ePhone Telecom, Inc.
1145 Herndon Parkway
Herndon, Virginia 20170
(703) 787-7000
May 6, 2003
VIA FACSIMILE TRANSMISSION
AND FEDERAL EXPRESS
Mr. Mahmoud Wahba President and Chief Executive Officer Champion Teleport, Inc.
88 South Water Street
Greenwich, CT 06830
Re: Champion Teleport, Inc. Financing to and Merger with ePhone Telecom, Inc.
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Gentlemen:
We are pleased to enter into this letter agreement ("Agreement")
outlining our intention to effect a business combination between Champion
Teleport, Inc., a Delaware corporation ("Champion") and ePhone Telecom, Inc., a
Florida corporation ("ePhone"). It is our understanding that:
(a) Champion or its affiliates agree to invest $200,000 into ePhone
upon execution of this Agreement and will receive from ePhone a 9% Convertible
Secured Promissory Note ("Note").
(b) ePhone's common stock, $.001 par value per share (the "ePhone
Common Stock") currently trades on the OTC Bulletin Board (symbol: EPHO). At
March 31, 2003: (i) an aggregate of 40,476,298 shares of ePhone Common Stock
were issued and outstanding, (ii) an aggregate of 4,248,249 shares of ePhone
Common Stock were reserved for issuance under outstanding options to purchase
ePhone Common Stock (the "ePhone Stock Options"), and (iii) zero shares of
ePhone Common Stock were reserved for issuance under outstanding warrants to
purchase ePhone Common Stock (the "ePhone Warrants"). Accordingly, at March 31,
2003, on a fully-diluted basis there would have been an aggregate of 44,724,547
shares of ePhone Common Stock issued and outstanding assuming the exercise in
full of all outstanding ePhone Stock Options and ePhone Warrants.
(c) ePhone Merger Corp. ("Mergerco"), a wholly-owned subsidiary of
ePhone, common stock, $.001 par value per share (the "Mergerco Common Stock") is
not a publicly traded security. At March 31, 2003: (i) an aggregate of 100
shares of Mergerco Common Stock were issued and outstanding, (ii) zero shares of
Mergerco Common Stock were reserved for issuance under outstanding options to
purchase Mergerco Common Stock (the "Mergerco Stock Options"), and (iii) zero
shares of Mergerco Common Stock were reserved for issuance under outstanding
warrants to purchase Mergerco Common Stock (the "Mergerco Warrants").
Accordingly, at March 31, 2003, on a fully-diluted basis there would have been
an aggregate of 100 shares of Mergerco Common Stock issued and outstanding
assuming conversion of all Mergerco Preferred Stock and exercise in full of all
outstanding Mergerco Stock Options and Mergerco Warrants.
(d) Champion's common stock, $.001 par value per share (the "Champion
Common Stock") is not a publicly traded security. At March 31, 2003: (i) an
aggregate of 100 shares of Champion Common Stock were issued and outstanding,
(ii) an aggregate of zero shares of preferred stock of Champion ("Champion
Preferred Stock") were issued and outstanding; (iii) an aggregate of zero shares
of Champion Common Stock were reserved for issuance under outstanding options to
purchase Champion Common Stock (the "Champion Stock Options"), and (iv) an
aggregate of zero shares of Champion Common Stock were reserved for issuance
under outstanding warrants to purchase Champion Common Stock (the "Champion
Warrants"). Accordingly, at March 31, 2003, on a fully-diluted basis there would
have been an aggregate of 100 shares of Champion Common Stock issued and
outstanding assuming conversion of all Champion Preferred Stock and exercise in
full of all outstanding Champion Stock Options and Champion Warrants.
1. Bridge Financing
Immediately upon execution of this Agreement, Champion and or its
affiliates will invest $200,000 in the form of a 9% Convertible Secured
Promissory Note ("Note"). The Note shall be due and payable on September 1,
2003, unless earlier converted. The Note is convertible into 13,333,333 shares
of ePhone Common Stock ("Conversion Shares"), and upon consummation of the
Merger, as described below, shall automatically convert into the Conversion
Shares. Champion acknowledges that ePhone does not currently have enough shares
of common stock authorized to issue the Conversion Shares upon completion of the
Merger, as defined below, and agrees not to convert the Note until ePhone has
increased its authorized shares of common stock necessary to issue the
Conversion Shares. The Notes shall bear interest at the rate of 9% per annum,
and such interest may be paid by ePhone in the form of shares of its common
stock, based on a value of $0.015 per share, at ePhone's discretion. The Notes
shall be secured by all of ePhone's assets, subject to any previously granted
security interests. ePhone, upon receipt of written consent from Champion, may
sell up to an additional $800,000 principal amount of Notes ("Additional
Notes"), however, Champion and or its affiliates shall have a right of first
refusal to purchase the Additional Notes, if ePhone offers such Additional Notes
to third party investors.
2. The Merger Transaction
2.1 It is our intention that the transaction shall qualify as a
tax-free reorganization under Section 368(a)(1)(A) of the Internal Revenue Code
of 1986, as amended. The transaction shall be effected through a merger (the
"Merger") of Champion with and into Mergerco, with Mergerco as the surviving
corporation of such Merger (the "Surviving Corporation").
2.2 In sole consideration for the Merger, the security holders of
Champion shall receive shares of ePhone Common Stock, in the manner described
below.
3. Merger Consideration
On the date that the Certificate of Merger of Champion with
and into Mergerco shall be filed with the Secretary of State of the State of
Delaware (the "Effective Date") each full issued and outstanding share of
Champion Common Stock shall be exchanged for such number of shares of ePhone
Common Stock to be established and calculated in the agreement and plan of
merger (the "Merger Agreement") in such a manner so that the holders of all
issued and outstanding shares of Champion Common Stock as at the Effective Date
of the Merger shall be entitled to receive an aggregate of 99,641,757 shares of
ePhone Common Stock (the "ePhone Merger Stock").
4. Timing and Procedures Relative to the Merger
If the proposal contained in this letter is accepted and countersigned
by Champion, we hereby mutually agree to use our individual and collective best
efforts to adhere to the following schedule and procedures with respect to the
Merger Transaction:
4.1 Each of ePhone and Champion and our respective representatives will
promptly commence the Due Diligence Investigations referred to below. In
addition, ePhone's legal counsel shall prepare and forward to Champion and its
representatives drafts of definitive agreements, instruments and documents,
including, without limitation, an agreement and plan of merger (the "Merger
Agreement") and the related exhibits thereto. At the same time, each of ePhone
and Champion and their respective representatives shall promptly commence to
prepare the disclosure schedules to such Merger Agreement.
4.2 Each of ePhone and Champion and their representatives shall
undertake in good faith to have fully negotiated and executed a definitive
Merger Agreement, which shall include all related exhibits and final disclosure
schedules; all of which shall be approved by the boards of directors of each of
ePhone and Champion (collectively, the "Merger Documents") by a date which shall
be not later than July 1, 2003.
4.3 Prior to execution and delivery of the Merger Documents, ePhone
shall have received from a reputable investment banking firm (the "ePhone
Financial Advisor") a duly executed Fairness Opinion (the "ePhone Fairness
Opinion") in form and content reasonably acceptable to the board of directors of
ePhone to the effect that, after review of the businesses, valuation of the
Champion telecommunications equipment, financial condition, assets, liabilities
and prospects of ePhone and the terms and conditions of the proposed Transaction
as to the ePhone Financial Advisor, the terms and conditions of the Merger are
fair from a financial point of view to the stockholders of ePhone.
4.4 The Merger Agreement shall provide that consummation of the Merger
will be subject only to the closing conditions contained therein, including
those referred to in Sections 7 and 8 of this letter. Such closing conditions
will include a condition to the effect that:
(a) ePhone shall have completed, and shall be satisfied with
the results of, a complete legal, financial, business, environmental and
accounting due diligence with respect to Champion and its subsidiaries, their
businesses, respective operations, finances, assets, liabilities and business
prospects (the "Champion Due Diligence Investigation"), and
(b) Champion shall have completed, and shall be satisfied with
the results of, a complete legal, financial, business, environmental and
accounting due diligence with respect to ePhone and its subsidiaries, their
businesses, respective operations, finances, assets, liabilities and business
prospects (the "ePhone Due Diligence Investigation" and together with the
Champion Due Diligence Investigation, the "Due Diligence Investigations").
Assuming that each of ePhone and Champion and their respective
representatives provide full cooperation to the other, the parties expect that
such Due Diligence Investigations shall be completed by not later than thirty
(30) days after the date of execution of the Merger Agreement. Accordingly, the
Merger Agreement shall provide that (i) completion of satisfactory Champion Due
Diligence Investigation and ePhone Due Diligence Investigation shall be a
condition to the obligations of each of ePhone and Champion, respectively, to
consummate the Merger (the "Due Diligence Condition"), and (ii) such Due
Diligence Condition will terminate and expire on a date which shall be thirty
(30) days from the date of execution of the Merger Agreement, unless such Due
Diligence Condition shall be extended by mutual agreement of the parties, or
either ePhone or Champion elects, prior to expiration of such Due Diligence
Condition, to terminate the Merger Agreement and the Transaction contemplated
thereby.
5. Management and Board of Directors.
Upon consummation of the Bridge Loan, Champion will be entitled to one
board seat, and upon consummation of the Merger, representatives of Champion
shall receive a majority of the seats on the board of directors of ePhone.
6. Merger Agreement.
6.1 Execution of the Merger Agreement will be subject to:
(a) preparation and negotiation of a mutually satisfactory
Merger Agreement and related Merger Documents, which shall incorporate the terms
and provisions contemplated by this letter agreement;
(b) delivery of the Fairness Opinion contemplated by Section
4.3 above;
(c) completion of the Bridge Financing; and
(d) execution of employment agreements by Mr. Carmine
Taglialatela, Jr. and Mr. Steven Heap, and by those
other individuals designated by Champion, which may
include additional current employees of ePhone.
6.2 The Merger Agreement shall provide, inter alia, that, except as may
otherwise be provided in this letter of intent or in the Merger Agreement, each
of ePhone or Champion may terminate the Merger Agreement at any time prior to
the expiration of the Due Diligence Condition, without any liability or
obligation of any kind to the other party or its subsidiaries or affiliates,
other than repayment of the Note in accordance with its terms and subject to the
Break-up fee discussed in Section 9 below.
6.3 The Merger Agreement will contain such representations, warranties,
covenants and indemnities as are customary in transactions of the type
contemplated hereby and which are mutually satisfactory to the parties,
including, without limitation:
(a) as to Champion and its subsidiaries and businesses, the
following representations and warranties (subject to scheduled exceptions, as
appropriate and customary and as reasonably acceptable to ePhone): (i) due
organization and existence (including as to the requisite power and authority to
operate its assets and businesses); (ii) due authorization to enter into and
perform the Merger Agreement and other Merger Documents; (iii) legal, valid and
binding effect of the Merger Agreement and other Merger Documents; (iv)
compliance of the Merger Agreement and the Transaction with organization
documents, law, orders, permits and agreements; (v) all necessary consents and
approvals; (vi) the preparation of financial information in accordance with
generally accepted accounting principles and the accuracy of the financial
statements; (vii) Champion has all assets necessary to and used to conduct its
businesses as currently conducted; (viii) good and marketable title, free and
clear of liens to all assets and properties; good and merchantable condition of
inventory and all other tangible assets; (ix) customer and supplier lists and
relationships; (x) receivables; (xi) no litigation, except as previously
disclosed to ePhone (including the Oxford tax obligation and related
litigation); (xii) no undisclosed liabilities of the businesses; (xiii)
schedules of all contracts; real property; permits and licenses; intellectual
property (including as to no infringement and validity of registrations); (xiv)
environmental matters; (xv) employees and benefit plans; (xvi) labor matters;
(xvii) insurance; (xviii) taxes; (xix) brokers, etc., (xx) absence of
non-ordinary course changes and no material adverse change; and (xxi) full
disclosure; and
(b) as to ePhone and its subsidiaries and businesses, the
following representations and warranties (subject to scheduled exceptions, as
appropriate and customary and as reasonably acceptable to Champion): (i) due
organization and existence (including as to the requisite power and authority to
operate its assets and businesses); (ii) due authorization to enter into and
perform the Merger Agreement and other Merger Documents; (iii) legal, valid and
binding effect of the Merger Agreement and other Merger Documents; (iv)
compliance of the Merger Agreement and the Transaction with organization
documents, law, orders, permits and agreements; (v) all necessary consents and
approvals; (vi) the preparation of financial information in accordance with
generally accepted accounting principles and the accuracy of the financial
statements; (vii) ePhone has all assets necessary to and used to conduct its
businesses as currently conducted; (viii) good and marketable title, free and
clear of liens to all assets and properties; good and merchantable condition of
inventory and all other tangible assets; (ix) customer and supplier lists and
relationships; (x) receivables; (xi) no litigation; (xii) no undisclosed
liabilities of the businesses; (xiii) schedules of all contracts; real property;
permits and licenses; intellectual property (including as to no infringement and
validity of registrations); (xiv) environmental matters; (xv) employees and
benefit plans; (xvi) labor matters; (xvii) insurance; (xviii) taxes; (xix)
brokers, etc., (xx) absence of non-ordinary course changes and no material
adverse change; (xxi) accuracy of all reports and other documents filed with the
SEC under the Securities Exchange Act of 1934, as amended; and (xxii) full
disclosure.
In addition to the above, Champion shall warrant (i) the audited
consolidated and consolidating balance sheet and financial statements of
Champion and its subsidiaries as of December 31, 2002 and for the fiscal year
then ended (the "Champion Fiscal 2002 Statements"), which Champion Fiscal 2002
Statements have been audited, and (ii) the interim unaudited consolidated and
consolidating balance sheets and financial statements of Champion and its
subsidiaries as at March 31, 2003 and for the three (3) months then ended.
ePhone shall warrant (i) the audited consolidated and consolidating balance
sheet and financial statements of ePhone and subsidiaries as at December 31,
2002 and for the fiscal year then ended (the "ePhone Fiscal 2002 Statements"),
which ePhone Fiscal 2002 Statements have been audited by Grant Thornton LLP, and
(ii) the interim unaudited consolidated and consolidating balance sheets and
financial statements of ePhone and its subsidiaries at March 31, 2003 and for
the three (3) months then ended.
7. Conditions. The Merger Agreement shall contain customary conditions
to the obligations of the parties to consummate the Merger on the Effective
Date, and shall include the following conditions:
7.1 No pending or threatened injunctions restraining, preventing
or prohibiting the Transaction;
7.2 No law or order promulgated, enacted, entered or enforced by
any governmental authority restraining, preventing or prohibiting the Merger;
7.3 Receipt of all applicable regulatory approvals;
7.4 The ePhone Financial Advisors shall not have withdrawn its
favorable fairness opinion or modified such opinion adversely to ePhone;
7.5 The accuracy of all material representations and warranties made by
each of ePhone and Champion and each corporation's compliance with all covenants
contained therein;
7.6 The absence of any material adverse change;
7.7 Acceptable amended and restated employment agreements have been
executed and delivered by certain members of senior management of ePhone, which
shall supercede in their entirety, the terms of existing employment agreements
with such executives;
7.8 Unless consummated on or before execution of the Merger Agreement,
theexecution and delivery of a mutually satisfactory lease agreement
between ePhone and JJTM, Inc., an affiliate of Champion, for JJTM's
Oxford, CT facilities ("JJTM Facilities") for a period of ten (10)
years at fair market value, with an option for ten (10) additional
years, including ePhone's right of first refusal to purchase the JJTM
Facilities;
7.9 The absence of any trading by executive officers, directors or
other principal shareholders of either ePhone or Champion in the securities of
ePhone; and
7.10 Such other conditions as are customary in transactions of the
type contemplated by this letter.
8. Exclusivity Period/Interim Operations. The parties do hereby mutually agree
as follows:
8.1 Except as provided in Section 8.2 below, for a period of thirty
(30) days following the date of execution of this Agreement (the "Exclusivity
Period"), ePhone shall not, and will cause all ePhone subsidiaries or affiliates
and all ePhone affiliates' officers, directors, employees, partners,
representatives and agents not to, solicit, encourage, entertain, initiate, or
seek to secure from any third person, firm or corporation (other than Champion
or its affiliates) any inquiries or proposals, relating to (a) the possible
disposition of all or any portion of the stock, assets or businesses (except
inventory disposed of in the ordinary course of business) of ePhone or any of
its subsidiaries, or (b) any joint venture, merger, consolidation or other
business combination involving ePhone, any of its subsidiaries, assets or
businesses which would be inconsistent with the proposed Merger and related
Transaction contemplated hereby; provided, that in the exercise of their
fiduciary duties and responsibilities to the stockholders of ePhone, the
executive officers, directors and representatives of ePhone may hold discussions
and negotiate with any third person, firm or corporation who makes a bona fide
unsolicited "Superior Offer", as defined below. A Superior Offer shall include
any unsolicited offer involving (a) the purchase of all or any portion of the
stock, assets or businesses (except inventory sold of in the ordinary course of
business) of ePhone or any of its subsidiaries, or (b) any joint venture,
merger, consolidation or other business combination involving ePhone, any of its
subsidiaries, assets or businesses a purchase price or consideration which shall
equal or exceed an aggregate of $1,000,000 million, payable in full either in
freely tradable common stock or in cash at closing.
8.2 Notwithstanding the foregoing, in the event that for any reason,
the Bridge Financing shall have not been consummated within two (2) days from
the date of execution of this letter agreement, the Exclusivity Period shall
expire (at the option of ePhone) immediately thereafter.
8.3 Each of ePhone and Champion shall operate their respective
companies and subsidiaries and conduct their businesses only in the ordinary
course and consistent with past practices, subject to certain agreed exceptions.
8.4 Unless otherwise agreed to in advance in writing by Champion,
during the Exclusivity Period, neither ePhone nor any subsidiary of ePhone
shall:
(a) enter into any material agreement binding upon ePhone or
such subsidiary or make a material change or modification to any existing
agreement on behalf of ePhone or such subsidiaries, other than agreements
relating to sales of inventory and purchase of inventory from suppliers in the
ordinary course of business and consistent with past practices;
(b) increase in any material manner the salary, bonus,
severance or other compensation or benefits of any member of management or other
employee of the businesses, except for annual and usual increase in salary to
any employee of the businesses not a member of management;
(c) enter into any employment agreement with any employee of
the businesses, adopt any benefit plan for such employees or amend or modify any
collective bargaining agreement or existing benefit plan for such employees; or
(d) take any action inconsistent with any of the foregoing.
8.5 From and after the execution and delivery of this letter of intent,
and until terminated pursuant to the second sentence of Section 14, ePhone shall
promptly (i) consult with Champion about any material matters concerning
ePhone's assets and businesses, and (ii) if any inquiries or proposals of the
type described in Section 8.1 above are received, ePhone shall promptly notify
Champion of such inquiries and proposals and provide Champion with copies of any
correspondence evidencing or regarding such inquiries or proposals.
9. Break-Up Fee/Expenses.
9.1 From and after the date of execution of this letter of intent, if
ePhone causes the Merger not to occur on or before July 1, 2003 other than by
reason of ePhone: (i) discovering a material due diligence issue that had not
previously been disclosed, or (ii) being unable to obtain the Fairness Opinion
from a reputable investment banking firm; then ePhone shall:
(a) pay to Champion, a break-up fee in an amount equivalent to
the sum of $150,000 (the "Break-up Fee"), payable in cash in immediately
available funds,
(b) issue to Champion warrants to purchase up to 1.2 million
shares of ePhone's common stock at an exercise price of $0.03 [closing price on
April 21, 2003] for a period of five (5) years; and
(c) pay to Champion reasonable legal expenses incurred in
connection with the transactions contemplated by this Agreement.
(d) pay to Champion or its affiliates the then outstanding
principal balance of the Note in cash in immediately available funds, plus
accrued interest paid in the form of ePhone common stock valued at $0.015 per
share.
9.2 Notwithstanding the foregoing, in the event that the Bridge
Financing has not been completed within two (2) business days of the date of
this Agreement and ePhone terminates negotiations with Champion prior to
execution of a definitive Merger Agreement, provided the Bridge Financing has
still not been completed, no Break Up Fee or expenses shall be due and payable
hereunder;
9.3 In the event Champion does not proceed with the Merger as a
consequence of Champion's discovery of a material due
diligence issue that had not previously been disclosed, exept
for the non public investigation of Federal Trade Commission
then Section 9.1(d) above shall apply.
Champion acknowledges that it has been made aware of the
non-public inquiry of the Federal Trade Commission ("FTC")
into the business of ePhone. As such, in the event that
Champion elects not to proceed with the Merger as a result of
a material change in the nature of the investigation or upon
becoming aware of information that leads it to conclude that
said inquiry will have an adverse effect upon the business
condition of ePhone, then Section 9.1(d) above shall apply.
9.4 Except as otherwise provided in this Section 9, each party agrees
to pay its own costs and expenses in connection with the Merger transaction, and
the conducting of its respective Due Diligence Investigations.
10. Confidentiality; Access to Records. From and after the date of execution of
this letter agreement, upon request, representatives of Champion shall have full
access to the ePhone books and records to enable Champion to conduct the ePhone
Due Diligence Investigation and representatives of ePhone shall have full access
to the Champion books and records to enable ePhone to conduct the Champion Due
Diligence Investigation. Access to such books and records shall controlled by
the provisions of a confidentiality agreement, in form and substance mutually
acceptable to ePhone and Champion.
11. Finders. Except for Kaufman Bros., L.P., which is entitled to receive
certain finders fees and related compensation from Champion, neither ePhone nor
Champion is obligated to pay any finders' fees or related brokerage commissions
in connection with the Merger and related Transactions contemplated hereby. The
parties hereto do further acknowledge that Kaufman Bros., L.P. has acted as
finder to ePhone and as advisor to Champion and by executing this Agreement each
of ePhone and Champion waive any perceived or actual conflict of interest by
reason of Kaufman Bros., L.P. provision of services to each of ePhone and
Champion.
12. Governing Law. This letter and the definitive agreements shall be governed
by and construed in accordance with the law of the State of New York, without
regard to the principles or policies thereof with respect to conflicts of laws.
13. Counterparts. This letter may be executed in counterparts and when so
executed shall constitute one document, notwithstanding that the parties are not
signatories to the same counterpart.
14. Termination. The proposal contained herein will terminate at 5:00 p.m.,
Eastern Standard Time, on May 7, 2003, unless the enclosed counterpart hereof is
countersigned and delivered by Champion to our offices prior to such time and
unless such time is extended in writing by us. In addition, once countersigned
by Champion and delivered to our offices, this Agreement may be terminated by
ePhone or Champion upon written notice to the other given at any time after 5:00
p.m., Eastern Standard Time, on May 7, 2003, unless prior to such time the
parties shall have duly executed and delivered agreements with respect to the
Bridge Financing.
15. Nonbinding and Binding Provisions. This letter, when executed and delivered
by the Ion to our offices (facsimile transmission shall be deemed to be valid
execution and delivery), shall set forth only the parties' mutual understanding
and intention and shall not constitute an agreement or agreement to agree with
respect to the final terms of the Merger Agreement; provided, however, that it
is hereby expressly understood and agreed by and among the parties hereto that
Sections 8, 9, 10, 11, 12,13 and 14 of this letter agreement and this Section
15, and the agreements and obligations of the parties set forth therein, shall
be binding upon the parties upon execution and delivery of this letter
agreement. The other terms and conditions hereof, however, shall only become
binding on the parties upon the execution and delivery of, and as set forth in,
the Merger Agreement.
If the foregoing correctly sets forth the parties' understanding with
respect to the Transaction and the parties' agreement as to Sections 8, 9, 10,
11, 12, 13, 14 and 15 of this letter, please so confirm by countersigning and
returning to the undersigned a counterpart hereof.
Very truly yours,
ePhone Telecom, Inc.
By: /s/ Carmine Taglialatela
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Carmine Taglialatela, President and CEO
The foregoing letter agreement is hereby confirmed and agreed to this 6th day of
May 2003:
Champion Teleport, Inc.
By: /s/ Mahmoud Wahba
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Mahmoud Wahba, President and Chief Executive Officer