United States
Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-QSB
{ X } Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the Period Ended December 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 Executive (Zip Code)
Offices)
(972) 458-9950
(Registrant's Telephone Number, including area code.)
Not Applicable
(Former name, Former Address and Former Fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by the Court. Yes X No
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practical date.
Common Stock, $ 0.001 Par Value - 10,860,142 Shares as of January 31, 1997.
Transitional Small Business Format Yes X No
<PAGE>
INDEX
PREFERRED/TELECOM, INC.
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets-December 31, 1996, December 31, 1995 and March 31, 1996.
Statements of Operations-Three Months Ended December 31, 1996; Nine
months ended December 31, 1996; Three Months Ended December 31, 1995; Nine
months ended December 31, 1995 and for the Year Ended March 31, 1996.
Statements of Cash Flows-Nine Months Ended December 31, 1995; Nine
Months Ended December 31, 1996 and for the Year Ended March 31, 1996.
Notes to Financial statements - December 31, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 1
Part II. Other Information 4
Item 1. Legal Proceedings 4
Item 2. Changes in Securities 4
Item 3. Defaults upon Senior Securities 4
Item 4. Submission of Matters to a Vote of Security Holders 4
Item 5. Other Information 4
Item 6. Exhibits and Reports on Form 8-K 5
Signatures 6
<PAGE>
PREFERRED/TELECOM, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 AND MARCH 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1996
ASSETS (UNAUDITED) (UNAUDITED) (AUDITED)
CURRENT ASSETS:
<S> <C> <C> <C>
CASH AND CASH EQUIVALENTS $ 39,218 $ 800,128 $ 42,574
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE 136,647 33,308 57,475
FOR DOUBTFUL ACCOUNTS OF $ 57,903, $-0-
AND $2,474 RESPECTIVELY
EMPLOYEE RECEIVABLES 1,529 7,086 13,185
PREPAID EXPENSES 206,657 37,889 30,917
------------------- ------------------- ------------------
TOTAL CURRENT ASSETS $ 384,050 $ 878,411 $ 144,151
------------------- ------------------- ------------------
PROPERTY AND EQUIPMENT:
COMPUTER EQUIPMENT $ 103,663 $ 120,410 99,979
FURNITURE AND FIXTURES 25,143 21,655 24,550
OFFICE EQUIPMENT 6,082 5,406 6,082
LEASEHOLD IMPROVEMENTS 6,248 3,356 6,248
CALL VALIDATION SYSTEM 122,087 -O- 112,520
LESS: ACCUMULATED DEPRECIATION (63,801) (15,349) (23,419)
------------------- ------------------- ------------------
NET PROPERTY AND EQUIPMENT $ 199,422 $ 135,478 $ 225,960
------------------- ------------------- ------------------
OTHER ASSETS:
DEPOSITS $ 103,624 $ 4,199 $ 14,852
PREPAID EXPENSES 640,000 -O- -O-
DEFERRED CONTRACT COSTS 100,203 149,813 121,576
DEFERRED DEBT ISSUE COSTS-NET 4,387 6,939 4,333
PATENTS AND TRADEMARKS-NET 19,443 -O- 16,208
CERTIFICATE OF DEPOSIT 52,039 -O- 50,445
STATE CERTIFICATIONS 22,891 -O- -O-
DEFERRED STOCK ISSUE COSTS 68,241 -O- -O-
------------------- ------------------- ------------------
TOTAL OTHER ASSETS $ 1,010,828 $ 160,951 $ 207,414
------------------- ------------------- ------------------
TOTAL ASSETS $ 1,594,299 $ 1,174,840 $ 577,525
=================== =================== ==================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1996
LIABILITIES AND STOCKHOLDER'S DEFICIT (UNAUDITED) (UNAUDITED) (AUDITED)
CURENT
LIABILITIES:
<S> <C> <C> <C>
ACCOUNTS PAYABLE $ 899,563 $ 299,956 526,162
ACCRUED OPERATING & VACATION EXPENSES 43,419 21,400 56,567
ACCRUED PAYROLL AND RELATED TAX 475,421 96,321 162,411
ACCRUED INTEREST PAYABLE 123,589 6,706 20,866
NOTES PAYABLE 1,413,100 895,000 985,000
NOTES PAYABLE-OFFICERS 57,500 57,500 57,500
------------------- ------------------- ------------------
TOTAL CURRENT LIABILITIES $ 3,012,593 $ 1,376,883 $ 1,808,506
------------------- ------------------- ------------------
LONG TERM DEBT $ 875,000 $ -0- $ -0-
------------------- ------------------- ------------------
COMMITMENTS AND CONTINGENCIES (NOTE G)
STOCKHOLDERS DEFICIT:
COMMON STOCK, $0.001 PAR VALUE
20,000,000 SHARES AUTHORIZED;
SHARES ISSUED 10,860,142, 8,949,942
AND 8,949,942 RESPECTIVELY $ 10,860 $ 8,950 $ 8,950
ADDITIONAL PAID IN CAPITAL 2,898,955 1,916,632 1,916,632
ACCUMULATED DEFICIT (5,201,241) (2,127,625) (3,156,428)
TREASURY STOCK - AT COST (1,868) -O- (135)
STOCK SUBSCRIPTIONS RECEIVABLE -O- -O- -O-
------------------- ------------------- ------------------
TOTAL STOCKHOLDER DEFICIT $ (2,293,294) $ (202,043) $ (1,230,981)
------------------- ------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDER DEFICIT $ 1,594,299 $ 1,174,840 $ 577,525
=================== =================== ==================
</TABLE>
<PAGE>
PREFERRED/TELECOM, INC.
STATEMENTS OF
OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- ----------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1996 1995 1996
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (AUDITED)
------------------ ------------------ ------------------- ------------------- -----------
<S> <C> <C> <C> <C> <C>
SALES $ 217,280 $ 40,070 $ 696,190 $ 54,520 $ 159,004
COST OF SALES 238,037 116,163 821,933 210,014 344,310
------------------ ------------------ ------------------- ------------------- -----------
GROSS PROFIT (LOSS) $ (20,757) $ (76,093) $ (125,743) $ (155,494) $ (185,306)
------------------ ------------------ ------------------- ------------------- -----------
COSTS AND EXPENSES:
SALES & MARKETING $ 127,640 $ 295,816 $ 879,877 $ 603,771 $ 1,091,453
GENERAL & ADMINISTRATIVE 286,092 369,161 905,168 870,250 1,360,693
INTEREST EXPENSE 134,025 65,603 86,469
47,954 25,831
------------------ ------------------ ------------------- ------------------- -----------
TOTAL COSTS AND $ 461,686 $ 690,808 $ 1,919,070 $ 1,539,624 $ 2,538,615
EXPENSES
------------------ ------------------ ------------------- ------------------- -----------
LOSS BEFORE INCOME TAX $ (482,443) $ (766,901) $ (2,044,813) $ (1,695,118) $(2,723,921)
PROVISION FOR INCOME TAX -O- -O- -O- -O- -O-
------------------ ------------------ ------------------- ------------------- -----------
NET LOSS $ (482,443) $ (766,901) $ (2,044,813) $ (1,695,118) $(2,723,921)
================== ================== =================== =================== ===========
NET LOSS PER SHARE $ (0.05) $ (0.20) $ (0.20) $ (0.23) $ (0.35)
================== ================== =================== =================== ===========
</TABLE>
<PAGE>
PREFERRED/TELECOM, INC.
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1996 AND 1995
AND FOR THE YEAR ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1996
(UNAUDITED) (UNAUDITED) (AUDITED)
------------------- ------------------- ------------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S> <C> <C> <C>
CASH RECEIVED FROM CUSTOMERS $ 559,115 $ 21,212 $ 101,529
CASH PAID TO SUPPLIERS AND EMPLOYEES (1,951,438) (1,600,726) (2,359,786)
INTEREST PAID -O- (75,916) (75,916)
------------------- ------------------- ------------------
NET CASH USED BY OPERATING $ (1,392,323) $ (1,655,430) $ (2,334,173)
ACTIVITIES
------------------- ------------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES $ (28,393) $ (124,727) $ (246,459)
PURCHASE OF CERTIFICATE OF DEPOSIT -O- -O- (50,000)
PROCEEDS FROM SALE OF FIXED ASSETS -O- -O- 3,056
------------------- ------------------- ------------------
NET CASH USED BY INVESTING $ (28,393) $ (124,727) $ (293,403)
ACTIVITIES
------------------- ------------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM SALE OF STOCK $ 180 $ 1,939,432 $ 1,938,332
PROCEEDS FROM NOTES PAYABLE 1,487,154 587,500 687,500
INCREASE IN DEFERRED OFFERING COST (68,241) -O- -O-
PURCHASE OF TREASURY STOCK
(1,733) -O- (135)
INCREASE IN DEBENTURES PAYABLE -O- 10,000 -O-
DECREASE IN STOCK SUBSCRIPTION RECEIVABLE -O- -O- 1,100
------------------- ------------------- ------------------
NET CASH PROVIDED BY FINANCING $ 1,417,360 $ 2,536,932 $ 2,626,797
ACTIVITIES
------------------- ------------------- ------------------
NET INCREASE (DECREASE) IN CASH AND CASH $ (3,356) $ 756,775 $ (779)
EQUIVALENTS
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD 42,574 43,353 43,353
------------------- ------------------- ------------------
END OF PERIOD $ 39,218 $ 800,128 $ 42,574
=================== =================== ==================
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
ISSUANCE OF COMMON STOCK IN EXCHANGE FOR
BARTERING CREDITS $ 800,000
CONVERSION OF DEBENTURE TO COMMON STOCK 75,000
-------------------
TOTAL NON-CASH INVESTING $ 875,000
ACTIVITIES
===================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1995 1996
(UNAUDITED) (UNAUDITED) (AUDITED)
------------------- ------------------- ------------------
RECONCILIATION OF NET LOSS TO
NET CASH USED BY OPERATING ACTIVITIES:
<S> <C> <C> <C>
NET LOSS $ (2,044,813) $ (1,695,118) $ (2,723,921)
------------------- ------------------- ------------------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED BY OPERATING ACTIVITIES:
DEPRECIATION $ 40,382 $ 12,953 $ 25,017
AMORTIZATION 32,634 8,515 29,604
(GAIN) LOSS ON SALE OF FIXED ASSETS -O- -O- (636)
CHANGES IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN ACCOUNTS RECEIVABLE (79,113) (33,308) (57,475)
(INCREASE) DECREASE IN EMPLOYEE RECEIVABLES 11,656 (7,086) (13,185)
(INCREASE) DECREASE IN CERTIFICATE OF DEPOSIT (1,653) -O- (445)
(INCREASE) DECREASE IN DEPOSITS (88,772) (1,354) (12,007)
(INCREASE) DECREASE IN PREPAID EXPENSES (15,740) (36,698) (29,726)
(INCREASE) DECREASE IN DEFERRED CONTRACT COSTS -0- (124,813) (114,500)
(INCREASE) DECREASE IN STATE CERTIFICATIONS (22,891) -O- -O-
INCREASE (DECREASE) IN ACCOUNTS PAYABLE 373,401 299,956 526,162
INCREASE (DECREASE) IN ACCRUED EXPENSES 402,586 (78,477) 36,939
------------------- ------------------- ------------------
$ 652,490 $ 39,688 $ 389,748
------------------- ------------------- ------------------
NET CASH USED BY OPERATING ACTIVITIES $ (1,392,323) $ (1,655,430) $ (2,334,173)
=================== =================== ==================
</TABLE>
<PAGE>
PREFERRED/TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A - GENERAL ORGANIZATION
Preferred/telecom, Inc. (the "Company") is a Delaware corporation incorporated
in 1992. The Company commenced business on May 13, 1994, and was in the
development stage until August 1, 1995. The Company provides long distance
telecommunications services throughout the United States and maintains its
principal offices in Dallas, Texas. The Company has not presented financial
statements for the period from incorporation in 1992 through May 14, 1994, as
the Company did not begin its planning and organizational activities until May
13, 1994. In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) that are necessary for a fair presentation of the financial
position of the Company at December 31, 1996, the results of its operations for
the three and nine months ended December 31, 1996 and 1995 and the results of
the cash flows for the nine months ended December 31, 1996 and 1995. These
financial statements should be read in conjunction with the notes to the
Company's annual financial statements that were included in the Company's Annual
Report on Form 10-KSB for the year ended March 31, 1996 filed with the
Securities and Exchange Commission (the "Commission") on August 2, 1996.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
amounts due from banks.
ACCOUNTS RECEIVABLE
In the normal course of business, the Company extends unsecured credit
to its customers with payment terms generally 30 days. Because of the credit
risk involved, management has provided an allowance for doubtful accounts which
reflects its opinion of amounts which will eventually become uncollectible. In
the event of complete nonperformance by the Company's customers, the maximum
exposure to the Company is the outstanding accounts receivable balance at the
date of nonperformance.
DEPRECIATION
The cost of property and equipment is depreciated over the estimated
useful lives of the related assets. Depreciation is computed on the
straight-line method for financial reporting purposes and the double declining
method for income tax purposes.
Maintenance and repairs are charged to operations when incurred. Betterments and
renewals are capitalized.
The useful lives of property and equipment for purposes of computing
depreciation are as follows:
Computer Equipment 5 years
Furniture and Fixtures 5 years
Office Equipment 5 years
Leasehold Improvements 6 years
INCOME TAXES
Income taxes are accounted for using the liability method under the provisions
of SFAS 109 "Accounting for Income Taxes".
LOSS PER SHARE
Loss per share is based on the weighted average number of shares outstanding of
10,574,566 and 10,150,231 for the three months and nine months ending December
31, 1996, respectively; 8,406,453 and 7,419,575 for the three months and nine
months ending December 31, 1995, respectively and 7,769,708 for the period
ending March 31, 1996.
AMORTIZATION
Fees and other expenses associated with the issuance of subordinated convertible
debentures are being amortized on the straight-line method over the term of the
debentures beginning in April, 1995. Amortization expense was $29,777 and
$14,000 for the nine months and three months ended December 31, 1996,
respectively; and $11,240 and $ 6,088 for the nine months and three months ended
December 31, 1995, respectively; and $ 10,303 for the fiscal year ended March
31, 1996.
NOTES TO FINANCIAL STATEMENTS
AMORTIZATION (CONTINUED)
The cost of patents and trademarks are being amortized on the straight line over
a period of 15 years. Amortization expense charged to operations as of December
31, 1996 was $ 2,857, $ 6,926 and $ 559 for the three months and nine months and
for the fiscal year ended March 31, 1996, respectively.
NOTE C-NOTES PAYABLE-RELATED PARTIES
Notes payable to related parties consist of the following:
<TABLE>
<CAPTION>
DEC. 31, DEC. 31, MARCH 31,
1996 1995
---------- --------
1996
Notes payable to a director and officer, dated Sept. 1,1994
and June 12, 1996, due on Oct. 1, 1996 and June 12, 1998,
and unsecured, interest payable semi-annually at a rate of
prime + 2% (8.25% at Dec. 31, 1996 and March 31, 1996
<S> <C> <C> <C>
and 7% per annum). $ 67,500 $ 7,500 $ 7,500
Notes payable to a director and officer, dated June 5,1994
due on Oct. 1, 1996 and unsecured, interest payable semi-
annually at a rate of prime + 2% (8.25% at Dec. 31, 1996
and March 31, 1996). 50,000 50,000 50,000
Notes Payable to Pegasus Settlement Trust (PST), a stockholder of the Company.
The beneficiary and a trustee of PST are officers of the Company. The notes are
unsecured and bear interest at rates ranging from prime rate(8.25% and 9% at
December, 1996 and March, 1996) with the principal and accrued interest payable
at maturity on various dates through
January 31, 1997 590,946 550,000 650,000
Notes payable to a stockholder of the Company and several affiliated trusts of
which the stockholder is the trustee. The notes are unsecured and bear interest
at rates of 9% and 10% per annum and prime (8.25% at December 31, 1996 and March
1996) with principal and accrued interest payable at
various dates through November 26, 1996 385,000 225,000 225,000
Total related party notes payable $ 1,093,446 $ 832,500 $ 932,500
</TABLE>
Interest expense charged to operations related to the related party notes
payable was $69,974 and $23,977 for the nine months and three months ended
December, 1996, respectively; and $43,678 and $ 18,898 for the nine months and
three months ended December, 1995, respectively; and $ 78,943 for the fiscal
year ended March 31, 1996.
NOTE D-LONG TERM DEBT
Long-term debt consisted of the following at December 31, 1996 and 1995 and
March 31, 1996:
<TABLE>
<CAPTION>
DEC. 31, DEC. 31, MARCH 31,
1996 1995 1996
Notes payable dated various dates from May 20, 1996 through September 24, 1996,
secured by common stock with principal and accrued interest due at maturity on
various dates through September 24, 1998. 437,500 warrants to purchase shares of
common stock at $ 1.50 per share expiring from dates in May
<S> <C> <C> <C> <C> <C>
through September, 1998 were issued to the note holders $ 875,000** $ -0- $ -0-
Total $ 875,000 $ -0- $ -0-
</TABLE>
**Includes $ 60,000 in related party participation.
NOTES TO FINANCIAL STATEMENTS
The following are maturities of long term debt for each of the next three years:
YEAR ENDING
MARCH 31, AMOUNT
1997 $ 0
1998 $ 0
1999 $ 875,000
----------
Total $ 875,000
NOTE E - COMMON STOCK:
STOCK PURCHASE WARRANTS
At December 31, 1996, the Company had outstanding warrants to purchase 2,572,400
shares of the Company's common stock at prices which ranged from $0.04 per share
to $2.44 per share. The warrants are exercisable at any time and expire on dates
ranging from January 27, 1998 to June 3, 2001. At December 31, 1996, 2,572,400
shares of common stock were reserved for that purpose.
CHANGE IN AUTHORIZED SHARES
On March 15, 1995, the Company's stockholders approved an amendment to increase
the number of authorized shares of common stock from 10,000,000 to 15,000,000.
On July 25, 1995, the Company's stockholders approved an amendment to increase
the number of authorized shares of common stock from 15,000,000 to 20,000,000.
COMMON STOCK RESERVED
At December 31, 1996, shares of common stock were reserved for the following
purposes:
Exercise of stock warrants 2,572,400
Conversion of convertible debentures 23,333
Exercise and future grants of stock options
and stock appreciation rights 396,000
Total 2,991,733
NOTE F - STOCK OPTION PLAN:
On November 1, 1994, the Company adopted a stock award and incentive plan which
permits the issuance of options and stock appreciation rights to selected
employees and independent contractors of the Company. The plan originally
reserved 450,000 shares of common stock for grant, of which 54,000 shares have
been purchased, leaving 396,000 shares of common stock for grant and provides
that the term of each award be determined by the committee of the Board of
Directors (Committee) charged with administering the plan.
Under the terms of the plan, options granted may be either nonqualified or
incentive stock option, and the exercise price, determined by the Committee, may
not be less than the fair market value of a share on the date of the grant.
Stock appreciation rights granted in tandem with an option shall be exercisable
only to the extent the underlying option is exercisable and the grant price
shall be equal to the exercise price of the underlying option. At December 31,
1996, options to purchase 77,500 shares at exercise prices of $0.10 to $1.50 per
share have been granted. No stock appreciation rights have been granted at
December 31, 1996.
NOTE G - COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENT
The Company has entered into a non-cancelable operating lease for office
facilities under a lease agreement which commenced on February 1, 1996 and
expires on August 31, 2002. Minimum future rental to be paid on non-cancelable
leases as of December 31, 1996 for each of the next five years in the aggregate
are:
NOTES TO FINANCIAL STATEMENTS
NOTE G - COMMITMENTS AND CONTINGENCIES: (CONTINUED)
LEASE COMMITMENT (CONTINUED)
YEAR ENDING
MARCH 31, AMOUNT
1997 $ 127,836
1998 127,836
1999 131,708
2000 151,608
2001 151,608
Thereafter 214,013
$ 904,609
Total rent expense charged to operations $96,517 and $31,313 for the nine months
and three months ended December 31, 1996, respectively; and $25,410 and $ 8,839
for the nine months and three months ended December 31, 1995, respectively; and
$ 49,661 for the fiscal year ended March 31, 1996.
LETTER OF CREDIT
At December 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 $52,039.
CARRIER AGREEMENT
The Company is obligated for minimum monthly service payments under the terms of
a carrier services agreement with MCI Telecommunications Corporation (MCI)
expiring in October 1998. The minimum annual commitments under the MCI agreement
are:
YEAR ENDING
MARCH 31, AMOUNT
1997 $ 9,725,000
1998 12,000,000
1999 12,000,000
2000 7,000,000
-----------------
$ 40,725,000
The MCI agreement is for a period of 46 months. The Company has a liability
equal to fifteen (15) percent of the remaining minimum payments in the event of
termination prior to expiration by the Company or MCI under certain conditions.
The remaining liability amounts to a maximum of $ 6,000,000. Currently, 60% of
the Company's collections from the sale of long distance are being paid to MCI,
subject to subsequent adjustments for over and underpayments.
OTHER COMMITMENTS
On April 19, 1995, the Company entered into a three year equipment and services
agreement with Brite Voice Systems, Inc. (BVS) for BVS to provide the Company
with voice-activated calling card services. Under the terms of this agreement,
the Company paid BVS an initial fee of $89,500 and minimum monthly payments,
starting at $ 20,000 per month, for months one through twelve (1-12) and
escalating to $ 25,000 per month in months thirteen through twenty-four (13-24)
and $ 30,000 in months twenty-five through thirty-six (25-36) of the agreement.
The Company renegotiated the BVS Agreement to reduce the monthly minimums from $
25,000 to $3,000 per month effective November 1, 1996. The total minimum monthly
commitments amount to $ 367,000 over the term of the agreement, $ 58,500 of
which have not yet become payable.
NOTES TO FINANCIAL STATEMENTS
NOTE H - BARTER TRANSACTION
On June 3, 1996, the Company entered into a media purchase agreement for the
promotion of its products and services with Proxhill Marketing, Ltd. (Proxhill).
Under the terms of the agreement, the Company committed to purchase $1,200,000
of media advertising time in exchange for 400,000 shares of common stock at a
value of $ 2.00 per share, and $400,000 in cash. The agreement is for a period
of five years. For each purchase of media advertising time, the Company will
receive a barter credit equal to 66.67% of the transaction value with the
remaining balance payable in cash. In connection with this agreement, the
Company issued Proxhill a warrant to purchase 100,000 shares of the Company's
common stock at a price of $2.00 per share. The warrants expire on June 3, 2001.
NOTE I - GOING CONCERN
The Company has incurred substantial operating losses to date. In June, 1995,
the Company issued 600,000 shares of its common stock to Star Resources, Inc.
(Star), a public company, for $ 24,000. The Company then filed a registration
statement with the Securities and Exchange Commission to allow Star to
distribute to its stockholders the 600,000 shares of common stock. Upon
completion of the Star distribution, the Company became a separate public
company. The Company has raised, and intends to continue to raise, additional
capital through subsequent offerings of its common stock.
In the first and second quarters ended September 30, 1996, the Company received
total proceeds of $875,000 in connection with a private offering of $10,000
notes bearing interest at 7% and warrants to purchase 5,000 shares of common
stock at a price of $1.50. The offering was closed on September 30, 1996. This
amount, however, was insufficient to fund the Company's operations. The Company
has been forced to significantly curtail its operations and made drastic cuts in
its overhead. The Company's operations, at this time, consist principally of
servicing existing customers. The Company has suspended its marketing operations
and is not acquiring additional platforms until additional funding is acquired.
The Company borrowed $ 60,000 from a shareholder in October, 1996. In November
and December, 1996 the Company borrowed $150,000 from a lender. This short term
funding allowed the Company to continue its curtailed operations only through
January 31, 1997. The Company has negotiated the sale of certain assets to Brite
Voice systems, Inc. ("Brite") which should close in early February. This
agreement requires settlement of the total MCI debt for a negotiated sum of
$250,000, reduces the Brite note by more than one-half and provides some working
capital, which should be sufficient through March 15, 1997. The Company intends
to make a private placement in the form of common stock and warrants in the
maximum amount of $1.8 million. If this maximum amount is raised, the Company
should be able to resume marketing operations beyond March 15, 1997.
In view of these matters, realization of a major portion of the assets in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations. Management
believes that actions presently being taken to meet the Company's financial
requirements will provide the Company the opportunity to continue as a going
concern.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Financial Statements of the Company and related notes thereto appearing
elsewhere in this filing.
RESULTS OF OPERATIONS
Preferred/telecom, Inc. (the Company) commenced business on May 13, 1994, and
was in the development stage through August 1, 1995. During the period from its
inception until March 31, 1995, the end of the fiscal year, the Company's
activities consisted entirely of developing and implementing its business plan,
including developing its product service offerings, formulating its marketing
strategies and operations, negotiation of agreements necessary to its proposed
operations and hiring personnel. The Company began its sales activities in April
1995 and had no revenues during the period of May 13, 1994 through March 31,
1995. The initial sales activity involved introducing the Company's proposed
services to prospective customers to gauge consumer response with respect to
pricing, features and viability of the services. The Company began enrolling
SecureCard customers in August 1995 and has been providing long distance
services, including SecureCard and traditional 1+ and 800 services since that
time.
In the nine months period ended December 31, 1995 the Company booked revenues of
$ 54,520 for services and the direct costs associated with generating sales was
$ 210,014. During the nine months ended December 31, 1996, the Company booked
revenues of $ 696,190. Of this amount, 18% was attributed to the SecureCard
product. The remainder of the Company's revenue was derived from 1+ and 800
service. Direct cost of sales for the nine months period ending December 31,
1996 was $ 821,933 or 118.1% of sales. Of that amount, $ 158,500 related to
contractual minimums, very little of which represented payment for actual
services. In part, this is due to the costs of the basic infrastructure that the
Company put into place and is required regardless of the level of sales.
During the fiscal year ended March 31, 1996, the Company booked $ 159,004 in
revenue and $ 344,310 in direct expenses associated with the sale of SecureCard
and other telecommunications services. Of these direct expenses, $ 140,000
related to paying contractual minimums. For the nine months ended December 31,
1996, sales and marketing expenses were 125% of sales, and general and
administrative expenses were 150% of sales. Each of these ratios are
considerable less than the equivalent ratios for the Fiscal year ended March 31,
1996, down from 722% and 697% respectively.
The Company has reevaluated its marketing efforts and product strategies as
expenses continue to exceed revenues. The Company now recognizes that the
services it pioneered are applicable not only in the end-user long distance
markets but also in the newly-competitive local calling arena and the realm of
wireless communications. The Company has negotiated the divestiture of its
end-user long distance customer base. The strategic focus will then be on
providing its products to domestic and international interexchange carriers and
other telecommunications service providers who wish to offer speech
recognition-enhanced services as a value added product to their customers, and
to corporations who wish to make the convenience of speech recognition available
to its employees.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at December 31, 1996 were $ 39,218.
During the period from inception , May 1994 through September 30, 1995, the
Company's operations were funded primarily through loans of $ 1,255,000 of which
an aggregate of $ 822,500 was borrowed from the Company officers, directors, and
a greater than 5% beneficial owner. In March, 1995 the Company conducted a
private offering of convertible debentures in which debentures due in September
1996 with an aggregate principal amount of $ 122,500. were sold. In October,
1995, $ 12,500 of those debentures were converted to common stock("the Common
Stock"), par value $ 0.001 per share, of the Company. In July, 1996, $ 15,000 of
those debentures were converted to Common Stock. By the terms of the debenture,
when the debenture came due on September 27, 1996 the holder was due principal,
interest and penalties for a sum due of $ 125,000. Of this amount, $ 60,000 was
converted to 40,000 shares of the Company's Common Stock, and $ 65,000 of the
debenture was replaced by a convertible note due March 27, 1997. This note bears
interest at a rate of 8.5% per annum and is convertible into Common Stock at the
conversion rate of $ 1.50 per share. In October 1995, the Company conducted a
Regulation S offering and sold 1,000,000 shares of Common Stock at $ 1.50 per
share. Additionally, in October and November 1995, the Company conducted an
offering of eight percent (8%) convertible debentures in accordance with
Regulation D under the Securities Act of 1933 (the "Securities Act"). The
principal of the debentures was to be due March 31, 1997 with interest payable
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quarterly commencing December 31, 1995. Under the terms of the debenture
offering, the $375,000 generated was converted to Common Stock in November,
1995. From the $ 1,875,000 generated, notes due to non-affiliates in the amount
of $ 300,000. were repaid with the associated interest. The remainder was
available for working capital and payment of vendor payables.
In April, 1996 the Company commenced a private offering of notes and warrants
("Units") with maximum proceeds to the Company of $ 800,000 with each Unit
consisting of (i) a note in the principal face amount of $ 10,000 bearing
interest at a rate of 7% per annum, with principal and interest payable two
years from the date of issue and (ii) warrants to purchase 5,000 shares of
Common Stock, at an exercise price of $ 1.50 per share at any time within two
(2) years after issuance of the warrants.
In June, 1996, the terms of the offering were amended to increase the size of
the offering from 80 Units to a maximum of 150 Units or proceeds to the Company
of $ 1,500,000. Also in this amendment the Company altered the repayment terms
to the promissory note by means of an addendum to the note stating that the
Company contemplated raising capital in an underwritten public offering and
after payment of expenses of the underwriting would apply proceeds of such
offering to repayment of the notes issued in the private offering . The funds
sought in the offering were intended only to permit the Company to continue
operations and meet its material operating obligations while it sought
additional funding sufficient for long term implementation of its business plan.
The offering was closed on September 30, 1996 , after the Company had raised $
875,000 in the private placement.
The Company entered into a letter of intent with an investment banking firm to
underwrite on a firm commitment basis, a proposed Four Million Dollar ($
4,000,000) public offering of the Company's securities. The underwriting was
subject to numerous conditions upon which ultimately the Company and the
investment banking firm could not agree. Therefore, the Company has terminated
its plans to conduct a public offering at this time. Although the provisions of
the letter of intent relating to the public offering have terminated, the letter
of intent grants to the investment banking firm a right of first refusal to act
as the Company's investment banker with regard to future offerings, and certain
acquisition/disposition transactions and provides for the payment of a
substantial fee to the investment banking firm for a breach of these provisions.
The Company requested a general termination and mutual release in order to move
forward with other means of financing. To date, the investment banking firm has
agreed to waive compensation on the near term financing requirements of the
Company but has not provided a release with respect to other transactions.
The Company acquired short term funding which allowed it to continue operations
through January 31, 1997. In October, 1996, a greater than 5% stockholder lent
the Company $ 60,000 at 10% per annum and is secured by office furniture and
equipment. Principal and interest was due on this note January 10, 1997. The
Company is currently in default on this note. Additional funding of $ 150,000
was negotiated with another stockholder which bears interest at 12% and is due
February 10, 1997. This note is secured by a media barter credit under its media
purchase agreement. See Note H to the Financial Statements. In addition, the
stockholder received warrants to purchase 600,000 shares of Common Stock, at an
exercise price of $ 0.50 per share. The Company has been forced to significantly
curtail its operations and has made drastic cuts in its overhead. The Company's
operations, at this time, consist principally of servicing existing customers.
It has suspended its marketing operations and is not acquiring additional
platforms until additional financing is in place.
The Company has negotiated the sale of all assets related to its long distance
services to Brite Voice Systems, Inc. (Brite) with an effective closing date of
January 31, 1997. This contract requires settlement of the total debt to MCI
through January 31, 1997 for a negotiated sum of $ 250,000; reduces the Brite
note by more than one-half, initiates a monthly payment plan for repayment of
the Brite note, and provides some working capital which should be sufficient
through March, 1997. The Company intends to offer a combination of Common Stock
and warrants in a Regulation D offering for maximum proceeds of $ 1,800,000. If
all such proceeds are raised, the Company will have sufficient funds to operate
while it continues to develop a long term financial structure. The timing of the
proposed offering is subject to a number of factors, certain of which are beyond
the Company's control; however, the Company intends to commence this offering in
late February, 1997.
Future Obligations. During the next six months, the Company plans, subject to
raising adequate capital, to sell platforms which provide the technology
necessary to utilize its Preferred SecureCard, VIP800 and Preferred Collect
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Service technology, to introduce new products, and to continue refining its
products. Subject to the Company's ability to fund the cost, Management expects
the Company to hire or contract with approximately 16 persons during the next 12
months, primarily to support its expanded marketing activities.
The ability of the Company to raise capital, in the opinion of Management, is
the primary constraint on execution of its 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
the funds being used to support marketing efforts. In addition, the Company will
be required to renegotiate or obtain extensions of its current debt or raise
additional funds of approximately $ 1,600,000 to retire its debt. There is no
assurance, however, that the Company will be able to secure any renegotiations,
financing or extensions of its current debt. In addition, the Company will
continue to seek a general termination and mutual release of the provisions of
the letter of intent with its investment banking firm relating to future
offerings.
The Company was obligated , under its agreement with MCI Telecommunications
Corporation (MCI), to pay at least $ 1,000,000. per month for transmission
services beginning January, 1996. Throughout 1996, negotiations for a mutually
beneficial revised agreement took place, but no final revised agreement was
executed. With the Company's new focus on sales of platforms, and the sale of
its long distance services to Brite, the need for a carrier agreement is no
longer necessary. The Company has negotiated a full and final release of all
obligations under the MCI service agreement.
The Company is subject to monthly minimum fees under its agreement with Brite.
The Company had committed to pay Brite at least $ 20,000. per month in
SecureCard charges through August, 1996. The minimum obligations to Brite
increased in September, 1996 to $ 25,000 and $ 30,000 in September, 1997. In
November, this agreement was amended and monthly minimums were reduced to $
3,000 per month. 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 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 this time, the Company's usage is
less than the minimum amount. The Company and Brite executed an agreement to
convert the monthly minimums for the period January through October, 1996 into a
promissory note in the amount of $ 216,500 due November 1, 1996. This note bears
interest at prime plus 2% per annum and warrants to purchase 60,000 shares of
common stock at a price of $ 2.44 per share exercisable three years from the
date of the note. On November 1, 1996, the note was renegotiated and interest
due of $ 5,654.21 was rolled into a new note in the amount of $ 222,154.21. In
conjunction with the sale of the long distance service to Brite, of the asset
purchase price $ 143,000 was used to pay down the note and the balance of $
84,931.31 is payable in eleven equal installments beginning March 1, 1997.
Certain of the information contained in Parts I and II of this form 10-QSB
constitutes forward looking statements within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934. Although
the Company believes that the expectations reflected in such forward looking
statements are based upon reasonable assumptions, it can give no assurance that
its expectations will be achieved. Important factors that could cause the actual
results to differ from the Company's expectations are set forth herein and under
the caption "Risk Factors" in the Company's prospectus dated August 15, 1995.
In addition to those risk factors, the following factors could cause actual
results to differ from the Company's expectations.
The Company has been unable to compete in the new long distance environment with
the passage of the Telecommunications Act of 1996. The Company will change its
business focus to providing its speech recognition products to
telecommunications service providers. There is no assurance that the new
business strategy will be successfully developed. In its new business strategy,
the Company is still dependent upon third parties. In this case, it depends on
Brite to supply platforms to resell to service providers and to write sofware
applications for the Company's products. Brite has not granted a non-exclusive
license to the technology in its products. Accordingly, there can be no
assurance that Brite will not license similar technology to other
telecommunications service providers. The Company's speech recognition product
incorporates applications of speech recognition-based call automation for the
telecommunications industry which are, in terms of the underlying core
technology, similar to products offered by competitors that have greater name
recogition and marketing resources such as Lucent Technologies, Brite,
InterVoice, Inc., Octel, etc. Any or all of these companies could conceivably
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develop applications that directly compete with the Company's products and
services. AT&T, Sprint, Southwestern Bell, GTE and others have recently
announced speech recognition products. Development and utilization of new
technology by the Company's competitors may have a significant adverse impact on
the Company's ability to activate its new business plan. In addition, an
important factor is the Company's ability to raise sufficient capital to execute
its business plan and meet its obligations. It also must work out payment terms
with its creditors in order to avoid having the creditors take actions that
would subvert the Company's operations. Therefore, the actual results that are
achieved may differ materially from any such forward looking information.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is not involved in any material legal proceedings.
Item 2. Changes in Securities.
(a) There have been no material changes in securities during the period.
(b) There have been no material changes in the class of securities or the
rights of the holders of the registered securities.
(c) In November, 1996, the Company granted an option ("the Option") to Bisbro
Investments, to purchase 600,000 shares of the Company's Common Stock, par value
$ 0.001 per share, with an exercise price of $ 0.50 per share, which exercise
price is based on a 2:1 reverse split of outstanding shares of Common Stock
being consummated. The Option is exercisable for a period of three (3) years
from the date of issuance, November 12, 1996. The Option was granted in
connection with a loan made by Bisbro to the Company in the principal amount of
$ 150,000 (the "Note"). The Note bears interest at prime and is secured by the
media purchase agreement discussed in Section H of the Notes to the Financial
Statements. Principal and interest on the note is due February 10, 1997.The
Option was issued in a transaction exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to
Section 4(2) of the Securities Act.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
Subsequent Events. On February 4, 1997 an Asset Purchase Agreement was entered
into with Brite Voice Systems, Inc. whereby the Company will sell to Brite all
right, title and interest in certain assets. These specific assets include the
Company's end-user customer base as of February 1, 1997 to include all
documents, notebooks, files and records on each customer relating to customer
billing, collection and customer service operations; all documents, files and
records relating to tariffs, both state and federal; all documents, files and
records relating to individual authority to do business in various states
throughout the United States; the currently being developed software system for
billing and customer service; all rights in the Company's Carrier Identification
Code (CIC); all Section 214 authority granted by the Federal Communications
Commission; and certain portions of the Barter Agreement. The purchase does not
include Accounts Receivable for any traffic prior to February 1, 1997. The
Company will provide Brite with Billing, Collection and Customer Service
assistance for six (6) months on a contract basis only to enable a smooth
transition. The total purchase price is $ 743,000 which will be distributed as
follows: $ 250,000 to MCI in full and final settlement of the Company's
liability, $ 143,000 in partial payment of the November note to Brite, $ 9,000
for Brite services November, 1996 through January, 1997 and $ 341,000 to the
Company. A new note to Brite was executed for the balance of $ 84,831.31,
payable in monthly installments beginning March 1, 1997. It is anticipated these
funds will allow the Company to make partial payments to creditors and maintain
reduced operations through March.
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Item 6. Exhibits and Reports on Form 8-K.
EXHIBIT
NUMBER DESCRIPTION
2.1 Asset Purchase Agreement between Brite Voice Systems, Inc. and
Preferred/telecom, Inc. dated February 4, 1997.
10.1 Restated Loan Agreement and Promissory Note to Bisbro Investments Company,
LTD. in original principal amount of $ 150,000, dated November 12, 1996.
10.2 Option Agreement for 600,000 shares of Common Stock with Bisbro Investments
Company, Ltd. in connection with the Promissory Note dated November 12,
1996.
10.3 Amendment to Loan Agreement and Promissory Note with Bisbro Investments
Company, LTD. stating that loan was funded in two portions, $ 100,000 on
November 12, 1996 and $ 50,000 on December 27, 1996.
10.4 Promissory Note dated November 1, 1996 to Brite Voice Systems, Inc. in the
amount of $ 222,154.21, payable in monthly installments and cancels
previous note of $ 216,500. for monthly minimums due.
10.5 Promissory Note to Lawrence E. Steinberg, in original principal amount of $
40,000, dated as of October 11, 1996. (Incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996, which was filed November 15, 1996.)
10.6 Promissory Note to Lawrence E. Steinberg, in original principal amount of $
20,000, dated as of October 14, 1996. (Incorporated by reference to Exhibit
10.3 to the Company's Quarterly Report on Form 10-QSB for the quarter ended
September 30, 1996, which was filed November 15, 1996.)
27.0 Financial Data Schedule
The Company did not file herewith any reports on Form 8-K during the three
months ended December 31, 1996.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PREFERRED/TELECOM, INC.
February 13, 1997 /s/Dennis Lee Gundy
- ------------------ --------------------------------
Date Dennis Lee Gundy, President
(Principal Executive Officer)
February 13, 1997 /s/Mary G. Merritt
- ------------------ --------------------------------
Date Mary G. Merritt, Secretary/Treasurer
(Principal Financial Officer)
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ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("Agreement") is made and entered into
this 4th day of February, 1997, by and between Brite Voice Systems, Inc., a
Kansas corporation (hereinafter referred to as "Brite") and Preferred/telecom,
Inc., a Delaware corporation (hereinafter referred to as "Preferred").
WHEREAS, Preferred is in the business of providing domestic and
international long-distance telecommunications services to customers (the
"Business"); and
WHEREAS, Brite desires to purchase from Preferred and Preferred desires
to sell to Brite all of the Assets (as herein defined) of the Business, subject
to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants,
representations, warranties and agreements contained herein, and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the parties agree as follows:
1. Purchase and Sale of Assets. Preferred hereby agrees to sell, transfer,
assign, convey and deliver to Brite and Brite hereby agrees to purchase and
acquire from Preferred, on the Closing Date, all right, title and interest of
Preferred in the assets of the Business including (a) all of Preferred's rights
with respect to the existing customers of the Business (other than accounts
receivable); (b) all documents, notebooks, records and files relating to all
tariffs and all applications for authorization to resell long-distance services
filed by Preferred with any state government agency or commission or any federal
agency or commission, including, but not limited to, all electronic readable
copies of such tariffs, applications and documents; (c) all documents,
notebooks, records and files containing third party tariff pricing and
telecommunications information relating to the sale, resale or purchase of
long-distance services; (d) all documents, notebooks, records and files relating
to Preferred's customer billing and collection operations; (e) all documents,
notebooks, records and files relating to Preferred's customer service
operations; (f) all documents, notebooks, records and files relating to the
Business; (g) all of Preferred's rights in the billing programs and systems
currently utilized by Preferred, whether or not provided by third parties to
Preferred; (h) the billing software and system currently being developed by or
on behalf of Preferred; (i) all of Preferred's rights in all authorizations to
resell long-distance services granted by any state regulatory authority ("State
Permits"); (j) all of Preferred's rights in Carrier Identification Code "844" or
"10844" (the "CIC Code"); (k) all of Preferred's rights in the Section 214
authority granted by the Federal Communications Commission (the "214
Authority"); and (l) that certain Agreement by and among Seller, Proxhill
Marketing Ltd., and Barter Corp. dated July 5, 1996 (the "Proxhill Agreement").
All of the foregoing are herein collectively referred to as the "Assets".
2. Assets Excluded from Sale. Unless specifically identified in this
Agreement, no assets of Preferred, including, without limitation, Preferred's
cash and accounts receivable, are being sold by Preferred hereunder.
3. Liabilities. From and after the Effective Time, Brite shall assume the
obligations and liabilities of Preferred under the Proxhill Agreement. Any and
all other debts, liabilities, obligations, contracts, loans, commitments, or
undertakings of Preferred, whether fixed, liquidated, absolute or contingent,
shall be and remain the sole obligations and liabilities of Preferred and Brite
shall not be obligated in any respect therefor.
4. Purchase Price. Brite shall pay to Preferred for the sale, transfer,
conveyance, and delivery of the Assets to Brite, the sum of Seven Hundred
Forty-Three Thousand Dollars ($743,000) on the Closing Date. Such amount shall
be payable (a) by wire transfer of Two Hundred Fifty Thousand Dollars ($250,000)
pursuant to wire transfer instructions received from MCI (b) Three Hundred
Forty-One Thousand Dollars ($341,000) by wire transfer to Preferred, account
number 1885483006, Bank One, Texas, N.A., 1717 Main Street, Dallas, Texas,
75201, ABA Number 111000614; (c) One Hundred Forty-Three Thousand Dollars
($143,000) by crediting such amount against the amount due Brite pursuant to
that certain promissory note of Preferred dated November 1, 1996 (the
"Promissory Note"); and (d) Nine Thousand Dollars ($9,000) by crediting such
amount against the amount due Brite pursuant to the BVS SecureCard Agreement
dated April 19, 1995 (the "SecureCard Agreement").
5. Closing.
A. Time and Place. The closing of the transaction (the "Closing") shall be
held at Brite's offices, 7309 East 21st Street North, Wichita, Kansas
on February 5, 1997 ("Closing Date"), or at such other place or earlier
or later time as may be mutually approved in writing by the parties.
Preferred's conveyance of the Assets to Brite shall be effective at
12:01 a.m. (CDST), on February 1, 1997 (the "Effective Time").
B. Deliveries. To effect the transfer referred to in Section 1 hereof,
Preferred will, on the Closing Date, execute and deliver to Brite an
Assignment and Bill of Sale substantially in the form attached hereto
as Exhibit A conveying in the aggregate all of the Assets, and Brite
shall deliver to Preferred the consideration therefor in the amount and
in the manner specified in Section 4 hereof. In addition, Preferred
shall execute and deliver to Brite the promissory note in the form
attached hereto as Exhibit E, and Brite shall accept such promissory
note in replacement of the Promissory Note.
6. Representations and Warranties of Preferred. Preferred hereby makes the
following representations, warranties and covenants to Brite, each of which is
true and correct on the date hereof and will be true and correct on the Closing
Date, each of which shall be unaffected by any investigation heretofore or
hereafter made by Brite, and each of which shall survive the Closing:
A. Organization and Qualification. Preferred is a corporation duly
organized and validly existing under the laws of the State of Delaware.
Preferred is duly qualified as a foreign corporation to do business and
is in good standing in each jurisdiction where the character of its
activities is such that qualification as a foreign corporation in that
jurisdiction is required by law, except as otherwise indicated in
Exhibit B hereto.
B. Authority and Adequacy of Rights. Preferred has taken, or will take
prior to the Closing Date, all necessary and proper corporate action to
authorize and approve this Agreement. The execution and delivery hereof
will not and does not violate any provision of any judicial or
governmental decree, order or judgment to which Preferred is a party
nor conflict with or result in a breach of or constitute a default
under the Articles of Incorporation or Bylaws of Preferred or any
material agreement or instrument to which Preferred is a party or by
which it is bound. This Agreement constitutes the legal, valid and
binding obligation of Preferred in accordance with its terms.
C. Title. Preferred has good and marketable title to the Assets and such
Assets are not now, and will not on the Closing Date be, subject to any
liens, rights to liens, claims, encumbrances or restrictions of any
kind.
D. No Litigation or Adverse Events. No suit, action or legal,
administrative, arbitration or other proceeding or, to the best of
Preferred's knowledge, no investigation by any governmental agency
pertaining to the Assets, is pending or has been threatened against
Preferred which could adversely affect the prospects for the Business
or any of the Assets.
E. No Consent or Approval Required. Except as may be required with respect
to the Proxhill Agreement, the State Certificates, the CIC Code, and
the 214 Authority, no consent, approval or authorization of, or
declaration, filing, or registration with, any person is required to be
made or obtained by Preferred in connection with the execution and
delivery of this Agreement by Preferred, the performance by Preferred
of its obligations hereunder, and the consummation of the transactions
contemplated hereby.
7. Brite's Representations and Warranties. Brite hereby makes the following
representations and warranties to Preferred, each of which is true and correct
on the date hereof, and will be true and correct as of the Closing Date, each of
which shall be unaffected by any investigation heretofore or hereafter made by
Preferred and each of which shall survive the Closing of the transactions
contemplated hereby:
A. Authorization for Agreement. The execution, delivery and
performance of this Agreement by Brite and the consummation of
the transactions contemplated hereby have been duly authorized by
all necessary actions and proceedings prior to the Closing, and
this Agreement is, and any documents or instruments to be
executed and delivered by Brite pursuant hereto will be, legal,
valid and binding obligations of Brite enforceable in accordance
with their terms.
B. Corporate. Brite is a corporation duly organized and validly
existing and in good standing under the laws of the State of
Kansas, and has all requisite corporate power and authority to
own its property and operate its business as and where it is now
being conducted. Brite has complete and unrestricted power and
authority to purchase the Assets.
8. Conditions Precedent to Brite's Obligations. Each and every obligation of
Brite to be performed on the Closing Date shall be subject to the satisfaction,
prior to or on the Closing Date, of the following conditions, unless waived in
writing by Brite:
A. Representations and Warranties True. The representations and
warranties made by Preferred in this Agreement shall be true and
correct on and as of the Closing Date with the same effect as
though such representations and warranties had been made or given
on and as of the Closing Date.
B. Compliance with Agreement. Preferred shall have performed and
complied with all of its obligations under this Agreement which
are to be performed or complied with by it prior to or on the
Closing Date.
C. Documents and Resolutions. Preferred shall have delivered or
caused to be delivered to Brite:
(1) evidence of the actions taken by Preferred with respect to this Agreement,
including duly adopted resolutions of its Board of Directors and stockholders
approving the sale of the Assets; and
(2) a certificate from the Secretary of State of Delaware evidencing Preferred's
good standing.
D. MCI Agreement. Brite, Preferred and MCI shall have entered into
an agreement pursuant to which MCI shall have agreed to continue
the provision of long-distance service to the Business on terms
and conditions satisfactory to Brite.
E. Proxhill Agreement. Proxhill Marketing, Ltd. and Barter Corp.
shall have consented in writing to Preferred's assignment of the
Proxhill Agreement to Brite.
F. Instruments of Transfer. Preferred shall have delivered to Brite
an Assignment and Bill of Sale substantially in the form attached
hereto as Exhibit A, a License Agreement substantially in the
form attached hereto as Exhibit C, and such other assignments and
other instruments of transfer and conveyance as Brite shall deem
to be necessary or desirable to vest in Brite all right, title
and interest in and to the Assets.
G. Certificate of Preferred. Brite shall have received from
Preferred a certificate of Preferred dated the Closing Date and
signed by the President and Chairman of the Board of Preferred,
substantially in the form of Exhibit D hereto.
H. Proceedings and Instruments Satisfactory. All proceedings,
corporate or otherwise, to be taken in connection with the
transactions contemplated by this Agreement and all appropriate
documents incident thereto shall be satisfactory in form and
substance to Brite's counsel, and Preferred shall have made
available to Brite for examination the originals or true and
correct copies of all records and documents which Brite may
reasonably request in connection with the transactions
contemplated hereby.
9. Conditions Precedent to Preferred's Obligations. Each and every obligation of
Preferred to be performed on the Closing Date shall be subject to Brite having
performed and complied with all of its obligations under this Agreement which
are to be performed or complied with by it prior to or on the Closing Date.
10. Post-Closing Operations and Responsibilities.
A. General. Preferred and Brite agree that title to the Assets, as
well as all benefits and risks associated with the ownership and
operation of the Business, shall be vested in Brite as of the
Effective Time. However, the parties acknowledge that, because of
certain applicable federal and state regulatory requirements,
Preferred shall continue to conduct certain aspects of the
Business as Brite's agent, as described herein.
B. Appointment. Brite hereby appoints Preferred as its agent for
purposes of conducting the customer service and billing functions
with respect to the Business and Preferred hereby accepts such
appointment. Preferred shall perform such services substantially
in the manner as the same were conducted immediately prior to the
Closing Date, subject to such changes as Brite may reasonably
direct in writing, and shall at all times use its commercially
reasonable best efforts in performing such activities. Preferred
shall perform such services as an independent contractor and
nothing contained herein shall be construed as creating a
partnership, joint venture, or other association between Brite
and Preferred with respect to the Business, or otherwise. For the
period during which Preferred performs such services and until
such time as Brite shall have otherwise directed, the Business
shall be operated under the name "Preferred Telecom".
C. Billings; Receivables. Until such time as Brite otherwise
directs, Preferred shall prepare and mail monthly statements to
customers of the Business in the manner in effect as of the
Closing Date. Effective March 10, 1997, all customer payments
shall be deposited to a bank account to be specified by Brite and
all subsequent invoices shall provide for payment to be delivered
as specified by Brite. Preferred may include in customers'
billings charges for amounts due as of the Closing Date. Upon
receipt of a customer's payment, Brite shall remit to Preferred
the amount due to Preferred from such customer as of the Closing
Date; provided, however, that if a customer pays less than the
full amount of its invoice, such payment shall be allocated among
Preferred and Brite based upon each party's percentage interest
in the aggregate amount due from such customer.
D. Fees and Payments. For and in consideration of its services
hereunder, Brite shall pay Preferred an amount equal to the cost
of performing such services. As used herein, the term "cost"
shall mean the sum of (a) the salaries of two customer service
representatives (estimated to be $5,431 per month), (b) the
salary of one billing employee (estimated to be $1,250 per
month), (c) Preferred's documented out-of-pocket costs incurred
for "Platinum Inc." account processing, "Data Dallas" billing
tape formatting, PIC Processing (LEC/IXC) and postage and other
supplies, and (d) a flat fee of $950 per month for equipment
usage and general and administrative overhead.
Preferred shall invoice Brite on a monthly basis for the amounts
due pursuant to the immediately preceding paragraph and Brite
shall make payment thereof within thirty (30) days of its receipt
of any such invoice; provided, however, that Brite shall be
entitled to offset against any such amount, any amount which is
past due under either the Promissory Note or the SecureCard
Agreement.
E. Transfers; Power of Attorney. Preferred shall take such actions
and execute such requests, agreements, assignments and other
documents as may be necessary to fully vest in Brite all of the
Assets, including without limitation, the State Certificates, the
CIC Code, the 214 Authority and all of Preferred's rights under
any existing state or federal tariffs. In addition, in order to
facilitate transfers of the State Certificates, Preferred shall
promptly take such actions as may be necessary to re-establish
its good standing as a foreign corporation in those jurisdictions
where such good standing has been terminated. Preferred hereby
designates and appoints Brite as Preferred's attorney-in-fact to
execute any and all documents on Preferred's behalf and to take
all such actions on Preferred's behalf which may be necessary to
vest in Brite all of its rights and interests in and to the
Assets.
F. Termination. Preferred shall provide the services described in
this Section 10 for a period of six months from the Closing Date;
provided, however, that Brite may terminate such services
immediately upon delivery of written notice to Preferred either
personally or by facsimile transmission to the notice address set
forth in Section 16 hereof. If Brite elects to terminate
Preferred's services, it shall promptly pay to Preferred upon
receipt of Preferred's invoice an amount equal to Preferred's
costs for the month of operations then in progress and, if such
notice of termination is delivered on or after the 16th of such
month, an amount equal to 50% of Preferred's invoiced costs for
the immediately preceding month, subject only to Brite's right of
offset as set forth above.
11. Indemnification.
A. By Preferred. Preferred agrees to defend, indemnify and hold
harmless Brite and its officers, directors, employees, agents,
representatives, successors and assigns from, against and in
respect of any and all loss, liability and expense resulting
from:
(1) all liabilities of Preferred of every kind and nature, without
limitation, known or unknown, contingent or otherwise;
(2) any misrepresentation or breach of warranty or nonfulfillment
of any obligation by Preferred under this Agreement or
from any misrepresentation in or omission from any
certificate or other instrument furnished or to be
furnished to Brite pursuant to this Agreement; and
(3) any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses (including legal
expenses) incident to any of the foregoing provisions.
Without limiting the generality of the foregoing, Preferred agrees that it will
continue to defend at its expense actions brought against Brite which are based
on dealings prior to the Closing Date, and Brite agrees to cooperate fully with
Preferred in such matters by providing access to files and other information
accessible to Brite and helpful to Preferred in defense of such claims.
B. By Brite. Brite shall indemnify and hold harmless Preferred and
its officers, directors, employees, agents representatives,
successors and assigns from, against and in respect of any and
all loss, liability and expense resulting from:
(1) any misrepresentation or breach of warranty or nonfulfillment
of any obligation by Brite under this Agreement; and
(2) Brite's conduct of the Business subsequent to the Closing Date.
C. Claims. Should any claim be made by a person not a party to this
Agreement with respect to any matter to which the foregoing
indemnities relate, the indemnified party, on not less than
thirty (30) days' notice to the indemnifying party, may make
settlement of such claim and such settlement shall be binding on
the indemnifying party; provided, however, that if, within said
thirty (30) day period, the indemnifying party shall have
requested the indemnified party to contest any such claim at the
expense of the indemnifying party, the indemnified party will
promptly comply and the indemnifying party shall have the right
to direct the defense of such claim or any litigation based
thereon at its own expense through counsel acceptable to the
indemnified party; provided that to the satisfaction of the
indemnified party, the indemnifying party shall indemnify and
secure the indemnified party against such contested claims and
for the expenses of contesting and defending the claims.
D. Costs. If any legal action or other proceeding is brought for the
enforcement or interpretation of any of the rights or provisions
of this Agreement, or because of an alleged dispute, breach,
default or misrepresentation in connection with any of the
provisions of this Agreement, the successful or prevailing party
shall be entitled to recover reasonable attorneys' fees and all
other costs and expenses incurred in that action or proceeding,
in addition to any other relief to which it may be entitled.
12. Termination and Abandonment. This Agreement may be terminated and
abandoned on or prior to the Closing Date as follows:
(1) by mutual consent of the parties hereto;
(2) by Preferred if the conditions precedent contained in
Section 8 hereof have not been fulfilled or waived, in
writing, on or prior to the Closing Date;
(3) by Brite if the conditions precedent contained in Section
9 hereof have not been fulfilled or waived, in writing, on
or prior to the Closing Date; or
(4) by Brite or Preferred if the closing has not occurred by
February 10, 1997.
In the event of termination by any party as provided above, written
notice shall promptly be given to the other party, and each party shall pay its
own expense, incident to the preparation for the consummation of this Agreement,
and the transactions contemplated hereby. A termination pursuant to the
provisions of this Section 12 shall not prejudice any claim for damages that any
party may have hereunder or in law or in equity.
13. Assignment. This Agreement shall not be assigned by either party
without the prior written consent of the other party and any
attempted assignment without such written consent shall be null
and void and without legal effect.
14. Governing Law. This Agreement shall be governed by and construed
and interpreted in accordance with the law of the State of
Kansas.
15. Amendment and Modification. The parties may amend, modify and
supplement this Agreement in such manner as may be mutually
agreed by them in writing.
16. Notices. All notices, requests, demands and other communications
hereunder shall be deemed to be duly given if delivered by hand,
if mailed by certified mail, registered mail or recognized
overnight delivery service, or if sent by facsimile transmission,
as follows:
Preferred/telecom, Inc.
Attention: President
12655 N. Central Expressway
Suite 800
Dallas, TX 75243
Fax: (972) 726-1940
Brite Voice Systems, Inc.
Attention: President
7309 East 21st Street North
Wichita, KS 67206-1083
Fax: (316) 652-6800
or to such other address as either party may provide to the other in writing.
17. Entire Agreement. This Agreement embodies the entire agreement
between the parties hereto with respect to the transactions
contemplated herein, and there have been and are no agreements,
representations or warranties between the parties other than
those set forth or provided for herein.
18. Execution and Delivery. This Agreement shall be binding upon and
shall inure to the benefit of each of the parties hereto and to
their respective successors and assigns and may be executed in
two or more counterparts, each of which shall be deemed an
original but all of which together shall constitute but one and
the same instrument. This Agreement, and any assignment,
certificate, license or other writing required pursuant to the
terms hereof, may be executed and duly delivered by a party by
facsimile transmission thereof to the other party at the
facsimile number of such party as set forth in Section 16 hereof.
The parties agree that if they execute and deliver this Agreement
or any certificate or other document to be delivered hereunder by
facsimile transmission, they will promptly circulate manually
signed originals of this Agreement or such other certificate or
document in order that each party may have an original "ribbon
copy" thereof for its files.
19. Headings. The headings used in this Agreement are for convenience
only and shall not constitute a part of this Agreement.
20. Exhibits. All of the exhibits attached hereto are incorporated
herein and made a part of this Agreement by reference thereto.
21. Negotiated Transaction. The provisions of this Agreement were
negotiated by the parties hereto and said Agreement shall be
deemed to have been drafted by both of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
PREFERRED/TELECOM, INC.
By:
--------------------
Dennis Gundy
President
BRITE VOICE SYSTEMS, INC.
By:
-------------------
Donald R. Walsh
Executive Vice President
<PAGE>
EXHIBIT A
ASSIGNMENT AND BILL OF SALE
This Assignment and Bill of Sale is made effective this 1st day of
February, 1997, by Preferred/telecom, Inc. ("Seller"), a Delaware corporation,
in favor of Brite Voice Systems, Inc., a Kansas corporation ("Buyer").
WHEREAS, Buyer and Seller have entered into an Asset Purchase Agreement
("Purchase Agreement"), pursuant to which Buyer agreed to purchase from Seller
and Seller agreed to sell, convey, assign, transfer and deliver to Buyer certain
assets of Seller and Seller further agreed to execute an Assignment and Bill of
Sale with respect to such assets.
NOW, THEREFORE, pursuant to the Purchase Agreement and in consideration
of the premises and of other valuable consideration, the receipt and sufficiency
whereof are hereby acknowledged, Seller by these presents does give, grant,
convey, assign, transfer, sell, remise, release, alienate, set over and confirm
unto Buyer, the business property, assets, rights and interests described as
follows:
all right, title and interest of Preferred in the assets of the
Business (as such term is defined in the Purchase Agreement) including
(a) all of Preferred's rights with respect to its existing customers
(other than accounts receivable); (b) all documents, notebooks, records
and files relating to all tariffs and all applications for
authorization to resell long-distance services filed by Preferred with
any state government agency or commission or any federal agency or
commission, including, but not limited to, all electronic readable
copies of such tariffs, applications and documents; (c) all documents,
notebooks, records and files containing third party tariff pricing and
telecommunications information relating to the sale, resale or purchase
of long-distance services; (d) all documents, notebooks, records and
files relating to Preferred's customer billing and collection
operations; (e) all documents, notebooks, records and files relating to
Preferred's customer service operations; (f) all documents, notebooks,
records and files relating to the Business; (g) all of Preferred's
rights in the billing programs and systems currently utilized by
Preferred, whether or not provided by third parties to Preferred; (h)
the billing software and system currently being developed by or on
behalf of Preferred; (i) all of Preferred's rights in all
authorizations to resell long-distance services granted by any state
regulatory authority; (j) all of Preferred's rights in Carrier
Identification Code "844" or "10844"; (k) all of Preferred's rights in
the Section 214 authority granted by the Federal Communications
Commission; and (l) all of Preferred's rights under that certain
agreement between Preferred, Proxhill Marketing Ltd. and Barter Corp.
dated July 5, 1996, to have and to hold all of the aforesaid unto Buyer
to and for the use of Buyer, its successors and assigns forever.
<PAGE>
IN WITNESS WHEREOF, Seller has executed this Assignment and Bill of
Sale effective as of the day and year first above written.
PREFERRED/TELECOM, INC.
By:
----------------------------
Dennis Gundy
President
<PAGE>
EXHIBIT B
PREFERRED TELECOM
AUTHORIZATIONS TO RESELL
LONG DISTANCE SERVICES
AUTHORIZED TO RESELL APPLICATION
NAME OF STATE PENDING
Alabama Pending
Alaska Not applied for
Arizona Granted
Arkansas Granted
California Granted
Colorado Granted
Connecticut Granted
Delaware Granted
Florida * Granted
Georgia Granted
Hawaii Not applied for
Idaho Granted
Illinois Granted
Indiana Granted
Iowa Granted
Kansas Granted
Kentucky Granted
Louisiana Granted
Maine Pending
Maryland Granted
Massachusetts Granted
Michigan Granted
Minnesota Denied
Mississippi Granted
Missouri * Granted
Montana Granted
Nebraska Granted
Nevada Granted
New Hampshire Denied
New Jersey Granted
New Mexico Pending
New York Granted
North Carolina Granted
North Dakota Granted
Ohio Granted
Oklahoma Granted
Oregon * Granted
Pennsylvania Granted
Rhode Island Revoked
South Carolina Granted
South Dakota Granted
Tennessee Granted
Texas Granted
Utah Granted
Vermont * Granted
Virginia * Granted
Washington Granted
West Virginia Granted
Wisconsin * Granted
Wyoming Granted
* Preferred Telecom, Inc.'s authorization to act as corporation has either
been revoked or Preferred Telecom is delinquent in filing its annual report
and/or owes funds for the privilege of doing business.
<PAGE>
EXHIBIT C
LICENSE AGREEMENT
THIS LICENSE AGREEMENT, effective as of February 1, 1997, is by and
between BRITE VOICE SYSTEMS, INC., a Kansas corporation ("Brite"), and
PREFERRED/TELECOM, INC., a Delaware corporation ("Preferred");
WHEREAS, Brite has acquired Preferred's long distance telephone
reseller business pursuant to a certain Asset Purchase Agreement dated February
1, 1997 ("Purchase Agreement"); and
WHEREAS, Preferred is the owner of certain service marks and trademarks
used in the long distance telephone reseller business; and
WHEREAS, Brite desires to use such service marks and trademarks in
connection with such business.
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises hereinafter set forth, the parties agree as follows:
1. Definitions.
A. "Business" shall have the meaning given such term in the Purchase
Agreement.
B. "Marks" shall mean the following service marks and trademarks:
SecureCard, VIP 800, Preferred Collect, Preferred Telecom and
Preferred/telecom along with all other service marks and
trademarks that are or have been utilized in connection with the
Business.
2. Continuation of Business. The parties acknowledge that Brite intends to
and shall have the right to operate the Business, including offering any and all
services that are identified by the Marks.
3. Grant of License. Preferred grants to Brite a perpetual, nonexclusive,
royalty free license to use the Marks and associated good will in connection
with the Business.
4. Ownership of Marks. Brite acknowledges ownership of the Marks in
Preferred, and shall take no action inconsistent with such ownership. Brite
further acknowledges that nothing in this License Agreement shall give Brite any
right, title or interest in the Marks, other than the right to use the Marks in
accordance with this License Agreement. Brite shall not attack the title of
Preferred to the Marks.
5. Use of Marks. Use of the Marks shall be in Brite's discretion, but shall
be subject to Preferred's right to reasonably review such use and to suggest
changes in usage. Brite shall cooperate with Preferred in facilitating
Preferred's right to review, if such right is exercised by Preferred.
6. Unauthorized Third Party Use. Brite shall notify Preferred of any
unauthorized use of the Marks by others that becomes known to Brite. Both Brite
and Preferred shall have the right to bring infringement or unfair competition
proceedings involving the Marks.
7. Assignment. This License Agreement may be assigned by Brite in
connection with a transfer of the Business, in whole or in part.
8. Choice of Law. This License Agreement shall be interpreted according to
the laws of the State of Kansas.
9. Entire Agreement. This License Agreement constitutes the entire
agreement of the parties and supersedes all prior agreements, understandings,
negotiations or contracts between the parties, written or oral, with respect to
license of the Marks. This Agreement may be effectively amended or modified only
by a writing that has been executed by the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this License
Agreement to be executed effective as of February 1, 1997.
PREFERRED/TELECOM, INC.
-----------------------------------
By:________________________________
Title:_____________________________
BRITE VOICE SYSTEMS, INC.
-----------------------------------
By:________________________________
Title:_____________________________
<PAGE>
EXHIBIT D
CERTIFICATE OF PRESIDENT AND CHAIRMAN OF THE BOARD OF DIRECTORS
OF PREFERRED/TELECOM, INC.
The undersigned, Dennis L. Gundy and Ray Miller, the President and
Chairman of the Board of Directors, respectively, of Preferred/telecom, Inc.(the
"Company"), certify that:
1. Attached hereto as Exhibit 1 is a true, complete and correct copy of the
Articles of Incorporation of the Company, which Articles of Incorporation are in
full force and effect as of the date hereof, there having been no amendments or
other documents filed affecting the Articles of Incorporation;
2. Attached hereto as Exhibit 2 is a true and complete copy of the Company's
Bylaws and said Bylaws are in full force and effect as of the date hereof;
3. Attached hereto as Exhibit 3 is a true and correct copy of the Resolutions of
the Board of Directors of the Company dated January 31, 1997 (the "Board
Resolutions") which authorize and approve the Asset Purchase Agreement dated as
of February 4, 1997 between Brite Voice Systems, Inc. and the Company (the
"Agreement"). Such Board Resolutions have not been amended, modified or revoked
and are in full force and effect on the date hereof;
4. Attached hereto as Exhibit 4 is a true and correct copy of the Resolutions
adopted and approved by the stockholders of the Company by written consent
dated January 31, 1997;
5. The stockholders having executed the written consent attached hereto as
Exhibit 4, own in the aggregate in excess of 66% of the issued and outstanding
common stock of the Company;
6. The representations and warranties made by the Company in the Agreement
are true and complete in all material respects as if made on and as of the date
hereof;
7. All covenants, obligations and conditions of the Agreement to be performed by
the Company on or before the date hereof have been so performed in all material
respects or waived.
In witness whereof, the undersigned have executed this Certificate this
_____ day of February, 1997.
- ------------------------------------ ------------------------------------
Dennis L. Gundy Ray Miller
President Chairman of the Board
<PAGE>
EXHIBIT E
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
<PAGE>
PREFERRED/TELECOM, INC. (herein called the "Maker"), for value
received, promises and agrees to pay to the order of BRITE VOICE SYSTEMS, INC.
at 7309 East 21st Street North, Wichita, Kansas 67206, or such other place as it
may designate, in lawful money of the United States of America, in immediately
available funds, the sum of Eighty Four Thousand Eight Hundred Thirty One
Dollars and 31/100 ($84,831.31), bearing interest at the Note Rate, payable in
eleven (11) monthly installments in equal amounts based upon the amortized loan
balance and the then applicable Note Rate. As used herein the term "Note Rate"
shall vary monthly on the first day of each month and shall be 2% above the
prime rate as listed in the Money Rates section of the Wall Street Journal
published on the first day of each month, or on the next date such publication
is published, if not published on the first day of a month. The initial Note
Rate applicable under this Promissory Note shall be 10.25%. Payment of the first
installment shall be due on March 1, 1997 and subsequent payments shall be due
on the first day of each of the next 10 consecutive months, as shown in the
following schedule:
Payment No. Payment Due Amount
----------- ----------- ------
1 03/01/97 $8,111.62
2 04/01/97 $8,111.62
3 05/01/97 $8,111.62
4 06/01/97 $8,111.62
5 07/01/97 $8,111.62
6 08/01/97 $8,111.62
7 09/01/97 $8,111.62
8 10/01/97 $8,111.62
9 11/01/97 $8,111.62
10 12/01/97 $8,111.62
11 01/01/98 $8,111.62
At the time of any change in the Note Rate, the amount of payments
numbered 1 through 11, due after the date of such change, shall be recalculated
to reflect the amortized amount necessary to fully pay off the remaining balance
due hereunder, at the new Note Rate, in equal payments on the remaining payment
due dates.
All payments shall be applied first to the payment of accrued interest
and then to the payment of principal.
In the event default is made in any payment hereof, then all of the
unpaid indebtedness hereunder shall, at the option of the holder, immediately
become due and payable and bear interest at the rate of 18% per annum from the
date of such default. Failure to exercise this option shall not constitute a
waiver of the right to declare all of the unpaid indebtedness due and payable at
once at any subsequent time.
Maker shall have the right to prepay any and all amounts due hereunder
without penalty for the privilege of doing so.
Should there be a default in the payment of the indebtedness
represented by this Note or any part thereof, and thereafter amounts payable
under this Note should be collected at law, in equity, in bankruptcy,
receivership or other court proceeding, or should this Note be placed in the
hands of an attorney for collection after default, the Maker agrees to pay
reasonable attorneys' fees and litigation costs in addition to principal and
interest due and payable thereon.
The provisions hereof shall bind and the benefits and advantages hereof
shall inure to the parties hereto and their respective successors, assigns,
personal or legal representatives, trustees, heirs, beneficiaries, legatees and
devisees.
This Note shall in all respects be governed by and construed and
enforced in accordance with the laws of the State of Kansas and Maker agrees to
jurisdiction and venue in the Sedgwick County, Kansas District Court in Wichita,
Kansas and the United States District Court in Wichita, Kansas.
MAKER: PREFERRED/TELECOM, INC.
By_____________________________________
Name___________________________________
Title__________________________________
LOAN AGREEMENT
THIS LOAN AGREEMENT ("Agreement"), dated this 12th day of November
1996, by and between Bisbro Investments Company Ltd., with an address of PO Box
3216, Safat 13033, Kuwait city, Kuwait, and maintains offices in care of T.R.
Winston & Company Incorporated, 1999 Avenue of the Stars, Suite 1950, Los
Angeles, CA 90067 ("Bisbro" or "Lender") and Preferred Telecom, Inc., a publicly
owned Delaware corporation with principal offices at 12655 N. Central
Expressway, Suite 800, Dallas, Texas 75243 ("Preferred" or "Borrower"). Lender
and Preferred are sometimes hereinafter collectively referred to as the
"Parties."
W I T N E S S E T H:
WHEREAS, Borrower desires to borrow up to $150,000 from Lender for the
business purposes hereinafter set forth and in anticipation of a fully defined
business plan which it is formulating with the cooperation and assistance of
First Capital Financial Services Corporation; and
WHEREAS, Lender is willing to lend up to $150,000 to Borrower
on the terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements herein contained, the receipt and adequacy of which are
hereby jointly and severally acknowledged and accepted by Lender and Borrower,
the parties hereby agree as follows:
1. GENERAL DEFINITIONS. When used herein, the following terms shall
have the following meanings:
(a) "Affiliates" shall mean any Person (as that term is hereinafter
defined) directly or indirectly controlled by or under common control with
Borrower. For the purpose of this definition, "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of
management and policies of the Person, whether through the ownership of voting
securities, by contract or otherwise.
(b) "Business Day" shall mean a day other than a Saturday, Sunday or
legal holiday on which banking institutions are authorized or required by law to
close.
(c) "Closing" shall mean the date, time and place where Lender shall
advance the Loan proceeds to Borrower in exchange for the Note (as that term is
hereinafter defined).
(d) "Default" shall mean the occurrence or existence of any one or
more of the events described in Section 7.1 of this Agreement.
(e) "Governmental Authority" shall mean any federal, provincial, state,
local, foreign or other court, administrative agency or commission, other
governmental authority or regulatory body.
(f) "Lien" shall mean any lien, mortgage, pledge, security interest,
right of first refusal or other limitation on transfer or other encumbrance.
<PAGE>
(g) "Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, entity, party, or government (whether national, provincial,
federal, state, county, city, municipal or otherwise, including, without
limitation, any instrumentality, division, agency, body or department thereof)
or any quasi governmental entity formed pursuant to any authorization by any of
the above entities.
(h) "Subsidiary" shall mean with respect to any Person (a) any
corporation of which the outstanding stock having at least a majority of votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or by such
Person and its Subsidiaries or (b) any entity other than a corporation of which
at least a majority of voting or policy directing interest, under ordinary
circumstances, is at the time, directly or indirectly, owned or controlled by
such Person or by such Person and its Subsidiaries.
2. TERMS OF THE LOAN.
2.1 The Loan. Lender hereby covenants and agrees to lend to Borrower,
and Borrower hereby accepts from Lender, such sums up to a maximum of One
Hundred Fifty Thousand ($150,000) United States Dollars. The Loan shall be
evidenced by a $150,000, 12% Secured Promissory Note in the form annexed hereto
as Exhibit "A" (the text of which is hereby incorporated herein by this
reference) duly executed by Borrower, and delivered to Lender at the Closing
(the "Note"), and secured by a Collateral Assignment of Media Credits in the
form annexed hereto as Exhibit "B" (hereby incorporated by reference) and duly
executed by Borrower. Upon execution of this Agreement, Borrower shall
immediately be funded by Lender by wire transfer to Borrower's banking
institution (Bank One, 1717 Main Street, Dallas, TX 75201; account no.
1888213186; ABA no. 111000614; to benefit Preferred/Telecom, Inc.) with One
Hundred Thousand Dollars ($100,000). Lender further agrees to make available to
Borrower an additional Fifty Thousand Dollars ($50,000) on December 1, 1996 by
the same wire transfer method, unless (a) Borrower is affected by unforseen
circumstances which materially affect its requirement for this portion of the
Loan; or (b) Borrower's business is materially affected by unforseen
circumstances which affect its ability to repay the Loan; or (c) Borrower
defaults pursuant to Section 7.1 of this Agreement. If Borrower draws down
additional sums against the Loan subject to the terms of this Agreement,
Borrower shall execute and deliver additional notes to Lender in form and
substance exactly the same as the Note, but for the amount and the date of
execution (the "Additional Notes"), the maturity date and other terms and
conditions remaining the same. Any and all Additional Notes shall be annexed to
this Agreement and the same, if and when annexed, are hereby incorporated herein
by reference. The Note and the Additional Notes are hereinafter collectively
referred to as the "Notes".
2.2 Interest Rate. Borrower hereby agrees to pay to Lender and Lender
hereby accepts as interest on the Loan an amount equal to twelve (12%) percent
per annum, payable upon maturity of the Loan as set forth below under Section
2.4 Term. Interest shall be computed on the basis of a year of 360 days and
actual days elapsed. From and after the occurrence of a Default under this
Agreement, and for so long as the Default is continuing, the Loan shall bear
interest at a rate equal to eighteen (18%) per annum computed as provided above
and payable on demand. All sums paid, or agreed to be paid by Borrower which
either are or may be construed to be compensation for the making of the Loan
shall, to the extent permitted by applicable law, be amortized, prorated, spread
and allocated throughout the full term of this Agreement or until the Loan is
paid in full.
<PAGE>
2.3 Options. As further consideration for the Loan, Borrower hereby
grants Lender or its assignee the option to purchase up to 600,000 shares of
Borrower's common stock, at $.50 per share, based upon an anticipated 2:1
reverse split of existing shares, for a period of three (3) years from the date
of this Agreement, as set forth on the attached Option Agreement, marked Exhibit
"C" and incorporated herein by this reference.
2.4 Term. This Agreement shall remain in effect until the Loan is fully
repaid. The Loan shall mature and be repaid upon, the earlier of: a) ninety (90)
days from the Closing date hereof; or b) the date of the funding of Borrower's
anticipated private placement or otherwise is reasonably deemed financially
capable of repaying the Loan. Borrower shall have the right to terminate this
Agreement at any time by prepaying the Loan without penalty, however, any
interest or other incentives such as the Options paid to the date of prepayment
shall not be affected (i.e., they shall not be refunded).
Upon full repayment of the Loan, Lender shall return to Borrower,
within ten (10) business days, all material documents including the Media Credit
as described in the Collateral Assignment of Media Credit and the Prepaid
Purchase Order.
At the option of Lender, all rights of Borrower under this Agreement
may be terminated by Lender upon the occurrence of a Default as provided in
Section 7.1 of this Agreement. If this Agreement is terminated by Lender based
upon such a default, then upon the effective date of termination, the entire
unpaid principal amount of the Loan shall become immediately due and payable
without further notice or demand. Notwithstanding any termination, and until all
sums due hereunder shall have been paid and satisfied, Borrower shall pay
accrued interest to Lender beginning on the 1st of the month following the 90
day maturity date, and continue such payments on or before the 1st of each month
thereafter, and Lender shall continue to have all of the other rights and
remedies set forth by law and in this Agreement.
2.5 Exercise of Prepayment Option. Borrower shall have the exclusive
right and option at any time and from time to time prior to the end of the Term
to prepay, without penalty, the all or any portion of the Loan (the "Prepayment
Option"), as set forth in Section 2.4 above. The Prepayment Option shall be
exercisable by Borrower giving Lender twenty (20) days advance written notice of
its intent to exercise the Prepayment Option (the "Prepayment Notice"). The
Prepayment Notice shall specify a closing date, time and place not less than
twenty (20) days thereafter where the Loan shall be repaid and the Agreement
terminated (the "Prepayment Closing"). At the Prepayment Closing, Borrower shall
deliver to Lender a certified, cashier's or bank check payable to the order of
Lender in the amount of the entire unpaid principal and accrued interest due
under the Notes and representing the Loan against satisfaction documents
including a form of general release to Borrower duly executed by Lender.
2.6 Transfer of the Notes. The Notes shall not be sold, assigned,
pledged or hypothecated by Lender without the prior written consent of Borrower,
which consent shall not be unreasonably withheld.
3. UTILIZATION OF THE LOAN PROCEEDS
<PAGE>
3.1 Borrower hereby agrees, acknowledges and accepts that Borrower
shall use the proceeds from the Loan: (i) to meet Borrower's general minimum
operating obligations and expenses in accordance with the Application of Loan
Proceeds annexed hereto as Exhibit "D" and hereby incorporated herein by this
reference. Any deviation from said use shall require the prior written approval
of First Capital Financial Services Corporation, which approval shall not
unreasonably be withheld.
4. COLLATERAL.
4.1 Security Interest- First Lien. To secure the payment to Lender of
the interest and principal on the Loan, Borrower hereby grants to Lender and
Lender hereby accepts, the media credit as described in the Collateral
Assignment of Media Credit and the Prepaid Purchase Order, attached together
hereto as Exhibit "B" and incorporated herein by this reference.
4.2 Deposit of the Collateral. Borrower shall deposit with Lender the
Prepaid Purchase Order for Media Credit upon the closing of this Agreement, the
title to which shall be transferred to Lender upon default of the terms of the
Notes in accordance with the Collateral Assignment of Media Credits as set forth
above.
4.3 Security Documents. At Lender's request, Borrower shall execute
and/or deliver to Lender, at any time or times hereafter, all security documents
including but not limited to UCC-1 financing statements that Lender may
reasonably request, in form and substance acceptable to Lender to evidence
Lender's security interest in the Collateral, and Borrower shall pay the costs
of any recording or filing of the same. Borrower will cooperate with and deliver
any security documents to such persons as Lender, in its sole discretion, may
deem appropriate. Borrower hereby specifically agrees and consents that a copy
of this Agreement or of a financing statement is sufficient as a financing
statement as may be filed with any governmental clerk as evidence of Lender's
security interest in the Collateral.
5. REPRESENTATIONS AND WARRANTIES OF BORROWER.
Borrower hereby represents and warrants to Lender as follows:
(a) Authorization, Validity and Enforceability of this Agreement.
Borrower has the power and authority (corporate and otherwise) to execute,
deliver and perform this Agreement. Borrower has taken all necessary corporate
action to authorize its execution, delivery and performance of this Agreement.
The Board of Directors of Borrower (the "Board") has approved this Agreement,
and the transactions contemplated hereby and herein. This Agreement has been
duly executed and delivered by Borrower and constitutes the legal, valid and
binding obligation of Borrower, enforceable against Borrower in accordance with
its terms, subject to bankruptcy, insolvency and other similar laws affecting
the enforcement of creditors' rights generally and the availability of
injunctive relief and other equitable remedies. Borrower's execution, delivery
and performance of this Agreement does not conflict with, constitute a violation
or breach of, constitute a default, or give rise to any right of termination or
acceleration of any right or obligation of Borrower under any other outstanding
loans or agreements, or result in the creation or imposition of any Lien except
for the First Lien and security interest granted to Lender with respect to the
Collateral described herein.
(b) Organization and Qualification. Borrower is duly incorporated,
validly existing and in good standing under the laws of its jurisdiction of
incorporation and is qualified to do business and is in good standing in every
jurisdiction where the failure to be so qualified and in good standing would
have a material adverse effect on its business.
<PAGE>
(c) Consents and Approvals. No consent, approval, authorization,
license or order of, registration or filing with, or notice to, any Governmental
Authority or other third party (such consents, approvals, authorizations,
licenses, orders, registrations, filings or notices being referred to
collectively as "Consents") is necessary to be obtained, made or given by
Borrower in connection with the execution, delivery and performance by Borrower
of this Agreement or the consummation by Borrower of the transactions
contemplated hereunder.
(d) Title to Media Credit. On the date and to the extent Borrower
delivers the Media Credit comprising the Collateral to the Escrow Agent,
Borrower will own the same free and clear of any and all liens, claims or
encumbrance of any nature or description. Delivery of the Prepaid Purchase Order
representing the Collateral pursuant to the Escrow Agreement will convey to
Lender and to the Escrow Agent good and valid title to such Credit, free and
clear of any Liens, and will entitle Lender to all the rights of a holder of
such Credit, subject in each case to the restrictions and obligations set forth
in the Media Purchase Agreement between Borrower and Proxhill Marketing Ltd.
dated June 3, 1996.
(e) Brokers. No broker, finder, investment banker or other intermediary
has been retained by or is authorized to act on behalf of Borrower which might
be entitled to any brokerage, finder's or other fee or commission from Lender or
any of its affiliates in connection with the transactions contemplated by this
Agreement.
(f) Disclosure of Actual and Contingent Liabilities. No other actual or
contingent liabilities exist or other legal actions of any kind or nature are
pending or anticipated, with the exception of those contingent liabilities and
pending actions set forth on Exhibit E, attached and incorporated herein by this
reference.
6. REPRESENTATIONS AND WARRANTIES OF LENDER.
6.1 Consents. No consents of governmental and other regulatory
agencies, foreign or domestic, or of other parties are required to be received
by or on the part of Lender to enable it to enter into and carry out this
Agreement in all material respects.
6.2 Binding Nature of Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have been
duly reviewed and approved by Lender Board of Directors and no other proceedings
on the part of Lender are necessary to authorize the execution and delivery of
this Agreement and the consummation of the transactions contemplated herein.
6.3 Litigation; Compliance with Law. Lender hereby warrants that it is
not aware of any litigation, pending or other, that would prohibit it from
entering into this Agreement making the Loan or implementing the same as
provided herein.
6.4 Brokers. With the exception of First Capital Investments, Inc.,
neither Lender nor any of its affiliates have engaged, consented to or
authorized any broker, finder, investment banker or other third party to act on
his behalf, directly or indirectly, as a broker or finder in connection with the
transactions contemplated by this Agreement.
<PAGE>
6.5 AVAILABLE INFORMATION. By virtue of its execution of this
Agreement, Lender hereby acknowledges and accepts that it has been furnished
with any and all information concerning the business and financial condition of
Borrower and each entity with regard to the Collateral, its corporate status as
well as all other related matters, which Lender's management deemed reasonable
and/or necessary to its decision to proceed with the Loan.
7. DEFAULT: RIGHTS AND REMEDIES ON DEFAULT
7.1 Default. The occurrence of any one or more of the following events
shall constitute a Default;
(a) Borrower's failure to repay the Loan in accordance with the terms
and condition of the Notes; or
(b) Borrower's fails or neglects to perform, keep or observe any other
term, provision, condition or covenant contained in this Agreement which is
required to be performed, kept or observed by Borrower and the same is not cured
to Lender's satisfaction within ten (10) days after Lender gives Borrower notice
identifying such event; or
(c) An event shall occur, and any applicable cure period shall have
expired, under any agreement, document or instrument, other than this Agreement,
now or hereafter existing, to which Borrower is a party, such that the same
shall constitute a default or breach under such agreement, document or
instrument, but only if that default or breach has a material adverse effect
upon Borrower's ability to repay the Loan; or
(d) The Collateral or any of Borrower's other assets are attached,
seized, levied upon or subjected to a writ or distress warrant, or come within
the possession of any receiver, trustee, custodian or assignee for the benefit
of creditors and the same is not cured within thirty (30) days thereafter; an
application is made by any individual, firm or entity other than Borrower for
the appointment of a receiver, trustee, or custodian for the Collateral or any
of Borrower's other assets and the same is not dismissed within thirty (30) days
after the application therefor; or
(e) A petition in bankruptcy is filed against Borrower or any guarantor
of its liabilities; Borrower or any guarantor makes an authorized assignment for
the benefit of its creditors; a receiver, receiver-manager or trustee for
Borrower is appointed; any case or proceeding is filed by or against Borrower
for its dissolution, liquidation, or termination; Borrower ceases to conduct its
business as now conducted or is enjoined, restrained or in any way prevented by
court order from conducting all or any material part of its business affairs; or
(f) A notice of lien, levy or assessment is filed of record with
respect to all or any substantial portion of Borrower's assets by the United
States, or by any state, county, municipal, provincial, federal or other
government agency, or any taxes or debts owing to any of the foregoing become a
lien or encumbrance upon the Collateral or any of Borrower's assets and such
lien or encumbrance is not released within thirty (30) days after its creation;
or
<PAGE>
(g) Judgement is rendered against Borrower on an uninsured claim of
$50,000.00 or more and Borrower fails either to commence appropriate proceedings
to appeal such judgement within the applicable appeal period or, after such
appeal is filed, Borrower fails to diligently prosecute such appeal or such
appeal is denied.
7.2 Acceleration of the Liabilities. Upon and after the occurrence of a
Default, all of the monies due any payable under the Loan may, at the option of
Lender and without demand, notice, of legal process of any kind, (including
without limitation notice of acceleration, notice of intent to acceleration,
notice of intent to accelerate or notice of intent to demand), be declared, and
immediately shall become due and payable; provided; however, that upon the
occurrence of a Default under Sections 7.1 hereof, all of the monies due any
payable under the Loan shall automatically and immediately become due and
payable without demand, notice or legal process of any kind.
7.3 Remedies. Upon and after the occurrence of a Default, Lender
shall have the following rights and remedies:
(a) All of the rights and remedies of a secured party under the Uniform
Commercial Code, or other applicable law, all of which rights and remedies shall
be cumulative, and none exclusive, to the extent permitted by law, in addition
to any other rights and remedies contained in the Agreement;
(b) The right to sell, use, or to otherwise dispose of the Collateral
as set forth in the Collateral Assignment of Media Credits (Exhibit "B"). The
proceeds realized from the sale of any Collateral shall be applied first to the
reasonable costs and expenses attendant upon such sale; second to interest due
upon the Loan; and third to the principal of the Loan. If any deficiency shall
arise, Borrower shall remain liable to Lender therefor.
(c) An additional 20% administrative transaction fee in order to cover
Lender's costs of disposition of the Collateral upon Default, which fee the
Parties agree is a reasonable administrative disposition cost.
7.4 Notice. Any notice required to be given by Lender of a sale, lease,
other disposition of the Collateral or any other intended action by Lender,
which is deposited in the United States mail, postage prepaid and duly addressed
to Borrower, at the address set forth in this Agreement, twenty (20) days prior
to such proposed action, shall constitute commercially reasonable and fair
notice thereof to Borrower.
8. CONDITIONS TO CLOSING
8.1 Mutual Conditions to Closing. The obligation of Lender to make the
Loan to Borrower at the Closing and the obligation of Borrower to issue and
deliver the Notes and related document and give the Assignment of Collateral to
Lender at the Closing, and the obligations of the parties to otherwise perform
their respective obligations hereunder shall be subject to the satisfaction of
the following mutual conditions on or prior to the Closing:
(a) No order, decree, judgment or injunction shall have been issued by
any Governmental Authority of competent jurisdiction and shall be in effect
which restrains or prohibits the consummation of the Loan and/or the issuance of
the first Lien; and
<PAGE>
(b) No material litigation shall have been commenced against Borrower
in any court of competent jurisdiction which, in the reasonable opinion of
Lender's litigation counsel shall jeopardize the consummation of the Loan and/or
the issuance of the Assignment.
8.2 Additional Conditions to the Obligations of Lender . The obligation
of Lender to make the Loan shall be subject to the satisfaction of the following
conditions which Borrower hereby covenants to perform (in addition to those
specified in Section 8.1) on or prior to the Closing:
(a) The execution and delivery to Lender of the Notes in the initial
amount of $100,000; (b) The execution and delivery to Lender of the
Notes in the subsequent amount of $50,000; (c) The execution and
delivery of the Assignment, and related exhibits and documents;
8.3 Transaction Fee. A transaction fee payable to First Capital
Investments, Inc. in the amount of ten percent (10%) of the total sum conferred
to Borrower shall be deferred until the Closing of the anticipated subsequent
financing as set forth in Section 2.4 Term.
9. TERMINATION
9.1. Termination. This Agreement may be terminated at any time prior
to the Closing Date:
(a) by mutual agreement in writing of Borrower and Lender; and
(b) by either Borrower or Lender by written notice to the other party
(i) if the Closing shall not have occurred by November 12, 1996, provided,
however, that the right to terminate this Agreement pursuant to clause (i) shall
not be available to any party whose failure to fulfil any of its obligations
under this Agreement resulted in the Closing not occurring by such date; or (ii)
if any Governmental Authority of competent jurisdiction shall have issued an
injunction, decree or order or taken any other action permanently enjoining,
restraining or otherwise prohibiting the Closing and such injunction, decree or
order, or other action shall have become final and nonappealable.
9.2 Effect of Termination. In the event of the termination of this
Agreement pursuant to Section 9.1, this Agreement shall thereafter become void
and have no effect, and no party hereto shall have any liability to the other
party hereto in respect thereof, except that nothing herein will relieve any
party from liability for any breach of any of its representations, warranties,
covenants or agreements contained in this Agreement prior to such termination.
10. MISCELLANEOUS
10.1 Representations and Warranties to Survive Closing. All
representations and warranties contained herein or in any schedule or
certificate delivered pursuant hereto or any writing signed by the parties on
the date hereof shall survive consummation of the transactions contemplated
under this Agreement, except that each representation and warranty shall expire
on the earlier of (i) one year from the date that the party for whose benefit
such representation or warranty is made has actual knowledge of the inaccuracy
of any representation or the breach of any warranty and (ii) the first
anniversary of the Closing Date.
<PAGE>
10.2 Entire Agreement; Severability. This Agreement contains the entire
understanding of the parties with respect to the subject matter hereof and
thereof and supersedes all prior agreements and understandings, oral or written
with respect to such matters and any writing signed by the parties on the date
hereof. There are no representations and warranties other than those set forth
herein. This Agreement shall be binding upon the respective successors of the
parties, but the restrictions contained herein applicable to Lender shall not be
binding on any transferee of the Conversion Shares unless such transferee is
required by the terms hereof to execute and deliver a written instrument
agreeing to be so bound. In the event that any provision of this Agreement shall
be declared unenforceable by a court of competent jurisdiction, such provision,
to the extent declared unenforceable, shall be stricken and the remainder of
this Agreement shall remain binding on the parties hereto. However, in the event
any such provision shall be declared unenforceable due to its scope, breadth or
duration, then it shall be modified to the scope, breadth or duration permitted
by law and shall continue to be fully enforceable as so modified.
10.3. Amendments; Waivers. This Agreement may not be modified or
amended except by a written instrument signed by authorized representatives of
each party hereto and referring specifically to this Agreement. Any term,
provision or condition of this Agreement may be waived in writing at any time by
the party which is entitled to the benefit thereof.
10.4. Notification of Certain Matters. Each party (the "First Party")
shall give prompt notice to the other party of (i) the occurrence or
nonoccurrence of any event, the occurrence or nonoccurrence of which would be
likely to cause any representation or warranty of the First Party contained in
this Agreement to be untrue or inaccurate in any material respect at or prior to
the Closing and (ii) any material failure of the First Party to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
Section 10.6 shall not limit or otherwise affect the remedies available
hereunder to the other party.
10.5. Public Announcements. Each party hereto agrees that it will not
disseminate any press release or public announcement concerning the transaction
contemplated hereby to any party, without the other party's prior written
consent which shall not be unreasonably withheld; except that Borrower will in
any event have the right to issue any such reports, statements or releases upon
advice of its counsel that such issuance is required in order to comply with the
requirements of the federal laws or the requirements of any applicable
regulatory agency. Each party agrees to cause any of its advisors, whether
financial, accounting, legal or otherwise, not to disseminate any of such
information to any other party without the other party's prior written consent
which shall not be unreasonably withheld.
10.6. Notices. Unless otherwise specifically provided for elsewhere in
this Agreement, any notices and other communications required to be given
pursuant to this Agreement shall be in writing and shall be effective upon
delivery by hand or upon receipt if sent by mail (registered or certified mail,
postage prepared, return receipt requested) or upon transmission if sent by
telex or facsimile (with request for confirmation of receipt in a manner
customary for communications of such respective type), except that if notice is
received by telex or facsimile after 5:00 P.M. local time on a business day at
the place of receipt, it shall be effective as of the following business day.
10.7 Counterparts. This Agreement may be executed in two or more
counterparts by facsimile, which together shall be considered one and the same
Agreement and each of which shall be deemed an original.
<PAGE>
10.8 Governing Law; Consent to Jurisdiction.
(a) This Agreement shall be governed by and construed in accordance
with the laws of the State of Colorado.
(b) Any action or proceeding seeking to enforce any provision of, or
based on any right arising out of this Agreement must be brought against any of
the parties in the United States District Court for the applicable District in
Colorado, and each of the parties hereby irrevocably submits to the jurisdiction
of such court in any such action or proceeding and waives any objection to venue
laid therein. Furthermore, Borrower and Lender hereby irrevocably consent to the
service of any and all process in any such action, suit or proceeding by the
mailing of copies of such process to them in the manner specified in Section
10.6 for the giving of notices. Nothing in this section shall affect the right
of Borrower or Lender to serve legal process in any other manner permitted by
law.
10.9. No Third Party Beneficiaries. This Agreement is for the
benefit of the parties hereto and is not intended to confer upon any other
Person any rights or remedies hereunder.
10.10 Specific Performance. Each of the parties hereto agrees that any
breach by it of any provision of this Agreement would irreparably injure the
other party and that money damages would be an inadequate remedy therefor.
Accordingly, each of the parties hereto agrees that the other shall be entitled
to one or more injunctions enjoining any such breach or requiring specific
performance of this Agreement and consents to the entry thereof, this being in
addition to any other remedy to which the non-breaching party is entitled at law
or equity. The prevailing party in any action to enforce the terms herein shall
be entitled to its related costs and attorney fees.
10.11 Captions. The captions herein are included for convenience
of reference and shall be ignored in the construction or interpretation hereof.
10.12 Access and Information. Each party hereto shall afford to other
party's accountants, counsel and other duly authorized representatives access,
during normal business hours and on reasonable advance notice, during the period
after execution of this Agreement and prior to the Closing, the right to make
copies of all properties, books, contracts, commitments and records (including
but not limited to tax returns). In addition, each party shall furnish promptly
to the other party: a copy of each report, schedule and other document file
received by it pursuant to the requirements of Canadian, provincial, federal or
state securities laws; a copy of any summons, complaint, petition, notice of
hearing or notice of the commencement of any governmental or administrative
investigation; and all other information concerning its business, properties and
personnel as may reasonably be requested; provided, however, that no
investigation pursuant to this section shall affect any representations or
warranties or the conditions to the obligations of the parties to consummate a
transaction referenced herein.
10.13 Expenses. Regardless of whether or not the transaction
contemplated herein is consummated, each party shall promptly pay, shall be
responsible for, and account for on its respective financial statements all
costs and expenses incurred by it in connection with this Agreement.
IN WITNESS WHEREOF, each of the authorized parties have executed this
Agreement on the date first written above.
<PAGE>
PREFERRED TELECOM, INC., BORROWER
By:
------------------------------------
G. Ray Miller, Chairman., CEO
By:
------------------------------------
Dennis L. Gundy, President
ATTEST:
By:
------------------------------------
, Secretary
BISBRO INVESTMENTS COMPANY, LTD., LENDER
By:
------------------------------------
Bader Al-Rezaihan
ATTEST:
By:
-----------------------------------
,Secretary
<PAGE>
EXHIBIT A
PROMISSORY NOTE(S)
SECURED PROMISSORY NOTE
$100,000 Dallas, Texas
FOR VALUE RECEIVED, Preferred Telecom, Inc., a publicly-held owned
Delaware corporation with offices at 12655 N. Central Expressway, Suite 800,
Dallas, Texas 75243 (hereinafter referred to as the "Maker") promises to pay to
the order of Bisbro Investments Company Ltd., with an address of PO Box 3216,
Safat 13033, Kuwait city, Kuwait, and maintains offices in care of T.R. Winston
& Company Incorporated, 1999 Avenue of the Stars, Suite 1950, Los Angeles, CA
90067 (hereinafter referred to as the "Holder"), in lawful money of the United
States, the principal sum of One Hundred Thousand and 00/100 ($100,000) Dollars
with interest at the rate of twelve percent (12%) per annum and payable ninety
(90) days following the execution and delivery of the loan proceeds from Lender
to Borrower, unless sooner repaid as provided in a Loan Agreement of even date
herewith between the Maker and the Holder to which this Note is attached as an
exhibit, the text of which is hereby incorporated herein by reference (the "Loan
Agreement"). The full principal amount of this Note shall be due and payable at
the offices of the Holder within ninety (90) days of the execution and delivery
of this Note (the "Due Date").
1. DEFINITION OF SECURITY USED AS COLLATERAL. Maker acknowledges this
Note as a general corporate obligation secured by the Collateral. As used in
this Note, the term "Collateral" shall mean the Prepaid Purchase Order
representing the media credit owned by Maker as shall be conveyed upon default
of this Note by the Collateral Assignment of Media Credit as set forth on
Exhibit "B" annexed to the Loan Agreement and hereby incorporated herein by
reference. The Collateral shall either be registered in the name of the Maker or
have been duly assigned to the Maker; and owned by the Maker free and clear of
any and all liens, claims or encumbrances of any nature or description.
2. WAIVER OF PRESENTMENT, ETC. The Maker of this Note hereby waives
presentment for payment, demand, notice of non-payment and dishonor, protest and
notice of protest; and waives trial by jury in any action or proceeding arising
on, out of, under or by reason of this Note. The rights and remedies of the
Holder under this Note shall be deemed cumulative, and exercise of any right or
remedy shall not be regarded as barring any other remedy or remedies. The
institution of any action to recover or the recovery of any portion of the
indebtedness evidenced by this Note shall not be deemed a waiver of any other
right of the Holder hereof. If applicable, in the event that any instalment of
the principal and accrued interest shall not be paid when due, and shall remain
unpaid for a period of twenty (20) days or more, then a late charge of two (2%)
percent of the amount then due shall also be due and owing for each month or any
portion thereof that such payment shall remain unpaid. The Maker hereby
irrevocably authorizes and empowers any attorney or attorneys, to appear for the
Maker in any court in any appropriate action there brought or to be brought
against the Maker by the Holder on this Note, with or without declaration filed
as of any term or time, and then and there to confess judgment against the Maker
for all sums due herein, together with costs of suit and attorneys' fee for
collection as aforesaid.
<PAGE>
3. STATUS OF REGISTERED HOLDER. The Maker may treat the holder of this
Note as the absolute owner of this Note for the purpose of making payments of
interest and/or principal and for all other purposes and shall not be affected
by any notice to the contrary.
4. DEFAULT. If Maker Defaults (as that term is defined in the Loan
Agreement) under any of the terms set forth in the Loan Agreement, the Holder of
this Note may declare the entire principal and unpaid accrued interest hereon
immediately due and payable, by notice in writing to the Maker.
a. The rights and remedies of the holder hereof, under this
Note shall be deemed cumulative and the exercise of any right or remedy shall
not be regarded as barring any other remedy or remedies. The institution of any
action to recover or recovery of any portion of the indebtedness evidenced by
this Note shall not be deemed a waiver of and other right of the Holder hereto.
b. The acceptance of any instalments or payments by the Holder
hereof after the due date herein, or the waiver of any other or subsequent
default shall not prevent the Holder hereof from immediately pursuing any or all
of its remedies afforded under the law or the Loan Agreement.
5. PREPAYMENT. The Maker shall have the right to prepay the entire
Loan without penalty, in accordance with the terms and conditions of the
Prepayment Option (as that term is defined in the Loan Agreement).
6. NOTICES OF RECORD DATE, ETC. IN THE EVENT OF CERTAIN EVENTS. The
Maker shall furnish the Holder with 30 days advance written notice of any of the
following action:
a. Any capital reorganization of the Maker, any
reclassification or recapitalization of the capital stock of the Maker or any
transfer of all or substantially all of the assets of the Maker to any other
person or any consolidation or merger involving the Maker; or
b. Any voluntary or involuntary dissolution, liquidation or
winding-up of the Maker. In such event, the Maker will mail to the Holder at
least 30 days prior to the earliest date specified in the legal document filed
with a court of competent jurisdiction and/or any governmental authority, a
notice specifying:
(i) The date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right; and
(ii) The date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding-up is expected to become effective and the record date for determining
stockholders entitled to vote thereon; or
<PAGE>
c. Any taking by the Maker of a record of the holders of any
class of securities of the Maker for the purpose of determining the holders
thereof who are entitled to receive any dividend (other than a cash dividend
payable out of earned surplus at the same rate as that of the last such cash
dividend theretofore paid) or other distribution, or any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right.
7. ASSIGNMENT AND BINDING EFFECT. This Note is binding upon and shall
inure to the benefit of the parties hereto and their respective heirs,
executors, administrators, representatives and/or successors and assigns.
Notwithstanding the foregoing, neither the Maker nor the Holder shall assign or
transfer any rights or obligations hereunder, except that: (a) the Maker may
assign or transfer this Note to a successor corporation in the event of a
merger, consolidation or transfer or sale of all or substantially all of the
assets of the Maker, provided (i) that no such assignment shall relieve the
Maker from liability for the obligations assumed by it hereunder and (ii) the
assignee or transferee shall specifically assume in writing all of the
obligations of the Maker set forth in this Note; and (b) on ten days advance
written notice to the Maker, the Holder may assign this Note to an entity
controlled by or under common control of the Holder or any parent or affiliate
thereof.
.
8. NO STOCKHOLDER RIGHTS. Nothing contained in this Note shall be
construed as conferring upon the Holder or any other person the right to vote or
to consent or to receive notice as a stockholder in respect of meetings of
stockholders for the election of directors of the Maker or any other matters or
any rights whatsoever as a stockholder of the Maker; and no dividends or
interest shall be payable or accrued in respect of this Note or the interest
represented hereby.
9. LOSS, THEFT, DESTRUCTION OR MUTILATION. In case this Note shall
become mutilated or defaced or be destroyed, lost or stolen, the Maker shall
execute and deliver a new Note in exchange for and upon surrender and
cancellation of such mutilated or defaced Note or in lieu of and in substitution
for such Note so destroyed, lost or stolen, upon the Holder of such Note filing
with the Maker evidence reasonably satisfactory to the Maker that such Note has
been so mutilated, defaced, destroyed, lost or stolen and of the ownership
thereof by the Holder as may be necessary; provided, however, that the Maker
shall be entitled, as a condition to the execution and delivery of such new
Note, to demand indemnity satisfactory to it and payment of reasonable expenses
and charges incurred in connection with the delivery of such new Note.
10. GOVERNING LAW; CONSENT TO JURISDICTION. This Note shall be governed
by and construed in accordance with the laws of the State of Colorado, without
giving effect to the principles of conflicts of law thereof. Any action or
proceeding seeking to enforce any provision of, or based on any right arising
out of this Note must be brought against any of the parties in the United States
District Court for the District of Colorado, and each of the parties hereby
irrevocably submits to the jurisdiction of such court in any such action or
proceeding and waives any objection to venue laid therein. Furthermore, the
Maker and the Holder hereby irrevocably consent to the service of any and all
process in any such action, suit or proceeding by the mailing of copies of such
process to them in the manner specified in the section concerning giving of
notices. Nothing in this section shall affect the right of Maker and the Holder
to serve legal process in any other manner permitted by law.
<PAGE>
11. CAPTIONS. The captions herein are included for convenience of
reference and shall be ignored in the construction or interpretation hereof.
12. NOTICES. Any notices and other communications required to be given
pursuant to this Note shall be in writing and shall be effective upon delivery
by hand or upon receipt if sent by mail (registered or certified mail, postage
prepared, return receipt requested), overnight package delivery service or upon
transmission if sent by telex or facsimile (with request for confirmation of
receipt in a manner customary for communications of such respective type),
except that if notice is received by telex or facsimile after 5:00 P.M. local
time on a business day at the place of receipt, it shall be effective as of the
following business day. Notices are to be addressed as follows:
If to the Maker: Preferred Telecom
12655 N. Central Expressway, Suite 800
Dallas, Texas 75243
If to the Holder: Bisbro Investments Company Ltd.
c/o T.R. Winston & Company Incorporated
1999 Avenue of the Stars, Suite 1950
Los Angeles, CA 90067
or to such other respective addresses as either the Maker or the Holder shall
designate to the other by notice in writing, provided that notice of a change of
address shall be effective only upon receipt.
IN WITNESS WHEREOF, the Maker by its duly authorized officer, has
executed this Note on this 12th day of November, 1996.
PREFERRED TELECOM, INC.
By:
-----------------------------
G. Ray Miller, Chairman., CEO
By:
-----------------------------
Dennis Gundy, President
<PAGE>
EXHIBIT B
COLLATERAL ASSIGNMENT OF MEDIA CREDIT
with
PREPAID PURCHASE ORDER attached as Exhibit 1
and
STATEMENT OF ACKNOWLEDGMENT AND CONSENT as Exhibit 2
COLLATERAL ASSIGNMENT OF MEDIA CREDIT
THIS COLLATERAL ASSIGNMENT OF MEDIA CREDIT ("Assignment") is made and
entered into on this 12th day of November, 1996, by and between Preferred
Telecom, Inc. ("Borrower") and Bisbro Investments Company Ltd., with an address
of PO Box 3216, Safat 13033, Kuwait city, Kuwait, and maintains offices in care
of T.R. Winston & Company Incorporated, 1999 Avenue of the Stars, Suite 1950,
Los Angeles, CA 90067 ("Bisbro" or "Lender") concerning certain media credit
owned by Preferred ("Media Credit") and to establish the terms and conditions
under which the Collateral Assignment of such Credits is made to Lender by
Preferred.
RECITALS
WHEREFORE, Borrower is the lawful owner of $800,000 in Media Credit
supplied through Source Corp. ("Seller") with principal offices at 18 West 100
22nd Street, Oakbrook Terrace, Illinois 60181 as set forth in Borrower's Media
Purchase Agreement among Preferred Telecom, Inc., Proxhill Marketing Ltd., and
Source Corp. dated June 3, 1996, and the Prepaid Purchase Order of even date
therewith. The Prepaid Purchase Order for said Media Credit is attached hereto
as Exhibit 1, and incorporated herein by this reference.
WHEREFORE, Lender has required as security, and Borrower desires to
secure the payment of the Promissory Note dated November 12, 1996 ("Note") and
any subsequent related Notes, through an Assignment of Credits for collateral
purposes only, in the event of default of any payment required by the Note(s) or
default in the performance of any of the terms, conditions and/or obligations
set forth therein.
ASSIGNMENT
NOW THEREFORE, as further consideration for the sums advanced and to be
advanced to it under the Note(s), and for other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, it is agreed that:
1. Borrower assigns and transfers to Lender, all of its right, title and
interest in and to said Media Credit, with full and complete authority and right
in Lender, in case of default in any payment required by the Note(s), or default
in the performance of any of the terms, conditions and/or obligations set forth
therein, to take possession of and to utilize said Media Credits for its own
purposes, or to sell, assign, transfer, hypothecate or dispose said Media Credit
as its own property. Lender hereby acknowledges receipt of the original purchase
order representing the ownership of said Media Credit.
<PAGE>
2. Upon default, this Assignment shall be acknowledged and recognized to
automatically transfer all rights, title, interest and ownership of said Media
Credit to the Lender, and the Seller of the media shall be given a copy of this
Assignment and shall confirm in writing its receipt and acknowledgment thereof
and its agreement to comply therewith and recognize the written instructions of
Lender. Lender shall further be entitled to, and shall comply with, all rights
and obligations afforded to and incumbent upon Borrower as set forth in
Borrower's Media Purchase Agreement dated June 3, 1996.
3. Borrower shall be permitted from time to time to substitute these Media
Credits for credits or other collateral of like value and exposure, with the
approval of Lender.
4. Borrower shall not pledge, assign, transfer or hypothecate the Media Credits
or any part thereof, without the prior consent of Lender.
5. Any modification, consent, notice or other communication required or
contemplated by this Assignment shall be in writing.
6. All the rights of the Lender under this Assignment shall be cumulative and
shall inure to the benefit of its successors and assigns. All obligations of the
Borrower hereunder shall be binding upon the successors and assigns of the
Borrower.
7. No consent, approval, authorization, license or order of, registration or
filing with, or notice to, any other party or Governmental Authority is
necessary to be obtained, made or given by Borrower in connection with the
execution, delivery and performance by Borrower of this Assignment or the
consummation by Borrower of the transactions contemplated hereunder. Statements
of Acknowledgment and Consent are attached hereto as Exhibit 2, and are
incorporated herein by this reference.
8. This Assignment shall be interpreted under and construed and governed in all
respects in accordance with the laws of the State of Colorado, irrespective of
the place of domicile or residence of any party. 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 presiding over the residence of Borrower, 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. The
prevailing party in any dispute arising out of this Assignment or related
agreements shall be entitled to its costs and attorney fees incurred in any such
action.
(The remainder of this page intentionally left blank)
<PAGE>
AUTHORIZED SIGNATURES:
PREFERRED TELECOM, INC., BORROWER
By:
--------------------------------
G. Ray Miller, Chairman and CEO
By:
--------------------------------
Dennis Gundy, President
ACCEPTANCE OF ASSIGNMENT:
BISBRO INVESTMENTS COMPANY LTD.
By:
--------------------------------
Bader Al-Rezaihan
<PAGE>
EXHIBIT 1
PREPAID PURCHASE ORDER
<PAGE>
EXHIBIT 2
STATEMENTS OF ACKNOWLEDGMENT AND CONSENT
<PAGE>
EXHIBIT C
OPTION AGREEMENT
[Included as Exhibit 10.2 to Form 10-QSB]
<PAGE>
EXHIBIT D
APPLICATION OF LOAN PROCEEDS
<PAGE>
EXHIBIT E
CONTINGENT LIABILITIES AND PENDING ACTIONS
OPTION AGREEMENT
THIS AGREEMENT is made as of the 12th day of November, 1996, by and
between Preferred Telecom, Inc., a publicly owned Delaware corporation with
principal offices at 12655 N. Central Expressway, Suite 800, Dallas, Texas 75243
("Preferred") and Bisbro Investments Company Ltd., with an address of PO Box
3216, Safat 13033, Kuwait city, Kuwait, and maintains offices in care of T.R.
Winston & Company Incorporated, 1999 Avenue of the Stars, Suite 1950, Los
Angeles, CA 90067 ("Bisbro"). Bisbro and Preferred are sometimes hereinafter
collectively referred to as the "Parties".
RECITALS
WHEREAS, in consideration for a Loan rendered by Bisbro to Preferred,
Preferred desires to grant an option ("Option") to Bisbro to purchase 600,000
shares of Preferred common stock under the terms and conditions as set forth in
this Option Agreement.
WHEREAS, in reliance upon the respective representations and warranties
of Preferred and the terms and conditions hereinafter set forth, Bisbro desires
to purchase, and Preferred desires to sell, under the terms set forth herein,
the number of shares (the "Shares") of common stock of Preferred (the "Company")
desired by Bisbro.
NOW, THEREFORE, in consideration of the premises and the respective
covenants hereinafter set forth, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. SALE AND PURCHASE OF SECURITIES. Preferred hereby grants Bisbro or
its assignee the Option to purchase up to 600,00 shares of Preferred common
stock, based upon an anticipated 2:1 reverse split of existing shares, for three
(3) years from the date of execution hereof, based upon an anticipated 2:1
reverse split of existing shares.
2. PURCHASE PRICE. Preferred agrees to sell to Bisbro the amount of
shares of Preferred common stock it desires, at a purchase price on the date of
purchase of fifty cents (US$.50) per share ("Purchase Price"), based upon an
anticipated 2:1 reverse split of existing shares. Funds paid as consideration
for said shares shall be transferred on a DVP basis or by any other means
acceptable to the parties, to the account of Preferred in compliance with
instructions to be provided at the time of purchase.
3. EXERCISE OF OPTION.
a. Upon exercise of the option as set forth above, Bisbro or
its assignee shall have "piggy back" registration rights, with regard to any
registration of an offering of Preferred securities. Preferred shall give notice
as promptly as possible of any such proposed registration to Bisbro, and will
include the shares of Bisbro upon the same terms of any offering, subject to any
requirements, limitations, and/or lockups of the underwriter, if applicable.
CORPDAL:61693.1 26287-00001
1
<PAGE>
b. Preferred will also timely cooperate with, approve, provide
and/or deliver opinions and all reasonable documentation, and execute as
necessary, any registration statements and documents customarily utilized in
connection with any sale of its securities by Bisbro (including any and all
amendments thereto including post-effective amendments), standby or other
underwriting or selling agreements, instructions to its transfer agent, sales or
transfer documentation reasonably requested by Bisbro or its assignee that shall
be necessary or required to implement Bisbro, or its assignee's sale, transfer,
pledge or hypothecation of the shares under the 33 Act, the securities or "blue
sky" laws of the various states or the rules of any governing body having
jurisdiction thereof.
c. Any registration, sale or transfer may include, but shall
not be limited to: (i) transactions made or consummated under or pursuant to a
Registration Statement under the 33 Act on Form S-1, S-2, S-3, or SB-2; (ii)
transactions made or consummated under or pursuant to an exemptions from
registration under the 33 Act under Regulation A, Rule 701, etc.; or (iii)
private or other sales of the shares and Warrants under the 33 Act or the rules
or regulations adopted thereunder including but not limited to Regulation S and
D. In this regard, the Preferred specifically covenants and agrees to prepare,
execute and deliver any and all documentation necessary to cause its securities
counsel o publish opinions and deliver written instructions to Preferred's
transfer agent within ten 910) business days from the date Bisbro or its
designee delivers written request to Preferred for the transfer, sale, and/or
removal of restrictive legend (where applicable) of or from the applicable
shares, options or warrants.
4. MISCELLANEOUS
a. The terms and conditions of this Agreement shall inure to
the benefit of and be binding upon the respective successors and assigned of the
parties hereto. Nothing in this Agreement, express or implied is intended to
confer upon any party, other than the parties hereto, and their respective
successors and assigned, any rights, remedies obligations or liabilities under
or by reason of this Agreement, except as expressly provided herein.
b. This Agreement shall be governed by and construed in
accordance with the laws of the state of Colorado.
c. This Agreement may be executed in two counterparts
via facsimile, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
d. The warranties and representations of Bisbro and Preferred
contained in or made pursuant to this Agreement shall survive the execution and
delivery of this Agreement and the closing hereunder.
e. Except as herein provided, any provision of this
Agreement may be amended or waived only by a written instrument signed by the
parties hereto.
CORPDAL:61693.1 26287-00001
2
<PAGE>
f. In the event a dispute arises concerning enforcement
of the terms of this Agreement, the prevailing party shall be entitled to its
costs and attorney fees.
IN WITNESS WHEREOF, the undersigned have hereunto set their hands and
seals as of the date and year first written above.
Preferred Telecom Inc.
By:/s/ G. Ray Miller
--------------------------
G. Ray Miller, Chairman, CEO
By:/s/ Dennis L. Gundy
-------------------------
Dennis L. Gundy, President
Bisbro Investments Company, Ltd.
By:/s/ Bader A-Rezaihan
------------------------
Bader A-Rezaihan
CORPDAL:61693.1 26287-00001
3
[GRAPHIC OMITTED]
January 7, 1997
Tyler Runnels
TR Winston & Company, Inc.
1999 Avenue of the Stars #1950
Los Angeles, CA 90067
RE: AMENDMENT TO LOAN AGREEMENT AND PROMISSORY NOTE WITH PREFERRED TELECOM, INC.
Dear Mr. Runnels:
Pursuant to our discussions, this letter will serve as confirmation of our
agreement to amend the prior Loan Agreement and Promissory Note entered into by
and between Bisbro Investments Company Ltd. ("Bisbro") and Preferred Telecom,
Inc. ("Preferred"), dated November 12, 1996 ("Loan Agreement" and "Note").
For and in consideration of the additional $50,000 contributed by First Capital
Financial Services Corporation ("First Capital"), Preferred and Bisbro hereby
consent and agree that all references to the loan amount of $100,000 shall be
amended to read "$150,000" and said $50,000 contribution will be governed by the
same Loan Agreement and Note as referred to above, and First Capital will be
granted the same rights proportionately thereof, including but not limited to a
proportionate share of the rights in the collateral, and warrants issued
pursuant thereto.
This letter will also acknowledge and confirm that the Secured Promissory Note
dated December 1, 1996 in the amount of $50,000 is canceled and superseded by
this letter, and that the Loan Agreement now consists of a total obligation by
Preferred to Bisbro and First Capital in the total amount of $150,000 plus
applicable interest, options and warrants, in consideration for $100,000
tendered on November 12, 1996, and $50,000 on December 27, 1996.
Very truly yours,
Gary J. Graham
AGREED AND ACCEPTED:
Bisbro Investments Company Ltd. Preferred Telecom, Inc.
Bader Al-Rezaihan Dennis L. Gundy, President & C.O.O.
G. Ray Miller, Chairman & C.E.O.
9250 EAST COSTILLA AVENUE o SUITE 650 o ENGLEWOOD o COLORADO o 80112
PHONE 303.792.0414 o FAX 303.792.0533 CORPDAL:61691.1 26287-00001
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
$222,154.21 November 1, 1996
Wichita, Kansas
PREFERRED TELECOM, INC. (herein called the "Maker"), for value
received, promises and agrees to pay to the order of BRITE VOICE SYSTEMS, INC.
at 7309 East 21st Street North, Wchita, Kansas 67206, or such other place as it
may designate, in lawful money of the United States of America, in immediately
available funds, the sum of Two Hundred Twenty-Two Thousand One Hundred
Fifty-Four Dollars and 21/100 ($222,154.21), bearing interest at the Note Rate,
payable in twelve (12) monthly installments, with the first one of such payments
being in the amount of One Hundred Thousand Dollars ($100,000.00) and the next
eleven of such payments being equal amounts based upon the amortized loan
balance and the then applicable Note Rate. As used herein the term "Note Rate"
shall vary monthly on the twenty-first day of each month and shall be 2% above
the prime rate as listed in the Money Rates section of the Wall Street Journal
published on the twenty-first day of each month, or on the next date such
publication is published, if not published on the twenty-first day of a month.
The initial Note Rate applicable under this Promissory Note shall be 10.25%.
Payment of the first installment shall be due on January 21, 1997 and subsequent
payments shall be due on the twenty-first day of each of the next 11 consecutive
months, as shown in the following schedule:
Payment No. Payment Date Amount
----------- ------------ ------
1 01/21/97 $100,000.00
2 02/21/97 $ 12,162.44
3 03/21/97 $ 12,162.44
4 04/21/97 $ 12,162.44
5 05/21/97 $ 12,162.44
6 06/21/97 $ 12,162.44
7 07/21/97 $ 12,162.44
8 08121/97 $ 12,162.44
9 09/21/97 $ 12,162.44
10 10/21/97 $ 12,162.44
11 11/21/97 $ 12,162.44
12 12/21/97 $ 12,162.49
CORPDAL:61635.1 26287-00001
1
<PAGE>
At the time of any change in the Note Rate, the amount of payments
numbered 2 through 12, due after the date of such change, shall be recalculated
to reflect the amortized amount necessary to fully pay off the remaining balance
due hereunder, at the new Note Rate, in equal payments on the remaining payment
due dates.
All payments shall be applied first to the payment of accrued interest
and then to the payment of principal.
In the event default is made in any payment hereof, then all of the
unpaid indebtedness hereunder shall, at the option of the holder, immediately
become due and payable and bear interest at the rate of 18% per annum from the
date of such default. Failure to exercise this option shall not constitute a
waiver of the right to declare all of the unpaid indebtedness due and payable at
once at any subsequent time.
Maker shall have the right to prepay any and all amounts due hereunder
without penalty for the privilege of doing so.
Should there be a default in the payment of the indebtedness
represented by this Note or any part thereof, and thereafter amounts payable
under this Note should be collected at law, in equity, in bankruptcy,
receivership or other court proceeding, or should this Note be placed in the
hands of an attorney for collection after default, the Maker agrees to pay
reasonable attorneys' fees and litigation costs in addition to principal and
interest due and payable thereon.
The provisions hereof shall bind and the benefits and advantages hereof
shall inure to the parties hereto and their respective successors, assigns,
personal or legal representatives, trustees, heirs, beneficiaries, legatees and
devisees.
This Note shall in all respects be governed by and construed and enforced
in accordance with the laws of the State of Kansas and Maker agrees to
jurisdiction and venue in the Sedgwick County, Kansas District Court in Wichita.
Kansas and the United States District Court in Wichita. Kansas
MAKER: PREFERRED TELECOM, INC.
By
Name
Title
CORPDAL:61635.1 26287-00001
2
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000946822
<NAME> Preferred/telecom, Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 39,218
<SECURITIES> 0
<RECEIVABLES> 194,450
<ALLOWANCES> (57,903)
<INVENTORY> 0
<CURRENT-ASSETS> 384,050
<PP&E> 263,223
<DEPRECIATION> (63,801)
<TOTAL-ASSETS> 1,594,299
<CURRENT-LIABILITIES> 3,012,593
<BONDS> 0
0
0
<COMMON> 10,860
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,594,299
<SALES> 217,280
<TOTAL-REVENUES> 217,280
<CGS> 238,037
<TOTAL-COSTS> 238,037
<OTHER-EXPENSES> 413,732
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,954
<INCOME-PRETAX> (482,443)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (482,443)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.05)
</TABLE>
