<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the fiscal year ended March 31, 1998
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ____________ to __________
Commission file number 333-8305
UTG COMMUNICATIONS INTERNATIONAL, INC.
(Name of small business issuer in its charter)
Delaware 13-3895294
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18 Cattano Avenue, Morristown, New Jersey 07960
----------------------------------------- -----
------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (973) 644-3161
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No __
-
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. | x |
1
<PAGE>
The issuer's revenues for its most recent fiscal year (year ended March 31,
1998) were $2,319,631.
The aggregate market value on July 8, 1998 of the voting stock held by non-
affiliates computed by reference to the last sale price on that date was
approximately $13,993,784. For purposes of this calculation only, all directors
and officers of the registrant and all holders of 5% or more of the Company's
Common Stock have been deemed to be affiliates of the Company. As of July 7,
1998, 1,303,190 shares of Common Stock, par value $.00001 per share, were
outstanding.
Transitional Small Business Disclosure Format (check one):
YES __ NO X
_
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
UTG Communications International, Inc. (the "Company" or "UTG") is a provider of
quality private voice, fax and data management telecommunication ("telecom")
services in Switzerland and other European countries, primarily to businesses
and business groups at prices which are generally below those of major telecom
carriers. In addition, the Company has entered into agreements with various
international telecom carriers for the exchange of traffic. Pursuant to these
agreements, the Company resells telecom minutes at a profit. As of May 30, 1998,
the Company has entered into contracts with 552 direct dial corporate customers
to provide customized telecom service packages. These customized packages
include telecom minutes plus other services selected by customers. The Company
provides local support, round-the-clock customer service and full network
redundancy to its customers. Available services include system design and
installation as well as digital compression, fax transmission compression,
digital data services and wideband digital data services.
In the first quarter of the fiscal year ended March 31, 1998, the Company
purchased for approximately $317,000 Multicom N.V., an Antwerp, Belgium based
company which offers direct and indirect dial services. The Company intends to
continue to expand its operations through local subsidiaries and joint ventures
in other European countries as business, market and regulatory conditions
permit. The Company is presently exploring opportunities in Germany, the United
Kingdom, and other European countries. During the fiscal year ended March 31,
1998, the Company disposed of certain of its subsidiaries and investments which
were no longer material to the business of the Company to third parties. See
"--Organization" and "Item 6. Management Discussion and Analysis of Financial
Condition and Results of Operation."
Both the competitive environment and the economic framework in which
international telecom companies operate are changing at a rapid pace. Due to the
liberalization of telecom markets and technical improvements, the Company
utilizes the infrastructure provided by international telecom carriers in
connection with the services it offers. This allows the Company to offer its
customers access to the largest meshed fiber optic networks in Europe, which
include more than 130 international points of presence ("POPs"). In providing
its services, the Company connects a customer's telephone installation to the
nearest Company-accessed POP by means of dedicated lines. The customer's
outgoing voice, fax and data transmissions are then transported directly to the
Company's switch facilities in the various countries. The communications are
then transferred directly from the Company's switches into the international
networks. All of this is achieved with speech quality or connection speed
comparable to that offered by the Company's competitors, and with the customer
dialing the international destination directly, as it had done prior to becoming
a customer. The Company is able to provide its services at attractive prices to
its customers due, among other things, to volume discounts the Company has
negotiated with carriers.
On January 3, 1998, Ronald Kuzon resigned from the Board of Directors of the
Company and Messrs. Ueli Ernst and Klaus Brenner were elected to the Board of
Directors of the Company and appointed Chairman of the Board & Chief Executive
Officer and Treasurer & Secretary, respectively. On January
3
<PAGE>
12, 1998, Keith Rhea resigned from all positions with the Company (including as
a director) and on February 12, 1998, David Schlecht resigned as a director of
the Company. All other previous officers and directors of the Company have
either resigned or been dismissed. During the third and fourth quarter of the
fiscal year ended March 31, 1998, the new management of the Company commenced a
revised management program under which it has implemented a system of controls
and assessments to more closely monitor gross profits, expenses and costs. In
addition, the new management of the Company is applying principles of lean
management. Pursuant to these management changes, the Company expects to realize
significant savings and further expects that its operations can be profitable
within a reasonable period of time, however there can be no assurance in this
regard.
On March 20, 1998, the Company effected a 1:13 reverse split of its Common
Stock.
The Company's operations are, to a large extent, dependent on the Company's
ability to obtain additional financing. There can be no assurance that the
Company will obtain the financing necessary to support its plan of operation.
See "Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ORGANIZATION
UTG was incorporated in the State of Delaware on April 17, 1996. UTG owns all of
the equity of UTG Telecom AG ("UTG Telecom") (previously UTG Communications
Holding AG), a Swiss company with operations in Switzerland and wholly-owned
subsidiaries in Switzerland and Belgium. On May 26, 1998, UTG Telecom's name was
changed, for marketing reasons, to Starfon Telecom Services AG. Effective as of
December 1, 1997, and November 30, 1997, respectively, the Company sold its
subsidiaries, UTG (Network) Ltd. a company organized under the laws of the
United Kingdom ("UTG Network"), and UTG Communications (Europe) AG, a
corporation incorporated under the laws of Switzerland ("UTG Europe"), to
Portmann Trading SA, a corporation incorporated under the laws of Panama with
interests in the telecommunications and energy industries for a purchase price
equal to CHF1,000 (approximately $700) in cash for each of UTG Network and UTG
Europe and the assumption of the liabilities of these companies. Effective as of
December 1, 1997 the Company acquired certain assets valued at $4,020,300 of UTG
Europe, including certain accounts receivables, loans, equipment, cash, deposits
and UTG Europe's customer base for a purchase price equal to $4,020,300, which
the Company paid by offsetting in part an outstanding loan to UTG Europe in the
aggregate amount of $4,538,899.
On April 2, 1997, UTG Telecom founded UTG Communications Hungary, Kft., a
company incorporated under the laws of Hungary, and on April 8, 1997, UTG
Holding consummated the purchase of its 49% interest in Tibesta Ltd. ("Tibesta")
for a purchase price of $10,551. On June 9, 1997, Metatel, a company wholly
owned by Tibesta, founded UTG Communications France S.A. ("UTG France"), a 94%
owned company with an office located in Paris. Metatel's initial investment in
UTG France was 750,000 FRF or approximately $129,500 of which 49% was paid by
the Company. On October 7, 1997, the Company transferred its interests in UTG
Hungary and another subsidiary of the Company, which in management's opinion was
immaterial to the Company's operations, to Mr. Fritz Wolff, a former Chief
Executive Officer and director of the Company in connection with Mr. Wolff's
resignation from his functions with the Company in return for the assumption of
all liabilities of such companies by Mr. Wolff. As of September 30, 1997, the
French companies had ceased their operations.
4
<PAGE>
Unless the context otherwise requires, all references herein to the "Company"
shall include UTG and its subsidiaries. UTG's principal executive offices are
located at 18 Cattano Avenue, Morristown, New Jersey 07960, and its telephone
number is (973) 644-3161.
INDUSTRY
Growth and change in the telecom industry have been fueled by a number of
factors, including greater consumer demand, globalization of industry, increases
in international business travel, privatization of incumbent telephone
operators, and growth of computerized transmission of voice and data
information. These trends have sharply increased the use of, and reliance upon,
telecom services throughout the world. The Company believes that at the same
time, businesses and residential customers have encountered higher prices with
poorer quality and service which were, and in some cases still are,
characteristic of many incumbent telephone operators. Demand for improved
service has created opportunities for private industry to compete in the
international telecom market. Increased competition, in turn, has spurred a
broadening of products and services, and new technologies have contributed to
improved quality and increased transmission capacity and speed.
Consumer demand and competitive initiatives have also acted as a catalyst for
government deregulation, especially in developed countries. Deregulation began
in the United States in 1984 with the divestiture of AT&T and the spin-off of
the regional Bell operating companies. Equal access to customers followed
thereafter for all United States carriers. In Europe, deregulation began in the
United Kingdom with the privatization of British Telecom, also in 1984.
Deregulation spread to the rest of Europe with the adoption of the European
Union ("EU") "Directive on Competition in the Markets for Telecommunication
Services" in 1990. A series of subsequent EU directives, reports and actions
have resulted in substantial deregulation of the telecom industries in most EU
countries. Other governments have begun to allow competition for value-added
and selected other telecommunications services and features, including data and
facsimile services and certain restricted voice services. In February 1997, 69
countries, including the United States, Japan, Switzerland, South Africa and all
of the member states of the EU, entered into the World Trade Organization
Agreement with the goal of increasing competition among telecom providers in
such markets beginning in 1998. In many countries, however, the rate of change
and emergence of competition remains slow and the timing and extent of future
deregulation is uncertain.
Long distance telecom carriers can be differentiated by several defining
operational characteristics. One such defining characteristic is between
transmission facilities-based companies and non-transmission facilities-based
companies (resellers). Transmission facilities-based carriers, such as AT&T and
British Telecom, own their own long distance interexchange or transmission
facilities and originate and terminate calls through local exchange systems.
Profitability for transmission facilities-based carriers is dependent not only
upon their ability to generate revenues but also upon their ability to manage
complex networking and transmission costs. All of the first- and most of the
second-tier long distance companies are transmission facilities-based carriers
and generally offer service over broad geographic areas. Most transmission
facilities-based carriers in the third tier of the market offer their service
only in a limited geographic area. Some transmission facilities-based carriers
contract with other transmission facilities-based carriers to provide
transmission where they have geographic gaps in their facilities.
5
<PAGE>
Resellers, such as the Company, carry their long distance traffic over
transmission lines leased from transmission facilities-based carriers, originate
and terminate calls through local exchange systems or "competitive access
providers" ("CAPs") and contract with transmission facilities-based carriers to
provide transmission of long distance traffic either on a fixed rate lease basis
or a call volume basis. Profitability for resellers is dependent largely on
their ability to generate on a continuing basis revenue volume which is
sufficient in size to permit them to negotiate attractive pricing with one or
more transmission facilities-based carriers.
A second operating characteristic differentiating telecom companies is between
switch-based and switchless telecom companies. Switch-based telecom companies,
such as the Company, own or lease one or more switches, which are computers that
direct telecom traffic to form a transmission path between a caller and the
recipient of a call. All transmission facilities-based carriers are switch-
based, as are many resellers, including the Company. Switchless resellers depend
on one or more transmission facilities-based carriers or switch-based resellers
for transmission and switching facilities. The Company believes that owning its
switches reduces its reliance on other carriers and enables it to efficiently
route telecom traffic over leased cost routes and to control costs and record
data and customer information.
SERVICES
The Company offers voice, fax and data transmission services in customized
packages designed to suit customers' needs. The Company's use of digital
compression techniques allows the Company to lease fewer lines and offer reduced
calling tariffs. It is the Company's policy to provide all of its customers with
high quality service, local support, round-the-clock customer service and full
network redundancy. Additionally, the Company's customers receive comprehensive
billing packages. The Company's standard monthly statement includes a management
summary report, a call detail report recording every long distance call.
Optional reports include call summaries by account code, area or city code,
international destination and time-of-day. This information is available to
customers in the form of hard copy, magnetic tape or disk.
BUSINESS STRATEGY
The Company's objective is to build a broad and profitable European market
presence and to further develop its switch-based European infrastructure. The
Company is well positioned to take advantage of telecom deregulation in
Switzerland and countries in the EU. The Company has positioned itself between
major full service high-priced telecom carriers and no service cut rate telecom
minutes resellers. The Company believes that it will retain and add customers
who wish to save on their telecom expenses and who demand a high level of
service.
The Company believes it enjoys certain competitive advantages over global
telecom carriers and incumbent telephone operators: (1) the Company believes
that its target customers make decisions primarily based on price, and the
Company's prices are generally lower than those charged by global telecoms and
incumbent telephone operators; (2) the small and medium sized business market
has traditionally been ignored by the global telecoms and incumbent telephone
operators; (3) the Company believes it can continue to attract seasoned telecom
managers who seek the advantages offered by smaller companies; and (4) the
Company is able to move quickly into new markets with new telecom services, as
compared to larger organizations which are slower to respond to changing market
6
<PAGE>
conditions.
SALES AND MARKETING
The Company markets its services through the Company's internal sales force,
independent sales agents and strategic arrangements. The Company currently has a
total of 7 internal sales personnel and approximately 12 independent sales
agents. Additional Telemarketers are used to generate leads for the Company's
internal sales force and independent sales agents. The Company's principal sales
offices are located in Switzerland, the United Kingdom and Belgium.
The Company's sales and marketing activities to retail corporate customers were
initially limited to Switzerland and the United Kingdom. In Switzerland, the
Company is currently exploring the provision of telecom services for credit
cards, debit cards and customer cards. The Company has begun to expand its
activities into other European countries and Canada. In June 1997, the Company
consummated the purchase, for approximately $317,000, of Multicom NV, a long
distance reseller headquartered in Antwerp, Belgium with a base of currently
more than 400 small and medium sized business customers. In Germany, the Company
is exploring opportunities to offer voice and data telecom services, as well as
telecom services for credit cards, debit cards and customer cards. There can be
no assurance that the Company's efforts in Germany will result in formal
arrangements or that any of the Company's current or future arrangements will be
successful. The Company's goal is to continue to expand its operations into
other European countries as and when business, market and regulatory conditions
permit. 1998.
The Company primarily targets customers with between $1,000 and $25,000 of
monthly usage. The Company believes that, in addition to being price sensitive,
these customers tend to be focused on customer service and are more likely to
rely on one or two carriers for their telecom needs. The Company strives to be
more cost effective and responsive to the needs of its customers than its major
competitors.
No customer accounted for 10% or more of the Company's total revenue in the
fiscal year ended March 31, 1998.
NETWORK
The Company's network consists of 11 owned POPs located in Switzerland, two
switches located in each of the United Kingdom and Belgium and leased-access to
major international telecom carriers' networks with over 100 POPs throughout
Europe. The largest of the Company's switches became operational in November
1996. The Company's switches route calls over networks owned by international
telecom carriers with whom the Company has entered into volume discount
contracts. The Company's switches include least cost routing software designed
to route calls in the most efficient available manner. Direct dial customers
access the Company's network via direct access lines. Indirect dial customers
access the Company's network via local incumbent telephone operators. Least cost
routing software integrated in the customer's telephone equipment determines the
most efficient routing of calls.
7
<PAGE>
During the fiscal year ended March 31, 1998, one of the Company's carriers, UTG
Europe, accounted for approximately 40% of the Company's traffic.
The Company generally utilizes network redundant, highly automated advanced
telecom equipment in its network and has diverse alternate routes available in
case of component or facility failure. Automatic traffic rerouting enables the
Company to provide a high level of reliability for its customers. Computerized
network monitoring equipment facilitates fast and accurate analysis and
resolution of network problems. The Company provides customer service and
support, 24-hour network monitoring, trouble reporting and response, service
implementation, coordination, billing assistance and problem resolution. The
Company controls all of its billing services through its switches in the places
of activity.
Substantially all of the lines linking the Company's POPs to its switches are
leased from various providers and carriers. The Company believes that its
network has adequate switching capacity to serve the Company's present volume of
traffic. The Company believes, however, that its network may not have adequate
switching capacity to serve the Company's projected volume of traffic beyond the
remainder of calendar 1998. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations."
INFORMATION SYSTEMS
The Company has invested substantial resources to implement sophisticated
information systems, which the Company believes are integral to being
competitive and to effectively managing its business. The Company plans to
continue to invest substantial capital and resources to enhance its information
systems. The Company's information systems enable it to provide high quality
customer service, provide customized billing information, track sales, provide
network security, provide network trouble shooting, and generate administrative
and marketing reports.
The Company is in the process of reviewing its computer systems to insure it
will not suffer catastrophic failures in connection with the change in the
calendar on January 1, 2000, but has not expended material amounts in this
respect. The Company currently believes that the cost of year 2000-related
corrections will not have a material effect on the Company's business, operation
or financial condition. The Company may also be exposed in the event any of the
carriers with whom the Company currently (or in the future) is contracting for
network access experiences a catastrophic failure in connection with the change
of calendar on January 1, 2000. While the Company attempts to obtain
contractual assurances from its carriers in this respect, there can be no
assurance that it is successful in its attempts or that such assurances, if
obtained, provide the Company with sufficient protection in the event one of its
carriers experienced a catastrophic year 2000 problem. See "Item 6 --
Management Discussion and Analysis -- Results of Operations."
INTELLECTUAL PROPERTY
The Company has filed trademark applications for certain of the Company's trade
names. In its business, the Company relies on proprietary know-how and employs
various methods to protect its concepts and ideas. However, such methods may
not afford complete protection and there can be no assurance that others will
not independently develop such know-how, concepts or ideas or obtain access to
the Company's know-how or ideas.
8
<PAGE>
REGULATORY MATTERS
The Company's provision of telecommunications services is subject to extensive
and rigorous government regulation by the European Union ("EU") and the national
regulatory authorities of Switzerland, Belgium, the United Kingdom, Germany and
other countries in which the Company may operate in the future. Each country in
which the Company conducts its business has a different regulatory scheme and
requirements. The Company believes that it is in substantial compliance with
applicable laws and regulations. To the extent that such laws and regulations
are changed or new laws or regulations are adopted by the EU or any country in
which the Company operates, the Company may be required to obtain additional
licenses or renew, modify or replace existing licenses. The Company has been
granted an International Simple Resale ("ISR") license in the United Kingdom.
The ISR license permits the Company to engage in the international resale of
telecom services. The Company has filed an application to the United Kingdom
Department of Trade and Industry for the issuance of an International Facility
License ("IFL"). The IFL would permit the Company to own international
facilities such as circuits, thereby enabling the Company to gain a cost
advantage by eliminating leased line charges.
Failure to comply with applicable regulatory requirements can result in, among
other things, fines, suspensions of approvals, operating restrictions and
criminal prosecutions. Furthermore, changes in existing regulations or adoption
of new regulations could affect current regulatory approvals and affect the
timing of, or prevent the Company from obtaining, future regulatory approvals.
The effect of changes in governmental regulation may be to delay for a
considerable period of time, or to prevent, the marketing and commercialization
of products or services of the Company and/or to impose costly requirements on
the Company. There can be no assurance that additional regulations will not be
adopted or current regulations amended in such a manner as will materially
adversely affect the Company.
COMPETITION
The telecom industry is highly competitive and is significantly
influenced by the marketing and pricing decisions of competitors. In each of its
markets, the Company will compete primarily on the basis of price and service,
as well as breadth of services offered. The industry has relatively
insignificant barriers to entry, numerous entities competing for the same
customers and a high average churn rate, as customers frequently change long
distance providers in response to the offering of lower rates or promotional
incentives by competitors. The industry has experienced and will continue to
experience rapid regulatory and technological change. Many competitors in each
of the Company's current and proposed markets are significantly larger than the
Company, have substantially greater resources than the Company, control
transmission lines and larger networks than the Company and may have long-
standing relationships with the Company's target customers.
The success of a non-transmission facilities-based carrier, such as the Company,
depends largely upon the amount of traffic that it can commit to the
transmission facilities-based carrier and the resulting volume discount it can
obtain. Subject to contract restrictions and customer brand loyalty, resellers
like the Company may competitively bid their traffic among other national long
distance carriers to gain improvement in the cost of service. The relationship
between resellers and the larger transmission
9
<PAGE>
facilities-based carriers is twofold. First, a reseller is a customer of the
services provided by the transmission facilities-based carriers, and that
customer relationship is predicated primarily upon the pricing strategies of the
first tier companies. The reseller and the transmission facilities-based
carriers are also competitors. The reseller will attract customers to the extent
that its pricing for customers is generally more favorable than the pricing
offered the same size customers by larger transmission facilities-based
carriers. Transmission facilities-based carriers have been aggressive in
developing discount plans which have had the effect of reducing the rates they
charge to customers whose business is sought by the reseller. Thus the business
success of a reseller is significantly tied to the pricing policies established
by the larger transmission facilities-based carriers.
Currently, the Company's main competitors in Switzerland are Swisscom, which
controls almost all of the Swiss telecom market, Sunrise and Diax. In addition,
there are a number of smaller companies providing telecom services in
Switzerland. Additional competitors in the European market include Viatel,
Esprit and MFS WorldCom. In the future, additional competitors may include,
among others, Deutsche Telekom, AT&T, MCI, Sprint, British Telecom and Mercury.
As the Company expands into other European countries there will be additional
competition.
In addition to these competitive factors, recent and pending telecom
deregulation in Switzerland and EU markets may encourage new entrants. As the
Company expands its geographic coverage, it will encounter increased
competition. Moreover, the Company believes that competition in Europe is likely
to increase and become more similar to competition in the United States markets
over time as the European markets continue to experience deregulatory
influences. Prices in the long distance industry have declined from time to time
in recent years and, as competition increases in Europe, prices are likely to
continue to decrease. The Company's competitors may reduce rates or offer
incentives to existing and potential customers of the Company. To maintain its
competitive position, the Company believes that it must be able to reduce its
prices in order to meet reductions in rates, if any, by others.
INVESTMENTS AND STRATEGIC ALLIANCES
As the Company expands its service offerings, geographic focus and its network,
the Company anticipates that it will seek to make investments in or enter into
strategic alliances with, companies providing services complementary to the
Company's existing business. The Company's ability to effect strategic alliances
and make investments will, to a large extent, be dependent upon its ability to
obtain additional financing. See "Item 6. Management's Discussion and Analysis
of Financial Condition and Results of Operations." In connection with
investments or strategic alliances, the Company could incur substantial
expenses, including the fees of financial advisors, attorneys and accountants,
and any expenses associated with registering shares of the Company's capital
stock, if such shares are issued. The financial impact of such investments or
strategic alliances could have a material adverse effect on the Company's
business, financial condition and results of operations and could cause
substantial fluctuations in the Company's quarterly and yearly operating
results.
RESEARCH AND DEVELOPMENT
During the fiscal year ended March 31, 1998 the Company has not expended
material amounts for research and development.
10
<PAGE>
ENVIRONMENTAL MATTERS
The Company is subject to various environmental laws and regulations in the
jurisdictions in which it operates, including those related to air emissions,
wastewater discharges, the handling and disposal of solid and hazardous wastes
and the remediation of contamination associated with the disposal of hazardous
substances. The Company leases properties in Switzerland and Belgium and may
have potential liability related to the remediation of past contamination at
sites where the Company presently is operating, or in the past has operated, its
business or the disposal of hazardous wastes to sites owned by third parties.
The Company has not incurred any material expenses related to environmental
matters. However, there can be no assurance that the Company may not incur such
expenses in the future. Accordingly, although the Company believes that it is in
substantial compliance with applicable environmental requirements, it is
possible that the Company could become subject to environmental liabilities in
the future that could result in an adverse effect on the Company's financial
condition or results of operation.
EMPLOYEES
As of June 13, 1998, the Company had 8 full-time employees in Switzerland and 2
full-time employees in each of the United Kingdom and Belgium. The Company has
never experienced a work stoppage and its employees are not represented by a
labor union or covered by a collective bargaining agreement. The Company
considers its employee relations to be good.
CAUTIONARY STATEMENTS
This report has been prepared by the new management of the Company based on its
knowledge and access to the Company's records to the extent such records have
been kept at the Company's premises in Switzerland, the United Kingdom and
Belgium, as well as records made available to the new management by the
Company's former secretary. Because the Company's new management was previously
not actively involved in the management of the Company, it is not in a position
to ascertain whether or not such records are complete or whether or not such
records disclose all material facts required to be disclosed in this report.
Accordingly, material facts with respect to the period covered by this report
may exist which are not disclosed herein because of management's current lack of
affirmative knowledge of such facts.
Investment in the Company's securities involves a high degree of risk. In
evaluating an investment in the Company's securities, Company stockholders and
prospective investors should carefully consider the risk factors discussed in
the Company's Registration Statement on Form SB-2, Registration No. 333-8305 and
the information detailed in this Form 10-K under Item 1 Business and Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as information contained in the Company's other filings with
the Securities and Exchange Commission.
Certain statements in this Report under Item 1 and Item 6 regarding the
Company's estimates, present view of future circumstances or events and
statements containing words such as "estimates," "anticipates," "intends" and
"expects" or words of similar import, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
including, without limitation, statements regarding the Company's ability to
meet future working capital
11
<PAGE>
requirements and future cash requirements. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Company, or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Forward-
looking statements speak only as of their dates. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information future events or otherwise. Risk factors include,
among others, delays in expanding the Company's network; need for additional
financing; failure to receive or delays in receiving regulatory approval;
general economic and business conditions; industry capacity; industry trends;
demographic changes; competition; material costs and availability; the loss of
any significant customers; changes in business strategy or development plans;
quality of management; availability, terms and deployment of capital; business
abilities and judgment of personnel; availability of qualified personnel;
changes in, or the failure to comply with, government regulations including
changes in industry regulations; and other factors referenced in this Report.
For a more detailed description of these and other factors, see the section
entitled "Risk Factors" in the Company's Registration Statement on Form SB-2,
Registration No. 333-8305, which was declared effective on September 6, 1996.
ITEM 2. PROPERTIES
The Company currently leases approximately 4,500 square feet in Zurich,
Switzerland for approximately CHF 7,000 (approximately $4,800) per month. The
lease expires on March 31, 1999. The Company's principal executive offices are
located in Morristown, New Jersey. There, the Company utilizes space for which
the Company pays approximately $1,000 per month. The Company leases
approximately 1,400 square feet in Antwerp, Belgium at a monthly rental of
approximately $814. The lease expires on February 20, 1999. As a consequence of
the sale of UTG Network, the Company no longer leases any office space in the
United Kingdom.
ITEM 3. LEGAL PROCEEDINGS
On or about April 24, 1997, litigation against UTG Holding AG and other
individual defendants was commenced in labor court in Paris, France by Mr. James
Taylor. On May 25, 1998, the court rendered a judgment against the Company in
the amount of 488,187 French Francs (approximately $64,670) for breach of an
alleged employment arrangement. The Company has filed an appeal against this
judgment.
On January 5, 1998, the Company's former Chief Operating Officer, Keith Rhea,
without authorization of the Company's Board of Directors, confessed a judgment
against the Company in favor of the Company's former part-time Chief Financial
Officer, Robert Finn, in the amount of $111,710. The alleged basis for this
amount is outstanding compensation and termination fees for various alleged
consulting arrangements between the Company, Mr. Finn and Telepath, Ltd, a
company which the Company believes to be affiliated with Mr. Rhea. The Company
believes that such judgment was fraudulently obtained, and that all or part of
such claims are without merit. The Company is presently evaluating several
strategies, including the commencement of legal proceedings against one or more
of the persons involved in this matter.
On August 22, 1997, Discont-o-fon, a company which provided Multicom with
bandwidth prior to the Company's acquisition of Multicom, filed a claim with the
main court in Brussels, Belgium to collect
12
<PAGE>
BEF 8.409.393 (approximately $233.500) claimed to be owing for traffic services
provided by Multicom. A settlement became effective on May 25, 1998 and an
amount of BEF 4,935,000 ($129,510) has been paid by the Company during the first
quarter of the fiscal year ending March 31, 1999 in full settlement of all
outstanding matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 27, 1998, the holders of 7,043,400 shares of Common Stock (on a pre-
reverse stock split basis), representing a majority of the shares of Common
Stock outstanding on such date, consented in writing pursuant to Sections 228
and 242 of the General Corporation Law of the State of Delaware to (i) the
increase of the number of authorized shares of capital stock of the Company from
20,000,000 to 70,000,000 shares of which 60,000,000 were to be designated shares
of Common Stock and 10,000,000 shares were to be designated shares of preferred
stock and (ii) the reverse split of each of the Company's outstanding shares of
Common stock into one-thirteenth (1/13) of a share.
13
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Since October 7, 1996, shares of the Common Stock have traded on the NASD
Bulletin Board under the symbol "UTGC". The following table sets forth, for the
periods indicated and as reported by the NASD Bulletin Board, the high and low
bid prices for shares of the Common Stock. The quotations listed below reflect
inter dealer prices, without retail mark-up, mark-down or commission , and may
not represent actual transactions. The closing price of the Common Stock on July
8, 1998 was $14.00.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1997 QUARTERLY COMMON STOCK PRICE RANGE
BY QUARTER
Quarter Date High Low
- ------- ---- ---- ---
<S> <C> <C> <C>
1st June 30, 1996 (1) (1)
2nd September 30, 1996 (1) (1)
3rd December 31, 1996 $81.25 (2) $ 45.50
4th March 31, 1997 $60.125 $11.375
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED MARCH 31, 1998 QUARTERLY COMMON STOCK PRICE RANGE
BY QUARTER
Quarter Date High Low
- ------- ---- ---- ---
<S> <C> <C> <C>
1st June 30, 1997 $ 45.50 $27.725
2nd September 30, 1997 $37.375 $17.062
3rd December 31, 1997 $ 19.50 $ 4.875
4th March 31, 1998 $14.625 $ 4.875
</TABLE>
(1) Prior to the quotation of the Company's Common Stock on the NASDAQ Bulletin
Board on October, 7, 1996, there was no public market in the Common Stock
and, accordingly, no market data is available.
(2) All stock prices are adjusted by the 13:1 reverse split of the Common Stock
on March 20, 1998.
HOLDERS OF COMMON STOCK
Based upon information supplied to the Company by its transfer agent, the number
of stockholders of record of the Common Stock on July 7, 1998 was approximately
50.
DIVIDENDS
The Company has never paid cash dividends with respect to the Common Stock. The
Company intends to retain future earnings, if any, that may be generated from
the Company's operations to help finance
14
<PAGE>
the operations and expansion of the Company and accordingly does not plan, for
the foreseeable future, to pay dividends to holders of the Common Stock. Any
decision as to the future payment of dividends on the Common Stock will depend
on the results of operations and financial position of the Company and such
other factors as the Company's Board of Directors, in its discretion, deems
relevant. In addition, arrangements with present or future lenders may prohibit
the payment of dividends.
SALES OF UNREGISTERED SECURITIES
As of April 30, 1996, the Company issued 211,538 shares of Common Stock (as
adjusted for the Company's 1:13 reverse stock split) to Interfinance Inv. Co.
Ltd., a Panamanian company ("Interfinance"), 183,333 of which shares were issued
in exchange for $200,000 in cash and 197,435 of which shares were issued in
exchange for $26 in cash and a 7% promissory note. The promissory note was
repaid as of June 28, 1996 from proceeds received from purchasers of a portion
of the shares resold by Interfinance. On August 15, 1996, the Company sold an
additional 30,769 shares of Common Stock to Interfinance for $1,000,000
consisting of $10,000 in cash and a 7% promissory note for $990,000. The note
was repaid in full in November 1996. Pursuant to a subscription agreement
entered into in November 1996, Interfinance subscribed for and the Company sold
an additional 9,615 shares of Common Stock at $52.00 per share. In addition, the
Company granted Interfinance an option to purchase up to an additional 92,308
shares of Common Stock at $26.00 per share for a two year period commencing on
completion of purchase of the full 153,846 shares. In connection with that
agreement, Mr. Combrinck transferred 5,769 shares to Interfinance for no
additional consideration. In January 1997, the Company entered into a
subscription agreement with Interfinance Inv. Co., Ltd. ("Interfinance"),
pursuant to which Interfinance subscribed for 153,846 shares of Common Stock at
a purchase price of $13.00 per share. In connection with the subscription
agreement, Mr. Thomas Combrinck agreed to transfer, without cost to
Interfinance, one share of UTG Common Stock owned by him for each share
purchased by Interfinance under the subscription agreement. As of the date
hereof, all amounts owing to the Company in respect of Interfinance's November
1996 and January 1997 subscriptions have been paid (giving effect to
approximately $20,000 in credits for expenses incurred by Interfinance on behalf
of the Company). No Underwriter's discount or fee was incurred by the Company in
connection with these issuances. The Company has agreed to register the resale
of the shares purchased by Interfinance under the Securities Act of 1933. These
transactions were exempt from the registration requirements of the Securities
Act of 1933 by reason of the exemption provided by Section 4(2) thereunder and
on the basis of certain representations provided by Interfinance including that
it is an "accredited investor."
On January 15, 1997, the Company granted an aggregate of 57,692 shares of Common
Stock to employees and consultants in consideration for services and as an
incentive to further the interests of the Company. On March 25, 1997, the
Company issued an aggregate of 769 shares to two individuals as part of a
settlement of claims by one of the individuals regarding breach of an alleged
employment relationship. These issuances were exempt from the registration
requirements of the Securities Act of 1933 by reason of the exemption provided
by Section 4(2) thereunder.
On March 10, 1997, the Company granted an option to purchase up to an aggregate
of 38,462 shares to certain of the Company's officers. As such individuals have
ceased to serve the Company in their
15
<PAGE>
respective executive capacity before the first anniversary of the above-
mentioned grant, non of such options vested.
Effective September 30, 1997, the Company sold to a limited number of accredited
or sophisticated investors 30,769 shares of common stock at a price of $6.50 per
share and, for no additional consideration, warrants to purchase an additional
15,385 shares of Common Stock at a price of $7.80 per share. At September 30,
1997, $125,000 of the total $200,000 had been received by the Company, and the
remaining $75,000 was fully paid by October 6, 1997. Interfinance acted as
placement agent for these issuances. No underwriter's discount or fee was
incurred by the Company in connection with these issuances. These issuances were
exempt from the registration requirements of the Securities Act of 1933 by
reason of the exemption provided by Section 4(2) thereunder.
On March 23, 1998, the Company issued 250,000 shares of Common Stock (post-
reverse split) at a purchase price of $2.00 per share. In addition, for each
share of Common Stock purchased, the subscriber received three warrants, each to
purchase one share of Common Stock, which warrants will expire five years from
the date of issuance and shall be exercisable at $2.00, $3.00 and $4.50 per
share, respectively. Net proceeds received by the Company were $500,000. In
connection with this issuance, Interfinance acted as placement agent and is
entitled to a placement fee of 3% of the gross proceeds to the Company. As of
the date hereof, Interfinance has not enforced its right to this fee. Under the
terms of the subscription agreement, as amended, the Company has the right,
subject to certain conditions, to request the subscriber to purchase up to an
additional 500,000 shares of Common Stock upon the same terms and purchase price
as for the initial purchase on or prior to September 30, 1998. These
transactions were exempt from the registration requirements of the Securities
Act of 1933 by reason of the exemption provided by Section 4(2) thereunder and
on the basis of certain representations provided by the subscriber including
that it is an "accredited investor."
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis relates to the financial condition and
results of operations of the Company for the year ended March 31, 1998. This
information should be read in conjunction with the Company's consolidated
financial statements appearing elsewhere herein.
GENERAL
The Company commenced operations in April 1996 and is a holding company for a
number of operating subsidiaries organized at various times since February 1996.
To date, the Company has received an aggregate of approximately $7,925,628 in
equity capital. Since inception, the Company's operations have been focused on
establishing and enhancing its switch-based European communications network and
expanding its European customer base. In implementing its network, the Company
experienced significant technical problems with multiplexers and transmission
equipment. The equipment has been upgraded by the suppliers at the supplier's
own expense. This has resulted in a lag in the realization of revenue.
The Company's revenue during the fiscal year ended March 31, 1998 was generated
from long distance telecom services provided to retail corporate customers and
wholesale customers. The Company's
16
<PAGE>
wholesale customers presently comprise international telecom carriers and
national telecoms, and the Company's retail customers presently comprise medium-
sized companies located in Switzerland, Belgium and the United Kingdom. The
Company was granted an International Simple Resale ("ISR") license in the United
Kingdom. The ISR license permits the Company to engage in the international
resale of telecom services. The Company has filed an application to the United
Kingdom Department of Trade and Industry for the issuance of an International
Facility License ("IFL"). The IFL would permit the Company to own international
facilities such as circuits, thereby enabling the Company to gain a cost
advantage by eliminating leased line charges. See "Item 1. Business--
Regulation."
While the Company's retail operations were initially limited to Switzerland, the
Company has begun to expand its operations through subsidiaries and joint
ventures into other European countries. In June 1997, the Company consummated
the purchase of Multicom NV, a long distance reseller headquartered in Antwerp,
Belgium with a base of currently more than 450 customers. The purchase price for
Multicom NV was 11,101,043 Belgium Francs (approximately $317,000). See Note
5(b) of the Notes to the Consolidated Financial Statements. The Company's goal
is to continue to expand its operations into other European countries as and
when business, market and regulatory conditions permit. The Company is presently
exploring opportunities in Germany, the United Kingdom and other European
countries.
Effective as of December 1, 1997, and November 30, 1997, respectively, the
Company sold its subsidiaries, UTG (Network) Ltd., a company organized under the
laws of the United Kingdom ("UTG Network", and UTG Communications (Europe) AG, a
corporation incorporated under the laws of Switzerland ("UTG Europe"), to
Portmann Trading SA, a corporation incorporated under the laws of Panama with
interests in the telecommunications and energy industries, for a purchase price
equal to CHF1,000 (approximately $700) in cash for each of UTG Network and UTG
Europe and the assumption of the liabilities of these companies. Effective as of
December 1, 1997 the Company acquired certain assets, valued at $4,020,300 of
UTG Europe, including certain accounts receivable, loans, equipment, cash,
deposits and UTG Europe's customer base for a purchase price equal to
$4,020,300, which the Company paid by offsetting in part an outstanding loan to
UTG Europe in the aggregate amount of $4,538,899.
During the quarter ended December 31, 1997, in order to permit full business
operations under Swiss law, UTG Communications Holding AG was renamed UTG
Telecom AG ("UTG Telecom"). Effective May 26, 1998, for marketing reasons, UTG
Telecom's name was again changed to Starfon Telecom Services AG.
Following the regulatory opening of the Swiss and European Telecommunications
markets on January 1, 1998, it is no longer necessary to route all outgoing
calls via London. Applicable telecommunications regulations now permit
interconnection with all European countries. This revision is expected to save
the Company a considerable amount of fixed overhead costs, and management
believes that this development is likely to facilitate economical self-
sustaining operations for the Company within a shorter period of time than
originally contemplated.
In Germany, the Company has undertaken the development of an international
calling card project for a large bank and insurance company. In its efforts to
focus on profitable markets, the Company is reviewing this project to determine
whether future investment or divestment is appropriate. The Company is currently
exploring appropriate.
17
<PAGE>
several opportunities in its core markets and in Germany as well as in other
countries. The Company will carefully evaluate expansion of its operations into
other European countries as and when business, market and regulatory conditions
permit. There can be no assurance that the Company's efforts in any of the
foregoing countries will result in successful commercial operations.
The Company's goal is to focus on its current operations and to continue the
streamlining of costs begun under the new management and to target optimal
network capacity utilization.
In reading the following comparison of the Company's financial condition and
results of operations for the fiscal year ended March 31, 1998 and March 31,
1997, readers should be aware of the fact that as a result of the disposition of
UTG Europe and UTG Network effective as of November 30, 1997 and December 1,
1997, respectively, the sales generated by such subsidiaries, which constituted
substantially all of the sales of the Company during the fiscal year ended March
31, 1997, are not included in the Company's Consolidated Statement of Operations
for the fiscal year ended March 31, 1998.
FINANCIAL CONDITION
At March 31, 1998, the Company had a positive working capital of $223,444, and
an accumulated deficit of $4,551,224, as compared to a working capital deficit
and accumulated deficit of $1,313,149 and $6,712,669, respectively, at March 31,
1997. This improvement in the financial position was achieved through the
disposition of certain subsidiaries and investments.
At March 31, 1998, the Company had no outstanding bank overdrafts, compared to
March 31, 1997 when the Company's outstanding bank balance was CHF 161,572
(approximately $132,237).
Effective September 30, 1997, the Company sold to a limited number of accredited
or sophisticated investors 30,769 shares of common stock at a price of $6.50 per
share and, for no additional consideration, warrants to purchase an additional
15,385 shares of Common Stock at a price of $7.80 per share. At September 30,
1997, $125,000 of the total $200,000 had been received by the Company, and the
remaining $75,000 was fully paid by October 6, 1997.
On March 23, 1998, the Company issued 250,000 shares of Common Stock (post stock
split) at a purchase price of $2.00 per share to an accredited investor. In
addition, for each share of Common Stock purchased, the investor also received
three warrants, each to purchase one share of Common Stock, which warrants will
expire five years from the date of issuance and shall be exercisable at $2.00,
$3.00 and $4.50 per share, respectively. Under the terms of the subscription
agreement, as amended, the Company has the right, subject to certain conditions,
to request the Subscriber to purchase an additional 500,000 shares of Common
Stock upon the same terms and purchase price of the initial purchase on or prior
to September 30, 1998.
The Company believes that its network has adequate switching capacity to serve
projected volume of traffic through calendar 1998. The Company initially
designed its network to take advantage of deregulation across Europe. It can
perform distributive least cost routing by using its hub sites in European
cities to direct traffic to carriers within a country, across the UTG network to
another
18
<PAGE>
country for termination, or back to the switch in London for routing. The
selected path is based on the least cost. This provides a large amount of
flexibility to the Company, and to ensure the quality of the connections and
lowest cost. With this distributive architecture the capacity of UTG's main
switch is not expected to be a limiting factor with regard to expansion. The
opening of the European telecommunications markets allows the Company to take
full advantage of its network flexibility.
Based upon the Company's plan of operation, the Company estimates that its
existing financing resources (including the available resources pursuant to the
call right against the subscriber of the Common Stock issued on March 23, 1998),
together with funds generated from operations, will be sufficient to fund the
Company's current working capital requirements. However, there can be no
assurance in that regard.
Accounts payable and accrued expenses amounted to approximately $1,369,818 at
March 31, 1998 compared to $3,208,711 at March 31, 1997.
RESULTS OF OPERATIONS
During the third and fourth quarter of the fiscal year ended March 31, 1998, the
new management of the Company commenced a revised management program under which
it implemented a system of controls and assessments to more closely monitor
gross profits, expenses and costs. In addition, the new management of the
Company is applying principles of lean management. Pursuant to these management
changes, the Company expects to realize significant savings and further expects
that its operations can be profitable within a reasonable period of time,
however there can be no assurance in this regard.
SALES
During the fiscal year ended March 31, 1998, the Company recorded net sales of
$2,319,631, in comparison to $1,743,377 during the fiscal year ended March 31,
1997. The sales recorded for the fiscal year ended March 31, 1998 reflect the
sales made by UTG Telecom during the four-month period from December 1, 1997
through March 31, 1998 and the sales made by UTG's Belgian subsidiaries during
the entire fiscal year ended March 31, 1998. The sales reported in the Company's
quarterly report on form 10-Q for the quarter ended December 31, 1997 for the
nine months ending December 31, 1997 of $4,264,938 included the sales generated
by UTG Europe and UTG Network prior to their disposition. The gross profit for
the fiscal year ended March 31, 1998 increased to $1,007,347 (or 43% of the
Company's net sales) as compared to the fiscal year ended March 31,1997 when the
Company had a gross loss of $77,467 (or 4% of the Company's net sales during
that period). The increase in gross profits reflects the fact that the Company's
volume of operations has increased and the cost of sales have decreased.
The Company's revenue has been generated primarily from long distance telecom
services provided to retail corporate customers in Switzerland and Belgium and
wholesale customers. The Company's wholesale customers presently comprise
international telecom carriers and national telecom companies. Management
anticipates that the allocation between wholesale and retail customers will
shift in favor of retail customers consistent with the Company's goal of
expanding its corporate retail customer base.
19
<PAGE>
COST OF SALES
Cost of sales was $1,312,284 for the fiscal year ended March 31, 1998, as
compared to $1,820,844 for the fiscal year ended March 31, 1997 consisting of
carrier charges and costs for leased lines and related activities. Carrier
charges and transport (leased lines) charges per unit are ultimately dependent
on the Company's ability to generate high volumes of traffic. This decrease is
the result of the Company's new management and business strategy and the
Company's ability to purchase services from carriers at competitive rates. Cost
of sales have also decreased because of the relatively smaller proportion of
fixed costs related to leased lines, which are incurred regardless of the amount
of traffic carried, compared to the carrier costs, which vary depending on the
amount of traffic carried.
SELLING AND TECHNICAL EXPENSES
Selling and technical expenses for the fiscal year ended December 31, 1998 were
$223,420, compared to $2,053,305 for the previous fiscal year. This decrease is
the result of the restructuring process the Company is undergoing, in which a
program of cost cutting measures has been implemented to limit expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses for the fiscal year ended March 31, 1998
were $3,020,117, compared to $4,298,438 for the fiscal year ended March 31,
1997. General and Administrative Expenses include Bad Debt Expenses and other
operating expenses (including doubtful receivables and litigation expenses) in
the aggregate amount of $1,826,355. A substantial portion of such expenses is
related to the Company's previous operations and the Company's restructuring and
constitute one-time, non-recurring expenses.
OTHER INCOME/EXPENSES
The Company realized an extraordinary gain of $4,529,000 related to the
disposition of certain of its subsidiaries which were deemed by the Company to
be no longer material to the Company's core market operations.
NET INCOME/LOSS
The Company's net loss from continuing operations for the fiscal year ended
March 31, 1998 was $2,367,555 as compared to $6,712,669 for the fiscal year
ended March 31, 1997. The decrease in the loss is due to the increase in the
volume of the Company's operations and the resulting decrease in the ratio of
fixed costs to revenue, as well as substantially lower selling and technical
expenses and lower general and administrative expenses.
The Company realized a net income of $2,161,445 in the fiscal year ended March
31, 1998 and a net loss for the fiscal year ended March 31, 1997 of $6,712,669
primarily resulting from the continuing effect of initial delays and cost
overruns in setting up the Company's network and resulting lag in the
realization of revenues. The net income for the quarter ended December 31, 1996
reflects the gain realized on the sale of discontinued subsidiaries and the more
limited nature of the Company's
20
<PAGE>
operations at that time with less overhead, personnel expenses, depreciation and
other operating expenses.
The Company is in the process of reviewing its computer systems to insure it
will not suffer catastrophic failures in connection with the change in the
calendar on January 1, 2000, but has not expended material amounts in this
respect. The Company currently believes that the cost of year 2000-related
corrections will not have a material effect on the Company's business, operation
or financial condition. The Company licenses most of the software it uses in
various functions. Although this practice has minimized the Company effort and
cost needed to make the Company year 2000 compliant, it does place greater
reliance on the outside firms that provide the software. Because most of the
Company's software is licensed, the Company's main internal compliance tasks are
auditing hardware and software, reviewing internal and external applications,
prioritizing applications by risk, creating a communications program to raise
awareness levels and enable correction of all existing application solutions,
and installation of vendor-provided year 2000 software fixes. The Company
believes that the majority of the major software applications it uses are either
year 2000 compliant or contain only minor problems, and only a few need
significant modification. The Company may be exposed in the event any of the
carriers with whom the Company currently (or in the future) is contracting for
network access if any such carrier experiences a catastrophic failure in
connection with the change of calendar on January 1, 2000. While the Company
attempts to obtain contractual assurances from its carriers in this respect,
there can be no assurance that it is successful in its attempts or that such
assurances, if obtained, provide the Company with sufficient protection in the
event one of its carriers experienced a catastrophic year 2000 problem.
ITEM 7. FINANCIAL STATEMENTS
See Index to Financial Statements on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
21
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS; PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The executive officers, directors and significant employees of the Company on
March 31, 1998 were as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Ueli Ernst 51 Chairman of the Board, Chief
Executive Officer and Director
Klaus Brenner 40 Treasurer, Secretary and Director
Andreas Popovici (1) 44 Vice President of UTG Telecom AG
</TABLE>
- -----------------------
(1) Andreas Popovici is not an executive officer but is deemed a "significant
employee".
UELI ERNST has served as a director and Chief Executive Officer of the Company
since January 3, 1998. Mr. Ernst currently devotes approximately 80% of his
business time to this position. The remaining time is devoted to various other
business activities of Mr. Ernst, including his services as President of
Interfinance Investment Company Ltd. He has 26 years of experience in
international business development in various industries primarily in management
consulting, financial advisory services and rendering advice to new growth
business ventures. He was Chairman of Swissray International Inc, a reporting
company listed on the NASDAQ Small Cap Market, from May 1995 through March 1997.
Mr. Ernst received his Masters of Business Administration (lic. oec. publ.)
degree in 1973 from the University of Zurich.
KLAUS BRENNER has served as a director of the Company since January 3, 1998.
Since 1996, Klaus Brenner has served as Chief Executive Officer of Brenner
Industrieholz-Spaene GmbH, Brenner Internationale Holz- und Spaenehandels-
gesellschaft and of Brenner Holding GmbH. From 1986 to 1996 Mr. Brenner has
served as the Chief Executive Officer of Brenner Bois Sprl., the Belgian
subsidiary of Brenner Holding GmbH. These companies are engaged in the lumber
business.
ANDREAS POPOVICI has served as vice president (Direktor) of United Telegroup AG
since March 1996 and currently serves as vice president of UTG Telecom. From
October 1995 to March 1996, Mr. Popovici served as general manager of Callcom, a
Swiss telecom service company. From 1991 through October 1995 Mr. Popovici
served as vice president (Direktor) of the systems department at Swissphone, a
Swiss telecom company.
Directors of the Company hold office until the next annual meeting of
stockholders of the Company and until their successors are duly elected and
qualified, or until their earlier death, resignation or removal.
22
<PAGE>
No family relationships exist among any of the directors or executive officers
of the Company.
The Company's equity securities are not registered pursuant to Section 12 of the
Securities Exchange Act of 1934. As such, no person is required to comply with
the requirements of Section 16 of such Act.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the cash and other compensation awarded to,
earned by or paid to David Schlecht, Fritz Wolff, Ronald Kuzon and Ueli Ernst
who served as the Company's chief executive officer during the fiscal year ended
March 31, 1998, and each other executive officer whose total annual salary and
bonus exceeded $100,000 during the fiscal year ended March 31, 1998. In certain
cases, dollar amounts are approximated based on foreign currency translations.
23
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
Awards Payouts
Name and Fiscal Year Salary Bonus Other Annual Restricted Securities LTIP All Other
Principal Ended March ($) ($) Compen-sation Stock Award(s) Underlying Payouts Compen-sation
Position 31, ($) ($) Options/ ($) ($)
SARs
(#)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ueli Ernst, 1998 -- -- -- (2) (2) -- --
Chairman of
the Board & 1997 -- -- -- -- --
Chief
Executive
Officer (1)
Ronald Kuzon, 1998 --
Chairman 1997 10,625 200,000 (4)
and Chief
Executive
Officer (3)
David Schlecht, 1998 5,000 (6) -- -- -- -- -- --
President & 55,000 (6)
Chief Executive 1997 -- -- 200,000 (4) (7) -- --
Officer (5)
Fritz K. Wolff, 1998 172,359 (9) -- -- 100,000 (10) (11)
Executive Vice 29,580 (9)
President & 1997 -- -- --
Chief Operating
Officer (8)
Keith Rhea, 1998 124,500(13) -- -- (14)
Chief Operating
Officer and
Director (12)
Robert Finn, 1998 182,228(16)
Chief Financial --
Officer (15) 1997
</TABLE>
(1) Mr. Ernst was appointed Chairman of the Board and Chief Executive Officer on
January 3, 1998. Mr. Ernst has not received any compensation for his services
in this capacity during the fiscal year ended March 31, 1998.
(2) Interfinance Investment Co. Ltd., a company controlled by Mr. Ernst was
issued an aggregate of 144,000 shares of Common Stock and 93,462 options to
purchase Common Stock of the Company in connection with various financings.
(3) Mr. Kuzon served as the Company's Chief Executive Officer from October 1997
through January 3, 1998.
(4) Represents the deemed fair market value of 15,385 unregistered shares of
Common Stock (as adjusted for the reverse stock split) on January 15, 1997, the
date of grant.
(5) Mr. Schlecht resigned as President and Chief Executive Officer on June 25,
1997. Prior to that time, he had been devoting 50% of his time to the business
of the Company in the indicated capacity. He resigned as a director on February
17, 1998.
24
<PAGE>
(6) Does not include amounts paid as rent to a Company controlled by Mr.
Schlecht. See "Item 12. Certain Relationships and Related Transactions."
(7) On March 10, 1997, Mr. Schlecht was granted options exercisable for 7,693
shares of Common Stock. Because of Mr. Schlecht's resignation from his position
prior to the expiration of the vesting period for such options, such options
have been forfeited.
(8) Mr. Wolff was the Company's Chief Executive Officer from June 28, 1997
through October 7, 1998. From January 15, 1997 through June 25, 1997, Mr. Wolff
served as the Company's Executive Vice President and Chief Operating Officer.
Prior thereto he served as a business development consultant to the Company.
(9) Reflects amounts paid to Birand Ltd., a company through which Mr. Wolff
provided services to the Company. See "--Employment Agreements" and "Item 12 -
Certain Relationships and Related Transactions."
(10) Represents the deemed fair market value of 7,693 unregistered shares of
Common Stock on January 15, 1997, the date of grant.
(11) On March 10, 1997, Mr. Wolff was granted options exercisable for 23,077
shares of Company Common Stock. Because of Mr. Wolff's resignation from his
position, prior to the expiration of the vesting period for the first
transaction of such options, such options have been forfeited.
(12) Mr. Rhea resigned from his positions with the Company on January 12, 1998.
(13) Includes amounts paid to Telepath Ltd., a company through which Mr. Rhea
provided services to the Company. See "---Employment Agreements" and "Item 12-
Certain Relationships and Related Transactions."
(14) Pursuant to the Employment Agreement, dated June 30, 1997 between the
Company and Keith Rhea, Mr. Rhea was granted options for 15,385 shares, of which
options for 3,847 shares of Common Stock would have vested prior to Mr. Rhea's
resignation from his positions with the Company. In connection with his
resignation, Mr. Rhea released the Company from its obligations under such
agreement.
(15) Mr. Finn was appointed Chief Financial Officer of the Company on June 25,
1997. He served in that capacity on a part-time basis until December 7, 1997.
(16) This amount includes $111,710 which Mr. Finn alleges he and Telepath Ltd.
are owed for consulting services performed by him. The Company disputes that
such amount is owed. Such amount is included herein merely for disclosure
purposes pending final determination of the dispute between the Company and Mr.
Finn. The inclusion of such amount herein may not be construed as admission by
the Company that all or part of such amount is in fact owed to Mr. Finn or
Telepath Ltd.
The following table sets forth all grants of options to purchase Common Stock to
the executive officers named in the Summary Compensation Table for the fiscal
year ended March 31, 1998.
25
<PAGE>
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
Name Number Of Securities Percent Of Total Exercise Of Base Price Expiration Date
(a) Underlying Options/SARs Granted ($/Sh) (e)
Options/SARs Granted to Employees In (d)
(#) Fiscal Year
(b) (c)
<S> <C> <C> <C> <C>
Ueli Ernst 1,923 (1) 8.06% 7.80 September 30, 2000
Ronald Kuzon -- -- --
David Schlecht -- -- -- --
Fritz K. Wolff -- -- -- --
Keith Rhea 15,385 (2) 64.52% -- --
Robert Finn -- -- -- --
</TABLE>
- --------------
(1) These immediately exercisable options were issued to Interfinance Investment
Co. Ltd. for Interfinance's services in connection with a private placement of
equity securities during the period from September 30, 1997 through October 6,
1997.
(2) See footnote 14 to the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTIONS/SAR VALUES
<TABLE>
<CAPTION>
Name Shares Acquired On Value Realized Number Of Unexercised Value Of Unexercised
(a) Exercise ($) Securities Underlying In-The-Money
(#) (c) Options/SARs At Options/SARs At
(b) FY-End (#) FY-End ($)
Exercisable/ Exercisable/
Unexercisable Unexercisable
(d) (e)
<S> <C> <C> <C> <C>
Ueli Ernst -- -- $94,227 $10,000
Ronald Kuzon -- -- -- --
David Schlecht -- -- -- --
Fritz K. Wolff -- -- -- --
Keith Rhea -- -- (1) --
Robert Finn -- -- -- --
</TABLE>
(1) See footnote 14 to the Summary Compensation Table.
26
<PAGE>
COMPENSATION OF DIRECTORS
The Company reimburses directors for reasonable out-of-pocket expenses incurred
in connection with attendance at board and committee meetings. See "Item 10 --
Executive Compensation" for a description of any additional compensation paid to
Messrs. Ernst, Kuzon, Schlecht and Rhea.
Pursuant to Section 145 of the Delaware General Corporation Law, the Company's
Certificate of Incorporation provides that the Company shall, to the fullest
extent permitted by law, indemnify all directors, officers, incorporators,
employees and agents of the Company against liability for certain of their acts.
The Company's Certificate of Incorporation also provides that, with certain
exceptions, no director of the Company will be liable to the Company for
monetary damages as a result of certain breaches of fiduciary duties as a
director. Exceptions to this include a breach of the director's duty of loyalty,
acts or omissions not in good faith or which involve intentional misconduct or
knowing violations of law, improper declaration of dividends and transactions
from which the director derived an improper personal benefit.
27
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 7, 1997, certain information
concerning beneficial ownership of the Company's Common Stock by (i) each
beneficial owner of more than five percent of the outstanding Common Stock,
(ii) each director of the Company, (iii) each executive officer named in the
Summary Compensation Table under Item 10 above and (iv) all current executive
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES BENEFICIALLY OWNED PERCENTAGE OF COMMON STOCK(1)
<S> <C> <C>
Medfield Investments S.A. 250,000 18.9%
Sonnenbergweg 12
5608-Stetten/AG
Switzerland
Ulrich Ernst 144,233(2) 10.9%
c/o UTG Communications
International Inc.
Morristown, N.J. 07460
Interfinance Inv. Co. 144,233 10.9%
Ltd.Steinhaldering 8,
8954 Geroldswil, Switzerland
Klaus Brenner 138,462(3) 10.5%
c/o UTG Communications
International Inc.
Morristown, N.J. 07460
Fritz Wolff -- *
26 South Mall
Cork, Ireland
Keith Rhea -- *
1105 Washington Street
Hoboken, NJ
David E. Schlecht 15,692 1.2%
17 Cattano Avenue
Morristown, NJ 07960
Ronald W. Kuzon 5,247 *
300 Park Avenue, Suite 1940
New York, NY 10022
All directors and executive officers 303,634 23.0%
as a group (six persons)
</TABLE>
- ---------------------
* Denotes less than 1%.
(1) Based on 1,322,421 shares of Common Stock issued and outstanding.
(2) Includes 144,233 shares of Common Stock beneficially owned by Interfinance
Inv. Co. Ltd., a company controlled by Mr. Ernst.
28
<PAGE>
(3) Includes 115,385 shares of Common Stock owned by Prozal Investment Co., a
company controlled by Mr. Brenner.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As of April 30, 1996, in exchange for 557,692 shares of Common Stock, (as
adjusted for the Company's 1:13 reverse stock split) the Company acquired all of
the outstanding shares, other than qualifying shares, of UTG Telecom from Thomas
Combrinck. At such time Thomas Combrinck, who subsequently became a Chairman of
the Board of Directors of the Company, was not a director of the Company but was
a director of UTG Telecom. The Company did not engage a third-party to
independently review the fairness of this transaction because the cost of such
review would have been high; however, the Company believes that this transaction
was fair from a financial point of view. This belief is based on the fact that
this transaction was analyzed by the Company's Board of Directors and was
negotiated by the Company with a then-unaffiliated third party at arm's length.
At the time such transaction was consummated, the two directors who voted in
favor of the transaction were the Company's only stockholders. On January 29,
1997, Mr. Combrinck resigned from all of his positions with the Company. For
compensation paid to or for the benefit of Mr. Combrinck during the Company's
last fiscal year, see "Item 10. Executive Compensation." In addition, as part
of the severance arrangement with Mr. Combrinck, the Company agreed to pay Mr.
Combrinck 10,000 CHF (approximately $7,000) per month through July 31, 1997 in
consideration of consulting services, if any, to be provided by Mr. Combrinck.
Mr. Combrinck agreed not to compete with the Company during the term of the
consultancy. From time to time during the Company's last fiscal year the
Company advanced an aggregate of approximately $525,000 to UTG Communications
Ltd. UK ("UTK"), a company controlled by Mr. Combrinck, which amounts were used
to fund certain of UTG's working capital needs. UTK is no longer active and the
Company does not anticipate recuperating any of such funds. As such, these
amounts have been written off as a bad debt expense for fiscal 1997.
As of April 30, 1996, the Company issued 211,538 shares of Common Stock (as
adjusted for the Company's 1:13 reverse stock split) to Interfinance Inv. Co.
Ltd., a Panamanian company ("Interfinance"), 183,333 of which shares were issued
in exchange for $200,000 in cash and 197,435 of which shares were issued in
exchange for $26 in cash and a 7% promissory note. The promissory note was
repaid as of June 28, 1996 from proceeds received from purchasers of a portion
of the shares resold by Interfinance. On August 15, 1996, the Company sold an
additional 30,769 shares of Common Stock to Interfinance for $1,000,000
consisting of $10,000 in cash and a 7% promissory note for $990,000. The note
was repaid in full in November 1996. Pursuant to a subscription agreement
entered into in November 1996, Interfinance subscribed for and the Company sold
an additional 9,615 shares of Common Stock at $52.00 per share. In connection
with that agreement, Mr. Combrinck transferred 5,769 shares to Interfinance for
no additional consideration. In January 1997, Interfinance subscribed for an
additional 153,846 shares of Common Stock at a purchase price of $13.00 per
share. In addition, the Company granted Interfinance an option to purchase up
to an additional 92,308 shares of Common Stock at $26.00 per share for a two
year period commencing on completion of the purchase of the full 153,846 shares
in accordance with the terms of the agreement. In connection with the
agreement, Mr. Combrinck agreed to transfer, for no additional consideration,
one share of Common Stock owned by him for each share purchased by Interfinance
under the agreement. As of the date hereof, all amounts owing to the Company in
respect of Interfinance's November 1996 and January 1997 subscriptions have
29
<PAGE>
been paid (giving effect to approximately $20,000 in credits for expenses
incurred by Interfinance on behalf of the Company). The Company has agreed to
register the resale of the shares purchased by Interfinance under the Securities
Act of 1933. The Company believes that the terms of all transactions with
Interfinance were as fair to the Company from a financial point of view as could
have been obtained from an unaffiliated third party.
In April, 1997, the Company's wholly-owned subsidiary, UTG Communications
Belgium N.V., acquired all of the equity of Multicom N.V., an Antwerp, Belgium
based company which offers direct and indirect dial services to more than 250
corporate customers. The purchase price was 11,101,043 BEF (approximately
$317,000), payable 50% on April 9, 1997, 25% on May 2, 1997 and 25% on June
2,1997. Payment of the purchase price was secured by the pledge by Interfinance
of 100,000 shares of the Company's Common Stock owned by Interfinance.
Effective September 30, 1997, the Company sold to a limited number of accredited
or sophisticated investors (including Andreas Popovici) 30,769 shares of common
stock at a price of $6.50 per share and, for no additional consideration,
warrants to purchase an additional 15,385 shares of Common Stock at a price of
$7.80 per share. At September 30, 1997, $125,000 of the total $200,000 had been
received by the Company, and the remaining $75,000 was fully paid by October 6,
1997. Interfinance acted as placement agent for these issuances. No
underwriter's discount or fee was incurred by the Company in connection with
these issuances. These issuances were exempt from the registration requirements
of the Securities Act of 1933 by reason of the exemption provided by Section
4(2) thereunder.
On March 23, 1998, the Company issued 250,000 shares of Common Stock (post-
reverse split) at a purchase price of $2.00 per share. In addition, for each
share of Common Stock purchased, the subscriber received three warrants, each to
purchase one share of Common Stock, which warrants will expire five years from
the date of issuance and shall be exercisable at $2.00, $3.00 and $4.50 per
share, respectively. Under the terms of the subscription agreement, as amended,
the Company has the right, subject to certain conditions, to request the
subscriber to purchase up to an additional 500,000 shares of Common Stock upon
the same terms and purchase price as for the initial purchase on or prior to
September 30, 1998. In connection with this issuance, Interfinance acted as
placement agent and is entitled to a placement fee of 3% of the gross proceeds
to the Company. As of the date hereof, Interfinance has not enforced its right
to this fee. The Company believes that the terms of all transactions with
Interfinance were as fair to the Company from a financial point of view as could
have been obtained from an unaffiliated third party.
The Company's principal executive offices utilize space provided by Mr. David
Schlecht, for which the Company is obligated to pay a company controlled by Mr.
Schlecht approximately $1,000 per month.
See "Item 10.Executive Compensation" for a description of employment and other
compensation arrangements with the Company's executive officers and directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
30
<PAGE>
(a) Exhibits
See Index to Exhibits on page E-1.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal year
ended March 31, 1998
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this Amendment to its report to be signed on its behalf by the
undersigned, thereunto duly authorized.
UTG COMMUNICATIONS INTERNATIONAL, INC.
By:/s/ Ueli Ernst
_________________________________________________
Ulrich Ernst, Chairman of the Board & Chief Executive
Officer
Date: July 14, 1998
31
<PAGE>
EXHIBIT INDEX
Reference is made below to exhibits indicated with the following footnotes which
are incorporated herein by reference thereto:
(1) Filed with the U.S. Securities and Exchange Commission (the "Commission")
as an exhibit to the Registration Statement on Form SB-2 (No. 333-8305)
filed on July 17, 1996 (the "SB-2").
(2) Filed with the Commission as an exhibit to Amendment No. 1 to the SB-2
filed on August 16, 1996.
(3) Filed with the Commission as an exhibit to Amendment No. 2 to the SB-2
filed on August 30, 1996.
(4) Filed with the Commisison as an exhibit to the Company's Form 10-Q for the
quarterly period ended December 31, 1996.
(5) Filed with the Commission as an exhibit to the Company's Form 10-K for the
fiscal year ended March 31, 1997.
(6) Filed with the Commission as an exhibit to the Company's Form 10-Q for the
quarterly period ended June 30, 1997.
(7) Filed with the Commission as an exhibit to the Company's Form 10-Q for the
quarterly period ended September 30, 1997.
Exhibits indicated with footnote (8) are executive contracts or compensatory
plan arrangements filed pursuant to Part III, Item 2 of Form 10-KSB.
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of the Company (1)
3.1(a) Amendment to Certificate of Incorporation of the Company (2)
3.1(b) Amendment to Certificate of Incorporation of the Company (3)
3.1(c) Amendment to Certificate of Incorporation of the Company
3.2 By-laws of the Company (1)
10.1 Stock Purchase Agreement dated April 30, 1996 between
Registrant and Tom Combrinck (2)
10.2 Subscription Agreement dated April 30, 1996 between Registrant
and Interfinance Inv. Co. Ltd. for the purchase of 183,333
shares of Common Stock (2)
10.3 Subscription Agreement dated April 30, 1996 between Registrant
and Interfinance Inv. Co. Ltd. for the purchase of 2,566,667
shares of Common Stock (2)
10.4 Promissory Note in the principal amount of $2,799,974, dated
April 30 1996, by Interfinance Inv. Co. Ltd. in favor of
Registrant (2)
10.5 Security and Pledge Agreement dated April 30, 1996 between
Registrant and Interfinance Inv. Co. Ltd. (2)
10.6 Registration Rights Agreement dated April 30, 1996 between
Registrant and
1
<PAGE>
Interfinance Inv. Co. Ltd. (2)
10.7 Agreement dated December 21, 1995 between Registrant and
Telemedia International, together with Assignment dated July 1,
1996 (2)
10.8 Lease beginning April 1, 1996 between Registrant and Guido M.
Renggli (2)
10.9 Management Agreement dated March 14, 1996 between Registrant
and Andreas Popovici (2), (8)
10.10 Management Agreement dated April 4, 1996 between Registrant and
Franco Reinschmidt (2), (8)
10.11 Form of Customer Contract of Registrant (2)
10.12 Subscription Agreement dated August 15, 1996, between
Registrant and Interfinance Inv. Co. Ltd., for the purchase of
400,000 shares of Common Stock (2)
10.13 Promissory Note in the principal amount of $990,000 dated
August 15, 1996, by Interfinance Inv. Co. Ltd., in favor of
the Registrant (2)
10.14 Security and Pledge Agreement dated August 15, 1996 between
Registrant and Interfinance Inv. Co. Ltd. (2)
10.15 Subscription Agreement dated as of January 15, 1997 between the
Company and Interfinance Inv. Co. Ltd. (4)
10.16 Subscription Agreement dated as of November 21, 1996 between
the Company and Interfinance Inv. Co. Ltd. (4)
10.17 Joint Instructions of Registrant and Thomas Combrinck and
Interfinance Inv. Co. Ltd. dated January 16, 1997 (5)
10.18 Consultancy Agreement effective September 1, 1996 between UTG
Communications (Europe) AG and Birand Ltd. (5), (8)
10.19 Share Purchase Agreement among UTG Communications Belgium N.V.,
Messrs. Luc and Tom Van den Bogart and UTG Communications
Holding AG. (5)
10.20 Pledge Agreement among UTG Communications Belgium N.V., Messrs.
Luc and Tom Van den Bogart and UTG Communications Holding AG.
(5)
10.21 Employment Agreement dated June 30, 1997 between the Registrant
and Keith Rhea (5), (8)
10.22 Cooperation Agreement dated August 6, 1997 betweenTrafficom and
UTG Hungary (6)
10.23 Consulting Agreement between the Company and Telepath, Ltd. (7),
(8)
10.24 Share Purchase Agreement dated December 29, 1997 between
Portmann Trading AG and UTG Communications Holding AG
10.25 Share Purchase Agreement dated _______ between Portmann Trading
AG and UTG Communications Holding AG
10.26 Asset Purchase Agreement dated December 30, 1997 between UTG
Communications (Europe) AG and UTG Communications Holding AG
10.27 Subscription Agreement, dated as of January __, 1998 by and
between the Registrant and Medfield Investment S.A. ("Medfield")
10.28 Agreement between Medfield and the Registrant, dated May 16,
1998
10.29 Form of Warrant issued to Medfield
10.30 Registration Rights Agreement, dated as of March 23, 1998
between the Registrant and Medfield
2
<PAGE>
10.31 Settlement Agreement among Fritz K. Wolff, Birand Ltd.,
TeleInvest Ltd. and UTG International, Inc., together with Share
Purchase Agreement dated as of May 31, 1998 among Fritz K.
Wolff, TeleInvest Ltd. and Interfinance Inv. Co. Ltd.
21.1 List of Subsidiaries
23.1 Consent of Merdinger, Fruchter, Rosen & Corso, P.C.
27.1 Financial Data Schedule
3
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED MARCH 31, 1997
INDEX
-----
INDEPENDENT AUDITORS' REPORT F2
CONSOLIDATED BALANCE SHEETS F3 - F4
CONSOLIDATED STATEMENTS OF OPERATIONS F5 - F6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY F7
CONSOLIDATED STATEMENTS OF CASH FLOWS F8 - F9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F10 - F20
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
UTG COMMUNICATIONS INTERNATIONAL, INC.
We have audited the accompanying consolidated balance sheets of UTG
COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES as of March 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. 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 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 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.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of UTG COMMUNICATIONS
INTERNATIONAL, INC. AND SUBSIDIARIES as of March 31, 1998 and 1997, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 13 to the
financial statements, the Company has suffered recurring losses from operations
and its limited capital resources raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 13. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
MERDINGER, FRUCHTER, ROSEN & CORSO, P.C.
Certified Public Accountants
New York, New York
June 22, 1998
F-2
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
------------------------
ASSETS 1998 1997
----------- -----------
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 363,169 $ 388,198
Subscription Receivable (Note 2) - 670,000
Accounts Receivable, Net of allowance for
doubtful accounts of $263,617 and $75,925 354,233 815,106
Other Receivables (Note 3) 902,563 -
Prepaid Expenses and Other Current Assets 74,318 167,508
----------- -----------
Total Current Assets 1,694,283 2,040,812
Property and Equipment, at cost, Net of Accumulated
Depreciation of $1,184,547 and $401,898 (Note 4) 2,311,164 1,618,316
Organization Costs, at cost, Net of Accumulated
Amortization of $3,303 and $6,795 10,162 27,286
Goodwill, at cost, Net of Accumulated Amortization
of $6,561 and $-0- 245,118 -
Customer Lists, at cost, Net of Accumulated
Amortization of $104,119 and $-0- (Note 6) 832,950 -
Deferred Taxes (Note 9) - -
Other Assets 78,665 12,218
----------- -----------
TOTAL ASSETS $5,172,342 $3,698,632
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdraft $ - $ 132,237
Accounts Payable and Accrued Expenses 1,369,818 3,208,711
Capital Lease Obligation, Current (Note 10) 101,021 13,013
----------- -----------
Total Current Liabilities 1,470,839 3,353,961
Capital Lease Obligation, Long-Term (Note 10) 469,958 14,132
Commitments and Contingencies (Note 10) - -
----------- -----------
TOTAL LIABILITIES 1,940,797 3,368,093
----------- -----------
STOCKHOLDERS' EQUITY (Notes 2,7,11 & 12)
Preferred stock - $.01 Par Value, Authorized
10,000,000 Shares; None Issued and Outstanding - -
Common Stock - $0.00001 Par Value, Authorized
60,000,000 Shares; 1,303,154 and 1,018,923
Issued and Outstanding 13 10
Additional Paid-in Capital 7,925,628 7,180,631
Accumulated Deficit (4,551,224) (6,712,669)
Cumulative Foreign Currency Translation Adjustment ( 142,872) ( 137,450)
Minority Interest - 17
----------- -----------
Total Stockholders' Equity 3,231,545 330,539
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,172,342 $ 3,698,632
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F4
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Years Ended
March 31,
-------------------------
1998 1997
---------- -----------
<S> <C> <C>
NET SALES $2,319,631 $1,743,377
COST OF SALES 1,312,284 1,820,844
---------- ----------
GROSS PROFIT 1,007,347 ( 77,467)
---------- ----------
SELLING AND TECHNICAL EXPENSES
Consulting Fees 75,457 366,801
Technical Fees 83,563 1,209,702
Sales Salaries 34,148 371,366
Other Selling Expenses 30,252 105,526
---------- ----------
Total Selling and Technical Expenses 223,420 2,053,395
---------- ----------
INCOME (LOSS) FROM OPERATIONS BEFORE
GENERAL AND ADMINISTRATIVE EXPENSES 783,927 (2,130,862)
---------- ----------
GENERAL AND ADMINISTRATIVE EXPENSES
Management and Consulting Fees 248,170 1,231,148
Salaries and Employee Benefits 128,610 689,024
Bad Debt Expense 1,026,900 611,987
Depreciation and Amortization 505,831 481,446
Professional Fees 194,309 377,658
Travel Expenses 40,379 160,601
Rent Expense 46,468 88,983
Insurance Expense 29,995 16,183
Other Operating Expenses 799,455 641,408
---------- ----------
Total General and Administrative Expenses 3,020,117 4,298,438
---------- ----------
LOSS FROM OPERATIONS (2,236,190) (6,429,300)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For The Years Ended
March 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
OTHER INCOME (EXPENSES)
Interest Income 24 25,044
Interest Expense ( 109,549) ( 37,688)
Loss From Foreign Currency ( 5,998) ( 123,012)
Loss on Disposal of Fixed Asset - ( 47,151)
Other Expenses ( 15,842) ( 100,562)
----------- -----------
Total Other Income (Expenses) ( 131,365) ( 283,369)
----------- -----------
LOSS BEFORE INCOME TAXES (2,367,555) (6,712,669)
INCOME TAXES (Note 9) - -
----------- -----------
LOSS FROM CONTINUING OPERATIONS (2,367,555) (6,712,669)
----------- -----------
DISCONTINUED OPERATIONS (Note 5)
Loss From Operations of Discontinued
Subsidiaries, Net of Income Tax (2,963,159) -
Gain on Sale of Discontinued Subsidiaries,
Net of Income Taxes 7,492,159 -
----------- -----------
Total Gain on Discontinued Subsidiaries 4,529,000 -
----------- -----------
NET INCOME (LOSS) $ 2,161,445 $(6,712,669)
=========== ===========
LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE
Basic $( 2.26) $( 8.35)
=========== ===========
Diluted $( 1.25) $( 8.35)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE
Basic $ 2.06 $( 8.35)
=========== ============
Diluted $ 1.14 $( 8.35)
=========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
<TABLE>
<CAPTION>
Additional Foreign
Common Stock Paid-In Accumulated Currency
----------------------------
Shares Amount Capital Deficit Adjustment
------------ -------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1996 - $ - $ - $ - $ -
Net Loss - For the Year
Ended
March 31, 1997 - - - (6,712,669) -
Issuance of Common Stock 13,246,000 132 7,303,442 - -
Offering Costs - - ( 122,933) - -
Cumulative Foreign
Currency Translation
Adjustment - - - - ( 137,450)
Minority Interest - - - - -
----------- ------------- ------------- ------------ -------------
Balance at March 31, 1997 13,246,000 132 7,180,509 (6,712,669) ( 137,450)
Giving Effect to a 13:1
Reverse
Stock Split (12,227,077) ( 122) 122 - -
----------- ------------- ------------- ------------ -------------
Balance at March 31, 1997,
Restated 1,018,923 10 7,180,631 (6,712,669) ( 137,450)
Net Income For The Year
Ended
March 31, 1998 - - - 2,161,445 -
Issuance of Common Stock,
Giving
Effect to a 13:1 Reverse
Split 284,231 3 744,997 - -
Cumulative Foreign Currency
Translation Adjustment - - - -
Minority Interest - - - - ( 5,422)
----------- ------------- ------------- ------------ -------------
Balance at March 31, 1998 1,303,154 $ 13 $ 7,925,628 $(4,551,224) $( 142,872)
=========== ============= ============= ============ =============
<CAPTION>
Total
Minority Stockholders'
Interest Equity
--------------- --------------
<S> <C> <C>
Balance at March 31, 1996 $ - $ -
Net Loss - For the Year
Ended
March 31, 1997 - ( 6,712,669)
Issuance of Common Stock - 7,303,574
Offering Costs - ( 122,933)
Cumulative Foreign
Currency Translation
Adjustment - ( 137,450)
Minority Interest 17 17
-------------- ------------
Balance at March 31, 1997 17 330,539
Giving Effect to a 13:1
Reverse
Stock Split - -
-------------- ------------
Balance at March 31, 1997,
Restated 17 330,539
Net Income For The Year
Ended
March 31, 1998 - 2,161,445
Issuance of Common Stock,
Giving
Effect to a 13:1 Reverse
Split - 745,000
Cumulative Foreign Currency
Translation Adjustment ( 17) ( 17)
Minority Interest - ( 5,422)
-------------- ------------
Balance at March 31, 1998 $ - $ 3,231,545
============== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For The Years Ended
March 31,
------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 2,161,445 $(6,712,669)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Used by Operating Activities
Common Stock Issued for Services - 770,000
Depreciation and Amortization 505,831 481,446
Changes in Certain Assets and Liabilities:
Increase in Accounts Receivable 439,605 ( 910,385)
Increase in Other Receivables ( 1,904,890) -
Increase in Prepaid Expenses and Other Current Assets 89,418 ( 180,795)
Increase in Organization Costs 13,048 ( 38,091)
Increase in Other Assets ( 69,846) ( 13,654)
Increase in Accounts Payable and Accrued Ex ( 1,780,166) 3,551,000
------------- -------------
Total Cash Used by Operating Activities ( 545,555) ( 3,053,148)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Fixed Assets, Net ( 1,586,760) ( 2,263,081)
Increase in Goodwill ( 304,535) _
------------- -------------
For Cash Used by Investing Activities ( 1,891,295) ( 2,263,081)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Bank Overdraft - 147,793
Increase in Loan Payable ( 26,928) -
Increase in Capital Lease Payable 594,479 30,338
Proceeds from Subscription Receivable 670,000 -
Contribution to Capital 745,000 5,863,574
Offering Costs - ( 122,933)
Minority Interest ( 17) 17
------------- -------------
Total Cash Provided By Financing Activities 1,982,534 5,918,789
------------- -------------
EFFECTS OF EXCHANGE RATE
CHANGES ON CASH 429,287 ( 214,362)
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ( 25,029) 388,198
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 388,198 -
------------- -------------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 363,169 $ 388,198
============= =============
CASH PAID DURING THE YEAR FOR:
Interest Expense $ 64,609 $ 37,688
============= =============
Income Taxes $ - $ -
============= =============
</TABLE>
NON-CASH INVESTING AND FINANCING ACTIVITIES
Year Ended March 31, 1998:
In November 1997, the Company purchased an existing customer base for SFR
1,426,500 (approximately $937,000) in exchange for a loan payable to a third
party (see also note 5).
Year Ended March 31, 1997:
The Company issued common stock in exchange for a stock subscription agreement.
As of March 31, 1997 the receivable on the agreement totalled $670,000 for
51,538 shares.
The Company issued common stock totalling 57,693 shares as compensation for
management and consulting services.
The Company issued common stock totalling 770 shares as payment for an
outstanding debt.
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation
---------------------
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles and with
the instructions to Form 10-KSB and Regulation S-B. In the opinion
of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation have been
included.
The accompanying consolidated financial statements include the
accounts of UTG Communications International, Inc. ("The Company"),
a holding company organized under the laws of the state of Delaware
on April 17, 1996 and its subsidiaries:
1) UTG Telecom AG ("Telecom"), formerly known as UTG
Communications Holding AG, ("UTG Holding"), incorporated
under the laws of Switzerland on February 29, 1996 (owned
100% by the Company);
2) UTG Communications (Europe) AG, ("Europe"), incorporated
under the laws of Switzerland on March 28, 1996, disposed off
(See Note 5d);
3) UTG Communications Belgium N.V., ("UTG Belgium"),
incorporated under the laws of Belgium on June 27, 1996
(owned 100% by Telecom);
4) United Telecom GMBH, ("UTG GmbH"), incorporated under the
laws of Switzerland on May 28, 1996 (owned 100% by Telecom);
5) UTG Communications (Network), Ltd., ("UTG NET") incorporated
under the laws of the United Kingdom on October 22, 1996,
disposed off (See Note 5e).
6) Multicom NV ("Multicom"), incorporated under the laws of
Belgium (owned 100% by UTG Belgium);
7) UTG Hungary ("Hungary") incorporated under the laws of
Hungary on April 2, 1997, disposed off (See Note 5a);
8) Tibesta Corporation N.V. ("Tibesta") incorporated under the
laws of Curacao on December 24, 1996, disposed off (See Note
5c);
9) Metatel Telemarketing N.V. ("Metatel") incoporated under the
laws of the Netherlands on February 5, 1979, disposed off
(See Note 5c); and
10) UTG Communications France, S.A. ("UTG France") incorporated
under the laws of France on June 9, 1997, disposed off (See
Note 5c).
All significant intercompany accounts and transactions have been
eliminated in consolidation.
F-10
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
b) Line of Business
----------------
The Company is a switch-based provider of private voice, fax and
data management telecommunication services throughout Europe and
Canada.
c) Use of 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.
d) Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
e) Property and Equipment
----------------------
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method based upon the estimated useful lives
of the various classes of assets. Maintenance and repairs are
charged to expense as incurred.
f) Organization Costs
------------------
Organization costs consist of legal and other administrative costs
incurred relating to the formation of the Company. These costs have
been capitalized and will be amortized over a period of five years.
g) Goodwill
--------
Goodwill represents the cost in excess of the fair market value of
the acquisition of Multicom N.V. Amortization is being computed
using the straight-line method over a period of forty years.
h) Customer Lists
--------------
Customer lists represents the cost of the acquisition of subscriber
names at their fair market value. Amortization is being computed
using the straight-line mthod over a period of three years.
i) Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform with
current year presentation.
j) Bank Overdraft
--------------
The Company maintains overdraft positions at certain banks. Such
overdraft positions are included in current liabilities.
F-11
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k) Translation of Foreign Currency
-------------------------------
The Company translates the foreign currency financial statements of
its Swiss and Belgium subsidiaries, in accordance with the
requirements of Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation". Assets and liabilities are
translated at current exchange rates, and related revenues and
expenses are translated at average exchange rates in effect during
the period. Resulting translation adjustments are recorded as a
separate component in stockholders' equity. Foreign currency
transaction gains and losses are included in the statement of
operations.
l) Income Taxes
------------
Income taxes are provided for based on the liability method of
accounting pursuant to Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes". The liability method
requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences
between the reported amount of assets and liabilities and their tax
basis.
m) Fair Value of Financial Instruments
-----------------------------------
The carrying value of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses, approximates fair
value due to the relatively short maturity of these instruments.
n) Stock-Based Compensation
------------------------
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation", encourages, but does not require
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
Interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee
must pay to acquire the stock.
o) Long-Lived Assets
-----------------
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of", was issued (SFAS No. 121). SFAS No.
121 requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. The Company has adopted this statement and determined
that no impairment loss need be recognized for applicable assets of
continuing operations.
F-12
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
p) Earnings Per Share
------------------
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128), which requires
presentation of basic earnings per share ("Basic EPS") and diluted
earnings per share ("Diluted EPS").
The computation of basic earnings per share is computed by dividing
income available to common stockholders by the weighted average
number of outstanding common shares during the period. Diluted
earnings per share gives effect to all dilutive potential common
shares outstanding during the period. The computation of diluted EPS
does not assume conversion, exercise or contingent exercise of
securities that would have an anti-dilutive effect on earnings. The
shares used in the computations are as follows:
<TABLE>
<CAPTION>
March 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Basic 1,046,756 803,846
Diluted 1,896,756 803,846
</TABLE>
NOTE 2 - SUBSCRIPTION RECEIVABLE
On January 15, 1997, the Company entered into a subscription
agreement to sell 2,000,000 shares of its common stock to
Interfinance Inv. Co., Ltd. ("IIC") for an aggregate price of
$2,000,000. As of March 31, 1997, $1,285,000 was received relating
to the agreement.
As of March 31, 1997, $670,000 was recorded as a receivable. This
amount was received during the first fiscal quarter of 1998. The
Company received the remaining $45,000 relating to the subscription
agreement during the second fiscal quarter of 1998.
NOTE 3 - OTHER RECEIVABLES
A) UTG Communications (Europe) AG $ 602,563
B) Former Director 300,000
---------
$ 902,563
=========
A) This receivable represents a balance due from UTG Communications
(Europe) AG, an unrelated thrid party. The balance relates to the
sale of Europe. (See Note 5d).
B) This receivable represents a balance due from a former director of
the Company relating to a settlement of services provided and the
sale of UTG Hungary. (See Notes 5a and 14).
F-13
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------
1998 1997
------------ -----------
<S> <C> <C>
Telecommunications Equipment $ 3,155,377 $ 1,681,212
Computer Equipment & Software 203,157 227,571
Furniture and Fixtures 137,177 111,431
----------- -----------
3,495,711 2,020,214
Less: Accumulated Depreciation ( 1,184,547) ( 401,898)
----------- -----------
$ 2,311,164 $ 1,618,316
=========== ===========
</TABLE>
Depreciation expense for the year ended March 31, 1998 and 1997 was
$387,029 and $473,850, respectively.
NOTE 5 - INVESTMENTS
a) On April 2, 1997, Telecom founded UTG Communications Hungary, Ltd.
("UTG Hungary"), incorporated under the laws of Hungary. Telecom's
initial investment in UTG Hungary was CHF 8,000.
During the third quarter, the Company, in connection with a
settlement reached with a former director and his related companies,
transferred its interest in UTG Hungary to this director, in return
for his assumption of all of UTG Hungary's debts and obligations.
The Company's loss from its investment in UTG Hungary amounted to
$49,638 Swiss Francs or approximately $32,607 which is included in
the Company's loss.
b) On April 2, 1997, UTG Belgium acquired a 100% ownership in Multicom
NV ("Multicom"), an existing telecommunications company operating in
the areas of direct and indirect dial for 11,101,043 Belgium Francs
or approximately $317,000.
c) On April 8, 1997, Telecom consummated the purchase of its 49%
interest in Tibesta Corporation NV ("Tibesta"), a company
incorporated under the laws of Curacao. Tibesta is the 100% parent
of Metatel Telemarketing BV ("Metatel"), a company incorporated
under the laws of the Netherlands. The purchase price for the
company's 49% ownership interest in Tibesta was $10,551 of which
$2,940 represented their 49% interest ownership in Metatel.
On June 9, 1997, Metatel founded UTG Communications Francs S.A.
("UTG France"), a 94% owned company with an initial investment of
750,000 French Francs or approximately $129,500 of which 49% was
paid by the Company.
As of September 30, 1997, the Company's subsidiaries Tibesta,
Metatel and UTG France were no longer active. The Company wrote off
its investments in these companies. Loss from investments in these
companies of $67,772 are included in loss from discontinued
operations.
F 14
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 5 - INVESTMENTS (Continued)
d) On November 30, 1997, an unrelated third party purchased from
Telecom 100% of Europe for 1,000 Swiss Francs or approximately $700
and all of UTG Europe's assets and liabilities. The Company's loss
from its investment in UTG Europe for the eight months ended
November 30, 1997 amounted to 3,131,140 Swiss Francs or
approximately $2,194,500 and is included in loss from discontinued
operations. Due to significant losses in the prior year on UTG
Europe and the current year loss, the sale resulted in a gain of
5,517,200 Swiss Francs or approximately $3,840,000 and is included
in gain on disposal of discontinued operations.
e) On December 1, 1997, an unrelated third party purchased from Telecom
100% of UTG Communications (Network) Ltd. For 1,000 Swiss Francs or
approximately $700. The Company's loss from its investment in "UTG
Net" for the eight months ending November 30, 1997 amounted to
618,900 British pounds or approximately $1,058,300 and is included
in loss from discontinued operations. Due to significant losses in
the prior year on UTG Network and the current loss, the sale
resulted in a gain of 2,356,000 Swiss Francs or approximately
$1,613,000 which is included in gain on disposal of discontinued
operations.
NOTE 6 - ACQUISITION OF ASSETS
On December 1, 1997, after the sale of its ownership in UTG Europe
to an unrelated third party, UTG Telecome purchased certain assets
including property and equipment and customer lists from UTG Europe
for a loan payable totalling approximately $4,020,300. These assets
were recorded at cost which approximated their fair market value and
are being depreciated over their estimated useful life.
NOTE 7 - MINORITY INTEREST
Minority interest represented less than a 1% share of the common
equity of the Company's subsidiary UTG Telecom AG as of March 31,
1997. As of March 31, 1998, the Company owned 100% of UTG Telecom.
NOTE 8 - FOREIGN OPERATIONS
As described in Note 1b, substantially all of The Company's
operations take place throughout Europe and Canada and the majority
of its identifiable assets are located in Switzerland, Belgium and
the United Kingdom.
F-15
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 9 - INCOME TAXES
The components of the provision for income taxes is as follows:
<TABLE>
<S> <C>
Current Tax Expense
U.S. Federal $ -
State and Local -
-----------
Total Current -
-----------
Deferred Tax Expense
U.S. Federal $ -
State and Local -
-----------
Total Deferred -
-----------
Total Tax Provision from Continuing
Operations $ -
===========
The reconciliation of the effective income tax rate to the Federal
statutory rate is as follows:
Federal Income Tax Rate ( 34.0)%
Deferred Tax Charge (Credit) -
Effect on Valuation Allowance 34.0%
State Income Tax, Net of Federal Benefit -
------------
Effective Income Tax Rate 0.0%
===========
</TABLE>
At March 31, 1998 and 1997, the Company had net carryforward losses of
approximately $4,551,000 and $6,713,000, respectively. Because of the
current uncertainty of realizing the benefits of the tax carryforward,
valuation allowances equal to the tax benefits for deferred taxes have
been established. The full realization of the tax benefit associated
with the carryforward depends predominantly upon the Company's ability
to generate taxable income during the carryforward period.
F-16
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 9 - INCOME TAXES (Continued)
Deferred tax assets and liabilities reflect the net tax effect of
temporary differences between the carrying amount of assets and
liabilities for financial reporting purposes and amounts used for
income tax purposes. Significant components of the Company's
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
March 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
Deferred Tax Assets
Loss Carryforwards $ 1,547,000 $ 2,282,000
Less: Valuation Allowance (1,547,000) (2,282,000)
----------- -----------
Net Deferred Tax Assets $ - $ -
=========== ===========
</TABLE>
Net operating loss carryforwards expire starting in 2011 through
2012. Per year availability is subject to change of ownership
limitations under Internal Revenue Code Section 382.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
a) On March 14, 1996, United Telegroup AG entered into a three year
Management Agreement with Andreas Popovici (the "Popovici
Agreement"), pursuant to which he serves as the Managing Director of
Telecom. The agreement states that he will devote 200 working days
to Telecom per year at an annual salary of approximately $179,000
and will also receive approximately $690 for each new customer he
introduces to the Company during the first year and approximately
$520 for each new Company customer he introduces to Telecom during
the second and third year of the Agreement.
Effective April 1, 1998, the Company and Mr. Popovici agreed to
modify his previous employment arrangement. Pursuant to the new
arrangement, Mr. Popovici serves as vice president of Telecom at an
annual salary of SFR 180,000 or approximately $120,000. Mr. Popovici
is reimbursed for expenses incurred in connection with the
performance of his duties pursuant to the Company's policies in
effect from time to time.
b) As of March 31, 1997, the Company had a bank overdraft facility with
Credit Suisse in Switzerland of CHF 300,000 (approximately
$207,000), which bears interest at 6 1/4% per annum plus 1% on
average overdraft in excess of fixed limit. The overdraft was
personally guaranteed by an officer of the Company. During fiscal
1998, this overdraft line was cancelled. Furthermore, the Company
had an overdraft position with the Union Bank of Switzerland. At
March 31, 1997 the balance outstanding was 161,572 Swiss Francs or
approximately $111,500. The balance beared interest of 7% per annum
plus a commission of highest outstanding balance of 1/4%. During
fiscal 1998, this overdraft line was also cancelled.
F-17
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
c) The Company's future minimum annual aggregate rental payments
required under operating and capital leases that have initial or
remaining non-cancelable lease terms in excess of one year are as
follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------------- ------------
<S> <C> <C>
1999 $ 51,238 $ 176,999
2000 51,238 175,631
2001 51,238 175,631
2002 51,238 175,631
2003 51,238 69,145
2004 and
thereafter - -
------------ ------------
Total Minimum Lease Payments 256,190 $ 773,037
=============
Less: Amounts Representing Interest (202,059)
------------
Present Value of Future Minimum 570,979
Lease Payments (101,021)
Less: Current Maturities ------------
Total $ 469,958
============
</TABLE>
Rent expense under operating leases for the year ended March 31, 1998
and 1997 was $46,468 and $88,983, respectively.
d) The Company is a party to claims and lawsuits arising in the normal
course of operations. Management is of the opinion that these claims
and lawsuits will not have a material effect on the financial
position of the Company. The Company believes these claims and
lawsuits should not exceed $232,000, and accordingly, has established
a reserve included in accounts payable and accrued expenses.
e) The Company's former subsidiary, UTG Europe, which was disposed of on
November 30, 1997. (See Note 5) derived revenue from retail customers
and carrier partners. For the year ending March 31, 1997, two carrier
partners accounted for approximately 50% of the net sales. UTG Europe
entered into agreements with these two carriers that continue through
the fiscal year ending March 31, 1999 and renew automatically for two
year cycles, unless terminated by either party in writing with one
months notice.
f) On June 30, 1997, the Company entered into an employment agreement
with Keith Rhea to serve as Chief Operating Officer of the Company
and a member of the Board of Directors and a consulting agreement
with Telegraph Ltd. a company believed to be affiliated with Mr.
Keith Rhea. The terms of the agreements were for three years
beginning on July 7, 1997 for an annual base salary of $100,000 and
an annual consulting fee of $80,000. The Company also issued non-
transferable stock options to purchase up to 200,000 shares of the
Company's common stock at an exercise price of $1 per share. The
options expire after 5 years and shall fully vest within 2 1/2
years.
F-18
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
g) Although other providers of telephone communications provide
international access services, UTG Telecom AG, the Company's Swiss
subsidiary, was using a single provider, UTG Europe AG, for
international access services from December 1997 through March 31,
1998. (See also Note 5d).
NOTE 11 - STOCKHOLDERS' EQUITY
On January 10, 1998, the UTG Board of Directors authorized the
issuance of an additional 40,000,000 common stock at $.0001 par value
bringing total authorized common shares to 60,000,000. The Board also
authorized the issuance of 10,000,000 preferred shares at $.01 par
value. At the same time, a reverse split of one-for-thirteen shares
was authorized to shareholders of record on March 24, 1998.
Shareholders' equity has been restated at March 31, 1997, to give
retroactive recognition to the reverse stock split for both periods
presented by reclassifying from common stock to additional capital
the reduced par value arising from the reverse split.
NOTE 12 - STOCK OPTIONS
In connection with the subscription agreement dated January 15, 1997
(See Note 2), the Company granted IIC an option to purchase up to an
additional 92,308 as adjusted by reverse split shares of common stock
at $26.00 per share for a two year period commencing on the
completion of the purchase of the full 153,846 shares subscribed
for.
On March 25, 1997, the Company granted nonqualified stock options to
purchase up to 7,692, 7,692 and 23,077 shares, respectively, as
adjusted by reverse split to each of Ron Kuzon, David Schlecht and
Fritz Wolff. The options are exercisable at $13.00 per share, vest in
equal installments on the first, second and third anniversaries of
the date of grant, and expire five years from the date of grant. As
of March 31, 1998, these options expired due to the officers no
longer being with the Company.
On June 25, 1997, the Company granted to Mr. Allen Howe, an employee,
a nonqualified stock option to purchase up to 13,846 shares, as
adjusted by reverse split at an exercise price of $13.00 per share.
The option vests in equal installments on July 1, 1997, July 1, 1998
and July 1, 1999. The option is exercisable as to any vested portion
during the 12 month period commencing on July 1, 1999. If Mr. Howe
remains employed by the Company through July 1, 1999, the Company
agreed to pay Mr. Howe a cash bonus which can only be used to satisfy
payment of the exercise price.
On March 23, 1998, the Company issued 250,000 shares of Common Stock
(post-reverse split) at a purchase price of $2.00 per share. For each
share of Common Stock purchased, the subscriber received three
warrants, each to purchase one share of Common Stock at $2.00, $3.00
and $4.50, respectively. The warrants will expire five years from
date of issuance.
F-19
<PAGE>
UTG COMMUNICATIONS INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
NOTE 13 - GOING CONCERN
The accompanying consolidated financial statements have been prepared
assuming the company will continue as a going concern. As of March
31, 1998, the Company had a working capital of $223,444 and an
accumulated deficit of $4,551,224. As of March 31, 1997, the company
had a working capital deficit of $1,313,149 and an accumulated
deficit of $6,712,669, the company's loss from operation for the
years ended March 31, 1998 and 1997 were $2,236,190 and $6,429,300,
respectively based upon the Company's plan of operation, the Company
estimates that existing resources, together with funds generated from
operations will not be sufficient to fund the Company's working
capital. The Company is actively seeking additional equity financing.
There can be no assurances that sufficient financing will be
available on terms acceptable to the Company or at all. If the
Company is unable to obtain such financing, the Company will be
forced to scale back operations which would have an adverse effect on
the Company's financial condition and results of operation.
NOTE 14 - SUBSEQUENT EVENTS
On May 26, 1998, the Company's subsidiary, UTG Telecom AG, changed
its name to Starfon Telecom Services AG.
On January 8, 1998, the Company's subsidiary, UTG Telecom AG signed a
service agreement for international access service with Cable &
Wireless (Switzerland) AG ("C&W") for international direct dial
service. C&W commenced providing these services after March 31,
1998
F-20
<PAGE>
Exhibit 3.1(c)
--------------
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
UTG COMMUNICATIONS INTERNATIONAL, INC.
UTG Communications International, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"), in order to amend its Certificate of
Incorporation, hereby certifies as follows:
FIRST: The Corporation hereby amends its Certificate of Incorporation
by changing the Article thereof, numbered "4(a)" so that, as amended,
said Article shall be and read as follows:
"FOURTH (a) The total number of shares of capital stock which may
be issued by the Corporation is 70,000,000 shares, of which
60,000,000 shares shall be of Common Stock ("Common Stock"),
having a par value of $.00001 per share, and 10,000,000 shares
shall be of Preferred Stock ("Preferred Stock"), having a par
value of $.01 per share.
Immediately upon the filing of the Certificate of Amendment with
the Secretary of State of Delaware (the "Effective Date"), each
share of Common Stock issued and outstanding immediately prior to
the Effective Date (the "Old Common Stock") shall automatically
be changed and converted, without any action on the part of the
holder thereof, into one-thirteenth (1/13) of a share of post-
reverse split fully paid Common Stock (the "New Common Stock"),
and in connection with fractional interests in shares of New
Common Stock of the Corporation, each holder whose aggregate
holdings of shares of Old Common Stock prior to the Effective
Date amounted to less than 13 or a number not evenly divisible by
13 shares of Old Common Stock, shall be entitled to receive for
such fractional interest one additional share of New Common
Stock."
SECOND: The amendment herein was authorized by the Board of Directors
of the Corporation and the consent in writing, setting forth the action so
taken, of the holders of a majority of all the outstanding shares entitled
to vote thereon, pursuant to Sections 228 and 242 of the General
Corporation Law of the State of Delaware.
THIRD: That the capital of said corporation shall not be reduced
under or by reason of said amendment.
(signature page follows)
<PAGE>
IN WITNESS WHEREOF, the Corporation, has caused this Certificate of
Amendment to be executed by its CEO, who affirms that the statements herein are
---
true under the penalties of perjury, this 20th day of March, 1998.
---- -----
/s/ Ueli Ernst
____________________________
Name:_______________________
Title:______________________
Ulrich Ernst
Chief Executive Officer
<PAGE>
Exhibit 10.24
-------------
The following is a fair and accurate English translation of the original
contract.
PURCHASE AGREEMENT
------------------
between
Portmann Trading SA
Hongkong Bank Building
Panama
BUYER
and
UTG Communications Holding AG
Baarerstr. 50
6300 Zug
SELLER
Since the beginning of 1997 UTG Communications (Europe) AG has been active in
providing telecommunication services in Switzerland.
The Buyer purchases from the Seller 10,000 registered shares of UTG
Communications (Europe) AG, Zug for a total purchase price of SFr. 1,000.00 (one
thousand francs).
The purchase price was paid in cash by the Seller upon signing of this
agreement, which is herewith acknowledged.
The Buyer confirms that he received from the Seller all existing contracts,
balance sheets and documents or has access to them. The Seller declares that
there are no pending court proceedings and that there are no liabilities other
than as stated on the balance sheet.
The Seller agrees to perform certain services for the Buyer on a mandate basis.
The transfer date is November 30, 1997 retroactively.
The Buyer agrees to change the name of the company no later than February 15,
1998 and to repay all outstanding loans of the Seller.
UTG Communications Holding AG Portman Trading AG
going forward (UTG Telecom AG)
/s/ Ueli Ernst /s/ Werner Rusterholz
- ------------------------------ ------------------
U. Ernst W. Rusterholz
Date: December 29, 1997 December 29, 1997
<PAGE>
Exhibit 10.25
-------------
The following is a fair and accurate English translation of the original
contract.
PURCHASE AGREEMENT
------------------
between
Portmann Trading SA
Hongkong Bank Building
Panama
BUYER
and
UTG Communications Holding AG
Baarerstr. 50
6300 Zug
SELLER
Since the beginning of 1997 UTG (Network) Ltd. has been active in providing
telecommunication services in Great Britain.
The Buyer purchases from the Seller all UTG (Network) Ltd. shares for a total
purchase price of SFr. 1,000.00 (one thousand francs).
The purchase price was paid in cash by the Seller upon signing of this
agreement, which is herewith acknowledged.
The Buyer confirms that he received from the Seller all existing contracts,
balance sheets and documents or has access to them. The Seller declares that
there are no pending court proceedings and that there are no liabilities other
than as stated on the balance sheet.
The Seller agrees to perform certain services for the Buyer on a mandate basis.
The transfer date is December 1, 1997 retroactively.
The Buyer agrees to change the name of the company no later than February 15,
1998 and to repay all outstanding loans of the Seller.
UTG Communications Holding AG Portman Trading AG
going forward (UTG Telecom AG)
/s/ Ueli Ernst /s/ Werner Rusterholz
- -------------------------------- ------------------------------------
U. Ernst W. Rusterholz
<PAGE>
Exhibit 10.26
-------------
AGREEMENT
BETWEEN
UTG COMMUNICATIONS (EUROPE) AG
BAARERSTR. 75,6300 ZUG
AS SELLER
AND
UTG COMMUNICATIONS HOLDING AG
(AFTERWARDS UTG TELECOM AG)
BAARERSTR. 75,6300 ZUG
AS BUYER
PREAMBLE
- --------
The Seller is involved in providing telecom services to different customers in
Europe. The Buyer is willing to buy some assets as the Seller will have another
alliance in the telecom area.
1. The purchase price is USD 4,020,300 (Four Million, twenty-thousand, three
hundred).
2. The purchase price is paid by compensation of the loan amount of USD
4,538,899 plus interest from January 10, 1997, originating from the
existing Loan Agreement. This loan has been made due on November 30, 1997
by the Buyer.
3. The exceeding amount due to the Buyer will be paid later by the Seller or
compensated with further services to the Buyer.
4. The following assets as per statement of November 30, 1997 are sold to the
Buyer:
. VAT receivables min. USD 121,629.
. All accounts receivable to customers min. USD 724,949 (including
allowance for doubtful amounts)
. Loans to UTG Belgium and Multicom from the Seller min. USD 220,000 plus
interest
. Loans to UTG Network from the Seller at full amount but depreciated
entirely and only calculated at USD 1.
. All equipment, computers, software, furniture and switches in the
possession of the Seller at a price of USD 2,670,274, less amortization
of USD 867,757, total of USD 1,802,517.
. Any deposits of car, PTT and so on is estimated at USD 12,000.
. Any cash amounts or guarantees of Creditsuisse and UBS to creditors as
per November 30, 1997 statements plus increases in the amount of USD
139,204.
<PAGE>
. The customer base has been evaluated at USD 1,000,000 and will be sold
entirely with all rights.
5. All above assets or receivables are herewith legally sold and the Buyer may
notify any parties by return on behalf of the Seller. The Buyer has the
right to negotiate with the creditors/lenders and so on and charge
differences to the Seller.
6. All assets will be taken over as per December 1, 1997. Any subsequent
payments, which have been made to the Seller have to be transferred to the
Buyer. Any subsequent receivables from the customer base after above date
belong to the Buyer.
7. It is agreed that the Seller will provide further services to the Buyer and
will charge these services at rates which have to be negotiated in the
future.
8. This agreement may be executed in any number of additional supplementary
agreements, if necessary.
9. The Swiss Code will be applicable. The place of jurisdiction is ZUG.
UTG Communications Holding AG UTG Communications (Europe) AG
Afterwards (UTG Telecom AG)
/s/ Ueli Ernst /s/ Werner Rusterholz
- -------------------------- ---------------------
U. Ernst W. Rusterholz
Dated: 30.12.97 Dated: 30.12.97
------------------ --------
2
<PAGE>
EXHIBIT 10.27
UTG COMMUNICATIONS INTERNATIONAL INC.
SUBSCRIPTION AGREEMENT
THIS AGREEMENT is made as of January ___, 1998, by and between UTG
Communications International Inc., a Delaware corporation (the "Company"),
having an address c/o Walter M. Epstein, Esq., 30 Rockefeller Plaza, 29th Floor,
New York, New York 10112, and the subscriber signatory hereto (the
"Subscriber").
Set forth below are the terms and conditions pursuant to which the Subscriber
subscribes for shares of common stock, $.00001 par value per share (the "Common
Stock"), of the Company in an offering by the Company of up to 750,000 shares at
$2 per share (Such number of shares and price gives effect to a 1:13 reverse
stock split to be completed as a condition to this subscription.). There is no
minimum number of shares being offered by the Company.
1. SUBSCRIPTION. Subject to the terms and conditions hereof, the
Subscriber, intending to be legally bound, hereby agrees to purchase from the
Company, 250,000 shares (the "Shares") of the Company's Common Stock, at a
purchase price of $2.00 per Share. For each Share purchased, the Subscriber will
also receive, for no additional consideration, three Warrants (the "Warrants"),
substantially in the form of Exhibit C attached hereto, each to purchase one
---------
share of Common Stock, which Warrants will expire five years from the date of
original issuance and shall be exercisable at $2, $3 and $4.50 per share,
respectively.
The Subscriber will pay for the subscription by check payable in U.S.
Dollars or by wire transfer in U.S. Dollars to the Company's designated account
the amount of $500,000 net of a 3% underwriting commission payable to
Interfinance Inv. Co. Ltd. against delivery of (i) one or more certificates
representing the 250,000 Shares, (ii) executed copies of the Warrants, (iii) an
executed copy of the Registration Rights Agreement between the parties hereto
and of even date herewith (the "Registration Rights Agreement"), substantially
in the form of Exhibit D hereto and (iv) an opinion of counsel to the Company
---------
covering the matters set forth in Exhibit E hereto in form and substance
---------
satisfactory to Subscriber's counsel.
2. REPRESENTATIONS AND WARRANTIES.
2.1 Representations of the Subscriber. The Subscriber hereby represents
---------------------------------
and warrants to the Company that:
<PAGE>
2
(a) THE SUBSCRIBER IS AWARE AND UNDERSTANDS THAT AN INVESTMENT IN THE
SHARES AND WARRANTS INVOLVES A NUMBER OF VERY SIGNIFICANT RISKS AND THAT THIS
INVESTMENT SHOULD NOT BE MADE UNLESS THE SUBSCRIBER IS PREPARED TO LOSE THE
ENTIRE INVESTMENT. SINCE INCEPTION, THE COMPANY HAS INCURRED SUBSTANTIAL LOSSES
AND NEGATIVE CASH FLOW, AND THE COMPANY EXPECTS TO CONTINUE TO INCUR SUBSTANTIAL
LOSSES AND NEGATIVE CASH FLOW FOR THE FORESEEABLE FUTURE. IN ADDITION TO THIS
INVESTMENT, THE COMPANY IS IN IMMEDIATE NEED OF SUBSTANTIAL ADDITIONAL CAPITAL
IN ORDER TO FUND ITS OPERATING REQUIREMENTS. THERE CAN BE NO ASSURANCE THAT
SUFFICIENT FINANCING WILL BE AVAILABLE ON TERMS ACCEPTABLE TO THE COMPANY OR AT
ALL. FAILURE TO OBTAIN SUCH FINANCING IN THE IMMEDIATE FUTURE COULD FORCE THE
COMPANY TO CEASE OPERATIONS COMPLETELY, RESULTING IN A LOSS OF THE SUBSCRIBER'S
ENTIRE INVESTMENT.
(b) the subscription hereunder is being made by the Subscriber as principal
for the Subscriber's own account and not for the benefit of any other person;
(c) the Subscriber is a resident of the jurisdiction set out on the
signature page hereof;
(d) this Subscription Agreement constitutes a legal, valid, binding and
enforceable obligation of the Subscriber;
(e) the Subscriber will not make any offers to sell the Shares and Warrants
or sell any of the Shares and Warrants except in accordance with the terms of
this Subscription Agreement;
(f) the Subscriber has such knowledge, sophistication and experience in
business and financial matters that it is capable of evaluating the merits and
risks of an investment in the Shares and Warrants, and at the present time, it
could afford a complete loss of such investment;
(g) the Subscriber acknowledges that the Company and counsel for the
Company will rely upon the accuracy and truth of the Subscriber's
representations in Sections 2 and 3 hereof and the Subscriber hereby consents to
such reliance;
(h) the Subscriber has access to the same kind of information which would
be available in registration statements filed by the Company under the
Securities Act;
<PAGE>
3
(i) neither the United States ("U.S.") Securities and Exchange Commission
(the "SEC") nor any state securities commission has approved any of the Shares
and Warrants offered or passed upon or endorsed the merits of the offering;
(j) the Subscriber acknowledges that all documents, records, and books
pertaining to the investment in the Shares and Warrants have been made available
for inspection by him, his attorney, accountant, purchaser representative or tax
advisor (collectively, the "Advisors");
(k) the Subscriber and the Advisors have had a reasonable opportunity to
ask questions of and receive answers from a person or persons acting on behalf
of the Company concerning the offering of the Shares and Warrants and all such
questions have been answered to the full satisfaction of the Subscriber and his
Advisors;
(l) in evaluating the suitability of an investment in the Company, the
Subscriber has not relied upon any representation or other information (oral or
written) other than as contained in documents or answers to questions so
furnished to the Subscriber or his Advisors by the Company;
(m) the Subscriber is unaware of, and in no way relying on, any form of
general solicitation or general advertising in connection with the offer and
sale of the Shares and Warrants;
(n) the Subscriber has such knowledge and experience in financial, tax, and
business matters so as to enable him to utilize the information made available
to him in connection with the offering of the Shares and Warrants to evaluate
the merits and risks of an investment in the Shares and Warrants and to make an
informed investment decision with respect thereto;
(o) the Subscriber is not relying on the Company respecting the tax and
other economic considerations of an investment in the Shares and Warrants, and
the Subscriber has relied on the advice of, or has consulted with, only his own
Advisors;
(p) the Subscriber is acquiring the Shares and Warrants solely for his own
account for investment and not with a view to distribution, other than in
accordance with the terms hereof;
(q) the Subscriber must bear the economic risk of the investment
indefinitely because none of the Shares and Warrants may be sold, hypothecated
or otherwise disposed of unless subsequently registered under the Act and
applicable state securities laws or an exemption from registration is available;
<PAGE>
4
(r) the Subscriber has adequate means of providing for its current needs
and foreseeable contingencies and has no need for its investment in the Shares
and Warrants to be liquid;
(s) the Subscriber has completed accurately the Subscriber Questionnaire
attached hereto as Exhibit A and meets the requirements of at least one of the
---------
suitability standards for an "accredited investor;" and
(t) the Subscriber: (u) if a natural person represents that the Subscriber
has reached the age of 21 and has full power and authority to execute and
deliver this Subscription Agreement and all other related agreements or
certificates and to carry out the provisions hereof and thereof; (v) if a
corporation, partnership, association, joint stock company, trust,
unincorporated organization or other entity represents that such entity was not
formed for the specific purpose of acquiring the Shares and Warrants, such
entity is validly existing under the laws of the state of its organization, the
consummation of the transactions contemplated hereby is authorized by, and will
not result in a violation of state law or its charter or other organizational
documents, such entity has full power and authority to execute and deliver this
Subscription Agreement and all other related agreements or certificates and to
carry out the provisions hereof and thereof, this Subscription Agreement has
been duly authorized by all necessary action, this Subscription Agreement has
been duly executed and delivered on behalf of such entity and is a legal, valid
and binding obligation of such entity; and (w) if executing this Subscription
Agreement in a representative or fiduciary capacity, represents that it has full
power and authority to execute and deliver this Subscription Agreement in such
capacity and on behalf of the subscribing individual, ward, partnership, trust,
estate, corporation, or other entity for whom the Subscriber is executing this
Subscription Agreement, and such individual, ward, partnership, trust, estate,
corporation, or other entity has full right and power to perform pursuant to
this Subscription Agreement and make an investment in the Company, and that this
Subscription Agreement constitutes a legal, valid and binding obligation of such
entity; and
2.2 Representations and Warranties by the Company.
---------------------------------------------
(a) Organization and Qualification: The Company and each subsidiary of the
Company (each, a "Subsidiary" and collectively, the "Subsidiaries"), is a
corporation duly organized and existing in good standing under the laws of their
respective jurisdiction of incorporation and each has the power to own its
property and to carry on its business as now being conducted. The Company and
each Subsidiary is duly qualified to do business and is in good standing in each
jurisdiction in which the nature of the business conducted or property owned by
it makes such qualification necessary.
<PAGE>
5
(b) Due Authorization: The execution and delivery of this Subscription
Agreement, the Registration Rights Agreement and such further documentation
contemplated to be executed under each of such agreements, including, but not
limited to, the issuance and sale of the Shares, any Additional Shares (as
hereinafter defined), the Warrants and any Additional Warrants (as hereinafter
defined) by the Company, and compliance by the Company with all the provisions
of this Subscription Agreement and the Registration Rights Agreement (i) are
within the corporate power and authority of the Company, (ii) do not require the
approval or consent of the stockholders of the Company (except for any approval
or consent which has been obtained prior to the date hereof) and (iii) have been
duly authorized by all requisite corporate action and proceedings on the part of
the Company. This Subscription Agreement, the Registration Rights Agreement and
the Warrants have been duly executed and delivered by the Company. Each such
document constitutes a valid and binding obligation of the Company, enforceable
in accordance with its respective terms, except that (i) such enforcement may be
subject to bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect relating to creditors' rights and (ii) the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought. The Company has furnished
to the Subscriber true and correct copies of the Company's certificate of
incorporation and by-laws as in effect on the date of this Subscription
Agreement.
(c) Legal Compliance: The Company and each Subsidiary is (i) in material
compliance with all applicable laws and regulations in the jurisdictions in
which it conducts business and (ii) no material adverse consequences are known,
filed or commenced against the Company or any Subsidiary with respect to any
failure so to comply, except where singly or in the aggregate of the foregoing
clauses (i) and/or (ii), noncompliance would not have material adverse
consequences. The foregoing is subject to the limitation that substantial
amounts are owed by the Company and its Subsidiaries, which can only be paid
assuming adequate financing is continually obtained. The failure to pay such
amounts would have a material adverse effect on the Company and its Subsidiaries
and could result in the bankruptcy of the Company and its Subsidiaries.
(d) Accuracy of Information: Information furnished in writing by the
Company and each Subsidiary, or any of their representatives, to the Subscriber
in connection with the transactions contemplated by this Subscription Agreement,
and the Company's reports and registration statements filed with the SEC do not
contain any material misstatement of fact, or omission of any material fact
required to be stated therein or otherwise disclosed so as to make the
statements therein not misleading.
(e) Litigation: There is no action, suit or proceeding pending against the
Company or any of its Subsidiaries, properties or assets by or before any court,
arbitrator or governmental body, department, commission, board, bureau, agency
or instrumentality.
<PAGE>
6
(f) Governmental Consents, Etc.: Except as obtained or made, the Company is
not required to obtain any consent, approval or authorization of, or to make any
declaration or filing with, any governmental authority as a condition to or in
connection with the valid execution, delivery and performance of this
Subscription Agreement and the Registration Rights Agreement and the valid
offer, issue, sale or delivery of the Shares, any Additional Shares, the
Warrants and any Additional Warrants, or the performance by the Company of its
obligations in respect thereof, except for any filings required to effect any
registration pursuant to the Registration Rights Agreement.
(g) Investment Company Act: The Company is not an "investment company" or
an "affiliated person" thereof or an "affiliated person" of any such "affiliated
person," as such terms are defined in the Investment Company Act of 1940, as
amended.
(h) Taxes: The Company and each Subsidiary has filed all material tax
returns which are required to be filed and has paid or caused to be paid all
material taxes as shown on said returns and on all assessments received by it to
the extent that such taxes have become due, or the validity or amount of which
is being contested in good faith by appropriate proceedings and with respect to
which adequate reserves have been set aside. The Company and each Subsidiary has
paid, or has established adequate reserves, for all material federal, state and
local tax liabilities applicable to the Company and each Subsidiary for all
fiscal years which have not been examined and reported on by the taxing
authorities (or closed by applicable statutes). For the purpose of this
Subscription Agreement, "tax" or "taxes" means any federal, state, local or
foreign income, gross receipts, windfall profits, severance, property,
production, sales, use, transfer, gains, license, excise, employment, payroll,
withholding, value added, estimated, alternative or add on minimum tax, or any
other tax, custom, duty, governmental fee or other like assessment or charge of
any kind whatsoever, together with any interest or any penalty, addition to tax
or additional amount imposed by any governmental authority.
(i) Conflicting Agreements and Charter Provisions: None of (i) the
execution and delivery of this Subscription Agreement and the Registration
Rights Agreement and the issuance of the Shares, any Additional Shares, the
Warrants and any Additional Warrants, (ii) the fulfillment of and compliance
with the terms and provisions of this Subscription Agreement, the Registration
Rights Agreement, the Warrants and the Additional Warrants, will conflict with
or results in or will (with or without the giving of notice or lapse of time or
both) result in a breach of the terms, conditions or provisions of, or give rise
to a right of termination under, or give rise to a right of payment or
compensation under, or constitute a default under, or result in any violation
of, the certificate of incorporation or by-laws of the Company or any mortgage,
agreement, instrument, indenture, order, judgment, decree, statute, law, rule or
regulation to which the Company or any of its properties is subject.
<PAGE>
7
(j) Capitalization: The Form 10-QSB filed for the period ended September
30, 1997 sets forth as of the date of this Subscription Agreement and prior to
the issuance of the Shares and the Warrants, (i) all classes of authorized
capital stock of the Company (collectively, the "Capital Stock"), (ii) the
respective amount authorized for each such class, and (iii) the issued and
outstanding amount of each such class (including such amounts subscribed and
approved for issuance but not yet issued by the Company's transfer agent),
except for the aggregate of 400,000 shares of Common Stock of the Company
subscribed by five investors and approved for issuance but not yet issued by the
Company's transfer agent, as evidenced in Exhibit F attached hereto. All of the
---------
outstanding shares of the Capital Stock have been validly issued and are fully
paid and nonassessable. No class of Capital Stock of the Company is entitled to
preemptive rights. Except as disclosed therein and except as expressly provided
for in this Subscription Agreement, as of the date of this Subscription
Agreement, there are no outstanding options, warrants, scrip, rights to
subscribe to, antidilution rights, calls or commitments of any character
whatsoever relating to, or securities or rights convertible into, shares of any
class of Capital Stock of the Company, or contracts, commitments, understandings
or arrangements by which the Company or any stockholder of the Company is or may
become bound relating to the issuance or transfer of any shares of Capital Stock
or options, warrants or rights to purchase or acquire any shares of Capital
Stock of the Company or relating to the voting of any shares of Capital Stock of
the Company. The reverse-split of Common Stock to be effected as a condition to
this Subscription Agreement (the "Reverse Stock Split") whereby for each
thirteen shares of Common Stock previously held, such holder will be entitled to
one share of Common Stock plus a three year warrant exercisable for one share of
post-split Common Stock at an exercise price of $15.00 per share (the "Reverse
Split Warrants"), was duly authorized and all necessary action on the part of
the Company has been taken, including, but not limited to, any and all corporate
action and any and all filings required under federal or state securities laws
and with any securities exchange or quotation system on which the Company's
Common Stock is listed or quoted, as the case may be. The Shares, any Additional
Shares and the shares of Common Stock issuable upon exercise of the Warrants,
any Additional Warrants and the Reverse Split Warrants will be duly authorized,
validly issued and outstanding, fully paid and nonassessable. Except for the
make-whole arrangement granted by the Company in connection with stockholder
consent for the Reverse Split, a copy of which is attached hereto as Exhibit G,
---------
and the Reverse Stock Split Warrants, the stockholders of the Company have not
received any additional consideration or rights in connection with the Reverse
Stock Split.
(k) Brokers: Except for Interfinance Inv. Co. Ltd., the Company has not
engaged any finder, broker or investment adviser in connection with the
transactions contemplated hereby.
(l) Elections and Appointments: All necessary corporate action has been
taken by the Company to duly elect Messrs. Ulrich Ernst and Klaus Brenner to the
Board of
<PAGE>
8
Directors of the Company, and to duly appoint Mr. Ulrich Ernst as Chairman of
the Board of Directors and Chief Executive Officer and Mr. Klaus Brenner as
Treasurer. Mr. Keith Rhea was also elected as Chief Operating Officer of the
Company, but no representation is made as to his continuing presence.
(m) TelePath Limited: The share agreement, dated November 7, 1997, between
the Company and TelePath Ltd. ("Telepath Agreement") has been validly terminated
and the Company has been released from any and all obligations thereunder. No
shares of Common Stock were issued by the Company pursuant to the Telepath
Agreement and the Company has no further obligation with respect thereto.
(n) Subsidiaries: All of the issued and outstanding shares of capital stock
or other equity interests of the Company's Subsidiaries are owned beneficially
and of record by the Company free and clear of any liens, charges or
encumbrances.
30 ACKNOWLEDGMENTS; REPRESENTATIONS AND COVENANTS OF THE SUBSCRIBER WITH
RESPECT TO U.S. SECURITIES LAWS; SECURITIES TRANSFERS.
(a) The Subscriber understands that the Shares and Warrants have not been
registered (i) under the U.S. Securities Act of 1933, as amended (the
"Securities Act") with the SEC in reliance upon the exemption from such
registration requirements afforded by Regulation S under the Securities Act,
governing the offer and sale of securities that occur outside the U.S., or (ii)
with any state securities commission. The Subscriber understands that the Shares
and Warrants may not be offered, sold, transferred or otherwise disposed of in
the U.S., its territories or possessions, or to persons known to be residents of
the U.S. or to a "U.S. person" within the meaning of Regulation S under the
Securities Act ("U.S. Person"; see the definition of U.S. Person annexed hereto
as Exhibit B) until the effectiveness of a registration statement registering
---------
the Shares and Warrants under the Securities Act or an exemption from the
registration requirements under the Securities Act is available.
(b) The Subscriber hereby represents and Warrants that the Subscriber is
not a resident of the U.S. and is not otherwise deemed to be a U.S. Person.
(c) The Subscriber agrees that if it should resell or transfer the Shares
and Warrants it will do so only (a) outside the United States in compliance with
Rule 904 under the Securities Act, (b) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if available) or
other applicable exemption under the Securities Act and state securities laws;
(c) in a transaction that does not require registration under the Securities Act
or any applicable state laws, or (d) pursuant to a registration statement that
has been declared effective under the Securities Act.
<PAGE>
9
(d) The Subscriber agrees that it will give each person to whom it
transfers the Shares and Warrants notice of any restrictions on transfer of such
Shares and Warrants, if then applicable. If a transfer of Shares and Warrants is
proposed to be made, the holder (or beneficial holder, as the case may be) will
be required to furnish to the Company or the Company's transfer agent, such
certifications, legal opinions, or other information as may reasonably be
requested to confirm that the proposed transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act.
(e) Each certificate representing the Shares and Warrants will bear the
following legend (unless such Shares and Warrants have been transferred pursuant
to a registration statement that has been declared effective under the
Securities Act):
THE COMMON STOCK EVIDENCED HEREBY HAS NOT BEEN REGISTERED UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR
TO, OR FOR THE ACCOUNT OR BENEFIT OF A U.S. PERSON EXCEPT AS SET FORTH IN
THE FOLLOWING SENTENCE. THE HOLDER HEREOF AGREES THAT: (1) IT WILL NOT
RESELL OR OTHERWISE TRANSFER THE COMMON STOCK EVIDENCED HEREBY EXCEPT (A)
OUTSIDE THE UNITED STATES IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES
ACT, (B) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144
UNDER THE SECURITIES ACT (IF AVAILABLE) OR OTHER THEN APPLICABLE EXEMPTION
UNDER THE SECURITIES ACT AND STATE SECURITIES LAWS, (C) IN A TRANSACTION
THAT DOES NOT REQUIRE REGISTRATION UNDER THE SECURITIES ACT OR ANY
APPLICABLE STATE LAWS, OR (D) PURSUANT TO A REGISTRATION STATEMENT WHICH
HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT (AND WHICH CONTINUES
TO BE EFFECTIVE AT THE TIME OF SUCH TRANSFER); (2) PRIOR TO ANY SUCH
TRANSFER (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 1(D) ABOVE), IT WILL
FURNISH TO THE COMPANY OR THE TRANSFER AGENT FOR THE COMMON STOCK SUCH
CERTIFICATIONS, LEGAL OPINIONS, OR OTHER INFORMATION AS THE COMPANY OR SUCH
TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS
BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT
TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OR STATE SECURITIES
LAWS; AND (3) IT WILL DELIVER TO EACH PERSON TO WHOM THE COMMON STOCK
EVIDENCED HEREBY IS
<PAGE>
10
TRANSFERRED (OTHER THAN A TRANSFER PURSUANT TO CLAUSE 1(D) ABOVE) A NOTICE
SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS
"UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY
REGULATION S UNDER THE SECURITIES ACT.
(f) The Subscriber understands and agrees that any disposition of the
Shares and Warrants in violation of this Subscription Agreement shall be null
and void, and that no transfer of the Shares and Warrants likely will be made by
the Company or the Company's transfer agent upon the Company's stock transfer
books unless there has been compliance with the terms of this Subscription
Agreement. The Subscriber also understands and agrees that the Company likely
will issue stop transfer instructions to the Company's transfer agent
instructing such transfer agent not to transfer the certificate(s) evidencing
the Shares and Warrants to U.S. Persons, and that any such stop transfer
instructions will only be removed to permit transfers made in compliance with
the terms of this Subscription Agreement.
(g) The Subscriber (i) acknowledges that the Shares and Warrants have not
been registered under the Securities Act and that the Company has an obligation
to so register any of the Shares and Warrants only in accordance with the
Registration Rights Agreement, (ii) represents and Warrants that the Subscriber
is acquiring beneficial ownership of the Shares and Warrants for the
Subscriber's own account and not for the account or benefit of a U.S. Person or
other person, and (iii) agrees that the Subscriber will not transfer or
otherwise dispose of any of the Shares and Warrants unless such transfer or
other disposition is registered under the Securities Act or is in accordance
with Regulation S under the Securities Act or otherwise is exempt from
registration under the Securities Act.
<PAGE>
11
40 COVENANTS.
4.1 Covenants of the Subscriber. The Subscriber acknowledges that in
---------------------------
making its decision to subscribe for the Shares and Warrants, it has not relied
upon the advice of any adviser to the Company or of any other third party.
4.2 Covenants of the Company.
------------------------
(a) Use of Proceeds: The proceeds of the sale of the Shares will be used
by the Company for general corporate purposes, including, but not limited to,
the satisfaction of liabilities.
(b) Reservation of Shares to be Issued upon Exercise of Warrants: The
Company will reserve the aggregate number of shares issuable upon exercise of
the Warrants and any Additional Warrants, and upon exercise of the Warrants and
any Additional Warrants such shares issued thereof will be validly issued, fully
paid and non-assessable, with no personal liability attaching to the ownership
thereof.
50 RIGHT TO REQUEST PURCHASE OF ADDITIONAL SHARES.
(a) From the date hereof through the sixth monthly anniversary hereof, the
Company shall have the right to request the Subscriber to subscribe for up to
500,000 shares of Common Stock (the "Additional Shares") on the same terms and
conditions as those set forth herein (including without limitation, the same
purchase price per share) by giving the Subscriber notice in writing to the
address specified on the signature page hereof no less than 15 business days
prior to the proposed purchase of such shares of Common Stock (the "Additional
Closing"); provided that at each such Additional Closing the Company shall issue
to the Subscriber the same number and type of Warrants for each Additional
Share (the "Additional Warrants") as is issuable to Subscriber at the Closing;
and provided further that the Subscriber shall have no obligation to purchase
any Additional Shares if on the date of any Additional Closing (i) any of the
representations and warranties contained herein shall be untrue in any material
respect, (ii) the Company is in breach of this Subscription Agreement, the
Registration Rights Agreement , any Warrant or Additional Warrant previously
issued to the Subscriber, (iii) the TMI Agreement shall not have been
terminated or renegotiated in form and substance satisfactory to the Subscriber,
(iv) (A) the Company or its Subsidiaries shall have voluntarily commenced any
proceeding under applicable bankruptcy, insolvency or liquidation of similar
laws, (B) an involuntary proceeding shall have been initiated under any such law
with respect to the Company, any of its Subsidiaries or their respective assets,
(C) a receiver, trustee, custodian, sequestrator or similar official shall have
been appointed with respect to the Company, any of its Subsidiaries or their
respective assets, (D) the Company or its Subsidiaries shall have made a general
assignment for the benefit of their respective creditors or (E) the Company or
any third party shall have taken any
<PAGE>
12
action with respect to any of the foregoing, (v) the Company or a substantial
part of its assets shall have been sold, transferred or assigned to a third
party or the Company shall have entered into an agreement to effect any of the
foregoing (except for the possible sale of any other assets heretofore disclosed
in writing to Subscriber) or (vi) there shall have occurred an event or
condition which makes the survival of the Company and its Subsidiaries as a
going concern unlikely, or the Company has knowledge that any such event or
condition is reasonably likely to occur.
(b) Together with the first notice given hereunder, the Company shall send
to the Subscriber evidence in writing of the termination or renegotiation of the
TMI Agreement.
(c) At any Additional Closing, the Company shall deliver to the Subscriber
(i) the requisite number of Additional Shares and Additional Warrants and (ii) a
certificate executed by a duly authorized officer of the Company to the effect
that (A) the Company's representations and warranties contained herein are true
and correct as of the date of such Additional Closing, (B) the Company is not in
breach of this Subscription Agreement, the Registration Rights Agreement or any
Warrant or Additional Warrant previously issued to the Subscriber and (C) no
event or condition shall have occurred which would entitle Subscriber not to
purchase Additional Shares pursuant to the provision of Section 5(a) hereof; and
the Subscriber shall deliver to the Company a certificate executed by a duly
authorized officer of the Subscriber to the effect that the representations and
warranties of the Subscriber contained herein are true and correct as of the
date of such Additional Closing.
60 FURTHER ASSURANCES. Each of the parties hereto agrees to execute and
deliver such documents, make such filings and do all such things as are required
by, and to comply with the provisions of the Securities Act, any other
applicable securities legislation and any orders, policies, rules or regulations
of the SEC, the National Association of Securities Dealers, Inc. or other
relevant regulatory authorities concerning the issuance by the Company and the
purchase, holding and resale by the Subscriber of the Shares and Warrants.
70 MODIFICATION. This Subscription Agreement shall not be modified or
waived except by an instrument in writing signed by the party against whom any
such modification or waiver is sought.
80 ASSIGNABILITY. This Subscription Agreement and the rights and
obligations hereunder are not transferable or assignable by the Subscriber.
90 BLUE SKY QUALIFICATION. The Subscriber's right to purchase Shares and
Warrants under this Subscription Agreement are expressly conditioned upon the
exemption from qualification of the offer and sale of the Shares and Warrants
from applicable Federal
<PAGE>
13
and state securities laws. The Company shall not be required to qualify this
transaction under the securities laws of any jurisdiction and, should
qualification be necessary, the Company shall be released from any and all
obligations to maintain its offer, and may rescind any sale contracted, in the
jurisdiction.
100 SURVIVAL; INDEMNIFICATION.
(a) All of the covenants, representations and warranties of the Subscriber
contained herein shall survive the execution and delivery of this Subscription
Agreement for a period of one year from the date hereof. The Subscriber agrees
to indemnify and hold harmless the Company and each director, officer, employee,
agent or representative thereof from and against any and all loss, damage or
liability and related costs and expenses (including but not limited to,
reasonable attorneys' fees and costs of investigation) due to or arising out of
a breach of any covenant, representation or warranty made by him in this
Subscription Agreement.
(b) All of the covenants, representations and warranties of the Company
contained herein shall survive the execution and delivery of this Subscription
Agreement for a period of one year from the date hereof. The Company agrees to
indemnify and hold harmless the Subscriber from and against all losses
(including reasonable attorneys fees) which are incurred or suffered by reason
of (i) the breach by the Company of any of the representations or warranties
made by the Subscriber herein or any document incorporated herein by reference
or (ii) by reason of the Company to comply with any of the covenants or
agreements contained herein or any document incorporated herein by reference at
or after the Closing.
110 AGREEMENT. The Subscriber agrees that by executing this subscription
agreement an irrevocable agreement of purchase and sale of the Shares and
Warrants shall be created upon its acceptance by the Company. This Subscription
Agreement and the Registration Rights Agreement constitute the entire agreement
between the parties hereto with respect to the subject matter hereof and may be
amended only by a writing executed by all parties.
120 NOTICES. All notices or other communications given or made hereunder
shall be in writing and shall be delivered or mailed by registered or certified
mail, return receipt requested, postage prepaid to the Subscriber at the address
set forth on the signature page hereof, and to the Company at the address set
forth in the first paragraph hereof.
130 OFFERING RESTRICTIONS. The Shares and Warrants have not been
registered under the Securities Act and the Subscriber agrees that it will not
sell any of the Shares and Warrants within the U.S. or to, or for the account or
benefit of, U.S. Persons except pursuant to an effective registration statement
registering the Shares and Warrants under
<PAGE>
14
the Securities Act, or pursuant to an exemption from the registration
requirements of the Securities Act.
140 GOVERNING LAW. Notwithstanding the place where this Subscription
Agreement may be executed by any of the parties hereto, the parties expressly
agree that all the terms and provisions hereof shall be governed by, and
constituted in accordance with, the laws of the State of Delaware without regard
to the choice of law principles thereof.
150 VALIDITY. The holding of any provision of this Subscription Agreement
to be invalid or unenforceable by a court of competent jurisdiction shall not
affect any other provision of this Subscription Agreement, which shall remain in
full force and effect.
160 TIME. Time shall be of the essence hereof.
170 INUREMENT. This Subscription Agreement shall inure to the benefit of
and be binding upon the respective legal representatives and successors of the
parties.
180 COUNTERPARTS. This Subscription Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this subscription by
signing any of such counterpart and delivering the same by telex, telecopy,
telegraph, cable or otherwise in writing (each delivery by any of such means to
be deemed to be "in writing" for purposes of this subscription agreement).
_____________________________________
Subscriber: Medfield Investment S.A.
By: /s/ David L. Deck
-----------------
Name:____________________________
Title:___________________________
Subscriber's Address for Notices and
Delivery of Securities:
____________________________________
____________________________________
____________________________________
<PAGE>
15
With a copy to:
Wuersch & Gering LLP
330 Madison Avenue, 14th Floor
New York, NY 10017
Fax (212) 856-0829
Subscription accepted as _______________
UTG COMMUNICATIONS INTERNATIONAL INC.
By: /s/ Ueli Ernst
---------------
Name: U. Ernst
Title: Director
<PAGE>
EXHIBIT A TO SUBSCRIPTION AGREEMENT
INVESTOR QUESTIONNAIRE
----------------------
ALL INVESTORS MUST INITIAL THE FOLLOWING:
- ----------------------------------------
x The undersigned understands that the representations contained in this
- -
Investor Questionnaire qualifying or disqualifying it as an accredited
investor as that term is defined in Rule 501 of Regulation D promulgated
under the Act are made for the purpose of inducing a sale of securities to
the undersigned. The undersigned understands and acknowledges that the
Company will rely upon such representations. The undersigned hereby
represents that the statement or statements initialed below are true and
correct in all respects, and the undersigned will notify the Company
immediately of any material change in any of the information contained in
such statement or statements. The undersigned understands that any false
representations may constitute a violation of law and that any company or
person who suffers damages as a result of such false representations may
have a claim against it for damages.
AN INVESTOR SHOULD INITIAL ANY OF THE FOLLOWING STATEMENTS THAT APPLY TO IT:
- ---------------------------------------------------------------------------
x (a) The undersigned certifies that it is an accredited investor because it
_ is either (i) a bank as defined in Section 3(a)(2) of the Act, or savings
and loan association or other institution as defined in Section 3(a)(5)(a)
of the Act whether acting in its individual or fiduciary capacity, (ii) a
broker or dealer registered pursuant to Section 15 of the Securities
Exchange Act of 1934, (iii) an insurance company as defined in Section
2(13) of the Act, (iv) an investment company registered under the
Investment Company Act of 1940 or a business development company registered
under the Investment Company Act of 1940 or a business development company
as defined in Section 2(a)(48) of such Act, (v) a small business investment
company licensed by the United States Small Business Administration under
Section 301(c) or (d) of the Small Business Investment Act of 1958, (v) a
plan established and maintained by a state, its political subdivisions, or
any agency or instrumentality of a state or its political subdivisions, for
the benefit of its employees, if such plan has total assets in excess of
$5,00,000, or (vii) an employee benefit plan within the meaning of the
Employee Retirement Income Security Act of 1974 if investment decisions are
made by a plan fiduciary, as defined in Section 3(21) of such Act, which is
either a bank, savings and loan association, insurance company, or
registered investment adviser, or an employee benefit plan that has total
assets in excess of $5,000,000 or, if a self-directed plan, with investment
decisions made solely by persons that are accredited investors.
<PAGE>
2
(b) The undersigned certifies that it is an accredited investor because it
___ is a private business development company as defined in Section 202(a)(22)
of the Investment Advisers Act of 1940.
x (c) The undersigned certifies that it is an accredited investor because it
___ is an organization described in Section 501(c)(3) of the Internal Revenue
Code, a corporation, business trust, or partnership with total assets in
excess of $5,000,000.
x (d) The undersigned certifies that it is an accredited investor because it
___ is a trust, with total asses in excess of $5,000,000, whose purchases of
securities are directed by a person who has such knowledge and experience
in financial and business matters that he/she is capable of evaluating the
merits and risks of an investment in the Company.
(e) The undersigned certifies that it is an accredited investor because it
___ is an entity in which all of the equity owners are accredited investors.
Each such equity owner must also properly complete and submit a Investor
Questionnaire as if such equity owner was a shareholder. If this section
applies a questionnaire for individuals is available upon request from the
Company.
<PAGE>
1
EXHIBIT B TO SUBSCRIPTION AGREEMENT
Definition of "U.S. Person"
---------------------------
Regulation S. Rule 902(o) provides:
(1) "U.S. Person" means:
(i) Any natural person resident in the United States;
(ii) Any partnership or corporation organized or incorporated
under the laws of the United States;
(iii) Any estate of which any executor or administrator is a
U.S. person;
(iv) Any trust of which any trustee is a U.S. person;
(v) Any agency or branch of a foreign entity located in the
United States;
(vi) Any non-discretionary account or similar account (other
than an estate or trust) held by a dealer or other fiduciary for the
benefit or account of a U.S. person;
(vii) Any discretionary account or similar account (other than
an estate or trust) held by a dealer or other fiduciary organized,
incorporated, or (if an individual) resident in the United States; and
(viii) Any partnership or corporation if: (A) organized or
incorporated under the laws of any foreign jurisdiction; and (B)
formed by a U.S. person principally for the purpose of investing in
securities not registered under the Act, unless it is organized or
incorporated, and owned, by accredited investors (as defined in Rule
501(a) who are not natural persons, estates or trusts.
(2) Notwithstanding paragraph (o)(1), of this rule, any discretionary
account or similar account (other than an estate or trust) held for the benefit
or account of a non-U.S. person by a dealer or other professional fiduciary
organized, incorporated, or (if an individual) resident in the United States
shall not be deemed a "U.S. person."
<PAGE>
2
(3) Notwithstanding paragraph (o)(1), any estate of which any professional
fiduciary acting as executor or administrator is a U.S. person shall not be
deemed a U.S. person if:
(i) An executor or administrator of the estate who is not a U.S.
person has sole or shared investment discretion with respect to the
assets of the estate; and
(ii) The estate is governed by foreign law.
(4) Notwithstanding paragraph (o)(1), any trust of which any professional
fiduciary acting as trustee is a U.S. person shall not be deemed a U.S. person
if a trustee who is not a U.S. person has sole or shared investment discretion
with respect to the trust assets, and no beneficiary of the trust (and no
settlor if the trust is revocable) is a U.S. person.
(5) Notwithstanding paragraph (o)(1), an employee benefit plan established
and administered in accordance with the law of a country other than the United
States and customary practices and documentation of such country shall not be
deemed a U.S. person.
(6) Notwithstanding paragraph (o)(1), any agency or branch of a U.S.
person located outside the United States shall not be deemed a "U.S. person" if:
(i) The agency or branch operates for valid business reasons;
and
(ii) The agency or branch is engaged in the business of insurance
or banking and is subject to substantive insurance or banking
regulations, respectively, in jurisdictions where located.
(7) The International Monetary Fund, the International Bank of
Reconstruction and Development, the Inter-American Development Bank, the Asian
Development Bank, the African Development Bank, the United Nations, and their
agencies, affiliates and pension plans, and any other similar international
organizations, their agencies, affiliates and pension plans shall not be deemed
"U.S. persons."
For the purposes of the foregoing "United States" means the United
States of America, its territories and possessions, any State of the United
States, and the District of Columbia.
<PAGE>
3
Exhibit C: Warrant
Exhibit D: Registration Rights Agreement
Exhibit E: Legal Opinion
Exhibit F: List of 5 investors regarding 400,000 shares subscribed but not yet
issued
Exhibit G: Make-whole Agreement
<PAGE>
Exhibit 10.28
-------------
CONTRACT
--------
between
Medfield Investment S.A.
Steinhaldenring 8, CH-8954 Geroldswil, Switzerland
as Investor
and
UTG Communications International, Inc.
17 Cattano Avenue, Morristown, New Jersey 07960, USA
as Seller
Referring to the Subscription Agreement dated January 16, 1998, both parties
hereby agree and confirm to extend the terms of this agreement so that the
Investor and the Seller can call the options until September 30, 1998 and that
the Investor can buy the shares until that time.
All other clauses and conditions remain the same.
The Seller The Investor
UTG Communications International, Inc. Medfield Investment S.A.
Date: May 15, 1998 Date: 16 May '98
Signature: Signature
/s/ U. Ernst /s/ D.L. Deck
- --------------------------- -------------
<PAGE>
EXHIBIT 10.29
Void after 5:00 p.m. New York, New York time
on [fifth anniversary of date of issuance]
Warrant to Purchase ___________ Shares of Common Stock
THIS WARRANT HAS BEEN ISSUED PURSUANT TO REGULATION S PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). NEITHER THIS WARRANT NOR ANY
SHARES ISSUED UPON THE EXERCISE OF THIS WARRANT (THE "SHARES") HAVE BEEN
REGISTERED UNDER THE ACT OR ANY STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE UNITED STATES OR TO A "U.S.
PERSON", AS THAT TERM IS DEFINED IN REGULATION S (A "U.S. PERSON"), UNLESS
REGISTERED UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS, OR AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
THIS WARRANT MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S. PERSON UNLESS THIS
WARRANT HAS BEEN REGISTERED UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES
LAWS OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
_________________________________________
WARRANT TO PURCHASE COMMON STOCK
OF
UTG Communications International, Inc.
a Delaware Corporation
This is to certify that, FOR VALUE RECEIVED, Medfield S.A., a
corporation organized under the laws of Panama or assigns ("Holder"), is
entitled to purchase, subject to the provisions of this Warrant, from UTG
Communications International, Inc., a Delaware Corporation (the "Company"),
_____________ fully paid, validly issued and non-assessable shares of common
stock, $.00001 par value, of the Company ("Common Stock") at any time through
and including [fifth anniversary of date of issuance] ("Exercise Period"). The
Warrant Exercise Price shall be $[2.00] [3.00] [4.50] for each share of Common
Stock of the Issuer issuable upon the exercise of this Warrant. The number of
shares of Common Stock to be received upon the exercise of this Warrant and the
price to be paid for each share of Common
<PAGE>
received upon the exercise of this Warrant and the price to be paid for each
share of Common Stock may be adjusted from time to time as hereinafter set
forth. The shares of Common Stock deliverable upon such exercise, and as
adjusted from time to time, are hereinafter sometimes referred to as "Warrant
Shares" and the exercise price of a share of common stock in effect at any time
and as adjusted from time to time is hereinafter sometimes referred to as the
"Exercise Price."
(a) Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part at any time during the Exercise Period, and during the Exercise Period the
Holder shall have the right to exercise this Warrant into the kind and amount of
shares of Common Stock and other securities and property (including cash)
receivable by a holder of the number of shares of Common Stock into which this
Warrant might have been exercisable immediately prior thereto. This Warrant,
subject to the provisions hereof, may only be exercised by presentation and
surrender hereof to the Company at the European headquarters of the Company at
____________________________________________________, with the Exercise Form
annexed as Exhibit A hereto duly executed and accompanied by (i) payment of the
Exercise Price for the number of Warrant Shares specified in such form and (ii)
an opinion of counsel reasonably satisfactory to the Company to the effect that
the Warrant and the Warrant Shares have been registered under the Act or are
exempt from such registration. As soon as practicable after each such exercise
of the Warrant, but not later than three (3) business days from the date of such
exercise, the Company shall issue and deliver to the Holder a certificate or
certificates for the Warrant Shares issuable upon such exercise, registered in
the name of the Holder or its designee; provided however, that, unless the
Warrant Shares are registered under the Act and any applicable blue sky or state
securities laws or an exemption from such registration is available, the Company
will not deliver any Warrant Shares within the United States or to any U.S.
Person. The Common Stock and any Warrants issued in exchange for this Warrant
shall be issued with such restrictive legends as are required by the Act or the
Regulations thereunder. If this Warrant should be exercised in part only, the
Company shall, upon surrender of this Warrant for cancellation, execute and
deliver a new Warrant evidencing the rights of the Holder thereof to purchase
the balance of the Warrant Shares purchasable thereunder. Upon receipt by the
Company of this Warrant, in proper form for exercise and accompanied (i) by
payment of the Exercise Price, (ii) the documentation set forth in this
paragraph (a) and (iii) delivery instructions consistent with this paragraph
(a), the Holder shall be deemed to be the holder of record of the shares of
Common Stock issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such shares of Common Stock shall not then by physically delivered
to the Holder.
(b) Reservation of Shares. The Company shall at all times reserve for
---------------------
issuance and/or delivery upon exercise of this Warrant such number of shares of
its Common Stock as shall be required for issuance and delivery upon exercise of
the Warrant.
(c) Fractional Shares. No fractional shares or script representing
-----------------
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share
2
<PAGE>
called for upon any exercise hereof, the shall pay to the Holder an amount in
cash equal to such fraction multiplied by the current market value of a share,
determined as follows:
(1) If the Common Stock is listed on a National Securities
Exchange or admitted to unlisted trading privileges on such exchange or listed
for trading on the NASDAQ system, the current market value shall be the last
reported sale price of the common stock on such exchange or system on the last
business day prior to the date of exercise of this Warrant or if no such sale is
made on such day, the average closing bid and asked prices for such day on such
exchange or system; or
(2) If the Common Stock is not so listed or admitted to unlisted
trading privileges, the current market value shall be the mean of the last
reported bid and asked prices reported by the National Quotation Bureau, Inc. on
the last business day prior to the date of the exercise of this Warrant; or
(3) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the current
market value shall be an amount not less than book value thereof as at the end
of the most recent fiscal year of the Company ending prior to the date of the
exercise of the Warrant, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
(d) Exchange, Transfer, Assignment or Loss of Warrant. This Warrant
-------------------------------------------------
is exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company at its European headquarters for other
warrants of different denominations entitling the holder thereof to purchase in
the aggregate the same number of shares of Common Stock purchasable hereunder.
Upon surrender of this Warrant to the Company at its principal office or at the
offices of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed and funds sufficient to pay any transfer tax, the Company
shall, without charge, execute and deliver a new Warrant in the name of the
assignee named in such instrument of assignment and this Warrant shall promptly
be canceled. The term "Warrant" as used herein includes any Warrants into which
this Warrant may be divided or exchanged. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Warrant, if mutilated, the Company will execute and deliver a new Warrant of
like tenor and date. Any such new Warrant executed and delivered shall
constitute an additional contractual obligation on the part of the Company,
whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at
any time enforceable by anyone.
(e) Rights of the Holder. The Holder shall not, by virtue hereof, be
--------------------
entitled to any rights of a shareholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in the Warrant and
are not enforceable against the Company except to the extent set forth herein.
3
<PAGE>
(f) Anti-Dilution Provisions. The Exercise Price in effect at any
------------------------
time and the number and kind of securities purchasable upon the exercise of the
Warrants shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(1) In case the Company shall (i) declare a stock dividend or
make a distribution on its outstanding shares of Common Stock in shares of
Common Stock, (ii) subdivide or reclassify its outstanding shares of Common
Stock into a greater number of shares, or (iii) combine or reclassify its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect at the time of the record date for such dividend or distribution
or of the effective date of such subdivision, combination or reclassification
shall be adjusted so that it shall equal the price determined by multiplying the
Exercise Price by a fraction, the denominator of which shall be the number of
shares of Common Stock outstanding after giving effect to such action, and the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to such action. Such adjustment shall be made successively
whenever any event listed above shall occur.
(2) Whenever the Exercise Price payable upon exercise of each
Warrant is adjusted pursuant to Subsection (1) above, the number of shares
purchasable upon exercise of this Warrant shall simultaneously be adjusted by
multiplying the number of shares initially issuable upon exercise of this
Warrant by the Exercise Price in effect on the date hereof and dividing the
product so obtained by the Exercise Price, as adjusted.
(3) Whenever the Exercise Price is adjusted, as herein provided,
the Company shall promptly cause a notice setting forth the adjusted Exercise
Price and adjusted number of shares issuable upon exercise of each Warrant to be
mailed to the Holders, at their last addresses appearing in the Warrant
Register, and shall cause a certified copy thereof to be mailed to its transfer
agent, if any. The Company may retain a firm of independent certified public
accountants selected by the Board of Directors (who may be the regular
accountants employed by the Company) to make any computation required by this
Section (f), and a certificate signed by such firm shall be conclusive evidence
of the correctness of such adjustment.
(4) In the event that at any time, as a result of an adjustment
made pursuant to Subsection (1) above, the Holder of this Warrant thereafter
shall become entitled to receive any shares of the Company, other than Common
Stock, thereafter the number of such other shares so receivable upon exercise of
this Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Subsection (1) above.
(5) Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon exercise of this Warrant, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Agreement.
4
<PAGE>
(g) Officer's Certificate. Whenever the Exercise Price shall be
---------------------
adjusted as required by the provisions of Section (f), the Company shall
forthwith file in the custody of its Secretary or an Assistant Secretary at its
principal office and with its stock transfer agent, if any, an officer's
certificate showing the adjusted Exercise Price determined as herein provided,
setting forth in reasonable detail the facts requiring such adjustment,
including a statement of the number of additional shares of Common Stock, if
any, and such other facts as shall be necessary to show the reason for and the
manner computing such adjustment. Each such officer's certificate shall be made
available at all reasonable times for inspection by the holder or any holder of
a Warrant executed and delivered pursuant to Section (a) and the Company shall
forthwith after each such adjustment, mail a copy by certified mail of such
certificate to the Holder or any such holder.
(h) Notices to Warrant Holders. So long as this Warrant shall be
--------------------------
outstanding, (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock or (ii) if the Company shall offer to all the holders of
Common Stock for subscription or purchase by them any share of any class or any
other rights or (iii) if the capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale of all or substantially all
of the property and assets of the Company to another corporation or voluntary or
involuntary dissolution, liquidation or winding up of the Company shall be
effected, then in any such case, the Company shall cause to be mailed by
certified mail to the holder, at least ten days prior to the date specified in
(x) or (y) below, as the case may be, a notice containing a brief description of
the proposed action and stating the date on which (x) a record is to be taken
for the purpose of such dividend, distribution or rights, or (y) such
reclassification, reorganization, consolidation, merger, sale, dissolution,
liquidation or winding up is to take place and date, if any is to be fixed, as
of which the holders of the Common Stock or other securities shall receive cash
or other property deliverable upon such reclassification, reorganization,
consolidation, merger, conveyance, dissolution, liquidation or winding up.
Notwithstanding the above, the failure to give such notice shall not affect the
validity of any transaction for which the notice was required to be given.
(i) Reclassification, Reorganization or Merger. In case of any
------------------------------------------
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation, other than a merger with a subsidiary,
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant or in case of any sale to another corporation of the property of the
Company as an entirety, the Company shall, as a condition precedent to such
transaction, cause effective provisions to be made so that the Holder shall have
the right thereafter by exercising this Warrant at any time prior to the
expiration of the Warrant, to purchase the kind and amount of shares of stock
and other securities and property receivable upon such reclassification, capital
reorganization and other change, consolidation, merger or sale by a holder of
the number of
5
<PAGE>
shares of Common Stock which might have been purchased upon exercise of this
Warrant immediately prior to such reclassification, change, consolidation,
merger or sale. Any such provision shall include provision for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Warrant. The foregoing provisions of this Section (i) shall
similarly apply to successive reclassification, capital reorganizations and
changes of shares of Common Stock and to successive consolidations, mergers or
sales. In the event that in connection with any such capital reorganization and
any shares of Common Stock shall be issued in exchange, conversion,
substitution or payment, in whole or in part, for a security of the Company
other than Common Stock, any such issue shall be treated as an issue of Common
Stock covered by the provisions of Subsection (1) of Section (f) hereof.
(j) Callable Warrant. This Warrant may not be called by the Company
----------------
at any time.
(k) Assignment. This Warrant may only be assigned to a transferee who
----------
has executed an Assignment Form, substantially in the form of Exhibit B attached
hereto.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
and attested by the Undersigned, each being duly authorized, as of the date
below.
UTG Communications International, Inc.
By:____________________
___________, 1998
6
<PAGE>
EXHIBIT A
EXERCISE FORM
-------------
Dated:______________
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing ________________ shares of Common Stock and
hereby makes payment of _____________ in payment of the actual exercise price
thereof.
INSTRUCTIONS FOR REGISTRATION OF STOCK
--------------------------------------
Name
________________________________________________________________________________
(Please typewrite or print in block letters)
Address
________________________________________________________________________________
Signature_______________________________________________________________________
_____________________
<PAGE>
EXHIBIT B
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED,
hereby sells, assigns and transfers unto
Name
________________________________________________________________________________
(Please typewrite or print in block letters)
Address
________________________________________________________________________________
the right to purchase Common Stock represented by this Warrant to the extent of
___________________shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint ______________________________ Attorney, to
transfer the same on the books of the Company with full power of substitution in
the premises.
Date ____________________
Signature ______________________
<PAGE>
Exhibit 10.30
REGISTRATION RIGHTS AGREEMENT, dated as of this 12 day of March,
1998 (This "Agreement") among UTG Communications International, Inc., a Delaware
corporation (the "Company"), and Medfield Inc., a Panamanian corporation (the
"Investor").
Whereas, pursuant to the Subscription Agreement, the Investor has
agreed to purchase the Shares and a Warrant from the Company in accordance with
the terms and conditions set forth therein.
The Company and the Investor desire to enter into this Agreement to
provide certain registration rights with respect to the Shares and to the shares
of Common Stock issuable upon exercise or conversion of the Warrant.
Accordingly, the parties hereto agree as follows:
1. Certain Definitions.
-------------------
Capitalized terms not otherwise defined herein shall have the meaning
set forth in the Subscription Agreement between the foregoing parties, dated as
of even date herewith. As used in this Agreement, the following terms shall
have the meanings ascribed to them below:
"Closing Date" shall mean the closing date of the Subscription
------------
Agreement.
"Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency then administering the Securities Act and other federal
securities laws.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at any time.
"Holder" or "Holders" shall mean the Investor and/or any party who
------ -------
shall hereafter acquire Registrable Securities from the Investor or from the
Company in accordance with the Subscription Agreement and to whom the Investor
assigns rights under this Agreement.
"Person" shall mean any natural person, corporation, partnership,
------
firm, association, trust, government, governmental agency or other entity,
whether acting in an individual, fiduciary or other capacity.
<PAGE>
"Subscription Agreement" shall have the meaning set forth in the
----------------------
recitals of this Agreement.
"Registrable Securities" shall mean any shares of Common Stock
----------------------
acquired pursuant to the Subscription Agreement and any shares of Common Stock
issued upon exercise or conversion of the Warrants or Additional Warrants (and
any shares issued upon any subdivision, combination or reclassification of such
shares or any stock dividend in respect of any of such shares) and any shares
of Common stock acquired by the Investor subsequent to the date hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
or any successor federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at any time.
2. Registration Under Securities Act, etc.
---------------------------------------
2.1. Registration on Request.
-----------------------------
(a) Request. At any time after the date of execution hereof, the
-------
Holder shall have the right to require the Company to file a
registration statement under the Securities Act covering all or part of
their Registrable Securities, by delivering a written request therefor
to the Company specifying the number of Registrable Securities to be
included in such registration by the Holder and the intended method of
distribution thereof, whereupon the Company will use its best efforts to
effect the registration under the Securities Act of such Registrable
Securities.
(b) Registration Statement Form. Registrations under this
---------------------------
Agreement shall be on such appropriate registration form of the
Commission as shall be reasonably selected by the Company.
(c) Expenses. The Company will pay the registration expenses in
--------
connection with any registration requested pursuant to this Agreement.
(d) Selection of Underwriters. The managing underwriter,
-------------------------
underwriter or underwriters, if any, of each offering of the Registrable
Securities so to be registered shall be selected by the Company subject
to approval by the Holder.
-2-
<PAGE>
(g) Limitations on Registration on Request. The Company shall
---------------------------
not be required to effect more than three Registrations on Request
during the term of this Agreement.
2.2. Piggyback Registration. If the Company proposes at any
----------------------
time to register (on its own behalf or on behalf of any third party) any
of its securities under the Securities Act (except registrations solely
for registration of securities in connection with an employee benefit
plan or dividend reinvestment plan or a merger, reorganization, or
consolidation), it will each such time give written notice to each
Holder of its intention to do so and of the Holder's rights hereunder.
Upon the written request of a Holder, to be made within 20 days after
the receipt of any such notice, the Company will use its best efforts to
effect the registration under the Securities Act of all Registrable
Securities which the Company has been so requested to register by the
Holder.
2.3. Limitations on Registration. The Company shall not be
---------------------------
required to effect any registration of Registrable Securities pursuant
to Section 2.1 or 2.2 hereof if it shall deliver to the Holder an
opinion of counsel (which opinion and counsel shall be reasonably
satisfactory to the Holder) to the effect that all Registrable
Securities held by the Holder may be sold immediately in the public
market without registration under the Securities Act and any applicable
state securities laws.
2.4. Cooperation.
-----------
(a) Preparation: Reasonable Investigation. In connection with
-------------------------------------
the preparation and filing of each registration statement under the
Securities Act pursuant to this Agreement, the Holder will give their
full cooperation to the Company, its underwriters, if any, and their
respective counsel and accountants in preparing such registration
statement, each prospectus and amendment related thereto, including
access to books and records (to the extent customarily given to
underwriters) and such opportunities to discuss any factual matters as
shall be deemed necessary by the Company to conduct a reasonable
investigation within the meaning of the Securities Act.
(b) Further Assurances. Each Holder shall immediately notify the
------------------
Company upon discovery that the prospectus included in a registration
statement includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to
make the statements therein not misleading, in the light of the
circumstances under which they were made, such. At the request of the
Company each Holder shall take any and all further action, or refrain
from any specified action, as the case may be, so that in the sole
judgment
-3-
<PAGE>
of the Company such prospectus shall not include an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made.
2.5. Indemnification.
---------------
(a) Indemnification by the Company. In the event of any
------------------------------
registration of any securities of the Company under the Securities Act, the
Company will, and hereby does, indemnify and hold harmless the Holders and
their respective directors, officers, partners, agents and affiliates and
each other Person who participates as an underwriter in the offering or
sale of such securities and each other Person, if any, who controls any
Holder or any such underwriter within the meaning of the Securities Act,
insofar as losses, claims, damages or liabilities (or actions or
proceedings, whether commenced or threatened, in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of
any material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or
any amendment or supplement thereto, or any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein in light of the circumstances in which they
were made not misleading, and the Company will reimburse the Holders and
each such director, officer, partner, agent or affiliate, underwriter and
controlling Person for any legal or any other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided, that the Company shall not be
--------
liable in any such case to the extent that any such loss, claim, damage,
liability (or action or proceeding in respect thereof) or expense arises
out of or is based upon an untrue statement or alleged untrue statement or
omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information
furnished to the Company through an instrument executed by or on behalf of
the Holders or underwriter, as the case may be, specifically stating that
it is for use in the preparation thereof; and provided, further, that the
-------- -------
Company shall not be liable to any Person who participates as an
underwriter in the offering or sale of Registrable Securities or any other
Person, if any, who controls such underwriter within the meaning of the
Securities Act, in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense
arises out of such Person's failure to send or give a copy of the final
prospectus, as the same may be then supplemented or amended, to the Person
asserting an untrue statement or alleged untrue statement or omission or
alleged omission at or prior to
-4-
<PAGE>
the written confirmation of the sale of Registrable Securities to such
Person if such statement or omission was corrected in such final prospectus
so long as such final prospectus, and any amendments or supplements
thereto, have been furnished to such underwriter. Such indemnity shall
remain in full force and effect regardless of any investigation made by or
on behalf of the Holders or any such director, officer, partner, agent or
affiliate or controlling Person and shall survive the transfer of such
securities by the Holders.
(b) Indemnification by the Holders. As a condition to including
------------------------------
any Registrable Securities in any registration statement, the Company shall
have received an undertaking satisfactory to it from the Holders, to
indemnify and hold harmless (in the same manner and to the same extent as
set forth in subdivision (a) of this Section 2.5) the Company, and each
director of the Company, each officer of the Company and each other Person,
if any, who controls the Company within the meaning of the Securities Act,
with respect to any statement or alleged statement in or omission or
alleged omission from such registration statement, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or
any amendment or supplement thereto, if such statement or alleged statement
or omission or alleged omission was made in reliance upon and in conformity
with written information furnished to the Company through an instrument
duly executed by the Holders specifically stating that it is for use in the
preparation of such registration statement, preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement; provided, however,
-------- -------
that the liability of the Holders under this Section 2.5(b) shall be
limited to the amount of proceeds received by the Holders in the offering
giving rise to such liability. Such indemnity shall remain in full force
and effect, regardless of any investigation made by or on behalf of the
Company or any such director, officer or controlling Person and shall
survive the transfer of such securities by the Holders.
(c) Contribution. If the indemnification provided for in this
------------
Section 2.5 shall for any reason be held by a court to be unavailable to an
indemnified party under subparagraph (a) or (b) hereof in respect of any
loss, claim, damage or liability, or any action in respect thereof, then,
in lieu of the amount paid or payable under subparagraph (a) or (b) hereof,
the indemnified party and the indemnifying party under subparagraph (a) or
(b) hereof shall contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in
connection with investigating the same), (i) in such proportion as is
appropriate to reflect the relative fault of the Company and the Holders,
with respect to the statements or omissions which resulted in such loss,
claim, damage or liability, or action in respect thereof, as well as any
other relevant equitable considerations or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion
as shall be appropriate
-5-
<PAGE>
to reflect the relative benefits received by the Company and the Holder
from the offering of the securities covered by such registration statement.
No Person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent misrepresentation. In
addition, no Person shall be obligated to contribute hereunder any amounts
in payment for any settlement of any action or claim effected without such
Person's consent, which consent shall not be unreasonably withheld.
(e) Other Indemnification. Indemnification and contribution
---------------------
similar to that specified in the preceding subdivisions of this Section 2.5
(with appropriate modifications) shall be given by the Company and the
Holder with respect to any required registration or other qualification of
securities under any federal or state law or regulation of any governmental
authority other than the Securities Act.
(f) Indemnification Payments. The indemnification and
------------------------
contribution required by this Section 2.5 shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as and when bills are received or expense, loss, damage or
liability is incurred. In any case in which it shall be judicially
determined that a party is not entitled to indemnification or contribution,
any payments previously received by such party hereunder shall be promptly
reimbursed.
3. Additional Provisions
(a) The Investor and the Holders may assign their respective
rights and obligations under this Agreement to any other Persons provided
that notice of such assignment is provided to the Company within a
reasonable period of time of such assignment.
(b) The provisions of the Subscription Agreement numbered 12
through 17, respectively, are herein incorporated by reference, and each
reference therein to the Subscription Agreement shall, for purposes of this
Agreement, be interpreted to refer to each of the Subscription Agreement
and this Registration Rights Agreement, with full force and effect as if
fully set forth herein. In addition, with respect to Notices, all notices
or communications to Holders shall be delivered in accordance with the
information such Persons provide the Company from time to time.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and
delivered by their respective officers thereunto duly authorized as of the date
first above written.
MEDFIELD INC.
By: /s/ David L. Deck
-----------------
Name: /s/ David L. Deck
Title: President
UTG COMMUNICATIONS INTERNATIONAL, INC.
By: /s/ Ueli Ernst
--------------
Name: /s/ Ulrich Ernst
Title: CEO
-7-
<PAGE>
Exhibit 10.31
-------------
The following is a fair and accurate English translation of the original
contract.
AGREEMENT
---------
BETWEEN
FRITZ WOLFF, 26 SOUTH MALL, CORK, IRELAND,
AND BIRAND LTD AND TELEINVEST LTD., DOUGLAS/LOM
AND HIS DIRECTLY INDIRECTLY HELD COMPANIES
INSOFAR AS THEY WERE AND STILL ARE INVOLVED IN UTG MATTERS,
REPRESENTED BY F. WOLFF
AND
UTG COMMUNICATION INT. INC.
AND THE WHOLE GROUP
18 CATTANO AVENUE
MORRISTOWN, NJ 07960, USA
REPRESENTED BY U. ERNST
PREAMBLE
- --------
This agreement shall settle all disputes. Therefore the following was agreed:
1. All outstanding bills which have been billed by F. Wolff, Birand Ltd. or
otherwise are herewith declared null and void and there are no claims
outstanding.
2. The automobile Range Rover is being offered for free by UTG as of May 1,
1998 and taken over by TCG according to the attached agreement.
3. The monies for salaries and expenses in the amount of CHF 550.000 withdrawn
between February and October 1997 are accepted by UTG and no reimbursements
shall be made.
4. The equity interest in UTG Hungary and UTG Poland have been explicitly
transferred to F. Wolff pursuant to agreements with K. Rhea and were
offered for purchase and transferred to Mr. Wolff against the assumption of
all liabilities. UTG Inc. shall not derive any claims with respect thereto
in the future.
5. With respect to the remaining points which needed clarification, such as
the facts of the whereabouts of the shares of UTGC at Telenor and Multicom
of Interfinance and the valuation of the assets of Multicom as of April 1,
1997 in the amount of approximately BF 840,000.00, Mr. Wolff shall give
sufficient explanation. Mr. Wolff also agrees to be available for further
information. Any travel expenses shall be reimbursed by UTG.
<PAGE>
6. F.K. Wolff voluntarily agrees to make funds available for the
reorganization of the Company without acknowledgement of any liability vis-
a-vis the UTG companies. In return, the management respectively the
supervisory body of the UTG group shall release Mr. Wolff from his
liabilities as a board member, director and chairman of the companies.
7. TeleInvest Ltd. herewith irrevocably assigns 300,000 (three hundred
thousand) shares of UTGC to the UTG group without compensation. These
shares are immediately transferred to UTG Comm. Int. Inc and F.W. Wolff
shall submit the respective certificates not later than May 31, 1998
together with a stock power issued by TeleInvest Ltd. and guaranteed by a
broker or a bank (Medallion Guarantee).
UTG had a stock split of 13:1 and gave TeleInvest Ltd. a three-year option
for 23,077 UTGC shares (twenty-three thousand and seventy-seven) for the
price of USD 15.00. All rights with respect to this stock split according
to Exhibit A shall remain with TeleInvest.
8. The parties herewith agree to collaborate in further projects. In the
event of future procurements of mergers and acquisitions and of single
business contacts a commission of 5% shall be paid and in the event of
wholesale business a commission on turnover, which shall be agreed upon on
a case-by-case basis.
9. The attached purchase agreement of 200'000 UTG shares between Interfinance
and F.K. Wolff / TeleInvest Ltd. forms an integrated part of this
agreement. Both agreements shall be effective upon signing.
10. All disputes arising in connection with this agreement shall be decided by
the courts of Zug. The applicable law shall be the Swiss Code of
Obligations.
<TABLE>
<CAPTION>
For UTG Int'l. Inc. F.K. Wolff Birand Ltd. TeleInvest Ltd.
<S> <C> <C> <C>
/s/ Ueli Ernst /s/ Fritz K. Wolff /s/ Fritz K. Wolff /s/ Fritz K. Wolff
- ------------------- ------------------ ------------------ ------------------
for all the present and by power of by power of
former subsidiaries attorney attorney
</TABLE>
2
<PAGE>
PURCHASE AGREEMENT
------------------
between
Fritz Wolff, TeleInvest Ltd.
26 South Mall and Victory House
Cork, Ireland Business Center
Douglas / Isle of Man
Seller
and
Interfinance Inv. Co. Ltd.
Postfach 13
8954 Geroldswil
Buyer
1. The sellers agree to sell 200,000 shares of UTGC (respectively 15,384
shares after the split) for a lump sum of Fr. 50,000.00 (Fr. fifty
thousand) to the buyer. The options and other rights acquired with the
split shall remain with the sellers.
2. The full purchase price is to be paid at the time of the transfer of the
original shares (cash against delivery). These shares shall be delivered
together with the respective stock power. The signature thereof has to be
confirmed by a Medaillon Guarantee of a bank or of a broker. The payment is
to be made by certified check drawn to one of the major Swiss banks, made
out to the order of TeleInvest Ltd.
3. This purchase agreement shall be executed by May 31. 1998 and the shares
shall be irrevocably transferred pursuant to section 2.
4. The laws of Switzerland shall be applicable. The courts of Zurich shall
decide any disputes arising in connection with of this purchase agreement.
The Sellers The Buyer
Fritz K. Wolff Interfinance Inv. Co. Ltd.
/s/ Fritz K. Wolff /s/ Ueli Ernst
- ---------------------------- --------------------------
TeleInvest Ltd.
/s/ Fritz K. Wolff
- -----------------------------
by power of attorney
3
<PAGE>
Exhibit 21.1
------------
Subsidiaries of the Registrant
------------------------------
1) Starfon Telecom Services AG ("Telecom") formerly known as UTG Telecom AG
and UTG Telecommunications Holding AG, incorporated under the laws of
Switzerland on February 29, 1996 (owned 100% by the Company);
2) UTG Communication Belgium N.V., ("UTG Belgium"), incorporated under the
laws of Belgium on June 27, 1996 (owned 100% by Telecom);
3) United Telecom GMBH, ("UTG GMBH") incorporated under the laws of
Switzerland on May 28, 1996 (owned 100% by Telecom); and
4) Multicom NV ("Multicom") incorporated under the laws of Belgium (owned 100%
by UTG Belgium).
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in this annual report on Form 10-KSB of our report
dated June 22, 1998 relating to the consolidated financial statements of UTG
Communications International, Inc. and Subsidiaries.
/s/ Merdinger, Fruchter, Rosen & Corso, P.C.
Merdinger, Fruchter, Rosen & Corso, P.C.
Certified Public Accountants
July 14, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-1-1997
<PERIOD-END> MAR-31-1997
<CASH> 363,169
<SECURITIES> 0
<RECEIVABLES> 617,850
<ALLOWANCES> 263,617
<INVENTORY> 0
<CURRENT-ASSETS> 1,694,283
<PP&E> 3,495,711
<DEPRECIATION> 1,184,547
<TOTAL-ASSETS> 5,172,342
<CURRENT-LIABILITIES> 1,470,839
<BONDS> 0
0
0
<COMMON> 13
<OTHER-SE> 3,231,532
<TOTAL-LIABILITY-AND-EQUITY> 5,172,342
<SALES> 2,319,631
<TOTAL-REVENUES> 2,319,631
<CGS> 1,312,284
<TOTAL-COSTS> 1,535,704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 109,549
<INCOME-PRETAX> (2,367,555)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,367,555)
<DISCONTINUED> 4,529,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> 2.06
<EPS-DILUTED> 1.14
</TABLE>
