<PAGE>
As filed with the Securities and Exchange Commission on July 13, 1999
Registration No. 333-
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
WORLDQUEST NETWORKS, INC.
(Name of Small Business Issuer in its Charter)
Delaware 4813 75-2673785
(State or (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification
incorporation or Number)
organization)
16990 Dallas Parkway, Suite 220
Dallas, Texas 75248
(972) 818-0460
(Address and telephone number
of principal executive offices and principal place of business)
B. Michael Adler
Chairman of the Board
16990 Dallas Parkway, Suite 220
Dallas, Texas 75248
(972) 818-0460
(Name, address and telephone number
of agent for service)
Copies to:
Michael D. Parsons, Esq. Thomas J. Poletti, Esq.
Michael A. Watson, Esq. Susan B. Kalman, Esq.
Glast Phillips & Murray, P.C. Ted Weitzman, Esq.
13355 Noel Road, Suite 2200 Freshman, Marantz, Orlanski, Cooper &
Dallas, Texas 75240 Klein
Telephone (972) 419-8300 9100 Wilshire Boulevard, 8th Floor
Facsimile (972) 419-8329 East
Beverly Hills, California 90212
Telephone (310) 273-1870
Facsimile (310) 274-8357
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Aggregate Amount of
Title of Each Class of Securities to Be Offering Registration
Registered Price(1) Fee
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<S> <C> <C>
Common Stock, $.01 par value(2)................ $23,000,000 $6,394
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Representative's Warrant....................... $ 200 $ 1
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Common Stock, $.01 par value(3)................ $ 2,400,000 $ 668
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Total.......................................... $25,400,200 $7,063
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(2) Includes shares which the underwriters have the option to purchase to cover
over-allotments, if any, equal to fifteen percent of the shares being
offered.
(3) Issuable upon exercise of the Representative's Warrant.
----------------
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated July 13, 1999
Shares
[Logo to come]
WorldQuest Networks, Inc.
Common Stock
We are an international Internet telephony company. We sell virtual prepaid
calling cards through our interactive and easy to use Web site and transmit
long distance calls at discounted rates through our Internet and traditional
networks. We advertise, sell and deliver our virtual calling cards worldwide
exclusively through the Internet.
We plan to have our shares approved for listing on the Nasdaq National Market
under the symbol "WQNI."
This is our initial public offering. No public market currently exists for
our shares. The offering price may not reflect the market price of our shares
after the offering. We estimate that the public offering price for the common
stock will range between $ and $ per share. See "Underwriting"
beginning on page 56 for factors used in determining our public offering price.
Your investment in our common stock involves a high degree of risk. Before
making an investment decision, you should carefully consider the risks
described under "Risk Factors" beginning on page 7.
<TABLE>
<CAPTION>
Per
The Offering Share Total
-------------------------------------- ----- -----
<S> <C> <C>
Public offering price $ $
Underwriting discounts and commissions $ $
Proceeds to us $ $
</TABLE>
We are also offering the underwriters a 45-day option to purchase up to
shares solely to cover any over-allotments on these same terms.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
EBI Securities Corporation
Prospectus dated , 1999
<PAGE>
[logo to come]
WorldQuest Networks, Inc.
(www.wqn.com)
[pictures]
[description to be filed by amendment]
The information on our Web site is not a part of this prospectus.
We intend to furnish stockholders with annual reports containing financial
statements audited by an independent public accounting firm and quarterly
reports containing unaudited financial information for the first three quarters
of each fiscal year. Our fiscal year ends on December 31 each year.
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<PAGE>
WORLDQUEST NETWORKS PROSPECTUS
About WorldQuest Networks
We were incorporated in October 1996 as a Texas corporation. We plan to
reincorporate in Delaware prior to the closing of this offering. Unless
expressly noted otherwise, all references to us in this prospectus assume we
have already become a Delaware corporation. Our executive offices are located
at 16990 Dallas Parkway, Suite 220, Dallas, Texas 75248. Our Web site address
is www.wqn.com and our telephone number is (972) 818-0460.
Introduction
Please read this prospectus carefully. It describes our business, our
products and services and our financial condition and results of operations. We
have prepared this prospectus so that you will have the information necessary
to make an informed investment decision.
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The information contained in this prospectus is
accurate only as of the date of the prospectus, regardless of the time the
prospectus is delivered or the common stock is sold.
Prospectus Delivery Obligations
Until , 1999 (25 days after the date of this prospectus), all
dealers effecting transactions in the common stock may be required to deliver a
prospectus, even if they do not participate in this offering. This is in
addition to the obligations of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 33
Management............................................................... 45
Certain Transactions..................................................... 49
Principal Stockholders................................................... 50
Description of Capital Stock............................................. 51
Shares Eligible for Future Sale.......................................... 54
Underwriting............................................................. 56
Legal Matters............................................................ 58
Independent Auditors..................................................... 58
Where You Can Get More Information....................................... 58
Index to Consolidated Financial Statements............................... F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us and the consolidated financial statements and notes
appearing elsewhere in this prospectus. Our fiscal year ends on December 31 of
each year.
WorldQuest Networks, Inc.
Our Business
We are an international Internet telephony company. We carry international
long distance calls over our own enhanced services platform through one of two
methods:
. We transmit calls over our own Internet network, which involves
transmission through our Internet gateways. In the country of
destination, we have contractual arrangements with local parties to
terminate the calls into the local telephone network.
. We transmit calls over our network of traditional long distance
telephone lines. This network consists of leased capacity from other
international long distance carriers who carry our calls at discounted
rates through their international telephone lines.
All of our calls are made from phone-to-phone over our networks. The voice
quality of our Internet carried calls is virtually the same as an international
telephone call carried over a traditional telephone line. We believe consumers
are more familiar and comfortable using telephones to make calls, as opposed to
computers which have historically been used for Internet telephony.
We advertise, sell and deliver our prepaid long distance virtual calling
cards worldwide exclusively over the Internet through our interactive and easy
to use Web site. Our Web site can be found at www.wqn.com. We focus on the
international long distance market, with particular emphasis on the calling
patterns between the United States and various countries. Our virtual calling
cards may be used to call from the United States to other countries, to call
from other countries to the United States, or to call between countries outside
the United States.
We also buy, at a discount, virtual calling cards processed through other
companies' platforms and sell them to our customers. We sell these virtual
calling cards for calls from the United States to other countries where we have
not established our own Internet network and where our negotiated rates with
our international long distance carriers are not as favorable.
Our Current Market Opportunity
The Internet is an increasingly significant interactive global medium for
communication, information and commerce. International Data Corporation, a
market research firm, estimates that the number of users who make purchases
over the Internet worldwide will grow from 31 million in 1998 to more than
183 million in 2003.
TeleGeography, a market research firm, estimates that revenues from
international long distance traffic will grow from $65.9 billion in 1997 to
$77.5 billion in 2001, with consumers and businesses making an estimated 128.7
billion minutes of international long distance calls in 2001. However,
traditional international long distance calls routed over domestic and foreign
public switched telephone networks are still relatively expensive for the
consumer.
Internet telephony has emerged as a low cost alternative to traditional long
distance telephony. Internet telephone calls are less expensive than
traditional international long distance calls primarily because these calls are
routed over the Internet. The use of the Internet bypasses a significant
portion of international long distance networks and the relevant tariffs. Also,
routing calls over the Internet is more cost-effective than routing calls over
traditional circuit-switched networks, due to technological advantages.
According to The PELORUS Group, a market research firm, the market for
prepaid calling cards has grown from an estimated $300.0 million in 1993 to an
estimated $2.8 billion in 1998. PELORUS predicts that this market will rise to
$10.9 billion in 2003. According to PELORUS, there were 30 million prepaid
calling cards sold in the United States in 1993 and 400 million sold in 1998.
PELORUS predicts there will be 652 million cards sold in the United States in
2003.
4
<PAGE>
Our Strategy
Our goal is to be a leading worldwide Internet telephony company. Our
objective is to increase our revenues through increasing our customer base and
the number of countries we access through our own Internet network. The
strategy to achieve our goal and take advantage of market opportunities
includes:
. focusing our marketing efforts on developing countries that have high
international long distance rates and significant calling traffic to
the U.S. or other countries;
. advertising on Web sites and portals frequently visited by our target
groups;
. increasing our name recognition;
. increasing the number of countries in which we locate our Internet
gateways;
. developing and offering enhanced products and services to complement
existing products and services;
. promoting repeat purchases; and
. advertising, selling and delivering our virtual calling cards 24 hours
per day, year round.
The Offering
Shares offered by WorldQuest.... shares
Shares to be outstanding after shares
the offering....................
Use of proceeds................. To expand our sales and marketing efforts; to
fund equipment purchases including certain
additional back-up systems; to repay
indebtedness; to fund software development;
to increase deposits with credit card
processing companies; and for working capital
and other general corporate purposes.
Proposed Nasdaq National Market "WQNI"
symbol..........................
Unless otherwise indicated, all information in this prospectus:
. gives effect to our reincorporation in Delaware prior to the closing of
this offering;
. gives effect to a 290-for-1 stock dividend in January 1997;
. assumes no exercise of the underwriters' over-allotment option or
exercise of the representative's warrant;
. assumes no exercise of outstanding warrants and stock options to
purchase 578,005 shares of common stock;
. assumes no exercise of stock options to purchase shares of common
stock to be issued at the effective date of this offering at an exercise
price equal to the initial public offering price; and
. assumes no issuance of options for 250,336 shares of common stock
available for future issuance under our stock option plan.
5
<PAGE>
Summary Financial Data
The summary financial data below has been derived from our audited and
unaudited consolidated financial statements included in this prospectus
beginning on page F-1. You should review this summary in conjunction with our
consolidated financial statements and their accompanying notes and the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 25. You should not assume that the
summary financial data is indicative of our future performance.
<TABLE>
<CAPTION>
Three months ended
Year ended December 31, March 31,
------------------------ ----------------------
1997 1998 1998 1999
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenue............... $ 51,963 $ 1,841,439 $ 55,350 $1,431,879
Gross margin (deficit)...... (175,048) (164,192) (39,712) 197,910
Operating expenses:
Selling, general and
administrative .......... 1,102,383 1,115,131 275,024 467,342
Research and development.. 438,860 186,638 52,097 62,851
Net loss.................... (1,589,556) (1,578,427) (339,469) (371,208)
Weighted-average common
shares outstanding - basic
and diluted (1)............ 3,000,000 3,000,000 3,000,000 3,000,000
Net loss per share - basic
and diluted (1)............ $ (0.53) $ (0.53) $ ( 0.11) $ (0.12)
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1999
-----------------------------------------
At December 31, Pro forma
1998 Actual Pro forma(2) as adjusted(3)
--------------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 18,833 $ 6,872 $ 461,872 $
Working capital
(deficit).............. (2,266,669) (2,533,747) (2,078,747)
Total assets............ 1,246,774 970,317 1,425,317
Long-term debt.......... 1,129,004 1,100,000 1,100,000
Stockholders' equity
(deficit).............. (2,514,790) (2,885,998) (2,230,998)
</TABLE>
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(1) See note 2 of notes to consolidated financial statements for a description
of the computation of net loss per share and the number of shares used in
the per share calculation.
(2) Reflects a private placement in May 1999 of 136,638 shares of common stock
for $455,000 and the conversion of $200,000 of short-term debt in May 1999
for 60,061 shares of common stock.
(3) Reflects our sale of shares of common stock at an assumed public
offering price of $ per share and our application of the estimated net
proceeds.
6
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below
and the other information in this prospectus before deciding whether to invest
in shares of our common stock. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business,
financial condition and operating results.
If any of the following risks occur, our business, financial condition and
operating results could be materially adversely affected. In such case, the
trading price of our common stock could decline and you may lose part or all of
your investment.
This prospectus also contains certain forward-looking statements that
involve risks and uncertainties. These statements refer to our future plans,
objectives, expectations and intentions. These statements can be identified by
the use of words such as "expects," "anticipates," "intends," "plans" and
similar expressions. Our actual results could differ materially from those
anticipated in such forward-looking statements. Factors that could contribute
to these differences include, but are not limited to, those discussed below and
elsewhere in this prospectus.
We Have a Limited Operating History
We were incorporated in October 1996. We began selling prepaid virtual
calling cards on our Web site in May 1998. We began routing calls over our
enhanced services platform in August 1998. Accordingly, we have a limited
operating history. Before you decide to purchase our common stock, you should
consider the risks and difficulties frequently encountered by early stage
companies in new and rapidly evolving markets. These risks include our:
. evolving business model;
. competition;
. need to expand our network infrastructure;
. need to expand our sales and marketing efforts;
. dependence on key personnel;
. ability to increase our brand name awareness;
. ability to attract and expand a large customer base;
. ability to continue to develop and upgrade our software;
. ability to access additional capital when required;
. need to manage growth and changing operations;
. need to continue to upgrade and develop our Web site and network
infrastructure;
. ability to develop and renew strategic relationships; and
. dependence on the reliability and growing use of the Internet for
commerce and communication and on general economic terms.
We cannot assure you that our business strategy will be successful or that
we will successfully address any of these risks. Our failure to do so could
materially adversely affect our business, financial condition and operating
results.
We Have a History of Losses and We Anticipate Future Losses and Negative Cash
Flow
Since inception, we have incurred operating losses, and as of March 31,
1999, we had an accumulated deficit of $(3.8) million. We incurred net losses
of $(1.6) million for the fiscal year ended December 31, 1998 and $(400,000)
for the three months ended March 31, 1999.
We anticipate that the net proceeds of this offering, together with
available funds, will be sufficient to meet our anticipated needs for working
capital and capital expenditures through at least the next 18 months. We expect
operating losses and negative cash flow to continue through at least the fourth
quarter of 1999. However, there can be no assurance that we will be profitable
beginning in 2000, because we expect to incur additional costs and expenses
related to:
. marketing and advertising related to traffic generation and brand
development;
7
<PAGE>
. purchases of equipment for our operations and network infrastructure;
. the expansion of our telecommunications network into other countries;
. the continued development of our Web site transaction processing and
network infrastructure;
. development and improvement of additional products and services; and
. the hiring of additional personnel.
Our future profitability depends on our ability to generate and sustain
substantially higher net sales while maintaining reasonable expense levels. If
we do achieve profitability, we cannot assure you that we will be able to
sustain it or improve upon it on a quarterly or annual basis for future
periods.
Our Future Operating Results are Unpredictable
Because of our limited operating history, we cannot accurately forecast our
net sales. We rely upon limited historical financial data to predict our future
operating results. Sales and operating results are difficult to forecast
because they generally depend on the volume of traffic on our network and the
volume and timing of sales of our virtual calling cards. In addition, because
of our anticipated future growth, historical financial data may be unreliable
as an indicator of our future operating results. Because of these factors, we
may be unable to adjust our spending in a timely manner to adjust for any
unexpected revenue shortfall.
To realize our business objectives, we intend to invest a portion of the
proceeds from this offering to market, promote, and to further develop our
telecommunications and online services. We also will invest our resources to
improve our technology and operating infrastructure. In light of our planned
expenditures, the rapidly evolving nature of our industry and our limited
operating history, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful. You should not rely upon
these as an indication of our future performance.
Our operating results are unpredictable and may fluctuate on a quarterly
basis as a result of factors, including:
. our ability to obtain new customers at reasonable cost, retain existing
customers, or encourage purchases;
. the number of visitors to our Web site or our ability to convert
visitors to our Web site into customers;
. seasonality or cyclicality of sales;
. our ability to keep pace with an evolving market;
. our ability to manage anticipated growth;
. our ability to adequately maintain, upgrade and develop our Web site,
transaction processing systems, platforms or network infrastructure;
. our ability to negotiate and maintain cost efficient online advertising;
. our ability to retain key employees;
. our ability to protect our intellectual property rights;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our operations;
. our ability to continually improve our customer service;
. our ability to effectively and efficiently use the proceeds from this
offering;
. consumer confidence in the Internet as a medium of commerce;
. reliability and viability of the Internet infrastructure;
. increased competition;
. reliance on third parties to provide security;
. increased United States and state regulation of the Internet, Internet
commerce or telecommunication services similar to ours;
. increased foreign government regulation of the Internet, Internet
commerce or telecommunication services similar to ours;
. our ability to protect our domain names;
. excessive computer problems associated with the new millennium; and
. the condition of United States and foreign economies.
8
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We Must Keep Pace With a Rapidly Evolving Market
The international telecommunications industry is changing rapidly, due to:
. deregulation;
. privatization of government-owned telephone monopolies;
. technological improvements;
. expansion of telecommunications infrastructure;
. the globalization of the world's economies; and
. free trade.
We may be unable to compete effectively or adjust our contemplated plan of
development to meet these changing market conditions.
Moreover, the telecommunications industry is in a period of rapid
technological evolution and expansion, marked by the introduction of new
products and services offered. These new products and services include the use
of the Internet for international voice and data communications, and increased
satellite and fiber optic cable transmission capacity. Our profitability will
depend, in part, on our ability to anticipate and adapt to rapid technological
changes occurring in the telecommunications industry. It will also depend on
our ability to offer, on a timely basis, services meeting developing industry
standards and customer preferences. We may be unable to adapt to these
technological changes or offer these services on a timely basis. Even if we are
able to do so, we may not be able to do so at reasonable cost or on a
profitable basis.
We Are Dependent upon Long Distance Carriers and Local Terminating Parties to
Carry and Terminate Our Traffic
We lease from international long distance carriers the right to use their
international telephone lines to transmit calls. We also enter into contracts
with local persons or entities in foreign countries to terminate our Internet
traffic. Our success depends, in part, on our ability to continue to lease
capacity at economic rates to serve the foreign countries we target. It also
depends, in part, on our ability to maintain our contractual relationships with
local terminating parties in those countries where we have Internet gateways.
We are dependent on these carriers and local terminating parties continuing to
provide the services to us they are currently providing. If we lose our leases
or contracts or if these parties are unable to provide these services, we
believe we could replace them. However, it would cause a disruption of our
business until they are replaced. Also, any replacement leases or contracts may
not be at rates or on terms as favorable to us.
When we lease telephone lines from carriers with international capacity, we
rely on the carriers to comply with local laws and regulations. We have no
control over the manner in which these companies operate in these countries.
Foreign telecommunications regulators or third parties may raise issues
regarding the compliance of these companies with local laws or regulations.
Regulatory, judicial, legislative or political decisions could limit the
ability of these companies to carry our calls. If these companies become unable
to provide these services to us, we would need to obtain similar services from
other sources.
It Would Cause a Disruption of Our Services if Internet Service Providers Fail
to Provide Internet Access
We depend on Internet service providers to provide Internet access to us and
our customers. We have two Internet service providers in Dallas. Our local
terminating parties in foreign countries also rely on local Internet service
providers for access to the Internet in their countries. If we lost our
connection with both of our Dallas Internet service providers, we could not
sell our virtual calling cards through our Web site, and Web initiated calls
could not be made by our customers, until the connection was reestablished. If
a local terminating party in a foreign country loses its Internet connection,
we could not route calls over the Internet to that destination until the
connection was reestablished. These failures could cause us to lose customers
and our ability to sell virtual calling cards and telephone services would be
affected.
Our customers also rely on Internet service providers for access to the
Internet. If our customers cannot access the Internet, they cannot access our
Web site to purchase virtual calling cards or make Web initiated calls.
9
<PAGE>
Our Operations will be Negatively Affected if Our Enhanced Services Platform
Fails to Operate Properly
All our calls are routed through our enhanced services platform. Our success
is dependent on our platform working properly. If our platform fails for any
reason, we could not route calls until the failure is corrected. From time to
time, we have experienced short term failures or malfunctions in our platform.
We cannot assure you that future failures will not occur.
We plan to develop and offer new products and services which may require
modifications and enhancements to our platform. Also, to respond to market
changes, we may need to offer additional products or services requiring further
modifications and enhancements. For any modification or enhancement, we may
contract with the manufacturer to develop new software or we may develop the
software, or a combination of both. If the software cannot be developed or we
experience significant delays in development, we would not be able to offer the
new products or services. This could put us in a competitive disadvantage if we
are unable to respond to changing market conditions. In the past, we have
experienced delays when we have tried to upgrade our platform. There can be no
assurance that we can successfully develop the software to enable us to offer
new products or services.
We Need to Increase the Number of Web Sites and Portals upon which We Advertise
We market our virtual calling cards and services on third-party Web sites
and portals using banner ads. The banner ads connect directly to our Web site
when "clicked" by the customer. If we cannot continue to cost effectively
market our virtual calling cards and services, our ability to expand our
customer base would be adversely affected.
The Telecommunications Market is Highly Competitive
With respect to prepaid calling cards, we compete with many of the largest
telecommunications providers, including AT&T, MCI WorldCom, Cable & Wireless
and Sprint. These companies are substantially larger and have greater
financial, technical, engineering, personnel and marketing resources, longer
operating histories, greater name recognition and larger customer bases than we
do. We also compete with smaller, emerging carriers in the prepaid calling card
market, including PT-1 Communications, Inc., RSL Communications, IDT Corp.,
SmarTalk Teleservices, Inc., Pacific Gateway Exchange, Inc., FaciliCom
International, LLC and Telegroup, Inc. We may also compete with large operators
in other countries. These companies may have larger, more established customer
bases and other competitive advantages. Deregulation in other countries could
also result in significant rate reductions. We believe that additional
competitors will be attracted to the prepaid card market. These competitors
include Internet-based service providers and other telecommunications
companies. Competition from existing or new competitors could reduce our
revenues from the sale of these cards. A general decrease in telecommunication
rates charged by international long distance carriers could also have a
negative effect on our operations.
The Internet Telephony Market is Also Highly Competitive
An increasing number of large, well-capitalized companies are entering the
market for Internet telephony products and services. As a result, we may not be
able to compete effectively with our competitors in this market, or to increase
our customer base.
In addition, major long distance providers, including AT&T, Bell Atlantic
Corporation and Deutsche Telekom AG, as well as other major companies,
including Motorola, Inc., Intel Corporation and Netscape Communications
Corporation, have all entered or plan to enter the Internet telephony market.
In some cases by investing in companies engaged in the development of Internet
telephony products.
Our competitors also include a number of companies that have introduced
services that make Internet telephony solutions available to businesses and
consumers. Net2Phone, Delta Three, ITXC Corp. and OzEmail Limited, which was
recently acquired by MCI WorldCom, provide a range of Internet telephony
services to consumers and businesses that are similar to the ones we offer.
Several companies, including industry leaders such as AT&T, Sprint and Qwest
Communications
10
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have announced their intention to offer these services on a wider basis in both
the United States and internationally.
In addition, we compete in the market for Internet telephony services with
companies that produce products that may be installed on a user's computer to
permit voice communications over the Internet. Current Internet telephony
products include VocalTec Communications, Ltd.'s Internet Phone, QuarterDeck
Corporation's WebPhone and Microsoft's NetMeeting. In addition, a number of
large companies, including Cisco Systems, Inc., Lucent Technologies, Inc.,
Northern Telecom Limited, Nuera Communications and Dialogic Corp. offer or plan
to offer server-based Internet telephony products. These products are expected
to allow voice communications over the Internet between parties using a
multimedia personal computer and a telephone and between two parties using
telephones.
We May be Vulnerable to Technical Malfunctions
We are dependent upon management information systems to provide services to
our customers, manage our network, track virtual calling card balances and
perform other vital functions. These systems and equipment are subject to
hardware defects and software bugs which may be beyond our control. If we
experience substantial technical difficulties with our hardware or software, we
may not succeed in routing traffic effectively, or in tracking virtual calling
card balances accurately, which could adversely affect our operations.
Network Failures Could Prevent us from Providing our Services and Could Cause
us to Lose Customers
We depend upon our software systems, communications hardware and enhanced
services platform presently located in Dallas, Texas to conduct our virtual
calling card sales and telephone routing. Our systems, communications hardware
and platform are vulnerable to damage or interruption from:
. natural disasters;
. power loss;
. telecommunication failures;
. loss of Internet access;
. physical and electronic break-ins;
. computer viruses; and
. intentional acts of vandalism and similar events.
We have experienced periodic system interruptions, which we believe will
continue to occur from time-to-time. For example, our enhanced services
platform and our third party credit card verification provider have in the past
experienced failures which temporarily prevented customers from using these
services. Since our operations depend on our ability to successfully expand our
network and to integrate new technologies and equipment into our network, there
is an increased risk of system failure as well as a natural strain on the
system.
Significant or lengthy telephone network failures, or difficulties for
customers in completing long-distance telephone calls, could damage our
reputation and result in the loss of customers. These kinds of damage and
losses could prevent us from obtaining new subscribers and customers, and
substantially reduce our revenues.
The success of our Internet-related business depends on our ability to
deliver high-quality, uninterrupted access to the Internet. In the past, we
experienced failures relating to individual Internet servers, and our
subscribers experienced difficulties in accessing and maintaining their
connection to the Internet. Significant or lengthy system failures or
difficulties for subscribers in accessing and maintaining connection with the
Internet could damage our reputation and cause a loss of consumer confidence in
our Web site. The result could be a loss of subscribers, which could reduce our
customer base and our revenues.
Our Systems May Not Accommodate Significant Growth in the Number of Users
Our success depends on our ability to handle a large number of simultaneous
calls. We expect that the volume of simultaneous calls will increase
significantly as we expand our operations. If this occurs, additional stress
will be placed upon the network hardware and software that manages our traffic.
We cannot assure you of our ability to efficiently manage a large number of
simultaneous calls. If we are not able to maintain an appropriate level of
operating performance, or if our service is
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disrupted, then we may develop a negative reputation and our business, results
of operations and financial condition would be materially adversely affected.
Dependence Upon Acceptance of Internet Telephony and Prepaid Calling Cards
In October 1998, we began offering phone-to-phone commercial telephone
service over the Internet. Demand for this service in the future may not
increase. We cannot be certain that Internet telephone service will gain market
acceptance or prove to be a viable alternative to traditional telephone
service. Customers may be reluctant or slow to adopt a new technology. If the
Internet telephony market fails to develop or develops more slowly than we
expect, then our future revenues would be adversely affected.
The market for prepaid calling cards is an emerging business with a large
number of market entrants. Because this market is emerging, it is difficult to
accurately determine what the demand will be for our products and services in
this area. Substantial markets may not continue to develop for prepaid calling
cards, and we may not be able to sustain or increase our sales of these
products and services.
Our Long-Term Success Depends on the Development of the e-commerce Market
We market, sell and deliver our virtual calling cards worldwide exclusively
through the Internet. We depend on customers accessing the Internet to see our
online advertisements and purchase our virtual calling cards. We anticipate
that e-commerce will account for substantially all of our future revenues. Our
business will suffer if e-commerce does not grow or grows more slowly than
expected. A number of factors could prevent acceptance of e-commerce,
including:
. e-commerce is at an early stage and buyers may be unwilling to shift
their purchasing from traditional vendors to online vendors;
. increased government regulation or taxation may limit the growth of
e-commerce; and
. adverse publicity and consumer concern about the security of e-commerce
transactions may discourage its acceptance and growth.
These factors could impair our ability to generate revenues from our online
sales of virtual calling cards, online transmission of telephone calls and
other e-commerce activities.
We Depend on the Internet and the Development of the Internet Infrastructure
Our success also depends in large part upon the development and maintenance
of the Internet infrastructure, such as:
. a reliable network backbone with the necessary speed, data capacity and
security; and
. the timely development of complementary products, such as high speed
modems, for providing reliable and convenient Internet access and
services.
For the Internet to be commercially viable in the long-term, it will need to
continually address the size of its network infrastructure, its enabling
technologies, necessary performance improvements and user security. To the
extent that the Internet continues to experience an increased number of users,
frequency of use or increased bandwidth requirements, we cannot assure you that
the performance or reliability of the Internet will not be adversely affected.
Furthermore, the Internet has experienced a variety of outages and other delays
as a result of damage to portions of its infrastructure, and could face such
outages and delays in the future. These outages and delays could adversely
affect the level of Internet usage and affect the level of traffic, the
processing of orders and the transmission of calls on our Web site.
We cannot assure you that the infrastructure or complementary products or
services necessary to make the Internet a viable commercial marketplace for the
long term will be developed. Even if these products and services are developed,
we cannot assure you that the Internet will become a viable commercial
marketplace for our virtual calling cards and services. If not, our business,
financial condition and operating results will be materially adversely
affected. Also, we may be required to incur substantial expenditures in order
to adapt our products and services to changing Internet technologies, which
could have a material adverse effect on our business, financial condition and
operating results.
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We Need to Manage Growth in Operations
Our ability to successfully offer products and services and implement our
business plan in a rapidly evolving market requires an effective planning and
management process. This is expected to place a significant strain on our
current management resources. To manage the expected growth of our operations,
we will need to improve our:
. transaction processing methods;
. operations and financial systems;
. procedures and controls; and
. training and management of our employees.
At March 31, 1999, we had a total of 11 full-time employees. A portion of
the proceeds from this offering will be used to hire additional key personnel.
Competition for personnel is intense, and we cannot assure you that we will be
able to successfully attract, integrate or retain sufficiently qualified
personnel. Our failure to attract and retain the necessary personnel or to
effectively manage our employee and operations growth could have a material
adverse effect on our business, financial condition and operating results.
Cyclicality, Seasonality and Dependence on United States and International
Economies
Our limited operating history makes it difficult to determine whether our
business is susceptible to seasonal or cyclical fluctuations in the United
States economy or any other country's economy. We cannot assure you that
seasonal or cyclical variations in our operations will not become more
pronounced over time or that they will not materially adversely affect our
business, financial condition and operating results.
We Plan to Offer New Products and Services that May not Prove to be Profitable
We may choose to expand our operations by developing and promoting new or
complementary services or products, expanding the breadth and depth of the
services we provide or expanding our market presence through relationships with
third parties. Any new product or service launched by us that is not favorably
received by consumers may damage our reputation and diminish the value of our
brand name. Expansion of our operations in this manner would also require
significant additional expenses and development, operations and other
resources, straining our current levels. The lack of market acceptance of our
services or our inability to generate satisfactory revenues from such expanded
services to offset their cost could have a material adverse effect on our
business, financial condition and operating results.
We are Exposed to Risks Associated with Internet Commerce Security and Credit
Card Fraud
Consumer concerns over the security of transactions conducted on the
Internet or the privacy of users may inhibit the growth of the Internet and
online commerce. To securely transmit confidential information, such as
customer credit card numbers, we rely on encryption and authentication
technology that we license from third parties. We cannot predict whether events
or developments will compromise or breach the technology that protects our
customer transaction data. If our security measures do not prevent security
breaches, this could have a material adverse effect on our business, financial
condition and operating results.
To date, we have suffered minimal losses as a result of orders placed with
fraudulent credit card data even though the associated financial institution
approved payment of the orders. Under current credit card practices, a merchant
is liable for fraudulent credit card transactions where the merchant does not
obtain a cardholder's signature. We do not obtain the signature of the
cardholder when we process orders. Although we have implemented mechanisms to
try to detect credit card fraud, we cannot assure you that our efforts will be
successful. Our inability to adequately detect credit card fraud could
materially adversely affect our business, financial condition and operating
results.
To the extent that our activities involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
expose us to a risk of loss or litigation and possible liability. We do not
presently carry insurance policies to reimburse us for losses caused by
security breaches. We cannot assure you that our security measures will prevent
security breaches. Our failure to prevent security breaches could have a
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material adverse effect on our business, financial condition and operating
results.
The Market Price For Your Common Stock May Be Volatile
The trading price of our stock is likely to be highly volatile and could be
subject to wide fluctuations in response to factors unrelated to our operating
performance, such as:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations;
. the offering of new services or products by us or our competitors;
. changes in financial estimates by securities analysts;
. conditions or trends in the telecommunications or Internet telephony
industries;
. conditions or trends in the Internet and online commerce industries;
. changes in the economic condition or market valuations of other Internet
or online service companies or telecommunications companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel;
. sales of restricted securities in the open market; and
. threatened or pending litigation.
The market prices of the securities of Internet-related and online commerce
companies have been especially volatile. The trading prices of many Internet
companies' stocks are at or near historical highs and reflect valuations
substantially above historical levels. We cannot assure you that these trading
prices and valuations will be sustained. Broad market and industry factors may
materially and adversely affect the market price of your common stock,
regardless of our operating performance.
In the past, following periods of volatility in the market price of their
stock, many companies have been the subject of securities class litigation.
Such litigation, if instituted, could result in substantial costs and a
diversion of our management's attention and resources, which could have a
material adverse effect on our business, financial condition and operating
results.
Protection of Our Domain Names is Uncertain
We currently hold various Internet domain names relating to our operations,
including "wqn.com," "creditcardphone.com" and "phonecollect.com." Governmental
agencies and their designees are responsible for regulating the acquisition and
maintenance of domain names. For example, the National Science Foundation has
appointed Network Solutions, Inc. as the current exclusive registrar for the
".com," ".net" and ".org" generic top-level domains in the United States. The
regulation of domain names in the United States and other countries may change
in the near future. Such changes in the United States are expected to include a
transition from the current system to a system that is controlled by a non-
profit corporation and the creation of additional top-level domains. Governing
bodies may establish additional top-level domain name registrars or modify the
requirements for holding domain names. As a result, we may be unable to acquire
or maintain relevant domain names in countries in which we conduct business.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear.
Therefore, we may be unable to prevent third parties from acquiring domain
names that are similar to, infringe upon or otherwise decrease the value of our
trademarks and other proprietary rights.
We Need to Protect Our Intellectual Property and Other Proprietary Rights From
Infringement
Our success depends in part upon our ability to protect our proprietary
technology and other intellectual property rights. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights. We protect our
proprietary software through United States copyright laws, and the source code
for our proprietary software is protected under trade secret laws. In December
1996, we applied to the United States Patent and Trademark Office to register
the trademarks: "WorldQuest" and "WorldQuest Networks." In April 1999, the
Patent and Trademark Office granted us a notice of allowance
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for "WorldQuest" for communication services, covering both voice and facsimile
transmissions. In October 1997, the Patent and Trademark Office issued a notice
of publication regarding our application to register "WorldQuest Networks" as a
trademark. In response to that notice, Qwest Communications filed a notice of
opposition in September 1998, which is currently pending before the Patent and
Trademark Office. If we do not prevail, we will not be able to obtain a
registered trademark for "WorldQuest Networks" and we could be required to stop
using the name or pay a fee to Qwest for permission to use it. Any trademark
may be challenged for a period of six years after it has been granted. Thus, we
could also face a cancellation proceeding with the Patent and Trademark Office
relating to our trademark for "WorldQuest." Effective trademark, service mark,
copyright and trade secret protection may not be available in every country in
which our services are made available online. Therefore, the steps that we take
may be inadequate to protect our rights.
We have entered into confidentiality and assignment agreements with our
employees and contractors, and nondisclosure agreements with parties with whom
we conduct business. We do this in order to limit access to and disclosure of
our proprietary information. We cannot assure you that these contractual
arrangements or the other steps taken by us to protect our intellectual
property will prove sufficient. To date, we have not actively policed
unauthorized use of our technology. This is because the global nature of the
Internet makes it difficult to control the ultimate destination or security of
software or other data transmitted.
In the future, we may license certain of our proprietary rights to third
parties. While we will attempt to ensure that the quality of the WorldQuest
Networks brand is maintained by such licensees, such licensees may take actions
that could have a material adverse effect on our business, financial condition
and operating results. We also rely on certain technologies that we license
from third parties. These may include suppliers of key database technology,
enhanced services platforms, gateway server platforms, operating systems and
specific hardware components for our services. We cannot assure you that these
third-party technology licenses will continue to be available to us on
commercially reasonable terms. The loss of such technology could require us to
obtain substitute technology of lower quality or performance standards or at
greater cost, which could materially adversely affect our business, financial
condition and operating results.
In July 1999, we filed a patent application with the United States Patent
and Trademark Office for the architecture of certain of our software
applications. These applications allow customers to Web initiate calls using
our world access virtual calling cards and to Web initiate collect calls using
our phone collect product.
The Internet Industry May Become Subject to Increased Government Regulation
Regulation of the Internet. The United States Congress and the Federal
courts have taken actions that, in some cases impose some forms of regulation
on the Internet, and in other cases protect the Internet from regulation. For
example, Congress has recently adopted legislation that regulates certain
aspects of the Internet. This includes restrictions on some forms of content.
These regulations have had mixed success in the Federal courts. The Supreme
Court has struck down some restrictions on indecent content, but has upheld
other restrictions on harassing Internet messages. Conversely, Congress last
year passed legislation that imposes a moratorium on the imposition of new
taxes on internet transactions for three years. At the same time, numerous new
bills have been proposed that would further regulate various aspects of
Internet commerce, and ensure the continued deregulation of others. It is
impossible to say at this time whether and to what extent the Internet may
ultimately be regulated by the United States government.
The European Union has also enacted several directives relating to the
Internet, one of which addresses online commerce. As with the United States
Congress, the European Union, and the governments of individual foreign
countries, are actively considering proposed legislation that could result in
new regulations on the Internet. Increased regulation of the Internet may
decrease its growth, which may negatively impact the cost of doing business via
the Internet or otherwise materially adversely affect our business, results of
operations and financial condition. In addition, applicability to the Internet
of existing laws governing issues such as property ownership, copyrights and
other
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intellectual property issues, taxation, libel, obscenity and personal privacy
is uncertain. The vast majority of such laws were adopted prior to the advent
of the Internet and related technologies. As a result, these laws do not
contemplate or address the unique issues of the Internet and related
technologies.
State Laws. Several states have also proposed legislation that would limit
the uses of personal user information gathered online or require online
services to establish privacy policies. Changes to existing laws or the passage
of new laws intended to address these issues could reduce demand for our
services or increase the cost of doing business. In addition, because our
services are accessible worldwide, and we facilitate the sale of goods to users
worldwide, other jurisdictions may claim that we are required to comply with
their laws. We are qualified to do business in Delaware and Texas only, and
failure by us to qualify as a foreign corporation in a jurisdiction where we
are required to do so could subject us to taxes and penalties for the failure
to qualify. This could also result in our inability to enforce contracts in
such jurisdictions. Any such new legislation or regulation, or the application
of laws or regulations from jurisdictions whose laws do not currently apply to
our business, could have a material adverse effect on our business, financial
condition and operating results.
Potential Regulation of Internet Telephony. To our knowledge, there are
currently no domestic and few international laws or regulations that prohibit
the transmission of voice communications over the Internet. If Congress, the
FCC, state regulatory agencies or governments of other countries impose
substantial regulations relating to Internet telephony, the growth of our
business could be adversely affected. In the United States, several efforts
have been made to enact federal legislation that would either regulate or
exempt from regulation telecommunication services provided over the Internet.
State public utility commissions may also attempt to regulate the provision of
intrastate Internet telephony services. In late 1998 and early 1999, however,
the FCC issued two decisions that suggest that all transmissions over the
Internet may be jurisdictionally interstate, and these decisions may restrict
the ability of state public utility commissions to regulate Internet telephony.
Internationally, a number of countries that currently prohibit competition in
the provision of voice telephony have also prohibited Internet telephony. Other
countries permit but regulate Internet telephony.
On April 10, 1998, the FCC issued a Report to Congress concerning its
implementation of the universal service provisions of the Telecommunications
Act. In the Report, the FCC indicated that it would examine the question of
whether any forms of "phone-to-phone" Internet Protocol telephony are
information services, which are unregulated, or telecommunications services,
which are fully regulated. The Report noted that the FCC did not have, as of
the date of the Report, an adequate record on which to make any definitive
pronouncements. The FCC did, however, note that the record before it suggested
that some forms of phone-to-phone Internet telephony appear to have the same
functionality as non-Internet Protocol telecommunications services.
While the FCC found that it needed a more complete record to establish new
rules, it tentatively concluded that providers of phone-to-phone Internet
telephony services should be treated like other providers of telephone service.
This means that they should be required to make payments into Federal universal
service subsidy programs. To date, the FCC has taken no further action, and has
not imposed this obligation on Internet telephony providers. It may do so at
some time in the future, however, and such a decision could have a material
adverse effect on our business, increasing our costs, and the price at which we
can offer our Internet telephony services.
We May be Subject to Sales and Other Taxes
We do not currently collect sales or other similar taxes for calling cards
or services sold through our Web site, other than for calling cards sold to
Texas residents. However, one or more states may seek to impose sales tax or
similar collection obligations on out-of-state companies, such as ours, which
engage in Internet commerce. A number of proposals have been made at the state
and local level that would impose additional taxes on the sale of goods and
services through the Internet. Such proposals, if adopted, could substantially
impair the growth of online commerce, and could adversely affect our
opportunity to derive financial benefit from such activities. Moreover, a
successful assertion by one or more states or any other country
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that we should collect sales or other taxes on the sale of cards or services on
our system could have a material adverse effect on our operations.
Legislation imposing a moratorium on the ability of states to impose taxes
on Internet-based transactions was passed by the United States Congress last
year. The tax moratorium will be in effect only for three years. The same
legislation that imposed the moratorium also established an Advisory Commission
to consider methods by which states could impose sales taxes on Internet
transactions. If the moratorium expires at the end of its three-year term,
there can be no assurance that the moratorium will be renewed at the end of
such period. Failure to renew the moratorium could allow various states to
impose taxes on Internet-based commerce. The imposition of such taxes could
have a material adverse effect on our business, financial condition and
operating results.
We Need to Expand our Internet Relationships
Our future also depends in part on developing relationships and improving
existing relationships with other online companies. Generally, these
relationships have terms of up to one year, are not exclusive and do not
provide for guaranteed renewal. We incur certain risks associated with
developing relationships with other online companies, including:
. the possibility that a competitor will purchase exclusive rights to
attractive space on one or more key sites;
. the uncertainty that significant spending on these relationships will
increase our revenues to an extent commensurate with increased spending;
. delays in the realization of revenues from these expenditures;
. increased costs associated with online advertising; and
. the possibility that attractive online sites will not permit our
advertising because such sites also offer services similar to ours or
contain advertisements by our competitors.
If we are unable to secure these relationships and advertising
opportunities, or to do so at reasonable costs, our business, financial
condition and operating results may be materially adversely affected.
We Face Various Challenges to Increase Our International Sales
A component of our business strategy is to further expand our sales
internationally. Further expansion into the international markets will require
management attention and resources. We believe that many of our competitors are
also undertaking expansion into international markets. We cannot assure you
that we will be successful in further expanding into international markets. Due
to the uncertainty regarding our ability to generate revenues from
international operations and expanding our international presence, there are
certain risks inherent in doing business internationally, including, among
others:
. regulatory constraints;
. legal uncertainty regarding liability;
. tariffs and other trade barriers;
. political instability;
. seasonal reductions in business activity; and
. potentially adverse tax consequences.
We cannot assure you that one or more of these factors will not have a
material adverse effect on our international sales.
We Depend on Key Personnel
We believe that our success will depend on the continued services of our
senior management team, especially B. Michael Adler and Michael R. Lanham. The
loss of the services of any of our senior management team or other key
employees could adversely affect our business, financial condition and
operating results.
We also depend on the ability of our senior management and key personnel to
work effectively as a team. In particular, we hired Mark C. Levy as Chief
Financial Officer and Treasurer in July 1999. Accordingly, our senior
management team has had a limited time to work together. We cannot assure you
that they will be able to work effectively together. We do not have employment
agreements with any of our key personnel. We carry $2.0 million of key person
life insurance on the lives of each of B. Michael Adler and Michael R. Lanham.
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We Have Discretion as to Use of Proceeds
The net proceeds we will receive from the sale of the shares of
common stock offered by us are estimated to be approximately $ million,
after deducting underwriting discounts, the underwriter's non-accountable
expense allowance and other estimated offering expenses. The primary purposes
of this offering are to obtain additional capital, create a public market for
our common stock and facilitate future access to public markets. We intend to
use the net proceeds from this offering for:
. expansion of our sales and marketing efforts;
. equipment purchases including certain additional back-up systems;
. repayment of indebtedness;
. software development;
. increasing deposits with credit card processing companies; and
. general corporate purposes, including working capital.
Accordingly, our management will retain broad discretion as to the
allocation of the proceeds of this offering. The failure of management to apply
such funds effectively could have a material adverse effect on our business,
financial condition and operating results.
We Face Year 2000 Risks
Many existing computer programs use only two digits to identify a year. For
example, the year 1998 is represented by the number "98" in many system
applications. Consequently, January 1, 2000 will be confused in many non-
compliant programs as January 1, 1900. These programs were designed without
addressing the impact of the upcoming change in the century. If not corrected,
many computer software applications could fail or create erroneous results.
We are in the process of reviewing the Y2K compliance of our internally
developed proprietary software. This review has included testing to determine
how our systems will function at and beyond the year 2000. We expect to
complete these tests during the third quarter of 1999. Our internally developed
software accounts for substantially all of the systems needed to operate our
Web site. These systems include the software used to provide our Web site's
search, customer interaction, transaction-processing and telephone routing
functions, as well as firewall, security, monitoring and back-up capabilities.
Based upon our assessment to date, we believe that our internally developed
proprietary software is Y2K compliant.
We are also dependent upon the Y2K compliance of our vendors and other third
party service providers. For example, we are dependent on the financial
institutions involved in processing our customers' credit card payments for
Internet services and third parties that provide our Internet access. We are
also dependent on telecommunications and Internet vendors to maintain our
network. We are currently assessing the Y2K readiness of our third party
vendors and service providers to determine the extent to which we may be
vulnerable to their failure to address Y2K problems. As part of this
assessment, we have sought assurances from these vendors that their software,
computer technology and other services are Y2K compliant. We expect this
assessment process to be completed during the third quarter of 1999. Based upon
the results of this assessment, we may have to develop a remediation plan to
partially insulate us from their non-compliance. At this time, the expenses
associated with this assessment and potential remediation plan cannot be
determined. We are unable to control Y2K system issues relating to third
parties. We cannot assure you that the Y2K problems of our vendors and service
providers will not have a material adverse effect on our business, financial
condition and operating results.
We are also contacting all of our credit card processing companies, Internet
service providers, local terminating parties and long distance carriers to
determine their Y2K compliance. We are requiring evidence from each of these
companies regarding the level of their Y2K readiness and compliance. Once
received, we will conduct selected tests to confirm their Y2K readiness.
The Y2K readiness of the general infrastructure necessary to support our
operations is difficult to assess. For instance, we depend on the integrity and
stability of the Internet to provide our services. We also depend on the Y2K
compliance of the computer systems and financial services used by the
customers. A significant disruption in the ability of customers to reliably
access the Internet or portions of it or to use their credit cards would have
an
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adverse effect on demand for our virtual calling cards and services and would
have a material adverse effect on us.
We May Need to Seek Additional Capital in the Future
We require substantial working capital to fund our business. Since our
inception, we have experienced negative cash flow from operations and expect to
experience negative cash flow from operations through at least the fourth
quarter of 1999. Our working capital requirements and cash flow provided by
operating activities can vary from quarter to quarter depending on revenues,
operating expenses, capital expenditures and other factors. We anticipate that
the net proceeds of this offering will be sufficient to meet our anticipated
needs through at least the next 18 months. Thereafter, we may need to raise
additional funds. We may also need to raise additional funds sooner than
anticipated to:
. fund more rapid expansion;
. develop new or enhanced services or products; and
. respond to competitive pressures.
If additional funds are raised through the issuance of equity or convertible
debt securities your rights and ownership in our company may be reduced.
We cannot assure you that additional financing will be available on terms
favorable to us or at all. If adequate funds are not available, or are not
available on acceptable terms, we may not be able to fund planned expansion,
take advantage of available opportunities, develop or enhance services or
products or respond to competitive pressures. Such inabilities could have a
material adverse effect on our business, financial condition and operating
results.
We May Issue Equity Securities With Greater Preferences Than Those Held by Our
Common Stockholders
Our Board of Directors has the authority to issue up to 10 million shares of
preferred stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by our common stockholders. Your rights as a holder of common stock
will be subject to, and may be materially adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of:
. delaying, deferring or preventing a change in control;
. discouraging tender offers for your common stock at a premium over its
market price; and
. materially adversely effecting your voting rights and the market price
of your common stock.
We have no current plans to issue shares of preferred stock.
Shares Eligible for Future Sale
Upon completion of this offering, there will be shares of common stock
outstanding, of which, shares will be deemed "restricted" under Rule 144
of the Securities Act of 1933. Following the expiration of 180-day and one year
lock-up agreements with the representative of the underwriters, shares and
shares of the restricted securities will be available for sale in the
public market, and the remaining restricted securities will be eligible for
sale from time to time thereafter upon expiration of applicable holding periods
under Rule 144. Furthermore, the representative of the underwriters may, in its
sole discretion and at any time without notice, release all or any portion of
the securities subject to lock-up agreements.
As of June 30, 1999, there were outstanding options and warrants to purchase
478,005 shares of our common stock. All of the shares issuable upon exercise of
such options and warrants are subject to lock-up agreements.
Immediately after this offering, we intend to register 667,867 shares of
common stock subject to outstanding options and reserved for issuance under our
stock option plan.
The sales of a substantial amount of restricted common stock in the public
market by our existing stockholders after this offering could adversely affect
the market price of your common stock. Such sales also might make it more
difficult for us to sell securities in the future at a time and price that we
deem appropriate.
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We have entered into a registration rights agreement with InterVoice, Inc.
We have agreed that if we file with the SEC a registration statement InterVoice
shall have the right to include all or any number of shares beneficially owned
by them in such registration statement. All expenses of such registrations
shall be at our expense. If InterVoice, by exercising its registration rights,
causes a large number of shares to be registered and sold in the public market,
such sales could have a material adverse effect on the market price of your
common stock. InterVoice is not selling any of its shares pursuant to this
prospectus.
A Majority of Our Stock is Owned By Our Current Management
Upon completion of this offering, our executive officers and directors will,
in the aggregate, own approximately % of our outstanding common stock. As a
result, such persons, acting together, will have the ability to control all
matters submitted to you for your approval and to select management.
Accordingly, such concentration of ownership may have the effect of:
. delaying, deterring or preventing a change in control;
. impeding a merger, consolidation, takeover or other business
combination;
. discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control; and
. preventing an increase in the market price of your stock as a result of
takeover speculation.
Antitakeover Provisions
Certain provisions of our Certificate of Incorporation and Bylaws are
designed to deter potential takeovers, including provisions that:
. allow us to divide the Board of Directors into three classes to serve
staggered three-year terms;
. prohibit the stockholders from taking action by written consent;
. restrict the ability of stockholders to call special meetings; and
. prohibit removal of a director except for cause and upon the affirmative
vote of stockholders owning 67% of our voting stock.
We are also subject to certain provisions of Delaware law that could have
the effect of delaying, deterring or preventing a change in control, including
Section 203 of the Delaware General Corporation Law. These provisions prohibit
a Delaware corporation from engaging in any business combination with an
interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met.
Taken together, the ownership position of our executive officers and
directors and their affiliates, the antitakeover provisions in our charter
documents and the effect of Section 203 of the Delaware General Corporation Law
could discourage potential takeover attempts and make it more difficult for
stockholders to effect changes in management. This could prevent an increase in
the market price of your common stock as a result of takeover speculation.
We Cannot Assure You That a Market For Your Stock Will Develop
Prior to this offering, there has been no public market for our common
stock, and we cannot assure you that an active public market will develop or be
sustained after this offering or that you will be able to sell your common
stock should you desire to do so. The initial public offering price will be
determined by negotiations between us and the representative of the
underwriters and may bear no relationship to the price at which the common
stock will trade upon completion of this offering.
Investors in this Offering Will Suffer Immediate and Substantial Dilution
The initial public offering price per share will significantly exceed the
net tangible book value per share. Accordingly, investors purchasing shares in
this offering will suffer immediate and substantial dilution of their
investment. See "Dilution."
We Do Not Expect to Pay Cash Dividends on Our Common Stock
We expect to retain future earnings, if any, for use in the operation and
expansion of our business. We do not anticipate paying any cash dividends on
our common stock in the foreseeable future.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to us from the sale of shares of common stock
offered by us at an assumed initial public offering price of $ per share
(after deducting estimated underwriting discounts, the underwriters' non-
accountable expense allowance and other estimated offering expenses payable by
us), are estimated to be $ (and an additional $ from the sale of
shares if the underwriters' over-allotment option is exercised in full).
The net proceeds of the offering will be used for the following purposes:
. expansion of our sales and marketing efforts (approximately $1.8
million);
. equipment purchases including certain additional back-up systems
(approximately $1.25 million);
. repayment of indebtedness (approximately $468,000);
. software development (approximately $450,000)
. increasing deposits with credit card processing companies (approximately
$150,000); and
. general corporate purposes, including working capital (approximately
$ ).
The indebtedness to be repaid is a portion of a $2.0 million credit facility
with Eagle Venture Capital, LLC, formerly known as WorldQuest Networks, LLC
("Eagle Venture"), our controlling stockholder. B. Michael Adler, our Chairman
of the Board, owns 94% of Eagle Venture. At March 31, 1999, $1.8 million was
outstanding under the credit facility. The facility consists of a $1.1 million
term loan and a revolving line of credit of up to $900,000. The facility bears
interest at 8% per year and the $1.1 million term loan and accrued interest
thereon is payable May 5, 2002. Any balance outstanding under the $900,000
revolving line of credit is payable on May 5, 2002, unless demand is made by
Eagle Venture for earlier payment, and accrued interest on the line of credit
portion is payable on December 18, 1999 and thereafter is payable monthly.
Demand for payment of $468,000 of the principal balance of the line of credit
portion (with accrued interest thereon) has been made effective upon closing of
this offering. The proceeds of this credit facility were used to provide us
with working capital.
Prior to their eventual use, the net proceeds will be invested in high
quality, short-term investment instruments such as short-term corporate
investment grade or United States Government interest-bearing securities.
DIVIDEND POLICY
We have never paid any dividends on our common stock, and we currently
intend to retain any future earnings to fund the development and growth of our
business. Any future determination to pay dividends will depend on our results
of operations, future earnings, financial condition and capital requirements,
applicable restrictions under any credit facilities or other debt arrangements
and such other factors deemed relevant by our Board of Directors.
21
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1999, our (A) actual short-
term debt and capitalization at March 31, 1999 and (B) pro forma to reflect a
private placement in May 1999 of 136,638 shares of common stock for $455,000
and the conversion of $200,000 of short-term debt in May 1999 for 60,061 shares
(collectively, the "Private Placement") and (C) pro forma as adjusted to
reflect the sale by us of shares of common stock offered by us at an
assumed initial public offering price of $ per share and the application of
the net proceeds therefrom (after deducting estimated underwriting discounts,
the underwriters' non-accountable expense allowance and other estimated
offering expenses payable by us). The information in the table should be read
in conjunction with the more detailed consolidated financial statements and
notes beginning on page F-1.
<TABLE>
<CAPTION>
As of March 31, 1999
-------------------------------------
Pro forma
Actual Pro forma as adjusted
----------- ----------- -----------
<S> <C> <C> <C>
Short-term debt.......................... $ 897,174 $ 697,174 $
=========== =========== ===========
Long-term debt........................... $ 1,100,000 $ 1,100,000 $
----------- ----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value;
10,000,000 shares authorized; none
issued and
outstanding actual, pro forma and pro
forma as adjusted.................... -- -- --
Common stock, $.01 par value:
50,000,000 shares authorized;
3,000,000 issued and outstanding
actual; 3,196,699 shares issued and
outstanding pro forma; shares
issued and
outstanding pro forma as adjusted.... 300,000 319,670
Additional capital..................... 609,253 1,244,583
Accumulated deficit.................... (3,795,251) (3,795,251)
----------- ----------- -----------
Total stockholders' equity
(deficit)......................... (2,885,998) (2,230,998)
----------- ----------- -----------
Total capitalization............... $(1,785,998) $(1,130,998) $
=========== =========== ===========
</TABLE>
22
<PAGE>
DILUTION
Our pro forma net tangible book value (deficiency) at March 31, 1999 was
$(2.2) million or $(0.70) per share. Pro forma net tangible book value
(deficiency) per share represents the amount of our total tangible assets less
total liabilities, divided by the number of shares of common stock outstanding,
after giving effect to the Private Placement. After giving effect to the
receipt by us of the net proceeds from the sale of shares of common stock
offered hereby at the assumed initial public offering price of $ per share
and the application of the net proceeds therefrom (after deducting the
estimated underwriting discounts, the underwriters' non-accountable expense
allowance and other estimated offering expenses payable by us), our pro forma
as adjusted net tangible book value at March 31, 1999 would have been $
or $ per share. This represents an immediate increase in pro forma net
tangible book value of $ per share to the existing stockholders and an
immediate substantial dilution of $ per share to new investors purchasing
shares in this offering. The following table illustrates this per share
dilution:
<TABLE>
<CAPTION>
Assumed initial public offering price per share...................... $
<S> <C> <C>
Pro forma net tangible book value per share before this
offering........................................................ $
Increase per share attributable to new investors ..................
------
Pro forma net tangible book value per share after this offering......
------
Dilution per share to new investors.................................. $
======
</TABLE>
The following table summarizes as of March 31, 1999, after giving pro forma
effect to the Private Placement, the differences between existing stockholders
and new investors (before deducting the estimated underwriting discounts, the
underwriters' non-accountable expense allowance and other estimated offering
expenses payable by us) with respect to the number of shares of common stock
purchased from us, the total consideration paid and the average price per
share.
<TABLE>
<CAPTION>
Shares owned
after Total
the offering consideration
-------------- -------------- Average price
Number Percent Amount Percent per share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... % $ % $
New investors....................... $
---- ----- ----- -----
Total............................. 100.0% 100.0%
==== ===== ===== =====
</TABLE>
Eagle Venture owns 2,666,478 shares of our common stock. Eagle Venture paid
an average of $0.24 per share for these shares. B. Michael Adler, our Chairman
of the Board, owns 94% of Eagle Venture. Each of Mr. Adler and one of our other
directors, Hugh E. Humphrey, Jr., have options to acquire 5,000 shares of our
common stock for an exercise price of $1.00 per share. Michael R. Lanham, our
President and a director, has an option to purchase 167,867 shares at an
exercise price of $3.33 per share.
23
<PAGE>
SELECTED FINANCIAL DATA
You should read the selected financial and operating data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes included elsewhere in this prospectus. The statement of operations data
set forth below for the fiscal years ended December 31, 1997 and 1998 and the
selected balance sheet data as of December 31, 1998 have been derived from our
audited consolidated financial statements appearing elsewhere in this
prospectus. The statement of operations data for the three months ended March
31, 1998 and 1999 and the selected balance sheet data as of March 31, 1999 have
been derived from our unaudited consolidated financial statements. Our
unaudited consolidated financial statements include all adjustments, consisting
of normal recurring accruals, which we consider necessary for a fair
presentation of the results of operations for these periods. The historical
results are not necessarily indicative of results to be expected for any future
period. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
Year ended December 31, Three months ended March 31,
-------------------------- ----------------------------
1997 1998 1998 1999
------------ ------------ -------------- --------------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Retail prepaid calling
card revenue........... $ -- $ 1,466,322 $ -- $ 1,228,351
Wholesale traffic and
other.................. 51,963 375,117 55,350 203,528
------------ ------------ -------------- --------------
Total revenue......... 51,963 1,841,439 55,350 1,431,879
Cost of sales........... 227,011 2,005,631 95,062 1,233,969
------------ ------------ -------------- --------------
Gross margin (deficit).. (175,048) (164,192) (39,712) 197,910
Selling, general and
administrative......... 1,102,383 1,115,131 275,024 467,342
Research and
development............ 438,860 186,638 52,097 62,851
------------ ------------ -------------- --------------
Operating loss.......... (1,716,291) (1,465,961) (366,833) (332,283)
Interest expense........ (28,265) (162,466) (22,636) (38,925)
Other income............ 155,000 50,000 50,000 --
------------ ------------ -------------- --------------
Loss before income
taxes.................. (1,589,556) (1,578,427) (339,469) (371,208)
Income tax benefit...... -- -- --
------------ ------------ -------------- --------------
Net loss................ $ (1,589,556) $ (1,578,427) $ (339,469) $ (371,208)
============ ============ ============== ==============
Weighted-average common
shares outstanding -
basic and diluted..... 3,000,000 3,000,000 3,000,000 3,000,000
============ ============ ============== ==============
Net loss per share -
basic and diluted..... $ (0.53) $ (0.53) $ (0.11) $ (0.12)
============ ============ ============== ==============
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998 At March 31, 1999
-------------------- -----------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................ $ 18,833 $ 6,872
Working capital (deficit)................ (2,266,669) (2,533,747)
Total assets............................. 1,246,774 970,317
Long-term debt........................... 1,129,004 1,100,000
Stockholders' equity (deficit)........... (2,514,790) (2,885,998)
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the discussion in this prospectus
contains forward-looking statements that involve risks and uncertainties. These
statements refer to our future plans, objectives, expectations and intentions.
These statements may be identified by the use of words such as "expects,"
"anticipates," "intends," "plans" and similar expressions. Our actual results
could differ materially from those anticipated in such forward-looking
statements. Factors that could contribute to these differences include, but are
not limited to, the risks discussed in the section titled "risk factors" in
this prospectus.
Overview
General. We are an international Internet telephony company. We sell virtual
prepaid calling cards through our interactive and easy to use Web site and
transmit long distance calls at discounted rates through our Internet and
traditional networks. We advertise, sell and deliver our virtual calling cards
worldwide exclusively through the Internet.
We were incorporated in October 1996 and began offering services for sale in
December of that year. We were formed when the principal shareholder of Eagle
Venture decided to pursue Internet telephony opportunities. In conjunction with
our formation, Eagle Venture contributed cash and other assets valued at
approximately $185,000 (the estimated fair value) in exchange for 100% of our
then outstanding common stock. During 1997, Eagle Venture contributed an
additional $316,000 to further capitalize us, but received no additional shares
of common stock.
We started our company to develop an international fax business. In May
1998, we changed our business model to focus on providing Internet based
telephone services. We began selling prepaid virtual calling cards on our Web
site in May 1998. We began routing calls over our enhanced services platform in
August 1998.
Revenues. We receive revenue from two sources, the sale of virtual calling
cards and the sale of excess line capacity to other long distance carriers. Our
virtual calling cards are sold to our customers worldwide over the Internet
through our Web site primarily through credit card purchases. Our wholesale
traffic and other revenues are derived from the sale of excess line capacity to
other long distance carriers pursuant to short-term contracts and the
transmission of facsimile traffic. Revenues from the sale of prepaid virtual
calling cards is deferred and recognized as calling services are used.
Wholesale traffic revenue is recognized as calls are processed.
All sales of our virtual calling cards are made over the Internet primarily
through credit card purchases. We use credit card processing companies to
verify credit cards. Until May 1999, our former credit card processing company
restricted the amount of credit card purchases that could be made from us per
month. That company also would not allow purchases with non United States
issued credit cards. These restrictions prevented us from increasing our sales
as rapidly as desired. In May 1999, we began processing with another credit
card processing company which sets no limit on our monthly credit card sales
and agreed to accept purchases with non United States issued credit cards. We
believe these developments may have a positive effect on sales in the near
term.
Accounts receivable consists of amounts owed by credit card processing
companies relating to prepaid virtual calling card sales, and amounts owed by
telephone companies for processed call traffic. At March 31, 1999, a telephone
company accounted for 33% of total accounts receivable. This company accounted
for 59% of total accounts receivable at December 31, 1998. At March 31, 1999, a
credit card processing company accounted for 48% of total accounts receivable.
This company accounted for 26% of total accounts receivable at December 31,
1998. No individual customer accounted for more than 10% of total sales either
for the first quarter of 1999 or for 1998. Customers purchase our virtual
prepaid calling cards primarily using major credit
25
<PAGE>
cards which are reimbursed by credit card processing companies. Accordingly, we
do not routinely perform on-going credit evaluations of our customers, but do
perform evaluations of our credit card processors. Additionally, we do not
require collateral.
Expenses. Due to our changing business model from fax services to Internet
telephony services, we have substantially expanded our infrastructure and
increased our capital expenditures and capital lease obligations relating to
property and equipment. During the first quarter of 1999, our capital
expenditures and payments on capital leases totaled $109,000. These capital
expenditures and payments were $202,000 during 1998. As we continue to grow, we
expect to expand our infrastructure by increasing our capital expenditures and
leases. We expect these expenditures will represent a smaller percentage of
sales as our sales volume grows.
Research and development costs are expensed as incurred and consist
primarily of salaries, supplies and contract services.
Since inception, we have incurred significant losses and, as of March 31,
1999, had an accumulated deficit of $(3.8) million. We expect operating losses
and negative cash flow to continue through at least the fourth quarter of 1999.
We expect to incur additional costs and expenses related to:
. marketing and advertising related to traffic generation and brand
development;
. purchases of equipment for our operations and network infrastructure;
. the expansion of our telecommunications network into other countries;
. the continued development of our Web site transaction processing and
network infrastructure;
. development and improvement of additional products and services; and
. the hiring of additional personnel.
We have a limited operating history on which to base an evaluation of our
business and prospects. In addition, due to the change in our model from fax
services to Internet telephony services in May 1998, 1998 operations only
include a period of eight months of revenues from Internet telephony services.
Therefore, it is not very meaningful to compare 1998 to 1997 because of the
different models pursued in each year. You must also consider our prospects in
light of the risks, expenses and difficulties frequently encountered by
companies in their early stage of development, particularly companies in new
and rapidly evolving markets such as e-commerce. Such risks for us include, but
are not limited to, an evolving and unpredictable business model and management
of growth. To address these risks, we must, among other things, maintain and
expand our customer base, implement and successfully execute our business and
marketing strategy, continue to develop and upgrade our technology and systems
that we use to process customers' orders and payments, improve our Web site,
provide superior customer service, respond to competitive developments and
attract, retain and motivate qualified personnel. We cannot assure you that we
will be successful in addressing such risks, and our failure to do so could
have a material adverse effect on our business, prospects, financial condition
and results of operations.
26
<PAGE>
Results of Operations
The following table sets forth statement of operations data as a percentage
of revenues for the periods indicated:
<TABLE>
<CAPTION>
Three months
Year ended ended March
December 31, 1998 31,
----------------- --------------
1998 1999
------ -----
<S> <C> <C> <C>
Retail prepaid calling card revenue.......... 79.6% -- % 85.8%
Wholesale traffic and other.................. 20.4 100.0 14.2
----- ------ -----
Total revenue.............................. 100.0 100.0 100.0
Cost of sales................................ 108.9 171.8 86.2
----- ------ -----
Gross margin (deficit)....................... (8.9) (71.8) 13.8
Selling, general and administrative.......... 60.6 496.9 32.6
Research and development..................... 10.1 94.1 4.4
----- ------ -----
Operating loss............................... (79.6) (662.8) (23.2)
Interest expense............................. 8.8 40.9 2.7
Other income................................. (2.7) (90.3) --
----- ------ -----
Net loss..................................... (85.7)% (613.4)% (25.9)%
===== ====== =====
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Revenue
Revenue increased to $1.4 million for the three months ended March 31, 1999
from $55,000 for the comparable period in 1998 as a result of the change in our
business model, significant growth of our customer base and an increase in
repeat purchases from our existing customers. Of the $1.4 million received for
the three months ended March 31, 1999, $1.2 million represents prepaid virtual
calling card revenue and the remainder represents wholesale traffic and other
revenue, $35,000 of which was derived from a subsidiary which ceased operations
in June 1999.
Cost of Sales
Cost of sales consists primarily of the costs of termination of long
distance traffic over our networks. Cost of sales increased to $1.2 million for
the three months ended March 31, 1999 from $95,000 for the comparable period in
1998. This $1.1 million increase was primarily attributable to our increased
sales volume. We expect cost of sales to increase in future periods to the
extent that our sales volume increases.
Operating Expenses
Selling, General and Administrative. Selling, general and administrative
expenses consist of advertising and promotional expenditures, payroll and
related expenses for executive and administrative personnel, facilities
expenses, professional services expenses, travel and other general corporate
expenses. Selling, general and administrative expenses increased to $467,000
for the three months ended March 31, 1999 from $275,000 for the comparable
period in 1998, but decreased significantly as a percentage of revenue. Such
expenses are expected to continue to decrease as a percentage of revenue during
1999. We expect selling, general and administrative expenses to increase in
absolute dollars as we continue to pursue advertising and marketing efforts,
expand our network termination locations worldwide, expand our staff and incur
additional costs related to the growth of our business and being a public
company.
27
<PAGE>
Research and Development Costs. Research and development costs consist
primarily of payroll and related expenses for evaluating and integrating new
hardware and software, Web site development and information technology
personnel, Internet access and hosting charges and Web content and design
expenses. Research and development costs increased to $63,000 for the three
months ended March 31, 1999 from $52,000 for the comparable period in 1998.
While we will continue to incur expenses for research and development to
increase our product line and enhance our services, we expect these
expenditures will continue to decrease as a percentage of revenue as our sales
volume increases.
Interest Expense
Interest expense consists of interest charges attributable to capital leases
for equipment and to borrowings under a credit facility with our principal
stockholder. The increase to $39,000 for the three months ended March 31, 1999
from $23,000 for the comparable period in 1998 is attributable to increased
borrowings under the credit facility and new equipment leases entered into
after the end of the 1998 quarter.
Other Income
Other income consists of license fees received from our previous fax
services business model. Other income was zero for the three months ended March
31, 1999 as compared to $50,000 for the comparable period in 1998.
Net Loss
We incurred a net loss of $(371,000) for the three months ended March 31,
1999 as compared to $(339,000) for the comparable period in 1998. Net loss for
the three months ended March 31, 1999 was affected by the write off of $140,000
of goodwill in connection with the termination of our Costa Rican operations.
Income Taxes
As of March 31, 1999, we had $3.1 million of net operating loss
carryforwards for federal income tax purposes, which expire beginning in 2011.
We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of
uncertainty regarding its future realizability. Limitations on the utilization
of these carryforwards may result if we experience a change of control, as
defined in the Internal Revenue Code of 1986, as amended, as a result of
changes in the ownership of our common stock. See note 9 of notes to
consolidated financial statements.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenue
Revenue increased to $1.8 million for 1998 from $52,000 for 1997 as a result
of the change in our business model, significant growth of our customer base
and an increase in repeat purchases from our existing customers. Of the $1.8
million, $1.5 million represents prepaid virtual calling card revenue and the
remainder represents wholesale traffic and other revenue, $220,000 of which was
derived from a subsidiary which ceased operations in June 1999.
Cost of Sales
Cost of sales increased to $2.0 million for 1998 from $227,000 for 1997.
This $1.8 million increase was primarily attributable to increased sales
volume.
28
<PAGE>
Operating Expenses
Selling, General and Administrative. Selling, general and administrative
expenses remained constant at $1.1 million between 1998 and 1997. Selling,
general and administrative expenses decreased significantly as a percentage of
revenue due to the low revenue level in 1997.
Research and Development Costs. Research and development costs decreased to
$187,000 in 1998 from $439,000 in 1997. This $252,000 decrease was primarily
attributable to a change from a hardware and downloadable software based
Internet fax model to a Web page driven prepaid virtual calling card model.
Research and development is not as significant under our Internet telephony
model as under our facsimile transmission model.
Interest Expense
Interest expense increased to $162,000 in 1998 from $28,000 in 1997 as a
result of increased borrowings under a credit facility with our principal
stockholder and new equipment leases entered into during 1998.
Other Income
Other income was $50,000 for 1998 as compared to $155,000 for 1997.
Net Loss
We incurred a net loss of $(1.6) million in each of 1998 and 1997 as we
changed our business model from a fax services to Internet telephony services
company and developed an infrastructure for future growth.
Income Taxes
As of December 31, 1998, we had approximately $2.9 million of net operating
loss carryforwards for federal income tax purposes, which expire beginning in
2011. We have provided a full valuation allowance on the deferred tax asset,
consisting primarily of net operating loss carryforwards, because of
uncertainty regarding its future realizability. Limitations on the utilization
of these carryforwards may result if we experience a change of control, as
defined in the Internal Revenue Code of 1986, as amended, as a result of
changes in the ownership or our common stock. See note 9 of notes to
consolidated financial statements.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through a $2.0
million credit facility with our principal stockholder, private sales of equity
and cash generated from operations. As of March 31, 1999, we had approximately
$7,000 of cash and cash equivalents. As of that date, our principal commitments
consisted of obligations outstanding under capital leases for equipment,
obligations under leases and contracts for long distance transmissions and our
credit facility with our principal stockholder.
Outstanding amounts owed to our principal stockholder as of March 31, 1999
were $1.8 million and as of December 31, 1998 were $1.7 million. In May 1999,
we amended our credit facility with our principal stockholder to convert $1.1
million to a term loan bearing interest at 8% per annum with interest and
principal payable May 5, 2002. Our principal stockholder also agreed at such
time to convert $200,000 of the loan into 60,061 shares of our common stock, at
a conversion price of $3.33 per share. We also continue to have a $900,000 line
of credit with our principal stockholder, $468,000 of which was drawn and
outstanding as of the date of the amendment. Demand for payment of the $468,000
has been made effective upon the closing of this offering, and we intend to
repay such amount from the proceeds of this offering.
Net cash (used in) provided by operating activities was $49,000 for the
three months ended March 31, 1999, $(661,000) in 1998 and $(1.0 million) in
1997. Net cash used in operating activities for 1998 and 1997
29
<PAGE>
primarily consisted of net operating losses as well as increases in personnel,
accounts receivable, and deposits and other assets, partially offset by
increases in accounts payable, deferred revenue, accrued expenses and
depreciation and amortization. The increase in working capital during the
fiscal quarter ended March 31, 1999 was primarily due to a lower net loss and a
decrease in the accounts receivable balance.
Net cash used in investing activities consists of additions to property and
equipment, including computer equipment and Internet gateways for voice over
the Internet transmission. Net cash used in investing activities was $84,000
for the three months ended March 31, 1999, $148,000 in 1998 and $111,000 in
1997. During 1999, we expect to spend approximately $330,000 in capital
expenditures, of which $160,000 will be for gateway servers, $20,000 for a data
base server, $100,000 for software and $50,000 in miscellaneous other
equipment. Through March 31, 1999, $84,000 of such amount had been spent.
Net cash provided by financing activities was $22,000 for the three months
ended March 31, 1999, $841,000 for 1998 and $1.1 million for 1997. Net cash
provided by financing activities for 1998 and 1997 was affected by higher
levels of borrowings under our credit facility with our principal stockholder
and for 1997 was affected by a capital contribution of $316,000 from our
principal stockholder. During 1999, we expect to spend approximately $150,000
under capital leases for a switching platform.
We currently anticipate that the net proceeds of this offering, together
with our available funds, will be sufficient to meet our anticipated needs for
working capital and capital expenditures through at least the next 18 months.
We may need to raise additional funds prior to the expiration of such period
if, for example, we pursue business or technology acquisitions or experience
operating losses that exceed our current expectations. If we raise additional
funds through the issuance of equity, equity-related or debt securities, such
securities may have rights, preferences or privileges senior to those of the
rights of our common stock and our stockholders may experience additional
dilution. We cannot be certain that additional financing will be available to
us on favorable terms when required, or at all.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), which requires disclosure of total comprehensive income in interim and
annual financial statements. We adopted SFAS 130 during 1998. There were no
items of other comprehensive income for 1998 and 1997.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"), which requires disclosure by
public companies of information related to a company's operating segments, as
defined. We have adopted SFAS 131 for 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. This pronouncement identifies the characteristics of internal
use software and provides guidance on new cost recognition principles. SOP 98-1
is effective for fiscal years beginning after December 15, 1998. SOP 98-1 is
not expected to have a material impact on our results of operations, financial
position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Similar
Financial Instruments and for Hedging Activities" ("SFAS 133"), which provides
a comprehensive and consistent standard for the recognition and measurement of
derivative and hedging activities. We will be required to adopt SFAS 133 at the
beginning of fiscal 2001. We have not yet assessed the impact SFAS 133 will
have on our results of operation, financial
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position or cash flows. However, we currently have no derivatives or financial
instruments that would be impacted by SFAS 133.
Year 2000
Many existing computer programs use only two digits to identify a year.
These programs were designed and developed without addressing the impact of the
upcoming change in the century. If not corrected, many computer software
applications could fail or create erroneous results by, at or beyond the year
2000. We use software, computer technology and other services internally
developed and provided by third-party vendors that may fail due to the year
2000 phenomenon. For example, we are dependent on the financial institutions
involved in processing our customers' credit card payments for Internet
services and third parties that provide our Internet access. We are also
dependent on telecommunications and Internet vendors to maintain our network.
We are in the process of reviewing the year 2000 compliance of our
internally developed proprietary software. This review has included testing to
determine how our systems will function at and beyond the year 2000. We expect
to complete these tests during the third quarter of 1999. Since inception, we
have internally developed substantially all of the systems for the operation of
our Web site. These systems include the software used to provide our Web site's
search, customer interaction, and transaction-processing and delivery
functions, as well as monitoring and back-up capabilities. Based upon our
assessment to date, we believe that our internally developed proprietary
software is year 2000 compliant.
We are currently assessing the year 2000 readiness of our third-party
supplied software, computer technology and other services, which include
software used in accounting, database and security systems. The failure of such
software or systems to be year 2000 compliant could have a material negative
impact on our corporate accounting functions and the operation of our Web site.
As part of the assessment of the year 2000 compliance of these systems, we have
sought assurances from these vendors that their software, computer technology
and other services are year 2000 compliant. We have expensed amounts incurred
in connection with year 2000 assessment since our formation through March 31,
1999. Such amounts have not been material. We expect this assessment process to
be completed during the third quarter of 1999. Based upon the results of this
assessment, we will develop and implement, if necessary, a remediation plan
with respect to third-party software, third-party vendors and computer
technology and services that may fail to be year 2000 compliant. We expect to
complete any required remediation during the third quarter of 1999. At this
time, the expenses associated with this assessment and potential remediation
plan that may be incurred in the future cannot be determined; therefore, we
have not developed a budget for these expenses. The failure of our software and
computer systems and of our third-party suppliers to be year 2000 complaint
would have a material adverse effect on us.
We are also contacting all of our credit card processing companies, Internet
service providers, local terminating parties and long distance carriers to
determine their year 2000 compliance. We are requiring evidence from each of
these companies regarding the level of their year 2000 readiness and
compliance. Once received, we will conduct selected tests to confirm their year
2000 readiness.
The year 2000 readiness of the general infrastructure necessary to support
our operations is difficult to assess. For instance, we depend on the integrity
and stability of the Internet to provide our services. We also depend on the
year 2000 compliance of the computer systems and financial services used by
consumers. Thus, the infrastructure necessary to support our operations
consists of a network of computers and telecommunications systems located
throughout the world and operated by numerous unrelated entities and
individuals, none of which has the ability to control or manage the potential
year 2000 issues that may impact the entire infrastructure. Our ability to
assess the reliability of this infrastructure is limited and relies solely on
generally available news reports, surveys and comparable industry data. Based
on these sources, we believe most entities and individuals that rely
significantly on the Internet are carefully reviewing and attempting to
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remediate issues relating to year 2000 compliance, but it is not possible to
predict whether these efforts will be successful in reducing or eliminating the
potential negative impact of year 2000 issues. A significant disruption in the
ability of consumers to reliably access the Internet or portions of it or to
use their credit cards would have an adverse effect on demand for our services
and would have a material adverse effect on us.
At this time, we have not yet developed a contingency plan to address
situations that may result if our vendors or we are unable to achieve year 2000
compliance because we currently do not believe that such a plan is necessary.
The cost of developing and implementing such a plan, if necessary, could be
material. Any failure of our material systems, our vendors' material systems or
the Internet to be year 2000 compliant could have material adverse consequences
for us. Such consequences could include difficulties in operating our Web site
effectively, taking product orders, making product deliveries or conducting
other fundamental parts of our business.
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BUSINESS
We are an international Internet telephony company. We carry international
long distance calls over our own enhanced services platform through one of two
methods. We transmit calls over our own Internet network, which involves
transmission through our Internet gateways. In the country of destination, we
have contractual arrangements with local parties to terminate the calls. We
also transmit calls over our network of traditional long distance telephone
lines. This network consists of leased capacity from other international long
distance carriers who carry our calls at discounted rates through their
international telephone lines.
All of our calls are made from phone-to-phone over our networks. The voice
quality of our Internet carried calls is virtually the same as an international
telephone call carried over a traditional telephone line. We believe consumers
are more familiar and comfortable using telephones to make call, as opposed to
computers which have historically been used for Internet telephony.
We advertise, sell and deliver our prepaid long distance virtual calling
cards worldwide exclusively over the Internet through our interactive and easy
to use Web site. Our Web site can be found at www.wqn.com. We focus on the
international long distance market, with particular emphasis on the calling
patterns between the United States and various countries. Our virtual calling
cards may be used to call from the United States to other countries, to call
from other countries to the United States, or to call between countries outside
the United States
We also buy, at a discount, virtual calling cards processed through other
companies' platforms and sell them to our customers. We sell these virtual
calling cards for calls from the United States to other countries where we have
not established our own Internet network and where our negotiated rates with
our international long distance carriers are not as favorable.
Industry Overview
The Internet is an increasingly significant interactive global medium for
communication, information and commerce. International Data Corporation, a
market research firm, estimates that the number of users who make purchases
over the Internet worldwide will grow from 31 million in 1998 to more than 183
million in 2003.
Emergence of Internet Telephony. TeleGeography, a market research firm,
estimates that revenues from international long distance traffic will grow from
$65.9 billion in 1997 to $77.5 billion in 2001, with consumers and businesses
making an estimated 128.7 billion minutes of international long distance calls
in 2001. However, traditional international long distance calls routed over
domestic and foreign public switched telephone networks are still relatively
expensive for the consumer. The primary reason for this expense is tariffs set
by foreign governments and carriers that are passed on to consumers in the form
of higher long distance rates.
Internet telephony has emerged as a low cost alternative to traditional long
distance telephony. Internet telephone calls are less expensive than
traditional international long distance calls primarily because these calls are
routed over the Internet. The use of the Internet bypasses a significant
portion of international long distance networks and the relevant tariffs. Also,
routing calls over the Internet is more cost-effective than routing calls over
traditional circuit-switched networks, because the packet-switching technology
that enables Internet telephony is more efficient than traditional circuit-
switched voice technology. Packet-based networks, unlike circuit-based
networks, do not require a fixed amount of bandwidth to be reserved for each
call. This allows voice and data calls to be pooled, which means that packet
networks can carry more calls with the same amount of bandwidth. This greater
efficiency creates network cost savings that can be passed on to the consumer
in the form of lower long distance rates.
Problems of Existing Internet Telephony. The growth of Internet telephony
has been limited to date due to poor sound quality attributable to
technological issues such as delays in packet transmission and bandwidth
limitations related to Internet network capacity and local access constraints.
However, recent improvements in packet-switching and compression technology,
new software algorithms and improved
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hardware have substantially reduced delays in packet transmissions. In
addition, the use of private networks to transmit calls as an alternative to
the public Internet is helping to alleviate capacity constraints.
Several large long distance carriers, including AT&T and Sprint, have
announced Internet telephony service offerings. However, many of these service
offerings have not been deployed on a large scale. Many also require users to
purchase other telecommunications services or allow only domestic calling.
Smaller Internet telephony service providers also offer low-cost Internet
telephony services from personal computers to telephones and from telephones to
telephones. We also believe that existing Internet telephony service providers
rely upon technologies and systems that lack large-scale billing, network
management and monitoring systems, and customer service capabilities required
for the integration of voice communication into the Web.
In addition, many other companies currently provide Internet telephony
software and services that allow Internet telephone calls to be made between
personal computers. However, most of these companies require both the initiator
and the recipient of the call to have the same software installed on their
personal computers and to be online at the same time.
Prepaid Calling Card Industry. According to The PELORUS Group, a market
research firm, the market for prepaid calling cards has grown from an estimated
$300.0 million in 1993 to an estimated $2.8 billion in 1998. PELORUS predicts
that this market will rise to $10.9 billion in 2003. According to PELORUS,
there were 30 million prepaid calling cards sold in the United States in 1993
and 400 million sold in 1998. PELORUS predicts there will be 652 million cards
sold in the United States in 2003. This growth is attributed to three trends
according to PELORUS. First, the larger telecommunications companies have come
to understand the strategic and financial benefits of prepaid calling cards.
Second, consumers are becoming more aware of various advantages of prepaid
cards. Third, businesses are beginning to purchase prepaids as a means of
controlling telephony costs and simplifying record keeping. We believe that the
affordable pricing, convenience and enhanced features of prepaid calling cards
has attracted price sensitive customers, business travelers, international
callers and other users of long distance service. Also, while prepaid calling
cards are relatively new in the United States, they have been a widely used and
accepted method of making telephone calls in Europe and Asia since the 1970's.
Problems with Traditional Prepaid Calling Card Industry. Manufacturers of
traditional prepaid long distance calling cards face numerous issues and costs.
These include costs associated with physical production of the actual cards,
security issues and costs to prevent theft during storage and transport, and
inventory costs to maintain cards at potentially numerous physical locations.
Manufacturers must also establish and maintain a retail distribution network.
Traditional prepaid long distance calling cards are typically sold through
multiple retail outlets familiar to consumers. These outlets include grocery
stores, convenience stores, discount retail stores, gas stations and stores
targeting resident nationals from other countries. The typical arrangement to
induce a retailer to carry prepaid cards in stores or in dispensing machines
involves providing the retailer with an inventory on consignment and allowing
the retailer a substantial commission on the sale of each card, thus adding
additional costs for the manufacturer.
We also believe that manufacturers using traditional store-based retailers
face a number of challenges in providing a satisfying combination of products
to its customers, including:
. the number of prepaid cards and the variety available is constrained by
the limited shelf space available in the retail outlet, thereby limiting
selection for consumers;
. security issues for this type of inventory are a disincentive to many
traditional store-based retailers;
. due to the cost of carrying inventory in multiple store locations,
traditional store-based retailers focus their product selection on the
most popular products that produce the highest inventory turns, thereby
further limiting consumer selection; and
. the ability to make sales is limited to the hours the traditional store-
based retailers are open for business.
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In addition, we believe that many consumers find the shopping experience to
be time-consuming, inconvenient and unpleasant due to factors such as location,
store layout, product selection, level of customer service and the
inconvenience of having to leave home to purchase something that can be sold
and delivered another way.
WorldQuest Networks Solution
Internet Telephony. We believe we provide a superior international telephony
service. All of our calls are made from phone-to-phone over our network of
leased dedicated international and local long distance lines or over our
Internet network using Internet gateways. The voice quality of our Internet
carried calls is virtually the same as an international telephone call carried
over a traditional telephone line and our customers do not experience
transmission delays experienced with earlier Internet telephony. We believe
consumers are more familiar and comfortable with telephones to make calls, as
opposed to computers. Also, it is not necessary to have special hardware or
software on a personal computer to make calls using our network. Once we have
electronically issued a virtual calling card and a toll free access number to a
customer, it is not necessary to have a personal computer to make a call from
the United States to other countries. For calls from other countries to the
United States or another country, a standard personal computer with access to
the Internet is used to communicate with our Web site to initiate a call and
then the call is completed by our calling platform phone-to-phone. We are
focusing our marketing efforts on developing countries that have high
international long distance rates and significant calling traffic to the United
States or other countries.
Prepaid Virtual Calling Cards. We believe our e-commerce solution provides
consumers with a wide range of product choice and a superior shopping
experience. We market, sell and deliver our prepaid virtual calling cards
worldwide exclusively over the Internet within seconds of the customer's
decision to buy. We deliver virtual cards to our customers electronically
through our Web site once the electronic purchase has been completed. This
allows our customers to use them immediately to place long distance calls. It
allows us to avoid the cost of physically printing, storing, safeguarding and
delivering actual calling cards. We also avoid the necessity of negotiating
with and maintaining a retail distributor network to sell and distribute our
cards.
Our virtual calling cards give us the flexibility of promptly changing the
rates and features to respond to changing consumer demand, rather than having
an inventory of physical cards with set features that cannot be changed until
all are recalled or used. This also allows us to offer and test several
different types of virtual calling cards with varying pricing features, thus
providing a greater selection to our customers.
Our Web site is accessible 24 hours per day, seven days a week, so we are
not constrained by the hours that a retail store would be open for business.
Our Web site may also be reached from the customer's home or office. The
customer is not required to physically travel to another location to make a
purchase and receive delivery. Our online purchasing and delivery also allows
us to deliver a broad selection of products to customers worldwide in rural or
other locations that do not have convenient access to physical stores.
Business Strategy
Our goal is to be a leading worldwide Internet telephony company. Our
objective is to increase our revenues through increasing our customer base and
the number of countries we access through our Internet network. The strategy to
achieve our goal and take advantage of market opportunities includes:
Identify Target Countries and Customer Groups. Our strategy is to provide
international long distance service to and from countries which have high
numbers of international long distance calls. We also target countries that
have high international long distance rates, which normally means full
deregulation has not yet occurred. We determine these countries through
research of publicly available international long distance calling patterns and
other sources.
Advertise on Web Sites and Portals Frequented by Target Groups. Once we have
identified a desired country and customer group, we research Web sites and
portals frequently visited by this customer group in the
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United States and abroad. When a desirable Web site or portal has been found,
we negotiate our advertising arrangement and place a banner ad on the Web site
which connects directly to our Web site (www.wqn.com) when "clicked" by the
customer. By advertising in this way, we do not need physical retail sites to
store and display calling cards. The use of banner advertising on Internet Web
sites and portals allows us great flexibility in marketing. Banners can be
changed easily and quickly to feature new rates, seasonal specials, new art
work and new destinations. We placed our first banner ad on another Web site in
April 1998 and currently have banner ads on seven Web sites.
Increase Our Name Recognition. We believe that brand name recognition is an
important component of customer loyalty. Our goal is for our Web site to be a
preferred Internet destination of choice for international long distance
telephone customers. We plan to increase our name and product recognition
through increased advertising on other Web sites and portals, direct e-mail
marketing to e-mail lists of our Internet service providers and other select
mailing lists, e-mail communications with our customer base and other
promotional activities.
Place Internet Gateways in Countries Currently Served and in Additional
Countries. Our future profitability is based in large part on our ability to
transmit our customers' international long distance telephone calls on a cost
effective basis over the Internet. We intend to place additional Internet
gateways in certain countries currently served and in additional countries. By
extending our Internet network, we expect to be able to lower our transmission
costs for international long distance calls.
Continue to Offer Enhanced Services and Products. We offer a selection of
virtual cards targeted with special rates for various international markets. We
intend to develop and offer additional products and services that complement
our existing products and services. We will evaluate and test these new
products and services and introduce them when we believe they will be accepted
by customers.
Promote Repeat Purchases. We are focused on promoting customer loyalty,
building repeat purchase relationships with our customers, leveraging our
customer acquisition costs and maximizing the lifetime value of our customer
relationships. As our customer base grows, we continue to collect significant
data about our customers' buying preferences and habits in an effort to
increase repeat purchases by existing customers. We intend to maximize the
value of this information by delivering meaningful information and special
offers to our customers via e-mail and other means. From inception through
March 31, 1999, we had sold virtual calling cards purchased with approximately
27,500 separately identifiable credit cards. Of these separately identifiable
credit cards, 8,939 had made more than two repeat purchases, 2,069 had made
more than 10, 456 had made more than 25, and 88 had made more than 50 repeat
purchases.
Focus on Convenience. We believe the most successful Internet Web sites are
those which allow a customer to complete the purchase transaction while
connected to the Web site. Our "buy it now, use it now" approach to our product
marketing permits the customer to make a purchase and begin using the product
within two to three minutes depending on the speed of the customer's Internet
connection.
Our Telephone Service Products
We sell virtual prepaid calling cards over the Internet. They are virtual
because we do not issue a physical card. Rather, we electronically issue a
personal identification number, or PIN, to the customer when the electronic
purchase transaction is completed. Once sold, the virtual calling card can be
used immediately to make international and domestic long distance calls. During
the first quarter of 1999, on average, 53.1% of the minutes purchased on our
virtual calling cards were used within three days of purchase, 85.1% within 13
days and 94.7% within 30 days. We believe this rapid use and the convenience of
our Web site and our "buy it now, use it now" capability fosters repeat
purchases and repeat customers.
Our system functions as follows. A potential customer accesses our Web site
follows the prompts to enter the credit card information to purchase the
virtual calling card, we verify the credit card within seconds and the
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confidential PIN and a toll free number is displayed for the customer to
record, and the virtual calling card can be used immediately to place a call.
The customer information becomes part of our data base for future reference.
U.S. Access. Our U.S. Access virtual calling cards provide access to our
network for calls from the United States to more than 241 countries and
territories. When using the U.S. Access virtual calling card for a call from
the United States to another country, the customer uses a touch tone telephone
to dial a toll free number and enters the PIN and the telephone number the
customer seeks to reach. Our enhanced services platform determines the virtual
calling card is valid and the number of call minutes remaining on it, based on
the rate for the country being called. The platform then completes the call and
reduces the available credit balance on the virtual calling card at the
conclusion of the call.
World Access. When using the World Access virtual calling card for a call
from another country to the United States or from country to country outside
the United States, the customer initiates the call through the Internet by
accessing our Web site and going to the world access page. On this page, a
virtual card is displayed and the customer enters the telephone number where he
or she is, the telephone number he or she wants to call and his or her PIN and
then "clicks" on the call button. This information is transmitted over the
Internet to our platform. The platform determines the virtual calling card is
valid and has a sufficient balance and then routes a call to the customer at
the number where he or she is. When the customer answers, the platform
completes the call by connecting to the number the customer wanted to call.
This feature allows customers to make calls from anywhere in the world at our
international United States long distance rates using the virtual calling card
and Internet access to our Web site and platform.
In certain countries where we have an Internet gateway, we can e-mail to
customers a local telephone number to dial. This number connects to our
platform the same as if the toll free number in the United States had been
dialed and the process is the same from that point. This feature allows a
customer to place a call from that country to the United States or another
country with a touch tone telephone and without the need for Internet access to
our Web site and platform. These calls are also at our international United
States long distance rates.
Phone Collect. Another service we have recently launched and intend to make
available in the fourth quarter of 1999 is our Phone Collect service. While on
our Web site and after going to the Phone Collect page, a customer will be able
to enter his or her name and address and we will issue a Phone Collect PIN
without charge. The customer will then be able to enter his or her PIN and the
telephone number where he or she is and "click" on the call button. This
information will be transmitted over the Internet to our platform. Our platform
will dial a United States operator service company and route a call to the
customer at the number where he or she is. When the customer answers, he or she
will have a connection to a United States operator and can place a collect or
operator assisted call. We will be paid by the United States operator service
company for the call.
Resale of Virtual Calling Cards. We also buy, at a discount, virtual calling
cards processed through other companies' platforms and sell them to our
customers on our Web site as our virtual calling cards. We sell these virtual
calling cards for calls from the United States to other countries where we have
not established our own Internet network and where our negotiated rates with
our international long distance carriers are not as favorable. We estimate that
approximately 80% of our revenues for the three months ended March 31, 1999 and
during 1998 were generated from these virtual calling cards processed through
other companies' platforms. As we increase our infrastructure and negotiate
better rates with international carriers, it is expected that the resale of
these virtual calling cards will become a less significant part of our total
business.
Our International Networks
Our Enhanced Services Platform. Our enhanced services platform is a
specialized telephone switch. It is connected to our Web site and data base and
to our network of outgoing and incoming telephone lines and
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Internet lines. It sets up all customer account and PIN information when a
virtual calling card is purchased and immediately activates the virtual calling
card so it can be used at the time of purchase. The platform also accepts and
evaluates all calls from virtual calling card holders over the toll free number
and over the Internet and confirms the validity of the virtual calling card and
remaining balance. We have also programmed into the platform a lowest cost
routing matrix. This matrix automatically routes each call over the route most
economical to us. This means it will select our international carrier with the
lowest rate or the Internet if we have a gateway in the call destination
country. We believe our platform can currently support approximately 384
simultaneous calls and over 4 million minutes of traffic per month. Our
platform is expandable to carry more traffic by adding additional telephone
trunks and line cards. Focusing on the international market, the use of our
platform is spread throughout the day as a result of the different world time
zones. Many of our calls are routed during night time in Dallas.
Our Internet Gateway Network. We presently have international gateways
operational in Mexico and Indonesia, and we are negotiating for installations
in India, Sri Lanka and Brazil. We also have domestic gateways operational at
our offices in Dallas and at 60 Hudson Street in New York City. We intend to
place Internet gateways in various other countries. Before we place a gateway
in another country, we enter into contractual relationships with local persons
or entities to operate them. We typically own or lease the gateway or have the
right to purchase it and the local person or entity is responsible for
procuring local Internet provider connection and local telephone lines and
complying with local law. Our contracts with the local person or entity are
generally for a one year term and are renewable unless either party declines to
renew. We pay the local person or entity a negotiated rate per minute for
terminating or originating calls through the gateway.
Our gateways allow for voice quality transmission through the Internet. The
historical poor sound quality of Internet voice transmission is due to the
Internet not being created for simultaneous voice traffic. Unlike conventional
voice communication circuits, in which the entire circuit is reserved for a
call, Internet telephony uses packet switching technology, in which voice data
is divided into discrete packets that are transmitted over the Internet. These
packets must travel through several routers in order to reach their
destination, which may cause misrouting, and delays in transmission and
reception. Our gateways connect the packet switched data transmitted over the
Internet to circuit switched public telephone networks. This virtually
eliminates the delay and any distinction in voice quality for transmissions
over the Internet.
Our Internet gateways enable us to route voice quality calls through our
enhanced server platform to and from the country via the public Internet or
private intranet networks such as a frame relay network. The cost of these
calls is based on the local telephone rates for the country where the gateway
is located. They are not based on international or local long distance rates.
From inception through March 31, 1999, approximately 25% of the minutes
transmitted through our platform were carried through our Internet gateway
network. As we add Internet gateways, we believe this percentage will increase.
Our Leased Lines Network. We also lease international telephone lines to
transmit calls. Our lease agreements obligate the carriers to terminate calls
routed by us to them at different rates for different countries and
territories. With these agreements, we have access to more than 241 countries
and territories. Leased capacity is typically obtained on a per-minute basis or
point-to-point fiscal cost basis. Our agreements are short-term agreements.
Rates are adjusted approximately every 30 days, are based on volume and our
rates generally decline as volume increases. We are dependent on these carriers
to transport our calls, and the loss of one or more of them as a source for
transporting calls could have a material adverse affect on us. However, we
believe there are numerous international long distance carriers that transport
calls to the countries we desire to target and we believe we could replace any
of the carriers we lost. If the rates of any replacement carrier are higher, or
our existing carriers raise their rates, our profit margins would decrease.
From inception through March 31, 1999, approximately 75% of the minutes
transmitted through our platform were carried through our leased international
network.
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Credit Card Processing Arrangements
All sales of our virtual calling cards are made over the Internet through
credit card purchases. We use credit card processing companies to verify credit
cards. These companies are connected to our platform and data base and
verification or denial is usually accomplished within seconds. We pay these
processing companies a percentage of sales as their fee. Until May 1999, our
former credit card processing company restricted the amount of credit card
purchases that could be made from us per month. That company also would not
allow purchases with non United States issued credit cards. These restrictions
prevented us from increasing our sales as rapidly as desired. In May 1999, we
began processing with a new processing company which sets no limit on our
monthly credit card sales and agreed to accept purchases with non United States
issued credit cards. These changes will allow us to aggressively seek to
increase our sales, and will open our market for non United States purchased
virtual calling cards. We plan to use a portion of the proceeds of this
offering to further increase our allowed base for credit card sales by
increasing the deposits we maintain with our processing companies. We believe
these developments may have a positive effect on sales in the near-term.
Sales and Marketing
We have developed a marketing strategy based on increasing customer traffic
to our Web site and strengthening our brand name.
Internet Advertising. We have taken a selective approach in our advertising
strategy. We attempt to maximize the return from promotional expenditures by
choosing advertising media based on the cost relative to the likely audience
and ability to generate increased traffic for our Web site. We identify a
country and customer group to whom we desire to market our virtual calling
cards.
We place advertisements on various Web sites frequently visited by this
customer group in the United States and abroad. These advertisements usually
take the form of banner ads that encourage readers to click through directly to
our Web site.
We also advertise on Internet portals. An Internet portal is a super Web
site with search engines and multiple services available to site visitors. We
believe that placing banner advertising on these and other portals may
significantly increase our targeted exposure to prospective customers and
increase our name identity.
Customer Electronic Mail Broadcasts. We actively market to our base of
customers through e-mail broadcasts. All new virtual calling card purchasers
are automatically added to our electronic mailing list, which consists of over
36,800 prior purchasers and Internet customers of our local Internet service
providers in other countries. We currently send more than 5,000 e-mail messages
each month announcing new rates, new countries, new products and new features.
Electronic Mail to Select Mailing Lists. We also plan to deliver e-mail
broadcasts to certain select mailing lists from time to time announcing
pertinent information, including the addition of a new country, new products
and rates.
Other Methods. We will continually review other potential cost-effective
methods of advertising and marketing our products and services through the
Internet. Such methods may include the use of an affiliate program, chat rooms,
video e-mail and other methods.
Customer Support and Service
We believe that our ability to establish and maintain long-term
relationships with our customers and encourage repeat purchases is dependent,
in part, on the strength of our customer support and service operations and
staff. Our customer support and service personnel are available from 9:00 a.m.
to 5:00 p.m. Central Time, five days a week to provide assistance via e-mail or
telephone. They are responsible for handling all customer inquiries.
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We provide pre- and post-sales support via both e-mail and telephone service
during business hours. If a customer has encountered a problem in ordering or
using our products, our customer service department will take the call, or the
e-mail, and respond immediately. If the virtual calling card is from our own
inventory and operates on our enhanced services platform, problems can be
resolved immediately and always within one business day. For virtual calling
cards that we sell as a reseller, directing traffic through someone else's
switch, we are able to respond to the customer immediately but resolution of
the matter may take up to two business days.
Our Web site has been designed around industry standard architectures to
reduce downtime in the event of outages or catastrophic occurrences. Our Web
site provides 24 hour a day, seven day a week availability. Our Web site
operations staff consists of systems administrators who manage, monitor and
operate our Web site. The continued uninterrupted operation of our Web site is
essential to our business, and it is the job of the site operations staff to
ensure, to the greatest extent possible, the reliability of our Web site. We
provide our own connection to the Internet through MCI Worldcom/UUNET's
backbone and through SAVVIS's backbone. We believe that these
telecommunications and Internet service facilities are essential to our
operation and we anticipate upgrading these facilities as volume and demand for
our services grow.
Technology
We use a combination of our own proprietary software applications and
commercially available licensed technology to conduct our Internet and
telephone routing operations.
Proprietary Technology. We have developed proprietary customer software
which permits a customer to purchase a virtual calling card on our Web site
using a credit card and to have the virtual calling card delivered while on our
Web site. We have also developed proprietary customer software to allow our
world access virtual calling cards and phone collect PINs to initiate calls
through regular telephone lines using our Web site and enhanced services
platform, and we have developed various proprietary credit and fraud management
applications which aid us in checking credit and limiting fraudulent
transactions.
Our engineering staff consists of three software development engineers and
consultants. We historically have developed and expect to continue to develop
proprietary software internally. Our engineering strategy focuses on the
development of our Web site, which includes the enhancement of features and
functionality of our existing software components, the development of
additional new software components, and the integration of off-the-shelf
components into our systems.
Commercially Available Licensed Technology. Our strategy has also been to
license commercially available technology whenever possible rather than seek a
custom-made or internally-developed solution. We believe that this strategy
enables us to reduce our operating costs and to respond to changing demands due
to growth and technological shifts. This strategy also allows us to focus our
development efforts on creating and enhancing the specialized, proprietary
software applications that are unique to our business. Listed below are some of
our key architectural components:
. High speed links to the Internet through MCI Worldcom/UUNET's and
SAVVIS's backbones;
. Dell 2300 and 4300 Servers for Web and data base application running
Windows NT and Oracle;
. Microsoft Internet Information Server 4.0 has been chosen for its
ability to secure sensitive customer information through SSL encryption;
and
. Oracle 8i and Microsoft SQL Servers are the relational database
providers. All customer names and addresses, PINs, number of purchases
and call records are stored within these data bases.
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Government Regulation
Regulation of the Internet. The United States Congress and the Federal
courts have taken actions that, in some cases impose some forms of regulation
on the Internet, and in other cases protect the Internet from regulation. For
example, Congress has recently adopted legislation that regulates certain
aspects of the Internet. This includes restrictions on some forms of content.
These regulations have had mixed success in the Federal courts. The Supreme
Court has struck down some restrictions on indecent content, but has upheld
other restrictions on harassing Internet messages. Conversely, Congress last
year passed legislation that imposes a moratorium on the imposition of new
taxes on internet transactions for three years. At the same time, numerous new
bills have been proposed that would further regulate various aspects of
Internet commerce, and ensure the continued deregulation of others. It is
impossible to say at this time whether and to what extent the Internet may
ultimately be regulated by the United States government.
The European Union has also enacted several directives relating to the
Internet, one of which addresses online commerce. As with the United States
Congress, the European Union, and the governments of individual foreign
countries, are actively considering proposed legislation that could result in
new regulations on the Internet. Increased regulation of the Internet may
decrease its growth, which may negatively impact the cost of doing business via
the Internet or otherwise materially adversely affect our business, results of
operations and financial condition. In addition, applicability to the Internet
of existing laws governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel, obscenity and personal
privacy is uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and related technologies. As a result, these laws do not
contemplate or address the unique issues of the Internet and related
technologies.
Potential Regulation of Internet Telephony. To our knowledge, there are
currently no domestic and few international laws or regulations that prohibit
the transmission of voice communications over the Internet. If Congress, the
FCC, state regulatory agencies or governments of other countries impose
substantial regulations relating to Internet telephony, the growth of our
business could be adversely affected. In the United States, several efforts
have been made to enact federal legislation that would either regulate or
exempt from regulation telecommunication services provided over the Internet.
State public utility commissions may also attempt to regulate the provision of
intrastate Internet telephony services. In late 1998 and early 1999, however,
the FCC issued two decisions that suggest that all transmissions over the
Internet may be jurisdictionally interstate, and these decisions may restrict
the ability of state public utility commissions to regulate Internet telephony.
Internationally, a number of countries that currently prohibit competition in
the provision of voice telephony have also prohibited Internet telephony. Other
countries permit but regulate Internet telephony.
On April 10, 1998, the FCC issued a Report to Congress concerning its
implementation of the universal service provisions of the Telecommunications
Act. In the Report, the FCC indicated that it would examine the question of
whether any forms of "phone-to-phone" Internet Protocol telephony are
information services, which are unregulated, or telecommunications services,
which are fully regulated. The Report noted that the FCC did not have, as of
the date of the Report, an adequate record on which to make any definitive
pronouncements. The FCC did, however, note that the record before it suggested
that some forms of phone-to-phone Internet telephony appear to have the same
functionality as non-Internet Protocol telecommunications services.
While the FCC found that it needed a more complete record to establish new
rules, it tentatively concluded that providers of phone-to-phone Internet
telephony services should be treated like other providers of telephone service.
This means that they should be required to make payments into Federal universal
service subsidy programs. To date, the FCC has taken no further action, and has
not imposed this obligation on Internet telephony providers. It may do so at
some time in the future, however, and such a decision could have a material
adverse effect on our business, increasing our costs, and the price at which we
can offer our Internet telephony services.
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State Laws. Several states have also proposed legislation that would limit
the uses of personal user information gathered online or require online
services to establish privacy policies. Changes to existing laws or the passage
of new laws intended to address these issues could reduce demand for our
services or increase the cost of doing business. In addition, because our
services are accessible worldwide, and we facilitate the sale of goods to users
worldwide, other jurisdictions may claim that we are required to comply with
their laws. We are qualified to do business in Delaware and Texas only, and
failure by us to qualify as a foreign corporation in a jurisdiction where we
are required to do so could subject us to taxes and penalties for the failure
to qualify and could result in our inability to enforce contracts in such
jurisdictions. Any such new legislation or regulation, or the application of
laws or regulations from jurisdictions whose laws do not currently apply to our
business, could have a material adverse effect on our business, financial
condition and operating results.
Sales Taxes. We do not currently collect sales or other similar taxes for
virtual calling cards or other services sold through our Web site, other than
for virtual calling cards sold to Texas residents. However, one or more states
may seek to impose sales tax or similar collection obligations on out-of-state
companies, such as ours, which engage in Internet commerce. A number of
proposals have been made at the state and local level that would impose
additional taxes on the sale of goods and services through the Internet. Such
proposals, if adopted, could substantially impair the growth of online
commerce, and could adversely affect our opportunity to derive financial
benefit from such activities. Moreover, a successful assertion by one or more
states or any foreign country that we should collect sales or other taxes on
the sale of virtual calling cards or services on our system could have a
material adverse effect on our operations.
Legislation imposing a moratorium on the ability of states to impose taxes
on Internet-based transactions was passed by the United States Congress last
year. The tax moratorium will be in effect only for three years. The same
legislation that imposed the moratorium also established an Advisory Commission
to consider methods by which states could impose sales taxes on Internet
transactions. If the moratorium expires at the end of its three-year term,
there can be no assurance that the moratorium will be renewed at the end of
such period. Failure to renew the moratorium could allow various states to
impose taxes on Internet-based commerce. The imposition of such taxes could
have a material adverse effect on our business, financial condition and
operating results.
Competition
With respect to prepaid calling cards, we compete with many of the largest
telecommunications providers, including AT&T, MCI WorldCom, Cable & Wireless
and Sprint. These companies are substantially larger and have greater
financial, technical, engineering, personnel and marketing resources, longer
operating histories, greater name recognition and larger customer bases than we
do. We also compete with smaller, emerging carriers in the prepaid calling card
market, including PT-1 Communications, Inc., RSL Communications, IDT Corp.,
SmarTalk Teleservices, Inc., Pacific Gateway Exchange, Inc., FaciliCom
International, LLC and Telegroup, Inc. We may also compete with large operators
in other countries. These companies may have larger, more established customer
bases and other competitive advantages. Deregulation in other countries could
also result in significant rate reductions. We believe that additional
competitors will be attracted to the prepaid card market. These competitors
include Internet-based service providers and other telecommunications
companies. Competition from existing or new competitors could substantially
reduce our revenues from the sale of these cards. A general decrease in
telecommunication rates charged by international long distance carriers could
also have a negative effect on our operations.
An increasing number of large, well-capitalized companies are entering the
market for Internet telephony products and services. As a result, we may not be
able to compete effectively with our competitors in this market, or to increase
our customer base. Various major long distance providers, including AT&T, Bell
Atlantic Corporation and Deutsche Telekom AG, as well as other major companies,
including Motorola, Inc., Intel Corporation and Netscape Communications
Corporation, have all entered or plan to enter the Internet telephony market,
in some cases by investing in companies engaged in the development of Internet
telephony products. Our competitors also include a number of companies that
have introduced services that make Internet
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telephony solutions available to businesses and consumers. Net2Phone, Delta
Three, ITXC Corp. and OzEmail Limited, which was recently acquired by MCI
WorldCom, provide a range of Internet telephony services to consumers and
businesses that are similar to the ones we offer. Several companies, including
industry leaders, including AT&T, Sprint and Qwest Communications, have
announced their intention to offer these services on a wider basis in both the
United States and internationally.
In addition, we compete in the market for Internet telephony services with
companies that produce software and other computer equipment that may be
installed on a user's computer to permit voice communications over the
Internet. Current Internet telephony products include VocalTec Communications,
Ltd.'s Internet Phone, QuarterDeck Corporation's WebPhone and Microsoft's
NetMeeting. Also, a number of large companies, including Cisco Systems, Inc.,
Lucent Technologies, Inc., Northern Telecom Limited, Neura Communications and
Dialogic Corp. offer or plan to offer server-based Internet telephony products.
These products are expected to allow communications over the Internet between
parties using a multimedia PC and a telephone and between two parties using
telephones.
We believe that the principal competitive factors affecting our market in no
particular order are:
. price and rates;
. quality of transmission;
. product accessability and ease of use;
. customer service;
. brand recognition;
. Web site convenience and accessibility;
. targeted marketing directly to probable users of the services;
. quality of search tools; and
. system reliability.
Increased competition may result in reduced operating margins, loss of
market share and diminished value in our brand. We cannot assure you that we
will be able to compete successfully against current and future competitors. As
a strategic response to changes in the competitive environment, we may, from
time to time, make certain pricing, service or marketing decisions that could
have a material adverse effect on our business, financial condition and
operating results.
New technologies and the expansion of existing technologies may increase
competitive pressures by enabling our competitors to offer lower-cost services.
Certain Web-based applications that direct Internet traffic to other Web sites
may channel users to services that compete with us. In addition, companies that
control access to transactions through network access or Web browsers could
promote our competitors or charge us substantial fees for inclusion. The
occurrence of any of these events could have a material adverse effect on our
business, financial condition and operating results.
Intellectual Property and Other Proprietary Rights
Our success depends in part upon our ability to protect our proprietary
technology and other intellectual property rights. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in our products
and services. We protect our proprietary software through United States
copyright laws, and the source code for our proprietary software is protected
under trade secret laws. In December 1996, we applied to the United States
Patent and Trademark Office to register the trademarks: "WorldQuest" and
"WorldQuest Networks." In April 1999, the Patent and Trademark Office granted
us a notice of allowance for "WorldQuest" for communication services, both
voice and facsimile transmissions. In October 1997, the Patent and Trademark
Office issued a notice of publication regarding our application to register
"WorldQuest Networks" as a trademark. In response to that notice, Qwest
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Communications filed a notice of opposition in September 1998, which is
currently pending before the Patent and Trademark Office. If we do not prevail,
we will not be able to obtain a registered trademark for "WorldQuest Networks"
and we could be required to stop using the name or pay a fee to Qwest for
permission to use it. Any trademark may be challenged for a period of six years
after it has been granted. Thus, we could also face a cancellation proceeding
with the Patent and Trademark Office relating to our trademark for
"WorldQuest." Effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are made
available online, and thus, the steps that we take may be inadequate to protect
our rights. We cannot assure you that we will be issued any of these trademarks
and may find that such marks are unavailable.
We have entered into confidentiality and assignment agreements with our
employees and contractors, and nondisclosure agreements with parties with whom
we conduct business. We do this in order to limit access to and disclosure of
our proprietary information. We cannot assure you that these contractual
arrangements or the other steps taken by us to protect our intellectual
property will prove sufficient. To date, we have not actively policed
unauthorized use of our technology. This is because the global nature of the
Internet makes it difficult to control the ultimate destination or security of
software or other data transmitted.
In the future, we may license certain of our proprietary rights to third
parties. While we will attempt to ensure that the quality of the WorldQuest
Networks' brand is maintained by such licensees, we cannot assure you that such
licensees will not take actions that might materially adversely affect the
value of our proprietary rights or reputation, and have a material adverse
effect on our business, financial condition and operating results. We also rely
on certain technologies that we license from third parties. These may include
suppliers of key database technology, enhanced services platforms, gateway
server platforms, operating systems and specific hardware components for our
service. We cannot assure you that these third-party technology licenses will
continue to be available to us on commercially reasonable terms. The loss of
such technology could require us to obtain substitute technology of lower
quality or performance standards or at greater cost, which could materially
adversely affect our business, financial condition and operating results.
On July 9, 1999, we filed a patent application with the United States Patent
and Trademark office for the architecture of certain of our software
applications. These applications allow customers to Web initiate calls using
our world access virtual calling cards and to Web initiate collect calls using
our phone collect product.
Employees
As of March 31, 1999, we had 11 full-time employees. None of our employees
are represented by a labor union. We have not experienced any work stoppages
and consider our employee relations to be good.
Our future performance depends in significant part upon the continued
service of our key technical and senior management personnel, none of whom are
bound by an employee agreement requiring service for any defined period of
time. The loss of services of one or more of our key employees could have a
material adverse effect on our business, financial condition and operating
results. Our future success also depends in part upon our continued ability to
attract, hire, train and retain highly qualified technical and managerial
personnel. Competition for such personnel is intense and there can be no
assurance that we can retain our key personnel in the future.
Facilities
Our executive offices are presently located in Dallas, Texas, where we lease
approximately 3,298 square feet under a lease at a monthly rental of
approximately $5,500. The lease expires January 31, 2002. We believe our space
is adequate for our current needs. As we expand, we expect that suitable
additional space will be available on commercially reasonable terms, although
no assurance can be made in this regard.
Legal Proceedings
We occasionally become involved in litigation arising out of the normal
course of business. There are no material pending legal proceedings against us.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth the name, age as of June 30, 1999, and
position of all of our directors and executive officers:
<TABLE>
<CAPTION>
Directors and Executive
Officers Age Position
- ----------------------- --- --------
<S> <C> <C>
B. Michael Adler........ 52 Chairman of the Board and Chief Executive Officer
Michael R. Lanham....... 45 Director, President, Chief Operating Officer and Secretary
E. Denton Jones......... 48 Director
Hugh E. Humphrey, Jr.... 74 Director
Mark C. Levy............ 46 Chief Financial Officer and Treasurer
</TABLE>
B. Michael Adler is the founder of WorldQuest Networks and has been our
Chairman of the Board and Chief Executive Officer since our inception in 1996.
Mr. Adler is a director of Intellicall, Inc., a publicly traded manufacturer of
pay phones and call processing equipment (American Stock Exchange symbol
"ICL"). Mr. Adler founded Intellicall in 1984 and served as Chairman or Vice
Chairman of the Board from its inception until November 1993. For approximately
the last five years until July 1999, Mr. Adler was the Chairman of the Board of
The Payphone Company Limited, a company that installed and owns a wireless pay
phone network in Sri Lanka. For approximately the last four years, he has been
the Chief Executive Officer of Eagle Venture Capital, LLC, a Delaware limited
liability company, formerly known as WorldQuest Networks, LLC.
Michael R. Lanham joined WorldQuest Networks in December 1998 as a director
and the President and Chief Operating Officer. Mr. Lanham has been the acting
Chief Financial Officer since December 1998, and will be replaced by Mr. Levy
on July 19, 1999. From June 1997 to December 1998, he provided management
consulting services to Stratton Voice and Data, a telephone and data
integration company. Mr. Lanham was a member of the founding group of
MultiTechnology Services Corporation, a competitive local exchange carrier, and
served as Chief Executive Officer from May 1991 until June 1997.
E. Denton Jones has been Chairman of the Board and Chief Executive Officer
of New York City Telecommunications Company, Inc., a privately held
telecommunications company, since he co-founded it in June 1993. Mr. Jones has
been involved in the telecommunications industry since 1984 and owned or
operated several privately held telecommunications companies during that time
prior to co-founding New York City Telecommunications. He has been a director
of WorldQuest Networks since July 1999.
Hugh E. Humphrey, Jr. has been President, Chief Executive Officer and
Chairman of the Board of Algiers Bancorp, Inc., a publicly traded savings and
loan holding company based in New Orleans, Louisiana (trading symbol "ALGC"),
since 1996 and has been President since 1996 and Chief Executive Officer since
1984 of Algiers Homestead Association, the subsidiary of Algiers Bancorp, Inc.
He has been a director of WorldQuest Networks since 1996.
Mark C. Levy will join WorldQuest Networks on July 19, 1999 as our Chief
Financial Officer and Treasurer. For the past five years before joining us, he
was engaged in financial management consulting services from September 1998
until July 1999 for his own firm, Levy & Associates, was Vice President and
Controller from August 1996 until August 1998 of Darling International, Inc., a
recycling company, Vice President and Controller from April 1995 until August
1996 of Staffing Resources, Inc., a staffing services and consulting company,
and Vice President Financial Services from March 1993 until April 1995 of MBNA
Information Services, Inc., a credit card processing company.
Board of Directors
Our Board of Directors currently has four members. Directors are elected
annually to serve until the next annual meeting of stockholders and until their
successors are elected and qualified, unless the Board is divided into classes.
Our Bylaws provide that the Board of Directors may be divided into three
classes, as nearly equal
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in number as possible, if approved by a majority of the Board. If divided into
classes, Class I Directors would serve until the next annual meeting of
stockholders and thereafter for terms of three years until their successors
have been elected and qualified; Class II Directors would serve until the
second succeeding annual meeting of stockholders and thereafter for terms of
three years until their successors have been elected and qualified; and Class
III Directors would serve until the third succeeding annual meeting of
stockholders and thereafter for terms of three years until their successors
have been elected and qualified.
Our Bylaws also provide that Directors may only be removed from office for
cause and only by the affirmative vote of holders of 67% or more of the voting
stock. Cause is defined exclusively to mean conviction of a felony, proof
beyond a reasonable doubt of the gross negligence or willful misconduct of a
director which is materially detrimental to the company or proof beyond a
reasonable doubt of a breach of fiduciary duty by a director which is
materially detrimental to the company.
Board of Directors Compensation
We intend to pay our non-employee directors annual compensation of $20,000
for their services. In addition, non-employee directors will receive a fee of
$1,000 for each meeting attended. Non-employee directors attending any
committee meeting will receive an additional fee of $1,000 for each committee
meeting attended, unless the committee meeting is held on the day of a meeting
of the Board of Directors, in which case they will receive no additional
compensation for attending the committee meeting. Non-employee directors will
also be reimbursed for reasonable costs and expenses incurred for attending any
director or committee meetings. Our officers who are directors will not be paid
any directors fees. Concurrently with this offering, we intend to grant options
to purchase shares of common stock under our Stock Option Plan to each of our
non-employee directors. See "--Stock Options."
Board of Directors Committees
Our Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee is comprised of Hugh E. Humphrey, Jr. and E. Denton Jones
and is responsible for making recommendations concerning the engagement of
independent certified public accountants, approving professional services
provided by the independent certified public accountants and reviewing the
adequacy of our internal accounting controls. The Compensation Committee is
comprised of B. Michael Adler and E. Denton Jones and is responsible for
recommending to the Board of Directors all officer salaries, management
incentive programs and bonus payments.
Limitations on Directors' Liabilities and Indemnification
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a corporation to eliminate or limit the personal liability of a
director to the corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director, provided that such provision shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the DGCL relating to
unlawful dividends, stock purchases or redemptions or (iv) for any transaction
from which the director derived an improper personal benefit. Section 102(b)(7)
of the DGCL is designed, among other things, to encourage qualified individuals
to serve as directors of Delaware corporations. Our Certificate of
Incorporation provides that, except to the extent prohibited by the DGCL, our
directors shall not be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty by our directors. We believe
this provision will assist us in securing the services of qualified directors
who are not our employees. Under Delaware law, the directors have fiduciary
duties to us that are not eliminated by this provision of the Certificate of
Incorporation and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of non-monetary relief will remain available. In
addition, each director will continue to be subject to liability under Delaware
law for breach of the director's duty of loyalty to us for acts or
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omissions that are found by a court of competent jurisdiction to be not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director and for payment of
dividends or approval of stock repurchases or redemptions that are prohibited
by Delaware law. This provision also does not affect the director's
responsibilities under any other laws, such as the federal securities law or
state or federal environmental laws. In addition, we intend to maintain
liability insurance for, and will enter into indemnification agreements with,
our officers and directors. If equitable remedies are found not to be available
to stockholders in any particular case, stockholders may not have any effective
remedy against actions taken by directors that constitute negligence or gross
negligence.
Section 145 of the DGCL permits us to, and the Certificate of Incorporation
provides that we shall, indemnify each person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
by reason of the fact that he or she is or was, or has agreed to become, our
director or officer, or is or was serving, or has agreed to serve, at our
request, as a director, officer or trustee of, or in a similar capacity with,
another corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan), or by reason of any action alleged to
have been taken or omitted in such capacity, against all expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or her on his or her behalf in connection with such
action, suit or proceeding and any appeal therefrom. Such right of
indemnification shall inure to such individuals whether or not the claim
asserted is based on matters that antedate the adoption of the Certificate of
Incorporation. Such right of indemnification shall continue as to a person who
has ceased to be a director or officer and shall inure to the benefit of the
heirs and personal representatives of such a person. The indemnification
provided by the Certificate of Incorporation shall not be deemed exclusive of
any other rights that may be provided now or in the future under any provision
currently in effect or hereafter adopted by the Certificate of Incorporation,
by any agreement, by vote of stockholders, by resolution of directors, by
provision of law or otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors pursuant to the foregoing provision, or
otherwise, we have been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.
Executive Compensation
Summary Compensation Table
The following table sets forth information concerning the annual and long-
term compensation earned by our Chief Executive Officer. No executive officer
had an annual salary and bonus during fiscal 1998 exceeding $100,000.
<TABLE>
<CAPTION>
Annual Compensation
-------------------------
Other annual
Name and principal position Year Salary($) compensation($)
--------------------------- ---- --------- ---------------
<S> <C> <C> <C>
B. Michael Adler................................. 1998 $-- $--
Chairman of the Board
and Chief Executive Officer(1).................. 1997 -- --
1996 -- --
</TABLE>
- --------
(1) Mr. Adler did not receive compensation from WorldQuest Networks for his
services during 1998, 1997 or 1996.
Upon closing of this offering, B. Michael Adler will begin receiving an
annual salary of $175,000. Michael R. Lanham will receive an annual salary of
$125,000 for 1999 and Mark C. Levy will receive an annual salary of $120,000
for 1999.
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Stock Options
1997 Stock Option Plan
In January 1997, our Board of Directors and stockholders adopted our 1997
Stock Option Plan (the "Plan"), which provides for the grant of non-qualified
stock options under the Internal Revenue Code. The Plan is administered by our
Board of Directors. Options may be granted to our officers, directors and key
employees or any future subsidiaries. The exercise price for any option granted
under the Plan may not be less than the fair market value of the shares of
common stock at the time the option is granted as determined by the Board of
Directors in the exercise of their sole and exclusive judgement. The purpose of
the Plan is to provide a means of performance-based compensation in order to
attract and retain qualified personnel and to provide an incentive to those
whose job performance affects us.
The Plan authorizes the grant of options to purchase an aggregate of up to
500,000 shares of our unissued voting common stock. The number of shares
reserved for issuance under the Plan is subject to anti-dilution provisions for
stock splits, stock dividends and similar events. If an option granted under
the Plan expires or terminates, for any reason, the shares subject to any
unexercised portion of such option will again become available for the issuance
of further options under the Plan. Unless the Plan is terminated earlier, it
terminates 10 years from its effective date. Such termination will have no
effect on options previously granted.
Under the Plan, we may make loans available to stock option holders, subject
to our Board's approval, in connection with the exercise of stock options
granted under the Plan. If shares of common stock are pledged as collateral for
such indebtedness, such shares may be returned to us in satisfaction of such
indebtedness.
The term of each option shall be determined by the Board, but shall not be
for more than 10 years from the date the option is granted.
Options granted under the Plan will become exercisable according to the
terms of the grant made by the Board. The Board has discretionary authority to
select participants from among eligible persons and to determine at the time an
option is granted, the number of shares granted, form of payment, the terms and
provisions of the option and when and in what increments shares covered by the
option may be purchased. Options may be exercisable either in whole or in part,
but not less than 100 shares may be purchased at any one time unless the number
purchased is the total number of shares granted by the option.
The exercise price of any option granted under the Plan is payable in full
in cash or in such other consideration as the Board deems appropriate,
including shares of common stock of our company valued at fair market value as
of the date of exercise of the option. No option may be exercised during the
optionee's lifetime unless the optionee is then an employee or consultant of
our company or a subsidiary corporation; provided that, in the event the
optionee's employment terminates for reasons other than death or disability,
the option may be exercised during the three month period following the
termination of employment. Thereafter, the option terminates. In the case of
disability or death, the Board may extend the option for up to one year.
Notwithstanding the foregoing, options granted to directors may be exercisable
for a period of up to seven years following the date such director ceases to be
one of our directors.
Options granted under the Plan are not transferable, except in the event of
death of the employee. In that event, the option may be exercised at any time
within one year after death by the personal representative of the estate.
The Board may from time to time revise or amend the Plan, and may suspend or
discontinue it at any time. However, no such revision or amendment may be made
without stockholder approval where there is any increase in the number of
shares subject to the Plan (with the exception of adjustments resulting from
changes in capitalization), any changes in the designation of the class of
participants eligible to receive options under the Plan or any material
increase in the benefits accruing to participants under the Plan.
In the event shares of common stock are changed into or exchanged for stock
in another unrelated corporation or are converted to cash pursuant to a plan of
merger, liquidation or dissolution as defined in the Plan, all options issued
shall be exercisable with respect to all the shares covered thereby.
48
<PAGE>
Options to acquire 149,664 shares are outstanding under the Plan at an
average exercise price per share of $2.86 and an additional option to acquire
100,000 shares will be issued on July 19, 1999 at an exercise price equal to
the initial public offering price. Of these amounts, options to acquire 110,000
shares are, or will be, held by executive officers and directors. Options to
acquire 167,867 shares have been granted outside the Plan to our President at
an exercise price of $3.33 per share, all of which vest on the closing of this
offering. On the effective date of this offering, we expect to grant to certain
other employees, officers and directors options to acquire shares of
common stock at a per share exercise price equal to the initial public offering
price, vesting in 25% increments on each anniversary from the date of grant for
nondirectors, and 100% on the first anniversary of the date of grant for non-
employee directors.
CERTAIN TRANSACTIONS
Effective at our formation on October 14, 1996, Eagle Venture contributed
$1,000 and various tangible and intangible assets to us in exchange for 100% of
our outstanding common stock. The assets had a book value of approximately
$184,000, which was determined to be the fair value of the assets by B. Michael
Adler, our Chairman of the Board, who was also our only director at the time.
Mr. Adler also owns 94% of Eagle Venture. The contributed assets had an initial
cost to Eagle Venture of approximately $230,000. We also assumed an existing
real estate lease from which premises we initially conducted operations. During
the first quarter of 1997, Eagle Venture contributed an additional $316,000 in
cash to us as additional equity without requiring any additional shares of
common stock to be issued to it.
From time to time, Eagle Venture has made advances to us. We have a credit
facility with Eagle Venture to provide available credit to us of up to $2.0
million. The outstanding amount owed to Eagle Venture by us at March 31, 1999
was $1.8 million and at December 31, 1998 was $1.7 million, which were the
largest outstanding balances during each of those periods. In May 1999, we
converted $1.1 million owed to Eagle Venture under the credit facility to a
term loan bearing interest at 8% per annum with interest and principal payable
May 5, 2002. Eagle Venture also agreed at such time to convert $200,000 of the
facility into 60,061 shares of our common stock, at a conversion price of $3.33
per share. We also continue to have a $900,000 line of credit facility with
Eagle Venture, which bears interest at 8% per annum and is payable on demand.
If no demand is made, accrued interest on the outstanding line of credit
facility accrues until December 18, 1999, at which time it is payable.
Thereafter, accrued interest on the outstanding line of credit facility is
payable monthly and the outstanding line of credit facility is payable on May
5, 2002. Demand for payment of $468,000 of the principal balance of the line of
credit facility has been made effective upon the closing of this offering, and
we intend to repay such amount from the proceeds of this offering.
On December 7, 1998, we entered into a written agreement with WorldQuest
Communications, Inc. and Eagle Venture which formalized an earlier oral
agreement relating to the grant of a license to us by WorldQuest Communications
of the name "WorldQuest," and to various amounts funded to Eagle Venture by
WorldQuest Communications, portions of which Eagle Venture then funded to us as
equity or as a loan. Pursuant to this agreement, Eagle Venture acknowledged its
prior oral agreement to transfer, and caused the transfer of, 360,000 shares of
our common stock owned by it to WorldQuest Communications in consideration of
WorldQuest Communications canceling approximately $100,000 of payables owed by
Eagle Venture to WorldQuest Communications, and WorldQuest Communications
acknowledged its prior oral grant of a license to us of the name "WorldQuest."
As part of this transaction, E. Denton Jones also cancelled $150,000 of
payables owed to him by Eagle Venture, which Eagle Venture also had funded to
us as equity or as a loan. Mr. Jones beneficially owns 99% of WorldQuest
Communications.
We entered into a Joint Venture Agreement with BDC, LLC, a Nevada limited
liability company owned by E. Denton Jones, in April 1999 to fund the
installation of an Internet gateway in each of Sri Lanka, Costa Rica and India.
BDC contributed $50,000 to the joint venture and we agreed to be responsible
for obtaining the Internet gateways and for installing and operating them. We
are entitled to 60% of the profits and losses from the operation of these
gateways and BDC is entitled to 40%.
During January 1999 and during 1998 and 1997, B. Michael Adler's brother
performed consulting services to us. We paid him $5,500 for the three months
ended March 31, 1999, $61,500 during 1998 and $44,000 during 1997 for these
consulting services.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of June 30, 1999, and as adjusted to reflect
the sale of the shares of common stock offered hereby, by: (i) each
of our directors; (ii) each of our executive officers; (iii) each person known
to us to be beneficial owner of more than 5% of the common stock; and (iv) all
of our directors and executive officers as a group.
<TABLE>
<CAPTION>
Percentage of shares owned
------------------------------
Name and address of Shares beneficially Before the After the
beneficial owner(1) owned offering offering (2)
- ------------------- ------------------- ------------ ---------------
<S> <C> <C> <C>
B. Michael Adler.......... 2,671,478(/3/) 83.4%
16990 Dallas Parkway,
Suite 220
Dallas, Texas 75248
E. Denton Jones........... 360,000(/4/) 11.3
The Claridge, Suite 18D
3510 Turtle Creek Blvd.
Dallas, Texas 75219
Michael R. Lanham......... 167,867(/5/) 5.0
16990 Dallas Parkway,
Suite 220
Dallas, Texas 75248
Mark C. Levy.............. 100,000(/6/) 3.0
16990 Dallas Parkway,
Suite 220
Dallas, Texas 75248
Hugh E. Humphrey, Jr...... 5,000(/7/) * *
No. 1 Westbank Expressway
New Orleans, Louisiana
70174
All directors and
executive officers
as a group (5 persons)... 3,304,345 95.1
</TABLE>
- --------
*Less than 1%
(1) To our knowledge, except as set forth in the footnotes to this table and
subject to applicable community property laws, each person named in the
table has sole voting and investment power with respect to the shares of
common stock set forth opposite such person's name.
(2) The percentage of beneficial ownership after the offering is calculated
assuming that shares of common stock are sold in this offering.
(3) Eagle Venture Capital, LLC is the record and beneficial owner of 2,666,478
of these shares. B. Michael Adler owns 94% of the outstanding member
interests in Eagle Venture and is also deemed to beneficially own these
shares. The share ownership for Mr. Adler also includes a vested option to
purchase 5,000 shares.
(4) WorldQuest Communications, Inc. is the record and beneficial owner of these
shares. E. Denton Jones beneficially owns 99% of the outstanding capital
stock of WorldQuest Communications, Inc. and is also deemed to beneficially
own these shares.
(5) Represents options to purchase 167,867 shares granted December 7, 1998, all
of which vest on the closing of this offering.
(6) Represents options to purchase 100,000 shares to be granted effective July
19, 1999, which vest 20%, 30% and 50% on the first, second and third
anniversaries of the date of grant.
(7) Represents vested options to purchase these shares.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50 million shares of common stock
and 10 million of preferred stock. After giving effect to this offering, there
will be shares of common stock outstanding and no shares of preferred
stock outstanding. The following description of our capital stock does not
purport to be complete and is subject to and qualified in its entirety by our
Certificate of Incorporation and Bylaws, which are included as exhibits to the
registration statement of which this prospectus forms a part, and by the
provisions of applicable Delaware law.
Common Stock
Holders of common stock are entitled to one vote per share on matters to be
voted upon by the stockholders. There are no cumulative voting rights. Holders
of common stock are entitled to receive ratable dividends when, as and if
declared by the Board of Directors out of funds legally available therefor.
Upon our liquidation, dissolution or winding up, holders of common stock share
ratably in our assets available for distribution to our stockholders, subject
to the preferential rights of any then-outstanding shares of preferred stock.
No shares of preferred stock will be outstanding immediately following the
consummation of this offering. Holders of common stock have no preemptive,
subscription, redemption, conversion rights or any right of first refusal. All
shares of common stock outstanding upon the effective date of this prospectus,
and the shares offered hereby will, upon issuance and sale, be fully paid and
nonassessable.
Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10 million shares of preferred stock in one or
more series, and to fix the designations, rights, preferences, privileges,
qualifications and restrictions thereof including dividend rights, conversion
rights, voting rights, rights and terms of redemption, liquidation preferences
and sinking fund terms, any or all of which may be superior to the rights of
the common stock. The Board of Directors, without stockholder approval, can
issue preferred stock with voting, conversion and other rights which could
adversely affect the voting power and other rights of the holders of common
stock. Preferred stock could thus be issued quickly with terms calculated to
delay or prevent a change in control or to make removal of management more
difficult. In certain circumstances, such issuance could have the effect of
decreasing the market price of the common stock. The issuance of preferred
stock may have the effect of delaying, deterring or preventing a change in
control without any further action by the stockholders including, but not
limited to, a tender offer to purchase common stock at a premium over then
current market prices. We have no present plan to issue any additional shares
of preferred stock.
Warrants and Options
At March 31, 1999, we had outstanding warrants and options to purchase up to
478,005 shares of common stock at an average weighted exercise price of $3.18
per share and effective July 19, 1999 will have outstanding additional options
to purchase 100,000 shares at an exercise price equal to the initial public
offering price. Options and warrants to purchase up to shares of common
stock will be subject to 180-day lock-up agreements and shares will be
subject to one-year lock-up agreements with the underwriters. All of such
warrants and options expire between 2003 and July 2006.
We have also granted the representative of the underwriters a warrant to
purchase shares of common stock for an exercise price of $ per
share at any time during the four years following closing of this offering.
Registration Rights
We have entered into a registration rights agreement with InterVoice, Inc.,
pursuant to which we have agreed that if we file with the SEC a registration
statement (other than a registration statement registering
51
<PAGE>
shares pursuant to an employee benefit or similar plan), InterVoice shall have
the right to include all or any number of shares beneficially owned by them in
such registration statement, subject to limitations imposed by marketing
conditions. All expenses of such registrations shall be at our expense. If
InterVoice, by exercising its registration rights, causes a large number of
shares to be registered and sold in the public market, such sales could have a
material adverse effect on the market price of your common stock. InterVoice is
not selling any of its shares pursuant to this prospectus. In addition, we will
endeavor to register, or file a post-effective amendment to this registration
statement to register shares of common stock underlying a warrant granted to
the representative of the underwriters in connection with this offering. See
"Underwriting" for a more complete description of the representative's warrant.
Anti-takeover Effects of Provisions of the Company's Charter and Bylaws
Our Bylaws provide that the Board of Directors may be divided into three
classes. If the Board is divided into classes, Class I Directors would serve
until the next annual meeting of stockholders and thereafter for terms of three
years and until their successors have been duly elected and qualified; Class II
Directors would serve until the second succeeding annual meeting of
stockholders and thereafter for terms of three years and until their successors
have been elected and qualified; and Class III Directors would serve until the
third succeeding annual meeting of stockholders and thereafter for terms of
three years and until their successors have been elected and qualified.
Stockholders have no cumulative voting rights and stockholders representing a
majority of the shares of common stock outstanding are able to elect all of the
directors. The Bylaws provide that a special meeting of the stockholders may
only be called by the Board of Directors, the Chairman of the Board, the Chief
Executive Officer, the President or stockholders owning not less than 67% of
our voting stock. Our Bylaws provide that Directors may be removed from office
only for cause and only by the affirmative vote of stockholders owning 67% of
our outstanding voting stock. Cause is exclusively defined to mean conviction
of a felony, proof beyond a reasonable doubt of the gross negligence or willful
misconduct of a director which is materially detrimental to the company or
proof beyond a reasonable doubt of a breach of fiduciary duty by a director
which is materially detrimental to the company.
The classification of the Board of Directors, lack of cumulative voting and
restrictions on stockholders' abilities to call special meetings and remove
directors makes it more difficult for existing stockholders to replace the
Board of Directors as well as for any other party to obtain control of us by
replacing the Board of Directors. Since the Board of Directors has the power to
retain and discharge our officers, these provisions could make it more
difficult for existing stockholders or another party to effect a change in
management.
These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control of management. They are intended to
enhance the likelihood of continued stability in the composition of the Board
of Directors and in the policies furnished by the Board of Directors and to
discourage certain types of actions that may involve an actual or threatened
change of control. These provisions are designed to reduce our vulnerability to
an unsolicited acquisition proposal and are also intended to discourage certain
tactics that may be used in proxy fights. However, such provisions could have
the effect of discouraging others from making tender offers for your shares,
which may inhibit fluctuations in the market price of your shares that could
result from actual or rumored takeover attempts.
Section 203 of the Delaware General Corporation Law
Generally, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a broad range of "business combinations" with an
"interested stockholder" (defined generally as a person owning 15% of more of a
corporation's outstanding voting stock) for three years following the date such
person became an interested stockholder unless (i) before the person becomes an
interested stockholder, the transaction resulting in such person becoming an
interested stockholder or the business combination is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction that
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the
52
<PAGE>
outstanding voting stock of the corporation (excluding shares owned by
directors who are also officers of the corporation or shares held by employee
stock plans that do not provide employees with the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender offer or exchange offer), or (iii) on or after such date on which such
person became an interested stockholder the business combination is approved by
the board of directors and authorized at an annual or special meeting, and not
by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock excluding shares owned by the interested stockholders.
The restrictions of Section 203 do not apply, among other reasons, if a
corporation, by action of its stockholders, adopts an amendment to its
certificate of incorporation or bylaws expressly electing not to be governed by
Section 203, provided that, in addition to any other vote required by law, such
amendment to the certificate of incorporation or bylaws must be approved by the
affirmative vote of a majority of the shares entitled to vote. Moreover, an
amendment so adopted is not effective until 12 months after its adoption and
does not apply to any business combination between the corporation and any
person who became an interested stockholder of such corporation on or prior to
such adoption. Our Certificate of Incorporation and Bylaws do not currently
contain any provisions electing not to be governed by Section 203 of the DGCL.
Section 203 of the DGCL may discourage persons from making a tender offer
for or acquisitions of substantial amounts of common stock. This could have the
effect of inhibiting changes in management and may also prevent temporary
fluctuations in the market price of your common stock that often result from
takeover attempts.
Stockholder Proposals for Consideration at Annual Meeting
Our Bylaws provide that no matter may be brought before the annual meeting
of stockholders unless it is contained in our proxy statement delivered to
stockholders with regard to such annual meeting. Any stockholder who desires to
include a proposal for consideration at any annual meeting must submit such
proposal to the Board of Directors in writing, by delivering such notice to the
attention of the President at our executive offices, no earlier than January 1
of the year in which such annual meeting will be held and not later than
February 15 of the year in which such annual meeting will be held.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is .
53
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Shares Outstanding and Freely Tradeable Immediately Following this Offering
Prior to this offering, there has been no public market for our common
stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price
prevailing from time to time. Sales of substantial amounts of common stock in
the public market could adversely effect prevailing market prices.
After this offering, we will have outstanding shares of common stock. Of
the outstanding shares, the shares to be sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act unless purchased by "affiliates" as that term is defined in Rule
144 under the Securities Act, which shares, if purchased by an affiliate, will
be subject to certain of the resale limitations imposed by Rule 144.
Shares Subject to Rule 144
The remaining shares of common stock outstanding upon completion of this
offering are "restricted securities" as that term is defined in Rule 144,
2,606,417 of which will be eligible for sale under Rule 144 upon completion of
this offering, subject to the lock-up described below. As described below,
Rule 144 permits resales of restricted securities subject to certain
restrictions.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year, including any person who may be deemed an "affiliate," would be entitled
to sell within any three-month period a number of such shares that does not
exceed the greater of 1% of the shares of our common stock then outstanding
( shares immediately after this offering) or the average weekly trading
volume in our common stock during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. A person who is not
deemed to have been an "affiliate" at any time during the three months
immediately preceding a sale and who has beneficially owned shares for at least
two years would be entitled to sell such shares under Rule 144 without regard
to the volume limitation described above.
Lock-Up Agreements
Each of our company and our executive officers, directors and the holders of
an aggregate of outstanding shares and shares covered by outstanding
options and warrants have agreed that they will not, without the prior written
consent of EBI Securities Corporation (which consent may be withheld in its
sole discretion) and subject to certain limited exceptions, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, sell short,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend or otherwise transfer or dispose of, directly or indirectly, any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock, or enter into any swap or similar agreement that
transfers, in whole or in part, any of the economic consequences of ownership
of the common stock, for a period commencing on the date of this prospectus and
continuing to a date 180 days after such date with regard to shares covered
by a warrant and one year after such date with regard to shares outstanding
or covered by outstanding options or warrants; provided, however, that such
restrictions do not apply to shares of common stock sold or purchased in this
offering or to shares of common stock purchased in the open market following
this offering. EBI Securities Corporation, on behalf of the underwriters, may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to these lock-up agreements. In addition, we
have agreed that, for a period of one year after the date of this prospectus,
we will not, without the consent of EBI Securities Corporation, make any
offering, purchase, sale, or other disposition of any shares of common stock or
other securities convertible into or exchangeable or exercisable for shares of
common stock (or agreement for such) except for the grant of options to
purchase shares of common stock pursuant to the Stock Option Plan.
54
<PAGE>
Resale of Shares Underlying Stock Options and Warrants
In general, under Rule 701 under the Securities Act, any of our employees,
directors, consultants or advisors who purchase shares from us in connection
with a compensatory stock or option plan or other written compensatory
agreement is entitled to resell such shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144, and are eligible to resell such shares 90 days after the effective
date of this offering in reliance on Rule 144, subject to the provisions of the
one year lock-up arrangements discussed above.
The Stock Option Plan authorizes the grant of options to purchase, and
awards of, an aggregate of up to 500,000 shares of the Company's common stock.
Options to purchase 149,664 shares are outstanding under the Stock Option Plan,
and an additional option for 167,867 shares outside of the Stock Option Plan
has been granted to our President. Options to purchase an additional 100,000
shares will be granted effective July 19, 1999. Of these options, 317,531
options have an average weighted option price of $3.11 per share and 100,000
options will have an exercise price equal to the initial public offering price.
After the expiration of the one year lock-up period and subject to certain
vesting restrictions, all of the shares issued pursuant to the exercise of
these stock options may be resold pursuant to Rule 701. In addition, we expect
to grant options to purchase 100,000 shares to certain of our employees,
officers and directors on the effective date of this offering. We intend to
file a registration statement on Form S-8 covering the shares that have been
reserved for issuance under the Stock Option Plan, permitting the resale of
such shares in the public market.
We have issued additional options and warrants to purchase an aggregate of
160,474 shares of common stock with an average weighted exercise price of $3.33
per share, of which 159,474 shares represent a warrant granted to InterVoice,
Inc. The shares of common stock that are issued pursuant to these options and
warrants must be held for a minimum of one year from the date of exercise prior
to their resale.
Registration Rights
We have entered into a registration rights agreement with InterVoice,
pursuant to which we have agreed that if we file with the SEC a registration
statement (other than a registration statement registering shares pursuant to
an employee benefit or similar plan), InterVoice shall have the right to
include all or any number of shares beneficially owned by them in such
registration statement, subject to limitations imposed by marketing conditions.
All expenses of such registrations shall be at our expense. If InterVoice, by
exercising its registration rights, causes a large number of shares to be
registered and sold in the public market, such sales could have a material
adverse effect on the market price of your common stock. InterVoice is not
selling any of its shares pursuant to this prospectus. In addition, we will
endeavor to register, or file a post-effective amendment to this registration
statement to register shares of common stock underlying a warrant granted to
the representative of the underwriters in connection with this offering. See
"Underwriting" for a more complete description of the representative's warrant.
Effect of Substantial Sales on Market Price of Common Stock
We are unable to estimate the number of shares that may be sold in the
future by existing security holders, or the effect, if any, that such sales
will have on the market price of the common stock prevailing from time to time.
Sales of substantial amounts of common stock, or the prospect of such sales,
could adversely affect the market price of our common stock.
55
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the underwriting agreement,
the underwriters named below, for which EBI Securities Corporation is acting as
representative, have agreed to purchase from our company the respective number
of shares of common stock set forth opposite each underwriter's name.
<TABLE>
<CAPTION>
Underwriter Number of Shares
- ----------- ----------------
<S> <C>
EBI Securities Corporation....................................
----
Total.....................................................
====
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in WorldQuest Networks' business and the receipt
of certain certificates, opinions and letters from WorldQuest Networks, its
counsel and independent auditors. The nature of the underwriters' obligations
is that they are obligated to purchase and pay for all the shares of common
stock offered hereby, if any shares are purchased.
The underwriters propose initially to offer stock directly to the public at
the public offering price set forth on the cover page of this prospectus and to
certain dealers at such price less a concession not in excess of $ per
share. After the initial public offering of the shares, the offering price and
other selling terms may be changed by the representative of the underwriters.
The representative has advised WorldQuest Networks that the underwriters do not
expect sales to accounts for which any of the underwriters will exercise
discretion as to such sale to exceed five percent of the total number of shares
offered hereby.
Each of WorldQuest Networks, its executive officers, directors and other
security holders have agreed that they will not, without the prior written
consent of EBI Securities Corporation (which consent may be withheld in its
sole discretion) dispose of or hedge any of their common stock or securities
convertible into or exchangeable for shares of common stock during the period
from the date of this prospectus continuing through the first anniversary of
the date of this prospectus. See "Shares Eligible for Future Sale" for a
discussion of these transfer restrictions.
WorldQuest Networks has granted to the representative an option, expiring at
the close of business on the 45th day after the date of this prospectus, to
purchase up to additional shares at the initial public offering price, less
the underwriting discounts, all as set forth on the cover page of this
prospectus. The representative may exercise such option only to cover over-
allotments made in connection with the sale of common stock in this offering.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
Upon completion of this offering, WorldQuest Networks will sell to the
representative for $ a warrant to purchase shares of common stock. The
representative's warrant will become exercisable one year after the effective
date of this offering at a per share exercise price of $ and will expire
five years from the effective date of this offering. The representative's
warrant and underlying shares of common stock will be restricted from sale,
transfer, assignment or hypothecation for a period of one year from the date of
this
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<PAGE>
prospectus, except to the representative, underwriters, selling group members
and their officers or partners. During the exercise period, holders of the
representative's warrants are entitled to certain demand and incidental rights
with respect to the shares of common stock issuable upon exercise of the
representative's warrant. The common stock issuable on exercise of the
representative's warrant is subject to adjustment in certain events to prevent
dilution.
WorldQuest Networks will pay the representative a nonaccountable expense
allowance of 2% of the gross proceeds of the offering, which will include
proceeds from the over-allotment option, if exercised. The representative's
expenses in excess of the nonaccountable expense allowance will be borne by the
representative. WorldQuest Networks has paid $40,000 to the representative as
an advance for expenses.
WorldQuest Networks has agreed to indemnify the underwriters against certain
liabilities, including civil liabilities under the Securities Act, and to
contribute to payments which the underwriters may be required to make regarding
these liabilities.
WorldQuest Networks has agreed to give notice to the representative of
meetings of the board of directors and to grant access to such meetings to a
nominee of the representative to attend the meetings as an observer. EBI
Securities Corporation also has the right, but not the obligation, to nominate
one director to WorldQuest Networks' board of directors for four years from the
closing of this offering.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation
M under the Exchange Act. Over-allotment involves syndicate sales in excess of
the offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representative to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Neither WorldQuest Networks nor the underwriters can predict the effect that
the transactions described above may have on the price of the common stock. In
addition, neither WorldQuest Networks nor the underwriters represent that the
underwriters will engage in such transactions. If commenced, such transactions
may be discontinued at any time without notice. It is anticipated that certain
of the underwriters will make a market in the common stock on completion of
this offering, as permitted by applicable law. The underwriters are not
obligated to make a market in the common stock and if they do so may
discontinue making a market at any time. There is no assurance an active
trading market will ever develop for the common stock.
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between WorldQuest Networks and the representative. The principal factors
considered in determining the initial public offering price will include:
. the information set forth in this prospectus and otherwise available;
. the history and the prospects for the industry in which WorldQuest
Networks will compete;
. the ability of WorldQuest Networks' management;
. the prospects for future earnings of WorldQuest Networks;
. the present state of WorldQuest Networks development and its current
financial condition;
. the general condition of the securities markets at the time of this
offering; and
. the recent market prices of, and the demand for, publicly traded stock
of generally comparable companies.
57
<PAGE>
LEGAL MATTERS
Certain matters relating to this offering are being passed upon for us by
Glast, Phillips & Murray, a professional corporation, Dallas, Texas. Certain
legal matters will be passed upon for the underwriters by Freshman, Marantz,
Orlanski, Cooper & Klein, a law corporation, Beverly Hills, California.
INDEPENDENT AUDITORS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1998 and for each of the two years in the
period ended December 31, 1998, as set forth in their report. We have included
our financial statements in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
WHERE YOU CAN GET MORE INFORMATION
At your request, we will provide you, without charge, with a copy of any
exhibits to our registration statement incorporated by reference in this
prospectus. If you want more information, write or call us at:
WorldQuest Networks, Inc.
16990 Dallas Parkway, Suite 220
Dallas, Texas 75248
Telephone: (972) 818-0460
Fax: (972) 818-0978
Our fiscal year ends on December 31. We intend to furnish our stockholders
with annual reports containing audited financial statements and other
appropriate reports. In addition, we intend to become a reporting company and
file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any reports, statements or
other information we file at the SEC's public reference room at 450 Fifth
Street, N.W., Washington D.C. 20549, and at the SEC's regional offices located
at Seven World Trade Center, 13th Floor, New York, New York 10048, and the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information
on the operation of the public reference rooms. You can also request copies of
these documents, upon payment of a duplicating fee, by writing the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549. Our SEC filings are also available
to the public on the SEC Internet site at http:\\www.sec.gov.
58
<PAGE>
WorldQuest Networks, Inc. and Subsidiary
Index to Consolidated Financial Statements
Contents
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and March 31, 1999
(unaudited).............................................................. F-3
Consolidated Statements of Operations for the years ended December 31,
1997 and 1998 and the three month periods ended March 31, 1998 and 1999
(unaudited).............................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the years ended December 31, 1997 and 1998 and the three month period
ended March 31, 1999 (unaudited)......................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1998 and the three month periods ended March 31, 1998 and 1999
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
WorldQuest Networks, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of WorldQuest
Networks, Inc., as of December 31, 1998 and the related consolidated statements
of operations, consolidated changes in stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of WorldQuest
Networks, Inc., at December 31, 1998, and the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
July 7, 1999 /s/ Ernst & Young LLP
Dallas, Texas
F-2
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 18,833 $ 6,872
Accounts receivable................................ 235,244 82,183
----------- -----------
Total current assets................................. 254,077 89,055
Property and equipment, net.......................... 252,485 268,070
Other assets......................................... 740,212 613,192
----------- -----------
Total assets......................................... $ 1,246,774 $ 970,317
=========== ===========
LIABILITIES
Current liabilities:
Accounts payable................................... $ 1,234,726 $ 1,279,176
Accrued expenses................................... 344,231 339,334
Deferred revenue................................... 95,965 107,118
Note payable....................................... 100,000 100,000
Line of credit from principal stockholder.......... 638,096 686,181
Current portion of capital lease obligation........ 107,728 110,993
----------- -----------
Total current liabilities............................ 2,520,746 2,622,802
Term loan............................................ 1,100,000 1,100,000
Accrued interest..................................... 111,814 133,513
Capital lease obligation............................. 29,004 --
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, par value $.10 per share:
Authorized shares--5,000,000; none issued and
outstanding at December 31, 1998 and
March 31, 1999 (unaudited) -- --
Common stock, par value $.10 per share:
Authorized shares--10,000,000; issued and
outstanding shares--3,000,000 at December 31, 1998
and
March 31, 1999 (unaudited)........................ 300,000 300,000
Additional capital................................. 609,253 609,253
Accumulated deficit................................ (3,424,043) (3,795,251)
----------- -----------
Total stockholders' equity (deficit)................. (2,514,790) (2,885,998)
----------- -----------
Total liabilities and stockholders' equity
(deficit)........................................... $ 1,246,774 $ 970,317
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1997 and 1998 and the three months ended March
31, 1998 and 1999 (unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
------------------------ -----------------------
1997 1998 1998 1999
----------- ----------- ----------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Retail prepaid calling card
revenue................... $ -- $ 1,466,322 $ -- $1,228,351
Wholesale traffic and
other..................... 51,963 375,117 55,350 203,528
----------- ----------- ----------- ----------
Total revenue............ 51,963 1,841,439 55,350 1,431,879
Cost of sales.............. 227,011 2,005,631 95,062 1,233,969
----------- ----------- ----------- ----------
Gross margin (deficit)..... (175,048) (164,192) (39,712) 197,910
Selling, general and
administrative............ 1,102,383 1,115,131 275,024 467,342
Research and development
costs..................... 438,860 186,638 52,097 62,851
----------- ----------- ----------- ----------
Operating loss............. (1,716,291) (1,465,961) (366,833) (332,283)
Interest expense........... (28,265) (162,466) (22,636) (38,925)
Other income............... 155,000 50,000 50,000 --
----------- ----------- ----------- ----------
Loss before income taxes... (1,589,556) (1,578,427) (339,469) (371,208)
Income tax benefit......... -- -- -- --
----------- ----------- ----------- ----------
Net loss................... $(1,589,556) $(1,578,427) $ (339,469) $ (371,208)
=========== =========== =========== ==========
Weighted-average common
shares outstanding--basic
and diluted............... 3,000,000 3,000,000 3,000,000 3,000,000
=========== =========== =========== ==========
Net loss per share--basic
and diluted............... $ (0.53) $ (0.53) $ (0.11) $ (0.12)
=========== =========== =========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1997 and 1998 and the three months ended March
31, 1999 (unaudited)
<TABLE>
<CAPTION>
Common Common
Stock Stock Additional Accumulated Stockholders'
Shares Amount Capital Deficit Equity (Deficit)
--------- --------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 10,000 $ 1,000 $ -- $ (256,060) $ (255,060)
Additional capital
contribution......... -- -- 500,000 -- 500,000
Stock dividend........ 2,990,000 299,000 (299,000) -- --
Net loss.............. -- -- -- (1,589,556) (1,589,556)
--------- --------- --------- ------------ ------------
Balance at December 31,
1997................... 3,000,000 300,000 201,000 (1,845,616) (1,344,616)
Issuance of stock
purchase warrants.... -- -- 408,253 -- 408,253
Net loss.............. -- -- -- (1,578,427) (1,578,427)
--------- --------- --------- ------------ ------------
Balance at December 31,
1998................... 3,000,000 $ 300,000 $ 609,253 $ (3,424,043) $ (2,514,790)
Net loss (unaudited).. -- -- -- (371,208) (371,208)
--------- --------- --------- ------------ ------------
Balance at March 31,
1999 (unaudited)..... 3,000,000 $ 300,000 $ 609,253 $ (3,795,251) $ (2,885,998)
========= ========= ========= ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997 and 1998 and the three months ended March
31, 1997 and 1998
<TABLE>
<CAPTION>
December 31, March 31,
-------------------------- ----------------------
1997 1998 1998 1999
------------ ------------ ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Operating Activities
Net loss.................. $ (1,589,556) $ (1,578,427) $ (339,469) $ (371,208)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation............ 155,133 141,833 26,465 47,177
Amortization............ -- 121,222 3,883 21,139
Goodwill write-off...... -- -- -- 139,747
Changes in operating
assets and liabilities:
Accounts receivable... (41,715) (193,529) (44,728) 153,061
Accrued interest...... 27,387 84,427 21,158 21,699
Accounts payable and
accrued expenses..... 437,921 747,384 (8,429) 39,553
Deferred revenue...... -- 95,965 -- 11,153
Deposits and other
assets............... (5,433) (79,594) -- (12,727)
------------ ------------ ---------- ----------
Net cash (used in)
provided by operating
activities............... (1,016,263) (660,719) (341,120) 49,594
Investing Activities
Additions to property and
equipment................ (111,056) (148,047) (31,900) (83,902)
------------ ------------ ---------- ----------
Net cash used in investing
activities............... (111,056) (148,047) (31,900) (83,902)
Financing Activities
Proceeds from line of
credit, net.............. 788,137 919,294 440,971 48,085
Payments on capital
leases................... -- (53,519) -- (25,738)
Payment on note payable... -- (25,000) (25,000) --
Capital contribution...... 316,208 -- -- --
------------ ------------ ---------- ----------
Net cash provided by
financing activities..... 1,104,345 840,775 415,971 22,347
Increase (decrease) in
cash and cash
equivalents.............. (22,974) 32,009 42,951 (11,961)
Cash and cash equivalents
at beginning of period... 9,798 (13,176) (13,176) 18,833
------------ ------------ ---------- ----------
Cash and cash equivalents
at end of period......... $ (13,176) $ 18,833 $ 29,775 $ 6,872
============ ============ ========== ==========
Supplemental Disclosure of
Cash Flow Information
Interest paid............. $ 878 $ 54,075 $ 1,478 $ 4,658
============ ============ ========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1998 and the three months ended March 31,
1998 and 1999
1. Organization and Description of Business
WorldQuest Networks, Inc. (WorldQuest or the Company) was incorporated as a
Texas corporation effective October 14, 1996. The majority of the Common stock
of the Company is owned by Eagle Venture Capital, LLC ( Eagle) (formerly
WorldQuest Networks, LLC), a limited liability company. WorldQuest was formed
when the principal stockholder of Eagle decided to pursue Internet telephony
opportunities. In conjunction with the formation, Eagle contributed cash and
other assets valued at approximately $185,000 ( the estimated fair value) in
exchange for 100% of the then outstanding common stock. During 1997, Eagle
contributed an additional $316,000 to further capitalize the Company but
received no additional shares of common stock.
WorldQuest is an international Internet telephony company that sells virtual
prepaid calling cards through its Internet website and transmits long distance
calls over its own enhanced server platform using its own network or leased
capacity from other long distance carriers. In late 1998, the Company began to
sell its excess capacity to other long distance carriers. The Company was
considered a development stage enterprise until 1998 when substantial revenues
from the sale of prepaid calling cards began.
In 1998 and the three months ended March 31, 1998 and 1999 (unaudited)
wholesale traffic and other revenues include approximately $221,000, $55,000
and $35,000, respectively relating to the Company's Costa Rican subsidiary in
which WorldQuest has a 90% interest. See Note 5.
As of December 31, 1998 and March 31, 1999 (unaudited) tangible assets
located in foreign locations totaled 7% and 8%, respectively of total
consolidated assets.
WorldQuest is headquartered in Dallas, Texas
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiary. All significant intercompany balances and transactions have
been eliminated.
Interim Financial Statements
The consolidated unaudited financial statements as of March 31, 1999 and for
the three months in the periods ended March 31, 1999 and 1998 reflect all
adjustments (consisting only of normal recurring adjustments except as
described in Note 5) necessary for a presentation of the financial position and
results of operations for such periods.
Cash Equivalents
Cash equivalents include money market mutual funds and other highly liquid
investments purchased with maturities of three months or less.
Property and Equipment
Property and Equipment are recorded at cost. Depreciation is computed
principally using the double declining balance method over the estimated useful
lives of the assets. Amortization of capital leases and leasehold improvements
is provided on a double declining basis over the lives of the related assets or
the life of the lease, whichever is shorter, and is included with depreciation
expense.
F-7
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
Intangible Assets
The cost in excess of the fair value of tangible and identified intangible
assets of the Costa Rican operation (goodwill) is being amortized on a
straight-line basis over 10 years.
Impairment of Long-lived Assets
The Company evaluates long-lived assets, including goodwill for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable and the undiscounted cash flows to be
generated by these assets are less than the carrying amounts of these assets.
Deferred Income Taxes
Deferred income taxes are determined using the liability method, which gives
consideration to the future tax consequences associated with differences
between the financial accounting and tax basis of assets and liabilities. This
method also gives immediate effect to changes in income tax laws.
Revenue Recognition
Retail prepaid phone card revenue is deferred when the cards are purchased
by the customer and recognized as calling services are used. Wholesale traffic
revenue is recognized as calls are processed.
Research and Development Costs
Research and development costs are expensed as incurred and consist
primarily of salaries, supplies and contract services.
Advertising Costs
The Company expenses the cost of advertising as incurred. Advertising
expense for the years ended December 31, 1997 and 1998 and the three months
ended March 31, 1998 and 1999 (unaudited), was $3,745, $46,528, $138 and
$23,173, respectively.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," in the primary financial
statements and has provided supplemental disclosures required by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (see Note 10).
Net Loss per Share
Basic and diluted net loss per share is computed using the Company's net
loss for each period presented divided by the average common shares
outstanding. Stock options and warrants convertible into 80,000, 455,841,
80,000 and 477,005 shares of the Company's common stock for the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999
(unaudited), respectively, were not considered in the calculation of average
common shares outstanding as the effect would be anti-dilutive due to the
Company's net loss for all periods presented.
Concentration of Credit Risks
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash equivalents and accounts receivable.
Accounts receivable consist of amounts owed by credit
F-8
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
card processing companies relating to prepaid phone card sales, and amounts
owed by telephone companies for processed call traffic. At December 31, 1998
and March 31, 1999 (unaudited) a telephone company accounted for 59% and 33%,
respectively and a credit card processing company 26% and 48%, respectively, of
total accounts receivable. Customers purchase the Company's prepaid calling
cards primarily using major credit cards which are reimbursed by credit card
processing companies. Accordingly, the Company does not routinely perform on-
going credit evaluations of its customers but does perform evaluations of its
credit card processors. Additionally, the Company does not require collateral.
Significant Customers
For fiscal 1997 and 1998 and the three months ended March 31, 1998 and March
31, 1999 (unaudited), no one customer accounted for more than 10% of total
sales.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash equivalents,
accounts receivable, accounts payable and short term debt. The carrying amount
of financial instruments are representative of their fair values due to their
short maturities. The Company's line of credit with Eagle bears interest at
market rates and thus management believes their carrying amounts approximate
fair value.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), which requires disclosure of total comprehensive income in interim and
annual financial statements. The Company adopted SFAS 130 during 1998. Items of
other comprehensive income for 1997 and 1998 and the quarter ended March 31,
1999 (unaudited), were not material.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (SFAS 131), which requires disclosure by
public companies of information related to the Company's operating segments, as
defined. The Company has adopted SFAS 131 for the year ended December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance
on accounting for the costs of computer software developed or obtained for
internal use. This pronouncement identifies the characteristics of internal use
software and provides guidance on new cost recognition principles. SOP 98-1 is
effective for fiscal years beginning after December 15, 1998. SOP 98-1 is not
expected to have a material impact on the Company's results of operations,
financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Similar
Financial Instruments and for Hedging Activities" (SFAS 133), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The Company will be required to adopt SFAS
133 at the beginning of fiscal 2000. The Company has not assessed the impact
this standard will have on its results of operations, financial position or
cash flows. However, the Company does not currently have any derivatives or
financial instruments that would be impacted by SFAS 133.
F-9
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
3. Property and Equipment
Property and Equipment consists of the following as of:
<TABLE>
<CAPTION>
Estimated
Useful
Lives December 31, March 31,
(Years) 1998 1999
--------- ------------ -----------
(unaudited)
<S> <C> <C> <C>
Leasehold improvements................ 5 $ 14,297 $ 17,442
Switch and other network equipment.... 2 to 3 596,902 676,959
Furniture and fixtures................ 5 37,010 37,010
Capitalized software.................. 5 22,915 23,614
--------- ---------
Total................................. 671,124 755,025
Less: accumulated depreciation and
amortization....................... (418,639) (486,955)
--------- ---------
$ 252,485 $ 268,070
========= =========
</TABLE>
Included in the above net totals for property and equipment in 1998 and 1999 is
approximately $84,556 and $63,417, respectively relating to capital leases.
4. Other Assets
Other Assets consists of the following as of:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
Lease options (see Note 11)...................... $514,500 $514,500
Goodwill......................................... 139,747 --
Deposits......................................... 84,933 87,661
Other............................................ 1,032 11,031
-------- --------
$740,212 $613,192
======== ========
</TABLE>
5. Costa Rican Operation
In January 1997, the Company and a Costa Rican national formed a Costa Rican
corporation, owned 50% by each party, to provide facsimile termination service.
In January 1998, the Company purchased 40% of such interest from the other
party for $125,000 resulting in 90% ownership. The purchase consideration was
in the form of a note payable to the other party, of which $25,000 was paid in
January 1998.
During the first quarter 1999, this operation ceased terminating traffic due
to the loss of available circuits resulting in the effective shutdown of its
operations. Management determined that the outlook for this operation
F-10
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
was not favorable and ceased efforts to reinstate service. Accordingly, the
Company wrote-off its remaining goodwill in the first quarter of 1999. Other
remaining assets are carried at their realizable value or will be used in other
Company operations.
6. Accrued Expenses
Accrued Expenses consist of the following as of :
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
Deposits received................................ $182,463 $191,756
Other............................................ 161,768 147,578
-------- --------
$344,231 $339,334
======== ========
</TABLE>
7. Line of Credit from Parent
In December 1996, the Company entered into a $2,000,000 line of credit
agreement with Eagle. The outstanding amount on the line of credit as of
December 31, 1998 and March 31, 1999 (unaudited) totals $1,738,096 and
$1,786,181, respectively. The loan from Eagle bears interest at 8% per year and
is payable on December 18, 2001, unless demand is made by Eagle for earlier
payment. The proceeds of this loan were used to provide working capital.
In May 1999, Eagle and the Company amended its credit agreement whereby
$1,100,000 was converted into a term loan with interest and principal due May
5, 2002 and the line of credit agreement was reduced to $900,000 of which
$261,904 and $213,819 is available for future borrowings as of December 31,
1998 and March 31, 1999, respectively. Accordingly this amount has been treated
as long-term debt in the accompanying financial statements. Eagle also agreed
at such time to convert $200,000 of the line of credit into 60,061 shares of
common stock, at a conversion price of $ 3.33 per share.
8. Related Party Transactions
General
The Company's founder and Chief Executive Officer (CEO) holds a controlling
interest in Eagle, which in turn holds approximately 2.6 million outstanding
shares of the common stock of the Company as of December 31, 1998, and March
31, 1999 (unaudited). The founder and CEO has also agreed to provide necessary
funding to the Company in the event that the Company's current capital raising
efforts are unsuccessful.
Consulting Fees
In 1997 and 1998 and for the three months ended March 31, 1998 and March 31,
1999 (unaudited) a relative of the CEO was paid $44,000, $61,500, $16,500 and
$5,500, respectively, for providing consulting services to the Company.
F-11
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December March 31,
31, 1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Deferred tax assets:
Deferred revenue.............................. $ 32,628 $ 36,420
Depreciation and amortization................. 70,937 74,233
Other......................................... 52,754 109,299
Net operating loss carryforwards.............. 993,360 1,050,171
----------- -----------
Total deferred tax assets................... 1,149,679 1,270,123
Valuation allowance............................. (1,149,679) (1,270,123)
----------- -----------
Net deferred tax assets......................... $ -- $ --
=========== ===========
</TABLE>
The Company has U.S. net operating loss carryforwards of approximately $3.1
million as of March 31, 1999 (unaudited) which expire beginning in 2011. The
Company's total deferred tax assets have been fully reserved due to the
uncertainty of future taxable income. Accordingly, no tax benefit has been
recognized in the accompanying financial statements. No other significant
reconciling items exist between the actual effective tax rate and the expected
effective tax rate.
10. Stockholders' Equity (Deficit)
Common and Preferred Stock
On October 14, 1996, the Company was incorporated with authorized share
capital consisting of 10,000,000 shares of common stock with par value of $0.10
per share, and 5,000,000 shares of preferred stock with par value of $0.10 per
share. As of the incorporation date, 10,000 shares of Common Stock, with $.10
par value were issued and outstanding.
On January 6, 1997 the Company declared a stock dividend of 299 shares for
each share of common stock issued and outstanding as of this date. 2,990,000
shares of common stock were distributed at par value, and an amount of $299,000
was recorded as common stock.
During May 1999, the Company sold 136,638 shares of its common stock for
$3.33 per share. In addition, as discussed in Note 7, $200,000 owed to Eagle
under the line of credit was converted into 60,061 shares of common stock, at a
conversion price of $3.33 per share.
Warrants
In 1998, the Company issued warrants to a third party in connection with an
equipment lease entered into by the Company and the third party (see Note 11).
The warrants' entitle the third party to purchase 159,474 shares of common
stock at $3.33 per share. The warrants are fully vested, are immediately
exercisable and have a five-year term. The warrants also carry anti-dilution
provisions that are triggered if equity instruments are issued by the Company
for prices below the then existing exercise price of the warrant. The fair
value of these warrants of approximately $408,000 is being amortized as
additional lease expense.
F-12
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Equity (Deficit) (continued)
Stock Options
The Company has a stock option plan (Option Plan) under which the Company
may grant Directors and key employees options to purchase up to 500,000 shares
of the Company's common stock at an amount at least equal to the fair value of
the Company's common stock on the date of grant. All options have a seven year
term.
On January 7, 1997, the Company granted options to Directors (the Directors
Options) to purchase 20,000 shares of common stock at $1 per share, vesting
immediately. On January 7, 1997, the Company granted options to Key Employees
(the Key Employees Options) to purchase 60,000 shares of common stock at $1 per
share. Ten percent of the Key Employees Options' vest immediately and the
remaining vest ratably over a three-year period.
On December 8, 1998, the Company granted options to employees to purchase
98,500 shares of common stock at $3.33 per share. 42,950 of the options vest
immediately, 45,550 vest eighteen months from the date of grant, and 10,000
vest ratably over a three-year period. The options are exercisable when vested.
In February 1999, the Company granted options to an employee under the
Option Plan, to purchase 21,164 shares of common stock at an exercise price of
$3.33, these shares vest ratably over a three year period.
Employee stock option transactions under the Option Plan for the years ended
December 31, 1998 and 1997, and the three months ended March 31, 1999
(unaudited) are summarized below:
<TABLE>
<CAPTION>
Weighted
Shares Weighted Average
Under Average Remaining
Option Exercise Contractual
Plan Price Life
------- -------- -----------
<S> <C> <C> <C>
Beginning Balance.................................. -- -- --
Granted............................................ 80,000 $1.00 5 years
Exercised.......................................... -- -- --
Canceled........................................... -- -- --
------- ----- ---------
Outstanding at December 31, 1997................... 80,000 $1.00 5 years
Granted............................................ 98,500 3.33 7 years
Exercised.......................................... -- -- --
Canceled........................................... 50,000 1.00 --
------- ----- ---------
Outstanding at December 31, 1998................... 128,500 $2.79 6.5 years
Granted............................................ 21,164 3.33 7 years
Exercised.......................................... -- -- --
Canceled........................................... -- -- --
------- ----- ---------
Outstanding at March 31, 1999...................... 149,664 $2.86 6.6 years
======= ===== =========
Available for granting in future periods........... 350,336
=======
</TABLE>
At December 31, 1997 and 1998, and March 31, 1999 26,000, 66,950 and 69,950
options were exercisable under the Option Plan.
In December 1998, the Company issued options outside of the Option Plan to
purchase 167,867 shares of its common stock to its Chief Operating Officer (the
COO) at an exercise price of $3.33. These options have a seven-year term and
vest 20% on the first anniversary date, 30% on the second anniversary date and
50% on the third anniversary date. These options vest immediately upon the
closing of an initial public offering by the Company, certain changes of
control, a merger or liquidation or a sale of substantially all of the assets
of the Company.
F-13
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Equity (Deficit) (continued)
As permitted under SFAS No. 123, the Company has not recognized compensation
expense for the theoretical value of its options at the grant date (in excess
of the recognition of the intrinsic value). Had compensation expense for the
Option Plan been based on the fair value of options at the grant date amortized
over the vesting period, the Company's pro forma net loss and net loss per
share would have been the same as reported net loss and basic and diluted net
loss per share.
In determining the fair value of options granted for purposes of the
preceding pro forma disclosures, the Company used the minimum value option-
pricing model with the following weighted-average assumptions for 1998 and
1997, respectively: risk-free interest rate of 5%, dividend yield of zero; and
an expected option life of 4 years. The options granted during 1997 and 1998
and the three months ended March 31, 1999 had a weighted-average fair value of
$.60, $.18 and $.60 per share, respectively.
Reserved Capital Shares
The Company has reserved the following shares of common stock as of March
31, 1999:
<TABLE>
<S> <C>
Stock Option Plan................................................. 500,000
Stock Purchase Warrants........................................... 159,474
Options issued to COO............................................. 167,867
-------
Total............................................................. 827,341
=======
</TABLE>
11. Commitments
The Company has capital leases for telecommunications equipment and
operating leases relating principally to office facilities. Future minimum
lease commitments at December 31, 1998, for leases with initial or remaining
terms of more than one year are summarized by fiscal year as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
1999................................................. $118,339 $ 62,662
2000................................................. 29,585 63,486
2001................................................. -- 63,486
2002................................................. -- 5,291
2003................................................. --
Thereafter........................................... --
-------- --------
147,924 $194,925
========
Less amount representing interest.................... 11,192
--------
Present value of minimum lease payments.............. 136,732
Less current portion................................. 107,728
--------
Long-term portion of obligations under capital
leases.............................................. $ 29,004
========
</TABLE>
Rental expense under operating leases was approximately $111,316, $75,185,
$38,637 and $13,048 for fiscal years 1997 and 1998, and the three months ended
March 31, 1998 and 1999 (unaudited), respectively.
The Company entered into a leasing agreement with a third party to lease
equipment to be used in the Company's prepaid calling card business. In
connection with this lease agreement, the Company's issued the warrants
described in Note 10 and received options to purchase 100,000 shares of the
lessor's common stock at an exercise price equal to the fair value of the
common stock on the date of grant. The fair value of the options
F-14
<PAGE>
WorldQuest Networks, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Commitments (continued)
was estimated at approximately $514,500 on the grant date using the Black-
Scholes option-pricing model. This asset is included in other assets (see Note
4) and is being treated as a reduction of future lease expense.
The monthly lease payments for the above equipment is equal to the greater
of a set per minute charge based on usage or 10% of the revenues generated by
the Company using the leased equipment. Contingent rent expense under this
lease was approximately $0, $10,000, $0 and $12,000 for 1997 and 1998 and the
three months ended March 31, 1998 and 1999 (unaudited), respectively.
12. Contingencies
In October 1997, the Patent and Trademark Office issued a notice of
publication regarding our application to register "WorldQuest Networks" as a
trademark. In response to that notice, Qwest Communications (Qwest) filed a
notice of opposition in September 1998, which is currently pending before the
Patent and Trademark Office. If the Company does not prevail, it will not be
able to obtain a registered trademark for "WorldQuest Networks" and could be
required to stop using the name or pay a fee to Qwest for permission to use it.
Any trademark may be challenged for a period of six years after it has been
granted. Thus the Company could also face a cancellation proceeding with the
Patent and Trademark Office relating to the trademark for "WorldQuest."
The Company is defendant from time to time in lawsuits incidental to their
business. The Company believes that resolution of all known contingencies, is
uncertain, and there can be no assurance that future costs related to such
litigation would not be material to the Company's financial position or results
of operations.
F-15
<PAGE>
[WorldQuest Logo appears here]
Shares
Common Stock
-----------------------
PROSPECTUS
, 1999
-----------------------
EBI Securities Corporation
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits the Registrant
to indemnify directors and officers. Article X, Section 10.2, of the
Certificate of Incorporation, and Article VIII, Section 8.06, of the Bylaws,
provide that the Registrant shall indemnify each person who was or is a party,
or is threatened to be made a party, to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was, or has agreed to
become, a director or officer of the Registrant or is or was serving, or has
agreed to serve, at the request of the Registrant, as a director, officer or
trustee of, or in a similar capacity with, another corporation, partnership,
joint venture, trust or other enterprise (including any employee benefit plan),
or by reason of any action alleged to have been taken or omitted in such
capacity, against all expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him or her
or on his or her behalf in connection with such action, suit or proceeding and
any appeal therefrom. Such right of 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 the heirs, executors and administrators of such a
person.
ITEM 25. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates,
except the SEC, NASD and Nasdaq fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.................... $7,063
NASD filing fee........................................................ 3,040
Nasdaq National Market listing application fee......................... 5,000
Underwriters' nonaccountable expense allowance......................... *
Printing and engraving expenses........................................ *
Accounting fees and expenses........................................... *
Legal fees and expenses................................................ *
Fees and expenses (including legal fees) for qualifications under state
securities laws....................................................... *
Transfer agent and registrar's fees and expenses....................... *
Miscellaneous expenses................................................. *
------
Total.............................................................. $ *
======
</TABLE>
- --------
* To be completed by amendment.
ITEM 26. Recent Sales of Unregistered Securities
Set forth in the table below are the dates, the number of securities sold
and the total offering price of such securities sold by the Registrant within
the past three years. Unless otherwise indicated, all securities were sold to
the purchasers directly by the Registrant, and therefore, no underwriting
discounts or commissions were involved.
<TABLE>
<CAPTION>
Total
Date of Number of offering
Title of securities sold purchase shares price($)
------------------------ ------------- -------------- ----------
<S> <C> <C> <C>
Common Stock........................... October 1996 10,000(/1/) $ 501,000
Promissory Note........................ December 1996 (/2/) 2,000,000
Common Stock (stock dividend).......... January 1997 2,900,000(/1/)
Common Stock Purchase Warrant.......... June 1998 159,474(/3/)
Common Stock........................... May 1999 136,138(/4/) 455,000
Common Stock........................... May 1999 60,061(/2/) 200,000
</TABLE>
II-1
<PAGE>
- --------
(1) This common stock and the dividend was issued to our founding stockholder.
(2) This note is a credit facility payable to our founding stockholder. On May
5, 1999, $200,000 of the facility was converted into 60,061 shares of
common stock.
(3) Represents a right to purchase 159,474 shares of common stock granted in
connection with a lease of equipment from the warrant holder.
(4) These shares of common stock were sold to ten private investors during May
1999.
All of the above securities were sold by the Registrant in reliance on
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 27. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1* Specimen common stock certificate.
4.2 Amended and Restated Note dated May 5, 1999 payable to WorldQuest
Networks, LLC (now known as Eagle Venture Capital, LLC).
4.3* Form of Warrant Agreement between the Registrant and EBI Securities
Corporation, including form of Representative's Warrant.
5.1* Opinion of Glast, Phillips & Murray, a Professional Corporation.
Joint Venture Agreement dated April 9, 1999 between the Registrant and
10.1 BDC, LLC.
10.2 Amended 1997 Stock Option Plan.
Stock Option Agreement dated December 7, 1998 granted to Michael R.
10.3 Lanham by the Registrant.
10.4 Stock Transfer Agreement dated December 7, 1998 between WorldQuest
Communications, Inc., WorldQuest Networks, LLC and the Registrant.
10.5 Stock Purchase Warrant dated June 10, 1998 granted to InterVoice, Inc.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Glast, Phillips & Murray, P.C. (contained in Exhibit 5.1).
Power of Attorney (included on signature page of registration
24.1 statement).
27.1 Financial Data Schedule.
99.1 Consent of Mark C. Levy.
</TABLE>
- --------
* To be filed by amendment
ITEM 28. Undertakings
The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made, a post-
effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually, or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar
value of the securities offered would not exceed that which was
registered) and any
II-2
<PAGE>
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in this registration statement; and
(iii) to include any additional or changed material information with
respect to the plan of distribution;
(2) that, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) to remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
this offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide the underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b) (1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas on July 12, 1999.
WORLDQUEST NETWORKS, INC.
/s/ B. Michael Adler
By: _________________________________
B. Michael Adler, Chairman of
the
Board and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned officers and directors of WorldQuest Networks, Inc., do
hereby constitute and appoint B. Michael Adler and Michael R. Lanham, or either
of them, our true and lawful attorneys and agents, to do any and all acts and
things in our names in the capacities indicated below, which said attorneys and
agents, or either of them, may deem necessary or advisable to enable said
corporation to comply with the Securities Act of 1933, as amended, and any
rules, regulations, and requirements of the Securities and Exchange Commission,
in connection with this registration statement, including specifically, but
without limitation, power and authority to sign for us or any of us in our
names and in the capacities indicated below, any and all amendments (including
post-effective amendments) to this registration statement, or any related
registration statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, as amended; and we do hereby ratify
and confirm all that the said attorneys and agents, or either of them, shall do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the capacity
indicated on July 12, 1999.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ B. Michael Adler Executive Officer (Principal July 12, 1999
____________________________________ Executive Officer)
B. Michael Adler
/s/ Michael R. Lanham Director (Principal July 12, 1999
____________________________________ Financial and Accounting
Michael R. Lanham Officer)
/s/ Hugh E. Humphrey, Jr. Director July 12, 1999
____________________________________
Hugh E. Humphrey, Jr.
/s/ E. Denton Jones Director July 12, 1999
____________________________________
E. Denton Jones
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the Registrant.
3.2 Bylaws of the Registrant.
4.1* Specimen common stock certificate.
4.2 Amended and Restated Note dated May 5, 1999 payable to WorldQuest
Networks, LLC (now known as Eagle Venture Capital, LLC).
4.3* Form of Warrant Agreement between the Registrant and EBI Securities
Corporation, including form of Representative's Warrant.
5.1* Opinion of Glast, Phillips & Murray, a Professional Corporation.
10.1 Joint Venture Agreement dated April 9, 1999 between the Registrant and
BDC, LLC.
10.2 Amended 1997 Stock Option Plan.
10.3 Stock Option Agreement dated December 7, 1998 granted to Michael R.
Lanham by the Registrant.
10.4 Stock Transfer Agreement dated December 7, 1998 between WorldQuest
Communications, Inc., WorldQuest Networks, LLC and the Registrant.
10.5 Stock Purchase Warrant dated June 10, 1998 granted to InterVoice, Inc.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Glast, Phillips & Murray, P.C. (contained in Exhibit 5.1).
24.1 Power of Attorney (included on signature page of registration
statement).
27.1 Financial Data Schedule.
99.1 Consent of Mark C. Levy.
</TABLE>
- --------
*To be filed by amendment
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
WORLDQUEST NETWORKS, INC.
ARTICLE I
1.01 The name of the corporation is: WORLDQUEST NETWORKS, INC.
ARTICLE II
2.01 The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
3.01 The purpose or purposes of the corporation to be conducted or promoted
shall be to engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
ARTICLE IV
4.01 The total number of shares of all classes of stock which the
corporation shall have authority to issue is: Sixty Million (60,000,000); all of
such shares shall have a par value of $0.01 per share, and Fifty Million
(50,000,000) shares thereof shall be designated common stock (the "Common
Stock") and Ten Million (10,000,000) shares thereof shall be designated
preferred stock (the "Preferred Stock"). A statement of the designations and
all the powers, preferences and rights, and the qualifications, limitations, or
restrictions thereof, in respect of the Preferred Stock and the Common Stock is
as follows:
4.02 Preferred Stock:
The Corporation's board of directors (the "Board") is hereby authorized,
subject to limitations prescribed by law and to the provisions of this Article
IV, to provide for the issuance of the Preferred Stock in series, and by filing
a certificate pursuant to applicable Delaware law, to establish from time to
time the number of shares of Preferred Stock to be included in each such series,
and to fix the designation, powers, preferences, and rights of the Preferred
Stock of such series and the qualifications, limitations, or restrictions
thereof. Without limiting the generality of the foregoing express grant of
authority, the Board may fix and determine, by resolution or resolutions adopted
at any time or from time to time:
1
<PAGE>
(i) The number of shares constituting each series of the Preferred Stock
and the distinctive designation of that series;
(ii) The dividend rate on the Preferred Stock of that series, whether
dividends shall be cumulative, from which date or dates dividends
shall be payable, and the relative rights of priority (if any) of
payment of dividends on shares of that series;
(iii) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting
rights, and whether class voting shall be limited or denied to the
extent allowed by law;
(iv) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board shall
determine;
(v) Whether the Preferred Stock of that series shall be redeemable, and,
if so, the terms and conditions of such redemption;
(vi) The rights of the Preferred Stock of that series in the event of
voluntary or involuntary liquidation, dissolution, or winding up of
the corporation, and the relative rights of priority (if any) of
payment of shares of that series;
(vii) Whether the Preferred Stock shall be entitled to the benefit of a
sinking fund or purchase fund to be applied to the purchase or
redemption of shares of such series;
(viii) Whether the Preferred Stock shall be entitled to the benefit of
conditions and restrictions upon the creation of indebtedness of the
corporation or any subsidiary, upon the issue of any additional
stock (including additional shares of such series or of any other
series) and upon the payment of dividends, or the making of other
distributions on and the purchase, redemption or any other
acquisition by the corporation or any subsidiary of, any outstanding
stock of the corporation; and
(ix) Any other designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions of that series.
Except where otherwise set forth in the resolution or resolutions adopted
by the Board providing for the issue of any series of Preferred Stock, the
number of shares comprising such series may be increased or decreased (but not
below the number of shares then outstanding) from time to time by like action of
the Board.
Shares of any series of Preferred Stock which have been redeemed (whether
through the operation of a sinking fund or otherwise) or purchased by the
corporation, or which, if convertible or exchangeable, have been converted into
or exchanged for shares of stock of any other class or
2
<PAGE>
classes shall have the status of authorized and unissued shares of Preferred
Stock and may be reissued as a part of the series of which they were originally
a part of or may be classified and reissued as part of a new series of Preferred
Stock to be created by resolution or resolutions of the Board or as part of any
other series of Preferred Stock, all subject to the conditions or restrictions
on issuance set forth in the resolution or resolutions adopted by the Board
providing for the issue of any series of Preferred Stock and to any filing
required by law.
4.03 Common Stock:
(i) Except as otherwise provided by law or this certificate of
incorporation or by the resolution or resolutions of the Board
providing for the issue of any series of the Preferred Stock, the
Common Stock shall have the exclusive right to vote for the election
of directors and for all other purposes, each holder of the Common
Stock being entitled to one vote for each share held.
(ii) Subject to all of the rights of the Preferred Stock or any series
thereof, the holders of the Common Stock shall be entitled to
receive, when, as and if declared by the Board, out of funds legally
available therefor, dividends payable in cash, stock or otherwise.
(iii) Upon liquidation, dissolution or winding up of the corporation,
whether voluntary or involuntary, and after the holders of each
series of the Preferred Stock shall have been paid in full the
amounts to which they respectively shall be entitled, or a sum
sufficient for such payment in full shall have been set aside, the
remaining net assets of the corporation shall be distributed pro
rata to the holders of the Common Stock in accordance with their
respective rights and interests.
4.04 General Provision:
No stockholder shall be entitled as a matter of right to subscribe for or
receive additional shares of any class of stock of the corporation, whether now
or hereafter received, or any bonds, debentures or other securities convertible
into stock, but such additional shares of stock or other securities convertible
into stock may be issued or disposed of by the Board to such persons and on such
terms as in the Board's discretion the Board shall deem advisable. Cumulative
voting is expressly denied.
ARTICLE V
5.01 The name and mailing address of each incorporator is as follows:
3
<PAGE>
Michael D. Parsons
Glast, Phillips & Murray, P.C.
2200 One Galleria Tower
13355 Noel Road, L.B. 48
Dallas, Texas 75240
ARTICLE VI
6.01 The corporation is to have perpetual existence.
ARTICLE VII
7.01 In furtherance and not in limitation of the powers conferred by
statute, the Board is expressly authorized to make, alter or repeal the Bylaws
of the corporation.
ARTICLE VIII
8.01 B.Michael Adler shall serve as the initial Director of the
corporation until the first annual meeting of stockholders or until his
successor is elected and qualified. His mailing address is 16990 Dallas
Parkway, Suite 220, Dallas, Texas 75248.
8.02 Elections of Directors need not be by written ballot unless the
Bylaws of the corporation shall so provide.
8.03 Meeting of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board or in the Bylaws of the corporation.
ARTICLE IX
9.01 The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE X
10.01 A Director of the corporation shall not be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director except for liability (i) for any breach of the Director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the Director derived any improper
personal benefit. If the General Corporation Law of the
4
<PAGE>
State of Delaware is amended to authorize corporate action further eliminating
or limiting the personal liability of Directors, then the liability of a
Director of the corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware, as so
amended. Any repeal or modification of this Article by the stockholders of the
corporation shall not adversely affect any right or protection of a Director of
the corporation existing at the time of such repeal or modification.
10.02 The corporation shall, to the fullest extent permitted by Section
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 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 Bylaw, 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.
THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose
of forming a corporation pursuant to the General Corporation Law of the State of
Delaware, does make this Certificate, hereby declaring and certifying that this
is his act and deed and the facts herein stated are true, and accordingly have
hereunto set his hands this 30th day of June, 1999.
/S/ MICHAEL D. PARSONS
____________________________________________
MICHAEL D. PARSONS
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EXHIBIT 3.2
BYLAWS
OF
WORLDQUEST NETWORKS, INC.
<PAGE>
BYLAWS
OF
WORLDQUEST NETWORKS, INC.
A Delaware Corporation
INDEX
Article Page
- ------- ----
I Offices......................................................... 1
1.01 Registered Office.................................... 1
1.02 Other Offices........................................ 1
II Meetings of Stockholders........................................ 1
2.01 Place of Meetings.................................... 1
2.02 Annual Meetings...................................... 1
2.03 Notice of Annual Meetings............................ 2
2.04 List of Stockholders................................. 2
2.05 Special Meetings..................................... 2
2.06 Notice of Special Meetings........................... 2
2.07 Quorum and Adjournment............................... 2
2.08 Proxies.............................................. 3
2.09 No Consent In Lieu of Meetings....................... 3
2.10 Nominations for Director............................. 3
2.11 Chair of Meetings.................................... 3
III Directors....................................................... 3
3.01 Qualifications, Election and Term.................... 3
3.02 Removal.............................................. 4
3.03 Vacancies............................................ 4
3.04 Meetings of the Board of Directors................... 4
3.05 First Meeting........................................ 4
3.06 Regular Meetings..................................... 4
3.07 Special Meetings..................................... 5
3.08 Quorum............................................... 5
3.09 Consent In Lieu of Meeting........................... 5
3.10 Conference Calls..................................... 5
3.11 Committees of Directors.............................. 5
3.12 Minutes of Committees................................ 6
3.13 Compensation of Directors............................ 6
IV Notices......................................................... 6
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4.01 Notice............................................... 6
4.02 Waiver of Notice..................................... 6
V Officers........................................................ 7
5.01 Title and Number..................................... 7
5.02 First Meeting........................................ 7
5.03 Term of Office....................................... 7
5.04 Salaries............................................. 7
5.05 Removal.............................................. 7
5.06 Chairman of the Board................................ 7
5.07 Chief Executive Officer.............................. 7
5.08 President............................................ 8
5.09 Chief Operating Officer.............................. 8
5.10 Chief Financial Officer.............................. 8
5.11 Vice President....................................... 8
5.12 Secretary............................................ 8
5.13 Assistant Secretary.................................. 9
5.14 Treasurer............................................ 9
5.15 Bond of Treasurer.................................... 9
5.16 Assistant Treasurer.................................. 9
VI Stock Certificates.............................................. 10
6.01 Description of Shares................................ 10
6.02 Facsimile Signatures................................. 10
6.03 Lost Certificates.................................... 10
6.04 Transfer of Stock.................................... 11
6.05 Address For Notice................................... 11
6.06 Fixing Record Date................................... 11
6.07 Registered Stockholders.............................. 11
VII Dividends....................................................... 12
7.01 Dividends............................................ 12
7.02 Reserves............................................. 12
VIII Miscellaneous Provisions........................................ 12
8.01 Checks............................................... 12
8.02 Contracts............................................ 12
8.03 Deposits............................................. 12
8.04 Fiscal Year.......................................... 12
8.05 Seal................................................. 12
8.06 Indemnification...................................... 12
8.07 Insurance............................................ 13
8.08 Disallowed Compensation.............................. 13
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IX Annual Statement................................................ 13
9.01 Financial Statements................................. 13
X Amendment of Bylaws............................................. 13
10.01 Adoption, Amendment, Repeal of Bylaws by Directors... 13
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BYLAWS OF
WORLDQUEST NETWORKS, INC.
(the "Corporation")
ARTICLE I
Offices
1.01 Registered Office. The registered office of the Corporation in the
State of Delaware shall be in the City of Wilmington, County of New Castle,
State of Delaware.
1.02 Other Offices. The Corporation may also have offices at such other
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
2.01 Place of Meetings. All meetings of the stockholders for the
election of directors shall be held in the City of Dallas, State of Texas, at
such place as may be fixed from time to time by the Board of Directors, or at
such other place either within or without the States of Delaware or Texas as
shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting. Meetings of stockholders for any other purpose may
be held at such time and place, within or without the States of Delaware or
Texas, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
2.02 Annual Meetings. Annual meetings of stockholders, commencing
within the year 2000, shall be held on the first Tuesday of June at 10:00 a.m.,
or at such other date and time as shall be designated from time to time by the
Board of Directors and stated in the notice of the meeting, at which time they
shall elect a board of directors, and transact such other business as may
properly be brought before the meeting. Notwithstanding any other provision of
these Bylaws to the contrary, no matter may be brought before the annual meeting
of stockholders unless it is contained in the Corporation's Proxy Statement
delivered to stockholders with regard to such annual meeting. Any stockholder
who desires to include a proposal for consideration at the annual meeting must
submit such proposal to the Board of Directors in writing, by delivering such
notice to the attention of the President at the Corporation's executive offices,
no earlier than January 1 of the year in which such annual meeting will be held
and not later than February 15 of the year in which such annual meeting will be
held.
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2.03 Notice of Annual Meetings. Written notice of the annual meeting
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten (10) nor more
than sixty (60) days before the date of the meeting.
2.04 List of Stockholders. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten (10) days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder, for any purpose germane to the meeting, which shall be open to the
inspection of any stockholder during ordinary business hours, for a period of at
least ten (10) days prior to the meeting, either at a place within the city
where the meeting is to be held, which place shall be specified in the notice of
the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
2.05 Special Meetings. Special meetings of the stockholders, for any
purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called by the Chairman of the Board, the
Chief Executive Officer, the President or by the Board of Directors or by the
written order of a majority of the directors; and shall be called by the
President or Secretary at the request in writing of stockholders owning not less
then 67% of the entire capital stock of the Corporation issued and outstanding
and entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
2.06 Notice of Special Meetings. Written notice of a special meeting
stating the place, date and hour of the meeting and the purpose or purposes for
which the meeting is called, shall be given not less than ten (10) nor more than
sixty (60) days before the date of the meeting, to each stockholder entitled to
vote at such meeting.
2.07 Quorum and Adjournment. The holders of a majority of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute, by the Certificate of Incorporation or by these Bylaws. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might have
been transacted at the meeting as originally notified. If the adjournment is
for more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
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When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which by express provision of the statutes, these Bylaws or of the
Certificate of Incorporation, a different vote is required in which case such
express provision shall govern and control the decision of such question.
2.08 Proxies. Unless otherwise provided in the Certificate of
Incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of the capital stock
having voting power held by such stockholder, but no proxy shall be voted on
after three (3) years from its date, unless the proxy provides for a longer
period.
2.09 No Consent In Lieu of Meetings. No action by the stockholders may
be taken by written consent.
2.10 Nominations for Director. Any stockholder proposing to nominate a
person for election to the Board of Directors shall provide the Corporation 60
days prior written notice of such nomination, stating the name and address of
the nominee and describing his qualifications for being a director of the
Corporation. Such notice shall be sent or delivered to the principal office of
the Corporation to the attention of the Board of Directors, with a copy to the
President and Secretary of Corporation.
2.11 Chair of Meetings. At any meeting of stockholders, the Chairman or
President of the Corporation (in such order) shall act as the chairman of the
meeting, and the stockholders shall not have the right to elect a different
person as chairman of the meeting. The chairman of the meeting shall have the
authority to determine (i) when the election polls shall be closed in connection
with any vote to be taken at the meeting; and (ii) when the meeting shall be
recessed.
ARTICLE III
Directors
3.01 Qualifications, Election and Term. The business and affairs of the
Corporation shall be managed by a Board of Directors, which shall have and may
exercise all of the powers of the Corporation, except such as are expressly
conferred upon the stockholders by law, by the Certificate of Incorporation or
by these Bylaws. The exact number of Directors shall be fixed from time to time
by either (i) the Board of Directors pursuant to a resolution adopted by a
majority of the entire Board of Directors, (ii) the affirmative vote of the
holders of 67% or more of the voting power of all of the shares of the
Corporation entitled to vote generally in the election of Directors, voting
together as a single class, or (iii) the Certificate of Incorporation. No
decrease in the number of Directors constituting the Board of Directors shall
shorten the term of any incumbent Director. The Directors may pursuant to a
resolution adopted by a majority of the Board of Directors divide the Board of
Directors into three classes, as nearly equal in number as possible, with the
term of office of the first class to expire at the next annual meeting of
Shareholders and thereafter for terms of three years until
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their successors are elected and qualified, the term of the second class to
expire at the second succeeding annual meeting of Shareholders (an initial two
year term) and thereafter for terms of three years until their successors are
elected and qualified, and the term of the third class to expire at the third
succeeding annual meeting of Shareholders (an initial three year term) and
thereafter for terms of three years until their successors have been elected and
qualified. At each annual meeting of Shareholders following such initial
classification and election, Directors, elected to succeed those Directors whose
terms expire shall be elected for a term of office for the class whose term of
office expires at all such future annual meetings.
3.02 Removal. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, any director, or the entire Board of
Directors, may be removed from office at any time only for cause and only by the
affirmative vote of the holders of 67% or more of the voting power of all of the
shares of the Corporation entitled to vote generally in the election of
Directors, voting together as a single class. "Cause" shall be exclusively
defined to mean: (a) conviction of a felony, (b) proof beyond a reasonable doubt
of the gross negligence or willful misconduct of such Director which is
materially detrimental to the Corporation, or (c) proof beyond a reasonable
doubt of a breach of fiduciary duty of such Director which is materially
detrimental to the Corporation.
3.03 Vacancies. Subject to the rights of holders of any series of any
Preferred Stock then outstanding, newly-created directorships resulting from any
increase in the authorized number of directors and any vacancies in the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause may be filled by a majority vote of the
directors then in office even though less than a quorum or by a sole remaining
director and the directors so chosen shall hold office until the next annual
election and until their successors are duly elected and shall qualify, unless
sooner displaced. If there are no directors in office, then an election of
directors may be held in the manner provided by statute.
3.04 Meetings of the Board of Directors. The Board of Directors of the
Corporation may hold meetings, both regular and special, either within or
without the States of Delaware or Texas.
3.05 First Meeting. The first meeting of each newly elected Board of
Directors shall be held at such time and place as shall be fixed by the vote of
the stockholders at the annual meeting, and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
Board of Directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the Board of Directors, or as shall be specified in a
written waiver signed by all of the directors.
3.06 Regular Meetings. Regular meetings of the Board of Directors may
be held without notice at such time and at such place as shall from time to time
be determined by the Board.
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3.07 Special Meetings. Special meetings of the Board may be called by
the Chairman of the Board on two (2) days' notice to each director, either
personally or by mail or by telegram; special meetings shall be called by the
President or Secretary in like manner and on like notice on the written request
of a majority of the directors (unless the Board consists of only one director;
in which case special meetings shall be called by the President or Secretary in
like manner and on like notice on the written request of the sole director).
3.08 Quorum. At all meetings of the Board, a majority of the directors
shall constitute a quorum for the transaction of business and the act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors, except as may be otherwise
specifically provided by statute, these Bylaws or by the Certificate of
Incorporation. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
3.09 Consent In Lieu of Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, without a prior notice and without a vote, if
all members of the Board or committee, as the case may be, consent thereto in
writing, and the writing or writings are filed with the minutes of proceedings
of the Board or committee.
3.10 Conference Calls. Unless otherwise restricted by the Certificate
of Incorporation or these Bylaws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
3.11 Committees of Directors. The Board of Directors may, by resolution
passed by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. 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 the absence or disqualification of a member of a committee, the member
or members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in the place of any such
absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board
of Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed
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to all papers which may require it; but no such committee shall have the power
or authority in reference to amending the Certificate of Incorporation (except
that a committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
as provided in Section 151(a) of the General Corporation Law of Delaware (the
"Act") fix any of the preferences or rights of such shares relating to
dividends, redemption, dissolution, any distribution of assets of the
Corporation or the conversion into, or the exchange of such shares for, shares
of any other class of classes or any other series of the same or any other class
or classes of stock of the corporation), adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution or amending the Bylaws of the Corporation; and, unless the
resolution or the Certificate of Incorporation expressly so provides, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock or to adopt a certificate of ownership and
merger. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
3.12 Minutes of Committees. Each committee shall keep regular minutes
of its meetings and report the same to the Board of Directors when required.
3.13 Compensation of Directors. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensa tion of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
ARTICLE IV
Notices
4.01 Notice. Whenever, under the provisions of the statutes or of the
Certificate of Incorporation or of these Bylaws, notice is required to be given
to any director or stockholder, it shall not be construed or mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
Corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by telegram or facsimile.
4.02 Waiver of Notice. Whenever any notice is required to be given
under the provisions of the statutes or of the Certificate of Incorporation or
of these Bylaws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
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ARTICLE V
Officers
5.01 Title and Number. The officers of the Corporation shall be chosen
by the Board of Directors and may be a chairman of the board, a chief executive
officer, a president, a chief operating officer, a chief financial officer, one
or more vice presidents, any one or more of which may be designated executive
vice president or senior vice president, a secretary and a treasurer. The Board
of Directors may also choose assistant vice presidents, one or more assistant
secretaries and assistant treasurers, and such other officers as may be chosen
by the Board of Directors. Any number of offices may be held by the same
person, unless the Certificate of Incorporation or these Bylaws otherwise
provide. The Chairman shall be elected from among the directors.
5.02 First Meeting. The Board of Directors at its first meeting after
each annual meeting of stockholders shall choose a president, one or more vice
presidents, a secretary and a treasurer.
5.03 Term of Office. The Board of Directors may appoint such other
officers and agents as it shall deem necessary who shall hold their offices for
such terms and shall exercise such powers and perform such duties as shall be
determined from time to time by the Board.
5.04 Salaries. The salaries of all officers and agents of the
Corporation shall be fixed by the Board of Directors or a committee thereof.
5.05 Removal. The officers of the Corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors then in office. Such removal shall be
without prejudice to the contract rights, if any, of the person so removed,
provided, however, that the election or appointment of an officer shall not, of
itself, create contract rights. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.
5.06 Chairman of the Board. In the event that a Chairman of the Board
is appointed, the Chairman shall preside over all meetings of the stockholders
and of the Board. He shall see that all orders and resolutions of the Board are
carried into effect. The Chairman shall have such other powers and duties as
usually pertain to such office or as may be assigned to him from time to time by
the Board.
5.07 Chief Executive Officer. The Chief Executive Officer shall
preside at all meetings of the stockholders and of the Board, unless a Chairman
of the Board is appointed by the Board. The Chief Executive Officer shall have
general and active authority for day-to-day operations of the business of the
corporation and all officers of the corporation shall report to the Chief
Executive Officer. The Chief Executive Officer shall have the power to call
special meetings of the Board and of the shareholders to be held at such times
and places as provided by these Bylaws. The Chief Executive Officer shall affix,
or delegate the authority to affix, the signature of the
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corporation to all deeds, conveyances, mortgages, leases, obligations, bonds,
certificates and other papers and instruments in writing that may require the
same, and sign, or delegate to the President the authority to sign, certificates
of stock representing capital stock of the Corporation. The Chief Executive
Officer shall be supervised by, and report directly to, the Board.
5.08 President. In the absence or disability of the Chief Executive
Officer, the President shall serve in the capacity of the Chief Executive
Officer and perform the duties and exercise the powers of the Chief Executive
Officer. The President shall have the responsibility for the day-to-day
operations of the business of the Corporation and shall supervise all manager
level and other employees of the Corporation, who shall report directly to the
President. The President shall report directly to the Chief Executive Officer.
5.09 Chief Operating Officer. In the absence or disability of the
President, the Chief Operating Officer shall serve in the capacity of the
President and perform the duties and exercise the powers of the President. The
Board may designate both a President and a Chief Operating Officer, in which
case the Board shall set forth the powers and responsibilities of each officer.
The Chief Operating Officer shall report directly to the Chief Executive
Officer.
5.10 Chief Financial Officer. The Chief Financial Officer shall be
responsible for proper maintenance of all financial books and records of the
Corporation and shall be responsible for financial reporting to the stockholders
and such other parties as designated, from time to time, by the Board of
Directors or the President. He shall render to the stockholders at the regular
annual meeting thereof, or, from time to time, whenever the Board of Directors
or the President may require, an account of all transactions and of the
financial condition of the Corporation, and shall perform such other duties as
may, from time to time, be prescribed by the Board of Directors or President.
He shall exhibit or cause to be exhibited the books of the Corporation to the
Board of Directors, or to any committee appointed by the Board, or to any
Director on application during business hours. The Chief Financial Officer
shall be the chief financial officer of the Corporation and shall report
directly to the President.
5.11 Vice President. In the absence of the President or in the event of
his inability or refusal to act, and in the absence of a Chief Operating
Officer, the Vice President (or in the event there be more than one vice
president, the vice presidents in the order designated by the directors, or in
the absence of any designation, then in the order of their election) shall
perform the duties of the President, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the President. The Vice
Presidents shall perform such other duties and have such other powers as the
President, the Board of Directors or any committee of the Board of Directors may
from time to time prescribe. Each Vice President shall report to the President.
5.12 Secretary. The Secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings of
the meetings of the Corporation and of the Board of Directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. The Secretary shall give, or cause to be given, notice of all
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meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or President, under whose supervision he shall be. The Secretary shall have
custody of the corporate seal of the Corporation and he, or any assistant
secretary, shall have authority to affix the same to any instrument requiring it
and when so affixed, it may be attested by his signature or by the signature of
such assistant secretary. The Board of Directors may give general authority to
any other officer to affix the seal of the Corporation and to attest the
affixing by his signature. The Secretary shall report directly to the
President.
5.13 Assistant Secretary. The Assistant Secretary, or if there be more
than one, the assistant secretaries in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the Secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe. Assistant Secretaries shall
report directly to the Secretary.
5.14 Treasurer. The Treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all monies
and other valuable effects in the name and to the credit of the Corporation in
such depositories as may be designated by the Board of Directors. The Treasurer
shall disburse the funds of the Corporation as may be ordered by the Board of
Directors or the President, taking proper vouchers for such disbursements, and
shall render to the President and the Board of Directors, at its regular
meetings or when the Board of Directors so requires, an account of all his
transactions as Treasurer. The Treasurer shall report directly to the
President.
5.15 Bond of Treasurer. If required by the Board of Directors, the
Treasurer shall give the Corporation a bond (which shall be renewed every six
(6) years) in such sum and with such surety or sureties as shall be satisfactory
to the Board of Directors for the faithful performance of the duties of his
office and for the restoration to the Corporation, in case of his death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his possession or under his control
belonging to the Corporation.
5.16 Assistant Treasurer. The Assistant Treasurer, or if there be more
than one, the assistant treasurers in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the Treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe. Assistant Treasurers shall
report directly to the Treasurer.
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ARTICLE VI
Stock Certificates
6.01 Description of Shares. The shares of the Corporation shall be
represented by a certificate or shall be uncertificated. Certificates shall be
signed by, or in the name of the Corporation by, the Chairman or vice-chairman
of the Board of Directors, or the President or Vice President and the Treasurer
or an assistant treasurer, or the Secretary or an assistant secretary of the
Corporation.
Upon the face or back of each stock certificate issued to represent any
partly paid shares, or upon the books and records of the Corporation in the case
of uncertificated partly paid shares, shall be set forth the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Certificates shall also contain such legends or statements as may be required by
law and any agreement between the Corporation and the holder thereof.
If the Corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the Act, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
Within a reasonable time after the issuance or transfer of uncertificated
stock, the Corporation shall send to the registered owner thereof a written
notice containing the information required to be set forth or stated on
certificates pursuant to Sections 151, 156, 202(a) or 218(a) of the Act or a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations preferences and relative participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
6.02 Facsimile Signatures. Any or all the signatures on a certificate
may be facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
6.03 Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
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claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates or uncertificated
shares, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or his legal representative, to advertise
the same in such manner as it shall require or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
6.04 Transfer of Stock. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. Upon receipt of proper transfer instructions from
the registered owner of uncertificated shares such uncertificated shares shall
be cancelled and issuance of new equivalent uncertificated shares or
uncertificated shares shall be made to the person entitled thereto and the
transaction shall be recorded upon the books of the corporation. Transfers of
shares shall be made only on the books of the Corporation by the registered
holder thereof, or by his attorney thereunto authorized by power of attorney and
filed with the Secretary of the Corporation or the transfer agent.
6.05 Address For Notice. Every stockholder or transferee shall furnish
the Secretary or a transfer agent with the address to which notice of meetings
and all other notices may be served upon or mailed to him or her, and in default
thereof, he or she shall not be entitled to service or mailing of any such
notice.
6.06 Fixing Record Date. In order that the Corporation may determine
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of such meeting, nor more than sixty (60) days prior to any other action.
A determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
6.07 Registered Stockholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, to vote as such owner, and to hold such person
registered on its books liable for calls and assessments as the owner of such
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
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ARTICLE VII
Dividends
7.01 Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Certificate of Incorporation, if any, and
applicable law, may be declared by the Board of Directors at any regular or
special meeting. Dividends may be paid in cash, in property or in shares of
capital stock, subject to the provisions of the Certificate of Incorporation.
7.02 Reserves. Before payment of any dividend, there may be set aside
out of any funds of the Corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall determine to be in the interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
ARTICLE VIII
Miscellaneous Provisions
8.01 Checks. All checks, demands, drafts, or other orders for payment
of money, notes or other evidences of indebtedness issued in the name of the
Corporation, shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
8.02 Contracts. The Board of Directors may authorize any officer,
officers, agent, or agents, to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the Corporation, and such
authority may be general or confined to specific instances.
8.03 Deposits. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies, or other depositories as the Board of Directors may
select.
8.04 Fiscal Year. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
8.05 Seal. The corporate seal shall have inscribed thereon the name of
the Corporation, the year of its organization and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
8.06 Indemnification. Unless otherwise provided in the Certificate of
Incorporation, the Corporation shall indemnify its officers, agents and
directors to the fullest extent permitted by the General Corporation Law of
Delaware. The protection and indemnification provided hereunder shall
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not be deemed exclusive of any other rights to which such director, agent or
officer or former director or officer or such person may be entitled under any
agreement, insurance policy, vote of stockholders or otherwise.
8.07 Insurance. The 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.
8.08 Disallowed Compensation. Any payments made to an officer or
employee such as a salary, commission, bonus, interest, rent, travel or
entertainment expense incurred by him, which shall be disallowed in whole or in
part as a deductible expense by the Internal Revenue Service, shall be
reimbursed by such officer or employee to the corporation to the full extent of
such disallowance. It shall be the duty of the directors, as a Board, to enforce
payment of each such amount disallowed. In lieu of payment by the officer or
employee, subject to the determination of the directors, proportionate amounts
may be withheld from his future compensation payments until the amount owed has
been recovered.
ARTICLE IX
Annual Statement
9.01 Financial Statements. The President and the Board shall present at
each annual meeting a full and complete statement of the business and affairs of
the corporation for the preceding year. Such statement shall be prepared and
presented in whatever manner the Board shall deem advisable and need not be
verified at that time by a certified public accountant.
ARTICLE X
Amendment of Bylaws
10.01 Adoption, Amendment, Repeal of Bylaws by Directors. These Bylaws
may be altered, amended, or repealed, and new Bylaws may be adopted by the
affirmative vote of a majority of the Board of Directors or by stockholders
holding at least 67% of the voting stock of the Corporation, present at any
meeting at which a quorum of each respective body is present, provided that
notice of a proposed alteration, amendment, repeal or adoption shall be
contained in the notice of the meeting. This power to alter, amend or repeal
the Bylaws, and to adopt new Bylaws, may be modified or divested by action of
stockholders representing at least 67% of the voting stock of the Corporation
taken at any regular or special meeting of the stockholders.
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EXHIBIT 4.2
AMENDED AND RESTATED NOTE
$2,000,000.00 May 5, 1999
FOR VALUE RECEIVED, the undersigned, WorldQuest Networks, Inc. (hereinafter
referred to as "Maker"), promises to pay to the order of WorldQuest Networks,
LLC ("Holder"), in lawful money of the United States of America, the principal
sum of Two Million Dollars ($2,000,000.00), or so much thereof as may be
advanced from time to time and noted on Schedule A hereof, with interest thereon
from the date of each advance until such advance is repaid at a rate of eight
percent (8%) per annum. Effective the date of each such subsequent advance and
as advances are repaid, Maker shall sign, date and deliver to Holder an updated
Schedule A to replace the prior Schedule A to this Note. Interest payable under
this Note shall be computed on the basis of a 365-day year and actual days
elapsed.
This Note is partially a term note and partially a revolving note. The
term note portion represents $1,100,000 of the principal balance, which
$1,100,000 of principal balance is outstanding as of the date of this Note, with
accrued interest thereon of $144,039.88 as of the date of this Note. The term
note portion of the principal balance and such accrued interest, together with
interest accruing hereafter on such principal balance, is due and payable in
full on May 5, 2002.
The remaining principal balance of this Note, of up to $900,000, or so much
thereof as may be advanced from time to time and noted on Schedule A hereof,
constitutes the revolving portion of the Note. Maker may borrow, repay, and
reborrow the revolving portion of this Note until such time as Holder shall have
notified Maker in writing that no further advances will be made under such
revolving portion of this Note. As of the date of this Note, $467,755.72 in
principal has been borrowed pursuant to the revolving portion of this Note and
is outstanding as of the date hereof, together with accrued interest thereon of
$42,884.82. The principal balance of the revolving portion of this Note,
together with all accrued interest, is payable on demand by Holder. If no
demand is made, the accrued interest of $42,884.82, plus the interest accruing
after the date of this Note on the outstanding revolving portion of the
principal balance of this Note, shall accrue until December 18, 1999, at which
time such accrued interest shall be due and payable and, thereafter, accrued
interest on the outstanding revolving portion of the principal balance of this
Note shall be payable monthly in arrears, with the first payment due January 18,
2000 and thereafter on the 18th day of each succeeding month, and the
outstanding revolving portion of the principal balance of this Note shall be
paid in full on May 5, 2002.
Except as otherwise expressly provided herein, Maker and each surety,
endorser, and guarantor of this Note hereby severally waives demand and
presentation for payment, notice of non-payment, protest and notice of protest,
and the diligence of bringing suit against any party hereto and consents that
time of payment may be extended from time to time without notice thereof
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to him, her or it.
All amounts payable hereunder by Maker shall be payable to Holder at the
address set forth by Holder, from time to time, in writing to Maker, and shall
be made by Maker in lawful money of the United States in cash or its equivalent
at such place of payment.
If any payment required to be made hereunder becomes due and payable on a
non-business day, the maturity thereof shall extend to the next business day and
interest shall be payable at the rate applicable thereto during such extension.
The term "business day" shall mean a calendar day excluding Saturdays, Sundays
or other days on which banks in the State of Texas are required or authorized to
remain closed.
If this Note is placed in the hands of an attorney for collection, Maker
agrees to pay reasonable attorneys' fees and costs and expenses of collection,
including but not limited to court costs.
Upon the failure of prompt and timely payment when due of any installment
of principal or interest under this Note, then Holder, at Holder's option, may
declare the entire unpaid balance of principal and accrued interest hereunder to
be immediately due and payable.
This Note is given for an actual lending transaction for business purposes
and not for personal, residential or agricultural purposes.
This Note shall be governed by and construed in accordance with the laws of
the State of Texas and applicable laws of the United States.
In no contingency or event whatsoever shall the amount paid or agreed to be
paid by Maker, received by Holder, or requested or demanded to be paid by Maker
exceed the maximum amount permitted by applicable law. In the event any such
sums paid to Holder by Maker would exceed the maximum amount permitted by
applicable law, Holder shall automatically apply such excess to the unpaid
principal amount of this Note or, if the amount of such excess exceeds the
unpaid principal amount of this Note, such excess automatically shall be applied
by Holder to the unpaid principal amount of other indebtedness, if any, owed by
Maker to Holder, or if there be no such other indebtedness, such excess shall be
paid to Maker. All sums paid or agreed to be paid by Maker, received by Holder,
or requested or demanded to be paid by Maker which are or hereafter may be
construed to be or in respect of compensation for the use, forbearance, or
detention of money shall, to the extent permitted by applicable law, be
amortized, prorated, spread and allocated throughout the full term of all
indebtedness of Maker to Holder, to the end that the actual rate of interest
hereon shall never exceed the maximum rate of interest permitted from time to
time by applicable law.
This Amended and Restated Note amends, restates and supersedes, but is not
intended to and shall not extinguish or cancel the indebtedness evidenced by,
that certain Note dated December
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18, 1996 in the original principal amount of up to $2,000,000 payable by Maker
to Holder. However, Holder agrees as a condition to Maker's execution of this
Amended and Restated Note, that Holder will return the Note dated December 18,
1996 to Maker marked "canceled" and this Amended and Restated Note shall govern
the rights and obligations of the parties.
EXECUTED as of the date first above written.
MAKER:
WORLDQUEST NETWORKS, INC.
By: /S/ B. MICHAEL ADLER
---------------------------------------------
B. Michael Adler, Chief Executive Officer
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SCHEDULE A
TO
AMENDED AND RESTATED NOTE DATED MAY 5, 1999
PAYABLE BY WORLDQUEST NETWORKS, INC.
TO WORLDQUEST NETWORKS, LLC
Dollar Amount Dollar Amount
- -------------
of Advance Date of Advance of Repayment Date of Repayment
- ---------- --------------- ------------ -----------------
$467,755.72 May 5, 1999
MAKER:
WORLDQUEST NETWORKS, INC.
By: /S/ B. MICHAEL ADLER
------------------------------------
B. Michael Adler, Chief Executive
Officer
Date of Schedule A: May 5, 1999
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EXHIBIT 10.1
JOINT VENTURE AGREEMENT
This Joint Venture Agreement (the "Agreement") is entered into this 9/th/
day of April, 1999, between BDC LLC, a Nevada limited liability company,
("Partner") and WorldQuest Networks, Inc., a Texas corporation ("WQN" and
together with Partner, the Parties).
TERMS OF THE AGREEMENT
WHEREAS, the Parties desire to enter into a joint venture ("JV") to provide
Internet voice and related services at the three Sites (described below); and
WHEREAS, WQN has provided PARTNER with the projections set forth on Exhibit
A with respect to the proposed operations of the JV.
NOW WHEREFORE, the Parties, in exchange for valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, agree to be bound as
follows.
1. Ownership. Each of Partner and WQN shall share in the profits and
losses of the JV on a 60% to WQN and 40% to Partner basis. Distribution of net
cash flow shall be made no less often than quarterly. It is understood that in
the event that WQN elects to lease the equipment necessary to activate these
circuits the lease payments shall be paid from the WQN (60%) portion of the net
income.
2. Installation and Maintenance. At no cost to the JV, WQN shall be
responsible for the following:
(a) Location of sites for circuits in international markets (The
location of the three (3) Sites shall be in Sri Lanka, Costa Rica
and one in India) ("Sites");
(b) The installation of Internet voice terminating equipment
("Equipment") at
the Sites;
(c) 24 hour monitoring and maintenance of the Equipment;
(d) The marketing and sale of the Internet voice termination service
(the "Service");
(e) Administration, including accounting and record keeping, of the
Equipment, Sites and customers; and
(f) Compliance with all applicable, local, state, federal and
international laws and regulations.
3. Reasonable Business Practices. WQN shall employ all reasonable
business practices to manage the enterprise including 1) the selection of the
Sites, 2) the installation and maintenance of the Equipment, 3) the management
of call traffic, and 4) the reporting and accounting of the JV activities to
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the Parties.
4. Capital Contribution Partner agrees to contribute $50,000 upon
execution of this agreement.
5. Operating Expenses. The Parties agree that the JV shall have no
employees, and that, without the unanimous consent of the Parties, JV will incur
no expenses other than the following:
5.1 Carrier, local circuits and termination costs.
5.2. Actual out-of-pocket costs for replacement parts and maintenance
of the Equipment.
5.3. Taxes, fees or assessments imposed on the JV by any federal,
state or governmental authority.
5.4. Actual costs for the preparation of required federal and state
income, use, property and sales tax returns.
5.5. Actual costs for the preparation of quarterly and annual
financial statements.
6. Segregation of Funds. The parties agree that the JV shall establish a
separate bank account (the "JV Account") for the deposit of all funds collected
with respect to the JV funds. The JV's funds shall not be commingled with the
funds of any party or any other third party. In addition, only the payment of
the amounts authorized in Paragraph 5 above and distributions to the parties
shall be made from the JV Account.
7. Reporting. Each Party will receive monthly and annual statements
relative to the activities of the JV and may reasonably request additional
information from time to time as may be necessary.
8. Site Substitution. In the event the right for a local termination at
a Site is lost for any reason, the Parties shall use a reasonable efforts basis
to secure additional rights in that location, or alternatively, may move the
circuit to an alternative location (country) of mutual choice.
9. Delegation of Duties. WQN shall have full, complete and exclusive
authority to manage and control the business affairs and assets of the JV, to
make all decisions regarding those matters and to perform any and all other acts
and activities customary or incident to the management of the JV's business
including, entering into, making and performing contracts, agreements and other
undertakings binding the JV that may be necessary, appropriate or advisable in
the furtherance of the purpose of the JV and acquiring, utilizing for JV
purposes and selling or disposing of any assets of the JV; provided however, WQN
shall not, without the prior written consent of Partner, (a) cause or permit the
JV to dispose or encumber any of its Equipment or other assets, (b) cause or
permit the JV to incur any indebtedness for borrowed money, (c) approve capital
budgets and operating budgets of the JV, (d) cause or permit the JV to be a
party to a merger, conversion, interest exchange or other similar transaction,
(e) cause or permit the JV to cancel, amend or restate or relinquish any
material rights
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under, any material contract or agreement to which the JV is a party, (f)
terminate the JV, (g) add any additional parties to the JV, (h) amend this
Agreement or (i) take any other action which would materially effect Partner's
rights or WQN's obligations hereunder.
10. Miscellaneous Provisions.
10.1. Any notice required or permitted hereunder shall be in writing
and shall be sufficiently given if personally delivered or mailed by certified
or registered mail, return receipt requested, addressed to the address set forth
below each of the Parties signature to this Agreement (or to such other address
as any Party shall specify by written notice so given), and shall be deemed to
have been delivered as of the date so personally delivered or mailed.
10.2. The Parties will at any time, and from time to time after the
Closing Date, upon request of the other Party, execute, acknowledge and deliver
all such further acts, deeds, assignments, transfers, conveyances, powers of
attorney and assurances as may be required to carry out the intent of this
Agreement.
10.3. This Agreement shall be binding upon and shall inure to the
benefit of the Parties and their respective heirs, successors, executors,
administrators and assigns. Notwithstanding anything contained in this Agreement
to the contrary, nothing in this Agreement, expressed or implied, is intended to
confer on any person other than the Parties or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
10.4. This Agreement, together with the Exhibits, Schedules and other
documents contemplated hereby, constitute the final written expression of all of
the agreements between the Parties, and is a complete and exclusive statement of
those terms. It supersedes all understandings and negotiations concerning the
matters specified herein. Any representations, promises, warranties or
statements made by any party that differ in any such way from the terms of this
written Agreement and the Exhibits, Schedules and other documents contemplated
hereby, shall be given no force or effect. The Parties specifically represent,
each to each other, that there are no additional or supplemental agreements
between them related in any way to the matters herein contained unless
specifically included or referred to herein. No additional to or modification of
any provision of this Agreement shall be binding upon any Party unless made in
writing and signed by both Parties.
10.5. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF TEXAS. THE PARTIES AGREE THAT ANY DISPUTE WITH
REGARD TO THIS AGREEMENT SHALL BE BROUGHT EXCLUSIVELY IN THE DALLAS COUNTY,
TEXAS DISTRICT COURT.
10.6 This Agreement may be executed in any number of counterparts,
each of which shall be deemed an original but all of which shall constitute one
and the same instrument.
10.7 The Parties may, by written notice to the other, (i) extend the
time for the performance of any of the obligations or other actions of the other
under this Agreement; (ii) waive any inaccuracies in the representations or
warranties of the other contained in this Agreement or in any
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document delivered pursuant to this Agreement; (iii) waive compliance with any
of the conditions or covenants of the other contained in this Agreement; or (iv)
waive performance of any of the obligations of the other under this Agreement.
Except as provided in the preceding sentence, no action taken pursuant to this
Agreement, including without limitation any investigation by or on behalf of any
party, shall be deemed to constitute a waiver by the party taking such action of
compliance with any representations, warranties, covenants or agreements
contained in this Agreement. The waiver by any party hereto of a breach of any
provision hereunder shall not operate or be construed as a waiver of any prior
or subsequent breach of the same or any other provision hereunder.
10.8 If for any reason whatsoever, any one or more of the provisions
of this Agreement shall be held or deemed to be inoperative, unenforceable or
invalid as applied to any particular case or in all cases, such circumstances
shall not have the effect of rendering such provision invalid in any other case
or of rendering any of the other provisions of this Agreement, inoperative,
unenforceable or invalid.
10.9 Neither this Agreement nor any of the Parties' rights hereunder
shall be assignable by any Party hereto without the prior written consent of the
other Parties hereto.
10.10 The Parties expressly agree that each of the Parties may,
during the continuation of the JV, and notwithstanding the existence of this
Agreement, engage in any activities they choose, even if such activities are
competitive with the activities of the JV, without having or incurring any
obligation to offer any interest in such activities to the JV or any of the
Parties hereto. Neither this Agreement nor the activity undertaken pursuant
hereto shall prevent WQN or any of the other Parties hereto, or any affiliate of
WQN or any of such other Parties, from engaging in such activities, or require
WQN, any of the other Parties or any of the affiliates of WQN or the other
Parties to permit the JV or any of the Parties to participate in such
activities, and, as a material part of the consideration for the execution
hereof by the Parties, each of the Parties hereto waives, relinquishes and
renounces any such right or claim of participation.
EXECUTED, this the 9/th/ day of April, 1999.
BDC LLC - Partner WORLDQUEST NETWORKS, INC.
By: /S/ E. DENTON JOHNES By: /S/ MICHAEL LANHAM
---------------------- --------------------
E. Denton Jones Michael Lanham
President President
ADDRESS FOR NOTICE ADDRESS FOR NOTICE
PURPOSES: PURPOSES:
6408 Clinton Highway 16990 Dallas Parkway
PO Box 12322 Suite 220
Knoxville, TN 37912-0322 Dallas, TX 75248
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EXHIBIT 10.2
AMENDED 1997 STOCK OPTION PLAN
OF
WORLDQUEST NETWORKS, INC.
1. Purpose. This plan (the "Plan") adopted effective as of January 14,
1997, as amended July 1, 1999, is designed to encourage key employees and
consultants of WORLDQUEST NETWORKS, INC. (the "Company"), as well as key
employees and consultants of any after-acquired subsidiary corporation, to
acquire a proprietary interest in the Company and thus share in the future
success of the Company's business. This Plan is intended as a means, not only
of attracting and retaining outstanding management personnel and consultants who
are in a position to make important and direct contributions to the success of
the Company, but also of promoting a closer identity of interests between the
Company's employees and its shareholders.
2. Stock Options. Options granted under this Plan shall be Nonstatutory
Stock Options ("Options") under the Internal Revenue Code of 1986, as amended
(the "Code").
3. Scope and Duration of the Plan. There will be reserved for sale upon
the exercise of Options granted under this Plan Five Hundred Thousand (500,000)
shares of the Company's authorized but unissued voting common stock. If an
Option expires or terminates for any reason without having been fully exercised,
the unpurchased shares will be available for other Options under the Plan.
Unless this Plan is terminated earlier pursuant to Section 15 hereof, it shall
terminate ten (10) years from its effective date and no Option shall be granted
after that date; provided, however, that termination of this Plan will have no
effect on the Options previously granted.
4. Administration. The Plan shall be administered by the Board of
Directors of the Company. Directors shall be eligible for the grant of Options
hereunder.
The Board of Directors has the responsibility to adopt such rules and
regulations as it deems necessary or desirable for the proper administration of
this Plan. Any decision or action taken or to be taken by the Board of
Directors, arising out of or in connection with the construction,
interpretation, and administration of this Plan shall, to the extent permitted
by law, be within its absolute discretion, but subject to the express provisions
of this Plan. Decisions of the Board of Directors shall be conclusive and
binding upon all recipients of Options and any person claiming under or through
any recipient of an Option.
5. Eligible Employees. Options may be granted to directors and key
employees of the Company and future subsidiary corporations who otherwise comply
with the requirements of this Plan. The Board of Directors has the authority,
subject to the terms of this Plan, to determine key employees to whom Options
shall be granted, the number of shares to be covered by each Option, form of
payment, the time or times at which Options shall be granted, and the terms and
provisions of the instruments evidencing Options. The term "key employee" shall
include officers, executives and supervisory personnel of the Company. In
determining the key employees
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and consultants to whom Options shall be granted and the number of shares to be
issued on the exercise of an Option, the Committee shall take into account the
duties of the key employees and consultants, their present and potential
contributions to the success of the Company and its subsidiary corporations, and
such other factors as the Committee deems relevant to accomplish the purpose of
this Plan.
6. Exercise Price. Subject to the provisions of Section 5 above, the
price of the shares of common stock to be issued on exercise of Options shall be
not less than the fair market value of such shares on the date an Option is
granted, as determined by the Board of Directors in the exercise of its sole and
exclusive judgment, which shall be binding upon all parties. If the Company's
common stock shall become listed on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ"), the fair market value shall be
deemed to be the closing bid price of the Company's common stock on NASDAQ on
the date the Option is granted, or if no sale of the Company's common stock
shall have been made on that date, on the next preceding day on which there was
a sale of such stock. If the Company's common stock shall become listed on an
established stock exchange, the fair market value shall be deemed to be the
closing bid price of the stock on such exchange on the date the Option is
granted, or if no sale of the Company's stock shall have been made on such day,
then on the next preceding day on which there was a sale of such stock.
Subject to the foregoing, the Board of Directors, in fixing the Option price,
shall have full authority and discretion and their good faith judgment in
establishing fair market value and in establishing the purchase price shall be
conclusive.
7. Term of Options. The term of each Option shall be determined by the
Board of Directors, but shall not be for more than ten (10) years from the date
the Option is granted.
8. Exercise of Options. An Option may vest and be exercised on such
terms and conditions as the Board of Directors shall determine, subject to the
requirements of this Plan. Unless otherwise determined by the Board of
Directors, the price of the shares purchased pursuant to an Option shall be paid
in full at the time of exercise in cash or in such other consideration as the
Board of Directors deems appropriate, including, without limitation, shares of
common stock of the Company valued at fair market value (in the manner
prescribed in Section 6 above) as of the date of exercise of the Option. No
Option may be exercised during the optionee's lifetime unless the optionee is
then an employee or consultant of the Company or a subsidiary corporation;
provided that, in the event the optionee's employment terminates for reasons
other than death or disability, the Option may be exercised during the three (3)
month period following the termination of employment. Thereafter, the Option
shall terminate and be at an end. In the case of disability or death, the Board
of Directors may extend the Option for up to one (1) year. Notwithstanding the
foregoing, Options granted to Directors may be exercisable for a period of up to
seven (7) years following the date such Director ceases to be a Director of the
Company.
Whether an authorized leave of absence, disability, or temporary absence
from employment for any other reason constitutes termination of employment for
the purposes of this Plan shall be determined by the Board of Directors.
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9. Additional Restrictions Upon Exercise of Options. Options may be
exercisable either in whole or in part. No less than one hundred (100) shares
common stock may be purchased at any one time unless the number purchased is the
total number of shares at that time purchasable under the Option. The Board of
Directors may impose such other restrictions upon the exercise of the Option or
the transfer shares of common stock acquired upon the exercise of the Option as
the Committee deems necessary to comply with federal and state securities law.
10. Nontransferability of Options. During the lifetime of the optionee,
the Option shall be exercised only by the optionee. An Option granted under
this Plan is not transferable by the optionee by operation of law or otherwise,
except that in the event of death of the optionee while in the employ of the
Company or a subsidiary, an Option granted hereunder may be exercised (subject
to the time restrictions set forth in Section 7 hereof) at any time within one
(1) year after death, by the duly appointed personal representative of the
optionee, or by any person or persons who shall acquire such Option directly
from the optionee by bequest or inheritance.
11. Adjustments for Changes in Capitalization. Notwithstanding any other
provision of this Plan, each instrument evidencing an Option may contain such
provision as the Board of Directors determines to be appropriate, if any, for
the adjustment of the number and class of shares of common stock covered by the
Option, the Option price, and the number of shares of common stock as to which
the Option shall be exercisable at any time, in the event of changes in the
outstanding shares of common stock of the Company by reason of stock dividends,
split-ups, recapitalizations, mergers, consolidations, reorganizations, or
liquidations. In the event of any such change in the outstanding shares of
common stock of the Company (other than the dividend of 299 shares of common
stock for each outstanding share of common stock approved on January 6, 1997),
the aggregate number of shares available under this Plan shall be appropriately
adjusted.
12. Events Accelerating Exercise of Options. If the shares of common
stock of the Company are changed into or exchanged for shares of stock of
another unrelated corporation or are converted to cash pursuant to a plan of
merger, partial or complete liquidation or dissolution, each Option then
outstanding (to the extent this Plan is not continued, as adjusted in the manner
specified in Section 11 by the successor entity) shall be exercisable, with
respect to all the shares of common stock covered thereby and without regard to
the time the Option has been outstanding, beginning with the date the Board of
Directors approves or authorizes such change or conversion, and ending two (2)
days prior to the effective date of such change or conversion.
13. Loans to Holders of Options. The Company may, in the sole discretion
of the Board of Directors, directly or indirectly, lend money or credit to any
employee for the purpose of assisting an optionee in purchasing shares of common
stock to be issued upon the exercise of an Option granted under this Plan.
14. Employment Rights; Noncompetition Covenants. Nothing in this Plan or
any instrument evidencing an Option shall confer upon any employee any right to
continue in the employment of the Company or a subsidiary corporation, nor be
construed to interfere in any way with the right otherwise available to the
Company or a subsidiary corporation to terminate the
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employee's employment at any time for any reason. The Board of Directors may
condition each grant of an Option upon the recipient's agreement to execute and
be bound by a noncompetition covenant following termination of such recipient's
employment by the Company voluntarily by such recipient, or by the Company with
or without cause, as the Board of Directors may determine in each individual
instance.
15. Amendment/Termination. The Board of Directors may amend or terminate
this Plan from time to time in such respects as it may deem advisable; provided
that the following revisions or amendments shall require approval at a duly held
shareholders' meeting of the holders of a majority of the voting power of the
outstanding shares of the Company entitled to vote;
(1) Any increase in the number of shares subject to the Plan, other
than in connection with an adjustment under Section 12;
(2) Any change in the designation of the class of employees or
consultants eligible to be granted Options; or
(3) Any material increase in the benefits accruing to participants
in this Plan.
16. Rights as a Shareholder. An optionee, or permitted transferee of an
Option upon the death of an optionee, shall have no rights as a stockholder with
respect to any shares of common stock covered by an Option until the date of the
issuance of a stock certificate to and for such shares. No adjustment shall be
made for dividends (ordinary or extraordinary, whether in cash, securities, or
other property) or distributions or other rights for which the record date is
prior to the date such stock certificate is issued, except as provided in
Section 12 above.
17. Investment Purpose. Common stock acquired upon the exercise of an
Option granted under this Plan may only be resold in the event such stock is
registered under the Securities Act of 1933, as amended, or if, in the opinion
of responsible counsel for the Company, such stock can be resold without such
registration. Unless a registration statement with respect to such stock
covering the holder of such Option is then in effect, each certificate issued
pursuant to the exercise of such Option shall contain a legend to this effect.
18. Other Provisions. The Option Agreements authorized under this Plan
may contain such other provisions, including without limitation, restrictions
upon the exercise of Options, as the Board of Directors shall deem advisable.
19. Indemnification of Committee. In addition to such other rights of
indemnification as they may have as Directors, the Board of Directors shall be
indemnified by the Company against the reasonable expenses, including attorneys'
fees actually and necessarily incurred in connection with the defense of any
action, suit or proceeding, or in connection with any appeal therein, to which
they or any of them may be a party by reason of any action taken or failure to
act under or in connection with this Plan or any Option granted hereunder, and
against all amounts
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paid by them in settlement thereof (provided such settlement is approved by the
Company), or paid by them in satisfaction of a judgment in any such action, suit
or proceeding, except in relation to matters as to which it shall be adjudged in
such action, suit, or proceeding that such Director is liable for negligence or
misconduct in the performance of his duties; provided that within sixty (60)
days after the institution of any such action, suit or proceeding, the Director
shall, in writing, offer the Company the opportunity, at its own expense, to
defend the same.
This Plan, as amended, is executed July 1, 1999.
WORLDQUEST NETWORKS, INC.
By: /S/ B. MICHAEL ADLER
----------------------------
B. Michael Adler,
Chief Executive Officer
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EXHIBIT 10.3
WORLDQUEST NETWORKS, INC.
STOCK OPTION AGREEMENT
This Stock Option Agreement ("Agreement") is entered into as of December 7,
1998 between WorldQuest Networks, Inc., a Texas corporation (the "Company"), and
Michael R. Lanham, an employee of the Company (the "Employee").
Recitals:
The Company desires to grant to the Employee a Nonqualified Stock Option to
purchase shares of its Common Stock, $0.10 par value, pursuant to the terms and
conditions of this Agreement.
The parties agree as follows:
1. Grant of option. The Company hereby grants to the Employee the right
and option (the "Option") to purchase all or any part of an aggregate of 167,867
shares (the "Shares") of its Common Stock, $0.10 par value, which constitutes
five percent (5%) of the fully diluted outstanding shares of Common Stock of the
Company after giving effect to the granting of this Option, on the terms and
conditions and subject to all the limitations set forth herein.
2. Purchase Price. The purchase price of the Shares covered by the Option
shall be $3.33 per share.
3. Vesting of Option. Subject to the other terms and conditions of this
Agreement, the Shares exercisable upon exercise of the Option granted hereby
shall vest in accordance with the following schedule: (i) 20% shall vest on the
first anniversary of the date of this Agreement if Employee continues to be
employed by the Company on such date, (ii) 30% shall vest on the second
anniversary of the date hereof if Employee continues to be employed by the
Company on such date, and (iii) 50% shall vest on the third anniversary of the
date hereof if Employee continues to be employed by the Company on such date.
Any non-vested Shares under the Option granted hereby shall be deemed to
have immediately and automatically vested two business days prior to the
occurrence of any of the following events: (i) a change of control of the
Company, which shall mean some person or entity other than WorldQuest Networks,
LLC or B. Michael Adler or an entity controlled by him owns more than 50% of the
voting capital stock or 50% in value of the voting and nonvoting capital stock
of the Company; (ii) the Company successfully closes an initial public offering
of its Common Stock which results in the Common Stock being registered under
Section 12 of the Securities Exchange Act of 1934, as amended; (iii) a sale of
all or substantially all of the assets of the Company; (iv) the merger or
consolidation of the Company into another entity that is the surviving entity;
(v) a partial or complete liquidation or dissolution of the Company; or (vi) the
Company's shares of Common Stock are changed into or exchanged for shares of
stock of another corporation or entity or are converted to cash pursuant to a
plan of merger, consolidation or similar arrangement.
4. Exercise of Option. Subject to the other terms and conditions of this
Agreement, the vested Shares granted pursuant to this Option may be exercised at
any time during the term of this Agreement in accordance with the terms of
paragraph 7.
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5. Term of Option. The Option shall terminate on the seventh (7th)
anniversary of the date hereof, but shall be subject to earlier termination as
provided herein.
In the event the Employee's employment is terminated by the Company for
"Cause" (as hereinafter defined), or the Employee voluntarily leaves the
employment of the Company, the unvested Shares granted pursuant to this Option
shall be immediately forfeited; provided, however, that notwithstanding the
vesting schedule set forth above, if Employee's employment is terminated by the
Company on or after June 7th in any year, any Shares which would have otherwise
vested on December 7th of such year shall not be forfeited and shall be deemed
vested notwithstanding such termination. If the Employee's employment is
terminated without "Cause" by the Company, this Option shall continue in effect
and any non-vested Shares under the Option shall be deemed to vest on the dates
set forth in paragraph 3 even though Employee is not employed by the Company on
any of such vesting dates. For purposes of this Agreement, the term "Cause"
shall mean and be strictly limited to: (1) being indicted for or formally
charged with a crime constituting a felony under state or federal law; (2)
committing fraud on the Company; (3) gross misconduct by Employee, such as
intoxication on the job, use of drugs on the job for non-medical purposes, or
other gross misconduct which has a material adverse effect on the business of
the Company; or (4) Employee continuing to act beyond his scope of authority
granted by the Board of Directors of the Company after written notice from the
Board to Employee to cease such actions.
If the Employee ceases to be an employee of the Company by reason of death
or disability, the Option shall terminate one year after the date of death or
disability and may be exercised by Employee's estate or heirs during such one-
year period if otherwise exercisable during such one-year period under the terms
hereof.
6. Non-Assignability. The Option shall not be transferable by the
Employee otherwise than by will or by the laws of descent and distribution and
shall be exercisable, during the Employee's lifetime, only by the Employee or
his or her guardian or legal representative. The Option shall not be assigned,
pledged or hypothecated in any way (whether by operation of law or otherwise)
and shall not be subject to execution, attachment or similar process. Any
attempted transfer, assignment, pledge, hypothecation or other disposition of
the Option or of any rights granted hereunder contrary to the provisions of this
paragraph 6, or the levy of any attachment or similar process upon the Option or
such rights, shall be null and void.
7. Manner of Exercising Option and Issue of Shares. The Option relating
to vested Shares may be exercised in whole or in part by giving written notice
to the Company, together with the tender of the Option purchase price. Such
written notice shall be signed by the person exercising the Option, shall state
the number of Shares with respect to which the Option is being exercised, shall
contain any representation required by paragraph 8 below and shall otherwise
comply with the terms and conditions of this Agreement. The Company shall pay
all transfer or original issue taxes with respect to the issue of the Shares
pursuant hereto and all other fees and expenses necessarily incurred by the
Company in connection herewith. Except as specifically set forth herein,
Employee acknowledges that any income or other taxes due from him with respect
to this Option or the Shares issuable pursuant to this Option shall be the
responsibility of Employee and that the Company may, in accordance with the
Internal Revenue Code, require Employee to pay additional withholding taxes in
respect of the amount that is considered compensation includable in Employee's
gross income. Employee shall have rights as a shareholder only with respect to
any Shares covered by the Option after due exercise of the Option and tender of
the full exercise price for the Shares being purchased pursuant to such
exercise.
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8. Purchase for Investment. Unless the offering and sale of the Shares
to be issued upon the particular exercise of the Option shall have been
effectively registered under the Securities Act of 1933, as amended, or any
successor legislation (the "Act"), the Company shall be under no obligation to
issue the Shares covered by such exercise unless and until the following
conditions have been fulfilled:
The person(s) who exercise the Option shall represent to the Company, at
the time of such exercise, that such person(s) are, acquiring such Shares for
his or her own account, for investment and not with a view to, or for sale in
connection with, the distribution of any such Shares, in which event the
person(s) acquiring such Shares shall be bound by the provisions of the
following legend which shall be endorsed upon the certificate(s) evidencing
their option Shares issued pursuant to such exercise:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. WITHOUT SUCH
REGISTRATION, SUCH SECURITIES MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR
OTHERWISE TRANSFERRED, EXCEPT UPON DELIVER TO THE COMPANY OF AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED FOR
SUCH TRANSFER OR THE SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS
MAY BE SATISFACTORY TO THE COMPANY TO THE EFFECT THAT ANY SUCH TRANSFER
SHALL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS OR ANY RULE OR REGULATION PROMULGATED
THEREUNDER."
Without limiting the generality of the foregoing, the Company may delay
issuance of the Shares until completion of any action or obtaining of any
consent, which the Company deems necessary under any applicable law (including
without limitation state securities or "blue sky" laws).
9. Noncompetition and Nonsolicitation. In order to induce the Company to
grant the Option granted hereby to Employee, Employee covenants that for a
period of one (1) year from the date of the termination of Employer's employment
for any reason whatsoever (or if this period shall be unenforceable, for such
lesser period as shall be enforceable), Employee will not, either directly or
indirectly, anywhere in the world (or if this area shall be unenforceable for
such area as shall be enforceable):
(a) for Employee's own behalf or on behalf of any other individual,
partnership, association, corporation, firm, group, organization or other
entity ("person"), hire or solicit or in any manner attempt to influence or
induce any employee employed by the Company at the time of termination of
Employee's employment with the Company to leave the employment of the
Company, nor use or disclose to any person any information concerning the
names and addresses of such employees; or
(b) call on, solicit, or take away, or attempt to call on, solicit, or
take away any of the customers, clients, prospective customers or
prospective clients of the Company on whom Employee called, with whom he
became acquainted, or the
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names of which he learned while employed by the Company, either for
Employee's own behalf or for any other person for purposes of such person
competing directly against the Company, except with the prior written
consent of the Company; or
(c) perform any act or engage in any activity which interferes,
directly or indirectly, with any relationship between the Company and any
client, customer, prospective client or prospective customer of the
Company.
The term "prospective client" or "prospective customer", as used in this
Agreement, refers to any person whose business has been solicited by the Company
or its agents at any time during one (1) year preceding the termination of
employment of Employee. The term "business", as used in this Agreement, shall
mean the specific business in which the Company is engaged at the time of
termination of employment and the term "prospective business", as used in this
Agreement, shall mean any specific prospective or potential business of the
Company which the Company has not commenced but which has been identified or
discussed in strategic or other business plans or meetings, either internally or
externally, as a pending business which the Company intends to actively pursue.
10. Notices. Any notice to be given under this Agreement shall be deemed
sufficient if addressed in writing, and delivered by registered or certified
mail or delivered personally, in the case of the Company to its principal
business office and in the case of the Employee, to his address appearing on the
records of the Company, or to such other address as he may have designated in
writing to the Company.
11. Governing Law. This Agreement shall be construed and enforced in
accordance with the internal laws, and not the laws of conflict, of the State of
Texas.
12. Benefit of Agreement. This Agreement shall be for the benefit of and
shall be binding upon the heirs, executors, administers and successors of the
parties hereto.
13. Adjustment of Shares. Wherever this Agreement specifies a number of
shares of Common Stock or a purchase price per share, the specified number of
Shares of Common Stock to be received on exercise and the applicable purchase
price per share shall be changed to reflect adjustments (which may require that
additional securities or other property be delivered on exercise) required by
this paragraph 13, as follows:
(a) If a stock or property dividend is declared to the holders of
shares of the same class of securities of the Company as is issuable upon
exercise of this Option, there shall be added with respect to each Share
issuable upon exercise of this Option the amount of the dividend, stock or
property, which would have been issued to Employee had Employee been the
holder of record of such issuable share at the dividend record date. Such
additional stock or property resulting from such dividend shall be
delivered without additional cost upon the exercise of this Option. Any
distribution to the holders of Common Stock of the Company of any kind,
other than a distribution of cash as a dividend out of profits of the
Company for the current year of the dividend, shall be treated as a stock
or property dividend for purposes of this subparagraph 13(a). If Employee
is entitled to receive cash upon exercise of this Option under this
subparagraph 13(a), Employee may, at Employee's option, elect to reduce the
applicable purchase price by all or part of the cash to be received by
Employee upon exercise under this subparagraph 13(a).
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(b) If an increase has been effected in the number of outstanding
shares of the same class of securities of the Company as is issuable upon
exercise of this Option by reason of a subdivision of such shares, the
number of Shares which may thereafter be purchased upon exercise of this
Option shall be increased with respect to each Share issuable upon exercise
of this Option by the number of Shares which could have been received by
Employee at the time of such subdivision had he been the holder of record
of such issuable Shares at the record and/or effective date of the
subdivision. In such event, the purchase price per Share under this Option
shall be proportionately reduced.
(c) If a decrease has been effected in the number of outstanding
shares of the same class of securities of the Company as is issuable upon
exercise of this Option by reason of a reverse stock split, the number of
Shares which may thereafter be purchased upon exercise of this Option shall
be changed with respect to each Share issuable upon exercise of this Option
to the number of Shares which would have been held by Employee at the time
of said reverse stock split had Employee been the holder of such issuable
Share at the record and/or effective date of the reverse stock split. In
such event, the purchase price per Share shall be proportionately
increased.
EXECUTED effective as of December 7, 1998.
COMPANY:
WORLDQUEST NETWORKS, INC.
By: /s/ B. MICHAEL ADLER
--------------------------------
B. Michael Adler, Chairman of
the Board
EMPLOYEE:
/s/ MICHAEL R. LANHAM
-----------------------------------
Michael R. Lanham
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EXHIBIT 10.4
STOCK TRANSFER AGREEMENT
THIS STOCK TRANSFER AGREEMENT ("Agreement") is entered into as of the 7th
day of December 1998, by and between WORLDQUEST COMMUNICATIONS, Inc., a Delaware
Corporation ("Purchaser" or "Communications"), ("WORLDQUEST NETWORKS, LLC
("LLC") and WORLDQUEST NETWORKS, INC., a Texas Corporation (the "Corporation").
WHEREAS, the Corporation has 10,000,000 shares of common stock authorized,
$.10 par value, and 5,000,000 shares of preferred stock authorized, $.10 par
value, and LLC owns 3,000,000 shares of common stock, and there are options and
warrants granted for an additional 357,341 shares of common stock;
WHEREAS, the parties hereto acknowledge that prior to the date hereof
Purchaser and/or Communications have funded approximately $100,000 for the
benefit of LLC and the Corporation and have granted an exclusive license to use
the name "WorldQuest" to both LLC and the Corporation which has not been
memorialized in writing and the parties desire to memorialize such license in
writing by virtue of this Agreement; and
WHEREAS, LLC and the Corporation acknowledge that in consideration of the
approximate $100,000 funded for the benefit of LLC and Corporation and in
exchange for the exclusive license of the name "WorldQuest" Purchaser was to
receive 360,000 shares of common stock in the Corporation and that LLC desires
to cause the transfer of such shares to be made to Purchaser so that Purchaser
will own of record a total of ten percent (12%) of the issued and outstanding
shares of common stock of the Corporation.
NOW THEREFORE, in consideration of the mutual covenants and conditions
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do hereby agree
as follows:
1. Transfer of Shares. LLC hereby agrees to transfer and assign record and
beneficial ownership of 360,000 shares of the issued and outstanding shares of
common stock of the Corporation to Purchaser representing twelve percent (12%)
of the issued and outstanding shares of common stock of the Corporation as of
the date of this Agreement (the "Acquired Shares") and the Corporation shall
cancel common stock certificate number 002, representing 2,990,000 shares of
common stock, upon receipt thereof from LLC and shall issue one (1) stock
certificate in Purchaser's name in the amount of 360,000 shares of common stock
of the Corporation which shall be delivered to Purchaser within ten (10)
business days following the execution of this Agreement and shall issue one (1)
stock certificate in LLC's name in the amount of 2,630,000 shares of common
stock which shall be delivered to LLC within ten (10) business days following
the execution of this Agreement.
2. License; No Repayment of $100,000. Each of Purchaser and Communications
confirm and agree that they have granted an exclusive (except for the retained
right hereinafter set forth), perpetual, world-wide license to both LLC and the
Corporation to use the name "WorldQuest", reserving only the right in the name
of Communications to use the name "WorldQuest" for use in connection with its
existing business. Purchaser and Communications also confirm and agree that
they do not expect to be repaid from
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any source the approximate amount of $100,000 previously funded by them to or
for the benefit of LLC and the Corporation.
3. Title to the Stock. LLC represents and warrants to the Purchaser that (i)
LLC has good, absolute and marketable title to the Acquired Shares, free and
clear of all liens, claims, encumbrances and restrictions of every kind; and
(ii) LLC has the complete and unrestricted right, power and authority to
transfer and assign the Acquired Shares hereunder. LLC makes no other warranty
or representation to Purchaser concerning or relating to the Acquired Shares,
other than as stated herein.
4. Representations of Purchaser, (and Communications). Each of Purchaser and
Communications represents and warrants to LLC and the Corporation as follows:
A. Each of Purchaser and Communications is a corporation duly organized,
validly existing and in good standing under the laws of Nevada. The Purchaser
has full corporate power and authority to enter into and to perform this
Agreement and to acquire the Acquired Shares from LLC and has received all
financial and other information which Purchaser has requested about LLC and the
Corporation and Purchaser understands that neither LLC nor the Corporation
guarantees or represents that there will ever be an appreciation in the price of
the Acquired Shares and that the price of the Acquired Shares may decline;
Communications has full corporate power and authority, to enter into and to
perform this Agreement; and this Agreement has been, or when executed will be,
duly executed and delivered by each of Purchaser, and Communications and is or
will be, upon execution, the legal and binding obligation of each of Purchaser
and Communications enforceable against each of them in accordance with its
terms, except as limited by bankruptcy, insolvency, reorganization, moratorium
and other similar laws affecting creditors' rights and principles of equity.
B. Purchaser acknowledges that the Acquired Shares have not been
registered under the Securities Act of 1993 (the "Act") or qualified under any
state securities act in reliance on certain exemptions, and Purchaser also
acknowledges that there are substantial restrictions of the transferability of
the Acquired Shares, that the shareholders have no right to require that the
Acquired Shares be registered under the Act and that there will be no public
market for the Acquired Shares unless they are registered under the Act.
5. Representation of the Corporation and LLC. The Corporation and LLC hereby
represent and warrant to Purchaser the following:
A. The Corporation is a corporation duly organized, validly existing and
in good standing under the laws of Texas. The Corporation has full corporate
power and authority to carry on its business as it is now being conducted and to
own and operate its assets, properties and business. Each of LLC and the
Corporation has full limited liability company or corporate power and authority
to enter into and to perform this Agreement and to consummate the transactions
contemplated hereby.
B. The authorized capital stock of the Corporation consists solely of
10,000,000 shares of common stock, 3,000,000 of which are issued and
outstanding, and 5,000,000 shares of preferred stock, no shares of which are
issued and outstanding. There are no other authorized classes or series of
capital stock of the Corporation, except that a series of 166,667 shares of
preferred stock have been designated as
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Series A Preferred Stock, but no shares of such series are issued and
outstanding. All outstanding shares of common stock of the Corporation are duly
authorized, validly issued, fully paid, and nonassessable and have been offered,
issued, sold and delivered by the Corporation in compliance with applicable
securities laws. There are no preemptive rights with respect to the common stock
or preferred stock of the Corporation. There are no outstanding subscriptions,
options, warrants, rights or other arrangements or commitments, whether express
or implied, obligating the Corporation to issue any shares of common stock or
preferred stock of the Corporation or securities exchangeable for or convertible
into the common stock or preferred stock of the Corporation except for a warrant
to purchase 159,474 shares of common stock at an exercise price of $3.33 per
share granted to InterVoice, Inc.; options to purchase 167,867 shares of common
stock at an exercise price of $3.33 per share granted to Michael Lanham; and
options exercisable at an exercise price of $1.00 per share granted to directors
of the Corporation (an aggregate of 20,000 shares) and employees of the
Corporation (an aggregate of 10,000 shares). The issuance and delivery at the
Closing of the certificates representing the Acquired Shares will provide
Purchaser record ownership to such Acquired Shares free and clear of all liens
assuming Purchaser has taken no action to create a lien on any of the Acquired
Shares. Except for the Articles of Incorporation and Bylaws of the Corporation,
and this Agreement, there are no outstanding agreements or documents binding on
the Corporation regarding the transfer, voting, pledge, optioning, or gifting of
any capital stock of the Corporation.
C. The Corporation does not own, directly or indirectly, any of the
capital stock of any other corporation or any entity, profit sharing
participation or other interest in any other entity.
D. The execution, delivery and performance by the Corporation of this
Agreement has been duly authorized and approved by the board of directors of the
Corporation, and no further corporate action on the part of the Corporation is
necessary to fully authorize such execution, delivery and performance. The
execution, delivery and performance by LLC of this Agreement has been duly
authorized and approved by the members of LLC, and no further limited liability
company action on the part of LLC is necessary to fully authorize such
execution, delivery and performance. This Agreement has been, or when executed
will be, duly executed and delivered by the Corporation and LLC and is or will
be, upon execution, the legal and binding obligation of the Corporation and LLC
enforceable against each of them in accordance with its terms, except as limited
by bankruptcy, insolvency, reorganization, moratorium and other similar laws
affecting creditors' rights and principles of equity.
E. The execution and delivery of this Agreement will not (a) result in a
breach or violation of, constitute a default under, or result in the creation of
any lien upon any of any assets owned by the Corporation; or (b) violate any
provision of any law applicable to the Corporation.
F. The Corporation has all licenses and permits necessary to conduct the
operation of the Corporation and all governmental regulatory forms have been
timely filed.
G. Schedule I sets forth a true, correct and complete copy of the
Financial Statements. Except for the absence of footnotes and subject to normal
year-end adjustments, the Financial Statements (a) fairly present the financial
position of the Corporation, and the consolidated results of operations of the
Corporation for the respective periods indicated therein; (b) have been prepared
on a consistent basis with prior periods; and (c) have not been rendered untrue,
incomplete, or unfair as representations of the financial condition or results
of operations of Corporation by the subsequent discovery of events or
3
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occurrences which should have been reflected in such financial statements.
H. Except as set forth on Schedule H, the Financial Statements reflect
all material liabilities of the Corporation which are required to be reflected
thereon. All reserves shown or incorporated in the Financial Statements are
reasonable to provide for losses thereby contemplated. Except as set forth in
the Financial Statements or on Schedule H, the corporation is not liable upon or
with respect to, subject to or obligated in any other way to provide funds in
respect of or to guarantee or assume in any manner, any debt, obligation or
dividend of any other Person and there is no basis for the assertion of any such
claims or liabilities.
6. Anti-Dilution Protection. Upon issuance by the Corporation of shares at a
price below $1.00 per share ("Dilution Price"), the Corporation shall issue
shares to Purchase equal to the product of the number of shares purchased by
Purchaser multiplied by the difference in the purchase price per share for such
shares divided by the Dilution Price.
Survival of Representations. All representations, warranties and agreements
made by any party to this Agreement shall survive the execution and
delivery hereof and the closing of the transaction contemplated hereby.
8. Indemnification of Purchaser. The Corporation shall defend, indemnify and
hold Purchaser harmless from, against and in respect of any and all claims,
demands, lawsuits, proceedings, losses, assessments, fines, penalties,
administrative orders, obligations, costs, expenses, liabilities and damages,
including interest, penalties and reasonable attorneys' fees and costs of
investigation (all of the foregoing are hereinafter collectively referred to as
the "Claims") which arise or result from or relate to:
A. The breach or failure of any representation or warranty made by the
Corporation under or contained in this Agreement;
B. The breach by the Corporation of, or failure by the Corporation to
perform any of its covenants, commitments, agreements or obligations under or
contained in this Agreement, or
C. Purchaser being required to defend against, assume or discharge any
debt, liability or obligation of the Corporation of any nature whatsoever.
9. Arbitration.
A. In the event of a dispute arising out of or relating to this
Agreement, then, upon notice by any party to the other parties (an "Arbitration
Notice") and to the American Arbitration Association (the "AAA"). 140 West 51st
Street, New York, New York 10020-1202 (telephone 212-484-3266; fax 212-3074387),
the dispute shall be submitted to a sole arbitrator who is independent and
impartial, for binding arbitration in Dallas, Texas, in accordance with the
AAA's Commercial Arbitration Rules (the "Rules") as modified or supplemented by
this Agreement. The parties agree that they will faithfully observe this
Agreement and the Rules and that they will abide by and perform any award
rendered by the arbitrator. The arbitration shall be governed by the Federal
Arbitration Act, 9 U.S.C. Section 1-16 (or by the same principles enunciated by
such Act in the event it may not be technically applicable). The award or
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judgment of the arbitrator shall be final and binding on all parties and the
judgment upon the award or judgment of the arbitrator may be entered and
enforced by any court having jurisdiction. If any party becomes the subject of
a bankruptcy, receivership or similar proceeding under the laws of the United
States of America, any state or commonwealth or any other nation or political
subdivision thereof, then, to the extent permitted or not prohibited by
applicable law, any factual or substantive legal issues arising in or during the
pendency of any such proceeding shall be subject to all of the foregoing
mandatory arbitration provisions and shall be resolved in accordance therewith.
The agreements contained herein have been given for valuable consideration, are
coupled with an interest and are not intended to be executory contracts. The
fees and expenses of the arbitrator will be shared equitably (as determined by
the arbitrator) by all parties engaged in the dispute.
B. Promptly after the Arbitration Notice is given, the AAA will select
five (5) possible arbitrators, to whom the AAA will give the identities of the
parties and the general nature of the controversy. If any of those arbitrators
disqualifies himself or declines to serve. The AAA shall continue to designate
potential arbitrators until the parties have a panel of five (5) arbitrators to
select from. After the panel of five (5) potential arbitrators has been
completed, a two page summary of the background of each potential arbitrator
will be given to each of the parties and the parties will have a period of ten
(10) days after receiving the summaries in which to attempt to agree upon the
arbitrator to conduct the arbitration. If the parties are unable to agree upon
an arbitrator, then one (1) of the parties shall notify the AAA and the other
party, and the AAA will notify each party that each such party has five (5) days
from the AAA's notice to strike two (2) names from this list and advise the AAA
of the two (2) names stricken. After expiration of the strike period, if all
but one (1) candidate of the panel has been stricken, the remaining one (I)
person will be the arbitrator. If two (2) or more have not been stricken, then
the AAA shall select the arbitrator from one of those not stricken. The
decision of the AAA with respect to the selection of the arbitrator will be
final and binding in such case. For purposes of this Section 9., Purchaser will
be one party and the Corporation will be one party.
C. No litigation or other proceeding may ever be instituted at any time
in any court or before an administrative agency or body for the Purpose of
adjudicating, interpreting, or enforcing any of the rights or obligations of the
parties hereto or any rights or obligations relating to the subject matter
hereof whether or not covered by the express terms of this Agreement, or for the
purpose of adjudicating a breach or determination of the validity of this
Agreement, or for the purpose of having the award or judgment of an arbitrator,
except a proceeding instituted (i) for the purpose of having the award or
judgment of an arbitrator entered and enforced or (ii) to seek an injunction or
restraining order (but not damages in connection therewith) in circumstances
where such relief is available.
D. Within ten (10) days after the selection of the arbitrator, the
parties and their counsel will appear before the arbitrator at a place in
Dallas, Texas at a time designated by the arbitrator for the purpose of each
party making a one (1) hour or less presentation and summary of the case.
Thereafter, the arbitrator will set dates and times for additional hearings in
accordance with the Rules until the proceeding is concluded. The desire and
goal of the parties is, and the arbitrator will be advised that his goal should
be, to conduct the arbitration proceeding as expeditiously as possible. If any
party or his counsel fails to appear at any hearing, the arbitrator shall be
entitled to reach a decision based on the evidence with has been presented to
him by the parties who did appear.
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10. Choice of Law. It is the intention of the parties that the laws of the
State of Texas should govern the validity of this Agreement, the construction of
its terms, and the interpretation of the right and benefit of the parties.
11. Benefits. Each party agrees to execute any additional instruments
necessary to effectuate the intent of this Agreement. This Agreement shall be
binding upon, and inure to the benefit of, the parties' personal
representatives, successors and/or assigns.
12. Notices. All notices. requests, consents and other communications under
this Agreement shall be in writing and shall be deemed to have been delivered on
the date personally delivered or deposited in the United States Postal Service,
postage prepaid, by certified mail, return receipt requested, or telegraphed and
confirmed, or faxed and confirmed, if addressed to the respective parties as
follows:
If to the Corporation or LLC:
c/o WorldQuest Networks, Inc.
16990 Dallas Parkway, Suite 220
Dallas, TX 75248
If to the Purchaser or Communications:
c/o WORLDQUEST COMMUNICATIONS, Inc.
6408 Clinton Highway
P.O. Box 12322
Knoxville, TN 37912-0322
7
13. Entire Agreement. This Agreement cancels and supersedes all prior
negotiations and understandings between the parties relating hereto, and
embodies the entire agreement and understanding between such parties with
respect to the matters covered hereby.
14. Attorney Fees. The Corporation agrees to pay reasonable attorney fees and
expenses of the Corporation' and Purchaser's counsel that have been incurred in
the preparation of this transaction.
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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
effective as of December 7, 1998.
THE CORPORATION:
- ----------------
WORLDQUEST NETWORKS, INC.
By: /S/ MICHAEL LANHAM
____________________________
Michael Lanham, President
LLC:
- ----
WORLDQUEST NETWORKS, LLC
By: /S/ MIKE ADLER
___________________________________
Mike Adler, Chief Executive Officer
PURCHASER (COMMUNICATIONS):
- ---------------------------
WORLDQUEST COMMUNICATIONS, INC.
By: /S/ E. DENTON JONES
____________________________
E. Denton Jones, President
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<PAGE>
EXHIBIT 10.5
WORLDQUEST NETWORKS, INC.
STOCK PURCHASE WARRANT
granted to
INTERVOICE, INC.
June 10, 1998
<PAGE>
TABLE OF CONTENTS
Page
----
1. Manner of Exercise; Issuance of Certificates; Payment for Shares........1
2. Period of Exercise......................................................2
3. Certain Agreements of the Company.......................................2
(a) Shares to be Fully Paid..........................................2
(b) Reservation of Shares............................................2
(c) Certain Actions Prohibited.......................................2
(d) Registration.....................................................3
4. Antidilution Provisions.................................................3
(a) Stock Dividends; Subdivisions and Combinations...................3
(b) Issuance of Rights, Options, and Warrants........................4
(c) Extraordinary Dividends and Distributions........................5
(d) Issuance of Common Stock.........................................5
(e) Computation of Market Price......................................6
(f) Record Date Adjustments..........................................6
(g) Minimum Adjustment of Exercise Price.............................7
(h) Reorganization, Reclassification,
Consolidation, Merger, or Sale...................................7
(i) No Fractional Shares.............................................8
(j) Notice of Adjustment.............................................8
(k) Other Notices....................................................8
(l) Certain Events...................................................9
(m) Nonconvertible Preferred Stock...................................9
5. Registration Rights.....................................................9
(a) Right to Participate in Registrations............................9
(b) Registration Procedures.........................................10
(c) Required Information............................................10
(d) Expenses of Registration........................................11
(e) Indemnification.................................................11
(f) Lock-Up.........................................................11
6. Issue Tax..............................................................11
7. Availability of Information............................................11
8. No Rights or Liabilities as a Shareholder..............................12
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9. Transfer, Exchange, and Replacement of Warrant.........................12
(a) Warrant Transferable............................................12
(b) Warrant Exchangeable for Different Denominations................12
(c) Replacement of Warrant..........................................12
(d) Cancellation; Payment of Expenses...............................12
(e) Register........................................................13
(f) Exercise or Transfer Without Registration.......................13
10. Notices................................................................13
11. Possible Amendment of Equipment Lease..................................13
12. GOVERNING LAW..........................................................14
13. Miscellaneous..........................................................14
(a) Amendments......................................................14
(b) Descriptive Headings............................................14
(c) Successors and Assigns..........................................14
iii
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THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR UNDER ANY STATE SECURITIES
OR BLUE SKY LAWS. NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD,
ASSIGNED, TRANSFERRED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF REGISTRATION
UNDER SAID ACT AND UNDER APPLICABLE STATE SECURITIES OR BLUE SKY LAWS OR
EXEMPTIONS FROM SUCH REGISTRATION. THIS WARRANT MAY NOT BE SOLD, ASSIGNED,
TRANSFERRED, OR OTHERWISE DISPOSED OF EXCEPT UPON THE CONDITIONS SPECIFIED IN
THIS WARRANT, AND NO SALE, ASSIGNMENT, TRANSFER, OR OTHER DISPOSITION OF THIS
WARRANT SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH CONDITIONS SHALL HAVE
BEEN COMPLIED WITH.
No. W-001 Right to Purchase 159,474 Shares
STOCK PURCHASE WARRANT
This certifies that, for value received, InterVoice, Inc., a Texas
corporation, or registered assigns, is entitled to purchase from WorldQuest
Networks, Inc., a Texas corporation (the "Company"), at any time or from time to
time during the period specified in Paragraph 2 hereof, One Hundred Fifty-Nine
Thousand Four Hundred Seventy-Four (159,474) fully paid and nonassessable shares
of the Company's Common Stock, par value $.10 per share (the "Common Stock"), at
an exercise price per share of Three and 33/100 Dollars ($3.33) (the "Exercise
Price"). The term "Warrant Shares", as used herein, refers to the shares of
Common Stock purchasable hereunder. On the date of issuance of the initial
Warrant (as herein defined), the Warrant Shares constituted 5% of the issued and
outstanding Common Stock of the Company on a fully diluted basis after taking
into account the exercise or conversion of all outstanding options, rights,
warrants, convertible securities and other instruments of any nature whatsoever
convertible into, or exchangeable for, Common Stock. The Warrant Shares and
the Exercise Price are subject to adjustment as provided in Paragraph 4 hereof.
This Stock Purchase Warrant was originally issued in connection with the initial
holder's execution of the Equipment Lease dated June 10, 1998 (the "Equipment
Lease") with the Company under which such holder agreed to lease to the Company
equipment and license software for 400 Ports with ISDN primary rate network
connectivity. The term "Warrants", as used herein, shall mean this Stock
Purchase Warrant and all other Stock Purchase Warrants issued in connection with
any transfer, exchange, or replacement thereof.
This Warrant is subject to the following terms, provisions, and conditions:
1. Manner of Exercise; Issuance of Certificates; Payment for Shares.
Subject to the provisions hereof, this Warrant may be exercised by the holder
hereof, in whole or in part (but not as to a fractional Warrant Share), subject
to a maximum of five exercises. Any exercise of this Warrant must involve an
aggregate Exercise Price equal to the lesser of (i) $100,000 or (ii) the
mathematical product of $3.33 multiplied by the then-remaining number of Warrant
Shares purchasable hereunder. The holder hereof may exercise this Warrant by
the surrender of this Warrant, together with a completed Exercise Agreement in
the form attached hereto, to the Company
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during normal business hours on any business day at the Company's principal
office in Dallas, Texas (or such other office or agency of the Company as it may
designate by notice to the holder hereof), and upon payment to the Company in
cash or by certified or official bank check of the Exercise Price for the
Warrant Shares specified in said Exercise Agreement. The Warrant Shares so
purchased shall be deemed to be issued to the holder hereof or its designee as
the record owner of such shares as of the close of business on the date on which
this Warrant shall have been surrendered, the completed Exercise Agreement
delivered, and payment made for such shares as aforesaid. Certificates for the
Warrant Shares so purchased, representing the aggregate number of shares
specified in said Exercise Agreement, shall be delivered to the holder hereof
within a reasonable time, not exceeding seven business days, after this Warrant
shall have been so exercised. The certificates so delivered shall be in such
denominations as may be requested by the holder hereof and shall be registered
in the name of said holder or such other name as shall be designated by said
holder. If this Warrant shall have been exercised only in part, then, unless
this Warrant has expired, the Company shall, at its expense, at the time of
delivery of said certificates, deliver to said holder a new Warrant representing
the number of shares with respect to which this Warrant shall not then have been
exercised. The Company shall pay all taxes and other expenses and charges
payable in connection with the preparation, execution, and delivery of stock
certificates (and any new Warrants) pursuant to this Paragraph 1 except that, in
case such stock certificates shall be registered in a name or names other than
the holder of this Warrant, funds sufficient to pay all stock transfer taxes
which shall be payable in connection with the execution and delivery of such
stock certificates shall be paid by the holder hereof to the Company at the time
of the delivery of such stock certificates by the Company as mentioned above.
2. Period of Exercise. This Warrant is exercisable at any time or from
time to time after June 10, 1998, and before 5:00 p.m., local time in Dallas,
Texas, on June 10, 2003.
3. Certain Agreements of the Company. The Company hereby covenants and
agrees as follows:
(a) Shares to be Fully Paid. All Warrant Shares will, upon issuance,
be validly issued, fully paid, and nonassessable and free from all taxes,
liens, and charges with respect to the issue thereof.
(b) Reservation of Shares. During the period within which this
Warrant may be exercised, the Company will at all times have authorized,
and reserved for the purpose of issue upon exercise of this Warrant, a
sufficient number of shares of Common Stock to provide for the exercise of
this Warrant.
(c) Certain Actions Prohibited. The Company will not, by amendment
of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities, or any
other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed by it
hereunder, but will at all times in good faith assist in the carrying out
of all the provisions of this Warrant and in the taking of all such action
as may reasonably be requested by the holder of this Warrant in order to
protect the exercise privilege of the holder of this Warrant against
dilution or other impairment, consistent with the tenor and purpose of this
Warrant. Without limiting
2
<PAGE>
the generality of the foregoing, (i) the Company will not increase the par
value of the shares of Common Stock receivable upon the exercise of this
Warrant above the Exercise Price then in effect, (ii) before taking any
action which would cause an adjustment reducing the Exercise Price below
the then par value of the shares of Common Stock so receivable, the Company
will take all such corporate action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock at such adjusted Exercise Price upon
the exercise of this Warrant and (iii) the Company will not take any action
which results in any adjustment of the Exercise Price if the total number
of shares of Common Stock issuable after the action upon the exercise of
this Warrant would exceed the total number of shares of Common Stock then
authorized by the Company's charter and available for the purpose of issue
upon such exercise.
(d) Registration. If the issuance of any Warrant Shares required to
be reserved for purposes of exercise of this Warrant requires registration
with or approval of any governmental authority under any federal or state
law (other than any registration under the Securities Act of 1933, as
amended (the "Securities Act"), or under applicable state securities or
blue sky laws, which registration is subject to Paragraph 5 hereof) or
listing on any national securities exchange, before such shares may be
issued upon exercise of this Warrant, the Company will, at its expense, use
its best efforts to cause such shares to be duly registered or approved, or
listed on the relevant national securities exchange, as the case may be, at
such time, so that such shares may be issued in accordance with the terms
hereof.
4. Antidilution Provisions. The Exercise Price shall be subject to
adjustment from time to time as provided in this Paragraph 4. Upon each
adjustment of the Exercise Price, the holder of this Warrant shall thereafter be
entitled to purchase, at the Exercise Price resulting from such adjustment, the
largest number of Warrant Shares obtained by multiplying the Exercise Price in
effect immediately prior to such adjustment by the number of Warrant Shares
purchasable hereunder immediately prior to such adjustment and dividing the
product thereof by the Exercise Price resulting from such adjustment. For
purposes of this Paragraph 4, the term "Capital Stock", as used herein, includes
the Common Stock and any additional class of stock of the Company which may be
authorized in the future by an amendment to the Company's charter, provided that
the shares purchasable pursuant to this Warrant shall include only shares of
Common Stock, or shares resulting from any subdivision or combination of the
Common Stock, or in the case of any reorganization, reclassification,
consolidation, merger, or sale of the character referred to in Paragraph 4(h)
hereof, the stock or other securities or property provided for in said
Paragraph.
(a) Stock Dividends; Subdivisions and Combinations. In case at any time
the Company shall (i) pay a dividend or make a distribution on Common Stock in
Common Stock, (ii) subdivide the outstanding shares of Common Stock into a
greater number of shares, or (iii) combine the outstanding shares of Common
Stock into a smaller number of shares, the Exercise Price in effect immediately
prior thereto shall be adjusted proportionately so that the adjusted Exercise
Price shall bear the same relation to the Exercise Price in effect immediately
prior to such event as the total number of shares of Common Stock outstanding
immediately prior to such event shall bear to the total number of shares of
Common Stock outstanding immediately after such event. An adjustment made
pursuant to this Paragraph 4(a) shall become effective immediately after the
record date in the
3
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case of a dividend or distribution and shall become effective immediately after
the effective date in the case of a subdivision or combination.
(b) Issuance of Rights, Options, and Warrants. In case at any time the
Company shall issue any rights, options, or warrants (such rights, options, or
warrants being herein called "Options") entitling any person to subscribe for or
purchase Common Stock at a price per share less than the Exercise Price in
effect on the date of issuance of the applicable Options, the following two
adjustments shall be made:
(i) Exercise Price. The Exercise Price shall be adjusted to equal
the mathematical product of (i) the Exercise Price in effect
immediately prior to the issuance of the applicable Options multiplied
by (ii) a fraction of which [1] the numerator is the total number of
shares of Common Stock outstanding on such issuance date plus the
number of shares of Common Stock which the aggregate consideration paid
or payable to the Company in connection with the issuance and/or
exercise of the Options would purchase at the Exercise Price and [2]
the denominator is the total number of shares of Common Stock
outstanding on such issuance date plus the maximum number of shares of
Common Stock covered by the Options.
(ii) Warrant Shares. The number of Warrant Shares shall be
adjusted to equal the mathematical product of (i) number of Warrant
Shares issuable on the exercise hereof immediately prior to the
issuance of the applicable Options multiplied by (ii) a fraction of
which [1] the numerator is the total number of shares of Common Stock
outstanding on such issuance date plus the maximum number of shares of
Common Stock covered by the Options and [2] the denominator is the
total number of shares of Common Stock outstanding on such issuance
date plus the number of shares of Common Stock which the aggregate
consideration paid or payable to the Company in connection with the
issuance and/or exercise of the Options would purchase at the Exercise
Price.
In the case of an issuance by the Company of securities convertible into or
exchangeable for Common Stock (such convertible or exchangeable securities being
herein called "Convertible Securities"), for purposes of this Paragraph 4(b),
such issuance shall be deemed to be an issuance of Options to such holders
entitling them to subscribe for or purchase Common Stock at the Convertible
Securities Price (as herein defined). The Convertible Securities Price shall be
determined by dividing [1] the minimum aggregate amount of consideration payable
to the Company upon the issuance of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, other than such
Convertible Securities, payable to the Company upon the conversion or exchange
thereof, by [2] the total maximum number of shares of Common Stock issuable upon
the conversion or exchange of such Convertible Securities.
(c) Extraordinary Dividends and Distributions. In case at any time the
Company shall pay a dividend or make a distribution to all holders of Capital
Stock, as such, of shares of its stock (other than Capital Stock), evidences of
its indebtedness, assets (excluding dividends or distributions payable in cash
out of earnings or earned surplus), or rights, options, or warrants to subscribe
for or purchase
4
<PAGE>
such shares, evidences of indebtedness, or assets (excluding the rights,
options, and warrants referred to in Paragraph 4(b) hereof), then in each such
case the Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the Exercise Price in effect immediately prior to the
record date mentioned below by a fraction, the numerator of which shall be the
total number of shares of Capital Stock outstanding on such record date
multiplied by the market price per share of Capital Stock (determined as
provided in Paragraph 4(e) hereof) on such record date, less the fair market
value (as determined in good faith by the Board of Directors of the Company) as
of such record date of such shares of stock, evidences of indebtedness, assets,
or rights, options, or warrants so paid or distributed, and the denominator of
which shall be the total number of shares of Capital Stock outstanding on such
record date multiplied by the market price per share of Capital Stock
(determined as provided in Paragraph 4(e) hereof) on such record date. Such
adjustment shall be made whenever such dividend is paid or such distribution is
made and shall become effective immediately after the record date for the
determination of shareholders entitled to receive such dividend or distribution.
(d) Issuance of Common Stock. The following two adjustments shall be made
if and whenever the Company shall sell any shares of Common Stock (the "Dilutive
Common Stock") without consideration or for a consideration per share less than
the Exercise Price in effect immediately prior to the date of issuance or sale
of the Dilutive Common Stock.
(i) Exercise Price. The Exercise Price shall be adjusted to equal
the mathematical product of (i) the Exercise Price in effect
immediately prior to the issuance or sale of the Dilutive Common Stock
multiplied by (ii) a fraction of which [1] the numerator is the total
number of shares of Common Stock outstanding on the date of issuance or
sale plus the number of shares of Common Stock which the aggregate
consideration received by the Company for the Dilutive Common Stock
would purchase at the Exercise Price and [2] the denominator is the
total number of shares of Common Stock outstanding on such date of
issuance or sale plus the number of shares of Dilutive Common Stock.
(ii) Warrant Shares. The number of Warrant Shares shall be
adjusted to equal the mathematical product of (i) number of Warrant
Shares issuable on the exercise hereof immediately prior to the
issuance or sale of the Dilutive Common Stock multiplied by (ii) a
fraction of which [1] the numerator is the total number of shares of
Common Stock outstanding on the date of issuance or sale of the
Dilutive Common Stock plus the number of shares of Dilutive Common
Stock and [2] the denominator is the total number of shares of Common
Stock outstanding on such date of issuance or sale plus the number of
shares of Common Stock which the aggregate consideration received by
the Company for the Dilutive Common Stock would purchase at the
Exercise Price.
(e) Computation of Market Price. For the purpose of any computation under
Paragraph 4(c) hereof, the market price of the security in question on any day
shall be deemed to be the average of the last reported sale prices for the
security for the 20 consecutive Trading Days (as defined below)
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<PAGE>
commencing 20 Trading Days before the day in question. The last reported sale
price for each day shall be (i) the last reported sale price of the security on
the Nasdaq National Market, the Nasdaq Small Cap Issuer Market or any similar
system of automated dissemination of quotations of securities prices then in
common use, if so quoted, or (ii) if not quoted as described in clause (i)
above, the mean between the high bid and low asked quotations for the security
as reported by the National Quotation Bureau, Inc. if at least two securities
dealers have inserted both bid and asked quotations for such security on at
least 10 of such 20 consecutive Trading Days, or (iii) if the security is listed
or admitted for trading on any national securities exchange, the last sale
price, or the closing bid price if no sale occurred, of such class of security
on the principal securities exchange on which such class of security is listed
or admitted to trading. If the security is quoted on a national securities or
central market system, in lieu of a market or quotation system described above,
the last reported sale price shall be determined in the manner set forth in
clause (ii) of the preceding sentence if bid and asked quotations are reported
but actual transactions are not, and in the manner set forth in clause (iii) of
the preceding sentence if actual transactions are reported. If none of the
conditions set forth above is met, the last reported sale price of the security
on any day or the average of such last reported sale prices for any period shall
be the fair market value of such security as determined by a member firm of the
New York Stock Exchange mutually selected by the Company and the holder of this
Warrant. If the fair market value is determined pursuant to the immediately
preceding sentence, such value shall continue to be used by the Company and the
holder for all purposes of this Paragraph 4(e) for the immediately succeeding
90-day period; provided, however, the use of such value during such 90-day
period shall immediately cease if either (i) the market price of such security
can be determined in the manner contemplated by the first three sentences of
this Paragraph 4(e) or (ii) the Company is unable to provide the holder with an
officer's certificate to the effect that there has been no change within the
elapsed portion of such 90-day period in the condition of the Company, financial
or otherwise, that would materially affect the market value of the applicable
security. The term "Trading Days", as used herein, means (i) if the security is
quoted on the Nasdaq National Market or any similar system of automated
dissemination of quotations of securities prices, days on which trades may be
made on such system or (ii) if the security is listed or admitted for trading on
any national securities exchange, days on which such national securities
exchange is open for business.
(f) Record Date Adjustments. In any case in which this Paragraph 4
requires that a downward adjustment of the Exercise Price shall become effective
immediately after a record date for an event, the Company may defer until the
occurrence of such event (A) issuing to the holder of this Warrant exercised
after such record date and before the occurrence of such event the additional
Warrant Shares issuable upon such exercise by reason of the adjustment required
by such event over and above the Warrant Shares issuable upon such exercise
before giving effect to such adjustment and (B) paying to such holder any amount
in cash in lieu of a fractional share pursuant to Paragraph 4(i) hereof.
(g) Minimum Adjustment of Exercise Price. No adjustment of the Exercise
Price shall be made in an amount less than 0.5% of the Exercise Price in effect
at the time such adjustment is otherwise required to be made, but any such
lesser adjustment shall be carried forward and shall be made at the time and
together with the next subsequent adjustment which, together with any
adjustments so carried forward, shall amount to not less than 0.5% of such
Exercise Price.
(h) Reorganization, Reclassification, Consolidation, Merger, or Sale. If
any capital
6
<PAGE>
reorganization of the Company, or any reclassification of the Capital Stock, or
any consolidation or merger of the Company with or into another corporation or
entity, or any sale of all or substantially all the assets of the Company, shall
be effected in such a way that the holders of Common Stock (or any other
securities of the Company then issuable upon the exercise of this Warrant) shall
be entitled to receive stock or other securities or property (including cash)
with respect to or in exchange for Common Stock (or such other securities),
then, as a condition of such reorganization, reclassification, consolidation,
merger, or sale, lawful and adequate provision shall be made whereby the holder
of this Warrant shall thereafter have the right to purchase and receive upon the
basis and upon the terms and conditions specified in this Warrant, and in lieu
of the shares of Common Stock (or such other securities) immediately theretofore
purchasable and receivable upon the exercise hereof, such stock or other
securities or property (including cash) as may be issuable or payable with
respect to or in exchange for a number of outstanding shares of Common Stock (or
such other securities) equal to the number of shares of Common Stock (or such
other securities) immediately theretofore purchasable and receivable upon the
exercise of this Warrant, had such reorganization, reclassification,
consolidation, merger, or sale not taken place. In any such case appropriate
provision shall be made with respect to the rights and interests of the holder
of this Warrant to the end that the provisions hereof (including, without
limitation, the provisions for adjustments of the Exercise Price and of the
number of Warrant Shares purchasable upon exercise hereof) shall thereafter be
applicable, as nearly as reasonably may be, in relation to the stock or other
securities or property thereafter deliverable upon the exercise hereof
(including an immediate adjustment of the Exercise Price if by reason of or in
connection with such consolidation, merger, or sale any securities are issued or
event occurs which would, under the terms hereof, require an adjustment of the
Exercise Price). In the event of a consolidation or merger of the Company with
or into another corporation or entity as a result of which a greater or lesser
number of shares of common stock of the surviving corporation or entity are
issuable to holders of Capital Stock in respect of the number of shares of
Capital Stock outstanding immediately prior to such consolidation or merger,
then the Exercise Price in effect immediately prior to such consolidation or
merger shall be adjusted in the same manner as though there were a subdivision
or combination of the outstanding shares of Capital Stock. The Company shall not
effect any such consolidation, merger, or sale unless prior to or simultaneously
with the consummation thereof the successor corporation or entity (if other than
the Company) resulting from such consolidation or merger or the corporation or
entity purchasing such assets and any other corporation or entity the shares of
stock or other securities or property of which are receivable thereupon by the
holder of this Warrant shall expressly assume, by written instrument executed
and delivered (and satisfactory in form) to the holder of this Warrant, the
obligation to deliver to such holder such stock or other securities or property
as, in accordance with the foregoing provisions, such holder may be entitled to
purchase.
(i) No Fractional Shares. No fractional shares of Common Stock are to be
issued upon the exercise of this Warrant, but the Company shall pay a cash
adjustment in respect of any fractional share which would otherwise be issuable
in an amount equal to the same fraction of the current market value of a share
of Common Stock, which current market value shall be the last reported sale
price (determined as provided in Paragraph 4(e) hereof) on the Trading Day
immediately preceding the date of the exercise as reasonably determined by the
Company.
(j) Notice of Adjustment. Upon the occurrence of any event which requires
any adjustment of the Exercise Price, then and in each such case the Company
shall give notice thereof
7
<PAGE>
to the holder of this Warrant, which notice shall state the Exercise Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon exercise, setting forth in
reasonable detail the method of calculation and the facts upon which such
calculation is based.
(k) Other Notices. In case at any time:
(i) the Company shall declare any dividend upon the Capital
Stock payable in shares of stock of any class or make any other
distribution (other than dividends or distributions payable in cash out
of earnings or earned surplus) to the holders of the Capital Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of the Capital Stock any additional shares of stock of any
class or other rights;
(iii) there shall be any capital reorganization of the Company, or
reclassification of the Capital Stock, or consolidation or merger of
the Company with or into, or sale of all or substantially all its
assets to, another corporation or entity; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation, or winding-up of the Company;
then, in each such case, the Company shall give to the holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record
shall be taken for determining the holders of Capital Stock entitled to receive
any such dividend, distribution, or subscription rights or for determining the
holders of Capital Stock entitled to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, or
winding-up and (b) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, or winding-up, notice of
the date (or, if not then known, a reasonable approximation thereof by the
Company) when the same shall take place. Such notice shall also specify the
date on which the holders of Capital Stock shall be entitled to receive such
dividend, distribution, or subscription rights or to exchange their Capital
Stock for stock or other securities or property deliverable upon such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding-up, as the case may be. Such notice shall be given at
least 20 days prior to the record date or the date on which the Company's books
are closed in respect thereto.
(l) Certain Events. If any event occurs as to which, in the good faith
judgment of the Board of Directors of the Company, the other provisions of this
Paragraph 4 are not strictly applicable or if strictly applicable would not
fairly protect the exercise rights of the holder of this Warrant in accordance
with the essential intent and principles of such provisions, then the Board of
Directors of the Company and the holder of this Warrant shall, at the Company's
expense, appoint a mutually agreed firm of independent public accountants of
recognized national standing which shall give their opinion upon the adjustment,
if any, on a basis consistent with such essential intent and principles,
necessary to preserve, without dilution, the rights of the holder of this
Warrant. Upon receipt of such opinion, the Board of Directors of the Company
shall forthwith make the adjustments
8
<PAGE>
described therein; provided, that no such adjustment shall have the effect of
increasing the Exercise Price as otherwise determined pursuant to this Paragraph
4.
(m) Nonconvertible Preferred Stock. The Company will not issue any
nonconvertible preferred stock (i.e., preferred stock that is not convertible
into Common Stock) at a price per share less than the Exercise Price without the
prior written consent of the holder of this Warrant, which consent will not be
unreasonably withheld. The Company will not issue any other class or series of
Common Stock.
5. Registration Rights.
(a) Right to Participate in Registrations. If at any time the Company
proposes to register shares of Capital Stock (as defined in Paragraph 4 hereof)
under the Securities Act on Form S-1, S-2, or S-3 (or any form which replaces or
is substantially similar to such form), the Company shall each such time give
notice of such proposed registration to the holder of this Warrant, if this
Warrant has not yet expired, and to all holders of Warrant Shares. Subject to
the terms and provisions of this Paragraph 5(a), upon the request of any such
holder made within 20 days after the giving of such notice by the Company, the
Company shall cause all Warrant Shares that have been acquired by such holder
pursuant to the exercise of this Warrant, and all Warrant Shares that will be
acquired by such holder pursuant to the exercise of this Warrant not later than
the fifth day prior to the filing of the registration statement under the
Securities Act, which shares such holder shall have requested to be included in
the proposed registration (the "Registrable Shares"), to be included as "piggy-
back" shares in such registration (the "Piggyback Registration") to the extent
requisite to permit the sale or other disposition by such holder of such
Registrable Shares. In the event the offering to be conducted pursuant to the
proposed registration is to be an underwritten public offering, the registration
rights provided in this Paragraph 5(a) shall be subject to the approval of the
managing underwriter or underwriters of such offering, who shall determine the
number of Registrable Shares, if any, that may be included in such registration
without adversely affecting such offering; provided, however, any such reduction
by the underwriter or underwriters in the number of shares of Common Stock
included in such offering shall be applied and borne pro rata among all
participants in such offering other than the Company.
(b) Registration Procedures. If and whenever the Company is required by
the provisions of Paragraph 5 (a) to cause Registrable Shares to be included in
the registration of securities of the Company under the Securities Act, the
Company will, as expeditiously as possible:
(A) prepare and file with the Securities and Exchange Commission (the
"Commission") a registration statement (the "Registration Statement")
covering such Registrable Shares and use its best efforts to cause the
Registration Statement to become effective and to remain effective for so
long as may reasonably be necessary to complete the sale or other
disposition of such Registrable Shares, provided that the Company shall not
in any event be required to use its best efforts to maintain the
effectiveness of the Registration Statement for a period in excess of 180
days;
(B) prepare and file with the Commission such amendments and
supplements to the Registration Statement and the prospectus contained
therein as may be necessary to keep the
9
<PAGE>
Registration Statement effective, and comply with the provisions of the
Securities Act, with respect to the sale or other disposition of such
Registrable Shares;
(C) furnish to each holder of such Registrable Shares such numbers of
copies of the Registration Statement, the prospectus contained therein
(including each preliminary prospectus), and each amendment and supplement
to the Registration Statement and such prospectus, in conformity with the
requirements of the Securities Act, and such other documents, as such
holder may reasonably request in order to facilitate the sale or other
disposition of such Registrable Shares;
(D) use reasonable efforts to register or qualify such Registrable
Shares for sale under the securities or blue sky laws of such jurisdictions
as the holders thereof may request, and do any and all other acts and
things that may be necessary under such securities or blue sky laws to
enable the holders of such Registrable Shares to consummate the sale or
other disposition of such Registrable Shares in such jurisdictions,
provided that the Company shall not in any event be required to keep any
such registration or qualification in effect after the expiration of the
period during which the Company maintains the effectiveness of the
Registration Statement and shall not for any such purpose be required to
qualify to do business as a foreign corporation in any jurisdiction wherein
it is not so qualified or to subject itself to taxation in any such
jurisdiction; and
(E) before filing the Registration Statement, any prospectus to be used
in connection with the offering to be conducted pursuant to such
registration, or any amendments or supplements to the Registration
Statement or such prospectus with the Commission, furnish counsel to the
holders of such Registrable Shares with copies of all such documents
proposed to be filed, which shall be subject to the reasonable approval of
such counsel.
(c) Required Information. The Company shall not be required to include any
Registrable Shares in a proposed registration of its securities under the
Securities Act unless and until (i) the holder of such Registrable Shares
furnishes to the Company such information regarding such holder and such
Registrable Shares and the intended method of disposition of such Registrable
Shares as the Company shall reasonably request in order to satisfy the
requirements applicable to such registration, and (ii) in the event of a
Piggyback Registration that is part of an underwritten public offering, such
Holder agrees to the terms of the underwriting agreed to between the Company and
the underwriter or underwriters of such offering and executes all documents
reasonably required to effect such offering.
(d) Expenses of Registration. In the event of the inclusion pursuant to
Paragraph 5(a) of Registrable Shares in a Piggyback Registration by the Company,
each holder of such Registrable Shares shall pay any brokerage and underwriting
discounts and commissions payable in respect of Registrable Shares sold on such
holder's behalf and all fees and expenses of any attorneys and accountants
employed by such holder, and the Company shall pay any and all other fees and
expenses of any nature whatsoever incurred in connection with such Piggyback
Registration.
(e) Indemnification. In connection with any registration of Registrable
Shares pursuant to the provisions of this Paragraph 5, the Company shall
indemnify and hold harmless the holder of such
10
<PAGE>
Registrable Shares to the extent that companies generally indemnify and hold
harmless underwriters in connection with public offerings under the Securities
Act, and such holder shall indemnify and hold harmless the Company to the extent
that selling shareholders generally indemnify and hold harmless issuers of
securities in connection with public offerings under the Securities Act with
respect to the written information provided by such holder for use by the
Company in the preparation of the Registration Statement.
(f) Lock-Up. In connection with any registration of Registrable Shares
pursuant to the provisions of this Paragraph 5, the holder of such Registrable
Shares shall, if requested by the underwriter or underwriters of such offering,
execute a reasonable lock-up agreement in customary form pursuant to which such
holder agrees not to sell any Common Stock (other than the Registrable Shares
covered by the Registration Statement) during a period of time not exceeding 120
days following the effective date of the Registration Statement.
6. Issue Tax. The issuance of certificates for Warrant Shares upon the
exercise of this Warrant shall be made without charge to the holder of this
Warrant or such shares for any issuance tax in respect thereof, provided that
the Company shall not be required to pay any tax which may be payable in respect
of any transfer involved in the issuance and delivery of any certificate in a
name other than the holder of this Warrant.
7. Availability of Information. The Company will cooperate with the
holder of this Warrant and each holder of any Warrant Shares in supplying such
information as may be necessary for such holder to complete and file any
information reporting forms presently or hereafter required by the Commission as
a condition to the availability of an exemption from the Securities Act for the
sale of this Warrant or any Warrant Shares. The Company will deliver to the
holder of this Warrant, promptly upon their becoming available, copies of all
financial statements, reports, notices, and proxy statements sent or made
available generally by the Company to its shareholders, and copies of all
regular and periodic reports, if any, and all registration statements and
prospectuses, if any, filed by the Company with any securities exchange or with
the Commission.
8. No Rights or Liabilities as a Shareholder. This Warrant shall not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company. No provision of this Warrant, in the absence of affirmative
action by the holder hereof to purchase Warrant Shares, and no mere enumeration
herein of the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Exercise Price or as a shareholder of the
Company, whether such liability is asserted by the Company or by creditors of
the Company.
9. Transfer, Exchange, and Replacement of Warrant.
(a) Warrant Transferable. Subject to the prior written consent of the
Company (which consent shall not be unreasonably withheld), this Warrant is
transferable, in whole or in part, to an aggregate of not more than three
transferees. The transfer of this Warrant and all rights hereunder, in whole or
in part, is registrable at the office or agency of the Company referred to in
Paragraph 9(e) hereof by the holder hereof in person or by such holder's duly
authorized attorney, upon surrender of this Warrant properly endorsed. Each
taker and holder of this Warrant, by taking or holding the same, consents and
agrees that this Warrant, when endorsed in blank, shall be deemed negotiable,
and
11
<PAGE>
that the holder hereof, when this Warrant shall have been so endorsed, may be
treated by the Company and all other persons dealing with this Warrant as the
absolute owner and holder hereof for any purpose and as the person entitled to
exercise the rights represented by this Warrant and to the registration of
transfer hereof on the books of the Company; but until due presentment for
registration of transfer on such books the Company may treat the registered
holder hereof as the owner and holder hereof for all purposes, and the Company
shall not be affected by any notice to the contrary.
(b) Warrant Exchangeable for Different Denominations. This Warrant is
exchangeable, upon the surrender hereof by the holder hereof at the office or
agency of the Company referred to in Paragraph 9(e) hereof, for new Warrants of
like tenor representing in the aggregate the right to purchase the number of
shares of Common Stock which may be purchased hereunder, each of such new
Warrants to represent the right to purchase such number of shares as shall be
designated by said holder hereof at the time of such surrender.
(c) Replacement of Warrant. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
this Warrant and, in the case of any such loss, theft, or destruction, upon
delivery of an indemnity agreement reasonably satisfactory in form and amount to
the Company, or, in the case of any such mutilation, upon surrender and
cancellation of this Warrant, the Company, at its expense, will execute and
deliver, in lieu thereof, a new Warrant of like tenor.
(d) Cancellation; Payment of Expenses. Upon the surrender of this Warrant
in connection with any transfer, exchange, or replacement as provided in this
Paragraph 9, this Warrant shall be promptly canceled by the Company. The
Company shall pay all taxes (other than securities transfer taxes) and all other
expenses and charges payable in connection with the preparation, execution, and
delivery of Warrants pursuant to this Paragraph 9.
(e) Register. The Company shall maintain, at its principal office in
Dallas, Texas (or such other office or agency of the Company as it may designate
by notice to the holder hereof), a register for this Warrant, in which the
Company shall record the name and address of the person in whose name this
Warrant has been issued, as well as the name and address of each transferee and
each prior owner of this Warrant.
(f) Exercise or Transfer Without Registration. Anything in this Warrant to
the contrary notwithstanding, if, at the time of the surrender of this Warrant
in connection with any exercise, transfer, or exchange of this Warrant, this
Warrant shall not be registered under the Securities Act and under applicable
state securities or blue sky laws, the Company may require, as a condition of
allowing such exercise, transfer, or exchange, that (i) the holder or transferee
of this Warrant, as the case may be, furnish to the Company a written opinion of
counsel, which opinion and counsel are acceptable to the Company, to the effect
that such exercise, transfer, or exchange may be made without registration under
said Act and under applicable state securities or blue sky laws and (ii) the
holder or transferee execute and deliver to the Company an investment letter in
form and substance acceptable to the Company. The first holder of this Warrant,
by taking and holding the same, represents to the Company that such holder is
acquiring this Warrant for investment and not with a view to the distribution
thereof.
12
<PAGE>
10. Notices. All notices, requests, and other communications required or
permitted to be given or delivered hereunder to the holder of this Warrant or to
the holder of shares acquired upon exercise of this Warrant shall be in writing,
and shall be personally delivered by overnight delivery service, or shall be
sent by certified or registered mail, postage prepaid and addressed, to such
holder at the address shown for such holder on the books of the Company, or at
such other address as shall have been furnished to the Company by notice from
such holder. All notices, requests, and other communications required or
permitted to be given or delivered hereunder to the Company shall be in writing,
and shall be personally delivered, or shall be sent by certified or registered
mail, postage prepaid and addressed, to the office of the Company at 16990
Dallas Parkway, Suite 206, Dallas, Texas 75248, Attention: President, or at such
other address as shall have been furnished to the holder of this Warrant or to
the holder of shares acquired upon exercise of this Warrant by notice from the
Company. Any such notice, request, or other communication may be sent by
telegram or telex, but shall in such case be subsequently confirmed by a writing
personally delivered or sent by certified or registered mail as provided above.
All notices, requests, and other communications shall be deemed to have been
given either at the time of the delivery thereof to (or the receipt by, in the
case of a telegram or telex) the person entitled to receive such notice at the
address of such person for purposes of this Paragraph 10 or, if mailed, at the
completion of the third full day following the time of such mailing thereof to
such address, as the case may be.
11. Possible Amendment of Equipment Lease. The Company and the initial
holder will amend the Equipment Lease to delete clause (a) from the first
sentence of Section 11 of the Equipment Lease, if at any time during the three-
year initial term of the Equipment Lease the value of the Warrant Shares equals
or exceeds $1.5 million based on (i) consideration paid to Warrant holders
pursuant to an acquisition of such Warrant Shares in connection with an
acquisition of substantially all of the Capital Stock and/or assets of the
Company, by merger or otherwise, or (ii) the market price of the Warrant Shares,
determined in accordance with Section 4(e), on any recognized national stock
exchange (i.e., the New York Stock Exchange and/or the American Stock Exchange),
or the Nasdaq National Market or the Nasdaq Small Cap Issuer Market.
12. GOVERNING LAW. THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
13. Miscellaneous.
(a) Amendments. This Warrant and any provision hereof may not be changed,
waived, discharged, or terminated orally, but only by an instrument in writing
signed by the party (or any predecessor in interest thereof) against which
enforcement of the same is sought.
(b) Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for purposes of reference only, and
shall not affect the meaning or construction of any of the provisions hereof.
(c) Successors and Assigns. This Warrant shall be binding upon any entity
succeeding to the Company by merger, consolidation, or acquisition of all or
substantially all the Company's assets.
13
<PAGE>
In witness whereof, the Company has caused this Warrant to be signed by its
duly authorized officer under its corporate seal, attested by its duly
authorized officer, as of the 10/th/ day of June, 1998.
Worldquest Networks, Inc.
By: /S/ MIKE ADLER
------------------------------
Name:
Title:
[Corporate Seal]
Attest:
- ----------------------------
Name:
-----------------------
Title:
----------------------
14
<PAGE>
FORM OF EXERCISE AGREEMENT
Dated:
-------------------------
To:
-----------------------
The undersigned, pursuant to the provisions set forth in the within
Warrant, hereby agrees to purchase __________ shares of Common Stock covered by
such Warrant, and makes payment herewith in full therefor at the price per share
provided by such Warrant in cash or by certified or official bank check in the
amount of $____________. Please issue a certificate or certificates for such
shares of Common Stock in the name of and pay any cash for any fractional share
to:
Name:
--------------------------
Signature:
---------------------
Title of Signing Officer
or Agent (if any):
Note: The above signature should correspond exactly with the name on the
face of the within Warrant or with the name of the assignee
appearing in the assignment form.
and, if said number of shares of Common Stock shall not be all the shares
purchasable under the within Warrant, a new Warrant is to be issued in the name
of said undersigned covering the balance of the shares purchasable thereunder
less any fraction of a share paid in cash.
15
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers all
the rights of the undersigned under the within Warrant, with respect to the
number of shares of Common Stock covered thereby set forth hereinbelow, to:
Name of Assignee Address No. of Shares
, and hereby irrevocably constitutes and appoints ____________________ as agent
and attorney-in-fact to transfer said Warrant on the books of the within-named
corporation, with full power of substitution in the premises.
Dated:
---------------------
In the presence of
- ---------------------------
Name:
----------------------------
Signature:
-----------------------
Title of Signing Officer
or Agent (if any):
Address:
-------------------------
Note: The above signature should correspond
exactly with the name on the face of the
within Warrant.
16
<PAGE>
EXHIBIT 23.1
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 7, 1999, in the Registration Statement on Form SB-2
and related Prospectus of WorldQuest Networks, Inc. filed with the Commission on
July 13, 1999.
/s/ Ernst & Young LLP
Dallas, Texas
July 12, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 1998 AND MARCH 31, 1999 AND THE
CONSOLIDATED STATEMENTS OF OPERATIONS AND CASH FLOWS FOR THE YEAR ENDED DECEMBER
31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1999, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 18,833 6,872
<SECURITIES> 0 0
<RECEIVABLES> 235,244 82,183
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 254,077 89,055
<PP&E> 671,124 755,025
<DEPRECIATION> 418,639 486,955
<TOTAL-ASSETS> 1,246,774 970,317
<CURRENT-LIABILITIES> 2,520,746 2,622,802
<BONDS> 1,240,818 1,233,513
0 0
0 0
<COMMON> 300,000 300,000
<OTHER-SE> (2,814,790) (3,185,998)
<TOTAL-LIABILITY-AND-EQUITY> 1,246,774 970,317
<SALES> 1,841,439 1,431,879
<TOTAL-REVENUES> 1,841,439 1,431,879
<CGS> 2,005,631 1,233,969
<TOTAL-COSTS> 2,005,631 1,233,969
<OTHER-EXPENSES> 1,301,769 530,193
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 162,466 38,925
<INCOME-PRETAX> (1,578,427) (371,208)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,578,427) (371,208)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,578,427) (371,208)
<EPS-BASIC> (0.53) (0.12)
<EPS-DILUTED> (0.53) (0.12)
</TABLE>
<PAGE>
EXHIBIT 99.1
CONSENT
TO: Board of Directors
WorldQuest Networks, Inc.
The undersigned hereby consents to being named as an executive officer of
WorldQuest Networks, Inc. in its Form SB-2 Registration Statement filed with the
Securities and Exchange Commission.
/s/ Mark C. Levy
---------------------------------
Mark C. Levy
Date: July 12, 1999
