<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
(Amendment No. 2)
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement |_| Confidential, for Use of the
Commission Only
|X| Definitive Proxy Statement (as permitted by Rule 14a-6(e)(2))
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
TALK VISUAL CORPORATION (f/k/a Legacy Software, Inc.)
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
- --------------------------------------------------------------------------------
1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
5) Total fee paid:
|X| Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
<PAGE>
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
- --------------------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
3) Filing party:
- --------------------------------------------------------------------------------
4) Date Filed:
<PAGE>
(LOGO OF TALK VISUAL CORPORATION APPEARS HERE)
Fellow Shareholders:
I am pleased to invite you to attend a special meeting of stockholders of
Talk Visual Corporation (formerly known as Legacy Software, Inc.) on
Tuesday, June 15, 1999
10:00 a.m.
One Canal Park, 3rd Floor
Cambridge, Massachusetts 02142
This is a very important meeting that affects your investment in Talk Visual .
At the meeting you will be asked to vote on a merger between a wholly
owned subsidiary of Talk Visual and Videocall International Corporation. In the
merger, Talk Visual will pay Videocall shareholders (other than certain founders
of Videocall) one share of Talk Visual stock for each share of Videocall stock,
and Videocall will become a subsidiary of Talk Visual. The Videocall Founders
instead will generally be paid a combination of shares of Talk Visual stock and
three-year options to purchase Talk Visual stock at an exercise price of $1 per
share on the same one-for-one share basis. Talk Visual stockholders will
continue to own their existing shares after the merger. We estimate that the
shares of Talk Visual stock to be issued to Videocall stockholders will
represent approximately 80% of the outstanding stock of Talk Visual after the
merger (88% if all the options to be issued in the merger were exercised).
Your Board of Directors recommends that you vote FOR approval of the
merger, which we believe is in Talk Visual's and your best interests.
We have enclosed a notice of the special meeting and a Proxy
Statement/Prospectus/Notification of Merger discussing the merger. We encourage
you to read this document carefully. Also enclosed is a proxy card so you can
vote on the merger without attending the meeting. Please complete, sign and date
the enclosed proxy card and return it to us as soon as possible in the envelope
we have provided. If you decide to come to the special meeting, you may vote
your shares in person whether or not you have mailed us a proxy.
Very truly yours,
Michael J. Zwebner
Chairman
May 28, 1999
<PAGE>
[TALK VISUAL LOGO]
TO THE SHAREHOLDERS OF TALK VISUAL CORPORATION
(Formerly Known as Legacy Software, Inc.):
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held
Tuesday, June 15, 1999
10:00 a.m.
One Canal Park, 3rd Floor
Cambridge, Massachusetts 02142
The Board of Directors of Talk Visual asks you to attend this meeting to vote on
the following:
1. Proposed Merger. Your vote on the agreement providing for the proposed
merger of Videocall with a subsidiary of Talk Visual is important. In the
merger, Talk Visual will pay Videocall shareholders (other than certain
founders of Videocall) one share of Talk Visual stock for each share of
Videocall stock, and Videocall will become a subsidiary of Talk Visual.
The Videocall Founders instead generally will be paid a combination of
shares of Talk Visual stock and three-year options to purchase Talk Visual
stock at an exercise price of $1 per share on the same one-for-one share
basis. Talk Visual stockholders will continue to own their existing shares
after the merger. The Agreement and Plan of Merger providing for the
merger, which describes the terms of the merger in great detail, is
attached to the accompanying Proxy Statement/Prospectus/Notification of
Merger as Annex A.
2. Reincorporation in Nevada. To consider and vote upon the proposed change
in Talk Visual's state of incorporation from Delaware to Nevada and, as
part of the reincorporation, increasing Talk Visual's authorized stock
from 15,000,000 to 125,000,000 shares, of which 100,000,000 will be Common
Stock and 25,000,000 will be Preferred Stock.
3. Other Business. To consider and vote on any other matters that properly
come before the meeting or any adjournments or postponements.
Only shareholders who hold their stock at the close of business on
May 10, 1999 are entitled to notice of and to vote at the special meeting or any
adjournments or postponements thereof.
By Order of the Board of Directors,
-----------------------------
Secretary
We invite you to attend the special meeting because it is important
that your shares be represented at the meeting. Please sign, date and return the
enclosed proxy card in the accompanying postage-paid envelope. If you attend the
meeting, you may personally vote, which will revoke your signed proxy. You may
also revoke your proxy at any time before the meeting either in writing or by
personal notification.
A complete list of stockholders entitled to vote at the special
meeting will be available for examination at Talk Visual's principal executive
offices, located at One Canal Park, 3rd Floor, Cambridge, Massachusetts 02142,
for any purpose germane to the special meeting, during ordinary business hours,
for a period of at least 10 days prior to the special meeting and will also be
available for inspection at the special meeting.
<PAGE>
PROXY STATEMENT/PROSPECTUS NOTIFICATION OF MERGER
OF OF
TALK VISUAL CORPORATION VIDEOCALL INTERNATIONAL
SPECIAL MEETING OF SHAREHOLDERS CORPORATION
To Be Held on June 15, 1999
The Boards of Directors of Talk Visual Corporation and Videocall
International Corporation have agreed to merge Videocall with a subsidiary of
Talk Visual. Videocall would become a wholly owned subsidiary of Talk Visual and
Talk Visual would pay Videocall shareholders (other than certain founders of
Videocall) one share of Talk Visual stock for each share of Videocall stock. The
Videocall Founders instead will generally be paid a combination of shares of
Talk Visual stock and three-year options to purchase Talk Visual stock at an
exercise price of $1 per share on the same one-for-one share basis.
The merger cannot be completed unless Talk Visual shareholders approve it.
The Talk Visual Board of Directors has scheduled a special meeting for Talk
Visual shareholders to vote on the merger (and the reincorporation of Talk
Visual in Nevada) as follows:
Tuesday, June 15, 1999
10:00 a.m.
One Canal Park, 3rd Floor
Cambridge, Massachusetts 02142
Shareholders of Videocall holding a majority of the Videocall stock have
agreed to consent in writing to the merger. Accordingly, no meeting of Videocall
shareholders will be held to vote on the merger. This document notifies the
other shareholders of Videocall of the merger.
This document gives you detailed information about the proposed merger.
Videocall has provided the information concerning Videocall, and Talk Visual has
provided the information concerning Talk Visual. Please see "Where You Can Find
More Information" on page 91 for additional information about Videocall and
Talk Visual on file with the United States Securities and Exchange Commission.
This Proxy Statement/Prospectus/Notification of Merger is being mailed to
shareholders of Talk Visual beginning about May 28, 1999 and will be mailed to
shareholders of Videocall, if the merger is approved by the Talk Visual
shareholders, promptly after the special meeting of the Talk Visual
shareholders.
We urge you to carefully read the "Risk Factors--The Company" section
beginning on page 11, where we describe specific risks associated with the Talk
Visual stock.
<PAGE>
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
regulator has approved or disapproved the Talk Visual common stock or options to
be issued under this Proxy Statement/Prospectus/Notification of Merger or
determined if this Proxy Statement/Prospectus/Notification of Merger is accurate
or adequate. Any representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
The date of this Proxy Statement/Prospectus/Notification of Merger is May
28, 1999.
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY OF PROXY STATEMENT/PROSPECTUS/NOTIFICATION OF
MERGER.......................................................................2
RISK FACTORS--THE COMPANY....................................................11
RISK FACTORS--VIDEOCALL......................................................14
INTRODUCTION.................................................................15
VOTING AND PROXIES...........................................................17
PROPOSAL 1. THE MERGER......................................................18
PARTIES TO THE MERGER........................................................18
Talk Visual Corporation.................................................18
Videocall International Corporation.....................................19
THE MERGER...................................................................20
General.................................................................20
Background of the Merger................................................20
Reasons for the Merger..................................................22
Effective Time of the Merger............................................23
Conversion and Cancellation of Videocall Common Stock...................23
Exchange Procedures.....................................................23
Interim Operations of the Company; Conduct Pending Merger...............24
Conditions to the Merger................................................25
Termination.............................................................27
Rights Offering.........................................................28
Interests of Certain Persons in the Merger..............................28
Appraisal Rights........................................................28
Comparative Rights of Stockholders of the Company and Videocall.........30
Resale and Voting Restrictions..........................................37
Federal Income Tax Considerations.......................................38
Regulatory Approvals....................................................39
MARKET PRICE DATA............................................................39
TALK VISUAL CORPORATION PRO FORMA FINANCIAL INFORMATION......................41
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF TALK
VISUAL CORPORATION..........................................................45
THE COMPANY--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................46
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF VIDEOCALL
INTERNATIONAL CORPORATION...................................................55
VIDEOCALL--MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...............................56
INFORMATION CONCERNING THE COMPANY...........................................59
BUSINESS.....................................................................59
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT..................................................................65
MANAGEMENT...................................................................66
<PAGE>
INFORMATION CONCERNING VIDEOCALL.............................................72
BUSINESS.....................................................................72
PRINCIPAL STOCKHOLDERS.......................................................75
MANAGEMENT...................................................................76
DESCRIPTION OF CAPITAL STOCK - THE COMPANY...................................80
DESCRIPTION OF CAPITAL STOCK - VIDEOCALL.....................................80
LEGAL MATTERS................................................................81
EXPERTS......................................................................81
PROPOSAL 2. REINCORPORATION PROPOSAL........................................81
Principal Features of the Reincorporation Proposal......................82
Purpose for Proposed Reincorporation....................................84
Comparison of Shareholder Rights........................................84
Possible Disadvantages of the Reincorporation Proposal..................89
Tax Consequences........................................................90
Abandonment.............................................................90
Vote Required...........................................................90
OTHER MATTERS................................................................91
MISCELLANEOUS................................................................91
WHERE YOU CAN FIND MORE INFORMATION..........................................91
APPENDICES
Annex A - Agreement and Plan of Merger
Annex B - Sections 607.1301, 607.1302 and 607.1320 of the Florida Business
Corporation Act
Annex C - Reincorporation Merger Agreement
Annex D - New Charter
Annex E - New Bylaws
<PAGE>
SUMMARY OF PROXY STATEMENT/PROSPECTUS/NOTIFICATION OF MERGER
This summary highlights selected information from this document and may
not contain all of the information that is important to you. To understand the
merger fully and for a more complete description of the legal terms of the
merger, you should read carefully this entire document and the documents we have
referred you to. See "Where You Can Find More Information" (page ___). The
Merger Agreement is attached as Annex A to this document. We encourage you to
read the Merger Agreement. It is the legal document that governs the merger.
The Companies:
Talk Visual Corporation
One Canal Park, 3rd Floor
Cambridge, Massachusetts 02142
(617) 679-0300
Talk Visual (formerly known as Legacy Software, Inc.) has been in the
business of developing CD-ROM and Internet games. In connection with the Merger,
Legacy intends to exit this business and to concentrate solely on the business
of Videocall, which is global video teleconferencing. Our Common Stock is traded
on the OTC Bulletin Board under the symbol "TVCP."
Videocall International Corporation
One Canal Park, 3rd Floor
Cambridge, Massachusetts 02142
(617) 679-0300
Videocall was formed on February 2, 1998 for the purpose of building a
global telecommunications organization specializing in the field of video
teleconferencing. Videocall intends to establish retail locations throughout the
world from which business and general public customers may participate in
videocalls.
The Talk Visual Special Meeting
Talk Visual will hold its special meeting of stockholders on June 15, 1999
at One Canal Park, 3rd Floor, Cambridge, Massachusetts at 10:00 a.m. At the
special meeting, Talk Visual stockholders will be asked to approve:
o The Merger Agreement
o Changing the state of incorporation of Talk Visual from Delaware to
Nevada
2
<PAGE>
As part of the reincorporation of Talk Visual in Nevada, the number of shares of
stock Talk Visual is authorized to issue will be increased from 25,000,000 to
125,000,000, of which 100,000,000 will be Common Stock and 25,000,000 will be
Preferred Stock.
As of May 10, 1999, the record date for the special meeting, Talk Visual
had 4,954,916 shares of Common Stock outstanding.
Our Reasons for the Merger
Since inception, Talk Visual had never achieved profitability. In early
1998, it became apparent to the Board of Directors, that Talk Visual shortly
would have insufficient working capital to continue its operations. In addition,
Talk Visual had not developed sufficient CD-ROM "edutainment" computer software
titles to achieve profitability. Talk Visual was also faced with its stock being
delisted by Nasdaq, which subsequently occurred. Accordingly, after
unsuccessfully attempting to negotiate a joint venture agreement, the Board
decided to locate a possible transaction for Talk Visual which would provide
Talk Visual with sufficient capital. At approximately the same time, the Board
of Directors of Videocall had decided to seek an appropriate public company with
which to merge to help Videocall achieve its goal of building a global
video-calling network by providing Videocall with a publicly traded security
with which to effectuate acquisitions.
The Talk Visual Board believes that consummation of the Merger with
Videocall provides Talk Visual and its stockholders with the best opportunity
for the survival of Talk Visual. Also, the Talk Visual Board believes that the
global videocalling business is an attractive one and that Talk Visual has an
excellent opportunity to enter this business through Videocall.
Approval of Merger by Talk Visual Stockholders
Approval of the Merger requires the affirmative vote of the holders of
both
o a majority of Talk Visual's common stock and
o a majority of the shares of Talk Visual common stock voting at the
special meeting not issued by Talk Visual to Videocall or any of its
affiliates.
The proposal to reincorporate Talk Visual in Nevada requires the
affirmative vote of the holders of a majority of Talk Visual's outstanding
common stock.
3
<PAGE>
Approval of Merger by Videocall Stockholders
No meeting or general solicitation of consents is being conducted by
Videocall. The directors and officers of Videocall, and other Videocall
stockholders affiliated with them, who hold approximately 54.2% of the Videocall
common stock, have agreed to consent to the Merger. Videocall stockholders are
not being asked to send Videocall proxies or written consents.
Recommendation to Talk Visual Stockholders
The Talk Visual Board believes that the Merger is in your best interests
and unanimously recommends that you vote FOR the proposal to approve the
Agreement and Plan of Merger and the issuance of shares of Talk Visual common
stock and Talk Visual stock options to Videocall stockholders in the Merger.
The Merger
The Agreement and Plan of Merger is attached as Appendix A to this Proxy
Statement/Prospectus/Notification of Merger. We encourage you to read the
Agreement and Plan of Merger as it is the legal document that governs the
Merger.
What Videocall Stockholders Will Receive
As a result of the Merger, Videocall stockholders, other than founders of
Videocall, who do not exercise their appraisal rights will receive one share of
Talk Visual common stock for each share of Videocall common stock that they own.
The founders of Videocall will generally receive a combination of shares of Talk
Visual common stock and three-year options to purchase Talk Visual common stock
at an exercise price of $1 per share on the same one-for-one share basis. See
"Introduction -- Talk Visual Corporation" on page 15 for a description of how
the exact combination of Talk Visual shares and options will be determined.
Videocall stockholders should not send in their stock certificates until
requested to do so after the Merger is completed.
Ownership of Talk Visual Following the Merger
We anticipate that Talk Visual will issue approximately 19.8 million
shares of Talk Visual common stock and options to purchase approximately 15.6
million shares to Videocall stockholders in the Merger. Based on that number,
the shares of Talk Visual common stock issued to Videocall stockholders in the
Merger will represent approximately 80% of the outstanding common stock of Talk
Visual after the Merger (88% if all the options to be issued in the Merger are
exercised). As a result of the change in ownership, this transaction is
accounted for as a reverse acquisition, in which Videocall is the accounting
acquiror.
Other Interests of Officers and Directors in the Merger
In considering the recommendation of Talk Visual's Board of Directors with
respect to the Merger, stockholders should be aware that all but two of the
current officers and directors of Talk Visual are affiliated with Videocall.
4
<PAGE>
Conditions to the Merger
The completion of the Merger depends upon satisfaction of a number of
conditions, including the continued accuracy in all material respects of each
party's representations and warranties, the performance by each party of its
obligations under the Agreement and Plan of Merger, and the absence of any
events or changes with respect to either having, or which reasonably could be
expected to have, a material adverse effect on that party. Certain of the
conditions to the Merger may be waived by the company entitled to assert the
condition.
Termination of the Agreement and Plan of Merger
The two companies can agree to terminate the Agreement and Plan of Merger
without completing the Merger, and either of us can terminate the Agreement and
Plan of Merger under various circumstances, including if
o the Merger is not completed by June 30, 1999
o a court or other governmental authority prohibits the Merger
o the other has materially breached any representation, warranty or
obligation contained in the Merger Agreement
o the approval of the Merger by the stockholders of Talk Visual or
Videocall has not been obtained
Important Federal Income Tax Consequences
We have structured the Merger so that neither Talk Visual, Videocall nor
our stockholders will recognize any gain or loss for Federal income tax purposes
as a result of the Merger.
Appraisal Rights:
No Appraisal Rights of Talk Visual Stockholders
Under Delaware law, Talk Visual stockholders do not have the right to
require Talk Visual to purchase the shares of Talk Visual common stock held by
them for cash at the fair value of those shares in connection with, or as a
result of, the Merger or the other matters to be acted upon at the special
meeting.
5
<PAGE>
Appraisal Rights of Videocall Stockholders
Under Florida law, holders of Videocall common stock are entitled to
require Videocall to purchase the shares of Videocall common stock held by them
for cash at the fair value of these shares if the Merger is consummated provided
certain procedures are followed. Failure to take any necessary steps will result
in a termination or waiver of the rights of a Videocall stockholder to seek
appraisal.
Comparative Market Price Data
On September 11, 1998, the last full trading day prior to public
announcement of the signing of the Merger Agreement, the closing price per share
reported on the Nasdaq SmallCap Market for the Talk Visual common stock was $1
5/16. The average daily closing price per share reported on the Nasdaq SmallCap
Market for the Talk Visual common stock during the month of August 1998 was $1
7/32. Effective April 7, 1999, the Talk Visual common stock was delisted from
the Nasdaq SmallCap Market and currently trades on the OTC Bulletin Board. There
is no public market for the Videocall common stock.
Listing of Talk Visual Common Stock
The shares of Talk Visual common stock issued in connection with the
Merger will be traded on the OTC Bulletin Board.
Dividends After the Merger
Historically, neither Talk Visual nor Videocall has paid dividends. Talk
Visual and Videocall have had, and Talk Visual will continue to have, a
substantial commitment to expanding their businesses, and that expansion has
required the cash that otherwise might be available for dividends.
6
<PAGE>
Selected Historical Financial Data
TALK VISUAL CORPORATION
The following table presents the summary historical financial information
of the Company. The summary historical financial information as of the end of or
for each of the last five fiscal years has been derived from audited financial
statements of the Company. The information as of and for the three month periods
ended March 31, 1999 and 1998 has been derived from unaudited financial
statements and, in the opinion of management, includes all adjustments
(consisting of normal recurring adjustments) necessary for a fair presentation
of the information shown herein. The operating results for the three months
ended March 31, 1999 are not necessarily indicative of the results to be
expected for the entire fiscal year. This selected financial data should be read
in conjunction with the Company's consolidated financial statements and the
accompanying notes presented elsewhere in this Proxy
Statement/Prospectus/Notification of Merger. The historical information for the
years ended December 31, 1995 and 1994 are not included in this Proxy
Statement/Prospectus/Notification of Merger.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenue
Royalties ........................ $ 206,452 $ 411,465 $ 768,716 $ 9,179 $ 16,809
Software sales ................... 52,960 85,723 13,501 36,399 69,856
Consulting ....................... 80,000 -- 12,125 6,000 100,000
Rental activities ................ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total ......................... 339,412 497,188 794,342 51,578 186,665
Costs and expenses:
Cost of royalties ................ 9,558 211,308 76,507 13,939 --
Cost of software sales ........... 33,254 98,881 9,745 31,528 46,783
Product development .............. 1,008,640 619,516 1,664,478 72,951 196,595
Consulting services .............. -- -- -- -- --
Legal and accounting ............. -- -- -- -- --
General and administrative ....... 941,667 1,351,127 1,585,084 336,457 133,644
Real estate operations ........... -- -- -- -- --
Selling .......................... 77,309 267,376 91,995 21,216 9,829
----------- ----------- ----------- ----------- -----------
Total ......................... 2,070,428 2,548,208 3,427,809 476,091 386,851
Income (loss) from operations ...... (1,731,016) (2,051,020) (2,633,467) (424,513) (200,186)
Interest expense ................... 47,626 123,571 459,315 267,005 51,707
Interest income .................... -- (19,492) (108,240) -- --
Other expense ...................... 32,862 -- -- -- --
Other income ....................... (192,798) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss before extraordinary item.. $(1,618,706) $(2,155,099) $(2,984,452) $ (691,518) $ (251,893)
Extraordinary item ................. 300,000 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss ........................... $(1,318,706) $(2,155,099) $(2,984,452) $ (691,518) $ (251,893)
=========== =========== =========== =========== ===========
Net loss per common share basic
and diluted
Before extraordinary item ....... $ (1.54) $ (2.51) $ (4.78) $ (2.60) $ (0.95)
Extraordinary item .............. 0.28 -- -- -- --
After extraordinary item ........ $ (1.26) $ (2.51) $ (4.78) $ (2.60) $ (0.95)
Dividends per share ................ 0 0 0 0 0
Weighted average common stock
outstanding basic and diluted .... 1,054,175 858,211 623,968 266,067 266,067
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
<S> <C> <C>
Statement of Operations Data:
Revenue
Royalties ........................ $ 2,028 $ 128,909
Software sales ................... -- 8,122
Consulting ....................... -- 42,000
Rental activities ................ 19,264 --
----------- -----------
Total ......................... 21,292 179,031
Costs and expenses:
Cost of royalties ................ 3,204 17,221
Cost of software sales ........... -- 10,562
Product development .............. --
Consulting services .............. 1,483,887 --
Legal and accounting ............. 95,310 29,459
General and administrative ....... 49,349 159,812
Real estate operations ........... 8,766 --
Selling .......................... -- 24,556
----------- -----------
Total ......................... 1,640,516 284,942
Income (loss) from operations ...... (1,619,224) (105,910)
Interest expense ................... 1,243 12,645
Interest income .................... (4,037) --
Other expense ...................... 1,563 --
Other income ....................... -- --
----------- -----------
Net loss before extraordinary item.. $(1,617,993) $ (118,555)
Extraordinary item ................. -- --
----------- -----------
Net loss ........................... $(1,617,993) $ (118,555)
=========== ===========
Net loss per common share basic
and diluted
Before extraordinary item ....... $ (0.47) $ (0.12)
Extraordinary item .............. -- --
After extraordinary item ........ $ (0.47) $ (0.12)
Dividends per share ................ 0 0
Weighted average common stock
outstanding basic and diluted .... 3,454,555 885,001
</TABLE>
<TABLE>
<CAPTION>
December 31, March 31,
1998 1997 1996 1995 1994 1999
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ....... $ 153,608 $ 14,464 $ 1,804,779 $ 365,190 $ 20,750 $ 449,799
Working capital (deficiency) .... 1,674,338 (672,039) 1,155,017 (162,097) (186,013) 1,768,802
Total assets .................... 2,503,561 1,614,932 3,680,507 710,890 96,492 6,744,584
Long-term debt (including current
portion) ...................... 356,066 945,501 461,802 1,338,084 626,431 1,171,151
Stockholders' equity (deficit) .. 2,000,842 552,388 2,505,481 (834,590) (674,895) 5,376,222
</TABLE>
- -------------
(1) Product development expenses for the years ended December 31, 1998, 1997,
1996, 1995 and 1994 and the three months ended March 31, 1999 and 1998 are
net of co-funding development expenses of $0, $0, $173,000, $261,140,
$338,058, $0 and $0, respectively.
7
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION AND SUBSIDIARY
The following table presents the historical financial information for
Videocall. Videocall commenced operations in 1998 and, accordingly, earlier
periods are not presented.
<TABLE>
<CAPTION>
Initial Period Three Months
Ended December 31, 1998 Ended March 31, 1999
----------------------- --------------------
<S> <C> <C>
Statement of Operations Data
Revenue .............................................. $ 229,127 $ 206,904
Costs and Expenses:
Product development .............................. 270,376 39,935
Real estate operations .......................... 258,446 111,322
General and administrative ....................... 798,461 493,550
Selling and marketing ............................ 51,607 43,329
Total .................................. 1,378,891 687,136
Income (loss) from operations ........................ (1,149,764) (480,232)
Interest Expense ..................................... (106,768) (129,570)
Interest Income ...................................... 2,445 --
Loss before other adjustments ........................ (1,254,087) (609,801)
Less current year loss from subsidiary attributable to
pre-ownership period ............................ 56,713 --
Net loss ............................................. $ (1,197,374) $ (609,801)
Net loss per common share ............................ $ (0.13) $ (0.02)
Dividends per share .................................. -- --
Weighted average common stock outstanding ............ 9,610,293 27,827,500
Balance Sheet Data
Cash and cash equivalents ........................ $ 225,050 $ 37,769
Working capital (deficiency) ..................... 183,501 478,544
Total assets ..................................... 11,011,494 10,935,882
Long-term debt (including current portion) ....... 4,183,188 5,223,756
Stockholders' equity (deficit) ................... 5,144,090 4,612,170
</TABLE>
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Talk Visual Corporation and Subsidiaries Summary Pro Forma Financial Data
The following table presents the summary pro forma financial data of the
Company after giving effect to the Merger of Videocall, accounted for as a
reverse merger, with and into Legacy Software Acquisition, Inc., the Company's
wholly owned subsidiary. The summary pro forma financial information has been
derived from or prepared consistently with the pro forma consolidated financial
statements included herein. The pro forma financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or operating results that would have occurred or that will occur upon
consummation of the Merger. The following summary financial information should
be read in conjunction with such historical and pro forma consolidated financial
statements and notes thereto included herein. See "Pro Forma Condensed
Statements."
Summary Pro Forma Financial Information
<TABLE>
<CAPTION>
For the Period
Ended March 31, 1999
---------------------------
Statement of Operations Data
Revenue
<S> <C>
Rental activities.................................................................. $ 226,168
Software sales and development services............................................ 2,028
Total.......................................................................... 228,196
Costs and Expenses:
Consulting services................................................................ $ 1,483,887
Cost of software development....................................................... 38,935
Cost of software sales............................................................. 3,204
Real estate operations............................................................. 120,088
General and administrative......................................................... 542,899
Legal and accounting............................................................... 95,310
Selling and marketing.............................................................. 43,329
Other expenses..................................................................... 1,563
Total.......................................................................... 2,329,215
Income (loss) from operations......................................................... (2,101,019)
Interest expense...................................................................... (130,813)
Interest income....................................................................... 4,037
Net loss.............................................................................. (2,227,795)
Net loss per common share............................................................. (0.11)
Dividends per share................................................................... --
Weighted average common stock outstanding............................................. 20,895,575
Balance Sheet Data
Cash and cash equivalents.......................................................... $ 674,849
Working capital.................................................................... 1,952,303
Total assets....................................................................... 17,771,078
Long-term debt (including current portion)......................................... 6,593,289
Stockholders' equity............................................................... 10,605,312
</TABLE>
9
<PAGE>
Forward Looking Statements
Talk Visual and Videocall have made forward-looking statements in this
document that are subject to risks and uncertainties. Forward-looking statements
include the information concerning possible or assumed future results of
operations of Talk Visual and Videocall as well as statements preceded by,
followed by or that include the words "believes", "expects", "anticipates" or
similar expressions. You should understand that certain important factors, in
addition to those discussed elsewhere in this document, could affect the future
results of Talk Visual and could cause those results to differ materially from
those expressed in our forward-looking statements. Such factors include delays
or unexpected costs incurred in connection with Talk Visual, through Videocall,
entering the world-wide video teleconferencing market.
Unless otherwise indicated, all information in this document reflects a
one-for-three reverse split of the outstanding shares of Common Stock in June
1998.
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RISK FACTORS--THE COMPANY
In connection with the Merger, the Company intends to exit the business of
developing CD-ROM and Internet games and to concentrate solely on the business
of Videocall. Accordingly, to the extent that the following risk factors relate
to the business of developing CD-ROM and Internet games, they may be of limited
relevance to the Company in the event that the Merger is consummated. For risks
relating to the business of Videocall, see "Risk Factors -- Videocall."
Need for additional capital; uncertainty as a going concern. Prior to the
$2,200,000 private placements made in conjunction with the proposed merger with
Videocall and the reduction of indebtedness resulting from the settlement with
IBM and the sale of certain assets plus assumption of debt by Legacy
Interactive, Inc., a company affiliated with the former Chairwoman of Talk
Visual, the Company
o had never achieved operating profits,
o had negative working capital and limited cash on hand,
o had significant short and long term indebtedness,
o ceased development of new titles pending the generation of
additional working capital or the implementation of subcontractor
relationships on terms that permit payments to be made by the
Company when it has cash available to make such payments,
o curtailed its Internet gaming services,
o closed one of its business offices,
o significantly reduced marketing and public relations efforts, and
o reduced its total number of employees to four.
Revenues from the Company's Emergency Room title and derivatives thereof
are minimal and in light of the proposed Merger with Videocall, are expected to
cease. The Company has incurred net losses since inception and expects to
continue to operate at a loss during 1999. The Company's prospects must be
considered in light of the risks, expenses and difficulties encountered by
companies in the early stages of development, particularly companies in new and
rapidly evolving markets. The Company's ability to maintain operations in the
near term and to achieve positive cash flow in the future depends on a variety
of factors. Without the infusion of funds in conjunction with the Videocall
transaction and given the Company's current working capital deficiency and lack
of cash resources, should the Company be unable to obtain additional funding to
supply its near-term cash requirements, there is substantial doubt as to the
Company's ability to continue as a going concern. Additionally, since we have
ceased our software development and sales activities, in the event the Merger is
not consummated, we will not have any future revenue stream.
Delisting of the Company's common stock on NASDAQ. On April 7, 1999, we
were notified by The Nasdaq Stock Market, Inc. that we were being delisted from
the NASDAQ SmallCap Market and would trade on the OTC Bulletin Board. The
Company believes that this delisting is likely to adversely affect the liquidity
of the Talk Visual Common Stock. The Company is now subject to the "penny stock"
rules of Rule 15g-9 under the Exchange Act. The penny stock rules impose various
sales practice and disclosure requirements on brokers. These
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sales practice and disclosure requirements may adversely affect the trading
market in the Talk Visual Common Stock.
Management of growth; uncertainties relating to acquisitions, business
combinations and new businesses. We have pursued, are currently pursuing and, in
the future may pursue, new technologies and businesses internally and through
acquisitions and combinations which involve significant risks. Any such
acquisition or combination may involve, among other things, the issuance of
equity securities, the payment of cash, the incurrence of contingent liabilities
and the amortization of expenses related to goodwill and other intangible
assets, and transaction costs, which have adversely affected, or may adversely
affect, the Company's business, results of operations and financial condition.
Our ability to integrate and organize any new businesses and/or products,
whether internally developed or obtained by acquisition or combination,
including the Passport2 Internet game and information service, will likely
require significant expansion of our operations. There is no assurance that we
will have or be able to obtain the necessary resources to satisfactorily effect
such expansion and the failure to do so could have a material adverse effect on
our business, financial condition and results of operations. In addition, our
future acquisitions and or combinations involve risks of, among other things,
entering markets or segments in which we have no or limited prior experience,
the potential loss of key employees of the acquired company and/or difficulty,
delay or failure in the integration of the operations, management, personnel and
business of any such new business with our business and operating and financial
difficulties of any new or newly combined operations, any of which could have a
materially adverse effect on our business, financial condition and results of
operations. Moreover, there can be no assurance that the anticipated benefits of
any specific acquisition or of any internally developed new business segment or
business combination will be realized.
Dependence on discontinued products for substantially all the Company's
revenues. For the year ended December 31, 1998, approximately 93% of our total
revenue was derived from Alpha Soft Corporation on royalty revenue generated by
the D.A. Pursuit of Justice and Emergency Room Intern titles. We have terminated
our co-development relationship with IBM with respect to future RealPlay(TM)
titles, including, but not limited to, the D.A. Pursuit of Justice title. In
light of our cessation of software development and sales as a result of the
proposed Merger with Videocall, should the Merger not take place, there will be
a material adverse effect on our business, financial condition and results of
operations. In addition, upon the Merger taking effect, the Company will
concentrate on the business activity of Videocall, with the attendant risk of
Videocall's development activity. See "The Company--Management's Discussion and
Analysis of Financial Condition and Results of Operations--General" and
"--Results of Operations."
No assurance of profitability. Because Videocall is a development stage
company, with no history of earnings, there can be no assurance that we will
achieve profitability after the Merger and, even if achieved, that profitability
will be consistent on a quarterly or annual basis.
Year 2000 issues. The Company has reviewed its computer systems in order
to evaluate if any modifications are necessary for the year 2000. The Company
currently does not anticipate that any material modifications or expenditures
will be required in its computer systems to bring the systems into compliance
with the computational needs for the year 2000.
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<PAGE>
The Company has been advised by its external vendors that their systems are in
compliance with year 2000 issues.
13
<PAGE>
RISK FACTORS--VIDEOCALL
Dependence on senior management. Videocall is dependent in large part on
its ability to retain the services of its principal executive officers, and upon
the ability of these executives to execute Videocall's strategy. The loss of any
of these individuals may have a material adverse effect on Videocall. Videocall
plans to hire additional senior management; however, there is no assurance that
appropriate management personnel will be available to Videocall. The failure of
Videocall to retain additional management personnel will restrict Videocall's
future growth plans.
Mass market ownership of technology. The communications industry is
characterized by rapidly changing technology, frequent new service and product
introductions, significant and rapid lowering of the price of technology, and
more widespread personal ownership of technology. New technology may make
Videocall's technology obsolete. Wide spread personal ownership of Videocall
technology may significantly reduce any demand for Videocall's services.
Videocall's success will depend upon its services being in demand from a
services provider like Videocall; and if that demand is not present, for
Videocall to offer similar services for which there is a demand from a services
provider like Videocall.
Rapid advance of industry. The communications industry is fast paced and
rapidly changing. There is no guarantee that Videocall's plans as they exist
today will be viable in the future. Shifts in technology, business and consumer
demands, acquisition of teleconferencing and Videocall technology by businesses
and consumers, and government regulations could hinder Videocall's strategy and
growth plans.
Competition. Videocall will be faced with competition from off-the-shelf
and value-added sellers of communications equipment and services. There is no
assurance that Videocall will be able to compete effectively. It is conceivable
that existing retailers and value-added communications service providers could,
if necessary, alter their business strategies and compete more effectively than
Videocall. Additionally, other start-up operations could open in Videocall's
targeted markets, thus hindering Videocall's growth plans.
Lack of sufficient capital. Videocall will require significant additional
capital in order to execute its business plans. There is no guarantee that
Videocall will have access to future capital.
No expectation of dividends. Videocall intends to use all available funds
for the operation and expansion of Videocall. Accordingly, Videocall has no
plans to pay dividends for the foreseeable future, even if such funds were to
become available.
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<PAGE>
INTRODUCTION
Talk Visual Corporation
This Proxy Statement/Prospectus/Notification of Merger is furnished to the
holders of Company Common Stock in connection with the solicitation by the
Company of proxies to be voted at a Special Meeting of Stockholders of the
Company (the "Stockholders") to be held on Tuesday, June 15, 1999 (the "Special
Meeting") and any postponements or adjournments thereof. This Proxy Statement is
first being mailed to Stockholders of the Company on or about May 28, 1999.
At the Special Meeting, the Stockholders will consider and vote upon a
proposal to approve the Agreement and Plan of Merger, dated as of September 14,
1998 (the "Merger Agreement"), pursuant to which, among other things:
o Videocall will be merged with and into a wholly owned subsidiary of
Talk Visual; and
o each share of common stock of Videocall outstanding immediately
prior to the Merger (other than shares held by the Company or by
stockholders who have perfected and not withdrawn their rights to
seek appraisal of their shares under applicable Florida law) will be
converted into one share of Common Stock of the Company, except that
shares owned by the Videocall Founders will each be converted into a
combination of shares of Talk Visual Common Stock and/or
non-transferable three-year options to purchase Talk Visual Common
Stock at an exercise price of $1.00 per share, generally equal to
one share of Talk Visual Common Stock (actual shares and/or options)
for each share of Videocall common stock (respectively, the "Merger
Consideration").
The actual combination of shares and options generally will be determined
on the basis of (a) three shares of Talk Visual Common Stock for each one dollar
invested in Videocall common stock (except in the case of nominal investments of
$.01 per share) and (b) to the extent that the number of shares of Videocall
common stock held exceeds the number of shares of Talk Visual Common Stock
determined pursuant to clause (a), options for the number of such excess shares.
The 19,841,400 shares of Talk Visual Common Stock to be issued in connection
with the Merger represent approximately 80.02% of the shares of Talk Visual
Common Stock to be outstanding immediately upon consummation of the Merger, and,
in addition, options to purchase 15,608,477 shares of Talk Visual Common Stock
will be issued to the Videocall Founders.
At the effective time of the Merger (the "Effective Time"), all shares of
Videocall common stock will no longer be outstanding and will be canceled and
retired and will cease to exist, and each certificate representing any shares of
Videocall common stock (the "Certificates") will thereafter represent only the
right to receive the Merger Consideration, or the right, if any, to receive
payment from the Talk Visual subsidiary (the "Transitory Subsidiary") of the
"fair value" of such shares as determined in accordance with the Florida law.
15
<PAGE>
Upon the consummation of the Merger, the separate corporate existence of
Videocall will cease, all of the rights, privileges, powers, franchises,
properties, assets, liabilities and obligations of Videocall will be vested in
the Transitory Subsidiary and the Transitory Subsidiary will continue as the
surviving corporation and a wholly owned subsidiary of the Company. See
"Proposal 1. The Merger--The Merger."
The Stockholders will also be asked to consider and vote upon a proposal
to change the state of incorporation of the company from Delaware to Nevada and
in connection therewith effectively increase the number of shares of capital
stock from 15,000,000 to 125,000,000, of which 100,000,000 will be Common Stock
and 25,000,000 will be preferred stock, $.001 par value.
The Board of Directors of the Company has determined that the Merger
Agreement and the transactions contemplated thereby are reasonable, fair to and
in the best interests of the Company and its stockholders and recommends that
the stockholders of the Company approve the Merger Agreement and the Merger as
well as the Reincorporation Proposal.
Videocall International Corporation:
Videocall is not soliciting proxies or written consents in connection with
the Merger. Upon consummation of the Merger, this Proxy
Statement/Prospectus/Notification of Merger will be sent to the holders of
Videocall Stock as the Notification of Merger required by Section 607.0704 of
the Florida Business Corporation Act (the "FBCA"). Holders of Videocall common
stock should review this Proxy Statement/Prospectus/Notification of Merger
carefully, particularly the matters set forth under "Proposal 1. The Merger" in
order to determine whether to exercise their appraisal rights. See Proposal 1.
The Merger--The Merger--Appraisal Rights."
16
<PAGE>
VOTING AND PROXIES
Date, Time and Place of Special Meeting
The Special Meeting is scheduled to be held at 10:00 a.m., local time, on
Tuesday, June 15, 1999, at One Canal Park, 3rd Floor, Cambridge, Massachusetts
02142.
Record Date and Outstanding Shares
Only holders of record of shares of Company Common Stock at the close of
business on May 10, 1999 (the "Record Date") may vote at the Special Meeting or
at any adjournments or postponements thereof. As of the Record Date, there were
4,954,916 shares of Common Stock outstanding, the only class of securities of
the Company entitled to vote at the Special Meeting, held by approximately 800
stockholders of record. Each stockholder is entitled to one vote for each share
registered in the stockholder's name on the Record Date.
Voting Proxies
Many of the Company's stockholders may be unable to attend the Special
Meeting. Therefore, the Company's Board of Directors is soliciting proxies so
that each stockholder has the opportunity to vote on the proposals to be
considered at the Special Meeting. When a proxy card is returned properly signed
and dated, the shares represented thereby will be voted in accordance with the
instructions on the proxy card. However, if a stockholder does not return a
signed proxy card, his or her shares will not be voted by the proxies.
Stockholders are urged to mark the boxes on the proxy card to indicate how their
shares are to be voted. If a stockholder returns a signed proxy card and a
choice is not specified, the shares represented by that proxy card will be voted
in favor of (1) the Merger and (2) the Reincorporation Proposal and may also be
voted in the proxy holder's discretion on such other business as may properly
come before the meeting or any adjournments or postponements thereof. See "Vote
Required" below.
Stockholders of the Company who execute proxies retain the right to revoke
them at any time before they are voted. Any proxy given by a stockholder may be
revoked
o by duly executing and delivering a later proxy prior to the exercise
of such proxy,
o by giving notice of revocation in writing to the Secretary of the
Company prior to the meeting at One Canal Park, 3rd Floor,
Cambridge, Massachusetts 02142, or
o by attending the Special Meeting and voting in person.
Vote Required
A quorum for the transaction of business at the meeting consists of
holders of a majority of the outstanding shares of the Company's Common Stock,
present in person or by proxy. In the event that less than a majority of the
outstanding shares are present at the Special Meeting, either in person or by
proxy, a majority of the shares so represented may vote to adjourn the Special
Meeting from time to time without further notice, other than announcement at the
Special Meeting, until a quorum shall be present or represented.
17
<PAGE>
The affirmative vote of holders of at least a majority of the outstanding
shares of Talk Visual Common Stock as of the Record Date is required to approve
and adopt the Merger Agreement and the transactions contemplated thereby and the
Reincorporation Proposal. In addition, the adoption of the Merger Agreement will
require the affirmative vote of holders of a majority of the shares of Talk
Visual Common Stock voting at the Special Meeting not issued by the Company to
Videocall or any of its affiliates. Under the Delaware General Corporation Law
(the "Delaware Law"), in determining whether the proposal regarding the adoption
of the Merger Agreement and the Reincorporation Proposal has received the
requisite number of affirmative votes, abstentions and broker non-votes will be
counted and will have the same effect as a vote against such proposal.
Solicitation of Proxies; Expenses
The cost of solicitation, including the cost of preparing and mailing the
Notice of the Special Meeting of Stockholders and this Proxy
Statement/Prospectus/Notification of Merger, will be borne by the Company.
Solicitation will be made primarily by mailing this Proxy
Statement/Prospectus/Notification of Merger to all stockholders entitled to vote
at the Special Meeting. In addition, the Company will request brokers,
custodians, nominees and other fiduciaries to forward copies of such materials
to persons for whom they hold Talk Visual Common Stock in order that such shares
may be voted. Proxies may be solicited by officers and regular employees,
personally or by telephone, but at no compensation in addition to their regular
compensation as employees. The Company may reimburse brokers, custodians,
nominees and other fiduciaries holding shares in their names for third parties,
for the cost of forwarding Proxy Statements/Prospectuses/Notifications of Merger
to and obtaining proxies from third parties. In addition, while the Company has
no present intention to retain anyone to assist in soliciting proxies, the
Company may do so if it deems such action necessary.
PROPOSAL 1. THE MERGER
PARTIES TO THE MERGER
Talk Visual Corporation
The Company was organized in California in 1989 as a successor to a
partnership formed in 1986, and was reincorporated in Delaware in 1996. The
principal offices of the Company are located at One Canal Park, 3rd Floor,
Cambridge, Massachusetts 02142, and its telephone number is (617) 679-0300.
Historically, the Company developed mind stimulating CD-ROM and Internet
games which entertained as well as educated. The Company created several best
selling "edutainment" software titles, including Children's Writing and
Publishing Center (published by The Learning Company), Mickey's Crossword Puzzle
Maker (Walt Disney), Mutanoid Math Challenge, Mutanoid Word Challenge and Magic
Bear's Masterpiece (published by Talk Visual). An edutainment product combines
entertainment and education content for home and educational use and makes
learning an integral part of playing a game. In 1995, the Company introduced its
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<PAGE>
first title in the Company's RealPlay(TM) (formerly Career SimTM) series,
Emergency Room, marketed by its then co-development partner, International
Business Machines Corporation. In 1997, the Company introduced a second title in
the Company's RealPlay series, D.A. Pursuit of Justice TM and Emergency Room
Intern TM a Win95 enhanced version of Emergency Room TM featuring 50 new cases
both of which were distributed through a marketing and distribution agreement
with Alpha Software Corporation, which terminated on December 31, 1998. See "The
Company--Management's Discussion and Analysis of Financial Condition and Results
of Operations."
In addition to CD-ROM development, in 1997 the Company created an Internet
game and information service, the Passport2 TM Network. Passport2 enabled users
to compete with one another via the Internet. This Internet service was based on
proprietary Win95 client server technology developed by On The Toes of Giants, a
California corporation, substantially all of the assets of which the Company
acquired in August, 1996. The Company closed Passport2 on October 9, 1998.
In connection with the Merger, the Company intends to exit the business of
developing CD-ROM and Internet games and to concentrate solely on the business
of Videocall.
Videocall International Corporation
Videocall International Corporation ("Videocall") is building a global
telecommunications organization that will specialize in the field of
video-conferencing. Videocall intends to provide consumers and businesses both
in the United States and in other countries throughout the world with a wide
range of telecommunications services, specializing in offering customers the
ability to Videocall each other. Videocall's primary operations are based out of
Cambridge, Massachusetts. Videocall has engaged an experienced management team,
sales associates and support staff. Videocall is currently a development stage
company, with international operations scheduled to start in the spring of 1999.
Videocall is licensed by the Federal Communications Commission ("FCC") and
has associate companies and organizations licensed in several other countries.
Videocall's plans to undertake an aggressive growth strategy that includes
setting up retail Videocalling centers in various locations in the United States
and throughout the world, and acquiring other national and international
operations to establish and increase market presence, sales volume and
Videocall's global geographic base. Videocall is currently exploring developing
and expanding its retailing operations by acquiring other associate businesses,
such as existing telecommunications and videoconferencing operations as well as
travel agencies and tour operators located in key cities around the world. These
locations would have videoconferencing facilities installed into them, thus
quickly expanding Videocall's sphere of activities globally.
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THE MERGER
General
The discussion of the Merger in this Proxy
Statement/Prospectus/Notification of Merger and the description of the principal
terms of the Merger Agreement are subject to and qualified in their entirety by
reference to the Merger Agreement, a copy of which is attached hereto as Annex A
and incorporated herein by reference, and to each of the other Annexes to this
Proxy Statement.
Background of the Merger
Videocall believes it is one of the first companies in the world to
attempt to bring the benefits of international videocalling to the general
public. The inspiration for and understanding of its service and profit
potential is based on the founders' direct involvement in and creation of the
prepaid global telecommunications industry. Videocall's global mission focuses
on linking key population groups in city micro-environments with their "dual
nationality counterparts" in other cities, both domestically in the U.S. and
abroad, for the purposes of creating ongoing videocalling traffic.
In order to develop its global reach, the Directors of Videocall decided
in February of 1998 to seek an appropriate public vehicle with which to merge to
obtain a publicly traded "currency" with which to effectuate acquisitions. The
Directors considered the possibilities of either a Bulletin Board, NASDAQ,
American or New York Stock Exchange listed company with which to effectuate a
merger. In July of 1998, while the Directors were considering a variety of
possible merger candidates, the Directors of Videocall were approached by First
Fidelity Capital with respect to a proposed relationship with the Company.
In early 1998, it became apparent to the Board of Directors of the Company
that the Company shortly would have insufficient working capital to continue its
operations. Accordingly, after unsuccessfully attempting to negotiate a joint
venture agreement with a third party, the Company engaged First Fidelity Capital
to locate a possible transaction for the Company which would provide the Company
with sufficient capital.
In the middle of August 1998, Videocall signed a non-circumvent and
non-compete agreement with First Fidelity Capital, and shortly thereafter
entered into merger discussions with the Company's then Chief Executive Officer
(Dr. C. Robert Kline), Chairwoman (Dr. Ariella Lehrer) and Chief Financial
Officer (William Sliney). A series of discussions took place in Los Angeles,
Cambridge and via telephone over the course of the five weeks following the
non-circumvent agreement.
The Company had expected to use the majority of the net proceeds of its
initial public offering in May 1996 to develop additional CAREER-SIMS(TM)
titles. Only two titles were developed.
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Since inception, Talk Visual had never achieved profitability. The Company
developed CD-ROM "edutainment" computer software -- a product which combines
entertainment and education content for home and educational use, and in which
learning is an integral part of playing a game.
On February 26, 1998 Talk Visual had been notified by NASDAQ that the
Company was not in compliance with the net tangible assets/market
capitalization/net income requirement(s), pursuant to NASD Marketplace Rule(s)
4310(c)(02) and the minimum bid price requirement, pursuant to NASD Marketplace
Rule 4310(c)(04), both of which became effective on February 23, 1998.
Non-compliance with these and other rules adopted by NASDAQ at that date,
would have resulted in the Company's stock being delisted from the NASDAQ
SmallCap Market. On July 20, 1998 NASDAQ notified the Company that continuing
failure to comply with these rules would result in delisting of the Company's
stock on July 28, 1998. The Company filed an appeal for an oral hearing on a
date to be determined by NASDAQ to stay the delisting. NASDAQ subsequently set
the date of September 18, 1998 for an oral hearing.
Based on the fiscal, operational and capital structure of Talk Visual and
Videocall, on September 4, 1998 and pursuant to meetings held during the
previous four days, the Directors of the Company signed a Letter of Intent to
purchase the common shares of Videocall in exchange for Common Stock. To assist
in supporting the continuing operations and staff at Talk Visual, on the same
day Videocall infused $200,000 into the Company to assist the Company in
handling current payables and salaries.
On September 8, 1998, Talk Visual and Videocall entered into a non-binding
agreement to effectuate the acquisition of Videocall by Talk Visual. In a
separate announcement on the same day, but related to the maintenance of the
NASDAQ listing, the Directors of Talk Visual announced a one-for-three split of
its Common Stock.
On Tuesday, September 15th, the Merger Agreement was announced by the
issuance of a joint press release. The release documented the actions of the
Board of Directors of Talk Visual on the evening of Monday, September 14, 1998.
On that day, the Company Board and the Chairman of Videocall, Michael J.
Zwebner, acting on behalf of the Board of Videocall, executed and delivered the
Merger Agreement.
In other actions at the September 14th meeting, Ariella Lehrer resigned as
a Director of Talk Visual. Michael Cuzner-Charles, Eugene A. Rosov, and
Alexander H. Walker, Jr. were appointed to the Talk Visual Board of Directors.
Michael J. Zwebner was elected a Director and Chairman of Talk Visual.
On September 18, 1998 the NASDAQ oral hearing/meeting was attended by
members of the Company Board and key management. Pursuant to requirements
promulgated by the NASDAQ review board, and based on NASDAQ staff
recommendations, the Company's Chairman, Michael J. Zwebner, was requested to,
and agreed to arrange for the infusion into Talk Visual of, the sum of
$2,000,000 in order to maintain the Company's NASDAQ listing. These
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funds were to be in addition to the $200,000 infused earlier. Within seven days,
the funds were held in escrow by the Company's General Counsel, Alexander H.
Walker, Jr. at his law firm in Salt Lake City, Utah. The receipt of the funds,
pursuant to a private placement effectuated by Mr. Zwebner, was announced by the
Company on September 25, 1998.
Reasons for the Merger
The Company's Board of Directors believes that the Merger Agreement and
the Merger are advisable and fair to and in the best interests of the Company
and its stockholders and has unanimously approved the Merger Agreement and the
Merger. Accordingly, The Board Of Directors Unanimously Recommends That The
Stockholders Of The Company Vote For Approval And Adoption Of The Merger
Agreement And The Merger.
In the course of its deliberations during the Board meeting held on
September 14, 1998, the Company Board reviewed with management a number of
factors relevant to the Merger, including the strategic overview and prospects
for the Company. In reaching its unanimous determination that the Merger
Agreement and the Merger are in the best interests of the Company and its
stockholders, the Board considered a number of factors. Negative factors
included
o the risk that the benefits sought in the Merger would not be fully
achieved,
o the risk that the Merger would not be consummated, and the effect of
the public announcement on the Company's sales and operating
results,
o the risks attendant to the integration of the two companies and
o the other risks described under "Risk Factors--The Company" and
"Risk Factors--Videocall."
The Board believes that these negative factors were outweighed by the positive
factors including, without limitation, information relating to the financial
condition and results of operations of the Company and of Videocall, and
management's estimates of the prospects of the Company and Videocall, including
prospects for the global videocalling business, which, in the Board's view,
supported a determination that the consummation of the Merger with Videocall
provided the Company and its stockholders with the best opportunity to make the
survival of the Company more likely.
As a legal matter, in the Merger, Talk Visual will acquire Videocall,
which will become a wholly owned subsidiary of Talk Visual. However, because the
Videocall stockholders will own a majority of the outstanding shares of Common
Stock after the Merger, for accounting purposes, the transaction will be treated
as a reverse acquisition with Videocall as the accounting acquiror.
The foregoing discussion of the information and factors discussed by the
Board of Directors is not meant to be exhaustive, but includes material factors
considered by the Board. The Board did not quantify or attach any particular
weight to the various factors that it considered in reaching its determination
that the Merger is in the best interests of the Company and its stockholders.
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Effective Time of the Merger
The Merger Agreement provides that Videocall will be merged with and into
the Transitory Subsidiary and that following the Merger, the separate existence
of Videocall will cease and the Transitory Subsidiary will continue as the
wholly owned subsidiary of the Company. The Merger will become effective upon
the filing of the Articles of Merger contemplated by the Merger Agreement with
the Secretary of State of the State of Florida (the "Effective Time") in
accordance with the FBCA. The Effective Time of the Merger will be as soon as
practicable after all conditions to the Merger have been fulfilled or waived,
which is anticipated to be on or about the date of the Special Meeting. The
Merger Agreement also provides that
o the Certificate of Incorporation of the Transitory Subsidiary as in
effect immediately prior to the Effective Time shall be the
Certificate of Incorporation of the Transitory Subsidiary;
o the Bylaws of the Transitory Subsidiary as in effect immediately
prior to the Effective Time shall be the Bylaws of the Transitory
Subsidiary;
o at the Effective Time, the directors of Videocall, together with
Michael J. Zwebner, Eugene A. Rosov, Michael Cuzner-Charles and
Alexander M. Walker, Jr. shall be the directors of the Transitory
Subsidiary;
o the officers of Videocall and such other persons as designated by
Videocall shall be the initial officers of the Transitory
Subsidiary; and
o the Merger shall, from and after the Effective Time, have all the
effects provided by the FBCA.
Conversion and Cancellation of Videocall Common Stock
At the Effective Time, all such shares of Videocall common stock will no
longer be outstanding and will be canceled and retired and will cease to exist,
and each certificate representing any shares of Videocall common stock (the
"Certificates") will thereafter represent only the right to receive the Merger
Consideration, or the right, if any, to receive payment from the Transitory
Subsidiary of the "fair value" of such shares as determined in accordance with
the FBCA.
Exchange Procedures
Immediately following the Effective Time, the Company will furnish to The
Nevada Agency and Trust Company (the "Exchange Agent") instructions directing
the Exchange Agent to issue to each shareholder of Videocall their pro rata
share of the Merger Consideration.
As soon as reasonably practicable after the Effective Time, the Exchange
Agent will mail to each holder of record of Videocall Stock immediately prior to
the Effective Time (excluding any Dissenting Shares) a letter of transmittal
(with instructions for use) for each such holder to use in surrendering the
certificates which represented such holder's Certificates in exchange for a
certificate representing the number of shares of Common Stock of the Company to
which such holder is entitled.
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The Company will not pay any dividend or make any distribution on Common
Stock (with a record date at or after the Effective Time) to any record holder
of outstanding Certificates until such holder surrenders for exchange his, her,
or its certificates which represented Certificates. The Company instead will pay
the dividend or make the distribution to the Exchange Agent in trust for the
benefit of the holder pending surrender and exchange. The Company may cause the
Exchange Agent to invest any cash the Exchange Agent receives from the Company
as a dividend or distribution in one or more permitted investments; provided,
however, that the terms and conditions of the investments shall be such as to
permit the Exchange Agent to make prompt payments of cash to the holders of
outstanding Certificates as necessary. The Company may cause the Exchange Agent
to pay over to the Company any net earnings with respect to the investments, and
the Company will replace promptly any cash which the Exchange Agent loses
through investments. In no event, however, will any holder of outstanding
Certificates be entitled to any interest or earnings on the dividend or
distribution pending receipt.
The Company may cause the Exchange Agent to return any Common Stock and
dividends and distributions thereon remaining unclaimed 180 days after the
Effective Time, and thereafter each remaining record holder of outstanding
Certificates shall be entitled to look to the Company (subject to abandoned
property, escheat, and other similar laws) as a general creditor thereof with
respect to the Certificates and dividends and distributions thereon to which he,
she, or it is entitled upon surrender of his, her or its certificates.
Certificates Should Not Be Surrendered By The Holders Of Videocall Stock
Until Such Holders Receive The Letter Of Transmittal.
Interim Operations of the Company; Conduct Pending Merger
From and after the date of the Merger Agreement until the Effective Time,
except as contemplated by any other provision of the Merger Agreement, unless
Videocall has consented in writing thereto, the Company has agreed:
o to conduct its operations according to its usual, regular and
ordinary course in substantially the same manner as theretofore
conducted;
o to refrain from amending its Certificate of Incorporation or Bylaws
or comparable governing instruments;
o to refrain from granting, conferring or awarding any option,
warrant, conversion right or other right not existing on the date of
the Merger Agreement to acquire any shares of capital stock of the
Company or issue, sell or otherwise dispose of any of its capital
stock (except upon the conversion or exercise of options, warrants,
and other rights currently outstanding);
o to refrain from (a) declaring, setting aside or paying any dividend
or making any other distribution or payment with respect to any
shares of its capital stock or other ownership interests or (b)
directly or indirectly redeeming, purchasing or otherwise acquiring
any shares of its capital stock or making any commitment for any
such action;
o to refrain from incurring or guarantying any indebtedness for
borrowed money or making any loans, advances or capital
contributions to, or investments in, any other
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person, or issuing or selling any debt securities other than
borrowings under existing lines of credit and usual and customary
advancements of expenses in the ordinary course of business;
o to refrain from mortgaging or otherwise encumbering or subjecting to
any lien any of its properties or assets;
o to refrain from making any commitment or entering into any contract
or agreement or making any capital expenditure other than in the
ordinary course of business; and
o to refrain from initiating any changes in employment terms for any
of the Company's directors, officers, and employees outside the
ordinary course of business; or commit to taking any of such above
prohibited actions.
Conditions to the Merger
Each party's respective obligation to effect the Merger is subject to the
fulfillment at or prior to the date of the closing of the transactions
contemplated by the Merger Agreement (the "Closing Date") of the following
conditions:
o the Merger Agreement and the transactions contemplated therein shall
have been approved, in the manner required by applicable law or by
the applicable regulations of any stock exchange or other regulatory
body, as the case may be, by the holders of the issued and
outstanding shares of capital stock of the Company and the
Transitory Subsidiary,
o neither of the parties to the Merger Agreement shall be subject to
any order or injunction of a court of competent jurisdiction which
prohibits the consummation of the transactions contemplated by the
Merger Agreement,
o the Merger Consideration shall have been approved for listing on the
Nasdaq SmallCap Market and
o all consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental entity required in connection
with the execution, delivery and performance of the Merger Agreement
shall have been obtained or made, except for filings in connection
with the Merger and any other documents required to be filed after
the Effective Time and except where the failure to have obtained or
made any such consent, authorization, order, approval, filing or
registration would not have a material adverse effect on the
business, assets, financial condition or results of operations of
either Videocall or the Company.
The obligations of the Company to effect the Merger shall be subject to
the fulfillment at or prior to the Closing Date of each of the following
conditions, unless waived by the Company:
o there shall have been no intentional or willful nonperformance, in
any material respect, by Videocall of its agreements contained in
the Merger Agreement required to be performed on or prior to the
Closing Date nor shall there have been, in any material respect, any
willfully or intentionally untrue representation or warranty of
Videocall contained in the Merger Agreement or in any document
delivered in connection therewith,
o Videocall shall have performed in all material respects its
agreements contained in the Merger Agreement required to be
performed on or prior to the Closing Date,
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and the representations and warranties of Videocall contained in the
Merger Agreement and in any document delivered in connection
therewith shall be true and correct as of the Closing Date, except
(A) for changes specifically permitted by the Merger Agreement and
(B) that those representations and warranties which address matters
only as of a particular date shall remain true and correct, in all
material respects, as of such date,
o the Company shall have received a certificate of the President or a
Vice President of Videocall, dated the Closing Date, certifying to
the effect of the preceding clauses,
o the Company shall have received the resignations, effective as of
the Closing Date, of each director and officer of Videocall,
o Videocall shall have canceled all outstanding or authorized options,
warrants, purchase rights, conversion rights, exchange rights, or
other contracts or commitments that could require Videocall to
issue, sell, or otherwise cause to become outstanding any of its
capital stock,
o there shall not have been any action taken, or any statute, rule,
regulation, order, judgment or decree proposed, enacted,
promulgated, entered, issued, or enforced by any foreign or United
States federal, state or local governmental entity and there shall
be no action, suit or proceeding pending (with a reasonable
likelihood of success), which could (A) prevent consummation of any
of the transactions contemplated by the Merger or the Merger
Agreement, (B) cause any of the transactions contemplated by the
Merger or the Merger Agreement to be rescinded following
consummation, or (C) materially and adversely affect the right of
the Transitory Subsidiary to own the former assets and to operate
the former businesses of Videocall,
o the Merger Agreement and the Merger shall have received the approval
of the holders of a majority of the Common Stock of the Company and
the holders of a majority of the Common Stock voting at the Special
Meeting not issued by the Company to Videocall or any of its
affiliates,
o the Merger Agreement and the Merger shall have received requisite
approval of the holders of a majority of the Videocall Stock,
o Videocall shall have delivered to the Company the required Estoppel
Certificates (as defined in the Merger Agreement),
o from the date of the Merger Agreement through the Effective Time,
there shall not have occurred any change or effect, either
individually or in the aggregate, that is materially adverse to the
business, assets, financial condition, properties or results of
operations or prospects of Videocall and
o the Company shall have received an opinion of counsel for Videocall,
in form and substance reasonably satisfactory to the Company and its
counsel.
The obligations of Videocall to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions, unless
waived by Videocall:
o there shall have been no intentional or willful non-performance, in
any material respect, by the Company of its agreements contained in
the Merger Agreement required to be performed on or prior to the
Closing Date nor shall there have been any
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willfully or intentionally untrue representation or warranty of the
Company contained in the Merger Agreement or in any document
delivered in connection therewith,
o the Company shall have performed in all material respects its
agreements contained in the Merger Agreement required to be
performed on or prior to the Closing Date, and the representations
and warranties of the Company contained in the Merger Agreement and
in any document delivered in connection therewith shall be true and
correct as of the Closing Date, except (A) for changes specifically
permitted by the Merger Agreement or otherwise accepted in writing
by Videocall and (B) that those representations and warranties which
address matters only as of a particular date shall remain true and
correct, in all material respects, as of such date,
o Videocall shall have received a certificate of the President or a
Vice President of the Company, dated the Closing Date, certifying to
the effect of the preceding clauses,
o from the date of the Merger Agreement through the Effective Time,
there shall not have occurred any change or effect, either
individually or in the aggregate, that is materially adverse to the
business, assets, financial condition, properties or results of
operations or prospects of the Company,
o there shall not have been any action taken, or any statute, rule,
regulation, order, judgment or decree proposed, enacted,
promulgated, entered, issued, or enforced by any foreign or United
States federal, state or local governmental entity, and there shall
be no action, suit or proceeding pending (with a reasonable
likelihood of success), which could (A) prevent consummation of any
of the transactions contemplated by the Merger or the Merger
Agreement, (B) cause any of the transactions contemplated by the
Merger or the Merger Agreement to be rescinded following
consummation, or (C) materially and adversely affect the right of
the Transitory Subsidiary to own the former assets and to operate
the former businesses of Videocall,
o Videocall shall have received an opinion of counsel for the Company,
in form and substance reasonably satisfactory to Videocall and its
counsel,
o the Merger Agreement and the Merger shall have received the approval
of the holders of a majority of the Common Stock of the Company and
the holders of a majority of the Common Stock voting at the Special
Meeting not issued by the Company to Videocall or any of its
affiliates and the Company's approval as the sole stockholder of the
Transitory Subsidiary,
o the Merger Agreement and the Merger shall have received approval of
the holders of a majority of the Videocall Stock, and
o Michael J. Zwebner, Eugene A. Rosov, Michael Cuzner-Charles and
Alexander M. Walker, Jr. shall be elected directors of the
Transitory Subsidiary.
Termination
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, before or after the approval of the Merger
Agreement by the stockholders of the Company, by the mutual consent of Videocall
and the Company. In addition, the Merger Agreement may be terminated and the
Merger may be abandoned by action of the Board of Directors of either Videocall
or the Company if (1) the Merger shall not have been consummated within five (5)
business days following June 30, 1999 (the "Termination Date") or (2) the
approval of the Company's or Videocall's stockholders required by the Merger
Agreement
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<PAGE>
shall not have been obtained at a meeting duly convened therefor or at any
adjournment thereof; and provided, in the case of a termination pursuant to
clause (1), that the terminating party shall not have breached any
representation, warranty or covenant made in the Merger Agreement in any manner
that shall have proximately contributed to the failure to consummate the Merger
by the Termination Date.
Rights Offering
If the Merger is consummated, it is the intention of the Company to grant,
for no consideration, to each holder of Talk Visual Common Stock immediately
prior to the consummation of the Merger, rights (the "Rights") to subscribe for
one share of Talk Visual Common Stock at a subscription price of $2.50 per
share. Each holder of Talk Visual Common Stock will receive one Right for each
share of Talk Visual Common Stock held immediately prior to the consummation of
the Merger. Videocall stockholders, as such, would not receive Rights. The
Rights would expire 90 days after their date of issuance. Such rights will not
be transferable by a holder of Talk Visual Common Stock, except to the immediate
family or a trust set up for the benefit of such holder. In order to effect the
offering of Rights (the "Rights Offering"), the Company must prepare and file
with the Commission under the Securities Act, and the Commission must declare
effective, a registration statement with respect to the Rights and the
underlying Talk Visual Common Stock. The Company is unable to predict whether or
when such registration statement would be declared effective and, accordingly,
no assurance can be given as to the timing of the Rights Offering. The Rights
Offering will be made only by a Prospectus under the Securities Act.
Interests of Certain Persons in the Merger
In addition to any interest as stockholders of the Company and/or
Videocall, the current officers and directors of the Company other than David B.
Hurwitz are all affiliated with Videocall. However, it should be noted that the
Company Board which approved the Merger Agreement and the transactions related
thereto, and determined that they are fair to and in the best interests of the
Company and its stockholders, was not comprised of affiliates of Videocall. See
"Information Concerning the Company -- Management."
Appraisal Rights
If the Merger is consummated, holders of shares of Talk Visual Common
Stock are not entitled to appraisal rights under the Delaware Law.
Holders of shares of Videocall common stock are entitled to appraisal
rights under Sections 607.1301, 607.1302 and 607.1320 of the FBCA. Sections
607.1301, 607.1302 and 607.1320 are reprinted in their entirety as Appendix B to
this Proxy Statement/Prospectus/Notification of Merger. All references in
Appendix B and in this summary of rights of dissenting stockholders to a
"stockholder" or a "shareholder" are to the record holder or holders of the
dissenting shares of Videocall common stock. A person having a beneficial
interest in shares of Videocall common stock that are held of record in the name
of another person, such as a broker or nominee, must act promptly to cause the
record holder to follow the
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steps summarized below properly and in a timely manner to perfect whatever
appraisal rights the beneficial owner may have.
The following discussion presents the material provisions of the FBCA
relating to appraisal rights, however it is not a complete statement of such law
and is qualified in its entirety by reference to Appendix B. This discussion and
Appendix B should be reviewed carefully by any holder who wishes to exercise
statutory appraisal rights or who wishes to preserve the right to do so, as
failure to comply with the procedures set forth herein or therein will result in
the loss of appraisal rights.
Shareholders generally have the right under FBCA to dissent to the
proposed Merger Agreement as set forth in the FBCA at Sections 607.1301 et seq.
All shareholders of Videocall who wish to exercise their dissenters rights must
not consent in writing to the Merger.
If the proposed Merger is adopted by the shareholders of Videocall, the
holders of all Videocall common stock who did not consent in writing to the
Merger must be given notice of the approval of the Merger within ten (10) days
of approval being obtained. The dissenting shareholders then have twenty (20)
days from receiving notice of the adoption of the Merger in which to demand from
the corporation the fair market value of the shares. The dissenting shareholders
must deposit their certificates for certificated shares with the corporation
simultaneously with the filing of a demand. Failure to make demand for payment
by any dissenting shareholder bars the dissenting shareholder from objecting to
the Merger and binds the shareholder to the Merger. However, if demand for
payment is made by a dissenting shareholder within the prescribed time period as
set forth above, the dissent may not be withdrawn after an offer is made by the
corporation for the shares without the consent of the corporation, and all of
the shareholder's rights cease except for the right to obtain payment for the
shares.
Within ten (10) days after the expiration of a shareholder's deadline to
elect to dissent or within ten (10) days after the proposed corporate action is
effected, whichever is later, the corporation must make a written offer to
purchase the shares of the dissenting shareholder at a specified, fair market
value price. This notice must be accompanied by a financial statement containing
a current balance sheet and a statement of operations. If the dissenting
shareholder and the corporation agree within thirty (30) days of this offer, the
dissenting shareholder must be paid within ninety (90) days and the shareholder
must surrender his certificates. If an agreement is not reached, the shareholder
may assert his or her appraisal rights under the FBCA.
If a dissenting shareholder and the corporation fail to agree on the fair
market value of the shares which did not consent in writing to the proposed
Merger within the thirty (30) day period after the shareholder's deadline to
dissent or the effective date of the corporate action, then the corporation has
sixty (60) days to file a court action requesting the determination of the fair
market value of the shares. If the corporation fails to act, any dissenting
shareholder may file a court action on behalf of the corporation to obtain the
appraised value of the shares. A copy of the petition may be filed in any court
within the county where the corporation's registered office is located and a
copy of the petition must be filed upon each dissenter. The court having
jurisdiction will appoint one or more appraisers to review evidence and
recommend a fair value.
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The corporation must pay the dissenting shareholder within ten (10) days
after the fair market value is determined by the court.
Comparative Rights of Stockholders of the Company and Videocall
The rights of the stockholders of the Company are governed by the Delaware
Law, the Certificate of Incorporation of the Company ("Company Certificate"),
and the Bylaws of the Company ("Company Bylaws"). The rights of the stockholders
of Videocall are governed by the FBCA, the Articles of Incorporation of
Videocall ("Videocall Articles"), and the Bylaws of Videocall ("Videocall
Bylaws"). Upon consummation of the Merger, holders of Videocall common stock
will become holders of Talk Visual Common Stock, and their rights as holders of
Talk Visual Common Stock will be governed by Delaware Law, the Company
Certificate and the Company Bylaws. The following is a summary of all material
differences between the rights of stockholders of the Company and the rights of
stockholders of Videocall, as contained in provisions of Delaware Law and the
FBCA, the Company Certificate and Company Bylaws, and the Videocall Articles and
Videocall Bylaws. However, if the Reincorporation Proposal is adopted, the
rights of the stockholders of the Company will be governed by the Nevada
Business Corporation Act (the "Nevada Law"). See "Proposal 2. The
Reincorporation Proposal--Comparison of Stockholder Rights" for a comparison
between the rights of the stockholders of a Delaware corporation and a Nevada
corporation.
The following does not purport to be a complete statement of the rights of
the Company's stockholders under applicable Delaware law and the Company
Certificate and Company Bylaws as compared with the rights of Videocall
stockholders under applicable Florida law and the Videocall Articles and
Videocall Bylaws.
Stockholders' Dissenters' Rights
Under both Delaware Law and the FBCA, stockholders may exercise a right of
dissent from certain corporate actions and obtain payment of the fair value of
their shares. This remedy is an exclusive remedy, except where the corporate
action involves fraud or illegality.
Under Delaware Law, dissenters' rights are limited. Appraisal rights are
available only in connection with certain statutory mergers or consolidations,
amendments to the certificate of incorporation (if so provided in the
certificate of incorporation; the Company Certificate does not grant such
rights), any merger or consolidation in which the corporation is a constituent
corporation, or sales of all or substantially all of the assets of a
corporation. Appraisal rights are not available under Delaware law, however, if
the corporation's stock is (prior to the relevant transaction) listed on a
national securities exchange or designated on the NASDAQ National Market System
or held of record by more than 2,000 stockholders; provided, that if the merger
or consolidation requires stockholders to exchange their stock for anything
other than shares of the surviving corporation, shares of another corporation
that will be listed on a national securities exchange, designated on the NASDAQ
National Market System or held of record by more than 2,000 stockholders, cash
in lieu of fractional shares of any such corporation, or a combination of such
shares and cash, then appraisal rights will be available.
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Under the FBCA, the categories of transactions subject to dissenters'
rights are broader than those under Delaware Law. A stockholder of a Florida
corporation may exercise dissenter's rights in connection with an amendment to
the articles of incorporation which materially and adversely affects the rights
or preferences of shares held by the dissenting stockholder, a disposition of
all or substantially all of the corporation's property and assets not in the
usual course of business, a plan of merger in which the stockholder may vote,
and a plan of exchange involving the acquisition of the corporation's shares if
the stockholder is entitled to vote on the plan. However, unless the articles of
incorporation otherwise provide, these provisions do not apply with respect to a
plan of merger or share exchange or a proposed sale or exchange of property, to
the holders of shares of any class or series which, on the record date fixed to
determine the shareholders entitled to vote at the meeting of shareholders at
which such action is to be acted upon or to consent to any such action without a
meeting, were either registered on a national securities exchange or designated
as a national market system security on an interdealer quotation system by the
National Association of Securities Dealers, Inc., or held of record by not fewer
than 2,000 shareholders. Holders of Common Stock will have fewer instances in
which they may exercise dissenters' rights under Delaware Law than current
shareholders of Videocall Stock have available under the FBCA.
Board of Directors
Delaware Law provides that the board of directors of a Delaware
corporation shall consist of one or more directors as fixed by the certificate
of incorporation or bylaws. The Company Bylaws provide for such number of
directors as shall be determined from time to time by resolution of the Company
Board. Although permitted under Delaware Law, the Company's Board of Directors
is not classified.
The FBCA provides that the board of directors of a Florida corporation
shall consist of one or more directors as fixed by the articles of incorporation
or bylaws. The Videocall Bylaws provide that the board shall consist of not less
than one nor more than __ directors, which number may be increased or decreased
from time to time by resolution of a majority of the entire board then in
office. Although permitted under the FBCA, the Videocall Board of Directors is
not classified.
Removal of Directors
Delaware Law provides that a director or the entire board of directors may
be removed, with or without cause, by the holders of a majority of the shares
then entitled to vote at an election of directors. In the case of a corporation
whose board is classified, unless the certificate of incorporation provides
otherwise, directors may be removed by the shareholders only for cause. If the
corporation has cumulative voting, and less than the entire board is to be
removed, no director may be removed without cause if the votes cast against the
director's removal would be sufficient to elect that director if voted
cumulatively either at an election of the entire board of directors or for
classes of the board. If the holders of any class or series of stock are
entitled to elect one or more directors pursuant to the certificate of
incorporation, then directors so elected shall, in respect to removal without
cause, be removed by a majority vote of the holders of the outstanding shares of
that class or series and not a vote of the holders of the outstanding shares as
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a whole. The Company Certificate does not classify its board of directors but
does provide for cumulative voting.
The FBCA provides that, absent a provision to the contrary in the articles
of incorporation of the corporation, the directors may be removed with or
without cause by the affirmative vote of a majority of the voting power of the
shares of the classes or series the director represents. If a corporation has
cumulative voting, the FBCA provides that a director is not removed from the
board if the votes cast against removal of the director would be sufficient to
elect the director at an election of the entire board under cumulative voting.
The Videocall Articles do not provide for cumulative voting.
In the event that certain classes of securities are granted the right to
elect certain directors, the holders of Common Stock as a group would have a
greater ability to remove any or all directors for cause while the current
Videocall shareholders would only be able to remove those directors for which
they have the right to vote.
Vacancies and Newly Created Directorships
Under Delaware Law, unless the certificate of incorporation or bylaws
provides otherwise, vacancies in the board of directors and newly created
directorships may be filled by a majority of directors then in office without a
vote of the shareholders. A director elected in this manner holds office until
the next election of directors and a successor is elected and qualified. In the
case of a classified board of directors, a director may be chosen by the
remaining directors in such class and shall hold office until the next election
for such class and a successor is elected and qualified. However, if at the time
of filling any vacancy or newly created directorship, the directors then in
office constitute less than a majority of the entire board (calculated
immediately prior to an increase in the size of the board, if any) the Delaware
Court of Chancery may, upon the application of any shareholder or shareholders
holding at least ten percent of the shares entitled to vote for directors,
summarily order an election to be held to fill any such vacancies or newly
created directorships, or to replace the directors chosen by the directors then
in office.
The Company Board is not classified. The Company Bylaws provide that any
vacancy or newly created directorship shall be filled by the majority of
directors then in office.
The FBCA provides that, unless the articles of incorporation or bylaws
provide otherwise, a vacancy in the board of directors and newly created
directorships may be filled by the majority of directors then in office or a
majority of shareholders entitled to vote thereon. The FBCA does not distinguish
between non-classified and classified boards in this respect. The term of any
director chosen to fill a vacancy expires at the next shareholders' meeting at
which directors are elected and when a successor is elected and qualified.
The Videocall Board is not classified. The Videocall Bylaws provide that
all vacancies and newly created directorships shall be filled by the directors
then in office until the next annual meeting of shareholders.
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Dividends
A Delaware corporation may make a distribution to its shareholders out of
its net profits for the fiscal year in which the dividend is payable and/or the
preceding fiscal year or from its surplus. In either case, a distribution may be
made notwithstanding the fact that the corporation is insolvent.
Under the FBCA, a corporation may not make a distribution to its
shareholders if, after giving effect to the distribution, the corporation would
be insolvent or its total assets would be less than the sum of its total
liabilities plus the amount required to satisfy outstanding liquidation rights
superior to the liquidation rights of those receiving the distribution.
Amendments to Bylaws
Under Delaware Law and the Company Bylaws, the Company Bylaws may be
altered, amended, supplemented or repealed, or new bylaws adopted, by approval
of the holders of a majority of the shares entitled to vote; and, under the
Company Certificate and pursuant to Delaware Law, by a majority vote of the
board of directors.
The FBCA and the Videocall Bylaws provide that the power to adopt, amend
or repeal the bylaws shall be vested in the board and the stockholders, except
that the stockholders may amend the bylaws to provide expressly, under the FBCA,
that the board may not amend or repeal the bylaws or any specific provision
thereof.
Under Delaware Law, shareholders retain the right to amend a corporation's
bylaws and such right must be conferred upon the board of directors by the
certificate of incorporation; while the FBCA vests the power in both the
shareholders and the board of directors, with the proviso that shareholders may
expressly prohibit certain amendments by the board of directors.
Amendments to Certificate or Articles
Under Delaware Law, amendment of the certificate of incorporation shall be
made by a resolution of the board of directors setting forth the amendment,
declaring its advisability, and either calling a special meeting of the
stockholders entitled to vote or directing that the amendment proposed be
considered at the next annual meeting of the stockholders. At such stockholders'
meeting, a majority of the outstanding shares entitled to vote is required to
approve the amendment. If an amendment would increase or decrease the number of
authorized shares of a class, increase or decrease the par value of the shares
of such class or alter or change the powers, preferences or other special rights
of a class of outstanding shares so as to affect the class adversely, then a
majority of shares of such class must approve the amendment as well. Delaware
Law also permits a corporation to make provision in its certificate requiring a
greater proportion of voting power to approve a specified amendment. The Company
Certificate does not so provide.
The FBCA provides that an amendment to a corporation's articles must be
proposed and, absent a conflict of interest or other special circumstances,
recommended by the board to the stockholders. Under the FBCA , any such
amendment must be approved by the affirmative vote of a majority of the
stockholders entitled to vote thereon, except that the articles or the board may
33
<PAGE>
provide for a specified proportion or number larger than a majority. The
Videocall Articles make no such provision.
Delaware Law provides that the majority of a class of stock that would be
adversely affected by an amendment to the certificate of incorporation must
approve such amendment while the FBCA creates greater rights for the security
holders of various classes of stock by providing that each class with a right to
vote thereon, whether or not adversely affected, must approve an amendment by a
majority.
Additionally, the FBCA permits the board of directors to condition the
approval of amendments and to set supermajority requirements, while Delaware Law
does not permit the board to so condition amendments and requires that
supermajority voting requirements be set forth in the certificate of
incorporation.
Indemnification
Delaware Law and the FBCA both contain provisions setting forth conditions
under which a corporation may indemnify its directors, officers, and employees.
While indemnification is permitted only if certain statutory standards of
conduct are met, Delaware Law and the FBCA are substantially similar in
providing for indemnification if the person acted in good faith and in a manner
the person reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful. The statutes differ,
however, with respect to whether, and to what extent, reimbursement of
judgments, fines, settlements, and expenses is allowed.
Although indemnification is permitted in both Delaware and Florida,
Delaware Law and the FBCA allow a corporation, through its certificate of
incorporation, bylaws, or other intracorporate agreements, to make
indemnification mandatory. Pursuant to this authority, the Company Bylaws
provide that the Company may indemnify any person to the fullest extent
permitted by law and specifically requires indemnification of judgments, fines,
settlements, and expenses of actions, suits or proceedings for any person who is
a party, or is threatened to be made a party, by reason of the fact that such
person was or is a director, officer, employee or agent of the Company or
because such person was serving the Company or any other legal entity in any
capacity at the request of the Company while a director, officer, employee or
agent of the Company. The Company Bylaws make the advancement of expenses
mandatory for any threatened, pending or completed action involving such
persons. The Videocall Bylaws require that Videocall shall indemnify all persons
made a party to a proceeding by virtue of the fact that he may serve or has
served at any time as a director or officer of Videocall or, at the request of
Videocall, as a director or officer of another corporation in which Videocall,
at such time, owned or may have owned shares of stock or of which Videocall was
or may have been a creditor. Such indemnification extends only to expenses
incurred in connection with such proceeding.
Under Delaware Law, if a director is involved in an action other than one
brought in the right of the corporation, a director may be indemnified for
expenses, judgments, fines and amounts paid in settlement, while the FBCA
provides for indemnification for liability incurred in connection with such
proceeding. In the case of an action brought in the right of a corporation,
34
<PAGE>
Delaware Law provides for indemnification against expenses and settlement costs;
while the FBCA provides the same, it limits such indemnity to the estimated cost
of litigating such action to its conclusion.
Liability of Directors
Under Delaware Law, a corporation's certificate of incorporation may
contain a provision limiting or eliminating a director's personal liability to
the corporation or its stockholders for monetary damages for a director's breach
of fiduciary duty. The Company Certificate provides that a director shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability for any breach
of the director's duty of loyalty to the corporation or its stockholders, for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for any transaction for which the director derived any
personal benefit, or, as provided in Delaware Law, for liability for an unlawful
payment of a dividend, stock purchase or redemption. The Company Certificate
also provides that if Delaware Law is amended to authorize further elimination
of the personal liability of directors, then the liability of directors shall be
limited to the fullest extent permitted by Delaware Law, as so amended.
The FBCA provides that a director shall not be held personally liable for
monetary damages to the corporation or any other person for any statement, vote,
decision, or failure to act, regarding corporate management or policy, unless
the director breached or failed to perform his duties as a director and such
breach or failure was: a violation of criminal law (unless the director had
reasonable cause to believe his conduct was legal), resulted in improper
personal benefit, an unlawful dividend, or under certain circumstances involved
willful misconduct or recklessness.
Stockholder Meetings
In accordance with Delaware Law and the Company Bylaws, special meetings
of the stockholders of the Company may be called by the Board of Directors or by
the President. Delaware Law and the Company Bylaws require that whenever
stockholders are required or authorized to take action at a meeting, notices
stating the purpose, time and place of the meeting must be sent to all
stockholders of record entitled to vote thereon not less than 10 nor more than
60 days before the meeting.
The FBCA and the Videocall Bylaws provide that the Chairman of the Board,
the board of directors or a stockholder or stockholders holding 10% or more of
the shares entitled to vote at such meeting may call a special meeting. The FBCA
requires that notices stating the purpose, time and place of such special
meeting must be sent to all stockholders of record entitled to vote thereon not
less than 10 nor more than 60 days before the meeting. If the meeting is
demanded by stockholders, notice must be given within 60 days after receipt of
the demand by the secretary of the corporation.
Mergers and Consolidations
In order to effect a merger under Delaware Law, a corporation's board of
directors must adopt an agreement of merger and recommend it to the
corporation's stockholders. The
35
<PAGE>
agreement must be adopted by holders of a majority of the outstanding shares of
the corporation entitled to vote thereon.
The FBCA provides that a corporation's board of directors must adopt a
plan of merger and recommend it to the corporation's stockholders. Unlike
Delaware Law, the FBCA requires that a majority of each class of shares of a
Florida corporation must approve the plan if it contains a provision which, if
contained in a proposed amendment to the corporation's articles of
incorporation, would entitle such class to vote as a class or if the shares of
such class are to be converted or exchanged under such agreement.
Business Combinations
Delaware Law bars a corporation which has securities traded on an
exchange, designated on the NASDAQ National Market System or held of record by
more than 2,000 stockholders from engaging in certain business combinations,
including a merger, sale of substantial assets, loan or substantial issuance of
stock, with an interested stockholder, or an interested stockholder's affiliates
and associates, for a three-year period beginning on the date the interested
stockholder acquires 15% or more of the outstanding voting stock of the
corporation. The restrictions on business combinations do not apply if the board
of directors gives prior approval to the transaction in which the 15% ownership
level is exceeded, the interested stockholder acquires at one time 85% of the
corporation's stock (excluding those shares owned by persons who are directors
and also officers as well as employee stock plans in which employees do not have
a confidential right to vote), or the business combination is approved by the
board of directors and authorized at a meeting of stockholders by the holders of
at least two-thirds of the outstanding voting stock, excluding shares owned by
the interested stockholder. Although a Delaware corporation may elect, pursuant
to its certificate or bylaws, not to be governed by this provision, the Company
Certificate and Bylaws contain no such election or other limitation on the
applicability of this provision.
The FBCA contains a provision which restricts certain business combination
transactions with an interested stockholder for five years after such
stockholder has acquired 10% of the voting power of a corporation. Under the
FBCA, if a business combination (including certain mergers, disposition of
substantially all assets, issuance of securities and other similar transactions)
occurs with a person who, together with its affiliates, owns 10% or more of the
outstanding capital stock of such corporation (a "Related Person"), then the
combination must be approved by two-thirds of the outstanding capital stock
entitled to vote for directors. However, the combination may occur without such
a vote if, among other exceptions, (i) a majority of disinterested directors
approves the transaction, (ii) the corporation has not had more than 300
stockholders of record prior to the announcement of the proposed merger, or
(iii) the Related Person is the beneficial owner of at least 90% of the
outstanding voting shares of the corporation, exclusive of shares acquired
directly from the corporation in a transaction not approved by a majority of
disinterested directors.
Other Anti-Takeover Provisions
Delaware Law does not contain a control share acquisition statute which
restricts the voting rights of a person who acquires a controlling interest in
the corporation to those voting
36
<PAGE>
rights which are conferred by the stockholders at a meeting. The FBCA contains a
control share acquisition statute, which, absent a provision to the contrary in
an issuing corporation's articles of incorporation or by-laws, provides that the
control shares (shares acquired by a person for the purpose of gaining voting
control of the issuing corporation) of a certain issuing corporation only have
voting rights to the extent granted in a resolution approved by the affirmative
vote of a majority of each class or series of shares, excluding all interested
shares. Neither the Videocall Articles nor the Videocall Bylaws except Videocall
from this provision.
Company Preferred Stock
The Company's Board of Directors is authorized to issue preferred stock in
one or more series and to fix the voting rights, liquidation preferences,
dividend rights, conversion rights, redemption rights and terms, including
sinking fund provisions and certain other rights and preferences, of the
preferred stock. The Board of Directors of the Company can, without stockholder
approval, issue shares of such preferred stock with voting, conversion and
liquidation rights which could adversely affect the voting power and liquidation
rights of the holders of Common Stock and may have the effect of delaying,
deferring or preventing a change in control of the Company.
Resale and Voting Restrictions
The shares of Talk Visual Common Stock to be issued to Videocall
stockholders in connection with the Merger have been registered under the
Securities Act. Accordingly, all shares of Talk Visual Common Stock received by
Videocall stockholders in the Merger will be freely transferable, except that:
o each Videocall stockholder is being requested to agree in the letter
of transmittal that these shares of Talk Visual Common Stock will
not be sold or otherwise disposed of until one year after the
Effective Time, at which time these restrictions will lapse with
respect to 5% of the shares per month, and
o shares of Talk Visual Common Stock received by persons who are
deemed to be "affiliates" (as such term is defined under the
Securities Act) of Videocall prior to the Merger may be resold by
them only in transactions permitted by the resale provisions of Rule
145 promulgated under the Securities Act (or Rule 144 in the case of
such persons who become affiliates of the Company) or as otherwise
permitted under the Securities Act.
Persons who may be deemed to be affiliates of Videocall or the Company generally
include individuals or entities that control, are controlled by, or are under
common control with, such party and may include certain officers and directors
of such party as well as principal stockholders of such party. This Proxy
Statement/Prospectus/Notification of Merger does not cover resales of Talk
Visual Common Stock received by any person who may be deemed to be an affiliate
of Videocall.
The options to be issued to Videocall stockholders in connection with the
Merger are not transferable. In addition, the shares of Talk Visual Common Stock
underlying the options have not been registered under the Securities Act and may
only be sold in transactions permitted by
37
<PAGE>
the resale provisions of Rule 144 promulgated under the Securities Act. In
addition, each Videocall stockholder is being requested in the letter of
transmittal to agree that these underlying shares of Talk Visual Common Stock
will not be sold or otherwise disposed of until one year after they become
transferable pursuant to the Securities Act, at which time these restrictions
will lapse with respect to 5% of the shares per month.
In addition, by accepting the Merger Consideration, each Videocall
stockholder will be deemed to have agreed to vote their shares of Talk Visual
Common Stock in accordance with the directions of the management of the Company
for a period of two years from the Effective Time.
Federal Income Tax Considerations
The following is a general description of the Federal Income Tax Consequences of
the Proposed Transaction without consideration of the facts and circumstances of
any particular Videocall stockholder's situation. Each Videocall stockholder
should consult his or her own tax advisor as to the specific tax consequences of
the Proposed Transaction, including the application and effect of state, local,
foreign and other tax laws.
Based upon current federal income tax laws, the Company believes as of the
date hereof that the Merger will have the following federal income tax
consequences:
(1) The Merger will constitute a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
(2) No gain or loss will be recognized by Videocall, the Transitory
Subsidiary or the Company as a result of the Merger.
(3) No gain or loss will be recognized by any Videocall stockholder whose
shares of Videocall Stock are converted into Talk Visual Common Stock in the
Merger.
(4) No gain or loss will be recognized by any Videocall stockholder upon
the receipt of any options to purchase shares of Talk Visual Common Stock.
(5) The aggregate basis of the Talk Visual Common Stock received by a
Videocall stockholder in the Merger will be the same as the aggregate basis of
the shares of Videocall Stock converted into the Talk Visual Common Stock.
(6) The holding period for shares of Talk Visual Common Stock received by
a Videocall stockholder in the Merger will include such stockholder's holding
period for the shares of Videocall common stock converted into the Talk Visual
Common Stock.
If the percentage of voting stock owned by certain direct or indirect
shareholders of Videocall or the Company increases by more than 50 percentage
points, in the aggregate, over the lowest percentage of voting stock owned by
such shareholders in such corporation during any three-year period, then
utilization of such corporation's Federal income tax net operating loss
carryforwards could be limited.
38
<PAGE>
The foregoing tax discussion is included for general information only and is
based upon present law. Each stockholder should consult such stockholder's own
tax advisor as to the specific tax consequences of the merger to such
stockholder, including the application and effect of federal, state, local and
other tax laws and the possible effect of changes in such tax laws. Special
rules apply to common stock received pursuant to the exercise of employee stock
options or otherwise as compensation.
Regulatory Approvals
Neither the Company nor Videocall is aware of any regulatory approvals
that must be obtained in order to consummate the Merger.
MARKET PRICE DATA
From May 14, 1996 through April 7, 1999, the Talk Visual Common Stock was
traded on the Nasdaq SmallCap Market. As of April 7, 1999, the Talk Visual
Common Stock was delisted from the Nasdaq SmallCap Market and currently trades
on the OTC Bulletin Board under the symbol TVCP. Prior to May 14, 1996, there
was no public trading market for the Talk Visual Common Stock. The following
table sets forth for each period indicated the high and low bids for the Talk
Visual Common Stock As of May 10, 1999, there were 4,954,916 shares of the Talk
Visual Common Stock outstanding, representing approximately 800 beneficial
holders.
Price
-------------------------
Calendar Year 1999 High Low
------------------ -------- --------
First Quarter ........................ $ 4 3/4 $ 2 5/8
Second Quarter (through
May 14, 1999)......................... 3 7/8 1 5/8
Calendar Year 1998 High Low
------------------ -------- --------
First Quarter......................... $ 3 3/4 $ 1 1/8
Second Quarter........................ 3 3/8 15/16
Third Quarter......................... 1 25/32 15/16
Fourth Quarter........................ 1 27/32 1 1/4
Calendar Year 1997 High Low
------------------ -------- --------
First Quarter......................... $ 4 1/2 $ 1 7/8
Second Quarter........................ 4 1 3/4
Third Quarter......................... 3 1/2 1
Fourth Quarter........................ 2 9/36 1/4
The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain all future earnings, if
any, for use in its business and does
39
<PAGE>
not anticipate paying any cash dividends on its capital stock in the foreseeable
future. In addition, the payment of cash dividends may by limited by financing
agreements entered into by the Company in the future.
Quotations on the OTC Bulletin Board reflect inter-dealer prices, without
retail mark-up, mark-down or commissions and may not represent actual
transactions.
Videocall is a privately held corporation. As of May 10, 1999, there were
30,396,750 shares of common stock, $.01 par value, of Videocall outstanding. As
of May 10, 1999, there were approximately 61 holders of the Videocall Stock.
40
<PAGE>
TALK VISUAL CORPORATION AND SUBSIDIARIES
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated statement of operations for
the period ended December 31, 1998 and for the period ended March 31, 1999 was
prepared as if the Merger was effective as of January 1, 1998. The pro forma
consolidated balance sheet as of December 31, 1998 and March 31, 1999 was
prepared as if the Merger was effective as of those respective dates.
The pro forma financial information should be read in conjunction with the
Company's historical Consolidated Financial Statements and notes thereto
appearing elsewhere in this Proxy Statement/Prospectus/Notification of Merger.
The pro forma financial information set forth below and elsewhere in this Proxy
Statement/Prospectus/Notification of Merger is presented for informational
purposes only and is not necessarily indicative of the results that would have
actually occurred had the events been consummated as of the dates presented or
the results that may occur in the future. The Merger will be accounted for as a
reverse acquisition wherein Videocall will be treated as the acquiror for
accounting purposes. This is accounted for as a reverse acquisition since the
shareholders of Videocall will control the combined companies. A reverse merger
is treated for in a similar manner as a recapitalization of Videocall.
41
<PAGE>
TALK VISUAL CORPORATION
PROFORMA
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------------------------------------------
Talk Visual Videocall Adjustments Note Consolidated
Proforma
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.... $ 153,608 $ 225,050 $ -- $ 378,658
Accounts Receivable net of 31,243 42,573 -- 73,816
allowance of $12,500........
Inventory.................... 8,250 0 -- 8,250
Marketable securities........ 89,210 882,100 -- 971,310
Other receivables............ -- 33,895 -- 33,895
Advances-related parties..... 70,000 451,840 (74,000)(1) 447,840
Subscriptions receivable..... 1,743,000 100,000 -- 1,843,000
Other current assets......... 6,746 155,356 4,000 (1) 166,102
----------- ----------- --------- -------------- -----------
Total current assets......... 2,102,057 1,890,814 (70,000) 3,922,871
----------- ----------- --------- -------------- -----------
Product development costs, 381,604 -- -- 381,604
net of amortization.........
Property and equipment, net.. 18,500 8,444,559 -- 8,463,059
Goodwill..................... -- -- -- --
Other assets................. 1,400 676,121 (120,000)(2) 557,521
----------- ----------- --------- -----------
Total assets.... $ 2,503,561 $11,011,494 (190,000) $13,325,055
=========== =========== ========= ============== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............. $ 129,968 $ 192,679 -- $ 322,647
Accrued expenses............. 16,685 158,907 -- 175,592
Other current liabilities.... -- 43,680 -- 43,680
Notes payable and current 281,066 1,312,047 70,000(1) 1,523,113
portion of long-term debt... ----------- ----------- --------- -------------- -----------
Total current liabilities.... 427,719 1,707,313 70,000 2,065,032
----------- ----------- --------- -------------- -----------
Long-term debt, net of 75,000 4,160,091 -- 4,235,091
current portion ----------- ----------- --------- -------------- -----------
Total liabilities............ 502,719 5,867,404 70,000 6,300,123
----------- ----------- --------- -----------
Stockholders' equity
Preferred Stock, par value -- -- --
$.001 per share, 5,000,000
shares authorized: 975,000
shares issued and
outstanding.................
Common Stock, par value 1,393 278,275 258,434(2) 21,234
$.001 per share, 10,000,000
shares authorized:
21,234,000 shares issued
and outstanding.............
Stock subscribed............. (156,618) (1,563,974) -- (1,720,592)
Additional paid in capital... 10,000,719 7,405,227 (138,434)(2) 17,544,380
Accumulated deficit (7,829,760) (1,197,374) -- (9,027,133)
Accumulated other (14,892) 221,935 -- 207,043
comprehensive income........ ----------- ----------- --------- -------------- -----------
Total stockholders' equity... 2,000,842 5,144,090 120,000 7,024,932
----------- ----------- --------- -------------- -----------
Total liabilities and $ 2,503,561 $11,011,494 $ 190,000 $13,325,055
stockholders' equity.... =========== =========== ========= ============== ===========
Book value per common share, 2.37 1.15 0.62
basic and diluted........... =========== =========== ========= ============== ===========
Weighted Average Common 1,054,175 9,610,293 21,234,000
Stock shares outstanding.... =========== =========== ========= ============== ===========
</TABLE>
- ----------------
NOTES: (1) Remove intercompany debt
(2) Adjust investment and equity accounts
42
<PAGE>
TALK VISUAL CORPORATION
PROFORMA
CONSOLIDATED BALANCE SHEET
MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1999
------------------------------------------------------------------------------------
Talk Visual Videocall Adjustments Note Consolidated
Proforma
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents.... $ 449,799 $ 37,769 $ -- $ 487,568
Accounts Receivable net of 2,260 63,119 -- 65,379
allowance of $12,500........
Inventory.................... 8,029 -- -- 8,029
Marketable securities........ -- 1,003,638 -- 1,003,638
Other receivables............ 130,232 195,734 -- 325,966
Advances-related parties..... 1,512,049 8,711 1,520,760
Other current assets......... 10,710 313,818 324,528
----------- ----------- -------------- ------------ ------------
Total current assets......... 2,113,079 1,622,789 3,735,868
----------- ----------- -------------- ------------ ------------
Product development costs, 381,604 -- -- 381,604
net of amortization.........
Property and equipment, net.. 1,900,446 8,641,615 -- 10,542,061
Advances on acquisition...... 2,250,000 120,000 (120,000)(1) 2,250,000
Other assets................. 99,455 551,478 650,933
----------- ----------- -------------- ------------
Total assets.... $ 6,744,584 $10,935,882 (120,000) $ 17,560,466
=========== =========== ============== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable............. $ 136,112 $ 423,343 -- $ 559,455
Accrued expenses............. 40,294 56,981 -- 97,275
Related parties payable.... -- 575,483 575,483
Other current liabilities.... 20,805 44,150 -- 64,955
Notes payable and current 147,066 44,288 191,354
portion of long-term debt... ----------- ----------- -------------- ------------ ------------
Total current liabilities.... 344,277 1,144,245 1,488,522
----------- ----------- -------------- ------------ ------------
Long-term debt, net of 1,024,085 5,179,468 -- 6,203,553
current portion ----------- ----------- -------------- ------------ ------------
Total liabilities............ 1,368,362 6,323,713 7,692,075
----------- ----------- -------------- ------------
Stockholders' equity
Preferred Stock, par value 975 -- 975
$.001 per share, 5,000,000
shares authorized: 975,000
shares issued and
outstanding.................
Common Stock, par value 4,725 278,725 (258,884)(1) 24,566
$.001 per share, 10,000,000
shares authorized:
24,566,000 shares issued
and outstanding.............
Stock subscribed............. 28 (17,258) -- (17,230)
Additional paid in capital... 14,825,965 7,505,070 138,884 (1) 22,469,919
Accumulated deficit.......... (9,455,471) (1,807,175) -- (11,262,646)
Stock subscription receivable -- (1,690,666) (1,690,666)
Accumulated other __-- 343,473 -- 343,473
comprehensive income........ -------------- ----------- -------------- ------------ ------------
Total stockholders' equity... 5,376,222 4,612,169 (120,000) 9,868,391
----------- ----------- -------------- ------------ ------------
Total liabilities and $ 6,744,584 $10,935,882 $(120,000) $ 17,560,466
stockholders' equity.... =========== =========== ============== ============ ============
Book value per common share, 1.56 1.14 0.40
basic and diluted........... =========== =========== ============== ============ ============
Weighted Average Common 3,454,555 9,610,293 21,566,000
Stock shares outstanding.... =========== =========== ============== ============ ============
</TABLE>
- ----------------
NOTES: (1) adjust equity for stock issued on date of merger and remove
prepaid acquisition costs
43
<PAGE>
TALK VISUAL CORPORATION
PROFORMA
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------------
Consolidated
Talk Visual Videocall Adjust. (1) Proforma
-------------------------------------------------------------------
Revenues
<S> <C> <C> <C> <C>
Royalties.................... 206,452 206,452
Software Sales............... 52,960 52,960
Corporate services........... 80,000 80,000
Real estate income........... 229,127 229,127
Consulting................... 0
---------- ---------- -------------- ----------
Total Revenues 339,412 229,127 0 568,539
---------- ---------- -------------- ----------
Costs and expenses
Cost of royalties............ 9,558 9,558
Cost of software sales....... 33,254 33,254
Research & Development....... 270,376 270,376
Product development.......... 1,008,640 1,008,640
Real estate operations....... 258,446 258,446
General & Administrative 941,667 593,202 1,534,869
Expenses....................
Consulting services.......... 0
Legal and accounting......... 205,260 205,260
Selling...................... 77,309 51,607 128,916
---------- ---------- -------------- ----------
Total costs and expenses...... 2,070,428 1,378,891 0 3,449,319
---------- ---------- -------------- ----------
Loss from operations.......... (1,731,016) (1,149,764) 0 (2,880,780)
Interest expense.............. (47,626) (106,768) 0 (154,394)
Interest income............... 2,445 2,445
Other expense................. (32,862) (32,862)
Other income.................. 192,798 192,798
---------- ---------- -------------- ----------
Loss before extraordinary
Item and other adjustments.... (1,618,706) (1,254,087) 0 (2,872,793)
Less current year loss from 56,713 56,713
subsidiary attributable to
pre-ownership period.........
Loss before extraordinary item (1,618,706) (1,197,374) 0 (2,816,080)
Extraordinary item............ 300,000 300,000
---------- ---------- -------------- ----------
Net Loss...................... (1,318,706) (1,197,374) 0 (2,516,080)
========== ========== ============== ==========
Net Loss per common share,
basic and diluted............ (1.26) (0.13) (0.12)
========== ========== ============== ==========
Weighted Average Common Stock
shares outstanding........... 1,054,175 9,610,293 20,895,575
========== ========== ============== ==========
</TABLE>
- -------------------
(1) There were no intercompany transactions for the period 1/1/98-12/31/98
44
<PAGE>
TALK VISUAL CORPORATION
PROFORMA
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, 1999
-------------------------------------------------------------------
Consolidated
Talk Visual Videocall Adjust. (1) Proforma
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Royalties.................... 1,366 1,366
Software Sales............... 662 662
Real estate income........... 19,264 206,904 226,168
Consulting...................
---------- --------- -------------- ----------
Total Revenues 21,292 206,904 0 228,196
---------- --------- -------------- ----------
Costs and expenses
Cost of software sales....... 3,204 3,204
Research & Development....... 38,935 38,935
Real estate operations....... 8,766 111,322 120,088
General & Administrative 49,349 493,550 542,899
Expenses....................
Consulting services.......... 1,483,887 1,483,887
Legal and accounting......... 95,310 95,310
Selling...................... 43,329 43,329
---------- --------- -------------- ----------
Total costs and expenses...... 1,640,516 687,136 0 2,327652
---------- --------- -------------- ----------
Loss from operations.......... (1,619,224) (480,232) 0 (2,099,456)
Interest expense.............. (1,243) (129,570) 0 (130,813)
Interest income............... 4,037 4,037
Other expense................. (1,563) (1,563)
---------- --------- -------------- ----------
Net Loss...................... (1,617,993) (608,902) 0 (2,227,795)
========== ========= ============== ==========
Net Loss per common share,
basic and diluted............ (0.47) (0.06) (0.11)
========== ========= ============== ==========
Weighted Average Common Stock
shares outstanding........... 3,454,555 9,610,293 21,566,000
========== ========= ============== ==========
</TABLE>
(1) There were no intercompany transactions for the period 1/1/99-3/31/99
45
<PAGE>
THE COMPANY--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company was organized in California in 1989, as a successor to a
partnership formed in 1986 and was reincorporated in Delaware in March 1996. The
Company completed an initial public offering of 1,150,000 shares of its Common
Stock in May of 1996. The Company developed edutainment CD-ROM computer
software. An edutainment product combines entertainment and education content
for home and education use, in which learning is an integral part of playing a
game. The Emergency Room title, the Company's first RealPlay(TM) (formerly
Career Sim(TM) series title, was a multimedia computer simulation designed to
provide a realistic and involving experience of what it is like to be an
emergency room doctor. The second title in the Company's RealPlay(TM) series,
D.A. Pursuit of Justice, was a multimedia computer simulation designed to
provide a realistic and involving experience of what it is like to be a district
attorney. The first three episodes were released in 1997. In addition the
Company released The Best of Emergency Room consisting of 50 of the original
Emergency Room cases in DOS and Emergency Room Intern consisting of 50 new cases
in a DOS/Win95 enhanced CD-ROM. The Company also operated Passport2, its
Internet gaming technology, whereby users were able to complete with one another
in interactive games via the Internet. See "Risk Factors--The
Company--Management of Growth; Uncertainties Relating to Acquisitions, Business
Combinations and New Businesses" and "--Competition."
In 1996 and for six months of 1997 International Business Machines ("IBM")
marketed the Emergency Room title which the Company co-developed with IBM. Due
to the Company's inability to reasonably estimate returns on the Emergency Room
title, the Company did not recognize royalty revenue on this product on the
accrual basis of accounting until the fourth quarter of 1996 when the amount of
returns could be reasonably estimated in accordance with Statement of Financial
Accounting Standards No. 48 ("SFAS 48").
The Company and IBM entered into a Development and Licensing Agreement
(the "DA License Agreement") on November 16, 1995. In the fourth quarter of 1996
the Company and IBM mutually agreed to terminate the DA License Agreement with
respect to the D.A. Pursuit of Justice title. As consideration for the
termination and for acquisition of IBM's rights under the DA License Agreement,
the Company was obligated to pay IBM an aggregate sum of $400,000, which sum
represents the total amount of milestone payments made by IBM to the Company
under the DA License Agreement. The final termination agreement, effective
January 3, 1997, provided for payment to IBM based upon a fixed percentage of
royalty payments received, or net revenue generated if the Company distributed
the software directly, with payment in full required by December 15, 1997. In
the event that the Company breached its obligation to pay IBM the aggregate sum
of $400,00 by December 15, 1997, as royalties and final payment, the total
amount due IBM would be increased by interest at an annual rate of 10% and
continuing on the unpaid balance until paid in full. The Company recorded a
$400,000 current liability at December 31, 1996 to account for the payments
under the termination agreement which effectively increased the capitalized
software development costs related to the D.A. Pursuit of
46
<PAGE>
Justice title. On December 15, 1997 the Company was unable to make the payment
to IBM. The Company and IBM reached an agreement on September 14, 1998 whereby
the Company will pay $200,000 to IBM in quarterly payments of $25,000 commencing
with the fiscal quarter ended September 30, 1998. The Company has complied with
all the terms of the agreement and has made all the payments due under the
agreement.
Acquisitions
In January 1998, the Company signed a non-binding Letter of Intent with
Black Trust Medical, Inc., a Nevada corporation ("BTI") to joint venture the
development and publishing of high production value education software. BTI, as
a part of a $3.5 million financing program, was to make an equity investment in
the Company. The Letter of Intent was superseded by a revised Letter of Intent
dated March 25, 1998. Pursuant to the revised Letter of Intent BTI and Talk
Visual would pursue joint venture programs for the development and distribution
of up to four product-oriented joint ventures. On April 29, 1998 the Company and
BTI mutually agreed to terminate negotiations.
On September 8, 1998, the Company and Videocall announced that the two
companies had entered into a Letter of Intent for the Company to purchase the
common stock of Videocall in exchange for the Company's common and preferred
stock. On September 14, 1998, the two companies signed the Merger Agreement
detailing the terms of the transaction whereby Videocall will merge with a newly
formed, wholly owned subsidiary of the Company.
Although the Company believes that the Merger is in the best interests of
the Company and its stockholders, there are significant risks associated with
this transaction. The Company's ability to integrate and organize new businesses
and successfully manage require significant expansion in its operational,
financial and management systems. There is no assurance that the Company will be
able to address these requirements in a satisfactory manner, and the failure to
do so could have a material adverse effect on the Company's results of
operations, financial condition and business.
On February 24, 1999, the Company acquired a 22,622 square foot property
in Toronto, Canada in exchange for 975,000 shares of Class A Preferred stock,
$.001 par value, paying dividends of $.095 per share per annum. This building
was acquired as an investment and as part of the facility needs of the
videocalling operations.
On March 22, 1999, the Company and Proximity Inc. ("Proximity"), a Vermont
corporation, signed a Letter of Intent whereby, subject to due diligence by both
parties, the Company will purchase the outstanding stock of Proximity for $4
million in Common Stock of the Company valued at $4.00 per share. In addition,
the Company will pay Proximity shareholders the sum of $250,000 in 10 equal
monthly installments and, subject to receiving audited financial statements and
pro forma operating reports, will make available $200,000 for working capital
purposes. Proximity provides international full spectrum videoconferencing
services with public access to over 2,000 videoconferencing sites.
47
<PAGE>
Results of Operations
For the Year Ended December 31, 1998 Compared to the Year Ended December
31, 1997
For the twelve months ended December 31, 1998, revenue decreased $157,776
from the twelve months ended December 31, 1997. Royalty revenue decreased
$205,013, or 50%, from the twelve months ended December 31, 1997 principally due
to decreased sales of the Company's ER Intern and DA Pursuit of Justice titles.
Software sales decreased $32,763, or 38%, due to decreasing sales of The Best of
ER and other offerings of the Company's DOS products. Corporate services, a
division formed in January 1998, recorded $80,000 in revenue for the year ended
December 31, 1998. The Corporate Services division was formed to separate the
development of new software titles from programming services offered to
commercial enterprises.
Cost of royalties decreased $201,750 for the twelve months ended December
31, 1998 from the $211,308 recorded in the twelve months ended December 31,
1997. The decrease was caused primarily by the lower royalty sales in 1998 and a
reclassification of a reduction in product development costs of $859,424 based
on lower forecasted sales associated with the DA Pursuit of Justice title from
cost of royalties to product development expense. Cost of software sales
decreased from $98,881 in the twelve months ended December 31, 1997 to $33,254
for the twelve months ended December 31, 1998 due to a lower sales volume of all
software products.
Product development costs increased $389,124 for the twelve months ended
December 31, 1998 primarily caused by the charge of $859,424 associated with the
DA Pursuit of Justice title in 1998 which was offset by a decrease in production
development expenses due to the cessation of development of new titles by the
Company.
General and administrative costs decreased from $1,351,127 in the twelve
months ended December 31, 1997 to $941,667 for the twelve months ended December
31, 1998, a decrease of 30%. This decrease is due to the Company in June 1997
implementing cost reduction programs by ceasing all costs associated with
development of new titles; discontinuing its Internet gaming services; closing
one business office; significantly reducing marketing and public relations
efforts; reducing the total Company staff to two personnel and implementing
other operating cost reductions.
Selling expenses decreased $190,067 to $77,309 for the twelve months ended
December 31, 1998 from $267,376 for the twelve months ended December 31, 1997.
This decrease resulted from the elimination of all selling and public relations
efforts by the Company in 1998 with the 1998 expense primarily associated with
customer service and technical support of titles currently in the market.
Interest expense in the twelve months ended December 31, 1998 was $47,626
compared to $123,571 for the twelve months ended December 31, 1997 with the
reduction attributed to a decrease in the amount of outstanding debt during
1998. Other expenses of $32,862 in 1998 are due to the reduction of the fixed
assets of the Company to net realizable values and miscellaneous adjustments;
other income of $192,798 in 1998 primarily results from the sale of certain
assets to, and the assumption of certain liabilities by, Legacy Interactive.
48
<PAGE>
The extraordinary item of $300,000 in the twelve months ended December 31,
1998, is due to the cancellation of debt of $300,000. This resulted from the
Company and IBM signing a Payment Agreement relating to the licensing and
distribution agreements for the Emergency Room and DA Pursuit of Justice titles
formerly co-developed with IBM. In the event of a default in payment by the
Company, which is not cured within a thirty day period, an amount of $400,000,
less any payments already made under the agreement, will be immediately due and
payable to IBM, with interest accruing at the rate of ten percent per annum.
As of December 31, 1998, the Company has federal and state net operating
loss carryforwards of approximately $6,851,000 and $3,333,600, respectively,
available to offset taxable income through the year 2013. The Company's net
deferred tax assets of approximately $2,790,900 and $2,253,000 as of December
31, 1998 and 1997, respectively, consisted primarily of net operating losses.
The Company has established a valuation allowance equal to the net deferred tax
asset for each period, as the Company could not conclude, based upon prior
recurring operating losses, that it was more likely than not that the Company
will generate sufficient taxable income before 2013 to utilize all of the
Company's deferred tax assets.
For the Year Ended December 31, 1997 Compared to the Year Ended December
31, 1996.
For the twelve months ended December 31, 1997 revenue decreased by
$297,154 from $794,342 for the twelve months ended December 31, 1996 to $497,188
for the twelve months ended December 31, 1997. This decrease was primarily due
to a decrease in royalty revenue related to sales of the Emergency Room title by
IBM in the twelve months ended December 31, 1997 compared to the twelve months
ended December 31, 1996 partially offset by increases in royalty revenue of
$343,447 related to sales of the D.A. Pursuit of Justice and Emergency Room
Intern titles by Alpha Soft during the six months ended December 31, 1997. As
disclosed in the Company's Annual Report on Form 10K for 1996, in accordance
with SFAS 48 the Company was able to reasonably estimate the returns and
recognize royalty revenue during the fourth quarter of 1996. Software sales
increased from $13,501 for the twelve months ended December 31, 1996 to $85,723
for the twelve months ended December 31, 1997 primarily from sales of the Best
of Emergency Room title which began shipping in June, 1997 and individual cases
of the D.A. Pursuit of Justice title which began shipping in July, 1997 both
directly marketed by the Company.
For the twelve month period ended December 31, 1997 cost of royalties was
$211,308 compared to $76,507 for the twelve months ended December 31, 1996. The
increase is the result of amortization of the capitalized product development
costs of $134,279 during the year ended December 31, 1997 from sales of the D.A.
Pursuit of Justice and Emergency Room Intern titles by Alpha Soft. The cost of
software sales increased from $9,745 in the twelve-month period ended December
31, 1996 to $98,881 in the twelve-month period ended December 31, 1997 as a
result of sales of the Best of Emergency Room title and individual cases of the
D.A. Pursuit of Justice in the twelve months ended December 31, 1997 compared to
sales of older Company software products in 1996, as the Best of Emergency Room
and the D.A. Pursuit of Justice and Emergency Room titles were not available in
1996.
Product development expense, which is net of co-development expenses, for
the twelve months ended December 31, 1997 decreased by $1,044,962, or 63%, to
$619,516 compared to
49
<PAGE>
$1,664,478 for the twelve months ended December 31, 1996. The decrease was
primarily due to completion of the D.A. Pursuit of Justice and Emergency Room
Intern and the Best of Emergency Room titles in July 1997 and the Company's
cessation of development of future products at that time.
General and administrative expense decreased from $1,585,084 for the
twelve months ended December 31, 1996 to $1,351,127, a decrease of $233,957, or
15%, for the twelve months ended December 31, 1997. This decrease is due to the
Company in June 1997 implementing cost reduction programs by ceasing all costs
associated with development of new titles; significantly curtailing its Internet
gaming services; closing one business office; significantly reducing marketing
and public relations efforts; reducing the total Company staff to four personnel
and implementing other operating cost reductions.
Selling expenses for the twelve months ended December 31, 1997 increased
by $175,381 to $267,376 from $91,995 for the twelve months ended December 31,
1996. The increase is primarily related to the increases in company public
relations efforts and promotional expenses related to the Passport2Network and
promotion of The Best of Emergency Room, D.A. Pursuit of Justice and Emergency
Room titles which were incurred during the first six months of 1997 compared to
the prior year when primarily all selling costs were incurred by IBM.
Interest expense decreased from $459,315 for the twelve months ended
December 31, 1996 to $123,571 for the twelve months ended December 31, 1997,
resulting primarily from that certain convertible note in the original principal
amount of $1,000,000 payable to EBC Trust Corporation that was retired in May of
1996. Interest income decreased to $19,942 for the twelve months ended December
31, 1997 compared to $108,240 for the twelve months ended December 31, 1996, due
to use of the proceeds of the initial public offering in Company operations
during 1997.
At December 31, 1998, the Company has federal and state net operating loss
carryforwards of approximately $6,851,000 and $3,333,600, respectively,
available to offset taxable income through the year 2013. The Tax Reform Act of
1986 contains provisions which limit the federal net operating loss
carryforwards available that can be used in any given year in the event of
certain occurrences, which include significant ownership changes.
At December 31, 1998 and 1997, the Company's net deferred tax asset
consisted primarily of net operating losses. The Company established a valuation
allowance equal to the net deferred tax asset, as the Company could not conclude
that it was more likely than not that the deferred tax asset would be realized.
The valuation allowance at December 31, 1998 and 1997 was $2,790,900 and
$2,253,000, respectively.
For the Three Months Ended March 31, 1999 Compared to the Three Months
Ended March 31, 1998
For the three months ended March 31, 1999, revenues decreased from
$179,031 for the three months ended March 31, 1998 to $21,292. This $157,739
decrease was due primarily to the cessation of software development and sales
pending the Merger. Of the $21,292 in revenue
50
<PAGE>
for the three months ended March 31, 1999, $19,264 or 90% was from rent receipts
in the Toronto property.
Costs of revenues for the three months ended March 31, 1999 totaled
$3,204, representing costs incurred in the current period for products
previously shipped. Total costs of revenues for the three months ended March 31,
1998 were $27,783. As a result of the cessation of software development and
sales activities, the cost of such sales decreased accordingly.
For the three months ended March 31, 1999, the Company did not make any
expenditures for product development, compared to the $43,332 expense for the
period ended March 31, 1998.
Expenses of $8,766 were incurred for the Toronto real estate operation
acquired February 24, 1999. Rental income, as noted above, was $19,264 yielding
net rental earnings of $10,498.
General and administrative expenses decreased $110,463 from $159,812 for
the three months ended March 31, 1998 to $49,349 for the three months ended
March 31, 1999. This resulted from the Company closing its Los Angeles office
and consolidating operations with Videocall in Cambridge, Massachusetts;
terminating all employees except one; and terminating all services from outside
vendors except for incidental costs associated with the former software
development and sale activities.
Consulting services, not related to software development or sales, for the
three months ended March 31, 1999 were $1,483,887, compared to no expense for
the three months ended March 31, 1998. This amount represents $1,481,387 paid in
shares of the Company's Common Stock and $2,500 paid in cash. The majority of
the consulting services were for assistance in financing, investor relations and
public relations services.
Legal and accounting expense increased from $29,459 for the three months
ended March 31, 1998 to $95,310 for the three months ended March 31, 1999. The
increase of $65,851 resulted primarily from legal costs incurred in the
preparation of the proxy related to the Merger; legal costs incurred in Nasdaq
matters and legal costs for the Toronto subsidiary and the issuance of preferred
stock. Of the $95,310 expense, $16,250 was paid for with Common Stock of the
Company.
The Company had no selling expenses for the three months ended March 31,
1999, compared to $24,556 of expenses for the three months ended March 31, 1998.
The decrease was a result of the cessation of software development and sales
activities.
Interest expense decreased $11,402 from $12,645 for the three months ended
March 31, 1998 to $1,243 for the three months ended March 31, 1999. For the
three months ended March 31, 1998 there was no interest income received,
compared to $4,037 for the three months ended March 31, 1999. Both changes in
interest expense and interest income were a result of the capital infusion from
funds and assets received in the private placements occurring in 1998.
The $1,563 of other expense in the three months ended March 31, 1999
(compared to no other expenses incurred in the three months ended March 31,
1998) resulted from the market
51
<PAGE>
value of the common stock issued over the liability recorded in the exchange of
common stock for debt.
Liquidity and Capital Resources
The Company had $16,783 in cash outflows from operating activities for the
three months ended March 31, 1999 compared to cash outflows of $12,350 for the
three months ended March 31, 1998. The increase in net outflows of $4,433
between 1999 and 1998 operating cash flow, primarily resulted from the
following: an increase in the net loss from operations after adjustments for
non-cash items of $41,268; a decrease in the change of deferred revenue of
$26,380; a decrease in the change in accounts receivable of $7,817; an increase
in the change in other receivables of $28,687; a decrease in the change in
inventory of $11,288; a decrease in the change in accounts payable of $6,148; an
increase in the change in accrued expenses of $20,149 and an increase in other
assets of $13,128. This increase is primarily due to the Company's cessation of
sales and marketing; the increased legal and professional costs associated with
the shareholder proxy statement and additional insurance purchases.
Investing activities in the first three months ended March 31, 1999
consisted of the purchase of the Toronto property, which required cash payments
of $37,390, compared to the purchase of computer equipment in the three months
ended March 31, 1998, for $3,578; additional expenditures for organization costs
of $868 for the period ended March 31, 1999; and advances to related parties of
$1,512,049.
The acquisition of the Toronto, Ontario, Canada property was accomplished
with the issuance of 975,000 shares of Class A Preferred Stock, Series 1999-A,
$.00l par value, and the assumption of a first mortgage in the amount of
$935,450 along with various minor obligations totaling $31,293. The Preferred
shares have a stated value of $975,000 ($1.00 per share), are non-voting, and
pay a cumulative dividend of $0.095 per share. The total acquisition price of
the property was $1,941,743. The property was appraised at $1,854,000. Included
in other assets is $87,743 representing the excess purchase price paid over the
fair value of the acquisition. The property is held by a subsidiary of the
Company, The Ontario International Property Corporation.
The Company had cash inflows of $1,863,281 from financing activities for
the first three months of 1999 compared to cash inflows of $29,415 for the first
three months of 1998. Financing activities for first the three months ended
March 31, 1999 included collection of stockho1ders' receivables of $1,900,000;
payment on notes payable of $29,000 and payment of cash dividends on the
preferred stock of $7,719. This compares to an advance received of $30,000 for
use in project joint ventures offset by payments of $585 on notes payable for
the three months ended March 31, 1998.
As noted earlier the Company and Videocall announced that the two
companies had entered into a Letter of Intent for the Company to purchase the
common shares of Videocall in exchange for the Company's common and preferred
stock. On September 14, 1998, the two companies signed the Merger Agreement
detailing the terms of the transaction whereby Videocall will merge with a newly
formed wholly owned subsidiary of the Company.
52
<PAGE>
On September 14, 1998, September 22, 1998, December 18, 1998 and December
31, 1998, private placements of $200,000, $2,000,000, $104,102 and $350,000 for
400,000, 2,040,816, 52,051 and 200,000 shares of Common Stock, respectively,
were subscribed to by third party investors to provide additional capital to the
Company for use in the merged Company/Videocall operations. Management feels
that based on these contributed capital amounts, the Company will be able to
operate for the coming twelve months. The Company believes that it will be able
to consummate the Merger, and its prospects for obtaining additional financing
will improve as a result thereof.
Year 2000
The Company has reviewed its computer systems in order to evaluate if any
modifications are necessary for the year 2000. The Company currently does not
anticipate that any material modifications or expenditures will be required in
its computer systems to bring the systems into compliance with the computational
needs for the year 2000. The Company has been advised by its external vendors
that their systems are in compliance with year 2000 issues.
ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure," ("SFAS 129") issued by the FASB is
effective for financial statements ended after December 15, 1997. This standard
reinstates various securities disclosure requirements previously in effect under
Accounting Principles Board Opinion No. 15, which has been superseded by SFAS
No. 128. The Company adopted SFAS No. 129 on December 15, 1997 and it had no
effect on its financial position or results of operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", ("SFAS 130") issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997. SFAS
130 establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. The
Company has adopted SFAS 130 for the year ended December 31, 1998, with respect
to prior years, the Company believes that this pronouncement does not have an
impact on its financial position or results of operations and the only effect is
limited to the form and content of disclosures.
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information", ("SFAS 131") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 131 requires that public companies report certain
information about operating segments, products, services and geographical areas
in which they operate and their major customers. The Company has adopted SFAS
131 for the year ended December 31, 1998; with respect to prior years, the
Company believes that this pronouncement does not have an impact on its
financial position or results of operations and the only effect is limited to
the form and content of disclosures.
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", ("SFAS 132")
issued by the FASB is effective for financial statements with fiscal years
beginning after December 15, 1997. SFAS 132 revises the
53
<PAGE>
disclosure requirements for pension and other postretirement benefit plans. At
December 31, 1998, the Company did not maintain any postretirement benefit
plans.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities", ("SFAS 133") issued by the FASB
is effective for financial statements with fiscal years beginning after June 15,
1999. This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Company does not expect
the adoption of SFAS 133 to have an impact on its financial position or results
of operations.
Statement of Position 97-2, "Software Revenue Recognition," ("SOP 97-2")
issued by the AICPA is effective for transactions entered into in fiscal years
beginning after December 15, 1997. SOP 97-2 supersedes SOP 91-1 regarding
software revenue recognition. SOP 97-2 establishes standards which require a
company to recognize revenue when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred, (iii) the vendor's fee is fixed or
determinable, and (iv) collectability is probable. The SOP also discusses the
revenue recognition criteria for multiple element contracts and allocation of
the fee to various elements based on vendor-specific objective evidence of fair
value. The Company has adopted SOP 97-2 for the year ended December 31, 1998;
with respect to prior years, the Company believes that this pronouncement does
not have a material impact on its financial position or results of operations.
EFFECTS OF INFLATION
The Company believes that inflation has not had a material effect on its
net sales and results of operations. Substantial increases in labor costs or
video production costs on video produced for use within the Company's software
programs or programs produced by joint ventures could adversely affect the
operations of the Company for future periods.
54
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF VIDEOCALL
INTERNATIONAL CORPORATION AND SUBSIDIARIES
The selected financial information is derived from the consolidated
financial statements of Videocall, which financial statements are included
elsewhere in this Proxy Statement/Prospectus/Notification of Merger. The
following tables should be read in conjunction with the consolidated financial
statements and related notes included elsewhere in this Joint Proxy
Statement/Prospectus/Notification of Merger.
<TABLE>
<CAPTION>
Initial Period
Ended December 31, 1998
-----------------------
<S> <C>
Statement of Operations Data
Revenue ...................................................... $ 229,127
Costs and Expenses:
Product development ...................................... 270,376
Real estate operations ................................... 258,446
General and administrative ............................... 798,461
Selling and marketing .................................... 51,607
Total .......................................... 1,378,891
Income (loss) from operations ................................ (1,149,764)
Interest Expense ............................................. (106,768)
Interest Income .............................................. 2,445
Loss before other adjustments ................................ (1,254,087)
Less current year loss from subsidiary attributable to
pre-ownership period ..................................... 56,713
Net loss ..................................................... $ (1,197,374)
Net loss per common share .................................... $ (0.12)
Dividends per share .......................................... --
Weighted average common stock outstanding .................... 9,610,293
Balance Sheet Data
Cash and cash equivalents ................................ $ 225,050
Working capital .......................................... 183,501
Total assets ............................................. 11,011,494
Long-term debt (including current portion) ............... 4,183,188
Stockholders' equity ..................................... 5,144,090
</TABLE>
55
<PAGE>
VIDEOCALL--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company is a development stage company which was organized on February
2, 1998. Since its inception, the Company has not had any operating revenues and
has been engaged in developing the system, engineering and marketing program for
video conferencing activities. For the initial 11 month period, the Company has
incurred on a consolidated basis, a cumulative net loss of $1,197,374. General
and administrative costs for the initial period were $798,461, which were
incurred primarily in establishing the management infrastructure necessary to
oversee operational needs of the video conferencing business.
Included in general and administrative costs were legal and professional
fees of $205,260, officer salary expenses of $227,710, public relations costs of
$45,850 and directors fees of $30,000.
Net rental revenues and tenant reimbursements from the real estate
operations of the acquired subsidiary (see discussion below), for the three
month period ended December 31, 1998, totaled $229,127. Operating expenses for
the three month period ended December 31, 1998 were $258,446, which included a
bad debt expense of $150,959. The relatively high bad debt expense was
attributable to the write-off of inter-company loans due from entities related
to the seller. The loss for the three months ended December 31, 1998 was reduced
by $56,713, as that was the amount of the loss which was attributable to the
period prior to the Company owning the subsidiary.
Product development costs were $270,376. These costs were incurred in the
research and development of the technology and computer programs and databases
necessary to execute the video transmissions and billing systems.
The Company has invested in subsidiary corporations and made advances to
joint venture partners in an effort to secure video conference facilities. As of
December 31, 1998, these investments have totaled $4,468,950 in subsidiaries and
$126,500 in advances.
For the period January 1, 1999 through March 31, 1999, the Company's only
source of revenue was from the rental property. The Company incurred a loss in
the amount of $609,801, or $0.02 per common share. Net real estate receipts
totaled $206,904 for the three months ended March 31, 1999. Real estate expenses
totaled $111,322; interest related to the real estate totaled $127,033. These
amounts gave rise to a net loss from real estate activities in the amoun of
$31,451 for the three months ended March 31, 1999. Research and development
expenses totaled $38,935, marketing expenses $43,329 and general and
administrative expenses were $493,550. Primary components of the general and
administrative expenses were: payroll and payroll tax expenses of $94,609;
travel of $43,281; consultants of $34,253; rents of $63,561; and legal and
accounting of $35,335. For the three months ended March 31, 1999, cash flows
from operating activities utilized $728,452 of the Company's funds; the purchase
of property and equipment utilized $228,060 of funds and borrowings on debt
generated $769,231 in funds. This resulted in a net decrease in cash funds of
$187,281 for a net ending cash balance of $37,769.
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Liquidity and Capital Resources
The Company is a developmental stage company and to date has not generated
any revenues from operations. Therefore, the Company has funded its operations,
since inception, through private equity offerings.
From inception to December 1998, the Company consummated various private
offerings totaling 20,562,500 shares of its common stock under a combination
U.S. offering of 1,000,000 shares and offshore offerings of 19,562,500 shares.
Net assets to the Company from these offerings were approximately $4,266,195
after deducting offering-related expenses of $57,343. The assets received under
the subscriptions are composed of $1,172,709 in cash and cash expense payments,
$1,461,163 in marketable securities, third party notes receivable and other
assets and $1,689,666 in receivables from subscribers. Of the $1,689,666 due
from subscribers at December 31, 1998, the Company has received $100,000 as of
April 23, 1999. At December 31, 1998, the value of the marketable securities
which the Company held as available for sale, had increased $221,935 over the
book basis.
The Company has borrowed $250,000 under a convertible discounted loan note
("CDLN"), secured by a third lien on the land, building and rents held by the
subsidiary, with interest at the rate of 9%, payable monthly, and the principal
balance will be due November 2001. Concurrent with the placement of the CDLN,
the lender has subscribed to 500,000 shares of common stock at a price of
$500,000, paying $55,000 toward the total subscription. The CDLN is convertible,
at the option of the lender, into 250,000 shares of the Company's common stock,
during the term of the note or at maturity. If at maturity, the lender declines
the conversion feature, the Company is obligated to pay the principal on the
note, rescind the subscription for the 500,000 shares of common stock and refund
the deposit paid toward that subscription. The lender has agreed to lend an
additional $2,250,000 under similar terms, including the stock subscription.
On October 28, 1998, the Company acquired all of the outstanding shares of
Sacramento Results, Inc. ("SRI") for 3,000,000 shares of the Company's common
stock, valued at $1 per share, $1,000,000 of new debt and the satisfaction of
$468,950 of the seller's debt to a related entity. SRI owns and manages a
119,000 square foot retail and office strip center in Sacramento, California.
The short term obligation of $1,000,000 was renegotiated and partially
paid down on February 19, 1999. Under the renegotiated note, the Company paid an
advance against leasehold improvements in the amount of $350,000 and a principal
payment of $100,000, leaving a balance due of $900,000 on the renegotiated note.
The renegotiated note is secured by a third position on the real estate and
collateralized by 200,000 shares of Talk Visual common stock. Repayment of the
renegotiated note is to occur on the refinancing of the property. At the
holder's option, the note may be discharged by accepting the Talk Visual stock
collateralizing the note, as full payment. As part of this real estate
acquisition, the Company will install a video conference site and offices in a
portion of the facility. The Company anticipates restructuring its financing to
satisfy the renegotiated obligation.
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Although no revenues have been generated through December 31, 1998, the
Company anticipates it will generate future revenues when the video conferencing
facilities become operational.
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INFORMATION CONCERNING THE COMPANY
BUSINESS
In connection with the Merger, the Company intends to exit the business of
developing CD-ROM and Internet games and to concentrate solely on the business
of Videocall. Accordingly, the following information regarding the Company may
be of limited relevance in the event that the Merger is consummated.
General
Talk Visual Corporation ("Talk Visual" or the "Company") was organized in
California in 1989 as a successor to a partnership formed in 1986, and was
reincorporated in Delaware in 1996 under the name Legacy Software, Inc. The
principal offices of the Company are located at One Canal Park, 3rd Floor,
Cambridge, Massachusetts 02142, and its telephone number is (617) 679-0300
Historically, the Company developed mind stimulating CD-ROM and Internet
games which entertained as well as educated. The Company created several best
selling "edutainment" software titles, including Children's Writing and
Publishing Center (published by The Learning Company), Mickey's Crossword Puzzle
Maker (Walt Disney), Mutanoid Math Challenge, Mutanoid Word Challenge and Magic
Bear's Masterpiece (published by Talk Visual). An edutainment product combines
entertainment and education content for home and educational use and makes
learning an integral part of playing a game. In 1995, the Company introduced its
first title in the Company's RealPlay(TM) (formerly Career Sim(TM)) series,
Emergency Room, marketed by its then co-development partner International
Business Machines Corporation ("IBM"). In 1997, the Company introduced a second
title in the Company's RealPlay Series, D.A. Pursuit of Justice(TM) and
Emergency Room Intern(TM), a Win95 enhanced version of Emergency Room(TM)
featuring 50 new cases both of which were distributed through a marketing and
distribution agreement with Alpha Software Corporation ("Alpha Soft"), which
terminated on December 31, 1998. The Company has ceased marketing and public
relations efforts with respect to its software products. See "The
Company--Management's Discussion and Analysis of Financial Condition and Results
of Operations."
In addition to CD-ROM development, in 1997 the Company created an Internet
game and information service, the Passport2(TM) Network. Passport2 enabled users
to compete with one another via the Internet. This Internet service was based on
proprietary Win95 client server technology developed by On The Toes of Giants, a
California corporation ("OTTOG"), substantially all of the assets of which Talk
Visual acquired in August, 1996. The Company closed Passport2 on October 9,
1998.
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Initial Public Offering
In May, 1996, the Company completed an initial public offering of
1,150,000 shares (before adjustment for a one-for-three reverse split) of its
common stock, $.001 par value per share ("Common Stock"). Net proceeds to the
Company were $5,198,048 after deducting all offering-related expenses. During
1996 and 1997, the Company used the majority of such proceeds for the
development of additional RealPlay(TM) titles, including the first three
episodes of the D.A. Pursuit of Justice title, the Emergency Room Intern title
and the Best of Emergency Room title, all of which were released by the Company
in 1997, development of three additional episodes of the District Attorney
title, the launching of Passport2, the Company's Internet gaming technology,
repayment of certain outstanding indebtedness and for working capital purposes.
Acquisition of Research and Development
In August, 1996, the Company acquired substantially all of the assets,
properties and rights of OTTOG, pursuant to an Asset Purchase Agreement, dated
August 19, 1996, which consisted primarily of purchased research and
development. The consideration for the purchased assets consisted of 33,334
newly-issued shares of the Company's Common Stock and the assumption by the
Company of certain liabilities of OTTOG. The transaction was valued as of August
30, 1996, the closing date, based on the last sales price of $7.00 per share of
the Common Stock on the NASDAQ SmallCap Market on such date, and the aggregate
purchase price of the transaction, $233,338, was recorded as an expense of
product development. The Company developed and operated a separate
Internet-oriented business unit based upon the purchased research and
development. This business was closed on October 9, 1998. See "Risk Factors--The
Company--Management of Growth: Uncertainties Relating to Acquisitions, Business
Combinations and New Businesses."
Prior Business Affiliations
In January, 1998, the Company signed a non-binding Letter of Intent with
Black Tusk Medical, Inc., a Nevada corporation ("BTI"), to joint venture the
development and publishing of high production value educational software. The
Letter of Intent was superseded by a revised Letter of Intent dated March 25,
1998. Pursuant to the revised Letter of Intent BTI and Talk Visual would pursue
joint venture programs for the development and distribution of up to four
product-oriented joint ventures, including new titles in the Company's
RealPlay(TM) series -- Emergency Room and D.A. Pursuit of Justice. On April 29,
1998 the Company and BTI mutually agreed to terminate negotiations.
Marketing and Distribution and Corporate Services Agreements
On July 31, 1997, the Company and Alpha Soft entered into a Distribution
Agreement for D.A. Pursuit of Justice cases 1 through 3 and the Emergency Room
Intern titles. Under the terms of the Agreement Alpha Soft produced, marketed
and distributed the titles and the Company received a royalty on each sale.
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On June 5, 1997, the Company entered into an Information Provider
Commission Agreement with AT&T WorldNet Service ("WorldNet") whereby customers
of WorldNet were offered the opportunity to participate in Passport2Network
interactive games. The Passport2Network paid WorldNet a percentage of
advertising revenue.
On October 14, 1997, the Company signed an Information Provider Commission
Agreement with The New York Times Electronic Media Company ("Times on Line")
whereby subscribers of the Times On Line Bridge and Chess columns were provided
the opportunity to participate in Passport2Network interactive games under terms
similar to the WorldNet agreement.
On January 8, 1998, the Company signed an Information Provider Commission
Agreement with Earthlink Networks, Inc. whereby subscribers were provided the
opportunity to participate in Passport2Network interactive games under terms
similar to the WorldNet agreement.
Each of the above agreements was terminated on December 31, 1998, except
for the agreement with Times on Line, which was terminated on August 31, 1998.
Products and Services
CD-ROM Titles
Emergency Room, an interactive game which the Company co-developed with
IBM, was the first RealPlay(TM) title designed to give teenagers and adults a
realistic experience of a particular career. In this game, the player begins as
a medical student who can work his or her way up the ranks to become the
attending physician by successfully completing 400 different medical cases. The
player examines, diagnoses and treats patients whose problems range from simple
broken bones to gunshot wounds. From October, 1995, to Summer, 1997, IBM
distributed over 160,000 units of this DOS-based title through the consumer
retail channel. In addition, from September 1997 through December 31, 1997,
Alpha Soft distributed over 45,000 units of Emergency Room Intern. The
Distribution Agreement with Alpha Soft terminated on December 31, 1998. See "The
Company--Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The Company and IBM entered into a Development and Licensing Agreement,
(the "DA License Agreement") on November 16, 1995. The D.A. Pursuit of Justice
title was the Company's second RealPlay(TM) title. In the fourth quarter of 1996
the Company and IBM mutually agreed to terminate the DA License Agreement with
respect to the D.A. Pursuit of Justice title. See "The Company--Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Developed as a six-part series, D.A. Pursuit of Justice built on the
public's fascination for high profile criminal cases and explored what it is
like to be a district attorney. Similar to Emergency Room, the game was
developed around an underlying database of accurate information relating to a
specific career.
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The Passport2Network
Passport2 was a distributed software technology that allowed
client/server-based games to be played across the Internet with usage and
billing information tracked at a central location. Passport2's categories of
games and activities included: Passport2Compete; Passport2Learn; and
Passport2Participate. The Company launched its family multiplayer network in
November, 1996 which included the following games: bridge, chess, backgammon,
Intelligentsia (trivia) and Spell-O-rama. In 1997 and 1998 the Company
negotiated information provider agreements with AT&T WorldNet Service, The New
York Times Electronic Media Company and Earthlink Networks, Inc. whereby
customers of each company were offered the opportunity to participate in
Passport2Network interactive games. The Passport2Network paid each company a
percentage of advertising revenue. See "The Company--Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Risk
Factors--The Company--Management of Growth; Uncertainties Relating to
Acquisitions, Business Combinations and New Businesses" and "--Rapidly Changing
Technologies and Markets." The Company closed Passport2 on October 9, 1998.
Interactive Services Division
In December, 1997 the Company launched an Interactive Services Division
for the purpose of marrying its interactive design expertise and high production
values with corporate sales and marketing goals. The primary mission was to
bring the fullest range of interactive solutions to business clients in the
communications, advertising, educational and entertainment industries.
On January 15, 1998, the Company signed a Certificate of Authorship and
Services Agreement with Addision Wesley Longman, Inc. ("AWL") to develop and
provide an interactive sales demonstration for the AWL Waterford Early Reading
Program, Levels 1 and 2.
On March 10, 1998, the Company signed a Certificate of Authorship and
Services Agreement with Polar Vision, Inc. to develop CD-ROM Website and printed
materials for Polar Vision's product lines.
Research and Development
The Company's research and development program consisted primarily of
activity relating to the early development stages of game titles and the
development of new product concepts. Product development expenses are presented
in the Company's financial statements net of co-funded development expenses and
primarily include personnel expenses associated with both creative developers
and programmers, and costs associated with external video production for use in
the Company's software titles. For the years ended December 31, 1998, 1997 and
1996 net product development expenses were $1,008,640, $619,516, and $1,664,478,
respectively. For the year ended December 31, 1998, development expenses totaled
$1,008,640, of which $112,504 were actual costs of development, $36,712
amortization of development costs based on unit sales and the remaining $859,424
represented the write-off of capitalized product development costs to net
realizable value. See "The Company--Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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Competition
The Company competed in the computer software industry. Each of the
computer software development, Internet technology and software retail
distribution industries is intensely competitive. The Company's former
competitors in each industry ranged from small companies with limited resources
to large, more established companies which has significantly greater assets and
greater financial, technical and personnel resources than those of the Company.
Company Strategy
Prior to entering into the Merger Agreement, Talk Visual's objective was
to establish itself as a leading developer of edutainment, infotainment, and
simulation software products. Upon stockholder approval of the Merger, the
Company will concentrate on the establishment of videocalling operations through
strategic partnerships and the development of retail outlets.
Proprietary Rights
The Company has relied primarily on a combination of trademark, copyright,
trade secret laws, employee and third-party non-disclosure agreements and other
methods to protect its proprietary rights. The source code for the Company's
proprietary software is protected both as a trade secret and as an unpublished
and unregistered copyrighted work.
The Company has registered trademarks in the United States for both the
Legacy name and certain of its product names and has pending trademarks and
copyrights for certain additional product names.
The technology in which the Company has proprietary rights is embodied in
its software. This includes (1) the Emergency Room title software, (2) the
improved software which the Company is using in its current products and its
off-line tools for translating data and (3) the software being utilized for the
development of the Company's Internet game server network. A competitor could
independently develop software which produces the same results as the Company's
software without copying the Company's software and without violating the
Company's proprietary rights.
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Employees
As of March 31, 1999 the Company had one full-time employee. The Company's
employee is not covered by a collective bargaining agreement and the Company has
experienced no work stoppages. The Company believes that its relationship with
its employee is good.
Properties
In February 1998, the Company terminated its lease for the facility at
5757 W. Century Blvd., Suite 700, Los Angeles, CA and negotiated a
month-to-month lease for a smaller portion of space at a reduced rental rate in
the same building, and in March 1998 the Company terminated its lease for office
property located in Oakhurst, CA. On February 24, 1999, the Company closed its
Los Angeles, CA office, and consolidated its operations with Videocall at One
Canal Park, Cambridge, Massachusetts, where Videocall leases 2,504 square feet.
The Company believes that the new space is adequate and suitable for its needs.
Recent Developments
On February 24, 1999, the Company acquired a 22,622 square foot property
in Toronto, Canada in exchange for 975,000 shares of Class A Preferred Stock,
$.001 par value, paying dividends of $.095 per annum. See "Description of
Capital Stock - The Company" for a description of the Class A Preferred Stock.
On February 19, 1999, the Company signed a Placement and Fee Agreement
with Red Laguna Trading Company, Inc. ("Red Laguna") for 500,000 Warrants to
purchase the Company's Common Stock, at the exercise price of $5.00 per share,
to employ Red Laguna to find strategic business alliances for the Company over
the period of the next three years.
On February 23, 1999, the Company and Infochannel Limited ("Infochannel"),
a Jamaican corporation, signed a Memorandum of Understanding whereby the Company
will purchase a 23% interest in Infochannel for 78,823 shares of the Company's
Common Stock valued at $4.17 per share. The Company and Infochannel will in turn
form a joint venture, Videocall Jamaica, Limited, to operate the videocalling
outlets in the Jamaican market.
On March 22, 1999, the Company and Proximity Inc. ("Proximity"), a Vermont
corporation, signed a Letter of Intent whereby, subject to due diligence by both
parties, the Company will purchase the outstanding stock of Proximity for $4
million dollars in common Stock of the Company valued at $4.00 per share. In
addition the Company will pay Proximity shareholders the sum of $250,000 in 10
equal monthly installments and subject to receiving audited financials and pro
forma operating reports will make available $200,000 for working capital
purposes. Proximity provides international full spectrum videoconferencing
services with public access to over 2,000 videoconferencing sites.
On April 7, 1999, the Talk Visual Common Stock was delisted from the
Nasdaq SmallCap Market and commenced trading on the OTC Bulletin Board.
Legal Proceedings
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On August 18, 1997, the U.S. Securities and Exchange Commission ("SEC")
issued a subpoenas deces tecum to the Custodian of Records of the Company and
other parties. The subpoenas were issued in connection with the SEC's formal
investigation entitled In the Matter of Reynolds Kendrick Stratton, Inc., File
No. LA-752 (the "Investigation"). The Investigation appears to center around
activities of JB Oxford Holdings, Inc., a broker-dealer, which is the successor
to Reynolds Kendrick Stratton, Inc., and was the underwriter of the Company's
initial public offering. The SEC has indicated that it expects to take the
testimony of the Company and other parties at some point in the future. The
Company has no reason to conclude that it is a target of the Investigation.
The Company has filed a lawsuit (the "Complaint") in Los Angeles,
California against the former Chairperson, Ariella Lehrer, the D&A Lehrer
Children Trust and other related entities. In that action, the Company alleges
that Lehrer breached her fiduciary duties to the Company through various actions
that, according to the Complaint, "undertook to burden an already weakened
Legacy with unreasonable, unnecessary and unfair obligations that primarily
benefited her faith and were...not in the best interest of Plaintiff Legacy or
its shareholders." The Company also alleges that Lehrer fraudulently backdated
documents for her personal benefit, and "deliberately and maliciously
misrepresented the financial condition of plaintiff Legacy..." The Company
claims that the misrepresentations created substantial and unnecessary legal
exposure for the Company, particularly with the Company's listing on the Nasdaq
SmallCap Stock Market. The Company seeks to recover substantial damages, to be
proved at trial, for Lehrer's actions and also seeks injunctive relief requiring
Lehrer to return to the Company significant assets.
The Company has filed a lawsuit in Los Angeles, California, claiming a
total of $30,000,000 in damages against DCI Telecommunications, Inc., its
officers and Directors and several of its shareholders. The lawsuit alleges that
during the period February 1998 to April 1999, the defendants conspired jointly
to libel, slander and falsely accuse the Chairman of the Company of wrong doing
by posting messages on the Internet.
The Company is not currently involved in any litigation that is expected
to have a material adverse effect on the Company's business or financial
position. There can be no assurance, however, that third parties will not assert
infringement or other claims against the Company in the future which, regardless
of the outcome, could have an adverse impact on the Company as a result of
defense costs, diversion of management resources and other factors.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth, as of May 10, 1999, the number and
percentage of shares of Common Stock beneficially owned (as defined in Rule
13d-3 adopted under the Exchange Act) by (a) all persons known to the Company to
own beneficially more than 5% of any class of voting security of the Company,
(b) each of the Company's directors, (c) the Company's officers named in the
Summary Compensation Table set forth herein and (d) all directors and executive
officers of the Company as a group.
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Common Stock
------------------------------
Number Percentage
of Shares of Shares
Name and Beneficially Beneficially
Address(1) Owned(2)(3) Owned(2)(3)
- ------------------------ ------------ ------------
Ariella J. Lehrer, Ph.D. 130,474 2.62
William E. Sliney 100,000 1.98
Michael J. Zwebner (4) 658,167 13.28
One Canal Park, 3rd Floor
Cambridge, Massachusetts 02142
All directors and executive officers
as a group (3 persons) ............... 888,677 17.47
- ----------
(1) Unless otherwise indicated, the stockholder's address is the Company's
principal executive offices.
(2) Percentage ownership is based on 4,954,916 shares of Common Stock
outstanding as of May 10, 1999 plus any shares issuable pursuant to
options or warrants held by the person or class in question which may be
exercised within 60 days of May 10 1999.
(3) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, each stockholder named in this table
has sole voting and investment power with respect to the shares set forth
opposite such stockholder's name.
(4) Such shares are held through affiliates.
MANAGEMENT
Directors and Executive Officers of the Company
In accordance with the terms of the September 8, 1998 Letter of Intent
with Videocall and as provided in the Merger Agreement Michael J. Zwebner was
elected Chairman of the Board of Directors of the Company and Ariella J. Lehrer,
Ph.D. resigned as Chairwoman of the Board. In addition to Mr. Zwebner the
Company elected Alexander H. Walker, Jr., Michael Cuzner-Charles and Eugene A.
Rosov to fill existing vacancies on the Board.
In order to insure a smooth transition of management and direction of the
merged companies, C. Robert Kline, Ph.D., Ivan M. Rosenberg, Ph.D. and William
E. Sliney resigned as members of the Board of Directors effective October 9,
1998. In addition, on the same date, Dr.
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Kline resigned as Chief Executive Officer and Mr. Sliney resigned as Vice
President and Chief Financial Officer.
On November 6, 1998, the Company elected David B. Hurwitz to the Board of
Directors filling a vacancy. The Company also gave Eugene A. Rosov, President
the additional title of Chief Executive Officer and C. Harold Snyder was named
the Chief Financial Officer.
The biographies of David B. Hurwitz and Michael Cuzner-Charles are set
forth below. See "Information Concerning Videocall -- Management" for the
biographies of the other new directors and officers of the Company.
David B. Hurwitz
David B. Hurwitz, age 35, has been a Director of the Company since
November 6, 1998. Mr. Hurwitz is the Executive Vice President & General Manager
of US WATS, Inc., in charge of the day-to-day operation of that company. A
senior executive and business development professional, Mr. Hurwitz has proven
ability to build entrepreneurial-based businesses through strategic alliances,
teaming relationships, creating cohesive organizational structures, and the
professional development of their human resources. Mr. Hurwitz has over 12 years
experience in the telecommunications industry, encompassing business
development, general management, and strategic sales and marketing initiatives.
Prior to joining Commonwealth Long Distance/RCN as Vice President of Sales &
Marketing, where Mr. Hurwitz led a sales force of greater than 140
representatives and was a key element in the development and management of
corporate sales and marketing strategies, Mr. Hurwitz was involved in several
successful entrepreneurial start-up ventures, funded by Petrocelli Industries of
NYC. As Executive Vice President & Chief Operating Officer of Internet
Communications Services, Inc., Mr. Hurwitz was responsible for the development
and operation of a prepaid "debit" long distance calling card service and
validation processing service bureau, and as General Manager of FiberNet, Mr.
Hurwitz was responsible for overseeing the sale and marketing of services
associated with FiberNet's Upstate, and New York Metropolitan Area Networks. Mr.
Hurwitz spearheaded the development of business relationships with the country's
largest long distance carriers, and was responsible for product and service
development, rate structures and operating policies and procedures. Prior to
developing the business plan and negotiating funding for InterNet, Mr. Hurwitz
participated in the due diligence and sale of FiberNet's Upstate, and
Metropolitan New York Area markets to MFS. Mr. Hurwitz graduated with a BA in
English and History from Hobart College in 1985. He completed Master's level
course work in Telecommunications Management in 1988 and 1989 at the State
University of Albany. While affiliated with Rochester Tel. Telecommunications
Group, a division of Rochester Telephone (now Frontier) from 1985 until February
of 1992, Mr. Hurwitz held numerous positions including: Account Executive,
Regional Sales Manager and Director of the Mid-Atlantic and Central Regions.
Michael Cuzner-Charles
Michael Cuzner-Charles, age 52, has been a Director of the Company since
September 1998. Mr. Cuzner-Charles serves as a director of Regal Brook Ltd. in
Berkshire (UK), since 1995. He was finance director of Kingston Coatings,
Courtaulds Plc from 1976 to 1979, and became a Director of the CJ Phoenix Group
(Jewellers in Paris, London and Birmingham) in
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1979 until 1982. For the international management consulting firm of Grant
Thornton, Mr. Cuzner-Charles was senior manager from 1982 to 1984, and became
senior manager of Corporate Finance for Touche Ross from 1984-1992. From
1992-1995 Mr. Cuzner-Charles served as a director of MBS Plc, a computer
distribution company, and was Chief Executive Officer of Trade Intermediary
Group Plc. He is a Fellow of the Institute of Chartered Accountants in England
and Wales.
Key Employee of the Company
Vincent A. Lee was hired by Talk Visual in April 1999 to design, select,
deploy and maintain the local and wide area network architectures and
technologies to support Talk Visual's global video/voice calling services, as
well as its host multimedia services. Prior to joining the Company, Mr. Lee
worked as a software engineer/project leader for Hewlett-Packard Corporation in
its medical products division.
Committees of the Board of Directors
The Board of Directors has appointed an Audit Committee, Compensation
Committee and a Stock Option Committee, but has not appointed a standing
Nominating Committee.
The Audit Committee is responsible for reviewing financing statements,
consulting with the independent auditors concerning the Company's financial
statements, accounting and financial policies and internal controls and
reviewing the scope of the independent auditors' activities and fees.
The Compensation Committee reviews and makes recommendations to the Board
of Directors with respect to the compensation of all officers of the Company and
issuances of equity securities of the Company to directors, officers, employees
and consultants of the Company.
The Stock Option Committee is responsible for administering the Company's
Stock Option/Stock Issuance Plan and granting options thereunder.
Compensation of Executive Officers and Directors
Compensation of Directors
The Company has no standard arrangements pursuant to which directors of
the Company are compensated for any services provided as a director except for
the Automatic Option Grant Program component of the 1995 Stock Option/Stock
Issuance Plan (the "1995 Plan"). Directors who are not current employees of the
Company ("non-employee directors") are eligible for the Automatic Option Grant
Program component of the 1995 Plan under which option grants will automatically
be made at periodic intervals to eligible non-employee Board members to purchase
shares of Common Stock at an exercise price equal to 100% of their fair market
value on the grant date.
Under the Automatic Option Grant Program, each individual who is first
elected or appointed as a non-employee Board member will receive a 3,333 share
option grant on the date of such election or appointment, provided such
individual has not been in the prior employ of the
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Company. In addition, at each Annual Meeting, beginning with the 1997 Annual
Meeting, each individual who is to continue to serve as a non-employee Board
member after the meeting will receive an additional option grant to purchase 833
shares of Common Stock whether or not such individual has been in the prior
employ of the Company.
Each automatic grant will have a term of ten (10) years, subject to the
earlier termination following the optionee's cessation of Board service. Each
automatic option will be immediately exercisable; however, any shares purchased
upon exercise of the option will be subject to repurchase should the optionee's
service as a non-employee Board member cease prior to vesting in the shares. The
initial 3,333 share grant will vest in four equal and successive annual
installments over the optionee's period of Board service. Each additional 833
share grant will vest upon the optionee's completion of one year of Board
service measured from the grant date. However, each outstanding option will
immediately vest upon (1) certain changes in the ownership or control of the
Company or (2) the death or disability of the optionee while serving as a Board
member.
Compensation of Executive Officers
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company on behalf of (i) the Chief Executive
Officer and (ii) the other most highly compensated executive officer of the
Company whose total annual salary and bonus for fiscal year 1998 exceeded
$100,000 (the "Named Executive Officers"), with respect to services rendered by
such persons to the Company and its subsidiaries for each of the fiscal years
ended December 31, 1996, 1997 and 1998:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
Awards
Other Annual ----------------------
Salary Compensation Securities
Name and Principal Position Year ($) ($) Underlying Options (#)
- --------------------------- ---- ----------- ------------ ----------------------
<S> <C> <C> <C> <C>
Ariella J. Lehrer, Ph.D.(1)............. 1998 $ 85,000 $ -0- 33,333
Chief Executive Officer, 1997 $105,115 $ -0- -0-
President, Chairwoman of 1996 $117,500 $ -0- 33,333
the Board of Directors
Eugene A. Rosov (2)(3).................. 1998 $ -0- $ -0- -0-
Chief Executive Officer
William E. Sliney (4) .................. 1998 $120,000 $ -0- 100,000
Vice President of Finance, 1997 $117,581 $ -0- -0-
Chief Financial Officer 1996 $112,500 $ -0- 16,666
And Secretary
</TABLE>
- ----------
(1) Ms. Lehrer ceased to be Chief Executive Officer, President and Chairwoman
of the Board of Directors on September 14, 1998.
(2) Mr. Rosov became Chief Executive Officer on November 6, 1998. His
compensation is paid by Videocall.
(3) C. Robert Kline, Ph.D., served as Chief Executive Officer from September
14, 1998 until October 6, 1998, and received $7,500 in compensation for
his services as such.
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<PAGE>
(4) Mr. Sliney ceased to be Vice President of Finance, Chief Financial Officer
and Secretary on October 6, 1998.
Compensation Committee Interlocks and Insider Participation
The Company's Compensation Committee was formed in January, 1996 to
establish salary, bonus and other forms of compensation for officers of the
Company, provide recommendations for the salaries and incentive compensation of
the employees and consultants of the Company and make recommendations to the
Board of Directors regarding such matters. The principal objectives of the
Company's executive compensation are to:
o support the achievement of the desired Company performance;
o align the executive officer's interests with the success of the
Company and with the interests of the Company's stockholders; and
o provide compensation that will attract and retain qualified
management and reward performance.
These objectives are principally achieved through compensation in the form of
annual base salaries, discretionary bonuses and equity investment opportunities,
such as stock option grants. Prior to January, 1996, the Board of Directors
performed the functions of the Compensation Committee. The Company has not
historically linked executive compensation directly to corporate performance.
During the 1998 fiscal year, the Compensation Committee was composed of
Mr. Hessler and Dr. Rosenberg until October 9, 1998 and Messrs. Hurwitz, Rosov
and Cuzner-Charles thereafter. No interlocking relationship exists between the
Company's Board of Directors or Compensation Committee and the board of
directors or compensation committee of any other company, nor has any such
interlocking relationship existed in the past.
Stock Options
The following table sets forth certain information with respect to options
granted to each of the Company's Named Executive Officers during fiscal year
1998. The Company did not grant any stock appreciation rights during fiscal year
1998.
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<PAGE>
Option Grants in Fiscal 1998
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------------------------------
Potential Realizable
Number of Percent of Value at Assumed
Securities Total Options Rates of Stock
Underlying Granted to Appreciation for
Options Eligible Persons Exercise or Option Term(1)
Granted in Fiscal Base Price Expiration --------------------
Name (#) Year ($/Sh) Date 5% 10%
- ---- ---------- ---------------- ----------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Ariella J. Lehrer, 16,666 11.8% $2.07 8/20/01 -0- -0-
Ph.D.
8,333 5.9 3.11 8/20/01 -0- -0-
8,333 5.9 4.14 8/20/01 -0- -0-
William E. Sliney 50,000 35.3 2.07 8/20/01 -0- -0-
25,000 17.6 3.11 8/20/01 -0- -0-
25,000 17.6 4.14 8/20/01 -0- -0-
</TABLE>
- ----------
(1) The 5% and 10% assumed rates of appreciation are specified under the rules
of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future Common Stock price. There
can be no assurance provided to any executive officer or any other holder
of the Company's securities that the actual stock price appreciation over
the three-year option term will be at the assumed 5% and 10% levels or at
any other defined level. Unless the market price of the Common Stock
appreciates over the option term, no value will be realized from the
option grants made to the executive officers.
Aggregated Option Exercises in Fiscal 1998
and Value of Options at End of Fiscal 1998
The following table sets forth certain information with respect to the
Company's Named Executive Officers concerning unexercised stock options held as
of December 31, 1998. No stock options were exercised by such individuals during
fiscal year 1998. The Company did not grant any stock appreciation rights during
fiscal year 1998 and no such rights were outstanding as of the end of such
fiscal year.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Securities Underlying in-the-Money
Options at Options at
Fiscal Year-End Fiscal Year-End($)(1)
------------------------------ ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ariella J. Lehrer, Ph.D................. 66,666 -- $11,833 --
Eugene A. Rosov......................... -0- -- -0- --
William E. Sliney....................... 116,667 -- $35,500 --
</TABLE>
- ----------
(1) Calculated on the basis of the fair market value of the underlying
securities at December 31, 1998 ($2.78 per share) minus the exercise
price.
71
<PAGE>
INFORMATION CONCERNING VIDEOCALL
BUSINESS
General
Videocall was recently incorporated to provide a focused retailer to sell
videoconferencing and videocall services to individuals and business customers.
Videocall intends to establish retail locations throughout the world from which
business and general public consumers may participate in videocalls with others
that have access to videocall facilities or equipment. The principals of
Videocall began working on the business concept approximately two years ago, and
together with management have prepared Videocall's business plans and programs.
Most of the founders and management team of Videocall have spent the past
decade in the telecommunications industry, producing and marketing telecom
products and services. The development of Videocall's business plan is a result
of their telecommunications experience, their research, and their sales,
marketing and telecommunications product development. Videocall intends to set
up and operate a global network of convenient, strategically located retail
outlets to offer the general public videocalling services in its facilities at a
reasonable cost. Videocall's mission is to bring to the general public in major
population centers the world over high value, cost-effective videocalling
services. Videocall intends to accomplish its goals by establishing retail
locations in major international cities, by its own development of strategic
locations through franchises, or via strategic partnerships. At these
conveniently sited locations worldwide, Videocall expects that customers will
readily book calls to locations in many other countries and cities worldwide.
The Corporate Market
Videocall's founders believe that the global business community is primed
for a surge in videoconferencing facilities and services. Internet development
and its focus on visual imagery reflects the corporate interest in rapid
audio/visual communication worldwide. Videocall is designed to fill the need for
the delivery of economical, efficient and convenient videocall services to
commercial users worldwide.
Ethnic Markets
Ethnic minorities worldwide often comprise substantial numbers of
displaced or otherwise separate families. In many cases, immigrants into
countries the world over make up a significant fraction of local ethnic
communities. These immigrants often have been unable to return to their home
countries to see their distant families. Often for both political and or
financial reasons they are not able to travel easily, but they are capable of
telephone calls, and are currently a significant purchasing group for prepaid
phone cards. Videocall believes that videocalling will offer them a preferable
and desirable alternative to non-visual telephone calls.
Large segments of populations in many countries make up such groups, and
these have created what Videocall believes is a ready and willing market for
videocalling services. Based on management's experience and knowledge of ethnic
markets - in terms of locations, resources,
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<PAGE>
consumer responsiveness, and Videocall's market sensitivity - Videocall's
business strategy should result in these ethnic markets visually and aurally
reuniting with their families on an international scale. Videocall believes that
once the availability of videocall service is present to connect a given ethnic
group with key global locations, routine and regular videocalling will become a
part of the normal activities for many members of these communities. Videocall
believes that it is the first such commercial venture to approach this market in
a knowledgeable and comprehensive manner, with a manageable plan for global
implementation.
The Technology
The core aspect of Videocall's business is the purchase and delivery of
the videocalling system, with full technical support on an ongoing basis from
the Picturetel Corporation of Andover, Massachusetts. Videocall may also source
equipment from other manufacturers. Picturetel Corporation is the world leader
in videoconferencing technologies, products and services. Picturetel Corporation
claims over 56% of the world market for videoconferencing systems.
The equipment that Videocall expects to primarily utilize is Intel
Corporation's "Pro Share 500" system. This simple yet high tech system is
compatible with most current videoconferencing systems (there being an
established industry standard - the H.323/H.320 international standard - in
effect).
Global Telecommunications Transmission Standards
The standard transmission protocol that Videocall will use is ISDN. The
difference between ISDN and a regular phone line is that the ISDN "pipe" - or
bandwidth - is substantially larger and more efficient. Rather than operating in
the usual "analog" manner, an ISDN line transmits digital signals which are not
subject to the normal degradation and operational problems of analog
connectivity. ISDN is therefore able to carry more data and speech, very rapidly
and with clearer connectivity. It provides a clarity of voice transmissions and
real time transmission of simultaneous video picture without the slow "step by
step" images of earlier analog line transmissions. Because it is digital, ISDN
allows for direct computer-to-computer communications and facilitates high
volume data, video and voice applications such as global videocalling. As of
July 1998, there are over 40 countries worldwide in which ISDN is commercially
available.
The Wireline Carriers
Videocall intends to enter into separate agreements with local PTTs in
every target country for the installation of ISDN circuits at all of its own
retail locations and the locations of its strategic partners. In almost all
cases, ISDN installation rates have been reduced to only a few hundred dollars
per location, and the monthly rental rates have been reduced to as low as $30
per month or less. This should help Videocall to operate economically and
competitively. In addition, Videocall intends to obtain ISDN long distance
service from major international carriers such as AT&T, MCI and SPRINT. The
current global industry trend is towards a general lowering of calling rates,
and Videocall expects that ISDN rates will remain part of this trend.
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<PAGE>
Global Siting of Retail Locations
Videocall has organized its expansion activities toward different targeted
locations and toward business-formation strategies designed to secure locations.
Videocall's approach to establishing its global network of retail locations
includes:
1. Company-owned locations
2. Travel agency acquisitions
3. Partnerships
4. Franchises
5. Strategic commercial arrangements
While Videocall has developed financial models for various retail location
options, the financial models will vary from country to country, and indeed even
from city to city within a given country. Management will review all available
options on an individual location basis, and intends to obtain such locations in
a manner consistent with cash flow needs, projected profitability goals,
location desirability, and the marketplace demand for local videocalling
origination and receipt.
Recent Transactions
On September 28, 1998, Videocall signed a Letter of Intent to purchase all
the assets and assume all the liabilities of Town and Country Village West from
Sacramento Results, Inc. of Mesa, Arizona. The commercial property comprises
130,000 square feet, with 114,000 net leaseable feet on 6.36 acres of land with
an estimated gross property value of $10 million. Videocall will use a portion
of the available office space to establish a Western US operations center. This
transaction was consummated on October 28, 1998 with the payment by Videocall to
the seller of a $1,000,000 promissory note and 3,000,000 shares of Videocall
Common Stock.
Videocall as a part of its videocalling expansion plans has signed letters
of intent or leases providing for videocalling outlets to be opened in the
following locations in 1999:
Retail Stores
Boston, Massachusetts
Miami, Florida
Sacramento, California
San Francisco, California
Hotels
The Hyatt Regency, Hong Kong
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<PAGE>
Newspapers
The Philippine News - offices in San Francisco, Los Angeles, New
York City, San Diego, Toronto, Manila, Hawaii, Guam and Malaysia.
Videocall has signed the following service agreements
Page Mart Wireless, Inc. - pager services for the Americas and the
Caribbean.
Cable & Wireless, Inc. - utilization of internet global network.
Global Exchange - utilization of network system. The videocalling locations will
be connected worldwide to the Cable & Wireless IP Global Backbone Network. This
will permit customers to be offered a choice of videocalling services with calls
being connected both over the Internet and via ISDN.
Competition
The business in which Videocall is engaged is highly competitive. At this
time, however, Videocall is not aware of any other business organized pursuant
to a business plan similar to that of Videocall: a world-wide retail business
designed to enable the general public to participate in individual videocalling
services.
Videocall believes that most, if not all, of the videoconferencing
companies in existence today are involved in connecting/bridging corporate
customers. Some companies have found specific niche markets into which they have
invested substantial infrastructure. For example, one particular company
operating within the legal profession has set up a videoconferencing service to
enable lawyers, their clients and courts to interact amongst themselves with
videoconferencing facilities. Videocall believes that this has led to a dramatic
savings for all parties concerned as the participants can now set up over a
video-conference link various processes previously performed in person. This
negates substantial travel and creates cost efficiencies.
Videocall believes that videoconferencing also is becoming a more
widely-used tool in the medical industry, with doctors using videoconferencing
facilities as a means of communicating with patients in various locations
including hospitals, clinics, nursing homes and convalescent facilities.
Videocall has been advised that in the manufacturing industry, many
companies have discovered savings and efficiencies through videoconferencing.
Many banks and financial institutions are also utilizing videoconferencing for
internal and external communications. The oil and gas industry is now installing
videoconferencing facilities at many worldwide installations to enable
management and employees to communicate with each other the world over.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of March 31, 1999
regarding each person known by Videocall to own beneficially more than 5% of the
Videocall Stock, each director of Videocall who beneficially owns Videocall
Stock, each executive officer who
75
<PAGE>
beneficially owns Videocall Stock and all executive officers and directors of
Videocall as a group. Except as indicated in the footnotes to the table, all of
such shares of Videocall Stock are owned with sole voting and investment power.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Pro Forma Beneficial
Ownership of Company
Common Stock(1)
- -------------------------------------------------------------------------------------------------------------------------------
Shares of Videocall Percent Number Percent
Stock of of Of
Name Beneficially Owned Class Shares Class
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael J. Zwebner 3,460,000 11.38% 1,413,000 6.00%
4 Melvin Hall
Golders Green
London NW 11
England
- -------------------------------------------------------------------------------------------------------------------------------
Whyteburg SA 3,000,000 9.87 1,080,000 4.58
C/o Kerman & Co.
79 New Cavendish Street
London W1M 0AQ
England
- -------------------------------------------------------------------------------------------------------------------------------
Overseas Communications Ltd 2,000,000 6.58 - -
C/o Greenwood & Co. Solicitors
7 Hatton Garden
London EC1N 8AT
England
- -------------------------------------------------------------------------------------------------------------------------------
H&G Partnership 3,000,000 9.87 3,000,000 12.74
1237 S. Val Vista Drive
Mesa, Arizona 85204
- -------------------------------------------------------------------------------------------------------------------------------
Eugene A. Rosov 1,100,000 3.62 - -
- -------------------------------------------------------------------------------------------------------------------------------
C. Harold Snyder 500,000 1.64 - -
- -------------------------------------------------------------------------------------------------------------------------------
Charles Zwebner 400,000 1.32 300,000 1.27
- -------------------------------------------------------------------------------------------------------------------------------
Alexander H. Walker, Jr. 100,000 * 100,000 *
- -------------------------------------------------------------------------------------------------------------------------------
Richard Sablon 100,000 * 90,000 *
- -------------------------------------------------------------------------------------------------------------------------------
Michael Hilsenrath 100,000 * 100,000 *
- -------------------------------------------------------------------------------------------------------------------------------
All directors and executive officers 5,760,000 18.95 2,003,000 8.50
as a group (8 persons)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ----------
* Less than one percent
(1) Excludes options to be issued as a portion of the Merger Consideration.
MANAGEMENT
Videocall was recently incorporated. The current members of Videocall's
Board of Directors and management are set forth below:
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<PAGE>
Board of Directors and Management
- --------------------------------------------------------------------------------
Name Age Position
- ---- --- --------
- --------------------------------------------------------------------------------
Michael J. Zwebner 46 Chairman
- --------------------------------------------------------------------------------
Eugene A. Rosov 50 CEO, President, Director
- --------------------------------------------------------------------------------
C. Harold Snyder 42 Chief Financial Officer
- --------------------------------------------------------------------------------
Charles Zwebner 39 Director, VP Canadian Operations (CA)
- --------------------------------------------------------------------------------
Alexander H. Walker Jr. 72 Director, General Counsel
- --------------------------------------------------------------------------------
Salvatore Gilbertie 39 Director, Corporate Finance
- --------------------------------------------------------------------------------
Richard Sablon 38 Chief Technical Officer
- --------------------------------------------------------------------------------
Michael Hilsenrath 39 Director, VP European Operations (UK)
- --------------------------------------------------------------------------------
Michael J. Zwebner
Michael Zwebner is the founder and has served as Chairman of Videocall
International Corporation since February 1998. From 1974 to 1986, Mr. Zwebner
founded and ran a travel and tourism company as well as a charter airline,
specializing in the areas of air charter travel, wholesale ticketing and general
business and tourist travel. From 1986 to 1990, Mr. Zwebner owned and operated
several real estate companies as well as managed a chain of five family
restaurants and related catering services in England. From 1991 to 1997 Mr.
Zwebner founded and served as Vice-President of Cardcall International Holdings
Inc. (USA) and Operating Manager of Cardcall (UK) Ltd. for which he designed and
developed telecommunications and marketing concepts and organized the extensive
prepaid phone card operations (Cardcall having been the largest such operation
in both the UK and Canada). Mr. Zwebner also coordinated corporate finance
activities for Cardcall.
In February of 1997, Mr. Zwebner negotiated and secured the sale/merger of
the Cardcall Group to DCI Telecommunications Inc., a publicly-held entity based
in Connecticut, USA, and was subsequently instrumental in the multi-million
dollar sale of the UK distribution contract to SmarTalk Teleservices Inc. In
addition, in February of 1988, Mr. Zwebner negotiated the creation of a
multi-million dollar joint venture between Cardcaller Canada Inc. with Datawave
Systems Inc. of Vancouver, Canada. Mr. Zwebner resigned from his positions with
the Cardcall Group in February 1998 to actively and exclusively pursue the
Videocall project.
Eugene A. Rosov
Eugene Rosov has served as Director, President and Chief Executive Officer
of Videocall International Corporation since June 1998. In 1967, Mr. Rosov
started a national music educational and touring company, and in 1978 started
the international chamber music association, Chamber Music America. Mr. Rosov
served as acting Director of Marketing for the nation's largest public radio
station, WNYC, from 1979 to 1980. In 1980 he was founder, president and CEO of
Water Test Corporation, a national drinking water testing laboratory
77
<PAGE>
acquired by Household International in 1987. From 1988 to 1995 he was founder,
president, CEO and Chairman of Innovative Telecom Corporation, the Nashua, New
Hampshire telecommunications systems integrator and provider to five (of six)
Regional Bell operating companies of prepaid telephone card technologies and
customer service operations. From 1995-1998 Mr. Rosov acted as a consultant to
various telecom companies. Mr. Rosov graduated from Harvard College in 1971 with
a BA in General Studies.
Richard Sablon
Richard Sablon is the Company's Chief Technology Officer. He matriculated
from Miami-Dade Community College in 1982, majoring in computer sciences. Three
years later, in 1985, he developed, promulgated and marketed the first prepaid
telephone cards sold in the United States. In 1989 he began to sell the first
commercially available prepaid phone card (debit card) computer telephony switch
platforms for use in the United States and overseas, and two years later - in
1991 was the first to offer commercial telephone service from the United States
directly to Cuba via Canadian circuits, after nearly 30 years of U.S. Government
telephone blockades. From 1991-1998 Mr. Sablon developed and ran switch
manufacturing and operating companies. He is a member of the Institute of
Electronic Engineers (IEEE) and the U.S. Telecard Association (USTA). For the
past ten years he has enhanced his educational background with specialized
courses in network architecture and ISDN protocols.
C. Harold Snyder
Harold Snyder has served as the Chief Financial Officer of Videocall
International Corporation since July 1998. Mr. Snyder started a full service
printing firm in 1969, which he sold in 1975. From 1975 through 1985 Mr. Snyder
worked with Stegman & Co. in Baltimore as business and tax advisor and auditor.
From 1985-1990 Mr. Snyder served as executive officer for finance and
administration for North American Beauty Services Company, a wholesale and
retail distributor of beauty products. From 1990-1992, Mr. Snyder served as VP
Finance for Innovative Telecom Company Inc., a telecommunications provider. From
1992 to July 1998, Mr. Snyder served as a business consultant, financial and tax
strategist for companies throughout New England. Mr. Snyder holds a Masters
Degree from the University of Baltimore and is a certified public accountant
(CPA).
Sal Gilbertie
Sal Gilbertie has served as a Director and the Director of Corporate
Finance of Videocall International Corporation, since July 1998. Mr. Gilbertie
serves as president (since 1996) of Cambial Financing, Inc., an asset-backed
financing company based in San Francisco and New York. He was Vice-President and
Partner in the Merrill Lynch Futures/Elders Finance Group from 1984 to 1990, and
prior to that he served as General Manager of Merrill Lynch's energy brokerage
unit. He has served as a consultant to the Director of the (United States)
Department of Energy's Strategic Petroleum Reserves. Mr. Gilbertie represented
and traded for Bear Stearns, Reico Natural Gas, LLC and AGM Derivatives
Corporation during the period 1994 to 1996. Mr. Gilbertie graduated from
Fairfield University with a B.S. in Business Management in 1982.
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<PAGE>
Charles Zwebner
Charles Zwebner has served as Vice President and a Director of Videocall
International Corporation since February 1998. Mr. Zwebner was the former
president of Cardcaller Canada Inc. (1992-July 1998) and was a member of its
Board of Directors (1992-1998) prior to the sale of the company. Mr. Zwebner
founded Cardcaller Canada in 1992, and has been involved in all elements of
design, development, production and manufacturing of the first Canadian fixed
amount prepaid multilingual telephone calling card. As Vice President of the
Mortgage Department of Concinnity Corporation, Inc. from 1985 to 1992, Mr.
Zwebner handled underwriting, management and syndication of residential and
commercial mortgage portfolios.
Michael Zwebner and Charles Zwebner are brothers.
Michael Hilsenrath
Michael Hilsenrath, a Director of the Company, also holds a directorship
of a major European telecommunications provider, and in 1997 was director of
Cardcall UK, a prepaid phone card company in the United Kingdom. Earlier, he was
a senior manager in both commercial and technical areas in the
telecommunications industry, and has assisted in the launch of new telecom
services in the United Kingdom and in Europe. From 1987-1993 he was contracted
to Cable & Wireless. During the period from 1993 to 1995, he served as Cable and
Wireless' General Manager - Voice and Facsimile Services, General Manager -
Information and was responsible for the initial development of the group's
global intelligent virtual network. His expertise includes all areas of business
planning, videoconference technology, voice-mail systems and many other
commercial and technical areas. From 1984 to 1987 he worked for Western Union
supporting their messaging products. He holds a B.A. from the City University of
New York, Baruch College (1979), Masters Degree in History from London
University (1993), and a Certificate in Marketing Management. Mr. Hilsenrath
maintains an American passport, but has lived and worked in Europe for the past
thirteen years.
Alexander H. Walker, Jr.
Mr. Walker has served as Director and General Counsel to Videocall
International Corporation since July 1998. Since 1968 Mr. Walker has served as
Chairman of the Board of the Nevada Agency and Trust Company in Reno, Nevada, a
licensed and registered Trust Company and Transfer Agent in business since 1903.
From 1944 to 1946 Mr. Walker served in the United States Army, rising to the
rank of Captain, Infantry in the United States Army Reserve. He received his
B.A. from Waynesburg College (1950) and his J.D. from the University of
Pittsburgh School of Law in 1952. Since 1956, Mr. Walker has been a practicing
attorney, with his practice including all phases of trial work, with a
particular emphasis on corporate securities matters. From 1954 to 1955 he served
first as Attorney Advisory, and then 1955-1956 as Attorney in Charge of the Salt
Lake (UT) Branch for the United States Securities and Exchange Commission (SEC).
From 1956 to date, he has maintained a private practice as an Attorney.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK - THE COMPANY
The Company's authorized capital stock consists of 10,000,000 shares of
Talk Visual Common Stock and 5,000,000 shares of Preferred Stock, issuable in
series. See "Proposal 2. The Reincorporation Proposal."
Common Stock. Holders of Talk Visual Common Stock have one vote for each
share held, are entitled to cumulate their votes for the election of Directors
but do not have preemptive rights. The issued and outstanding shares of Talk
Visual Common Stock are, and all shares of Talk Visual Common Stock to be issued
in connection with the Merger and upon the exercise of outstanding options and
warrants will be, validly issued, fully paid and nonassessable. All shares of
Talk Visual Common Stock have equal rights and, subject to the rights of the
holders of the Preferred Stock, are entitled to receive such dividends, if any,
as may be declared from time to time by the Company Board out of funds legally
available therefor and to share pro rata in the net assets of the Company
available for distribution to holders of Talk Visual Common Stock upon
liquidation.
Preferred Stock. The Company Board may without further action by the
Company's stockholders, from time to time, direct the issuance of shares of
Preferred Stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. The rights of any such
series may include voting and conversion rights which would adversely affect the
voting power of the holders of Talk Visual Common Stock. Satisfaction of any
dividend preferences of outstanding Preferred Stock would reduce the amount of
funds available for payment of dividends on Talk Visual Common Stock. Also, the
holders of Preferred Stock would normally be entitled to receive a preference
payment in the event of any liquidation, dissolution or winding-up of the
Company before any payment is made to the holders of the Talk Visual Common
Stock.
The Company presently has 975,000 shares of one series of Preferred Stock,
the Class A Preferred Stock, Series 1999-A ("Series A Stock"), outstanding. Each
share of Series A stock is entitled to cumulative dividends, before any
dividends are paid on the Talk Visual Common Stock, at the annual rate of $0.095
per share, payable monthly. The Series A Stock is redeemable by the Company at
any time, in whole or in part, at the price of $1.15 per share, plus accrued and
unpaid cumulative dividends. Each share of Series A Stock may be converted at
the option of the holder thereof into a number of shares of Talk Visual Common
Stock, at any time prior to February 24, 2002, determined by dividing $1.00 by
the lesser of $3.25 or the average of the lowest three day closing bid prices of
the Talk Visual Common Stock during the 25 trading days prior to the conversion
date, subject to adjustments for stock splits, stock dividends and the like.
Upon any liquidation of the Company, each share of Series A Stock is entitled to
receive an amount of $1.00 per share, plus accrued and unpaid cumulative
dividends, before any distribution is made upon the Talk Visual Common Stock.
Except as otherwise required by applicable law, the shares of Series A Stock
have no voting rights. Payments on the Series A Stock must be made in Canadian
Dollars converted on the basis of US$1.00 = Cdn$1.524. The Company does not
presently intend to issue any other series of Preferred Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK - VIDEOCALL
Videocall is authorized to issue 50,000,000 shares of common stock, $.01
par value. There are 30,396,750 shares of Videocall common stock currently
issued and outstanding. Each holder of Videocall common stock is entitled to one
vote per share owned on all matters submitted to a vote of the shareholders.
Holders of Videocall common stock will be entitled to receive ratably any
dividends declared by the Videocall Board of Directors out of funds legally
available for dividends. If Videocall is liquidated, dissolved or wound up,
holders of the Videocall common stock have the right to a ratable portion of the
assets remaining after payment of liabilities. All shares of Videocall common
stock outstanding are fully paid and non-assessable.
LEGAL MATTERS
The validity of the shares of Talk Visual Common Stock being offered
hereby is being passed upon for the Company by Haythe & Curley, 237 Park Avenue,
New York, New York 10017.
EXPERTS
The financial statements of Talk Visual Corporation (formerly known as
Legacy Software, Inc.) as of December 31, 1996 and 1997 and for each of the two
years in the period ended December 31, 1997 as presented herein, have been
audited by BDO Seidman, LLP, Independent Certified Public Accountants as stated
in their reports. The report dated March 12, 1998 included in the financial
statements includes an explanatory paragraph regarding a going concern
uncertainty. Such financial statements have been so included in reliance upon
the reports of such firm given upon their authority as experts in auditing and
accounting.
The financial statements included in this Proxy Statement/Prospectus/
Notification of Merger, as of December 31, 1998, except as they relate to the
unaudited interim periods, have been audited by Mayer Rispler & Company,
Independent Certified Public Accountants as stated in their reports. Such
financial statements have been so included in reliance on the reports of such
firm given upon their authority as experts in auditing and accounting.
PROPOSAL 2. REINCORPORATION PROPOSAL
The Board of Directors of the Company has unanimously approved, subject to
shareholder approval, a proposal to change the Company's state of incorporation
from Delaware to Nevada by means of a merger (the "Reincorporation Merger") of
the Company with and into Talk Visual Corporation, a Nevada corporation ("Talk
Visual (Nevada)"), a newly formed, wholly owned subsidiary of the Company (the
"Reincorporation Proposal"). The principal office of Talk Visual (Nevada) is One
Canal Park, 3rd Floor, Cambridge, Massachusetts 02142, telephone (617) 679-0300.
Talk Visual (Nevada) will be the surviving corporation, the effect of which will
be a change in the law applicable to the Company's corporate affairs from the
Delaware General Corporation Law ("Delaware Law") to the Nevada Business
Corporation Act ("Nevada Law"), including certain differences in shareholders'
rights. See "-Comparison of Shareholder Rights."
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The following discussion summarizes certain aspects of the Reincorporation
Proposal, including certain material differences between Delaware Law and Nevada
Law. This summary is not intended to be a complete description of the
Reincorporation Proposal or the differences between shareholders' rights under
Delaware Law or Nevada Law, and is qualified in its entirety by reference to
o the Plan of Reorganization and Agreement of Merger dated as of June
15, 1999 between the Company and Talk Visual (Nevada) (the
"Reincorporation Merger Agreement") attached hereto as Annex C,
o the Articles of Incorporation of Talk Visual (Nevada) (the "New
Charter") attached hereto as Annex D, and
o the Bylaws of Talk Visual (Nevada) (the "New Bylaws") attached
hereto as Annex E.
Copies of the Company's Certificate of Incorporation (the "Present Charter") and
Bylaws (the "Present Bylaws") are available for inspection at the Company's
executive offices, and copies will be provided to shareholders upon request.
The Company Board has unanimously approved the Reincorporation Proposal
and, for the reasons set forth below, believes that the best interests of the
Company and its shareholders will be served by changing the Company's state of
incorporation from Delaware to Nevada. The Company's shareholders are being
asked to approve the Reincorporation Proposal (including the adoption of the
Reincorporation Merger Agreement and the approval of the New Charter and the New
Bylaws) at the Special Meeting. The Board of Directors unanimously recommends
that the Company's shareholders approve the Reincorporation Proposal.
Approval of the Reincorporation Proposal by the Company's shareholders
will constitute adoption of the Reincorporation Merger Agreement and approval of
the Reincorporation Merger, the New Charter and the New Bylaws. Pursuant to the
terms of the Reincorporation Merger Agreement, the New Charter and New Bylaws
will replace the Present Charter and Present Bylaws as the charter documents
affecting corporate governance and shareholders' rights. See "-Comparison of
Shareholder Rights." Accordingly, shareholders are urged to read carefully this
Proxy Statement and the Annexes attached hereto. In addition, each of the
current directors of the Company are directors of Talk Visual (Nevada). By
voting in favor of the Reincorporation Proposal, the Company's shareholders will
be deemed to have approved of such persons as directors of Talk Visual (Nevada)
without further action. For additional information concerning those directors,
see "Proposal 1. -- The Merger -- Information Concerning the Company --
Management."
Principal Features of the Reincorporation Proposal
At the Effective Date of the Merger (as defined in the Reincorporation
Merger Agreement), the separate existence of the Company will cease and Talk
Visual (Nevada), as the surviving corporation, will succeed to all business,
properties, assets and liabilities of the Company. Each share of Common Stock of
the Company issued and outstanding immediately prior to the Effective Date, and
each share to be issued to the Videocall stockholders in connection with the
Merger with Videocall, will by virtue of the Reincorporation Merger be
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converted into one share of common stock, par value $.001 per share, of Talk
Visual (Nevada) ("Talk Visual (Nevada) Common Stock"). At the Effective Date,
certificates which immediately prior to the Effective Date represented shares of
Common Stock of the Company will be deemed for all purposes to represent the
same number of shares of Talk Visual (Nevada) Common Stock. It will not be
necessary for shareholders of the Company to exchange their existing stock
certificates for stock certificates of Talk Visual (Nevada). However, when
outstanding certificates representing shares of Common Stock of the Company are
presented for transfer after the Reincorporation Merger, new certificates
representing shares of Talk Visual (Nevada) Common Stock will be issued. New
certificates will also be issued upon the request of any shareholder, subject to
normal requirements as to proper endorsement, signature, guarantee, if required,
and payment of applicable taxes, if any.
Following consummation of the Reincorporation Merger, Talk Visual
(Nevada)'s Common Stock will be trading on the OTC Bulletin Board, the market on
which the Common Stock of the Company is currently listed for trading. Talk
Visual (Nevada)'s Common Stock will be listed under the symbol "TVCP." Delivery
of existing stock certificates representing Common Stock of the Company will
constitute "good delivery" of shares of Talk Visual (Nevada) in transactions
subsequent to the Effective Date of the Reincorporation Merger.
Approval of the Reincorporation Proposal will effect a change in the legal
domicile of the Company and certain other changes of a legal nature, as
described in this Proxy Statement. Reincorporation of the Company will not, in
and of itself, result in any change in the business, management, location of the
principal executive offices, assets, liabilities or shareholders' equity of the
Company. The number of directors comprising the Board of Directors of Talk
Visual (Nevada) will be five initially, each of whom is currently a director of
the Company. The chief executive officer of Talk Visual (Nevada) is currently
serving as the chief executive officer of the Company. Shareholders should note
that approval of the Reincorporation Proposal will constitute ratification of
all of the currently serving directors of Talk Visual (Nevada).
Pursuant to the terms of the Reincorporation Merger Agreement, each option
to purchase Common Stock of the Company outstanding immediately prior to the
Effective Date of the Reincorporation Merger, and each option to purchase Common
Stock of the Company to be issued to the Videocall Founders in connection with
the proposed Merger with Videocall, will become an option to purchase Talk
Visual (Nevada) Common Stock, subject to the same terms and conditions as set
forth in the agreements pursuant to which such option was granted. All employee
benefit plans and other agreements and arrangements of the Company will be
continued by Talk Visual (Nevada) upon the same terms and subject to the same
conditions. Approval of the Reincorporation Proposal will constitute approval by
the shareholders of the Company of Talk Visual (Nevada)'s assumption of the
stock option plan and other employee benefit plans and arrangements of the
Company.
Upon approval of the Reincorporation Proposal by the Company's
shareholders, the proposed reorganization will be consummated at such time as
the Boards of Directors of the Company and Talk Visual (Nevada) determine is
advisable. The Reincorporation Merger Agreement provides, however, that the
Reincorporation Merger may be abandoned by the Board of Directors of either the
Company or Talk Visual (Nevada) prior to the Effective Date, either before or
after shareholder approval. In addition, the Reincorporation Merger Agreement
may be
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amended prior to the Effective Date, either before or after shareholder
approval; provided, however, that the Reincorporation Merger Agreement may not
be amended after shareholder approval if such amendment would (1) alter or
change the amount or kind of shares or other consideration to be received by
shareholders in the Reincorporation Merger, (2) alter or change any term of the
New Charter, (3) alter or change any of the terms and conditions of the
Reincorporation Merger Agreement if such alternation or change would adversely
affect the shareholders, or (4) otherwise violate applicable law.
Purpose for Proposed Reincorporation
The primary purpose for reincorporating in Nevada is that the franchise
tax and related fees that the Company pays as a Delaware corporation, and the
franchise tax and related fees that the Company will pay based upon its
increased capitalization as a result of the Proposed Merger with Videocall (see
"Proposal 1. -- The Merger"), are significantly higher than the comparable fees
for a Nevada corporation. Additionally, after considering the advantages and
disadvantages of the Reincorporation Proposal, including the differences between
Delaware Law and Nevada Law, the Board of Directors concluded that the benefits
of being incorporated in Nevada outweigh the benefits of remaining in Delaware,
in light of the detriments of remaining in Delaware, including the continuing
expense of Delaware's annual franchise tax. In light of the foregoing, the Board
of Directors of the Company believes that the best interests of the Company and
its shareholders will be served by changing the Company's state of incorporation
from Delaware to Nevada. See "--Comparison of Shareholder Rights" and
"--Possible Disadvantages of the Reincorporation Proposal."
Comparison of Shareholder Rights
Although the corporate statutes of Nevada and Delaware are substantially
similar, certain differences exist. The most significant differences, in the
judgment of the management of the Company, are summarized below. This summary is
not intended to be complete, and stockholders should refer to the Delaware
General Corporation Law (the "Delaware Law") and the Nevada Business Corporation
Act (the "Nevada Law") to understand how these laws will apply to Talk Visual
(Nevada) and the Company.
Classified Board of Directors
The Delaware Law permits any Delaware corporation to classify its board of
directors into as many as three classes as equally as possible with staggered
terms of office. After initial implementation of a classified board, one class
(consisting of approximately 1/3 of the entire board) will be elected at each
annual meeting of the stockholders to serve for a term of three years or until
their successors are elected to take office. The Nevada Law also permits
corporations to classify boards of directors provided that at least one-fourth
of the total number of directors is elected annually. Since neither the Company
nor Talk Visual (Nevada) have a classified board, there will be no difference in
stockholders' rights with respect to this issue.
Cumulative Voting
Cumulative voting for directors entitles stockholders to cast a number of
votes that is equal to the number of voting shares held multiplied by the number
of directors to be elected.
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Stockholders may cast all such votes either for one nominee or distribute such
votes among up to as many candidates as there are positions to be filled.
Cumulative voting may enable a minority stockholder or group of stockholders to
elect at least one representative to the board of directors where such
stockholders would not otherwise be able to elect any directors.
The Nevada Law permits cumulative voting in the election of directors as
long as certain procedures are followed. A Delaware corporation may provide for
cumulative voting in the corporation's certificate of incorporation.
Since both the Company and Talk Visual (Nevada) utilize cumulative voting,
there will be no significant difference in stockholders' rights with respect to
this issue.
Vacancies
Under the Delaware Law, subject to the rights, if any, of any series of
preferred stock to elect directors and to fill vacancies on the board of
directors, vacancies on the board of directors will be filled by the affirmative
vote of a majority of the remaining directors then in office, even if less than
a quorum. Any director so appointed will hold office for the remainder of the
full term of the class of directors in which the vacancy occurred. Similarly,
the Nevada Law provides that vacancies may be filled by a majority of the
remaining directors, though less than a quorum, unless the articles of
incorporation provide otherwise. In addition, the by-laws of the Company and
Talk Visual (Nevada) address the issue of director vacancies in the same manner.
Therefore, the change from Delaware law to Nevada law will not alter
stockholders' rights with respect to filling vacancies.
Indemnification of Officers and Directors and Advancement of Expenses
Delaware and Nevada law have substantially identical provisions regarding
indemnification by a corporation of its officers, directors, employees and
agents, except Nevada provides broader indemnification in connection with
stockholder derivative lawsuits. Delaware and Nevada law differ in their
provisions for advancement of expenses incurred by an officer or director in
defending a civil or criminal action, suit or proceeding. The Delaware law
provides that expenses incurred by an officer or director in defending any
civil, criminal, administrative or investigative action, suit or proceeding may
be paid by the corporation in advance of the final disposition of the action,
suit or proceeding upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined that he
or she is not entitled to be indemnified by the corporation. Thus, a Delaware
corporation has the discretion to decide whether or not to advance expenses.
Under the Nevada Law, the articles of incorporation, bylaws or an agreement made
by the corporation may provide that the corporation must pay advancements of
expenses in advance of the final disposition of the action, suit or proceedings
upon receipt of an undertaking by or on behalf of the director or officer to
repay the amount if it is ultimately determined that he or she is not entitled
to be indemnified by the corporation. Thus, a corporation may have no discretion
to decide whether or not to advance expenses. There will be no difference in
stockholders' rights with respect to this issue because the New Bylaws and the
Present Bylaws each provides for advancement of expenses.
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The Company was obligated to indemnify a narrower range of people than
Talk Visual (Nevada). Whereas the New Bylaws provides for Talk Visual (Nevada)
to indemnify directors, officers, employees and some agents, the Present Bylaws
only addressed indemnification of directors and officers. In this regard, it
should be noted that the Company Board retained the discretionary authority to
authorize the indemnification of officers, employees and agents, subject to
certain conditions under the Delaware Law.
Limitation on Personal Liability of Directors
A Delaware corporation is permitted to adopt provisions in its certificate
of incorporation limiting or eliminating the liability of a director to a
company and its stockholders for monetary damages for breach of fiduciary duty
as a director, provided that such liability does not arise from certain
proscribed conduct, including breach of the duty of loyalty, acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law or liability to the corporation based on unlawful dividends or
distributions or improper personal benefit. The Present Charter limits the
liability of directors to the Company to the fullest extent permitted by law.
While the Nevada Law has a similar provision permitting the adoption of
provisions in the articles of incorporation limiting personal liability, the
Nevada provision differs in two respects. First, the Nevada provision applies to
both directors and officers. Second, while the Delaware provision excepts from
the limitation on liability the breach of the duty of loyalty, the Nevada
counterpart does not contain this exception. Thus, the Nevada provision
expressly permits a corporation to limit the liability of officers, as well as
directors, and permits limitation of liability arising from a breach of the duty
of loyalty. The New Charter limits the liability to Talk Visual (Nevada) of
directors and officers. Therefore, the Company had a narrower limitation on
liability, and more parties were potentially liable to the Company. The Company,
however, could determine to indemnify such persons in its discretion subject to
the conditions of the Delaware Law.
Dividends
The Delaware Law is more restrictive than the Nevada Law with respect to
when dividends may be paid. Under the Delaware Law, unless otherwise provided in
the certificate of incorporation, a corporation may declare dividends, out of
surplus, or if no surplus exists, out of net profits for the fiscal year in
which the dividend is declared and/or the preceding fiscal year (provided that
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital represented
by the issued and outstanding stock of all classes having a preference upon the
distribution of assets). In addition, the Delaware Law provides that a
corporation may redeem its shares only out of surplus.
The Nevada Law provides that no distribution (including dividends on, or
redemption or repurchases of, shares of capital stock) may be made if, after
giving effect to such distribution, the corporation would not be able to pay its
debts as they become due in the usual course of business, or the corporation's
total assets would be less than the sum of its total liabilities plus the amount
that would be needed at the time of a liquidation to satisfy the preferential
rights of preferred stockholders.
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Restrictions on Business Combinations
Both the Delaware Law and the Nevada Law contain provisions restricting
the ability of a corporation to engage in business combinations with an
interested stockholder. Under the Delaware Law, a corporation is not permitted
to engage in a business combination with any interested stockholder for a
three-year period following the date such stockholder became an interested
stockholder, unless the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the board of directors
of the corporation before the person becomes an interested stockholder; the
interested stockholder acquires 85% or more of the outstanding voting stock of
the corporation in the same transaction that makes it an interested stockholder
(excluding shares owned by persons who are both officers and directors of the
corporation, and shares held by certain employee stock ownership plans); or on
or after the date the person becomes an interested stockholder, the business
combination is approved by the corporation's board of directors and by the
holders of at least 66% of the corporation's outstanding voting stock at an
annual or special meeting, excluding shares owned by the interested stockholder.
The Delaware Law defines "interested stockholder" generally as a person who owns
15% or more of the outstanding shares of a corporation's voting stock.
The Nevada Law regulates business combinations more stringently. First, an
interested stockholder is defined as a beneficial owner of ten percent (10%) or
more of the voting power. Second, the three-year moratorium can be lifted only
by advance approval by a corporation's board of directors, as opposed to
Delaware's provision that allows interested stockholder combinations at the time
of the transaction with stockholder approval. Finally, after the three-year
period, combinations remain prohibited unless they are approved by the board of
directors, the disinterested stockholders or a majority of the outstanding
voting power not beneficially owned by the interested party, or the interested
stockholders satisfy certain fair value requirements. As in Delaware, a Nevada
corporation may opt-out of the statute with appropriate provisions in its
articles of incorporation.
Amendment to Certificate/Articles of Incorporation and Bylaws
Both the Delaware Law and the Nevada Law require the approval of the
holders of a majority of all outstanding shares entitled to vote, with each
stockholder being entitled to one vote for each share so held, to approve
proposed amendments to a corporation's certificate/articles of incorporation.
Neither state requires stockholder approval for the board of directors of a
corporation to fix the voting powers, designations, preferences, limitations,
restrictions and rights of a class of stock provided that the corporation's
organizational documents grant such power to its board of directors. The holders
of the outstanding shares of a particular class are entitled to vote as a class
on a proposed amendment if the amendment would alter or change the power,
preferences or special rights of one or more series of any class so as to affect
them adversely. The number of authorized shares of any such class of stock may
be increased or decreased (but not below the number of shares then outstanding)
by the affirmative vote of the holders of a majority of the stock entitled to
vote thereon (without a class vote) if so provided in any amendment to the
articles of incorporation or resolutions creating such class of stock.
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Actions by Written Consent of Stockholders
The Nevada Law and the Delaware Law each provide that, unless the charter
provides otherwise, any action required or permitted to be taken at a meeting of
the stockholders may be taken without a meeting if the holders of outstanding
stock having at least the minimum number of votes that would be necessary to
authorize or take such action at a meeting consents to the action in writing. In
addition, the Delaware Law requires the corporation to give prompt notice of the
taking of corporate action without a meeting by less than unanimous written
consent to those stockholders who did not consent in writing.
Stockholder Vote for Mergers and Other Corporate Reorganizations
In general, both jurisdictions require authorization by an absolute
majority of outstanding shares entitled to vote, as well as approval by the
board of directors, with respect to the terms of a merger or a sale of
substantially all of the assets of the corporation. Neither the Nevada Law nor
the Delaware Law requires stockholder approval by the stockholders of a
surviving corporation in a merger or consolidation as long as the surviving
corporation issues no more than 20% of its voting stock in the transaction.
Dissenters' Rights
In both jurisdictions, dissenting stockholders of a corporation engaged in
certain major corporate transactions are entitled to appraisal rights. Appraisal
rights permit a stockholder to receive cash equal to the fair market value of
the stockholder's shares (as determined by agreement of the parties or by a
court), in lieu of the consideration such stockholder would otherwise receive in
any such transaction.
Under the Delaware Law, appraisal rights are generally available for the
shares of any class or series of stock of a Delaware corporation in a merger or
consolidation, provided that no appraisal rights are available for the shares of
any class or series of stock which, at the record date for the meeting held to
approve such transaction, were either (1) listed on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
("NASD") or (2) held of record by more than 2,000 stockholders. Even if the
shares of any class or series of stock meet the requirements of clause (1) or
(2) above, appraisal rights are available for such class or series if the
holders thereof receive in the merger or consolidation anything except:
o shares of stock of the corporation surviving or resulting from such
merger or consolidation;
o shares of stock of any other corporation which at the effective date
of the merger or consolidation is either listed on a national
securities exchange, or designated as a national market system
security on an interdealer quotation system by the NASD or held of
record by more than 2,000 stockholders;
o cash in lieu of fractional shares; or
o any combination of the foregoing.
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No appraisal rights are available to stockholders of the surviving corporation
if the merger did not require their approval.
Under the Nevada Law, a stockholder is entitled to dissent from, and
obtain payment for the fair value of his or her shares in the event of
consummation of a plan of merger or plan of exchange in which the corporation is
a party and, to the extent that the articles of incorporation, bylaws or a
resolution of the board of directors provides that voting or nonvoting
stockholders are entitled to dissent and obtain payment for their shares, any
corporate action taken pursuant to a vote of the stockholders. As with the
Delaware Law, the Nevada Law provides an exception to dissenters' rights.
Holders of securities listed on a national securities exchange or designated as
a national market system security on an interdealer quotation system by the NASD
or held by more than 2,000 stockholders of record are generally not entitled to
dissenters' rights.
Stockholder Inspection Rights
The Delaware Law grants any stockholder the right to inspect and to copy
for any proper purpose the corporation's stock ledger, a list of its
stockholders, and its other records. A proper purpose is one reasonably related
to such person's interest as a stockholder. Directors also have the right to
examine the corporation's stock ledger, a list of its stockholders and its other
records for a purpose reasonably related to their positions as directors.
The Nevada Law provides the right to inspect the corporation's financial
records for only a shareholder who owns at least 15% of the corporation's issued
and outstanding shares, or has been authorized in writing by the holder(s) of at
least 15% of the issued and outstanding shares. To inspect the corporation's
stock ledger, the stockholder must have been a stockholder of record for six
months prior to demanding inspection.
Derivative Suits
Under both the Delaware Law and the Nevada Law, a stockholder may bring a
derivative action on behalf of the corporation only if the stockholder was a
stockholder of the corporation at the time of the transaction in question or the
stockholder acquired the stock thereafter by operation of law.
Special Meetings of Stockholders
The Delaware Law permits special meetings of stockholders to be called by
the board of directors or by any other person authorized in the certificate of
incorporation or bylaws to call a special stockholder meeting. The Nevada Law
does not address the manner in which special meetings of stockholders may be
called.
Possible Disadvantages of the Reincorporation Proposal
Despite the belief of the Board of Directors that the Reincorporation
Proposal is in the best interests of the Company and its shareholders,
shareholders should be aware that may provisions in the New Charter, the New
Bylaws and under Nevada Law have not yet received extensive scrutiny and
interpretation by the Nevada courts. Delaware Law is widely regarded as the most
extensive and well-defined body of corporate law in the United States. Because
of
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Delaware's prominence as a state of incorporation for many major corporations,
both the legislature and courts in Delaware have demonstrated an ability and
willingness to act quickly and effectively to meet changing business needs.
Furthermore, Delaware corporations are often guided by the extensive body of
court decisions interpreting Delaware's corporate law. The Board of Directors,
however, believes Nevada Law will provide the Company with the comprehensive,
flexible structure which it needs to operate effectively.
Tax Consequences
The Company has received an opinion from its special counsel, Haythe &
Curley, New York, New York, to the effect that the proposed Reincorporation
Merger will be a tax free reorganization under the Internal Revenue Code of
1986, as amended. Accordingly:
no gain or loss will be recognized for federal income tax purposes by the
shareholders of the Company as a result of the Reincorporation Merger and
the basis and holding period for the stock of Talk Visual (Nevada)
received by the shareholders of the Company in exchange for Common Stock
of the Company will be the same as the basis and holding period of the
stock of the Company exchanged therefor.
The Reincorporation Merger will have no federal income tax effect on the
Company, State, local or foreign income tax consequences to shareholders may
vary from the federal tax consequences described above, and shareholders should
consult their own tax advisors as to the effect of the Reincorporation Proposal
under applicable state, local or foreign income tax laws.
Abandonment
Notwithstanding a favorable vote of the shareholders, the Company reserves
the right by action of its Board of Directors to abandon the proposed
reincorporation prior to the Effective Date of the Reincorporation Merger if it
determines that such abandonment is in the best interests of the Company. The
Board of Directors has made no determination as to any circumstances which may
prompt a decision to abandon the proposed reincorporation.
Vote Required
Pursuant to Delaware Law and the Present Charter, the affirmative vote of
the holders of a majority of the outstanding shares of the Company's Common
Stock is required for approval of the Reincorporation Merger to effectuate the
reincorporation of the Company in Nevada. Approval of the Reincorporation
Proposal by shareholders of the Company will constitute specific approval of the
Reincorporation Merger Agreement, the New Charter and New Bylaws, and of all
other transactions and proceedings relating to the Reincorporation Merger,
including ratification of the directors of the Company, the assumption by Talk
Visual (Nevada) of the Company's stock option plan and all other employee
benefit plans and agreements, and the obligations of the Company under such
plans and agreements.
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The Board of Directors has unanimously approved the Reincorporation
Proposal and the Reincorporation Merger which will effectuate the proposed
reincorporation and unanimously recommends a vote for approval of the
Reincorporation Proposal.
OTHER MATTERS
At the time of preparation of this Proxy Statement, the Board knows of no
other matters which will be acted upon at the Special Meeting other than the
approval of the Merger Agreement and the transactions contemplated thereby and
the approval of the Reincorporation Proposal. If any other matters are presented
for action at the Special Meeting or at any adjournment or adjournments thereof,
it is intended that the proxies will be voted with respect thereto in accordance
with the best judgment and in the discretion of the proxy holders.
MISCELLANEOUS
All costs relating to the solicitation of proxies of holders of Common
Stock will be borne by the Company. Proxies may be solicited by officers,
directors and regular employees of the Company personally, by mail or by
telephone or otherwise.
It is important that proxies be returned promptly. Stockholders who do not
expect to attend the Special Meeting in person are urged to mark, sign and date
the accompanying proxy and mail it in the enclosed return envelope, which
requires no postage if mailed in the United States, so that their votes can be
recorded.
Stockholder Proposals
As indicated in the Company's proxy statement dated April 30, 1998,
stockholder proposals intended to be presented at the 1999 Annual Meeting of
Stockholders of the Company had to have been received by the Company at its
principal executive offices by January 15, 1999 in order to be considered for
inclusion in the Company's proxy statement relating to such meeting. Since no
stockholder notified the Company by March 16, 1999 of an intent to be present at
the Company's 1999 Annual Meeting of Stockholders in order to present a proposal
for a vote, the Company will have the right to exercise its discretionary
authority to vote against any proposal, if presented, without including any
information about such proposal in its proxy materials.
WHERE YOU CAN FIND MORE INFORMATION
The Company is subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at Seven
World Trade Center (13th Floor), New York, New York 10048. Copies of such
material may be obtained by mail from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates. The Commission maintains a Web site that
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contains reports, proxy and information statements and other materials that are
filed through the Commission's Electronic Data Gathering, Analysis, and
Retrieval system. This Web site can be accessed at http://www.sec.gov.
No person has been authorized to give any information or to make any
representations not contained herein, and any information or representation not
contained herein must not be relied upon as having been authorized by the
Company, the Transitory Subsidiary or Videocall. Neither the delivery hereof nor
any distribution of the securities being offered pursuant hereto shall, under
any circumstances, create an implication that there has been no change in the
information set forth herein since the date of this Proxy
Statement/Prospectus/Notification of Merger. This Proxy
Statement/Prospectus/Notification of Merger does not constitute an offer or
solicitation by anyone in any state in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such offer or
solicitation.
92
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Talk Visual Corporation
Report of Independent Certified Public Accountants............................................F-2
Report of Independent Certified Public Accountants............................................F-3
Balance Sheets at December 31, 1998 and 1997..................................................F-4
Statements of Operations for the years ended December 31, 1998, 1997 and 1996.................F-5
Statements of Stockholders' Equity for the years ended December 31, 1998,
1997 and 1996........................................................................F-6
Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.................F-7
Notes to Financial Statements.................................................................F-9
Videocall International Corporation
Report of Independent Certified Public Accountants............................................F-24
Consolidated Balance Sheet at December 31, 1998...............................................F-25
Consolidated Statement of Operations for the initial eleven month period ended
December 31, 1998....................................................................F-26
Consolidated Statement of Stockholders' Equity for the Period February 2, 1998
(date of inception), to December 31, 1998............................................F-27
Consolidated Statement of Cash Flows for the initial eleven month period
ended December 31, 1998..............................................................F-28
Notes to Consolidated Financial Statements....................................................F-30
Talk Visual Corporation (Unaudited)
Consolidated Balance Sheets at March 31, 1999 and December 31, 1998...........................F-39
Consolidated Statement of Operations for the three months ended March 31, 1999
and 1998.............................................................................F-40
Consolidated Statements of Cash Flows for the three months ended March 31, 1999
and 1998.............................................................................F-41
Notes to Consolidated Financial Statements....................................................F-43
Videocall International Corporation (Unaudited)
Consolidated Balance Sheet at March 31, 1999..................................................F-47
Consolidated Statement of Operations for the three months ended March 31, 1999................F-49
Consolidated Statement of Cash Flows for the three months ended March 31, 1999................F-50
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Stockholders of
Talk Visual Corporation
(Formerly Legacy Software, Inc.)
Cambridge, Massachusetts
We have audited the accompanying balance sheet of Talk Visual Corporation
(formerly Legacy Software, Inc.) as of December 31, 1998, and the statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion of these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedule are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation of the financial statements and schedule. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Talk Visual Corporation
(formerly Legacy Software, Inc.) as of December 31, 1998, and the results of its
operations and its cash flows for the year ended in conformity with generally
accepted accounting principles.
Mayer Rispler & Company, P.C.
Brooklyn, New York
March 29, 1999
F-2
<PAGE>
Report of Independent Certified Public Accountants
To the Stockholders of
Legacy Software, Inc.
Los Angeles, California
We have audited the accompanying balance sheet of Legacy Software, Inc. as of
December 31, 1997 and the related statements of operations, stockholders' equity
and cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation
of the financial statements. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Legacy Software, Inc. as of
December 31, 1997 and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has never achieved
operating profits, and in addition, at December 31, 1997, has negative working
capital, minimal cash, significant indebtedness and liquidity problems. These
matters raise substantial doubt as to the Company's ability to continue as a
going concern. The Company's future operations are dependent upon generating
funds to finance the marketing and expansion of its operations. Management plans
to generate these funds through a possible merger and the issuance of the
Company's stock. There is no assurance that this will generate sufficient funds
to enable the Company to continue its operations for the next twelve months.
The financial statements do not include any adjustments that might results from
the outcome of this uncertainty.
BDO Seidman, LLP
Los Angeles, California
March 12, 1998
F-3
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 153,608 $ 14,464
Accounts receivable, net of allowances
for doubtful accounts of $12,500 and $12,500 31,243 148,606
Inventory 8,250 22,320
Other receivables 70,000 21,016
Subscriptions receivable 1,743,000
Marketable securities 89,210 --
Other current assets 6,746 22,217
------------ ------------
Total current assets 2,102,057 228,623
------------ ------------
Product development costs, net 381,604 1,255,570
Property and equipment, net 18,500 128,910
Other assets 1,400 1,829
------------ ------------
Total assets $ 2,503,561 $ 1,614,932
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 129,968 $ 55,567
Accrued expenses 16,685 18,466
Deferred revenues -- 43,010
Notes payable and current portion
of long-term debt 281,066 783,619
------------ ------------
Total current liabilities 427,719 900,662
------------ ------------
LONG-TERM DEBT, net of current portion 75,000 161,882
------------ ------------
Total Liabilities 502,719 1,062,544
------------ ------------
COMMITMENTS -- --
STOCKHOLDERS' EQUITY
Preferred Stock, par value $.001 per share, 5,000,000
shares authorized; none issued and outstanding
Common Stock, par value $.001 per share, 10,000,000
shares authorized: 1,393,418 and 885,000 shares
issued and outstanding 1,393 885
Stock Subscribed 382 --
Additional paid in capital 10,000,719 7,062,557
Accumulated deficit (7,829,760) (6,511,054)
Accumulated other comprehensive loss (14,892) --
Stock Subscriptions receivable (157,000) --
------------ ------------
Total stockholders' equity 2,000,842 552,388
------------ ------------
Total Liabilities and Stockholders' Equity $ 2,503,561 $ 1,614,932
============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
---- ---- ----
REVENUE
Royalties $ 206,452 $ 411,465 $ 768,716
Software sales 52,960 85,723 13,501
Corporate services 80,000
Consulting 12,125
----------- ----------- -----------
Total revenue 339,412 497,188 794,342
----------- ----------- -----------
COSTS AND EXPENSES
Cost of royalties 9,558 211,308 76,507
Cost of software sales 33,254 98,881 9,745
Product development 1,008,640 619,516 1,664,478
General & administrative 941,667 1,351,127 1,585,084
Selling 77,309 267,376 91,995
----------- ----------- -----------
Total costs and expenses 2,070,428 2,548,208 3,427,809
----------- ----------- -----------
LOSS FROM OPERATIONS (1,731,016) (2,051,020) (2,633,467)
INTEREST EXPENSE (47,626) (123,571) (459,315)
INTEREST INCOME 19,492 108,240
OTHER EXPENSE (32,862)
OTHER INCOME 192,798
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM (1,618,706) (2,155,099) (2,984,542)
EXTRAORDINARY ITEM 300,000
-----------
NET LOSS $(1,318,706) $(2,155,099) $(2,984,542)
=========== =========== ===========
NET LOSS PER COMMON SHARE
BASIC AND DILUTED
BEFORE EXTRAORDINARY ITEM $ (1.54) $ (2.51) $ (4.78)
EXTRAORDINARY ITEM $ 0.28
----------- ----------- -----------
NET LOSS PER COMMON SHARE $ (1.26) $ (2.51) $ (4.78)
=========== =========== ===========
WEIGHTED AVERAGE COMMON STOCK SHARES
OUTSTANDING
BASIC AND DILUTED 1,054,175 858,211 623,968
See accompanying notes to financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
Common Shares Additional
-------------------------------- Stock Paid-In
Shares Amount Subscribed Capital
---------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1996................ 247,000 $ 247 $ 546,576
Issuance of common shares in
exchange for services................ 2,400 2 14,398
Issuance of common shares in
conversion of note payable........... 178,117 178 699,822
Issuance of common shares in
initial public offering.............. 383,333 383 6,899,617
Offering costs associated with
initial public offering.............. -- -- (1,701,952)
Issuance of common shares in
acquisition of research and
development.......................... 11,111 11 233,327
Issuance of common shares through
employee stock purchase plan......... 2,410 2 28,918
Issuance of common shares in
exchange for services................ 16,667 17 99,983
Compensation related to nonemployee
stock options........................ -- -- 39,907
Net loss................................ -- -- --
--------- -------------- -------------- --------------
BALANCE, December 31, 1996.............. 841,038 841 6,860,595
Issuance of common shares through
employee stock purchase plan......... 2,614 3 23,523
Issuance of common shares for
conversion of warrants............... 41,348 41 162,459
Compensation related to nonemployee
stock options........................ 15,980 15,980
Net loss................................
--------- -------------- -------------- --------------
BALANCE, December 31, 1997.............. 885,000 885 7,062,557
Issuance of common shares in
private placement on June 30,
1998................................. 72,667 73 109,177
Issuance of common shares on
exercise of warrants................. 19,084 19 74,981
Issue of common stock in private
placement on September 14, 1998...... 400,000 400 199,600
Subscription for common shares in
private placement on
September 22, 1998................... 102 1,999,898
Issuance of common stock for
services............................. 16,667 16 27,484
Subscription for common stock for
investment on December 18, 1998...... 52 104,050
Subscription for common stock in
private placement on
December 31, 1998.................... 200 349,800
Agreement for common shares in
exchange for debt.................... 28 73,172
Net loss................................
Comprehensive income - unrealized
loss on marketable securities........
--------- -------------- -------------- --------------
BALANCE, December 31, 1998.............. 1,393,418 $ 1,393 $ 382 $ 10,000,719
<CAPTION>
Accumulated
Stock Other
Subscription Comprehensive Accumulated
Receivable Loss Deficit Totals
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1996................ $ (1,371,413) $ (824,590)
Issuance of common shares in
exchange for services................ -- 14,400
Issuance of common shares in
conversion of note payable........... -- 700,000
Issuance of common shares in
initial public offering.............. -- 6,900,000
Offering costs associated with
initial public offering.............. -- (1,701,952)
Issuance of common shares in
acquisition of research and
development.......................... -- 233,338
Issuance of common shares through
employee stock purchase plan......... -- 28,920
Issuance of common shares in
exchange for services................ -- 100,000
Compensation related to nonemployee
stock options........................ -- 39,907
Net loss................................ (2,984,542) (2,984,542)
-------------- -------------- -------------- --------------
BALANCE, December 31, 1996.............. (4,355,955) 2,505,481
Issuance of common shares through
employee stock purchase plan......... 23,526
Issuance of common shares for
conversion of warrants............... 162,500
Compensation related to nonemployee
stock options........................
Net loss................................ (2,155,099) (2,155,099)
-------------- -------------- -------------- --------------
BALANCE, December 31, 1997.............. (6,511,054) 552,388
Issuance of common shares in
private placement on June 30,
1998................................. 109,250
Issuance of common shares on
exercise of warrants................. 75,000
Issue of common stock in private
placement on September 14, 1998...... 200,000
Subscription for common shares in
private placement on
September 22, 1998................... (157,000) 1,843,000
Issuance of common stock for
services............................. 27,500
Subscription for common stock for
investment on December 18, 1998...... 104,102
Subscription for common stock in
private placement on
December 31, 1998.................... 350,000
Agreement for common shares in
exchange for debt.................... 73,200
Net loss................................ (1,318,706) (1,318,706)
Comprehensive income - unrealized
loss on marketable securities........ (14,892) (14,892)
-------------- -------------- -------------- --------------
BALANCE, December 31, 1998.............. $ (157,000) $ (14,892) $ (7,829,760) $ 2,000,842
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(1,318,706) $(2,155,099) $(2,984,542)
Adjustments to reconcile net loss to net cash
used in operating activities:
Provision for doubtful accounts 62,500 6,877
Amortization of product development costs 36,712 134,279 76,507
Writedown of product development costs 859,424 75,000 --
Amortization of deferred loan fees and original
issue discount 355,307
Depreciation 74,392 99,614 57,399
Due former co-development partner (300,000)
(Gain) on sale of assets and assumption of
debt by third party (153,235)
(Gain) loss on disposal of property and
equipment 178,537 144
Reduction of property and equipment to Net Realizable Value 35,092
Stock based compensation expense 15,980 44,245
Issuance of common stock in exchange for
services 31,750 -- 14,400
Issuance of common stock in acquisition of
research and development 233,338
Increase (decrease) in cash from changes in:
Accounts receivable, net 117,363 (159,967) (6,691)
Other receivables (48,984) 104,872 (125,888)
Inventories 14,070 (22,320)
Other assets 15,471 (323) (16,624)
Accounts payable 74,401 (111,530) 157,145
Accrued expenses (1,781) (19,896) (5,419)
Accrued vacation (32,127) 43,101
Payable to former co-development partner 400,000
Development expense co-funding billings in
excess of development expense co-funding
recognized (54,637)
Deferred revenues (43,010) 2,622 40,388
Accrued interest 80,000 (148,550)
----------- ----------- -----------
Net cash used in operating activities (607,041) (1,747,858) (1,913,500)
----------- ----------- -----------
Cash flows from investing activities:
Note receivable (50,000)
Purchase of property and equipment (6,052) (5,238) (388,829)
Proceeds from the disposition of property and
equipment 6,978 7,438 7,750
Unrealized loss on marketable investments available for sale (14,892)
Additions to product development costs (22,170) (204,372) (1,260,478)
----------- ----------- -----------
Net cash used in investing activities (36,136) (252,172) (1,641,557)
----------- ----------- -----------
Cash flows from financing activities:
Restricted cash 55,240 (55,240)
Payments under line of credit (35,250) 35,250
Proceeds from note payable 75,000
Increase in short term borrowings 29,104
Advances for product development and operations 44,317
Payments on notes payable and long term debt (75,350) (71,301) (365,534)
Borrowings on notes payable and long term debt
Proceeds from private placement of convertible note
Net proceeds from initial public offering -- 5,355,589
Proceeds from private placements for common stock 709,250
Exercise of Common Stock Warrants 75,000 162,500
Issuance of stock under employee stock purchase plan 23,526 24,581
----------- ----------- -----------
Net cash provided by financing activities 782,321 209,715 4,994,646
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 139,144 (1,790,315) 1,439,589
Cash and cash equivalents, at beginning of period 14,464 1,804,779 365,190
----------- ----------- -----------
Cash and cash equivalents, at end of period $ 153,608 $ 14,464 $ 1,804,779
=========== =========== ===========
</TABLE>
F-7
<PAGE>
Supplemental disclosure of cash flow information
(a) Non-cash transactions
On January 23, 1996, the Company issued 2,400 shares of common stock to an
individual for consulting services.
In May, 1996, $700,000 of a convertible note payable to a trust company
was converted into common stock of the Company.
On August 30, 1996, the Company issued 11,111 shares of common stock to
acquire substantially all of the assets of an internet technology company,
which consisted primarily of purchased research and development (Note 13).
On November 1, 1996, the Company issued 16,667 shares of common stock to
an individual in satisfaction of accrued compensation in the amount of
$100,000 (Note 8).
During the years ended December 31, 1997 and December 31, 1996, the
Company recorded $15,980 and $39,907 respectively representing
compensation in conjunction with nonemployee stock options (Notes 8 and
9).
In September 1998 the Company issued 16,667 shares of common stock in
exchange for services.
On December 18, 1998, the Company agreed to issue 52,051 shares of common
stock in exchange for the contribution of a short term investment with a
market value of $104,102.
In December, 1998, the Company agreed to issue 28,150 shares of common
stock for the cancellation of a note payable including accrued interest in
the amount of $73,200.
<TABLE>
<S> <C> <C> <C>
Sale of assets and assumption of debt by a third party $147,935
----------------------------------------
Reduction of debt by a former co-development partner $300,000
----------------------------------------
(b) Cash paid during the period for:
Interest $47,626 $43,569 $252,000
----------------------------------------
Income taxes $1,000
----------------------------------------
</TABLE>
See accompanying notes to financial statements
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1 -- Summary of Significant Accounting Policies
Business
Legacy Software, Inc., renamed Talk Visual Corporation February 26, 1999 (the
"Company") was reincorporated in Delaware in March 1996. On September 8, 1998
the Company and Videocall International Corporation ("Videocall") announced that
the two companies had entered into a Letter of Intent for the Company to
purchase the common shares of Videocall in exchange for the Company's common and
preferred stock. On September 14, 1998 the two companies signed an Agreement and
Plan of Merger ("Merger Plan") detailing the terms of the transaction, whereby
Videocall will merge (the "Merger") into a newly formed, wholly owned subsidiary
of the Company. In accordance with the terms of the Letter of Intent, the
officers of Videocall and certain Board Members of Videocall were elected to the
Board of the Company, and the existing Members of the Board of the Company
resigned, thus making Videocall a related entity. Videocall is a development
stage company formed to provide videocalling services to businesses and
consumers. Videocall is in the process of developing international locations
through strategic partnerships and wholly owned outlets. The Board of Directors
of the Company and the Board of Directors of Videocall have approved the Merger.
The parties are currently preparing a definitive Proxy Statement and
Registration Statement on Form S-4 to be submitted for stockholder approval of
the Merger Plan. Upon the approval by stockholders, it is the intent of the
Company to exit its' CD-ROM software development activities, to determine the
economic value of sale or retention of existing products and going forward to
focus entirely on Videocall operations. At December 31, 1998, the Company had
ceased developing and marketing software products and was focusing on
consummating the Merger with Videocall. Also, subject to approval of the Merger
Plan, it is the intent of the Company to reincorporate from Delaware to Nevada.
Use of Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with an initial maturity of three months or
less to be cash equivalents.
Inventory
Inventory, which consists of finished goods, is valued at the lower of cost or
market. Cost is determined by the first-in, first-out (FIFO) method.
Stock Subscriptions Receivable
On September 22, 1998 a private placement of $2,000,000 for 2,040,816 shares of
Common Stock was subscribed to by third party investors to provide additional
capital to the Company for use in the merged Company/Videocall operations. Of
the $1,900,000 still due under the subscriptions at year end, through March 31,
1999, $1,743,000 has been received in cash which has cleared as collected funds;
the balance of $157,000 has been received as other assets.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation on property and equipment is computed using the straight-line
method over the estimated useful lives of the assets, which range from three to
seven years.
During the year ended December 31, 1998, the Company adjusted the carrying value
of all fixed assets to net realizable value. This resulted in a charge to
operating expense of $44,071.
Note 1 -- Summary of Significant Accounting Policies (Continued)
F-9
<PAGE>
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes." Under the
asset and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by
Income Taxes (continued)
applying enacted statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities.
Under SFAS 109, deferred tax assets may be recognized for temporary differences
that will result in deductible amounts in future periods. A valuation allowance
is recognized, if on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax asset will not be realized.
Revenue Recognition
Royalty Revenue
Royalty revenues consist of royalties earned on sales of software developed with
co-development partners or sales made by distribution partners, from which the
Company earns a specified percentage of the sales price or a specified dollar
amount per unit. Royalty revenues on consignment shipments made by the
co-development partners are only recognized when both (i) the Company can
reasonably estimate the product sell-through from its co-development partners
has occurred and (ii) the Company can comply with Statement of Financial
Accounting Standards No. 48 (SFAS 48), "Revenue Recognition When Right of Return
Exists." The Company has determined that it can recognize revenue in accordance
with SFAS 48 by reviewing and analyzing, among other things, (i) the Company's
and the co-development partners' experience on co-development software sales and
returns to date, (ii) sales and returns of the Company's past co-development
software products and other information relating thereto, (iii) sales and
returns of comparable computer software products of other information relating
thereto, (iv) information regarding significant purchasers of the Company's
product, and (v) computer software industry data and practices.
Royalty revenues on sales made by distribution partners are recognized upon
shipment to customers, less a reasonable estimate for returns (Note 15).
Software Sales
Software sales, which consist of sales of Company-owned software, including
Company developed software, are recorded at the time of shipment provided that
no significant vendor and post-contract support obligations remain outstanding
and collection of the resulting receivable is deemed probable by management. Any
insignificant post-contract support obligations and provisions for estimated
returns, including distributors' stock balancing rights and liability under
price protection programs, are accrued for at the time of sale.
Consulting Revenue and Contract Services
Consulting revenue and Contract Service revenue is recognized as services are
performed.
Product Development Costs
Statement of Financial Accounting Standards No. 86 provides for the
capitalization of certain software development costs once technological
feasibility has been established upon completion of a detailed program design.
All costs capitalized are net of related development expense co-funding, and the
Company ceases capitalizing such costs when the product derived from the project
is available for general release to customers. These costs are amortized on a
product-by-product basis at the greater of the amount computed using (a) the
ratio of current revenues for a product to the total of current and anticipated
future revenues or
F-10
<PAGE>
Note 1 -- Summary of Significant Accounting Policies (Continued)
(b) the straight-line method over the remaining estimated economic life of the
product. The Company evaluates the recoverability of any software development
costs capitalized on a quarterly basis by comparing the net realizable value,
determined pursuant to management's estimates of future product cash flows, with
the unamortized balance of software development costs (see below). Based on this
evaluation, the Company recorded a writedown of software development costs of
$75,000 in 1997. As discussed earlier, the Company has ceased developing and
marketing software products and is focusing on consumating the Merger. The
Company terminated all co-development agreements prior to January 1, 1998. The
Company has not entered into any new co-development contracts since that date.
For the year ended December 31, 1998, the Company engaged the services of an
independent third party to render an opinion of net realizable value for the
capitalized software development costs remaining on the balance sheet.
Accordingly, amortization for the year ended December 31, 1998 reflects an
adjustment in the amount of $859,424, to bring capitalized software development
costs to net realizable value. Separate from the adjustment to net realizable
value, during the year ended December 31, 1998, the Company capitalized $22,170
of software development costs relating to the Emergency Room Intern title and
the DA Pursuit of Justice title, and amortized $36,712 into operations. With
respect to the year ended December 31, 1997, the Company capitalized $140,148 of
software development costs related to the DA Pursuit of Justice title and in the
year ended December 31, 1997, the Company amortized $169,080 into operations.
During the year ended December 31, 1997 the Company capitalized $64,224 relating
to the Emergency Room Intern title and amortized $40,199 into operations.
Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share," during 1997. SFAS No.
128 requires presentation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts, such as stock options, to
issue common stock were exercised or converted into common stock. All prior
period weighted average and per share information has been restated in
accordance with SFAS No. 128. Additionally, all amounts have been adjusted for
the September 8, 1998 three for one reverse split.
Stock-Based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," (SFAS 123), as of January 1, 1996,
which establishes a fair method of accounting for stock-based compensation
plans. In accordance with SFAS 123, the Company has chosen to continue to
account for stock-based compensation utilizing the intrinsic value method
prescribed in APB 25. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market price of the Company's stock
at the date of grant over the amount an employee must pay to acquire the stock.
Also, in accordance with SFAS 123, the Company has provided footnote disclosure
with respect to stock-based employee compensation. The cost of stock-based
employee compensation is measured at the grant date based on the value of the
award and recognized over the service period. The value of the stock-based award
is determined using a pricing model whereby compensation cost is the excess of
the fair value of the stock as determined by the model at grant date or other
measurement date over the amount an employee must pay to acquire the stock.
Accounting Pronouncements:
Capital Structure Disclosure
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure," ("SFAS 129") issued by the FASB is effective for
financial statements ended after December 15, 1997. This standard reinstates
various securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by SFAS No. 128. The
Company adopted SFAS No. 129 on December 15, 1997 and it had no effect on its
financial position or results of operations.
F-11
<PAGE>
Note 1 -- Summary of Significant Accounting Policies (Continued)
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS 130") issued by the FASB is effective for financial statements
with fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company has adopted
SFAS 130 effective with the year ending December 31, 1998, prior years had no
impact on its financial position or results of operations.
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," ("SFAS 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. SFAS 131 requires that public companies report certain information
about operating segments, products, services and geographical areas in which
they operate and their major customers. The Company is not subject to the
reporting requirements of SFAS 131 as it does not have any segment activity to
report on in the years presented.
Pension and Postretirement Benefits
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Postretirement Benefits," ("SFAS 132") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 132 revises the disclosure requirements for pension and
other postretirement benefit plans. At December 31, 1998, the Company did not
maintain any postretirement benefit plans.
Derivative Instruments and Hedging
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133") issued by the FASB is
effective for financial statements with fiscal years beginning after June 15,
1999. This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Company does not expect
the adoption of SFAS 133 to have an impact on its financial position or results
of operations.
Software Revenue Recognition
Statement of Position 97-2, "Software Revenue Recognition," ("SOP 97-2") issued
by the AICPA is effective for transactions entered into in fiscal years
beginning after December 15, 1997. SOP 97-2 supersedes SOP 91-1 regarding
software revenue recognition. SOP 97-2 establishes standards which require a
company to recognize revenue when (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred, (iii) the vendor's fee is fixed or
determinable, and (iv) collectability is probable. The SOP also discusses the
revenue recognition criteria for multiple element contracts and allocation of
the fee to various elements based on vendor-specific objective evidence of fair
value. The Company believes this SOP does not have a material effect on the
financial statements.
Note 2 -- Financial Condition and Liquidity
As of December 31, 1998, the Company had (i) never achieved operating profits,
(ii) ceased development of new titles, (iii) ceased its internet gaming
services, (iv) closed one of its business offices in California, (v) ceased
marketing and public relations efforts with respect to the software products,
and (vi) reduced its total number of employees to two. Revenues from the
Company's Emergency Room and DA Pursuit of Justice titles and derivatives
thereof are minimal and in light of the proposed Merger with Videocall, are
expected to cease. On September 8, 1998 the Company and Videocall announced that
the two companies had entered into a Letter of Intent for the Company to
purchase the common shares of Videocall in exchange for the Company's common and
preferred stock. On September 14, 1998 the two companies signed Merger Plan. On
September 22, 1998 a private placement subscription of $2,000,000 for 2,040,816
shares of the Company's Common Stock was made by third party investors into the
Company to provide additional capital to the Company for use in the merged
Company/Videocall operations. At March 31, 1999, all amounts due under stock
subscriptions had been received by the Company. The Company has
F-12
<PAGE>
Note 2 -- Financial Condition and Liquidity (continued)
received a total of $905,717 in contributed capital during the period June 1,
1998 through December 31, 1998. Management feels that based on these contributed
capital amounts, the Company will be able to operate for the coming twelve
months. The Company believes that it will be able to consummate the Merger, and
its prospects for obtaining additional financing will improve as a result
thereof. Additionally, subject to approval of the Merger Plan, it is the intent
of the Company to reincorporate from Delaware to Nevada.
On February 26, 1998. the Company was notified by The Nasdaq Stock Market, Inc.
("NASDAQ") that the Company is not in compliance with the net tangible
assets/market capitalization/net income requirement(s), pursuant to NASD
Marketplace Rule(s) 4310(c )(02) and the minimum bid price requirement, pursuant
to NASD Marketplace Rule 4310(c )(04) both of which became effective on February
23, 1998. Non-compliance with these and other rules adopted by NASDAQ at that
date, will result in the Company's stock being delisted from the NASDAQ SmallCap
Market. On July 20, 1998 NASDAQ notified the Company continuing failure to
comply with the rules would result in delisting of the Company's stock on July
28, 1998. The Company filed an appeal for an oral hearing on a date to be
determined by NASDAQ to stay the delisting. The Company appeared before a
hearing committee on September 18, 1998 and outlined the steps it has taken and
will subsequently take to maintain compliance. As a result of the hearing NASDAQ
granted the Company an exception to the listing requirements if the Company
complied with certain of the requirements. This exception, originally granted
through December 7, 1998, was extended to January 29, 1999 and further extended
to May 15, 1999.
Fair Value of Financial Instruments
SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. Cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
amounts due to and from affiliates are reflected in the financial statements at
fair value because of the short-term maturity of these instruments. The fair
value of long-term debt closely approximates its carrying value. The Company
uses quoted market prices, when available, or discounted cash flows to calculate
these fair values.
Marketable Securities
Marketable securities consist of common stock currently trading on a national
exchange. Marketable securities are stated at market value as determined by the
most recently traded price of each security at the balance sheet date. At
December 31, 1998, marketable securities were considered as available-for-sale
as defined by Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. The cost of
investments sold is determined on the specific identification or the first-in,
first-out method. At December 31, 1998, available-for-sale equity securities and
their market value was as follows:
Equity Securities, at cost $ 104,102
Unrealized Loss (14,892)
----------
Market Value at December 31, 1998 $ 89,210
==========
F-13
<PAGE>
Note 3 -- Property and Equipment
Property and equipment are summarized as follows:
December 31,
------------
1998 1997
---- ----
Computers and equipment $ 16,500 $212,688
Furniture and fixtures 1,000 17,930
Computer software 1,000 10,496
-------- --------
18,500 241,114
Less accumulated depreciation -- 112,204
-------- --------
Totals $ 18,500 $128,910
======== ========
Depreciation and amortization expense on property and equipment was $74,392,
$99,614, and $57,399 for the years ended December 31, 1998, 1997, and 1996,
respectively.
Due to the Company downsizing and relocating its corporate offices, the Company
wrote off $35,071 related to computers and equipment during 1998. The Company
wrote off $51,885 related to computers and equipment and $32,250 related to
leasehold improvements during 1997. Additionally, in 1997 the Company sold the
majority of its furniture and fixtures to its Landlord and recorded a loss of
approximately $95,000.
Note 4 - Extraordinary Item
Termination of Co-Development Partner's Agreement
The Company and IBM entered into a Development and Licensing Agreement (the "DA
License Agreement") on November 16, 1995. In the fourth quarter of 1996 the
Company and IBM mutually agreed to terminate the DA License Agreement. At that
time, the Company had an obligation to IBM in the amount of $500,000. The
Company and IBM reached an agreement on September 14, 1998 whereby the Company
will pay $200,000 to IBM in quarterly payments of $25,000 commencing with the
fiscal quarter ended September 30, 1998. The Company has recognized $300,000 of
extraordinary income as a result of the cancellation of the debt under the terms
of the agreement with IBM.
During 1996 a letter of intent was signed with McGraw Hill Home Interactive
("McGraw Hill") for the development and licensing of the contemplated Animal
Doctor title. The letter of intent was effectively terminated without cause by
McGraw Hill prior to December 31, 1996, with unfunded development expense
reimbursement due in the amount of $75,000. The unfunded development expense due
was received in 1997.
F-14
<PAGE>
Note 5 -- Long Term Debt
The Company's long-term debt is as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Unsecured note payable to related party bearing interest at 10.5%; all
accrued interest and principal payable in monthly installments of $10,000,
from July 1997 through June 1999 $260,051
Unsecured note payable to shareholder bearing interest at 16.7%; all
accrued interest and principal payable over the course
of two years from March 1998 through February 2000 73,200
Unsecured note payable to shareholder bearing interest at 10.5%; all
accrued interest and principal payable over the course
of two years from March 1998 through February 2000 57,250
Unsecured note payable to IBM, due in quarterly installments of
$25,000 through September 30, 2000 175,000
Unsecured obligation to IBM for milestone payments 480,000
Unsecured note payable to a third party with outstanding principal due
December 31, 1998 75,000
Unsecured notes payable to third parties 178,066
Unsecured notes payable to related parties 4,000
-------- --------
Total notes payable 356,066 945,501
Less current portion 281,066 783,619
-------- --------
Long-term portion $ 75,000 $161,882
======== ========
</TABLE>
On September 14, 1998 the Company entered into an Agreement of Sale between the
Company and Legacy Interactive ("Interactive"), a company currently owned by the
former Chairperson of the Company, whereby certain assets of the Company
totaling $216,260 were sold to Interactive and Interactive assumed $324,359 in
debt from the Company. The difference of $108,099, was recorded as a note
payable.
On December 31, 1998, a shareholder and former member of the Board agreed to
cancel the Company's debt obligation in the amount of $73,200 in exchange for
28,150 shares of common stock to be issued.
F-15
<PAGE>
Note 5 -- Long Term Debt (Continued)
The aggregate maturities of long-term debt maturing in succeeding years are as
follows:
December 31, Amount
------------ ------
2000 $ 75,000
========
Note 6 --Commitments and Contingencies
Operating Leases
The Company leases certain equipment under various operating leases which expire
at various dates through November 5, 1999. Future minimum rental payments
required under operating leases that have initial or remaining terms in excess
of one year at December 31, 1998 are as follows:
Operating
December 31, Leases
------------ ------
1999 $9,948
2000 9,948
-------
$19,896
=======
Rent expense for the years ended December 31, 1998, 1997 and 1996 was $61,031,
$155,013, $113,569.
Employment Agreements
During 1997, the Company cancelled all of its employment agreements with
employees, exclusive of two officers, whose employment agreements were cancelled
in 1998.
Legal Proceedings
On August 18, 1997, the U.S. Securities and Exchange Commission ("SEC") issued
subpoenas deces tecum to the Custodian of Records of the Company and other
parties. The subpoenas were issued in connection with the SEC's formal
investigation entitled In the Matter of Reynolds Kendrick Stratton, Inc., File
No. LA-752 (the "Investigation"). The Investigation appears to center around
activities of JB Oxford Holdings, Inc., a broker-dealer, which is the successor
to Reynolds Kendrick Stratton, Inc., and was the underwriter of the Company's
initial public offering. The SEC has indicated that it expects to take the
testimony of the Company and other parties at some point in the future. The
Company has no reason to conclude that it is a target of the Investigation.
The Company has filed a lawsuit (the "Complaint") in Los Angeles, California
against the former Chairperson, Ariella Lehrer, the D&A Lehrer Children Trust
and other related entities. In that action, the Company alleges that Lehrer
breached her fiduciary duties to the Company through various actions that,
according to the Complaint, "undertook to burden an already weakened Legacy with
unreasonable, unnecessary and unfair obligations that primarily benefited her
personally." The Company also claims that Lehrer's actions were "taken in bad
faith and were... not in the best interest of Plaintiff Legacy or its
shareholders." The Company also alleges that Lehrer fraudulently backdated
documents for her personal benefit, and "deliberately and maliciously
misrepresented the financial condition of plaintiff Legacy..." The company
claims that the misrepresentations created substantial and unnecessary legal
exposure for the Company, particularly with the Company's listing on the Nasdaq
SmallCap Stock Market. The Company seeks to recover substantial damages, to be
proved at trial, for Lehrer's actions and also seeks injunctive relief requiring
Lehrer to return to the Company significant assets.
F-16
<PAGE>
Note 6 --Commitments and Contingencies (continued)
Stock and Warrant Contingency
The Company has agreed to issue 600,000 shares of stock and 1,800,000 options to
parties responsible for the introduction of the Company to Videocall. The
options are exercisable at twenty five cents per share and expire three years
from the issue date. Additionally, Videocall has agreed to issue 1,200,000
shares in connection with the Merger agreement to parties responsible for the
introduction of Videocall to the Company. Both equity obligations take effect on
the successful Merger of Videocall with the Company.
Note 7 -- Stockholders' Equity
Initial Public Offering
In May 1996, the Company consummated an initial public offering of 383,333
shares of its common stock adjusted for the 1:3 reverse split in September 1998.
Net proceeds to the Company were approximately $5,198,048 after deducting all
offering-related expenses. During 1996 and 1997, the Company used a majority of
the net proceeds for the development of additional RealPlayTM (formerly Career
SimTM) titles, the development of Passport2, the Company's Internet gaming
technology, certain outstanding debt, and for working capital purposes.
Capital Stock Transactions
On January 23, 1996, the Company issued 2,400 shares of common stock to an
individual in exchange for consulting services. The Company recorded expenses
during 1996 of $14,400 representing the fair market value of the common shares
issued.
In May 1996 $700,000 of a convertible note payable to a trust company was
converted into 178,117 shares of the Company stock. The number of shares issued
was determined by the conversion price of $3.93 per share.
In May 1996, in conjunction with the initial public offering, the Company
granted to the underwriter a five-year warrant to purchase up to 30,933 shares
of common stock exercisable at $27.00 per share. The Company did not record an
expense during 1996, as the Company determined the value of the warrants was
less than the exercise price.
During the years ended December 31, 1997 and 1996 the Company recorded
stock-based compensation expense of $15,980 and $39,907 related to non-employee
stock options in accordance with SFAS 123.
On August 30, 1996 the Company issued 11,111 shares of common stock to acquire
substantially all of the assets of an internet technology company, which
consisted primarily of purchased research and development. The Company recorded
$233,338 of product development expenses related to this transaction which was
valued based on the fair market value of the stock issued.
On October 31, 1996, the Company issued 2,410 shares of common stock to various
employees under the Employee Stock Purchase Plan. The fair market value of the
stock was $12.00 per share on October 31, 1996 and the purchase price to the
plan was $10.20 per share. The Company recorded compensation expense of $4,338
related to this transaction.
On November 1, 1996 the Company issued 16,667 shares of common stock to an
individual in satisfaction of accrued consulting compensation. This transaction
was valued at the fair market value of the services received of $100,000.
On May 30, 1997 the Company issued 2,614 shares of common stock to various
employees under the Employee Stock Purchase Plan. The fair market value of the
stock was $9.00 per share on May 30, 1997 and the purchase price to the plan was
$7.65 per share. The Company recorded compensation expense of $3,529 related to
this transaction (See Note 9).
On August 15, 1997 a trust company exchanged 41,348 warrants on the Company's
common stock for $162,500.
On June 30, 1998 the Company issued 72,667 shares of common stock in a private
placement of $109,250.
F-17
<PAGE>
Note 7 -- Stockholders' Equity (continued)
On June 23, 1998 a trust company exchanged 19,084 warrants on the Company's
common stock for $75,000.
On September 14, 1998 the Company issued 400,000 shares of common stock in a
private placement for $200,000.
On September 22, 1998 the Company received stock subscriptions for 2,040,818
shares of common stock in a private placement of $2,000,000. At that date
$100,000 was paid on the subscriptions. Of the remaining $1,900,000 due under
the subscriptions, $1,743,000 has been received in cash funds collected by the
depository as of March 31, 1999 and therefor has been classified as a current
receivable; the balance of $157,000 has been received in other assets as of
March 31, 1999.
On October 1, 1998 the Company issued 16,667 shares of common stock for
services.
On December 18, 1998, the Company exchanged 52,051 shares for marketable
securities with a market value of $104,102.
On December 31, 1998, the Company had received $300,000 in cash and an advance
receivable in the amount of $50,000 for 200,000 shares to be issued.
On December 31, 1998, a shareholder and former member of the Board, had agreed
to cancel the Company's debt obligation to him of $73,200 in exchange for 28,150
shares of stock to be issued. The debt was cancelled effective December 31,
1998.
Warrants
In connection with the Company's initial public offering of common stock, the
Company issued warrants to a trust company to purchase 66,667 shares of common
stock at $3.93 per share. The warrants were exercisable immediately.
During 1997 the trust company exercised warrants to purchase 41,348 shares of
common stock and in 1998, 19,084 shares of common stock. As of December 31,
1998, warrants to purchase 6,235 shares of common stock were outstanding.
Note 8 -- Stock Option and Purchase Plans
The Company had a stock option plan for employees and certain non-employees,
that provided for the granting of stock options and authorized the issuance of
common stock. On June 19, 1997, in connection with the termination of certain
employment agreements, all stock options were fully vested for terminating
employees. At December 31, 1998, all outstanding stock options were fully
vested.
The Option Plan was divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals could, at
the discretion of the Plan Administrator, be granted options to purchase shares
of Common Stock at an exercise price not less than 85% of their fair market
value on the grant date; (ii) the Stock Issuance Program under which such
individuals could, at the Plan Administrator's discretion, be issued shares of
Common Stock directly, through the purchase of shares at a price not less than
85% of their fair market value at the time of issuance or as a bonus tied to the
performance of services; and (iii) the Automatic Option Grant Program under
which option grants will automatically be made at periodic intervals to eligible
non-employee Board members to purchase shares of Common Stock at an exercise
price equal to 100% of the fair market value on the grant date.
F-18
<PAGE>
Note 8 -- Stock Option and Purchase Plans (continued)
Option activity within each plan was as follows:
<TABLE>
<CAPTION>
Weighted
Incentive Directors Average
Stock Option Stock Option Price
Plans Plan Per Share
----- ---- ---------
<S> <C> <C> <C>
Balance outstanding December 31, 1996 157,222 6,667 $ 9.54
Options granted range from
$9.00 to $11.25 per share 3,332 1,667 $10.50
Options canceled range from
$9.00 to $21.75 per share (41,554) $ 9.48
Balance outstanding, December 31, 1997 119,000 8,333 $ 9.60
Options granted range from
$2.07 to $12.00 per share 140,000 1,667 $ 3.20
Options cancelled range from
$3.00 to $12.00 per share (6,667) (10,000) $ 9.60
-------- -------- ------
Balance outstanding, December 31, 1998 252,333 0 $ 5.74
======== ======== ======
Options exercisable, December 31, 1998 252,333 0 $ 5.74
======== ======== ======
</TABLE>
Information relating to stock options at December 31, 1998 summarized by
exercise price are as follows:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------- -----------
Weighted Average Weighted Average
---------------- ----------------
Exercise Price Life Exercise Exercise
Per Share Shares (Months) Price Shares Price
------ -------- ----- ------ -----
<S> <C> <C> <C> <C> <C>
Incentive Stock Option Plan
59,500 6.0 $8.25 59,500 $8.25
59,500 6.0 $9.75 59,500 $9.75
66,667 18.0 $2.07 66,667 $2.07
33,333 18.0 $3.11 33,333 $3.11
33,333 18.0 $4.14 33,333 $4.14
------- -------
252,333 12.4 $5.74 252,333 $5.74
======= =======
</TABLE>
All stock options issued to employees have an exercise price of not less than
85% of the fair market value of the Company's common stock on the date of the
grant, and in accordance with accounting for such options utilizing the
intrinsic value method there is a related compensation expense recorded in the
Company's financial statements representing 15% of the fair market value. Had
the compensation cost for stock-based compensation been determined based on the
fair value of the grant dates consistent with the method of SFAS 123, the
Company's net loss and loss per share for the years ended December 31, 1998,
1997 and 1996 would have been increased to the pro forma amounts presented below
as follows:
Note 8 -- Stock Option and Purchase Plans (continued)
F-19
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss as reported $(1,318,706) $(2,155,099) $(2,984,542)
Net loss pro forma $(1,366,120) $(2,621,214) $(2,997,000)
Basic net loss per common share as reported $ (1.26) $ (2.51) $ (4.78)
Basic net loss per common share pro forma $ (1.30) $ (3.05) $ (4.80)
Diluted net loss per common share as reported $ (1.26) $ (2.51) $ (4.78)
Diluted net loss per common share pro forma $ (1.30) $ (3.05) $ (4.80)
</TABLE>
The fair value of option grants is estimated on the date of grant utilizing the
Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1997 and 1996; expected life of option of 10 years,
expected volatility of 26.2%, and 14.7% respectively risk-free interest rate of
6.0% and 6.2%, respectively and a 0% and 0% dividend yield, respectively. The
weighted average fair value at date of grants for options granted during 1997
and 1996 was approximately $1.72 and $3.00 per option. For 1998, all outstanding
options expire within eighteen months. At December 31, 1998, option exercise
prices were above the market price of the stock, except for 66,667 shares.
Under the Company's Automatic Option Grant Program, options were outstanding to
outside directors at December 31, 1997. In accordance with accounting for
options granted to nonemployees utilizing the fair value method in accordance
with SFAS 123, the Company recorded stock-based compensation expense of $15,980
and $39,907 in the Statement of Operations for the years ended December 31, 1997
and 1996, with a corresponding credit to additional paid-in-capital.
On October 31, 1996, the Company's Employee Stock Purchase Plan (the "Purchase
Plan") purchased 2,410 shares of the Company's common stock. The fair market
value of the stock on this date was $12.00 per share, and the purchase price to
the employees was 85% of fair market value, or $10.20 per share. Compensation
expense in the amount of $4,338 related to this transaction was recognized in
the Statement of Operations for the year ended December 31, 1996. On May 30,
1997 the plan purchased 2.614 shares of the Company's common stock. The fair
market value was $9.00 per share and the purchase price to the employees was 85%
of fair market value, or $7.65 per share. Compensation expense in the amount of
$3,529 was recognized in the Statement of Operations for the year ended December
31, 1997.
Note 9 - Income Taxes
At December 31, 1998, the Company has federal and state net operating loss
carryforwards of approximately $6,851,000 and $3,333,600, respectively,
available to offset taxable income through the year 2013. The Tax Reform Act of
1986 contains provisions which limit the federal net operating loss
carryforwards available that can be used in any given year in the event of
certain occurrences, which include significant ownership changes.
At December 31, 1998 and 1997, the Company's net deferred tax asset consisted
primarily of net operating losses. The Company established a valuation allowance
equal to the net deferred tax asset, as the Company could not conclude that it
was more likely than not that the deferred tax asset would be realized. The
valuation allowance at December 31, 1998 and 1997 was $2,790,900 and $2,253,000.
Note 10 - Significant Customer
The Company had one significant customer in 1998, 1997 and 1996 which
represented approximately 61%, 69%, and 94% of revenue.
F-20
<PAGE>
Note 11 - Related Party Transactions
During 1997, and 1996 the Company paid $3,974, and $1,527,328 in production
coordination expenses to a company in which an employee is a 50% owner. During
1998 the Company paid $21,102 in legal fees to a member of the Board, and
advanced $70,000 to a subsidiary of Videocall. Additionally, Videocall advanced
$4,000 at December 31, 1998 to the Company.
As provided in the Merger Plan, and in accordance with the terms of the
September 8, 1998 Letter of Intent, Michael J. Zwebner was elected Chairman of
the Board of Directors of the Company and Ariella J. Lehrer, Ph.D. resigned as
Chairwoman of the Board. Dr. Lehrer resigned to form Legacy Interactive, Inc.
("Interactive") and as a condition of the transaction, the Company entered into
an agreement to sell certain assets totaling $216,260 to Interactive and
Interactive assumed certain debts totaling $324,359 from the Company. On
September 14, 1998 the Company made a payment of $36,033 to Interactive as a
portion of the difference between the assets sold and debt assumed by
Interactive. The parties are currently in negotiations to determine a plan of
payment for the balance due of $72,066. In addition to Mr. Zwebner, the Company
elected Alexander H. Walker, Jr., Michael Cuzner-Charles and Eugene A. Rosov to
fill existing vacancies on the board. Mr. Zwebner is Chairman of the Board for
Videocall and Mr. Rosov is President and CEO of Videocall. Additionally, Mr.
Zwebner, Mr. Rosov and Mr. Walker are Directors of Videocall.
During the year ended December 31, 1998 and 1997, the Company entered into a
number of related party debt transactions as described in Note 6.
Note 12 - Acquisition of Research and Development
In August 1996, the Company acquired substantially all of the assets,
properties, and rights of On the Toes of Giants, Inc., a California corporation
("OTTOG"), pursuant to an Asset Purchase Agreement, dated August 19, 1996, which
consisted primarily of purchased research and development. The Consideration for
the purchased assets consisted of 11,111 newly-issued shares of common stock,
par value $.001, of the Company and the assumption of certain liabilities of
OTTOG. The transaction was valued as of August 30, 1996, the closing date, when
the common stock had a fair market value of $21.00 per share, at a total fair
market value of $233,338, and was recorded as an expense of product development.
Note 13 - Earnings Per Share
The following is a reconciliation of the weighted average number of shares used
to compute basic and diluted earnings per share:
1998 1997 1996
---- ---- ----
Basic weighted average shares outstanding 1,054,175 858,211 623,968
Dilutive effect of options -- -- --
--------- --------- ---------
Diluted weighted average shares outstanding 1,054,175 858,211 623,968
Options to purchase 252,333, 127,333 and 163,889 shares were outstanding during
the years ended 1998, 1997 and 1996, respectively, but were not included in the
computation of diluted loss per common share because the effect would be
antidilutive.
Note 14 - Fourth Quarter Transaction
During the fourth quarter of 1996, the Company recognized into its Statement of
Operations $747,995 of royalty revenue from the Emergency Room title that
related to the co-development sales. Although the cash had been received in
earlier periods, the Company was unable to reasonably estimate returns on its
early sales of the Emergency Room title in accordance with Statement of
Financial Accounting Standards No. 48 (SFAS 48). However, during the fourth
quarter, sufficient information was available for the Company to reasonably
estimate the returns. Of the royalty revenue recognized in the fourth quarter of
1996, $312,787, $493,670, $266,592 and $73,946 relates to sales from the fourth
quarter of 1995, and the first, second, and third quarters of 1996,
respectively.
Note 15 - Subsequent Events
Subsequent to December 31, 1998, the following activities have occurred with
respect to the Company:
F-21
<PAGE>
Property Acquisitions
The Company has acquired a 22,622 square foot property in Toronto, Canada in
exchange for 975,000 shares of Class A Preferred stock, $.001 par value, paying
dividends at the rate of $ .095 per share per annum.
Business Alliances
On February 19, 1999 the Company signed a Placement and Fee Agreement with Red
Laguna Trading Company, Inc., ("Red Laguna") for compensation of 500,000
Warrants to purchase the Company's Common Stock, at an exercise price of $5.00
per share, to employ Red Laguna to find strategic business alliances for the
Company over the period of the next three years.
On February 23, 1999 the Company and Infochannel Limited ("Infochannel"), a
Jamaican corporation signed a Memorandum of Understanding whereby the Company
will purchase a 23% interest in Infochannel for 78,823 shares of the Company's
Common Stock valued at $4.17 per share. The Company and Infochannel will in turn
form a joint venture, Videocall Jamaica, Limited, to operate the videocalling
outlets in the Jamaican market.
Business Acquisitions
On March 22, 1999 the Company and Proximity Inc. ("Proximity"), a Vermont
corporation, signed a Letter of Intent whereby, subject to due diligence by both
parties, the Company will purchase the outstanding stock of Proximity for $4
million dollars in common stock of the Company valued at $4.00 per share. In
addition the Company will pay Proximity shareholders the sum of $250,000 in 10
equal monthly installments and subject to receiving audited financials and pro
forma operating reports will make available $200,000 for working capital
purposes. Proximity provides international full spectrum videoconferencing
services with public access to over 2,000 videoconferencing sites.
Facilities
On February 24, 1999 the Company closed the Los Angeles office and consolidated
its operations with Videocall at One Canal Park, Cambridge, MA.
Corporate Name and Trading Symbol
Effective March 1, 1999, the Company changed its name to Talk Visual
Corporation. On the same date, the Company's trading symbol on the Nasdaq
SmallCap Stock Market was changed to TVCPC.
Stockholder Public Relation Services
The Company issued 150,000 shares on January 25, 1999, to a public relations
firm for representation services.
F-22
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
F-23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Stockholders:
Videocall International Corporation
Cambridge, Massachusetts
We have audited the accompanying consolidated balance sheet of Videocall
International Corporation as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Videocall International Corporation at
December 31, 1998, and the results of its operations and cash flows for the year
then ended, in conformity with generally accepted accounting principles.
Mayer Rispler & Company, P.C.
Certified Public Accountants
April 27, 1999
Brooklyn, New York
F-24
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 225,050
Accounts Receivable 42,573
Marketable Securities 882,100
Other Receivables 33,895
Receivable - Related Parties 451,840
Stock Subscription Receivable 100,000
Other Current Assets 155,356 $ 1,890,814
------------
Property & Equipment, Net 8,444,559
Other Assets
Prepaid Acquisition Cost $ 120,000
Other Assets 556,121 676,121
------------ ------------
TOTAL ASSETS $ 11,011,494
============
<CAPTION>
LIABILITIES & STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Current Portion of Long Term Debt $ 23,097
Accounts Payable 192,679
Accrued Expenses 158,907
Short Term Debt 1,218,950
Payable - Related Party 70,000
Other Current Liabilities 43,680 $ 1,707,313
------------
Long-Term Debt, Net Current Portion 4,160,091
------------
TOTAL LIABILITIES $ 5,867,404
Commitments and Contingencies
Stockholders' Equity
Common Stock, par value $.01 per share,
50,000,000 shares authorized: 27,827,500
shares issued and outstanding $ 278,275
Stock Subscribed 25,693
Additional Paid-In Capital 7,405,227
Accumulated Deficit (1,197,374)
Accumulated Other Comprehensive Income 221,935
Stock Subscriptions Receivable (1,589,666)
------------
TOTAL STOCKHOLDERS' EQUITY 5,144,090
------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 11,011,494
============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-25
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FEBRUARY 2, 1998 (DATE OF INCEPTION), TO DECEMBER 31, 1998
Real Estate Income $ 229,127
Costs and Expenses
Research & Development $ 270,376
Real Estate Operations 258,446
Marketing 51,607
Professional Fees 205,260
General & Administrative Expenses 593,202 1,378,891
----------- -----------
Loss From Operations $(1,149,764)
Interest Expense $ (106,768)
Interest Income 2,445 (104,323)
----------- -----------
Loss Before Other Adjustments (1,254,087)
Less: Current Year Loss From Subsidiary
Attributable to Pre-ownership Period 56,713
-----------
NET LOSS $(1,197,374)
===========
Net Loss Per Common Share, Basic and Diluted $ (0.12)
===========
Weighted Average Common Stock Shares Outstanding 9,610,293
===========
See accompanying notes to condensed consolidated financial statements.
F-26
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FEBRUARY 2, 1998 (DATE OF INCEPTION), TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common Additional
Common Stock Paid-in Subscription
Shares Amount Subscribed Capital
------ ------ ---------- -------
<S> <C> <C> <C> <C>
Issuance of Common Stock for Services 3,930,000 $ 39,300 $ 403,700
Issuance of Common Stock for Assets 7,273,500 72,735 $25,243 4,405,685
Issuance of Common Stock for Cash, Net
of Offering Costs and Expenses of $57,343 16,624,000 166,240 2,571,292
Subscription for Common Stock for Cash 450 24,550
Net Loss
Comprehensive Income - Unrealized
Gain on Marketable Securities
--------------------------------------------------
BALANCE, DECEMBER 31, 1998 27,827,500 $278,275 $25,693 $7,405,227
==================================================
<CAPTION>
Accumulated
Stock Other
Accumulated Comprehensive Stockholders' Total
Receivable Deficit Income Equity
---------- ------- ------ ------
<S> <C> <C> <C> <C>
Issuance of Common Stock for Services $ 443,000
Issuance of Common Stock for Assets 4,503,663
Issuance of Common Stock for Cash, Net
of Offering Costs and Expenses of $57,343 $(1,589,666) 1,147,866
Subscription for Common Stock for Cash 25,000
Net Loss $(1,197,374) (1,197,374)
Comprehensive Income - Unrealized
Gain on Marketable Securities $221,935 221,935
-----------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $(1,589,666) $(1,197,374) $221,935 $5,144,090
===========================================================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-27
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FEBRUARY 2, 1998 (DATE OF INCEPTION), TO DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Cash Flows From Operating Activities
Net Loss $(1,197,374)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and Amortization 41,979
Issuance of Common Stock in Exchange for Services 223,000
Increase (Decrease) In Cash From Changes in:
Accounts Receivable, Net 28,326
Other Receivables (3,895)
Receivable - Related Party (94,779)
Other Current Assets (94,160)
Accounts Payable 184,838
Accrued Expenses 43,024
Security and Other Prepaid Deposits 3,122
Other Current Liabilities 26,408 $357,863
--------- -----------
Net Cash from Operating Activities $(893,134)
Cash Flows From Investing Activities
Purchase of Property and Equipment $(125,138)
Purchase of Subsidiary (468,950)
Purchase of Other Assets (85,606)
---------
Net Cash Used in Investing Activities $(679,694)
Cash Flows From Financing Activities
Net Borrowings on Short Term Debt $288,950
Net Borrowings on Long Term Debt 319,543
Proceeds from Private Placements for Common Stock 1,172,709
Payments of Loan Fees and Closing Costs (36,349)
Payments on Notes Payable and Long Term Debt (1,812)
---------
Net Cash Provided by Financing Activities 1,743,041
-----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $223,836
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,214
-----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $225,050
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-28
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FEBRUARY 2, 1998 (DATE OF INCEPTION), TO DECEMBER 31, 1998
(CONTINUED)
Supplemental Disclosures of Cash Flow Information:
a) Cash Paid For:
Interest $5,540
Income Taxes
b) Noncash Investing and Financing Transactions:
During the year the Company received $75,000 in equipment and
$66,000 in third party notes receivable in exchange for 611,909 shares of
common stock.
Various times during the year, the Company received a total of
$882,100 in marketable securities in exchange for 2,974,250 shares of
common stock.
In August, 1998, the Company received $100,00 of legal services paid
in advance and organizational services in exchange for 500,000 shares of
common stock.
In October, 1998, the Company exchanged 3,000,000 shares of common
stock and a note payable in the amount of $1,000,000 in exchange for all
of the outstanding common stock of Sacramento Results, Inc.
In November, 1998, the Company issued 212,500 shares of common stock
for 212,500 options to purchase 212,500 shares of DCI, Inc., valued at
$341,998 net of the option exercise price.
See accompanying notes to condensed consolidated financial statements.
F-29
<PAGE>
Note 1 -- Summary of Significant Accounting Policies
Business
Videocall International Corporation (the "Company") is a development stage
company formed to provide videocalling services to businesses and consumers. The
Company is in the process of developing national and international locations
through strategic partnerships and wholly owned outlets. The Company and Legacy
Software, Inc., renamed Talk Visual Corporation February 26, 1999 ("Talk
Visual"), announced that the two companies had entered into a Letter of Intent
for the Company to purchase the common shares of the Company in exchange for
Talk Visual's common and preferred stock. On September 14, 1998 the two
companies signed an Agreement and Plan of Merger ("Merger Plan") detailing the
terms of the transaction, whereby the Company will merge (the "Merger") into a
newly formed, wholly owned subsidiary of Talk Visual. In accordance with the
terms of the Letter of Intent, the officers of the Company and certain Board
Members of the Company were elected to the Board of Talk Visual, and the
existing Members of the Board of Talk Visual resigned, thus making the Company a
related entity. The Board of Directors of Talk Visual and the Board of Directors
of the Company have approved the Merger. The parties are currently preparing a
definitive Proxy Statement and Registration Statement on Form S-4 to be
submitted for approval by Talk Visual's stockholders of the Merger Plan.
On October 28, 1998, the Company acquired all of the outstanding shares of
Sacramento Results, Inc. ("SRI") for 3,000,000 shares of the Company's common
stock, valued at $1 per share, $1,000,000 of new debt and the assumption of
$468,950 of seller's debt to a related entity. SRI owns and manages a 119,000
square foot retail and office strip center in Sacramento, California. As part of
this real estate acquisition, the Company will install a video conference site
and offices in a portion of the facility.
The acquisition of SRI has been accounted for using the purchase method of
accounting and accordingly the purchase price has been allocated to the assets
purchased and liabilities assumed based on the fair market values at the date of
the acquisition as follows:
Current assets $ 73,632
Land, buildings and other fixed assets 8,271,926
Other assets 17,383
Liabilities (3,893,991)
-----------
Total purchase price $ 4,468,950
===========
Operations of SRI have been included in the Consolidated Statement of Operations
from the beginning of SRI's fiscal year to December 31, 1998, less the net loss
attributable to the period prior to the Company's ownership.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, SRI. Inter-company accounts and
transactions have been eliminated in consolidation.
Use of Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash Equivalents
For purposes of the Consolidated Statement of Cash Flows, the Company considers
all highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents.
F-30
<PAGE>
Note 1 -- Summary of Significant Accounting Policies (Continued)
Stock Subscriptions Receivable
Of the $1,689,666 still due under the subscriptions at year end, through April
23, 1999, $100,000 has been received in cash which has cleared as collected
funds.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation on property and equipment is computed using the straight-line
method over the estimated useful lives of the assets, which range from three to
seven years, except for buildings, which have been assigned a forty year life.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS 109) "Accounting for Income Taxes." Under the
asset and liability method, deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities.
Under SFAS 109, deferred tax assets may be recognized for temporary differences
that will result in deductible amounts in future periods. A valuation allowance
is recognized, if on the weight of available evidence, it is more likely than
not that some portion or all of the deferred tax asset will not be realized.
Earnings Per Share
The Company has adopted SFAS No. 128, "Earnings Per Share." SFAS No. 128
requires presentation of basic and diluted earnings per share. Basic earnings
per share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the reporting period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts, such as stock options, to issue common stock were
exercised or converted into common stock.
Accounting Pronouncements:
Capital Structure Disclosure
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure," ("SFAS 129") issued by the FASB is effective for
financial statements ended after December 15, 1997. This standard reinstates
various securities disclosure requirements previously in effect under Accounting
Principles Board Opinion No. 15, which has been superseded by SFAS No. 128. The
Company has adopted SFAS No. 129.
Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," ("SFAS 130") issued by the FASB is effective for financial statements
with fiscal years beginning after December 15, 1997. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company has adopted
SFAS 130.
F-31
<PAGE>
Note 1 -- Summary of Significant Accounting Policies (Continued)
Segment Reporting
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information," ("SFAS 131") issued by the FASB is
effective for financial statements with fiscal years beginning after December
15, 1997. SFAS 131 requires that public companies report certain information
about operating segments, products, services and geographical areas in which
they operate and their major customers. The Company is not subject to the
reporting requirements of SFAS 131 as it is not a public company.
Pension and Post Retirement Benefits
Statement of Financial Accounting Standards No. 132, "Employers' Disclosure
about Pensions and Other Post Retirement Benefits," ("SFAS 132") issued by the
FASB is effective for financial statements with fiscal years beginning after
December 15, 1997. SFAS 132 revises the disclosure requirements for pension and
other post retirement benefit plans. At December 31, 1998, the Company did not
maintain any post retirement benefit plans.
Derivative Instruments and Hedging
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS 133") issued by the FASB is
effective for financial statements with fiscal years beginning after June 15,
1999. This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. The Company does not expect
the adoption of SFAS 133 to have an impact on its financial position or results
of operations.
Note 2 -- Financial Condition and Liquidity
The Company is a developmental stage company and to date has not generated any
revenues from operations, exclusive of rental income on the subsidiary's
facilities. Therefore, the Company has funded its operations, since inception,
through private sales of equity as discussed in Note 7.
With the acquisition of SRI, a real estate entity, the Company has incurred a
short term obligation, as more fully described in Note 6, of $1,000,000, which
was renegotiated in February, 1999. The Company anticipates restructuring its
financing to satisfy the renegotiated obligation.
Although no operating revenues have been generated through December 31, 1998,
the Company anticipates it will generate future revenues when the video
conferencing facilities become operational. Additional, the Company plans to
receive its outstanding subscriptions receivable of $1,589,666 during the next
twelve months, and will have additional private sales of equity.
Fair Value of Financial Instruments
SFAS 107, "Disclosure About Fair Value of Financial Instruments," requires
certain disclosures regarding the fair value of financial instruments. Cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities and
amounts due to and from affiliates are reflected in the financial statements at
fair value because of the short-term maturity of these instruments. The fair
value of long-term debt closely approximates its carrying value. The Company
uses quoted market prices, when available, or discounted cash flows to calculate
these fair values.
F-32
<PAGE>
Note 3 -- Marketable Securities
Marketable securities consist of common stock currently trading on a national
exchange. Marketable securities are stated at market value as determined by the
most recently traded price of each security at the balance sheet date. At
December 31, 1998, marketable securities were considered as available-for-sale
as defined by Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities." Available-for-sale
securities are carried at fair value, with the unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. The cost of
investments sold is determined on the specific identification or the first-in,
first-out method. At December 31, 1998, available-for-sale equity securities and
their market value were as follows:
Equity Securities, at cost $ 660,165
Unrealized Gain included in comprehensive income 221,935
----------
Market Value at December 31, 1998 $ 882,100
==========
Note 4 -- Property and Equipment
Property and equipment are summarized as follows:
Computers and equipment $ 172,758
Furniture and fixtures 13,528
Leasehold improvements 12,575
Computer software 2,685
Retail kiosk 5,900
Building 4,315,904
----------
4,523,350
Less accumulated depreciation 96,357
----------
4,426,993
Land 4,017,566
----------
Total $8,444,559
==========
Depreciation and amortization expense on property and equipment was $41,982 for
the year ended December 31, 1998.
Note 5 - Other Assets
Other assets consist of the following:
Deposits $ 26,864
Assigned stock options on marketable securities
net of option costs 299,498
Trademark costs 5,089
Organization costs 27,645
Loan Fees and costs 240,532
Less accumulated amortization on intangibles (43,507)
---------
Total Other Assets $ 556,121
=========
F-33
<PAGE>
Note 6 -- Short Term Debt
With the acquisition of SRI, the Company incurred a short term obligation of
$1,000,000 and assumed the seller's debt to a third party in the amount of
$468,950. At December 31, 1998, the Company owed a balance of $218,950 on the
third party debt assumed. The short term obligation to the seller of $1,000,000
was renegotiated and partially paid down on February 19, 1999. Under the
renegotiated note, the Company paid an advance against leasehold improvements in
the amount of $350,000 and a principal payment of $100,000, leaving a balance
due of $900,000 on the renegotiated note. The renegotiated note is secured by a
third position on the real estate and collateralized by 200,000 shares of Talk
Visual common stock. Repayment of the renegotiated note is to occur on the
refinancing of the property. At the holder's option, the note may be discharged
by accepting the Talk Visual stock collaterilizing the note, as full payment.
Note 7 -- Long Term Debt
The Company's long-term debt consists of the following:
<TABLE>
<S> <C>
Convertible discounted loan note ("CDLN"), secured by a third lien on the land
and building, with imputed interest at the rate of 9%, interest payable
monthly, principal balance due November 2001, net of unamortized discount
of $55,000 $195,000
Mortgage note, secured by a first lien on the land and building, including a
deed of trust on rents and fixtures; bearing interest at 10% for the initial
12 months and 12% thereafter; payable monthly, interest only for seventy-two
months, with the entire principal due January, 2004 3,840,000
12.5% Mortgage note, secured by a second lien on the land and building,
including a deed of trust on rents and a lien on specified equipment;
disbursed to a maximum funding of $500,000 based upon completion of certain
leasehold improvements and delivery of specified equipment; payable in
monthly installments of principal and interest for 60 months; undisbursed
funds at December 31, 1998 totaled $350,000 148,188
----------
Total notes payable $4,183,188
Less current portion 23,097
----------
Long-term portion $4,160,091
==========
</TABLE>
Concurrent with the placement of the CDLN, the lender has subscribed to 500,000
shares of common stock at a price of $500,000, paying $55,000 toward the total
subscription. The CDLN is convertible, at the option of the holder, into 250,000
shares of the Company's common stock, during the term of the note or at
maturity. If at maturity, the holder declines the conversion feature, the
Company is obligated to pay the principal on the note, rescind the subscription
for the 500,000 shares of common stock and refund the deposit paid toward that
subscription.
F-34
<PAGE>
Note 7 -- Long Term Debt (continued)
The aggregate maturities of long-term debt maturing in succeeding years are as
follows:
December 31, Amount
------------ ------
1999 $ 23,097
2000 26,155
2001 224,619
2002 33,541
2003 and thereafter 3,875,776
Note 8 --Commitments and Contingencies
Operating Leases
The Company leases certain equipment and real estate under various operating
leases which expire at various dates through February 19, 2002. Future minimum
rental payments required under operating leases that have initial or remaining
terms in excess of one year at December 31, 1998 are as follows:
Operating
December 31, Leases
------------ ------
1999 $119,453
2000 70,511
2001 66,131
2002 78
--------
Total future minimum rentals $256,173
========
The lease covering the Company's corporate office expires in July, 1999. Rent
expense for the year ended December 31, 1998 was $48,630.
Stock Contingency
The Company has agreed to issue 1,200,000 shares of stock to parties responsible
for the introduction of the Company to Talk Visual. Additionally, Talk Visual
has agreed to issue 600,000 shares of common stock and 1,800,000 options,
exercisable at twenty five cents per share, in connection with the Merger
agreement to parties responsible for the introduction of Talk Visual to the
Company. Both equity obligations take effect on the consummation of the Merger.
Note 9 -- Stockholders' Equity
Private Offerings
From inception to December 1998, the Company consummated various private
offerings totaling 20,562,500 shares of its common stock under a combination
U.S. offering of 1,000,000 shares and offshore offerings of 19,562,500 shares.
Net assets to the Company were approximately $4,266,195 after deducting
offering-related expenses of $57,343. The assets received under the
subscriptions are composed of $1,172,709 in cash, $1,461,163 in marketable
securities, third party notes receivable and other assets and $1,689,666 in
receivables from subscribers. Of the $1,689,666 due from subscribers, the
Company has received
F-35
<PAGE>
Note 9 -- Stockholders' Equity - Private Offerings (continued)
$100,000 as of April 23, 1999. The Company plans on using the funds to design,
implement and begin operations at the Company's planned videoconference
locations, acquire strategic business operations and assets, and for working
capital purposes.
Capital Stock Transactions
On August 14, 1998, the Company issued 600,000 shares of common stock to various
individuals in exchange for consulting services, 200,000 shares to two
individuals for Director's fees and 1,600,000 shares to officers of the Company
as compensation, subject to certain restrictions. On October 28, 1998, the
Company issued 200,000 shares of common stock for consulting services. On
November 13, 1998, the Company issued 30,000 shares for consulting services and
on November 16, 1998 the Company issued 100,000 shares to one individual for
Director's fees and 1,200,000 shares in payment of commissions due. The Company
recorded expenses related to these issuances of $443,000 representing the fair
market value of the common shares issued.
On October 28, 1998 the Company issued 3,000,000 shares of common stock to
acquire all of the outstanding stock of SRI.
Note 10 - Income Taxes
At December 31, 1998, the Company has federal and state net operating loss
carryforwards of approximately $1,020,400, available to offset taxable income
through the year 2013. The Tax Reform Act of 1986 contains provisions which
limit the federal net operating loss carryforwards available that can be used in
any given year in the event of certain occurrences, which include significant
ownership changes.
At December 31, 1998, the Company's net deferred tax asset consisted primarily
of net operating losses. The Company established a valuation allowance equal to
the net deferred tax asset, as the Company could not conclude that it was more
likely than not that the deferred tax asset would be realized. The valuation
allowance at December 31, 1998 was $285,700.
Note 11 - Related Party Transactions
During 1998 the Company paid $56,188 in consulting expenses to the President of
the Company prior to his becoming an employee. During 1998 the Company also paid
$68,600 in legal fees to a member of the Board, paid $80,000in consulting
services to a company in which the Chairman is general manager, and received an
advance of $70,000 in the SRI subsidiary from Talk Visual. Additionally, the
Company had advanced $4,000 at December 31, 1998 to Talk Visual.
Other current assets include prepaid legal expense in the amount of $53,833,
which represents an amount paid to a firm whose principal is a shareholder in
the Company.
As provided in the Merger Plan, and in accordance with the terms of the
September 8, 1998 Letter of Intent, Michael J. Zwebner, Chairman of the Company,
was elected Chairman of the Board of Directors of Talk Visual and Ariella J.
Lehrer, Ph.D. resigned as Chairwoman of the Board of Talk Visual. In addition to
Mr. Zwebner, Talk Visual elected Alexander H. Walker, Jr., and Eugene A. Rosov,
both members of the Company's Board, to fill existing vacancies on the Board of
Talk Visual. Talk Visual's Board also elected Mr. Rosov, President of the
Company, to serve as President and CEO of Talk Visual.
F-36
<PAGE>
Note 11 - Related Party Transactions (continued)
Receivables from related parties are composed of the net amount of $348,235 due
from the Chairman of the Company relating to amounts collected from equity
subscriptions; $96,500 advanced to Videocall Canada Ltd. and $7,104 of
miscellaneous officer and other related party advances.
Note 12 - Subsequent Events
Subsequent to December 31, 1998, the following activities have occurred with
respect to the Company:
As a part of the Company's videocalling expansion plans, Letters of Intent or
Leases have been signed providing for videoconference outlets to be opened in
the following locations in 1999:
Retail Stores
Boston, Massachusetts
Miami, Florida
Sacramento, California
Hotels
The Hyatt Regency, Hong Kong
Newspapers
The Philippine News - offices in San Francisco, Los Angeles,
New York City, San Diego, Toronto, Manila, Hawaii, Guam and
Malaysia
The Company has signed the following service agreements
Page Mart Wireless, Inc. - pager services for the Americas and the
Caribbean
Cable & Wireless - utilization of internet global network.
Global Exchange - utilization of network system
F-37
<PAGE>
TALK VISUAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
F-38
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-----------------------------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents..................................................... $ 449,799 $ 153,608
Accounts receivable, net of allowances for doubtful accounts of
$12,500 and $12,500........................................................ 2,260 31,243
Inventory..................................................................... 8,029 8,250
Other receivables............................................................. 130,232 70,000
Advances -- related parties................................................... 1,512,049 --
Subscriptions receivable...................................................... -- 1,743,000
Marketable securities......................................................... -- 89,210
Other current assets.......................................................... 10,710 6,746
------------- ------------
Total current assets.......................................................... 2,113,079 2,102,057
------------- ------------
Product development costs, net................................................... 381,604 381,604
Property and equipment, net...................................................... 1,900,446 18,500
Advance on acquisition........................................................... 2,250,000 --
Other assets..................................................................... 99,455 1,400
------------- ------------
Total assets............................................................. $ 6,744,584 $ 2,503,561
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................................................. $ 136,112 $ 129,968
Accrued expenses.............................................................. 40,294 16,685
Other current liabilities..................................................... 20,805 --
Notes payable and current portion of long-term debt........................... 147,066 281,066
------------- ------------
Total current liabilities................................................ 344,277 427,719
------------- ------------
LONG-TERM DEBT, net of current portion........................................... 1,024,085 75,000
------------- ------------
Total Liabilities........................................................ 1,368,362 502,719
------------- ------------
COMMITMENTS -- --
STOCKHOLDERS' EQUITY
Preferred Stock, par value $.001 per share, 5,000,000 shares
authorized; 975,000 and -0- issued and outstanding......................... 975 --
Common Stock, par value $.001 per share, 10,000,000 shares authorized:
4,724,913 and 1,393,417 shares issued and outstanding...................... 4,725 1,393
Stock Subscribed.............................................................. 28 382
Additional paid in capital.................................................... 14,825,966 10,000,719
Accumulated deficit........................................................... (9,455,471) (7,829,760)
Accumulated other comprehensive loss.......................................... -- (14,892)
Stock Subscriptions receivable................................................ -- (157,000)
------------- -------------
Total stockholders' equity................................................. 5,376,222 2,000,842
------------- ------------
Total Liabilities and Stockholders' Equity............................... $ 6,744,584 $ 2,503,561
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-39
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
REVENUE
Royalties.................................................................. $ 2,028 $ 128,909
Software sales............................................................. -- 8,122
Corporate services......................................................... -- 42,000
Rental activities.......................................................... 19,264 --
------------- -------------
Total revenue................................................................. 21,292 179,031
------------- -------------
COSTS AND EXPENSES
Cost of royalties.......................................................... 3,204 17,221
Cost of software sales..................................................... -- 10,562
Product development........................................................ -- 43,332
Real estate operations..................................................... 8,766 --
General & administrative................................................... 49,349 159,812
Consulting services........................................................ 1,483,887 --
Legal and accounting....................................................... 95,310 29,459
Selling.................................................................... -- 24,556
------------- -------------
Total costs and expenses...................................................... 1,640,516 284,942
------------- -------------
LOSS FROM OPERATIONS.......................................................... (1,619,224) (105,910)
INTEREST EXPENSE.............................................................. (1,243) (12,645)
INTEREST INCOME............................................................... 4,037 --
OTHER EXPENSE................................................................. (1,563)
OTHER INCOME.................................................................. --
------------- -------------
NET LOSS...................................................................... $ (1,617,993) (118,555)
============= =============
NET LOSS PER COMMON SHARE BASIC............................................... $ (0.47) $ (0.12)
NET LOSS PER COMMON SHARE DILUTED............................................. $ (0.47) $ (0.12)
============= =============
WEIGHTED AVERAGE COMMON STOCK SHARES
OUTSTANDING BASIC AND DILUTED................................................. 3,454,555 885,001
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-40
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
-----------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (1,617,993) $ (118,555)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of product development costs................................. -- 23,730
Depreciation.............................................................. 3,147 20,447
(Gain) loss on stock exchanged for debt................................... 1,563 --
Common stock issues for services.......................................... 1,497,637 --
Increase (decrease) in cash from changes in:
Accounts receivable, net..................................................... 28,983 36,800
Other receivables............................................................ 43,870 15,183
Inventories.................................................................. 221 11,509
Other assets................................................................. (3,964) 9,164
Accounts payable............................................................. 6,144 12,292
Accrued expenses............................................................. 23,609 3,460
Deferred revenues............................................................ -- (26,380)
Net cash from operating activities........................................ (16,783) (12,350)
------------- -------------
Cash flows from investing activities:
Purchase of property and equipment........................................... (37,390) (3,578)
Additions to organization costs.............................................. (868) --
Advances-related parties..................................................... (1,512,049) --
Net cash used in investing activities..................................... (1,550,307) (3,578)
------------- -------------
Cash flows from financing activities:
Product development advances................................................. -- 30,000
Payments on notes payable and long term debt................................. (29,000) (585)
Payment of cash dividends.................................................... (7,719) --
Collection of stock subscriptions receivable................................. 1,900,000 --
Net cash provided by financing activities................................. 1,863,281 29,415
------------- -------------
Increase (decrease) in cash and cash equivalents................................ 296,191 13,487
Cash and cash equivalents, at beginning of period............................... 153,608 14,464
------------- -------------
Cash and cash equivalents, at end of period..................................... $ 449,799 $ 27,951
============= =============
Supplemental disclosure of cash flow information
a. Cash paid during the period for:
Interest................................................................ $ 1,243 $ 12,645
------------- -------------
Income Taxes............................................................ $ 800 --
-------------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-41
<PAGE>
<TABLE>
<CAPTION>
3/31/99
-----------------
<S> <C>
b. Non-cash transactions
Conversion of marketable securities contributed under a stock subscription
For a note receivable..................................................................... $ 104,102
============
Purchase of Toronto real estate in exchange for 975,000 shares of
Convertible Preferred Stock with a value of $975,000, assumption of a
mortgage and other debts in the amount of $966,743..................................... $ 1,941,743
============
600,000 shares issued under agreement for the acquisition of Videocall
International as a commission.......................................................... $ 2,250,000
============
20,000 shares issued in cancellation of a note payable in the amount of $75,000........... $ 77,500
============
7,500 shares issued in cancellation of an advance payable in the amount of $30,000........ $ 29,063
============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-42
<PAGE>
(1) Basis of presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation of the Company's financial position
at March 31, 1999, the results of operations for the three months ended March
31, 1999 and the cash flows for the three months ended March 31, 1999 are
included. Operating results for the three month period ended March 31, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
The information contained in this Form 10-QSB should be read in
conjunction with audited financial statements as of December 31, 1998 filed as
part of the Company's Annual Report on Form 10-KSB.
The Balance Sheet at December 31, 1998, does not reflect the rental
property assets acquired February 24, 1999. Additionally, the Consolidated
Statement of Operations for the period ended March 31, 1998 does not reflect any
income or expense from the rental property. When viewing the respective
comparitive financial information, the reader is advised to take into
consideration the inclusion or exclusion of the rental property acquired
February 24, 1999.
(2) Proposed Acquisition of Videocall International Corporation
On September 8, 1998 Legacy Software, Inc., renamed Talk Visual
Corporation February 26, 1999 (the "Company") and Videocall International
Corporation ("Videocall") announced that the two companies had entered into a
Letter of Intent for the Company to purchase the common shares of Videocall in
exchange for the Company's common and preferred stock. On September 14, 1998 the
two companies signed an Agreement and Plan of Merger ("Merger Plan") detailing
the terms of the transaction, whereby Videocall will merge (the "Merger") with a
newly formed, wholly owned subsidiary of the Company. Videocall is a development
stage company formed to provide videocalling services to businesses and
consumers. Videocall is in the process of developing international locations
through strategic partnerships and wholly owned outlets. The Board of Directors
of the Company and the Board of Directors of Videocall have approved the Merger
Plan. The parties have prepared a definitive Proxy Statement and Registration
Statement on Form S-4 to be submitted for Company stockholder approval of the
Merger Plan at the annual shareholder meeting scheduled for June 15, 1999, for
shareholders of record May 7, 1999.
(3) Financial Condition and Liquidity
As of March 31, 1999, the Company had never achieved operating profits.
During the fourth quarter of 1998, the Company received $2,654,102 in cash
and other assets from third party investors to provide additional capital to the
Company for use in the merged Company/Videocall operations.
On February 24, 1999, the Company acquired a 22,622 square foot property
in Toronto, Canada in exchange for 975,000 shares of Class A Preferred stock,
$.001 par value, paying dividends of $.095 per share per annum. This building
was acquired as an investment and as part of the facility needs of the
videocalling operations.
The Company believes that it will be able to consummate the Merger, as
previously described, and its prospects for obtaining additional financing will
improve as a result thereof. However, should this transition not be successful,
the Company could face liquidity requirements that could significantly deplete
its current cash resources.
The Company has ceased its' CD-ROM software development activities, and is
in the process of determining the economic value of the sale or retention of
existing products and is currently focusing entirely on Videocall operations in
anticipation of shareholder approval of the Merger Plan. Since the Company has
ceased its software development and sales activities, in the event the Merger is
not consummated, the Company will not have any future revenue stream.
On April 7, 1999, the Company was notified by The Nasdaq Stock Market,
Inc. ("Nasdaq") that the Company was not in compliance with the requirements for
continued listing on The Nasdaq SmallCap Market(SM), as set forth in the Nasdaq
Listing Qualifications Panel (the "Panel") decision dated January 20, 1999.
Accordingly, the
F-43
<PAGE>
Company's securities were delisted from The Nasdaq SmallCap Market(SM) effective
April 7, 1999 and are currently listed under the symbol "TVCP" on the OTC
Bulletin Board. The Company is currently appealing the Panel's decision.
(4) Equity Transactions
On January 19,1999, the Company issued 175,000 shares of common stock to
an entity for services related to obtaining financing sources. This transaction
was priced at $3.625 per share for a total expense of $634,375.
On January 25, 1999, the Company issued 600,000 shares common stock
pursuant to the agreement with the parties responsible for the introduction of
Videocall to the Company. This transaction was priced at $3.75 per share for a
total cost of $2,250,000. The shares are in escrow pending the consummation of
the Merger, and accordingly the transaction has been recorded as an advance on
the acquisition of Videocall.
On January 25, 1999, the Company issued 190,000 shares common stock for
consulting services at $3.75 per share for a total expense of $712,500.
On February 1, 1999, the Company issued 5,000 shares common stock for
legal services at $3.25 per share for a total expense of $16,250.
On February 2, 1999, the Company issued 40,000 shares common stock for
consulting services at $3.25 per share for a total expense of $130,000.
On March 5, 1999, the Company issued 27,500 shares common stock in
exchange for $105,000 of notes payable and accrued interest at $3.875 per share.
The market value of the shares issued on the date of exchange exceeded the
obligations recorded on the books of the Company by $1,562.
On March 16, 1999, the Company issued 1,128 shares common stock for
services rendered at $4.00 per share for a total expense of $4,512.
On February 24, 1999, the Company acquired a 22,622 square foot office
facility in Ontario, Canada with the issuance of 975,000 shares of Class A
Preferred Stock, Series 1999-A, $.001 par value, and the assumption of a first
mortgage in the amount of $935,450 along with various minor obligations totaling
$31,293. The Preferred shares have a stated value of $975,000 ($1.00 per share),
are non-voting, and pay a cumulative dividend of $0.095 per share. The total
acquisition price of the property was $1,941,743. The property was appraised at
$1,854,000. Included in other assets is $87,743 representing the excess purchase
price paid over the fair value of the acquisition.
(5) Segment Information
The Company has two reportable segments: Software development and sales
and Rental activities. Pending the Merger, Software development and sales have
been discontinued, excluding minor incidental sales. The Rental activity results
from the ownership of the Toronto property acquired in the current reporting
period. The Company's reportable segments are separate business units with their
individual reporting systems. Rental activity is delineated on the Consolidated
Statements of Operations under rental revenue and cost of sales -- real estate
operations.
(6) Contingencies
The Company is involved in certain claims arising in the normal course of
business. An estimate of the possible loss resulting from these matters cannot
be made; however, the Company believes that the ultimate resolution of these
matters will not have a material adverse effect on its financial position or
results of operations.
(7) Subsequent Events
The Company has signed an agreement with Interconnect Sprl. of Brussels
Belguim to introduce the videocalling concept to its telephone call shop
customers worldwide. The Company and Interconnect Sprl. will jointly market
"turnkey" video calling room systems to telephone call shops in key global
markets, under a plan to bring low-cost videocalling capability to thousands of
call shops globally.
F-44
<PAGE>
The Company has filed a lawsuit in Los Angeles, California, claiming a
total of $30,000,000 in damages against DCI Telecommunications, Inc., its
officers and Directors and several of its shareholders. The lawsuit alleges that
during the period February 1998 to April, 1999, the defendants conspired jointly
to libel, slander and falsely accuse the Chairman of the Company of wrong doing
by posting messages on the internet.
(8) Earnings Per Share
The Company adopted SFAS No. 128, "Earnings Per Share", during 1997. SFAS
No. 128 requires presentation of basic and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding for the
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if securities or other contracts, such as stock options, to
issue common stock were exercised or converted into common stock. For The three
months ended March 31, 1999, all outstanding options and warrants were not
included in diluted earnings per share since they were antidilutive.
(9) Year 2000 Compliance
The Company has reviewed its computer systems in order to evaluate if any
modifications are necessary for the year 2000. The Company currently does not
anticipate that any material modifications or expenditures will be required in
its computer systems to bring the systems into compliance with the computational
needs for the year 2000. The Company has been advised by its external vendors
that their systems are in compliance with year 2000 issues.
F-45
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1999
F-46
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, 1999
ASSETS
Current Assets
Cash and Cash Equivalents $ 37,769
Accounts Receivable 63,119
Marketable Securities 1,003,638
Other Receivables 195,734
Receivable - Related Parties 8,711
Other Current Assets 313,818 $ 1,622,789
----------
Property & Equipment, Net 8,641,615
Other Assets
Prepaid Acquisition Cost $ 120,000
Other Assets 551,478 671,478
----------- ------------
TOTAL ASSETS $ 10,935,882
============
F-47
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
MARCH 31, 1999
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current Liabilities
Accounts Payable $ 423,343
Accrued Expenses 56,981
Short Term Debt 44,288
Payable - Related Party 575,483
Other Current Liabilities 44,150 $ 1,144,245
-----------
Long-Term Debt, Net Current Portion 5,179,468
------------
TOTAL LIABILITIES $ 6,323,712
Commitments and Contingencies -
Stockholders' Equity
Common Stock, par value $.01 per share,
50,000,000 shares authorized: 27,827,500
shares issued and outstanding $ 278,275
Stock Subscribed (17,258)
Additional Paid-In Capital 7,505,070
Accumulated Deficit (1,807,175)
Accumulated Other Comprehensive Income 343,473
Stock Subscriptions Receivable (1,690,666)
-----------
TOTAL STOCKHOLDERS' EQUITY 4,612,170
------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 10,935,882
============
</TABLE>
F-48
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Real Estate Income $ 206,904
Costs and Expenses
Research & Development $ 38,935
Real Estate Operations 111,322
Marketing 43,329
General & Administrative Expenses 493,550 687,136
--------- -----------
Loss From Operations (480,232)
Interest Expense 129,570
-----------
NET LOSS $ (609,801)
===========
Net Loss Per Common Share, Basic and Diluted $( 0.02)
===========
Weighted Average Common Stock Shares Outstanding 27,827,500
===========
F-49
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Cash Flows From Operating Activities
Net Loss $(609,801)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and Amortization $ 35,646
Increase (Decrease) In Cash From Changes in:
Accounts Receivable, Net $ (20,546)
Other Receivables (161,839)
Other Current Assets (101,119)
Accounts Payable 230,664
Accrued Expenses (101,927)
Other Current Liabilities 470 (188,651)
--------- ---------
Net Cash Used In Operating Activities $(728,452)
Cash Flows From Investing Activities
Purchase of Property and Equipment $(221,163)
Purchase of Other Assets ( 6,897)
---------
Net Cash Used in Investing Activities $(228,060)
Cash Flows From Financing Activities
Net Borrowings on Short Term Debt $ 61,000
Net Borrowings on Long Term Debt 948,613
Payments on Notes Payable and Long Term Debt (240,382)
Net Cash Provided By Financing Activities 769,231
---------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS $ 187,281
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 225,050
---------
CASH AND CASH EQUIVALENTS
AT END OF PERIOD $ 37,769
=========
F-50
<PAGE>
VIDEOCALL INTERNATIONAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(CONTINUED)
Supplemental Disclosures of Cash Flow Information:
a) Cash Paid For:
Interest $129,570
Income Taxes -0-
F-51
<PAGE>
ANNEX A
MERGER AGREEMENT
A-1
<PAGE>
AGREEMENT AND PLAN OF MERGER
AMONG
LEGACY SOFTWARE, INC.,
LEGACY ACQUISITION, INC.
AND
VIDEOCALL INTERNATIONAL CORPORATION
September 14, 1998
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER entered into as of September 14, 1998 by and
among Legacy Software, Inc., a Delaware corporation (the "Buyer"), Legacy
Software Acquisition, Inc., a Florida corporation to be incorporated (the
"Transitory Subsidiary"), and Videocall International Corporation., a Florida
corporation (the "Target"). The Buyer, the Transitory Subsidiary, and the Target
are referred to collectively herein as the "Parties;"
WHEREAS, upon the terms and subject to the conditions of this Agreement
and of a Merger Agreement in the form attached hereto as Exhibit A (the "Merger
Agreement"), in accordance with the Florida General Corporation Law, the Buyer,
the Target, and the Transitory Subsidiary will carry out a business combination
pursuant to which the Target will merge with and into the Transitory Subsidiary,
the stockholders of the Target will convert all of their outstanding Target
Shares into the Buyer Shares;
WHEREAS, the Board of Directors of the Buyer and of the Target unanimously
have determined that the Merger is fair to, and in the best interests of, their
respective companies and stockholders, and have approved and adopted this
Agreement and the Merger, and have recommended approval and adoption of this
Agreement and the Merger by their respective stockholders; and
WHEREAS, the Buyer's Board of Directors has approved and adopted this
Agreement and has approved the Merger as the sole stockholder of the Transitory
Subsidiary.
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the Parties agree as follows:
1. Definitions.
"Affiliate" has the meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act.
"Affiliated Group" means any affiliated group within the meaning of
Code ss.1504(a) or any similar group defined under a similar provision of state,
local, or foreign law.
"Buyer" has the meaning set forth in the preface above.
"Buyer-owned Share" means any Target Share that the Buyer owns
beneficially or of record.
"Buyer Shares" means the 5 million shares of the Common Stock,
$0.001 par value per share, and the 5 million shares of Series A Preferred
Stock, $0.001par value, of the Buyer.
2
<PAGE>
"Buyer's Most Recent Balance Sheet" means the balance sheet
contained within the Buyer's Most Recent Financial Statements.
"Buyer's Most Recent Financial Statements" means the Buyer's
financial statements for the six months ended June 30, 1998.
"Buyer's Most Recent Fiscal Year End" means the year ended December
31, 1997.
"Certificate of Merger" has the meaning set forth in ss.2(d) below.
"Closing" has the meaning set forth in ss.2(c) below.
"Closing Date" has the meaning set forth in ss.2(c) below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the
businesses and affairs of any of the Parties and their respective Subsidiaries
that is not already generally available to the public.
"Controlled Group of Corporations" has the meaning set forth in Code
ss.1563.
"Conversion Ratio" has the meaning set forth in ss.2(f)(i) below.
"Delaware General Corporation Law" means the general corporation
laws of the State of Delaware.
"Disclosure Schedule" has the meaning set forth in ss.3 below.
"Dissenting Shares" has the meaning set forth in ss.2(i) below.
"Effective Time" has the meaning set forth in ss.2(e)(i) below.
"Employee Benefit Plan" means any (a) nonqualified deferred
compensation or retirement plan or arrangement which is an Employee Pension
Benefit Plan, (b) qualified defined contribution retirement plan or arrangement
which is an Employee Pension Benefit Plan, (c) qualified defined benefit
retirement plan or arrangement which is an Employee Pension Benefit Plan
(including any Multiemployer Plan), or (d) Employee Welfare Benefit Plan or
material fringe benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA
ss.3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA
ss.3(1).
"Environmental, Health, and Safety Laws" means the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, the Resource
Conservation and
3
<PAGE>
Recovery Act of 1976, and the Occupational Safety and Health Act of 1970, each
as amended, together with all other laws (including rules, regulations, codes,
plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder)
of federal, state, local, and foreign governments (and all agencies thereof)
concerning pollution or protection of the environment, public health and safety,
or employee health and safety, including laws relating to emissions, discharges,
releases, or threatened releases of pollutants, contaminants, or chemical,
industrial, hazardous, or toxic materials or wastes into ambient air, surface
water, ground water, or lands or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport, or
handling of pollutants, contaminants, or chemical, industrial, hazardous, or
toxic materials or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
"Exchange Agent" has the meaning set forth in ss.2(g) below.
"Fiduciary" has the meaning set forth in ERISA ss.3(21).
"Florida General Corporation Law" means the general corporation laws
of the State of Florida.
"GAAP" means United States generally accepted accounting principles
as in effect from time to time, applied on a consistent basis.
"Hart-Scott-Rodino Act" means the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
"Independent Auditors" has the meaning set forth in ss.2(f)(iii)
below.
"Initial Closing Statement" has the meaning set forth in
ss.2(f)(iii) below.
"Initial Closing Statement Income" has the meaning set forth in
ss.2(f)(iii) below.
"Initial Closing Statement Revenues" has the meaning set forth in
ss.2(f)(iii) below.
4
<PAGE>
"Intellectual Property" means (a) all inventions (whether patentable
or unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures, together
with all reissuances, continuations, continuations-in-part, revisions,
extensions, and reexaminations thereof, (b) all trademarks, service marks, trade
dress, logos, trade names, and corporate names, together with all translations,
adaptations, derivations, and combinations thereof and including all goodwill
associated therewith, and all applications, registrations, and renewals in
connection therewith, (c) all copyrightable works, all copyrights, and all
applications, registrations, and renewals in connection therewith, (d) all mask
works and all applications, registrations, and renewals in connection therewith,
(e) all trade secrets and confidential business information (including ideas,
research and development, know-how, formulas, compositions, manufacturing and
production processes and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost information, and
business and marketing plans and proposals), (f) all computer software
(including data and related documentation), (g) all other proprietary rights,
and (h) all copies and tangible embodiments thereof (in whatever form or
medium).
"IRS" means the Internal Revenue Service.
"Liability" means any liability (whether absolute, accrued or
contingent), including any liability for Taxes.
"Merger" has the meaning set forth in ss.2(a) below.
"Merger Agreement" has the meaning set forth in the preamble above.
"Multiemployer Plan" has the meaning set forth in ERISA ss.3(37).
"NASDAQ" means The NASDAQ SmallCap Market, Inc.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity and
frequency).
"Party" has the meaning set forth in the preface above.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Prohibited Transaction" has the meaning set forth in ERISA ss.406
and Code ss.4975.
"Prospectus" means the final prospectus relating to the registration
of the Buyer Shares issued in the Merger under the Securities Act.
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"Reportable Event" has the meaning set forth in ERISA ss.4043.
"Requisite Buyer Stockholder Approval" means the affirmative vote of
the holders of a majority of the Buyer Shares entitled to vote thereon, in favor
of this Agreement and the Merger.
"Requisite Target Stockholder Approval" means the affirmative vote
of the holders of 100% of the Target Shares entitled to vote thereon, in favor
of this Agreement and the Merger.
"Rights" has the meaning set forth in ss.6(o) below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
as amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, (b) liens for taxes not yet due and payable or for taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Surviving Corporation" has the meaning set forth in ss.2(a)(i)
below.
"Target" has the meaning set forth in the preface above.
"Target Director Designees" means Michael J. Zwebner, Eugene A.
Rosov, Michael Cuzner-Charles and Alexander H. Walker, Jr.
"Target Options" means the options to acquire Target Shares issued
to the officers, directors, employees and consultants of the Target, and
identified on Schedule 3(c) of the Disclosure Schedule.
"Target Share" means any share of Common Stock, $0.01 par value per
share, of the Target.
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"Target Stockholder" means any Person who or which holds any Target
Shares.
"Target's Most Recent Balance Sheet" means the balance sheet
contained within the Target's Most Recent Financial Statements.
"Target's Most Recent Financial Statements" has the meaning set
forth in ss.3(g) below.
"Target's Most Recent Financial Statement Date" has the meaning set
forth in ss.3(g) below.
"Target's Most Recent Fiscal Year End" has the meaning set forth in
ss.3(g) below.
"Target's Notice" has the meaning set forth in ss.5(q) hereof.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (including taxes under Code ss.59A),
customs duties, capital stock, franchise, profits, withholding, social security
(or similar), unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on minimum,
estimated, or other tax of any kind whatsoever, including any interest, penalty,
or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"to the Buyer's Knowledge" or other reference herein to the Buyer's
knowledge or awareness, means the actual knowledge of C. Robert Kline, Ph.D and
William E. Sliney, after due inquiry of the officers and directors of the Buyer
and after reasonable investigation of the books, records and files of the Buyer.
"to the Target's Knowledge" or other reference herein to the
Target's knowledge or awareness, means the actual knowledge of Michael J.
Zwebner, Eugene A. Rosov and Harold Snyder, after due inquiry of the officers
and directors of the Target and after reasonable investigation of the books,
records and files of the Target.
"Transitory Subsidiary" has the meaning set forth in the preface
above.
2. Basic Transaction.
(a) The Merger.
(i) On and subject to the terms and conditions of this
Agreement and the Merger Agreement, and in accordance with the Florida
General Corporation Law, the Target will merge with and into the
Transitory Subsidiary (the "Merger") at the Effective
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Time. The Transitory Subsidiary shall be the corporation surviving the
Merger as a wholly-owned subsidiary of the Buyer (the "Surviving
Corporation").
(ii) The Target hereby represents that its Board of Directors,
at a meeting duly called and held at which a quorum was present and acting
throughout, has unanimously (A) determined that this Agreement, the Merger
Agreement and the Merger are fair to and in the best interests of, the
Target and its stockholders, (B) approved this Agreement, the Merger
Agreement and the Merger, and (C) resolved to recommend approval and
adoption by the stockholders of the Target of this Agreement, the Merger
Agreement and the Merger to the extent required and in a manner permitted
by the Florida General Corporation Law.
(b) Action by the Buyer. The Buyer, acting through its Board of
Directors, shall, as soon as practicable, take all actions necessary to obtain
stockholder approval in accordance with the Delaware General Corporation Law and
the Securities Exchange Act by: (A) as soon as practicable, duly call, give
notice of, convene and hold the Special Buyer Meeting for the purpose of
adopting and approving this Agreement, the Merger Agreement and the Merger; (B)
include in the Definitive Buyer Proxy Materials the conclusion and
recommendation of the Board of Directors to the effect that the Board of
Directors, having determined that this Agreement, the Merger Agreement and the
Merger are in the best interests of the Buyer and its stockholders, has approved
this Agreement, the Merger Agreement and the Merger and recommends that the
stockholders of the Buyer vote in favor of the approval and adoption of this
Agreement, the Merger Agreement and the Merger; (C) use its reasonable best
efforts to obtain the necessary approval and adoption of this Agreement, the
Merger Agreement and the Merger by the stockholders of the Buyer; and (D) as
sole stockholder of the Transitory Subsidiary, shall adopt and approve this
Agreement, the Merger Agreement and the Merger.
(c) The Closing. The closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Troop Steuber
Pasich Reddick & Tobey, LLP in Los Angeles, California, commencing at 9:00 a.m.
local time on the second business day following the satisfaction or waiver of
all conditions to the obligations of the Parties to consummate the transactions
contemplated hereby (other than conditions with respect to actions the
respective Parties will take at the Closing itself) or such other date as the
Parties may mutually determine (the "Closing Date").
(d) Actions at the Closing. At the Closing, (i) the Target will
deliver to the Buyer the various certificates, instruments, and documents
referred to in ss.6(a) below, (ii) the Buyer and the Transitory Subsidiary will
deliver to the Target the various certificates, instruments, and documents
referred to in ss.6(b) below, (iii) the Transitory Subsidiary and the Target
will file with the Secretary of State of the State of Florida a Certificate of
Merger in the form attached hereto as Exhibits B (the "Certificate of Merger"),
and (iv) the Buyer will deliver to the Exchange Agent in the manner provided
below in this ss.2 the certificates evidencing the Buyer Shares issued in the
Merger.
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(e) Effect of Merger.
(i) General. The Merger shall become effective at the time
(the "Effective Time") the Transitory Subsidiary and the Target file the
Certificate of Merger with the Secretary of State of Florida. The Merger
shall have the effect set forth in the Florida General Corporation Law.
The Surviving Corporation may, at any time after the Effective Time, take
any action (including executing and delivering any document) in the name
and on behalf of either the Buyer or the Target in order to carry out and
effectuate the transactions contemplated by this Agreement.
(ii) Certificate of Incorporation. The Certificate of
Incorporation of the Transitory Subsidiary in effect at and as of the
Effective Time will remain the Certificate of Incorporation of the
Surviving Corporation without any modification or amendment in the Merger.
(iii) Bylaws. The Bylaws of the Transitory Subsidiary in
effect at and as of the Effective Time will remain the Bylaws of the
Surviving Corporation without any modification or amendment in the Merger.
(iv) Directors and Officers. The directors and officers of the
Target in office at and as of the Effective Time will remain the directors
and officers of the Surviving Corporation (retaining their respective
positions and terms of office), together with the Target Director
Designees.
(v) Buyer Shares. Each Buyer Share issued and outstanding at
and as of the Effective Time will remain issued and outstanding.
(vi) Target Shares. No Target Share shall be deemed to be
outstanding or to have any rights other than those set forth in ss.2(f)
and ss.2(i) below after the Effective Time.
(f) Conversion of Target Shares. At the Effective Time, by virtue of
the Merger and without any action on the part of the Buyer, the Target, the
Transitory Subsidiary, or the holders of any of the foregoing securities:
Every share of Target Stock issued and outstanding and owned
by the Buyer immediately prior to the Effective Time, shall automatically
be canceled and retired and shall cease to exist, and no cash or Buyer
Shares, or other consideration shall be delivered or deliverable or
exchanged therefor. For purposes of this ss.2(f)(i) and the calculation of
the Conversion Ratio, it is assumed that there are such number of Target
Shares outstanding as referenced in the attached Schedule 2(f)-1. At and
as of the Effective Time, (1) each Target Share (other than any Dissenting
Shares or Buyer-owned Shares) shall be converted into the right to receive
such number of Buyer Shares (the ratio of Buyer Shares to one Target Share
is referred to herein as the "Conversion Ratio" ) as specified in the
attached Schedule 2(f)-2, (2) each Dissenting Share shall be converted
into the right to
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receive payment from the Buyer with respect thereto in accordance with the
provisions of the Florida General Corporation Law, and (3) each
Buyer-owned Share shall be canceled; provided, however, that the
Conversion Ratio shall be subject to equitable adjustment in the event of
any stock split, stock dividend, reverse stock split, or other change in
the number of Target Shares outstanding; provided further, however, that
the Conversion Ratio shall be subject to adjustments, if applicable,
provided in ss.2(f)(ii), (iii) and (iv) below. No fractional Buyer Shares
shall be issued. Any conversion which would otherwise result in a
fractional share shall be rounded up to the nearest whole Buyer Share.
(g) Procedure for Payment.
(i) Immediately after the Effective Time, (A) the Buyer will
furnish to Chase Mellon Shareholder Services (the "Exchange Agent")
instructions directing the Exchange Agent to issue to each Target
Shareholder (other than holders of Dissenting Shares and Buyer-owned
Shares) their pro rata share of Buyer Shares equal to the product of (I)
the Conversion Ratio times (II) the number of Target Shares such
stockholder owns, and (B) the Buyer will cause the Exchange Agent to mail
a letter of transmittal (with instructions for its use) in the form
attached hereto as Exhibit C to each record holder of outstanding Target
Shares for the holder to use in surrendering the certificates which
represented his, her, or its Target Shares in exchange for a certificate
representing the number of Buyer Shares to which he, she, or it is
entitled.
(ii) The Buyer will not pay any dividend or make any
distribution on Buyer Shares (with a record date at or after the Effective
Time) to any record holder of outstanding Target Shares until the holder
surrenders for exchange his, her, or its certificates which represented
Target Shares. The Buyer instead will pay the dividend or make the
distribution to the Exchange Agent in trust for the benefit of the holder
pending surrender and exchange. The Buyer may cause the Exchange Agent to
invest any cash the Exchange Agent receives from the Buyer as a dividend
or distribution in one or more of the permitted investments set forth on
Exhibit D attached hereto; provided, however, that the terms and
conditions of the investments shall be such as to permit the Exchange
Agent to make prompt payments of cash to the holders of outstanding Target
Shares as necessary. The Buyer may cause the Exchange Agent to pay over to
the Buyer any net earnings with respect to the investments, and the Buyer
will replace promptly any cash which the Exchange Agent loses through
investments. In no event, however, will any holder of outstanding Target
Shares be entitled to any interest or earnings on the dividend or
distribution pending receipt.
(iii) The Buyer may cause the Exchange Agent to return any
Buyer Shares and dividends and distributions thereon remaining unclaimed
180 days after the Effective Time, and thereafter each remaining record
holder of outstanding Target Shares shall be entitled to look to the Buyer
(subject to abandoned property, escheat, and other similar laws) as a
general creditor thereof with respect to the Buyer Shares and dividends
and distributions thereon to which he, she, or it is entitled upon
surrender of his, her, or its certificates.
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(iv) The Buyer shall pay all charges and expenses of the
Exchange Agent.
(h) Closing of Transfer Records. After the close of business on the
Closing Date, transfers of Target Shares outstanding prior to the Effective Time
shall not be made on the stock transfer books of the Surviving Corporation. On
or after the Closing Date, any Target Share presented to the Buyer, the Exchange
Agent, or the Surviving Corporation, as the case may be, shall be converted into
the applicable number of Buyer Shares.
(i) Dissenting Shares.
(i) Notwithstanding any other provision of this Agreement to
the contrary, shares of Target Stock that are outstanding immediately
prior to the Effective Time and which are held by Target Stockholders who
shall not have voted in favor of the Merger or consented thereto in
writing and who shall be entitled to and shall have demanded properly in
writing appraisal for such shares in accordance with the Florida General
Corporation Law and who shall not have withdrawn such demand or otherwise
have forfeited appraisal rights (collectively, the "Dissenting Shares")
shall not be converted into or represent the right to receive Buyer
Shares. Such stockholders shall be entitled to receive payment of the
appraised value of such Target Shares held by them in accordance with the
provisions of the Florida General Corporation Law, except that all
Dissenting Shares held by such stockholders, who shall have failed to
perfect or who effectively shall have withdrawn, forfeited, or lost their
rights to appraisal of such Target Shares under the Florida General
Corporation Law, shall thereupon be deemed to have been converted into and
to have become exchangeable for, as of the Effective Time, the right to
receive, the Buyer Shares, upon surrender, in the manner provided in
ss.2(f) above.
(ii) The Target shall give the Buyer prompt notice of any
demands for appraisal received by it, withdrawals of such demands, and any
other instruments served pursuant to the Florida General Corporation Law
and received by the Target and relating thereto. The Target (and after the
Closing, the Transitory Subsidiary) shall direct all negotiations and
proceedings with respect to demand for appraisal rights under the Florida
General Corporation Law.
3. Representations and Warranties of the Target. The Target represents and
warrants to the Buyer that the statements contained in this ss.3 are correct and
complete as of the date of this Agreement and, subject to amendment by Target
for events occurring after the date of this Agreement, will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this ss.3),
except as set forth in the disclosure schedule accompanying this Agreement and
initialed by the Parties (the "Disclosure Schedule"). The Disclosure Schedule
will be arranged in paragraphs corresponding to the lettered and numbered
paragraphs contained in this ss.3. The Disclosure Schedule may be amended from
time to time and such Disclosure Schedule as amended becomes the Disclosure
Schedule of the disclosing party.
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(a) Organization, Qualification, and Corporate Power. The Target is
a corporation duly organized, validly existing, and in corporate good standing
under the laws of the State of Florida. The Target is duly qualified as a
foreign corporation in each jurisdiction where its ownership or leasing of
property or where the nature of its activities requires such qualification. The
Target has full corporate power and authority to carry on the businesses in
which it is engaged and to own, lease, and use the properties owned, leased, and
used by it, and has in full force and effect all authorizations and has made all
filings to the extent required for such ownership, lease, and use of its
properties and the conduct of its business.
(b) Capitalization. The entire authorized capital stock of the
Target is set forth in the attached 2(f)-1. All of the issued and outstanding
Target Shares have been duly authorized and are validly issued, fully paid, and
nonassessable. Except for the Target Options, there are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, or other contracts or commitments that could require
the Target to issue, sell, or otherwise cause to become outstanding any of its
capital stock. There are no outstanding or authorized stock appreciation,
phantom stock, profit participation, or similar rights with respect to the
Target.
(c) Authorization of Transaction. The Target has the requisite
corporate power and authority to execute and deliver this Agreement and the
Merger Agreement and to perform its obligations hereunder and thereunder;
provided, however, that the Target cannot consummate the Merger unless and until
it receives the Requisite Target Stockholder Approval. This Agreement
constitutes the valid and legally binding obligation of the Target, enforceable
against Target in accordance with its terms and conditions, except as such
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratoriums or other similar laws affecting the enforcement of
creditors' rights generally and the availability of equitable remedies
(regardless of whether enforceability is considered in a proceeding at law or in
equity).
(d) Noncontravention. To the Target's Knowledge, neither Target's
execution and the delivery of this Agreement, nor Target's consummation of the
transactions contemplated hereby, will (i) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge, or other
restriction of any government, governmental agency, or court to which the Target
is subject or any provision of the charter or bylaws of the Target, which would
have a material adverse effect on the Target, or (ii) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify, or cancel, or require any
notice under any material agreement, contract, lease, license, instrument or
other arrangement to which the Target is a party or by which it is bound or to
which any of its assets is subject (or result in the imposition of any Security
Interest upon any of its assets). To the Target's Knowledge, and other than in
connection with the Florida General Corporation Law, the Target does not need to
give any notice to, make any filing with, or obtain any authorization, consent,
or approval of any government or governmental agency in order for the Parties to
consummate the transactions contemplated by this Agreement, except where the
violation, conflict, breach, default, acceleration, termination, modification,
cancellation or failure to give notice would not have a material adverse effect
on the ability of Target to consummate the
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transactions contemplated by this Agreement or have a material adverse effect on
the Target's business, operations, condition (financial or otherwise), assets or
Liabilities as in existence immediately prior to the Closing.
(e) Title to Assets. The Target has good title to, or a valid
leasehold interest in, the properties and assets used by the Target, located on
its premises, or shown on the Most Recent Balance Sheet or acquired after the
date thereof, free and clear of all Security Interests, except for properties
and assets disposed of in the Ordinary Course of Business since the date of the
Most Recent Balance Sheet.
(f) Subsidiaries. There are no Subsidiaries of the Target.
(g) Financial Statements Attached hereto as Exhibit E are the
following financial statements (collectively the "Financial Statements"):
unaudited balance sheet and statements of operations and cash flows as of and
for the period ended September 10, 1998 ("Most Recent Financial Statement Date")
for the Target. The Financial Statements (including the notes thereto) have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby, present fairly the financial condition of the Target as
of such dates and the results of operations of the Target for such periods, are
correct and complete in all material respects; and are consistent in all
material respects with the books and records of the Target); provided, however,
that they are subject to normal year-end adjustments and lack footnotes and
other presentation items.
(h) Events Subsequent to Most Recent Financial Statement Date. Since
the Most Recent Financial Statement Date and continuing up to and including the
date of this Agreement, there has not been any material adverse change in the
business, financial condition, operations or results of operations of the
Target. Without limiting the generality of the foregoing, since that date:
(i) the Target has not sold, leased, transferred, or assigned
any of its assets, tangible or intangible, other than in the Ordinary
Course of Business;
(ii) the Target has not entered into any agreement, contract,
lease, or license (or series of related agreements, contracts, leases, and
licenses) either involving more than $50,000 or outside the Ordinary
Course of Business;
(iii) the Target has not and to the Target's Knowledge, no
other party has accelerated, terminated, modified, or canceled any
agreement, contract, lease, or license (or series of related agreements,
contracts, leases, and licenses) involving more than $50,000 to which the
Target is a party or by which the Target is bound;
(iv) the Target has not imposed any Security Interest upon any
of its assets, tangible or intangible, except in favor of Buyer;
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(v) the Target has not made any capital expenditure (or series
of related capital expenditures) either involving more than $50,000 or
outside the Ordinary Course of Business;
(vi) the Target has not made any capital investment in, any
loan to, or any acquisition of the securities or assets of, any other
Person (or series of related capital investments, loans, and acquisitions)
either involving more than $50,000 or outside the Ordinary Course of
Business;
(vii) the Target has not issued any note, bond, or other debt
security or created, incurred, assumed, or guaranteed any indebtedness for
borrowed money or capitalized lease obligation either involving more than
$50,000 singly or $100,000 in the aggregate, except with respect to the
Buyer;
(viii) the Target has not delayed or postponed the payment of
accounts payable and other Liabilities outside the Ordinary Course of
Business;
(ix) the Target has not canceled, compromised, waived, or
released any right or claim (or series of related rights and claims)
either involving more than $50,000 or outside the Ordinary Course of
Business;
(x) the Target has not granted any license or sublicense of
any rights under or with respect to any Intellectual Property;
(xi) there has been no change made or authorized in the
charter or bylaws of the Target;
(xii) the Target has not issued, sold, or otherwise disposed
of any of its capital stock, or granted any options, warrants, or other
rights to purchase or obtain (including upon conversion, exchange, or
exercise) any of its capital stock, except in connection with the exercise
of the Target Options;
(xiii) the Target has not declared, set aside, or paid any
dividend or made any distribution with respect to its capital stock
(whether in cash or in kind) or redeemed, purchased, or otherwise acquired
any of its capital stock;
(xiv) the Target has not experienced any material damage,
destruction, or loss (whether or not covered by insurance) to its
property;
(xv) the Target has not made any loan to, or entered into any
other transaction with, any of its directors, officers, and employees
outside the Ordinary Course of Business;
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(xvi) the Target has not entered into any employment contract
or collective bargaining agreement, written or oral, or modified the terms
of any existing such contract or agreement;
(xvii) the Target has not granted any increase in the base
compensation of any of its directors, officers, and employees outside the
Ordinary Course of Business;
(xviii) the Target has not adopted, amended, modified or
terminated any bonus, profit-sharing, incentive, severance, or other plan,
contract, or commitment for the benefit of any of its directors, officers,
and employees (or taken any such action with respect to any other Employee
Benefit Plan);
(xix) the Target has not made any other change in employment
terms for any of its directors, officers, and employees outside the
Ordinary Course of Business;
(xx) the Target has not made or pledged to make any charitable
or other capital contribution outside the Ordinary Course of Business;
(xxi) there has not been any other material occurrence, event,
incident, action, failure to act, or transaction outside the Ordinary
Course of Business involving the Target; and
(xxii) the Target has not committed to any of the foregoing,
except in respect to the transactions contemplated by this Agreement.
(i) Undisclosed Liabilities. The Target has no material Liability
except for (i) Liabilities reflected on the Financial Statements and (ii)
Liabilities which have arisen after the Most Recent Financial Statement Date in
the Ordinary Course of Business, none of which results from, arises out of,
relates to, is in the nature of, or was caused by any breach of contract, breach
of warranty, tort, infringement, or violation of law.
(j) Legal Compliance. The Target has complied with all applicable
laws (including rules, regulations, codes, plans, injunctions, judgments,
orders, decrees, rulings, and charges thereunder) of federal, state, local, and
foreign governments (and all agencies thereof), and no action, suit, proceeding,
hearing, investigation, charge, complaint, claim, demand, or notice has been
filed or commenced against the Target alleging any failure so to comply and, to
the Target's Knowledge, there is no basis for any such action, suit, proceeding,
hearing, investigation, charge, complaint, claim, demand, or notice to be filed
or to be commenced against any of them alleging any failure so to comply. This
compliance includes compliance with the state, federal and international
securities laws in connection with the offering and or sale of the Target's
Shares.
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(k) Tax Matters.
(i) The Target has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing to
any employee, independent contractor, creditor, stockholder, or other
third party.
(ii) The Target does not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed.
There is no dispute or claim, and there is no basis for any such dispute
or claim, concerning any Tax Liability of the Target. ss.3(k) of the
Disclosure Schedule lists all federal, state, local, and foreign income
Tax Returns filed with respect to the Target for taxable periods ended on
or after December 31, 1997, indicates those Tax Returns that have been
audited, and indicates those Tax Returns that currently are the subject of
audit. The Target has delivered to the Buyer correct and complete copies
of all state, local, and federal income Tax Returns, examination reports,
and statements of deficiencies assessed against or agreed to by the Target
since December 31, 1993.
(iii) The Target has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.
(iv) The unpaid Taxes of the Target (A) did not, as of the
Most Recent Financial Statement Date, exceed the reserve for Tax Liability
(rather than any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) reflected in the Most Recent
Balance Sheet (and in any notes thereto) and (B) will not exceed that
reserve as adjusted for the passage of time up to and including the
Closing Date in accordance with the past custom and practice of the Target
in filing its Tax Returns.
(v) The Target has not filed a consent under Code ss.341(f)
concerning collapsible corporations. The Target has not made any payments,
is not obligated to make any payments, nor is the Target a party to any
agreement that under certain circumstances would obligate it to make any
payments that will not be deductible under Code ss.280G. The Target has
not been a United States real property holding corporation within the
meaning of Code ss.897(c)(2) during the applicable period specified in
Code ss.897(c)(1)(A)(ii). The Target has disclosed on its federal income
Tax Returns all positions taken therein that would give rise to a
substantial understatement of federal income Tax within the meaning of
Code ss.6662. The Target is not a party to any Tax allocation or sharing
agreement. The Target (A) has not been a member of an Affiliated Group
filing a consolidated federal income Tax Return (other than a group the
common parent of which was the Target) nor (B) does the Target have any
Liability for the Taxes of any Person (other than the Target) under Treas.
Reg. ss.1.1502-6 (or any similar provision of state, local, or foreign
law), as a transferee or successor, by contract, or otherwise.
(vi) ss.3(k) of the Disclosure Schedule sets forth the
following information with respect to the Target as of the most recent
practicable date (as well as on an estimated pro forma basis as of the
Closing giving effect to the consummation of the transactions contemplated
hereby): (A) the basis of the Target in its assets; and (B) to the extent
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applicable, the amount of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax, or excess charitable
contribution allocable to the Target.
(l) Real Property.
(i) The Target does not own any real property:
(ii) ss.3(l)(ii) of the Disclosure Schedule lists and
describes briefly all real property leased or subleased to the Target. The
Target has delivered to the Buyer correct and complete copies of the
leases and subleases listed in ss.3(l)(ii) of the Disclosure Schedule (as
amended to date). With respect to each lease and sublease listed in
ss.3(l)(ii) of the Disclosure Schedule,
(A) the lease or sublease is in full force and effect
and constitutes a legal, valid and binding agreement of the Target,
enforceable in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy,
reorganization, insolvency, moratoriums or other similar laws
affecting the enforcement of creditors' rights generally and the
availability of equitable remedies (regardless of whether
enforceability is considered in a proceeding at law or in equity);
(B) the Target is not and to the Target's Knowledge, no
other party to the lease or sublease is in material breach or
default, and no event has occurred which, with notice or lapse of
time, would constitute a material breach or default or permit
termination, modification, or acceleration thereunder;
(C) there are no oral agreements, forebearance programs
in effect or material disputes as to the lease or sublease;
(D) the Target has not assigned, transferred, conveyed,
mortgaged, deeded in trust, or encumbered any interest in the
leasehold or subleasehold;
(E) (i) the Target is not in violation of any applicable
laws or governmental rules and regulations in regard to the use of
the facilities leased or subleased thereunder, and (ii) the Target
has not received any written notice from any governmental authority
of any such violation; and
(F) all facilities leased or subleased thereunder are
supplied with or have available utilities and other services
suitable for the operation of said facilities.
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(m) Intellectual Property.
(i) The Target owns or has the right to use pursuant to
license, sublicense, agreement, or permission all Intellectual Property
sufficient for the operation of the businesses of the Target as presently
conducted and as presently proposed to be conducted. The Target has taken
sufficient protective measures to maintain and protect each item of
Intellectual Property that it owns or uses.
(ii) The Target has not interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual
Property rights of third parties, and the Target has not received any
charge, complaint, claim, demand, or notice alleging any such
interference, infringement, misappropriation, or violation (including any
claim that the Target must license or refrain from using any Intellectual
Property rights of any third party). To the Target's Knowledge, no third
party has interfered with, infringed upon, misappropriated, or otherwise
come into conflict with any Intellectual Property rights of the Target.
(iii) The Target does not own any patent or application
therefor. ss.3(m)(iii) of the Disclosure Schedule identifies each material
license, agreement, or other permission which the Target has granted to
any third party with respect to any of its Intellectual Property. The
Target has delivered to the Buyer correct and complete copies of all
material licenses, agreements, and permissions (as amended to date) and
has made available to the Buyer correct and complete copies of all other
written documentation evidencing ownership and prosecution (if applicable)
of each such item. ss.3(m)(iii) of the Disclosure Schedule also identifies
each trade name or unregistered trademark used by the Target in connection
with any of its businesses. With respect to each item of Intellectual
Property required to be identified in ss.3(m)(iii) of the Disclosure
Schedule,
(A) the Target possesses all right, title, and interest
in and to the item, free and clear of any Security Interest,
license, or other restriction;
(B) the item is not subject to any outstanding
injunction, judgment, order, decree, ruling, or charge; and
(C) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or, to the Target's
Knowledge, threatened which challenges the legality, validity,
enforceability, use, or ownership of the item, and there is no basis
for any such action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand; and
(D) the Target has never agreed to indemnify any Person
for or against any interference, infringement, misappropriation, or
other conflict with respect to the item pursuant to any material
agreement relating to the Intellectual Property.
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(iv) ss.3(m)(iv) of the Disclosure Schedule identifies each
material item of Intellectual Property that any third party owns and that
the Target uses pursuant to license, sublicense, agreement, or permission.
The Target has delivered to the Buyer correct and complete copies of all
such licenses, sublicenses, agreements, and permissions (as amended to
date). With respect to each item of Intellectual Property required to be
identified in ss.3(m)(iv) of the Disclosure Schedule,
(A) the license, sublicense, agreement, or permission
covering the item is in full force and effect and constitutes a
legal, valid and binding agreement of the Target, enforceable in
accordance with its terms, except as such enforceability may be
limited by applicable bankruptcy, reorganization, insolvency,
moratoriums or other similar laws affecting the enforcement of
creditors' rights generally and the availability of equitable
remedies (regardless of whether enforceability is considered in a
proceeding at law or in equity);
(B) (i) the Target is not in material breach or default,
and (ii) no event has occurred which with notice or lapse of time
would constitute a material breach or default or permit termination,
modification, or acceleration thereunder;
(C) the Target is not a party to any sublicense material
to the business of the Target;
(D) to the Target's Knowledge, the underlying item of
Intellectual Property is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(E) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand is pending or is threatened
which challenges the legality, validity, or enforceability of the
underlying item of Intellectual Property; and
(F) the Target has not granted any sublicense or similar
right with respect to the license, sublicense, agreement, or
permission.
(v) The Target will not interfere with, infringe upon,
misappropriate, or otherwise come into conflict with, any Intellectual
Property rights of third parties as a result of the continued operation of
its businesses as presently conducted and as presently proposed to be
conducted.
(n) Tangible Assets. ss.3(n) of the Disclosure Schedule lists the
Target's tangible assets. The Target owns or leases all buildings, machinery,
equipment, and other tangible assets adequate for the conduct of the business as
presently conducted and as presently proposed to be conducted. Each such
tangible asset is free from material defects (patent and latent), has been
maintained in all material respects in accordance with normal industry practice,
is in
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reasonable operating condition and repair (subject to normal wear and tear), and
is suitable for the purposes for which it presently is used and presently is
proposed to be used.
(o) Inventory. The inventory of the Target consists of purchased
parts and finished goods, all of which is presently usable and salable for the
purpose for which it was procured, except for obsolete items and items of below
standard quality, all of which have been written off or written down to their
net realizable value as reflected in the aggregate on the Most Recent Balance
Sheet, to be adjusted for the passage of time up to and including the Closing
Date in accordance with past custom and practice of the Target.
(p) Contracts. ss.3(p) of the Disclosure Schedule lists the
following contracts and other agreements to which the Target is a party, except
contracts and other agreements involving a potential acquisition of the capital
stock or assets of Target, which by their terms are subject to a non-disclosure
covenant:
(i) any agreement (or group of related agreements) for the
lease of personal property to or from any Person providing for lease
payments in excess of $25,000 per annum;
(ii) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products, or
other personal property, or for the furnishing or receipt of services, the
performance of which will extend over a period of more than one year,
involve consideration in excess of $50,000 per year or result in a
material loss to the Target;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under
which it has created, incurred, assumed, or guaranteed any indebtedness
for borrowed money, or any capitalized lease obligation, in excess of
$25,000 or under which it has imposed a Security Interest on any of its
assets, tangible or intangible;
(v) any agreement concerning confidentiality or
non-competition, except as hereinabove provided;
(vi) any agreement involving any of the Target Stockholders
and their Affiliates (other than the Target);
(vii) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other material plan or
arrangement for the benefit of its current or former directors, officers,
and employees;
(viii) any collective bargaining agreement;
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(ix) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis, not cancelable on 30
days or less notice, and which provides for annual compensation in excess
of $25,000 or provides severance benefits;
(x) any agreement under which it has advanced or loaned any
amount to any of its directors, officers, and employees outside the
Ordinary Course of Business;
(xi) except as otherwise listed pursuant to this ss.3(p), any
agreement under which the consequences of a default or termination could
have a material adverse effect on the business, operations, condition
(financial or otherwise), assets or Liabilities of the Target, other than
client or customer sales contracts entered into in the Ordinary Course of
Business of the Target;
(xii) any other agreement (or group of related agreements) the
performance of which involves annual consideration in excess of $50,000.
The Target has delivered to the Buyer a correct and complete copy of each
written agreement listed in ss.3(p) of the Disclosure Schedule (as amended to
date) and a written summary setting forth the material terms and conditions of
each oral agreement referred to in ss.3(p) of the Disclosure Schedule. With
respect to each such agreement: (A) the agreement is in full force and effect
and constitutes a legal, valid and binding agreement of the Target, enforceable
in accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, reorganization, insolvency, moratoriums or other similar
laws affecting the enforcement of creditors' rights generally and the
availability of equitable remedies (regardless of whether enforceability is
considered in a proceeding at law or inequity); and (B) no party is in material
breach or default, and no event has occurred which with notice or lapse of time
would constitute a material breach or default, or permit termination,
modification, or acceleration, under the agreement.
(q) Notes and Accounts Receivable. All notes and accounts receivable
of the Target are reflected properly on its books and records, are valid
receivables and are collectible in the aggregate, net of reserves for bad debts,
pending sales, and cancellations, as reflected in the Most Recent Balance Sheet
(or in any notes thereto), to be adjusted for the passage of time up to and
including the Closing Date in accordance with the past custom and practice of
the Target.
(r) Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Target.
(s) Insurance. ss.3(s) of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including policies
providing property, casualty, liability, and workers' compensation coverage and
bond and surety arrangements) to which the Target has been a party, a named
insured, or otherwise the beneficiary of coverage at any time within the past
three years:
(i) the name, address, and telephone number of the agent;
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(ii) the name of the insurer, the name of the policyholder,
and the name of each covered insured;
(iii) the policy number and the period of coverage;
(iv) a description of any retroactive premium adjustments or
other loss-sharing arrangements.
With respect to each such insurance policy: (A) the policy is in full force and
effect and constitutes a legal, valid and binding agreement, enforceable in
accordance with its terms, of the Target, except as such enforceability may be
limited by applicable bankruptcy, reorganization, insolvency, moratoriums or
other similar laws affecting the enforcement of creditors' rights generally and
the availability of equitable remedies (regardless of whether enforceability is
considered in a proceeding at law or inequity); and (B) neither the Target nor
any other party to the policy is in material breach or default (including with
respect to the payment of premiums or the giving of notices), and no event has
occurred which, with notice or the lapse of time, would constitute such a
material breach or default, or permit termination, modification, or
acceleration, under the policy.
(t) Litigation. ss.3(t) of the Disclosure Schedule sets forth in
each instance in which the Target (i) is subject to any outstanding injunction,
judgment, order, decree, ruling, or charge or (ii) is a party or, to the
Target's Knowledge, is threatened to be made a party to any action, suit,
proceeding, hearing, or investigation of, in, or before any court or
quasi-judicial or administrative agency of any federal, state, local, or foreign
jurisdiction or before any arbitrator. There is no basis for any present or
future action, suit, proceeding, hearing and investigation that could result in
any material adverse change in the business, operations, condition (financial or
otherwise), assets or Liabilities of the Target.
(u) Product Warranty. Within the last 48 months, each product sold,
leased, or delivered by the Target has been in conformity with all express and
implied warranties of the Target, and the Target does not have any Liability
(and there is no basis for any present or future action, suit, proceeding,
hearing, investigation, charge, complaint, claim, or demand against any of them
giving rise to any Liability) for replacement or repair thereof or other damages
in connection therewith, subject only to the reserve for product warranty claims
reflected in the Most Recent Balance Sheet to be adjusted for the passage of
time up to and including the Closing Date in accordance with the past custom and
practice of the Target. ss.3(u) of the Disclosure Schedule includes copies of
the standard terms and conditions of sale or lease for the Target (containing
applicable guaranty, warranty, and indemnity provisions).
(v) Employees. No executive, key employee, or group of employees has
tendered resignations or expressed their intentions to terminate employment with
the Target. The Target is not a party to or bound by any collective bargaining
agreement, nor has the Target experienced any strikes, grievances, claims of
unfair labor practices, or other collective bargaining disputes. To the Target's
Knowledge, there is no organizational effort presently being made or threatened
by or on behalf of any labor union with respect to employees of the Target.
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(w) Employee Benefits.
(i) ss.3(w) of the Disclosure Schedule lists each Employee
Benefit Plan that the Target maintains or as to which the Target
contributes.
(A) Each such Employee Benefit Plan (and each related
trust, insurance contract, or fund) complies in material form and in
operation in all material respects with the applicable requirements
of ERISA, the Code, and other applicable laws.
(B) All reports and descriptions (including Form 5500
Annual Reports, Summary Annual Reports, PBGC-1's, and Summary Plan
Descriptions) have been filed or distributed appropriately with
respect to each such Employee Benefit Plan. The requirements of Part
6 of Subtitle B of Title I of ERISA and of Code ss.4980B will have
been met in all material respects prior to the Closing Date with
respect to each applicable Employee Benefit Plan which is an
Employee Welfare Benefit Plan.
(C) All contributions (including all employer
contributions and employee salary reduction contributions) which are
due have been paid to each such Employee Benefit Plan which is an
Employee Pension Benefit Plan and any and all contributions for any
period ending on or before the Closing Date which are not yet due
have been paid to each such Employee Pension Benefit Plan or accrued
in accordance with the past custom and practice of the Target. All
premiums or other payments for all periods ending on or before the
Closing Date have been paid or accrued in accordance with the past
custom and practice of the Target with respect to each such Employee
Benefit Plan which is an Employee Welfare Benefit Plan.
(D) Each such Employee Benefit Plan which is an Employee
Pension Benefit Plan meets the material formal requirements of a
"qualified plan" under Code ss.401(a) and has received, within the
last two years, an updated favorable determination letter from the
Internal Revenue Service.
(E) The Target does not maintain and has not maintained
any Employee Pension Benefit Plan which is a defined benefit type
plan.
(F) The Target has delivered to the Buyer correct and
complete copies of the plan documents and summary plan descriptions,
the most recent determination letter received from the IRS, the most
recent Form 5500 Annual Report, and all related trust agreements,
insurance contracts, and other funding agreements which implement
each such Employee Benefit Plan.
(ii) The Target is not a member of a Controlled Group of
Corporations. With respect to each Employee Benefit Plan that the Target
maintains or ever has
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maintained or to which the Target contributes, ever has contributed, or
ever has been required to contribute:
(A) No such Employee Benefit Plan which is an Employee
Pension Benefit Plan (other than any Multiemployer Plan) has been
completely or partially terminated or been the subject of a
Reportable Event as to which notices would be required to be filed
with the PBGC. No proceeding by the PBGC to terminate any such
Employee Pension Benefit Plan (other than any Multiemployer Plan)
has been instituted or, to the Target's Knowledge, threatened.
(B) There have been no Prohibited Transactions with
respect to any such Employee Benefit Plan. No Fiduciary has any
Liability for breach of fiduciary duty or any other failure to act
or comply in connection with the administration or investment of the
assets of any such Employee Benefit Plan. No action, suit,
proceeding, hearing, or investigation with respect to the
administration or the investment of the assets of any such Employee
Benefit Plan (other than routine claims for benefits) is pending or
threatened. There is no basis for any such action, suit, proceeding,
hearing, or investigation.
(C) The Target has not incurred, nor to the Target's
Knowledge, is there any reason to expect that the Target will incur
any Liability to the PBGC (other than PBGC premium payments) or
otherwise under Title IV of ERISA (including any withdrawal
Liability) or under the Code with respect to any such Employee
Benefit Plan which is an Employee Pension Benefit Plan.
(iii) The Target does not contribute to, never has contributed
to, and never has been required to contribute to any Multiemployer Plan,
nor does it have any Liability (including withdrawal Liability) under any
Multiemployer Plan.
(iv) The Target does not maintain and never has maintained and
does not contribute, never has contributed, and never has been required to
contribute to any Employee Welfare Benefit Plan providing medical, health,
or life insurance or other welfare-type benefits for current or future
retired or terminated employees, their spouses, or their dependents (other
than in accordance with Code ss.4980B).
(x) Guaranties. The Target is neither a guarantor nor liable for any
Liability or obligation (including indebtedness) of any other Person.
(y) Environmental, Health, and Safety. The Target has complied in
all material respects with all Environmental, Health, and Safety Laws, and no
action, suit, proceeding, hearing, investigation, charge, complaint, claim,
demand, or notice has been filed or commenced against the Target alleging any
failure so to comply. Without limiting the generality of the preceding sentence,
the Target has obtained and been in compliance with all of the terms and
conditions of all material permits, licenses, and other authorizations which are
required under, and has complied with all other material limitations,
restrictions, conditions, standards,
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prohibitions, requirements, obligations, schedules, and timetables which are
contained in, all Environmental, Health, and Safety Laws, except where such
non-compliance would not have a material adverse effect on the operations of the
Target.
(z) Certain Business Relationships With the Target.None of the
Target Stockholders and their Affiliates has been involved in any business or
contractual (whether written or oral) arrangement or relationship with the
Target within the past 12 months involving aggregate annual payments in excess
of $50,000, and none of the Target Stockholders and their Affiliates owns any
asset, tangible or intangible, which is used in the business of the Target.
(aa) Brokers' Fees. Except as set forth in Schedule 3(aa) of the
Disclosure Schedule, and as otherwise provided in ss.8(l), the Target has no
liability or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this Agreement.
(ab) Continuity of Business Enterprise. The Target operates at least
one significant historic business line, or owns at least a significant portion
of its historic business assets, in each case within the meaning of Treas. Reg.
ss.1.368-1(d).
(ac) Substantial Customers, Brokers and Suppliers
(i) ss.3(ac) of the Disclosure Schedule lists the 10 customers
of the Target with the highest volume of purchases from the Target during
the period ending September 10, 1998, and the amount for which each such
customer was invoiced during such period.
(ii) The Target has not been declared ineligible to bid on a
state or federal government contract.
(iii) No customer listed on ss.3(ac) of the Disclosure
Schedule has (A) ceased, or notified the Target in writing of an intention
to cease dealing with or through the Target; (B) reduced or notified the
Target in writing of an intention to reduce, substantially its dealings
with or through the Target; or (C) changed, or notified the Target in
writing of an intention to change, substantially the terms on which it is
prepared to deal with or through the Target. To the Target's Knowledge all
of the customers listed in ss.3(ac) of the Disclosure Schedule will
continue to be a customer of the Transitory Subsidiary after the Closing.
(ad) Disclosure. None of the information that Target has provided in
connection with the representations and warranties provided for herein contain
or that the Target will supply specifically for use in the Registration
Statement, the Prospectus, or the Definitive Buyer Proxy Materials will contain
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light of the
circumstances under which they are or will be made, not misleading.
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4. Representations and Warranties of the Buyer. In addition to the
transactions with Dr Ariella Lehrer and Legacy Interactive Inc, which have been
disclosed to and approved by the Target, the Buyer represents and warrants to
the Target that the statements contained in this ss.4 are correct and complete
as of the date of this Agreement and will be correct and complete as of the
Closing Date (as though made then and as though the Closing Date were
substituted for the date of this Agreement throughout this ss.4), except as set
forth in the Disclosure Schedule. The Disclosure Schedule will be arranged in
paragraphs corresponding to the numbered and lettered paragraphs contained in
this ss.4. The Disclosure Schedule may be amended from time to time and such
Disclosure Schedule as amended becomes the Disclosure Schedule of the disclosing
party.
(a) Organization, Qualification, and Corporate Power. The Buyer is a
corporation duly organized, validly existing, and in corporate good standing
under the laws of the State of Delaware. The Buyer is duly qualified as a
foreign corporation in each jurisdiction where its ownership or leasing of
property or where the nature of its activities requires such qualification,
except to the extent that the failure to so qualify would not have a material
adverse effect on the business, operations, condition (financial or otherwise),
assets or Liabilities of the Buyer. The Buyer has full corporate power and
authority to carry on the businesses in which it is engaged and to own, lease,
and use the properties owned, leased, and used by it, and has in full force and
effect all authorizations and has made all filings to the extent required for
such ownership, lease, and use of its properties and the conduct of its
business, except to the extent that the failure to obtain such authorizations or
to make such filings would not have a material adverse effect on the operations
of the Buyer.
(b) Capitalization. The entire authorized capital stock of the Buyer
consists of 5,000,000 shares of preferred stock, none of which is outstanding,
and 10,000,000 Buyer Shares,details of which are set forth on Schedule 4(b)
attached hereto. All of the issued and outstanding Buyer Shares have been duly
authorized and are validly issued, fully paid, and nonassessable (except for the
Buyer Shares currently offered, which will be fully paid and non-assessable when
issued). All of the Buyer Shares to be issued in the Merger have been duly
authorized and, upon consummation of the Merger, will be validly issued, fully
paid, and nonassessable. Except for the options and warrants listed on ss.4(b)
to the Disclosure Schedule, there are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Buyer to issue,
sell, or otherwise cause to become outstanding any of its capital stock. There
are no outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar rights with respect to the Buyer.
(c) Authorization of Transaction. The Buyer has the requisite
corporate power and authority to execute and deliver this Agreement and the
Merger Agreement and to perform its obligations hereunder and thereunder;
provided, however, that the Buyer cannot consummate the Merger unless and until
it receives a Hardship Exemption or the Requisite Buyer Stockholder Approval.
This Agreement constitutes the valid and legally binding obligation of the
Buyer, enforceable against the Buyer in accordance with its terms and
conditions, except as such enforceability may be limited by applicable
bankruptcy, reorganization, insolvency, moratoriums
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or other similar laws affecting the enforcement of creditors' rights generally
and the availability of equitable remedies (regardless of whether enforceability
is considered in a proceeding at law or in equity).
(f) Undisclosed Liabilities. The Buyer has no material Liability
except for (i) Liabilities reflected on the Buyer's Most Recent Balance Sheet
(and in any notes thereto) and (ii) Liabilities which have arisen after the
Buyer's Most Recent Fiscal Year End in the Ordinary Course of Business, none of
which results from, arises out of, relates to, is in the nature of, or was
caused by any breach of contract, breach of warranty, tort, infringement, or
violation of law.
(g) Legal Compliance. To the Buyer's Knowledge, the Buyer has
complied with all applicable laws (including rules, regulations, codes, plans,
injunctions, judgments, orders, decrees, rulings, and charges thereunder) of
federal, state, local, and foreign governments (and all agencies thereof),
except to the extent any such failure would not have a material adverse effect
on the operations of the Buyer, and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against the Buyer alleging any failure so to comply and, to the
Buyer's Knowledge, there is no basis for any such action, suit, proceeding,
hearing, investigation, charge, complaint, claim, demand, or notice to be filed
or to be commenced against any of them alleging any failure so to comply.
(h) Noncontravention. To the Buyer's Knowledge, neither the
execution and the delivery of this Agreement, nor the consummation of the
transactions contemplated hereby, will (i) violate any constitution, statute,
regulation, rule, injunction, judgment, order, decree, ruling, charge, or other
restriction of any government, governmental agency, or court to which the Buyer
is subject or any provision of the charter or bylaws of the Buyer, or (ii)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any material agreement, contract, lease,
license, instrument or other arrangement to which the Buyer is a party or by
which it is bound or to which any of its assets is subject (or result in the
imposition of any Security Interest upon any of its assets). To the Buyer's
Knowledge, and other than in connection with the Delaware General Corporation
Law, the Securities Exchange Act, the Securities Act, and the state securities
laws, the Buyer does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or governmental
agency in order for the Parties to consummate the transactions contemplated by
this Agreement, except where the violation, conflict, breach, default,
acceleration, termination, modification, cancellation or failure to give notice
would not have a material adverse effect on the ability of the Buyer to
consummate the transactions contemplated by this Agreement or have a material
adverse effect on the Buyer's business, operations, condition (financial or
otherwise), assets or Liabilities as in existence immediately prior to the
Closing.
(i) Tax Matters.
(i) The Buyer has filed all Tax Returns required to be filed
by it. All such Tax Returns were correct and complete in all material
respects. All Taxes owed by the Buyer (whether or not shown on any Tax
Return) have been paid. The Buyer currently
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is not the beneficiary of any extension of time within which to file any
Tax Return. No claim has ever been made by an authority in a jurisdiction
where the Buyer does not file Tax Returns that it is or may be subject to
taxation by that jurisdiction. There are no Security Interests on any of
the assets of the Buyer that arose in connection with any failure (or
alleged failure) to pay any Tax.
(ii) The Buyer has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing to
any employee, independent contractor, creditor, stockholder, or other
third party.
(iii) The Buyer does not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed.
There is no dispute or claim, and to the Buyer's Knowledge there is no
basis for any such dispute or claim, concerning any Tax Liability of the
Buyer. ss.4(i) of the Disclosure Schedule lists all federal, state, local,
and foreign income Tax Returns filed with respect to the Buyer for taxable
periods ended on or after December 31, 1995, indicates those Tax Returns
that have been audited, and indicates those Tax Returns that currently are
the subject of audit. The Buyer has delivered to the Target correct and
complete copies of all state, local, and federal income Tax Returns,
examination reports, and statements of deficiencies assessed against or
agreed to by the Buyer since December 31, 1995.
(iv) The Buyer has not waived any statute of limitations in
respect of Taxes or agreed to any extension of time with respect to a Tax
assessment or deficiency.
(v) The unpaid Taxes of the Buyer (A) did not, as of the
Buyer's Most Recent Fiscal Year End, exceed the reserve for Tax Liability
(rather than any reserve for deferred Taxes established to reflect timing
differences between book and Tax income) expected to be set forth on the
face of the Buyer's Most Recent Balance Sheet (rather than in any notes
thereto) and (B) do not exceed that reserve as adjusted for the passage of
time through the Closing Date in accordance with the past custom and
practice of the Buyer in filing their Tax Returns.
(vi) The Buyer has not filed a consent under Code ss.341(f)
concerning collapsible corporations. The Buyer has not made any payments,
is not obligated to make any payments, nor is the Buyer a party to any
agreement that under certain circumstances would obligate it to make any
payments that will not be deductible under Code ss.280G. The Buyer has not
been a United States real property holding corporation within the meaning
of Code ss.897(c)(2) during the applicable period specified in Code
ss.897(c)(1)(A)(ii). The Buyer has disclosed on its federal income Tax
Returns all positions taken therein that would give rise to a substantial
understatement of federal income Tax within the meaning of Code ss.6662.
The Buyer is not a party to any Tax allocation or sharing agreement. The
Buyer (A) has not been a member of an Affiliated Group filing a
consolidated federal income Tax Return (other than a group the common
parent of which was the Buyer) nor (B) does the Buyer have any Liability
for the Taxes of any Person
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(other than the Target) under Treas. Reg. ss.1.1502-6 (or any similar
provision of state, local, or foreign law), as a transferee or successor,
by contract, or otherwise.
(vii) ss.4(i) of the Disclosure Schedule sets forth the
following information with respect to the Buyer as of the most recent
practicable date (as well as on an estimated pro forma basis as of the
Closing giving effect to the consummation of the transactions contemplated
hereby): (A) the basis of the Buyer in its assets; (B) to the extent
applicable, the amount of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax, or excess charitable
contribution allocable to the Buyer.
(j) Contracts. ss.4(j) of the Disclosure Schedule lists the
following contracts and other agreements to which the Buyer is a party, except
contracts and other agreements involving a potential acquisition of the capital
stock or assets of the Buyer, which by their terms are subject to a
non-disclosure covenant:
(i) any agreement (or group of related agreements) for the
lease of personal property to or from any Person providing for lease
payments in excess of $25,000 per annum;
(ii) any agreement (or group of related agreements) for the
purchase or sale of raw materials, commodities, supplies, products, or
other personal property, or for the furnishing or receipt of services, the
performance of which will extend over a period of more than one year,
result in a material loss to the Buyer, or involve consideration in excess
of $50,000 per year;
(iii) any agreement concerning a partnership or joint venture;
(iv) any agreement (or group of related agreements) under
which it has created, incurred, assumed, or guaranteed any indebtedness
for borrowed money, or any capitalized lease obligation, in excess of
$25,000 or under which it has imposed a Security Interest on any of its
assets, tangible or intangible;
(v) any agreement concerning confidentiality or
non-competition, except as hereinabove provided;
(vi) any agreement involving any of the Buyer Management
Stockholders and their Affiliates (other than the Target);
(vii) any profit sharing, stock option, stock purchase, stock
appreciation, deferred compensation, severance, or other material plan or
arrangement for the benefit of its current or former directors, officers,
and employees;
(viii) any collective bargaining agreement;
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(ix) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis not cancelable on 30 days
or less notice providing annual compensation in excess of $25,000 or
providing severance benefits;
(x) any agreement under which it has advanced or loaned any
amount to any of its directors, officers, and employees outside the
Ordinary Course of Business;
(xi) except as otherwise listed pursuant to this ss.4(j), any
agreement under which the consequences of a default or termination could
have a material adverse effect on the business, financial condition,
operations, results of operations of the Buyer, other than client or
customer sales contracts entered into in the Ordinary Course of Business
of the Buyer;
(xii) any other agreement (or group of related agreements) the
performance of which involves annual consideration in excess of $50,000.
The Buyer has delivered to the Target a correct and complete copy of each
written agreement listed in ss.4(j) of the Disclosure Schedule (as amended to
date) and a written summary setting forth the material terms and conditions of
each oral agreement referred to in ss.4(j) of the Disclosure Schedule. With
respect to each such agreement, to the Buyer's Knowledge: (A) the agreement is
in full force and effect and constitutes a legal, valid and binding agreement,
enforceable in accordance with its terms, of the Buyer, except as such
enforceability may be limited by applicable bankruptcy, reorganization,
insolvency, moratoriums or other similar laws affecting the enforcement of
creditors' rights generally and the availability of equitable remedies
(regardless of whether enforceability is considered in a proceeding at law or
inequity); (C) no party is in material breach or default, and no event has
occurred which with notice or lapse of time would constitute a material breach
or default, or permit termination, modification, or acceleration, under the
agreement.
(k) Litigation. ss.4(k) of the Disclosure Schedule sets forth in
each instance in which the Buyer (i) is subject to any outstanding injunction,
judgment, order, decree, ruling, or charge or (ii) is a party or, to the Buyer's
Knowledge, is threatened to be made a party to any action, suit, proceeding,
hearing, or investigation of, in, or before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator. To the Buyer's Knowledge, there is no basis for any
present or future action, suit, proceeding, hearing and investigation that could
result in any material adverse change in the business, condition (financial or
otherwise), operations, assets or Liabilities of the Buyer.
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(l) Product Warranty. Within the last 48 months, each product sold,
leased, or delivered by the Buyer has been in conformity with all express and
implied warranties of the Buyer, and the Buyer does not have any Liability (and
to the Buyer's Knowledge, there is no basis for any present or future action,
suit, proceeding, hearing, investigation, charge, complaint, claim, or demand
against any of them giving rise to any Liability) for replacement or repair
thereof or other damages in connection therewith, subject only to the reserve
for product warranty claims set forth on the face of the Buyer's Most Recent
Balance Sheet to be adjusted for the passage of time up to and including the
Closing Date in accordance with the past custom and practice of the Buyer.
ss.4(m) of the Disclosure Schedule includes copies of the standard terms and
conditions of sale or lease for the Target (containing applicable guaranty,
warranty, and indemnity provisions).
(m) Continuity of Business Enterprise. It is the present intention
of the Buyer to continue at least one significant historic business line of the
Target, or to use at least a significant portion of the Target's historic
business assets in a business, in each case within the meaning of Treas. Reg.
ss.1.368-1(d).
(n) Real Property.
(i) The Buyer does not own any real property:
(ii) ss.4(n)(ii) of the Disclosure Schedule lists and
describes briefly all real property leased or subleased to the Buyer. The
Buyer has delivered to the Target correct and complete copies of the
leases and subleases listed in ss.4(n)(ii) of the Disclosure Schedule (as
amended to date). With respect to each lease and sublease listed in
ss.4(n)(ii) of the Disclosure Schedule,
(A) the lease or sublease is in full force and effect
and constitutes a legal, valid and binding agreement of the Buyer,
enforceable in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy,
reorganization, insolvency, moratoriums or other similar laws
affecting the enforcement of creditors' rights generally and the
availability of equitable remedies (regardless of whether
enforceability is considered in a proceeding at law or in equity);
(B) the Buyer is not and to the Buyer's Knowledge, no
other party to the lease or sublease is in material breach or
default, and no event has occurred which, with notice or lapse of
time, would constitute a material breach or default or permit
termination, modification, or acceleration thereunder;
(C) there are no oral agreements, forebearance programs
in effect or material disputes as to the lease or sublease;
(D) the Buyer has not assigned, transferred, conveyed,
mortgaged, deeded in trust, or encumbered any interest in the
leasehold or subleasehold;
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(E) (i) to the Buyer's Knowledge, the Buyer is not in
violation of any applicable laws or governmental rules and
regulations in regard to the use of the facilities leased or
subleased thereunder, and (ii) the Buyer has not received any
written notice from any governmental authority of any such
violation; and
(F) all facilities leased or subleased thereunder are
supplied with or have available utilities and other services
suitable for the operation of said facilities.
(o) Subsidiaries. The Transitory Subsidiary, when incorporated, will
be the only Subsidiary of the Buyer. ss.4(o) of the Disclosure Schedule sets
forth for the Transitory Subsidiary (i) its name and expected jurisdiction of
incorporation, (ii) the number of shares of authorized capital stock of each
class of its capital stock, (iii) the number of shares of each class of its
capital stock to be issued to the Buyer, and (v) the proposed directors and
officers of the Transitory Subsidiary. As of the Closing, the Transitory
Subsidiary will be a corporation duly organized, validly existing, and in good
standing under the laws of the jurisdiction of its incorporation. The Transitory
Subsidiary will be duly authorized to conduct business and will be in good
standing under the laws of each jurisdiction where such qualification is
required. Prior to the Closing, the Transitory Subsidiary will not conduct any
business. At the time of the Closing, the Transitory Subsidiary will have full
corporate power and authority to ratify this Agreement and carry out the
transactions contemplated herein. As of the Closing, all of the issued and
outstanding shares of capital stock of the Transitory Subsidiary will have been
duly authorized and will be validly issued, fully paid, and nonassessable. The
Buyer will hold of record and own beneficially all of the outstanding shares of
the Transitory Subsidiary, free and clear of any restrictions on transfer (other
than restrictions under the Securities Act and state securities laws), Taxes,
Security Interests, options, warrants, purchase rights, contracts, commitments,
equities, claims, and demands. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Buyer to sell,
transfer, or otherwise dispose of any capital stock of any of the Transitory
Subsidiary. There are no outstanding stock appreciation, phantom stock, profit
participation, or similar rights with respect to the Transitory Subsidiary.
There are no voting trusts, proxies, or other agreements or understandings with
respect to the voting of any capital stock of the Transitory Subsidiary. As of
the Closing, the minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
Transitory Subsidiary will be correct and complete. As of the Closing, the
Transitory Subsidiary will not be in default under or in violation of any
provision of its charter or bylaws. As of the Closing, the Transitory Subsidiary
will not control directly or indirectly or have any direct or indirect equity
participation in any corporation, partnership, trust, or other business
association.
(u) Filings with the SEC. To the Buyer's Knowledge, the Buyer has
filed with the SEC all reports, registrations, and statements together with any
amendments thereto required to be made thereto, all of which as the respective
dates were in full compliance with the rules and regulations of the SEC.
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(v) Disclosure. None of the information that Buyer has provided in
connection with the representations and warranties provided for herein contain
or that the Buyer will supply specifically for use in the Definitive Buyer Proxy
Materials will contain any untrue statement of a material fact or omit to state
a material fact necessary in order to make the statements made therein, in the
light of the circumstances under which they are or will be made, not misleading
5. Covenants. The Parties agree as follows with respect to the period from
and after the execution of this Agreement.
(a) Notices and Consents. The Target and the Buyer will give any
notices to third parties, and will use its respective reasonable best efforts to
obtain any third party consents, that the Buyer or the Target reasonably may
request in connection with the matters referred to in ss.3(d) or ss.4(h) above.
(b) Regulatory Matters and Approvals. Each of the Parties will give
any notices to, make any filings with, and use its reasonable best efforts to
obtain any authorizations, consents, and approvals of governments and
governmental agencies in connection with the matters referred to in this
agreement.
(c) Listing of Buyer Shares. The Buyer will use its reasonable best
efforts to cause the Buyer Shares that will be issued in the Merger to be
approved for listing on the Nasdaq SmallCap Market, subject to official notice
of issuance, at or prior to the Effective Time.
(d) No Material Changes. Both parties agree that prior to the
Closing Date neither party will make or permit to be made any material change
affecting any bank, trust company, savings and loan association, brokerage firm,
or safe deposit box or in the names of the persons authorized to draw thereon,
to have access thereto or to authorize transactions therein or in any powers of
attorney, or open additional accounts or boxes or grant any additional powers of
attorney, without in each case obtaining the prior written consent of the other
party, such consent not be unreasonably withheld or delayed.
(e) Operation of Business. Neither party will engage in any
practice, take any action, or enter into any transaction, in any material
respect, outside the Ordinary Course of Business, without the prior written
consent of the other party. Without limiting the generality of the foregoing:
(i) Neither party will authorize or effect any change in
its charter or bylaws;
(ii) Neither party will grant any options, warrants, or other
rights to purchase or obtain any of its capital stock or issue, sell, or
otherwise dispose of any of its capital stock (except upon the conversion
or exercise of options, warrants, and other rights currently outstanding);
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(iii) Neither party will declare, set aside, or pay any
dividend or distribution with respect to its capital stock (whether in
cash or in kind), or redeem, repurchase, or otherwise acquire any of its
capital stock, in either case outside the Ordinary Course of Business;
(iv) Neither party will issue any note, bond, or other debt
security or create, incur, assume, or guarantee any indebtedness for
borrowed money or capitalized lease obligation outside the Ordinary Course
of Business;
(v) Neither party will impose any Security Interest upon any
of its assets outside the Ordinary Course of Business;
(vi) Neither party will make any capital investment in, make
any loan to, or acquire the securities or assets of any other Person
outside the Ordinary Course of Business;
(vii) Neither party will initiate any changes in employment
terms for any of its directors, officers, and employees outside the
Ordinary Course of Business; and
(viii) Neither party will commit to any of the foregoing.
(f) Full Access. The Parties will permit representatives of the
other Party to have full access at all reasonable times, and in a manner so as
not to interfere with the normal business operations of the Parties, to all
premises, properties, personnel, books, records (including tax records),
contracts, and documents of or pertaining to each of the Parties. The Parties
will treat and hold as such any Confidential Information they receive in the
course of the reviews contemplated by this ss.5(f), will not use any of the
Confidential Information except in connection with this Agreement, and, if this
Agreement is terminated for any reason whatsoever, agree to return to the
respective Party all tangible embodiments (and all copies) thereof which are in
their respective possession.
(g) Notice of Developments. Each Party will give prompt written
notice to the other of the occurrence of any event that would constitute a
breach of any of its own representations and warranties in ss.3 and ss.4 above.
No disclosure by any Party pursuant to this ss.5(g), however, shall be deemed to
amend or supplement the Disclosure Schedule or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant, except as
otherwise provided in ss.3 above.
(h) Exclusivity. Neither party will solicit, initiate, or encourage
the submission of any proposal or offer, and will not entertain, pursue,
consider or accept any proposal or offer from any Person relating to the
acquisition of all or substantially all of its capital stock or assets
(including any acquisition structured as a merger, consolidation, or share
exchange). Each party shall notify the other party immediately if any Person
makes any proposal, offer, inquiry, or contact with respect to any of the
foregoing and will provide the other party with a written copy of any such
proposal, offer, inquiry, or contact.
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(i) Continuity of Business Enterprise. The Buyer will continue at
least one significant historic business line of the Target, or use or lease a
significant portion of the Target's historic business assets in a business, in
each case within the meaning of Treas. Reg. ss.1.368-1(d).
(j) Directorships. The Buyer will recommend to its stockholders the
Target Director Designees for nomination to positions as directors of the Buyer
at the next annual or special meeting of stockholders of the Buyer. As the sole
stockholder of Transitory Subsidiary, the Buyer shall elect the Target Director
Designees as directors of the Transitory Subsidiary. The Buyer will also take
all actions necessary to amend the Buyer's bylaws and charter, if necessary or
advisable, to provide for staggered terms of Board members.
(k) Ancillary Agreements. The Target shall provide each of its
stockholders that acquired common stock in the Target based upon the private
offering memorandum dated July 28, 1998 an opportunity to rescind and shall not
draw upon any subcription payments until such time as the investors have
declined the opportunity to exercise his hers or its rescission rights after a
reasonable period of time (the "Rescission Offer). The Rescission Offer shall be
in compliance with any and all applicable state and federal laws including "blue
sky laws." No Buyer Shareholder approval shall be effective until such time as
the Rescission Offer has been completed. The Rescission Offer must include
disclosure on the risks of the Merger including the lack of liquidity of the
Buyer Shares and the possibility that the Buyer Stockholders may have to pay
taxes in connection with the Merger.
(l) Target Employees. The Buyer shall cause the Transitory
Subsidiary to (i) continue to employ each person employed by Target on the
Closing Date on at least an "employment-at-will" basis as of the first business
day after the Closing Date, (ii) provide such benefits and salary to such person
comparable to the benefits and salary previously provided or paid by Target as
of the Closing Date, and (iii) grant to each such person credit for his/her
years of service with the Target for purposes of calculating such person's right
to participate in applicable benefit plans and programs and the level of such
participation.
(m) Notification of Changes in Representations and Warranties. The
Parties will notify each other of any material changes in the representations
and warranties provided in ss.3 and ss.4 hereof as soon as reasonably
practicable after the respective Party first discovers such changed
circumstances.
(n) Estoppel Certificates. The Target shall use its reasonable best
efforts to obtain Estoppel Certificates (the "Estoppel Certificates") in the
form attached hereto as Exhibit G.
(o) Rights Offering. The Board of Directors of the Buyer shall
authorize a rights offering to their current stockholders that will provide the
issuance of one right for each share of Buyer's Common Stock outstanding or
issuable upon exercise of currently outstanding options or warrants (the
"Rights"). The Rights will enable each current stockholder to purchase
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one new share of the Buyer's Common Stock for $0.50. The Target Stockholders
shall agree to waive their right to participate in this Rights offering. The
Rights offering shall be open and exercisable for a period twenty four months
from the commencement date of such Rights offering. The Rights are not
transferrable except to the immediate family or a trust set up for the benefit
of such stockholder.
6. Conditions to Obligation to Close.
(a) Conditions to Obligation of the Buyer. The obligation of the
Buyer to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions:
(i) this Agreement, the Merger Agreement and the Merger shall
have received the Requisite Buyer Stockholder Approval;
(ii) the Target shall have procured all of the third party
consents specified in ss.5(a) above;
(iii) each representation and warranty set forth in ss.3 above
shall be true and correct in all material respects at and as of the
Closing Date, subject to any amendments thereto as permitted under ss.3
above;
(iv) the Target shall have fully performed and complied with
all of its covenants contained in ss.5 hereunder through the Closing;
(v) no action, suit, or proceeding shall be pending or
threatened before any court or quasijudicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge could (A) prevent consummation of any of the
transactions contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, or (C) materially and adversely affect the right of the
Surviving Corporation to own the former assets and to operate the former
businesses of the Target, and (D) and no such injunction, judgement,
order, decree, ruling or charge shall be in effect;
(vi) the Target shall have delivered to the Buyer a
certificate to the effect that each of the conditions specified above in
ss.6(a)(i)-(v) is satisfied;
(vii) this Agreement, the Merger Agreement and the Merger
shall have received the Requisite Target Stockholder Approval;
(viii) the Buyer Shares that will be issued in the Merger
shall have been approved for listing on the Nasdaq SmallCap Market,
subject to official notice of issuance;
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(ix) the Parties shall have received all authorizations,
consents, and approvals of governments and governmental agencies referred
to in ss.3(d) and ss.4(h) above;
(x) the Buyer shall have received from counsel to the Target
an opinion in form and substance as set forth in Exhibit H attached
hereto, addressed to the Buyer, and dated as of the Closing Date;
(xi) the Buyer shall have received the resignations, effective
as of the Closing, of each director and officer of the Target;
(xii) the Buyer shall have completed its due diligence and all
outstanding issues relating thereto shall have been satisfactorily
resolved to the satisfaction of the Parties;
(xiii) the Buyer shall be satisfied that the Target's offering
of Target Shares (A) did not violate any state, federal or international
securities laws; (B) that the Buyer's Stockholders were fully informed of
the potential tax consequence of an investment in the Target; and (C) that
the Target will not be subject to any new regulations;
(xiv) the Target shall have delivered the Estoppel
Certificates executed by the lessors of the properties listed in Schedule
3(l)(ii) of the Target's Disclosure Schedule;
(xv) the Target shall have canceled all outstanding or
authorized options, warrants, purchase rights, subscription rights,
conversion rights, exchange rights, or other contracts or commitments that
could require the Target to issue, sell, or otherwise cause to become
outstanding any of its capital stock;
(xvi) all actions to be taken by the Target in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form
and substance to the Buyer;
(xvii) from the date hereof through the Effective Time, there
shall have been no material adverse change (or developments involving a
prospective material adverse change) in the business, condition (financial
or otherwise), operations, properties, or prospects of the Target; and
(xviii) the Target Stockholders shall have waived their right
to participate in the Rights offering.
The Buyer may waive any condition specified in this ss.6(a) if it executes a
writing so stating at or prior to the Closing.
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(b) Conditions to Obligation of the Target. The obligation of the
Target to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of the following conditions:
(i) this Agreement, the Merger Agreement and the Merger shall
have received the Requisite Buyer Stockholder Approval and the Buyer's
Approval as the sole stockholder of the Transitory Subsidiary;
(ii) the Buyer Shares that will be issued in the Merger shall
have been approved for listing on the Nasdaq SmallCap Market, subject to
official notice of issuance;
(iii) each representation and warranty set forth in ss.4 above
shall be true and correct in all material respects at and as of the
Closing Date;
(iv) the Buyer shall have performed and complied with all of
its covenants hereunder through the Closing;
(v) no action, suit, or proceeding shall be pending or
threatened before any court or quasijudicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge could (A) prevent consummation of any of the
transactions contemplated by this Agreement, (B) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, or (C) materially and adversely affect the right of the
Surviving Corporation to own the former assets and to operate the former
businesses of the Target; and (D) no such injunction, judgement, order,
decree, ruling or charge shall be in effect;
(vi) the Buyer shall have delivered to the Target a
certificate to the effect that each of the conditions specified above in
ss.6(b)(i)-(v) and ss.6(b)(vii)-(ix) below, is satisfied;
(vii) this Agreement, the Merger Agreement and the Merger
shall have received the Requisite Target Stockholder Approval;
(viii) the Target Director Designees shall be elected
directors of the Buyer, contingent only upon the Closing;
(ix) the Parties shall have received all authorizations,
consents, and approvals of governments and governmental agencies referred
to in ss.3(d) and ss.4(h) above;
(x) the Target Director Designees shall be elected directors
of the Transitory Subsidiary;
(xi) both parties shall have completed their due diligence and
all outstanding issues relating thereto shall have been resolved to the
satisfaction of the Parties;
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(xii) the Buyer shall have procured all of the third party
consents specified in ss.5(a) above;
(xiii) all actions to be taken by the Buyer in connection with
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments, and other documents required to effect the
transactions contemplated hereby will be reasonably satisfactory in form
and substance to the Target; and
(xiv) from the date hereof through the Effective Time, there
shall have been no material adverse change (or developments involving a
prospective material adverse change) in the business, condition (financial
or otherwise), operations, properties, or prospects of the Buyer.
The Target may waive any condition specified in this ss.6(b) if it executes a
writing so stating at or prior to the Closing.
7. Termination
(a) Termination of Agreement Either the Buyer or the Target may
terminate this Agreement with the prior authorization of its board of directors
(whether before or after stockholder approval) as provided below:
(i) the Buyer and the Target may terminate this Agreement by
mutual written consent at any time prior to the Effective Time;
(ii) the Buyer may terminate this Agreement by giving written
notice to the Target at any time prior to the Effective Time (A) in the
event the Target has breached any representation, warranty, or covenant
contained in this Agreement in any material respect, the Buyer has
notified the Target of this breach, in writing, and the breach has
continued without cure for a period of five (5) business days after the
written notice of breach or (B) if the Closing shall not have occurred on
or before December 30, 1998, by reason of the failure of any condition
precedent under ss.6(a) hereof that cannot be satisfied through the
exercise of reasonable best efforts within five (5) business days
following December 30, 1998 (unless the failure results primarily from the
Buyer breaching any representation, warranty, or covenant contained in
this Agreement);
(iii) the Target may terminate this Agreement by giving
written notice to the Buyer at any time prior to the Effective Time (A) in
the event the Buyer has breached any representation, warranty, or covenant
contained in this Agreement in any material respect, the Target has
notified the Buyer of the breach, in writing, and the breach has continued
without cure for a period of five (5) business days after the written
notice of breach or (B) if the Closing shall not have occurred on or
before December 30, 1998, by reason of the failure of any condition
precedent under ss.6(b) hereof that cannot be satisfied through the
exercise of reasonable best efforts within five (5) business days
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following December 30, 1998 (unless the failure results primarily from the
Target breaching any representation, warranty, or covenant contained in
this Agreement);
(iv) any Party may terminate this Agreement by giving written
notice to the other Party at any time in the event this Agreement and the
Merger fail to receive the Requisite Buyer Stockholder Approval or the
Requisite Target Stockholder Approval, respectively; and
(b) Effect of Termination If any Party terminates this Agreement
pursuant to ss.7(a) above, all rights and obligations of the Parties hereunder
shall terminate without any liability of any Party to any other Party (except
for any liability of any Party then in breach); provided, however, that the
confidentiality provisions contained in ss.5(f) above and the Confidentiality
and the Non-Disclosure Agreement referenced therein shall survive any such
termination; provided further, however, that any such termination will have no
effect on amounts that the Target currently owes or may owe in the future to the
Buyer. Anything herein to the contrary notwithstanding, termination of this
Agreement pursuant to ss.7(a) above shall be the sole and exclusive remedy for
the breach of any representation or warranty by a Party under ss.3 or ss.4
above.
8. Miscellaneous.
(a) Survival None of the representations, warranties, and covenants
of the Parties (other than the provisions in ss.2 above concerning issuance of
the Buyer Shares), the provisions of ss.5(i) above concerning continuity of
business enterprise, the provisions of ss.5(j) above concerning the respective
employment agreements, the provisions of ss.5(k) above concerning the Target
Designee Directors, the provisions of ss.5(s) above concerning the Conversion
Options, and the provisions of ss.5(t) above concerning registration of the
Conversion Options) will survive the Effective Time. This ss.8(a) is not
intended to limit, expand, or otherwise affect the rights, remedies, or
obligations that the Buyer, the Target, or any other Person may have pursuant to
other written agreements referred to in this Agreement or otherwise.
(b) Press Releases and Public Announcements. No Party shall issue
any press release or make any public announcement relating to the subject matter
of this Agreement without the prior written approval of the other Party;
provided, however, that any Party may make any public disclosure it believes in
good faith is required by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case the disclosing Party
will use its reasonable efforts to advise the other Party prior to making the
disclosure).
(c) No Third Party Beneficiaries. This Agreement shall not confer
any rights or remedies upon any Person other than the Parties and their
respective successors and permitted assigns. This ss.8(c) is not intended to
limit, expand, or otherwise affect the rights, remedies, or obligations that the
Buyer, the Target, or any other Person may have pursuant to other written
agreements referred to in this Agreement or otherwise.
40
<PAGE>
(d) Entire Agreement. This Agreement (including the documents
referred to herein) constitutes the entire agreement between the Parties and
supersedes any prior understandings, agreements, or representations by or
between the Parties, written or oral, to the extent they related in any way to
the subject matter hereof.
(e) Succession and Assignmen. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior written
approval of the other Party.
(f) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(g) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(h) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to the Target:
Michael J. Zwebner
Videocall International, Inc.
1 Canal Park
Cambridge, MA 02142
41
<PAGE>
Copy to:
Alexander Walker, Jr.
57 West 200 South
Suite 400
Salt Lake City, UT 84101
If to the Buyer:
C. Robert Kline, Ph.D.
Legacy Software, Inc.
5340 Alla Road
Los Angeles, CA 90066
Copy to:
V. Joseph Stubbs, Esq.
Troop Steuber Pasich Reddick & Tobey, LLP.
2029 Century Park East, 24th Floor
Los Angeles, CA 90067
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other Party
notice in the manner herein set forth.
(i) Governing Law. This Agreement shall be governed by and construed
in accordance with applicable federal laws and the domestic laws of the State of
Delaware without giving effect to any choice or conflict of law provision or
rule (whether of the State of Delaware or any other jurisdiction) that would
cause the application of the laws of any jurisdiction other than the State of
Delaware.
(j) Amendments and Waivers. The Parties may mutually amend any
provision of this Agreement at any time prior to the Effective Time with the
prior authorization of their respective boards of directors; provided, however,
that any amendment effected subsequent to stockholder approval will be subject
to the applicable restrictions contained in the Delaware General Corporation Law
and in the Florida General Corporation Law. No amendment of any provision of
this Agreement shall be valid unless the same shall be in writing and signed by
both of the Parties. No waiver by any Party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or not, shall
be deemed to extend to any prior or
42
<PAGE>
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
(k) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(l) Expenses. Except as herein provided, each of the Parties will
bear its own costs and expenses (including legal fees and expenses) incurred in
connection with this Agreement. However, the Buyer will pay at the Closing (i)
the fees of Troop Steuber Pasich Reddick & Tobey, LLP.
(m) Construction. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires. The
word "including" shall mean including without limitation.
(n) Incorporation of Exhibits and Schedules. The Exhibits and
Schedules identified in this Agreement are incorporated herein by reference and
made a part hereof.
(o) Venue; Jurisdiction. All actions with respect to this Agreement
will be instituted in a state court sitting in Wilmington, Delaware or in a
federal court in the State of Delaware, subject to the provisions on arbitration
in ss.8(p) below. By the execution of this Agreement, each Party irrevocably and
unconditionally submits to the jurisdiction (both subject matter and personal)
of each such court and irrevocably and unconditionally waives: (a) any objection
such Party might now or hereafter have to the venue in any such court; and (b)
any claim that any action or proceeding brought in any such court has been
brought in an inconvenient forum.
(p) Arbitration. Any disputes arising out of this Agreement and the
transactions among the Parties contemplated by this Agreement shall be settled
by binding arbitration to be held in Wilmington, Delaware in accordance with the
rules of the American Arbitration Association. Judgment upon any award rendered
by any arbitrator may be entered in any court having jurisdiction. The statute
of limitations, estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable in
any arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of an action for these purposes. This ss.8(p)
is not intended to limit, expand, or otherwise affect the rights, remedies, or
obligations that the Buyer, the Target, or any other Person may have pursuant to
other written agreements referred to in this Agreement or otherwise.
(q) Attorneys' Fees. Each Party agrees that the losing party in any
suit or action shall reimburse the prevailing party for its reasonable costs,
expenses, and attorney's fees incurred in any action brought to determine the
rights of the Parties hereunder.
43
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement
as of the date first above written.
Legacy Software, Inc.
By: /s/ William Sliney
--------------------------------
Title: Vice President - CFO
-----------------------------
Legacy Software Acquisition, Inc.
By: /s/ Ariella J. Lehrer
--------------------------------
Title: President
-----------------------------
Videocall International Corporation
By: /s/ M. Zwebner
--------------------------------
Title: Chairman
-----------------------------
2
<PAGE>
MERGER AGREEMENT
AMENDMENT NO. 1
dated as of
December 1, 1998
to
AGREEMENT AND PLAN OF MERGER
dated as of
September 14, 1998
Among
Talk Visual Corporation
(f/k/a Legacy Software, Inc.),
Legacy Acquisition, Inc.
and
Videocall International Corporation
A-2
<PAGE>
AMENDMENT NO. 1
to
AGREEMENT AND PLAN OF MERGER
AMENDMENT NO. 1 dated as of December 1, 1998, to the AGREEMENT AND
PLAN OF MERGER dated as of September 14, 1998, (the "Merger Agreement") among
Talk Visual Corporation (f/k/a Legacy Software, Inc.), a Delaware corporation (
"Buyer"), Videocall International Corporation, a Florida corporation ("Target"),
and Legacy Acquisition, Inc., a Florida corporation and a wholly owned
subsidiary of Buyer ("Merger Subsidiary").
WHEREAS, Buyer, Target and Merger Subsidiary have entered into the
Merger Agreement; and
WHEREAS, Buyer, Target and Merger Subsidiary desire, through this
Amendment No. 1, to amend the Merger Agreement.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Merger Agreement, the parties hereto agree as follows:
1. Section 5 of the Merger Agreement is hereby amended by deleting
subsection 5(o) of such section in its entirety and by substituting in lieu
thereof the following:
"(o) Rights Offering. The Board of Directors of the Buyer shall
authorize a rights offering to their current stockholders that will
provide the issuance of one right for each share of Buyer's Common
Stock outstanding or issuable upon exercise of currently outstanding
options or warrants (the "Rights"). The Rights will enable each
current stockholder to purchase one new share of the Buyer's Common
Stock for $2.50. The Target Stockholders shall agree to waive their
right to participate in this Rights offering with respect to shares
of Buyer's Common Stock received by them in connection with the
Merger. The Rights offering shall be open and exercisable for a
period of ninety (90) days from the commencement date of such Rights
offering. The Rights are not transferable except to the immediate
family or a trust set up for the benefit of such stockholder."
2. Section 7(a) of the Merger Agreement is hereby amended by
changing the date in clauses (ii) and (iii) thereof from "December 31, 1998" to
"June 30, 1999."
3. All references in the Merger Agreement to the "Agreement" shall
be to the Merger Agreement as amended by this Amendment No. 1.
A-3
<PAGE>
4. All other terms and conditions of the Merger Agreement shall
remain unaffected by this Amendment No. 1 and shall remain in full force and
effect.
5. This Amendment No. 1 may be signed in any number of counterparts,
each of which shall be an original, with the same effect as if the signatures
thereto and hereto were upon the same instrument. This Amendment No. 1 shall
become effective when each party hereto shall have received counterparts hereof
signed by all of the other parties hereto. This Amendment No. 1 shall be
governed by and construed in accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
No. 1 to be duly executed by their respective authorized officers as of the day
and year first above written.
Attested: TALK VISUAL CORPORATION
/s Andrew Beck By: /s/ Harold Snyder
- ------------------- ---------------------------------------
Name: Harold Snyder
Title: Chief Financial Officer
VIDEOCALL INTERNATIONAL
Attested: CORPORATION
/s Andrew Beck By: /s/ Harold Snyder
- ------------------- ---------------------------------------
Name: Harold Snyder
Title: Chief Financial Officer
Attested: LEGACY ACQUISITION, INC.
/s Andrew Beck By: /s/ Harold Snyder
- ------------------- ---------------------------------------
Name: Harold Snyder
Title: Chief Financial Officer
A-4
<PAGE>
ANNEX B
B-1
<PAGE>
The following definitions apply
S 607.1302 and 607. 132;
(1) Corporation means the issuer of the shares held by dissenting shareholder
before the corporate action or the surviving or acquiring corporation by
merger or share 1
exchange of that issuer.
(2) "Fair Value," With respect to a dissenter's shares, means the value of the
shares as of the close of business on the day prior to the shareholders'
authorization date, excluding any appreciation or depreciation in anticipation
of the corporate action unless exclusion inequitable.
(3) "Shareholders' authorization date" means the date an which the
shareholders' vote authorizing the proposed action was taken,
the date on which the corporation received
written consents without a meeting from the requisite number or shareholders in
order to authorize the action, or, in the case of a merger pursuant to s
607.1104. the day prior to the date Bill On which a copy of the plan of merger
was mailed to each shareholder of record of the subsidiary corporation.
I the
607.1302 RIGHT OF SHAREHOLDERS TO DISSENT. -(1) Any shareholder of a corporation
has the right to dissent from. and obtain payment of the fair value of his or
her shares in the event of, any of the following corporate actions: (a)
Consummation of a plan of merger to which the corporation is a party: (1) If the
shareholder is entitled to vote on the merger, or
(2) If the corporation is a subsidiary that is merged with its parent under s.
6071104, the Shareholders would have been entitled to vote on action taken,
except for the applicability of s. 607.1104:
(b) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation other than in the usual and regular course of
business, if the shareholder
1 is entitled to vote on the sale or exchange pursuant to s. 607-1202,
including a sale in dissolution but not but no; including a sale pursuant to
court order or a sale for cash
pursuant to
by which all or substantially all of the net proceeds of the sale will be
distributed to the shareholders within I year after the date of sale.
(c) As provided in s. 607,09020(11) 1). the approval of a control-share
acquisition;
A 1998 Aspen Law & Business. A division of Aspen Publishers, Inc
(S)607.1302
B-2
<PAGE>
170 -Corp. FLORIDA 1989 business Corporation Act 9-15-98
d)) Consummation of a plan of sham exchange to which the corporation is a party
as Ott; the corporation The shares of which will be acquired, if the shareholder
is entitled To vote 411 Off plan;
e) Any of the articles of incorporation it the shareholder is entitled to
vote on the amendment and if such amendment would adversely affect such
shareholder by: 1. Altering or abolishing any preemptive rights attached to any
of his or her shares; Altering or abolishing the voting rights pertaining to any
of his or her shares, except as such rights may be affected by the rights of
new shares then being authorized of any existing or now class or series of
shares.
.1. Effecting an exchange. cancellation, or reclassification of any of his or
her shams,
when such exchange, cancellation, or reclassification would alter or abolish I
the shareholders voting rights or alter his or her percentage of equity in the
corporation. or effecting reduction or cancellation of accrued dividends or
other arrearages in respect to such shams; 4. Reducing the stated redemption
price of any of I the shareholder's redeemable
shares 1; altering or abolishing any provision relating to' any sinking fund for
the redemption 81 purchase Of any of his or her shams, or making any of his
shares subject to redemption when
they are not otherwise redeemable:
: Making non cumulative in whole or in part, dividends of any of I the
shareholders
preferred shares which had theretofore been cumulative;
Reducing The stated dividend preference of any of 'rite shareholder's preferred
or
7. Reducing any stated preferential amount payable on any of like shareholders
preferred If shams upon voluntary or involuntary liquidation; or
(f) Any corporate action taken, to the extent the articles of incorporation
provide that
voting or nonvoting shareholder is entitled to dissent and obtain payment for
his or
Mites,
till A shareholder dissenting from any amendment specified in paragraph (l)(e)
has
has the right to dissent only as to those of his or her shams which are
adversely affected by
A shareholder may dissent as to less than all the shares registered in his or
her
name. In the event shareholder's rights shall be determined as if The shares as
to
III that event. I the
he or she has dissented and his or her other shares were registered in the names
of
different shareholders.
Unless the articles of incorporation otherwise provide, ibis section does not
apply with respect to a plan of merger or share exchange or a proposed sale or
exchange of
property In the holders of shares of any class Or Series which. an the record
date fixed to determine the shareholders entitled to vote at (he meeting of
shareholders at which such
action 11 it) be acted upon or to consent to any such action without a meeting.
were either
registered on a n securities exchange or designated as 4 national market System
security on an inter dealer quotation system by the National association
securities Dealers,
Inc, or held of record by not fewer' than 2.000 shareholders,
this (5) A shareholder entitled to dissent and obtain payment for his or her
shams under
this section may not challenge the corporate action creating his or her
entitlement unless
the action Is unlawful or fraudulent with respect to the shareholder or the
corporation. (Last
amended by Ch. 97-101 L '97. eff. 7-1-97
Ch 97-102 L. '97. off 7-1-97 added matter in italic and deleted
'"his".
607.13 607.1320 PROCEDURE FOR EXERCISE Of DISSENTERS' RIGHT
III)I (1)(a) if a proposed corporate action creating dissenters' rights under s.
607,1302 is
submitted it) a volt at a shareholders' meeting, the meeting notice shall
state that shareholders are or may be entitled to assert dissenters'
rights and be accompanied by a
copy of
ss . 1. 607.1302. and 607.1320. A shareholder who wishes to assert dissenters
rights shall
1. Deliver to the corporation before the vote is taken written notice of the
shareholder's
intent to demand payment for his or her shares if the proposed action is
effectuated, and
3 NW vote his or her shams in favor of the proposed action. A proxy OF vow
--
against the proposed action does no constitute such a notice of intent to demand
payment.
B-3
<PAGE>
9-15-98 FLORIDA 1989 Business Corporation Act Corp.171
(b) If proposed corporate action creating dissenter' rights orders. 607.1302 is
effectuated by written consent without a meeting, the corporation shall deliver
a copy of ss. 1301, 607.1302, and 607.1320 to each shareholder simultaneously
with any request
for the shareholder's written consent or. if such a request is not made, within
10 days After the date the corporation received written consents without a
meeting from the requisite number of shareholders necessary to authorize the
action.
(2) Within 10 days after the shareholders authorization date, The corporation
shall
give written notice of such authorization at consent or adoption of the plan of
merger. as
the case may be, to each shareholder who filed a notice of intent to demand
payment for
his or her shams pursuant to paragraph (1)(8) or. in the case of action
authorized by written
consent to each shareholder. excepting any who voted for, or consented in
writing to, the
proposed action.
(3) Within 20 days after the giving of notice to him or her, any shareholder who
elects
lb dissent shall file with the corporation a notice of such election, stating I
the shareholder' 7
name and address, the number, classes, and series of shams as to which he or she
dissents
And a demand for payment of the fair value of his or heir shares. Any
shareholder failing
to file such election to dissent within the period set forth shall be bound by
the terms of
the proposed corporate action. My shareholder filing an election to dissent
shall deposit
his or her certificates for certificated shares with the corporation
simultaneously with the
filing of the election to dissent. The corporation I on may restrict the
transfer of uncertificated
shares from the date the shareholder election to dissent is filed with the
corporation,
(4) Upon filing a notice of election to dissent. the shareholder shall
thereafter be
entitled only to payment as provided in this section and shall not be entitled
to vote or to exercise any other Tights of a shareholder, A notice of election
may be withdrawn in writing by the shareholder at any time before an offer is
made by the corporation as provided in subsection (5), to pay for his or her
shares. After such offer. no such notice of election may be withdrawn unless the
corporation consents thereto. However. the right of such shareholder to be paid
the fair value of his or her shares $hall cease, and 'the shareholder shall be
reinstated to hove all his or her rights as a shareholder as of the filing of
his or her notice of election, including any intervening preemptive rights and
The right to payment of an intervening dividend or other distribution or, if any
such rights have expired or any such dividend or distribution other than in cub
has been completed, in lieu thereof. at the election of the corporation. the
fair value thereof in cash as determined by the board as of the time of such
expiration or completion, but without prejudice otherwise to any corporate
proceedings that may have been taken in the interim if:
(A) Such demand is withdrawn as provided in this section;
(B) The proposed corporate action is abandoned or rescinded or the shareholders
revoke
B-4
<PAGE>
the, authority to effect such action;
(c) No demand or petition for the determination of fair value by 4 court has
been made
or Mod within the time provided in this section. or
Fri) A court of competent jurisdiction determines that such shareholder is not
entitled
to the relief provided by this section.
(5) Within 10 days after the expiration of the period in which Shareholders may
file
their notices of election to dissent, or within 10 days after such corporate
action is effected, whichever is later (but in no caw 1319T than 90 days from
the shareholders' authorization made the corporation shall make! a written offer
to each dissenting shareholder who has made demand as provided in this section
to pay an amount the corporation estimates to be the fair value for such shares,
If the corporate action has not been consummated before expiration of the 90-day
period after the shareholders authorization date. the offer may
be made conditional upon the consummation or such action, Such notice and offer
shall
accompanied by;
(0) A balance sheet of the corporation, the shares of which the dissenting
shareholder
holds as of the latest available date and not MOM than 12 months prior to the
making of
MA offer and
(b) A profit and loss statement of such corporation for the 12-month period
ended on
the date of such balance sheet or. if the corporation was not in existence
throughout such
12-month period, for the portion thereof during which it was in existence.
A 1998 Aspen Law & Business. A DIvision of Aspen Publishers, Inc.
(S)607.1320
B-5
<PAGE>
172---Corp. FLORIDA 1989 Business Corporation Act 9-15-98
(6) If within 30 days after the making of such offer any shareholder accepts the
same, payment for his or her shares shall be made within 90 days after the
making of such offer
or the consumption of the proposed action, whichever is later. Upon payment of
the
agreed value, the dissenting shareholder shall cease to have any interest in
such shares.
(7) If the corporation fails to make such offer within the period specified
therefor in
subsection (5) or if it makes the offer and any dissenting shareholder or
shareholders fail to accept the same within the period of 30 days thereafter,
then the corporation, within 30 days after receipt of written demand from any
dissenting shareholder given within 60 days
after the date on which such corporate action was effected. shall, or at its
election at any time within such period of 60 days may, file an action in any
court of competent jurisdiction in the country in this state where the
registered office of the corporation is located requesting that the fair value
of such shares be determined. The court shall also determine whether each
dissenting shareholder, as to whom the corporation requests the court to make
such determination, is entitled to receive payment for his or her shares. If
the corporation fails to institute the proceeding as herein provided, any
dissenting shareholder may do so in the name of the corporation. All dissenting
shareholders (whether or not residents of this state), other than shareholders
who have agreed with the corporation as to the value of their shares, shall be
made parties to the proceeding as an action against their shares. The
corporation shall serve a copy of the initial pleading in such proceeding upon
each dissenting shareholde who is a resident of this state in the manner
provided by law for the service of a summons and complaint and upon each
nonresident dissenting shareholder either by registered or certified mail and
publication or in such other manner as is permited by law. The jurisdiction of
the court is plenary and exclusive. All shareholders who are proper partjes to
the proceeding are entitled to judgement against the corporation for the amount
of the fair value of their shares. The court may, if it so elects, appoint one
or more persons as appraisers to receive and recommend a decision on the
question of fair value. The appraisers shall have such power and authority as is
specified in the order of their appointment or an amendment thereof. The
corporation shall pay each dissenting shareholder the amount found to be due him
or her 10 days after final determination of the proceedings. Upon payment of the
judgement, the dissenting shareholder shall cease to have any interest in such
shares.
(8) The judgement may, at the discretion of the court, include a fair rate
of interest, to be determined by the court.
(9) The costs and expenses of any such proceeding shall be determined by
the court and shall be assessed against the corporation, but all or any part of
such costs and expenses may be apportioned and assessed as the court deems
equitable against any or all of the dissenting shareholders who are parties to
the proceeding, to whom the corporation has
made an offer to pay for the shares, if the court finds that the action of such
shareholders in failing to accept such an offer was arbitrary, vexatious, or not
in good faith. Such expenses shall include reasonable compensation for, and
reasonable expenses of, the appraisers, but shall exclude the fees and expenses
of counsel for, and experts employed by, any party. If the fair value of the
shares, as determined, materially exceeds the amount which the corporation
offered to pay therefor or if no offer was made, the court in its discretion may
award to any shareholder who is a party to the proceeding such sum as the court
determines to be reasonable compensation to any attorney or expert employed by
the shareholder in the proceeding.
B-6
<PAGE>
(10) Shares acquired by a corporation pursuant to payment of the agreed value
thereof or pursuant to payment of the judgement entered therefor, provided in
this section, may be held and disposed
of by such corporation as authorized but unissued shares of the corporation,
except that, in the case of a merger,
they may be held and disposed of as the plan of merger otherwise provides. The
shares of the surviving corporation into which the shares of such dissenting
shareholders would have been converted had they assented to the merger shall
have the status of authorized but unissued shares of the surviving corporation.
(Last amended by Ch. 97-102, L. '97. eff. 7-1-97.)
- --------------
Ch. 97-102, L. '97, eff. 7-1-97 added marter in italic and deleted `-his" and `-
he".
B-7
<PAGE>
ANNEX C
C-1
<PAGE>
MERGER AGREEMENT
BETWEEN
Talk Visual Corporation
A Delaware Corporation
AND
Talk Visual Corporation
A Nevada Corporation
* * * * * *
WITNESS the terms of this Merger Agreement by and between Talk
Visual Corporation, a Delaware Corporation, hereinafter referred to as "the
Delaware corporation" and Talk Visual Corporation, a Nevada corporation,
hereinafter referred to as "the Nevada corporation."
RECITALS:
1. [IDENTITY OF PARTIES]
Talk Visual Corporation, a Delaware corporation, was organized in
accordance with the laws of the State of Delaware on December 15, 1995 and has
an authorized capitalization of 10,000,000 shares of common stock, having a par
value of $0.001 per share, of which there are issued and outstanding 4,954,916
shares; and 5,000,000 shares of preferred stock, par value $0.001 per share, of
which 975,000 shares are outstanding..
Talk Visual Corporation, a Nevada corporation, was incorporated in
accordance with the laws of the State of Nevada on November 24, 1998, with a
capitalization of 125,000,000 shares, par value $0.001 per share. There are no
shares outstanding.
2. [ASSUMPTION OF ASSETS SUBJECT TO LIABILITIES]
C-2
<PAGE>
The Nevada corporation, when this Merger Agreement shall become
effective, as is hereinafter provided, shall assume all of the assets and all of
the liabilities standing on the books and records of The Delaware corporation.
As a result thereof, The Delaware corporation shall no longer be engaged in
business, having been merged into The Nevada corporation.
3. [REQUIREMENTS OF NEVADA LAW]
Pursuant to the laws of the State of Nevada, a majority of the
directors of a Nevada corporation may enter into a Merger Agreement setting
forth the terms and conditions of the proposed merger, including a statement of
the capitalization, the number of shares of capital stock of the surviving
Nevada corporation, a statement of the manner of conversion of the shares and
assets of the Delaware corporation, a statement of the method of carrying the
terms of the Merger Agreement into effect, and such other details as may be
deemed necessary to disclose all matters effective in a merger. The laws of the
State of Nevada further provide that notice of a proposed merger shall be given
by mail to the last known address of each stockholder, not less than ten (10)
days prior to such meeting. Such notice shall contain the time and place of
meeting. The laws of the State of Nevada provide further that notice of the
proposed merger may be waived by the stockholders. By the further terms of the
laws of the State of Nevada, it is specified that if a majority of the
outstanding stock of the Nevada corporation shall be voted in favor of the
merger, the Merger Agreement shall be declared adopted. The vote thereon shall
be certified on the Merger Agreement by the President or Vice President and by
the Secretary or Assistant Secretary of the Nevada corporation. The Merger
Agreement shall be signed and acknowledged by the President or Vice President
and by the Secretary or Assistant Secretary of the Nevada corporation, and the
seal of such corporation shall be affixed thereto, whereupon the
C-3
<PAGE>
same shall be filed in the office of the Secretary of State of Nevada. Upon
recordation in the office of the Secretary of State of Nevada, the merger shall,
insofar as Nevada law is concerned, be deemed to be consummated.
4. [REQUIREMENTS OF DELAWARE LAW]
The action contemplated hereby is deemed under Delaware law to be a
merger. In connection with a merger, Delaware law requires that the Board of
Directors of the Delaware corporation shall by resolution approve and adopt the
Merger Agreement. The Merger Agreement shall specify the names of the
corporations proposing to merge. The name of the surviving corporation, the
terms and conditions of the merger, manner and basis of converting the shares of
the retiring corporation into shares of the surviving corporation, a statement
of any changes in the Articles of Incorporation of the surviving corporation, to
the extent that they are the result of such merger, and such other provisions
with respect to the merger as are deemed necessary or desirable shall also be
specified in the Plan of Merger. The statutes of the State of Delaware further
provide that the Board of Directors shall by resolution direct that the Merger
Agreement be submitted to a vote of the shareholders, that written or printed
notice shall be given to each shareholder of record no less than twenty (20)
days prior to such meeting, and that such notice shall state the purpose of the
meeting, as well as the place, day and hour thereof, and shall be delivered
either personally or by deposit in the United States mail, properly addressed,
postage prepaid. Delaware law further requires that a copy of or a summary of
the Merger Agreement shall be included or enclosed with such notice. The laws of
the State of Delaware further specify that the Plan of Merger shall be deemed to
have been approved upon receiving the affirmative vote of the holders of at
least a majority of the outstanding shares, and such laws specify that upon such
approval, the Merger Agreement shall be executed in duplicate by the
C-4
<PAGE>
President or Vice President and by the Secretary or Assistant Secretary, and
shall be verified by one of such officers. Such Merger Agreement shall record or
set forth the plan of merger, the number of shares outstanding with respect to
each corporation, and the number of shares voted for and against the plan of
merger. It is further required that such duplicate originals be delivered to the
Secretary of State of Delaware, and upon the subsequent issuance of a
Certificate of Merger by the Secretary of State of Delaware, the corporations
party to the merger shall become a single corporation, the separate existence of
the merged corporation shall cease, and the surviving corporation shall have all
the rights, privileges, immunities, powers, properties and assets and shall be
subject to the duties, liabilities, debts and obligations of both corporations.
NOW, THEREFORE, AND IN CONSIDERATION OF THE FOREGOING RECITALS, AND
THE MUTUAL COVENANTS HEREINAFTER SET FORTH, TALK VISUAL CORPORATION, A NEVADA
CORPORATION, AND TALK VISUAL CORPORATION, A DELAWARE CORPORATION, DESIRE TO
MERGE, AS THAT TERM IS USED IN THE LAWS OF THE STATES OF DELAWARE AND NEVADA,
AND DO HEREBY, ACTING THROUGH A MAJORITY OF THE BOARD OF DIRECTORS OF EACH SUCH
CORPORATION, AGREE TO MERGE AS FOLLOWS:
5. [STATEMENT UNDER DELAWARE LAW]
The terms and conditions of the proposed merger of the Delaware
corporation into the Nevada corporation, shall be as follows:
(a) The Articles of Incorporation of the Nevada corporation,
the surviving corporation, which are on file with the Secretary of State of
Nevada, shall be amended as follows:
The name of the Corporation shall be
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<PAGE>
Talk Visual Corporation
(b) The 5,929,916 shares outstanding of the Delaware
corporation shall be converted into 5,929,916 shares of the Nevada corporation.
6. [STATEMENT UNDER DELAWARE LAW] The plan of merger shall be as
follows:
(a) The names of the corporations proposing to merge are :
Talk Visual Corporation, a Delaware corporation, and Talk Visual Corporation, a
Nevada corporation, which is designated as the surviving corporation.
(b) The conversion of the shares of the Delaware corporation
into that of the surviving Nevada corporation will be on the basis of one (1)
share of the Delaware corporation converted into one (1) share of the Nevada
corporation.
(c) The surviving Nevada corporation, agrees that it may be
served with process in the State of Delaware in any proceeding for the
enforcement of any obligation to which the Delaware corporation was a party with
regard to the merger into the Nevada corporation and the Nevada corporation,
further agrees that it may be served with process in the State of Delaware in
any proceeding for the enforcement of the rights of a dissenting shareholder of
the Delaware corporation against the Nevada corporation.
(d) The Nevada corporation, the surviving corporation, does
hereby irrevocably appoint the Secretary of State of Delaware as its agent to
accept service of process in any such proceeding heretofore described in
paragraph (c) above.
(e) The Nevada corporation, the surviving corporation, agrees,
as the surviving corporation, to promptly pay to the dissenting shareholders of
the Delaware corporation, the amount, if any, to which those dissenting
shareholders shall be entitled under
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<PAGE>
the provisions of the statutes of the State of Delaware with respect to the
rights of such dissenting shareholders of the Delaware corporation.
7. [AGREEMENT TO MERGE]
The parties hereby agree that the Delaware corporation shall be
merged into the Nevada corporation, and they do hereby further specifically
agree, in order to accomplish such results, as follows:
(a) Each of the parties hereto shall prepare and cause to be
mailed such notices as may be required or be desirable pursuant to the laws of
the States of Nevada and Delaware. And in addition, they shall see to the
mailing to the stockholders of the parties of all information which may be
reasonably necessary or desirable in order to permit such stockholders to reach
an intelligent and informed decision with respect to the proposed merger. The
expense of all such notices, reports and information and of the mailing of the
same shall be borne by the party with respect to which the material is prepared
or to whose stockholders the material is submitted, as the case may be, save
only that neither party shall be charged by the other for the costs of preparing
any reports or documents heretofore published and available and deemed desirable
for such distribution. Each of the parties hereto shall proceed with all due
diligence, but strictly in cooperation with the other, to secure the approval of
the Merger Agreement by the requisite vote of the stockholders of the parties
and shall thereafter see to the filing of all required notices and undertakings
of every kind and character, pursuant to the laws of the States of Nevada and
Delaware.
(b) Upon completion of the final steps necessary to permit
this Merger Agreement to become effective, the same shall forthwith become
effective wherein the Nevada corporation shall take over all of the assets and
assume all of the liabilities of the
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<PAGE>
Delaware corporation, and the stockholders of the Delaware corporation shall
surrender their stock certificates in exchange for Common Stock of the Nevada
corporation on the basis of one (1) share of the Delaware corporation being
exchanged for one (1) share of the surviving Nevada corporation, with the shares
of the Delaware corporation being surrendered for cancellation and retirement.
8. [EXPENSES AND FEES]
The surviving Nevada corporation shall discharge all expenses in
connection with the calling and convening of the special stockholders' meetings
to ratify and approve the Merger Agreement.
9. [DIRECTOR AND OFFICERS]
(a) On the effective date of this merger, the Board of Directors of
the surviving Nevada corporation shall consist of five (5) directors. The terms
of office of such members of the Board of Directors shall be until the next
annual meeting of stockholders of the surviving corporation, after the effective
date of the merger, and until their successors shall be qualified and shall have
been elected. The names and addresses of such directors are as follows:
Eugene Rosov, Michael Zwebner, David B. Hurwitz, Alexander Walker,
Jr. and Michael Cuzner - Charles, all of whose address is One Canal Park, 3rd
Floor, Cambridge, Massachusetts 02142
(b) Upon the effective date of the merger, there shall be
three (3) officers of the surviving Nevada corporation, who are presently
holding these positions. These officers, each of whom shall hold office until
his successor shall be duly elected or appointed and shall have qualified, or
until his earlier death, resignation or removal, and their respective offices
and addresses are as follows:
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<PAGE>
Chairman Michael J. Zwebner
President Eugene A. Rosov
Vice President, Secretary and Treasurer C. Harold Snyder
10. [DISSENTING SHAREHOLDERS]
The surviving Nevada corporation shall comply with the provisions of
applicable law, with the appraisal of and payment for stock of stockholders
objecting to the merger, and The surviving Nevada corporation agrees further
that payments for such stock and the cost of all proceedings in connection with
all matters necessary to be performed in connection therewith will be at its
expense.
11. [ABANDONMENT OF MERGER]
Anything herein to the contrary notwithstanding, this merger may be
terminated and the merger provided herein abandoned at any time prior to the
effective date of the merger, whether before or after such action of the
stockholders, pursuant to resolution adopted by the Board of Directors of either
party hereto. In the event of the termination or abandonment of this Merger
Agreement, the same shall become wholly void and of no effect and there shall be
no liability on the part of either party hereto, or their respective Boards of
Directors or the stockholders.
12. [EXECUTION]
This Merger Agreement may be executed in any number of counterparts,
all of which together shall constitute one original Merger Agreement.
13. [BINDING EFFECT] This Merger Agreement and the terms and
conditions thereof shall be binding upon and inure to the benefit of the assigns
and successors of the respective parties hereto.
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<PAGE>
14. [MERGER CLAUSE] This Merger Agreement supersedes all prior
agreements and understandings between the parties and may not be changed or
terminated orally, and no attempted change, termination or waiver of any of the
provisions hereof shall be binding, unless in writing and signed by all parties
hereto.
15. [GOVERNING LAW] This Merger Agreement shall be governed by and
construed according to the laws of the State of Nevada, which is the state of
incorporation of The surviving Nevada corporation.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their duly authorized officers in each case by authority of
the Board of Directors of each corporation, and have caused their seals to be
hereto affixed and a majority of the Board of Directors of each corporation have
executed this Merger Agreement as of the day and year set forth below:
DATED this _____ day of ________, 1999.
ATTEST:
--------------------------------
A Nevada corporation
By:
- -------------------------- --------------------------------
, Secretary , President
ATTEST:
--------------------------------
A Delaware corporation
- -------------------------- --------------------------------
, Secretary , President
- -------------------------- --------------------------------
A Delaware corporation A Nevada corporation
Board of Directors: Board of Directors:
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<PAGE>
- ---------------------------------- -----------------------------
- ---------------------------------- -----------------------------
- ---------------------------------- -----------------------------
- ---------------------------------- -----------------------------
C-11
<PAGE>
STATE OF )
------------------
: s.s.
COUNTY OF )
-----------------
The undersigned, a Notary Public, does hereby certify that on this
____ day of ________, 1999, personally appeared before me
_______________________, who being by me first duly sworn, declared that he is
the President of _________________, a Nevada corporation; and _____________, who
being by me first duly sworn, declared that he is the Secretary of
_______________________, a Nevada corporation; that they signed the foregoing
document as President and Secretary of the corporation, and that the statements
therein contained are true.
IN WITNESS WHEREOF, I have set my hand and seal this ____ day of
_______, 1999.
-------------------------------------
Notary Public
Residing in:
-------------------------
My Commission Expires:
- ----------------------
STATE OF )
------------------
: s.s.
COUNTY OF )
-----------------
The undersigned, a Notary Public, does hereby certify that on this
____ day of _______, 1999, personally appeared before me __________________, who
being by me first duly sworn, declared that he is the President of
___________________, a Delaware corporation; and _________________, who being by
me first duly sworn, declared that he is the Secretary of _____________________,
a Delaware corporation; that they signed the foregoing document as President and
Secretary of the corporation, and that the statements therein contained are
true.
IN WITNESS WHEREOF, I have set my hand and seal this ____ day of
_______, 1999.
-------------------------------------
Notary Public
Residing in:
-------------------------
My Commission Expires:
- ----------------------
C-12
<PAGE>
ANNEX D
D-1
<PAGE>
ARTICLES OF INCORPORATION
OF
TALK VISUAL CORPORATION
* * * * * *
The undersigned, acting as incorporator, pursuant to the provisions of the
laws of the State of Nevada relating to private corporations, hereby adopts the
following Articles of Incorporation:
ARTICLE ONE. [NAME]. The name of the corporation is:
TALK VISUAL CORPORATION
ARTICLE TWO. [RESIDENT AGENT].The initial agent for service of process is
The Nevada Agency and Trust Company, 50 West Liberty Street, Suite 880, City of
Reno, County of Washoe, State of Nevada 89501.
ARTICLE THREE. [PURPOSES]. The purposes for which the corporation is
organized are to engage in any activity or business not in conflict with the
laws of the State of Nevada or of the United States of America, and without
limiting the generality of the foregoing, specifically:
I. [OMNIBUS]. To have to exercise all the powers now or hereafter
conferred by the laws of the State of Nevada upon corporations organized
pursuant to the laws under which the corporation is organized and any and
all acts amendatory thereof and supplemental thereto.
II. [CARRYING ON BUSINESS OUTSIDE STATE]. To conduct and carry on
its business or any branch thereof in any state or territory of the United
States or in any foreign country in conformity with the laws of such
state, territory, or foreign country, and to have and maintain in any
state, territory, or foreign country a business office, plant, store or
other facility.
III. [PURPOSES TO BE CONSTRUED AS POWERS]. The purposes specified
herein shall be construed both as purposes and powers and shall be in no
wise limited or restricted by reference to, or inference from, the terms
of any other clause in this or any other article, but the purposes and
powers
D-2
<PAGE>
specified in each of the clauses herein shall be regarded as independent
purposes and powers, and the enumeration of specific purposes and powers
shall not be construed to limit or restrict in any manner the meaning of
general terms or of the general powers of the corporation; nor shall the
expression of one thing be deemed to exclude another, although it be of
like nature not expressed.
ARTICLE FOUR. [CAPITAL STOCK]. The corporation shall have authority to
issue an aggregate of ONE HUNDRED TWENTY-FIVE MILLION (125,000,000) shares of
stock, divided into two (2) classes of stock as follows for a total
capitalization of ONE HUNDRED TWENTY-FIVE THOUSAND DOLLARS ($125,000):
(A) NON-ASSESSABLE COMMON STOCK: ONE HUNDRED MILLION (100,000,000)
shares of COMMON STOCK, Par Value ONE MILL ($0.001) per share
and
(B) PREFERRED STOCK: TWENTY-FIVE MILLION (25,000,000)shares of
PREFERRED STOCK, Par Value ONE MILL ($0.001) per share.
All capital stock when issued shall be fully paid and non-assessable. No
holder of shares of capital stock of the corporation shall be entitled as such
to any pre-emptive or preferential rights to subscribe to any unissued stock, or
any other securities which the corporation may now or hereafter be authorized to
issue.
The corporation's capital stock may be issued and sold from time to time
for such consideration as may be fixed by the Board of Directors, provided that
the consideration so fixed is not less than par value.
Holders of the corporation's Common Stock shall not possess cumulative
voting rights at any shareholders meetings called for the purpose of electing a
Board of Directors or on other matters brought before stockholders meetings,
whether they be annual or special.
ARTICLE FIVE. [DIRECTORS]. The affairs of the corporation shall be
governed by a Board of Directors of not more than fifteen (10) nor less than one
(1) person. The Board of Directors may be classified as determined by the
initial Board at its discretion. The name and address of the first Board of
Directors is:
NAME ADDRESS
---- -------
Alexander H. Walker, Jr. 50 W. Liberty Street, Suite 880
Reno, Nevada 89501
D-3
<PAGE>
ARTICLE SIX. [ASSESSMENT OF STOCK]. The capital stock of the corporation,
after the amount of the subscription price or par value has been paid in, shall
not be subject to pay debts of the corporation, and no paid up stock and no
stock issued as fully paid up shall ever be assessable or assessed.
ARTICLE SEVEN. [INCORPORATOR]. The name and address of the incorporator of
the corporation is as follows:
NAME ADDRESS
---- -------
Amanda Cardinalli 50 West Liberty Street, Suite 880
Reno, Nevada 89501
ARTICLE EIGHT. [PERIOD OF EXISTENCE]. The period of existence of the
corporation shall be perpetual.
ARTICLE NINE. [BY-LAWS]. The initial By-laws of the corporation shall be
adopted by its Board of Directors. The power to alter, amend, or repeal the
By-laws, or to adopt new By-laws, shall be vested in the Board of Directors,
except as otherwise may be specifically provided in the By-laws.
ARTICLE TEN. [STOCKHOLDERS' MEETINGS]. Meetings of stockholders shall be
held at such place within or without the State of Nevada as may be provided by
the By-laws of the corporation. Special meetings of the stockholders may be
called by the President or any other executive officer of the corporation, the
Board of Directors, or any member thereof, or by the record holder or holders of
at least ten percent (10%) of all shares entitled to vote at the meeting. Any
action otherwise required to be taken at a meeting of the stockholders, except
election of directors, may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by stockholders having at
least a majority of the voting power.
ARTICLE ELEVEN. [CONTRACTS OF CORPORATION]. No contract or other
transaction between the corporation and any other corporation, whether or not a
majority of the shares of the capital stock of such other corporation is owned
by this corporation, and no act of this corporation shall in any way be affected
or invalidated by the fact that any of the directors of this corporation are
pecuniarily or otherwise interested in, or are directors or officers of such
other corporation. Any director of this corporation, individually, or any firm
of which such director may be a member, may be a party to, or may be pecuniarily
or otherwise interested in any contract or transaction of the corporation;
provided, however, that the fact that he or such firm is so interested shall be
disclosed or shall have been known to the Board of Directors of this
corporation, or a majority thereof; and any director of this corporation who is
also a director or officer of such other corporation, or who is so interested,
may be counted in determining the existence of a quorum at any meeting of the
Board of Directors of this
D-4
<PAGE>
corporation that shall authorize such contract or transaction, and may vote
thereat to authorize such contract or transaction, with like force and effect as
if he were not such director or officer of such other corporation or not so
interested.
ARTICLE TWELVE. [LIABILITY OF DIRECTORS AND OFFICERS]. No director or
officer shall have any personal liability to the corporation or its stockholders
for damages for breach of fiduciary duty as a director or officer, except that
this Article Twelve shall not eliminate or limit the liability of a director or
officer for (I) acts or omissions which involve intentional misconduct, fraud or
a knowing violation of law, or (ii) the payment of dividends in violation of the
Nevada Revised Statutes.
IN WITNESS WHEREOF, the undersigned incorporator has hereunto affixed her
signature at Reno, Nevada this 23rd day of November, 1998.
-----------------------------
AMANDA CARDINALLI
D-5
<PAGE>
STATE OF NEVADA }
: ss.
COUNTY OF WASHOE }
On the 23rd day of November, 1998, before me, the undersigned, a Notary
Public in and for the State of Nevada, personally appeared AMANDA CARDINALLI,
known to me to be the person described in and who executed the foregoing
instrument, and who acknowledged to me that she executed the same freely and
voluntarily for the uses and purposes therein mentioned.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year first above written.
----------------------------------
NOTARY PUBLIC
Residing in Reno, Nevada
My Commission Expires:
October 10, 2002
D-6
<PAGE>
ANNEX E
E-1
<PAGE>
BY-LAWS FOR THE REGULATION
EXCEPT AS OTHERWISE PROVIDED BY STATUTE
OR ITS ARTICLES OF INCORPORATION OF
TALK VISUAL CORPORATION
A NEVADA CORPORPATION
* * * * *
ARTICLE I.
Offices
Section 1. PRINCIPAL OFFICE. The principal office for the transaction of
the business of the corporation is hereby fixed and located at Suite 880, Bank
of America Plaza, 50 West Liberty Street, Reno, Nevada 89501, being the offices
of THE NEVADA AGENCY AND TRUST COMPANY. The board of directors is hereby granted
full power and authority to change said principal office from one location to
another in the State of Nevada.
Section 2. OTHER OFFICES. Branch or subordinate offices may at any time be
established by the board of directors at any place or places where the
corporation is qualified to do business.
ARTICLE II.
Meetings of Shareholders
Section 1. MEETING PLACE. All annual meetings of shareholders and all
other meetings of shareholders shall be held either at the principal office or
at any other place within or without the State of Nevada which may be designated
either by the board of directors, pursuant to authority hereinafter granted to
said board, or by the written consent of all shareholders entitled to vote
thereat, given either before or after the meeting and filed with the Secretary
of the corporation.
E-2
<PAGE>
Section 2. ANNUAL MEETINGS. The annual meetings of shareholders shall be
held on the 1st day of July each year, at the hour of 10:00 o'clock a.m. of said
day commencing with the year 1999, provided, however, that should said day fall
upon a legal holiday then any such annual meeting of shareholders shall be held
at the same time and place on the next day thereafter ensuing which is not a
legal holiday. The board of directors of the corporation shall have the power to
change the date of the annual meeting as it deems appropriate.
Written notice of each annual meeting signed by the president or a vice
president, or the secretary, or an assistant secretary, or by such other person
or persons as the directors shall designate, shall be given to each shareholder
entitled to vote thereat, either personally or by mail or other means of written
communication, charges prepaid, addressed to such shareholder at his address
appearing on the books of the corporation or given by him to the corporation for
the purpose of notice. If a shareholder gives no address, notice shall be deemed
to have been given to him, if sent by mail or other means of written
communication addressed to the place where the principal office of the
corporation is situated, or if published at least once in some newspaper of
general circulation in the county in which said office is located. All such
notices shall be sent to each shareholder entitled thereto not less than ten
(10) nor more than sixty (60) days before each annual meeting, and shall specify
the place, the day and the hour of such meeting, and shall also state the
purpose or purposes for which the meeting is called.
Section 3. SPECIAL MEETINGS. Special meetings of the shareholders, for any
purpose or purposes whatsoever, may be called at any time by the president or by
the board of directors, or by one or more shareholders holding not less than 10%
of the voting power of the corporation. Except in special cases where other
express provision is made by statute, notice of
E-3
<PAGE>
such special meetings shall be given in the same manner as for annual meetings
of shareholders. Notices of any special meeting shall specify in addition to the
place, day and hour of such meeting, the purpose or purposes for which the
meeting is called.
Section 4. ADJOURNED MEETINGS AND NOTICE THEREOF. Any shareholders'
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to time by the vote of a majority of the shares, the holders of which
are either present in person or represented by proxy thereat, but in the absence
of a quorum, no other business may be transacted at any such meeting.
When any shareholders' meeting, either annual or special, is adjourned for
thirty (30) days or more, notice of the adjourned meeting shall be given as in
the case of an original meeting. Save as aforesaid, it shall not be necessary to
give any notice of an adjournment or of the business to be transacted at an
adjourned meeting, other than by announcement at the meeting at which such
adjournment is taken.
Section 5. ENTRY OF NOTICE. Whenever any shareholder entitled to vote has
been absent from any meeting of shareholders, whether annual or special, an
entry in the minutes to the effect that notice has been duly given shall be
conclusive and incontrovertible evidence that due notice of such meeting was
given to such shareholders, as required by law and the By-Laws of the
corporation.
Section 6. VOTING. At all annual and special meetings of stockholders
entitled to vote thereat, every holder of stock issued to a bona fide purchaser
of the same, represented by the holders thereof, either in person or by proxy in
writing, shall have one vote for each share of stock so held and represented at
such meetings, unless the Articles of Incorporation of the company shall
otherwise provide, in which event the voting rights, powers and privileges
E-4
<PAGE>
prescribed in the said Articles of Incorporation shall prevail. Voting for
directors and, upon demand of any stockholder, upon any question at any meeting
shall be by ballot. Any director may be removed from office by the vote of
stockholders representing not less than two-thirds of the voting power of the
issued and outstanding stock entitled to voting power.
Section 7. QUORUM. The presence in person or by proxy of the holders of a
majority of the shares entitled to vote at any meeting shall constitute a quorum
for the transaction of business. The shareholders present at a duly called or
held meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum.
Section 8. CONSENT OF ABSENTEES. The transactions of any meeting of
shareholders, either annual or special, however called and noticed, shall be as
valid as though at a meeting duly held after regular call and notice, if a
quorum be present either in person or by proxy, and if either before or after
the meeting, each of the shareholders entitled to vote, not present in person or
by proxy, sign a written Waiver of Notice, or a consent to the holding of such
meeting, or an approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of this meeting.
Section 9. PROXIES. Every person entitled to vote or execute consents
shall have the right to do so either in person or by an agent or agents
authorized by a written proxy executed by such person or his duly authorized
agent and filed with the secretary of the corporation; provided that no such
proxy shall be valid after the expiration of eleven (11) months from the date of
its execution, unless the shareholder executing it specifies therein the length
of time for which such proxy is to continue in force, which in no case shall
exceed seven (7) years from the date of its execution.
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<PAGE>
ARTICLE III
Section 1. POWERS. Subject to the limitations of the Articles of
Incorporation or the By-Laws, and the provisions of the Nevada Revised Statutes
as to action to be authorized or approved by the shareholders, and subject to
the duties of directors as prescribed by the By-Laws, all corporate powers shall
be exercised by or under the authority of, and the business and affairs of the
corporation shall be controlled by the board of directors. Without prejudice to
such general powers, but subject to the same limitations, it is hereby expressly
declared that the directors shall have the following powers, to wit:
First - To select and remove all the other officers, agents and employees
of the corporation, prescribe such powers and duties for them as may not be
inconsistent with law, with the Articles of Incorporation or the By-Laws, fix
their compensation, and require from them security for faithful service.
Second - To conduct, manage and control the affairs and business of the
corporation, and to make such rules and regulations therefor not inconsistent
with law, with the Articles of incorporation or the By-Laws, as they may deem
best.
Third - To change the principal office for the transaction of the business
of the corporation from one location to another within the same county as
provided in Article I, Section 1, hereof; to fix and locate from time to time
one or more subsidiary offices of the corporation within or without the State of
Nevada, as provided in Article I, Section 2, hereof; to designate any place
within or without the State of Nevada for the holding of any shareholders'
meeting or meetings; and to adopt, make and use a corporate seal, and to
prescribe the forms of certificates of stock, and to alter the form of such seal
and of such certificates from time to time, as in their
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<PAGE>
judgment they may deem best, provided such seal and such certificates shall at
all times comply with the provisions of law.
Forth - To authorize the issue of shares of stock of the corporation from
time to time, upon such terms as may be lawful, in consideration of money paid,
labor done or services actually rendered, debts or securities canceled, or
tangible or intangible property actually received, or in the case of shares
issued as a dividend, against amounts transferred from surplus to stated
capital.
Fifth - To borrow money and incur indebtedness for the purposes of the
corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages,
pledges, hypothecations or other evidences of debt and securities therefore.
Sixth - To appoint an executive committee and other committees and to
delegate to the executive committee any of the powers and authority of the board
in management of the business and affairs of the corporation, except the power
to declare dividends and to adopt, amend or repeal By-Laws. The executive
committee shall be composed of one or more directors.
Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The authorized number of
directors of the corporation shall be not less than one (1) and no more than
fifteen (15).
Section 3. ELECTION AND TERM OF OFFICE. The directors shall be elected at
each annual meeting of shareholders, but if any such annual meeting is not held,
or the directors are not elected thereat, the directors may be elected at any
special meeting of shareholders. All directors shall hold office until their
respective successors are elected.
E-7
<PAGE>
Section 4. VACANCIES. Vacancies in the board of directors may be filled by
a majority of the remaining directors, though less than a quorum, or by a sole
remaining director, and each director so elected shall hold office until his
successor is elected at an annual or a special meeting of the shareholders.
A vacancy or vacancies in the board of directors shall be deemed to exist
in case of the death, resignation or removal of any director, or if the
authorized number of directors be increased, or if the shareholders fail at any
annual or special meeting of shareholders at which any director or directors are
elected to elect the full authorized number of directors to be voted for at that
meeting.
The shareholders may elect a director or directors at any time to fill any
vacancy or vacancies not filled by the directors. If the board of directors
accept the resignation of a director tendered to take effect at a future time,
the board or the shareholders shall have the power to elect a successor to take
office when the resignation is to become effective.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of his term of office.
Section 5. PLACE OF MEETING. Regular meetings of the board of directors
shall be held at any place within or without the State which has been designated
from time to time by resolution of the board or by written consent of all
members of the board. In the absence of such designation, a regular meeting
shall be held at the principal office of the corporation. Special meetings of
the board may be held either at a place so designated, or at the principal
office.
Section 6. ORGANIZATION MEETING. Immediately following each annual meeting
of shareholders, the board of directors shall hold a regular meeting for the
purpose of
E-8
<PAGE>
organization, election of officers, and the transaction of other business.
Notice of such meeting is hereby dispensed with.
Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the board of
directors shall be held without call and the day of each month and at an hour
deemed appropriate and set by the board of directors; provided, however, should
such set day fall upon a legal holiday, then said meeting shall be held at the
same time on the next day thereafter ensuing which is not a legal holiday.
Notice of all such regular meetings of the board of directors is hereby
dispensed with.
Section 8. SPECIAL MEETINGS. Special meetings of the board of directors
for any purpose or purposes shall be called at any time by the president, or, if
he is absent or unable or refuses to act, by any vice president or by any two
(2) directors.
Written notice of the time and place of special meetings shall be
delivered personally to the directors or sent to each director by mail or other
form of written communication, charges prepaid, addressed to him at his address
as it is shown upon the records of the corporation, or if it is not shown on
such records or is not readily ascertainable, at the place in which the meetings
of the directors are regularly held. In case such notice is mailed or
telegraphed, it shall be deposited in the United States mail or delivered to the
telegraph company in the place in which the principal office of the corporation
is located at least forty-eight (48) hours prior to the time of the holding of
the meeting. In case such notice is delivered as above provided, it shall be so
delivered at least twenty-four (24) hours prior to the time of the holding of
the meeting. Such mailing, telegraphing or delivery as above provided shall be
due, legal and personal notice to such director.
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Section 9. NOTICE OF ADJOURNMENT. Notice of the time and place of holding
an adjourned meeting need not be given to absent directors, if the time and
place be fixed at the meeting adjourned.
Section 10. ENTRY OF NOTICE. Whenever any director has been absent from
any special meeting of the board of directors, an entry in the minutes to the
effect that notice has been duly given shall be conclusive and incontrovertible
evidence that due notice of such special meeting was give to such director, as
required by law and the By-Laws of the corporation.
Section 11. WAIVER OF NOTICE. The transactions of any meeting of the board
of directors, however called and noticed or wherever held, shall be as valid as
though had a meeting duly held after regular call and notice, if a quorum be
present, and if, either before or after the meeting, each of the directors not
present sign a written waiver of notice or a consent to the holding of such
meeting or an approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
Section 12. QUORUM. A majority of the authorized number of directors shall
be necessary to constitute a quorum for the transaction of business, except to
adjourn as hereinafter provided. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum is
present, shall be regarded as the act of the board of directors, unless a
greater number be required by law or by the Articles of Incorporation.
Section 13. ADJOURNMENT. A quorum of the directors may adjourn any
directors' meeting to meet again at a stated day and hour; provided, however,
that in the absence of a quorum, a majority of the directors present at any
directors' meeting, either regular or special, may adjourn from time to time
until the time fixed for the next regular meeting of the board.
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Section 14. FEES AND COMPENSATION. Directors shall not receive any stated
salary for their services as directors, but by resolution of the board, a fixed
fee, with or without expenses of attendance may be allowed for attendance at
each meeting. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation therefor.
ARTICLE IV.
Officers
Section 1. OFFICERS. The officers of the corporation shall be a president,
a vice president and a secretary/treasurer. The corporation may also have, at
the discretion of the board of directors, a chairman of the board, one or more
vice presidents, one or more assistant secretaries, one or more assistant
treasurers, and such other officers as may be appointed in accordance with the
provisions of Section 3 of this Article. Officers other than president and
chairman of the board need not be directors. Any person may hold two or more
offices.
Section 2. ELECTION. The officers of the corporation, except such officers
as may be appointed in accordance with the provisions of Section 3 or Section 5
of this Article, shall be chosen annually by the board of directors, and each
shall hold his office until he shall resign or shall be removed or otherwise
disqualified to serve, or his successor shall be elected and qualified.
Section 3. SUBORDINATE OFFICERS, ETC. The board of directors may appoint
such other officers as the business of the corporation may require, each of whom
shall hold office for such period, have such authority and perform such duties
as are provided in the By-Laws or as the board of directors may from time to
time determine.
Section 4. REMOVAL AND RESIGNATION. Any officer may be removed,
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either with or without cause, by a majority of the directors at the time in
office, at any regular or special meeting of the board.
Any officer may resign at any time by giving written notice to the board
of directors or to the president, or to the secretary of the corporation. Any
such resignation shall take effect at the date of the receipt of such notice or
at any later time specified therein; and, unless otherwise specified therein,
the acceptance of such resignation shall not be necessary to make it effective.
Section 5. VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in the By-Laws for regular appointments to such office.
Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if there
shall be such an officer, shall, if present, preside at all meetings of the
board of directors, and exercise and perform such other powers and duties as may
be from time to time assigned to him by the board of directors or prescribed by
the By-Laws.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may
be given by the board of directors to the chairman of the board, if there be
such an officer, the president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors, have
general supervision, direction and control of the business and officers of the
corporation. He shall preside at all meetings of the shareholders and in the
absence of the chairman of the board, or if there be none, at all meetings of
the board of directors. He shall be ex-officio a member of all the standing
committees, including the executive committee, if any, and shall have the
general powers and duties of management usually vested in the office of
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president of a corporation, and shall have such other powers and duties as may
be prescribed by the board of directors or the By-Laws.
Section 8. VICE PRESIDENT. In the absence or disability of the president,
the vice presidents in order of their rank as fixed by the board of directors,
or if not ranked, the vice president designated by the board of directors, shall
perform all the duties of the president and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the president. The vice
presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them respectively by the board of directors
or the By-Laws.
Section 9. SECRETARY. The secretary shall keep, or cause to be kept, a
book of minutes at the principal office or such other place as the board of
directors may order, of all meetings of directors and shareholders, with the
time and place of holding, whether regular or special, and if special, how
authorized, the notice thereof given, the names of those present at directors'
meetings, the number of shares present or represented at shareholders' meetings
and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal office, a
share register, or a duplicate share register, showing the names of the
shareholders and their addresses; the number and classes of shares held by each;
the number and date of certificates issued for the same, and the number and date
of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all the meetings
of the shareholders and of the board of directors required by the By-Laws or by
law to be given, and he shall keep the seal of the corporation in safe custody,
and shall have such other powers and perform such other duties as may be
prescribed by the board of directors or the By-Laws.
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Section 10. TREASURER. The treasurer shall keep and maintain, or cause to
be kept and maintained, adequate and correct accounts of the properties and
business transactions of the corporation, including accounts of its assets,
liabilities, receipts, disbursement, gains, losses, capital, surplus and shares.
Any surplus, including earned surplus, paid-in surplus and surplus arising from
a reduction of stated capital, shall be classified according to source and shown
in a separate account. The books of account shall at all times be open to
inspection by any director.
The treasurer shall deposit all moneys and other valuables in the name and
to the credit of the corporation with such depositaries as may be designated by
the board of directors. He shall disburse the funds of the corporation as may be
ordered by the board of directors, shall render to the president and directors,
whenever they request it, an account of all of his transactions as treasurer and
of the financial condition of the corporation, and shall have such other powers
and perform such other duties as may be prescribed by the board of directors or
the By-Laws.
ARTICLE V.
INDEMNIFICATION OF OFFICERS, DIRECTORS
AND KEY PERSONEL
Section 1. The corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of the corporation, by reason
of the fact that such person is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses including attorneys fees,
judgments, fines and amounts paid in
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settlement actually and reasonable incurred by such person in connection with
the action, suit or proceeding if such person acted in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendre or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best interest
of the corporation, and that, with respect to any criminal action or proceeding,
such person had reasonable cause to believe that his conduct was unlawful.
Section 2. The corporation may indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
the corporation's favor by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against expenses including amount paid in settlement and attorneys fees actually
and reasonable incurred by such person in connection with the defense or
settlement of the action or suit if such person acted in good faith and in a
manner which such person reasonably believed to be in or not opposed to the best
interests of the corporation. Indemnification may not be made for any claim,
issue or matter as to which such a person has been adjudged by a court of
competent jurisdiction determining, after exhaustion of all appeals therefrom,
to be liable to the corporation or for amount paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
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application that in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
Section 3. To the extent that a director, officer, employee or agent of a
corporation had been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 1 and 2 of this Article V, or
in defense of any claim, issue or matter therein, the corporation shall
indemnify him against expenses, including attorneys fees, actually and
reasonably incurred by such person in connection with the defense.
Section 4. The procedure for authorizing the indemnifications listed in
Section 1, 2 and 3 of this Article V, and the limitations on such
indemnification and advancement of expenses, shall be that set forth in Section
78.751 of the Nevada Revised Statutes, and shall be amended from time to time as
such statute is amended.
ARTICLE VI.
Miscellaneous
Section 1. RECORD DATE AND CLOSING STOCK BOOKS. The board of directors may
fix a time, in the future, not exceeding fifteen (15) days preceding the date of
any meeting of shareholders, and not exceeding thirty (30) days preceding the
date fixed for the payment of any dividend or distribution, or for the allotment
of rights, or when any change or conversion or exchange of shares shall go into
effect, as a record date for the determination of the shareholders entitled to
notice of and to vote at any such meeting, or entitled to receive any such
dividend or distribution, or any such allotment of rights, or to exercise the
rights in respect to any such change, conversion or exchange of shares, and in
such case only shareholders of record on the date so fixed shall be entitled to
notice of and to vote at such meetings, or to receive such dividend,
distribution or allotment of rights, or to exercise such rights, as the case may
be,
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notwithstanding any transfer of any shares on the books of the corporation after
any record date fixed as aforesaid. The board of directors may close the books
of the corporation against transfers of shares during the whole, or any part of
any such period.
Section 2. INSPECTION OF CORPORATE RECORDS. The share register or
duplicate share register, the books of account, and minutes of proceedings of
the shareholders and directors shall be open to inspection upon the written
demand of any shareholder or the holder of a voting trust certificate, at any
reasonable time, and for a purpose reasonably related to his interests as a
shareholder, or as the holder of a voting trust certificate, and shall be
exhibited at any time when required by the demand of ten percent (10%) of the
shares represented at any shareholders' meeting. Such inspection may be made in
person or by an agent or attorney, and shall include the right to make extracts.
Demand of inspection other than at a shareholders' meeting shall be made in
writing upon the president, secretary or assistant secretary of the corporation.
Section 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
payment of money, notes or other evidences of indebtedness, issued in the name
of or payable to the corporation, shall be signed or endorsed by such person or
persons and in such manner as, from time to time, shall be determined by
resolution of the board of directors.
Section 4. ANNUAL REPORT. The board of directors of the corporation shall
cause to be sent to the shareholders not later than one hundred twenty (120)
days after the close of the fiscal or calendar year an annual report.
Section 5. CONTRACT, ETC., HOW EXECUTED. The board of directors, except as
in the By-Laws otherwise provided, may authorize any officer or officers, agent
or agents, to enter into any contract, deed or lease or execute any instrument
in the name of and on
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behalf of the corporation, and such authority may be general or confined to
specific instances; and unless so authorized by the board of directors, no
officer, agent or employee shall have any power or authority to bind the
corporation by any contract or engagement or to pledge its credit to render it
liable for any purpose or to any amount.
Section 6. CERTIFICATES OF STOCK. A certificate or certificates for shares
of the capital stock of the corporation shall be issued to each shareholder when
any such shares are fully paid up. All such certificates shall be signed by the
president or a vice president and the secretary or an assistant secretary, or be
authenticated by facsimiles of the signature of the president and secretary or
by a facsimile of the signature of the president and the written signature of
the secretary or an assistant secretary. Every certificate authenticated by a
facsimile of a signature must be countersigned by a transfer agent or transfer
clerk.
Certificates for shares may be issued prior to full payment under such
restrictions and for such purposes as the board of directors or the By-Laws may
provide; provided, however, that any such certificate so issued prior to full
payment shall state the amount remaining unpaid and the terms of payment
thereof.
Section 7. REPRESENTATIONS OF SHARES OF OTHER CORPORATIONS. The president
or any vice president and the secretary or assistant secretary of this
corporation are authorized to vote, represent and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted to said officers to vote or represent on behalf of this corporation or
corporations may be exercised either by such officers in person or by any person
authorized so to do by proxy or power of attorney duly executed by said
officers.
Section 8. INSPECTION OF BY-LAWS. The corporation shall keep in its
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principal office for the transaction of business the original or a copy of the
By-Laws as amended, or otherwise altered to date, certified by the secretary,
which shall be open to inspection by the shareholders at all reasonable times
during office hours.
ARTICLE VI.
Amendments
Section 1. POWER OF SHAREHOLDERS. New By-Laws may be adopted or these
By-Laws may be amended or repealed by the vote of shareholders entitled to
exercise a majority of the voting power of the corporation or by the written
assent of such shareholders.
Section 2. POWER OF DIRECTORS. Subject to the right of shareholders as
provided in Section 1 of this Article VI to adopt, amend or repeal By-Laws,
By-Laws other than a By-Law or amendment thereof changing the authorized number
of directors may be adopted, amended or repealed by the board of directors.
Section 3. ACTION BY DIRECTORS THROUGH CONSENT IN LIEU OF MEETING. Any
action required or permitted to be taken at any meeting of the board of
directors or of any committee thereof, may be taken without a meeting, if a
written consent thereto is signed by all the members of the board or of such
committee. Such written consent shall be filed with the minutes of proceedings
of the board or committee.
/s/
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Amanda Cardinalli
Incorporator
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