<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1996
REGISTRATION NO. 333-14327
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
NETSOURCE COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4813 68-0386077
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
444 SPEAR STREET, SUITE 200
SAN FRANCISCO, CALIFORNIA 94105
(415) 243-8080
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
EDWARD A. BRINSKELE
CHIEF EXECUTIVE OFFICER
NETSOURCE COMMUNICATIONS, INC.
444 SPEAR STREET, SUITE 200
SAN FRANCISCO, CALIFORNIA 94105
(415) 243-8080
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
AARON J. ALTER CHRISTOPHER L. KAUFMAN
DAVID J. SEGRE ORA T. FRUEHAUF
CHRISTOPHER K. SADEGHIAN TAD J. FREESE
WILSON SONSINI GOODRICH & ROSATI LATHAM & WATKINS
PROFESSIONAL CORPORATION 505 MONTGOMERY STREET,
650 PAGE MILL ROAD SUITE 1900
PALO ALTO, CALIFORNIA 94304 SAN FRANCISCO, CA 94111
(415) 493-9300 (415) 391-0600
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER SHARE PRICE(2) FEE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value.................. 4,025,000(1) $15.00(2) $60,375,000 18,296(3)
</TABLE>
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- -------------------------------------------------------------------------------
(1)Includes 525,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2)Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457 (a).
(3)An aggregate of $17,425 has been previously paid to the Commission. As a
result, $871 is being paid with this filing.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANYSTATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 25, 1996
[LOGO IF NETSOURCE APPEARS HERE]
- -------------------------------------------------------------------------------
3,500,000 SHARES
COMMON STOCK
- -------------------------------------------------------------------------------
All of the 3,500,000 shares of Common Stock offered hereby are being sold by
NetSource Communications, Inc. ("NetSource" or the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the
Company. It is currently anticipated that the initial public offering price
will be between $13 and $15 per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering
price.
Of the 3,500,000 shares of Common Stock offered hereby, shares are
being offered for sale in the U.S. by the U.S. Underwriters, and shares
are being offered for sale in Europe and Canada by the International
Underwriters (together, the "offering"). See "Underwriting."
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the trading symbol "NSCE."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share $ $ $
Total (3) $ $ $
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other information.
(2) Before deducting expenses of the offering payable by the Company
estimated at $1,150,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase
up to an additional 525,000 shares of Common Stock for the purpose of
covering over-allotments. If the Underwriters exercise such option in
full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the Underwriters when, as and if
delivered to and accepted by them, subject to their right to withdraw, cancel
or reject orders in whole or in part and subject to certain other conditions.
It is expected that delivery of the shares of Common Stock will be made in
New York, New York, against payment therefor on or about , 1996.
The date of this Prospectus is , 1996
[LOGO OF DEUTSCH MORGAN
GRENFELL APPEARS HERE]
<PAGE>
[DESCRIPTION OF ARTWORK]
Inside Cover
- ------------
Picture of man at notebook computer with the following overlay: Managed Business
Communications. Also lists the following services and products:
Telecommunications, Telemanagement, Network Design, Internet Access, Web
Hosting, Software Development, Web Architecture, Content Services, Web
Applications, Interactive Development and Marketing Communications.
IN CONNECTION WITH THIS OFFERING, THE U.S. UNDERWRITERS AND THE
INTERNATIONAL UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH
STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
[DESCRIPTION OF ARTWORK]
Gatefold
- --------
Photographs of man on telephone and a compact disk; world map with lines
illustrating existing and planned telecommunications frame relay network
connections and U.S. map with lines illustrating planned Internet backbone
connections and NetSource points of presence; a list of certain products and
services provided by the Company including Telecommunications, Interactive,
Marketing Communications, and Internet Access; the words "A Communications
Convergence"; and Web Sites developed by the Company including Tecmar
Technologies, SeniorNet, Fujitsu, ACC, The Yankee Group, Diamond Multimedia,
Union Camp, Cadence, Citibank, Ameritech, CCPA, and Cyber Cash.
<PAGE>
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the section entitled "Risk
Factors" and elsewhere in this Prospectus. The following summary is qualified
in its entirety by the more detailed information and Consolidated Financial
Statements, including notes thereto, appearing elsewhere in this Prospectus.
Except as otherwise specified, all information in this Prospectus (i) assumes
no exercise of the Underwriters' over-allotment option, (ii) reflects the
consummation of the Reorganization (as defined and described in "Business--
Reorganization") in June 1996, (iii) excludes the shares issued in connection
with the acquisitions of scruz-net, inc. and DNA New Media Group, Inc. in
November 1996 (as described in "Business--Recent Developments"), (iv) excludes
options, warrants and convertible notes exercisable for or convertible into an
aggregate of 5,889,598 shares of Common Stock outstanding as of September 30,
1996 (assuming an initial public offering price of $14 per share) and (v)
reflects a three-for-four reverse split of the Company's Common Stock as of
November 20, 1996. For the definition of certain terms used in this Prospectus,
see "Glossary."
THE COMPANY
NetSource Communications, Inc. ("NetSource" or the "Company") develops,
implements and manages a wide range of communications solutions for business
and end-user customers worldwide. The Company's products and services include
international and domestic long distance telecommunications, value-added
telecommunications and related telemanagement services, Internet access and
hosting, Internet and interactive electronic commerce products and services,
such as Web-based architecture development and maintenance, Web-based content
development and management, and marketing communications services. The
Company's strategy consists of integrating communications solutions, expanding
its telecommunications and Internet-related networks, broadening its
distribution channels, developing innovative technology and acquiring
complementary technologies and businesses.
The Company believes that the telecommunications, applications software
development and marketing communications services industries are becoming
increasingly complementary as a result of telecommunications deregulation, the
proliferation of personal computers, connectivity advances and rapidly
converging technologies. Traditional voice and data services, multimedia
applications and emerging Internet-based products are being delivered to
customers using the medium of telecommunications. At the same time, businesses
worldwide are being confronted with increasingly complex communications
requirements as interaction increases with customers, remote offices,
affiliates and computer networks in global markets. To manage increased traffic
from fax, voice, data and electronic/Internet related media, businesses must
currently utilize multiple vendors for a number of communications services
including long distance telecommunications, network design and engineering,
Internet access, design and implementation of Web architectures, and corporate
marketing communications. NetSource offers its customers a single source
solution for such services on both a bundled and discrete basis.
The Company currently offers telecommunications services in the U.S. and in
over 130 countries worldwide. NetSource offers international and domestic long
distance telephony services through its dedicated facilities and international
network of five digital switches that use advanced technologies such as packet
and SS7 signaling protocols and centralized computer control. The Company
believes that its proprietary Computer Controlled Switching Arrangement
provides the Company with a competitive advantage by enabling the Company to
optimize the routing of calls over the NetSource network or other carriers'
networks, depending upon the lowest cost route available at any given time.
3
<PAGE>
During the next 24 months, the Company expects to expand its telecommunications
network by deploying up to 14 additional switches in Europe, Asia and the
Americas. In addition to long distance services, NetSource offers value-added
telephony services including travel card, cellular reorigination, data
transmission, inbound toll free 800 and dedicated private line services. The
Company markets its telephony services via independent sales affiliates,
strategic partners, joint ventures, a direct sales force and M-net, the
Company's network marketing system. In the year ended December 31, 1995 and the
nine months ended September 30, 1996, the Company's revenues from its
telecommunications business were approximately $86.9 million and $67.9 million,
respectively.
NetSource also provides an array of Internet-based Web architecture
development and maintenance and content products and services for Internet and
Intranet-based electronic commerce solutions. The Company defines electronic
commerce as the delivery of information (both voice and data), products,
services, marketing, systems and support both within an organization or to the
external marketplace over any interactive, electronic or on-line medium. Many
of the Company's service and product offerings involve the implementation of
WebSense, the Company's Web architecture methodology, and Content Management
Systems, the Company's software-based system that allows for the efficient
updating and management of content. The Company believes that its Internet and
Intranet solutions provide its customers with a cost-effective means of
storing, managing and transferring information via an interactive medium more
readily accessed by employees, clients, suppliers and other parties connected
to the customer. Since the inception of its Internet oriented business in mid-
1995, NetSource has created and deployed 20 electronic commerce Web sites for
its customers, including the American College of Cardiology, the American
College of Surgeons, Cadence Design Systems, Inc., Conner Peripherals, Inc.
(now a subsidiary of Seagate Technologies, Inc.), CyberCash, Inc., Fujitsu
Microelectronics, Inc. and The Yankee Group, and is in the process of creating
Web architectures for additional customers, including Boehringer Mannheim
Corporation, Boston Scientific Corporation, the California Society of Certified
Public Accountants and Union Camp Corporation. In the year ended December 31,
1995 and the nine months ended September 30, 1996, the Company's revenues from
its electronic commerce products and services business were approximately
$654,000 and $1.1 million, respectively.
Among its electronic commerce products and services, the Company offers a
variety of convergent product offerings that leverage the Company's
relationships and expertise in the telecommunications industry, including
Internet access and Web hosting services. The Company plans to use a portion of
the proceeds of this offering to deploy an Internet backbone. The Company also
has acquired scruz-net, inc., an Internet service provider located in Santa
Cruz, California with approximately 2,000 customers as of November 15, 1996.
The Company's business also includes a full-service advertising and marketing
communications component that specializes in leveraging both traditional and
electronic media into business solutions for a range of companies and other
organizations via today's range of print, broadcast and Internet
communications. The Company believes that its experience in and application of
more traditional content-related marketing communications services enhance the
Company's capabilities in delivering a comprehensive electronic commerce
solution to its customers. In the year ended December 31, 1995 and the nine
months ended September 30, 1996, the Company's revenues from its marketing
communications business were approximately $3.8 million and $1.9 million,
respectively.
REORGANIZATION
NetSource, which was incorporated in Delaware on November 20, 1995, succeeded
to the businesses of MTC Telemanagement Corporation, a California corporation
("MTC Telemanagement"),
4
<PAGE>
MTC International, Inc., a Nevada corporation ("MTC International"), and
Transphere Interactive, Inc. ("Transphere Interactive") and Transphere
International, Inc. ("Transphere International"), each California corporations
(collectively the "Transphere Entities") pursuant to a series of reorganization
transactions consummated on June 28, 1996 (collectively, the "Reorganization").
See "Business--Reorganization." MTC Telemanagement commenced operations in
October 1988 as a provider of long distance services in the U.S. MTC
International was formed in March 1993 as a provider of international
telecommunications services to countries outside the U.S. Pursuant to a series
of stock exchanges, MTC Telemanagement and MTC International became wholly-
owned subsidiaries of the Company. Transphere International, an advertising and
marketing communications company, was formed in 1985, while Transphere
Interactive, a provider of services related to the Internet, with a focus on
Web-site design and enabling Web-based electronic commerce on the Internet, was
formed in August 1995. The Transphere Entities merged to form NetSource
Interactive Services, Inc. ("NetSource Interactive") in June 1996. NetSource
Interactive thereafter merged into the Company in connection with the
Reorganization.
RECENT DEVELOPMENTS
In November 1996, the Company acquired scruz-net, inc., an Internet service
provider, for an aggregate of 230,190 shares of Common Stock. The business
competencies of scruz-net include Internet network design, implementation and
administration, and technology management for data networking and Intranet
applications. In November 1996, the Company also acquired DNA New Media Group,
Inc., an interactive development firm, for an aggregate of 230,190 shares of
Common Stock. The Company believes that DNA has substantial skill and
experience in the areas of multimedia, interactive and graphic design and
content creation for Web sites for a diverse group of clients. The shares
issued in both the acquisitions are restricted under federal securities laws
but have registration rights which permit, under certain circumstances, such
shares to be included in future public offerings of the Company.
In September 1996, the Company entered into a memorandum of understanding
with British Telecommunications plc ("BT") to provide electronic commerce
solutions to BT's finance sector customers. The memorandum contemplates the
training of BT sales personnel and includes revenue goals as well as specific
customers of BT that the parties hope to supply with the Company's electronic
commerce solutions. The Company expects to obtain additional customers referred
by BT. See "Business--Recent Developments."
The address of the Company's corporate headquarters is 444 Spear Street,
Suite 200, San Francisco, CA 94105. The Company's telephone number is (415)
243-8080, and its facsimile number is (415) 546-5252. The Company's Web site is
located at http://www.netsourcecom.com. Neither the information contained in
the Company's Web site nor those of its customers shall be deemed to be part of
this Prospectus.
5
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered hereby:
U.S. offering............................. shares
International offering.................... shares
Total offering............................ 3,500,000 shares
Common Stock to be outstanding after the
offering.................................. 19,478,074 shares
Use of Proceeds............................ For capital expenditures,
including telecommunications
network upgrade and expansion and
establishment of Internet
backbone, working capital and
other general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol..... NSCE
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OTHER OPERATING DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPER-
ATIONS DATA
Revenues(1):
Telecommunications........... $23,510 $48,937 $86,871 $64,985 $67,907
Marketing communications..... 4,792 4,915 3,774 3,022 1,943
Electronic commerce products
and services................ -- -- 654 408 1,106
------- ------- ------- -------- --------
Total revenues............. 28,302 53,852 91,299 68,415 70,956
------- ------- ------- -------- --------
Cost of revenues:
Telecommunications........... 16,676 34,565 58,467 43,634 44,802
Marketing communications..... 2,164 1,497 1,194 986 544
Electronic commerce products
and services................ -- -- 281 154 402
------- ------- ------- -------- --------
Total cost of revenues..... 18,840 36,062 59,942 44,774 45,748
------- ------- ------- -------- --------
Gross profit................... 9,462 17,790 31,357 23,641 25,208
Sales and marketing expenses... 2,289 6,713 13,191 9,810 9,558
General and administrative ex-
penses........................ 7,708 12,837 18,495 13,131 17,825
------- ------- ------- -------- --------
Operating income (loss)........ $ (535) $(1,760) $ (329) $ 700 $ (2,175)
======= ======= ======= ======== ========
Net loss....................... $ (438) $(1,998) $(1,834) $ (124) $ (3,450)
======= ======= ======= ======== ========
Pro forma net loss per share... $ (0.10) $ (0.17)
Weighted average common shares
and common share equivalents
outstanding................... 16,952 17,507
OTHER FINANCIAL DATA
EBITDA(2)...................... $ (341) $(1,300) $ 711 $ 1,469 $ 1,044
Net cash provided by operating
activities.................... 1,478 3,603 1,456 1,235 85
Net cash used in investing ac-
tivities...................... (1,659) (1,779) (3,276) (2,828) (6,802)
Net cash provided by (used in)
financing activities.......... (17) (832) 1,043 775 11,120
Capital expenditures........... 982 2,331 3,231 2,783 3,198
OTHER OPERATING DATA(3)
Number of switches(4).......... 4 4 5 5 5
Telecommunications customers... 7,000 36,400 60,000 56,300 75,300
Cumulative Web architectures
created and deployed.......... -- -- 8 2 16
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Cash, cash equivalents and short-term investments.......... $ 8,396 $52,816
Total working capital...................................... (2,282) 42,138
Total assets............................................... 37,042 81,462
Long-term debt and capital lease obligations............... 21,411 21,411
Total debt and capital lease obligations................... 22,689 22,689
Stockholders' equity (deficit)............................. (7,869) 36,551
</TABLE>
6
<PAGE>
- --------
(1) Telecommunications revenues represent revenues derived from sales of
telecommunications products and services; marketing communications revenues
represent revenues derived from sales of traditional advertising services;
and electronic commerce products and services revenues represent revenues
derived from sales of Internet and interactive products and services,
including Internet access and hosting.
(2) EBITDA consists of earnings before interest (net), income taxes,
depreciation, amortization and share of losses of joint ventures. EBITDA is
not a measure of financial performance under generally accepted accounting
principles and therefore should not be considered as an alternative to net
income as a measure of performance nor as an alternative to cash flow as a
measure of liquidity. EBITDA is a term commonly used in the
telecommunications industry.
(3) Information derived from operating records of the Company.
(4) Total deployed switches at end of period indicated.
7
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act"). The Company's
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors including those set
forth in the following risk factors and elsewhere in this Prospectus. In
evaluating the Company and its business, prospective investors should
carefully consider the following factors in addition to the other information
presented in this Prospectus before purchasing shares of Common Stock offered
hereby.
FINANCIAL MANAGEMENT AND INTERNAL CONTROLS. In connection with the audit of
the Company's financial statements for the nine months ended September 30,
1996 and the year ended December 31, 1995, the Company's independent auditors
identified a series of material weaknesses in the Company's internal
accounting control structure, including the lack of continuity of the
Company's financial management personnel, a shortage of staffing resources in
the finance and control functions, failure to maintain complete written
financial policies and procedures, inadequate maintenance and retention of
records and ineffective management reporting. In addition, in the course of
their audit, the auditors proposed a significant number of audit adjustments
relating to various account balances as of December 31, 1995 and 1994 to
conform with generally accepted accounting principles. The Company believes
that none of the identified material weaknesses in the Company's accounting
control structure has resulted in any material adverse effects on the
Company's business, financial condition or results of operations for the
periods examined.
In October 1996, the Company hired a Chief Financial Officer and a Corporate
Controller who are seeking to address the material weaknesses in the Company's
internal accounting and control structure cited by the auditors, including
hiring additional financial management personnel. There can be no assurance,
however, that the Company will be able to address the cited material
weaknesses and develop the requisite controls, resources, systems and
procedures effectively or on a timely basis, particularly in light of the
Company's plans for expansion, and the failure to do so would have a material
adverse effect on the Company's ability to manage its business, to have
visibility on its operating results and financial condition, and to accurately
report its financial position on a timely basis, and could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company has agreed to have its financial
statements for all quarterly periods beginning in 1997 audited by its
independent auditors prior to the public release of any financial information
related to such financial statements and until such time as it receives a
letter from such auditors to the effect that all identified material
weaknesses have been eliminated. The Company has also engaged a consulting
firm to review and make recommendations on the process of monitoring and
validating carrier charges. Additionally, the Company has engaged another
consulting firm to make recommendations to the Company on how to re-engineer
its financial processes to enable the Company to provide the reporting of
accurate financial data in a timely manner.
LIMITED OPERATING HISTORY; NO ASSURANCE OF FUTURE PROFITABILITY. The
Company's Reorganization, in which the businesses of MTC International, MTC
Telemanagement and NetSource Interactive were combined into the Company, was
consummated on June 28, 1996. See "Business--Reorganization." MTC
International and MTC Telemanagement have been operating in the
telecommunications market since March 1993 and October 1988, respectively.
NetSource Interactive entered the Internet and interactive products and
services business in the third quarter of 1995. Accordingly, the combined
Company and each operating entity has only a limited operating history on
which investors may evaluate the Company and an investment in the Common Stock
offered hereby. In fiscal 1994 and 1995 and for the nine months ended
September 30, 1996, the Company incurred operating losses of approximately
$1.8 million, $329,000 and $2.2 million, respectively. Such operating
8
<PAGE>
losses primarily related to the substantial increases in the Company's sales
and marketing and general and administrative expense levels related to
increased headcount and infrastructure in support of its international
telecommunications business, which was commenced in mid-1993, as well as
generally higher average commission rates on international telecommunications
sales. The Company expects to incur operating losses in fiscal 1996 and at
least the first two quarters of fiscal 1997 primarily due to increased expense
levels associated with the planned upgrade and expansion of the Company's
switching network and continued expansion of the Company's sales and marketing
efforts and distribution channels and hiring of additional management and
other personnel to support the Company's global operations. There can be no
assurance that the Company will be able to effectively grow its business or be
profitable in any future period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS OF GROWTH AND EXPANSION. The Company intends to deploy a global
telecommunications network of hardware, software and facilities while
introducing new telecommunications, Internet and interactive products and
services to allow the Company to expand its customer base and remain cost
effective. The Company's current network expansion plan requires substantial
capital expenditures and calls for the deployment over the next 24 months of
up to 14 additional telecommunications switches in Europe, Asia and the
Americas and additional hardware, software and switches to establish and
maintain the Company's Internet backbone. There can be no assurance, however,
that the Company will be able to deploy such a network or add Internet and
interactive products and services at the rate presently planned by the Company
or at all. The Company's telecommunications network and Internet backbone
expansion plan will substantially increase the Company's cost structure in
advance of a corresponding increase in revenues. At the same time, the Company
has experienced and expects to continue to experience competitive pricing
pressures in the telecommunications services market. As a result of these
planned increases in the Company's cost structure and competitive trends, the
Company's gross margins and other operating results would be adversely
affected if its revenues do not increase substantially in the future. In
addition, the expansion of NetSource's business will produce increased demands
on its network capabilities, its sales and marketing resources, its
engineering personnel as well as its management and accounting capabilities.
The inability to continue to upgrade its network and development hardware or
its switching and routing systems or to hire and retain necessary qualified
personnel or the occurrence of unexpected expansion difficulties could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In order to carry traffic on the Internet without payment of certain usage-
based fees, the Company may be required to obtain network "peering" in the
future. In the event that the Company is not able to obtain network peering
when needed, its ability to profitably act as an Internet service provider
("ISP") could be materially and adversely affected, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON OTHER CARRIERS; MINIMUM VOLUME REQUIREMENTS. NetSource is
dependent on local exchange carriers ("LECs"), typically the Regional Bell
Operating Companies ("RBOCs") and postal, telephone and telegraph companies
("PTTs") of foreign countries, in both the domestic and international
telecommunications markets for origination and termination of all calls. In
addition, the Company currently buys a large volume of long distance minutes
from a few long distance carriers. As such, the Company's ability to maintain
and expand its business depends, in part, on its ability to continue to obtain
these services on favorable terms from other facilities-based carriers such as
Sprint Communications Company, L.P. ("Sprint"), Worldcom, Inc., Frontier
Communications, Inc. ("Frontier') and others. The Company's agreements with
such carriers often provide that the carriers may terminate such agreements
with little notice. In the event of termination of any such agreements, there
can be no assurance that excess capacity would be available from alternate
carriers or that, if available, it would be available on acceptable terms. A
change in carriers could cause a delay in service and a possible loss of
sales, which would adversely affect the Company's operating results.
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Finally, certain of the Company's contract arrangements involve meeting
minimum volume commitments for leased capacity. Failure to do so may result in
significant cash penalties imposed by the applicable carriers. The Company has
from time to time failed to meet certain minimum volume requirements for
leased capacity from Frontier and Sprint. While these parties have in the past
waived the requirement of the Company to pay these penalties, there can be no
assurance that the carriers will waive penalties in the future if they become
due. The failure to obtain carrier services when needed would have a material
adverse effect on the Company's business, financial condition and results of
operations.
DEPENDENCE ON THIRD PARTY SALES; DISTRIBUTION CONCENTRATION. The Company's
telecommunications sales efforts are primarily conducted by a network of
third-party sales affiliates and their sub-affiliates. There can be no
assurance that the Company will be able to recruit, retain and offer
incentives to these affiliates sufficient to support the Company's planned
expansion or that in the future these affiliates will be able to market the
Company's products and services effectively. In addition, other companies with
greater resources may be able to provide greater incentives to offer their
services, thereby reducing the Company's base of affiliates. Historically, a
significant portion of the Company's sales have been generated by fewer than
10% of the Company's sales affiliates. Although the Company bills to and
collects directly from the majority of its end-users rather than through its
sales affiliates, this concentration could adversely affect the Company's
ability to retain its end-users. A loss of any major sales affiliate could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business--Marketing and Sales."
GOVERNMENT REGULATION.
TELECOMMUNICATIONS
DOMESTIC. Federal and state regulations, regulatory actions and court
decisions have had, and may have in the future, an impact on the Company and
its ability to compete as well as on the number and types of competitors in
the market. The U.S. Federal Communications Commission (the "FCC") and various
state public service and utilities commissions typically impose obligations to
file tariffs containing the rates, terms and conditions of service. Neither
the FCC nor the state utility commissions currently regulate the Company's
profit levels, although they have the authority to do so. There can be no
assurance that regulators will not raise material issues with regard to the
Company's compliance with regulations or that existing or future regulations
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
Federal. The Company has been granted authority by the FCC to provide
international telecommunication services through the resale of switched
services of U.S. facilities-based carriers. The FCC reserves the right to
condition, modify or revoke such international authority for violations of the
Communications Act of 1934, as amended and the rules promulgated thereunder.
The Telecommunications Act of 1996 (the "1996 Telecommunications Act")
substantially alters the regulatory framework for the telecommunications
industry for domestic and U.S. international telecommunications services. This
law allows telephone companies and cable television companies to compete in
each others' markets and permits the local exchange carriers ("LECs"),
including the RBOCs, to offer and sell long distance services (including
inter-LATA and interstate services within their service territories following
compliance with certain conditions), subject to any otherwise applicable state
and/or federal regulatory approvals, in exchange for permitting competition in
the local markets. Rulemaking proceedings implementing the 1996
Telecommunications Act are currently pending and there can be no assurances
that, when they are completed, the legislation and any rules will not have a
material adverse effect on the Company's business, financial condition or
results of operations. As of the date of this Prospectus, the FCC has not yet
issued a notice of proposed rulemaking contemplating changes in the rules
governing charges by LECs for access services, although such a notice is
expected to be released before the end of 1996. Because the FCC has not
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yet initiated the rulemaking proceeding considering changes in the regulation
of access charges, the Company cannot at this time predict the likelihood that
the rules will be changed in a way that would have a material adverse effect
on the Company's business. In addition, if the LECs are no longer required to
provide equal access for origination and termination of calls by customers of
long distance companies such as the Company, or if the fees charged for such
access services change, particularly if changed to allow variable pricing of
such fees based upon volume, such changes could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company is classified by the FCC as a non-dominant carrier. Among
domestic carriers, only LECs are now classified as dominant carriers, with
charges and services subject to greater FCC regulation than those of the
Company. The FCC has reclassified AT&T Corporation as a non-dominant carrier,
eliminating certain pricing and tariffing restrictions that had applied to
AT&T Corporation, and making it easier for AT&T Corporation to compete with
the Company for low-volume long distance customers. The FCC retains the
jurisdiction to act upon complaints against any common carrier for failure to
comply with its statutory obligations. The FCC also has the authority to
impose more stringent regulatory requirements on the Company and change its
regulatory classification.
Both domestic and international non-dominant carriers must maintain
interstate tariffs on file with the FCC, except that during the next ten
months, domestic non-dominant carriers will be required to withdraw their
interstate tariffs but make information about rates and conditions of service
publicly available. Although the tariffs on non-dominant carriers, and the
rates and charges they specify, are subject to FCC review, they are presumed
to be lawful and are seldom contested. In reliance on the FCC's past practice
of allowing domestic non-dominant carriers to file tariffs with a "reasonable
range of rates" instead of the detailed schedules of individual charges
required of dominant carriers, the Company has not maintained detailed rate
schedules for domestic offerings in their tariffs. Until the two-year statute
of limitations expires, the Company could be held liable for damages for its
failure to do so, although it believes that such an outcome is highly unlikely
and would not have a material adverse effect on the Company.
State. The intrastate long distance telecommunications operations of the
Company are also subject to varying levels of regulation in those states in
which the Company provides intrastate telecommunications. The vast majority of
the states require the Company to apply for certifications to provide
telecommunications services, or at least to register or to be found exempt
from regulation, before commencing intrastate service. The vast majority of
states also require the Company to file and maintain detailed tariffs listing
their rates for intrastate service. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and/or the rules, regulations
and policies of the state regulatory authorities. The Company is in the
process of seeking approvals from the applicable regulatory authorities in
each state in which such approval is required.
INTERNATIONAL. The Company's international telecommunications products and
services are subject to the jurisdiction of many regulators. The FCC has
imposed certain restrictions on international callback and reorigination
providers, including the requirement that licensees provide service in a
manner consistent with the laws of the countries in which they operate. Local
laws and regulations differ significantly among the jurisdictions in which the
Company operates, and the interpretation and enforcement of such laws and
regulations vary and are often based on the informal views of the local
ministries which, in some cases, are subject to influence by PTTs. In
addition, failure to interpret accurately the applicable laws and regulations
and the mode of their enforcement in particular jurisdictions, could cause the
Company to lose, or be unable to obtain, regulatory approvals necessary for it
to be able to provide certain services it markets in such jurisdictions or
could result in monetary penalties imposed against it that could be
significant. Furthermore, since the Company's callback and reorigination
products and services effectively bypass the local telephone system,
regulators in certain countries have objected to callback and reorigination
services, and some countries have declared such
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services illegal. Based on information made available by the FCC, the Company
believes that the following countries have prohibitions on callback services:
Oman, People's Republic of China, Colombia, Ecuador, Honduras, Hungary, India,
Indonesia, Netherlands Antilles, Peru, Philippines, Saudi Arabia, Tanzania,
Uruguay and Venezuela. In addition, other countries or their PTTs have
publicly indicated that at least some form of callback services was not
permitted in their respective countries. The Company does not derive material
revenues from callback and reorigination services to customers located in any
of such countries. In certain countries which have prohibited the provision of
services through the automatic callback access method utilized by the Company,
such as Thailand and Netherland Antilles, the Company has discontinued or
modified certain of its services. Existing or future regulations in other
countries could also have similar consequences. In addition, MCI
Communications Corporation has filed a petition with the FCC that challenges
the legality of reorigination. Such petition is currently pending. The Company
generates a significant portion of its monthly international revenue from
customers originating calls in Japan, Germany, Argentina, France, Hong Kong
and Taiwan. In 1994, approximately 45% of the Company's total revenues was
derived from customers located outside the U.S. That percentage increased to
69% in 1995, and to 72% in the first nine months of 1996. In the event that
any of these countries prohibited the Company's services or regulated the
pricing or profit levels of such services, the Company's business, results of
operations and financial condition could be materially adversely affected. At
this time, the Argentine government is attempting to provide sufficient
information to demonstrate to the FCC's satisfaction that call reorigination
is unlawful in Argentina. Although the Company believes that the probability
that the FCC would rescind the Company's grant of authority to provide
callback and reorigination services for failure to comply with non-U.S. law is
unlikely, such action by the FCC would have a material adverse effect on the
Company's business. The Company intends to expand its international service
offerings to continue to be competitive as new markets are opened and rates in
these countries are reduced. To facilitate this expansion, the Company may
deploy additional switching facilities located in a number of countries. As a
result, the Company will be directly subject to regulation in an increasing
number of countries, and there can be no assurance that foreign regulation
will not have a material adverse effect on the Company's business, results of
operations and financial condition.
In addition, there can be no assurance that the Company has accurately
interpreted or will accurately predict the interpretation of applicable laws
and regulations or regulatory and enforcement trends in a given jurisdiction
or that the Company will be found to be in compliance with all such laws and
regulations. Failure to interpret accurately the applicable laws and
regulations and the mode of their enforcement in particular jurisdictions,
could cause the Company to lose, or be unable to obtain, regulatory approvals
necessary for it to be able to provide certain services in such jurisdictions
or to use certain of its transmission methods. Such failure could result in
significant monetary penalties imposed against the Company.
INTERNET
Except for regulations governing the ability of the Company to disclose the
contents of communications by its customers and recent legislation that is the
subject of current constitutional challenge, there are currently no U.S.
government imposed limitations or guidelines pertaining to customer privacy or
the pricing, service characteristics or capabilities, geographic distribution
or quality control features of Internet access services. However, if a U.S.
governmental policy for the data network access industry were implemented, it
could have a material adverse effect on the Company. Also, a petition pending
before the FCC urges the FCC to regulate as telecommunications services voice
services utilizing the Internet. The Company cannot predict the impact, if
any, that future regulation or regulatory changes may have on its Internet
access business. The 1996 Telecommunications Act imposes criminal liability on
persons sending or displaying in a manner available to minors indecent
material on an interactive computer service such as the Internet and on an
entity knowingly permitting facilities under its control to be used for such
activities. The ultimate interpretation and enforcement of this law is
uncertain, but this legislation may decrease demand for
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Internet access, chill the development of Internet content or have other
adverse effects on Internet access providers such as the Company. In addition,
in light of the uncertainty attached to interpretation and application of this
law, there can be no assurances that the Company would not have to modify its
operations to comply with the statute, including prohibiting users from
maintaining home pages on the Web. Certain foreign countries may also regulate
Internet access or electronic commerce, which could have a material adverse
effect on the Company. See "Business--Regulation."
COMPETITION. The markets in which the Company operates are extremely
competitive. There are no substantial barriers to entry in the Internet and
interactive products and services markets or in any of the telecommunications
markets in which the Company competes. The Company expects competition in these
markets to intensify in the future.
TELECOMMUNICATIONS
International. In the area of international telecommunications services, the
Company competes with large multinational corporations as well as PTTs in
foreign countries. The PTTs and many of these companies have significant market
share and greater resources than the Company. Certain PTTs may also influence
regulatory authorities to outlaw the provision of callback or reorigination
services or block access to the callback or reorigination services the Company
markets. In the past, the Company has benefited from the fact that regulation
of telecommunications services in foreign countries has created a high
differential between the rates charged by PTTs and the rates charged by the
Company. As deregulation continues in foreign markets, this differential in
rates is expected to decrease, which will place pricing pressure on the
Company, and may lead to additional competitors entering the international
telecommunications market. Some of the Company's competitors offer cellular and
other wireless products and services. While the Company provides specialized
long distance products for users of cellular devices, there can be no assurance
that the Company will be able to provide long distance service to users of each
new technology as it evolves. In addition, certain global satellite-based
telecommunication systems now under development could eventually bypass the
international long distance network of the PTTs and major international
carriers. Development of such technologies could adversely affect the market
for the Company's long distance telecommunication services.
Domestic. In the U.S., the Company competes with long distance carriers and
second tier resellers. Domestically, the Company has a very small share of the
telecommunications services reseller market. In addition, this market is
nearing maturity in terms of aggregate revenue growth rates and consolidation.
The Company and many other smaller resellers anticipate adverse effects on
their core customer base and financial results by the entrance of the RBOCs
into the long distance industry. The RBOCs have significantly greater resources
than the Company and, as current providers of local service, substantial market
intelligence and end-user contact. As a result of this and continued
international expansion, the Company expects domestic revenues from its
telecommunications business to further decline as a percentage of its total
telecommunications sales. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation" and "Business--Industry
Overview."
INTERNET AND INTERACTIVE PRODUCTS AND SERVICES
Internet Access. The Company's current and prospective competitors in
Internet access include many large companies that have substantially greater
market presence and financial, technical, marketing and other resources than
the Company. In addition, the Company presently provides direct Internet access
services to a limited number of customers, and there can be no assurance as to
when or if the Company will be able to successfully provide such services on a
larger scale. The Company's Internet access business is expected to compete
directly or indirectly with national and regional commercial ISPs, established
on-line services companies that currently offer or are expected to offer
Internet access, national long distance telecommunications carriers, RBOCs,
media and cable operators, and nonprofit or educational ISPs. In particular,
the Company's ability to compete in the
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Internet access market is substantially dependent upon the rates that it is
required to pay outside vendors for ISDN, T-1 and T-3 lines.
Electronic Commerce. In the area of electronic commerce, the Company competes
with or expects to compete with manufacturers of electronic commerce server
software tools and software companies as well as a range of Internet
development companies. Many of these companies have been in the electronic
commerce business longer than the Company and have substantially greater market
share and resources. The Company expects that many new competitors, including
large computer hardware and software, cable, media and telecommunications
companies, such as the RBOCs, will enter the electronic commerce market.
The failure of the Company to adequately compete in its markets would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Competition."
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company's quarterly operating
results are expected to fluctuate from quarter to quarter depending on various
factors, including the rate of deployment of new network hardware, the timing
of release of new products and services, competition, the evolving and
unpredictable nature of the markets in which the Company's products and
services are sold, the mix of distribution channels and products, pricing
actions by the Company or its competitors, the pace of telecommunications
deregulation in the markets in which the Company competes, seasonality, and
general economic conditions. A significant portion of the Company's expenses,
such as rent, headcount, depreciation, costs of telecommunications capacity
from local and interexchange carriers and capital lease expenses, are
relatively fixed in advance, based in large part on the Company's forecasts of
future sales. The forecasting of future sales by the Company is necessarily
imprecise and this imprecision is compounded and the timeliness of such
forecasting is adversely affected by the material weaknesses in the Company's
internal control structure and operations and by the early stage nature of the
Company's Internet and interactive products and services. If sales are below
expectations in any given period, the adverse effect of a shortfall in sales on
the Company's operating results may be magnified by the Company's inability to
adjust spending to compensate for such shortfall. The Company's markets,
characterized by short product life cycles and declining prices of existing
products and services, requires introduction of new products and services and
enhancements to existing products and services to maintain gross margins.
Moreover, in response to competitive pressures or to pursue new product or
market opportunities, the Company may take certain pricing or marketing actions
that could materially and adversely affect the Company's operating results. The
Company's total revenues remained relatively flat in the second half of 1995
through the quarter ended September 30, 1996, primarily as a result of the lack
of availability of sufficient capital resources to support further expansion
and upgrade of the Company's switching network. This inability of the Company
to expand and upgrade its network during this period prevented the Company from
offering its customers more aggressively priced service rates, resulting in
relatively flat telecommunications revenues. In addition, the Company's
telecommunications revenues can be affected by seasonality, which varies by
geographic region. As a result of all of the foregoing, there can be no
assurance that the Company will be able to achieve or sustain profitability on
a quarterly or annual basis. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
FUTURE CAPITAL NEEDS. The Company intends to increase its telecommunications
network significantly, adding network hardware and dedicated leased lines in
numerous locations throughout the world. The Company believes that total
revenues remained relatively flat in the second half of 1995 through the third
quarter of 1996, primarily as a result of the lack of availability of
sufficient capital resources to support further expansion and upgrade of the
Company's switching network. This inability of the Company to expand and
upgrade its network during this period prevented the Company from offering its
customers more aggressively priced service rates, which resulted in slowed
revenue
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growth. In addition, the Company intends to utilize capital to invest in
research and development and strategic joint ventures and to make acquisitions
of complementary products, technologies and businesses. While the Company
believes that the proceeds of this offering combined with cash flow from
operations will be sufficient to meet its capital requirements for the 24
months following this offering, there can be no assurance that the Company
will not require additional financing before such time. The Company's funding
requirements may change at any time due to various factors including the
Company's operating results, the results and timing of the Company's launch of
new products and services, governmental or regulatory changes, the timing and
extent of its network expansion, the ability of the Company to meet product
and project demands, the nature and timing of the Company's acquisition of
complementary products, technologies or businesses, the success of the
Company's marketing efforts, technological advances and competition. There can
be no assurance that adequate funding will be available to the Company or, if
available, that funding will be on terms favorable to the Company. Any
shortfall in funding could result in the Company's having to curtail the
introduction of new products and services, its entry into new markets and the
deployment of network hardware, software and other facilities, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
UNCERTAINTIES RELATING TO INTEGRATION OF OPERATIONS. Achieving the
anticipated benefits of the Reorganization will depend in part upon whether
the integration of the constituent companies' businesses is achieved in an
efficient, effective and timely manner, and there can be no assurance that
this will occur. The combination of the constituent companies requires, among
other things, successful integration of MTC International and MTC
Telemanagement's telecommunications business with the Company's Internet and
interactive products and services offerings. The successful expansion of the
Company's business will require communication and cooperation in product
development and marketing among the senior executives and key technical
personnel of the constituent companies. Given the inherent difficulties
involved in major business combinations, there can be no assurance that such
cooperation will occur or that the integration of the respective businesses
will be successful and will not result in disruptions in one or more sectors
of the Company's business. The integration will require the dedication of
management's resources which may distract attention from the day-to-day
business of the Company. Failure to effectively accomplish the integration of
the constituent companies' operations could have a material adverse effect on
NetSource's business, financial condition and results of operations.
NEW AND UNCERTAIN MARKET. The Company's ability to derive increased revenues
from Internet and interactive products and services will depend in part upon
the development of the Internet as a viable commercial medium and on the
development of the public infrastructure for providing Internet access and
carrying Internet traffic. Because global commerce and online exchange of
information on the Internet and other similar open wide area networks are new
and evolving, it is difficult to predict with any assurance whether the
Internet will become and remain a viable commercial marketplace. Moreover,
critical issues concerning the commercial use of the Internet (including
security, reliability, cost, ease of use and access and quality of service)
remain unresolved and may impact the growth of Internet use. In particular,
inadequate development of the necessary infrastructure (e.g., reliable network
backbone), untimely development of complementary products (e.g., high speed
modems), or delays in the development or adoption of new standards and
protocols required to handle increased levels of Internet activity would make
it more difficult for the Company to market its Internet and Interactive
products. In addition, to the extent that the Internet continues to experience
significant growth in the number of users and the level of use, there can be
no assurance that the Internet infrastructure will continue to be able to
support the demands placed on it by such potential growth. The Company's
revenues derived from Internet and Interactive products and services for the
year ended December 31, 1995 and the nine months ended September 30, 1996 were
only approximately $654,000 and $1.1 million, respectively. The Company's
future growth depends, in part, upon
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increasing the amount of revenues it derives from providing such products and
services. To date, the Company has only limited experience in providing
Internet and interactive products and services. If the Internet does not become
a viable commercial marketplace, or if the Company is unable to successfully
expand its Internet and Interactive products and services business, the
Company's business, financial condition and results of operations would be
materially adversely affected.
DEPENDENCE ON ATTRACTION AND RETENTION OF KEY EMPLOYEES. The ability of the
Company to maintain its competitive and technological position depends, in
large part, on its ability to attract and retain highly qualified technical,
marketing, financial and management personnel. Competition for such personnel
is intense. The inability to retain certain key employees as well as to attract
and retain the significant numbers of additional personnel required to
effectively manage and expand its operations would have a significant adverse
impact on the Company's business. In particular, the loss of Edward Brinskele,
the Company's Chairman and Chief Executive Officer, or Charles Schoenhoeft, the
Company's Vice Chairman and President, could adversely affect the Company. See
"Business--Employees" and "Management."
RISK OF SYSTEM FAILURE; SECURITY RISKS. The success of the Company is largely
dependent upon its ability to deliver high quality, uninterrupted
telecommunications products and services and access to the Internet. From time
to time, the Company has experienced failures relating to its network
facilities, and the Company's customers have experienced difficulties in
accessing and utilizing the Company's telecommunications network. As the
Company attempts to expand its telecommunications network to include Internet
access services and data traffic grows, there will be increased stress on
network hardware and traffic management systems. The Company's operations also
are dependent on its ability to integrate new and emerging technologies and
equipment into its network, which are likely to increase the risk of system
failure and may cause unforeseen strains upon the network. There can be no
assurance that the Company will not experience failures relating to its network
facilities or the entire network. While the Company has not experienced a
significant interruption of its ability to provide service to date, there can
be no assurance that this type of failure will not occur in the future.
Significant or prolonged system failures or difficulties for subscribers in
accessing and maintaining connection with the Company's network could damage
the reputation of the Company and result in the loss of customers. Such damage
or losses could have a material adverse effect on the Company's business,
financial condition and results of operations.
The Company's operations are dependent on its ability to protect its software
and hardware against damage from fire, earthquake, power loss,
telecommunications failure, natural disaster and similar events. A significant
portion of the Company's computer equipment is located at its facilities in
Petaluma and San Francisco, California. The Company does not currently carry
earthquake insurance. Accordingly, the destruction or damage of a significant
portion of the equipment located in such facilities would cause an interruption
in the Company's operations, which would have a material adverse effect on the
Company's business, financial condition and results of operations. The
Company's planned Internet infrastructure will also be vulnerable to computer
viruses, break-ins and similar disruptive problems. See "Business--Facilities."
UNCERTAINTIES RELATING TO ACQUISITIONS. The Company's growth strategy
includes the acquisition of complementary products, technologies and
businesses. In November 1996, the Company consummated the acquisitions of
scruz-net, inc., an ISP, and DNA New Media Group, Inc., an interactive
marketing firm. These acquisitions, and any future acquisitions by the Company,
will be subject to various risks and uncertainties, including the inability to
effectively assimilate the operations, products, technologies and personnel of
the acquired companies (which may be located in diverse geographic regions),
the potential disruption of the Company's existing business, the inability to
maintain uniform standards, controls, procedures and policies and the potential
impairment of relationships with customers. In addition, there can be no
assurance that the Company will be able to identify appropriate acquisition
candidates in the future. See "Business--Recent Developments."
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DEPENDENCE ON TECHNOLOGICAL DEVELOPMENT. The markets for telecommunications
and Internet and interactive products and services are characterized by rapid
technological developments, evolving industry standards and customer demands,
and frequent new product and service introductions and enhancements. These
market characteristics are exacerbated by the emerging nature of the Internet
and the fact that many companies are expected to introduce new Internet and
interactive products and services in the near future. The Company's future
success will depend in significant part on the Company correctly identifying
which technologies will achieve market acceptance and the Company's ability to
access and adapt to technological developments on a timely basis and to respond
to both evolving demands of the marketplace and competitive product and service
offerings. For example, Internet services are currently accessed primarily by
computers through telephone lines. The Company's planned Internet access
services are based on such method of access by end-users. However, several
companies have recently introduced, on an experimental basis, delivery of
Internet access services through cable television lines. If the Internet
becomes accessible by cable modem, screen-based telephones, television or other
consumer electronic devices, or customer requirements change the way Internet
access is provided, such developments could materially and adversely affect the
Company's business, and the Company could be required to develop new technology
or modify its existing technology to accommodate these developments. There can
be no assurance that the Company would be successful in this regard.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. In fiscal 1994, 1995 and the
first nine months of 1996, international customers accounted for approximately
45%, 69% and 72%, respectively, of the Company's total revenues. International
customers accounted for a negligible amount of the Company's revenue in fiscal
1993. The Company anticipates that revenues from international customers will
continue to account for a significant percentage of its total revenues.
A significant portion of the Company's total revenues will therefore be subject
to risks associated with international sales, including unexpected changes in
legal and regulatory requirements, changes in tariffs, exchange rates and other
trade barriers, political and economic instability, difficulties in staffing
and managing international operations, difficulties in protecting the Company's
intellectual property overseas, potentially adverse tax consequences and the
regulation of telecommunications and Internet access and commerce providers by
foreign jurisdictions. In this regard, the Company has not been issued any
foreign counterparts for its U.S. patents. There can be no assurance that the
Company will be able to obtain the foreign permits and operating licenses, if
any, necessary for it to operate, hire and train employees or market, sell and
deliver its products and services. Although the Company's sales to date to
international customers have generally been denominated in U.S. dollars, the
value of the U.S. dollar in relation to foreign currencies may also adversely
affect the Company's sales to international customers. The Company intends to
expand its international operations. To the extent the Company expands its
international operations or changes its pricing practices to denominate prices
in foreign currencies, the Company will be exposed to increased risks of
currency fluctuation and would need to develop a foreign exchange strategy to
hedge currency fluctuations. Failure to implement and successfully manage the
Company's foreign currency exchange program could subject the Company to the
possibility of significant losses. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Strategy."
DIFFERENCES IN FINANCIAL STATEMENTS CONTAINED IN PRIVATE PLACEMENT
MEMORANDUM. In June 1996, the Company sold $20 million principal amount Series
A Secured Subordinated Convertible Notes to 42 foreign investors (the "Notes"),
together with detachable Warrants to purchase Common Stock (the "Warrants").
The Notes and the Warrants will be convertible into Common Stock of the Company
upon the earlier of December 31, 1996 or the closing of this offering. The
Notes are due and payable in June 1998. The Notes and Warrants were sold
pursuant to a private placement memorandum dated May 31, 1996 (the "Private
Placement Memorandum"). While the Reorganization had not yet been completed at
the time the Notes and Warrants were sold, the Private Placement Memorandum
contained unaudited selected financial data for the Company on a pro forma
basis giving
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effect to the Reorganization for the fiscal year ended December 31, 1995 and
for the fiscal quarter ended March 31, 1996. As a result of adjustments
recorded in connection with the Company's independent auditors' audit of the
Company's 1995 financial statements, the Company has determined that the
unaudited financial data included in the Private Placement Memorandum differs
in certain respects from the data contained in the audited financial
statements. In addition, the quarterly information for the first quarter of
1996 contained in the Private Placement Memorandum also differed from the
Company's revised quarterly information. For example, net income for fiscal
1995 and the first quarter of 1996 included in the Private Placement
Memorandum was $1,095,000 and $190,000, respectively, while the audited annual
financial statements contained in this Prospectus show a net loss of
$1,834,000 and the Company's revised quarterly information contained in this
Prospectus shows a net loss of $204,000 for the same period. The Company notes
that the purchasers of the Notes may convert their Notes and exercise their
Warrants at a 30% discount to the price to the public in this offering.
However, there can be no assurance that a claim based on the aforementioned
differences would not be made by any purchaser of the Notes and Warrants in
the future or that the Company would prevail in such an action. See "Risk
Factors--Financial Management and Internal Controls" and "Description of
Capital Stock--Notes and Warrants."
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH COMPANY'S
NETWORK. ISPs, through their Internet access and Web hosting services, face
potential liability of uncertain scope for the actions of customers and others
using their systems, including liability for infringement of intellectual
property rights, rights of publicity, defamation, and libel and criminal
activity under the laws of the U.S. and foreign jurisdictions, which could
have a material adverse effect on the Company. In addition, recent legislative
enactments and pending legislative proposals aimed at limiting the use of the
Internet to transmit certain materials could potentially result in significant
potential liability to Internet access and service providers, including the
Company, as well as additional costs and technological challenges in complying
with any statutory or regulatory requirements imposed by such legislation. See
"Business--Regulation."
PROTECTION OF INTELLECTUAL PROPERTY. The Company's success is dependent in
part upon its ability to enhance its technology, although the Company believes
that its success is more dependent upon its technical expertise than its
proprietary rights. The Company relies on a combination of patent, copyright,
trademark and trade secret laws and contractual restrictions to establish and
protect its technology. The Company has been assigned two patents in the U.S.
relating to its least cost routing technology and has corresponding
applications pending for patent protection of such technology in 20 foreign
countries. However, there can be no assurance that the Company will be
successful in obtaining foreign patent protection. There can be no assurance
that the Company's least cost routing patents or any future patents will
provide protection against competitive technology or will be held valid and
enforceable if challenged or that the Company's competitors will not be able
to design around the patents. In addition, there can be no assurance that
licenses for any intellectual property that might be required by the Company
will be available on reasonable terms, if at all. See "Business--Technology
and Intellectual Property."
CONTROL BY EXISTING STOCKHOLDERS. Following the completion of this offering,
Edward Brinskele, Charles Schoenhoeft and Roger Sheppard will collectively own
approximately 49.6% of the outstanding shares of the Common Stock on a fully
diluted basis, including shares issuable upon exercise or conversion of
outstanding options, warrants and convertible notes. Edward Brinskele,
together with either Roger Sheppard or Charles Schoenhoeft, may have the
ability to control the affairs and policies of the Company and may be able to
elect a sufficient number of directors to control the Board and to approve or
disapprove of any matter submitted to a vote of the stockholders. The voting
power of these stockholders could also have the effect of delaying or
preventing a change in control of the Company.
NO PRIOR PUBLIC MARKET; VOLATILITY OF STOCK PRICE. Prior to the date of this
Prospectus, there has been no public market for the Common Stock, and there
can be no assurance that a viable public
18
<PAGE>
market for the Common Stock will develop or be sustained after completion of
the offering contemplated hereby. The initial public offering price of the
Common Stock will be determined by negotiation between the Company and the
Underwriters and may bear no relationship to the price at which the Common
Stock will trade after completion of the offering. For factors to be
considered in determining the initial public offering price, see
"Underwriting." The Company believes that factors such as announcements of
developments related to the Company's business, announcements by competitors,
fluctuations in the Company's financial results and general conditions in the
telecommunications and Internet and interactive products and services markets
in which the Company competes or the national economies in which the Company
does business, could cause the price of the Common Stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market in general, and
the market for shares of small capitalization technology stocks in particular,
have experienced extreme price fluctuations, which have often been unrelated
to the operating performances of affected companies. Such fluctuations could
have a material adverse effect on the market price of the Common Stock.
RISKS ASSOCIATED WITH FEDERAL COURT LITIGATION. One of the Company's former
sales affiliates and current competitors has brought suit against the Company
in Federal District Court for the Northern District of California. The former
sales affiliate has made a number of claims, including breach of contract and
misappropriation of trade secrets and seeks compensatory and punitive damages.
In addition, in connection with such action, the former affiliate's foreign
sub-affiliate has brought suit against both the former sales affiliate and the
Company which suit is pending in Federal District Court for the District of
Iowa. The foreign sub-affiliate has claimed violation of RICO, intentional
interference with the prospective economic advantage of his customers (who are
end-users of the Company's services provided through the former sales
affiliate) and an open accounting for amounts allegedly owed to the foreign
sub-affiliate. The foreign sub-affiliate seeks compensatory damages in excess
of $1 million, as well as punitive damages and certain injunctive relief. The
Company has filed a motion to dismiss the RICO claim brought by the foreign
sub-affiliate against the former affiliate and the Company. The court has
granted the former affiliate's motion with respect to dismissing the RICO
claim and the Company expects a similar ruling from the court. The Company
believes these suits are without merit and intends to vigorously defend the
suits. While the Company believes it has valid defenses to these claims and
intends to contest them vigorously, an adverse determination of the claims and
a judgment against the Company for a substantial amount of damages could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Legal Proceedings."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS AND DELAWARE LAW. Certain
provisions of the Company's Certificate of Incorporation and Bylaws could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. Such provisions could diminish the opportunities
for a stockholder to participate in tender offers, including tender offer at a
price above the then current market value of the Common Stock. Such provisions
may also inhibit fluctuations in the market price of the Common Stock that
could result from takeover attempts. The Company is also afforded the
protections of Section 203 of the Delaware General Corporation Law, which
could delay or prevent a change in control of the Company or could impede a
merger, consolidation, takeover or other business combination involving the
Company or discourage a potential acquiror from making a tender offer or
otherwise attempting to obtain control of the Company. In addition, the Board
of Directors has authority to issue up to 10,000,000 shares of Preferred Stock
and to fix the rights, preferences, privileges and restrictions, including
voting rights, of these shares without any further vote or action by the
stockholders. The rights of the holders of the Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for
19
<PAGE>
a third party to acquire a majority of the outstanding voting stock of the
Company, thereby delaying, deferring or preventing a change in control of the
Company. Furthermore, such Preferred Stock may have other rights, including
economic rights, senior to the Common Stock, and as a result, the issuance of
such Preferred Stock could have a material adverse effect on the market value
of the Common Stock. The Company has no present plan to issue shares of
Preferred Stock. Additionally, the Company's Certificate of Incorporation
provides for three classes of directors, to be elected on a staggered basis,
beginning after the first annual meeting of stockholders of the Company after
the date of the offering. One class is elected each year with each class
serving a three-year term, which also enables existing management to exercise
significant control over the Company's affairs. See "Description of Capital
Stock--Delaware Anti-Takeover Law and Certain Charter Provisions."
IMPACT OF SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial amounts of
the Common Stock in the public market after this offering could have a
material adverse effect on the market price of the Common Stock. In addition
to the 3,500,000 shares offered hereby, 15,978,074 additional shares
outstanding and 1,976,707 shares issuable upon exercise of vested options
outstanding as of the date of this Prospectus will be eligible for immediate
sale in the public market following expiration of 180 day lock-up agreements
with the Company and the Underwriters or release from such lock-up agreements
by the Company, with the consent of Deutsche Morgan Grenfell Inc., subject in
some cases to compliance with certain volume limitations and other
restrictions under Rule 144. The Company intends to file a Form S-8
Registration Statement with the Commission in order to register an aggregate
of 5,257,080 shares of Common Stock reserved for issuance upon exercise of
outstanding or future options and for sale under the Company's 1996 Employee
Stock Purchase Plan. In addition, after consummation of the offering, the
Notes and Warrants may be converted or exercised into an aggregate of
2,204,081 shares of Common Stock, assuming an initial public offering price of
$14 per share, and an additional Warrant issued to the placement agent for the
Note and Warrant financing may be exercised for 147,959 shares of Common
Stock. These shares will become eligible for sale in the public market
following expiration of 180 day lock-up agreements with the Company.
The Company also has outstanding vested options exercisable into an
aggregate of 225,000 shares of Common Stock which will become available for
sale in the public market two years after the exercise price is paid, subject
to compliance with Rule 144. The Company has granted certain rights to the
holders of these shares for the registration of such shares under the
Securities Act. See "Description of Capital Stock--Registration Rights." All
such shares are subject to 180 day lock-up agreements with the Company. See
"Management--Stock Option Plans and Arrangements," "Principal Stockholders,"
"Description of Capital Stock--Notes and Warrants," "Shares Eligible for
Future Sale" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION TO NEW INVESTORS. The initial public
offering price is substantially higher than the book value per share of the
outstanding Common Stock. Investors purchasing Common Stock in this offering
will, therefore, incur immediate and substantial dilution of approximately
$12.12 in the net tangible book value per share of Common Stock from the
initial public offering price and may incur additional dilution upon the
exercise of outstanding stock options, warrants and convertible notes. See
"Dilution."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS. Current stockholders will
receive the following benefits as a result of the offering: (a) the creation
of a market for the Company's Common Stock and (b) any unrealized gain in the
value of their equity based upon the difference between the cost of acquiring
the Company's Common Stock or securities that are convertible into such Common
Stock and the value of such Common Stock based upon the public offering price.
See "Dilution."
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,500,000 shares of
Common Stock offered by the Company hereby are estimated to be $44,420,000
($51,255,500 if the Underwriters' over-allotment option is exercised in full),
assuming an initial public offering price of $14 per share, after deducting
the underwriting discount and estimated offering expenses payable by the
Company.
Of such net proceeds, the Company expects to use approximately $10.0 million
to upgrade and maintain its telecommunications network, $15.0 million to
acquire additional switches and leased lines to expand its telecommunications
network, $11.5 million to establish and maintain the Company's Internet
backbone, although the Company may fund such capital expenditures through
lease financing arrangements, and the balance for working capital, product
development, expansion of sales and marketing efforts, and other general
corporate purposes. In addition, as part of its business strategy, the Company
intends to make strategic acquisitions of complementary businesses,
technologies or products. Although the Company evaluates such potential
acquisitions from time to time, the Company currently has no understanding,
commitment or agreement with respect to any such acquisitions.
Pending such uses, the Company intends to invest the net proceeds of this
offering in U.S. short-term, investment grade, interest-bearing securities.
While the Company believes that the proceeds of this offering combined with
cash flow from operations will be sufficient to meet its capital requirements
for the 24 months following this offering, there can be no assurance that the
Company will not require additional financing before such time. The foregoing
estimate of the period of time through which its financial resources will be
sufficient to meet its capital requirements is a forward-looking statement
that involves risks and uncertainties, and actual results could vary as a
result of a number of factors including the Company's operating results, the
results and timing of the Company's launch of new products and services, the
timing and extent of network expansion, governmental or regulatory changes,
the ability of the Company to meet product and project demands, the success of
the Company's marketing efforts, technological advances and competition,
working capital requirements, and acquisitions of complementary businesses,
technologies or products. There can be no assurance that adequate funding will
be available to the Company or, if available, that funding will be on terms
favorable to the Company, and could require the issuance of additional debt or
equity securities which could dilute the ownership of existing stockholders.
Any shortfall in funding could result in the Company's having to curtail the
introduction of new products and services, its entry into new markets and the
deployment of network hardware and other facilities, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Future Capital Needs" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The foregoing assumes conversion of the Notes into Common Stock. The Notes
bear interest at the rate of 10% per annum, payable semi-annually, and mature
in June 1998. The Notes are convertible into Common Stock subject to certain
events at a conversion price equal to 70% of the price to public set forth on
the cover of this Prospectus, subject to certain adjustments. The Notes are
also subject to prepayment at the election of the Company after the first
anniversary of their issuance (June 24, 1997). In the event that (i) the
Company elects to prepay the Notes and all of the Notes are not converted by
the holders prior to prepayment, or (ii) all of the Notes are not otherwise
converted prior to their maturity in June 1998, the Company will be required
to repay the principal amount of, plus any interest accrued on, such
unconverted Notes at such time. The Company expects that in the event any such
payment is required, the Company would be required to reduce its budget for
capital expenditures and, specifically, would be required to lease capital
equipment now planned to be purchased. There can be no assurance as to the
terms of such a lease financing. See Note 8 to Notes to Consolidated Financial
Statements.
21
<PAGE>
DIVIDEND POLICY
To date, the Company has neither declared nor paid any cash dividends on
shares of its Common Stock. The Company presently intends to retain all future
earnings for its business and does not anticipate paying cash dividends on its
Common Stock in the foreseeable future. In addition, so long as any of the
Company's Series A Convertible Secured Subordinated Notes remain outstanding,
and until the consummation of an initial public offering of the Common Stock,
the Company is prohibited from paying dividends with respect to any class of
the Company's capital stock.
CAPITALIZATION
The following table sets forth the capitalization of the Company at September
30, 1996, and as adjusted to give effect to the sale of the shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $14 per share, after deducting the underwriting discount and estimated
offering expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
Cash, cash equivalents and short-term investments......... $ 8,396 52,816
======= ======
Secured Subordinated Convertible Notes.................... 19,691 19,691
Other long-term debt and capital lease obligations,
excluding current portion................................ 1,720 1,720
Stockholders' equity (deficit):
Common stock--$.001 par value; 44,000,000 shares
authorized, 15,978,074 shares issued and outstanding,
actual; 100,000,000 shares authorized, 19,478,074 shares
outstanding, as adjusted................................. 16 20
Additional paid-in capital................................ -- 44,416
Stock purchase warrants................................... 353 353
Accumulated deficit....................................... (8,238) (8,238)
------- ------
Total stockholders' equity (deficit).................... (7,869) 36,551
------- ------
Total capitalization.................................. $13,542 57,962
======= ======
</TABLE>
The above computations assume that (i) no part of the Underwriters' over-
allotment option is exercised and (ii) no options or warrants are exercised
after September 30, 1996. As of September 30, 1996, there were (i) outstanding
options to purchase an aggregate of 3,537,558 shares of Common Stock at a
weighted average exercise price of $3.30 per share, (ii) outstanding warrants
to purchase 311,224 shares of Common Stock at an exercise price of $9.80 per
share (assuming an initial public offering price of $14 per share), and (iii)
Notes convertible into 2,040,816 shares of Common Stock at a conversion price
of $9.80 per share (assuming an initial public offering price of $14 per
share). See "Management--Stock Option Plans and Arrangements," "Description of
Capital Stock" and Notes 8, 11 and 14 of Notes to Consolidated Financial
Statements.
22
<PAGE>
DILUTION
The net tangible book value of the Company as of September 30, 1996, was
$(7,869,000), or $(0.49) per share of Common Stock. "Net tangible book value"
per share represents the amount of total tangible assets of the Company
reduced by the amount of its total liabilities and divided by the total number
of shares of Common Stock outstanding. Without taking into account any other
changes in such net tangible book value after September 30, 1996, other than
to give effect to the sale by the Company of the shares of Common Stock
offered hereby at an assumed initial public offering price of $14 per share
after deducting the underwriting discount and estimated offering expenses
payable by the Company, the pro forma net tangible book value of the Company
as of September 30, 1996, would have been $36,551,000, or $1.88 per share.
This amount represents an immediate increase in such net tangible book value
of $2.37 per share to existing stockholders and an immediate dilution of
$12.12 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $14.00
Net tangible book value per share as of September 30, 1996... $(0.49)
Increase per share attributable to new investors............. 2.37
------
Pro forma net tangible book value per share after the offer-
ing........................................................... 1.88
------
Dilution per share to new investors............................ $12.12
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 30,
1996, the differences between the existing stockholders and the new investors
with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price
paid per share, based upon an assumed initial public offering price of $14 per
share (before deducting the underwriting discount and estimated offering
expenses payable by the Company) with respect to the 3,500,000 shares offered
by the Company hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 15,978,074 82.0% $ 412,600 0.8% $0.03
New investors.................. 3,500,000 18.0 49,000,000 99.2 14.00
---------- ----- ----------- -----
Total........................ 19,478,074 100.0% $49,412,600 100.0%
========== ===== =========== =====
</TABLE>
The above computations assume that (i) no part of the Underwriters' over-
allotment option is exercised and (ii) no options or warrants are exercised
after September 30, 1996. As of September 30, 1996, there were (i) outstanding
options to purchase an aggregate of 3,537,558 shares of Common Stock at a
weighted average exercise price of $3.30 per share, (ii) outstanding warrants
to purchase 311,224 shares of Common Stock at an exercise price of $9.80 per
share (assuming an initial public offering price of $14 per share), and (iii)
Notes convertible into 2,040,816 shares of Common Stock at a conversion price
of $9.80 per share (assuming an initial public offering price of $14 per
share). To the extent the above options and warrants are exercised and the
Notes are converted, there will be further dilution to new investors. See
"Management--Stock Option Plans and Arrangements," "Description of Capital
Stock" and Notes 8, 11 and 14 of Notes to Consolidated Financial Statements.
23
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
thereto included elsewhere in this Prospectus. The balance sheet information
as of December 31, 1994 and 1995 and September 30, 1996 and the income
statement data set forth below for the years ended December 31, 1993, 1994,
and 1995 and the nine months ended September 30, 1996 are derived from the
audited financial statements included elsewhere in this Prospectus. The
balance sheet information as of December 31, 1992 and 1993 and the income
statement data for the year ended December 31, 1992 are derived from unaudited
financial statements of the Company not included herein. The income statement
data for the nine months ended September 30, 1995 is derived from unaudited
financial statements included herein. In the opinion of management, such
unaudited financial statements have been prepared on the same basis as the
audited financial statements referred to above and include all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the Company results of operations for the indicated period. Operating results
for the nine months ended September 30, 1995 and 1996 are not necessarily
indicative of the results that may be expected for any future period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- ------------------
1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues:
Telecommunications..... $17,924 $23,510 $48,937 $86,871 $ 64,985 $ 67,907
Marketing communica-
tions................. 2,965 4,792 4,915 3,774 3,022 1,943
Electronic commerce
products and servic-
es.................... -- -- -- 654 408 1,106
------- ------- ------- ------- -------- --------
Total revenues....... 20,889 28,302 53,852 91,299 68,415 70,956
Cost of revenues:
Telecommunications..... 14,448 16,676 34,565 58,467 43,634 44,802
Marketing communica-
tions................. 1,564 2,164 1,497 1,194 986 544
Electronic commerce
products and servic-
es.................... -- -- -- 281 154 402
------- ------- ------- ------- -------- --------
Total cost of reve-
nues................ 16,012 18,840 36,062 59,942 44,774 45,748
------- ------- ------- ------- -------- --------
Gross profit......... 4,877 9,462 17,790 31,357 23,641 25,208
------- ------- ------- ------- -------- --------
Operating expenses:
Sales and marketing.... 1,067 2,289 6,713 13,191 9,810 9,558
General and adminis-
trative............... 4,637 7,708 12,837 18,495 13,131 17,825
------- ------- ------- ------- -------- --------
Total operating ex-
penses.............. 5,704 9,997 19,550 31,686 22,941 27,383
------- ------- ------- ------- -------- --------
Operating profit
(loss).............. (827) (535) (1,760) (329) 700 (2,175)
Share of losses of joint
ventures............... -- -- -- (489) (187) (541)
Other income (expense),
net.................... (149) 144 (233) (464) (225) (624)
------- ------- ------- ------- -------- --------
Income (Loss) before
income taxes.......... (976) (391) (1,993) (1,282) 288 (3,340)
Income tax expense...... (16) (47) (5) (552) (412) (110)
------- ------- ------- ------- -------- --------
Net loss............... $ (992) $ (438) $(1,998) $(1,834) $ (124) $ (3,450)
======= ======= ======= ======= ======== ========
Pro forma net loss per
share.................. $ (0.10) $ (0.17)
======= ========
Shares used in per share
computation............ 16,952 17,507
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996
------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash, cash equivalents and
short-term investments... $ 424 $ 834 $ 1,274 $ 497 $ 8,396
Total working capital def-
icit..................... (1,114) (3,296) (8,309) (13,546) (2,282)
Total assets.............. 4,932 12,935 17,722 20,910 37,042
Long-term debt and capital
lease obligations........ 152 164 -- 1,146 21,411
Total debt and capital
lease obligations........ 157 173 24 6,252 22,689
Stockholders' deficit..... (752) (767) (2,768) (4,462) (7,869)
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the nine months ended September 30, 1995 and
1996 and the years ended December 31, 1993, 1994 and 1995. The discussion
should be read in conjunction with the Company's Consolidated Financial
Statements, including the Notes thereto, and the other financial data included
elsewhere in this Prospectus.
OVERVIEW
NetSource develops, implements and manages a wide range of communications
solutions for business and end-user customers worldwide. The Company's
products and services include international and domestic long distance
telecommunications, value-added telecommunications and related telemanagement
services, Internet access and hosting, and Internet and interactive electronic
commerce products and services, such as Web-based architecture development and
maintenance, Web-based content development and management, and marketing
communications services. No customer represented greater than 10% of the
Company's revenues in any of the years ended December 31, 1993, 1994 and 1995
or in the nine months ended September 30, 1995 and 1996.
The Company's Reorganization, in which the businesses of MTC International,
MTC Telemanagement and NetSource Interactive were combined into the Company,
was consummated on June 28, 1996. MTC International and MTC Telemanagement,
the Company's subsidiaries, have been operating in the telecommunications
market since March 1993 and October 1988, respectively. NetSource Interactive
entered the interactive communications and Internet electronic commerce
services business in the third quarter of 1995. Accordingly, the combined
Company and each operating entity have only a limited operating history on
which investors may evaluate the Company. In addition, the Company has not had
material sales of its Internet product and service offerings to date. The
Company's current focus is on expanding its global network of hardware,
software and facilities and introducing new Internet and interactive products
and services to increase its customer base. The Company intends to continue to
hire additional personnel and to increase its expenses related to product
development, marketing, management, network infrastructure, technical
resources and customer support. There can be no assurance that revenue growth
will continue or that the Company will in the future achieve or sustain
profitability on either a quarterly or annual basis. See "Business--
Reorganization," "Risk Factors--Limited Operating History; No Assurance of
Future Profitability" and Note 1 of Notes to Consolidated Financial
Statements.
25
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth certain financial data for the Company's
operations as a percentage of total revenues for the years ended December 31,
1993, 1994 and 1995, and for the nine months ended September 30, 1995 and
1996, except for cost of telecommunications revenues, cost of marketing
communications revenues and cost of electronic commerce revenues, which are
presented as a percentage of their respective associated revenues. The
operating results for any period are not necessarily indicative of results for
any future period. The Company anticipates that results will fluctuate
depending on a number of factors. See "Risk Factors--Variability of Quarterly
Operating Results."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Telecommunications revenues..... 83.1% 90.9% 95.2% 95.0% 95.7%
Marketing communications reve-
nues........................... 16.9 9.1 4.1 4.4 2.7
Electronic commerce revenues.... -- -- 0.7 0.6 1.6
Total revenues................. 100.0 100.0 100.0 100.0 100.0
Cost of telecommunications reve-
nues........................... 70.9 70.6 67.3 67.1 66.0
Cost of marketing communications
revenues....................... 45.2 30.5 31.6 32.6 28.0
Cost of electronic commerce rev-
enues.......................... -- -- 43.0 37.7 36.3
Total cost of revenues......... 66.6 67.0 65.7 65.4 64.5
Gross margin.................... 33.4 33.0 34.3 34.6 35.5
Sales and marketing expenses.... 8.1 12.5 14.4 14.3 13.5
General and administrative ex-
penses......................... 27.2 23.8 20.3 19.2 25.1
Operating income (loss)......... (1.9) (3.3) (0.4) 1.0 (3.1)
Income (loss) before income tax-
es............................. (1.4) (3.7) (1.4) 0.4 (4.7)
Net loss........................ (1.5) (3.7) (2.0) (0.2) (4.9)
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
Revenues. Total revenues for the nine months ended September 30, 1996
increased 4% to $71.0 million from $68.4 million for the nine months ended
September 30, 1995. For the first nine months of 1996, revenues derived from
customers located outside the U.S. amounted to 72% of total revenues, as
compared to 68% in the first nine months of 1995. This increase reflects the
growth of the Company's telecommunications services business in international
markets due to increased recognition of the benefits of re-origination
services in these markets. This increase more than offset a decline in
domestic telecommunications revenue resulting from the Company's de-emphasis
in marketing its telecommunications services and the increased competition in
the domestic market. Domestic telecommunications revenues declined to $14.8
million in the first nine months of 1996 from $16.3 million in the first nine
months of 1995. Telecommunications revenues increased 4% to $67.9 million, or
96% of total revenues, in the first nine months of 1996, from $65.0 million,
or 95% of total revenues, in 1995. The Company experienced slowed growth in
telecommunications revenue in the first nine months of 1996, primarily as a
result of the lack of availability of sufficient capital resources to support
further expansion and upgrade of the Company's switching network. This
inability of the Company to expand and upgrade its network during this period
prevented the Company from offering its customers more aggressively priced
service rates, which resulted in slowed revenue growth. The Company currently
expects to spend a substantial portion of the proceeds of this offering on
capital expenditures over the next 24 months for switching and other equipment
for the upgrade and expansion of the Company's telecommunications network. See
"Use of Proceeds." Marketing communications revenues declined to $1.9 million,
or 3% of total revenues, in the first nine months of 1996 from $3.0 million,
or 4% of total revenues, in 1995. The decrease in marketing communications
26
<PAGE>
revenues primarily reflected the loss of a significant marketing
communications customer that was acquired by another company in the first half
of 1996. While the Company has obtained additional marketing communications
customers in 1996, the Company believes that significant growth of its
marketing communications revenues is substantially dependent upon the
Company's ability to expand its presence in the electronic commerce products
and services market. Electronic commerce products and services revenues
amounted to $1.1 million in the first nine months of 1996, as compared to
$408,000 in the first nine months of 1995. The Company commenced its
electronic commerce business in mid-1995. See Notes 1 and 2 of Notes to
Consolidated Financial Statements.
Cost of Telecommunications Revenues. The Company's cost of
telecommunications revenues consists primarily of the direct cost associated
with telecommunications capacity obtained from local and interexchange
carriers and costs related to the Company's telecommunications network such as
rent for switch housing and depreciation on switching equipment. Costs of
telecommunications revenues increased to $44.8 million in the first nine
months of 1996 from $43.6 million in the same period of 1995. As a percentage
of telecommunications revenues, such costs declined to 66% in the first nine
months of 1996 from 67% in the same period in 1995. This relative stability of
costs of telecommunications revenues as a percentage of telecommunications
revenues reflects the modest growth in such revenues in the first nine months
of 1996 as compared to 1995.
Cost of Marketing Communications Revenues. The Company's cost of marketing
communications revenues consists primarily of direct costs associated with
design and production of marketing communications materials. Cost of marketing
communications revenues decreased to $544,000 in the first nine months of 1996
from $986,000 in the first nine months of 1995 corresponding to related
revenue declines, while decreasing to 28% of marketing communications revenues
in the first nine months of 1996 from 33% in the first nine months of 1995.
This decrease in such costs as a percentage of marketing communications
revenues reflects a number of higher margin marketing communications projects
underway in the first nine months of 1996 as compared to 1995.
Cost of Electronic Commerce Revenues. The Company's cost of electronic
commerce products and services revenues consists primarily of direct costs
associated with the design, development and deployment of interactive media
products and services. Cost of such revenues amounted to $402,000 in the first
nine months of 1996, or 36% of such revenues, as compared to $154,000, or 38%
of such revenues, in the same period in 1995.
Gross Profit. The Company's gross profit (total revenues less total cost of
revenues) increased to $25.2 million in the first nine months of 1996, from
$23.6 million in the first nine months of 1995. The Company's gross margin
(total revenues less total cost of revenues as a percentage of revenues)
remained at approximately 35% in the first nine months of 1996 and 1995. The
Company's current telecommunications network and Internet backbone expansion
plan will substantially increase the Company's cost structure in advance of a
corresponding increase in revenues. At the same time, the Company has
experienced and expects to continue to experience competitive pricing
pressures in the telecommunications services market. As a result of these
planned increases in the Company's cost structure and competitive trends, the
Company's gross margins and other operating results would be adversely
affected if its revenues do not increase substantially in the future. The
number of telecommunications switches the Company expects to deploy over the
next 24 months and the Company's planned establishment and expansion of its
Internet backbone over this period are forward-looking statements that involve
risks and uncertainties, and actual results could differ materially as a
result of a number of factors, including those described in "Risk Factors--
Risks of Growth and Expansion."
27
<PAGE>
Sales and Marketing Expenses. The Company's sales and marketing expenses
consist primarily of sales commissions paid to independent master affiliates
and salaries and related support costs associated with the Company's affiliate
support and marketing group. Sales and marketing expenses decreased to $9.6
million in the first nine months of 1996 from $9.8 million in the year earlier
period. As a percentage of total revenues, these expenses decreased slightly
to approximately 13% in the first nine months of 1996, as compared to 14% in
the first nine months of 1995. Such decreases primarily reflected lower total
commission payments in respect of telecommunications sales due to lower
average commission rates on such sales and an increase in the proportion of
non-commissionable sales of such services. The Company expects sales and
marketing expenses to grow in dollar amount in future periods as it expands
its sales and marketing efforts and distribution channels in connection with
expansion of its telecommunications network and electronic commerce business.
General and Administrative Expenses. The Company's general and
administrative expenses increased 36% to $17.8 million in the first nine
months of 1996 from $13.1 million in the first nine months of 1995. As a
percentage of total revenues, general and administrative expenses increased to
25% of total revenues in the first nine months of 1996 from 19% in 1995. These
increases reflected legal fees and other administrative costs, as well as
severance payments, associated with the Reorganization effected in June 1996
and expansion of the Company's management team and administrative
infrastructure to support the Company's operations, an increase in expenses
associated with the retention of temporary and consulting personnel,
particularly in the financial and accounting area and an additional provision
against certain accounts receivable. The Company expects that general and
administrative expenses will increase substantially in dollar amount in the
future as the Company continues to expand its global operations.
Share of Losses of Joint Ventures. In February 1995, the Company formed a
joint venture to market and distribute telecommunications services in Japan,
and in January 1996, the Company formed a joint venture to market and
distribute telecommunications services in the Netherlands. The Company's share
of losses generated by these joint ventures amounted to $541,000 and $187,000
in the nine months ended September 30, 1996 and 1995, respectively. These
losses resulted primarily from the early stages of development of the joint
ventures. The Company expects losses to continue from both joint ventures at
least through 1997. While the Company has no continuing contractual obligation
to fund such losses and reviews from time to time whether it should continue
to do so, the Company presently intends to continue recognizing its share of
the losses of the joint ventures. The foregoing statements concerning the
Company's expectation as to the duration of further losses from its joint
ventures constitute forward-looking statements that involve risks and
uncertainties and the actual results of operations of the joint ventures could
vary as a result of a number of factors, including, but not limited to, the
ability of such joint ventures to penetrate their target markets, the results
and timing of the Company's launch of new products and services, the timing
and extent of network expansion, governmental or regulatory changes, the
success of the Company's marketing efforts, technological advances and
competition. See Note 3 of Notes to Consolidated Financial Statements.
Other Income (Expense), Net. The increase in the net charge to other income
(expense), net to $624,000 in the nine months ended September 30, 1996
compared to $225,000 in the same period in 1995 primarily reflects increased
interest expense in the first nine months of 1996. The Company expects
interest expense to increase during the remainder of 1996 as the Company
incurs additional interest expense associated with the $20 million in
principal amount of secured subordinated convertible notes issued by the
Company in June 1996. See Note 8 of Notes to Consolidated Financial Statements
and "--Liquidity and Capital Resources."
Income Taxes. Prior to the Reorganization effected June 28, 1996, the
several entities that combined to form the Company did not file consolidated
tax returns. As a result, income recognized by a given entity could not be
offset for tax purposes by losses realized by another entity. In the nine
28
<PAGE>
months ended September 30, 1996 and 1995, certain of such entities recognized
pre-tax profits and as a result made related provisions for income taxes
aggregating $110,000 and $412,000, respectively. See Notes 2 and 10 of Notes
to Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Total revenues for the year ended December 31, 1995 increased 70%
to $91.3 million from $53.9 million for 1994. For 1995, revenues derived from
international customers amounted to 69% of total revenues, as compared to 45%
in 1994. This increase primarily reflects increased sales of the Company's
international telecommunications services due to the Company's expanded
international distribution channels and the increased recognition in the
international market of the benefits of re-origination services, which more
than offset a decline in domestic telecommunications revenues. Domestic
telecommunications revenues declined to $23.6 million in 1995 from $24.9
million in 1994. Telecommunications revenues increased 78% to $86.9 million,
or 95% of total revenues, in 1995, from $48.9 million, or 91% of total
revenues, in 1994. Marketing communications revenues declined to $3.8 million,
or 4% of total revenues, in 1995 from $4.9 million, or 9% of total revenues,
in 1994. The decrease in marketing communications revenues primarily reflected
the loss of a significant marketing communications customer that filed for
bankruptcy protection in mid-1994. Electronic commerce products and services
revenues amounted to $654,000 in 1995. The Company commenced, its electronic
commerce business in mid-1995. See Notes 1 and 2 of Notes to Consolidated
Financial Statements.
Cost of Telecommunications Revenues. Costs of telecommunications revenues
increased to $58.5 million in 1995, from $34.6 million in 1994, but declined
to 67% of telecommunications revenues in 1995 from 71% in 1994. This decrease
is primarily due to allocation of the Company's fixed costs over its larger
revenue base and the increased level of telecommunications revenues derived
from international markets in which the Company received favorable volume
pricing from a number of major interexchange carriers.
Cost of Marketing Communications Revenues. Cost of marketing communications
revenues decreased to $1.2 million in 1995 from $1.5 million in 1994 as
related revenue declined, but increased to 32% of marketing communications
revenues in 1995 from 30% in 1994. The increase in such costs as a percentage
of marketing communications revenues reflects the completion of a number of
higher margin marketing communications projects in 1994.
Cost of Electronic Commerce Revenues. The Company's cost of electronic
commerce products and services revenues amounted to $281,000 in 1995, or 43%
of such revenues.
Gross Profit. The Company's gross profit increased to $31.4 million in 1995,
from $17.8 million in 1994. The Company's gross margin increased to 34% in
1995 from 33% in 1994.
Sales and Marketing Expenses. Sales and marketing expenses increased 96% to
$13.2 million in 1995 from $6.7 million in 1994. These expenses increased as a
percentage of total revenues to 14% in 1995 from 12% in 1994. These increases
reflect higher average commissions paid on international products and services
than those paid on domestic products and services and an overall increase in
the support staff and marketing expenses of the Company associated with its
increased revenues.
General and Administrative Expenses. The Company's general and
administrative expenses increased 44% to $18.5 million in 1995 from $12.8
million for 1994. As a percentage of total revenues, general and
administrative expenses decreased to 20% of total revenues in 1995 from 24% in
1994, reflecting the Company's substantial increase in total revenues in 1995.
The increase in dollar amount of such spending primarily reflects expansion of
the Company's management team and administrative infrastructure to support the
Company's operations. In addition, general and administrative expense in
29
<PAGE>
1994 included a charge of approximately $1.2 million as a result of non-
payment by a customer for marketing communications services provided by the
Company.
Share of Losses of Joint Ventures. The Company's share of losses generated
by its telecommunications services joint venture in Japan amounted to $489,000
in 1995, its first year of operations. See Note 3 of Notes to Consolidated
Financial Statements.
Other Income (Expense), Net. The increase in the net charge to other income
(expense), net to $464,000 in 1995 compared to $233,000 in the same period in
1994 reflected several capital leases, notes payable and borrowing
transactions (including certain termination fees) that increased the Company's
interest expense to $312,000 during that year.
Income Taxes. In 1995, certain of the entities that combined to form the
Company pursuant to the Reorganization in June 1996 recognized pre-tax income
and, as a result, recorded related provisions for income taxes aggregating
$552,000. In 1994, the pre-tax income recognized by such entities was nominal
and accordingly only an immaterial tax provision was recorded. See Notes 2 and
10 of Notes to Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues. Total revenues for the year ended December 31, 1994 increased 90%
to $53.9 million from $28.3 million for 1993. Telecommunications revenues
totaled $48.9 million, or 91% of total revenues, in 1994. In 1993,
international telecommunications revenues were nominal in amount. The Company
commenced its international telecommunication services business in mid-1993.
Marketing communications revenues totaled $4.9 million, or 9% of total
revenues, in 1994 as compared to $4.8 million, or 17% of total revenues, in
1993.
Cost of Telecommunications Revenues. Cost of telecommunications revenues
increased to $34.6 million in 1994 from $16.7 million in 1993. Such costs as a
percentage of telecommunications revenues remained at approximately 71% in
each of 1994 and 1993, however. During 1994, cost efficiencies associated with
the Company's higher level of telecommunications revenues were offset by
increased fixed costs attributable to deployment and expansion of the
Company's international telecommunications network.
Cost of Marketing Communications Revenues. The Company's costs of marketing
communications revenues declined to $1.5 million in 1994 from $2.2 million in
1993, and decreased substantially as a percentage of advertising revenues to
30% in 1994 from 45% in 1993. The significant decrease in such costs as a
percentage of marketing communications revenues primarily reflects the
commencement of a number of higher margin marketing communications projects
for customers in 1994.
Gross Profit. Gross profit increased to $17.8 million in 1994 from $9.5
million in 1993. The Company's gross margin remained at approximately 33% in
1994 and 1993.
Sales and Marketing Expenses. The Company's sales and marketing expenses
increased to $6.7 million in 1994 from $2.3 million in 1993. As a percentage
of total revenues, such expenditures increased to 12% of total revenues in
1994 from 8% of total revenues in 1993. These increases reflect higher average
commissions paid to international master affiliates and an overall increase in
support staff and marketing expenses associated with the Company's first full
year of international operations.
General and Administrative Expenses. The Company's general and
administrative expenses increased 67% to $12.8 in 1994 from $7.7 million in
1993. As a percentage of total revenues, such expenses declined to
approximately 24% of total revenues in 1994 from 27% in 1993. The increase in
30
<PAGE>
dollar amount of such spending primarily reflects the substantial expansion of
the Company's management and administrative infrastructure to support the
Company's expansion into the international telecommunications market beginning
in mid-1993. In addition, general and administrative expense in 1994 included
a charge of approximately $1.2 million, on net receivables of $2.7 million, as
a result of non-payment by a customer for marketing communications services
provided by the Company.
Other Income (Expense), Net. During 1994, the Company recorded a net charge
of $233,000 in other income (expense), net primarily due to recognition of an
$83,000 loss related to a discontinued product line and an $82,500 loss on the
sale of certain fixed assets. This compared to the realization of $144,000 in
other income (expense), net in 1993, primarily due to the fact that interest
income was not offset by other expense.
Income Taxes. In each of 1994 and 1993, the Company recorded only nominal
provisions for income taxes.
QUARTERLY RESULTS
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------
DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1994 1995 1995 1995 1995 1996 1996 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Telecommunications..... $17,749 $20,977 $22,066 $21,942 $21,886 $22,592 $22,737 $22,578
Marketing
communications........ 657 675 1,333 1,014 752 658 616 669
Electronic commerce
products and
services.............. -- -- 132 276 246 230 286 590
------- ------- ------- ------- ------- ------- ------- -------
Total revenues......... 18,406 21,652 23,531 23,232 22,884 23,480 23,639 23,837
Cost of revenues:
Telecommunications..... 12,816 13,966 14,859 14,809 14,833 14,852 14,693 15,257
Marketing
communications........ 248 222 424 340 208 146 188 210
Electronic commerce
products and
services.............. -- 1 52 101 127 164 106 132
------- ------- ------- ------- ------- ------- ------- -------
Total cost of
revenues.............. 13,064 14,189 15,335 15,250 15,168 15,162 14,987 15,599
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 5,342 7,463 8,196 7,982 7,716 8,318 8,652 8,238
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.... 2,329 3,105 3,332 3,373 3,381 3,350 3,112 3,096
General and
administrative........ 3,367 3,965 4,410 4,756 5,364 4,836 5,435 7,554
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 5,696 7,070 7,742 8,129 8,745 8,186 8,547 10,650
------- ------- ------- ------- ------- ------- ------- -------
Operating profit
(loss)................ (354) 393 454 (147) (1,029) 132 105 (2,412)
Share of losses of joint
ventures............... 0 (2) (40) (145) (302) (35) (249) (257)
Other expense, net...... (211) (54) (77) (94) (239) (113) (155) (356)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes.......... (565) 337 337 (386) (1,570) (16) (299) (3,025)
Income tax benefit
(expense).............. 88 (80) (152) (180) (140) (188) (78) 156
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)...... $ (477) $ 257 $ 185 $ (566) $(1,710) $ (204) $ (377) $(2,869)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
31
<PAGE>
The Company's quarterly operating results are expected to fluctuate from
quarter to quarter depending on various factors, including the rate of
deployment of new switching equipment, the timing of release of new products
and services, competition, the evolving and unpredictable nature of the
markets in which the Company's products and services are sold, the mix of
distribution channels and products, pricing actions by the Company or its
competitors, the pace of telecommunications deregulation in the markets in
which the Company competes, seasonality, and general economic conditions. A
significant portion of the Company's expenses, such as rent, headcount,
depreciation, costs of telecommunications capacity from local and
interexchange carriers and capital lease expenses, are relatively fixed in
advance, based in large part on the Company's forecasts of future sales. The
forecasting of future sales by the Company is necessarily imprecise and this
imprecision is compounded and the timeliness of such forecasting is adversely
affected by the material weaknesses in the Company's internal control
structure and operations and by the early stage of development of the
Company's Internet and interactive products and services. If sales are below
expectations in any given period, the adverse effect of a shortfall in sales
on the Company's operating results may be magnified by the Company's inability
to adjust spending to compensate for such a shortfall. The Company's markets,
characterized by short product life cycles and declining prices of existing
products and services, require introduction of new products and services and
enhancements to existing products and services to maintain gross margins.
Moreover, in response to competitive pressures or to pursue new product or
market opportunities, the Company may take certain pricing or marketing
actions that could materially and adversely affect the Company's operating
results. In addition, the Company's telecommunications revenues can be
affected by seasonality, which varies by geographic region. As a result of all
of the foregoing, there can be no assurance that the Company will be able to
achieve or sustain profitability on a quarterly or annual basis.
Total revenues increased on a quarter-to-quarter basis over the periods
presented through the quarter ended June 30, 1995, primarily reflecting growth
in demand for the Company's telecommunications services, especially in
international markets. The Company's total revenues remained relatively flat
in the second half of 1995 through the quarter ended September 30, 1996,
primarily as a result of the lack of availability of sufficient capital
resources to support further expansion and upgrade of the Company's switching
network. This inability of the Company to expand and upgrade its network
during this period prevented the Company from offering its customers more
aggressively priced service rates, resulting in relatively flat
telecommunications revenues. While the Company's results of operations over
the periods presented do not exhibit material seasonal trends, the Company
believes that such trends, in particular seasonal softness in Europe during
the late summer months, may affect its operating results in the future. Gross
margins (gross profit as a percentage of total revenues) increased to
approximately 34% to 36% in 1995 and 1996, respectively, from a gross margin
of approximately 29% in the quarter ended December 31, 1994, reflecting
increased competition in the telecommunications carrier market, which has
resulted in improved capacity pricing for the Company. Sales and marketing
expenses increased through the quarter ended December 31, 1995 but declined in
the three quarter period ended September 30, 1996, primarily due to lower
aggregate commission payments in respect of telecommunications sales due to an
increase in the proportion of non-commissionable sales of such services. While
general and administrative expenses generally increased on a quarter-to-
quarter basis over the periods presented, such expenditures increased
substantially in the quarter ended September 30, 1996, reflecting legal fees
and other administrative costs, as well as severance payments associated with
the Reorganization, expansion of the Company's management team and
administrative infrastructure to support the Company's operations, an increase
in expenses associated with the retention of temporary and consulting
personnel, particularly in the financial and accounting area, and an
additional provision against certain accounts receivable.
LIQUIDITY AND CAPITAL RESOURCES
The Company has experienced significant growth in its operations in recent
years, which has required substantial working capital to finance receivables
and capital expenditures. In addition, the
32
<PAGE>
Company has financed a substantial portion of its working capital needs by
taking advantage of the timing of its billing and collection cycle versus its
carrier payments. For the vast majority of the Company's international
telecommunications service revenue, the Company generally invoiced its
customers on a monthly basis, but collected funds on a weekly basis via an
automatic charge to its customers' credit card accounts. By collecting such
cash on a weekly basis while paying its carriers on a less frequent basis, the
Company has internally financed its activities, although occasionally
experiencing negative working capital balances. Such working capital deficits
have resulted in the Company's engaging in certain debt financing activities.
Net cash provided by operating activities was $1.5 million, $3.6 million,
$1.4 million and $85,000 in 1993, 1994, 1995 and the nine months ended
September 30, 1996, respectively. In 1994 and 1995, rapid international sales
growth and the accelerated collection process for international
telecommunications receivables relative to payment by the Company of its
carrier payables, resulted in significant cash flow from operations despite a
negative working capital position at year end.
Net cash used in investing activities was $1.7 million, $1.8 million, $3.3
million and $6.8 million in 1993, 1994, 1995 and the nine months ended
September 30, 1996, respectively. A substantial portion of investing activity
in 1993, 1994, 1995 and the first nine months of 1996 consisted of the
purchase and deployment of switching equipment, as well as costs incurred in
the development of the Company's management information systems and purchase
of office furniture as overall head count increased.
Net cash provided by (used in) financing activity was $(17,000), $(832,000),
$1.0 million and $11.1 million in 1993, 1994, 1995 and the nine months ended
September 30, 1996, respectively. The cash used in financing activity in 1994
primarily related to the repayment of $789,000 in bank overdrafts. During
1995, cash provided by financing activity primarily reflected drawdowns on a
domestic credit line that was in place in November and December 1995. The
substantial increase in net cash provided by financing activities in the nine
months ended September 30, 1996 reflected the proceeds from the Company's
issuance of the Notes. In June 1996 the Company issued $20 million in
principal amount of the Notes to certain foreign institutional investors. The
Notes bear interest at the rate of 10% per annum, payable semi-annually, and
mature in June 1998. The Notes are convertible into Common Stock subject to
certain events at a conversion price equal to 70% of the price to public set
forth on the cover of this Prospectus, subject to certain adjustments. The
Notes are also subject to prepayment at the election of the Company after the
first anniversary of their issuance (June 24, 1997). In the event that (i) the
Company elects to prepay the Notes and all of the Notes are not converted by
the holders prior to prepayment, or (ii) all of the Notes are not otherwise
converted prior to their maturity in June 1998, the Company will be required
to repay the principal amount of, plus any interest accrued on, such
unconverted Notes at such time. The Company expects that in the event any such
payment is required, the Company would be required to reduce its budget for
capital expenditures and, specifically, would be required to lease capital
equipment now planned to be purchased. There can be no assurance as to the
terms of such a lease financing. See Note 8 of Notes to Consolidated Financial
Statements.
At September 30, 1996, the Company's principal source of liquidity was $8.4
million in cash and cash equivalents, although the Company had a negative
working capital balance at such date of approximately $2.3 million. The
Company currently expects to spend approximately $36.5 million on capital
expenditures over the next 24 months for switching and other equipment for the
upgrade and expansion of the Company's telecommunications network, Internet
backbone, and for additional computer equipment in support of its interactive
businesses, although the Company may fund such capital expenditures through
lease financing arrangements.
The Company intends to increase its telecommunications network
significantly, adding network hardware and dedicated leased lines in numerous
locations throughout the world. In addition, the Company intends to utilize
capital to invest in research and development and strategic joint ventures
33
<PAGE>
and to make acquisitions of complementary products, technologies and
businesses. While the Company believes that the proceeds of this offering
combined with cash flow from operations will be sufficient to meet its capital
requirements for the 24 months following this offering, there can be no
assurance that the Company will not require additional financing before such
time. The Company's funding requirements may change at any time due to various
factors including the Company's operating results, the results and timing of
the Company's launch of new products and services, governmental or regulatory
changes, the timing and extent of its network expansion, the ability of the
Company to meet product and project demands, the nature and timing of the
Company's acquisition of complementary products, technologies or businesses,
the success of the Company's marketing efforts, technological advances and
competition. There can be no assurance that adequate funding will be available
to the Company or, if available, that funding will be on terms favorable to
the Company, and could require the issuance of additional debt or equity
securities which could dilute the ownership of existing stockholders. Any
shortfall in funding could result in the Company's having to curtail the
introduction of new products and services, its entry into new markets and the
deployment of network hardware and other facilities, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. See Note 1 of Notes to Consolidated Financial
Statements.
34
<PAGE>
BUSINESS
GENERAL
NetSource Communications, Inc. ("NetSource" or the "Company") develops,
implements and manages a wide range of communications solutions for business
and end-user customers worldwide. The Company's products and services include
international and domestic long distance telecommunications, value-added
telecommunications and related telemanagement services, Internet access and
hosting, Internet and interactive electronic commerce products and services,
such as Web-based architecture development and maintenance, content
development and management, and marketing communications services. The
Company's strategy consists of integrating communications solutions, expanding
its telecommunications and Internet-related networks, broadening its
distribution channels, developing innovative technology and acquiring
complementary technologies and businesses.
The Company believes that the telecommunications, applications software
development and marketing communications services industries are becoming
increasingly complementary as a result of telecommunications deregulation, the
proliferation of personal computers, connectivity advances and rapidly
converging technologies. Traditional voice and date services, multimedia
applications and emerging Internet-based products are being delivered to
customers using the medium of telecommunications. At the same time, businesses
worldwide are being confronted with increasingly complex communications
requirements as interaction increases with customers, remote offices,
affiliates and computer networks in global markets. To manage increased
traffic from fax, voice, data and electronic/Internet related media,
businesses must currently utilize multiple vendors for a number of
communications services including long distance telecommunications, network
design and engineering, Internet access, design and implementation of Web
architectures, and corporate marketing communications. NetSource offers its
customers a single source solution for such services on both a bundled and
discrete basis.
INDUSTRY OVERVIEW
DOMESTIC TELECOMMUNICATIONS
According to the U.S. Federal Communications Commission ("FCC"), in 1995 the
U.S. long distance telecommunications market was approximately $72.5 billion,
with AT&T Corporation, MCI Communications Corporation, Sprint Corporation and
Worldcom, Inc., generating approximately 81.9% of aggregate U.S. long distance
carrier revenues, with numerous other telecommunications carriers and
resellers accounting for the balance of the market.
Long distance companies that have their own transmission facilities and
switches are referred to as facilities-based carriers. Facilities-based
carriers are switch-based carriers, meaning that they have at least one switch
to direct their long distance traffic. Non-facilities-based carriers either
(i) depend upon facilities-based carriers for switching and transmission
facilities ("switchless resellers") or (ii) install and operate their own
switches but depend on facilities-based carriers for transmission facilities
("switch-based resellers"). Switch-based resellers are able to reduce service
costs with respect to those calls that originate and terminate in cities that
are served by such resellers' switches. Facilities-based carriers often engage
in the resale of other telecommunication carriers' services.
The relationship between resellers and the major long distance carriers is
predicated primarily upon the fact that the pricing strategies and cost
structures of the major long distance carriers have resulted historically in
their charging higher rates to the small to medium-sized business customer.
Small to medium-sized business customers typically are not able to make the
volume commitments necessary to negotiate reduced rates with long distance
carriers under individualized contracts. By
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committing to large volumes of traffic, the reseller guarantees traffic to the
major long distance carrier, but the major long distance carrier is relieved
of the administrative burden of qualifying and servicing large numbers of
small to medium-sized accounts. The successful reseller has lower overhead
costs and is able to efficiently market the long distance product, process
orders, verify credit and provide customer service to a large number of
accounts.
INTERNATIONAL TELECOMMUNICATIONS
International telecommunications consist of telephone-based (terrestrial,
wireless and satellite) transmissions that originate in one country and
terminate in a different country. The international long distance
telecommunications services market is divided into two major segments:
telecommunications that either originate or terminate in the U.S.; and
telecommunications between countries other than the U.S. The International
Telephone Union estimates that in 1994, the international long distance
telecommunications services market was approximately $50.6 billion, with AT&T
Corporation, Deutsche Telekom AG, MCI Communications Corporation, France
Telecom and British Telecommunications plc, generating approximately 39.8% of
aggregate global long distance carrier revenues, with numerous other
telecommunications carriers and resellers accounting for most of the balance
of the market.
Historically, national PTT monopolies provided the telephone services
required by their respective countries, leaving customers with no choice but
to use those services and pay the prices charged by PTTs. Additionally, much
of the intercountry traffic has been historically controlled by PTTs. Due to
this lack of competition, the historical cost of making international
telephone calls from points of origin outside of the U.S. has been
significantly higher than that of making international calls from inside the
U.S. In connection with increasing deregulation in international markets,
telecommunications providers such as the Company offered savings over the
rates charged by PTTs in countries with regulated telecommunications markets
through a process known as "callback." Callback technology allows
telecommunications providers to purchase telecommunications capacity from
service providers outside the regulated countries at lower rates and resell
the service to clients at a favorable rate relative to that offered by the
PTTs. Callback works by the caller making an initial telephone call and then
waiting for a "call back" from the network switch to complete the call.
Callback is a "non-transparent" service in that some action must be taken by
the caller other than dialing a phone number (i.e., hanging up and answering
the call back).
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More recently, technical innovations have allowed some companies to offer
customers a "transparent" callback service known as "reorigination" that
requires no additional actions by the caller. Using an "autodialer" which is
connected to the customer's telephone network, reorigination sends a signal to
an operations center which reroutes the call to the desired location without
the customer having to hang up and wait for a call back. The following diagram
illustrates the operation of callback and reorigination.
[ILLUSTRATION OF CALLBACK AND REORIGINATION APPEARS HERE]
How Callback Works
- ------------------
1. Customer subscriber calls pre-determined telephone number, hears ring and
hangs up.
2. Network (consisting of network switch controller and network switch)
identifies caller and initiates a return telephone call to the subscriber.
3. Subscriber answers the returned call and hears a dial tone.
4. Subscriber dials the destination telephone number and is connected.
How Reorigination Works
- -----------------------
1. Customer subscriber calls destination telephone number and "intelligent"
autodialer simultaneously alerts network switch controller to subscriber's call
initiation.
2. Switch initiate's call back to autodialer and autodialer bridges caller to
the network.
3. Reorigination network routes call through switch to destination telephone
number and call is connected.
The reduced costs afforded by callback and reorigination technology, coupled
with the introduction of value-added services such as voice mail, call
waiting, caller identification and call forwarding, have resulted in new
competitors to PTTs in providing international telecommunications services.
In the future, the Company believes that continuing deregulation of
international telecommunications markets coupled with technological advances
will lead to increased competition similar to that in the U.S. Specifically,
the Company believes that increased utilization of high speed
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fiber optic cable and technologically advanced switching software may increase
capacity, speed and quality and may offer value-added features while reducing
cost. The Company believes that these developments will result in decreased
demand for callback and reorigination services in deregulated markets, but
that these factors will lead to increased traffic volume for international
facilities-based carriers with an established customer base, carrier
relationships and switches.
THE INTERNET AND ELECTRONIC COMMERCE
The Internet is a global collection of computer networks cooperating to
enable commercial organizations, educational institutions, government agencies
and individuals to communicate electronically, access and share information
and conduct business. Unlike the public and private telecommunications
networks that are managed by businesses, government agencies or other
entities, the Internet is a cooperative interconnection of many such public
and private networks. The networks that comprise the Internet are connected in
a variety of ways, including the public switched telephone network and high
speed, dedicated leased lines.
A great deal of the growth in Internet use in the past several years has
been driven by the emergence of a specific network of servers and information
available on the Internet known as the World Wide Web (the "Web"). Based on a
client/server model and a set of standards for information access and
navigation, the Web allows non-technical users to exploit the capabilities of
the Internet thereby allowing them to retrieve, link and download information
on the Internet in a consistent manner and making the underlying complexities
of the Internet relatively seamless to the end-user. The growth of the
Internet and the Web has also been facilitated by the global proliferation of
personal computers, by connectivity advances, such as ISDN, xDSL and T-1
circuits, and by the development and distribution of easy-to-use graphical
interface software, such as NetScape Navigator and Microsoft Explorer.
The proliferation of the Web is a result in part of businesses recognizing
that the Web is an alternative for marketing communications and commerce due
to its interactive nature, which enables companies to customize their business
communications and access previously unused distribution channels. The
establishment of Web-based architectures for businesses represents an
efficient means of storing, managing and transferring documents and
interactive media in a way that can be more effectively used by employees,
customers, suppliers and other parties connected to a business. The use of the
Internet has also been expanded as a means for intra-enterprise
communications, or Intranets, as a cost effective way for businesses to link
their global internal networks.
The growth of the Web has led to an increase in the amount of electronic
commerce conducted over the Internet. The Company defines electronic commerce
as the delivery of information (both voice and data), products, services,
marketing, systems and support both within an organization or to the external
marketplace over any interactive, electronic or on-line medium. An electronic
commerce-based Web site may allow for the purchasing of products on-line or
the creation or changing of a visitor's bank or other account. The Forrester
Report for December 1995 estimated that typical budgets for a company to
launch and maintain a Web site for one year ranged, depending on the type of
site, from approximately $300,000 for a site with static content, to over $3
million for a site providing for consumer transactions. This report estimated
that these expenditures could rise up to 230% through 1997.
THE NETSOURCE STRATEGY
The Company believes that businesses worldwide are being confronted with
increasingly complex communications requirements as interaction increases with
customers, remote offices, affiliates and computer networks in global markets.
To manage increased traffic from fax, voice, data and
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electronic/Internet related media, businesses must currently utilize multiple
vendors for a number of communications services including long distance
telecommunications, network design and engineering, Internet access, design
and implementation of Web architectures, and corporate communications and
advertising. NetSource offers its customers a single source solution for such
services on both a bundled and discrete basis. The following are elements of
the Company's strategy in providing a complete communications solution.
Provide Integrated Solutions. The Company offers integrated communications
solutions which include telecommunications, network design, interactive
software systems, multimedia content creation and management and marketing
communications expertise. NetSource is able to exploit its technical
competence in telecommunications network design and computer telephony along
with its experience in the design and implementation of Web architectures and
marketing communications to provide its customers with a single source for
managed business communications products and services.
The foundation of the Company's solution is its global telecommunications
network and its experience in network design and computer telephony.
Telecommunications is the primary delivery medium for Internet access and
Internet hosting services. Internet access and hosting provides the platform
upon which the Company's Internet architectures, software and content
solutions are delivered. The Company's experience in marketing communications
enables the Company to create the "look and feel" of interactive media and
communications utilized in a client Internet presence. The ability to develop,
design and maintain content allows the Company to provide market-specific
applications.
Continue Development of Networks. The Company is currently engaged in a
large scale upgrade of its domestic and international telecommunications
network. During the next 24 months, the Company plans to deploy up to an
additional 14 digital switches throughout Europe, Asia and the Americas. The
Company's ownership of switches reduces its reliance on other carriers,
enables routing of traffic over multiple leased lines, aids in cost control
and permits the compilation of call record data and other customer
information, and will allow for the continued expansion of its switched based
network. In addition, the Company plans to expand its U.S. network control
center and establish a mirrored network control center in Europe. The Company
also continues to implement existing and emerging technologies, such as packet
and SS7 signalling protocols.
To complement its current telecommunications product offerings, the Company
plans to expand its Internet service capabilities to provide Internet access
and Web hosting. In order to do this, the Company plans to deploy a nationwide
network of data switches, routers and T-3 circuits to form the backbone of
such a network. The Company also acquired scruz-net, an ISP with over 2,000
customers as of October 15, 1996. See "--Recent Developments." In addition,
the Company plans to establish three Web farms in the U.S. and one in Europe,
to offer its Web hosting services.
Leverage and Expand Global Distribution Network. The Company is seeking to
leverage its international telecommunications distribution channels by selling
its telecommunications, Internet and interactive products and services through
such channels to new and existing customers. The Company intends to continue
to expand its distribution channels to obtain greater geographic and market
coverage. For example, the Company intends to increase its use of foreign
joint ventures to service markets in which the Company does not already have a
presence. See "--Marketing and Sales."
Maintain Leading Edge Technology. The Company believes that its core
technological capabilities enable it to offer differentiated services and
products to its customers. The Company believes it was a pioneer in the
development of least cost routing technology, computer-controlled switch-based
telecommunications networks and advanced Web architectures for electronic
commerce. NetSource's strategy of technology innovation and implementation is
based upon research and
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development efforts that the Company expects to continue to result in the
introduction of new products and services in a rapid time-to-market and cost-
effective manner. See "--Technology and Intellectual Property."
Acquire Complementary Technologies and Businesses. The Company intends to
pursue the acquisition of complementary technologies, products, services and
businesses. The Company's acquisition strategy is to pursue opportunistic
acquisitions which will allow the Company to obtain leading edge technology,
talented and experienced personnel, previously established customer
relationships and complementary product offerings. See "--Recent
Developments."
PRODUCTS AND SERVICES
TELECOMMUNICATIONS OFFERINGS
INTRODUCTION. NetSource currently provides its telecommunications services
to small and medium-sized businesses and end-users located in the U.S. and
over 130 countries worldwide. Through its dedicated facilities and network of
digital switches, NetSource is able to offer a wide variety of international
and domestic long distance telephony services. Principal telecommunications
service offerings consist of international long distance calls originating
outside the U.S., international long distance calls originating in the U.S.
and domestic long distance calls. NetSource also offers a wide array of value-
added services including travel card, cellular, data transmission, inbound
toll-free 800, conference calling and dedicated private line services. During
the nine months ended September 30, 1996 the top five foreign countries in
which the Company provided telecommunication services were Japan, Germany,
Argentina, France and the United Kingdom. See Note 1 to Notes to Consolidated
Financial Statements.
THE NETSOURCE NETWORK. The Company operates a facilities-based long distance
carrier network consisting of five digital switches, two of which are located
in San Francisco, California, and the remainder of which are located in
Newark, New Jersey, London, England and Tokyo, Japan. All of the switches are
connected to a control center located in Petaluma, California. The Company's
digital switches allow for the provision of a greater number of "on-net"
calls, that travel on the Company's fixed-cost facilities, thereby reducing
the number of calls handed off to other carriers. In addition, the Company's
ownership of switches reduces its reliance on other carriers, enables routing
of telecommunications traffic over multiple leased transmission lines, aids in
controlling costs and permits the compilation of call record data and other
customer information. The Company recently adopted SS7 and packet signaling
protocols that allow signalling for rapid call set up on the network. The
Company's SS7 upgrade provides increased performance and efficiencies network-
wide in the areas of call set up, call disconnect, look ahead routing, and
call progress identification messaging. SS7 is used by most major U.S.
carriers and provides increased performance and efficiencies within their
networks in these areas.
The Company's network is designed to allow all of the Company's switches to
be continually updated and controlled by a central computer at the Company's
control center. The Company believes that its Computer Controlled Switching
Arrangement ("CCSA") provides a competitive advantage by allowing the Company
to optimize the routing of calls over the NetSource network or by utilizing
other carriers, depending on the lowest cost route available at any given
time. This can result in savings over PTT rates. The Company has also
developed an Internet-based on-line capability that allows the Company's
authorized sales affiliates and direct sales force to create customer
profiles, conduct credit checks of potential customers and initiate
connectivity services through CCSA. The Company continually reviews the CCSA
system to determine whether additional suppliers should be added to the
Company's network to further reduce the cost of routing traffic to a specific
country and to maintain redundancy, diversity and quality within the network.
Substantially all of the Company's telecommunications products and services
utilize the Company's proprietary CCSA technology. The
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global least cost routing function of the Company's CCSA technology is based
on two U.S. patents; however, several of the Company's competitors utilize a
form of least cost routing technology, and there can be no assurance that the
Company's competitors will not develop or acquire least cost routing
technologies that are equal to or superior to the Company's CCSA technology.
See "Risk Factors--Dependence on Technological Development" and "--Technology
and Intellectual Property."
The Company plans to install 14 additional digital switches within the next
24 months in Germany, Sweden, France, the Netherlands, Australia, Belgium,
Hong Kong, Switzerland, Brazil, Argentina, Singapore, Italy, Spain and India.
In addition, during the fourth quarter of 1996, the Company expects to
commence on-net service in Frankfurt, Paris and Stockholm. The Company is also
in the process of testing for deployment additional open architecture digital
switching platforms which will provide it with the ability to deploy fully
functional nodes into key markets both on an expedited basis and at reduced
cost. These switches promote an open high speed bus architecture allowing
value added services like voice mail, fax mail, interactive voice response and
information services to be integrated into the network quickly and
efficiently. The foregoing statements regarding the timing of installation of
switches, commencement of services and deployment of new switching platforms
are forward-looking statements that involve risks and uncertainties and the
actual timing of these events could vary as a result of a number of factors
including the Company's operating results, governmental or regulatory changes,
the ability of the Company to meet product and project demands, the success of
the Company's marketing efforts, technological advances and competition,
working capital requirements and acquisitions of complementary businesses,
technologies or products. See "Risk Factors--Future Capital Needs."
The Company's telecommunications products and services are divided into five
types: (1) Non-Transparent Access Services; (2) Transparent Access Services;
(3) Wholesale Services; (4) Other Value-Added Services; and (5) Customer
Support Services.
NON-TRANSPARENT ACCESS SERVICES. The Company's Non-Transparent Access
Services require the caller to hang up after making the initial call and wait
for the "call back."
Passport. Passport is a long distance calling plan that offers competitive
international calling rates to and from over 130 countries outside the U.S.
The primary components of this product are country-specific rate plans based
on local competitive factors, typically offering savings to frequently called
destinations. This service is targeted at residential and small office/home
office ("SOHO") markets.
CellBacksm. CellBack is an international long distance product for cellular
phone users that offers international calling. Benefits of CellBack include
free air time on inbound calls in certain home service areas and the ability
to have CellBack billings consolidated with Passport billings. CellBack
typically offers discounts over services of PTTs and cellular service
providers. This service is primarily targeted to international business
customers.
MiliTelsm. MiliTel is an international long distance calling plan designed
for U.S. military personnel stationed overseas. MiliTel provides low cost long
distance calling to the most frequently called countries from military bases
located in Japan, Germany and other parts of the world.
TRANSPARENT ACCESS SERVICES. The Company's Transparent Access Services allow
the caller to utilize the Company's network to make long distance calls by
simply dialing the phone number.
GCMSsm. GCMS is a comprehensive direct dial call management system targeted
at business customers in regulated international markets. Through the use of
an "intelligent" autodialer and other telecommunication technology, GCMS
provides transparent access to the Company's global network utilizing call
routing decision capability that augments the Company's CCSA technology.
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Access Directsm. Access Direct allows customers to access dial-tone from a
Company-owned local digital switch, automatically connecting them to the
Company's global network. Access Direct is targeted at small to medium-sized
businesses in deregulating international markets. Currently, the Company
offers Access Direct in the United Kingdom.
Direct Connectsm. Direct Connect allows access via a dedicated line to the
Company's local digital switch for high volume, medium to large business users
to avoid PTT charges by paying a flat rate for the dedicated facility.
Competitive Edgesm. Competitive Edge is the Company's U.S. long distance
product that typically offers low rates on switched and dedicated services.
Calls made through Competitive Edge may be handled either by the Company's
network or on services of other carriers that are resold. Competitive Edge is
targeted at small to medium-sized businesses.
WHOLESALE SERVICES. The Company offers wholesale carrier services to both
facilities-based and non-facilities-based carriers and resellers worldwide.
Reselling wholesale services spreads the Company's fixed costs over a larger
volume of calls and increases the Company's purchasing power from long
distance carriers.
OTHER VALUE ADDED SERVICES.
One Cardsm. One Card is a long distance domestic and international calling
card that offers competitive international calling rates from 45 countries,
including the U.S., as well as other bundled value-added services such as
speed dial, conference calling and geographic call blocking. This product is
targeted at the business traveler.
Toll Free Services. The Company offers a variety of toll free inbound
calling services for both the U.S. and international markets. The Company's
U.S. toll free 800 and 888 services include a variety of time of day routing
and restricted access features and can be forwarded to other countries to
allow companies abroad to advertise and sell their products in the U.S.
market.
Conference-Calling. The Company resells a domestic and international
conference-calling service. The service allows the Company's customers to dial
a simple feature code that transfers the customer to an operator who can set
up a variety of types of conference calls and provides conference-related
features such as transcription, conference notification and set up for
multiple parties located throughout the world.
CUSTOMER SUPPORT SERVICES.
Consolidated Billing Services. The Company provides consolidated billing
which includes charges for most of the Company's various telecommunications
services and for multiple customer sites in a single bill. In addition, the
Company delivers its customers a monthly NetSource Intelligent Invoice. This
invoice consolidates the customer's calling patterns into easy-to-interpret
management reports, which the Company believes facilitates the management of
the customer's communications expenses.
Call Center. The Company's Call Center, located in Petaluma, California, is
staffed and operated seven days a week, 24 hours per day by support personnel
with English, French and Spanish language capabilities. The Company plans to
expand the number of operators and provide additional language capabilities,
including Italian, German, Chinese and Japanese. The Company is in the process
of establishing a Call Center in Ireland that will be operated on a
coordinated basis with the Company's Petaluma center.
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Telemanagement Services. Because the Company uses numerous carriers, the
Company manages the mix of different carriers to minimize a customer's
telecommunications costs. In addition, the Company offers customers management
reports that present billed minutes by calling type (i.e., domestic and
international long distance, toll free service and One Card), area code,
frequently called numbers, and call duration. The management reports can also
include multiple location businesses.
INTERNET AND INTERACTIVE PRODUCT AND SERVICE OFFERINGS
The Company provides an array of Internet-based Web architecture and content
products and services for Internet and Intranet-based electronic commerce
solutions. The Company's Internet products and service offerings are focused
on a number of complementary areas: (1) consulting services; (2) Web
architecture and development services, including Web maintenance services;
(3) content services; and (4) interactive applications. The Company believes
that its Internet solutions provide its customers with a cost effective means
of storing, managing and transferring information via an interactive medium
more easily accessed by employees, customers, suppliers and other parties
connected to the customer. The Company focuses on higher-margin offerings
through strategic consulting processes, advanced software tools and
architectures and advertising agency-level content and creative services that
enable a high level of functionality.
CONSULTING AND DESIGN SERVICES. The Company offers a range of consulting and
design services to its Internet and interactive customers that focus on
determining the appropriate architecture for the individual customer. These
consulting services also include marketing communications services, which
enhance the Company's ability to provide its customers with an easy-to-use
interface, a tailored "look and feel" and an effective delivery medium for
branded messages to a targeted constituency.
WebSense. The Company implements its "WebSense" methodology to assist
businesses in the implementation of Internet-based interactive software
architectures. WebSense is a comprehensive, in-depth, multi-stage consulting
process in which NetSource professionals analyze, structure, schedule and
budget each application of an electronic commerce solution. This allows the
customer to be more effective in the use of and interaction with all aspects
of electronic media. For example, companies often engage NetSource to assist
in establishing a basic Web architecture. NetSource believes that with the
benefit of WebSense, these companies are able to generate electronic commerce
Intranet and Internet systems, with informational databases, order processing
systems, billing systems, sales and marketing systems, Web-based training, and
on-line marketing and branding programs.
Marketing Communications Services. The Company believes that its experience
in and application of more traditional content-related marketing
communications services enhances the Company's capabilities in delivering a
comprehensive electronic commerce solution to its customers. The Company
maintains a marketing communications and advertising staff providing services
for companies in the areas of advertising, direct response, market research,
retail promotion, trade show and other marketing services. The Company's team
of experienced designers, art directors, copywriters, strategic planners and
account service staff is able to implement creative services and project
management. The Company believes that its client service and project
management systems, developed over 12 years of advertising agency experience,
allow it to effectively manage the competing demands of client needs and
production costs in the areas of marketing communications and creative
services. The Company has obtained a number of new marketing communications
services clients during 1996 to replace former customers and plans to continue
to develop this segment of its business by offering marketing communications
services as an integral part of certain of its Internet and interactive
products and services.
WEB ARCHITECTURE AND SOFTWARE DEVELOPMENT SERVICES. The Company's Web
architecture and development services include software development services,
the generation of the appropriate
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type of architecture for the customer and Web maintenance services. The
Company develops the software and related tools that underlie the Web sites
and related architectures designed by the Company for its customers, including
the user interface, layout and flow. The Company focuses on three types of Web
site architectures for its customers: (1) Promotional/Marketing, (2) Catalog
and (3) Transactional. The Company also delivers Web maintenance services
designed to provide an ongoing level of quality, functionality and performance
for a customer's Web site.
Software Development Services. The Company's software development group is
skilled in HTML, C/C++, Perl, CGI, Visual Basic and Java and uses these
programming languages and a variety of software development tools to engineer
the customers' Web sites, including software applications, customer database
integration and links to other sites or other areas within a site. The
software development group is also skilled in ISAPI, NSAPI, ODBC, JOBC,
Microsoft SQL server and Oracle and Sybase database methodologies. In
addition, the software development group includes professionals skilled in
creative design, graphic design, advertising and promotion which enables the
Company to offer its customers a range of services in development and
deployment of a Web site. The Company also designs and develops security
systems for the Web architectures it delivers to protect its customers'
confidential business information.
Promotional/Marketing Architectures. The Company designs and implements
interactive Web architectures for its customers that function as promotional
or marketing tools to illustrate their business or products. While this is the
Company's most basic consulting service, NetSource brings a range of services
to bear in designing and building these architectures, including creative
design, format conversion, content creation, staging of time dependent content
and quality control. Tools such as Adobe Photoshop, Adobe Exchange,
Debabelizer, NetScape Gold, Macromedia Shockwave and high resolution scanners
are used in developing promotional marketing architectures.
Case Study: Cadence Design Systems, Inc. In April 1995, Cadence retained
NetSource to create an interactive Web site to target design engineers, with
the goal of increasing exposure, furthering product knowledge and augmenting
customer service programs online. NetSource devised and implemented a strategy
that incorporated graphics, customized site search, links to strategic
business partners, trade show registration, worldwide training programs,
industry information and24-hour Web site administration. The Company recently
redesigned the Cadence Web site into an interactive magazine format designed
to deliver the latest industry information to electronic engineers.
Catalog Architectures. The Company's catalog architectures support an
extensive and comprehensive content driven platform to create a more
interactive format than the promotional/marketing architectures. This
architecture guides the visitor through different categories of information,
depending on choices that the visitor selects. Many of the Company-developed
catalog architectures are supported by its Content Management System
(discussed below). Catalog Architectures also contain content that is dynamic
in nature, such as site search results supported by the use of search engines
including Excite and WAIS.
Case Study: Fujitsu Microelectronics, Inc. Fujitsu Microelectronics, Inc.
("FMI") engaged the Company in February 1995 to create a Web site that would
describe FMI's comprehensive range of products while making detailed
information and specifications readily available to engineers developing
electronic systems in a consistent manner during key points in the development
process. NetSource developed a Web architecture site plan that was broad
enough to accommodate considerable amounts of data and highly specific product
information and was designed to allow such information to be managed,
accessed, downloaded and refreshed on a regular basis. Potential benefits to
FMI include faster time-to-market, ease of manipulation and dissemination of
data, and less need for hard copy documentation, printing and inventory. In
addition, the Company developed multi-Web site linkages to connect FMI's site
to various distributor and reseller sites, which were designed to broaden
FMI's customer base. As part of the Company's services to FMI, the Company
produces a CD-ROM for
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distribution to customers and sales personnel that is embedded with content
from, and can provide a link to, the FMI Web site.
Transactional Architectures. The Company's transactional architectures
contain the functionality to allow visitors to a Web site to engage in
transactions or make decisions via the Web site. For example, a transactional
Web site may allow for the purchase of products on-line or the creation or
changing of a visitor's bank or other account. Creating a transactional
architecture involves designing and building secure linkages between Web users
and existing corporate databases and business systems. Transactional
architectures provide interactive and dynamically generated user interfaces
with information tailored to individual users. NetSource employs its Object
Firewall in building transactional architectures. Transactional architectures
are complex systems built using a variety of technologies including Java,
Javascript, JDBC, C++, RDBMS and SSL capable servers such as the Netscape
Commerce Server and Microsoft IIS.
Case Study: WebDesk. The Company developed WebDesk as a transactional
Internet product for use by its own telecommunications sales affiliates and
direct sales force. Authorized users can use the WebDesk site to create a
customer profile, conduct a credit check of a potential customer, initiate
connectivity services and perform other general and administrative functions.
WebDesk allows such persons to access Company documents and information
without needing to deal with additional personnel, thereby reducing general
and administrative expenses.
Web Maintenance Services. Web sites need constant maintenance to provide an
ongoing level of quality, functionality and performance for the end-user. The
Company enters into maintenance contracts to provide regular services to its
customers such as ongoing software programming and changing the structure of
Web sites due to market factors.
CONTENT DEVELOPMENT AND MANAGEMENT SERVICES. The Company provides
development and management services to customers to create initial content for
their Web sites. As Web architectures grow larger, containing more and more
data, graphics and functionality, companies are searching for better ways to
manage, maintain and update the content and information contained within their
Web sites. Content management involves the tracking, coordination and
development of information that is distributed or otherwise made available on
the Internet or an Intranet. The Company provides the content development
services and software tools to build and update such content on an ongoing
basis. In addition, the Company provides more extensive content services, in
the form of online marketing and branding.
CMS. The Company's Content Management Services ("CMS") is a software-based
system that allows for the efficient updating and management of content for
each commerce architecture that the Company develops. This is essential for
larger sites which contain more graphics or data. Content management may
include the housing and maintaining of database libraries and multimedia
files. NetSource plans to support CMS on both the NT and Solaris platforms
using several relational databases including Microsoft SQL Server and Sybase.
NetSource also plans to support Netscape and Microsoft Web server software.
CMS defines a range of roles, assigns capabilities to each role and
orchestrates the flow of work in producing Web content. As a part of the CMS
system, the Company also builds and provides software tools and interfaces
that allow for the quick updating of Web-based content from a customer's
internal systems and resource libraries. CMS enables the Company to manage and
position company-specific content within a Web environment and allows the end-
user to select market-specific applications.
Online Marketing and Branding Services. The Company offers a range of on-
line marketing and electronic branding services for its clients worldwide
including on-line advertising, interface design on-line promotions and
electronic media planning. To date, the Company has prepared banner
advertising for several customers which were placed on publishing industry Web
sites, such as ZDNet, a division
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of Ziff-Davis publishing. The Company has also created consumer Web interfaces
for clients such as CyberCash in which the Company designed and prepared for
implementation the "look and feel" and usage structure for the consumer Web
site that CyberCash customers will use to buy services. In addition, the
Company intends to act as a development vendor to advertising agencies that
may not have the ability or knowledge necessary to develop their own
interactive service capability.
INTERACTIVE APPLICATIONS. The Company currently offers or intends to offer
certain interactive applications, that may be used by multiple customers.
PCINet. PCINet, initially created for an outpatient healthcare practice,
consists of a network system that combines Internet-based software, Internet
connectivity, industry-specific applications and interfaces, system
implementation and product support to facilitate communications and
information access. PCINet fulfills the specific connectivity needs of
outpatient healthcare practices which include access to clinical,
administrative and financial data and information. The system accomplishes
this task by using customizable browser and home page software, thereby
allowing each PCINet user to personalize a password-protected interface to
individual preferences and job duties. Due to the commonality of needs of
customers in the healthcare industry, the Company believes that this product
would be useful to a wide range of healthcare customers.
Sales Information System. In November 1996, the Company licensed a software
product from AOL Productions Inc. through which the Company will offer a sales
force automation solution to increase the productivity of a customer's sales
force. This extensive, business oriented product will enable sales personnel
to create proposals and sales presentations and customize marketing
communications more quickly and efficiently than with conventional methods by
providing these services and software programs in a CD-ROM format. Information
that can be stored and manipulated includes a customer's client profiles,
video and audio clips about the customer and data about a customer's
interaction with its clients, such as previous sales. The Company believes
that the CD-ROM format of this product is useful due to its portability and
the ability to store large amounts of data or video and audio that would not
otherwise be possible to store and use on the Internet.
CONVERGENCE OFFERINGS. The Company offers a number of Internet-related
services that leverage the Company's telecommunications products and services
base.
Internet Access Services. Internet access consists of services that allow
customers to access the Internet through dedicated lines or through local
telephone calls via modem to the nearest NetSource point of presence ("POP").
The Company currently intends to deploy its nationwide Internet backbone based
on leased T-3 lines and a network of switches and routers. Once connected, a
customer's traffic is routed through the Company's network infrastructure to
the desired Internet location. The Company believes that this network
infrastructure will provide the necessary bandwidth, increased throughput,
quality, reliability, capacity and geographic coverage desired by its
customers. In this regard, in November 1996 the Company acquired scruz-net, an
ISP with an established customer base of over 2,000 customers. The Company
also hopes to add its current telecommunications customers as Internet access
customers. See "--Recent Developments."
The Company currently offers Internet access through its NetSource
AnywhereSM and NetSource Superline services. NetSource Anywhere is the
Company's dial-up Internet access product. NetSource Anywhere delivers high
speed Internet access to the Company's North American customers with local or
toll free calls. The product includes an e-mail account, access to the Web,
FTP sites and Usenet news groups. NetSource Anywhere is targeted at
individuals and SOHO businesses. NetSource Superline is the Company's Internet
connectivity product that uses a T-1 line to provide dedicated, high speed
digital access to the Internet. This product includes domain name
registration, an IP address block, domain name service and news server access.
NetSource Superline targets medium to large business markets that require
dedicated access.
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The Company intends to offer an ISDN connectivity service called NetSource
On Demand during the first quarter of 1997 that is designed to provide
"transparent connectivity" in that connecting will be accomplished faster and
with less user interaction than conventional dial-up access. This product will
include a customer's domain name registration, an IP address block, domain
name service and installation coordination. NetSource On Demand will be
targeted at small to medium-sized businesses and regional offices of large
businesses.
Web Hosting Services. The Company offers Web hosting services to customers
worldwide. Web hosting consists of providing and/or managing the necessary
equipment to allow companies to operate Web architectures. The components of
the Web hosting service are the server, a workstation or PC which runs the Web
site; the facility to host the server; high-speed Internet access for hosted
servers on high speed circuits; server power and backup, designed to assure 24
hour per day functionality; and maintenance to ensure the on-going operations
of the server. Currently, the Company has 12 customers for which it provides
Web hosting.
The Company provides Web hosting services to multiple clients from
facilities called "Web farms." The Company does not currently operate any Web
farms and provides its Web hosting services primarily on a subcontract basis
with third parties. However, the Company intends to migrate its current Web
hosting customers to servers located in its own facilities. Web hosting
services are targeted at electronic commerce client companies that want the
performance and reliability of a NetSource server in a managed location on a
high-speed Internet connection.
CUSTOMERS
TELECOMMUNICATIONS
The Company sells its long distance telecommunications services to
businesses, SOHOs and individuals worldwide. Clients who utilize such services
include GE Japan, Limited and Hexcel Corporation. In addition, the Company
provides telecommunications wholesale services to facilities-based and non-
facilities-based customers, including British Telecommunications plc ("BT").
INTERNET AND INTERACTIVE
NetSource's customers for Internet and interactive products and services
include the American College of Cardiology, the American College of Surgeons,
Ameritech, Cadence Design Systems, Inc., Chicago Board of Trade, Citibank,
Conner Peripherals, Inc. (now a subsidiary of Seagate Technologies, Inc.),
CyberCash, Inc., Fujitsu Microelectronics, Inc., PepsiCo and The Yankee Group.
In addition, the Company is in the process of creating Web sites for
additional customers, including Boehringer Mannheim Corporation, Boston
Scientific Corporation, the California Society of Certified Public Accountants
and Union Camp Corporation.
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MARKETING AND SALES
The Company utilizes a three-tiered marketing and sales strategy to match
appropriate distribution channels to corresponding market segments. The
following table illustrates the Company's sales and marketing approach.
NetSource Distribution Approach
Type of Customer Type of Sales Effort
---------------- --------------------
[ILLUSTRATION OF COMPANY'S SALES AND MARKETING APPROACH APPEARS HERE]
Direct Sales Force. The Company's direct sales force consists of
approximately 10 employees located in San Francisco, Chicago, Stamford,
Connecticut and London, England who concentrate on selling the Company's
larger-scale interactive applications, Web architectures and tools, custom Web
content and design, Web hosting services, higher-end telecommunications
services and products and Internet access. The Company uses its direct sales
force to market to medium to large corporate customers, as well as small to
medium corporate customers.
Joint Ventures and Strategic Partners. The Company enters into joint
ventures in order to better sell its telecommunications products and services
in foreign markets. The Company entered into joint ventures in Japan (MTC
Japan, Ltd.) and the Netherlands (MTC Telecom Western Europe B.V.) in April
1995 and January 1996, respectively. The Company believes that the joint
ventures develop new local distribution sources and provide technical
telecommunications expertise to customers in the region. In addition, the
Company intends to use joint ventures to provide Internet expertise to such
customers. Under its agreements with its current joint venture partners, the
Company provides the joint ventures with carrier services while the joint
ventures are responsible for local marketing and distribution of NetSource
telecommunications services and products. The joint ventures sustained losses
in 1995 and 1996, primarily from the early stage of development of the joint
ventures. The
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Company expects losses to continue from both joint ventures at least through
1997, but does not expect such losses to have a material adverse effect on the
Company's business, financial condition or results of operations. While the
Company has no continuing contractual obligation to fund such losses and
reviews from time to time whether it should continue to do so, the Company
presently intends to continue funding the joint ventures. See "Management's
Discussion of Financial Condition and Results of Operations."
The Company sometimes uses strategic partnerships to increase penetration
into a particular market. For example, the Company has and expects to continue
to obtain customers referred by BT in the United Kingdom market. BT typically
refers clients to the Company for specialized services such as electronic
commerce products and services, digital private line, travel card and
reorigination services in international PTT-controlled markets. The Company
also works with its strategic partners to market its products to very large
corporations.
No joint venture partner currently competes with the Company in markets in
which the partners provide service. The Company's strategic partners do
compete with the Company and are expected to continue to compete with the
Company in the future.
Sales Affiliates. The Company has a network of approximately 100 independent
sales affiliate companies worldwide that market the Company's
telecommunications services and products to small to medium corporate
customers, SOHOs and individuals. In addition, the Company intends to use its
sales affiliates to market its Web hosting services, internet access and
custom Web content and design services in the future. The Company trains and
supplies its independent sales affiliates with necessary promotional materials
and product and service updates through printed material and access to the
WebDesk module. The affiliates are compensated on a commission basis relative
to monthly billings by their user accounts. Sales affiliates utilize
independent agents known as subaffiliates, to broaden their market coverage in
particular user segments. The Company's WebDesk system provides worldwide
access to the Company's order entry and product fulfillment services for its
sales affiliates and direct sales force. Specifically, WebDesk allows an
authorized user to check on the amounts of commission that such affiliate has
earned, to conduct a customer credit check, to create a customer profile, to
initiate connectivity services and to perform other general and administrative
functions. No sales affiliate was responsible for sales representing more than
10% of the Company's revenues.
M-net. M-net, the Company's network marketing system, currently consists of
approximately 2,500 active representatives, who are not employed by the
Company. This network marketing system has been selected by the Company for
SOHOs and individuals because the Company believes it reduces marketing costs,
subscriber acquisition costs and subscriber attrition. The Company encourages
M-net representatives to enroll subscribers with whom the M-net
representatives have an ongoing relationship because the Company believes that
subscribers will be more likely to remain with the Company because they have
been enrolled with the Company by someone with whom they have an ongoing
relationship. The Company also believes that its network marketing system will
continue to build a base of potential subscribers for additional services and
products. The Company believes that its network marketing system is
particularly attractive to prospective M-net representatives because of the
potential for supplemental income and because the M-net representatives are
not required to purchase any inventory, have no monthly sales quotas or
account collection issues, have minimal paperwork and have a flexible work
schedule.
All M-net representatives' compensation is paid directly by the Company and
is based on the acquisition of subscribers and their long distance usage. M-
net representatives receive subscriber acquisition commissions only after,
among other things, subscribers sign up for and utilize the Company's products
and services. In addition, while the Company does not pay a commission to M-
net representatives for introducing new M-net representatives to the Company,
M-net representatives may receive subscriber acquisition commissions as well
as long distance usage commissions for
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subscribers signed up by certain other M-net representatives they have
recruited directly themselves or indirectly.
An individual, partnership or corporation may become an M-net representative
by purchasing a training kit for approximately $50 that includes the basic
materials to begin a business and includes a detailed explanation of the
Company's products, services and compensation plan. M-net representatives are
not restricted to any geographic location, and the Company believes that many
M-net representatives acquire subscribers and recruit downline M-net
representatives who reside in different geographic locations than such M-net
representatives.
RECENT DEVELOPMENTS
In November 1996, the Company acquired scruz-net, an ISP, for an aggregate
of 230,190 shares of Common Stock. The business competencies of scruz-net
include Internet network design, implementation and administration, and
technology management for data networking and Intranet applications. NetSource
does not intend to actively pursue any new service accounts from individual
customers, rather the Company intends to concentrate on expanding corporate
Internet service accounts. In November 1996, the Company also acquired DNA, an
interactive development firm, for an aggregate of 230,190 shares of Common
Stock. The Company believes that DNA has substantial skill and experience in
the areas of multimedia, interactive and graphic design and content creation
for Web sites for a diverse group of clients. The shares issued in both the
acquisitions are restricted under federal securities laws but have
registration rights which permit, under certain circumstances, such shares to
be included in future public offerings of the Company. As of November 15,
1996, scruz-net had approximately 2,000 customers and an established ISP
backbone consisting of six POPs in Monterey, Santa Cruz, San Jose, Scotts
Valley, Mountain View and Palo Alto.
In September 1996, the Company entered into a memorandum of understanding
with British Telecommunications plc ("BT") to provide electronic commerce
solutions to BT's finance sector customers. The memorandum contemplates the
training of BT sales personnel and includes revenue goals as well as specific
customers of BT that the parties hope to supply with the Company's electronic
commerce solutions. The Company expects to obtain additional customers
referred by BT.
TECHNOLOGY AND INTELLECTUAL PROPERTY
The Company's success and ability to compete is dependent in part upon its
ability to enhance its technology, although the Company believes that its
success is more dependent upon its technical expertise than its proprietary
rights. The Company relies on a combination of patent, copyright, trademark
and trade secret laws and contractual restrictions to establish and protect
its technology.
The Company's CCSA technology is a telecommunications network architecture
that facilitates the routing of long distance calls over the least cost route
available. A long distance call travels along the local exchange network that
serves the customer to the Company's switch network. At that point, the
Company's CCSA technology analyzes the relative costs of the long distance
carriers available to the Company's network to carry the call. After making
such "least cost" choice, the Company's network routes the customer's call
along the chosen route to a terminating switch and from there along the
destination's local exchange network to the destination. This can result in
savings over PTT rates. The Company continually reviews the CCSA system to
determine whether additional suppliers should be added to the Company's
network to further reduce the cost of routing traffic to a specific country
and to maintain redundancy, diversity and quality within the network. The
global least cost routing function of the Company's CCSA technology is based
on two U.S. patents; however, several of the Company's competitors utilize a
form of CCSA technology, and there can be no assurance that the Company's
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competitors will not develop or acquire CCSA technologies that are equal to or
superior to the Company's CCSA technology.
The Company has been assigned two U.S. patents in connection with its least
cost routing technology, and has corresponding applications pending for
foreign patent protection of such technology in 20 foreign countries,
including Japan, Australia, Canada and 17 European countries. In addition, the
Company has applications pending in the U.S. and certain foreign countries
with respect to the registration of a number of trademarks and service marks,
including the name "NetSource." Several of the Company's competitors utilize a
form of least cost routing technology, and there can be no assurance that the
Company's competitors will not develop the ability to provide such services or
will not develop technologies that are superior to the Company's technology.
There can be no assurance that the Company's least cost routing patents will
provide protection against competitive technology or will be held valid and
enforceable if challenged or that the Company's competitors would not be able
to design around the patents. In addition, there can be no assurance that
licenses for any intellectual property that might be required by the Company
would be available on reasonable terms if at all. See "Risk Factors--
Dependence on Technological Development" and "Risk Factors--Protection of
Intellectual Property."
COMPETITION
The markets in which the Company operates are extremely competitive. There
are no substantial barriers to entry in either the Internet and interactive
products and services markets or in any of the telecommunications markets in
which the Company competes. The Company expects competition in these markets
to intensify in the future.
Telecommunications. In the international telecommunications markets in which
the Company competes, competition is based primarily on prices of services
offered and the ability of the supplier to "bundle" various telecommunications
products according to subscriber tastes.
International. While international operating agreements have in the past
deterred companies such as AT&T Corporation, BT, MCI Communications
Corporation, Sprint Corporation and Worldcom, Inc. from offering callback and
reorigination services in regulated markets, there can be no assurance that
these companies will not offer callback and reorigination services in the
future or that these companies will not reduce their rates significantly,
decreasing margins and profitability of the Company. In fact, AT&T Corporation
has recently announced its intention to offer callback services in certain
markets. In addition, the Company expects PTTs in foreign countries to price
their services more competitively in the future. International carriers, some
of which have larger customer bases and networks and higher capital resources,
may in the future develop and market their products more effectively than the
Company. Certain PTTs may also influence regulatory authorities to outlaw the
provision of call reorigination services or block access to the call
reorigination services the Company markets. Additionally, there are a large
number of competitors in the call reorigination market, several of which have
significant market share and greater resources than the Company. In the past,
the Company has benefited from the fact that regulation of telecommunications
services in foreign countries has created a high differential between the
rates charged by PTTs and the rates charged by the Company. As deregulation
continues in foreign markets this differential in rates is expected to
decrease, which will place pricing pressure on the Company. In addition,
deregulation may lead to additional competitors entering the international
telecommunications market. Some of the Company's competitors offer cellular
and other wireless products and services. While the Company provides
specialized long distance products for users of cellular devices, there can be
no assurance that the Company will be able to provide long distance service to
users of each new technology as it evolves. In addition, certain global
satellite-based telecommunications systems now under development could
eventually bypass the international long distance network of the PTTs and
major international carriers.
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Development of such technologies could adversely affect the market for the
Company's long distance telecommunication services.
Domestic. Domestically, the Company has a very small share of the
telecommunications services reseller market. In addition, this market is
nearing maturity in terms of aggregate revenue growth rates and consolidation.
In the U.S., the Company competes with long distance carriers such as AT&T
Corporation, MCI Communications Corporation, Sprint Corporation, and WorldCom,
Inc., as well as second tier resellers such as, LCI International and Frontier
Corporation. The Company anticipates adverse effects on its core customer base
and financial results by the entrance of the Regional Bell Operating Companies
("RBOCs") into the long distance industry. The RBOCs have significantly
greater resources than the Company and, as current providers of local service,
substantial market intelligence and end-user contact. As a result of this and
continued international expansion, the Company currently expects domestic
revenues from its telecommunications business to further decline as a
percentage of its total telecommunications sales. See "Business--
Telecommunications Offerings."
INTERNET AND INTERACTIVE PRODUCTS AND SERVICES.
Internet Access. In the Internet markets in which the Company competes,
competition is based primarily on price and range of services provided. The
Company's current and prospective competitors in Internet access include many
large companies that have substantially greater market presence and financial,
technical, marketing and other resources than the Company. In addition, the
Company presently provides direct Internet access services to a limited number
of customers, and there can be no assurance as to when or if the Company will
be able to successfully provide such services on a larger scale. The Company's
Internet access business is expected to compete directly or indirectly with:
(i) national and regional commercial ISPs, such as BBN Planet, a subsidiary of
BBN Corporation, Netcom On-line Communication Services, Inc., PSINet, Inc. and
UUNET Technologies, Inc., a subsidiary of MFS Communications Company, Inc.,
(ii) established on-line services companies that currently offer or are
expected to offer Internet access, such as America OnLine, Inc., CompuServe
Incorporated, Delphi Internet Services, Inc. and Prodigy Services Company,
(iii) national long distance telecommunications, carriers, such as AT&T
Corporation, MCI Communications Corporation and Sprint Corporation that
currently offer electronic messaging services, (iv) RBOCs, such as Pacific
Bell, (v) media and cable operators, such as Comcast Corporation, Tele-
Communications, Inc. and Time Warner, Inc., which have recently begun, on an
experimental basis, to offer on-line services, and (vi) nonprofit or
educational ISPs. In particular, the Company's ability to compete in the
Internet access market is substantially dependent upon the rates that it is
required to pay outside vendors for ISDN, T-1 and T-3 lines.
Electronic Commerce. In the Internet and interactive products and services
markets in which the Company competes, competition primarily is based upon the
type and quality of services offered. The Company expects to compete with
companies such as Open Market and Connect Inc., manufacturers of electronic
commerce server software tools and software companies such as Microsoft and
NetScape, which have indicated an intention to enter the electronic commerce
products and services arena. In the area of Web site development and
electronic commerce, the Company competes with a range of Internet development
companies such as CKS Group, Inc., Eagle River Interactive, Inc., Modem Media,
Poppe Tyson and Organic Online, Inc. Many of these companies have been in the
Internet services business longer than the Company, and have substantially
greater market presence and resources. The Company believes that the
electronic commerce products and services market is at an early stage of
development and expects many new competitors, including large computer
hardware and software, cable, media and telecommunications companies, will
enter the electronic commerce products and services market. The ability of
these competitors or others to bundle connectivity services and products with
Internet connectivity services could place the Company at a significant
competitive disadvantage.
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REGULATION
TELECOMMUNICATIONS
DOMESTIC. The terms and conditions under which the Company provides
communications services are subject to government regulation. Federal laws and
FCC regulations apply to interstate telecommunications, while state regulatory
authorities have jurisdiction over telecommunications that originate and
terminate within the same state. Federal and state regulations, regulatory
actions and court decisions have had, and may have in the future, an impact on
the Company and its ability to compete as well as on the number and types of
competitors in the market. The FCC and various state public service and
utilities commissions typically impose obligations to file tariffs containing
the rate, terms and conditions of service. Neither the FCC nor the state
utility commissions currently regulate the Company's profit levels, although
they have the authority to do so. There can be no assurance that regulators
will not raise material issues with regard to the Company's compliance with
regulations or that existing or future regulations will not have a material
adverse effect on the Company's business, financial condition and results of
operations.
Federal. The Company believes it has all necessary authority to provide
domestic interstate telecommunications services. The Company has been granted
authority by the FCC to provide international telecommunication services
through the resale of switched services of U.S. facilities-based carriers. The
FCC reserves the right to condition, modify or revoke such international
authority for violations of the Communications Act or its rules. The
Telecommunications Act of 1996 (the "1996 Telecommunications Act")
substantially alters the regulatory framework for the telecommunications
industry for domestic and U.S. international telecommunications services. This
law allows telephone companies and cable television companies to compete in
each others' markets and permits the local exchange carriers ("LECs"),
including the RBOCs, to offer and sell long distance services (including
inter-LATA and interstate services within their service territories following
compliance with certain conditions), subject to any otherwise applicable state
and/or federal regulatory approvals, in exchange for permitting competition in
the local markets. The RBOCs are already permitted to provide long distance
services outside of their service territories. As of the date of this
Prospectus, the FCC has not yet issued a notice of proposed rulemaking
contemplating changes in the rules governing charges by LECs for access
services, although such a notice is expected to be released before the end of
1996. Because the FCC has not yet initiated, the rulemaking proceeding
considering changes in the regulation of access charges, the Company cannot at
this time predict the likelihood that the rules will be changed in a way that
would have a material adverse effect on the Company's business. However, the
Company does not believe that the legislation imposes substantial regulatory
burdens on the Company's international call reorigination, Internet access or
domestic telecommunications operations.
The Company is classified by the FCC as a non-dominant carrier. Among
domestic carriers, only LECs are now classified as dominant carriers, with
charges and services subject to greater FCC regulation than those of the
Company. The FCC has reclassified AT&T as a non-dominant carrier, eliminating
certain pricing and tariffing restrictions that had applied to AT&T, and
making it easier for AT&T to compete with the Company for low-volume long
distance customers. The FCC retains the jurisdiction to act upon complaints
against any common carrier for failure to comply with its statutory
obligations. The FCC also has the authority to impose more stringent
regulatory requirements on the Company and change its regulatory
classification. The Company believes, however, that the FCC is unlikely to do
so.
Both domestic and international non-dominant carriers must maintain
interstate tariffs on file with the FCC. Although the tariffs on non-dominant
carriers, and the rates and charges they specify, are subject, except that
during the next ten months, domestic non-dominant carriers will be required to
withdraw their interstate tariffs but make information about rates and
conditions of service publicly available. Although the tariffs on non-dominant
carriers, and the rates and changes they specify, are subject to FCC review,
they are presumed to be lawful and are seldom contested. In reliance on the
FCC's past practice of allowing domestic non-dominant carriers to file tariffs
with a "reasonable range of rates" instead of the detailed schedules of
individual charges required of dominant carriers, the
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Company has not maintained detailed rate schedules for domestic offerings in
their tariffs. Until the two-year statute of limitations expires, the Company
could be held liable for damages for its failure to do so, although it believes
that such an outcome is highly unlikely and would not have a material adverse
effect on the Company. In order to recover damages, a competing
telecommunications service provider would have to show that the Company's
failure to file detailed rate schedules caused that other service provider to
lose customers and that the Company should be liable for the damages. The
possible amount of such damages, if any, cannot be determined by the Company.
The Company has always been required to include, and has included, detailed
rate schedules in its international tariffs. As a non-dominant carrier, the
Company is permitted to make tariff filings on a single day's notice and
without cost support to justify specific rates. Resale carriers are also
subject to a variety of miscellaneous regulations that, for instance, limit the
use of "800" numbers for pay-per-call services, require disclosure of operator
services and restrict interlocking directors and management.
State. The intrastate long distance telecommunications operations of the
Company are also subject to varying levels of regulation in the states in which
the Company provides intrastate telecommunications. The vast majority of the
states require the Company to apply for certifications to provide
telecommunications services, or at least to register or to be found exempt from
regulation, before commencing intrastate service. Currently, the Company is
certified and tariffed where required to provide intrastate service to
customers in approximately 35 states, and is in the process of obtaining
certification in all other states. The Company continuously monitors regulatory
developments and intends to continue to obtain licenses where necessary for the
conduct of its business. The Company is in the process of seeking approvals
from the applicable regulatory authorities in each state in which such approval
is required.
On January 24, 1995, the California Public Utilities Commission (the "PUC")
determined that the Company was operating as a reseller of long-distance
services in California without the requisite state authorization. The PUC
assessed a fine against the Company and required that the Company pay the fees
required to be collected by telecommunications providers for the services it
rendered during the period it operated without authorization. The Company has
since remitted all sums required and obtained the requisite authorization to
operate as a reseller in California.
The vast majority of states also require the Company to file and maintain
detailed tariffs listing their rates for intrastate service. Many states also
impose various reporting requirements and/or require prior approval for
transfers of control of certified carriers, assignments of carrier assets,
including customer bases, carrier stock offerings and incurrence by carriers of
significant debt obligations. Certificates of authority can generally be
conditioned, modified, canceled, terminated or revoked by state regulatory
authorities for failure to comply with state law and/or the rules, regulations
and policies of the state regulatory authorities.
INTERNATIONAL. The Company's international callback and reorigination
products and services are subject to the jurisdiction of many regulators. The
FCC has imposed certain restrictions on international callback and
reorigination providers, including the requirement that licensees provide
service in a manner consistent with the laws of the countries in which they
operate. Local laws and regulations differ significantly among the
jurisdictions in which the Company operates, and the interpretation and
enforcement of such laws and regulations vary and are often based on the
informal views of the local ministries which, in some cases, are subject to
influence by the local PTTs. In addition, since the Company's callback and
reorigination products and services effectively bypass the local telephone
system, regulators in certain countries have objected to callback and
reorigination services, and some countries have declared such services illegal.
Based on information made available by the FCC, the Company believes that the
following countries have prohibitions on callback services: Oman, People's
Republic of China, Colombia, Ecuador, Honduras, Hungary, India, Indonesia,
Netherlands Antilles, Peru, Philippines, Saudi Arabia, Tanzania, Uruguay, and
Venezuela. In addition, other countries or their PTTs have publicly indicated
that at least some form of callback service was not permitted in their
respective countries.The Company does not derive material revenues from
callback and reorigination services to customers located in any of such
countries. In certain countries which have
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prohibited the provision of services through the automatic callback access
method utilized by the Company, such as Thailand and Netherland Antilles, the
Company has discontinued or modified certain of its services in such
countries. Existing or future regulations in other countries could also have
similar consequences. In addition, MCI Communications Corporation has filed a
petition with the FCC that challenges the legality of reorigination. Such
petition is currently pending. The Company generates a significant portion of
its monthly international revenue from customers originating calls in Japan,
Germany, Argentina, France, Hong Kong and Taiwan. In 1994, approximately 45%
of the Company's total revenues was derived from customers located outside the
U.S. That percentage increased to 69% in 1995, and to 72% in the first nine
months of 1996. In the event that any of these countries prohibited the
Company's services or regulated the pricing or profit levels of such services,
the Company's business, results of operations and financial condition could be
materially adversely affected. At this time, the Argentine government is
attempting to provide sufficient information to demonstrate to the FCC's
satisfaction that call reorigination is unlawful in Argentina. Although the
Company believes that the probability that the FCC would rescind the Company's
grant of authority to provide callback and reorigination services for failure
to comply with non-U.S. law is unlikely, such action by the FCC would have a
material adverse effect on the Company's business. The Company intends to
expand its international service offerings to continue to be competitive as
new markets are opened and rates in these countries are reduced. To facilitate
this expansion, the Company may deploy additional switching facilities located
in a number of countries. As a result, the Company will be directly subject to
regulation in an increasing number of countries, and there can be no assurance
that such regulation will not have a material adverse effect on the Company's
business, results of operations and financial condition.
In addition, there can be no assurance that the Company has accurately
interpreted or will accurately predict the interpretation of applicable laws
and regulations or regulatory and enforcement trends in a given jurisdiction
or that the Company will be found to be in compliance with all such laws and
regulations. Failure to interpret accurately the applicable laws and
regulations and the mode of their enforcement in particular jurisdictions,
could cause the Company to lose, or be unable to obtain, regulatory approvals
necessary for it to be able to provide certain services in such jurisdictions
or to use certain of its transmission methods. Such failure could result in
significant monetary penalties imposed against the Company.
INTERNET
Internet access providers are generally not regulated under the laws and
regulations governing the U.S. telecommunications industry. Except for
regulations governing the ability of the Company to disclose the contents of
communications by its customers and a provision of the 1996 Telecommunications
Act that is the subject of current constitutional challenge and the
enforcement of which has been enjoined by the U.S. District Court for the
Eastern District of Pennsylvania, there are currently no U.S. government
imposed limitations or guidelines pertaining to customer privacy or the
pricing, service characteristics or capabilities, geographic distribution or
quality control features of Internet access services. However, proposed
regulations at the FCC would require discounted Internet connectivity rates
for schools and libraries. In addition, certain localities have imposed a tax
on companies that connect customers to the Internet, and other localities may
impose similar taxes. There also exists the risk that a U.S. governmental
policy for the data network access industry could be implemented by executive
order, legislation or administrative order. If such a policy is adopted, it
could have a material adverse effect on the Company. Also, a petition pending
before the FCC urges the FCC to regulate as telecommunications services voice
services utilizing the Internet. The Company cannot predict the impact, if
any, that future regulation or regulatory changes may have on its Internet
access business. The 1996 Telecommunications Act imposes criminal liability on
persons sending or displaying in a manner available to minors indecent
material on an interactive computer service such as the Internet and on an
entity knowingly permitting facilities under its control to be used for such
activities. The ultimate interpretation and enforcement of this law is
uncertain, but this legislation may decrease demand for Internet access, chill
the development of Internet content or have other adverse effects on Internet
access providers such as the Company. In addition, in light of the uncertainty
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attached to interpretation and application of this law, there can be no
assurances that the Company would not have to modify its operations to comply
with the statute, including prohibiting users from maintaining home pages on
the Web. Certain foreign countries may in the future regulate Internet access
or electronic commerce in their respective countries. The Company cannot
predict the outcome of current or future FCC proceedings or of pending
amendments to international copyright conventions and U.S. copyright law that
would make the Company liable for the copyright violations of its customers
transmitting information over the Internet.
Depending on the outcome of FCC rulemakings required by the 1996
Telecommunications Act, the Company could be subjected to additional
regulatory requirements, including that it contribute some portion of its
telecommunications revenues to a universal service fund, and to increased
competition and interconnections costs. If the LECs are no longer required to
provide equal access for origination and termination of calls by customers of
long distance companies such as the Company, or if the fees charged for such
access services change, particularly if changed to allow variable pricing of
such fees based upon volume, such changes could have a material adverse effect
on the Company's business, financial condition and results of operations. In
the event that the Company is not able to provide the services it is presently
providing or intends to provide, or to use existing or contemplated
transmission methods due to the application of laws and regulations that
prohibit such services or transmission methods or due to its inability to
receive or retain formal or informal approvals for such services or
transmission methods, or for whatever other reason related to regulatory
compliance or the lack thereof, the Company's business could be materially
adversely affected. There can be no assurance that any number of the Company's
services or transmission methods will not be prohibited or become more costly
in its current and proposed markets. Depending upon the countries in which
such prohibition occurs, there could be a material adverse effect on the
Company's business, financial condition or results of operations. See "Risk
Factors--Governmental Regulation."
EMPLOYEES
As of October 15, 1996, the Company had 235 employees, including 56 in
research and development, 22 in marketing and sales and 157 in corporate,
administration. These employees are located in the Company's principal
facilities as follows: 167 in the Company's Petaluma, California offices, 61
in the Company's San Francisco, California offices, four in the Company's
Stamford, Connecticut offices, with three additional home office employees in
Chicago, Illinois. None of the Company's employees are represented by unions,
and the Company believes that its employee relations are good.
FACILITIES
The Company's principal executive offices are located in San Francisco,
California, where the Company leases approximately 20,500 square feet under
two leases expiring in December 1997 and December 2001. The Company leases
approximately 41,750 square feet of office space in Petaluma, California under
a lease expiring in July 2001. In addition, the Company has entered into
leases to house switches in Frankfurt, Germany; London, U.K.; Newark, New
Jersey; San Francisco, California; Stockholm, Sweden; and Paris, France. Most
of the Company's Internet-oriented functions are housed at the Company's San
Francisco location. The Company has also entered into a lease for
approximately 1,000 square feet in Stamford, Connecticut, expiring in January
1998. The Stamford facility houses certain of the Company's interactive
development sales channels. In addition, as a result of the acquisitions of
scruz-net, inc. and DNA New Media Group, Inc., the Company leases an aggregate
of approximately 5,600 square feet of office space in Santa Cruz, California
and Chicago, Illinois which house its Internet Service Provider business and
certain marketing communications functions.
LEGAL PROCEEDINGS
One of the Company's former sales affiliates and current competitors has
brought suit against the Company in Federal District Court for the Northern
District of California. The former sales affiliate has
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made a number of claims, including breach of contract and misappropriation of
trade secrets and seeks compensatory and punitive damages. In addition, in
connection with such action, the former affiliate's foreign sub-affiliate has
brought suit against both the former sales affiliate and the Company which
suit is pending in Federal District Court for the District of Iowa. The
foreign sub-affiliate has claimed violation of RICO, intentional interference
with the prospective economic advantage of his customers (who are end-users of
the Company's services provided through the former sales affiliate) and an
open accounting for amounts allegedly owed to the foreign sub-affiliate. The
foreign sub-affiliate seeks compensatory damages in excess of $1 million, as
well as punitive damages and certain injunctive relief. The Company has filed
a motion to dismiss the RICO claim brought by the foreign sub-affiliate
against the former affiliate and the Company. The court has granted the former
affiliate's motion with respect to dismissing the RICO claim and the Company
expects a similar ruling from the court. The Company believes these suits are
without merit and intends to vigorously defend the suits. See "Risk Factors--
Risks Associated with Federal Court Litigation."
A former sales affiliate of the Company filed an informal complaint with the
FCC in June 1995 alleging the Company engaged in wrongful billing practices.
The Company believes these claims are without merit and is seeking to have
such complaint dismissed by the FCC.
A former consultant of MTC International filed a complaint against MTC
International in the California Superior Court in August 1996. The complaint
for declaratory relief, breach of contract and fraud alleges that MTC
International failed to permit the former consultant to exercise certain stock
options granted to him by MTC International which represent the equivalent of
450,000 shares of NetSource Common Stock. The Company believes this action is
without merit and intends to vigorously defend the suit.
In addition to the foregoing, from time to time individual customers file
complaints with various state and federal regulatory agencies, including the
California Public Utilities Commission, the Federal Trade Commission, the FCC
and State Attorneys General relating to rate and quality of service issues.
There can be no assurance that the Company will prevail in any such
proceedings or in any of the above-described disputes.
REORGANIZATION
NetSource, which was incorporated in Delaware on November 20, 1995,
succeeded to the businesses of MTC Telemanagement Corporation, a California
corporation ("MTC Telemanagement"), MTC International, Inc., a Nevada
corporation ("MTC International"), and Transphere Interactive, Inc.
("Transphere Interactive") and Transphere International, Inc. ("Transphere
International"), each California corporations, pursuant to a series of
reorganization transactions consummated on June 28, 1996 and described below
(the "Reorganization"). MTC Telemanagement commenced operations in October
1988 as a switchless reseller of long-distance services in the U.S. MTC
International was formed in March 1993, as a provider of reorigination "call
back" telecommunications services in the international telecommunications
market. Transphere International, an advertising and marketing communications
Company, was formed in 1983, while Transphere Interactive was formed in August
1995, to provide services related to the Internet, with a focus on Web-site
design and enabling Web-based electronic commerce on the Internet. In June
1996, Transphere International and Transphere Interactive merged into
NetSource Interactive Services, Inc., a Delaware corporation ("NetSource
Interactive").
The Exchange. Pursuant to the Reorganization, the Company exchanged shares
of its Common Stock and options to purchase its Common Stock for the
outstanding shares of common stock and options to purchase common stock of MTC
Telemanagement and MTC International. The exchange described in the foregoing
sentence is referred to as the "Exchange." Upon the consummation of the
Exchange, MTC Telemanagement and MTC International each became wholly-owned
subsidiaries of the Company.
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The Merger. Immediately after consummation of the Exchange, and pursuant to
an Agreement and Plan of Reorganization by and between NetSource Interactive
and the Company (the "Merger Agreement"), NetSource Interactive merged into
the Company (the "NetSource Merger"). The Company was the surviving
corporation in the NetSource Merger and issued shares of its Common Stock and
options to purchase its Common Stock in exchange for the outstanding shares of
and options to purchase common stock of NetSource Interactive.
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Edward A. Brinskele..... 41 Chairman of the Board and Chief Executive Officer
Charles Schoenhoeft..... 39 Vice Chairman of the Board and President
Gary R. Anderson........ 49 Executive Vice President and Chief Financial Officer
Gregory A. Reznick...... 41 Executive Vice President and Chief Operating Officer
Evan A. Kraus........... 38 Executive Vice President, Secretary and General Counsel
Kevin J.F. Paul......... 36 Managing Director, Europe
Michael J. Brinskele.... 33 Executive Vice President, Global Network Services
Yoav Stern (1)(2)....... 43 Director
Joshua G. Cooperman
(1)(2)................. 47 Director
Alex S. Vieux(1)........ 39 Director
Yaron Eitan(2).......... 40 Director
</TABLE>
- --------
(1)Member of the Compensation Committee
(2)Member of the Audit Committee
OTHER KEY EMPLOYEES
The following table sets forth certain information regarding other key
employees of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
N. Scott Dickson................. 34 Vice President and Corporate Controller
Andrew G. Salisbury.............. 39 Vice President of Interactive Development
Ron Wolf......................... 45 Vice President of Software Technology
Jade Wong........................ 33 Vice President of Marketing Communications
</TABLE>
EDWARD A. BRINSKELE has served as the Chairman of the Board and Chief
Executive Officer of the Company since its formation in November 1995. In
1988, Mr. Brinskele founded MTC Telemanagement, and in 1992, he founded MTC
International. He has served as Chairman of the Board and Chief Executive
Officer of both companies since inception. Mr. Brinskele has been in the
telecommunications industry for over 20 years. In 1985, Mr. Brinskele was
involved with the start up of Centex Telemanagement, Inc., a
telecommunications company, as Director of Engineering, where he was
responsible for the design and engineering of all telecommunications
facilities used by Centex. From 1974 through 1983, he worked for Harris
Corporation, a manufacturer of telecommunications products and equipment, as a
System Engineer. Mr. Brinskele has designed telecommunications networks for
numerous domestic and international organizations, including MCI, American
Express and the U.S. Department of Energy.
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CHARLES SCHOENHOEFT joined the Company in June 1996 as Vice Chairman of the
Board and President. From 1984 to June 1996, Mr. Schoenhoeft was Chief
Executive Officer and Chairman of the Board of Transphere International until
its merger with the Company in June 1996. In July 1995, he founded Transphere
Interactive which provided strategic planning and marketing commercial
services for fast growth, international high technology companies, including
Conner Peripherals, Fujitsu Microelectronics and Diamond Multimedia.
GARY R. ANDERSON joined the Company in September 1996 as Chief Financial
Officer and Executive Vice President. From April 1995 until April 1996, Mr.
Anderson was Vice President and Chief Financial Officer of Air Net
Communications, a manufacturer of base stations for wireless communications
services. From June 1989 until January 1995, Mr. Anderson served as Senior
Vice President and Chief Financial Officer of WYSE Technology, Inc., a
manufacturer of computer peripherals. Mr. Anderson is a Certified Public
Accountant.
GREGORY A. REZNICK has served as Executive Vice President and Chief
Operating Officer of the Company since June 1996. In February 1996, Mr.
Reznick joined Transphere Interactive as Executive Vice President and General
Manager--Interactive and served in that capacity until the merger of
Transphere Interactive into the Company in June 1996. From June 1995 until
February 1996, he was President of Orchid Technology, a computer peripherals
manufacturer, and from March 1993 until March 1995, he served as Vice
President--Marketing of Media Vision Technology, Inc., a multimedia
peripherals manufacturer. From 1990 until March 1993, he served as President
on a full-time basis of Pivotal Research, a software developer.
EVAN A. KRAUS has served as Executive Vice President, Secretary and General
Counsel of the Company since June 1996. Mr. Kraus served as Vice President and
Corporate Counsel of MTC Telemanagement since February 1996. Mr. Kraus has
also served as Secretary of MTC International since April 1996. From January
1992 until February 1996, Mr. Kraus served as Vice President, General Counsel
and Secretary for IASCO, a diversified international services company and as
corporate counsel from December 1989 until January 1992.
KEVIN J.F. PAUL has served as Managing Director, Europe since July 1996.
From November 1995 until July 1996, Mr. Paul served as President and Chief
Executive Officer of Applications of On-line Inc., an Internet based content
delivery company. Mr. Paul served as Chief Executive Officer of V. Corp Ltd.,
a company specializing in investing in start-up companies from September 1993
until November 1995. From May 1991 to September 1993, Mr. Paul served as Chief
Executive Officer of a division of Kent Technologies, a company engaged in the
development of factory automation software.
MICHAEL J. BRINSKELE has served as Executive Vice President--Global Network
Services of the Company since June 1996 and manages all of the Company's
global network operations including research, development and integration of
new technologies, applications engineering and product development. From May
1992 until the present, Mr. Brinskele has also served as Vice President of
Systems Engineering of MTC Telemanagement. From April 1991 until May 1992, he
served as Vice President of Corporate Services of MTC Telemanagement. Mr.
Brinskele joined MTC Telemanagement in March 1990 as Director of Customer
Service and in this position was responsible for field sales and
telecommunications consulting for major accounts until April 1991.
YOAV STERN has served as a director of the Company since April 1996. Mr.
Stern has been a Managing Partner of Helix Capital L.L.C., a merchant banking
firm involved in investments and mergers and acquisitions with technology-led-
businesses, since August 1995. Mr. Stern has served as Co-Chairman and Chief
Executive Officer of Kellstrom Industries, Inc., a commercial jet engine
reseller from its inception in December 1993 until June 1995 and has served as
Co-Chairman of the Board since then. Mr. Stern was the Co-Chief Executive
Officer, Co-President and a director of Bogen Communication International
("BCI") from March 1995 until August 1995, and since then he has
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served as a director and member of the BCI Board's Executive Committee. BCI is
a public company involved in the business of voice processing and digital
peripherals for PABX. From January 1993 to September 1993, Mr. Stern was
President and from January 1992 until May 1995 a director of WordStar
International, Inc., which was engaged in research and development and
worldwide marketing and distribution of software for business and consumer
applications and which was restructured and renamed Softkey International,
Inc. From April 1989 to December 1992, Mr. Stern was Vice President of
Business Development of Elron Electronic Industries Ltd., a multi-national
publicly-traded holding company based in Israel that is engaged in operating
and investing in high technology companies.
JOSHUA G. COOPERMAN has served as a director of the Company since its
formation in November 1995. Since October 1993 he has served as President and
Chief Executive Officer and Vice President of Transocean Funding, Inc., a
company engaged in municipal leasing and provision of financial advisory
services. From December 1989 until October 1993, Mr. Cooperman was Vice
President of Transocean Funding, Inc. From December 1994 until October of
1996, Mr. Cooperman was a Principal of Digital Wireless, a telecommunications
marketing firm. From September 1988 until July 1992, Mr. Cooperman served in
an of counsel position at the Boston law firm of Gaston & Snow.
ALEX S. VIEUX has served as a director of the Company since November 1996.
Mr. Vieux has served as Chairman of the Board of Directors of DASAR Inc., an
information technology consulting company since 1989. Mr. Vieux is a member of
the Board of Directors of Tandem Computer, Inc. Mr. Vieux has also served as a
special advisor to the French Minister of Industry, a business correspondent
for the French daily, Le Monde, and as an instructor in Economics at the
Universite de Paris-La Sorbonne.
YARON EITAN has served as a director of the Company since November 1996. Mr.
Eitan is currently Chief Executive Officer and a founder of Geotek
Communications, Inc., an international provider of wireless voice and data
communications for businesses, which positions he has held since 1989.
Mr. Eitan has also been the Chairman of the Board at Geotek since October
1996. Prior to that, he served as President and Chief Operating Officer of
Patlex Corporation, a manufacturer of electronic munitions fuses and
transformers from 1985 to 1987. Prior to that, Mr. Eitan served as Executive
Vice President of Reshef Technologies, Ltd., an electronic fuse manufacturer.
N. SCOTT DICKSON has served as Vice President and Corporate Controller since
October 1996. From June 1995 until April 1996, he served as Controller and
from May 1996 to October 1996 he served as Vice President and Chief Financial
Officer of Splash Studios, Inc., a company engaged in the development of
interactive children's entertainment for CD-ROM and Internet applications.
From November 1993 until June 1995 Mr. Dickson was a business consultant. He
was Controller at Ballard Computer, Inc., a regional retailer of computer
hardware, software and related accessories from December 1992 to October 1993.
From July 1991 to December 1992, Mr. Dickson served as Controller at Sight &
Sound Entertainment, Inc., a manufacturer and distributor of in-store
television programming. From September 1985 until September 1990, Mr. Dickson
served as a Senior Auditor at KPMG Peat Marwick LLP.
ANDREW G. SALISBURY has served as Vice President of Interactive Development
since April 1996. From July 1994 to March 1996, Mr. Salisbury was Vice
President of Strategic Technology at Walker Interactive, a software
applications company. From December 1993 to July 1994 he was the Chief
Technology Officer of Marathon Systems, a client-server systems integration
company. From November 1991 to December 1993, he was the Director of Systems
Integration at Oracle Corporation, a database software company. From March
1986 to November 1991 Mr. Salisbury was a Director of Price Waterhouse LLP.
RON WOLF has served as Vice President of Software Technology since June
1996. From February 1995 until June 1996 Mr. Wolf was Vice President,
Technology for Transphere Interactive. Mr. Wolf
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<PAGE>
held various engineering and executive positions at Gupta Corporation, a
database software company, from April 1989 to February 1995, including Senior
Director of Connectivity.
JADE WONG has served as Vice President of Marketing Communications of the
Company since June 1996. From September 1993 until June 1996, Ms. Wong served
as General Manager of Transphere International and as Management Director of
Transphere International from July 1992 until September 1993. She joined
Transphere International as an Account Supervisor in March 1990.
There are no family relationships among any of the Company's directors or
executive officers, except that Edward A. Brinskele and Michael J. Brinskele
are brothers.
Currently, directors are elected for a term of one year or until their
successor is elected, appointed and qualified. The Company's Certificate of
Incorporation provides that, effective as of the date of the first regularly-
scheduled annual meeting of stockholders following the closing of this
offering, the Board of Directors will be divided into three classes of
directors serving staggered three-year terms. As a result, one-third of the
Company's Board of Directors will be elected each year. See "Delaware Anti-
Takeover Law and Certain Charter Provisions--Anti-Takeover Effect of Certain
Charter Provisions."
AUDIT COMMITTEE
The Audit Committee consists of Messrs. Stern, Cooperman and Eitan. The
Audit Committee makes recommendations to the Board regarding the selection of
independent auditors, reviews the results and scope of the audit and other
services provided by the Company's independent auditors and reviews and
evaluates the Company's internal audit and control functions.
COMPENSATION COMMITTEE; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION
The Compensation Committee consists of Messrs. Stern, Cooperman and Vieux.
The Compensation Committee administers the Company's stock option plans and
makes recommendations to the Board concerning salaries and incentive
compensation for employees and consultants of the Company.
DIRECTOR COMPENSATION
The Company's non-employee directors currently receive $2,500 for attending
each board meeting. There is no additional compensation to directors for
attending the meetings of any committees on which they sit. In addition, board
members are reimbursed for their out-of-pocket expenses incurred in attending
committee meetings. The directors are eligible to receive stock option grants
under the Company's 1996 Stock Option Plan.
EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year ended December 31, 1995,
all compensation earned for services rendered to the Company's predecessor
corporations by the Company's Chief Executive Officer and the only other most
highly compensated executive officer of the Company whose total compensation
for 1995 exceeded $100,000 (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
IN 1995
------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)
- --------------------------- --------- --------
<S> <C> <C>
Edward A. Brinskele(1)....................................... $240,000 --
Chairman of the Board and Chief Executive Officer
Charles Schoenhoeft(2)....................................... 120,000 100,000
Vice Chairman of the Board and President
</TABLE>
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<PAGE>
- --------
(1) The amount shown does not include $239,664 paid to Mr. Brinskele in
consideration of the license of a patent by Mr. Brinskele to MTC
Telemanagement in 1995. See "Certain Transactions."
(2) Mr. Schoenhoeft was paid such compensation as an employee of Transphere
International.
EMPLOYMENT AGREEMENTS
The Company intends to enter into Employment Agreements with each of Edward
Brinskele, Charles Schoenhoeft, Gary Anderson, Kevin Paul, Gregory Reznick,
Evan Kraus and Michael Brinskele, for such persons to serve as Chief Executive
Officer, President, Executive Vice President and Chief Financial Officer,
Managing Director, Europe, Executive Vice President and Chief Operating
Officer, Executive Vice President and General Counsel and Executive Vice
President, Global Network Services, respectively, for terms and for salaries
to be agreed upon. The Company contemplates that such agreements will include
severance payments for terminations of employment during the terms of such
agreements.
STOCK OPTION PLANS AND ARRANGEMENTS
PREDECESSOR CORPORATION OPTIONS
In connection with the Reorganization, on June 28, 1996, the Company assumed
previously issued options to purchase shares of common stock of NetSource
Interactive (the "Assumed Options"). The Assumed Options were originally
granted by Transphere International, a predecessor corporation to NetSource
Interactive, to employees of Transphere International at an exercise price
equal to the fair market value of the shares on the respective dates of grant.
All of the Assumed Options are nonstatutory stock options. The Assumed Options
generally have terms of 10 years.
In the event of certain changes in control of the Company, the option
agreements for the Assumed Options require that such Assumed Options be
assumed or an equivalent option substituted by the successor corporation;
provided, however, if the Assumed Options are not so assumed or substituted,
the optionees of the Assumed Options shall have the right to exercise the
Assumed Options as to all or a portion of the stock subject thereto, including
shares which would not otherwise be exercisable. The Company may amend or
terminate the Assumed Options only with the written consent of the optionees.
As of the date of this Prospectus, there were outstanding Assumed Options to
purchase 356,745 shares of Common Stock.
In addition, on June 28, 1996, the Company issued nonstatutory options to
purchase 225,000 shares of Common Stock to certain holders of MTC
International in connection with the Reorganization in exchange for their
options to purchase shares of MTC International. These options were originally
granted by the Board of Directors of MTC International at an exercise price
equal to the fair market value on the date of grant, and have a term of 10
years. The options contain terms relating to changes in control of the Company
similar to those of the Assumed Options.
1996 OMNIBUS EQUITY INCENTIVE PLAN
In January 1996, the Company adopted its 1996 Omnibus Equity Incentive Plan
(the "Omnibus Plan"), pursuant to which an aggregate of 6,075,000 shares of
Common Stock were reserved for issuance to employees and consultants of the
Company and its subsidiaries. The Omnibus Plan provides for awards of both
nonstatutory stock options and incentive stock options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
stock appreciation rights, restricted stock subject to forfeiture and
restrictions on transfer, and performance awards entitling the recipient to
receive cash or Common Stock in the future following the attainment of
performance goals determined by the Board of Directors.
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The Omnibus Plan is administered by the Compensation Committee of the Board
of Directors, which has the authority to select the persons to whom future
awards will be made, to determine the nature and amounts of such awards and to
interpret, construe and implement the Omnibus Plan.
The exercise price of all incentive stock options granted under the Omnibus
Plan must be at least equal to the fair market value of the shares of Common
Stock on the date of grant. With respect to any participant possessing more
than 10% of the voting power of the Company's outstanding capital stock, the
exercise price of any option granted must be equal to at least 110% of the
fair market value on the grant date and the maximum term of the option must
not exceed five years. The terms of all options granted under the Omnibus Plan
may not exceed 10 years.
The Omnibus Plan provides that in the event of a merger, reorganization or
certain other events affecting the Common Stock, an adjustment shall be made
in the number and class of stock deliverable under the Omnibus Plan and the
shares subject to outstanding options, Stock Appreciation Rights and
Restricted Stock Awards granted under the Omnibus Plan as the plan
administrator, in its sole discretion, shall determine to be appropriate to
prevent the dilution or diminishment of awards outstanding under the Omnibus
Plan.
As of the date of this Prospectus, there were outstanding options to
purchase an aggregate of 2,200,335 shares of Common Stock under the Omnibus
Plan. The Omnibus Plan has been terminated as to future grants but remains in
place with respect to stock options already granted.
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the
Board of Directors in September 1996. A total of 1,950,000 shares of Common
Stock have been reserved for issuance under the 1996 Plan. The 1996 Plan
provides for the grant to employees of the Company (including officers and
directors) of incentive stock options within the meaning of Section 422 of the
Code, and for the grant of nonstatutory stock options to employees, directors
and consultants of the Company. The 1996 Plan is administered by the
Compensation Committee of the Board of Directors, which selects the optionees,
determines the number of shares to be subject to each option and determines
the exercise price of each option. The exercise price of all incentive stock
options granted under the 1996 Plan must be at least equal to the fair market
value of the Common Stock on the date of grant. The exercise price of all
nonstatutory stock options granted under the 1996 Plan must be at least equal
to 85% of the fair market value of the Common Stock on the date of grant. With
respect to any participant who owns stock possessing more than 10% of the
voting power of all classes of stock of the Company, the exercise price of any
stock option granted must equal at least 110% of the fair market value on the
grant date and the maximum term of the option must not exceed five years. The
term of all other options granted under the 1996 Plan may not exceed 10 years.
In the event of certain changes in control of the Company, the 1996 Plan
requires that each outstanding option be assumed or an equivalent option
substituted by the successor corporation; provided, however, if the options
are not so assumed or substituted, each optionee shall have the right to
exercise the option as to all or a portion of the stock subject thereto,
including shares which would not otherwise be exercisable. Unless terminated
sooner, the 1996 Plan will terminate ten years from its effective date. The
Board has authority to amend, suspend, or terminate the 1996 Plan, provided no
such action would impair the rights of the holder of any outstanding options
without the written consent of such holder.
As of the date of this Prospectus, there were outstanding options to
purchase an aggregate of 1,022,400 shares of Common Stock under the 1996 Plan.
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1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors in October 1996. A total of 750,000 shares of Common
Stock have been reserved for issuance under the Purchase Plan. The Purchase
Plan, which is intended to qualify under Section 423 of the Code, will be
implemented by a series of offering periods of 24 months duration with new
offering periods (other than the first offering period) commencing on or about
May 14 and November 15 of each year. Each offering period will consist of four
consecutive purchase periods of six months duration, with the last day of each
period being designated a purchase date. The first such purchase period will
commence on the effective date of the Company's initial public offering and
continue through May 14, 1997, with subsequent purchase dates to occur every
six months thereafter. The Purchase Plan is administered by the Board of
Directors, or a committee named by the Board of Directors. Employees
(including officers and employee directors) of the Company, or of any majority
owned subsidiary designated by the Board, are eligible to participate if they
are employed by the Company or any such subsidiary for at least 20 hours per
week and more than five months per year. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions, which may not
exceed 10% of an employee's compensation, at a price equal to the lower of 85%
of the fair market value of the Company's Common Stock at the beginning of the
offering period or the purchase date. If the fair market value of the Common
Stock on a purchase date is less than the fair market value at the beginning
of the offering period, a new 24 month offering period will automatically
begin on the first business day following the purchase date with a new fair
market value. Employees may end their participation in the Purchase Plan at
any time during the offering period, and once during each offering period may
decrease the rate of payroll deductions. Participation in the Purchase Plan
ends automatically on termination of employment with the Company.
The Purchase Plan provides that in the event of a merger of the Company with
or into another corporation or a sale of substantially all of the Company's
assets, each right to purchase stock under the Purchase Plan will be assumed
or an equivalent right substituted by the successor corporation unless the
Board of Directors shortens the offering period so that employees' rights to
purchase stock under the Purchase Plan are exercised prior to the merger or
sale of assets. The Board of Directors has the power to amend or terminate the
Purchase Plan as long as such action does not adversely affect any outstanding
rights to purchase stock thereunder. If not terminated earlier, the Purchase
Plan will have a term of 10 years.
SECTION 401(K) PLAN
In December 1995, MTC Telemanagement adopted a 401(k) Plan (the "401(k)
Plan"), subsequently assumed by the Company, covering the Company's full-time
employees located in the U.S. who have completed six months of service.
Pursuant to the 401(k) Plan, employees may elect to reduce their current
compensation by up to the statutorily prescribed limit ($9,500 in 1996) and to
have the amount of such reduction contributed to the 401(k) Plan. The Board
has approved an amendment to the 401(k) Plan to require an additional matching
contribution by the Company on behalf of all participants in an amount equal
to 10% of the employee's contribution, but only to the extent of the first 8%
of the employee's compensation. The 401(k) Plan is intended to qualify under
Section 401(k) of the Internal Revenue Code so that contributions to the
401(k) Plan by employees or by the Company, and the investment earnings
thereon, will not be taxable to employees until withdrawn from the 401(k) Plan
and so that contributions by the Company, if any, will be deductible by the
Company when made.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally
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liable for monetary damages for breach of their fiduciary duties as directors,
except liability for (i) any breach of their duty of loyalty to the
corporation or its stockholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
unlawful payments of dividends or unlawful stock repurchase or redemptions or
(iv) any transaction from which the director derived an improper personal
benefit.
The Company's Bylaws provide that the Company shall indemnify its directors
and executive officers and may indemnify its other officers and employees and
other agents to the fullest extent permitted by law. The Company believes that
indemnification under its Bylaws covers at least negligence and gross
negligence on the part of indemnified parties. The Company's Bylaws also
permit it to secure insurance on behalf of any officer, director, employee or
other agent for any liability arising out of his or her actions in such
capacity, regardless of whether the Bylaws would permit indemnification.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the
Company's directors and executive offices for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company, arising out of such person's services as a director or executive
officer of the Company, any subsidiary of the Company or any other company or
enterprise to which the person provides services at the request of the
Company. The Company believes that these provisions and agreements are
necessary to attract and retain qualified persons as directors and executive
officers.
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CERTAIN TRANSACTIONS
AGREEMENTS WITH MTC INFORMATION SYSTEMS, INC.
In January 1994, MTC Information Systems, Inc. ("Information Systems"), a
California corporation owned by Edward A. Brinskele, the Chairman of the
Board, Chief Executive Officer and currently a 42% stockholder of the Company,
and Roger Sheppard, currently an 18% stockholder of the Company, entered into
a sublease with the Company's wholly-owned subsidiary, MTC Telemanagement, for
the Company's offices in Petaluma, California. Information Systems charged MTC
Telemanagement the same rate that it was paying to the lessor. In October
1996, Information Systems and MTC Telemanagement terminated the sublease and
assigned the lease to the Company so that the Company currently leases the
property directly from the lessor. Additionally, Information Systems has
assigned to the Company certain leases for equipment space and an equipment
lease to which Information Systems was previously a party.
AGREEMENT WITH AIR TRAFFIC MANAGEMENT SERVICES, INC.
In July 1995, MTC Telemanagement entered into a five year
sales/distribution, license and services and facilities agreement with Air
Traffic Management Services, Inc. ("Air Traffic"), an overnight delivery and
shipping management services company, which at the time was owned equally by
Mr. Brinskele and Mr. Sheppard. Pursuant to the agreement, MTC Telemanagement
(i) sold and distributed a product and management service owned by Air
Traffic; (ii) performed services to run the day-to-day operations of Air
Traffic; (iii) provided Air Traffic facilities; and (iv) licensed to Air
Traffic certain billing software. Under the agreement, Air Traffic paid MTC
Telemanagement a monthly base charge and commission. Payments received from
Air Traffic for the years ended December 31, 1993, 1994, and 1995 and for the
nine months ended September 30, 1996, were $662,000, $1,516,000, $2,413,000
and $1,620,000, respectively. The Company had receivables from Air Traffic as
of December 31, 1993, 1994, and 1995, and September 30, 1996, in the amount of
$112,000, $687,000, $288,000 and $547,000, respectively. Mr. Brinskele has
disposed of his entire interest in Air Traffic.
In November, 1996, MTC Telemanagement, Air Traffic, Roger Sheppard and The
Dobson Acquisition Corp. entered into an Asset Purchase Agreement under which
Air Traffic sold all of its air courier service business assets and MTC
Telemanagement released its rights to certain assets that it used to operate
such service business. Concurrently with the execution of the aforementioned
Asset Purchase Agreement, MTC Telemanagement entered into a Settlement
Agreement with Air Traffic and Roger Sheppard pursuant to which the facilities
and services agreement was terminated, and MTC Telemanagement indemnified Air
Traffic and Roger Sheppard for certain Asset Purchase Agreement
representations. In connection with the agreements, MTC Telemanagement
received payment of $547,000 and expects to receive additional payments by
December 31, 1996. The Air Traffic arrangement was terminated as a result of
the fact that the arrangement generated minimal revenues, the services
provided were unrelated to the Company's primary telecommunications product
offerings and the sale of the Air Traffic product and management service owned
by Air Traffic utilized sales channels incompatible with the Company's
existing sales channels for its telecommunications products.
MERGER AND ACQUISITION ADVICE AGREEMENT
NetSource is a party to an agreement with Helix Capital L.L.C. dated April
15, 1996 ("Helix") pursuant to which Helix provides merger and acquisition,
financing and strategic advisory services to the Company and has a term of
eighteen months, which may be extended by mutual consent. The agreement
originally provided that Helix would receive a non-refundable retainer of
$7,500 per month for the first three months, and that the amount would
increase to $10,000 per month for one year following the completion of the
sale of the Notes in June 1996. In October 1996, recognizing additional
efforts in the financial integration of certain acquisitions not contemplated
in the original agreement, the
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retainer was increased to $17,500 per month. The agreement also provides that
the parties will agree upon fees for specific merger and acquisition
activities at a later stage. Yoav Stern, a director of the Company, is a
member of the managing partner of Helix and has a 33% equity ownership
interest in Helix. The Company believes that the terms of the Helix agreement
are comparable to those that the Company could have obtained in arms-length
bargaining with an unrelated third party.
PATENT ASSIGNMENT AGREEMENT
Pursuant to an agreement dated May 30, 1996, Edward A. Brinskele has
assigned to the Company all of his rights, title and interest in and to two
U.S. patents and corresponding patent applications pending in certain foreign
countries. The patents relate to the global least cost routing function of the
Company's CCSA technology. See "Business--Technology and Intellectual
Property." Mr. Brinskele has been paid an aggregate of approximately $409,000
between January 1994 and May 1996 in consideration of a prior license of the
patents. The patents expire in November 2012 and September 2013.
LOAN TO EDWARD A. BRINSKELE
During the period from January 1992 through November 1993, the Company made
payments to third parties on behalf of Edward A. Brinskele in the aggregate
amount of $249,000. The balance bears interest at the prime rate and is due no
later than June 1997.
CANCELLATION AND GRANT OF OPTIONS
Pursuant to a Settlement and Release Agreement, effective in June 1996,
Edward A. Brinskele and Roger Sheppard each consented to the rescission of
options held by them to purchase 112,500 shares each of Common Stock. Pursuant
to this agreement, the Company agreed to issue options for an aggregate of
225,000 shares of the Common Stock of the Company to certain other
stockholders of the Company.
ROGER SHEPPARD SETTLEMENT AGREEMENT
Pursuant to a Settlement and Release Agreement between the Company and Roger
Sheppard effective in June 1996, Mr. Sheppard was paid a severance payment of
$150,000 plus accrued salary and benefits arising out of his former employment
with the Company.
STOCK ISSUANCE TO EDWARD A. BRINSKELE
In March 1995, the Company issued Mr. Brinskele an aggregate of 88,410
shares of Common Stock in consideration of the transfer by Mr. Brinskele of an
aggregate of 25,260 shares to two employees of the Company in March 1992 and
the transfer of 56,835 shares to one employee in July 1993. Such transfers
were originally made by Mr. Brinskele on the Company's behalf because the
Company did not have sufficient authorized option shares to issue to such
employees at the times such grants were made.
See also "Business--Reorganization."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's outstanding common stock as of September 30, 1996,
and as adjusted to reflect the sale of the securities offered by the Company
in the offering made hereby, (i) by each person (or group of affiliated
persons) who is known by the Company to own beneficially more than 5% of the
Company's Common Stock, (ii) each of the Company's directors and executive
officers who hold vested options within 60 days of September 30, 1996 and
(iii) all directors and executive officers as a group. Except as indicated in
the footnotes to this table and subject to applicable community property laws,
the persons named in the table, based on information provided by such persons,
have sole voting and investment power with respect to all shares of Common
Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED(1)
NUMBER OF SHARES ----------------------------
NAME AND ADDRESS OF BENEFICIAL BENEFICIALLY BEFORE AFTER
OWNER OWNED(1) THE OFFERING THE OFFERING(2)
------------------------------ ---------------- ------------ ---------------
<S> <C> <C> <C>
Edward A. Brinskele ............ 6,929,369(3) 42.47% 34.96%
444 Spear St., Suite 200
San Francisco, CA 94105
Charles Schoenhoeft ............ 3,082,035 19.28 15.82
444 Spear St., Suite 200
San Francisco, CA 94105
Roger Sheppard ................. 3,021,585(4) 18.51 15.24
14 Bracken Court
San Rafael, CA 94901
Michael J. Brinskele............ 102,630(5) * *
Gregory A. Reznick.............. 81,135(6) * *
Yoav Stern...................... 190,770(7) 1.19 *
Joshua G. Cooperman............. -- -- --
Yaron Eitan..................... -- -- --
Alex Vieux...................... -- -- --
All officers and directors as a
group (11 persons)............. 10,477,255(8) 63.20% 52.18%
</TABLE>
- --------
* Under 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by that
person that are currently exercisable or will become exercisable within 60
days after September 30, 1996, are deemed outstanding, while such shares
are not deemed outstanding for purposes of computing percentage ownership
of any other person.
(2) Assumes no exercise of the Underwriters' over-allotment option to purchase
up to an aggregate of shares of Common Stock of the Company.
(3) Includes 337,500 shares issuable pursuant to stock options and exercisable
within 60 days of September 30, 1996 and 98,412 shares transferred to a
stockholder of the Company in October 1996.
(4) Includes 337,500 shares issuable pursuant to stock options and exercisable
within 60 days of September 30, 1996.
(5) Includes 90,000 shares issuable pursuant to stock options and exercisable
within 60 days of September 30, 1996.
(6) Constitutes shares issuable pursuant to stock options and exercisable
within 60 days of September 30, 1996.
(7) Constitutes shares held by Helix Capital L.L.C., of which Mr. Stern is a
managing partner and of which he holds a 33% equity ownership interest, as
to which shares he disclaims beneficial ownership.
(8) Includes 607,037 shares issuable pursuant to stock options and exercisable
within 60 days of September 30, 1996.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares of
Common Stock, par value $0.001 per share.
COMMON STOCK
As of September 30, 1996, there were 15,978,074 shares of Common Stock issued
and outstanding and held of record by 15 stockholders.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, except that upon
giving of a notice required by law, stockholders may cumulate the votes in
elections of directors. Upon the Company's having 800 stockholders,
stockholders shall no longer have such cumulative voting rights. The holders of
Common Stock are entitled to receive ratably such dividends as may be declared
by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining available for distribution to them after payment of
liabilities. The holders of Common Stock have no conversion, preemptive or
other subscription rights, and there are no redemption or sinking fund
provisions applicable to the Common Stock. All of the outstanding shares of
Common Stock are, and all shares of Common Stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
PREFERRED STOCK
The Board of Directors has authority to issue up to 10,000,000 shares of
Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further vote
or action by the stockholders. The rights of the holders of the Company's
Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any Preferred Stock that may be issued in the future. The
issuance of Preferred Stock, while providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company, thereby delaying, deferring or
preventing a change in control of the Company. Furthermore, such Preferred
Stock may have other rights, including economic rights, senior to the Common
Stock, and as a result, the issuance of such Preferred Stock could have a
material adverse effect on the market value of the Common Stock. As of the date
of this Prospectus, no shares of Preferred Stock are outstanding, and the
Company has no present plan to issue shares of Preferred Stock.
NOTES AND WARRANTS
In June 1996, the Company issued the Notes in the aggregate principal amount
of $20 million, together with the Warrants, to 42 foreign investors. The Notes
bear interest at the rate of 10% per annum, and interest is due semi-annually.
Principal and all accrued and unpaid interest under the Notes is due and
payable in full in June 1998. The Notes may be prepaid by the Company after
June 1997. The number of shares of Company Stock into which the Notes are
convertible and the conversion price are based on the per share initial public
offering price to the public of the Registrant's Common Stock. Assuming an
offering price of $14 per share in this offering, the Notes will be convertible
into an aggregate of 2,040,816 shares of Common Stock at a conversion price of
$9.80 per share or 70% of such offering price. The number of shares into which
the Warrants are exercisable and the exercise price are based on the per share
initial public offering price to the public of the Registrant's Common Stock.
Assuming an offering price of $14 per share in this offering, the Warrants will
be exercisable for an aggregate of 163,265 shares of Common Stock at an
exercise price of $9.80 per share, or 70% of such offering price.
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TRANSFER AGENT AND REGISTRAR
The Company's transfer agent and registrar is ChaseMellon Shareholder
Services.
REGISTRATION RIGHTS
If the Company at any time proposes to register any of its securities under
the Securities Act (other than a registration effected solely to implement an
employee benefit plan, a transaction to which Rule 145 of the Commission is
applicable or any other form or type of registration in which "Registrable
Securities" (as defined below) cannot be included pursuant to Commission
regulation, rule or practice), then optionees whose stock options were assumed
or substituted in the Reorganization (who hold in the aggregate options to
purchase 2,213,700 shares of Common Stock) have been granted certain piggyback
registration rights with respect to the Common Stock issuable upon exercise of
their options (the "Registrable Securities"), subject to (i) termination at
such time that all shares of Registrable Securities held or entitled to be
held upon conversion by such holders may be publicly sold under Rule 144 or
any applicable exemption or registration statement during any three month
period and (ii) cutback if the underwriter managing such registration notifies
the holders of Registrable Securities in writing that market or economic
conditions limit the amount of securities which may reasonably be expected to
be sold or that inclusion of such Registrable Securities would jeopardize the
success of the offering. In addition, the Company has granted the shareholders
of scruz-net and DNA piggyback registration rights similar to those of the
optionees discussed above. See "Business--Recent Developments," "--
Reorganization" and "Shares Eligible for Future Sale."
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. Certain provisions of
the Company's Certificate of Incorporation and Bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. Such provisions could diminish the opportunities for a
stockholder to participate in tender offers, including tender offer at a price
above the then current market value of the Common Stock. Such provisions may
also inhibit fluctuations in the market price of the Common Stock that could
result from takeover attempts. The Company is also afforded the protections of
Section 203 of the Delaware General Corporation Law, which could delay or
prevent a change in control of the Company or could impede a merger,
consolidation, takeover or other business combination involving the Company or
discourage a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company. In addition, the Board of
Directors has authority to issue up to 10,000,000 shares of Preferred Stock
and to fix the rights, preferences, privileges and restrictions, including
voting rights, of these shares without any further vote or action by the
stockholders. The rights of the holders of the Company's Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company, thereby delaying, deferring or preventing a
change in control of the Company. Furthermore, such Preferred Stock may have
other rights, including economic rights, senior to the Common Stock, and as a
result, the issuance of such Preferred Stock could have a material adverse
effect on the market value of the Common Stock. No shares of Preferred Stock
are outstanding as of the date of this Prospectus. The Company has no present
plan to issue shares of Preferred Stock. The Company's Certificate of
Incorporation provides that, effective as of the date of the first regularly-
scheduled annual meeting of stockholders following the closing of the
offering, the Board of Directors will be divided into three classes of
directors serving staggered three-year terms. As a result, one-third of the
Company's Board of Directors will be elected each year.
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SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that market sales of the
Company's Common Stock or the availability of the Company's Common Stock for
sale will have on the market price prevailing from time to time. Nevertheless,
sales of substantial amounts of the Common Stock of the Company in the public
market after the restrictions described below lapse could adversely affect the
prevailing market price and the ability of the Company to raise equity capital
in the future.
Upon completion of this offering (assuming no exercise of the Underwriters'
over-allotment option), the Company will have outstanding 19,478,074 shares of
Common Stock (based on shares outstanding as of the date of this Prospectus).
Commencing 180 days after the date of the Prospectus, upon the expiration of
lock-up agreements with the Company and the Underwriters, approximately
15,978,074 of such shares of Common Stock will be eligible for immediate sale
in the public market pursuant to the exemption from registration contained in
Section 3(a)(10) of the Securities Act, subject in some cases to compliance
with certain volume limitations and other restrictions under Rule 144.
The Company currently has outstanding $20 million principal amount Notes,
together with the Warrants which were issued pursuant to Regulation S under
the Securities Act. The Notes are convertible into and the Warrants are
exercisable for Common Stock at the option of the holders thereof after the
earlier of December 31, 1996 or completion of the Company's initial public
offering. All of such shares are subject to 180 day lock-up agreements with
the Company. If the offering is completed prior to December 31, 1996, the
price per share into which the Notes are convertible and the exercise price of
the Warrants will each be 70% of the initial public offering price per share.
Assuming that the offering is completed on or before December 31, 1996 and the
initial public offering price is $14 per share, the maximum number of shares
that would be issuable upon conversion of the Notes and exercise of the
Warrants would be 2,204,081. In the event that the offering is not completed
prior to December 31, 1996, the conversion price would be $5.40 per share,
subject to adjustment, such that a maximum of 4,000,000 shares of Common Stock
would be issuable upon exercise or conversion. The shares issuable upon
conversion of the Notes and exercise of the Warrants will become eligible for
sale in the public market in June 1997 following expiration of the lock-up
agreements.
In connection with the issuance of the Notes and Warrants, a warrant
identical to the Warrants described above was issued for an aggregate of
147,959 shares of Common Stock to the placement agent for the financing
described above. Such warrant has the same exercise price as the warrants
described above. Such shares will become eligible for sale in the U.S.
following expiration of the lock-up agreements.
There are outstanding options for an aggregate of 3,579,480 shares of Common
Stock issued under the Company's Omnibus Plan and 1996 Plan or assumed as a
result of the Reorganization, all of which shall be subject to lock-up
agreements referenced above and 1,976,707 of which shall be vested and
exercisable after expiration of the lock-up agreements and eligible for sale
in the public market. Following the completion of this offering, the Company
intends to file a Form S-8 Registration Statement with the Commission in order
to register all of such shares and, in addition, the remaining shares reserved
for issuance under the 1996 Stock Plan and 1996 Employee Stock Purchase Plan.
Options to purchase an aggregate of an additional 225,000 shares of Common
Stock are currently outstanding, which were issued in connection with the
Reorganization and which will become eligible for sale in the U.S. only after
the exercise price is paid and the two-year holding period under Rule 144 has
elapsed.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least two
years, including the holding period of any securities which converted into the
Restricted Shares and including the holding period of any prior owner except
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an affiliate, will be entitled to sell within any three month period a number
of shares that does not exceed the greater of 1% of the then outstanding shares
of Common Stock (194,780 shares immediately after this offering assuming no
exercise of the Underwriters' over-allotment option) or the average weekly
trading volume of the Common Stock during the four calendar weeks preceding
such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Any person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at the
time during the 90 days preceding a sale, and who has beneficially owned shares
for at least three years (including any period of ownership of preceding non-
affiliated holders), will be entitled to sell such shares under Rule 144(k)
without regard to the volume limitations, manner of sale provisions, public
information requirements or notice requirements.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers prior to the closing of
this offering, pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. In addition, the
Securities and Exchange Commission has indicated that Rule 701 will apply to
stock options granted by the Company before this offering, along with the
shares acquired upon exercise of such options. Securities issued in reliance on
Rule 701 are deemed to be restricted shares and, beginning 90 days after the
date of this Prospectus (unless subject to the contractual restrictions
described above), may be sold by persons other than affiliates subject only to
the manner of sale provisions of Rule 144 and by affiliates of the Company
under Rule 144 without compliance with its two-year minimum holding period
requirements.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of Common Stock by a
person that, for U.S. federal income tax purposes, is a non-resident alien
individual, a foreign corporation, a foreign partnership or an estate or trust,
in each case not subject to U.S. federal income tax on a net income tax basis
in respect of income or gain from Common Stock (a "non-U.S. holder"). This
discussion is based on the Internal Revenue Code of 1986, as amended, Treasury
regulations thereunder, and administrative and judicial interpretations as of
the date hereof, all of which may be changed. This discussion does not address
all the aspects of U.S. federal income and estate taxation that may be relevant
to non-U.S. holders in light of their particular circumstances, or to certain
types of holders subject to special treatment under U.S. federal income tax
laws (such as life insurance companies and dealers in securities). Nor does it
address tax consequences under the laws of any state, municipality or other
taxing jurisdiction or under the laws of any country other than the U.S.
Prospective holders should consult their own tax advisors about the
particular tax consequences to them of holding and disposing of Common Stock.
DIVIDENDS
Generally, dividends paid to a non-U.S. holder of Common Stock will be
subject to U.S. federal withholding tax at a 30% rate or such lower rate as may
be specified by an applicable income tax treaty, unless the dividends are
effectively connected with the conduct of a trade or business within the U.S.
(or alternatively are attributable to a U.S. permanent establishment of such
holder, if an applicable income tax treaty so requires as a condition for the
non-U.S. holder to be subject to U.S. income tax on a net income basis in
respect of such dividends). Such "effectively connected" dividends, or
dividends attributable to a permanent establishment, are subject to tax at
rates applicable
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to U.S. citizens, resident aliens and domestic U.S. corporations, and are not
generally subject to withholding. Effectively connected dividends received by
a non-U.S. corporation may be subject to an additional "branch profits tax" at
a 30% rate (or a lower rate under an applicable income tax treaty) when such
dividends are deemed repatriated from the U.S.
Under current U.S. Treasury regulations, dividends paid to an address
outside the U.S. in a foreign country are presumed to be paid to a resident of
such country for purposes of the withholding tax. Under current interpretation
of U.S. Treasury regulations, the same presumption applies to determine the
applicability of a reduced rate of withholding under a tax treaty. Thus, non-
U.S. holders receiving dividends at addresses outside the U.S. are not
currently required to file tax forms to obtain the benefit of an applicable
treaty rate. Under U.S. Treasury regulations that are proposed to be effective
for distributions after 1997 (the "Proposed Regulations"), to claim the
benefits of a tax treaty a non-U.S. holder of Common Stock would be required
to satisfy applicable certification requirements. In addition, under the
Proposed Regulations, in the case of Common Stock held by a foreign
partnership, (x) the certification requirement would generally be applied to
the partners of the partnership and (y) the partnership would be required to
provide certain information. The Proposed Regulations also provide look-
through rules for tiered partnerships. It is not certain whether, or in what
form, the Proposed Regulations will be adopted as final regulations.
If there is excess withholding on a person eligible for a treaty benefit,
the person can file for a refund with the U.S. Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of Common Stock unless (i) the
gain is effectively connected with a trade or business of the non-U.S. holder
in the U.S., (ii) in the case of a non-U.S. holder who is an individual and
holds the Common Stock as a capital asset, such holder is present in the U.S.
for 183 or more days in the taxable year of the disposition and certain other
conditions are met, (iii) the non-U.S. holder is subject to tax pursuant to
the provisions of U.S. tax law applicable to certain U.S. expatriates, or
(iv) the Company is or has been a "U.S. real property holding corporation" for
federal income tax purposes and, if the Common Stock is regularly traded on an
established securities market, the non-U.S. holder held, directly or
indirectly, at any time during the 5-year period ending on the date of
disposition (or such shorter period that such shares were held) more than 5%
of the Common Stock. The Company has not been and does not anticipate becoming
a "U.S. real property holding corporation" for U.S. federal income tax
purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Generally, the Company must report to the U.S. Internal Revenue Service the
amount of dividends paid, the name and address of the recipient and the
amount, if any, of tax withheld. A similar report is sent to the holder.
Pursuant to tax treaties or other agreements, the U.S. Internal Revenue
Service may make its reports available to tax authorities in the recipient's
country of residence. Dividends not subject to withholding tax may be subject
to backup withholding if the non-U.S. holder is not an "exempt recipient" and
fails to provide a tax identification number and other information to the
Company. Under the Proposed Regulations, dividend payments generally will be
subject to information reporting and backup withholding unless applicable
certification requirements are satisfied.
If the proceeds of a disposition of Common Stock are paid over by or through
a U.S. office of a broker, the payment is subject to information reporting and
possible backup withholding at a 31% rate unless the disposing holder
certifies under penalties of perjury as to his name, address, and non-U.S.
holder status or otherwise establishes an exemption. Generally, U.S.
information reporting and backup withholding requirement will not apply to a
payment of disposition proceeds if the payment is made
73
<PAGE>
outside the U.S. through a non-U.S. office of a broker. However, U.S.
information reporting requirements (but not backup withholding) will apply to
a payment of disposition proceeds outside the U.S. if (A) the payment is made
through an office outside the U.S. of a broker that either (i) is a U.S.
person, (ii) derives 50% or more of its gross income for certain periods from
the conduct of a trade or business in the U.S. or (iii) is a "controlled
foreign corporation" for U.S. federal income tax purposes and (B) the broker
fails to maintain documentary evidence that the holder is a non-U.S. holder or
that the holder otherwise is entitled to an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained.
FEDERAL ESTATE TAXES
Common Stock held by a non-U.S. holder at the time of death will be included
in such holder's gross estate for U.S. federal estate tax purposes unless an
applicable estate tax treaty provides otherwise.
74
<PAGE>
UNDERWRITING
The U.S. Underwriters named below, for whom Deutsche Morgan Grenfell Inc. is
acting as the representative, and the International Underwriters named below,
for whom Morgan Grenfell & Co., Limited is acting as the representative, have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement to purchase from the Company the respective number of
shares of Common Stock indicated below opposite their respective names. The
Underwriters are committed to purchase all of the shares, if they purchase
any.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- ---------
<S> <C>
Deutsche Morgan Grenfell Inc........................................
---------
Subtotal..........................................................
=========
<CAPTION>
INTERNATIONAL UNDERWRITERS
--------------------------
<S> <C>
Morgan Grenfell & Co., Limited......................................
---------
Subtotal..........................................................
=========
Total........................................................... 3,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions.
The U.S. Underwriters and the International Underwriters have entered into
an Agreement between U.S. and International Underwriters (the "Intersyndicate
Agreement") that provides for the coordination of their activities. Pursuant
to the Intersyndicate Agreement, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares of Common
Stock so sold shall be the initial public offering price, less an amount not
greater than the selling concession.
Under the terms of the Intersyndicate Agreement, the International
Underwriters and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to persons who are U.S. persons,
and the U.S. Underwriters and any dealer to whom they sell shares of Common
Stock will not offer to sell or sell shares of Common Stock to any non-U.S.
persons except, in each case, for transactions pursuant to the Intersyndicate
Agreement. As used herein, "U.S. person" means any national or resident of the
U.S., or any corporation, pension, profit-sharing or other trust or other
entity organized under the laws of the U.S. or of any political subdivision
thereof (other than a branch located outside of the U.S. of any U.S. Person)
and shall include any U.S. branch of a person who is otherwise not a U.S.
person.
The Underwriters propose to offer the Common Stock to the public on the
terms set forth on the cover page of this Prospectus. The Price to Public and
Underwriting Discount will be identical in the U.S. and international
offerings. The Underwriters may allow to selected dealers (who may include the
Underwriters) a concession of not more than $ per share. The selected
dealers may reallow a concession of not more than $ to certain other
dealers. After the initial public offering, the price and concessions and re-
allowances to dealers and other selling terms may be changed by the
Underwriters. The Common Stock is offered subject to receipt and acceptance by
the Underwriters, and to certain other conditions, including the right to
reject orders in whole or in part. The Underwriters do not intend to sell any
of the shares of Common Stock offered hereby to accounts for which they
exercise discretionary authority.
75
<PAGE>
The Company has granted an option to the Underwriters to purchase up to a
maximum of 525,000 additional shares of Common Stock to cover over-allotments,
if any, at the public offering price, less the underwriting discount set forth
on the cover page of this Prospectus. Such option may be exercised at any time
until 30 days after the date of the Underwriting Agreement. To the extent the
Underwriters exercise this option, each of the Underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with the offering.
Each International Underwriter has represented and agreed that (i) it has not
offered or sold and will not offer or sell any shares of Common Stock offered
hereby to persons in the United Kingdom except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purpose of their business or
otherwise in circumstances which have not resulted and will not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995, (ii) it has complied and will comply
with all applicable provisions of the Financial Services Act 1986 with respect
to anything done by it in relation to the shares of Common Stock offered hereby
in, from or otherwise involving the United Kingdom, and (iii) it has only
issued or passed on and will only issue or pass on to any person in the United
Kingdom any document received by it in connection with the issue of the shares
of Common Stock offered hereby if that person is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995 or is a person to whom such document may otherwise
lawfully be issued or passed on.
Pursuant to the Intersyndicate Agreement, each International Underwriter has
represented that it has not offered or sold, and has agreed not to offer or
sell, any shares of Common Stock offered hereby, directly or indirectly, in
Canada in contravention of the securities laws of Canada or any province or
territory thereof and has represented that any offer of such shares of Common
Stock in Canada will be made only pursuant to an exemption from the requirement
to file a prospectus in the province or territory of Canada in which such offer
is made. Each International Underwriter has further agreed to send to any
dealer who purchases from it any shares of Common Stock offered hereby a notice
stating in substance that, by purchasing such shares, such dealer represents
and agrees that it has not offered or sold, and will not offer or sell,
directly or indirectly, any of such shares in Canada or to, or for the benefit
of, any resident of Canada in contravention of the securities laws of Canada or
any province or territory thereof and that any offer of shares of Common Stock
in Canada will be made only pursuant to an exemption from the requirement to
file a prospectus in the province or territory of Canada in which such offer is
made, and that such dealer will deliver to any other dealer to whom it sells
any of such shares of Common Stock a notice to the foregoing effect.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including civil liabilities
under the Securities Act or will contribute to payments the Underwriters may be
required to make in respect thereof.
The Company has entered into an additional agreement with the Underwriters
pursuant to which, in the event the offering contemplated by this Prospectus is
consummated, the Company will pay reasonable, itemized out-of-pocket expenses
(including reasonable fees and expenses of counsel) of the Underwriters in the
offering, of up to $200,000.
In connection with the offering, the Company and the directors and executive
officers of the Company and all other holders of the Company's securities have
agreed not to offer, sell or otherwise dispose of any shares of Common Stock
for a period of 180 days after the date of this Prospectus without the prior
written consent of Deutsche Morgan Grenfell Inc.
76
<PAGE>
Deutsche Bank Aktiengesellschaft, an affiliate of Deutsche Morgan Grenfell
Inc. and Morgan Grenfell & Co., Limited, holds $100,000 in principal amount of
the Company's Notes and related Warrants convertible into 816 shares of Common
Stock, assuming an initial public offering price of $14 per share.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
will be determined by negotiations among the Company and the Underwriters.
Among the factors to be considered in such negotiations are prevailing market
conditions, the market prices of securities of publicly traded companies
engaged in activities somewhat similar to those of the Company, the Company's
financial and operating history and condition, estimates of the business
potential of the Company and the present state of the Company's development.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain matters will be passed upon for the Company by
Pezzola & Reinke, A Professional Corporation, Oakland, California, and for the
Underwriters by Latham & Watkins, San Francisco, California.
EXPERTS
The consolidated financial statements and schedule of NetSource
Communications, Inc. and subsidiaries as of December 31, 1994 and 1995 and
September 30, 1996 for each of the years in the three-year period ended
December 31, 1995 and nine months ended September 30, 1996 have been included
in this Prospectus and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent auditors, appearing elsewhere
herein and upon the authority of said firm as experts in accounting and
auditing.
77
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1, including amendments thereto, under the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules filed therewith. For further information with respect
to the Company and the Common Stock offered hereby, reference is hereby made
to such Registration Statement and to the exhibits and schedules filed
therewith. Statements contained in this Prospectus regarding the contents of
any contract or other document referred to are not necessarily complete, and
in each instance reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference. The Registration
Statement, including the exhibits and schedules thereto, may be inspected
without charge at the principal office of the Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all
or any part thereof may be obtained from such office upon the payment of the
prescribed fees. Such materials may also be obtained from the Commission's Web
site at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent
auditors and quarterly reports containing consolidated financial information.
78
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES ----
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1994, 1995, and September
30, 1996 ................................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1993, 1994, and 1995, and the Nine Months Ended September 30, 1995 (unau-
dited) and 1996.......................................................... F-4
Consolidated Statements of Stockholders' Deficit for the Years Ended De-
cember 31, 1993, 1994, and 1995, and the Nine Months Ended September 30,
1996..................................................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1994, and 1995, and the Nine Months Ended September 30, 1995 (unau-
dited) and 1996.......................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
MTC JAPAN LTD.
Independent Auditors' Report.............................................. F-26
Balance Sheet as of December 31, 1995..................................... F-27
Statement of Operations for the Period from Inception (March 22, 1995) to
December 31, 1995........................................................ F-28
Statement of Stockholders' Deficit for the Period from Inception (March
22, 1995) to December 31, 1995........................................... F-29
Statement of Cash Flows for the Period from Inception (March 22, 1995) to
December 31, 1995........................................................ F-30
Notes to Financial Statements............................................. F-31
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
NetSource Communications, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of NetSource
Communications, Inc. and subsidiaries ("the Company") as of December 31, 1994
and 1995 and September 30, 1996, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for each of the years in the
three-year period ended December 31, 1995 and for the nine months ended
September 30, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide 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 NetSource
Communications, Inc. and subsidiaries as of December 31, 1994 and 1995 and
September 30, 1996, and the results of their operations and their cash flows
for each of the years in the three-year period ended December 31, 1995 and for
the nine months ended September 30, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
San Francisco, California
November 13, 1996,
except as to Note
14(b) which is as of
November 20, 1996.
F-2
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
ASSETS 1994 1995 1996
------ ------- ------ -------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................... $ 1,274 497 4,900
Short-term investments......................... -- -- 3,496
Trade receivables, less allowances of $1,319,
$1,496, and $1,500, respectively.............. 9,291 7,062 7,501
Due from joint ventures, less allowances of $
-- , $ -- , and $493, respectively............ -- 688 2,981
Due from officer............................... -- -- 249
Other receivables, less allowances of $607,
$950, and $457, respectively.................. 840 485 617
Costs in excess of billings on uncompleted pro-
jects......................................... 94 162 153
Prepaid expenses and other current assets...... 330 892 286
------- ------ ------
Total current assets......................... 11,829 9,786 20,183
Property and equipment, net..................... 3,323 7,954 11,505
Deposits with carriers.......................... 2,008 2,501 1,981
Debt issuance costs, net of accumulated amorti-
zation of $243................................. -- -- 1,702
Other assets and deposits....................... 313 420 1,671
Due from officer................................ 249 249 --
------- ------ ------
Total assets................................. $17,722 20,910 37,042
======= ====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C> <C>
Current liabilities:
Trade accounts payable and accrued expenses.... $17,642 14,483 16,728
Notes payable.................................. -- 3,495 304
Line of credit................................. -- 1,087 --
Current portion of capital lease obligations... 24 524 974
Billings in excess of costs on uncompleted pro-
jects......................................... 212 195 121
Other current liabilities...................... 2,260 3,548 4,338
------- ------ ------
Total current liabilities.................... 20,138 23,332 22,465
Series A secured subordinated convertible prom-
issory notes................................... -- -- 19,691
Capital lease obligations, less current por-
tion........................................... -- 1,146 1,720
Deferred rent................................... 212 333 312
Investments in joint ventures, net of advances.. -- 290 723
Deferred taxes.................................. -- 271 --
Payable to stockholder.......................... 140 -- --
------- ------ ------
Total liabilities............................ 20,490 25,372 44,911
Commitments and contingencies
Stockholders' deficit
Common stock: $.001 par value, 44,000,000
shares authorized; 13,746,719, 14,786,384, and
15,978,074 shares issued and outstanding,
respectively.................................. 14 15 16
Additional paid-in capital...................... 83 222 --
Stock purchase warrants......................... -- -- 353
S corporation retained earnings (deficit)....... 1,063 (2,361) --
Accumulated deficit............................. (3,928) (2,338) (8,238)
------- ------ ------
Total stockholders' deficit.................. (2,768) (4,462) (7,869)
------- ------ ------
Total liabilities and stockholders' deficit.. $17,722 20,910 37,042
======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER NINE MONTHS ENDED
31, SEPTEMBER 30,
------------------------ ------------------
1993 1994 1995 1995 1996
------- ------ ------- ----------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications.............. $23,510 48,937 86,871 64,985 67,907
Marketing communications........ 4,792 4,915 3,774 3,022 1,943
Electronic commerce products and
services........................ -- -- 654 408 1,106
------- ------ ------- ------ ------
Total revenues................. 28,302 53,852 91,299 68,415 70,956
Cost of revenues:
Telecommunications.............. 16,676 34,565 58,467 43,634 44,802
Marketing communications........ 2,164 1,497 1,194 986 544
Electronic commerce products and
services........................ -- 281 154 402
------- ------ ------- ------ ------
Total cost of revenues......... 18,840 36,062 59,942 44,774 45,748
------- ------ ------- ------ ------
Gross profit................... 9,462 17,790 31,357 23,641 25,208
------- ------ ------- ------ ------
Operating expenses:
Sales and marketing............. 2,289 6,713 13,191 9,810 9,558
General and administrative...... 7,708 12,837 18,495 13,131 17,825
------- ------ ------- ------ ------
Total operating expenses....... 9,997 19,550 31,686 22,941 27,383
------- ------ ------- ------ ------
Operating income (loss)........ (535) (1,760) (329) 700 (2,175)
Share of losses of joint
ventures........................ -- -- (489) (187) (541)
Other income (expense), net...... 144 (233) (464) (225) (624)
------- ------ ------- ------ ------
Income (loss) before income
taxes.......................... (391) (1,993) (1,282) 288 (3,340)
Income tax expense............... (47) (5) (552) (412) (110)
------- ------ ------- ------ ------
Net loss....................... $(438) (1,998) (1,834) (124) (3,450)
======= ====== ======= ====== ======
Pro Forma:
Net loss before income taxes.... (1,282) (3,340)
Pro forma income tax benefit
(expense)...................... (347) 378
------- ------
Pro forma net loss.............. $(1,629) (2,962)
======= ======
Pro forma net loss per share.... $ (0.10) (0.17)
======= ======
Shares used in pro forma per
share computation............... 16,952 17,507
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
S CORPORATION
COMMON STOCK ADDITIONAL STOCK RETAINED TOTAL
----------------- PAID-IN PURCHASE EARNINGS ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL WARRANTS (DEFICIT) DEFICIT DEFICIT
---------- ------ ---------- -------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances as of December
31, 1992............... 13,656,720 $ 14 63 -- (391) (38) (352)
Net earnings (loss)..... -- -- -- -- 911 (1,349) (438)
---------- ---- ---- --- ------ ------ ------
Balances as of December
31, 1993............... 13,656,720 14 63 -- 520 (1,387) (790)
Issuance of common
stock................... 90,000 -- 20 -- -- -- 20
Net earnings (loss)..... -- -- -- -- 543 (2,541) (1,998)
---------- ---- ---- --- ------ ------ ------
Balances as of December
31, 1994............... 13,746,720 14 83 -- 1,063 (3,928) (2,768)
Issuance of common
stock................... 1,039,664 1 139 -- -- -- 140
Net earnings (loss)..... -- -- -- -- (3,424) 1,590 (1,834)
---------- ---- ---- --- ------ ------ ------
Balances as of December
31, 1995............... 14,786,384 15 222 -- (2,361) (2,338) (4,462)
Issuance of common
stock.................. 1,191,690 1 11 -- -- -- 12
Issuance of warrants in
conjunction with con-
vertible promissory
notes.................. -- -- -- 353 -- -- 353
Distributions to
shareholders........... -- -- (233) -- (89) -- (322)
Merger with MTC and
Transphere............. -- -- -- -- 3,315 (3,315) --
Net loss................ -- -- -- -- (865) (2,585) (3,450)
---------- ---- ---- --- ------ ------ ------
Balances as of September
30, 1996............... 15,978,074 $ 16 -- 353 -- (8,238) (7,869)
========== ==== ==== === ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------
1993 1994 1995 1995 1996
------- ------ ------ ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................ $ (438) (1,998) (1,834) (124) (3,450)
Adjustments to reconcile net
loss to net cash provided by
operating activities:
Depreciation and amortization.. 194 460 1,040 769 1,131
Amortization of debt issuance
costs......................... -- -- -- -- 243
Provision for doubtful accounts
trade receivables............. 487 2,495 1,213 735 1,263
Provision for doubtful accounts
on other receivables.......... 218 389 343 257 (493)
Loss on disposition of fixed
assets........................ -- 50 -- -- --
Share of losses of joint
ventures...................... -- -- 489 231 541
Noncash service expense........ -- 20 -- -- --
Deferred taxes................. 20 (20) 271 237 110
Changes in operating assets and
liabilities:
Trade receivables.............. (4,877) (4,937) 925 (211) (1,209)
Due from joint venture......... -- -- (688) (217) (2,293)
Other receivables.............. (340) (1,107) 103 (369) (132)
Costs in excess of billings on
uncompleted projects.......... (540) 498 (68) 16 9
Prepaid expenses and other
current assets................ (118) (195) (716) 227 606
Deposits with carriers......... (1,013) (995) (493) (391) 520
Deposits and other assets...... (107) (104) (107) (180) (1,207)
Trade accounts payable and
accrued expenses.............. 5,978 7,918 (92) (532) 3,745
Billings in excess of costs on
uncompleted projects.......... 299 (87) (17) (27) (74)
Other current liabilities...... 1,715 1,004 966 702 796
Deferred rent.................. -- 212 121 112 (21)
------- ------ ------ ------ -------
Net cash provided by operating
activities................... 1,478 3,603 1,456 1,235 85
------- ------ ------ ------ -------
Cash flows from investing
activities:
Purchases of property and
equipment...................... (982) (2,331) (3,231) (2,783) (3,198)
Investment in joint ventures.... -- -- (45) (45) (108)
Purchases of short-term
investments.................... (1,029) -- -- -- (5,481)
Proceeds from sale of short-term
investments.................... 477 552 -- -- 1,985
Loans to stockholders........... (125) -- -- -- --
------- ------ ------ ------ -------
Net cash used in investing
activities.................... (1,659) (1,779) (3,276) (2,828) (6,802)
------- ------ ------ ------ -------
Cash flows from financing
activities:
Cash overdraft.................. -- (789) 322 1,051 (387)
Proceeds from line of credit.... -- -- 3,881 -- 9,478
Proceeds from note payable...... -- -- -- 103 --
Repayment of line of credit..... -- -- (2,794) -- (10,565)
Repayment of note payable....... -- -- -- -- (4,579)
Principal payments under capital
lease obligations.............. (17) (43) (366) (379) (572)
Payment of debt issuance costs.. -- -- -- -- (1,945)
Issuance of convertible
promissory notes............... -- -- -- -- 20,000
Distributions to shareholders... -- -- -- -- (322)
Issuance of common stock........ -- -- -- -- 12
------- ------ ------ ------ -------
Net cash provided by (used in)
financing activities.......... (17) (832) 1,043 775 11,120
------- ------ ------ ------ -------
Increase (decrease) in cash and
cash equivalents................ (198) 992 (777) (818) 4,403
Cash and cash equivalents at
beginning of period............. 480 282 1,274 1,274 497
------- ------ ------ ------ -------
Cash and cash equivalents at end
of period....................... $ 282 1,274 497 456 4,900
======= ====== ====== ====== =======
Supplemental disclosures of cash
paid during the period:
Interest........................ $ 16 37 120 34 709
======= ====== ====== ====== =======
Taxes........................... $ 91 2 14 12 370
======= ====== ====== ====== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30,1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(1) ORGANIZATION
NetSource Communications, Inc. (the "Company"), incorporated in Delaware on
November 20, 1995, was formed to succeed the businesses of MTC Telemanagement
Corporation, a California corporation, MTC International, Inc., a Nevada
corporation (collectively, "MTC"), and Transphere International, Inc. and
Transphere Interactive, Inc., each California corporations (collectively,
"Transphere").
On June 28, 1996, the Company issued 11,704,364 shares of its common stock
in a merger with MTC. In conjunction with this merger, the Company granted
2,186,985 options to replace stock options outstanding in the MTC entities.
The entities comprising MTC had substantial common ownership and accordingly
this transaction was accounted for as a combination of entities under common
control in a manner similar to a pooling of interests.
Concurrently, the Company merged with Transphere in exchange for 4,273,710
shares of the Company's common stock. In conjunction with this merger, the
Company granted 356,745 options to replace stock options outstanding in the
Transphere entities. This merger was accounted for as a pooling of interests.
The accompanying consolidated financial statements have been restated to
include the accounts and operations of MTC and Transphere for all periods
presented. Net sales for MTC are reflected as telecommunication revenues,
while net sales for Transphere are reflected as marketing communications and
electronic commerce product and services revenues in the consolidated
financial statements. Net income of the merged entities, prior to the merger,
are presented in the following table.
<TABLE>
<CAPTION>
SIX
MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
--------------------- ---------
1993 1994 1995 1995 1996
----- ------ ------ ---- ----
<S> <C> <C> <C> <C> <C>
Net income (loss):
MTC....................................... $ (73) (2,008) (2,288) 204 (88)
Transphere................................ (365) 10 454 238 (493)
----- ------ ------ --- ----
$(438) (1,998) (1,834) 442 (581)
===== ====== ====== === ====
</TABLE>
No significant nonrecurring costs and expenses were incurred in 1996 in
conjunction with this series of transactions.
Nature of Operations
The Company develops, implements and manages a wide range of communications
solutions for business and end-user customers worldwide. The Company's
products and services include international and domestic long distance
telecommunications, value-added telecommunications and related telemanagement
services, Internet access and hosting, Internet and interactive electronic
commerce products and services, such as Web-based architecture development and
maintenance, Web-based content development and management, and marketing
communications services.
F-7
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Sales by geographic area were as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- -----------------
1994 1995 1995 1996
------- ------ -------- --------
<S> <C> <C> <C> <C>
USA........................................ $29,801 27,998 22,049 20,171
Europe..................................... 8,850 24,630 18,792 23,541
Other Asia................................. 5,238 14,578 11,729 6,717
Japan...................................... 3,624 10,086 6,790 9,214
South America.............................. 3,510 9,770 5,273 9,394
Other...................................... 2,829 4,237 3,782 1,919
------- ------ -------- --------
$53,852 91,299 68,415 70,956
======= ====== ======== ========
</TABLE>
Export sales were not significant in 1993. No customer exceeded 10% of total
net revenues in 1993, 1994, or 1995, or in the nine months ended September 30,
1995 or 1996. Since marketing communications revenues were not significant in
1994 and 1995 and are not expected to exceed 10% of total revenues in the near
future, segment information by operating activity is not presented even though
marketing communications revenues for 1993 exceeded 10% of total revenues.
Liquidity
The Company has incurred recurring losses from operations over the past
several years and as of September 30, 1996, has negative working capital of
approximately $2,300. The Company secured financing for $20,000 in June 1996,
in the form of secured subordinated convertible promissory notes (see Note 8).
Management believes that such debt financing, combined with a number of cost
and growth control measures, will be sufficient to fund operations through
December 31, 1997. Management further believes, however, that achievement of
the Company's growth will require additional financing.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries, MTC. All significant
intercompany balances and transactions have been eliminated in consolidation.
Cash Equivalents and Short-Term Investments
Cash equivalents consist of instruments with maturities of 90 days or less
when such instruments were purchased.
In 1995, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities. The cumulative effect of adopting SFAS No. 115 was not material to
the Company's consolidated financial position and results of
F-8
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
operations. The Company's investments, which consist of corporate debt
securities, are classified as "available-for-sale" under the provisions of
SFAS No. 115. The securities are carried at fair value which approximates cost
and mature within one year.
Premiums and discounts on available-for-sale debt securities are amortized
to income using the effective interest method. Such amortization is included
in other income, net. Realized gains and losses, and declines in value judged
to be other than temporary on available-for-sale securities are included in
other income, net. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in other income, net.
Revenue Recognition
The Company recognizes revenue on telecommunication and electronic commerce
products and services in the month the related service is provided.
Marketing communications revenues consist of commissions for placement of
advertisements in printed media and from fees for production of materials.
Commission revenue is recognized when the advertisements are published. Trade
receivables include both the commission income recognized as well as the
actual media and production costs which are paid for by the Company and
rebilled to clients at the Company's cost. Fee revenues derived from fixed fee
arrangements are recognized on the percentage-of-completion method based on
the ratio of costs incurred to total estimated costs.
Costs in excess of billings on uncompleted projects represent the costs
incurred and anticipated profits earned on projects in progress in excess of
amounts billed, and are recorded as an asset. Billings in excess of costs on
uncompleted projects represent amounts billed in excess of costs incurred and
estimated profit earned, and are recorded as a liability. Such billings are
generally in accordance with contract provisions. To the extent incurred and
anticipated costs to complete projects in progress exceed anticipated
billings, a loss is accrued for the excess.
The Company incurred a loss of approximately $1,200 in 1994 as the result of
nonpayment by a customer for marketing communication services provided by the
Company. In connection with this transaction, the Company conveyed the rights
to certain trade receivables from this customer to certain vendors in
settlement of accounts payable to the vendors of $1,463.
Debt Issuance Costs
The costs related to the issuance of debt are capitalized and amortized to
interest expense using the effective interest method over the period in which
the related debt is outstanding.
Due from Officer
Due from officer consists of expenses paid by MTC on behalf of the Company's
Chief Executive Officer. The balance bears interest at the prime rate (8.25%
as of September 30, 1996) and is due in June 1997.
Property and Equipment
Property and equipment are recorded at cost. Equipment under capital lease
is recorded at the lower of the present value of the minimum payments or the
fair value of the leased property. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, ranging
from 5 to 15 years. Leasehold improvements are stated at cost and are
amortized using the
F-9
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
straight-line method over the shorter of the estimated useful life of the
improvements or the related lease term. Equipment under capital leases is
amortized on a straight-line basis, generally 3 to 5 years.
Deposits with Carriers
Deposits with carriers consist of funds held by interexchange carriers
generally based upon a percentage of anticipated volume, and accrued interest
under the terms of the respective carrier contracts.
Concentrations of Credit Risk
Financial instruments that potentially expose the Company to concentrations
of credit risk principally consist of cash, cash equivalents, short-term
investments and trade receivables. The Company's cash investment policies
limit investments to short-term, low risk instruments. Concentrations of
credit risk with respect to trade receivables are limited due to the
dispersion of the Company's customer base among different industries and
geographic areas.
The Company receives a significant portion of its payments for
telecommunication services from customer's credit card charges. The Company
receives payments for the credit card charges through the use of a third-party
intermediary. The Company's exposure to credit loss in the event of
nonperformance by the third party consists of charges for payment presented to
the third party for payment for which the Company has not yet received
reimbursement. Amounts due from the third-party intermediary in the normal
course of business were $1,958, $1,007, and $5 as of December 31, 1994 and
1995, and September 30, 1996, respectively.
Foreign Currency
The functional currency for substantially all of the Company's activities is
the U.S. Dollar. Substantially all of the Company's revenues and costs are
denominated in U.S. Dollars.
The functional currency for MTC Japan is the Japanese Yen. Translation gains
or losses of the joint ventures are included in a separate component of
stockholders' deficit. Translation gains or losses were not significant in any
period.
Income Taxes
The Company accounts for income taxes under the asset and liability method
of accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized based on the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in income in the period that includes the
enactment date.
Prior to the mergers discussed in Note 1, the Company consisted of three
entities treated as C corporations and one entity treated as an S corporation
for federal and state income tax purposes. The income of the S corporation was
taxed at the individual stockholder level. Accordingly, tax
F-10
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
expense in the accompanying consolidated statements of operations for the
years ended December 31, 1993, 1994, and 1995, reflect a different effective
rate of tax than would be expected if all the entities were taxed as C
corporations and filed as a consolidated group. The accompanying pro forma
loss for the year ended December 31, 1995, and for the nine months ended
September 30, 1996, reflect provisions for taxes on a pro forma basis, using
the asset and liability method, as if all entities had been taxed as
C corporations and filed as a consolidated group since the beginning of those
respective periods.
Use of Estimates
The preparation of the consolidated 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
disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the recorded amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Trade accounts payable to telecommunication service providers are subject to
negotiation as to the ultimate payment to be made by the Company. Amounts
recovered by the Company from telecommunication service providers will be
recognized in the period in which such amounts are realized. Additional
amounts owed by the Company to telecommunication service providers will be
recognized in the period in which it becomes probable that such amounts will
be paid.
Stock Splits
On August 1, 1996, the Company effected a ten-for-one stock split on
outstanding shares. Additionally, on September 16, 1996, the Company effected
an additional two-for-one stock split on outstanding shares. Accordingly, all
share amounts have been adjusted to reflect the stock splits.
Pro Forma Net Loss Per Share
Pro forma net loss per share is based on the weighted average number of
shares of common stock and dilutive common equivalent shares from options and
warrants outstanding during the period using the treasury stock method and
from convertible securities outstanding during the period using the as if
converted method.
Pursuant to certain Securities and Exchange Commission (SEC) Staff
Accounting Bulletins, common stock issued for consideration below the assumed
initial public offering (IPO) price and stock options and warrants granted
with exercise prices below the assumed IPO price during the 12-month period
prior to the date of the initial filing of the Registration Statement, even
when antidilutive, have been included in the calculation of pro forma net
income per share, using the treasury stock method based on the assumed IPO
price, as if they were outstanding for all periods presented prior to their
issuance or grant.
Interim Financial Information
The accompanying unaudited consolidated financial statements for the nine
months ended September 30, 1995, have been prepared on substantially the same
basis as the audited consolidated financial statements, and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the consolidated financial information set forth therein.
F-11
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(3) JOINT VENTURES
The Company has investments in the following joint ventures which are
accounted for by the equity method of accounting:
MTC Japan
In February 1995, the Company formed MTC Japan, Ltd., a joint venture. The
Company has a 45% interest in the joint venture. The joint venture distributes
telecommunication equipment and telemanagement product and services in Japan.
The Company's share of losses incurred by the joint venture during 1995 and for
the nine months ended September 30, 1995 and 1996, were $489, $187, and $380,
respectively. The recorded loss in excess of the Company's investment as of
December 31, 1995, is due to the Company's intention to provide continued
financial support to the joint venture over the near term. Investments in joint
ventures, net of advances is comprised of the losses incurred to date net of
the Company's original investment of $45 and advances of telecommunication
equipment of $154.
Summary financial information for the joint venture is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
DECEMBER 31,
1995 1995 1996
------------ ------ -------
<S> <C> <C> <C>
Assets:
Current assets............................... $ 719 239 1,095
Noncurrent assets............................ 456 468 743
------- ------ -------
1,175 707 1,838
Total liabilities............................. 1,911 1,102 3,643
------- ------ -------
Deficit....................................... $ (736) (395) (1,805)
======= ====== =======
Revenues...................................... $ 1,169 413 3,463
======= ====== =======
Operating loss................................ $(1,086) (416) (843)
======= ====== =======
Net loss...................................... $(1,086) (416) (843)
======= ====== =======
</TABLE>
During 1995 and for the nine months ended September 30, 1995 and 1996, the
Company recorded sales to the joint venture totaling $688 and $234, and $2,399,
respectively.
F-12
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
MTC Telecom Western Europe
In January 1996, the Company formed MTC Telecom Western Europe B.V., a joint
venture. The joint venture provides telecommunication services in Western
Europe. The Company has a 50% interest in the joint venture. The Company's
share of losses incurred by the joint venture during the nine months ended
September 30, 1996 were $160. The recorded loss in excess of the Company's
investment as of September 30, 1996 is due to the Company's intention to
provide continued financial support to the joint venture over the near term.
Investments in joint ventures, net of advances, is comprised of the losses
incurred to date net of the Company's original investment of $25 and advances
of $82.
Summary financial information for the joint venture is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
Assets:
Current assets................................................ $ 774
Noncurrent assets............................................. 301
-----
1,075
Total liabilities.............................................. 1,334
-----
Deficit........................................................ $(259)
=====
Revenues....................................................... $ 670
=====
Operating losses............................................... $(311)
=====
Net loss....................................................... $(321)
=====
</TABLE>
During the nine months ended September 30, 1996, the Company recorded sales
to the joint venture totalling $329.
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1994 1995 1996
------ ------ -------------
<S> <C> <C> <C>
Switching and installation equipment.......... $1,325 4,179 6,401
Computer equipment............................ 1,499 3,196 5,823
Furniture and fixtures........................ 742 912 1,063
Leasehold improvements........................ 281 798 900
Access equipment.............................. 354 377 377
Construction in progress...................... 18 428 --
------ ------ ------
4,219 9,890 14,564
Accumulated depreciation and amortization..... (896) (1,936) (3,059)
------ ------ ------
$3,323 7,954 11,505
====== ====== ======
</TABLE>
F-13
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Property and equipment as of December 31, 1994 and 1995, and September 30,
1996, included equipment under capital leases of approximately $56, $2,103 and
$3,637 respectively; and related accumulated amortization of approximately $7,
$119 and $557, respectively.
(5) OTHER CURRENT LIABILITIES
A summary of other current liabilities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
1994 1995 1996
------ ----- -------------
<S> <C> <C> <C>
Accrued commissions.............................. $ 928 1,152 1,005
Taxes payable.................................... 414 593 567
Accrued payroll and related items................ 125 319 708
Accrued interest................................. -- -- 537
Cash overdraft................................... 65 387 --
Other liabilities................................ 728 1,097 1,521
------ ----- -----
$2,260 3,548 4,338
====== ===== =====
</TABLE>
(6) NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER
31, SEPTEMBER 30,
---------- -------------
1994 1995 1996
---- ----- -------------
<S> <C> <C> <C>
Note payable to vendor, unsecured, interest rate
14%; monthly payments from January to October
1996............................................. $-- 3,067 304
Note payable for equipment financing; interest
rate 9%; due July 1996........................... -- 428 --
---- ----- ---
$-- 3,495 304
==== ===== ===
</TABLE>
The note payable to vendor represents trade payables converted to short-term
notes payable during 1995.
(7) LINE OF CREDIT
In November 1995, a subsidiary entered into a $3,000 revolving line of
credit agreement which bore interest at the bank's prime rate plus 2.5%. Under
the terms of the agreement, advances under the line were limited to 80% of
billed trade receivables and 45% of unbilled trade receivables. The agreement
contained certain financial covenants restricting the subsidiary from entering
into major debt agreements. The creditor was granted a security interest in
certain of the subsidiary's tangible and intangible assets. As of December 31,
1995, the outstanding balance was $1,087. As of December 31, 1995, the
subsidiary was not in technical compliance with the debt covenants, and in
June, 1996, the
F-14
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
creditor recalled the line of credit based on non-compliance. In conjunction
with the called line, the subsidiary paid $175 in termination fees which were
accrued as of December 31, 1995.
(8) SERIES A SECURED SUBORDINATED CONVERTIBLE PROMISSORY NOTES
In June 1996, the Company issued $20,000 in Series A Secured Subordinated
Convertible Promissory Notes ("Notes") and detachable warrants ("Detachable
Warrants") to purchase a number of shares of the Company's common stock equal
to 8% of the number of shares into which the Notes are convertible. The Notes
bear interest at a rate of 10% per annum, interest is payable semiannually,
and they are due and payable in June 1998. The holders of the Notes have been
granted a security interest in all of the assets of the Company, subordinated
to any other secured institutional debt incurred by the Company in an
aggregate amount not to exceed $10,000, plus any existing or future capital
leases. The Notes contain certain restrictive covenants with respect to the
Company's payments of bonuses or dividends.
The holders of the Notes have the right to convert the Notes into shares of
the Company's common stock at any time after the earlier to occur of (i) the
consummation of an IPO, or (ii) January 1, 1997. In the event an IPO is
consummated on or before December 31, 1996, the per share conversion price for
the Notes shall be equal to 70% of the per share price to the public of the
common stock in the IPO. In the event an IPO is not consummated by December
31, 1996, the conversion price for the Notes shall be $5.40.
The Detachable Warrants may be exercised at any time after the earlier to
occur of (i) an IPO, or (ii) January 1, 1997, and the Detachable Warrants
expire on June 30, 1999.
The per share exercise price for the Detachable Warrants shall be equal to
the conversion price established under the Notes. However, if an IPO is not
consummated prior to June 30, 1998, the Detachable Warrant exercise prices
will be adjusted to equal 50% of the per share price of any unaffiliated
third-party equity financing in excess of $2,000 consummated on or after June
30, 1998, and prior to the expiration of the Detachable Warrants.
The Company also granted warrants to a placement agent, to purchase shares
of the Company's common stock. Warrants issued shall entitle the warrant
holder to purchase an aggregate number of shares equal to approximately 8% of
the number of shares into which the Notes are convertible.
The Company has recorded the fair value of the warrants amounting to $353 as
a discount on the related debt with an offsetting credit to stockholders'
deficit. The fair value of the warrants was determined using a Black-Sholes
valuation methodology using the following assumptions: risk free interest rate
of 6.06%; 3 year life of the warrant; .60 expected volatility and no
dividends. The debt discount is being amortized to interest expense over the
period in which the debt is outstanding using the effective interest method.
F-15
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(9) COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its principal offices under noncancelable operating lease
agreements which expire in various years through 2001 and provide for renewal
options. In addition, the lease agreements require the payment of a pro rata
share of certain annual operating expenses of the property. The Company leases
certain equipment under capital leases. Property and equipment acquired under
capital leases for the years ended December 31, 1993, 1994, and 1995, and for
the nine months ended September 30, 1995 and 1996, were $-0-, $56, $2,103,
$1,313, and $3,637, respectively. As of December 31, 1995, future minimum
lease payments under all noncancelable lease agreements are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING DECEMBER 31, LEASES LEASES
------------------------- ------- ---------
<S> <C> <C>
Three months ending December 31, 1996...................... $ 338 368
1997....................................................... 1,279 1,231
1998....................................................... 1,070 982
1999....................................................... 471 891
2000....................................................... 90 805
2001 and thereafter........................................ -- 319
------ ------
Total minimum lease payments............................... 3,248 $4,596
======
Less amount representing interest.......................... 554
------
Present value of minimum lease payments.................... 2,694
Less current portion....................................... 974
------
Long-term capital lease obligations........................ $1,720
======
</TABLE>
Net rental expenses for operating leases during the years ended December 31,
1993, 1994, and 1995, and the nine months ended September 30, 1995 and 1996,
were $420, $815, $1,043, $620, and $1,075, respectively.
Litigation
The Company is party to various legal proceedings arising in the ordinary
course of its business. In the opinion of management, the results of these
proceedings will not have a material adverse effect on the Company's financial
position or results of operations.
Telecommunications Service Contracts
The Company has entered into short-term telecommunications service contracts
with various carriers in the normal course of business that provide the
Company with long distance capacity at specified rates. The telecommunications
service contracts contain minimum usage or purchase requirements, which
contain a provision whereby if in any month the Company's customers use less
F-16
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
than the minimum commitment, the difference is nevertheless due and payable to
the carrier in the following month. In the opinion of management, the
Company's sales to its current customer base is sufficient to meet these
minimum commitments as they come due.
The Company has three carriers that represented 53%, 86%, 69%, 72%, and 44%
of the total cost of revenues in 1993, 1994, and 1995 and in the nine months
ended September 30, 1995 and 1996, respectively. Management believes that
other carriers could provide the volume required upon similar terms and
conditions. A change in carriers, however, could cause a delay in service and
a possible loss of sales, which could adversely affect operating results.
(10) INCOME TAXES
Income tax expense consisted of:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------- -------------------
1993 1994 1995 1995 1996
---- ---- ---- -------- ---------
<S> <C> <C> <C> <C> <C>
Current:
Federal.................................. $18 -- 188 158 194
State.................................... 9 25 93 49 187
--- --- --- -------- ---------
27 25 281 207 381
--- --- --- -------- ---------
Deferred:
Federal.................................. 17 (23) 217 164 (217)
State.................................... 3 3 54 41 (54)
--- --- --- -------- ---------
20 (20) 271 205 (271)
--- --- --- -------- ---------
Income taxes............................ $47 5 552 412 110
=== === === ======== =========
</TABLE>
Income tax expense differs from the amounts computed by applying the U.S.
federal income tax rate of 34% to pretax income as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
----------------- -------------------
1993 1994 1995 1996
----- ---- ---- ----
<S> <C> <C> <C> <C>
Expected tax benefit................ $(133) (678) (436) (1,136)
Other............................... (25) 93 50 (72)
Reserve on deferred tax asset....... 587 753 180 891
State taxes, net of federal
benefit............................. 8 26 64 122
S corporation (earnings) losses not
subject to corporate taxation....... (390) (189) 694 305
----- ---- ---- ------
Income tax expense............... $ 47 5 552 110
===== ==== ==== ======
</TABLE>
F-17
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------- -------------
1994 1995 1996
------ ------ -------------
<S> <C> <C> <C>
Deferred tax assets:
Reserves on receivables....................... $ 396 918 2,542
Investment in affiliate....................... -- 196 444
Accrued expenses.............................. -- 89 298
Other......................................... 40 95 129
Net operating loss carryforwards.............. 1,223 512 1,086
------ ------ ------
Total gross deferred tax assets.............. 1,659 1,810 4,499
Less valuation allowance....................... (1,540) (1,720) (3,801)
------ ------ ------
Net deferred tax assets...................... 119 90 698
Deferred tax liability:
Fixed assets.................................. (119) (361) (698)
------ ------ ------
Deferred tax liability........................ $ -- (271) --
====== ====== ======
</TABLE>
The Company has the following net operating loss carryforwards as of
December 31, 1995, and September 30, 1996, as follows:
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Federal.......................................................... 1,487 2,942
State............................................................ 93 1,471
</TABLE>
The Company's federal net operating loss carryforwards expire between 2008
and 2011. The Company's state net operating loss carryforwards expire between
1998 and 2001. Additionally, the Company's net operating loss carryforwards as
of December 31, 1995, and September 30, 1996 are also subject to the "Separate
Return Limitation Year" rules. These rules provide that the net operating
losses of one corporation cannot offset the taxable income of another
corporation in the consolidated group.
F-18
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The pro forma provisions for income taxes reflect the tax expense that would
have been reported if all the entities had been taxed as C corporations and
filed as a consolidated group. The components of pro forma income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Pro forma income taxes:
Current:
Federal....................................... $ 31 --
State......................................... 53 4
---- ----
84 4
---- ----
Deferred:
Federal....................................... 210 (304)
State......................................... 53 (78)
---- ----
263 (382)
---- ----
Total pro forma income tax expense (benefit). $347 (378)
==== ====
</TABLE>
The following tabulation reconciles the statutory corporate federal income
tax benefit (computed by multiplying the Company's loss before income taxes by
34%) to the Company's pro forma income tax expense:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Pro forma expected federal income tax benefit... $(436) (1,136)
State taxes, net of federal effect.............. 70 (49)
Change to reserve on deferred tax asset......... 656 736
Permanent differences........................... 66 71
Other differences............................... (9) --
----- ------
Total pro forma income tax expense (benefit).... $ 347 (378)
===== ======
</TABLE>
F-19
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The tax effects of temporary differences that give rise to significant
portions of the pro forma deferred tax assets are presented below:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30
-------------- ------------
1994 1995 1996
------ ------ ------------
<S> <C> <C> <C>
Pro forma deferred tax assets:
Reserves on receivables...................... $1,120 1,952 2,539
Investment in affiliate...................... -- 196 444
Accrued expenses............................. 200 474 298
Other........................................ 63 71 69
Net operating loss carryforwards............. 634 126 917
------ ------ ------
Total gross pro forma deferred tax assets.. 2,017 2,819 4,267
Less valuation allowance...................... (2,017) (2,819) (3,569)
------ ------ ------
Net pro forma deferred tax assets.......... -- -- 698
Pro forma deferred tax liability--fixed
assets....................................... (119) (382) (698)
------ ------ ------
Net pro forma deferred tax liability........ $ (119) (382) 0
====== ====== ======
</TABLE>
(11) STOCKHOLDERS' DEFICIT
1996 Omnibus Equity Incentive Plan
As of September 30, 1996, the Company had reserved 6,075,000 shares of
common stock for issuance under its 1996 Omnibus Equity Incentive Plan (the
"Omnibus Plan"). Under the Omnibus Plan, options may be granted to employees
and consultants to purchase shares of the Company's common stock at not less
than the fair market value of the Company's common stock at the grant date
(for incentive stock options) or not less than 85% of the fair market value of
such common stock (for nonqualified stock options). Options become exercisable
as determined by the Company's Board of Directors, and generally expire no
more than 10 years from the date of grant.
1996 Stock Option Plan
In September 1996, the Company adopted the Stock Option Plan (the "1996
Plan"), which is in addition to the Omnibus Plan discussed above. Under the
1996 Plan, the Company has reserved 1,950,000 shares of common stock. Options
may be granted under the 1996 Plan at the discretion of the Company's Board of
Directors. Under the 1996 Plan, options may be granted to employees,
directors, and consultants to purchase shares of the Company's common stock at
not less than the fair market value of the Company's common stock at the grant
date (for incentive stock options) or not less 85% of the fair market value of
such common stock (for nonqualified stock options) at the grant date. Options
under the 1996 Plan become exercisable as determined by the Company's Board of
Directors, generally over four years. Options generally expire no more than 10
years from the grant date.
F-20
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
A summary of the Omnibus Plan and 1996 Plan transactions follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
OUTSTANDING
------------------------
PRICE PER
SHARES SHARE
--------- -------------
<S> <C> <C>
Balances as of December 31, 1992................... -- $ --
Stock options authorized.......................... -- --
Stock options granted............................. 30,780 .23 - 1.59
--------- -------------
Balances as of December 31, 1993................... 30,780 .23 - 1.59
Stock options granted............................. 1,440,000 .23 - 1.59
--------- -------------
Balances as of December 31, 1994................... 1,470,780 .23 - 1.59
Stock options granted............................. 1,745,805 .23 - 1.59
Stock options canceled............................ (750,795) .23 - 1.59
--------- -------------
Balances as of December 31, 1995................... 2,465,790 .23 - 1.59
Stock options granted............................. 1,413,858 .23 - 10.40
Stock options canceled............................ (923,835) .23 - 1.59
--------- -------------
Balances as of September 30, 1996.................. 2,955,813 $ .23 - 10.40
========= =============
</TABLE>
As of September 30, 1996 the Company had an additional 581,745 options to
purchase shares of the Company's common stock outstanding which are not
pursuant to any stock option plan. The options are subject to terms and
conditions as determined by the Board of Directors on the date of grant.
As of September 30, 1996, 1,844,610 options were exercisable.
1996 Employee Stock Purchase Plan
In September 1996, the Company adopted the 1996 Stock Purchase Plan (the
"1996 Plan") and reserved 750,000 shares of common stock for issuance under
the Purchase Plan.
Accounting for Stock-Based Compensation
The Company has elected to continue to use the intrinsic value-based method
to account for all of its employee stock-based compensation plans. Under APB
Opinion No. 25, Accounting for Stock Issued to Employees, the Company has
recorded no compensation costs related to its stock option plans for the years
ended December 31, 1993, 1994, and 1995 and for the nine months ended
September 30, 1996 because the exercise price of each option equals or exceeds
the fair value of the underlying common stock as of the grant date for each
stock option.
Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the
Company is required to disclose the pro forma effects on net loss and net loss
per share data as if the Company had elected to use the fair value approach to
account for all its employee stock-based compensation plans. Had compensation
cost for the Company's plans been determined consistent with the fair value
approach enumerated in SFAS No. 123, the Company's pro forma net loss and pro
forma net loss per
F-21
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
share for the year ended December 31, 1995 and the nine months ended September
30, 1996 would have been increased as indicated below:
<TABLE>
<CAPTION>
NINE
YEAR MONTHS
ENDED ENDED
DECEMBER SEPTEMBER
31, 1995 30, 1996
-------- ---------
<S> <C> <C>
Pro forma net loss As reported $1,629 $2,962
Adjusted pro forma 1,659 3,135
Pro forma net loss per shareAs reported (0.10) (0.17)
Adjusted pro forma (0.10) (0.18)
</TABLE>
The fair value of options granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1995 and 1996: risk-free interest rate of
6.25%; expected life ranging from 1.25 years to 3.25 years; zero expected
volatility; and no dividends.
A summary of the status of the Company's fixed option plans as of December
31, 1995 and September 30, 1996 and changes during the periods ended on those
dates is presented below:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Fixed Options
Outstanding at beginning of
year.............................. 1,695,780 0.29 2,752,215 0.37
Granted.......................... 1,807,230 0.44 1,709,178 6.49
Forfeited........................ (750,795) 0.37 (923,835) 0.48
--------- ---------
Outstanding at end of period..... 2,752,215 0.37 3,537,558 3.30
========= =========
Options exercisable at period-end.. 1,538,928 1,844,610
Weighted-average fair value of
options granted during the period
at exercise price equal to market
price at grant date............... $ 0.07 $ 1.05
</TABLE>
The following table summarizes information about fixed stock options
outstanding at September 30, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------
RANGE OF NUMBER OF WEIGHTED AVERAGE
EXERCISE OUTSTANDING AT REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
PRICES SEPTEMBER 30, 1996 CONTRACTUAL LIFE EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- ------------------ ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$.004 to 0.47 2,115,793 8.3 years $0.26 1,679,943 $0.25
$1.59 to 3.33 302,462 9.4 2.77 58,051 1.94
$6.67 to 10.40 1,119,303 9.9 9.19 106,616 6.69
</TABLE>
F-22
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(12) PROFIT SHARING PLANS
(a) Transphere Plan
Transphere had a qualified noncontributory profit sharing plan that covered
all employees on the later of the date upon which they attained 18 years of
age or complete one year of service. The plan provided for annual
discretionary contributions by Transphere which were proportionately allocated
to eligible employees based upon each participant's proportionate compensation
for the plan year (July 1 through June 30). Such discretionary company profit
sharing contributions were subject to a gradual "step" vesting schedule,
becoming 100% vested after completing six years of service. The charge to
operations for contributions to the plan were $91 in 1993. There were no
contributions to the plan in 1995 or 1994. The plan was terminated in 1996.
(b) Retirement and Savings Plan
The Company maintains a salary deferral defined contribution benefit plan
under which participating employees employed as of January 1, 1996, or who
have completed six months of service, may elect to defer a portion of their
pretax earnings, up to 15% of their qualified compensation. Effective October
1, 1996, the Company matches 10% of each employee's contributions, up to a
maximum of 8% of the employee's annual earnings. Prior to October 1, 1996, the
Company matched 10% of each employee's contributions, up to 6% of the
employee's annual earnings to a maximum of $250. In addition, the Company will
make a discretionary profit sharing contribution to the plan which will be
proportionately allocated to eligible employees who have completed at least
1,000 hours of service in the plan year and are employed on the last day of
the plan year.
(13) RELATED PARTY TRANSACTIONS
MTC Information Systems, Inc.
In January 1994, the Company entered into a sublease agreement with MTC
Information Systems, Inc. ("Information Systems"), a California corporation,
wholly owned by the holders of a majority of the Company's common stock, for
certain office space. The Company lease payments are paid directly to the
ultimate landlord. No fees or commissions are paid to Information Systems.
Lease payments for the years ended December 31, 1993, 1994, and 1995 and the
nine months ended September 30, 1995 and 1996 were $84, $451, $564, $401, and
$531, respectively.
Additionally, Information Systems held certain telecommunication service
contracts on behalf of the Company. The Company makes all payments on the
telecommunication service contracts directly to the carriers. No fees or
commissions are made payable to Information Systems.
Air Traffic Management Services, Inc.
The Company has a sales and distribution, license and services, and
facilities agreement dated July 27, 1995, with Air Traffic Management
Services, Inc. ("Air Traffic"), a California corporation, owned by the holders
of a majority of the Company's common stock. Pursuant to the agreement, the
Company sells and distributes Air Traffic products and services; provides
accounting, billing and administrative functions; shares facilities with; and
licenses certain software to Air Traffic. Payments made by the Company on
behalf of Air Traffic for the years ended December 31, 1993, 1994, and 1995
and the nine months ended September 30, 1995 and 1996, were $773, $1,701,
$2,192, $1,638 and $1,264, respectively. Payments received from Air Traffic
for the years ended December 31, 1993, 1994, and 1995 and the nine months
ended September 30, 1995 and 1996, were $662, $1,516, $2,413, $1,516, and
$1,620, respectively.
F-23
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995 AND SEPTEMBER 30, 1996
(INFORMATION AS OF SEPTEMBER 30, 1995 AND FOR THE NINE MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The Company had receivables from Air Traffic as of December 31, 1993, 1994,
and 1995, and September 30, 1996, in the amount of $112, $687, $288, and $547,
respectively.
In November 1996 the Company received a payment from Air Traffic as partial
settlement of amounts due from Air Traffic. This settlement consisted of cash
proceeds of $547. The Company included the cash proceeds in other income
(expense), net for the nine months ended September 30, 1996 because the
Company previously had established an allowance against the receivables. Due
to the uncertainty regarding the collectability of the Company's remaining
amounts due from Air Traffic, the Company will recognize income as payments
are received from Air Traffic.
Patent Agreement
For the years ended December 31, 1994 and 1995 and the nine months ended
September 30, 1995 and 1996, the Company paid $139, $240, $180, and $30,
respectively, to an officer for the right to use certain patents. The patents
were assigned to the Company in May 1996 for no additional consideration.
Merger and Acquisition Advice Agreement
In fiscal 1996, the Company entered into an agreement with Helix Capital
L.L.C. ("Helix") to provide merger and acquisition, financing and strategic
advisory services to the Company. The managing partner of Helix is a Director
of the Company. Total payments made to Helix for services rendered in the nine
month period ended September 30, 1996 were approximately $39.
(14) SUBSEQUENT EVENTS
(a) Acquisition of scruz-net, inc. and DNA New Media Group, Inc. (unaudited)
On November 14, 1996, the Company completed the acquisition of scruz-net.
Under the terms of the acquisition, the Company exchanged 230,190 shares of
common stock in exchange for all the outstanding shares of scruz-net, inc. The
acquisition of scruz-net is expected to be accounted for as a pooling of
interests. On November 18, 1996, the Company completed the acquisition of DNA
New Media Group, Inc. ("DNA"). Under the terms of the acquisition, the Company
exchanged 230,190 shares of common stock in exchange for all the outstanding
shares of DNA. The acquisition of DNA is expected to be accounted for as a
pooling of interests. Since the impact of these acquisitions on prior period
financial statements is not expected to be material, the acquisitions will be
accounted for on a prospective basis.
(b) Reverse Stock Split
On November 20, 1996, the Company effected a three-for-four reverse stock
split in outstanding shares. Accordingly, all share amounts have been adjusted
to reflect the reverse stock split.
F-24
<PAGE>
MTC JAPAN LTD.
FINANCIAL STATEMENTS
DECEMBER 31, 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
MTC Japan Ltd.
We have audited the accompanying balance sheet of MTC Japan Ltd. as of
December 31, 1995, and the related statements of operations, stockholders'
deficit, and cash flows for the period from inception (March 22, 1995) to
December 31, 1995. Those financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of MTC Japan Ltd. at December
31, 1995, and the results of its operations for the period from inception
(March 22, 1995) to December 31, 1995 in conformity with financial accounting
standards of Japan.
Accounting principles generally accepted in Japan vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected results of operations for the period from inception (March
22, 1995) to December 31, 1995 and stockholders' deficit as of December 31,
1995, to the extent summarized in Note 6 to the financial statements.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has suffered substantial loss from
operations and has a net capital deficiency that 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 8. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.
KPMG PEAT MARWICK
Tokyo, Japan
October 31, 1996
F-26
<PAGE>
MTC JAPAN LTD.
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS 1995 1995
------ ---- ----
((Yen)) (US$)
<S> <C> <C>
Current assets:
Cash............................................... 2,403,792 24,038
Trade accounts receivable (note 4)................. 33,631,107 336,311
Other receivable................................... 14,329,008 143,290
Bad debts reserve.................................. (333,802) (3,338)
Prepaid expenses................................... 1,239,354 12,394
Refundable consumption tax......................... 4,006,183 40,062
Other current assets............................... 220,721 2,207
------------ ----------
Total current assets............................. 55,496,363 554,964
------------ ----------
Fixed assets:
Telecommunications equipment....................... 35,524,668 355,247
Less accumulated depreciation...................... (9,958,257) (99,583)
------------ ----------
Net.............................................. 25,566,411 255,664
Telephone rights................................... 432,000 4,320
Rental deposit..................................... 900,000 9,000
Long-term prepaid expenses......................... 483,334 4,833
------------ ----------
Total fixed assets............................... 27,381,745 273,817
------------ ----------
Deferred assets:
Organization costs (note 6)........................ 15,083,649 150,837
------------ ----------
Total assets..................................... 97,961,757 979,618
============ ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
Current liabilities:
Trade accounts payable (notes 3 and 4)............. 70,829,600 708,296
Other accounts payable (note 3).................... 8,560,345 85,604
Short-term borrowing (note 3)...................... 110,391,753 1,103,918
Accrued expenses (note 3).......................... 18,413,437 184,134
Accrued corporate taxes (note 2)................... 52,500 525
Other current liabilities.......................... 498,830 4,988
------------ ----------
Total current liabilities........................ 208,746,465 2,087,465
------------ ----------
Stockholders' deficit:
Common stock, (Yen)50,000 par value. Authorized 800
shares, issued and outstanding 200 shares......... 10,000,000 100,000
Accumulated deficit................................ (120,784,708) (1,207,847)
------------ ----------
Total stockholders' deficit...................... (110,784,708) (1,107,847)
------------ ----------
Commitments (note 5):
Total liabilities and stockholders' deficit...... 97,961,757 979,618
============ ==========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
MTC JAPAN LTD.
STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION (MARCH 22, 1995) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
1995 1995
---- ----
(Yen) (US$)
<S> <C> <C>
Revenue........................................... 116,850,751 1,168,508
Cost of revenue (notes 3 and 5)................... 64,740,300 647,403
----------- ---------
Gross profit.................................... 52,110,451 521,105
----------- ---------
Selling, general and administrative expenses
(note 3)......................................... 172,913,867 1,729,139
----------- ---------
Operating loss.................................. 120,803,416 1,208,034
----------- ---------
Other income (note 3):
Equipment received free of charge................ 15,389,316 153,893
Other............................................ 546,429 5,464
----------- ---------
15,935,745 159,357
----------- ---------
Other expense (note 3):
Foreign exchange loss............................ 6,111,310 61,113
Disposal loss of equipment....................... 8,575,000 85,750
Interest expense................................. 1,178,227 11,782
----------- ---------
15,864,537 158,645
----------- ---------
Loss before income taxes........................ 120,732,208 1,207,322
Income taxes (note 2)............................. 52,500 525
----------- ---------
Net loss (note 7)............................... 120,784,708 1,207,847
=========== =========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
MTC JAPAN LTD.
STATEMENT OF STOCKHOLDERS' DEFICIT
PERIOD FROM INCEPTION (MARCH 22, 1995) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
TOTAL
COMMON ACCUMULATED STOCKHOLDERS'
STOCK DEFICIT DEFICIT
--------------- ------------ -------------
<S> <C> <C> <C>
Balance as of March 22, 1995....... -- --
Issuance of common stock.......... (Yen)10,000,000 -- 10,000,000
Net loss for the period from in-
ception (March 22, 1995) to De-
cember 31, 1995.................. -- (120,784,708) (120,784,708)
--------------- ------------ ------------
Balance as of December 31, 1995.... (Yen)10,000,000 (120,784,708) (110,784,708)
=============== ============ ============
</TABLE>
See accompanying notes to financial statements.
F-29
<PAGE>
MTC JAPAN LTD.
STATEMENT OF CASH FLOWS
PERIOD FROM INCEPTION (MARCH 22, 1995) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Cash flows from operating activities:
Net loss................................... (Yen)(120,784,708)
Adjustments to reconcile net earnings to
net cash used in operating activities:
Depreciation of telecommunication equip-
ment...................................... (Yen)9,958,257
Amortization of organization costs......... 3,033,394
Bad debt expense........................... 333,802
Disposal loss of equipment................. 8,575,000
Equipment received free of charge.......... (15,389,316)
Increase in trade accounts receivable...... (33,631,107)
Increase in prepaid expenses............... (1,239,354)
Increase in refundable consumption tax..... (4,006,183)
Increase in other current assets........... (220,721)
Increase in long-term prepaid expenses..... (483,334)
Increase in trade accounts payable......... 70,829,600
Increase in other accounts payable......... 8,560,345
Increase in accrued expenses............... 18,413,437
Increase in accrued corporate taxes........ 52,500
Increase in other current liabilities...... 498,830 65,285,150
-----------------
Net cash used in operating activities... (55,499,558)
-----------------
Cash flows from investing activities
Purchase of telecommunication equipment.... (28,710,352)
Purchase of telephone rights............... (432,000)
Increase in other receivable............... (14,329,008)
Increase in rental deposit................. (900,000)
Increase in organization costs............. (18,117,043)
-----------------
Net cash used in investing activities... (62,488,403)
-----------------
Cash flows from financing activities
Issuance of common stock................... 10,000,000
Increase in short-term borrowing........... 110,391,753
-----------------
Net cash provided by financing activi-
ties................................... 120,391,753
-----------------
Net increase in cash.................... 2,403,792
Cash at beginning of period............... --
-----------------
Cash at end of period..................... (Yen) 2,403,792
=================
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
MTC JAPAN LTD.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Financial Statement Preparation
The accompanying financial statements have been prepared from the accounts
of the Company, which are maintained in accordance with financial accounting
standards of Japan with certain modifications considered necessary in order to
present them in a form more familiar to readers outside Japan.
The notes to the financial statements include additional information, not
required under generally accepted accounting principles and practices in
Japan, in order to present them in a form more familiar to readers outside
Japan.
(b) Allowance for Doubtful Accounts
An allowance for doubtful accounts has been set up as a general provision
for uncollectible accounts. This allowance approximates the allowable limit
for Japanese income tax purposes.
(c) Fixed Assets
Telecommunication equipment is stated at cost less accumulated depreciation.
Depreciation of telecommunication equipment is computed on the straight line
method based on the estimated useful lives. Depreciation for the period from
inception (March 22, 1995) to December 31, 1995 amounted to (Yen)9,958,257.
The cost of minor additions, less than (Yen)200,000, is charged to
operations when incurred. In case of retirement and other dispositions, the
asset and accumulated depreciation accounts are relieved and any resulting
gain or loss is credited or charged to operations.
(d) Income Taxes
The Company does not recognize deferred income taxes which would arise from
certain timing differences between taxable income and income for financial
statement purposes. Recognition of deferred taxes is not required in Japan.
(e) Employee Retirement and Severance Benefits
The Company has an employee retirement plan under which employees who sever
their connection with the Company for reasons other than dismissal for cause,
are entitled to lump sum payments based on rate of pay and length of service.
Payments with respect to voluntary severance are half of the payments for
involuntary severence.
Employees do not vest for 5 years and the service period of all MTC Japan
employees is less than one year. Accordingly no accrual is required in Japan
at December 31, 1995.
Directors are not covered by the plan described above and benefits provided
to directors are charged to operations as paid.
(f) Organization Costs
Organization costs have been capitalized and are amortized over five years
on a straight line basis according to the Japanese Commercial Code.
F-31
<PAGE>
MTC JAPAN LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
(g) Consumption Tax
Transactions subject to consumption tax are recorded under the net tax
method.
(h) Translation of Foreign Currency Transactions
The Company maintains its records and prepares its financial statements in
Japanese yen. Transactions denominated in currencies other than Japanese yen
are translated into Japanese yen at rates in effect at the time they occur,
and the gains or losses arising on settlement of the related receivables or
payables are included in operations and reflected in non-operating income
(expenses). Receivables and payables denominated in foreign currencies at the
balance sheet date are translated into Japanese yen at the rates in effect as
of the balance sheet date.
(i) Financial Statement Translation
The financial statements presented herein are expressed in yen and, solely
for the convenience of the reader, have been translated into United States
dollars at the rate of (Yen)102.95 or (Yen)100=U.S.$1, the approximate
exchange rate prevailing on the Tokyo Foreign Exchange Market on December 31,
1995. This translation should not be construed as a representation that the
amounts shown could be converted into United States dollars at such rate.
(2) INCOME TAXES
The Company is subject to a number of taxes based on profit, which in the
aggregate resulted in a normal tax rate of approximately 51%.
The Company incurred a loss during the period and accordingly no taxes,
except per capita inhabitants taxes were paid. At December 31, 1995, the
Company had a tax loss carryforward of (Yen)106 million which expires December
31, 2000.
The Company's corporate tax returns have not been examined by the Japanese
tax authorities since inception of the Company.
(3) INTERCOMPANY BALANCES AND TRANSACTIONS
The Company is a joint venture among NetSource Communications Inc. (45%),
General Tsushin Japan K.K. (45%) and a partnership (10%). The Company was
established March 22, 1995 to provide callback service in the Japan market.
Major intercompany balances at December 31, 1995 and transactions for the
period from inception (March 22, 1995) to December 31, 1995 are summarized as
follows:
<TABLE>
<CAPTION>
BALANCES 1995
-------- ----
<S> <C>
General Tsushin Kogyo K.K.:
Other accounts payable................................ (Yen) 8,560,345
Short-term borrowing.................................. 110,391,753
Accrued expenses...................................... 4,786,167
NetSource Communications Inc.:
Trade accounts payable................................ 70,829,600
</TABLE>
F-32
<PAGE>
MTC JAPAN LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
<TABLE>
<S> <C>
TRANSACTIONS 1995
------------ ----
General Tsushin Kogyo K.K.:
Selling, general and administrative expenses........... (Yen)42,975,236
Other expense.......................................... 1,178,227
NetSource Communications Inc.:
Telecommunication charge (cost of revenue)............. 64,740,300
Other income (equipment received free of charge)....... 15,389,316
</TABLE>
(4) ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCY
At December 31, 1995, the Company had the following assets and liabilities
denominated in foreign currency:
<TABLE>
<S> <C> <C>
Trade accounts receivable.............. (Yen) 2,487,051 (U.S. $ 24,158)
Trade accounts payable................. (Yen)70,829,600 (U.S. $688,000)
</TABLE>
At December 31, 1995, the U.S. dollar denominated receivable and payable
were translated into yen at (Yen)102.95, the year end rate.
(5) COMMITMENTS
The Company occupies office and other facilities under certain lease
agreements. Rental expense and lease expense for the period from inception
(March 22, 1995) to December 31, 1995 amounted to (Yen)3,193,894 and
(Yen)2,382,800, respectively.
(6) RECONCILIATION OF JAPANESE AND U.S. ACCOUNTING PRINCIPLES
The Company prepares its accounts in accordance with Japanese GAAP, which
differ in certain material respects from U.S. GAAP. The significant
differences relate to the following items.
Income Taxes -- In accordance with Japanese GAAP, income taxes are provided
only for amounts currently payable for each year. U.S. GAAP requires that
deferred income taxes be recognized for temporary differences between the tax
basis of assets and liabilities and the reported amounts in the financial
statements. The Company would have a gross deferred tax asset under US GAAP.
However, it would be fully reserved.
Pension Cost -- Under Japanese GAAP, liabilities for retirement and
severance benefits are not recorded until the employees vest. The Company is a
startup and no employees will vest until they have 5 years of service. U.S.
GAAP requires the liability and periodic pension expense to be measured on an
actuarial basis. Management believes that the liability would be immaterial.
Organization Costs -- According to Japanese GAAP, organization costs broadly
defined are capitalized and amortized over 5 years. U.S. GAAP permits only
limited organization costs to be capitalized.
F-33
<PAGE>
MTC JAPAN LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1995
The following table summarizes the effect on net loss of the differences
between Japanese GAAP and U.S. GAAP for the period from inception (March 22,
1995) to December 31, 1995 (in thousands of yen):
<TABLE>
<CAPTION>
1995
------------
<S> <C>
Net loss as shown in the Japanese GAAP fi-
nancial statements......................... (Yen)120,784
Adjustments for:
Other income (equipment received free of
charge).................................. 15,389
Organization costs........................ 8,244
Others (vacation pay accrual)............. 2,407
------------
Net loss according to U.S. GAAP............. (Yen)146,824
============
</TABLE>
(7) NET LOSS PER SHARE
Net loss per share for the period from inception (March 22, 1995) to
December 31, 1995 amounted to (Yen)603,924 which is based on the number of
issued shares as of the end of the year.
(8) LIQUIDITY
The Company had an excess of current liabilities over current assets of
(Yen)153,250,102 and a stockholders' deficiency of (Yen)110,784,708 as of
December 31, 1995, and had a net loss of (Yen)120,784,708 for the period from
inception (March 22, 1995) to December 31, 1995. To continue to meet its
current obligations, the Company must achieve future profitable operations,
obtain suspension of repayment of debt, arrange for additional financing or
capital or a combination thereof.
Management believes it will be able to successfully accomplish one or more
of the aforementioned actions.
F-34
<PAGE>
GLOSSARY OF TERMS
CALLBACK--a form of dial up access that allows an end-user to access a
telecommunications company's network by placing a telephone call and waiting
for a call back.
CAPACITY--the amount of circuit volume to which a telecommunications services
provider has access.
CCSA--Computer Controlled Switching Arrangement.
DEDICATED OR DIRECT ACCESS--a means of accessing a network through the use of
a permanent circuit.
DOMAIN NAME--the location of a specific computer or group of network computers
that is on the Internet.
ELECTRONIC COMMERCE--the delivery of information, including voice and data,
products, services, marketing, systems and support within an organization or
to the external marketplace over any interactive, electronic or on-line
medium.
FACILITIES-BASED CARRIER--a carrier that owns transmission facilities both in
terms of capacity and digital switches.
FIREWALL--A security architecture that uses multiple machines and carefully
designed interfaces to wall off corporate information.
FTP--File Transfer Protocol. A standard transfer protocol used on the
Internet.
HOSTING--the provision of the necessary hardware, software, equipment,
facilities and services that allows end-users to operate Web architectures.
INTERNET--a global collection of computer networks that use a common
communications protocol, TCP/IP.
INTERNET BACKBONE--a high speed digital data network usually consisting of T-3
dedicated circuits connected to smaller regional digital networks.
IP--Internet Protocol.
ISDN--Integrated Services Digital Network. A hybrid digital network capable of
providing transmission speeds of up to 128 kilobits per second for both voice
and data.
ISP--Internet Service Provider. A company that provides access services to the
Internet via modem, ISDN, xDSL and dedicated circuits.
MODEM--communications equipment that allows computers to connect to a
transmission line.
PACKET SIGNALING PROTOCOL--allows for packet signaling on the Company's
network (i.e. X.25 is a standard switching protocol for data that enables data
to be broken down into packets).
PEERING--The exchange of traffic and routing information between two networks,
so that traffic may be sent directly between the two networks without using
the services of any other Internet service provider.
POP--Point of Presence. An interconnected group of routers and servers located
in particular regional areas that allows end-users to access the Internet
through a local telephone call or dedicated circuit.
PTT--Postal, Telephone and Telegraph Companies. Incumbent national
telecommunications carriers which usually have dominant home market positions
due to monopolistic practices.
RELATIONAL DATABASE PRODUCTS--a database product that is based on relational
theory and that is accessed via standard interfaces and languages such as ODBC
and SQL. Examples of relational database products include Microsoft SQL
Server, Sybase, and Oracle.
REORIGINATION--a transparent call back service which, through the use of an
autodialer, allows end-users to seamlessly access an alternative
telecommunications network.
RESALE--the leasing and reselling of network capacity from a
telecommunications carrier.
G-1
<PAGE>
ROUTER--a device which receives and transmits data packets within a network.
SERVER--a high powered computer combined with software that allows computers
to offer service to another computer.
SS7--a standard signaling protocol of Signaling System 7.
SWITCH--a device which originates and terminates circuits or selects the
necessary path or circuits to be used for the transmission of voice, data and
video.
T-1--a high speed communications line capable of providing transmission speeds
of up to 1.5 megabits per second.
T-3--a high speed communications line capable of providing transmission speeds
of up to 45 megabits per second. Also known as DS3.
TCP/IP--Transmission Control Protocol/Internet Protocol. A collection of
computer protocols that allows computers with different architectures and
operating systems to communicate in an open system.
WEB ARCHITECTURE--the design and specification of a web site including the
range of content, interelationship of content, navigation, system design,
security, access characteristics, and phasing of implementation.
WORLD WIDE WEB--a client/server model using a set of standards to link servers
and that allows end- users to access information, data, graphics, video and
sound.
X.25--a standard packet protocol for data which enables data to be broken down
into small, manageable packets.
XDSL--Digital Subscriber Line. A high speed communications protocol utilizing
a standard copper wire with varying transmission speeds of between 769
kilobits per second and 1.5 megabits per second. Also known as ADSL, CAP ADSL,
DSL and HDSL.
G-2
<PAGE>
[DESCRIPTION OF ARTWORK]
Back Cover
- ----------
World map with lines illustrating existing and planned telecommunications frame
relay network connections and U.S. map with lines illustrating planned Internet
backbone connections and NetSource points of presence.
<PAGE>
-------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND,
IF GIVEN OR MADE, INFORMATION OR SUCH REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PER-
SON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. EXCEPT WHERE
OTHERWISE INDICATED, THIS PROSPECTUS SPEAKS AS OF THE EFFECTIVE DATE OF THE
REGISTRATION STATEMENT. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
-------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 3
Risk Factors............................................................ 8
Use of Proceeds......................................................... 21
Dividend Policy......................................................... 22
Capitalization.......................................................... 22
Dilution................................................................ 23
Selected Consolidated Financial Data.................................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 25
Business................................................................ 35
Management.............................................................. 58
Certain Transactions.................................................... 66
Principal Stockholders.................................................. 68
Description of Capital Stock............................................ 69
Shares Eligible for Future Sale......................................... 71
Certain United States Federal Tax Considerations for Non-U.S. Holders of
Common Stock........................................................... 72
Underwriting............................................................ 75
Legal Matters........................................................... 77
Experts................................................................. 77
Additional Information.................................................. 78
Index to Consolidated Financial Statements.............................. F-1
Glossary of Terms....................................................... G-1
</TABLE>
UNTIL , 1997 (25 DAYS FROM THE DATE OF THIS PROSPECTUS) ALL DEALERS EF-
FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS
IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
-------------------------------------------------------------------------------
[LOGO OF NETSOURCE APPEARS HERE]
3,500,000 SHARES
COMMON STOCK
PROSPECTUS
, 1996
[LOGO OF DEUTSCHE MORGAN GRENFELL APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses payable by
the Registrant in connection with the sale of the Common Stock being
registered hereby.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- ----------
<S> <C>
SEC Registration Fee............................................. $ 18,296
NASD Filing Fee.................................................. 6,538
Nasdaq National Market Listing Fee............................... 50,000
Blue Sky Fees and Expenses....................................... 10,000
Printing and Engraving Expenses.................................. 100,000
Legal Fees and Expenses.......................................... 400,000
Accounting Fees and Expenses..................................... 550,000
Transfer Agent and Registrar Fees................................ 1,500
Miscellaneous.................................................... 13,666
----------
Total.......................................................... $1,150,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145(a) of the Delaware General Corporation Law (the "DGCL") provides
in relevant part that "a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation),
by reason of the fact that he is or was a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts
paid in settlement actually and reasonable incurred by him in connection with
such action, suitor proceeding if he acted in good faith and in a manner he
reasonable believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful." With respect to
derivative actions, Section 145(b) of the DGCL provides in relevant part that
"[a] corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its
favor. .....[by reason of his service in one of the capacities specified in the
preceding sentence] against expenses (including attorneys' fees) actually and
reasonable incurred by him in connection with the defense or settlement of
such action or suit is he acted in good faith and in a manner he reasonable
believed to be in or not opposed to the best interest of the corporation and
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extend that the Court of Chancery or the
court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonable entitled to
indemnify for such expenses which the Court of Chancery or such other court
shall deem proper."
The Registrant's Certificate of Incorporation provides that each person who
is or was or who had agreed to become a director or officer of the Registrant
or who had agreed at the request of the Registrant's Board of Directors or an
officer of the Registrant to serve as an employee or agent of the Registrant
or as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall be indemnified by
the Registrant to the full extent permitted by the DGCL or any other
applicable laws. Such Certificate of Incorporation also provides that the
Registrant may enter into one or more agreements with any person which
provides for indemnification greater or
II-1
<PAGE>
different than that provided in such Certificate, and that no amendment or
repeal of such Certificate shall apply to or have any effect on the right to
indemnification permitted or authorized thereunder for or with respect to
claims asserted before or after such amendment or repeal arising from acts or
omissions occurring in whole or in part before the effective date of such
amendment or repeal.
The Registrant's Bylaws provide that the Registrant shall indemnify to the
full extent authorized by law any person made or threatened to be made a party
to an action or a proceeding, whether criminal, civil, administrative or
investigative, by reason of the fact that he, his testator or intestate was or
is a director, officer or employee of the Registrant or any predecessor of the
Registrant or serves or served any other enterprise as a director, officer or
employee at the request of the Registrant or any predecessor of the
Registrant.
The Registrant has entered into indemnification agreements with its
directors and certain of its officers.
The Registrant has purchased and maintains insurance on behalf of any person
who is or was a director or officer against any loss arising from any claim
asserted against him and incurred by him in any such capacity, subject to
certain exclusions.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On May 28, 1996, the Company issued 15 shares of Common Stock to Edward
Brinskele for a purchase price of $0.067 in cash. The sale of the shares was
deemed to be exempt from registration under the Securities Act pursuant to
Section 4(2) thereof.
In connection with the Reorganization, on June 28, 1996, the Registrant
issued an aggregate of 15,978,059 shares of Common Stock to the shareholders
of MTC Telemanagement, MTC International, and NetSource Interactive. The
shares were issued after the Registrant obtained the determination of the
California Department of Corporations of the fairness of the terms and
conditions of the Reorganization following a hearing. As a result of such
approval, the issuance of the shares was exempt from registration under the
Securities Act pursuant to Section 3(a)(10) thereof.
In connection with the Reorganization, on June 28, 1996, the Registrant
issued options to purchase an aggregate of 2,213,700 shares of Common Stock to
the former option holders of MTC Telemanagement, MTC International and
NetSource Interactive at exercise prices ranging from $0.004 to $1.583 per
share. The issuance of such options was exempt from registration under the
Securities Act pursuant to Section 3(a)(10) thereof.
On June 24, 1996, the Registrant issued 10% Series A Secured Subordinated
Convertible Notes (the "Notes") in the aggregate principal amount of $20
million, together with detachable Warrants (the "Warrants"), to 42 foreign
investors. The Notes bear interest at the rate of 10% per annum, and interest
is due semi-annually in arrears. Principal and all accrued and unpaid interest
under the Notes is due and payable in full on June 24, 1998. The number of
shares into which the Notes are convertible and the conversion price are based
on the per share initial public offering price to the public of the
Registrant's Common Stock. Assuming an offering price of $14 per share in this
offering, the Notes will be convertible into an aggregate of 2,040,816 shares
of Common Stock at a conversion price of $9.80 per share or 70% of such
offering price. The number of shares into which the Warrants are exercisable
and the exercise price are based on the per share initial public offering
price to the public of the Registrant's Common Stock. Assuming an offering
price of $14 per share in this offering, the Warrants will be exercisable for
an aggregate of 163,265 shares of Common Stock at an exercise price of $9.80
per share, or 70% of such offering price. The Registrant received $18,200,000
in cash for the Notes and the Warrants, after paying $1,800,000 in commissions
to a placement agent in connection with services performed by such person in
connection with the sale of the Notes and Warrants. The
II-2
<PAGE>
sale of the Notes and Warrants to the foreign investors was deemed to be
exempt from registration under the Securities Act in reliance on Regulation S
promulgated under the Securities Act.
On June 24, 1996, the Registrant issued a warrant to a placement agent in
consideration of services performed by the placement agent in the offering of
the Notes and Warrants. Assuming an offering price of $14 per share in this
offering, this warrant will be exercisable for an aggregate of 147,959 shares
of Common Stock at an exercise price of $9.80 per share, or 70% of such
offering price. The sale of the warrant to the placement agent was deemed to
be exempt from registration under the Securities Act in reliance on Regulation
S promulgated under the Securities Act.
At various times between July 1996 and October 1996, the Company granted
options under the Company's 1996 Omnibus Equity Incentive Plan and 1996 Stock
Option Plan to employees, directors and consultants to purchase an aggregate
of 1,590,780 shares of Common Stock. Such options had exercise prices ranging
from $3.33 to $11.05 per share. Such issuances were exempt from the
requirement of registration pursuant to Rule 701 promulgated under the
Securities Act or Section 4(2) of the Securities Act.
In November 1996, the Company issued an aggregate of 230,190 shares of
Common Stock to the three former shareholders of scruz-net inc. in exchange
for all of the outstanding stock of scruz-net. Such issuance was made in
reliance of the exemption contained in Section 4(2) of the Securities Act.
In November 1996, the Company issued an aggregate of 230,190 shares of
Common Stock to the two former shareholders of DNA New Media Group, Inc. in
exchange of all of the outstanding stock of DNA. Such issuance was made in
reliance of the exemption contained in Section 4(2) of the Securities Act.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
A. EXHIBITS.
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization dated as of May 31, 1996 between
NetSource Interactive and NetSource International Telecommunications,
Inc.
2.2* Form of Common Stock and Option Exchange Agreement dated as of May 31,
1996 between NetSource International Telecommunications, Inc. and
shareholders and holders of options to purchase shares of MTC
International, Inc.
2.3* Form of Common Stock and Option Exchange Agreement dated as of May 31,
1996 between NetSource International Telecommunications, Inc. and
shareholders and holders of options to purchase shares of MTC
Telemanagement Corporation.
2.4 Agreement and Plan of Reorganization dated October 15, 1996 by and
between the Registrant, DNA Acquisition Corporation, DNA New Media
Group, Inc., Andrew Hayman and David Wallinga.
2.5 Agreement and Plan of Reorganization dated October 16, 1996 by and
between the Registrant, scruz-net, inc., Qarin Van Brink, Matthew
Kaufman, Timothy Garlick and scruz-net Acquisition Corporation.
2.6 Form of Exchange Agreement dated as of June 4, 1996 between NetSource
Interactive and the holders of common stock and holders of options to
purchase common stock of Transphere Interactive, Inc.
2.7 Exchange Agreement dated June 4, 1996 between NetSource Interactive and
the holder of common stock of Transphere International, Inc.
2.8 Agreement and Plan of Reorganization dated June 4, 1996 by and between
NetSource Interactive and Transphere Interactive, Inc.
2.9 Agreement and Plan of Reorganization dated June 4, 1996 by and between
NetSource Interactive and Transphere International, Inc.
3.1* Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
3.3 Certificate of Incorporation of the Registrant dated November 20, 1995.
3.4 Certificate of Amendment of Certificate of Incorporation dated January
1996.
3.5 Certificate of Amendment to Certificate of Incorporation dated May 28,
1996.
3.6 Certificate of Amendment to Certificate of Incorporation dated July 26,
1996.
3.7 Certificate of Amendment to Certificate of Incorporation dated September
16, 1996.
4.1 Specimen Common Stock certificate of the Registrant.
4.2* Form of 10% Series A Secured Subordinated Convertible Note.
4.3* Form of Series A Warrant to purchase Common Stock.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
10.1* Form of Indemnification Agreement for directors and executive officers.
10.2* 1996 Omnibus Equity Incentive Plan.
10.3* 1996 Stock Option Plan.
10.4* 1996 Employee Stock Purchase Plan.
10.5* Severance Agreement between the Registrant and Evan Kraus dated March
15, 1996.
10.6* Patent Assignment Agreement dated as of May 30, 1996 between the
Registrant and Edward Brinskele.
10.7* Letter Agreement dated April 12, 1996 among NetSource Inc., Transphere
International and Helix Capital LLC.
10.8* Lease Agreement between Charles R. Stevens and MTC Information Systems
dated December 20, 1993 for the Registrant's facility located in
Petaluma.
10.9* Sublease Agreement dated January 1, 1994 between MTC Information Systems
and MTC Telemanagement for the Registrant's facility located in
Petaluma.
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.10* Lease Agreement between 470 Spear Associates and Offices Unlimited of
California, Inc. dated September 29, 1987 for the Registrant's
facility located in San Francisco.
10.11* Amendment, dated August 15, 1994, to Lease Agreement between 470
Spear Associates and Offices Unlimited of California, Inc. for the
Registrant's facility located in San Francisco.
10.12* Lease Agreement dated May 17, 1996 between 470 Spear Associates and
Transphere International, Inc. for Registrant's facility located in
San Francisco.
*10.13** Joint Venture Agreement dated February 1995 among MTC Telemanagement
Corporation, Tsushin-Kogyo KK and Associated Strategic Alliance
Partners.
*10.14** Joint Venture Agreement dated January 1996 by and among MTC
Telemanagement Corporation, Henk J. Keilman and Jan-Peter Kastelein.
10.15* Form of Subscription Agreement for sale of Series A Secured
Subordinated Convertible Note and Series A Warrants.
10.16* Sublease Agreement between Lee Pierce and Transphere International
Inc. and assignment to the Registrant.
10.17 Office Lease dated November 4, 1996 between the Registrant and 470
Spear Associates, a California Limited Partnership.
11.1 Statement regarding calculation of earnings per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, independent auditors.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (See Exhibit 5.1).
23.3 Consent of KPMG Peat Marwick, independent auditors.
23.4 Consent of Pezzola & Reinke, A Professional Corporation.
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** Documents for which confidential treatment has been requested.
B. FINANCIAL STATEMENT SCHEDULES.
Schedule IX--Valuation and Qualifying Accounts
All other schedules are omitted because they are inapplicable or the
requested information is shown in the Consolidated Financial Statements of the
Registrant or Notes thereto.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1993 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 14, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as of the time
it was declared effective; (2) for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes that, for the purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF
PETALUMA, STATE OF CALIFORNIA, ON THE 21ST DAY OF NOVEMBER, 1996.
NetSource Communications, Inc.
By: /s/ Edward A. Brinskele
-----------------------------
EDWARD A. BRINSKELE,
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No.1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Edward A. Brinskele Chief Executive November 21, 1996
- ------------------------------------ Officer, Chairman
EDWARD A. BRINSKELE of the Board
(Principal
Executive Officer)
/s/ Gary Anderson* Chief Financial November 21, 1996
- ------------------------------------ Officer (Principal
GARY ANDERSON Financial and
Accounting
Officer)
/s/ Charles Schoenhoeft* President and Vice November 21, 1996
- ------------------------------------ Chairman of the
CHARLES SCHOENHOEFT Board
/s/ Yoav Stern* Director November 21, 1996
- ------------------------------------
YOAV STERN
/s/ Joshua G. Cooperman* Director November 21, 1996
- ------------------------------------
JOSHUA G. COOPERMAN
, 1996
Director
- ------------------------------------
ALEX VIEUX
Director , 1996
- ------------------------------------
YARON EITAN
- --------
* By attorney-in-fact.
</TABLE>
II-7
<PAGE>
SCHEDULE IX
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND NINE MONTHS ENDED
SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ALLOWANCE FOR TRADE
RECEIVABLES
Year ended December 31,
1993........................ -- 487 -- 487
Year ended December 31,
1994........................ 487 2,495 1,663 1,319
Year ended December 31,
1995........................ 1,319 1,213 1,036 1,496
Nine months ended September
30, 1996.................... 1,496 1,263 1,259 1,500
ALLOWANCE FOR OTHER
RECEIVABLES AND DUE FROM
JOINT VENTURES
Year ended December 31,
1993........................ -- 218 -- 218
Year ended December 31,
1994........................ 218 389 -- 607
Year ended December 31,
1995........................ 607 343 -- 950
Nine months ended September
30, 1996.................... 950 -- -- 950
VALUATION ALLOWANCE FOR
DEFERRED TAX ASSET
Year ended December 31,
1993........................ 200 587 -- 787
Year ended December 31,
1994........................ 787 753 -- 1,540
Year ended December 31,
1995........................ 1,540 180 -- 1,720
Nine months ended September
30, 1996.................... 1,720 2,081(1) -- 3,801
</TABLE>
- --------
(1) Includes an increase to the valuation allowance of $1,100 relating to the
initial recognition of deferred tax assets in connection with the
conversion of MTC Telemanagement from an S corporation to a C corporation.
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1* Agreement and Plan of Reorganization dated as of May 31, 1996 between
NetSource Interactive and NetSource International Telecommunications,
Inc.
2.2* Form of Common Stock and Option Exchange Agreement dated as of May 31,
1996 between NetSource International Telecommunications, Inc. and
shareholders and holders of options to purchase shares of MTC
International, Inc.
2.3* Form of Common Stock and Option Exchange Agreement dated as of May 31,
1996 between NetSource International Telecommunications, Inc. and
shareholders and holders of options to purchase shares of MTC
Telemanagement Corporation.
2.4 Agreement and Plan of Reorganization dated October 15, 1996 by and
between the Registrant, DNA Acquisition Corporation, DNA New Media
Group, Inc., Andrew Hayman and David Wallinga.
2.5 Agreement and Plan of Reorganization dated October 16, 1996 by and
between the Registrant, scruz-net, inc., Qarin Van Brink, Matthew
Kaufman, Timothy Garlick and scruz-net Acquisition Corporation.
2.6 Form of Exchange Agreement dated as of June 4, 1996 between NetSource
Interactive and the holders of common stock and holders of options to
purchase common stock of Transphere Interactive, Inc.
2.7 Exchange Agreement dated June 4, 1996 between NetSource Interactive
and the holder of common stock of Transphere International, Inc.
2.8 Agreement and Plan of Reorganization dated June 4, 1996 by and between
NetSource Interactive and Transphere Interactive, Inc.
2.9 Agreement and Plan of Reorganization dated June 4, 1996 by and between
NetSource Interactive and Transphere International, Inc.
3.1* Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2* Bylaws of the Registrant.
3.3 Certificate of Incorporation of the Registrant dated November 20,
1995.
3.4 Certificate of Amendment of Certificate of Incorporation dated January
1996.
3.5 Certificate of Amendment to Certificate of Incorporation dated May 28,
1996.
3.6 Certificate of Amendment to Certificate of Incorporation dated July
26, 1996.
3.7 Certificate of Amendment to Certificate of Incorporation dated
September 16, 1996.
4.1 Specimen Common Stock certificate of the Registrant.
4.2* Form of 10% Series A Secured Subordinated Convertible Note.
4.3* Form of Series A Warrant to purchase Common Stock.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
10.1* Form of Indemnification Agreement for directors and executive
officers.
10.2* 1996 Omnibus Equity Incentive Plan.
10.3* 1996 Stock Option Plan.
10.4* 1996 Employee Stock Purchase Plan.
10.5* Severance Agreement between the Registrant and Evan Kraus dated March
15, 1996.
10.6* Patent Assignment Agreement dated as of May 30, 1996 between the
Registrant and Edward Brinskele.
10.7* Letter Agreement dated April 12, 1996 among NetSource Inc., Transphere
International and Helix Capital LLC.
10.8* Lease Agreement between Charles R. Stevens and MTC Information Systems
dated December 20, 1993 for the Registrant's facility located in
Petaluma.
10.9* Sublease Agreement dated January 1, 1994 between MTC Information
Systems and MTC Telemanagement for the Registrant's facility located
in Petaluma.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.10* Lease Agreement between 470 Spear Associates and Offices Unlimited of
California, Inc. dated September 29, 1987 for the Registrant's
facility located in San Francisco.
10.11* Amendment, dated August 15, 1994, to Lease Agreement between 470
Spear Associates and Offices Unlimited of California, Inc. for the
Registrant's facility located in San Francisco.
10.12* Lease Agreement dated May 17, 1996 between 470 Spear Associates and
Transphere International, Inc. for Registrant's facility located in
San Francisco.
*10.13** Joint Venture Agreement dated February 1995 among MTC Telemanagement
Corporation, Tsushin-Kogyo KK and Associated Strategic Alliance
Partners.
*10.14** Joint Venture Agreement dated January 1996 by and among MTC
Telemanagement Corporation, Henk J. Keilman and Jan-Peter Kastelein.
10.15* Form of Subscription Agreement for sale of Series A Secured
Subordinated Convertible Note and Series A Warrants.
10.16* Sublease Agreement between Lee Pierce and Transphere International
Inc. and assignment to the Registrant.
10.17 Office Lease dated November 4, 1996 between the Registrant and 470
Spear Associates, a California Limited Partnership.
11.1 Statement regarding calculation of earnings per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, independent auditors.
23.2 Consent of Wilson Sonsini Goodrich & Rosati, P.C. (See Exhibit 5.1).
23.3 Consent of KPMG Peat Marwick, independent auditors.
23.4 Consent of Pezzola & Reinke, A Professional Corporation.
24.1* Power of Attorney.
27.1 Financial Data Schedule.
</TABLE>
- --------
* Documents previously filed.
** Documents for which confidential treatment has been requested.
2
<PAGE>
EXHIBIT 1.1
NETSOURCE COMMUNICATIONS, INC.
Shares
------
Common Stock
($.001 par value)
Underwriting Agreement
New York, New York
, 1996
------------
DEUTSCHE MORGAN GRENFELL INC.
As U.S. Representative of the several U.S. Underwriters,
c/o Deutsche Morgan Grenfell Inc.
31 West 52nd Street
New York, New York 10019
MORGAN GRENFELL & CO., LIMITED
As International Representative of the several
International Underwriters,
c/o Morgan Grenfell & Co., Limited
6 Bishops Gate
London, England E1
Ladies and Gentlemen:
NetSource Communications, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to the Underwriters (as defined below)
___________ shares of Common Stock, par value $.001 per share, of the Company
(the "Firm Securities"). It is understood that, subject to the conditions
contained herein, __________ Firm Securities (the "U.S. Firm Securities") will
be sold to the several U.S. Underwriters named in Schedule I hereto (the "U.S.
Underwriters") in connection with the offering and sale of such U.S. Firm
Securities in the United States and Canada to United States and Canadian Persons
(as defined below), and ____________ Firm Securities (the "International Firm
Securities") will be sold to the several International Underwriters named in
Schedule II hereto (the "International Underwriters") in connection with the
offering and sale of such International Firm Securities outside the United
States and Canada to persons other than United States and Canadian Persons.
Deutsche Morgan Grenfell Inc. shall act as the representative (the "U.S.
Representative") of the several U.S. Underwriters, and Morgan Grenfell & Co.,
Limited shall act as the representative (the "International Representative") of
the several International Underwriters. The U.S. Underwriters and the
International Underwriters are hereinafter referred to collectively as the
"Underwriters"; and the U.S. Representative and the International Representative
are hereinafter referred to collectively as the "Representatives."
The Company also proposes to grant to the U.S. Underwriters an
option to purchase up to _______ additional shares of Common Stock, par value
$.001 per share, of the Company (the "U.S. Option Securities") and to grant to
the International Underwriters an option to purchase up to _______ additional
shares of Common Stock, par value $.001 per share, of the Company (the
"International Option Securities," and together with the U.S. Option Securities,
the "Option Securities"). The Firm Securities and the Option Securities are
hereinafter collectively referred to as the "Securities."
It is further understood that the U.S. Underwriters and the
International Underwriters have entered into an Agreement Between U.S. and
International Underwriters of even date herewith (the "Agreement Between
Underwriters"), pursuant to which, among other things, the International
Underwriters may purchase from the U.S. Underwriters a portion of the U.S.
Securities to be sold pursuant hereto, and the U.S. Underwriters may purchase
from the International Underwriters a portion of the International Securities to
be sold pursuant hereto.
<PAGE>
The terms which follow, when used in this Agreement, shall have the
following meanings:
"Effective Date" shall mean each date that the
Registration Statement and any post-effective amendment or
amendments thereto and any Rule 462(b) Registration Statement
became or become effective.
"Execution Time" shall mean the date and time that
this Agreement is executed and delivered by the parties
hereto.
"Preliminary Prospectus" shall mean any preliminary
prospectus with respect to the offering of the Securities and
any preliminary prospectus with respect to the offering of the
Securities included in the Registration Statement at the
Effective Date that omits Rule 430A Information.
"Prospectus" shall mean such form of prospectus
relating to the Securities as first filed pursuant to
paragraph (1) or (4) of Rule 424(b) or, if no filing pursuant
to paragraph (1) or (4) of Rule 424(b) is made, such form of
prospectus included in the Registration Statement at the
Effective Date.
"Registration Statement" shall mean the registration
statement referred to in paragraph (i) of Section 1 below,
including exhibits and financial statements, as amended at the
Execution Time (or, if not effective at the Execution Time, in
the form in which it shall become effective) and, in the event
any post-effective amendment thereto or any Rule 462(b)
Registration Statement becomes effective prior to the Closing
Date (as hereinafter defined), shall also mean such
registration statement as so amended or such Rule 462(b)
Registration Statement, as the case may be. Such term shall
include any Rule 430A Information deemed to be included
therein at the Effective Date as provided by Rule 430A.
"Rule 424", "Rule 430A", "Rule 462" and "Regulation
S-K" refer to such rules or regulations under the Securities
Act.
"Rule 430A Information" means information with
respect to the Securities and the offering thereof permitted
to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a
registration statement and any amendments thereto filed
pursuant to Rule 462(b) relating to the offerings covered by
the initial registration statement (file number 333-______).
"Securities Act" means the Securities Act of 1933,
as amended.
"United States or Canadian Person" shall mean any
national or resident of the United States or Canada, or any
corporation, pension, profit-sharing or other trust or other
entity organized under the laws of the United States or Canada
or of any political subdivision thereof (other than a branch
located outside of the United States and Canada of any United
States or Canadian Person), and shall include any United
States or Canadian branch of a person who is otherwise not a
United States or Canadian Person.
"U.S." or "United States" shall mean the United
States of America (including the states thereof and the
District of Columbia), its territories, its possessions and
other areas subject to its jurisdiction.
1. Representations and Warranties of the Company.
------------------------------------------------
The Company represents and warrants to, and agrees with, each Underwriter as
follows:
2
<PAGE>
(i) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement (file number
333-___) on Form S-1, including a Preliminary Prospectus, for the
registration under the Securities Act of the offering and sale of the
Securities. The Company may have filed one or more amendments thereto,
including the related Preliminary Prospectus, each of which has
previously been furnished to you. The Company will next file with the
Commission one of the following: (A) prior to effectiveness of such
registration statement, a further amendment to such registration
statement, including the form of final prospectus, or (B) a final
prospectus in accordance with Rules 430A and 424(b)(1) or (4). In the
case of clause (B), the Company has included in such registration
statement, as amended at the Effective Date, all information (other
than Rule 430A Information) required by the Securities Act and the
rules thereunder to be included in the Prospectus with respect to the
Securities and the offering thereof. As filed, such amendment and form
of final prospectus, or such final prospectus, shall contain all Rule
430A Information, together with all other such required information,
with respect to the Securities and the offering thereof and, except to
the extent the Representatives shall agree in writing to a
modification, shall be in all substantive respects in the form
furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you, prior to
the Execution Time, will be included or made therein. Upon your
request, but not without our agreement, the Company will also file a
Rule 462(b) Registration Statement in accordance with Rule 462(b) under
the Securities Act.
(ii) On the Effective Date, the Registration Statement did or
will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date and any subsequent
settlement date pursuant to Section 3 hereof, each Prospectus (and any
supplements thereto) will, comply in all material respects with the
applicable requirements of the Securities Act and the rules and
regulations thereunder; on the Effective Date, the Registration
Statement did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus, if not filed
pursuant to Rule 424(b), did not or will not, and on the date of any
filing pursuant to Rule 424(b) and on the Closing Date and any
subsequent settlement date pursuant to Section 3 hereof, the Prospectus
(together with any supplement thereto) will not, include any untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
the information contained in or omitted from the Registration Statement
or the Prospectus (or any supplements thereto) in reliance upon and in
conformity with information furnished in writing to the Company by or
on behalf of any Underwriter through the Representatives specifically
for inclusion in the Registration Statement or the Prospectus (or any
supplements thereto) (which the parties hereto hereby understand and
agree consists only of (A) the names of the Underwriters contained in
the Prospectus, (B) the information contained in the last paragraph of
the front cover page and in the second paragraph on page 2 of the
Prospectus, and (C) the information contained in the [fourth, fifth,
sixth, seventh, eighth, ninth, tenth and final paragraphs] under the
caption "Underwriting" in the Prospectus). No contract or other
document is required to be described in the Registration Statement or
the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein or filed as required.
(iii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus relating to the
proposed offering of the Securities nor instituted or, to the Company's
knowledge, threatened proceedings for that purpose.
(iv) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware
with full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Registration
3
<PAGE>
Statement and the Prospectus, and is duly registered and qualified to
conduct its business and is in good standing in each jurisdiction or
place where the nature of its business requires such registration or
qualification, except where the failure to be so qualified would not,
singly or in the aggregate, have a material adverse effect on the
condition (financial or other), business, prospects, properties, net
worth or results of operations of the Company and its subsidiaries
taken as a whole (a "Material Adverse Effect").
(v) All of the Company's material subsidiaries (individually,
a "Subsidiary" and collectively, the "Subsidiaries") are listed on
Schedule III hereto and on Exhibit 21.1 to the Registration Statement.
Each Subsidiary is a corporation duly organized, validly existing and
in good standing in the jurisdiction of its incorporation, with full
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration Statement
and the Prospectus, and is duly registered and qualified to conduct its
business and is in good standing in each jurisdiction or place where
the nature of its properties or the conduct of its business requires
such registration or qualification, except where the failure so to
register or qualify or to be in good standing would not, singly or in
the aggregate, have a Material Adverse Effect; all of the outstanding
shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and nonassessable and
free of any preemptive or similar rights, and except for ______ of [MTC
Japan], are owned by the Company, free and clear of any lien, adverse
claim, security interest or other encumbrance, except as described in
the Registration Statement.
(vi) The outstanding shares of Common Stock, par value $.001
per share, of the Company have been duly authorized and validly issued
and are fully paid and non-assessable; the Securities to be issued and
sold by the Company have been duly authorized and when issued and paid
for as contemplated herein will be validly issued, fully paid and
non-assessable; and no preemptive rights of stockholders exist with
respect to any of the Securities or the issue and sale thereof.
(vii) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus. The authorized capital
stock, including the Securities, of the Company conforms to the
description thereof contained in the Prospectus.
(viii) Except as disclosed in the Prospectus, there are no
outstanding (A) securities or obligations of the Company or any of the
Subsidiaries convertible into or exchangeable for any capital stock of
the Company or any such Subsidiary, (B) warrants, rights or options to
subscribe for or purchase from the Company or any such Subsidiary any
such capital stock or any such convertible or exchangeable securities
or obligations, or (C) obligations of the Company or any such
Subsidiary to issue any shares of capital stock, any such convertible
or exchangeable securities or obligations, or any such warrants, rights
or options.
(ix) The execution and delivery of this Agreement has been
duly authorized by the Company, and this Agreement has been duly
executed and delivered by the Company and is the valid and binding
agreement of the Company, enforceable against the Company in accordance
with its terms, except (i) as such enforceability may be limited by
applicable bankruptcy, reorganization, moratorium or other similar
federal or state laws affecting the rights of creditors and by rules of
law governing specific performance, injunctive relief or other
equitable remedies (regardless of whether any such remedy is considered
in a proceeding at law or in equity), and (ii) as to the enforceability
of the indemnification provisions of Section 8. The execution of this
Agreement, the consummation of the transactions herein contemplated and
the fulfillment of the terms hereof will not (A) conflict in any
respect with or result in a breach of any of the terms or provisions
of, or constitute a default under, any material indenture, mortgage,
deed of trust or other material agreement or material instrument to
which the Company or any Subsidiary is a party or by which the Company
or any of the Subsidiaries is a party or by which any of the
Subsidiaries or any of their respective properties are bound, or the
charter or by-laws of the
4
<PAGE>
Company or any Subsidiary or any order, decree, rule or regulation
applicable to the Company or any Subsidiary of any court or of any
regulatory body or administrative agency or other governmental body
having jurisdiction, (B) including without limitation, the
Communications Act of 1934, as amended, and the rules and regulations
of the Federal Communications Commission thereunder.
(x) Neither the Company nor any Subsidiary is in default under
any material agreement, lease, contract, indenture or other material
instrument or material obligation to which it is a party or by which it
or any of its respective properties are bound (nor, to the Company's
knowledge is any other party thereto in default thereunder), and no
event has occurred which, with notice or the lapse of time or both,
would constitute such a default thereunder, in any such case in which a
default or event, singly or in the aggregate, would have a Material
Adverse Effect.
(xi) No legal or governmental proceedings are pending to which
the Company or any Subsidiary is a party or to which the property of
the Company or any Subsidiary is subject that are required to be
described in the Registration Statement or the Prospectus and are not
described therein, and, to the Company's knowledge, no such proceedings
have been threatened against the Company or any Subsidiary or with
respect to any of their respective properties.
(xii) Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body necessary in connection with
the execution and delivery by the Company of this Agreement and the
consummation of the transactions herein contemplated (except such
additional steps as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") or as may be necessary to qualify
the Securities for public offering by the Underwriters under State
securities or Blue Sky laws) has been obtained or made and is in full
force and effect.
(xiii) Except as disclosed in the Registration Statement and
the Prospectus, there are no business relationships or related party
transactions required to be disclosed therein by Item 404 of Regulation
S-K and each business relationship or related party transaction
described therein is a fair and accurate description of the
relationships and transactions so described.
(xiv) None of the Company, any Subsidiary or any officer or
director acting, or to the Company's knowledge, purporting to act on
behalf of the Company or any Subsidiary has during the past five years
(A) made any contributions to any candidate for political office, or
failed to disclose fully any such contributions, in violation of law;
(B) made any payment to any foreign, federal, state or local
governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or allowed
by applicable law; (C) made any payment outside the ordinary course of
business to any purchasing or selling agent or person charged with
similar duties of any entity to which the Company or any such
Subsidiary, as applicable, sells (or has in the past sold) or from
which the Company, any such Subsidiary or any officer or director
purporting to act on behalf of the Company or any such Subsidiary, as
applicable, buys (or has in the past bought) products for the purpose
of influencing such agent or person in violation of applicable law to
buy products from or sell products to the Company or any such
Subsidiary, as applicable; or (D) engaged in any transaction,
maintained any bank account or used any corporate funds except for
transactions, bank accounts and funds which have been and are reflected
in the normally maintained books and records of the Company or any such
Subsidiary, as applicable.
(xv) KPMG Peat Marwick LLP, who have certified certain of the
financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants with respect
to the Company and each of the Subsidiaries as required by the
Securities Act and the rules thereunder.
5
<PAGE>
(xvi) The consolidated financial statements of the Company,
together with the related notes and schedules as set forth in the
Registration Statement, present fairly the financial position and the
results of the operations of the Company, at the indicated dates and
for the indicated periods. Such financial statements have been prepared
in accordance with generally accepted principles of accounting,
consistently applied throughout the periods involved, and all
adjustments necessary for a fair presentation of results for such
periods have been made. The summary financial and statistical data
included in the Registration Statement under "Summary Consolidated
Financial Data" and "Selected Consolidated Financial Data" present
fairly the information shown therein and has been compiled on a basis
consistent with the financial statements presented therein. The other
financial and statistical information and data set forth in the
Registration Statement (and any amendment or supplement thereto) is, in
all material respects, accurately presented and prepared on a basis
consistent with such financial statements and the books and records of
the Company and its Subsidiaries.
(xvii) The Company and each Subsidiary maintains a system of
internal accounting controls sufficient to provide reasonable
assurances that (A) transactions are executed in accordance with
management's general or specific authorization; (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets; (C) access to assets is permitted
only in accordance with management's general or specific authorization;
and (D) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(xviii) Except as described in the Prospectus, the Company,
its subsidiaries which have been or are consolidated with the Company
for the purpose of filing income tax returns (the "Consolidated Tax
Subsidiaries") and any group of which the Company or any of its
Consolidated Tax Subsidiaries is or was a member for income tax
purposes have filed all foreign, federal, state and local tax returns
that are required to be filed or have requested extensions thereof and
have paid all taxes required to be paid by any of them and any related
or similar assessment, fine or penalty levied against any of them, to
the extent that any of the foregoing is due and payable, except for any
such tax, assessment, fine or penalty that is currently being contested
in good faith and by appropriate proceedings; and adequate charges,
accruals and reserves have been made in the applicable financial
statements referred to in paragraph (xvi) above in respect of all
foreign, federal, state and local taxes for all periods as to which the
tax liability of the Company, its Consolidated Tax Subsidiaries and any
group of which the Company or any of its Consolidated Tax Subsidiaries
is or was a member for income tax purposes has not been finally
determined.
(xix) The Company has not distributed nor, prior to the later
to occur of (A) 30 days after the Closing Date or (B) completion of the
distribution of the Securities, will it distribute any offering
material in connection with the offering and sale of the Securities
other than the Registration Statement, the Preliminary Prospectus, the
Prospectus or other materials, if any, permitted by the Securities Act
and reviewed by the Representatives.
(xx) The Company and each Subsidiary has good and marketable
title to all of the properties and assets reflected in the financial
statements (except as otherwise described in the Registration Statement
and the Prospectus) hereinabove described as being owned by them,
subject to no lien, mortgage, pledge, charge or encumbrance of any kind
except those reflected in such financial statements (except as
otherwise described in the Registration Statement and the Prospectus)
or which are not material in amount. The Company and each Subsidiary
occupies its leased properties under leases are that valid and binding
with respect to the Company or such Subsidiaries, as the case may be,
and, to the Company's knowledge, with respect to each other party to
such leases. Neither the Company nor any Subsidiary has received any
notice of any violations of laws, ordinances, codes, orders or
regulations issued by any governmental authority having jurisdiction
over or affecting any such properties or assets.
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(xxi) The Company and each Subsidiary maintains insurance with
insurers of recognized financial responsibility of the types and in the
amounts generally deemed adequate for its respective business and
consistent with insurance coverage maintained by similar companies in
similar businesses, including, but not limited to, insurance covering
real and personal property owned or leased by the Company or such
Subsidiary against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against, all of which insurance is
in full force and effect; neither the Company nor any Subsidiary has
been refused any insurance coverage sought or applied for; and the
Company and has no reason to believe that either it or any Subsidiary
will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar
insurers as may be necessary to continue its respective business at a
cost that would not have a Material Adverse Effect.
(xxii) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, (A) there has been no material adverse change
in the condition (financial or other), business, prospects, properties,
net worth or results of operations of the Company or any Subsidiary,
whether or not arising in the ordinary course of business; (B) there
have been no transactions entered into by either the Company or any
Subsidiary, other than those in the ordinary course of business, which
are material with respect to the Company and the subsidiaries, taken as
a whole; (C) there has been no dividend or distribution of any kind
declared, paid or made by the Company on the Common Stock or any
issuance of any securities of the Company; and (D) neither the Company
nor any Subsidiary has incurred any liabilities or obligations, direct
or contingent, which are material to the Company and the subsidiaries,
taken as a whole.
(xxiii) The Company and each Subsidiary is in compliance with
its respective charter and bylaws and is operating in material
compliance with all laws, regulations, administrative orders or rulings
or court decrees applicable to it or to any of its property (including
without limitation those relating to telecommunications regulations,
environmental, safety or similar matters, and federal and state laws
relating to the hiring, promotion or pay of employees). There are no
laws, regulations, administrative orders, rulings or court decrees
required, to be described in the Registration Statement or Prospectus
that are not described as required by the Act or the rules and
regulations promulgated thereunder.
(xxiv) There is no labor strike, dispute or work stoppage or
lockout pending, or, to the knowledge of the Company, threatened,
against or affecting the Company or any Subsidiary, and no such labor
strike, dispute, work stoppage or lockout has occurred with respect to
any employees of the Company or any Subsidiary during the two years
prior to the date of this Agreement. None of the employees of the
Company or any Subsidiary are represented by a union and, to the
Company's knowledge, no union organization campaign is in progress with
respect to the employees of the Company or any Subsidiary and no
question concerning representation exists with respect to such
employees. No charges with respect to or relating to the Company or any
Subsidiary are pending before the Equal Employment Opportunity
Commission or any state, local or foreign agency responsible for the
prevention of unlawful employment practices, and no such charges have
been filed against the Company or any Subsidiary.
(xxv) The Company and each Subsidiary holds all material
approvals, orders, licenses, certificates and permits from federal,
state, foreign and local governmental authorities which are necessary
to the conduct of its respective business as now being conducted and as
proposed to be conducted as described in the Registration Statement and
the Prospectus.
(xxvi) The Company and each Subsidiary owns or possesses
adequate rights to use, without infringing the rights of others, all
patents, patent applications, trademarks, trademark registrations,
service marks, service mark registrations, trade names, copyrights,
licenses, inventions, trade secrets, and other similar rights,
technology and proprietary knowledge
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(collectively, "Intangibles") described in the Prospectus as being
owned or used by them or any of them or necessary for the conduct of
their respective businesses, and the Company is not aware of any claim
to the contrary or any challenge by any other person to the rights of
the Company or any Subsidiary with respect to the Intangibles. Except
in connection with transactions entered into in the ordinary course of
business, neither the Company nor any Subsidiary has granted any
licenses or other rights or has any obligations to grant licenses or
any other rights to any Intangibles. Neither the Company nor any
Subsidiary has made any material claim of violation or infringement by
others of rights to, or in connection with, the Intangibles, and the
Company knows of no basis for making any such claim.
(xxvii) Neither the Company nor any Subsidiary is or, after
giving effect to the sale of the Securities, will be (A) an "investment
company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended, or (B) a
"holding company" or a "subsidiary company" or an "affiliate" of a
holding company within the meaning of the Public Utility Holding
Company Act of 1935, as amended.
(xxviii) Neither the Company nor any Subsidiary has incurred
any liability for finder's or broker's fees or agent's commissions in
connection with the execution and delivery of this Agreement, the offer
and sale of the Securities or the transactions contemplated hereby.
(xxix) The Securities have been approved for listing on the
Nasdaq Stock Market's National Market (the "Nasdaq National Market"),
subject only to official notice of issuance.
2. Purchase and Sale of the Securities.
------------------------------------
(a) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company hereby agrees
to sell to each Underwriter, and each Underwriter hereby agrees, severally and
not jointly, to purchase from the Company, at a purchase price of U.S. $____ per
share, the number of Firm Securities set forth opposite such Underwriter's name
in Schedule I or Schedule II hereto, as the case may be.
(b) Subject to the terms and conditions and in reliance
upon the representations and warranties herein set forth, the Company hereby
grants options to the several Underwriters to purchase, severally and not
jointly, up to the amount of Option Securities set forth opposite each such
Underwriter's name on Schedule I or Schedule II hereto, as the case may be, at
the same purchase price per share as the Underwriters shall pay for the Firm
Securities. Said options may be exercised only to cover over-allotments in the
sale of the Firm Securities by the Underwriters. Said options may be exercised
in whole or in part at any time on or before 5:00 p.m., New York City time, on
the 30th day after the date of the Prospectus upon written, telecopied or
telegraphic notice by the Representatives to the Company setting forth the
aggregate number of shares of Option Securities as to which the several
Underwriters are exercising the option and the related settlement date. Such
options may be exercised more than once, but in no event may the total number of
Option Securities purchased under all exercises exceed _____________ shares of
Common Stock. Delivery of certificates for the shares of Option Securities by
the Company and payment therefor to the Company shall be made as provided in
Section 3 below. The number of shares of Option Securities to be purchased by
each Underwriter shall be the same percentage of the total number of shares of
the Option Securities to be purchased by the several Underwriters as such
Underwriter is purchasing of the Firm Securities, subject to such adjustments as
the Representatives in their sole discretion shall make to eliminate any
fractional shares.
3. Delivery and Payment. Delivery of and payment for
--------------------
the Firm Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the second business
day prior to the Closing Date) shall be made at 10:00 a.m., New York City time,
on the fourth full business day following the date of this Agreement or at such
later date as the Representatives shall designate, which date and time may be
postponed by agreement between the Representatives and the Company or as
provided in Section 9 hereof (such date and time of delivery and
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payment for the Securities being herein called the "Closing Date"). Delivery of
the Securities shall be made to the U.S. Representative for the respective
accounts of the several Underwriters against payment by the several Underwriters
through the U.S. Representative of the aggregate purchase price of the
Securities to or upon the order of the Company by wire transfer of immediately
available funds. Delivery of the Firm Securities and the Option Securities shall
be made at such location as the U.S. Representative shall reasonably designate
at least one business day in advance of the Closing Date and payment for the
Securities shall be made at the offices of Wilson Sonsini Goodrich & Rosati, 650
Page Mill Road, Palo Alto, CA 94304 (or at such other location as may be agreed
upon by the Company and the Representatives). Certificates for the Securities
shall be registered in such names and in such denominations as the U.S.
Representative may request not less than three full business days in advance of
the Closing Date.
The Company agrees to have the Securities available for
inspection, checking and packaging by the U.S. Representative in New York, New
York not later than 1:00 p.m., New York City time, on the business day prior to
the Closing Date.
If the options provided for in Section 2(b) hereof are
exercised after the third business day prior to the Closing Date, the Company
will deliver or have delivered (at the expense of the Company) to the U.S.
Representative for the respective accounts of the several Underwriters, at 31
West 52nd Street, New York, New York, on the date specified by the U.S.
Representative (which shall be within three business days after the exercise of
said option), certificates for the Option Securities in such names and
denominations as the U.S. Representative shall have requested against payment by
the several Underwriters through the U.S. Representative of the purchase price
thereof to the order of the Company by wire transfer of immediately available
funds. If settlement for the Option Securities occurs after the Closing Date,
the Company will deliver to the Representatives on the settlement dates for the
Option Securities, and the obligation of the Underwriters to purchase the Option
Securities shall be conditioned upon receipt of, supplemental opinions,
certificates and letters delivered on the Closing Date pursuant to Section 6
hereof, in each case speaking as of such settlement dates.
4. Offering by Underwriters. It is understood that the
------------------------
several Underwriters propose to offer the Securities for sale to the public as
set forth in the Prospectus. Each U.S. Underwriter hereby makes to and with the
Company the representations and agreements of such U.S. Underwriters contained
in ______ of the Agreement Between Underwriters. Each International Underwriter
hereby makes to and with the Company the representations and agreements of such
International Underwriter contained in ______ of the Agreement Between
Underwriters.
5. Agreements of the Company. The Company agrees with
-------------------------
the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the offering
of the Securities (which will be deemed to have occurred on the date that is the
earlier of (i) 60 days after the Closing Date and (ii) the date on which the
Representatives shall have informed the Company in writing that the offering of
the Securities has terminated), the Company will not file any amendment of the
Registration Statement, supplement to the Prospectus or any Rule 462(b)
Registration Statement unless the Company has furnished the Representatives a
copy for their review prior to filing and will not file any such proposed
amendment, supplement or Rule 462(b) Registration Statement to which the
Representatives reasonably object. Subject to the foregoing sentence, if the
Registration Statement has become or becomes effective pursuant to Rule 430A, or
filing of the Prospectus is otherwise required under Rule 424(b), the Company
will cause the Prospectus, properly completed, and any supplement thereto to be
filed with the Commission pursuant to the applicable paragraph of Rule 424(b)
within the time period prescribed and will provide evidence satisfactory to the
Representatives of such timely filing. Upon your request but not without our
agreement, the Company will cause the Rule 462(b) Registration Statement,
completed and in compliance with the Securities Act and the applicable rules and
regulations thereunder, to be filed with the Commission pursuant to Rule 462(b)
and
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<PAGE>
will provide evidence satisfactory to the Representatives of such filing. The
Company will promptly advise the Representatives (A) when the Registration
Statement, if not effective at the Execution Time, and any amendment thereto,
shall have become effective, (B) when the Prospectus, or any respective
supplement thereto, shall have been filed (if required) with the Commission
pursuant to Rule 424(b), (C) when, prior to termination of the offering of the
Securities, any amendment to the Registration Statement shall have been filed or
become effective, (D) of any request by the Commission for any amendment of the
Registration Statement or supplement to the Prospectus or for any additional
information, (E) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or the institution or
threatening of any proceeding for that purpose and (F) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of the Securities for sale in any jurisdiction or the initiation or threatening
of any proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order and, if issued, to obtain as soon as
possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Securities Act, any event
occurs as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading or if it shall be necessary to amend
the Registration Statement or supplement the Prospectus to comply with the
Securities Act or the rules and regulations thereunder, the Company shall
promptly (i) prepare and file with the Commission, subject to the second
sentence of paragraph (a) of this Section 5, an amendment or supplement which
will correct such statement or omission or an amendment which will effect such
compliance and (ii) supply any supplemented Prospectus to you in such quantities
as you may reasonably request.
(c) As soon as practicable, the Company will make
generally available to its security holders and to the Representatives an
earnings statement or statements of the Company and its subsidiaries which will
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 under
the Securities Act.
(d) The Company will furnish to the U.S. Representative
on behalf of the Representatives and to counsel for the Underwriters, without
charge, a complete manually signed copy of the Registration Statement (including
exhibits thereto) as originally filed and each amendment thereto, and to each
other Underwriter a conformed copy of the Registration Statement (without
exhibits thereto) as originally filed and each amendment thereto; and so long as
delivery of a prospectus by any Underwriter or dealer may be required by the
Securities Act, as many copies of each Preliminary Prospectus and the Prospectus
and any supplement thereto as either of the Representatives may reasonably
request. The Company will pay the expenses of printing or other reproduction of
all documents relating to the offering of the Securities.
(e) The Company will arrange for the qualification of
the Securities for sale under the laws of such jurisdictions as the
Representatives may designate and will maintain such qualifications in effect so
long as required for the distribution of the Securities. The Company will pay
the fee of the NASD in connection with its review of the offering and the
reasonable fees of counsel for the Underwriters in connection therewith.
(f) The Company will not, for a period of 180 days
following the Execution Time, without the prior written consent of the U.S.
Representative, directly or indirectly, offer to sell, contract to sell, sell or
otherwise dispose of, or announce the offering of, any other shares of Common
Stock or any securities convertible into or exchangeable or exercisable for
shares of Common Stock; provided, however, that the Company may issue (i) shares
of Common Stock (and options therefor) under the stock option plans in effect at
the Execution Time and described in the Prospectus under the caption "Management
Stock Option Plans and Arrangements", (ii) shares of Common Stock upon exercise
of warrants outstanding as of the Execution Time and (iii) shares of Common
Stock upon conversion of the Company's Series A Secured Subordinated Convertible
Promissory Notes. In addition, the Company
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<PAGE>
shall cause each of the persons listed as directors or executive officers of the
Company under the caption "Management" in the Prospectus and all other holders
of Common Stock and securities convertible into or exchangeable for shares of
Common Stock as of the date hereof to execute, at the Execution Time, a letter
in form acceptable to the U.S. Representative (each, a "Lock-Up Letter"),
wherein such person agrees that for a period of 180 days following the Execution
Time, without the prior written consent of the U.S. Representative, he or she
shall not, directly or indirectly, offer to sell, contract to sell, sell or
otherwise dispose of, or announce the offering of, any shares of Common Stock or
any securities convertible into or exchangeable or exercisable for shares of
Common Stock (and upon Execution Time the Company shall instruct its Registrar
and Transfer Agent to not effect any such restricted transfer).
(g) The Company shall apply the net proceeds from the
sale of Securities as set forth in the Prospectus.
(h) The Company shall take all steps as shall be
necessary to ensure that neither the Company nor any Subsidiary shall become an
"investment company" within the meaning of such term under the Investment
Company Act of 1940 and the rules and regulations of the Commission thereunder.
(i) The Company confirms as of the date hereof that it
is in compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, An Act Relating to Disclosure of Doing Business with Cuba, and the
Company further agrees that if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba after the
date the Registration Statement becomes or has become effective with the
Commission or with the Florida Department of Banking and Finance (the
"Department"), whichever date is later, or if the information reported in the
Prospectus, if any, concerning the Company's business with Cuba or with any
person or affiliate located in Cuba changes in any material way, the Company
will provide the Department notice of such business or change, if then required
by Florida law and as appropriate, in a form acceptable to the Department.
(j) During a period of three years from the Effective
Date, the Company shall furnish to the Representatives copies of all reports or
other communications (financial or other) furnished to shareholders, provided
that the foregoing shall not obligate the Company to furnish projections or any
other forward-looking information.
(k) Until such time as the Company's independent public
accountants provide it with a letter stating that there are no material
weaknesses with respect to the Company's internal control structure or its
operation, all of the Company's consolidated financial statements for all
annual, quarterly or other interim periods shall be audited by independent
public accountants, and no public release of any financial information related
to any such consolidated financial statements shall occur prior to the
completion of the audit of such consolidated financial statements.
6. Conditions to the Obligations of the Underwriters.
-------------------------------------------------
The obligations of the Underwriters to purchase the Firm Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company contained herein as of
the Execution Time, the Closing Date and any subsequent settlement date pursuant
to Section 3 hereof, to the accuracy of the statements of the Company made in
any certificates pursuant to the provisions hereof, to the performance by the
Company of its obligations hereunder and to the following additional conditions:
(a) If the Registration Statement has not become
effective prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become effective not
later than (i) 6:00 p.m., New York City time, on the date of determination of
the public offering price, if such determination occurred at or prior to 3:00
p.m., New York City time, on such date or (ii) 12:00 Noon, New York City time,
on the business day following the day on which the public offering price was
determined, if such determination occurred after 3:00 p.m., New York City time,
on such date; if filing of the Prospectus, or any supplement thereto, is
required pursuant to the applicable paragraph of Rule 424(b), the Prospectus,
and any such supplement, will be filed in the manner and within the time
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<PAGE>
period required by Rule 424(b); and no stop order suspending the effectiveness
of the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or threatened.
(b) The Company shall have furnished to the
Representatives the opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, counsel for the Company, dated the Closing Date, to the effect
that:
(i) each of the Company and each Subsidiary has been
duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction in which it is chartered or
organized, with full corporate power and authority to own its
properties and conduct its business as described in the Prospectus, and
is duly qualified to do business as a foreign corporation and is in
good standing under the laws of each jurisdiction which requires such
qualification, except where the failure to so qualify or be in good
standing, singly or in the aggregate would not have a material Adverse
Effect;
(ii) all the outstanding shares of capital stock of each
Subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable and all outstanding shares of capital
stock of the Subsidiaries (other than ___ of [MTC Japan]) are owned by
the Company free and clear of any perfected security interest and, to
the knowledge of such counsel, after due inquiry, any other security
interests, claims, liens or encumbrances, except as described in the
Registration Statement;
(iii) the Company's authorized equity capitalization is as
set forth in the Prospectus; the capital stock of the Company conforms
to the description thereof contained in the Prospectus; the outstanding
shares of Common Stock, par value $.001 per share, of the Company have
been duly and validly authorized and issued and are fully paid and
nonassessable; the Securities being sold hereunder have been duly and
validly authorized, and, when issued and delivered to and paid for by
the Underwriters pursuant to this Agreement, will be fully paid and
nonassessable; the Securities are duly authorized for quotation,
subject to official notice of issuance, on the Nasdaq National Market;
the certificates for the Securities are in valid and sufficient form;
and the holders of outstanding shares of capital stock of the Company
are not entitled to preemptive or other rights to subscribe for the
Securities;
(iv) to the knowledge of such counsel, there is no
pending or threatened action, suit or proceeding before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any of its subsidiaries of a character required to be
disclosed in the Registration Statement which is not adequately
disclosed in the Prospectus, and there is no franchise, contract or
other document of a character required to be described in the
Registration Statement or Prospectus, or to be filed as an exhibit,
which is not described or filed as required; and the statements in the
Prospectus under the captions "Prospectus Summary--Reorganization,"
"Risk Factors--Government Regulation," "Risk Factors--Impact of Shares
Eligible for Future Sale," "Business-Regulation," "Business--Legal
Proceedings," "Business--Reorganization," "Management--Stock Option
Plans and Arrangements," "Certain Transactions," "Description of
Capital Stock, "Shares Eligible for Future Sale," and "Certain U.S. Tax
Considerations for Non-U.S. Holders" fairly summarize, in all material
respects, the matters therein described, in each case insofar as such
statements constitute summaries of the legal matters, documents or
proceedings referred to therein;
(v) the Registration Statement has become effective
under the Securities Act; any required filing of the Prospectus, and
any supplements thereto, pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); to the
knowledge of such counsel, no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for
that purpose have been instituted or threatened; the Registration
Statement and the Prospectus (other than the financial statements and
other financial and
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statistical information contained therein as to which such counsel need
render no opinion) comply as to form in all material respects with the
applicable requirements of the Securities Act and the rules and
regulations thereunder; and such counsel has no reason to believe that
at the Effective Date the Registration Statement (other than the
financial statements and other financial and statistical information
contained therein as to which such counsel need render no opinion)
includes any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus, as of its
date or the Closing Date (other than the financial statements and other
financial and statistical information contained therein as to which
such counsel need render no opinion), includes any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
(vi) this Agreement has been duly authorized, executed
and delivered by the Company;
(vii) no consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation
of the transactions contemplated herein, except such as have been
obtained under the Securities Act and such as may be required under the
blue sky laws of any jurisdiction or the NASD Corporate Financing Rule
in connection with the purchase and distribution of the Securities by
the Underwriters and such other approvals (if any, and specified in
such opinion) as have been obtained;
(viii) neither the issue and sale of the Securities, nor
the consummation of any other of the transactions contemplated herein,
nor the fulfillment of the terms hereof will conflict with result in a
breach or violation of, or constitute a default under, any law or the
charter or by-laws of the Company or the terms of any indenture or
other agreement or instrument known to such counsel and to which the
Company or any Subsidiary is a party or bound or any judgment, order or
decree known to such counsel to be applicable to the Company or any
Subsidiary of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over the Company or
any Subsidiary; and
(ix) no holders of securities of the Company have rights to
the registration of such securities under the Registration Statement,
which rights have not been satisfied or waived with respect to the
offering made by the Registration Statement.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other
than the State of California or the federal laws of the United States,
to the extent they deem proper and specified in such opinion, upon the
opinion of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters and
(B) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company and public
officials. References to the Prospectus in this paragraph (b) include
any supplements thereto at the Closing Date.
With respect to paragraph (b)(v) of this Section 6, counsel
may state that its belief is based upon its participation in the
preparation of the Registration Statement and Prospectus and any
amendments and supplements thereto and review and discussion of the
contents thereof, but is without independent check or verification.
(c) The Representatives shall have received from Latham
& Watkins, counsel for the Underwriters, such opinion or opinions, dated the
Closing Date, with respect to the issuance and sale of the Securities, the
Registration Statement, the Prospectus (together with any supplements thereto)
and other related matters as the Representatives may reasonably require, and the
Company shall have furnished to such counsel such documents as they request for
the purpose of enabling them to pass upon such matters.
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(d) The Company shall have furnished to the
Representatives a certificate of the Company, signed by the Chief Executive
Officer, President and Chief Financial Officer of the Company, dated the Closing
Date, to the effect that the signers of such certificate have carefully examined
the Registration Statement, the Prospectus, any supplement to the Prospectus,
and this Agreement, and that:
(i) the representations and warranties of the Company in
this Agreement are true and correct on and as of the Closing Date with
the same effect as if made on the Closing Date and the Company has
complied with all the agreements and satisfied all the conditions on
its part to be performed or satisfied hereunder at or prior to the
Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge,
threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any supplements
thereto), there has been no material adverse change, or development
involving a prospective change, in the condition (financial or other),
business, prospects, properties, net worth or results of operations of
the Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, except as
set forth in or contemplated in the Prospectus (exclusive of any
supplements thereto).
(e) At the Execution Time and at the Closing Date, KPMG
Peat Marwick LLP shall have furnished to the Representatives a signed letter,
dated respectively as of the Execution Time and as of the Closing Date, each in
the respective form contemplated for "comfort letters addressed to underwriters"
by Statement of Auditing Standards No. 72 ("SAS 72"), and in form and substance
previously provided to for review and agreed to as satisfactory to the
Representatives and to counsel for the Underwriters. Each such letter shall
specify therein, inter alia, the amounts described as being set forth therein in
paragraph (f)(i) of this Section 6 as of the dates contemplated by SAS 72.
(f) Subsequent to the Execution Time or, if earlier, the
dates as of which information is given in the Registration Statement (exclusive
of any amendment thereof) and the Prospectus (exclusive of any supplement
thereto), there shall not have been (i) any increases in the Company's
(including its consolidated subsidiaries') long-term debt (including current
maturities), or changes in the Company's (including its consolidated
subsidiaries') capital stock or stockholders' equity, or decreases in the
Company's (including its consolidated subsidiaries') working capital, total net
sales, net income (or increases in net loss) or per share amounts, in each case
from the amounts specified in the letter delivered at the Execution Time and
referred to in paragraph (e) of this Section 6 or (ii) any change, or any
development involving a prospective change, in or affecting the condition
(financial or other), business, prospects, properties, net worth or results of
operations of the Company and its subsidiaries, taken as a whole, the effect of
which, in any case referred to in clauses (i) or (ii) above, is, in the judgment
of the Representatives, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the Registration Statement (exclusive of any amendment thereof)
and the Prospectus (exclusive of any supplement thereto).
(g) On or prior to the Execution Time, the NASD shall
have approved the Underwriters' participation in the distribution of the
Securities and the Nasdaq National Market shall have approved the Securities for
listing thereon.
(h) At the Execution Time, the Company shall have
furnished to the Representatives each of the signed Lock-Up Letters.
(i) Prior to the Closing Date, the Company shall have
furnished to the Representatives such further information, certificates and
documents as the Representatives or counsel for the Underwriters may reasonably
request.
14
<PAGE>
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the Company in
writing or by telephone or telegraph confirmed in writing.
7. Reimbursement of Underwriters' Expenses. If the sale of
---------------------------------------
the Securities provided for herein is not consummated because any condition to
the obligations of the Underwriters set forth in Section 6 hereof is not
satisfied, because of any termination pursuant to Section 10 hereof or because
of any refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the Underwriters, the Company will reimburse the Underwriters
severally upon demand by the Representatives for all reasonable out-of-pocket
expenses (including reasonable fees and disbursements of counsel for the
Underwriters) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities prior to the earliest of (i) the
date notice of cancellation is given pursuant to Section 6, (ii) the date of
termination pursuant to Section 10, or (iii) the date of such refusal, inability
or failure by the Company.
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter
and each person who controls any Underwriter within the meaning of either the
Securities Act or the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), against any and all losses, claims, damages or liabilities, joint or
several, to which they or any of them may become subject under the Securities
Act, the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement for the registration of the Securities as originally
filed or in any amendment thereof, or in any Preliminary Prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, (ii) the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading or (iii) any
act or failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating in any manner to, the Securities or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
covered by clause (i) or (ii) above (provided that the Company shall not be
liable under this clause (iii) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss, claim, damage,
liability or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct), and agrees to reimburse each such indemnified
party, as incurred, for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter through the Representatives specifically for inclusion therein
(which the parties hereto understand and agree consists only of the information
specifically identified as such in paragraph (ii) of Section 1 of this
Agreement). This indemnity agreement will be in addition to any liability which
the Company may otherwise have.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls the Company within the
meaning of either the Securities Act or the Exchange Act to the same extent as
the foregoing indemnity from the Company to each Underwriter, but only with
reference to written information relating to such Underwriter furnished to the
Company by or on behalf of such
15
<PAGE>
Underwriter through the Representatives
specifically for inclusion in the documents referred to in the foregoing
indemnity (which the parties hereto understand and agree consists only of the
information specifically identified as such in paragraph (ii) of Section 1 of
this Agreement). This indemnity agreement will be in addition to any liability
which any Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel if (i) the use of counsel chosen by the indemnifying party to
represent the indemnified party would present such counsel with a conflict of
interest, (ii) the actual or potential defendants in, or targets of, any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties which are different
from or additional to those available to the indemnifying party, (iii) the
indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of the institution of such action or (iv) the indemnifying party
shall authorize the indemnified party to employ separate counsel at the expense
of the indemnifying party. An indemnifying party will not, without the prior
written consent of the indemnified parties (which consent will not be
unreasonably withheld), settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding. An indemnified party will
not, without the prior written consent of the indemnifying party, which consent
will not be unreasonably withheld, settle or compromise or consent to the entry
of any judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification may be sought hereunder.
(d) In the event that the indemnity provided in paragraph (a)
or (b) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Underwriters agree to
contribute to the aggregate losses, claims, damages and liabilities (including
legal or other expenses reasonably incurred in connection with investigating or
defending same) (collectively "Losses") to which the Company and one or more of
the Underwriters may be subject in such proportion as is appropriate to reflect
the relative benefits received by the Company, on the one hand, and by the
Underwriters, on the other hand, from the offering of the Securities; provided,
however, that in no case shall any Underwriter (except as may be provided in any
agreement among underwriters relating to the offering of the Securities) be
responsible for any amount in excess of the underwriting discount or commission
applicable to the Securities purchased by such Underwriter hereunder. If the
allocation provided by the immediately preceding sentence is unavailable for any
reason, the Company and the Underwriters shall contribute in such proportion as
is appropriate to reflect not only such relative benefits but also the relative
fault of the Company and of the Underwriters in connection with the statements
or omissions which resulted in such Losses as well as any other relevant
equitable considerations. Benefits received by the Company shall be deemed to be
equal to the total net proceeds from the offering of the Securities (before
deducting expenses) received by it, and benefits received by the Underwriters
shall be
16
<PAGE>
deemed to be equal to the total underwriting discounts and commissions from the
offering of the Securities, in each case as set forth on the cover page of the
Prospectus. Relative fault shall be determined by reference to whether any
alleged untrue statement or omission relates to information provided by the
Company or the Underwriters. The Company and the Underwriters agree that it
would not be just and equitable if contribution were determined by pro rata
allocation or any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this paragraph (d), 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. For purposes of this Section 8, each person who controls any
Underwriter within the meaning of either the Securities Act or the Exchange Act
and each director, officer, employee and agent of any Underwriter shall have the
same rights to contribution as such Underwriter, and each person who controls
the Company within the meaning of either the Securities Act or the Exchange Act,
each officer of the Company who shall have signed the Registration Statement and
each director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and provisions of this
paragraph (d).
9. Default by any Underwriter. If any one or more Underwriters
--------------------------
shall fail to purchase and pay for any of the Securities agreed to be purchased
by such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Firm Securities
set forth opposite their names in Schedule I or Schedule II, as the case may be,
bears to the aggregate amount of Firm Securities set forth opposite the names of
all the remaining Underwriters) the Securities which the defaulting Underwriter
or Underwriters agreed but failed to purchase; provided, however, that in the
event that the aggregate amount of Securities which the defaulting Underwriter
or Underwriters agreed but failed to purchase shall exceed 10% of the aggregate
amount of Securities set forth in Schedule I and Schedule II hereto, the
remaining Underwriters shall have the right to purchase all, but shall not be
under any obligation to purchase any, of the Securities, and if such
non-defaulting Underwriters do not purchase all the Securities, this Agreement
will terminate without liability to any non-defaulting Underwriter or the
Company. In the event of a default by any Underwriter as set forth in this
Section 9, the Closing Date shall be postponed for such period, not exceeding
seven days, as the Representatives shall determine in order that the required
changes in the Registration Statement and the Prospectus or in any other
documents or arrangements may be effected. Nothing contained in this Agreement
shall relieve any defaulting Underwriter of its liability, if any, to the
Company and any non-defaulting Underwriter for damages occasioned by its default
hereunder.
10. Effective Date of Agreement and Termination. This Agreement
-------------------------------------------
shall become effective at such time (after notification of the effectiveness of
the Registration Statement has been released by the Commission) as the
Representatives and the Company shall agree on the initial public offering price
and underwriting discount per share, unless prior to such time such of the
Underwriters as have agreed to purchase in the aggregate 50% or more of the
Securities shall have given notice to the Company that such Underwriters elect
that this Agreement shall not become effective; provided, however, that the
provisions of this Section 10 and of Section 8 hereof shall at all times be
effective. If this Agreement shall not have become effective prior to 5:00 p.m.,
New York City time, on the seventh full business day after the Effective Date,
this Agreement shall not thereafter become effective unless such period is
extended by agreement among the Underwriters and the Company.
This Agreement shall be subject to termination in the absolute
discretion of the Representatives, by notice given to the Company prior to
delivery of and payment for the Securities, if prior to such time (i) trading in
the Company's Common Stock shall have been suspended from quotation by the
Commission or the Nasdaq National Market or trading in securities generally on
the New York Stock Exchange, the American Stock Exchange or the Nasdaq National
Market shall have been suspended or limited or minimum prices shall have been
established on either of such Exchanges or Market System, (ii) a banking
moratorium shall have been declared either by federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war or
other calamity or crisis the effect of which on financial
17
<PAGE>
markets is such as to make it, in the judgment of the Representatives,
impracticable or inadvisable to proceed with the offering or delivery of the
Securities as contemplated by the Prospectus (exclusive of any supplement
thereto).
11. Representations and Indemnities to Survive. The respective
------------------------------------------
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, and of the Underwriters set forth in or made pursuant
to this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
the officer, directors or controlling persons referred to in Section 8 hereof,
and will survive delivery of and payment for the Securities. The provision of
Sections 7 and 8 hereof shall survive the termination or cancellation of this
Agreement.
12. Notices. All communications hereunder will be in writing
-------
and effective only on receipt, and, if sent to the U.S. Representative or the
International Representative, will be mailed, delivered or telegraphed and
confirmed to them, care of Deutsche Morgan Grenfell Inc., at 31 West 52nd
Street, New York, New York 10019 (with a copy to Latham & Watkins, 505
Montgomery Street, Suite 1900, San Francisco, California 94111, attention:
Christopher L. Kaufman, Esq.); or, if sent to the Company, will be mailed,
delivered or telegraphed and confirmed to it at 1304 South Pointe Boulevard,
Petaluma, California 94954, attention: Edward A. Brinskele, Chief Executive
Officer (with a copy to Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road,
Palo Alto, California 94304, attention: Aaron J. Alter, Esq.).
13. Successors. This Agreement will inure to the benefit of and
----------
be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8 hereof,
and no other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and
--------------
construed in accordance with the internal laws of the State of New York.
18
<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company and the several Underwriters.
Very truly yours,
NetSource Communications, Inc.
By:
------------------------------------
Chief Executive Officer
The foregoing Agreement is
hereby confirmed and accepted
as of the date first above
written.
Deutsche Morgan Grenfell Inc.
As U.S. Representative of the
several U.S. Underwriters,
By: Deutsche Morgan Grenfell Inc.
By:
---------------------------
Director
For themselves and the other several
U.S. Underwriters named in Schedule I
to the foregoing Agreement.
Morgan Grenfell & Co., Limited
As International Representative of the
several International Underwriters,
By: Morgan Grenfell & Co., Limited
By:
--------------------------
Director
For themselves and the other several
International Underwriters named in
Schedule II to the foregoing Agreement.
19
<PAGE>
SCHEDULE I
U.S. Underwriters
Maximum Number
Number of U.S. of U.S. Option
U.S. Underwriters Firm Securities Securities
to be Purchased to be Purchased
Deutsche Morgan Grenfell Inc. ...................
------------------------
Total....................... _____________ _______________
========================
20
<PAGE>
SCHEDULE II
International Underwriters
Number of Maximum Number
International Firm of International
Securities Option Securities
International Underwriters to be Purchased to be Purchased
Morgan Grenfell & Co., Limited .................................
------------------------
Total......................... _____________ _______________
========================
21
<PAGE>
SCHEDULE III
List of Material Subsidiaries
of
NetSource Communications, Inc.
MTC Telemanagement Corporation, a California corporation
MTC International, Inc., a Nevada corporation
MTC Japan, Ltd.
[others]
22
<PAGE>
EXHIBIT 2.4
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is
entered into as of October 15, 1996, between and among DNA NEW MEDIA GROUP,
INC., an Illinois corporation ("DNA"); DAVID WALLINGA and ANDREW HAYMAN
(individually "Shareholder" and collectively, the "Shareholders"); on the one
hand, and DNA ACQUISITION CORPORATION, a Delaware corporation ("Acquisition")
and NETSOURCE COMMUNICATIONS, INC., a Delaware corporation ("NCI") on the other.
RECITALS
WHEREAS, subject to and in accordance with the terms and conditions of
this Agreement and pursuant to the Certificate and Articles of Merger attached
hereto as Exhibit A ("Certificates of Merger"), the parties intend that
Acquisition will merge with and into DNA (the "Merger"), whereby all of the
outstanding shares of common stock of DNA ("DNA Common Stock") will be exchanged
for shares of common stock of NCI ("NCI Common Stock");
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the parties hereto desire to set forth certain
representations, warranties and covenants made by each to the other as an
inducement to the consummation of the Merger.
AGREEMENT
NOW, THEREFORE, in reliance on the foregoing recitals and in and for
the consideration and mutual covenants set forth herein, the parties agree as
follows:
1. Certain Definitions.
-------------------
1.1 "Affiliate" shall have the meaning set forth in the rules and
regulations promulgated by the Commission pursuant to the Securities Act.
1.2 "Code" shall mean the United States Internal Revenue Code of
1986, as amended.
1.3 "Commission" shall mean the United States Securities and
Exchange Commission.
1.4 "Key Employees" shall mean David Wallinga and Andrew Hayman.
1.5 "DNA Common Stock" shall mean shares of Common Stock of DNA.
1.6 "DNA Products/Services" shall mean all versions and
implementations of any product which has been or is being marketed by DNA or
currently is under development and all services which have been or are being
marketed by DNA or currently are under development, and all patents, patent
applications, trade secrets, copyrights, trademarks, trade names and other
proprietary rights related to such products or services.
-1-
<PAGE>
1.7 "DNA Shares" shall mean the shares of DNA capital stock issued
and outstanding at the effective time of the Merger, other than the Dissenting
Shares.
1.8 "NCI Common Stock" shall mean shares of Common Stock of NCI.
1.9 "NCI Products/Services" shall mean all versions and
implementations of any product which has been or is being marketed by NCI, or
currently is under development and all services which have been or are being
marketed by NCI, or currently are under development, and all patents, patent
applications, trade secrets, copyrights, trademarks, trade names and other
proprietary rights related to such products or services.
1.10 "Securities" shall mean the DNA Shares and Dissenting Shares.
1.11 "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.12 "Stockholders" shall mean the holders of the outstanding
shares of DNA Shares.
1.13 "Transaction Documents" shall mean all documents or agreements
attached as an exhibit or schedule hereto, and set forth on the Table of
Contents.
2. Plan of Reorganization.
----------------------
2.1 The Merger. Subject to the terms and conditions of this
----------
Agreement and the Certificates of Merger, Acquisition shall be merged with and
into DNA in accordance with the applicable provisions of the laws of the States
of Illinois and Delaware, and with the terms and conditions of this Agreement
and the Certificates of Merger, so that:
(a) At the Effective Time (as defined in Section 2.6 below),
Acquisition shall be merged with and into DNA. As a result of the Merger, the
separate corporate existence of Acquisition shall cease and DNA shall continue
as the surviving corporation (sometimes referred to herein as the "Surviving
Corporation") and shall succeed to and assume all of the rights and obligations
of Acquisition in accordance with the laws of Illinois.
(b) The Articles of Incorporation and Bylaws of DNA in effect
immediately prior to the Effective Time shall be the Articles of Incorporation
and Bylaws, respectively, of the Surviving Corporation after the Effective Time
unless and until further amended as provided by law.
(c) Subject to the terms of this Agreement, the directors and officers
of Acquisition immediately prior to the Effective Time shall be the directors
and officers of the Surviving Corporation after the Effective Time. Such
directors and officers shall hold their position until the election and
qualification of their respective successors or until their tenure is otherwise
terminated in accordance with the Bylaws of DNA.
-2-
<PAGE>
2.2 Conversion of Shares. Each share of DNA Common Stock, issued and
--------------------
outstanding immediately prior to the Effective Time, will, by virtue of the
Merger and at the Effective Time, and without further action on the part of any
holder thereof, be converted automatically into and exchanged for one hundred
fifty three and 46/100 (153.46) shares of fully paid and nonassessable NCI
Common Stock (the "Exchange Ratio"). The shares of NCI Common Stock issued
pursuant hereto shall also be referred to as the "Merger Consideration".
2.3 Fractional Shares. No fractional shares of NCI Common Stock will
-----------------
be issued in connection with the Merger, but in lieu thereof, holders of DNA
Common Stock who would otherwise be entitled to receive a fraction of a share of
NCI Common Stock will receive from NCI, promptly after the Effective Time, an
agreed upon amount of cash equal to four and 5/100 dollars ($4.05) per share of
NCI Common Stock, multiplied by the fraction of a share of NCI Common Stock to
which such holder would otherwise be entitled.
2.4 Escrow Agreement. At the Effective Time, certificates
----------------
representing ten percent (10%) of the shares of the NCI Common Stock issued to
the holders of DNA Common Stock in the Merger shall be deposited in escrow, on a
pro rata basis. The shares placed in the escrow pursuant to this Section 2.4
(the "DNA Escrow Shares") shall be held as collateral for the indemnification
obligations of DNA under Section 12 and pursuant to the provisions of an escrow
agreement (the "Escrow Agreement") to be entered into between the parties and a
third party commercial escrow agent, with the terms of such agreement to be
mutually agreed upon, which terms shall not be inconsistent with the terms set
forth in this Agreement.
2.5 The Closing. Subject to termination of this Agreement as
-----------
provided in Section 11 below, the closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of PEZZOLA &
REINKE, A Professional Corporation, 1999 Harrison Street, Suite 1300, Oakland,
California 94612, as soon as possible upon the satisfaction or waiver of all
conditions set forth in Sections 9 and 10 hereof (the "Closing Date"), or such
other time and place as is mutually agreeable to the parties.
2.6 Effective Time. Simultaneously with the Closing, the
--------------
Certificates of Merger shall be filed in the offices of the Secretaries of State
of the States of Illinois and Delaware. The Merger shall become effective
immediately upon the filing of the Certificates of Merger with such offices.
The date and time of the effectiveness of the Merger under the laws of Illinois
is the "Effective Time."
2.7 Tax Free Reorganization. The parties intend to adopt this
-----------------------
Agreement as a tax-free plan of reorganization and to consummate the Merger in
accordance with the provisions of Section 368(a)(2)(E) of the Code. Each party
agrees that it will not take or assert any position on any tax return, report or
otherwise which is inconsistent with the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code. The NCI Common
Stock issued in the Merger will be issued solely in exchange for the DNA Common
Stock pursuant to this Agreement, and no other transaction other than the Merger
represents, provides for or is intended to be an adjustment to the consideration
paid for the DNA Common Stock. Except for cash paid in lieu of fractional
shares or Dissenting Shares, no consideration that could constitute "other
property" within the meaning of Section 356 of the Code is being paid by NCI for
the DNA Common Stock. In addition, NCI represents now, and as of the Closing
Date, that it presently intends to continue DNA's historic business or use a
significant portion of DNA's business assets in a business, and that it
presently intends to retain control of DNA within the NCI affiliated group.
-3-
<PAGE>
3. Representations and Warranties of DNA. Except as otherwise set
-------------------------------------
forth in the "DNA Disclosure Schedule" provided to NCI on the date hereof, DNA
and each Shareholder jointly and severally represent and warrant to NCI as set
forth below. No fact or circumstance disclosed to NCI shall constitute an
exception to these representations and warranties unless such fact or
circumstance is set forth in the DNA Disclosure Schedule or such supplements
thereto as may mutually be agreed upon in writing by DNA and NCI.
3.1 Organization. DNA is a corporation duly organized, validly
------------
existing and in good standing under the laws of the state of incorporation of
such entity and has corporate power and authority to carry on its business as it
is now being conducted. DNA is duly qualified or licensed to do business and
in good standing in each jurisdiction in which the nature of its business or
properties makes such qualification or licensing necessary except where the
failure to be so qualified would not have a material adverse effect on the
operations, assets or financial condition (a "Material Adverse Effect") of DNA.
The DNA Disclosure Schedule contains a true and complete listing of the
locations of all sales offices, manufacturing facilities, and any other offices
or facilities of DNA and a true and complete list of all states in which DNA
maintains any employees. The DNA Disclosure Schedule contains a true and
complete list of all states in which DNA is duly qualified to transact business
as a foreign corporation. True and complete copies of DNA's Articles of
Incorporation and Bylaws, as in effect on the date hereof and as to be in effect
as of the Closing, have been provided to NCI or its representatives.
3.2 Capitalization.
--------------
(a) The authorized capital of DNA consists of one hundred
thousand shares of Common Stock, of which two thousand (2,000) shares
are issued and outstanding. There are no outstanding options to purchase DNA
Common Stock.
(b) Except as set forth in the DNA Disclosure Schedule, DNA does
not have outstanding any preemptive or subscription rights, options, warrants,
rights to acquire any DNA capital stock equivalents, or other rights to purchase
rights to convert or exchange, capital stock equivalents, or other rights to
purchase or otherwise acquire any DNA capital stock or other securities.
(c) All of the issued and outstanding shares of DNA capital stock
have been duly authorized, validly issued, are fully paid and nonassessable, and
such capital stock, and all warrants and options to purchase capital stock of
DNA, have been issued in full compliance with all applicable federal and state
securities laws. None of DNA's issued and outstanding shares of capital stock,
or options or rights to purchase capital stock of DNA, is subject to repurchase
or redemption rights.
(d) Except for any restrictions imposed by applicable state and
federal securities laws, there is no right of first refusal, option, or other
restriction on transfer applicable to any shares of DNA's capital stock.
(e) DNA is not under any obligation to register under the
Securities Act any shares of its capital stock or any other of its securities
that might be issued in the future if the Merger were not consummated.
(f) DNA is not a party or subject to any agreement or
understanding (and, to DNA's actual knowledge, there is no agreement or
understanding between or among any persons) that affects or relates to the
voting or giving of written consent with respect to any security.
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<PAGE>
3.3 Power, Authority and Validity. DNA has the corporate power to
-----------------------------
enter into this Agreement and the other Transaction Documents to which it is a
party and to carry out its obligations hereunder and thereunder. The execution
and delivery of this Agreement and the Transaction Documents and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by the Board of Directors of DNA and on the Closing Date, by the
stockholders of DNA and no other corporate proceedings on the part of DNA are
necessary to authorize this Agreement, the other Transaction Documents and the
transactions contemplated herein and therein. DNA is not subject to or
obligated under any charter, bylaw or contract provision or any license,
franchise or permit, or subject to any order or decree, which would be breached
or violated by or in conflict with its executing and carrying out this Agreement
and the transactions contemplated hereunder and under the Transaction Documents.
Except for (i) the filing of the Certificates of Merger with the Secretaries of
State of the States of Illinois and Delaware, and appropriate documents with the
relevant authorities of other states in which DNA is qualified to do business,
and (ii) filings under applicable securities laws, no consent of any person who
is a party to a contract which is material to DNA's business, nor consent of any
governmental authority, is required to be obtained on the part of DNA to permit
the transactions contemplated herein and to permit DNA to continue its business
activities as previously conducted without a Material Adverse Effect. This
Agreement is, and the other Transaction Documents when executed and delivered by
DNA shall be, the valid and binding obligations of DNA, enforceable in
accordance with their respective terms.
3.4 Financial Statements.
--------------------
(a) DNA has delivered to NCI copies of its unaudited balance
sheet as of June 30,1996, and statements of operations, stockholders' equity and
cash flow for the twelve month (12) month period ending June 30, 1996 and the
unaudited balance sheet as of December 31, 1995, and statements of operations,
stockholder's equity and cash flow for the twelve (12) month period then ended
(collectively, the "DNA Financial Statements").
(b) The DNA Financial Statements are complete and in accordance
with the books and records of DNA and present fairly the financial position of
DNA as of their historical dates. The DNA Financial Statements have been
prepared in accordance with generally accepted accounting principles ("GAAP")
(except for the absence of footnotes) applied on a basis consistent with prior
periods. Except and to the extent reflected or reserved against in such balance
sheets (including the notes thereto), DNA does not have, as of the dates of such
balance sheets, any liabilities or obligations (absolute or contingent) of a
nature required or customarily reflected in a balance sheet (or the notes
thereto) prepared in accordance with GAAP. The reserves, if any, reflected on
the DNA Financial Statements are adequate in light of the contingencies with
respect to which they are made.
(c) DNA has no debt, liability, or obligation of any nature,
whether accrued, absolute, contingent, or otherwise, and whether due or to
become due, that is not reflected or reserved against in the DNA Financial
Statements, except for those (i) that may have been incurred after the date of
the DNA Financial Statements or (ii) that are not required by GAAP to be
included in a balance sheet or the notes thereto, except that DNA has not
established any reserves with respect to the costs and fees associated with this
Agreement, the other Transaction Documents, and the transactions contemplated
hereby and thereby. All material debts, liabilities, and obligations incurred
after the date of the DNA Financial Statements were incurred in the ordinary
course of business, and are usual and normal in amount both individually and in
the aggregate.
-5-
<PAGE>
3.5 Tax Matters.
-----------
(a) DNA has fully and timely, properly and accurately filed all
tax returns and reports required to be filed by it, including all federal,
foreign, state and local tax returns and estimates for all years and periods
(and portions thereof) for which any such returns, reports or estimates were
due. All such returns, reports and estimates were prepared in the manner
required by applicable law. All income, sales, use, occupation, employment,
property or other taxes or assessments due from DNA has been paid. There are no
pending assessments, asserted deficiencies or claims for additional taxes that
have not been paid. The reserves for taxes, if any, reflected on the DNA
Financial Statements are adequate and there are no tax liens on any property or
assets of DNA (other than liens for taxes not yet due). There have been no
audits or examinations of any tax returns or reports by any applicable
governmental agency. No state of facts exists or has existed which would
constitute grounds for the assessment of any penalty or of any further tax
liability beyond that shown on the respective tax reports, returns or estimates.
There are no outstanding agreements or waivers extending the statutory period of
limitation applicable to any federal, state or local income tax return or report
for any period.
(b) All taxes which DNA has been required to collect or withhold
have been duly withheld or collected and, to the extent required, have been paid
to the proper taxing authority.
(c) DNA is not a party to any tax-sharing agreement or similar
arrangement with any other party.
(d) At no time has DNA been included in the federal consolidated
income tax return of any affiliated group of corporations.
(e) No payment which DNA is obliged to pay to any director,
officer, employee or independent contractor pursuant to the terms of an
employment agreement, severance agreement or otherwise will constitute an excess
parachute payment as defined in Section 280G of the Code.
(f) DNA is not currently under any contractual obligation to pay
any tax obligations of, or with respect to any transaction relating to, any
other person or to indemnify any other person with respect to any tax.
3.6 Tax Free Reorganization.
-----------------------
(a) Neither DNA nor, to its actual knowledge, any DNA
stockholder has taken or agreed to take any action that would prevent the Merger
from constituting a reorganization qualifying under the provisions of Section
368(a) of the Code.
(b) To the actual knowledge of DNA, there is no current plan or
intention by any DNA stockholder to sell, exchange or otherwise dispose of more
than fifty percent (50%) of the shares of NCI Common Stock to be received in the
Merger within the next two years.
(c) DNA is not an investment company as defined in Sections
368(a)(2)(F)(iii) and (iv) of the Code.
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<PAGE>
3.7 Absence of Certain Changes or Events. Since June 30, 1996, DNA
------------------------------------
has not:
(a) suffered any material adverse change in its financial
condition or in the operations of its business, nor any material adverse changes
in its balance sheet, (with the DNA Financial Statements and any subsequent
balance sheet analyzed as if each had been prepared according to GAAP),
including but not limited to cash distributions or material decreases in its net
assets.
(b) suffered any damage, destruction or loss, whether covered by
insurance or not, materially and adversely affecting its properties or business;
(c) granted or agreed to make any increase in the compensation
payable or to become payable by it to its officers or employees, except those
occurring in the ordinary course of business;
(d) declared, set aside or paid any dividend or made any other
distribution on or in respect of the shares of its capital stock or declared any
direct or indirect redemption, retirement, purchase or other acquisition by it
of such shares;
(e) issued any shares of its capital stock or any warrants,
rights, options or entered into any commitment relating to its shares;
(f) made any change in the accounting methods or practices it
follows, whether for general financial or tax purposes, or any change in
depreciation or amortization policies or rates adopted therein;
(g) sold, leased, abandoned or otherwise disposed of any real
property or any machinery, equipment or other operating property other than in
the ordinary course of business;
(h) sold, assigned, transferred, licensed or otherwise disposed
of any patent, trademark, trade name, brand name, copyright (or pending
application for any patent, trademark or copyright) invention, work of
authorship, process, know-how, formula or trade secret or interest thereunder or
other intangible asset except in the ordinary course of its business;
(i) suffered any labor dispute;
(j) engaged in any activity or entered into any material
commitment or transaction (including without limitation any borrowing or capital
expenditure) other than in the ordinary course of business;
(k) incurred any liabilities except in the ordinary course of
business and consistent with past practice which would be required to be
disclosed in financial statements prepared in accordance with GAAP;
(l) permitted or allowed any of its property or assets to be
subjected to any mortgage, deed of trust, pledge, lien, security interest or
other encumbrance of any kind, except those permitted under Section 3.8 hereof,
other than any purchase money security interests incurred in the ordinary course
of business;
-7-
<PAGE>
(m) made any capital expenditure or commitment for additions to
property, plant or equipment individually in excess of Three Thousand Dollars
($3,000), or in the aggregate, in excess of Ten thousand Dollars ($10,000);
(n) paid, loaned or advanced any amount to, or sold, transferred
or leased any properties or assets to, or entered into any agreement or
arrangement with any of its Affiliates, officers, directors or stockholder or
any Affiliate or associate of any of the foregoing;
(o) made any amendment to or terminated any agreement which, if
not so amended or terminated, would be required to be disclosed on the DNA
Disclosure Schedule; or
(p) agreed to take any action described in Sections 2.7, 3.6 or
3.7 or outside of its ordinary course of business or which would constitute a
breach of any of the representations contained in this Agreement.
3.8 Title and Related Matters. DNA has good and marketable title to
-------------------------
all the properties, interests in properties and assets, real and personal,
reflected in the DNA Financial Statements or acquired after the date of the DNA
Financial Statements (except properties, interests in properties and assets sold
or otherwise disposed of since the date of the DNA Financial Statements in the
ordinary course of business), free and clear of all mortgages, liens, pledges,
charges or encumbrances of any kind or character, except the lien of current
taxes not yet due and payable and except for liens which in the aggregate do not
secure more than Three Thousand Dollars ($3,000) in liabilities. The equipment
of DNA used in the operation of its business is in good operating condition and
repair. All real or personal property leases to which DNA is a party are valid,
binding, enforceable obligations of DNA and the party they are entered into with
and effective in accordance with their respective terms. There is not under any
of such leases any existing material default or event of default or event which,
with notice or lapse of time or both, would constitute a material default. The
DNA Disclosure Schedule contains a description of all real and personal property
leased or owned by DNA, identifying such property and, in the case of real
property, stating the monthly rental due, term of lease and square feet leased.
True and correct copies of each of DNA's leases have been provided to NCI or its
representatives.
3.9 Proprietary Rights.
------------------
(a) DNA owns all right, title and interest in and to, or valid
licenses for use of, all patents, copyrights, technology, software, software
tools, know-how, processes, trade secrets, trademarks, service marks, trade
names and other proprietary rights used in or necessary for the conduct of DNA's
business as conducted to the date hereof or contemplated, including, without
limitation, the technology and all proprietary rights developed or discovered or
used in connection with or contained in the DNA Products/Services, free and
clear of all liens, claims and encumbrances (including without limitation
distribution rights) (all of which are referred to as "DNA Proprietary Rights").
The foregoing representation as it relates to DNA Third-Party Technology (as
hereinafter defined) is limited to DNA's interest pursuant to the DNA Third-
Party Licenses (as hereinafter defined), all of which are valid and enforceable
and in full force and effect and which grant DNA such rights to the DNA Third-
Party Technology as are employed in or necessary to the business of DNA as
conducted or proposed to be conducted. The DNA Disclosure Schedule contains an
accurate and complete description of (i) all patents, trademarks (with separate
listings of registered and unregistered
-8-
<PAGE>
trademarks), trade names, and registered copyrights in or related to the DNA
Products/ Services, all applications and registration statements therefor, and a
list of all licenses and other agreements relating thereto, and (ii) a list of
all licenses and other agreements with third parties (the "DNA Third-Party
Licenses") relating to any software, inventions, technology, know-how, or
processes that DNA is licensed or otherwise authorized by such third parties to
use, market, distribute or incorporate into products distributed by DNA (such
software, inventions, technology, know-how and processes are collectively
referred to as the "DNA Third-Party Technology"). DNA's trademark or trade name
registrations related to the DNA Products/Services and DNA's copyrights in any
of the DNA Products/Services are valid and in full force and effect; and
consummation of the transactions contemplated hereby will not alter or impair
any such rights. Except as disclosed on the DNA Disclosure Schedule, no claims
have been asserted against DNA (and DNA is not aware of any claims which are
likely to be asserted against it or which have been asserted against others) by
any person challenging DNA's use, possession, manufacture, sale, provision or
distribution of the DNA Products/Services under any patents, trademarks, trade
names, copyrights, trade secrets, software, technology, know-how or processes
utilized by DNA (including, without limitation, the DNA Third-Party Technology)
or challenging or questioning the validity or effectiveness of any license or
agreement relating thereto (including, without limitation, the DNA Third-Party
Licenses). To their knowledge, there is no valid basis for any claim of the
type specified in the immediately preceding sentence which could in any material
way relate to or interfere with the currently planned continued enhancement and
exploitation by DNA of any of the DNA Products/ Services. None of the DNA
Products/Services nor the use or exploitation of any patents, trademarks, trade
names, copyrights, software, technology, know-how or processes by DNA in its
current business infringes on the rights of, constitutes misappropriation of, or
in any way involves unfair competition with respect to, any proprietary
information or intangible property right of any third person or entity,
including, without limitation, any patent, trade secret, copyright, trademark or
trade name.
(b) To DNA's and each Shareholder's best knowledge, no employee
of such entity is in violation of any term of any employment contract, patent
disclosure agreement or any other contract or agreement relating to the
relationship of any such employee with that entity or, to DNA's actual
knowledge, any other party because of the nature of the business conducted by
DNA or proposed to be conducted by DNA.
(c) Each person presently or previously employed by DNA
(including independent contractors, if any) with access to confidential
information which would have a Material Adverse Effect if disclosed, has
executed a confidentiality and non-disclosure agreement pursuant to the form of
agreement previously provided to DNA or its representa tives. Such
confidentiality and non-disclosure agreements constitute valid and binding
obligations of such persons, enforceable in accordance with their respective
terms.
(d) No product or service liability or warranty claims which
individually or in the aggregate could exceed Three Thousand Dollars ($3,000)
individually or Ten Thousand Dollars ($10,000) in the aggregate have been
communicated to or threatened against DNA nor, to the DNA's actual knowledge, is
there any specific situation, set of facts or occurrence that provides a basis
for such claim.
3.10 Employee Benefit Plans. There is no unfunded prior service cost
----------------------
with respect to any bonus, deferred compensation, pension, profit-sharing,
retirement, stock purchase, stock option, or other employee benefit or fringe
benefit plans, whether formal or informal, maintained by DNA. Each bonus,
deferred compensation, pension, profit-sharing,
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<PAGE>
retirement, stock purchase, stock option, and other employee benefit or fringe
benefit plans, whether formal or informal, maintained by DNA conforms to all
applicable requirements of the Employees Retirement Income Security Act of 1974.
The DNA Disclosure Schedule lists and describes all profit-sharing, bonus,
incentive, deferred compensation, vacation, severance pay, retirement, stock
option, group insurance or other plans (whether written or not) providing
employee benefits.
3.11 Bank Accounts. The DNA Disclosure Schedule sets forth the names
-------------
and locations of all banks, trusts, companies, savings and loan associations,
and other financial institutions at which DNA maintains accounts of any nature
and the names of all persons authorized to draw thereon or make withdrawals
therefrom.
3.12 Contracts.
---------
(a) DNA has no agreements, contracts or commitments that provide
for the sale, licensing or distribution by that entity of any of its products,
services, inventions, technology, know-how, trademarks or trade names except in
the ordinary course of its business.
(b) DNA has no agreements, contracts or commitments that call for
fixed and/or contingent payments or expenditures by or to that entity of more
than Ten Thousand Dollars ($10,000).
(c) Without limiting the provisions of Section 3.9 and except for
any agreements with NCI, DNA has not granted to any third party any exclusive
rights of any kind with respect to any of the DNA Products/Services, including,
without limitation, territorial exclusivity or exclusivity with respect to
particular versions, implementations or translations of any of the DNA
Products/Services.
(d) There is no outstanding sales contract, commitment or
proposal of DNA that is currently expected to result in any loss to such entity
(before allocation of overhead and administrative costs) upon completion or
performance thereof.
(e) DNA has no outstanding agreements, contracts or commitments
with officers, employees, agents, consultants, advisors, salesmen, sales
representatives, distributors or dealers that are not cancelable by it on notice
of not longer than thirty (30) days and without liability, penalty or premium.
(f) DNA has no employment, independent contractor or similar
agreement, contract or commitment that is not terminable on no more than thirty
(30) days' notice without penalty or liability of any type, including without
limitation severance or termination pay.
(g) DNA has no currently effective collective bargaining or union
agreements, contracts or commitments.
(h) DNA is not restricted by agreement from competing with any
person or from carrying on its business anywhere in the world.
(i) DNA has not guaranteed any obligations of other persons or
made any agreements to acquire or guarantee any obligations of other persons.
-10-
<PAGE>
(j) DNA has no outstanding loan or advance to any person; nor is
it party to any line of credit, standby financing, revolving credit or other
similar financing arrangement of any sort which would permit the borrowing by
such entity of any sum not reflected in the DNA Financial Statements.
(k) All material contracts, agreements and instruments to which
DNA is a party are valid, binding, in full force and effect, and enforceable by
DNA in accordance with their respective terms. No such material contract,
agreement or instrument contains any material liquidated-damages, penalty or
similar provision. DNA has not received any notice from any party to any such
material contract, agreement or instrument that such party intends to cancel,
withdraw, modify or amend such contract, agreement or arrangement.
(l) The DNA Disclosure Schedule lists all material agreements
pursuant to which DNA has agreed to supply to any third-party DNA
Products/Services.
(m) DNA is not in default under or in breach or violation of,
nor, to its actual knowledge, is there any valid basis for any claim of default
by such entity under, or breach or violation by such entity of, any contract,
commitment or restriction to which such entity is a party or to which it or any
of its properties is bound, where such defaults, breaches, or violations would,
in the aggregate, have a Material Adverse Effect on DNA. DNA's actual knowledge,
no other party is in default under or in breach or violation of, nor is there
any valid basis for any claim of default by any other party under or any breach
or violation by any other party of, any material contract, commitment, or
restriction to which DNA is bound or by which any of its properties is bound,
where such defaults, breaches, or violations would, in the aggregate, have a
Material Adverse Effect on DNA.
(n) All agreements, contracts and commitments involving DNA's
right to receive or obligation to pay more than Ten Thousand Dollars ($10,000)
per year (the "Material Contracts") are listed on the DNA Disclosure Schedule.
Either (i) the Material Contracts will not be affected by a change in control of
DNA as a result of the Merger or (ii) DNA has described in the DNA Disclosure
Schedule any actions that are necessary to ensure the enforceability by DNA of
the Material Contracts following the Merger.
(o) True and correct copies of each document or instrument
described in the DNA Disclosure Schedule pursuant to this Section 3.12 have been
made available to NCI or its representatives.
3.13 Insider Transactions. No Affiliate of DNA has any interest in
--------------------
(i) any material equipment or other property, real or personal, tangible or
intangible, including, without limitation, any item of intellectual property,
used in connection with or pertaining to the business of DNA, or (ii) any
creditor, supplier, customer, agent or representative of DNA; provided, however,
that no such Affiliate or other person shall be deemed to have such an interest
solely by virtue of the ownership of less than one percent (1%) of the
outstanding stock or debt securities of any publicly-held company, the stock or
debt securities of which are traded on a recognized stock exchange or quoted on
the National Association of Securities Dealers Automated Quotation System.
3.14 Insurance. The DNA Disclosure Schedule contains a list of the
---------
principal policies of fire, liability and other forms of insurance held by DNA.
-11-
<PAGE>
3.15 Disputes and Litigation. There is no suit, action, litigation,
-----------------------
proceeding, investigation, claim, complaint, or accusation pending, or to its
knowledge threatened against or affecting DNA or any of its properties, assets
or business or to which DNA is a party, in any court or before any arbitrator of
any kind or before or by any governmental agency (including, without limitation,
any federal, state, local, foreign or other governmental department, commission,
board, bureau, agency or instrumentality), and to its knowledge there is no
basis for such suit, action, litigation, proceeding, investigation, claim,
complaint, or accusation; (b) to its knowledge there is no pending or threatened
change in any environmental, zoning or building laws, regulations or ordinances
which affect or could affect DNA or any of its properties, assets or businesses;
and (c) there is no outstanding order, writ, injunction, decree, judgment or
award by any court, arbitrator or governmental body against or affecting DNA or
any of its properties, assets or business. To its knowledge, there is no
litigation, proceeding, investigation, claim, complaint or accusation, formal or
informal, or arbitration pending, or any of the aforesaid threatened, or any
contingent liability which would give rise to any right of indemnification or
similar right on the part of any director or officer of DNA or any such person's
heirs, executors or administrators as against DNA.
3.16 Compliance with laws. DNA has at all times been, and presently
--------------------
is, in substantial compliance with, and has not received notice of any claimed
violation of, any applicable federal, state, local, foreign and other laws,
rules and regulations. DNA has filed all returns, reports and other documents
and furnished all information required or requested by any federal, state, local
or foreign governmental agency and all such returns, reports, documents and
information are true and complete in all respects the failure of which would
have a Material Adverse Effect. To its knowledge, all permits, licenses,
orders, franchises and approvals of all federal, state, local or foreign
governmental or regulatory bodies required of DNA for the conduct of its
business have been obtained, no violations are or have been recorded in respect
of any such permits, licenses, orders, franchises and approvals, and there is no
litigation, proceeding, investigation, arbitration, claim, complaint or
accusation, formal or informal, pending or threatened, which may revoke, limit,
or question the validity, sufficiency or continuance of any such permit,
license, order, franchise or approval. Such permits, licenses, orders,
franchises and approvals are valid and sufficient for all activities presently
carried on by DNA.
3.17 Governmental Authorizations and Regulations. All licenses,
-------------------------------------------
franchises, permits and other governmental authorizations held by DNA and
material to its business are valid and sufficient for the business presently
carried on by DNA. The business of DNA is not being conducted in violation of
any law, ordinance or regulation of any governmental entity, except for
violations which either singly or in the aggregate do not and will not have a
Material Adverse Effect on DNA.
3.18 Subsidiaries. DNA has no subsidiaries. DNA does not own or
------------
control (directly or indirectly) any capital stock, bonds or other securities
of, and does not have any proprietary interest in, any other corporation,
general or limited partnership, firm, association or business organization,
entity or enterprise, and DNA does not control (directly or indirectly) the
management or policies of any other corporation, partnership, firm, association
or business organization, entity or enterprise.
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<PAGE>
3.19 Environmental Matters.
---------------------
(a) As of the date hereof, to the actual knowledge of DNA, no
underground storage tanks are present under any property that DNA has at any
time owned, operated, occupied or leased. As of the date hereof except as set
forth in the DNA Disclosure Schedule, no material amount of any substance that
has been designated by any governmental entity or by applicable federal, state
or local law to be radioactive, toxic, hazardous or otherwise a danger to health
or the environment, including, without limitation, PCBs, asbestos, petroleum,
urea-formaldehyde and all substances listed as hazardous substances pursuant to
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, or defined as a hazardous waste pursuant to the United States
Resource Conser vation and Recovery Act of 1976, as amended, and the regulations
promulgated pursuant to said laws (a "Hazardous Material"), excluding office,
janitorial and other immaterial supplies, are present, as a result of the
actions of DNA or, to DNA's actual knowledge, as a result of any actions of any
third party or otherwise, in, on or under any property, including the land and
the improvements, ground water and surface water, that DNA has at any time
owned, operated, occupied or leased.
(b) At no time has DNA transported, stored, used, manufactured,
disposed of, released or exposed its employees or others to Hazardous Materials
in violation of any law in effect on or before the Closing Date, nor has DNA
disposed of, transported, sold, or manufactured any product containing a
Hazardous Material (collectively, "Hazardous Materials Activities") in violation
of any rule, regulation, treaty or statute promulgated by any governmental
entity to prohibit, regulate or control Hazardous Materials or any Hazardous
Material Activities.
(c) DNA currently holds all environmental approvals, permits,
licenses, clearances and consents (the "Environmental Permits") necessary for
the conduct of its business as such business is currently being conducted, the
absence of which would be reasonably likely to have a Material Adverse Effect on
DNA.
(d) No action, proceeding, revocation proceeding, amendment
procedure, writ, injunction or claim is pending or, to the actual knowledge of
DNA, threatened concerning any Environmental Permit. DNA is not aware of any
fact or circumstance which could involve it in any environmental litigation or
impose upon it any environmental liability which would be reasonably likely to
have a Material Adverse Effect on DNA.
3.20 Corporate Documents. DNA has furnished to NCI for its
-------------------
examination: (i) copies of its Articles of Incorporation and Bylaws; (ii) its
Minute Book containing all records required to be set forth of all proceedings,
consents, actions, and meetings of the stock holders, the board of directors and
any committees thereof; (iii) all permits, orders, and consents issued by any
regulatory agency with respect to such entity, or any securities of such entity,
and all applications for such permits, orders, and consents; and (iv) its stock
transfer books setting forth all transfers of any capital stock. The corporate
minute books, stock certificate books, stock registers and other corporate
records of DNA are complete and accurate in all material respects, and the
signatures appearing on all documents contained therein are the true signatures
of the persons purporting to have signed the same. All actions reflected in
such books and records were duly and validly taken in compliance with the laws
of the applicable jurisdiction.
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<PAGE>
3.21 No Brokers. Neither DNA nor any of its stockholders is
----------
obligated for the payment of fees or expenses of any broker or finder in
connection with the origin, negotiation or execution of this Agreement or the
Certificates of Merger or in connection with any transaction contemplated hereby
or thereby.
3.22 Disclosure. No statements by DNA contained in this Agreement or
----------
the Exhibits or DNA Disclosure Schedule, any other Transaction Document or any
written state ment or certificate furnished or to be furnished pursuant hereto
or in connection with the transactions contemplated hereby and thereby (when
read together) contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein not misleading in light of the circumstances under which they were
made.
4. Representations and Warranties of Each of the Shareholders. Each
----------------------------------------------------------
of the Shareholders severally and not jointly represents and warrants to NCI and
Acquisition as follows:
4.1 Authority, Approval and Enforceability.
--------------------------------------
(a) Such Shareholder has full power and authority to execute,
deliver and perform its obligations under this Agreement and the Escrow
Agreement and to consum mate the Transactions, and all action on its part
necessary for such execution, delivery, performance and consummation has been
duly taken.
(b) The execution and delivery by such Shareholder of this
Agreement does not, and the performance and consummation of the Merger will not,
result in or give rise to (with or without the giving of notice or the lapse of
time, or both) any conflict with, breach or violation of, or default,
termination, forfeiture or acceleration of obligations under, any statute, rule,
regulation, judicial, governmental, regulatory or administrative decree, order
or judgment applicable to such Shareholder, or any agreement or other instrument
to which it is a party or to which any of its assets is subject.
(c) This Agreement and the Escrow Agreement are such
Shareholder's legal, valid and binding obligation, enforceable against it in
accordance with the respective terms hereof and thereof, except as such
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally and subject to
general equitable principles.
(d) Such Shareholder is the record and beneficial owner of the
DNA Shares reflected as owned by it on the DNA Disclosure Schedule, free and
clear of any and all claims, liens, encumbrances or security interests.
4.2 Pooling. To the best knowledge of such Shareholder, such
-------
Shareholder has not engaged in any transaction which it believes would preclude
the Merger from being accounted for as a pooling of interests.
4.3 Investment Intent. Such Shareholder is acquiring the shares of
-----------------
NCI Common Stock to be issued in the Merger for investment purposes for its own
account and without a view to distribution or resale thereof.
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<PAGE>
5. Representations and Warranties of NCI. Except as otherwise set
-------------------------------------
forth in the "NCI Disclosure Schedule" which will be provided to DNA and the
Shareholders prior to closing, NCI represents and warrants to DNA and the
Shareholders as set forth below. No fact or circumstance disclosed to DNA shall
constitute an exception to these representations and warranties unless such fact
or circumstance is set forth in the NCI Disclosure Schedule or such supplements
thereto as may mutually be agreed upon in writing by NCI and DNA. NCI and
Acquisition are referred to herein collectively as the NCI Entities.
5.1 Organization. Each of the NCI Entities is a corporation duly
------------
organized, validly existing and in good standing under the laws of the state of
incorporation of such entity and has corporate power and authority to carry on
its business as it is now being conducted. Each of the NCI Entities is duly
qualified or licensed to do business and in good standing in each jurisdiction
in which the nature of its business or properties makes such qualification or
licensing necessary except where the failure to be so qualified would not have a
material adverse effect on the operations, assets or financial condition (a
"Material Adverse Effect") of the NCI Entities considered as a whole. True and
complete copies of each of the NCI Entities' Articles of Incorporation and
Bylaws, as in effect on the date hereof and as to be in effect as of the
Closing, have been provided to NCI or its representatives.
5.2 Capitalization.
--------------
(a) The authorized capital of NCI consists of forty-four
million (44,000,000) Shares of NCI Common Stock. As of September 16, 1996,
twenty-one million three hundred four thousand and one hundred (21,304,100)
shares are issued and outstanding.
(b) Except as set forth in the NCI Disclosure Schedule, NCI
does not have outstanding any preemptive or subscription rights, options,
warrants, rights to convert or exchange, capital stock equivalents, or other
rights to purchase or otherwise acquire any NCI capital stock or other
securities.
(c) All of the issued and outstanding shares of NCI capital
stock have been duly authorized, validly issued, are fully paid and
nonassessable, and such capital stock, and all warrants and options to purchase
capital stock of NCI, have been issued in full compliance with all applicable
federal and state securities laws. None of NCI's issued and outstanding shares
of capital stock, or options or rights to purchase capital stock of NCI, is
subject to repurchase or redemption rights.
5.3 Power, Authority and Validity. The NCI Entities have the
-----------------------------
corporate power to enter into this Agreement and the other Transaction Documents
to which it is a party and to carry out its obligations hereunder and
thereunder. The execution and delivery of this Agreement and the Transaction
Documents and the consummation of the transactions contem plated hereby and
thereby have been duly authorized by the Board of Directors of each of the NCI
Entities and on the Closing Date, by the stockholders of Acquisition and no
other corporate proceedings on the part of the NCI Entities is necessary to
authorize this Agreement, the other Transaction Documents and the transactions
contemplated herein and therein. The NCI Entities are not subject to or
obligated under any charter, bylaw or contract provision or any license,
franchise or permit, or subject to any order or decree, which would be breached
or violated by or in conflict with its executing and carrying out this Agreement
and the transactions contemplated hereunder and under the Transaction Documents.
Except for (i) the filing of the Certificates of Merger with the Secretaries of
State of the States of Illinois and
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Delaware; and (ii) filings under applicable securities laws, no consent of any
governmental authority, is required to be obtained on the part of each of the
NCI Entities to permit the transactions contemplated herein and to permit NCI to
continue its business activities as previously conducted without a Material
Adverse Effect. This Agreement is, and the other Transaction Documents when
executed and delivered by the NCI entities shall be, the valid and binding
obligations of NCI, enforceable in accordance with their respective terms.
5.4 Financial Statements.
--------------------
(a) NCI will deliver audited Financial Statements as of December
31, 1995, and unaudited Financial Statements as of June 30, 1996 (the "NCI
Financial Statements").
(b) The NCI Financial Statements are complete and in accordance
with the books and records of the NCI and present fairly the financial position
of NCI as of their historical dates. The NCI Financial Statements have been
prepared in accordance with generally accepted accounting principles
("GAAP")(except for the absence of footnotes in any unaudited financial
statements) applied on a basis consistent with prior periods. Except and to the
extent reflected or reserved against in such balance sheets (including the notes
thereto), NCI does not have, as of the dates of such balance sheets, any
liabilities or obligations (absolute or contingent) of a nature required or
customarily reflected in a balance sheet (or the notes thereto) prepared in
accordance with GAAP. The reserves, if any, reflected on the NCI Financial
Statements are adequate in light of the contingencies with respect to which they
are made.
(c) NCI has no debt, liability, or obligation of any nature,
whether accrued, absolute, contingent, or otherwise, and whether due or to
become due, that is not reflected or reserved against in the NCI Financial
Statements, except for those (i) that may have been incurred after the date of
the NCI Financial Statements or (ii) that are not required by GAAP to be
included in a balance sheet or the notes thereto, except that NCI has not
established any reserves with respect to the costs and fees associated with this
Agreement, the other Transaction Documents, and the transactions contemplated
hereby and thereby. All material debts, liabilities, and obligations incurred
after the date of the NCI Financial Statements were incurred in the ordinary
course of business, and are usual and normal in amount both individually and in
the aggregate.
5.5 Tax Matters.
-----------
(a) NCI has fully and timely, properly and accurately filed all
tax returns and reports required to be filed by it, including all federal,
foreign, state and local tax returns and estimates for all years and periods
(and portions thereof) for which any such returns, reports or estimates were
due. All such returns, reports and estimates were prepared in the manner
required by applicable law. All income, sales, use, occupation, property or
other taxes or assessments due from NCI have been paid. There are no pending
assessments, asserted deficiencies or claims for additional taxes that have not
been paid. The reserves for taxes, if any, reflected on the NCI Financial
Statements are adequate and there are no tax liens on any property or assets of
NCI (other than liens for taxes not yet due). There have been no audits or
examinations of any tax returns or reports by any applicable governmental
agency. No state of facts exists or has existed which would constitute grounds
for the assessment of any penalty or of any further tax liability beyond that
shown on the respective tax reports, returns or estimates. There are no
outstanding agreements or waivers extending the statutory period of limitation
applicable to any federal, state or local income tax return or report for any
period.
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<PAGE>
(b) All taxes which NCI has been required to collect or withhold
have been duly withheld or collected and, to the extent required, have been paid
to the proper taxing authority.
(c) NCI is not a party to any tax-sharing agreement or similar
arrangement with any other party.
5.6 Absence of Certain Changes or Events. Since June 30, 1996, NCI
------------------------------------
has not suffered any material adverse change in its financial condition or in
the operations of its business, nor any material adverse changes in its balance
sheet, (with the NCI Financial Statements and any subsequent balance sheet
analyzed as if each had been prepared according to GAAP), including but not
limited to cash distributions or material decreases in the net assets of NCI.
5.7 Title and Related Matters. NCI has good and marketable title to
-------------------------
all the properties, interests in properties and assets, real and personal,
reflected in the NCI Financial Statements or acquired after the date of the NCI
Financial Statements (except properties, interests in properties and assets sold
or otherwise disposed of since the date of the NCI Financial Statements in the
ordinary course of business), free and clear of all mortgages, liens, pledges,
charges or encumbrances of any kind or character, except the lien of current
taxes not yet due and payable and except for liens which in the aggregate do not
secure more than Five Hundred Thousand Dollars ($500,000) in liabilities. The
equipment of NCI used in the operation of its business is in good operating
condition and repair. All real or personal property leases to which NCI is a
party are valid, binding, and enforceable obligations of NCI effective in
accordance with their respective terms. There is not under any of such material
leases any existing material default or event of default or event which, with
notice or lapse of time or both, would constitute a material default, and cause
a Material Adverse Effect upon NCI.
5.8 Proprietary Rights.
------------------
(a) NCI owns all right, title and interest in and to, or valid
licenses for use of, all patents, copyrights, technology, software, software
tools, know-how, processes, trade secrets, trademarks, service marks, trade
names and other proprietary rights used in or necessary for the conduct of NCI
business as conducted to the date hereof, including, without limitation, the
technology and all proprietary rights developed or discovered or used in
connection with or contained in the NCI Products/Services, free and clear of all
liens, claims and encumbrances (including without limitation distribution
rights) (all of which are referred to as "NCI Proprietary Rights"). NCI's
trademark or trade name registrations related to the NCI Products/Services and
all of NCI's copyrights in any of the NCI Products/Services are valid and in
full force and effect; and consummation of the transactions contemplated hereby
will not alter or impair any such rights. Except as disclosed on the NCI
Disclosure Schedule, no claims have been asserted against NCI (NCI is not aware
of any claims which are likely to be asserted against it or which have been
asserted against others) by any person challenging NCI's use, possession,
manufacture, sale, provision or distribution of the NCI Products/Services under
any patents, trademarks, trade names, copyrights, trade secrets, software,
technology, know-how or processes utilized by NCI or challenging or questioning
the validity or effective ness of any license or agreement relating thereto. To
NCI's knowledge, none of the NCI Products/Services nor the use or exploitation
of any patents, trademarks, trade names, copyrights, software, technology, know-
how or processes by NCI in its current business infringes on the rights of,
constitutes misappropriation of, or in any way involves unfair competition with
respect to, any proprietary information or intangible property right of any
third person or entity, including without limitation any patent, trade secret,
copyright, trademark or trade name.
-17-
<PAGE>
(b) To NCI's actual knowledge, no employee of such entity is in
violation of any term of any employment contract, patent disclosure agreement or
any other contract or agreement relating to the relationship of any such
employee with that entity or, to NCI's actual knowledge, any other party because
of the nature of the business conducted by NCI or proposed to be conducted by
NCI.
(c) Each person presently employed by NCI (including independent
contractors, if any) with access to confidential information which would have a
Material Adverse Effect if disclosed, has executed a confidentiality and non-
disclosure agreement pursuant to the form of agreement previously provided to
DNA or its representatives. Such confidentiality and non-disclosure agreements
constitute valid and binding obligations of such persons, enforceable in
accordance with their respective terms.
(d) No product or service liability or warranty claims which
individually exceed Five Hundred Thousand Dollars ($500,000) or in the aggregate
exceed Five Million Dollars ($5,000,000) have been communicated to or threatened
against NCI.
5.9 Employee Benefit Plans. There is no unfunded prior service cost
----------------------
with respect to any bonus, deferred compensation, pension, profit-sharing,
retirement, stock purchase, stock option, or other employee benefit or fringe
benefit plans, whether formal or informal, maintained by NCI. Each bonus,
deferred compensation, pension, profit-sharing, retirement, stock purchase,
stock option, and other employee benefit or fringe benefit plans, whether formal
or informal, maintained by NCI conforms to all applicable requirements of the
Employees Retirement Income Security Act of 1974. The NCI Disclosure Schedule
lists and describes all profit-sharing, bonus, incentive, deferred compensation,
vacation, severance pay, retirement, stock option, group insurance or other
plans (whether written or not) providing employee benefits.
5.10 Bank Accounts. The NCI Disclosure Schedule sets forth the names
-------------
and locations of all banks, trusts, companies, savings and loan associations,
and other financial institutions at which NCI maintains accounts of any nature
and the names of all persons authorized to draw thereon or make withdrawals
therefrom.
5.11 Contracts.
---------
(a) NCI has no currently effective collective bargaining or
union agreements, contracts or commitments.
(b) NCI is not restricted by agreement from competing with any
person or from carrying on its business anywhere in the world.
(c) To NCI's actual knowledge, all material contracts, agreements
and instruments to which NCI is a party are valid, binding, in full force and
effect, and enforceable by NCI in accordance with their respective terms. NCI
has not received any notice from any party to any such material contract,
agreement or instrument that such party intends to cancel, withdraw, modify or
amend such contract, agreement or arrangement.
(d) NCI is not in default under or in breach or violation of,
nor, to its actual knowledge, is there any valid basis for any claim of default
by NCI under, or breach or violation by NCI of, any contract, commitment or
restriction to which NCI is a party or to which it or any of its properties is
bound, where such defaults, breaches, or violations would,
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<PAGE>
in the aggregate, have a Material Adverse Effect on NCI. To NCI's actual
knowledge, no other party is in default under or in breach or violation of, nor
is there any valid basis for any claim of default by any other party under or
any breach or violation by any other party of, any material contract,
commitment, or restriction to which NCI is bound or by which any of its
properties is bound, where such defaults, breaches, or violations would, in the
aggregate, have a Material Adverse Effect on NCI.
(e) True and correct copies of each document or instrument
described in the NCI Disclosure Schedule pursuant to this Section 5.11 have been
made available to DNA or its representatives.
5.12 Insider Transactions. No Affiliate of NCI has any interest in
--------------------
(i) any material equipment or other property, real or personal, tangible or
intangible, including, without limitation, any item of intellectual property,
used in connection with or pertaining to the business of NCI, or (ii) any
creditor, supplier, customer, agent or representative of NCI; provided, however,
that no such Affiliate or other person shall be deemed to have such an interest
solely by virtue of the ownership of less than one percent (1%) of the
outstanding stock or debt securities of any publicly-held company, the stock or
debt securities of which are traded on a recognized stock exchange or quoted on
the National Association of Securities Dealers Automated Quotation System.
5.13 Litigation. There are no suits, actions or proceedings pending
----------
or, to NCI's actual knowledge, threatened against or affecting NCI or which
questions or challenges the validity of this Agreement. There is no judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against NCI.
5.14 Governmental Authorizations and Regulations. All licenses,
-------------------------------------------
franchises, permits and other governmental authorizations held by NCI and
material to its business are valid and sufficient for the business presently
carried on by NCI. The business of NCI is not being conducted in violation of
any law, ordinance or regulation of any governmental entity, except for
violations which either singly or in the aggregate do not and will not have a
Material Adverse Effect on NCI.
5.15 Environmental Matters.
---------------------
(a) As of the date hereof, to the actual knowledge of NCI, no
underground storage tanks are present under any property that NCI has at any
time owned, operated, occupied or leased. As of the date hereof except as set
forth in the NCI Disclosure Schedule, no material amount of any substance that
has been designated by any governmental entity or by applicable federal, state
or local law to be radioactive, toxic, hazardous or otherwise a danger to health
or the environment, including, without limitation, PCBs, asbestos, petroleum,
urea-formaldehyde and all substances listed as hazardous substances pursuant to
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, or defined as a hazardous waste pursuant to the United States
Resource Conser vation and Recovery Act of 1976, as amended, and the regulations
promulgated pursuant to said laws (a "Hazardous Material"), excluding office,
janitorial and other immaterial supplies, are present, as a result of the
actions or NCI or, to NCI's actual knowledge, as a result of any actions of any
third party or otherwise, in, on or under any property, including the land and
the improvements, ground water and surface water, that NCI have at any time
owned, operated, occupied or leased.
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<PAGE>
(b) At no time has NCI transported, stored, used, manufactured,
disposed of, released or exposed its employees or others to Hazardous Materials
in violation of any law in effect on or before the Closing Date, nor has NCI
disposed of, transported, sold, or manufactured any product containing a
Hazardous Material (collectively, "Hazardous Materials Activities") in violation
of any rule, regulation, treaty or statute promulgated by any governmental
entity to prohibit, regulate or control Hazardous Materials or any Hazardous
Material Activities.
(c) NCI currently holds all environmental approvals, permits,
licenses, clearances and consents (the "Environmental Permits") necessary for
the conduct of its business as such business is currently being conducted, the
absence of which would be reasonably likely to have a Material Adverse Effect on
NCI.
(d) No action, proceeding, revocation proceeding, amendment
procedure, writ, injunction or claim is pending or, to the actual knowledge of
NCI, threatened concerning any Environmental Permit. NCI is not aware of any
fact or circumstance which could involve it in any environmental litigation or
impose upon it any environmental liability which would be reasonably likely to
have a Material Adverse Effect on NCI.
5.16 Corporate Documents. The NCI Entities have furnished to DNA for
-------------------
its examination: (i) copies of their Articles of Incorporation and Bylaws; (ii)
Minute Books containing all records required to be set forth of all proceedings,
consents, actions, and meetings of the stockholders, the board of directors and
any committees thereof; (iii) all permits, orders, and consents issued by any
regulatory agency with respect to such entities, or any securities of such
entities, and all applications for such permits, orders, and consents; and (iv)
its stock transfer books setting forth all transfers of any capital stock. The
corporate minute books, stock certificate books, stock registers and other
corporate records of the NCI entities are complete and accurate in all material
respects, and the signatures appearing on all documents contained therein are
the true signatures of the persons purporting to have signed the same. All
actions reflected in such books and records were duly and validly taken in
compliance with the laws of the applicable jurisdiction.
5.17 No Brokers. None of the NCI Entities nor any of their
----------
stockholders are obligated for the payment of fees or expenses of any broker or
finder in connection with the origin, negotiation or execution of this Agreement
or the Certificates of Merger or in connection with any transaction contemplated
hereby or thereby.
5.18 Disclosure. No statements by any of the NCI Entities contained
----------
in this Agreement and the Exhibits and NCI Disclosure Schedule attached hereto,
any other Trans action Document or any written statement or certificate
furnished or to be furnished pursuant hereto or in connection with the
transactions contemplated hereby and thereby (when read together) contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements contained herein or therein not misleading in
light of the circumstances under which they were made.
6. Preclosing Covenants of DNA and NCI.
-----------------------------------
6.1 Employment Agreements, Other Commitments Terminated.
---------------------------------------------------
(a) Prior to the Closing, all employment agreements to which DNA
is a party shall be reviewed by DNA and NCI and, as agreed between them, either
terminated prior to the Closing or assumed by NCI as of the Closing with such
modifications as may be acceptable to DNA, NCI and the employee party to such
agreement.
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<PAGE>
(b) Simultaneously with the execution of this Agreement, the Key
Employees shall each enter into an Employment Agreement with NCI in form and
substance acceptable to NCI and each such Key Employee.
6.2 Advice of Changes.
-----------------
(a) DNA will promptly advise NCI in writing (i) of any event
occurring subsequent to the date of this Agreement which would render any
representation or warranty of DNA contained in this Agreement, if made on or as
of the date of such event or the Closing Date, untrue or inaccurate in any
material respect and (ii) of any material adverse change in DNA's business,
taken as a whole.
(b) NCI will promptly advise DNA in writing (i) of any event
occurring subsequent to the date of this Agreement which would render any
representation or warranty of NCI contained in this Agreement, if made on or as
of the date of such event or the Closing Date, untrue or inaccurate in any
material respect and (ii) of any material adverse change in NCI's business,
taken as a whole.
7. Mutual Covenants.
----------------
7.1 Conduct of Business by DNA. Until the Closing, DNA will continue
--------------------------
to conduct its business and maintain its business relationships in the ordinary
and usual course. and will not, without the prior written consent of NCI:
7.2 Incur or commit to incur any capital expenditures in excess of
Ten Thousand Dollars ($10,000) in the aggregate or borrow any money;
(a) lease, license, sell, transfer or encumber or permit to be
encumbered any asset, intellectual property right or other property associated
with the business of DNA (including sales or transfers to Affiliates of DNA),
except for sales of inventory in the usual and ordinary course of business;
(b) dispose of any of its assets, except in the regular and
ordinary course of business;
(c) enter into any lease or contract for the purchase or sale of
any property, real or personal except in the ordinary course of business;
(d) pay any bonus, increased salary, or special remuneration to
any officer or employee, including any amounts for accrued but unpaid salary or
bonuses (other than amounts not in excess of normal payments made on a regular
basis in prior periods);
(e) change accounting methods;
(f) declare, set aside or pay any cash or stock dividend or other
distribution in respect of capital, or redeem or otherwise acquire any of its
capital stock;
(g) amend or terminate any contract, agreement or license to
which it is a party except in the ordinary course of business;
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<PAGE>
(h) loan any amount to any person or entity, or guaranty or act
as a surety for any obligation;
(i) issue or sell any shares of its capital stock of any class or
any other of its securities, or issue or create any warrants, obligations,
subscriptions, options, convertible securities, or other commitments to issue
shares of capital stock, other than stock options granted as part of existing
stock option program or pursuant to any recapitalization plan disclosed to and
approved by NCI in its discretion (a "Recapitalization Plan");
(j) split or combine the outstanding shares of its capital stock
of any class or enter into any recapitalization affecting the number of
outstanding shares of its capital stock of any class or affecting any other of
its securities;
(k) amend its Articles of Incorporation or Bylaws;
(l) make or change any election, change any annual accounting
period, adopt or change any accounting method, file any amended tax return,
enter into any closing agreement, settle any tax claim or assessment, surrender
any right to claim refund of taxes, consent to any extension or waiver of the
limitation period applicable to any tax claim or assessment, or take any other
action or omit to take any action, if any such election, adoption, change,
amendment, agreement, settlement, surrender, consent or other action or omission
would have the effect of increasing the tax liability of DNA;
(m) do anything that would cause there to be material adverse
changes in its Financial Statements, including, but not limited to, cash
distributions or material decreases in the net assets of DNA), except as would
occur in the ordinary course of DNA's business, between the date of the DNA
Financial Statements and the Closing Date; or
(n) agree to do any of the things described in the preceding
clauses Section 7.1 (a) through (n).
7.3 Stockholders' Tax Representations. DNA will use its best efforts
---------------------------------
to cause each DNA stockholder to execute prior to the Closing (i) a reasonable
continuity of interest representation concerning such stockholder's lack of plan
or intention to sell, exchange or otherwise dispose of shares of NCI Common
Stock to be received in the Merger; and (ii) initial public offering lock-up
provisions not to exceed one hundred eighty (180) days acceptable to NCI and the
DNA stockholders; provided that all executive officers, Directors and
Shareholders holding in excess of five percent (5%) of the outstanding Common
Stock of NCI as of the date hereof enter into similar lock-up provisions.
7.4 Conduct of Business by NCI. Until the Closing, NCI will continue
--------------------------
to conduct its business and maintain its business relationships in the ordinary
and usual course.
7.5 No Public Announcement. The parties shall make no public
----------------------
announcement concerning this Agreement, their discussions or any other memos,
letters or agreements between the parties relating to the Merger until such time
as they agree to the contents of a mutually satisfactory press release which
they intend to publicly-release on the date of this Agreement. Either of the
parties, but only after reasonable consultation with the other, may make
disclosure if required under applicable law.
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<PAGE>
7.6 Other Negotiations. Between the date hereof and the Closing, or
------------------
such earlier date as this Agreement is terminated in accordance with its terms
(the "Expiration Date"), neither NCI nor DNA will take any action to solicit,
initiate, seek, encourage or support any inquiry, proposal or offer from,
furnish any information to, or participate in any negotia tions with, any
corporation, partnership, person or other entity or group (other than discus
sions pursuant to this Agreement) regarding any acquisition, any merger or
consolidation with or involving DNA, or any acquisition of any material portion
of the stock or assets. DNA and NCI agree that any such negotiations in
progress as of the date hereof will be terminated or suspended during such
period.
7.7 Due Diligence, Investigation, and Audits. At such time prior to
----------------------------------------
the Closing as may be reasonably requested, each party shall make available to
the other party and the other party's employees, agents and representatives all
information concerning the operation, business and prospects of such party as
may be reasonably requested by the other party, including, without limitation,
making the working papers of such party's independent certified public
accountants available for inspection by the other party's independent certified
public accountants. Each party will cooperate with the other party for the
purpose of permitting the other party to discuss such party's business and
prospects with such party's customers, creditors, suppliers and other persons
having business dealings with such party, subject to reasonable confidentiality
obligations between the parties.
7.8 Regulatory Filings; Consents; Reasonable Efforts. Subject to the
------------------------------------------------
terms and conditions of this Agreement, DNA and NCI shall use their respective
best efforts to (i) make all necessary filings with respect to the Merger and
this Agreement under the Securities Act, and applicable blue sky or similar
securities laws and shall use all reasonable efforts to obtain required
approvals and clearances with respect thereto and shall supply all additional
information requested in connection therewith; (ii) make merger notification or
other appropriate filings with federal, state or local governmental bodies or
applicable foreign governmental agencies and shall use all reasonable efforts to
obtain required approvals and clearances with respect thereto and shall supply
all additional information requested in connection therewith; (iii) obtain all
consents, waivers, approvals, authorizations and orders required in connection
with the authorization, execution and delivery of this Agreement and the
consummation of the Merger; and (iv) take, or cause to be taken, all appropriate
action, and do, or cause to be done, all things necessary, proper or advisable
to consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement (v) release the DNA Shareholders from their
personal guarantees of DNA's Small Business Administration loan and capital
leases with Finova Capital and AT&T Capital Leasing.
7.9 Further Assurances. Prior to and following the Closing, each
------------------
party agrees to cooperate fully with the other parties and to execute such
further instruments, documents and agreements and to give such further written
assurances, as may be reasonably requested by any other party to better evidence
and reflect the transactions described herein and contemplated hereby and to
carry into effect the intents and purposes of this Agreement.
7.10 Meeting of Stockholders. DNA and Acquisition shall promptly
-----------------------
after the date hereof take all action necessary in accordance with applicable
state laws, their respective Articles of Incorporation and Bylaws to obtain the
approval of its stockholders of the Merger. DNA and Acquisition each shall use
its best efforts to solicit from their respective stockholders proxies in favor
of the Merger and shall take all other action necessary or advisable to secure
the vote or consent of their respective stockholders required to effect the
Merger.
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7.11 Pooling Accounting. DNA and NCI shall each use best efforts to
-------------------
cause the business combination to be effected by the Merger to be accounted for
as a pooling of interests. Each of NCI and DNA shall use its best efforts to
cause its Affiliates, which in any event will include all directors, executive
officers and holders of at least five percent (5%) of outstanding voting
securities, not to take action that would adversely affect the ability of NCI to
account for the business combination to be effected by the merger as a pooling
of interest.
7.12 Affiliate Agreements. DNA shall use its best efforts to deliver
---------------------
or cause to be delivered to NCI, concurrently with the execution of this
Agreement (and in each case prior to the Effective Time) from each of the
Affiliates of DNA, an executed Affiliate Agreement in form and substance
reasonably acceptable to NCI and each Affiliate ("DNA Affiliate Agreement").
NCI shall be entitled to place appropriate legends on the certificates
evidencing any NCI Common Stock to be received by such Affiliates of DNA
pursuant to the terms of this Agreement, and to issue appropriate stop transfer
instructions to the transfer agent for NCI Common Stock, consistent with the
terms of such Affiliate Agreement.
8. Closing Matters.
---------------
8.1 Filing of Certificates of Merger. On the date of the Closing,
--------------------------------
but not prior to the Closing, the Certificates of Merger shall be filed with the
offices of the Secretaries of State of the States of Illinois and Delaware, and
the merger of Acquisition with and into DNA shall be consummated.
8.2 Exchange of Certificates.
------------------------
(a) Exchange Agent. Prior to the Closing Date, NCI shall
--------------
appoint & Reinke, its legal counsel, to act as exchange agent (the "Exchange
Agent") in the Merger.
(b) NCI to Provide Stock. Promptly after the Effective
--------------------
Time of the Merger and at the Closing, NCI shall make available for exchange in
accordance with Section 2 and the Certificates of Merger, through such
reasonable procedures as NCI may adopt, the shares of NCI Common Stock issuable
pursuant to Section 2 and the Certificates of Merger in exchange for outstanding
shares of DNA Common Stock (less the number of shares of NCI Common Stock to be
deposited in escrow pursuant to Section 2.4).
(c) Exchange Procedures. After the Effective Time of the
-------------------
Merger and at the Closing, upon surrender of a certificate or certificates that
immediately prior to the Effective Time of the Merger represented outstanding
shares of DNA Common Stock (the "Certificates") for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by NCI, the holder of
such Certificates shall be entitled to receive the number of shares of NCI
Common Stock to which such holder is entitled pursuant to Section 2 hereof (less
the number of shares of NCI Common Stock to be deposited in escrow pursuant to
Section 2.4). The Certificates so surrendered shall immediately be cancelled.
NCI shall make customary provisions for lost stock certificates. In the event of
a transfer of ownership of DNA Common Stock that is not registered in the
transfer records of DNA, the appropriate number of shares of NCI Common Stock
may be delivered to a transferee if the Certificates representing such DNA
Common Stock is presented to the Exchange Agent and accompanied by all documents
required to evidence and effect such transfer and to evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 8.2, each Certificate shall be deemed at any time
after the Effective Time of the Merger to represent the right to receive upon
such surrender the number of shares of NCI Common Stock as provided by this
Section 8.2.
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<PAGE>
(d) No Further Ownership Rights in DNA Common Stock. All NCI
-----------------------------------------------
Common Stock delivered upon the surrender for exchange of shares of DNA Common
Stock in accordance with the terms hereof shall be deemed to have been delivered
in full satisfaction of all rights pertaining to such shares of DNA Common
Stock. There shall be no further registration of transfers on the stock transfer
books of the Surviving Corporation of the shares of DNA Common Stock that were
outstanding immediately prior to the Effective Time of the Merger. If, after the
Effective Time of the Merger, Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided in
this Section 8.2.
8.3 Delivery of Documents. On or before the Closing, the parties
---------------------
shall deliver the documents, and shall perform the acts, which are set forth in
Section 9 and Section 10, as specified in such Sections, including delivery of
the counterpart signature pages of the Transaction Documents executed by DNA
and/or NCI, as the case may be. All documents which DNA shall deliver or cause
to be delivered shall be in form and substance reasonably satisfactory to NCI.
All documents which NCI shall deliver or cause to be delivered shall be in form
and substance reasonably satisfactory to DNA.
9. Conditions to DNA's Obligations. Unless otherwise provided below,
-------------------------------
DNA's obligations to close the transactions contemplated under this Agreement
are subject to the fulfillment or satisfaction by Closing of each of the
following conditions (any one or more of which may be waived by DNA, but only in
a writing signed by DNA):
9.1 Accuracy of Representations and Warranties. The representations
------------------------------------------
and warranties of NCI set forth in Section 5 shall be true in all material
respects on and as of the Closing with the same force and effect as if they had
been made at the Closing, and DNA shall receive a certificate to such effect
executed by the Chief Executive Officer of NCI.
9.2 Covenants. NCI shall have performed and complied with all of
---------
its covenants contained in Sections 6 and 7 on or before the Closing, and DNA
shall receive a certificate from NCI to such effect executed by the Chief
Executive Officer of NCI.
9.3 No Litigation. On and as of the Closing, no litigation or
-------------
proceeding shall be threatened or pending against NCI with the purpose or with
the probable effect of enjoining or preventing the consummation of any of the
transactions contemplated by this Agreement, and DNA shall receive a certificate
to such effect executed by the Chief Executive Officer of NCI.
9.4 No Adverse Development. There shall not have been any material
----------------------
adverse changes in the financial condition, results of operations, assets,
liabilities, business or prospects of NCI since the date of this Agreement, and
DNA shall receive a certificate to such effect executed by the Chief Executive
Officer of NCI.
9.5 Authorizations. DNA shall have received from NCI written
--------------
evidence that the execution, delivery and performance of NCI's obligations under
this Agreement and the Certificates of Merger have been duly and validly
approved and authorized by the Board of Directors of NCI and Acquisition.
9.6 Government Consents. There shall have been obtained at or prior
-------------------
to the Closing such permits or authorizations, and there shall have been taken
such other action, as may be required by any regulatory authority having
jurisdiction over the parties and the subject matter and the actions herein
proposed to be taken.
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<PAGE>
9.7 Release. There shall have been obtained at or prior to the
-------
closing the release of the DNA Shareholders from their personal guarantees of
DNA's Small Business Administration loan and capital leases with Finova Capital
and AT&T Capital Leasing.
9.8 Financial Statements/Disclosure Schedule. DNA and the
----------------------------------------
Shareholders shall have approved the Financial Statements and Disclosure
Schedule of NCI. Prior to the Closing, NCI shall deliver to DNA and the
Shareholders copies of NCI's Financial Statements and Disclosure Schedule.
Within two business days after receiving such documents, but not sooner than
6:00 p.m. C.S.T. Monday October 28, 1996, DNA and the Shareholders shall deliver
to NCI, via facsimile, their written approval or rejection of the Financial
Statements and Disclosure Schedule information to NCI. Such approval or
rejection shall be made in good faith.
9.9 Opinion of NCI's Counsel. At the Closing, DNA shall have
----------------------
received from counsel to NCI, an opinion dated as of the Closing Date, in form
and substance reasonably acceptable to DNA.
9.10 Filing of Certificates of Merger. As of the Closing, the
--------------------------------
Certificates of Merger shall have been filed with the Secretaries of State of
the States of Illinois and Delaware.
10. Conditions to NCI's Obligations. Unless otherwise provided below, the
-----------------------------
obligations of NCI are subject to the fulfillment or satisfaction by
Closing, of each of the following conditions (any one or more of which may be
waived by NCI, but only in a writing signed by NCI):
10.1 Accuracy of Representations and Warranties. The representations
------------------------------------------
and warranties of DNA and the Shareholders contained in Sections 3 and 4 shall
be true in all material respects on and as of the Closing with the same force
and effect as if they had been made at the Closing, and NCI shall receive a
certificate from DNA to such effect with respect to the representations and
warranties of DNA executed by its President.
10.2 Covenants. DNA shall have performed and complied with all of
---------
its covenants contained in Sections 6 and 7 on or before the Closing, and NCI
shall receive a certificate from DNA to such effect signed by its President.
10.3 No Litigation. On and as of the Closing, no litigation or
-------------
proceeding shall be threatened or pending against DNA for the purpose or with
the probable effect of enjoining or preventing the consummation of any of the
transactions contemplated by this Agreement, or and NCI shall receive a
certificate from DNA to such effect signed by its President.
10.4 Authorizations. NCI shall have received from DNA written
--------------
evidence that the execution, delivery and performance of this Agreement and the
Certificates of Merger have been duly and validly approved and authorized by its
Board of Directors and by the holders of One Hundred Percent (100%) of the
outstanding shares of capital stock of DNA. NCI shall have received a
certificate from DNA to such effect signed by its President. NCI shall also
have received the duly executed Affiliate Agreements described in Section 7.11
hereof.
10.5 No Adverse Development. There shall not have been any material
----------------------
adverse changes in the financial condition, results of operations, assets,
liabilities, business or prospects of DNA since the date of this Agreement. NCI
shall have received a certificate from DNA to such effect signed by its
President.
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<PAGE>
10.6 Government Consents. There shall have been obtained at or prior
-------------------
to the Closing such permits or authorizations, and there shall have been taken
such other action, as may be required by any regulatory authority having
jurisdiction over the parties and the subject matter and the actions herein
proposed to be taken.
10.7 Pooling Letter. DNA and NCI shall have received a letter from
--------------
KPMG Peat Marwick, each dated the date of the Information Statements and
confirmed in writing at the Effective Time of the Merger and addressed to DNA
and NCI, stating that the business combination to be effected by the Merger will
qualify as a pooling of interests transaction under generally accepted
accounting principles.
10.8 Opinion of DNA's Counsel. At the Closing, NCI shall have
----------------------
received from counsel to DNA, an opinion dated the Closing Date in form and
substance reasonably acceptable to NCI.
10.9 Filing of Certificates of Merger. As of the Closing, the
--------------------------------
Certificate of Merger shall have been filed with the Secretaries of State of the
States of Illinois and Delaware.
11. Termination of Agreement.
------------------------
11.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Closing by the mutual written consent of each of the parties hereto.
This Agreement may also be terminated and abandoned:
(a) By NCI if any of the conditions precedent to NCI's
obligations pursuant to Section 10 shall not have been fulfilled at and as of
the Closing.
(b) By DNA if any of the conditions precedent to DNA's
obligations pursuant to Section 9 above shall not have been fulfilled at and as
of the Closing.
(c) By either DNA or NCI, if the Merger is not effected by
November 1, 1996.
Any termination of this Agreement under this Section 11.1 shall be effected by
the terminating party's delivery of written notice to the other parties hereto.
11.2 Liability for Termination. Any termination of this Agreement
-------------------------
pursuant to this Section 11 shall be without further obligation or liability
upon any party in favor of any other party hereto; provided, that if such
termination shall result from fraud or the willful failure of a party to carry
out its obligations under this Agreement, then such party shall be liable for
losses incurred by the other parties. The provisions of this Section 11.2 shall
survive termination.
11.3 Certain Effects of Termination. In the event of the termination
------------------------------
of this Agreement by either DNA or NCI as provided in Section 11.1 hereof, each
party, if so requested by the other party, will (i) return promptly every
document (other than documents publicly available) furnished to it by the other
party (or any subsidiary, division, associate or affiliate of such other party)
in connection with the transactions contemplated hereby, whether so obtained
before or after the execution of this Agreement, and any copies thereof which
may have been made, and will cause its representatives and any representatives
of financial
-27-
<PAGE>
institutions and investors and others to whom such documents were furnished
promptly to return such documents and any copies thereof any of them may have
made, or (ii) destroy such documents and cause its representatives and such
other representatives to destroy such documents, and such party shall deliver a
certificate executed by its president or vice president stating to such effect.
11.4 Remedies. No party shall be limited to the termination right
--------
granted in Section 11.1 hereto by reason of the nonfulfillment of any condition
to such party's closing obligations but may, in the alternative, elect to do one
of the following:
(a) proceed to close despite the nonfulfillment of any closing
condition, it being understood that consummation of the transactions
contemplated hereby shall be deemed a waiver of any misrepresentation or breach
of warranty or covenant and of any party's rights and remedies with respect
thereto to the extent that the other party shall have actual knowledge of such
misrepresentation or breach and the Closing shall nonetheless take place; or
(b) decline to close, terminate this Agreement as provided in
Section 11.1 hereof, and thereafter seek damages to the extent provided in
Section 11.2 hereof.
12. Indemnification.
---------------
12.1 Survival of Representations, Warranties, Covenants and
------------------------------------------------------
Agreements.
- ----------
(a) The Escrow as provided in Section 2.4 shall terminate on the
earlier of (i) one (1) year after the Closing Date or (ii) the date the first
audit of NCI's financial statements, which includes the results of operations of
DNA, has been completed and NCI has received a signed opinion from its
independent auditors certifying such financial statements (the "Escrow
Termination Date"). Except as set forth in 12.1(b) below, all warranties and
representations of the parties hereto shall terminate on the later of one year
or on the date the first audit of NCI's financial statements, which includes the
results of operations of DNA, has been completed and NCI has received a signed
opinion from its independent auditors certifying such financial statements.
(b) The representations, warranties, covenants and agreements of
the DNA and/or the Shareholders contained in Sections 3.4 and 3.7 of this
Agreement or in any writing delivered pursuant to such sections, to the extent
that a breach or default in any such representations, warranties, covenants or
agreements is not as a result of fraud or a willful breach or misconduct, shall
terminate at the end of the twenty-forth month following the month in which the
Closing Date occurs (the "Termination Date"); provided, however, that
representations and warranties as set forth in Sections 3.2, 4 and 5.2 shall
terminate at the end of the forty-eighth (48) month following the month in which
the Closing Date occurs (absent fraud or a willful breach or misconduct).
Notwithstanding the foregoing, in the event of fraud or a willful breach, the
representations and warranties of the parties hereto and their indemnity
obligations under this Section 12 shall not terminate. All representations,
warran ties covenants and agreements shall survive as to any claim or demand
made prior to the Escrow Termination Date or Termination Date, as applicable,
until such claim or demand is fully paid or otherwise resolved by the parties
hereto in writing or by a court of competent jurisdiction.
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<PAGE>
(c) The covenants and agreements of the parties contained in
Sections 6, 7, 8, 9 and 10 of this Agreement shall terminate at and shall not
survive the Closing Date, except for covenants that by their own terms apply
after the Closing Date.
12.2 Indemnification by DNA and the Shareholders.
-------------------------------------------
(a) General.
-------
(i) DNA and the Shareholders shall jointly and severally,
indemnify and hold harmless NCI, its directors and officers, and each other
person, if any, who controls NCI within the meaning of the Securities Act
("Controlling Persons") in respect of any and all claims, losses, damages,
liabilities, demands, assessments, judgments, costs and expenses (including,
without limitation, settlement costs and any legal or other expenses for
investigating, bringing or defending any actions or threatened actions)
reasonably incurred by NCI, any of its directors, officers or Controlling
Persons in connection with any misrepre sentation or breach of any warranty made
by DNA or a Shareholder in this Agreement or in any schedule, exhibit,
certificate or other instrument contemplated by this Agreement.
(ii) Notwithstanding the foregoing, except for liability
arising directly or indirectly out of fraud or a willful breach or misconduct,
the liability of DNA and the Shareholders under this Agreement shall not exceed
One Million Two Hundred Forty-three Thousand Thirty-eight Dollars ($1,243,038).
Any liability arising under this Agreement shall be satisfied by the
Shareholders, first by a return of the Merger Shares and the remainder, if any,
out of the Shareholders' other assets.
(b) Claims for Indemnification.
--------------------------
(i) Whenever any claim shall arise for indemnification under
this Section 12.2, NCI shall describe such claim in a written notice ("Notice of
Claim") to a Representative (as defined in Section 12.6 below) and, when known,
specify the facts con stituting the basis for such claim and the amount or an
estimate of the amount of such claim. Each Notice of Claim shall (A) be signed
by a representative of NCI, (B) contain a description of the claim, (C) specify
the amount of such claim, and (D) state that, in the opinion of the signer
thereof, such Notice of Claim is valid under the terms of Section 12 hereof and
is being given by NCI in good faith.
(ii) NCI shall give such Representative prompt notice of any
claim for indemnification hereunder resulting from, or in connection with, any
claim or legal proceeding by a person who is not a party to this Agreement
("Third-Party Claim") and, with respect to any Third-Party Claim, such
Representative shall undertake the defense thereof by representatives reasonably
satisfactory to NCI and such Representative. Such Representative shall not have
the right to settle or compromise or enter into any binding agreement to settle
or compromise, or consent to entry of any judgment arising from, any such claim
or proceed ing in its sole discretion without the prior written consent of NCI.
NCI shall have the right to participate in any such defense of a Third-Party
Claim with advisory counsel of his own choosing at his own expense. In the event
such Representative, within a reasonable time after notice of any Third-Party
Claim, fails to defend, NCI shall have the right to undertake the defense,
compromise or settlement of such Third-Party Claim on behalf of, and for the
account of, the Stockholders, at the expense and risk of the Stockholders to the
extent of their liability set forth in Section 12. NCI shall not settle or
compromise any such Third-Party Claim or consent to entry of any judgment that
does not include, as an unconditional term thereof, the
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<PAGE>
giving by the claimant or the plaintiff to NCI and/or NCI's subsidiary or
subsidiaries, or affiliate or affiliates, as the case may be, an unconditional
release from all liability in respect of such Third-Party Claim.
Notwithstanding any provision herein to the contrary, failure of NCI to give any
notice of any Third-Party Claim required by this Section 12 shall not constitute
a waiver of NCI's right to indemnification or a defense to any claim by NCI
hereunder, unless DNA and\or the Shareholders is materially prejudiced thereby.
12.3 Indemnification by NCI.
----------------------
(a) General.
-------
(i) NCI shall indemnify and hold harmless the Stockholders
in respect of any and all claims, losses, damages, liabilities, demands,
assessments, judgments, costs and expenses (including, without limitation,
settlement costs and any legal or other expenses for investigating, bringing or
defending any actions or threatened actions) reasonably incurred by the
Stockholders in connection with any misrepresentation or breach of any warranty
made by NCI in this Agreement or in any schedule, exhibit, certificate or other
instrument contemplated by this Agreement.
(ii) Notwithstanding the foregoing, except for liability
arising directly or indirectly out of fraud or a willful breach or misconduct,
the liability of NCI under this Agreement shall not exceed One Million Two
Hundred Forty-three Thousand Thirty-eight Dollars ($1,243,038).
(b) Claims for Indemnification.
---------------------------
(i) Whenever any claim shall arise for indemnification under
this Section 12.3, a Representative shall describe such claim in a Notice of
Claim to NCI and, when known, specify the facts constituting the basis for such
claim and the amount or an estimate of the amount of such claim. Each Notice of
Claim shall (A) be signed by a Representative, (B) contain a description of the
claim, (C) specify the amount of such claim, and (D) state that, in the opinion
of the signer thereof, such Notice of Claim is valid under the terms of Section
12 hereof and is being given by a Representative in good faith.
(ii) A Representative shall give NCI prompt notice of any
claim for indemnification hereunder resulting from, or in connection with, any
claim or Third-Party Claim and, with respect to any Third-Party Claim, NCI shall
undertake the defense thereof by representatives reasonably satisfactory to NCI
and such Representative. NCI shall not have the right to settle or compromise or
enter into any binding agreement to settle or compromise, or consent to entry of
any judgment arising from, any such claim or proceeding in its sole discretion
without the prior written consent of a Representative. A Representative shall
have the right to participate in any such defense of a Third-Party Claim with
advisory counsel of its own choosing at its own expense. In the event that NCI,
within a reasonable time after notice of any Third-Party Claim, fails to defend,
a Representative shall have the right to undertake the defense, compromise or
settlement of such Third-Party Claim on behalf of, and for the account of, NCI,
at the expense and risk of NCI to the extent of its liability set forth in
Section 12. NCI, without a Representative's written consent, shall not settle or
compromise any such Third-Party Claim or consent to entry of any judgment that
does not include, as an unconditional term thereof, the giving by the claimant
or the plaintiff to the Stockholders, or affiliate or affiliates, as the case
may be, an unconditional release from all liability in respect of such Third-
Party Claim. Notwithstanding any provision herein to the contrary, failure of a
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<PAGE>
Representative to give any notice of any Third-Party Claim required by this
Section 12 shall not constitute a waiver of the Stockholders' right to
indemnification or a defense to any claim by the Stockholders hereunder, unless
NCI is materially prejudiced thereby.
12.4 Arbitration. If a party makes a good faith determination that a
-----------
breach (or potential breach) of any of the confidentiality, non-competition, or
intellectual property rights provisions of this Agreement by the other party (or
the Stockholders) may result in damages or consequences that will be immediate,
severe, and incapable of adequate redress after the fact, so that a temporary
restraining order or other immediate injunctive relief is necessary for a
realistic and adequate remedy, that party may seek immediate injunctive relief
without first seeking relief through arbitration. After the court has ruled on
the request for injunctive relief, the parties will thereafter proceed with
arbitration of the dispute and stay the litigation pending arbitration. Subject
to the foregoing, any dispute arising out of this Agreement, or its performance
or breach, shall be resolved by binding arbitration conducted by JAMS/Endispute
under the JAMS/Endispute Rules for Complex Arbitration (the "JAMS Rules"). This
arbitration provision is expressly made pursuant to and shall be governed by the
Federal Arbitration Act, 9 U.S.C. Sections 1-14. The parties hereto agree that
pursuant to Section 9 of the Federal Arbitration Act, a judgment of the United
States District Courts for the Northern District of California shall be entered
upon the award made pursuant to the arbitration. A single arbitrator, who shall
have the authority to allocate the costs of any arbitration initiated under this
paragraph, shall be selected according to the JAMS Rules within ten (10) days of
the submission to JAMS/Endispute of the response to the statement of claim or
the date on which any such response is due, whichever is earlier. The
arbitrator shall conduct the arbitration in accordance with the Federal Rules of
Evidence. The arbitrator shall decide the amount and extent of pre-hearing
discovery which is appropriate. The arbitrator shall have the power to enter
any award of monetary and/or injunctive relief (including the power issue
permanent injunctive relief and also the power to reconsider any prior request
for immediate injunctive relief by either of the parties and any order as to
immediate injunctive relief previously granted or denied by a court in response
to a request therefor by either of the parties), including the power to render
an award as provided in Rule 43 of the JAMS Rules; provided, however, that the
arbitrator shall not have the power to award punitive damages under any
circumstances (whether styled as punitive, exemplary, or treble damages, or any
penalty or punitive type of damages) regardless of whether such damages may be
available under applicable law, the parties hereby waiving their rights to
recover any such damages. The arbitrator shall award the prevailing party its
costs and reasonable attorneys' fees, and the losing party shall bear the entire
cost of the arbitration, including the arbitrator's fees. All arbitration shall
be held in San Francisco, California. In addition to the above court, the
arbitration award may be enforced in any court having jurisdiction over the
parties and the subject matter of the arbitration. Notwithstanding the
foregoing, the parties irrevocably submit to the nonexclusive jurisdiction of
the state and federal courts situated where the respondent is domiciled or
resides as of the Effective Date in any action to enforce an arbitration award.
With respect to any request for immediate injunctive relief, that state and
federal courts in San Francisco, California, shall have nonexclusive
jurisdiction and venue over any such disputes.
12.5 Limitation on Indemnification. No indemnified party hereunder
-----------------------------
will be entitled to make a claim against any indemnifying party under Section
12.2 or 12.3, unless and until with respect to the party claiming
indemnification (i) the aggregate amount of losses indemnifiable by the
Stockholders exceeds Twenty-five Thousand Dollars ($25,000); and (ii) the
aggregate amount of losses indemnifiable by NCI exceeds Two Hundred and Fifty
Thousand Dollars ($250,000), respectively, and then only to the extent of the
excess. Except as otherwise expressly provided under this Section 12, for
purposes of the indemnification set
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<PAGE>
forth in this Section 12 as it relates to the Escrow Shares, the parties agree
that each Escrow Share shall have a value of Four Dollars and Five Cents ($4.05)
(subject to adjustment for stock splits, combinations, reclassifications and the
like).
12.6 The Stockholders' Representatives; Power of Attorney. The
----------------------------------------------------
Stockholders shall appoint Andrew Hayman and David Wallinga as their true and
lawful attorneys-in-fact, agents and representatives (each a "Representative"
and collectively, the "Representatives"), with full power of substitution and
resubstitution, to negotiate and sign all amendments to this Agreement, and all
other documents in connection with the transactions contemplated by this
Agreement. Should any Representative be unable or unwilling to serve or to
appoint his successor to serve in his stead, and unless the Stockholders appoint
a successor to serve in his stead, such Stockholders shall be deemed to be
represented solely by the remaining Representative or the Board of Directors of
DNA should the remaining Representative be unable or unwilling to serve in his
capacity. Each Representative shall have full authority to act on behalf of and
bind the Stockholders.
12.7 Escrow.
------
(a) DNA Escrow Shares shall be placed with a third party
commercial escrow agent, satisfactory to NCI and a Representative for a period
beginning on the Closing Date and ending on the Escrow Termination Date, to be
disbursed solely upon the joint signa tures of NCI and the Representative or
upon the Escrow Termination Date, all as set forth below. Disbursements from the
escrow shall be made for the payment of amounts, if any, to satisfy the
indemnification rights of NCI pursuant to Section 12 hereof.
(b) Subject to the following provisions, the DNA Escrow Shares
shall be disbursed during the term hereof at any time or from time to time,
whenever NCI shall give a Representative a Notice of Claim. Such Notice of Claim
must be for a specified amount.
(i) The Representative may give NCI a written notice ("Notice
of Objection") (A) attaching a copy of such Notice of Claim, (B) stating that,
in the good faith opinion of the Representatives, the claim described in such
Notice of Claim is invalid (either in whole or in specified party) under the
terms of Section 12 hereof, (C) giving the reasons for the alleged invalidity,
and (D) stating that, based on such alleged invalidity, the Repre sentatives
object to the payment of any portion of the DNA Escrow Shares to the requesting
party on account thereof. In the event that a Notice of Objection alleges that a
Notice of Claim is only partially invalid, the Representatives, within thirty
(30) days of the receipt of such Notice of Claim, agree to pay over to NCI that
portion of the amounts specified in such Notice of Claim as to which no
objection is made. The Representatives are not required to agree to make any
payments to NCI in respect of a Notice of Claim that has been objected to in a
Notice of Objection given to the Representatives as aforesaid except (X) as
provided in the immediately preceding sentence, or (Y) in accordance with an
order of any arbitration panel initiated by any of the parties hereto pursuant
to paragraph (ii) below.
(ii) NCI and the Representatives agree to submit to final and
binding arbitration any and all disputes the Representatives have specified in a
Notice of Objection or NCI has specified in a Notice of Claim to which the
Representatives have not responded within thirty (30) days of receipt of such
Notice of Claim. Any such dispute subject to arbitration in accordance with the
JAMS Rules as provided in Section 12 hereof.
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(c) The escrow shall be terminated and the Escrow Shares
automatically delivered to the Shareholders, on the Escrow Termination Date;
provided, however, that the escrow may continue beyond such date if NCI has
asserted indemnification claims, and any such claims remain unsatisfied. All
Escrow Shares in excess of the amount asserted but unsatisfied shall be
delivered to the Shareholders.
13. Miscellaneous.
-------------
13.1 Governing Laws. It is the intention of the parties hereto
--------------
that the internal laws of the State of California (irrespective of its choice of
law principles) shall govern the validity of this Agreement, the construction of
its terms, and the interpretation and enforcement of the rights and duties of
the parties hereto.
13.2 Binding upon Successors and Assigns. Subject to, and
-----------------------------------
unless otherwise provided in, this Agreement, each and all of the covenants,
terms, provisions, and agreements contained herein shall be binding upon, and
inure to the benefit of, the permitted successors, executors, heirs,
representatives, administrators and assigns of the parties hereto.
13.3 Severability. If any provision of this Agreement, or the
------------
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
13.4 Entire Agreement. This Agreement, the exhibits hereto, the
----------------
documents referenced herein, and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied, written or
oral, between the parties with respect hereto and thereto. The express terms
hereof control and supersede any course of performance or usage of the trade
incon sistent with any of the terms hereof.
13.5 Counterparts. This Agreement may be executed in any
------------
number of counterparts, each of which shall be an original as against any party
whose signature appears thereon and all of which together shall constitute one
and the same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
13.6 Expenses. Except as provided to the contrary herein,
--------
within seven (7) days of the Closing, NCI shall pay DNA's costs and expenses
incurred with respect to the negotiation, execution and delivery of this
Agreement, the exhibits hereto, and the other Transaction Documents in an amount
not to exceed Forty Thousand Dollars ($40,000).
13.7 Amendment and Waivers. Any term or provision of this
---------------------
Agreement may be amended, and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and either retroactively
or prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof for default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or any succeeding breach or default.
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<PAGE>
13.8 Survival of Agreements. All covenants, agreements,
----------------------
representations and warranties made herein shall survive the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby notwithstanding any investigation of the parties hereto and shall
terminate on the date one year after the Closing Date.
13.9 No Waiver. The failure of any party to enforce any of the
---------
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
13.10 Attorneys' Fees. Should suit be brought to enforce or
---------------
interpret any part of this Agreement, the prevailing party shall be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorneys' fees to be fixed by the court (including without limitation, costs,
expenses and fees on any appeal). The prevailing party shall be the party
entitled to recover its costs of suit, regardless of whether such suit proceeds
to final judgment. A party not entitled to recover its costs shall not be
entitled to recover attorneys' fees. No sum for attorneys' fees shall be
counted in calculating the amount of a judgment for purposes of determining if a
party is entitled to recover costs or attorneys' fees.
13.11 Notices. Any notice provided for or permitted under this
-------
Agreement will be treated as having been given when (a) delivered personally,
(b) sent by confirmed telex or telecopy, (c) sent by commercial overnight
courier with written verification of receipt, or (d) mailed postage prepaid by
certified or registered mail, return receipt requested, to the party to be
notified, at the address set forth below, or at such other place of which the
other party has been notified in accordance with the provisions of this Section
13.11.
DNA: DNA New Media Group, Inc.
212 W. Superior St., Ste. 400
Chicago, IL 60610
With copy to: Monica Carroll, Esq.
ROSS & HARDIES
150 N. Michigan Ave., Ste. 2500
Chicago, IL 60610
NCI Entities: NetSource Communications, Inc.
1304 Southpoint Boulevard
Petaluma, California 94954
Attention: Legal Department
With copy to: Pezzola & Reinke
A Professional Corporation
1999 Harrison Street, Suite 1300
Oakland, CA 94612
Attention: Don Reinke, Esq.
Such notice will be treated as having been received upon actual receipt.
13.12 Time. Time is of the essence of this Agreement.
----
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<PAGE>
13.13 Construction of Agreement. This Agreement has been
-------------------------
negotiated by the respective parties hereto and their attorneys and the language
hereof shall not be construed for or against any party. The titles and headings
herein are for reference purposes only and shall not in any manner limit the
construction of this Agreement which shall be considered as a whole.
13.14 No Joint Venture. Nothing contained in this Agreement shall
----------------
be deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party shall have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party shall have any power or authority to bind or
commit any other. No party shall hold itself out as having any authority or
relationship in contravention of this Section 13.14.
13.15 Pronouns. All pronouns and any variations thereof shall
--------
be deemed to refer to the masculine, feminine or neuter, singular
or plural, as the identity of the person, persons, entity or entities may
require.
13.16 Further Assurances. Each party agrees to cooperate fully
------------------
with the other parties and to execute such further instruments,
documents and agreements and to give such further written assurances, as may be
reasonably requested by any other party to better evidence and reflect the
transactions described herein and contemplated hereby and to carry into effect
the intents and purposes of this Agreement.
13.17 Absence of Third-Party Beneficiary Rights. No
-----------------------------------------
provisions of this Agreement are intended, nor shall be interpreted, to provide
or create any third-party beneficiary rights or any other rights of any kind in
any client, customer, affiliate, stockholder, partner of any party hereto or any
other person or entity except employees and stockholders of DNA specifically
referred to herein, and, except as so provided, all provisions hereof shall be
personal solely between the parties to this Agreement.
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
-35-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
NETSOURCE COMMUNICATIONS, INC. DNA NEW MEDIA GROUP, INC.
a Delaware corporation an Illinois corporation
By: /s/ Edward A. Brinskele By: /s/ Andrew Hayman
--------------------------------------- -----------------------------
Title: Chairman and Chief Executive Officer Title: President
------------------------------------ --------------------------
By: /s/ Charles Schoenhoeft
---------------------------------------
Title: President
------------------------------------
DNA ACQUISITION CORPORATION SHAREHOLDERS:
a Delaware corporation
By: /s/ Evan A. Kraus /s/ David Wallinga
--------------------------------------- ---------------------------------
David Wallinga
Title: Secretary
------------------------------------
/s/ Andrew Hayman
---------------------------------
Andrew Hayman
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<PAGE>
EXHIBIT 2.5
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is entered
into as of October 16, 1996, between and among scruz-net, inc., a California
corporation ("scruz-net"); QARIN VAN BRINK, MATTHEW KAUFMAN and TIMOTHY GARLICK
(individually "Shareholder" and collectively, the "Shareholders"); on the one
hand, and scruz-net ACQUISITION CORPORATION, a Delaware corporation
("Acquisition") and NETSOURCE COMMUNICATIONS, INC., a Delaware corporation
("NCI") on the other.
RECITALS
WHEREAS, subject to and in accordance with the terms and conditions of this
Agreement and pursuant to the Articles of Merger attached hereto as Exhibit A
("Articles of Merger"), the parties intend that Acquisition will merge with and
into scruz-net (the "Merger"), whereby all of the outstanding shares of common
stock of scruz-net ("scruz-net Common Stock") will be exchanged for shares of
common stock of NCI ("NCI Common Stock");
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the parties hereto desire to set forth certain representations,
warranties and covenants made by each to the other as an inducement to the
consummation of the Merger.
AGREEMENT
NOW, THEREFORE, in reliance on the foregoing recitals and in and for the
consideration and mutual covenants set forth herein, the parties agree as
follows:
1. CERTAIN DEFINITIONS.
-------------------
1.1 "AFFILIATE" shall have the meaning set forth in the rules and
regulations promulgated by the Commission pursuant to the Securities Act.
1.2 "CODE" shall mean the United States Internal Revenue Code of
1986, as amended.
1.3 "COMMISSION" shall mean the United States Securities and Exchange
Commission.
1.4 "KEY EMPLOYEES" shall mean Qarin Van Brink and Matthew Kaufman.
1.5 "SCRUZ-NET COMMON STOCK" shall mean shares of Common Stock of
scruz-net.
1.6 "SCRUZ-NET PRODUCTS/SERVICES" shall mean all versions and
implementations of any product which has been or is being marketed by scruz-net
or currently is under development and all services which have been or are being
marketed by scruz-net or currently are under development, and all patents,
patent applications, trade secrets, copyrights, trademarks, trade names and
other proprietary rights related to such products or services.
<PAGE>
1.7 "SCRUZ-NET SHARES" shall mean the shares of scruz-net capital
stock issued and outstanding at the effective time of the Merger, other than the
Dissenting Shares.
1.8 "NCI COMMON STOCK" shall mean shares of Common Stock of NCI.
1.9 "NCI PRODUCTS/SERVICES" shall mean all versions and
implementations of any product which has been or is being marketed by NCI, or
currently is under development and all services which have been or are being
marketed by NCI, or currently are under development, and all patents, patent
applications, trade secrets, copyrights, trademarks, trade names and other
proprietary rights related to such products or services.
1.10 "SECURITIES" shall mean the scruz-net Shares and Dissenting
Shares.
1.11 "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.12 "STOCKHOLDERS" shall mean the holders of the outstanding shares
of scruz-net Shares.
1.13 "TRANSACTION DOCUMENTS" shall mean all documents or agreements
attached as an exhibit or schedule hereto, and set forth on the Table of
Contents.
2. PLAN OF REORGANIZATION.
----------------------
2.1 THE MERGER. Subject to the terms and conditions of this
----------
Agreement and the Articles of Merger, Acquisition shall be merged with and into
scruz-net in accordance with the applicable provisions of the laws of the State
of California, and with the terms and conditions of this Agreement and the
Articles of Merger, so that:
(a) At the Effective Time (as defined in Section 2.6 below),
Acquisition shall be merged with and into scruz-net. As a result of the Merger,
the separate corporate existence of Acquisition shall cease and scruz-net shall
continue as the surviving corporation (sometimes referred to herein as the
"Surviving Corporation") and shall succeed to and assume all of the rights and
obligations of Acquisition in accordance with the laws of California.
(b) The Articles of Incorporation and Bylaws of Acquisition in
effect immediately prior to the Effective Time shall be the Articles of
Incorporation and Bylaws, respectively, of the Surviving Corporation after the
Effective Time unless and until further amended as provided by law.
(c) Subject to the terms of this Agreement, the directors and
officers of Acquisition immediately prior to the Effective Time shall be the
directors and officers of the Surviving Corporation after the Effective Time.
Such directors and officers shall hold their position until the election and
qualification of their respective successors or until their tenure is otherwise
terminated in accordance with the Bylaws of the Surviving Corporation.
2.2 CONVERSION OF SHARES. All shares of scruz-net Common Stock,
--------------------
issued and outstanding immediately prior to the Effective Time, will, by virtue
of the Merger and at the Effective Time, and without further action on the part
of any holder thereof, be converted
-2-
<PAGE>
automatically into and exchanged for 306,923 shares of fully paid and
nonassessable NCI Common Stock (the "Exchange Ratio"), on a pro rata basis. The
shares of NCI Common Stock issued pursuant hereto shall also be referred to as
the "Merger Consideration".
2.3 FRACTIONAL SHARES. No fractional shares of NCI Common Stock
-----------------
will be issued in connection with the Merger, but in lieu thereof, holders of
scruz-net Common Stock who would otherwise be entitled to receive a fraction of
a share of NCI Common Stock will receive from NCI, promptly after the Effective
Time, an agreed upon amount of cash equal to Four Dollars Five Cent ($4.05) per
share of NCI Common Stock, multiplied by the fraction of a share of NCI Common
Stock to which such holder would otherwise be entitled.
2.4 ESCROW AGREEMENT. At the Effective Time, certificates
----------------
representing ten percent (10%) of the shares of the NCI Common Stock issued to
the holders of scruz-net Common Stock in the Merger shall be deposited in
escrow, on a pro rata basis. The shares placed in the escrow pursuant to this
Section 2.4 (the "scruz-net Escrow Shares") shall be held as collateral for the
indemnification obligations of scruz-net under Section 12 and pursuant to the
provisions of an escrow agreement (the "Escrow Agreement") to be entered into
between the parties, with the terms of such agreement to be mutually agreed
upon, which terms shall not be inconsistent with the terms set forth in this
Agreement.
2.5 THE CLOSING. Subject to termination of this Agreement as
-----------
provided in Section 11 below, the closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Pezzola &
Reinke, Lake Merritt Plaza, 1999 Harrison Street, Oakland, California, as soon
as possible upon the satisfaction or waiver of all conditions set forth in
Section 9 and Section 10 hereof (the "Closing Date"), or such other time and
place as is mutually agreeable to the parties.
2.6 EFFECTIVE TIME. Simultaneously with the Closing, the Articles of
--------------
Merger shall be filed in the office of the Secretary of State of the State of
California. The Merger shall become effective immediately upon the filing of
the Articles of Merger with such office. The date and time of the effectiveness
of the Merger under the laws of California is the "Effective Time."
2.7 TAX FREE REORGANIZATION. The parties intend to adopt this
-----------------------
Agreement as a tax-free plan of reorganization and to consummate the Merger in
accordance with the provisions of Section 368(a)(2)(E) of the Code. Each party
agrees that it will not take or assert any position on any tax return, report or
otherwise which is inconsistent with the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code. The NCI Common
Stock issued in the Merger will be issued solely in exchange for the scruz-net
Common Stock pursuant to this Agreement, and no other transaction other than the
Merger represents, provides for or is intended to be an adjustment to the
consideration paid for the scruz-net Common Stock. Except for cash paid in lieu
of fractional shares or Dissenting Shares, no consideration that could
constitute "other property" within the meaning of Section 356 of the Code is
being paid by NCI for the scruz-net Common Stock. In addition, NCI represents
now, and as of the Closing Date, that it presently intends to continue scruz-
net's historic business or use a significant portion of scruz-net's business
assets in a business.
3. REPRESENTATIONS AND WARRANTIES OF SCRUZ-NET. Except as otherwise set
-------------------------------------------
forth in the "scruz-net Disclosure Schedule" provided to NCI on the date hereof,
scruz-net and each Shareholder jointly and severally represent and warrant to
NCI as set forth below. No fact or circumstance disclosed to NCI shall
constitute an exception to these representations and
-3-
<PAGE>
warranties unless such fact or circumstance is set forth in the scruz-net
Disclosure Schedule or such supplements thereto as may mutually be agreed upon
in writing by scruz-net and NCI.
3.1 ORGANIZATION. scruz-net is a corporation duly organized, validly
------------
existing and in good standing under the laws of the state of incorporation of
such entity and has corporate power and authority to carry on its business as it
is now being conducted. scruz-net is duly qualified or licensed to do business
and in good standing in each jurisdiction in which the nature of its business or
properties makes such qualification or licensing necessary except where the
failure to be so qualified would not have a material adverse effect on the
operations, assets or financial condition (a "Material Adverse Effect") of
scruz-net. The scruz-net Disclosure Schedule contains a true and complete
listing of the locations of all sales offices, manufacturing facilities, and any
other offices or facilities of scruz-net and a true and complete list of all
states in which scruz-net maintains any employees. The scruz-net Disclosure
Schedule contains a true and complete list of all states in which scruz-net is
duly qualified to transact business as a foreign corporation. True and complete
copies of scruz-net's Articles of Incorporation and Bylaws, as in effect on the
date hereof and as to be in effect as of the Closing, have been provided to NCI
or its representatives.
3.2 CAPITALIZATION.
--------------
(a) The authorized capital of scruz-net consists of one million
shares (1,000,000) shares of Common Stock, of which Three hundred Thousand
(300,000) shares are issued and outstanding. There are no outstanding options to
purchase scruz-net Common Stock.
(b) Except as set forth in the scruz-net Disclosure Schedule,
scruz-net does not have outstanding any preemptive or subscription rights,
options, warrants, rights to convert or exchange, capital stock equivalents, or
other rights to purchase or otherwise acquire any scruz-net capital stock or
other securities.
(c) All of the issued and outstanding shares of scruz-net capital
stock have been duly authorized, validly issued, are fully paid and
nonassessable, and such capital stock, and all warrants and options to purchase
capital stock of scruz-net, have been issued in full compliance with all
applicable federal and state securities laws. None of scruz-net's issued and
outstanding shares of capital stock, or options or rights to purchase capital
stock of scruz-net, is subject to repurchase or redemption rights.
(d) Except for any restrictions imposed by applicable state and
federal securities laws, there is no right of first refusal, option, or other
restriction on transfer applicable to any shares of scruz-net's capital stock.
(e) scruz-net is not under any obligation to register under the
Securities Act any shares of its capital stock or any other of its securities
that might be issued in the future if the Merger were not consummated.
(f) scruz-net is not a party or subject to any agreement or
understanding (and, to scruz-net's actual knowledge, there is no agreement or
understanding between or among any persons) that affects or relates to the
voting or giving of written consent with respect to any security.
-4-
<PAGE>
3.3 POWER, AUTHORITY AND VALIDITY. scruz-net has the corporate power
-----------------------------
to enter into this Agreement and the other Transaction Documents to which it is
a party and to carry out its obligations hereunder and thereunder. The
execution and delivery of this Agreement and the Transaction Documents and the
consummation of the transactions contemplated hereby and thereby have been duly
authorized by the Board of Directors of scruz-net and on the Closing Date, by
the stockholders of scruz-net and no other corporate proceedings on the part of
scruz-net are necessary to authorize this Agreement, the other Transaction
Documents and the transactions contemplated herein and therein. scruz-net is
not subject to or obligated under any charter, bylaw or contract provision or
any license, franchise or permit, or subject to any order or decree, which would
be breached or violated by or in conflict with its executing and carrying out
this Agreement and the transactions contemplated hereunder and under the
Transaction Documents. Except for (i) the filing of the Articles of Merger with
the Secretary of State of the State of California, and appropriate documents
with the relevant authorities of other states in which scruz-net is qualified to
do business, and (ii) filings under applicable securities laws, no consent of
any person who is a party to a contract which is material to scruz-net's
business, nor consent of any governmental authority, is required to be obtained
on the part of scruz-net to permit the transactions contemplated herein and to
permit scruz-net to continue its business activities as previously conducted
without a Material Adverse Effect. This Agreement is, and the other Transaction
Documents when executed and delivered by scruz-net shall be, the valid and
binding obligations of scruz-net, enforceable in accordance with their
respective terms.
3.4 FINANCIAL STATEMENTS.
--------------------
(a) scruz-net has delivered to NCI copies of its unaudited
balance sheet as of August 30, 1996, and statements of operations, stockholders'
equity and cash flow for the eight (8) month period then-ended and the unaudited
balance sheet as of December 31, 1995, and statements of operations,
stockholder's equity and cash flow for the twelve (12) month period then ended
(collectively, the "scruz-net Financial Statements").
(b) The scruz-net Financial Statements are complete and in
accordance with the books and records of scruz-net and present fairly the
financial position of scruz-net as of their historical dates. The scruz-net
Financial Statements have been prepared in accordance with generally accepted
accounting principles ("GAAP") (except for the absence of footnotes) applied on
a basis consistent with prior periods. Except and to the extent reflected or
reserved against in such balance sheets (including the notes thereto), scruz-net
does not have, as of the dates of such balance sheets, any liabilities or
obligations (absolute or contingent) of a nature required or customarily
reflected in a balance sheet (or the notes thereto) prepared in accordance with
GAAP. The reserves, if any, reflected on the scruz-net Financial Statements are
adequate in light of the contingencies with respect to which they are made.
(c) scruz-net has no debt, liability, or obligation of any
nature, whether accrued, absolute, contingent, or otherwise, and whether due or
to become due, that is not reflected or reserved against in the scruz-net
Financial Statements, except for those (i) that may have been incurred after the
date of the scruz-net Financial Statements or (ii) that are not required by GAAP
to be included in a balance sheet or the notes thereto, except that scruz-net
has not established any reserves with respect to the costs and fees associated
with this Agreement, the other Transaction Documents, and the transactions
contemplated hereby
-5-
<PAGE>
and thereby. All material debts, liabilities, and obligations incurred after
the date of the scruz-net Financial Statements were incurred in the ordinary
course of business, and are usual and normal in amount both individually and in
the aggregate.
3.5 TAX MATTERS.
-----------
(a) scruz-net has fully and timely, properly and accurately filed
all tax returns and reports required to be filed by it, including all federal,
foreign, state and local tax returns and estimates for all years and periods
(and portions thereof) for which any such returns, reports or estimates were
due. All such returns, reports and estimates were prepared in the manner
required by applicable law. All income, sales, use, occupation, employment,
property or other taxes or assessments due from scruz-net has been paid. There
are no pend ing assessments, asserted deficiencies or claims for additional
taxes that have not been paid. The reserves for taxes, if any, reflected on the
scruz-net Financial Statements are adequate and there are no tax liens on any
property or assets of scruz-net. There have been no audits or examinations of
any tax returns or reports by any applicable governmental agency. No statement
of facts exists or has existed which would constitute grounds for the assessment
of any penalty or of any further tax liability beyond that shown on the
respective tax reports, returns or estimates. There are no outstanding
agreements or waivers extending the statutory period of limitation applicable to
any federal, state or local income tax return or report for any period.
(b) All taxes which scruz-net has been required to collect or
withhold have been duly withheld or collected and, to the extent required, have
been paid to the proper taxing authority.
(c) scruz-net is not a party to any tax-sharing agreement or
similar arrangement with any other party.
(d) At no time has scruz-net been included in the federal
consolidated income tax return of any affiliated group of corporations.
(e) No payment which scruz-net is obliged to pay to any director,
officer, employee or independent contractor pursuant to the terms of an
employment agreement, severance agreement or otherwise will constitute an excess
parachute payment as defined in Section 280G of the Code.
(f) scruz-net is not currently under any contractual obligation
to pay any tax obligations of, or with respect to any transaction relating to,
any other person or to indemnify any other person with respect to any tax.
3.6 TAX FREE REORGANIZATION.
-----------------------
(a) Neither scruz-net nor, to its actual knowledge, any scruz-net
stockholder has taken or agreed to take any action that would prevent the Merger
from constituting a reorganization qualifying under the provisions of Section
368(a) of the Code.
-6-
<PAGE>
(b) To the actual knowledge of scruz-net, there is no plan or
intention by any scruz-net stockholder to sell, exchange or otherwise dispose of
more than fifty percent (50%) of the shares of NCI Common Stock to be received
in the Merger.
(c) scruz-net is not an investment company as defined in Sections
368(a)(2)(F)(iii) and (iv) of the Code.
3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since August 30, 1996,
------------------------------------
scruz-net has not:
(a) suffered any material adverse change in its financial
condition or in the operations of its business, nor any material adverse changes
in its balance sheet, (with the scruz-net Financial Statements and any
subsequent balance sheet analyzed as if each had been prepared according to
GAAP), including but not limited to cash distributions or material decreases in
its net assets.
(b) suffered any damage, destruction or loss, whether covered by
insurance or not, materially and adversely affecting its properties or business;
(c) granted or agreed to make any increase in the compensation
payable or to become payable by it to its officers or employees, except those
occurring in the ordinary course of business;
(d) declared, set aside or paid any dividend or made any other
distribution on or in respect of the shares of its capital stock or declared any
direct or indirect redemption, retirement, purchase or other acquisition by it
of such shares;
(e) issued any shares of its capital stock or any warrants,
rights, options or entered into any commitment relating to its shares;
(f) made any change in the accounting methods or practices it
follows, whether for general financial or tax purposes, or any change in
depreciation or amortization policies or rates adopted therein;
(g) sold, leased, abandoned or otherwise disposed of any real
property or any machinery, equipment or other operating property other than in
the ordinary course of business;
(h) sold, assigned, transferred, licensed or otherwise disposed of
any patent, trademark, trade name, brand name, copyright (or pending application
for any patent, trademark or copyright) invention, work of authorship, process,
know-how, formula or trade secret or interest thereunder or other intangible
asset except in the ordinary course of its business;
(i) suffered any labor dispute;
(j) engaged in any activity or entered into any material
commitment or transaction (including without limitation any borrowing or capital
expenditure) other than in the ordinary course of business;
-7-
<PAGE>
(k) incurred any liabilities except in the ordinary course of business
and consistent with past practice which would be required to be disclosed in
financial statements prepared in accordance with GAAP;
(l) permitted or allowed any of its property or assets to be subjected
to any mortgage, deed of trust, pledge, lien, security interest or other
encumbrance of any kind, except those permitted under Section 3.8 hereof, other
than any purchase money security interests incurred in the ordinary course of
business;
(m) made any capital expenditure or commitment for additions to
property, plant or equipment individually in excess of Three Thousand Dollars
($3,000), or in the aggregate, in excess of Ten Thousand Dollars ($10,000);
(n) paid, loaned or advanced any amount to, or sold, transferred or
leased any properties or assets to, or entered into any agreement or arrangement
with any of its Affiliates, officers, directors or stockholder or any Affiliate
or associate of any of the foregoing;
(o) made any amendment to or terminated any agreement which, if not so
amended or terminated, would be required to be disclosed on the scruz-net
Disclosure Schedule; or
(p) agreed to take any action described in Sections 2.7, 3.6 or 3.7 or
outside of its ordinary course of business or which would constitute a breach of
any of the representations contained in this Agreement.
3.8 TITLE AND RELATED MATTERS. scruz-net has good and marketable
-------------------------
title to all the properties, interests in properties and assets, real and
personal, reflected in the scruz-net Financial Statements or acquired after the
date of the scruz-net Financial Statements (except properties, interests in
properties and assets sold or otherwise disposed of since the date of the scruz-
net Financial Statements in the ordinary course of business), free and clear of
all mortgages, liens, pledges, charges or encumbrances of any kind or character,
except the lien of current taxes not yet due and payable and except for liens
which in the aggregate do not secure more than Three Thousand Dollars ($3,000)
in liabilities. The equipment of scruz-net used in the operation of its
business is in good operating condition and repair. All real or personal
property leases to which scruz-net is a party are valid, binding, enforceable
obligations of scruz-net and the party they are entered into with and effective
in accordance with their respective terms. There is not under any of such
leases any existing material default or event of default or event which, with
notice or lapse of time or both, would constitute a material default. The
scruz-net Disclosure Schedule contains a description of all real and personal
property leased or owned by scruz-net, identifying such property and, in the
case of real property, stating the monthly rental due, term of lease and square
feet leased. True and correct copies of each of scruz-net's leases have been
provided to NCI or its representatives.
3.9 PROPRIETARY RIGHTS.
------------------
(a) scruz-net owns all right, title and interest in and to, or
valid licenses for use of, all patents, copyrights, technology, software,
software tools, know-how, processes, trade secrets, trademarks, service marks,
trade names and other proprietary rights used in or necessary for the conduct of
scruz-net's business as conducted to the date hereof or contemplated, including,
without limitation, the technology and all proprietary rights
-8-
<PAGE>
developed or discovered or used in connection with or contained in the scruz-net
Products/Services, free and clear of all liens, claims and encumbrances
(including without limitation distribution rights) (all of which are referred to
as "scruz-net Proprietary Rights"). The foregoing representation as it relates
to scruz-net Third-Party Technology (as hereinafter defined) is limited to
scruz-net's interest pursuant to the scruz-net Third-Party Licenses (as
hereinafter defined), all of which are valid and enforceable and in full force
and effect and which grant scruz-net such rights to the scruz-net Third-Party
Technology as are employed in or necessary to the business of scruz-net as
conducted or proposed to be conducted. The scruz-net Disclosure Schedule
contains an accurate and complete description of (i) all patents, trademarks
(with separate listings of registered and unregistered trademarks), trade names,
and registered copyrights in or related to the scruz-net Products/Services, all
applications and registration statements therefor, and a list of all licenses
and other agreements relating thereto, and (ii) a list of all licenses and other
agreements with third parties (the "scruz-net Third-Party Licenses") relating to
any software, inventions, technology, know-how, or processes that scruz-net is
licensed or otherwise authorized by such third parties to use, market,
distribute or incorporate into products distributed by scruz-net (such software,
inventions, technology, know-how and processes are collectively referred to as
the "scruz-net Third-Party Technology"). scruz-net's trademark or trade name
registrations related to the scruz-net Products/Services and scruz-net's
copyrights in any of the scruz-net Products/Services are valid and in full force
and effect; and consummation of the transactions contemplated hereby will not
alter or impair any such rights. No claims have been asserted against scruz-net
(and scruz-net is not aware of any claims which are likely to be asserted
against it or which have been asserted against others) by any person challenging
scruz-net's use, possession, manufacture, sale, provision or distribution of the
scruz-net Products/Services under any patents, trademarks, trade names,
copyrights, trade secrets, software, technology, know-how or processes utilized
by scruz-net (including, without limitation, the scruz-net Third-Party
Technology) or challenging or questioning the validity or effectiveness of any
license or agreement relating thereto (including, without limitation, the scruz-
net Third-Party Licenses). There is no valid basis for any claim of the type
specified in the immediately preceding sentence which could in any material way
relate to or interfere with the currently planned continued enhancement and
exploitation by scruz-net of any of the scruz-net Products/Services. None of
the scruz-net Products/Services nor the use or exploitation of any patents,
trademarks, trade names, copyrights, software, technology, know-how or processes
by scruz-net in its current business infringes on the rights of, constitutes
misappropriation of, or in any way involves unfair competition with respect to,
any proprietary information or intangible property right of any third person or
entity, including without limitation any patent, trade secret, copyright,
trademark or trade name.
(b) To scruz-net's and each Shareholder's best knowledge, no employee
of such entity is in violation of any term of any employment contract, patent
disclosure agreement or any other contract or agreement relating to the
relationship of any such employee with that entity or, to scruz-net's actual
knowledge, any other party because of the nature of the business conducted by
scruz-net or proposed to be conducted by scruz-net.
(c) Each person presently or previously employed by scruz-net
(including independent contractors, if any) with access to confidential
information has executed a confidentiality and non-disclosure agreement pursuant
to the form of agreement previously provided to NCI or its representatives.
Such confidentiality and non-disclosure agreements constitute valid and binding
obligations of scruz-net and such person, enforceable in accordance with their
respective terms. To scruz-net's actual knowledge, neither the execution or
delivery of such agreements, nor the carrying on of their business as employees
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by such persons, nor the conduct of their business as currently anticipated,
will conflict with or result in a breach of the terms, conditions or provisions
of or constitute a default under any contract, covenant or instrument under
which any of such persons is obligated.
(d) No product or service liability or warranty claims which
individually or in the aggregate could exceed Three Thousand Dollars ($3,000)
individually or Ten Thousand Dollars ($10,000) in the aggregate have been
communicated to or threatened against scruz-net nor, to the scruz-net's actual
knowledge, is there any specific situation, set of facts or occurrence that
provides a basis for such claim.
3.10 EMPLOYEE BENEFIT PLANS. There is no unfunded prior service cost
----------------------
with respect to any bonus, deferred compensation, pension, profit-sharing,
retirement, stock purchase, stock option, or other employee benefit or fringe
benefit plans, whether formal or informal, maintained by scruz-net. Each bonus,
deferred compensation, pension, profit-sharing, retirement, stock purchase,
stock option, and other employee benefit or fringe benefit plans, whether formal
or informal, maintained by scruz-net conforms to all applicable requirements of
the Employees Retirement Income Security Act of 1974. The scruz-net Disclosure
Schedule lists and describes all profit-sharing, bonus, incentive, deferred
compensation, vacation, severance pay, retirement, stock option, group insurance
or other plans (whether written or not) providing employee benefits.
3.11 BANK ACCOUNTS. The scruz-net Disclosure Schedule sets forth the
-------------
names and locations of all banks, trusts, companies, savings and loan
associations, and other financial institutions at which scruz-net maintains
accounts of any nature and the names of all persons authorized to draw thereon
or make withdrawals therefrom.
3.12 CONTRACTS.
---------
(a) scruz-net has no agreements, contracts or commitments that
provide for the sale, licensing or distribution by that entity of any of its
products, services, inventions, technology, know-how, trademarks or trade names
except in the ordinary course of its business.
(b) scruz-net has no agreements, contracts or commitments that
call for fixed and/or contingent payments or expenditures by or to that entity
of more than Ten Thousand Dollars ($10,000).
(c) Without limiting the provisions of Section 3.9 and except
for any agreements with NCI, scruz-net has not granted to any third party any
exclusive rights of any kind with respect to any of the scruz-net
Products/Services, including, without limitation, territorial exclusivity or
exclusivity with respect to particular versions, implementations or translations
of any of the scruz-net Products/Services.
(d) There is no outstanding sales contract, commitment or
proposal of scruz-net that is currently expected to result in any loss to such
entity (before allocation of overhead and administrative costs) upon completion
or performance thereof.
(e) scruz-net has no outstanding agreements, contracts or
commitments with officers, employees, agents, consultants, advisors, salesmen,
sales repre sentatives, distributors or dealers that are not cancelable by it on
notice of not longer than thirty (30) days and without liability, penalty or
premium.
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<PAGE>
(f) scruz-net has no employment, independent contractor or similar
agreement, contract or commitment that is not terminable on no more than thirty
(30) days' notice without penalty or liability of any type, including without
limitation severance or termination pay.
(g) scruz-net has no currently effective collective bargaining or
union agreements, contracts or commitments.
(h) scruz-net is not restricted by agreement from competing with any
person or from carrying on its business anywhere in the world.
(i) scruz-net has not guaranteed any obligations of other persons or
made any agreements to acquire or guarantee any obligations of other persons.
(j) scruz-net has no outstanding loan or advance to any person; nor is
it party to any line of credit, standby financing, revolving credit or other
similar financing arrangement of any sort which would permit the borrowing by
such entity of any sum not reflected in the scruz-net Financial Statements.
(k) All material contracts, agreements and instruments to which scruz-
net is a party are valid, binding, in full force and effect, and enforceable by
scruz-net in accordance with their respective terms. No such material contract,
agreement or instrument contains any material liquidated-damages, penalty or
similar provision. scruz-net has not received any notice from any party to any
such material contract, agreement or instrument that such party intends to
cancel, withdraw, modify or amend such contract, agreement or arrangement.
(l) The scruz-net Disclosure Schedule lists all material agreements
pursuant to which scruz-net has agreed to supply to any third-party scruz-net
Products/Services.
(m) scruz-net is not in default under or in breach or violation of,
nor, to its actual knowledge, is there any valid basis for any claim of default
by such entity under, or breach or violation by such entity of, any contract,
commitment or restriction to which such entity is a party or to which it or any
of its properties is bound, where such defaults, breaches, or violations would,
in the aggregate, have a Material Adverse Effect on scruz-net. To scruz-net's
actual knowledge, no other party is in default under or in breach or violation
of, nor is there any valid basis for any claim of default by any other party
under or any breach or violation by any other party of, any material contract,
commitment, or restriction to which scruz-net is bound or by which any of its
properties is bound, where such defaults, breaches, or violations would, in the
aggregate, have a Material Adverse Effect on scruz-net.
(n) All agreements, contracts and commitments involving scruz-net's
right to receive or obligation to pay more than Ten Thousand Dollars ($10,000)
per year (the "Material Contracts") are listed on the scruz-net Disclosure
Schedule. Either (i) the Material Contracts will not be affected by a change in
control of scruz-net as a result of the Merger or (ii) scruz-net has described
in the scruz-net Disclosure Schedule any actions that are necessary to ensure
the enforceability by scruz-net of the Material Contracts following the Merger.
(o) True and correct copies of each document or instrument described
in the scruz-net Disclosure Schedule pursuant to this Section 3.12 have been
made available to NCI or its representatives.
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3.13 INSIDER TRANSACTIONS. No Affiliate of scruz-net has any
--------------------
interest in (i) any material equipment or other property, real or personal,
tangible or intangible, including, without limitation, any item of intellectual
property, used in connection with or pertaining to the business of scruz-net, or
(ii) any creditor, supplier, customer, agent or representative of scruz-net;
provided, however, that no such Affiliate or other person shall be deemed to
have such an interest solely by virtue of the ownership of less than one percent
(1%) of the outstanding stock or debt securities of any publicly-held company,
the stock or debt securities of which are traded on a recognized stock exchange
or quoted on the National Association of Securities Dealers Automated Quotation
System.
3.14 INSURANCE. The scruz-net Disclosure Schedule contains a list of
---------
the principal policies of fire, liability and other forms of insurance held by
scruz-net.
3.15 DISPUTES AND LITIGATION. There is no suit, action, litigation,
-----------------------
proceeding, investigation, claim, complaint, or accusation pending, or to its
knowledge threatened against or affecting scruz-net or any of its properties,
assets or business or to which scruz-net is a party, in any court or before any
arbitrator of any kind or before or by any governmental agency (including,
without limitation, any federal, state, local, foreign or other governmental
department, commission, board, bureau, agency or instrumentality), and to its
knowledge there is no basis for such suit, action, litigation, proceeding,
investigation, claim, complaint, or accusation; (b) to its knowledge there is no
pending or threatened change in any environmental, zoning or building laws,
regulations or ordinances which affect or could affect scruz-net or any of its
properties, assets or businesses; and (c) there is no outstanding order, writ,
injunction, decree, judgment or award by any court, arbitrator or governmental
body against or affecting scruz-net or any of its properties, assets or
business. To its knowledge, there is no litigation, proceeding, investigation,
claim, complaint or accusation, formal or informal, or arbitration pending, or
any of the aforesaid threatened, or any contingent liability which would give
rise to any right of indemnification or similar right on the part of any
director or officer of scruz-net or any such person's heirs, executors or
administrators as against scruz-net.
3.16 COMPLIANCE WITH LAWS. scruz-net has at all times been, and
--------------------
presently is, in full compliance with, and has not received notice of any
claimed violation of, any applicable federal, state, local, foreign and other
laws, rules and regulations. scruz-net has filed all returns, reports and other
documents and furnished all information required or requested by any federal,
state, local or foreign governmental agency and all such returns, reports,
documents and information are true and complete in all respects. To its
knowledge, all permits, licenses, orders, franchises and approvals of all
federal, state, local or foreign governmental or regulatory bodies required of
scruz-net for the conduct of its business have been obtained, no violations are
or have been recorded in respect of any such permits, licenses, orders,
franchises and approvals, and there is no litigation, proceeding, investigation,
arbitration, claim, complaint or accusation, formal or informal, pending or
threatened, which may revoke, limit, or question the validity, sufficiency or
continuance of any such permit, license, order, franchise or approval. Such
permits, licenses, orders, franchises and approvals are valid and sufficient for
all activities presently carried on by scruz-net.
3.17 GOVERNMENTAL AUTHORIZATIONS AND REGULATIONS. All licenses,
-------------------------------------------
franchises, permits and other governmental authorizations held by scruz-net and
material to its business are valid and sufficient for the business presently
carried on by scruz-net. The business of scruz-net is not being conducted in
violation of any law, ordinance or regulation of any
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governmental entity, except for violations which either singly or in the
aggregate do not and will not have a Material Adverse Effect on scruz-net.
3.18 SUBSIDIARIES. scruz-net has no subsidiaries. scruz-net does
------------
not own or control (directly or indirectly) any capital stock, bonds or other
securities of, and does not have any proprietary interest in, any other
corporation, general or limited partnership, firm, association or business
organization, entity or enterprise, and scruz-net does not control (directly or
indirectly) the management or policies of any other corporation, partnership,
firm, association or business organization, entity or enterprise.
3.19 ENVIRONMENTAL MATTERS.
---------------------
(a) As of the date hereof, to the actual knowledge of scruz-net,
no underground storage tanks are present under any property that scruz-net has
at any time owned, operated, occupied or leased. As of the date hereof except as
set forth in the scruz-net Disclosure Schedule, no material amount of any
substance that has been designated by any governmental entity or by applicable
federal, state or local law to be radioactive, toxic, hazardous or otherwise a
danger to health or the environment, including, without limitation, PCBs,
asbestos, petroleum, urea-formaldehyde and all substances listed as hazardous
substances pursuant to the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, or defined as a hazardous waste pursuant
to the United States Resource Conservation and Recovery Act of 1976, as amended,
and the regulations promulgated pursuant to said laws (a "Hazardous Material"),
excluding office, janitorial and other immaterial supplies, are present, as a
result of the actions of scruz-net or, to scruz-net's actual knowledge, as a
result of any actions of any third party or otherwise, in, on or under any
property, including the land and the improvements, ground water and surface
water, that scruz-net has at any time owned, operated, occupied or leased.
(b) At no time has scruz-net transported, stored, used,
manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in violation of any law in effect on or before the Closing
Date, nor has scruz-net disposed of, transported, sold, or manufactured any
product containing a Hazardous Material (collectively, "Hazardous Materials
Activities") in violation of any rule, regulation, treaty or statute promulgated
by any governmental entity to prohibit, regulate or control Hazardous Materials
or any Hazardous Material Activities.
(c) scruz-net currently holds all environmental approvals,
permits, licenses, clearances and consents (the "Environmental Permits")
necessary for the conduct of its business as such business is currently being
conducted, the absence of which would be reasonably likely to have a Material
Adverse Effect on scruz-net.
(d) No action, proceeding, revocation proceeding, amendment
procedure, writ, injunction or claim is pending or, to the actual knowledge of
scruz-net, threatened concerning any Environmental Permit. scruz-net is not
aware of any fact or circumstance which could involve it in any environmental
litigation or impose upon it any environmental liability which would be
reasonably likely to have a Material Adverse Effect on scruz-net.
3.20 CORPORATE DOCUMENTS. scruz-net has furnished to NCI for its
-------------------
examination: (i) copies of its Articles of Incorporation and Bylaws; (ii) its
Minute Book containing all records required to be set forth of all proceedings,
consents, actions, and
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meetings of the stockholders, the board of directors and any committees thereof;
(iii) all permits, orders, and consents issued by any regulatory agency with
respect to such entity, or any securities of such entity, and all applications
for such permits, orders, and consents; and (iv) its stock transfer books
setting forth all transfers of any capital stock. The corporate minute books,
stock certificate books, stock registers and other corporate records of scruz-
net are complete and accurate in all material respects, and the signatures
appearing on all documents contained therein are the true signatures of the
persons purporting to have signed the same. All actions reflected in such books
and records were duly and validly taken in compliance with the laws of the
applicable jurisdiction.
3.21 NO BROKERS. scruz-net nor any of their stockholders are
----------
obligated for the payment of fees or expenses of any broker or finder in
connection with the origin, negotiation or execution of this Agreement or the
Articles of Merger or in connection with any transaction contemplated hereby or
thereby.
3.22 DISCLOSURE. No statements by scruz-net contained in this
----------
Agreement or the Exhibits or scruz-net Disclosure Schedule, any other
Transaction Document or any written statement or certificate furnished or to be
furnished pursuant hereto or in connection with the transactions contemplated
hereby and thereby (when read together) contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements contained herein or therein not misleading in light of the
circumstances under which they were made.
4. REPRESENTATIONS AND WARRANTIES OF EACH OF THE SHAREHOLDERS. Each of
----------------------------------------------------------
the Shareholders represents and warrants to NCI and Acquisition as follows:
4.1 AUTHORITY, APPROVAL AND ENFORCEABILITY.
--------------------------------------
(a) Such Shareholder has full power and authority to execute,
deliver and perform its obligations under this Agreement and the Escrow
Agreement and to consummate the Transactions, and all action on its part
necessary for such execution, delivery, performance and consummation has been
duly taken.
(b) The execution and delivery by such Shareholder of this
Agreement does not, and the performance and consummation of the Merger will not,
result in or give rise to (with or without the giving of notice or the lapse of
time, or both) any conflict with, breach or violation of, or default,
termination, forfeiture or acceleration of obligations under, any statute, rule,
regulation, judicial, governmental, regulatory or administrative decree, order
or judgment applicable to such Shareholder, or any agreement or other instrument
to which it is a party or to which any of its assets is subject.
(c) This Agreement and the Escrow Agreement are such Shareholder's
legal, valid and binding obligation, enforceable against it in accordance with
the respective terms hereof and thereof, except as such enforcement may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting creditors' rights generally and subject to general
equitable principles.
(d) Such Shareholder is the record and beneficial owner of the
scruz-net Shares reflected as owned by it on the scruz-net Disclosure Schedule,
free and clear of any and all claims, liens, encumbrances or security interests.
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<PAGE>
4.2 POOLING. To the best knowledge of such Shareholder, such
-------
Shareholder has not engaged in any transaction which it believes would preclude
the Merger from being accounted for as a pooling of interests.
4.3 INVESTMENT INTENT. Such Shareholder is acquiring the shares of
-----------------
NCI Common Stock to be issued in the Merger for investment purposes for its own
account and without a view to distribution or resale thereof.
5. REPRESENTATIONS AND WARRANTIES OF NCI. Except as otherwise set forth
-------------------------------------
in the "NCI Disclosure Schedule" which will be provided to scruz-net prior to
closing, NCI represents and warrants to scruz-net as set forth below. No fact
or circumstance disclosed to scruz-net shall constitute an exception to these
representations and warranties unless such fact or circumstance is set forth in
the NCI Disclosure Schedule or such supplements thereto as may mutually be
agreed upon in writing by NCI and scruz-net. NCI and Acquisition are referred
to herein collectively as the NCI Entities.
5.1 ORGANIZATION. Each of the NCI Entities is a corporation duly
------------
organized, validly existing and in good standing under the laws of the state of
incorporation of such entity and has corporate power and authority to carry on
its business as it is now being conducted. Each of the NCI Entities is duly
qualified or licensed to do business and in good standing in each jurisdiction
in which the nature of its business or properties makes such qualification or
licensing necessary except where the failure to be so qualified would not have a
material adverse effect on the operations, assets or financial condition (a
"Material Adverse Effect") of the NCI Entities considered as a whole. True and
complete copies of each of the NCI Entities' Articles of Incorporation and
Bylaws, as in effect on the date hereof and as to be in effect as of the
Closing, have been provided to NCI or its representatives.
5.2 CAPITALIZATION.
--------------
(a) The authorized capital of NCI consists of forty-four million
(44,000,000) Shares of NCI Common Stock. As of September 16, 1996, twenty-one
million three hundred four thousand eighty (21,304,080) shares are issued and
outstanding.
(b) Except as set forth in the NCI Disclosure Schedule, NCI does
not have outstanding any preemptive or subscription rights, options, warrants,
rights to convert or exchange, capital stock equivalents, or other rights to
purchase or otherwise acquire any NCI capital stock or other securities.
(c) All of the issued and outstanding shares of NCI capital stock
have been duly authorized, validly issued, are fully paid and nonassessable, and
such capital stock, and all warrants and options to purchase capital stock of
NCI, have been issued in full compliance with all applicable federal and state
securities laws. None of NCI's issued and outstanding shares of capital stock,
or options or rights to purchase capital stock of NCI, is subject to repurchase
or redemption rights.
5.3 POWER, AUTHORITY AND VALIDITY. The NCI Entities have the
-----------------------------
corporate power to enter into this Agreement and the other Transaction Documents
to which it is a party and to carry out its obligations hereunder and
thereunder. The execution and delivery of this Agreement and the Transaction
Documents and the consummation of the transactions contem plated hereby and
thereby have been duly authorized by the Board of Directors of each of the NCI
Entities and on the Closing Date, by the stockholders of Acquisition and no
other
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<PAGE>
corporate proceedings on the part of the NCI Entities is necessary to authorize
this Agreement, the other Transaction Documents and the transactions
contemplated herein and therein. The NCI Entities are not subject to or
obligated under any charter, bylaw or contract provision or any license,
franchise or permit, or subject to any order or decree, which would be breached
or violated by or in conflict with its executing and carrying out this Agreement
and the transactions contemplated hereunder and under the Transaction Documents.
Except for (i) the filing of the Articles of Merger with the Secretary of State
of the State of California, and (ii) filings under applicable securities laws,
no consent of any governmental authority, is required to be obtained on the part
of each of the NCI Entities to permit the transactions contemplated herein and
to permit NCI to continue its business activities as previously conducted
without a Material Adverse Effect. This Agreement is, and the other Transaction
Documents when executed and delivered by the NCI entities shall be, the valid
and binding obligations of NCI, enforceable in accordance with their respective
terms.
5.4 FINANCIAL STATEMENTS.
--------------------
(a) NCI will deliver audited Financial Statements as of December
31, 1995, and unaudited Financial Statements as of June 30, 1996 (the "NCI
Financial Statements").
(b) The NCI Financial Statements are complete and in accordance
with the books and records of the NCI and present fairly the financial position
of NCI as of their historical dates. The NCI Financial Statements have been
prepared in accordance with generally accepted accounting principles
("GAAP")(except for the absence of footnotes in any unaudited financial
statements) applied on a basis consistent with prior periods. Except and to the
extent reflected or reserved against in such balance sheets (including the notes
thereto), NCI does not have, as of the dates of such balance sheets, any
liabilities or obligations (absolute or contingent) of a nature required or
customarily reflected in a balance sheet (or the notes thereto) prepared in
accordance with GAAP. The reserves, if any, reflected on the NCI Financial
Statements are adequate in light of the contingencies with respect to which they
are made.
(c) NCI has no debt, liability, or obligation of any nature,
whether accrued, absolute, contingent, or otherwise, and whether due or to
become due, that is not reflected or reserved against in the NCI Financial
Statements, except for those (i) that may have been incurred after the date of
the NCI Financial Statements, or (ii) that are not required by GAAP to be
included in a balance sheet or the notes thereto, except that NCI has not
established any reserves with respect to the costs and fees associated with this
Agreement, the other Transaction Documents, and the transactions contemplated
hereby and thereby. All material debts, liabilities, and obligations incurred
after the date of the NCI Financial Statements were incurred in the ordinary
course of business, and are usual and normal in amount both individually and in
the aggregate.
5.5 TAX MATTERS.
-----------
(a) NCI has fully and timely, properly and accurately filed all
tax returns and reports required to be filed by it, including all federal,
foreign, state and local tax returns and estimates for all years and periods
(and portions thereof) for which any such returns, reports or estimates were
due. All such returns, reports and estimates were prepared in the manner
required by applicable law. All income, sales, use, occupation, property or
other taxes or assessments due from NCI have been paid. There are no pending
assessments,
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<PAGE>
asserted deficiencies or claims for additional taxes that have not been paid.
The reserves for taxes, if any, reflected on the NCI Financial Statements are
adequate and there are no tax liens on any property or assets of NCI. There
have been no audits or examinations of any tax returns or reports by any
applicable governmental agency. No state of facts exists or has existed which
would constitute grounds for the assessment of any penalty or of any further tax
liability beyond that shown on the respective tax reports, returns or estimates.
There are no outstanding agreements or waivers extending the statutory period of
limitation applicable to any federal, state or local income tax return or report
for any period.
(b) All taxes which NCI has been required to collect or withhold
have been duly withheld or collected and, to the extent required, have been paid
to the proper taxing authority.
(c) NCI is not a party to any tax-sharing agreement or similar
arrangement with any other party.
5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since June 30, 1996, NCI
------------------------------------
has not suffered any material adverse change in its financial condition or in
the operations of its business, nor any material adverse changes in its balance
sheet, (with the NCI Financial Statements and any subsequent balance sheet
analyzed as if each had been prepared according to GAAP), including but not
limited to cash distributions or material decreases in the net assets of NCI.
5.7 TITLE AND RELATED MATTERS. NCI has good and marketable title to
-------------------------
all the properties, interests in properties and assets, real and personal,
reflected in the NCI Financial Statements or acquired after the date of the NCI
Financial Statements (except properties, interests in properties and assets sold
or otherwise disposed of since the date of the NCI Financial Statements in the
ordinary course of business), free and clear of all mortgages, liens, pledges,
charges or encumbrances of any kind or character, except the lien of current
taxes not yet due and payable and except for liens which in the aggregate do not
secure more than Five Hundred Thousand Dollars ($500,000) in liabilities. The
equipment of NCI used in the operation of its business is in good operating
condition and repair. All real or personal property leases to which NCI is a
party are valid, binding, and enforceable obligations of NCI effective in
accordance with their respective terms. There is not under any of such material
leases any existing material default or event of default or event which, with
notice or lapse of time or both, would constitute a material default, and cause
a Material Adverse Effect upon NCI.
5.8 PROPRIETARY RIGHTS.
------------------
(a) NCI owns all right, title and interest in and to, or valid
licenses for use of, all patents, copyrights, technology, software, software
tools, know-how, processes, trade secrets, trademarks, service marks, trade
names and other proprietary rights used in or necessary for the conduct of NCI
business as conducted to the date hereof, including, without limitation, the
technology and all proprietary rights developed or discovered or used in
connection with or contained in the NCI Products/Services, free and clear of all
liens, claims and encumbrances (including without limitation distribution
rights) (all of which are referred to as "NCI Proprietary Rights"). NCI's
trademark or trade name registrations related to the NCI Products/Services and
all of NCI's copyrights in any of the NCI Products/Services are valid and in
full force and effect; and consummation of the transactions contemplated hereby
will not alter or impair any such rights. No claims have been asserted against
NCI (NCI is not aware of any claims which are likely to be asserted against it
or which have been asserted against others) by any person challenging NCI's use,
possession, manufacture, sale, provision or
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distribution of the NCI Products/Services under any patents, trademarks, trade
names, copyrights, trade secrets, software, technology, know-how or processes
utilized by NCI or challenging or questioning the validity or effectiveness of
any license or agreement relating thereto. To NCI's knowledge, none of the NCI
Products/Services nor the use or exploitation of any patents, trademarks, trade
names, copyrights, software, technology, know-how or processes by NCI in its
current business infringes on the rights of, constitutes misappropriation of, or
in any way involves unfair competition with respect to, any proprietary
information or intangible property right of any third person or entity,
including without limitation any patent, trade secret, copyright, trademark or
trade name.
(b) To NCI's actual knowledge, no employee of such entity is in
violation of any term of any employment contract, patent disclosure agreement or
any other contract or agreement relating to the relationship of any such
employee with that entity or, to NCI's actual knowledge, any other party because
of the nature of the business conducted by NCI or proposed to be conducted by
NCI.
(c) Each person presently employed by NCI (including independent
contractors, if any) with access to confidential information which would have a
Material Adverse Effect if disclosed, has executed a confidentiality and non-
disclosure agreement pursuant to the form of agreement previously provided to
scruz-net or its representatives. Such confidentiality and non-disclosure
agreements constitute valid and binding obligations of such persons, enforceable
in accordance with their respective terms.
(d) No product or service liability or warranty claims which
individually exceed Five Hundred Thousand Dollars ($500,000) or in the aggregate
exceed Five Million Dollars ($5,000,000) have been communicated to or threatened
against NCI.
5.9 EMPLOYEE BENEFIT PLANS. There is no unfunded prior service cost
----------------------
with respect to any bonus, deferred compensation, pension, profit-sharing,
retirement, stock purchase, stock option, or other employee benefit or fringe
benefit plans, whether formal or informal, maintained by NCI. Each bonus,
deferred compensation, pension, profit-sharing, retirement, stock purchase,
stock option, and other employee benefit or fringe benefit plans, whether formal
or informal, maintained by NCI conforms to all applicable requirements of the
Employees Retirement Income Security Act of 1974. The NCI Disclosure Schedule
lists and describes all profit-sharing, bonus, incentive, deferred compensation,
vacation, severance pay, retirement, stock option, group insurance or other
plans (whether written or not) providing employee benefits.
5.10 BANK ACCOUNTS. The NCI Disclosure Schedule sets forth the names
-------------
and locations of all banks, trusts, companies, savings and loan associations,
and other financial institutions at which NCI maintains accounts of any nature
and the names of all persons authorized to draw thereon or make withdrawals
therefrom.
5.11 CONTRACTS.
---------
(a) NCI has no currently effective collective bargaining or union
agreements, contracts or commitments.
(b) NCI is not restricted by agreement from competing with any
person or from carrying on its business anywhere in the world.
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(c) To NCI's actual knowledge, all material contracts, agreements
and instruments to which NCI is a party are valid, binding, in full force and
effect, and enforceable by NCI in accordance with their respective terms. NCI
has not received any notice from any party to any such material contract,
agreement or instrument that such party intends to cancel, withdraw, modify or
amend such contract, agreement or arrangement.
(d) NCI is not in default under or in breach or violation of,
nor, to its actual knowledge, is there any valid basis for any claim of default
by NCI under, or breach or violation by NCI of, any contract, commitment or
restriction to which NCI is a party or to which it or any of its properties is
bound, where such defaults, breaches, or violations would, in the aggregate,
have a Material Adverse Effect on NCI. To NCI's actual knowledge, no other party
is in default under or in breach or violation of, nor is there any valid basis
for any claim of default by any other party under or any breach or violation by
any other party of, any material contract, commitment, or restriction to which
NCI is bound or by which any of its properties is bound, where such defaults,
breaches, or violations would, in the aggregate, have a Material Adverse Effect
on NCI.
(e) True and correct copies of each document or instrument
described in the NCI Disclosure Schedule pursuant to this Section 5.11 have been
made available to scruz-net or its representatives.
5.12 INSIDER TRANSACTIONS. No Affiliate of NCI has any interest in
--------------------
(i) any material equipment or other property, real or personal, tangible or
intangible, including, without limitation, any item of intellectual property,
used in connection with or pertaining to the business of NCI, or (ii) any
creditor, supplier, customer, agent or representative of NCI; provided, however,
that no such Affiliate or other person shall be deemed to have such an interest
solely by virtue of the ownership of less than one percent (1%) of the
outstanding stock or debt securities of any publicly-held company, the stock or
debt securities of which are traded on a recognized stock exchange or quoted on
the National Association of Securities Dealers Automated Quotation System.
5.13 LITIGATION. There are no suits, actions or proceedings pending
----------
or, to NCI's actual knowledge, threatened against or affecting NCI or which
questions or challenges the validity of this Agreement. There is no judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against NCI.
5.14 GOVERNMENTAL AUTHORIZATIONS AND REGULATIONS. All licenses,
-------------------------------------------
franchises, permits and other governmental authorizations held by NCI and
material to its business are valid and sufficient for the business presently
carried on by NCI. The business of NCI is not being conducted in violation of
any law, ordinance or regulation of any governmental entity, except for
violations which either singly or in the aggregate do not and will not have a
Material Adverse Effect on NCI.
5.15 ENVIRONMENTAL MATTERS.
---------------------
(a) As of the date hereof, to the actual knowledge of NCI, no
underground storage tanks are present under any property that NCI has at any
time owned, operated, occupied or leased. As of the date hereof except as set
forth in the NCI Disclosure Schedule, no material amount of any substance that
has been designated by any governmental entity or by applicable federal, state
or local law to be radioactive, toxic, hazardous or otherwise a danger to health
or the environment, including, without limitation, PCBs, asbestos,
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petroleum, urea-formaldehyde and all substances listed as hazardous substances
pursuant to the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or defined as a hazardous waste pursuant to
the United States Resource Conservation and Recovery Act of 1976, as amended,
and the regulations promulgated pursuant to said laws (a "Hazardous Material"),
excluding office, janitorial and other immaterial supplies, are present, as a
result of the actions or NCI or, to NCI's actual knowledge, as a result of any
actions of any third party or otherwise, in, on or under any property, including
the land and the improvements, ground water and surface water, that NCI have at
any time owned, operated, occupied or leased.
(b) At no time has NCI transported, stored, used, manufactured,
disposed of, released or exposed its employees or others to Hazardous Materials
in violation of any law in effect on or before the Closing Date, nor has NCI
disposed of, transported, sold, or manufactured any product containing a
Hazardous Material (collectively, "Hazardous Materials Activities") in violation
of any rule, regulation, treaty or statute promulgated by any governmental
entity to prohibit, regulate or control Hazardous Materials or any Hazardous
Material Activities.
(c) NCI currently holds all environmental approvals, permits,
licenses, clearances and consents (the "Environmental Permits") necessary for
the conduct of its business as such business is currently being conducted, the
absence of which would be reasonably likely to have a Material Adverse Effect on
NCI.
(d) No action, proceeding, revocation proceeding, amendment procedure,
writ, injunction or claim is pending or, to the actual knowledge of NCI,
threatened concerning any Environmental Permit. NCI is not aware of any fact or
circumstance which could involve it in any environmental litigation or impose
upon it any environmental liability which would be reasonably likely to have a
Material Adverse Effect on NCI.
5.16 CORPORATE DOCUMENTS. The NCI Entities will furnish to scruz-net
-------------------
for its examination: (i) copies of their Articles of Incorporation and Bylaws;
(ii) Minute Books containing all records required to be set forth of all
proceedings, consents, actions, and meetings of the stockholders, the board of
directors and any committees thereof; (iii) all permits, orders, and consents
issued by any regulatory agency with respect to such entities, or any securities
of such entities, and all applications for such permits, orders, and consents;
and (iv) its stock transfer books setting forth all transfers of any capital
stock. The corporate minute books, stock certificate books, stock registers and
other corporate records of the NCI entities are complete and accurate in all
material respects, and the signatures appearing on all documents contained
therein are the true signatures of the persons purporting to have signed the
same. All actions reflected in such books and records were duly and validly
taken in compliance with the laws of the applicable jurisdiction.
5.17 NO BROKERS. None of the NCI Entities nor any of their
----------
stockholders are obligated for the payment of fees or expenses of any broker or
finder in connection with the origin, negotiation or execution of this Agreement
or the Articles of Merger or in connection with any transaction contemplated
hereby or thereby.
5.18 DISCLOSURE. No statements by any of the NCI Entities contained
----------
in this Agreement and the Exhibits and NCI Disclosure Schedule attached hereto,
any other Transaction Document or any written statement or certificate furnished
or to be furnished pursuant hereto or in connection with the transactions
contemplated hereby and thereby (when read together) contains any untrue
statement of a material fact or omits to state a
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material fact necessary in order to make the statements contained herein or
therein not misleading in light of the circumstances under which they were made.
6. PRECLOSING COVENANTS OF SCRUZ-NET AND NCI.
-----------------------------------------
6.1 EMPLOYMENT AGREEMENTS, OTHER COMMITMENTS TERMINATED.
---------------------------------------------------
(a) Prior to the Closing, all employment agreements to which scruz-net
is a party shall be reviewed by scruz-net and NCI and, as agreed between them,
either terminated prior to the Closing or assumed by NCI as of the Closing with
such modifications as may be acceptable to scruz-net, NCI and the employee party
to such agreement.
(b) Simultaneously with the execution of this Agreement or prior to
the Closing, the Key Employees shall each enter into an Employment Agreement
with NCI in form and substance acceptable to NCI and each such Key Employee.
Additionally, Timothy Garlick shall enter into a Consulting Agreement with NCI
in form and substance acceptable to NCI and Mr. Garlick.
6.2 ADVICE OF CHANGES.
-----------------
(a) scruz-net will promptly advise NCI in writing (i) of any event
occurring subsequent to the date of this Agreement which would render any
representation or warranty of scruz-net contained in this Agreement, if made on
or as of the date of such event or the Closing Date, untrue or inaccurate in any
material respect and (ii) of any material adverse change in scruz-net's
business, taken as a whole.
(b) NCI will promptly advise scruz-net in writing (i) of any event
occurring subsequent to the date of this Agreement which would render any
representation or warranty of NCI contained in this Agreement, if made on or as
of the date of such event or the Closing Date, untrue or inaccurate in any
material respect and (ii) of any material adverse change in NCI's business,
taken as a whole.
7. MUTUAL COVENANTS.
----------------
7.1 CONDUCT OF BUSINESS BY SCRUZ-NET. Until the Closing, scruz-net
--------------------------------
will continue to conduct its business and maintain its business relationships in
the ordinary and usual course. and will not, without the prior written consent
of NCI:
(a) Incur or commit to incur any capital expenditures in excess of Ten
Thousand Dollars ($10,000) in the aggregate or borrow any money;
(b) lease, license, sell, transfer or encumber or permit to be
encumbered any asset, intellectual property right or other property associated
with the business of scruz-net (including sales or transfers to Affiliates of
scruz-net), except for sales of inventory in the usual and ordinary course of
business;
(c) dispose of any of its assets, except in the regular and ordinary
course of business;
(d) enter into any lease or contract for the purchase or sale of any
property, real or personal except in the ordinary course of business;
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<PAGE>
(e) pay any bonus, increased salary, or special remuneration to any
officer or employee, including any amounts for accrued but unpaid salary or
bonuses (other than amounts not in excess of normal payments made on a regular
basis in prior periods);
(f) change accounting methods;
(g) declare, set aside or pay any cash or stock dividend or other
distribution in respect of capital, or redeem or otherwise acquire any of its
capital stock;
(h) amend or terminate any contract, agreement or license to which it
is a party except in the ordinary course of business;
(i) loan any amount to any person or entity, or guaranty or act as a
surety for any obligation;
(j) issue or sell any shares of its capital stock of any class or any
other of its securities, or issue or create any warrants, obligations,
subscriptions, options, convertible securities, or other commitments to issue
shares of capital stock, other than stock options granted as part of existing
stock option program or pursuant to any recapitalization plan disclosed to and
approved by NCI in its discretion (a "Recapitalization Plan");
(k) split or combine the outstanding shares of its capital stock of
any class or enter into any recapitalization affecting the number of outstanding
shares of its capital stock of any class or affecting any other of its
securities;
(l) amend its Articles of Incorporation or Bylaws;
(m) make or change any election, change any annual accounting period,
adopt or change any accounting method, file any amended tax return, enter into
any closing agreement, settle any tax claim or assessment, surrender any right
to claim refund of taxes, consent to any extension or waiver of the limitation
period applicable to any tax claim or assessment, or take any other action or
omit to take any action, if any such election, adoption, change, amendment,
agreement, settlement, surrender, consent or other action or omission would have
the effect of increasing the tax liability of scruz-net;
(n) do anything that would cause there to be material adverse changes
in its Financial Statements, including, but not limited to, cash distributions
or material decreases in the net assets of scruz-net), except as would occur in
the ordinary course of scruz-net's business, between the date of the scruz-net
Financial Statements and the Closing Date; or
(o) agree to do any of the things described in the preceding clauses
Section 7.1 (a) through (n).
7.2 STOCKHOLDERS' TAX REPRESENTATIONS. scruz-net will use its best
---------------------------------
efforts to cause each scruz-net stockholder to execute prior to the Closing (i)
a reasonable continuity of interest representation concerning such stockholder's
lack of plan or intention to sell, exchange or otherwise dispose of shares of
NCI Common Stock to be received in the Merger; and (ii) initial public offering
lock-up provisions acceptable to NCI.
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<PAGE>
7.3 CONDUCT OF BUSINESS BY NCI. Until the Closing, NCI will continue
--------------------------
to conduct its business and maintain its business relationships in the ordinary
and usual course.
7.4 NO PUBLIC ANNOUNCEMENT. The parties shall make no public
----------------------
announcement concerning this Agreement, their discussions or any other memos,
letters or agreements between the parties relating to the Merger until such time
as they agree to the contents of a mutually satisfactory press release which
they intend to publicly-release on the date of this Agreement. Either of the
parties, but only after reasonable consultation with the other, may make
disclosure if required under applicable law.
7.5 OTHER NEGOTIATIONS. Between the date hereof and the Closing, or
------------------
such earlier date as NCI and scruz-net mutually agree to discontinue discussions
of the Merger (the "Expiration Date"), neither NCI nor scruz-net will take any
action to solicit, initiate, seek, encourage or support any inquiry, proposal or
offer from, furnish any information to, or participate in any negotiations with,
any corporation, partnership, person or other entity or group (other than
discussions pursuant to this Agreement) regarding any acquisition, any merger or
consolidation with or involving scruz-net, or any acquisition of any material
portion of the stock or assets. scruz-net and NCI agree that any such
negotiations in progress as of the date hereof will be terminated or suspended
during such period.
7.6 DUE DILIGENCE, INVESTIGATION, AND AUDITS. At such time prior to
----------------------------------------
the Closing as may be reasonably requested, each party shall make available to
the other party and the other party's employees, agents and representatives all
information concerning the operation, business and prospects of such party as
may be reasonably requested by the other party, including, without limitation,
making the working papers of such party's independent certified public
accountants available for inspection by the other party's independent certified
public accountants. Each party will cooperate with the other party for the
purpose of permitting the other party to discuss such party's business and
prospects with such party's customers, creditors, suppliers and other persons
having business dealings with such party, subject to reasonable confidentiality
obligations between the parties.
7.7 REGULATORY FILINGS; CONSENTS; REASONABLE EFFORTS. Subject to the
------------------------------------------------
terms and conditions of this Agreement, scruz-net and NCI shall use their
respective best efforts to (i) make all necessary filings with respect to the
Merger and this Agreement under the Securities Act, and applicable blue sky or
similar securities laws and shall use all reasonable efforts to obtain required
approvals and clearances with respect thereto and shall supply all additional
information requested in connection therewith; (ii) make merger notification or
other appropriate filings with federal, state or local governmental bodies or
applicable foreign governmental agencies and shall use all reasonable efforts to
obtain required approvals and clearances with respect thereto and shall supply
all additional information requested in connection therewith; (iii) obtain all
consents, waivers, approvals, authorizations and orders required in connection
with the authorization, execution and delivery of this Agreement and the
consummation of the Merger; and (iv) take, or cause to be taken, all appropriate
action, and do, or cause to be done, all things necessary, proper or advisable
to consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement. NCI shall use its best efforts to release the
scruz-net Stockholders and Victor Bankoff from their personal guarantees of
scruz-net debts and obligations.
7.8 FURTHER ASSURANCES. Prior to and following the Closing, each
------------------
party agrees to cooperate fully with the other parties and to execute such
further instruments, documents and agreements and to give such further written
assurances, as may be reasonably requested
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by any other party to better evidence and reflect the transactions described
herein and contemplated hereby and to carry into effect the intents and purposes
of this Agreement.
7.9 MEETING OF STOCKHOLDERS. scruz-net and Acquisition shall
-----------------------
promptly after the date hereof take all action necessary in accordance with the
laws of California, their respective Articles of Incorporation and Bylaws to
obtain the approval of its stockholders of the Merger. scruz-net and
Acquisition each shall use its best efforts to solicit from their respective
stockholders proxies in favor of the Merger and shall take all other action
necessary or advisable to secure the vote or consent of their respective
stockholders required to effect the Merger.
7.10 POOLING ACCOUNTING. scruz-net and NCI shall each use best
-------------------
efforts to cause the business combination to be effected by the Merger to be
accounted for as a pooling of interests. Each of NCI and scruz-net shall use
its best efforts to cause its Affiliates, which in any event will include all
directors, executive officers and holders of at least five percent (5%) of
outstanding voting securities, not to take action that would adversely affect
the ability of NCI to account for the business combination to be effected by the
merger as a pooling of interest.
7.11 AFFILIATE AGREEMENTS. scruz-net shall use its best efforts to
---------------------
deliver or cause to be delivered to NCI, concurrently with the execution of this
Agreement (and in each case prior to the Effective Time) from each of the
Affiliates of scruz-net, an executed Affiliate Agreement in form and substance
reasonably acceptable to NCI ("scruz-net Affiliate Agreement"). NCI shall be
entitled to place appropriate legends on the certificates evidencing any NCI
Common Stock to be received by such Affiliates of scruz-net pursuant to the
terms of this Agreement, and to issue appropriate stop transfer instructions to
the transfer agent for NCI Common Stock, consistent with the terms of such
Affiliate Agreement.
8. CLOSING MATTERS.
---------------
8.1 FILING OF ARTICLES OF MERGER. On the date of the Closing, but
----------------------------
not prior to the Closing, the Articles of Merger shall be filed with the offices
of the Secretary of State of California, and the merger of Acquisition with and
into scruz-net shall be consummated.
8.2 EXCHANGE OF CERTIFICATES
------------------------
(A) EXCHANGE AGENT. Prior to the Closing Date, NCI shall appoint
--------------
Pezzola & Reinke, its legal counsel, to act as exchange agent (the "Exchange
Agent") in the Merger.
(B) NCI TO PROVIDE STOCK. Promptly after the Effective Time of
--------------------
the Merger (but in no event later than ten (10) business days thereafter), NCI
shall make available for exchange in accordance with Section 2 and the Articles
of Merger, through such reasonable procedures as NCI may adopt, the shares of
NCI Common Stock issuable pursuant to Section 2 and the Articles of Merger in
exchange for outstanding shares of scruz-net Common Stock (less the number of
shares of NCI Common Stock to be deposited in escrow pursuant to Section 2.4).
(C) EXCHANGE PROCEDURES. As soon as practicable after the
-------------------
Effective Time of the Merger (but no later than fifteen (15) days thereafter),
the Exchange Agent shall mail to each holder of record of a certificate or
certificates that immediately prior to the Effective Time of the Merger
represented outstanding shares of scruz-net Common Stock (the
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<PAGE>
"Certificates"), whose shares are being converted into NCI Common Stock pursuant
to Section 2 and the Merger Agreement, (i) a letter of transmittal (which shall
specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the Exchange
Agent and which shall be in such form and have such other provisions as NCI may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for NCI Common Stock. Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by NCI together with such letter of transmittal, duly
executed, the holder of such Certificate shall be entitled to receive the number
of shares of NCI Common Stock to which such holder is entitled pursuant to
Section 2 hereof (less the number of shares of NCI Common Stock to be deposited
in escrow pursuant to Section 2.4). The Certificate so surrendered shall
immediately be canceled. NCI shall make customary provisions for lost stock
certificates. In the event of a transfer of ownership of scruz-net Common Stock
that is not registered in the transfer records of scruz-net, the appropriate
number of shares of NCI Common Stock may be delivered to a transferee if the
Certificate representing such scruz-net Common Stock is presented to the
Exchange Agent and accompanied by all documents required to evidence and effect
such transfer and to evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 8.2, each Certificate
shall be deemed at any time after the Effective Time of the Merger to represent
the right to receive upon such surrender the number of shares of NCI Common
Stock as provided by this Section 8.2.
(d) NO FURTHER OWNERSHIP RIGHTS IN SCRUZ-NET COMMON STOCK. All NCI
-----------------------------------------------------
Common Stock delivered upon the surrender for exchange of shares of scruz-net
Common Stock in accordance with the terms hereof shall be deemed to have been
delivered in full satisfaction of all rights pertaining to such shares of scruz-
net Common Stock. There shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of the shares of scruz-net
Common Stock that were outstanding immediately prior to the Effective Time of
the Merger. If, after the Effective Time of the Merger, Certificates are
presented to the Surviving Corporation for any reason, they shall be canceled
and exchanged as provided in this Section 8.2.
8.3 DELIVERY OF DOCUMENTS. On or before the Closing, the parties
---------------------
shall deliver the documents, and shall perform the acts, which are set forth in
Section 9 and Section 10, as specified in such Sections, including delivery of
the counterpart signature pages of the Transaction Documents executed by scruz-
net and/or NCI, as the case may be. All documents which scruz-net shall deliver
or cause to be delivered shall be in form and substance reasonably satisfactory
to NCI. All documents which NCI shall deliver or cause to be delivered shall be
in form and substance reasonably satisfactory to scruz-net.
9. CONDITIONS TO SCRUZ-NET'S OBLIGATIONS. Unless otherwise provided
-------------------------------------
below, scruz-net's obligations to close the transactions contemplated under this
Agreement are subject to the fulfillment or satisfaction by Closing of each of
the following conditions (any one or more of which may be waived by scruz-net,
but only in a writing signed by scruz-net):
9.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
------------------------------------------
and warranties of NCI set forth in Section 5 shall be true in all material
respects on and as of the Closing with the same force and effect as if they had
been made at the Closing, and scruz-net shall receive a certificate to such
effect executed by the Chief Executive Officer of NCI.
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<PAGE>
9.2 COVENANTS. NCI shall have performed and complied with all of its
---------
covenants contained in Sections 6 and 7 on or before the Closing, and scruz-net
shall receive a certificate from NCI to such effect executed by the Chief
Executive Officer of NCI.
9.3 NO LITIGATION. On and as of the Closing, no litigation or
-------------
proceeding shall be threatened or pending against NCI with the purpose or with
the probable effect of enjoining or preventing the consummation of any of the
transactions contemplated by this Agreement, and scruz-net shall receive a
certificate to such effect executed by the Chief Executive Officer of NCI.
9.4 NO ADVERSE DEVELOPMENT. There shall not have been any material
----------------------
adverse changes in the financial condition, results of operations, assets,
liabilities, business or prospects of NCI since the date of this Agreement, and
scruz-net shall receive a certificate to such effect executed by the Chief
Executive Officer of NCI.
9.5 AUTHORIZATIONS. scruz-net shall have received from NCI written
--------------
evidence that the execution, delivery and performance of NCI's obligations under
this Agreement and the Articles of Merger have been duly and validly approved
and authorized by the Board of Directors of NCI and Acquisition.
9.6 GOVERNMENT CONSENTS. There shall have been obtained at or prior
-------------------
to the Closing such permits or authorizations, and there shall have been taken
such other action, as may be required by any regulatory authority having
jurisdiction over the parties and the subject matter and the actions herein
proposed to be taken.
9.7 RELEASE. There shall have been obtained at or prior to the
-------
closing the release of the scruz-net Shareholders and Victor Bankoff from their
personal guarantees of scruz-net's debts and obligations unless NCI provides in
writing to scruz-net prior to closing NCI's agreement to indemnify the scruz-net
Shareholders and Victor Bankoff for all costs incurred after the Closing as a
result of such personal guarantees.
9.8 FINANCIAL STATEMENTS/DISCLOSURE SCHEDULE. Prior to closing NCI
----------------------------------------
shall deliver to scruz-net and the Shareholders copies of its Financial
Statements and Disclosure Schedule. scruz-net shall have two business days from
the receipt of such information in which to review and send via facsimile,
written confirmation to NCI of approval by scruz-net and the Shareholders of the
Financial Statements and Disclosure Schedule.
9.9 OPINION OF NCI'S COUNSEL. At the Closing, scruz-net shall have
------------------------
received from counsel to NCI, an opinion dated as of the Closing Date, in form
and substance reasonably acceptable to scruz-net.
9.10 FILING OF ARTICLES OF MERGER. As of the Closing, the Articles
----------------------------
of Merger shall have been filed with the Secretary of State of the State of
California.
10. CONDITIONS TO NCI'S OBLIGATIONS. Unless otherwise provided below,
-------------------------------
the obligations of NCI are subject to the fulfillment or satisfaction by
Closing, of each of the following conditions (any one or more of which may be
waived by NCI, but only in a writing signed by NCI):
10.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES. The representations
------------------------------------------
and warranties of scruz-net and the Shareholders contained in Sections 3 and 4
shall be true in all
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material respects on and as of the Closing with the same force and effect as if
they had been made at the Closing, and NCI shall receive a certificate from
scruz-net to such effect with respect to the representations and warranties of
scruz-net executed by its President.
10.2 COVENANTS. scruz-net shall have performed and complied with all
---------
of its covenants contained in Sections 6 and 7 on or before the Closing, and NCI
shall receive a certificate from scruz-net to such effect signed by its
President.
10.3 NO LITIGATION. On and as of the Closing, no litigation or
-------------
proceeding shall be threatened or pending against scruz-net for the purpose or
with the probable effect of enjoining or preventing the consummation of any of
the transactions contemplated by this Agreement, or and NCI shall receive a
certificate from scruz-net to such effect signed by its President.
10.4 AUTHORIZATIONS. NCI shall have received from scruz-net written
--------------
evidence that the execution, delivery and performance of this Agreement and the
Articles of Merger have been duly and validly approved and authorized by its
Board of Directors and by the holders of One Hundred Percent (100%) of the
outstanding shares of capital stock of scruz-net. NCI shall have received a
certificate from scruz-net to such effect signed by its President. NCI shall
also have received the duly executed Affiliate Agreements described in Section
7.11 hereof.
10.5 NO ADVERSE DEVELOPMENT. There shall not have been any material
----------------------
adverse changes in the financial condition, results of operations, assets,
liabilities, business or prospects of scruz-net since the date of this
Agreement. NCI shall have received a certificate from scruz-net to such effect
signed by its President.
10.6 GOVERNMENT CONSENTS. There shall have been obtained at or prior
-------------------
to the Closing such permits or authorizations, and there shall have been taken
such other action, as may be required by any regulatory authority having
jurisdiction over the parties and the subject matter and the actions herein
proposed to be taken.
10.7 POOLING LETTER. scruz-net and NCI shall have received a letter
--------------
from KPMG Peat Marwick, each dated the date of the Information Statements and
confirmed in writing at the Effective Time of the Merger and addressed to scruz-
net and NCI, stating that the business combination to be effected by the Merger
will qualify as a pooling of interests transaction under generally accepted
accounting principles.
10.8 OPINION OF SCRUZ-NET'S COUNSEL. At the Closing, NCI shall have
------------------------------
received from counsel to scruz-net, an opinion dated the Closing Date in form
and substance reasonably acceptable to NCI.
10.9 FILING OF ARTICLES OF MERGER. As of the Closing, the Articles
----------------------------
of Merger shall have been filed with the Secretary of State of the State of
California.
11. TERMINATION OF AGREEMENT.
------------------------
11.1 TERMINATION. This Agreement may be terminated at any time prior
-----------
to the Closing by the mutual written consent of each of the parties hereto.
This Agreement may also be terminated and abandoned:
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(a) By NCI if any of the conditions precedent to NCI's
obligations pursuant to Section 10 shall not have been fulfilled at and as of
the Closing.
(b) By scruz-net if any of the conditions precedent to scruz-
net's obligations pursuant to Section 9 above shall not have been fulfilled at
and as of the Closing.
(c) By either scruz-net or NCI, if the Merger is not effected by
November 15, 1996.
Any termination of this Agreement under this Section 11.1 shall be effected by
the terminating party's delivery of written notice to the other parties hereto.
11.2 LIABILITY FOR TERMINATION. Any termination of this Agreement
-------------------------
pursuant to this Section 11 shall be without further obligation or liability
upon any party in favor of any other party hereto; provided, that if such
termination shall result from fraud or the willful failure of a party to carry
out its obligations under this Agreement, then such party shall be liable for
losses incurred by the other parties. The provisions of this Section 11.2 shall
survive termination.
11.3 CERTAIN EFFECTS OF TERMINATION. In the event of the termination
------------------------------
of this Agreement by either scruz-net or NCI as provided in Section 11.1 hereof,
each party, if so requested by the other party, will (i) return promptly every
document (other than documents publicly available) furnished to it by the other
party (or any subsidiary, division, associate or affiliate of such other party)
in connection with the transactions contemplated hereby, whether so obtained
before or after the execution of this Agreement, and any copies thereof which
may have been made, and will cause its representatives and any representatives
of financial institutions and investors and others to whom such documents were
furnished promptly to return such documents and any copies thereof any of them
may have made, or (ii) destroy such documents and cause its representatives and
such other representatives to destroy such documents, and such party shall
deliver a certificate executed by its president or vice president stating to
such effect.
11.4 REMEDIES. No party shall be limited to the termination right
--------
granted in Section 11.1 hereto by reason of the nonfulfillment of any condition
to such party's closing obligations but may, in the alternative, elect to do one
of the following:
(a) proceed to close despite the nonfulfillment of any closing
condition, it being understood that consummation of the transactions
contemplated hereby shall be deemed a waiver of any misrepresentation or breach
of warranty or covenant and of any party's rights and remedies with respect
thereto to the extent that the other party shall have actual knowledge of such
misrepresentation or breach and the Closing shall nonetheless take place; or
(b) decline to close, terminate this Agreement as provided in
Section 11.1 hereof, and thereafter seek damages to the extent provided in
Section 11.2 hereof.
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12. INDEMNIFICATION.
---------------
12.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS.
-----------------------------------------------------------------
(a) The Escrow as provided in Section 2.4 shall terminate on the
earlier of (i) one (1) year after the Closing Date or (ii) the date the first
audit of NCI's financial statements, which includes the results of operations of
scruz-net, has been completed and NCI has received a signed opinion from its
independent auditors certifying such financial statements (the "Escrow
Termination Date"). Except as set forth in 12.1(b) below, all warranties and
representations of the parties hereto shall terminate on the Escrow Termination
Date.
(b) The representations, warranties, covenants and agreements of the
scruz-net and/or the Shareholders contained in Sections 3 and 4 of this
Agreement or in any writing delivered pursuant to such sections, to the extent
that a breach or default in any such representations, warranties, covenants or
agreements is not as a result of fraud or a willful breach or misconduct, shall
terminate at the end of the twenty-forth month following the month in which the
Closing Date occurs (the "Termination Date"); provided, however, that
representations and warranties as set forth in Sections 3.1, 3.2 and 4 shall
terminate at the end of the forty-eighth (48) month following the month in which
the Closing Date occurs (absent fraud or a willful breach or misconduct).
Notwithstanding the foregoing, in the event of fraud, the representations and
warranties of the parties hereto and their indemnity obligations under this
Section 12 shall not terminate. All representations, warranties covenants and
agreements shall survive as to any claim or demand made prior to the Escrow
Termination Date or Termination Date, as applicable, until such claim or demand
is fully paid or otherwise resolved by the parties hereto in writing or by a
court of competent jurisdiction.
(c) The covenants and agreements of the parties contained in Sections
6, 7, 8, 9 and 10 of this Agreement shall terminate at and shall not survive the
Closing Date, except for covenants that by their own terms apply after the
Closing Date.
12.2 INDEMNIFICATION BY SCRUZ-NET AND THE SHAREHOLDERS.
-------------------------------------------------
(a) GENERAL.
-------
(i) scruz-net and the Shareholders shall jointly and severally,
indemnify and hold harmless NCI, its directors and officers, and each other
person, if any, who controls NCI within the meaning of the Securities Act
("Controlling Persons") in respect of any and all claims, losses, damages,
liabilities, demands, assessments, judgments, costs and expenses (including,
without limitation, settlement costs and any legal or other expenses for
investigating, bringing or defending any actions or threatened actions)
reasonably incurred by NCI, any of its directors, officers or Controlling
Persons in connection with any misrepre sentation or breach of any warranty made
by scruz-net or a Shareholder in this Agreement or in any schedule, exhibit,
certificate or other instrument contemplated by this Agreement.
(ii) Notwithstanding the foregoing, except for liability arising
directly or indirectly out of fraud or a willful breach or misconduct, the
liability of scruz-net and the Shareholders under this Agreement shall not
exceed One Million Five Hundred Thousand Dollars ($1,500,000). Such amount
shall be reduced by any amount paid to NCI as a result of a Peering Contract
Breach as defined below.
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<PAGE>
(iii) Notwithstanding anything to the contrary, if the peering
contract with MCI to which scruz-net is a party is terminated by MCI prior to
March 1, 1998, by reason of an alleged breach by scruz-net or NCI and its
subsidiaries ("Peering Contract Breach"), and such Peering Contract Breach is a
direct or indirect result of the Shareholders' direct action or failure to take
necessary action, the Shareholders jointly and severally shall (A) transfer and
assign to NCI free and clear of any and all claims, liens, encumbrances or
security interests shares of NCI Common Stock equal to thirty percent (30%) of
the Merger Shares (the "Peering Shares"); or, in the alternative, if the
Shareholders fail to deliver the Peering Shares as required hereunder, then (B)
pay NCI cash in an amount equal to the product obtained by multiplying the
number of Peering Shares by Four Dollars and Five Cents ($4.05).
(B) CLAIMS FOR INDEMNIFICATION.
--------------------------
(i) Whenever any claim shall arise for indemnification under this
Section 12.2, NCI shall describe such claim in a written notice ("Notice of
Claim") to a Representative (as defined in Section 12.6 below) and, when known,
specify the facts con stituting the basis for such claim and the amount or an
estimate of the amount of such claim. Each Notice of Claim shall (A) be signed
by a representative of NCI, (B) contain a description of the claim, (C) specify
the amount of such claim, and (D) state that, in the opinion of the signer
thereof, such Notice of Claim is valid under the terms of Section 12 hereof and
is being given by NCI in good faith.
(ii) NCI shall give such Representative prompt notice of any claim
for indemnification hereunder resulting from, or in connection with, any claim
or legal proceeding by a person who is not a party to this Agreement ("Third-
Party Claim") and, with respect to any Third-Party Claim, NCI shall undertake
the defense thereof by representatives reasonably satisfactory to NCI and such
Representative. NCI shall not have the right to settle or compromise or enter
into any binding agreement to settle or compromise, or consent to entry of any
judgment arising from, any such claim or proceeding in its sole discretion
without the prior written consent of such Representative. The Representative
shall have the right to participate in any such defense of a Third-Party Claim
with advisory counsel of his own choosing at his own expense. In the event NCI,
within a reasonable time after notice of any Third-Party Claim, fails to defend,
any Representative shall have the right to undertake the defense, compromise or
settlement of such Third-Party Claim on behalf of, and for the account of, the
Stockholders, at the expense and risk of the Stockholders to the extent of their
liability set forth in Section 12. No Representative, without NCI's written
consent, shall settle or compromise any such Third-Party Claim or consent to
entry of any judgment that does not include, as an unconditional term thereof,
the giving by the claimant or the plaintiff to NCI and/or NCI's subsidiary or
subsidiaries, or affiliate or affiliates, as the case may be, an unconditional
release from all liability in respect of such Third-Party Claim. Notwithstanding
any provision herein to the contrary, failure of NCI to give any notice of any
Third-Party Claim required by this Section 12 shall not constitute a waiver of
NCI's right to indemnification or a defense to any claim by NCI hereunder.
12.3 INDEMNIFICATION BY NCI.
----------------------
(A) GENERAL.
-------
(i) NCI shall indemnify and hold harmless the Stockholders in
respect of any and all claims, losses, damages, liabilities, demands,
assessments, judgments, costs and expenses (including, without limitation,
settlement costs and any legal or other
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<PAGE>
expenses for investigating, bringing or defending any actions or threatened
actions) reasonably incurred by the Stockholders in connection with any
misrepresentation or breach of any warranty made by NCI in this Agreement or in
any schedule, exhibit, certificate or other instrument contemplated by this
Agreement.
(ii) Notwithstanding the foregoing, except for liability arising
directly or indirectly out of fraud or a willful breach or misconduct, the
liability of NCI under this Agreement shall not exceed One Million Five Hundred
Thousand Dollars ($1,500,000).
(B) CLAIMS FOR INDEMNIFICATION.
--------------------------
(i) Whenever any claim shall arise for indemnification under this
Section 12.3, a Representative shall describe such claim in a Notice of Claim to
NCI and, when known, specify the facts constituting the basis for such claim and
the amount or an estimate of the amount of such claim. Each Notice of Claim
shall (A) be signed by a Repre sentative, (B) contain a description of the
claim, (C) specify the amount of such claim, and (D) state that, in the opinion
of the signer thereof, such Notice of Claim is valid under the terms of Section
12 hereof and is being given by a Representative in good faith.
(ii) A Representative shall give NCI prompt notice of any claim
for indemnification hereunder resulting from, or in connection with, any claim
or Third-Party Claim and, with respect to any Third-Party Claim, such
Representative shall undertake the defense thereof by representatives reasonably
satisfactory to NCI and such Representative. No Representative shall have the
right to settle or compromise or enter into any binding agreement to settle or
compromise, or consent to entry of any judgment arising from, any such claim or
proceeding in its sole discretion without the prior written consent of NCI. NCI
shall have the right to participate in any such defense of a Third-Party Claim
with advisory counsel of its own choosing at its own expense. In the event any
Representative, within a reasonable time after notice of any Third-Party Claim,
fails to defend, NCI shall have the right to undertake the defense, compromise
or settlement of such Third-Party Claim on behalf of, and for the account of,
NCI, at the expense and risk of NCI to the extent of its liability set forth in
Section 12. NCI, without a Representative's written consent, shall not settle or
compromise any such Third-Party Claim or consent to entry of any judgment that
does not include, as an unconditional term thereof, the giving by the claimant
or the plaintiff to the Stockholders, or affiliate or affiliates, as the case
may be, an unconditional release from all liability in respect of such Third-
Party Claim. Notwithstanding any provision herein to the contrary, failure of a
Representative to give any notice of any Third-Party Claim required by this
Section 12 shall not constitute a waiver of the Stockholders' right to
indemnification or a defense to any claim by the Stockholders hereunder.
12.4 ARBITRATION. If a party makes a good faith determination that a
-----------
breach (or potential breach) of any of the confidentiality, non-competition, or
intellectual property rights provisions of this Agreement by the other party (or
the Stockholders) may result in damages or consequences that will be immediate,
severe, and incapable of adequate redress after the fact, so that a temporary
restraining order or other immediate injunctive relief is necessary for a
realistic and adequate remedy, that party may seek immediate injunctive relief
without first seeking relief through arbitration. After the court has ruled on
the request for injunctive relief, the parties will thereafter proceed with
arbitration of the dispute and stay the litigation pending arbitration. Subject
to the foregoing, any dispute arising out of this Agreement, or its performance
or breach, shall be resolved by binding arbitration conducted by JAMS/Endispute
under the JAMS/Endispute Rules for Complex Arbitration (the "JAMS Rules"). This
arbitration provision is expressly made pursuant to and shall be governed by the
Federal Arbitration Act,
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<PAGE>
9 U.S.C. Sections 1-14. The parties hereto agree that pursuant to Section 9 of
the Federal Arbitration Act, a judgment of the United States District Courts for
the Northern District of California shall be entered upon the award made
pursuant to the arbitration. A single arbitrator, who shall have the authority
to allocate the costs of any arbitration initiated under this paragraph, shall
be selected according to the JAMS Rules within ten (10) days of the submission
to JAMS/Endispute of the response to the statement of claim or the date on which
any such response is due, whichever is earlier. The arbitrator shall conduct
the arbitration in accordance with the Federal Rules of Evidence. The
arbitrator shall decide the amount and extent of pre-hearing discovery which is
appropriate. The arbitrator shall have the power to enter any award of monetary
and/or injunctive relief (including the power issue permanent injunctive relief
and also the power to reconsider any prior request for immediate injunctive
relief by either of the parties and any order as to immediate injunctive relief
previously granted or denied by a court in response to a request therefor by
either of the parties), including the power to render an award as provided in
Rule 43 of the JAMS Rules; provided, however, that the arbitrator shall not have
the power to award punitive damages under any circumstances (whether styled as
punitive, exemplary, or treble damages, or any penalty or punitive type of
damages) regardless of whether such damages may be available under applicable
law, the parties hereby waiving their rights to recover any such damages. The
arbitrator shall award the prevailing party its costs and reasonable attorneys'
fees, and the losing party shall bear the entire cost of the arbitration,
including the arbitrator's fees. All arbitration shall be held in San
Francisco, California. In addition to the above court, the arbitration award
may be enforced in any court having jurisdiction over the parties and the
subject matter of the arbitration. Notwithstanding the foregoing, the parties
irrevocably submit to the nonexclusive jurisdiction of the state and federal
courts situated where the respondent is domiciled or resides as of the Effective
Date in any action to enforce an arbitration award. With respect to any request
for immediate injunctive relief, that state and federal courts in San Francisco,
California, shall have nonexclusive jurisdiction and venue over any such
disputes.
12.5 LIMITATION ON INDEMNIFICATION. No indemnified party hereunder
-----------------------------
will be entitled to make a claim against any indemnifying party under Section
12.2 or 12.3, unless and until with respect to the party claiming
indemnification (i) the aggregate amount of losses indemnifiable by the
Stockholders exceeds Twenty-five Thousand Dollars ($25,000); and (ii) the
aggregate amount of losses indemnifiable by NCI exceeds Five Hundred Thousand
Dollars ($500,000), respectively, and then only to the extent of the excess.
Except as otherwise expressly provided under this Section 12, for purposes of
the indemnification set forth in this Section 12 as it relates to the Escrow
Shares, the parties agree that each Escrow Share shall have a value of Four
Dollars and Five Cents ($4.05) (subject to adjustment for stock splits,
combinations, reclassifications and the like).
12.6 THE STOCKHOLDERS' REPRESENTATIVES; POWER OF ATTORNEY. The
----------------------------------------------------
Stockholders shall appoint Qarin Van Brink and Matthew Kaufman as their true and
lawful attorneys-in-fact, agents and representatives (each a "Representative"
and collectively the "Representatives"), with full power of substitution and
resubstitution, to negotiate and sign all amendments to this Agreement, and all
other documents in connection with the transactions contemplated by this
Agreement. Should any Representative be unable or unwilling to serve or to
appoint his successor to serve in his stead, and unless the Stockholders appoint
a successor to serve in his stead, such Stockholders shall be deemed to be
represented solely by the remaining Representative or the Board of Directors of
scruz-net should the remaining Representative be unable or unwilling to serve in
his capacity. Each Representative shall have full authority to act on behalf of
and bind the Stockholders.
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12.7 ESCROW.
------
(a) scruz-net Escrow Shares shall be placed with an escrow agent,
satisfactory to NCI and a Representative for a period beginning on the Closing
Date and ending on the Escrow Termination Date, to be disbursed solely upon the
joint signatures of NCI and the Representative, all as set forth below.
Disbursements from the escrow shall be made for the payment of amounts, if any,
to satisfy the indemnification rights of NCI pursuant to Section 12 hereof.
(b) The scruz-net Escrow Shares shall be disbursed during the term
hereof at any time or from time to time, whenever NCI shall give a
Representative a Notice of Claim. Such Notice of Claim must be for a specified
amount.
(i) The Representative may give NCI a written notice ("Notice of
Objection") (A) attaching a copy of such Notice of Claim, (B) stating that, in
the good faith opinion of the Representatives, the claim described in such
Notice of Claim is invalid (either in whole or in specified party) under the
terms of Section 12 hereof, (C) giving the reasons for the alleged invalidity,
and (D) stating that, based on such alleged invalidity, the Representatives
object to the payment of any portion of the scruz-net Escrow Shares to the
requesting party on account thereof. In the event that a Notice of Objection
alleges that a Notice of Claim is only partially invalid, the Representatives,
within thirty (30) days of the receipt of such Notice of Claim, agree to pay
over to NCI that portion of the amounts specified in such Notice of Claim as to
which no objection is made. The Representatives are not required to agree to
make any payments to NCI in respect of a Notice of Claim that has been objected
to in a Notice of Objection given to the Representatives as aforesaid except (X)
as provided in the immediately preceding sentence, or (Y) in accordance with an
order of any arbitration panel initiated by any of the parties hereto pursuant
to paragraph (ii) below.
(ii) NCI and the Representatives agree to submit to final and
binding arbitration any and all disputes the Representatives have specified in a
Notice of Objection or NCI has specified in a Notice of Claim to which the
Representatives have not responded within thirty (30) days of receipt of such
Notice of Claim. Any such dispute subject to arbitration in accordance with the
JAMS Rules as provided in Section 12 hereof.
(c) The escrow shall be terminated on the Escrow Termination Date;
provided, however, that the escrow may continue beyond such date if NCI has
asserted indemnification claims, and any such claims remain unsatisfied.
13. MISCELLANEOUS.
-------------
13.1 GOVERNING LAWS. It is the intention of the parties hereto that
--------------
the internal laws of the State of California (irrespective of its choice of law
principles) shall govern the validity of this Agreement, the construction of its
terms, and the interpretation and enforcement of the rights and duties of the
parties hereto.
13.2 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless
-----------------------------------
otherwise provided in, this Agreement, each and all of the covenants, terms,
provisions, and agreements contained herein shall be binding upon, and inure to
the benefit of, the permitted successors, executors, heirs, representatives,
administrators and assigns of the parties hereto.
13.3 SEVERABILITY. If any provision of this Agreement, or the
------------
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of
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this Agreement and application of such provision to other persons or
circumstances shall be interpreted so as best to reasonably effect the intent of
the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
which will achieve, to the extent possible, the economic, business and other
purposes of the void or unenforceable provision.
13.4 ENTIRE AGREEMENT. This Agreement, the exhibits hereto, the
----------------
documents referenced herein, and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied, written or
oral, between the parties with respect hereto and thereto. The express terms
hereof control and supersede any course of performance or usage of the trade
inconsistent with any of the terms hereof.
13.5 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and the
same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
13.6 EXPENSES. Except as provided to the contrary herein, each party
--------
shall pay all of its own costs and expenses incurred with respect to the
negotiation, execution and delivery of this Agreement, the exhibits hereto, and
the other Transaction Documents.
13.7 AMENDMENT AND WAIVERS. Any term or provision of this Agreement
---------------------
may be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof for default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or any succeeding breach or default.
13.8 SURVIVAL OF AGREEMENTS. All covenants, agreements,
----------------------
representations and warranties made herein shall survive the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby notwithstanding any investigation of the parties hereto and shall
terminate on the date one year after the Closing Date.
13.9 NO WAIVER. The failure of any party to enforce any of the
---------
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
13.10 ATTORNEYS' FEES. Should suit be brought to enforce or
---------------
interpret any part of this Agreement, the prevailing party shall be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorneys' fees to be fixed by the court (including without limitation, costs,
expenses and fees on any appeal). The prevailing party shall be the party
entitled to recover its costs of suit, regardless of whether such suit proceeds
to final judgment. A party not entitled to recover its costs shall not be
entitled to recover attorneys' fees. No sum for attorneys' fees shall be
counted in calculating the amount of a judgment for purposes of determining if a
party is entitled to recover costs or attorneys' fees.
13.11 NOTICES. Any notice provided for or permitted under this
-------
Agreement will be treated as having been given when (a) delivered personally,
(b) sent by confirmed telex or telecopy, (c) sent by commercial overnight
courier with written verification of receipt, or
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<PAGE>
(d) mailed postage prepaid by certified or registered mail, return receipt
requested, to the party to be notified, at the address set forth below, or at
such other place of which the other party has been notified in accordance with
the provisions of this Section 13.11.
SCRUZ-NET: scruz-net, inc.
903 Pacific Avenue, No. 203A
Santa Cruz, CA 95060
WITH COPY TO: G. Gervaise Davis, Esq.
DAVIS & SCHROEDER
215 W. Franklin St., 4th Fl.
Monterey, CA 93940
NCI ENTITIES: NetSource Communications, Inc.
1304 Southpoint Boulevard
Petaluma, California 94954
Attention: Legal Department
WITH COPY TO: Pezzola & Reinke
A Professional Corporation
Lake Merritt Plaza Bldg.
1999 Harrison Street, Suite 1300
Oakland, CA 94612
Attention: Donald C. Reinke, Esq.
Such notice will be treated as having been received upon actual receipt.
13.12 TIME. Time is of the essence of this Agreement.
----
13.13 CONSTRUCTION OF AGREEMENT. This Agreement has been negotiated
-------------------------
by the respective parties hereto and their attorneys and the language hereof
shall not be construed for or against any party. The titles and headings herein
are for reference purposes only and shall not in any manner limit the
construction of this Agreement which shall be considered as a whole.
13.14 NO JOINT VENTURE. Nothing contained in this Agreement shall be
----------------
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party shall have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party shall have any power or authority to bind or
commit any other. No party shall hold itself out as having any authority or
relationship in contravention of this Section 13.14.
13.15 PRONOUNS. All pronouns and any variations thereof shall be
--------
deemed to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
13.16 FURTHER ASSURANCES. Each party agrees to cooperate fully with
------------------
the other parties and to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by any other party to better
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<PAGE>
evidence and reflect the transactions described herein and contemplated hereby
and to carry into effect the intents and purposes of this Agreement.
13.17 ABSENCE OF THIRD-PARTY BENEFICIARY RIGHTS. No provisions of
-----------------------------------------
this Agreement are intended, nor shall be interpreted, to provide or create any
third-party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner of any party hereto or any other
person or entity except employees and stockholders of scruz-net specifically
referred to herein, and, except as so provided, all provisions hereof shall be
personal solely between the parties to this Agreement.
13.18 ATTORNEY'S FEES. Except as provided to the contrary herein,
---------------
within 30 days of Closing, NCI shall pay scruz-net's attorney fees incurred with
respect to the execution and delivery of this Agreement and other related
documents in an amount not to exceed Twelve Thousand Dollars ($12,000).
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.)
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
<TABLE>
<S> <C>
NETSOURCE COMMUNICATIONS, INC. scruz-net, inc.
a Delaware corporation a California corporation
By: /s/ Edward A. Brinskele By: /s/ Qarin Van Brink
------------------------------------ ---------------------------
Title: Chairman and Chief Executive Officer Title: President and Chief
------------------------------------ ---------------------------
Executive Officer
---------------------------
By: /s/ Charles Schoenhoeft
-----------------------------------
Title: President
-----------------------------------
scruz-net ACQUISITION CORPORATION SHAREHOLDERS:
a California corporation
By: /s/ Evan A. Kraus /s/ Qarin Van Brink
----------------------------------- -----------------------------
Title: Secretary QARIN VAN BRINK
-----------------------------------
/s/ Matthew Kaufmann
-----------------------------
MATTHEW KAUFMAN
/s/ Timothy Garlick
-----------------------------
TIMOTHY GARLICK
</TABLE>
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<PAGE>
EXHIBIT 2.6
NETSOURCE INTERACTIVE
TRANSPHERE INTERACTIVE
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT is made as of June 4, 1996, by and between
Netsource Interactive, a Delaware corporation (the "Company"), the undersigned
holders (each a "Shareholder" and together the "Shareholders") of common stock
of Transphere Interactive, Inc., a California corporation ("Transphere") and the
undersigned holders (each an "Optionholder" and together the "Optionholders") of
options to purchase common stock of Transphere.
R E C I T A L S
---------------
A. Each Shareholder holds of record the outstanding shares of the common
stock (the "Common Shares") of Transphere set forth in Exhibit A. Each
---------
Optionholder holds of record the outstanding options (the "Options") to purchase
shares of the common stock of Transphere set forth in Exhibit A.
---------
B. Each Shareholder wishes to transfer all of his Common Shares in
Transphere in exchange for shares of common stock in the Company as set forth in
Exhibit A hereto ("Company Shares"). Each Optionholder wishes to transfer all
- ---------
of his Options in exchange for options to purchase shares of common stock in the
Company as set forth in Exhibit A hereto ("Company Options").
---------
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
contained herein, the parties hereto agree as follows:
A G R E E M E N T
-----------------
The parties hereby agree as follows:
1. Exchange.
--------
1.1. Issuance of the Company Shares. Subject to the terms and
------------------------------
conditions hereof, the Company will issue to each Shareholder that number of
Company Shares indicated by the Shareholder's name on the exchange schedule (the
"Exchange Schedule") attached hereto as Exhibit A in exchange for the surrender
---------
by the Shareholder of all of such Shareholder's Common Shares.
1.2. Issuance of the Company Options. Subject to the terms and
-------------------------------
conditions hereof, the Company will issue to each Optionholder Company Options
to purchase that number of shares of common stock of the Company indicated by
the Shareholder's name on the exchange schedule (the "Exchange Schedule")
attached hereto as
<PAGE>
Exhibit A in exchange for the surrender by the Optionholder of all of such
- ---------
Optionholder's Options. The Company Options issued to each Optionholder will
contain terms and conditions which are substantially similar to the terms and
conditions of the Optionholder's Options, with the exercise price being adjusted
to take into account the exchange ratio for the options.
2. Closing Date; Delivery.
----------------------
2.1. Closing Date.
------------
(a) The closing of the exchange shall be held at the office of
Gray Cary Ware & Freidenrich, 400 Hamilton Avenue, Palo Alto, California, on
June 4, 1996, or a such other time and place as the Company and the Shareholder
may agree in writing.
(b) The closing referred to in subsection (a) above is
hereinafter referred to as the "Closing" and the date of the Closing is
hereinafter referred to as the "Closing Date".
2.2. Delivery.
--------
(a) Subject to the terms of this Agreement, at the Closing the
Company will (i) deliver to each Shareholder a stock certificate reflecting the
issuance of the Company Shares to the Shareholder as set forth herein against
delivery of the certificate(s) representing the Shareholder's Common Shares
accompanied by duly executed stock power(s) for such certificate(s), and (ii)
deliver to each Optionholder a Company Option to purchase that number of shares
of common stock of the Company as set forth on Exhibit A hereto against delivery
---------
of the Options.
(b) Despite anything in this Agreement to the contrary, the
rights and obligations of the parties to this Agreement under Section 3 of this
Agreement are conditional upon the occurrence of the Closing upon satisfaction
of all conditions of Closing set forth in Section 6.1 of this Agreement and are
and will be of no force and effect until the occurrence of the Closing. The
parties hereto agree that this Agreement may be terminated unilaterally by the
Company at any time prior to the Closing on written notice to the other parties
hereto.
3. Representations and Warranties of the Company.
----------------------------------------------
The Company hereby represents and warrants to each of the
Shareholders and Optionholders, as follows:
3.1. Organization and Standing. The Company is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
2.
<PAGE>
3.2. Legal Power. The Company has now, or will have at the Closing
-----------
Date, all requisite power to enter into this Agreement, to issue the Company
Shares and Company Options hereunder, and to carry out and perform its
obligations under the terms of this Agreement, and has or will have taken all
actions necessary for the authorization, execution and delivery of this
Agreement and the issuance of the Company Shares and Company Options set forth
on Exhibit A. This Agreement is a valid and binding obligation of the Company
---------
enforceable in accordance with its respective terms, except as the same may be
limited by bankruptcy, insolvency, moratorium, and other laws of general
application affecting the enforcement of creditors' rights.
3.3. Valid Issuance. The Company Shares, when issued in compliance
--------------
with the provisions of this Agreement, and the Company's common stock, when
issued upon proper exercise of the Company Options, will be validly issued,
fully paid and nonassessable, and will be free of any liens or encumbrances;
provided, however, that the Company Shares and such common stock may be subject
to restrictions on transfer under state and/or federal securities laws as set
forth herein, and as may be required by future changes in such laws.
4. Representations and Warranties of the Shareholders and Optionholders
--------------------------------------------------------------------
and Restrictions on Transfer Imposed by the Securities Act of 1933.
- ------------------------------------------------------------------
4.1. Disclosure. Each Shareholder and each Optionholder
----------
(collectively referred to as the "Holders" and singularly as a "Holder")
represents and warrants to the Company that the Holder has had full opportunity
to discuss the transaction covered by this Agreement with the managements of
Transphere and of the Company, and has had full access to the books and records
of Transphere and the Company.
4.2. Representations and Warranties by the Holder Regarding
------------------------------------------------------
Investment Intent; Restrictions on Transfer. Each Holder, severally and not
- -------------------------------------------
jointly, represents and warrants to the Company as follows:
(a) The Company Shares or Company Options to be received by
the Holder will be acquired for the Holder's own account, for investment and not
with a view to, or for resale in connection with, any distribution or public
offering thereof within the meaning of the Securities Act of 1933, as amended
(the "Securities Act"), and that the Holder has no current commitment or
obligation, contingent or otherwise, to anyone other than the Company, to
dispose of the Company Shares or Company Options and has no current plan or
intent to dispose of the Company Shares or Company Options other than in a
public offering registered by the Company or any successor corporation under the
Securities Act or under Rule 144 under the Securities Act following such a
registered public offering.
(b) The Holder understands and acknowledges that the offering
of the Company Shares and Company Options pursuant to this Agreement will not be
registered under the Securities Act on the grounds that the exchange of the
Common Shares for the Company Shares and the exchange of the Options for the
Company Options contemplated by this Agreement is exempt from registration under
the Securities Act and exempt from qualification pursuant to Section 25102(f) of
the California Corporate Securities Law of 1968, as amended (the "Law"), and
that the Company's reliance upon such exemption and
3.
<PAGE>
qualification is predicated upon the Holder's representations set forth in this
Agreement. The Holder acknowledges and understands that the Company Shares and
Company Options must be held indefinitely unless the Company Shares or the
common stock underlying the Company Options are subsequently registered under
the Securities Act and qualified under the Law or an exemption from such
registration and such qualification is available.
(c) The Holder covenants that in no event will the Holder
dispose of any of the Company Shares or Company Options (other than in
conjunction with an effective registration statement for the Company Shares or
the common stock underlying the Company Options under the Securities Act or in
compliance with Rule 144 promulgated under the Securities Act) unless and until
(i) the Holder shall have notified the Company of the proposed disposition and
shall have furnished the Company with a detailed, true and accurate statement of
the circumstances surrounding the proposed disposition, and (ii) if requested by
the Company, the Holder shall have furnished the Company with an opinion of
counsel satisfactory in form and substance to the Company to the effect that (x)
such disposition will not require registration under the Securities Act or
qualification under the Law or (y) appropriate action necessary for compliance
with the Securities Act, the Law and any other applicable state, local or
foreign law has been taken.
(d) The Holder understands that if the Company does not
register its securities with the Securities and Exchange Commission ("SEC")
pursuant to Section 12 or become subject to Section 15(d) of the Securities
Exchange Act of 1934, as amended, or supply information pursuant to Rule 15c2-11
thereunder or if a registration statement covering the Company Shares (or a
filing pursuant to the exemption from registration under Regulation A of the
Securities Act covering the Company Shares) under the Securities Act is not in
effect when it desires to sell the Company Shares, the Holder may be required to
hold the Company Shares and the Company Options (or the common stock underlying
the Company Options) for an indeterminate period. The Holder also understands
that any sale of the Company Shares or the common stock underlying the Company
Options that might be made by the Holder in reliance upon Rule 144 under the
Securities Act may be made only in limited amounts in accordance with the terms
and conditions of that rule.
(e) The Holder's ownership of such Holder's Common Shares and
Options consists of good and valid title, free and clear of all security
interests, liens, encumbrances, options, calls, pledges, trusts, voting trusts
and other agreements, covenants, restrictions, reservations and other burdens
("Restrictions"), except (i) Restrictions imposed pursuant to applicable federal
and state securities laws, (ii) such Restrictions as are set forth in common
stock option agreements, warrants or stock purchase agreements executed by
Transphere.
(f) The Holder's execution and delivery of this Agreement and
one or more stock powers with respect to such Holder's Common Shares shall
transfer to and vest in good and valid title to such Holder's Common Shares and
Options free and clear of all Restrictions except such Restrictions as are
referenced in Section 6.1(e) above.
(g) The execution and delivery of this Agreement by the Holder
and the consummation of the transactions contemplated hereby will not result in
the breach of any
4.
<PAGE>
term of or constitute a default under, any contract, agreement, commitment,
indenture, mortgage, note or other instrument or obligation to which the Holder
is a party or by which such Holder or any of such Holder's Common Shares or
Options may be bound.
(h) The Holder has full legal capacity, power and authority to
execute, deliver, and perform his, her or its obligations under this Agreement.
(i) This Agreement has been duly executed and delivered by the
Holder and constitutes a legal, valid and binding obligation of such Holder,
enforceable in accordance with its terms, except as limited by applicable
bankruptcy, insolvency and other laws affecting the enforcement of creditors'
rights and by the availability of equitable remedies.
5. Conditions to Closing.
---------------------
5.1. Conditions to Holders' Obligations. The obligation of each
----------------------------------
Holder to exchange the Holder's Common Shares for Company Shares and Options for
Company Options at the Closing is subject to the fulfillment, on or prior to the
Closing Date, of the following conditions:
(a) Representations and Warranties Correct. The representations
--------------------------------------
and warranties made by the Company in Section 3 hereof shall be true and correct
when made, and shall be true and correct in all material respects on the Closing
Date with the same force and effect as if they had been made on and as of said
date. The Company shall have performed in all material respects all obligations
and conditions herein required to be performed or observed by it on or prior to
the Closing Date.
(b) Consents and Waivers. The Company shall have obtained in a
--------------------
timely fashion any and all consents, permits and waivers necessary or
appropriate for consummation of the transactions contemplated by this Agreement.
5.2. Conditions to Obligations of the Company. The Company's
----------------------------------------
obligation to issue the Company Shares and Company Options to the Holder at the
Closing is subject to the fulfillment to the Company's satisfaction on or prior
to the Closing Date of the following conditions, any of which may be waived by
the Company in its sole discretion:
(a) Representations and Warranties Correct. The representations
--------------------------------------
and warranties made by each Holder in Section 5 hereof shall be true and correct
when made, and shall be true and correct on the Closing Date with the same force
and effect as if they had been made on and as of said date.
(b) Consents and Waivers. The conditions set forth in Section
--------------------
5.1(b) shall have been fulfilled.
5.
<PAGE>
6. Miscellaneous.
-------------
6.1. Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
6.2. Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive the Closing of the transactions
contemplated hereby.
6.3. Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
6.4. Further Acts. The parties hereto shall perform all further acts
------------
and execute and deliver all documents that may be reasonably necessary to carry
out their obligations hereunder and the purposes of this Agreement.
6.5. Changes and Termination. Subject to Section 2.1(a), neither this
-----------------------
Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally, but only by a statement in writing signed by the Company and
each Holder.
6.6. Entire Agreement. This Agreement and the other documents
----------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
6.7. Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be delivered personally or
mailed by first class mail, postage prepaid, addressed (a) if to the Holder, at
such Holder's address set forth beneath such Holder's signature on the signature
page hereto, or at such other address as such Holder shall have furnished to the
Company, or (b) if to the Company, at the address of the Company set forth
beneath the Company's signature on the signature page hereto, or at such other
address as the Company shall have furnished to the Holder in writing.
6.8. Severability. In case any provision of this Agreement shall be
------------
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Agreement shall not in any way be affected or
impaired thereby.
6.9. Expenses. The Company and the Holder shall each bear its own
--------
expenses and legal fees in connection with this Agreement and the transactions
contemplated hereby.
6.10. Titles and Subtitles. The titles of the sections and
--------------------
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
6.
<PAGE>
6.11. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.12. Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to the Company or to the Holder shall impair any
such right, power or remedy of the Company or the Holder, nor shall it be
construed to be a waiver of any breach or default under this Agreement, or any
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any delay or omission to exercise any right, power or
remedy or any waiver of any single breach or default be deemed a waiver of any
other right, power or remedy or breach or default theretofore or thereafter
occurring. All remedies, either under this Agreement, or by law otherwise
afforded to the Company or the Holder, shall be cumulative and not alternative.
7.
<PAGE>
NETSOURCE INTERACTIVE
a Delaware corporation
By
-------------------------------------
Charles Schoenhoeft, President
Address:
444 Spear Street, Suite 200
San Francisco, CA 94105
The foregoing Exchange Agreement is hereby agreed to and accepted. The number
and type of Common Shares or Options owned and held of record by the
undersigned are accurately set forth on Exhibit A hereto.
---------
HOLDER:
--------------------------
Signature
--------------------------
Print Name
Address:
-----------------
-----------------
8.
<PAGE>
EXHIBIT A
EXCHANGE SCHEDULE
<TABLE>
<CAPTION>
Shareholder Common Shares Company Shares
- ----------- ------------- --------------
<S> <C> <C>
Charles Schoenhoeft 4,439,000 4,103,292
Jade Wong 2,671,000 2,469,000
Ron Wolf 2,000,000 1,849,000
Helix Capital 890,000 823,000
Optionholder Options* Company Options**
- ------------ -------- -----------------
Ed Fotch 1,000,000 924,000
Greg Reznick 379,000 350,000
Jim Killian 287,000 265,000
</TABLE>
* Number indicates number of shares of common stock of Transphere that can
be purchased pursuant to the terms of the Options.
** Number indicates number of shares of common stock of the Company that can
be purchased pursuant to the terms of the Company Options.
9.
<PAGE>
EXHIBIT 2.7
NETSOURCE INTERACTIVE
TRANSPHERE INTERNATIONAL
EXCHANGE AGREEMENT
THIS EXCHANGE AGREEMENT is made as of June 4, 1996, by and between
NetSource Interactive, a Delaware corporation (the "Company") and the
undersigned holder (the "Shareholder") of common stock of Transphere
International, a California corporation ("Transphere").
R E C I T A L S
---------------
A. The Shareholder holds of record all of the outstanding shares of
the common stock (the "Common Shares") of Transphere.
B. The Shareholder wishes to transfer all of his Common Shares in
Transphere in exchange for shares of common stock in the Company as set forth in
Exhibit A hereto ("Company Shares").
- ---------
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties hereto agree as follows:
A G R E E M E N T
-----------------
The parties hereby agree as follows:
1. Exchange.
--------
1.1 Issuance of the Company Shares. Subject to the terms and
------------------------------
conditions hereof, the Company will issue to the Shareholder that number of
Company Shares indicated by the Shareholder's name on the exchange schedule (the
"Exchange Schedule") attached hereto as Exhibit A in exchange for the surrender
---------
by the Shareholder of all of such Shareholder's Common Shares.
2. Closing Date; Delivery.
----------------------
2.1 Closing Date.
------------
(a) The closing of the exchange shall be held at the office
of Gray Cary Ware & Freidenrich, 400 Hamilton Avenue, Palo Alto, California, on
June 4, 1996, or a such other time and place as the Company and the Shareholder
may agree in writing.
(b) The closing referred to in subsection (a) above is
hereinafter referred to as the "Closing" and the date of the Closing is
hereinafter referred to as the "Closing Date".
<PAGE>
2.2 Delivery.
--------
(a) Subject to the terms of this Agreement, at the Closing
the Company will deliver to the Shareholder a stock certificate reflecting the
issuance of the Company Shares to the Shareholder as set forth herein against
delivery of the certificate(s) representing the Shareholder's Common Shares
accompanied by duly executed stock power(s) for such certificate(s).
(b) Despite anything in this Agreement to the contrary, the
rights and obligations of the parties to this Agreement under Section 3 of this
Agreement are conditional upon the occurrence of the Closing upon satisfaction
of all conditions of Closing set forth in Section 5.1 of this Agreement and are
and will be of no force and effect until the occurrence of the Closing. The
parties hereto agree that this Agreement may be terminated unilaterally by the
Company at any time prior to the Closing on written notice to the other parties
hereto.
3. Representations and Warranties of the Company.
---------------------------------------------
The Company hereby represents and warrants to the Shareholder as
follows:
3.1 Organization and Standing. The Company is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
3.2 Legal Power. The Company has now, or will have at the
-----------
Closing Date, all requisite power to enter into this Agreement, to issue the
Company Shares hereunder, and to carry out and perform its obligations under the
terms of this Agreement, and has or will have taken all actions necessary for
the authorization, execution and delivery of this Agreement and the issuance of
the Company Shares set forth on Exhibit A. This Agreement is a valid and binding
---------
obligation of the Company enforceable in accordance with its respective terms,
except as the same may be limited by bankruptcy, insolvency, moratorium, and
other laws of general application affecting the enforcement of creditors'
rights.
3.3 Valid Issuance. The Company Shares, when issued in
-------------
compliance with the provisions of this Agreement, will be validly issued, fully
paid and nonassessable, and will be free of any liens or encumbrances; provided,
however, that the Company Shares may be subject to restrictions on transfer
under state and/or federal securities laws as set forth herein, and as may be
required by future changes in such laws.
2.
<PAGE>
4. Representations and Warranties of the Shareholder and Restrictions
------------------------------------------------------------------
on Transfer Imposed by the Securities Act of 1933.
- -------------------------------------------------
4.1 Disclosure. The Shareholder represents and warrants to the
----------
Company that the Shareholder has had full opportunity to discuss the transaction
covered by this Agreement with the managements of Transphere and the Company,
and has had full access to the books and records of Transphere and the Company.
4.2 Representations and Warranties by the Shareholder Regarding
-----------------------------------------------------------
Investment Intent; Restrictions on Transfer. The Shareholder represents and
- -------------------------------------------
warrants to the Company as follows:
(a) The Company Shares to be received by the Shareholder
will be acquired for the Shareholder's own account, for investment and not with
a view to, or for resale in connection with, any distribution or public offering
thereof within the meaning of the Securities Act of 1933, as amended (the
"Securities Act"), and that the Shareholder has no current commitment or
obligation, contingent or otherwise, to anyone other than the Company, to
dispose of the Company Shares and has no current plan or intent to dispose of
the Company Shares other than in a public offering registered by the Company or
any successor corporation under the Securities Act or under Rule 144 under the
Securities Act following such a registered public offering.
(b) The Shareholder understands and acknowledges that the
offering of the Company Shares pursuant to this Agreement will not be registered
under the Securities Act on the grounds that the exchange of the Common Shares
for the Company Shares contemplated by this Agreement is exempt from
registration under the Securities Act and exempt from qualification pursuant to
Section 25102(f) of the California Corporate Securities Law of 1968, as amended
(the "Law"), and that the Company's reliance upon such exemption and
qualification is predicated upon the Shareholder's representations set forth in
this Agreement. The Shareholder acknowledges and understands that the Company
Shares must be held indefinitely unless the Company Shares are subsequently
registered under the Securities Act and qualified under the Law or an exemption
from such registration and such qualification is available.
(c) The Shareholder covenants that in no event will the
Shareholder dispose of any of the Company Shares (other than in conjunction with
an effective registration statement for the Company Shares under the Securities
Act or in compliance with Rule 144 promulgated under the Securities Act) unless
and until (i) the Shareholder shall have notified the Company of the proposed
disposition and shall have furnished the Company with a detailed, true and
accurate statement of the circumstances surrounding the proposed disposition,
and (ii) if requested by the Company, the Shareholder shall have furnished the
Company with an opinion of counsel satisfactory in form and substance to the
Company to the effect that (x) such disposition will not require registration
under the Securities Act or qualification of the Company Shares under the Law or
(y) appropriate action necessary for compliance with the Securities Act, the Law
and any other applicable state, local or foreign law has been taken.
3.
<PAGE>
(d) The Shareholder understands that if the Company does not
register its securities with the Securities and Exchange Commission ("SEC")
pursuant to Section 12 or become subject to Section 15(d) of the Securities
Exchange Act of 1934, as amended, or supply information pursuant to Rule 15c2-11
thereunder or if a registration statement covering the Company Shares (or a
filing pursuant to the exemption from registration under Regulation A of the
Securities Act covering the Company Shares) under the Securities Act is not in
effect when it desires to sell the Company Shares, the Shareholder may be
required to hold the Company Shares for an indeterminate period. The Shareholder
also understands that any sale of the Company Shares that might be made by the
Shareholder in reliance upon Rule 144 under the Securities Act may be made only
in limited amounts in accordance with the terms and conditions of that rule.
(e) The Shareholder's ownership of such Shareholder's Common
Shares consists of good and valid title, free and clear of all security
interests, liens, encumbrances, options, calls, pledges, trusts, voting trusts
and other agreements, covenants, restrictions, reservations and other burdens
("Restrictions"), except (i) Restrictions imposed pursuant to applicable federal
and state securities laws, (ii) such Restrictions as are set forth in common
stock option agreements, warrants or stock purchase agreements executed by
Transphere.
(f) The Shareholder's execution and delivery of this
Agreement and one or more stock powers with respect to such Shareholder's Common
Shares shall transfer to and vest in good and valid title to such Shareholder's
Common Shares free and clear of all Restrictions except such Restrictions as are
referenced in Section 4.1(e) above.
(g) The execution and delivery of this Agreement by the
Shareholder and the consummation of the transactions contemplated hereby will
not result in the breach of any term of or constitute a default under, any
contract, agreement, commitment, indenture, mortgage, note or other instrument
or obligation to which the Shareholder is a party or by which such Shareholder
or any of such Shareholder's Common Shares may be bound.
(h) The Shareholder has full legal capacity, power and
authority to execute, deliver, and perform his, her or its obligations under
this Agreement.
(i) This Agreement has been duly executed and delivered by
the Shareholder and constitutes a legal, valid and binding obligation of such
Shareholder, enforceable in accordance with its terms, except as limited by
applicable bankruptcy, insolvency and other laws affecting the enforcement of
creditors' rights and by the availability of equitable remedies.
4.
<PAGE>
5. Conditions to Closing.
---------------------
5.1 Conditions to Holders' Obligations. The obligation of the
----------------------------------
Shareholder to exchange the Shareholder's Common Shares for Company Shares at
the Closing is subject to the fulfillment, on or prior to the Closing Date, of
the following conditions:
(a) Representations and Warranties Correct. The
--------------------------------------
representations and warranties made by the Company in Section 3 hereof
shall be true and correct when made, and shall be true and correct in all
material respects on the Closing Date with the same force and effect as if
they had been made on and as of said date. The Company shall have performed
in all material respects all obligations and conditions herein required to
be performed or observed by it on or prior to the Closing Date.
(b) Consents and Waivers. The Company shall have obtained in
--------------------
a timely fashion any and all consents, permits and waivers necessary or
appropriate for consummation of the transactions contemplated by this
Agreement.
5.2 Conditions to Obligations of the Company. The Company's
----------------------------------------
obligation to issue the Company Shares to the Shareholder at the Closing is
subject to the fulfillment to the Company's satisfaction on or prior to the
Closing Date of the following conditions, any of which may be waived by the
Company in its sole discretion:
(a) Representations and Warranties Correct. The
--------------------------------------
representations and warranties made by the Shareholder in Section 4 hereof
shall be true and correct when made, and shall be true and correct on the
Closing Date with the same force and effect as if they had been made on and
as of said date.
(b) Consents and Waivers. The conditions set forth in
--------------------
Section 5.1(b) shall have been fulfilled.
6. Miscellaneous.
-------------
6.1 Governing Law. This Agreement shall be governed in all
-------------
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
6.2 Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive the Closing of the transactions
contemplated hereby.
6.3 Successors and Assigns. Except as otherwise expressly
----------------------
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
5.
<PAGE>
6.4 Further Acts. The parties hereto shall perform all further
------------
acts and execute and deliver all documents that may be reasonably necessary to
carry out their obligations hereunder and the purposes of this Agreement.
6.5 Changes and Termination. Subject to Section 2.1(a), neither
-----------------------
this Agreement nor any provision hereof may be changed, waived, discharged or
terminated orally, but only by a statement in writing signed by the Company and
the Shareholder.
6.6 Entire Agreement. This Agreement and the other documents
----------------
delivered pursuant hereto constitute the full and entire understanding and
agreement between the parties with regard to the subjects hereof and thereof.
6.7 Notices, etc. All notices and other communications required
------------
or permitted hereunder shall be in writing and shall be delivered personally or
mailed by first class mail, postage prepaid, addressed (a) if to the
Shareholder, at such Shareholder's address set forth beneath such Shareholder's
signature on the signature page hereto, or at such other address as such
Shareholder shall have furnished to the Company, or (b) if to the Company, at
the address of the Company set forth beneath the Company's signature on the
signature page hereto, or at such other address as the Company shall have
furnished to the Shareholder in writing.
6.8 Severability. In case any provision of this Agreement shall
------------
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions of this Agreement shall not in any way be affected
or impaired thereby.
6.9 Expenses. The Company and the Shareholder shall each bear
--------
its own expenses and legal fees in connection with this Agreement and the
transactions contemplated hereby.
6.10 Titles and Subtitles. The titles of the sections and
--------------------
subsections of this Agreement are for convenience of reference only and are not
to be considered in construing this Agreement.
6.11 Counterparts. This Agreement may be executed in any number
------------
of counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
6.12 Delays or Omissions. No delay or omission to exercise any
-------------------
right, power or remedy accruing to the Company or to the Shareholder shall
impair any such right, power or remedy of the Company or the Shareholder, nor
shall it be construed to be a waiver of any breach or default under this
Agreement, or any acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any delay or omission to exercise any
right, power or remedy or any waiver of any single breach or default be deemed a
waiver of any other right, power or remedy or breach or default theretofore or
thereafter occurring. All remedies, either under this Agreement, or by law
otherwise afforded to the Company or the Shareholder, shall be cumulative and
not alternative.
6.
<PAGE>
NETSOURCE INTERACTIVE
a Delaware corporation
By /s/Charles Schoenhoeft
----------------------------------
Charles Schoenhoeft, President
Address:
444 Spear Street, Suite 200
San Francisco, CA 94105
The foregoing Exchange Agreement is hereby agreed to and accepted. The
number and type of Common Shares of Transphere owned and held of record by the
undersigned are accurately set forth on Exhibit A hereto.
---------
SHAREHOLDER:
/s/ Charles Schoenhoeft
-----------------------------------
Charles Schoenhoeft
Address: 444 Spear Street, Suite 200
San Francisco, CA 94105
7.
<PAGE>
EXHIBIT A
EXCHANGE SCHEDULE
Shareholder Common Shares Company Shares
----------- ------------- --------------
Charles Schoenhoeft 4,000 9,192,708
8.
<PAGE>
EXHIBIT 2.8
AGREEMENT AND
PLAN OF REORGANIZATION
DATED JUNE 4, 1996
BY AND BETWEEN
NETSOURCE INTERACTIVE
AND
TRANSPHERE INTERACTIVE, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. Certain Definitions................................................. 1
1.1 "Code"........................................................ 1
1.2 "Commission".................................................. 1
1.3 "Securities Act".............................................. 1
1.4 "Transaction Documents"....................................... 1
2. Plan of Reorganization.............................................. 2
2.1 The Merger..................................................... 2
2.2 Exchange of Shares and Options................................. 2
2.3 The Closing.................................................... 2
2.4 Effective Time................................................. 3
2.5 Tax Free Reorganization........................................ 3
2.6 Restricted Securities.......................................... 3
3. Mutual Covenants.................................................... 3
3.1 Due Diligence, Investigation, and Audits....................... 3
3.2 Regulatory Filings; Consents; Reasonable Efforts............... 4
3.3 Further Assurances............................................. 4
4. Closing Matters..................................................... 4
4.1 Filing of Certificate of Merger................................ 4
5. Conditions to Transphere's Obligations.............................. 4
5.1 NetSource Certificate of Incorporation......................... 4
5.2 Date of Closing................................................ 4
5.3 Filing of Certificate of Merger................................ 4
6. Conditions to NetSource's Obligations............................... 5
6.1 NetSource Certificate of Incorporation......................... 5
6.2 Date of Closing................................................ 5
6.3 Filing of Certificate of Merger................................ 5
7. Termination of Agreement............................................ 5
7.1 Termination.................................................... 5
7.2 Liability for Termination...................................... 5
7.3 Certain Effects of Termination................................. 5
7.4 Remedies....................................................... 6
8. No Survival of Covenants and Agreements............................. 6
9. Miscellaneous....................................................... 6
9.1 Governing Laws................................................ 6
9.2 Binding upon Successors and Assigns........................... 6
9.3 Severability.................................................. 6
i.
<PAGE>
9.4 Entire Agreement.............................................. 7
9.5 Counterparts.................................................. 7
9.6 Expenses...................................................... 7
9.7 Amendment and Waivers......................................... 7
9.8 Survival of Agreements........................................ 7
9.9 No Waiver..................................................... 7
9.10 Attorneys' Fees............................................... 7
9.11 Notices....................................................... 8
9.12 Time.......................................................... 8
9.13 Construction of Agreement..................................... 8
9.14 No Joint Venture.............................................. 8
9.15 Pronouns...................................................... 8
9.16 Further Assurances............................................ 9
9.17 Absence of Third Party Beneficiary Rights..................... 9
EXHIBIT A CERTIFICATE OF MERGER..........................................11
EXHIBIT B RESTATED CERTIFICATE OF INCORPORATION..........................12
ii.
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered
into this 4th day of June, 1996, by and between NetSource Interactive, a
Delaware corporation ("NetSource"), and Transphere Interactive, Inc., a
California corporation ("Transphere").
RECITAL
-------
WHEREAS, subject to and in accordance with the terms and conditions of
this Agreement and pursuant to the Certificate of Merger attached hereto as
Exhibit A ("Certificate of Merger"), the respective Board of Directors and
- ---------
security holders of NetSource and Transphere have approved the merger of
Transphere with and into NetSource (the "Merger"), whereby all of the
outstanding shares of common stock of Transphere ("Transphere Stock") will be
converted into shares of common stock of NetSource ("NetSource Common Stock"),
and all outstanding options to purchase Transphere Stock will be exchanged for
options to purchase NetSource Common Stock.
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a tax free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, the parties hereto desire to set forth certain representations,
warranties and covenants made by each to the other as an inducement to the
consummation of the Merger.
AGREEMENT
---------
NOW, THEREFORE, in reliance on the foregoing recitals and in and for the
consideration and mutual covenants set forth herein, the parties agree as
follows:
1. Certain Definitions.
-------------------
1.1 "Code" shall mean the United States Internal Revenue Code of
1986, as amended.
1.2 "Commission" shall mean the United States Securities and Exchange
Commission.
1.3 "Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.4 "Transaction Documents" shall mean all documents or agreements
attached as an exhibit or schedule hereto, and set forth on the Table of
Contents.
<PAGE>
2. Plan of Reorganization.
----------------------
2.1 The Merger. Subject to the terms and conditions of this Agreement
----------
and the Certificate of Merger, Transphere shall be merged with and into
NetSource in accordance with the applicable provisions of the laws of the State
of California and the State of Delaware, and with the terms and conditions of
this Agreement and the Certificate of Merger, so that:
(a) At the Effective Time, Transphere shall be merged with and
into NetSource. As a result of the Merger, the separate corporate existence of
Transphere shall cease and NetSource shall continue as the surviving corporation
(sometimes referred to herein as the "Surviving Corporation") and shall succeed
to and assume all of the rights and obligations of NetSource in accordance with
the laws of California and Delaware.
(b) The Certificate of Incorporation and Bylaws of NetSource in
effect at the Effective Time shall be the Certificate of Incorporation and
Bylaws, respectively, of the Surviving Corporation after the Effective Time
unless and until further amended as provided by law.
(c) Subject to the terms of this Agreement, the directors and
officers of Transphere immediately prior to the Effective Time shall be the
directors and officers of the Surviving Corporation after the Effective Time.
Such directors and officers shall hold their position until the election and
qualification of their respective successors or until their tenure is otherwise
terminated in accordance with the Bylaws of the Surviving Corporation.
2.2 Exchange of Shares and Options.
------------------------------
(a) Each share of Transphere Stock, issued and outstanding
immediately prior to the Effective Time, will be exchanged for approximately
0.9247 shares of fully paid and nonassessable NetSource Common Stock pursuant to
Exchange Agreements entered into between NetSource and each shareholder of
Transphere on the date hereof.
(b) Each option to purchase shares of Transphere Stock
("Transphere Option") that is outstanding immediately prior to the Effective
Time will be exchanged by NetSource and converted into an option (a "NetSource
Option") to purchase NetSource Common Stock pursuant to Exchange Agreements
entered into between NetSource and each shareholder of Transphere on the date
hereof.
2.3 The Closing. Subject to termination of this Agreement as provided in
-----------
Section 7 below, the closing of the transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of Gray Cary Ware & Freidenrich,
A Professional Corporation, 400 Hamilton Avenue, Palo Alto, California, as soon
as possible upon the satisfaction or waiver of all conditions set forth in
Section 5 and Section 6 hereof (the "Closing Date"), or such other time and
place as is mutually agreeable to the parties.
2.
<PAGE>
2.4 Effective Time. Simultaneously with the Closing, the Certificate of
--------------
Merger shall be filed in the office of the Secretary of State of the State of
Delaware. The Merger shall become effective immediately upon the filing of the
Certificate of Merger with such office. The date and time of the effectiveness
of the Merger under the laws of Delaware is the "Effective Time."
2.5 Tax Free Reorganization. The parties intend to adopt this Agreement
-----------------------
as a tax-free plan of reorganization and to consummate the Merger in accordance
with the provisions of Section 368(a)(1)(A) of the Code. Each party agrees that
it will not take or assert any position on any tax return, report or otherwise
which is inconsistent with the qualification of the Merger as a reorganization
within the meaning of Section 368(a) of the Code. The NetSource Common Stock
issued in the Merger will be issued solely in exchange for the Transphere Stock
pursuant to this Agreement, and no other transaction other than the Merger
represents, provides for or is intended to be an adjustment to the consideration
paid for the Transphere Common Stock. Except for cash paid in lieu of fractional
shares, no consideration that could constitute "other property" within the
meaning of Section 356 of the Code is being paid by NetSource for the Transphere
Stock. In addition, NetSource represents now, and as of the Closing Date, that
it presently intends to continue Transphere's historic business or use a
significant portion of Transphere's business assets in a business.
2.6 Restricted Securities. The NetSource Common Stock will be subject to
---------------------
the following restrictions:
(a) restrictions imposed by applicable federal and state securities
laws;
(b) certificates representing NetSource Common Stock will bear
legends describing certain of the applicable restrictions on transferability
referred to in this Section 2.6.
3. Mutual Covenants.
----------------
3.1 Due Diligence, Investigation, and Audits. At such time prior
----------------------------------------
to the Closing as may be reasonably requested, each party shall make available
to the other party and the other party's employees, agents and representatives
all information concerning the operation, business and prospects of such party
as may be reasonably requested by the other party, including, without
limitation, making the working papers of such party's independent certified
public accountants available for inspection by the other party's independent
certified public accountants. Each party will cooperate with the other party for
the purpose of permitting the other party to discuss such party's business and
prospects with such party's customers, creditors, suppliers and other persons
having business dealings with such party, subject to reasonable confidentiality
obligations between the parties.
3.
<PAGE>
3.2 Regulatory Filings; Consents; Reasonable Efforts. Subject to the
------------------------------------------------
terms and conditions of this Agreement, Transphere and NetSource shall use their
respective best efforts to (i) make all necessary filings with respect to the
Merger and this Agreement under the Securities Act, and applicable blue sky or
similar securities laws and shall use all reasonable efforts to obtain required
approvals and clearances with respect thereto and shall supply all additional
information requested in connection therewith; (ii) make merger notification or
other appropriate filings with federal, state or local governmental bodies or
applicable foreign governmental agencies and shall use all reasonable efforts to
obtain required approvals and clearances with respect thereto and shall supply
all additional information requested in connection therewith; and (iii) take, or
cause to be taken, all appropriate action, and do, or cause to be done, all
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement.
3.3 Further Assurances. Prior to and following the Closing, each
------------------
party agrees to cooperate fully with the other parties and to execute such
further instruments, documents and agreements and to give such further written
assurances, as may be reasonably requested by any other party to better evidence
and reflect the transactions described herein and contemplated hereby and to
carry into effect the intents and purposes of this Agreement.
4. Closing Matters.
---------------
4.1 Filing of Certificate of Merger. On the date of the Closing, but
-------------------------------
not prior to the Closing, the Certificate of Merger shall be filed with the
offices of the Secretary of State of the State of Delaware and the merger of
Transphere with and into NetSource shall be consummated.
5. Conditions to Transphere's Obligations. Unless otherwise provided
--------------------------------------
below, Transphere's obligations to close the transactions contemplated under
this Agreement are subject to the fulfillment or satisfaction by the Closing
Date of each of the following conditions (any one or more of which may be waived
by Transphere, but only in a writing signed by Transphere):
5.1 NetSource Certificate of Incorporation. NetSource shall have
--------------------------------------
amended and restated its Certificate of Incorporation in substantially the form
attached hereto as Exhibit B.
---------
5.2 Date of Closing. The Closing shall have occurred not later than
---------------
June 30, 1996, or such later date as the parties may mutually agree.
5.3 Filing of Certificate of Merger. As of the Closing, the
-------------------------------
Certificate of Merger shall have been filed with the Secretary of State of the
State of Delaware.
4.
<PAGE>
6. Conditions to NetSource's Obligations. Unless otherwise provided
-------------------------------------
below, NetSource's obligations to close the transactions contemplated under this
Agreement are subject to the fulfillment or satisfaction by the Closing Date of
each of the following conditions (any one or more of which may be waived by
NetSource, but only in a writing signed by NetSource):
6.1 NetSource Certificate of Incorporation. NetSource shall have
--------------------------------------
amended and restated its Certificate of Incorporation in substantially the form
attached hereto as Exhibit B.
---------
6.2 Date of Closing. The Closing shall have occurred not later than
---------------
June 30, 1996, or such later date as the parties may mutually agree.
6.3 Filing of Certificate of Merger. As of the Closing, the
-------------------------------
Certificate of Merger shall have been filed with the Secretary of State of the
State of Delaware.
7. Termination of Agreement.
------------------------
7.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Closing by the mutual written consent of each of the parties hereto. This
Agreement may also be terminated and abandoned:
(a) By NetSource if any of the conditions precedent to
NetSource's obligations pursuant to Section 6 shall not have been fulfilled at
and as of the Closing.
(b) By Transphere if any of the conditions precedent to
Transphere's obligations pursuant to Section 5 above shall not have been
fulfilled at and as of the Closing.
(c) By either Transphere or NetSource, if the Merger is not
effected by June 30, 1996.
Any termination of this Agreement under this Section 7.1 shall be effected
by the delivery of written notice of the terminating party to the other parties
hereto.
7.2 Liability for Termination. Any termination of this Agreement
-------------------------
pursuant to this Section 7 shall be without further obligation or liability upon
any party in favor of any other party hereto. The provisions of this Section 7.2
shall survive termination.
7.3 Certain Effects of Termination. In the event of the termination
------------------------------
of this Agreement by either Transphere or NetSource as provided in Section 7.1
hereof, each party, if so requested by the other party, will (i) return promptly
every document (other than documents publicly available) furnished to it by the
other party (or any subsidiary, division, associate or affiliate of such other
party) in connection with the transactions contemplated hereby, whether so
obtained before or after the execution of this Agreement, and any copies thereof
which may have been made, and will cause its representatives and any
representatives of financial institutions and investors and others to whom such
documents were furnished promptly to return such documents and any copies
thereof any of them may have made, or
5.
<PAGE>
(ii) destroy such documents and cause its representatives and such other
representatives to destroy such documents, and such party shall deliver a
certificate executed by its president or vice president stating to such effect.
7.4 Remedies. No party shall be limited to the termination right granted
--------
in Section 7.1 hereto by reason of the nonfulfillment of any condition to such
party's closing obligations but may, in the alternative, elect to do one of the
following:
(a) proceed to close despite the nonfulfillment of any closing
condition, it being understood that consummation of the transactions
contemplated hereby shall be deemed a waiver of any misrepresentation or breach
of warranty or covenant and of any party's rights and remedies with respect
thereto to the extent that the other party shall have actual knowledge of such
misrepresentation or breach and the Closing shall nonetheless take place; or
(b) decline to close and terminate this Agreement as provided in
Section 7.1 hereof.
8. No Survival of Covenants and Agreements. The representations,
---------------------------------------
warranties, covenants and agreements of the parties contained in Sections 3, 4,
5 and 6 of this Agreement shall terminate at and shall not survive the Closing
Date, except for covenants that by their own terms apply after the Closing Date.
9. Miscellaneous.
-------------
9.1 Governing Laws. It is the intention of the parties hereto that
--------------
the internal laws of the State of California (irrespective of its choice of law
principles) shall govern the validity of this Agreement, the construction of its
terms, and the interpretation and enforcement of the rights and duties of the
parties hereto.
9.2 Binding upon Successors and Assigns. Subject to, and unless
-----------------------------------
otherwise provided in, this Agreement, each and all of the covenants, terms,
provisions, and agreements contained herein shall be binding upon, and inure to
the benefit of, the permitted successors, executors, heirs, representatives,
administrators and assigns of the parties hereto.
9.3 Severability. If any provision of this Agreement, or the
------------
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
6.
<PAGE>
9.4 Entire Agreement. This Agreement, the exhibits hereto, the
----------------
documents referenced herein, and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied, written or
oral, between the parties with respect hereto and thereto. The express terms
hereof control and supersede any course of performance or usage of the trade
inconsistent with any of the terms hereof.
9.5 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original as against any party whose
signature appears thereon and all of which together shall constitute one and the
same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
9.6 Expenses. Except as provided to the contrary herein, each party
--------
shall pay all of its own costs and expenses incurred with respect to the
negotiation, execution and delivery of this Agreement, the exhibits hereto, and
the other Transaction Documents. If the Merger is consummated, all investment
banking, broker's and finder's fees incurred by Transphere and/or its
shareholders in connection with the Merger will become obligations of NetSource.
9.7 Amendment and Waivers. Any term or provision of this Agreement may
---------------------
be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof for default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or any succeeding breach or default.
9.8 Survival of Agreements. All covenants, agreements, representations
----------------------
and warranties made herein shall survive the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
notwithstanding any investigation of the parties hereto and shall terminate on
the date one year after the Closing Date.
9.9 No Waiver. The failure of any party to enforce any of the
---------
provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
9.10 Attorneys' Fees. Should suit be brought to enforce or interpret any
---------------
part of this Agreement, the prevailing party shall be entitled to recover, as an
element of the costs of suit and not as damages, reasonable attorneys' fees to
be fixed by the court (including without limitation, costs, expenses and fees on
any appeal). The prevailing party shall be the party entitled to recover its
costs of suit, regardless of whether such suit proceeds to final judgment. A
party not entitled to recover its costs shall not be entitled to recover
attorneys' fees. No sum for attorneys' fees shall be counted in calculating the
amount of a judgment for purposes of determining if a party is entitled to
recover costs or attorneys' fees.
7.
<PAGE>
9.11 Notices. Any notice provided for or permitted under this Agreement
-------
will be treated as having been given when (a) delivered personally, (b) sent by
confirmed telex or telecopy, (c) sent by commercial overnight courier with
written verification of receipt, or (d) mailed postage prepaid by certified or
registered mail, return receipt requested, to the party to be notified, at the
address set forth below, or at such other place of which the other party has
been notified in accordance with the provisions of this Section 9.11.
Transphere: Transphere Interactive, Inc.
444 Spear Street, Suite 200
San Francisco, California 94105
Attention: Charles Schoenhoeft
NetSource: NetSource Interactive
444 Spear Street, Suite 200
San Francisco, California 94105
Attention: Charles Schoenhoeft
With copy to: Gray Cary Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, CA 94301
Attention: Thomas W. Furlong
Such notice will be treated as having been received upon actual receipt.
9.12 Time. Time is of the essence of this Agreement.
----
9.13 Construction of Agreement. This Agreement has been negotiated by
-------------------------
the respective parties hereto and their attorneys and the language hereof shall
not be construed for or against any party. The titles and headings herein are
for reference purposes only and shall not in any manner limit the construction
of this Agreement which shall be considered as a whole.
9.14 No Joint Venture. Nothing contained in this Agreement shall be
----------------
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party shall have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party shall have any power or authority to bind or
commit any other. No party shall hold itself out as having any authority or
relationship in contravention of this Section 9.14.
9.15 Pronouns. All pronouns and any variations thereof shall be deemed
--------
to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
8.
<PAGE>
9.16 Further Assurances. Each party agrees to cooperate fully with the
------------------
other parties and to execute such further instruments, documents and agreements
and to give such further written assurances, as may be reasonably requested by
any other party to better evidence and reflect the transactions described herein
and contemplated hereby and to carry into effect the intents and purposes of
this Agreement.
9.17 Absence of Third Party Beneficiary Rights. No provisions of this
-----------------------------------------
Agreement are intended, nor shall be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner of any party hereto or any other
person or entity except employees and shareholders of Transphere specifically
referred to herein, and, except as so provided, all provisions hereof shall be
personal solely between the parties to this Agreement.
9.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
NETSOURCE INTERACTIVE TRANSPHERE INTERACTIVE, INC.
By:/s/ Charles Schoenhoeft By:/s/ Charles Schoenhoeft
-------------------------------- --------------------------------
Title: President Title: President
----------------------------- -----------------------------
10.
<PAGE>
EXHIBIT A
---------
CERTIFICATE OF MERGER
OF TRANSPHERE INTERACTIVE, INC.
(a California corporation)
INTO
NETSOURCE INTERACTIVE SERVICES, INC.
(a Delaware corporation)
The undersigned corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware, does hereby certify:
First: That the name and state of incorporation of each of the
constituent corporations of the merger is as follows:
Name State of Incorporation
---- ----------------------
Transphere Interactive, Inc. California
NetSource Interactive Services, Inc. Delaware
Second: That an Agreement and Plan of Reorganization dated as of June 4,
1996, between NetSource Interactive Services, Inc. and Transphere Interactive,
Inc. has been approved, adopted, certified, executed and acknowledged by each of
the constituent corporations in accordance with the requirements of Section 252
of the General Corporation Law of the State of Delaware and Section 1201 of the
California General Corporate Law.
Third: That the name of the surviving corporation of the merger is
NetSource Interactive Services, Inc. (the "Surviving Corporation").
Fourth: That the Certificate of Incorporation of NetSource Interactive
Services, Inc., as amended, shall, as of the effective time of the merger, be
the Certificate of Incorporation, of the Surviving Corporation.
Fifth: That the executed Agreement and Plan of Reorganization is on file
at the principal place of business of the Surviving Corporation. The address of
said principal place of business is 444 Spear Street, Suite 200, San Francisco,
California 94105.
Sixth: That a copy of the Agreement and Plan of Reorganization will be
furnished by the Surviving Corporation upon request and without charge to any
stockholder of any constituent corporation.
Seventh: The authorized capital stock of Transphere Interactive, Inc. is
12,000,000 shares of Common Stock, no par value.
IN WITNESS WHEREOF, the undersigned has caused this Certificate to be
executed by its duly authorized officer this 4th day of June, 1996.
NETSOURCE INTERACTIVE
SERVICES, INC.
(a Delaware corporation)
By: /s/ Charles Schoenhoeft
----------------------------
Charles Schoenhoeft
11.
<PAGE>
EXHIBIT B
---------
RESTATED CERTIFICATE OF INCORPORATION
[intentionally omitted]
12.
<PAGE>
EXHIBIT 2.9
AGREEMENT AND
PLAN OF REORGANIZATION
DATED JUNE 4, 1996
BY AND BETWEEN
NETSOURCE INTERACTIVE
AND
TRANSPHERE INTERNATIONAL, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
1. Certain Definitions............................................ 1
1.1 "Code"................................................ 1
1.2 "Commission".......................................... 1
1.3 "Securities Act"...................................... 1
1.4 "Transaction Documents"............................... 1
2. Plan of Reorganization......................................... 2
2.1 The Merger............................................ 2
2.2 Conversion of Shares.................................. 2
2.3 The Closing........................................... 2
2.4 Effective Time........................................ 2
2.5 Tax Free Reorganization............................... 3
2.6 Restricted Securities................................. 3
3. Mutual Covenants............................................... 3
3.1 Due Diligence, Investigation, and Audits.............. 3
3.2 Regulatory Filings; Consents; Reasonable Efforts...... 3
3.3 Further Assurances.................................... 4
4. Closing Matters................................................ 4
4.1 Filing of Certificate of Merger....................... 4
5. Conditions to Transphere's Obligations......................... 4
5.1 NetSource Certificate of Incorporation................ 4
5.2 Date of Closing....................................... 4
5.3 Filing of Certificate of Merger....................... 4
6. Conditions to NetSource's Obligations.......................... 4
6.1 NetSource Certificate of Incorporation................ 4
6.2 Date of Closing....................................... 5
6.3 Filing of Certificate of Merger....................... 5
7. Termination of Agreement....................................... 5
7.1 Termination........................................... 5
7.2 Liability for Termination............................. 5
7.3 Certain Effects of Termination........................ 5
7.4 Remedies.............................................. 5
8. No Survival of Covenants and Agreements........................ 6
9. Miscellaneous.................................................. 6
9.1 Governing Laws........................................ 6
9.2 Binding upon Successors and Assigns................... 6
9.3 Severability.......................................... 6
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
9.4 Entire Agreement..................................... 6
9.5 Counterparts......................................... 7
9.6 Expenses............................................. 7
9.7 Amendment and Waivers................................ 7
9.8 Survival of Agreements............................... 7
9.9 No Waiver............................................ 7
9.10 Attorneys' Fees...................................... 7
9.11 Notices.............................................. 7
9.12 Time................................................. 8
9.13 Construction of Agreement............................ 8
9.14 No Joint Venture..................................... 8
9.15 Pronouns............................................. 8
9.16 Further Assurances................................... 8
9.17 Absence of Third Party Beneficiary Rights............ 9
EXHIBIT A CERTIFICATE OF MERGER........................................ 11
EXHIBIT B RESTATED CERTIFICATE OF INCORPORATION........................ 12
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered
into this 4th day of June, 1996, by and between NetSource Interactive, a
Delaware corporation ("NetSource"), and Transphere International, Inc., a
California corporation ("Transphere").
RECITAL
WHEREAS, subject to and in accordance with the terms and conditions of
this Agreement and pursuant to the Certificate of Merger attached hereto as
Exhibit A ("Certificate of Merger"), the respective Board of Directors and
security holders of NetSource and Transphere have approved the merger of
Transphere with and into NetSource (the "Merger"), whereby all of the
outstanding shares of common stock of Transphere ("Transphere Stock") will be
converted into shares of common stock of NetSource ("NetSource Common Stock").
WHEREAS, for federal income tax purposes, it is intended that the
Merger shall qualify as a tax free reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, the parties hereto desire to set forth certain
representations, warranties and covenants made by each to the other as an
inducement to the consummation of the Merger.
AGREEMENT
NOW, THEREFORE, in reliance on the foregoing recitals and in and for
the consideration and mutual covenants set forth herein, the parties agree as
follows:
1. Certain Definitions.
1.1. "Code" shall mean the United States Internal Revenue
Code of 1986, as amended.
1.2. "Commission" shall mean the United States Securities
and Exchange Commission.
1.3. "Securities Act" shall mean the Securities Act of
1933, as amended, or any similar federal statute and the rules and regulations
thereunder, all as the same shall be in effect at the time.
1.4. "Transaction Documents" shall mean all documents or
agreements attached as an exhibit or schedule hereto, and set forth on the Table
of Contents.
<PAGE>
2. Plan of Reorganization.
----------------------
2.1. The Merger. Subject to the terms and conditions of this
----------
Agreement and the Certificate of Merger, Transphere shall be merged with and
into NetSource in accordance with the applicable provisions of the laws of the
State of California and the State of Delaware, and with the terms and conditions
of this Agreement and the Certificate of Merger, so that:
(a) At the Effective Time, Transphere shall be merged
with and into NetSource. As a result of the Merger, the separate corporate
existence of Transphere shall cease and NetSource shall continue as the
surviving corporation (sometimes referred to herein as the "Surviving
Corporation") and shall succeed to and assume all of the rights and obligations
of NetSource in accordance with the laws of California and Delaware.
(b) The Certificate of Incorporation and Bylaws of
NetSource in effect immediately prior to the Effective Time shall be the
Certificate of Incorporation and Bylaws, respectively, of the Surviving
Corporation after the Effective Time unless and until further amended as
provided by law.
(c) Subject to the terms of this Agreement, the
directors and officers of NetSource immediately prior to the Effective Time
shall be the directors and officers of the Surviving Corporation after the
Effective Time. Such directors and officers shall hold their position until the
election and qualification of their respective successors or until their tenure
is otherwise terminated in accordance with the Bylaws of the Surviving
Corporation.
2.2. Conversion of Shares. Each share of Transphere Stock,
--------------------
issued and outstanding immediately prior to the Effective Time, will be
exchanged for approximately 2,298.177 shares of fully paid and nonassessable
NetSource Common Stock pursuant to an Exchange Agreement entered into between
NetSource and the sole shareholder of Transphere on the date hereof.
2.3. The Closing. Subject to termination of this Agreement as
-----------
provided in Section 7 below, the closing of the transactions contemplated by
this Agreement (the "Closing") shall take place at the offices of Gray Cary Ware
& Freidenrich, A Professional Corporation, 400 Hamilton Avenue, Palo Alto,
California, as soon as possible upon the satisfaction or waiver of all
conditions set forth in Section 5 and Section 6 hereof (the "Closing Date"), or
such other time and place as is mutually agreeable to the parties.
2.4. Effective Time. Simultaneously with the Closing, the
--------------
Certificate of Merger shall be filed in the office of the Secretary of State of
the State of Delaware. The Merger shall become effective immediately upon the
filing of the Certificate of Merger with such office. The date and time of the
effectiveness of the Merger under the laws of Delaware is the "Effective Time."
2.
<PAGE>
2.5. Tax Free Reorganization. The parties intend to adopt
-----------------------
this Agreement as a tax-free plan of reorganization and to consummate the Merger
in accordance with the provisions of Section 368(a)(1)(A) of the Code. Each
party agrees that it will not take or assert any position on any tax return,
report or otherwise which is inconsistent with the qualification of the Merger
as a reorganization within the meaning of Section 368(a) of the Code. The
NetSource Common Stock issued in the Merger will be issued solely in exchange
for the Transphere Stock pursuant to this Agreement, and no other transaction
other than the Merger represents, provides for or is intended to be an
adjustment to the consideration paid for the Transphere Common Stock. Except for
cash paid in lieu of fractional shares, no consideration that could constitute
"other property" within the meaning of Section 356 of the Code is being paid by
NetSource for the Transphere Stock. In addition, NetSource represents now, and
as of the Closing Date, that it presently intends to continue Transphere's
historic business or use a significant portion of Transphere's business assets
in a business.
2.6. Restricted Securities. The NetSource Common Stock will
---------------------
be subject to the following restrictions
(a) restrictions imposed by applicable federal and
state securities laws;
(b) certificates representing NetSource Common Stock
will bear legends describing certain of the applicable restrictions on
transferability referred to in this Section.
3. Mutual Covenants.
----------------
3.1. Due Diligence, Investigation, and Audits. At such time
----------------------------------------
prior to the Closing as may be reasonably requested, each party shall make
available to the other party and the other party's employees, agents and
representatives all information concerning the operation, business and prospects
of such party as may be reasonably requested by the other party, including,
without limitation, making the working papers of such party's independent
certified public accountants available for inspection by the other party's
independent certified public accountants. Each party will cooperate with the
other party for the purpose of permitting the other party to discuss such
party's business and prospects with such party's customers, creditors, suppliers
and other persons having business dealings with such party, subject to
reasonable confidentiality obligations between the parties.
3.2. Regulatory Filings; Consents; Reasonable Efforts.
------------------------------------------------
Subject to the terms and conditions of this Agreement, Transphere and NetSource
shall use their respective best efforts to (i) make all necessary filings with
respect to the Merger and this Agreement under the Securities Act, and
applicable blue sky or similar securities laws and shall use all reasonable
efforts to obtain required approvals and clearances with respect thereto and
shall supply all additional information requested in connection therewith; (ii)
make merger notification or other appropriate filings with federal, state or
local governmental bodies or applicable foreign governmental agencies and shall
use all reasonable efforts to obtain required approvals and clearances with
respect thereto and shall supply all additional information requested in
connection therewith; and (iii) take, or cause to be taken, all
3.
<PAGE>
appropriate action, and do, or cause to be done, all things necessary, proper or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement.
3.3. Further Assurances. Prior to and following the Closing,
------------------
each party agrees to cooperate fully with the other parties and to execute such
further instruments, documents and agreements and to give such further written
assurances, as may be reasonably requested by any other party to better evidence
and reflect the transactions described herein and contemplated hereby and to
carry into effect the intents and purposes of this Agreement.
4. Closing Matters.
---------------
4.1. Filing of Certificate of Merger. On the date of the
-------------------------------
Closing, but not prior to the Closing, the Certificate of Merger shall be filed
with the offices of the Secretary of State of the State of Delaware and the
merger of Transphere with and into NetSource shall be consummated.
5. Conditions to Transphere's Obligations. Unless otherwise
--------------------------------------
provided below, Transphere's obligations to close the transactions contemplated
under this Agreement are subject to the fulfillment or satisfaction by the
Closing Date of each of the following conditions (any one or more of which may
be waived by Transphere, but only in a writing signed by Transphere):
5.1. NetSource Certificate of Incorporation. NetSource shall
--------------------------------------
have amended and restated its Certificate of Incorporation in substantially the
form attached hereto as Exhibit B.
---------
5.2. Date of Closing. The Closing shall have occurred not
---------------
later than June 30, 1996, or such later date as the parties may mutually agree.
5.3. Filing of Certificate of Merger. As of the Closing, the
-------------------------------
Certificate of Merger shall have been filed with the Secretary of State of the
State of Delaware.
6. Conditions to NetSource's Obligations. Unless otherwise
-------------------------------------
provided below, NetSource's obligations to close the transactions contemplated
under this Agreement are subject to the fulfillment or satisfaction by the
Closing Date of each of the following conditions (any one or more of which may
be waived by NetSource, but only in a writing signed by NetSource):
6.1. NetSource Certificate of Incorporation. NetSource shall
--------------------------------------
have amended and restated its Certificate of Incorporation in substantially the
form attached hereto as Exhibit B.
---------
4.
<PAGE>
6.2. Date of Closing. The Closing shall have occurred not
---------------
later than June 30, 1996, or such later date as the parties may mutually agree.
6.3. Filing of Certificate of Merger. As of the Closing, the
-------------------------------
Certificate of Merger shall have been filed with the Secretary of State of the
State of Delaware.
7. Termination of Agreement.
------------------------
7.1. Termination. This Agreement may be terminated at any
-----------
time prior to the Closing by the mutual written consent of each of the parties
hereto. This Agreement may also be terminated and abandoned:
(a) By NetSource if any of the conditions precedent
to NetSource's obligations pursuant to Section 6 shall not have been fulfilled
at and as of the Closing.
(b) By Transphere if any of the conditions precedent
to Transphere's obligations pursuant to Section 5 above shall not have been
fulfilled at and as of the Closing.
(c) By either Transphere or NetSource, if the
Merger is not effected by June 30, 1996.
Any termination of this Agreement under this Section 7.1 shall be
effected by the delivery of written notice of the terminating party to the other
parties hereto.
7.2. Liability for Termination. Any termination of this
-------------------------
Agreement pursuant to this Section shall be without further obligation or
liability upon any party in favor of any other party hereto. The provisions of
this Section 7.2 shall survive termination.
7.3. Certain Effects of Termination. In the event of the
------------------------------
termination of this Agreement by either Transphere or NetSource as provided in
Section 7.1 hereof, each party, if so requested by the other party, will return
promptly every document (other than documents publicly available) furnished to
it by the other party (or any subsidiary, division, associate or affiliate of
such other party) in connection with the transactions contemplated hereby,
whether so obtained before or after the execution of this Agreement, and any
copies thereof which may have been made, and will cause its representatives and
any representatives of financial institutions and investors and others to whom
such documents were furnished promptly to return such documents and any copies
thereof any of them may have made, or destroy such documents and cause its
representatives and such other representatives to destroy such documents, and
such party shall deliver a certificate executed by its president or vice
president stating to such effect.
7.4. Remedies. No party shall be limited to the termination
--------
right granted in Section 7.1 hereto by reason of the nonfulfillment of any
condition to such party's closing obligations but may, in the alternative, elect
to do one of the following:
(a) proceed to close despite the nonfulfillment of any
closing condition, it being understood that consummation of the transactions
contemplated hereby
5.
<PAGE>
shall be deemed a waiver of any misrepresentation or breach of warranty or
covenant and of any party's rights and remedies with respect thereto to the
extent that the other party shall have actual knowledge of such
misrepresentation or breach and the Closing shall nonetheless take place; or
(b) decline to close and terminate this Agreement as
provided in Section 7.1 hereof.
8. No Survival of Covenants and Agreements. The representations,
---------------------------------------
warranties, covenants and agreements of the parties contained in Sections 3, 4,
5 and 6 of this Agreement shall terminate at and shall not survive the Closing
Date, except for covenants that by their own terms apply after the Closing Date.
9. Miscellaneous.
-------------
9.1. Governing Laws. It is the intention of the parties
--------------
hereto that the internal laws of the State of California (irrespective of its
choice of law principles) shall govern the validity of this Agreement, the
construction of its terms, and the interpretation and enforcement of the rights
and duties of the parties hereto.
9.2. Binding upon Successors and Assigns. Subject to, and
-----------------------------------
unless otherwise provided in, this Agreement, each and all of the covenants,
terms, provisions, and agreements contained herein shall be binding upon, and
inure to the benefit of, the permitted successors, executors, heirs,
representatives, administrators and assigns of the parties hereto.
9.3. Severability. If any provision of this Agreement, or the
------------
application thereof, shall for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances shall be interpreted so as best to reasonably
effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision which will achieve, to the extent possible, the economic,
business and other purposes of the void or unenforceable provision.
9.4. Entire Agreement. This Agreement, the exhibits hereto,
----------------
the documents referenced herein, and the exhibits thereto, constitute the entire
understanding and agreement of the parties hereto with respect to the subject
matter hereof and thereof and supersede all prior and contemporaneous agreements
or understandings, inducements or conditions, express or implied, written or
oral, between the parties with respect hereto and thereto. The express terms
hereof control and supersede any course of performance or usage of the trade
inconsistent with any of the terms hereof.
6.
<PAGE>
9.5. Counterparts. This Agreement may be executed in any
------------
number of counterparts, each of which shall be an original as against any party
whose signature appears thereon and all of which together shall constitute one
and the same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the signatures
of all of the parties reflected hereon as signatories.
9.6. Expenses. Except as provided to the contrary herein,
--------
each party shall pay all of its own costs and expenses incurred with respect to
the negotiation, execution and delivery of this Agreement, the exhibits hereto,
and the other Transaction Documents. If the Merger is consummated, all
investment banking, broker's and finder's fees incurred by Transphere and/or its
shareholders in connection with the Merger will become obligations of NetSource.
9.7. Amendment and Waivers. Any term or provision of this
---------------------
Agreement may be amended, and the observance of any term of this Agreement may
be waived (either generally or in a particular instance and either retroactively
or prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof for default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or any succeeding breach or default.
9.8. Survival of Agreements. All covenants, agreements,
----------------------
representations and warranties made herein shall survive the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby notwithstanding any investigation of the parties hereto and shall
terminate on the date one year after the Closing Date.
9.9. No Waiver. The failure of any party to enforce any of
---------
the provisions hereof shall not be construed to be a waiver of the right of such
party thereafter to enforce such provisions.
9.10. Attorneys' Fees. Should suit be brought to enforce or
---------------
interpret any part of this Agreement, the prevailing party shall be entitled to
recover, as an element of the costs of suit and not as damages, reasonable
attorneys' fees to be fixed by the court (including without limitation, costs,
expenses and fees on any appeal). The prevailing party shall be the party
entitled to recover its costs of suit, regardless of whether such suit proceeds
to final judgment. A party not entitled to recover its costs shall not be
entitled to recover attorneys' fees. No sum for attorneys' fees shall be counted
in calculating the amount of a judgment for purposes of determining if a party
is entitled to recover costs or attorneys' fees.
9.11. Notices. Any notice provided for or permitted under
-------
this Agreement will be treated as having been given when delivered personally,
sent by confirmed telex or telecopy, sent by commercial overnight courier with
written verification of receipt, or mailed postage prepaid by certified or
registered mail, return receipt requested, to the party to be notified, at the
address set forth below, or at such other place of which the other party has
been notified in accordance with the provisions of this Section 9.11
7.
<PAGE>
Transphere: Transphere International, Inc.
444 Spear Street, Suite 200
San Francisco, California 94105
Attention: Charles Schoenhoeft
NetSource: NetSource Interactive
444 Spear Street, Suite 200
San Francisco, California 94105
Attention: Charles Schoenhoeft
With copy to: Gray Cary Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, CA 94301
Attention: Thomas W. Furlong
Such notice will be treated as having been received upon actual receipt.
9.12. Time. Time is of the essence of this Agreement.
----
9.13. Construction of Agreement. This Agreement has been
-------------------------
negotiated by the respective parties hereto and their attorneys and the language
hereof shall not be construed for or against any party. The titles and headings
herein are for reference purposes only and shall not in any manner limit the
construction of this Agreement which shall be considered as a whole.
9.14. No Joint Venture. Nothing contained in this Agreement
----------------
shall be deemed or construed as creating a joint venture or partnership between
any of the parties hereto. No party is by virtue of this Agreement authorized as
an agent, employee or legal representative of any other party. No party shall
have the power to control the activities and operations of any other and their
status is, and at all times, will continue to be, that of independent
contractors with respect to each other. No party shall have any power or
authority to bind or commit any other. No party shall hold itself out as having
any authority or relationship in contravention of this Section 9.14.
9.15. Pronouns. All pronouns and any variations thereof shall
--------
be deemed to refer to the masculine, feminine or neuter, singular or plural, as
the identity of the person, persons, entity or entities may require.
9.16. Further Assurances. Each party agrees to cooperate
------------------
fully with the other parties and to execute such further instruments, documents
and agreements and to give such further written assurances, as may be reasonably
requested by any other party to better evidence and reflect the transactions
described herein and contemplated hereby and to carry into effect the intents
and purposes of this Agreement.
8.
<PAGE>
9.17. Absence of Third Party Beneficiary Rights. No
-----------------------------------------
provisions of this Agreement are intended, nor shall be interpreted, to provide
or create any third party beneficiary rights or any other rights of any kind in
any client, customer, affiliate, stockholder, partner of any party hereto or any
other person or entity except employees and shareholders of Transphere
specifically referred to herein, and, except as so provided, all provisions
hereof shall be personal solely between the parties to this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first set forth above.
NETSOURCE INTERACTIVE TRANSPHERE INTERNATIONAL, INC.
By: /s/ Charles Schoenhoeft By: /s/ Charles Schoenhoeft
---------------------------- ----------------------------
Title: President Title: President
------------------------- -------------------------
9.
<PAGE>
EXHIBIT A
---------
CERTIFICATE OF MERGER
OF TRANSPHERE INTERNATIONAL, INC.
(a California corporation)
INTO
NETSOURCE INTERACTIVE SERVICES, INC.
(a Delaware corporation)
The undersigned corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware, does hereby certify:
First: That the name and state of incorporation of each of the
constituent corporations of the merger is as follows:
Name State of Incorporation
---- ----------------------
Transphere International, Inc. California
NetSource Interactive Services, Inc. Delaware
Second: That an Agreement and Plan of Reorganization dated as of June 4,
1996, between NetSource Interactive Services, Inc. and Transphere International,
Inc. has been approved, adopted, certified, executed and acknowledged by each of
the constituent corporations in accordance with the requirements of Section 252
of the General Corporation Law of the State of Delaware and Section 1201 of the
California General Corporate Law.
Third: That the name of the surviving corporation of the merger is
NetSource Interactive (the "Surviving Corporation").
Fourth: That the Certificate of Incorporation of NetSource Interactive
Services, Inc. shall, as of the effective time of the merger, be the Certificate
of Incorporation, as amended, of the Surviving Corporation.
Fifth: That the executed Agreement and Plan of Reorganization is on file
at the principal place of business of the Surviving Corporation. The address of
said principal place of business is 444 Spear Street, Suite 200, San Francisco,
California 94105.
Sixth: That a copy of the Agreement and Plan of Reorganization will be
furnished by the Surviving Corporation upon request and without charge to any
stockholder of any constituent corporation.
Seventh: The authorized capital stock of Transphere International, Inc. is
4,000 shares of Common Stock, no par value.
IN WITNESS WHEREOF, the undersigned has caused this Certificate to be
executed by its duly authorized officer this 4th day of June, 1996.
NETSOURCE INTERACTIVE
SERVICES, INC.
(a Delaware corporation)
By: /s/ Charles Schoenhoeft
----------------------------
Charles Schoenhoeft
10.
<PAGE>
EXHIBIT B
---------
RESTATED CERTIFICATE OF INCORPORATION
[intentionally omitted]
11.
<PAGE>
Exhibit 3.3
CERTIFICATE OF INCORPORATION
OF
MTC TELECOMMUNICATIONS, INC,
FIRST: The name of the corporation is MTC Telecommunications, Inc.
SECOND: The address of the registered office of the corporation in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of its registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of Common Stock which the corporation is
authorized to issue is one thousand (1,000) shares of Common Stock, $.001 par
value.
FIFTH: In furtherance and not in limitation of the powers conferred by law,
the Board of Directors shall have the power to make, alter, amend and repeal the
by-laws (except so far as the by-laws adopted by the stockholders shall
otherwise provide). Any by-laws made by the Board of Directors under the powers
conferred hereby may be altered, amended or repealed by the Board of Directors
or by the stockholders.
SIXTH: Meetings of stockholders may be held within or without the State of
Delaware as the by-laws may provide. The books of the corporation may be kept,
subject to any provision contained in applicable law, outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the by-laws of the corporation. Elections of directors
need not be by written ballot unless a bylaw of the corporation shall so
provide.
SEVENTH: To the fullest extent permitted by the General Corporation Law of
the State of Delaware, as it exists on the date hereof or as it may hereafter be
amended, a director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. Any repeal or modification of this ARTICLE SEVENTH by the
stockholders of the corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
corporation with respect to any act or omission occurring prior to the time of
such repeal or modification.
EIGHTH: The corporation reserves the right to amend, alter, change or
repeal
<PAGE>
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute and this Certificate of Incorporation, and
all rights conferred on stockholders herein are granted subject to this
reservation.
NINTH: The corporation shall have the power to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a director, officer,
employee, agent or affiliate of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys" fees), judgments, fines and amounts in connection
with such action, suit or proceeding, in accordance with the laws of the State
of Delaware, and to the full extent permitted by said laws, except as the by-
laws of the corporation may otherwise provide. Such indemnification shall not be
deemed exclusive of any other rights to which those seeking indemnification may
be entitled under any by-law, agreement, vote of stockholders or disinterested
directors or otherwise, including insurance purchased and maintained by the
corporation, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, agent or affiliate and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
TENTH: The name and address of the sole incorporator is as follows:
Tom Hakel
1304 Southpoint Boulevard
Petaluma, California 94954
THE UNDERSIGNED, being the sole incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of the
State of Delaware does make this certificate, hereby declaring and certifying
that this is his act and deed and the facts herein stated are true, and
accordingly has hereunto set forth his hand this 20th day of November, 1995.
/s/ Tom Hakel
----------------
Tom Hakel
<PAGE>
Exhibit 3.4
CERTIFICATE OF AMENDMENT OF
CERTIFCATE OF INCORPORATION OF
MTC TELECOMMUNICATTONS, INC.
MTC TELECOMMUNICATIONS, INC., a corporation organized and
existing under the laws of the State of Delaware, hereby certifies that:
(1) The corporation's original Certificate of Incorporation
was filed with the Secretary of State of the State of Delaware on November 20,
1992.
(2) This Certificate of Amendment of Certificate of
Incorporation amends the provisions of the Certificate of Incorporation of this
corporation and has been duly adopted in accordance with Section 241 of the
General Corporation Law of the State of Delaware. As of the date of this
Amendment, the corporation has received no payment for any of its stock. This
Amendment of Certificate of Incorporation shall become effective on the date of
filing of this Amendment of Certificate of Incorporation with the Secretary of
State of the State of Delaware.
(3) The Board of Directors of said corporation, by the
unanimous written consent of its members, filed with the minutes of the Board,
adopted a resolution proposing and declaring advisable the following amendment
to the Certificate of Incorporation of said corporation:
RESOLVED, that the Certificate of Incorporation of MTC
Telecommunications, Inc. be amended by changing the Fourth Article
thereof so that, as amended, said Article shall be and read as follows:
"FOURTH: The total number of shares of Common Stock which the
corporation is authorized to issue is two million two hundred
thousand (2,200,000) shares of Common Stock, $.001 par value."
IN WITNESS WHEREOF, the corporation has caused this Amendment of Certificate of
Incorporation to be signed by its Chairman of the Board and Chief Executive
Officer and attested by its Secretary this ____ day of January, 1996.
By: /s/ Edward A. Brinskele
-------------------------
Edward A. Brinskele
Chairman of the Board and
Chief Executive Officer
Attest:
By: /s/ Roger Sheppard
--------------------------
Roger Sheppard
Assistant Secretary
<PAGE>
- --------------------------------------------------------------------------------
Page 1
- --------------------------------------------------------------------------------
Exhibit 3.5
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
MTC TELECOMMICATIONS, INC.
MTC TELECOMMUNICATIONS, INC., a corporation duly organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify that:
I.
The amendment to the Corporation's Certificate of Incorporation set
forth below was duly adopted in accordance with the provisions of Section 242
and has been consented to in writing by the sole stockholder in accordance with
Section 228 of the General Corporation law of the State of Delaware.
II.
The First Article of the Corporation's Certificate of Incorporation is
amended to read in its entirety as follows:
"The name of the Corporation is NetSource International
Telecommunications, Inc."
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by Edward A. Brinskele, its authorized officer, on this 28th day of
May, 1996.
By: /s/ Edward A. Brinskele
--------------------------------
Edward A. Brinskele
Chairman of the Board and
Chief Executive Officer
Attest:
By: /s/ Roger Sheppard
----------------------
Roger Sheppard
Assistant Secretary
<PAGE>
Exhibit 3.6
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC.
NetSource International Telecommunications, Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "Corporation"), does hereby certify that:
I.
The amendments to the Corporation's Certificate of Incorporation set
forth below were duly adopted in accordance with Section 242 of the General
Corporation Law of the State of Delaware and have been consented to in writing
by at least a majority of the holders of the outstanding shares of Common Stock
of the Corporation in accordance with Section 228 of the General Corporation Law
of the State of Delaware.
II.
The First Article of the Corporation's Certificate of Incorporation is
amended to read in its entirety as follows:
"The name of the Corporation is NetSource Communications, Inc."
III.
The Fourth Article of the Corporation's Certificate of Incorporation is
amended to read in its entirety as follows:
"The total number of shares of Common Stock which this Corporation is
authorized to issue is Twenty-Two Million (22,000,000) shares of Common
Stock, $0.001 par value.
Upon the filing of this Certificate of Amendment with the Secretary of
State of the State of Delaware (the "Effective Time"), each share of
Common Stock of this Corporation issued and outstanding immediately
prior to the Effective Time shall be changed and converted into ten
(10) shares of Common Stock of this Corporation."
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by Edward A. Brinskele, its Chairman of the Board and Chief Executive
Officer, on this _____ day of July, 1996.
NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC.
By: /s/ Edward A. Brinskele
-------------------------
Edward A. Brinskele
Chairman of the Board and
Chief Executive Officer
Attest:
By: /s/ Evan A. Kraus
----------------------
Evan A. Kraus
Secretary
<PAGE>
Exhibit 3.7
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
NETSOURCE COMMUNICATIONS, INC.
NetSource Communications, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
does hereby certify that:
I.
The amendment to the Corporation's Certificate of Incorporation set
forth below was duly adopted in accordance with Section 242 of the General
Corporation Law of the State of Delaware and has been consented to in writing by
at least a majority of the holders of the outstanding shares of Common Stock of
the Corporation in accordance with Section 228 of the General Corporation Law of
the State of Delaware.
II.
The Fourth Article of the Corporation's Certificate of Incorporation is
amended to read in its entirety as follows:
"The total number of shares of Common Stock which this Corporation is
authorized to issue is Forty-Four Million (44,000,000) shares of Common
Stock, $0.001 par value.
Upon the filing of this Certificate of Amendment with the Secretary of
State of the State of Delaware (the "Effective Time"), each share of
Common Stock of this Corporation issued and outstanding immediately
prior to the Effective Time shall be changed and converted into two (2)
shares of Common Stock of this Corporation."
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed by Edward A. Brinskele, its Chairman of the Board and Chief Executive
Officer, on this day of September, 1996.
----
NETSOURCE COMMUNICATIONS, INC.
By: /s/ Edward A. Brinskele
---------------------------
Edward A. Brinskele
Chairman of the Board and
Chief Executive Officer
Attest:
By: /s/ Evan A. Kraus
-------------------
Evan A. Kraus
Secretary
<PAGE>
Exhibit 4.1
NCC
COMMON STOCK COMMON STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
CUSIP 64114X 10 6
SEE REVERSE FOR CERTAIN DEFINITIONS AND A STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND LIMITATIONS OF SHARES
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.001 PAR VALUE, OF
NETSOURCE COMMUNICATIONS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by a duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
SECRETARY PRESIDENT
<PAGE>
NETSOURCE COMMUNICATIONS, INC.
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations and restrictions of such preferences
and/or rights as established, from time to time by the Certificate of
Incorporation of the Corporation and by any certificate of determination, the
number of shares constituting each class and series, and the designation
thereof, may be obtained by the holder hereof upon request without charge at the
principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ................... Custodian .........................
(Cust) (Minor)
under Uniform Gifts to Minors
Act ...................................................
(State)
UNIF TRF MIN ACT -- .................... Custodian (until age .............)
(Cust)
................................ under Uniform Transfers
(Minor)
to Minors Act ..........................................
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,.................... hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- ------------------------------------------------------------------------ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ---------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated -------------------------------------------------------
X ------------------------------------------------
X ------------------------------------------------
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
NOTICE: FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By ------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF WILSON, SONSINI, GOODRICH & ROSATI]
November 19, 1996
NetSource Communications, Inc.
444 Spear Street, Suite 200
San Francisco, CA 94105
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
We have examined (1) the Registration Statement on Form S-1 (file no.
333-14237) filed by you with the Securities and Exchange Commission on October
16, 1996, in connection with the registration under the Securities Act of 1933,
as amended, of 3,500,000 shares of your Common Stock, $0.001 par value (the
"Shares"), all of which are authorized but heretofore unissued, including an
over-allotment option for 525,000 shares held by the Underwriters, and (2)
Pre-effective Amendment No. 1 to the Registration Statement proposed to be filed
with the Commission on or about November 19, 1996. The Shares are to be sold to
the Underwriters for resale to the public as described in the Registration
Statement pursuant to the Underwriting Agreement filed as an exhibit thereto. As
your counsel in connection with this transaction, we have examined the
proceedings proposed to be taken in connection with said sale and issuance of
the Shares.
It is our opinion that, upon completion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, the Shares when issued and sold in the manner referred to in the
Registration Statement will be legally and validly issued, fully paid and
non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, including the prospectus constituting a part thereof, and any
amendment thereto and consent to the use of our name under the heading "Legal
Matters" contained in the Prospectus.
Very truly yours,
WILSON, SONSINI, GOODRICH & ROSATI
Professional Corporation
/s/ Wilson, Sonsini, Goodrich & Rosati
<PAGE>
Exhibit 10.17
BASIC LEASE INFORMATION
OFFICE LEASE
------------
LEASE DATE: November 4, 1996
LANDLORD: 470 Spear Associates,
a California limited partnership
ADDRESS OF LANDLORD: 55 Francisco Street, 8th Floor
San Francisco, CA 94133
TELEPHONE/FACSIMILE: (415) 393-8008
(415) 393-8098 Fax
TENANT: NetSource Communications, Inc.
a Delaware corporation
ADDRESS OF TENANT: 444 Spear Street, Suite 200
San Francisco, CA 94105
CONTACT: Jade Wong, Vice President
TELEPHONE/FACSIMILE: (415) 243-8080 / (415) 546-5252
BUILDING: 444 Spear Street
FLOOR: Second Floor
SUITES: 201 and 204, ("Initial Premises"), and Suite 200
and 205 ("Additional Premises") to be added
effective January 1, 1998. (See Paragraph 33.)
RENTABLE AREA: Initial Premises: 7,024 rentable square feet
Additional Premises: 13,520 rentable square feet
PARAGRAPH (3): TERM: Suite 201: Sixty Three (63) months
Suite 204: Sixty (60) months
Suite 200: Forty Eight (48) months
Suite 205: Forty Eight (48) months
(Suites 200 & 205 to terminate contiguous with
Suites 201 and 204)
COMMENCEMENT DATE:
Suite 201: Thirty (30) days after fully executed
Lease by both parties, or upon occupancy
whichever is sooner.
Suite 204: Ninety (90) days after fully executed
Lease by both parties, or upon occupancy
whichever is sooner.
Suite 200: January 1, 1998
Suite 205: January 1, 1998
EXPIRATION DATE: Sixty Three (63) months after
term Commencement Date for Suite 201.
-1-
<PAGE>
PARAGRAPH (5): BASE RENT:
Initial Premises: $11,121.33 per month,
Additional Premises: $22,048.87 per month
based upon $ 19.00 per rentable square
foot per year which shall be increased by
three percent (3%) annually on the
anniversary of the Commencement Date of
this Lease. Additional Premises Base Rent
is based upon $19.57 per rentable square
foot per year as it commences January 1,
1998, ($19.00 x 1.03% = $19.57)
PARAGRAPH (6): SECURITY DEPOSIT: $ 22,242.00 to be increased to
$44,291.00 effective January 1, 1998.
PARAGRAPH (7): BASE TAX YEAR:
Initial Premises: 1997
Additional Premises: 1998
BASE EXPENSE YEAR:
Initial Premises: 1997
Additional Premises: 1998
PARAGRAPH (7B): TENANT'S PERCENTAGE SHARE:
13.31%, (Initial Premises)
25.62% (Additional Premises)
based on 52,764 square feet of total rentable
area of project.
EXHIBITS EXHIBIT A and A-1: SITE PLANS
EXHIBIT A-2: FIRST RIGHT SPACE
EXHIBIT B: WORK LETTER AGREEMENT
EXHIBIT C: COMMENCEMENT DATE
EXHIBIT D: RULES AND REGULATIONS
-2-
<PAGE>
OFFICE BUILDING LEASE
---------------------
1. PARTIES. This Lease, dated, for reference purposes only, November 4,
1996, is made by and between 470 Spear Associates, a California limited
partnership (herein called "Landlord") and Netsource Communications, Inc., a
Delaware corporation (herein called "Tenant").
2. PREMISES.
(a) Demise of Premises. Landlord does hereby lease to Tenant and Tenant
------------------
hereby leases from Landlord that certain office space ( the "Premises")
indicated on Exhibit "A" attached hereto and incorporated herein by reference,
said Premises being agreed, for the purpose of this Lease, to have an area of
approximately the number of rentable square feet indicated in the Basic Lease
Information and being situated on the floor of that certain building identified
in the Basic Lease Information (the "Building").
(b) Terms and Conditions. Said Lease is subject to the terms, covenants
--------------------
and conditions herein set forth and the Tenant covenants as a material part of
the consideration for this Lease to keep and perform each and all of said terms,
covenants and conditions by it to be kept and performed and that this Lease is
made upon the condition of said performance.
3. TERM.
(a) Initial Term. The term of this Lease shall be for the period
------------
indicated in the Basic Lease Information, commencing on the date (the
"Commencement Date") which is (i) for Suite 201 the earlier of thirty (30) days
from receipt of the fully executed Lease, or the date Tenant takes occupancy of
such portion of the Premises, (ii) for Suite 204 the earlier of ninety (90) days
from receipt of the fully executed Lease, or the date Tenant takes occupancy of
such portion of the Premises, and (iii) for the Additional Premises on January
1, 1998, and ending on the last day of the month in which the end of the Term,
as defined in Basic Lease Information for each such portion of the Premises,
occurs (the "Expiration Date"). As soon as the Commencement Date is determined,
the parties shall execute a memorandum in the form attached hereto as Exhibit
"C" (the "Commencement Date Memorandum") setting forth the Commencement Date and
the Expiration Date. Failure to execute the Commencement Date Memorandum,
however, shall not affect Tenant's or Landlord's obligations hereunder.
(b) Option Term. Provided that Tenant is not in default under the Lease
------------
either at the time of exercise or at the time the Option Term commences, Tenant
shall have the option to extend the initial five (5) year term of this Lease for
one additional period of five (5) years ("Option Term") on the same terms,
covenants and conditions provided in the Lease, except that there shall be no
further options to extend, and upon such renewal the Base Rent due hereunder
shall be equal to the fair market value of the Premises as reasonably determined
by Landlord. Tenant shall exercise said option by giving Landlord written notice
("Option Notice") no less than nine (9) months prior to the expiration of the
initial term of this Lease. Landlord shall notify Tenant of the Base Rent for
the Premises within thirty (30) days of receipt of the Option Notice from
Tenant.
(c) Failure to Exercise Option. If Tenant shall fail to exercise any
--------------------------
option herein provided, each option shall terminate, and shall be null and void
and of no further force and effect. Tenant's exercise of any option shall not
operate to cure any default by Tenant of any of the terms or provisions in the
Lease, nor to extinguish or impair any rights or remedies of Landlord arising by
virtue of such default. If the Lease or Tenant's right to possession of the
Premises shall terminate in any manner whatsoever before Tenant shall exercise
any option herein provided, then immediately upon such termination, the options
herein granted to extend the Term, shall simultaneously terminate and become
null and void. If Tenant does not timely exercise any option granted herein,
Tenant shall promptly, following demand by Landlord, execute, acknowledge and
deliver to Landlord a release of option, quitclaim deed, or other such document
as may be required or requested by Landlord to verify the termination of each
option. Time is of the essence of this provision.
-3-
<PAGE>
(d) Appraisal. If the parties are unable to agree on the fair market
---------
value of the Premises within sixty (60) days after Tenant provides the Option
Notice to Landlord, either party may submit the determination of such fair
market value to appraisal, by proceeding as follows:
(i) Either party may demand an appraisal by giving written
notice to the other party, which demand to be effective must state the name,
address and qualifications of an appraiser selected by the party demanding an
appraisal (the "Notifying Party"), which appraiser shall be a member of the
American Institute of Real Estate Appraisers and shall have at least five (5)
years experience appraising office space located in the vicinity of the
Premises. Within ten (10) days following the Notifying Party's appraisal demand,
the other party (the "Non-Notifying Party") shall either approve the appraiser
selected by the Notifying Party or select a second similarly qualified appraiser
by giving written notice of the name, address and qualification of said
appraiser to the Notifying Party. If the Non-Notifying Party fails to select an
appraiser within the ten (10) day period, the appraiser selected by the
Notifying Party shall be deemed selected by both parties and no other appraiser
shall be selected. If two appraisers are selected, they shall select a third
appropriately qualified appraiser. If the two appraisers fail to select a third
qualified appraiser, the third appraiser shall be appointed by the then
presiding judge of the county where the Premises are located upon application by
either party.
(ii) If only one appraiser is selected, that appraiser shall
notify the parties in simple letter form of its determination of the fair market
value for the Premises within fifteen (15) days following his selection, which
appraisal shall be conclusively determinative and binding on the parties as the
appraised fair market value.
(iii) If multiple appraisers are selected, the appraisers
shall meet not later than ten (10) days following the selection of the last
appraiser. At such meeting the appraisers shall attempt to determine the fair
market value for the Premises as of the commencement date of the Option Term by
the agreement of at least two (2) of the appraisers.
(iv) If two (2) or more of the appraisers agree on the fair
market value for the Premises at the initial meeting, such agreement shall be
determinative and binding upon the parties hereto and the agreeing appraisers
shall, in simple letter form executed by the agreeing appraisers, forthwith
notify both Landlord and Tenant of the amount set by such agreement. If multiple
appraisers are selected and two (2) appraisers are unable to agree on the fair
market value for the Premises, all appraisers shall submit to Landlord and
Tenant an independent appraisal of the fair market value for the Premises in
simple letter form within twenty (20) days following appointment of the final
appraiser. The parties shall then determine the fair market value for the
Premises by averaging the appraisals; provided that any high or low appraisal,
differing from the middle appraisal by more than ten percent (10%) of the middle
appraisal, shall be disregarded in calculating the average.
(v) The appraisers' determination of fair market value shall
be based on rental of space of similar age, construction, size and location as
the Premises with the improvements installed therein at Landlord's expense and
shall take into account Tenant's obligations to pay additional rent under this
Lease.
(vi) If only one appraiser is selected, then each party shall
pay one-half of the fees and expenses of that appraiser. If three appraisers are
selected, each party shall bear the fees and expenses of the appraiser it
selects and one-half of the fees and expenses of the third appraiser.
4. POSSESSION.
If the Landlord, for any reason whatsoever, cannot deliver possession
of those portions of the said Premises to the Tenant on the respective
Commencement Date(s) noted in the Basic Lease Information, this Lease shall not
be void or voidable, nor shall Landlord be liable to Tenant for any loss or
damage resulting therefrom, nor shall the Expiration Date be
-4-
<PAGE>
extended, but in that event, all rent shall be abated during the period between
the Anticipated Commencement Date and the Commencement Date.
5. RENT.
Tenant agrees to pay to Landlord as rental, without prior notice or
demand, for the Premises the Base Rent indicated in the Basic Lease Information,
on or before the first day of the first full calendar month of the term hereof
and a like sum on or before the first day of each and every successive calendar
month thereafter during the term hereof, except that the first month's rent
shall be paid upon the execution hereof. Rent for any period during the term
hereof which is for less than one (1) month shall be a prorated portion of the
monthly installment herein, based upon a thirty (30) day month. Said rental
shall be paid, without deduction or offset in lawful money of the United States
of America, which shall be legal tender at the time of payment, to Landlord, at
the address of Landlord indicated in the Basic Lease Information, or to such
other person or at such other place as Landlord may from time to time designate
in writing.
6. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum of
Twenty Two Thousand Two Hundred Forty Two Dollars ($22,242.00) (the "Security
Deposit"). The Security Deposit shall be held by Landlord as security for the
faithful performance by Tenant of all the terms, covenants, and conditions of
this Lease to be kept and performed by Tenant during the term hereof. An
additional Security Deposit of Twenty Two Thousand Forty Nine Dollars
($22,049.00) shall be due and payable no later than January 1, 1998. If Tenant
defaults with respect to any provision of this Lease, including, but not limited
to the provisions relating to the payment of rent, Landlord may (but shall not
be required to) use, apply or retain all or any part of this Security Deposit
for the payment of any rent or any other sum in default, or for the payment of
any amount which Landlord may spend or become obligated to spend by reason of
Tenant's default, or to compensate Landlord for any other loss or damage which
Landlord may suffer by reason of Tenant's default. If any portion of said
Security Deposit is so used or applied, Tenant shall within five (5) days after
written demand therefor, deposit cash with Landlord in an amount sufficient to
restore the Security Deposit to its original amount and Tenant's failure to do
so shall be a material breach of this Lease. Landlord shall not be required to
keep the Security Deposit separate from its general funds, and Tenant shall not
be entitled to interest on such deposit. If Tenant shall fully and faithfully
perform every provision of this Lease to be performed by it, the Security
Deposit or any balance thereof shall be returned to Tenant (or, at Landlord's
option, to the last assignee of Tenant's interest hereunder) at the expiration
of the Lease term. In the event of termination of Landlord's interest in this
Lease, Landlord shall transfer said deposit to Landlord's successor in interest.
7. RENT ADJUSTMENTS.
(a) Definitions. For the purposes of this Article, the following terms
-----------
are defined as follows:
(i) Base Year. The calendar year of 1997. (Initial Premises)
(ii) Comparison Year. Each calendar year of the term after the Base
Year.
(iii) Direct Expense. All direct costs of operation and maintenance as
determined by standard accounting practices, which shall include the following
costs by way of illustration, but not limitation: real property taxes and
assessments; rent taxes, gross receipt taxes (whether assessed against the
Landlord or assessed against the Tenant and collected by the Landlord, or both);
water and sewer charges; insurance premiums; utilities; janitorial services;
labor; costs incurred in the management of the Building, if any;
air-conditioning and heating; elevator maintenance; supplies; materials;
equipment; and tools; including maintenance, costs, and upkeep of all parking
and common areas. Direct Expenses shall not include depreciation on the Building
of which the Premises are a part, loan payments, or real estate brokers'
commissions. Direct Expenses that vary with occupancy and that are attributable
to any part of the term in which less than ninety-five percent (95%) of the
rentable area of the Building is
-5-
<PAGE>
occupied by tenants will be adjusted by Landlord to the amount that Landlord
reasonably believes such Direct Expenses would have been if ninety-five percent
(95%) of the rentable area of the Building had been so occupied.
(b) Additional Rent. Tenant shall pay to Landlord as "additional rent"
---------------
Tenant's Percentage Share of the amount of any increase in Direct Expenses
incurred in any Comparison Year over Direct Expenses incurred in the Base Year.
Landlord shall endeavor to give to Tenant on or before the first day of March of
each year following the Base Year a statement of the additional rent payable by
Tenant hereunder, but failure by Landlord to give such statement by said date
shall not constitute a waiver by Landlord of its right to require payment of
such amount. Upon receipt of the statement, Tenant shall pay in full Tenant's
Percentage Share of the total amount of the increase, if any, due for the past
year. In addition, unless Landlord reasonably estimates that the amount of any
increase in Direct Expenses for the succeeding Comparison Year over the Direct
Expenses for the Base Year will differ, an amount equal to any such increase
shall be divided into twelve (12) equal monthly installments and Tenant shall
pay to Landlord, concurrently with the regular monthly rent payment next due
following the receipt of such statement, an amount equal to one (1) monthly
installment multiplied by the number of months from January in the calendar year
in which said statement is submitted to the month of such payment, both months
inclusive. Subsequent installments shall be payable concurrently with the
regular monthly rent payments for the balance of that calendar year and shall
continue until the next Comparison Year's statement is rendered. If a greater
increase in Direct Expenses occurs in the next or any succeeding Comparison
Year, then upon receipt of a statement from Landlord, Tenant shall pay a lump
sum equal to Tenant's Percentage Share of such total increase in Direct
Expenses, less the total of the monthly installments of estimated increases paid
in the previous calendar year by Tenant; and the estimated monthly installments
to be paid for the next year, following said Comparison Year, shall be adjusted
to reflect such increase. If in any Comparison Year the total of the estimated
payments of Tenant's Percentage Share of the increase in Direct Expenses is less
than the amount owed, then upon receipt of Landlord's statement, any overpayment
made by Tenant on the monthly installment basis provided above shall be credited
towards the next monthly rent falling due and the estimated monthly installments
of Direct Expenses to be paid shall be adjusted to reflect such lower Direct
Expenses for the most recent Comparison Year. If this Lease terminates during a
calendar year, the rental adjustment shall be payable for the portion of the
calendar year included in the Lease term.
8. USE.
(a) Permitted Use. Tenant shall use the Premises for general office
-------------
purposes and shall not use or permit the Premises to be used for any other
purposes without the prior written consent of Landlord, which may be withheld in
Landlord's sole discretion.
(b) Prohibited Uses. Tenant shall not do or permit anything to be done
---------------
in or about the Premises, nor bring or keep anything therein, which will in any
way increase the existing rate of or affect any fire or other insurance upon the
Building or any of its contents, or cause cancellation of any insurance policy
covering said Building or any part thereof or any of its contents. Tenant shall
not do or permit anything to be done in or about the Premises which will in any
way obstruct or interfere with the rights of other tenants or occupants of the
Building or injure or annoy them or use or allow the Premises to be used for any
improper, immoral, unlawful or objectionable purpose, nor shall Tenant cause,
maintain or permit any nuisance in, on or about the Premises. Tenant shall not
commit or suffer to be committed any waste in or upon the Premises.
(c) Hazardous Materials. Tenant shall not bring, store, deposit or use
-------------------
any Hazardous Material (as defined herein) on or about the Premises or the
Building, nor shall Tenant allow or permit its agents, employees, or contractors
to bring, store, deposit or use any Hazardous Material on or about the Premises
or the Building, except incidental quantities of household chemicals commonly
used for office and janitorial purposes. "Hazardous Material" as used herein
shall mean any hazardous, toxic or radioactive substance now or hereafter
regulated by federal, state or local governmental or other authority, including,
but not limited to, any
-6-
<PAGE>
"hazardous substance" as defined in Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as it may be
amended or supplemented, and any crude oil, petroleum product, natural gas
product or related materials.
9. COMPLIANCE WITH LAW. Tenant shall not use the Premises or Building or
permit anything to be done in or about the Premises or Building which will in
any way conflict with any law, statute, ordinance or governmental rule or
regulation now in force or which may hereafter be enacted or promulgated
(collectively, "Laws"). Tenant shall, at its sole cost and expense, promptly
comply with all Laws, and with the requirements of any board of fire insurance
underwriters or other similar bodies now or hereafter constituted, relating to,
or affecting the condition, use or occupancy of the Premises or the Building,
excluding structural changes not related to or affected by Tenant's improvements
or acts. The judgment of any court of competent jurisdiction or the admission of
Tenant in any action against Tenant, whether Landlord be a party thereto or not,
that Tenant has violated any Law shall be conclusive of that fact as between the
Landlord and Tenant.
10. ALTERATIONS AND ADDITIONS. Tenant shall not make or suffer to be
made any alterations, additions or improvements ("Alterations") to or of the
Premises or any part thereof without the prior written consent of Landlord,
which consent shall not be unreasonably withheld, and any Alterations to or of
said Premises, including, but not limited to, wall covering, paneling and
built-in cabinet work, but excepting movable furniture and trade fixtures
installed at the sole cost and expense of Tenant, shall on the expiration of the
term and belong to the Landlord and shall be surrendered with the Premises. In
the event Landlord consents to the making of any Alterations to the Premises by
Tenant, the same shall be made by Tenant at Tenant's sole cost and expense.
Tenant shall be notified at time of consent that Landlord may require removal of
said alteration at Lease expiration. All Alterations to be constructed by Tenant
shall be constructed in accordance with all Laws using new materials of good
quality, by a licensed contractor approved by Landlord. Tenant shall not
commence construction of any Tenant's Alterations until (i) all required
governmental approvals and permits have been obtained, (ii) all requirements
regarding insurance imposed by this Lease have been satisfied, (iii) Tenant has
given Landlord at least five days' prior written notice of its intention to
commence such construction, and (iv) if reasonably requested by Landlord, Tenant
has obtained contingent liability and broad form builders' risk insurance in an
amount reasonably satisfactory to Landlord. Upon the expiration or sooner
termination of the Term hereof, Tenant shall, upon written demand by Landlord,
at Tenant's sole cost and expense, forthwith and with all due diligence remove
any Alterations made by Tenant and designated by Landlord to be removed, and
Tenant shall, forthwith and with all due diligence at its sole cost and expense,
repair any damage to the Premises caused by such removal.
11. REPAIRS.
(a) Tenant's Obligation. By taking possession of the Premises, Tenant
-------------------
shall be deemed to have accepted the Premises as being in good, sanitary order,
condition and repair. Tenant shall, at Tenant's sole cost and expense, keep the
Premises and every part thereof in good condition and repair, and Tenant shall
surrender the Premises to Landlord upon the expiration or sooner termination of
this Lease in such condition. Except as specifically provided in this Lease,
Landlord shall have no obligation whatsoever to alter, remodel, improve, repair,
decorate or paint the Premises or any part thereof and the parties hereto affirm
that Landlord has made no representations to Tenant respecting the condition of
the Premises, the Building or the Building except as specifically herein set
forth.
(b) Landlord's Obligation. Notwithstanding the provisions of Article
---------------------
11(a) hereinabove, Landlord shall repair and maintain the structural portions of
the Building, including the basic plumbing, air conditioning, heating, and
electrical systems, installed or furnished by Landlord, unless such maintenance
and repairs are caused in part or in whole by the act, neglect, fault or
omission of any duty by the Tenant, its agents, servants, employees or invitees,
in which case Tenant shall pay to Landlord the reasonable cost of such
maintenance and repairs. Landlord shall not be liable for any failure to make
any such repairs or to perform any maintenance unless such failure shall persist
for an unreasonable time after
-7-
<PAGE>
written notice of the need of such repairs or maintenance is given to Landlord
by Tenant. Excpet as provided in Article 22 hereof, there shall be no abatement
of rent and no liability of Landlord by reason of any injury to or interface
with Tenant's business arising from the making of any repairs, alterations or
improvements in or to any portion of the Building or the Premises or in or to
fixtures, appurtenances and equipment therein. Tenant waives the right to make
repairs at Landlord's expense under any Law now or hereafter in effect, except
in the instance that Landlord receives notice from Tenant of necessary repairs
required by law and Landlord fails to commence said repair within five (5)
business days.
12. LIENS. Tenant shall keep the Building free from any liens arising
out of any work performed, materials furnished or obligations incurred by
Tenant. Landlord may require, at Landlord's sole option, that Tenant shall
provide to Landlord, at Tenant's sole cost and expense, a lien and completion
bond in an amount equal to one and one-half (1-1/2) times any and all estimated
cost of any Alterations made by Tenant in the Premises, to insure Landlord
against any liability for mechanics' and materialmen's liens and to insure
completion of the work.
13. ASSIGNMENT AND SUBLETTING. Tenant shall neither voluntarily nor by
operation of law, assign, transfer, mortgage, pledge, hypothecate or encumber
this Lease or any interest therein, and shall not sublet the said Premises or
any part thereof, or any right or privilege appurtenant thereto, or suffer any
other person (the employees, agents, servants and invitees of Tenant excepted)
to occupy or use the Premises, or any portion thereof, without the prior written
consent of Landlord, which consent shall not be unreasonably withheld. Any such
assignment, or subletting without such consent shall be void, and shall, at the
option of the Landlord, constitute a default under this Lease. An assignment for
purposes of this paragraph shall include any sale or transfer, including by
consolidation, merger or reorganization, of a majority of the voting stock of
Tenant, if Tenant is a corporation, or any sale or other transfer of a majority
of the partnership interest in Tenant, if Tenant is a partnership, in a single
transaction or a series of related transactions. A consent to one assignment,
subletting, occupation or use by any other person shall not be deemed to be a
consent to any subsequent assignment, subletting, occupation or use by another
person. If Tenant shall assign, sublet or otherwise transfer this Lease or the
Premises, or any portion thereof, with Landlord's consent, Tenant shall pay to
Landlord as additional rent, as and when received, all amounts received by
Tenant from such assignment, subletting or transfer, in excess of the amounts
required to be paid by Tenant to Landlord pursuant to this Lease.
14. HOLD HARMLESS. Tenant shall indemnify and hold harmless Landlord
against and from any and all claims arising from Tenant's use of the Premises or
from any activity, work, or other thing done, permitted or suffered by Tenant in
or about the Building, and shall further indemnify and hold harmless Landlord
against and from any and all claims arising from any breach or default in the
performance of any obligation on Tenant's part to be performed under the terms
of this Lease, or arising from any act or negligence of Tenant, or any officer,
agent, employee, guest, or invitee of Tenant, and from and against all costs,
reasonable attorney's fees, expenses and liabilities incurred in or resulting
from any such claim or any action or proceeding brought thereon, and, in any
case, if any action or proceeding is brought against Landlord by reason of any
such claim, Tenant upon notice from Landlord shall defend the same at Tenant's
expense by counsel reasonably satisfactory to Landlord. Tenant as a material
part of the consideration to Landlord hereby assumes all risk of damage to
property or injury to persons, in, upon or about the Premises, from any cause
other than Landlord's negligence, and Tenant hereby waives all claims in respect
thereof against Landlord. Landlord or its agents shall not be liable for any
damage to property entrusted to employees of the Building, nor for loss or
damage to any property by theft or otherwise, nor for any injury to or damage to
persons or property or to the business of Tenant resulting from fire, explosion,
falling plaster, steam, gas, electricity, water or rain which may leak from any
part of the Building or from the pipes, appliances or plumbing works therein or
from the roof, street or subsurface or from any other place resulting from
dampness or any other cause whatsoever, unless caused by or due to the
negligence of Landlord, its agents, servants or employees. Neither Landlord nor
its agents shall be liable for interference with the light or other incorporeal
hereditaments, loss of business by Tenant, or any latent defect in the Premises
or in the Building. Tenant shall give prompt notice to Landlord in case of fire
or
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<PAGE>
accidents in the Premises or in the Building or of defects therein or in the
fixtures or equipment.
15. WAIVER OF SUBROGATION. Landlord and Tenant shall each obtain from
their respective insurers under all policies of fire and other casualty
insurance maintained by either of them at any time during the term, insuring or
covering the Premises, or any portion thereof, or operations or property
contained therein, a waiver of all rights of subrogation which the insurer of
one party might otherwise have against the other party, and Landlord and Tenant
shall each indemnify the other against any loss or expense, including reasonable
attorney's fees, resulting from the failure to obtain such waiver.
16. LIABILITY AND PROPERTY INSURANCE.
(a) Required Coverage. Tenant shall, at Tenant's expense, obtain and
-----------------
keep in force during the term of this Lease the following insurance coverage:
(i) comprehensive public liability insurance insuring Landlord and Tenant
against any liability arising out of the ownership, use, occupancy or
maintenance of the Premises and all areas appurtenant thereto. The minimum
acceptable amount of comprehensive liability insurance is a combined single
limit of $1,000,000 for each occurrence of bodily injury liability and/or
property damage liability; (ii) "all risk" fire and extended coverage property
damage insurance insuring Tenant's personal property in the Premises for the
full actual replacement cost thereof; (iii) workers' compensation coverage and
any other employee benefit insurance sufficient to comply with all Laws;
(iv) business interruption insurance providing coverage against direct or
indirect loss of Tenant's earnings from all causes, including losses
attributable to Tenant's inability to use fully or obtain access to the Premises
or Building; and (v) with respect to construction of Alterations or the like
undertaken by Tenant, contingent liability and broad form builder's risk
insurance in an amount reasonably satisfactory to Landlord.
(b) Terms of Coverage. The limits of said insurance shall not limit the
-----------------
liability of the Tenant hereunder. Tenant may carry said insurance under a
blanket policy, providing, however, said insurance by Tenant shall have a
Landlord's protective liability endorsement attached thereto. If Tenant shall
fail to procure and maintain said insurance, Landlord may, but shall not be
required to, procure and maintain same, but at the expense of Tenant. Insurance
required hereunder shall be in companies rated A-7 or better in "Best's
Insurance Guide." Tenant shall deliver to Landlord prior to occupancy of the
Premises copies of policies of liability insurance required herein or
certificates evidencing the existence and amounts of such insurance with loss
payable clauses satisfactory to Landlord. No policy shall be cancelable or
subject to reduction of coverage except after ten (10) days prior written notice
to Landlord. Each policy of insurance required to be carried by Tenant shall
name Landlord and such other parties in interest as Landlord reasonably
designates as additional insureds.
17. SERVICES AND UTILITIES.
(a) Services and Utilities Provided. So long as Tenant is not in default
-------------------------------
hereunder, Landlord agrees to furnish to the Premises during reasonable hours of
generally recognized business days, to be determined by Landlord in its sole
discretion, and subject to the Rules and Regulations of the Building,
electricity for normal lighting and fractional horsepower office machines, heat
and air conditioning required in Landlord's judgment for the comfortable use and
occupation of the Premises, and janitorial service. Landlord shall also maintain
and keep lighted the common stairs, common entries and toilet rooms in the
Building of which the Premises are a part. Landlord shall not be liable for, and
Tenant shall not be entitled to, any reduction of rental by reason of Landlord's
failure to furnish any of the foregoing when such failure is caused by accident,
breakage, repairs, strikes, lockouts or other labor disturbances or labor
disputes of any character, or by any other cause, similar or dissimilar, beyond
the reasonable control of Landlord. Landlord shall not be liable under any
circumstances for a loss of or injury to property, however occurring, through or
in connection with or incidental to failure to furnish any of the foregoing, or
as a result of the failure or interruption of any utility or other service
provided to the Premises for any reason beyond the reasonable control of
Landlord, including any failure of telephone cabling or
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<PAGE>
telecommunications facilities. Wherever heat generating machines or equipment
are used in the Premises which affect the temperature otherwise maintained by
the air conditioning system, Landlord reserves the right to install
supplementary air conditioning units in the Premises and the cost thereof,
including the cost of installation, and the cost of operation and maintenance
thereof shall be paid by Tenant to Landlord upon demand by Landlord.
(b) Additional Services. Tenant will not, without written consent of
-------------------
Landlord, use any apparatus or device in the Premises, including, but without
limitation thereto, electronic data processing machines, punch card machines,
and machines using in excess of one hundred twenty (120) volts, which will in
any way increase the amount of electricity usually furnished or supplied for the
use of the Premises as general office space; nor connect with electric current
except through existing electrical outlets in the Premises, any apparatus or
device, for the purpose of using electric current. If Tenant shall require water
or electric current in excess of that usually furnished or supplied for the use
of the Premises as general office space, Tenant shall first procure the written
consent of Landlord, which Landlord may refuse, to the use thereof and Landlord
may cause a water meter or electrical current meter to be installed in the
Premises, so as to measure the amount of water and electric current consumed for
any such use. The cost of any such meters and of installation, maintenance and
repair thereof shall be paid by the Tenant and Tenant agrees to pay to Landlord,
promptly upon demand therefor, for all such water and electric current consumed
as shown by said meters, at the rates charged for such services by the local
public utility furnishing the same, plus any additional expense incurred in
keeping account of the water and electric current so consumed. If a separate
meter is not installed, such excess cost for such water and electric current
will be established by an estimate made by a utility company or electrical
engineer. Tenant shall be billed for consumption of heat and air conditioning
after the stated hours or on non-business days at the rate of Twenty Five
Dollars ($25.00) per hour, which rate may be adjusted annually to reflect any
increase in the actual cost of providing such additional service.
18. PROPERTY TAXES. Tenant shall pay, or cause to be paid, before
delinquency, any and all taxes levied or assessed and which become payable
during the term hereof upon all Tenant's leasehold improvements, equipment,
furniture, fixtures and personal property located in the Premises, except that
which has been paid for by Landlord, and is the standard of the Building. In the
event any or all of the Tenant's leasehold improvements, equipment, furniture,
fixtures and personal property shall be assessed and taxed with the Building,
Tenant shall pay to Landlord its share of such taxes within ten (10) days after
delivery to Tenant by Landlord of a statement in writing setting forth the
amount of such taxes applicable to Tenant's property.
19. RULES AND REGULATIONS. Tenant shall faithfully observe and comply
with the Rules and Regulations attached hereto as Exhibit "D" and such other
Rules and Regulations as Landlord may from time to time promulgate. Landlord
reserves the right from time to time to make all reasonable modifications to
said rules. The additions and modifications to those rules shall be binding upon
Tenant upon delivery of a copy of them to Tenant. Landlord shall not be
responsible to Tenant for the nonperformance of any said rules by any other
tenants or occupants.
20. HOLDING OVER. If Tenant remains in possession of the Premises or any
part thereof after the expiration of the term hereof, with the express written
consent of Landlord, such occupancy shall be a tenancy from month to month at a
rental in an amount equal to one hundred twenty five percent (125%) of the rent
in effect during the last month of the term, plus all other charges payable
hereunder, and upon all the terms hereof applicable to a month-to-month tenancy.
21. ENTRY BY LANDLORD. Landlord reserves and shall at any and all times
have the right to enter the Premises, inspect the same, supply janitorial
service and any other service to be provided by Landlord to Tenant hereunder, to
submit said Premises to prospective purchasers or tenants, to post notices of
non-responsibility, and to alter, improve or repair the Premises and any portion
of the Building of which the Premises are a part that Landlord may deem
necessary or desirable, without abatement of rent and may for that
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<PAGE>
purpose erect scaffolding and other necessary structures where reasonably
required by the character of the work to be performed, always providing that the
entrance to the Premises shall not be blocked thereby, and further providing
that the business of the Tenant shall not be interfered with unreasonably.
Tenant hereby waives any claim for damages or for any injury or inconvenience to
or interference with Tenant's business, any loss of occupancy or quiet enjoyment
of the Premises, and any other loss occasioned thereby. For each of the
aforesaid purposes, Landlord shall at all times have and retain a key with which
to unlock all of the doors in, upon and about the Premises, excluding Tenant's
vaults, safes and files, and Landlord shall have the right to use any and all
means which Landlord may deem proper to open said doors in an emergency, in
order to obtain entry to the Premises without liability to Tenant except for any
failure to exercise due care for Tenant's property. Any entry to the Premises
obtained by Landlord by any of said means, or otherwise shall not under any
circumstances be construed or deemed to be a forcible or unlawful entry into, or
a detainer of, the Premises, or an eviction of Tenant from the Premises or any
portion thereof.
22. RECONSTRUCTION.
(a) Insured Damage. In the event the Premises or the Building of which
--------------
the Premises are a part are damaged by fire or other perils fully covered by the
proceeds of fire and extended coverage insurance received by Landlord, Landlord
agrees to forthwith repair the same; and this Lease shall remain in full force
and effect, except that Tenant shall be entitled to a proportionate reduction of
the Base Rent while such repairs are being made, such proportionate reduction to
be based upon the extent to which the making of such repairs shall materially
interfere with the business carried on by the Tenant in the Premises. If the
damage is due to the fault or neglect of Tenant or its employees, there shall be
no abatement of rent.
(b) Uninsured Damage. In the event the Premises or the Building is
----------------
damaged as a result of any cause other than the perils covered by fire and
extended coverage insurance, then Landlord shall forthwith repair the same,
provided the extent of the destruction is less than ten percent (10%) of the
then full replacement cost of the Premises or the Building. In the event the
destruction of the Premises or the Building is to an extent greater than ten
percent (10%) of the full replacement cost, then Landlord shall have the option:
(i) to repair or restore such damage, this Lease continuing in full force and
effect, but the rent to be proportionately reduced as provided in this Article;
or (ii) give notice to Tenant at any time within sixty (60) days after such
damage terminating this Lease as of the date specified in such notice, which
date shall be no less than thirty (30) and no more than sixty (60) days after
the giving of such notice. In the event of giving such notice, this Lease shall
expire and all interest of the Tenant in the Premises shall terminate on the
date so specified in such notice and the Base Rent, reduced by a proportionate
amount, based upon the extent, if any, to which such damage materially
interfered with the business carried on by the Tenant in the Premises, and an
additional rent, shall be paid up to date of such termination.
(c) Damage at End of Lease Term. Notwithstanding anything to the
---------------------------
contrary contained in this Article, Landlord shall not have any obligation
whatsoever to repair, reconstruct or restore the Premises when the damage
resulting from any casualty covered under this Article occurs during the last
twelve (12) months of the term of this Lease or any extension thereof.
(d) Property of Tenant. Landlord shall not be required to repair any
------------------
injury or damage by fire or other cause, or to make any repairs or replacements
of any panels, decoration, office fixtures, railings, floor covering,
partitions, or any other property installed in the Premises by Tenant.
(e) Interruption of Use. The Tenant shall not be entitled to any
-------------------
compensation or damages from Landlord for loss of the use of the whole or any
part of the Premises, Tenant's personal property or any inconvenience or
annoyance occasioned by such damage, repair, reconstruction or restoration.
23. DEFAULT. The occurrence of any one or more of the following events
shall constitute a default and breach of this Lease by Tenant:
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<PAGE>
(a) The vacating or abandonment of the Premises by Tenant;
(b) The failure by Tenant to make any payment of rent or any
other payment required to be made by Tenant hereunder, as and when due,
where such failure shall continue for a period ten days (10) days after
rent is due thereof by Tenant to Landlord;
(c) The failure by Tenant to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or
performed by the Tenant, other than described in Article 23(b) above,
within the time period therefore specified herein, or if no time period
is specified, where such failure shall continue for a period of thirty
(30) days after written notice thereof by Landlord to Tenant; provided,
however, that if the nature of Tenant's default is such that more than
thirty (30) days are reasonably required for its cure, then Tenant
shall not be deemed to be in default if Tenant commences such cure
within said thirty (30) day period and thereafter diligently prosecutes
such cure to completion; or
(d) The making by Tenant of any general assignment or general
arrangement for the benefit of creditors; or the filing by or against
Tenant of a petition to have Tenant adjudged a bankrupt, or a petition
or reorganization or arrangement under any law relating to bankruptcy
(unless, in the case of a petition filed against Tenant, the same is
dismissed within sixty (60) days); or the appointment of a trustee or a
receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, where
possession is not restored to Tenant within thirty (30) days; or the
attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this
Lease, where such seizure is not discharged in thirty (30) days.
24. REMEDIES ON DEFAULT. In the event of any default or breach of this
Lease by Tenant, Landlord may at any time thereafter, with or without notice or
demand and without limiting Landlord in the exercise of a right or remedy which
Landlord may have by reason of such default or breach:
(a) Termination of Lease. Terminate this Lease and all rights of Tenant
--------------------
hereunder by any lawful means, in which case this Lease shall terminate and
Tenant shall immediately surrender possession of the Premises to Landlord. In
such event Landlord shall be entitled to recover from Tenant all damages
incurred by Landlord by reason of Tenant's default including, but not limited
to, (i) the worth at the time of award of any unpaid rent which had been earned
at the time of such termination; plus (ii) the worth at the time of award of the
amount by which the unpaid rent which would have been earned after termination
until the time of award exceeds the amount of such rental loss that Tenant
proves could have been reasonably avoided; plus (iii) the worth at the time of
award of the amount by which the unpaid rent for the balance of the term after
the time of award exceeds the amount of such rental loss that Tenant proves
could be reasonably avoided; plus (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
Tenant's obligations under this Lease or which in the ordinary course of events
would be likely to result therefrom, including, but not limited to, the cost of
recovering possession of the Premises, expenses of reletting, renovation and
alteration of the Premises, reasonable attorney's fees, and any real estate
commissions. The "worth at the time of award" for purposes of subsections
(i) and (ii) above is computed by allowing interest at the maximum legal rate,
and the "worth at the time of award" for purposes of subsection (iii) is
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco at the time of award plus one percent (1%). In the event
Tenant shall have abandoned the Premises, Landlord shall have the option of (x)
taking possession of the Premises and recovering from Tenant the amount
specified in this paragraph, or (y) proceeding under the provisions of the
following Article 24(b);
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<PAGE>
(b) Continuation of Lease. Maintain Tenant's right to possession, in
---------------------
which case this Lease shall continue in effect whether or not Tenant shall have
abandoned the Premises. In such event Landlord shall be entitled to enforce all
of Landlord's rights and remedies under this Lease, including the right to
recover the rent as it becomes due hereunder; or
(c) Remedies Cumulative. Pursue any other remedy now or hereafter
-------------------
available to Landlord. All rights, options and remedies of Landlord contained in
this Lease shall be construed, and held to be, cumulative and no one of them
shall be exclusive of the other, and Landlord shall have the right to pursue any
one or all of such remedies or any other remedy or relief which may now or
hereafter be provided by law or in equity, whether or not stated in this Lease.
No act or omission by any party shall be construed as an election to terminate
this Lease unless a written notice of such intention is given to Tenant.
25. EMINENT DOMAIN. If more than twenty-five percent (25%) of the
Premises shall be taken or appropriated by any public or quasi-public authority
under the power of eminent domain, either party hereto shall have the right, at
its option, to terminate this Lease, and Landlord shall be entitled to any and
all income, rent, award, or any interest therein whatsoever which may be paid or
made in connection with such public or quasi-public use or purpose, and Tenant
shall have no claim against Landlord for the value of any unexpired term of this
Lease. If either less than or more than twenty-five percent (25%) of the
Premises is taken, and neither party elects to terminate as herein provided, the
rental thereafter to be paid shall be equitably reduced. If any part of the
Building other than the Premises may be so taken or appropriated, Landlord shall
have the right at its option to terminate this Lease and shall be entitled to
the entire award as above provided.
26. OFFSET STATEMENT. Tenant shall at any time and from time to time
upon not less than ten (10) days prior written notice from Landlord execute,
acknowledge and deliver to Landlord a statement in writing (a) certifying that
this Lease is unmodified and in full force and effect (or, if modified, stating
the nature of such modification and certifying that this Lease as so modified,
is in full force and effect), and the date to which the rental and other charges
are paid in advance, if any; (b) acknowledging that there are not, to Tenant's
knowledge, any uncured defaults on the part of the Landlord hereunder, or
specifying such defaults if any are claimed; and (c) setting forth any other
matters which Landlord may reasonably request. Any such statement may be relied
upon by any prospective purchaser or encumbrance of all or any portion of the
real property of which the Premises are a part.
27. PARKING. Tenant shall have the right to use in common with other
tenants or occupants of the Building the parking facilities of the Building, if
any, subject to the monthly rates, Rules and Regulations, and any other charges
of Landlord for such parking facilities which may be established or altered by
Landlord at any time or from time to time during the term hereof. Landlord shall
reserve the next three (3) parking spaces which become available in the parking
structure for Tenant's use at market rents.
28. RELOCATION. Intentionally omitted.
29. AUTHORITY OF PARTIES; LIMITATION OF LIABILITY.
(a) Corporate Authority. If Tenant is a corporation, each individual
-------------------
executing this Lease on behalf of said corporation represents and warrants that
he is duly authorized to execute and deliver this Lease on behalf of said
corporation, in accordance with a duly adopted resolution of the board of
directors of said corporation or in accordance with the bylaws of said
corporation, and that this Lease is binding upon said corporation in accordance
with its terms.
(b) Limited Partnership. If the Landlord herein is a limited
-------------------
partnership, it is understood and agreed that any claims by Tenant on Landlord
shall be limited to Landlord's interest in the Building and furthermore, Tenant
expressly waives any and all rights to proceed against the individual partners
or the officers, directors or shareholders of any corporate partner.
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<PAGE>
30. BROKERS. Tenant warrants that it has had no dealings with any real
estate broker or agents in connection with the negotiation of this Lease except
Lalanne Volckmann.
31. FIRST RIGHT OF OPPORTUNITY. Landlord hereby grants to Tenant a First
Right of Opportunity to lease that certain space shown on Exhibit "A-2" (the
First Right Space") on the terms contained in this paragraph, subordinate to all
currently existing expansion rights on the First Right Space at the time this
lease is executed. If the First Right Space shall become available to lease at
any time after the Commencement Date of this Lease and before the expiration or
sooner termination of the Lease Term, then Landlord shall notify Tenant in
writing of the following basic business terms upon which Landlord is willing to
lease the First Right Space (collectively referred to herein as the "Basic
Business Terms"): (i) the description of the space to be leased; (ii) the term
of the lease; (iii) the tenant improvements Landlord is willing to construct, if
any, or the contribution Landlord is willing to make to pay for any tenant
improvements; (iv) the rent for the initial term or the formula to be used to
determine such rent (including the tenant's share of taxes, assessments,
operating expenses, insurance costs, and the like); (v) any option or options to
extend; and (vi) any other material business term Landlord elects to specify. If
Tenant, within ten (10) calendar days after receipt of Landlord's notice,
indicates in writing its agreement to lease such space on the Basic Business
Terms stated in Landlord's notice, then Landlord shall lease to Tenant and
Tenant shall lease from Landlord such space on the terms stated in Landlord's
notice and the lease of such space shall be consummated by the preparation and
execution of an amendment to this Lease, modified to incorporate the Basic
Business Terms set forth in Landlord's notice. If Tenant does not indicate in
writing its agreement to lease such space on the terms contained in Landlord's
notice within said period of time, then Landlord thereafter shall have the right
to lease such space to any third party on terms to be negotiated by Landlord.
The provisions of this paragraph shall terminate upon (i) the expiration or
earlier termination of the Lease, or (ii) any assignment by Tenant of its
interest in this Lease or subletting by Tenant of substantially all of the
Leased Premises for substantially all of the remainder of the Lease Term, or
(iii) upon a failure by Tenant to indicate in a timely manner in writing its
agreement to lease the First Right Space on the Basic Business Terms stated in
Landlord's notice, or (iv) upon a sale or other transfer of fee title to the
Building to any party in which neither Landlord nor the partners of Landlord
hold an interest.
32. TENANT IMPROVEMENTS. Landlord shall construct Tenant Improvements in
the Premises based upon a mutually agreed upon floor plan in accordance with the
attached Exhibit "A" to the Lease and further defined in the Tenant Improvement
Workletter, Exhibit "B". All costs and expenses of the Tenant Improvements shall
be at the sole cost of the Tenant. The Tenant shall not be charged any
construction supervisory or other administrative fees associated with the
construction of the Tenant Improvements installed by the Landlord. All telephone
and computer cabling shall be installed by and paid for by the Tenant, at its
sole cost and expense. In addition, all costs associated with the moving and
relocation of the Tenant shall be at Tenant's sole cost and expense.
33. ADDITIONAL PREMISES. The Tenant currently occupies Suite 200,
consisting of 10,520 square feet, under the terms of a Sublease with Lee Pierce,
Inc. This Sublease terminates effective December 31, 1997. The Tenant also
occupies Suite 205 consisting of 3,000 square feet which is on a separate Lease
Agreement with the Landlord and terminates effective December 31, 1997.
Effective January 1, 1998, the Initial Premises ( 7,024 square feet) shall be
expanded by the addition of the Additional Premises (10,520 square feet plus
3,000 square feet) for a total of 20,544 square feet, the "Revised Premises". If
either the Tenant or the Landlord shall negotiate an early termination agreement
with Lee Pierce, Inc., then Landlord and Tenant shall enter into an Amendment to
Lease to reflect the earlier addition of the Additional Premises to this Lease.
34. GENERAL PROVISIONS.
(a) Plats and Riders. Clauses, plats and riders, if any, signed by the
----------------
Landlord and the Tenant and endorsed on or affixed to this Lease are a part
hereof.
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<PAGE>
(b) Waiver. The waiver by Landlord of any term, covenant or condition
------
herein contained shall not be deemed to be a waiver of such term, covenant or
condition on any subsequent breach of the same or any other term, covenant or
condition herein contained. The subsequent acceptance of rent hereunder by
Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of
any term, covenant or condition of this Lease, other than the failure of the
Tenant to pay the particular rental so accepted, regardless of Landlord's
knowledge of such preceding breach at the time of the acceptance of such rent.
(c) Notices. All notices and demands which may or are to be required or
-------
permitted to be given by either party to the other hereunder shall be in
writing. All notices and demands shall be: (i) personally delivered, and
considered effective upon receipt, (ii) sent by United States Mail, first class,
certified, postage prepaid, addressed as set forth in the Basic Lease
Information, or in the case of Tenant, to the Premises, and shall be considered
effective three (3) days after mailing; or (iii) sent by facsimile to the number
contained in the Basic Lease Information, and shall be considered effective upon
confirmation of receipt. Either party may specify a different address for notice
purposes by written notice to the other.
(d) Joint Obligation. If there be more than one Tenant the obligations
-----------------
hereunder imposed upon Tenants shall be joint and several.
(e) Marginal Headings. The marginal headings and titles to the
------------------
Articles of this Lease are not a part of this Lease and shall have no effect
upon the construction or interpretation of any part hereof.
(f) Time. Time is of the essence of this Lease and each and all of its
----
provisions in which performance is a factor.
(g) Successors and Assigns. The covenants and conditions herein
----------------------
contained, subject to the provisions as to assignment, apply to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
(h) Recordation. Neither Landlord nor Tenant shall record this Lease or
-----------
a short form memorandum hereof without the prior written consent of the other
party.
(i) Quiet Possession. Upon Tenant paying the rent reserved hereunder and
----------------
observing and performing all of the covenants, conditions and provisions on
Tenant's part to be observed and performed hereunder, Tenant shall have quiet
possession of the Premises for the entire term hereof, subject to all the
provisions of this Lease.
(j) Late Charges. Tenant hereby acknowledges that late payment by Tenant
------------
to Landlord of rent or other sums due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Landlord by terms of any mortgage or trust deed covering the Premises.
Accordingly, if any installment of rent or of a sum due from Tenant shall not be
received by Landlord or Landlord's designee within ten (10) days after such
amount is due, then Tenant shall pay to Landlord a late charge equal to ten
percent (10%) of such overdue amount. The parties hereby agree that such late
charges represent a fair and reasonable estimate of the cost that Landlord will
incur by reason of the late payment by Tenant. Acceptance of such late charges
by the Landlord shall in no event constitute a waiver of Tenant's default with
respect to such overdue amount, nor prevent Landlord from exercising any of the
other rights and remedies granted hereunder.
(k) Inability to Perform. Except as provided for in Articles 22 and 25
--------------------
herein, this Lease and the obligations of the Tenant hereunder shall not be
affected or impaired because the Landlord is unable to fulfill any of its
obligations hereunder or is delayed in doing so, if such inability or delay is
caused by reason of strike, labor troubles, acts of God, or any other cause
beyond the reasonable control of the Landlord.
-15-
<PAGE>
(l) Attorneys' Fees. In the event of any action or proceeding brought by
----------------
either party against the other under this Lease the prevailing party shall be
entitled to recover all costs and expenses including the fees of its attorneys
in such action or proceeding in such amount as the court may adjudge reasonable
as attorneys' fees.
(m) Sale of Premises by Landlord. In the event of any sale of the
----------------------------
Building, Landlord shall be and is hereby entirely freed and relieved of all
liability under any and all of its covenants and obligations contained in or
derived from this Lease arising out of any act, occurrence or omission occurring
after the consummation of such sale; and the purchaser, at such sale or any
subsequent sale of the Premises shall be deemed, without any further agreement
between the parties or their successors in interest or between the parties and
any such purchaser, to have assumed and agreed to carry out any and all of the
covenants and obligations of the Landlord under this Lease.
(n) Subordination, Attornment. Upon request of the Landlord, Tenant will
-------------------------
in writing subordinate its rights hereunder to the lien of any mortgage, deed of
trust, ground lease or similar instrument now or hereafter affecting all or any
portion of the Building, and upon any buildings hereafter placed upon the
Building, and to all advances made or hereafter to be made upon the security
thereof. In the event any proceedings are brought for foreclosure, or in the
event of the exercise of the power of sale under any mortgage or deed of trust
made by the Landlord covering the Premises, and, at the election of the
purchaser, the Tenant shall attorn to the purchaser upon any such foreclosure or
sale and recognize such purchaser as the Landlord under this Lease.
(o) Mortgagee Modification. Tenant hereby agrees to modify the Lease as
----------------------
may reasonably be required from time to time by the holder of a security
interest in the Building or any portion thereof, so long as such modification
does not materially increase the obligations of Tenant hereunder.
(p) Default by Landlord. In the event of any default on the part of
-------------------
Landlord, Tenant shall use reasonable efforts to give notice by registered mail
to any holder of a security interest in the Building whose name has been
provided to Tenant and shall offer such party a reasonable opportunity to cure
the default, including time to obtain possession of the Premises by power of
sale or judicial foreclosure or other appropriate legal proceedings, if such
should prove necessary to effect a cure.
(q) Name. Tenant shall not use the name of the Building or of Building
----
for any purpose other than as an address of the business to be conducted by the
Tenant in the Premises.
(r) Separability. Any provision of this Lease which shall prove to be
------------
invalid, void or illegal shall in no way affect, impair or invalidate any other
provision hereof of such other provision shall remain in full force and effect.
(s) Cumulative Remedies. No remedy or election hereunder shall be
--------------------
deemed exclusive but shall, wherever possible, be cumulative with all other
remedies at law or in equity.
(t) Choice of Law. This Lease shall be governed by the laws of the
-------------
State in which the Premises are located.
(u) Signs and Auctions. Tenant shall not conduct any auction upon the Premises
-------------------
or Building without Landlord's prior written consent. Landlord hereby grants
Tenant permission to install the name "NETSOURCE" on the front of the building,
subject to Landlord approval prior to installation, which said approval shall be
timely and shall not be unreasonably withheld, and subject to the City of San
Francisco permit specifications. Tenant shall at its sole cost and expense be
responsible for the permitting, installation, maintenance, and all other sign
related issues. Upon termination of this lease, Tenant shall be responsible at
its sole cost and expense for the removal of said signage and any repair to the
building as a result of said signage.
-16-
<PAGE>
(v) Submission of Lease. If this Lease has been filled in, it has been
-------------------
prepared for submission to your attorney for his approval. No representation or
recommendation is made by the real estate broker or its agents or employees as
to the legal sufficiency, legal effect, or tax consequences of this Lease or the
transactions relating thereto. This Lease shall not be effective or binding on
any party until fully executed by both parties hereto.
(w) Entire Agreement. This Lease contains the entire agreement of the
----------------
parties hereto with respect to any matter covered or mentioned in this Lease,
and no prior agreements, understanding or representation pertaining to any such
matters shall be effective for any purpose. No provision of this Lease may be
amended or added to except by an agreement in writing signed by the parties
hereto or their respective successors in interest.
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease intending to be
bound as of the last date set forth below.
LANDLORD TENANT
<TABLE>
<S> <C>
470 Spear Associates, NetSource Communications, Inc.
a California limited partnership a Delaware corporation
By: Lalanne Babcock & Brown Company,
a California limited partnership
its General Partner
By: Lalanne Babcock & Brown Company, Inc.
a California corporation
Its General Partner
By: /s/ Robert J. Lalanne By: /s/ NetSource Communications, Inc.
--------------------------- ----------------------------------
Robert J. Lalanne
Its President
</TABLE>
-18-
<PAGE>
EXHIBIT A
DESCRIPTION OF PREMISES
INITIAL PREMISES
SUITES # 201 & 204
7,024 Rentable Square Feet
-19-
<PAGE>
EXHIBIT B
---------
WORK LETTER AGREEMENT
---------------------
The purpose of this Work Letter Agreement ("Agreement") is to delineate the
responsibilities of Landlord and Tenant with respect to the design and
construction of the tenant improvements (the "Tenant Improvements") in the
Premises. At this time, there are no Tenant Improvements anticipated for this
Lease. However, this Work Letter Agreement shall govern all agreed upon future
Tenant Improvements. This Agreement is made a part of the Lease by reference and
shall be subject to all of the terms and conditions of the Lease.
1. Description of Work.
-------------------
1.1 Tenant Improvements. Landlord shall construct in the Premises the
-------------------
Tenant Improvements, if any, described in the plans ("Working Drawings"), a copy
of which is attached hereto as Exhibit "B-1". In no event shall the Tenant
Improvements include the procurement, construction and/or installation of any
trade fixtures, equipment, furniture, furnishings, telephone equipment (except
for the relocation of the telephone and ethernet wiring) or other personal
property (collectively, "Personal Property") to be used in the Premises by
Tenant.
1.2 Tenant's Work. Tenant may require work ("Tenant's Work") that is
-------------
different from or in addition to the Tenant Improvements, subject to the
reasonable approval of Landlord and otherwise in accordance with Paragraph 10 of
the Lease. Any and all work other than the Tenant Improvements shall be deemed
and construed as Tenant's Work, and Tenant shall pay all costs of performing
Tenant's Work at its sole cost and expense. Except as otherwise expressly agreed
in writing by Landlord, any changes to the Tenant Improvements requested by
Tenant shall be deemed Tenant's Work.
2. Plans and Specifications.
------------------------
2.1 Approval of Working Drawings. Working Drawings have been approved by
----------------------------
both Landlord and Tenant as attached hereto in Exhibit B-1.
2.2 Liability for Plan. Approval of the Working Drawings by Landlord shall
------------------
not be considered a representation or warranty by or on behalf of Landlord as to
the adequacy, efficiency, suitability, fitness or desirability of any space
layout or improvements or otherwise constitute an assumption by Landlord of any
responsibility for the accuracy or sufficiency thereof.
-20-
<PAGE>
3. Construction.
------------
3.1 Commencement & Prosecution of Work. Upon execution of the Lease by both
----------------------------------
parties, Landlord's contractor ("Contractor") shall be instructed to commence
and diligently proceed with the construction of the Tenant Improvements
substantially in accordance with the approved Working Drawings.
3.2 Cost of Tenant Improvements. Tenant shall pay the cost of the Tenant
---------------------------
Improvements described in the Working Drawings. The costs of the Tenant Work
shall be paid by Tenant promptly upon demand by Landlord for progress payments
as they become due to Contractor under its contract with Landlord for Tenant
Work. Landlord, at its option, may require Tenant to pay for any necessary
up-front expenses of the Tenant Work, which amount shall be paid by Tenant
within no more than fifteen (15) days after request therefrom and in any event
before Landlord shall be required to commence construction of the Tenant Work.
3.3 Completion. As used in this Agreement and in the Lease, the substantial
----------
completion of the Tenant Improvements and/or the Premises shall mean the
substantial completion of the Tenant Improvements in accordance with the
approved Working Drawings, as determined by the Contractor. Tenant acknowledges
that "punchlist items" may remain to be completed or corrected subsequent to the
completion of the Tenant Improvements and/or the Premises.
4. Changes, Additions or Alterations.
---------------------------------
4.1 Changes Requested by Tenant. Any changes in the Tenant Improvements
---------------------------
after approval of the Working Drawings shall be at Tenant's sole cost and
expense and shall be subject to Landlord's approval. Tenant shall pay all costs
incurred by Landlord in reviewing any requested change, whether such change is
approved by Landlord or not. If Landlord approves any such request, Landlord
shall notify Tenant of the estimated costs and delay, if any, chargeable to
Tenant by reason of such change. Within three (3) days of receipt of such
estimated cost, Tenant shall notify Landlord in writing whether Tenant approves
such change. If Tenant approves such change, Tenant shall promptly pay Landlord
the estimated costs of such change, and the Contractor shall proceed with the
change as soon as reasonably practical thereafter. If Tenant does not promptly
approve such change and/or pay such estimated cost, Landlord shall be entitled
to proceed in accordance with the previously approved Working Drawings.
4.2 Changes by Landlord. Landlord shall have the right to make such
-------------------
changes to the approved Working Drawings (or in the Tenant Improvements pursuant
thereto), as Landlord may deem reasonably necessary for coordinating and
completing the Tenant Improvements or as required by governmental authorities.
Tenant agrees and understands that any substitutions, changes or deviations from
the approved Working Drawings that may be reasonably necessary during
construction of the Premises shall not affect, change or invalidate the Lease,
or give rise to any claim by Tenant for any offset, credit, loss, damage or
delay, or otherwise. Landlord shall notify Tenant of any such changes.
-21-
<PAGE>
5. Delay; Force Majeure.
--------------------
5.1 Tenant Delay. Tenant shall be responsible for and pay any and all costs
------------
and expenses incurred by Landlord in connection with any delay ("Tenant Delay")
in the commencement or completion of the Tenant Improvements caused by (a)
Tenant's failure to approve or disapprove any cost estimates or prices for
Tenant Work within the time periods required herein, (b) Tenant's request for
materials, finishes, installations or improvements other than building standard,
(c) any changes, additions or alterations requested by or on behalf of Tenant
after Landlord's approval of the Working Drawings, (d) Tenant's failure to pay
any amount when due hereunder, (e) failure or refusal by Tenant to observe and
perform fully and promptly any other provision of this Agreement or the Lease on
Tenant's part to be observed or performed, or (f) any other delay of any kind or
nature caused by any act or omission of Tenant, or any contractor, agent,
servant or employee of Tenant. If there is any Tenant Delay, the Premises shall
be deemed completed, and the Commencement Date shall be deemed to occur, on the
date the Premises would have been completed but for such Tenant Delay, as
determined by the Contractor.
5.2 Force Majeure. Landlord's obligation to perform the Tenant Improvements
-------------
shall not require Landlord to incur overtime costs and expenses and shall be
subject to delays due to acts of God, governmental restrictions, strikes, labor
disturbances, shortages of material or supplies, Tenant Delay, and to any cause
or event beyond Landlord's reasonable control, whether similar or dissimilar to
the foregoing and whether or not foreseeable by the parties. Except as otherwise
expressly provided in the Lease, failure of Landlord to deliver possession of
the Premises with in the time and in the condition provided for in the Lease
will not give rise to any claim for damages by Tenant against Landlord or
Landlord's contractors, architects, engineers, consultants, employees, attorneys
or agents.
6. Default & Remedies.
------------------
6.1 Failure to Perform. Failure or refusal by Tenant to perform any
------------------
obligation on Tenant's part to be performed in accordance with the provisions of
this Agreement shall constitute an event of default by Tenant under this
Agreement and under Paragraph 23 of the Lease.
6.2 Remedies. Landlord shall have and be entitled to exercise all rights
--------
and remedies available to Landlord for default in payment of rent under the
Lease if Tenant fails to make any payment required of Tenant in accordance with
the provisions of this Agreement. Landlord shall not be obligated to commence or
to continue with any of the Tenant Improvements until Landlord receives all
payments then due. Landlord shall be entitled to collect from Tenant upon demand
all attorneys' fees incurred by Landlord in connection with enforcement of this
Agreement. If at any time there is any breach or default by Tenant under this
Agreement, Landlord shall have the right, in addition to all other rights and
remedies available to Landlord under the Lease or at law or in equity, to
terminate the Lease by and upon written notice to Tenant, without any liability
to Tenant from liability to Landlord for breach of the Lease or this Agreement.
7. Performance of Tenant's Work. Tenant may, with Landlord's written consent,
----------------------------
enter the Premises prior to the Commencement Date solely for the purpose of
performing Tenant's Work and installing Tenant's Personal Property as long as
such entry will not interfere with the orderly construction and completion of
the Tenant Improvements in the Premises. Tenant shall notify Landlord of its
desired time(s) of entry and shall submit for Landlord's approval the scope of
the work to be performed and the name(s) of the contractor(s) who will perform
the same. Tenant hereby indemnifies and agrees to protect, defend and hold
harmless, any mortgagee, ground lessor or beneficiary of a mortgage, ground
lease or deed of trust related to the Premises or the Building harmless from and
against any and all suits, claims, actions, losses, costs or expenses (including
claims for worker's compensation) of any nature whatsoever, together with
reasonable attorneys' fees for counsel of Landlord's choice, arising out of or
in connection with the performance of Tenant's Work or the installation of
Tenant's Personal Property (including, but not limited to, claims for breach of
warranty, personal
-22-
<PAGE>
injury or property damage) except with respect to injury or damage caused by
Landlord's willful or negligent acts or omissions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
LANDLORD TENANT
<TABLE>
<S> <C>
470 Spear Associates NetSource Communications, Inc.,
a California limited partnership a Delaware corporation
By: Lalanne Babcock & Brown Company,
a California limited partnership
Its General Partner
By: Lalanne Babcock & Brown Company, Inc.,
a California corporation
Its General Partner
By: J. Volckmann & Associates, Inc.
a California corporation
its General Partner
By: /s/ Robert J. Lalanne By: /s/ NetSource Communications, Inc.
--------------------------- ----------------------------------
Robert J. Lalanne
Its President
</TABLE>
-23-
<PAGE>
EXHIBIT C
---------
COMMENCEMENT DATE MEMORANDUM
----------------------------
THIS COMMENCEMENT DATE MEMORANDUM dated, for reference purposes only, as of
the ______ day of _________________________, 19__, is made by and between 470
Spear Associates, a California limited partnership ("Landlord") and NetSource
Communications, Inc., a Delaware corporation ("Tenant").
RECITALS
- --------
A. Landlord is the Landlord and Tenant is the Tenant under that certain Office
Lease between them dated, for reference purposes only, as of ________, 1996 (the
"Lease"). Unless otherwise defined, capitalized terms used herein shall have the
same respective meanings as given them in the Lease.
B. Pursuant to Paragraph 3 of the Lease, the parties desire to confirm certain
matters pertaining to the Lease.
AGREEMENT
- ---------
NOW, THEREFORE, the parties agree as follows:
1. Tenant acknowledges and agrees that the Tenant Improvements have been
substantially completed in accordance with the Work Letter and that the Tenant
Improvements and the Premises are in good and satisfactory order, condition and
repair.
2. The Commencement Date of the Lease is __________________.
3. The Expiration Date of the Lease is _____________________.
4. This Memorandum may be executed in counterparts, each of which shall be
deemed an original, and both of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have executed this Memorandum as of the date
first above written.
LANDLORD TENANT
<TABLE>
<S> <C>
470 Spear Associates NetSource Communications, Inc.,
a California limited partnership a Delaware corporation
By: Lalanne Babcock & Brown Company,
a California limited partnership
Its General Partner
By: Lalanne Babcock & Brown Company, Inc.,
a California corporation
Its General Partner
By: /s/ Robert J. Lalanne By: /s/ NetSource Communications, Inc.
-------------------------- ----------------------------------
Robert J. Lalanne
Its President
</TABLE>
-24-
<PAGE>
EXHIBIT D
---------
RULES AND REGULATIONS
---------------------
1. No sign, placard, picture, advertisement, name or notice shall be inscribed,
displayed or printed or affixed on or to any part of the outside or inside of
the Building without the written consent of Landlord first had and obtained and
Landlord shall have the right to remove any such sign, placard, picture,
advertisement, name or notice without notice to and at the expense of Tenant.
2. All approved signs or lettering on doors shall be printed, painted, affixed
or inscribed at the expense of Tenant by a person approved by Landlord.
3. Tenant shall not place anything or allow anything to be placed near the glass
of any window, door, partition or wall which may appear unsightly from outside
the Premises; provided, however, that Landlord may furnish and install a
Building standard window covering at all exterior windows. Tenant shall not
without prior written consent of Landlord cause or otherwise sunscreen any
window.
4. The sidewalks, halls, passages, exits, entrances, elevators and stairways
shall not be obstructed by any of the tenants or used by them for any purpose
other than for ingress and egress from their respective Premises.
5. Tenant shall not alter any lock or install any new or additional locks or any
bolts on any doors or windows of the Premises.
6. The toilet rooms, urinals, wash bowls and other apparatus shall not be used
for any purpose other than that for which they were constructed and no foreign
substance of any kind whatsoever shall be thrown therein. The expense of any
breakage, stoppage or damage resulting from the violation of this rule shall be
borne by the Tenant who, or whose employees or invitees, shall have caused it.
7. Tenant shall not overload the floor of the Premises or in any way deface the
Premises or any part thereof. No furniture, freight or equipment of any kind
shall be brought into the Building without the prior notice to Landlord and all
moving of the same into or out of the Building shall be done at such time and in
such manner as Landlord shall designate. Landlord shall have the right to
prescribe the weight, size and position of all safes and other heavy equipment
brought into the Building and also the times and manner of moving the same in
and out of the Building. Safes or other heavy objects shall, if considered
necessary by Landlord, stand on supports of such thickness as is necessary to
properly distribute the weight. Landlord will not be responsible for loss of or
damage to any such safe or property from any cause and all damage done to the
Building by moving or maintaining any such safe or other property shall repaired
at the expense of Tenant.
8. Tenant shall not use, keep or permit to be used or kept any foul or noxious
gas or substance in the Premises, or permit or suffer the Premises to be
occupied or used in a manner offensive or objectionable to the Landlord or other
occupants of the Building by reason of noise, odors and/or vibrations, or
interfere in any way with other tenants or those having business therein, nor
shall any animals or birds be brought in or kept in or about the Premises or the
Building.
9. No cooking shall be done or permitted by any Tenant on the Premises, nor
shall the Premises be used for the storage of merchandise, for washing clothes,
for lodging, or for any improper, objectionable or immoral purposes.
10. Tenant shall not use or keep in the Premises or the Building any kerosene,
gasoline or inflammable or combustible fluid or material, or use any method of
heating or air conditioning other than that supplied by Landlord.
11. Landlord will direct electricians as to where and how telephone and
telegraph wires are to be introduced. No boring or cutting for wires will be
allowed without the consent of the Landlord. The location of telephones, call
boxes and other office equipment affixed to the Premises shall be subject to the
approval of Landlord.
12. On Saturdays, Sundays and legal holidays, and on other days between the
hours of 6:00 p.m. and 8:00 a.m. the following day, access to the Building, or
to the halls, corridors, elevators or stairways in the Building, or to the
Premises may be refused unless the person seeking access is known to the person
or employee of the Building in charge and has a pass or is properly identified.
The Landlord shall in no case be liable for damages for any error with regard to
the admission to or exclusion from the Building of any person. In case of
invasion, mob, riot, public excitement, or other commotion, the Landlord
reserves the right to prevent access to the Building during the continuance of
the same by closing of the doors or otherwise, for the safety of the tenants and
protection of property in the Building and the Building.
13. Landlord reserves the right to exclude or expel from the Building any person
who, in the judgment of Landlord, is intoxicated or under the influence of
liquor or drugs, or who shall in any manner do any act in violation of any of
the Rules and Regulations of the Building.
-25-
<PAGE>
14. No vending machine or machines of any description shall be installed,
maintained or operated upon the Premises without the written consent of the
Landlord.
15. Landlord shall have the right, exercisable without notice and without
liability to Tenant, to change the name and street address of the Building of
which the Premises are a part.
16. Tenant shall not disturb, solicit, or canvass any occupant of the Building
and shall cooperate to prevent same.
17. Without the written consent of Landlord, Tenant shall not use the name of
the Building in connection with or in promoting or advertising the business of
Tenant except as Tenant's address.
18. Landlord shall have the right to control and operate the public portions of
the Building, and the public facilities, and heating and air conditioning, as
well as facilities furnished for the common use of the tenants, in such manner
as it deems best for the benefit of the tenants generally.
19. All entrance doors in the Premises shall be left locked when the Premises
are not in use, and all doors opening to public corridors shall be kept closed
except for normal ingress and egress from the Premises.
-26-
<PAGE>
EXHIBIT A-1
DESCRIPTION OF PREMISES
ADDITIONAL PREMISES
SUITES # 200 & 205
13,520 Rentable Square Feet
-27-
<PAGE>
EXHIBIT 11.1
NETSOURCE COMMUNICATIONS, INC.
STATEMENT RE: COMPUTATION OF PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C>
Pro forma net loss....................... $(1,629) $(2,962)
======= =======
Weighted average number of common shares
outstanding............................. 14,231 14,786
Shares and options issued subject to SAB
No. 83:
Common stock issuances................. 1,652 1,652
Stock option grants.................... 780 780
Issuance of warrants................... 289 289
------- -------
2,721 2,721
------- -------
Shares used in computing pro forma net
loss per share.......................... 16,952 17,507
======= =======
Pro forma net loss per share............. $ (0.10) $ (0.17)
======= =======
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. MTC Telemanagement Corporation, a California Corporation
2. MTC International, Inc., a Nevada Corporation
3. scruz-net, inc.
4. DNA New Media Group, Inc.
<PAGE>
EXHIBIT 23.1
REPORT ON SCHEDULE AND CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
NetSource Communications, Inc. and subsidiaries:
The audits referred to in our report dated November 13, 1996, except as to
Note 14(b) which is as of November 20, 1996, included the related financial
statement schedule as of December 31, 1994 and 1995 and September 30, 1996 and
for each of the years in the three-year period ended December 31, 1995 and for
the nine months ended September 30, 1996, included in the Registration
Statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
San Francisco, California
November , 1996
<PAGE>
EXHIBIT 23.3
The Board of Directors
MTC Japan Ltd.
We consent to the inclusion of our report dated October 31, 1996, with
respect to the balance sheet of MTC Japan Ltd. (Company) as of December 31,
1995, and the related statements of operations, stockholders' deficit, and
cash flows for the period from inception (March 22, 1995) to December 31,
1995, which report appears in Amendment No. 1 to Form S-1 of NetSource
Communications, Inc.
Our report dated October 31, 1996, contains an explanatory paragraph that
states that the Company has suffered substantial loss from operations and has
a net capital deficiency that raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
Tokyo, Japan /s/ KPMG Peat Marwick
November 20, 1996
<PAGE>
EXHIBIT 23.4
------------
[LETTERHEAD OF PEZZOLA & REINKE]
November 21, 1996
NetSource Communications, Inc.
444 Spear Street, Suite 200
San Francisco, CA 94105
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
Reference is made to the Registration Statement on Form S-1 (file no.
333-14327) filed by you on October 16, 1996, as amended by pre-effective
Amendment No. 1 thereto proposed to be filed by you on or about November 21,
1996 (as so amended, the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of 3,500,000 shares
of your common stock, including an over-allotment option for 525,000 shares held
by the Underwriters.
We consent to the reference to our firm contained under the heading
"Legal Matters" in the Registration Statement, including the prospectus
constituting a part thereof, and any amendment thereto.
Very truly yours,
PEZZOLA & REINKE
A Professional Corporation
/s/ Pezzola & Reinke
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 SEP-30-1996
<CASH> 497 4,900
<SECURITIES> 0 3,496
<RECEIVABLES> 9,246 12,724
<ALLOWANCES> (1,496) (1,993)
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,786 20,183
<PP&E> 9,890 14,564
<DEPRECIATION> (1,936) (3,059)
<TOTAL-ASSETS> 20,910 37,042
<CURRENT-LIABILITIES> 23,332 22,465
<BONDS> 0 0
0 0
0 0
<COMMON> 20 21
<OTHER-SE> 0 353
<TOTAL-LIABILITY-AND-EQUITY> 20,910 37,042
<SALES> 91,299 70,956
<TOTAL-REVENUES> 91,229 70,956
<CGS> 59,942 45,748
<TOTAL-COSTS> 59,942 45,748
<OTHER-EXPENSES> 464 624
<LOSS-PROVISION> 1,556 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (329) (2,175)
<INCOME-TAX> (552) (110)
<INCOME-CONTINUING> (1,834) (3,450)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,834) (3,450)
<EPS-PRIMARY> (0.10) (0.17)
<EPS-DILUTED> 0 0
</TABLE>
