UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
Telefficiency Holding Corporation
(Name of Small Business Issuer in its Charter)
Delaware 98-0188197
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5155 Spectrum Way, Bldg. 30, Mississauga, Ontario, Canada L4W 5A1
(Address of principal executive offices) (Zip Code)
(416) 324-3030
(Issuer's Telephone Number)
Securities to be Registered under Section 12(b) of the Act: None
Securities to be Registered under Section 12(g) of the Act: Class "A" Voting and
Participating Common Shares, $.0001 par value per share
Page 1 of 88
Index to Exhibits in on Page 54
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Telefficiency Holding Corporation
Registration Statement on Form 10 SB
Part I
Page
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Item 1. Description of Business...............................................3
Item 2. Managements' Discussion and Analysis or Plan of Operation............18
Item 3. Description of Property..............................................23
Item 4. Security Ownership of Certain Beneficial Owners and Management.......23
Item 5. Directors, Executive Officers, Promoters and Control Persons.........25
Item 6. Executive Compensation...............................................26
Item 7. Certain Relationships and Related Transactions ......................28
Item 8. Description of Securities............................................28
Part II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters...................30
Item 2. Legal Proceeding ....................................................31
Item 3. Changes in and Disagreements with Accountants........................31
Item 4. Recent Sales of Unregistered Securities..............................31
Item 5. Indemnifications of Directors and Officers...........................33
Part F/S
Financial Statements.................................................36
Part III
Item 1 and 2 Index to and Description of Exhibits............................54
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ITEM 1. DESCRIPTION OF BUSINESS
A. Corporate Background
Telefficiency Holding Corporation (the "Company") was incorporated under
the laws of the State of Delaware on April 29, 1998 for the purpose of
effecting, on a tax deferred basis, a reorganization of Telefficiency
Corporation, a corporation organized and existing under the laws of Ontario,
Canada ("Telefficiency"), pursuant to which (i) the shareholders of
Telefficiency received a pro-rata voting interest in the Company and (ii) the
Company acquired all of the issued and outstanding voting securities of
Telefficiency (collectively, the "Reorganization").
The Reorganization was effected on May 12, 1998. For accounting purposes,
the Reorganization was treated as a reverse takeover and as such, Telefficiency
was deemed the acquiring entity.
Telefficiency was formed under Ontario law on October 27, 1992, as 1005611
Ontario Limited O/A Telefficiency. On August 14, 1995, it changed its name to
Telefficiency Corporation, and on January 8, 1995, it acquired all of the
outstanding capital stock of a related company, 1013747 Ontario Limited O/A
Telefficiency Kitchener ("Kitchener"), which was incorporated under Ontario law
on January 7, 1993. From its incorporation until its acquisition by
Telefficiency, Kitchener was wholly owned by the spouses of Michael Brunet and
William Clubine, the Company's sole officers and directors.
From inception, Telefficiency has engaged in the sale, installation and
servicing of business telecommunications products, services and software in
Canada.
B. General Description of Business
As an "interconnect" company, the Company, through Telefficiency, seeks to
provide "single source solutions" to businesses and other end users of telephone
systems, supplying them with products and services needed to interconnect their
telephone and computer systems internally and with outside public telephone
lines. Telefficiency pursues its business by offering customers integrated,
modular telecommunications equipment and related products manufactured or
produced by independent companies and by providing on-going upgrading and
servicing of such equipment and products through well-trained and
customer-oriented personnel.
The Company's principal products consist of multifeatured, digitally
controlled key switching systems. The Company also sells call processing
products, including call centers, voice messaging and interactive voice response
systems; computer-telephone integration products; individual telephone units and
other related products.
Although the Company sells products manufactured by others, approximately
90% of the telephone systems sold by the Company are manufactured by Nortel
Networks ("Nortel"), formerly Northern Telecom Limited. Nortel is the Company's
primary supplier.
The Company also performs moves, adds and changes related to customers'
existing telephone systems. Moves, adds and changes consist of moving telephones
to new user locations, adding telephones or expansion cards in a telephone
system, and changing system and user features.
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The Company provides service on products it sells in the form of regular
maintenance and service calls. The Company also markets wireless communications
products.
The Company currently sells and installs equipment and related products
primarily in the southern Ontario market area through three office locations in
the greater Toronto metropolitan area. The Company also maintains accounts with
certain customers on a national Canadian basis.
C. Risks Factors
The Company's Business is substantially dependent on its continuing relationship
with Nortel
Successful operation of the Company's business requires that it provide
superior products and service. Although the Company can exercise direct control
over customer care and support services, it cannot exercise such control over
products provided by others. The Company does not manufacture any of the
products it sells or services. The principal products sold and serviced by the
Company are manufactured by Nortel. Sales of Nortel products accounted for
approximately 90% of the Company's sales of new telecommunications products in
the fiscal year ended December 31, 1998 and in the 9 month period ended
September 30, 1999.
Nortel distributes its business telecommunications products in Canada
through regional telephone companies and interconnect companies, such as
Telefficiency. Telefficiency purchases products from Nortel through purchase
orders rather than through a long-term supply agreement or similar arrangement.
The Company's non exclusive right to distribute Nortel's products can be
terminated by Nortel or the Company at any time, subject to applicable Canadian
laws governing distribution arrangements.
There can be no assurance that Nortel will continue the Company's
distribution rights or that there will not be adverse developments regarding
such rights. In addition, even while the Company's distribution rights are in
effect, Nortel is free to grant non-exclusive distribution rights to additional
parties or to commence directly distributing its products to retail customers.
Any interruption or adverse change in the Company's business relationship with
Nortel could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, the Company's success depends in
large part upon market acceptance of Nortel products. These products compete
with telecommunications products manufactured by other companies. Reduced market
acceptance for Nortel products by reason of competing products or otherwise
could have a material adverse effect on the Company's business, operating
results and financial condition if the Company were not able to access and
distribute products from other suppliers.
The Company faces substantial competition from larger and better financial
companies.
The Company competes within the business telecommunications segment of the
telecommunications industry. This market segment is intensely competitive and
rapidly changing. Numerous companies throughout the world manufacture and sell
business telecommunications products. Manufacturers distributing such products
in Canada currently include Nortel, Nitsuko, Toshiba Canada, Mitel Corporation,
Panasonic and Lucent (AT&T) to name a few.
Competition among interconnect companies, such as the Company, is localized
and intense. Although interconnect companies in Canada have tended to be small
companies doing
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business principally within local and regional markets, many of these companies
are larger and better financed than the Company.
The Company believes that regional telephone companies, manufacturers and
interconnect suppliers compete for the sale and servicing of business
telecommunications products on the basis of product quality, availability,
price, warranty, service and support. The ability of the Company to compete
successfully depends on a number of factors both within and outside its control.
Such factors include but are not limited to the quality, price and availability
of and the warranty for, Nortel products; the continuance of the Company's
national distribution rights for Nortel products; the quality and promptness of
the Company's service and support functions; and the entry of new competitors
into the market for the manufacture of business telecommunications.
There are approximately 6,440,000 shares (assuming the conversion of the
outstanding shares of Class B Common Stock into shares of Class A Common Stock)
subject to resale under Rule 144. Such Resales could have a depressive effect on
the price of the Company's Class A Common Stock.
Of the 115,000,000 shares of the Company's shares of Class "A" Voting and
Participating Common Shares (the "Class A Common Stock") and 30,000,000 of the
Company's Class "B" Convertible Voting and Nonparticipating Common Shares
("Class B Common Stock") authorized, there are presently issued and outstanding
9,460,000 and 5,500,000 respectively; all but approximately 8,520,000 shares of
the Class A Common Stock are "restricted securities" as that term is defined
under the Act, and in the future may be sold in compliance with Rule 144 of the
Act, pursuant to a registration statement filed under the Act, or other
applicable exemptions from registration thereunder. There are also approximately
1,551,328 and 1,943,000 shares respectively of Class A Common Stock reserved for
issuance upon exercise of outstanding warrants and options. Rule 144 provides,
in essence, that a person holding restricted securities for a period of one (1)
year may sell those securities in unsolicited brokerage transactions or in
transactions with a market maker, in an amount equal to one percent (1%) of the
Company's outstanding Common Stock every three (3) months. Additionally, Rule
144 requires that an issuer of securities make available adequate current public
information with respect to the issuer. Such information is deemed available if
the issuer satisfies the reporting requirements of Sections 13 or 15(d) of the
Exchange Act and of Rule 15c2-11 thereunder. Rule 144 also permits, under
certain circumstances, the sale of shares by a person who is not an affiliate of
the Company and who has satisfied a two (2) year holding period without any
quantity limitation and whether or not there is adequate current public
information available. Investors should be aware that sales under Rule 144, or
pursuant to a registration statement filed under the Act, may have a depressive
effect on the market price of the Company's securities in any market that may
develop for such shares. No effect is given to the potential exercise options
and warrants.
Since there is a limited market for the Company's securities shareholders may
find it difficult to sell or otherwise dispose of their shares.
There is only a limited trading market for the Company's Class A Common
Stock on the National Association of Securities Dealers, Inc. ("NASD")
over-the-counter Bulletin Board (the "OTCBB"), which may limit the marketability
and liquidity of the shares of the Class A Common Stock. Please also refer to
"Part II Item 1. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters."
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The Penny Stock Rules may further hinder resale of shares of Class A Common
Stock by the Company's shareholders.
Under Rule 15g-9 under the Exchange Act, a broker or dealer may sell a
"penny stock" (as defined in Rule 3a51-1) to or effect the purchase of a penny
stock by any person unless:
(1) such sale or purchase is exempt from Rule 15g-9; or
(2) prior to the transaction the broker or dealer has (a) approved the
person's account for transaction in penny stocks in accordance with Rule
15g-9 and (b) received from the person a written agreement to the
transaction setting forth the identity and quantity of the penny stock to
be purchased; and
(3) the purchaser has been provided an appropriate disclosure statement as
to penny stock investment.
The Securities and Exchange Commission (the "Commission") has adopted
regulations that generally define a penny stock to be any equity security other
than a security excluded from such definition by Rule 3a51-1. Such exemptions
include, but are not limited to (a) an equity security issued by an issuer that
has (i) net tangible assets of at least $2,000,000, if such issuer has been in
continuous operations for at least three years, (ii) net tangible assets of at
least $5,000,000, if such issuer has been in continuous operation for less than
three years, or (iii) average revenue of at least $6,000,000, for the preceding
three years; (b) except for purposes of Section 7(b) of the Exchange Act and
Rule 419, any security that has a price of $5.00 or more; and (c) a security
that is authorized or approved for authorization upon notice of issuance for
quotation on the NASDAQ Stock Market, Inc.'s Automated Quotation System.
It is likely that the Company's Common Stock will be subject to the
regulations on penny stocks; consequently, the market liquidity for the
Company's Common Stock may be adversely affected by such regulations limiting
the ability of broker/dealers to sell the Company's Common Stock and the ability
of purchasers in the offering to sell their securities in the secondary market.
Moreover, the Company's shares may only be sold or transferred by its
stockholders in those jurisdictions in which an exemption for such "secondary
trading" exists or in which the shares may have been registered.
The Company may experience uncertain revenue growth.
Although the Company recorded gross sales of $8,144,945, $16,565,022 and
$6,519,235 in fiscal 1998, 1997 and 1996, respectively, there can be no
assurance that profitability or revenue growth will be realized. Moreover, the
Company suffered operating losses of $1,369,735, $976,482 and $708,001 in fiscal
1998, 1997 and 1996, respectively. The Company's immediate strategy is to
substantially increase the number of its sales, service and warehouse facilities
and its product lines, each of which will require it to significantly increase
its expenses for personnel, marketing, network infrastructure and the
development of new services. In addition, the Company's operating results may be
affected by various factors, many of which are outside of the Company's control,
including general economic conditions, specific economic conditions in the
business
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telecommunications market, intensive competition, capital expenditures and other
costs relating to the expansion of operations, and the introduction of new
products and services by the Company or its competitors. In response to a
changing competitive environment, the Company may elect from time to time to
make certain pricing, service or marketing decisions that could have a material
adverse effect on the Company's business or results of operations.
The Company's future profitability is linked to the success of its growth
strategy.
Major elements of the Company's growth strategy are to substantially expand
the number and geographic scope of its sales, service and warehouse facilities
and to leverage and expand its customer base by offering a broader range of
telecommunications products and services. The Company's ability to increase
revenues in future periods will depend to some extent on the success of its
strategy to serve as the single source service provider of business
telecommunications products and services for its customers. To implement its
strategy, the Company must attract, train and retain additional personnel with
specialized expertise necessary to market and service such products and services
and to manage the Company's administrative, operating and software requirements.
There can be no assurance that such personnel will be available to the Company
on terms acceptable to the Company. The successful implementation of the
Company's strategy also depends to a substantial degree on market acceptance of
Nortel products and the absence of adverse developments with respect to the
Company's national distribution rights for Nortel products. To the extent the
Company is unable to attract, train and retain necessary personnel or if there
is a disruption or adverse change in the Company's relationship with Nortel or
in the market acceptance of its products, the Company's business, operating
results and financial condition could be materially and adversely affected.
The Company will require additional capital financing.
The Company currently anticipates that its available cash resources and
credit facilities, will be sufficient to meet its presently anticipated working
capital and capital expenditure requirements for at least the next 12 months,
including the payment of over $200,000 in interest on its outstanding
Debentures, due and payable commencing December 31, 2000. However, the Company
may need to raise additional funds in order to support more rapid expansion,
develop new or enhanced services and products, respond to competitive pressures,
acquire complementary businesses or technologies or take advantage of
unanticipated opportunities. The Company's future liquidity and capital
requirements will depend upon numerous factors, including the costs and timing
of expansion of research and development efforts and the success of such
efforts, the success of the Company's existing and new service offerings and
competing technological and market developments.
The Company may be required to raise additional funds through public or
private financing, strategic relationship or other arrangements. There can be no
assurance that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. Furthermore, any additional equity
financing may be dilutive to shareholders, and debt financing, if available, may
involve restrictive covenants. If additional funds are raised through the
issuance of equity securities, the percentage ownership of the Company's
shareholders will be reduced, shareholders may experience additional dilution in
net book value per share, or such equity securities may have rights, preferences
or privileges senior to those of the holders of the Preferred Stock and or the
Class A or Class B Common Stock. If adequate funds are not available on
acceptable terms, the Company may be unable to develop or enhance its services
and products, take advantage of future opportunities or respond to competitive
pressures, any of which could have a material adverse effect on the Company's
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business, financial condition and operating results.
In order to achieve its objectives the Company must be able to expand its
physical and human resources.
The Company's plan for growth will place a significant strain on the
Company's administrative, operational, and financial resources and increase the
demands on its systems and controls. There can be no assurance that the Company
will be able to establish or acquire such facilities in new cities at a rate or
according to a schedule to be established by the Company. Accordingly, there can
be no assurance that the Company will be able to manage successfully and
profitably the network of sales, service and warehouse operations contemplated
by its growth strategy. In addition, increase in the Company's customer base
will result in additional demands on the Company's customer support, sales and
marketing, and administrative resources as well as its software infrastructure.
While the Company believes that its plan for operating and financial control
systems are adequate to address expansion plans through 2000, there can be no
assurance that such systems and controls will be adequate to maintain and
effectively monitor future growth. The Company anticipates that its continued
growth also will require it to recruit, hire and train a substantial number of
new managerial, technical, sales, and marketing personnel. The inability to
continue to upgrade the network or the operating and financial control systems,
the inability to recruit and hire necessary personnel, or the emergence of
unexpected expansion difficulties could materially and adversely affect the
Company's business, results of operations and financial condition.
The Company's success may be adversely affected by technological change and the
introduction of new products by its competitors.
The market for products and services marketed by the Company is
characterized by technological change and frequent new product introductions.
Accordingly, the Company believes that its future success will depend on its
ability, and the ability of its suppliers, such as Nortel, to identify and
incorporate in a timely manner enhancements to existing products and services
and new products that gain market acceptance. There can be no assurance that the
Company or its suppliers will be able to identify, market or support new
products successfully, that such new products will gain market acceptance or
that the Company or its suppliers will be able to respond effectively to
technological change.
The loss of the services provided by Messrs. Brunet and Clubine would adversely
affect the Company's operations.
The Company's success depends to a significant degree upon the technical
and management skills of its key employees, including in particular the
Company's founders, Michael R. Brunet and William R. Clubine. Although the
Company maintains key person life insurance on Messrs. Brunet and Clubine, the
loss of the services of either or both Messrs. Brunet or Clubine could have a
material adverse effect on the Company. The Company's success also will depend
upon its ability to attract and retain qualified management, marketing,
technical, and sales executives and personnel. Competition for such executives
and personnel is intense and there are a limited number of persons with
knowledge of and experience in the interconnect market. There can be no
assurance that the Company will be successful in attracting and retaining such
executives and personnel.
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The Company's operations are effectively controlled by management 34% and
accordingly shareholders may not be able to direct the Company's affairs.
Messrs. Brunet and Clubine, the founders of the Company, currently own
approximately 18%(1) and 16%(2), respectively, or 34% in the aggregate of the
Company's outstanding voting Common Shares. Therefore, Messrs., Brunet and
Clubine will continue to be able to control the business and affairs of the
Company in most respects.
D. The Telecommunications Industry in Canada
Commencing in the 1980's, changes in government regulation and business
conditions opened the market for business and residential telecommunications
systems. Following earlier changes in the United States regulatory environment,
in 1980 the Quebec and Ontario provincial authorities first permitted customers
to own their own individual telephone sets. This development was subsequently
adopted by all other Canadian provincial and territory authorities. This
regulatory change opened the business and residential telecommunications market
to manufacturers other than regional telephone companies and selected suppliers
and created market opportunities for interconnect companies to distribute the
products of new and existing manufacturers.
In part as a result of regulatory changes, there currently are a large
number of manufacturers of telecommunications products located throughout the
world that sell such products directly and through regional telephone companies
and independent companies, as well as other more specialized companies, which
also develop, manufacture and sell a wide variety of applications relating to
traditional telecommunications products.
The market for wireless communications products is in a formative phase in
North America. Such products are currently relatively expensive and just
starting to offer data connectivity. Wireless products are manufactured by
certain of the companies producing telephone systems and are sold directly or
through regional telephone companies and interconnect companies. The Company
believes that the market for wireless products will grow as customers' exposure
to such products increases, regulatory and technological advances occur and
pricing becomes more attractive.
E. Market Trends
The Company believes that as markets are becoming more global, information
driven and competitive, businesses are placing an increasing emphasis on rapid
and comprehensive communications technology to improve employee productivity and
customer service. As a result, businesses are looking to a variety of new
technologies to enhance the performance of their telecommunications systems and
to increase the speed, accuracy and availability of information. The Company
believes that several trends contribute to a favorable market outlook for the
business telecommunications industry:
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(1) Deborah Brunet, Mr. Brunet's wife owns 1,262,807 shares of Class B
Common Stock as to which shares Mr. Brunet disclaims beneficial ownership.
(2) Luana Clubine, Mr. Clubine's wife owns 1,136,526 shares of Class B
Common Stock, as to which shares Mr. Clubine disclaims beneficial ownership.
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o Continuing market for telephone switching systems. The Company
believes that as communications technologies proliferate, businesses
will continue to upgrade and replace their switching systems,
resulting in continuing modest growth in the market for telephone
switching equipment.
o Growth of new communications products and markets. A variety of new
communications technologies have emerged over the past several years
that enhance the capabilities of traditional telephone systems.
Manufacturers have introduced products (including call centers, voice
response units, video conferencing systems and voice messaging
products) that improve the performance and efficiency of
communications systems. Such products constitute an important and
growing component of the business telecommunications product market.
The Company believes that manufacturers that develop integrated,
modular multimedia telecommunications products capable of efficiently
integrating technological advances, together with distributors that
have access to the products of such manufacturers, and that have the
expertise to sell, service and support these extended product lines
will benefit from the growth of existing and emerging communications
markets.
o Convergence of voice, video, data and image markets. Since the
introduction of local and wide area computer networks, the market for
data communications has grown rapidly and comprises a growing portion
of the overall communications market. As the prevalence of computer
networks continues to increase and voice, video, data and image are
increasingly transmitted in a digital format using the same networks,
the Company believes that demand for services related to the
integration of data and voice networks will increase. As these markets
converge, the Company believes that companies with the expertise and
capability to perform communications integration services will have a
significant competitive advantage relative to distribution companies
with narrower product lines and relative to manufacturers of
individual products that sell directly to customers.
o Vendor consolidation. As the number and complexity of communications
technologies grow, the Company believes North American businesses will
increasingly seek to narrow their vendor base to the suppliers that
offer a broad range of products and services, leading to a
consolidation among vendors of communications systems. The Company
believes those vendors with access to integrated, modular product
lines, and with the capability to integrate a broad range of
communications technologies, will benefit from the trend toward vendor
consolidation.
o Wireless systems. The Company believes that the market for wireless
communications will grow, as there is increased consumer awareness of
the benefits of such products, technological and regulatory advances
enhance such products and the pricing of such products becomes more
competitive.
o Increasing complexity of managing communications systems. The Company
believes businesses are increasingly turning to vendors that are
capable of providing complete communications solutions, including the
ability to manage all the voice, video, data and image communications
needs of a business and to provide a single point of contact
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for communications systems. The Company also believes an increasing
number of companies will seek a vendor with the ability to manage
communications systems through outsourcing agreements, thereby
enabling customers to focus on their primary business.
F. Growth Strategy
The Company has formulated a growth strategy based on the creation and
maintenance of a nationwide network of sales, service and warehouse facilities;
access to Nortel's full line of modular, integrated business telecommunications
products as well as complimentary products of other manufacturers; and the
leveraging of its existing customer base to capture an increasing portion of
each customer's telecommunications needs.
o Creation of National Network. In addition to the Company's existing
sales and service arrangements with distributors of Nortel's products
throughout the southern tier of Canada, the Company plans to
establish, over the next 3 years, new sales, service and warehouse
facilities, or acquire distributors. There can be no assurance,
however, that the Company's existing business relationship with Nortel
will continue, that Nortel will not grant national distribution rights
to additional companies or elect to distribute its products directly,
or that the Company will be able to capitalize on its relationship
with Nortel.
o Expansion of product lines. At the same time, the Company intends to
expand the scope of Nortel's products marketed by it in order to gain
access to a greater share of the business telecommunications market.
The Company also markets Nortel's related application products as well
as complimentary products of other manufacturers. The Company intends
to monitor new product developments regularly, to expand its line of
application products consistently and provide customers with
integrated, modular "single source solutions" to their
telecommunications needs.
o Leveraging of Customer Base. As it expands the geographic scope of its
distribution network and broadens the scope of its customer base, the
Company will seek to capture a broader portion of each customer's
telecommunications needs. The Company believes it will be able to
market additional products and services to existing customers as the
Company adds such additional products to its product lines. The
Company will seek to leverage its customer base by providing better
and faster service than its competitors and by offering integrated,
modular product lines that enable customers to quickly, inexpensively
and effectively upgrade their systems. In order to leverage its
customer base, the Company will rely on attracting, training and
retaining a skilled and customer-oriented force of marketing, sales
and service personnel.
o The Telefficiency Productivity System. The Company plans to implement
a concept called "The Telefficiency Productivity System" ("TPS"). The
Company intends to include in TPS the following:
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o Hardware and software service. This component of TPS includes the
systems that the Companys' currently sells; however, as additional
service capabilities are added, more hardware and software will be
available. Most of the hardware and software will be purchased form
the Company's primary communications hardware and software vendor,
Nortel Networks.
o Local and long distance phone services.
o Internet Services. These services will consist of direct access for
the Company's customers to the Internet, Web hosting, e-mail services
as well as Web design and e-commerce Web sites.
These voice and data offerings are necessary to provide the Company's
customers with a true integrated communications solution with full
support to increase productivity. These bundled services are the
direction of today's technological advances that are linking computers
to telephones with the internet.
o Strategic Acquisitions. The Company's other significant growth
strategy will be through the acquisition of other interconnect and
communications companies. Acquisitions will be targeted for their
"fit" in the overall strategic plan with the primary goal of adding
value to acquired companies by converting customers' line to
Telefficiency's C.L.E.C. services. The location of each acquisition
relative to an existing or target customer base and the efficiencies
that can be realized in servicing a combined customer base is
important to determining "fit". Capabilities found to exist in select
acquisitions can literally be the basis of new departments or
divisions, provided that the planned organizational structure can
effect cooperation and unity of purpose in meeting the strategic
business objectives. Additionally, the Company believes that through
acquisitions it can realize savings from increased productivity of its
technical service staff, greater volume discounts from suppliers and
competitive local exchange carriers and consolidation of insurance
programs and other corporate operations, such as accounting and
financial reporting. The Company has entered into an agreement with
Cascade International Capital Corporation, 814 University Center 2,
1320 South University Drive, Fort Worth, Texas 76107 ("Cascade"),
pursuant to which Cascade is endeavoring to assist the Company in
obtaining an acquisition financing commitment of $60,000,000. Through
the date of this Registration Statement, no such commitment has been
obtained. Please refer to "Part I - Item 2. Managements' Discussion
and Analysis or Plan of Operation."
The Company's ability to successfully implement its growth strategy is
subject to numerous factors, many of which are beyond the Company's control.
Please refer to "Part I - Item 1. Description of Business - Risk Factors."
G. Products and Services
The Company's core business has been the sale of telephone systems; moves,
adds and changes; and systems maintenance and services. From this core business,
the Company has expanded its operations and shifted its product mix to
incorporate new products and services, such as call
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processing products and data communications integration products and competitive
local exchange carrier ("C.L.E.C.") communications services. This array of
products and services allows the Company to provide single source solutions to
customers' communications needs.
Substantially all of the telecommunications equipment and related products
sold by the Company are digitally based products that are part of or compatible
with integrated, modular telecommunications systems.
Telephone Systems
The Company offers a wide variety of private telephone systems. These
systems typically consist of a telephone switch and individual telephones
located at the customer site. A telephone switch is a device that provides the
connection between the customer's internal telephone sets and the outside
telephone network. The telephone switch, typically owned by the customer, is
available in two primary types: PBX systems and Key systems. PBX switches are
generally used for installations of more than 150 telephone sets and can
accommodate up to several thousand telephone sets. A PBX condenses the number of
internal phone lines to a significantly smaller number of outside trunk lines
that connect to the telephone network. When an incoming call is received, the
PBX switches the call to the appropriate internal telephone extension. When a
call is made from within the business, the PBX determines whether the call is an
internal call, in which case the PBX switches the call to the appropriate
internal telephone extension, or an outgoing call, in which case the PBX directs
the call to an open outside line. The PBX also provides a base platform from
which the customer's telephone system can be upgraded with features such as
voice messaging and caller identification. In contrast to PBX systems, Key
systems are relatively inexpensive and appropriate for small installations that
require fewer than approximately 150 telephone sets. Although earlier models of
Key systems displayed all outside lines and required the user to select a line
when making an outside call, modern Key systems share attributes of and are
operated similarly to PBX systems.
The Company markets one PBX system and three models of Key systems, all of
which are manufactured by Nortel. The Company currently markets Nortel's
Meridian 1 Option 11 PBX system (serving from 30 to 900 "ports" or connections
to the telephone system) and Nortel's Meridian Norstar line of Key systems,
including the Norstar 308 (serving up to 3 lines 8 phones), the Norstar Compact
ICS (serving up to 16 lines and 25 phones), and the Norstar Modular ICS (serving
up to 300 ports).
Moves, Adds and Changes
The Company performs moves, adds and changes related to its customers'
telephone systems. Moves, adds and changes consist of moving telephones to new
user locations, adding telephones or expansion cards in a telephone system and
changing system and user features.
Maintenance and Services
The Company provides service on the products it sells in the form of
preventative maintenance and service calls. Telephone switching systems
generally require a higher level of ongoing maintenance and service than other
products sold by the Company and generate the majority of maintenance and
service revenue.
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Call Processing
Call processing consists of three primary functions: call centers, voice
messaging and interactive voice response products.
Call centers are complex systems that can process a large number of
incoming calls per hour and are used by businesses in applications such as
reservation centers, customer support centers and catalog order centers. Call
centers utilize a variety of call processing technologies, such as interactive
voice response products, voice messaging and computer interaction to maximize
the efficiency of large call-receiving operations. A call center utilizing an
interactive voice response product can obtain information from a caller with a
touchtone telephone, permitting more detailed information on the call to be
retrieved from a computer database and be available to an agent when answering
the call. The Company offers a variety of call center products manufactured by
Nortel and Cintech Telemanagement Systems, Inc., which can service from one to
over 500 call-receiving agents. The Company sells Nortel's Meridian Max line of
call centers and Cintech Telemanagement System, Inc.'s Prelude and Cinphony call
centers.
Voice messaging enables verbal communications to be sent, stored and
retrieved at a later time within a user's internal system or from a remote
location. The Company offers integrated voice messaging products from Nortel.
These products include the Flashtalk, Norstar Voice Mail and Meridian Mail
systems, which are compatible with Nortel's key and PBX systems.
Interactive voice response products allow a caller to access a computer
data base to retrieve or input data by using a touchtone telephone. Interactive
voice response products can be utilized in a stand-alone application, such as
when a caller uses a touchtone telephone to obtain account information from a
bank of flight schedules from an airline's automated retrieval system.
Interactive voice response products can also be utilized in a call center
application to route calls and provide data on the caller based on information
from a bank of flight schedules from an airline's automated retrieval system.
Interactive voice response products can also be utilized in a call center
application to route calls and provide data on the caller based on information
input by the caller via a touchtone telephone. The Company currently markets
models manufactured by Nortel Networks. Such products include Nortel's Meridian
Link system, which is compatible with its PBX systems and Nortel's Norstar IVR.
Wireless Systems
The Company currently markets Nortel's Companion wireless system. This
system is designed to provide mobile communications within a building through
the integration of wireless portable telephones, a base station connecting such
telephones within the building, and a controller which connects the wireless
system with the company's existing telephone system.
Other Products
The Company also markets a variety of related products and services, such
as call accounting software, paging systems and long distance service.
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<PAGE>
Marketing Sales
The Company has approximately 24 telecommunications consultants in the
greater Toronto metropolitan area. These representatives focus on either new
prospects or the sale of additional products or services to the Company's
customer base. In addition to these representatives, the Company has four
training specialists. These specialists work with the representatives to provide
integrated communications solutions for the Company's customers.
The Company's representatives and specialists use a comprehensive approach
to evaluating each customer's communications needs and implementing solutions.
The representative begins with a detailed needs analysis of the customer's
current and future communications requirements. After determining the customer's
needs, the Company proposes solutions to satisfy current and anticipated future
requirements. The Company's operations teams then work with the customer to plan
the installation of purchased technologies and identify required training. By
planning the precise requirements of each installation, the Company's
specialists are able to install, test and bring new equipment on-line with
minimal service interruption. Finally, the Company provides an ongoing support
program tailored to meet the customer's specific application requirements
incorporating remote diagnostics, in-field service and support, additional
training, and help desk support from the Company's customer support
representatives.
The Company uses a variety of methods to communicate with existing and
potential customers, including direct mail and telemarketing campaigns, Yellow
Page advertising, radio, business publications and in-person marketing.
Customers and Customer Service
In line with the products historically offered by the Company, the Company
until recently has focused its marketing initiatives on customers with 100 or
less users. With the expansion of its product lines, the Company has expanded
its marketing objectives to include customers with 200 or more users and those
customers with complex communications requirements. Although the Company has
been active primarily on a local and regional basis in southern Ontario, it
currently maintains accounts with customers on a national Canadian basis. The
Company serves national accounts in part through informal arrangements with
independent distributors of Nortel products in other Canadian cities. Pursuant
to these arrangements, the Company may refer national customers' servicing and
other needs to out-of-area distributors in return for a referral fee. The
Company monitors the quality of service provided by such other distributors.
The Company believes that providing service exceeding customers'
expectations is an important element of its ability to compete effectively in
the communications market. The Company maintains a highly trained force of
service technicians and customer support representatives who provide on-site and
remote service and support. The Company coordinates its customer service
response through a centralized service dispatch center in its head office.
Overall, the Company has approximately 18 employees devoted primarily to
providing customer service.
The Company sells across many industry segments, including banks, retail
stores and restaurant chains. No single customer accounted for more than 5% of
the Company's total revenue for fiscal 1998 and for the 9 months period ended
September 30, 1999.
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<PAGE>
In 1999 in an effort to improve customer loyalty, the Company introduced
the "Telefficiency Customer Alliance Program" ("TCAP") pursuant to which the
Company agreed to install and maintain a Remote Access Device ("RAD") on its
customers telecommunications systems, and provide the following services at no
charge (provided the customer is under a warranty or service contract):
o Remote diagnostics performed by Telefficiency's staff
o Regular, scheduled back up of customers' system programming
o Complete programming changes, done remotely
o Printed reports of system status faxed to the Customer
o Secure, off-site storage of customers' system back up ensuring disaster
recovery
o On-line trouble shooting and programming changes by the Company's staff
o Faster on-line services
TCAP is available for a one time registration fee of $210.00 payable at the
time of original sale for new customers or with Maintenance Agreement renewals
for new and existing customers.
To qualify for the program, the customer must have a valid maintenance
agreement or be covered by an original warranty.
In addition to ensuring greater customer loyalty, the program has
additional benefits for the Company as follows:
o Reduction in the number of visits to customer sites when not required
o Ability to troubleshoot the problem before dispatch
o Verification of equipment compatibility
o Allowance for larger system support
H. Suppliers; Relationship with Nortel
Nortel is the Company's principal supplier. The Company estimates that
approximately 90% of its new products sold in 1998 and for the 9 month period
ended September 30, 1999, were manufactured by Nortel. Products supplied by
Nortel include Key systems, PBX systems, call centers, voice messaging products,
wiring and interactive voice response products, routers, hubs and instant
internet access interface units. In addition, the Company distributes
complementary communications products manufactured by Cintech Telemanagement
Systems, Inc., Bogen, Inc. and a variety of small companies. The Company
regularly monitors new developments and products in the business and residential
telecommunications market in order to expand its product lines consistently with
its strategy of providing integrated modular "single source" solutions to
customers' telecommunications needs.
Nortel is a global manufacturer of telecommunications equipment. Its
business consists of the research and the design, development, manufacture,
marketing, sale, financing, installation and servicing of central office
switching equipment, multimedia communication systems equipment (including
business and residential systems), transmission equipment, wireless systems and
cable and other products and services.
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<PAGE>
Nortel manufactures and markets integrated, modular key and PBX switching
systems, related products, telephone units and related software and other
products.
Telefficiency purchases products from Nortel on the basis of purchase
orders rather than a long-term supply agreement or similar arrangement.
Telefficiency has a nonexclusive right to distribute a broad range of Nortel's
business and residential telecommunications products on a national basis
throughout Canada. Such right was not granted for a term of years and,
accordingly, can be terminated by Nortel or the Company at any time, subject to
applicable Canadian laws governing distribution arrangements.
I. Backlog
The Company's backlog typically does not exceed US$350,000 and is generally
filled within 30 days. The Company maintains an inventory of products that are
used in connection with its servicing activities and typically places orders
with its suppliers only upon receipt of firm orders for products from its
customers. The Company's suppliers typically fill the Company's orders within
three days, and the Company ordinarily delivers the product to the customer
within an additional ten-day period.
J. Competition
The Company competes within the business telecommunications segment of the
telecommunications industry. This market segment is intensely competitive and
rapidly changing. Numerous companies throughout the world manufacture and sell
business telecommunications products. Manufacturers distributing such products
in Canada currently include Nortel, Nitsuko, Toshiba Canada, Mitel, NEC,
Panasonic and Lucent (AT&T) to name a few.
Competition among interconnect companies, such as the Company, currently is
localized and intense. Although interconnect companies in Canada have tended to
be small companies doing business principally within local and regional markets,
many of these companies are larger and better financed than the Company.
The Company believes that regional telephone companies, manufacturers and
interconnect companies compete for the sale and servicing of business and
residential telecommunications products on the basis of product quality,
availability, price, warranty, service and support. The ability of the Company
to compete successfully depends on a number of factors both within and outside
its control, including the quality, price and availability of, and the warranty
for, Nortel products; the continuance of the Company's national distribution
rights for Nortel products; the quality and promptness of the Company's service
and support functions; the entry of new competitors into the market for the
manufacture of business telecommunications products or the sale and servicing of
such products; and the business strategies adopted by the telecommunications
operating companies and manufacturers of business telecommunications products
with respect to the sale and servicing of such products. In addition, although
United States manufacturers and distributors of business telecommunications
products historically have not played a major role in the Canadian market, if
such manufacturers and distributors were to aggressively seek to establish a
greater share of the Canadian market, the Company's business operating results
and financial condition could be materially and adversely affected.
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<PAGE>
K. Government Regulation
The Canadian Radio-Television and Telecommunications Commission ("CRTC")
has promulgated regulations setting installation and equipment standards for
telecommunications products of the type marketed by the Company in Canada, and
requiring that all such products be registered with, and meet standards adopted
by, the CRTC. The Company's products are designed by manufacturers to comply
with these requirements and registered by such manufacturers with the CRTC. The
CRTC also requires that all regional telephone companies provide
nondiscriminatory interconnection for such products with local exchange services
in order to promote the competitive provision of such products. In addition, the
regional telephone companies must offer local exchange services on an unbundled
basis from such products, again to promote the competitive provision of these
products.
L. Newly Formed C.L.E.C. (Competitive Local Exchange Carrier) Division
Regulatory changes in Canada now allow telecommunications companies to
compete against the existing telephone line supplier. Up until this change,
customers have had to purchase their telephone numbers (lines) from only one
supplier, the incumbent telephone company ("I.L.E.C."). The term C.L.E.C. stands
for Competitive Local Exchange Carriers.
This deregulation now allows the Company to offer it's existing and new
customers a one-stop solution for all their telecommunication needs for
hardware, software and monthly billings of their telephone lines and services.
During the fall of 1999, the Company announced that it was launching new
C.L.E.C. communications services in early 2000. These new services allow the
Company to be a "Virtual" C.L.E.C. A "Virtual" C.L.E.C. is a reseller of voice
and data network services that it leases from a C.L.E.C. or I.L.E.C.
The incumbent supplier (Bell Canada) largely provides local line service to
the Company's customers. The Company believes it has an advantage over the
incumbent supplier because it's customers are already dealing with it for their
telephone systems, service and communications solutions. Accordingly, the
Company believes that it will be able to provide voice and data services to its
customers and a true "One Stop Shop" to its current customer base.
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Company, through its subsidiary, Telefficiency, which is based in
Ontario, Canada engages in the sale, installation and servicing of business
telecommunications products, services and software in Canada.
The Company was incorporated under the laws of Delaware on April 29, 1998
for the purpose of effecting, on a tax deferred basis, a reorganization of
Telefficiency, a corporation organized and existing under the laws of Ontario,
Canada, pursuant to which (i) the shareholders of Telefficiency received a pro
rata voting interest in the Company and (ii) the Company acquired all of the
issued and outstanding voting securities of Telefficiency.
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<PAGE>
Telefficiency was incorporated and entered the communications business in
1992.
The Company believes that the following trends contribute to a favorable
market outlook for the business telecommunications industry. There is a
continuing market for telephone systems as businesses continue to upgrade and
replace such systems. In addition, a variety of new communications technologies
have emerged in the last few years that enhance the capabilities of traditional
telephone systems and will continue to do so. The Company believes that
distributors like the Company, that have access to products that integrate such
technological advances will benefit from the growth of existing and emerging
communications markets.
Moreover, the Company believes that demand for services related to the
integration of data and voice networks will increase and as these markets
converge, companies, such as Telefficiency, which have expertise and capability
to perform these services will have a significant competitive advantage.
Finally, as the management of communications systems becomes more complex,
businesses increasingly turn to vendors such as the Company that are able to
provide complete communications solutions and a single point of contact.
A combination of these trends should have a favorable impact on the
Company's revenues from continuing operations.
The Company estimates that approximately 90% of its new products sold in
1998 and for the 9 month period ended September 30, 1999 were manufactured by
Nortel. Indeed, Nortel is the Company's principal supplier. The Company
purchases products from Nortel on the basis of purchase orders rather then a
long-term supply agreement or similar arrangement. Telefficiency has a
nonexclusive right to distribute a broad range of Nortel's products throughout
Canada, other than British Columbia. However, such right may be terminated by
Nortel or the Company at any time. A termination of the right to distribute
Nortel products or any other adverse changes in the Company's business
relationship with Nortel would have a material adverse impact on the Company's
business, operating results and financial condition.
The Company has formulated a growth strategy designed to make the Company a
premier provider of integrated business telecommunications products and services
in Canada and the United States. This growth strategy is based on the creation
and maintenance of a nationwide network of sales, service and warehouse
facilities; access to Nortel's full line of modular, integrated business
telecommunications products as well as complimentary products of other
manufacturers; and the leveraging of its existing customer base to capture an
increasing portion of each customer's telecommunications needs.
To implement its strategy, the Company must attract, train and retain
additional personnel with specialized expertise necessary to market and service
such products and services and to manage the Company's administrative, operating
and software requirements. In addition, the Company will rely in part upon the
acquisition of established distributors to implement its planned expansion of
sales, service and warehouse facilities. The successful implementation of the
Company's strategy also depends to a substantial degree on market acceptance of
Nortel products and the absence of adverse developments with respect to the
Company's national distribution rights for Nortel products. To the extent the
Company is unable to attract, train and retain necessary personnel or to acquire
and integrate existing distributors on acceptable terms, or there is a
disruption of adverse change in the Company's relationship with Nortel or the
market acceptance of its products, the
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Company's business, operating results and financial condition could be
materially and adversely affected.
Basis of Presentation
The following discussion is based on the Company's consolidated audited
financial statements for the years ended December 31, 1998 and 1997 and the
unaudited financial statements for the periods ended September 30, 1999 and
1998. This discussion is qualified in its entirety by reference to such
financial statements. The audited financial statements were prepared in
accordance with the US GAAP.
Results of operations - Nine Months Ended September 30, 1999 and 1998
For the nine months ended September 30, 1999, the Company had a net loss of
$251,008 as compared to a net loss of $1,027,299 for the nine months ended
September 30, 1998. The substantial decrease in net loss for the nine month
period in 1999 is due to management and staff changes in early 1999 to reduce
expenses. In addition, in the same period in 1998 there was a one time expense
of $165,000 that can be directly accountable for cost in additional professional
fees, salaries and expenses incurred in connection with the preparation of
financial statements and documentation required as a precondition to the
Company's qualification on the NASD.OTC on August 17, 1998.
Total revenue for the nine month period ended September 30, 1999 was
$8,467,409. During this period the Company was able to increase business by 39%
or $2,358,700 over the same period in 1998. This increase is largely due to the
Company's ability in 1999 to focus on the day to day business versus the time
and energy that was expended by the Company in 1998 in the preparation for its
qualification on the NASD.OTC on August 17, 1998.
Operating expenses in the nine month period ended September 30, 1999 were
$3,790,354 reflecting an increase of $1,210,893 or 47%, from $2,579,461 in the
same period in 1998. This increase is a direct result of the 39% increase in
sales in this period and the additional cost incurred in connection with the
changes in staff and management in early 1999.
The Company's decision to focus on higher margin business in 1999 resulted
in a gross profit of 42% for the nine month period ended September 30, 1998.
This substantial increase of an additional 17% over the same nine month period
in 1998 evidences the fact that focus on complete solutions for customers
provides the Company with better margins.
For the nine months ended September 30, 1999, the Company had a negative
cash flow from operating activities of $676,433, compared to a negative cash
flow of $2,207,873 for the same nine month period in 1998. The negative cash
flow in 1998 is primarily attributable to the net use of cash in operating
activities. Investment activities and financing activities resulted in the net
proceeds of cash of $492,612 in this nine month period in 1999. Investment
activities and financing activities in 1998 resulted in a net proceeds of cash
of $2,139,316 for the same nine month period.
A significant proportion of the Company's cash flow requirement for
operating activities arises from inventory, accounts receivable as well as for a
reduction of $181,179 in our payables and accrued liabilities in this nine month
period ended September 30, 1999. The Company typically requires payment for new
products in cash upon delivery or within 30 days. Payment
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<PAGE>
terms tend to be given by the Company in connection with sales of larger systems
and sales to national accounts or larger companies. Other sales are typically
made against cash.
Accounts receivable were reduced by 26% or $269,267 from $1,049,241 at
September 30, 1998 to $779,974 at September 30, 1999. The reduction in accounts
receivable is largely attributable to management and staff focusing on
collections of aged accounts to provide the Company with better cash flow.
The Company met its cash needs in the nine month period ending September
30,1999 through borrowings under a $480,000 line of credit with the Royal Bank
of Canada (the "Bank Line of Credit") and a $500,000 promissory note (the
"Note"). The Bank Line of Credit provides for demand loans and is secured by
substantially all of the Company's assets. Interest on borrowings is at the rate
of 8.5% per annum. The Company can borrow against the Bank Line of Credit if
needed, assuming there is no breach of the covenants (which include requirement
for minimum working capital and net worth and limit management salaries, and
require that the aggregate principal amount outstanding at any time under the
credit agreement not exceed the "borrowing base" which is based on inventory and
receivables) set forth in the credit agreement. The Company has been in default
with the net worth covenant as at December 31, 1998. However, the Royal Bank of
Canada has not declared an event of default under the Bank Line of Credit or
required outstanding loans to be repaid.
On September 9, 1999, the Company borrowed $500,000 from Mr. Leo Maa, an
unaffiliated third party. This loan was reflected by the Note which bore
interest at 10% per annum calculated quarterly. The Note was due upon the
receipt of funds by the Company in connection with an equity or debt financing.
On February 14, 2000, the Company paid back the outstanding principal balance on
the Note. The Company intends to pay the accrued unpaid interest in full by
February 25, 2000.
Results of operations - Years Ended December 31, 1998 and 1997
For the year ended December 31, 1998, the Company had a net loss of
$1,369,735 as compared to a net loss of $976,482 for the year ended December 31,
1997. The increase in net loss for 1998 is due to the increased expenses and
additional cost in effecting a change of domicile from Ontario to Delaware. A
one time expense of $165,000 can be directly accountable for cost in additional
professional fees, salaries and expenses incurred in connection with the
preparation of financial statements and documentation required as a precondition
to the Company's qualification on the NASD.OTC on August 17, 1998. An additional
loss of $96,658 was attributable to a write off of bad debts. Both Michael R.
Brunet, the Company's President and CEO, and William R. Clubine, the Company's
Chief Development Officer and Secretary, started in 1998 taking a salary of
$140,000 compared to not taking any remuneration for both 1997 and 1996.
Total revenue for 1998 was $8,144,945. The Company's decision to eliminate
low margin business in 1998 resulted in a decrease of $8,420,077 or 51%, from
$16,565,022 in 1997. However this decision resulted in a substantial increase of
gross profit of $2,069,549 or 25.4% of sales for 1998 compared to 14.1% in 1997.
The Company decided to focus on higher margin business and offer more complete
solutions to our customers.
Operating expenses in 1998 were $3,439,284 reflecting an increase of
$123,532 or 3.7%, from $3,315,752 in 1997.
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For the year ended December 31, 1998 the Company had a negative cash flow
from operating activities of $2,118,215, compared to a positive cash flow of
$306,124 in 1997. The negative cash flow in 1998 is primarily attributable to
the net use of cash in operating activities. Investment activities and financing
activities resulted in the net proceeds of cash of $2,036,565 in 1998 compared
to a negative amount of $422,905 in 1997.
A significant proportion of the Company's cash flow requirement for
operating activities arise from inventory, accounts receivable as well as for a
reduction of $644,403 in our payables and accrued liabilities in 1998. The
Company typically requires payment for new products in cash upon delivery or
within 30 days. Payment terms tend to be given by the Company in connection with
sales of larger systems and sales to national accounts or larger companies.
Other sales are typically made against cash. Of the Company's $996,395 of
accounts receivable as at December 31, 1998, $523,016 (or 52.5 %) were aged 30
days or less from the date of invoice, $244,114 (or 24.5%) were aged between 31
and 60 days, $159,811 (or 16.0%) were aged between 61 and 90 days and $69,454
(or 7.0%) were aged 91 days or more.
Accounts receivable increased by 23% from $809,791 at December 31, 1997 to
$996,395 at December 31, 1998. The increase in accounts receivable is
attributable to increased sales to major accounts and larger systems sold, which
typically involve 30 day payment terms.
The Company met its cash needs in 1998 and 1997 through the issuance of
capital stock and warrants and advances from related companies.
Inflation; Seasonally
The Company does not believe inflation has a significant impact on its
results of operations, nor are its sales from operations materially affected by
seasons, with the exception of July and August with more decision-makers taking
vacation during this time. However, as the Company increases its service
contract revenues and adds revenue from C.L.E.C. services, any changes of
operations during these months should be reduced.
Liquidity and Capital Resources
To date, the Company has met its cash needs from:
o the Bank Line of Credit
o the Note
o the issuance of capital stock and warrants
o advances from related companies.
In February 2000, the Company completed its offering of an aggregate
principal amount of $1,800,000 of 13% Debentures due December 31, 2002.
The Company believes the implementation of its growth strategy will result
in greater working capital needs. The Company expects that such needs will arise
as a result of increased sales, giving risk to proportionate increases in
accounts receivable, and in connection with the training of new sales and
marketing personnel. In addition, the Company expects that the amount of its
account
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receivable as a percentage of its total revenues will increase if, as
anticipated, the Company increases the proportion of its sales attributable to
larger telecommunication systems and national accounts.
At January 31, 2000, the Company did not have any material commitments for
capital expenditures. The Company currently anticipates that its available cash
resources and credit facilities, will be sufficient to meet its presently
anticipated working capital and capital expenditure requirements for at least
the next 12 months, including the payment of over $200,000 in interest due in
2001.
ITEM 3. DESCRIPTION OF PROPERTY
The Company's facilities are comprised of the facilities of its subsidiary,
Telefficiency. The Company maintains its headquarters at the central offices of
Telefficiency located at 5155 Spectrum Way, Building 30, Mississauga, Ontario,
Canada L4W 5A1. The Mississauga premises consist of approximately 9,400 square
feet of space used for offices and the warehousing of electronics. The premises
are leased through June 30, 2000 at a monthly rental of $5,767. The Company
believes that it will be able to either renew the lease or find other suitable
space in the same general area.
Telefficiency leases an additional office on a month to month basis at 277
Manitou Drive, Unit E, Kitchener, Ontario, Canada N2C 1L4. Monthly rent is $748.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of January 31, 2000 by (i) each
person who is known by the Company to own beneficially more than five percent
(5%) of the Company's outstanding Class A Common Stock; (ii) each of the
Company's directors and officers; and (iii) all directors and officers of the
Company as a group. As at January 31, 2000 there were 9,460,000 shares of Class
A Common Stock and 5,500,000 shares of Class B Common Stock issued and
outstanding.
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Class A Voting Stock
<TABLE>
<CAPTION>
Approximate
Name and Address Amount of Percentage of
of Beneficial Owner Beneficial Ownership(1) Total Voting Securities
------------------- -------------------- -----------------------
<S> <C> <C> <C>
Deborah-Ann Brunet(2) 2,775,615(2) 18.25%
1328 Deerwood Trail
Oakville, Ontario
L4G 2H4 Canada
Luana M. Clubine(3) 2,523,054(3) 16.59%
37 Jolana Court
Woodbridge, Ontario
L4H 3B7 Canada
Global Asset Products AG(4) 500,000 3.34%(4)
Bahnhofstrasse 69
8001 Zurich, Switzerland
Officers and Directors
----------------------
Michael R. Brunet(5) 2,775,615(5) 18.25%
1328 Deerwood Trail
Oakville, Ontario
L4G 2H4 Canada
William R. Clubine(6) 2,523,054(6) 16.59%
37 Jolana Court
Woodbridge, Ontario
L4H 3B7 Canada
Officers and Directors as a group 5,298,669(7) 34.27%
(2 people)
</TABLE>
(1) Unless indicated otherwise, each beneficial owner has direct ownership of
the shares indicated. All shares of Class B Common Stock are exchangeable,
at the option of the holder, to Class A Common Stock on a one for one
basis.
(2) Deborah-Ann Brunet is the wife of Michael Brunet. Includes 1,262,808 shares
of Class B Common Stock owned by Michael Brunet and 250,000 shares of Class
A Common Stock which can be purchased by Mr. Brunet upon exercise of
options.
(3) Luana M. Clubine is the wife of William Clubine. Includes 1,136,528 shares
of Class B Common Stock owned by Mr. William Clubine and 250,000 shares of
Class A Common Stock which can be purchased by Mr. Clubine upon exercise of
options.
(4) Global Asset Products AG is a privately held company, unrelated to the
Company or any of its officers and directors or their respective
affiliates. The principal owner of Global Asset Products
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<PAGE>
AG is Mr. Gilles Koch. Global Asset Products AG owns 5.29% of the
outstanding shares of Class A Common Stock. However, the shares of Class A
Common Stock owned by Global Asset Products AG constitute only 3.34% of the
total outstanding voting securities.
(5) Includes 1,262,807 shares of Class B Common Stock owned by Mrs. Deborah-Ann
Brunet, Mr. Brunet's wife and 250,000 shares of Class A Common Stock which
can be purchased by Mr. Brunet upon exercise of options.
(6) Includes 1,136,526 shares of Class B Common Stock owned by Mrs. Luana
Clubine, Mr. Clubine's wife, and 250,000 shares of Class A Common Stock
that can be purchased by Mr. Clubine upon exercise of options.
(7) Includes 1,262,808 shares of Class B Common Stock owned by Michael Brunet,
250,000 shares of Class A Common Stock which can be purchased by each of
Messrs. Brunet and Clubine upon exercise of options, 1,136,528 shares of
Class B Common Stock owned by Mr. William Clubine, 1,262,807 Shares of
Class B Common Stock owned by Mrs. Deborah-Ann Brunet, Mr. Brunet wife, and
1,136,526 shares of Class B Common Stock owned by Luana M. Clubine, Mr.
Clubine's wife.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following persons are the directors, executive officers and/or key
employees of the Company:
Name Age Position
- ---- --- --------
Michael R. Brunet 44 President, Chief Executive Officer, and
Director since May 12, 1998
William R. Clubine 45 Chief Development Officer, Secretary, and
Director since May 12, 1998
All directors and officers of the Company are elected annually to serve for
one year or until their successors are duly elected and qualified.
Management's business experience during the past five years is as follows:
Michael R. Brunet, President, Chief Executive Officer and Director
Michael R. Burnet is a co-founder of Telefficiency Corporation and has been
President and Chief Executive Officer since its incorporation in October 1992.
Mr. Brunet is responsible for the overall profitability of Marketing and Sales.
Mr. Brunet has over 23 years experience in the telecommunications industry both
nationally and internationally. He has successfully established and operated
companies in telecommunications, construction and insurance.
William R. Clubine, Chief Development Officer, Secretary and Director
William R. Clubine is a co-founder of Telefficiency Corporation and has
been Chief Financial Officer since its incorporation in October 1992 until May
1998. Mr. Clubine has been
25
<PAGE>
Chief Development Officer since May 1998. As such, he is responsible for the
development through acquisitions of interconnect companies and continues to
raise money for Telefficiency's growth and expansion. He has established and
operated an independent telecommunications company and has extensive experience
in the investment field.
During the past five years no director, executive officer, promoter or
control person of the Company:
(1) was the subject of any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time;
(2) was convicted in a criminal proceeding or is subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses);
(3) was subject to any order, judgment, or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities; and
(4) was found by a court of competent jurisdiction (in a civil action), the
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law.
ITEM 6. EXECUTIVE COMPENSATION
General
The following table sets forth information concerning the compensation of
the named executive officers for each of the registrant's last three completed
fiscal year:
<TABLE>
<CAPTION>
====================================================================================================================================
Annual Compensation Long-Term Compensation
- ------------------------------------------------------------------------------------------------------------------------------------
Awards Payouts
- ------------------------------------------------------------------------------------------------------------------------------------
Restricted Securities
Name and Principal Other Annual Stock Underlying LTIP All other
Position Year Salary Bonuses Compensation Award(s) Options/SARs Payouts Compensation
(a) (b) ($)(c) ($)(d) ($)(e) ($)(f) (=)(g) ($)(h) ($)(i)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael R. Brunet 1999 140,000 - - 250,000 - -
CEO, President and 1998 140,000 - - - -
Director 1997 0 - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
William R. Clubine 1999 140,000 - - 250,000 - -
Chief Development 1998 140,000 - - - -
Officer, Secretary and 1997 0 - - - -
Director
====================================================================================================================================
</TABLE>
26
<PAGE>
Options/SAR Grants Table
The following table sets forth information concerning individual grants
of stock options (whether or not in tandem with stock appreciation rights
("SARs")), and freestanding SARs made during the last completed fiscal year to
each of the named executive officers;
<TABLE>
<CAPTION>
=============================================================================================================================
OPTION/SAR GRANTS IN CURRENT FISCAL YEAR
(Individual Grants)
- -----------------------------------------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Options/SARs at In-The-Money
FY-End($) Exercisable/ Options/SARs At
Unexercisable 9/30/99 Exercisable/
(d) Unexercisable
Shares Acquired On (e)
Name Exercise Value Realized
(a) (#)(b) ($)(c)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Michael R. Brunet N/A N/A 250,000(1) $416,250
- -----------------------------------------------------------------------------------------------------------------------------
William R. Clubine N/A N/A 250,000(1) $416,250
- -----------------------------------------------------------------------------------------------------------------------------
All other employees(2) N/A N/A 1,318,000(3) $2,006,860
- -----------------------------------------------------------------------------------------------------------------------------
Consultants(4) N/A N/A 125,000(5) $121,875
=============================================================================================================================
</TABLE>
(1) Granted on October 21, 1999. Exercise price is $.21 per share. Option
expires subject to earlier termination on October 21, 2004.
(2) All grants of options to employees were pursuant to Rule 701 of the
Securities Act.
(3) Includes: (a) 497,000 options granted on November 9, 1999 with an exercise
price of $0.37 and an expiration date, subject to earlier termination, of
January 1, 2002; (b) 100,000 options granted on October 15, 1999 with an
exercise price of $0.15 and an expiration date, subject to earlier
termination, of October 15, 2000; (c) 200,000 options granted on June 30,
1999 with an exercise price of $0.05 and an expiration date, subject to
earlier termination, of June 30, 2001; (d) 300,000 options granted on June
17, 1999 vesting on July 1, 1999 with an exercise price of $0.05 and an
expiration date, subject to earlier termination, of July 1, 2004; and (e)
221,000 options granted on June 17, 1999 vesting on January 31, 2000 with
an exercise price of $0.50 and an expiration date, subject to earlier
termination of January 31, 2005.
(4) Three consultants were granted options in consideration of services
rendered to the Company in connection with the development of an in-house
public relations group. Upon the exercise of such options, the underlying
securities will be restricted.
(5) Includes: (a) 75,000 options granted on January 1, 2000 with an exercise
price of $1.00 and an expiration date, subject to earlier termination, of
December 31, 2000; and (b) 50,000 options granted on January 1, 2000 with
an exercise price of $0.75 and an expiration date, subject to earlier
termination, of December 31, 2000.
The Company's directors are not compensated for their services provided as
directors of the Company. There are no arrangements pursuant to which any
director has been or is currently compensated for any service provided as a
director. In addition, directors and/or officers will receive expense
reimbursement for expenses reasonably incurred on behalf of the Company.
27
<PAGE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company was organized under the laws of Delaware on April 29, 1998 for
the purpose of effecting on a tax deferred basis, a reorganization of
Telefficiency.
Pursuant to the Plan of Reorganization and Share Purchase Agreement dated
May 11, 1998 between the Company and Telefficiency, (1) each shareholder of
Telefficiency (including Messrs. Brunet and Clubine and their spouses) received
Class B Common Stock representing a pro rata voting interest in the Company and
(2) the Company acquired all of the issued and outstanding voting securities of
Telefficiency.
Other than the foregoing transaction, there has been no transaction during
the last two years, or proposed transactions, to which the Company is or will be
a party in which any of its officers, directors, principal stockholders or any
family member of such person had or will have a direct or indirect material
interest.
ITEM 8. DESCRIPTION OF SECURITIES
Preferred Stock
The Company is authorized to issue 5,000,000 shares of Preferred Stock, of
which none were issued and outstanding as of the date of this Registration
Statement. The Company's Board of Directors has not designated any series of
Preferred Stock to date. However, shares of Preferred Stock of any one series
shall be of equal rank and identical in all respects.
As such, the holders of equally ranking series of Preferred Stock in
preference to the holders of the Class A and B Common Stock and the holders of
any junior ranking series of Preferred Stock; (i) will have equal rights to
dividends from funds legally available therefor, when, and if, declared by the
Board of Directors of the Company; (ii) upon liquidation, dissolution or winding
up of the affairs of the Company, will be entitled to share ratably in all of
the assets of the Company available for distribution to the holders of such
equally ranking series of Preferred Stock to receive the amount per share fixed
by the Board of Directors when creating the series of which these shares are a
part; and (iii) do not have preemptive, subscription or conversion rights.
The holders of Preferred Stock will have no voting power or voting rights
with respect to any matter whatsoever, except as may otherwise by required by
law or as may be set forth by the Board of Directors when creating the series of
which such shares are a part.
Common Stock
The Company is authorized to issue 115,000,000 shares of Class A Common
Stock and 30,000,000 shares of Class B Common Stock, of which 9,460,000 shares
of Class A Common Stock and 5,500,000 shares of Class B Common Stock were issued
and outstanding as of the date of this Registration Statement. Each outstanding
share of Class A or Class B Common Stock entitles the holder to one vote, either
in person or by proxy, on all matters that may be voted upon by the owners
thereof at meetings of the stockholders.
28
<PAGE>
After the requirements with respect to preferential dividends, if any, on
any series of Preferred Stock shall have been met, the holders of Class A Common
Stock shall have equal rights to dividends from funds legally available
therefor, when, and if, declared by the Board of Directors of the Company. In
the event a dividend payable in Class A Common Stock is declared on shares of
Class A Common Stock, holders of Class B Common Stock shall be entitled to
receive a like proportionate dividend payable in shares of Class B Common Stock.
Similarly, in the event a dividend payable in shares of Class B Common Stock is
declared on shares of Class B Common Stock, holders of Class A Common Stock
shall be entitled to receive a like proportionate dividend payable in shares of
Class A Common Stock.
In the event of liquidation, dissolution or winding up of the affairs of
the Company, subject to prior repayment of (1) the payments required in respect
of Preferred Stock and (2) the capital of the Class A Common Stock, the holders
of the Class B Common Stock shall be entitled to receive ratably out of the net
assets of the Company, no more than the par value per share of such Class B
Common Stock.
Each share of Class B Common Stock shall be subject to redemption by the
Company, at the discretion of the Board of Directors for cash, property or
rights provided that at the time of such redemption, the Company shall have
issued and outstanding shares of its Class A Common Stock.
No combination, reclassification, subdivision, split or any other change
with respect to shares of Class A Common Stock or Class B Common Stock or the
capitalization of the Company or any other action or transaction may be effected
which will change the relative voting rights between shares of Class B Common
Stock and Class A Common Stock, unless all adjustments are made as may be
necessary to preserve to holders of the shares of Class A Common Stock and Class
B Common Stock those rights and privileges which are substantially proportionate
to the rights and privileges of such shares existing prior to said event or
events.
Each share of Class B Common Stock is exchangeable into one Class A Common
Stock upon the transfer to the Company of such shares of Class B Common Stock
together with (i) one Class A Exchangeable Share of Telefficiency or (ii) two
Class B Exchangeable Shares of Telefficiency as pursuant to the Plan of
Reorganization and Share Purchase Agreement between the Company and
Telefficiency.
The holders of shares of Common Stock of the Company do not have cumulative
voting rights, which means that the holders of more than 50% of such outstanding
shares, voting for the election of directors, can elect all directors of the
Company if they so choose and, in such event, the holders of the remaining
shares will not be able to elect any of the Company's directors. The present
officers and directors of the Company own approximately 36% of the outstanding
shares of the Company.
29
<PAGE>
PART II
ITEM 1. MARKET PRICE OF DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Class A Common Stock of the Company has been quoted on the OTC BB since
August 17, 1998. The following table sets forth high and low bid prices for the
Class A Common Stock for the calendar quarters indicated as reported by the OTC
BB from September 30, 1998 through December 31, 1999. These prices represent
quotations between dealers without adjustment for retail markup, markdown or
commission and may not represent actual transactions.
================================================================================
Quarter Ending: High Low Volume
- --------------------------------------------------------------------------------
December 31, 1999 $1.34 $.375 8,538,400
- --------------------------------------------------------------------------------
September 30, 1999 .75 .25 6,530,100
- --------------------------------------------------------------------------------
June 30, 1999 .88 .22 2,110,600
- --------------------------------------------------------------------------------
March 31, 1999 1.28 .31 2,521,300
- --------------------------------------------------------------------------------
December 31, 1998 4.38 1.19 2,163,300
- --------------------------------------------------------------------------------
September 30, 1998 4.75 4.0 2,532,600
- --------------------------------------------------------------------------------
June 30, 1998 N/A N/A N/A
================================================================================
No assurance can be given that a market for the Company's Class A Common
Stock will be sustained or that the Class A Common Stock will continue to be
quoted on the OTC BB.
On January 31, 2000, the closing price of the Company's Class A Common
Stock as reported on the OTC BB was $1.875 per share.
There is no established public trading market for the Company's Class B
Common Stock. There are no shares of Class B Common Stock that are subject to
outstanding options or warrants to purchase, or securities convertible into
shares of the Company's Class B Common Stock.
As of January 31, 2000, there were approximately 300 holders of the
Company's Class A Common Stock and 36 holders of the Company's Class B Common
Stock.
Dividend
The Company has not declared any dividends since inception, and has no
present intention of paying any dividends on its Class A or Class B Common Stock
in the foreseeable future. The payment by the Company of dividends, if any, in
the future, rests within the discretion of the Board of Directors and will
depend, among other things, upon the Company's earnings, its capital
requirements and its financial condition, as well as other relevant factors.
In addition, although the Company has not designated any series of
Preferred Stock, upon the designation and issuance of such shares of Preferred
Stock, no dividends may be paid on shares of Class A or Class B Common Stock
until all requirements with respect to preferential dividends of the shares of
Preferred Stock have been met and after the Company shall have complied with all
requirements with respect to the setting aside of sums in a sinking fund for the
purchase or redemption of the shares of Preferred Stock.
30
<PAGE>
Only the holders of the Company's Class A Common Stock shall be entitled to
receive dividends payable in cash or property (other than capital stock of the
Company) as declared by the Board of Directors. In the event a dividend payable
in Class A Common Stock is declared on shares of Class A Common Stock, holders
of Class B Common Stock shall be entitled to receive a like proportionate
dividend payable in shares of Class B Common Stock. Similarly, in the event a
dividend payable in shares of Class B Common Stock is declared on shares of
Class B Common Stock, holders of Class A Common Stock shall be entitled to
receive a like proportionate dividend payable in shares of Class A Common Stock.
ITEM 2. LEGAL PROCEEDINGS
The Company is not a party to any material litigation, and has no knowledge
of any pending or threatened litigation against it.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Since inception the Company has sold securities in the manner set forth
below without registration under Securities Act of 1933, as amended (the "Act").
1. On May 12, 1998, the Company issued in an exchange transaction pursuant
to the Plan of Reorganization and Share Purchase Agreement dated May 11, 1998
between the Company and its subsidiary, Telefficiency, 5,500,000 shares of Class
B Common stock in exchange for all of the issued and outstanding shares of
Telefficiency. The Company believes that such transaction was exempt from
registration under the Act pursuant to Section 4(2) and the rules and
regulations promulgated thereunder as a transaction by an issuer not involving
any public offering.
2. Prior to the Reorganization, Telefficiency has 146,328 stock purchase
warrants issued and outstanding. Such warrants had been granted to Fox & Co. in
exchange for obtaining funding for Telefficiency. After the Reorganization, the
Company issued 146,328 replacement warrants to Fox & Co. on May 12, 1998 (the
"Replacement Warrants") which had an adjusted exercise price and the same
expiration date. Each Replacement Warrant entitled the holder thereof to
purchase one share of Class A Common Stock at $6.21 up to December 31, 1998; at
$7.59 after December 31, 1998 and up to December 31, 1999; and at $8.97 after
December 31, 1999 and up to the expiration date of December 31, 2001. The
Company believes that such transaction was exempt from registration under the
Act pursuant to Section 4(2) and the rules and regulations promulgated
thereunder as a transaction by an issuer not involving any public offering.
3. During May 1998 through July 1998, the Company offered and sold in an
ongoing offering by the Company pursuant to Rule 504 of Regulation D, 8,500,000
shares of Class A Common Stock at $.115 per share to accredited investors, for
aggregate gross proceeds of $977,500.
4. During May 1998 through September 1998, the Company offered and sold in
an ongoing offering by the Company pursuant to the terms of Regulation S,
5,500,000 Stock Purchase
31
<PAGE>
Warrants at $.01 per warrant for aggregate gross proceeds of $55,000. Each
Warrant entitles the holder thereof to purchase one share of Class A Common
Stock at a price of $1.00 per share.
5. During June 1998 through August 1998, the Company offered and sold in an
ongoing offering by the Company pursuant to Rule 504 of Regulation D, 20,000
shares of Class A Common Stock at $1.00 per share for aggregate gross proceeds
of $20,000.
6. During June 1998 through August 1998, the Company offered and sold in an
ongoing offering by the Company pursuant to the terms of Regulation S, 165,000
Stock Purchase Units at a price of $1.00 per Unit, comprised of (i) one share of
Class A Common Stock; and (ii) one Class A Stock Purchase Warrant entitling the
holder thereof to purchase one share of Class A Common Stock at a price of $1.00
per share for aggregate gross proceeds of $165,000.
7. During August 1998 through January 1999, the Company offered and sold in
an ongoing offering by the Company pursuant to the terms of Regulation S,
775,000 shares of Class A Common Stock at a price of $1.00 per share for
aggregate gross proceeds of $775,000.
8. During December 1999 through February 2000, the Company offered and
sold, through Financial Research Limited, 1465 Greenbriar Drive, Green Oaks,
Illinois, 18 units at a price of $100,000 per unit consisting of (i) $100,000
principal amount of the Company's Series A 13% Debentures due December 31, 2002
and (ii) a stock purchase warrant entitling the holder thereof to purchase up to
30,000 shares of Class A Common Stock at an exercise price of $0.25 per share
(the "Debenture Units"). In connection with the offer and sale of the 18
Debenture Units, the Company agreed to pay Financial Research Limited a
placement fee calculated as follows: (i) for every Debenture Unit sold, up to a
maximum of 10 Debenture Units, a warrant to purchase up to 70,000 shares of
Class A Common Stock at a price of $0.25 per share for a period of 2 years
following the closing date; and (ii) for every Debenture Unit sold in excess of
10 Debenture Units, a cash payment equal to 5% ($5,000 per Debenture Unit) of
the proceeds received by the Company from the sale of any Debenture Unit in
excess of 10 Debenture Units. The Company believes that the transactions were
exempt from registration under the Act, pursuant to Section 4(2) and the rules
and regulations promulgated thereunder as a transaction by an issuer not
involving any public offering.
9. On January 1, 2000, in consideration of services rendered to the Company
in connection with the development of an in-house public relations group, the
Company granted consultants 50,000 shares of Class A Common Stock; 75,000
options to purchase Class A Common Stock with an exercise price of $1.00 and an
expiration date of December 31, 2000; and 50,000 options to purchase Class A
Common Stock with an exercise price of $0.75 and an expiration date of December
31, 2000. The Company believes that the transaction was exempt from registration
under the Act, pursuant to Section 4(2) and the rules and regulations
promulgated thereunder as a transaction by an issuer not involving any public
offering.
Except for shares issued pursuant to Rule 504, such shares are "restricted
securities," as that term is defined in the rules and regulations promulgated
under the Securities Act subject to certain restrictions regarding resale.
Certificates evidencing all of the above-referenced securities have been stamped
with a restrictive legend and will be subject to stop transfer orders.
32
<PAGE>
ITEM 5. INDEMNIFICATIONS OF DIRECTORS AND OFFICERS
Except as hereinafter set forth there is no charter provision, bylaw,
contract, arrangement or statute under which any officer or director of the
Company is insured or indemnified in any manner against any liability which he
may incur in his capacity as such.
Statutory indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law, as amended, provides
for the indemnification of the Company's officers, directors and corporate
employees and agents under certain circumstances as follows:
Indemnification of Officers, Directors, Employee and Agents; Insurance
(a) A corporation may indemnify any person who was or is 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 the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fee),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or 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 corporations, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding, by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best interest
of the corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
(b) 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 the fact that he if or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit 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
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 extent 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 if fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery of such court shall deem
proper.
(c) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of ay
action, suit or proceeding referred to in subsections (a) and (b) of this
section, or in defense of nay claim, issue or matter therein, he shall be
33
<PAGE>
indemnified against expenses (including attorney's fees) actually and reasonably
incurred by him in connection therewith.
(d) Any indemnification under subsection (a) and (b) of this section
(unless ordered by a court) shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in subsections (a) and (b) of this
section. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of the 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 in written opinion, or (3) by the stockholders.
(e) Expenses (including attorney's fees) incurred by an officer or director
in defending any civil, criminal, administrative or investigative action, suit
or proceeding may be paid by the corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of any undertaking by or on
behalf of such director to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the corporation as
authorized in this section. Such expenses including attorney's fees incurred by
other employees and agents may be so paid such terms and conditions, if any, as
the board of directors deems appropriate.
(f) The indemnification and advancement expenses provided by, or granted
pursuant to, the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement
expenses may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding such office.
(g) A corporation shall have power to purchase and maintain insurance on
behalf of 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 against any liability asserted against him
and incurred by him in any such capacity or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under this section.
(h) For purposes of this Section, references to "the corporation" shall
include, in addition to the resulting corporation, any constituent corporation
including ( any constituent of a constituent) absorbed in a consolidation or
merger which, if separate existence had continued, would have had power and
authority to indemnify its directors, officers and employees or agents so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under this section with respect to such constituent corporation if its
separate existence had continued.
(i) For purposes of this section, reference to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
services as a director, officer, employee or agent of the corporation which
imposes duties on, or involve services by, such director, officer, employee, or
agent with respect to any
34
<PAGE>
employee benefit plan, its participants, or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this section.
The Company's Certificate of Incorporation eliminates the personal
liability of directors of the Company to the fullest extent permitted by the
General Corporation Law of the State of Delaware and sets forth that the Company
shall indemnify those persons it shall have the power to indemnify under Section
145 of the Delaware General Corporation Law.
The Company's by-laws also provide that any person who was involved in any
action, suit or proceeding by reason of the fact that he is a director or
officer of the Company or was serving at the request of the Company as a
director, officer, employee or agent of another corporation shall be indemnified
and held harmless by the corporation to the fullest extent permitted by the
General Corporation Law of Delaware.
The Securities and Exchange Commission's Policy on Indemnification
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to any provisions contained in its Certificate of Incorporation, or
by-laws, or otherwise, the Company 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 Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the successful defenses of any action, suit
or proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company 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
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
35
<PAGE>
PART F/S
Financial Statements
TELEFFICIENCY HOLDING CORPORATION
Page
----
Audited Financial Statements:
Report of Independent Auditors dated December 2, 1999....................37
Consolidated Balance Sheets as at December 31, 1998 and 1997.............38
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997............................................39
Consolidated Statements of Stockholders' Deficit and
Comprehensive Income for the Years Ended December 31, 1998 and 1997...40
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997............................................41
Notes to Consolidated Financial Statements for the Years Ended
December 31, 1998 and 1997............................................42
Unaudited Financial Statements:
Interim Consolidated Balance Sheet as at September 30, 1999 and 1998 ....49
Interim Consolidated Statement of Operations for the nine months
Ended September 30, 1999 and 1998 ....................................50
Interim Consolidated Statement of Cash Flows for the nine months
ended September 30, 1999 and 1998.....................................51
Notes to the Unaudited Financial Statements..............................52
36
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Telefficiency Holding Corporation
We have audited the consolidated balance sheet of Telefficiency Holding
Corporation as at December 31, 1998 and the related consolidated statements of
operations, stockholders' deficit and comprehensive income and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of
Telefficiency Holding Corporation as of December 31, 1997 were audited by other
auditors whose report dated March 26, 1998 expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the aforementioned consolidated financial statements present
fairly, in all material respects, the financial position of Telefficiency
Holding Corporation as at December 31, 1998 and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Citrin Cooperman & Company, LLP
-----------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
December 2, 1999
New York, New York
37
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
ASSETS
Current assets:
Accounts receivable $ 996,395 $ 809,791
Inventory 544,912 517,011
Prepaid expenses 21,933 66,477
----------- -----------
Total current assets 1,563,240 1,393,279
Property and equipment - net 56,357 58,776
Advances to related companies 308,496 885,860
Goodwill 34,104 42,761
----------- -----------
TOTAL ASSETS $ 1,962,197 $ 2,380,676
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Bank indebtedness $ 436,153 $ 527,621
Accounts payable and accrued liabilities 1,707,953 2,352,356
Deferred revenue 492,728 442,660
Customers' deposits 106,876 97,833
Income taxes payable 16,559
Obligation under capital leases - current portion 42,513 31,670
----------- -----------
Total current liabilities 2,786,223 3,468,699
Obligation under capital leases 25,157 60,846
----------- -----------
Total liabilities 2,811,380 3,529,545
----------- -----------
Commitments (Note 12)
Stockholders' deficit:
Capital stock 1,496 550
Additional paid in capital 2,642,301 1,052,484
Cumulative translation adjustment 172,444 93,786
Accumulated deficit (3,665,424) (2,295,689)
----------- -----------
Total stockholders' deficit (849,183) (1,148,869)
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,962,197 $ 2,380,676
=========== ===========
See accompanying notes to consolidated financial statements.
38
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
------------ ------------
Sales $ 8,144,945 $ 16,565,022
Cost of sales 6,075,396 14,225,752
------------ ------------
Gross profit 2,069,549 2,339,270
------------ ------------
Expenses:
Wages and salaries 1,251,474 1,353,059
Subcontract costs 424,693 616,805
Management salaries 285,214
Automobile 256,194 271,854
Sales commissions 218,766 196,222
Professional fees 215,777 51,411
Office and general 132,557 145,040
Employee benefits 121,057 138,629
Advertising and promotion 114,523 154,822
Telephone 98,737 89,245
Bad debts (recovery) 96,658 (36,117)
Premises lease cost 84,389 98,678
Bank charges and interest 79,194 165,389
Insurance 13,406 9,219
Utilities 12,640 12,755
Repairs and maintenance 10,673 18,496
Amortization 23,332 30,245
------------ ------------
3,439,284 3,315,752
------------ ------------
NET LOSS $ (1,369,735) $ (976,482)
============ ============
NET LOSS PER SHARE $ (0.13) $ (0.18)
============ ============
See accompanying notes to consolidated financial statements.
39
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
Total
Common Stock Additional Accumul- Cumulative Comprehen- Share-
Paid in ated Translation sive Income holder's
Shares Amount Capital (Deficit) Adjustment (Loss) Deficit
---------- --------- ---------- ----------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1997 5,500,000 $550 $1,052,484 $(1,319,207) $(266,173)
Net loss (976,482) $(976,482)
Other comprehensive income:
Cumulative translation adjustment $ 93,786 93,786
---------
Total comprehensive loss $(882,696) (882,696)
---------- --------- ---------- ----------- -------- ========= ---------
Balance - December 31, 1997 5,500,000 550 1,052,484 (2,295,689) 93,786 (1,148,869)
Common stock, Class A,
issued in private placements 9,460,000 946 1,542,446 1,543,392
Warrants issued in private
placements 47,371 47,371
Net loss (1,369,735) $(1,369,735)
Other comprehensive income:
Cumulative translation adjustment 78,658 78,658
---------
Total comprehensive loss $(1,291,077) (1,291,077)
---------- --------- ---------- ----------- -------- ========= ---------
Balance - December 31, 1998 14,960,000 $1,496 $2,642,301 $(3,665,424) $172,444 $(849,183)
========== ========= ========== =========== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
40
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
Cash flows from operating activities:
Net loss $(1,369,735) $ (976,482)
Adjustments for items not affecting cash:
Amortization 23,332 30,245
Changes in assets and liabilities:
Accounts receivable (186,604) 761,163
Inventory (27,901) 23,363
Prepaid expenses and sundry 44,544 (19,062)
Accounts payable and accrued
liabilities (644,403) 249,691
Income taxes payable (16,559) (46,202)
Customers' deposits 9,043 97,833
Deferred revenue 50,068 185,575
----------- -----------
Net cash provided (used)
by operating activities (2,118,215) 306,124
----------- -----------
Cash flows from investing activities:
Purchase of capital assets (8,401) (6,469)
----------- -----------
Cash flows from financing activities:
Issuance of capital stock and warranties 1,590,763
Advances from (to) related companies 577,364 (366,668)
Obligations under capital leases (31,693) (9,917)
Bank indebtedness (91,468) (39,851)
----------- -----------
Net cash provided (used) by financing
activities 2,044,966 (416,436)
----------- -----------
Effect of exchange rate changes on cash 81,650 116,781
----------- -----------
Increase in cash -- --
Cash - beginning -- --
----------- -----------
CASH - ENDING $ -- $ --
=========== ===========
Supplemental Cash Flow Information:
Cash paid for interest $ 79,194 $ 165,389
=========== ===========
Cash paid for income taxes $ 17,296 $ --
=========== ===========
Non-cash financing transactions -
Assets acquired under capital leases $ 11,217 $ 65,493
=========== ===========
See accompanying notes to consolidated financial statements.
41
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 1 - NATURE OF BUSINESS
The Company operates in one industry segment and is engaged in the
sales, installation and service of telephone systems throughout
Canada. Substantially all of the Company's net assets are within
Canada.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
On May 12, 1998, the shareholders of Telefficiency Corporation ("TC")
exchanged all their issued common shares for common shares of
Telefficiency Holding Corporation ("THC"). The acquisition of TC and
THC is a reverse takeover whereby TC is identified as the acquiring
company. THC was incorporated in Delaware in April 1998, and prior to
the acquisition THC was inactive. The financial statements include the
operations of TC for the years 1998 and 1997. The consolidated
financial statements include the accounts of the Company and its
subsidiary after eliminating all intercompany accounts and
transactions.
Translation of foreign currencies
The Company uses the local currency as the functional currency and
translates all assets and liabilities at year-end exchange rates, all
income and expense accounts at average rates and records adjustments
resulting from the translation in a separate component of equity.
Inventory
Inventory is valued at the lower of cost and net realizable value.
Cost is determined on a first-in first-out basis.
Accounts receivable
The Company considers accounts receivable to be fully collectible.
Accordingly, no allowance for doubtful accounts is provided.
Property and equipment
Property and equipment are recorded at cost. Amortization is
calculated using the declining balance method over the useful life of
the assets generally three to seven years.
Leasehold improvements are amortized on the straight-line basis over
the term of the lease, 1 1/2 years.
Goodwill
Goodwill represents the excess of the cost of a prior acquisition of a
Canadian company over the fair value of the assets acquired, and is
being amortized over 10 years using the straight-line basis.
42
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred revenue
Revenue from service contracts is amortized on a straight-line basis
over the term of the contract, generally twelve months.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results
could differ from those estimates and assumptions.
Financial instruments
The Company's financial instruments consist of accounts receivable,
advances to related companies, bank indebtedness, accounts payable and
accrued liabilities and obligation under capital leases. Unless
otherwise noted, it is management's opinion that the Company is not
exposed to signficant interest, currency or credit risks arising from
these financial instruments. The fair value of these financial
instruments approximate their carrying values, unless otherwise noted.
Income taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109. Deferred income taxes are
provided on material temporary differences between book and tax bases
of assets and liabilities when such differences arise. As of December
31, 1998, there are no material differences between the book and tax
bases of the Company's assets and liabilities. Deferred taxes are also
recognized for operating losses available to offset future income
taxes. An allowance is provided if it is more likely than not that the
Company will not realize the benefits of a deferred tax asset.
NOTE 3 - UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in
errors when information using year 2000 dates is processed. In
addition, similar problems may arise in some systems which use certain
dates in 1999 to represent something other than a date.
43
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 3 - UNCERTAINTY DUE TO THE YEAR 2000 ISSUE (CONTINUED)
The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations
and financial reporting may range from minor errors to significant
systems failure, which could affect an entity's ability to conduct
normal business operations. It is not possible to be certain that all
aspects of the Year 2000 Issue affecting the entity, including those
related to the efforts of customers, suppliers, or other third
parties, will be fully resolved.
NOTE 4 - PROPERTY AND EQUIPMENT
1998
Accumulated
Depreciation Net Book
and Amorti- Net Book Value
Cost zation Value 1997
-------- -------- -------- --------
Computer hardware $ 26,828 $ 13,673 $ 13,155 $ 11,825
Assets under capital lease 98,393 56,845 41,548 46,365
Computer software 6,978 6,768 210 586
Leasehold improvements 7,297 5,853 1,444
-------- -------- -------- --------
$139,496 $ 83,139 $ 56,357 $ 58,776
======== ======== ======== ========
NOTE 5 - ADVANCES TO RELATED COMPANIES
1998 1997
-------- --------
Vema Holdings Inc. $ 18,660 $413,467
W.R.C. Holdings Limited 289,836 472,393
-------- --------
$308,496 $885,860
======== ========
These advances are non-interest bearing, and have no fixed terms of
repayment. These companies are controlled by shareholders of the
Company. The amounts owed are personally guaranteed by the
shareholders.
NOTE 6 - GOODWILL
1998 1997
-------- --------
Goodwill, at cost $ 56,840 $ 61,086
Less: accumulated amortization 22,736 18,325
-------- --------
$ 34,104 $ 42,761
======== ========
NOTE 7 - BANK INDEBTEDNESS
1998 1997
-------- --------
Bank indebtedness is represented by:
Bank overdraft $ 80,709 $ 33,473
Demand loan 355,444 494,148
-------- --------
$436,153 $527,621
======== ========
44
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 7 - BANK INDEBTEDNESS (CONTINUED)
Bank indebtedness is secured by a general security agreement covering
all the assets of the company and a security agreement covering all
the accounts receivable. The bank loan agreement contains provisions
which require the Company to maintain a stated working capital, to
maintain a minimum net worth, to limit management salaries and to
provide financial statements within a certain time period. As at
December 31, 1998, the Company was in default of certain of these
covenants. The loan bears interest at the bank's prime rate plus 2%,
8% at December 31, 1998.
NOTE 8 - OBLIGATION UNDER CAPITAL LEASES
The Company is obligated under various capital lease for computer
equipment that expire at various dates during the next four years. As
of December 31, the future minimum lease payments under capital leases
are computed as follows:
1998
----
1999 $50,242
2000 13,099
2001 11,437
2002 934
-------
Total minimum lease payments 75,712
Less: Amount representing interest 8,042
-------
Balance of obligation 67,670
Less: Current portion 42,513
-------
$25,157
=======
The leases bear implicit interest rates ranging from 10.65% to 11.29%.
NOTE 9 - CAPITAL STOCK
Capital stock is comprised as follows:
1998 1997
---- ----
Authorized Issued
5,000,000 Preferenced shares,
par value $.0001 $ -- $ --
115,000,000 9,460,000 Class A common shares,
par value $.0001 946 --
30,000,000 5,500,000 Class B common shares,
par value $.0001 550 550
-------- --------
$ 1,496 $ 550
======== ========
45
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 9 - CAPITAL STOCK (CONTINUED)
Additional paid in capital
Additional paid in capital is comprised as follows:
1998 1997
---------- ---------
Balance - beginning $1,052,484 $1,052,484
Issue of Class A Common shares
(net of issue costs) 1,042,496
Issue of warrants, net of issue costs 47,371
Shares subscribed, issued in 1999 499,950
---------- ----------
Balance - ending $2,642,301 $1,052,484
========== ==========
Class A common shares are voting and participating.
Class B common shares are voting and non-participating, and may be
exchanged together with TC shares to obtain THC Class A common shares
after a restriction period.
There are 5,665,000 Class A common share purchase warrants outstanding
that are each good for the purchase of one Class A common share for
$1. These include 5,500,000 warrants issued separately for $0.01 each,
expiring May 1999, and 165,000 warrants, expiring May 2000, issued in
conjunction with the issuance of 165,000 Class A common shares.
There are an additional 146,328 Class A common share purchase warrants
outstanding exercisable up to December 2001 at prices ranging from
$6.21 to $8.97 per share.
In March 1998 the Company received $500,000 for 500,000 Class A common
shares. The shares were issued in January 1999.
46
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ENDED DECEMBER 31, 1998 AND 1997
NOTE 10 - INCOME TAXES
A reconciliation comparing income taxes calculated at the Canadian
statutory rate to the amount provided in the accompanying consolidated
financial statements is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Combined Canadian federal and provincial
income tax rates 44.6% 44.6%
=========== ===========
Loss before income taxes $(1,369,735) $ (976,482)
=========== ===========
Expected income taxes (recovery) $ (610,000) $ (436,000)
Permanent differences 42,000 19,000
Operating losses for which tax benefit
has been negated by an increase in
the valuation allowance 568,000 417,000
----------- -----------
Income tax provision $ -- $ --
=========== ===========
</TABLE>
The Company and its subsidiaries are subject to income taxes on an
individual basis rather than a consolidated basis. Cumulatively, for
Canadian tax purposes, the Company has non-capital losses for
carryforward aggregating approximately $2,654,000 which are available
for the reduction of future years' taxable incomes. These losses
expire as follows:
2003 $ 669,000
2004 849,000
2005 1,136,000
----------
$2,654,000
==========
For U.S. purposes, the Company has a net operating loss carryforward
of $68,000 that expires in 2019.
At December 31, 1998 the Company's net deferred tax assets are
estimated as follows:
Canada U.S. Total
----------- -------- -----------
Net operating loss
carryforward $ 1,183,684 $ 17,000 $ 1,200,684
Valuation allowance (1,183,684) (17,000) (1,200,684)
----------- -------- -----------
Net deferred tax asset $ -- $ -- $ -
=========== ======== ===========
47
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE 11 - NET LOSS PER SHARE
Net consolidated loss per share has been computed by dividing the net
consolidated loss applicable to common shareholders by the weighted
average number of shares of common stock outstanding during the
respective years (10,626,593 in 1998 and 5,500,000 in 1997). The
effect on the loss per share of the exercise of the stock warrants
referred to in Note 9 is not dilutive.
NOTE 12 - COMMITMENTS
The Company is committed under various operating leases for occupied
premises and vehicles, which expire from 1999 to 2001. Future minimum
annual payments (exclusive of taxes, insurance and maintenance costs)
are as follows:
1999 $131,269
2000 77,212
2001 29,444
--------
$237,925
========
NOTE 13 - MAJOR VENDORS
The Company purchases 95% of its inventory from a single vendor under
an agreement that provides for price rebates, in advance, if certain
purchase volumes are met. The Company failed to meet the requested
volume for the year and has accrued $146,000 for the repayment of
factory rebates. The Company estimates that approximately 90% of its
new products sold are from this vendor.
NOTE 14 - GOING CONCERN
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As shown in the financial
statements, the Company incurred net losses for each of the years
ended December 31, 1998 and 1997. At December 31, 1998, the Company
has a working capital deficit of $1,222,983 and a stockholders'
deficit of $849,183. Subsequent to December 31, 1998, the Company has
begun obtaining funds under a Private Placement Memorandum. Further,
the Company has hired new management in an effort to control expenses
and maintain timely reporting of financial position. Finally, the
Company is hopeful for new revenue arising out of the deregulation of
the interconnect industry in Canada. On September 3, 1999 the Company
obtained a loan of $500,000. Interest is payable at 10% per annum and
the principal is due within 48 hours of receipt of funds by the
Company from any debt or equity financing.
NOTE 15 - SUBSEQUENT EVENT
Subsequent to December 31, 1998, the Company offered for sale, under a
private placement, 18 units of combined debt and warrants. Each unit
consists of $100,000 principal amount of 13% debentures due December
31, 2002 and a warrant to purchase up to 30,000 shares of the
Company's Class A common stock at a price of $0.25 per share. Each
unit is offered at a price of $100,000.
48
<PAGE>
Telefficiency Holding Corporation
Interim Consolidated Balance Sheet
As at September 30, 1999 and 1998
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Current
Accounts receivable $ 779,974 $ 1,049,241
Inventory 563,092 521,000
Prepaid expenses and sundry 27,014 22,423
----------- -----------
1,370,080 1,517,664
Capital assets 53,081 60,276
Advances to related companies 372,995 278,500
Goodwill 35,225 36,200
----------- -----------
Total Assets $ 1,831,381 $ 1,967,640
=========== ===========
LIABILITIES
Current
Bank indebtedness $ 702,703 $ 452,000
Accounts payable and accrued liabilities 1,176,831 1,358,010
Deferred revenue 306,105 483,192
Loan payable 500,000 0
Obligation under capital leases - current portion 66,422 42,000
----------- -----------
2,752,061 2,335,202
Obligation under capital lease 0 35,199
Customers deposits 0 110,050
----------- -----------
2,752,061 2,480,451
----------- -----------
SHAREHOLDERS' DEFICIENCY
Preferred stock, $.0001 par value; Authorized
5,000,000 shares, none issued or outstanding
Class A Common stock, $.0001 par value: Authorized
115,000,000 shares: issue and outstanding 9,460,000 946 946
Class B Common stock, $.0001 par value: Authorized
30,000,000; issued and outstanding 5,500,000 550 550
Additional paid in capital 2,642,301 2,642,301
Cumulative translation adjustment 351,955 72,595
Deficit (3,916,432) (3,229,203)
----------- -----------
(920,680) (512,811)
----------- -----------
Total liabilities and shareholders' deficit $ 1,831,381 $ 1,967,640
=========== ===========
</TABLE>
49
<PAGE>
Telefficiency Holding Corporation
Interim Consolidated Statement of Operations
For the Nine Months Ended September 30, 1999
(Unaudited)
================================================================================
1999 1998
Sales $ 8,467,409 $ 6,108,709
Cost of Sales 4,928,063 4,556,547
----------- -----------
Gross Profit 3,539,346 1,552,162
----------- -----------
Expenses
Wages and salaries 1,427,035 1,152,515
Subcontract Costs 1,055,787 318,520
Automobile 253,513 192,145
Sales commissions 285,754 164,074
Professional fees 47,437 161,833
Office and general 85,033 99,418
Employee benefits 159,775 90,793
Advertising and promotion 175,785 85,892
Telephone 84,639 74,053
Bad Debts 72,493
Premises lease cost 84,231 63,292
Bank charges and Interest 75,668 59,395
Other 36,284 27,539
Amortization 19,413 17,499
----------- -----------
3,790,354 2,579,461
----------- -----------
Net Loss $ (251,008) $(1,027,299)
=========== ===========
Loss per share $ (0.02) $ (0.07)
=========== ===========
50
<PAGE>
Telefficiency Holding Corporation
Interim Consolidated Statement of Cash Flows
For the Nine Months Ended September 30, 1999
(Unaudited)
================================================================================
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Cash flows from operating activities
Net Loss $ (251,008) $(1,027,299)
Adjustments for items not affecting cash:
Amortization 19,413 17,499
Changes in assets and liabilities:
Accounts Receivable 216,421 (239,450)
Inventory (18,180) (3,989)
Prepaid expenses and sundry (5,081) 44,054
Accounts payable and accrued liabilities (531,122) (994,346)
Income taxes payable (16,559)
Customers' deposits (106,876) 12,217
----------- -----------
Net cash used by operating activities (676,433) (2,207,873)
----------- -----------
Cash flows from investing activities
Purchase of capital assets (21,568) (8,401)
----------- -----------
Cash flows from financing activities
Share capital issued, net of issue costs 1,590,763
Advances to related companies (64,499) 607,360
Deferred revenue (186,623) 40,532
Obligation under capital leases (1,248) (15,317)
Bank indebtedness 266,550 (75,621)
Loan payable 500,000
----------- -----------
Net cash provided by financing activities 514,180 2,147,717
----------- -----------
Effect of exchange rate changes on cash 183,821 68,557
----------- -----------
Increase in cash
Cash, beginning of period
----------- -----------
Cash, end of period $ -- $ --
=========== ===========
</TABLE>
51
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 1999
(Unaudited)
================================================================================
The financial information included herein is unaudited; however, such
information reflects all adjustments, consisting solely of normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of the periods indicated. Certain information and footnote
disclosures normally included in financial statements prepared in conformity
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
These condensed financial statements should be read in conjunction with the
consolidated financial statements and related notes contained in the Company's
Annual Report for the twelve months ended December 31, 1998.
The following is a summary of the significant accounting policies followed by
the Company:
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the
company and its wholly-owned subsidiary. All significant intercompany
transactions and balances have been eliminated in consolidation.
Cash and cash equivalents
The company considers all highly liquid investments with a maturity of three
months or less from time of purchase to be cash equivalents.
Inventory
Inventory is valued at lower of cost or market. Cost is determined on the
first-in-first-out basis.
Property and equipment
Property and equipment is stated at cost. Depreciation is provided on a
straight-line basis over the estimated useful life of the assets, usually five
years. For leasehold improvements, depreciation is provided on straight-line
basis over five years.
52
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
Notes to Consolidated Financial Statements
For the Nine Months Ended September 30, 1999
(Unaudited)
================================================================================
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates and assumptions.
Financial Instruments
The company considers the fair value of all financial instruments to be not
materially different from their carrying value at year end.
Translation of foreign currencies
The company uses the local currency as the functional currency and translates
all assets and liabilities at year-end exchange rates, all income and expense
accounts at average rates and records adjustments resulting from the translation
in a separate component of common shareholders' equity.
Loss per common share
Loss per common share is based on the weighted average number of common shares
outstanding during each period.
53
<PAGE>
PART III
Item 1 and 2. INDEX TO AND DESCRIPTION OF EXHIBITS
2(1) Amended and Restated Certificate of Incorporation
2(2) By-laws
2(3) Plan of Reorganization and Share Purchase Agreement dated May 11, 1998
between the Company and Telefficiency.
21 Subsidiaries of the Company
27 Financial Data Schedule
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Telefficiency Holding Corporation
---------------------------------
(Registrant)
Date: February 15, 2000 By: /s/ Michael Brunet
----------------- -----------------------------
Michael Brunet
President and Chief Executive Officer
55
<PAGE>
TELEFFICIENCY HOLDING CORPORATION
Registration Statement - Form 10SB
Exhibits
Exhibit Page
- ------- ----
2(1) Amended and Restated Certificate of Incorporation......................57
2(2) By-laws ...............................................................66
2(3) Plan of Reorganization and Share Purchase Agreement dated
May 11, 1998 between the Company and Telefficiency.....................79
21 Subsidiaries of the Company............................................88
27 Financial Data Schedule................................................89
56
Exhibit 2(1)
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
TELEFFICIENCY HOLDING CORPORATION
It is hereby certified that:
1. The present name of the Corporation (the "Corporation") is Telefficiency
Holding Corporation. The name under which the Corporation was originally
incorporated was Telefficiency Corporation, and the date of the filing the
original Certificate of Incorporation of the Corporation with the Secretary of
State of the State of Delaware was April 29, 1998.
2. The amendments and the restatement of the certificate of incorporation
herein certified have been duly adopted by the sole incorporator of the
Corporation in accordance with the provisions of Sections 241 and 245 of the
General Corporation Law of the State of Delaware.
3. The Certificate of Incorporation of the Corporation, as amended and
restated herein, shall from and after the time of filing of this Amended and
Restated Certificate of Incorporation with the Secretary of State of the State
of Delaware, read in its entirety as follows:
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
TELEFFICIENCY HOLDING CORPORATION
FIRST: The name of the corporation (herein referred to as the "Corporation") is:
TELEFFICIENCY HOLDING CORPORATION
SECOND: The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road in the City of Wilmington, County of New Castle,
19805. The name of its registered agent at such address is the Corporation
Service Company.
THIRD: The purpose of the Corporation is:
To engage in, promote, conduct, and carry on any lawful acts or activities
for which corporations may be organized under the General Corporation Law
of the State of Delaware.
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FOURTH: The total number of shares of stock which the Corporation shall have
authority to issue is 150,000,000 of which (i) 115,000,000 shall be designated
Class "A" Voting and Participating Common Shares, $.0001 par value per share
("Class A Common Stock"); (ii) 30,000,000 shall be designated Class "B"
Convertible Voting and Nonparticipating Common Shares, $.0001 par value per
share ("Class B Common Stock"); and (iii) 5,000,000 shall be designated as
Preferred Shares, par value $.0001 per share.
The designations, preferences, privileges, and powers and relative,
participating, optional, or other special rights and qualifications,
limitations, or restrictions in the above classes of capital stock shall be as
follows:
A. Preferred Stock
1. Shares of Preferred Stock may be issued in one or more series at such time
or times and for such consideration as the Board of Directors may
determine. All shares of any one series shall be of equal rank and
identical in all respects.
2. Authority is hereby expressly granted to the Board of Directors to fix from
time to time, by resolution or resolutions providing for the establishment
and/or issuance of any series of Preferred Stock, the designation of the
series, and the qualifications, limitations, or restrictions thereof,
including the following:
a. the distinctive designation and number of shares comprising the
series, which number may, except where otherwise provided by the Board
of Directors in creating the series, be increased or decreased from
time to time by action of the Board of Directors, but not below the
number of shares then outstanding;
b. the rate of dividends, if any, on the shares of that series, whether
dividends shall be noncumulative, cumulative to the extent earned, or
cumulative, and if cumulative, from which date or dates, whether
dividends shall be payable in cash, property, or rights, or in shares
of the Corporation's capital stock, and the relative rights of
priority, if any, of payment of dividends on shares of that series
over shares of any other series;
c. whether the shares of that series shall be redeemable and, if so, the
terms and conditions of the redemption, including the date or date
upon or after which they shall be redeemable, the event or events upon
or after which they shall be redeemable or at whose option they shall
be redeemable, and the amount per share payable in case of redemption,
which amount may vary under different conditions and at different
redemption dates, or the property or rights, including securities of
any other corporation, payable in case of redemption;
d. whether that series shall have a sinking fund for the redemption or
purchase of shares of that series and, if so, the terms and amounts
payable into the sinking fund;
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e. the rights to which the holders of the shares of that series shall be
entitled in the event of voluntary or involuntary liquidation,
dissolution, or winding up on the Corporation, and the relative rights
or priority, if any, or payment of shares of that series in any such
event;
f. whether the shares of that series shall be convertible into or
exchangeable for shares of stock of any other class or any other
series and, if so, the terms and conditions of the conversion or
exchange, including the rate or rates of conversion or exchange, the
date or dates upon or after which they shall be convertible or
exchangeable, the duration for which they shall be convertible or
exchangeable, and the method, if any, of adjusting the rates of
conversion or exchange in the event of a stock split, stock dividend,
combination of shares, or similar event;
g. whether the issuance of any additional shares of the series, or of any
shares of any other series, shall be subject to restrictions as to
issuance, or as to the powers, preferences, or rights of any such
other series; and
h. any other preferences, privileges, powers, or special rights and
qualifications, limitations, or restrictions of the series as the
Board of Directors may deem advisable and as shall not be inconsistent
with the provisions of this Certificate of Incorporation and to the
full extent now or hereafter permitted by the laws of the State of
Delaware;
3. Payment of dividends shall be as follows:
a. The holders of any series of Preferred Stock, in preference to the
holders of the Common Stock and the holders of any junior ranking
series of Preferred Stock, shall be entitled to receive, as and when
declared by the Board of Directors out of funds legally available
therefor, dividends in cash, property, or rights, or in shares of the
Corporation's capital stock, at the rate for such series fixed in
accordance with the provisions of paragraph A(2)(b) of this Article
FOURTH.
b. No dividend shall be paid upon, or declared or set aside for, any
series of Preferred Stock with respect to any dividend period unless:
(i) All dividends on all senior ranking series of Preferred Stock
shall, for the same dividend period, and for all past dividend
periods, to the extent the dividends on such senior ranking series of
Preferred Stock are cumulative, have been fully paid or declared and
provided for; and
(ii) At the same time, a like proportionate dividend with respect to
the same dividend period, ratable in proportion to the respective
annual dividend rates fixed therefor, shall be paid upon, or declared
and provided for, all equally ranking series of Preferred Stock.
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c. As long as any shares of any series of Preferred Stock shall be
outstanding, in no event shall any dividend, whether in cash,
property, excluding shares of Common Stock of the Corporation, or
rights, be paid upon, or declared and provided for, nor shall any
distribution be made, on the outstanding shares of Common Stock,
unless all dividends on all cumulative series of Preferred Stock with
respect to all past dividend periods and unless all dividends on all
series of Preferred Stock for the then current dividends on all series
of Preferred Stock for the then current dividend period shall have
been paid upon, or declared and provided for, and unless the
Corporation shall not be in default under any of its obligations with
respect to any sinking fund for any series of Preferred Stock. The
foregoing provisions of this paragraph (c) shall not, however, in any
way prohibit or limit the Corporation from paying a dividend or other
distribution of shares of Common Stock on the outstanding shares of
Common Stock.
d. No dividends shall be deemed to have accrued on any share of any
series of Preferred Stock with respect to any period prior to the date
of the original issuance of the share or the dividend payment date
immediately preceding or following the date of original issue, except
as may otherwise be provided in the resolution or resolutions of the
Board of Directors creating such series. Accruals of dividends shall
not bear interest.
4. In the event of any voluntary or involuntary liquidation, dissolution, or
winding up of the Corporation, the holders of the shares of any series of
Preferred Stock then outstanding shall be entitled to receive out of the
net assets of the Corporation, whether capital or surplus, but only in
accordance with the preferences, if any, provided for such series, before
any distribution or payment shall be made to the holders of the Common
Stock and the holders of any junior ranking series of Preferred Stock, the
amount per share fixed by the resolution or resolutions of the Board of
Directors to be received by the holders of such shares on such voluntary or
involuntary liquidation, dissolution, or winding up, as the case may be. If
the payment shall have been made in full to the holders of all outstanding
Preferred Stock of all series, or duly provided for, the remaining net
assets of the Corporation shall be available for distribution to the
holders of Common Stock to the extent the Board of Directors shall
determine as provided for in paragraph B(2)and (4) of this Article FOURTH.
If, upon any such voluntary or involuntary liquidation, dissolution, or
winding up, the net assets of the Corporation available for distribution
among the holders of any one or more series of the Preferred Stock which
(i) are entitled to a preference over the holders of the Common Stock and
(ii) rank equally in connection therewith, shall be insufficient to make
payment in full of the preferential amount to which the holders of such
shares shall be entitled, then the assets shall be distributed among the
holders of such series of the Preferred Stock ratably according to the
respective amounts to which they would be entitled in respect of the shares
held by them upon the distribution if all amounts payable on or with
respect to the shares were paid in full. Neither the consolidation nor
merger of the Corporation, nor a reduction of the
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capital of the Corporation, nor the sale, lease, or conveyance of all or
part of its assets, whether for cash, securities or other property, shall
be deemed a voluntary or involuntary liquidation, dissolution, or winding
up of the Corporation within the meaning of the foregoing provisions.
5. The shares of Preferred Stock shall have no voting power or voting rights
with respect to any matter whatsoever, except as may be otherwise required
by law or may be provided in the resolution or resolutions of the Board of
Directors creating the series of which such shares are a part.
B. Common Stock
1. After the requirements with respect to preferential dividends, if any, on
any series of Preferred Stock, fixed pursuant to paragraph A(2)(b) and as
further provided for in paragraph A(3), both contained in this Article
FOURTH, shall have been met, and after the Corporation shall have complied
with all requirements, if any, with respect to the setting aside of sums in
a sinking fund for the purchase or redemption of shares of any series of
Preferred Stock, fixed pursuant to paragraph A(2)(d) of this Article
FOURTH, then, and not otherwise, the holders of any shares of Class A or
Class B Common Stock (collectively "Common Stock"), except as is set forth
in paragraph B(4) below, shall receive, to the extent permitted by law and
to the extent the Board of Directors shall determine, such dividends as may
be declared from time to time by the Board of Directors with respect to
Class A or Class B Common Stock, as the case may be.
2. After distribution in full of the preferential amount, if any, fixed
pursuant to paragraph A(2)(e) and as further provided for in paragraph
A(4), both of this article FOURTH, to be distributed to the holders of any
series of Preferred Stock in the event of the voluntary or involuntary
liquidation, dissolution, or winding up of the Corporation, the holders of
any and all classes of Common Stock, except as is set forth in paragraph
B(4) below, equally and variably, shall be entitled to receive such of the
remaining assets of the Corporation of whatever kind available for
distribution to the extent the Board of Directors shall determine.
3. Except as may be otherwise required by law or by this Certificate of
Incorporation, each holder of Common Stock shall have one vote in respect
of each share of such stock held by him on all matters voted upon by the
stockholders.
4. The relative rights, preferences, and limitations of the shares of Class A
Common Stock and Class B Common Stock are as follows:
(i) Except as otherwise provided by law or by this Certificate of
Incorporation, each share of Common Stock, without distinction as to
class, shall have the same rights, privileges, interest, and
attributes, and shall be subject to the same limitations, as every
other share of Common Stock.
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(ii) Only the holders of Class A Common Stock shall be entitled to
receive, to the extent permitted by law and to the extent the Board of
Directors shall determine, dividends payable in cash or property
(other than capital stock of the Corporation) as may be declared from
time to time by the Board of Directors. In the event a dividend
payable in Class A Common Stock of the Corporation is declared on
shares of Class A Common Stock, holders of Class B Common Stock shall
be entitled to receive a like proportionate dividend payable in shares
of Class B Common Stock. Similarly, in the event a dividend payable in
Class B Common Stock of the Corporation is declared on shares of Class
B Common Stock, holders of Class A Common Stock shall be entitled to
receive a like proportionate dividend payable in shares of Class A
Common Stock.
(iii) In the event any voluntary or involuntary liquidation or winding
up of the Corporation, subject to the prior repayment of (1) the
capital and other payments required in respect of the Preferred Stock
as provided in paragraph A(4) above and (2) the capital of the Class A
Common Stock, the holders of Class B Common Stock shall be entitled to
receive not as a preference but ratably out of the net assets of the
Corporation, whether capital or surplus, no more than the par value
per share of Class B Common Stock of $.0001 per share.
(iv) On and after the date hereof, and subject to any conditions
herein contained, each share of Class B Common Stock shall be subject
to redemption by the Corporation, at the discretion of the Board of
Directors, for cash, property or rights, including securities of same
or another corporation and shall thereafter be restored to the status
of authorized and unissued shares of Class B Common Stock provided
that at the time of such redemption, the Corporation shall have issued
and outstanding shares of its Class A Common Stock.
(v) No combination, reclassification, subdivision, split or any other
change with respect to shares of Class A Common Stock or Class B
Common Stock or the capitalization of the Corporation, or any other
action or transaction may be effected which will change the relative
voting rights between shares of Class B Common Stock and Class A
Common Stock, unless all adjustments are made as may be necessary to
preserve to holders of the shares of Class A Common Stock and Class B
Common Stock those rights and privileges which are substantially
proportionate to the rights and privileges of such shares existing
prior to said event or events.
C. Preemptive Rights
No holder of any of the shares of the stock of the Corporation,
whether now or hereafter authorized and issued, shall be entitled as of
right to purchase or subscribe for any unissued stock of any class, or any
additional shares of any class to be issued by reason of any increase of
the authorized capital stock of any class of the Corporation, or
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bonds, certificates of indebtedness, debentures, or other securities
convertible into stock of any class of the Corporation, or carrying any
right to purchase stock of any class of the Corporation, but any such
unissued stock or any such additional authorized issue of any stock or of
other securities convertible into stock, or carrying any right to purchase
stock, may be issued and disposed of pursuant to resolution of the Board of
Directors to such persons, firms, corporations, or associations, and upon
such terms, as may be deemed advisable by the Board of Directors in the
exercise of its discretion.
FIFTH. The Corporation shall have the right to impose restrictions on the sale
or other disposition of its shares provided that all such restrictions are
placed upon the certificates evidencing the Corporation's shares to which such
restrictions apply.
SIXTH. The name and mailing address of the sole incorporator are:
Joseph Sierchio
41 East 57th Street
39th Floor
New York, New York 10022
SEVENTH. The Corporation is to have perpetual existence.
EIGHTH. The number of directors of the Corporation shall be such as from time to
time shall be fixed by, or in the manner provided in the bylaws. To the extent
that the number of directors is less than the number so fixed, the majority of
the directors then in office shall have the right, without shareholder vote, to
appoint such number of additional directors equal to the difference between the
number of directors in office and the maximum number of directors fixed in the
bylaws. Election of directors need not be by written ballot. The Board of
Directors is authorized, without the assent or vote of the shareholders, to
make, alter or repeal the by-laws of the Corporation.
NINTH. The personal liability of the directors of the Corporation is hereby
eliminated to the fullest extent permitted by the provisions of paragraph (7) of
subsection (b) of ss. 102 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented. The Corporation shall, to
the fullest extent permitted by the provision of ss. 145 of the General
Corporation Law of the State of Delaware, as the same may be amended and
supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any by-law, 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, and shall continue as to a person who has ceased to be a
director, officer, employee, or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
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TENTH. The officers, directors and other members of management of this
Corporation shall be subject to the doctrine of corporate opportunities only
insofar as its applies to business opportunities in which this corporation has
expressed an interest as determined from time to time by the Corporation's Board
of Directors as evidenced by resolutions appearing in the Corporation's Minutes.
When such areas of interest are delineated, all such business opportunities
within such areas of interest which come to the attention of an officer,
director or other member of management of this Corporation shall be disclosed
promptly to this Corporation and made available to it. The Board of Directors
may reject any business opportunity presented to it and thereafter any officer,
director or other member of management may avail himself or herself of such
opportunity. Until such time as this Corporation, through its Board of
Directors, has designated an area of interest, the officers, directors and other
members of management of this Corporation shall be free to engage in such areas
of interest on their own and the doctrine of corporate opportunities shall not
limit the rights of any officer, director or other member of management of this
Corporation to continue a business existing prior to the time that such area of
interest is designated by this corporation. This provision shall not be
construed to release any employee of the Corporation (other than an officer,
director or member of management) from any duties which he or she may have to
the Corporation.
ELEVENTH. In furtherance and not in limitation of the rights, powers,
privileges, and discretionary authority granted or conferred by the General
Corporation Law of the State of Delaware or other statutes or laws of the State
of Delaware, the Board of Directors is expressly authorized without the consent
of our stockholders to:
A. Make, amend, alter, or repeal the Bylaws of the Corporation;
B. Authorize and cause to be executed mortgages and liens upon the real and
personal property of the Corporation, and to hypothecate such property;
C. Set apart out of any funds of the Corporation available for dividends a
reserve or reserves of any proper purpose and reduce any such reserve in
the manner in which it was created; and
D. Adopt from time to time Bylaw provisions with respect to indemnification of
directors, officer, employees, agents, and other persons as it shall deem
expedient and in the best interest of the Corporation and to the extent
permitted by law. In the event no such Bylaw provisions are adopted, then
the Corporation shall indemnify all persons whom it may indemnify to the
full extent permitted by Section 145 of the Delaware General Corporation
Law as amended from time to time.
TWELFTH. The books of the Corporation may be kept outside the State of Delaware
at such place or places as may be designated from time to time by the Board of
Directors or in the Bylaws of the Corporation, subject to any provisions
contained in the statutes.
THIRTEENTH. The Corporation reserves the right to amend, alter, change, or
repeal any provisions herein contained, in the manner now or hereafter
prescribed by statute, and all rights,
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powers, privileges, and discretionary authority granted or conferred herein upon
stockholders or directors are granted subject to this reservation.
The undersigned, being the sole incorporator herein before named, does
hereby make this Amended and Restated Certificate of Incorporation, hereby
declaring, affirming, acknowledging, and certifying, under penalties of perjury,
that this is the act and deed of the undersigned and that the facts stated
herein are true, and accordingly has hereunto set his hand this 10th day of May,
1998.
----------------------------------
Joseph Sierchio, Sole Incorporator
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Exhibit 2(2)
BY-LAWS
OF
TELEFFICIENCY HOLDING CORPORATION
1. MEETINGS OF STOCKHOLDERS.
1.1 Annual Meeting. The annual meeting of stock-holders shall be held on
the first Monday of May in each year, or as soon thereafter as practicable, and
shall be held at a place and time determined by the board of directors (the
"Board").
1.2 Special Meetings. Special meetings of the stockholders may be called by
resolution of the Board or the president and shall be called by the presidenty
or secretary upon the written request (stating the purpose or purposes of the
meeting) of a majority of the directors then in office or of the holders of a
majority of the outstanding shares entitled to vote. Only business related to
the purposes set forth in the notice of the meeting may be transacted at a
special meeting.
1.3 Place and Time of Meetings. Meetings of the stockholders may be held in
or outside Delaware at the place and time specified by the Board or the officers
or stockholders requesting the meeting.
1.4 Notice of Meetings; Waiver of Notice. Written notice of each meeting of
stockholders shall be given to each stockholder entitled to vote at the meeting,
except that (a) it shall not be necessary to give notice to any stockholder who
submits a signed waiver of notice before or after the meeting, and (b) no notice
of an adjourned meeting need be given, except when required under section 1.5
below or by law. Each notice of a meeting shall be
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given, personally or by mail, not fewer than 10 nor more than 60 days before the
meeting and shall state the time and place of the meeting, and, unless it is the
annual meeting, shall state at whose direction or request the meeting is called
and the purposes for which it is called. If mailed, notice shall be considered
given when mailed to a stockholder at his address on the corporation's records.
The attendance of any stockholder at a meeting, without protesting at the
beginning of the meeting that the meeting is not lawfully called or convened,
shall constitute a waiver of notice by him.
1.5 Quorum. At any meeting of stockholders, the presence in person or by
proxy of the holders of a majority of the shares entitled to vote shall
constitute a quorum for the transaction of any business. In the absence of a
quorum, a majority in voting interest of those present or, if no stockholders
are present, any officer entitled to preside at or to act as secretary of the
meeting, may adjourn the meeting until a quorum is present. At any adjourned
meeting at which a quorum is present, any action may be taken that might have
been taken at the meeting as originally called. No notice of an adjourned
meeting need be given, if the time and place are announced at the meeting at
which the adjournment is taken, except that, if adjournment is for more than 30
days or if, after the adjournment, a new record date is fixed for the meeting,
notice of the adjourned meeting shall be given pursuant to section 1.4.
1.6 Voting; Proxies. Each stockholder of record shall be entitled to one
vote for each share registered in his name. Corporate action to be taken by
stockholder vote, other than the election of directors, shall be authorized by a
majority of the votes cast at a meeting of stockholders, except as otherwise
provided by law or by section 1.8. Directors shall be elected in the manner
provided in section 2.1. Voting need not be by ballot, unless requested by a
majority of the stockholders entitled to vote at the meeting or ordered by the
chairman of the meeting. Each stockholder entitled to vote at any meeting of
stockholders or to express consent to or dissent from corporate action in
writing without a meeting may authorize another
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person to act for him by proxy. No proxy shall be valid after three years from
its date, unless it provides otherwise.
1.7 List of Stockholders. Not fewer than 10 days prior to the date of any
meeting of stockholders, the secretary of the corporation shall prepare 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 his name. For a period of not fewer than 10 days prior to
the meeting, the list shall be available during ordinary business hours for
inspection by any stockholder for any purpose germane to the meeting. During
this period, the list shall be kept either (a) at a place within the city where
the meeting is to be held, if that place shall have been specified in the notice
of the meeting, or (b) if not so specified, at the place where the meeting is to
be held. The list shall also be available for inspection by stockholders at the
time and place of the meeting.
1.8 Action by Consent Without a Meeting. Any action required or permitted
to be taken at any meeting of stockholders 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 the holders of outstanding stock having
not fewer 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 voting. Prompt notice of the taking of any such action shall be
given to those stockholders who did not consent in writing.
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2. BOARD OF DIRECTORS.
2.1 Number, Qualification, Election and Term of Directors. The business of
the corporation shall be managed by the entire Board, which initially shall
consist of two (2) directors. The number of directors may be changed by
resolution of a majority of the Board or by the stockholders, but no decrease
may shorten the term of any incumbent director. To the extent that the Board or
stockholders increase the number of directors, such newly created positions may
be filled by the Board in the manner provided in Section 2.10 hereof. Except as
otherwise provided herein, directors shall be elected at each annual meeting of
stockholders by a plurality of the votes cast and shall hold office until the
next annual meeting of stockholders and until the election and qualification of
their respective successors, subject to the provisions of section 2.9. As used
in these by-laws, the term "entire Board" means the total number of directors
the corporation would have, if there were no vacancies on the Board.
2.2 Quorum and Manner of Acting. A majority of the entire Board shall
constitute a quorum for the transaction of business at any meeting, except as
provided in section 2.10. Action of the Board shall be authorized by the vote of
the majority of the directors present at the time of the vote, if there is a
quorum, unless otherwise provided by law or these by-laws. In the absence of a
quorum, a majority of the directors present may adjourn any meeting from time to
time until a quorum is present.
2.3 Place of Meetings. Meetings of the Board may be held in or outside
Delaware.
2.4 Annual and Regular Meetings. Annual meetings of the Board, for the
election of officers and consideration of other matters, shall be held either
(a) without notice immediately after the annual meeting of stockholders and at
the same place, or (b) as soon as practicable after the annual meeting of
stockholders, on notice as provided in section 2.6.
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Regular meetings of the Board may be held without notice at such times and
places as the Board determines. If the day fixed for a regular meeting is a
legal holiday, the meeting shall be held on the next business day.
2.5 Special Meetings. Special meetings of the Board may be called by the
president or by a majority of the directors.
2.6 Notice of Meetings; Waiver of Notice. Notice of the time and place of
each special meeting of the Board, and of each annual meeting not held
immediately after the annual meeting of stockholders and at the same place,
shall be given to each director by mailing it to him at his residence or usual
place of business at least three days before the meeting, or by delivering or
telephoning or telegraphing it to him at least two days before the meeting.
Notice of a special meeting also shall state the purpose or purposes for which
the meeting is called. Notice need not be given to any director who submits a
signed waiver of notice before or after the meeting or who attends the meeting
without protesting at the beginning of the meeting the transaction of any
business because the meeting was not lawfully called or convened. Notice of any
adjourned meeting need not be given, other than by announcement at the meeting
at which the adjournment is taken.
2.7 Board or Committee Action Without a Meeting. Any action required or
permitted to be taken by the Board or by any committee of the Board may be taken
without a meeting, if all the members of the Board or the committee consent in
writing to the adoption of a resolution authorizing the action. The resolution
and the written consents by the members of the Board or the committee shall be
filed with the minutes of the proceedings of the Board or the committee.
2.8 Participation in Board or Committee Meetings by Conference Telephone.
Any or all members of the Board or any committee of the Board may participate in
a meeting
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of the Board or the committee by means of a conference telephone or similar
communications equipment allowing all persons participating in the meeting to
hear each other at the same time. Participation by such means shall constitute
presence in person at the meeting.
2.9 Resignation and Removal of Directors. Any director may resign at any
time by delivering his resignation in writing to the president or secretary of
the corporation, to take effect at the time specified in the resignation; the
acceptance of a resignation, unless required by its terms, shall not be
necessary to make it effective. Any or all of the directors may be removed at
any time, either with or without cause, by vote of the stockholders.
2.10 Vacancies. Any vacancy in the Board, including one created by an
increase in the number of directors, may be filled for the unexpired term by a
majority vote of the remaining directors, though less than a quorum.
2.11 Compensation. Directors shall receive such compensation as the Board
determines, together with reimbursement of their reasonable expenses in
connection with the performance of their duties. A director also may be paid for
serving the corporation or its affiliates or subsidiaries in other capacities.
3. COMMITTEES.
3.1 Executive Committee. The Board, by resolution adopted by a majority of
the entire Board, may designate an executive committee of one or more directors,
which shall have all the powers and authority of the Board, except as otherwise
provided in the resolution, section 141(c) of the General Corporation Law of
Delaware or any other applicable law. The members of the executive committee
shall serve at the pleasure of the Board. All action of the executive committee
shall be reported to the Board at its next meeting.
3.2 Other Committees. The Board, by resolution adopted by a majority of
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the entire Board, may designate other committees of one or more directors, which
shall serve at the Board's pleasure and have such powers and duties as the Board
determines.
3.3 Rules Applicable to Committees. The Board 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 case of the absence or
disqualification of any member of a committee, the member or members present at
a meeting of the committee and not disqualified, whether or not a quorum, may
unanimously appoint another director to act at the meeting in place of the
absent or disqualified member. All action of a committee shall be reported to
the Board at its next meeting. Each committee shall adopt rules of procedure and
shall meet as provided by those rules or by resolutions of the Board.
4. OFFICERS.
4.1 Number; Security. The executive officers of the corporation shall be
the president, one or more vice presidents (including an executive vice
president, if the Board so determines), a secretary and a treasurer. Any two or
more offices may be held by the same person. The board may require any officer,
agent or employee to give security for the faithful performance of his duties.
4.2 Election; Term of Office. The executive officers of the corporation
shall be elected annually by the Board, and each such officer shall hold office
until the next annual meeting of the Board and until the election of his
successor, subject to the provisions of section 4.4.
4.3 Subordinate Officers. The Board may appoint subordinate officers
(including assistant secretaries and assistant treasurers), agents or employees,
each of whom shall hold office for such period and have such powers and duties
as the Board determines. The Board may delegate to any executive officer or
committee the power to appoint and define
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the powers and duties of any subordinate officers, agents or employees.
4.4 Resignation and Removal of Officers. Any officer may resign at any time
by delivering his resignation in writing to the president or secretary of the
corporation, to take effect at the time specified in the resignation; the
acceptance of a resignation, unless required by its terms, shall not be
necessary to make it effective. Any officer elected or appointed by the Board or
appointed by an executive officer or by a committee may be removed by the Board
either with or without cause, and in the case of an officer appointed by an
executive officer or by a committee, by the officer or committee that appointed
him or by the president.
4.5 Vacancies. A vacancy in any office may be filled for the unexpired term
in the manner prescribed in sections 4.2 and 4.3 for election or appointment to
the office.
4.6 The President. The president shall be the chief executive officer of
the corporation. Subject to the control of the Board, he shall have general
supervision over the business of the corporation and shall have such other
powers and duties as presidents of corporations usually have or as the Board
assigns to him.
4.7 Vice President. Each vice president shall have such powers and duties
as the Board or the president assigns to him.
4.8 The Treasurer. The treasurer shall be the chief financial officer of
the corporation and shall be in charge of the corporation's books and accounts.
Subject to the control of the Board, he shall have such other powers and duties
as the Board or the president assigns to him.
4.9 The Secretary. The secretary shall be the secretary of, and keep the
minutes of, all meetings of the Board and the stockholders, shall be responsible
for giving
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notice of all meetings of stockholders and the Board, and shall keep the seal
and, when authorized by the Board, apply it to any instrument requiring it.
Subject to the control of the Board, he shall have such powers and duties as the
Board or the president(3) assigns to him. In the absence of the secretary from
any meeting, the minutes shall be kept by the person appointed for that purpose
by the presiding officer.
4.10 Salaries. The Board may fix the officers' salaries, if any, or it may
authorize the president to fix the salary of any other officer.
5. SHARES.
5.1 Certificates. The corporation's shares shall be represented by
certificates in the form approved by the Board. Each certificate shall be signed
by the president(10) or a vice president, and by the secretary or an assistant
secretary or the treasurer or an assistant treasurer, and shall be sealed with
the corporation's seal or a facsimile of the seal. Any or all of the signatures
on the certificate may be a facsimile.
5.2 Transfers. Shares shall be transferable only on the corporation's
books, upon surrender of the certificate for the shares, properly endorsed. The
Board may require satisfactory surety before issuing a new certificate to
replace a certificate claimed to have been lost or destroyed.
5.3 Determination of Stockholders of Record. The Board may fix, in advance,
a date as the record date for the determination of stockholders entitled to
notice of or to vote at any meeting of the stockholders, or to express consent
to or dissent from any proposal without a meeting, or to receive payment of any
dividend or the allotment of any rights, or for the purpose of any other action.
The record date may not be more than 60 or
- ----------
(3) If there is a chairman, this responsibility may also, or in the
alternative, be his.
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fewer than 10 days before the date of the meeting or more than 60 days before
any other action.
6. INDEMNIFICATION AND INSURANCE.
6.1 Right to Indemnification. Each person who was or is a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he, or a person of whom he is the
legal representative, is or was a director or officer of the corporation or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action or inaction in an
official capacity or in any other capacity while serving as director, officer,
employee or agent, shall be indemnified and held harmless by the corporation to
the fullest extent permitted by the General Corporation Law of Delaware, as
amended from time to time, against all costs, charges, expenses, liabilities and
losses (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement) reasonably incurred or
suffered by such person in connection therewith, and that indemnification shall
continue as to a person who has ceased to be a director, officer, employee or
agent and shall inure to the benefit of his heirs, executors and administrators;
provided, however, that, except as provided in section 6.2, the corporation
shall indemnify any such person seeking indemnification in connection with a
proceeding (or part thereof) initiated by that person, only if that proceeding
(or part thereof) was authorized by the Board. The right to indemnification
conferred in these by-laws shall be a contract right and shall include the right
to be paid by the corporation the expenses incurred in defending any such
proceeding in advance of its final disposition; provided, however, that, if the
General Corporation Law of Delaware, as amended from time to time, requires, the
payment of such expenses incurred by a
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director or officer in his capacity as a director or officer (and not in any
other capacity in which service was or is rendered by that person while a
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of a proceeding shall be made
only upon delivery to the corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced, if it shall ultimately be
determined that such director or officer is not entitled to be indemnified under
these by-laws or otherwise. The corporation may, by action of its Board, provide
indemnification to employees and agents of the corporation with the same scope
and effect as the foregoing indemnification of directors and officers.
6.2 Right of Claimant to Bring Suit. If a claim under section 6.1 is not
paid in full by the corporation within 30 days after a written claim has been
received by the corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant also shall be entitled to be paid
the expense of prosecuting that claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition, where the required
undertaking, if any, is required and has been tendered to the corporation) that
the claimant has failed to meet a standard of conduct that makes it permissible
under Delaware law for the corporation to indemnify the claimant for the amount
claimed. Neither the failure of the corporation (including its Board, its
independent legal counsel or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
permissible in the circumstances because he has met that standard of conduct,
nor an actual determination by the corporation (including its Board, its
independent counsel or its stockholders) that the claimant has not met that
standard of conduct, shall be a defense to the action or create a presumption
that the claimant has failed to meet that standard of conduct.
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6.3 Non-Exclusivity of Rights. The right to indemnification and the payment
of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this section 6 shall not be exclusive of any other
right any person may have or hereafter acquire under any statute, provision of
the certificate of incorporation, by-law, agreement, vote of stockholders or
disinterested directors or otherwise.
6.4 Insurance. The corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the corporation
would have the power to indemnify such person against that expense, liability or
loss under Delaware law.
6.5 Expenses as a Witness. To the extent any director, officer, employee or
agent of the corporation is by reason of such position, or a position with
another entity at the request of the corporation, a witness in any action, suit
or proceeding, he shall be indemnified against all costs and expenses actually
and reasonably incurred by him or on his behalf in connection therewith.
6.6 Indemnity Agreements. The corporation may enter into agreement with any
director, officer, employee or agent of the corporation providing for
indemnification to the fullest extent permitted by Delaware law.
7. MISCELLANEOUS.
7.1 Seal. The Board shall adopt a corporate seal, which shall be in the
form of a circle and shall bear the corporation's name and the year and state in
which it was incorporated.
7.2 Fiscal Year. The Board may determine the corporation's fiscal year.
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Until changed by the Board, the last day of the corporation's fiscal year shall
be December 31.
7.3 Voting of Shares in Other Corporations. Shares in other corporations
held by the corporation may be represented and voted by an officer of this
corporation or by a proxy or proxies appointed by one of them. The Board may,
however, appoint some other person to vote the shares.
7.4 Amendments. By-laws may be amended, repealed or adopted by the
stockholders and, as provided by the Certificate of Incorporation, by the Board
of Directors without the assent or vote of the stockholders.
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Exhibit 2(3)
PLAN OF REORGANIZATION & SHARE PURCHASE AGREEMENT dated as of May 11, 1998
("Purchase Agreement") between Telefficiency Holding Corporation, a Delaware
corporation ("Delco") and Telefficiency Corporation, an Ontario, Canada
corporation ("Telefficiency").
Telefficiency and Delco are desirous of effecting a corporate
reorganization of Telefficiency on a tax deferred basis (the "Reorganization")
upon the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of the premises and the mutual covenants
and representations hereinafter stated and for other good and valuable
considerations the receipt and sufficiency of which is hereby acknowledged, the
parties agree as follows:
1. Definitions.
Articles of Amendment: shall mean the Articles of Amendment attached as
Exhibit 2(a)(iii) hereto.
Call Right: shall have the meaning set forth in Section
6(c).
Class A Exchangeable Shares: shall mean the Class A Exchangeable Shares, no
par value, of Telefficiency, having those
attributes set forth in the Articles of
Amendment.
Class B Exchangeable Shares: shall mean the Class B Exchangeable Shares, no
par value, of Telefficiency, having those
attributes set forth in the Articles of
Amendment.
Common Shares: shall mean the Common Shares no par value of
Telefficiency.
Delco: shall mean Telefficiency Holding Corporation, a
Delaware Corporation.
Delco Class A Common Shares: shall mean the Class A Voting and Participating
Common Shares of Delco having a par value of
$.0001 per share.
Delco Class B Common Shares: shall mean the Class B Convertible Voting and
Non-participating Common Shares of Delco having
a par value of $.0001 per shares.
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Effective Date: shall mean the date on which the second set of
Articles of Amendment are filed and receipted by
the appropriate regulatory bodies in Ontario,
Canada.
Equivalent Factor: shall mean, in the case of the Class A
Exchangeable Shares the factor of 1.0, and in
the case of Class B Exchangeable Shares the
factor of 0.5, providing, however, that such
Equivalent Factor shall be adjusted from time to
time in proportion to any splits or
consolidation of the Delco Class A Common Shares
or any stock dividends issued on the Delco Class
A Common Shares of Telefficiency Holding
Corporation.
Equivalent Number of
Exchangeable Shares: shall be the number of Exchangeable shares
multiplied by the respective Equivalent Factor.
Exchangeable Shares: shall mean either the Class A Exchangeable
Shares or the Class B Exchangeable Shares of the
Corporation, as the case may be.
Put Option: shall have the meaning set forth in Section 5(a)
hereof.
Redemption Right: shall have the meaning set forth in Section 7(a)
hereof.
Restriction Period: shall mean a period of one year commencing on
the Effective Date.
Retraction Right: shall have the meaning set forth in Section 6(a)
hereof.
Share Consolidation: shall have that meaning set forth in Section
2(a)(iii) hereof.
Special Common Shares: shall mean the Special Common Shares, no par
value of Telefficiency, having those attributes
set forth in the Articles of Amendment.
Stock Dividend: shall have that meaning set forth in Section
2(a)(i) hereof.
Telefficiency: shall mean Telefficiency Corporation, a
corporation formed and existing under the laws
of Ontario, Canada.
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2. Share Restructuring.
(a) Stock Dividend and Consolidation.
(i) On or prior to the Effective Date, Telefficiency shall declare and pay
a stock dividend in respect of its Common Shares (the "Stock Dividend") of
0.379862735 Common Shares for each issued and outstanding Common Share.
(ii) Notwithstanding the foregoing, Messrs. Michael Brunet and William
Clubine and parties related and associated with them (collectively the "Control
Group") will irrevocably waive their rights in and to the Stock Dividend.
(iii) Subsequent to the payment and receipt of the Stock Dividend and
subject to shareholder approval, Telefficiency will or will cause existing
Articles of Incorporation to be amended (the "Articles of Amendment") to, among
other things consolidate the 7,589,241 then to be outstanding and allotted
Common Shares into 5,500,000 Common Shares of Telefficiency (the "Share
Consolidation"). It is intended that as a result of the Stock Dividend and Share
Consolidation, the Control Group will suffer a reduction in their existing
Common Share ownership by 2.11% and all remaining Shareholders will then enjoy
an increase in their interest in the Company by 34.88% over the ownership
division as at the record date. The Articles of Amendment shall be substantially
as set forth in Exhibit 2(a)(iii) hereto.
(b) Exchangeable Shares of Telefficiency into Delco Class A Common Shares.
(i) The Articles of Amendment will provide that, in addition to the
existing unlimited number of authorized Common Shares, the share capital of
Telefficiency be further increased and amended, by creation of: (1) Special
Common Shares and (2) two new classes of exchangeable shares consisting of Class
A Exchangeable Shares and Class B Exchangeable Shares.
(ii) Pursuant to the Articles of Amendment, each Common Share will be
converted into a Class A Exchangeable Share on the basis of one Class A
Exchangeable Share for each Common Share. However, Telefficiency Shareholders
will have the option to exchange all or a portion of their Common Shares for
Special Common Shares, thus realizing the benefit of the capital gains exemption
afforded under applicable Canadian tax legislation. Pursuant to the Articles of
Amendment, each Special Common Shares issued will be converted into two Class B
Exchangeable Shares.
(iii) The Class A Exchangeable Shares and Class B Exchangeable Shares shall
have the designations, powers and attributes set forth in the Articles of
Amendment.
(iv) On the Effective Date, Telefficiency will have no voting securities of
any type issued and outstanding and, except as contemplated hereby with respect
to the issuance to Delco, no commitment or obligation to issue any such voting
securities.
3. Sale, Purchase and Delivery of Delco Class B Common Shares.
In order to provide the Telefficiency Shareholders with a pro rata voting
interest in Delco, on the Effective Date subject to the terms and conditions of
this Agreement, Telefficiency agrees to sell,
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transfer, convey, assign and deliver 5,500,000 Common Shares (the
"Reorganizational Shares") to Delco, and Delco agrees to purchase the
Reorganizational Shares in consideration, in part, of the delivery to the
Telefficiency Shareholders of 5,500,000 of Delco Class B Common shares on the
basis of one share of Delco Class B Common Shares for every (i) one Class A
Exchangeable Share or (ii) two Class B Exchangeable Shares owned of record by
such Telefficiency Shareholder. The certificates representing the Delco Class B
Common Shares shall be delivered to the Telefficiency Shareholders at the
addresses set forth in Telefficiency's Shareholder register.
4. Restrictions on Transfer.
(a) Once issued and delivered as aforesaid, neither the Delco Class B
Common Shares nor the Class A Exchangeable shares (the "Class A Exchangeable
Unit") on the one hand and/or the Delco Class B Common Shares and the Class B
Exchangeable Shares (the "Class B Exchangeable Unit") on the other hand, may be
detached and/or transferred or otherwise disposed of separate and apart from the
other securities constituting such Unit.
(b) No transfer or other disposition of either a Class A Exchangeable Unit
or Class B Exchangeable Unit will be permitted during the Restriction Period.
(c) Upon termination of the Restriction Period, a Class A Exchangeable Unit
and Class B Exchangeable Unit may only be transferred in accordance with (i)
Sections 5, 6 and 7 hereof, or (ii) an applicable exemption from the
registration requirements of the Securities Act of 1933, as amended.
(d) The certificates representing the Class A Exchangeable Shares,
Class B Exchangeable shares and the Delco Class B Common Shares shall bear a
legend reflecting the foregoing transferability restrictions.
5. Exchange Rights.
(a) Notwithstanding the restrictions set forth in Section 4 hereof, at any
time after the expiration of the Restriction Period and subject to the further
provisions of this Section 5,
(i) each holder of Class A Exchangeable Shares shall have the right to
sell (the "Class A Put Option") a Class A Exchangeable Share to Delco in
exchange, subject to adjustments as provided in the Articles of Amendment,
for one Delco Class A Common Share for each Class A Exchangeable Share; and
(ii) each holder of Class B Exchangeable Shares shall have the right
to sell (the "Class B Put Option") two Class B Exchangeable Shares to Delco
in exchange, subject to adjustments as provided in the Articles of
Amendments, for one Delco Class A Common Share. The Class A Put Option and
the Class B Put Option are sometimes collectively referred to as the "Put
Options."
(b) the Put Options are exercisable by delivery to Delco of the notice (the
"Put Notice") in the form attached hereto as Exhibit 5(b).
(c) The exercise of the Put Options is further conditioned upon the
delivery by the exercising Telefficiency Shareholder to Delco of (i) the
certificate(s) representing the Class A
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Exchangeable Shares and Class B Exchangeable Shares which are the subject of the
Put Options, and (ii) as well as the certificate(s) representing one Delco B
Common Share for (i) in the case of Class A Exchangeable Shares, every one Class
A Exchangeable Share tendered and (ii) in the case of the Class B Exchangeable
Shares, every two Class B Exchangeable Shares tendered. All such certificates
shall be duly endorsed, in blank, for transfer. Within 10 business days of
receipt the Put Notice and all requisite certificates, Delco will issue the
Delco Class A Common Shares to the exercising Telefficiency Shareholders. The
Delco Class B Common Shares transferred pursuant to the exercise of Put Options
shall be restored to the status of authorized and unissued Delco Class B Common
Shares.
6. Retraction and Overriding Call Right.
(a) Holders of Class A Exchangeable Shares or Class B Exchangeable Shares
may, at any time after the Restriction Period, require Telefficiency to redeem
(the "Retraction Right"), respectively, all or any portion of such Exchangeable
Shares owned of record by such holder, for a redemption price equal to the fair
market value at the time of redemption of the Equivalent Number of Delco Class A
Common Shares to be paid and satisfied by the delivery of an Equivalent Number,
of Delco Class A Common Shares of Delco and any additional amount representing
any declared and unpaid dividends on the respective Exchangeable Shares.
(b) The Retraction Right is exercisable by delivery to Telefficiency and
Delco of the notice (the "Retraction Notice") in the form attached hereto as
Exhibit 6(b).
(c) The exercise of the Retraction Right is further conditioned on the
delivery by the exercising Telefficiency Shareholder to (i) Telefficiency, the
certificates representing the Class A or Class B Exchangeable Shares, as the
case may be, being tendered and to (ii) Delco, the certificate(s) representing
one Delco B Common Share for (i) in the case of Class A Exchangeable, every one
Class A Exchangeable Share tendered and (ii) in the case of the Class B
Exchangeable, every two Class B Exchangeable Shares tendered. All such
certificates shall be duly endorsed in blank, for transfer to Telefficiency in
the case of the Class A or Class B Exchangeable Shares and to Delco in the case
of the Delco Class B Common Shares. Subject to its Call Right, within 20
business days of the receipt by Telefficiency and Delco of the Retraction Notice
and the requisite certificates, Delco will issue an Equivalent Number of Delco
Class A Common Shares to the tendering Telefficiency Shareholder. Delco B Common
Shares tendered in connection with the exercise of the Retraction Right shall be
restored to the status of authorized and unissued Delco Class B Common Shares.
(d) The Retraction Right provided in Section 6(a) herein is subject to the
overriding call right (the "Call Right") of Delco, pursuant to which Delco may
acquire the Class A Exchangeable or Class B Exchangeable Shares tendered in
consideration of the issuance of the Equivalent Number, subject to adjustment as
provided in the Articles of Amendment, of Delco Class A Common Shares in
priority to Telefficiency's obligations under the Retraction Right. The Call
Right may be exercised by Delco within 20 days of receipt of the Retraction
Notice by providing written notice thereof to the tendering Telefficiency
Shareholder. Upon the exercise of the Call Right by Delco, the certificate(s)
representing the Class A Exchangeable and Class B Exchangeable Shares as well as
the certificate(s) representing Delco Class B Common Shares delivered along with
the Retraction Notice to Delco will be deemed delivered pursuant to Delco's
exercise of its Call Right. Upon consummation of the Call Right, the Delco Class
B Common Shares shall be restored to the status of authorized and unissued Delco
Class B Common Shares.
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7. Redemption Rights.
(a) Telefficiency shall have the right at any time after June 1, 2028 to
redeem (the "Redemption Right"), respectively, the Class A Exchangeable and
Class B Exchangeable Shares for a redemption price equal to the fair market
value at the time of redemption of the Equivalent Number of Delco Class A Common
Shares, to be paid and satisfied by the delivery of the Equivalent Number of
Delco Class A Common Shares, and an additional amount representing any declared
and unpaid dividends on Class A or Class B Exchangeable Shares.
(b) The Redemption Right is exercisable by delivery of the notice (the
"Redemption Notice") in form attached hereto as Exhibit 7(b).
(c) Delivery of the Delco Class A Shares to the Telefficiency Shareholders
is subject to the further condition that the Telefficiency Shareholders deliver
(i) to Telefficiency the certificates representing the Class A or Class B
Exchangeable Shares to be redeemed and (ii) to Delco, the certificate(s)
representing one Delco B Common Share for (i) in the case of Class A
Exchangeable, every one Class A Exchangeable Share redeemed and (ii) in the case
of the Class B Exchangeable, every two Class B Exchangeable Shares being
redeemed. All such certificates are to be duly endorsed in blank for transfer,
in the case of the Class A and Class B Exchangeable Shares to Telefficiency and
in the case of the Delco Class B Common Shares to Delco.
(d) Upon consummation of the Redemption Right, the Delco B Common Shares
delivered to Delco shall be restored to the status of authorized and unissued
Delco Class B Common Shares.
8. Representations, Warranties and Covenants of Delco.
Delco hereby represents and warrants to, and covenants with Telefficiency
that:
(a) Delco is a corporation duly and validly organized and existing under
the laws of the State of Delaware, with full power and authority to execute and
deliver this Agreement, and to perform its obligations hereunder.
(b) Delco has duly and lawfully executed and delivered this Agreement, and
this Agreement represents the legally binding obligation of Delco, enforceable
in accordance with the terms and conditions hereof, subject to any applicable
bankruptcy, reorganization, insolvency, or other laws, now or hereafter in
effect, affecting creditors' rights generally, and with respect to the specific
performance hereof, to equitable doctrines applicable thereto.
(c) Delco agrees that the certificates for Telefficiency's Common Shares to
be purchased by it shall bear an appropriate legend indicating that such Common
Shares will be subject to the restrictions set forth in Section 4 herein and may
be sold only if registered under the Securities Act of 1933, as amended (the
"Act"), or pursuant to an applicable exemption from the registration
requirements of the Act, or if the sale is not subject to the Act.
9. Representations, Warranties, Covenants and Certain Agreements of
Telefficiency.
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Telefficiency hereby represents and warrants to, and covenants and further
agrees with, Delco that:
(a) Telefficiency is a corporation duly and validly organized and existing
under the laws of the Ontario, Canada, with full power and authority to execute
and deliver this Agreement, and to perform its obligations hereunder.
(b) Telefficiency has duly and lawfully executed and delivered this
Agreement, and this Agreement constitutes a valid and binding obligation of
Telefficiency enforceable in accordance with its terms and conditions hereof,
subject to any applicable bankruptcy, reorganization, insolvency or other laws,
now or hereafter in effect, affecting creditors' rights generally and with
respect to the specific performance hereof, to equitable doctrines applicable
thereto. Telefficiency's shareholders have duly approved and authorized the
Reorganization, the execution and delivery by Telefficiency of this Agreement
and the consummation by Telefficiency of the transactions contemplated hereby.
(c) Telefficiency agrees that the certificates for Delco's Class B Common
Shares to be acquired by it shall bear an appropriate legend indicating that
such Shares will be subject to the restrictions set forth in Section 4 herein
and may be sold only if registered under the Securities Act of 1933, as amended
(the "Act"), or pursuant to an applicable exemption from the registration
requirements of the Act, or if the sale is not subject to the Act.
10. Survival of Representations and Warranties; Etc.
(a) The representations, warranties, covenants and agreements of each of
the parties hereto set forth in this Agreement shall survive the Effective Date
and any investigation made by or on behalf of the other party.
(b) All statements contained in any instrument delivered by or on behalf of
any party hereof pursuant to, or in connection with, the transactions
contemplated by this Agreement, shall be deemed representations and warranties
by that party.
(c) The representations, warranties, covenants and agreements herein
contained are and shall be binding upon and are and shall be for and shall inure
to the benefit of the parties hereto and their successors and assigns, and shall
not be binding upon or for or inure to the benefit of any other person.
11. Notices and Deliveries.
All notices, deliveries, requests and other communications hereunder shall
be in writing and shall be deemed to have been duly given if delivered,
transmitted by facsimile or if mailed by certified or registered mail, pre-paid
to a party at the address set forth below to this agreement or at such other
address as shall be given in writing by either party to the other.
If to Delco:
Telefficiency Holding Corporation
5155 Spectrum Way, Building 30
Mississauga, Ontario L4W 5A1 Canada
Facsimile: (905) 602-9324
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If to Telefficiency:
Telefficiency Corporation
5155 Spectrum Way, Building 30
Mississauga, Ontario L4W 5A1 Canada
Facsimile: (905) 602-9324
If to a Telefficiency Shareholder:
To the address for such shareholder set forth on
Telefficiency's Shareholder Registry.
12. Modifications.
This Agreement represents the entire agreement of the parties hereto with
respect to the matters contemplated hereby except where reference is made
otherwise. This Agreement may be modified only by written agreement signed by
the parties hereto.
13. Counterparts.
This Agreement 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.
14. Captions and Paragraph Headings.
Caption and Section headings used herein are for convenience only and are
not a part of this Agreement and shall not be used in construing it.
15. Choice of Law.
This Agreement will be governed by and construed and enforced in accordance
with the laws of the State of New York.
16. Succession.
This Agreement shall inure to the benefit of and be binding upon the
Telefficiency's heirs, executors, administrators, and legal representatives,
successors and assigns and Delco's successors and assigns.
17. Use of Pronouns.
The use of the masculine third person singular pronoun in this Agreement
shall be deemed to include the feminine and neuter third person singular
pronoun.
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IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first above written.
TELEFFICIENCY HOLDING CORPORATION
By: _____________________________
TELEFFICIENCY CORPORATION
By: _____________________________
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EXHIBIT 21
The Company has one subsidiary, Telefficiency Corporation. Telefficiency
Corporation was incorporated under the laws of Ontario, Canada and does business
under its name.
88
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Telefficiency Holding Corporation Consolidated Balance Sheet and Income
Statement and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 996,395
<ALLOWANCES> 0
<INVENTORY> 544,912
<CURRENT-ASSETS> 1,563,240
<PP&E> 139,496
<DEPRECIATION> 83,139
<TOTAL-ASSETS> 1,962,197
<CURRENT-LIABILITIES> 2,786,223
<BONDS> 25,157
0
0
<COMMON> 1,496
<OTHER-SE> (850,679)
<TOTAL-LIABILITY-AND-EQUITY> 1,962,197
<SALES> 8,144,945
<TOTAL-REVENUES> 8,144,945
<CGS> 6,075,396
<TOTAL-COSTS> 6,075,396
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 79,194
<INCOME-PRETAX> (1,369,735)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,369,735)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
