<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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)
1304 SOUTHPOINT BOULEVARD
PETALUMA, CALIFORNIA 94954
(707) 762-9600
(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.
1304 SOUTHPOINT BOULEVARD
PETALUMA, CALIFORNIA 94954
(707) 762-9600
(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 MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) FEE
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<S> <C> <C>
Common Stock, $.001 par value.................. $57,500,000 $17,425
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 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(o).
----------------
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 , 1996
[LOGO OF NETSOURCE COMMUNICATIONS, INC.]
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SHARES
COMMON STOCK
- -------------------------------------------------------------------------------
All of the 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 $ and $ per share. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price.
Of the shares of Common Stock offered hereby, shares are being offered
for sale in the U.S. and Canada by the U.S. Underwriters, and shares are
being offered for sale in Europe 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 $ .
(3) The Company has granted to the Underwriters a 30-day option to purchase
up to an additional 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.
DEUTSCHE MORGAN GRENFELL
The date of this Prospectus is , 1996
<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.
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent
auditors and quarterly reports containing unaudited consolidated financial
information.
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, a hand on a mouse, a compact disk, Web sites
developed by the Company, a map of world with network connections diagrammed,
and a list of certain products and services provided by the Company including
Telecommunications, Internet Access, Interactive Communications and Marketing
Communications.
<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 issuable in connection
with the pending acquisitions of scruz-net, inc. and DNA New Media Group, Inc.
(as described in "Business--Recent Developments") and (iv) excludes options,
warrants and convertible notes exercisable for or convertible into an aggregate
of shares of Common Stock outstanding as of September 30, 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 signalling 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
six months ended June 30, 1996, the Company's revenues from its
telecommunications business were approximately $86.9 million and $45.3 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 19 electronic commerce Web sites for
its customers, including the American College of Cardiologists, the American
College of Surgeons, Ascend Communications, Inc., Cadence Design Systems, Inc.,
Conner Peripherals, Inc. (now a subsidiary of Seagate Technologies, Inc.),
CyberCash, Inc., Diamond Multimedia Systems, Inc., Fujitsu Microelectronics,
Inc., Nomura Securities and the U.S. Department of Defense, 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, Robert Fleming Holdings Ltd.
("Flemings") and Union Camp Corporation. In the year ended December 31, 1995
and the six months ended June 30, 1996, the Company's revenues from its
electronic commerce products and services business were approximately $654,000
and $517,000, 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
intends to acquire scruz-net, inc., an Internet service provider located in
Santa Cruz, California with approximately 2,000 customers as of October 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 six
months ended June 30, 1996, the Company's revenues from its marketing
communications business were approximately $3.8 million and $1.3 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
During October 1996, the Company expects to acquire scruz-net, an Internet
service provider, for an aggregate of 306,923 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. During October 1996, the Company also
expects to acquire DNA New Media, Inc., an interactive development firm, for an
aggregate of 306,923 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. As of October 15, 1996, the Company
is providing such solutions to Nomura Securities and Flemings, international
investment banks. 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 1304 Southpoint
Boulevard, Petaluma, CA 94954. The Company's telephone number is (707) 762-
9600, and its facsimile number is (707) 769-5940. 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............................ shares
Common Stock to be outstanding after the
offering.................................. 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 CERTAIN OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues(1):
Telecommunications............ $23,510 $48,937 $86,871 $43,042 $45,329
Marketing communications...... 4,792 4,915 3,774 2,009 1,273
Electronic commerce products
and services................. -- -- 654 131 517
------- ------- ------- -------- --------
Total revenues.............. 28,302 53,852 91,299 45,182 47,119
------- ------- ------- -------- --------
Cost of revenues:
Telecommunications............ 16,676 34,565 58,467 28,825 29,834
Marketing communications...... 2,164 1,497 1,194 646 334
Electronic commerce products
and services................. -- -- 281 53 270
------- ------- ------- -------- --------
Total cost of revenues...... 18,840 36,062 59,942 29,524 30,438
------- ------- ------- -------- --------
Gross profit.................... 9,462 17,790 31,357 15,658 16,681
Sales and marketing expenses.... 2,289 6,713 13,191 6,437 6,462
General and administrative ex-
penses......................... 7,708 12,837 18,495 8,375 9,940
------- ------- ------- -------- --------
Operating income (loss)......... $ (535) $(1,760) $ (329) $ 846 $ 279
======= ======= ======= ======== ========
Net income (loss)............... $ (438) $(1,998) $(1,834) $ 442 $ (539)
======= ======= ======= ======== ========
Pro forma net (loss) per share..
Weighted average common shares
and common share equivalents
outstanding....................
OTHER OPERATING DATA
EBITDA(000's)(2)................ $ (341) $(1,330) $ 711 $ 1,326 $ 897
Capital expenditures(000's)..... 982 2,331 3,231 2,633 1,797
Number of switches(3)........... 4 4 5 5 5
Telecommunications custom-
ers(4)......................... 7,000 36,400 60,000 52,800 69,300
Cumulative Web Architectures
created and deployed........... -- -- 8 2 16
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
BALANCE SHEET DATA
Cash....................................................... $16,949
Total working capital...................................... 3,136
Total assets............................................... 40,346
Long-term debt and capital lease obligations............... 19,601
Total debt and capital lease obligations................... 22,901
Stockholders' equity (deficit)............................. (4,636)
</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) Total deployed switches at end of period indicated.
(4) Information derived from operating records of the Company.
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 1995 financial statements, 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.
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.
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, the Company incurred operating losses
of approximately $1.8 million and $329,000, respectively. For the six months
ended June 30, 1996, the Company had operating income of $279,000. The Company
expects to incur operating losses in fiscal 1996 and at least the first two
quarters of fiscal 1997. 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
8
<PAGE>
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., Worldcom, Inc., Frontier Communications
of the West, Inc. 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. 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. There can be no assurance that the Company
will be able to meet the minimum volume commitments required by such contracts
and avoid penalty payments. 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."
9
<PAGE>
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.
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. 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
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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 services illegal. 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 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, 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.
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 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.
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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.
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
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
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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 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. 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
second 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 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 at
least 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,
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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. The Company's
revenues derived from Internet and Interactive products and services for the
year ended December 31, 1995 and the six months ended June 30, 1996 were only
approximately $654,000 and $517,000, respectively. The Company's future growth
depends, in part, upon 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. 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.
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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. 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 October 1996, the Company expects to consummate the
acquisitions of scruz-net, an ISP, and DNA, 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."
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 six months of 1996, international customers accounted for approximately
45%, 69% and 73%, 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
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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."
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 % of the outstanding shares of the Common Stock on a fully
diluted basis, including outstanding options. Edward Brinskele, together with
either Roger Sheppard or Charles Schoenhoeft, will have the ability to control
the affairs and policies of the Company and will 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 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, the U.S. Representative and the International
Representative (each as defined herein) 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
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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.
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 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. 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 shares offered hereby, 21,304,100 additional shares outstanding and
2,582,154 shares issuable upon exercise of vested options outstanding as of
September 30, 1996 will be eligible for immediate sale in the public market
following expiration of 180 day lock-up agreements with the Company 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 under Rule 144. In addition, after consummation of the offering
holders of the Company's Series A Secured Subordinated Convertible Promissory
Notes, (the "Notes") and detachable Warrants (the "Warrants") may convert such
Notes and Warrants into shares of Common Stock at a per share exercise price
equal to 70% of the initial public offering price. An additional
shares of Common Stock would become eligible for sale upon exercise of
Warrants issued to the finder and the placement agent for the Note and Warrant
financing. Assuming an initial public offering price of $ , an aggregate of
shares of Common Stock would become eligible for sale on the market
beginning in June 1997. See "Management--Stock Option Plans," "Principal
Stockholders," "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
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purchasing Common Stock in this offering will, therefore, incur immediate and
substantial dilution of approximately $ 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."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company hereby are estimated to be ( if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $ 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 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, other than the pending acquisitions of
scruz-net and DNA, which are expected to be stock for stock transactions. See
"Business--Recent Developments."
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 at least 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 "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
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.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 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
$ per share, after deducting the underwriting discount and estimated
offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------
ACTUAL AS ADJUSTED
------- -----------
<S> <C> <C>
Secured Subordinated Convertible Notes.................... $18,042
Other long-term debt and capital lease obligations, ex-
cluding current portion.................................. 1,559
Stockholders' equity:
Preferred stock--$.001 par value; no shares authorized or
outstanding, actual; 10,000,000 shares authorized, no
shares outstanding, as adjusted.......................... --
Common stock--$.001 par value; 44,000,000 shares
authorized, 21,304,100 shares issued and outstanding,
actual; 100,000,000 shares authorized, shares
outstanding, as adjusted................................. 21
Additional paid-in capital................................ 228
Stock purchase warrants................................... 353
Accumulated deficit....................................... (5,238)
-------
Total stockholders' equity.............................. (4,636)
-------
Total capitalization.................................. $14,965
=======
</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 June 30, 1996. As of June 30, 1996, there were (i) outstanding options to
purchase an aggregate of 3,391,640 shares of Common Stock at a weighted average
exercise price of $ per share, (ii) outstanding warrants to purchase
shares of Common Stock at a weighted average exercise price of $ per share
(assuming an initial public offering price of $ per share), and (iii)
outstanding Series A Convertible Secured Subordinated Notes (the "Notes")
convertible into shares of Common Stock at a conversion price of $ per share
(assuming an initial public offering price of $ per share). See
"Management--Stock Option Plans and Arrangements," "Description of Capital
Stock" and Notes 7 and 13 of Notes to Consolidated Financial Statements.
20
<PAGE>
DILUTION
The net tangible book value of the Company as of June 30, 1996, was $ , or
$ 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 June 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 $ 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 June 30, 1996,
would have been $ , or $ per share. This amount represents an immediate
increase in such net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................... $
Net tangible book value per share as of June 30, 1996............... $
Increase per share attributable to new investors....................
----
Pro forma net tangible book value per share after the offering........
----
Dilution per share to new investors................................... $
====
</TABLE>
The following table summarizes, on a pro forma basis as of June 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 $ per share
(before deducting the underwriting discount and estimated offering expenses
payable by the Company) with respect to the 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... % $ % $
New investors...........
------- --------- --------- ----------
Total................. 100.0% $ 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 June 30, 1996. As of June 30, 1996, there were (i) outstanding options
to purchase an aggregate of 3,391,640 shares of Common Stock at a weighted
average exercise price of $ per share, (ii) outstanding warrants to
purchase shares of Common Stock at a weighted average exercise price of
$ per share (assuming an initial public offering price of $ per share),
and (iii) outstanding Series A Convertible Secured Subordinated Notes (the
"Notes") convertible into shares of Common Stock at a conversion price of
$ per share (assuming an initial public offering price of $ per share).
To the extent the above options and warrants are exercised and the Notes are
converted, there will be further dilution to fnew investors. See "Management--
Stock Option Plans and Arrangements," "Description of Capital Stock" and Notes
7 and 13 of Notes to Consolidated Financial Statements.
21
<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 the income statement data set forth below
for fiscal 1993, 1994, and 1995 are derived from the audited financial
statements included elsewhere in this Prospectus. The balance sheet
information as of December 31, 1991, 1992 and 1993 and the income statement
data for fiscal 1991 and 1992 are derived from unaudited financial statements
of the Company not included herein. The balance sheet information as of June
30, 1996 and the income statement data for the six-months ended June 30, 1995
and 1996 are 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 financial position of the Company and
the results of operations for the indicated periods. Operating results for the
six-months ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the full year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Telecommunications..... $14,201 $17,924 $23,510 $48,937 $86,871 $ 43,042 $ 45,329
Marketing communica-
tions................. 2,648 2,965 4,792 4,915 3,774 2,009 1,273
Electronic commerce
products and servic-
es.................... -- -- -- -- 654 131 517
------- ------- ------- ------- ------- -------- --------
Total revenues....... 16,849 20,889 28,302 53,852 91,299 45,182 47,119
Cost of revenues:
Telecommunications..... 11,139 14,448 16,676 34,565 58,467 28,825 29,834
Marketing communica-
tions................. 1,399 1,564 2,164 1,497 1,194 646 334
Electronic commerce
products and servic-
es.................... -- -- -- -- 281 53 270
------- ------- ------- ------- ------- -------- --------
Total cost of reve-
nues................ 12,538 16,012 18,840 36,062 59,942 29,524 30,438
------- ------- ------- ------- ------- -------- --------
Gross profit......... 4,311 4,877 9,462 17,790 31,357 15,658 16,681
------- ------- ------- ------- ------- -------- --------
Operating expenses:
Sales and marketing.... 847 1,067 2,289 6,713 13,191 6,437 6,462
General and adminis-
trative............... 3,510 4,637 7,708 12,837 18,495 8,375 9,940
------- ------- ------- ------- ------- -------- --------
Total operating ex-
penses.............. 4,357 5,704 9,997 19,550 31,686 14,812 16,402
------- ------- ------- ------- ------- -------- --------
Operating profit
(loss).............. (46) (827) (535) (1,760) (329) 846 279
Share of losses of joint
ventures............... -- -- -- -- (489) (42) (284)
Other income (expense),
net.................... (14) (149) 144 (233) (464) (130) (268)
------- ------- ------- ------- ------- -------- --------
Income (Loss) before
income taxes.......... (60) (976) (391) (1,993) (1,282) 674 (273)
Income tax expense...... (21) (16) (47) (5) (552) (232) (266)
------- ------- ------- ------- ------- -------- --------
Net income (loss)...... $ (81) $ (991) $ (438) $(1,998) $(1,834) $ 442 $ (539)
======= ======= ======= ======= ======= ======== ========
Pro forma net loss per
share.................. $ $
======= ========
Shares used in per share
computation............
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
------ ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................... $ 63 $ 425 $ 282 $ 1,274 $ 497 $16,949
Total working
capital(deficit)...... (240) (1,114) (3,296) (8,309) (13,546) 3,136
Total assets........... 3,893 4,931 12,935 17,722 20,910 40,346
Long-term debt and cap-
ital lease obliga-
tions................. -- -- 24 -- 1,146 19,601
Total debt and capital
lease obligations..... 6 5 33 24 6,252 22,901
Stockholders' equity
(deficit)............. (80) (752) (767) (2,768) (4,462) (4,636)
</TABLE>
22
<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 six months ended June 30, 1996 and 1995 and
the years ended December 31, 1995, 1994 and 1993. 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 six months ended June 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. See "Business--Reorganization." 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 "Risk Factors--Limited Operating History; No Assurance of Future
Profitability."
23
<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 six months ended June 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>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Telecommunications revenues...... 83.1% 90.9% 95.2% 95.3% 96.2%
Marketing communications reve-
nues............................ 16.9 9.1 4.1 4.4 2.7
Electronic commerce revenues..... -- -- 0.7 0.3 1.1
Total revenues................. 100.0 100.0 100.0 100.0 100.0
Cost of telecommunications reve-
nues............................ 70.9 70.6 67.3 67.0 65.8
Cost of marketing communications
revenues........................ 45.2 30.5 31.6 32.2 26.2
Cost of electronic commerce reve-
nues............................ -- -- 43.0 40.5 52.2
Total cost of revenues......... 66.6 67.0 65.7 65.3 64.6
Gross margin..................... 33.4 33.0 34.3 34.7 35.4
Sales and marketing expenses..... 8.1 12.5 14.4 14.2 13.7
General and administrative ex-
penses.......................... 27.2 23.8 20.3 18.5 21.1
Operating income (loss).......... (1.9) (3.3) (0.4) 1.9 0.6
Income (loss) before income tax-
es.............................. (1.4) (3.7) (1.4) 1.5 (0.6)
Net income (loss)................ (1.5) (3.7) (2.0) 1.0 (1.1)
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Revenues. Total revenues for the six months ended June 30, 1996 increased 4%
to $47.1 million from $45.2 million for the six months ended June 30, 1995.
For the first six months of 1996, revenues derived from customers located
outside the U.S. amounted to 73% of total revenues, as compared to 70% in the
first six 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 $11.1 million in the first six months
of 1996 from $11.4 million in the first six months of 1995. Telecommunications
revenues increased 5% to $45.3 million, or 96% of total revenues, in the first
six months of 1996, from $43.0 million, or 95% of total revenues, in 1995.
Marketing communications revenues declined to $1.3 million, or 3% of total
revenues, in the first six months of 1996 from $2.0 million, or 4% of total
revenues, in 1995. The decrease in marketing communications revenues primarily
reflected the loss of a significant marketing communications customer that was
acquired by another company in the first half of 1996. Electronic commerce
products and services revenues amounted to $517,000 in the first six months of
1996, as compared to $131,000 in the first six 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
24
<PAGE>
revenues increased to $29.8 million in the first six months of 1996 from $28.8
million in the same period of 1995. As a percentage of telecommunications
revenues, such costs declined to 66% in the first six 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 six 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 $334,000 in the first six months of 1996
from $646,000 in the first six months of 1995 corresponding to related revenue
declines, while decreasing to 26% of marketing communications revenues in the
first six months of 1996 from 32% in the first six 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 six 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 $270,000 in the first
six months of 1996, or 52% of such revenues, as compared to $53,000, or 40% 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 $16.7 million in the first six months of 1996, from
$15.7 million in the first six 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 six months of 1996 and 1995. 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. 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. 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."
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 increased to $6.5
million in the first six months of 1996 from $6.4 million in the year earlier
period. As a percentage of total revenues, these expenses remained at
approximately 14% in the first six months of 1996 and 1995. The Company
expects sales and marketing expenses to continue to grow in dollar amount as
it expands its sales and marketing efforts and distribution channels.
General and Administrative Expenses. The Company's general and
administrative expenses increased 19% to $9.9 million in the first six months
of 1996 from $8.4 million in the first six months of 1995. As a percentage of
total revenues, general and administrative expenses increased to 21% of total
revenues in the first six 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
25
<PAGE>
effected in June 1996 and expansion of the Company's management team and
administrative infrastructure to support the Company's operations. 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 $284,000 and $42,000
in the six months ended June 30, 1996 and 1995, respectively. 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 $268,000 in the six months ended June 30, 1996 compared to
$130,000 in the same period in 1995 primarily reflects increased interest
expense in the first six 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 13 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 six
months ended June 30, 1996 and 1995, certain of such entities recognized pre-
tax profits and as a result made related provisions for income taxes
aggregating $266,000 and $232,000, respectively. See Notes 2 and 6 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.
26
<PAGE>
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 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 $375,000 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
6 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
27
<PAGE>
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
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 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.
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 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 $4.6 million in 1993, 1994, 1995 and the six months ended
June 30, 1996, respectively. In 1994 and 1995, rapid
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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 $1.8 million in 1993, 1994, 1995 and the six months ended June 30,
1996, respectively. A substantial portion of investing activity in 1993, 1994,
1995 and the first six 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 $13.6 million in 1993, 1994, 1995 and the six months ended
June 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 six
months ended June 30, 1996 reflected the proceeds from the Company's issuance
of secured subordinated convertible notes. In June 1996 the Company issued $20
million in principal amount of secured subordinated convertible notes to
certain foreign institutional investors. Such notes bear interest at the rate
of 10% per annum, payable semi-annually, and mature in June 1998. Such
subordinated notes are convertible into Common Stock subject to certain events
and at varying conversion rates over time. See Notes 10 and 13 of Notes to
Consolidated Financial Statements.
At June 30, 1996, the Company's principal source of liquidity was $16.9
million in cash and cash equivalents. In addition, the Company's working
capital balance at June 30, 1996 was approximately $3.1 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.
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 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 at least 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.
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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 committing to large volumes of
traffic, the reseller guarantees traffic to the major long distance carrier,
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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.
[DESCRIPTION OF ARTWORK]
Diagram illustrating how the Company's callback and reorigination services work,
which includes pictograms of network switches, network switch controllers,
autodialer and initiating and terminating caller.
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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 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.
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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 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 facilities
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 intends to acquire 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
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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 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.
THE NETSOURCE NETWORK. The Company operates a facilities-based long distance
carrier network consisting of five digital switches located in San Francisco,
California; Newark, New Jersey; London, England; and Tokyo, Japan which 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 global least cost
routing function of the Company's CCSA technology is based on two U.S.
patents;
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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 additional 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 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.
CellBack(SM). 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.
MiliTel(SM). 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, Korea, 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.
GCMS(SM). 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.
Access Direct(SM). 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 Connect(SM). 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.
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Competitive Edge/sm/. 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 Card/sm/. 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.
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
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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.
WEB ARCHITECTURE AND SOFTWARE DEVELOPMENT SERVICES. The Company's Web
architecture and development services include software development services,
the generation of the appropriate 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
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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 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.
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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 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
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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. Upon consummation of a pending transaction, the
Company expects to 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, the Company intends to acquire 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.
The Company intends to offer an ISDN connectivity service called NetSource
On Demand 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.
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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, Silicon Graphics, Inc., the Fair-Issac Companies
and Hexcel Corporation. In addition, the Company provides telecommunications
wholesale services to facilities-based and non-facilities-based customers.
Clients include British Telecommunications plc ("BT") and Communication
TeleSystems International.
INTERNET AND INTERACTIVE
NetSource's customers for Internet and interactive products and services
include the American College of Cardiologists, the American College of
Surgeons, Ascend Communications, Inc., Cadence Design Systems, Inc., Conner
Peripherals, Inc. (now a subsidiary of Seagate Technologies, Inc.), CyberCash,
Inc., Diamond Multimedia Systems, Inc., Fujitsu Microelectronics, Inc. and
Nomura Securities. 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, Flemings 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.
[DESCRIPTION OF ARTWORK]
Pyramid diagram of the Company's distribution approach including types of
customers, products and services, and sales efforts.
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 and the
Netherlands 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.
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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.
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 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.
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RECENT DEVELOPMENTS
During October 1996, the Company expects to acquire scruz-net, an ISP, for
an aggregate of 306,923 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. During October 1996, the Company also
expects to acquire DNA, an interactive development firm, for an aggregate of
306,923 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 will be restricted under federal
securities laws but will have registration rights which permit, under certain
circumstances, such shares to be included in future public offerings of the
Company. As of October 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. As of October 15, 1996, the
Company is providing such solutions to Nomura Securities and Flemings,
international investment banks. 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
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
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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, 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.
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."
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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 BB IV Planet, 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.
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.
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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. 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 or its business,
financial condition or results of operations, but 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 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. 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
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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.
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. 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 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
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<PAGE>
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
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
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Company's employees are represented by unions, and the Company believes that
its employee relations are good.
FACILITIES
The Company's administrative, sales and marketing, and product development
headquarters are located in Petaluma, California, where the Company subleases
approximately 41,750 square feet from MTC Information Systems, Inc., an
affiliate of the Company. The Company expects to enter into a lease assignment
with MTC Information Systems, Inc. to become the lessee under a lease expiring
in July 2001 with respect to such property. See "Certain Transactions--
Agreements with MTC Information Systems Inc." 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. The Company leases approximately 14,000 square feet in San Francisco,
California, under a lease expiring in December 1997. Most of the Company's
Internet-oriented functions are housed at this 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.
LEGAL PROCEEDINGS
One of the Company's sales affiliates has brought suit against the Company
in Federal District Court for the Northern District of California. The 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 affiliate's sub-affiliate has
brought suit against both the sales affiliate and the Company which suit is
pending in Federal District Court for the District of Iowa. The 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 sales affiliate) and an open accounting for
amounts allegedly owed to the sub-affiliate. The 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 sub-affiliate against the affiliate and the Company. The
court has granted the affiliate's motion with respect to 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.
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.
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
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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.
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.
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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)....... 42 Director
Joshua G. Cooperman
(1)(2)................. 47 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......................... 44 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.
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. Mr.
Brinskele served as the Chief Executive Officer and Chairman of the Board of
Transphere International until its merger with the Company in June 1996.
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
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<PAGE>
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.
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 February 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 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.
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<PAGE>
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.
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.
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 and Chief Financial Officer for Transphere Interactive. Mr. Wolf
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.
AUDIT COMMITTEE
The Audit Committee consists of Messrs. Stern and Cooperman. 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 and Cooperman. 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.
55
<PAGE>
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>
- --------
(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
NetSource intends to enter into employment agreements with the following
persons and for the positions indicated and on the terms to be determined:
Edward A. Brinskele--Chairman of the Board and Chief Executive Officer;
Charles Schoenhoeft--Vice Chairman of the Board and President; Evan A. Kraus--
Executive Vice President, Secretary and General Counsel; Gregory A. Reznick--
Executive Vice President and Chief Operating Officer; Gary R. Anderson--
Executive Vice President and Chief Financial Officer; and Michael J.
Brinskele--Executive Vice President, Global Network Services. Pursuant to a
letter agreement dated March 15, 1996 between the Company and Evan Kraus,
Mr. Kraus will be entitled to receive 15 months salary and full benefits upon
a change in control of the Company.
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,
56
<PAGE>
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 475,660 shares of Common Stock.
In addition, on June 28, 1996, the Company issued nonstatutory options to
purchase 300,000 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 8,100,000 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.
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 2,888,520 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 2,600,000 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.
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<PAGE>
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 857,057 shares of Common Stock under the 1996 Plan.
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 1,000,000 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
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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.
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 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. Information
Systems and MTC Telemanagement have agreed to terminate the sublease and to
assign the lease to the Company so that the Company will lease the property
directly from the lessor, subject to the lessor's consent. 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. Mr. Brinskele has
disposed of his entire interest in Air Traffic. The Company intends to enter
into an agreement with Air Traffic pursuant to which the parties will settle
all outstanding obligations of Air Traffic to the Company in exchange for a
payment of $175,000. Such termination agreement is not expected to have a
material adverse effect on the Company's financial statements.
Payments received from Air Traffic for the years ended December 31, 1993,
1994, and 1995 and for the six months ended June 30, 1996, were $662,000,
$1,126,000, $1,846,000 and $1,580,000, respectively. The Company had
receivables from Air Traffic as of December 31, 1993, 1994, and 1995, and
June 30, 1996, in the amount of $112,000, $687,000, $406,000 and $0,
respectively.
MERGER AND ACQUISITION ADVICE AGREEMENT
NetSource Interactive was a party to an agreement with Helix Capital L.L.C.
("Helix"), pursuant to which Helix provided merger and acquisition, financing
and strategic advisory services to NetSource Interactive, which was merged
into the Company in the Reorganization, and continues to provide such services
to the Company. The agreement provided that Helix received a retainer of
$7,500 per month for 3 months commencing on April 15, 1996, which amount
increased to $10,000 per month for one year following the completion of the
sale of the Notes in June 1996. As the successor of NetSource Interactive, the
Company is responsible for making such payments to Helix. Yoav Stern, who is a
director of the Company, is a managing partner and has a 33% equity ownership
interest in Helix.
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.
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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 150,000 shares each of Common Stock. Pursuant
to this agreement, the Company agreed to issue options for an aggregate of
300,000 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 October 1993, the Company issued Mr. Brinskele an aggregate of 70,000
shares of Common Stock in consideration of the transfer by Mr. Brinskele of an
aggregate of 20,000 shares to two employees of the Company in March 1992 and
the transfer of 45,000 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 ----------------------------
BENEFICIALLY BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED(1) THE OFFERING THE OFFERING(2)
- ------------------------------------ ---------------- ------------ ---------------
<S> <C> <C> <C>
Edward A. Brinskele ............. 9,239,146(3) 42.47%
1304 South Point Boulevard
Petaluma, CA 94954
Charles Schoenhoeft ............. 4,109,380 19.29
1304 South Point Boulevard
Petaluma, CA 94954
Roger Sheppard .................. 4,028,780(3) 18.52
14 Bracken Court
San Rafael, CA 94901
Michael J. Brinskele............. 136,840(4) * *
Gregory A. Reznick............... 108,180(5) * *
Yoav Stern....................... 254,360(6) 1.19
Joshua G. Cooperman.............. -- --
All officers and directors as a
group (10 persons).............. 17,876,700(7) 79.69%
</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 450,000 shares issuable pursuant to stock options and exercisable
within 60 days of September 30, 1996.
(4) Includes 120,000 shares issuable pursuant to stock option and exercisable
within 60 days of September 30, 1996.
(5) Constitutes shares issuable pursuant to stock options and exercisable
within 60 days of September 30, 1996.
(6) 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
(7) Includes 1,145,020 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 21,304,100 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.
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 3,091,640 shares of Common Stock) are to be 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
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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 intends to grant 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 shares of Common
Stock (based on shares outstanding as of September 30, 1996). Commencing 180
days after the date of the Prospectus, upon the expiration of lock-up
agreements with the Underwriters, approximately 21,304,100 shares of Common
Stock issued and outstanding as of September 30, 1996, 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 to
compliance with certain volume limitations and other restrictions under Rule
144.
The Company currently has outstanding $20 million principal amount Series A
Secured Subordinated Convertible Notes (the "Notes"), together with detachable
warrants (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. 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 $ per share, the maximum number of shares
that would be issuable upon conversion of the Notes and exercise of the
Warrants would be . In the event that the offering is not completed prior
to December 31, 1996, the conversion price would be $4.05 per share, subject
to adjustment, such that a maximum of 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.
In connection with the issuance of the Notes and Warrants, warrants
identical to the Warrants described above were issued for an aggregate of
shares of Common Stock to the finder and placement agent for the financing
described above. Such warrants have the same exercise price described above.
of such shares would become eligible for sale in the U.S. beginning after
June 1997 and the remaining shares would not become eligible for sale until
the exercise price was paid and the two-year holding period under Rule 144 had
elapsed.
There are outstanding options for an aggregate of 4,221,237 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 2,582,154 of which shall be vested and
exercisable after expiration of the lock-up agreements. Options to purchase an
aggregate of an additional 300,000 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
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 ( 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
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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 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.
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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 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
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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.
68
<PAGE>
UNDERWRITING
The U.S. Underwriters named below, for whom Deutsche Morgan Grenfell Inc. is
acting as the representative (the "U.S. Representative"), and the
International Underwriters named below, for whom Morgan Grenfell & Co.,
Limited is acting as the representative (the "International Representative"),
have severally agreed, subject to the terms and conditions contained in the
U.S. Underwriting Agreement and International Underwriting Agreement
(together, the "Underwriting Agreements"), respectively, to purchase from the
Company the respective number of shares of Common Stock indicted 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...........................................................
===
</TABLE>
The Underwriting Agreements provide 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 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. or
Canadian 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. or Canadian persons except, in each case, for transactions
pursuant to the Intersyndicate Agreement. As used herein, "U.S. or Canadian
person" means any national or resident of the U.S. or Canada, any corporation,
partnership or other entity created or organized under the laws of the U.S. or
Canada or of any political subdivision thereof, or any estate or trust the
income of which is subject to U.S. or Canadian federal income taxation,
regardless of its source (other than any non-U.S. or non-Canadian branch of
any U.S. or Canadian person) and includes any U.S. or Canadian branch of a
person other than a U.S. or Canadian person; "Canada" means Canada, its
provinces, territories, possessions and other areas as subject to its
jurisdictions and "United States" means the United States of America, its
territories, its possessions and all areas subject to its jurisdiction.
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,
69
<PAGE>
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.
The Company has granted an option to the Underwriters to purchase up to a
maximum of 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 Agreements. 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 (the "U.K. Regulations"), (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the U.K. Regulations 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 and 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 U.S. Underwriter has
represented that it has not offered or sold, and has agreed not to offer or
sell, any shares of Common Stock, 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 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 U.S. Underwriter has further agreed to send to any dealer who purchases
from it any shares of Common Stock 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 Agreements provide 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
70
<PAGE>
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.
Deutsche Bank Aktiengesellschaft, the parent of Deutsche Morgan Grenfell
Inc. and Morgan Grenfell & Co., Limited holds $100,000 in principal amount of
the Company's Notes.
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, the U.S. Representative
and the International Representative. 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 Underwriters by
Latham & Watkins, San Francisco, California.
EXPERTS
The consolidated financial statements and schedule of NetSource
Communications, Inc. and subsidiaries as of December 31, 1995 and 1994 and for
each of the years in the three-year period ended December 31, 1995 have been
included in this Prospectus and in the registration statement in reliance upon
the report of KPMG Peat Marwick LLP, independent auditors, elsewhere herein
and upon the authority of said firm as experts in accounting and auditing.
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.
71
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1994, 1995, and June 30,
1996 (unaudited)........................................................ F-3
Consolidated Statements of Operations for the Years Ended December 31,
1993, 1994, and 1995, and the Six Months Ended June 30, 1995 and 1996
(unaudited)............................................................. F-4
Consolidated Statements of Stockholders' Deficit for the Years Ended De-
cember 31, 1993, 1994, and 1995, and the Six Months Ended June 30, 1996
(unaudited)............................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1993, 1994, and 1995, and the Six Months Ended June 30, 1995 and 1996
(unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................... F-7
</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 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. 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
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
San Francisco, California
September 11, 1996
F-2
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 30,
ASSETS 1994 1995 1996
------ ------- ------ -----------
(UNAUDITED)
-----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 1,274 497 16,949
Trade receivables, less allowances of $1,319,
$1,496, and $1,197, respectively................ 9,291 7,062 7,430
Due from joint venture........................... -- 688 2,166
Due from officer................................. -- -- 249
Other receivables, less allowances of $607, $950,
and $950, respectively.......................... 840 485 13
Costs in excess of billings on uncompleted pro-
jects........................................... 94 162 92
Prepaid expenses and other current assets........ 330 892 448
------- ------ ------
Total current assets........................... 11,829 9,786 27,347
Property and equipment, net....................... 3,323 7,954 10,621
Deposits with carriers............................ 2,008 2,501 1,964
Deposits and other assets......................... 313 420 414
Due from officer.................................. 249 249 --
------- ------ ------
Total assets................................... $17,722 20,910 40,346
======= ====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C> <C>
Current liabilities:
Trade accounts payable and accrued expenses...... $17,642 14,483 16,556
Notes payable.................................... -- 3,495 1,694
Line of credit................................... -- 1,087 739
Current portion of capital lease obligations..... 24 524 867
Billings in excess of costs on uncompleted pro-
jects........................................... 212 195 133
Other current liabilities........................ 2,260 3,548 4,222
------- ------ ------
Total current liabilities...................... 20,138 23,332 24,211
Series A secured subordinated convertible promis-
sory notes....................................... -- -- 18,042
Capital lease obligations, less current portion... -- 1,146 1,559
Deferred rent..................................... 212 333 322
Investment in and advances to joint ventures...... -- 290 550
Deferred tax liability............................ -- 271 298
Payable to stockholder............................ 140 -- --
------- ------ ------
Total liabilities.............................. 20,490 25,372 44,982
Commitments and contingencies
Stockholders' deficit
Common stock: $.001 par value, 44,000,000 shares
authorized; 18,328,960, 19,715,180, and
21,304,100 shares issued and outstanding,
respectively.................................... 18 20 21
Additional paid-in capital........................ 79 217 228
Stock purchase warrants........................... -- -- 353
S corporation retained earnings (deficit)......... 1,063 (2,361) --
Accumulated deficit............................... (3,928) (2,338) (5,238)
------- ------ ------
Total stockholders' deficit.................... (2,768) (4,462) (4,636)
------- ------ ------
Total liabilities and stockholders' deficit.... $17,722 20,910 40,346
======= ====== ======
</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>
SIX MONTHS
YEARS ENDED DECEMBER ENDED JUNE
31, 30,
------------------------ --------------
1993 1994 1995 1995 1996
------- ------ ------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications.................. $23,510 48,937 86,871 43,042 45,329
Marketing communications............ 4,792 4,915 3,774 2,009 1,273
Electronic commerce products and
services............................ -- -- 654 131 517
------- ------ ------- ------ ------
Total revenues..................... 28,302 53,852 91,299 45,182 47,119
Cost of revenues:
Telecommunications.................. 16,676 34,565 58,467 28,825 29,834
Marketing communications............ 2,164 1,497 1,194 646 334
Electronic commerce products and
services............................ -- -- 281 53 270
------- ------ ------- ------ ------
Total cost of revenues............. 18,840 36,062 59,942 29,524 30,438
------- ------ ------- ------ ------
Gross profit....................... 9,462 17,790 31,357 15,658 16,681
------- ------ ------- ------ ------
Operating expenses:
Sales and marketing................. 2,289 6,713 13,191 6,437 6,462
General and administrative.......... 7,708 12,837 18,495 8,375 9,940
------- ------ ------- ------ ------
Total operating expenses........... 9,997 19,550 31,686 14,812 16,402
------- ------ ------- ------ ------
Operating income (loss)............ (535) (1,760) (329) 846 279
Share of losses of joint ventures.... -- -- (489) (42) (284)
Other income (expense), net.......... 144 (233) (464) (130) (268)
------- ------ ------- ------ ------
Income (loss) before income taxes.. (391) (1,993) (1,282) 674 (273)
Income tax benefit (expense)......... (47) (5) (552) (232) (266)
------- ------ ------- ------ ------
Net income (loss).................. $ (438) (1,998) (1,834) 442 (539)
======= ====== ======= ====== ======
Pro Forma:
Net loss before income taxes........ (1,282) (273)
Pro forma income tax expense........ (347) (3)
------- ------
Pro forma net loss.................. $(1,629) (276)
======= ======
Pro forma net loss per share........ $
======= ======
Shares used in pro forma per share
computation.........................
======= ======
</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............... 18,208,960 $ 18 59 -- (391) (38) (352)
Net earnings (loss)..... -- -- -- -- 911 (1,349) (438)
---------- ---- --- --- ------ ------ ------
Balances as of December
31, 1993............... 18,208,960 18 59 -- 520 (1,387) (790)
Issuance of common
stock................... 120,000 -- 20 -- -- -- 20
Net earnings (loss)..... -- -- -- -- 543 (2,541) (1,998)
---------- ---- --- --- ------ ------ ------
Balances as of December
31, 1994............... 18,328,960 18 79 -- 1,063 (3,928) (2,768)
Issuance of common
stock................... 1,386,220 2 138 -- -- -- 140
Net earnings (loss)..... -- -- -- -- (3,424) 1,590 (1,834)
---------- ---- --- --- ------ ------ ------
Balances as of December
31, 1995............... 19,715,180 20 217 -- (2,361) (2,338) (4,462)
Issuance of common stock
(unaudited)............ 1,588,920 1 11 -- -- -- 12
Issuance of warrants in
conjunction with con-
vertible promissary
notes
(unaudited)............ -- -- -- 353 -- -- 353
Net earnings (loss)
(unaudited)............ -- -- -- -- (243) (296) (539)
Merger with MTC and
Transphere
(unaudited)............ -- -- -- -- 2,604 (2,604) --
---------- ---- --- --- ------ ------ ------
Balances as of June 30,
1996 (unaudited)....... 21,304,100 $ 21 228 353 -- (5,238) (4,636)
========== ==== === === ====== ====== ======
</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>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- --------------
1993 1994 1995 1995 1996
-------- -------- -------- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)................. $ (438) (1,998) (1,834) 442 (539)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Depreciation and amortization.... 194 460 1,040 480 618
Provision for doubtful accounts
trade receivables................ 487 2,495 1,213 2,352 (299)
Provision for doubtful accounts
on other receivables............. 218 389 343 -- --
Loss of disposition of fixed
assets........................... -- 50 -- -- 7
Share of losses of joint
ventures......................... -- -- 489 42 284
Noncash service expense.......... -- 20 -- -- --
Deferred taxes................... 20 (20) 271 177 (25)
Changes in operating assets and
liabilities:
Trade receivables............... (4,877) (4,937) 925 (2,480) (70)
Due from joint venture.......... -- -- (688) (317) (1,477)
Other receivables............... (340) (1,107) 103 -- 472
Costs in excess of billings on
uncompleted projects............ (540) 498 (68) (63) 70
Prepaid expenses and other
current assets.................. (118) (195) (716) 943 444
Deposits with carriers.......... (1,013) (995) (493) (330) (21)
Deposits and other assets....... (107) (104) (107) (113) 6
Trade accounts payable and
accrued expenses................ 5,978 7,918 (92) 590 8,615
Billings in excess of costs on
uncompleted projects............ 299 (87) (17) 38 (62)
Other current liabilities....... 1,715 1,004 966 492 (3,370)
Deferred rent................... -- 212 121 124 (11)
-------- ------- ------- ------ ------
Net cash provided by operating
activities..................... 1,478 3,603 1,456 2,377 4,642
-------- ------- ------- ------ ------
Cash flows from investing
activities:
Purchases of property and
equipment......................... (982) (2,331) (3,231) (2,633) (1,797)
Loans to stockholders............. (125) -- -- -- --
Investment in joint ventures...... -- -- (45) (45) (25)
Purchases of short-term
investments....................... (1,029) -- -- -- --
Proceeds from sale of short-term
investments....................... 477 552 -- -- --
-------- ------- ------- ------ ------
Net cash used in investing
activities...................... (1,659) (1,779) (3,276) (2,678) (1,822)
-------- ------- ------- ------ ------
Cash flows from financing
activities:
Cash overdraft.................... -- (789) 322 680 (387)
Proceeds from line of credit...... -- -- 3,881 -- 9,587
Proceeds from note payable........ -- -- -- 103 --
Repayment of line of credit....... -- -- (2,794) -- (9,935)
Repayment of note payable......... -- -- -- -- (3,270)
Principal payments under capital
lease obligations................. (17) (43) (366) (14) (271)
Payment of debt issuance costs.... -- -- -- -- (2,104)
Issuance of convertible promissory
notes............................. -- -- -- -- 20,000
Issuance of common stock.......... -- -- -- -- 12
-------- ------- ------- ------ ------
Net cash provided by (used in)
financing activities............ (17) (832) 1,043 769 13,632
-------- ------- ------- ------ ------
Increase (decrease) in cash and
cash equivalents................... (198) 992 (777) 468 16,452
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 1,742 16,949
======== ======= ======= ====== ======
Supplemental disclosures of cash
paid during the period:
Interest.......................... $ 16 37 120 10 14
======== ======= ======= ====== ======
Taxes............................. $ 91 2 14 12 120
======== ======= ======= ====== ======
</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
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX 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 15,605,800 shares of its common stock
in a merger with MTC. In conjunction with this merger, the Company granted
2,915,980 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 5,698,280
shares of the Company's common stock. In conjunction with this merger, the
Company granted 475,660 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 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 (65)
Transphere................................ (365) 10 454 238 (474)
----- ------ ------ --- ----
$(438) (1,998) (1,834) 442 (539)
===== ====== ====== === ====
</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
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Sales by geographic area were as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
-------------- -------------
1994 1995 1995 1996
------- ------ ------ ------
<S> <C> <C> <C> <C>
USA............................................ $29,801 27,998 13,581 12,871
Europe......................................... 8,850 24,630 13,474 15,681
Other Asia..................................... 5,238 14,578 7,745 4,917
Japan.......................................... 3,624 10,086 4,802 6,123
South America.................................. 3,510 9,770 2,678 6,515
Other.......................................... 2,829 4,237 2,903 1,012
------- ------ ------ ------
$53,852 91,299 45,183 47,119
======= ====== ====== ======
</TABLE>
Export sales were not significant in 1993. No customer exceeded 10% of total
net revenues in 1993, 1994, or 1995, or in the six months ended June 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 December 31, 1995, has negative working capital of
approximately $13,500. The Company has secured additional financing for
$20,000 subsequent to December 31, 1995, in the form of secured subordinated
convertible promissory notes (see Note 13). 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, 1996. 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
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
operations. The Company's investments are classified as "available-for-sale"
under the provisions of SFAS No. 115. The securities are carried at fair value
which approximates cost.
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.
Due from Officer
Due from officer consists of payments made by MTC on behalf of the Company's
Chief Executive Officer. The balance bears interest at the prime rate (8.5% as
of December 31, 1995) and is due in June 1997. It is the Company's policy to
record interest income on this balance as received.
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 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.
F-9
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 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 $1,042 as of December 31, 1994 and
1995, and June 30, 1996, respectively.
Foreign Currency
The functional currency for substantially all of the Company's foreign
activities is the U.S. dollar.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 will be effective
for fiscal years beginning after December 15, 1995, and will require that the
Company either recognize in its consolidated financial statements costs
related to its employee stock-based compensation plans, such as stock option
and stock purchase plans, or make pro forma disclosures of such costs in a
footnote to the consolidated financial statements.
The Company expects to continue to use the intrinsic value-based method of
Accounting Principles Board Opinion No. 25, as allowed under SFAS No. 123, to
account for all of its employee stock-based compensation plans. SFAS No. 123
is not expected to have a material effect on the Company's consolidated
results of operations or financial position.
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
F-10
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 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 six months ended June 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.
Pro Forma Net Loss
Pro Forma income taxes have been provided based on the estimated income
taxes that the Company would have incurred had all the entities filed as C
Corporations in a consolidated group.
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.
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 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.
F-11
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
The Company has not calculated pro forma net loss per share because
information regarding the pricing of the shares of common stock under the
contemplated public offering has not yet been determined.
Interim Financial Information
The accompanying unaudited consolidated financial statements as of June 30,
1996 and for the six months ended June 30, 1996 and 1995, have been prepared
on substantially the same basis as the audited consolidated financial
statements, and include all adjustments, consisting only or normal recurring
adjustments, necessary for a fair presentation of the consolidated financial
information set forth therein.
(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 six months ended June 30, 1995 and 1996, were $489, $42, and $180,
respectively. The recorded loss in excess of the Company's investment as of
December 31, 1995, is due to the Company's commitment to provide continued
financial support to the joint venture. Investment in and advances to joint
venture 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>
JUNE 30,
------------
DECEMBER 31,
1995 1995 1996
------------ ---- ------
<S> <C> <C> <C>
Assets:
Current assets.................................. $ 719 105 1,107
Noncurrent assets............................... 456 465 1,045
------- --- ------
1,175 570 2,152
Total liabilities................................ 1,911 580 3,221
------- --- ------
Deficit.......................................... $ (736) (10) (1,069)
======= === ======
Revenues......................................... $ 1,169 96 2,033
======= === ======
Operating loss................................... $(1,086) (93) (400)
======= === ======
Net loss......................................... $(1,086) (93) (400)
======= === ======
</TABLE>
During 1995 and for the six months ended June 30, 1995 and 1996, the Company
recorded sales to the joint venture totaling $688 and $53, and $1,429,
respectively.
F-12
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
MTC Telecom Western Europe (Unaudited)
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
contributions to the joint venture as well as the Company's share of losses
incurred by the joint venture as of and for the six months ended June 30, 1996
were not significant.
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- JUNE 30,
1994 1995 1996
------ ------ --------
<S> <C> <C> <C>
Switching and installation equipment............... $1,325 4,179 5,960
Computer equipment................................. 1,499 3,196 4,614
Furniture and fixtures............................. 742 912 1,020
Leasehold improvements............................. 281 798 870
Access equipment................................... 354 377 329
Construction in progress........................... 18 428 382
------ ------ ------
4,219 9,890 13,175
Accumulated depreciation and amortization.......... (896) (1,936) (2,554)
------ ------ ------
$3,323 7,954 10,621
====== ====== ======
</TABLE>
Property and equipment as of December 31, 1994 and 1995, and June 30, 1996,
included equipment under capital leases of approximately $56, $2,103 and
$3,523, respectively; and related accumulated depreciation of approximately
$7, $119 and $256, respectively.
(5) OTHER CURRENT LIABILITIES
A summary of other current liabilities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1994 1995 1996
------ ----- --------
<S> <C> <C> <C>
Accrued commissions................................... $ 928 1,152 1,457
Cash overdraft........................................ 65 387 --
Taxes payable......................................... 414 593 1,160
Accrued payroll and related items..................... 125 319 451
Other liabilities..................................... 728 1,097 1,154
------ ----- -----
$2,260 3,548 4,222
====== ===== =====
</TABLE>
F-13
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(6) INCOME TAXES
Income tax expense consisted of:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, JUNE 30,
--------------- ---------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Current:
Federal............................................ $18 -- 188 68 99
State.............................................. 9 25 93 33 140
--- --- --- --- ---
27 25 281 101 239
--- --- --- --- ---
Deferred:
Federal............................................ 17 (23) 217 105 25
State.............................................. 3 3 54 26 2
--- --- --- --- ---
20 (20) 271 131 27
--- --- --- --- ---
Income taxes...................................... $47 5 552 232 266
=== === === === ===
</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
DECEMBER 31,
-----------------
1993 1994 1995
----- ---- ----
<S> <C> <C> <C>
Expected tax benefit.................................... $(133) (678) (436)
Other................................................... (25) 93 50
Reserve on deferred tax asset........................... 587 753 180
State taxes, net of federal benefit..................... 8 26 64
S corporation (earnings) losses not subject to corporate
taxation................................................ (390) (189) 694
----- ---- ----
Income tax expense................................... $ 47 5 552
===== ==== ====
</TABLE>
F-14
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX 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,
--------------
1994 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Reserves on receivables..................................... $ 396 918
Investment in affiliate..................................... -- 196
Accrued expenses............................................ -- 89
Other....................................................... 40 95
Net operating loss carryforwards............................ 1,223 512
------ ------
Total gross deferred tax assets............................ 1,659 1,810
Less valuation allowance..................................... (1,540) (1,720)
------ ------
Net deferred tax assets.................................... 119 90
Deferred tax liability:
Fixed assets................................................ (119) (361)
------ ------
Deferred tax liability...................................... $ -- (271)
====== ======
</TABLE>
The Company has the following net operating loss carryforwards as of
December 31, 1995, and June 30, 1996, as follows:
<TABLE>
<CAPTION>
1995 1996
----- ----
<S> <C> <C>
Federal........................................................... 1,487 654
State............................................................. 93 327
</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 June 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-15
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX 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, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
Pro forma income taxes:
Current:
Federal.............................................. $ 31 --
State................................................ 53 3
---- ---
84 3
---- ---
Deferred:
Federal.............................................. 210 --
State................................................ 53 --
---- ---
263 --
---- ---
Total pro forma income tax expense.................. $347 3
==== ===
</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, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
Pro forma expected federal income tax benefit.......... $(436) (93)
State taxes, net of federal effect..................... 70 3
Change to reserve on deferred tax asset................ 656 75
Permanent differences.................................. 66 8
Other differences...................................... (9) 10
----- ---
Total pro forma income tax expense $ 347 3
===== ===
</TABLE>
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,
--------------
1994 1995
------ ------
<S> <C> <C>
Pro forma deferred tax assets:
Reserves on receivables..................................... $1,120 1,952
Investment in affiliate..................................... -- 196
Accrued expenses............................................ 200 474
Other....................................................... 63 71
Net operating loss carryforwards............................ 634 126
------ ------
Total gross pro forma deferred tax assets................. 2,017 2,819
Less valuation allowance..................................... (2,017) (2,819)
------ ------
Net pro forma deferred tax assets......................... -- --
Pro forma deferred tax liability--fixed assets............... (119) (382)
------ ------
Net pro forma deferred tax liability....................... $ (119) (382)
====== ======
</TABLE>
F-16
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(7) STOCKHOLDERS' DEFICIT
1996 Omnibus Equity Incentive Plan
As of June 30, 1996, the Company had reserved 8,100,000 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.
A summary of the Omnibus 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.............................. 41,040 .17 - 1.19
---------- -----------
Balances as of December 31, 1993.................... 41,040 .17 - 1.19
Stock options granted.............................. 1,920,000 .17 - 1.19
---------- -----------
Balances as of December 31, 1994.................... 1,961,040 .17 - 1.19
Stock options granted.............................. 2,327,740 .17 - 1.19
Stock options canceled............................. (1,001,040) .17 - 1.19
---------- -----------
Balances as of December 31, 1995.................... 3,287,740 .17 - 1.19
Stock options granted (unaudited).................. 120,000 .17 - 1.19
Stock options canceled (unaudited)................. (791,760) .17 - 1.19
---------- -----------
Balances as of June 30, 1996 (unaudited)............ 2,615,980 $.17 - 1.19
========== ===========
</TABLE>
As of June 30, 1996 the Company had an additional 775,660 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 June 30, 1996, 2,380,314 options were exercisable.
1996 Stock Option Plan (Unaudited)
In September 1996, the Company adopted the 1996 Stock Option Plan (the "1996
Plan"), which is in addition to the Omnibus Plan discussed above. Under the
1996 Plan, the Company has reserved 2,600,000 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
F-17
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
less than 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.
(8) 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 six months ended June 30, 1995 and 1996, were $-0-, $56, $2,103, $715, and
$1,230, respectively. As of December 31, 1995, future minimum lease payments
under all noncancelable lease agreements are as follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
1996...................................................... $ 724 1,252
1997...................................................... 670 1,279
1998...................................................... 474 923
1999...................................................... 150 882
2000...................................................... 19 838
Thereafter................................................ -- 423
------ ------
Total minimum lease payments.............................. 2,037 $5,597
====== ======
Less amount representing interest......................... 367
------
Present value of minimum lease payments................... 1,670
Less current portion...................................... 524
------
Long-term capital lease obligations....................... $1,146
======
</TABLE>
Net rental expenses for operating leases during the years ended December 31,
1993, 1994, and 1995, and for the six months ended June 30, 1995 and 1996,
were $420, $815, $1,043, $405, and $1,280, respectively.
Litigation
The Company is party to various legal proceedings arising in the ordinary
course of its business. In the opinion of management, these proceedings will
not have a material adverse effect on the Company's financial position or
results of operations.
F-18
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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
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%, 84%, and 85%
of the total cost of revenues in 1993, 1994, and 1995 and in the six months
ended June 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.
(9) NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- JUNE 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 1,389
Note payable to vendor, interest rate 10%........... -- -- 305
Note payable for equipment financing; interest rate
9%; due July 1996.................................. -- 428 --
------- ----- -----
$ -- 3,495 1,694
======= ===== =====
</TABLE>
The notes payable to vendors represent trade payables converted to short-
term notes payable during 1995 and 1996.
(10) 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% (11%
as of December 31, 1995). 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
and the unused line of credit was $1,913. As of December 31, 1995, the
subsidiary was not in technical compliance with the debt covenants, and,
subsequent to year end, the 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.
F-19
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(11) RELATED PARTY TRANSACTIONS
MTC Information Systems, Inc.
In January 1994, the Company entered in a sublease agreement with MTC
Information Systems, Inc. ("Information System"), 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 were $84,
$451, and $564, 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 for the six months ended June 30, 1995 and 1996, were $773, $1,701,
$2,192, $1,111, and $1,410, respectively. Payments received from Air Traffic
for the years ended December 31, 1993, 1994, and 1995 and for the six months
ended June 30, 1995 and 1996, were $662, $1,126, $1,846, $1,216, and $1,580,
respectively.
The Company had receivables from Air Traffic as of December 31, 1993, 1994,
and 1995, and June 30, 1996, in the amount of $112, $687, $406, and $0,
respectively.
Patent Agreement
For the years ended December 31, 1994 and 1995 and for the six months ended
June 30, 1995 and 1996, the Company paid $139, $240, $120, 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 six-
month period ended June 30, 1996 were approximately $30.
F-20
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(12) TRANSPHERE PROFIT SHARING 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.
(13) SUBSEQUENT EVENTS
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.
Retirement and Savings Plan (Unaudited)
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.
1996 Employee Stock Purchase Plan (Unaudited)
On October 10, 1996, the Board adopted (subject to stockholder approval) the
1996 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 1,000,000
shares of common stock for issuance under the Purchase Plan.
Series A Secured Subordinated Convertible Promissory Notes (Unaudited)
In June 1996, the Company issued $20,000 in Series A Secured Subordinated
Convertible Promissory Notes ("the Notes") and 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.
F-21
<PAGE>
NETSOURCE COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1993, 1994, AND 1995
(INFORMATION AS OF JUNE 30, 1995 AND 1996 AND FOR THE SIX MONTHS THEN ENDED IS
UNAUDITED.)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 based upon a pre-IPO per
share valuation of the Company.
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 warrants expire on June
30, 1999.
The per share exercise price for the 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 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 warrants.
The Company also granted warrants to a placement agent, and expects to grant
warrants as a finder's fee to a third party, to purchase shares of the
Company's common stock. Warrants issued or to be issued to these two parties
shall entitle the parties to purchase an aggregate number of shares equal to
approximately 9% of the number of shares into which the Notes are convertible.
F-22
<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.
ISP--Internet Service Provider. A company that provides access services to the
Internet via modem, ISDN, xDSL and dedicated circuits.
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.
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).
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.
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.
G-1
<PAGE>
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 present and planned telecommunications network connections and
U.S. map with planned Internet network connections.
<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......................................................... 19
Dividend Policy......................................................... 19
Capitalization.......................................................... 20
Dilution................................................................ 21
Selected Consolidated Financial Data.................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 23
Business................................................................ 30
Management.............................................................. 53
Certain Transactions.................................................... 60
Principal Stockholders.................................................. 62
Description of Capital Stock............................................ 63
Shares Eligible for Future Sale......................................... 65
Certain United States Federal Tax Considerations for Non-U.S. Holders of
Common Stock........................................................... 66
Underwriting............................................................ 69
Legal Matters........................................................... 71
Experts................................................................. 71
Additional Information.................................................. 71
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 COMMUNICATIONS, INC.]
SHARES
COMMON STOCK
DEUTSCHE MORGAN GRENFELL
PROSPECTUS
, 1996
<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............................................... $ 17,425
NASD Filing Fee.................................................... 6,250
Nasdaq National Market Listing Fee................................. *
Blue Sky Fees and Expenses......................................... 10,000
Printing and Engraving Expenses.................................... 100,000
Legal Fees and Expenses............................................ 300,000
Accounting Fees and Expenses....................................... 350,000
Transfer Agent and Registrar Fees.................................. 1,500
Miscellaneous...................................................... *
--------
Total............................................................ $
========
</TABLE>
- --------
* To be completed by amendment.
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,
II-1
<PAGE>
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 of
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 20 shares of Company Stock to Edward
Brinskele for a purchase price of $0.05 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 21,304,080 shares of Common Stock to the shareholders
of MTC Telemanagement Corporation, MTC International, Inc., and NetSource
Interactive Services, Inc. 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 2,615,980 shares of Common Stock to
the former option holders of MTC Telemanagement Corporation and MTC
International, Inc. at exercise prices ranging from $0.1665 to $1.1875 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 $ per share in
this offering, the Notes will be convertible into an aggregate of shares
of Common Stock at a conversion price of $ 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 $ per share in this offering, the Warrants will be exercisable for
an aggregate of shares of Common Stock at an
II-2
<PAGE>
exercise price of $ 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 and a finder in
connection with services performed by such persons in connection with the sale
of the Notes and Warrants. The 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 $ per share in this
offering, this warrant will be exercisable for an aggregate of shares of
Common Stock at an exercise price of $ 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.
On June 24, 1996, the Registrant issued a warrant to a finder in
consideration of services performed by the finder in the offering of the Notes
and Warrants. Assuming an offering price of $ per share in this offering,
this warrant will be exercisable for an aggregate of shares of Common
Stock at an exercise price of $ per share. The sale of the warrant to the
finder was deemed to be exempt from registration under the Securities Act in
reliance on Section 4(2) thereof.
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 1,129,597 shares of Common Stock. Such options had exercise prices ranging
from $2.50 to an exercise price equal to 80% of the initial public offering
price per share. Such issuances were exempt from the requirement of
registration pursuant to Rule 701 promulgated under 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 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 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.
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Bylaws of the Registrant.
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.
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.
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.
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).
24.1 Power of Attorney (see page II-6).
</TABLE>
- --------
*Documents to be filed by amendment.
**Documents for which confidential treatment has been requested.
II-4
<PAGE>
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 financial statements of the Registrant
or notes thereto.
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.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF PETALUMA, STATE OF
CALIFORNIA, ON THE 16TH DAY OF OCTOBER, 1996.
NetSource Communications, Inc.
By: /s/ Edward A. Brinskele
----------------------------
EDWARD A. BRINSKELE,
CHIEF EXECUTIVE OFFICER AND
CHAIRMAN OF THE BOARD
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Edward A. Brinskele and Charles
Schoenhoeft, and each of them acting individually, as his true and lawful
attorneys-in-fact and agents, with full power of each to act alone, with full
powers of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments or any abbreviated
registration statement and any amendments thereto filed pursuant to Rule
462(b) increasing the number of securities for which registration is sought),
and file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, with full power of each to act alone,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully for all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Edward A. Brinskele Chief Executive October 16,
- ------------------------------------- Officer, Chairman 1996
EDWARD A. BRINSKELE of the Board
(Principal
Executive Officer)
/s/ Gary Anderson Chief Financial October 16,
- ------------------------------------- Officer (Principal 1996
GARY ANDERSON Financial and
Accounting Officer)
/s/ Charles Schoenhoeft President and Vice October 16,
- ------------------------------------- Chairman of the 1996
CHARLES SCHOENHOEFT Board
/s/ Yoav Stern Director October 16,
- ------------------------------------- 1996
YOAV STERN
/s/ Joshua G. Cooperman Director October 16,
- ------------------------------------- 1996
JOSHUA G. COOPERMAN
II-6
<PAGE>
SCHEDULE IX
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
<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.. 0 487 0 487
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
ALLOWANCE FOR OTHER RECEIVABLES
Year ended December 31, 1993.. 0 218 0 218
Year ended December 31, 1994.. 218 389 0 607
Year ended December 31, 1995.. 607 343 0 950
VALUATION ALLOWANCE FOR
DEFERRED TAX ASSET
Year ended December 31, 1993.. 200 587 0 787
Year ended December 31, 1994.. 787 753 0 1,540
Year ended December 31, 1995.. 1,540 180 0 1,720
</TABLE>
<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 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 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.
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Bylaws of the Registrant.
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.
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.
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.
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).
24.1 Power of Attorney (see page II-6).
</TABLE>
- --------
*Documents to be filed by amendment.
**Documents for which confidential treatment has been requested.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND
PLAN OF REORGANIZATION
DATED MAY 31, 1996
BY AND BETWEEN
NETSOURCE INTERACTIVE
AND
NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC.
<PAGE>
TABLE OF CONTENTS
Page
1. Certain Definitions................................................... 1
-------------------
1.1 "Affiliate"..................................................... 1
1.2 "Code".......................................................... 1
1.3 "Commission".................................................... 2
1.4 "Dissenting Shares"............................................. 2
1.5 "Key Employees"................................................. 2
1.6 "MTC Exchanges"................................................. 2
1.7 "NetSource Common Stock"........................................ 2
1.8 "NetSource Products/Services"................................... 2
1.9 "NetSource Shares".............................................. 2
1.10 "NIT Common Stock".............................................. 2
1.11 "NIT Products/Services"......................................... 2
1.12 "Securities".................................................... 2
1.13 "Securities Act"................................................ 2
1.14 "Stockholders".................................................. 2
1.15 "Transaction Documents"......................................... 2
1.16 "Transphere Mergers"............................................ 2
2. Plan of Reorganization................................................ 2
----------------------
2.1 The Merger...................................................... 2
----------
2.2 Conversion of Shares and Substitution of Options................ 3
------------------------------------------------
2.3 Fractional Shares............................................... 3
-----------------
2.4 Escrow Agreement................................................ 4
----------------
2.5 Appraisal Rights................................................ 4
----------------
2.6 The Closing..................................................... 4
-----------
2.7 Effective Time.................................................. 4
--------------
2.8 Tax Free Reorganization......................................... 4
-----------------------
2.9 Exemption from Registration; California Permit.................. 5
----------------------------------------------
3. Representations and Warranties of NetSource........................... 5
-------------------------------------------
3.1 Organization.................................................... 5
------------
3.2 Capitalization.................................................. 5
--------------
3.3 Power, Authority and Validity................................... 6
-----------------------------
3.4 Financial Statements............................................ 6
--------------------
3.5 Tax Matters..................................................... 7
-----------
3.6 Tax Free Reorganization......................................... 8
-----------------------
3.7 Absence of Certain Changes or Events............................ 8
------------------------------------
3.8 Title and Related Matters....................................... 9
-------------------------
3.9 Proprietary Rights.............................................. 9
------------------
3.10 Employee Benefit Plans.......................................... 11
----------------------
3.11 Bank Accounts................................................... 11
-------------
3.12 Contracts....................................................... 11
---------
3.13 Insider Transactions............................................ 12
--------------------
3.14 Insurance....................................................... 13
---------
3.15 Litigation...................................................... 13
----------
3.16 Permit Application; Information Statement....................... 13
-----------------------------------------
3.17 Governmental Authorizations and Regulations..................... 13
-------------------------------------------
3.18 Subsidiaries.................................................... 13
------------
3.19 Environmental Matters........................................... 13
---------------------
3.20 Corporate Documents............................................. 14
-------------------
3.21 No Brokers...................................................... 14
----------
3.22 Disclosure...................................................... 14
----------
<PAGE>
4. Representations and Warranties of NIT................................. 14
-------------------------------------
4.1 Organization.................................................... 15
------------
4.2 Capitalization.................................................. 15
--------------
4.3 Power, Authority and Validity................................... 16
-----------------------------
4.4 Financial Statements............................................ 16
--------------------
4.5 Tax Matters..................................................... 16
-----------
4.6 Tax Free Reorganization......................................... 17
-----------------------
4.7 Absence of Certain Changes or Events............................ 17
------------------------------------
4.8 Title and Related Matters....................................... 18
-------------------------
4.9 Proprietary Rights.............................................. 19
------------------
4.10 Employee Benefit Plans.......................................... 20
----------------------
4.11 Bank Accounts................................................... 20
-------------
4.12 Contracts....................................................... 20
---------
4.13 Insider Transactions............................................ 22
--------------------
4.14 Insurance....................................................... 22
---------
4.15 Litigation...................................................... 22
----------
4.16 Permit Application; Information Statement....................... 22
-----------------------------------------
4.17 Governmental Authorizations and Regulations..................... 22
-------------------------------------------
4.18 Subsidiaries.................................................... 22
------------
4.19 Environmental Matters........................................... 23
---------------------
4.20 Corporate Documents............................................. 23
-------------------
4.21 No Brokers...................................................... 24
----------
4.22 Disclosure...................................................... 24
----------
5. Preclosing Covenants of NetSource and NIT............................. 24
-----------------------------------------
5.1 Material Consents............................................... 24
-----------------
5.2 Transphere Mergers and MTC Exchanges............................ 24
------------------------------------
5.3 Employment Agreements, Other Commitments Terminated............. 24
---------------------------------------------------
5.4 Voting Agreement and Irrevocable Proxies........................ 24
----------------------------------------
5.5 Advice of Changes............................................... 25
-----------------
6. Mutual Covenants...................................................... 25
----------------
6.1 Conduct of Business by NetSource................................ 25
--------------------------------
6.2 Stockholders' Tax Representations............................... 26
----------------------------------
6.3 Conduct of Business by NIT...................................... 26
--------------------------
6.4 No Public Announcement.......................................... 27
----------------------
6.5 Other Negotiations.............................................. 27
------------------
6.6 Due Diligence, Investigation, and Audits........................ 28
----------------------------------------
6.7 Regulatory Filings; Consents; Reasonable Efforts................ 28
------------------------------------------------
6.8 Further Assurances.............................................. 28
------------------
6.9 Preparation of Permit Application/Information Statement......... 28
-------------------------------------------------------
6.10 Meeting of Stockholders......................................... 29
-----------------------
6.11 Pooling Accounting.............................................. 29
------------------
6.12 Affiliate Pooling Agreements.................................... 29
----------------------------
7. Closing Matters....................................................... 30
---------------
7.1 Filing of Certificate of Merger................................. 30
-------------------------------
7.2 Exchange of Certificates........................................ 30
------------------------
7.3 Delivery of Documents........................................... 31
---------------------
8. Conditions to NetSource's Obligations................................. 31
-------------------------------------
8.1 Accuracy of Representations and Warranties...................... 31
------------------------------------------
8.2 Covenants....................................................... 31
---------
8.3 No Litigation................................................... 31
-------------
ii
<PAGE>
Table of Contents, continued
8.4 No Adverse Development.......................................... 31
----------------------
8.5 Authorizations.................................................. 31
--------------
8.6 Government Consents; Fairness Hearing........................... 31
-------------------------------------
8.8 Transphere Mergers and MTC Exchanges............................ 31
------------------------------------
8.9 NIT Financing................................................... 32
-------------
8.10 Opinion of NIT's Counsel........................................ 32
------------------------
8.11 Pooling Letter..................................................
--------------
8.12 Filing of Certificate of Merger................................. 32
-------------------------------
9. Conditions to NIT's Obligations....................................... 32
-------------------------------
9.1 Accuracy of Representations and Warranties...................... 32
------------------------------------------
9.2 Covenants....................................................... 32
---------
9.3 No Litigation................................................... 32
-------------
9.4 Authorizations.................................................. 32
--------------
9.6 Government Consents; Fairness Hearing........................... 33
-------------------------------------
9.7 Transphere Mergers and MTC Exchanges............................ 33
------------------------------------
9.8 Pooling Letter..................................................
--------------
9.9 NIT Financing................................................... 33
-------------
9.10 Opinion of NetSource's Counsel.................................. 33
------------------------------
10. Termination of Agreement.............................................. 34
------------------------
10.1 Termination..................................................... 34
-----------
10.2 Liability for Termination....................................... 34
-------------------------
10.3 Certain Effects of Termination.................................. 34
------------------------------
10.4 Remedies........................................................ 34
--------
10.5 Right to Damages................................................ 35
----------------
11. Indemnification....................................................... 35
---------------
11.1 Survival of Representations, Warranties, Covenants
--------------------------------------------------
and Agreements................................................. 35
--------------
11.2 Indemnification by NetSource.................................... 35
----------------------------
11.3 Indemnification by NIT.......................................... 36
----------------------
11.4 Arbitration..................................................... 37
-----------
11.5 Limitation on Indemnification................................... 38
-----------------------------
11.6 The Stockholders Representatives; Power of Attorney............. 38
---------------------------------------------------
11.7 Escrow.......................................................... 38
------
12. Miscellaneous......................................................... 39
-------------
12.1 Governing Laws.................................................. 39
--------------
12.2 Binding upon Successors and Assigns............................. 39
-----------------------------------
12.3 Severability.................................................... 40
------------
12.4 Entire Agreement................................................ 40
----------------
12.5 Counterparts.................................................... 40
------------
12.6 Expenses........................................................ 40
--------
12.7 Amendment and Waivers........................................... 40
---------------------
12.8 Survival of Agreements.......................................... 40
----------------------
12.9 No Waiver....................................................... 40
---------
12.10 Attorneys' Fees................................................. 40
---------------
12.11 Notices......................................................... 40
-------
12.12 Time............................................................ 41
----
12.13 Construction of Agreement....................................... 41
-------------------------
iii
<PAGE>
Table of Contents, continued
12.14 No Joint Venture................................................ 41
----------------
12.15 Pronouns........................................................ 41
--------
12.16 Further Assurances.............................................. 41
------------------
12.17 Absence of Third Party Beneficiary Rights....................... 41
-----------------------------------------
Exhibits and Schedules
Exhibit A Certificate of Merger
Exhibit B Employment Agreement
Exhibit C-1 Form of NetSource Voting Agreement and Irrevocable Proxy
Exhibit C-2 Form of NIT Voting Agreement and Irrevocable Proxy
Exhibit D-1 NetSource Affiliates Agreement
Exhibit D-2 NIT Affiliates Agreement
Exhibit E Form of Legal Opinion to be Delivered by Counsel to NetSource
Exhibit F Form of Legal Opinion to be Delivered by Counsel to NIT
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is entered
into this 31st day of May, 1996, by and between NetSource Interactive, a
Delaware corporation ("NetSource") and NetSource International
Telecommunications, Inc., a Delaware corporation ("NIT").
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 parties intend that NetSource will
- ---------
merge with and into NIT (the "Merger"), whereby all of the outstanding shares of
common stock of NetSource ("NetSource Common Stock") will be converted into
shares of common stock of NIT ("NIT Common Stock"), and all outstanding options
to purchase NetSource Common Stock will be exchanged for options to purchase NIT
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, prior to the closing of the Merger, Transphere International,
Inc., a California corporation ("Transphere International"), Transphere
Interactive, Inc., a California corporation ("Transphere Interactive") intend to
merge into NetSource, such that Netsource shall have acquired all of the assets
and assumed all of the liabilities of each of Transphere International and
Transphere Interactive (the "Transphere Mergers").
WHEREAS, prior to the closing, the holders of securities in and rights
of MTC Telemanagement Corporation, a California corporation ("MTC
Telemanagement") that are, directly or indirectly, convertible into or
exchangeable or exercisable for MTC Telemangement securities (collectively, the
"MTC Telemangement Securities"), and the holders of securities in and rights of
MTC International, Inc., a Nevada corporation ("MTC International") that are,
directly or indirectly, convertible into or exchangeable or exercisable for MTC
International securities (collectively, the "MTC International Securities"),
shall have exchanged their MTC Telemanagement Securities and MTC International
Securities for NIT Common Stock or securities in and rights of NIT that are,
directly or indirectly, convertible into or exchangeable or exercisable for NIT
Common Stock (the "MTC Exchanges")
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
<PAGE>
1.4 "Dissenting Shares" shall mean those shares held by holders
who perfect their appraisal rights under the laws of Delaware and, to the extent
applicable, California with respect thereto.
1.5 "Key Employees" shall mean Charles Schoenhoeft and Edward
Brinskele.
1.6 "MTC Exchanges" shall have the meaning set forth in the
Recitals.
1.7 "NetSource Common Stock" shall mean shares of Common Stock
of NetSource.
1.8 "NetSource Products/Services" shall mean all versions and
implementations of any product which has been or is being marketed by NetSource,
Transphere International or Transphere Interactive or currently is under
development and all services which have been or are being marketed by NetSource,
Transphere International or Transphere Interactive 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.
1.9 "NetSource Shares" shall mean the shares of NetSource capital
stock issued and outstanding at the effective time of the Merger, other than the
Dissenting Shares.
1.10 "NIT Common Stock" shall mean shares of Common Stock of
NIT.
1.11 "NIT Products/Services" shall mean all versions and
implementations of any product which has been or is being marketed by NIT, MTC
Telemanagement or MTC International or currently is under development and all
services which have been or are being marketed by NIT, MTC Telemanagement or MTC
International 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.
1.12 "Securities" shall mean the NetSource Shares, Dissenting
Shares and the NetSource Options.
1.13 "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.
1.14 "Stockholders" shall mean the holders of the outstanding
shares of NetSource Shares.
1.15 "Transaction Documents" shall mean all documents or
agreements attached as an exhibit or schedule hereto, and set forth on the Table
of Contents.
1.16 "Transphere Mergers" shall have the meaning set forth in
the Recitals.
2. Plan of Reorganization.
----------------------
2.1 The Merger. Subject to the terms and conditions of this
----------
Agreement and the Certificate of Merger, NetSource shall be merged with and into
NIT in accordance with the applicable provisions of the laws of 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 (as defined in Section 2.7 below),
NetSource shall be merged with and into NIT. As a result of the Merger, the
separate corporate existence of NetSource shall cease and NIT 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 NIT in accordance with the laws of Delaware.
2
<PAGE>
(b) The Certificate of Incorporation and Bylaws of NIT 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 NIT 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 and Substitution of Options.
------------------------------------------------
(a) Each share of NetSource 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 into 0.0154534 share of fully paid and
nonassessable of NIT Common Stock (the "Exchange Ratio"). The shares of NIT
Common Stock issued pursuant hereto shall also be referred to as the "Merger
Consideration".
(b) Each option to purchase shares of NetSource Common Stock
("NetSource Option") that is 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 assumed by NIT and converted into
an option (a "NIT Option") to purchase that number of shares of NIT Common Stock
determined by multiplying the number of shares of NetSource Common Stock
issuable upon exercise of such option by the Exchange Ratio (with the resulting
number of shares of NIT Common Stock rounded down to the nearest whole number).
The exercise price per share of NIT Common Stock purchasable under each such NIT
Option will be equal to the exercise price of the NetSource Option (per share of
NetSource Common Stock) divided by the Exchange Ratio (with the resulting amount
rounded up to the nearest whole cent). Continuous employment with NetSource,
whether occurring before or after the Effective Time, shall be credited to an
optionee for purposes of determining the number of shares subject to exercise,
vesting or repurchase after the Effective Time. It is the intention of the
parties that the assumption of NetSource Options shall meet the requirements of
Section 424(a) of the Code and that, therefore, the NetSource Options assumed by
NIT qualify following the Effective Time as incentive stock options as defined
in Section 422 of the Code ("incentive stock options") to the extent the
NetSource Options qualified as incentive stock options prior to the Effective
Time. After the Effective Time, NIT shall issue to each holder of an outstanding
NetSource Option a document evidencing the foregoing assumption by NIT. No
fractional shares of NIT Common Stock shall be issued in connection with
options. All fractional shares which would otherwise be issuable shall be
rounded down to the next full share. All of the other terms of each NIT Option
will remain the same as the corresponding assumed NetSource Option.
2.3 Fractional Shares. No fractional shares of NIT Common Stock
-----------------
will be issued in connection with the Merger, but in lieu thereof, holders of
NetSource Common Stock who would otherwise be entitled to receive a fraction of
a share of NIT Common Stock will receive from NIT, promptly after the Effective
Time, an agreed upon amount of cash equal to Eighty Dollars and Thirty Seven
Cents ($80.37) per share of NIT Common Stock, multiplied by the fraction of a
share of NIT 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 NIT Common Stock issued to
the holders of NetSource Common Stock in the Merger shall be deposited in
escrow, on a pro rata basis; and upon each exercise of the NIT Options that are
issued to holders of NetSource Options in the Merger, if such occurs between the
Effective Time and on or before the final escrow release date, NIT will deposit
in escrow ten percent (10%) of the shares of NIT Common Stock issuable upon such
exercise. The shares placed in the escrow pursuant to this Section 2.4 (the
"NetSource Escrow Shares") shall be held as collateral for the indemnification
obligations of NetSource under Section 11 and pursuant to the provisions of an
escrow agreement (the "Escrow
3
<PAGE>
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 Appraisal Rights. If holders of NetSource Common Stock are
----------------
entitled to appraisal rights in connection with the Merger, any Dissenting
Shares shall not be converted into a right to receive NIT Common Stock but shall
be converted into the right to receive such consideration as may be determined
to be due with respect to such Dissenting Shares pursuant to the laws of the
State of Delaware or, if applicable, the State of California. NetSource shall
give NIT prompt notice of any demand received by NetSource for appraisal of
NetSource capital stock, and the Representatives, as such term is defined in
Section herein, shall have the right to control all negotiations and
proceedings with respect to such demand, provided that NIT shall have the right
to participate in all such negotiations and proceedings. NetSource agrees that,
except with the prior written consent of NIT or as required under the Delaware
General Corporation Law (the "DGCL") or, if applicable, the General Corporation
Law of the State of California (the "CGCL"), it will not voluntarily make any
payment with respect to, or settle or offer to settle, any such demand for
appraisal. Each holder of Dissenting Shares ("Dissenting Stockholder") who,
pursuant to the provisions of the DGCL or, if applicable, the CGCL, becomes
entitled to payment of the value of shares of NetSource Common Stock shall
receive payment therefor (but only after the value therefor shall have been
agreed upon or finally determined pursuant to such provisions). In the event of
legal obligation, after the Effective Time of the Merger, to deliver a right to
receive NIT Common Stock to a holder of shares of NetSource capital stock who
shall have failed to make an effective demand for appraisal or shall have lost
his status as a Dissenting Stockholder, NIT shall deliver, upon surrender by
such Dissenting Stockholder of his certificate or certificates representing
shares of NetSource Common Stock, as applicable, the NIT Common Stock to which
such Dissenting Stockholder is then entitled under this Section and the
Certificate of Merger.
2.6 The Closing. Subject to termination of this Agreement as
-----------
provided in Section 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
and Section hereof (the "Closing Date"), or such other time and place as is
mutually agreeable to the parties.
2.7 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."
2.8 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 NIT Common
Stock issued in the Merger will be issued solely in exchange for the NetSource
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 NetSource 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 NIT for the NetSource Common Stock. In addition, NIT represents
now, and as of the Closing Date, that it presently intends to continue
NetSource's historic business or use a significant portion of NetSource's
business assets in a business.
2.9 Exemption from Registration; California Permit. The parties
----------------------------------------------
hereto expect that the NIT Common Stock to be issued in connection with the
Merger will be issued in a transaction exempt from registration under the
Securities Act, by reason of Section 3(a)(10) thereof, and that the NIT Common
Stock and NIT's assumption of the NetSource Options hereunder will be qualified
under the CGCL, pursuant to Section 25121 thereof, after a fairness hearing has
been held pursuant to the authority granted by Section 25142 of such law.
4
<PAGE>
3. Representations and Warranties of NetSource. Except as otherwise
-------------------------------------------
set forth in the "NetSource Disclosure Schedule" provided to NIT on the date
hereof, NetSource represents and warrants to NIT as set forth below. No fact or
circumstance disclosed to NIT shall constitute an exception to these
representations and warranties unless such fact or circumstance is set forth in
the NetSource Disclosure Schedule or such supplements thereto as may mutually be
agreed upon in writing by NetSource and NIT. NetSource, Transphere
International and Transphere Interactive are referred to herein collectively as
the "NetSource Entities".
3.1 Organization. Each of the NetSource 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
NetSource 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 NetSource Entities
considered as a whole. The NetSource Disclosure Schedule contains a true and
complete listing of the locations of all sales offices, manufacturing
facilities, and any other offices or facilities of the NetSource Entities and a
true and complete list of all states in which NetSource Entities maintain any
employees. The NetSource Entities Disclosure Schedule contains a true and
complete list of all states in which the each of the NetSource Entities is duly
qualified to transact business as a foreign corporation. True and complete
copies of each of the NetSource 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 NIT or its representatives.
3.2 Capitalization.
--------------
(a) The authorized capital of NetSource will consist, prior
to the Closing but after the Transphere Mergers, of 20,000,000 shares of common
stock, of which 18,437,000 shares will be issued and outstanding.
(b) The NetSource Disclosure Schedule accurately describes
the vesting schedules associated with such NetSource Common Stock and each of
the NetSource Options.
(c) Except as set forth in the NetSource Disclosure Schedule,
NetSource 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 NetSource capital stock or
other securities.
(d) All of the issued and outstanding shares of NetSource
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 NetSource, have been issued in full compliance with all
applicable federal and state securities laws. None of NetSource's issued and
outstanding shares of capital stock, or options or rights to purchase capital
stock of NetSource, is subject to repurchase or redemption rights. All of
NetSource's options have been issued in accordance with its current stock option
plan and in accordance with all state securities laws.
(e) 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 NetSource's capital
stock.
(f) NetSource 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.
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(g) NetSource is not a party or subject to any agreement or
understanding (and, to NetSource'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.
3.3 Power, Authority and Validity.
-----------------------------
(a) NetSource 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 NetSource and on the Closing Date, by the stockholders of
NetSource and no other corporate proceedings on the part of NetSource are
necessary to authorize this Agreement, the other Transaction Documents and the
transactions contemplated herein and therein. NetSource 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 Certificate of Merger with the Secretary of
State of the State of Delaware and appropriate documents with the relevant
authorities of other states in which NetSource 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 NetSource's business, nor consent of
any governmental authority, is required to be obtained on the part of the
NetSource Entities to permit the transactions contemplated herein and to permit
NetSource to continue the business activities of each of the NetSource Entities
as previously conducted by each of the NetSource Entities without a Material
Adverse Effect. This Agreement is, and the other Transaction Documents when
executed and delivered by NetSource shall be, the valid and binding obligations
of NetSource, enforceable in accordance with their respective terms.
(b) The assumption by NIT of the NetSource Options in
accordance with Section will not (i) give the optionees additional benefits
which they did not have under their options prior to such assumption (after
taking into account the existing provisions of the options, such as their
respective exercise prices and vesting schedules) or (ii) constitute a breach of
the NetSource stock option plans or any agreement entered into pursuant to such
plans.
3.4 Financial Statements.
--------------------
(a) Each of the NetSource Entities has delivered to NIT
copies of each of the NetSource Entities' unaudited balance sheet as of March
31, 1996, and statements of operations, stockholders' equity and cash flow for
the three 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 month period then ended (collectively, the "NetSource Financial
Statements").
(b) The NetSource Financial Statements are complete and in
accordance with the books and records of each of the NetSource Entities and
present fairly the financial position of each of the NetSource Entities as of
their historical dates. The NetSource 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), each of the NetSource Entities 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 NetSource Financial Statements are adequate in light of the
contingencies with respect to which they are made.
(c) Each of the NetSource Entities 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 NetSource Financial Statements, except for those (i) that may have
6
<PAGE>
been incurred after the date of the NetSource Financial Statements or (ii) that
are not required by GAAP to be included in a balance sheet or the notes thereto,
except that each of the NetSource Entities 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
NetSource 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) Each of the NetSource Entities 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 each of the
NetSource Entities 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 NetSource Financial Statements are
adequate and there are no tax liens on any property or assets of each of the
NetSource Entities. 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 each of the NetSource Entities 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) Each of the NetSource Entities is not a party to any tax-
sharing agreement or similar arrangement with any other party.
(d) At no time have any of the NetSource Entities been
included in the federal consolidated income tax return of any affiliated group
of corporations.
(e) No payment which any of the NetSource Entities 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) Each of the NetSource Entities 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 NetSource nor, to its actual knowledge, any
NetSource 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 any of the NetSource Entities,
there is no plan or intention by any NetSource stockholder to sell, exchange or
otherwise dispose of more than fifty percent (50%) of the shares of NIT Common
Stock to be received in the Merger.
7
<PAGE>
(c) NetSource 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 March 31, 1996,
------------------------------------
each of the NetSource Entities 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 NetSource 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 each of the NetSource Entities;
(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 except for
the issuance of its pursuant to the exercise of outstanding options;
(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;
8
<PAGE>
(m) made any capital expenditure or commitment for additions
to property, plant or equipment individually in excess of Twenty Thousand
Dollars ($20,000), or in the aggregate, in excess of Fifty Thousand Dollars
($50,000);
(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
NetSource Disclosure Schedule; or
(p) agreed to take any action described in Sections 2.8, 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. Each of the NetSource Entities has
-------------------------
good and marketable title to all the properties, interests in properties and
assets, real and personal, reflected in the NetSource Financial Statements or
acquired after the date of the NetSource Financial Statements (except
properties, interests in properties and assets sold or otherwise disposed of
since the date of the NetSource 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 Twenty Five Thousand Dollars ($25,000) in liabilities. The equipment of
each of the NetSource Entities used in the operation of its business is in good
operating condition and repair. All real or personal property leases to which
each of the NetSource Entities is a party are valid, binding, enforceable
obligations of each of the NetSource Entities 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 NetSource Disclosure Schedule
contains a description of all real and personal property leased or owned by each
of the NetSource Entities, 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 the NetSource Entities' leases have been
provided to NIT or its representatives.
3.9 Proprietary Rights.
------------------
(a) Each of the NetSource Entities 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 each of the NetSource Entities' 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 NetSource Products/Services, free and clear
of all liens, claims and encumbrances (including without limitation distribution
rights) (all of which are referred to as "NetSource Proprietary Rights") and
NetSource has the right to transfer all such rights to NIT as contemplated
hereby. The foregoing representation as it relates to NetSource Third Party
Technology (as hereinafter defined) is limited to each of the NetSource
Entities' interest pursuant to the NetSource Third Party Licenses (as
hereinafter defined), all of which are valid and enforceable and in full force
and effect and which grant each of the NetSource Entities such rights to the
NetSource Third Party Technology as are employed in or necessary to the business
of each of the NetSource Entities as conducted or proposed to be conducted. The
NetSource 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 NetSource 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
"NetSource Third Party Licenses") relating to any software, inventions,
technology, know-how, or processes that any of the NetSource Entities is
licensed or otherwise authorized by such third parties to use, market,
distribute or incorporate into products distributed by each of the NetSource
Entities (such software, inventions,
9
<PAGE>
technology, know-how and processes are collectively referred to as the
"NetSource Third Party Technology"). Each of the NetSource Entities' trademark
or trade name registrations related to the NetSource Products/Services and all
of each of the NetSource Entities' copyrights in any of the NetSource
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 any of the NetSource Entities (and each of
the NetSource Entities 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 each of the NetSource Entities's use, possession, manufacture, sale,
provision or distribution of the NetSource Products/Services under any patents,
trademarks, trade names, copyrights, trade secrets, software, technology, know-
how or processes utilized by each of the NetSource Entities (including, without
limitation, the NetSource Third Party Technology) or challenging or questioning
the validity or effectiveness of any license or agreement relating thereto
(including, without limitation, the NetSource 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 each of the
NetSource Entities of any of the NetSource Products/Services. None of the
NetSource Products/Services nor the use or exploitation of any patents,
trademarks, trade names, copyrights, software, technology, know-how or processes
by each of the NetSource Entities 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 each of the NetSource Entities' 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 each of the NetSource
Entities' actual knowledge, any other party because of the nature of the
business conducted by each of the NetSource Entities or proposed to be conducted
by the NetSource Entities.
(c) Each person presently or previously employed by each of
the NetSource Entities (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 NIT or its
representatives. Such confidentiality and non-disclosure agreements constitute
valid and binding obligations of each of the NetSource Entities and such person,
enforceable in accordance with their respective terms. To each of the NetSource
Entities' actual knowledge, neither the execution or delivery of such
agreements, nor the carrying on of their business as employees 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 Twenty Thousand Dollars ($20,000)
individually or Fifty Thousand ($50,000) in the aggregate have been communicated
to or threatened against the NetSource Entities nor, to the NetSource Entities'
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 each of the NetSource
Entities. 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 each of the NetSource
Entities conforms to all applicable requirements of the Employees Retirement
Income Security Act of 1974. The NetSource 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.
10
<PAGE>
3.11 Bank Accounts. The NetSource Disclosure Schedule sets forth
-------------
the names and locations of all banks, trusts, companies, savings and loan
associations, and other financial institutions at which each of the NetSource
Entities maintains accounts of any nature and the names of all persons
authorized to draw thereon or make withdrawals therefrom.
3.12 Contracts.
---------
(a) Each of the NetSource Entities 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) Each of the NetSource Entities has no agreements,
contracts or commitments that call for fixed and/or contingent payments or
expenditures by or to that entity of more than Twenty Thousand Dollars
($20,000).
(c) Without limiting the provisions of Section 3.9 and except
for any agreements with NIT, each of the NetSource Entities has not granted to
any third party any exclusive rights of any kind with respect to any of the
NetSource Products/Services, including, without limitation, territorial
exclusivity or exclusivity with respect to particular versions, implementations
or translations of any of the NetSource Products/Services.
(d) There is no outstanding sales contract, commitment or
proposal of any of the NetSource Entities 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) Each of the NetSource Entities 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) Each of the NetSource Entities 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) Each of the NetSource Entities has no currently effective
collective bargaining or union agreements, contracts or commitments.
(h) Each of the NetSource Entities is not restricted by
agreement from competing with any person or from carrying on its business
anywhere in the world.
(i) Each of the NetSource Entities has not guaranteed any
obligations of other persons or made any agreements to acquire or guarantee any
obligations of other persons.
(j) Each of the NetSource Entities 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 NetSource
Financial Statements.
(k) All material contracts, agreements and instruments to
which each of the NetSource Entities is a party are valid, binding, in full
force and effect, and enforceable by each of the NetSource Entities in
accordance with their respective terms. No such material contract, agreement or
instrument contains any material liquidated-damages, penalty or similar
provision. Each of the NetSource Entities has not received any notice from any
party to any such material contract, agreement or
11
<PAGE>
instrument that such party intends to cancel, withdraw, modify or amend such
contract, agreement or arrangement.
(l) The NetSource Disclosure Schedule lists all material
agreements pursuant to which each of the NetSource Entities has agreed to supply
to any third party NetSource Products/Services.
(m) Each of the NetSource Entities 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 the NetSource Entities. To each of the NetSource Entities' 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 each of the NetSource Entities 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 the NetSource Entities.
(n) All agreements, contracts and commitments (the "Material
Contracts") listed or described in the NetSource Disclosure Schedule pursuant to
this Section 3.12 are assumable, or will otherwise be the property of, the
Surviving Corporation following the Merger without further action by the
Surviving Corporation or NIT. If any of the Material Contracts are not assumable
by or will not be the property of, the Surviving Corporation following the
Merger, then NetSource has described in the NetSource Disclosure Schedule such
actions as is necessary for assumption of the Material Contract by the Surviving
Corporation.
(o) True and correct copies of each document or instrument
described in the NetSource Disclosure Schedule pursuant to this Section 3.12
have been made available to NIT or its representatives.
3.13 Insider Transactions. No Affiliate of each of the NetSource
--------------------
Entities 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
each of the NetSource Entities, or (ii) any creditor, supplier, customer, agent
or representative of each of the NetSource Entities; 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 NetSource Disclosure Schedule contains a list
---------
of the principal policies of fire, liability and other forms of insurance held
by each of the NetSource Entities.
3.15 Litigation. There are no suits, actions or proceedings
----------
pending or, to each of the NetSource Entities' actual knowledge, threatened
against or affecting the NetSource Entities 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 any of the NetSource Entities.
3.16 Permit Application; Information Statement. The information
-----------------------------------------
supplied by each of the NetSource Entities and which is included in the
application for issuance of a permit (the "Permit Application") pursuant to
Section 25121 of the California Corporate Securities Act of 1968, as amended
(the "California Law"), shall not, at the time the fairness hearing is held
pursuant to Section 25142 of the California Law and at the time the
qualification of such securities is effective under such Section 25122 of the
California Law, contain any untrue statement of a material fact or omit to state
any material fact
12
<PAGE>
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The information supplied by each of the NetSource Entities for
inclusion in the information statement (the "Information Statement") to be sent
to the stockholders of NetSource in connection with the meeting of NetSource's
stockholders to consider this Agreement and the Merger (the "NetSource Common
Stockholders' Meeting") shall not, on the date the Information Statement is
first mailed to stockholders of NetSource, at the time of the NetSource Common
Stockholders' Meeting and at the Effective Time, contain any statement which, at
such time and in light of the circumstances under which it was made, is false or
misleading with respect to any material fact, or omit to state any material fact
necessary in order to make the statements made in the Information Statement not
false or misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of
proxies for the NetSource Common Stockholders' Meetings which has become false
or misleading. If at any time prior to the Effective Time any event relating to
the NetSource Entities or any of their Affiliates, officers or directors should
be discovered by the NetSource Entities which should be set forth in an
amendment to the Permit Application or a supplement to the Information
Statement, the NetSource Entities shall promptly inform NIT thereof.
3.17 Governmental Authorizations and Regulations. All licenses,
-------------------------------------------
franchises, permits and other governmental authorizations held by each of the
NetSource Entities and material to its business are valid and sufficient for the
business presently carried on by each of the NetSource Entities. The business
of each of the NetSource Entities 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 the NetSource Entities.
3.18 Subsidiaries. Each of the NetSource Entities has no
------------
subsidiaries. Each of the NetSource Entities 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 each of the NetSource Entities 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 each of
the NetSource Entities, no underground storage tanks are present under any
property that any of the NetSource Entities has at any time owned, operated,
occupied or leased. As of the date hereof except as set forth in the NetSource
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 the NetSource Entities or, to each of the NetSource Entities' 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 the NetSource Entities have at any time owned, operated,
occupied or leased.
(b) At no time has any of the NetSource Entities 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 any of the NetSource Entities 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
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promulgated by any governmental entity to prohibit, regulate or control
Hazardous Materials or any Hazardous Material Activities.
(c) Each of the NetSource Entities 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 the NetSource Entities.
(d) No action, proceeding, revocation proceeding, amendment
procedure, writ, injunction or claim is pending or, to the actual knowledge of
each of the NetSource Entities, threatened concerning any Environmental Permit.
Each of the NetSource Entities 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 the NetSource Entities .
3.20 Corporate Documents. Each of the NetSource Entities has
-------------------
furnished to NIT for its examination: (i) copies of its Certificate or 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 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 each of the
NetSource 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.
3.21 No Brokers. None of the NetSource 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 Certificate of Merger or in connection with any transaction contemplated
hereby or thereby.
3.22 Disclosure. No statements by NetSource contained in this
----------
Agreement and the Exhibits and NetSource 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 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 NIT. Except as otherwise set
-------------------------------------
forth in the "NIT Disclosure Schedule" provided to NIT on the date hereof, NIT
represents and warrants to NetSource as set forth below. No fact or
circumstance disclosed to NIT shall constitute an exception to these
representations and warranties unless such fact or circumstance is set forth in
the NIT Disclosure Schedule or such supplements thereto as may mutually be
agreed upon in writing by NIT and NetSource. NIT, MTC Telemanagement and MTC
International are referred to herein collectively as the "NIT Entities."
4.1 Organization. Each of the NIT 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 NIT 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 NIT Entities considered as a whole. The NIT
Disclosure Schedule contains a true and complete listing of the locations of all
sales offices, manufacturing facilities, and any
14
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other offices or facilities of the NIT Entities and a true and complete list of
all states in which NIT Entities maintain any employees. The NIT Entities
Disclosure Schedule contains a true and complete list of all states in which the
each of the NIT Entities is duly qualified to transact business as a foreign
corporation. True and complete copies of each of the NIT 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 NIT or its representatives.
4.2 Capitalization.
--------------
(a) The authorized capital of NIT will consist, prior to the Closing
but after the MTC Exchanges, of 2,200,000 shares of common stock, of which
780,290 shares will be issued and outstanding.
(b) The NIT Disclosure Schedule accurately describes the vesting
schedules associated with such NIT Common Stock and each of the NIT Options.
(c) Except as set forth in the NIT Disclosure Schedule, NIT 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 NIT capital stock or other securities.
(d) All of the issued and outstanding shares of NIT 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 NIT,
have been issued in full compliance with all applicable federal and state
securities laws. None of NIT's issued and outstanding shares of capital stock,
or options or rights to purchase capital stock of NIT, is subject to repurchase
or redemption rights. All of NIT's options have been issued in accordance with
its current stock option plan and in accordance with all state securities laws.
(e) 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 NIT's capital stock.
(f) NIT 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.
(g) NIT is not a party or subject to any agreement or understanding
(and, to NIT'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.
4.3 Power, Authority and Validity. NIT 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 NIT and on the Closing Date, by the
stockholders of NIT and no other corporate proceedings on the part of NIT is
necessary to authorize this Agreement, the other Transaction Documents and the
transactions contemplated herein and therein. NIT 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 Certificate of Merger with the Secretary of
State of the State of Delaware and appropriate documents with the relevant
authorities of other states in which NIT 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 NIT's business, nor consent of any
governmental authority, is required to be obtained on the part of each of the
NIT Entities to permit the transactions contemplated herein and to
15
<PAGE>
permit NIT to continue the business activities of each of the NIT Entities as
previously conducted by each of the NIT Entities without a Material Adverse
Effect. This Agreement is, and the other Transaction Documents when executed and
delivered by NIT shall be, the valid and binding obligations of NIT, enforceable
in accordance with their respective terms.
4.4 Financial Statements.
--------------------
(a) Each of the NIT Entities has delivered to NIT copies of each of
the NIT Entities' unaudited balance sheet as of March 31, 1996, and statements
of operations, stockholders' equity and cash flow for the three 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
month period then ended (collectively, the "NIT Financial Statements").
(b) The NIT Financial Statements are complete and in accordance with
the books and records of each of the NIT Entities and present fairly the
financial position of each of the NIT Entities as of their historical dates.
The NIT 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), each of the NIT Entities 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 NIT Financial Statements are adequate in light of the contingencies with
respect to which they are made.
(c) Each of the NIT Entities 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 NIT Financial
Statements, except for those (i) that may have been incurred after the date of
the NIT Financial Statements or (ii) that are not required by GAAP to be
included in a balance sheet or the notes thereto, except that each of the NIT
Entities 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 NIT Financial Statements were
incurred in the ordinary course of business, and are usual and normal in amount
both individually and in the aggregate.
4.5 Tax Matters.
-----------
(a) Each of the NIT Entities 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 each of the NIT Entities 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 NIT Financial Statements are adequate and there are no tax
liens on any property or assets of each of the NIT Entities. 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 each of the NIT Entities 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.
16
<PAGE>
(c) Each of the NIT Entities is not a party to any tax-sharing
agreement or similar arrangement with any other party.
(d) At no time prior to the MTC Exchanges has any of the NIT Entities
been included in the federal consolidated income tax return of any affiliated
group of corporations.
(e) No payment which any of the NIT Entities 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) Each of the NIT Entities 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.
4.6 Tax Free Reorganization.
-----------------------
(a) Neither NIT nor, to its actual knowledge, any NIT 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) NIT is not an investment company as defined in Sections
368(a)(2)(F)(iii) and (iv) of the Code.
4.7 Absence of Certain Changes or Events. Since March 31,
------------------------------------
1996, each of the NIT Entities 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 NIT 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
each of the NIT Entities;
(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 except for the
issuance of its pursuant to the exercise of outstanding options;
(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;
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<PAGE>
(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;
(m) made any capital expenditure or commitment for additions to
property, plant or equipment individually in excess of Fifty Thousand Dollars
($50,000);
(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 NIT Disclosure
Schedule; or
(p) agreed to take any action described in Sections 4.6 or 4.7 or
outside of its ordinary course of business or which would constitute a breach of
any of the representations contained in this Agreement.
4.8 Title and Related Matters. Each of the NIT Entities has good and
-------------------------
marketable title to all the properties, interests in properties and assets, real
and personal, reflected in the NIT Financial Statements or acquired after the
date of the NIT Financial Statements (except properties, interests in properties
and assets sold or otherwise disposed of since the date of the NIT 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 Fifty Thousand Dollars ($50,000) in
liabilities. The equipment of each of the NIT Entities used in the operation of
its business is in good operating condition and repair. All real or personal
property leases to which each of the NIT Entities is a party are valid, binding,
enforceable obligations of each of the NIT Entities 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 NIT Disclosure Schedule
contains a description of all real and personal property leased or owned by each
of the NIT Entities, 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 the NIT Entities' leases have been provided
to NIT or its representatives.
4.9 Proprietary Rights.
------------------
(a) Each of the NIT Entities owns all right, title and interest in and
to, or valid licenses for use of, all patents, copyrights, technology, software,
software tools, know-how,
18
<PAGE>
processes, trade secrets, trademarks, service marks, trade names and other
proprietary rights used in or necessary for the conduct of each of the NIT
Entities' 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 NIT Products/Services,
free and clear of all liens, claims and encumbrances (including without
limitation distribution rights) (all of which are referred to as "NIT
Proprietary Rights") and NIT has the right to transfer all such rights to NIT as
contemplated hereby. The foregoing representation as it relates to NIT Third
Party Technology (as hereinafter defined) is limited to each of the NIT
Entities' interest pursuant to the NIT Third Party Licenses (as hereinafter
defined), all of which are valid and enforceable and in full force and effect
and which grant each of the NIT Entities such rights to the NIT Third Party
Technology as are employed in or necessary to the business of each of the NIT
Entities as conducted or proposed to be conducted. The NIT 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 NIT 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 "NIT Third Party Licenses") relating to any
software, inventions, technology, know-how, or processes that any of the NIT
Entities is licensed or otherwise authorized by such third parties to use,
market, distribute or incorporate into products distributed by each of the NIT
Entities (such software, inventions, technology, know-how and processes are
collectively referred to as the "NIT Third Party Technology"). Each of the NIT
Entities' trademark or trade name registrations related to the NIT
Products/Services and all of each of the NIT Entities' copyrights in any of the
NIT 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 any of the NIT Entities (and each
of the NIT Entities 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
each of the NIT Entities's use, possession, manufacture, sale, provision or
distribution of the NIT Products/Services under any patents, trademarks, trade
names, copyrights, trade secrets, software, technology, know-how or processes
utilized by each of the NIT Entities (including, without limitation, the NIT
Third Party Technology) or challenging or questioning the validity or
effectiveness of any license or agreement relating thereto (including, without
limitation, the NIT 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 each of the NIT Entities of any of the NIT
Products/Services. None of the NIT Products/Services nor the use or exploitation
of any patents, trademarks, trade names, copyrights, software, technology, know-
how or processes by each of the NIT Entities 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 each of the NIT Entities' 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 each of the NIT Entities' actual
knowledge, any other party because of the nature of the business conducted by
each of the NIT Entities or proposed to be conducted by the NIT Entities.
(c) Each person presently or previously employed by each of the NIT
Entities (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 NIT or its representatives.
Such confidentiality and non-disclosure agreements constitute valid and binding
obligations of each of the NIT Entities and such person, enforceable in
accordance with their respective terms. To each of the NIT Entities' actual
knowledge, neither the execution or delivery of such agreements, nor the
carrying on of their business as employees 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
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<PAGE>
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 exceed Fifty Thousand Dollars ($50,000) or in the aggregate exceed
Two Hundred Fifty Thousand Dollars ($250,000) have been communicated to or
threatened against the NIT Entities nor, to the NIT Entities' actual knowledge,
is there any specific situation, set of facts or occurrence that provides a
basis for such claim.
4.10 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 each of the NIT
Entities. 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 each of the NIT
Entities conforms to all applicable requirements of the Employees Retirement
Income Security Act of 1974. The NIT 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.
4.11 Bank Accounts. The NIT Disclosure Schedule sets forth the names
-------------
and locations of all banks, trusts, companies, savings and loan associations,
and other financial institutions at which each of the NIT Entities maintains
accounts of any nature and the names of all persons authorized to draw thereon
or make withdrawals therefrom.
4.12 Contracts.
---------
(a) Each of the NIT Entities 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) Each of the NIT Entities has no agreements, contracts or
commitments that call for fixed and/or contingent payments or expenditures by or
to that entity of more than Fifty Thousand Dollars ($50,000).
(c) Without limiting the provisions of Section 4.9 and except for any
agreements with NIT, each of the NIT Entities has not granted to any third party
any exclusive rights of any kind with respect to any of the NIT
Products/Services, including, without limitation, territorial exclusivity or
exclusivity with respect to particular versions, implementations or translations
of any of the NIT Products/Services.
(d) There is no outstanding sales contract, commitment or proposal of
any of the NIT Entities 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) Each of the NIT Entities 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) Each of the NIT Entities 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) Each of the NIT Entities has no currently effective collective
bargaining or union agreements, contracts or commitments.
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(h) Each of the NIT Entities is not restricted by agreement from
competing with any person or from carrying on its business anywhere in the
world.
(i) Each of the NIT Entities has not guaranteed any obligations of
other persons or made any agreements to acquire or guarantee any obligations of
other persons.
(j) Each of the NIT Entities 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 NIT Financial
Statements.
(k) All material contracts, agreements and instruments to which each
of the NIT Entities is a party are valid, binding, in full force and effect, and
enforceable by each of the NIT Entities in accordance with their respective
terms. No such material contract, agreement or instrument contains any material
liquidated-damages, penalty or similar provision. Each of the NIT Entities 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 NIT Disclosure Schedule lists all material agreements
pursuant to which each of the NIT Entities has agreed to supply to any third
party NIT Products/Services.
(m) Each of the NIT Entities 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 the NIT Entities. To each of the NIT Entities' 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 each of the NIT Entities 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 the NIT Entities.
(n) True and correct copies of each document or instrument described
in the NIT Disclosure Schedule pursuant to this Section 4.12 have been made
available to NetSource or its representatives.
4.13 Insider Transactions. No Affiliate of each of the NIT Entities
--------------------
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
each of the NIT Entities, or (ii) any creditor, supplier, customer, agent or
representative of each of the NIT Entities; 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.
4.14 Insurance. The NIT Disclosure Schedule contains a list of the
---------
principal policies of fire, liability and other forms of insurance held by each
of the NIT Entities.
4.15 Litigation. There are no suits, actions or proceedings pending
----------
or, to each of the NIT Entities' actual knowledge, threatened against or
affecting the NIT Entities 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 any of the NIT Entities.
21
<PAGE>
4.16 Permit Application; Information Statement. The information
-----------------------------------------
supplied by each of the NIT Entities and which is included in the application
for issuance of a permit (the "Permit Application") pursuant to Section 25121 of
the California Corporate Securities Act of 1968, as amended (the "California
Law"), shall not, at the time the fairness hearing is held pursuant to Section
25142 of the California Law and at the time the qualification of such securities
is effective under such Section 25122 of the California Law, 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, in light of
the circumstances under which they were made, not misleading. The information
supplied by each of the NIT Entities for inclusion in the information statement
(the "Information Statement") to be sent to the stockholders of NIT in
connection with the meeting of NIT's stockholders to consider this Agreement and
the Merger (the "NIT Common Stockholders' Meeting") shall not, on the date the
Information Statement is first mailed to stockholders of NIT, at the time of the
NIT Common Stockholders' Meeting and at the Effective Time, contain any
statement which, at such time and in light of the circumstances under which it
was made, is false or misleading with respect to any material fact, or omit to
state any material fact necessary in order to make the statements made in the
Information Statement not false or misleading; or omit to state any material
fact necessary to correct any statement in any earlier communication with
respect to the solicitation of proxies for the NIT Common Stockholders' Meetings
which has become false or misleading. If at any time prior to the Effective Time
any event relating to the NIT Entities or any of their Affiliates, officers or
directors should be discovered by the NIT Entities which should be set forth in
an amendment to the Permit Application or a supplement to the Information
Statement, the NIT Entities shall promptly inform NIT thereof.
4.17 Governmental Authorizations and Regulations. All licenses,
-------------------------------------------
franchises, permits and other governmental authorizations held by each of the
NIT Entities and material to its business are valid and sufficient for the
business presently carried on by each of the NIT Entities. The business of each
of the NIT Entities 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 the
NIT Entities.
4.18 Subsidiaries. Prior to the MTC Exchanges, each of the NIT
------------
Entities has no subsidiaries. Each of the NIT Entities 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 each of the NIT Entities does not control (directly or
indirectly) the management or policies of any other corporation, partnership,
firm, association or business organization, entity or enterprise.
4.19 Environmental Matters.
---------------------
(a) As of the date hereof, to the actual knowledge of each of the
NIT Entities, no underground storage tanks are present under any property that
any of the NIT Entities has at any time owned, operated, occupied or leased. As
of the date hereof except as set forth in the NIT 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 the NIT Entities or, to
each of the NIT Entities' 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 the NIT Entities have at
any time owned, operated, occupied or leased.
(b) At no time has any of the NIT Entities transported, stored,
used, manufactured, disposed of, released or exposed its employees or others to
Hazardous Materials in
22
<PAGE>
violation of any law in effect on or before the Closing Date, nor has any of the
NIT Entities 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) Each of the NIT Entities 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 the NIT Entities.
(d) No action, proceeding, revocation proceeding, amendment
procedure, writ, injunction or claim is pending or, to the actual knowledge of
each of the NIT Entities, threatened concerning any Environmental Permit. Each
of the NIT Entities 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 the NIT
Entities.
4.20 Corporate Documents. Each of the NIT Entities has furnished to
-------------------
NIT for its examination: (i) copies of its Certificate or 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
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 each of the
NIT 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.
4.21 No Brokers. None of the NIT 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 Certificate of Merger or in connection with any transaction contemplated
hereby or thereby.
4.22 Disclosure. No statements by any of the NIT Entities contained
----------
in this Agreement and the Exhibits and NIT 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 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.
5. Preclosing Covenants of NetSource and NIT.
-----------------------------------------
5.1 Material Consents. NetSource shall exert reasonable, good faith
-----------------
commercial efforts to obtain any and all consents necessary for the assumption
of the Material Contracts by the Surviving Corporation concurrent with the
Merger as described in the NetSource Disclosure Schedule (the "Material
Consents").
5.2 Transphere Mergers and MTC Exchanges.
------------------------------------
(a) On or prior to the Closing, NetSource, Transphere International
and Transphere Interactive shall have completed the Transphere Mergers and
NetSource shall have acquired all of the assets and assumed all of the
liabilities of each of Transphere International and Transphere Interactive.
23
<PAGE>
(b) On or prior to the Closing, NIT, MTC Telemanagement and MTC
International shall have completed the MTC Exchanges such that holders of more
than ninety-five percent (95%) of the outstanding securities of each of MTC
Telemanagement and MTC International shall have exchanged such securities for
NIT Common Stock or securities convertible into or exercisable for NIT Common
Stock.
5.3 Employment Agreements, Other Commitments Terminated.
---------------------------------------------------
(a) Prior to the Closing, all employment agreements to which NetSource
is a party shall be reviewed by NetSource and NIT and, as agreed between them,
either terminated prior to the Closing or assumed by NIT as of the Closing with
such modifications as may be acceptable to NetSource, NIT and the employee party
to such agreement. As of the Closing, any obligation of NetSource to issue
options, stock or warrants to any employee or consultant of NetSource to whom
such options, stock or warrants have been offered or promised shall have been
fulfilled to the mutual satisfaction of NIT and NetSource.
(b) Simultaneously with the execution of this Agreement, the Key
Employees shall each enter into an Employment Agreement with NIT in the form
attached hereto as Exhibit B.
---------
5.4 Voting Agreement and Irrevocable Proxies.
----------------------------------------
(a) NetSource shall use its best efforts, on behalf of NIT and
pursuant to the request of NIT, to cause Charles Schoenhoeft and Jade Wong to
execute and deliver to NIT a voting agreement and irrevocable proxy,
substantially in the form attached hereto as Exhibit C-1, concurrently with the
-----------
execution of this Agreement.
(b) NIT shall use its best efforts, on behalf of NetSource and
pursuant to the request of NetSource, to cause Edward A. Brinskele to execute
and deliver to NetSource a voting agreement and irrevocable proxy, substantially
in the form attached hereto as Exhibit C-2, concurrently with the execution of
-----------
this Agreement.
5.5 Advice of Changes.
-----------------
(a) NetSource will promptly advise NIT in writing (i) of any event
occurring subsequent to the date of this Agreement which would render any
representation or warranty of NetSource 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 NetSource's
business, taken as a whole.
(b) NIT will promptly advise NetSource in writing (i) of any event
occurring subsequent to the date of this Agreement which would render any
representation or warranty of NIT 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 NIT's business,
taken as a whole.
6. Mutual Covenants.
----------------
6.1 Conduct of Business by NetSource. Until the Closing, NetSource
--------------------------------
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
NIT:
(a) borrow any money which borrowings exceed in the aggregate Twenty
Thousand Dollars ($20,000) or incur or commit to incur any capital expenditures
in excess of Fifty Thousand Dollars ($50,000) in the aggregate;
24
<PAGE>
(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 NetSource (including sales or transfers to Affiliates of
NetSource), 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;
(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 NIT 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 Certificate of Incorporation or Bylaws except as
necessary to carry out a Recapitalization Plan;
(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 NetSource;
(n) do anything that would cause there to be material adverse changes
in its Financial Statements (with such Financial Statements analyzed as if it
had been prepared according to GAAP, and including but not limited to cash
distributions or material decreases in the net assets of NetSource), except as
would occur in the ordinary course of NetSource's business, between the date of
the NetSource Financial Statements and the Closing Date; or
(o) agree to do any of the things described in the preceding clauses
Section 6.1(a) through (n).
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<PAGE>
6.2 Stockholders' Tax Representations. NetSource will use its best
---------------------------------
efforts to cause each NetSource stockholder holding at least one percent (1%) of
its shares to execute prior to the Closing a reasonable continuity of interest
representation concerning such stockholder's lack of plan or intention to sell,
exchange or otherwise dispose of shares of NIT Common Stock to be received in
the Merger.
6.3 Conduct of Business by NIT. Until the Closing, NIT 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 NetSource:
(a) borrow any money which borrowings exceed in the aggregate Two
Hundred Fifty Thousand Dollars ($250,000), other than the Yorkton Financing
(defined in Section 8.10 below) or financing secured by accounts receivable
consistent with past practices, or incur or commit to incur any capital
expenditures in excess of Fifty Thousand Dollars ($50,000) in the aggregate;
(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 NIT (including sales or transfers to Affiliates of NIT),
except for the license of its products to customers in the usual and ordinary
course of business;
(c) dispose of any of its assets in excess of $100,000, except
inventory 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;
(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), except for bonus payments to the Chief Operating Officer of NIT that
have been pre-approved by both of the Key Employees;
(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, except for the repurchase of any unvested 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 an existing
or proposed stock option program or pursuant to any recapitalization plan
disclosed to and approved by NetSource in its discretion (a "Recapitalization
Plan");
(k) 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 Certificate of Incorporation or Bylaws except as
necessary to carry out this Merger;
26
<PAGE>
(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 NIT or NetSource;
(n) do anything that would cause there to be material adverse changes
in its Financial Statements (with such Financial Statements analyzed as if it
had been prepared according to GAAP, and including but not limited to cash
distributions or material decreases in the net assets of NIT), except as would
occur in the ordinary course of NIT's business, between the date of the NIT
Financial Statements, and the Closing Date; or
(o) agree to do any of the things described in the preceding clauses
Section 6.3(a) through (n).
6.4 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.
6.5 Other Negotiations. Between the date hereof and the Closing, or
------------------
such earlier date as NIT and NetSource mutually agree to discontinue discussions
of the Merger (the "Expiration Date"), neither NIT nor NetSource 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 NetSource, or any acquisition of any material
portion of the stock or assets. NetSource and NIT agree that any such
negotiations in progress as of the date hereof will be terminated or suspended
during such period.
6.6 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.
6.7 Regulatory Filings; Consents; Reasonable Efforts. Subject to the
------------------------------------------------
terms and conditions of this Agreement, NetSource and NIT 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.
27
<PAGE>
6.8 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 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.
6.9 Preparation of Permit Application/Information Statement.
--------------------------------------------------------
(a) As soon as practicable after the execution of this Agreement,
NetSource and NIT shall each prepare, with the cooperation of the other, a
information statement for the stockholders of NetSource and NIT, respectively,
to approve this Agreement, the Certificate of Merger and the transactions
contemplated hereby and thereby. Such information statements shall be referred
to herein as the "Information Statements." Each of the Information Statements
shall constitute a disclosure document for the offer and issuance of the shares
of NIT Common Stock to be received by the holders of NetSource Common Stock in
the Merger. NIT and NetSource shall each use reasonable commercial efforts to
cause the Information Statements to comply with applicable federal and state
securities laws requirements. Each of NIT and NetSource agrees to provide
promptly to the other such information concerning its business and financial
statements and affairs as, in the reasonable judgment of the providing party or
its counsel, may be required or appropriate for inclusion in the Information
Statements, or in any amendments or supplements thereto, and to cause its
counsel and auditors to cooperate with the other's counsel and auditors in the
preparation of the Information Statements. NetSource will promptly advise NIT,
and NIT will promptly advise NetSource, in writing if at any time prior to the
Effective Time either NetSource or NIT shall obtain knowledge of any facts that
might make it necessary or appropriate to amend or supplement the Information
Statements in order to make the statements contained or incorporated by
reference therein not misleading or to comply with applicable law. The
Information Statements shall contain the recommendation of the Board of
Directors of NetSource and NIT that the NetSource and NIT shareholders,
respectively, approve the Merger and this Agreement and the conclusion of the
Board of Directors that the terms and conditions of the Merger are fair and
reasonable to the shareholders of NetSource and NIT, respectively. Anything to
the contrary contained herein notwithstanding, neither party shall include in
their respective Information Statement any information with respect to the other
party or its Affiliates, the form and content of which information shall not
have been approved by the other party prior to such inclusion.
(b) As soon as practicable after the execution of this Agreement,
NetSource and NIT shall prepare the Permit Application. NIT and NetSource shall
each use reasonable commercial efforts to cause the Permit Application to comply
with the requirements of applicable federal and state laws. Each of NIT and
NetSource agrees to provide promptly to the other such information concerning
its business and financial statements and affairs as, in the reasonable judgment
of the providing party or its counsel, may be required or appropriate for
inclusion in the Permit Application, or in any amendments or supplements
thereto, and to cause its counsel and auditors to cooperate with the other's
counsel and auditors in the preparation of the Permit Application. NetSource
will promptly advise NIT, and NIT will promptly advise NetSource, in writing if
at any time prior to the Effective Time either NetSource or NIT shall obtain
knowledge of any facts that might make it necessary or appropriate to amend or
supplement the Permit Application in order to make the statements contained or
incorporated by reference therein not misleading or to comply with applicable
law. Anything to the contrary contained herein notwithstanding, NIT shall not
include in the Permit Application any information with respect to NetSource or
its Affiliates, the form and content of which information shall not have been
approved by NetSource prior to such inclusion.
6.10 Meeting of Stockholders. NetSource and NIT shall promptly after
-----------------------
the date hereof take all action necessary in accordance with the laws of
Delaware and their respective Certificates of Incorporation and Bylaws to obtain
the approval of the NetSource and NIT stockholders of the Merger as soon as
possible after the issuance of a permit pursuant to Section 25121 of the
California Law. NetSource and NIT each shall use its best efforts to solicit
from their respective stockholders proxies in favor of the
28
<PAGE>
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.
6.11 Pooling Accounting. NIT and NetSource 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 NIT and NetSource shall use
its best efforts to cause its Affiliates, which in any event will include all
directors, executive officers and holders of at least 5% of outstanding voting
securities, not to take action that would adversely affect the ability of NIT to
account for the business combination to be effected by the merger as a pooling
of interest.
6.12 Affiliate Pooling Agreements.
-----------------------------
(a) NetSource shall use its best efforts to deliver or cause to be
delivered to NIT, concurrently with the execution of this Agreement (and in each
case prior to the Effective Time) from each of the Affiliates of NetSource, an
executed Affiliate Agreement in the form attached hereto as Exhibit D-1
------------
("NetSource Affiliate Agreement"). NIT shall be entitled to place appropriate
legends on the certificates evidencing any NIT Common Stock to be received by
such Affiliates of NetSource pursuant to the terms of this Agreement, and to
issue appropriate stop transfer instructions to the transfer agent for NIT
Common Stock, consistent with the terms of such Affiliate Agreement.
(b) NIT shall use its best efforts to deliver to cause to be delivered
to NetSource, concurrently with the execution of this Agreement (and in each
case prior to the Effective Time) from each of the Affiliates of NIT, an
executed Affiliate Agreement in the form attached hereto as Exhibit D-2 ("NIT
-----------
Affiliate Agreement").
7. Closing Matters.
---------------
7.1 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
NetSource with and into NIT shall be consummated.
7.2 Exchange of Certificates.
------------------------
(a) Exchange Agent. Prior to the Closing Date, NIT shall appoint
--------------
Pezzola & Reinke, its legal counsel, to act as exchange agent (the "Exchange
Agent") in the Merger.
(b) NIT to Provide Stock. Promptly after the Effective Time of the
--------------------
Merger (but in no event later than ten (10) business days thereafter), NIT shall
make available for exchange in accordance with Section 2 and the Certificate of
Merger, through such reasonable procedures as NIT may adopt, the shares of NIT
Common Stock issuable pursuant to Section 2 and the Certificate of Merger in
exchange for outstanding shares of NetSource Common Stock (less the number of
shares of NIT 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 NetSource Common Stock (the "Certificates"),
whose shares are being converted into NIT 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 NIT may reasonably
specify) and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for NIT 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 NIT together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive the number of shares of
NIT Common Stock to which such holder is entitled pursuant to Section 2 hereof
(less
29
<PAGE>
the number of shares of NIT Common Stock to be deposited in escrow pursuant to
Section 2.4 ). The Certificate so surrendered shall immediately be canceled. NIT
shall make customary provisions for lost stock certificates. In the event of a
transfer of ownership of NetSource Common Stock that is not registered in the
transfer records of NetSource, the appropriate number of shares of NIT Common
Stock may be delivered to a transferee if the Certificate representing such
NetSource 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 7.2 , 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 NIT Common Stock as provided by this
Section and by the DGCL.
(d) No Further Ownership Rights in NetSource Common Stock. All NIT
-----------------------------------------------------
Common Stock delivered upon the surrender for exchange of shares of NetSource
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
NetSource Common Stock. There shall be no further registration of transfers on
the stock transfer books of the Surviving Corporation of the shares of NetSource
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 7.2 .
7.3 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 8 and Section 9, as specified in such Sections, including delivery of
the counterpart signature pages of the Transaction Documents executed by
NetSource and/or NIT, as the case may be. All documents which NetSource shall
deliver or cause to be delivered shall be in form and substance reasonably
satisfactory to NIT. All documents which NIT shall deliver or cause to be
delivered shall be in form and substance reasonably satisfactory to NetSource.
8. 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 Closing 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):
8.1 Accuracy of Representations and Warranties. The representations
------------------------------------------
and warranties of NIT set forth in Section 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 NetSource shall receive a certificate to such
effect executed by the President and Chief Executive Officer of NIT.
8.2 Covenants. NIT shall have performed and complied with all of its
---------
covenants contained in Sections 5 and 6 on or before the Closing, and NetSource
shall receive a certificate from NIT to such effect executed by the President
and Chief Executive Officer of NIT.
8.3 No Litigation. On and as of the Closing, no litigation or
-------------
proceeding shall be threatened or pending against NIT with the purpose or with
the probable effect of enjoining or preventing the consummation of any of the
transactions contemplated by this Agreement, and NetSource shall receive a
certificate to such effect executed by the President and Chief Executive Officer
of NIT.
8.4 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 NIT since the date of this Agreement, and
NetSource shall receive a certificate to such effect executed by the President
and Chief Executive Officer of NIT.
8.5 Authorizations. NetSource shall have received from NIT written
--------------
evidence that the execution, delivery and performance of NIT's obligations under
this Agreement and the Certificate of Merger have been duly and validly approved
and authorized by the Board of Directors of NIT and by the holders of the
outstanding shares of capital stock of NIT.
30
<PAGE>
8.6 Government Consents; Fairness Hearing. 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. As of the Closing, a fairness hearing
shall have been conducted by the California Commissioner of Corporations
pursuant to Section 25142 of the CGCL.
8.7 Election of Charles Schoenhoeft. Charles Schoenhoeft shall have
-------------------------------
been elected as President of NIT and appointed to the Board of Directors of NIT.
8.8 Transphere Mergers and MTC Exchanges. The Transphere Mergers and
------------------------------------
MTC Exchanges described in Section 5.2 of this Agreement have been consummated.
8.9 NIT Financing. Prior to or concurrent with the Closing, NIT
-------------
shall have closed a financing pursuant to which NIT shall have received no less
than $10 million in exchange for convertible debt securities that are
convertible into NIT Common Stock in accordance in all material respects with
that certain commitment letter dated April 8, 1996 from Yorkton Securities to
MTC International (the "Yorkton Financing").
8.10 Opinion of NIT's Counsel. At the Closing, NetSource shall have
------------------------
received from counsel to NIT, an opinion dated the Closing Date in substantially
the form attached hereto as Exhibit E.
----------
8.11 Pooling Letter. NetSource and NIT 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 and addressed to NetSource and NIT,
stating that the business combination to be effected by the Merger will qualify
as a pooling of interests transaction under generally accepted accounting
principles.
8.12 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.
8.13 Registration Rights Agreement. As of the Closing, NIT will have
-----------------------------
entered into registration rights agreements with all of the Stockholders and
holders of NetSource Options that provide that the NIT Common Stock, to the
extent such stock was not issued pursuant to Section 3(a)(10) of the Securities
Act of 1933, as amended, that they receive in the Merger or pursuant to Section
11.3 of this Agreement or, in the case of the holders of NetSource Options, that
they receive upon exercise of such options will, at the option of the
shareholder, be included in NIT-initiated registrations of NIT Common Stock,
subject to the right of NIT in an underwritten public offering to exclude all or
a portion of such stock should the underwriters determine that inclusion of such
shares would jeopardize the success of the offering; provided, however, that
none of the shares of such holders shall be excluded from the public offering
unless a pro rata portion (based on the number of shares of NIT Common Stock
held by such parties participating in the offering) of the shares of NIT Common
Stock acquired in the MTC Exchanges are also excluded from the offering. The
registration rights agreements will also provide that the Stockholders and the
holders of NetSource Options will not sell, transfer or otherwise dispose of NIT
Common Stock during the 180 day period following the effective date of the
initial public offering of NIT; provided that all directors and officers of NIT
and the holders of the NIT Common Stock acquired in the MTC Exchanges shall have
also agreed to and are performing in accordance with similar terms with NIT.
9. Conditions to NIT's Obligations. Unless otherwise provided below,
-------------------------------
the obligations of NIT 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 NIT, but only in a writing signed by NIT):
9.1 Accuracy of Representations and Warranties. The representations
------------------------------------------
and warranties of NetSource contained in Section 2 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 NIT shall receive a certificate from NetSource to
such effect with respect to the representations and warranties of NetSource
executed by Charles Schoenhoeft and Jade Wong.
31
<PAGE>
9.2 Covenants. NetSource shall have performed and complied with all
---------
of its covenants contained in Sections 5 and 6 on or before the Closing, and NIT
shall receive a certificate from NetSource to such effect signed by Charles
Schoenhoeft and Jade Wong.
9.3 No Litigation. On and as of the Closing, no litigation or
-------------
proceeding shall be threatened or pending against NetSource 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 NIT shall receive a
certificate from NetSource to such effect signed by Charles Schoenhoeft and Jade
Wong.
9.4 Authorizations. NIT shall have received from NetSource written
--------------
evidence that the execution, delivery and performance of this Agreement and the
Certificate of Merger have been duly and validly approved and authorized by its
Board of Directors and by the holders of at least ninety-five percent (95%) of
the outstanding shares of capital stock of NetSource. NIT shall have received a
certificate from NetSource to such effect signed by Charles Schoenhoeft and Jade
Wong.
9.5 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 NetSource since the date of this
Agreement. NIT shall have received a certificate from NetSource to such effect
signed by Charles Schoenhoeft and Jade Wong.
9.6 Government Consents; Fairness Hearing. 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. As of the Closing, a fairness hearing
shall have been conducted by the California Commissioner of Corporations
pursuant to Section 25142 of the CGCL.
9.7 Transphere Mergers and MTC Exchanges. The Transphere Mergers and
------------------------------------
MTC Exchanges described in Section 5.2 of this Agreement have been consummated.
9.8 Pooling Letter. NetSource and NIT 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
NetSource and NIT, stating that the business combination to be effected by the
Merger will qualify as a pooling of interests transaction under generally
accepted accounting principles.
9.9 NIT Financing. Prior to or concurrent with the Closing, NIT
-------------
shall have closed a financing pursuant to which NIT shall have received no less
than $10 million in exchange for convertible debt securities that are
convertible into NIT Common Stock in accordance in all material respects with
that certain commitment letter dated April 8, 1996 from Yorkton Securities to
MTC International.
9.10 Opinion of NetSource's Counsel. At the Closing, NIT shall have
------------------------------
received from counsel to NetSource, an opinion dated the Closing Date in
substantially the form attached hereto as Exhibit F.
---------
9.11 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.
9.12 Registration Rights Agreement. As of the Closing, NIT will have
-----------------------------
entered into registration rights agreements with all of the Stockholders and
holders of NetSource Options that provide that the NIT Common Stock, to the
extent such stock was not issued pursuant to Section 3(a)(10) of the Securities
Act of 1933, as amended, that they receive in the Merger or pursuant to Section
11.3 of this Agreement or, in the case of the holders of NetSource Options, that
they receive upon exercise of such options will, at the option of the
shareholder, be included in NIT-initiated registrations of NIT Common Stock,
subject to the right of NIT in an underwritten public offering to exclude all or
a portion of such stock should the underwriters determine that inclusion of such
shares would jeopardize the success of the
32
<PAGE>
offering; provided, however, that none of the shares of such holders shall be
excluded from the public offering unless a pro rata portion (based on the number
of shares of NIT Common Stock held by such parties participating in the
offering) of the shares of NIT Common Stock acquired in the MTC Exchanges are
also excluded from the offering. The registration rights agreements will also
provide that the Stockholders and the holders of NetSource Options will not
sell, transfer or otherwise dispose of NIT Common Stock during the 180 day
period following the effective date of the initial public offering of NIT;
provided that all directors and officers of NIT and the holders of the NIT
Common Stock acquired in the MTC Exchanges shall have also agreed to and are
performing in accordance with similar terms with NIT.
10. Termination of Agreement.
------------------------
10.1 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 NIT if any of the conditions precedent to NIT's obligations
pursuant to Section 9 shall not have been fulfilled at and as of the Closing.
(b) By NetSource if any of the conditions precedent to NetSource's
obligations pursuant to Section 8 above shall not have been fulfilled at and as
of the Closing.
(c) By either NetSource or NIT, if the Merger is not effected by
June 30, 1996.
Any termination of this Agreement under this Section 10.1 shall be
effected by the delivery of written notice of the terminating party to the other
parties hereto.
10.2 Liability for Termination. Any termination of this Agreement
-------------------------
pursuant to this Section 10 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 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 as set forth in Section 10.5. The provisions of
this Section 10.2 shall survive termination.
10.3 Certain Effects of Termination. In the event of the termination
------------------------------
of this Agreement by either NetSource or NIT as provided in Section 10.1 hereof:
(a) 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; and
(b) NetSource and NIT shall continue to abide by the provisions of the
Mutual Nondisclosure Agreement dated May 2, 1996 between NIT and NetSource.
This Section 10.3 shall survive any termination of this Agreement.
10.4 Remedies. No party shall be limited to the termination right
--------
granted in Section 10.1 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
33
<PAGE>
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
10.1 hereof, and thereafter seek damages to the extent permitted in Section 10.5
hereof.
10.5 Right to Damages. If this Agreement is terminated pursuant to
----------------
Section 10.1 hereof, neither party hereto shall have any claim against the other
except if the circumstances giving rise to such termination were caused by the
other party's wilful failure to comply with a material covenant set forth
herein, in which event the following applies:
(a) If NetSource terminates this Agreement as a result of a wilful
breach by NIT of one or more of the covenants contained in Sections 5 or 7
hereof, NetSource and NIT each agrees that it would be impracticable and/or
extremely difficult to fix or establish the actual damages sustained by
NetSource, and that One Million Dollars ($1,000,000) (the "Damages") is a
reasonable approximation of such damages considering all of the circumstances
existing as of the date hereof. Accordingly, in the event NetSource terminates
this Agreement by reason of NIT's wilful breach of the covenants contained in
Sections 5 or 7 hereof, the Damages shall constitute and be deemed to be the
agreed and liquidated damages of NetSource and shall be paid by NIT to NetSource
as NetSource's sole and exclusive remedy.
(b) If NIT terminates this Agreement as a result of a wilful breach by
NetSource of one or more of the covenants contained in Sections 5,6 or 7 hereof,
NetSource and NIT each agrees that it would be impracticable and/or extremely
difficult to fix or establish the actual damages sustained by NIT, and that the
Damages is a reasonable approximation of such damages considering all of the
circumstances existing as of the date hereof. Accordingly, in the event NIT
terminates this Agreement by reason of NetSource's wilful breach of the
covenants contained in Sections 5,6 or 7 hereof, the Damages shall constitute
and be deemed to be the agreed and liquidated damages of NIT and shall be paid
by NetSource to NIT as NIT's sole and exclusive remedy.
11. Indemnification.
---------------
11.1 Survival of Representations, Warranties, Covenants and Agreements.
-----------------------------------------------------------------
(a) The representations, warranties, covenants and agreements of the
parties 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, shall not terminate at, but rather shall survive, the Closing Date and
shall terminate on the earlier of (i) one (1) year after the Closing Date or
(ii) the date the first audit of NIT's financial statements, which includes the
results of operations of NetSource, has been completed and NIT has received a
signed opinion from its independent auditors certifying such financial
statements (the "Termination Date"); provided, however, that such
-------- -------
representations, warranties, covenants and agreements shall survive as to any
claim or demand made prior to their termination date until such claim or demand
is fully paid or otherwise resolved by the parties hereto in writing or by a
court of competent jurisdiction.
(b) The covenants and agreements of the parties contained in Sections
5 and 6, 7, 8 and 9 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.
34
<PAGE>
11.2 Indemnification by NetSource.
----------------------------
(a) General.
-------
(i) NetSource shall, indemnify and hold harmless NIT, its
directors and officers, and each other person, if any, who controls NIT 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 NIT, any of its directors, officers
or Controlling Persons in connection with any misrepresentation or breach of any
warranty made by NetSource in this Agreement or in any schedule, exhibit,
certificate or other instrument contemplated by this Agreement.
(ii) In no event shall the liability under this Section 11.2(a)
of NetSource exceed the amount of NetSource Escrow Shares.
(b) Claims for Indemnification.
--------------------------
(i) Whenever any claim shall arise for indemnification under this
Section 11.2, NIT shall describe such claim in a written notice ("Notice of
Claim") to the Representatives (as defined in Section 11.6 below) 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 proper representative of NIT, (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
11 hereof and is being given by NIT in good faith.
(ii) NIT shall give the Representatives 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, NIT shall
undertake the defense thereof by representatives reasonably satisfactory to NIT
and the Representatives. NIT 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 the Representatives. The Representatives
shall have the right to participate in any such defense of a Third Party Claim
with advisory counsel of their own choosing at their own expense. In the event
NIT, within a reasonable time after notice of any Third Party Claim, fails to
defend, the Representatives 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 11. The Representatives, without
NIT'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 NIT and/or NIT'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 NIT to give any
notice of any Third Party Claim required by this Section 11 shall not constitute
a waiver of NIT's right to indemnification or a defense to any claim by NIT
hereunder.
(c) Manner of Indemnification. All indemnification by NetSource
-------------------------
hereunder shall be effected by the transferring and assigning to NIT the
NetSource Escrow Shares having a value equal to the amount of the
indemnification liability, using an agreed upon value equal to $80.37 per share
of NIT Common Stock until either (i) the Termination Date, or (ii) the escrow is
exhausted, whichever occurs first.
11.3 Indemnification by NIT.
----------------------
(a) General.
-------
35
<PAGE>
(i) NIT 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 NIT in this Agreement or in any schedule, exhibit, certificate or other
instrument contemplated by this Agreement.
(ii) In no event shall the liability under Section 11.3(a)(i) of
NIT exceed the product of 2.2 multiplied by the aggregate value of the NetSource
Escrow Shares (calculated in accordance with the agreed upon value per share set
forth in Section 11.2(c)).
(b) Claims for Indemnification.
--------------------------
(i) Whenever any claim shall arise for indemnification under this
Section 11.3, the Representative shall describe such claim in a Notice of Claim
to NIT 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 11
hereof and is being given by the Representative in good faith.
(ii) The Representatives shall give NIT 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, the
Representatives shall undertake the defense thereof by representatives
reasonably satisfactory to NIT and the Representatives. The Representatives
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 NIT. NIT 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 the Representatives, within a reasonable time after
notice of any Third Party Claim, fail to defend, NIT shall have the right to
undertake the defense, compromise or settlement of such Third Party Claim on
behalf of, and for the account of, NIT, at the expense and risk of NIT to the
extent of their liability set forth in Section 11. NIT, without the
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 the Representatives to give any
notice of any Third Party Claim required by this Section 11 shall not constitute
a waiver of the Stockholders' right to indemnification or a defense to any claim
by the Stockholders hereunder.
(c) Manner of Indemnification. All indemnification by NIT hereunder
-------------------------
shall be effected by NIT issuing to the Stockholders, on a pro rata basis,
shares of NIT Common Stock having a value equal to the amount of the
indemnification liability, using an agreed upon value equal to $80.37 per share
of NIT Common Stock until either (i) the Termination Date, or (ii) shares of NIT
Common stock have been issued pursuant to this Section 11.3 having an aggregate
value equal to the product of 2.2 multiplied by the aggregate value of the
NetSource Escrow Shares (calculated in accordance with the agreed upon value per
share set forth in Section 11.2(c)), whichever occurs first.
11.4 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
36
<PAGE>
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.
11.5 Limitation on Indemnification. No indemnified party hereunder
-----------------------------
will be entitled to make a claim against any indemnifying party under Section
11.2 or 11.3 unless and until the aggregate amount of indemnifiable losses
exceeds One Hundred Thousand Dollars ($100,000) and then only to the extent of
the excess.
11.6 The Stockholders Representatives; Power of Attorney. The
---------------------------------------------------
Stockholders shall appoint Charles Schoenhoeft and Ron Wolf as their true and
lawful attorneys-in-fact, agents and representatives (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 by the remaining Representative
or the Board of Directors of NetSource should the remaining Representative be
unable or unwilling to serve in his capacity. All actions by the
Representatives shall be by majority vote.
11.7 Escrow.
------
(a) NetSource Escrow Shares shall be placed with an escrow agent,
satisfactory to NIT and the Representatives for a period beginning on the
Closing Date and ending on the Termination Date, to be disbursed solely upon the
joint signatures of NIT, NetSource and the Representatives, 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 NIT pursuant to Section 11
hereof.
(b) The NetSource Escrow Shares shall be disbursed during the term
hereof at any time or from time to time, NIT may give the Representatives a
Notice of Claim. Such Notice of Claim must be for a specified amount.
37
<PAGE>
(i) NetSource and/or the Representatives may give NIT 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 11 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 NetSource 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, each of
NetSource and the Representatives, within thirty (30) days of the receipt of
such Notice of Claim, agree to pay over to NIT that portion of the amounts
specified in such Notice of Claim as to which no objection is made. NetSource
and/or the Representatives are not required to agree to make any payments to NIT
in respect of a Notice of Claim that has been objected to in a Notice of
Objection given to NetSource and/or 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 (v) below.
(ii) NIT, NetSource and the Representatives agree to submit to
final and binding arbitration any and all disputes NetSource and/or the
Representatives have specified in a Notice of Objection or NIT 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 11 hereof.
(c) The NIT Common Stock to be issued pursuant to this Section 11
shall be issued during the term hereof at any time, or from time to time, the
Representatives may give NIT a Notice of Claim. Such Notice of Claim must be
for a specified amount.
(i) NIT may give the Representatives a written notice ("Notice of
Objection") (A) attaching a copy of such Notice of Claim, (B) stating that, in
the good faith opinion of NIT, the claim described in such Notice of Claim is
invalid (either in whole or in specified party) under the terms of Section 11
hereof, (C) giving the reasons for the alleged invalidity, and (D) stating that,
based on such alleged invalidity, NIT objects to the payment of any portion of
the NIT 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, NIT, within thirty (30) days of the receipt of such Notice of Claim,
agrees to pay over to the Representatives that portion of the amounts specified
in such Notice of Claim as to which no objection is made. NIT is not required
to agree to make any payments to the Representatives in respect of a Notice of
Claim that has been objected to in a Notice of Objection given by NIT 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 (v) below.
(ii) The Representatives and NIT agree to submit to final and
binding arbitration any and all disputes NIT has specified in a Notice of
Objection or the Representatives have specified in a Notice of Claim to which
NIT has 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 11 hereof.
(d) The escrow shall be terminated on the Termination Date; provided,
--------
however, that the escrow may continue beyond such date if the Representatives
- -------
have asserted indemnification claims, and any such claims remain unsatisfied.
12. Miscellaneous.
-------------
12.1 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.
38
<PAGE>
12.2 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.
12.3 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.
12.4 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.
12.5 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.
12.6 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.
12.7 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.
12.8 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.
12.9 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.
12.10 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.
12.11 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
39
<PAGE>
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 12.11.
NetSource Entities:
Transphere International, Inc.
444 Spear Street, Suite 200
San Francisco, CA 94105
Attention: Charles Schoenhoeft
With copy to: Gray Cary Ware & Freidenrich
400 Hamilton Avenue
Palo Alto, CA 94301
Attention: Thomas W. Furlong
NIT Entities: MTC Telemanagement Corporation
1304 Southpoint Boulevard
Petaluma, California 94954
Attention: Legal Department
With copy to: Pezzola & Reinke
Lake Merritt Plaza Bldg.
1999 Harrison Street, Suite 1300
Oakland, CA 94612
Attention: Don Reinke
Such notice will be treated as having been received upon actual receipt.
12.12 Time. Time is of the essence of this Agreement.
----
12.13 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.
12.14 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 12.14.
12.15 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.
12.16 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.
40
<PAGE>
12.17 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 NetSource 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 INTERNATIONAL NETSOURCE INTERACTIVE
TELECOMMUNICATIONS, INC.
By: /s/ Edward A. Brinskele By: /s/ Charles Schoenhoeft
-------------------------- --------------------------
Title: CEO & President Title: President
----------------------- -----------------------
41
<PAGE>
EXHIBIT A
---------
CERTIFICATE OF MERGER
42
<PAGE>
EXHIBIT B
---------
FORM OF NON-COMPETE AND NON-SOLICITATION AGREEMENT
43
<PAGE>
EXHIBIT C-1
-----------
FORM OF VOTING AGREEMENT AND IRREVOCABLE PROXY
TO BE EXECUTED BY THE STOCKHOLDERS OF NetSource
44
<PAGE>
EXHIBIT C-2
-----------
FORM OF VOTING AGREEMENT AND IRREVOCABLE PROXY
TO BE EXECUTED BY THE STOCKHOLDERS OF NIT
45
<PAGE>
EXHIBIT D-1
-----------
NetSource AFFILIATES AGREEMENT
46
<PAGE>
EXHIBIT D-2
-----------
NIT AFFILIATES AGREEMENT
47
<PAGE>
EXHIBIT E
---------
FORM OF LEGAL OPINION TO BE DELIVERED BY
COUNSEL TO NetSource
48
<PAGE>
EXHIBIT F
---------
FORM OF LEGAL OPINION TO BE DELIVERED BY
COUNSEL TO NIT
49
<PAGE>
EXHIBIT 2.2
-----------
COMMON STOCK AND OPTION EXCHANGE AGREEMENT
By and Among
NetSource International Telecommunications, Inc.
1304 Southpoint Boulevard
Petaluma, California 94954
and
Shareholders and Holders of Options to Purchase Shares of
MTC International, Inc., a Nevada Corporation.
Dated as of June ___, 1996
<PAGE>
THIS COMMON STOCK AND OPTION EXCHANGE AGREEMENT (the "Agreement") is
dated for references purposes as of June ___, 1996, by and among NetSource
International Telecommunications, Inc., a Delaware corporation (the "Company"),
the undersigned shareholders of MTC International, Inc., a Nevada corporation
formerly known as Envoy International Information Systems, Inc. ("MTC
International") (each individually a "Shareholder" and collectively, the
"Shareholders") and the undersigned holders of options to purchase common stock
of MTC International (each individually an "Optionholder" and collectively, the
"Optionholders").
RECITALS
A. The Shareholders hold of record all of the outstanding 1,010,000
shares of the common stock of MTC International (the "MTC International
Shares"), such common stock being the only outstanding class of shares of MTC
International.
B. The Optionholders hold of record all of the outstanding options to
purchase common stock of MTC International, with such options covering 224,785
shares (the "MTC International Options").
C. The Company and the Shareholders desire to exchange, in a tax-free
exchange, 600,000 shares of common stock of the Company (the "Company Shares")
for all of the MTC International Shares (the "Stock Exchange").
D. The Company and the Optionholders desire to exchange, in a tax-
free exchange, options to purchase 134,871 shares of common stock of the company
(the "Company Options") for all of the MTC International Options (the "Option
Exchange," which together with the Stock Exchange shall be referred to as the
"MTC International Exchange"). The Company Options will have vesting terms and
other conditions and terms similar to the MTC International Options for which
they are being exchanged.
E. Concurrently with the execution of this Agreement, the Company,
the shareholders of MTC Telemanagement Corporation, a California corporation,
("MTC Domestic"), and the holders of options to purchase common stock of MTC
Domestic will be entering into a similar Common Stock and Option Exchange
Agreement (such exchanges collectively referred to as the "MTC Domestic
Exchange"), pursuant to which the Company will exchange 174,290 Company Shares
for all of the outstanding shares of the common stock of MTC Domestic and will
exchange Company Options to purchase 10,928 Company Shares for all of the
outstanding options to purchase shares of the common stock of MTC Domestic.
F. The Company and NetSource Interactive Services, Inc., a Delaware
corporation ("NetSource Interactive"), have entered into a merger agreement
pursuant to which NetSource will merge with and into the Company, with the
Company being the surviving corporation and with the shareholders and
optionholders of NetSource Interactive surrendering their shares and options in
NetSource Interactive in exchange for shares and options in the Company (the
"NetSource Merger").
G. Upon completion of the MTC International Exchange, the MTC
Domestic Exchange and the NetSource Merger, the Company will issue and place no
less than $10,000,000 of debt which is convertible into shares of the Company
(the "Debt Offering").
-1-
<PAGE>
AGREEMENT
1. Exchange.
a. Exchange of Shares. Subject to the terms and conditions hereof,
------------------
the Company will issue to each of the Shareholders 0.60 Company Shares for each
MTC International Share owned and held of record by such Shareholder in exchange
for such MTC International Share, as set forth on Schedule A attached hereto.
Each Shareholder acknowledges and agrees that Schedule A sets forth both the
aggregate number of MTC International Shares that such Shareholder owns and the
aggregate number of Company Shares that such Shareholder is entitled to receive
in exchange for such Shareholder's MTC International Shares pursuant to this
Agreement.
b. Delivery of the Shares. Concurrently with the execution of this
----------------------
Agreement, each Shareholder is delivering to the Company the certificate(s)
representing the number of MTC International Shares set forth opposite the
Shareholder's name on Schedule A attached hereto, together with duly executed
stock power(s) for such certificates.
c. Exchange of the Options. Subject to the terms and conditions
-----------------------
hereof, the Company will issue to each Optionholder the number of Company
Options listed opposite that Optionholder's name on Schedule B attached hereto
in exchange for that Optionholder's MTC International 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 MTC
International Options, with the exercise price being modified to take into
account the exchange ratio for the options. Each Optionholder acknowledges and
agrees that Schedule B sets forth the aggregate number of the MTC International
Options that such Optionholder owns as well as the aggregate number of Company
Options that such Optionholder is entitled to receive in exchange for such
Shareholder's MTC International Options pursuant to this Agreement.
d. Delivery of the Options. Concurrently with the execution of this
-----------------------
Agreement, each Optionholder is delivering to the Company the original option
agreement(s) for all of the MTC International Options set forth opposite the
Optionholder's name on Schedule B attached hereto.
2. Closing Date; Delivery.
a. Closing Date. The closing of the MTC International Exchange ("the
------------
Closing") shall be held at the offices of Pezzola & Reinke, 1999 Harrison
Street, Suite 1300, Oakland, California, on, or before, June 30, 1996, as
determined by the Company upon consummation of the Closing conditions set forth
herein (the "Closing Date").
b. Delivery. Subject to the terms of this Agreement, at the Closing,
--------
the Company will deliver to each Shareholder or his representative the
certificates representing the Company Shares to be received by the Shareholder
in the Stock Exchange and will deliver to each Optionholder or his
representative new option agreements representing the Company Options to be
received by the Optionholder in the Option Exchange. Each Optionholder
acknowledges and agrees that upon delivery of the Company Options, the MTC
International Options shall automatically terminate and shall be deemed
cancelled.
-2-
<PAGE>
3. Representations and Warranties of the Company.
The Company hereby represents and warrants to each of the Shareholders and
Optionholders, as follows:
a. Organization and Standing. The Company is a corporation duly
-------------------------
organized, validly exisiting and in good standing under the laws of the State of
Delaware.
b. Corporate Power. The Company has now, or will have at the closing
---------------
Date, all requisite corporate 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 nescessary for the authorization, execution and delivery of this
Agreement and the issuance of the Company Shares and the Company Options. This
Agreement is a valid and binding obligation of the Company enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, moratorium, and other laws of general application affecting the
enforcement of creditors' rights and by the availability of equitable remedies.
c. Valid Issuance of Shares. The Company Shares, when issued in
------------------------
compliance with the provisions of this Agreement, will be validly issued, fully
paid and nonasessable, and will be free of any liens or encumbrances imposed by
the Company; provided, however, that the Company shares will be subject to
restrictions on transfer under this Agreement and state and dfederal securiites
laws as set forth herein, and as may be required by future changes in such laws.
d. Valid Issuance of Options. The Company Options, when issued in
-------------------------
compliance with the provisions of this Agreement, will be validly granted.
4. Representations and Warranties of Shareholders and Optionholders.
Each Shareholder and Optionholder represents and warrants, severally but
not jointly, to the Company as follows:
a. Capacity. Such Shareholder or Optionholder has full legal
--------
capacity, power and authority to execute, deliver, and perform his, her or its
obligations under this Agreement, and, if an individual, is at least 21 years of
age.
b. Ownership of Stock; Vesting Title. Such Shareholder owns of
---------------------------------
record and beneficially only such number of MTC International Shares as
indicated opposite such Shareholder's name on Schedule A attached hereto, with
full right and authority to deliver such shares hereunder, and upon delivery of
such shares and of one or more stock powers with respect to such Shares
hereunder, the Company will receive good, valid and marketable title thereto,
free and clear of all liens or encumbrances, and not subject to any agreements
or understandings among any persons with respect to the voting or transfer of
such shares.
c. Ownership of Options; Vesting Title. Such Optionholder owns of
-----------------------------------
record and beneficially only such number of MTC International Options as
indicated opposite such Optionholder's name on Schedule B attached hereto, with
full right and authority to deliver such options hereunder, and upon delivery of
such shares and options hereunder, the Company will receive good, valid and
marketable title thereto, free and clear of all liens or encumbrances.
-3-
<PAGE>
d. Ability to Protect Own Interest. Such Shareholder or Optionholder
-------------------------------
has a preexisting personal or business relationship with the Company or one or
more of its directors of officers or controlling persons, or, by reason of such
Shareholder's or Optionholder's business or financial experience, the business
or financial experience of such Shareholder's or Optionholder's professional
advisors (who are not affiliated with or compensated by the Company or any of
their affiliates) or the business or financial experience of such Shareholder's
or Optionholder's purchaser representative, such Shareholder or Optionholder has
the capacity to protect its own interest in connection with the MTC
International Exchange.
e. Access to Information. Such Shareholder or Optionholder (or, if
---------------------
applicable, such Shareholder's or Optionholder's purchaser representative) has
received and read a copy of that Confidential Private Placement Offering
Exchange Memorandum dated as of June ___, 1996, and has had an opportunity to
discuss the Company's business, management and financial affairs with its
management and to ask questions of officers of the Company, which questions were
answered to its satisfaction. It understands that such discussions with
management, as well as any written information issued by the Company, were
intended to describe certain aspects of the Company's business and prospects but
were not a thorough or exhaustive description. The foregoing, however, does not
limit or modify the representations and warranties of the Company in Section 3
hereof or the right of the Shareholders or Optionholders to rely thereon.
f. Reliance. In deciding to enter into and consummate the
--------
transactions contemplated hereby, such Shareholder or Optionholder has not
relied, as to tax, securities and other legal matters, on the advice that such
Shareholder or Optionholder has received from the Company or any of its
attorneys or representatives, but only on the advice of such Shareholder's or
Optionholder's own advisors and experts.
g. Investment Intent. The Company Shares to be received by such
-----------------
Shareholder and Company Options to be received by such Optionholder will be
acquired for such Shareholder's or Optionholder'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"). Such Shareholder or Optionholder furthermore
has no current commitment or obligation, contingent or otherwise, to anyone
other than the Company pursuant to the terms hereof 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.
h. No Violation. The execution and delivery of this Agreement 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
such Shareholder or Optionholder, or any of such Shareholder's MTC International
Shares, or Optionholder's MTC International Options, may be bound.
i. Binding Obligation. This Agreement has been duly executed and
-------------------
delivered by such Shareholder or Optionholder and constitutes a legal, valid and
binding obligation of such Shareholder or Optionholder, 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 the Company's Obligation to Close.
The Company's obligation to issue the Company Shares and Company
Options 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 Shareholders and Optionholders 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. Tender. The Shareholders shall have tendered all of the
-------
outstanding MTC International Shares and stock powers and the Optionholders
shall have tendered all of the outstanding MTC International Options.
c. Consents and Waivers. The Company shall have obtained any and all
--------------------
consents, permits and waivers necessary or appropriate for consummation of the
transactions contemplated by this Agreement.
d. Percentage Minimum. This Agreement shall have been signed by
-------------------
Shareholders holding at least 90% of the outstanding MTC International Shares
and by all Optionholders, and certificates evidencing such shares and option
agreements evidencing such options, accompanied by duly executed stock powers,
shall have been delivered to the Company at or prior to the Closing.
6. Public Offering Lock-Up and Restrictive Legends.
a. Lock-Up. In connection with the first underwritten public
-------
registration of the Company's securities, each Shareholder and Optionholder
agrees, upon the request of the Company or the underwriters managing such
underwritten offering of the Company's securities, not to sell, make any short
sale of, loan, grant any option for the purchase of, or otherwise dispose of any
Company Shares or Company Options (other than those included in the
registration) without the prior written consent of the Company and such
underwriters, as the case may be, for a period of time, not to exceed one
hundred eighty (180) days from the effective date of such registration; provided
that all executive officers, directors and 5% or greater shareholders of the
Company enter into similar agreements. Such agreement shall be in writing in
the form reasonably satisfactory to the Company and such underwriter. The
Company may impose stop-transfer instructions with respect to the shares subject
to the foregoing restrictions until the end of said 180-day period.
b. Restrictive Legends. Each instrument evidencing the Company
-------------------
Shares or the Company Options which the Investor may purchase hereunder and any
other securities issued upon any stock split, stock dividend, recapitalization,
merger, consolidation or similar event (unless no longer required in the opinion
of the counsel for the Company) shall be imprinted with legends substantially in
the following form as well as any additional legend(s) as may be required by the
Department of Corporations pursuant to any qualification or "fairness hearing":
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE
OFFERED OR SOLD WITHOUT REGISTRATION UNDER THE ACT UNLESS THE CORPORATION
RECEIVES AN OPINION OF
-5-
<PAGE>
COUNSEL, SATISFACTORY TO THE CORPORATION, THAT AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE OR SUCH REGISTRATION IS NOT REQUIRED PURSUANT TO
REGULATIONS UNDER THE ACT.
THE SECURITIES REPRESENTED BY THIS INSTRUMENT ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER SET FORTH IN THAT CERTAIN JUNE ___, 1996, COMMON
STOCK AND OPTION EXCHANGE AGREEMENT BETWEEN THE ORIGINAL HOLDER HEREOF AND
THE CORPORATION.
The Company shall be entitled to enter stop transfer notices on its transfer
books with respect to the Company Shares during periods when transfers are
restricted under the terms of this Agreement.
c. Pooling. Each Shareholder and Optionholder will not, within the
-------
thirty (30) days prior to the effective date of the Closing, sell, transfer or
otherwise dispose of, or reduce its interest in or risk relating to, any shares
of MTC International or the Company which it owns. In addition, each
Shareholder and Optionholder will not sell, transfer or otherwise dispose of, or
reduce its interest in or risk relating to, any shares of the Company's stock
issued hereunder in a manner which might prevent treating the transactions
contemplated hereunder as poolable transactions for accounting purposes.
7. Piggyback Registration.
a. The Corporation's Obligation to Register. If the Company at any
-----------------------------------------
time proposes to register any of its securities under the 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
all Shareholder parties and Optionholder parties to this Agreement, as well as
all NetSource Interactive shareholders and optionholders under the NetSource
Merger and all shareholders and optionholders under the MTC Domestic Exchange
shall receive written notice from the Company (the "Company Notice") of its
intention to make such registration (all common stock issued pursuant to such
transactions and all common stock issuable under options which were issued
pursuant to such transactions are referred to herein as "Registrable
Securities"). If such registration is proposed to be on a form which permits
inclusion of the Registrable Securities, then upon the written request of any
holders of the Registrable Securities given within ten (10) days after
transmittal by the Company to such holders of the Company Notice, the Company
will, subject to the limits contained in this Section, use its reasonable
efforts to cause such Registrable Securities of said requesting holders to be
registered under the Act, all to the extent requisite to permit such sale or
other disposition by such holders of the Registrable Securities so registered.
b. Limitations\Cutbacks. The right of any such holder to request
---------------------
inclusion in the registration pursuant to this Section 7 shall terminate (i)
upon the fourth anniversary date of the Closing or (ii) at such time that all
shares of Registrable Securities held or entitled to be held upon conversion by
such holder may be publicly sold under Rule 144 or any applicable exemption or
registration statement during any 90-day period. Furthermore, notwithstanding
any other provision of this Section, 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, then the Company may
exclude all or any portion of such Registrable Securities; provided, however,
that such cutback shall be pro rata among all holders desiring to participate in
such registration based on the number of shares of Registrable Securities held
by such holders.
-6-
<PAGE>
c. Further Documents. Any holder of Registrable Securities desiring
------------------
to participate in a registration under this Section 7 shall enter into such
further agreements, including indemnification and customary underwriting
agreements, as the Company and the managing underwriter shall reasonably
require.
7. Miscellaneous
a. Governing Law. The Agreement shall be governed in all respects
--------------
by the laws of the State of California.
b. Survival. The representations, warranties, covenants and
---------
agreements made herein shall survive the Closing of the transactions
contemplated hereby.
c. 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.
d. 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, including
but not limited to restricting transferability of the Company Shares so as to
permit the MTC International Exchange to qualify for "pooling of interests"
accounting treatment.
e. Changes and Termination. Subject to Section 2.3, 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 party
against whom enforcement of the change, waiver, discharge or termination is
sought.
f. 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.
g. Brokers
-------
(i) Each party represents and warrants to the other that it has
dealt with no brokers with respect to the MTC International Exchange
contemplated hereby. No party has done any acts, had any negotiations or
conversations, or made any agreements or promises which will in any way create
or give rise to any obligation or liability for the payment of any fee, charge,
commission or other compensation to any party with respect to the transactions
contemplated hereby.
(ii) The Shareholders, the Optionholders and the Company agree to
forever indemnify, defend and save harmless (on an after-tax basis) each other
of, from and against any and all claims or suits for compensation, commission or
otherwise which may be asserted or made by any broker, person or entity as a
result of any dealing by the indemnifying party or its representatives with such
other broker, person or entity, including, without limitation, all costs,
losses, liabilities, damages and expenses (including, without limitation,
attorneys' fees and disbursements) related thereto. This subsection shall
survive the Closing or any sooner expiration or termination of this Agreement.
h. Confidentiality. All information furnished to any Shareholder or
----------------
Optionholder by the Company shall be treated confidentially by the Shareholder
or Optionholder. Each Shareholder and Optionholder hereby agrees that, except
as required by law, it will not release or cause or permit to be released any
press notices, publicity (oral or written) or advertising promotion or otherwise
announce or disclose or cause or permit to be
-7-
<PAGE>
announced or disclosed, in any manner whatsoever, the fact that negotiation have
taken place, or the terms and conditions or substance of the transactions
contemplated herein without first obtaining the express written consent of the
Company. The obligation to keep such information confidential shall survive the
termination of this Agreement for three years. Notwithstanding anything to the
contrary set forth in this subsection, (i) Shareholders and Optionholders shall
be permitted to provide confidentially all materials and information furnished
by the Company to their attorneys and legal counsel, who shall likewise keep
such information confidential and (ii) such confidentiality restrictions
hereunder shall not apply to information furnished pursuant to this Exchange
Agreement which has entered the public domain through no fault of such
Shareholder or Optionholder.
i. Notices, etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be delivered personally,
mailed by registered or certified mail, postage prepaid, return receipt
requested, or sent via Internationally recognized overnight courier, addressed
(a) if to a Shareholder or Optionholder, to such Shareholder's or Optionholder's
address et forth, respectively, on Schedule A or Schedule B attached hereto,
---------- ----------
or at such other address as such Shareholder or Optionholder shall have
furnished to the Company in writing, or (b) if to the Company, to the address of
the Company set forth at the beginning of this Agreement, or to such other
address as the Company shall have furnished to each Shareholder and Optionholder
in writing. Notices that are mailed shall be deemed given one (1) day after
deposit in the United States mail.
j. 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.
k. Expenses. The Company, the Shareholders, and the Optionholders
---------
shall each bear their own expenses and legal fees in connection with this
Agreement and the transactions contemplated hereby and thereby.
l. 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.
m. Additional Consents. Each Shareholder and Optionholder hereby
--------------------
consents to the terms of the transactions set forth in that Confidential Private
Placement Offering Exchange Memorandum dated as of June ___, 1996.
n. Counterparts. This Agreement may be executed in any number of
-------------
counterparts, each of which shall be an original, but all of which together
constitute one instrument.
o. Delays or Omissions. No delay or omission to exercise any right,
--------------------
power or remedy accruing to the Company shall impair any such right, power or
remedy of the company, nor shall it be construed to be a waiver of any breach or
default under this Agreement, or any acquiescence therein, or any waiver of or
acquiescence in any similar breach or default thereafter occurring; nor shall
any delay or omission to exercise any right, power or remedy accruing to the
Company or any waiver by the company of any single breach or default by any
other party be deemed a waiver by the Company 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 shall
be cumulative and not alternative.
-8-
<PAGE>
p. Arbitration. BY EXECUTING THIS AGREEMENT, THE PARTIES ARE
------------
AGREEING TO HAVE ANY DISPUTE WHICH IS DESCRIBED IN THIS SUBSECTION DECIDED BY
NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND ARE GIVING UP ANY RIGHTS
THEY MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY
EXECUTING THIS AGREEMENT, THE PARTIES ARE GIVING UP JUDICIAL RIGHTS TO DISCOVERY
AND APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE ARBITRATION
PROVISION; IF ANY OF THE PARTIES REFUSES TO SUBMIT TO ARBITRATION IT MAY BE
COMPELLED TO ARBITRATE UNDER THE CALIFORNIA CODE OF CIVIL PROCEDURE. A PARTY'S
AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. BY EXECUTING THIS
AGREEMENT, EACH OF THE PARTIES ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD THE
FOREGOING AND HAS AGREED TO SUBMIT DISPUTES DESCRIBED IN THIS SUBSECTION TO
NEUTRAL ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement or the breach hereof shall be settled by arbitration, which
arbitration shall be conducted as follows: A party seeking arbitration shall
promptly send notice of arbitration to the party. The place of arbitration
hereunder shall be San Francisco, California. Within ten (10) days of the date
of such notice, each party shall appoint its arbitrator. An arbitrator shall be
a duly qualified professional with five years of experience in the field of law.
Within fifteen (15) days of their appointment, the two arbitrators shall meet
and select a third arbitrator. The three arbitrators shall then meet and
otherwise confer as they shall deem necessary to agree on a determination of the
issue before them. In any dispute submitted to arbitration, the decision of two
out of the three arbitrators shall be binding and conclusive upon the parties
hereto and shall be enforceable in a court having jurisdiction over the parties.
The Rules of the American Arbitration Association for commercial arbitration
shall be applied to any arbitration hereunder as to all matters of procedure,
provided, however, that the parties may obtain discovery in aid of the
arbitration. Arbitration costs shall be borne as follows: one-half of the
arbitration costs shall be borne by the Shareholders and Optionholders who are
adverse parties to the Company in the Arbitration, and the other half of the
arbitration costs shall be borne by the Company, except that each party shall be
responsible for its own expenses and costs of any witnesses selected by such
party.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-9-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of
May 31, 1996.
NetSource International
Telecommunications, Inc.
a Delaware corporation
By: /s/ Edward A. Brinskele
------------------------------------------------
Name: Edward A. Brinskele
Title: President and Chief Executive Officer
SHAREHOLDERS:
/s/ Edward A. Brinskele
- ---------------------------------------------------
Edward A. Brinskele
/s/ Roger Sheppard
- ---------------------------------------------------
Roger Sheppard
/s/ Thomas Bruner
- ---------------------------------------------------
Thomas Bruner
/s/ En Kin Liew
- ---------------------------------------------------
En Kin Liew
/s/ Chen Ching
- ---------------------------------------------------
Chen Ching
/s/ Teo Leng Ming
- ---------------------------------------------------
Teo Leng Ming
/s/ Yeng Chiah Kern
- ---------------------------------------------------
Yeng Chiah Kern
/s/ Claude A. Giroux
- ---------------------------------------------------
Claude A. Giroux
-10-
<PAGE>
OPTIONHOLDERS:
/s/ Edward A. Brinskele
- ---------------------------------------------------
Edward A. Brinskele
/s/ Roger Sheppard
- ---------------------------------------------------
Roger Sheppard
/s/ Thomas Hakel
- ---------------------------------------------------
Thomas Hakel
/s/ Eugene McCord
- ---------------------------------------------------
Eugene McCord
/s/ Michael Brinskele
- ---------------------------------------------------
Michael Brinskele
/s/ Robert Lara
- ---------------------------------------------------
Robert Lara
/s/ Brien Voorhees
- ---------------------------------------------------
Brien Voorhees
/s/ Evan Kraus
- ---------------------------------------------------
Evan Kraus
/s/ En Kin Liew
- ---------------------------------------------------
En Kin Liew
-11-
<PAGE>
/s/ Thomas Bruner
- --------------------------------------------
Thomas Bruner
/s/ Chen Ching
- --------------------------------------------
Chen Ching
/s/ Teo Leng Ming
- --------------------------------------------
Teo Leng Ming
/s/ Yeng Chiah Kern
- --------------------------------------------
Yeng Chiah Kern
-12-
<PAGE>
Schedule A
MTC INTERNATIONAL SHAREHOLDERS
------------------------------
<TABLE>
<CAPTION>
Number of Number of
MTC International NetSource International
Name of Shareholder Shares Held Shares To Be Exchanged
- ------------------------------ ----------------- -----------------------
<S> <C> <C>
Edward A. Brinskele 550,000 330,000
12200 Point Reyes
Petaluma Road
Nicasio, CA 94946
Roger J. Sheppard 200,000 120,000
14 Bracken Court
San Rafael, CA 94901
Thomas Bruner 50,000 30,000
744 E. Angela Street
Pleasanton, CA 94566
En Kin Liew 50,000 30,000
60 Watten Heights
Singapore 1128
Chen Ching 50,000 30,000
0 Anson Road, #17-25
International Plaza
Singapore 079903
Teo Leng Ming 50,000 30,000
477A Joo Chiat Road
Singapore 1542
Yeng Chiah Kern 50,000 30,000
c/o Yang Lik Realty Co. Ltd.
7th Floor Unit D & E
Cindic Towers
128 Gloucester Road
Wanchai, Hong Kong
Claude A. Giroux 10,000 6,000
8 Neshamany Interplex
Trevose, PA 19053
</TABLE>
-13-
<PAGE>
Schedule B
MTC INTERNATIONAL OPTIONHOLDERS
-------------------------------
<TABLE>
<CAPTION>
Number NetSource International
Name of Shares Options To Be Exchanged
- ------------------------- --------- -----------------------
<S> <C> <C>
Edward A. Brinskele 37,500 22,500
12200 Point Reyes
Petaluma Road
Nicasio, CA 94946
Roger Sheppard 37,500 22,500
14 Bracken Court
San Rafael, CA 94901
Thomas Hakel 44,785 26,871
328 Firethorn Drive
Rohnert Park, CA 94928
Eugene McCord 25,000 15,000
581 Almanor Street
Petaluma, CA 94954
Michael Brinskele 25,000 15,000
5 Princeville Court
Petaluma, CA 94954
Robert Lara 10,000 6,000
125 5th Street W.
Sonoma, CA 95476
Brian Voorhees 10,000 6,000
2079 Bedford Street
Santa Rosa, CA 95404
Evan Kraus 10,000 6,000
415 Ash Street
Mill Valley, CA 94941
Thomas Bruner 5,000 3,000
744 E. Angela Street
Pleasanton, CA 94566
En Kin Liew 5,000 3,000
60 Watten Heights
Singapore 1128
</TABLE>
-14-
<PAGE>
<TABLE>
<S> <C> <C>
Chen Ching 5,000 3,000
0 Anson Road, #17-25
International Plaza
Singapore 079903
Teo Leng Ming 5,000 3,000
477A Joo Chiat Road
Singapore 1542
Yeng Chiah Kern 5,000 3,000
c/o Yang Lik Realty Co. Ltd.
7th Floor Unit D & E
Cindic Towers
128 Gloucester Road
Wanchai, Hong Kong
</TABLE>
-15-
<PAGE>
EXHIBIT 2.3
COMMON STOCK AND OPTION EXCHANGE AGREEMENT
By and Among
NetSource International Telecommunications, Inc.
1304 Southpoint Boulevard
Petaluma, California 94954
and
Shareholders and Holders of Options to Purchase Shares of
MTC Telemanagement Corporation, a California Corporation.
Dated as of June ___, 1996
<PAGE>
THIS COMMON STOCK AND OPTION EXCHANGE AGREEMENT (the "Agreement") is dated
for reference purposes as of June ___, 1996, by and among NetSource
International Telecommunications, Inc., a Delaware corporation (the "Company"),
the undersigned shareholders of MTC Telemanagement Corporation, a California
corporation ("MTC Domestic") (each individually a "Shareholder" and
collectively, the "Shareholders") and the undersigned holders of options to
purchase common stock of MTC Domestic (each individually an "Optionholder" and
collectively, the "Optionholders").
RECITALS
A. The Shareholders hold of record all of the outstanding 2,070,000 shares
of the common stock of MTC Domestic (the "MTC Domestic Shares"), such common
stock being the only outstanding class of shares of MTC Domestic.
B. The Optionholders hold of record all of the outstanding options to
purchase common stock of MTC Domestic, with such options covering 129,785 shares
(the "MTC Domestic Options").
C. The Company and the Shareholders desire to exchange, in a tax-free
exchange, 174,290 shares of common stock of the Company (the "Company Shares")
for all of the MTC Domestic Shares (the "Stock Exchange").
D. The Company and the Optionholders desire to exchange, in a tax-free
exchange, options to purchase 10,928 shares of common stock of the Company (the
"Company Options") for all of the MTC Domestic Options (the "Option Exchange,"
which together with the Stock Exchange shall be referred to as the "MTC Domestic
Exchange"). The Company Options will have vesting terms and other conditions
and terms similar to the MTC Domestic Options for which they are being
exchanged.
E. Concurrently with the execution of this Agreement, the Company, the
shareholders of MTC International, Inc., a Nevada corporation, formerly known as
Envoy International Information Systems, Inc. ("MTC International"), and the
holders of options to purchase common stock of MTC International will be
entering into a similar Common Stock and Option Exchange Agreement (such
exchanges collectively referred to as the "MTC International Exchange"),
pursuant to which the Company will exchange 606,000 Company Shares for all of
the outstanding shares of the common stock of MTC International and will
exchange Company Options to purchase 134,871 Company Shares for all of the
outstanding options to purchase shares of the common stock of MTC International.
F. The Company and NetSource Interactive Services, Inc., a Delaware
corporation ("NetSource Interactive"), have entered into a merger agreement
pursuant to which NetSource Interactive will merge with and into the Company,
with the Company being the surviving corporation and with the shareholders and
optionholders of NetSource Interactive surrendering their shares and options in
NetSource Interactive in exchange for shares and options in the Company (the
"NetSource Merger").
G. Upon completion of the MTC Domestic Exchange, the MTC International
Exchange and the NetSource Merger, the Company will issue and place no less than
$10,000,000 of debt which is convertible into shares of the Company (the "Debt
Offering").
-1-
<PAGE>
AGREEMENT
1. EXCHANGE.
A. EXCHANGE OF SHARES. Subject to the terms and conditions hereof,
------------------
the Company will issue to each of the Shareholders 0.0841981 Company Shares for
each MTC Domestic Share owned and held of record by such Shareholder in exchange
for such MTC Domestic Share, as set forth on Schedule A attached hereto. Each
Shareholder acknowledges and agrees that Schedule A sets forth both the
aggregate number of MTC Domestic Shares that such Shareholder owns and the
aggregate number of Company Shares that such Shareholder is entitled to receive
in exchange for such Shareholder's MTC Domestic Shares pursuant to this
Agreement.
B. DELIVERY OF THE SHARES. Concurrently with the execution of this
----------------------
Agreement, each Shareholder is delivering to the Company the certificate(s)
representing the number of MTC Domestic Shares set forth opposite the
Shareholder's name on Schedule A attached hereto, together with duly executed
stock power(s) for such certificates.
C. EXCHANGE OF THE OPTIONS. Subject to the terms and conditions
-----------------------
hereof, the Company will issue to each Optionholder the number of Company
Options listed opposite that Optionholder's name on Schedule B attached hereto
in exchange for that Optionholder's MTC Domestic 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 MTC
Domestic Options, with the exercise price being modified to take into account
the exchange ratio for the options. Each Optionholder acknowledges and agrees
that Schedule B sets forth the aggregate number of the MTC Domestic Options that
such Optionholder owns as well as the aggregate number of Company Options that
such Optionholder is entitled to receive in exchange for such Shareholder's MTC
Domestic Options pursuant to this Agreement.
D. DELIVERY OF THE OPTIONS. Concurrently with the execution of this
-----------------------
Agreement, each Optionholder is delivering to the Company the original option
agreement(s) for all of the MTC Domestic Options set forth opposite the
Optionholder's name on Schedule B attached hereto.
2. CLOSING DATE; DELIVERY; TERMINATION OF "S" CORPORATION STATUS.
A. CLOSING DATE. The closing of the MTC Domestic Exchange ("the
------------
Closing") shall be held at the offices of Pezzola & Reinke, 1999 Harrison
Street, Suite 1300, Oakland, California, on, or before, June 30, 1996, as
determined by the Company upon consummation of the Closing conditions set forth
herein (the "Closing Date").
B. DELIVERY. Subject to the terms of this Agreement, at the
--------
Closing, the Company will deliver to each Shareholder or his representative the
certificates representing the Company Shares to be received by the Shareholder
in the Stock Exchange and will deliver to each Optionholder or his
representative new option agreements representing the Company Options to be
received by the Optionholder in the Option Exchange. Each Optionholder
acknowledges and agrees that upon delivery of the Company Options, the MTC
Domestic Options shall automatically terminate and shall be deemed cancelled.
C. TERMINATION OF "S" CORPORATION STATUS. The Shareholders agree
-------------------------------------
that effective as of the Closing, MTC Domestic shall terminate its "S"
Corporation for income tax purposes.
-2-
<PAGE>
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company hereby represents and warrants to each of the Shareholders and
Optionholders, as follows:
A. ORGANIZATION AND STANDING. The Company is a corporation duly
-------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
B. CORPORATE POWER. The Company has now, or will have at the
---------------
closing Date, all requisite corporate 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. This
Agreement is a valid and binding obligation of the Company enforceable in
accordance with its terms, except as the same may be limited by bankruptcy,
insolvency, moratorium, and other laws of general application affecting the
enforcement of creditors' rights and by the availability of equitable remedies.
C. VALID ISSUANCE OF SHARES. 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 imposed by
the Company; provided, however, that the Company shares will be subject to
restrictions on transfer under this Agreement and state and federal securities
laws as set forth herein, and as may be required by future changes in such laws.
D. VALID ISSUANCE OF OPTIONS. The Company Options, when issued in
-------------------------
compliance with the provisions of this Agreement, will be validly granted.
4. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS AND OPTIONHOLDERS.
Each Shareholder and Optionholder represents and warrants, severally but
not jointly, to the Company as follows:
A. CAPACITY. Such Shareholder or Optionholder has full legal
--------
capacity, power and authority to execute, deliver, and perform his, her or its
obligations under this Agreement, and, if an individual, is at least 21 years of
age.
B. OWNERSHIP OF STOCK; VESTING TITLE. Such Shareholder owns of
---------------------------------
record and beneficially only such number of MTC Domestic Shares as indicated
opposite such Shareholder's name on Schedule A attached hereto, with full right
and authority to deliver such shares hereunder, and upon delivery of such shares
and of one or more stock powers with respect to such Shares hereunder, the
Company will receive good, valid and marketable title thereto, free and clear of
all liens or encumbrances, and not subject to any agreements or understandings
among any persons with respect to the voting or transfer of such shares.
C. OWNERSHIP OF OPTIONS; VESTING TITLE. Such Optionholder owns of
-----------------------------------
record and beneficially only such number of MTC Domestic Options as indicated
opposite such Optionholder's name on Schedule B attached hereto, with full right
and authority to deliver such options hereunder, and upon delivery of such
shares and options hereunder, the Company will receive good, valid and
marketable title thereto, free and clear of all liens or encumbrances.
-3-
<PAGE>
D. ABILITY TO PROTECT OWN INTEREST. Such Shareholder or
-------------------------------
Optionholder has a preexisting personal or business relationship with the
Company or one or more of its directors of officers or controlling persons, or,
by reason of such Shareholder's or Optionholder's business or financial
experience, the business or financial experience of such Shareholder's or
Optionholder's professional advisors (who are not affiliated with or compensated
by the Company or any of their affiliates) or the business or financial
experience of such Shareholder's or Optionholder's purchaser representative,
such Shareholder or Optionholder has the capacity to protect its own interest in
connection with the MTC Domestic Exchange.
E. ACCESS TO INFORMATION. Such Shareholder or Optionholder (or, if
---------------------
applicable, such Shareholder's or Optionholder's purchaser representative) has
received and read a copy of that Confidential Private Placement Offering
Exchange Memorandum dated as of June ___, 1996, and has had an opportunity to
discuss the Company's business, management and financial affairs with its
management and to ask questions of officers of the Company, which questions were
answered to its satisfaction. It understands that such discussions with
management, as well as any written information issued by the Company, were
intended to describe certain aspects of the Company's business and prospects but
were not a thorough or exhaustive description. The foregoing, however, does not
limit or modify the representations and warranties of the Company in Section 3
hereof or the right of the Shareholders or Optionholders to rely thereon.
F. RELIANCE. In deciding to enter into and consummate the
--------
transactions contemplated hereby, such Shareholder or Optionholder has not
relied, as to tax, securities and other legal matters, on the advice that such
Shareholder or Optionholder has received from the Company or any of its
attorneys or representatives, but only on the advice of such Shareholder's or
Optionholder's own advisors and experts.
G. INVESTMENT INTENT. The Company Shares to be received by such
-----------------
Shareholder and Company Options to be received by such Optionholder will be
acquired for such Shareholder's or Optionholder'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"). Such Shareholder or Optionholder furthermore has
no current commitment or obligation, contingent or otherwise, to anyone other
than the Company pursuant to the terms hereof 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.
H. NO VIOLATION. The execution and delivery of this Agreement 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
such Shareholder or Optionholder, or any of such Shareholder's MTC Domestic
Shares, or Optionholder's MTC Domestic Options, may be bound.
I. BINDING OBLIGATION. This Agreement has been duly executed and
-------------------
delivered by such Shareholder or Optionholder and constitutes a legal, valid and
binding obligation of such Shareholder or Optionholder, 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 THE COMPANY'S OBLIGATION TO CLOSE.
The Company's obligation to issue the Company Shares and Company
Options 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 Shareholders and Optionholders 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. TENDER. The Shareholders shall have tendered all of the
-------
outstanding MTC Domestic Shares and stock powers and the Optionholders shall
have tendered all of the outstanding MTC Domestic Options.
C. CONSENTS AND WAIVERS. The Company shall have obtained any and
--------------------
all consents, permits and waivers necessary or appropriate for consummation of
the transactions contemplated by this Agreement.
D. PERCENTAGE MINIMUM. This Agreement shall have been signed by
-------------------
Shareholders holding at least 90% of the outstanding MTC Domestic Shares and by
all Optionholders, and certificates evidencing such shares and option agreements
evidencing such options, accompanied by duly executed stock powers, shall have
been delivered to the Company at or prior to the Closing.
6. PUBLIC OFFERING LOCK-UP AND RESTRICTIVE LEGENDS.
A. LOCK-UP. In connection with the first underwritten public
-------
registration of the Company's securities, each Shareholder and Optionholder
agrees, upon the request of the Company or the underwriters managing such
underwritten offering of the Company's securities, not to sell, make any short
sale of, loan, grant any option for the purchase of, or otherwise dispose of any
Company Shares or Company Options without the prior written consent of the
Company and such underwriters, as the case may be, for a period of time, not to
exceed one hundred eighty (180) days from the effective date of such
registration; provided that all executive officers, directors and 5% or greater
shareholders of the Company enter into similar agreements. Such agreement shall
be in writing in the form reasonably satisfactory to the Company and such
underwriter. The Company may impose stop-transfer instructions with respect to
the shares subject to the foregoing restrictions until the end of said 180-day
period.
B. RESTRICTIVE LEGENDS. Each instrument evidencing the Company
-------------------
Shares or the Company Options which the Investor may purchase hereunder and any
other securities issued upon any stock split, stock dividend, recapitalization,
merger, consolidation or similar event (unless no longer required in the opinion
of the counsel for the Company) shall be imprinted with legends substantially in
the following form as well as any additional legend(s) as may be required by the
Department of Corporations pursuant to any qualification or "fairness hearing":
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE
OFFERED OR SOLD WITHOUT REGISTRATION UNDER THE ACT UNLESS THE CORPORATION
RECEIVES AN OPINION OF COUNSEL, SATISFACTORY TO THE CORPORATION, THAT AN
EXEMPTION
-5-
<PAGE>
FROM SUCH REGISTRATION IS AVAILABLE OR SUCH REGISTRATION IS NOT REQUIRED
PURSUANT TO REGULATION S UNDER THE ACT.
THE SECURITIES REPRESENTED BY THIS INSTRUMENT ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER SET FORTH IN THAT CERTAIN JUNE ___, 1996, COMMON
STOCK AND OPTION EXCHANGE AGREEMENT BETWEEN THE ORIGINAL HOLDER HEREOF AND
THE CORPORATION.
The Company shall be entitled to enter stop transfer notices on its transfer
books with respect to the Company Shares during periods when transfers are
restricted under the terms of this Agreement.
C. POOLING. Each Shareholder and Optionholder will not, within the
-------
thirty (30) days prior to the effective date of the Closing, sell, transfer or
otherwise dispose of, or reduce its interest in or risk relating to, any shares
of MTC Domestic or the Company which it owns. In addition, each Shareholder and
Optionholder will not sell, transfer or otherwise dispose of, or reduce its
interest in or risk relating to, any shares of the Company's stock issued
hereunder in a manner which might prevent treating the transactions contemplated
hereunder as poolable transactions for accounting purposes.
7. PIGGYBACK REGISTRATION.
A. THE CORPORATION'S OBLIGATION TO REGISTER. If the Company at any
-----------------------------------------
time proposes to register any of its securities under the 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
all Shareholder parties and Optionholder parties to this Agreement, as well as
all NetSource Interactive shareholders and optionholders under the NetSource
Merger and all shareholders and optionholders under the MTC International
Exchange shall receive written notice from the Company (the "Company Notice") of
its intention to make such registration (all common stock issued pursuant to
such transactions and all common stock issuable under options which were issued
pursuant to such transactions are referred to herein as "Registrable
Securities"). If such registration is proposed to be on a form which permits
inclusion of the Registrable Securities, then upon the written request of any
holders of the Registrable Securities given within ten (10) days after
transmittal by the Company to such holders of the Company Notice, the Company
will, subject to the limits contained in this Section, use its reasonable
efforts to cause such Registrable Securities of said requesting holders to be
registered under the Act, all to the extent requisite to permit such sale or
other disposition by such holders of the Registrable Securities so registered.
B. LIMITATIONS\CUTBACKS. The right of any such holder to request
---------------------
inclusion in the registration pursuant to this Section 7 shall terminate (i)
upon the fourth anniversary date of the Closing or (ii) at such time that all
shares of Registrable Securities held or entitled to be held upon conversion by
such holder may be publicly sold under Rule 144 or any applicable exemption or
registration statement during any 90-day period. Furthermore, notwithstanding
any other provision of this Section, 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, then the Company may
exclude all or any portion of such Registrable Securities; provided, however,
that such cutback shall be pro rata among all holders desiring to participate in
such registration based on the number of shares of Registrable Securities held
by such holders.
-6-
<PAGE>
C. FURTHER DOCUMENTS. Any holder of Registrable Securities
------------------
desiring to participate in a registration under this Section 7 shall enter into
such further agreements, including indemnification and customary underwriting
agreements, as the Company and the managing underwriter shall reasonably
require.
7. MISCELLANEOUS
A. GOVERNING LAW. The Agreement shall be governed in all respects
--------------
by the laws of the State of California.
B. SURVIVAL. The representations, warranties, covenants and
---------
agreements made herein shall survive the Closing of the transactions
contemplated hereby.
C. 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.
D. 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, including
but not limited to restricting transferability of the Company Shares so as to
permit the MTC Domestic Exchange to qualify for "pooling of interests"
accounting treatment.
E. CHANGES AND TERMINATION. Subject to Section 2.3, 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 party
against whom enforcement of the change, waiver, discharge
or termination is sought.
F. 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.
G. BROKERS
-------
(i) Each party represents and warrants to the other that it has
dealt with no brokers with respect to the MTC Domestic Exchange contemplated
hereby. No party has done any acts, had any negotiations or conversations, or
made any agreements or promises which will in any way create or give rise to any
obligation or liability for the payment of any fee, charge, commission or other
compensation to any party with respect to the transactions contemplated hereby.
(ii) The Shareholders, the Optionholders and the Company agree to
forever indemnify, defend and save harmless (on an after-tax basis) each other
of, from and against any and all claims or suits for compensation, commission or
otherwise which may be asserted or made by any broker, person or entity as a
result of any dealing by the indemnifying party or its representatives with such
other broker, person or entity, including, without limitation, all costs,
losses, liabilities, damages and expenses (including, without limitation,
attorneys' fees and disbursements) related thereto. This subsection shall
survive the Closing or any sooner expiration or termination of this Agreement.
H. CONFIDENTIALITY. All information furnished to any Shareholder or
----------------
-7-
<PAGE>
Optionholder by the Company shall be treated confidentially by the Shareholder
or Optionholder. Each Shareholder and Optionholder hereby agrees that, except
as required by law, it will not release or cause or permit to be released any
press notices, publicity (oral or written) or advertising promotion or otherwise
announce or disclose or cause or permit to be announced or disclosed, in any
manner whatsoever, the fact that negotiation have taken place, or the terms and
conditions or substance of the transactions contemplated herein without first
obtaining the express written consent of the Company. The obligation to keep
such information confidential shall survive the termination of this Agreement
for three years. Notwithstanding anything to the contrary set forth in this
subsection, (i) Shareholders and Optionholders shall be permitted to provide
confidentially all materials and information furnished by the Company to their
attorneys and legal counsel, who shall likewise keep such information
confidential and (ii) such confidentiality restrictions hereunder shall not
apply to information furnished pursuant to this Exchange Agreement which has
entered the public domain through no fault of such Shareholder or Optionholder.
I. NOTICES, ETC. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be delivered personally,
mailed by registered or certified mail, postage prepaid, return receipt
requested, or sent via internationally recognized overnight courier, addressed
(a) if to a Shareholder or Optionholder, to such Shareholder's or Optionholder's
address et forth, respectively, on Schedule A or Schedule B attached hereto,
---------- ----------
or at such other address as such Shareholder or Optionholder shall have
furnished to the Company in writing, or (b) if to the Company, to the address of
the Company set forth at the beginning of this Agreement, or to such other
address as the Company shall have furnished to each Shareholder and Optionholder
in writing. Notices that are mailed shall be deemed given one (1) day after
deposit in the United States mail.
J. 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.
K. EXPENSES. The Company, the Shareholders, and the Optionholders
---------
shall each bear their own expenses and legal fees in connection with this
Agreement and the transactions contemplated hereby and thereby.
L. 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.
M. ADDITIONAL CONSENTS. Each Shareholder and Optionholder hereby
--------------------
consents to the terms of the transactions set forth in that Confidential Private
Placement Offering Exchange Memorandum dated as of June ___, 1996.
N. COUNTERPARTS. This Agreement may be executed in any number of
-------------
counterparts, each of which shall be an original, but all of which together
constitute one instrument.
O. DELAYS OR OMISSIONS. No delay or omission to exercise any right,
--------------------
power or remedy accruing to the Company shall impair any such right, power or
remedy of the company, nor shall it be construed to be a waiver of any breach or
default under this Agreement, or any acquiescence therein, or any waiver of or
acquiescence in any similar breach or default thereafter occurring; nor shall
any delay or omission to exercise any right, power or remedy accruing to the
Company or any waiver by the company of any single breach or default by any
other party be deemed a waiver by the Company of any other right, power
-8-
<PAGE>
or remedy or breach or default theretofore or thereafter occurring. All
remedies, either under this Agreement, or by law otherwise afforded to the
Company shall be cumulative and not alternative.
P. ARBITRATION. BY EXECUTING THIS AGREEMENT, THE PARTIES ARE
------------
AGREEING TO HAVE ANY DISPUTE WHICH IS DESCRIBED IN THIS SUBSECTION DECIDED BY
NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW AND ARE GIVING UP ANY RIGHTS
THEY MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY
EXECUTING THIS AGREEMENT, THE PARTIES ARE GIVING UP JUDICIAL RIGHTS TO DISCOVERY
AND APPEAL, UNLESS SUCH RIGHTS ARE SPECIFICALLY INCLUDED IN THE ARBITRATION
PROVISION; IF ANY OF THE PARTIES REFUSES TO SUBMIT TO ARBITRATION IT MAY BE
COMPELLED TO ARBITRATE UNDER THE CALIFORNIA CODE OF CIVIL PROCEDURE. A PARTY'S
AGREEMENT TO THIS ARBITRATION PROVISION IS VOLUNTARY. BY EXECUTING THIS
AGREEMENT, EACH OF THE PARTIES ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD THE
FOREGOING AND HAS AGREED TO SUBMIT DISPUTES DESCRIBED IN THIS SUBSECTION TO
NEUTRAL ARBITRATION. Any controversy or claim arising out of or relating to
this Agreement or the breach hereof shall be settled by arbitration, which
arbitration shall be conducted as follows: A party seeking arbitration shall
promptly send notice of arbitration to the party. The place of arbitration
hereunder shall be San Francisco, California. Within ten (10) days of the date
of such notice, each party shall appoint its arbitrator. An arbitrator shall be
a duly qualified professional with five years of experience in the field of law.
Within fifteen (15) day of their appointment, the two arbitrators shall meet and
select a third arbitrator. The three arbitrators shall then meet and otherwise
confer as they shall deem necessary to agree on a determination of the issue
before them. In any dispute submitted to arbitration, the decision of two out
of the three arbitrators shall be binding and conclusive upon the parties hereto
and shall be enforceable in a court having jurisdiction over the parties. The
Rules of the American Arbitration Association for commercial arbitration shall
be applied to any arbitration hereunder as to all matters of procedure,
provided, however, that the parties may obtain discovery in aid of the
arbitration. Arbitration costs shall be borne as follows: one-half of the
arbitration costs shall be borne by the Shareholders and Optionholders who are
adverse parties to the Company in the Arbitration, and the other half of the
arbitration costs shall be borne by the Company, except that each party shall be
responsible for its own expenses and costs of any witnesses selected by such
party.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
-9-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of
May 31, 1996.
NETSOURCE INTERNATIONAL
TELECOMMUNICATIONS, INC.
a Delaware corporation
/s/ Edward A. Brinskele
By:______________________________________________
Name: Edward A. Brinskele
Title: President and Chief Executive Officer
SHAREHOLDERS:
/s/ Edward A. Brinskele
- --------------------------------------------
Edward A. Brinskele
/s/ Michael Brinskele
- --------------------------------------------
Michael Brinskele
/s/ Joseph Brinskele
- --------------------------------------------
Joseph Brinskele
/s/ Carl Hildebrant
- --------------------------------------------
Carl Hildebrant
/s/ Roger J. Sheppard
- --------------------------------------------
Roger J. Sheppard
OPTIONHOLDERS:
/s/ Thomas Hakel
- --------------------------------------------
Thomas Hakel
/s/ Eugene McCord
- --------------------------------------------
Eugene McCord
-10-
<PAGE>
SCHEDULE A
MTC DOMESTIC SHAREHOLDERS
-------------------------
<TABLE>
<CAPTION>
Number of Number of
MTC Domestic NetSource International
Name of Shareholder Shares Held Shares To Be Exchanged
- ---------------------------- ------------ -----------------------
<S> <C> <C>
Edward A. Brinskele 1,300,000 109,457
12200 Point Reyes
Petaluma Road
Nicasio, CA 94946
Roger J. Sheppard 700,000 58,939
14 Bracken Court
San Rafael, CA 94901
Joseph Brinskele 50,000 4,210
540 Grandview Court
Point Richmond, CA 94801
Michael Brinskele 10,000 842
5 Princeville Court
Petaluma, CA 94954
Carl Hildebrant 10,000 842
7401 Mitchell Drive
Petaluma, CA 94928
</TABLE>
<PAGE>
SCHEDULE B
MTC DOMESTIC OPTIONHOLDERS
--------------------------
<TABLE>
<CAPTION>
Number NetSource International
Name of Shares Option Shares Exchanged
====================== ========= =======================
<S> <C> <C>
Thomas Hakel 79,785 6,718
328 Firethorn Drive
Rohnert Park, CA 94928
Eugene McCord 50,000 4,210
581 Almanor Street
Petaluma, CA 94954
</TABLE>
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NETSOURCE COMMUNICATIONS, INC.
NetSource Communications, Inc., a corporation organized and existing under
the laws of the State of Delaware, does hereby certify:
1. The name of the corporation is NetSource Communications, Inc. The
original Certificate of Incorporation was filed with the Secretary of State of
the State of Delaware on November 20, 1995 (formerly MTC Telecommunications,
Inc.).
2. This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the provisions of the corporation's Certificate of
Incorporation as heretofore amended. The amendments and restatement herein set
forth have been duly approved by the Board of Directors in accordance with
Sections 242 and 245 of the General Corporation Law of Delaware and by the
written consent of a majority of the stockholders of the corporation and a
majority of the holders of each class entitled to a class vote thereon in
accordance with the provisions of Sections 228 and 242 of the General
Corporation Law of Delaware.
3. The text of the Certificate of Incorporation is hereby restated and
further amended to read in its entirety as follows:
FIRST. The name of the corporation is NetSource Communications, Inc.
SECOND. The address of the corporation's registered office in the State
of Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware
19801. The name of its registered agent at such address is 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 Delaware.
FOURTH. The corporation is authorized to issue two classes of stock to
be designated, respectively, "Common Stock" and "Preferred Stock". The total
number of shares that the corporation is authorized to issue is One Hundred and
Ten Million (110,000,000) shares, consisting of One Hundred
<PAGE>
Million (100,000,000) shares of Common Stock, par value $0.001 per share, and
Ten Million (10,000,000) shares of Preferred Stock, par value $0.001 per share.
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized to fix or alter from time to time
the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof, including
without limitation the dividend rights, dividend rate, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions),
redemption price or prices, and the liquidation preferences of any wholly
unissued series of Preferred Stock, and to establish from time to time the
number of shares constituting any such series and the designation thereof, or
any of them; and to increase or decrease the number of shares of any series
subsequent to the issuance of shares of that series, but not below the number of
shares of such series then outstanding. In case the number of shares of any
series shall be decreased in accordance with the foregoing sentence, the shares
constituting such decrease shall resume the status that they had prior to the
adoption of the resolution originally fixing the number of shares of such
series.
FIFTH. The number of directors which constitute the entire Board of
Directors of the corporation shall be as specified in the bylaws of the
corporation. At each annual meeting of stockholders, directors of the
corporation shall be elected to hold office until the expiration of the term of
which they are elected and until their successors have been dully elected and
qualified; except that if any such election shall not be so held, such election
shall take place at a stockholders' meeting called and held in accordance with
the General Corporation Law of Delaware.
Effective as of the date of the first regularly-scheduled annual meeting of
the stockholders following the closing of this corporation's initial public
offering (the "Closing Date"), the directors of the corporation shall be divided
into three classes as nearly equal in size as is practicable, hereby designated
Class I, Class II and Class III. The term of office of the initial Class I
directors shall expire at the second annual meeting of the stockholders
following the Closing Date, the term of office of the initial Class II directors
shall expire at the third annual meeting of the stockholders following the
Closing Date and the term of office of the initial Class III directors shall
expire at the fourth annual meeting of the stockholders following the Closing
Date. At each annual meeting of stockholders, commencing with the second
regularly-scheduled annual meeting of stockholders following the Closing Date,
each of the successors elected to replace the directors of a Class whose term
shall have expired at such annual meeting shall be elected to hold office until
the third annual meeting next succeeding his or her election and until his or
her respective successor shall have been duly elected and qualified .
If the number of directors is hereafter changed, any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as is practicable,
provided that no decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Any director may be removed from office by the stockholders of the
corporation only for cause.
-2-
<PAGE>
Vacancies occurring on the Board of Directors for any reason and newly
created directorships resulting from an increase in the authorized number of
directors may be filled only by vote of a majority of the remaining members of
the Board of Directors, although less than a quorum, at any meeting of the
Board of Directors. A person so elected by the Board of Directors to fill a
vacancy or newly created directorship shall hold office until the next election
of the Class for which such director shall have been chosen and until his or her
successor shall have been duly elected and qualified.
SIXTH. The Board of Directors of the corporation is expressly authorized
to adopt, amend or repeal the bylaws of the corporation (except as may be
otherwise provided in the bylaws), but the stockholders may make additional
bylaws and may alter or repeal any bylaw whether adopted by them or otherwise.
SEVENTH. Elections of directors need not be by written ballot except and
to the extent provided in the bylaws of the corporation.
EIGHTH. A director of the corporation shall not be liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the General Corporation Law of
Delaware as the same exists or may hereafter be amended. Any repeal or
modification of this Article EIGHTH shall not adversely affect any right or
protection of a director of the corporation existing hereunder with respect to
any act or omission occurring prior to such repeal or modification.
NINTH. Stockholders of the corporation may not take action by written
consent in lieu of a meeting but must take any actions at a duly called annual
or special meeting.
TENTH. Notwithstanding any other provisions of this Amended and Restated
Certificate of Incorporation or any provision of law which might otherwise
permit a lesser vote or no vote, but in addition to any affirmative vote of the
holders of the capital stock required by law or this Amended and Restated
Certificate of Incorporation, the affirmative vote of the holders of at least
two-thirds (2/3) of the combined voting power of all of the then-outstanding
shares of the corporation entitled to vote shall be required to alter, amend or
repeal Articles FIFTH, SIXTH, SEVENTH, EIGHTH, NINTH and TENTH.
ELEVENTH. The corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
-3-
<PAGE>
THE UNDERSIGNED, being the President and Chief Executive Officer of the
corporation, 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 his hand this __th day of _______________, 1996.
NetSource Communications, Inc.
----------------------------------------
Edward Brinskele, Chairman
Attest:
- -------------------------
Evan Kraus, Secretary
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
MTC TELECOMMUNICATIONS, INC.
(a Delaware Corporation
(as of January 9.1996)
<PAGE>
TABLE OF CONTENTS
PAGE
----
ARTICLE I
OFFICES
Section 1.1 Registered Office............................................ 1
Section 1.2 Other Offices................................................ 1
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.1 Place of Meeting............................................. 1
Section 2.2 Annual Meeting............................................... 1
Section 2.3 Notice of Annual Meeting..................................... 1
Section 2.4 List of Stockholders......................................... 2
Section 2.5 Special Meetings............................................. 2
Section 2.6 Notice of Special Meetings................................... 2
Section 2.7 Business at Special Meetings................................. 2
Section 2.8 Adjourned Meetings and Notice Thereof........................ 2
Section 2.9 Quorum....................................................... 3
Section 2.10 Majority Vote................................................ 3
Section 2.l1 Voting....................................................... 3
Section 2.12 Stockholder Action Without Meeting........................... 4
ARTICLE III
DIRECTORS
Section 3.1 Number of Directors, Election and Term of Office............. 4
Section 3.2 Vacancies.................................................... 4
Section 3.3 Powers....................................................... 5
Section 3.4 Compensation of Directors.................................... 5
Section 3.5 Resignation and Removal...................................... 5
ARTICLE IV
MEETINGS OF THE BOARD OF DIRECTORS
Section 4.1 Place of Meeting............................................. 5
Section 4.2 Organization Meeting......................................... 5
i
<PAGE>
Section 4.3 Regular Meetings............................................. 5
Section 4.4 Special Meetings............................................. 6
Section 4.5 Notice of Special Meetings................................... 6
Section 4.6 Waiver of Notice............................................. 6
Section 4.7 Quorum....................................................... 6
Section 4.8 Adjournment.................................................. 6
Section 4.9 Action Without Meeting....................................... 6
Section 4.10 Conference Communication..................................... 7
ARTICLE V
COMMITTEES OF DIRECTORS
Section 5.1 Committees of Directors...................................... 7
Section 5.2 Committee Minutes............................................ 8
ARTICLE VI
OFFICERS
Section 6.1 Officers..................................................... 8
Section 6.2 Other Officers............................................... 8
Section 6.3 Election..................................................... 8
Section 6.4 Compensation................................................. 8
Section 6.5 Term......................................................... 8
Section 6.6 The Chairman of the Board.................................... 8
Section 6.7 The Chief Executive Officer and President.................... 9
Section 6.8 The Vice Presidents.......................................... 9
Section 6.9 The Secretary................................................ 9
Section 6.10 The Assistant Secretary...................................... 9
Section 6.11 The Chief Financial Officer or Treasurer..................... 9
Section 6.12 The Assistant Treasurer...................................... 10
ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS
Section 7.1 Indemnification.............................................. 10
Section 7.2 Insurance.................................................... 13
Section 7.3 Savings Clause............................................... 13
ii
<PAGE>
ARTICLE VIII
STOCKHOLDERS
Section 8.1 Certificates of Stock........................................ 13
Section 8.2 Lost Certificates............................................ 14
Section 8.3 Transfer of Stock............................................ 14
Section 8.4 Stockholders of Record; No Record Date....................... 14
Section 8.5 Registered Stockholders...................................... 15
ARTICLE IX
GENERAL PROVISIONS
Section 9.1 Dividends.................................................... 15
Section 9.2 Checks....................................................... 16
Section 9.3 Execution of Documents....................................... 16
ARTICLE X
AMENDMENTS
Section 10.1 Amendments................................................... 16
CERTIFICATE OF SECRETARY.................................................... 17
iii
<PAGE>
ARTICLE I
OFFICES
SECTION 1.1 REGISTERED OFFICE. The registered office of the corporation in
the State of Delaware shall be 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of the registered agent of the corporation at
such location is The Corporation Trust Company. Such registered agent has a
business address identical with such registered office.
SECTION 1.2 OTHER OFFICES. The corporation may also have offices at such
other places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.1 PLACE OF MEETING. Meetings of stockholders shall be held at
such place, either within or without the State of Delaware, as may be designated
by the Board of Directors. In the absence of any such designation, stockholders
meetings shall be held at the corporation's principal executive offices.
SECTION 2.2 ANNUAL MEETING. The annual meeting of stockholders shall be
held on the third Tuesday in April of each year or such other date and at such
time as shall be designated by the Board of Directors and stated in the notice
of the meeting, provided that the date so designated shall be within thirteen
months alter the next preceding annual meeting.
At each annual meeting the stockholders shall elect directors to succeed
those whose terms expire in that year and to serve until their successors are
elected, and shall transact such other business as may properly be brought
before the meeting. Notwithstanding the foregoing, no annual meeting shall be
held if all actions, including the election of directors, required by the
General Corporation Law of the State of Delaware to be taken at a stockholders'
annual meeting are taken by written consent in lieu of a meeting pursuant to
Section 2.12 of this Article II.
SECTION 2.3 NOTICE OF ANNUAL MEETING. Written notice of the annual meeting
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty calendar days before the date of the meeting. Such notice shall be given
either personally or by United States mall, postage prepaid, or other means of
written communication, directed to each stockholder entitled to vote at such
meeting at the address of such stockholder appearing on the books of the
corporation or given by him to the corporation for the purpose of such notice.
The notice shall be deemed to have been given at the
<PAGE>
time when delivered personally or deposited in the United States mall, postage
prepaid, or sent by other means of written communication.
SECTION 2.4 LIST OF STOCKHOLDERS. The officer who has charge of the stock
ledger of the corporation shall prepare and make, at least ten calendar days
before every meeting of stockholders, a complete list of stockholders entitled
to vote at the meeting, arranged in alphabetical order, and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least ten calendar days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 2.5 SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called by the Chairman of the Board, the
president or the secretary, and shall be called by the Chairman of the Board,
the president or the secretary at the request of a majority of the Board of
Directors or at the request in writing of stockholders owning a majority in
amount of the outstanding capital stock of the corporation issued and
outstanding and entitled to vote. Such request shall state the purpose or
purposes of such meeting.
SECTION 2.6 NOTICE OF SPECIAL MEETINGS. Written notice of a special meeting
of stockholders stating the place, date and hour of the meeting and the purpose
or purposes for which the meeting is called shall be given not less than ten nor
more than sixty calendar days before the date of the meeting to each stockholder
entitled to vote at such meeting. Such notice shall be given either personally
or by United States mall, postage prepaid, or other means of written
communication, directed to each stockholder entitled to vote at such meeting at
the address of such stockholder appearing on the books of the corporation or
given by him to the corporation for the purpose of such notice. The notice shall
be deemed to have been given at the time when delivered personally or deposited
in the United States mall, postage prepaid, or sent by other means of written
communication.
Upon request by any person or persons entitled to call a special meeting, the
Chairman of the Board, President, Vice President or Secretary shall within
twenty calendar days alter receipt of the request cause notice to be given to
the stockholders entitled to vote that a special meeting will be held at a time
requested by the person or persons calling the meeting, but not less than
thirty-five calendar days alter receipt of the request.
SECTION 2.7 BUSINESS AT SPECIAL MEETINGS. The business transacted at any
special meeting of stockholders shall be limited to the purposes stated in the
notice.
SECTION 2.8 ADJOURNED MEETINGS AND NOTICE THEREOF. Any stockholders'
meeting, annual or special, whether or not a quorum is present, may be adjourned
from time to
2
<PAGE>
time by the vote of a majority of the shares represented either in person or by
proxy, but in the absence of a quorum, no other business may be transacted at
such meeting, except as provided in Section 2.10 of these by-laws.
When a stockholders' meeting is adjourned to another time or place, a notice
of the adjourned meeting need not be given if the time and place thereof are
announced at the meeting at which the adjournment is taken; except that if the
adjournment is for more than thirty days or if alter the adjournment a new
record date is fixed for the adjourned meeting, notice of the adjourned meeting
small be given to each stockholder of record entitled to vote thereat.
At the adjourned meeting, the corporation may transact any business which
might have been transacted at the original meeting.
SECTION 2.9 QUORUM. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation.
SECTION 2.10 MAJORITY VOTE. If a quorum is present at any meeting, the
affirmative vote of the holders of a majority of the stock having voting power
present in person or represented by proxy shall decide any question brought
before such meeting, unless a different vote is required on that question by
express provision of statute or of the certificate of incorporation, in which
case such express provision shall govern and control. Where a separate vote by
class is required, the affirmative vote of the majority of shares of such class
present in person or by proxy at the meeting shall be the act of such class.
The stockholders present at a duly called or held meeting at which a quorum
is present may continue to do business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum, if any action
taken (other than adjournment) is approved by at least a majority of the shares
required to constitute a quorum, unless a different vote is required as set
forth above.
SECTION 2.11 VOTING. Except as otherwise provided in the certificate of
incorporation and subject to Section 8.4 of these by-laws, each stockholder
shall be entitled to one vote for each share of capital stock having voting
power held by such stockholder. Each stockholder entitled to vote at a meeting
of stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or her
by proxy, but no such proxy shall be voted or acted upon alter three years from
its date, unless the proxy provides for a longer period. Voting may be viva voce
or by written ballot; provided, however, that all elections for directors must
be by written ballot, unless otherwise provided in the certificate of
incorporation.
Any holder of shares entitled to vote on any matter may vote part of the
shares in favor of the proposal and refrain from voting the remaining shares or
vote them against the proposal, other than elections to office, but, if the
stockholder falls to specify the number of
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shares such stockholder is voting affirmatively, it shall be conclusively
presumed that the stockholder's approving vote is with respect to all shares
said stockholder is entitled to vote.
SECTION 2.12 STOCKHOLDER ACTION WITHOUT MEETING. Unless otherwise provided
in the certificate of incorporation, any action required to be taken at any
annual or special meeting of stockholders of the corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may be
taken without a meeting, without prior notice and without a vote, if a consent
or consents in writing, setting forth the action so taken, shall be signed by
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. Prompt notice
of the taking of corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
ARTICLE III
DIRECTORS
SECTION 3.1 NUMBER OF DIRECTORS, ELECTION AND TERM OF OFFICE. The number of
directors which shall constitute the whole board shall be not less than five (5)
nor more than nine (9), and the exact number of directors shall be five (5)
until changed, within the limits specified above, by a resolution amending such
exact number, duly adopted by the Board of Directors or by the stockholders,
provided that, if required by the Certificate of Incorporation, the directors
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may be elected on a class basis as set forth in the Certificate of
Incorporation. Unless otherwise provided in the certificate of incorporation,
all elections of directors shall be by written ballot. Each director elected
shall hold office until his successor is elected and qualified. Directors need
not be stockholders.
SECTION 3.2 VACANCIES. A vacancy in the Board of Directors shall be deemed
to exist in case of the death, resignation or removal of any director, or if the
authorized number of directors be increased, or if the stockholders fall at any
annual or special meeting of stockholders at which any director or directors are
elected to elect the full authorized number of directors to be voted for at that
meeting.
Unless otherwise provided in the certificate of incorporation, vacancies
occurring on the Board for any reason may be filled by a majority of the
directors then in office, although less than a quorum, or by a sole remaining
director, and any director so chosen shall hold office for the unexpired term in
respect of which such vacancy occurred and until his or her successor is duly
elected and qualified.
Unless otherwise provided in the certificate of incorporation, when one or
more directors shall resign from the board, effective at a future date, a
majority of the directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective.
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SECTION 3.3 POWERS. The business and affairs of the corporation shall be
managed by or under the direction of its Board of Directors which may exercise
all such powers of the corporation and do all such lawful acts and things as are
not by statute or by the certificate of incorporation or by these by-laws
directed or required to be exercised or done by the stockholders.
SECTION 3.4 COMPENSATION OF DIRECTORS. The directors shall not receive any
stated salary for their services as directors but may be paid their expenses, if
any, of attendance at each meeting of the Board of Directors and may be paid a
fixed sum for attendance at each meeting of the Board of Directors. No such
payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor. Members of special or standing
committees may be allowed like compensation for attending committee meetings.
SECTION 3.5 RESIGNATION AND REMOVAL. Any director may resign effective upon
giving written notice to the Chairman of the Board, the President, the Secretary
or the Board of Directors of the corporation, unless the notice specifies a
later time for the effectiveness of such resignation. If the resignation is
effective at a future time, a successor may be elected to take office when the
resignation becomes effective.
Any director may be removed in accordance with applicable law.
ARTICLE IV
MEETINGS OF THE BOARD OF DIRECTORS
SECTION 4.1 PLACE OF MEETING. Unless otherwise restricted by the
certificate of incorporation, the Board of Directors of the corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
SECTION 4.2 ORGANIZATION MEETING. As soon as practicable alter each annual
meeting of stockholders, the Board of Directors shall hold a regular meeting for
the purpose of organization, electing officers and transacting other business.
No notice of such meeting need be given. In the event such meeting is not so
held, the meeting may be held at such time and place as shall be specified in a
notice given as hereinafter provided for special meetings of the Board of
Directors, or as shall be specified in a written waiver signed by all of the
directors. Notwithstanding the foregoing, no such regular meeting shall be held
if all such actions are taken by written consent in lieu of a meeting pursuant
to Section 4.9 of this Article IV.
SECTION 4.3 REGULAR MEETINGS. Regular meetings of the Board of Directors
may be held at such time and at such place as shall from time to time be
determined by the Board of Directors. Such regular meetings may be held without
notice.
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SECTION 4.4 SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the president or on the written
request of a majority of the directors then in office.
SECTION 4.5 NOTICE OF SPECIAL MEETINGS. Notice of the time and place of
special meetings of the Board of Directors shall be delivered personally to each
director, or sent to each director by mall, facsimile transmission, telephone or
telegraph. In case such notice is sent by mail, it shall be deposited in the
United States mail at least four days prior to the time of the holding of the
meeting. In case such notice is delivered personally, or by facsimile
transmission, telephone or telegraph, it shall be so delivered at least twenty-
four hours prior to the time of the holding of the meeting. Such notice shall
not be necessary if appropriate waivers, consents and/or approvals are filed in
accordance with Section 4.6 of this Article IV.
SECTION 4.6 WAIVER OF NOTICE. Notice of a meeting need not be given to any
director who signs a waiver of notice, whether before or alter the meeting, or
who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to such director.
The transactions of any meeting of the Board of Directors, however called and
noticed or wherever held, shall be as valid as though had at a meeting duly held
alter regular call and notice if a quorum is present and if, either before or
alter the meeting, each of the directors not present signs a written waiver of
notice, a consent to holding the meeting or an approval of the minutes thereof.
All such waivers, consents and approvals shall be filed with the corporate
records or made a part of the minutes of the meeting.
SECTION 4.7 QUORUM. At all meetings of the Board of Directors, a majority
of the total authorized number of directors shall constitute a quorum for the
transaction of business unless the certificate of incorporation requires a
greater number. The vote of the majority of the directors present at a meeting
at which a quorum is present shall be the act of the Board of Directors unless
the certificate of incorporation shall require a vote of a greater number. If a
quorum shall not be present at any meeting of the Board of Directors, the
directors present thereat may adjourn the meeting without notice other than
announcement at the meeting, until a quorum shall be present. A meeting at which
a quorum is initially present may continue to transact business, notwithstanding
the withdrawal of directors, if any action taken is approved by at least a
majority of the required quorum for such meeting.
SECTION 4.8 ADJOURNMENT. Any meeting of the Board of Directors, whether or
not a quorum is present, may be adjourned to another time and place by the vote
of a majority of the directors present. Notice of the time and place of the
adjourned meeting need not be given to absent directors if said time and place
are fixed at the meeting adjourned.
SECTION 4.9 ACTION WITHOUT MEETING. Unless otherwise restricted by the
certificate of incorporation or these by-laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if
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all members of the Board of Directors or committee thereof, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or committee thereof.
SECTION 4.10 CONFERENCE COMMUNICATION. Unless otherwise restricted by the
certificate of incorporation or these by-laws, members of the Board of Directors
or any committee designated by the Board of Directors may participate in a
meeting of the Board of Directors or committee by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other. Participation in a meeting pursuant to this
Section 4.10 shall constitute presence in person at such meeting.
ARTICLE V
COMMITTEES OF DIRECTORS
SECTION 5.1 COMMITTEES OF DIRECTORS. The Board of Directors may, by
resolution passed by a majority of the whole Board of Directors, designate one
or more committees, each committee to consist of one or more of the directors of
the corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting and
not disqualified from voting, whether or not such member or members constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors or
in these by-laws, shall have and may exercise all the powers and authority of
the Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it, but no such committee shall have the power or
authority in reference to amending the certificate of incorporation (except that
a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in Section 151(a) of the Delaware General Corporation Law, fix the
designations and any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
corporation or the conversion into, or the exchange of such shares for, shares
of any other class or classes or any other series of the same or any other class
or classes of stock of the corporation or fix the number of shares of any series
of stock or authorize the increase or decrease of the shares of any series),
adopting an agreement of merger or consolidation under Section 251 or 252 of the
Delaware General Corporation Law, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the by-laws of the Corporation; and,
unless the resolution, by-laws, or certificate of incorporation expressly so
provide, no such committee shall have the power or authority to declare a
dividend, to authorize the issuance of stock, or to adopt a certificate of
ownership and merger pursuant to Section 253 of the Delaware
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General Corporation Law. Such committee or committees shall have such name or
names as may be determined from time to time by resolution adopted by the Board
of Directors.
SECTION 5.2 COMMITTEE MINUTES. Each committee shall keep regular minutes of
its meetings and report the same to the Board of Directors when required.
ARTICLE VI
OFFICERS
SECTION 6.1 OFFICERS. The officers of the corporation shall be chosen by
the Board of Directors and shall be a Chairman of the Board, a president, a
secretary and a treasurer or chief financial officer. The Board of Directors may
also choose one or more vice presidents, and one or more assistant secretaries
and assistant treasurers. Any number of offices may be held by the same person,
unless the certificate of incorporation or these by-laws otherwise provide.
SECTION 6.2 OTHER OFFICERS. The Board of Directors may appoint such other
officers and agents as it shall deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board of Directors.
SECTION 6.3 ELECTION. The Board of Directors at its first meeting alter
each annual meeting of stockholders shall choose a Chairman of the Board, a
president, a secretary and a treasurer.
SECTION 6.4 COMPENSATION. The salaries of all officers and agents of the
corporation shall be fixed from time to time by the president, and no officer
shall be prevented from receiving such compensation by reason of the fact that
he is also a director of the corporation.
SECTION 6.5 TERM. Each officer shall hold office until his or her successor
is elected and qualified or until his or her earlier resignation or removal. Any
officer elected or appointed by the Board of Directors may be removed at any
time, either with or without cause, by the affirmative vote of a majority of the
Board of Directors. Any officer may resign at any time by giving written notice
to the corporation. Any such resignation shall take effect at the date of the
receipt of such notice or at any later time specified therein; and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective. Any vacancy occurring in any office of the
corporation by death, resignation, removal or otherwise, shall be filled by the
Board of Directors.
SECTION 6.6 THE CHAIRMAN OF THE BOARD. The Chairman of the Board shall
preside at all meetings of the Board of Directors and of the stockholders. He
shall present at each annual meeting of stockholders and of directors a report
of the condition of the business
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of the corporation. The Chairman of the Board shall have such other powers and
duties as may be prescribed by the Board of Directors or by these by-laws.
SECTION 6.7 THE CHIEF EXECUTIVE OFFICER AND PRESIDENT. The president shall
be the chief executive officer of the corporation and shall, subject to the
control of the Board of Directors, have general supervision, direction and
control of the business and affairs of the corporation. The president shall act
on behalf of the Chairman of the Board whenever the Chairman of the Board is for
any reason unable to perform his duties or exercise his powers. He shall be ex
--
officio a member of all the standing committees, including the executive
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committee, if any, and shall have the general powers and duties of management
usually vested in the office of president of a corporation, and shall have such
other powers and duties as may be prescribed by the Board of Directors or by
these by-laws.
SECTION 6.8 THE VICE PRESIDENTS. In the absence or disability of the
president, the vice presidents in order of their rank as fixed by the Board of
Directors, or, if not ranked, the vice presidents in order of their seniority of
employment with the corporation, shall perform the duties of the president, and
when so acting shall have all the powers of, and be subject to all the
restrictions upon the president. The vice presidents shall have such other
powers and perform such other duties as from time to time may be prescribed for
them respectively by the president. The Board of Directors may appoint one or
more executive vice presidents.
SECTION 6.9 THE SECRETARY. The secretary shall keep, or cause to be kept, a
book of minutes in written form of the proceedings of the Board of Directors,
committees of the board, and stockholders. Such minutes shall include all
waivers of notice, consents to the holding of meetings, or approvals of the
minutes of meetings executed pursuant to these by-laws or statute. The secretary
shall keep, or cause to be kept at the principal executive office or at the
office of the corporation's transfer agent or registrar, a record of its
stockholders, giving the names and addresses of all stockholders and the number
and class of shares held by each.
The secretary shall give or cause to be given notice of all meetings of the
stockholders and of the Board of Directors required by these by-laws or by law
to be given, and shall keep the seal of the corporation in safe custody, and
shall have such other powers and perform such other duties as may be prescribed
by the Board of Directors or these by-laws .
SECTION 6.10 THE ASSISTANT SECRETARY. The assistant secretary shall have
all the powers and perform all the duties of the secretary in the absence or
inability of the secretary to act and shall perform such other duties as the
Board of Directors, the chairman of the board or the president shall designate.
SECTION 6.11 THE CHIEF FINANCIAL OFFICER OR TREASURER. The treasurer shall
be the chief financial officer of the corporation. He shall deposit all monies
and other valuables in the name and to the credit of the corporation with such
depositaries as may be designated by the Board of Directors. He shall disburse
all funds of the corporation as may be ordered by the Board
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of Directors, shall render to the president and directors, whenever they request
it, an account of all of his transactions as treasurer and of the financial
condition of the corporation, and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or by these by-laws.
SECTION 6.12 THE ASSISTANT TREASURER. The assistant treasurer, or if there
shall be more than one, the assistant treasurers in the order determined by the
Board of Directors (or if there is no such determination, then in the order of
their election), shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS,
EMPLOYEES AND AGENTS
SECTION 7.1 INDEMNIFICATION.
(a) ACTIONS, SUITS OR PROCEEDINGS OTHER THAN BY OR IN THE RIGHT OF THE
CORPORATION. The corporation shall to the fullest extent permitted by
applicable law 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 or she is
or was or has agreed to become a director or officer of the corporation, or is
or was serving or has agreed to serve at the request of the corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise (including, without limitation, service with respect to
employee benefit plans) against all costs, charges, expenses (including
attorneys' fees), liabilities and losses, judgments, fines, amounts paid in
settlement and excise taxes or penalties assessed with respect to any employee
benefit or welfare plan reasonably incurred or suffered by him or her or on his
or her behalf in connection with such action, suit or proceeding and any appeal
therefrom, if he or she acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. The termination of any action, suit or
proceeding by judgment, order, settlement, conviction, or upon a plea of nolo
----
contendere or its equivalent, shall not, of itself, create a presumption that
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the person did not act in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that his or her conduct was unlawful.
(b) ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The
corporation shall indemnify to the fullest extent permitted by applicable law
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
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the right of the corporation to procure a judgment in its favor by reason of the
fact that he or she is or was or has agreed to become a director or officer of
the corporation, or is or was serving or has agreed to serve at the request of
the corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise (including, without limitation, service
with respect to employee benefit plans), against all costs, charges, expenses
(including attorneys' fees), judgments, amounts paid in settlement and excise
taxes or penalties assessed with respect to any employee benefit or welfare plan
reasonably incurred or suffered by him or her or on his or her behalf in
connection with such action or suit and any appeal therefrom, if he or she acted
in good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation, except that no indemnification
shall be made under this Section 7.1(b) 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 extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of such liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such costs, charges and expenses which the Court of Chancery or
such other court shall deem proper.
(c) INDEMNIFICATION FOR COSTS, CHARGES AND EXPENSES OF SUCCESSFUL PARTY.
Notwithstanding any other provision of this Article VII, to the extent that a
director, officer, employee or agent of the corporation has been successful on
the merits or otherwise, including, without limitation, the dismissal of an
action without prejudice, in defense of any action, suit or proceeding referred
to in Sections 7.1(a) or 7.1(b) of this Article VII or in defense of any claim,
issue or matter therein, he or she shall be indemnified against all costs,
charges and expenses (including attorneys' fees) actually and reasonably
incurred by him or her or on his or her behalf in connection therewith.
(d) DETERMINATION OF RIGHT TO INDEMNIFICATION. Any indemnification under
Sections 7.1(a) or 7.1(b) of this Article VII (unless ordered by a court) shall
be paid by the corporation only as authorized in the specific case upon a
determination that indemnification is proper in the circumstances because the
indemnified person has met the applicable standard of conduct set forth in
Sections 7.1(a) and 7.1(b) of this Article VII. Such determination shall be made
(1) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel (who may be the
regular counsel of the corporation) in a written opinion, or (3) by the
stockholders.
(e) ADVANCEMENT OF COSTS, CHARGES AND EXPENSES. Expenses (including
attorneys' fees) incurred by a director or officer referred to in Sections
7.1(a) or 7.1(b) of this Article VII in defending a civil or criminal action,
administrative or investigative action, suit or proceeding shall be paid by the
corporation, in advance of a determination of right to indemnification pursuant
to Section 7.1(d) of this Article VII or the final disposition of such action,
suit or proceeding, upon the written request of such director or officer;
provided, however, that the payment of such expenses in advance of the
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determination of right to indemnification or the final disposition of such
action, suit or proceeding shall be made only
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upon receipt of an undertaking by or on behalf of such director or officer to
repay such amount if it shall ultimately be determined that such director or
officer is not entitled to be indemnified by the corporation as authorized in
this Section 7.1. The Board of Directors may, in such case, and upon approval of
such director or officer of the corporation, authorize the corporation's counsel
to represent such person, in any action, suit or proceeding, whether or not the
corporation is a party to such action, suit or proceeding. Such costs, charges
and expenses incurred by other employees and agents may be so paid upon such
terms and conditions, if any, as the Board of Directors deems appropriate.
(f) PROCEDURE FOR INDEMNIFICATION. Any indemnification under Sections
7.1(a), 7.1(b) or 7.1(c) of this Article VII or advance of expenses under
Section 7.1(e) of this Article VII shall be made promptly, and in any event
within 60 days, upon the written request of the indemnified person. The right to
indemnification or advances as granted by this Section 7.1 shall be enforceable
by the indemnified person in any court of competent jurisdiction, if the
corporation denies such request, in whole or in part, or if no disposition
thereof is made within 60 days. Such person's costs and expenses actually and
reasonably incurred in connection with successfully establishing his or her
right to indemnification, in whole or in part, in any such action shall also be
indemnified by the corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for the advance of costs, charges and
expenses under Section 7.1 of this Article VII where the required undertaking,
if any, has been received by the corporation) that the claimant has not met the
standard of conduct set forth in Section 7.1(a) or 7.1(b) of this Article VII
but the burden of proving such defense shall be on the corporation. Neither the
failure of the corporation (including its Board of Directors, its independent
legal counsel, and its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of c6nduct
set forth in Sections 7.1(a) or 7.1(b) of this Article VII nor the fact that
there has been an actual determination by the corporation (including its Board
of Directors, its independent legal counsel, and its stockholders) that the
claimant has not met such applicable standard of conduct, shall be a defense to
the action or create a presumption that the claimant has not met the applicable
standard of conduct.
(g) OTHER RIGHTS; CONTINUATION OF RIGHT TO INDEMNIFICATION. The
indemnification and advancement of costs, charges and expenses provided by, or
granted pursuant to, this Section 7.1 shall not be deemed exclusive of any other
rights to which a person seeking indemnification or advancement of costs,
charges and expenses may be entitled under any law (common or statutory),
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his or her official capacity and as to action in another capacity
while holding such office as set forth in Sections 7.1(a) and 7.1(b) of this
Article VII or otherwise, and, unless otherwise provided when authorized or
ratified, shall continue as to a person who has ceased to hold such office and
shall inure to the benefit of the estate, heirs, executors and administrators of
such person. All rights to indemnification under this Section 7.1 shall be
deemed to be a contract between the corporation and each director and officer of
the corporation who serves or served in such capacity at any time while this
Section 7.1 is in effect. Any repeal or modification of this Section 7.1 or any
repeal or modification of relevant provision of the Delaware General
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Corporation Law or any other applicable laws shall not in any way diminish any
rights to indemnification of such director or officer or the obligations of the
Corporation arising hereunder.
(h) INDEMNIFICATION OF EMPLOYEES AND OTHER AGENTS. The Board of Directors
in its discretion shall have power on behalf of the corporation, subject to
applicable law, to indemnify any person made a party to any action, suit or
proceeding by reason of the fact that such person, or his or her testator or
intestate, is or was an employee or other agent of the corporation and to
advance costs, charges and expenses (including attorneys' fees) incurred by such
person in defending any such action, suit or proceeding.
SECTION 7.2 INSURANCE. The corporation may purchase and maintain insurance
on behalf of any person who is or was or has agreed to become a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her and incurred by him or her or on his or
her behalf in any such capacity, or arising out of his or her status as such,
whether or not the corporation would have the power to indemnity him or her
against such liability under the provisions of this Article VII.
SECTION 7.3 SAVINGS CLAUSE. If this Article VII or any portion hereof shall
be invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnity each director and officer of the
corporation as to costs, charges and expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement with respect to any action, suit
or proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the corporation, to the full extent
permitted by any applicable portion of this Article VII that shall not have been
invalidated and to the full extent permitted by applicable law
ARTICLE VII
STOCKHOLDERS
SECTION 8.1 CERTIFICATES OF STOCK. Every holder of stock in the corporation
shall be entitled to have a certificate, signed by, or in the name of the
corporation by, the chairman or vice chairman of the Board of Directors or the
president or a vice president, and by the treasurer or an assistant treasurer,
or the secretary or an assistant secretary of the corporation, representing the
number of shares registered in certificate form. Any or all the signatures on
the certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
13
<PAGE>
SECTION 8.2 LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates of stock to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond (or other adequate
security) in such sum as it may direct as indemnity against any claim that may
be made against the corporation on account of the alleged loss, theft or
destruction of any such certificate or the issuance of such new certificate.
SECTION 8.3 TRANSFER OF STOCK. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
SECTION 8.4 STOCKHOLDERS OF RECORD; NO RECORD DATE. In order that the
corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which record date shall not be more than sixty nor less than ten calendar days
before the date of such meeting. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting, provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
In order that the corporation may determine the stockholders entitled to
consent to corporate action in writing without a meeting, the Board of Directors
may fix a record date, which record date shall not precede the date upon which
the resolution fixing the record date is adopted by the Board of Directors, and
which date shall not be more than ten calendar days after the date upon which
the resolution fixing the record date is adopted by the Board of Directors. If
no record date has been fixed by the Board of Directors, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board of Directors is required by
statute, shall be the first date on which a signed written consent setting forth
the action taken or proposed to be taken is delivered to the corporation by
delivery to its registered office in the State of Delaware, its principal place
of business or an officer or agent of the corporation having custody of the book
in which proceedings of meetings or stockholders are recorded. Delivery made to
the corporation's registered office shall be by hand or by certified or
registered mall, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the board of directors is required by
statute, the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall be at the close of business
on the day on which the Board of Directors adopts the resolution taking such
prior action.
14
<PAGE>
In order that the corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or the stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than sixty days prior to such action. If
no record date is fixed, the record date for determining stockholders for any
such purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be the close
of business on the day next preceding the day on which notice is given, or, if
notice is waived, the close of business of the day next preceding the day on
which the meeting is held.
SECTION 8.5 REGISTERED STOCKHOLDERS. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
ARTICLE IX
GENERAL PROVISIONS
SECTION 9.1 DIVIDENDS. Dividends upon the capital stock of the corporation,
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock of the corporation, subject to the provisions of the certificate of
incorporation. If a dividend is to be paid in shares of the corporation's
theretofore unissued stock, the Board of Directors shall, by resolution, direct
that there be designated as capital in respect of such shares an amount which is
not less than the aggregate par value of par value shares being declared as a
dividend and, in the case of shares without par value being declared as a
dividend, such amount as shall be determined by the Board of Directors. No such
designation as capital shall be necessary if shares are distributed pursuant to
a split-up or division of the corporation's stock rather than as payment of a
dividend declared payable in stock of the corporation. Before payment of any
dividend, there may be set aside out of any funds of the corporation legally
available for dividends such sum or sums as the directors may from time to time,
in their absolute discretion, think proper as a reserve or reserves to meet
contingencies, or for equalizing dividends, or for repairing or maintaining any
property of the corporation, or for such other purposes as the directors shall
think conducive to the interest of the corporation, and the directors may modify
or abolish any such reserve in the manner in which it was created.
15
<PAGE>
SECTION 9.2 CHECKS. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
SECTION 9.3 EXECUTION OF DOCUMENTS. The Chairman of the Board of Directors,
the president or any other officer, employee or agent of the corporation
designated by the Board of Directors shall have the power to execute and deliver
deeds, leases, contracts, mortgages, bonds, debentures, checks, drafts and other
documents for and in the name of the corporation, and such power may be
delegated by written instrument to other officers, employees or agents of the
corporation.
ARTICLE X
AMENDMENTS
SECTION 10.1 AMENDMENTS. These by-laws may be altered, amended, or repealed
or new by-laws may be adopted, by the Board of Directors at any regular or
special meeting thereof, subject to the powers of the holders of a majority of
the outstanding stock of the corporation entitled to vote in respect thereof, by
their vote given at an annual meeting or at any special meeting, to amend or
repeal any by-law.
16
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, do hereby certify:
1. That I am the duly elected and acting Secretary of MTC
TELECOMMUNICATIONS INC., a Delaware corporation.
2. That the foregoing By-laws constitute the By-laws of said corporation
as adopted by the directors 6f this corporation by written unanimous consent on
__________________ 199__.
IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal
of the corporation this ______ day of __________,199__.
/s/ Rebecca B. Brinskele
__________________________________
Rebecca B. Brinskele
[SEAL]
17
<PAGE>
EXHIBIT 4.2
NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC.
SECURED SUBORDINATED CONVERTIBLE NOTE
TO PURCHASE COMMON STOCK
Series A- Petaluma, California
---
U.S. $ June 24, 1996
--------------
NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC., a Delaware corporation
(the "Company"), the principal office of which is located at 1304 Southpoint
Boulevard, Petaluma, California 94954, for value received, hereby promises to
pay to _______________________, or registered assigns, the sum of ______________
U.S. Dollars (U.S.$_____________), or such lesser amount as shall then equal the
outstanding principal amount hereof on the terms and conditions set forth
hereinafter. Interest shall accrue on this Note at the rate of ten percent (10%)
per annum and be paid semi-annually, all as set forth in Section 2.a (below).
The principal hereof and any remaining unpaid but accrued interest hereon,
following the third semi-annual interest payment, as set forth below, shall be
due and payable on the second anniversary of the date of this Note (the "Due
Date"). Payment for all amounts due hereunder shall be made by mail to the
registered address of the Holder or by mail or wire transfer to the address of
any unaffiliated third-party "fiscal agent" appointed by the Company from time
to time (the "Fiscal Agent") to forward payments to the registered Holder by
mail or by wire transfer; provided, however, that for the Holder to receive its
interest or principal payments by wire transfer, the Fiscal Agent must receive
such Holder's written bank wire transfer instructions by the record date for
such payment. This Note is one of a Series issued in connection with that
certain Fiscal Agency Agreement dated as of June 24, 1996 (the "Agency
Agreement") between the Company and the Fiscal Agent in connection with the
transactions described in that certain Subscription Agreement dated for
reference purposes only as of May 31, 1996 between the Company and the Holder
(the "Subscription Agreement"). The Holder of this Note is subject to certain
restrictions set forth in the Subscription Agreement and shall be entitled to
certain rights and privileges set forth in the Subscription Agreement.
The following is a statement of the rights of the Holder of this Note and
the conditions to which this Note is subject, and to which the Holder hereof, by
the acceptance of this Note, agrees:
1. Definitions. As used in this Note, the following terms, unless the
-----------
context otherwise requires, have the following meanings:
a. "IPO" shall mean the Company's first underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, (the "Act") cover ing the offering and sale of shares of
Common Stock for the account of the Company (other than a registration statement
effected solely to implement an employee benefit plan or a transaction in which
Rule 145 of the Securities and Exchange Commission is applicable).
b. "Company" includes any corporation which shall succeed to or assume
the obligations of the Company under this Note.
c. "Holder," when the context refers to a holder of this Note, shall
mean any person who shall at the time be the registered holder of this Note on
the register maintained by the Fiscal Agent.
d. "United States Alien" shall mean any person who, for United States
federal income tax purposes, is a foreign corporation, a foreign partnership, a
non-resident alien individual, or a foreign estate or trust.
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<PAGE>
2. Interest.
--------
a. Interest Rate. Until all outstanding principal and accrued
-------------
interest on this Note shall have been paid in full, interest shall accrue and be
payable on the outstanding principal balance of this Note, in arrears on each
sixth month anniversary date following the date of this Note (the "Interest
Payment Date"), at the lower of (i) the rate of ten percent (10%) per annum
accruing from the date of this Note; and (ii) applicable usury interest limits
(collectively, the "Interest Rate"). If applicable usury interest limits for
any interest payment are below the rate of ten percent (10%) per annum, the
Company shall, on or before the record date for such payment, deliver an
Officer's Certificate to the Fiscal Agent as provided in the Agency Agreement,
certifying the amount of the interest rate for such interest payment based on
the applicable usury limits. Interest on this Note shall accrue from the date
hereof on the outstanding principal balance, as such principal may decline from
time to time, until such principal is paid. Interest shall be calculated based
on actual days elapsed. Interest will be paid semiannually in arrears on
December 24 and June 24, commencing on December 24, 1996 (each an "Interest
Payment Date"). Any interest past due for more than five (5) business days
after the applicable Interest Payment Date (such five (5) business days referred
to herein as the "Grace Period") shall likewise bear interest at the rate of ten
percent (10%) per annum from such Interest Payment Date until paid in full.
b. Additional Interest. The Company shall, subject to the exceptions
-------------------
and limitations set forth below, pay as additional interest to a Holder who is a
United States Alien, such amounts as may be necessary so that every net payment
on this Note, after withholding for or on account of any present or future tax,
assessment or other governmental charge imposed upon or as a result of such
payment of interest by the United States (or any political subdivision or taxing
authority thereof or therein), will not be less than the amount of interest
provided in such Note to be then due and payable ("Additional Interest").
However, the Company shall not be required to make any payment of Additional
Interest for or on account of:
i. Any tax, assessment or other governmental charge that would not
have been so imposed but for (a) the existence of any present or former
connection between such Holder (or between a fiduciary, settlor or beneficiary
of, or a person holding a power over, such Holder, if such Holder is an estate
or a trust, or a member or shareholder of such Holder is a corporation), and the
United States, including, without limitation, such Holder (or such fiduciary,
settlor, beneficiary, person holding a power, member or shareholder) being or
having been a citizen or resident thereof or being or having been engaged in a
trade or business or present therein or having or having had a permanent
establishment therein; or (b) the past or present status of such Holder as a
bank, personal holding company, foreign personal holding company, controlled
foreign corporation, or private foundation or other tax-exempt organization
with respect to the United States, or as a corporation that accumulates earnings
to avoid United States federal income tax;
ii. Any estate, inheritance, gift, sales, transfer or personal
property tax or any similar tax, assessment or other governmental charge;
iii. Any tax, assessment or other governmental charge that would not
have been imposed but for the presentation by such Holder of this Note for
payment more than fifteen (15) days after the date on which such payment became
due and payable or the date on which payment thereof was duly provided, for
whichever occurred later;
iv. Any tax, assessment or other governmental charge that is payable
otherwise than by withholding from payments of principal of and interest on this
Note;
v. Any tax, assessment or other governmental charge that would not
have been imposed but for a failure to comply with applicable certification,
information, documentation or other reporting requirements concerning the
nationality, residence, identity or connection with the
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<PAGE>
United States of such Holder if, without regard to any tax treaty, such
compliance is required by statute or regulation of the United States as
precondition to relief or exemption from such tax, assessment or other
governmental charge;
vi. Any tax, assessment or other governmental charge imposed on
a Holder that actually or constructively owns ten percent (10%) or more of the
capital or profits interest of the Company;
vii. Any tax, assessment or other governmental charge required to
be withheld by any paying agent from a payment on this Note, if such payment can
be made without such withholding by any other paying agent; or
viii. Any combination of items 2.b.i through 2.b.vii.
Additional Interest shall not be paid with respect to a payment to a Holder that
is a fiduciary or company or other than the sole beneficial owner of such
payment to be extent such payment would be required by the laws of the United
States (or any political subdivision thereof) to be included in the income for
tax purposes of a beneficiary, settlor, with respect to such fiduciary or a
member of such company or a beneficial owner that would not have been entitled
to the Additional Interest had such beneficiary, settlor, member or beneficial
owner been the registered owner of this Note. Also, if the Company is required
to pay Additional Interest to a Holder, and the Holder subsequently receives a
tax credit or tax refund which is attributable to the tax, assessment or other
governmental charge which gave rise to the Company's obligation to pay the
Additional Interest, the Holder shall promptly reimburse the Company such amount
as will leave the Holder after the reimbursement in no better and no worse
position than it would have been if the payment of Additional Interest had not
been required; provided, however, that the Holder shall not be required to
disclose information regarding its tax affairs or computations to the Company
other than such non-proprietary information as may be necessary to permit the
Company to confirm its reimbursement rights hereunder.
3. Prepayment.
-----------
a. At Company's Election. The Company may prepay any portion or
---------------------
all of the principal balance and/or interest under this Note any time after the
one (1) year anniversary of the date of this Note upon twenty (20) calendar
days' prior written notice to the Holder, which notice for purposes of the
twenty (20) days may be given prior to such one (1) year anniversary. Any
prepayment of this Note will be credited first against accrued interest and then
against principal.
b. Mandatory. The Company shall be obligated to prepay all of the
---------
principal and accrued interest under this Note within five (5) business days
after July 31, 1996, if the Company's Reorganization (as defined in the
Company's Private Placement memorandum dated for reference purposes only as of
May 31, 1996) has not been consummated by July 31, 1996.
4. Conversion.
----------
a. Holder's Conversion Rights. So long as any principal remains
--------------------------
outstanding hereunder up to and through the Due Date, Holder may, at its option
by written notice to the Fiscal Agent given by delivery to the Fiscal Agent of
the Conversion Election Form appended to this Note (the "Conversion Election
Form") at any time after the Conversion Price has been established pursuant to
Section 4.b (below), and prior to the Due Date (collectively, the "Conversion
Period"), convert all or any portion of the principal outstanding hereunder
(such conversion of principal to be in increments of Ten Thousand Dollars
($10,000) and/or such lesser or additional amount as may remain outstanding
under this Note at the time of conversion) into Common Stock of the Company at
the Conversion Price established in Section 4.b (below).
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<PAGE>
b. Conversion Price. The conversion price per share at which the
----------------
principal under this Series A Note shall be convertible shall equal the price
established below (the "Conversion Price"):
i. If an IPO is consummated by the Company on, or before,
December 31, 1996, the Conversion Price shall be equal to seventy percent (70%)
of the per share price to the public of the Common Stock in the IPO (rounded to
the nearest whole cent). If the Company consummates an IPO on, or before,
December 31, 1996, it shall, within thirty (30) days thereafter, notify the
Fiscal Agent in writing of the Conversion Price by delivery of an Officer's
Certificate; and
ii. If an IPO has not been consummated on, or before, December 31,
1996, the Conversion Price shall be Eighty-one Dollars ($81.00) based upon the
pre-money valuation of the Company prior to the sale of the Series A Notes
determined by taking the annualized gross revenues of the Company during the
first calendar quarter of 1996 (comprising the revenues of MTC Telemanagement
Corporation, MTC International, Inc., and NetSource Interactive, Inc.). These
gross revenues are currently estimated to be approximately One Hundred Million
Dollars ($100,000,000) on an annualized basis. If an audit of the Company's
gross revenues results in an adjustment either up or down of more than Two
Million Five Hundred Thousand Dollars ($2,500,000) for such quarter, then the
Conversion Price shall be appropriately adjusted by dividing such audited gross
revenues (on an annualized basis) by the number of issued and outstanding shares
of the Company's Common Stock on a fully-diluted basis (1,065,204 shares +
169,582 shares issuable under outstanding options = 1,234,786 fully-diluted
shares). If there is an adjustment to the Conversion Price as a result of such
audit, the Company shall notify the Holder in writing of the adjusted Conversion
Price within thirty (30) days after such adjustments by delivery of an Officer's
Certificate.
c. General Conversion Terms. The Company shall not be obligated to
------------------------
issue certificates evidencing the shares of the Common Stock issuable upon
conversion of this Note unless this Note is delivered to the Fiscal Agent,
together with a properly executed Conversion Election Form; provided, however,
that this Note need not be delivered for conversion if the Holder notifies the
Fiscal Agent that such Note has been lost, stolen or destroyed and executes an
agreement satisfactory to the Company and the Fiscal Agent to indemnify the
Company and the Fiscal Agent from any loss incurred by it in connection with
such Note, including the posting of a bond as may be reasonably requested by the
Company and the Fiscal Agent. The Company shall, as soon as practicable after
such delivery to the Fiscal Agent, or such agreement, indemnification and bond
if required by the Company, issue and deliver to such Holder of such Note, a
certificate or certificates for the securities to which the Holder shall be
entitled accompanied by any appropriate restrictive legends on transfer, a check
payable to the Holder in the amount of any cash amounts payable as the result of
a conversion into fractional shares of Common Stock, as the case may be, and a
new Note upon the same terms as this Note for any remaining principal in the
case of a conversion of only a portion of this Note. The shares issued upon
conversion will bear legends which are substantially the same as the Securities
Legends appearing on the face of this Note if conversion occurs prior to the
Anniversary Date; thereafter shares issued upon conversion will be issued
without the "Securities Legends." In addition, the shares issued upon
conversion will bear a legend which is substantially the same as the Lock-Up
Legend appearing on the face of this Note if conversion occurs prior to the
expiration date of the Lock-Up Period set forth in Section 8 of this Note;
thereafter shares issued upon conversion will be issued without the "Lock-Up
Legend." Any shares issued upon conversion will not bear the Security Agreement
Legend. Such conversion shall be deemed to have been made immediately prior to
the close of business on the date of receipt by the Fiscal Agent of the Holder's
Conversion Election Form and this Note (or agreement, indemnification and bond
if required by the Company). The person or persons entitled to receive Common
Stock issuable upon such conversion shall be treated for all purposes as the
record Holder or Holders of such Common Stock on such date.
-5-
<PAGE>
5. Note Confers No Rights of Shareholder. The Holder shall not have any
-------------------------------------
rights as a shareholder of the Company with regard to the shares issuable
hereunder prior to actual conversion hereunder.
6. Reservation of Shares. The Company agrees at all times during the
---------------------
Conversion Period to have authorized and reserved, for the exclusive purpose of
issuance and delivery upon conversion of this Note, a sufficient number of
shares of its Common Stock to provide for the conversion of the rights
represented hereby. On, or before, the Anniversary Date, the Company will give
its stock transfer agent a standing order authorizing the stock transfer agent
to issue, after the Anniversary Date, free of the Securities Legends, the shares
of Common Stock issuable upon conversion of this Note.
7. Adjustments. If the Company at any time during the Conversion Period
------------
shall, by subdivision, combination or re-classification of securities, change
any of the Company's Common Stock to which purchase rights under this Note exist
into the same or a different number of securities of any class or classes, this
Note shall thereafter entitle the Holder to acquire such number and kind of
securities as would have been issuable as a result of such change with respect
to the shares here under immediately prior to such subdivision, combination, or
re-classification. If shares of the Company's Common Stock are subdivided into
a greater number of shares of Common Stock, the conversion price for the shares
hereunder upon conversion of this Note shall be proportionately reduced and the
number of such shares shall be proportionately increased; and conversely, if
shares of the Company's Common Stock are combined into a smaller number of
Common Stock shares, the price shall be proportionately increased, and the
number of shares hereunder shall be proportionately decreased. If there is any
such adjustment to the Conversion Price, the Company shall notify the Fiscal
Agent in writing of the adjusted Conversion Price within thirty (30) days after
such adjustment by delivery of an Officer's Certificate.
8. Public Offering Lock-Up. In connection with the IPO, the Holder
-----------------------
agrees, upon the written request of the Company or the underwriters managing
such underwritten offering of the Company's securities, not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any of the Company's securities without the prior written consent of the
Company, and such underwriters, as the case may be, for a period of time, not to
exceed one hundred eighty (180) days from the effective date of the registration
statement for the IPO (the "Lock-Up Period"). Such agreement shall be in
writing in the form reasonably satisfactory to the Company and such underwriter.
The Company may impose stop-transfer instructions with respect to this Note and
the shares subject to the foregoing restrictions until the end of said Lock-Up
Period. On, or before, the expiration date of the Lock-Up Period, the Company
will give its stock transfer agent a standing order authorizing the stock
transfer agent to issue, after such expiration date, free of the Lock-Up Legend,
the shares of Common Stock issuable upon conversion of this Note. In addition,
on, or before, the expiration date of the Lock-Up Period, the Company will give
the Fiscal Agent a standing order authorizing the Fiscal Agent to issue, after
such expiration date, free of the Lock-Up Legend, a new Note instrument for this
Note upon surrender and at the request of the Holder. The Company will also, at
least thirty (30) days prior to the expiration date of the Lock-Up Period, give
notice in writing to the Fiscal Agent of such expiration date by delivery of an
Officer's Certificate.
9. Secured Interest. The original Holders of all Series A Notes are
----------------
parties to a Security Agreement dated for reference purposes only as of May 31,
1996 (the "Security Agreement") which encumbers the assets of the Company as
provided in the Security Agreement (herein the "Collateral"). Any permitted
transferees of the Notes will be entitled to become parties to the Security
Agreement. Variations or amendments with or among the Series A Notes shall not
affect the pari passu security interest of each Holder therein in the
Collateral. The Holder will share in the Collateral and proceeds
-6-
<PAGE>
therefrom in the ratio that Holder's Series A Note principal bears to the
aggregate unpaid principal then due all Holders of Series A Notes. THE RIGHTS OF
ANY TRANSFEREE, PLEDGEE OR OTHER ASSIGNEE OF THIS NOTE UNDER THE SECURITY
AGREEMENT COULD POTENTIALLY BE ENCUMBERED BY CERTAIN THIRD PARTY CLAIMS AND
COULD THEREFORE PROVE TO BE INEFFECTUAL UNLESS EACH PREVIOUSLY REGISTERED HOLDER
OF THIS NOTE HAS PROPERLY FILED A FORM UCC-2 STATEMENT OF ASSIGNMENT OF ITS
RIGHTS UNDER THE SECURITY AGREEMENT PURSUANT TO APPLICABLE STATE LAW COMMERCIAL
CODES IN CONNECTION WITH ANY SALE, TRANSFER OR PLEDGE OF SUCH NOTE.
10. Original Issue Discount Disclosure. This Note is being issued in
----------------------------------
conjunction with certain warrants. A portion of the original issue price of
this investment unit (consisting of this Note and its associated warrants) has
been allocated to these warrants. The original issue price of this Note is
therefore less than its principal amount. Because the excess of the principal
amount of this Note over its original issue price is less than (a) one-quarter
of one percent of this Note's principal amount (b) multiplied by the number of
complete years to this Note's maturity, this Note will not have "original issue
discount" as that phrase is defined for United States income tax purposes. Any
Holder may contact the Company's Chief Financial Officer or Treasurer at its
address as indicated on this Note (or such other address as the Company shall
subsequently furnish to the Holder) for further information concerning the
computation of original issue discount under the terms of this Note.
11. Defaults. If any of the Defaults specified in Section 7 of the
--------
Security Agreement shall occur, the Holder of this Note may, so long as such
condition exists, declare the entire unpaid principal and accrued interest
hereon immediately due and payable, by notice in writing to the Company. In the
event of a Default, interest shall continue to accrue at the rate provided for
in Section 2.a on any amounts of principal and accrued interest which remain
unpaid and outstanding. The Fiscal Agent shall have no duty whatsoever with
respect to a "Default" under the Note and owes no fiduciary duty to any Holder
of a Note, except as provided in Section 20 hereof.
12. Assignment. Subject to any restrictions on transfer described
----------
elsewhere herein or the Subscription Agreement, the rights and obligations of
the Company and the Holder of this Note shall be binding upon and benefit the
successors, assigns, heirs, administrators and transferees of the parties
hereto.
13. Waiver and Amendment. Any provision of this Note may be amended,
--------------------
waived or modified upon the approval of the Company and the Holders of fifty
percent (50%) or more of the outstanding principal amount of all then
outstanding Series A Notes; provided, however, that any amendment to the Due
Date, Interest Rate, Conversion Price, or Sections 9 and 11 above, shall require
the approval of Holders of seventy-five percent (75%) or more of the outstanding
principal amount of all then outstanding Series A Notes; and further provided,
however, that any such amendments shall apply to all Series A Notes. Upon the
obtaining of the approval of the Holders of seventy-five percent (75%) or more
of the outstanding principal amount, the Company has the right to effect such
amendment, and the Fiscal Agent has no duty or right to sign such amendment on
behalf of the Holders; provided, however, that no amendments to the Series A
Notes shall alter the Fiscal Agent's rights or duties without its consent.
14. Transfer of this Note or Securities Issuable on Conversion Hereof.
-----------------------------------------------------------------
With respect to any offer, sale or other disposition of this Note or
any underlying securities to be made prior to the Anniversary Date, the Holder
will give written notice to the Company prior thereto, describing briefly the
manner thereof, together with a written opinion of such Holder's counsel, to the
effect that such offer, sale or other distribution may be effected without
registration or qualification (under any applicable federal or state law then in
effect, including, but not limited to, Regulation S under the Act).
Furthermore, no such transfer shall be made unless the transferee meets the same
investor
-7-
<PAGE>
suitability standards set forth in the Subscription Agreement. Promptly upon
receiving such written notice and reasonably satisfactory opinion, if so
requested, the Company, as promptly as practicable, shall notify such Holder
that such Holder may sell or otherwise dispose of this Note or the underlying
securities, as the case may be, all in accordance with the terms of the written
notice delivered to the Company. The Company shall promptly deliver to the
Fiscal Agent a copy of its notice to the Holder, together with a written order
directing the Fiscal Agent to effect such transfer. If a determination has been
made pursuant to this Section 14 that the opinion of counsel for the Holder is
not reasonably satisfactory to the Company, the Company shall so notify the
Holder promptly after such determination has been made. Each Note or underlying
securities thus transferred shall bear the same legends appearing on the face of
this Note immediately prior to such transfer. The Company may issue stop
transfer instructions to its transfer agent in connection with such
restrictions. Notes issued upon transfers after the Anniversary Date shall be
issued without Securities Legends or the Security Agreement Legend, and Notes
issued after the expiration date of the Lock-Up Period shall be issued without
the Lock-Up Legend.
15. Loss, Theft, Destruction or Mutilation of Note. Upon receipt by the
----------------------------------------------
Company and the Fiscal Agent of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of this Note or a stock certificate
issued pursuant to conversion of this Note, and in the case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
reimbursement to the Company and the Fiscal Agent of all reasonable expenses
incidental thereto, and upon surrender and cancellation of this Note or such
stock certificate, if mutilated, the Company and the Fiscal Agent will make and
deliver a new Note or stock certificate of like tenor and dated as of such
cancellation, in lieu of this Note or such stock certificate.
16. Notices. Any notice required or permitted under this Note shall be
-------
given in writing and shall be deemed effectively given upon personal delivery to
the party to be notified by hand or professional courier service or for
mailings from and to any address in North America (Canada, United States and
Mexico) five (5) days after receipt, by registered or certified mail, postage
prepaid at the address of the party to be notified as set forth for such party
in the Subscription Agreement, or at such other address as such party may
designate by ten (10) days' advance written notice to the other parties.
17. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of California, applicable to contracts
between California residents entered into and to be performed entirely within
the State of California. Venue for all disputes hereunder shall be San
Francisco, California.
18. Attorneys' Fees. If any action at law or in equity is necessary to
---------------
enforce or interpret the terms of this Note between the Company and the Holder
of the Note, the prevailing party shall be entitled to reasonable attorneys'
fees, costs and disbursements in addition to any other relief to which such
party may be entitled.
19. Heading; References. All headings used herein are used for
-------------------
convenience only and shall not be used to construe or interpret this Note.
20. Fiscal Agent. Notwithstanding anything to the contrary herein, the
------------
Fiscal Agent is the agent of the Company and does not owe any fiduciary duty to
the Holders of the Series A Notes; provided, however, that the Fiscal Agent
shall have a duty to deliver to such Holders all payments of interest and
principal which are delivered by the Company to the Fiscal Agent.
-8-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be issued as of the
date first set forth above.
NETSOURCE INTERNATIONAL
TELECOMMUNICATIONS, INC.
By:
------------------------------------------------
(Signature)
------------------------------------------------
(Print Name and Title)
-9-
<PAGE>
FISCAL AGENT'S CERTIFICATE OF AUTHENTICATION
This is one of the 10% Series A Secured Subordinated Convertible Notes
described in the Subscription Agreement and Fiscal Agency Agreement.
Dated: UNITED STATES TRUST COMPANY
-------------------------------- OF NEW YORK
as Fiscal Agent
By:
----------------------------------
Authorized Signature
-10-
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below:
(I) or (We) assign and transfer this Note to:
- --------------------------------------------------------------------------------
(Insert Assignee's Social Security or Tax I.D. Number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Print or Type Assignee's Name, Address and Zip Code)
and irrevocably appoint the Company's Transfer Agent to transfer this Note on
the books of the Company. The Transfer Agent may substitute another to act for
it/him/her.
Dated:
---------------------------
*Signature:
--------------------------------
(Sign exactly as your name
appears on the first page of
this Note.)
It is understood and agreed that the Company may request in writing such
assurances and representations as may be reasonably requested pursuant to
Section 14 of this Note.
*NOTICE: This Signature must be guaranteed by an Institution which is a member
of one of the following recognized Signature Guaranty Programs: (i) The
Securities Transfer Agent Medallion Program ("STAMP"); (ii) The New York Stock
Exchange Medallion Program ("MSP"); (iii) The Stock Exchange Medallion Program
("SEMP"); or (iv) in such other guaranty program acceptable to the Company's
Transfer Agent.
-11-
<PAGE>
NOTICE OF CONVERSION
To: NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC.
(1) The undersigned hereby elects to convert $____________ in principal
amount of the attached Note for ____________ shares of Common Stock of NetSource
International Telecommunications, Inc., pursuant to the terms of the attached
Note.
(2) In converting this Note, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, for
investment, and that the undersigned will not offer, sell or otherwise dispose
of any such shares of Common Stock except under circumstances that will not
result in a violation of the Securities Act of 1933, as amended (the "Securities
Act"), including, but not limited to, Regulation S promulgated thereunder, or
any state securities laws.
(3) Please issue a certificate representing said shares of Common Stock in
the name of the undersigned.
(4) Please issue a new Note for the non-converted portion of the attached
Note in the name of the undersigned.
-------------------------------------
(Name)
- ----------------------- -------------------------------------
(Date) (Signature)*
(Sign exactly as your name appears on
the first page of this Note.)
*NOTICE: This Signature must be guaranteed by an Institution which is a member
of one of the following recognized Signature Guaranty Programs: (i) The
Securities Transfer Agent Medallion Program ("STAMP"); (ii) The New York Stock
Exchange Medallion Program ("MSP"); (iii) The Stock Exchange Medallion Program
("SEMP"); or (iv) in such other guaranty program acceptable to the Company's
Transfer Agent.
To exercise your right of conversion, this Notice of Conversion should be
delivered, together with the Note, to the Fiscal Agent at the applicable address
shown below:
<TABLE>
<CAPTION>
By Registered
or Certified Mail By Hand By Overnight Courier
- ----------------- ------- --------------------
<S> <C> <C>
United States Trust United States Trust United States Trust
Company of New York Company of New York Company of New York
P.O. Box 844 111 Broadway 770 Broadway, 13th Floor
Cooper Station Lower Level New York, NY 10003
New York, NY 10216-0844 New York, NY 10006 Attention: Corporate
Attention: Corporate Trust Attention: Corporate Trust Services
Services Trust Services
</TABLE>
-12-
<PAGE>
EXHIBIT 4.3
SERIES A WARRANT TO PURCHASE COMMON STOCK
No. Series A-____
THE SECURITIES REPRESENTED BY OR UNDERLYING THIS INSTRUMENT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
QUALIFIED UNDER APPLICABLE STATE SECURITIES LAWS AND HAVE BEEN TAKEN FOR
INVESTMENT PURPOSES ONLY AND NOT WITH A VIEW TO OR FOR SALE IN CONNECTION WITH
ANY DISTRIBUTION THEREOF. THE SECURITIES MAY NOT BE SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION AND QUALIFICATION WITHOUT AN
OPINION OF COUNSEL FOR THE HOLDER, CONCURRED IN BY COUNSEL FOR THE CORPORATION
THAT SUCH REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
THE SECURITIES REPRESENTED BY OR UNDERLYING THIS INSTRUMENT ARE SUBJECT TO
RESTRICTIONS ON TRANSFER PURSUANT TO REGULATION S PROMULGATED UNDER THE ACT, AND
MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED EXCEPT PURSUANT TO THE
PROVISIONS UNDER REGULATION S OR PURSUANT TO REGISTRATION UNDER SUCH ACT OR
PURSUANT TO AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION.
THIS WARRANT AND THE UNDERLYING WARRANT SHARES HAVE NOT BEEN REGISTERED UNDER
THE ACT, AND (i) THE WARRANT AND THE WARRANT SHARES MAY NOT BE EXERCISED,
OFFERED OR SOLD BY OR ON BEHALF OF U.S. PERSONS, (ii) THE WARRANT MAY NOT BE
EXERCISED IN THE UNITED STATES (EXCEPT AS PERMITTED BY REGULATION S) AND (iii)
THE WARRANT SHARES MAY NOT BE DELIVERED IN THE UNITED STATES UNLESS, IN EACH
CASE, THERE IS A REGISTRATION STATEMENT IN EFFECT COVERING THE WARRANT AND
WARRANT SHARES OR THERE IS AVAILABLE AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE ACT.
BEGINNING ON THE FIRST DAY AFTER THE ONE YEAR ANNIVERSARY OF THE TERMINATION OF
THE CORPORATION'S SERIES A NOTE OFFERING (THE "ANNIVERSARY DATE"), EACH OF THE
ABOVE THREE RESTRICTIVE LEGENDS AND THIS LEGEND ("SECURITIES LEGENDS") SHALL BE
OF NO FURTHER FORCE OR EFFECT, AND THE TRANSFER AGENT IS HEREBY AUTHORIZED, AT
ANY TIME ON OR AFTER THE ANNIVERSARY DATE, TO ISSUE A NEW WARRANT INSTRUMENT
WITHOUT THE SECURITIES LEGENDS OR THIS LEGEND, IN EXCHANGE FOR THIS LEGENDED
WARRANT INSTRUMENT UPON SURRENDER BY AND AT THE REQUEST OF THE HOLDER WITHOUT
FURTHER AUTHORIZATION FROM THE CORPORATION.
THE SECURITIES REPRESENTED BY THIS WARRANT OR ISSUABLE HEREUNDER ARE ALSO
SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER FOR A PERIOD OF TIME, NOT TO EXCEED
ONE HUNDRED EIGHTY (180) DAYS FROM THE EFFECTIVE DATE OF THE CORPORATION'S FIRST
UNDERWRITTEN PUBLIC OFFERING, AS SET FORTH IN SECTION 10 OF THIS WARRANT (THE
"LOCK-UP PERIOD"). BEGINNING ON THE FIRST DAY AFTER THE EXPIRATION DATE OF THE
LOCK-UP PERIOD, THIS RESTRICTIVE LEGEND (THE "LOCK-UP LEGEND") SHALL BE OF NO
FURTHER FORCE OR EFFECT, AND THE TRANSFER AGENT IS HEREBY AUTHORIZED, AT ANY
TIME ON OR AFTER THE EXPIRATION DATE OF THE LOCK-UP PERIOD, TO ISSUE A NEW
WARRANT INSTRUMENT WITHOUT THE LOCK-UP LEGEND, IN EXCHANGE FOR THIS LEGENDED
WARRANT INSTRUMENT UPON SURRENDER BY AND AT THE REQUEST OF THE HOLDER WITHOUT
FURTHER AUTHORIZATION FROM THE CORPORATION.
<PAGE>
No. Series A-___
WARRANT TO PURCHASE COMMON STOCK
--------------------------------
NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC., a Delaware
corporation (the "Corporation"), hereby grants to ______________________ (the
"Holder"), the right to purchase from the Corporation that number of shares of
the common stock of the Corporation (the "Warrant Shares") as set forth below.
This Warrant is one of a series of Warrants issued in connection with and
subject to certain rights, privileges and restrictions set forth in a
Subscription Agreement dated for reference purposes only as of May 31, 1996
entered into between the Holder and the Corporation (the "Subscription
Agreement") in connection with a Confidential Private Placement Memorandum dated
for reference purposes only on even date therewith (the "PPM"), pursuant to
which the Holder has purchased this Warrant and a Series A Secured Subordinated
Convertible Note (Serial No. A-___) of the Corporation, in the principal amount
of ___________________________ U.S. Dollars ($________) (the "Series A Note").
1. Term. This Warrant may be exercised at any time after the earlier to
----
occur of (i) the Corporation's first underwritten public offering pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
(the "Act") covering the offering and sale of shares of Common Stock for the
account of the Corporation (other than a registration statement effected solely
to implement an employee benefit plan or a transaction in which Rule 145 of the
Securities and Exchange Commission is applicable (the "IPO"), or (ii) January 1,
1997, and through June 30, 1999 (the "Exercise Period").
2. Warrant Shares. The number of Warrant Shares for which this Warrant
--------------
may be exercised shall be equal to eight percent (8%) of the number of shares of
common stock into which the Series A Note is converted or is convertible from
time to time (rounded down to the nearest whole number); provided, however, that
in the event the Series A Note is cancelled, the number of shares for which this
Warrant may be exercised shall thereafter be equal to eight percent (8%) of the
number of shares of common stock into which the Series A Note would be
convertible if still outstanding (rounded down to the nearest whole number).
3. Exercise Price. The exercise price for each share of the
--------------
Corporation's common stock purchasable hereunder shall be equal to the per share
conversion price established from time to time under the Series A Note;
provided, however, that in the event the Series A Note is cancelled, the per
share exercise price hereunder shall thereafter be equal to the per share
conversion price that would be established under the Series A Note if still
outstanding; and provided further, however, that if the IPO has not been
consummated on, or prior to, June 30, 1998, the exercise price will be adjusted
to a per share price equal to fifty percent (50%) of the average per share price
of any unaffiliated third-party equity financing in excess of $2,000,000
undertaken in one transaction or series of related transactions consummated by
the Corporation after June 30, 1998 and prior to the termination of the Exercise
Period (the "Exercise Price"). Upon request by the Holder, the Corporation shall
notify the Holder as to the then applicable Exercise Price in effect.
4. Exercise of Warrant. This Warrant may be exercised in whole or in
-------------------
part, but not for less than one thousand (1,000) Warrant Shares (or such lesser
number of Warrant Shares as may at the time of exercise constitute the maximum
number exercisable) and in excess of 1,000 Warrant Shares in increments of 1,000
Warrant Shares. It is exercisable, subject to the satisfaction of applicable
securities laws, at any time during the Exercise Period by the surrender of the
Warrant to the Corporation at its principal office together with the Notice of
Exercise annexed hereto duly completed
-2-
<PAGE>
and executed on behalf of the Holder, accompanied by payment in full of the
amount of the aggregate Exercise Price of the Warrant Shares in immediately
available funds. The Corporation agrees that the Warrant Shares so purchased
shall be issued as soon as practicable thereafter, and that the Holder shall be
deemed the record owner of such Warrant Shares as of and from the close of
business on the date on which this Warrant shall be surrendered, together with
payment in full as required above. It shall be a condition to the exercise of
this Warrant that the Holder or any transferee hereof certify to the
Corporation, at the time of exercise, either that he or it is not a U.S. Person
(as defined in Regulation S under the Securities Act of 1933, as amended (the
"Securities Act") and that this Warrant is not being exercised on behalf of a
U.S. Person, or to provide an opinion of counsel that the Warrant and the
Warrant Shares to be delivered upon exercise thereof have been registered under
the Securities Act or that an exemption from the registration requirements of
the Securities Act is available. It shall be a further condition to the exercise
of this Warrant that the Warrant may not be exercised in the United States and
the Warrant Shares may not be delivered to the United States absent registration
under the Securities Act or an available exemption from registration, unless
otherwise permitted by Regulation S.
5. Fractional Interest. The Corporation shall not be required to issue
-------------------
any fractional shares on the exercise of this Warrant.
6. Warrant Confers No Rights of Stockholder. The Holder shall not have
----------------------------------------
any rights as a stockholder of the Corporation with regard to the Warrant Shares
prior to actual exercise resulting in the purchase of the Warrant Shares.
7. Investment Representation. Neither this Warrant nor the Warrant
-------------------------
Shares issuable upon the exercise of this Warrant have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), or any state
securities laws. The Holder acknowledges by acceptance of the Warrant that as of
the date of this Warrant and at the time of exercise (a) he has acquired this
Warrant or the Warrant Shares, as the case may be, for investment and not with a
view to distribution; and either (b) he has a pre-existing personal or business
relationship with the Corporation, or its executive officers, or by reason of
his business or financial experience he has the capacity to protect his own
interests in connection with the transaction; (c) he is an accredited investor
as that term is defined in Regulation D promulgated under the Securities Act and
(d) he meets all of the requirements for a purchaser to qualify for exemption
under Regulation S promulgated under the Securities Act. The Holder agrees that
any Warrant Shares issuable upon exercise of this Warrant will be acquired for
investment and not with a view to distribution and such Warrant Shares will not
be registered under the Securities Act and applicable state securities laws and
that such Warrant Shares may have to be held indefinitely unless they are
subsequently registered or qualified under the Securities Act and applicable
state securities laws or, based on an opinion of counsel reasonably satisfactory
to the Corporation, an exemption from such registration and qualification is
available. The Holder, by acceptance hereof, consents to the placement of the
following restrictive legends, or substantially similar legends, on each
certificate to be issued to the Holder by the Corporation in connection with the
issuance of such Warrant Shares up to and through the Anniversary Date or the
date of expiration of the Lock-Up Period, as applicable:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES
LAW, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS (A) THERE
IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR LAWS COVERING SUCH
SECURITIES, OR (B) THE HOLDER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF
THE SECURITIES SATISFACTORY TO THE CORPORATION, STATING THAT SUCH SALE,
TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND
PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND THE QUALIFICATION REQUIREMENTS
UNDER APPLICABLE STATE LAW.
-3-
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON
TRANSFER PURSUANT TO REGULATION S PROMULGATED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED OR HYPOTHECATED EXCEPT
PURSUANT TO THE PROVISIONS UNDER REGULATION S OR PURSUANT TO REGISTRATION UNDER
SUCH ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM SUCH REGISTRATION.
BEGINNING ON THE FIRST DAY AFTER THE ONE YEAR ANNIVERSARY OF THE TERMINATION OF
THE CORPORATION'S SERIES A NOTE OFFERING (THE "ANNIVERSARY DATE"), EACH OF THE
ABOVE RESTRICTIVE LEGENDS AND THIS LEGEND ("SECURITIES LEGENDS") SHALL BE OF NO
FURTHER FORCE OR EFFECT, AND THE TRANSFER AGENT IS HEREBY AUTHORIZED, AT ANY
TIME ON OR AFTER THE ANNIVERSARY DATE, TO ISSUE A NEW CERTIFICATE WITHOUT THE
SECURITIES LEGENDS, IN EXCHANGE FOR THIS LEGENDED CERTIFICATE UPON SURRENDER BY
AND AT THE REQUEST OF THE HOLDER WITHOUT FURTHER AUTHORIZATION FROM THE
CORPORATION.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER FOR A PERIOD OF TIME, NOT TO EXCEED ONE HUNDRED EIGHTY
(180) DAYS FROM THE EFFECTIVE DATE OF THE CORPORATION'S FIRST UNDERWRITTEN
PUBLIC OFFERING (THE "LOCK-UP PERIOD"). BEGINNING ON THE FIRST DAY AFTER THE
EXPIRATION DATE OF THE LOCK-UP PERIOD, THIS RESTRICTIVE LEGEND (THE "LOCK-UP
LEGEND") SHALL BE OF NO FURTHER FORCE OR EFFECT, AND THE TRANSFER AGENT IS
HEREBY AUTHORIZED, AT ANY TIME ON OR AFTER THE EXPIRATION DATE OF THE LOCK-UP
PERIOD, TO ISSUE A NEW CERTIFICATE WITHOUT THE LOCK-UP LEGEND, IN EXCHANGE FOR
THIS LEGENDED CERTIFICATE UPON SURRENDER BY AND AT THE REQUEST OF THE HOLDER
WITHOUT FURTHER AUTHORIZATION FROM THE CORPORATION.
8. Reservation of Shares. The Corporation agrees at all times during
---------------------
the Exercise Period to have authorized and reserved, for the exclusive purpose
of issuance and delivery upon exercise of this Warrant, a sufficient number of
shares of its common stock to provide for the exercise of the rights represented
hereby. On or before the Anniversary Date, the Corporation will give its stock
transfer agent a standing order authorizing the stock transfer agent to issue,
after the Anniversary Date, free of Securities Legends, the shares of Common
Stock issuable upon exercise of this Warrant.
9. Adjustment for Re-Classification of Capital Stock. If the
-------------------------------------------------
Corporation at any time during the Exercise Period shall, by subdivision,
combination or re-classification of securities, change any of the securities to
which purchase rights under this Warrant exist into the same or a different
number of securities of any class or classes, this Warrant shall thereafter
entitle the Holder to acquire such number and kind of securities as would have
been issuable as a result of such change with respect to the Warrant Shares
immediately prior to such subdivision, combination, or re-classification. If
shares of the Corporation's common stock are subdivided into a greater number of
shares of common stock, the Exercise Price for the Warrant Shares upon exercise
of this Warrant shall be proportionately reduced and the number of Warrant
Shares shall be proportionately increased; and conversely, if shares of the
Corporation's common stock are combined into a smaller number of common stock
shares, the price shall be proportionately increased, and the number of Warrant
Shares shall be proportionately decreased.
10. Public Offering Lock-Up. In connection with the IPO, the Holder
-----------------------
agrees, upon the request of the Corporation or the underwriters managing such
underwritten offering of the Corporation's securities, not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any of the Corporation's securities without the prior written consent of the
Corporation, and such underwriters, as the case may be, for a period of time,
not to exceed one hundred eighty (180) days from the effective date of the
registration statement for the IPO (the "Lock-Up Period"). Such agreement shall
be in writing in the form reasonably satisfactory to the Corporation and such
underwriter. The Corporation may impose stop-transfer instructions with respect
to the shares subject to the foregoing restrictions until the end of said
Lock-Up Period. On or before the expiration
-4-
<PAGE>
date of the LockUp Period, the Corporation will give its stock transfer agent a
standing order authorizing the stock transfer agent to issue, after such
expiration date, free of the "Lock-Up Legend," the shares of Common Stock
issuable upon exercise of this Warrant. In addition, on or before the expiration
date of the Lock-Up Period, the Corporation will give its stock transfer agent a
standing order authorizing the stock transfer agent to issue, after such
expiration date, free of the "Lock-Up Legend," a new Warrant instrument for this
Warrant upon surrender and at the request of the Holder.
11. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by
-------------------------------------------------
the Corporation of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of any Warrant or stock certificate, and in case of
loss, theft or destruction, of indemnity or security reasonably satisfactory to
it, and upon reimbursement to the Corporation of all reasonable expenses
incidental thereto, and upon surrender and cancellation of such Warrant or stock
certificate, if mutilated, the Corporation will make and deliver a new Warrant
or stock certificate of like tenor and dated as of such cancellation, in lieu of
this Warrant or stock certificate.
12. Assignment. With respect to any offer, sale or other disposition of
----------
this Warrant or any underlying securities to be made prior to the Anniversary
Date, the Holder will give written notice to the Corporation prior thereto,
describing briefly the manner thereof, together with a written opinion of such
Holder's counsel, to the effect that such offer, sale or other distribution may
be effected without registration or qualification (under any applicable federal
or state law then in effect, including, but not limited to, Regulation S under
the Act). Furthermore, no such transfer shall be made unless the transferee
meets the same investor suitability standards set forth in the Subscription
Agreement. Promptly upon receiving such written notice and reasonably
satisfactory opinion, if so requested, the Corporation, as promptly as
practicable, shall notify such Holder that such Holder may sell or otherwise
dispose of this Warrant or the underlying securities, as the case may be, all in
accordance with the terms of the written notice delivered to the Corporation. If
a determination has been made pursuant to this Section 12 that the opinion of
counsel for the Holder is not reasonably satisfactory to the Corporation, the
Corporation shall so notify the Holder promptly after such determination has
been made. Each Warrant thus transferred shall bear the same legends appearing
on this Warrant, and underlying securities thus transferred shall bear the
legends required by Section 7. The Corporation may issue stop transfer
instructions to its transfer agent in connection with such restrictions.
Warrants and underlying securities issued upon transfers after the Anniversary
Date shall be issued without the Securities Legends. Warrants and underlying
securities issued upon transfers after the expiration date of the Lock-Up Period
shall be issued without the Lock-Up Legend.
13. Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of California applicable to contracts
between California residents entered into and to be performed entirely within
the State of California.
14. Amendments. Any terms of this Warrant may be amended with the
----------
written consent of the Corporation and the holders of Warrants representing not
less than 75% of the shares of Common Stock issuable upon exercise of all
Warrants, except that authorized amendments to the Series A Note that by their
terms necessarily affect this Warrant shall automatically be deemed amendments
to this Warrant.
15. Notices. Any notice required or permitted under this Warrant shall
-------
be given in writing and shall be deemed effectively given upon personal delivery
to the party to be notified by hand or professional courier service or for
mailings from and to any address in North America (Canada, United States and
Mexico) five (5) days after deposit with the United States Post Office, by
registered or certified mail, postage prepaid and addressed to the party to be
notified at the address indicated for such party in the Subscription Agreement,
or at such other address as such party may designate by ten (10) days' advance
written notice to the other parties.
-5-
<PAGE>
16. Attorneys' Fees. If any action at law or in equity is necessary to
---------------
enforce or interpret the terms of this Warrant, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and disbursements in addition to
any other relief to which such party may be entitled.
17. Headings; References. All headings used herein are used for
--------------------
convenience only and shall not be used to construe or interpret this Warrant.
Dated: June 24, 1996
NETSOURCE INTERNATIONAL
TELECOMMUNICATIONS, INC.
By:
--------------------------------
(Signature)
-----------------------------------
(Print Name & Title)
-6-
<PAGE>
NOTICE OF EXERCISE
To: NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC.
(1) The undersigned hereby elects to purchase ____________ shares of
Common Stock of NetSource International Telecommunications, Inc., pursuant to
the terms of the attached Warrant, and tenders herewith payment of the Exercise
Price for such shares in full.
(2) In exercising this Warrant, the undersigned hereby confirms and
acknowledges that the shares of Common Stock are being acquired solely for the
account of the undersigned and not as a nominee for any other party, for
investment, and that the undersigned will not offer, sell or otherwise dispose
of any such shares of Common Stock except under circumstances that will not
result in a violation of the Securities Act of 1933, as amended (the "Securities
Act"), including, but not limited to, Regulation S promulgated thereunder, or
any state securities laws.
(3) The undersigned hereby certifies that either (i) the undersigned is
not a U.S. Person (as such term is defined in Regulation S under the Securities
Act), or (ii) the undersigned has delivered to the Corporation an opinion of
counsel to the effect that this Warrant and the Warrant Shares to be delivered
upon exercise thereof have been registered under the Securities Act or an
exemption from such registration is available.
(4) The undersigned further certifies that this Warrant is not being
exercised in the United States and understands and agrees that the Warrant
Shares may not be delivered to the United States, except as permitted by
Regulation S, absent registration under the Securities Act or an available
exemption from such registration.
(5) Please issue a certificate representing said shares of Common Stock
in the name of the undersigned.
(6) Please issue a new Warrant for the unexercised portion of the
attached Warrant in the name of the undersigned.
--------------------
(Name)
--------------------- --------------------
(Date) (Signature)
-7-
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into this
________________ day of August, 1996 between NetSource Communications, Inc., a
Delaware corporation ("the Company") and ________________________
("Indemnitee").
WITNESSETH THAT:
WHEREAS, Indemnitee performs a valuable service for the Company; and
WHEREAS, the Board of Directors of the Company have adopted By-Laws (the
"By-Laws") providing for the indemnification of the directors of the Company to
the maximum extent authorized by Delaware General Corporation Law, in effect at
such time as indemnification is sought hereunder ("Law"); and
WHEREAS, the By-Laws and the Law, by their nonexclusive nature, permit
contracts between the Company and the directors and officers of the Company with
respect to the indemnification of such directors and officers; and
WHEREAS, in accordance with the authorization as provided by the Law, the
Company may purchase and maintain a policy or policies of director's and
officer's liability insurance ("D & O Insurance"), covering certain liabilities
which may be incurred by its directors or officers in the performance of their
obligations as directors and/or officers of the Company; and
WHEREAS, as a result of recent developments affecting the terms, scope and
availability of D & O Insurance there exists general uncertainty as to the
extent of protection afforded Company directors and officers by such D & O
Insurance and said uncertainty also exists under statutory and bylaw
indemnification provisions; and
WHEREAS, in recognition of past services and in order to induce Indemnitee
to continue to serve as an officer or director of the Company, the Company has
determined and agreed to enter into this contract with Indemnitee;
NOW, THEREFORE, in consideration of Indemnitee's continued service as a
director after the date hereof, the parties hereto agree as follows:
1. Indemnity of Indemnitee. The Company hereby agrees to hold harmless
-----------------------
and indemnify Indemnitee to the full extent authorized or permitted by the
provisions of the Law, as such may be amended from time to time, and the By-
Laws, as such may be amended. In furtherance of the foregoing indemnification,
and without limiting the generality thereof:
(a) Proceedings Other Than Proceedings by or in the Right of the Company.
--------------------------------------------------------------------
Indemnitee shall be entitled to the rights of indemnification provided in this
Section l(a) if, by
1
<PAGE>
reason of his Corporate Status (as hereinafter defined), he is, or is threatened
to be made, a party to or participant in any Proceeding (as hereinafter defined)
other than a Proceeding by or in the right of the Company. Pursuant to this
Section l(a), Indemnitee shall be indemnified against all Expenses (as
hereinafter defined), judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in connection with such
Proceeding or any claim, issue or matter therein, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best interests
of the Company and, with respect to any criminal Proceeding, had no reasonable
cause to believe his conduct was unlawful.
(b) Proceedings by or in the Right of the Company. Indemnitee shall be
---------------------------------------------
entitled to the rights of indemnification provided in this Section l(b) if, by
reason of his Corporate Status, he is, or is threatened to be made, a party to
or participant in any Proceeding brought by or in the right of the Company to
procure a judgment in its favor. Pursuant to this Section l(b), Indemnitee
shall be indemnified against all Expenses actually and reasonably incurred by
him or on his behalf in connection with such Proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the Company; provided, however, that, if applicable law so
provides, no indemnification against such Expenses shall be made in respect of
any claim, issue or matter in such Proceeding as to which Indemnitee shall have
been adjudged to be liable to the Company unless and to the extent that the
court in which such Proceeding shall have been brought or is pending, shall
determine that such indemnification may be made.
(c) Indemnification for Expenses of a Party Who is Wholly or Partly
---------------------------------------------------------------
Successful. Notwithstanding any other provision of this Agreement, to the extent
- ----------
that Indemnitee is, by reason of his Corporate Status, a party to and is
successful, on the merits or otherwise, in any Proceeding, he shall be
indemnified to the maximum extent permitted by law against all Expenses actually
and reasonably incurred by him or on his behalf in connection therewith. If
Indemnitee is not wholly successful in such Proceeding but is successful, on the
merits or otherwise, as to one or more but less than all claims, issues or
matters in such Proceeding, the Company shall indemnify Indemnitee against all
Expenses actually and reasonably incurred by him or on his behalf in connection
with each successfully resolved claim, issue or matter. For purposes of this
Section and without limitation, the termination of any claim, issue or matter in
such a Proceeding by dismissal, with or without prejudice, shall be deemed to be
a successful result as to such claim, issue or matter.
2. Additional Indemnity.
--------------------
(a) Subject only to the exclusions set forth in Section 2(b) hereof,
the Company hereby further agrees to hold harmless and indemnify Indemnitee or
on his behalf against any and all Expenses, judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by Indemnitee in
connection with any Proceeding (including an action by or on behalf of the
Company) to which Indemnitee is, was or at any time becomes a party, or is
threatened to be made a party, by reason of his Corporate Status; provided,
however, that with respect to actions by or on behalf of the Company,
indemnification of Indemnitee against any
2
<PAGE>
judgments shall be made by the Company only as authorized in the specific case
upon a determination that Indemnitee acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company; and
(b) No indemnity pursuant to this Section 2 shall be paid by the
Company:
(i) In respect to remuneration paid to Indemnitee if it shall
be determined by a final judgment or other final adjudication that such
remuneration was in violation of law;
(ii) On account of any suit in which judgment is rendered
against Indemnitee for an accounting of profits made from the purchase or sale
by Indemnitee of securities of the Company pursuant to the provisions of Section
16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar
provisions of any federal, state or local statutory law;
(iii) On account of Indemnitee's conduct which is finally
adjudged to have been knowingly fraudulent or deliberately dishonest, or to
constitute willful misconduct; or
(iv) If a final decision by a court having jurisdiction in the
matter shall determine, that such indemnification is not lawful.
3. Contribution. If the indemnification provided in Sections 1 and 2
------------
is unavailable and may not be paid to Indemnitee for any reason other than those
set forth in paragraphs (i), (ii) and (iii) of Section 2(b), then in respect to
any Proceeding in which the Company is jointly liable with Indemnitee (or would
be if joined in such Proceeding), the Company shall contribute to the amount of
Expenses, judgments, penalties, fines and amounts paid in settlement actually
and reasonably incurred and paid or payable by Indemnitee in such proportion as
is appropriate to reflect (i) the relative benefits received by the Company on
the one hand and by the Indemnitee on the other hand from the transaction from
which such Proceeding arose, and (ii) the relative fault of the Company on the
one hand and of the Indemnitee on the other hand in connection with the events
which resulted in such Expenses, judgments, penalties, fines or settlement
amounts, as well as any other relevant equitable considerations. The relative
fault of the Company on the one hand and of the Indemnitee on the other hand
shall be determined by reference to, among other things, the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
the circumstances resulting in such Expenses, judgments, penalties, fines or
settlement amounts. The Company agrees that it would not be just and equitable
if contribution pursuant to this Section 3 were determined by pro rata
allocation or any other method of allocation which does not take account of the
foregoing equitable considerations.
4. Indemnification for Expenses of a Witness. Notwithstanding any
-----------------------------------------
other provision of this Agreement, to the extent that Indemnitee is, by reason
of his Corporate Status, a witness or deponent in any Proceeding to which
Indemnitee is not a party, he shall be indemnified
3
<PAGE>
against all Expenses actually and reasonably incurred by him or on his behalf in
connection therewith.
5. Advancement of Expenses. Notwithstanding any other provision of
-----------------------
this Agreement, the Company shall advance all reasonable Expenses incurred by or
on behalf of Indemnitee in connection with any Proceeding by reason of
Indemnitee's Corporate Status within thirty (30) days after the receipt by the
Company of a statement or statements from Indemnitee requesting such advance or
advances from time to time, whether prior to or after final disposition of such
Proceeding. Such statement or statements shall reasonably evidence the Expenses
incurred by Indemnitee and shall include or be preceded or accompanied by an
undertaking by or on behalf of Indemnitee to repay any Expenses advanced if it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
against such Expenses. Any advances and undertakings to repay pursuant to this
Section 5 shall be unsecured and interest free. Notwithstanding the foregoing,
the obligation of the Company to advance Expenses pursuant to this Section 5
shall be subject to the condition that, if, when and to the extent that the
Company determines that Indemnitee would not be permitted to be indemnified
under applicable law, the Company shall be entitled to be reimbursed, within
thirty (30) days of such determination, by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid; provided, however,
that if Indemnitee has commenced or thereafter commences proceedings pursuant to
Section 8(a) below to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Company that
Indemnitee would not be permitted to be indemnified under applicable law shall
not be binding and Indemnitee shall not be required to reimburse the Company for
any advance of Expenses until a final judicial determination is made with
respect thereto by any court of competent jurisdiction or arbitrator (as to
which all rights of appeal therefrom have been exhausted or lapsed).
6. Procedure for Determination of Entitlement to Indemnification.
-------------------------------------------------------------
(a) To obtain indemnification (including, but not limited to, the
advancement of Expenses and contribution by the Company) under this Agreement,
Indemnitee shall submit to the Company a written request, including therein or
therewith such documentation and information as is reasonably available to
Indemnitee and is reasonably necessary to determine whether and to what extent
Indemnitee is entitled to indemnification. The Secretary of the Company shall,
promptly upon receipt of such a request for indemnification, advise the Board of
Directors in writing that Indemnitee has requested indemnification.
(b) Upon written request by Indemnitee for indemnification pursuant to
the first sentence of Section 6(a) hereof, a determination, if required by
applicable law, with respect to Indemnitee's entitlement thereto shall be made
in the specific case: (i) if a Change in Control (as hereinafter defined) shall
have occurred, by Independent Counsel (as hereinafter defined) in a written
opinion to the Board of Directors, a copy of which shall be delivered to
Indemnitee (unless Indemnitee shall request that such determination be made by
the Board of Directors or the stockholders, in which case the determination
shall be made in the manner provided in Clause (ii) below), or (ii) if a Change
in Control shall not have occurred, (A) by the Board of Directors by a
4
<PAGE>
majority vote of a quorum consisting of Disinterested Directors (as hereinafter
defined), or (B) if a quorum of the Board of Directors consisting of
Disinterested Directors is not obtainable or, even if obtainable, said
Disinterested Directors so direct, by Independent Counsel in a written opinion
to the Board of Directors, a copy of which shall be delivered to Indemnitee, or
(C) if so directed by said Disinterested Directors, by the stockholders of the
Company; and, if it is determined that Indemnitee is entitled to
indemnification, payment to Indemnitee shall be made within thirty (30) days
after such determination. Indemnitee shall cooperate with the person, persons or
entity making such determination with respect to Indemnitee's entitlement to
indemnification, including providing to such person, persons or entity upon
reasonable advance request any documentation or information which is not
privileged or otherwise protected from disclosure and which is reasonably
available to Indemnitee and reasonably necessary to such determination. Any
Independent Counsel, member of the Board of Directors, or stockholder of the
Company shall act reasonably and in good faith in making a determination under
the Agreement of the Indemnitee's entitlement to indemnification. Any costs or
expenses (including attorneys' fees and disbursements) incurred by Indemnitee in
so cooperating with the person, persons or entity making such determination
shall be borne by the Company (irrespective of the determination as to
Indemnitee's entitlement to indemnification) and the Company hereby indemnifies
and agrees to hold Indemnitee harmless therefrom.
(c) If the determination of entitlement to indemnification is to be
made by Independent Counsel pursuant to Section 6(b) hereof, the Independent
Counsel shall be selected as provided in this Section 6(c). If a Change in
Control shall not have occurred, the Independent Counsel shall be selected by
the Board of Directors, and the Company shall give written notice to Indemnitee
advising him of the identity of the Independent Counsel so selected. If a Change
in Control shall have occurred, the Independent Counsel shall be selected by
Indemnitee (unless Indemnitee shall request that such selection be made by the
Board of Directors, in which event the preceding sentence shall apply), and
Indemnitee shall give written notice to the Company advising it of the identity
of the Independent Counsel so selected. In either event, Indemnitee or the
Company, as the case may be, may, within ten (10) days after such written notice
of selection shall have been given, deliver to the Company or to Indemnitee, as
the case may be, a written objection to such selection; provided, however, that
such objection may be asserted only on the ground that the Independent Counsel
so selected does not meet the requirements of "Independent Counsel" as defined
in Section 14 of this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. Absent a proper and timely
objection, the person so selected shall act as Independent Counsel. If a
written objection is made and substantiated, the Independent Counsel selected
may not serve as Independent Counsel unless and until such objection is
withdrawn or a court has determined that such objection is without merit. If,
within twenty (20) days after submission by Indemnitee of a written request for
indemnification pursuant to Section 6(a) hereof, no Independent Counsel shall
have been selected and not objected to, either the Company or Indemnitee may
petition a court in San Francisco, California or other court of competent
jurisdiction for resolution of any objection which shall have been made by the
Company or Indemnitee to the other's selection of Independent Counsel and/or for
the appointment as Independent Counsel of a person selected by the court or by
such other person as the court shall designate, and the person with respect to
whom all objections are so resolved or
5
<PAGE>
the person so appointed shall act as Independent Counsel under Section (b)
hereof. The Company shall pay any and all reasonable fees and expenses of
Independent Counsel incurred by such Independent Counsel in connection with
acting pursuant to Section 6(b) hereof, and the Company shall pay all reasonable
fees and expenses incident to the procedures of this Section 6(c), regardless of
the manner in which such Independent Counsel was selected or appointed. Upon the
due commencement of any judicial proceeding or arbitration pursuant to Section
8(a)(iii) of this Agreement, Independent Counsel shall be discharged and
relieved of any further responsibility in such capacity (subject to the
applicable standards of professional conduct then prevailing).
(d) The Company shall not be required to obtain the consent of the
Indemnitee to the settlement of any Proceeding which the Company has undertaken
to defend if the Company assumes full and sole responsibility for such
settlement and the settlement grants the Indemnitee a complete and unqualified
release in respect of the potential liability.
7. Presumptions and Effect of Certain Proceedings.
----------------------------------------------
(a) In making a determination with respect to entitlement to
indemnification hereunder, the person or persons or entity making such
determination shall presume that Indemnitee is entitled to indemnification under
this Agreement if Indemnitee has submitted a request for indemnification in
accordance with Section (a) of this Agreement, and the Company shall have the
burden of proof to overcome that presumption in connection with the making by
any person, persons or entity of any determination contrary to that presumption.
(b) If the person, persons or entity empowered or selected under
Section 6 of this Agreement to determine whether Indemnitee is entitled to
indemnification shall not have made a determination within thirty (30) days
after receipt by the Company of the request therefor, the requisite
determination of entitlement to indemnification shall be deemed to have been
made and Indemnitee shall be entitled to such indemnification, absent (i) a
misstatement by Indemnitee of a material fact or an omission of a material fact
necessary to make Indemnitee's statement not materially misleading, in
connection with the request for indemnification, or (ii) a prohibition of such
indemnification under applicable law; provided, however, that such 30-day period
may be extended for a reasonable time, not to exceed an additional fifteen (15)
days, if the person, persons or entity making the determination with respect to
entitlement to indemnification in good faith requires such additional time for
the obtaining or evaluating documentation and/or information relating thereto;
and provided, further, that the foregoing provisions of this Section 7(b) shall
not apply (i) if the determination of entitlement to indemnification is to be
made by the stockholders pursuant to Section 6(b) of this Agreement and if (A)
within fifteen (15) days after receipt by the Company of the request for such
determination the Board of Directors or the Disinterested Directors, if
appropriate, resolve to submit such determination to the stockholders for their
consideration at an annual meeting thereof to be held within seventy five (75)
days after such receipt and such determination is made thereat, or (B) a special
meeting of stockholders is called within fifteen (15) days after such receipt
for the purpose of making such determination, such meeting is held for such
purpose within sixty (60) days after having been so called and such
6
<PAGE>
determination is made thereat, or (ii) if the determination of entitlement to
indemnification is to be made by Independent Counsel pursuant to Section 6(b) of
this Agreement.
(c) The termination of any Proceeding or of any claim, issue or matter
therein, by judgment, order, settlement (with or without court approval),
conviction, or upon a plea of nolo contendere or its equivalent, shall not
(except as otherwise expressly provided in this Agreement) of itself adversely
affect the right of Indemnitee to indemnification or create a presumption that
Indemnitee did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Company or, with
respect to any criminal Proceeding, that Indemnitee had reasonable cause to
believe that his conduct was unlawful.
(d) For purposes of any determination of good faith, Indemnitee shall
be deemed to have acted in good faith if Indemnitee's action is based on the
records or books of account of the Enterprise (as hereinafter defined),
including financial statements, or on information supplied to Indemnitee by the
officers of the Enterprise in the course of their duties, or on the advice of
legal counsel for the Enterprise or on information or records given or reports
made to the Enterprise by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by the Enterprise. In
addition, the knowledge and/or actions, or failure to act, of any director,
officer, agent or employee of the Enterprise shall not be imputed to Indemnitee
for purposes of determining the right to indemnification under this Agreement.
The provisions of this Section 7(d) shall not be deemed to be exclusive or to
limit in any way the other circumstances in which the Indemnitee may be deemed
to have met the applicable standard of conduct set forth in this Agreement.
8. Remedies of Indemnitee.
----------------------
(a) In the event that (i) a determination is made pursuant to Section
6 of this Agreement that Indemnitee is not entitled to indemnification under
this Agreement, (ii) advancement of Expenses is not timely made pursuant to
Section 5 of this Agreement, (iii) no determination of entitlement to
indemnification shall have been made pursuant to Section 6(b) of this Agreement
within 90 days after receipt by the Company of the request for indemnification,
(iv) payment of indemnification is not made pursuant to Section 3 or 4 of this
Agreement within thirty (30) days after receipt by the Company of a written
request therefor, or (v) payment of indemnification is not made within thirty
(30) days after a determination has been made that Indemnitee is entitled to
indemnification or such determination is deemed to have been made pursuant to
Section 6 or 7 of this Agreement, Indemnitee shall be entitled to an
adjudication in an appropriate court of the State of California, or in any other
court of competent jurisdiction, of his entitlement to such indemnification.
Alternatively, Indemnitee, at his option, may seek an award in arbitration to be
conducted by a single arbitrator pursuant to the complex arbitration rules of
JAMS/Endispute, which arbitration shall be held in San Francisco, California.
Indemnitee shall commence such proceeding seeking an adjudication or an award in
arbitration within 180 days following the date on which Indemnitee first has the
right to commence such proceeding pursuant
7
<PAGE>
to this Section 8(a). The Company shall not oppose Indemnitee's right to seek
any such adjudication or award in arbitration.
(b) In the event that a determination shall have been made pursuant to
Section 6(b) of this Agreement that Indemnitee is not entitled to
indemnification, any judicial proceeding or arbitration commenced pursuant to
this Section 8 shall be conducted in all respects as a de novo trial, or
arbitration, on the merits and Indemnitee shall not be prejudiced by reason of
that adverse determination.
(c) If a determination shall have been made pursuant to Section 6(b)
of this Agreement that Indemnitee is entitled to indemnification, the Company
shall be bound by such determination in any judicial proceeding or arbitration
commenced pursuant to this Section 8, absent (i) a misstatement by Indemnitee of
a material fact, or an omission of a material fact necessary to make
Indemnitee's statement not materially misleading, in connection with the request
for indemnification, or (ii) a prohibition of such indemnification under
applicable law.
(d) In the event that Indemnitee, pursuant to this Section 8, seeks a
judicial adjudication of or an award in arbitration to enforce his rights under,
or to recover damages for breach of, this Agreement, Indemnitee shall be
entitled to recover from the Company, and shall be indemnified by the Company
against, any and all expenses (of the types described in the definition of
Expenses in Section 16 of this Agreement) actually and reasonably incurred by
him in such judicial adjudication or arbitration, but only if he prevails
therein. If it shall be determined in said judicial adjudication or arbitration
that Indemnitee is entitled to receive part but not all of the indemnification
sought, the expenses incurred by Indemnitee in connection with such judicial
adjudication or arbitration shall be appropriately prorated. The Company shall
indemnify Indemnitee against any and all expenses and, if requested by
Indemnitee, shall (within thirty (30) days after receipt by the Company of a
written request therefor) advance such expenses to Indemnitee, which are
incurred by Indemnitee in connection with any action brought by Indemnitee to
recover under any D & O Insurance maintained by the Company, regardless of
whether Indemnitee ultimately is determined to be entitled to such
indemnification, advancement of expenses or insurance recovery, as the case may
be.
(e) The Company shall be precluded from asserting in any judicial
proceeding or arbitration commenced pursuant to this Section 8 that the
procedures and presumptions of this Agreement are not valid, binding and
enforceable and shall stipulate in any such court or before any such arbitrator
that the Company is bound by all the provisions of this Agreement.
9. Non-Exclusivity; Survival of Rights; Insurance; Subrogation.
-----------------------------------------------------------
(a) The rights of indemnification as provided by this Agreement shall
not be deemed exclusive of any other rights to which Indemnitee may at any time
be entitled under applicable law, the certificate of incorporation of the
Company, the By-Laws, any agreement, a vote of stockholders or a resolution of
directors, or otherwise. No amendment, alteration or repeal of this Agreement
or of any provision hereof shall limit or restrict any right of Indemnitee
8
<PAGE>
under this Agreement in respect of any action taken or omitted by such
Indemnitee in his Corporate Status prior to such amendment, alteration or
repeal. To the extent that a change in the Law, whether by statute or judicial
decision, permits greater indemnification than would be afforded currently under
the By-Laws and this Agreement, it is the intent of the parties hereto that
Indemnitee shall enjoy by this Agreement the greater benefits so afforded by
such change. No right or remedy herein conferred is intended to be exclusive of
any other right or remedy, and every other right and remedy shall be cumulative
and in addition to every other right and remedy given hereunder or now or
hereafter existing at law or in equity or otherwise. The assertion or employment
of any right or remedy hereunder, or otherwise, shall not prevent the concurrent
assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains D & O Insurance for
directors, officers, employees, or agents or fiduciaries of the Company or of
any other corporation, partnership, joint venture, trust, employee benefit plan
or other enterprise which such person serves at the request of the Company,
Indemnitee shall be covered by such policy or policies in accordance with its or
their terms to the maximum extent of the coverage available for any such
director, officer, employee or agent under such policy or policies.
(c) In the event of any payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and take all
action necessary to secure such rights, including execution of such documents as
are necessary to enable the Company to bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable hereunder if and to the extent that
Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.
10. Exception to Right of Indemnification. Notwithstanding
-------------------------------------
any other provision of this Agreement, Indemnitee shall not be entitled to
indemnification under this Agreement with respect to any Proceeding brought by
Indemnitee, or any claim therein, unless (a) the bringing of such Proceeding or
making of such claim shall have been approved by the Board of Directors or (b)
such Proceeding is being brought by the Indemnitee to assert his rights under
this Agreement.
11. Duration of Agreement. All agreements and obligations
---------------------
of the Company contained herein shall continue during the period Indemnitee is a
director of the Company (or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise) and shall continue thereafter so long as
Indemnitee shall be subject to any Proceeding (or any proceeding commenced under
Section 8 hereof) by reason of his Corporate Status, whether or not he is acting
or serving in any such capacity at the time any liability or expense is incurred
for which indemnification can be provided under this Agreement. This Agreement
shall be binding upon and inure to the benefit of and be enforceable by the
parties hereto and their respective successors (including any direct or
9
<PAGE>
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), assigns, spouses,
heirs, executors and personal and legal representatives. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director of the Company or any other enterprise at the Company's request.
12. Security. To the extent requested by the Indemnitee
--------
and approved by the Board of Directors, the Company may at any time and from
time to time provide security to the Indemnitee for the Company's obligations
hereunder through an irrevocable bank line of credit, funded trust or other
collateral. Any such security, once provided to the Indemnitee, may not be
revoked or released without the prior written consent of the Indemnitee.
13. Enforcement.
-----------
(a) The Company expressly confirms and agrees that it has entered into
this Agreement and assumed the obligations imposed on it hereby in order to
induce Indemnitee to serve as a director of the Company, and the Company
acknowledges that Indemnitee is relying upon this Agreement in serving as a
director of the Company.
(b) This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, oral, written and implied, between the
parties hereto with respect to the subject matter hereof.
14. Definitions. For purposes of this Agreement:
-----------
(a) "Change in Control" means a change in control of the Company
occurring after the date of this Agreement of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or in
response to any similar item on any similar schedule or form) promulgated under
the Securities Exchange Act of 1934 (as amended from time to time, the "Act"),
whether or not the Company is then subject to such reporting requirement;
provided, however, that, without limitation, such a Change in Control shall be
deemed to have occurred if after the date of this Agreement (i) any "person" (as
such term is used in Sections 13(d) and 14(d) of the Act, other than a trustee
or other fiduciary holding securities under an employee benefit plan of the
Company or a corporation owned directly or indirectly by the stockholders of the
Company in substantially the same proportions as their ownership of stock of the
Company, is or becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Act), directly or indirectly, of securities of the Company representing 15%
or more of the combined voting power of the Company's then outstanding
securities (other than any such person or any affiliate thereof that is such a
15% beneficial owner as of the date hereof) without the prior approval of at
least two-thirds of the members of the Board of Directors in office immediately
prior to such person attaining such percentage interest; (ii) there occurs a
proxy contest, or the Company is a party to a merger, consolidation, sale of
assets, plan of liquidation or other reorganization, as a consequence of which
members of the Board of Directors in office immediately prior to such
transaction or event constitute less than a majority of the Board of Directors
thereafter; or (iii) during any period of two consecutive years, other than as a
result of
10
<PAGE>
an event described in clause (a)(ii) of this Section 16, individuals
who at the beginning of such period constituted the Board of Directors
(including for this purpose any new director whose election or nomination for
election by the Company's stockholders was approved by a vote of at least two-
thirds of the directors then still in office who were directors at the beginning
of such period) cease for any reason to constitute at least a majority of the
Board of Directors. A Change in Control shall not be deemed to have occurred
under clause (i) above if the "person" described under clause (i) is entitled to
report its ownership on Schedule 13G promulgated under the Act and such person
is able to represent that it acquired such securities in the ordinary course of
its business and not with the purpose nor with the effect of changing or
influencing the control of the Company, nor in connection with or as a
participant in any transaction having such purpose or effect. If the "person"
referred to in the previous sentence would at any time not be entitled to
continue to report such ownership on Schedule 13G pursuant to Rule 13d-
l(b)(3)(i)(B) of the Act, then a Change in Control shall be deemed to have
occurred at such time.
(b) "Corporate Status" describes the status of a person who is or was
a director, officer, employee or agent or fiduciary of the Company or of any
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise which such person is or was serving at the express request of
the Company.
(c) "Disinterested Director" means a director of the Company who is
not and was not a party to the Proceeding in respect of which indemnification is
sought by Indemnitee.
(d) "Enterprise" shall mean the Company and any other corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise of
which Indemnitee is or was serving at the express written request of the Company
as a director, officer, employee, agent or fiduciary.
(e) "Expenses" shall include all reasonable attorneys' fees,
retainers, court costs, transcript costs, fees of experts, witness fees, travel
expenses, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service fees, and all other disbursements or expenses of the
types customarily incurred in connection with prosecuting, defending, preparing
to prosecute or defend, investigating, participating, or being or preparing to
be a witness or a deponent in a Proceeding.
(f) "Independent Counsel" means a law firm, or a member of a law firm,
that is experienced in matters of corporation law and neither presently is, nor
in the past five years has been, retained to represent: (i) the Company or
Indemnitee in any matter material to either such party (other than with respect
to matters concerning the Indemnitee under this Agreement, or of other
indemnitees under similar indemnification agreements), or (ii) any other party
to the Proceeding giving rise to a claim for indemnification hereunder.
Notwithstanding the foregoing, the term "Independent Counsel" shall not include
any person who, under the applicable standards of professional conduct then
prevailing, would have a conflict of interest in representing either the Company
or Indemnitee in an action to determine Indemnitee's rights under this
Agreement. The Company agrees to pay the reasonable fees of the Independent
Counsel referred to above and to
11
<PAGE>
fully indemnify such counsel against any and all Expenses, claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto.
(g) "Proceeding" includes any threatened, pending or completed action,
suit, arbitration, alternate dispute resolution mechanism, investigation,
inquiry, administrative hearing or any other actual, threatened or completed
proceeding, whether brought by or in the right of the Company or otherwise and
whether civil, criminal, administrative or investigative, in which Indemnitee
was, is or will be involved as a party or otherwise, by reason of the fact that
Indemnitee is or was a director of the Company, by reason of any action taken by
him or of any inaction on his part while acting as a director, officer, employee
or agent of the Company, or by reason of the fact that he is or was serving at
the request of the Company as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise; in each case
(i) whether or not he is acting or serving in any such capacity at the time any
liability or expense is incurred for which indemnification can be provided under
this Agreement, (ii) whether or not liability or expense arises from actions or
omissions of Indemnitee before or after the date of this Agreement; and
(iii) excluding any proceeding initiated by an Indemnitee pursuant to Section 8
of this Agreement to enforce his rights under this Agreement.
15. Severability. If any provision or provisions of this Agreement
------------
shall be held by a court of competent jurisdiction to be invalid, void, illegal
or otherwise unenforceable for any reason whatsoever: (a) the validity, legality
and enforceability of the remaining provisions of this Agreement (including
without limitation, each portion of any section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall not in any way be affected or impaired
thereby and shall remain enforceable to the fullest extent permitted by law; and
(b) to the fullest extent possible, the provisions of this Agreement (including,
without limitation, each portion of any section of this Agreement containing any
such provision held to be invalid, illegal or unenforceable, that is not itself
invalid, illegal or unenforceable) shall be construed so as to give effect to
the intent manifested thereby.
16. Modification and Waiver. No supplement, modification,
-----------------------
termination or amendment of this Agreement shall be binding unless executed in
writing by both of the parties hereto. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provisions hereof (whether or not similar) nor shall such waiver constitute a
continuing waiver.
17. Notice by Indemnitee. Indemnitee agrees promptly to notify the
--------------------
Company in writing upon being served with any summons, citation, subpoena,
complaint, indictment, information or other document relating to any Proceeding
or matter which may be subject to indemnification covered hereunder. The failure
to so notify the Company shall not relieve the Company of any obligation which
it may have to the Indemnitee under this Agreement or otherwise.
18. Notices. All notices, requests, demands and other communications
-------
hereunder shall be in writing and shall be deemed to have been duly given if
(i) delivered by hand
12
<PAGE>
and receipted for by the party to whom said notice or other communication shall
have been directed, or (ii) mailed by certified or registered mail with postage
prepaid, on the third business day after the date on which it is so mailed:
(a) If to Indemnitee, to:
(b) If to the Company, to:
NetSource Communications, Inc.
1304 Southpoint Boulevard
Petaluma, CA 94954
Attention: Legal Department
or to such other address as may have been furnished to Indemnitee by the Company
or to the Company by Indemnitee, as the case may be.
19. Identical Counterparts. This is Agreement may be executed in one
----------------------
or more counterparts, each of which shall for all purposes be deemed to be an
original but all of which together shall constitute one and the same Agreement.
Only one such counterpart signed by the party against whom enforceability is
sought needs to be produced to evidence the existence of this Agreement.
20. Headings. The headings of the paragraphs of this Agreement are
--------
inserted for convenience only and shall not be deemed to constitute part of this
Agreement or to affect the construction thereof
21. Governing Law. The parties agree that this Agreement shall be
-------------
governed by, and construed and enforced in accordance with, the laws of the
State of California without application of the conflict of laws principles
thereof.
22. Gender. Use of the masculine pronoun shall be deemed to
------
include usage of the feminine pronoun where appropriate.
IN S WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.
NETSOURCE COMMUNICATIONS, INC.
13
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By
------------------------------------
Charles Schoenhoeft
President
------------------------------------
Indemnitee
14
<PAGE>
EXHIBIT 10.2
MTC TELECOMMUNICATIONS, INC.
1996 OMNIBUS EQUITY INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1 BACKGROUND, PURPOSE AND DURATION.............................. 1
1.1 Background and Effective Date................................. 1
1.2 Purpose of the Plan........................................... 1
1.3 Duration of the Plan.......................................... 1
SECTION 2 DEFINITIONS................................................... 1
2.1 "1934 Act".................................................... 1
2.2 "Affiliate"................................................... 2
2.3 "Affiliated SAR".............................................. 2
2.4 "Award"....................................................... 2
2.5 "Award Agreement"............................................. 2
2.6 "Board"....................................................... 2
2.7 "Code"........................................................ 2
2.8 "Committee"................................................... 2
2.9 "Company"..................................................... 2
2.10 "Consultant................................................... 2
2.11 "Director".................................................... 2
2.12 "Disability".................................................. 3
2.13 "Employee".................................................... 3
2.14 "ERISA"....................................................... 3
2.15 "Fair Market Value"........................................... 3
2.16 "Freestanding SAR"............................................ 3
2.17 "Incentive Stock Option"...................................... 3
2.18 "Nonqualified Stock Option"................................... 3
2.19 "Option"...................................................... 3
2.20 "Option Price"................................................ 3
2.21 "Participant"................................................. 3
2.22 "Performance Unit"............................................ 3
2.23 "Performance Share"........................................... 4
2.24 "Period of Restriction"....................................... 4
2.25 "Plan......................................................... 4
2.26 "Restricted Stock"............................................ 4
2.27 "Retirement".................................................. 4
2.28 "Rule 16b-3".................................................. 4
2.29 "Section 16 Person"........................................... 4
2.30 "Shares"...................................................... 4
2.31 "Stock Appreciation Right".................................... 4
2.32 "Subsidiary".................................................. 4
2.33 "Tandem SAR".................................................. 4
2.34 "Termination of Employment"................................... 4
</TABLE>
1
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<TABLE>
<CAPTION>
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<S> <C>
2.35 "Window Period"............................................... 5
SECTION 3 ADMINISTRATION................................................ 5
3.1 Procedure..................................................... 5
3.1.1 Appointment of the Committee............................ 5
3.1.2 The Committee Post-Registration......................... 6
3.2 Authority of the Committee.................................... 6
3.3 Decisions Binding............................................. 6
SECTION 4 SHARES SUBJECT TO THE PLAN.................................... 6
4.1 Number of Shares.............................................. 6
4.2 Lapsed Awards................................................. 6
4.3 Adjustments in Authorized Shares.............................. 6
SECTION 5 STOCK OPTIONS................................................. 7
5.1 Grant of Options.............................................. 7
5.2 Award Agreement............................................... 7
5.3 Option Price.................................................. 7
5.3.1 Nonqualified Stock Options............................. 7
5.3.2 Incentive Stock Options................................ 8
5.3.3 Substitute Options..................................... 8
5.4 Expiration of Options......................................... 8
5.4.1 Expiration Dates....................................... 8
5.4.2 Committee Discretion................................... 9
5.5 Exercise of Options........................................... 9
5.6 Payment....................................................... 9
5.7 Restrictions on Share Transferability......................... 10
5.8 Certain Additional Provisions for Incentive Stock
Options....................................................... 10
5.8.1 Exercisability......................................... 10
5.8.2 Termination of Employment.............................. 10
5.8.3 Company and Subsidiaries Only.......................... 10
5.8.4 Expiration............................................. 10
5.9 Nontransferability of Options................................. 10
SECTION 6 STOCK APPRECIATION RIGHTS.................................... 11
6.1 Grant of SARs................................................. 11
6.2 Exercise of Tandem SARs....................................... 11
6.2.1 ISOs................................................... 11
6.3 Exercise of Affiliated SARs................................... 11
6.4 Exercise of Freestanding SARs................................. 12
6.5 SAR Agreement................................................. 12
6.6 Expiration of SARs............................................ 12
6.7 Payment of SAR Amount......................................... 12
</TABLE>
2
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<TABLE>
<CAPTION>
Page
<S> <C>
6.8 Nontransferability of SARs.................................... 12
SECTION 7 RESTRICTED STOCK.............................................. 13
7.1 Grant of Restricted Stock..................................... 13
7.2 Restricted Stock Agreement.................................... 13
7.3 Transferability............................................... 13
7.4 Other Restrictions............................................ 13
7.5 Removal of Restrictions....................................... 14
7.6 Voting Rights................................................. 14
7.7 Dividends and Other Distributions............................. 14
7.8 Return of Restricted Stock to Company......................... 14
SECTION 8 PERFORMANCE UNITS AND PERFORMANCE SHARES...................... 15
8.1 Grant of Performance Units/Shares............................. 15
8.2 Value of Performance Units/Shares............................. 15
8.3 Earning of Performance Units/Shares........................... 15
8.4 Form and Timing of Payment of Performance
Units/Shares.................................................. 15
8.5 Cancellation of Performance Units/Shares...................... 15
8.6 Nontransferability............................................ 16
SECTION 9 BENEFICIARY DESIGNATION....................................... 16
SECTION 10 DEFERRALS..................................................... 16
SECTION 11 RIGHTS OF EMPLOYEES........................................... 17
11.1 No Effect on Employment or Service............................ 17
11.2 Participation................................................. 17
SECTION 12 AMENDMENT, SUSPENSION, OR TERMINATION......................... 17
12.1 Amendment, Suspension, or Termination......................... 17
SECTION 13 TAX WITHHOLDING............................................... 17
13.1 Withholding Requirements...................................... 17
13.2 Shares Withholding............................................ 17
SECTION 14 INDEMNIFICATION............................................... 18
SECTION 15 SUCCESSORS.................................................... 19
SECTION 16 LEGAL CONSTRUCTION............................................ 19
16.1 Gender and Number............................................. 19
16.2 Severability.................................................. 19
16.3 Requirements of Law........................................... 19
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Page
<S> <C>
16.4 Securities Law Compliance..................................... 19
16.5 Governing Law................................................. 19
16.6 Captions...................................................... 20
</TABLE>
4
<PAGE>
MTC TELECOMMUNICATIONS, INC.
1996 OMNIBUS EQUITY INCENTIVE PLAN
MTC TELECOMMUNICATIONS, INC., hereby adopts the MTC Telecommunications,
Inc. 1996 Omnibus Equity Incentive Plan, effective as of January _____, 1996, as
follows:
SECTION 1
BACKGROUND, PURPOSE AND DURATION
1.1 Background and Effective Date. The Plan provides for the granting of
-----------------------------
Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock,
Performance Units, and Performance Shares. The Plan is effective as of
January _____, 1996, subject to ratification by an affirmative vote of the
holders of a majority of Shares. Awards may be granted prior to the receipt of
such vote, but such grants shall be null and void if such vote is not in fact
received.
1.2 Purpose of the Plan. The purpose of the Plan is to promote the
-------------------
success, and enhance the value, of the Company by aligning the interests of
Participants with those of the Company's shareholders, and by providing
Participants with an incentive for outstanding performance.
The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of outstanding
individuals, upon whose judgment, interest, and special effort the success of
the Company largely is dependent.
1.3 Duration of the Plan. The Plan shall commence on the date specified
--------------------
in Section 1.1, and subject to Section 12 (concerning the Board's right to amend
or terminate the Plan), shall remain in effect thereafter. However, without
further stockholder approval, no Incentive Stock Option may be granted under the
Plan on or after January _____, 2006.
SECTION 2
DEFINITIONS
The following words and phrases shall have the following meanings unless a
different meaning is plainly required by the context:
2.1 "1934 Act" means the Securities Exchange Act of 1934, as amended.
--------
Reference to a specific section of the Exchange
<PAGE>
Act or regulation thereunder shall include such section or regulation, any valid
regulation promulgated under such section, and any comparable provision of any
future legislation or regulation amending, supplementing or superseding such
section or regulation.
2.2 "Affiliate" means any corporation or any other entity (including, but
---------
not limited to, partnerships and joint ventures) controlling, controlled by, or
under common control with the Company.
2.3 "Affiliated SAR" means an SAR that is granted in connection with a
--------------
related Option, and which automatically will be deemed to be exercised at the
same time that the related Option is exercised.
2.4 "Award" means, individually or collectively, a grant under the Plan
-----
of Nonqualified Stock Options, Incentive Stock Options, SARs, Restricted Stock,
Performance Units, or Performance Shares.
2.5 "Award Agreement" means the written agreement setting forth the terms
---------------
and provisions applicable to each Award granted under the Plan.
2.6 "Board" or "Board of Directors" means the Board of Directors of the
-----
Company.
2.7 "Code" means the Internal Revenue Code of 1986, as amended.
----
Reference to a specific section of the Code or regulation thereunder shall
include such section or regulation, any valid regulation promulgated under such
section, and any comparable provision of any future legislation or regulation
amending, supplementing or superseding such section or regulation.
2.8 "Committee" means the committee appointed by the Board (pursuant to
---------
Section 3.1) to administer the Plan.
2.9 "Company" means MTC Telecommunications, Inc., a Delaware corporation,
-------
or any successor thereto.
2.10 "Consultant" means an individual who provides significant services
----------
to the Company and/or an Affiliate, but who is neither a Director nor an
Employee.
2.11 "Director" means any individual who is a member of the Board of
--------
Directors of the Company.
2
<PAGE>
2.12 "Disability" means a permanent and total disability within the
----------
meaning of Code Section 22(e)(3).
2.13 "Employee" means an employee of the Company or of an Affiliate,
--------
whether such employee is so employed at the time the Plan is adopted or becomes
so employed subsequent to the adoption of the Plan.
2.14 "ERISA" means the Employee Retirement Income Security Act of 1974,
-----
as amended. Reference to a specific section of ERISA shall include such
section, any valid regulation promulgated thereunder, and any comparable
provision of any future legislation amending, supplementing or superseding such
section.
2.15 "Fair Market Value" means the value of the common stock as
-----------------
determined in good faith by the Board of Directors or the Committee or, upon
completion of the Company's initial public offering, the average of the highest
and lowest quoted selling prices for Shares on the relevant date, or if there
were no sales on such date, the arithmetic mean of the highest and lowest quoted
selling prices on the nearest day before and the nearest day after the relevant
date, as determined by the Board of Directors or the Committee.
2.16 "Freestanding SAR" means a SAR that is granted independently of any
----------------
Option.
2.17 "Incentive Stock Option" or "ISO" means an option to purchase
---------------------- ---
Shares, which is designated as an Incentive Stock Option and is intended to meet
the requirements of Section 422 of the Code.
2.18 "Nonqualified Stock Option" or "NQSO" means an option to purchase
------------------------- ----
Shares which is not intended to be an Incentive Stock Option.
2.19 "Option" means an Incentive Stock Option or a Nonqualified Stock
------
Option.
2.20 "Option Price" means the price at which a Share may be purchased
------------
pursuant to an Option.
2.21 "Participant" means an Employee or Consultant who has an outstanding
-----------
Award.
2.22 "Performance Unit" means an Award granted to an Employee pursuant to
----------------
Section 8.
3
<PAGE>
2.23 "Performance Share" means an Award granted to an Employee pursuant
-----------------
to Section 8.
2.24 "Period of Restriction" means the period during which the transfer
---------------------
of Shares of Restricted Stock are subject to restrictions.
2.25 "Plan" means the MTC Telecommunications, Inc. 1996 Omnibus Equity
----
Incentive Plan, as set forth in this instrument and as hereafter amended from
time to time.
2.26 "Restricted Stock" means an Award granted to a Participant pursuant
----------------
to Section 7.
2.27 "Retirement" means, in the case of an Employee, a Termination of
----------
Employment by reason of the Employee's retirement at or after age 62.
2.28 "Rule 16b-3" means Rule 16b-3 promulgated under the 1934 Act, and
----------
any future regulation amending, supplementing or superseding such regulation.
2.29 "Section 16 Person" means a person who, with respect to the Shares,
-----------------
is subject to Section 16 of the 1934 Act.
2.30 "Shares" means the shares of common stock, $0.001 par value, of the
------
Company.
2.31 "Stock Appreciation Right" or "SAR" means an Award, granted alone or
------------------------
in connection with a related Option, that pursuant to the terms of Section 7 is
designated as an SAR.
2.32 "Subsidiary" means any corporation in an unbroken chain of
----------
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent or more of the total combined voting power of all classes of stock in
one of the other corporations in such chain.
2.33 "Tandem SAR" means an SAR that is granted in connection with a
----------
related Option, the exercise of which shall require forfeiture of the right to
purchase an equal number of Shares under the related Option (and when a Share is
purchased under the Option, the SAR shall be canceled to the same extent).
2.34 "Termination of Employment" means a cessation of the employee-
-------------------------
employer relationship between an employee and the Company
4
<PAGE>
or an Affiliate for any reason, including, but not by way of limitation, a
termination by resignation, discharge, death, Disability, Retirement, or the
disaffiliation of an Affiliate, but excluding any such termination where there
is a simultaneous reemployment by the Company or an Affiliate.
2.35 "Window Period" means the period beginning on the third business day
-------------
following the date of public release of the Company's quarterly sales and
earnings information, and ending on the twelfth business day following such
date.
SECTION 3
ADMINISTRATION
3.1 Procedure. This Plan shall be administered by the Board of Directors
---------
of the Company unless and until the Board of Directors delegates administration
to a Committee, as provided in this Section 3.1.
3.1.1 Appointment of the Committee. Subject to Section 3.1.2, the Board
----------------------------
of Directors may appoint a Committee consisting of not less than two persons
(who need not be members of the Board of Directors) to administer this Plan on
behalf of the Board of Directors, subject to such terms and conditions not
inconsistent with this Plan as the Board of Directors may prescribe. The Board
of Directors may from time to time increase the size of the Committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies however caused, or
remove all members of the Committee and thereafter directly administer this
Plan. Once appointed, the Committee shall continue to serve until otherwise
directed by the Board of Directors. All references herein to the Committee
shall refer to the Board of Directors if such Committee has not been appointed.
Members of the Board who are either eligible for Awards or have been granted
Awards may vote on any matters affecting the administration of this Plan or the
grant of any Awards pursuant to this Plan, except that no such member shall act
upon the granting of an option to such member, but any such member may be
counted in determining the existence of a quorum at any meeting of the Board
during which action is taken with respect to the granting of Awards to such
member.
3.1.2 The Committee Post-Registration. Notwithstanding the foregoing
-------------------------------
Section 3.1.1, if the Company registers any class of any equity security
pursuant to Section 12 of the Exchange Act, from the effective date of such
registration
5
<PAGE>
until six months after the termination of such registration, the Plan shall be
administered by a Committee consisting of not less than two Directors. The
Committee shall be comprised solely of Directors who are "disinterested persons"
under Rule 16b-3.
3.2 Authority of the Committee. The Committee shall have all powers and
--------------------------
discretion necessary or appropriate to administer the Plan and to control its
operation, including, but not limited to, the power (a) to determine which
Employees and Consultants shall be granted Awards, (b) to prescribe the terms
and conditions of such Awards, (c) to interpret the Plan and the Awards, (d) to
adopt rules for the administration, interpretation and application of the Plan
as are consistent therewith, and (e) to interpret, amend or revoke any such
rules.
The Committee, in its sole discretion and on such terms and conditions as
it may provide, may delegate all or any part of its authority and powers under
the Plan to one or more directors and/or officers of the Company; provided,
however, that the Committee may not delegate its authority and powers (a) with
respect to Section 16 Persons, or (b) in any way which would jeopardize the
Plan's qualification under Rule 16b-3.
3.3 Decisions Binding. All determinations and decisions made by the
-----------------
Committee shall be final, conclusive, and binding on all persons, and shall be
given the maximum deference permitted by law.
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in Section 4.3,
----------------
the total number of Shares available for grant under the Plan may not exceed
405,000. Such Shares may be authorized but unissued Shares or Treasury Shares.
4.2 Lapsed Awards. If an Award is cancelled, terminates, expires, or
-------------
lapses for any reason (with the exception of the termination of a Tandem SAR
upon exercise of the related Option, or the termination of a related Option upon
exercise of the corresponding Tandem SAR), any Shares subject to such Award
again shall be available to be the subject of an Award.
4.3 Adjustments in Authorized Shares. In the event of any merger,
--------------------------------
reorganization, consolidation, recapitalization, separation, liquidation, stock
dividend, split-up, Share
6
<PAGE>
combination, or other change in the corporate structure of the Company affecting
the Shares, such adjustment shall be made in the number and class of Shares
which may be delivered under the Plan, and in the number and class of and/or
price of Shares subject to outstanding Options, SARs, and Restricted Stock
granted under the Plan, as the Committee, in its sole discretion, shall
determine to be appropriate to prevent the dilution or diminishment of Awards.
Notwithstanding the preceding sentence, the number of Shares subject to any
Award always shall be a whole number.
SECTION 5
STOCK OPTIONS
5.1 Grant of Options. Options may be granted to Employees and
----------------
Consultants at any time and from time to time, as determined by the Committee in
its sole discretion. The Committee, in its sole discretion, shall determine the
number of Shares subject to Options granted to each Participant. The Committee
may grant ISOs, NQSOs, or a combination thereof.
5.2 Award Agreement. Each Option shall be evidenced by an Award
---------------
Agreement that shall specify the Option Price, the expiration date of the
Option, the number of Shares to which the Option pertains, any conditions to
exercise of the Option, and such other terms and conditions as the Committee, in
its discretion, shall determine. The Award Agreement also shall specify whether
the Option is intended to be an ISO or a NQSO.
5.3 Option Price. Subject to the provisions of this Section 5.3, the
------------
Option Price for each Option shall be determined by the Committee in its sole
discretion.
5.3.1 Nonqualified Stock Options. In the case of a Nonqualified
--------------------------
Stock Option, the Option Price shall be not less than eighty-five percent (85%)
of the Fair Market Value of a Share on the date that the Option is granted,
provided, that the option price of the initial grant of options to purchase
- --------
shares in connection with the exchange of options for options of the Company's
subsidiaries shall be determined under the applicable exchange agreement.
5.3.2 Incentive Stock Options. In the case of an Incentive Stock
-----------------------
Option, the Option Price shall be not less than one hundred percent (100%) of
the Fair Market Value of a Share on the date that the Option is granted;
provided, however, that if at the time that the Option is granted, the Employee
(together with
7
<PAGE>
persons whose stock ownership is attributed to the Employee pursuant to Section
424(d) of the Code) owns stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or any of its Subsidiaries,
the Option Price shall be not less than one hundred and ten percent (110%) of
the Fair Market Value of a Share on the date that the Option is granted.
5.3.3 Substitute Options. Notwithstanding the provisions of
------------------
Sections 5.3.1 and 5.3.2, in the event that the Company or an Affiliate
consummates a transaction described in Section 424(a) of the Code (e.g., the
----
acquisition of property or stock from an unrelated corporation), persons who
become Employees or Consultants on account of such transaction may be granted
Options in substitution for options granted by their former employer. If such
substitute Options are granted, the Committee, in its sole discretion, may
determine that such substitute Options shall have an exercise price less than
100% of the Fair Market Value of the Shares on the date the Option is granted.
5.4 Expiration of Options. Each Option shall terminate upon the first to
---------------------
occur of the events listed in Section 5.4.1, subject to Section 5.4.2.
5.4.1 Expiration Dates.
----------------
(a) The date for termination of the Option set forth in the written
stock option agreement;
(b) The expiration of ten years from the date the Option was granted,
subject to the provisions of clause (f), below; or
(c) The expiration of one year from the date of the Optionee's
Termination of Employment for a reason other than the Optionee's
death, Disability or Retirement, subject to the provisions of clause
(f) below; or
(d) The expiration of three years from the date of the Optionee's
Termination of Employment by reason of Disability, subject to the
provisions of clause (f) below; or
(e) The expiration of three years from the date of the Optionee's
Retirement; provided that no Incentive Stock Option may be exercised
after the expiration of three months from the date of the Optionee's
8
<PAGE>
Retirement, subject in each case to the provisions of clause (f)
below; or
(f) The expiration of one year from the date of the Optionee's death, if
such death occurs while the Optionee is in the employ of the Company
or an Affiliate or within the one-year or three-year periods referred
to in (c), (d) or (e) above, whichever is applicable.
5.4.2 Committee Discretion. Subject to the provisions of this
--------------------
Section 5.4, the Committee shall provide, in the terms of each individual
Option, when such Option expires and becomes unexercisable. After the Option is
granted, the Committee, in its sole discretion and subject to Section 5.8.4 and
this Section 5.4, may extend the maximum term of such Option.
5.5 Exercise of Options. Options granted under the Plan shall be
-------------------
exercisable at such times, and subject to such restrictions and conditions, as
the Committee shall determine in its sole discretion. After an Option is
granted, the Committee, in its sole discretion, may accelerate the
exercisability of the Option. However, in no event may any Option granted to a
Section 16 Person be exercisable until at least six (6) months following the
date of its grant.
5.6 Payment. Options shall be exercised by the Participant's
-------
delivery of a written notice of exercise to the Secretary of the Company,
setting forth the number of Shares with respect to which the Option is to be
exercised, accompanied by full payment for the Shares.
The Option Price upon exercise of any Option shall be payable to the
Company in full in cash. The Committee, in its sole discretion, also may permit
exercise (a) by tendering previously acquired Shares having an aggregate Fair
Market Value at the time of exercise equal to the total Option Price (provided
that the Shares which are tendered must have been held by the Participant for at
least six (6) months prior to their tender to satisfy the Option Price), or (b)
by any other means which the Committee, in its sole discretion, determines to
both provide legal consideration for the Shares, and to be consistent with the
purposes of the Plan.
As soon as practicable after receipt of a written notification of
exercise and full payment for the Shares purchased, the Company shall deliver to
the Participant Share certificates (in the Participant's name) representing such
Shares.
9
<PAGE>
5.7 Restrictions on Share Transferability. The Committee may impose
-------------------------------------
such restrictions on any Shares acquired pursuant to the exercise of an Option,
as it may deem advisable, including, but not limited to, restrictions related to
Federal securities laws, the requirements of any national securities exchange or
system upon which such Shares are then listed and/or traded, and/or any blue sky
or state securities laws.
5.8 Certain Additional Provisions for Incentive Stock Options.
---------------------------------------------------------
5.8.1 Exercisability. The aggregate Fair Market Value (determined
--------------
at the time the Option is granted) of the Shares with respect to which Incentive
Stock Options are exercisable for the first time by any Employee during any
calendar year (under all plans of the Company and its Subsidiaries) shall not
exceed $100,000.
5.8.2 Termination of Employment. No Incentive Stock Option may be
-------------------------
exercised more than three months after the Participant's termination of
employment for any reason other than Disability or death, unless (a) the
Participant dies during such three-month period, and (b) the Award Agreement
and/or the Committee permits later exercise. No Incentive Stock Option may be
exercised more than one year after the Participant's termination of employment
on account of Disability, unless (a) the Participant dies during such one-year
period, and (b) the Award Agreement and/or the Committee permit later exercise.
5.8.3 Company and Subsidiaries Only. Incentive Stock Options may be
-----------------------------
granted only to persons who are employees of the Company and/or a Subsidiary at
the time of grant.
5.8.4 Expiration. No Incentive Stock Option may be exercised after
----------
the expiration of 10 years from the date such Option was granted; provided,
however, that if the Option is granted to an Employee who, together with persons
whose stock ownership is attributed to the Employee pursuant to Section 424(d)
of the Code, owns stock possessing more than 10% of the total combined voting
power of all classes of the stock of the Company or any of its Subsidiaries, the
Option may not be exercised after the expiration of 5 years from the date that
it was granted.
5.9 Nontransferability of Options. No Option granted under the Plan
-----------------------------
may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will, the laws of descent and distribution, or as
provided under Section 9. All
10
<PAGE>
Options granted to a Participant under the Plan shall be exercisable during his
or her lifetime only by such Participant.
SECTION 6
STOCK APPRECIATION RIGHTS
6.1 Grant of SARs. An SAR may be granted to an Employee or
-------------
Consultant at any time and from time to time as determined by the Committee, in
its sole discretion. The Committee may grant Affiliated SARs, Freestanding
SARs, Tandem SARs, or any combination thereof.
The Committee shall have complete discretion to determine the number
of SARs granted to any Participant, and consistent with the provisions of the
Plan, the terms and conditions pertaining to such SARs. However, the grant
price of a Freestanding SAR shall be at least equal to the Fair Market Value of
a Share on the date of grant. The grant price of Tandem or Affiliated SARs
shall equal the Option Price of the related Option. In no event shall an SAR
granted to a Section 16 Person become exercisable until at least six (6) months
after the date that it was granted.
6.2 Exercise of Tandem SARs. Tandem SARs may be exercised for all or
-----------------------
part of the Shares subject to the related Option upon the surrender of the right
to exercise the equivalent portion of the related Option. A Tandem SAR may be
exercised only with respect to the Shares for which its related Option is then
exercisable.
6.2.1 ISOs. Notwithstanding any contrary provision of the Plan,
----
with respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem
SAR shall expire no later than the expiration of the underlying ISO; (ii) the
value of the payout with respect to the Tandem SAR shall be for no more than one
hundred percent (100%) of the difference between the Option Price of the
underlying ISO and the Fair Market Value of the Shares subject to the underlying
ISO at the time the Tandem SAR is exercised; and (iii) the Tandem SAR shall be
exercisable only when the Fair Market Value of the Shares subject to the ISO
exceeds the Option Price of the ISO.
6.3 Exercise of Affiliated SARs. An Affiliated SAR shall be deemed
---------------------------
to be exercised upon the exercise of the related Option. The deemed exercise of
an Affiliated SAR shall not necessitate a reduction in the number of Shares
subject to the related Option.
11
<PAGE>
6.4 Exercise of Freestanding SARs. Freestanding SARs shall be
-----------------------------
exercisable on such terms and conditions as the Committee, in its sole
discretion, shall determine. However, no SAR granted to a Section 16 Person
shall be exercisable until at least six (6) months after the date of grant.
6.5 SAR Agreement. Each SAR shall be evidenced by an Award Agreement
-------------
that shall specify the grant price, the term of the SAR, the conditions of
exercise, and such other terms and conditions as the Committee, in its sole
discretion, shall determine.
6.6 Expiration of SARs. An SAR granted under the Plan shall expire
------------------
upon the date determined by the Committee, in its sole discretion, and set forth
in the Award Agreement. Notwithstanding the foregoing, the rules of Section 5.4
(pertaining to Options) also shall apply to SARs.
6.7 Payment of SAR Amount. Upon exercise of an SAR, a Participant
---------------------
shall be entitled to receive payment from the Company in an amount determined by
multiplying:
(a) The difference between the Fair Market Value of a Share on the
date of exercise over the grant price; times
(b) The number of Shares with respect to which the SAR is exercised.
At the discretion of the Committee, the payment upon SAR exercise may
be in cash, in Shares of equivalent value, or in some combination thereof.
6.8 Nontransferability of SARs. No SAR granted under the Plan may be
--------------------------
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will, the laws of descent and distribution, or as permitted under
Section 9. An SAR granted to a Participant shall be exercisable during the
Participant's lifetime only by such Participant.
12
<PAGE>
SECTION 7
RESTRICTED STOCK
7.1 Grant of Restricted Stock. Subject to the terms and provisions
-------------------------
of the Plan, the Committee, at any time and from time to time, may grant Shares
of Restricted Stock to Employees and Consultants in such amounts as the
Committee, in its sole discretion, shall determine.
7.2 Restricted Stock Agreement. Each Award of Restricted Stock shall
--------------------------
be evidenced by an Award Agreement that shall specify the Period of Restriction,
the number of Shares granted, and such other terms and conditions as the
Committee, in its sole discretion, shall determine. Unless the Committee
determines otherwise, shares of Restricted Stock shall be held by the Company as
escrow agent until the restrictions on such shares have lapsed.
7.3 Transferability. Except as provided in this Section 7, Shares of
---------------
Restricted Stock may not be sold, transferred, pledged, assigned, or otherwise
alienated or hypothecated until the end of the applicable Period of Restriction.
However, in no event may the restrictions on Restricted Stock granted to a
Section 16 Person lapse prior to six (6) months following the date of its grant.
All rights with respect to the Restricted Stock granted to a Participant under
the Plan shall be available during his or her lifetime only to such Participant.
7.4 Other Restrictions. The Committee, in its sole discretion, may
------------------
impose such other restrictions on any Shares of Restricted Stock as it may deem
advisable including, without limitation, restrictions based upon the achievement
of specific performance goals (Company-wide, divisional, and/or individual),
and/or restrictions under applicable Federal or state securities laws; and may
legend the certificates representing Restricted Stock to give appropriate notice
of such restrictions. For example, the Committee may determine that some or all
certificates representing Shares of Restricted Stock shall bear the following
legend:
"The sale or other transfer of the shares of stock represented by this
certificate, whether voluntary, involuntary, or by operation of law, is
subject to certain restrictions on transfer as set forth in the MTC
Telecommunications, Inc. 1996 Omnibus Equity Incentive Plan, and in a
Restricted Stock Agreement. A copy of the Plan and such Restricted Stock
Agreement may be obtained
13
<PAGE>
from the Secretary of MTC Telecommunications, Inc.."
7.5 Removal of Restrictions. Except as otherwise provided in this
-----------------------
Section 7, Shares of Restricted Stock covered by each Restricted Stock grant
made under the Plan shall be released from escrow as soon as practicable after
the last day of the Period of Restriction. The Committee, in its discretion,
may accelerate the time at which any restrictions shall lapse, and/or remove any
restrictions; provided, however, that the Period of Restriction on Shares
granted to a Section 16 Person may not lapse until at least six (6) months after
the date of grant. After the restrictions have lapsed, the Participant shall be
entitled to have any legend or legends under Section 7.4 removed from his or her
Share certificate, and the Shares shall be freely transferable by the
Participant.
7.6 Voting Rights. During the Period of Restriction, Participants
-------------
holding Shares of Restricted Stock granted hereunder may exercise full voting
rights with respect to those Shares, unless the Committee determines otherwise.
7.7 Dividends and Other Distributions. During the Period of
---------------------------------
Restriction, Participants holding Shares of Restricted Stock shall be entitled
to receive all dividends and other distributions paid with respect to such
Shares, unless otherwise provided in the Award Agreement. If any such dividends
or distributions are paid in Shares, the Shares shall be subject to the same
restrictions on transferability and forfeitability as the Shares of Restricted
Stock with respect to which they were paid.
With respect to an Award to a Section 16 Person, any dividend or
distribution that constitutes a "derivative security" or an "equity security"
under Section 16 of the 1934 Act shall be subject to a Period of Restriction
equal to the longer of: (a) the remaining Period Restriction on the Shares of
Restricted Stock with respect to which the dividend or distribution is paid; or
(b) six (6) months.
7.8 Return of Restricted Stock to Company. Subject to the applicable
-------------------------------------
Award Agreement and Section 7.5, upon the earlier of (a) the Participant's
termination of employment, or (b) the date set forth in the Award Agreement, the
Restricted Stock for which restrictions have not lapsed shall revert to the
Company and, subject to Section 4.2, again shall become available for grant
under the Plan.
14
<PAGE>
SECTION 8
PERFORMANCE UNITS AND PERFORMANCE SHARES
8.1 Grant of Performance Units/Shares. Performance Units and
---------------------------------
Performance Shares may be granted to Employees and Consultants at any time and
from time to time, as shall be determined by the Committee, in its sole
discretion. The Committee shall have complete discretion in determining the
number of Performance Units and Performance Shares granted to each Participant.
8.2 Value of Performance Units/Shares. Each Performance Unit shall
---------------------------------
have an initial value that is established by the Committee at the time of grant.
Each Performance Share shall have an initial value equal to the Fair Market
Value of a Share on the date of grant. The Committee shall set performance
goals in its discretion which, depending on the extent to which they are met,
will determine the number and/or value of Performance Units/Shares that will be
paid out to the Participants. The time period during which the performance
goals must be met shall be called the "Performance Period". Performance Periods
of Awards granted to Section 16 Persons shall not be less than six (6) months.
8.3 Earning of Performance Units/Shares. After the applicable
-----------------------------------
Performance Period has ended, the holder of Performance Units/Shares shall be
entitled to receive a payout of the number of Performance Units/Shares earned by
the Participant over the Performance Period, to be determined as a function of
the extent to which the corresponding performance goals have been achieved.
After the grant of a Performance Unit/Share, the Committee, in its sole
discretion, may adjust and/or waive the achievement of any performance goals for
such Performance Unit/Share; provided, however, that Performance Periods of
Awards granted to Section 16 Persons shall not be less than six (6) months.
8.4 Form and Timing of Payment of Performance Units/Shares. Payment
------------------------------------------------------
of earned Performance Units/Shares shall be made as soon as practicable after
the expiration of the applicable Performance Period. The Committee, in its sole
discretion, may pay earned Performance Units/Shares in the form of cash, in
Shares (which have an aggregate Fair Market Value equal to the value of the
earned Performance Units/Shares at the close of the applicable Performance
Period) or in a combination thereof.
8.5 Cancellation of Performance Units/Shares. Subject to the
----------------------------------------
applicable Award Agreement, upon the earlier of (a) the
15
<PAGE>
Participant's termination of employment, or (b) the date set forth in the Award
Agreement, all remaining Performance Units/Shares shall be forfeited by the
Participant to the Company, and subject to Section 4.2, the Shares subject
thereto shall again be available for grant under the Plan.
8.6 Nontransferability. Performance Units/Shares may not be sold,
------------------
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will, the laws of descent and distribution, or as permitted under
Section 9. A Participant's rights under the Plan shall be exercisable during
the Participant's lifetime only by the Participant or the Participant's legal
representative.
SECTION 9
BENEFICIARY DESIGNATION
If permitted by the Committee, a Participant may name a beneficiary or
beneficiaries to whom any unpaid vested Award shall be paid in event of the
Participant's death. Each such designation shall revoke all prior designations
by the same Participant and shall be effective only if given in a form and
manner acceptable to the Committee. In the absence of any such designation,
benefits remaining unpaid at the Participant's death shall be paid to the
Participant's estate and, subject to the terms of the Plan, any unexercised
vested Award may be exercised by the administrator or executor of the
Participant's estate.
SECTION 10
DEFERRALS
The Committee, in its sole discretion, may permit a Participant to
defer receipt of the payment of cash or the delivery of Shares that would
otherwise be due to such Participant under an Award. Any such deferral
elections shall be subject to such rules and procedures as shall be determined
by the Committee in its sole discretion.
16
<PAGE>
SECTION 11
RIGHTS OF EMPLOYEES AND CONSULTANTS
11.1 No Effect on Employment or Service. Nothing in the Plan
----------------------------------
shall interfere with or limit in any way the right of the Company to terminate
any Participant's employment or service at any time, with or without cause.
11.2 Participation. No Employee or Consultant shall have the
-------------
right to be selected to receive an Award under this Plan, or, having been so
selected, to be selected to receive a future Award.
SECTION 12
AMENDMENT, SUSPENSION, OR TERMINATION
12.1 Amendment, Suspension, or Termination. The Board, in its
-------------------------------------
sole discretion, may alter, amend or terminate the Plan, or any part thereof, at
any time and for any reason. However, as required by Rule 16b-3, without
further stockholder approval, no such alteration or amendment shall (a)
materially increase the benefits accruing to participants under the Plan, (b)
materially increase the number of securities which may be issued under the Plan,
or (c) materially modify the requirements as to eligibility for participation in
the Plan; provided, however, that stockholder approval is not required if such
approval is not required in order to assure the Plan's continued qualification
under Rule 16b-3. Neither the amendment, suspension, nor termination of the Plan
shall, without the consent of the Participant, alter or impair any rights or
obligations under any Award theretofore granted. No Award may be granted during
any period of suspension nor after termination of the Plan.
SECTION 13
TAX WITHHOLDING
13.1 Withholding Requirements. Prior to the delivery of any Shares or
------------------------
cash pursuant to an Award, the Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, state, and local taxes required to be withheld
with respect to such Award.
13.2 Shares Withholding. The Committee, in its sole discretion and
------------------
pursuant to such procedures as it may specify from
17
<PAGE>
time to time, may permit a Participant to satisfy such tax withholding
obligation, in whole or in part, by electing to have the Company withhold Shares
having a value equal to the amount required to be withheld or by delivering to
the Company already-owned shares to satisfy the withholding requirement. The
amount of the withholding requirement shall be deemed to include any amount
which the Committee agrees may be withheld at the time the election is made, not
to exceed the amount determined by using the maximum federal, state or local
marginal income tax rates applicable to the Participant with respect to the
Award on the date that the amount of tax to be withheld is to be determined.
The value of the Shares to be withheld or delivered will be based on their Fair
Market Value on the date that the taxes are required to be withheld.
SECTION 14
INDEMNIFICATION
Each person who is or shall have been a member of the Committee, or of
the Board, shall be indemnified and held harmless by the Company against and
from any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, notion, suit, or proceeding to which he or she may be a party or in which
he or she may be involved by reason of any action taken or failure to act under
the Plan or any Award Agreement and against and from any and all amounts paid by
him or her in settlement thereof, with the Company's approval, or paid by him or
her in settlement thereof, with the Company's approval, or paid by him or her in
satisfaction of any judgment in any such action, suit, or proceeding against him
or her, provided he or she shall give the Company an opportunity, at its own
expense, to handle and defend the same before he or she undertakes to handle and
defend it on his or her own behalf. The foregoing right of indemnification
shall not be exclusive of any other rights of indemnification to which such
persons may be entitled under the Company's Articles of Incorporation or Bylaws,
as a matter of law, or otherwise, or any power that the Company may have to
indemnify them or hold them harmless.
18
<PAGE>
SECTION 15
SUCCESSORS
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the business
and/or assets of the Company.
SECTION 16
LEGAL CONSTRUCTION
16.1 Gender and Number. Except where otherwise indicated by the
-----------------
context, any masculine term used herein also shall include the feminine; the
plural shall include the singular and the singular shall include the plural.
16.2 Severability. In the event any provision of the Plan shall
------------
be held illegal or invalid for any reason, such illegality or invalidity shall
not affect the remaining parts of the Plan, and the Plan shall be construed and
enforced as if the illegal or invalid provision had not been included.
16.3 Requirements of Law. The granting of Awards and the issuance of
-------------------
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
16.4 Securities Law Compliance. Notwithstanding any contrary
-------------------------
provision of the Plan, unless and until the Company registers its equity
securities under Section 12 of the Exchange Act, all references herein to
Section 16, Section 16 Persons and/or Rule 16b-3 shall be of no force or effect.
After such registration, with respect to Section 16 Persons, transactions under
this Plan are intended to comply with all applicable conditions of Rule 16b-3.
To the extent any provision of the Plan, Award Agreement or action by the
Committee fails to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the Committee.
16.5 Governing Law. The Plan and all Award Agreements shall be
-------------
construed in accordance with and governed by the laws of the State of
California.
19
<PAGE>
16.6 Captions. Captions are provided herein for convenience
--------
only, and shall not serve as a basis for interpretation or construction of the
Plan.
EXECUTION
IN WITNESS WHEREOF, the Company, by its duly authorized officer, has
executed the Plan on the date indicated below.
MTC TELECOMMUNICATIONS, INC.
/s/ MTC Telecommunications, Inc.
Dated: ______________ By_________________________________
Title:
20
<PAGE>
EXHIBIT 10.3
NETSOURCE COMMUNICATIONS, INC.
1996 STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants of the Company and its Subsidiaries and to promote the success of
the Company's business. Options granted under the Plan may be Incentive Stock
Options or Non-Qualified Stock Options, as determined by the Administrator at
the time of grant.
2. Definitions. As used herein, the following definitions shall apply:
-----------
a. "Administrator" means the Board or any of the Committees
-------------
appointed to administer the Plan.
b. "Affiliate" and "Associate" shall have the respective meanings
--------- ---------
ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.
c. "Applicable Laws" means the legal requirements relating to
---------------
the administration of stock option plans, if any, under applicable provisions of
federal securities laws, state corporate and securities laws, the Code, the
rules of any applicable stock exchange or national market system, and the rules
of any foreign jurisdiction applicable to Options granted to residents therein.
d. "Board" means the Board of Directors of the Company
-----
e. "Code" means the Internal Revenue Code of 1986, as amended.
----
f. "Committee" means any committee appointed by the Board to
---------
administer the Plan.
g. "Common Stock" means the common stock of the Company.
------------
h. "Company" means NetSource Communications, Inc., a Delaware
-------
corporation.
i. "Consultant" means any person who is engaged by the Company or
----------
any Parent or Subsidiary to render consulting or advisory services as an
independent contractor and is compensated for such services.
j. "Continuing Directors" means members of the Board who
--------------------
either (i) have been Board members continuously for a period of at least
thirty-six (36) months or (ii) have been Board members for less than thirty-six
(36) months and were elected or nominated for election as Board members by at
least a majority of the Board members described in clause (i) who were still in
office at the time such election or nomination was approved by the Board.
k. "Continuous Status as an Employee, Director or Consultant" means
--------------------------------------------------------
that the employment, director or consulting relationship with the Company, any
Parent, or Subsidiary, is not interrupted or terminated. Continuous Status as an
Employee, Director or
<PAGE>
Consultant shall not be considered interrupted in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of absence approved by the Company shall include sick leave, military
leave, or any other personal leave approved by an authorized representative of
the Company. For purposes of Incentive Stock Options, no such leave may exceed
ninety (90) days, unless reemployment upon expiration of such leave is
guaranteed by statute or contract.
l. "Corporate Transaction" means any of the following stockholder-
---------------------
approved transactions to which the Company is a party:
i. a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the state in which the Company is incorporated;
ii. the sale, transfer or other disposition of all or
substantially all of the assets of the Company (including the capital stock of
the Company's subsidiary corporations) in connection with the complete
liquidation or dissolution of the Company; or
iii. any reverse merger in which the Company is the surviving
entity but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such securities
immediately prior to such merger.
m. "Covered Employee" means an Employee who is a "covered employee"
----------------
under Section 162(m)(3) of the Code.
n. "Director" means a member of the Board.
--------
o. "Employee" means any person, including an Officer or Director,
--------
who is an employee of the Company or any Parent or Subsidiary of the Company for
purposes of Section 422 of the Code. The payment of a director's fee by the
Company shall not be sufficient to constitute "employment" by the Company.
p. "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
q. "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
i. Where there exists a public market for the Common Stock,
the Fair Market Value shall be (A) the closing sales price for a Share for the
last market trading day prior to the time of the determination (or, if no sales
were reported on that date, on the last trading date on which sales were
reported) on the stock exchange determined by the Administrator to be the
primary market for the Common Stock or the Nasdaq National Market, whichever is
applicable or (B) if the Common Stock is not traded on any such exchange or
national market system, the average of the closing bid and asked prices of a
Share on the Nasdaq Small Cap Market for the day prior to the time of the
determination (or, if no such prices were reported on that date, on the last
date on which such prices were reported), in each case, as
2.
<PAGE>
reported in The Wall Street Journal or such other source as the Administrator
deems reliable; or
ii. In the absence of an established market of the type
described in (i), above, for the Common Stock, the Fair Market Value thereof
shall be determined by the Administrator in good faith.
r. "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code
s. "Non-Qualified Stock Option" means an Option not intended to
--------------------------
qualify as an Incentive Stock Option.
t. "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
u. "Option" means a stock option granted pursuant to the Plan.
------
v. "Option Agreement" means the written agreement evidencing the
----------------
grant of an Option executed by the Company and the Optionee, including any
amendments thereto.
w. "Optioned Stock" means the Common Stock subject to an Option.
--------------
x. "Optionee" means an Employee, Director or Consultant who
--------
receives an Option under the Plan.
y. "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
z. "Performance - Based Compensation" means compensation qualifying
--------------------------------
as "performance-based compensation" under Section 162(m) of the Code.
aa. "Plan" means this 1996 Stock Option Plan.
----
bb. "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act
----------
or any successor thereto.
cc. "Share" means a share of the Common Stock.
-----
dd. "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3.
<PAGE>
3. Stock Subject to the Plan.
-------------------------
a. Subject to the provisions of Section 10, below, the maximum
aggregate number of Shares which may be optioned and sold under the Plan is
2,600,000 Shares. The Shares may be authorized, but unissued, or reacquired
Common Stock.
b. If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option exchange program,
such unissued or retained Shares shall become available for future grant under
the Plan (unless the Plan has terminated). Shares that actually have been issued
under the Plan shall not be returned to the Plan and shall not become available
for future distribution under the Plan, except that if unvested Shares are
forfeited, or repurchased by the Company at their original purchase price, such
Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
--------------------------
a. Plan Administrator.
------------------
i. Administration with Respect to Directors and Officers. With
-----------------------------------------------------
respect to grants of Options to Directors or Employees who are also Officers or
Directors of the Company, the Plan shall be administered by (A) the Board or
(B) a Committee designated by the Board, which Committee shall be constituted in
such a manner as to satisfy the Applicable Laws and to permit such grants and
related transactions under the Plan to be exempt from Section 16(b) of the
Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by the
Board.
ii. Administration With Respect to Consultants and Other
----------------------------------------------------
Employees. With respect to grants of Options to Employees or Consultants who are
- ---------
neither Directors nor Officers of the Company, the Plan shall be administered by
(A) the Board or (B) a Committee designated by the Board, which Committee shall
be constituted in such a manner as to satisfy the Applicable Laws. Once
appointed, such Committee shall continue to serve in its designated capacity
until otherwise directed by the Board. The Board may authorize one or more
Officers to grant such Options and may limit such authority by requiring that
such Options must be reported to and ratified by the Board or a Committee within
six (6) months of the grant date, and if so ratified, shall be effective as of
the grant date.
iii. Administration With Respect to Covered Employees.
------------------------------------------------
Notwithstanding the foregoing, grants of Options to any Covered Employee
intended to qualify as Performance-Based Compensation shall be made only by a
Committee (or subcommittee of a Committee) which is comprised solely of two or
more Directors eligible to serve on a committee making Options qualifying as
Performance-Based Compensation. In the case of such Options granted to Covered
Employees, references to the "Administrator" or to a "Committee" shall be deemed
to be references to such Committee or subcommittee.
4.
<PAGE>
iv. Administration Errors. In the event an Option is granted in
---------------------
a manner inconsistent with the provisions of this subsection (a), such Option
shall be presumptively valid as of its grant date to the extent permitted by the
Applicable Laws.
b. Powers of the Administrator. Subject to Applicable Laws and
---------------------------
the provisions of the Plan (including any other powers given to the
Administrator hereunder), and except as otherwise provided by the Board, the
Administrator shall have the authority, in its discretion:
i. to select the Employees, Directors and Consultants to whom
Options may be granted from time to time hereunder;
ii. to determine whether and to what extent Options are granted
hereunder;
iii. to determine the number of Shares to be covered by each
Option granted hereunder;
iv. to approve forms of Option Agreement for use under the Plan;
v. to determine the terms and conditions of any Option granted
hereunder;
vi. to establish additional terms, conditions, rules or
procedures to accommodate the rules or laws of applicable foreign jurisdictions
and to afford Optionees favorable treatment under such laws; provided, however,
that no Option shall be granted under any such additional terms, conditions,
rules or procedures with terms or conditions which are inconsistent with the
provisions of the Plan;
vii. to amend the terms of any outstanding Option granted under
the Plan, including a reduction in the exercise price of any Option to reflect a
reduction in the Fair Market Value of the Common Stock since the grant date of
the Option, provided that any amendment that would adversely affect the
Optionee's rights under an outstanding Option shall not be made without the
Optionee's written consent;
viii. to construe and interpret the terms of the Plan and Options
granted pursuant to the Plan; and
ix. to take such other action, not inconsistent with the terms
of the Plan, as the Administrator deems appropriate.
c. Effect of Administrator's Decision. All decisions,
----------------------------------
determinations and interpretations of the Administrator shall be conclusive and
binding on all persons.
5. Eligibility. Non-Qualified Stock Options may be granted to
-----------
Employees, Directors and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee, Director or Consultant who has been granted an
Option may, if otherwise eligible, be granted additional Options. Options may be
granted to such Employees of the Company and its
5.
<PAGE>
subsidiaries who are residing in foreign jurisdictions as the Administrator may
determine from time to time.
6.
<PAGE>
6. Terms and Conditions of Options.
-------------------------------
a. Designation of Options. Each Option shall be designated as
----------------------
either an Incentive Stock Option or a Non-Qualified Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of Shares subject to Options designated as Incentive Stock Options which
become exercisable for the first time by an Optionee during any calendar year
(under all plans of the Company or any Parent or Subsidiary) exceeds $100,000,
such excess Options, to the extent of the Shares covered thereby in excess of
the foregoing limitation, shall be treated as Non-Qualified Stock Options. For
this purpose, Incentive Stock Options shall be taken into account in the order
in which they were granted, and the Fair Market Value of the Shares shall be
determined as of the date the Option with respect to such Shares is granted.
b. Conditions of Option. Subject to the terms of the Plan, the
--------------------
Administrator shall determine the provisions, terms, and conditions of each
Option including, but not limited to, the Option vesting schedule (which in no
case shall be less than 20% per year over five years from the date of grant),
repurchase provisions, rights of first refusal, forfeiture provisions, and
satisfaction of any performance criteria. The performance criteria established
by the Administrator may be based on any one of, or combination of, increase in
share price, earnings per share, total stockholder return, return on equity,
return on assets, return on investment, net operating income, cash flow,
revenue, economic value added, personal management objectives, or other measure
of performance selected by the Administrator. Partial achievement of the
specified criteria may result in vesting corresponding to the degree of
achievement as specified in the Option Agreement.
c. Term of Option. The term of each Option shall be the term
--------------
stated in the Option Agreement, provided, however, that the term of an Incentive
Stock Option shall be no more than ten (10) years from the date of grant
thereof. However, in the case of an Incentive Stock Option granted to an
Optionee who, at the time the Option is granted, owns stock representing more
than ten percent (10%) of the voting power of all classes of stock of the
Company or any Parent or Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the Option Agreement.
d. Transferability of Options. Incentive Stock Options may not
--------------------------
be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee.
Non-Qualified Stock Options shall be transferable to the extent provided in the
Option Agreement.
e. Time of Granting Options. The date of grant of an Option
------------------------
shall for all purposes, be the date on which the Administrator makes the
determination to grant such Option, or such other date as is determined by the
Administrator. Notice of the grant determination shall be given to each
Employee, Director or Consultant to whom an Option is so granted within a
reasonable time after the date of such grant.
7. Option Exercise Price, Consideration and Taxes.
----------------------------------------------
a. Exercise Price. The exercise price for an Option shall be as
--------------
follows:
7.
<PAGE>
i. In the case of an Incentive Stock Option:
(1) granted to an Employee who, at the time of the grant of
such Incentive Stock Option owns stock representing more than ten percent (10%)
of the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be not less than one hundred ten
percent (110%) of the Fair Market Value per Share on the date of grant.
(2) granted to any Employee other than an Employee
described in the preceding paragraph, the per Share exercise price shall be not
less than one hundred percent (100%) of the Fair Market Value per Share on the
date of grant.
ii. In the case of Options intended to qualify as Performance-
Based Compensation, the per Share exercise price shall be not less than one
hundred percent (100%) of the Fair Market Value per Share on the date of grant.
iii. In the case of a Non-Qualified Stock Option:
(1) granted to a person who, at the time of the grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
per Share exercise price shall be no less than 110% of the Fair Market Value per
Share on the date of the grant.
(2) granted to any person, the per Share exercise price
shall be no less than 85% of the Fair Market Value per Share on the date of
grant.
b. Consideration. Subject to Applicable Laws, the consideration to
-------------
be paid for the Shares to be issued upon exercise of an Option including the
method of payment, shall be determined by the Administrator (and, in the case of
an Incentive Stock Option, shall be determined at the time of grant). In
addition to any other types of consideration the Administrator may determine,
the Administrator is authorized to accept as consideration for Shares issued
under the Plan the following:
i. cash;
ii. check;
iii. delivery of Optionee's promissory note with such recourse,
interest, security, and redemption provisions as the Administrator determines as
appropriate;
iv. surrender of Shares (including withholding of Shares
otherwise deliverable upon exercise of the Option) which have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised (but only to the extent that
such exercise of the Option would not result in an accounting compensation
charge with respect to the Shares used to pay the exercise price unless
otherwise determined by the Administrator);
v. delivery of a properly executed exercise notice together
with such other documentation as the Administrator and the broker, if
applicable, shall require to effect
8.
<PAGE>
an exercise of the Option and delivery to the Company of the sale or
loan proceeds required to pay the exercise price; or
vi. any combination of the foregoing methods of payment.
c. Taxes. No Shares shall be delivered under the Plan to any
-----
Optionee or other person until such Optionee or other person has made
arrangements acceptable to the Administrator for the satisfaction of any
foreign, federal, state, or local income and employment tax withholding
obligations, including, without limitation, obligations incident to the receipt
of Shares or the disqualifying disposition of Shares received on exercise of an
Incentive Stock Option. Upon exercise of an Option, the Company shall withhold
or collect from Optionee an amount sufficient to satisfy such tax obligations.
8. Exercise of Option.
------------------
a. Procedure for Exercise: Rights as a Stockholder.
-----------------------------------------------
i. Any Option granted hereunder shall be exercisable at such
times and under such conditions as determined by the Administrator under the
terms of the Plan and specified in the Option Agreement.
ii. An Option shall be deemed to be exercised when written
notice of such exercise has been given to the Company in accordance with the
terms of the Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Until the issuance (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Shares, no right to vote or
receive dividends or any other rights as a stockholder shall exist with respect
to Optioned Stock, notwithstanding the exercise of an Option. The Company shall
issue (or cause to be issued) such stock certificate promptly upon exercise of
the Option. No adjustment will be made for a dividend or other right for which
the record date is prior to the date the stock certificate is issued, except as
provided in the Option Agreement or Section 10, below.
b. Exercise of Option Following Termination of Employment, Director
----------------------------------------------------------------
or Consulting Relationship.
- --------------------------
i. Upon termination of an Optionee's Continuous Status as an
Employee, Director or Consultant, other than upon the Optionee's death or
disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revet to the Plan.
9.
<PAGE>
ii. Disability of Optionee. If an Optionee's Continuous Status
----------------------
as an Employee, Director or Consultant terminates as a result of the Optionee's
disabilty, the Optionee may exercise the Option to the extent the Option is
vested on the date of termination, but only within twelve (12) months from the
date of such termination (and in no event later than the expiration date of the
term of such Option as set forth in the Option Agreement). If such disability is
not a "disability" as such term is defined in Section 22(e)(3) of the Code, in
the case of an Incentive Stock Option such Incentive Stock Option shall
automatically convert to a Non-Qualified Stock Option on the day three months
and one day following such termination. If, on the date of termination, the
Optionee is not vested as to the entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Option is not exercised within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
iii. Death of Optionee. In the event of the death of an
-----------------
Optionee, the Option may be exercised at any time within twelve (12) months
following the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement) to the extent vested
on the date of death. If, at the time of death, the Optionee is not vested as to
the entire Option, the Shares covered by the unvested portion of the Option
shall revert to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s) entitled to
exercise the Option under the Optionee's will or the laws of descent or
distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
c. Buyout Provisions. The Administrator may at any time offer to
-----------------
buy out for a payment in cash or Shares, an Option previously granted, based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
9. Conditions Upon Issuance of Shares.
----------------------------------
a. Shares shall not be issued pursuant to the exercise of an
Option unless the exercise of such Option and the issuance and delivery of such
Shares pursuant thereto shall comply with all Applicable Laws, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
b. As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required by any
Applicable Laws.
10. Adjustments Upon Changes in Capitalization. Subject to any required
------------------------------------------
action by the stockholders of the Company, the number of Shares covered by each
outstanding Option, and the number of Shares which have been authorized for
issuance under the Plan but as to which no Options have yet been granted or
which have been returned to the Plan, as well as the price per share of
Common Stock covered by each such outstanding Option, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
10.
<PAGE>
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other similar event
resulting in an increase or decrease in the number of issued shares of Common
Stock. Except as expressly provided herein, no issuance by the Company of shares
of stock of any class, or securities convertible into shares of stock of any
class, shall affect, and no adjustment by reason hereof shall be made with
respect to, the number or price of Shares subject to an Option.
11. Corporate Transactions.
----------------------
a. In the event of any Corporate Transaction, each Option
which is at the time outstanding under the Plan automatically shall become fully
vested and exercisable and be released from any restrictions on transfer and
repurchase or forfeiture rights, immediately prior to the specified effective
date of such Corporate Transaction, for all of the Shares at the time
represented by such Option. However, an outstanding Option under the Plan shall
not so fully vest and be exercisable and released from such limitations if and
to the extent: (i) such Option is, in connection with the Corporate Transaction,
either to be assumed by the successor corporation or Parent thereof or to be
replaced with a comparable Option with respect to shares of the capital stock of
the successor corporation or Parent thereof, or (ii) such Option is to be
replaced with a cash incentive program of the successor corporation which
preserves the compensation element of such Option existing at the time of the
Corporate Transaction and provides for subsequent payout in accordance with the
same vesting schedule applicable to such Option. The determination of Option
comparability under clause (i) above shall be made by the Administrator, and its
determination shall be final, binding and conclusive.
b. Effective upon the consummation of the Corporate Transaction, all
outstanding Options under the Plan shall terminate and cease to remain
outstanding, except to the extent assumed by the successor company or its
Parent.
c. The portion of any Incentive Stock Option accelerated under
this Section 11 in connection with a Corporate Transaction shall remain
exercisable as an Incentive Stock Option under the Code only to the extent the
$100,000 dollar limitation of Section 422(d) of the Code is not exceeded. To the
extent such dollar limitation is exceeded, the accelerated excess portion of
such Option shall be exercisable as a Non-Qualified Stock Option.
12. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board or its approval by the stockholders of the
Company. It shall continue in effect for a term of ten (10) years unless sooner
terminated.
13. Amendment, Suspension or Termination of the Plan.
------------------------------------------------
a. The Board may at any time amend, suspend or terminate the
Plan. To the extent necessary to comply with Applicable Laws, the Company shall
obtain stockholder approval of any Plan amendment in such a manner and to such a
degree as required.
b. No Option may be granted during any suspension of the Plan or
after termination of the Plan.
11.
<PAGE>
c. Any amendment, suspension or termination of the Plan shall not
affect Options already granted, and such Options shall remain in full force and
effect as if the Plan had not been amended, suspended or terminated, unless
mutually agreed otherwise between the Optionee and the Administrator, which
agreement must be in writing and signed by the Optionee and the Company.
14. Reservation of Shares.
---------------------
a. The Company, during the term of the Plan, will at all times
reserve and keep available such number of Shares as shall be sufficient to
satisfy the requirements of the Plan.
b. The inability of the Company to obtain authority from any
regulatory body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Shares as to which such requisite authority shall not have been
obtained.
15. No Effect on Terms of Employment. The Plan shall not confer upon
--------------------------------
any Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his or her
right or the Company's right to terminate his or her employment or consulting
relationship at any time, with or without cause.
16. Stockholder Approval. The grant of Incentive Stock Options under
--------------------
the Plan shall be subject to approval by the stockholders of the Company within
twelve (12) months before or after the date the Plan is adopted. Such
stockholder approval shall be obtained in the degree and manner required under
Applicable Laws. The Administrator may grant Incentive Stock Options under the
Plan prior to approval by the stockholders, but until such approval is obtained,
no such Incentive Stock Option shall be exercisable. In the event that
stockholder approval is not obtained within the twelve (12) month period
provided above, all Incentive Stock Options previously granted under the Plan
shall terminate.
17. Information to Optionees and Purchasers. The Company shall provide
---------------------------------------
to each Optionee, not less frequently than annually, copies of annual financial
statements. The Company shall also provide such statements to each individual
who acquires Shares pursuant to the Plan while such individual owns such Shares.
The Company shall not be required to provide such statements to Employees,
Directors or Consultants whose duties in connection with the Company assure
their access to equivalent information.
12.
<PAGE>
EXHIBIT 10.4
NETSOURCE COMMUNICATIONS, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1996 Employee Stock Purchase
Plan of NETSOURCE COMMUNICATIONS, INC.
1. PURPOSE. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. DEFINITIONS.
-----------
a. "BOARD" shall mean the Board of Directors of the Company.
-----
b. "CODE" shall mean the Internal Revenue Code of 1986, as amended.
----
c. "COMMON STOCK" shall mean the Common Stock of the Company.
------------
d. "COMPANY" shall mean NETSOURCE COMMUNICATIONS, INC., a Delaware
-------
corporation.
e. "COMPENSATION" shall mean all base straight time gross earnings,
------------
plus any payments for overtime, shift premium, incentive compensation, incentive
payments, bonuses, commissions and other compensation.
f. "DESIGNATED SUBSIDIARIES" shall mean the Subsidiaries which have
-----------------------
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
g. "EMPLOYEE" shall mean any individual who is an Employee of the
--------
Company or a Designated Subsidiary for purposes of tax withholding under the
Code whose customary employment with the Company or any Designated Subsidiary is
at least twenty (20) hours per week and more than five (5) months in any
calendar year. For purposes of the Plan, the employment relationship shall be
treated as continuing intact while the individual is on sick leave or other
leave of absence approved by the Company. Where the period of leave exceeds
ninety (90) days and the individual's right to re-employment is not guaranteed
either by statute or by contract, the employment relationship will be deemed to
have terminated on the ninety-first (91st) day of such leave.
h. "ENROLLMENT DATE" shall mean the first day of each Offering
---------------
Period.
i. "EXERCISE DATE" shall mean the last day of each Purchase Period.
-------------
j. "FAIR MARKET VALUE" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
<PAGE>
i. If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the National
Market System of the National Association of Securities Dealers, Inc. Automated
Quotation ("NASDAQ") System, its Fair Market Value shall be the closing sale
price for the Common Stock (or the mean of the closing bid and asked prices, if
no sales were reported), as quoted on such exchange (or the exchange with the
greatest volume of trading in Common Stock) or system on the date of such
determination, as reported in The Wall Street Journal or such other source as
-----------------------
the Board deems reliable, or;
ii. If the Common Stock is quoted on the NASDAQ system (but not
on the National Market System thereof) or is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock on
the date of such determination, as reported in The Wall Street Journal or such
-----------------------
other source as the Board deems reliable, or;
iii. In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
iv. For purposes of the Enrollment Date under the first
Offering Period under the Plan, the Fair Market Value of the Common Stock shall
be the Price to Public as set forth in the final prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424 under the Securities Act
of 1933, as amended.
k. "OFFERING PERIOD" shall mean the period of approximately twenty-
---------------
four (24) months during which an option granted pursuant to the Plan may be
exercised, commencing on the first Trading Day on or after May 15 and November
15 of each year and terminating on the last Trading Day in the periods ending
twenty-four (24) months later, except that the first Offering Period shall be a
shortened Offering Period of approximately twenty-three (23) months, commencing
with the date on which the Company's registration statement on Form S-1 (or any
successor form thereof) is declared effective by the Securities and Exchange
Commission and ending on the last Trading Day in the period ending November 14,
1998. The second Offering Period under the Plan shall commence with the first
Trading Day on or after May 15, 1997. The duration of Offering Periods may be
changed pursuant to Section 4 of this Plan.
l. "PLAN" shall mean this 1996 Employee Stock Purchase Plan.
----
m. "PURCHASE PRICE" shall mean an amount equal to eighty-five
--------------
percent (85%) of the Fair Market Value of a share of Common Stock on the
Enrollment Date or on the Exercise Date, whichever is lower.
n. "PURCHASE PERIOD" shall mean the approximately six (6) month
---------------
period commencing after one Exercise Date and ending with the next Exercise
Date, except that the first Purchase Period of any Offering Period shall
commence on the Enrollment Date and end with the next Exercise Date; provided,
however, that the first Purchase Period of the first Offering Period under the
Plan shall commence with the date on which the Company's registration statement
on Form S-1 (or any successor form thereof) is declared effective by the
Securities and Exchange Commission and end on the last Trading Day occurring in
the period ending May 15, 1997.
-2-
<PAGE>
o. "RESERVES" shall mean the number of shares of Common Stock
--------
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
p. "SUBSIDIARY" shall mean a corporation, domestic or foreign, of
----------
which not less than fifty percent (50%) of the voting shares are held by the
Company or a Subsidiary, whether or not such corporation now exists or is
hereafter organized or acquired by the Company or a Subsidiary.
q. "TRADING DAY" shall mean a day on which national stock exchanges
-----------
and the NASDAQ System are open for trading.
3. ELIGIBILITY.
-----------
a. Any Employee (as defined in Section 2.g), who shall be
employed by the Company on a given Enrollment Date shall be eligible to
participate in the Plan.
b. Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) if, immediately after the
grant, such Employee (or any other person whose stock would be attributed to
such Employee pursuant to Section 424(d) of the Code) would own capital stock of
the Company and/or hold outstanding options to purchase such stock possessing
five percent (5%) or more of the total combined voting power or value of all
classes of the capital stock of the Company or of any Subsidiary, or (ii) which
permits his or her rights to purchase stock under all employee stock purchase
plans of the Company and its subsidiaries to accrue at a rate which exceeds
Twenty-five Thousand Dollars ($25,000) worth of stock (determined at the fair
market value of the shares at the time such option is granted) for each calendar
year in which such option is outstanding at any time.
4. OFFERING PERIODS. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 15 and November 15 each year, or on such other date
as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 19 hereof; provided, however, that the first Offering
Period under the Plan shall be a shortened Offering Period of approximately
twenty-three (23) months, commencing with the first Trading Day on or after the
date on which the Company's registration statement on Form S-1 (or any successor
form thereof) is declared effective by the Securities and Exchange Commission
and ending on the last Trading Day in the period ending November 14, 1998. The
second Offering Period under the Plan shall commence with the first Trading Day
on or after May 15, 1997. The Board shall have the power to change the duration
of Offering Periods (including the commencement and termination dates thereof)
with respect to future offerings without stockholder approval if such change is
announced at least fifteen (15) days prior to the scheduled beginning of the
first Offering Period to be affected thereafter.
-3-
<PAGE>
5. PARTICIPATION.
-------------
a. An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date, unless a later time for filing the
subscription agreement is set by the Board for all eligible Employees with
respect to a given Offering Period.
b. Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. PAYROLL DEDUCTIONS.
------------------
a. At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period, and the aggregate of such payroll deductions during the Offering Period
shall not exceed ten percent (10%) of the participant's Compensation during said
Offering Period.
b. All payroll deductions made for a participant shall be credited
to his or her account under the Plan and will be withheld in whole percentages
only. A participant may not make any additional payments into such account.
c. A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
d. Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at such time during any
Purchase Period which is scheduled to end during the current calendar year (the
"Current Purchase Period") that the aggregate of all payroll deductions which
were previously used to purchase stock under the Plan in a prior Purchase Period
which ended during that calendar year plus all payroll deductions accumulated
with respect to the Current Purchase Period equal Twenty-one Thousand Two
Hundred Fifty Dollars ($21,250). Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Purchase Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
e. At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any,
-4-
<PAGE>
which arise upon the exercise of the option or the disposition of the Common
Stock. At any time, the Company may, but will not be obligated to, withhold from
the participant's compensation the amount necessary for the Company to meet
applicable withholding obligations, including any withholding required to make
available to the Company any tax deductions or benefits attributable to sale or
early disposition of Common Stock by the Employee.
7. GRANT OF OPTION. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than a
number of Shares determined by dividing Twenty-five Thousand Dollars ($25,000)
by the Fair Market Value of a share of the Company's Common Stock on the
Enrollment Date, and provided further that such purchase shall be subject to the
limitations set forth in Section 3.b and 12 hereof. Exercise of the option
shall occur as provided in Section 8 hereof, unless the participant has
withdrawn pursuant to Section 10 hereof, and shall expire on the last day of the
Offering Period.
8. EXERCISE OF OPTION. Unless a participant withdraws from the Plan as
------------------
provided in Section 10 hereof, his or her option for the purchase of shares will
be exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional share will be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier withdrawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. DELIVERY. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
-------------------------------------
a. A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account will be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period will be automatically terminated, and no further payroll deductions for
the purchase of shares will be made during the Offering Period. If a
participant withdraws from an Offering Period, payroll deductions will not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
-5-
<PAGE>
b. Upon a participant's ceasing to be an Employee (as defined in
Section 2.g hereof), for any reason, including by virtue of him or her having
failed to remain an Employee of the Company for at least twenty (20) hours per
week during an Offering Period in which the Employee is a participant, he or she
will be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option will be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 14 hereof, and such participant's option will be automatically
terminated.
11. INTEREST. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
12. STOCK.
-----
a. The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be 1,000,000 shares,
subject to adjustment upon changes in capitalization of the Company as provided
in Section 18 hereof. If on a given Exercise Date the number of shares with
respect to which options are to be exercised exceeds the number of shares then
available under the Plan, the Company shall make a pro rata allocation of the
shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
b. The participant will have no interest or voting right in shares
covered by his option until such option has been exercised.
c. Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant and
his or her spouse.
13. ADMINISTRATION. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties. Members of the Board
who are eligible Employees are permitted to participate in the Plan, provided
that:
i. Members of the Board who are eligible to participate in the
Plan may not vote on any matter affecting the administration of the Plan or the
grant of any option pursuant to the Plan.
ii. If a committee is established to administer the Plan, no
member of the Board who is eligible to participate in the Plan may be a member
of the committee.
14. DESIGNATION OF BENEFICIARY.
--------------------------
a. A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to an Exercise Date
on which the option is exercised but prior to
-6-
<PAGE>
delivery to such participant of such shares and cash. In addition, a participant
may file a written designation of a beneficiary who is to receive any cash from
the participant's account under the Plan in the event of such participant's
death prior to exercise of the option. If a participant is married and the
designated beneficiary is not the spouse, spousal consent shall be required for
such designation to be effective.
b. Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
15. TRANSFERABILITY. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
16. USE OF FUNDS. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
17. REPORTS. Individual accounts will be maintained for each participant
-------
in the Plan. Statements of account will be given to participating Employees at
least annually, which statements will set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, LIQUIDATION,
---------------------------------------------------------------------
MERGER OR ASSET SALE.
- --------------------
a. CHANGES IN CAPITALIZATION. Subject to any required action by the
-------------------------
shareholders of the Company, the Reserves, as well as the price per share and
the number of shares of Common Stock covered by each option under the Plan which
has not yet been exercised, shall be proportionately adjusted for any increase
or decrease in the number of issued shares of Common Stock resulting from a
stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of shares of Common Stock effected without receipt of consideration by
the Company; provided, however, that conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an option.
-7-
<PAGE>
b. DISSOLUTION OR LIQUIDATION. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Periods shall terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
c. MERGER OR ASSET SALE. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, any Purchase Periods then in progress shall be
shortened by setting a new Exercise Date (the "New Exercise Date") and any
Offering Periods then in progress shall end on the New Exercise Date. The New
Exercise Date shall be before the date of the Company's proposed sale or merger.
The Board shall notify each participant in writing, at least ten (10) business
days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
19. AMENDMENT OR TERMINATION.
------------------------
a. The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 18 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in Section 18
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Rule 16b-3 or under Section 423 of the Code (or any successor rule
or provision or any other applicable law or regulation), the Company shall
obtain stockholder approval in such a manner and to such a degree as required.
b. Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
20. NOTICES. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
-8-
<PAGE>
21. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, as amended, the rules and
regulations promulgated thereunder, and the requirements of any stock exchange
upon which the shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
22. TERM OF PLAN. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 19 hereof.
23. ADDITIONAL RESTRICTIONS OF RULE 16B-3. The terms and conditions of
-------------------------------------
options granted hereunder to, and the purchase of shares by, persons subject to
Section 16 of the Exchange Act shall comply with the applicable provisions of
Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
24. AUTOMATIC TRANSFER TO LOW PRICE OFFERING PERIOD. To the extent
-----------------------------------------------
permitted by Rule 16b-3 of the Exchange Act, if the Fair Market Value of the
Common Stock on any Exercise Date in an Offering Period is lower than the Fair
Market Value of the Common Stock on the Enrollment Date of such Offering Period,
then all participants in such Offering Period shall be automatically withdrawn
from such Offering Period immediately after the exercise of their option on such
Exercise Date and automatically re-enrolled in the immediately following
Offering Period as of the first day thereof.
-9-
<PAGE>
EXHIBIT A
---------
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _______________________ hereby elects to participate in the NETSOURCE
COMMUNICATIONS, INC. 1996 Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan") and subscribes to purchase shares of the Company's Common Stock
in accordance with this Subscription Agreement and the Employee Stock Purchase
Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
_____% of my Compensation on each payday (not to exceed 10%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note that
no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price determined
in accordance with the Employee Stock Purchase Plan. I understand that if I do
not withdraw from an Offering Period, any accumulated payroll deductions will be
used to automatically exercise my option.
4. I have received a copy of the complete "NETSOURCE COMMUNICATIONS, INC. 1996
Employee Stock Purchase Plan." I understand that my participation in the
Employee Stock Purchase Plan is in all respects subject to the terms of the
Plan. I understand that the grant of the option by the Company under this
Subscription Agreement is subject to obtaining stockholder approval of the
Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of Employee or Employee and spouse only):
____________________________________________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within two years after the Enrollment Date (the first day of the Offering
Period during which I purchased such shares) or one year after the Exercise
Date, I will be treated for federal income tax purposes as having received
ordinary income at the time of such disposition in an amount equal to the excess
of the fair market value of the shares at the time such shares were purchased
over the price which I paid for the shares. I HEREBY AGREE TO NOTIFY THE COMPANY
------------------------------------
IN WRITING WITHIN 30 DAYS AFTER THE DATE OF ANY DISPOSITION OF MY SHARES AND I
- ------------------------------------------------------------------------------
WILL MAKE ADEQUATE PROVISION FOR FEDERAL, STATE OR OTHER TAX WITHHOLDING
- ------------------------------------------------------------------------
OBLIGATIONS, IF ANY, WHICH ARISE UPON THE DISPOSITION OF THE COMMON STOCK. The
- -------------------------------------------------------------------------
Company may, but will not be obligated to, withhold from my compensation the
amount necessary to meet any applicable withholding obligation including any
withholding necessary to make available to the Company any tax deductions or
benefits attributable to sale or early disposition of Common Stock by me. If I
dispose of such shares at any time after the expiration of the two-year and one-
year holding periods, I understand that I will be treated for federal income tax
purposes as having received income only at the time of such disposition, and
that such income will be taxed as ordinary income only to the extent of an
amount equal to the lesser of (1) the excess of the fair market value of the
shares at the time of such disposition over the purchase price which I paid for
the shares; or (2) fifteen (15%) of the fair market value of the shares on the
first day of the Offering Period. The remainder of the gain, if any, recognized
on such disposition will be taxed as capital gain.
<PAGE>
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon my
eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the Employee
Stock Purchase Plan:
NAME: (Please Print) ____________________________________________
(First) (Middle) (Last)
____________________________________________
Relationship
____________________________________________
Address
Employee's Social
Security Number: ____________________________________________
Employee's Address: ____________________________________________
____________________________________________
____________________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated: _____________ _____________________________________________
Signature of Employee
_____________________________________________
Spouse's Signature (If beneficiary
is other than spouse)
-ii-
<PAGE>
EXHIBIT B
---------
NETSOURCE COMMUNICATIONS, INC.
1996 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the NETSOURCE
COMMUNICATIONS, INC. 1996 Employee Stock Purchase Plan which began on
__________________, 19___ (the "Enrollment Date") hereby notifies the Company
that he or she hereby withdraws from the Offering Period. He or she hereby
directs the Company to pay to the undersigned as promptly as practicable all the
payroll deductions credited to his or her account with respect to such Offering
Period. The undersigned understands and agrees that his or her option for such
Offering Period will be automatically terminated. The undersigned understands
further than no further payroll deductions will be made for the purchase of
shares in the current Offering Period and the undersigned shall be eligible to
participate in succeeding Offering Periods only be delivering to the Company a
new Subscription Agreement.
Name and Address of Participant
-------------------------------------
-------------------------------------
-------------------------------------
-------------------------------------
Signature:
-------------------------------------
Date:
--------------------------------
-iii-
<PAGE>
EXHIBIT 10.5
ADDENDUM TO EMPLOYMENT LETTER
-----------------------------
March 15, 1996
Mr. Evan Kraus
415 Ash Street
Mill Valley, CA. 94941
Dear Evan:
This letter is intended as a modification of the original terms and conditions
of your employment with MTC Telemanagement Corporation and MTC International,
Inc. (collectively, "MTC"). Except as expressly provided herein, the terms of
your employment letter dated January 25, 1996 shall continue to apply. We
recognize the change in circumstances relating to your service to MTC, and for
this reason, MTC agrees to the following:
1. Salary: Your salary shall be $10,000.00 per month retroactive to the
------
commencement of your employment with the company; and
2. Severance Agreement: You shall have severance rights and benefits, subject to
--------------------
the following terms and conditions:
. In the event that your employment with MTC is terminated or you elect to
resign because the terms or conditions of your employment are altered due to
any merger, consolidation or restructuring in which (a) MTC is not the
consolidated, surviving and controlling entity or (b) a transfer of all or
substantially all of the assets of MTC occurs, you shall be entitled to a
severance payment from the company in an amount equal to fifteen (15 months
of your then monthly salary, payable as follows: twenty percent (20%) of the
aggregate amount shall be payable in immediately available funds on the
effective date of your termination, and the balance of the aggregate amount
shall be due in twelve (12) equal monthly payments payable in arrears on the
first day of the month, commencing with the first day of the month following
the date of your termination. The surviving or controlling entity shall
execute and deliver to you on or before your last day of service to the
company a promissory note, without interest, in the principal amount of the
unpaid balance of your severance payment. You shall also be entitled to full
benefits offered at such time by the surviving or controlling entity until
such promissory note is paid in full.
<PAGE>
Mr. Evan Kraus
March 15, 1996
page 2.
. In the event of any such restructuring or transfer of assets described above,
your rights under this severance arrangement shall be assigned to and assumed
by the surviving or resulting entity or to the transferee of MTC's assets.
This arrangement shall remain enforceable for the duration of your
employment, shall be in lieu of and supersedes any other severance policy or
arrangement of the company, whether written or oral, and is intended as well
as a liquidated payment compensating you for and is in lieu of any claims or
damages you might have or otherwise might incur in connection with the
aforementioned merger, consolidation or restructuring.
If the foregoing accurately reflects our discussions and agreements, please so
indicate by executing the duplicate copy of this letter agreement and returning
the fully executed copy to one of the undersigned officers.
MTC Telemanagement Corporation
By: /s/ Thomas A. Hakel
---------------------------------
Thomas A. Hakel
Title: Senior Vice President
---------------------
By: /s/ Roger Sheppard
---------------------------------
Roger Sheppard
Title: Senior Vice President
---------------------
AGREED AND ACCEPTED:
/s/ Evan Kraus
- ------------------------------------
Evan Kraus
<PAGE>
EXHIBIT 10.6
PATENT ASSIGNMENT AGREEMENT
This Patent Assignment Agreement ("Agreement"), dated as of May 30,
1996, is entered into by and among Edward A. Brinskele ("Mr. Brinskele"), and
NetSource International Telecommunications, Inc. (formerly known as MTC
Telecommunications, Inc.), a Delaware corporation ("NetSource").
RECITALS
WHEREAS, Mr. Brinskele researched, developed and owns the patents
identified in Exhibit A;
WHEREAS, Mr. Brinskele has previously, orally granted to MTC (as
defined below) a non-exclusive right to use the patents for purposes described
herein; and
WHEREAS, the parties now desire to enter into a definitive written
agreement to confirm the prior grant by Mr. Brinskele to MTC of a non-exclusive
right to use the patents, and for the irrevocable assignment by Mr. Brinskele of
his right to and interest in the patents to NetSource.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
Definitions
-----------
As used in this Agreement, the following terms shall have the
following meanings:
SECTION 1.1. Agreement. "Agreement" shall mean this Patent
---------
Assignment Agreement, including any amendments thereto.
SECTION 1.2. Assigned Patents. "Assigned Patents" shall mean and
----------------
include all patents set forth on Exhibit A attached hereto and any and all
continuations, divisional and continuation-in-part applications based thereon,
and all patents issuing thereon, including reissues, patents of addition and
extensions thereof.
SECTION 1.3. Licensed Products. "Licensed Products" shall mean any
-----------------
products or services to be manufactured or sold using the Licensed Patents,
including without limitation, the product currently offered and sold by MTC, MTC
Sales Affiliates and MTC International, Inc. under the name "Passport".
SECTION 1.4. MTC. "MTC" shall mean MTC Telemanagement Corporation, a
---
California corporation, and its affiliate, MTC International, Inc., and their
successors and assigns.
<PAGE>
SECTION 1.5. MTC Sales Affiliates. "MTC Sales Affiliates" shall mean
--------------------
the persons or entities who from time to time offer to sell MTC services and
products pursuant to an agreement or license with MTC.
ARTICLE II
Assignment of Patent
--------------------
SECTION 2.1. Confirmation of Oral Grant. Mr. Brinskele hereby
--------------------------
confirms his previous oral grant to MTC, of a nonexclusive license to the
Assigned Patents, which included the right to sublicense to any subsidiary,
parent or affiliate of MTC or to MTC Sales Affiliates, and to make, use and sell
or otherwise dispose of the Licensed Products.
SECTION 2.2. Assignment of Rights. Mr. Brinskele hereby irrovacably
--------------------
assigns all of his right, title and interest in and to the Assigned Patents to
NetSource under this Agreement. Nothing contained herein shall be construed as
a license to or other grant, express or implied, under any other patents owned
or controlled by Mr. Brinskele.
SECTION 2.3. Assumption of Rights. NetSource hereby accepts the
--------------------
assignment of all of Mr. Brinskele's right, title and interest in and to the
Assigned Patents.
ARTICLE III
Consideration for Oral License and Assignment
---------------------------------------------
SECTION 3.1. Cash Royalty In Exchange for Assignment. In exchange for
---------------------------------------
the previous oral grant of the license and the assignment of the Assigned
Patents referred to Sections 2.1 and 2.2 respectively, NetSource hereby agrees
(a) to ratify all prior payments by MTC which commenced on January 1, 1994 and
ended on or about May 1, 1996 in the aggregate amount of four hundred and ten
thousand dollars ($410,000) and (b) to ratify the payment by MTC of all legal
and related patent registration expenses in the amount of sixty one thousand
five hundred twenty nine and 12/100 dollars ($61,529.12) incurred in connection
with the Assigned Patents.
2
<PAGE>
ARTICLE IV
Representations and Warranties of Envoy
---------------------------------------
NetSource represent and warrant to Mr. Brinskele as follows:
SECTION 4.1. Corporate Existence. NetSource is a corporation duly
-------------------
organized, validly existing and in good standing under the laws of the State of
Delaware.
SECTION 4.2. Authority. NetSource has full power and authority to
---------
enter into this Agreement and to carry out the transactions contemplated hereby.
NetSource has taken all action required by law and the NetSource charter
documents to authorize the execution, delivery and performance by NetSource of
this Agreement and the transactions contemplated hereby. This Agreement is a
legal, valid and binding agreement of NetSource, enforceable against NetSource
in accordance with its terms.
SECTION 4.3. No Violation. Neither the execution and delivery of
------------
this Agreement nor the consummation of any of the transactions contemplated
hereby will violate any provisions of NetSource's articles of incorporation or
bylaws or violate, or be in conflict with, or constitute a default under, or
cause the acceleration of the maturity of any debt or obligation pursuant to, or
result in the creation or imposition of any security interest, lien or other
encumbrance upon any property or assets of NetSource under, any agreement or
commitment to which NetSource is a party or by which NetSource is bound, or
violate any statute or law or any judgment, decree, order, regulation or rule of
any court or governmental authority.
ARTICLE V
Representations and Warranties of Mr. Brinskele
-----------------------------------------------
Mr. Brinskele represents and warrants to NetSource as follows:
SECTION 5.1. Capacity. Mr. Brinskele has full legal capacity and
--------
authority to enter into this Agreement and carry out the transactions
contemplated hereby. This Agreement is a legal, valid and binding agreement by
Mr. Brinskele, enforceable against Mr. Brinskele in accordance with its terms.
SECTION 5.2. No Violation. Neither the execution and delivery of
------------
this Agreement nor the consummation of any of the transactions contemplated
hereby will violate any provision of or violate or be in conflict with, or
constitute a default under, or cause the acceleration of the maturity of any
debt or obligation pursuant to, any agreement or commitment to which Mr.
Brinskele, to his knowledge, is a party or by which Mr. Brinskele, to his
knowledge, is bound, or violate any statute or law, or any judgment, decree,
order, regulation or rule of any court or governmental authority.
3
<PAGE>
SECTION 5.3. Title. Mr. Brinskele has good and valid title to the
-----
Assigned Patents.
SECTION 5.4. Patents. Mr. Brinskele has the sole and exclusive right
-------
to use and license the inventions described in the Assigned Patents, and the
Assigned Patents are free and clear of all liens, claims, charges, security
interests, covenants, reservations, restrictions or other encumbrances and the
consummation of the transactions contemplated hereby will not alter or impair
any such rights. No claims have been asserted by any person that challenge the
validity or enforceability of any Assigned Patents and there is no valid basis
for any such claim or of any prior art or other facts that would render any of
the Assigned Patents invalid; and the use of the Assigned Patents by NetSource
as may be contemplated by this Agreement will not infringe on the rights of any
person. There is no existing or threatened claim by the Mr. Brinskele against
others for infringement, misuse or misappropriation of any patent, trade secret
or know-how relating to the Assigned Products. Mr. Brinskele is not infringing,
misusing or misappropriating any trade secret or know-how owned by any third
party relating to the Assigned Patents.
SECTION 5.5. No Other Agreements. Mr. Brinskele is not a party to
-------------------
any agreement, license or other commitment relating to the Assigned Patents
which would impair the value of the benefits granted hereunder to NetSource.
ARTICLE VI
Limitation of Liability
-----------------------
SECTION 6.1. Limitation of Liability. IN NO EVENT SHALL MR.
-----------------------
BRINSKELE BE LIABLE TO NETSOURCE UNDER THIS AGREEMENT FOR ANY SPECIAL, INDIRECT,
INCIDENTAL OR CONSEQUENTIAL DAMAGES, WHETHER BASED ON BREACH OF CONTRACT, TORT
(INCLUDING NEGLIGENCE, PRODUCT LIABILITY, OR OTHERWISE), INCLUDING WITHOUT
LIMITATION ANY LOSS RESULTING FROM USE OF THE ASSIGNED PATENTS OR LICENSED
PRODUCTS OR ANY LOSS OF ANY KIND, HOWEVER CAUSED, EVEN IF MR. BRINSKELE KNOWS,
HAS REASON TO KNOW, OR HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. IN
NO EVENT SHALL MR. BRINSKELE'S LIABILITY ARISING OUT OF THIS AGREEMENT EXCEED
THE AGGREGATE CONSIDERATION SET FORTH IN SECTION AND 3.1.
SECTION 6.2. No Other Warranties. Except for the limited warranty
-------------------
set forth above, NetSource agrees that the Assigned Patents are furnished on an
"As-Is" basis. MR. BRINSKELE MAKES NO OTHER WARRANTIES OF ANY KIND, EITHER
EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING WITHOUT LIMITATION
THE CONDITION, MERCHANTABILITY, OR FITNESS FOR ANY PARTICULAR PURPOSES OF THE
ASSIGNED PATENTS. MR. BRINSKELE DOES NOT WARRANT THAT THE ASSIGNED PATENTS WILL
MEET NETSOURCE'S REQUIREMENTS, THAT IT WILL OPERATE IN THE COMBINATIONS WHICH
NETSOURCE MAY SELECT, OR THAT ITS OPERATION WILL BE UNINTERRUPTED OR ERROR
FREE. MR.
4
<PAGE>
BRINSKELE DOES NOT ASSUME ANY LIABILITY REGARDING USE OF, OR ANY DEFECT IN, THE
ASSIGNED PATENTS.
ARTICLE VII
Infringement
------------
SECTION 7.1. Cooperation and Defense. The parties shall cooperate in
-----------------------
good faith to redress any threatened or actual unauthorized use or infringement
of the Assigned Patents by third parties; provided that NetSource shall be
--------
obligated, at its sole cost and expense, to initiate and pursue in good faith
legal proceedings and other actions so as to protect the Assigned Patents
against third-party infringement and Mr. Brinskele shall assist NetSource in
such activities.
SECTION 7.2. Notification. Each party shall promptly notify the
------------
other party in writing of any such actual or threatened third party
infringement.
ARTICLE VIII
Dispute Resolution
------------------
SECTION 8.1. Choice of Law; Waivers. THIS AGREEMENT SHALL BE
----------------------
INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS
RULES) OF THE STATE OF CALIFORNIA GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY
WITHIN SUCH STATE. WITH RESPECT TO ANY CLAIMS RELATING TO OR ARISING FROM THIS
AGREEMENT: THE PARTIES HEREBY CONSENT TO THE EXCLUSIVE JURISDICTION OF ANY STATE
COURT LOCATED WITHIN THE COUNTY OF SONOMA, THE STATE OF CALIFORNIA; THE PARTIES
WAIVE ANY OBJECTION OF FORUM NON CONVENIENS AND VENUE; THE PARTIES WAIVE
PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT OR THEM, AND CONSENT THAT ALL
SUCH SERVICE OF PROCESS BE MADE IN THE MANNER SET FORTH IN SECTION 9.3 HEREOF
FOR THE GIVING OF NOTICE; AND THE PARTIES FURTHER WAIVE ANY RIGHT THEY MAY
OTHERWISE HAVE TO COLLATERALLY ATTACK ANY JUDGMENT ENTERED AGAINST THEM.
SECTION 8.2. Specific Enforcement. The parties hereby acknowledge
--------------------
and agree that each would be irrevocably damaged in the event that any of the
provisions of this Agreement are not performed or are otherwise breached. It is
accordingly agreed that each party shall be entitled to an injunction or
injunctions to prevent breaches or threatened breaches of this Agreement by any
other party and to specifically enforce this Agreement and the terms and
provisions hereof against such other parties, in addition to any other remedy to
which such aggrieved party may be entitled at law or in equity, and without
being required to post bond or other security and without having to prove the
inadequacy of the other available remedies at law.
SECTION 8.3 Arbitration. BY EXECUTING THIS AGREEMENT, THE
-----------
5
<PAGE>
PARTIES ARE AGREEING TO HAVE ANY MATTER WHICH IS THE SUBJECT OF ARBITRATION
PURSUANT TO THIS SECTION 8.3 DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY
CALIFORNIA LAW AND ARE GIVING UP ANY RIGHTS THEY MIGHT POSSESS TO HAVE THE
DISPUTE LITIGATED IN A COURT OR JURY TRIAL. BY EXECUTING THIS AGREEMENT, THE
PARTIES ARE GIVING UP JUDICIAL RIGHTS TO DISCOVERY AND APPEAL, UNLESS SUCH
RIGHTS ARE SPECIFICALLY INCLUDED IN THE ARBITRATION PROVISION; IF ANY OF THE
PARTIES REFUSES TO SUBMIT TO ARBITRATION IT MAY BE COMPELLED TO ARBITRATE UNDER
THE CALIFORNIA CODE OF CIVIL PROCEDURE. A PARTY'S AGREEMENT TO THIS ARBITRATION
PROVISION IS VOLUNTARY. BY EXECUTING THIS AGREEMENT, EACH OF THE PARTIES
ACKNOWLEDGES THAT IT HAS READ AND UNDERSTOOD THE FOREGOING AND HAS AGREED TO
SUBMIT DISPUTES ARISING OUT OF MATTERS INCLUDED IN THIS SECTION 8.3 TO NEUTRAL
ARBITRATION. Any controversy or claim arising out of or relating to this
Agreement or the breach hereof shall be settled by arbitration, which
arbitration shall be conducted as follows: A party seeking arbitration shall
promptly send notice of arbitration to the other party. The place of arbitration
hereunder shall be Petaluma, California. Within thirty (30) days of the date of
such notice, the parties shall appoint one neutral arbitrator. The mutually
acceptable neutral arbitrator shall be selected from the panel of arbitrators at
JAMS/Endispute and the arbitrator shall be a duly qualified professional with at
least five years of experience in the field of Intellectual Property law. The
arbitrator shall determine all issues presented, and the decision and award of
such arbitrator shall be binding and conclusive upon the parties hereto and
shall be enforceable in a court having jurisdiction over the parties. The Rules
of JAMS/Endispute for complex commercial arbitration shall be applied to any
arbitration hereunder as to all matters of procedure, provided, however, that
the parties may obtain discovery in aid of the arbitration. Arbitration costs
shall be borne by the losing party in arbitration, or if the arbitration
produces no clear loser, equally by the parties to such claim or controversy,
except that each party shall be responsible for its own expenses and costs of
any witnesses selected by such party.
SECTION 8.4. Attorneys' Fees and Expenses. If any arbitration or
-----------------------------
judicial proceedings shall be commenced to enforce this Agreement, the
prevailing party(ies) in such proceedings shall be entitled to recover the
reasonable attorneys' fees, costs and expenses incurred by such prevailing party
in connection with such proceedings from the losing party.
ARTICLE IX
Miscellaneous
-------------
SECTION 9.1. Amendment and Modification. Subject to applicable law,
--------------------------
this Agreement may only be amended, modified or supplemented by written
agreement of the parties.
SECTION 9.2. Waiver of Compliance. Any failure of any party, to
--------------------
comply with any obligation, covenant, agreement or condition herein may be
expressly waived in writing by NetSource or Mr. Brinskele, as the case may be,
but such waiver or failure to insist upon strict
6
<PAGE>
compliance with such obligation, covenant, agreement or condition shall not
operate as a waiver of, or estoppel with respect to, any subsequent or other
failure to comply with this Agreement.
SECTION 9.3. Notices. All notices, requests, demands and other
-------
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given if delivered by hand, telecopied (with receipt
confirmed), sent by overnight courier service or mailed, by certified or
registered mail:
(a) If to Mr. Brinskele, to:
1304 Southpoint Boulevard
Petaluma, California 94954
or to such other person or address as Mr. Brinskele shall furnish to NetSource
in writing.
(b) If to NetSource, to:
1304 Southpoint Boulevard
Petaluma, California 94954
or to such other person or address as NetSource shall furnish to Mr. Brinskele
in writing.
SECTION 9.4. Severability. If any term or provision of this
------------
Agreement or the application thereof to any party, person or circumstance shall,
to any extent, be invalid or unenforceable, the remainder of this Agreement, or
the application of such term or provision to any party, person or circumstance
other than those as to which it is held invalid or unenforceable, shall not be
affected thereby, and each term and provision of this Agreement shall be valid
and be enforced to the fullest extent permitted by law.
SECTION 9.5. Counterparts. This Agreement may be executed
------------
simultaneously in counterparts, each of which shall be deemed an original, but
both of which together shall constitute one and the same instrument.
SECTION 9.6. Headings. The headings of the Articles and sections of
--------
this Agreement are inserted for convenience only and shall not constitute a part
hereof or affect in any way the meaning or interpretation of this Agreement.
SECTION 9.7. Entire Agreement. This Agreement, including Schedule A
----------------
attached hereto, and any other documents and certificates delivered pursuant to
the terms hereof, set forth the entire agreement and understanding of the
parties hereto in respect of the subject matter contained herein, and supersede
all prior agreements, promises, covenants, arrangements, communications,
representations or warranties, whether oral or written, by any officer, employee
or representative of any party hereto.
SECTION 9.8. Third Parties. Nothing contained herein shall be
-------------
construed to confer upon or give to any person or corporation, other than the
parties hereto and their successors or permitted assigns, any rights or remedies
under or by reason of this Agreement.
7
<PAGE>
SECTION 9.9. Construction. This Agreement shall be construed as to
------------
its fair meaning and not strictly for or against either party.
IN WITNESS WHEREOF, the parties hereto acknowledge that they have
consulted with individual counsel and they knowingly and willingly enter into
this agreement and have caused their duly authorized officers to execute this
Agreement on their behalf.
/s/ Edward A. Brinskele
------------------------------
Edward A. Brinskele
NETSOURCE INTERNATIONAL
TELECOMMUNICATIONS, INC.
By: /s/ Edward A. Brinskele
---------------------------
Name: Edward A. Brinskele
Title: Chief Executive Officer and President
8
<PAGE>
Exhibit A
---------
Description of Patents
Patent No. 5,425,084 Computer-controlled Telecommunications System granted
6/13/95, and all foreign counterparts and all
continuations and continuations in part of this patent.
9
<PAGE>
EXHIBIT 10.7
<TABLE>
<S> <C> <C>
HELIX One Sansome Street 850 Third Avenue
CAPITAL Suite 1800 10th Floor
L.L.C. San Francisco, California 94104 New York New York 10022
(415) 288-2406 * Fax: (415) 288-2407 (212) 750-5820 * Fax: (212) 935-3882
===============================================================================================
</TABLE>
Gentlemen:
Pursuant to our recent discussions, this letter agreement (this "Agreement")
confirms the agreement among Transphere International, Inc., Transphere
Interactive, Inc. (collectively with its affiliates and subsidiaries, "TSI"),
newly formed corporation Netsource Inc. ("Netsource") and Helix Capital
Corporation, L.L.C. ("Helix") in connection with our proposal to assist you in
merging MTC Telemanagement Inc. (collectively with its affiliates and
subsidiaries, "MTC"), and TSI and Netsource preparing Netsource/MTC/TSI for
private placement and IPO and advising you in your M&A and financing activities.
A. PROPOSED SERVICES
We propose to act as the exclusive TSI and Netsource (Netsource = MTC +
Transphere) M&A advisor and to be available to provide a range of other services
to assist the development of the company while maximizing shareholder value. In
this capacity we will:
1. Lead the process of merging the companies. Work with all professionals
(Lawyers, accountants, internal teams) to effectively complete an
operational, legal and financial merger as soon as practically possible.
2. Pre- and post merger M&A, financing, and strategic advisory services,
coupled with assistance in the preparation of a business plan, investor
presentation and road show support.
3. Find and develop a publicly traded corporate shell as a contingency against
IPO timing issues.
4. If requested, assist in the arranging of mezzanine financing and a
secondary offering.
5. Complete the proposed acquisitions of Pineapple Multimedia, The Little
Garden, RainNet.
6. Perform M&A research, financial design and acquisition execution for the
post merger company.
Page 1 Helix Capital L.L.C. Confidential
<PAGE>
B. FURTHER AGREEMENT TERMS
1. SINGLE PROPOSAL. Helix's proposal for compensation is based on all parties
agreeing to engage Helix's services for all the services proposed.
2. COMPENSATION.
a) THE M&A RETAINER. In consideration of Helix's services to be provided
hereunder, TSI and/or Netsource shall deliver to Helix a monthly
retainer of $7500, paid monthly, for a period of 4 months commencing
on 15 April 1996.
Starting from the completion of financing (at least $500,000), monthly
retainer will be $10,000, paid monthly, for a period of 12 months,
which may be terminated after a year upon 60 days notice by either
party.
b) SUCCESS FEES: As detailed in Section A, paragraphs 5 and 6, Helix shall
be receive success fees for these services, terms and conditions of
which will be agreed upon between the parties at a later stage.
3. EXPENSES. In addition to the consideration payable to Helix pursuant to
B(2) above, the companies shall reimburse Helix, upon Helix's request, for
its reasonable out-of-pocket expenses incurred in connection herewith,
provided, however, that the Companies shall not be liable to Helix for out-
of-pocket expenses in excess of $5,000 per calendar month without the prior
consent of Ed Brinskele or Charles Schoenhoeft.
4. CONFIDENTIALITY. All information, materials, contacts or other data
provided by Helix to the Companies hereunder shall be kept confidential and
shall not, without the prior written consent of Helix, be disclosed to
third parties other than employees, attorneys and accountants of the
Companies who need to know such information for the purpose of evaluating
the Transaction, who shall be informed of the nature of the information and
who shall agree to act in accordance with the terms of this provision. If
such disclosure is required by any proceeding or governmental authority to
be disclosed, the Companies shall provide Helix with prompt notice thereof
and if Helix waives compliance with the provisions hereof, and in the
opinion of its counsel the Companies are compelled to disclose such
information, the Companies may furnish only that portion of the information
which it is advised by opinion of counsel is legally required.
5. INDEMNIFICATION. The Companies agree to indemnify and hold Helix and its
members, managers, officers, employees and agents harmless from and against
any claims, liabilities, losses, damages or expenses related to or arising
out of the engagement of Helix hereunder or its role in connection
herewith, and will reimburse Helix and any other such party for all
reasonable expenses (including reasonable counsel fees) as may be incurred
by Helix or any such party in connection with investigating, preparing or
defending any such action or claim, whether or not in connection with
pending or threatened litigation in which Helix or such party is a party.
The Companies will not, however, be responsible for any claims,
liabilities, losses, damages or expenses which are finally judicially
determined to have resulted primarily from the bad faith or gross
negligence of Helix. The foregoing agreement shall be in addition to any
rights that Helix or any indemnified party may have at common law or
otherwise, including without limitation, any right of contribution. If such
indemnification is for any reason unavailable, the Companies agree to
contribute to the claims, liabilities, losses, damages and expenses
involved in such proportion as it is appropriate to reflect
Page 2 Helix Capital L.L.C. Confidential
<PAGE>
the relative benefits received (or anticipated to be received) by the
Companies and Helix from the actual or proposed Transaction, provided
however that Helix shall not be responsible for any amounts in excess of
the amount of any fees received or anticipated to be received by Helix. The
Companies agree that they will not, without the prior written consent of
Helix, settle or compromise any pending or threatened claim, action or suit
in respect of which indemnification or contribution may be sought hereunder
unless the foregoing contains an unconditional release of Helix from all
liability arising therefrom. The Companies further agree that Helix shall
have no liability whatsoever arising out of any oral or written information
provided to Helix or any of its agents or employees, by the conduct of any
of the foregoing or otherwise in connection with this engagement (except
for losses and expenses incurred by Helix that are finally judicially
determined to have resulted primarily from the bad faith or gross
negligence of Helix).
6. TERMINATION. This Agreement will terminate 18 months from the date of its
execution hereof, unless extended by mutual consent Notwithstanding the
foregoing, the provisions of Section A, paragraphs 1 through 6 and Section
B paragraphs I through 5 shall survive any termination hereof.
7. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California and the federal laws of
the United States of America applicable therein. Each of the parties
attorns to the jurisdiction of the Courts of the State of California to
hear all actions, suits and proceedings arising in connection with and
arising from this Agreement.
8. SURVIVAL. In the event that any provision herein is determined to be
unenforceable under the current law at the time of execution of this
Agreement, or unenforceable under such law that may tend to supersede that
law in place at the time of execution, all other provisions and the intent
of this Agreement shall survive such findings.
9. WAIVER OF RIGHTS. No provision of this Agreement may be amended, modified,
waived or discharged unless such amendment, waiver, modification or
discharge is agreed to in writing by the party against whom the same is
sought to be enforced and no failure by either party to enforce any of its
rights hereunder shall, except as aforesaid, be deemed to be a waiver of
such right. No waiver by either party hereto at any time of any breach by
the other party hereto of, or compliance with, any provision of this
Agreement to be performed by such other party shall be deemed to be a
waiver of a similar or dissimilar provision hereof at the same or any prior
or subsequent time.
10. NOTICES. Any notice required or permitted to be given under this Agreement
shall be in writing and shall be properly given if delivered personally or
mailed prepaid registered mail addressed a follows.
Page 3 Helix Capital L.L.C. Confidential
<PAGE>
In the case of Helix:
Helix Capital L.L.C.
Sansome Street
Suite 1800
San Francisco, CA 94104
Te1: (415) 288-2404 Fax: (415) 288-2407
In the case of the Transphere International Inc:, Transphere
Interactive Inc: and Netsource:
Mr. Charlie Schoenhoeft
Transphere International
444 Spear Street
Suite 200
San Francisco, CA 94105
Te1: (415) 243-8080 Fax: (415) 546-5252
or to such other address as the parties shall from time to time specify by
notice given in accordance herewith. Any notice so given shall be
conclusively deemed to have been given or made on the day of delivery, if
delivered, or, if mailed by registered mail, upon the date shown on the
postal return receipt as the date upon which the envelope containing such
notice was actually received by the addressee.
11. ENTIRE AGREEMENT. This mutually signed Agreement constitutes the entire
agreement between the parties with respect to the transactions and services
contemplated hereby and cancels and supersedes all prior undertakings and
agreements between the parties with respect thereto and no agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not
expressly set forth in this Agreement.
12: SUCCESSORS AND ASSIGNS. The provisions hereof shall inure to the benefit of
and be binding upon the successors and assigns of the Companies and Helix
and any person or entity entitled to indemnification hereunder.
13. MISCELLANEOUS. Each of the parties represents that it is duly authorized to
execute this letter agreement. This letter agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original and
all of which together shall be deemed to be the same agreement.
Page 4 Helix Capital L.L.C. Confidential
<PAGE>
If the foregoing correctly sets forth our mutual understanding, please so
indicate on the enclosed signed copy of this letter in the space provided and
return it to us, whereupon this letter shall constitute a binding agreement
among TSI, Netsource and Helix.
Regards,
HELIX CAPITAL CORPORATION, L.L.C.
/s/ Yoav Stern
Name: Yoav Stern
Title: Managing Partner
AGREED TO AND ACCEPTED
this 12th day of April, 1996
Transphere International, Inc. Transphere Interactive, Inc.
By: /s/ Charles Schoenhoeft By: /s/ Charles Schoenhoeft
-------------------------------- ------------------------------
Name: Charles Schoenhoeft Name: Charles Schoenhoeft
Title: President Title: President
AGREED TO AND ACCEPTED
this 12th day of April, 1996
Netsource, Inc.
By: /s/ Charles Schoenhoeft
--------------------------------
Name: Charles Schoenhoeft
Page 5 Helix Capital L.L.C. Confidential
<PAGE>
EXHIBIT 10.8
PROP SERVICE LEASE SUMMARY AND INDEX
<TABLE>
<CAPTION>
<C> <S> <C>
1 PARTIES TO LEASE AGREEMENT 2
1.1 Landlord: Charles R. Stephens 2
1.2 Address: P.O. Box 750007, Petaluma, CA 94975 2
1.3 Tenant: MTC Information Systems, a California Corporation 2
1.4 Address: 1304 Southpoint Boulevard, Suite 200, Petaluma, CA 94954 2
1.5 Date of Agreement: December 20, 1993 2
2 PREMISES: 2
2.1 Building Name: Southpoint Corporate Plaza 2
2.2 Address: 1304 Southpoint Blvd., Petaluma, CA 94954 2
2.3 Premises: Approx. Square Feet 32,464 Rentable Square Feet - Suites 2
100, 110, 120, 130 & 200
3 TERM: 2
3.1 Lease Term: Seven (7) Years Six (6) Months 2
3.2 Commencement: January 1, 1994 2
4 RENT: 2
4.1 Rent Without Offset and Late Charge 2
4.2 Rent Schedules
Year 1: Mo. 01 $16,048.00 Month Year 4: $49,196.00 Monthly
Mos. 02-03 $19,559.00 Monthly Year 5: $50,301.00 Monthly
Mos. 04-12 $42,122.00 Monthly Year 6: $52,013.00 Monthly
Year 2: $44,255.00 Monthly Year 7: $53,880.00 Monthly
Year 3: $46,992.00 Monthly Year 8: $55,766.00 Monthly
4.3 Advance Rent: Deposit to Ninetieth (90th): $55,766.00 2
4.4 Full Service Expenses 2
4.5 Option to Extend: Two Five Year Terms at Negotiated Rents 3
5 SECURITY DEPOSIT: Amount: $55,766.00 3
6 USE: 4
7 COMMON AREAS: 4
7.1 Availability and Use of Common Area 4
7.2 Parking: Spaces allowed: 162 4
8 CONSTRUCTION OF PREMISES: 4
8.1 Landlord's Obligations 4
8.2 Tenant's Acceptance of Premises 4
9 REPAIRS, MAINTENANCE, ALTERATIONS AND ADDITIONS: 4
9.1 Landlord's Obligations 4
9.2 Tenant's Obligations 4
9.3 Surrender 5
9.4 Alterations and Additions 5
10 LIENS 5
11 ENTRY BY LANDLORD: 5
12 SIGNS AND WINDOW COVERINGS: 5
13 INDEMNITY: 5
14 INSURANCE: 5
14.1 Fire Insurance 5
14.2 Liability Insurance 5
15 ASSIGNMENT AND SUBLETTING: 5
16 DEFAULTS AND REMEDIES 6
17 SUBORDINATION: 6
18 MISCELLANEOUS: 6
18.1 Estoppel Certificate 6
18.2 Waiver 6
18.3 Entire Agreement 6
18.4 Cost of Suit 6
18.5 Sale of Premises by Landlord 6
18.6 Covenants to Bind Successors 6
18.7 Financial Statement 6
18.8 Holding Over 7
18.9 Interest on Past Due Obligations 7
18.10 Notices 7
18.11 Reconstruction 7
EXHIBIT A - Site Plan 8
EXHIBIT B - Premises 9
EXHIBIT C1- Tenant Improvements - Southpoint Corporate Plaza - MTC 10
EXHIBIT C2 - Suite 200 - Design Drawing Previously Delivered 11
EXHIBIT C3 - Deleted
EXHIBIT C4 - Suite 100 - Previously Delivered 13
EXHIBIT C5 - Suites 110-120-130 - Design Drawings to be Determined 14, 15, 16
EXHIBIT D - Rules and Regulations 17
EXHIBIT E - Acceptance of Premises 18
EXHIBIT F - Addendum to Lease by and Between Landlord and Tenant 19
EXHIBIT G - Addendum to Lease by and Between Landlord and Tenant 20
</TABLE>
<PAGE>
1 PARTIES TO LEASE AGREEMENT
1.1 Landlord: Charles R. Stephens
-------------------
The owner of the building is Charles R. Stephens, hereinafter referred to as
"Landlord"
1.2 Address: P.O. Box 750007, Petaluma, CA 94975
------------------------------------
1.3 Tenant: MTC Information Systems, a California Corporation
-------------------------------------------------
The Tenant entering into this agreement is MTC Information Systems, hereinafter
-----------------------
referred to as "Tenant".
1.4 Address: 1304 Southpoint Boulevard, Suite 200, Petaluma, CA
--------------------------------------------------
94954
-----
1.5 Date of Agreement: December 20, 1993
-----------------
This lease is made and entered into this 20th day of December, 1993, by and
---- --------------
between the Landlord and Tenant named above.
2 PREMISES:
2.1 Building Name: Southpoint Corporate Plaza
--------------------------
2.2 Address: 1304 Southpoint Blvd., Petaluma, CA 94954
------------------------------------------
2.3 Premises: Approximately 32,464 Rentable Square Feet
------
The premises leased by Landlord to Tenant are located in the city of Petaluma,
County of Sonoma, State of California, and consist of space within that certain
real property commonly known as the Southpoint Corporate Plaza in Southpoint
Business Park (hereinafter "Property"). See EXHIBIT A - Site Plan.
The Premises shall consist of approximately 32,464 rentable square feet as
------
outlined on the EXHIBIT B - Premises, incorporated herein by reference.
3 TERM:
3.1 Lease Term: Seven (7) Years six (6) Months
3.2 Commencement: January 1, 1994
4 RENT:
4.1 Rent Without Offset and Late Charge.
Rent shall be due, according to the following Rent Schedule 4.2, in advance on
the first day of each and every month during the term of this Lease. Rent shall
be paid by Tenant to Landlord at 715 Southpoint Blvd., Petaluma, CA 94954, and
shall be paid without demand from Landlord, and without any deductions offset
whatsoever. If any installment of the Monthly Rent shall not be received by
Landlord on or before the tenth day of the month, Tenant shall pay to Landlord a
late charge of $100 per day from the eleventh day to the receipt of the past due
Monthly Rent.
<TABLE>
<S> <C> <C> <C>
4.2 Rent Schedule:
Rent Schedules
Year 1: Mo. 01 $16,048.00 Month Year 4: $49,196.00 Monthly
------- ------ -------
Mos. 02-03 $19,559.00 Monthly Year 5: $50,301.00 Monthly
---------- -------
Mos. 04-12 $42,122.00 Monthly Year 6: $52,013.00 Monthly
---------- -------
Year 2: $44,255.00 Monthly Year 7: $53,880.00 Monthly
------- -------
Year 3: $46,992.00 Monthly Year 8 (6 mos.): $55,766.00 Monthly
------- ----------------
4.3 Advance Rent: Deposit to Ninetieth (90th) Month: $55,766.00
----------
</TABLE>
Tenant, with the execution of this Lease, has deposited with Landlord the sum of
$111,532.00, receipt of $111,532.00 which is hereby acknowledged, consisting of
a deposit to the Ninetieth (90th) month rent and a security deposit of
$55,766.00.
4.4 Full Service Expenses
4.4.1.1 Direct Operating Expenses
Full Service Expenses shall include Direct Operating Expenses. Direct Operating
Expenses are all direct costs of operation and common area maintenance, as
determined by standard accounting practices, and shall include the following
costs, but not be limited to: water and sewer charges, common area utilities;
air-conditioning and heating maintenance; costs and upkeep of all parking,
building management, landscaping and common areas; fire alarm monitoring;
security patrol; costs, maintenance and monitoring of electronic access control.
4.4.1.2 Property taxes and Insurance.
Full Service Expenses shall include all real property taxes and assessments, and
the costs of building hazard and liability insurance including extended
coverages.
4.4.1.3 Gas and Electricity Expense.
<PAGE>
During Normal Business Hours (7:00 a.m. to 6:00 p.m., Monday through Friday,
excluding Saturdays, Sundays and legal Holidays), Landlord shall furnish the
Premises with gas and electricity for lighting and operation of customary office
machines, and heating and air condition.
During all other hours, Landlord shall furnish such services and the cost of
such services as reasonably established by Landlord shall be paid by Tenant.
4.4.1.4 Janitorial Expense.
Landlord at Landlord's sole cost and expense shall maintain or cause to be
maintained the Premises and the public and common areas of the building, such as
lobbies, elevators, stairs, corridors and restrooms, in good order and condition
consistent with a first-class Sonoma County office building, except for damage
caused by any act or omission of Tenant, the repair of which damage shall be
paid by Tenant. Landlord shall provide light bulb replacement for building
fixtures, toilet room supplies, window washing at reasonable intervals, and
customary building janitorial service (not including lunch room dish washing).
4.4.2 Landlord Payment of Base Year Expenses.
Landlord shall pay for all Full Service Expenses as outlined herein except for
increases over the Base Year Cost of such expenses.
Landlord shall not be liable for any loss, injury or damage to property caused
by any variation, interruption, or failure of such services due to any cause
whatsoever, or from failure to make any repairs or perform any maintenance.
4.4.3 Base Year Expenses.
4.4.3.1 Calculation of Base Year Cost.
Base Year Expenses are determined by the following method: The Base Year shall
begin with the commencement of occupancy by any tenant and proceed to the
beginning of the next calendar year, however, this is not applicable to deferred
expenses from prior years. This Full Service Expense period shall then be
converted to an annualized figure (12 months equivalent). The annualized figure
shall be prorated for any vacancies to arrive at a full year full occupancy
equivalent. This sum to include any supplemental assessments.
Property Tax and Assessments shall be applied for the calendar year as paid, not
on a tax year basis. All other expenses will be applied to the year expense is
not paid, not the year when incurred. Increases to property taxes due to owner
sales or transfer shall not be passed through to Tenant.
4.4.3.2 Annual Increases.
As permitted herein, on each anniversary of the Base Year, the anniversary year
Full Service Expenses shall be compared to the Base Year Full Service Expenses.
Tenant will be billed for a Pro Rata share of any increases over the Base year
costs. In addition, this increase amount shall serve as Estimated Increases for
the following year. The Estimated Increases shall be pro rated to a monthly
basis and added to the Rent for the following year. The Estimated Increases
will be reconciled to the actual increases after year's end, and any refund or
additional billing will be made at that time. The computations and
reconciliation's referenced herein shall be completed and Tenant advised by the
end of the first quarter of the year following the year in question. Increases
will be capped at 2 1/2% annually.
4.4.4 Tenant Obligations.
4.4.4.1 Tenant Payment of Expense Increases.
Tenant shall pay to Landlord, as Additional Rent, A Pro Rata Share of any
increases over the Base Year Cost of the full Service Expenses for this
building, however, Tenant will not be responsible for any increase prior to
commencement of lease.
In the event of non-payment of Additional Rent payable by Tenant hereunder,
Landlord shall have the same rights with respect to such no-payment as it has
with respect to any other non-payment of Rent hereunder.
4.4.4.2 Tenant's Pro Rate Share: Initial: 67.63% Adjusted: Retroactively
------ -------------
This Pro Rate Share is estimated to be 67.63 percent of the entire building.
-----
The Pro Rate Share will be adjusted retroactively upon final total occupancy of
the building since the total square footage of the building may change depending
on the build out of the hallways.
4.5 Option to Extend: Two Five (5) Year Options.
-------------------------
Tenant may extend this Lease for a further period of Five(5) years twice by
giving Landlord notice in writing of Tenant's intention to do so at least 180
days prior to the expiration of the term hereof. Said extension shall be under
all the terms and conditions of this Lease except for Rent, which, shall be as
schedule below:
5 SECURITY DEPOSIT: Amount $55,766.00
---------------- ----------
Tenant, prior to the execution of this lease, has deposited with Landlord the
sum of $55,766.00. This deposit shall be held by Landlord as security for the
performance by Tenant of every covenant and condition of this Lease. This
deposit shall not bear interest or earn income and shall not be considered an
advance payment of rent or a measure of Landlord's damages in case of default by
Tenant. Landlord shall not be required to keep this deposit separate from its
general funds and may commingle the deposit with its other assets. If Tenant
complies with all of the covenants and conditions of this lease, the Security
Deposit, or any balance thereof shall be returned to the Tenant within twenty
days after both the expiration or termination of this Lease and after delivery
of possession of the premises to Landlord. In the event of termination of
Landlord's interest in this lease, and provided Tenant is not in default under
any of the material obligations of this lease to be performed by Tenant, the
Landlord shall transfer said deposit to Landlord's successor in interest and
thereafter Tenant agrees to release Landlord from all liability for the return
of such deposit. Additionally, in the event of termination of Landlord's
interest in this lease due to Landlord's default to the then current not holder
of the subject property, and provided Tenant is not in default under any of the
material obligations of this lease to be performed by Tenant, the Security
Deposit shall be credited, automatically without regard to requests of landlord
or of any landlords creditors, to
<PAGE>
the Ninetieth (90th) Month's Rent. Landlord agrees that it will not assign or
encumber the Security Deposit. No trust relationship is created herein between
Tenant and Landlord with respect to the Security Deposit.
6 USE:
The Premises are to be used only for professional telecommunication offices, and
for no other business or purpose without the prior written consent of Landlord.
No act shall be done in or about the Premises that is unlawful or that will
increase the existing rate of insurance on the Building. Tenant shall not
commit or allow to be committed any waste upon the Premises, or any public or
private nuisance or other act or thing which disturbs the quiet enjoyment of any
other tenant in the Building. Tenant shall comply with all laws relating to its
uses or occupancy of the Premises and shall observe such reasonable rules and
regulations as may be adopted by Landlord from time to time for the safety, care
and cleanliness of the Premises or the Building. See EXHIBIT D - Rules and
Regulations.
7 COMMON AREAS:
7.1 Availability and Use of Common Area.
Areas within the outer property lines of the Property on which the Premises are
located as delineated on the EXHIBIT A - Site Plan, exclusive of areas specified
as usable area for tenants shall be known as Common Areas. Any additional lands,
not part of this Property, which may be designated for additional parking will
be considered part of the Common Area.
All Common Areas shall be subject to the exclusive control and management of
Landlord. Landlord shall have the right to establish, modify, amend, and
enforce reasonable rules and regulations concerning the Common Area. Tenant
acknowledges receipt of a copy of the current Rules and Regulations, attached as
EXHIBIT - D. Tenant agrees to abide by and conform with such Rules; to cause
its concessionaires and its and their employees and agents to abide by such
Rules; and to use its best efforts to cause its customers, invitees and
licensees to abide by such Rules.
MTC may use the entry lobby as their reception area, however, any costs to do
this will be incurred by MTC and the area is not be disruptive to the other
tenant.
7.2 Parking. Spaces allowed: 162
---
Landlord grants to Tenant a non-exclusive license to use designated parking
areas in the Common Areas for the use of motor vehicles during the term of this
Lease, subject to rights reserved to Landlord. Landlord reserves the right at
any time to grant similar non-exclusive use to other tenants; to promulgate
rules and regulations relating to the use of parking areas by tenants and
employees of tenant; and to make changes in the parking layout. However, 162
parking spaces shall be available to Tenant. These spaces will not be
designated unless deemed necessary by Landlord. Tenant hereby agrees to
restrict its parking use to areas as designated by Landlord from time to time.
Tenant agrees not to over burden the parking facilities and to abide by the
rules and regulations. Upon request Tenant shall provide to Landlord a list of
license plate numbers of all employees. Of the allotted spaces, thirty two (32)
will be allowed in the parking garage. The 32 garage parking spaces will be
labeled as MTC parking.
8 CONSTRUCTION OF PREMISES:
8.1 Landlord's Obligations.
Landlord shall construct, at its expense, upon the Premises described in EXHIBIT
- - B according to plans and specifications to be prepared at Landlord's expense,
conforming to the general construction outline attached as EXHIBIT - C. Landlord
may, without the consent of Tenant, make minor variations in the site or floor
plan attached as EXHIBITS A, B and C, and in the plans and specifications, but
such changes shall not alter the general appearance, relative location or total
amount of floor space of the Premises.
8.2 Tenants Acceptance of Premises.
Within ten days after Tenant shall take possession of the Premises, Tenant shall
execute and deliver to Landlord a statement in the form attached as EXHIBIT E -
Acceptance of Premises, indicating any exceptions that may exist at that time.
Failure of Tenant to execute this form shall constitute an acceptance of the
Premises and an acknowledgment by Tenant that the statements included in the
Acceptance of Premises are true and correct without exception. Prior to
acceptance of premises, and periodically prior to occupancy, Landlord and Tenant
will walk through the constructed Premises compiling a "punch list" (as that
term is used in construction industry) of items needing correction. The
existence of such "punch list" items shall not postpone the Commencement Date of
this Lease nor the obligation of Tenant to pay rent, nor Acceptance of Premises.
9 REPAIRS, MAINTENANCE, ALTERATIONS AND ADDITIONS:
9.1 Landlord's Obligations.
Landlord shall maintain in good order, condition and repair the building and all
other portions of the Premises not the obligation of Tenant.
9.2 Tenant's Obligations.
Provided Landlord repairs and maintains the structural portions of the building,
including the basic plumbing, air conditioning, heating and electrical systems,
installed of furnished by Landlord, Tenant at its cost shall maintain the
Premises in good order, condition and repair including, but not limited to, the
interior surfaces of the ceilings, walls and floors, all doors, interior
windows, plumbing, electrical wiring, switches, and lighting fixtures. Tenant
expressly waives the benefits of any statute in effect now or future which would
otherwise give the tenant the right to make repairs at Landlord's expense or to
terminate this Lease because of Landlord's failure to keep the Premises in good
order, condition and repair unless Landlord fails to diligently pursue necessary
repairs within five (5) days of receipt of written notice and provided the delay
is beyond the reasonable control of the Landlord.
9.3 Surrender.
<PAGE>
Upon expiration of this Lease, Tenant shall surrender the Premises in the same
condition as received, reasonable wear and tear excepted. Tenant, at its
expense, agrees to repair any damages caused by or in connection with the
removal of any personal property, business or trade fixtures, including but not
limited to, repairing the floor and patching and painting the walls where
required by Landlord.
9.4 Alterations and Additions.
Tenant shall not, without Landlord's prior written consent, make any
alterations, additions, improvements or utility installations in or to the
Premises. Any of which, if approved, will become the property of the Landlord
and remain upon the Premises when surrendered, excluding Tenant supplied trade
fixtures or Systems Furniture, unless Landlord requests they be removed, which
shall be at Tenant's expense.
10 LIENS:
Tenant shall keep the Premises and the Building free from any liens arising out
of work performed, material furnished, or obligations incurred by Tenant.
Tenant shall indemnify, hold harmless and defend Landlord from any liens or
encumbrances arising out of any work performed or materials furnished by or at
the direction of Tenant.
11 ENTRY BY LANDLORD:
Landlord and its agents shall have free access to the Premises during all
reasonable hours to determine if Premises are in good repair and for any other
purpose not inconsistent with Tenant's use, including but not limited to, the
establishment and maintenance of Common Area facilities and for the purpose of
installing, maintaining, and replacing water, gas, sewer or other pipelines, and
telephone or electric lines, and conduits as Landlord may deem desirable in
connection with the development or use of any other areas in the Property.
Landlord shall have the right to show the Premises to prospective purchasers,
tenants or lenders.
12 SIGNS AND WINDOW COVERINGS:
Tenant shall not erect or install any signs, window or door lettering, or window
coverings (drapes, blinds, etc.) without Landlord's prior written consent.
Landlord may withhold is consent for any aesthetic reason. Any approved
installations must be made in full conformance with local code and governmental
regulations and requirements. Landlord may, at its option, promulgate a sign
and window covering program specifying Building standards for allowable signs
and window coverings. Additionally, Landlord shall provide the Tenant with the
following signage: building standard lobby directory signage, building standard
suite entry signage, and any building external monument signage in existence now
or erected during the lease term.
Any signage on the building is to be approved by the City of Petaluma Building
Department and MTC will be responsible for any expenses incurred.
13 INDEMNITY:
Provided Landlord or Landlord's agents have not been negligent, Tenant shall
defend and indemnify Landlord and hold Landlord harmless from and against all
liability, damages, costs, or expenses, including attorney fees, arising from
any accident, injury, or damage to any person or property, occurring in or about
the Building or Premises arising from any act, omission, or negligence of Tenant
or its officers, contractors, licensees, agents, employees, guests or visitors
in or about the Building or Premises, or arising from any breach or default
under this Lease by Tenant.
Excluding Landlord or Landlord's agents negligence, in no event shall Landlord
be liable to Tenant for any damages to the Premises or for any loss, damage or
injury to any property of Tenant therein occasioned by bursting, rupture,
leakage or overflow of any plumbing or other pipes (including without
limitation, water, steam or refrigerant lines), sprinklers, tanks, drains,
drinking fountains or washstands, or other similar cause in, above, upon or
about the Premises or Building. Tenant agrees to insure its property against
such perils.
14 INSURANCE
14.1 Fire Insurance.
Landlord shall keep the Building and improvements within which the Premises are
contained insured against loss or damage by fire, with extended coverage and
vandalism and malicious mischief endorsements or their equivalents, and any
other coverage required by the Building lender. The cost of such insurance
shall be included as Direct Expenses.
14.2 Liability Insurance
Tenant shall, at its expense, maintain for the joint benefit, and in the names
of Tenant and landlord as co-insureds, with cross liability endorsement,
property damage and personal liability insurance. Such insurance shall be
maintained on the minimum basis of $5,000,000.00 for damage to property and
$2,000,000.00 for personal injury in any one occurrence. Each insurance policy
shall contain a clause that it cannot be canceled or reduced in scope without
thirty days prior written notice to Landlord and to any Building lender of whom
the insurer has been notified in writing. Tenant shall deliver to landlord a
certificate of insurance policy that outlines the coverage in Sections 13 and 14
of this lease prior to the commencement of this Lease and at least thirty days
prior to any future expiration of such policy.
15 ASSIGNMENT AND SUBLETTING:
Tenant shall not, voluntarily or by operation of law, assign or mortgage this
Lease, sublet all or any portion of the Premises or permit the use of all or
part of the Premises by any party other than Tenant without Landlord's prior
written consent which shall not be unreasonably withheld. If Tenant is a
corporation, association or partnership, the transfer, assignment, or
hypothecation of any stock or interest in the aggregate in excess of fifty-one
percent shall be deemed an assignment for purposes of this Lease.
Notwithstanding the foregoing, the Landlord's consent will not be required for
the transfer, assignment, or hypothecation of any stock or interest in MTC
Information Systems (MTC). A transfer by Tenant to a corporation or partnership
or a merger that would cause a name change by Tenant, shall not required the
approval of Landlord.
<PAGE>
16 DEFAULTS AND REMEDIES:
All rights and remedies of Landlord shall be cumulative, and none shall exclude
any other right or remedy allowed by law. Landlord's remedies in the event of
Tenant's breach or abandonment, without limiting the Landlord in the exercise of
any right or remedy at law or in equity shall include:
(a) Maintain this Lease in full force and effect and recover the rent and any
other monetary charges as they become due, without terminating Tenant's right to
possession irrespective of whether Tenant shall have abandoned the Premises. In
the event Landlord elects not to terminate the Lease, Landlord shall have the
right to attempt to re-lease the Premises at such rent and upon such conditions
and for such a term, and to do all acts necessary to maintain or preserve the
Premises as Landlord deems reasonable and necessary without being deemed to have
elected to terminate the Lease, including removal of all persons and property
from the Premises; such property may be removed and stored in a public warehouse
or elsewhere at the cost of and for the account of the Tenant. In the event any
such re-leasing occurs, this Lease shall terminate automatically upon the new
Tenant taking possession of the Premises.
(b) Terminate Tenant's rights to possession 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, without limitation, the following (i ) any unpaid Rent at the time
of surrender; plus (ii) any unpaid Rent from surrender to commencement of re-
lease plus; (iii) any other reasonable amount necessary to compensate Landlord
for all the detriment cause by Tenant's failure to perform its obligations under
this Lease.
17 SUBORDINATION:
This Lease at Landlord's option shall be subject and subordinate to the lien of
any mortgages or deeds of trust placed on or against the land or improvements of
which the Premises are a part, without the necessity of the execution and
delivery of any further reasonable instruments on the part of Tenant to
effectuate such subordination. However, Tenant agrees to execute and deliver
upon demand without charge therefore, such further reasonable instruments
evidencing such subordination of this Lease as may be required by Landlord.
18 MISCELLANEOUS
18.1 Estoppel Certificate
Tenant shall at any time upon demand from Landlord execute, acknowledge, and
deliver to Landlord a statement in writing (a) certifying that this Lease is 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 rent and other charges are paid in advance, if any, and
(b) acknowledging that there are not, to Tenant's knowledge, any uncured
defaults on the part of Landlord, or specifying such default if any are claimed.
Any such statement may be conclusively relied upon by a prospective purchaser or
encumbrancer of the Premises.
If Landlord desires to finance or refinance said Premises, Tenant agrees to
deliver to any lender designated by Landlord such financial statements of Tenant
as may be reasonably required by such lender. Such statements shall include the
past three years' financial statements of Tenant. All such financial statements
shall be received by Landlord in confidence and shall be used only for the
purposes herein set forth.
18.2 Waiver.
One or more waivers of any covenant, term or condition of this Lease by Landlord
shall not be construed as a waiver of subsequent breach of the same covenant,
term or condition. The consent or approval of any act by the Tenant of a nature
requiring consent or approval by Landlord shall not be deemed to waiver or
render unnecessary consent to or approval of any subsequent similar act. No
failure of Landlord to enforce any term of this Lease shall be deemed to be a
waiver.
18.3 Entire Agreement
This Lease contains all convenants and agreements between Landlord and Tenant
relating in any manner to the Rent, use and occupancy of the Premises and
Tenant's use of the Building and other matters set forth in this Lease. No
prior agreement (written or oral) or understanding pertaining to the same shall
be valid or of any force or effect. The covenants and agreements of this Lease
shall not be altered, modified, or added to except in writing signed by Landlord
and Tenant.
18.4 Cost of Suit.
In the event of a lawsuit between Landlord and Tenant, the party who wins the
suit shall be entitled to receive from the party who loses a sum to cover
reasonable expended attorney's fees and costs.
18.5 Sale of Premises by Landlord
Landlord may assign, in whole or in part, Landlord's interest in this Lease and
may sell the Property. In such event Landlord shall be entirely freed and
relieved of all liability, but only with respect to events arising after the
transfer and only subject to a satisfactory account for the Tenant by the
Landlord of the security deposit and any prepaid rent, under any and all of its
covenants and obligations contained in this Lease.
18.6 Covenants to Bind Successors.
Terms and agreements contained in this Lease shall be binding upon either
parties' respective heirs, executors, administrators, personal representatives
and assigns and successors in interest.
<PAGE>
18.7 Financial Statement
It is acknowledged by all parties hereto that the attached financial statements
of Tenant is incorporated as a part of this Lease, that the information
contained therein is true and correct in all respects, and that accuracy of the
information is a significant fact upon which Landlord has relied in the granting
of this Lease.
18.8 Holding Over.
If Tenant remains in possession of all or part of the Premises after the
expiration of the term thereof, such tenancy shall be from month to month only,
and not a renewal hereof or an extension for any further term. In such case,
rent and other monetary sums due hereunder shall be payable in the amount as
last time specified in this Lease and such month-to-month tenancy shall be
subject to every other term, covenant and agreement contained herein.
18.9 Interest on Past Due Obligations.
Any amount due to Landlord not paid when due shall bear interest at ten percent
(10%) or five percent (5%) over the discount rate, whichever is greater per
annum from the due date. Payment of such interest shall not excuse or cure any
default by Tenant under this Lease.
18.10 Notices.
All notices or demands required to be given by Landlord or Tenant shall be in
writing and shall be deemed delivered forty-eight hours after depositing the
notice or demand in the United States, mail, postage prepaid, addressed
respectively to the parties as stated in Section 1.
18.11 Reconstruction
In the event the Premises or the Building of which the Premises are a part are
damaged by fire or other perils covered by extended coverage insurance, 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 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. Additionally, provided the damage is not due to the fault
or neglect of the Tenant or its employees, and the scope of the repairs render
the Premises uninhabitable for a period of ten (10) days, the Tenant shall have
the right to terminate this lease.
18.12 This lease restates and supersedes any and all prior leases respective to
Southpoint Corporate Plaza entered into between the parties.
SIGNATURES:
Witnessed by their signature below, the Landlord and Tenant have executed this
Lease the date and year written in Section 1.
LANDLORD: Charles R. Stephens TENANT: MTC Information Systems,
a California Corporation
/s/ Charles R. Stephens Date: /s/ Edward A. Brinskele Date:
- -------------------------- ------------------------------
Charles R. Stephens Edward A. Brinskele
President & Chief Executive Officer
<PAGE>
EXHIBIT A - Site Plan
- ---------------------
ARTWORK
<PAGE>
EXHIBIT B - Premises
- --------------------
ARTWORK
<PAGE>
EXHIBIT C2 -- Suite 200 -- Design Drawing Previously Delivered
- --------------------------------------------------------------
ARTWORK
<PAGE>
EXHIBIT C1 - Tenant Improvements - Southpoint Corporate Plaza - MTC
1. Landlord shall, at Landlord's sole cost and expense, construct building
standard, ceiling height walls and doors, rearrange the existing ceiling
light fixtures as required to accommodate the new walls, and install
conduit inside the walls for telephone and data wires substantially
represented on the attached Exhibit C2.
2. Landlord shall, at Landlord's sole cost and expense, install an additional
HVAC thermostat with exhaust override control unit in the MIS room within
the Premises.
3. Landlord shall, at Landlord's sole cost and expense, install the building
standard lower cabinets and a sink with hot and cold running water in the
kitchen area. Upper cabinets and appliance shall be the cost of the Tenant.
4. Tenant shall, at Tenant's sole cost and expense, contract with TLW Electric
of Novato (415/892-4800) to install all of Tenant's over-standard
electrical work which may include, but not necessarily limited to,
following:
a) 3 outlets on separate circuit at Telephone room.
b) 3" conduit across hallway from Telephone room to MIS room.
c) 4 floor outlet with 3 circuits at each location
d) Drill all holes for tel/comp. cables
e) 2" conduit between floors for tel/comp. cables
f) 21 new duplex outlets
g) 17 tel/comp. stubs
h) 4 isolated ground outlets
5. Tenant shall, at Tenant's cost and expense, remove existing carpeting, and
install Tenant's floor covering in the MIS room. Tenant is aware that when
Tenant's contractor removes the existing carpeting from those areas where
the rubber flooring is to be laid, damage to the light-weight concrete may
occur, and that repair or replacement of the light-weight sub-floor may be
required.
6. Tenant shall, at Tenant's sole cost and expense, pay for Tenant's own lock
smith to key the doors to the Premises except the main entry which shall be
controlled by the building's security system.
7. The above work #1 - #6 has been performed.
LANDLORD: Charles R. Stephens TENANT: MTC Information Systems, a
California Corporation
/s/ Charles R. Stephens Date: /s/ Edward A. Brinskele Date:
- ----------------------- -----------------------------------
Charles R. Stephens Edward A. Brinskele
President & Chief Executive Officer
<PAGE>
EXHIBIT C2 -- Suite 200 -- Design Drawing Previously Delivered
- --------------------------------------------------------------
ARTWORK
<PAGE>
EXHIBIT C4 -- Suite 100 -- New Floor Plan
- -----------------------------------------
ARTWORK
<PAGE>
EXHIBIT C5 -- Suite 110-120-130 -- Design Drawings to be Determined
- -------------------------------------------------------------------
ARTWORK
<PAGE>
EXHIBIT C5 -- Suite 110-120-130 -- Design Drawings to be Determined
___________________________________________________________________
ARTWORK
<PAGE>
EXHIBIT C5 -- Suite 110-120-130 -- Design Drawings to be Determined
- -------------------------------------------------------------------
ARTWORK
<PAGE>
EXHIBIT D - Rules and Regulations
RULES AND REGULATIONS WHICH CONSTITUTE A PART OF THIS LEASE
A. Tenant shall not mar, drive nails, screw, bore or drill into, paint or
in any way deface the exterior walls, roof, foundations, bearing walls, columns
or pillars without the prior written consent of Landlord. The expense of
repairing any breakage, stoppage or damage resulting from a violation of this
rule shall be borne by Tenant.
B. Tenant shall not do anything in the Premises, or bring or keep
anything therein, which will increase the risk of fire or the rate of fire
insurance. Tenant shall not use any machinery in the Premises which may cause
any unreasonable noise or jar or tremor to the floors or walls, or which by its
weight might injure the floors of the Premises.
C. Tenant shall not make or permit any loud, unusual, or improper noises,
nor interfere with any other tenants and shall park its vehicles in the areas
designated for employee parking. Tenant shall not throw cigar or cigarette butts
or other substances or litter of any kind in or about the property.
D. All freight must be moved promptly into, within and out of the
Premises by rear overhead doors and only according to such regulations as may be
posted by Landlord.
E. Tenant shall not loiter on the lawn areas or other common areas of the
Property, nor shall it obstruct the sidewalks, entry passages, pedestrian
passage ways, driveways, entrances and exits to the Property, and they shall use
them only as passageways to and from their respective work areas.
F. Tenant is required to observe all security regulations issued by the
Landlord.
G. Landlord reserves the right to change or rescind or add to these rules
and regulations. Landlord shall not be responsible to Tenant or any other person
for the non-observance or violation of these rules and regulations by any other
tenant or person. No waiver of any rule or regulation by Landlord shall be
effective unless expressed in writing and signed by landlord or his authorized
agent.
H. No smoking will be allowed on premises, except at patio areas.
<PAGE>
EXHIBIT E - Acceptance of Premises
ACCEPTANCE OF PREMISES
Date: December 16,1993
Gentlemen:
The undersigned as Tenant under that certain Lease made and entered into by and
between, Charles R. Stephens, as Landlord, and the undersigned as Tenant, for
space in the development commonly known as 1304 Southpoint Boulevard, Petaluma;
hereby certifies that the undersigned has entered into occupancy of the premises
demised under said Lease, which is in full force and effect and has not been
modified, supplemented or amended in any way, except by instrument dated
December 16, 1993; and that all conditions under said Lease to be performed by
Landlord have been satisfied. On this date there are no existing defenses or
offsets which the undersigned has against the enforcement of said Lease by
Landlord. Rental in the amount of $55,313.00 for the period of June, 2001 has
been paid in advance.
Sincerely,
/s/ Edward A. Brinskele
- -----------------------------------
Edward A. Brinskele
President & Chief Executive Officer
<PAGE>
EXHIBIT F
ADDENDUM TO LEASE BY AND BETWEEN LANDLORD AND TENANT
NEW LEASE
1. This lease dated December 20, 1993 supersedes and deletes the MTC Lease
Agreement dated June 23, 1993.
2. MTC to be billed for all overhour electrical and HVAC use on a monthly
basis with all bills to be paid within 20 days of billing dates.
<PAGE>
EXHIBIT G
ADDENDUM TO LEASE BY AND BETWEEN LANDLORD AND TENANT
RIGHT OF FIRST REFUSAL
Tenant shall have the continuous right of first refusal to add additional space
to the Premises. This right shall apply to all areas of the building.
MTC also has the right of fist refusal to purchase the building and will be
required to reply within the same time limits as set forth in any third party
offer to purchase the building.
<PAGE>
TRANSASIA PETALUMA HOLDINGS, INC.
P.O. Box 750007
Petaluma, CA 94975
707/763-6819
November 30, 1994
MTC
1304 Southpoint Blvd., Suite 100
Petaluma, CA 94954
Attn: Mike Crockett
RE: ADDENDUM TO LEASE BY AND BETWEEN LANDLORD AND TENANT
Exhibit H
Dear Mr. Crockett:
Since we have received approval on November 28 from Mike Crockett for the
additional $196.00 per month additional lighting, please disregard my previous
correspondence dated November 9, 1994. Instead, please have Edward Brinskele
sign the attached addendum (two copies) to your lease dated December 20, 1993.
Once we receive both signed copies we will return one for your files.
Thank you.
Sincerely,
TRANSASIA PETALUMA HOLDINGS, INC.
/s/ Charles R. Stephens
- -----------------------
Charles R. Stephens
Building Manager
Attachment
<PAGE>
TRANSASIA PETALUMA HOLDINGS, INC.
P.O. Box 750007
Petaluma, CA 94975
707/763-6819
July 20, 1994
MTC
1304 Southpoint Blvd., Suite 100
Petaluma, CA 94954
Attn: Eugene McCord
RE: ADDENDUM TO LEASE BY AND BETWEEN LANDLORD AND TENANT
Exhibit I
Dear Gene:
Please have Edward Brinskele sign the attached addendum (two copies) to your
lease dated December 20, 1993.
Once we receive both signed copies we will return one for your files.
Thank you.
Sincerely,
TRANSASIA PETALUMA HOLDINGS, INC.
/s/ Charles R. Stephens
- -----------------------
Charles R. Stephens
Building Manager
Attachment
<PAGE>
EXHIBIT I
ADDENDUM TO LEASE BY AND BETWEEN LANDLORD AND TENANT
ADDITIONAL MONITORING FEES OF NEW EQUIPMENT
As of August 1,1994, Tenant shall apply a $24.00 security monitoring fee to rent
as specified in lease dated December 20, 1993. Rent schedule is as follows:
Mos. 08-12 $42,146.00 Monthly
Year 2: $44,279.00 Monthly
Year 3: $47,016.00 Monthly
Year 4: $49,220.00 Monthly
Year 5: $50,325.00 Monthly
Year 6: $52,037.00 Monthly
Year 7: $53,904.00 Monthly
Year 8 (6 mos.): $55,790.00 Monthly
LANDLORD TENANT:
Marin Telemangement Corporation,
a California Corporation
/s/ Charles R. Stephens Date: /s/ Edward A. Brinskele Date:
- -------------------------- ------------------------------
By: Charles R. Stephens By: Edward A. Brinskele
President & Chief Executive Officer
<PAGE>
EXHIBIT J - 3 PAGES
ADDENDUM TO LEASE BY AND BETWEEN LANDLORD AND TENANT
Addendum to Lease by and between Landlord (Transasia Petaluma Holdings, Inc.)
and Tenant - Marin Telemanagement Corporation - MTC.
1. This Addendum dated May 1, 1995 supersedes and deletes specific items in
the MTC Lease dated January 1, 1994 only as noted below. All other terms
and conditions of the January 1, 1994 Lease remain in full force and effect
as if noted herein.
2. This Lease is modified for the purpose of adding Suites 230 and 250 to the
January 1, 1994 Lease which will add 29 additional parking spaces to the
Lease Agreement, six (6) of which will be in the underground parking
garage. Suite 230 and 250, (existing floor plans attached), will be
delivered as is and the revised Lease payments to be as follows:
Year 2 - Mos 05 - 06 $44,509.00 Monthly
Mos 07-12 $51,248.00 Monthly
Year 3 - $54,322.00 Monthly
Year 4 - $56,880.00 Monthly
Year 5 - $58,356.00 Monthly
Year 6 - $60,458.00 Monthly
Year 7 - $62,734.00 Monthly
Year 8 - $65,051.00 Monthly
LANDLORD: Transasia Petaluma Holdings, Inc. TENANT: MTC Information
Systems, a California
Corporation
/s/ Charles R. Stephens Date: /s/ Edward A. Brinskele Date:
- -------------------------- ------------------------------
Charles R. Stephens By: Edward A. Brinskele
Property Manager President & Chief Executive Officer
TRANSASIA PETALUMA HOLDINGS, INC.
/s/ Roger Mackenzie Date:
- --------------------------
Roger Mackenzie
Secretary
<PAGE>
EXHIBIT K - 3 PAGES
ADDENDUM TO LEASE BY AND BETWEEN LANDLORD AND TENANT
Addendum to Lease by and between Landlord (Transasia Petaluma Holdings, Inc.)
and Tenant - Marin Telemanagement Corporation - MTC.
1. This Addendum dated August 31, 1996 supersedes and deletes specific items
in the MTC Lease dated January 1, 1994 only as noted below. All other terms and
conditions of the January 1, 1994 Lease remain in full force and effect as if
noted herein. September, 1995 rent will remain $51,248.00. This Addendum will
be effective as of October 1, 1995.
2. * This Lease is modified for the purpose of adding Suites 240 (1, 098
Rentable Square Feet) and 260 (2,330 Rentable Square Feet) to the January 1,
1994 Lease which will add 17 additional parking spaces to the Lease Agreement,
three (3) of which will be in the underground parking garage. Suites 240 and
260 (existing floor plans attached), will be delivered as is and the revised
Lease Payments to be as follows:
Year 2 - Mos 10 - 12 $55,876.00 Monthly
Year 3 - $58,950.00 Monthly
Year 4 - $61,670.00 Monthly
Year 5 - $63,284.00 Monthly
Year 6 - $65,590.00 Monthly
Year 7 - $68,046.00 Monthly
Year 8 - (6 Mos) $70,549.00 Monthly
LANDLORD: Transasia Petaluma Holdings, Inc. TENANT: MTC Information
Systems, a California
Corporation
/s/ Charles R. Stephens Date: /s/ Edward A. Brinskele Date:
- -------------------------- ------------------------------
Charles R. Stephens By: Edward A. Brinskele
Property Manager President & Chief Executive Officer
TRANSASIA PETALUMA HOLDINGS, INC.
/s/ Roger Mackenzie Date:
- --------------------------
Roger Mackenzie
Secretary
* Addendum to Lease, Exhibit J - Dated May 8, 1995 added Suite 230 (2,684
Rentable Square Feet) and Suite 250 (3,176 Rentable Square Feet) for a total
Rentable Square Feet to MTC's Lease through Exhibit K of 41,752 Rentable Square
Feet.
<PAGE>
TRANSASIA PETALUMA HOLDINGS, INC.
P.O. Box 750007
Petaluma, CA 94975
707/763-6819
September 12, 1995
MTC
1304 Southpoint Blvd., Suite 100
Petaluma, CA 94954
Attn: Mike Crockett
RE: EXHIBIT K - LEASE AGREEMENT
Dear Mike:
Attached is Exhibit K to the Lease Agreement showing the square footages per
your request.
Please replace the top copy only with this front page with the Exhibits that
were sent over on August 3, 1995. All the back-up remains the same.
Please have them signed as soon as you can.
Thank you for your prompt attention in regards to this matter.
Sincerely,
TRANSASIA PETALUMA HOLDINGS, INC.
/s/ Charles R. Stephens
- -----------------------
Charles R. Stephens
Property Manager
CRS/eer
enclosure
<PAGE>
TRANSASIA PETALUMA HOLDINGS, INC.
P.O. Box 750007
Petaluma, CA 94975
707/763-6819
October 5, 1995
MTC
1304 Southpoint Blvd., Suite 100
Petaluma, CA 94954
Attn: Mike Crockett
RE: EXHIBIT K - EXECUTED LEASE AGREEMENT
Dear Mike:
Enclosed please find an executed copy of Exhibit K to the Lease Agreement for
your files.
Sincerely,
TRANSASIA PETALUMA HOLDINGS, INC.
/s/ Ellie R. Rovira
- -----------------------
Ellie R. Rovira
Executive Secretary
CRS/eer
enclosure
<PAGE>
EXHIBIT K - Suite 240 - ACCEPTED
ARTWORK
<PAGE>
EXHIBIT K - Suite 260 - ACCEPTED
ARTWORK
<PAGE>
EXHIBIT L
ADDENDUM TO LEASE BY AND BETWEEN LANDLORD AND TENANT
Addendum to Lease by and between Landlord (Transasia Petaluma Holdings, Inc.)
and Tenant - Marin Telemanagement Corporation - MTC
1. This Addendum dated October 12, 1995 supersedes and deletes specific items
in the MTC Lease dated January 1, 1994 only as noted below. All other terms
and conditions of the January 1, 1994 Lease remain in full force and effect
as if noted herein. This Addendum will be effective as of November 1, 1995.
2. This Lease is modified for the purpose of adding a maintenance fee for
leaving the parking lot and garage lights on from 6:00 p.m. to 6:00 a.m.,
seven days per week. The revised Lease payments to be as follows:
Year 2 - Mos 11 - 12 $55,989.00 Monthly
Year 3 - $59,063.00 Monthly
Year 4 - $61,789.00 Monthly
Year 5 - $63,409.00 Monthly
Year 6 - $65,721.00 Monthly
Year 7 - $68,183.00 Monthly
Year 8 - (6 Mos) $70,693.00 Monthly
LANDLORD: Transasia Petaluma Holdings, Inc. TENANT: MTC Information
Systems, a California
Corporation
/s/ Charles R. Stephens Date: /s/ Edward A. Brinskele Date:
- -------------------------- ------------------------------
Charles R. Stephens By: Edward A. Brinskele
Property Manager President & Chief Executive Officer
TRANSASIA PETALUMA HOLDINGS, INC.
/s/ Roger Mackenzie Date:
- --------------------------
Roger Mackenzie
Secretary
<PAGE>
EXHIBIT 10.9
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT dated as of the lst day of January, 1994
("Sublease"), by and between MTC Information Systems, a California corporation,
1304 Southpoint Blvd., Ste. 100, Petaluma, CA 94954 ("Sublessor) and MTC
Telemanagement Corporation, a California corporation, 1304 Southpoint Blvd.,
Ste. 100, Petaluma, CA 94954 ("Sublessee").
WHEREAS, Sublessor has previously entered into that certain Lease Agreement
dated December 20, 1993 (the "Lease"), whereby Sublessor has leased certain real
property from its landlord, for a period and upon the terms and conditions set
forth in such Agreement;
WHEREAS, Sublessor desires to sublease and permit use of certain of such
property to Sublessee, upon the terms and conditions as set forth in such
Agreement and as stipulated herein;
WHEREAS, the Sublessee agrees to adhere to and attorn to the Lease, as
supplemented by such terms and conditions as provided hereunder,
NOW, THEREFORE, the parties for such valuable consideration as is
acknowledged individually by each of the parties, agree as follows:
1. Sublessee shall sublease 41,752 square feet of 1304 Southpoint
Boulevard, to be designated by the parties, but to include in such square
footage the amounts on the first floor as specified by Sublessee. The sublease
shall not exceed the period set forth in the Lease, and in all cases, the
sublease shall terminate no later than one month prior to the end of the term of
the Lease Agreement. Monthly rent for the sublease payable in advance shall be
$42,182 for the first year, $55,876 for the second year, $58,950 for the third
year, $61,670 for the fourth year, $63,284 for the fifth year, $65,590 for the
sixth year, $68,046 for the seventh year and $70,549 for the first six months of
the eighth year. Late charges for rentals not paid by the eleventh of each
month shall be $100.00 per diem until payment is received, which charges shall
be in addition to any other sums due Sublessor under this Sublease. In
addition, Sublessee shall pay to Sublessor its allocable share on a square
footage basis of any Full Service Expenses and any annual increases to such
expenses or over Base Year Expenses, to the extent such Expenses are chargeable
to Sublessor under the Lease.
2. To the extent Sublessor exercises its option to renew the Lease,
Sublessee shall have a similar right to renew this Sublease for a similar term
as provided the Sublessor in the Lease and for such Sublease rentals as
negotiated by the parties. Such option shall not extend to any other options
negotiated by Sublessor in the Lease, including a right of first refusal on any
additional space in the building and any options to acquire the building.
<PAGE>
3. Sublessee upon execution of this Sublease shall provide a security
deposit to Sublessor equal to the security deposit set forth in the Lease times
an allocable percentage of the square footage covered hereunder as it relates to
the total square footage leased by Sublessor. To the extent that Sublessee
increases its square footage utilized, it shall increase the security deposit to
Sublessor using the formula above. Such security deposit shall be covered by
the same terms and conditions as provided in the Lease, except that in the event
Sublessor is in default under the Lease and the Landlord as defined in the Lease
terminates Sublessor's interest and provided that Sublessee is not in default
hereunder, Sublessor shall return to Sublessee the security deposit. Sublessee
shall also upon execution of this Sublease deposit with Sublessor an amount
equal to the last month's rent hereunder, to be credited towards payment of such
rent. Such rental shall not earn any interest and may be retained by Sublessor
for its sole purposes and uses.
4. Sublessor allocates to Sublessee 180 parking spaces of those allotted
to Sublessor, of which 38 spaces shall be in the parking garage. To the extent
the spaces are labelled "MTC" in the garage, Sublessee shall only use such
spaces for its vehicles.
5. To the extent permitted Sublessor by Landlord under the Lease,
Sublessee shall have rights in conjunction with the Sublessor to use the lobby
as a reception area.
6. In addition to any provisions restricting assignment in the Lease, any
change in control of Sublessee (which shall be defined as the transfer of more
than a 51% interest in stock of the Sublessee) or transfer by Sublessee to a
corporation or partnership, or a merger by Sublessee, shall require consent of
Sublessor, not to be unreasonably withheld.
7. This Sublease shall be subordinate to the Lease and any mortgages and
liens placed upon the building by the Landlord. Sublessee acknowledges and
attorns to the Lease, a copy of which has been previously provided to Sublessee
by Sublessor. To the extent the Lease is amended or modified by the Landlord
and Sublessor, Sublessor shall provide Sublessee with a copy of such
modifications or amendments.
8. This Sublease shall be governed and construed in accordance with the
laws of the State of California, and venue for all actions hereunder shall be in
the courts of general jurisdiction in Sonoma County, California. In the event
of any dispute or controversy arising under this Sublease, the prevailing party
shall be entitled to its reasonable attorney's fees, costs and expenses.
9. In the event of sale by the Landlord of the building, any accounting
as provided in the Lease shall occur between Sublessor and Landlord, and
Sublessee shall not have any rights for an additional accounting with Sublessor.
<PAGE>
10. Sublessee shall provide Sublessor on a quarterly basis a reviewed or
audited financial statement reflecting the financial status of Sublessee.
11. Any amounts not paid when due hereunder shall bear interest at the
rates set forth in the Lease.
12. In the event of any fire or similar event, Sublessee shall be provided
a proportionate reduction in its rent equal to the allocated amount on a square
footage basis of any proportionate reduction provided Sublessor by Landlord, and
the determination of Sublessor and Landlord as to the proportionate reduction
from which the allocation hereunder is derived shall govern for all purposes of
this Sublease.
13. The provisions of the Lease shall apply to any issues between the
Sublessor and Sublessee not specifically addressed herein.
IN WITNESS WHEREOF, the parties hereunder through their duly authorized officers
or representatives have executed this Sublease as of the day first written
above.
MTC INFORMATION SYSTEMS MTC TELEMANAGEMENT CORP.
By: /s/ MTC Information Systems By: /s/ MTC Telemanagement Corp.
--------------------------- ----------------------------
Its: Its:
--------------------------- ----------------------------
<PAGE>
EXHIBIT 10.10
470 SPEAR STREET
LEASE
between
470 SPEAR ASSOCIATES,
a California limited partnership,
Landlord,
and
OFFICES UNLIMITED OF CALIFORNIA, INC.,
a California corporation,
(presently known as, and doing business as,
Beier & Gunderson, Inc., a California corporation),
Tenant.
Dated: September 29, 1987
<PAGE>
470 SPEAR STREET
LEASE
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. DEFINITIONS 1
1.1. Additional Charges 1
1.2 Base Year 1
1.3. Base Year Operating Expenses 1
1.4. Brokers 1
1.5. Building 1
1.6. Common Area 1
1.7. Existing Lease 1
1.8. Estimated Increased Operating Expenses 1
1.9. Expiration Date 1
1.10. Fair Market Rent 1
1.11. Fixed Rent 2
1.12. Interest Rate 2
1.13. Landlord's Address 2
1.14. Landlord's Delay 2
1.15. Lease Year 2
1.16. License Termination Date 2
1.17. Operating Expenses 2
1.18. Permitted Use 3
1.19. Premises 3
1.20. Project 3
1.21. Property 3
1.22. Real Property Taxes 3
1.23. Rent 4
1.24. Rent Commencement Date 4
1.25. Security Deposit 4
1.26. Tenant's Address 4
1.27. Tenant's Share 4
1.28. Term 4
2. LEASE OF PREMISES 4
2.1. Premises 4
2.2. Landlord's Reserved Rights 4
2.3. No Representations or Warranties 5
2.4. Parking Spaces 5
3. TERM 5
3.1. Initial Term 5
3.2. Delivery of Possession 5
3.3. Options to Extend 5
3.4. Conditions to Exercise 6
3.4.1. Lease in Effect 6
3.4.2. No Default 6
3.4.3. Occupancy 6
3.4.4. No Defaults During Term 6
3.4.5. Net Worth 6
4. RENT; ADDITIONAL CHARGES 6
4.1. Fixed Minimum Monthly Rent 6
4.2. Fair Market Rent 6
4.2.1. Appraisal 7
4.2.2. Appraiser Designation 7
4.2.3. Third Appraiser Se1ection 7
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
4.2.4. Determination of Fair Market Rent 7
4.2.5. Appraiser's Qualifications 7
4.2.6. Successor Appraisers 8
4.3. Additional Charges 8
4.4. Manner of Payment 8
5. PAYMENT OF OPERATING EXPENSES 8
5.1. Payment By Tenant 8
5.2. Manner of Payment 8
5.3. Adjustments to Operating Expenses 9
5.4. Prorations 9
5.5. Review of Records 9
5.6. Occupancy Adjustments of Operating Expenses 9
6. TAXES PAYABLE BY TENANT 9
7. CONDITION AND OPERATION OF THE BUILDING 10
7.1. As Is 10
7.2. Alteration of Building 10
7.3. Security and Life Safety 10
8. USE AND COMPLIANCE WITH LAWS 11
8.1. Use of Premises 11
8.2. No Nuisance 11
8.3. Compliance with Laws 11
8.4. Compliance with Insurance Requirements 11
8.5. Right to Contest 11
9. ALTERATIONS, TENANT'S PROPERTY, TENANT'S WORK AND LIENS 12
9.1. Alterations by Tenant 12
9.2. Title to Alterations 12
9.3. Tenant's Work 12
9.4. Liens 12
10. REPAIRS AND MAINTENANCE 12
10.1. Landlord's Obligations 12
10.2. Tenant's Obligations 13
10.3. Conditions Applicable to Repairs 13
10.4. Landlord's Rights 13
11. UTILITIES AND OTHER SERVICES 13
11.1. Services to the Premises 13
11.2. Standard of Services 14
11.3. Additional Services 14
11.4. Interruption 14
12. DAMAGE OR DESTRUCTION 15
12.1. Obligations to Repair 15
12.2. Landlord's and Tenant's Election 15
12.3. Abatement of Rent 15
12.4. Last Six Months of Term 15
12.5. Total Destruction 16
12.6. Insurance Proceeds 16
12.7. No Release of Liability 16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
13. INSURANCE AND INDEMNITY 16
13.1. Insurance on Tenant's Property 16
13.2. Tenant's Liability Insurance 16
13.3. Landlord's Fire and Extended Coverage Insurance 17
13.4. Waiver of Subrogation 17
13.5. Form of Policies 17
13.6. Waiver of Claims 17
13.7. Indemnity 17
13.8. Non-Application of Certain Statutes 18
14. EMINENT DOMAIN 18
14.1. Effect of Taking 18
14.2. Award 18
14.3. Abatement of Rent 18
14.4. Temporary Taking 18
15. SUBLEASE AND ASSIGNMENT 19
15.1. Consent Required 19
15.2. Notice 19
15.3. Conditions of Approval 19
15.4. No Release 19
15.5. Cost of Processing Request 19
15.6. Scope of Assignment 20
15.7. Assumption of Obligations 20
15.8. No Signs or Encumbrances 20
15.9. Recapture Rights 20
16. DEFAULT; REMEDIES 21
16.1. Events of Default 21
16.1.1. Vacation or Abandonment 21
16.1.2. Nonpayment of Money 21
16.1.3. Other Obligations 21
16.1.4. Prohibited Assignment or Subletting 21
16.1.5. Insolvency 21
16.2. Notice to Tenant 21
16.2.1. Vacation or Abandonment 21
16.2.2. Nonpayment of Money 21
16.2.3. Other Obligations 21
16.2.4. No Notice or Cure 22
16.3. Remedy Upon Occurrence of Event of Default 22
16.4. Damages Upon Termination 22
16.5. Computation of Rent and Other Amounts for Purposes of Default 23
16.6. Waiver of Statutory Notice Periods 23
16.7. Landlord's Right to Perform on Tenant's Breach 23
16.8. Receiver 23
16.9. Landlord's Defaults 23
16.9.1. Notice and Cures; Landlord's Liability 23
16.9.2. Recovery Against Landlord 23
6.10. Waiver; Remedies Cumulative 24
6.11. Interest 24
6.12. No Accord and Satisfaction 24
6.13. Waiver of Right of Redemption 24
17. SUBORDINATION, ATTORNMENT AND ESTOPPELS 24
17.1. Subordination 24
17.2. Attornment by Tenant; Non-Disturbance 25
17.3. Tenant's Certificates 25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
18. FEES AND EXPENSES; PAYMENT 26
18.1. Interest on Past Due Obligations 26
18.2. Late Charges 26
19. ACCESS TO PREMISES 26
19.1. Landlord's Right to Enter 26
19.2. Emergency 26
20. NOTICES 27
21. RULES AND REGULATIONS 27
22. SURRENDER OF PREMISES ON TERMINATION 27
23. EXISTING LEASE AND RIGHT OF FIRST OFFER 28
23.1. Existing Lease 28
23.2. Right to Assign, Sublease or Terminate 28
23.3. Modification 28
23.4. Right of First Offer 28
23.4.1. Exercise of Right of First Offer 28
23.4.2. Non-Exercise of Right of First Offer 29
24. MISCELLANEOUS 29
24.1. Warranty of Authority to Enter into Lease 29
24.2. Inability to Perform 29
24.3. References 29
24.4. Severability 30
24.5. Successors and Assigns 30
24.6. Construction 30
24.7. No Option 30
24.8. Integration 30
24.9. Quitclaim 30
24.10. Quiet Enjoyment 30
24.11. Light, Air and View 30
24.12. Holding Over 31
24.13. Counterparts 31
24.14. Time of Essence 31
24.15. Broker's Commissions 31
24.16. No Merger 31
24.17. Landlord's Consents 31
24.18. Memorandum of Lease 31
24.19. Survival 31
24.20. Amendments 32
24.21. Attorneys' Fees 32
24.22. Financial Statements 32
</TABLE>
EXHIBIT A - FLOOR PLAN
EXHIBIT B - LEGAL DESCRIPTION
EXHIBIT C - RULES AND REGULATIONS
EXHIBIT D - CONSTRUCTION EXHIBIT
<PAGE>
BASIC LEASE INFORMATION
-----------------------
470 SPEAR STREET
LEASE
Lease Date: September 29, 1987
Landlord/Address: 470 Spear Associates,
a California limited partnership
c/o Lalanne Babcock & Brown Company
240 Steuart Street, 2nd Floor
San Francisco, CA 94105
Tenant/Address: Offices Unlimited of California, Inc.
(presently known as and doing business as
Beier & Gunderson, Inc., a California corporation)
470 Spear Street, 2nd Floor
San Francisco, CA 94105
Tenant's Business: Contract sale of furniture
Contact/Telephone: Lee Pierce (415) 832-8383
Premises: Part of second floor
Term: Ten (10) years, plus two (2) five (5) year options to
extend.
Fixed Rent: Period of Term Amount
-------------- ------
Rent Commencement Date
to End of Lease Year 1 $l4,685.00 month
Lease Years 2-5 $14,685.00 month
Lease Years 6-10 See Section 4.2
First Extended Term 90% Fair Market Rent
Second Extended Term 90% Fair Market Rent
Base Year: 1988
Tenant's Share: 21.9%
Brokers: Coldwell Banker
Exhibits:
- ---------
Exhibit A - Floor Plan
Exhibit B - Legal Description
Exhibit C - Rules and Regulations
Exhibit D - Construction Exhibit
Initials: Landlord ^^ ; Tenant ^^
----------------- ---------------
NOTE. This Basic Lease Information is provided solely as a convenience
- ----
to summarize certain Lease provisions and is not intended as a complete summary
of all material terms and conditions of the Lease. In the event of any
inconsistency between any information shown on this Basic Lease Information and
the provisions of the Lease, the provisions of the Lease govern.
<PAGE>
470 SPEAR STREET
LEASE
This Lease is made and entered in to as of the date specified in the Basic
Lease Information, by and between 470 SPEAR ASSOCIATES, a California limited
partnership ("Landlord") and the Tenant identified in the Basic Lease
Information.
IN CONSIDERATION OF THE MUTUAL COVENANTS AND AGREEMENTS CONTAINED IN THIS LEASE,
THE PARTIES AGREE AS FOLLOWS:
1. DEFINITIONS.
-----------
Certain terms used in this Lease and the Exhibits hereto shall have the
meaning set forth below for each such term. Certain other terms shall have the
meaning set forth elsewhere in this Lease and the Exhibits hereto.
1.1. Additional Charges. All charges and other amounts payable by
------------------
Tenant pursuant to the terms of the Lease other than Fixed Rent.
1.2. Base Year. The calendar year specified in the Basic Lease
---------
Information.
1.3. Base Year Operating Expenses. The Operating Expenses paid or
----------------------------
incurred by Landlord in the Base Year. If during the Base Year an average of
less then ninety-five percent (95%) of the net rentable area of the Building is
leased and occupied, then Base Year Operating Expenses shall be adjusted by
Landlord to equal an amount which would have been paid or incurred by Landlord
if an average of ninety-five percent (95%) of the net rentable area of the
Building had been leased and occupied during the entire Base Year.
1.4. Brokers. The real estate broker or brokers specified in the Basic
-------
Lease Information.
1.5. Building. The building and related improvements located on the
--------
Property. Any enlargements to the Building or additional improvements to the
Property shall be included in the definition of Building for purposes of this
Lease.
1.6. Common Area. The non-exclusive areas on individual floors of the
-----------
Building comprised of restrooms, janitor, telephone and electrical closets,
mechanical areas, elevator lobbies, public or fire corridors, service areas and
similar facilities maintained for the benefit of all Building tenants, but
excluding public Building stairs, elevator shafts, fire towers, flues, vents,
stacks, pipe shafts and vertical ducts.
1.7. Estimated Increased Operating Expenses. Landlord's estimate of
--------------------------------------
the increase in Operating Expenses in any calendar year over the Base Year
Operating Expenses, as the same may from time to time be adjusted in such
calendar year as specified in this Lease.
1.8. Existing Lease. That certain lease between Tenant and Hansal
--------------
Corporation, dated February 1, 1984, for space located at 450 Sansome Street,
San Francisco, California.
1.9. Expiration Date. December 31, 1997, or the last day of any
---------------
applicable Extended Term.
1.10. Fair Market Rent. The monthly rate (and any applicable
----------------
provisions for escalations) being charged for comparable office space in
comparable buildings located in the vicinity of the Building (in particular, the
south and north
<PAGE>
waterfront areas of San Francisco), with San Francisco Bay views, taking into
consideration term of the Lease, extent of service provided or to be provided,
the time the particular rate under consideration became or is to become
effective and any other relevant terms or conditions.
1.11. Fixed Rent. The sum specified in the Basic Lease Information, as
----------
adjusted pursuant to the provisions of Section 4.2.
1.12. Interest Rate. The per annum rate equal to the lesser of (i) the
-------------
reference rate, or succeeding similar index, of Bank of America in effect from
time to time plus two percent (2%), or (ii) the maximum rate allowed by
applicable usury law.
1.13. Landlord's Address. The address for Landlord specified in the
------------------
Basic Lease Information or such other address as Landlord shall designate from
time to time in accordance with the provisions of Article 20.
1.14. Landlord Delay. A delay in completion of construction of the
--------------
tenant improvements to be constructed in accordance with Exhibit D attached to
---------
this Lease caused solely as a result of an action by Landlord, as reasonably
determined by Landlord. If Tenant believes a Landlord Delay has occurred, then
Tenant shall deliver written notice to Landlord within two (2) days of the
occurrence of such event describing such alleged delay. Landlord shall
reasonably determine within two (2) days after receipt of such notice whether
such event constitutes a Landlord Delay. Landlord's reasonable determination
shall be binding on Tenant. A delay in construction of the Landlord's Work, as
defined in Exhibit D, shall not constitute a Landlord Delay.
---------
1.15. Lease Year. Each period of twelve (12) consecutive calendar
----------
months during the Term, commencing January 1, 1988. The last Lease Year shall
consist of the period between the date on which the Term expires or terminates
and the day after the last day of the preceding Lease Year.
1.16. License Termination Date. The date of termination of that
------------------------
certain License Agreement between Landlord and Bryant-Harrison Associates, a
California limited partnership concerning the right of Landlord to use and enter
upon certain real property located adjacent to the Property.
1.17. Operating Expenses. All expenses and costs (excluding costs
------------------
separately billed to and actually paid by specific tenants of the Building) of
every kind and nature incurred and paid by Landlord in, or properly allocable
to, a calendar year, in connection with the ownership, management, operation,
maintenance and preservation of the Project. Operating Expenses shall include
the following: (i) wages, salaries, payroll burdens and all related expenses and
benefits of all on-site and off-site employees, limiting such charges only to
amounts directly allocable to services rendered by the employees for the benefit
of the Project; (ii) the cost of all supplies, materials and rental equipment;
(iii) costs of all unreimbursed utilities supplied to or for the benefit of the
Project, including water, sewer, power, heating, lights, gas, cable TV and
communications facilities, waste disposal and ventilation; (iv) Project
management overhead costs and the costs of all property management, maintenance,
security, janitorial and other services for the Project and the equipment
therein, including alarm services, window cleaning, elevator services, Common
Area maintenance, and the fair market rent of, and the cost to operate, the
office of the property manager located in the Building, to the extent such
office is used for the benefit of the Project; (v) legal and accounting costs
for the Project, including the costs of audits conducted by certified public
accountants employed by Landlord; provided, however, that legal expenses shall
not include the cost of negotiating leases, termination of leases, extension of
leases, proceedings against any specific tenant, or legal costs incurred in
connection with the additional development and/or construction of the Project;
(vi) premiums and all other costs for all insurance carried by Landlord with
respect to the Project; (vii) costs of all repairs, replacements and general
<PAGE>
maintenance (except for repair costs paid by proceeds of insurance or by Tenant
or by other third parties, and alteration costs attributable solely to tenants
of the Project other than Tenant); (viii) any and all maintenance and operating
costs for the Common Area and all other areas of the Project used in common by
tenants of the Building or the public, including the Building entrance and
lobbies; public Building stairs, fire towers, elevator shafts, elevators, flues,
vents, stacks, pipe shafts and vertical ducts, windows, the Building exterior,
sidewalks, landscaping, service areas and loading and receiving facilities; (ix)
Real Property Taxes; (x) costs and expenses (excluding costs and expenses
relating to capital expenditures) levied, incurred or required to be paid,
either directly or indirectly, to comply with any and all laws, statutes,
ordinances, rules and regulations, or the requirements of governmental or public
authorities and/or utilities, including payroll, license, business, occupation
or other taxes and fees, any fees, charges or asessments arising out of or in
any way related to the treatment of the Project, or any portion thereof such as
parking facilities, as sources of air pollution, traffic, storm water run-off or
other adverse environmental effects, and transit taxes, assessments or fees;
(xi) depreciation on personal property located in or used in connection with the
Project, reasonably related to the useful life of such property; and (xii)
amortization of capital improvements made to the Project by Landlord which are
designed to improve the operating efficiency of the Project or which are
required under any governmental law or regulation applicable to the Project,
with amortization over such period as Landlord shall determine, together with
interest thereon at the rate paid by Landlord on funds borrowed for the purpose
of making such capital improvements. Operating Expenses shall not include taxes
payable by Tenant under this Lease, depreciation on the structural portion of
the Building (other than as specifically provided hereinabove), real estate
brokerage commissions, or interest and capital expenditures (other than as
specifically provided in this Section 1.17).
1.18. Permitted Use. Contract showroom and support uses in connection
-------------
with the conduct of, and consistent with the nature of, Tenant's business
described in the Basic Lease Information.
1.19. Premises. That portion of the Building outlined on the floor
--------
plan(s) attached hereto as Exhibit A, and situated on the floor(s) of the
---------
Building specified in the description of the Premises in the Basic Lease
Information, together with the appurtenant right to use in common and subject to
rules and regulations promulgated by Landlord from time to time, the Common
Area.
1.20. Project. The Building and the Property.
-------
1.21. Property. That certain real property located in the City and
--------
County of San Francisco, State of California, more particularly described in
Exhibit B hereto, upon which the Building is located. Any enlargements of or
- ---------
additions to the Property shall be included in the definition of Property for
purposes of this Lease.
1.22. Real Property Taxes. "Real Property Taxes" includes all of the
-------------------
following: (i) all real estate taxes and assessments, and all other taxes
relating to, or levied, assessed or imposed on, the Project, or any portion
thereof, or interest therein; (ii) all taxes, assessments, charges, levies,
fees, excises or penalties, general and special, ordinary and extraordinary,
unforeseen as well as foreseen, of any kind and nature imposed, levied upon,
measured by or attributable to Landlord's equipment, furniture, fixtures and
other property located in, or used in connection with, the Project, or levied
upon, measured by or reasonably attributable to the cost or value of any of the
foregoing; (iii) all other taxes, assessments, charges, levies, fees, or
penalties, general and special, ordinary and extraordinary, unforeseen as well
as foreseen, of any kind and nature imposed, levied, assessed, charged,
conformed or collected by any governmental authority or other entity either
directly or indirectly (A) for public improvements, user, maintenance or
development fees, transit, housing, police, fire, open space,
<PAGE>
streets, sidewalks, utilities, job training or other governmental services or
benefits, (B) upon or with respect to the development, possession, leasing,
operation, management, maintenance, alteration, repair, use or occupancy of, or
business operations in, the Project (C) upon, against or measured by the area of
the Project, or uses made thereof, or leases made to tenants thereof, and (D)
for environmental matters or as a result of the imposition of mitigation
measures, including parking taxes, employer parking regulations, or fees,
charges or assessments as a result of the treatment of the Project, or any
portion thereof or interest therein, as a source of pollution or storm water
runoff; (iv) any tax or excise, however described, imposed in addition to, or
in substitution partially or totally of, any or all of the foregoing taxes,
assessments, charges or fees; and (v) any and all costs, expenses and attorneys'
fees paid or incurred by Landlord in connection with any proceeding or action to
contest in whole or in part, formally or informally, the imposition, collection
or validity of any of the foregoing taxes, assessments, charges or fees. If by
law any Real Property Taxes may be paid in installments at the option of the
taxpayer, then Landlord shall include within Real Property Taxes only those
installments (including interest, if any) which would become due by exercise of
such option. Real Property Taxes shall not include any taxes, assessment fees
or charges for which Tenant is directly responsible under Article 6 below or
taxes payable by Landlord measured by Landlord's net income, or as franchise or
inheritance taxes. Notwithstanding the foregoing, Real Property Taxes shall not
include fifty percent (50%) of any increase in any Real Property Taxes resulting
solely as a result of a reassessment of the Property solely as a result of a
sale, exchange or other transfer by Landlord of all or any portion of its
interest in the Property.
1.23. Rent. Fixed Rent and Additional Charges.
----
1.24. Rent Commencement Date. July 1, 1988 plus the number of complete
----------------------
days, if any, of all Landlord Delays.
1.25. Security Deposit. The amount specified in the Basic Lease
----------------
Information.
1.26. Tenant's Address. The address for Tenant specified in the Basic
----------------
Lease Information, or such other address as Tenant designates from time to time
under Article 20.
1.27. Tenant's Share. The percentage specified in the Basic Lease
--------------
Information.
1.28. Term. The period from the date of this Lease to the Expiration
----
Date.
2. LEASE OF PREMISES.
-----------------
2.1. Premises. Landlord leases to Tenant and Tenant leases from
--------
Landlord the Premises, subject to and upon all the terms, covenants and
conditions contained in this Lease. Landlord and Tenant hereby stipulate that
the net rentable area of the Premises is 10,520 square feet. Neither Landlord
nor Tenant shall have any right during the Term to dispute, challenge, contest
or otherwise seek to amend the designation of the net rentable area of the
Premises set forth in this Section 2.1.
2.2. Landlord's Reserved Rights. Landlord specifically reserves from
--------------------------
the leasehold estate hereunder (i) all exterior walls and windows bounding the
Premises, and all space located within the Premises for public Building stairs,
elevator shafts, fire towers, flues, vents, stacks, pipe shafts, vertical ducts,
conduits, electric and all other utilities, air-conditioning, sinks or other
Building facilities, the use thereof, and access thereto through the Premises
for operation, maintenance, repair or replacment thereof, and (ii) the right
from time to time, without unreasonable interference with Tenant's use to
install, remove or
<PAGE>
relocate any of the foregoing for service to any part of the Building to
locations which will not materially interfere with Tenant's use of the Premises,
to make alterations or additions to and to build additional stories on the
Building, to alter or relocate any other Common Area facility or any other
common facility, and to make changes or alterations therein or enlargements
thereof. Subject to the rights of Tenant specified in this Lease, Landlord shall
have the sole and exclusive right to possession and control of the Common Area
and all other public areas of the Project. Tenant shall have the right, at its
sole cost and expense, to install, and keep in place during the Term, above the
windows of the Premises a sign identifying the name of Tenant; provided,
however, that Landlord shall have the right, in its reasonable discretion, to
approve the size, style, color and other aspects of any such sign.
2.3. No Representations or Warranties. Neither Landlord nor Landlord's
--------------------------------
agent have made any representations or warranties with respect to the Premises,
the Project or this Lease except as expressly set forth in this Lease, and no
rights, easements or licenses are or shall be acquired by Tenant by implication
or otherwise unless expressly set forth in this Lease.
2.4. Parking Spaces. Before the License Termination Date, Tenant shall
--------------
have the right to lease from Landlord, at a rental rate determined by Landlord
from time to time to equal the fair market rental rate sixteen (16) parking
spaces located on the Property. After the License Termination Date, Tenant shall
have the right to lease from Landlord, at a rental rate determined by Landlord
from time to time equal to the fair market rental rate, four (4) parking spaces
located on the Property. In addition, after the License Termination Date,
Landlord shall use due diligence to obtain, at Tenant's sole cost and expense,
four (4) additional parking spaces for Tenant on vacant lots adjacent to the
Property.
3. TERM.
3.1. Initial Term. This Lease shall be effective as of the date
------------
hereof. The Term shall commence on January 1, 1988 and shall expire on the
Expiration Date unless the Term is earlier terminated as provided in this Lease.
3.2. Delivery of Possession. If for any reason completion of
----------------------
construction of tenant improvements on the Premises is delayed and does not
occur before January 1, 1988, this Lease shall not be void or voidable, nor
shall Landlord be liable for any loss or damage as a result thereof. A delay in
completion of construction of the tenant improvements shall not extend the Term
or otherwise affect the obligations of Landlord or Tenant under this Lease.
Notwithstanding the foregoing, if the Landlord Delays exceed ninety (90) days,
and if solely as a result of such ninety (90) days of Landlord Delays Tenant is
unable to substantially complete construction of the tenant improvements on the
Premises by April 1, 1988, then Tenant may terminate this Lease by giving
Landlord written notice of termination at any time after April 1, 1988 and
before April 10, 1988.
3.3. Options to Extend. Subject to the conditions set forth in Section
-----------------
3.4, Landlord grants to Tenant an option to extend (the "Option") the Term for
two (2) consecutive periods of five (5) years each (the "Extended Terms").
Tenant shall have the right to exercise the Option with respect to the first
five (5) year Extended Term without concurrently exercising the Option with
respect to the second (2nd) Extended Term. The Option shall be exercised by
Tenant delivering to Landlord written notice of its intent to extend the Term
not less than nine (9) months and not more than two (2) years before the
expiration of the initial Terin of the Lease, or the first Extended Term, as the
case may be. The Extended Terms shall be on the same terms, covenants and
conditions as provided in this Lease, except that (i) there shall be no further
options to extend the Term, and (ii) the Fixed Rent for the Extended Terms, if
exercised, shall be adjusted to equal the greater of: (A) the Fixed Rent for the
Lease Year immediately preceding such Extended Term, or (B) ninety percent (90%)
of the Fair Market Rent, defined below, on the first (1st) day of such Extended
Term, as determined in accordance with the provisions of
<PAGE>
Sections 4.2.1 - 4.2.6. If Tenant exercises the Option, then Landlord shall
deliver a written notice to Tenant, at least six (6) months before commencement
of the applicable Extended Term, setting forth the Fair Market Rent. If Tenant
wishes to dispute the amount of Fair Market Rent, Tenant shall deliver a written
notice to Landlord, not later than thirty (30) days after delivery of Landlord's
notice, demanding appraisal of Fair Market Rent in accordance with the
provisions of Sections 4.2.1 - 4.2.6. Tenant's failure to deliver this notice in
a timely manner shall bind Tenant to the Fair Market Rent as determined by
Landlord. If Tenant demands appraisal and the appraisal is not concluded before
the date upon which Fair Market Rent shall be effective, Tenant shall pay Fair
Market Rent as determined by Landlord on and after such effective date. If the
amount of Fair Market Rent as determined by appraisal is greater than or less
than Landlord's determination, then any adjustment required to correct the
amount previously paid by Tenant shall be made by payment by the appropriate
party within ten (10) days after such determination of Fair Market Rent.
3.4. Conditions to Exercise. Tenant's right to exercise the Option and
----------------------
extend the Term for either Extended Term is subject to the following conditions
precedent, which are solely for the benefit of Landlord.
3.4.1. Lease in Effect. This Lease shall be in effect at the time
---------------
notice of exercise of the Option is given and on the last day of the initial
Term or the first Extended Term, as the case may be;
3.4.2. No Default. Tenant shall not be in default under any
----------
provision of this Lease at the time notice of exercise of the Option is given or
on the last day of the initial Term of the Lease or the first Extended Term, as
the case may be;
3.4.3. Occupancy. Tenant shall be in occupancy of the Premises, and
---------
no assignment of Tenant's interest in the Lease, and no sublease of fifty
percent (50%) or more of the net rentable area of the Premises, shall have
occurred, at the time notice of exercise of the Option is given and on the last
day of the initial term of the Lease or the first Extended Term, as the case may
be;
3.4.4. No Defaults During Term. Tenant shall have committed no more
-----------------------
than two (2) Events of Default during the initial Term or the first (1st)
Extended Term, as the case may be; and
3.4.5. Net Worth. The net worth of Tenant is reasonably determined
---------
by Landlord to be comparable to the net worth of tenants renting comparable
space at comparable rents in comparable buildings.
4. RENT: ADDITIONAL CHARGES.
------------------------
4.1. Fixed Minimum Monthly Rent. Except as otherwise provided in
--------------------------
Articles 12 and 14, commencing on the Rent Commencement Date and continuing
until the Expiration Date, Tenant shall pay to Landlord Fixed Rent in the
amounts and during the periods described in the Basic Lease Information. Fixed
Rent shall be payable by Tenant in consecutive monthly installments on or before
the first day of each month, in advance. If the Rent Commencement Date should
occur on a day other than the first day of a calendar month or if the Expiration
Date should occur on a day other than the last day of a calendar month, then the
Fixed Rent for such fractional month shall be prorated upon a daily basis based
upon a thirty (30) day calendar month.
4.2. Fair Market Rent. From the first (1st) day of the sixth (6th)
----------------
Lease Year until the end of the tenth (10th) Lease Year, the Fixed Rent shall
equal the greater of: (i) Fourteen Thousand Six Hundred Eighty-Five and 00/100
Dollars ($14,685.00) per month, or (ii) the lesser of (A) Eighteen Thousand Five
Hundred Fourty-Two and 00/100 ($18,542.00) per month or (B) ninety percent (90%)
of Fair Market Rent. For purposes of determination of Fixed Rent for and after
the sixth
<PAGE>
(6th) Lease Year, Fair Market Rent shall be determined in accordance with the
provisions of this Section 4.2. Landlord shall deliver a written notice to
Tenant, at least six (6) months before commencement of the sixth (6th) Lease
Year, setting forth the Fair Market Rent. If Tenant wishes to dispute the amount
of Fair Market Rent, Tenant shall deliver a written notice to Landlord, not
later than thirty (30) days after delivery of Landlord's notice, demanding
appraisal of Fair Market Rent in accordance with the provisions of this Section
4.2. Tenant's failure to deliver this notice in a timely manner shall bind
Tenant to the Fair Market Rent as determined by Landlord. If Tenant demands
appraisal and the appraisal is not concluded before the date upon which Fair
Market Rent shall be effective, Tenant shall pay Fixed Rent as computed on the
basis of Fair Market Rent as determined by Landlord on and after such effective
date. If the amount of Fair Market Rent as determined by appraisal is greater
than or less than Landlord's determination, then any adjustment required to
correct the amount previously paid by Tenant shall be made by payment by the
appropriate party within ten (10) days after such determination of Fair Market
Rent.
4.2.1. Appraisal. If Tenant disputes the amount claimed by Landlord
---------
as Fair Market Rent, the dispute shall be resolved in accordance with the
procedures described in this Section 4.2. The judgment or the award rendered in
such proceeding may be entered in any court having jurisdiction and shall be
final and binding between the parties, absent fraud or gross negligence. The
proceeding shall be conducted and determined in the City of San Francisco.
4.2.2. Appraiser Designation. Tenant's demand for appraisal pursuant
---------------------
to Section 4.2 shall specify the name and address of the person to act as the
appraiser on Tenant's behalf. Within ten (10) days after receipt of Tenant's
demand, Landlord shall notify Tenant of the name and address of the person
designated by Landlord to act as the appraiser on Landlord's behalf. If
Landlord does not timely notify Tenant of the appointment of its appraiser, then
Tenant's appraiser shall be the sole appraiser to determine the Fair Market
Rent.
4.2.3. Third Appraiser Selection. If two appraisers are chosen, the
-------------------------
appraisers shall meet within ten (10) days after the second appraiser is
appointed. and if within ten (10) days after such first meeting the two
appraisers are unable to agree upon a determination of Fair Market Rent, they
shall appoint a third appraiser, with similar qualifications. If they are unable
to agree upon a third appraiser within five (5) days, the third appraiser shall
be selected by Landlord and Tenant. If Landlord and Tenant cannot agree upon the
third appraiser within a further period of five (5) days, then either party, on
behalf of both, may request appointment of the third appraiser by the then
president (or other head) of the San Francisco branch of the American Institute
of Real Estate Appraisers, or if such institute does not exist then any similar
institute or association selected by Landlord and Tenant.
4.2.4. Determination of Fair Market Rent. If a third appraiser is
---------------------------------
selected, Landlord's and Tenant's appraisers shall each state in writing their
determination of Fair Market Rent, supported by the reasons therefore, and
deliver counterpart copies to the third appraiser and Landlord and Tenant. The
third appraiser shall select which of the two proposed determinations most
closely approximates his determination of Fair Market Rent. The third appraiser
shall have no right to propose a middle ground or any modification of either of
the two resolutions. The resolution he chooses as most closely approximating his
determination shall constitute the decision of the appraisers and shall be final
and binding upon the parties:
4.2.5. Appraiser's Qualifications. All appraisers selected pursuant
--------------------------
to this Section 4.2 shall be unaffiliated to either Landlord or Tenant, shall be
qualified as real estate appraisers familiar with the fair market rent of
comparable space in the same area of San Francisco, and shall be impartial
members of the American Institute of Real Estate Appraisers, or any successor
organization, with a then current senior designation of MAI, or similar
successor designation,
<PAGE>
currently certified under the continuing education program, and shall have at
least ten (10) years experience in appraising similar office space in San
Francisco.
4.2.6. Successor Appraisers. If any appraiser fails, refuses, or is
--------------------
unable to act, his successor shall be appointed by him, but in the case of the
third appraiser, his successor shall be appointed in the same manner as provided
for appointment of the third appraiser above. Each party shall pay the fee and
expenses of its respective appraiser and both parties shall share equally the
fee and expenses of the third appraiser, if any, and attorneys' fees and
expenses of counsel for the respective parties and of witnesses shall be paid by
the respective party engaging such counsel or calling such witnesses. The
appraisers shall have the right to consult experts and competent authorities
with factual information or evidence pertaining to a determination of Fair
Market Rent, but any such consultation shall be made in the presence of both
parties with full right on their part to cross-examine. The appraisers shall
render their decision and award in writing with counterpart copies to each
party. The appraisers shall have no power to modify the provisions of this
Lease.
4.3. Additional Charges. Tenant shall pay to Landlord all Additional
------------------
Charges, including without limitation all amounts due pursuant to the
provisions of Articles 5 and 6 and the Exhibits hereto. All such amounts and
charges shall be payable to Landlord at Landlord's Address. Landlord shall have
the same remedies for Tenant's failure to pay any item of Additional Charges
when due as for failure to pay any installment of Fixed Rent when due.
4.4. Manner of Payment. All payments of Fixed Rent and Additional
-----------------
Charges shall be made without prior demand or notice and without offset,
deduction or counterclaim, in lawful money of the United States of America. All
Rent shall be paid to Landlord at Landlord's Address.
5. PAYMENT OF OPERATING EXPENSES.
-----------------------------
5.1. Payment By Tenant. Tenant shall pay to Landlord in the manner
-----------------
provided in this Article 5, Tenant's Share of the total increase, if any, in
Operating Expenses in each calendar year over the Base Year Operating Expenses.
Tenant shall receive no refund, credit or reduction in Fixed Rent if the
Operating Expenses in any such calendar year are less than the Base Year
Operating Expenses.
5.2. Manner of Payment. On or before December 31, 1988 and
-----------------
December 31 of each subsequent calendar year during the Term, or as soon
thereafter as practicable, Landlord shall furnish to Tenant an itemized
statement setting forth the Estimated Increased Operating Expenses. On the first
day of each calendar month during the ensuing calendar year, Tenant shall pay in
advance one-twelfth (1/12th) of Tenant's Share of the Estimated Increased
Operating Expenses; provided, however, that if such notice is not given in
December, Tenant shall continue to pay one-twelfth (1/12th) of Tenant's Share of
the Estimated Increased Operating Expenses of the previous calendar year until
the month after such statement is given. Within one hundred twenty (120) days
after the end of each calendar year during the Term or as soon thereafter as
practicable, Landlord shall furnish to Tenant a statement of Tenant's Share of
the actual increase or decrease in Operating Expenses for such calendar year
above or below the Base Year Operating Expenses. If Tenant's Share of Estimated
Increased Operating Expenses paid by Tenant during such calendar year is less
than Tenant's Share of the actual increase in Operating Expenses for such period
over the Base Year Operating Expenses as shown on Landlord's statement, then
Tenant shall pay the difference to Landlord within ten (10) days after the date
of Landlord's statement. If Tenant's Share of Estimated Increased Operating
Expenses paid by Tenant during such calendar year is more than Tenant's Share of
the actual increase in Operating Expenses for such period over the Base Year
Operating Expenses as shown on such statement, then Tenant shall be allowed a
credit on future payments of Tenant's Share of Estimated Increased Operating
Expenses for the amount of such excess, or, if the statement is given by
Landlord with respect to the calendar year in which the Term expires, Landlord
shall pay such excess to
<PAGE>
Tenant together with such statement. Landlord's statements of Operating
Expenses, including Operating Expenses for the Base Year, shall be prepared and
certified to be correct by an officer or principal of Landlord, shall be
prepared in accordance with acceptable accounting principles, and shall be
binding and conclusive on the parties.
5.3. Adjustments to Operating Expenses. If at any time it appears to
---------------------------------
Landlord that the actual increases in Operating Expenses for any calendar year
during the Term will exceed the Estimated Increased Operating Expenses set forth
in Landlord's statement to Tenant by more than five percent (5%), then Landlord
shall have the right by notice to Tenant to revise the Estimated Increased
Operating Expenses for such year and subsequent payments of Tenant's Share
thereof shall, commencing with the first month after which Tenant receives such
notice, be increased based upon such revised statement.
5.4. Prorations. For the calendar years in which the Term commences
----------
and expires, Tenant's Share of increases in Operating Expenses shall be prorated
based on the number of days in the calendar year during which the Term is in
effect. Expiration of the Term of this Lease shall not affect the obligations of
Landlord or Tenant pursuant to Section 5.2 hereof to be performed after such
expiration.
5.5. Review of Records. Not more than once during any calendar year,
-----------------
and upon thirty (30) days prior written notice to Landlord, Tenant shall have
the right to review Landlord's books and records (including all applicable
source documents) with respect to the Base Year Operating Expenses and with
respect to Estimated Increased Operating Expenses and the Operating Expenses of
any calendar year within one (1) year of the date of such review.
5.6. Occupancy Adjustments of Operating Expenses. If an average of
-------------------------------------------
less than ninety-five percent (95%) of the Building is leased and occupied
during any entire calendar year, then Operating Expenses, including Base Year
Operating Expenses, for such calendar year shall be adjusted by Landlord to
equal an amount which would have been paid or incurred if an average of ninety-
five percent (95%) of the net rentable area of the Building had been leased and
occupied during the entire calendar year.
6. TAXES PAYABLE BY TENANT.
-----------------------
In addition to payment of Fixed Rent and Tenant's Share of increases in
Operating Expenses, Tenant shall pay prior to delinquency, any and all taxes,
assessments, license fees, levies, business taxes, impositions, transit
development fees, assessments or charges for housing funds, service payments, in
lieu taxes or fees, and any other governmental fees, excises or charges of any
kind or character, general and special, ordinary and extraordinary, whether or
not customary or now within the contemplation of the parties hereto, (i) levied
against, upon, measured by or attributable to Tenant's equipment, furniture,
fixtures and other personal property located in the Premises or any leasehold
improvements made in or to the Premises by or for Tenant, regardless of whether
title to such improvements shall be in Landlord or Tenant, or levied upon,
measured by or reasonably attributable to the cost or value of any of the
foregoing; (ii) levied upon, assessed against or measured by the Fixed Rent or
any other amounts payable to Landlord under this Lease, including without
limitation any gross income taxes, excise tax or so-called value added tax
levied by any governmental authority or other entity with respect to the receipt
of such payments; (iii) levied upon or with respect to the development,
possession, 1easing, operation, management, maintenance, alteration, repair, use
or occupancy by Tenant of, or business operations of Tenant in, the Premises or
any portion thereof; or (iv) levied upon or with respect to this transaction,
any document to which Tenant is a party creating or transferring any interest or
an estate in the Premises or any leases, subleases, licenses or concessions made
to Tenant, any subtenant or other occupant of the Premises; or (v) enacted by
way of substitution for or in addition to all or any part of the foregoing.
Upon demand by Landlord, Tenant shall furnish Landlord satisfactory
<PAGE>
evidence of these payments. If any of the foregoing taxes, assessments, fees or
charges are included in tax bills for Real Property Taxes, then Tenant shall pay
to Landlord the amount attributable to the taxes, fees, assessments or charges
so included immediately upon demand by Landlord.
7. CONDITION AND OPERATION OF THE BUILDING.
---------------------------------------
7.1. As Is. Subject to the provisions of Exhibit D hereto,
----- ---------
Tenant has carefully examined the Premises and is satisfied with the current
condition of the Premises. By occupying the Premises as a tenant, Tenant
formally acdepts the Premises and acknowledges that the Premises are in the
Condition called for hereunder. No representation or warranty is made or shall
be deemed made by Landlord concerning the nature, quality or suitability for
Tenant's business of the Building or the Premises, or the existence of any
hazardous substances in, on, upon, under or about the Premises or the Project,
and Tenant shall have no rights against Landlord by reason of such matters or
any claimed deficiencies therein, it being expressly understood that Tenant is
accepting the Premises As Is.
7.2. Alteration of Building. Landlord reserves the right, at any time
----------------------
and from time to time, to make alterations or additions to the Building; to
change, add to, eliminate or reduce the extent, size, shape or configuration of
any aspect of the Building or its and operations; to change the arrangement,
character, usp or location of corridors, stairs, toilets, mechanical, plumbing,
electrical or other operating systems or any other parts of the Building;
provided, however, that none of the foregoing acts shall materially adversely
affect the quality of the Building. None of the foregoing acts shall be deemed
an actual or constructive eviction of Tenant, shall entitle Tenant to any
reduction of Rent or shall result in any liability of Landlord to Tenant.
Landlord shall have the exclusive rights to the airspace above and around, and
the subsurface below, the Premises and other portions of the Building. Landlord
shall have the exclusive right to use all exterior walls, roofs and other
portions of the Building for signs, notices and other promotional purposes.
Tenant shall have the right to approve all signs to be placed on the exterior of
the Building (or visible from the exterior of the Building) as to style, size,
shape and configuration, which approval shall not be unreasonably withheld or
delayed; provided, however, that if Tenant has not approved or disapproved any
such sign within five (5) days after receipt from Landlord of notice requesting
Tenant's approval, then Tenant shall be deemed to have approved any such sign.
7.3. Security and Life Safety. Tenant shall furnish Landlord during
------------------------
the Term telephone numbers of Tenant's employees for Landlord to call in case of
an emergency in connection with the Premises or the Building. Tenant shall fully
cooperate with all of Landlord's efforts to satisfy the requirements of any
governmental agency in connection with security, fire and life safety rules,
ordinances, regulations, recommendations or guidelines, including the following:
(i) the designation of a "floor warden", if requested by Landlord, (ii) the
cooperation with, and participation in, fire drills and similar exercises, (iii)
the distribution and/or posting of notices and information regarding security
and life safety, (lv) the designation of one or more persons who shall serve as
the direct liaison with Landlord concerning security and life safety matters,
and (v) the purchase and maintenance of fire extinguishers in reasonably
convenient locations within the Premises. Landlord shall have the right from
time to time to adopt such policies, procedures and programs as it shall deem
necessary or appropriate for the security of the Project and Tenant shall
cooperate with Landlord in the enforcement of such policies, procedures and
programs. Specifically, but without limiting the generality of the foregoing,
Landlord reserves the right to exclude from the Building between the hours of
6:00 p.m. and 7:00 a.m. and at all hours on Saturdays, Sundays and holidays all
persons who do not present a valid pass to the Building or who are not
specifically approved by Tenant or Tenant's agents. Landlord shall furnish
passes to persons for whom Tenant requests the same in writing and Tenant shall
be solely responsible for all persons for whom it requests passes and shall be
liable to Landlord for all acts of
<PAGE>
such persons. Landlord sha11 in no case be liable for damages for any error
with regard to the admission to or exclusion from the Building of any person and
Landlord shall have the right at any time and from time to time to exclude any
person from the Building for any reason within Landlord's reasonable discretion.
8. USE AND COMPLIANCE WITH LAWS.
----------------------------
8.1. Use of Premises. Tenant sha11 use and occupy the Premises during
---------------
the Term solely for the purpose specified in the Basic Lease Information and for
no other purpose or purposes without the prior written consent of Landlord.
8.2. No Nuisance. Tenant sha11 not suffer, permit or commit any waste,
-----------
nor allow, suffer or permit any odors, vapors, steam, water, vibrations, noises
or undesirable effects to emanate from the Premises or from any apparatus,
equipment or installation in the Premises into other portions of the Building or
outside the Building. Tenant shall not allow, suffer or permit the Premises or
any use thereof to constitute a nuisance or interfere with the safety, comfort
or enjoyment of the Building by Landlord or any other occupants of the Building
or their licensees, invitees, customers, visitors and clients, or any others
lawfully in, upon or about the Building or its environs. Tenant shall not place
any loads upon the floor, walls or ceiling of the Premises which endanger the
structure nor place any harmful liquids in the drainage system of the Building.
8.3. Compliance with Laws. Tenant, at Tenant's cost and expense, shall
--------------------
with respect to the Premises or the use or occupancy of the Premises by Tenant
comply with (i) all applicable laws, orders, rules, ordinances and regulations
of federal, state, county and municipal authorities, (ii) all directions,
pursuant to law, of all public officers, and (iii) all recorded documents
affecting the Premises, except that Tenant shall not be required to make any
alterations of the structure, foundation, exterior walls or exterior roof of the
Building in order to comply unless such alterations of the structure,
foundation, exterior walls or exterior roof of the Building shall be
necessitated or occasioned, in whole or in part, by the acts, omissions or
negligence of Tenant or any person claiming through or under Tenant, or any of
their servants, invitees, employees, contractors, agents, visitors or licensees,
or by the use or occupancy or manner of use or occupancy of the Premises by
Tenant or any such person. All work and installations made or performed by or on
behalf of Tenant or any person claiming through or under Tenant pursuant to the
provisions of this Section 8.3 shall be made in conformity with, and subject to
the provisions of, Section 10.3.
8.4. Compliance with Insurance Requirements. Tenant shall not do
--------------------------------------
anything, or permit anything to be done, in or about the Premises that might (i)
invalidate or be in conflict with, or cause cancellation of, the provisions of
any fire, public liability or other insurance policies covering the Project or
any property located therein, (ii) result in a refusal by casualty insurance
companies to insure the Project or any such property in amounts and on terms and
conditions satisfactory to Landlord, (iii) subject Landlord to any liability or
responsibility for injury to any person or property by reason of any use,
business operation or other practice conducted in the Premises, or (iv) cause
any increase in any insurance rates applicable to the Project or property
located therein. TENANT, at Tenant's expense, shall comply with all rules,
orders, regulations or requirements of any board of fire underwriters or other
similar body.
8.5. Right to Contest. Tenant may contest or review, by procedures
----------------
permitted by applicable law or insurance policies, at its own expense, any
order, requirement, law, ordinance, rule or regulation described in Sections 8.3
or 8.4, and may delay compliance therewith if permitted by such law or policy,
provided that Landlord or any other tenant or owner of the Project is not
subject to civil liability or criminal prosecution as a result thereof and
Landlord's title to or interest in, or such tenants' or owners' business in or
title to, the Project, or any portion thereof, is not subjected to forfeiture,
involuntary sale, loss or closure as a result thereof. Tenant shall indemnify,
defend, protect and hold
<PAGE>
Landlord and such other tenants and owners harmless from and against any and all
liability, loss, cost, damage or expense (including attorneys' fees) resulting
from or in connection with any contest hereunder. Any contest shall be conducted
with all due diligence. Tenant shall diligently comply with any final, non-
appealable decision in any such contest.
9. ALTERATIONS, TENANT'S PROPERTY. TENANT'S WORK AND LIENS.
-------------------------------------------------------
9.1. Alterations By Tenant. Tenant shall not make or allow to be made
---------------------
any alterations, additions or improvements in or to the Premises (collectively,
"Alterations") without Landlord's prior written consent, which sha11 not be
unreasonably withheld. All Alterations approved by Landlord and undertaken by
Tenant shall be done in accordance with the provisions of Section 10.3, and such
other requirements as Landlord may deem necessary or appropriate.
9.2. Title to Alterations. All Alterations shall become the property
--------------------
of Landlord, and shall be surrendered to Landlord upon the expiration or earlier
termination of this Lease; provided, however that this provision shall not apply
to furniture owned by Tenant.
9.3. Tenant's Work. Concurrently with execution of this Lease, Tenant
-------------
shall execute that certain Construction Exhibit in the form attached to this
Lease. Landlord and Tenant shall construct the work, described in the
Construction Exhibit, in accordance with the terms of the Construction Exhibit.
9.4. Liens. Tenant shall keep the Premises and the Project free from
-----
any liens arising out of any (i) work performed or material furnished to or for
the Premises, and (ii) obligations incurred by or for Tenant or any person
claiming through or under Tenant. Tenant sha1l, within ten (10) days following
the imposition of any such lien, cause such lien to be released of record by
payment or posting of a bond fully satisfactory to Landlord in form and
substance. Landlord shall have the right at all times to post and keep posted on
the Premises any notices permitted or required by law, or that Landlord shall
deem proper for the protection of Landlord, the Premises, the Project and any
other party having an interest therein, from mechanics', materialmen's and other
liens. In addition to all other requirements contained in this Lease, Tenant
shall give to Landlord at least ten (10) business days prior written notice
before commencement of any construction on the Premises.
10. REPAIRS AND MAINTENANCE.
-----------------------
10.1. Landlord's Obligations. Subject to the obligations of Tenant set
----------------------
forth in Section 10.2 and the other provisions of this Lease, Landlord shall
maintain, in functional condition, the Common Area, the foundations, bearing and
exterior walls, and exterior roof of the Building, all Building standard lights,
all unexposed plumbing and electric Systems, all windows, window frames, gutters
and downspouts on the Building, and heating and ventilating systems servicing
the Premises. In addition, Landlord shall remove from the Building any hazardous
substances, including asbestos, existing as of the date of this Lease which are
in excess of levels set forth by the State of California or the United States.
Landlord shall have no obligation to make any repairs or replacement hereunder
until the expiration of ten (10) days following written notice from Tenant to
Landlord of the need therefor; provided, however, Landlord shall respond in an
appropriately diligent and speedy manner in connection with any emergency
situation. Tenant waives any right now or hereafter granted by law to make any
repairs under this Section 10.1 upon Landlord's failure to do so hereunder or
otherwise, including any rights under Sections 1941, 1942 and 1942.5 of the
California Civil Code, or under any similar law now or hereafter effect.
Landlord shall not be liable for and, except as provided in Article 12, there
shall be no abatement of Rent with respect to, any injury to or interference
with Tenant's business arising from any repairs, maintenance, alteration or
improvement in or to
<PAGE>
any portion of the Building, including the Premises, or in or to the fixtures,
appurtenances and equipment therein.
10.2. Tenant's Obligations. Tenant sha1l maintain the Premises
--------------------
(including without limitation all signs, metal work, doors, door jambs, door
hardware, door closers, non-bearing interior walls, partitions, floors,
ceilings, appliances, fixtures and all exposed plumbing, electrical and EVAC
systems located within the Premises) in good, clean, safe and sanitary order and
condition and, at Tenant's sole cost and expense, shall make all repairs and
replacements as and when Landlord deems necessary to preserve the Premises in a
good, clean, safe and sanitary order and condition. Tenant sha11 be responsible
for such structural repairs or structural replacements to the Premises as are
necessitated or occasioned by, and be responsible for any and all damage to the
Building caused by, the acts, omissions or negligence of Tenant or any person
claiming through or under Tenant, or any of their servants, employees,
contractors, agents, visitors or licensees, or by the use or occupancy or manner
of use or occupancy of the Premises by Tenant or any such person; the repair of
any such damage sha1l be made by Landlord, at such times as Landlord deems
necessary (whether after normal business hours, during weekends or otherwise),
at Tenant's cost and expense; and Tenant sha1l reimburse to Landlord all such
costs and expenses, together with a management and administration fee of ten
percent (10%) of the amount thereof, within ten (10) days after submission by
Landlord to Tenant of a statement of the amount thereof; provided, however, that
Tenant shall have the right, subject to Landlord's reasonable approval and
subject to compliance with the provisions of Section 10.3, to repair
------------
such damage at Tenant's cost and expense (excluding payment of any
administrative fee to Landlord) at such times as Landlord deems necessary.
10.3. Conditions Applicable to Repairs. All repairs, replacements and
--------------------------------
reconstruction made by or on behalf of Tenant or any person claiming through or
under Tenant shall be made and performed (i) diligently, at Tenant's sole cost
and expense, in a good and workmanlike manner and at such time and in such
manner as Landlord may reasonably designate, (ii) by contractors approved in
advance by Landlord, (iii) so that the repairs, replacements or reconstruction
shall be at least equal in quality, value and utility to the original work or
installation, (iv) in accordance with such reasonable requirements as Landlord
may impose with respect to insurance and bonds to be obtained by Tenant in
connection with the proposed work, and (v) in accordance with the Rules and
Regulations for the Building adopted by Landlord from time to time and in
accordance with all applicable laws and regulations of governmental authorities
having jurisdiction over the Premises.
10.4. Landlord's Rights. If Tenant fails to perform Tenant's
-----------------
obligations under Section 10.2, Landlord shall give Tenant notice of such acts
as are reasonably required to fulfill such obligations. If Tenant fails to
commence the work within thirty (30) days after notice and diligently prosecute
the work to completion, then Landlord sha11 have the right (but not the
obligation) to do such acts or expend such funds at the expense of Tenant as are
reasonably required to perform such work. Any amount so expended by Landlord
sha1l be paid by Tenant to Landlord promptly after demand with interest at the
Interest Rate. Landlord sha1l have no liability to Tenant for any damage to, or
interference with Tenant's use of, the Premises, or inconvenience to Tenant as a
result of performing any such work.
11. UTILITIES AND OTHER SERVICES.
----------------------------
11.1. Services to the Premises. Unless the Premises are separately
------------------------
metered, during the Term, Landlord shall furnish the Premises with the following
services: (i) hot and cold water at those points of supply provided for general
use of other tenants in the Project, in an amount sufficient for use of the
Premises as showroom space; (ii) central heat and ventilation at such business
hours as Landlord normally furnishes such services to all other tenants in the
Project and at such temperatures and in such amounts as are reasonably
considered
<PAGE>
by Landlord to be standard, or such shorter period, temperature or amounts as
may be prescribed by any applicable law, ordinance, rule, policy or regulation
adopted by any utility or governmental agency; (iii) elevator service; and (iv)
electrical facilities to provide sufficient power for a reasonable number of
typewriters, microcomputers, one mini-computer and other office machines of
similar electrical consumption, but not including electricity required for
additional mini-computers or other electronic data processing equipment, special
lighting of a type other than, or in excess of, Building standard, and any other
item of electrical equipment which requires a voltage other than 110 volts
single phase.
11.2. Standard of Services. All services under Section 11.1 shall be
--------------------
furnished in a manner customary and usual in comparable San Francisco buildings.
In particular, heat, ventilation and air-conditioning shall be furnished to the
Premises during the hours of 8:00 a.m. to 8:00 p.m., Monday through Friday, and
9:00 a.m. to 6:00 p.m. on Saturday. If Tenant desires or requests any such
services in amounts in excess of those deemed by Landlord to be Building
standard in accordance with the foregoing and if Landlord. elects to provide
such additional services, Tenant shall pay Landlord the cost of providing such
additional services, together with an administration fee equal to ten percent
(l0%) of such cost, within ten (10) days of presentation of a statement therefor
by Landlord to Tenant.
11.3. Additional Services. Without the prior written consent of
-------------------
Landlord, which Landlord shall not unreasonably withhold, Tenant shall not use
any apparatus or device in the Premises, or take any other actions, which will
increase the amount of water or electricity furnished or supplied for use of the
Premises as general office space in excess of the amounts described in Section
11.1(i) or (iv); nor shall Tenant connect with electric current (except through
existing electrical outlets in the Premises) or water pipes, any apparatus or
device for the purposes of using electrical current or water. As a condition to
Landlord's consent to any of the foregoing, Landlord may install an electric
meter in the Premises to measure the amount of electricity consumed by any
excess use. The cost of such meters and of the installation, maintenance, and
repair thereof, and the cost of the installation, maintenance or repair of any
additional or modified electrical, water or other utility systems at the request
of Tenant, shall be paid by Tenant, and promptly upon demand by Landlord, Tenant
shall pay the cost of all excess water and electricity at the rates charged by
the provider thereof. Prior to installation of any apparatus or device in the
Premises which will use current in excess of 110 volts, Tenant shall deliver to
Landlord, for Landlord's review and approval, the electrical specifications for
the apparatus or device provided by the manufacturer. This obligation shall be
in addition to, and not in lieu of, Tenant's obligation to obtain the consent of
Landlord to use any such apparatus or device under the provisions of this
Section 11.3. If Tenant's leasehold improvements are not consistent with
Building standard improvements, then Tenant shall pay any additional cleaning
costs attributable thereto. All costs payable by Tenant under this Section 11.3
shall include an administration fee equal to ten percent (l0%) of such costs and
shall be payable by Tenant from time to time within ten (10) days of the
presentation of a statement therefor by Landlord.
11.4. Interruption. Failure by Landlord to any extent to furnish
------------
any service herein specified or any cessation thereof due to any cause including
accident, making of repairs, alterations or improvements, unusually severe
weather, unusual difficulty or ability to obtain services or supplies from
sources usually used for the Project, labor difficulties or other causes beyond
Landlord's reasonable control or the limitation, curtailment, rationing or
restrictions on use of water, electricity, gas or any other form of energy or
service serving the Premises or the Project shall not render Landlord liable in
any respect for damages of any kind, including without limitation to person,
property or business, nor be construed as an eviction of Tenant nor work an
abatement of Rent, nor relieve Tenant of any obligation under this Lease,
including the payment of Rent. Landlord shall use reasonable efforts diligently
to remedy any interruption in services and should any of the equipment or
machinery utilized in furnishing the services listed herein break down or for
any cause cease to function properly, Landlord shall use
<PAGE>
reasonable diligence to repair the same promptly. If any services of Landlord
are required to be reduced by applicable governmental law, ordinance, rule,
regulation or program applicable to the Project or by any public utility or
other entity serving the Project or imposed by them, Landlord shall have the
right to apportion such services among the Tenants of the Building in accordance
with Landlord's reasonable judgment with respect to the needs of tenants of the
Project, without liability or relieving Tenant's obligations as herein provided,
notwithstanding the interruption of any service hereunder due to such
apportionment. Notwithstanding the foregoing, if electrical service to the
Premises ceases for more than three (3) days solely as a result of an
intentional action by Landlord, then Rent shall thereafter abate until such time
as electrical service is resumed to the Premises.
12. DAMAGE OR DESTRUCTION.
---------------------
12.1 Obligations to Repair. If during the Term the Premises, or
---------------------
any part thereof, or any portion of the Building necessary for Tenant's use of
the Premises, is damaged by fire or other casualty insured against by Landlord's
fire and extended coverage insurance policy covering the Building, and if, in
the reasonable judgment of Landlord, the damage can be repaired within ninety
(90) days after the date of the casualty, Landlord, at Landlord's expense, shall
repair such damage to the Premises or the Building, to substantially their
condition immediately before such damage or destruction. Tenant shall promptly
repair or replace, at its sole cost, in conformance with the provisions of
Section 10.3, any Alterations, and Tenant's trade fixtures, furnishings,
equipment and all other property of Tenant, in a manner and to a condition at
least equal to that immediately before such damage or destruction.
12.2. Landlord's and Tenant's Election. If during the Term the
--------------------------------
Premises, or any part thereof, or any portion of the Building necessary for
Tenant's use of the Premises, are damaged or destroyed, and Section 12.1 does
not apply, Landlord may elect by written notice given to Tenant within thirty
(30) days after the date of the casualty either (i) to repair the damage, in
which event this Lease shall remain in full force and effect, but the Rent shall
be abated in the manner specified in Section 12.3, or (ii) to terminate this
Lease as of the date of the casualty. If all or any portion of the Building or
the Premises necessary for Tenant's use of the Premises is damaged by fire or
other casualty, and if such damage is not substantially repaired within one (1)
year from the date of such damage, then at any time thereafter, but before
substantial completion of such repair, Tenant may elect to terminate this Lease,
as of the date of delivery of notice to Landlord, by written notice given to
Landlord.
12.3. Abatement of Rent. Except as otherwise provided in this
-----------------
Article 12, if the entire Premises is rendered untenantable for a period of at
least five (5) consecutive days by reason of any damage covered under Section
12.1, then the Rent shall abate from the date of such damage to the date when
such damage shall have been substantially repaired. If only a part of the
Premises shall be rendered untenantable, the Rent shall abate for such period in
the proportion that the area of the part of the Premises so rendered
untenantable bears to the total area of the Premises. If, before all of such
damage has been repaired, any part of the Premises previously rendered
untenantable is rendered tenantable or is used or occupied by Tenant or any
person or persons claiming through or under Tenant, the amount of abatement
shall be reduced accordingly. Notwithstanding the foregoing, if any damage to
the Premises is due to the fault or neglect of Tenant, any person claiming
through or under Tenant, or any of their servants, employees, agents,
contractors, visitors or licensees, then there shall be no abatement of Rent by
reason of such damage.
12.4. Last Six Months of Term. If the Premises, or any part thereof,
-----------------------
or any portion of the Building necessary for Tenant's use of the Premises, are
damaged or destroyed during the last six (6) months of the Term, or any
extension thereof, Landlord or Tenant may terminate this Lease by giving written
notice thereof to the
<PAGE>
other party within thirty (30) days after the date of the casualty, in which
case this Lease shall terminate as of the date of the casualty.
12.5. Tota1 Destruction. If at any time during the Term the Building
-----------------
is totally destroyed from any cause (including any total destruction required by
any authorized public authority), or existing law does not permit repair,
Landlord may terminate this Lease as of the date of the casualty. For purposes
of this Section 12.5, notwithstanding that the Premises is totally or partially
destroyed or damaged, the Building shall be deemed totally destroyed if, in
Landlord's sole reasonable judgment, the cost to repair such damage would exceed
thirty percent (30%) of the then replacement cost of the Building.
12.6. Insurance Proceeds. If this Lease is terminated by either party
------------------
as a consequence of a casualty in accordance with any of the provisions of this
Article 12, all proceeds of insurance required to be maintained either by
Landlord or Tenant shall be paid to Landlord; provided, however, that Tenant
shall be paid all proceeds of insurance payable in connection with Tenant's
trade fixtures, furnishings, equipment and all other items of personal property
of Tenant.
12.7. No Release of Liability. Except to the extent expressly provided
-----------------------
in this Lease, nothing contained in this Lease shall relieve Tenant of any
liability to Landlord or to its insurance carriers that Tenant may have under
law or under the provisions of this Lease in connection with any damage to the
Premises or the Building by fire or other casualty.
13. INSURANCE AND INDEMNITY.
-----------------------
13.1. Insurance on Tenant's Property. Tenant shall during the
------------------------------
Term provide insurance coverage against loss or damage by fire and such other
risks as are from time to time included in a standard or special extended
coverage endorsement insuring the full insurable value of the Premises,
including any Alterations, Tenant's trade fixtures, furnishings, equipment, and
all other items of personal property of Tenant.
13.2. Tenant's Liability Insurance. Tenant shall procure at its sole
----------------------------
cost and expense and keep in effect from the date of this Lease and at all times
during the Term either comprehensive general liability insurance or commercial
general liability insurance applying to the use or occupancy of the Premises,
and contractual liability insurance applying to all of Tenant's indemnity
obligations under this Lease. Such coverage shall have a minimum combined single
limit of liability of at least one million dollars ($1,000,000). All such
policies shall be written to apply to all bodily injury, property damage or
other covered loss occurring during the policy term, shall be endorsed to add
---
Landlord as an additional named Insured, to provide that such coverage shall be
- ---------------------------------------
primary and that any insurance mantained by Landlord shall be excess insurance
only. All such insurance shall provide for severability of interests; shall
provide that an act or omission of one of the named insureds shall not reduce or
avoid coverage to the other named insureds; and shall afford coverage for all
claims based on acts, omissions, injury and damage, which claims occurred or
arose (or the onset of which occurred or arose) in whole or in part during the
policy period. Tenant shall also maintain workers compensation insurance in
accordance with California law, and employers liability insurance with a limit
no less than $100,000 per employee and $500,000 per occurrence. Such coverage
shall be endorsed to waive the insurer's rights of subrogation against Landlord.
If at any time during the Term the amount of insurance which Tenant is required
to carry under this Section 13.2 is, in Landlord's reasonable judgment,
materially less than the amount or type of insurance coverage typically carried
by owners or lessees of properties located in San Francisco, California, which
are similar to and operated for similar purposes as the Premises, Landlord shall
have the right to require Tenant to increase the amount or types of insurance
coverage required under this Section 13.2.
<PAGE>
13.3. Landlord's Fire and Extended Coverage Insurance. Landlord
-----------------------------------------------
shall maintain insurance on the Building against damage by fire and those perils
now specified in the most current standard extended coverage endorsement in an
amount equal to eighty percent (80%) of the full insurable cost of the Building
as determined by Landlord, exclusive of excavations and foundations and subject
to such "deductibles" or amounts of self insurance as Landlord may provide under
such insurance from time to time within Landlord's sole discretion. Such
insurance shall exclude coverage for any improvements made by Tenant, and
fixtures and items installed or paid for by Tenant pursuant to this Lease,
including Tenant's trade fixtures, furnishings, equipment, plate glass, signs or
other items of personal property of Tenant. Within fifteen (15) days of written
request by Tenant, Landlord shall deliver to Tenant a copy of all insurance
policies carried by Landlord in connection with the Building. Landlord shall
have the right to carry any other insurance with respect to the Project and to
reduce or terminate any insurance or coverage called for by this Section 13.3 to
the extent that any such coverage is not reasonably available in the commercial
insurance industry from recognized carriers or not available at a cost which is
in Landlord's judgment economic or feasible under the circumstances. All
insurance proceeds payable under Landlord's insurance carried hereunder shall be
payable solely to Landlord and Tenant shall have no interest therein.
13.4. Waiver of Subrogation. To the extent permitted by law, and
---------------------
without affecting the coverage provided by insurance required to be maintained
hereunder, Landlord and Tenant each waive any right to recover against the other
on account of any and all claims Landlord or Tenant may have against the other
with respect to any risk insured against by insurance actually carried, or
required to be carried hereunder, to the extent of the proceeds realized from
such insurance coverage. Each casualty insurance policy carried by Landlord or
Tenant hereunder, or which either may obtain with respect to the Premises or the
Project independent of obligations hereunder, shall provide that the insurer
waives all rights of recovery by way of subrogation against Landlord or Tenant
in connection with all matters included within the scope of the waiver of
recovery contained in this Section 13.4.
13.5. Form of Policies. All Tenant insurance policies required to
----------------
be carried under this Lease shall (i) be written by companies rated A:XII or
better in "Best's Insurance Guide" and authorized to do business in California,
and (ii) name any parties designated by Landlord as additional named insureds.
Any deductible amounts under any insurance policies required hereunder shall be
subject to Landlord's prior written approval. Tenant shall deliver certified
copies of its insurance policies to Landlord on or before the Comencement Date,
and thereafter at least thirty (30) days before the expiration dates of expiring
policies; and, in the event Tenant shall fail to procure such insurance or to
deliver such policies or certificates, Landlord may, at its option and in
addition to Landlord's other remedies in the event of a default by Tenant
hereunder, procure same for the account of Tenant, and the cost thereof shall be
paid to Landlord as Additional Charges. All coverages described in this Article
13 shall be endorsed to provide Landlord with 30 days' notice of cancellation.
13.6. Waiver of Claims. Landlord shall not be liable to Tenant, or
----------------
to any other person from or for any event, occurrence, act, neglect, omission,
loss, damage, injury or death, howsoever caused or whenever occurring, including
damages arising from any act or neglect of other occupants of the Building, or
owners of adjacent property, or of Landlord or their respective employees,
agents, contractors, licensees, or invitees, or the public, or damages caused by
fire, accident, riot, strike, labor disputes, acts of God.
13.7. Indemnity. Tenant shall indemnify, defend, protect and save
---------
Landlord harmless from and against any and all claims, proceedings, damages,
causes of action, liability, costs or expense (including attorneys fees) arising
from or in connection with, or caused by (i) any act, omission or negligence of
Tenant or any subtenant of Tenant, or their respective contractors, licensees,
invitees,
<PAGE>
agents, servants or employees, wheresoever the same may occur, or (ii) any use
of the Premises, or any accident, injury, death or damage to any person or
property occurring in, on or about the Premises, or any part thereof, and any
service delivery facilities used by Tenant.
13.8. Non-Application of Certain Statutes. The provisions of Articles
-----------------------------------
12 and 13 shall govern exclusively the repair and reconstruction of any damage
or destruction, and any statute to the contrary, including Sections 1932(2) and
1933(4) of the California Civil Code, shall have no application to this Lease or
any damage or destruction to all or any part of the Premises or any other
portion of the Building.
14. EMINENT DOMAIN.
--------------
14.1. Effect of Taking. If all of the Premises is condemned or taken
----------------
in any manner before or during the Term for public or quasi-public use, or any
transfer of the Premises is made in avoidance of an exercise of the power of
eminent domain (each of which acts shall be referred to as a "taking"), this
Lease shall automatically terminate as of the date of the vesting of title or
taking of possession as a result of such taking. If a part of the Premises is so
taken, this Lease shall automatically terminate as to the portion of the
Premises so taken as of the date of the vesting of title as a result of such
taking. If such portion of the Project is taken as, in the reasonable opinion of
Landlord and Tenant, to render the Building incapable of economically feasible
operation or to require a substantial alteration or reconstruction of the
remaining portions thereof, this Lease may be terminated by Landlord, as of the
date of the vesting of title as a result of such taking, by written notice to
Tenant within sixty (60) days following notice to Landlord of the date of which
said vesting will occur. If such portion of the Project or the Premises is taken
as to render the Premises or the remaining portion thereof untenantable and
unusable by Tenant as reasonably determined by Landlord, this Lease may be
terminated by Tenant as of the date of the vesting of title as a result of such
taking, by written notice to Landlord within sixty (60) days following notice to
Tenant of the date on which said vesting will occur.
14.2 Award. Landlord shall be entitled to the entire award for any
-----
taking, including, without limitation, any award made for the value of the
leasehold estate created by this Lease. No award for any partial or entire
taking shall be apportioned, and Tenant hereby assigns to Landlord any award
that may be made in any taking, together with any and all rights of Tenant now
or hereafter arising in or to such award or any part thereof; provided, however,
Tenant shall be entitled to any award made to Tenant for its relocation
expenses, the taking of personal property and fixtures belonging to Tenant or
the interruption of or damage to Tenant's business.
14.3. Abatement of Rent. If a partial taking does not result in a
-----------------
termination of this Lease as to the entire Premises, then Fixed Rent and
Additional Charges shall abate in proportion to the portion of the Premises
taken or rendered untenantable by such taking. Tenant hereby waives and releases
its rights under Section 1265.130 of the California Code of Civil Procedure or
any similar statute now or hereafter in effect.
14.4. Temporary Taking. If all or any portion of the Premises is
----------------
taken for a limited period of time before or during the Term, this Lease shall
remain in full force and effect and Tenant shall continue to perform all of the
terms, conditions and covenants of this Lease; provided, however, that the Fixed
Rent and Additional Charges shall abate during such limited period in proportion
to the portion of the Premises taken by such taking. Landlord shall be entitled
to receive the entire award made in connection with any such temporary taking.
Any temporary taking of all or a portion of the Premises which continues for six
(6) months shall be deemed a permanent taking of the Premises or such portion.
<PAGE>
15. SUBLEASE AND ASSIGNMENT.
-----------------------
15.1. Consent Required. Notwithstanding the provisions of Section
----------------
24.5 Tenant shall not directly or indirectly, voluntarily or by operation of
law, sell, assign, encumber, pledge or otherwise transfer or hypothecate all or
any part of the Premises or Tenant's leasehold estate hereunder (each such act
is referred to herein as an "Assignment"), or sublet the Premises or any portion
thereof or permit the Premises to be occupied by anyone other than Tenant (each
such act is referred to herein as a "Sublease") without Landlord's prior written
consent in each instance, which consent shall not be unreasonably withheld. Any
Assignment or Sublease that is not in compliance with this Article 15 shall, at
the option of Landlord, be void and shall constitute an Event of Default. The
acceptance of Rent or Additional Charges by Landlord from a proposed assignee,
sublessee or occupant of the Premises shall not constitute consent to such
Assignment or Sublease by Landlord. Fifty percent (50%) of the excess of the
total amount of rent and other consideration payable under any such Assignment
or Sublease (including without limitation any amounts paid for the purchase of
Tenant's interest in this Lease or for the execution of such Assignment or
Sublease) over the Rent and Additional Charges payable hereunder shall be
payable to Landlord as Additional Charges in the manner specified in Section
15.9.
15.2. Notice. Notwithstanding anything to the contrary contained
------
in this Lease, Tenant shall have no right to enter into an Assignment or a
Sublease unless Tenant shall have first requested in writing Landlord's consent
to such Assignment or Sublease. Any request by Tenant for Landlord's consent to
a specific Assignment or Sublease shall include (a) the name of the proposed
assignee, subtenant or occupant, (b) the nature of the proposed assignee's,
subtenant's or occupant's business to be carried on in the Premises, (c) a copy
of the proposed Assignment or Sublease, and (d) such financial information as
Landlord may reasonably request concerning the proposed assignee, subtenant or
occupant or its business. Within thirty (30) days after the receipt of such
written notice, Landlord shall either (1) consent in writing to such proposed
Assignment or Sublease, subject to the terms and conditions set forth in this
Article 15, or (ii) notify Tenant in writing that Landlord refuses such consent.
During such thirty (30) day period, Tenant shall promptly supply to Landlord any
other relevant information concerning the proposed Assignment or Sublease
reasonably requested by Landlord.
15.3. Conditions of Approval. Without limiting the circumstances
----------------------
under which it may be reasonable for Landlord to withhold its consent to an
Assignment or Sublease, it is expressly agreed that it shall be reasonable for
Landlord to withhold its consent if Landlord determines that (i) the character
of the Building is likely to be adversely affected during the Term as a result
of such Assignment or Sublease, (ii) the use of the Premises proposed by such
assignee or subtenant does not conform to the Permitted Use, or (iii) the
financial condition of the proposed new tenant or subtenant at the time of the
proposed Assignment or Sublease is inferior to that of Tenant and any guarantor
of this Lease as of the date of this Lease.
15.4. No Release. No consent by Landlord to any Assignment or Sublease
----------
by Tenant shall relieve Tenant of any obligation to be performed by Tenant under
this Lease, whether arising before or after the Assignment or Sublease. The
consent by Landlord to any Assignment or Sublease shall not relieve Tenant or
any successor of Tenant from the obligation to obtain Landlord's express written
consent to any other Assignment or Sublease.
15.5. Cost of Processing Request. As a condition to its right to
--------------------------
enter into an Assignment or Sublease, Tenant shall pay to Landlord the amount of
Landlord's reasonable costs (not to exceed $1,000.00 per Assignment or Sublease)
of processing every proposed Assignment or Sublease (including the costs of
attorneys and other professional fees and administrative, accounting and
clerical time of Landlord), and the amount of all direct and indirect expenses
incurred by Landlord
<PAGE>
arising from any assignee, occupant or subtenant taking occupancy (including
security service, janitorial and cleaning service, and rubbish removal service).
Landlord shall have no obligation to process any request for consent to an
Assignment or Sublease unless Landlord receives from Tenant the amount of
Landlord's processing and other direct and indirect costs which Landlord
estimates it will incur in connection with such Assignment or Sublease.
15.6. Scope of Assignment. Any sale or other transfer, including
-------------------
without limitation by consolidation, merger or reorganization, of a majority of
the voting stock of Tenant or any beneficial interest therein, if Tenant is a
corporation, or any sale or other transfer of a majority of the general
partnership interests in Tenant or any beneficial interest therein, if Tenant is
a partnership, shall be an Assignment for purposes of this Lease. The sale or
other transfer of more than fifty percent (50%), by value, of the assets of
Tenant used in conducting its business in the Premises shall also constitute an
Assignment for purposes of this Lease. If Tenant is a trust, the transfer,
voluntarily or involuntarily, of all or any part of the controlling interest in
such trust shall constitute an Assignment. If Tenant is any other form of
entity, a transfer, voluntary or involuntary, of all or part of any interest in
such entity shall constitute an Assignment.
15.7. Assumption of Obligations. Each Assignment or Sublease to
-------------------------
which Landlord consents shall be effected by an instrument in writing in form
and substance satisfactory to Landlord, and shall be executed by both Tenant
and the assignee or sublessee. One (1) executed copy of such written instrument
shall be delivered to Landlord concurrently with the consummation of such
Assignment or Sublease. Each new assignee or sublessee in any Assignment or
Sublease transaction shall agree in such written instrument to assume and be
bound by all of the terms, covenants, conditions and obligations of this Lease.
Every Sublease shall be subject and subordinate to the provisions of this Lease.
15.8. No Signs or Encumbrance. Tenant shall not place or allow to
-----------------------
be placed in, on or about the Building any sign or other notice indicating
Tenant's desire to assign this Lease or sublet the Premises. Tenant shall not
encumber, hypothecate or transfer as security (whether by conditional Assignment
or Sublease, or otherwise) this Lease, or any of Tenant's rights, duties or
obligations under this Lease.
15.9. Recapture Rights. Landlord's right to excess rent and other
----------------
consideration specified in this Section 15.9 is expressly reserved from the
grant of Tenant's leasehold estate. Landlord shall have such right to fifty
percent (50%) of any excess rent and other consideration in the event of any
Assignment or Sublease by any succeeding subtenant or assignee, regardless of
whether (i) the instrument effecting any such Assignment or Sublease provides
such right to Landlord, or (ii) Landlord has approved such an instrument which
fails to provide such right to Landlord. If Landlord consents to any Assignment
or Sublease, then Tenant shall pay to Landlord immediately upon Tenant's receipt
thereof, fifty percent (50%) of any and all consideration received by Tenant on
account of such transaction, howsoever the same may be denominated, and in the
case of Subleases, to the extent that such consideration exceeds the pro rata
portion of the Fixed Rent and other charges payable by Tenant hereunder
attributable to the sublet portion of the Premises, based on the net rentable
area of the Premises and the net rentable area of the Premises sublet. As used
herein "consideration" includes any payments received by Tenant on account of or
in connection with such Assignment or Subletting, Rent and other payments
received by Tenant on account thereof or in connection therewith, so-called key
money and/or initiation money received by Tenant on account of or in connection
therewith, payments made in consideration of the operation of Tenant's business
in the Premises, goodwill, non-competition covenants, or any other amounts
payable either directly or indirectly in connection with such transaction.
Notwithstanding the foregoing, before payment to Landlord of fifty percent (50%)
of any excess Rent pursuant to this Section 15, Tenant shall
----------
<PAGE>
have the right to reimbursement of any reasonable real estate brokerage
commissions paid by Tenant in connection with any Sublease or Assignment.
16. DEFAULT: REMEDIES.
-----------------
16.1. Events of Default. The occurrence of any of the following
-----------------
shall constitute an "Event of Default" by Tenant:
16.1.1. Vacation or Abandonment. Vacation or abandonment of the
-----------------------
Premises for a continuous period in excess of fifteen (15) days.
16.1.2. Nonpayment of Money. Failure to pay Rent or any other sum
-------------------
due and payable by Tenant under this Lease, or the failure to perform any act
under this Lease which requires the expenditure by Tenant of money.
16.1.3. Other Obligations. Failure to perform any term, obligation,
-----------------
condition, agreement pr covenant under this Lease, other than (i) nonpayment of
money or (ii) an Assignment or Sublease in violation of Article 15.
16.1.4. Prohibited Assignment or Subletting. The making by Tenant
-----------------------------------
of any Assignment or Sublease in violation of Article 15.
16.1.5. Insolvency. The admission by Tenant in writing of its
----------
inability to pay its debts as they become due; the filing by Tenant of a
petition seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, the filing by Tenant of an answer admitting or failing timely
to contest a material allegation of a petition filed against Tenant in any such
proceedings or, if within sixty (60) days after the commencement of any
involuntary proceeding against Tenant seeking any reorganization, or
arrangement, composition, readjustment, liquidation, dissolution or similar
relief, such proceeding shall not have been dismissed; the appointment of a
receiver or trustee to take possession of all or substantially all of the assets
of Tenant; a general assignment by Tenant for the benefit of creditors; any
action or proceeding commenced by Tenant under any insolvency or bankruptcy act,
or under any other statute or regulation having as its purpose the protection of
creditors, or any such action commenced against Tenant and not discharged within
sixty (60) days after the date of commencement, or the attachment, execution or
other judicial seizure of all or substantially all of Tenant's assets or the
Premises, if such attachment or other seizure remains undismissed or
undischarged for a period of thirty (30) days after the levy thereof. For
purposes of this Section 16.1.5, the term "Tenant" shall mean Tenant or any
partner of Tenant, if Tenant is a partnership, or any person or entity
comprising Tenant, if Tenant is comprised of more than one person or entity.
16.2. Notice to Tenant. Upon the occurrence of any Event
----------------
of Default, Landlord shall give Tenant written notice thereof, specifying the
Event of Default and the provisions of this Lease breached by Tenant and Tenant
shall have the right to cure such Event of Default within the time periods, if
any, hereinafter specified.
16.2.1. Vacation or Abandonment. For vacation or abandonment of
-----------------------
the Premises, within fifteen (15) days after Landlord's notice.
16.2.2. Nonpayment of Money. For failure to pay Fixed Rent,
-------------------
Additional Charges or any other sum, within five (5) days after Landlord's
notice, unless Tenant has failed more than four (4) times during the Term timely
to pay any Rent so that Landlord has been required to give notice hereunder, in
which event no written notice or cure period shall thereafter be required or
applicable hereunder.
16.2.3. Other Obligations. For failure to perform any term,
-----------------
obligation, condition, agreement or covenant under this Lease, other than
nonpayment of monies, thirty (30) days after Landlord's notice, unless Tenant
has
<PAGE>
defaulted in the performance of any material term, obligation, condition,
agreement or covenant more than four (4) times during the Term and notice of
such Event of Default has been given by Landlord in each instance, in which
event no notice or cure period shall thereafter be required or applicable
hereunder.
16.2.4. No Notice or Cure. No notice or cure period shall be
-----------------
required or applicable hereunder for any Event of Default specified in Sections
16.1.4 or 16.1.5.
16.3. Remedy Upon Occurrence of Event of Default. On the occurrence
------------------------------------------
of an Event of Default which Tenant fails to cure after notice and expiration of
the applicable cure period, if any, specified above, Landlord shall have the
right either (i) to terminate this Lease, and at any time thereafter recover
possession of the Premises, or any part thereof, and expel and remove therefrom
Tenant and any other person occupying the same, by any lawful means, and again
repossess and enjoy the Premises without prejudice to any of the remedies that
Landlord may have under this Lease, or at law or equity by reason of the Event
of Default or of such termination, or (ii) to continue this Lease in effect for
so long as Landlord does not so terminate Tenant's right to possession, and
enforce all Landlord's rights and remedies under this Lease, including the right
to (A) recover Fixed Rent and Additional Charges as they become due, or (B)
relet the Premises at such rental and upon such terms and conditions as
Landlord, in its reasonable discretion, may deem advisable. Acts of maintenance,
preservation or efforts to lease the Premises, the appointment of a receiver
upon application of Landlord to protect Landlord's interest under this Lease, or
re-entry or taking of possession of the Premises by Landlord hereunder, shall
not constitute an election to terminate Tenant's right to possession unless
specific written notice of such termination is given to Tenant hereunder.
Landlord may store any property of Tenant located in the Premises in a public
warehouse or elsewhere at Tenant's expense or otherwise dispose of such property
in the manner provided by law. If Landlord does not terminate this Lease
hereunder, Tenant shall continue to pay currently all amounts payable by Tenant
under this Lease, together with the cost of obtaining possession of and
reletting the Premises, any repairs and alterations necessary to prepare the
Premises for reletting, and brokerage commissions and attorneys' fees incurred
in connection therewith, less the rents, if any, received from such reletting.
Any and all monthly deficiencies so payable by Tenant shall be paid on each due
date for Fixed Rent herein specified. Notwithstanding any reletting without
termination, Landlord may at any time thereafter elect to terminate this Lease
pursuant to this Section 16.3.
16.4. Damages Upon Termination. If Landlord terminates this
------------------------
Lease pursuant to Section 16.3, Landlord may exercise all rights and remedies
available to a landlord at law or in equity, including, without limitation, the
right to recover from Tenant: (i) the worth at the time of award of the unpaid
Rent and other amounts payable by Tenant hereunder which had been earned at the
time of termination; (ii) the worth at the time of award of the amount by which
the unpaid Rent and such other amounts which would have been earned after
termination until the time of the award exceeds the amount of loss of Rent and
such other amounts that the Tenant proves could have been reasonably avoided;
(iii) the worth at the time of award of the amount by which the unpaid Rent and
such other amounts for the balance of the term after the time of the award
exceeds the amount of loss of Rent and such other amounts that the Tenant proves
could be reasonably avoided; and (iv) any other amount necessary to compensate
Landlord for all the detriment proximately caused by Tenant's failure to perform
its obligations under this Lease or which, in the ordinary course of things,
would be likely to result therefrom. The "worth at the time of award" of the
amounts referred to in clauses (i) and (ii) shall be computed with interest at
the Interest Rate. The "worth at the time of award" of the amount referred to in
clause (iii) shall be computed by discounting such amount at the discount rate
of the Federal Reserve Bank of San Francisco, California, plus one percent (1%).
As used herein, "time of award" shall mean either the date upon which Tenant
pays to Landlord the amount recoverable by Landlord as hereinabove set forth, or
the date of entry of any determination, order or judgment, of any court
<PAGE>
or other legally constituted body determining the amount recoverable, whichever
first occurs.
16.5. Computation of Rent and Other Amounts for Purposes of Default.
-------------------------------------------------------------
purposes of Section 16.4, unpaid Rent and other amounts which wduld have accrued
and become payable under this Lease shall consist of the sum of: (i) the tota1
Fixed Rent for the balance of the Term, plus (ii) a computation of Tenant's
----
Share of the increase in Operating Expenses for the balance of the Term,
assuming that such amount for the Lease Year in which the Event of Default
occurs and each future Lease Year is equal to Tenant's Share of the increase of
Operating Expenses for the calendar year prior to the calendar year in which the
Event of Default occurs, compounded at a per annum rate equal to the mean
average rate of inflation for the preceding five (5) Lease Years as determined
by the Index.
16.6. Waiver of Statutory Notice Periods. The notice periods
----------------------------------
after Events of Default specified in Section 16.2 shall be exclusive of any
other notice period provided by law with respect to any such Event of Default,
and Tenant hereby waives any right under law to any other notice period now or
hereinafter enacted.
16.7. Landlord's Right to Perform on Tenant's Breach. In addition
----------------------------------------------
to any other right or remedy of Landlord hereunder, upon the occurrence of an
Event of Default and without waiving or releasing Tenant from any obligation of
Tenant hereunder, Landlord may (but shall not be required) to cure such Event of
Default for the account of Tenant. Landlord shall not be responsible or liable
to Tenant for any loss or damage that may be caused to Tenant's stock or
business by reason of effecting cure hereunder. All sums paid by Landlord and
all costs and expenses incurred by Landlord in connection with such cure
(inc1uding attorneys' fees), together with interest thereon at the Interest Rate
from the respective dates of Landlord's incurrence of each item of cost or
expense, shall be payable by Tenant on demand.
16.8. Receiver. If a receiver is appointed in any action by Landlord
--------
against Tenant on account of any Event of Default, such receiver may take
possession of any personal property belonging to Tenant and used in the
business conducted on the Premises, and the entry or possession by such a
receiver shall not constitute an eviction of Tenant from the Premises, or any
portion thereof. Tenant shall indemnify, defend, protect and hold Landlord
harmless from any damages, causes of action, liability, cost or expense
(including reasonable attorneys fees) arising out of or in connection with the
entry by such receiver and the taking of possession of the Premises and/or such
personal property. Neither the application for the appointment of such receiver,
nor the appointment itself, shall constitute an election on Landlord's part to
terminate this Lease, unless written notice of such election is given by
Landlord to Tenant hereunder.
16.9. Landlord's Defaults.
-------------------
16.9.1. Notice and Cures: Landlord's Liability. If Landlord fails
--------------------------------------
to perform any of its obligations under this Lease, then Tenant shall give
Landlord written notice thereof, specifying with particularity the breach
claimed by Tenant. Landlord shall have the right to cure such breach during the
30-day period following receipt of Tenant's notice hereunder, unless such breach
cannot reasonably be cured within such 30-day period, in which event Landlord
shall not be in default under this Lease if Landlord commences within such 30-
day period such cure and thereafter diligently prosecutes the same to
completion. If Landlord fails to cure its breach hereunder (or such breach is
not cured by a mortgagee or beneficiary as herein specified), then Landlord
shall be liable to Tenant only for Tenant's direct damages caused thereby and
Tenant waives any rights to recover consequential damages on account thereof.
16.9.2. Recovery Against Landlord. Tenant shall look solely to
-------------------------
Landlord's interest in the Project for the recovery of any judgment against
Landlord. Landlord, or if Landlord is a partnership, its partners whether
general
<PAGE>
or limited, or if Landlord is a corporation, its directors, officers and
shareholders, shall never be personally liable for any such judgment. Any lien
obtained to enforce any such judgment and any levy of execution thereon shall be
subject and subordinate to all ground leases, or underlying leases, and the
liens of all mortgages or deeds of trust referred to in Section 17.
16.10. Waiver: Remedies Cumulative. Failure of Landlord to declare
---------------------------
an Event of Default immediately upon the occurrence thereof, or delay in taking
any action in connection therewith, shall not waive such Event of Default, but
Landlord shall have the right to declare any such Event of Default at any time
thereafter. No waiver by Landlord of an Event of Default, or any agreement,
term, covenant or condition contained in this Lease, shall be effective or
binding on Landlord unless made in writing and no such waiver shall be implied
from any omission by Landlord to take action with respect to such Event of
Default or other such matter. No express written waiver by Landlord of any Event
of Default, or other such matter, shall affect or cover any other Event of
Default, matter or period of time, other than the Event of Default, matter
and/or period of time specified in such express waiver. One or more written
waivers by Landlord of any Event of Default, or other matter, shall not be
deemed to be a waiver of any subsequent Event of Default, or other matter, in
the performance of the same provision of this Lease. Acceptance of Rent by
Landlord hereunder, or endorsement of any check, shall not, in and of itself,
constitute a waiver of any Event of Default or of any agreement, term, covenant
or condition of this Lease, except as to the payment of Rent so accepted,
regardless of Landlord's knowledge of any concurrent Event of Default or matter.
No course of conduct between Landlord and Tenant, and no acceptance of the keys
to or possession of the Premises before the termination of the Term by Landlord
or any employee of Landlord shall constitute a waiver of any such breach or of
any term, covenant or condition of this Lease or operate as a surrender of this
Lease. All of the remedies permitted or available to Landlord under this Lease,
or at law or in equity, shall be cumulative and not alternative and invocation
of any such right or remedy shall not constitute a waiver or election of
remedies with respect to any other permitted or available right or remedy.
16.11. Interest. Any sum due and payable to Landlord under the terms
--------
of this Lease which is not paid when due shall bear interest at the Interest
Rate from the date when the same becomes due and payable by the provisions
hereof until paid.
16.12. No Accord and Satisfaction. No payment by Tenant, or receipt
--------------------------
by Landlord, of a lesser amount than the Rent herein provided shall be deemed to
be other than on account of the earliest Rent due and payable hereunder, nor
shall any endorsement or statement on any check, or letter accompanying any
check or payment, as Rent be deemed an accord and satisfaction. Landlord may
accept any such check or payment without prejudice to Landlord's right to
recover the balance of such Rent or pursue any other right or remedy provided in
this Lease.
16.13. Waiver of Right of Redemption. Tenant hereby expressly
-----------------------------
waives any and all rights of redemption granted by or under any present or
future law in the event Tenant is evicted or dispossessed from the Premises for
any cause, or in the event Landlord obtains possession of the Premises by reason
of the commission by Tenant of an Event of Default or otherwise.
17. SUBORDINATION, ATTORNMENT AND ESTOPPELS.
---------------------------------------
17.1. Subordination. Without necessity of execution by Tenant of
-------------
any additional document this Lease, and all of Tenant's rights under this Lease,
shall be subject and subordinate at all times to any Mortgage. The term
"Mortgage" shall include the following: (i) all ground leases and sale and
leaseback leases that may now exist or hereafter be executed affecting the
Project or any portion thereof, (ii) the lien of any mortgage or deed of trust
or other security instrument (and any advances or interest thereunder) that may
now exist or hereafter be executed in any amount for which the Project or any
portion thereof, any ground leases or sale and leaseback leases, or any of
Landlord's interest or
<PAGE>
estate therein is specified as security; and (iii) all modifications, renewals,
supplements, consolidations and replacements of any of the foregoing. The term
"Mortgagee" shall mean the mortgagee, beneficiary, ground lessor, sale leaseback
lessor, or other party holding a beneficial interest under a Mortgage. The term
"Sa1e and Leaseback Leases" shall refer to any sale and leaseback transaction in
which Landlord sells and simultaneously leases back all or any portion of its
interest in the Project. If any such Mortgagee so elects in writing, then this
Lease shall be superior to the lien of the Mortgage held by such Mortgagee,
whether this Lease is dated before or after such Mortgage. Tenant shall promptly
execute and deliver, upon demand by Landlord and in the form requested by
Landlord, any additional documents evidencing the priority or subordination of
this Lease, or reasonably requested by Landlord in connection with such
subordination, with respect to any such Mortgage or other security instruments.
Tenant irrevocably appoints Landlord as Tenant's attorney-in-fact to execute,
deliver and record any such documents in Tenant's name, place and stead upon
Tenant's failure to do so within ten (10) days after Landlord's request;
provided, however, that the execution by Landlord of any document as Tenant's
attorney-in-fact pursuant to this Section 17.1 shall not be effective unless
such document provides that Tenant shall not be disturbed in its possession of
the Premises so long as Tenant performs all of the terms, covenants and
conditions under this Lease. Tenant expressly acknowledges that the foregoing
power of attorney is coupled with an interest, is irrevocable, and shall survive
death, lnsolvency or incapacity of Tenant. Nothing hereunder shall waive the
default constituted by Tenant's failure to deliver any such document.
17.2. Attornment by Tenant: Non-Disturbance. Upon enforcement of any
------------------------------------
rights or remedies under any Mortgage to which this Lease is subordinated
(including, without limitation, proceedings for judicial or power of sale
foreclosure, or deed in lieu of foreclosure delivered by Landlord to the
Mortgagee thereunder), Tenant shall attorn to the purchaser or transferee under
such right or remedy and recognize such purchaser or transferee as Landlord
under this Lease. If Tenant attorns hereunder, then, so long as Tenant performs
all of the terms, covenants and conditions under this Lease, Tenant shall not be
disturbed in its possession of the Premises. Tenant shall execute and deliver
any document or instrument required by such purchaser or transferee confirming
the attornment hereunder.
17.3. Tenant's Certificates. Tenant, at any time and from time to
---------------------
time, shall execute, acknowledge and deliver to Landlord, addressed to Landlord,
at Landlord's request, and to any prospective purchaser or Mortgagee of any part
of the Project a certificate stating: (a) that Tenant has accepted the Premises
(or, if Tenant has not done so, that Tenant has not accepted the Premises and
specifying the reasons therefor), (ii) the Rent Commencement Date and Expiration
Date of this Lease, (iii) that this Lease is unmodified and in full force and
effect (or, if there have been modifications, that this Lease is in full force
and effect as modified and stating the modifications), (iv) whether or not there
are then existing any defenses against the enforcement of any of the obligations
of Tenant under this Lease (and, if so, specifying same), (v) whether or not
there are then existing any defaults by Landlord in the performance of its
obligations under this Lease (or acts or omissions which would constitute
defaults if uncured after notice), and, If so, specifying same, (vi) the dates,
if any, to which the Rent and Additional Charges and other amounts under this
Lease have been paid, and (vii) any other information and statements that may
reasonably be required by Landlord. Nothing herein shall waive the default
constituted by Tenant's failure to deliver the certificate required hereunder.
In addition, Tenant shall cause any and all guarantors of this Lease, at any
time during the Term and from time to time, to execute, acknowledge and deliver
to Landlord, addressed (at Landlord's request) to any prospective purchaser,
ground or underlying lessor or mortgagee of any part of the Project a
certificate stating (i) that the guaranty of such guarantor(s) is in full force
and effect, enforceable in accordance with its terms, and will continue to be
with respect to any successor of all or any portion of Landlord's interest in
the Project or this Lease, (ii) that there are no defenses, offsets or
<PAGE>
counterclaims to the liability or obligations of such guarantor(s) under their
guaranty, and (iii) any other information and statements that may reasonably be
required by Landlord. It is intended that any such certificate of Tenant may be
relied upon by any prospective purchaser, ground or underlying lessor or
mortgagee of all or any part of the Project.
18. FEES AND EXPENSES: PAYMENT.
--------------------------
18.1. Interest On Past Due Obligations. Unless otherwise specifically
--------------------------------
provided herein, any amount due from Tenant to Landlord under this Lease
(including, without limitation, any payment of Rent) which is not paid within
ten (10) days from the date due shall bear Interest from the due date until paid
at the Interest Rate. The payment of such interest shall not excuse or cure any
default under this Lease.
18.2. Late Charges. Tenant acknowledges that late payment by Tenant to
------------
Landlord of Rent will cause Landlord to incur costs not contemplated by this
Lease, the exact amount of such costs being extremely impracticable to fix. Such
costs include processing and accounting charges, and late charges that may be
imposed on Landlord by the terms of any encumbrance and note secured by any
encumbrance covering the Premises. Therefore, in addition to the provisions of
Section 18.1, if any installment of Rent due from Tenant is not received by
Landlord within seven (7) days after delivery of notice by Landlord of failure
to pay, Tenant shall pay to Landlord an additional sum of five percent (5%) of
the overdue Rent as a late charge. The parties agree that this late charge
represents a fair and reasonable estimate of the costs that Landlord will incur
by reason of late payment by Tenant. Acceptance of any late charge shall not
constitute a waiver of an Event of Default with respect to the overdue amount,
nor prevent Landlord from exercising any of the other rights and remedies
available to Landlord.
19. ACCESS TO PREMISES.
------------------
19.1 Landlord's Right to Enter. Landlord reserves for itself and its
-------------------------
agents, employees and Independent contractors the right to enter the Premises at
all reasonable times (i) to inspect the Premises, (ii) to supply any service and
perform any obligation to be provided or performed by Landlord to Tenant
hereunder, (iii) to show the Premises to prospective purchasers, mortgagees or
tenants, (iv) to post notices of non-responsibility, (v) to determine whether
Tenant is complying with its obligations under this Lease, (vi) to alter,
improve or repair the Premises or any other portion of the Building and (vii)
for any other lawful purpose. Landlord's right to enter the Premises shall
include the right to grant access to the Premises to governmental or utility
employees. Landlord may erect, use and maintain scaffolding, pipes, conduits and
other necessary structures in and through the Premises or any other portion of
the Building where reasonably required by the character of the work to be
performed in making repairs or improvements, provided that the entrance to the
Premises shall not be blocked thereby, and the business of Tenant shall not be
interfered with unreasonably. Tenant hereby waives any claim for damages for any
injury or inconvenience to or interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Premises, any right to abatement of Rent, or
any other loss occasioned by Landlord's reasonable exercise of any of its rights
under this Article 19. Any entry to the Premises obtained by Landlord in
accordance with this Article 19 shall not be consttued or deemed to be a
forcible or unlawful entry into, or a detainer of, the Premises, or an eviction,
actual or constructive, of Tenant from the Premises.
19.2 Emergency. In the event of an emergency involving the Premises
---------
or another portion of the Building, Landlord shall have the right to enter the
Premises at any time. Landlord shall have the right to use any and all means
that Landlord may deem necessary or proper in order to obtain entry to any
portion of the Premises in an emergency.
<PAGE>
20. NOTICES.
-------
Except as otherwise expressly provided in this Lease, any bills,
statements, notices, demands, requests or other communications given or required
to be given under this Lease shall be effective only if rendered or given in
writing, sent by registered or certified mail or delivered personally, addressed
(i) to Tenant (A) at Tenant's Address, if sent before Tenant takes possession of
the Premises, (B) at the Premises if sent subsequent to Tenant's taking
possession of the Premises, or (C) at Tenant's last known address or at any
place where Landlord believes that Tenant or any agent or employee of Tenant may
be found, if sent subsequent to Tenant's vacating, deserting, abandoning or
surrendering the Premises, (ii) to Landlord at Landlord's Address, or (iii) at
such other address as either Landlord or Tenant may designate as its new address
in California for such purpose by notice given to the other in accordance with
the provisions of this Article 20. Any bill, statement, notice, demand, request
or other communication shall be deemed to have been rendered or given (i) if
mailed, on the date it is shown as delivered to the intended recipient by return
receipt or equivalent, or, in the absence of such record of delivery, on the
third (3rd) business day after the date on which it was deposited in the mail as
provided in this Article 20, or (ii) upon receipt if personally delivered.
Tenant hereby appoints as its agent to receive the service of all dispossessory
proceedings and notices thereunder any agent or employee of Tenant employed in
the Premises, and if no such person shall be available, then such service may be
made by attaching such notice or service on the main entrance of the Premises.
If Tenant is notified of the identity and address of any Mortgagee, Tenant shall
give to such Mortgagee by registered or certified mail duplicate written notice
of any default by Landlord or failure by Landlord to perform any of its
obligations hereunder.
21. RULES AND REGULATIONS.
---------------------
Tenant shall faithfully observe and comply with the rules and regulations
attached to this Lease as Exhibit C and all modifications thereof and
---------
additions thereto from time to time put into effect by Landlord. Landlord shall
have the right to promulgate different rules and regulations applicable to
different portions of the Building. Landlord shall not be responsible for the
nonperformance by any other tenant or occupant of the Building of any of such
reules and regulations. Terms defined in the Lease shall have the same meaning
when used in the rules and regulations.
22. SURRENDER OF PREMISES ON TERMINATION.
------------------------------------
On or before ninety (90) days preceding the Expiration Date, Tenant
shall notify Landlord in writing of the precise date upon which Tenant plans to
surrender the Premises to Landlord. On the termination of the Term, Tenant shall
quit and surrender the Premises to Landlord, broom clean, in good order,
condition and repair as required by Section 10.1, together with all Alterations
made in, to or on the Premises, except movable furniture and Tenant's trade
fixtures installed at the expense of Tenant, except that Tenant shall ascertain
from Landlord not later than sixty (60) days before the end of the Term whether
Landlord desires to have the Premises, or any part or parts thereof, restored to
the condition in which the Premises were delivered to Tenant, or to their
conditions prior to making any Alteration thereto, and if Landlord shall so
desire, then Tenant shall, at Tenant's sole cost and expense, so restore the
Premises, or such part or parts thereof, before the end of the Term. On or
before the end of the Term, Tenant shall remove all its personal property from
the Premises, and all property of Tenant not removed hereunder shall be deemed,
at Landlord's option, to be abandoned by Tenant and Landlord may store such
property in Tenant's name at Tenant's expense, and/or dispose of the same in
any manner permitted by law. Tenant shall repair any and all damage to the
Premises caused by Tenant's removal of its furniture, trade fixtures or property
hereunder. If the Premises are not surrendered as of the end of the Term in the
manner and condition herein specified, Tenant shall indemnify, defend, protect
and hold Landlord harmless against all loss, liability, cost or
<PAGE>
expense (including attorneys fees) resulting from or caused by Tenant's delay or
failure in so surrendering the Premises including any claims made by any
succeeding tenant due to such delay or failure.
23. EXISTING LEASE AND RIGHT OF FIRST OFFER.
---------------------------------------
23.1. Existing Lease. Tenant is currently leasing certain space pursuant
--------------
to the Existing Lease. So long as no Event of Default is uncured, in
consideration for Tenant entering into this Lease, the Fixed Rent payable on the
Rent Commencement Date and on the first (1st) day of each month thereafter until
March 1, 1989 shall be reduced each month in an amount equal to the lesser of
(i) $5,900.00, or (ii) the amount of rent actually payable by Tenant for such
month under the Existing Lease. After March 1, 1989 Tenant shall receive no
further reductions of Fixed Rent, and Fixed Rent shall be payable in the amounts
set forth in Article 4. In addition, Tenant shall receive a rent credit, to be
distributed over the first twelve (12) payments of Fixed Rent to be made by
Tenant, in an amount equal to Five Thousand Nine Hundred Dollars ($5,900.00)
multiplied by the number of full calendar months between April 1, 1988 and the
Rent Commencement Date.
23.2. Right to Assign, Sublease or Terminate. Landlord shall have the right to
---------------------------- ---------
effect a termination, subleasing or assignment of the Existing Lease to be
effective on any date selected by Landlord following the date Landlord delivers
possession of the Premises to Tenant. Landlord may negotiate with the owner of
the premises under the Existing Lease and third persons to effect such
termination subleasing or assignment. Tenant shall cooperate fully with any such
efforts and shall execute such documents, in form and substance reasonably
requested by Landlord, as may be necessary to effect any such termination,
subleasing or assignment in an effort to reduce or terminate Landlord's
obligation to reduce the Fixed Rent pursuant to Section 23.1; provided however,
that Tenant shall not be obligated to pay any consideration in connection with
such termination, subleasing or assignment, nor shall any such termination,
subleasing or assignment otherwise impose on Tenant any increased liability or
obligations, unless Landlord agrees to pay such consideration or to indemnify
Tenant for such increased liability or obligations. As part of Tenant's
obligation to cooperate with Landlord under this Section 23.2, upon written
------------
request from Landlord, Tenant shall not remove any furniture from the premises
leased by Tenant under the Existing Lease; provided, however, that Landlord
shall return any such furniture to Tenant upon expiration of the Existing Lease
in the same condition as existed on the date of delivery of notice by Landlord
to Tenant, subject to reasonable wear and tear.
23.3. Modification. From and after the date of this Lease, Tenant
------------
shall not modify, amend or otherwise alter the Existing Lease without Landlord's
prior written consent. Any modification, amendment or other alteration of the
Existing Lease without Landlord's prior written consent shall constitute an
Event of Default.
23.4. Right of First Offer. During the Term, Landlord shall not lease
--------------------
to a third person any part of the second (2nd) floor of the Building (the "First
Offer Space"), except in accordance with this Section 23.4. Except for the
extension of a then existing lease pursuant to an option right contained in the
existing lease to the tenant who is then occupying the space, if Landlord
determines to lease part of the First Offer Space (the "Offered Space"), then
Landlord shall deliver a written notice to Tenant (the "Offered Space Notice").
The Offered Space Notice shal1 specify the rent and lease terms on which
Landlord is willing to lease the Offered Space, including any particular
extension options, improvement allowances, contributions, free rent, or other
terms, concessions or policies related to the leasing of the Offered Space
(collectively, the "Lease Policies").
23.4.1. Exercise of Right of First Offer. If within ten (10) days
--------------------------------
after receipt of the Offered Space Notice, Tenant notifies Landlord in writing
<PAGE>
of Tenant's election to lease the Offered Space, then the Offered Space shall be
leased to Tenant pursuant to the Lease Policies. Landlord shall reasonably
incorporate the Lease Policies in Landlord's then standard lease form, and
Landlord and Tenant shall promptly execute such standard lease form. Landlord
shall supply the then existing standard lease to Tenant at the time the Offered
Space Notice is delivered to Tenant.
23.4.2. Non-Exercise of Right of First Offer. If Tenant does not
------------------------------------
notify Landlord within ten (10) days after receipt of the Offered Space Notice
of its election to lease the Offered Space, or if Landlord and Tenant cannot
reasonably agree on the final terms of the lease for the Offered space within
ten (10) days after delivery of the Offered Space Notice, then Landlord
thereafter shall have the right to lease the Offered Space to a third person on
terms not materially less favorable to Landlord than the Lease Policies.
24. MISCELLANEOUS.
-------------
24.1. Warranty of Authority to Enter into Lease. Tenant warrants and
-----------------------------------------
represents to Landlord that Tenant has the full right, power and authority to
enter into this Lease and has obtained all necessary consents and approvals from
its partners, officers, board of directors or other members required under the
documents governing its affairs in order to consummate the Lease transaction
contemplated hereby. The persons executing this Lease on behalf of Tenant have
the full right, power and authority so to do and affirm the foregoing warranty
on behalf of Tenant and on their own behalf. Tenant warrants and represents to
Landlord that as of the date of execution of this Lease the name of Tenant is
Beier & Gunderson, a California corporation. As of the date of this Lease,
Tenant has commenced proceedings for change of the name of Tenant to Offices
Unlimited of California, Inc., a California corporation. Accordingly, until
Tenant has completed all applicable local and state requirements for legally
changing the name of Tenant, the Tenant under this Lease shall be deemed to be
Beier & Gunderson, a California corporation.
24.2. Inability to Perform. If, by reason of acts of God, governmental
--------------------
restrictions, strikes, labor disturbances, shortages of materials or supplies,
or any other cause or event beyond Landlord's reasonable control, Landlord is
unable to fulfill or is delayed in fulfilling any of Landlord's obligations
under this Lease or any collateral instrument, no such inability or delay shall
(a) constitute an actual or constructive eviction, in whole or in part, (b)
relieve Tenant from any of its obligations under this Lease, including its
obligation to pay Rent, or (c) impose any liability upon Landlord or its agents
by reason of inconvenience or annoyance to Tenant or by reason of injury to or
interruption of Tenant's business, or otherwise. Tenant hereby waives and
releases its right to terminate this Lease under Section 1932(1) of the
California Civil Code or under any similar law, statute or ordinance now or
hereafter in effect.
24.3. References. All personal pronouns used in this Lease, whether
----------
used in the masculine, feminine or neuter gender, include all other genders;
the singular includes the plural, and vice versa, and references to "party" or
"parties" refer solely to the parties signatory hereto. All references in this
Lease to Sections or Articles shall refer to the corresponding Section or
Article of this Lease, unless specific reference is made to another document or
instrument. The use herein of the words "including" or "include" when following
any general statement, term or matter shall not be construed to limit such
statement, term or matter to the specific items or matters set forth immediately
following such word or to similar items or matters, whether or not nonlimiting
language (such as "without limitation," or "but not limited to," or words of
similar import) is used with reference thereto, but rather shall be deemed to
refer to all other items or matters that would reasonably fall within the
broadest possible scope of such general statement, term or matter. The Basic
Lease Information and all Exhibits referenced herein and attached to this Lease
are hereby incorporated in this Lease by this reference. If there is more than
one Tenant, the obligations under this
<PAGE>
Lease imposed on Tenant shall be joint and several. The captions preceding the
Sections and Articles of this Lease have been inserted solely as a matter of
convenience and in no way define or limit the scope or intent of any provision
of this Lease.
24.4. Severabi1ity. If any provision of this Lease or the application
------------
thereof to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such provision
to persons or circumstances other than those as to which it is invalid or
unenforceable, shall not be affected thereby, and each provision of this Lease
shall remain in effect and shall be enforceable to the full extent permitted by
law.
24.5. Successors and Assigns. Subject to the provisions of Article 15
----------------------
regarding Assignment and Subleases, the terms, covenants and conditions
contained in this Lease shall bind and inure to the benefit of Landlord and
Tenant and their respective personal representatives, and successors and
assigns. Upon the sale, assignment or transfer by Landlord (or by any subsequent
landlord) of its interest in the Building or the Project as owner or lessee,
including any transfer upon or in lieu of foreclosure or by operation of law,
Landlord (or subsequent landlord) shall be relieved from all subsequent
obligations or liabilities under this Lease, and all obligations subsequent to
such sale, assignment or transfer.
24.6. Construction. This Lease shall be governed by and construed
------------
in accordance with the laws of the State of California. Any actions or
proceedings brought under this Lease, or with respect to any matter arising
under or out of this Lease, shall be brought and tried only in courts located in
the City and County of San Francisco, California (excepting appellate courts).
24.7. No Option. Submission of this instrument for examination
---------
or signature by Tenant does not constitute a reservation of or an option for
lease, and it is not effective as a lease or otherwise until execution and
delivery by both Landlord and Tenant.
24.8. Integration. The terms of this Lease are intended by the parties
-----------
as a final expression of their agreement with respect to such terms as are
included in this Lease and may not be contradicted by evidence of any prior or
contemporaneous agreement, arrangement, understanding or negotiation (whether
oral or written). The parties further intend that this Lease constitutes the
complete and exclusive statement of its terms, and no extrinsic evidence
whatsoever may be introduced in any judicial proceeding involving this Lease.
The language in all parts of this Lease shall in all cases be construed as a
whole and in accordance with its fair meaning and not restricted for or against
any party.
24.9. Quitclaim. Upon expiration or earlier termination of this
---------
Lease, Tenant shall, immediately upon request of Landlord, execute, acknowledge
and deliver to Landlord a recordable deed quit-claiming to Landlord all interest
of Tenant in the Premises, the Project and this Lease.
24.10. Quiet Enjoyment. Upon Tenant paying the Rent and Additional
---------------
Charges and performing all of Tenant's obligations under this Lease, Tenant may
peacefully and quietly enjoy the Premises during the Term as against all persons
or entities claiming by or through Landlord; subject, however, to the provisions
of this Lease and to any mortgages or ground or underlying leases referred to in
Article 17. This covenant (and any and all other covenants of Landlord contained
in this Lease) shall be binding upon Landlord and its successors only with
respect to breaches occurring during its and their respective ownerships of
Landlord's interest hereunder.
24.11. Light, Air and View. This Lease conveys to Tenant no rights
-------------------
for any light, air or view. No diminution of light, air or view, or any
impairment of the visibility of the Premises from inside or outside the
Building, by any
<PAGE>
structure or other object that may hereafter be erected (whether or not by
Landlord) shall entitle Tenant to any reduction of Rent under this Lease,
constitute an actual or constructive eviction of Tenant, result in any liability
of Landlord to Tenant, or in any other way affect this Lease or Tenant's
obligations hereunder.
24.12. Holding Over. If Tenant remains in possession of the Premises
------------
after the expiration of the Term with the express written consent of Landlord
and without executing a new lease, then such holding over shall be deemed a
tenancy from month-to-month, subject to all conditions, provisions and
obligations of this Lease, except that the Fixed Rent then in effect shall be
increased to an amount equal to one hundred twenty-five percent (125%) of such
Fixed Rent. No holding over by Tenant after the Term shall operate to extend the
Term. In the event of any unauthorized holding over, Tenant shall indemnify
Landlord against all claims for damages by any other tenant to whom Landlord may
have leased all or any part of the Premises commencing upon or after the
expiration of the Term. Any holding over without Landlord's consent shall
entitle Landlord to reenter the Premises as provided in Article 16, and to
enforce all other rights and remedies provided by law or this Lease.
24.13. Counterparts. This Lease may be executed in one or more
------------
counterparts, each of which shall be deemed an original; but all of which
together shall constitute one and the same instrument.
24.14. Time of Essence. Time is of the essence of each and every
---------------
provision of this Lease.
24.15. Broker's Commissions. Landlord shall pay all brokers commission
--------------------
payable to the Brokers in connection with this transaction. Tenant represents
and warrants that other than the Brokers, Tenant has not entered into any
agreement or incurred or created any obligation which might require Landlord to
pay any broker's commission, finder's fee or other commission or fee relating to
the leasing of the Premises, unless disclosed to and accepted by Landlord in
writing before the date hereof, and Tenant shall defend, indemnify and hold
harmless Landlord from and against any claims for any such commissions or fees
by anyone claiming by or through Tenant.
24.16. No Merger. The voluntary or other surrender or termination
---------
of this Lease by Tenant, or a mutual cancellation thereof shall not work a
merger, but, at Landlord's sole option, shall either terminate all existing
subleases or subtenancies or shall operate as an assignment to Landlord of all
such subleases or subtenancies.
24.17. Landlord's Consents. Unless otherwise expressly provided in
-------------------
this Lease, all consents and approvals to be given by Landlord may be withheld
for any reason or no reason, at Landlord's sole discretion but shall not be
unreasonably withheld, and any such action shall not be deemed inconsistent with
any covenant of good faith and fair dealing otherwise implied by law to be a
part of this Lease. If Landlord has actually received two (2) separate written
notices requesting Landlord's consent or approval, then Landlord's failure to
respond to a request for consent or approval from Tenant within thirty (30) days
(or such other period as may be provided in this Lease) shall be deemed to
constitute the granting of such consent or approval.
24.18. Memorandum of Lease. Tenant shall, upon request of Landlord,
-------------------
execute, acknowledge and deliver a short form memorandum of this Lease (and any
amendment hereto or consolidation hereof), in form suitable for recording. In no
event shall this Lease or any memorandum thereof be recorded without the prior
written consent of Landlord, and any attempt to do so shall constitute a default
by Tenant.
24.19. Survival. All of Tenant's covenants and obligations contained
--------
in this Lease shall survive the expiration or earlier termination of this Lease.
No
<PAGE>
provision of this Lease providing for termination in certain events shall be
construed as a limitation or restriction of Landlord's rights and remedies at
law or in equity available upon a breach by Tenant of this Lease.
24.20. Amendments. No amendments or modifications of this lease or
----------
any agreements in connection therewith shall be valid unless in writing duly
executed by both Landlord and Tenant. No amendment to this Lease shall be
binding on any Mortgagee unless such Mortgagee consents thereto in writing.
24.21. Attorneys' Fees. If either party becomes a party to any
---------------
litigation concerning this Lease, the Premises, or the Project by reason of any
act or omission of the other party or its authorized representatives, and not by
reason of any act or omission of the party that becomes a party to that
litigation, or any act or omission of its authorized representative, the party
that causes the other party to become involved in the litigation shall be liable
to the party involved for reasonable attorneys' fees and court costs incurred by
it in the litigation. If either party commences an action against the other
party arising out of or in connection with this Lease, or institutes any
proceeding in a bankruptcy or similar court which has jurisdiction over the
other party or any or all of its property or assets, the prevailing party shall
be entitled to have and recover from the losing party reasonable attorneys' fees
and court costs. "Prevailing party" within the meaning of this Section 24.21
shall include a party who dismisses an action for recovery hereunder in exchange
for payment of the sums allegedly due, performance of covenants allegedly
breached or consideration substantially equal to the relief sought in the
action.
24.22. Financial Statements. If Landlord intends to sell all or any
--------------------
portion of the Building or obtain a loan secured by the Building, then Tenant
shall, within fifteen (15) days of Landlord's written request, furnish Landlord
with financial statements of Tenant and the balance sheet for any guarantor of
the Lease, dated no earlier than one (1) year before such request, certified as
accurate by Tenant, reflecting Tenant's and such guarantor's then current
financial condition, in such form and detail as Landlord may reasonably request.
In addition, if Landlord finances the construction of improvements on and to
the Project, or otherwise procures financing secured by the Project, or any
portion thereof or interest
<PAGE>
therein, then the terms and provisions of this Lease may be subject to review
and approval by the financial source providing such financing.
IN WITNESS WHEREOF, Landlord and Tenant have each executed this Lease as of
the day and year first above written.
LANDLORD:
470 SPEAR ASSOCIATES,
A California limited partnership
By: Lalanne Babcock & Brown Company,
A Ca1ifornia limited partnership,
Its General Partner
By: Lalanne Babcock & Brown Company,
Inc., a California corporation,
Its General Partner
By: /s/ Robert J. Lalanne
------------------------------
Robert J. Lalanne, President
TENANT:
OFFICES UNLIMITED OF CALIFORNIA, INC., a
Ca1ifornia corporation (presently known as,
and doing business as, Beier & Gunderson,
Inc., a Ca1ifornia corporation)
By: /s/ OFFICES UNLIMITED OF CALIFORNIA, INC.
-------------------------------------------
Its: President
----------------------------------
By:
---------------------------------------
Its:
----------------------------------
<PAGE>
EXHIBIT B
PROPERTY DESCRIPTION
--------------------
That certain property referred to herein and situated in the State of
California, City and County of San Francisco and is described as follows:
Lot 15, as shown on that certain map entitled, "Parcel Map of a portion of
100 Vara Block No. 328, also being a portion of Assessor's Block No. 3768,
San Francisco, California", which Map was filed for record in the office of
the Recorder of the City and County of San Francisco, State of California,
on November 26, 1985, in Book 31 of Parcel Maps, at Page 130.
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
---------------------
1. The pavement, entry passages, halls, exits, entrances, elevators and
stairways of the Building shall not be obstructed by any of the Tenants or their
employees, visitors or clients or used by them for any purpose other than
ingress and egress to or from their respective Premises.
2. The halls, passages, exits, entrances, elevators, stairways, balconies
and roof are not for the use of the general public and Landlord shall in all
cases retain the right to control and prevent access thereto by all persons
whose presence in the judgment of Landlord shall be prejudicial to the safety,
character, reputation and interests of the Building and its tenants, provided
that nothing herein contained shall be construed to prevent such access to
persons with whom Tenant normally deals in the ordinary course of Tenant's
business unless such persons are engaged in illegal activities. No Tenant and no
employees or invitees of any Tenant shall go upon the roof of the Building or on
any fire escapes (except for emergency purposes).
3. The floors, skylights and windows that reflect or admit light into
passageways or into any place in the Building shall not be covered or obstructed
by any of the Tenants. The water closets and other water apparatus shall not be
used for any purpose other than those for which they were constructed and no
sweepings, rubbish, rags, ashes or other foreign substances shall be thrown
therein. Any damage resulting to such apparatus by misuse shall be borne by the
Tenant who, or whose employees or invitees, shall have caused it.
4. No sign, advertisement, placard, picture, name or notice shall be
inscribed, painted or affixed on or to any part of the outside or inside of the
Building or the Premises without the prior written consent of Landlord, 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.
All approved signs or lettering on doors and walls shall be of such color, size
and style and in such places upon or in the Bui1ding or the Premises as shall be
first designated by Landlord. Signs at the entry to Tenants' Premises shall be
painted or affixed for the Tenants by Landlord, and the cost of such painting or
affixing shall be paid by the respective Tenants.
5. Landlord shall have the right to prescribe the weight, size and
position of all safes and other heavy eequipment 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 a
platform of such design as is necessary to properly distribute the weight.
Landlord shall 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 be repaired at the expense of
Tenant.
6. The Tenants shall use the passenger elevator only for passengers and
not for carriage of goods; provided, however, that Tenant shall have the right
to use the elevator for carriage of goods and freight at any time after 6:00
p.m. so long as Tenant installs padding in any such elevator in a manner
reasonably acceptable to Landlord. The working hours of the elevators shall be
regulated by and be under the control of Landlord.
7. Landlord shall furnish Tenant with two (2) keys to the Premises, free
of charge. Landlord may impose a reasonable charge for any additional keys. No
additional or substituted locking devices shall be installed without the prior
written consent of Landlord. Landlord may impose a reasonable charge for the
removal of any additional lock or any bolt installed on any door of the Premises
without the prior written consent of Landlord. Tenant shall in each case furnish
Landlord with a key for any such lock. Upon request of Landlord, Tenant shall
furnish Landlord with a list of the names of all persons issued keys to the
Premises or the Building. Tenant, upon the termination of its tenancy, shall
deliver to Landlord all keys to doors in the Building and the Premises, and in
the
<PAGE>
event or loss or any keys so furnished, shall pay Landlord therefor. In
addition, Tenant shall collect all keys to the Premises and the Bui1ding from
all employees of Tenant upon cessation of their employment with Tenant.
8. Tenant shall fully cooperate with all of Landlord's efforts to satisfy
the requirements of any governmental agency in connection with security, fire
and life safety rules, ordinances, regulations, recommendations or guidelines.
9. Tenant shall not use or keep in the Premises or the Bui1ding any
kerosene, gasoline or inflammable or combustible fluid or material, or use any
method of heating or ventilation other than that supplied by Landlord.
10. The tenants shall give to Landlord prompt notice in writing of any
accident to or defects in the water pipes, gas pipes, electric wiring, lights or
fittings of the Building, or of any circumstance that may adversely affect the
security or safety of the Building or the occupants of the Building.
11. The tenants or their employees, visitors or clients shall not make or
permit any improper noises in the Building or defile the elevators, stairways or
corridors or interfere in any way with Landlord or with other Tenants or those
having business with it or them.
12. Landlord reserves the right to exclude or expel from the Bui1ding 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.
13. No animals or birds shall be brought or kept in, on or about the
Premises.
14. Tenant shall see that the doors of the Premises are closed and
securely locked before leaving the Bui1ding and shall observe strict care and
caution that all water faucets, water apparatus, appliances, electricity, gas
and air are entirely shut off before Tenant or Tenant's employees leave the
Building.
15. All drapes used in or on any of the windows of the Premises shall be
of such material, pattern, design and color as shall from time to time be
approved by Landlord and shall be hung as Landlord may determine. If Landlord by
a notice in writing to Tenant shall object to any curtains, blinds, shades or
screens attached to or hung in or used in connection with any window or door of
the Premises, such use of such curtains, blinds, shades or screens shall
forthwith be discontinued by Tenant. No awning shall be permitted on any part of
the Premises.
16. Tenants shall not without the written consent of the Landlord or his
agent erect a television antenna within or on the Premises.
17. No cooking shall be done or permitted by any Tenant on the Premises,
nor shall the Premises be used for washing clothes, for lodging, or for any
improper, objectionable or immoral purposes. Notwithstanding the foregoing,
Tenant shall have the right to install a microwave in the Premises and a stove
in the Premises (so long as the stove is ventilated in a manner satisfactory to
Landlord and otherwise complies with all applicable zoning and building
ordinances), and Tenant shall be permitted to prepare food in such microwave and
stove.
18. Landlord shall 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 Landlord. The location of telephones, call boxes
and other office equipment affixed to the Premises shall be subject to the
approval of Landlord.
19. No Tenant shall lay linoleum, tile, carpet or other similar floor
covering so that the same shall be affixed to the floor of the Premises in any
manner except as approved by Landlord. The expense of repairing any damage
resulting from a violation of this rule or removal of any floor covering shall
be borne by the Tenant by whom, or by whose contractors, employees or invitees,
the damage shall have been caused.
<PAGE>
20. No vending machine or machine of any description shall be installed,
maintained or operated on the Premises without the written consent of Landlord.
21. Landlord shall have the right, exercisable without notice and without
liability to Tenant, to change the name and the street address of the Building.
Tenant has received and agrees to be bound by these Rules and Regulations.
TENANT:
OFFICES UNLIMITED OF CALIFORNIA, INC., a
California corporation (PRESENTLY known
as, and doing business as, Beier &
Gunderson, Inc., a California corporation)
By: /s/ OFFICES UNLIMITED OF CALIFORNIA, INC.
------------------------------------------
Its: President
-------------------------------------
<PAGE>
EXHIBIT D
CONSTRUCTION EXHIBIT
--------------------
1. DEFINITIONS.
-----------
Terms defined in the Lease shall have the same meaning when used in this
Work Letter. Certain terms used in this Work Letter shall have the meaning set
forth below for each such term. Certain other terms shall have the meaning set
forth elsewhere in this Work Letter.
1.1. Landlord's Work. The work described on Appendix 1 attached
--------------- ----------
to this Work Letter, to be performed by Landlord.
1.2. Tenant's Cost. The total of (i) the actual cost of work done or
-------------
caused to be done by Tenant, its contractors, suppliers and work forces for
material and labor in connection with the Tenant's Work, (ii) costs of
governmental approvals, inspections, fees and permit charges for the Tenant's
Work, and (iii) mechanical and electrical engineer's fees.
1.3. Tenant's Plans. Final space plans, working drawings and
--------------
specifications (including floor, reflected ceiling, decorating, electrical and
telephone plans, specifications for Tenant's special Installations and all
necessary designations of materials, colors and finishes) for Tenant's Work, as
approved by Landlord pursuant to Section 2 of this Work Letter.
1.4. Tenant's Architectural Credit. An amount equal to Twelve Thousand
-----------------------------
and No/100 Dollars ($12,000.00).
1.5. Tenant's Construction Credit. An amount equal to Three Hundred
----------------------------
Seventy-Eight Thousand Two Hundred and No/l00 Dollars ($378,200.00).
1.6. Tenant's Work. All materials and work to be added to the Bui1ding
-------------
to finish the Premises for Tenant, including an HVAC system and any electrical
or plumbing work required to meet Tenant's electrical and plumbing
requirements; provided, however, that Work shall not include the following: (i)
furniture, trade fixtures or decorative effects (such as drapes and pictures),
(ii) office equipment, (iii) telephone installation, or (iv) cabinetry or
special decorative effects.
1.7. Work Letter. This Construction Exhibit attached as Exhibit D
----------- ---------
to the Lease.
2. TENANT'S PLANS.
--------------
2.1. Entry. Subject to the rights of existing tenants, Landlord shall
-----
permit Tenant to have access to the Premises so that Tenant shall be able to
prepare dimensioned scale drawings showing the area of the Premises and
structural elements and utility facilities in sufficient detail to permit Tenant
to prepare plans of Tenant's Work. Tenant shall indemnify and hold Landlord
harmless from any and all loss, cost, damage, injury or expense arising out of
or related to claims of injury to or death of persons, damage to property, or
claims of lien for work or labor performed, materials or supplies furnished as a
result of the exercise of Tenant's right of entry hereunder.
2.2. Architect. Tenant shall cause all plans, drawings and specifications
---------
for Tenant's Work, whether preliminary or final, to be prepared by licensed
architects and, where appropriate, licensed mechanical, electrical and
structural engineers, approved In advance by Landlord, which approval shall not
be unreasonably withheld.
2.3. Preparation. On or before November 1, 1987, Tenant shall prepare
-----------
and submit to Landlord for its approval as to acceptability of design, two sets
of
<PAGE>
fully dimensioned scale preliminary drawings of the Premises and the proposed
Tenant's Work therein (including specifications), along with material samples.
2.4. Approval. Within seven (7) days after receipt of Tenant's
--------
preliminary drawings, Landlord shall return one set of prints thereof with
Landlord's approval and/or suggested modifications noted thereon. If Landlord
has approved Tenant's preliminary drawings subject to modifications, such
modifications shall be deemed to be acceptable to and approved by Tenant unless
Tenant shall prepare and resubmit revised drawings for further consideration by
Landlord. If Landlord has suggested modifications without approving Tenant's
preliminary drawings, Tenant shall prepare and resubmit revised drawings within
fourteen (14) days for consideration by Landlord. All revised drawings shall be
submitted to Landlord within fourteen (14) days following Landlord's return to
Tenant of the drawings originally submitted, and Landlord shall approve or
disapprove such revised plans within seven (7) days following receipt of the
same. If Tenant has failed timely to submit or resubmit preliminary drawings to
Landlord, or if Landlord shall reasonably disapprove drawings resubmitted by
Tenant and Tenant shall refuse to make requested changes, Landlord shall have
the right to cancel the Lease five (5) days after delivery of notice to Tenant,
unless Tenant has cured such matter within such five (5) day period.
2.5. Final Plans. Following approval of Tenant's preliminary drawings by
-----------
Landlord, Tenant shall proceed diligently to prepare the final Tenant's Plans
for Tenant's Work in conformity with such approved preliminary drawings, and
shall furnish two copies of such final Tenant's Plans to Landlord for its
determination as to conformity with approved preliminary drawings and for its
approval as to any matters not shown in the approved preliminary drawings.
Landlord shall approve or disapprove such final Tenant's Plans within seven (7)
days after receipt, and in the event of disapproval Tenant shall promptly revise
and submit such final Tenant's Plans as required by Landlord.
2.6. Landlord's Approval Parameters. Notwithstanding Landlord's right
------------------------------
to approve the Tenant's Plans, Tenant shall be solely responsible for assuring
that the Tenant's Work complies with all applicable regulations, laws,
ordinances, codes and rules and Landlord shall not be liable to Tenant as a
consequence of any noncompliance. In addition, Landlord's approval shall not be
deemed to be an approval of the cost of the Tenant's Work or Tenant's Plans or
the adequacy or sufficiency of the Tenant's Plans. The Tenant's Plans shall not
be changed or modified by Tenant after such approval by Landlord without the
approval in writing of Landlord.
2.7. Cost. Landlord shall pay costs incurred in the preparation of the
----
Tenant's Plans in an amount not to exceed the Tenant's Architectural Credit.
Upon completion of the Tenant's Plans Landlord shall pay the costs incurred by
Tenant in connection with the preparation of the Tenant's Plans within ten (10)
days after receipt of Tenant's statement for any such costs and copies of all
bills demonstrating such costs, but Landlord shall have no obligation to pay any
such costs in excess of the Tenant's Architectural Credit.
2.8. Changes in Tenant's Plans. Subject to the provisions of this Section
-------------------------
2.8, Tenant shall have the right to request changes in the Tenant's Plans at any
time before substantial completion of the Tenant's Work, subject to Landlord's
right to approve in writing any such changes. Tenant shall have no right to
request any changes in the Tenant's Plans if such change shall affect in any way
any portion of the Building not included in the Premises, or shall adversely
affect a matter pertaining to compliance with any applicable bui1ding or
planning code.
3. CONSTRUCTION OF TENANT'S WORK.
-----------------------------
3.1. Construction. After approval of the Tenant's Plans by Landlord
------------
and delivery by Landlord of possession of the Premises to Tenant, Tenant shall
proceed forthwith to commence, and shall diligently and in a workmanlike manner
complete, Tenant's Work. Tenant shall provide Landlord with a copy of the signed
general contract for Tenant's Work (the "Construction Contract"), including a
list of all
<PAGE>
subcontractors by name, itemiized and tota1 costs, all change orders, and a
schedule by major trade showing date of commencement and completion. Tenant
shall perform Tenant's Work in compliance with all applicable laws and
regulations (including bui1ding codes) of governmental authorities having
jurisdiction over the Premises and in strict compliance with the Tenant's Plans.
Tenant shall obtain, prior to construction, all necessary building, sign and
other permits, licenses, approvals and consents from all governmental
authorities and quasi-public entities (such as public utilities) having
jurisdiction over the Premises. All applications for building, sign and other
permits by Tenant, and all other communications with applicable City, County and
other agencies regarding the Tenant's Work, shall be coordinated by Tenant
through a construction supervisor designated by Landlord. Tenant's contractors
and subcontractors shall be acceptable to and approved by Landlord, which
approval shall not be unreasonably withheld or delayed, and shall be subject to
administrative supervision by Landlord in their use of the Bui1ding and their
relationship with Landlord's contractors or contractors of other tenants in the
Building. Contractors and subcontractors engaged by Tenant shall employ
personnel and means to insure so far as may be possible the progress of Tenant's
Work without interruption on account of strikes, work stoppage or similar causes
of delay. Landlord shall give access to and entry to the Premises to Tenant and
its contractors and subcontractors, at the times and in accordance with the
provisions of the Lease, and reasonable opportunity and time and reasonable use
of facilities to enable Tenant to perform and complete Tenant's Work; provided,
however, that if such entry is prior to the commencement of the Term such entry
shall be subject to the rights of existing tenants in the Premises and to all of
the terms and conditions of the Lease except the payment of Rent or Additional
Charges. Any damage to the Bui1ding caused by Tenant or its contractors or
subcontractors in connection with the performance of Tenant's Work shall be
repaired at Tenant's expense.
3.2. Progress Payments. Subject to the provisions of Section
-----------------
3.4, Landlord shall pay to Tenant, upon presentation of invoices satisfactory to
Landlord, an amount equal to the lesser of: (i) Tenant's Cost and (ii) the
Tenant's Construction Credit, as follows:
3.2.1. Twenty Percent Completion. Within twenty (20) days after
-------------------------
twenty percent (20%) of Tenant's Work has been materially completed, as
certified in writing to Landlord by Tenant's contractor, Landlord shall pay to
Tenant or Tenant's contractors an amount equal to the lesser of: (i) the
Tenant's Cost to date, or (ii) twenty percent (20%) of the Tenant's Construction
Credit.
3.2.2. Forty Percent Completion. Within twenty (20) days after
------------------------
forty percent (40%) of Tenant's Work has been materially completed, as certified
in writing to Landlord by Tenant's contractor, Landlord shall pay to Tenant or
Tenant's contractors an amount equal to the lesser of: (i) the Tenant's Cost to
date, or (ii) forty percent (40%) of the Tenant's Construction Credit, less any
amounts theretofore paid under Section 3.2.1.
3.2.3. Sixty Percent Completion. Within twenty (20) days after
------------------------
sixty percent (60%) of Tenant's Work has been materially completed, as certified
in writing to Landlord by Tenant's contractor, Landlord shall pay to Tenant or
Tenant's contractors an amount equal to the lesser of: (i) the Tenant's Cost to
date, or (ii) sixty percent (60%) of the Tenant's Construction Credit, less any
amounts theretofore paid under Sections 3.2.1 or 3.2.2.
3.2.4. Eighty Percent Completion. Within twenty (20) days after
-------------------------
eighty percent (80%) of Tenant's Work has been materially completed as certified
in writing to Landlord by Tenant's contractor, Landlord shall pay to Tenant or
Tenant's contractors an amount equal to the lesser of: (i) the Tenant's Cost to
date, or (ii) eighty percent (80%) of the Tenant's Construction Credit, less any
amounts theretofore paid under Sections 3.2.1 - 3.2.3.
3.3. Payment. Within sixty (60) days after the completion of Tenant's
-------
Work, Tenant shall provide Landlord with a statement, and invoices satisfactory
to Landlord, as to the entire Tenant's Cost. If the entire Tenant's Cost shall
exceed
<PAGE>
the amounts paid by Landlord to Tenant pursuant to Section 3.2, then Landlord
shall pay the difference to Tenant within twenty (20) days after such statement
is provided, but in no event shall Landlord pay Tenant more than the Tenant's
Construction Credit. If the amounts paid by Landlord to Tenant pursuant to
Section 3.2 exceed the entire Tenant's Cost, then Tenant shall accompany such
statement with payment to Landlord of the amount of such excess.
3.4. Lien Waivers. As a condition to Landlord's obligation to
------------
make any payments under Section 3.2 or 3.3, Tenant shall furnish Landlord with
conditional and unconditional waivers of liens and sworn statements from all
contractors, subcontractors, materialmen and other relevant parties that they
have been compensated in full for the work performed to date.
3.5. Completion. Upon completion of Tenant's Work Tenant shall
----------
furnish to Landlord for its permanent files one reproducible set and two sets of
prints of "as built" drawings showing Tenant's Work as constructed or installed
in the Premises.
4. ENTRY.
-----
Landlord, and its agents, architects and general contractors, shall
have the right, but not the obligation, to inspect the Tenant's Work at any
reasonable time during the construction thereof. If Landlord discovers faulty
construction or any deviation from the Tenant's Plans approved by Landlord, then
Tenant, at its sole cost and expense, shall cause its contractors or
subcontractors to make corrections promptly; provided, however, that neither the
privi1ege herein granted to Landlord to make such inspections, nor the making of
such inspection by Landlord, shall operate as a waiver of any right of Landlord
to require conformance by Tenant to the terms and conditions of this Exhibit D.
---------
5. CONDITIONS PRECEDENT TO OPENING.
-------------------------------
The following shall be conditions precedent to Tenant's opening the Premises
for business:
5.1. Completion. The satisfactory substantial completion by Tenant
----------
of the work to be performed by Tenant under this Exhibit D, in accordance with
---------
Tenant's Plans, as approved by Landlord, including the recording of a Notice of
Completion by Tenant.
5.2. Compliance. Submittal by Tenant to Landlord of all evidence
----------
reasonably available from governmental authorities showing compliance with any
and all other laws, orders and regulations of any and all governmental
authorities having jurisdiction over the Premises, including without limitation
a certificate of occupancy .
6. INSURANCE AND BONDS.
-------------------
6.1. Insurance. Tenant, or its contractors, shall take out and maintain
---------
in at least the minimum amounts and in form required by law worker's
compensation insurance covering all persons employed in connection with
construction of the Tenant's Work. Tenant or such contractors shall pay all
premiums required to maintain such insurance in effect at all times during
performance of the Tenant's Work and shall, immediately upon receipt, deliver to
Landlord copies of the policies required hereunder, or certificates evidencing
the same, together with true copies of each and every receipt for premiums
thereon or other satisfactory evidence of payment thereof.
6.2. Bonds. Before commencement of the Tenant's Work, Tenant shall, at
-----
its own cost and expense, furnish to Landlord performance and payment bonds
issued by an insurance company qualified to do business in California, in a sum
equal to the cost of the Tenant's Work (as determined by the Construction
Contract), guaranteeing the completion of the Tenant's Work free and clear of
all liens and other charges, and in accordance with the Tenant's Plans approved
by Landlord.
<PAGE>
7. NO ADDITIONAL WORK.
------------------
Nothing contained in this Work Letter shall be construed to impose on
Landlord any obligation to construct, install or pay the cost of any Tenant's
Work in the event of any alteration to or expansion of the Premises after
completion of the initial Tenant's Work.
8. LANDLORD'S WORK.
---------------
Landlord at its sole cost and expense shall perform the Landlord's Work in
a good and workmanlike manner. At least ten (10) days before commencement of
construction of any portion of the Landlord's Work, Landlord shall deliver to
Tenant preliminary plans and specifications pertaining to such portion of the
Landlord's Work. Tenant shall have the right to make design recommendations
regarding any such plans and specifications and Landlord shall reasonably
consider such design recommendations and incorporate as many such design
recommendations as reasonably possible into Landlord's plans and specifications.
9. INCORPORATION IN LEASE.
----------------------
The provisions of this Work Letter shall be incorporated into, and
constitute a part of the Lease.
OFFICES UNLIMITED OF CALIFORNIA, INC., a
California corporation (presently known
as, and doing business as, Beier &
Gunderson, Inc., a Ca1ifornia corporation
By /s/ OFFICES UNLIMITED OF CALIFORNIA, INC.
------------------------------------------
Its President
-------------------------------------
By
-------------------------------------------
Its
--------------------------------------
<PAGE>
APPENDIX 1 TO EXHIBIT D
Landlord will provide the following Improvements to the Building:
1. Structurally upgrade the bui1ding to conform to Section 104F of the San
Francisco Building Code.
2. Renovate the exterior of the bui1ding including installation of new windows.
3. Construct new entryway and lobby.
4. Provide new passenger elevator.
5. Provide new toilet rooms on the second floor.
6. Provide stairway from ground floor lobby to second floor.
7. Install new sidewalk and trees along front of bui1ding along Spear Street as
per San Francisco Building Department requirements.
<PAGE>
EXHIBIT 10.11
AMENDMENT TO LEASE
THIS AGREEMENT, made and entered into this fifteenth (15th) day of August, 1994,
by and between 470 Spear Associates, hereinafter called Landlord and Offices
Unlimited of California, Inc., aka, Lee Pierce Incorporated, hereinafter called
Tenant.
WITNESSETH
THAT WHEREAS, on the twenty-ninth (29th) day of September, 1987, the said
Landlord and Tenant entered into a Lease covering those certain premises,
situated in the City and County of San Francisco, State of California, and more
particularly described as follows:
444 Spear Street, San Francisco, California 941 Os which consists of a portion
of the second floor, commonly known as Suite 200.
NOW THEREFORE, in consideration of the premises and agreements herein contained,
it is hereby agreed as follows:
1. RIGHT OF FIRST OFFER: By the execution of this Amendment To Lease, Tenant
hereby waives their right to lease additional second floor space as
provided by the Right of First Offer provision of the Lease and hereby
agrees to delete Paragraphs 23.4, 23.4.1 and 23.4.2 as they pertain to the
Right of First Offer for the remaining lease term.
With the exception of the aforementioned items, all other terms and conditions
of the Lease shall remain unchanged.
IN WITNESS WHEREOF, the said Landlord and Tenant have executed this Amendment To
Lease the day and year first above written.
<TABLE>
<S> <C>
LANDLORD: TENANT:
470 SPEAR ASSOCIATES, LEE PIERCE INCORPORATED,
a California limited partnership a California corporation
By: Lalanne Babcock & Brown Company, By: /s/ Lee Pierce Incorporated
a California limited partnership ----------------------------------
Its General Partner
Title: VP Finance/CFO
By: Lalanne Babcock & Brown Company, Inc., --------------------------------
a California corporation
Its General Partner Date: 8-17-94
--------------------------------
By: /s/ Robert Jo Lalanne
---------------------------------------
Robert Jo Lalanne
Its President
Date: 8/18/94
-------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.12
BASIC LEASE INFORMATION
OFFICE LEASE
------------
LEASE DATE: May 17,1996
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: Transphere International, Inc.
a California Corporation
(assignable to NetSource, Inc.)
ADDRESS OF TENANT: 444 Spear Street, Suite 205
San Francisco, CA 94105
CONTACT: Jade Wong, Vice President
TELEPHONE/FACSIMILE: (415) 243-8080 / (415) 546-5252
BUILDING 444 Spear Street
FLOOR: Second Floor
SUITE: 205
RENTABLE AREA: 3,000 rentable square feet
PARAGRAPH (3): Term: Nineteen (19) months
COMMENCEMENT DATE: June 1, 1996
EXPIRATION DATE: December 31,1997
PARAGRAPH (5) BASE RENT: $4,000 per month, based upon
$16.00 per rentable square foot year
PARAGRAPH (6) SECURITY DEPOSIT: $4,000.00
PARAGRAPH (7) BASE TAX YEAR: 1996
BASE EXPENSE YEAR: 1996
PARAGRAPH (7B) TENANT'S PERCENTAGE SHARE: 5.7%
BASED ON 52.764 SQUARE FEET TOTAL
RENTABLE AREA OF PROJECT
EXHIBITS EXHIBIT A - SITE PLAN
EXHIBIT B - IMPROVEMENT AGREEMENT
EXHIBIT C - COMMENCEMENT DATE
EXHIBIT D - RULES AND REGULATIONS
-1-
<PAGE>
OFFICE BUILDING LEASE
---------------------
1. PARTIES. This Lease, dated, for reference purposes only, May 17, 1996,
is made by and between 470 Spear Associates, a California limited partnership
(herein called "Landlord") and Transphere International, Inc., a California
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 the earlier of (i) substantial completion of the Tenant Improvements to
be constructed by Landlord pursuant to Exhibit "B", if any, or (ii) the date
that Tenant opens for business in the Premises, and ending on the last day of
the month in which the end of the term 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.
4. POSSESSION.
If the Landlord, for any reason whatsoever, cannot deliver possession of
the said Premises to the Tenant on the anticipated commencement dated noted in
the Basic Lease Information (the "Commencement Date"), 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 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 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.
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6. SECURITY DEPOSIT. Tenant has deposited with Landlord the sum of Four
Thousand Dollars ($4,000.00) (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. 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 potion of said Security Deposit is so sued
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 deposits 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 in which the Lease term commences.
(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 Project, 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 Project is
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 Project 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 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
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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 such total
increase in Direct Expenses, less the total of the monthly installments of
estimated increases paid in the previous calendar year; 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
Project, 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 Project, except incidental quantities of household chemicals commonly
used for office and janitorial purposes. "Hazardous Material" as used herein
shall mean nay hazardous, toxic or radioactive substance now or hereafter
regulated by federal, state or local governmental or other authority, including,
but not limited to, any "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 elated materials.
9. COMPLIANCE WITH LAW. Tenant shall not use the Premises or Project or
permit anything to be done in or about the Premises or Project 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 of the Project, excluding structural
changes not related to or affected by Tenant's improvements or acts. The
judgment of any
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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 alternations, additions or improvements ("Alterations") to or of the
Premises or any part thereof without the prior written consent of Landlord 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. 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 Alternations 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 Alternations 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 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 Project except as specifically herein set
forth.
(b) Landlord's Obligations. 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 written notice of the need of such repairs or
maintenance is given to Landlord by Tenant. Except 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 interference 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, appurtenance and equipment
therein. Tenant waives the right to make repairs at Landlord's expense under
any Law now or hereafter in effect.
12. LIENS. Tenant shall keep the Project 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
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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 Alternations 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. With the exception of an assignment to
NetSource, Inc., 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, except for an assignment to NetSource, Inc., 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'' 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 Project, and shall further indemnify and hold harmless Landlord
against and from any and all claims arising from any breach or default in the
performances 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,
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 Project. Tenant shall give prompt notice to Landlord in case of fire
or accidents in the Premises or in the Project or of defects therein or in the
fixtures or equipment.
15. WAIVER OF SUBROGATION. Landlord and Tenant shall each obtain from
their respective insures under all polices 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
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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 form 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 undertake 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 hereto. 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
of 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. SERVICE 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 is 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 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
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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 show 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 estimated made by a utility company for 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 is share f 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's 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 percent (120%) 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 the purpose erect
scaffolding and other necessary structures where reasonably required by the
character of the
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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 any injury or inconvenience 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 he 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 Damages. 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 panel, 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.
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23. DEFAULT. The occurrence of any one or more of the following events
shall constitute a default and breach of this Lease by Tenant:
(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 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 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
aware 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
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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);
(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 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 claims 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 take 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 statements 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.
28. RELOCATION. Intentionally omitted.
29. AUTHORITY OF PARTIES; LIMITATIONOF 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 or in accordance with the bylaws
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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.
30. BROKER. Tenant warrants that it has had no dealings with any real
estate broker or agents in connection with the negotiation of this Lease except
Laianne Volckmann.
31. Intentionally Omitted.
32. TENANT IMPROVEMENTS. Landlord agrees to provide Tenant Improvements
in the Premises in accordance with the attached Exhibit "B".
33. 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 part
hereof.
(b) Waiver. The waiver by Landlord of any term, convenant 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, convenant 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 be 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, 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 tbe Basic
Leae Information, and shall be considered effective upon confirmantion of
receipt. Either party may specify a different address for notice purpose
bywritten notice to the other.
(d) Joint Obligation. If there be more than one Tenant the obligations
hereunder imposed upon Tenents 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 on 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.
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(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 Tenent
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 morgage of trust deed covering the Premises.
Accordingly, if any installment of rent or of a sum due from Tenent 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 Tenent. Acceptance of such late charges
but 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. 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, of 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.
(l) Attorneys' Fees. In the event of any action or proceeding brought by
either party against the other under this Lease the pervailing 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
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 placed upon the
Project, 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 or the power of sale under any morgage 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) Morgagee 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 Project 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 of the part of
Landlord, tenent shall use reasonably efforts to give notice by registered mail
to any holder of a security interest in the Project whose name has been provided
to Tenent and shall offer such party a
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reasonable oppurtunity to cure the default, including time to obtain possession
of the Premises by power of sale of 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 Project for
any purpose other than as an address of the business to be conducted by the
tenant in the Premises.
(r) Separability. Any provisions 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 place any sign upon the Premises
or Building or conduct any auction thereon without Landlord's prior written
consent.
(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 or 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 metioned 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.
IN WITNESS WHEREOF, the partied hereto have executed this Lease intending to be
bound as of the last date set forth below.
LANDLORD TENANT
470 Spear Associates Transphere International, Inc.
a California limited partnership a California corporation
By: Laianne Babcock & Brown Company.
a California limited partnership
Its General Partner
By: Laianne Babcock & Brown Company.
a California limited partnership
Its General Partner
By: /s/ Robert J. Laianne By: /s/ Transphere International, Inc.
----------------------------- ----------------------------------
Robert J. Laianne
Its President
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EXHIBIT A
[A GRAPHIC DESCRIPTION OF THE PREMISES]
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EXHIBIT B
TENANT IMPROVEMENT PLAN
1. Description of Work
Landlord shall, at Landlord's sole expense, provide and install building
standard carpet throughout Suite 205. Tenant shall select the color, subject to
Landlord's approval.
2. Tenant's Work
Tenant may require work ("Tenant's Work") that is different from of 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 constructed as
Tenant's Work, and Tenant shall pay all costs of preforming 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 Tenants Work.
3. Tenant's Signage
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 unresonably 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.
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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 Transphere
International, Inc., a California 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 _______, 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
Improvement 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
470 Spear Associates Transphere International, Inc.
a California limited partnership a California corporation
By: Laianne Babcock & Brown Company.
a California limited partnership
Its General Partner
By: Laianne Babcock & Brown Company.
a California limited partnership
Its General Partner
By: __________________________ By:________________________________
Robert J. Laianne
Its President
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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, fish 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 of 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.
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.
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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.
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EXHIBIT 10.13
JOINT VENTURE AGREEMENT
THIS JOINT VENTURE AGREEMENT, together with all appendices and exhibits
hereto ("Agreement") is made the __th day of February, 1995, by and among
GENERAL TSUSHIN KOGYO KABUSHIKI KAISHA, a Japanese corporation having its
principal place of business at S&S Building, 6-36 Shin Ogawa-machi, Shinjuku-ku,
Tokyo 162 Japan (hereinafter referred to as "GTC"), MTC TELEMANAGEMENT
CORPORATION, an American corporation having its principal place of business at
1304 Southpoint Boulevard, Petaluma, CA 94954 U.S.A. (hereinafter referred to
as "MTC") and ASSOCIATED STRATEGIC ALLIANCE PARTNERS, an American corporation
having its principal address at 242 Pinehurst Avenue, Los Gatos, CA 95032
U.S.A. (hereinafter referred to as "ASAP").
W I T N E S S E T H:
WHEREAS, GTC has been engaged in the sales and installation of
telecommunications products and services;
WHEREAS, MTC has been engaged in the business of developing, producing and
distributing unique, technology-based telecommunication products and services;
WHEREAS, ASAP has been engaged in the business of facilitating new market
development by coordinating relations between American and Japanese business
partners;
WHEREAS, GTC, MTC and ASAP wish to establish the Joint Venture Company
(hereinafter referred to as "NEWCO") under the laws of Japan in order to
actively expand the business of telemanagement products and services in the
country of Japan.
NOW, THEREFORE, the parties hereto agree as follows:
Article 1. Organization of the New Company
1. Promptly after the effective date hereof, GTC, MTC and ASAP shall cause
a new company to be organized as a Kabushiki Kaisha under the Commercial Code of
Japan. NEWCO shall be known in the Japanese language as "MTC Japan Kabushiki
Kaisha and in English as "MTC Japan, Ltd."
2. The Articles of Incorporation for NEWCO shall be in both the Japanese
and English languages, attached herewith as Exhibit A.
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3. The authorized capital of NEWCO shall be forty million
yen((Yen)40,000,000). The initial paid-in capital of NEWCO shall be ten million
((Yen) 10,000,000). All shares to be issued by NEWCO shall be non-bearer common
shares having a par value of fifty thousand yen ((Yen)50,000). As the
contribution to the initial capital of NEWCO, (i) GTC shall subscribe to ( * )
( * ) shares, which shall represent ( * ) percent ( * ) of the shares to be
issued upon incorporation, by paying ( * ) yen ((Yen) * ), (ii) MTC shall
subscribe to (ninety) (90) shares, which shall represent (forty five) percent
(45%) of the shares to be issued upon incorporation, by paying (four million,
five hundred thousand) yen ((Yen) 4,500,000), and (iii) ASAP shall subscribe to
( * ) ( * ) shares, which shall represent ( * ) percent ( * %) of the shares to
be issued upon incorporation by paying ( * ) yen ((Yen) * ). GTC, MTC and ASAP
shall make payment in full for their respective shares in conformity with GTC's
instructions on the bank or banks to which such payment shall be made and on the
time limit for such payment.
4. The parties hereby agree to notify NEWCO of their intention not to
receive and hold their respective share certificates of NEWCO in accordance with
the Commercial Code of Japan.
5. GTC shall prepare any and all such documents as shall be required for
the incorporation of NEWCO, and MTC and ASAP shall, in conformity with GTC's
instructions promptly execute of cause to execute any such document as shall
require execution by MTC and ASAP and/or their nominees, respectively.
Article 2. Object and Purposes of NEWCO
The business activities of NEWCO shall be to:
(1) Manufacture and distribute telecommunication equipment and
telemanagement products and services;
(2) Distribute telemanagement products and services in Japan and the other
countries of Asia;
(3) Manufacture telemanagement products for distribution in Japan and the
other countries of Asia;
(4) Act as an MTC sales distributor in Japan and the other countries of
Asia; and
(5) Act as an MTC hardware manufacturer and distributor in Japan.
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* Confidential treatment requested; omitted portion filed separately with the
Commission.
<PAGE>
Article 3. Certain Restrictions upon the Activities of GTC, MTC and ASAP
During the term of this Agreement, and for a period of two years after the
termination of this Agreement, the parties, and their respective employees,
shall not directly or indirectly, engage in, invest in or perform any business
competitive with the business performed by NEWCO, without the prior written
approval of MTC.
Article 4. Directors and Auditor(s) of NEWCO
1. The total number of directors of NEWCO shall consist of five (5)
persons. GTC shall nominate two (2) persons, MTC shall nominate two (2)
directors and ASAP shall nominate one (1) director.
The parties hereto agree to exercise their voting rights to elect the
directors so nominated.
2. The statutory auditor(s) of NEWCO shall be as many as two (2)
person(s), one to be nominated by GTC, and one to be nominated by MTC. The
parties agree to exercise their respective voting rights to elect the person(s)
so nominated as statutory auditor(s).
3. Should the position of any director or statutory auditor become vacant,
however occasioned, the parties hereto agree to cause their respective voting
rights exercised to elect a director or statutory auditor nominated by the party
who nominated the preceding director or statutory auditor.
4. If and when any of the parties hereto intends to exercise its voting
right by proxy at any general meeting of shareholders of NEWCO, it shall appoint
any shareholder of NEWCO as its proxy.
Article 5. Staff of NEWCO
1. By the joint appointment of GTC and MTC, NEWCO's Board of Directors
shall appoint, Mr. Steve Weiner as ("President and Representative Director) and
Mr. Ikuo Kimura as a representative director.
2. During the initial period, staff support in Japan shall be provided by
GTC and dedicated product support shall be provided from the USA by MTC and its
affiliated companies in accordance with the terms of this Agreement.
3. Any and all such matters relating to the staffing of NEWCO as are not
provided for herein shall be separately agreed upon in writing by the Board of
Directors at a Board Meeting of NEWCO.
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Article 6. Financing of NEWCO
1. The parties hereto shall make all reasonable efforts to cause NEWCO to
operate on a self-supporting basis.
2. If and when NEWCO requires additional funds for its operation, the
Board of Directors of NEWCO shall direct the representative directors to arrange
commercial lines of credit sufficient to finance NEWCO's on-going operations.
In addition, GTC and MTC shall negotiate in good faith the terms and conditions
upon which GTC and MTC will provide an initial credit facility to NEWCO as set
forth in Exhibit B attached hereto. If such credit facility or other financing
arranged by NEWCO shall be insufficient then each of the parties hereto may
provide additional financing to NEWCO on terms and conditions to be agreed.
3. Unless otherwise agreed upon in advance by the parties hereto in
writing, the parties shall consult with each other to determine the initial
annual budget of NEWCO and sales planning therefor. Subsequent annual budgets
and sales planning will be determined and agreed upon prior to the commencement
of each of NEWCO's fiscal years.
Article 7. Certain Actions by NEWCO
1. The unanimous written consent of GTC, MTC and ASAP shall be required
for any of the actions set forth below of NEWCO:
(1) Changes in the Articles of Incorporation of NEWCO;
(2) The amount of remuneration of directors and statutory auditors;
(3) Payment of dividends;
(4) Approval of any financial statement for each fiscal year period;
and
(5) Acquisition, transfer (including the imposition of liens thereon)
or disposition of any patents, design patents, trademarks or
other intellectual property.
2. As for any of the actions referred to in the preceding paragraph
for which the unanimous written consent of GTC, MTC and ASAP has been given and
for which a resolution of either the general meeting of shareholders or the
Board of Directors is required, the parties hereto shall exercise their voting
rights as the shareholders or, as the case may be, shall cause their respective
nominee directors to exercise their voting rights to adopt the resolution
concerned in conformity with the action for which the unanimous consent of GTC,
MTC and ASAP was given.
3. Any other actions by NEWCO shall be made after the resolution of
a Board Meeting or a Shareholder's Meeting, as appropriate, adopted pursuant to
the Commercial Code and the Articles of Incorporation.
- 4 -
<PAGE>
Article 8. Management of NEWCO
1. The President and Representative Director of NEWCO, as jointly
appointed by GTC and MTC, shall have principal responsibility for the management
and business affairs except for all the actions set forth in Paragraph 1 of
Article 7.
2. The Board of Directors of NEWCO shall have authority to decide
the matters set forth in Paragraph 1 of Article 245 of the Commercial Code
except for all the actions set forth in Paragraph 1 of Article 7 and the
President and Representative Director shall have authority to perform such
matters in accordance with the resolution of the Board of Directors, provided,
however, that the President and Representative Director shall have authority to
decide and perform any other business and management activities other than
Paragraph 1 of Article 245 of the Commercial Code.
3. If any director nominated by the parties hereto performs any
business activity without authorization, the party hereto who nominated such a
director shall indemnify, defend and hold NEWCO, its agents, employees and
clients harmless from any loss damage, liability, claim, cost or expense
(including reasonable attorney's fees) incurred as a result of such unauthorized
act.
Article 9. Board of Directors
1. Except for all the actions set forth in Paragraph 1 of Article 7
hereof and in the Commercial Code and Articles of Incorporation, resolution of
the Board of Directors shall be adopted by a vote of four-fifths (4/5) of all
directors. The President and Representative Director shall be the Chairman of
the Board of Directors.
2. If the Board of Directors has reached a deadlock concerning a
proposed resolution, the Chairman shall make his best efforts to reach unanimous
approval to either adopt or reject the resolution concerned.
3. Notice of the convening of a meeting of the Board of Directors
shall be dispatched to each director not less than forty-five (45) days prior to
the date of such meeting. The period of notice may be shortened or the notice
may be dispensed with for a particular meeting by the unanimous consent of all
of the directors.
- 5 -
<PAGE>
Article 10. Records and Books of NEWCO
1. NEWCO shall prepare records and books of accounts in accordance
with the laws, regulations and accounting rules of Japan and shall preserve
these at the office of NEWCO.
2. The parties hereto shall have the right, at their sole expense,
to designate a certified public accountant to audit NEWCO's records and books
once a year.
3. The fiscal year period of NEWCO shall commence on the 1st of
January of each year and end on the 31st day of December of the same year,
provided however, that the first fiscal year period of NEWCO shall commence on
the day of its incorporation until the 31st day of December, 1995.
Article 11. Transfer of Shares of NEWCO
1. Without the prior written consent of MTC and GTC, the parties
shall not transfer, pledge or otherwise encumber of dispose of any of its shares
of NEWCO.
Article 12. Prohibition of Assignment of Rights and Duties
This Agreement or any of the rights or duties hereunder may not be
assigned by the parties hereto without the prior written consent of MTC and GTC.
Article 13. Use of Trade Mark
MTC has given permission to NEWCO to use and modify, subject to prior
approval, the "MTC" marks for business promotion during the term of this
Agreement.
Article 14. Notices
1. Any notice or other communication required or permitted to be
given or made under this Agreement, shall be in writing and may be given by
electronic mail, facsimile or registered airmail addressed to the party
concerned at the address of such party or by delivery to the addressee at such
address as shown on Page 1 of this Agreement. Any notice given by registered
mail shall be deemed to have been served seven (7) days after the date of
postmark, and any notice given by other manners shall be deemed to have been
serviced twenty-four (24) hours after date of transmission.
2. If and when the parties hereto respectively shall hereafter
change address as shown on Page 1, written notice shall be promptly given to
that effect to the other parties.
- 6 -
<PAGE>
Article 15. Modification
Any of the provisions of this Agreement may be modified by an
instrument duly executed by the authorized representatives of the parties
hereto.
Article 16. Effective Date, Duration and Termination of this Agreement
1. This Agreement shall become effective upon the date of the last
of all approvals of this Agreement by the Board of Directors of any of the
parties hereto and by the appropriate Japanese authorities in order to implement
their respective rights and duties under this Agreement.
2. Unless terminated earlier in accordance with the provisions of
Paragraph 3 or 4 below of this Article, this Agreement shall continue to be in
full force and effect so long as NEWCO is in existence.
3. This Agreement shall terminate if:
a) any party hereto commences relevant procedures for bankruptcy,
insolvency, receivership, liquidation, or winding up of its
affairs or such procedures are instituted by any third party
against any of the parties hereto;
b) any party shall be merged or consolidated or shall sell all or
substantially all of its assets to a third party; or
c) any party hereto materially violates any provision of this
Agreement and fails to cure or remedy the same within forty-five
(45) days after notice of such breach is provided to such party
by any other party hereto; AND
MTC and GTC hereto agree to the termination of this Agreement and send a notice
of such termination to the party which is subject of any of the acts set forth
in clauses a) - c) of this Paragraph 3. The effective date of termination shall
be the date upon which such notice of termination is dispatched.
4. NEWCO's "Total Quarterly Revenue Due MTC" is NEWCO's invoiced
-------------------------------
usage amount, as calculated quarterly, due MTC from NEWCO for services under
-----------------------
this Agreement plus any amount due to MTC from end user customers signed by
NEWCO and being invoiced directly by MTC. Usage is defined as the amount due to
MTC for services generated by call record activity processed through the MTC
switching network.
MTC reserves the right to terminate this Agreement after one (1) year
if customers signed by NEWCO have not achieved Total Quarterly Revenue Due MTC
-------------------------------
in the twelfth (12) calendar month after the incorporation of NEWCO of $[ * ].
-------------
- 7 -
* Confidential treatment requested; omitted portion filed separately with the
Commission.
<PAGE>
5. This Agreement shall also terminate if and when the parties
hereto agree to dissolve NEWCO.
Article 17. Effect of Termination
1. If and when this Agreement has been terminated under Paragraph 3 of
Article 16, the parties hereto shall decide either to dissolve NEWCO or to
receive the outstanding shares of NEWCO owned by the other parties hereto.
2. If and when this Agreement has been terminated under Article 16, the
parties hereto shall cause NEWCO to cease any use of the marks "MTC" upon the
termination of this Agreement.
3. If and when this Agreement has been terminated for any reason, the
following shall occur:
a. MTC shall have the right of first refusal to purchase 100% of the
outstanding shares of NEWCO, "Purchase". Such Purchase shall take place within
ninety (90) days of termination of this Agreement. Purchase price shall be
NEWCO's book price, as determined by an independent auditing firm, with such
firm agreed upon by MTC and GTC. If no agreement can be reached, MTC shall
select a firm.
Article 18. Ancillary Agreements
1. GTC and MTC shall provide an unsecured credit facility to NEWCO in
accordance with the basic terms set forth in Exhibit B and Such additional terms
as may be agreed based on good faith negotiations between GTC and MTC.
2. GTC shall, provide certain facilities and staff which GTC currently
has available to assist NEWCO to start its business operations as set forth in
Exhibit D.
3. MTC shall, upon incorporation of NEWCO, provide products and technical
support to NEWCO in accordance with the terms set forth in Exhibit C.
4. MTC shall, upon incorporation of NEWCO, appoint NEWCO as an MTC sales
distributor and hardware manufacturer in Japan.
5. [ * ]
6. GTC shall, as soon as practicable after incorporation of NEWCO , enter
into an agreement with NEWCO to become a master affiliate (major distributor) of
NEWCO's products and services, upon terms and conditions agreeable to both GTC
and NEWCO.
- 8 -
* Confidential treatment requested; omitted portion filed separately with the
Commission.
<PAGE>
7. MTC shall, upon incorporation of NEWCO, provide technical, engineering
and other assistance to enable NEWCO to have MTC Matrix manufactured by third
parties for use and sale by NEWCO in Japan and the other countries of Asia.
Article 19. Other Provisions
1. MTC and ASAP hereby represents and warrants that any of the provisions
of this Agreement or any implementation thereof will not violate any of the
United States laws.
2. GTC hereby represents and warrants that any of the provisions of this
Agreement or any implementation thereof will not violate any of the Japanese
laws.
3. GTC hereby appoints Mr. Shigeru Miki, Esq. as GTC's attorney-in-fact
for the sole purpose of notification given on behalf of GTC, MTC and ASAP,
pursuant to the Japanese Foreign Exchange and Foreign Trade Control Act.
4. GTC, MTC and ASAP shall cause NEWCO to submit to the Japanese Fair
Trade Commission ("FTC") the report on its holding shares of NEWCO within three
(3) months from the end of each and every fiscal year period of NEWCO under the
Act concerning prohibition of private monopoly and maintenance of fair trade in
Japan.
5. NEWCO shall file the required reports with the Ministry of Posts and
Telecommunications, pursuant with the requirements of foreign investment in
Japan.
Article 20. No Waiver of Rights
All waivers hereunder must be made in writing, and failure at any time to
require the other party's performance of any obligation under this Agreement
shall not affect the right subsequently to require performance of that
obligation. No waiver of any breach of any provision of this Agreement shall be
construed as a waiver of any continuing or succeeding breach of such provision
or a waiver or modification of the provision.
Article 21. Attorney's Fees
If any action or arbitration proceeding shall be commenced to enforce this
Agreement or any right arising in connection with this Agreement, the prevailing
party in such action or proceeding shall be entitled to recover from the other
party the reasonable attorney's fees, costs and expenses incurred by such
prevailing party in connection with such action or proceeding and in enforcing
any judgment or award obtained.
Article 22. Severability
Whenever possible, each provision of this Agreement shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Agreement should be prohibited or applicable law, such
provision or invalidity without invalidating the remainder of such provision or
the remaining provisions of this Agreement.
- 9 -
<PAGE>
Article 23. Subject Headings
The subject headings of the Articles of this Agreement are included for the
purposes of convenience only, and shall not affect the construction or
interpretation of any of its provisions.
Article 24. Further Assurances
The parties hereto shall each perform such acts, execute and deliver such
instruments and documents, and do all such other things as may be reasonably
necessary to accomplish the transactions contemplated in this Agreement.
The parties agree that this Agreement may be modified from time to time as
agreed by NEWCO's Board of Directors.
Article 25. Entire Agreement
1. This Agreement constitutes the entire agreement between the parties
hereto and supersedes all previous negotiations, agreement, commitments in
respect thereto.
2. Any and all documents attached as Exhibits A through E hereto shall
constitute part of this Agreement, provided, however, that if there are any
discrepancies between any provisions of Exhibit A through E and the provisions
of the main body of this Agreement, the provisions of the main body of this
Agreement shall prevail and provisions of such Exhibits shall be ineffective to
the extent of such discrepancy(ies).
3. The parties agree to finalize and execute a side agreement(s) as
deemed necessary, "Side Agreement" provided by MTC to the other parties within
sixty (60) days of the execution of this Agreement.
Article 26. Arbitration
All disputes arising among the parties to this Agreement shall be resolved
exclusively by arbitration in the country of the principal office of the party
against which the claim is entered, in accordance with the arbitration rules of
the arbitration associated in that location. Arbitration in Japan shall be
conducted in Tokyo at and in accordance with the rules of the Japan Commercial
Arbitration Association and arbitration in the United States shall be conducted
in San Francisco, California at the International Committee of the American
Arbitration Association in accordance with the rules of the American Arbitration
Association.
Judgment upon the award entered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
- 10 -
<PAGE>
Article 27. Governing Law and Languages
This Agreement shall be governed by the laws of Japan. This Agreement
shall be executed in English and Japanese languages and the text hereof in both
languages shall be equally valid as among the parties hereof.
IN WITNESS WHEREOF, the parties hereto having caused this Agreement to be
executed by their duly authorized representatives as of the date first written
above.
General Tsushin Kogyo Kabushiki Kaisha
By: Ikuo Kimura /s/
---------------
Name: Ikuo Kimura
-----------
Title: President, CEO
--------------
MTC Telemanagement Corporation
By: Edward A. Brinskele /s/
-----------------------
Name: Edward A. Brinskele
-------------------
Title: President, CEO
--------------
Associated Strategic Alliance Partners
By: Steve E. Weiner /s/
-------------------
Name: Steve E. Weiner
---------------
Title: President, CEO
--------------
- 11-
<PAGE>
EXHIBIT A
ARTICLES OF INCORPORATION
-------------------------
- 12 -
<PAGE>
ARTICLES OF INCORPORATION
OF
MTC JAPAN Ltd.
--------------
Duly Notarized on ___________________, 1994
in accordance with the approval of the
---
Meeting of Promoters as of _____________, 1994
- 13 -
<PAGE>
ARTICLES OF INCORPORATION
OF
MTC JAPAN, Ltd.
CHAPTER I. GENERAL PROVISIONS
------------------------------
Article 1. Corporate Name
The name of the Company shall be EMU TI-SHI- JAPAN KABUSHIKIKAISHA (in
--
"Katakana"). In English language it shall be known as MTC Japan Ltd.
Article 2. Purposes
The purposes of the Company shall be to:
(1) Manufacture and distribute telecommunication equipment and
telemanagement products and provide services in relation to the
products;
(2) Export and distribute telemanagement products and services in Japan and
the other countries of Asia;
(3) Manufacture telemanagement products for distribution in Japan and the
other countries of Asia;
(4) Act as MTC's exclusive service provider and hardware manufacturer and
distributor in Japan and other countries of Asia; and
(5) Undertake any and all businesses incidental to the foregoing activities
(The purpose of the Company will be subject to further negotiation with
the Legal Affairs Bureau.)
Article 3. Location of Head Office
The company shall have its head office in Shinjuku-ku, Tokyo.
Article 4. Method of Public Notice
Public notices of the Company shall be published in the Official Gazette.
CHAPTER II. SHARES
- 14 -
<PAGE>
Article 5. Number of Shares to be Issued
The total number of shares authorized to be issued by the Company shall be
eight thousand (800).
Article 6. Amount of Each Share Having Par Value
All shares to be issued by the Company shall have a par value of fifty
thousand yet ((Yen)50,000).
Article 7. Types of Share Certificates
All share certificates to be issued by the Company shall be in registered
and non-bearer form and in four (4) denominations of one (1) share certificate,
ten (10) share certificate, fifty (50) share certificate and one hundred (100)
share certificate.
Article 8. Restriction on Transfer of Shares
1. Transfers of shares of the Company shall require the approval of
the board of directors.
2. If the board of directors does not approve an application for a
particular share transfer, the board of directors shall designate another
transferee for such share transfer.
Article 9. Share Handling
The procedure for registration of transfer of shares, registration of
pledge of shares, indication of trust estate, re-issue of share certificates and
any other proceedings concerning share handling and relevant fees therefor shall
be governed by Share Handling Regulations adopted by resolution of the board of
directors.
- 15 -
<PAGE>
Article 10. Suspense of Alteration of Entries in the
Register of Shareholders
1. The Company shall suspend alterating any entry in the register of
shareholders from the date following the end of each fiscal year to the date on
which the ordinary general meeting of shareholders shall be completed.
2. In addition to the preceding paragraph, whenever necessary, the
Company may, by giving prior public notice, temporarily suspend alterating any
entry in the register of shareholders or fix the record in accordance with a
resolution of the board of directors.
CHAPTER III. GENERAL MEETINGS OF SHAREHOLDERS
Article 11. Procedures to Convene
1. An ordinary general meeting of shareholders shall be convened
within three (3) months following the end of each fiscal year period, and an
extraordinary general meeting of shareholders shall be convened from time to
time whenever necessary.
2. The president shall convene a general meeting of shareholders
pursuant to a resolution of the board of directors except as otherwise provided
for in the laws and government laws and regulations.
Article 12. Chairman of General Meetings
The president shall act as the chairman at a general meeting of
shareholders. When the president is unable to act as a chairman, one of other
directors, in accordance with the order previously determined by a resolution of
the board of directors, shall act as the chairman.
Article 13. Matters to be Resolved at General Meeting
The resolution of the following matters shall be made by unanimous
agreement of all the shareholders present at general meeting of shareholders,
including any vote by proxy:
- 16 -
<PAGE>
(1) Any changes in the Articles of Incorporation;
(2) The amount of the remuneration of directors and auditor;
(3) Payment of dividends;
(4) Approval of financial statements and other accounting documents for
fiscal year period;
(5) Acquisition, transfer (including the imposition of liens thereon), or
disposition of any patents design patents, trademarks or other
intellectual property.
Article 14. Method of Resolution
Except for the matters provided for in the preceding Article 13 and except
as otherwise provided for in the laws or government laws and regulations, any
resolutions of a general meeting of shareholders shall be adopted by a majority
vote at a meeting at which shareholders holding shares representing of more than
one half of the total number of the issued shares are present.
Article 15. Exercise of Voting Rights by a Proxy
A shareholder may exercise his vote by proxy. In such a case, the person
holding the proxy shall submit to the Company a document evidencing power of
representation at each general meeting of shareholders.
Article 16. Minutes
The substance of proceedings at a general meeting or shareholders and the
results thereof shall be recorded in the minutes of the meetings, which shall be
kept at the office of the Company after the chairman and the directors present
have signed their names or affixed their names and seals thereto.
2. A shareholder may have access to any minutes or other company records
at any time during business hours of the Company and may make copies hereof.
- 17 -
<PAGE>
CHAPTER 4, Directors and Auditors
Article 17. Number of Directors and Auditors
The Company shall have up to five (5) directors and one auditor.
Article 18. Election of Directors and Auditors
1. The directors and auditor of the Company shall be elected at a general
meeting of shareholders.
2. The election of directors shall not be based on cumulative voting.
Article 19. Term of Office
1. The terms of office or directors shall expire at the close of the
ordinary general meeting of shareholders held with respect to the settlement of
accounts for the last fiscal year period ending within one (1) year after their
assumption of office.
2. The term of office of a director elected to fill a vacancy shall
expire at the time when the term of office of the other directors then in office
shall expire.
3. The term of office of an auditor shall expire at the close of the
ordinary general meeting of shareholders held with respect to the settlement of
accounts for the last fiscal year period ending within three (3) years after
their assumption of office.
Article 20. Representative Director and Director with
Managing Position
1. The board of directors shall elect a President, one or more Senior
Managing directors and Managing directors, among the directors.
2. The President and Senior Managing Director shall represent the
Company, respectively.
- 18 -
<PAGE>
Article 21. Procedures of Convening a Meeting of the
Board of Directors
1. The President shall convene a meeting of the board of directors, and
act as a chairman of such meeting. When the President is unable to convene or
act as a chairman, one of the other directors, in accordance with the order
previously determined by a resolution of the board of directors shall convene a
meeting of the board of directors and may act as a chairman.
2. A notice of a meeting of the board of directors shall be dispatched to
each director at least forty-five (45) days prior to the date of such meeting,
provided, however, that the period of notice may be shortened or the notice may
be dispensed with by the unanimous consent of all the directors.
Article 22. Method of Adopting Resolution
Resolutions of the meeting of the board of directors shall require the
presence of not less than four fifth of all the directors and shall be adopted
by a majority of the directors present at the meeting.
Article 23. Remuneration for Directors and Auditors
Remuneration of the directors and auditor shall be determined by the
resolution of a general meeting of shareholders, respectively.
CHAPTER 4, Accounts
Article 24. Fiscal Year Period and the Settlement of
Accounts
The fiscal year period of the Company shall commence on January 1 of each
year and end on December 31 of the same year.
- 19 -
<PAGE>
Article 25. Disposition of Profit
Except as otherwise provided for in the laws and government laws and
regulatory, the profit for each fiscal year period shall be disposed of upon
approval of a general meeting of shareholders.
Article 26. Distribution of Dividends
Dividends on shares shall be paid to shareholders or registered pledges
appearing on the Register of shareholders as of the last day of each fiscal year
period.
Supplementary Provision
Article 27. Shares to be Issued upon Incorporation
The total amount of shares to be issued at the time of incorporation of the
Company shall be two hundred (200) shares having par value and the issue price
of fifty thousand (50,000) yen per share.
Article 28. Initial Fiscal Year Period
The initial fiscal year period of the Company shall commence on the day of
its incorporation and end on December 31, 1995.
Article 29. The Initial Term of Office of Directors and
Auditor
The initial term of office of directors and auditor shall expire at the
close of the ordinary general meeting of shareholders held with respect to the
settlement of accounts for the last fiscal year period ending within one year
after their assumption of office.
- 20 -
<PAGE>
Article 30. Promoters
The names and addresses of the promoters and the number of shares
subscribed to by such promoters upon incorporation are as follows:
Promoters Number of Shares
--------- ----------------
(Name) one (1) share
(Address)
(Name) one (1) share
(Address)
For the purpose of incorporation of said MTC Japan K.K., these Articles of
Incorporation have been prepared and the promoters have hereinbelow set forth
their names and addresses and affixed their seals:
Promoters
---------
(Name)
(Address)
(Name)
(Address)
- 21 -
<PAGE>
EXHIBIT B
UNSECURED CREDIT FACILITY TO BE PROVIDED BY GTC AND MTC
-------------------------------------------------------
Set forth below are the basic terms and conditions upon which GTC and MTC
shall provide an initial unsecured credit facility to NEWCO in the total
aggregate amount of (Yen) 100,000,000. Additional terms and conditions shall be
agreed to by GTC, MTC and NEWCO in good faith, as soon as possible after the
establishment of NEWCO.
1. TOTAL AGGREGATE AMOUNT OF CREDIT FACILITY:
(Yen) 100,000,000
2. ADVANCES: Advances shall be made in increments of (Yen) 10,000,000, to be
funded equally by MTC and GTC. Each advance shall be evidenced by a
promissory note duly executed by NEWCO.
3. TERM: The term of the credit facility shall be ten years.
4. LOAN FEES: None.
5. REPAYMENT AND INTEREST:
(a) Interest on the unpaid principal amount of each advance shall accrue
from the date of the advance until repaid in full at the fixed rate of three
percent per annum, for the actual number of days elapsed.
(b) No interest or principal shall be due and payable until a period of
five years, calculated from the first day of the month following the month in
which the advance is made, has elapsed ("Grace Period").
(c) The principal amount of each advance shall be repaid in twenty equal
quarterly installments in arrears, commencing on the last day of the first three
calendar months after the end of the Grace Period.
(d) Accrued interest during the Grace Period shall be repaid in 20
equal installments, together with the interest on the outstanding principal
amount of each advance, on the same date as the repayment of the principal
amount of the advance.
6. Optional Prepayments:
NEWCO may, upon at least one business day's prior written notice to GTC and
MTC, prepay the outstanding principal amount of any advance in whole, provided
that any such prepayment must be accompanied by payment of all accrued interest
to the date of such prepayment on the amount prepaid.
- 22 -
<PAGE>
EXHIBIT C
PRODUCTS SUPPLY AGREEMENT (Products and Services)
AND TECHNICAL SUPPORT
Upon incorporation of NEWCO, MTC shall provide products and services to
NEWCO, as requested by NEWCO, at the prices set forth below.
1. Products MTC shall initially provide to NEWCO shall include:
(a) Matrix Boxes (both single and multi line).
(b) As determined by MTC, Passport and related platform products at a cost
equal to MTC's loaded carrier cost plus ten percent.
2. MTC shall also provide NEWCO, promptly upon request, with complete
technical support, including:
(a) ESA Computer and software to provide communication facility to/from MTC
make NEWCO operational in terms of order entry and customer service in Japan;
(b) Sample data and specifications of MTC's billing software to allow third
party customization of the billing/invoicing system for the Japanese market.
(c) MTC shall use its best efforts, based upon production capacities, to
provide NEWCO with up to 50 Matrix Boxes per month for a period of up to four
(4) months.
- 23 -
<PAGE>
EXHIBIT D
OFFICE FACILITY AND STAFFING PROVIDED BY GTC
GTC shall provide the following office facility for NEWCO at the time of
establishment of NEWCO.
1. Dedicated office space at the S&S Building, co-located with GTC.
2. Furniture and office equipment to fully create an operational facility
for NEWCO.
3. On an as needed basis, staff support by assigning employees of GTC to
assist NEWCO staff with daily operations.
The above described facility shall be provided according to the following
conditions:
1. During the start-up period, defined as NEWCO able to perform at a better
than break-even level (revenue exceeds expenses) for three successive months, at
no cost.
2. When NEWCO's business performance demonstrates the capability to pay
"rent", a fee shall be negotiated in good faith between the management of GTC
and NEWCO.
3. When NEWCO's business performance demonstrates the capability to sustain
dedicated office facilities in location outside the S&S Building, and it is
determined beneficial to increasing marketshare, the management of NEWCO shall
coordinate with the management of GTC a move to another building.
- 24 -
<PAGE>
EXHIBIT E
[ * ]
- 25 -
* Confidential treatment requested; omitted portion filed separately with the
Commission.
<PAGE>
[ * ]
- 26 -
* Confidential treatment requested; omitted portion filed separately with the
Commission.
<PAGE>
MTC JAPAN
February, 1995
TABLE 1
QUARTER - YEAR 1 1 2 3 4
TOTAL QUARTERLY REVENUE DUE MTC [ * ] [ * ] [ * ] [ * ]
QUARTER - YEAR 2 1 2 3 4
TOTAL QUARTERLY REVENUE DUE MTC [ * ] [ * ] [ * ] [ * ]
* Confidential treatment requested; omitted portion filed separately with the
Commission.
<PAGE>
EXHIBIT 10.14
JOINT VENTURE AGREEMENT
THIS JOINT VENTURE AGREEMENT (as modified or amended from time to time, this
"Agreement") is made this ____ day of January, 1996, by and between Henk J.
Keilman and Jan Peter Kastelein (each individually a "JV Partner" and
collectively the "JV Partners"), and MTC Telemanagement Corporation, a
California corporation with offices in Petaluma, California, USA ("MTC") (the JV
Partners and MTC collectively referred to hereinafter as the "Parties"), with
reference to the following facts:
A. MTC is in the business of developing, producing, and
distributing unique, technology-based telecommunications products and services;
B. The JV Partners are principals in Atlantic Telecom B.V., a Dutch
corporation ("ATC"), which is engaged in the marketing, sales and installation
of telecommunications products and services; and
C. The Parties, desiring to establish a joint venture company under
the laws of the Netherlands in order to actively market and sell such products
and services in the Territory (defined below), entered into a Memorandum of
Understanding, dated as of November 22, 1995, which set forth the general
agreements of the Parties with respect to the joint venture.
D. The Parties now have agreed to establish such joint venture
company under the terms and conditions set forth below.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, MTC and the JV Partners hereby agree as follows:
I. DEFINITIONS
A. Defined Terms. The following definitions shall apply to this
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Agreement:
"Affiliate Support Services" shall mean those services provided by the
Corporation to any Master Affiliate Licensee or Sub-Affiliate, including,
without limitation, services in connection with customer support, promotion,
public relations, advertising, ESA support services, and billing services.
"Agent" shall mean any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise.
"Authorized Signatory" shall have the meaning set forth in Section V.D.1
hereof.
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"Business Plan" shall mean the comprehensive business plan for the
Corporation covering a period of at least three (3) years, a copy of which is
attached hereto as Exhibit C.
"Commercial Code" shall mean the laws of the Netherlands but only
insofar as they relate to the organization and internal management of a
corporation in the Netherlands.
"Common Stock" shall have the meaning set forth in Section II.B. hereof.
"Corporation" shall have the meaning set forth in Section II.A. hereof.
"Disclosing Party" shall mean the Party furnishing Proprietary
Information to any other Party.
"Effective Date" shall mean the later of (i) the date first written
above or (ii) the date on which this Agreement is executed by each Joint Venture
Partner, the Chief Executive Officer of MTC and a Senior Vice President of MTC.
"ESA" shall mean MTC's Extended System Access computer system.
"Events of Default" shall have the meaning set forth in Section X.C.
hereof.
"Existing Affiliate" shall mean any Master Affiliate Licensee or Sub-
Affiliate existing as of the date of this Agreement.
"Existing Sales" shall have the meaning set forth in Section III.F.2.
hereof.
"JV Partner" shall have the meaning set forth in the preamble hereof.
"Letters of Credit" shall mean the letters of credit issued for the
benefit of MTC pursuant to Section II.E. hereof.
"Majority Shareholders" shall mean, with respect to each class of Stock,
the Shareholders holding more than fifty percent (50%) of such class of Stock.
"Master Affiliate Licensees" shall mean the network of independent
contractors located in the United States of America and around the world which
enter into agreements with MTC and/or the Corporation to promote and market MTC
Services.
"MTC Customers" shall mean any customer of MTC, but shall specifically
exclude any Subscribers.
"MTC Services" shall mean MTC's Communication Management Services offered by MTC
to the Corporation from time to time, including, but not limited TO, incoming
and outgoing international long distance telephone service, client services such
as, but not limited to, billing sorts, formats,
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master billing arrangements, and carrier services provided by MTC through OCCs,
as the foregoing may be modified from time to time, and related Products.
"New Affiliates" shall mean those entities which first become Master
Affiliate Licensees or any Sub-Affiliate thereof following the Effective Date of
this Agreement.
"New Affiliate License Agreement" shall have the meaning set forth in
Section III.C. hereof.
"OCC" shall mean other common carriers.
"Party" shall mean either MTC or any JV Partner.
"Products" shall mean communication products offered by MTC to the MTC
Customers and/or Subscribers.
"Proprietary Information" shall mean: (i) this Agreement and any
amendment hereto; (ii) any and all technical information of the Disclosing Party
including, without limitation, product data, methods of manufacture, technical
processes, designs and design systems, inventions and research programs, trade
"know-how", software, algorithms, computer processing systems, object and source
codes, user manuals, systems documentation, secret processes, know-how,
receipts, formulas, training material and technical data, any other similar
information; (iii) any and all business information of or relating to the
Disclosing Party that is not known to the general public including, without
limitation, personnel information, employment records and policies, rates and
rate tables, compensation schedules, pricing policies, credit and collections
policies, operational methods, marketing plans and strategies, product
development techniques or plans, new personnel acquisition plans, contract terms
and conditions, affiliate lists and customer lists; (iv) any information
disclosed to the Disclosing Party by a third party and designated as
confidential; and (v) any other information designated as confidential by the
Disclosing Party. Notwithstanding the foregoing, Proprietary Information shall
not include information which: (a) has been published or otherwise come into the
public domain through no fault of the Parties; (b) prior to disclosure is
properly within the legitimate possession of the Receiving Party without
obligation of confidentiality; (c) subsequent to disclosure is lawfully received
from a third party having rights therein without restriction of the third
party's right to disseminate such information and without notice of any
restriction against its farther disclosure; (d) is independently developed
without breach of any obligation of confidentiality through parties who have not
had direct or indirect access to or knowledge of such Proprietary Information;
or (e) is transmitted to the Receiving Party after the Disclosing Party has
received written notice from the Receiving Party that it does not desire to
receive further Proprietary Information.
"Receiving Party" shall mean any Party receiving Proprietary Information
from the Disclosing Party.
"Sales Revenue" shall mean MTC billed revenue that is eligible for
commission as determined by MTC.
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"Secondary Joint Venture" shall have the meaning set forth in Section
III.C. hereof.
"Secondary Joint Venture Agreement" shall mean, with respect to any
Secondary Joint Venture established pursuant to the terms hereof, the joint
venture agreement between MTC, the Corporation, and the Third Party.
"Shareholders" shall mean each JV Partner and MTC and their permitted
successors and assigns.
"Stock" shall mean any capital stock issued by the Corporation as
contemplated herein.
"Sub-Affiliates" shall mean those independent contractor organizations
which contract with Master Affiliate Licensees to promote and market MTC
Services.
"Subscribers" shall mean customers who are billed directly by the
Corporation.
"Territory" shall mean Belgium, the Netherlands, Luxembourg, France and
Germany.
"Third Party" shall mean any entity within the Territory that (a)
occupies strategic positions and has substantial market share in the
telecommunication industry in the Territory, (b) has significant abilities to
market, sell and distribute the Services, (c) whose business is compatible with
MTC's business and global strategy, and (d) is willing to make substantial
investments, including a minimum of initial capital contribution of no less than
U.S.$l,000,000.
B. Section References. As used in this Agreement, the words
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"hereof," "herein" and "hereunder," and words of similar import shall refer to
this Agreement as a whole, and not to any particular provision of this
Agreement, and the words "Article", "Section", "Exhibit" and "Addendum" are to
this Agreement unless otherwise specified.
II. ORGANIZATION OF THE CORPORATION
A. General. Prior to the Effective Date, the JV Partners
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established a new company organized as a public limited liability company under
the Commercial Code of the Netherlands. The new company currently is known as
MTC Telecom Western Europe B.V.I.O. and upon proper qualification under the laws
of the Netherlands shall be known as MTC Telecom Western Europe B.V.
(hereinafter, the "Corporation"). The charter documents required for the
formation of the Corporation shall be printed in both the Dutch and English
languages (copies of which are attached hereto as Exhibit A.) The JV Partners
shall prepare any and all documents as shall be required for the incorporation
of the Corporation, and MTC and the JV Partners shall, in conformity with the JV
Partners' instructions, promptly execute or cause to be executed any such
document as may be required in connection therewith.
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Furthermore the Parties recognize that due to legal or tax
considerations, or considerations related to Dutch Company law, some aspects of
the Joint Venture Agreement may have to be amended after the Agreement has been
executed. Such amendments will be agreed upon by the Parties on a case by case
basis, and will be guided by the legal and tax requirements as advised by an
external, qualified consultant.
B. Authorized Capital. The Corporation shall have the authority to
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issue ___________________ (_______) shares of non-bearer common stock issuable
by the Corporation ("Common Stock"). The Common Stock shall have a par value of
one Dutch guilder per share. The Corporation's stock may be held by the Parties
directly or indirectly through an affiliated legal entity controlled by such
Party.
C. Contributions by the Parties. The Parties shall make capital
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contributions or loans to the Corporation in the following amounts:
1. MTC will contribute a total amount in cash of U.S.
$[ * ], of which U.S. $[ * ], will be contributed in the form of share
capital, and U.S. $[ * ] will be contributed in the form of [ * ]. The
total amount of U.S. $[ * ] will be paid in twelve equal monthly
installments of U.S. $[ * ] each, of which the first installment was
made on or around _________________ , 1996. In addition MTC will provide
to the Corporation the use of assets deemed worth U.S. $[ * ] in the
form of know how, contacts, the MTC name and support structure. The use
of these assets will be provided to the Corporation free of charge for
the duration of this Agreement.
2. The JV Partners collectively will contribute a total
amount in cash of U.S. $[ * ], of which U.S. $[ * ] will be contributed
in the form of share capital, and U.S. $[ * ] will be contributed in the
form of [ * ]. This amount will be paid within the first two weeks of
December 1995. In addition the JV Partners will provide to the
Corporation the use of assets deemed worth U.S. $[ * ]. These assets
comprise the assets of ATC, including its know how, trained staff, the
base of customers which are billed directly by ATC or one of its
affiliates, office equipment, contacts, distribution agreement with
Salland Corporation, billing and customer service software. A balance
sheet of ATC, in which these assets are stated, has been attached to
this Agreement as Exhibit A. The use of these assets will be provided to
the Corporation free of charge for the duration of this Agreement.
3. The Shareholders agree, that in the case the above
funding arrangements will not be adequate, the Shareholders will discuss
additional funding to the Corporation on a case by case basis.
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* Confidential treatment requested; omitted portion filed separately with the
Commission.
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D. Issuance of Shares.
1. MTC, directly or indirectly, shall receive ____________
shares of the Common Stock, representing [ * ] percent ([ * ]%) of the
total issued and outstanding shares Common Stock.
2. The JV Partners, directly or indirectly, collectively
shall receive _________________ shares of the Common Stock, representing
[ * ] percent ([ * ]%) of the total issued and outstanding shares of
Common Stock.
3. MTC and each JV Partner each shall notify the
Corporation of its intention not to receive and hold its respective
share certificates of the Common Stock in accordance with the laws of
the Netherlands.
E. Assignment of Credit Insurance. The JV Partners shall cause ATC
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to assign to the Corporation all credit insurance policies with respect to
Subscribers, and the Corporation immediately shall assign such policies to MTC.
Furthermore, the Corporation shall require credit insurance policies in
connection with sales to each Subscriber and shall assign all such policies to
MTC. Bach such credit insurance policy shall insure no less than eighty percent
(80%) of the retail amount of MTC Services billed to such Subscribers.
In the event that contractual or legal requirements prevent the JV Partners from
assigning such credit insurance policies, the JV Partners shall cause such
credit insurance policies to be pledged to MTC.
F. Financing. The Parties shall make all reasonable efforts to
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cause the Corporation to operate on a self-supporting basis. If and when the
Corporation requires additional fluids for its operation, the board of
supervisory directors of the Corporation shall direct the managing directors to
arrange commercial lines of credit sufficient to finance the Corporation's on-
going operations.
G. Security for Obligations to MTC. The Corporation shall take
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appropriate actions to limit any credit exposure of MTC with respect to all
wholesale sales of MTC Services to the Corporation for sale by the Corporation
to Subscribers. Notwithstanding the foregoing, the Corporation shall provide to
MTC such guaranties as shall deemed necessary by the Shareholders upon
consultation with the board of supervisory directors.
H. Proprietary Information. Notwithstanding any other provision
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contained herein, all product designs and design projects, technical, secret
process, product development techniques or plans, invention and research
projects, trade "know-how", methods of operation, formulae, software,
algorithms, computer processing systems, object and source codes, user manuals,
system documentation, training and marketing materials, technical data, and
other similar material and information are and shall remain the sole and
exclusive property of MTC; provided, that all such proprietary information owned
or developed by ATC or in which ATC claimed an interest prior to the Effective
Date, and all such proprietary information owned or developed by
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* Confidential treatment requested; omitted portion filed separately with the
Commission.
<PAGE>
the Corporation or in which the Corporation claims an interest, is and shall
remain the sole and exclusive property of the Corporation. MTC shall license the
Corporation to market and distribute MTC Services in connection therewith during
the term of this Agreement.
I. Subscribers. Once MTC has completed the implementation of its
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new billing platform, it is the intent of the parties to migrate Subscribers to
a direct billing arrangement by MTC and treated as MTC Customers.
III. OBJECTS AND PURPOSES OF THE CORPORATION
A. Actions. All actions with respect to the Corporation shall be
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made pursuant to a resolution approved by the board of supervisory directors or
the Shareholders, as appropriate.
B. Authorized Activities. The authorized business activities of the
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Corporation shall be:
1. To distribute MTC Services in the Territory;
2. To provide customer support to MTC Customers and
Subscribers;
3. To find and appoint New Affiliates within the Territory;
4. To establish Secondary Joint Ventures within the
Territory pursuant to Section III.C. below;
5. To make all Affiliate Support Services available to any
Master Affiliate Licensee, M-net representative, or Secondary Joint
Venture;
6. To make direct sales to MTC Customers or Subscribers;
and
7. Any other activities consistent with the terms of this
Agreement and otherwise as authorized from time to time by the
Shareholders.
C. New Affiliates. New Affiliates appointed by the Corporation
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shall enter into written marketing and license agreements with the Corporation,
in form and substance acceptable to MTC (each, a "New Affiliate License
Agreement"). Without limiting the generality of the foregoing, each New
Affiliate License Agreement shall provide that such agreement is assignable to
MTC, and the Corporation shall assign such agreement to MTC immediately after
its execution by the parties thereto.
D. Secondary Joint Ventures. In the event that the Corporation or
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MTC identifies a Third Party in the Territory then MTC, in its sole discretion,
may offer any such Third Party a joint venture arrangement with MTC (a
"Secondary Joint Venture") under the following terms
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and conditions and other such terms and conditions as shall be agreed upon by
MTC, the Corporation, and the Third Party in the respective Secondary Joint
Venture Agreement:
1. The division of shares between the Third Party, MTC and
the Corporation will be decided on a case by case basis.
2. Each Secondary Joint Venture Agreement will set forth
sales and revenue criteria, and the failure of the Secondary Joint
Venture to meet such criteria shall constitute an event of default
thereunder that shall give MTC the right, but not the obligation, to
purchase at fair market value the shares of such Secondary Joint Venture
held by either the Third Party or the Corporation.
3. The day-to-day management of any Secondary Joint Venture
shall be conducted by the Third Party. The Corporation shall provide
executive management and support services to the Secondary Joint Venture
as set forth in the Business Plan.
4. MTC, at its sole discretion, may agree with the JV
Partners and/or the Corporation to establish other joint ventures
outside of the Territory, but within Europe.
E. Restricted Activities.
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1. During the term of this Agreement and for a period of
two YEARS following the termination thereof, no JV Partner shall
directly or indirectly engage in, invest in, or perform any business
competitive with the business activities of the Corporation except as
described in Section III.F. below without the prior written consent of
MTC.
2. The Corporation may only contact existing MTC Customers
(other than those MTC Customers which became MTC Customers through ATC
or one of its Sub-Affiliates) with the written approval of the
appropriate Existing Affiliate and MTC.
F. Affiliate Relations. The JV Partners acknowledge that,
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notwithstanding any provision to the contrary contained herein, MTC and/or any
of its Existing Affiliates currently may market and sell MTC Services in the
Territory and that Existing Affiliates and New Affiliates will continue to be
authorized to sell and market MTC Services in the Territory. MTC will use its
best efforts to encourage the cooperation of Existing Affiliates with the
Corporation with respect to such sales and distribution activities, particularly
in the areas of certain support services that will be offered by the Corporation
including: (a) Affiliate Support Services; (b) promotion, public relations and
advertising; and (c) contract administration and MTC Customer database services.
Notwithstanding the foregoing, the JV Partners acknowledge that Existing
Affiliates are parties to binding contracts with MTC that do not contain such
provisions and that modification of such contracts will be time-consuming and,
in some cases, may not be possible without the consent of the Existing
Affiliates. Further details regarding the development of relations between the
Corporation, Existing Affiliates, M-Net representatives and MTC Customers will
be described in the Business Plan.
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G. Revenues of the Corporation. The Corporation shall earn revenues
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as follows:
1. Sales by New Affiliates. With respect to sales of MTC
Services by each New Affiliate within the Territory, during the term of
this Agreement the Corporation will receive from MTC a commission equal
to the greater of (a) [ * ] percent ([ * ]%) of such Sales Revenue, or
(b) the difference between (i) [ * ] percent ([ * ]%) of such Sales
Revenue and (ii) the commission paid to such New Affiliate; provided,
that any agreements which provide for commissions of greater than [ * ]
percent ([ * ]%) to any New Affiliate must be approved in advance by MTC
in writing.
2. Sales by Existing Affiliates. MTC will use its best
efforts to propose that Existing Affiliates modify their respective
agreements with MTC to provide that, with respect to sales of MTC
Services by each Existing Affiliate within the Territory who agrees to
use the Affiliate Support Services provided by the Corporation, the
Corporation will receive from the commissions currently paid to such
Existing Affiliate during the term of this Agreement a commission equal
to (a) [ * ] percent ([ * ]%) of such Sales Revenue up to the level of
Sales Revenue of such Existing Affiliate as of the date such Existing
Affiliate agreed to use the support services provided by the Corporation
(the "Existing Sales"), (b) [ * ] percent ([ * ]%) of the Sales Revenue
by such Existing Affiliate in excess of the Existing Sales, and (c)
[ * ] percent ([ * ]%) of the Sales Revenue of any Sub-Affiliate
appointed by the Existing Affiliate following the effective date of such
agreement. The Corporation will earn no commission with respect to the
Sales Revenue of an Existing Affiliate unless such Existing Affiliate
enters into a written modification of its existing agreements with MTC
pursuant to which such Existing Affiliate agrees to (y) use the
Affiliate Support Services provided by the Corporation, and (z) modify
its commission schedule with MTC.
3. Sales by Secondary Joint Ventures. With respect to sales
of MTC Services by any Secondary Joint Venture within the Territory,
during the term of this Agreement the Corporation will receive from MTC
a commission of between [ * ] percent ([ * ]%) to [ * ] percent ([ * ]%)
of such Sales Revenue, as agreed upon by the Parties from time to time.
4. Sales by M-net Representatives. With respect to sales of
Services by M-net representatives within the Territory, during the term
of this Agreement the Corporation will receive from MTC a commission
equal to [ * ] percent ([ * ]%) of eligible M-net Sales Revenue and as
defined in the Business Plan.
5. Equity in Secondary Joint Ventures. The Corporation will
receive no less than [ * ] percent ([ * ]%) of the initial equity
distribution in any Secondary Joint Venture, subject to (a) agreement
with the Third Party, (b) compliance by the JV Partners with the terms
of this Agreement and during the term hereof and (c) repurchase of such
equity interest by MTC as provided in the Secondary Joint Venture
Agreement between MTC, the Corporation, and the Third Party.
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* Confidential treatment requested; omitted portion filed separately with the
Commission.
<PAGE>
IV. SHAREHOLDERS
A. Time and Place of Meetings. Meetings of the Shareholders for any
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purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, (i) may be called by any Shareholder, and (ii)
shall be called at the request in writing of a majority of the board of
supervisory directors. Such request shall state the purpose or purposes of the
proposed meeting. Written notice of a Shareholder meeting stating the place,
date and hour of the meeting, and the purpose or purposes for which the meeting
is called, shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting to each Shareholder. The period of notice may be
shortened or the notice may be dispensed with for a particular meeting by the
unanimous consent of all of the Shareholders. Shareholder meetings may be held
by telephone.
B. Quorum. At all meetings of the Shareholders, Shareholders owning
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or otherwise representing eighty percent (80%) of all shares of Stock shall
constitute a quorum for the transaction of business.
C. Voting. Whenever Shareholders vote in connection with any action
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contemplated under the terms of this Agreement, each Shareholder shall be
entitled to cast votes equal in number to the number of shares held by such
Shareholder. Except as otherwise provide herein, any resolution of the
Shareholders shall be adopted by vote of the Majority Shareholders. Shareholders
will act reasonably and in good faith to avoid deadlocks.
D. Vote by Proxy. If and when any of the Shareholders intends to
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exercise its voting right by proxy at any general meeting of the Shareholders of
the Corporation, such Shareholder may appoint any Shareholder of the Corporation
as its proxy.
E. Consent Required for Certain Actions. The unanimous written
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consent of all Shareholders shall be required for any of the following actions
of the Corporation:
1. Any addition to or modification of the articles of
association;
2. The amount of compensation of statutory auditors;
3. Approval of any annual budgets, financial statement, or
business plan for each fiscal year;
4. Acquisition, transfer (including the granting or
imposition of liens thereon or the license or sub-license thereof), or
disposition of any patents, design patents, trademarks, copyrights, or
any other intellectual property, including any license of any of the
foregoing;
5. Sale of all or substantially all of the assets of the
Corporation, or the merger or consolidation of the Corporation with
another entity;
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6. Any modification of the capitalization of the
Corporation, whether such modification pertains to an increase in the
number of shares of Common Stock or the establishment of any other class
of capital stock;
7. The sale of any additional shares of Stock of the
Corporation; or
8. Other similar actions as agreed from time to time by a
unanimous written consent of the Shareholders.
As for any of the actions referred to in this Section IV.E. for which all
Shareholders have given written consent and for which a resolution of either the
general meeting of Shareholders or the board of supervisory directors is
required, the Shareholders shall exercise their respective voting rights as
Shareholders or, as the case may be, shall cause their respective nominee
supervisory directors to exercise their voting rights to adopt the related
resolution in conformity with the action for which such unanimous consent of the
Shareholders was given.
F. Written Consent. Unless otherwise provided in the certificate of
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incorporation, any action required to be taken at any meeting of the
Shareholders, or any action which may be taken at any meeting of the
Shareholders, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by all Shareholders.
G. Business Plans, Annual Budgets and Sales Planning. Prior to the
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formation of the Corporation, the JV Partners will provide the lead role in the
development of the Business Plan. Each year thereafter, the Corporation shall
prepare a revised business plan for approval by the Shareholders. Unless
otherwise agreed upon in advance by the Shareholders in writing, the
Shareholders shall consult with each other to determine the initial annual
budget of the Corporation and sales planning therefore. Subsequent annual
budgets and sales planning will be determined and agreed upon by the
Shareholders prior to the commencement of each of the Corporation's fiscal
years, along with the updated Business Plan.
H. Transfer of Shares. MTC may assign, pledge or otherwise transfer
------------------
its shares in the Corporation without the consent of the JV Partners. The JV
Partners may not assign, pledge or otherwise transfer any of their shares in the
Corporation without the prior written consent of MTC.
I. Auditors. Any Shareholder may, at its sole expense, designate a
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certified public accountant to audit the books and records of the Corporation
once each fiscal year.
J. Audit and Inspection Rights. Upon the request of any
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Shareholder, the board of managing directors shall provide to such Shareholder
copies of Corporation's corporate, financial, and operating records in such
detail as requested by such Shareholder. Any Shareholder or its representatives
may visit the properties of the Corporation at any time during normal business
hours to review such records, make copies thereof or abstracts therefrom, and to
discuss the
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matters related to the Corporation with the managing directors, other officers
or agents, and independent accountants, all at the expense of the Corporation.
V. GENERAL PROVISIONS
A. Dividends. Dividends upon the Stock, if any, and subject to the
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provisions of the certificate of incorporation, may be declared by the board of
supervisory directors at any regular or special meeting, pursuant to applicable
law. Dividends may be paid in cash, in property, or in shares of the Stock,
subject to the provisions of the certificate of Incorporation.
B. Reserves. Before payment of any dividend, there may be set aside
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out of any funds of the Corporation available for dividends such sum or sums as
the supervisory directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the supervisory directors shall think conducive to the
interest of the Corporation, and the supervisory directors may modify or abolish
any such reserve in the manner in which it was created.
C. Corporate Condition. Upon the request of the Majority
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Shareholders, the board of managing directors shall present at a meeting of the
Shareholders a full and clear statement of the business and condition of the
Corporation.
D. Fiscal Year. The fiscal year of the Corporation shall commence
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on the first (1st) day of January of each calendar year and shall end on the
thirty-first (31st) day of December of the same year; provided, that the initial
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fiscal year of the Corporation shall commence on the day of its incorporation
and shall end on the thirty-first (31st) day of December, 199_.
E. Indemnification. The Corporation shall, to the maximum extent
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permitted by law, have the power to indemnify each of its supervisory directors,
managing directors, officers and agents against expenses, judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding arising by reason of the fact that any such person is or was
a director, officer, or agent of the Corporation, and shall have the power to
advance to each such agent expenses incurred in defending any such proceeding to
the maximum extent permitted by law.
F. Staff and Product Support. The Shareholders shall provide
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ongoing staff and product support to the Corporation as set FORTH in the
Business Plan. Any and all such matters relating to the staffing of the
Corporation not specifically provided for in the Business Plan shall be
separately agreed upon in writing by the board of supervisory directors.
VI. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE JV PARTNERS
A. Representations and Warranties. Each JV Partner represents and
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warrants to
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MTC, as the Effective Date, that:
1. ATC is a corporation duly organized, validly existing
and in good standing under the laws of the Netherlands;
2. ATC has the power and authority and all governmental
licenses, authorizations, consents and approvals to own its assets,
carry on its business, and to execute, deliver and perform its
obligations under each agreement to which it is a party;
3. the execution, delivery and performance by the JV
Partners of this Agreement and each other agreement in connection
herewith to which any JV Partner or ATC is a party have been duly
authorized by all necessary corporate action, and do not and will not
(a) contravene the terms of any of ATC's organization documents, (b)
conflict with or result in the contravention of any order, injunction,
writ or decree of any governmental authority to which ATC is subject,
and (c) violate any requirement of any applicable law;
4. no approval, consent, exemption, authorization, or other
action by, or notice to, or filing with, any governmental authority is
necessary or required in connection with the execution, delivery or
performance by, or enforcement against, any JV Partner of this Agreement
except as expressly provided herein;
5. this Agreement constitutes a legal, valid and binding
obligation of each JV Partner, enforceable against each JV Partner in
accordance with its terms, except as enforceability may be limited by
applicable insolvency or similar laws or by equitable principles
relating to enforceability;
6. no JV Partner has entered into this Agreement for any
purpose other than to sell and market MTC Services, and that any use of
the Proprietary Information of MTC for purposes other than the
performance of its obligations hereunder, including any direct or
indirect competition with MTC. would cause MTC irreparable harm;
7. neither any JV Partner, ATC, nor any affiliate thereof
has entered into any agreement or understanding, oral or written, with
any MTC Customer which is inconsistent with the terms of this Agreement
or which shall result in, or with the passage of time reasonably may
result in, the breach or violation of this Agreement;
8. except as set forth in Exhibit D hereto, neither ATC nor
any JV Partner is a party to any actual or threatened claims,
litigation, suits, or proceedings;
9. except as set forth on Exhibit E hereto, no JV Partner
is a partner or joint venturer in any partnership or joint venture
related to the provision of telecommunications products and services or
in any manner or which might be construed as competitive in nature to
MTC and MTC Services; and
13
<PAGE>
10. All information provided to MTC by any JV Partner,
including the information set forth on the Exhibits attached hereto, is
true and correct as of the Effective Date.
B. Affirmative Covenants. Each JV Partner covenants to MTC that
---------------------
until the performance of all of its obligations hereunder and until the
termination of this Agreement, each JV Partner shall cause the Corporation to
comply with the following covenants:
1. Books and Records. The Corporation shall maintain
-----------------
adequate books and records and accounts in accordance with generally
accepted accounting principles consistently applied, and shall permit
any Shareholder, at any reasonable time during normal business hours, to
inspect, audit, and examine such books and records and inspect any of
its properties, and shall furnish each Shareholder with all information
regarding the business or finances of the Corporation promptly upon
request;
2. Quarterly Financial Reports. The Corporation shall
---------------------------
provide to each Shareholder, within sixty (60) days after the close of
each quarterly accounting period in each fiscal year the following
financial statements, each in form and substance satisfactory to MTC:
(a) a statement of Shareholders' equity and statement of changes in
financial position for such quarterly period; (b) an income statement;
and (c) a balance sheet as of the end of such quarterly period in all
reasonable detail, subject to year-end audit adjustments and certified
by the Corporation's principal financial officer to have been prepared
in accordance with generally accepted accounting principles consistently
applied;
3. Annual Financial Reports. The Corporation shall provide
------------------------
to MTC, within ninety (90) days after the close of each fiscal year, a
copy of the annual audit report for such year for the Corporation in
form and substance satisfactory to MTC, including therein: (a) a
statement of Shareholders' equity and statement of changes in financial
position for such quarterly period; (b) an income statement; and (c) a
balance sheet as of the end of such quarterly period in all reasonable
detail, certified by the Corporation's principal financial officer to
have been prepared in accordance with generally accepted accounting
principles consistently applied;
4. Compliance with Law. The Corporation shall comply with
-------------------
the requirements of all applicable laws, rules, regulations, orders of
any governmental agency and all material agreements to which it is a
party;
5. Notice of Litigation. The Corporation shall provide to
--------------------
each Shareholder prompt, written notice of any actual or threatened
claims, litigation, suits, proceedings or disputes which, if adversely
determined, would have a material adverse effect on the operations,
business, properties or condition (financial or otherwise) of the
Corporation or its ability to perform its obligations hereunder; and
6. Other Information. The Corporation shall provide to each
-----------------
Shareholder any other reports or information as any Shareholder may
reasonably request from time to time.
14
<PAGE>
C. Negative Covenants. Each JV Partner covenants to MTC that until
------------------
the performance of all of its respective obligations hereunder and until the
termination of this Agreement (unless another time period is specified), each JV
Partner shall comply with the following covenants:
1. Non-Competition. Without the prior written approval of
---------------
MTC, no JV Partner shall enter into a similar enterprise with any long
distance company, long distance reseller, long distance service
provider, switchless reseller, rebiller, aggregator, OCC, local exchange
carrier, post-telephone and telegraph administration, call-back service
provider, re-originator service provider, telemanagement company, agent,
or any other originating and/or terminating long distance, local access
or transport area, or local telephone service that sells, remarkets or
otherwise represents an organization that might be construed as
competitive in nature to MTC and MTC Services;
2. Non-Solicitation. Prior to that date which is two (2)
----------------
years following the termination of this Agreement, neither any JV
Partner, the Corporation nor any of its officers or employees shall (a)
solicit for business, directly or indirectly, verbally or otherwise, any
MTC Customer, (b) directly or indirectly sell, market, consult,
recommend, or offer opinions or referrals related to products and/or
services on behalf of any organization that may be construed, in the
sole but reasonable judgment of MTC, as providing and/or representing
products and/or services competitive in nature to MTC Services, (c)
derive direct or indirect financial benefit from the sale of any product
and/or service to any customer of MTC that may be construed, in the sole
but reasonable judgment of MTC, as competitive in nature to MTC
Services, (d) provide information regarding MTC Customers to any third
party for any purpose, (e) solicit MTC employees for employment
elsewhere, or (f) solicit any other sales entity of MTC, including,
without limitation any Master Affiliate Licensee or Sub-Affiliate, for
the purpose of representing the Corporation or any JV Partner;
3. Confidential Information. Except as set forth herein,
------------------------
neither the Corporation nor any JV Partner shall provide any third
party, directly or indirectly, with any Proprietary Information of MTC;
4. Other Agreements. Neither the Corporation nor any JV
----------------
Partner shall enter into any agreement or understanding, oral or
written, with any MTC Customer which attempts or purports to alter or
vary, or is inconsistent with, the terms of this Agreement or which
results in, or with the passage of time reasonably may result in, the
breach or violation of this Agreement;
5. Misrepresentations. Neither the Corporation nor any JV
------------------
Partner shall furnish MTC with any certificate or other document that
will contain any untrue statement
15
<PAGE>
of material fact or that will omit to state a material fact necessary to
make it not misleading in light of the circumstances under which it was
furnished; and
6. Partnerships. Except as set forth on Exhibit E hereto,
------------
without prior written notice to MTC no JV Partner shall be a partner or
joint venturer in any partnership or joint venture related to the
provision of telecommunications products and services or in any manner
or which might be construed as competitive in nature to MTC and MTC
Services.
VII. COVENANTS OF MTC
MTC covenants to the JV Partners that until the performance of all of
its obligations hereunder and until the termination of this Agreement, MTC shall
comply with the following covenants:
A. Confidential Information. Except as set forth herein, MTC shall
------------------------
not provide any third party, directly or indirectly, with any Proprietary
Information of any JV Partner except as permitted herein.
B. Misrepresentations. MTC shall not furnish any JV Partner or the
------------------
Corporation with any certificate or other document that will contain any untrue
statement of material fact or that will omit to state a material fact necessary
to make it not misleading in light of the circumstances under which it was
furnished.
VIII. CONFIDENTIALITY
A. Use of Proprietary Information. In performing its respective
------------------------------
obligations hereunder, the Parties may disclose to each other certain
Proprietary Information. Each Party agrees that Proprietary Information is, and
shall remain, the sole and exclusive property of the Disclosing Party. Each
Party shall treat the Proprietary Information in a confidential manner and shall
not divulge, communicate or use to the detriment of the Disclosing Party or for
the benefit of the Receiving Party or any other person or persons, or misuse in
any way, any Proprietary Information of the other Party except (i) with the
prior written consent of the Disclosing Party, (ii) if the Receiving Party is
required to do so pursuant to a final order of a court of competent
jurisdiction, or (iii) as the Receiving Party is otherwise required by
applicable law following notice of not less than thirty (30) days to the
Disclosing Party.
B. Dissemination of Proprietary Information. No Party shall reveal
----------------------------------------
the Proprietary Information of any other Party to any employee or agent of such
Party other than those employees or agents who (i) have a need to know such
Proprietary Information and (ii) agree to be bound by the provisions of this
Section VIII. Each Party shall inform each such employee or agent of the
confidential nature of the Proprietary Information and shall take all reasonable
and appropriate measures to ensure that no such employee or agent shall use or
disclose any Proprietary Information of any other Party, other than in
accordance with the terms
16
<PAGE>
of this Agreement. Such appropriate measures may include a written agreement
signed by each such employee or agent.
C. Return of Proprietary Information and Other Materials. Upon the
-----------------------------------------------------
earlier of (i) thirty (30) days following the termination or expiration of this
Agreement or (ii) the written request of the Disclosing Party at any time, the
Receiving Party shall return to the Disclosing Party all originals and any
copies of Proprietary Information of the Disclosing Party.
D. Relief Available Upon Disclosure or Dissemination. Each Party
-------------------------------------------------
acknowledges that the breach or threatened breach of this Section VIII may cause
the Disclosing Party irreparable harm which would not be adequately compensated
by monetary damages. Accordingly, in the event of any such breach or threatened
breach, the Receiving Party agrees that equitable relief, including temporary
restraining orders or preliminary or permanent injunctions, shall be an
available remedy in addition to any other legal remedies to which the Disclosing
Party may be entitled.
IX. CONDITIONS PRECEDENT
A. The obligation of MTC to provide any services or products to the
Corporation or its customers is subject to the fulfillment to MTC's satisfaction
of each of the following conditions on the Effective Date:
1. MTC shall have received written assurance from the JV
Partners that within one month from the date of this Agreement, the JV
Partners shall deliver an assignment of each credit insurance policy in
effect with respect to any Subscriber.
2. MTC shall have received executed copies of any ancillary
agreements as appropriate with respect to services to be provided to the
Corporation during the term of this Agreement;
3. MTC shall have received, in form and of substance
satisfactory to MTC, a written opinion, dated as of the Effective Date,
from a firm of international reputation licensed or otherwise authorized
to practice law in the Netherlands with respect to any matters required
by MTC;
4. MTC shall have received and approved the Business Plan;
5. MTC shall have received (a) ATC's most recent balance
sheet and profit and loss statement, and (b) a commitment to forward
ATC's year end 1995 financial statements upon their completion.
6. MTC shall have received evidence that ATC is organized
and is in good standing under the laws of the Netherlands;
17
<PAGE>
7. Within thirty (30) days of the Effective Date, MTC shall
have received evidence that the Corporation is organized and is in good
standing under the laws of the Netherlands; and
8. Within thirty (30) days of the Effective Date, MTC shall
have received evidence of insurance with respect to the operations of
the Corporation.
X. TERM OF AGREEMENT; TERMINATION
A. Term of Agreement. This Agreement shall remain in effect until
-----------------
terminated as set forth below.
B. Termination. Upon the occurrence of an Event of Default, the
-----------
non-breaching Party may terminate this Agreement and, except as provided in
Section X.D.1. below, all rights of the Parties hereunder upon forty-five (45)
days notice to the other Parties; provided, that the breaching Party shall have
--------
thirty (30) days from the occurrence of any Event of Default to cure such Event
of Default to the sole satisfaction of the non-breaching Party.
C. Events of Default. Each of the following events shall constitute
-----------------
a default hereunder (each, an "Event of Default"):
1. The breach by any JV Partner of any representation,
warranty, covenant or agreement contained herein;
2. The Corporation fails to meet projected sales, revenues
or other financial criteria as set forth in the Business Plan;
3. The liquidation or insolvency of any Shareholder; the
appointment of a receiver or similar officer for any Shareholder; an
assignment by any Shareholder for the benefit of all or substantially
all of its creditors; entry by any Shareholder into an agreement for the
composition, extension, or readjustment of all or substantially all of
its obligations; or the filing of a meritorious petition in bankruptcy
or similar procedure by or against any Shareholder under any bankruptcy
or debtors' law for its relief or reorganization;
4. Henk J. Keilman either (a) becomes deceased, (b) in good
faith becomes unable to effectively perform his duties as an employee or
director of the Corporation for any reason, (c) ceases to be employed by
the Corporation for any reason other than his resignation, or (d)
resigns from his position(s) with the Corporation;
5. Jan Peter Kastelein ceases to be employed by the
Corporation for any reason including, without limitation, his
resignation;
18
<PAGE>
6. Any assignment or attempted assignment by any JV Partner
of this Agreement or any interest of any JV Partner herein except as
permitted pursuant to Section XI.C. hereof; or
7. Any JV Partner performs any act, or omits to act, in a
situation which is considered by MTC to be detrimental to the business
of MTC or its relationship with any Subscriber or MTC Customer,
including, but not limited to, any material misrepresentation by any JV
Partner, any criminal act by any JV Partner, dissemination of
Proprietary Information pursuant to Section VIII hereof, or any W
Partner's interference with present or potential contractual rights of
MTC with any third party, including any Subscriber or MTC Customer.
D. Effect of Termination.
---------------------
1. Remedies Following Termination. Termination of this
------------------------------
Agreement shall not limit any Party from pursuing other remedies
available to it. The Parties' rights and obligations under Sections
VI.B. (Affirmative Covenants), VI.C. (Negative Covenants), VII
(Covenants of MTC), VIII (Confidentiality), and XI (Miscellaneous)
hereof shall survive the termination of this Agreement.
2. Purchase of JV Partners' Stock in the Corporation.
-------------------------------------------------
a. In the event that MTC exercises its right to
terminate this Agreement based solely on the occurrence of an
Event of Default set forth in Sections XII.C.2., XII.C.4.a.,
XII.C.4.b., XII.C.4.c., or any combination thereof, MTC shall
have the obligation to purchase the Stock of the Corporation
held by each JV Partner pursuant to Article XII.D.3. below.
b. In the event that any Shareholder terminates this
Agreement as a result of the occurrence of any Event of Default
other than those set forth in Sections XII.C.2., XIJ.C.4.a,
XII.C.4.b., or XII.C.4.c., MTC will have the option, but not the
obligation, to purchase the Stock of the Corporation from each
JV Partner.
3. Valuation of Stock in the Corporation. Any purchase of
-------------------------------------
the Stock of the Corporation pursuant to Section X.D.2. above shall be
for fair market value as determined according to generally accepted
accounting and valuation principles by an independent consulting firm
agreed upon by the Shareholders. Such valuation shall take into
consideration the goodwill associated with the income stream to the
Corporation as it relates to Sections III.G.l., III.G.2., III.G.3., and
III.G.4., and also the equity participation of the Corporation as
provided in Section III.G.5. In case the Shareholders cannot agree on a
consulting firm, MTC shall select a consulting firm to conduct such
appraisal, provided such consulting firm has no direct link with MTC,
and provided such consulting firm is a generally recognized and
reputable firm.
19
<PAGE>
XI. MISCELLANEOUS
A. Modification of MTC Services. MTC reserves the right at any time
----------------------------
to modify, alter, improve, change, add to or discontinue any or all of the MTC
Services or any carrier or feature thereof. MTC reserves the right to alter its
rates charged for the MTC Services as it deems appropriate in its sole
discretion. IATC shall use its best efforts to provide the Corporation with
advance notification of discontinued MTC Services and rate changes.
B. Use of Trademarks. The Corporation may use the trademarks and
-----------------
trade names of MTC in such form as provided to the Corporation. The Corporation
shall not use trademarks or service marks for services or products of other
companies except in strict compliance with the requirements of the holder of
such trademarks or service marks. Authorized logos will be provided by MTC.
C. Binding Agreement; Assignment. This Agreement shall be binding
-----------------------------
on the parties and their permitted successors and assigns; provided, however,
-------- -------
that MTC may assign, pledge or otherwise transfer this Agreement, all of its
rights thereunder, and transfer its Stock in the Corporation without the consent
of the JV Partners; and provided, further, that the JV Partners may not assign,
-------- -------
pledge or otherwise transfer any of their right, title and interest in this
Agreement or any of their Stock in the Corporation without the prior written
consent of MTC.
D. Arbitration. Any disputes arising under this Agreement shall be
-----------
submitted to neutral, binding arbitration in either the county of Sonoma,
California, U.S.A. or the county of San Francisco, California, U.S.A. (at the
sole discretion of MTC) in accordance with the California Arbitration Act
(C.C.P. (S)(S) 1280 et seq.) and not by court action except as provided by
California law for the judicial review of arbitration proceedings. The parties
shall be entitled to discovery as provided in Sections 1283.05 and 1283.1 of the
California Code of Civil Procedure, whether or not the California Arbitration
Act is deemed to apply to said arbitration. Any decision or award entered as a
result of such arbitration shall be final and binding upon both parties. The
filing of a judicial action to enable the recording of a notice of a pending
action, or for orders of attachment, receivership, injunction, or other
provisional remedies, shall not constitute a waiver of the right to arbitrate
under this provision. The Parties agree to the exclusive personal jurisdiction
of courts of general jurisdiction in Sonoma County, California, U.S.A. for
enforcement of such arbitration awards, agree to accept any service of process
by personal service, facsimile, express or overnight mail, or regular mail,
return receipt requested, at the address listed in Section XI.E. below as being
binding on such Party and agree to accept such arbitrators and court as being
the sole and exclusive forum and venue for hearing such claims, disputes,
controversies, breaches or similar events. The Parties agree to waive any
defense of forum non conveniens or improper venue respecting such courts.
----- --- ----------
E. Notices. Wherever one Party is required or permitted to give
-------
notice to any other Party pursuant to this Agreement, such notice shall be
deemed given when delivered in hand or by facsimile, or five days following
mailing when mailed by registered or certified mail, return receipt requested,
postage prepaid, and addressed as follows:
20
<PAGE>
In the case of MTC: MTC Telemanagement Corporation
1304 Southpoint Blvd.
Petaluma, CA 94954
U.S.A.
Attn: Roger J. Sheppard
Fax: (707) 769-6190
In the case of c/o Holland Trust
the JV Partners: Haaksbergweg 55
1101 BR Amsterdam Z.O.
The Netherlands
Attn: Henk J. Keilman
Fax: 31(0)206911728
Any Party may from time to time change its address for notification purposes by
giving the other Parties written notice of the new address and the date upon
which it will become effective.
F. Severability. If, but only to the extent that, any provision of
------------
this Agreement is declared or found to be illegal, unenforceable or void, then
both parties shall be relieved of all obligations arising under such provision,
it being the intent an agreement of the parties that this Agreement shall be
deemed amended by modifying such provision, to the extent necessary to make it
legal and enforceable while preserving its intent.
G. Waiver. A waiver by either of the parties of any covenants,
------
conditions or agreements to be performed by the other or any breach thereof
shall not be construed to be a waiver of any succeeding breach thereof or of any
other covenant, condition or agreement herein contained.
H. Remedies. Except as otherwise provided herein, all remedies set
--------
forth in this Agreement shall be cumulative and in addition to and not in lieu
of any other remedies available to the other Parties at law, in equity or
otherwise, including injunctive relief, and may be enforced concurrently or from
time to time.
I. Expenses. Each Party shall pay its own costs and expenses in the
--------
performance of its obligations hereunder; provided, however, that in the event
--------- -------
of an arbitration proceeding, the prevailing party shall be awarded its costs
and expenses (including, without limitation, legal expenses).
J. Entire Agreement. This Agreement, including any Exhibits and
----------------
documents referred to in this Agreement or attached thereto, constitutes the
entire and exclusive statement of agreement between the parties with respect to
its subject matter and supersedes any written or oral representations,
understandings or agreements which are not fully expressed herein.
K. Amendments. This Agreement may be amended or modified by a
----------
written instrument which specifically references this Agreement and which is
signed by a duly authorized
21
<PAGE>
representative of each party.
L. Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California, U.S.A., applicable to
contracts made and performed in that state, excluding conflicts of laws
principles, and, to the extent applicable, the laws of the United States;
provided, however, that matters of internal corporate governance shall be
- -------- -------
governed by the laws of the Netherlands to the extent required by such laws.
M. Headings. The section headings used in this Agreement are for
--------
reference and convenience only and shall not enter into the interpretation
hereof.
N. Initials. This Agreement shall not become effective unless and
--------
until all pages are initialed by the Chief Executive Officer or a Senior Vice
President of MTC.
IN WITNESS WHEREOF, the Parties have each caused this Agreement to be
signed and delivered by its duly authorized officer or representative as of the
date first written above.
MTC TELEMANAGEMENT CORPORATION
/s/ Henk J. Keilman
-------------------------------
By: /s/ MTC Telemanagement Corporation Henk J. Keilman,
---------------------------------- as an individual
Title:
------------------------------- /s/ Jan Peter Kastelein,
-------------------------------
By: Jan Peter Kastelein,
---------------------------------- as an individual
Title:
-------------------------------
22
<PAGE>
EXHIBIT A
ARTICLES OF ASSOCIATION AND BYLAWS OF THE CORPORATION
-----------------------------------------------------
XII. SUPERVISORY DIRECTORS AND AUDITORS
A. Supervisory Directors. Supervisory directors shall serve on a
---------------------
part-time basis without compensation. The number of supervisory directors which
shall constitute the whole board of supervisory directors of the Corporation
shall be five (5) persons. MTC shall nominate three (3) persons and the JV
Partners together shall nominate two (2) persons. The Shareholders agree to
exercise their respective voting rights to elect the supervisory directors so
nominated.
B. Statutory Auditors. The statutory auditor(s) of the Corporation
------------------
shall be as many as two (2) persons. The JV Partners collectively may nominate
one (1) statutory auditor, and MTC may nominate one (1) statutory auditor. The
Shareholders agree to exercise their respective voting rights to elect the
auditor(s) so nominated.
C. Vacancies. Should the position of any supervisory director or
---------
statutory auditor become vacant, however occasioned, the Shareholders shall
agree to exercise their respective voting rights to elect a supervisory director
or statutory auditor nominated by the Shareholder who nominated the preceding
supervisory director or statutory auditor.
D. Management. The business of the Corporation shall be managed by
----------
or under the direction of its board of supervisory directors which may exercise
all such powers of the Corporation and do all such lawful acts and things that
as are not by statute or by the certificate of incorporation or by this
Agreement directed or required to be exercised or done by the Shareholders.
Without in any way limiting the generality of the foregoing, the board of
supervisory directors is specifically granted the authority to approve the
hiring of all salaried employees of the Corporation. No such salaried employees
may be hired without such prior approval.
E. Regular Meetings. Regular meetings of the board of supervisory
----------------
directors may be held without notice at such time and at such place as shall
from time to time be determined by such board.
F. Special Meetings. Special meetings of the board of supervisory
----------------
directors may be called by any managing director on ten (10) days notice to each
supervisory director, either personally (by telephone or otherwise) or by
facsimile or telegram. Special meetings of the board of supervisory directors
shall be called by a managing director or the secretary of the Corporation in
like manner and on like notice on the written request of any two (2) supervisory
directors. The period of notice may be shortened or the notice may be dispensed
with for a particular meeting by the unanimous consent of all of the supervisory
directors.
23
<PAGE>
G. Quorum and Voting. At all meetings of the board of supervisory
-----------------
directors, a majority of the entire board shall constitute a quorum for the
transaction of business. Any resolution of the board of supervisory directors
shall be adopted by a vote of a majority of those supervisory directors present
at such meeting, except (i) as otherwise provided in the Commercial Code or the
articles of association, or (ii) those actions listed below, which shall also
require the unanimous written consent of all Shareholders:
1. Any addition to or modification of the articles of
association;
2. The amount of compensation of statutory auditors;
3. Approval of any annual budgets, financial statement, or
business plan for each fiscal year;
4. Acquisition, transfer (including the granting or
imposition of liens thereon or the license or sub-license thereof), or
disposition of any patents, design patents, trademarks, copyrights, or
any other intellectual property, including any license of any of the
foregoing;
5. Sale of all or substantially all of the assets of the
Corporation, or the merger or consolidation of the Corporation with
another entity;
6. Any modification of the capitalization of the
Corporation, whether such modification pertains to an increase in the
number of shares of Common Stock or the establishment of any other class
of capital stock;
7. The sale of any additional shares of Stock of the
Corporation; or
8. Other similar actions as agreed from time to time by a
unanimous written consent of the Shareholders.
H. Vote by Proxy. If and when any supervisory director intends to
-------------
exercise his or her voting right by proxy at any general meeting of the board of
supervisory directors, such supervisory director may appoint any other
supervisory director of the Corporation as his or her proxy.
I. Compensation. The board of supervisory directors shall not fix
------------
or modify the compensation to be received by supervisory directors or statutory
auditors without the written consent of all Shareholders. The supervisory
directors may be paid their reasonable expenses, if any, for the attendance at
each meeting of the board of supervisory directors. No such payment shall
preclude any supervisory director from serving the Corporation in any other
capacity and receiving compensation therefor.
24
<PAGE>
J. Removal. A supervisory director may be removed only by the vote
-------
of the Shareholder(s) who nominated such supervisory director.
XIII. MANAGING DIRECTORS
A. Managing Directors. The managing directors of the Corporation
------------------
shall be chosen by the Shareholders or, if the Shareholders so desire, by the
board of supervisory directors AND shall be a ________________________. The
Shareholders or the board of supervisory directors, as the case may be, may also
choose additional managing directors. Any number of offices may be held by the
same person, unless the articles of association otherwise provide.
B. Other Officers. The board of directors may appoint managing
--------------
directors and agents as it may deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the board of supervisory directors.
C. Compensation. The managing directors shall serve without
------------
compensation.
D. Tenure. The managing directors of the Corporation shall hold
------
office until their successors are chosen and qualify. Any officer elected or
appointed by the board of supervisory directors may be removed at any time by
the affirmative vote of a majority of the supervisory directors. Any vacancy in
any office of the Corporation shall be filled by the board of supervisory
directors.
E. Execution of Contracts. The managing directors shall sign and
----------------------
execute bonds, mortgages and other contracts, except where the signing and
execution thereof shall be expressly reserved by the board of supervisory
directors or delegated by the board of supervisory directors to some other
officer or agent of the Corporation.
[THE FOLLOWING SECTIONS WILL BE REVISED AS REQUIRED BY NETHERLANDS LAW]
F. PRESIDENT. THE PRESIDENT SHALL BE THE CHIEF EXECUTIVE AND CHIEF
---------
OPERATING OFFICER OF THE CORPORATION, SHALL PRESIDE AT ALL MEETINGS OF THE BOARD
OF DIRECTORS, SHALL HAVE GENERAL AND ACTIVE MANAGEMENT OF THE BUSINESS OF THE
CORPORATION AND SHALL EXECUTE ALL ORDERS AND RESOLUTIONS OF THE BOARD OF
DIRECTORS, SUBJECT, HOWEVER, TO THE RIGHT OF THE DIRECTORS TO DELEGATE ANY
SPECIFIC POWER, EXCEPT SUCH AS MAY BY STATUTE EXCLUSIVELY BE CONFERRED TO ANY
OTHER OFFICER OR OFFICERS OF THE CORPORATION. THE PRESIDENT SHALL DIRECT THE
ACTIVITIES OF THE OTHER OFFICERS IN THE EXECUTION OF THOSE DUTIES NOT
SPECIFICALLY ASSOCIATED
25
<PAGE>
WITH THEIR OFFICE.
G. VICE PRESIDENT. IN THE ABSENCE OF THE PRESIDENT OR IN THE EVENT
--------------
OF HIS OR HER INABILITY OR REFUSAL TO ACT, THE VICE PRESIDENTS IN THE ORDER
DESIGNATED BY THE DIRECTORS, OR IN THE ABSENCE OF ANY DESIGNATION, THEN IN THE
ORDER OF THEIR ELECTION, SHALL PERFORM THE DUTIES OF THE PRESIDENT, AND WHEN SO
ACTING, SHALL HAVE ALL THE POWERS OF AND BE SUBJECT TO ALL THE RESTRICTIONS UPON
THE PRESIDENT. THE VICE PRESIDENTS SHALL PERFORM SUCH OTHER DUTIES AND HAVE SUCH
OTHER POWERS AS THE BOARD OF DIRECTORS MAY FROM TIME TO TIME PRESCRIBE.
H. SECRETARY. THE SECRETARY SHALL ATTEND ALL MEETINGS OF THE BOARD
---------
OF DIRECTORS AND RECORD ALL THE PROCEEDINGS OF THE MEETINGS OF THE CORPORATION
AND OF THE BOARD OF DIRECTORS IN A BOOK TO BE KEPT FOR THAT PURPOSE. HE OR SHE
SHALL GIVE, OR CAUSE TO BE GIVEN, NOTICE OF ALL SPECIAL MEETINGS OF THE BOARD OF
DIRECTORS, AND SHALL PERFORM SUCH OTHER DUTIES AS MAY BE PRESCRIBED BY THE BOARD
OF DIRECTORS OR PRESIDENT, UNDER WHOSE SUPERVISION HE OR SHE SHALL BE. HE OR SHE
SHALL HAVE CUSTODY OF THE CORPORATE SEAL OF THE CORPORATION AND HE OR SHE, OR AN
ASSISTANT SECRETARY, SHALL HAVE AUTHORITY TO AFFIX THE SAME TO ANY INSTRUMENT
REQUIRING IT AND WHEN SO AFFIXED, IT MAY BE ATTESTED BY HIS OR HER SIGNATURE OR
BY THE SIGNATURE OF SUCH ASSISTANT SECRETARY. THE BOARD OF DIRECTORS MAY GIVE
GENERAL AUTHORITY TO ANY OTHER OFFICER TO AFFIX THE SEAL OF THE CORPORATION AND
TO ATTEST THE AFFIXING BY HIS OR HER SIGNATURE.
I. ASSISTANT SECRETARY. THE ASSISTANT SECRETARY, OR IF THERE BE
-------------------
MORE THAN ONE, THE ASSISTANT SECRETARIES IN THE ORDER DETERMINED BY THE BOARD OF
DIRECTORS (OR IF THERE BE NO SUCH DETERMINATION, THEN IN THE ORDER OF THEIR
ELECTION), SHALL, IN THE ABSENCE OF THE SECRETARY OR IN THE EVENT OF HIS OR HER
INABILITY OR REFUSAL TO ACT, PERFORM THE DUTIES AND EXERCISE THE POWERS OF THE
SECRETARY AND SHALL PERFORM SUCH OTHER DUTIES AND HAVE SUCH OTHER POWERS AS THE
BOARD OF DIRECTORS MAY FROM TIME TO TIME PRESCRIBE.
J. TREASURER. THE TREASURER SHALL HAVE THE CUSTODY OF THE CORPORATE
---------
FUNDS AND SECURITIES AND SHALL KEEP FULL AND ACCURATE ACCOUNTS OF RECEIPTS AND
DISBURSEMENTS IN BOOKS BELONGING TO THE CORPORATION AND SHALL DEPOSIT ALL MONEYS
AND OTHER VALUABLES IN THE NAME AND TO THE CREDIT OF THE CORPORATION IN SUCH
DEPOSITORIES AS MAY BE DESIGNATED BY THE BOARD OF DIRECTORS. THE TREASURER SHALL
HAVE EXCLUSIVE AUTHORITY TO OPEN BANK ACCOUNTS OR OTHERWISE TRANSACT THE
FINANCIAL BUSINESS OF THE CORPORATION; PROVIDED, HOWEVER, THAT THE PRESIDENT AND
-------- -------
EACH SHAREHOLDER SHALL HAVE COMPLETE ACCESS TO THE FINANCIAL RECORDS OF THE
CORPORATION AND SHALL BE PROVIDED UNAUDITED QUARTERLY FINANCIAL STATEMENTS,
AUDITED ANNUAL FINANCIAL STATEMENTS, OF THE CORPORATION, AND SUCH OTHER REPORTS
OR INFORMATION AS THE PRESIDENT OR ANY SHAREHOLDER MAY REQUEST FROM TIME TO
TIME.
K. TREASURER DUTIES. THE TREASURER SHALL DISBURSE THE FUNDS OF THE
----------------
CORPORATION AS MAY BE ORDERED BY THE BOARD OF DIRECTORS, TAKING PROPER VOUCHERS
FOR SUCH DISBURSEMENTS AND SHALL RENDER TO THE PRESIDENT AND THE BOARD OF
DIRECTORS AT ITS REGULAR MEETINGS, OR WHEN THE BOARD OF DIRECTORS SO REQUIRES,
AN ACCOUNT OF ALL HIS OR HER TRANSACTIONS AS TREASURER AND OF THE FINANCIAL
CONDITION OF THE CORPORATION.
26
<PAGE>
L. TREASURER BOND. IF REQUIRED BY THE BOARD OF DIRECTORS, THE
--------------
TREASURER SHALL GIVE THE CORPORATION A BOND IN SUCH SUM AND WITH SUCH SURETY OR
SURETIES AS SHALL BE SATISFACTORY TO THE BOARD OF DIRECTORS FOR THE FAITHFUL
PERFORMANCE OF THE DUTIES OF HIS OR HER OFFICE AND FOR THE RESTORATION TO THE
CORPORATION, IN CASE OF HIS OR HER DEATH, RESIGNATION, RETIREMENT OR REMOVAL
FROM OFFICE, OF ALL BOOKS, PAPERS, VOUCHERS, MONEY AND OTHER PROPERTY OF
WHATEVER KIND IN HIS OR HER POSSESSION OR UNDER HIS OR HER CONTROL BELONGING TO
THE CORPORATION.
M. ASSISTANT TREASURER. THE ASSISTANT TREASURER, OR IF THERE SHALL
-------------------
BE MORE THAN ONE, THE ASSISTANT TREASURERS IN THE ORDER DETERMINED BY THE BOARD
OF DIRECTORS (OR IF THERE BE NO SUCH DETERMINATION, THEN IN THE ORDER OF THEIR
ELECTION), SHALL, IN THE ABSENCE OF THE TREASURER OR IN THE EVENT OF HIS OR HER
INABILITY OR REFUSAL TO ACT, PERFORM THE DUTIES AND EXERCISE THE POWERS OF THE
TREASURER AND SHALL PERFORM SUCH OTHER DUTIES AND HAVE SUCH OTHER POWERS AS THE
BOARD OF DIRECTORS MAY FROM TIME TO TIME PRESCRIBE.]
27
<PAGE>
EXHIBIT B
BALANCE SHEET OF ATLANTIC TELECOM BV
---------------- -------------------
<PAGE>
ATLANTIC TELECOM B.V. PAGE: -1-
DATE: 25-JAN-96
<TABLE>
<CAPTION>
<S> <C>
BALANCE SHEET AS AT 1 NOVEMBER 1995
(after appropriation of results )
01 November
.......1995
-----------
NLG
FIXED ASSETS
- ------------
Software/Inventory 148,917
Goodwill 178,560
Development casts 235,000
--------
TOTAL FLIED ASSETS 562,477
CURRENT ASSETS
- --------------
Debtors 16,815
Taxes receivable 8,958
Other receivables 7,326
Cash at Banks & Deposits 3,323
TOTAL CURRENT ASSETS 36,422
TOTAL ASSETS 598,899
CURRENT LIABILITIES
- -------------------
Creditors 59,411
Clients deposits 18,975
Wage tax & Social charges 9,002
Other payables 13,669
TOTAL CURRENT LIABILITIES 101,056
TOTAL LIABILITIES 101,056
TOTAL ASSETS LESS LIABILITIES 497,843
--------
CAPITAL AND RESERVES
- --------------------
Share capital 40,000
Subordinated loan RIG Holding N.V 572,032
Revaluation reserve 178,550
Retained earnings/(acc. deficits) (292,749)
--------
TOTAL SHAREHOLDERS' EQUITY 497,843
</TABLE>
<PAGE>
ATLAI'ITIC TELECOM B.V. PAGE: -2-
DATE: 25-JAN-96
<TABLE>
<CAPTION>
PROFIT & LOSS ACCOUNT
FOR THE PERIOD ENDED 1 NOVEMBER 1995
01 November
1995
-----------
NLG
<S> <C>
Sales Commissions 128,308
Cost 0' sales 98,685
GROSS MARGIN 29,623
GENERAL EXPENSES
- ----------------
Personal expenses 81,695
Office expenses 80,699
Communication 40,393
Travel expenses 23,293
Other general expenses 85,725
311,805
FINANCIAL EXPENSES
- ------------------
Bankcharges 1,884
Interest bankers 278
Exchange results 1,385
-------
3,546
Total expenses 315,351
-------
OPERATING PROFITI(LOSS) BEFORE TAX (285,728)
Extraordinary item. (7,022)
NET PROFIT/(LOSS) FOR THE YEAR (292,749)
</TABLE>
<PAGE>
FAX TRANSMISSION
----------------
To: MTC Telemanagement Corporation
Att: Mr. Roger Sheppard
Fax: 707 7696190
From: Henk J. Keilman 25/01/96
MTC Western Europe BV
Haaksberweg 55
I 101 BR Amsterdam Z.O.
The Netherlands
Tel: 31(0)20691 1780
Fax: 31(0)20691 1728 Time: 23:52
Number of pages Incl. this page....................3........................
RE: BALANCE SHEET OF ATLANTIC TELECOM I ATTACHMENT TO JOINT-VENTURE AGREEMENT
<PAGE>
EXHIBIT C
BUSINESS PLAN
-------------
<PAGE>
MTC WESTERN EUROPE
------------------
BUSINESS PLAN
-------------
by Henk J. Keilman
November, 1995
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C> <C>
I Background 3
II: Objectives 4
III: The Market 5
IV. The Competition 5
V. Marketing arid Sales Strategy 6
VI. Strengths and Opportunities 9
VII. Weaknesses and Threats 10
VIII. Organisation and Operations 10
IX. Staff 11
X. Sales Forecast and Budget 12
XI. Conclusion 13
</TABLE>
<PAGE>
MTC Western Europe - Business Plan
November 1995
I - BACKGROUND
In September 1995 Atlantic Telecom BV and MTC Telemanagement Corporation decided
to enter into a Joint Venture for the purpose of marketing and selling MTC's
sophisticated telecommunication services to the Western European Market,
including the following countries: Benelux, France and Germany. Switzerland and
Austria will also be serviced from the headquarters of the Venture, based in
Amsterdam, The Netherlands, however not on the bases the exclusive arrangement
that exists within the Joint Venture territory. The Joint-Venture will be called
MTC Telecom Western Europe (hereinafter "MTC WE").
MTC, as provider of telecommunication technology and services, referred to as
Telemanagement Services, contributes its Telemanagement capacity to the Joint
Venture, which includes the following services:
. Call Back services
. Conference Calling
. Travel Card
. Itemised billing
. Direct dial for certain parts of the territory, to be extended within
two years to all parts of the territory
These Services include two key features:
1. Rates are competitive in comparison to local European PTT's, with
discounts varying from 20% to 65% depending on the countries from where
calls originate and where they terminate. It is the strategic objective
of MTC to be able to provide, at all times, a discount of 25% in
comparison to local European PTT's.
2. The quality of the lines must be comparable to those provided by the
local European PTT's:
Atlantic Telecom, primarily a marketing and sales organisation with strong roots
in the countries of the Venture, has contributed its organisational, marketing
and sales skills to the Venture. In addition it has developed customised
software to enable billing in local currencies, greater flexibility in terms of
pricing policy in the territory, and to provide an powerful customer database.
Furthermore, Atlantic Telecom has assisted in the development of a dialler, to
be used in conjunction with the call back services.
The joining of the capabilities, skills, assets and strengths of the two Venture
partners, will lead to a greater synergy, and will provide clear benefits to
both partners in the Venture.
<PAGE>
MTC Western Europe - Business Plan
November 1995
II - OBJECTIVES
MTC Western Europe has been formed by the parties to achieve the following
strategic objective:
"TO OCCUPY WITHIN THREE YEARS FROM NOW A STRONG, DISTINCT AND RECOGNISED
POSITION WITHIN THE EUROPEAN MARKET FOR TELECOMMUNICATION SERVICES -
PARTICULARLY WITHIN THE MARKET FOR SMALL AND MEDIUM SIZE BUSINESSES, AND IN THE
HIGHER SEGMENT OF THE PRIVATE MARKET, BY SUPPLYING MTC SERVICES AND FACILITIES,
POSSIBLY SUPPLEMENTED WITH COMPLEMENTARY PRODUCTS AND SERVICES FROM THIRD
PARTIES."
While the above stated strategic objective is clear, it is also general and
unspecified. Within the context of MTC's global strategy it is important to
elaborate on, and further specify the strategic objective. Before doing so, it
is important to understand MTC's global strategy. MTC is committed to develop
its global organisation on the bases of a decentralised model. Such a
decentralised model is to be accomplished by setting up partnerships with local
organisations, in key territories around the world. The definition of a
territory within this strategy, may vary from country to country, or region to
region. Yet, in general terms a territory has been defined as a homogenous area,
from cultural, social, political and economic perspectives. In some instances a
territory may be defined as a country, in other instances it may be a group of
countries.
The Joint Ventures are extensions of MTC, and enable MTC to operate in foreign
markets by providing a real presence, without on the one hand alienating this
market and on the other hand loosing control.
The Joint-Ventures will locally manage the selling, marketing and distribution
of MTC's services in the territory, thereby providing local support to already
existing sales organisations, while simultaneously further developing and
expanding the channels of distribution.
MOST IMPORTANTLY, MARKETING STRATEGY WILL BE CO-ORDINATED CENTRALLY, YET
LOCALLY, THROUGHOUT EACH JOINT VENTURE TERRITORY, TAKING LOCAL MARKET CONDITIONS
INTO CONSIDERATION, WHILE PRESERVING THE PROFESSIONAL IMAGE MTC IS TRYING TO
BUILD WORLD WIDE.
Over the past two years MTC has already developed a significant presence in the
Western European market, totalling sales of approximately 16 million US$ per
annum at present. These sales have been achieved by sub-affiliates, originally
appointed by and therefore acting through MTC's US based master affiliates.
However, no effective support structure exists to adequately service these sub-
affiliates and their customer base. The Joint Venture will fill this gap by
providing a local support and service infrastructure.
<PAGE>
MTC Western Europe - Business Plan
November 1995
III - THE MARKET
In The Netherlands the sales of the Dutch PTT constitutes approximately Nlg 11
billion per annum. Approximately one quarter of that volume is generated
through international telecommunication, the target market for MTC. The total
amount of calling minutes per annum for all outward international calls for the
Western European territory, not including the UK, is approximately 13.99
billion. Considering that on average each minute represents approximately Nlg
2,- in revenue, the international calling volume in Dutch Guilders would
therefore be approximately 28 billion per annum (or US$ 17,5 billion). This
volume is enormous indeed, and provides the relevant background to MTC WE
marketing efforts. Projected sales by MTC WE over 1996 of US$ 5.2 million
(approximately Nlg 8 million) would constitute a market share of 0,029%, which
is marginal in relative terms.
The world-wide market for Call-Hack services was estimated US$ 80 million in
1993, US$ 330 million in 1994, and is expected to grow to approximately US$ one
billion within five years. The Call-Back market has been growing, and will
continue to grow at an explosive rate.
IV - COMPETITION
Presently a detailed market study is being conducted in which the important
competitors of MTC are being analysed in terms of respective market share,
rates, quality of service, and market positioning. However, based on past
studies a great deal of information on the competition has already been
obtained. From this information, it appears that within the segment of call back
providers, MTC occupies a unique position in the market. The direct competitor
in this area is Telegroup Inc., an American company that started its services
approximately 5 years ago. Telegroup is rivalling MTC in size and sales volume.
However, it is evident that the medium and longer term strategy of MTC is
stronger and better developed, with clear competitive advantages. Regarding the
present situation, MTC has a clear advantage over Telegroup in terms of :
. rates,
. quality of lines,
. reliability of connections,
. capacity
. time needed to connect a new client to the system,
. response time of the call back system.
. availability of reliable dialler systems
In all of these areas MTC has distinct and quantifiable advantages. The main
disadvantage of MTC so far, has been the unavailability of discounts on the
intra-European calls. These discounts have been available to Telegroup for
nearly a year. However, as of August 1995, MTC has introduced competitive
discounts on intra-European calls, a service called EuroCall, thereby
eliminating this disadvantage. Beside call back services there have been
developments in other areas with regard to providing competitive
telecommunication rates. These consist of various organisations providing direct
dial services, at rates that are significantly lower in comparison to the
European national telecommunication providers. Direct dial providers are trying
to eliminate the one main disadvantage of the call back system, namely the user-
unfriendly additional action of calling, putting down the phone, waiting for the
call back, only after which
<PAGE>
MTC Western Europe - Business Plan
November 1995
time the real call can be initiated. However, the rates of direct dial providers
are not as competitive as the rates provided by call back providers. In
addition, the direct dial organisations are still dependant on a box, a dialler
or rerouter, in order to gain access to the local switch. In addition, depending
on the location, a client of such providers may still have to pay local tariffs
for calls made from his location to the switch:
However, call back services that take advantage of a computerised dialler, are
not at a disadvantage in comparison to the direct dial providers. A computerised
dialler, or "Dialler System" handles the entire call back procedure, so that the
end user, without virtually any delay, will immediately get access to the MTC
external line. In other words, the call back procedure has been made invisible
by the Dialler. Without a disadvantage from the viewpoint of user friendliness,
the better rates provided by call back providers, constitute a distinct
competitive advantage in comparison to direct dial providers. MTC, due to the
excellent quality of its services, has been highly successful in implementing
dialler systems in various countries.
Direct dial providers are also subject to our market research, and their
activities, marketing strategies, market shares, and sales volumes are being
analysed. Direct dial providers do pose some threat to MTC, in that they are
usually backed by powerful, professional organisations, that may have various
and different motivations to gain a market share in the telecommunication
market. On the other hand, the size of the market is such, that MTC with its
leading technology, and competitive edge in many areas, has every reason to be
optimistic.
V - MARKETING AND SALES STRATEGY
Considering the enormous size of the telecommunication market in Europe, whereby
market share is expressed in fractions of percentages, the objectives of MTC WE
are to be accomplished by precision marketing. Precision marketing requires a
clear identification of target groups. This can be achieved by hyper-
segmentation of the market, and a subsequent identification of the core of each
hyper segment. After the core has been identified, marketing efforts must be
directed to and focused on this core.
Furthermore, the American product formula and market approach will be translated
to a European market approach, on a country by country bases. Among other things
this requires translating product documentation into a format understandable to
the local market, and billing clients in their local currencies.
Due to the size of the market, several marketing and sales strategies will be
used simultaneously, such as direct marketing, dealer marketing and strategic
partnerships. In addition, the MLM channels will be utilised, although operating
under a different name (M-Net). Due to the massive size of the market, these
various channels will not conflict, but rather reinforce each other. Key
objective is to expand sales and increase market share as quickly as possible.
The above are general guidelines for the development of the marketing and sales
strategy for MTC Western Europe.
More specifically, on the operational side, marketing and sales strategy will
Consist of the following five items:
1) to engage in direct sales and marketing to end-users throughout the
territory,
2) finding and training new and qualified master and/or sub-affiliates
(dealers) in each country
<PAGE>
MTC Western Europe - Business Plan
November 1995
3) providing support to existing master and sub-affiliates, as well as the
M-Net organisation, the Multi Level Marketing branch of MTC world-wide.
4) to enter into strategic partnerships and JOINT-VENTURES, whenever
warranted
5) to develop, co-ordinate and implement a European strategy for
advertisement, promotion and PR
1) TO ENGAGE IN DIRECT SALES TO BOTH PRIVATE AND CORPORATE END-USERS
-----------------------------------------------------------------
In view of existing sales operations as developed by Atlantic Telecom,
direct sales to end users should be continued and vastly expanded under
the name of MTC Telecom. Direct sales is most important, since recent
investigations in marketing and sales strategies have indicated that MTC
Services and Products are ideally suited for direct sales, for two
reasons:
a. Because of its digital nature, most of the Services can be
delivered directly and instantaneously to the end-user, across
any boundaries
b. The Services :can easily be communicated to end-users by the
mass media
Direct sales and marketing will offer five major advantages:
1. Direct and substantial recruitment of new customers
2. Simultaneous creation of brand awareness
3. Inclusion of affiliates in the sales process by providing
referrals
4. Cost effective method of distribution
5. a direct relationship with end users will result in direct
contact with and better control and feed back from the market.
2) FINDING AND TRAINING NEW AND QUALIFIED MASTER AND/OR SUB-AFFILIATES IN
----------------------------------------------------------------------
EACH COUNTRY
------------
MTC WE will spend a great deal of effort in identifying master
affiliates for each country. The profile of a master affiliate can be
described as follows:
a. professional organisation, already active in the
telecommunications business with a good track record and
reputation
b. in possession of a significant customer base
c. ability to sell services, as well as telecommunication hardware;
in other words an organisation with a culture compatible to
MTC's services
d. willing to invest in training, promotion and advertisement
e. financially sound
All of the support services as described under point 1.2 Will also be
extended to the newly appointed affiliates.
3) PROVIDING SUPPORT TO EXISTING MASTER AND SUB-AFFILIATES, AS WELL AS
-------------------------------------------------------------------
THE M-NET ORGANISATION
----------------------
3.1 It is not the intention of MTC WE to compete with existing distribution
channels. To the contrary, one of the key functions of the Venture is to
provide support to existing channels, and to be SEEN to be providing
support. In other words, existing affiliates must be made aware of MTC
WE as an organisation that has been created to serve their interest, and
to assist them in doing a better job of selling and marketing MTC
products and services in Western Europe.
<PAGE>
MTC Western Europe - Business Plan
November 1995
In view of this consideration, MTC WE must be introduced carefully to
existing affiliates, taking into consideration sensitivities. The
introduction will effectively take place in two stages, namely
1. the introduction and presentation of the Joint Venture, followed
by a transitional period, and
2. consolidation, whereby clear operational guidelines are
established and agreed upon between MTC WE and the European
affiliates
The second phase will be achieved by a careful management of the first
phase, m which it is emphasised that MTC WE is there to serve, and not
to compete. Affiliates must be convinced on the bases of practical
experience, that the relationship with MTC WE is a win-win relationship.
The development of the two phases must be a natural evolution.
Phase one should start immediately after the formal incorporation of the
Joint Venture, phase two should take place within three to six months
thereafter.
3.2 Support to existing affiliates will consist of :
a. A European multilingual Call Centre, based in Amsterdam, to
provide customer support throughout the territory
b. National support centres for training and supporting master
affiliates and their sub-affiliates, on a country by COUNTRY
bases
c. National support centres for training and supporting the M-Net
organisation and its representatives
d. Customised and variable billing in local currencies
e. ESA support for connecting customers and processing applications
for MTC services
f. Providing additional marketing tools based on information
generated by the customer data base, such as selective mailings,
telemarketing etc.
g. Co-ordination and development of promotion, advertisement and PR
on a country by country bases, throughout the territory
4. TO ENTER INTO STRATEGIC PARTNERSHIPS AND JOINT-VENTURES, WHENEVER
-----------------------------------------------------------------
WARRANTED
---------
While MTC WE is the primary Joint-Venture in the Territory, in case it
or MTC identifies a third party in the Territory that:
a. occupies strategic positions and has substantial market share
in the telecommunication industry in the Territory
b. is interested, and is capable in a significant way to market,
sell and distribute the Services
c. whose businesses is compatible with MTC's business and global
strategy
d. is willing to make substantial investments, with a minimum of
US$ 1.000.000 in marketing and sales efforts in parts of the
Territory
MTC WE and MTC USA together may enter into a secondary Joint-Venture
agreement with such a Party. The objective is that such a secondary
Joint-Venture will accelerate market penetration in a significant way.
5. TO DEVELOP, CO-ORDINATE AND IMPLEMENT A EUROPEAN STRATEGY FOR
-------------------------------------------------------------
ADVERTISEMENT, PROMOTION AND PR
-------------------------------
In order to promote MTC as a professional and sophisticated provider of
telecommunications services, an advertisement and promotional campaign
will be launched throughout the territory of the
<PAGE>
MTC Western Europe - Business Plan
November 1995
Venture. Such a campaign will have a European ring to it, but will be
adjusted to local and national cultures, habits and customs.
VI - STRENGTHS AND OPPORTUNITIES
The strength of MTC lies within its advanced technology and competitive
pricing. The opportunity within the European market place is evident due
to the present high pricing structures set by the national
telecommunication monopolies. Their ability to reduce prices,
considering the fact that international telecommunications are their
main source of profit, is severely restricted by inflexible social and
political structures, and the undesirable prospect of having to lay off
people. The longer term opportunity consist of building upon the
customer base, and then upgrade this customer base and expand the range
of Value Added Services.
VII - WEAKNESSES AND THREATS
Ultimately the greatest threat will come from the major European carriers, who
will eventually lower their prices in order to become more competitive. This
will happen ahead of the official deadline for deregulation, which is January 1,
1998. MTC will have to retain a competitive pricing edge of approximately 20% to
25% in comparison to the local PTT's, which percentage is seen by industry
specialists as a critical margin. Furthermore MTC will have to be able to
upgrade its services to its customers, and move them over to more advanced
services, featuring direct dial, as well as other Value Added Services.
An immediate threat is the possibility of technological problems, such as
inferior quality of lines, unavailability of lines, incorrect billing. Although
intercontinental calls are relatively trouble free, till today EuroCall is still
problematic.
VIII - ORGANISATION AND OPERATIONS
MTC WE will have three main departments within its organisational structure,
which reflect the key functions and objectives of the organisation:
1. MARKETING & SALES
This department will provide the following functions:
a. recruitment of master and/or sub-affiliates
b. affiliate support and training
c. customer support
d. direct sales
e. maintenance of a customer database
f. Billing
g. Advertisement and promotion
Most of the functions of this department will be decentralised. i.e.
they will be implemented locally within the relevant country or area.
However, part of the support functions, billing and direct sales
<PAGE>
MTC Western Europe - Business Plan
November 1995
will be conducted centrally. For customer support a "Call Centre" will
be set up centrally in Amsterdam, with a multilingual staff. The Call
Centre can be accessed through toll free numbers in each country.
2. OPERATIONS
The department of Operations will be responsible for the "delivery" of
the products and services to the customers, and will include the
following functions:
a. technical support,
b. close liaison with suppliers (primarily MTC in California), or
future capacity suppliers with whom MTC has entered into strategic
alliances
c. input into customer and affiliate support functions
d. connecting customers to MTC services via ESA input
f. input into customer administration and data base
3. FINANCE AND ADMINISTRATION
The Finance and Administration department will be responsible for all
accounting and basic administrative functions of the Venture, including:
a. Preparing periodical reports, such as P&L accounts, balance sheets
and relevant management information
b. Management of Accounts receivables
c. Banking and management of cash flows
The Accounting and Operations departments will be predominantly centralised
departments, operating out of the Amsterdam head office, whereas the Sales and
Marketing department will be largely decentralised. In view of the core business
of the Venture, the Sales and Marketing department will play an eminently
important role within the entire organisational structure.
IX - STAFF
The executive board of MTC WE will consist of three executive directors (see
attached diagram), namely a Managing Director, a Director Operations, and a
Director Marketing arid Sales. The Managing Director will be directly
responsible for Finance and Administration. At a later stage the executive board
can be expanded to include a Director of Finance and Administration.
As such the following positions will be occupied:
1. Managing Director: Mr. Henk J. Keilman
(Including Finance and Administration)
2. Director Operations: Mr. Jan Peter Kastelein
(Including Training and Human resources)
3. Director Marketing and Sales: Vacant
4. Manager Marketing and Sales: Mr. Pieter Strijder
5. Accounting: Mr. Patrick Voorman
6. Personal Assistant to Henk J. Keilman
and sales support: Ms. Maltie Ramlal
7. Automation and Software Development: Mr. Rob Geleyn
8. System Support (internal automation): Mr. Stephan Olivier
9. Office Manager including Affiliate Support: Mrs. Ine van Daalen
<PAGE>
MTC Western Europe - Business Plan
November 1995
10 Administration: Ms. Cynthia Talen
11 Affiliate Support: Mrs. Dini van Guldener
12 Direct Sales: Mr. Simon Heijkoop
13 Benelux Marketing & Sales: Mr. Henk J. Keilman
Mr. Jan Peter Kastelein
14 Germany Marketing & Sales: Mr. Frans Verhoeven
Mr. Hans Lodewichs
15 France Marketing & Sales: Mr. Joe Claessens
. Accounting will include Cash Management and Receivables Management at
first
. Technical Support, Network Management, Co-ordination Network Suppliers
and Co ordination hardware suppliers will be combined at first. This
position is vacant, to be filled within a month.
. Marketing and Sales Director: Vacancy, to be filled immediately, will be
co-managed by Jan Peter Kastelein and Henk J. Keilman in the interim,
with assistance of Mr. Pieter Strijder. Marketing and Sales Director
will also manage directly PR' Advertisement and Promotion.
. Management of Affiliate Support and After Sales & Customer support will
be combined at first. This position is vacant, to be filled immediately.
. Total staff requirements at start: 17 employees, of which 9 will be on
the payroll of the Joint venture, and 8 will be working on either a
commission bases, or on contract bases. In view of labour laws in Europe
and Holland, it is advisable to employ a portion of staff on a contract
and/or commission bases.
. presently available 13 staff members, four vacancies need to be filled
almost immediately
<PAGE>
MTC Western Europe - Business Plan
November 1995
X - SALES FORECASTS AND BUDGET
The present objective of achieving US$ 38 million sales in 1996, and US$
76 million sales in 1997 is ambitious yet realistic, in view of market
opportunities. Results that have been achieved up until the present, as
well as the data obtained from our market research, justify the above
objectives, and their subsequent organisational and financial commitments.
However, these projected results are subject to the fact that the
potential weaknesses and threats, as outlined above, are largely
contained. A detailed analyses of sales and cash flow projections is
presented in separate documents. A summary of these projections, expressed
in US$ are shown below.
<TABLE>
<CAPTION>
ALL AMOUNTS IN US$ 1995 1996 1997 1998
<S> <C> <C> <C> <C>
Existing Sales 16,000,000 16,000,000 16,000,000 16,000,000
Increase existing Sales 1,600,000 17,680,641 47,113,723 94,449,015
New Sales 279,000 5,075,000 13,513,184 35,981,504
TOTAL SALES 17,879,000 38,755,641 76,626,906 146,430,518
Gross Margin 43,780 1,116,500 2,972,900 7,915,931
Commission Dealers 15,130 502,500 1,351,318 4,317,780
Net Margin 28,650 614,000 1,621,582 3,598,150
Net Margin from existing sales 28,800 690,419 1,858,123 4,922,451
TOTAL NET MARGIN 57,450 1,304,419 3,479,705 8,520,601
Expenses 219,219 790,275 1,418,015 1,943,064
Result before tax (161,769) 514,144 2,061,690 6,577,537
Taxes 309,253 986,631
NET RESULT (161,769) 514,144 1,752,436 5,590,906
</TABLE>
AS MENTIONED BEFORE, THE ABOVE PROJECTIONS WILL HAVE TO BE ADJUSTED ON A REGULAR
BASES.
<PAGE>
MTC Western Europe - Business Plan
November 1995
XI - CONCLUSION
In view of the strong technological position of MTC in the market, and the
enormous market opportunities in Europe, we are most confident that MTC WE will
be successful in realising its strategic objectives, and to create a strong
presence within the European telecommunication market. Present level of sales
within Europe demonstrate the potential, and the added support, sales and
marketing infrastructure should greatly enhance this potential. Other markets in
which MTC has expanded its services, such as the Japanese market are a
significant case in point, and show the vitality and attractiveness of its
products and services, and their high potential for success.
<PAGE>
EXHIBIT D
LITIGATION
----------
<PAGE>
The undersigned, Mr. ABRAHAM ZEEGERS, born in Amsterdam on March 15, 1949,
residing and practicing civil law in Amsterdam, herewith declares:
HENDRIK JOHANNES KEILMAN, born in Hoofddorp, The Netherlands, on October 7, 1953
and holder of a passport of The Kingdom of the Netherlands, number E 447360
and:
JAN-PETER KASTELEIN, born in Wissenkerke, The Netherlands, on April 12, 1969 and
holder of a passport of The Kingdom of the Netherlands, number N 04018263.
are known to him as his clients, are gentlemen of good reputation and financial
standing, have never been involved in bankruptcy and are not subject to any
litigation or financial claims.
Amsterdam, December 29, 1995
Mr. A. Zeegers (esq.)
<PAGE>
EXHIBIT E
PARTNERSHIPS AND JOINT VENTURES
-------------------------------
<PAGE>
EXHIBIT E
---------
Henk J. Keilman is owner of Holland Trust and Holland Trust related subsidiaries
and Holding Companies. In addition, in his capacity as trustee, he is also
involved in other partnerships and positions of directorship, the nature of
which he can not disclose for confidentiality reasons in relation to clients of
the trust company.
<PAGE>
EXHIBIT 10.15
No._______ Offeree Name_______________________
NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC.
REGULATION S
10% SERIES A SECURED CONVERTIBLE NOTES AND WARRANTS
TO PURCHASE COMMON STOCK
SUBSCRIPTION AGREEMENT
MAY 31, 1996
THE SECURITIES TO WHICH THIS SUBSCRIPTION AGREEMENT RELATES HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"),
OR UNDER ANY STATE SECURITIES LAWS ("BLUE SKY LAWS"), AND MAY NOT BE
OFFERED OR SOLD IN THE UNITED STATES OR TO U.S. PERSONS (AS DEFINED IN
REGULATION S) WITHOUT REGISTRATION UNDER THE SECURITIES ACT, AND AS
REQUIRED BY BLUE SKY LAWS IN EFFECT AS TO SUCH OFFER OR SALE, UNLESS AN
EXEMPTION FROM SUCH REGISTRATION UNDER STATE AND FEDERAL LAW IS AVAILABLE.
<PAGE>
- --------------------------------------------------------------------------------
INSTRUCTIONS FOR SUBSCRIPTION
- --------------------------------------------------------------------------------
NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC.
A DELAWARE CORPORATION
To Subscribe:
1. Subscription Agreement.
Please execute the Subscription Agreement at Page 9, complete the
Registration Statement and Offeree Questionnaire at Pages 10 and 11,
respectively, and the United States Treasury Department Form W-8 attached
as Schedule 3, and return the entire Subscription Agreement to Yorkton
Securities Inc. at the following address:
Yorkton Securities Inc.
10th Floor, Four Bentall Centre
Post Office Box 49333
1055 Dunsmuir Street
Vancouver, B.C. V7X1L4
Attn. Paul B. Hughes
(604) 640-0400
2. Please request wire transfer instructions from Yorkton Securities
Inc. for delivery of the Purchase Price.
1
<PAGE>
THE SECURITIES TO WHICH THIS SUBSCRIPTION AGREEMENT RELATES HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"),
OR UNDER ANY STATE SECURITIES LAWS ("BLUE SKY LAWS"), AND MAY NOT BE
OFFERED OR SOLD IN THE UNITED STATES OR TO U.S. PERSONS (AS DEFINED IN
REGULATION S) WITHOUT REGISTRATION UNDER THE SECURITIES ACT, AND AS
REQUIRED BY BLUE SKY LAWS IN EFFECT AS TO SUCH OFFER OR SALE, UNLESS AN
EXEMPTION FROM SUCH REGISTRATION UNDER STATE AND FEDERAL LAW IS AVAILABLE.
SUBSCRIPTION AGREEMENT
THIS SUBSCRIPTION AGREEMENT is made effective for reference purposes only
as of May 31, 1996, by and between NetSource International Telecommunications,
Inc., a Delaware corporation (the "Corporation") and the Investor whose
signature appears on the signature page to this Subscription Agreement (the
"Investor").
R E C I T A L
-------------
The Investor desires to purchase from the Corporation, and the Corporation
desires to sell to the Investor, securities of the Corporation, on the terms
and conditions hereinafter set forth.
A G R E E M E N T
-----------------
NOW, THEREFORE, in consideration of the mutual agreements, covenants,
representations and warranties contained in this Subscription Agreement, the
parties hereby agree as follows:
1. Purchase and Sale of Unit(s).
----------------------------
a. Sale and Issuance of Unit(s). Subject to the terms and
----------------------------
conditions of this Subscription Agreement, the undersigned Investor agrees to
purchase at the Closing (as defined in that certain Confidential Private
Placement Offering Memorandum dated for reference purposes as of May 31, 1996,
(the "Memorandum")) and the Corporation agrees to sell and issue to the Investor
at the Closing, that number of Unit(s) (the "Units") set forth on the
Registration Statement and signature page attached to this Subscription
Agreement; each Unit consisting of one (1) $10,000 10% Series A Secured
Convertible Note due May 31, 1998 (the "Series A Note") secured by certain of
the Corporation's assets as set forth in the Security Agreement dated of even
date herewith (the "Security Agreement") and a Warrant exercisable through May
31, 1999 to purchase eighty (80) shares of Common Stock of the Corporation for
each one thousand (1,000) shares of Common Stock into which each $10,000 Series
A Note is convertible at an initial exercise price equal to the conversion price
established under the Series A Note and as such exercise price is adjusted under
the terms of the Warrant (the "Warrant"); each such instrument in the form as
attached to the Memorandum, and incorporated herein by reference at a per Unit
purchase price of $10,000 (the "Purchase Price"). Any future reference herein
to a Unit shall also mean the Series A Note, the Warrant, all stock issuable
upon conversion of the Note (the "Note Shares") and all common stock issuable
upon exercise of the Warrant (the "Warrant Shares"). The Unit(s) offered to the
Investor are part of a larger private placement of units by the Corporation for
minimum aggregate gross proceeds of $10,000,000 and maximum aggregate gross
proceeds of $20,000,000 (the "Placement").
b. Payment and Delivery. The Investor shall pay the Purchase Price
--------------------
for the Unit(s) in cash, by wire transfer of funds to Yorkton Securities Inc.
("Yorkton") as trustee of the Corporation prior to the "Closing Date" (as
defined below).
2
<PAGE>
2. Closing. The Closing of the transactions provided for in this
-------
Subscription Agreement shall be on the terms and subject to the conditions set
forth in the Memorandum, which are incorporated herein by this reference.
3. Corporation's Representations, Warranties and Covenants. The
-------------------------------------------------------
Corporation hereby represents, warrants and covenants to the Investor as
follows:
a. Corporate Organization and Standing. The Corporation is a
-----------------------------------
corporation duly organized, validity existing and in good standing under the
laws of the State of Delaware. The Corporation is duly qualified to do business
in the jurisdictions where it is currently doing business. The Corporation has
the requisite corporate power to carry on its business as presently conducted,
and as proposed or contemplated to be conducted in the future, and to enter into
and carry out the provisions of this Subscription Agreement and the transactions
contemplated hereby.
b. Authorization. All corporate action on the part of the
-------------
Corporation, its directors and shareholders necessary for the authorization,
execution, delivery and performance of this Subscription Agreement by the
Corporation and the performance of all of the Corporation's obligations
hereunder has been taken. This Subscription Agreement, when executed and
delivered by the Corporation, shall constitute a valid and binding obligation of
the Corporation, enforceable in accordance with its terms, except as may be
limited by principles of public policy, and subject to laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or other
equitable remedies. The Unit(s), when issued in compliance with the provisions
of this Subscription Agreement, will be validly issued, fully paid and
nonassessable.
c. No Breach. The issue and sale of the Unit(s) by the Corporation
---------
does not and will not conflict with and does not and will not result in a breach
of any of the terms of the Corporation's incorporating documents or any
agreement or instrument to which the Corporation is a party. The consummation
of the transactions or performance of the obligations contemplated by this
Subscription Agreement will not result in a breach of any term of, or constitute
a default under, any statute, indenture, mortgage, or other agreement or
instrument to which the Corporation or any of its subsidiaries is or are a party
or by which any of them is or are bound, or any order, writ, judgment or decree.
d. Pending or Threatened Claims. Neither the Corporation nor any of
----------------------------
its subsidiaries is a party to any action, suit or proceeding which could
materially affect its business or financial condition, and no such actions,
suits or proceedings are contemplated or have been threatened.
e. No Preemptive Rights. There are no preemptive rights of any
--------------------
shareholder of the Corporation with respect to the Unit(s).
f. Disclosure. With respect to statements of the Corporation, the
----------
Memorandum, including all exhibits and schedules to the Memorandum, does not
contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in light of the
circumstances under which they have been made, not misleading.
g. Authorized Shares. The Corporation has sufficient authorized and
-----------------
unissued shares of Common Stock to provide for the issuance and delivery of the
Note Shares upon conversion of the Series A Note and the Warrant Shares upon
exercise of the Warrant.
4. Investor Representations and Warranties. The Investor represents and
---------------------------------------
warrants to the Corporation that:
a. Account/Regulation S. The Investor is acquiring the Unit(s) for
--------------------
investment for its own account, and not with a view to, or for resale in
connection with, any distribution thereof, and it has no present intention of
selling or distributing any of the Unit(s). The Investor understands that the
Unit(s) have not been registered under the Securities Act of 1933, as amended
(the "Securities Act") by reason of a specific exemption from the registration
provisions of the Securities Act which depends upon, among other things, the
bona fide nature of the investment as expressed herein. The Investor
3
<PAGE>
understands that the Corporation is relying on the rules and regulations
governing offers and sales made outside the United States to non-"U.S. Persons"
pursuant to Regulation S under the Securities Act.
b. Not A "U.S. Person." The Investor hereby certifies that (i) it
------------------
is not a "U.S. Person" as defined under Rule 902, Section (o) of Regulation S
promulgated under the Securities Act (a copy of which is attached hereto as
Schedule 1) and is not acquiring the Unit(s) for the account or benefit of any
U.S. Person, and (ii) it is acquiring the Unit(s) in an "offshore transaction"
as defined under Section (i) of such Rule 902 (a copy of which is attached
hereto as Schedule 2).
c. Access to Data. The Investor has had an opportunity to discuss
--------------
the Corporation's business, management and financial affairs with its management
and Yorkton Securities Inc. ("Yorkton") and to obtain any additional information
which the Investor has deemed necessary or appropriate for deciding whether or
not to purchase the Unit(s), including the Memorandum, all incorporated herein
by reference, together with all exhibits referenced therein. The Investor
acknowledges that no other representations or warranties, oral or written, have
been made by the Corporation or any agent thereof except as set forth in this
Subscription Agreement.
d. No Fairness Determination. The Investor is aware that no
-------------------------
federal, state or other agency has made any finding or determination as to the
fairness of the investment, nor made any recommendation or endorsement of the
Unit(s).
e. Knowledge and Experience. The Investor has such knowledge and
------------------------
experience in financial and business matters, including investments in other
start-up companies, that it is capable of evaluating the merits and risks of the
investment in the Unit(s), and it is able to bear the economic risk of such
investment. Further, the individual executing this Agreement has such knowledge
and experience in financial and business matters that he is capable of utilizing
the information made available to him in connection with the offering of the
Unit(s), of evaluating the merits and risks of an investment in the Unit(s) and
of making an informed investment decision with respect to the Unit(s), including
assessment of the Risk Factors set forth in the Memorandum and specifically
incorporated herein by reference.
f. Suitability. The Investor has carefully considered, and has, to
-----------
the extent the Investor deems it necessary, discussed with the Investor's own
professional legal, tax and financial advisers the suitability of an investment
in the Unit(s) for the Investor's particular tax and financial situation, and
the Investor has determined that the Unit(s) are a suitable investment.
g. Private Offering. The offer to sell the Unit(s) was directly
----------------
communicated to the Investor by the Corporation or Yorkton. At no time was the
Investor presented with or solicited by any leaflet, newspaper or magazine
article, radio or television advertisement, or any other form of general
advertising or solicited or invited to attend a promotional meeting otherwise
than in connection and concurrently with such communicated offer.
h. Reliance on Own Advisers. In connection with the Investor's
------------------------
subscription for the Unit(s), the Investor has not relied upon the Corporation
or Yorkton or their respective legal and tax advisers for legal or tax advice,
and has, if desired, in all cases sought the advice of the Investor's own
personal legal counsel and tax advisers.
i. Limited Public Market. The Investor is aware that there is no
---------------------
public market for the Corporation's securities. There is no guarantee that a
public market will develop at any time in the future. The Investor understands
that the Unit(s) are all unregistered and may not be publicly sold without
registration or an available exemption from registration. The Investor
understands that the Unit(s) cannot be readily sold or liquidated in case of an
emergency or other financial need. The Investor has sufficient liquid assets
available so that the purchase and holding of the Unit(s) will not cause it
undue financial difficulties.
4
<PAGE>
j. Commissions/Finders Fees. The Investor acknowledges that
------------------------
commissions/finders fees will be payable by the Corporation to Yorkton for sales
of the Unit(s), as disclosed in the Memorandum.
k. Investment Experience. The Investor is an institutional
---------------------
"accredited investor" as that term is defined in Regulation D promulgated by the
Securities and Exchange Commission. More specifically, the Investor fits within
one or more of the following categories:
(i) Any bank as defined in Section 3(a)(2) of the Securities Act, or
any savings and loan association or other institution as defined in Section
3(a)(5)(A) of the Securities Act whether acting in its individual or fiduciary
capacity; any broker or dealer registered pursuant to Section 15 of the Exchange
Act; insurance Corporation as defined in Section 2(13) of the Securities Act;
investment Corporation registered under the Investment Corporation Act of 1940;
or a business development Corporation as defined in Section 2(a)(48) of that
Act; Small Business Investment Corporation licensed by the U.S. Small Business
Administration under Section 301(c) or (d) of the Small Business Investment Act
of 1958; any plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political
subdivisions for the benefit of its employees, if such plan has total assets in
excess of $5,000,000; employee benefit plan within the meaning of the Employee
Retirement Income Security Act of 1974, if the investment decision is made by a
plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank,
savings and loan association, insurance Corporation, or registered investment
adviser, or if the employee benefit plan has total assets in excess of
$5,000,000 or, if a self-directed plan, with investment decision made solely by
persons that are accredited investors;
(ii) Any private business development Corporation as defined in
Section 202(a)(22) of the Investment Advisers Act of 1940;
(iii) Any organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(iv) Any trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the Unit(s) offered, whose purchase
is directed by a person who has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and risks of the
prospective investment; or
(v) Any entity in which all of the equity owners are accredited
investors.
l. IITSSA Compliance. The Investor shall provide to the
-----------------
Corporation, if applicable, all such information as is necessary to complete the
forms required to be filed by the Corporation with the U.S. Department of
Commerce, Bureau of Economic Analysis, under the International Investment and
Trade in Services Survey Act, as amended, and regulations issued thereunder.
m. Portfolio Interest Obligation. Under penalties of perjury, the
-----------------------------
Investor hereby certifies that either:
(i) upon purchase of the Unit(s), it will be the beneficial owner of
the Series A Note(s) included in such Unit(s) and further certifies (A) that it
is neither a citizen nor a resident of the United States, (B) that it has
provided to the Corporation or will provide to the Corporation no later than the
first interest payment date of the Series A Notes(s) an executed Treasury
Department Form W-8 on substantially the form attached hereto as Schedule 3, (C)
that it will provide to the Corporation updated Treasury Department Forms W-8
upon the Corporation's request and (D) that it will notify the Corporation
within 30 days of any change in any of the information on the Treasury
Department Form W-8 most recently provided to the Corporation; or
5
<PAGE>
(ii) it is a securities clearing organization, a bank or another
financial institution that holds customers' securities in the ordinary course of
its trade or business and further certifies (A) that the individual(s) signing
this Subscription Agreement on behalf of the Investor are duly authorized to do
so, (B) that either (1) the Investor has received from the beneficial owner of
the Series A Note(s) an executed Treasury Department Form W-8 on substantially
the form attached hereto as Schedule 3 or (2) the Investor has received from
another financial institution a similar statement that it, or another financial
institution acting on behalf of the beneficial owner, has received from the
beneficial owner an executed Treasury Department Form W-8 on substantially the
form attached hereto as Schedule 3, (C) that it has provided to the Corporation
or will provide to the Corporation no later than the first interest payment date
of the Series A Note(s) a copy of the executed Treasury Department Form W-8 from
the beneficial owner which indicates the beneficial owner's name and address,
(D) that it will use its best efforts to provide to the Corporation updated
copies of the beneficial owner's Treasury Department Forms W-8 upon the
Corporation's request and (E) that it will promptly notify the Corporation of
any change in any of the information on the Treasury Department Form W-8 most
recently provided to the Corporation, whether such changes are furnished by the
beneficial owner or whether the Investor obtains actual knowledge of such a
change.
5. Restrictions On Transfer Re Regulation S.
----------------------------------------
a. Transfer Restrictions. The Investor shall not attempt to have
---------------------
registered any transfer of the Unit(s) not made in accordance with the
provisions of Regulation S. In addition to any other restrictions on transfer
set forth in this Agreement, the Investor agrees to transfer the Unit(s) only
(i) in accordance with the provisions of Regulation S, pursuant to registration
under the Securities Act, or pursuant to an available exemption from
registration, and (ii) in accordance with any applicable state securities laws.
Unless so registered or exempt therefrom, such transfer restrictions shall
include but not be limited to and the Investor warrants and represents the
following:
(i) The Investor shall not sell the Unit(s) publicly or privately, or
through any short sale, or other hedging transaction to any U.S. Person, whether
directly or indirectly, or for the account or benefit of any such U.S. Person
for the restrictive period mandated by Regulation S after the purchase of the
Unit(s) unless registered or exempt from registration;
(ii) Any other offer or sale of the Unit(s) shall be made only if (A)
during the restrictive period any subsequent purchaser certifies in writing that
it is not a U.S. Person and is not acquiring the Unit(s) for the account or
benefit of any U.S. Person, or (B) after the restrictive period the Unit(s) are
purchased in a transaction that did not require registration under the
Securities Act and applicable Blue Sky laws; and
(iii) Any transferee of the Unit(s) shall agree in writing to
resell the Unit(s) only in accordance with the provisions of Regulation S,
pursuant to registration under the Securities Act, or pursuant to an available
exemption from registration.
b. Restrictions On Resales In the United States. The Investor
--------------------------------------------
understands and acknowledges that the Securities Act prohibits resales of
securities in the United States except pursuant to an effective registration
statement or an exemption from registration for which the securities and the
Investor holding such securities qualifies. The Investor understands and
acknowledges the requirements for qualifying for an exemption from registration
afforded by Section 4 of the Securities Act and that there can be no assurance
that the Investor will be able to qualify for such an exemption from
registration.
6. Registration Rights. The Investor shall be entitled to the
-------------------
registration rights which are described in the Memorandum and incorporated
herein by this reference.
6
<PAGE>
7. Public Offering Lock-Up. In connection with the first underwritten
-----------------------
public registration of the Corporation's securities, the Investor agrees, upon
the request of the Corporation or the underwriters managing such underwritten
offering of the Corporation's securities, not to sell, make any short sale of,
loan, grant any option for the purchase of, or otherwise dispose of any Unit(s)
(other than those included in the registration) without the prior written
consent of the Corporation and such underwriters, as the case may be, for a
period of time, not to exceed one hundred eighty (180) days from the effective
date of such registration. Such agreement shall be in writing in the form
reasonably satisfactory to the Corporation and such underwriter. The
Corporation may impose stop-transfer instructions with respect to the shares
subject to the foregoing restrictions until the end of said 180-day period.
8. Restrictive Legends. Each instrument evidencing the Unit(s) which
-------------------
the Investor may purchase hereunder and any other securities issued upon any
stock split, stock dividend, recapitalization, merger, consolidation or similar
event (unless no longer required in the opinion of the counsel for the
Corporation) shall be imprinted with legends substantially in the following
form:
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE
OFFERED OR SOLD WITHOUT REGISTRATION UNDER THE ACT UNLESS THE CORPORATION
RECEIVES AN OPINION OF COUNSEL, SATISFACTORY TO THE CORPORATION, THAT AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE OR SUCH REGISTRATION IS NOT
REQUIRED PURSUANT TO REGULATION S UNDER THE ACT.
THE SECURITIES REPRESENTED BY THIS INSTRUMENT ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER SET FORTH IN THAT CERTAIN MAY 31, 1996,
SUBSCRIPTION AGREEMENT BETWEEN THE ORIGINAL HOLDER HEREOF AND THE
CORPORATION.
The Corporation shall be entitled to enter stop transfer notices on its transfer
books with respect to the Unit(s) during periods when transfers are restricted
under the terms of this Subscription Agreement.
9. Authorization of Yorkton.
------------------------
a. Related Agreements. The Investor hereby irrevocably authorizes
------------------
Yorkton to negotiate and settle the form of any other document or agreement to
be entered into in connection with the Placement.
b. Agency Agreement. The Investor hereby acknowledges and agrees
----------------
that Yorkton and the Corporation may agree to vary, amend, alter or waive, in
whole or in part, one or more of the conditions set forth in that certain Agency
Agreement entered into by and between Yorkton and the Corporation with respect
to the Placement, in such manner and on such terms and conditions as they may
determine, acting reasonably, without affecting in any way the Investor's
obligations hereunder; provided, however, that Yorkton shall not vary, amend,
alter or waive any such condition where to do so would result in a material
change to any of the material terms of the transactions provided for in this
Subscription Agreement.
c. Closing; Termination. The Investor hereby acknowledges and
--------------------
agrees that Yorkton may waive, in whole or in part, or extend the time for
compliance with, any of the conditions for the Closing in such manner and on
such terms and conditions as Yorkton may determine, acting reasonably, without
in any way affecting the Investor's obligations, and may terminate this
Subscription Agreement on behalf of the Investor in the event that any condition
for the Closing has not been satisfied.
10. Reliance. The Investor is aware that the Corporation and Yorkton are
--------
relying on the accuracy of the above representations to establish compliance
with Federal and State securities laws. If any such warranties or
representations are not true and accurate in any respect as of the date of the
Closing, Investor shall so notify the Corporation in writing immediately and
shall be cause for rescission
7
<PAGE>
by the Corporation at its sole election. The Investor shall indemnify the
Corporation and Yorkton and their respective affiliates, legal counsel and
agents against all losses, claims, costs, expenses and damages or liabilities,
including reasonable attorneys' fees, which such parties may suffer or incur
caused or in connection with or arising out of, directly or indirectly, from
their reliance on such warranties and representations.
11. Miscellaneous.
-------------
a. Survival. The representations, warranties, covenants and
--------
agreements made herein shall survive the closing of the transactions
contemplated hereby.
b. 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.
c. Entire Agreement. This Subscription Agreement and the Schedules
----------------
attached hereto constitute the entire agreement and understanding between the
parties with respect to the subject matters herein, and supersede and replace
any prior agreements and understandings, whether oral or written between and
among them with respect to such matters. The provisions of this Subscription
Agreement may be waived, altered, amended or repealed, in whole or in part, only
upon the written consent of both the Corporation and the Investor.
d. Title and Subtitles. The titles of the Sections and subsections
-------------------
of this Subscription Agreement are for the convenience of reference only and are
not to be considered in construing this Subscription Agreement.
e. Counterparts. This Subscription 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.
f. Applicable Law. This Subscription Agreement shall be governed by
--------------
and construed in accordance with laws of the State of California, applicable to
contracts between California residents entered into and to be performed entirely
within the State of California.
g. Venue. Any action, arbitration, or proceeding arising directly
-----
or indirectly from this Subscription Agreement or any other instrument or
security referenced herein shall be litigated or arbitrated, as appropriate, in
the County of Sonoma, State of California.
h. Authority. If Investor is a corporation, partnership, trust or
---------
estate: (i) the individual executing and delivering this Agreement on behalf of
the Investor has been duly authorized and is duly qualified to execute and
deliver this Agreement on behalf of Investor in connection with the purchase of
the Unit(s) and (ii) the signature of such individual is binding upon Investor.
8
<PAGE>
i. Execution and Delivery of Subscription Agreement. The Corporation
------------------------------------------------
and Yorkton shall be entitled to rely on delivery by facsimile machine of an
executed copy of this Subscription Agreement, and acceptance by the Corporation
of such facsimile copy shall be equally effective to create a valid and binding
agreement between the Investor and the Corporation in accordance with the terms
hereof.
j. Execution and Delivery of Other Documents. The Investor agrees
-----------------------------------------
that it will execute and deliver such other documents as may be reasonably
requested by the Corporation to complete the transactions contemplated hereby.
k. Severability. The invalidity or unenforceability of any
------------
particular provision of this Subscription Agreement shall not affect or limit
the validity or enforceability of the remaining provisions of this Subscription
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of May 31, 1996.
INVESTOR NETSOURCE INTERNATIONAL
____________________________________ TELECOMMUNICATIONS, INC.
(print Name)
By:_________________________________ By:_________________________________
(Signature) (Signature)
____________________________________ ____________________________________
(Print Name and Title) (Print Name and Title)
Dollar Amount: $_____________
No. of Unit(s): _____________
(REMAINDER OF PAGE INTENTIONALLY LEFT BLANK)
9
<PAGE>
REGISTRATION STATEMENT
NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC.
TOTAL SUBSCRIPTION: Dollar Amount $_________________ No. of Units ____________
REGISTRATION:
Please print name in which your units are to be registered
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DOMICILE/PRINCIPAL PLACE OF BUSINESS ADDRESS:
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Entity Name
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Street
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City Country Postal Code
MAILING ADDRESS: if different from domicile/principal place of business address
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Entity Name
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Street
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City Country Postal Code
Business Telephone Phone Business Facsimile Phone
( ) ( )
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CHECK ONE:
___ Corporate Ownership
___ Partnership Ownership
___ Other Form of Ownership: Describe _________________________________________
FOR TRUST:
- ---------
_______________________________ Trust
____________________ Date Established
______________________________________
Name of Trustee or other Administrator
FOR ALL INVESTORS:
- -----------------
______________________________________
(Name of Person With Right To Control
the Voting of Securities on Behalf of Entity)
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OFFEREE QUESTIONNAIRE
NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC.
Gentlemen:
The undersigned understands that: (i) you will rely on the information contained
herein for purposes of securities law compliance and determination; and (ii) the
securities will not be registered under the Securities Act of 1933, as amended
(the "Securities Act") in reliance upon the exemption from registration provided
by Regulation S promulgated under the Securities Act. The undersigned further
represents to you that: (i) the information contained herein is complete and
accurate and may be relied upon by you; and (ii) the undersigned will notify you
immediately of any material change in any of such information occurring prior to
the purchase of such securities, if any purchase is made, by the undersigned.
THE UNDERSIGNED UNDERSTANDS AND AGREES THAT ALTHOUGH THIS QUESTIONNAIRE WILL BE
KEPT STRICTLY CONFIDENTIAL, NETSOURCE INTERNATIONAL TELECOMMUNICATIONS, INC.
MAY PRESENT THIS QUESTIONNAIRE TO SUCH PARTIES AS IT DEEMS ADVISABLE IF CALLED
UPON TO ESTABLISH THE AVAILABILITY UNDER ANY FEDERAL OR STATE SECURITIES LAWS OF
AN EXEMPTION FROM REGISTRATION OF THIS OFFERING OR ANY OTHER COMPLIANCE WITH
STATE OR FEDERAL SECURITIES LAWS.
The following information is to be provided by the individual who is making the
investment decision on behalf of the corporate, partnership, trust or other
entity investor purchasing the Unit(s):
________________________________________________________________________________
(Print Name and Title)
1. Current employment position and responsibility:
- --------------------------------------------------------------------------------
2. Details of any training or experience in financial or business investment
matters:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3. I have previously purchased securities on behalf of the Investor or on my
own behalf which were sold in reliance on Regulation S or a private offering
exemption from registration under the Securities Act of 1933, as amended:
_______ Yes _______ No
Initial Initial
If yes, please give several examples:
Type of Amount
Investment Invested
- ------------ --------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. Total assets of Investor exceed: $________________________________________.
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SCHEDULE 1
DEFINITION OF "U.S. PERSON"
"Reg. (S)230.902. As used in Regulation S, the following terms shall have
the meanings indicated:
(o) U.S. Person.
(1) "U.S. person" means:
(i) any natural person resident in the United States;
(ii) any partnership or corporation organized or incorporated under
the laws of the United States;
(iii) any estate of which any executor or administrator is a U.S.
person;
(iv) any trust of which any trustee is a U.S. person;
(v) any agency or branch of a foreign entity located in the United
States;
(vi) any non-discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary for the benefit or account
of a U.S. person;
(vii) any discretionary account or similar account (other than an
estate or trust) held by a dealer or other fiduciary organized, incorporated, or
(if an individual) resident in the United States; and
(viii) any partnership or corporation if:
(A) organized or incorporated under the laws of any foreign
jurisdiction; and
(B) formed by a U.S. person principally for the purpose of investing
in securities not registered under the Act, unless it is organized or
incorporated, and owned, by accredited investors (as defined in Rule 501(a)
under the Act ((S)230.501(a) of this chapter)) who are not natural persons,
estates or trusts.
(2) Notwithstanding paragraph (o)(1) of this section, any discretionary
account or similar account (other than an estate or trust) held for the benefit
or account of a non-U.S. person by a dealer or other professional fiduciary
organized, incorporated, or (if an individual) resident in the United States
shall not be deemed a "U.S. person."
(3) Notwithstanding paragraph (o)(1) of this section, any estate of which
any professional fiduciary acting as executor or administrator is a U.S. person
shall not be deemed a U.S. person if:
(i) an executor or administrator of the estate who is not a U.S.
person has sole or shared investment discretion with respect to the assets of
the estate; and
(ii) the estate is governed by foreign law.
(4) Notwithstanding paragraph (o)(1) of this section, any trust of which
any professional fiduciary acting as trustee is a U.S. person shall not be
deemed a U.S. person if a trustee who is not a U.S. person has sole or shared
investment discretion with respect to the trust assets, and no beneficiary of
the trust (and no settlor if the trust is revocable) is a U.S. person.
(5) Notwithstanding paragraph (o)(1) of this section, an employee benefit
plan established and administered in accordance with the law of a country other
than the United States and customary practices and documentation of such country
shall not be deemed a U.S. person.
(6) Notwithstanding paragraph (o)(1) of this section, any agency or branch
of a U.S. person located outside the United States shall not be deemed a "U.S.
person" if:
(i) the agency or branch operates for valid business reasons; and
(ii) the agency or branch is engaged in the business of insurance or
banking and is subject to substantive insurance or banking regulation,
respectively, in the jurisdiction where located.
(7) The International Monetary Fund, the International Bank for
Reconstruction and Development, the Inter-American Development Bank, the Asian
Development Bank, the African Development Bank, the United Nations, and their
agencies, affiliates and pension plans, and any other similar international
organizations, their agencies, affiliates and pension plans shall not be deemed
"U.S. persons."
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SCHEDULE 2
DEFINITION OF "OFFSHORE TRANSACTION"
"Reg. (S)230.902. As used in Regulation S, the following terms shall have
the meanings indicated:
(i) Offshore Transaction.
(1) An offer or sale of securities is made in an "offshore transaction" if:
(i) the offer is not made to a person in the United States; and
(ii) either:
(A) at the time the buy order is originated, the buyer is outside the
United States, or the seller and any person acting on its behalf reasonably
believe that the buyer is outside the United States; or
(B) for purposes of:
(1) (S)230.903, the transaction is executed in, on or through a
physical trading floor of an established foreign securities exchange that is
located outside the United States; or
(2) (S)230.904, the transaction is executed in, on or through the
facilities of a designated offshore securities market described in paragraph (a)
of this section, and neither the seller nor any person acting on its behalf
knows that the transaction has been pre-arranged with a buyer in the United
States.
(2) Notwithstanding paragraph (i)(1) of this section, offers and sales of
securities specifically targeted at identifiable groups of U.S. citizens abroad,
such as members of the U.S. armed forces serving overseas, shall not be deemed
to be made in "offshore transactions."
(3) Notwithstanding paragraph (i)(1) of this section, offers and sales of
securities to persons excluded from the definition of "U.S. person" pursuant to
paragraph (o)(7) of this section or persons holding accounts excluded from the
definition of "U.S. person" pursuant to paragraph (o)(2) of this section, solely
in their capacities as holders of such accounts, shall be deemed to be made in
"offshore transactions."
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EXHIBIT 10.16
SUBLEASE
1. PARTIES. This Sublease, dated, for reference purpose only, October 29,
1993, is made by and between LEE PIERCE INCORPORATED (hereinafter "Sublandlord")
and TRANSPHERE INTERNATIONAL INC. (hereinafter "Subtenant").
2. PREMISES. Sublandlord hereby subleases to Subtenant and Subtenant
hereby subleases from Sublandlord for the term, at the rental, and upon all of
the conditions set forth herein, the following described premises situated in
the City of San Francisco, County of San Francisco, State of California,
commonly known as 444 Spear Street and described as a portion of the 2nd Floor
which is approximately ten thousand five hundred and twenty (10,520) rentable
square feet, (hereinafter "Sublease Premises") in its entirety as defined by the
Master Lease (defined below).
3. TERM.
3.1 The term ("Term") of this Sublease shall be for a period of
forty-eight and one half (48.5) months commencing on December 15,1993, and
ending on December 31, 1997, unless sooner terminated pursuant to any provision
hereof, or of the Master Lease.
3.2 Notwithstanding said commencement date, if for any reason
Sublandlord cannot deliver possession of the Sublease Premises to Subtenant on
said date, Sublandlord shall not be subject to any liability therefore but in
such case Subtenant shall not be obligated to pay rent until possession of the
Sublease Premises is tendered to Subtenant; provided, however, that if
Sublandlord shall not have delivered possession of the Sublease Premises within
ninety (90) days from said commencement date, Subtenant may, at Subtenant's
option, by notice in writing to Sublandlord within ten (10) days after such
ninety (90) day period, cancel this Sublease, in which event the parties shall
be discharged from all obligations hereunder. If this Sublease is canceled as
herein provided, Sublandlord shall return any monies previously deposited by
Subtenant with Sublandlord.
3.3 In the event Subtenant, with Sublandlord's prior written
consent, takes possession and occupies any portion of the Sublease Premises
prior to the commencement of the term, such occupancy shall be subject to all of
the provisions of this Sublease, shall not advance the termination date of this
Sublease, and Subtenant shall pay rent to Sublandlord in advance of such early
possession for the period commencing with Subtenant's first day of possession
and ending with the commencement of the term at the same rental as that
prescribed for the sixth (6th) month of the term, prorated at the rate of 1/30th
thereof per day.
4. RENT.
4.1 MINIMUM RENT. Subtenant shall pay to Sublandlord, as minimum
rent ("Minimum Rent") without deduction, setoff, offset, notice, or demand, at
731 Sansome Street, San Francisco, California, or at such other place as
Sublandlord shall designate from time to time by notice to Subtenant, the
following:
Months 1-5 $0.00 (free rent period)
Months 6-12 $15,249.79 each month
Months 13-24 $16,564.79 each month
Months 25-36 $16,915.11 each month
Months 37-48 $17,235.97 each month
Month 48.5 (December 15,1997) $ 8,617.98 partial month
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in advance on the first day of each month of the Term (which day, for purposes
of this Sublease, shall be the fifteenth (15th) day of each month). Subtenant
shall pay to Sublandlord upon execution of this Sublease the sum of thirty-four
thousand one hundred fifty-one Dollars and eight Cents ($34,151.08) as "Prepaid
Minimum Rent". Such Prepaid Minimum rent shall not bear interest. One month of
Prepaid Minimum Rent in the amount of $16,915.11 shall be applied by Sublandlord
towards the payment of one (1) month's Minimum Rent during the period of the
"25th through the 36th" month. The remainder, the sum of $17,235.97 shall be
applied by Sublandlord towards the payment of one (1) month's Minimum Rent
during the period of the "37th through the 48th" month. Subtenant shall have the
right to choose the specific month within each period to which the Prepaid
Minimum Rent shall be applied after prior written notice to Sublandlord. Prior
written notice shall be given at least thirty (30) days in advance. If Subtenant
does not notify Sublandlord as provided herein, Sublandlord shall apply the
Prepaid Minimum Rent to the 36th month and the 48th month respectively.
Furthermore, in the event of Default (defined below) by Subtenant prior to the
application by Sublandlord of the first payment of Prepaid Minimum Rent, the
first one (1) month Prepaid Minimum Rent amount referenced above shall become
part of the Security Deposit, except no interest shall be earned by Subtenant or
payable by Sublandlord, and none of such first payment of Prepaid Minimum Rent
shall be available for application by Subtenant towards the payment of Minimum
Rent. In the event of a second Default by Subtenant prior to the payment to
Sublandlord of the second payment of Prepaid Minimum Rent, the second Prepaid
Minimum Rent amount shall also become part of the Security Deposit, except no
interest shall be earned and payable thereon, and none of such second payment of
Prepaid Minimum Rent shall be available for application by Subtenant to the
payment of Minimum Rent. For the purposes of determining whether any Prepaid
Minimum Rent shall become a part of the Security Deposit only, the term
"Default" shall be defined as Subtenant's failure to pay any Minimum Rent and
Additional Rent due to Sublandlord within five (5) days after said sums are due
and payable ("late Payment") for a fourth (4th) time during any twelve (12)
month period over the term of this Sublease. For purposes of determining when
Sublandlord may add the second amount of Prepaid Minimum Rent to the Security
Deposit, the fifth (5th) time a late Payment occurs, Sublandlord shall have the
right to add the second Prepaid Minimum Rent amount to the Security Deposit.
Sublandlord shall notify Subtenant of each occurrence of Default.
4.2 ADDITIONAL RENT. Commencing January 1, 1995, Subtenant shall pay
to Sublandlord, as "Additional Rent", any and all Operating Expenses (as defined
in the Master lease) to be paid by Sublandlord to Landlord which exceed the
Operating Expenses paid by Sublandlord under the terms of the Master Lease for
the "Lease Year", as defined in the Master Lease, of 1994 ("Base Operating
Expenses"). Minimum Rent and Additional Rent are sometimes collectively referred
to herein as "Rent" and all amounts payable or reimbursable by Subtenant to
Sublandlord under this Sublease, including any late charges or liquidated damage
amounts, shall constitute "Rent" and shall he payable and recoverable as Rent.
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4.3 NOTICE AND PAYMENT. As soon as reasonably practicable after
Sublandlord's receipt from Landlord of the Estimated Increased Operating
Expenses (as defined in the Master Lease) for the calendar year 1995 and for
each calendar year thereafter (e.g., 1996 and 1997), Sublandlord shall notify
Subtenant of any increases in Operating Expenses over Base Operating Expenses
(as defined in this Sublease) as estimated by Landlord for each such calendar
year. Sublandlord shall provide to Subtenant copies of Landlord's estimates and
statements as delivered to Sublandlord by Landlord. Commencing on the fifteenth
(15th) day of January 1995 and on the fifteenth (15th) day of every month
thereafter through and including December 15, 1997, Subtenant shall pay to
Sublandlord, as Additional Rent, one-twelfth (1/12) of Tenant's Share of the
Estimated Increased Operating Expenses (as defined in the Master lease);
provided, however, on the fifteenth (15th) day of January 1995, Subtenant shall
pay an amount equal to one-eighth (1/8) of Tenants Share of the Estimated
Increased Operating Expenses for the calendar year 1995 and, on the fifteenth
(15th) day of December 1997, Subtenant shall pay an amount equal to one twenty-
fourth (1/24) of Tenant's Share of the Estimated Increased Operating Expenses
for the calendar year 1997. Subject to the terms of this Paragraph 4.3 and
Paragraphs 7.6 and 4.2 of this Sublease, the Master lease shall control with
respect to the payment of Operating Expenses.
4.4 LATE PAYMENT CHARGES AND INTERESTS. Any payment of Rent or other
amounts from Subtenant to Sublandlord in this Sublease which is not paid on the
date due shall accrue interest from the date due until the date paid at a rate
equal to ten percent (10%) per annum; provided, however, in the event Subtenant
pays Rent and or any other sums due within five (5) days after the date due no
interest shall: be payable by Subtenant; provided further, however, that if a
court of competent jurisdiction determines the above rate exceeds the highest
lawful rate of interest, then at the maximum rate permitted by law. If any
installment of Minimum Rent and/or Additional Rent is not paid promptly on the
first of the month (which day, for purposes of this Sublease, shall be the
fifteenth (15th) day of each month), or otherwise when due, Sublessee shall pay
to Sublessor a late payment charge equal to five percent (5%) of the amount of
such delinquent payment, in addition to the installment of Minimum Rent and/or
Additional Rent then owing; provided, however, in the event Subtenant pays Rent
and or any other sums due within five (5) days after the date due no late
payment charge shall be payable by Subtenant. This Section 4 shall not relieve
Subtenant of Subtenant's obligation to pay any amount owing hereunder at the
time and in the manner provided.
5. LIQUIDATED DAMAGES. BY PLACING THEIR INITIALS IMMEDIATELY BELOW,
SUBTENANT AGREES THAT IT WOULD BE IMPRACTICABLE OR EXTREMELY DIFFICULT TO FIX
ACTUAL DAMAGES AND COSTS SUSTAINED BY SUBLANDLORD DUE TO THE FAILURE OF
SUBTENANT TO MAKE TIMELY PAYMENTS OF RENT, THAT THE AMOUNT SPECIFIED ABOVE IS
THE PARTIES REASONABLE ESTIMATE BY SUBTENANT AND SUBLANDLORD OF A FAIR AVERAGE
COMPENSATION FOR SUBLANDLORD'S DAMAGES AND COSTS IN THE EVENT OF SUBTENANT'S
DEFAULT IN EACH INSTANCE BY LATE PAYMENT OF AMOUNTS OWED HEREUNDER.
SUBTENANT'S INITIALS _____
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6. SECURITY DEPOSIT. Subtenant shall deposit with Sublandlord upon
execution hereof the sum twenty-nine thousand eight hundred six Dollars
($29,806.67) as security for Subtenant's faithful performance of Subtenant's
obligations hereunder. If Subtenant fails to pay Minimum Rent or Additional Rent
or other charges due hereunder, or otherwise defaults with respect to any
provision of this Sublease, Sublandlord may use, apply or retain all or any
portion of said deposit for the payment of any Rent or other charge in default
or for the payment of any other sum to which Sublandlord may become obligated by
reason of Subtenant's default, or to compensate Sublandlord for any loss or
damage which Sublandlord may suffer thereby. If Sublandlord so uses or applies
all or any portion of said deposit, Subtenant shall within ten (10) days after
written demand therefor, deposit cash with Sublandlord in an amount sufficient
to restore said deposit to the full amount hereinabove stated and Subtenant's
failure to do so shall be a breach of this Sublease, and Sublandlord may at its
option terminate this Sublease. Sublandlord shall not be required to keep said
deposit separate from its general accounts. If Subtenant performs all of
Subtenant's obligations hereunder, said deposit, or so much thereof as had not
theretofore been applied by Sublandlord, shall be returned to Subtenant (or, at
Sublandlord's option, to the last assignee, if any, of Subtenant's interest
hereunder) within thirty (30) days after the expiration of the term hereof, or
after Subtenant has vacated the Premises, whichever is later. The Security
Deposit shall be interest bearing, at an interest rate equal to a minimum of two
percent (2%) per annum but no greater than the rate offered by Bank of America
NT & SA on deposits which may be withdrawn at any time without payment of
penalty or premium during the Term hereof. Interest earned shall be payable to
Subtenant from Sublandlord within thirty (30) days after the expiration of each
lease year. Sublandlord, at Sublandlord's option, may apply earned interest due
to Subtenant, as a credit to Minimum Rent or Additional Rent due herein.
7. USE.
7.1 The Premises shall be used and occupied only for general office
purposes and for no other purpose without the prior written consent of
Sublandlord and Landlord, which consent may be withheld in Landlord's and
Sublandlord's respective sole discretion.
7.2 Except as provided in this Sublease (and specifically not the
Master lease), Sublandlord makes no representations or warranties with respect
to the Sublease Premises. Subtenant shall, at Subtenant's sole expense, comply
promptly with all applicable statutes, ordinances, rules, regulations, orders,
restrictions of record, and requirements in effect during the term hereof
regulating the use of the Sublease Premises.
7.3 Subtenant hereby accepts the Sublease Premises in its "as is"
condition existing as of the date of the execution hereof, excepting Sublandlord
shall shampoo the carpets prior to Subtenant's occupancy of the Sublease
Premises. Sublandlord shall also deliver the Sublease Premises in broom clean
condition without any furniture, and personal contents. As of the date of this
Sublease, Subtenant acknowledges that Subtenant shall have conducted Subtenant's
own investigation of the Sublease Premises and the physical condition thereof,
including accessibility and location of utilities, improvements, existence of
hazardous materials, including but not limited to asbestos, asbestos containing
materials, polychlorinated biphenyls (PCB) and earthquake preparedness, which in
Subtenant's judgment affect or influence Subtenant's use of the Sublease
Premises and Subtenant's willingness to enter this Sublease. Subtenant
recognizes that Sublandlord would not sublease the Sublet Space except on an "as
is" basis and acknowledges that Sublandlord has made no representations of any
kind in connection with improvements or physical conditions on, or bearing on,
the use of the Sublease Premises. Subtenant shall rely solely on Subtenant's own
inspection and examination of such items and not
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on any representations of Sublandlord, express or implied. Subtenant further
recognizes and agrees that neither Sublandlord nor Landlord shall be required to
perform any work of construction, alteration or maintenance of or to the
Sublease Premises, except as provided herein. Subtenant represents and warrants
to Sublandlord that Subtenant shall examine and inspect all matters with respect
to taxes, income and expense data, insurance costs, bonds, permissible uses, the
Master Lease, zoning, covenants, conditions and restrictions and all other
matters which in Subtenant's judgment bear upon the value and suitability of the
Sublease Premises for Subtenant's purposes.
7.4 Subtenant acknowledges that neither Sublandlord nor
Sublandlord's agents have made any representation or warranty as to the
suitability of the Sublease Premises for the conduct of Subtenant's business.
8. MASTER LEASE.
8.1 This Sublease is subject and subordinate to the Master Lease
between 470 Spear Associates, a California limited partnership ("Landlord") and
Sublandlord, as successor in interest to offices Unlimited of California, Inc.,
dated September 29, 1987 designated as Exhibit "A" ("Master Lease"). Subtenant
shall not commit or permit to be committed on the Sublease Premises any act or
omission which shall violate any term or condition of the Master Lease.
8.2 Subtenant shall assume and perform the obligations of
Sublandlord or Tenant in said Master Lease, to the extent said terms and
conditions are applicable to the Sublease Premises subleased pursuant to this
Sublease. Therefore, for the purpose of this Sublease, wherever in the Master
Lease "Landlord" or "Lessor" is used, it shall be deemed to mean the Sublandlord
herein, and wherever in the Master Lease 'Tenant" or "Lessee" is used, it shall
be deemed to mean the Subtenant herein. It is expressly understood, acknowledged
and agreed by Subtenant that all of the stated terms, conditions and covenants
of this Sublease shall be those stated in the Master Lease except as excluded
below, modified as appropriate in the circumstances so as to make such Articles,
and any Sections contained therein, applicable only to the subleasing hereunder
by Sublandlord of the Sublease Premises. Subtenant shall be subject to, bound by
and comply with all of said Articles and Sections of the Master Lease with
respect to the Sublease Premises and shall satisfy all applicable terms and
conditions of the Master Lease for the benefit of both Sublandlord and Landlord.
Upon the breach of any of said terms, conditions or covenants of the Master
Lease by Subtenant or upon the failure of Subtenant to pay Minimum Rent or
Additional Rent or comply with any of the provisions of this Sublease,
Sublandlord may exercise any and all rights and remedies granted to Landlord by
the Master Lease. It is further understood and agreed that Sublandlord has no
duty or obligation to Subtenant under the aforesaid Articles and Sections of the
Master Lease other than to maintain the Master Lease in full force and effect
during the term of this Sublease; provided, however, that Sublandlord shall not
be liable to Subtenant for any earlier termination of the Master Lease which is
not due to the fault of Sublandlord. Whenever the provisions of the Master Lease
incorporated as provisions of this Sublease require the written consent of
Landlord, said provisions shall be construed to require the written consent of
both Landlord and Sublandlord. Subtenant hereby acknowledges that it has read
and is familiar with all the terms of the Master Lease, and agrees that any
termination of the Master Lease without the fault of Sublandlord shall likewise
terminate this Sublease.
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8.3 All of the terms and conditions contained in the Master Lease
are incorporated herein except for Paragraphs 1.1, 1.4, 1.8, 1.10, 1.11, 1.13,
1.14, 1.18, 1.24, 1.25, 3.1, 3.2, 3.3-3.4.5, 4.2, 23.1, 23.2, 23.3, 23.4-23.4.2,
24.15, and Exhibit D.
8.4 Subtenant shall indemnify, defend (by counsel acceptable to
Sublandlord) and hold Sublandlord harmless of and from all liability, judgments,
costs, damages, claims, or demands, including reasonable attorney's fees,
arising out of Subtenant's failure to comply with or perform Subtenant's
obligations under both the Master Lease and this Sublease.
8.5 Sublandlord represents to Subtenant that the Master Lease is in
full force and effect and that no default exists on the part of Sublandlord, and
to the best of Sublandlord's knowledge, Landlord under and to the Master Lease.
Sublandlord agrees to maintain the Master Lease during the term of this
Sublease, subject, however, to an earlier termination of the Master Lease
without the default of Sublandlord, and to hold Subtenant harmless of and from
all liability, judgement, cost, damages, claims or demands, including reasonable
attorney's fees, arising out of Sublandlord's failure to comply with or perform
Sublandlord's obligations under both the Master Lease and this Sublease.
8.6 The time limits provided for in the provisions of the Master
Lease for the giving of notice, making of demands, performance of any act,
condition or covenant, or the exercise of any right, remedy or option, are
amended for the purposes of this Sublease by lengthening or shortening the same
in each instance by five (5) days, as appropriate, so that notices may be given,
demands made, or any act, condition or covenant performed, or any right, remedy
or option hereunder exercised, by Sublandlord or Subtenant, as the case may be,
within the time limit relating thereto contained in the Master Lease. If the
Master Lease allows only five (5) days or less for Sublandlord to perform any
act, or to undertake to perform such act, or to correct any failure relating to
the Premises or this Sublease, then Subtenant shall nevertheless be allowed
three (3) days to perform such act, undertake such act and/or correct such
failure.
8.7 It shall be the obligation of Landlord to (i) provide all
services to be provided by Landlord under the terms of tile Master Lease and
(ii) to satisfy all obligations and covenants of Landlord made in the Master
Lease. Subtenant acknowledges that Sublandlord shall be under no obligation to
provide any such services or satisfy any such obligations or covenants;
provided, however, Sublandlord, upon written notice by Subtenant, shall
diligently attempt to enforce all obligations of Landlord under the Master
Lease.
9. ASSIGNMENT AND SUBLETTING,
Subtenant shall not assign this Sublease or further sublet all or any
part of the Sublease Premises without the prior written consent of Sublandlord
(and the consent of Landlord, if such is required under the terms of the Master
Lease), both of which consents may be given or withheld upon all of the terms
and conditions applicable to assignment and/or Subletting contained in the
Master Lease. All of the terms and conditions contained in Master Lease
applicable to Assignment and/or Subletting shall be applicable to Sublandlord,
as "Landlord", and Subtenant, as "Tenant".
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10. BROKER.
10.1 BROKER PARTICIPATION. Sublandlord and Subtenant warrant and
represent that they have dealt with no real estate broker in connection with
this Sublease other than Marcus & Millichap (hereinafter "Broker") and Starboard
Commercial Brokerage, and that no other broker is entitled to any commission on
account of this Sublease. Sublandlord and Subtenant shall indemnify, defend and
hold the other harmless from and against any and all liability, loss, cost and
damage (including reasonable attorneys' fees) for any claim for a brokerage
commission other than as specified herein. The indemnifying party shall be the
party upon whose acts the broker(s) is claiming a commission.
10.2 BROKER COMMISSION. Upon execution of this Sublease, and consent
thereto by Landlord (if such consent is required under the terms of the Master
Lease), Sublandlord shall pay Broker a real estate brokerage commission in
accordance with Sublandlord's contract with Broker for the subleasing of the
Sublease Premises, if any, and otherwise in the amount of sixty-three thousand
one hundred twenty Dollars ($63,120) for services rendered in effecting this
Sublease which shall be divided as follows; four Dollars ($4) per rentable
square foot or forty-two thousand eighty Dollars ($42,080) to Starboard
Commercial Brokerage, and two Dollars ($2) per rentable square foot or twenty-
one thousand forty Dollars ($21,040) to Marcus & Millichap.
10.3 BROKER DISCLAIMER. Sublandlord and Subtenant acknowledge that
except as otherwise expressly stated herein, Broker has not made any
investigation, determination, warranty or representation with respect to any of
the following: (a) the legality of the present or any possible future use of the
Sublease Premises under any federal, state or local law; (b) the physical
condition or square footage of the Sublease Premises; (c) the terms of the
Master Lease or any other relevant legal document or agreement; or (d) the
presence or location of any hazardous materials on or about the property in
which the Sublease Premises are located (including, but not limited to,
asbestos, PCB's, other toxic, hazardous or contaminated substances, and
underground storage tanks).
11. ARBITRATION.
If a controversy arises with respect to the subject matter of this Sublease
or any provision hereof, Sublandlord, Subtenant and Broker agree that such
controversy shall be settled by final, binding arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association, and
judgement upon the award rendered by the arbitrator(s) may be entered in any
court having jurisdiction thereof.
12. ATTORNEY'S FEES.
If Sublandlord or Subtenant shall commence an action or arbitration against
the other arising out of or in connection with this Sublease, the prevailing
party shall be entitled to recover its costs of suit and reasonable attorney's
fees.
13. NOTICES.
All notices or demands of any kind required or desired to be given by
Sublandlord or Subtenant hereunder shall be in writing and shall be deemed
delivered forty-eight (48) hours after depositing the notice or demand in the
United States Mail, certified or registered, postage prepaid, addressed to the
Sublandlord or Subtenant respectively at the addresses set forth after their
signatures at the end of this Sublease. All rent and other payments due under
this Sublease or the Master Lease shall be made by Subtenant to Sublandlord at
the same address.
7
<PAGE>
14. ADDITIONAL PROVISIONS.
14.1 Holding Over: Subtenant shall not hold over in the Sublease
Premises after the expiration or sooner termination of the Lease Term without
the express prior written consent of Sublandlord. Subtenant shall indemnify and
defend (by counsel acceptable to Sublandlord) Sublandlord for, and hold
Sublandlord harmless from and against, any and all liabilities arising out of or
in connection with any delay by Subtenant in surrendering and vacating the
Sublease Premises, including, without limitation, any claims made by any
succeeding tenant based on any delay and any liabilities arising out of or in
connection with these claims. If possession of the Sublease Premises is not
surrendered to Sublandlord on the expiration or sooner termination of the
Sublease Lease Term, in addition to any other rights and remedies of Sublandlord
hereunder or at law or in equity, Subtenant shall pay to Sublandlord for each
month or portion thereof during which Subtenant holds over in the Sublease
Premises a sum equal to two (2) times the then-current Minimum Rent in addition
to all other Additional Rent payable under this Sublease. If any tenancy is
created by Subtenant's holding over in the Sublease Premises, the tenancy shall
be on all of the terms and conditions of this Sublease, except that Rent shall
be increased as set forth above and the tenancy shall be a month-to-month
tenancy. Nothing in this provision shall be deemed to permit Subtenant to retain
possession of the Sublease Premises after the expiration of sooner termination
of the Sublease Term.
14.2 The Sublease constitutes the entire agreement between
Sublandlord and Subtenant and there are no other oral or written agreements
between them with respect to the Sublease Premises. No modification or amendment
of the Sublease will be made without prior written consent of Landlord.
14.3 Any rights and remedies of Subtenant, if any, will be solely
against Sublandlord. Neither this consent nor the Sublease will give Subtenant
any rights under the Master Lease except those expressly granted by this
Sublease.
14.4 If any conflict between the Master Lease and the Sublease
occurs, the Master Lease will control.
14.5 All insurance policies required to be carried by Subtenant,
pursuant to the terms of the Master Lease as incorporated in this Sublease,
shall contain a provision whereby Subtenant and Landlord are each named as
additional insureds under such policies.
14.6 This Sublease is conditioned upon Landlord's written approval of
this Sublease within thirty (30) days after the date hereof; provided however,
----------
at Sublandlord's sole election and discretion, Sublandlord may elect to commence
this Sublease notwithstanding the failure to obtain such consent and provided
Sublandlord shall indemnify Subtenant for Subtenant's actual costs involved in
commencing operations at the Sublease Premises if Subtenant is evicted as a
result of such failure to obtain consent. If Landlord's consent has riot been
obtained prior to the date hereof and Sublandlord does not elect to waive this
condition precedent as provided in this section, the commencement date of this
Sublease shall be postponed for each day of delay until such consent is
obtained, to a maximum delay of thirty (30) days. If Landlord refuses to consent
to this Sublease, or if the thirty (30) day consent period expires, this
Sublease shall terminate and neither party shall have any continuing obligation
to the other with respect to the Sublease Premises; provided Sublandlord shall
return the Security Deposit, if previously delivered to Sublandlord, to
Subtenant.
14.7 Each person executing this Sublease on behalf of a party hereto
represents and warrants that he or she is authorized and empowered to do 50 and
to thereby bind the party on whose behalf he or she is signing.
8
<PAGE>
14.8 This Sublease is intended solely for the benefit of Sublandlord
and Subtenant (and specifically not any Broker), and no third party shall have
any rights or interest in any Provision of this Sublease.
DATE: __________________________ DATE: __________________________
SUBLANDLORD: SUBTENANT:
________________________________ ________________________________
ADDRESS ADDRESS
_______________________________ ________________________________
CITY, STATE, ZIP CITY, STATE, ZIP
_______________________________ ________________________________
TELEPHONE TELEPHONE
_______________________________ ________________________________
BY BY
_______________________________ ________________________________
TITLE TITLE
_______________________________ ________________________________
BY BY
_______________________________ ________________________________
TITLE TITLE
9
<PAGE>
OWNER'S CONSENT AND AGREEMENT
-----------------------------
The undersigned, 470 Spear Associates, a California limited partnership
("Landlord") under the lease referred to as the "Master Lease" in the foregoing
Sublease hereby consents to the subletting described in the Sublease upon the
following express terms and conditions Terms used in this Owner's Consent
shall have the meaning set forth in the Sublease and the Master Lease.
1. The Sublease is subject and subordinate to the Master Lease and to all
of the terms, covenants, conditions, provisions and agreements set forth in the
Master Lease. The Sublease shall automatically terminate on the termination of
the Master Lease.
2. The Subtenant shall perform faithfully and be bound by all of the
terms, covenants, conditions, provisions and agreements of the Master Lease, for
the period of such subletting and to the extent of the Sublease Premises.
3. Neither such subletting nor this Consent shall:
(a) release or discharge Sublandlord or any guarantor of the Master
Lease from any liability, whether past, present or future, under the Master
Lease;
(b) operate as a consent or approval by Landlord to or of any of the
terms, covenants, conditions, provisions or agreements of the Sublease and
Landlord shall not be bound thereby;
(c) be construed to modify, waive or affect any of the terms,
covenants, conditions, provisions or agreements of the Master Lease or to waive
any breach thereof, or any of Landlord's rights as Landlord thereunder; or to
enlarge or increase Landlord's obligations as Landlord thereunder, or
(d) be construed as a consent by Landlord to any further subletting
either by Sublandlord or by Subtenant or to any assignment by Sublandlord of the
Master Lease or assignment by Subtenant of the Sublease, whether or not the
Sublease purports to permit the same and, without limiting the generality of the
foregoing, both Sublandlord and Subtenant agree that the Subtenant has no right
whatsoever to assign, mortgage or encumber the Sublease nor to sublet any
portion of the Sublease Premises or permit any portion of the Sublease Premises
to be used or occupied by any other party.
-1-
<PAGE>
5. In the event of Sublandlord's default under the provisions of the
Master Lease, the rent due from the Subtenant under the Sublease shall be deemed
assigned to Landlord and Landlord shall have the right, upon such default, at
any time at Landlord's option, to give notice of such assignment to the
Subtenant, and Subtenant shall thereafter pay all rent under the Sublease
directly to Landlord. Landlord shall credit Sublandlord with any rent received
by Landlord under such assignment but the acceptance of any payment on account
of rent from the Subtenant as the result of any such default shall in no manner
whatsoever be deemed an attornment by the Subtenant to Landlord, or serve to
release Sublandlord from liability under the terms, covenants, conditions,
provisions or agreements under the: Master Lease. Notwithstanding the foregoing,
any other payment of rent from the Subtenant directly to Landlord, regardless of
the circumstances or reasons thereof or, shall in no manner whatsoever be deemed
an attornment by the Subtenant to the Landlord in the absence of a specific
written agreement signed by Landlord to such an effect.
6. Both Sublandlord and Subtenant shall be and continue to be liable for
the payment of all bills rendered by Landlord for charges incurred by Landlord
for services and materials supplied to the Sublease Premises.
7. The term of the Sublease shall expire and come to an end on its
natural expiration date or any premature termination date thereof or
concurrently with any premature termination of the Master Lease (whether by
consent or other right, now or hereafter agreed to by Landlord or Sublandlord,
or by operation of law or at Landlord's option in the event of default by
Sublandlord).
8. This Consent is not assignable, nor shall this Consent be a consent to
any amendment, modification, extension or renewal of the Sublease, without
Landlord's prior written consent.
9. Sublandlord and Subtenant covenant and agree that, under no
circumstances shall Landlord be liable for any brokerage commission or other
charge or expense in connection with the Sublease, and Sublandlord and Subtenant
agree to indemnify Landlord against same and against any cost or expense
(including but not limited to counsel fees) incurred by Landlord in resisting
any claim for any such brokerage commission.
10. Sublandlord and Subtenant understand and acknowledge that Landlord's
Consent hereto is not a consent to any improvement or alteration work being
performed in the Sublease Premises, that Landlord's consent must be separately
sought for such work.
-2-
<PAGE>
11. Notwithstanding any provision of the Sublease or this Consent to the
contrary, Subtenant agrees that Landlord shall not be (i) liable for any act or
omission of Sublandlord under the Sublease, (ii) liable for any act or omission
by any party which occurred prior to the termination date, (iii) subject to any
offsets or defenses which Subtenant may have against Sublandlord, (iv) bound by
any payment of rent or other sums made by Subtenant for any advance period under
the Sublease, (v) bound by any security deposits which Subtenant might have paid
to Sublandlord or any other party, or (v) bound by any amendment or modification
of the Sublease made without Landlord's prior written consent, which may be
withheld in the sole and absolute discretion of Landlord.
12. This Consent shall for all purposes be construed in accordance with
and governed by the laws of the State of California .
13. This Consent shall not be effective until executed by all the parties
hereto and the payment to Landlord of the sum of $1,000.00 to cover Landlord's
reasonable costs in processing this consent .
14. If any one or more of the provisions contained in this Consent shall
be invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained in this Consent shall not
in any way be affected or impaired thereby.
The execution of a copy of this Consent by Sublandlord and by the Subtenant
shall indicate your joint and several confirmation of the foregoing conditions
and of your agreement to be bound thereby and shall constitute Subtenant's
acknowledgment that it has received a copy of the Master Lease.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Consent as of the
day and year of the Sublease.
LANDLORD :
470 SPEAR ASSOCIATES,
A California limited partnership
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
-----------------------------
Robert J. Lalanne
President
SUBLANDLORD:
LEE PIERCE INCORPORATED
By: /s/ Lee Pierce Incorporated
----------------------------------
----------------------------------
(typed or printed name)
Dated:
---------------------------
SUBTENANT:
TRANSPHERE INTERNATIONAL, INC.
By: /s/ Transphere International, Inc.
----------------------------------
----------------------------------
(typed or printed name)
Dated:
---------------------------
GUARANTOR :
STEELCASE INC.
By: /s/ Steelcase Inc.
----------------------------------
----------------------------------
(typed or printed name)
Dated:
---------------------------
-4-
<PAGE>
[FLOOR PLAN APPEARS HERE]
<PAGE>
CONSENT TO ASSIGNMENT OF LEASE
June __, 1996
Recitals
A. 470 Spear Associated ("Spear") and Lee Pierce Incorporation ("Lee") have
entered into that certain Master Lease Agreement (the "Master Lease Agreement")
regarding the office space located at 444 Spear Street, Suite 200, San
Francisco, California (the "Leased Property").
B. Lee has entered into that certain Sublease Agreement (the "Sublease
Agreement") with Transphere International, a California corporation
("Transphere") regarding the Leased Property (the "Master Lease Agreement and
the Sublease Agreement are collectively referred to herein as the "Lease").
C. Transphere has entered into an Agreement and Plan of Reorganization (the
"Reorganization Agreement") by and between Transphere and NetSource Interactive
Services, Inc., a Delaware corporation ("NetSource") whereby Transphere was
merged with and into NetSource.
D. NetSource has entered into an Agreement and Plan of Reorganization (the
"Merger Agreement") by and between NetSource and NetSource International
Telecommunications, Inc., a Delaware corporation ("NIT") whereby NetSource was
merged with and into NIT.
NOW THEREFORE, intending to modify the Lease and to be legally bound, Spear
and Lee (collectively referred to herein as the ("Lessors") agree as follows:
1. Consent to Assignment. Lessors consent to the assignment to NIT by
---------------------
Transphere and Netsource of all of Transphere's and NetSource rights and
obligations, respectively, under the Lease, and to the subsidiaries of NIT for
Transphere/Netsource under the Lease, effective upon the closing of the
Reorganization Agreement and Merger Agreement. From and after the assignment of
the Lease to NIT, the Lease will continue in full force and effect, unmodified
in any way, except that references in the Lease to Transphere shall be deemed to
be references to NIT. No waiver or consent by Lessors is given or implied other
than as specifically set forth in this Consent.
2. Miscellaneous. This Consent is the binding agreement between Lessors,
-------------
Transphere and NetSource with respect to the subject matter of this Consent,
superseding in their entirely all prior agreements between Lessors, Transphere
and NetSource with respect to that subject matter, and will be binding upon and
inure to the benefit of Lessors' Transphere's and NetSource's respective
successors and assigns.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this consent of the date shown
on the first page.
TRANSPHERE INTERNATIONAL LEE PIERCE INCORPORATION
By: /s/ Charles Schoenhoeft By: /s/ Lee Pierce Incorporation
----------------------- ----------------------------
Title: CEO Title: President
---------------------- ---------------------------
NETSOURCE INTERACTIVE SERVICES, INC. 470 SPEAR ASSOCIATES
By: /s/ Charles Schoenhoeft By: /s/ 470 Spear Associates
----------------------- ----------------------------
Title: CEO Title:
---------------------- ---------------------------
NETSOURCE INTERNATIONAL
TELECOMMUNICATIONS, INC.
By: /s/ Charles Schoenhoeft
-----------------------
Title: President
----------------------
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. MTC Telemanagement Corporation, a California Corporation
2. MTC International, Inc., a Nevada Corporation
<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 September 11, 1996, included the
related financial statement schedule as of December 31, 1993, 1994 and 1995,
and for each of the years in the three-year period ended December 31, 1995,
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
October 15, 1996
