times of Ad Placement and price per
Insertion; (ii) the number and nature of Ads that Shall be required to be
produced for Insertion; (iii) delivery of Target Demographic(s); (iv) such other
and further information consistent with industry practices.
1.9 "Campaign" shall mean the sum of all Schedules comprising a
designated portion of the Media Plan as defined by time and/or budget and/or
Media Source and/or thematic parameters.
1.10 "Ad" shall mean the unit of advertising used to deliver the
Company's message, including (i) time duration specifications for radio,
television, and cable television Media Sources; and (ii) size and mechanical
specifications of non-electronic Media Sources (i.e., newspapers, magazines,
billboards, flyers, etc).
1.11 "Insertion" shall mean an individual occurrence of an Ad with a
Media Source.
1.12 "Media Source" shall mean the individual vehicle used for
Insertion such as but not limited to radio and television station(s), cable
system(s), newspaper publisher(s), magazine publisher(s), billboard vendor(s),
media time/space broker(s), or syndicator(s), etc.
1.13 "Market Research" shall mean the identification of the particular
market and/or markets as well as the identification of the particular
demographics within each such market that the Company desires to reach with any
Media Plan hereunder; and the Company shall cooperate fully with SC in supplying
SC any information necessary for them to complete their responsibilities
pursuant to this Agreement.
1.14 "Target Demographics" shall mean the specific grouping of persons
according to (i) age; and/or (ii) gender; and/or (iii) income; and/or (iv)
geographic location; and/or (v) lifestyle; and/or (vi) psychographic profile, as
stipulated by the Company for the purpose of defining the type of person to whom
the Company would like to advertise.
CORPDAL:53206.1 26287-00001
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1.15 "Schedule" shall mean the number and time parameters of
Insertions placed with a Media Source.
1.16 "Placement" (including words used in this Agreement, such as
"Place" and "Placed" or any other form thereof) with regard to Schedules,
Campaigns, and Media Plans, shall mean the process of requesting and/or
ordering, and/or negotiating, and/or confirming Insertions with a Media Source.
1.17 "Make Good" shall mean the re-scheduling of an Insertion that was
pre-empted during the contracted schedule, within a pre-determined, agreed upon
period of time following the preemption. That period of time will be stated as
part of the proposed Media Campaign or Plan.
1.18 "Media Plan Execution" shall mean the implementation of the Media
Plan by SC within the time and financial parameters set forth in such Media
Plan.
1.19 "Media Research" shall mean the identification by SC of the proper
Media to effectively reach the Company's target markets and audiences, based on
the goals and objectives of the Company's Media Program.
1.20 "Media Research Report" shall mean the written report prepared by
SC's media department and submitted to the Company that details the parameters
of Media Research required to fulfill any Media Plan covered by this Agreement.
1.21 "Options," if applicable, shall mean the right granted to Proxhill
by the Company to purchase the common stock of the Company under the terms and
conditions stated herein.
1.22 "Partially Prepaid Purchase Order" or "Media Credit" shall mean a
written form of Media voucher issued by Proxhill that SC has agreed to honor and
which shall entitle the Company to acquire Media for the promotion of its
products and services, and the Company's other projects for one (1) year payable
on a 33.333% cash and 66.666% Credit from the Partially Prepaid Purchase Order.
1.23 "Recognized Industry Source (Standard)" shall mean nationally
recognized media rate authorities (such as the Media Market Guide published by
Bethlehem Publishing Company, Incorporated, P.O. Box 119, Bethlehem, New
Hampshire, 03574-9981) which have established fair, estimated Media Costs Per
Point and/or Costs Per Thousand, for standard demographic audiences, within
designated market areas. Cost Per Point and/or Cost Per Thousand estimates may
vary to a greater or lesser extent from the estimates provided by a Recognized
Industry Standard Source, due to current and immediate market conditions.
However, combined markets Cost Per Point and/or Cost Per Thousand estimates
provided by a Recognized Industry Standard Source should be realizable.
1.24 "Transaction Fee" shall mean the cash fee that the Company shall
pay under the terms and conditions as described in Article III, Section 3.2 of
this Agreement.
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1.25 "Media Vendor" shall mean a specific company, contact,
representative, or affiliate that can provide written verification of media
placement and/or purchase for Media.
1.26 "Communication(s)" shall mean the establishment of a prior,
current, or subsequent communication or contact with a Media Vendor or source
wherein it is understood that the Company would use that vendor as a Media
provider or conduit for a given period of time or for a given project.
ARTICLE II
SALE AND PURCHASE
2.1 Sale and Purchase. Upon the terms and subject to the conditions
hereinafter set forth, and by virtue of their respective execution of this
Agreement, Proxhill hereby sells to the Company and the Company hereby purchases
and accepts from Proxhill a Partially Prepaid Purchase Order for $1,200,000
worth of Media (the "Purchase Price", as more fully described in Article III).
At the Closing, Proxhill shall deliver to the Company a duly executed Partially
Prepaid Purchase Order containing a notarized signature of an executive officer
of Proxhill warranting the Company's right to purchase Media under the terms of
this Agreement in the amount of the Purchase Price.
2.2 Payment of the Purchase Price - Common Stock. In partial payment of
the Purchase Price, and at the Closing of this transaction, the Company shall
cause the original issuance and delivery to Proxhill a certificate representing
an aggregate of 400,000 authorized but unissued shares of common stock in the
Company, $.001 par value per share, valued, for the purposes of this Agreement
at $2.00 per share (the "Shares"). The Shares shall be restricted securities as
that term is defined under the Securities Act of 1933, as amended (the "33 Act")
and as more fully described in Article VI, Section 6.10 of this Agreement. The
balance of the Purchase Price shall be paid as provided in Article II, Section
2.3 of this Agreement.
2.3 Payment of the Purchase Price - Options. In partial payment of the
Purchase Price, and at the Closing, the Company shall cause the original
issuance and delivery to Proxhill 100,000 options and all other necessary
documentation, acknowledging the Company's granting to Proxhill, the right for a
five (5) year period of time from the date this Agreement is executed, to
purchase 100,000 shares of the Company's common stock at $2.00 per share (the
"Options"). Hereafter when the term "Shares and Options" is used, the definition
includes the issuance of the 400,000 shares of common stock and the underlying
100,000 shares of common stock for the executions of the Options.
ARTICLE III
TERMS AND CONDITIONS
3.1 Payment of Cash Portion. All Media transactions pursuant to this
Agreement shall be consummated on a basis of 33.333% cash and 66.666% Media
Credit or as otherwise
CORPDAL:53206.1 26287-00001
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outlined in this Agreement, paid from the Partially Prepaid Purchase Order, (as
more fully described in Article III, Section 3.4.). The Company, by virtue of
its execution of this Agreement, hereby acknowledges that its timely payment of
the $400,000.00 cash portion of the Media (the "Cash") is a fundamental and
material requirement for the operation of the Media Plan as defined in Article
1, Section 1.8, and effects the ability of Proxhill and SC to implement the
intent of the parties as enumerated in this Agreement. Accordingly, and in the
event the Company does not tender Cash payments when due or fails to make a Cash
payment altogether, (including the failure to pay the Transaction Fee, but cash
payments due for execution of Media Plans as described in Article III, Section
3.4, are excluded, and will not apply to this Article III, Section 3.1), such a
course of action or failure to act shall be construed as and be deemed to be a
fundamental and material breach of this Agreement, entitling Proxhill and SC to
suspend further implementation of this Agreement on three (3) business days
advance written notice to the Company. The Company shall have ten (10) business
days to cure any default and bring current any and all cash payments due from
the date the Company was issued the written default notice (as verified by
certified mail or fax confirmation). In the event of termination as a result of
the failure of the Company to make a Cash payment(s) within the provisions of
this Agreement, Proxhill shall be entitled to retain the Shares and Options (as
described in Article II) and any cash paid to date as liquidated damages.
3.2 Payment of Transaction Fee. The Company shall pay an
eighty-thousand dollar ($80,000) cash Transaction Fee upon the execution of this
Agreement, (which is equal to ten (10%) percent of the Shares and Options
portion of this Agreement), to First Capital Investments, Inc., acting as
exclusive placement agent for Proxhill via certified funds, wire transfer or any
other means specified and accepted by First Capital Investments, Inc.
3.3 Deposit of Partially Prepaid Purchase Order. As soon as practicable
following the Closing, the Company shall deliver the Partially Prepaid Purchase
Order to SC; and SC hereby agrees to accept the Partially Prepaid Purchase Order
and hold the same for and on behalf of the Company. The Company hereby agrees
and acknowledges that the Partially Prepaid Purchase Order can only be deposited
and credit may only be executed with SC, with the exception of circumstances as
set out in Article III, Section 3.8 Termination. If and when the Company
consummates a Media transaction under and pursuant to this Agreement, SC shall
debit the Partially Prepaid Purchase Order with the amount of Media utilized by
the Company and shall confirm the same to the Company in writing, with a copy to
Proxhill. SC hereby specifically covenants and agrees that any Media Plan
implemented for and on behalf of the Company hereunder will equal or be less
than the Cost Per Point and/or Cost Per Thousand criteria for the same target
demographics of any specific market as established by a Recognized Industry
Source (as more fully described in Article 1, Section 1.23) and as selected by
Proxhill or in cases where there is no industry standard or Recognized Industry
Source, published rates. In addition, SC shall furnish the Company with a
monthly statement reflecting the amount of Media still held by SC for and on
behalf of the Company and shall send a copy thereof to Proxhill. Upon the
expiration of the five (5) year term of this Agreement, SC shall return the
Partially Prepaid Purchase Order to Proxhill along with a final statement of
unused Media, if any, via overnight delivery service for cancellation.
CORPDAL:53206.1 26287-00001
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<PAGE>
3.4 Use of Partially Prepaid Purchase Order For Media. Within twenty
(20) business days from the date of this Agreement, SC shall initiate a Media
Research Report by sending one or more experienced and qualified Media
specialists to the Company's facilities , at the Company' expense, as outlined
in Article III, Section 3.7, to initiate the process of preparing an initial
Media Plan utilizing the Partially Prepaid Purchase Order to purchase Media (the
"Initial Media Plan") in markets designated by the Company. With respect to all
Media Plans after the Initial Media Plan, the Company shall advise SC at least
ninety (90) calendar days prior to the Company's intended use thereof. In the
event the Company requests Media that is to be purchased and executed prior to
the ninety (90) calendar days to the intended use thereof, the Company
understands that SC is under no obligation to obtain the Media for the Company
under the terms of this Agreement, but may elect, at SC's sole option to obtain
the requested Media on a best efforts basis for the Company. The Company hereby
acknowledges and accepts that the Partially Prepaid Purchase Order may only be
utilized by it to purchase Media pursuant to a Media Plan. All the Company Media
Plans submitted pursuant to this Agreement shall be of a minimum duration of one
month; and all Media shall be acquired by SC on a subject- to- availability
basis. SC shall submit any and all Media Plans to the Company for approval not
less than 45 calendar days prior to the proposed commencement date, with a copy
to Proxhill. All Media transactions pursuant to this Agreement shall be
consummated on a 33.333% cash, 66.666% Media Credit basis unless otherwise
consummated as outlined in this Agreement. The Company shall promptly review
SC's Media Plan and communicate either its written approval or its written
objections or suggestions to SC within five (5) business days from its receipt
thereof. The failure of the Company to respond to SC as herein indicated shall
be deemed to be a disapproval of the submitted Media Plan. No media plan shall
proceed without the Company's written approval.
No less than twenty (20) business days prior to the Media Plan
execution date of an approved Media Plan, the Company shall pay to SC the cash
portion due thereunder and SC shall debit the Partially Prepaid Purchase Order
as hereinabove enumerated in Article III, Section 3.4. In the event SC does not
receive the required cash portion of the approved Media Plan from the Company no
less than the twenty (20) business days prior to the Media Plan execution date,
the approved Media Plan shall be deemed null and void and of no further force
and effect. Cash payments shall only be due SC when a Media Plan is approved by
the Company. Additionally, in the event that the Company wishes to amend an
approved Media Plan, SC may, at its sole discretion, deem the approved Media
Plan null and void and of no further force or effect. In such event, SC will
prepare and submit a new media plan. Any cash which was sent by the Company and
held by SC on behalf of the Company for a Media Plan, for any reason (i.e., such
as cancellation of purchase order), shall be used by SC for subsequent cash
billings for media plans executed for the Company.
All Media Plans will be prepared pursuant to the terms and conditions
of this Agreement, and the parties agree that the Media Credits shall be
dedicated for the purchase of Media. The Company understands and agrees that, if
the Company, its affiliates or representatives have had prior Communications,
written or oral, with a given Media Source or Media Vendor, then that Media
Source or Media Vendor requested by the Company shall be excluded and shall not
be subject to the terms and conditions of this Agreement. The duration, terms
and conditions of the
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Media may be extended or modified only upon the written consent of the Company,
Proxhill and SC.
3.5 Services. During the term of this Agreement, and so long as the
Company shall own Media Credit and shall furnish its Market Research to SC (if
any), SC shall provide the Company with Aid and Assistance in the consummation
of transactions involving Media. These services, which shall be offered at no
cost to the Company, (other than the expenses as set forth in Article III,
Section 3.7), shall include the conduct of further Media Research, the
preparation and submission to the Company of written Media Plans and aid and
assistance in implementing the Media Plans. In addition, SC shall: (i) furnish
the Company and Proxhill with monthly statements summarizing any and all Media
activity during the preceding 30 calendar days as well as current Partially
Prepaid Purchase Order balances; (ii) assign a customer service representative
to the Company to coordinate and expedite Media related transactions.
3.6 Special Provisions. In the course of implementing the Media Plan,
experience has proven that SC will either discover or be presented with the
opportunity to make special purchases of Media on terms and conditions outside
of the parameters enumerated in this Agreement. In addition, the Company may
make special requests of SC that require monetary arrangements outside of those
enumerated herein such as, but not limited to accelerating the time tables set
forth in Article III, Section 3.4. The Company agrees that the terms of these
special situations may vary from the Company using 10% cash - 90% Credit from
the Partially Prepaid Purchase to 10% Credit from the Partially Prepaid Purchase
- - 90% cash to make the purchase. Finally, and during the term of this Agreement,
market forces beyond the control of the parties may render the purchase of Media
on the terms and conditions enumerated herein either impracticable or
impossible. Situations may also develop whereas SC can provide the Company Media
Credit directly with a specific media source or vendor for a specific form of
Media under terms as outlined in this Agreement. Upon the occurrence of any
event or circumstance enumerated in this Article, SC will provide a written
summary to the Company describing the proposed transaction in detail and solicit
the Company's written authorization before proceeding with the purchase of any
Media on terms and conditions other than as enumerated in this Agreement.
The Special Provisions of this Article on any proposed purchase outside
the terms of this Agreement are subject to availability and will be provided on
a best efforts basis. Proxhill cannot guarantee that any Special Provision,
either requested by the Company or presented by SC, will be available or
obtainable at any given time for the duration of the Agreement.
3.7 Fees and Expenses. Upon execution of this Agreement, and in
addition to Article III, Section 3.2, the Company shall pay a one time $5,000
cash payment to SC via overnight delivery or by wire transfer for the purpose of
covering expenses incurred in preparing the Initial Media Plan for the Company,
as detailed in Article III, Section 3.4. SC agrees to waive its normal 10% cash
transaction fee with respect to any and all transactions consummated by the
Company under and pursuant to this Agreement. Notwithstanding the foregoing, the
Company shall be responsible for out-of-pocket disbursements incurred by SC on
the Company's behalf in connection with the consummation of any transaction
under this Agreement. All such expenses
CORPDAL:53206.1 26287-00001
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shall be billed monthly and paid monthly by the Company. SC shall not incur any
expense in excess of $100.00 without the Company's prior written consent
3.8 Termination. This Agreement shall expire sixty (60) months from the
effective date herein, or upon the depletion of credit, whichever occurs first.
3.9 Transfer. The parties hereby agree that in the event that SC is not
providing adequate pricing and/or delivery of the Media as defined in this
Agreement, and SC has not remedied the situation after having been given
reasonable opportunity to do so, the Company will notify Proxhill and SC in
writing within 10 business days providing a full description of the issues
giving rise to its complaint. If SC cannot rectify the situation within 21
business days to the Company's satisfaction, Proxhill will use its best efforts
to transfer the remaining, unused portion of the Partially Prepaid Purchase
Order within sixty (60) days to another media vendor selected by Proxhill. No
additional commission or cash fee will be charged to the Company for the
transfer.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby makes the following representations and warranties to
Proxhill and SC:
4.1 Valid Corporate Existence; Qualification. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware, and its securities were issued under said laws. The
Company has the corporate power to carry on its business as now conducted and to
own its assets. The Company is qualified to conduct business in all foreign
jurisdictions in which failure to qualify would have a material adverse effect
on the Company and its assets, properties or business, and there has not been
any claim by any jurisdiction to the effect that the Company is required to
qualify or otherwise be authorized to do business as a foreign corporation
therein.
4.2 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 the Company to enable it to enter into and carry out this
Agreement in all material respects.
4.3 Corporate Authority, Binding Nature of Agreement. The Company,
through its Chief Executive Officer, has the corporate power to enter into this
Agreement and to carry out its obligations hereunder. The execution and delivery
of this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by the Board of Directors of the Company and no other
corporate proceedings on the part of the Company are necessary to authorize the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby. This Agreement constitutes the valid and
binding obligations of the Company and is enforceable in accordance with its
terms.
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4.4 Authorized Shares. As of the date of this Agreement, the Company
has, and will reserve for issuance, a sufficient number of Shares so as to be
able to comply with the terms and conditions of this Agreement.
4.5 Reporting Status. As of the date of this Agreement, the Company is
current in all applicable reporting obligations with all governing bodies
including but not limited to, those required by the Securities Exchange Act of
1934. The Company will remain current in these obligations during the term of
this Agreement.
4.6 Cooperation with Registration. Upon request by Proxhill, (of which
Proxhill hereby agrees to not request a registration prior to thirty (30)
calendar days after the effective date of any Company registration, or in the
event the Company fails to complete a registration of its securities, Proxhill
will not request a registration of its securities earlier than one-hundred
eighty (180) calendar days from the execution date of this Agreement), the
Company will timely cooperate with, approve, and execute as necessary, any
registration statement, sale or transfer requested by Proxhill that registers
Proxhill's securities of the Company exclusively, and which is available under
the rules and regulations of the SEC or any other governing body. Said
registration, sale or transfer may include transactions pursuant, but are not
limited to S-1, S-2, S-3, SB-2, Reg. A, Rule 701, etc.
Notwithstanding the above, should Proxhill desire to enter into a
private sale of the Securities at any time after the execution of this
Agreement, (of which private sale may include Regulation S or any other means
available to Proxhill under the rules and regulations of the SEC or any other
governing body), the Company hereby agrees to cooperate with, approve, and
execute as necessary all of the appropriate documentation. Said cooperation will
include on a best efforts basis, but not be limited to the Company's corporate
counsel's opinion(s) and instructions to the Company's transfer agent, and said
cooperation will be provided within ten (10) business days from said request
from Proxhill.
The Company additionally agrees that no other securities of the Company
may be "piggy backed" onto any registration statement executed by or on behalf
of Proxhill, without Proxhill's prior written approval. The expenses incurred
with regard to such registration shall be dealt with as set forth in Article
VII, Section 7.2.
4.7 Permits and Licenses. The Company has, to the best of its
knowledge, all permits, licenses, orders and approvals of all federal, state,
local and foreign governmental or regulatory bodies required to carry on its
business as presently conducted; all such permits, licenses, orders, franchises
and approvals are in full force and effect, and to the knowledge of the Company,
after reasonable inquiry, no suspension or cancellation of any of such permits,
licenses, etc. is threatened; and to its knowledge the Company is in compliance
in all material respects with all requirements, standards and procedures of the
federal state, local and foreign procedures of the federal, state, local and
foreign governmental bodies which issued such permits, licenses, orders,
franchises and approvals.
CORPDAL:53206.1 26287-00001
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4.8 No Breach. To the best knowledge of the Company, neither the
execution and delivery of this Agreement nor compliance by the Company with any
of the provisions hereof nor the consummation of the transactions contemplated
hereby, will, to the best of its knowledge: (i) violate or conflict with any
provision of the Articles of Incorporation or By-laws of the Company; (ii)
violate or, alone or with notice of the passage of time, result in the material
breach or termination of, or otherwise give any contracting party the right to
terminate, or declare a default under, the terms of any Agreement or other
document or undertaking, oral or written, to which the Company is a party or by
which any of its properties or assets may be bound (except for such violations,
conflicts, breaches or defaults as to which required waivers or consents by
other parties have been, or will, prior to the execution of this Agreement, be,
obtained); (iii) result in the creation of any lien, security interest, charge
or encumbrances upon the Shares and Options or any of the properties or assets
of the Company pursuant to the terms of any such Agreement or instrument; (iv)
violate any judgment, order, injunction, decree or award against, or binding
upon the Company or upon its properties or assets; or (v) violate any law or
regulation of any jurisdiction relating to the Company, its securities, assets
or properties, the violation of which would have a material adverse effect on
the Company or the Shares and/or Options.
4.9 Finders. Neither the Company, its officers, directors, nor any of
their affiliates have engaged, consented to, or authorized any broker, finder,
investment banker or other third party other than Equity Communications, with
its principle location at 1512 Grand Avenue, Suite 200, Santa Barbara, CA 93104,
to act on its or their behalf, directly or indirectly, as a broker or finder in
connection with the transactions contemplated by this Agreement. The Company
shall indemnify and hold Proxhill and SC harmless from liability, including
attorneys fees, arising out of any claim to compensation as a broker or finder
by an individual, firm or entity engaged by the Company, and the Company takes
full responsibility for compensation, if any, to Equity Communications.
4.10 Issuance of the Shares and Options, Affiliations. The Shares and
Options, when issued to Proxhill, will be duly and validly issued, fully paid,
and non-assessable with no personal liability attached to the ownership thereof.
No executive officer, director, shareholder or affiliate of the Company is
affiliated with Proxhill or SC as an executive officer or director and the
Shares and Options represent less that 5% of the Company's issued and
outstanding common stock capitalization as of the date of this Agreement.
4.11 Litigation. The Company is not aware of any pending or threatened
litigation that would prohibit it from entering into this Agreement, issuing the
Shares and Options, or otherwise implementing the terms and conditions of this
Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SC
SC hereby makes the following representations and warranties to Proxhill and the
Company:
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5.1 Valid Corporate Existence; Qualification. ADEX, Source and GRO are
corporations duly organized, validly existing and in good standing under the
laws of the State of Illinois. Each has the corporate power to carry on its
business as now conducted and to own its assets. Each is qualified to conduct
business in all foreign jurisdictions in which failure to qualify would have a
material adverse effect on ADEX, Source and GRO and their assets, properties or
business, and there has not been any claim by any jurisdiction to the effect
that ADEX, Source and GRO is required to qualify or otherwise be authorized to
do business as a foreign corporation therein.
5.2 Corporate Authority, Binding Nature of Agreement. ADEX, Source and
GRO through their respective Presidents, have the corporate power to enter into
this Agreement and to carry out their respective obligations hereunder. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by the Board of
Directors of each entity and no other corporate proceedings on the part of any
such entity are necessary to authorize the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby. This
Agreement constitutes the valid and binding obligation of ADEX, Source and GRO
and is enforceable in accordance with its terms.
5.3 Permits and Licenses. ADEX, Source and GRO have all permits,
licenses, orders and approvals of all federal, state, local and foreign
governmental or regulatory bodies required, to the best of their respective
knowledge, to carry on their respective business as presently conducted; all
such permits, licenses, orders, franchises and approvals are in full force and
effect, and to the knowledge of ADEX, Source and GRO, after reasonable inquiry,
no suspension or cancellation of any of such permits, licenses, etc. is
threatened; and ADEX, Source and GRO are in compliance in all material respects
with all requirements, standards and procedures of the federal state, local and
foreign procedures of the federal, state, local and foreign governmental bodies
which issued such permits, licenses, orders, franchises and approvals.
5.4 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 ADEX, Source and GRO to enable each of them to enter into
and carry out this Agreement in all material respects.
5.5 Litigation; Compliance with Law. ADEX, Source and GRO hereby
jointly and severally warrant that they are not aware of any litigation,
pending, that would prohibit them from entering into this Agreement, or
otherwise implementing the terms and conditions of this Agreement.
5.6 No Breach. To the best of their respective knowledge, neither the
execution and delivery of this Agreement nor compliance by ADEX, Source and GRO
with any of the provisions hereof nor the consummation of the transactions
contemplated hereby, will: (i) violate or, alone or with notice of the passage
of time, result in the material breach or termination of, or otherwise give any
contracting party the right to terminate, or declare a default under, the terms
of any agreement or other document or undertaking, oral or written to which
ADEX, Source and GRO is a party or by which any of their properties or assets
may be bound (except for such violations, conflicts, breaches or defaults as to
which required waivers or consents by other parties have been,
CORPDAL:53206.1 26287-00001
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or will, prior to the execution of this Agreement, be, obtained); (ii) result in
the creation of any lien, security interest, charge or encumbrance upon any of
the properties or assets of ADEX, Source and GRO pursuant to the terms of any
such Agreement or instrument; (iii) violate any judgment, order, injunction,
decree or award against, or binding upon ADEX, Source and GRO or upon their
properties or assets; or (iv) violate any law or regulation of any jurisdiction
relating to ADEX, Source and GRO, their assets or properties, the violation of
which would have a material adverse effect on ADEX, Source and GRO.
5.7 Brokers. Neither SC, Adex, Source and GRO nor any of their
respective affiliates have engaged, consented to or authorized any broker,
finder, investment banker or other third party to act on its behalf, directly or
indirectly, as a broker or finder in connection with the transactions
contemplated by this Agreement.
5.8 Recognition. ADEX, Source and GRO hereby agree and covenant that
they will accept the Partially Prepaid Purchase Order for the Media portion of
any transaction sought to be consummated by the Company hereunder. ADEX, Source
and GRO shall treat and accept the Partially Prepaid Purchase Order in
accordance with this Agreement regardless of whether or not Proxhill is in
existence when the Partially Prepaid Purchase Order is sought to be utilized by
the company.
5.9 Pricing. ADEX, Source and GRO hereby specifically covenant and
agree that any Media Plan implemented for and on behalf of the Company hereunder
will equal or be less than the Cost Per Point and/or Cost Per Thousand criteria
for the targeted demographics of any given market as established by a Recognized
Industry Standard Source or, in the event where there is no industry standard or
Recognized Industry Source, published rates.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PROXHILL
Proxhill hereby makes the following representations and warranties to SC and the
Company:
6.1 Valid Corporate Existence; Qualification. Proxhill is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Colorado. Proxhill has the corporate power to carry on its business as
now conducted and to own its assets. Proxhill is qualified to conduct business
in all foreign jurisdictions in which failure to qualify would have a material
adverse effect on Proxhill and its assets, properties or business, and there has
not been any claim by any jurisdiction to the effect that Proxhill is required
to qualify or otherwise be authorized to do business as a foreign corporation
therein.
6.2 Corporate Authority, Binding Nature of Agreement. Proxhill through
its President has the corporate power to enter into this Agreement and to carry
out its obligations hereunder. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have been duly
authorized by the Board of Directors of Proxhill and no other corporate
proceedings on the part of Proxhill are necessary to authorize the execution
CORPDAL:53206.1 26287-00001
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and delivery of this Agreement and the consummation of the transactions
contemplated hereby. This Agreement constitutes the valid and binding
obligations of Proxhill and is enforceable in accordance with its terms.
6.3 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 Proxhill to enable it to enter into and carry out this
Agreement in all material respects.
6.4 Permits and Licenses. Proxhill has, to the best of its knowledge,
all permits, licenses, orders and approvals of all federal, state, local and
foreign governmental or regulatory bodies required to carry on its business as
presently conducted; all such permits, licenses, orders, franchises and
approvals are in full force and effect, and to the knowledge of Proxhill, after
reasonable inquiry, no suspension or cancellation of any of such permits,
licenses, etc. is threatened; and to its knowledge Proxhill is in compliance in
all material respects with all requirements, standards and procedures of the
federal, state, local and foreign procedures of the federal, state, local and
foreign governmental bodies which issued such permits, licenses, orders,
franchises and approvals.
6.5 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 Proxhill and no other proceedings on the part of
Proxhill are necessary to authorize the execution and delivery of this Agreement
and the consummation of the transactions contemplated herein.
6.6 Litigation; Compliance with Law. Proxhill hereby warrants that it
is not aware of any litigation, pending, that would prohibit it from entering
into this Agreement, issuing the Partially Prepaid Purchase Order, or otherwise
implementing the terms and conditions of this Agreement.
6.7 No Breach. To the best of its knowledge, neither the execution and
delivery of this Agreement nor compliance by Proxhill with any of the provisions
hereof nor the consummation of the transactions contemplated hereby, will: (i)
violate or, alone or with notice or the passage of time, result in the material
breach or termination of, or otherwise give any contracting party the right to
terminate, or declare a default under, the terms of any Agreement or other
document or undertaking, oral or written to which Proxhill is a party or by
which any of its properties or assets may be bound (except for such violations,
conflicts, breaches or defaults as to which required waivers or consents by
other parties have been, or will, prior to the execution of this Agreement, be,
obtained); (ii) result in the creation of any lien, security interest, charge or
encumbrance upon any of the properties or assets of Proxhill pursuant to the
terms of any such Agreement or instrument; (iii) violate any judgment, order,
injunction, decree or award against or binding upon Proxhill or upon its
properties or assets; or (iv) violate any law or regulation of any jurisdiction
relating to Proxhill, its assets or properties, the violation of which would
have a material adverse effect on Proxhill.
6.8 Brokers. Neither Proxhill nor any of its affiliates have engaged,
consented to or
CORPDAL:53206.1 26287-00001
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authorized any broker, finder, investment banker or other third party to act on
its behalf, directly or indirectly, as a broker or finder in connection with the
transactions contemplated by this Agreement.
6.9 Issuance of Credits. Proxhill has the full right and authority to
issue the Partially Prepaid Purchase Order to the Company hereunder and the same
when issued, will be duly and validly issued, fully paid with no liability
attaching to the ownership thereof.
6.10 Restricted Securities. Proxhill has been advised by counsel, and
by virtue of its execution of this Agreement, hereby accepts and acknowledges
that the Shares and Options will not be registered under the 33 Act; and that in
executing this Agreement and issuing the Shares and Options to Proxhill, the
Company will be relying upon an exemption from registration based upon the
investment representations of Proxhill. In this regard, Proxhill hereby
represents and warrants to and covenants with the Company that: (i) it will be
acquiring the Shares and Options for investment purposes and without a view
towards the distribution or resale thereof; (ii) any sale of the Shares and
Options will be accomplished only in accordance with the Act or the rules and
regulations of the SEC adopted thereunder. Proxhill acknowledges that a standard
form of stop transfer order will be placed against the Shares and Options on the
books and records of the Company's transfer agent and that a legend reading
substantially as follows has been placed on all certificates representing the
Shares and Options:
The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"). They may not
be sold, assigned or transferred in the absence of an effective
registration statement, receipt of a "no action" letter from the SEC or
an opinion of counsel satisfactory to the Company that registration is
not required under the Act.
6.11 No Inducement. Proxhill has not relied upon or been induced by any
statements, representations or warranties (whether expressed, implied in fact or
implied by law) of any kind, nature or description, concerning the chances or
probability of the Shares and Options to either increase or decrease in value
made by the Company, its agents, servants or employees; and has entered into
this Agreement and is agreeing to accept the Shares and Options based solely
upon its independent findings and conclusions concerning the Company and its
financial condition and not upon any representation, statements or warrants of
the Company or any obligations to make any such representations.
6.12 Business / Relationship. Proxhill is in the business of but not
limited to, providing Media financing to companies that have a consumer product
and/or service. Proxhill was not formed specifically to execute this
transaction. Further, Proxhill has no common ownership or other affiliation with
the Company or SC, other than what is contemplated by this Agreement.
ARTICLE VII
REGISTRATION RIGHTS PROVISIONS
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7.1 "Piggy Back" Registration Rights. If the Company shall, at any time
after the closing and prior to the fifth (5th) anniversary thereof, other than
what is agreed to in this Agreement. propose the registration of an offering of
its debt or equity securities, the Company shall give written notice as promptly
as possible of such proposed registration to Proxhill and will use all
reasonable efforts to cause the offering of such amount of Shares and Options
owned by Proxhill, as Proxhill shall request, within fifteen (15) calendar days
after the giving of such notice, to be included, upon the same terms (including
the method of distribution) of any such offer. In the event Proxhill proposes a
registration, it shall be in conformance with Article IV, Section 4.7 of this
Agreement.
7.2 Securities Registration Expenses. Unless otherwise agreed to by
Proxhill and the Company, the Company shall pay all costs and expenses
associated with any registration initiated by the Company, including without
limitation, (i) all filing fees with the Commission; (ii) fees and expenses of
compliance with securities or blue sky laws (including fees and disbursements of
counsel in connection with blue sky qualifications of the Shares and Options);
(iii) printing expenses; (iv) the fees and expenses incurred in connection with
the listing of the Shares and Options; (v) fees and expenses of counsel and
independent certified public accountants for the Company (including the expenses
of any comfort letters), including costs associated with registrations requested
by Proxhill, as set forth in Article IV, Section 4.7, and (vi) any registration
statement that is requested by Proxhill that must be executed by the Company on
its own behalf or for Proxhill. The Company agrees to provide full cooperation
in a timely manner for any registration statement for or by Proxhill, as is more
fully described in Article IV, Section 4.7.
Proxhill shall pay all of its own costs and expenses incurred,
including all commissions, legal fees and expenses associated with registration
and compliance under the various blue sky laws (including fees and disbursements
of counsel in connection with blue sky qualifications of the Securities) for the
sale or other distribution of the Securities with any states selected by
Proxhill not previously registered by the Company, pursuant to the terms of this
Agreement. The Company agrees to provide full cooperation in a timely manner for
any registration statement for or by Proxhill, as is more fully described in
Article IV, Section 4.7.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS; INDEMNIFICATION
8.1 Survival. The parties agree that their respective representations,
warranties, covenants and agreements contained in this Agreement shall survive
and extend until the complete utilization of the Partially Prepaid Purchase
Order or the termination of this Agreement, whichever is the later. Furthermore,
in the event this Agreement is terminated for any reason, the provisions of
Articles IV, Section 4.2 shall survive for a period of twenty-four (24) months
from the date of execution, as provided therein.
8.2 Indemnification. Each of the parties agrees to save, defend and
indemnify the other parties against and hold them harmless from any and all
liabilities, of every kind, nature and description, fixed or contingent
(including, without limitations, counsel fees and expenses in
CORPDAL:53206.1 26287-00001
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connection with any action, claim or proceeding relating to such liabilities)
arising out of any transaction or event commencing or occurring on or prior to
the date hereof related to the Partially Prepaid Purchase Order or by reason of
any breach or failure of observance or performance of any representation,
warranty, covenant, agreement or commitment made by each party hereunder or as a
result of any such representation, warranty, covenant, agreement or commitment
being untrue or incorrect in any respect.
8.3 Defense of Claims. A party entitled to indemnification hereunder
(an "Indemnified Party") agrees to notify each party required to indemnify
hereunder (an "Indemnifying Party") with reasonable promptness of any claim
asserted against it in respect to which any Indemnifying Party may be liable
under this Agreement, which notification shall be accompanied by a written
statement setting forth the basis of such claim and the manner of calculation
thereof. An Indemnifying Party shall have the right to defend any such claim at
its own expense and with counsel of its choice; provided, however, that such
counsel shall have been approved by the Indemnified Party prior to engagement,
which approval shall not be unreasonably withheld or delayed; and provided
further, that the Indemnified Party may participate in such defense, if it so
chooses, with its own counsel and at its own expense.
8.4 Rights Without Prejudice. The rights of the parties under this
Article are without prejudice to any other right or remedies that it may have by
reason of this Agreement or as otherwise provided by law.
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.1 Expenses. Each of the parties shall bear its own expenses in
connection herewith, including attorneys' and accountants' fees, with the
exception that the Company shall bear the expenses detailed in Article III,
Sections 3.2, 3.4, 3.7 and Article VII, Section 7.2.
9.2 Assignment. This Agreement shall not be assigned without the prior
written consent of the Company, SC, and Proxhill.
9.3 Non-Disclosure, Confidential Information. For a period of
twenty-four (24) months from the execution date of this Agreement, Proxhill and
the Company, their subsidiaries, representatives and agents hereby acknowledge
and agree that in the process of negotiating, entering into, and executing this
and any subsequent transaction(s), the parties will be exposed to certain trade
secrets and confidential knowledge which the parties consider as their
confidential, proprietary, trade secret information, the confidentiality of
which is fundamental to the business operations of the respective parties. Each
party to this Agreement acknowledges and agrees that such party and its
representatives will hold in a fiduciary capacity and in strict confidence all
information, knowledge, data and documents received from the other parties and,
if the transactions herein contemplated shall not be consummated, each party
will continue to hold such information and documents in strict confidence and
will return to such other parties all such documents (including the schedules
and exhibits attached to this Agreement) then in such receiving
CORPDAL:53206.1 26287-00001
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party's possession without retaining copies thereof; provided, however, that
each party's obligations under this Article to maintain such confidentiality
shall not apply to any information or documents that are in the public domain at
the time furnished by the others or that become in the public domain thereafter
through any means other than as a result of any act of the receiving party or of
its agents, officers, directors or stockholders which constitutes a breach of
this Agreement, or that are required by applicable law to be disclosed. The
parties agree that the remedy-at-law in any breach of the provisions of this
Article will be inadequate and/or difficult to calculate, and therefore in
addition to those remedies, each party will be entitled to injunctive relief to
compel the breaching party to perform or refrain from action required or
prohibited hereunder.
Each party also acknowledges and agrees that they shall not divulge to
others, nor allow any of its employees, representatives, confidants, associates,
or agents to divulge, by written, oral, electronic or by any other means
whatsoever, any trade secret or confidential knowledge, pertaining to the
business and affairs of the other party, obtained by a party as a result of its
engagement hereunder, unless authorized in writing, by the other party.
In the event either party breaches this portion of the Agreement, the
damages incurred will be difficult to calculate and determine in sufficiently
definite terms. Therefore, both Proxhill and the Company acknowledge and agree
that in the event of a breach, the non-breaching party will be entitled, in
addition to its equitable and other legal remedies, the sum of $1,000,000,
whichever is greater, as liquidated damages.
9.4 Publicity. The parties agree that no publicity, releases or other
public announcement concerning the transactions contemplated by this Agreement
shall be issued by either party without the advance approval of both the form
and substance of the same by the other party and its counsel, which approval, in
the case of any publicity, release or other public announcement required by
applicable law, shall not be unreasonably withheld or delayed; provided this
Article shall not serve to prevent a delay of disclosure which, in the opinion
of counsel for the disclosing party is advisable under applicable state or
federal law.
9.5 Entire Agreement. This Agreement including all of the exhibits to
be attached hereto constitutes the entire Agreement of the parties with respect
to the subject matter hereof. The representations, warranties, covenants and
agreements set forth in this Agreement and in any schedules or exhibits
delivered pursuant hereto constitute all the representations, warranties,
covenants and agreements of the parties and upon which the parties have relied
and except as may be specifically provided herein, no change, modification,
amendment, addition or termination of this Agreement or any part thereof shall
be valid unless in writing and signed by or on behalf of the party to be charged
therewith.
9.6 Notices. Any and all notices or other communications or deliveries
required or permitted to be given or made pursuant to any of the provisions of
this Agreement shall be deemed to have been duly given or made for all purposes
if sent by certified or registered mail, return receipt requested, and postage
prepaid, Federal Express, Express Mail, hand delivered or sent by telegraph or
telex with confirmation as follows:
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If to SC, at:
18 West 100 22nd Street
Oakbrook Terrace, IL 60181
Office # (708) 953-8100
Fax # (708) 953-8101
Attn.: Keith Groenwald
If to the Company, at:
12655 Central Expressway, Suite 800
Dallas, Texas 75244
Office # (214) 458-9950
Fax # (214) 726-1940
Attn: G. Ray Miller
If to Proxhill, at its agent, First Capital Investments, Inc., at:
9250 East Costilla, Suite 650
Englewood, CO 80112
Office # (303) 792-0414
Fax # (303) 792-0533
Attn.: Gary J. Graham
or at such other address as any party may specify by notice given to other party
in accordance with this Article. The date of giving of any such notice shall be
the date of the actual receipt thereof.
9.7 Waiver. No waiver of the provisions hereof shall be effective
unless in writing and signed by the party to be charged with such waiver. No
waiver shall be deemed a continuing waiver or waiver in respect of any
subsequent breach or default, either of similar or different nature, unless
expressly so stated in writing.
9.8 Laws of the State of Colorado. This Agreement shall be deemed to
have been made and delivered in and governed by and interpreted under and
construed in all respects in accordance with the laws of the State of Colorado,
irrespective of the place of domicile or residence of any party, except any
provisions relating to the issuance of securities by the company, as a Delaware
Corporation, will be governed by Delaware Law. In the event of controversy
arising out of the interpretation, construction, performance or breach of this
Agreement, the parties hereby agree and consent to the jurisdiction and venue of
the District Court of Arapaho County, or the United States District Court within
the State of Colorado, and further agree and consent that personal service of
process in any such action or proceeding outside of the State of Colorado shall
be tantamount to service in person within Colorado, and shall confer personal
jurisdiction upon either of said courts.
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9.9 Injunctive Relief. Solely by virtue of their respective execution
of this Agreement and in consideration for the mutual covenants of each other,
SC, Proxhill and the Company hereby agree, consent and acknowledge that, in the
event of a material breach and/or violation of any of the other material terms,
conditions and restrictions imposed hereunder, the parties will be without
adequate remedy-at-law and shall, therefore, be entitled to immediately redress
any material breach of this Agreement by temporary or permanent injunctive or
mandatory relief obtained in an action or proceeding instituted in the District
Court of the State of Colorado, or the United States District Court for the
District of Colorado without the necessity of proving the extent of damages and
in addition and without prejudice to any other remedies which they may have at
law or in equity. For the purposes of this Agreement, the parties hereby agree
and consent that upon a material breach of this Agreement, either party may
present a conformed copy of this Agreement to the aforesaid courts and shall
thereby be able to obtain a permanent injunction enforcing this Agreement or
barring, enjoining or otherwise prohibiting the other from circumventing the
express written intent of the parties as enumerated in this Agreement. The
jurisdictional, venue and service provisions of Article IX, Section 9.8 of this
Agreement shall be applicable to this Article. Additionally, in any action
commenced to enforce the terms of this Agreement, the prevailing party in any
such action shall be entitled to recover its related costs and reasonable
attorneys' fees associated with such action.
9.10 Headings. The headings or captions under articles of this
Agreement are for convenience and reference only and do not in any way modify,
interpret or construe the intent of the parties or effect any of the provisions
of this Agreement.
9.11 Facsimile signatures. Facsimile Signatures on this document shall
be sufficient and acceptable to bind the parties and for execution of this
Agreement. This Agreement shall only be effective and binding when executed by
all parties hereto. Original signature pages shall be circulated promptly
thereafter via US Mail, with complete original copies of this Agreement for all
of the parties.
(The remainder of this page intentionally left blank)
CORPDAL:53206.1 26287-00001
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written by the undersigned duly authorized person.
GRO ENTERPRISES:
By:
By: Keith Groenwald, Secretary
SOURCE CORP:
By:
By: Keith Groenwald, President
ADEX CORP:
By:
By: Scott Thomas, Vice President
PREFERRED/TELECOM, INC.
By:
By: G. Ray Miller, Chairman & CEO
FIRST CAPITAL INVESTMENTS, INC., AS IT PERTAINS TO ARTICLE III, SECTION 3.2 AND
ARTICLE IX, SECTIONS 9.6 AND 9.8:
By:
By: Gary J. Graham, President
PROXHILL MARKETING, LTD:
By:
By: Gary J. Graham, President
CORPDAL:53206.1 26287-00001
21
Exhibit A
This Note has 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
Note 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.
PROMISSORY NOTE
$10,000.00 Dallas, Texas April , 1996
FOR VALUE RECEIVED, Preferred/telecom, Inc., a Delaware corporation,
promises to pay to the order of , at
, or at such other address as the
holder hereof may designate, the principal sum of Ten Thousand Dollars
($10,000.00), together with interest on the unpaid principal balance from the
date hereof until this note is paid in full at a rate of 7% per annum.
Principal and interest shall be payable in one installment on April , 1998.
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.
<PAGE>
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.
In the event default is made in the payment of this Note, then the
holder will have the right from and after such default to convert the unpaid
balance on this Note into the number of shares of common stock, $.001 par value
per share, of Maker (the "Stock"), derived from dividing the unpaid balance by
the conversion rate where the conversion rate equals one-half of the average
closing price of the Stock on the exchange on which it is traded for the 45 day
period prior to conversion or if the Stock is not then traded on an exchange,
one-half of the average of the last bid price for the 45 day period prior to the
conversion.
All past due principal on this Note shall bear interest at a rate of
18% per annum from maturity until paid.
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.
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.
MAKER:
Preferred/telecom, Inc.
By:
G. RAY MILLER
Chief Executive Officer
Exhibit B
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. 5,000 Warrants
PREFERRED/TELECOM, INC
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies that for
value received (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, $0.00l par
value per share, of Preferred/telecom, Inc., a Delaware corporation (the
"Company"), at a purchase price of $1.50 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 $1.50 (the "Purchase
Price"). The Purchase Price and number of Warrants evidenced by this Warrant
Certificate are subject to adjustment as provided in Article 7.
<PAGE>
Common Stock purchased or subject to purchase 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
April , 1998, or if such date shall in the State of Texas be a holiday or a
day on which banks are 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 transferee(s) 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 Warrant Shares will not be registered under the Securitie
Act or any state securities law and shall not be transferrable unless registered
or an exemption from registration is available. A legend to the foregoing
effect will be placed on any certificate representing such shares.
4.2 If, at any time within five (5) 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
relating 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 Warrant Shares, it shall
each such time give written notice to the holder of these Warrants or the
Warrant Shares ("Holder" for purposes of this Section 4) of the Company's
intention to register such securities, and, upon the written request, given
within thirty (30) days after receipt of any such notice, of the Holders of the
Warrants and Warrant Shares outstanding, to register any of the Warrant Shares,
the Company shall cause the Warrant Shares so requested by the Holder to be
registered, whether such Warrant Shares are outstanding or subject to purchase
hereby, to be registered under the Securities Act, all to the extent requisite
to permit the sale or other disposition by the Holder of the Warrant Shares so
registered; provided, however, that the Warrant Shares as to which registration
had been requested need not be included in such registration if in the 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 Warrant Shares need not bear any restrictive legend.
In the event that any registration pursuant to this Section 4.2 shall be, in
whole or in part, an underwritten offering of securities of the Company, then
(i) any request pursuant to this Section 4.2 to register Warrant Shares 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, (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, and (iii) the Holder
will be bound by the terms of the underwriting agreement and the conditions
imposed by the underwriter on selling shareholders.
4.3 If and whenever the Company is under an obligation pursuant to the
provisions of this Warrant Certificate to register any Warrant
Shares, 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 Warrant Shares covered by such
registration statement;
<PAGE>
(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 Warrant Shares;
(d) use its best efforts to register or qualify the
Warrant Shares covered by such registration statement under such
securities or blue sky laws of such jurisdictions as the Holder shall
reasonably request and where registration or qualification will 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 Warrant Shares in such jurisdictions;
(e) notify the Holder, at any time when a prospectus
relating to the Warrant Shares is required to be delivered under the
Securities Act within the appropriate period mentioned in clause (b) of
this Section 4.3, 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 Warrant Shares, 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; and
(f) exercise its best efforts to furnish, at the
request of the Holder on the date that the Warrant Shares are delivered
to the underwriters for sale pursuant to such registration or, if the
Warrant Shares are not being sold through underwriters, on the date
that the registration statements with respect to such Warrant Shares
are declared effective, (1) an opinion, dated such date, of the counsel
representing the Company for the purposes of such registration,
addressed to the Holder, stating that such registration statement has
become effective under the Securities Act and that (i) to the best of
the knowledge of such counsel, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated under the
Securities Act; (ii) the registration statement, the related
prospectus, and each amendment or supplement thereto, comply as to form
in all material respects with the requirements of the Securities Act
and the applicable rules and regulations of the Commission thereunder
(except that such counsel need express no opinion as to financial
statements and other financial data contained therein); and (iii) such
counsel has no reason to believe that either the registration statement
or the prospectus, or any amendment or supplement thereto, contains any
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; and (2) a letter dated such date, from the
independent certified public accountants of the Company, stating that
they are independent certified public accountants within the meaning of
the Securities Act and the rules and regulations of the Commission
thereunder and that in the opinion of such accountants, the financial
statements and other financial data of the Company included in the
registration statement or the prospectus, or any amendment or
supplement thereof, comply as to form in all material respects with the
applicable accounting requirements of the Securities Act and the rules
and regulations of the Commission thereunder. Such letter from the
independent certified public accountants shall additionally cover such
other financial matters (including information as to periods ending not
more than five business days prior to the date of such letter) as the
Holder may reasonably request.
If the Holder exercises its rights to have the Warrant Shares
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.
4.4 All Registration Expenses incurred in connection with any
registration pursuant to this Warrant Certificate shall be
borne by the Company. All Selling Expenses in connection with
any registration pursuant to this Warrant Certificate shall be
borne by the Holder.
<PAGE>
For purposes of Section 4.4, all expenses incurred by the Company in
complying with Section 4.3, including, without limitation, all registration and
filing fees, fees and expenses of complying with securities and blue sky laws,
printing expenses, and fees and disbursements of counsel and of independent
public accountants for the Company (including the expense of any special audits
in connection with any such registration), are herein called "Registration
Expenses", and all underwriting discounts and selling commissions applicable to
the Warrant Shares covered by any such registration and all fees and
disbursements of counsel for the Holder are herein called "Selling Expenses".
4.5 In the event of any registration of any Warrant Shares 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
upon an untrue statement or alleged untrue statement of a material fact
contained in any registration statement under which the Warrant Shares 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 Warrant Shares
pursuant to paragraph 4.3(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 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 Warrant Shares 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 indemnify 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 of Warrant Shares, 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 preceding
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.
<PAGE>
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 issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable 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
Upon receipt by the Company of reasonable evidence of the ownership of
and the loss, theft, destruction or mutilation of 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 issuable upon exercise of the Warrants shall however be
shares of Common Stock of the Company, par value $0.00l 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 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 from par value to no par value, or a
change from 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 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.
<PAGE>
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
April, 1996.
PREFERRED/TELECOM, INC.
BY:
Chairman of the Board
Attest:
Secretary
SUBLEASE AGREEMENT
1. PARTIES.
This Sublease, dated January 11, 1996, is made between Felts, Mullens &
Fuos herein called ("Sublessor") whose primary business is 12655 North
Central Expressway, Suite 800, Dallas, Texas 75243 (the "Premises") and
Preferred Telecom, Inc. herein called ("Sublessee").
2. MASTER LEASE.
Whereas Sublessor as Tenant entered into a Lease with The Prudential
Insurance Company of America, a New Jersey Corporation as ("Lessor")
and Skeels, Mullens & Associates, Inc. d.b.a. Felts, Mullens & Fuos
("Lessee") dated June 11, 1992 hereinafter referred to as the "Master
Lease" a copy of which is attached hereto as Exhibit A and made a part
hereof and, Lessor and Lessee entered into a First Modification and
Ratification to the Lease dated January 21, 1993, a Second Modification
and Ratification to the Lease dated January 29, 1993, a Third
Modification and Ratification to the Lease dated June 21, 1993, a
Fourth Modification and Ratification to the Lease dated September 17,
1993, and a Fifth Modification and Ratification of the Lease dated
January 13, 1995, all of which Modifications and Ratifications of the
Lease are herein after incorporated and referred to as the Master
Lease.
3. PREMISES.
The parties hereto have agreed that Sublessor shall sublet to Sublessee
11,621 rentable square feet of space located on the 8th floor of North
Central Plaza I, located at 12655 North Central Expressway, Dallas,
Texas. This square footage figure was derived from the Master Lease and
will be used for all purposes under this Sublease.
4. WARRANTY BY SUBLESSOR.
Sublessor warrants and represents to Sublessee that the Master Lease
has not been amended or modified except as expressly set forth herein,
that Sublessor is not now, and as of the commencement of the Term
hereof will not be, in default or breach of any of the provisions of
the Master Lease, and that Sublessor has no knowledge of any claim by
Lessor that Sublessor is in default or breach of any of the provisions
of the Master Lease.
5. TERM.
The Term of this Sublease shall commence on February 1, 1996
("Commencement Date"), or when Lessor consents to this sublease if such
consent is required under the Master Lease, whichever shall last occur,
and end on August 31, 2002 ("Termination Date"), unless otherwise
sooner terminated in accordance with the provisions of this Sublease.
In the event the Term commences on a date other than the Commencement
Date, Sublessor and Sublessee shall execute a memorandum setting forth
the actual date of commencement of the Term and the Rent shall be
prorated accordingly. Possession of the Premises ("Possession") shall
be delivered to Sublessee on the commencement of the Term. If for any
reason Sublessor does not deliver Possession to Sublessee on the
commencement of the Term, Sublessor shall not be subject to any
liability for such failure, the Termination Date shall not be extended
by the
<PAGE>
delay, and the validity of this Sublease shall not be impaired, but
rent shall abate until delivery of Possession.
Notwithstanding the foregoing, if Sublessor has not delivered
Possession to Sublessee within seven (7) days after the Commencement
Date, then at any time thereafter and before delivery of Possession,
Sublessee may give written notice to Sublessor of Sublessee's intention
to cancel this Sublease. If Sublessor delivers Possession to Sublessee
on or before such effective date, this Sublease shall remain in full
force and effect. If Sublessor fails to deliver Possession to Sublessee
on or before such effective date, this Sublease shall be canceled, in
which case all consideration previously paid by Sublessee to Sublessor
on account of this Sublease shall be returned to Sublessee, this
Sublease shall thereafter be of no further force or effect, and
Sublessor shall have no further liability to Sublessee on account of
such delay or cancellation. If Sublessor permits Sublessee to take
Possession prior to the commencement of the Term, such early Possession
shall not advance the Termination Date and shall be subject to the
provisions of this Sublease, excluding the payment of rent.
6. RENT.
6.1 Minimum Rent. Sublessee agrees to pay to Sublessor as rent for
the Premises a monthly rent as follows:
02/01/96 - 01/31/99 $10,652.58 ($11.00/rsf)
02/01/99 - 08/31/02 $12,589.42 ($13.00/rsf)
Inclusive of parking and building standard utility usage.
Sublessee shall pay Sublessor, without notice, deduction or offset,
rent by the 3rd day of each month.
6.2 Operating Costs. The Master Lease requires Sublessor to pay to
Lessor all or a portion of the expenses of operating the building
and/or project of which the Premises are a part ("Additional Rent"),
including but not limited to taxes, utilities, and insurance over a
Base amount. The Sublessee shall pay to Sublessor as Additional Rent
all increases in these expenses as detailed in the Lease over the
actual cost for the calendar year 1996.
7. PREPAYMENTS.
Sublessee shall deposit with Sublessor upon execution of the Sublease
the sum of $10,652.58 as security for Sublessee's faithful performance
of Sublessee's obligations hereunder ("Security Deposit"). If Sublessee
fails to perform any of its other obligations hereunder, Sublessor may
use or apply all or any portion of the Security Deposit for the payment
of any rent or other amount then due hereunder and unpaid, for the
payment of any other sum for which Sublessor may become obligated by
reason of Sublessee's default or breach, or for any loss or damage
sustained by Sublessor as a result of Sublessee's default or breach. If
Sublessor so uses any portion of the Security Deposit, Sublessee shall,
within ten (10) days after written demand by Sublessor, restore the
Security Deposit to the full amount originally deposited, and
Sublessee's failure to do so shall constitute a default under this
Sublease. Notwithstanding the above, Sublessee will provide Sublessor,
within five (5) days of full execution of the
<PAGE>
Sublease Agreement, a Letter of Credit in the amount of Fifty Thousand
Dollars ($50,000.00) issued by BankOne. The term of this Letter of
Credit will be for two (2) years in the name of Felts, Mullens & Fuos,
or its Successors and/or Assigns. Further terms of this Letter of
Credit are outlined on Exhibit B of this Sublease. Additionally, upon
execution of the Sublease, Sublessee will prepay Sublessor the first
month of rent in the amount of $10,652.58.
Sublessor shall not be required to keep the Security Deposit separate
from its general accounts, and shall have no obligation or liability
for payment of interest on the Security Deposit. In the event Sublessor
assigns its interest in this Sublease, Sublessor shall deliver to its
assignee so much of the Security Deposit as is then held by Sublessor.
Within ten (10) days after the Term has expired, or Sublessee has
vacated the Premises, or any final adjustment pursuant to Subsection
6.2 hereof has been made, whichever shall last occur, and provided
Sublessee is not then in default of any of its obligations hereunder,
the Security Deposit, or so much thereof as had not theretofore been
applied by Sublessor, shall be returned to Sublessee or to the last
assignee, if any, of Sublessee's interest hereunder.
8. USE OF PREMISES.
Sublessee shall use the Premises for permitted office uses only as
defined in the Master Lease.
9. ASSIGNMENT AND SUBLETTING.
Sublessee shall not assign this Sublease or further sublet all or any
part of the Premises.
10. INDEMNIFICATION.
Sublessee shall not do or permit to be done any act or thing which will
constitute a breach or violation of any of the terms, covenants,
conditions or provisions of the Master Lease. Sublessee will defend,
indemnify and hold harmless Sublessor from and against all losses,
costs, damages, expenses and liabilities, including but not limited to
reasonable attorneys' fees, which Sublessor may incur or pay out by
reason of any injuries or death to persons or damage to property
occurring in, on or about the Premises during the term of the Sublease
or by reason of any breach or default hereunder on Sublessee's part, or
by reason of any work done in or to the Premises by Sublessee, its
agents, employees, guests, invitees and contractors during term of
Sublease. Sublessee shall in no case have any rights in respect to the
Premises greater than Sublessee's rights under the Master Lease, and
Sublessor shall have no liability to Sublessee for any matter
whatsoever for which Sublessor does not have at least coextensive
rights as Tenant, against the Landlord under the Master Lease.
Notwithstanding the foregoing this section shall not reduce or minimize
Sublessor's obligations under the Master Lease.
11. INSURANCE.
Sublessee covenants to provide on or before the Commencement Date and
to keep in force during the Term hereof insurance coverage per the
requirements of Tenant's Insurance of the Master Lease (Section 7.03)
which provides for General Public Liability Insurance "protection to
the limit of not less than 1,000,000.00 combination per occurrence."
Such policy which shall name Sublessor and Landlord as an additional
insured, is to be written by insurance
<PAGE>
companies licensed to do business in the State of Texas and have a
Best's rate of A-VII or better.
Further, Sublessee also covenants to provide on or before the
Commencement Date and to keep in force during the Term hereof 100% full
replacement insurance coverage for the phone system and furniture
delineated in Schedules A and B attached hereto.
Prior to the time such insurance is first required to be carried by
Sublessee, and thereafter, at least fifteen (15) days prior to the
expiration of any such policy, Sublessee agrees to deliver to Sublessor
either a duplicate original of the aforesaid policy or a certificate
evidencing such insurance, provided said certificate contains an
endorsement that such insurance may not be canceled or materially
changed except upon ten (10) days' notice to Sublessor, together with
evidence of payment of the premium. Sublessee's failure to provide and
keep in force the aforementioned insurance shall be regarded as a
material default hereunder entitling Sublessor to exercise any or all
of the remedies as provided in the Sublease in the event of Sublessee's
default. Notwithstanding anything to the contrary contained in this
Sublease, the carrying of insurance by Sublessee in compliance with
this paragraph shall not modify, reduce, limit or impair Sublessee's
obligations and liability under paragraph 10 hereof. Provisions of this
section should not reduce or limit Sublessor's insurance obligations
under the Master Lease.
12. OTHER PROVISIONS OF SUBLEASE.
Sublessee assumes and agrees to perform all obligations under the
Master Lease during the Term of this Sublease. Neither Sublessee nor
Sublessor shall commit or suffer any act or omission that will violate
any of the provisions of the Master Lease. Sublessor shall exercise due
diligence in attempting to cause Lessor to perform its obligations
under the Master Lease for the benefit of Sublessee. If the Master
Lease terminates, this Sublease shall terminate and the parties shall
be relieved of any further liability or obligation under this Sublease,
provided however, that if the Master Lease terminates as a result of a
default or breach by Sublessor or Sublessee under this Sublease and/or
the Master Lease, then the defaulting party shall be liable to the
non-defaulting party for all damage suffered as a result of such
termination.
Notwithstanding the foregoing, if the Master Lease gives Sublessor any
right to terminate the Master Lease in the event of the partial or
total damage, destruction, or condemnation of the Master Premises or
the building or project of which the Master Premises are a part, the
exercise of such right by Sublessor shall not constitute a default of
breach hereunder.
Notwithstanding the above, or anything contained to the contrary
herein, Sublessor agrees that it will not exercise its option to
terminate the Master Lease contained in Article 15.24 of the Master
Lease nor will it exercise its right to give back a portion of the
Premises under Article 15.25 of the Master Lease unless it receives
written notice from the Sublessee allowing Sublessor such action. Any
breach of this agreement by Sublessor will constitute a default by
Sublessor and Sublessee will be entitled to damages as set forth in
this Sublease.
13. ATTORNEYS' FEES.
<PAGE>
If Sublessor or Sublessee shall commence an action against the other
arising out of or in connection with this Sublease, the prevailing
party shall be entitled to recover its costs of suit and reasonable
attorneys' fees.
14. ADDITIONAL COSTS.
Sublessee shall be responsible for any additional costs incurred as a
result of Sublessee's occupancy of the Premises, i.e. after hours HVAC
costs, above standard electrical consumption, additional janitorial
costs, loss of parking cards or the cost of additional cards or keys to
the Premises, operating expense pass-throughs, etc. Sublessor will
forward all invoices received from the Landlord to Sublessee and
Sublessee will pay the same to Sublessor within five (5) business days.
15. HOLDOVER.
Any holdover at the expiration of this sublease with Sublessor's prior
written consent shall be on a month-to-month basis.
16. ALTERATIONS.
Sublessee shall accept the space in "as is" condition. However,
Sublessor, with Landlord's and Sublessor's written approval, will allow
Sublessee to perform (at Sublessee's sole cost and expense) minor
modifications to the Premises.
17. TERMINATION AND RE-ENTRY BY SUBLESSOR ON SUBLESSEE'S DEFAULT.
If Sublessee abandons or vacates the leased premises or is dispossessed
for cause by Sublessor before the termination of this Sublease, or any
renewal thereof, Sublessor may, on giving ten (10) days written notice
to Sublessee, declare this Sublease forfeited. Sublessee shall be
liable to Sublessor for all damages suffered by reason of such
forfeiture. Such damages shall include, but shall not be limited to,
the following; (1) all actual damages suffered by Sublessor until the
Premises are relet, including reasonable expenses incurred in
attempting to relet; (2) the difference between the rent received if
the Premises are relet and the rent under this Sublease.
18. LITIGATION COSTS.
If any legal action is filed to enforce this sublease, or any part
thereof, the prevailing party shall be entitled to recover reasonable
attorney fees, to be fixed by the court, and costs of the action.
19. APPLICABLE LAW, VENUE, AND SERVICE.
Texas law shall be used in interpreting this Sublease and in
determining the rights of the parties under it.
20. SURRENDER OF PREMISES AND KEYS.
Sublessee agrees that at the expiration of this Sublease, it will quit
and surrender the subleased premises without notice, and will deliver
to Lessor all keys belonging to the Premises, as well as parking and/or
security cards.
<PAGE>
21. SUBLESSEE'S INSOLVENCY, BANKRUPTCY, RECEIVERSHIP, OR ASSIGNMENT
FOR CREDIT.
If Sublessee becomes insolvent, voluntarily or involuntarily bankrupt,
or if a receiver, assignee for creditors, or other liquidating officer
is appointed for Sublessee's business, Sublessor may terminate this
sublease at its option.
22. NOTICES.
Except where otherwise required by statute, all notices given pursuant
to the provisions of this sublease shall be in writing, addressed to
the party to whom the notice is given, and sent by registered or
certified mail to the last known mailing address of the party. However,
notices to Sublessee may be sent to the address of the subleased
premises. Sublessor shall provide Sublessee timely written notification
of any address changes.
23. PHONE SYSTEM.
Sublessor's existing phone system is to remain with the space for
Sublessee's use during the entire Sublease term. Although Sublessee
will have the exclusive use and possession of the phone system,
Sublessor will retain ownership of the same.
24. FURNITURE.
During the Sublease term, Sublessor will allow Sublessee the use of
their conference room furniture (table, chairs and two side pieces) and
such other furniture as will be listed out by Sublessor within 5 (five)
business days of full execution of Sublease document and approval by
Landlord and shall then be attached to Schedule B and made a part of
the Sublease Document. Although Sublessee shall have the exclusive use
and possession of the aforementioned furniture, Sublessor will retain
ownership of the same.
25. PARKING.
Subtenant will take possession of Sublessor's existing parking spaces.
26. BASE YEAR.
For the purpose of calculating operating expense pass-through under
this Sublease, a 1996 base year expense stop will be utilized.
27. PHONE SERVICE.
Sublessee agrees to provide Sublessor or its Successors and/or Assigns
with long distance phone service at Sublessee's cost during the entire
sublease term so long as Sublessor pays Sublessee for such long
distance phone service in a timely manner consistent with Sublessee's
normal billing and payment policy.
28. COMMISSION.
Sublessor will pay all Broker and Outside Procuring Broker commissions
associated with this Sublease per separate Exclusive Subleasing Listing
Agreement.
29. RENTAL OBLIGATION UNDER MASTER LEASE.
<PAGE>
Sublessor shall continue to pay Base Rent and Additional Rent, due
under the Master Lease, directly to Lessor; and continue to comply with
all other provisions of the Master Lease.
30. SUBLEASE APPLICABLE TO HEIRS, SUCCESSORS AND ASSIGNS. The terms,
conditions, and covenants of this sublease shall inure to and be
binding on the heirs, successors, administrators, executors, and
assigns of the parties hereto, except as otherwise herein provided.
31. DEFAULT AND CURE.
The terms of Article 13 of the Master Lease (substituting "Sublessee"
for "Tenant" and "Sublessor" for "Landlord") shall cover this
provision, except that: 1) Sublessee shall have three (3) days rather
than five (5) days to cure a monetary default; and, 2) Sublessee shall
have twenty-five (25) days rather than thirty (30) days to cure a
nonmonetary default.
32. TERMINATION OF SUBLEASE
In the event Sublessor commits monetary default under the Master Lease
and Sublessor does not cure such default within a five (5) day period
after receiving written notice from Lessor, then Sublessee shall have
the right to cure such default for the Sublessor and/or, at their
election, they may terminate this Sublease Agreement with no further
obligations to Sublessor or Lessor. Under these events, Sublessor shall
return security deposit to Sublessee and the Letter of Credit
identified under Exhibit B of this Sublease Agreement shall become null
and void.
33. ASSIGNMENT BY SUBLESSOR.
In the event that Felts, Mullens & Fuos is purchased by or merges with
another firm, that other firm will agree to uphold the terms of this
Sublease and will therefore be assigned as and assume the position of
Sublessor with such change to become a documented addition to this
Sublease but with no other changes in the Sublease Agreement. Felts,
Mullens & Fuos along with any assigns shall be jointly liable to
perform the duties and obligations under this Sublease.
34. CONSENT BY LESSOR.
THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO BY
LESSOR WITHIN FIVE (5) DAYS AFTER EXECUTION HEREOF, UNLESS OTHERWISE
AGREED TO BY THE PARTIES OF THIS AGREEMENT, IF SUCH CONSENT IS REQUIRED
UNDER THE TERMS OF THE MASTER LEASE.
Exhibits A & B and Schedules A & B are attached to and are a part of this
Sublease Agreement.
SUBLESSOR: SUBLESSEE:
Felt, Mullens & Fuos Preferred Telecom, Inc.
<PAGE>
By:
Title: Title:
Date: Date:
<PAGE>
EXHIBIT A
(Original Lease Document with all modifications and ratifications, a.k.a Master
Lease)
<PAGE>
EXHIBIT B
(Furniture List)
AGREEMENT OF SUBTENANT
THIS AGREEMENT OF SUBTENANT (this "Agreement") is entered into as of
the 16 day of January, 1996, and between UNUM Life Insurance Company of America,
a Maine Corporation ("Landlord")and Preferred Telecom, Inc. ("Subtenant"), a
Delaware Corporation Inc., a Texas Corp. d/b/a Felts, Mullens & Fuos
WHEREAS, Landlord and Skeels, Mullens & Assoc., ("Tenant") have
executed a Lease Agreement dated June 11, 1992* (the "Lease") whereby Landlord
leased to Tenant and Tenant leased from Landlord certain space in the office
building known as N. Central Plaza I located at 12655 N. Central Expwy., Dallas,
Texas (such space, as more particularly described in the Lease, being the
"Premises");
WHEREAS, pursuant to that certain Sublease Agreement dated January 11,
1996, (the "Sublease") by and between Tenant and Subtenant, Tenant has agreed to
sublease to Subtenant and Subtenant has agreed to sublease from Tenant that
portion of the Premises described on Exhibit A attached hereto and made a part
hereof ("the Sublease Premises");
WHEREAS, pursuant to Section 11 of the Lease, Landlord has the right to
consent to subtenants and to approve the form of subleases.
WHEREAS, Landlord has agreed to consent to the Subtenant and the form
of the Sublease on the condition that Subtenant execute this Agreement;
NOW, THEREFORE, in consideration of Landlord's consent to the Subtenant
and the Sublease, Subtenant hereby agrees as follows:
1. Landlord shall not be bound by any term contained in the Sublease,
except as expressly stated in paragraph 9 below.
2. Landlord is not in privity of estate or contract with Subtenant.
3. Subtenant is not a third party beneficiary of the Lease or the
Consent of Sublease Agreement dated January 16, 1996, by and between Landlord
and Tenant.
4. Landlord and Landlord's agents have made no representations or
warranties (express or implied) with respect to the Sublease Premises.
*First Modification and Ratification of Lease Agreement dated January 21, 1993,
Second Modification and Ratification of Lease dated January 29, 1993, Third
Modification and Ratification of Lease dated June 21, 1993, Fourth Modification
and Ratification of Lease dated September 17, 1993 and Fifth Modification and
Ratification of Lease dated January 13, 1995.
5 Subtenant has received a copy of the Lease, and notwithstanding any
provision in the Sublease, agrees to be bound by the terms and conditions of the
Lease to the extent the same pertain to the Sublease Premises except with
respect to rent (the amount and timing of payment of which shall be controlled
by the Sublease) and the term of the Sublease, which shall be as stated in the
Sublease, provided that in any event and notwithstanding any contrary provision
of the Sublease, the term of the Sublease shall expire upon the expiration or
earlier termination of the Lease.
6.The Sublease shall not be modified or amended without the prior
written consent of Landlord.
7.Subtenant shall indemnify and hold harmless Landlord from and against
any and all liability, damages, claims, costs, expenses and causes of action
arising out of or relating to (a) Subtenant's use and/or occupancy of the
<PAGE>
Sublease Premises (b) any act or omission of Subtenant or the partners,
directors, officers agents, employees, invitees or contractors of Subtenant, and
(c) any injury, accident or damage occurring in or at the Sublease Premises.
8. Subtenant will deliver to Landlord copies of all notices sent to or
received from Tenant under or in connection with the Sublease.* Any such notice
which Subtenant receives from or sends to Tenant shall be of no force or effect,
unless a copy thereof is sent to Landlord at the same time sent by or to
Subtenant.**
9. In the event the Lease and/or the rights (including without
limitation the right of occupancy of the Sublease Premises) and/or obligations
of Tenant under the Lease are terminated for any reason, including without
limitation in connection with default by or bankruptcy of Tenant (which shall
include all persons or entities claiming by or through Tenant), Landlord may, at
its sole option, consider the Lease to be thereafter a direct lease to Subtenant
upon the terms and conditions contained in the Lease, except that the provisions
of the Sublease shall govern (a) the timing and amount of the payment of rent
and other sums by Subtenant and (b) the term of the Lease. In the event Landlord
exercises such option. Landlord shall not be (a) liable for any act or omission
of Tenant, (b) subject to any offsets of defenses which Subtenant may have
against Tenant, (c) bound by any rent or additional rent which Subtenant may
have paid for more than the current month to Tenant, or (d) bound by any
amendment or modification of the Sublease made without its written consent.
10. Subtenant understands that this Agreement is being delivered
to Landlord to induce Landlord to accept the Subtenant and the Sublease.
* Likewise, Landlord will deliver to Subtenant copies of all notices sent to or
received from Tenant under or in connection with the Sublease and/or Master
Lease.
** A copy of all notifications and documentation required under Paragraph 11 of
the Sublease Agreement shall also be timely sent to Landlord.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
LANDLORD: UNUM Life Insurance Company
of America, a Maine Corporation
By:
Name:
Title:
SUBTENANT: Preferred Telecom, Inc.
By:
Name:
Title:
This Note has 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
Note 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.
PROMISSORY NOTE
$216,500.00 Dallas, Texas July 31, 1996
FOR VALUE RECEIVED, Preferred/telecom, Inc., a Delaware corporation, promises to
pay to the order of Brite Voice Systems, Inc., at 7309 East 21st Street North,
Wichita, Kansas 67206, or at such other address as the holder hereof may
designate, the principal sum of Two Hundred Sixteen Thousand Five Hundred
Dollars ($216,500.00), together with interest on the unpaid principal balance
from the date hereof until this note is paid in full at a rate of prime plus 2%
per annum.
Principal and interest shall be payable in one installment on November 1, 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.
<PAGE>
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.
All past due principal on this Note shall bear interest at a rate of
18% per annum from maturity until paid.
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.
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.
MAKER:
Preferred/telecom, Inc.
By:
G. RAY MILLER
Chief Executive Officer
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. 54 60,000 Warrants
--------- ------------
PREFERRED/TELECOM, INC
WARRANT CERTIFICATE
This warrant certificate ("Warrant Certificate") certifies that for
value received Brite Voice Systems, Inc. (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, $0.00l par value per share, of Preferred/telecom, Inc., a Delaware
corporation (the "Company"), at a purchase price of $2.44 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 $2.44 (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 or subject to purchase pursuant to the
<PAGE>
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 July
31, 1999, or if such date shall in the State of Texas be a holiday or a day on
which banks are 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 transferee(s) 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
The Warrant Shares will not be registered under the Securities Act or
any state securities law and shall not be transferrable unless
registered or an exemption from registration is available. A legend to
the foregoing effect will be placed on any certificate representing
such shares.
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 issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Common Stock which shall be issuable 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
Upon receipt by the Company of reasonable evidence of the ownership of
and the loss, theft, destruction or mutilation of 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 issuable upon exercise of the Warrants shall however be
shares of Common Stock of the Company, par value $0.00l 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 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 from par value to no par value, or a
change from 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 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.
<PAGE>
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 31st day of July, 1996.
PREFERRED/TELECOM, INC.
BY:
Chairman of the Board
Attest:
Secretary
<PAGE>
