<PAGE>
As filed with the Securities and Exchange Commission on October 25, 1999
Registration No. 333-82721
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 4
To
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
WORLDQUEST NETWORKS, INC.
(Name of Small Business Issuer in its Charter)
Delaware 4813 75-2838415
(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
Title of Each Class of Securities to be Offering Amount of
Registered Price(1) Registration Fee
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<S> <C> <C>
Common Stock, $.01 par value(2)............ $33,120,000 $ 9,208
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Representative's Warrant................... $ 240 $ 1
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Common Stock, $.01 par value(3)............ $ 4,464,000 $ 1,241
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Total...................................... $37,584,240 $10,450
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</TABLE>
(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 Representatives' 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 October 25, 1999
2,400,000 Shares
[Logo of WorldQuest Networks appears here]
Common Stock
This is our initial public offering. No public market currently exists for
our shares. We estimate that the public offering price for the common stock
will range between $10.00 and $12.00 per share.
The common stock has been approved for quotation on the Nasdaq National
Market under the symbol "WQNI."
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 5.
<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
360,000 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.
-----------
Joint Book-Running Managers
Ladenburg Thalmann & Co. Inc. Kaufman Bros., L.P.
-----------
John G. Kinnard and Company Incorporated
EBI Securities Corporation
Prospectus dated , 1999
<PAGE>
[The inside front cover contains the following:]
[1. The following text appears at the top of the page:]
WorldQuest Networks [with logo]
[2. A picture of the globe appears in the middle of the page. Certain countries
are identified. A red line connects the countries included in WorldQuest's
present Internet phone network. A blue line connects the countries included
in WorldQuest's planned Internet phone network.]
[3. The following text appears below the globe:]
Using the Internet to build a global phone network
Present Internet phone network [with a key referring to the red line]
Planned Internet phone network [with a key referring to the blue line]
2
<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 sell virtual prepaid
calling cards through our interactive and easy to use Web site and transmit
international long distance calls at discounted rates 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.
. We transmit calls over our network of leased traditional long distance
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 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.
Our Company
We were incorporated in October 1996 as a Texas corporation. We plan to
reincorporate in Delaware prior to the closing of this offering. Our executive
offices are located at 16990 Dallas Parkway, Suite 220, Dallas, Texas 75248.
Our telephone number is (972) 818-0460 and our Web site can be found at
www.wqn.com. The information on our Web site is not part of this prospectus.
The Offering
Shares offered by WorldQuest 2,400,000 shares
Networks........................
Shares to be outstanding after 5,596,699 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.
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<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 not assume that the summary financial data is
indicative of our future performance.
<TABLE>
<CAPTION>
Six months ended June
Year ended December 31, 30,
------------------------ ----------------------
1997 1998 1998 1999
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenue............... $ 51,963 $ 1,841,439 $ 259,897 $2,650,050
Gross margin (deficit)...... (175,048) (164,192) (158,613) 501,303
Operating expenses:
Selling, general and
administrative .......... 1,277,383 1,290,131 644,148 877,043
Research and development.. 438,860 186,638 94,923 103,776
Net loss.................... (1,764,556) (1,753,427) (904,388) (568,042)
Weighted-average common
shares outstanding - basic
and diluted (1)............ 3,000,000 3,000,000 3,000,000 3,064,607
Net loss per share - basic
and diluted (1)............ $ (.59) $ (.58) $ (.30) $ (.19)
</TABLE>
<TABLE>
<CAPTION>
At June 30, 1999
At December 31, ---------------------------
1998 Actual As adjusted(2)
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<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents......... $ 18,833 $ 85,993 $22,206,642
Working capital (deficit)......... (2,266,669) (2,088,684) 21,114,896
Total assets...................... 1,246,774 1,294,854 23,415,503
Long-term debt and capital lease
obligations...................... 1,129,004 1,131,140 1,131,140
Stockholders' equity (deficit).... (2,514,790) (2,340,332) 20,863,248
</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 our sale of 2,400,000 shares of common stock at an assumed public
offering price of $11.00 per share and our application of the estimated net
proceeds.
4
<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.
We have a limited operating history with which to judge our performance.
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. We cannot assure you that our
business strategy will be successful or that we will successfully address 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 June 30, 1999,
we had an accumulated deficit of $(4.4) million. We incurred net losses of
$(1.8) million for the fiscal year ended December 31, 1998 and $(568,000) for
the six months ended June 30, 1999.
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;
. 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 quarterly operating results are subject to significant fluctuations and our
future operating results are unpredictable.
Our operating results are unpredictable and have fluctuated significantly on
a quarterly basis. We expect to continue to experience significant fluctuations
in our quarterly results of operations due to a variety of factors, many of
which are outside of our control. As a result, period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indications of future performance.
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. Because of these
factors, we may be unable to adjust our spending in a timely manner to adjust
for any unexpected revenue shortfall.
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
5
<PAGE>
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.
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.
If we do not increase the number of Web sites and portals upon which we
advertise our anticipated expansion could be adversely affected.
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 and Internet telephony markets are highly competitive
and our failure to compete effectively could adversely affect us.
With respect to prepaid calling cards, we compete with the largest
telecommunications providers in the United States, as well as smaller, emerging
carriers. We may also compete with large operators in other countries. An
increasing number of large, well-capitalized companies are entering the market
for Internet telephony products and services. These competitors include a
number of companies that have introduced services that make Internet telephony
solutions available to businesses and consumers, and that permit voice
communications over the Internet. Many of our competitors 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. Competition from existing or new competitors
could reduce our revenues from the sale of our virtual prepaid calling cards
and other services. A general decrease in telecommunication rates charged by
international long distance carriers could also have a negative effect on our
operations. Our ability to compete also depends on our ability to anticipate
and adapt to rapid technological and other changes occurring in the
telecommunications industry.
We may be vulnerable to technical malfunctions which could adversely affect our
operations.
We depend upon our software systems, communications hardware and enhanced
services platform to conduct our virtual calling card sales and telephone
routing, manage our network, track virtual calling card balances and perform
other vital functions. 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;
. hardware defects;
. computer viruses; and
. intentional acts of vandalism and similar events.
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. We have experienced periodic system interruptions, which we believe
will continue to occur from time-to-time. 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.
6
<PAGE>
Our systems may not accommodate significant growth in the number of users which
could have a negative effect on our operations.
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 disrupted, then we may develop a
negative reputation and our business, results of operations and financial
condition would be materially adversely affected.
If the Internet telephony and prepaid calling card markets do not gain market
acceptance by potential customers our business will be adversely affected.
We cannot be certain that Internet telephone service will gain market
acceptance or prove to be a viable alternative to traditional telephone
service. 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. Therefore, 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.
If the e-commerce market does not continue to develop and gain market
acceptance our revenues may be negatively affected.
We anticipate that e-commerce will continue to 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.
If the Internet and Internet infrastructure do not continue to develop as
anticipated our operations will be negatively affected.
For the Internet to be commercially viable in the long-term, the size of the
network infrastructure, enabling technologies, necessary performance
improvements and user security will need to be continually addressed. 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.
7
<PAGE>
The failure to manage our growth in operations and hire additional qualified
employees could have a material adverse effect on us.
The expected growth of our operations place a significant strain on our
current management resources. To manage this expected growth, we will need to
improve our:
. transaction processing methods;
. operations and financial systems;
. procedures and controls; and
. training and management of our 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.
Our potential customers may have concerns about Internet commerce security
which could inhibit our growth and we may incur losses resulting from 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
material adverse effect on our business, financial condition and operating
results.
The market price for your common stock may be volatile, which could cause you
to lose substantial portions of your investment.
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.
Our business may be adversely affected if we are not able 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 expect to be
granted a registered trademark for "WorldQuest" by the U.S. Patent and
Trademark Office upon our filing of an affidavit of use, which was filed in
September 1999. We have a pending trademark application on file with the Patent
and Trademark Office for "WorldQuest Networks."
8
<PAGE>
This application was challenged by Qwest Communications, who filed a notice of
opposition 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 its registration date. 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.
The Internet industry may become subject to increased government regulation
which could have a negative effect on our operations.
Various actions have been taken by the United States Congress and the
Federal courts that, in some cases impose some forms of regulation on the
Internet, and in other cases protect the Internet from regulation. Domestic and
international authorities regularly consider proposed legislation that could
result in new regulations on the Internet. It is impossible to say at this time
whether and to what extent the Internet may ultimately be regulated
domestically or internationally. 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, 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.
Sales tax collection by states may adversely affect our growth.
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 successful assertion by one or more states or
any other country 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.
The loss of key personnel could adversely affect our business.
We believe that our success will depend on the continued services of our
senior management team, especially B. Michael Adler and Michael R. Lanham. We
do not have employment agreements with any of our key personnel. At the closing
of this offering, we will carry $2.0 million of key person life insurance on
the lives of each of 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 face risks that our computer systems and those of our business partners may
not be year 2000 compliant.
Many existing computer programs use only two digits to identify a year.
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 currently conducting an assessment of the Y2K readiness of our
systems and those of our third-party vendors and suppliers. We expect to
complete our Y2K review during the fourth quarter of 1999. Based upon our
assessment to date, we believe that our internally developed proprietary
software is Y2K compliant. We have not yet determined the compliance level of
third parties. Therefore, we may have to develop a remediation plan to
partially insulate us from third-party non-compliance. At this time, the
expenses associated with this assessment and any potential remediation plan
cannot be determined. We cannot assure you that the Y2K problems of third
parties with which we do business will not have a material adverse effect on
our business, financial condition and operating results.
9
<PAGE>
We also depend on the Y2K compliance of the computer systems and financial
services used by our 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 adverse effect on demand for our virtual calling
cards and services and would have a material adverse effect on our business,
results of operations and financial condition.
We may not be able to raise needed additional capital in the future.
We require substantial working capital to fund our business. 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.
10
<PAGE>
FORWARD LOOKING STATEMENTS
This prospectus 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 above in
"Risk Factors" and elsewhere in this prospectus.
USE OF PROCEEDS
The net proceeds to us from the sale of 2,400,000 shares of common stock
offered by us at an assumed initial public offering price of $11.00 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 $23.2 million (and an additional $3.6 million 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, including increased
advertising on other Web sites and print media and direct advertising
campaigns (approximately $1.8 million);
. equipment purchases including certain additional back-up systems
(approximately $1.25 million);
. repayment of indebtedness (approximately $780,000);
. software development (approximately $450,000);
. increasing deposits with credit card processing companies (approximately
$150,000); and
. general corporate purposes, including working capital for payment of
outstanding payables, development of relationships with other long
distance carriers and local terminating parties, expansion of the
countries in which we have gateways, and research and development of new
products (approximately $19.1 million).
The indebtedness to be repaid is a portion of a $2.5 million credit facility
with Eagle Venture Capital, LLC, formerly known as WorldQuest Networks, LLC,
our controlling stockholder. B. Michael Adler, our Chairman of the Board, owns
a controlling interest in Eagle Venture. At June 30, 1999, $1.6 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 $1.4 million. 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 $1.4
million 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 $780,000 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.
11
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1999, our (A) actual short-
term debt and capitalization at June 30, 1999 and (B) as adjusted to reflect
the sale by us of 2,400,000 shares of common stock offered by us at an assumed
initial public offering price of $11.00 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 June 30, 1999
------------------------
Actual As adjusted
----------- -----------
<S> <C> <C>
Short-term debt...................................... $ 1,082,931 $ --
=========== ===========
Long-term debt and capital lease obligations......... $ 1,131,140 $ 1,131,140
----------- -----------
Stockholders' equity (deficit):
Preferred stock, $.01 par value;
10,000,000 shares authorized; none issued and
outstanding actual and as adjusted............... -- --
Common stock, $.01 par value:
50,000,000 shares authorized; 3,196,699 issued
and outstanding actual; 5,596,699 shares issued
and outstanding as adjusted...................... 319,670 343,670
Additional capital................................. 1,718,083 24,897,663
Accumulated deficit................................ (4,378,085) (4,378,085)
----------- -----------
Total stockholders' equity (deficit)........... (2,340,332) 20,863,248
----------- -----------
Total capitalization........................... $(1,209,192) $21,994,388
=========== ===========
</TABLE>
12
<PAGE>
DILUTION
Our net tangible book value (deficiency) at June 30, 1999 was $(2.3) million
or $(0.73) per share. 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
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 $11.00 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 as adjusted
net tangible book value at June 30, 1999 would have been $20.9 million or $3.73
per share. This represents an immediate increase in net tangible book value of
$4.46 per share to the existing stockholders and an immediate substantial
dilution of $7.27 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................... $11.00
<S> <C> <C>
Net tangible book value (deficiency) per share before this
offering....................................................... $(0.73)
Increase per share attributable to new investors ............... 4.46
------
Net tangible book value per share after this offering............. 3.73
-----
Dilution per share to new investors............................... $7.27
=====
</TABLE>
The following table summarizes as of June 30, 1999 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
the offering Total consideration
----------------- ------------------- Average price
Number Percent Amount Percent per share
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders....... 3,196,699 57.1% $ 1,156,000 4.2% $ 0.36
New investors............... 2,400,000 42.9 26,400,000 95.8 $11.00
--------- ----- ----------- -----
Total..................... 5,596,699 100.0% 27,556,000 100.0%
========= ===== =========== =====
</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 a controlling interest in 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.
13
<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 six months ended June 30,
1998 and 1999 and the selected balance sheet data as of June 30, 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.
<TABLE>
<CAPTION>
Year ended December 31, Six months ended June 30,
------------------------ -------------------------
1997 1998 1998 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Statement of Operations
Data:
Retail prepaid calling
card revenue........... $ -- $ 1,466,322 $ 149,198 $ 2,343,736
Wholesale traffic and
other.................. 51,963 375,117 110,699 306,314
----------- ----------- ------------ ------------
Total revenue......... 51,963 1,841,439 259,897 2,650,050
Cost of sales........... 227,011 2,005,631 418,510 2,148,747
----------- ----------- ------------ ------------
Gross margin (deficit).. (175,048) (164,192) (158,613) 501,303
Selling, general and
administrative......... 1,277,383 1,290,131 644,148 877,043
Research and development
costs.................. 438,860 186,638 94,923 103,776
----------- ----------- ------------ ------------
Operating loss.......... (1,891,291) (1,640,961) (897,684) (479,516)
Interest expense........ (28,265) (162,466) (56,704) (75,868)
Other income............ 155,000 50,000 50,000 --
----------- ----------- ------------ ------------
Loss before minority
interest and
income taxes........... (1,764,556) (1,753,427) (904,388) (555,384)
Minority interest....... -- -- -- (12,658)
----------- ----------- ------------ ------------
Loss before income
taxes.................. (1,764,556) (1,753,427) (904,388) (568,042)
Income tax benefit...... -- -- -- --
----------- ----------- ------------ ------------
Net loss................ $(1,764,556) $(1,753,427) $ (904,388) $ (568,042)
=========== =========== ============ ============
Weighted-average common
shares
outstanding - basic and
diluted................ 3,000,000 3,000,000 3,000,000 3,064,607
=========== =========== ============ ============
Net loss per share -
basic and diluted...... $ (0.59) $ (0.58) $ (0.30) $ (0.19)
=========== =========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
At December 31, 1998 At June 30, 1999
-------------------- ----------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............... $ 18,833 $ 85,993
Working capital (deficit)............... (2,266,669) (2,088,684)
Total assets............................ 1,246,774 1,294,854
Long-term debt and capital lease
obligations............................ 1,129,004 1,131,140
Stockholders' equity (deficit).......... (2,514,790) (2,340,332)
</TABLE>
14
<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. Excess line capacity is the remaining
capacity on our telephone lines not used by us to terminate our calls during
any given month. 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 June 30, 1999, a telephone
company accounted for 29% of total accounts receivable. This company had no
accounts receivable at December 31, 1998, but another telephone company
accounted for 22% of accounts receivable as of June 30, 1999 and, 59% of total
accounts receivable at December 31, 1998. At June 30, 1999, a credit card
processing company accounted for 30% of total accounts receivable. This company
had no accounts receivable at December 31, 1998, but another credit card
processing company accounted for 26% of total accounts
15
<PAGE>
receivable at December 31, 1998. No individual customer accounted for more than
10% of total sales either for the first six months of 1999 or for 1998.
Customers purchase our virtual prepaid calling cards primarily using major
credit 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.
Certain Assumptions. 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 representatives' warrant; assumes no exercise of outstanding
warrants and stock options to purchase 497,031 shares of common stock; assumes
no exercise of stock options to purchase 45,000 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 206,836
shares of common stock available at the effective date of this offering for
future issuance under our stock option plan.
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 six months of 1999, our capital
expenditures and payments on capital leases totaled $200,000. 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 June 30,
1999, had an accumulated deficit of $(4.4) 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.
16
<PAGE>
Results of Operations
The following table sets forth statement of operations data as a percentage
of revenues for the periods indicated:
<TABLE>
<CAPTION>
Six months
Year ended ended June
December 31, 1998 30,
----------------- --------------
1998 1999
------ -----
<S> <C> <C> <C>
Retail prepaid calling card revenue.......... 79.6% 57.4% 88.4%
Wholesale traffic and other(1)............... 20.4 42.6 11.6
----- ------ -----
Total revenue.............................. 100.0 100.0 100.0
Cost of sales................................ 108.9 161.0 81.1
----- ------ -----
Gross margin (deficit)....................... (8.9) (61.0) 18.9
Selling, general and administrative.......... 70.1 247.9 33.1
Research and development..................... 10.1 36.5 3.9
----- ------ -----
Operating loss............................... (89.1) (345.4) (18.1)
Interest expense............................. 8.8 21.8 2.9
Other income................................. (2.7) (19.2) --
Minority interest............................ -- -- 0.4
----- ------ -----
Net loss..................................... (95.2)% (348.0)% (21.4)%
===== ====== =====
</TABLE>
- --------
(1) Wholesale traffic represents the sale of excess line capacity and other
revenue represents facsimile transmission revenues in 1998.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenue
Revenue increased to $2.7 million for the six months ended June 30, 1999
from $260,000 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 $2.7 million received for
the six months ended June 30, 1999, $2.3 million represents prepaid virtual
calling card revenue and the remainder represents wholesale traffic of $271,000
and other revenue of $35,000, all of which other revenue 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 $2.1 million for
the six months ended June 30, 1999 from $419,000 for the comparable period in
1998. This $1.7 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 $877,000
for the six months ended June 30, 1999 from $644,000 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
because our sales of calling cards are based on e-commerce which allows
increases in calling card purchases without having to incrementally add
overhead. We expect selling, general and administrative expenses to increase in
absolute dollars as we continue
17
<PAGE>
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.
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 $104,000 for the six
months ended June 30, 1999 from $95,000 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 $76,000 for the six months ended June 30, 1999
from $57,000 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 six months ended June
30, 1999 as compared to $50,000 for the comparable period in 1998.
Net Loss
We incurred a net loss of $(568,000) for the six months ended June 30, 1999
as compared to $(904,000) for the comparable period in 1998. Net loss for the
six months ended June 30, 1999 was affected by the write off of $140,000 of
goodwill during the first quarter of 1999 in connection with the termination of
our Costa Rican operations in June 1999.
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 of $153,000 and other revenue of
$222,000, all of which other revenue 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.
Operating Expenses
Selling, General and Administrative. Selling, general and administrative
expenses remained constant at $1.3 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.
18
<PAGE>
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 $(1.8) 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.
Recent Developments
For the eight months ended August 31, 1999 and 1998 our total revenue was
$3.6 million and $513,000, respectively; net loss was $606,000 and $1.1
million, respectively; and basic and diluted net loss per share was $0.20 and
$0.38, respectively.
Liquidity and Capital Resources
Since inception, we have financed our operations primarily through a $2.5
million credit facility with our principal stockholder, private sales of equity
and cash generated from operations. As of June 30, 1999, we had approximately
$86,000 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 June 30, 1999
were $1.6 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 line of
credit with our principal stockholder. The amount we are able to borrow under
this line of credit was increased to $1.4 million by an amendment to our credit
facility in August 1999, $468,000 of which was drawn and outstanding as of the
date of the amendment. Demand for payment of $780,000 of the outstanding
principal balance of the line of credit portion 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 operating activities was $246,000 for the six months ended
June 30, 1999, $661,000 in 1998 and $1.0 million in 1997. Net cash used in
operating activities for 1998 and 1997 primarily consisted of net operating
losses as well as increases in accounts receivable and other assets, partially
offset by increases in accounts payable and accrued expenses.
19
<PAGE>
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 $131,000
for the six months ended June 30, 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
June 30, 1999, $131,000 of such amount had been spent.
Net cash provided by financing activities was $444,000 for the six months
ended June 30, 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. Through June 30, 1999, payments
on capital leases totaled $58,000.
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," which
requires disclosure of total comprehensive income in interim and annual
financial statements. We adopted this standard during 1998. There were no items
of other comprehensive income for the six months ended June 30, 1999 or 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," which requires disclosure by public
companies of information related to a company's operating segments, as defined.
We have adopted this standard 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." This statement provides guidance on
accounting for the costs of computer software developed or obtained for
internal use. This statement identifies the characteristics of internal use
software and provides guidance on new cost recognition principles. This
statement is effective for fiscal years beginning after December 15, 1998. This
statement 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," which provides a
comprehensive and consistent standard for the recognition and measurement of
derivative and hedging activities. We will be required to adopt this standard
at the beginning of fiscal 2001. We have not yet assessed the impact this
standard will have on our results of operation, financial position or cash
flows. However, we currently have no derivatives or financial instruments that
would be impacted by this standard.
20
<PAGE>
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 fourth 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 June 30,
1999. Such amounts have not been material. We expect this assessment process to
be completed during the fourth 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 fourth 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
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.
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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 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 incorporated in Texas in October 1996. We plan to reincorporate in
Delaware prior to the closing of this offering.
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.
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 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.
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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 industry sources. 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 1970s.
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.
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. There is virtually no difference
between the voice quality of our Internet carried calls and international
telephone calls carried over traditional telephone lines 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
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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 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 nine 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.
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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 June
30, 1999, we had sold virtual calling cards purchased with approximately 35,500
separately identifiable credit cards. Of these separately identifiable credit
cards, 15,897 had made more than two repeat purchases, 3,867 had made more than
10, 894 had made more than 25, and 161 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 six months ended June 30, 1999, on average, 53.7% of the minutes purchased
on our virtual calling cards were used within three days of purchase, 85.5%
within 13 days and 94.9% within 31 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
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
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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.
Intelligent Address Book and Calendar. Another new service we have developed
and intend to make available on our Web site in the fourth quarter of 1999 is
our Intelligent Address Book and Calendar. The Intelligent Address Book and
Calendar is an electronic address book with names, telephone numbers and
scheduled events which will be maintained by us on our secure Web site. One
will be maintained free of charge for each approved customer. This service is
interactive so the customer can add and delete names, numbers and events. The
Intelligent Address Book and Calendar will enable an approved customer to make
an international long distance call or PC generated facsimile transmission from
any country to any other country at our international United States long
distance rates, by simply accessing our Web site and following the prompts to
the page for the Intelligent Address Book and Calendar for such customer,
selecting the number where the customer is located and then "clicking" the name
and number of the person to be called or to whom the facsimile transmission is
to be sent.
Resale of Virtual Calling Cards. We also buy virtual calling cards processed
through other companies' platforms. We buy them at a discount 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 70% of our revenues for the six months ended June 30, 1999
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 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
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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 288 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.
We plan to develop and offer new products and services which may require
modifications and enhancements to our platform. For any modification or
enhancement, we will either contract with the manufacturer to develop new
software or we may develop the software, or a combination of both. In the past,
we have experienced delays when we have tried to upgrade our platform. If the
software cannot be developed cost effectively, or there will be significant
delays, we may elect to abandon a potential product or service in favor of one
that can be timely developed on a cost effective basis. There can be no
assurance that we can successfully develop the software to enable us to offer
new products or services.
Our Internet Gateway Network. We presently have international gateways
operational in Mexico and Indonesia, and expect to have gateways operational in
India and Sri Lanka in October. We are negotiating for installations in 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. We have also entered into an agreement with another
Internet telephony company that will enable us to use their existing Internet
gateway network in certain countries until we can place our own gateways in
those countries.
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. The software in our gateways connect the packet switched data
transmitted over the Internet to circuit switched public telephone networks in
such a manner that virtually eliminates the delay in transmission normally
involved in Internet voice transmission and the resulting pause and echo
effect. We also select Internet service providers with Internet connections
that permit us to limit the delay between their Internet connections and ours
to less than 200 to 400 milliseconds. This also improves the voice quality of
our 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.
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 typically one year
agreements with 30-day cancellation rights by either party. 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 terminate
our calls, and the loss of one or more of them as a source for terminating
calls could
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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. We also sell to other
long distance carriers any excess line capacity we have. Excess line capacity
is the remaining capacity on our telephone lines not used by us to terminate
our own calls during any given month.
Our Third Party Contracts. Our success depends, in part, on our ability to
continue to lease long distance telephone capacity from third parties 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. 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.
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.
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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.
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
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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.
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
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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.
Regulation of Leased Lines and Carriers. When we lease long distance
telephone capacity from third-party carriers, we rely on them to comply with
local laws and regulations. We have no control over the manner in which these
companies operate in these countries. Foreign regulatory, judicial, legislative
or political entities may raise issues regarding the compliance of these
companies with local laws or regulations, or limit their ability to carry our
calls.
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,
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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 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.
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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. All that is required for us to receive a
registered trademark for "WorldQuest" is to file an affidavit of use with the
Patent and Trademark Office, which was filed in September 1999. 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, and
currently scheduled for submission and determination of a ruling in July 2000.
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 its registration date. 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 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 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. These agreements are designed to make it clear
that we own any technology developed by our employees and contractors during
their engagement by us and to protect us against unauthorized 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.
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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 July 31, 1999, we had 15 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 3,300 square feet under a lease at a monthly rental of
approximately $5,300. 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. We also believe our property is
adequately covered by insurance.
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 July 31, 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 was the acting Chief
Financial Officer from December 1998 until 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. These companies were
Altus Communications, Inc., MSC Services, Inc., MSC National, Inc. and NYLT,
Inc. (which was formerly known as New York Local Telephone, Inc.). 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 joined WorldQuest Networks in July 1999 as the 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.
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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 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
directors.
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 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 (1) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (2) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (3) under Section 174 of the Delaware statutes relating to unlawful
dividends, stock purchases or redemptions or (4) for any transaction from which
the director derived an improper personal benefit. Section 102(b)(7) of the
Delaware statutes 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 Delaware law,
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
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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 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 Delaware statutes 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.
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Upon closing of this offering, B. Michael Adler will begin receiving an
annual salary of $175,000 through October 2000. Michael R. Lanham will receive
an annual salary of $125,000 through January 2000 and Mark C. Levy will receive
an annual salary of $120,000 through October 2000. We do not have employment
agreements with any of these officers relating to the payment of their salaries
or any other matter. Their salaries will be reviewed by the Compensation
Committee annually, who will make recommendations to the Board of Directors for
any adjustments. Adjustments will be based on our performance and condition,
the officer's performance and such other criteria deemed pertinent by the
Compensation Committee. We do not intend to pay these salaries from the
proceeds of this offering.
Stock Options
1997 Stock Option Plan
In January 1997, our Board of Directors and stockholders adopted our 1997
Stock Option 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.
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<PAGE>
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.
Options to acquire 148,164 shares are outstanding under the Plan at an
average exercise price per share of $2.88 and an additional option to acquire
100,000 shares is outstanding at an exercise price equal to the initial public
offering price. Of these amounts, options to acquire 110,000 shares are 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 45,000 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 directors.
CERTAIN TRANSACTIONS
Effective at our formation in October 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. This
lease expired in April 1997 and provided for monthly rental payments of
approximately $4,000. 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.
We have a credit facility with Eagle Venture to provide loans to us of up to
$2.5 million at an annual interest rate of 8%. The outstanding amount owed to
Eagle Venture by us at June 30, 1999 was $1.6 million and at December 31, 1998
was $1.7 million. In May 1999, we amended this credit facility to convert $1.1
million to a term loan with interest and principal payable in May 2002. Eagle
Venture 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 $1.4 million line of credit with Eagle Venture, which is
payable on demand. If no demand is made, accrued interest on the outstanding
line of credit accrues until December 18, 1999, at which time it is payable.
Thereafter, accrued interest on the outstanding line of credit is payable
monthly until May 2002, when the entire loan is due. Demand for payment of
$780,000 of the principal balance of the line of credit has been made effective
upon the closing of this offering, and we intend to repay such amount from the
proceeds of this offering.
In December 1998, we entered into a written agreement with WorldQuest
Communications, Inc. and Eagle Venture which formalized an earlier oral
agreement relating, among other things, to the grant of a license to us and
Eagle Venture by WorldQuest Communications of the name "WorldQuest." Pursuant
to this agreement, Eagle Venture also acknowledged its prior oral agreement to
transfer, and caused the transfer of, 300,000 shares of our common stock owned
by it to WorldQuest Communications in consideration of WorldQuest
40
<PAGE>
Communications canceling approximately $100,000 owed by Eagle Venture to
WorldQuest Communications. As part of this transaction, E. Denton Jones also
cancelled $150,000 owed to him by Eagle Venture, which Eagle Venture also had
funded to us as equity or as a loan. Mr. Jones, one of our directors,
beneficially owns 99% of WorldQuest Communications. Eagle Ventures also
contributed to us at our inception the right to use the name "WorldQuest".
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, Robert M. Adler, Jr., B.
Michael Adler's brother, performed sales and marketing consulting services to
us relating to our facsimile transmission services. We paid him $5,500 for the
six months ended June 30, 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 July 31, 1999, and as adjusted to reflect
the sale of the 2,400,000 shares of common stock offered hereby, by: (1) each
of our directors; (2) each of our executive officers; (3) each person known to
us to be beneficial owner of more than 5% of the common stock; and (4) all of
our directors and executive officers as a group.
Eagle Venture Capital, LLC is the record and beneficial owner of 2,666,478
of the shares shown in the table below. B. Michael Adler owns a controlling
interest 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. WorldQuest Communications, Inc. is the record and beneficial
owner of the shares reflected below, but E. Denton Jones beneficially owns 99%
of the outstanding capital stock of WorldQuest Communications, Inc. and is also
deemed to beneficially own these shares. Michael R. Lanham beneficially owns
options to purchase 167,867 shares, which vest on the closing of this offering.
Mark C. Levy beneficially owns options to purchase 100,000 shares granted
effective July 19, 1999, which vest 20%, 30% and 50% on the first, second and
third anniversaries of the date of grant. Hugh E. Humphrey, Jr. owns vested
options to purchase 5,000 shares.
<TABLE>
<CAPTION>
Percentage of shares owned
-------------------------------
Name and address of Shares beneficially Before the After the
beneficial owner owned offering offering
- ------------------- ------------------- ------------- -------------
<S> <C> <C> <C>
B. Michael Adler........ 2,671,478 83.4% 47.7%
16990 Dallas Parkway,
Suite 220
Dallas, Texas 75248
E. Denton Jones......... 360,000 11.3 6.4
The Claridge, Suite 18D
3510 Turtle Creek Blvd.
Dallas, Texas 75219
Michael R. Lanham....... 167,867 5.0 2.9
16990 Dallas Parkway,
Suite 220
Dallas, Texas 75248
Mark C. Levy............ 100,000 3.0 1.8
16990 Dallas Parkway,
Suite 220
Dallas, Texas 75248
Hugh E. Humphrey, Jr.... 5,000 * *
No. 1 Westbank
Expressway
New Orleans, Louisiana
70174
All directors and
executive officers
as a group (5
persons)............... 3,304,345 95.1 56.2
</TABLE>
- --------
*Less than 1%
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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 5,596,699 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 August 31, 1999, we had outstanding warrants and options to purchase up
to 317,031 shares of common stock at an average weighted exercise price of
$3.12 per share and outstanding options to purchase 180,000 shares at an
exercise price equal to the initial public offering price. All of such options
and warrants will be subject to 180 day lock-up agreements with the
underwriters. All of such warrants and options expire between 2003 and July
2006.
We will also grant the representatives of the underwriters a warrant to
purchase 240,000 shares of common stock for an exercise price per share equal
to 155% of the initial public offering price at any time during the five years
following closing of this offering commencing one year after the closing of
this offering.
Registration Rights
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 representatives of the underwriters in connection with this
offering. See "Underwriting" for a more complete description of the
representatives' warrant.
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<PAGE>
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 Delaware General Corporation Law 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 (1)
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, (2) upon consummation
of the transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owns at least 85% of the 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 (3) 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
44
<PAGE>
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 Delaware statutes.
Section 203 of the Delaware statutes 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 American Stock
Transfer & Trust Company.
45
<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 5,596,699 shares of common
stock. Of the outstanding shares, the 2,400,000 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.
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.
Shares Subject to Rule 144
The remaining 3,196,699 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
(55,967 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 3,196,699 outstanding shares and 497,031 shares covered by
outstanding options and warrants have agreed that they will not, without the
prior written consent of Ladenburg Thalmann & Co. Inc. and Kaufman Bros., L.P.,
as joint book-running managers on behalf of the underwriters, (which consent
may be withheld in their 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; 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. The joint book-running
managers, on behalf of the underwriters, may, in their 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
180 days after the date of this prospectus, we will not, without the consent of
the joint book-running managers, 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.
46
<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 248,164 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. Of these options, 316,031 options have an
average weighted option price of $3.12 per share and 100,000 options have an
exercise price equal to the initial public offering price. After the expiration
of the 180 day 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 45,000 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
80,000 shares of common stock with an exercise price equal to the initial
public offering price and 1,000 shares with an exercise price of $3.33 per
share. The shares of common stock that are issued pursuant to these options and
warrants generally must be held for a minimum of one year from the date of
exercise prior to their resale.
Registration Rights
We will endeavor to register, or file a post-effective amendment to this
registration statement to register shares of common stock underlying a warrant
to be granted to the representatives of the underwriters in connection with
this offering.
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.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, a copy of
which has been filed as an exhibit to the registration statement of which this
prospectus is a part, the underwriters named below have severally, and not
jointly, agreed through Ladenburg Thalmann & Co. Inc., Kaufman Bros., L.P.,
John G. Kinnard and Company Incorporated and EBI Securities Corporation, the
representatives of the underwriters, to purchase from the company, and the
company has agreed to sell to the underwriters, the aggregate number of shares
of common stock set forth opposite their respective names:
<TABLE>
<CAPTION>
Underwriter Number of Shares
- ----------- ----------------
<S> <C>
Ladenburg Thalmann & Co. Inc...................................
Kaufman Bros., L.P.............................................
John G. Kinnard and Company Incorporated.......................
EBI Securities Corporation.....................................
----
Total......................................................
====
</TABLE>
The underwriters are committed to take and to pay for all of the shares of
common stock offered hereby (other than the shares covered by the over-
allotment option described below), if any are purchased.
The underwriters have advised the company that they propose to offer the
common stock offered directly to the public initially at the price to the
public set forth on the cover page of this prospectus, that they may offer
shares to certain dealers at a price that represents a concession of not more
than $ per share, and that the underwriters may allow, and such dealers may
reallow, a concession of not more than $ per share to certain other dealers.
After the offering, the price to the public and the concessions may be changed
form time to time by the representatives.
The company has granted to the underwriters an option, exercisable within 45
days after the date of this prospectus, to purchase up to 360,000 additional
shares of common stock at the initial public offering price, less the
underwriting discount set forth on the cover page of this prospectus. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with the sale of the shares offered hereby. To the extent
the underwriters exercise such option, each of the underwriters will be
committed, subject to certain conditions, to purchase the same percentage
thereof as the percentage of the initial shares to be purchased by that
underwriter.
Upon completion of this offering, WorldQuest Networks will sell to the
representatives for $240 a warrant to purchase 240,000 shares of common stock.
The representatives' warrant will become exercisable one year after the
effective date of this offering at a per share exercise price equal to 155% of
the initial public offering price and will expire five years from the effective
date of this offering. The representatives' 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 prospectus, except
to the representatives, underwriters, selling group members and their officers
or partners. During the exercise period, holders of the representatives'
warrants are entitled to certain demand and incidental rights with respect to
the shares of common stock issuable upon exercise of the representatives'
warrant. The common stock issuable on exercise of the representatives' warrant
is subject to adjustment in certain events to prevent dilution.
WorldQuest Networks will pay the representatives 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 representatives'
expenses in excess of the nonaccountable expense allowance will be borne by the
representatives. WorldQuest Networks has paid $60,000 to the representatives as
an advance for expenses.
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<PAGE>
The company has agreed to indemnify the underwriters and certain related
persons against certain liabilities, including certain liabilities under the
Securities Act of 1933, and to contribute to payments the underwriters may be
required to make in respect thereof.
The company and its directors, officers and all security holders have agreed
that they will not, directly or indirectly, offer, sell or otherwise dispose of
any equity securities of the company or any securities convertible into or
exchangeable for, or any rights to purchase or acquire equity securities of the
company for a period of 180 days after the date of this prospectus, without the
prior written consent of Ladenburg Thalmann & Co. Inc. and Kaufman Bros., L.P.,
which consent may be withheld in their sole discretion.
The representatives have informed the company that the underwriters do not
expect sales to discretionary accounts to exceed 5% of the total number of
shares offered hereby, and the representatives do not intend to confirm sales
of shares to any account over which they exercise discretionary authority.
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 representatives 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 representatives. 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.
49
<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. Two
members of Glast, Phillips & Murray have options to acquire an aggregate of
10,000 shares of common stock at an exercise price equal to the initial public
offering price.
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.
50
<PAGE>
WorldQuest Networks, Inc.
Index to Consolidated Financial Statements
Contents
<TABLE>
<S> <C>
Report of Independent Auditors............................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and June 30, 1999
(unaudited).............................................................. F-3
Consolidated Statements of Operations for the years ended December 31,
1997 and 1998 and the six month periods ended June 30, 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 six month period ended
June 30, 1999 (unaudited)................................................ F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1998 and the six month periods ended June 30, 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.
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 (deficit), 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.
/s/ Ernst & Young LLP
July 7, 1999, except for Note 7,
as to which the date is September 16, 1999
Dallas, Texas
F-2
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 18,833 $ 85,993
Accounts receivable................................. 235,244 128,433
----------- ----------
Total current assets.................................. 254,077 214,426
Property and equipment, net........................... 252,485 373,774
Other assets.......................................... 740,212 706,654
----------- ----------
Total assets.......................................... $ 1,246,774 $1,294,854
=========== ==========
LIABILITIES
Current liabilities:
Accounts payable.................................... $ 1,234,726 $ 797,922
Accrued expenses.................................... 344,231 325,207
Deferred revenue.................................... 95,965 97,050
Note payable........................................ 100,000 426,000
Line of credit from principal stockholder........... 638,096 485,981
Current portion of capital lease obligation......... 107,728 170,950
----------- ----------
Total current liabilities............................. 2,520,746 2,303,110
Term loan............................................. 1,100,000 1,100,000
Accrued interest...................................... 111,814 188,278
Capital lease obligation.............................. 29,004 31,140
Minority interest..................................... -- 12,658
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
June 30, 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 3,196,699 at
June 30, 1999 (unaudited).......................... 300,000 319,670
Additional capital.................................. 995,253 1,718,083
Accumulated deficit................................. (3,810,043) (4,378,085)
----------- ----------
Total stockholders' equity (deficit).................. (2,514,790) (2,340,332)
----------- ----------
Total liabilities and stockholders' equity (deficit).. $ 1,246,774 $1,294,854
=========== ==========
</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 six months ended June
30, 1998 and 1999 (unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
------------------------ ----------------------
1997 1998 1998 1999
----------- ----------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Retail prepaid calling card
revenue.................... $ -- $ 1,466,322 $ 149,198 $2,343,736
Wholesale traffic and
other...................... 51,963 375,117 110,699 306,314
----------- ----------- ---------- ----------
Total revenue............. 51,963 1,841,439 259,897 2,650,050
Cost of sales............... 227,011 2,005,631 418,510 2,148,747
----------- ----------- ---------- ----------
Gross margin (deficit)...... (175,048) (164,192) (158,613) 501,303
Selling, general and
administrative............. 1,277,383 1,290,131 644,148 877,043
Research and development
costs...................... 438,860 186,638 94,923 103,776
----------- ----------- ---------- ----------
Operating loss.............. (1,891,291) (1,640,961) (897,684) (479,516)
Interest expense............ (28,265) (162,466) (56,704) (75,868)
Other income................ 155,000 50,000 50,000 --
----------- ----------- ---------- ----------
Loss before minority
interest and income taxes.. (1,764,556) (1,753,427) (904,388) (555,384)
Minority interest........... -- -- -- (12,658)
----------- ----------- ---------- ----------
Loss before income taxes.... (1,764,556) (1,753,427) (904,388) (568,042)
Income tax benefit.......... -- -- -- --
----------- ----------- ---------- ----------
Net loss.................... $(1,764,556) $(1,753,427) $ (904,388) $ (568,042)
=========== =========== ========== ==========
Weighted-average common
shares outstanding--basic
and diluted................ 3,000,000 3,000,000 3,000,000 3,064,607
=========== =========== ========== ==========
Net loss per share--basic
and diluted................ $ (0.59) $ (0.58) $ (0.30) $ (0.19)
=========== =========== ========== ==========
</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 six months ended June
30, 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 $ 219,792 $ (292,060) $ (71,268)
Additional capital
contribution......... -- -- 316,208 -- 316,208
Stock dividend........ 2,990,000 299,000 (299,000) -- --
Fair value of services
provided by
shareholder.......... -- -- 175,000 -- 175,000
Net loss.............. -- -- -- (1,764,556) (1,764,556)
--------- --------- ----------- ------------ ------------
Balance at December 31,
1997................... 3,000,000 300,000 412,000 (2,056,616) (1,344,616)
Issuance of stock
purchase warrants...... -- -- 408,253 -- 408,253
Fair value of services
provided by
shareholder............ -- -- 175,000 -- 175,000
Net loss................ -- -- -- (1,753,427) (1,753,427)
--------- --------- ----------- ------------ ------------
Balance at December 31,
1998................... 3,000,000 300,000 995,253 (3,810,043) (2,514,790)
Fair value of services
provided by
shareholder.......... -- -- 87,500 -- 87,500
Conversion of line of
credit from
shareholder.......... 60,061 6,006 193,994 200,000
Sale of common stock.. 136,638 13,664 441,336 455,000
Net loss (unaudited).. -- -- -- (568,042) (568,042)
--------- --------- ----------- ------------ ------------
Balance at June 30, 1999
(unaudited)............ 3,196,699 $ 319,670 $ 1,718,083 $ (4,378,085) $ (2,340,332)
========= ========= =========== ============ ============
</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 six months ended June
30, 1998 and 1999
<TABLE>
<CAPTION>
December 31, June 30,
-------------------------- ----------------------
1997 1998 1998 1999
------------ ------------ ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
Operating Activities
Net loss.................. $ (1,764,556) $ (1,753,427) $ (904,388) $ (568,042)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation............ 155,133 141,833 57,403 91,025
Amortization............ -- 121,222 7,764 42,279
Goodwill write-off...... -- -- -- 139,747
Minority interest in
loss of joint venture.. -- -- -- 12,658
Fair value of
shareholder services... 175,000 175,000 87,500 87,500
Changes in operating
assets and liabilities:
Accounts receivable... (41,715) (193,529) (23,481) 106,811
Accrued interest...... 27,387 84,427 47,114 76,464
Accounts payable and
accrued expenses..... 437,921 747,384 269,808 (455,828)
Note payable to
vendor............... -- -- -- 326,000
Deferred revenue...... -- 95,965 -- 1,085
Other assets.......... (5,433) (79,594) 351 (106,188)
------------ ------------ ---------- ----------
Net cash used in operating
activities............... (1,016,263) (660,719) (457,929) (246,489)
Investing Activities
Additions to property and
equipment................ (111,056) (148,047) (74,276) (141,159)
Proceeds from sale of
equipment................ -- -- -- 10,347
------------ ------------ ---------- ----------
Net cash used in investing
activities............... (111,056) (148,047) (74,276) (130,812)
Financing Activities
Proceeds from line of
credit, net.............. 788,137 919,294 562,641 47,885
Payments on capital
leases................... -- (53,519) -- (58,422)
Payment on note payable... -- (25,000) (25,000) --
Capital contribution...... 316,208 -- -- --
Sale of common stock...... -- -- -- 455,000
------------ ------------ ---------- ----------
Net cash provided by
financing activities..... 1,104,345 840,775 537,641 444,463
Increase (decrease) in
cash and cash
equivalents.............. (22,974) 32,009 5,436 67,162
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 $ (7,740) $ 85,995
============ ============ ========== ==========
Supplemental Disclosure of
Cash Flow Information
Interest paid............. $ 878 $ 54,075 $ 9,590 $ 6,983
============ ============ ========== ==========
</TABLE>
See accompanying notes.
F-6
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1997 and 1998 and the six months ended June 30, 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 six months ended June 30, 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 June 30, 1999 (unaudited) tangible assets
located in foreign locations totaled 7% and 11%, 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 subsidiaries. All significant intercompany balances and transactions
have been eliminated.
Interim Financial Statements
The consolidated unaudited financial statements as of June 30, 1999 and for
the six months in the periods ended June 30, 1998 and 1999 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 six months ended
June 30, 1998 and 1999 (unaudited), was $3,745, $46,528, $8,131 and $56,344,
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 478,005 shares of the Company's common stock for the years ended
December 31, 1997 and 1998 and the six months ended June 30, 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 June 30, 1999
(unaudited) and December 31, 1998, a single telephone company accounted for 29%
and 0% of total accounts receivable, respectively. A different telephone
company accounted for 22% and 59% of accounts receivable as of June 30, 1999
(unaudited) and December 31, 1998, respectively. At June 30, 1999 (unaudited)
and December 31, 1998 a credit card processing company accounted for 30% and 0%
of total accounts receivable, respectively. Another credit card processing
company accounted for 0% and 26% of total accounts receivable at the same
dates. 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 six months ended June 30, 1998 and 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 for six months ended June
30, 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, June 30,
(Years) 1998 1999
--------- ------------ -----------
(unaudited)
<S> <C> <C> <C>
Leasehold improvements................ 5 $ 14,297 $ 17,442
Switch and other network equipment.... 2 to 3 596,902 833,704
Furniture and fixtures................ 5 37,010 37,010
Capitalized software.................. 5 22,915 40,870
--------- ---------
Total................................. 671,124 929,026
Less: accumulated depreciation and
amortization....................... (418,639) (555,252)
--------- ---------
$ 252,485 $ 373,774
========= =========
</TABLE>
Included in the above net totals for property and equipment in 1998 and 1999 is
approximately $84,556 and $166,058, respectively relating to capital leases.
4. Other Assets
Other Assets consists of the following as of:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
Lease options (see Note 11)...................... $ 514,500 $ 514,500
Capitalized initial public offering costs........ -- 101,620
Goodwill (see Note 5)............................ 139,747 --
Deposits......................................... 84,933 76,722
Other............................................ 1,032 13,812
--------- ---------
$ 740,212 $ 706,654
========= =========
</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)
5. Costa Rican Operation (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, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
Deposits received................................ $182,463 $171,000
Other............................................ 161,768 154,207
-------- --------
$344,231 $325,207
======== ========
</TABLE>
7. Credit Facility from Parent and Note Payable to Vendor
In December 1996, the Company entered into a $2,000,000 line of credit
agreement with Eagle. The outstanding amount as of December 31, 1998 and June
30, 1999 (unaudited) totals $1,738,096 and $1,585,981, 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 facility 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 $414,019 is available for future borrowings as of December 31,
1998 and June 30, 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. In August 1999, Eagle
and the Company amended its credit facility by increasing the total available
under the line of credit to $1.4 million.
In March 1999, the Company converted vendor accounts payable totaling
$326,000 into an interest bearing promissory note. Principal and accrued
interest on the note is due, as amended, in November 1999. In conjunction with
the amended promissory note, on September 16, 1999 the Company granted the
vendor an option to acquire 30,000 shares of its common stock, which expires on
December 31, 2000. The option vests immediately and is exercisable at the
initial public offering price. The fair value of the option will be recognized
as additional interest expense on the promissory note.
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 and 2.7
million outstanding shares of the common stock of the Company as of
December 31, 1998, and June 30, 1999 (unaudited), respectively. 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.
Additionally the founder and CEO has elected to forego a cash salary until
the successful completion of an initial public offering. Subsequent to the
completion of such an offering, the founder and CEO will receive an annual
salary of $175,000. Management believes that this amount approximates the fair
value, on an annual basis, of the services rendered to the Company by the
founder and CEO, and accordingly has recognized this expense in the financial
statements since inception.
F-11
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Related Party Transactions (continued)
On December 7, 1998, the Company entered into a written agreement with
WorldQuest Communications, Inc. and Eagle which formalized an earlier oral
agreement relating, among other things, to the grant of a license to Eagle and
the Company by WorldQuest Communications of the name "WorldQuest." Pursuant to
this agreement, Eagle also acknowledged its prior oral agreement to transfer,
and caused the transfer of 300,000 shares of WorldQuest common stock owned by
it to WorldQuest Communications in consideration of WorldQuest Communications
canceling approximately $100,000 owed by Eagle to WorldQuest Communications. As
part of this transaction, the primary shareholder of WorldQuest Communications
( a director of the Company) also cancelled $150,000 owed to him by Eagle,
which Eagle also had funded to the Company as equity or as a loan. Effective
with the formation of the Company, Eagle transferred its exclusive rights to
the name "WorldQuest" as part of the initial capitalization of the Company.
Consulting Fees
In 1997 and 1998 and for the six months ended June 30, 1998 and June 30,
1999 (unaudited) a relative of the CEO was paid $44,000, $61,500, $41,000 and
$5,500, respectively, for providing consulting services to the Company.
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
31, 1998
-----------
<S> <C>
Deferred tax assets:
Deferred revenue........................................... $ 32,628
Depreciation and amortization.............................. 70,937
Other...................................................... 52,754
Net operating loss carryforwards........................... 993,360
-----------
Total deferred tax assets................................ 1,149,679
Valuation allowance.......................................... (1,149,679)
-----------
Net deferred tax assets...................................... $ --
===========
</TABLE>
The Company has U.S. net operating loss carryforwards of approximately $2.9
million as of December 31, 1998 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.
F-12
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Equity (Deficit) (continued)
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.
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 18 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.
F-13
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Equity (Deficit) (continued)
Employee stock option transactions under the Option Plan for the years ended
December 31, 1998 and 1997, and the six months ended June 30, 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.......................................... (1,500) 1.0 --
-------
Outstanding at June 30, 1999...................... 148,164 $2.88 6.6 years
=======
Available for granting in future periods.......... 351,836
=======
</TABLE>
At December 31, 1997 and 1998, and June 30, 1999 26,000, 66,950 and 68,900
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.
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 six months ended June 30, 1999 had a weighted-average fair value of
$.60, $.18 and $.60 per share, respectively.
F-14
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stockholders' Equity (Deficit) (continued)
Reserved Capital Shares
The Company has reserved the following shares of common stock as of June 30,
1999 (unaudited):
<TABLE>
<S> <C>
Stock Option Plan................................................. 500,000
Stock Purchase Warrants........................................... 159,474
Options issued outside of Stock Option Plan....................... 168,867
-------
Total............................................................. 828,341
=======
</TABLE>
11. Commitments
The Company has capital leases for internet gateway telecommunications
equipment and operating leases relating principally to office facilities. The
capital leases contain a bargain purchase option at the end of the lease term.
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,
$56,640 and $28,919 for fiscal years 1997 and 1998, and the six months ended
June 30, 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 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 $23,000 for 1997 and 1998 and the
six months ended June 30, 1998 and 1999 (unaudited), respectively.
Effective August 31, 1999, the parties reached an agreement whereby the
lease was terminated and the warrants described in Note 10 and the options
noted above were canceled. The effects of this transaction will
F-15
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Commitments (continued)
be recorded in the Company's third quarter and will in substance reverse the
amounts previously recorded in the consolidated financial statements.
In June 1999, the Company leased internet gateway telecommunications
equipment from a third party. Future minimum lease payments amount to $38,497
and $70,577 in 1999 and 2000, respectively. The capital lease has a 18 month
lease term and contains a bargain purchase option at the end of the lease term.
In July 1999, the Company entered into a revolving leasing agreement with a
third party. This agreement, which has a term of 36 months, provides the
Company with a $300,000 leasing facility to acquire Internet and Internet
related equipment. As of July 31, 1999, the Company had utilized $129,448 of
this facility. At the end of the lease term the equipment may be purchased at
the fair market value, or the lease can be renewed on an annual basis.
In conjunction with this agreement, the Company agreed to issue 30,000
warrants to purchase its common stock. These warrants have a five year term and
are exercisable at the initial public offering price, or $3.33 per share if a
public offering is not concluded prior to expiration of the warrants. The
Company will grant up to 30,000 warrants proportionate with the funding under
the $300,000 leasing facility. The fair value of the warrants will be
recognized as additional interest expense on the lease line of credit.
12. Joint Venture
In April 1999, the Company formed a joint venture with BDC, LLC, a Nevada
limited liability company owned by a director of the Company. The joint venture
was formed for the purpose of installing Internet gateway's in foreign
locations. The Company owns 60% of the joint venture. As a result, the accounts
of the joint venture have been consolidated since inception. Activity in this
joint venture has been minimal since formation and the Company has no funding
obligations to the joint venture.
13. 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 a 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-16
<PAGE>
[The back inside cover page contains a diagram composed of the following:]
[1. The background of the diagram consists of a picture of the globe with
clouds around it.]
[2. The following text appears in the upper right corner of the diagram:]
First Generation
[3. A sample of a page from WorldQuest's web site appears in the upper left
corner of the diagram showing sample virtual calling cards and rates for
calls from the U.S. to India and from the U.S. to Taiwan.]
[4. A sample of virtual calling cards and rates for calls from the U.S. to
India, the U.S. to China, the U.S. to U.S., the U.S. to Mexico and the U.S.
to Jamaica cascade from left to right down the center of the diagram.]
[5. A sample of a page from WorldQuest's web site depicting WorldQuest's Free
Internet Address Book appears in the lower left corner of the diagram.]
[6. The following text appears above the sample page from WorldQuest's web site
appearing in the lower left corner of the diagram:]
Next Generation
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 5
Forward Looking Statements............................................... 11
Use of Proceeds.......................................................... 11
Dividend Policy.......................................................... 11
Capitalization........................................................... 12
Dilution................................................................. 13
Selected Financial Data.................................................. 14
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 15
Business................................................................. 23
Management............................................................... 36
Certain Transactions..................................................... 40
Principal Stockholders................................................... 42
Description of Capital Stock............................................. 43
Shares Eligible for Future Sale.......................................... 46
Underwriting............................................................. 48
Legal Matters............................................................ 50
Independent Auditors..................................................... 50
Where You Can Get More Information....................................... 50
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[Logo of WorldQuest Networks appears here]
2,400,000 Shares
Common Stock
---------------
PROSPECTUS
, 1999
---------------
Joint Book-Running Managers
Ladenburg Thalmann & Co. Inc.
Kaufman Bros., L.P.
---------------
John G. Kinnard and Company Incorporated
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................ $ 10,450
NASD filing fee.................................................... 4,260
Nasdaq National Market listing fee................................. 66,875
Underwriters' nonaccountable expense allowance..................... 528,000
Printing and engraving expenses.................................... 100,000
Accounting fees and expenses....................................... 175,000
Legal fees and expenses............................................ 130,000
Fees and expenses (including legal fees) for qualifications under
state securities laws............................................. 10,000
Transfer agent and registrar's fees and expenses................... 10,000
Miscellaneous expenses............................................. 50,000
----------
Total.......................................................... $1,084,585
==========
</TABLE>
ITEM 26. Recent Sales of Unregistered Securities
Set forth in the table below are the dates, the number of securities sold
and the total offering price of such securities sold by the Registrant within
the past three years. Unless otherwise indicated, all securities were sold to
the purchasers directly by the Registrant, and therefore, no underwriting
discounts or commissions were involved.
<TABLE>
<CAPTION>
Total
Date of Number of offering
Title of securities sold purchase shares price($)
------------------------ ------------- -------------- ----------
<S> <C> <C> <C>
Common Stock........................... October 1996 10,000(/1/) $ 501,000
Promissory Note........................ December 1996 (/2/) 2,500,000
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
Common Stock Warrant................... August 1999 30,000(/5/)
Common Stock Option.................... August 1999 30,000(/5/)
</TABLE>
II-1
<PAGE>
- --------
(1) This common stock and the dividend was issued to Eagle Venture Capital,
LLC, 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. This Common
Stock Purchase Warrant was cancelled in August 1999 by mutual agreement
with the warrant holder in connection with a mutually agreed upon
termination of the equipment lease.
(4) These shares of common stock were sold to ten private accredited investors
during May 1999.
(5) The warrant was granted to the lessor under an equipment lease and the
option was granted to a telephone carrier as part of the modification of an
agreement for telephone call transmission and termination.
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 the
representatives of the underwriters, including form of
Representative's Warrant.
4.4* Amended and Restated Note dated August 15, 1999 payable to Eagle
Capital Venture, LLC, which replaces the Amended and Restated Note
filed as Exhibit 4.2.
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.
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., which was terminated by mutual agreement in August 1999.
10.6* Equipment lease between InterVoice, Inc. and Registrant, which was
terminated by mutual agreement in August 1999.
10.7* Amendment and Clarification Agreement dated September 27, 1999 between
WorldQuest Communications, Inc., WorldQuest Networks, Inc. and Eagle
Venture Capital, LLC amending and clarifying the Stock Transfer
Agreement filed as Exhibit 10.4.
21.1** List of Subsidiaries
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>
- --------
* Previously filed
** Filed herewith
II-2
<PAGE>
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 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 Amendment
No. 4 to the registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas
on October 25, 1999.
WORLDQUEST NETWORKS, INC.
/s/ B. Michael Adler
By: _________________________________
B. Michael Adler, Chairman of
the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the registration statement has been signed by the following persons in
the capacity indicated on October 25, 1999.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ B. Michael Adler Director and Chief Executive October 25, 1999
____________________________________ Officer (Principal
B. Michael Adler Executive Officer)
/s/ Michael R. Lanham Director October 25, 1999
____________________________________
Michael R. Lanham
/s/ Hugh E. Humphrey, Jr.* Director October 25, 1999
____________________________________
Hugh E. Humphrey, Jr.
/s/ E. Denton Jones* Director October 25, 1999
____________________________________
E. Denton Jones
/s/ Mark C. Levy Chief Financial Officer October 25, 1999
____________________________________ (Principal Financial and
Mark C. Levy Accounting Officer)
</TABLE>
/s/ Michael R. Lanham
*By: __________________________
Michael R. Lanham
Attorney-In-Fact
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 the
representatives of the underwriters, including form of
Representative's Warrant.
4.4* Amended and Restated Note dated August 15, 1999 payable to Eagle
Capital Venture, LLC, which replaces the Amended and Restated Note
filed as Exhibit 4.2.
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., which was terminated by mutual agreement in August 1999.
10.6* Equipment lease between InterVoice, Inc. and Registrant, which was
terminated by mutual agreement in August 1999.
10.7* Amendment and Clarification Agreement dated September 27, 1999 between
WorldQuest Communications, Inc., WorldQuest Networks, Inc. and Eagle
Venture Capital, LLC amending and clarifying the Stock Transfer
Agreement filed as Exhibit 10.4.
21.1** List of subsidiaries.
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>
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* Previously filed
** Filed herewith
<PAGE>
EXHIBIT 1.1
2,400,000 Shares
WORLDQUEST NETWORKS, INC.
Common Stock, $.01 par value
UNDERWRITING AGREEMENT
----------------------
____________, 1999
LADENBURG THALMANN & CO., INC.
KAUFMAN BROS., L.P.
JOHN G. KINNARD AND COMPANY, INCORPORATED
EBI SECURITIES CORPORATION
As Representatives of the Several Underwriters
named in Schedule A hereto
c/o Ladenburg Thalmann & Co., Inc.
590 Madison Avenue
New York, New York 10022
Dear Sirs:
1. Introductory. WorldQuest Networks, Inc., a Delaware corporation (the
------------
"Company"), proposes to sell, pursuant to the terms of this Agreement, to the
several underwriters named in Schedule A hereto (the "Underwriters," or, each,
an "Underwriter"), an aggregate of 2,400,000 shares of common stock, $.01 par
value (the "Common Stock"), of the Company. The aggregate of 2,400,000 shares
so proposed to be sold is hereinafter referred to as the "Firm Stock." The
Company also proposes to sell to the Underwriters, upon the terms and conditions
set forth in Section 3 hereof, up to an additional 360,000 shares of Common
Stock (the "Option Stock"). The Firm Stock and the Option Stock are hereinafter
collectively referred to as the "Stock" and the Stock and Representatives'
Warrant (as defined in Section 13 herein) and the shares of Common Stock
issuable pursuant to the exercise of the Representatives' Warrant are herein
collectively referred to as the "Securities." Ladenburg Thalmann & Co., Inc.
("Ladenburg"), and Kaufman Bros., L.P. ("Kaufman Bros.") are acting as joint
back-running managers and John G. Kinnard and Company, Incorporated and EBI
Securities Corporation are acting as co-managers, collectively, the joint back-
running managers and the co-managers are acting as representatives of the
several Underwriters and in such capacity are hereinafter referred to as the
"Representatives."
2. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement on Form SB-2 (File No. 333-82721) in the
form in which it became or becomes effective and also in such form as it may be
when any post-effective amendment thereto shall become effective with respect to
the Securities, including any pre-effective prospectuses included as part of the
registration statement as originally filed or as
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part of any amendment or supplement thereto, or filed pursuant to Rule 424 under
the Securities Act of 1933, as amended (the "Securities Act"), and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder, copies of which have heretofore been
delivered to you, has been carefully prepared by the Company in conformity with
the requirements of the Securities Act and has been filed with the Commission
under the Securities Act; one or more amendments to such registration statement,
including in each case an amended pre-effective prospectus, copies of which
amendments have heretofore been delivered to you, have been so prepared and
filed. Such registration statement is referred to hereinafter as the
"Registration Statement." If it is contemplated, at the time this Agreement is
executed, that a post-effective amendment to the Registration Statement will be
filed and must be declared effective before the offering of the Stock may
commence, the term "Registration Statement" as used in this Agreement means the
Registration Statement as amended by said post-effective amendment. The term
"Registration Statement" as used in this Agreement shall also include any
registration statement relating to the Stock that is filed pursuant to Rule
462(b) under the Securities Act. The term "Prospectus" as used in this Agreement
means the prospectus in the form included in the Registration Statement, or, (A)
if the prospectus included in the Registration Statement omits information in
reliance on Rule 430A under the Securities Act and such information is included
in a prospectus filed with the Commission pursuant to Rule 424(b) under the
Securities Act, the term "Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration Statement as supplemented by
the addition of the Rule 430A information contained in the prospectus filed with
the Commission pursuant to Rule 424(b) and (B) if prospectuses that meet the
requirements of Section 10(a) of the Securities Act are delivered pursuant to
Rule 434 under the Securities Act, then (i) the term "Prospectus" as used in
this Agreement means the "Prospectus subject to completion" (as such term is
defined in Rule 434(g) under the Securities Act) as supplemented by (a) the
addition of Rule 430A information or other information contained in the form of
prospectus delivered pursuant to Rule 434(b)(2) under the Securities Act or (b)
the information contained in the term sheets described in Rule 434(b)(3) under
the Securities Act, and (ii) the date of such prospectuses shall be deemed to be
the date of the term sheets. The term "Pre-effective Prospectus" as used in this
Agreement means the prospectus subject to completion in the form included in the
Registration Statement at the time of the initial filing of the Registration
Statement with the Commission, and as such prospectus shall have been amended
from time to time prior to the date of the Prospectus.
(b) The Commission has not issued or threatened to issue any order
preventing or suspending the use of any Pre-effective Prospectus, and, at its
date of issue, each Pre-effective Prospectus conformed in all material respects
with the requirements of the Securities Act and did not include any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, not misleading; and,
when the Registration Statement becomes effective and at all times subsequent
thereto up to and including the Closing Dates (as hereinafter defined), the
Registration Statement and the Prospectus and any amendments or supplements
thereto contained and will contain all material statements and information
required to be included therein by the Securities Act and conformed and will
conform in all materials respects to the requirements of the Securities Act and
neither the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, included or will include any untrue statement of a material
fact or omit to state any material fact required to be stated therein, in light
of the circumstances under which they were
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made in the case of the Prospectus, or necessary to make the statements therein
not misleading, provided, however, that the foregoing representations,
warranties and agreement shall not apply to information contained in or omitted
from any Pre-effective Prospectus or the Registration Statement or the
Prospectus or any such amendment or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by or on behalf of
any Underwriter, directly or through you, specifically for use in the
preparation thereof; and each Pre-effective Prospectus and Prospectus delivered
to the Underwriters for use in connection with the offering of the Stock will,
at the time of such delivery, be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T under the Securities Act. There is no franchise,
lease, agreement or document required to be described in the Registration
Statement or Prospectus or to be filed as an exhibit to the Registration
Statement which is not described or filed therein as required; and all
descriptions of any such franchises, leases, contracts, agreements or documents
contained in the Registration Statement are accurate and complete descriptions
of such documents in all material respects.
(c) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as set forth or
contemplated in the Prospectus, the Company has not incurred any liabilities or
obligations, direct or contingent, nor entered into any transactions not in the
ordinary course of business, and there has not been any material adverse change
in the condition (financial or otherwise), properties, business, management,
prospects, net worth or results of operations of the Company, individually or in
the aggregate (a "Material Adverse Effect"), or any change in the capital stock,
short-term or long-term debt of the Company.
(d) The audited consolidated financial statements of the Company
(which include the consolidated accounts of each of ___________, [the Costa
Rican corporation] and BDC, LLC (the "Subsidiaries"), in each case together with
related notes and schedules, as set forth in the Registration Statement and/or
any Pre-Effective Prospectus as applicable, present fairly the financial
position and the results of operations and cash flows of the Company and the
Subsidiaries on a consolidated basis, at the indicated dates and for the
indicated periods. Such financial statements and related schedules have been
prepared in accordance with generally accepted principles of accounting,
consistently applied throughout the periods involved, except as disclosed
therein, and all adjustments necessary for a fair presentation of results for
such periods have been made. The summary historical and statistical data
included in the Registration Statement present fairly the information shown
therein and such data have been compiled on a basis consistent with the
financial statements presented therein and the books and records of the Company
and the Subsidiaries. The selected financial information included under the
captions "Capitalization" and "Selected Financial Data" in the Prospectus
presents fairly the information shown therein and has been compiled on a basis
consistent with that of the audited consolidated financial statements of the
Company and the Subsidiaries. No other financial statements or schedules of the
Company or the Subsidiaries are required by the Securities Act or the Rules and
Regulations to be included in the Registration Statement or Prospectus. None of
the Company or any of the Subsidiaries is currently planning any probable
acquisition for which disclosure of pro forma financial information would be
required by the Securities Act.
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<PAGE>
(e) Ernst & Young LLP, who have expressed their opinions on the
audited financial statements included in the Registration Statement and the
Prospectus are independent public accountants as required by the Securities Act
and the Rules and Regulations.
(f) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware with full
corporate power and authority to own, lease and operate its properties and
conduct its business as described in the Prospectus. Each of the Subsidiaries
has been duly incorporated and is validly existing as a corporation or limited
liability company, as applicable, in good standing under the laws of the
jurisdiction of its incorporation, with full corporate or limited liability
company power and authority to own, lease and operate its properties and conduct
its business as described in the Prospectus. As of the Effective Date, the
outstanding capital stock of each of the Subsidiaries, as set forth in the
Prospectus, is owned by the Company, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest; and no preemptive
right, co-sale right, registration right, right of first refusal or other
similar right of stockholders exists with respect to any shares of any of the
Subsidiaries. The Company and each of the Subsidiaries is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a Material Adverse Effect, and
to the knowledge of the Company, no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification. The Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than the Subsidiaries. Neither of the Subsidiaries owns or controls,
direct or indirect, any corporation, association or other entity. None of the
stockholders of the Company immediately prior to the Effective Date owns or
controls, directly or indirectly, any interest in any corporation, association
or other entity (other than the Company and the Subsidiaries) engaged in the
business conducted by, or related to the business conducted by, the Company or
the Subsidiaries. Except as described in the Registration Statement and the
Prospectus, the Company is not engaged in any discussions or party to any
agreement or understanding, written or oral, regarding the acquisition of, or of
an interest in, any corporation, firm, partnership, joint venture, association
or other entity.
(g) All outstanding shares of capital stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable, have
been issued in compliance with all federal and sate securities laws, were not
issued in violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities, and the authorized and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" and conforms in all material respects to the statements
relating thereto contained in the Registration Statement and the Prospectus (and
such statements correctly state the substance of the instruments defining the
capitalization of the Company); the Firm Stock and the Option Stock to be
purchased from the Company hereunder have been duly and validly authorized for
issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company against payment therefor in accordance with
the terms of this Agreement, will be duly authorized and validly issued and
fully paid and nonassessable, and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of stockholders exists with respect to any shares of the
Firm Stock or Option Stock
4
<PAGE>
to be purchased from the Company hereunder or the issuance and sale thereof. The
certificates evidencing the Stock are in valid and proper legal form. The
Representatives' Warrant will be exercisable for shares of Common Stock of the
Company in accordance with the terms of the Representatives' Warrant and at the
price therein provided for. The shares of Common Stock issuable upon the
exercise of the Representatives' Warrant have been duly authorized and reserved
for issuance upon such exercise, and such shares, when issued upon such exercise
in accordance with the terms of the Representatives' Warrant and when the
exercise price is paid, shall be fully paid and non-assessable. No further
approval or authorization of any stockholder, the Board of Directors of the
Company or others is required for the issuance and sale of the Securities except
as may be required under state or other securities or blue sky laws. Except as
disclosed in the Prospectus and the audited consolidated financial statements of
the Company and the related notes thereto, included in the Prospectus, the
Company does not have outstanding any options to purchase, or any preemptive
rights or other rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible securities
or obligations. The description of the Company's 1997 Stock Option Plan (the
"Option Plan"), and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents the
information required to be shown with respect to the Option Plan and the options
granted thereunder. The description of the Securities set forth in the
Prospectus accurately and fairly presents the information required to be shown
with respect thereto.
(h) All the issued and outstanding capital stock of each of the
Subsidiaries has been duly authorized and validly issued and is fully paid and
nonassessable, and was not issued in violation of or subject to any preemptive
right, or other rights to subscribe for or purchase any securities or
obligations convertible into, or any contracts or commitments to issue or sell,
shares of its capital stock or any such options, rights, convertible securities
or obligations, and is owned of record and beneficially, as of the date hereof,
and will be owned of record and beneficially at or prior to the closing of the
issuance of the Firm Stock, by the Company free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest; and no preemptive
right, co-sale right, registration right, right of first refusal or other
similar right of stockholders exists with respect to any shares of the
Subsidiaries. There are no outstanding rights, warrants or options to acquire,
or instruments convertible into or exchangeable for, any shares of capital stock
or other equity interest in any of the Subsidiaries. Except as described in the
Registration Statement and the Prospectus or as may be restricted by the terms
and provisions of any credit or loan facility to which the Company or any of the
Subsidiaries is a party and which is described in the Registration Statement and
the Prospectus, or by relevant state law with respect to the need for sufficient
surplus, none of the Subsidiaries is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on its capital stock, or from transferring any of the property or
assets of any such Subsidiary to the Company.
(i) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of the Subsidiaries
is a party or of which any property of the Company or any Subsidiary is subject,
which, if determined adversely to the Company or any such Subsidiary, might
individually or in the aggregate (i) prevent or adversely affect the
transactions contemplated by this Agreement and the Representatives' Warrant,
(ii) suspend the effectiveness of the Registration Statement, (iii) prevent or
suspend the use of the Pre-effective Prospectus in any jurisdiction or (iv)
result in a Material Adverse Effect; and to the
5
<PAGE>
best of the Company's knowledge no such proceedings are threatened against the
Company or any Subsidiary by governmental authorities or others. Neither the
Company nor any Subsidiary is a party or subject to the provisions of any
material injunction, judgment, decree or order of any court, regulatory body or
other governmental agency or body.
(j) The execution, delivery and performance of this Agreement and the
Representatives' Warrant and the consummation of the transactions herein and
therein contemplated will not result (with or without due notice or lapse of
time or both) in the creation of any lien or in a breach or violation of or
constitute a default under any of the terms or provisions of, or give rise to
any right of termination, cancellation or acceleration under (i) any material
indenture, license, mortgage, deed of trust, note agreement or other agreement
or instrument to which the Company or any of the Subsidiaries is a party or by
which it or any of them or any of their properties is or may be bound, (ii) the
charter, by-laws or other organizational documents of the Company, or any of the
Subsidiaries or (iii) any law, statute, order, rule or regulation of any court
or governmental agency or body having jurisdiction over the Company or any of
the Subsidiaries or any of their properties.
(k) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company
and/or any of the Subsidiaries of the transactions contemplated by this
Agreement and the Representatives' Warrant, except such as may be required by
the National Association of Securities Dealers, Inc. (the "NASD") or under the
securities or blue sky laws of any jurisdiction in connection with the purchase
and distribution of the Stock by the Underwriters.
(l) The Company has the full corporate power and authority to enter
into this Agreement and the Representatives' Warrant and to perform its
obligations hereunder and thereunder (including to issue, sell and deliver the
Securities), and this Agreement and the Representatives' Warrant have been duly
and validly authorized, executed and delivered by the Company and are the valid
and binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except to the extent that rights to
indemnify and contribution hereunder and thereunder may be limited by federal or
state securities laws or the public policy underlying such laws or by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles.
(m) The Company and each of the Subsidiaries possesses all
authorizations, approvals, orders, licenses, certificates, franchises and
permits of and from, and have made all declarations and filings with, all
regulatory or governmental officials, bodies and tribunals ("Permits") to own,
lease or operate their respective properties and to conduct their respective
businesses described in the Registration Statement and the Prospectus, except
where the failure to have obtained or made the same would not have a Material
Adverse Effect and neither the Company nor any of the Subsidiaries has received
any notice of proceedings relating to the revocation or modification of any such
Permits.
(n) The Company and each of the Subsidiaries owns, and/or possesses
adequate rights to use, free and clear of all liens, charges, encumbrances,
pledges, security
6
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interests or defects, all patents, trademarks, service marks, logos, trade
names, trade secrets, know how, copyrights, proprietary technology and licenses,
and rights with respect to the foregoing (collectively, "Intellectual
Property"), used in the conduct of their respective businesses as described in
the Registration Statement and the Prospectus, and none of the Intellectual
Property presently owned, held or used by the Company or any of the Subsidiaries
infringes or conflicts with any Intellectual Property of any other person or
entity or are in dispute, and neither the Company nor any Subsidiaries has
received a notice, or knows of any basis, of any infringement of or conflict
with the asserted rights of others in any such respect.
(o) The Company and each of the Subsidiaries owns and has the right to
use all other trade secrets, know-how (including all other unpatented and/or
unpatentable proprietary or confidential information, systems or procedures),
inventions, designs, processes, works or authorship, computer programs and
technical data and information that are material to its business, properties and
operations.
(p) The Company and each of the Subsidiaries is in compliance with,
and conducts its business in conformity with, all applicable federal, state,
local and foreign laws, rules and regulations of each court or governmental
agency or body having jurisdiction over the Company or any of the Subsidiaries,
except where the failure to be in compliance would not have a Material Adverse
Effect; to the knowledge of the Company, otherwise than as set forth in the
Registration Statement and the Prospectus, no prospective change in any of such
federal or state laws, rules or regulations has been adopted which, when made
effective, would have a Material Adverse Effect.
(q) The Company and each of the Subsidiaries is in compliance with all
federal, state, local or foreign laws or regulations relating to pollution or
protection of human health or the environment ("Environmental Laws"), except
where the failure to be in compliance would not have a Material Adverse Effect.
Neither the Company nor any of the Subsidiaries has authorized, conducted or
generated, transported, stored, used, treated, disposed or released any
hazardous substance, hazardous waste, hazardous material, hazardous constituent,
toxic substance, pollutant, contaminant, petroleum product, natural gas,
liquified gas or synthetic gas, defined or regulated under any Environmental Law
on, in or under any property currently leased or owned or by any means
controlled by the Company or any of the Subsidiaries (the "Real Property") in
violation of any applicable law, except for any violation which would not have a
Material Adverse Effect; there is no pending or, to the Company's knowledge,
threatened claim, action litigation or any administrative agency proceeding
involving the Company, any of the Subsidiaries or their respective properties,
nor has the Company or any of the Subsidiaries received any written notice, or
any oral notice to any executive officer of the Company or any other employee
responsible for receipt of any such notice, from any governmental entity and
third party, that (A) alleges a violation of any Environmental Laws by the
Company or any of the Subsidiaries or any person or entity whose liability for a
violation of an Environmental Law the Company or any of the Subsidiaries has
retained or assumed either contractually or by operation of law, which liability
or violation could be reasonably expected to have a Material Adverse Effect, (B)
alleges the Company or any of the Subsidiaries is a liable party under the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
(S) 9601 et seq., or any state superfund law, (C) alleges possible contamination
of the environment by the Company or any of the Subsidiaries or (D) alleges
possible contamination of the Real Property.
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(r) The Company and each of the Subsidiaries has filed all necessary
federal, state, local and foreign income, payroll, franchise and other tax
returns and has paid all taxes shown as due thereon or with respect to any of
its properties, and there is no tax deficiency that has been, or to the
knowledge of the Company is likely to be, asserted against the Company or any of
the Subsidiaries or any of their respective properties or assets and all tax
liabilities are adequately provided for on the books of the Company and each of
the Subsidiaries.
(s) Neither the Company nor any of its officers, directors or
affiliates has taken or will take, directly or indirectly, any action designed
or intended to stabilize or manipulate the price of any security of the Company,
or which caused or resulted in, or which might in the future reasonably be
expected to cause or result in, stabilization or manipulation of the price of
any security of the Company.
(t) Neither the Company nor any of the Subsidiaries is in violation of
its respective charter or by-laws. The Company and each of the Subsidiaries has
performed all obligations required to be performed by the Company or any such
Subsidiary under any material license, indenture, mortgage, deed of trust, note
agreement or other agreement or instrument to which it is a party or by which it
is or any of its properties may be bound, and neither the Company nor any of the
Subsidiaries, nor to the knowledge of the Company or any Subsidiary, any other
party to such material license, indenture, mortgage, deed of trust, note
agreement or other agreement or instrument is in default under or in breach of
any such obligations. Neither the Company nor any of the Subsidiaries has
received or sent any notice of such default or breach.
(u) Neither the Company nor any of the Subsidiaries is involved in any
labor dispute nor, to their knowledge, is any such dispute threatened. Neither
the Company nor any of the Subsidiaries is aware that (A) any executive, key
employee or significant group of employees of the Company or any Subsidiary
plans to terminate employment with the Company or any such Subsidiary or (B) any
such executive or key employee is subject to any noncompete, nondisclosure,
confidentiality, employment, consulting or similar agreement that would be
violated by the present or proposed business activities of the Company or any of
the Subsidiaries. Neither the Company nor any Subsidiary has or expects to have
any liability for any prohibited transaction or funding deficiency or any
complete or partial withdrawal liability with respect to any pension, profit
sharing or other plan which is subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), to which the Company or any
Subsidiary makes or ever has made a contribution and in which any employee of
the Company or any Subsidiary is or has ever been a participant. With respect
to such plans, the Company and each Subsidiary is in compliance in all material
respects with all applicable provisions of ERISA.
(v) The Company has obtained the written agreement described in
Section 8(h) of this Agreement from each of its officers, directors, director
designees and holders of Common Stock listed on Schedule B hereto.
(w) Neither the Company nor the Subsidiaries own any real property,
and subject to the qualifications stated in the Prospectus, and as of the
Closing Dates, each of the Company and the Subsidiaries will have, good and
marketable title to all properties and assets free and clear of all liens,
encumbrances and defects except such as are described in the
8
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Prospectus or such as would not have a Material Adverse Effect; and any real
property and buildings held under lease by the Company or any of the
Subsidiaries are as of the Closing Dates, held by them under valid, subsisting
and enforceable leases with such exceptions as would not have a Material Adverse
Effect, in each case except as described in the Prospectus. All personal
property used by the Company and each of the Subsidiaries in their business is
either owned or leased by the Company or the Subsidiaries and is in good working
order and condition, ordinary wear and tear excepted.
(x) The Company and each Subsidiary is insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as is customary in the businesses in which it is engaged or proposes to
engage after giving effect to the transactions described in the Prospectus; and
neither the Company nor any Subsidiary has any reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue their business at a cost that would not have a Material Adverse
Effect.
(y) Other than as contemplated by this Agreement, the Registration
Statement or the Prospectus, there is no broker, finder or other party that is
entitled to receive from the Company any brokerage or finder's fee or other fee
or commission as a result of any of the transactions contemplated by this
Agreement.
(z) The Company and each of the Subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(aa) The Company shall, upon the initial filing of the Registration
Statement, make all filings required to obtain approval for the inclusion of the
Shares for quotation on the Nasdaq National Market and will use its best efforts
to effect concurrently with the effectiveness of the Registration Statement and
maintain the aforesaid approval for at least five (5) years from the date of
this Agreement. Within ten (10) days after the Effective Date, the Company
shall cause the Company to be listed in the Moody's OTC Industrial Manual and
cause such listing to be maintained for five years from the date of this
Agreement.
(bb) To the Company's knowledge, neither the Company nor any of the
Subsidiaries nor any employee or agent of the Company or any of the Subsidiaries
has made any payment of funds of the Company or any of the Subsidiaries or
received or retained any funds in violation of any law, rule or regulation,
which payment, receipt or retention of funds is of a character required to be
disclosed in the Prospectus.
(cc) Neither the Company nor any of the Subsidiaries is an "investment
company," or an entity "controlled" by an "investment company" required to be
registered under
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the Investment Company Act of 1940, as amended (the "1940 Act"), as such terms
are defined in the 1940 Act, and neither the Company nor any of the Subsidiaries
expects to be treated as such by reason of the receipt and application of the
net proceeds from the sale of the Stock.
(dd) The Stock has been duly approved for quotation on the Nasdaq
National Market, subject to notice of effectiveness.
(ee) No holder of any security of the Company has the right to have
any security owned by such holder included in the Registration Statement and,
except as described in the Registration Statement and the Prospectus, no holder
of any security of the Company has the right to demand registration of any
security owned by such holder during the period ending 12 months after the date
of the Prospectus.
(ff) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters pursuant to this
Agreement shall be deemed to be a representation and warranty by the Company as
to the matters covered thereby.
(gg) The Company has appointed at least two independent directors to
the Company's Board of Directors who have no material business relationship or
family relationship with the Company or any other director or officer thereof,
and which independent directors constitute at least half of the members of the
Company's Compensation Committee and Audit Committee. The Company has provided
to the Representatives the charter of the Audit Committee or resolutions
establishing such committee, which provides, among other things, for the Audit
Committee to approve in advance transactions between the Company and any of its
affiliates.
(hh) To the Company's knowledge, there are no affiliations or
associations between any member of the National Association of Securities
Dealers, Inc. ("NASD") and any of the Company's officers, directors or 5% or
greater securityholders, except as set forth in the Registration Statement.
(ii) The execution and delivery of the Agreement and Plan of Merger
dated as of September 15, 1999 (the "Merger Agreement") between World Quest
Networks, Inc., a Texas corporation (the "Texas Corporation"), and the Company,
effecting the reincorporation of the Texas Corporation under the laws of the
State of Delaware, was duly authorized by all necessary corporate action on the
part of each of the Texas Corporation and the Company. Each of the Texas
Corporation and the Company had all corporate power and authority to execute and
deliver the Merger Agreement, to file the Merger Agreement with the Secretary of
State of Texas and the Secretary of State of Delaware and to consummate the
reincorporation contemplated by the Merger Agreement, and the Merger Agreement
at the time of execution and filing constituted a valid and binding obligation
of each of the Texas Corporation and the Company, enforceable in accordance with
its terms and except as the enforcement hereof may be limited by applicable
bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally, or by general equitable principles.
(jj) To the extent necessary to comply with the regulation of Internet
telecommunications services providers and telecommunications carriers, the
Company has all
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necessary material consents, authorizations, approvals, orders, certificates and
permits of and from, and have made all declarations and filings with, all United
States federal and state and foreign authorities (the "Authorizations") to own,
lease, license and use their properties and assets and to conduct their business
in the manner described in the Prospectus, except as described in the
Prospectus, and all material agreements or arrangements of the Company comply
with all applicable United States federal and state and foreign laws. The
Company is not aware of any breach, violation or default with respect to such
Authorizations.
(kk) Solely with respect to matters specifically relating to the
regulation of Internet telecommunications services providers and
telecommunications carriers administered by United States federal or state or
foreign governmental authorities, including, but not limited to, the Federal
Communications Commission (the "FCC") and state public utility commissions or
similar state authorities (collectively, "PUCs" and, individually, a "PUC"), the
execution and delivery by the Company of, and the performance by the Company of
its obligations under, this Agreement will not contravene any provision of
applicable law or any judgment, order or decree of any governmental body,
agency, or court having jurisdiction over the Company or any subsidiary, and no
consent, approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the Company of
its obligations under this Agreement.
3. Purchase by, and Sale and Delivery to, Underwriters-Closing Dates.
-----------------------------------------------------------------
The Company agrees to sell to the Underwriters the Firm Stock, and on the basis
of the representations, warranties, covenants and agreements herein contained,
but subject to the terms and conditions herein set forth, the Underwriters
agree, severally and not jointly, to purchase the Firm Stock from the Company,
the number of shares of Firm Stock to be purchased by each Underwriter being set
opposite its name in Schedule A, subject to adjustment in accordance with
Section 12 hereof.
The purchase price per share to be paid by the Underwriters to the Company
will be $________ per share (the "Purchase Price").
The Company will deliver the Firm Stock, to the Representatives for the
respective accounts of the several Underwriters (in the form of definitive
certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company given at or prior
to 12:00 Noon, New York City time, on the second full business day preceding the
First Closing Date (as defined below) or, if no such direction is received, in
the names of the respective Underwriters or in such other names as Ladenburg may
designate (solely for the purpose of administrative convenience) and in such
denominations as Ladenburg may determine), against payment of the aggregate
Purchase Price therefor by wire transfer of same-day funds to an account
specified by the Company in writing at least two (2) business days prior to the
First Closing Date, all at the offices of Freshman, Marantz, Orlanski, Cooper &
Klein, 9100 Wilshire Boulevard, Suite 800-E, Beverly Hills, California 90212 or
such other place as the parties may designate. The time and date of the
delivery and closing shall be at 10:00 A.M., New York City time, on , 1999,
in accordance with Rule 15c6-1 of the Exchange Act. The time and date of such
payment and delivery are herein referred to as the "First Closing Date." The
First Closing Date and the location of delivery of, and the form of payment for,
the Firm
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Stock may be varied by agreement between the Company, and the Representatives.
The First Closing Date may be postponed pursuant to the provisions of Section
12.
The Company shall make the certificates for the Stock available to the
Representatives for examination on behalf of the Underwriters not later than
10:00 A.M., New York City time, on the business day preceding the First Closing
Date at the offices of Ladenburg, 590 Madison Avenue New York, New York, 10021.
It is understood that either of the Representatives, individually and not
as a Representative of the several Underwriters, may (but shall not be obligated
to) make payment to the Company on behalf of any Underwriter or Underwriters,
for the Stock to be purchased by such Underwriter or Underwriters. Any such
payment by any one of the Representatives shall not relieve such Underwriter or
Underwriters from any of its or their other obligations hereunder.
The several Underwriters agree to make an initial public offering of the
Firm Stock at the initial public offering price set forth on the cover page of
the Prospectus as soon after the effectiveness of the Registration Statement as
in their judgment is advisable. The Representatives shall promptly advise the
Company of the making of the initial public offering.
For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the Prospectus, the
Company hereby grants to the Underwriters an option to purchase, severally and
not jointly, an aggregate of up to 360,000 shares of Common Stock. The price
per share to be paid for the Option Stock shall be the Purchase Price. The
option granted hereby may be exercised as to all or any part of the Option Stock
at any time, and from time to time, not more than forty-five (45) days
subsequent to the effective date of this Agreement. No Option Stock shall be
sold and delivered unless the Firm Stock previously has been, or simultaneously
is, sold and delivered. The right to purchase the Option Stock or any portion
thereof may be surrendered and terminated at any time upon notice by the
Underwriters to the Company.
The option granted hereby may be exercised by the Underwriters by giving
written notice from the Representatives to the Company setting forth the number
of the Option Stock to be purchased by them and the date and time for delivery
of and payment for the Option Stock. Each date and time for delivery of and
payment for the Option Stock (which may be the First Closing Date, but not
earlier) is herein called the "Option Closing Date") and shall in no event be
earlier than two (2) business days nor later than ten (10) business days after
written notice is given. (The Option Closing Date and the First Closing Date are
herein called the "Closing Dates.") Option Stock shall be purchased for the
account of each Underwriter in the same proportion as the number of shares of
Firm Stock set forth opposite such Underwriter's name in Schedule A hereto bears
to the total number of shares of Firm Stock (subject to adjustment by the
Underwriters to eliminate odd lots). Upon exercise of the option by the
Underwriters, the Company agrees to sell to the Underwriters the number of
shares of Option Stock set forth in the written notice of exercise and the
Underwriters agree, severally and not jointly and subject to the terms and
conditions herein set forth, to purchase the number of such shares as determined
as aforesaid.
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The Company will deliver the Option Stock to the Underwriters (in the form
of definitive certificates, issued in such names and in such denominations as
the Representatives may direct by notice in writing to the Company given at or
prior to 12:00 Noon, New York City time, on the second full business day
preceding the Option Closing Date or, if no such direction is received, in the
names of the respective Underwriters or in such other names as Ladenburg and
Kaufman Bros. may designate (solely for the purpose of administrative
convenience) and in such denominations as Ladenburg and Kaufman Bros. may
determine), against payment of the aggregate Purchase Price therefor by wire
transfer of same day funds to an account specified by the Company in writing at
least two (2) business days prior to the Option Closing Date, all at the offices
of Freshman, Marantz, Orlanski, Cooper & Klein, 9100 Wilshire Boulevard, Suite
800-E, Beverly Hills, California 90212. The Option Closing Date and the
location of delivery of, and the form of payment for, the Option Stock may be
varied by agreement among the Company and the Representatives. The Option
Closing Date may be postponed pursuant to the provisions of Section 12.
4. Covenants and Agreements of the Company. The Company covenants and
---------------------------------------
agrees with the several Underwriters that:
(a) The Company will (i) if the Company and the Representatives have
determined not to proceed pursuant to Rule 430A, use its best efforts to cause
the Registration Statement to become effective, (ii) if the Company and the
Representatives have determined to proceed pursuant to Rule 430A, use its best
efforts to comply with the provisions of and make all requisite filings with the
Commission pursuant to Rule 430A and Rule 424 of the Rules and Regulations and
(iii) if the Company and the Representatives have determined to deliver
Prospectuses pursuant to Rule 434 of the Rules and Regulations, to use its best
efforts to comply with all the applicable provisions thereof. The Company will
advise the Representatives promptly as to the time at which the Registration
Statement becomes effective, will advise the Representatives promptly of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the institution of any proceedings for that
purpose, and will use its best efforts to prevent the issuance of any such stop
order and to obtain as soon as possible the lifting thereof, if issued. The
Company will advise the Representatives promptly of the receipt of any comments
of the Commission or any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for additional
information and will not at any time file any amendment to the Registration
Statement or supplement to the Prospectus which shall not previously have been
submitted to the Representatives a reasonable time prior to the proposed filing
thereof or to which the Representatives shall reasonably object in writing or
which is not in compliance with the Securities Act and the Rules and
Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon the request of the Representatives, any amendments or supplements to the
Registration Statement or the Prospectus which in the opinion of the
Representatives may be necessary to enable the several Underwriters to continue
the distribution of the Stock and will use its best efforts to cause the same to
become effective as promptly as possible.
(c) If at any time after the effective date of the Registration
Statement when a prospectus relating to the Stock is required to be delivered
under the Securities Act any event
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relating to or affecting the Company or any of the Subsidiaries occurs as a
result of which the Prospectus or any other prospectus as then in effect would
include an untrue statement of a material fact, or omit to state any material
fact necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading, or if it is necessary at any time to
amend the Prospectus to comply with the Securities Act, the Company will
promptly notify the Representatives thereof and will prepare an amended or
supplemented prospectus which will correct such statement or omission; and in
case any Underwriter is required to deliver a prospectus relating to the Stock
nine (9) months or more after the effective date of the Registration Statement,
the Company upon the request of the Representatives and at the expense of such
Underwriter will prepare promptly such prospectus or prospectuses as may be
necessary to permit compliance with the requirements of Section 10(a)(3) of the
Securities Act.
(d) The Company will deliver to the Representatives, at or before the
Closing Dates, signed copies of the Registration Statement, as originally filed
with the Commission, and all amendments thereto including all financial
statements and exhibits thereto, and will deliver to the Representatives such
number of copies of the Registration Statement, including such financial
statements but without exhibits, and all amendments thereto, as the
Representatives may reasonably request. The Company will deliver or mail to or
upon the order of the Representatives, from time to time until the effective
date of the Registration Statement, as many copies of the Pre-effective
Prospectus as the Representatives may reasonably request. The Company will
deliver or mail to or upon the order of the Representatives on the date of the
initial public offering, and thereafter from time to time during the period when
delivery of a prospectus relating to the Stock is required under the Securities
Act, as many copies of the Prospectus, in final form or as thereafter amended or
supplemented as the Representatives may reasonably request; provided, however,
that the expense of the preparation and delivery of any prospectus required for
use nine (9) months or more after the effective date of the Registration
Statement shall be borne by the Underwriters required to deliver such
prospectus.
(e) Company will make generally available to its stockholders as soon
as practicable, but not later than fifteen (15) months after the effective date
of the Registration Statement, an earnings statement which will be in reasonable
detail (but which need not be audited) and which will comply with Section 11(a)
of the Securities Act, covering a period of at least twelve (12) months
beginning after the "effective date" (as defined in Rule 158 under the
Securities Act) of the Registration Statement.
(f) The company will cooperate with the Representatives to enable the
Stock to be registered or qualified for offering and sale by the Underwriters
and by dealers under the securities laws of such jurisdictions as the
Representatives may reasonably designate and at the request of the
Representatives will make such applications and furnish such consents to service
of process or other documents as may be required of it as the issuer of the
Stock for that purpose; provided, however, that the Company shall not be
required to qualify to do business in any such jurisdiction where it is not now
so subject. The Company will, from time to time, prepare and file such
statements and reports as are or may be required of it as the issuer of the
Stock to continue such qualifications in effect for so long a period as the
Representatives may reasonably request for the distribution of the Stock. The
Company will advise the Representatives promptly after the Company becomes aware
of the suspension of the qualifications or registration of (or any such
exception relating to) the Common Stock of the Company for offering, sale or
trading
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<PAGE>
in any jurisdiction or of any initiation or threat of any proceeding for any
such purpose, and in the event of the issuance of any orders suspending such
qualifications, registration or exception, the Company will, with the
cooperation of the Representatives use its best efforts to obtain the withdrawal
thereof.
(g) The Company will furnish to its stockholders annual reports
containing financial statements certified by independent public accountants and
with quarterly summary financial information in reasonable detail which may be
audited. During the period of five (5) years from the date hereof, the Company
will deliver to the Representatives, as soon as they are available, copies of
each annual report of the Company containing the balance sheet of the Company as
of the close of such fiscal year and statements of income, stockholders' equity
and cash flows for the year then ended and the opinion thereon of the Company's
independent public accountants and each other report or communication furnished
by the Company to its stockholders and will deliver to the Representatives, (i)
as soon as they are available, copies of any other reports or communication
(financial or other) which the Company shall publish or otherwise make available
to any of its stockholders as such and (ii) as soon as they are available,
copies of any reports and financial statements furnished to or filed with the
Commission, or the NASD or any national securities exchange. So long as the
Company has active subsidiaries, such financial statements will be on a
consolidated basis to the extent the accounts of the Company and its
subsidiaries are consolidated in reports furnished to its stockholders
generally. Separate financial statements shall be furnished for all
subsidiaries whose accounts are not consolidated but which at the time are
significant subsidiaries as defined in the Rules and Regulations.
(h) The Company will use its best efforts to qualify for inclusion,
subject to notice of effectiveness on the Nasdaq National Market, the Stock to
be issued and sold by the Company.
(i) The Company will maintain a transfer agent and registrar for its
Common Stock.
(j) The Company will not, without the prior written consent of
Ladenburg and Kaufman Bros., offer, sell, assign, transfer, encumber, contract
to sell, grant an option to purchase or otherwise dispose of any of Common Stock
or securities convertible into or exercisable or exchangeable for Common Stock
during the 180 days following the date of the Prospectus, other than: (i) the
Company's sale of Common Stock hereunder, (ii) upon the exercise of stock
options granted or issued prior to the date hereof and as described in the
Registration Statement and (iii) the gram of stock options pursuant to the
Option Pan.
(k) The Company will apply the net proceeds from the sale of the Stock
as set forth in the description under "Use of Proceeds" in the Prospectus, which
description complies in all respects with the requirements of Item 504 of
Regulation S-B.
(1) The Company will supply you with copies of all correspondence to
and from, and all documents issued to and by, the Commission in connection with
the registration of the Stock under the Securities Act.
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(m) Prior to the Closing Dates the Company will furnish to you, as
soon as they have been prepared, copies of any unaudited interim consolidated
financial statements of the Company and each of the Subsidiaries for any periods
subsequent to the periods covered by the financial statements appearing in the
Registration Statement and the Prospectus.
(n) Prior to the Closing Dates the Company will issue no press release
or other communications directly or indirectly and hold no press conference with
respect to the Company or any of the Subsidiaries, the financial condition,
results of operation, business, prospects, assets or liabilities of any of them,
or the offering of the Stock, without your prior written consent.
(o) The Company will not at any time, directly or indirectly, take any
action designed or intended to stabilize or manipulate the price of any security
of the Company, or which caused or resulted in, or which might in the future
reasonably be expected to cause or result in, stabilization or manipulation of
the price of any security of the Company.
(p) Until the expiration of one year from the effective date of the
Offering contemplated hereby, the Company shall not grant any options, warrant
or other convertible securities or stock purchase rights, pursuant to the Option
Plan or otherwise, at an exercise or conversion price below the then applicable
fair market value of the security issuable upon exercise or conversion thereof.
(q) The Company will reserve and keep available that maximum number of
its authorized but unissued securities which are issuable upon exercise of the
Representatives' Warrant outstanding from time to time.
(r) The Company shall deliver to you, at the Company's expense, three
(3) bound volumes in form and content acceptable to you, containing the
Registration Statement and all exhibits filed therewith, and all amendments
thereto, and all other material correspondence, filings, certificates and other
documents filed and/or delivered in connection with this offering. The Company
shall use its best efforts to deliver such volumes within six (6) months of the
First Closing Date.
5. Payment of Expenses. Whether or not this Agreement becomes effective
-------------------
or the sale of the Stock to the Underwriters is consummated, (a) (1) the Company
will pay (directly or by reimbursement) all costs, fees and expenses incurred in
connection with expenses incident to the performance of its obligations under
this Agreement and in connection with the transactions contemplated hereby,
including but not limited to (i) all expenses and taxes incident to the issuance
and delivery of the Stock to the Representatives; (ii) all expenses incident to
the registration of the Stock under the Securities Act; (iii) the costs of
preparing stock certificates (including printing and engraving costs); (iv) all
fees and expenses of the registrar and transfer agent of the Stock; (v) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Stock to the Underwriters; (vi) fees and expenses of the
Company's counsel and the Company's independent accountants; (vii) all costs and
expenses incurred in connection with the preparation, printing, filing, shipping
and distribution of the Registration Statement, each Pre-effective Prospectus
and the Prospectus (including all exhibits and financial statements) and all
amendments and supplements provided for herein, the "Agreement Among
Underwriters" between the Representatives and the Underwriters, the Selling
Agreements, the
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<PAGE>
Underwriters' Questionnaire and the Blue Sky memoranda, if any, and this
Agreement; (viii) all filing fees, attorneys' fees and expenses incurred by the
Company or the Underwriters in connection with exemptions from the qualifying or
registering (or obtaining qualification or registration of) all or any part of
the Stock for offer and sale and determination of its eligibility for investment
under the Blue Sky or other securities laws of such jurisdictions as the
Representatives may designate and all fees and expenses, including attorneys'
fees, paid or incurred in connection with filings made with the NASD; (ix) all
fees and expenses in connection with qualifying the Stock for inclusion on the
Nasdaq National Market and (x) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section 5.
(2) In addition to the foregoing expenses, the Company shall at the
First Closing Date pay to you the balance of a non-accountable expense allowance
of 2.0% of the gross proceeds of the offering, of which a portion has been paid.
In the event the over-allotment option is exercised in part or in full, the
Company shall pay to you at the Option Closing Date an additional amount equal
to 2.0% of the gross proceeds received upon exercise of the overallotment
option.
(b) In addition to its other obligations under Section 6(a) hereof,
the Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
(i) any statement or omission or any alleged statement or omission or (ii) any
breach or inaccuracy in its representations and warranties, it will reimburse
each Underwriter on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse each Underwriter for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, each Underwriter shall promptly return
it to the Company together with interest, determined on the basis of the prime
rate (or other commercial lending rate for borrowers of the highest credit
standing) announced from time to time by Citibank, NA, New York, New York (the
"Prime Rate"). Any such interim reimbursement payments which are not made to an
Underwriter in a timely manner as provided below shall bear interest at the
Prime Rate from the due date for such reimbursement. This expense reimbursement
agreement will be in addition to any other liability which the Company may
otherwise have. The request for reimbursement will be sent to the Company.
(c) In addition to its other obligations under Section 6(b) hereof,
each Underwriter severally agrees that, as an interim measure during the
pendency of any claim, action, investigation, inquiry or other proceeding
arising out of or based upon any statement or omission, or any alleged statement
or omission, described in Section 6(c) hereof which relates to written
information furnished to the Company by the Representatives on behalf of the
Underwriters specifically for inclusion in the Registration Statement and the
Prospectus, it will reimburse the Company (and, to the extent applicable, each
officer, director or controlling person) on a quarterly basis for all reasonable
legal or other expenses incurred in connection with investigating or defending
any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of
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the Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director or controlling person) for such expenses and
the possibility that such payments might later be held to have been improper by
a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company (and, to the
extent applicable, each officer, director or controlling person) shall promptly
return it to the Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the Company within thirty (30) days of a request
for reimbursement shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which
such Underwriter may otherwise have.
(d) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in paragraph (b) and/or (c) of
this Section 5, including the amounts of any requested reimbursement payments
and the method of determining amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in paragraph (b) and/or (c) of
this Section 5 and would not resolve the ultimate propriety or enforceability of
the obligation to reimburse expenses which is created by the provisions of
Section 6.
6. Indemnification and Contribution. (a) The Company agrees to indemnify
--------------------------------
and hold harmless each Underwriter and each person, if any, who controls such
Underwriter within the meaning of the Securities Act and the respective
officers, directors, partners, employees, representatives and agents of each of
such Underwriter (collectively, the "Underwriter Indemnified Parties" and, each,
an "Underwriter Indemnified Party"), against any losses, claims, damages,
liabilities or expenses (including the reasonable cost of investigating and
defending against any claims therefor and counsel fees incurred in connection
therewith), joint or several, which may be based upon the Securities Act, or any
other statute or at common law, on the ground that any Pre-effective Prospectus,
the Registration Statement or the Prospectus (or any Pre-effective Prospectus,
the Registration Statement or the Prospectus as from time to time amended or
supplemented) includes or allegedly includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading; provided, however, that such
indemnity shall not inure to the benefit of any Underwriter (or any person
controlling such) on account of any losses, claims, damages, liabilities or
expenses arising from the sale of the Stock to any person by such Underwriter
(i) if such untrue statement or omission or alleged untrue statement or omission
was made in any Pre-effective Prospectus, the Registration Statement or the
Prospectus, or such amendment or supplement, in reliance upon and in conformity
with information furnished in writing to the Company by the Representatives on
behalf of any Underwriter specifically for use therein or (ii) as to any Pre-
effective Prospectus, with respect to any Underwriter, to the extent that any
such loss, claim, damage, liability or expense of such Underwriter results from
an untrue statement of a material fact contained in, or
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the omission of a material fact from, such Pre-effective Prospectus, which
untrue statement or omission was corrected in the Prospectus, if such
Underwriter sold Stock to the person alleging such loss, claim, damage or
liability without sending or giving, at or prior to the written confirmation of
such sale, a copy of the Prospectus, unless such failure resulted from the
failure of the Company to deliver copies of the Prospectus to such Underwriter
on a timely basis to permit such sending or giving. The Company will be entitled
to participate at its own expense in the defense or, if it so elects, to assume
the defense of any suit brought to enforce any such liability, but if the
Company elects to assume the defense, such defense shall be conducted by counsel
chosen by it. In the event the Company elects to assume the defense of any such
suit and retain such counsel, any Underwriter Indemnified Parties, defendant or
defendants in the suit, may retain additional counsel but shall bear the fees
and expenses of such counsel unless (i) the Company shall have specifically
authorized the retaining of such counsel or (ii) the parties to such suit
include any such Underwriter Indemnified Parties, and the Company and such
Underwriter Indemnified Parties at law or in equity have been advised by counsel
to the Underwriters that one or more legal defenses may be available to it or
them which may not be available to the Company, in which case the Company shall
not be entitled to assume the defense of such suit notwithstanding its
obligation to bear the fees and expenses of such counsel. This indemnity
agreement is not exclusive and will be in addition to any liability which the
Company might otherwise have and shall not limit any rights or remedies which
may otherwise be available at law or in equity to each Underwriter Indemnified
Party. The Company agrees that the statements with respect to the price and
underwriting discount set forth on the cover page of the Prospectus, and the
table of Underwriters, the paragraph regarding price and underwriting discount,
the paragraph regarding the amounts of the selling concession and reallowance
and the paragraphs regarding stabilization all set forth under the caption
"Underwriting" in the Prospectus and the identity of counsel to the Underwriters
under the heading "Legal Matters," constitute the only information provided in
writing by the Representatives on behalf of any Underwriter expressly for use in
the Registration Statement or the Prospectus.
(b) Each Underwriter severally and not jointly agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Securities Act (collectively, the "Company
Indemnified Parties") against any losses, claims, damages, liabilities or
expenses (including, unless the Underwriter or Underwriters elect to assume the
defense, the reasonable cost of investigating and defending against any claims
therefor and counsel fees incurred in connection therewith), joint or several,
which arise out of or are based in whole or in part upon the Securities Act, the
Exchange Act or any other federal, state, local or foreign statute or
regulation, or at common law, on the ground or alleged ground that any Pre-
effective Prospectus, the Registration Statement or the Prospectus (or any Pre-
effective Prospectus, the Registration Statement or the Prospectus, as from time
to time amended and supplemented) includes an untrue statement of a material
fact or omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
in which they were made, not misleading, but only insofar as any such statement
or omission was made in reliance upon, and in conformity with, written
information furnished to the Company by such Underwriter, directly or through
the Representatives, specifically for use in the preparation thereof; provided,
however, that in no case is such Underwriter to be liable with respect to any
claims made against any Company Indemnified Party against whom the action is
brought unless such Company Indemnified Party shall have notified such
Underwriter in writing
19
<PAGE>
within a reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon the Company
Indemnified Party, but failure to notify such Underwriter of such claim shall
not relieve it from any liability which it may have to any Company Indemnified
Party otherwise than an account of its indemnity agreement contained in this
paragraph. Such Underwriter shall be entitled to participate at its own expense
in the defense, or, if it so elects, to assume the defense of any suit brought
to enforce any such liability, but, if such Underwriter elects to assume the
defense, such defense shall be conducted by counsel chosen by it. In the event
that any Underwriter elects to assume the defense of any such suit and retain
such counsel, the Company Indemnified Parties and any other Underwriter or
Underwriters or controlling person to persons, defendant or defendants in the
suit, shall bear the fees and expenses of any additional counsel retained by
them, respectively. The Underwriter against whom indemnity may be sought shall
not be liable to indemnify any person for any settlement of any such claim
effected without such Underwriter's consent. This indemnity agreement is not
exclusive and will be in addition to any liability which such Underwriter might
otherwise have and shall not limit any rights or remedies which may otherwise be
available at law or in equity to any Company Indemnified Party.
(c) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred to herein, then
each indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Stock. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall contribute to such amount
paid or payable by such indemnified party in such proportion as is appropriate
to reflect not only such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company
and the Underwriters agree that it would not be just and equitable if
contribution were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
referred to above shall be deemed to include any legal or other expenses
reasonably incurred by each indemnified party in connection with investigating,
defending, settling or compromising any such claim. Notwithstanding the
provisions of this subsection (c), no Underwriter shall be required to
20
<PAGE>
contribute any amount in excess of the amount by which the total price at which
the shares of the Stock underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. The Underwriters' obligations to
contribute are several in proportion to their respective underwriting
obligations and not joint. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
7. Survival of Indemnities, Representations, Warranties, etc. The
----------------------------------------------------------
respective indemnities, covenants, agreements, representations, warranties and
other statements of the Company and the several Underwriters, as set forth in
this Agreement or made by them respectively, pursuant to this Agreement, shall
remain in full force and effect, regardless of any investigation made by or on
behalf of any Underwriter, the Company or any of its officers or directors or
any controlling person, and shall survive delivery of and payment for the Stock.
8. Conditions of Underwriters' Obligations. The respective obligations
---------------------------------------
of the several Underwriters hereunder shall be subject to the accuracy, at and
(except as otherwise stated herein) as of the date hereof and at and as of the
Closing Dates, of the representations and warranties made herein by the Company,
to compliance at and as of the Closing Dates by the Company with its covenants
and agreements herein contained and other provisions hereof to be satisfied at
or prior to the Closing Dates, and to the following additional conditions:
(a) The Registration Statement shall have become effective and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings for that purpose shall have been initiated or, to the knowledge
of the Company or the Representatives, shall be threatened by the
Commission, and any request for additional information on the part of the
Commission (to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the reasonable satisfaction
of the Representatives. Any filings of the Prospectus, or any supplement
thereto, required pursuant to Rule 424(b) or Rule 434 of the Rules and
Regulations, shall have been made in the manner and within the time period
required by Rule 424(b) and Rule 434 of the Rules and Regulations, as the
case may be.
(b) The Representatives shall have been satisfied that there shall not
have occurred any change, on a consolidated basis, prior to the Closing
Dates in the condition (financial or otherwise), properties, business,
management, prospects, net worth or results of operations of the Company
and the Subsidiaries, or any change in the capital stock, short-term or
long-term debt of the Company and the Subsidiaries, taken as a whole, such
that (i) the Registration Statement or the Prospectus, or any amendment or
supplement thereto, contains an untrue statement of fact which is material,
or omits to state a fact which is required to be stated therein or is
necessary to make the statements therein not misleading, or (ii) it is
impracticable in the reasonable judgment of the Representatives to proceed
with the public offering or purchase the Stock as contemplated hereby.
(c) At the time of execution of this Agreement and at each of the
Closing Dates, Ernst & Young LLP shall have furnished to the Underwriters a
letter or letters,
21
<PAGE>
dated, respectively, the date of execution of this Agreement and each of
the Closing Dates, confirming that they are independent certified public
accountants with respect to the Company and each of the Subsidiaries within
the meaning of the Securities Act and the applicable published Rules and
Regulations thereunder and stating that in their opinion the financial
statements and schedules examined by them and included in the Registration
Statement comply in form in all material respects with the applicable
accounting requirements of the Securities Act and the related published
Rules and Regulations; and containing such other statements and information
as is ordinarily included in accountants' "comfort letters" to Underwriters
with respect to the financial statements and certain financial and
statistical information contained in the Registration Statement and
Prospectus. and based upon the procedures described in such letter
delivered to you concurrently with the execution of this Agreement (herein
called the "Comfort Letter"), but carried out to a date not more than five
(5) business days prior to the First Closing Date or such later date on
which the Option Stock is to be purchased, as the case may be, (i)
confirming, to the extent true, that the statements and conclusions set
forth in the Comfort Letter are accurate as of the First Closing Date or
such later date on which Option Stock is to be purchased, as the case may
be, and (ii) setting forth any revisions and additions to the statements
and conclusions set forth in the Comfort Letter which are necessary to
reflect any changes in the facts described in the Comfort Letter since the
date of such letter, or to reflect the availability of more recent
financial statements, data or information. The letter shall not contain any
disclosure relating to any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the
Company or any of the Subsidiaries from that set forth in the Registration
Statement or Prospectus, which, in your sole judgment, is material and
adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Stock as
contemplated by the Prospectus. The Comfort Letter shall be addressed to or
for the use of the Underwriters in form and substance satisfactory to the
Representatives and their counsel.
(d) The Representatives shall have received from Glast, Phillips &
Murray, counsel for the Company, an opinion, dated each of the Effective
Date and the Closing Dates, to the effect set forth in Exhibit I hereto.
(e) The Representatives shall have received from Thompson & Howison,
LLP special intellectual property counsel for the Company, an opinion,
dated each of the Effective Date and the Closing Dates, to the effect set
forth in Exhibit II hereto.
(f) The Representatives shall have received from Kelley, Drye & Warren
LLP, special regulatory counsel for the Company, an opinion dated each of
the Effective Date and the Closing Dates, to the effect set forth in
Exhibit III hereto.
(g) All corporate proceedings and other legal matters relating to this
Agreement, the Registration Statement, the Prospectus, and other related
matters shall be reasonably satisfactory to or approved by Freshman,
Marantz, Orlanski, Cooper & Klein, counsel to the Underwriters, and the
Representatives shall have received form Freshman, Marantz, Orlanski,
Cooper & Klein, their opinion or opinions dated the Closing Dates with
respect to the incorporation of the Company, the validity of the Stock, the
22
<PAGE>
Registration Statement and the Prospectus and such other related matters as
it may reasonably request, and the Company shall have furnished to such
counsel such documents as they may reasonably request for the purpose of
enabling them to pass upon such matters. In rendering such opinion,
Freshman, Marantz, Orlanski, Cooper & Klein may rely as to all matters
governed other than by the law of California or federal laws on the opinion
of counsel referred to in paragraph (d) of this Section 8.
(h) The Representatives shall have received a certificate, dated the
Closing Dates, of the chief executive officer or the President and the
chief financial officer of the Company to the effect that:
(i) No stop order suspending the effectiveness of the
Registration Statement has been issued, and, to the best of the
knowledge of the signers, no proceedings for that purpose have been
instituted or are pending or contemplated under the Securities Act;
(ii) Neither any Pre-effective Prospectus, as of its date, nor
the Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, as of the time when the Registration Statement
became effective and at all times subsequent thereto up to the
delivery of such certificate, included any untrue statement of a
material fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading;
(iii) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
and except as set forth or contemplated in the Prospectus, neither the
Company nor any of the Subsidiaries has incurred any material
liabilities or obligations, direct or contingent, nor entered into any
material transactions not in the ordinary course of business and there
has not been any material adverse change in the condition (financial
or otherwise), properties, business, management, prospects, net worth
or results of operations of the Company and the Subsidiaries, or any
change in the capital stock, short-term or long-term debt of the
Company and any of the Subsidiaries;
(iv) The representations and warranties of the Company in this
Agreement are true and correct at and as of the Closing Dates, and the
Company has complied with all the agreements and performed or
satisfied all the conditions on its part to be performed or satisfied
at or prior to the Closing Dates;
(v) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus, and except as
disclosed in or contemplated by the Prospectus, (i) there has not been
any material adverse change or a development involving a material
adverse change in the condition (financial or otherwise), properties,
business, management, prospects, net worth or results of operations of
the Company and the Subsidiaries considered as a whole; (ii) the
business and operations conducted by the Company and the Subsidiaries
have not sustained a loss by strike, fire, flood, accident or other
calamity (whether
23
<PAGE>
or not insured) of such a character as to interfere materially with
the conduct of the business and operations of the Company and the
Subsidiaries considered as a whole; (iii) no legal or governmental
action, suit or proceeding is pending or, to the knowledge of the
Company, threatened against the Company or any of the Subsidiaries
which is material to the Company and the Subsidiaries considered as a
whole, whether or not arising from transactions in the ordinary course
of business, or which may materially and adversely affect the
transactions contemplated by this Agreement; (iv) since such dates and
except as so disclosed, the Company has not incurred any material
liability or obligation, direct, contingent or indirect, made any
change in its capital stock (except pursuant to its stock plans), made
any material change in its short-term or funded debt or repurchased or
otherwise acquired any of the Company's capital stock; and (v) the
Company has not declared or paid any dividend, or made any other
distribution, upon its outstanding capital stock payable to
stockholders of record on a date prior to the Closing Date.
(i) The Company shall have furnished to the Representatives such
additional certificates as the Representatives may have reasonably
requested as to the accuracy, at and as of the Closing Dates, of the
representations and warranties made herein by it and as to compliance at
and as of the Closing Dates by it with its covenants and agreements herein
contained and other provisions hereof to be satisfied at or prior to the
Closing Dates, and as to satisfaction of the other conditions to the
obligations of the Underwriters hereunder.
(j) Ladenburg and Kaufman Bros. shall have received the written
agreements of the officers, directors, director nominees of the Company and
the holders of securities of the Company listed in Schedule B that each
will not offer, sell assign, transfer, encumber, contract to sell, grant an
option to purchase or otherwise dispose of, any shares of Common Stock
(including, without limitation, Common Stock which may be deemed to be
beneficially owned by such officer, director, director nominee or holder in
accordance with the Rules and Regulations) or securities into or
exercisable or exchangeable for Common Stock during the 180 days following
the date of the Prospectus.
(k) The Nasdaq National Market shall have approved the Stock for
inclusion, subject only to notice of effectiveness.
(l) All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are satisfactory in
form and substance to the Representatives. The Company will furnish to the
Representatives conformed copies of such opinions, certificates, letters
and other documents as the Representatives shall reasonably request. If
any of the conditions hereinabove provided for in this Section 8 shall not
have been satisfied when and as required by this Agreement, this Agreement
may be terminated by the Representatives by notifying the Company of such
termination in writing or by telegram at or prior to the Closing Dates, but
Ladenburg shall be entitled to waive any of such conditions.
24
<PAGE>
(m) the Representatives shall have received such additional opinions
of counsel as shall be reasonably satisfactory to the Representatives in
their sole discretion.
9. Effective Date. This Agreement shall become effective immediately as
--------------
to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16, 17, 18, 19 and 20 and, as to all
other provisions, at 11:00 A.M. New York City time on the first full business
day following the effectiveness of the Registration Statement or at such earlier
time after the Registration Statement becomes effective as the Representatives
may determine on and by notice to the Company or by release of any of the Stock
for sale to the public. For the purposes of this Section 9, the Stock shall be
deemed to have been so released upon the release for publication of any
newspaper advertisement relating to the Stock or upon the release by you of
telegrams (i) advising Underwriters that the shares of Stock are released for
public offering or (ii) offering the Stock for sale to securities dealers,
whichever may occur first.
10. Termination. This Agreement (except for the provisions of Section 5)
-----------
may be terminated by the Company at any time before it becomes effective in
accordance with Section 9 by notice to the Representatives and may be terminated
by the Representatives at any time before it becomes effective in accordance
with Section 9 by notice to the Company. In the event of any termination of
this Agreement under this or any other provision of this Agreement, there shall
be no liability of any party to this Agreement to any other party, other than as
provided in Sections 5, 6 and 11 and other than as provided in Section 12 as to
the liability of defaulting Underwriters.
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if at or prior to any First Closing
Date trading in securities on any of the New York Stock Exchange, American Stock
Exchange or Nasdaq National Market shall have been suspended or minimum or
maximum prices shall have been established and are then currently in effect on
any such exchange or market, or a banking moratorium shall have been declared by
New York or United States authorities; (ii) trading of any securities of the
Company shall have been suspended on any exchange or in any over-the-counter
market; (iii) if at or prior to any Closing Date there shall have been (A) an
outbreak or escalation of hostilities between the United States and any foreign
power or of any other insurrection or armed conflict involving the United States
or (B) any change in financial markets or any calamity or crisis which, in the
reasonable judgment of the Representatives, makes it impractical or inadvisable
to offer or sell the Firm Stock on the terms contemplated by the Prospectus;
(iv) if there shall have been any development or prospective development or
prospective development involving particularly the business or properties or
securities of the Company or any of the Subsidiaries or the transactions
contemplated by this Agreement which, in the judgment of the Representatives,
makes it impracticable or inadvisable to offer or deliver the Firm Stock on the
terms contemplated by the Prospectus; (v) if there shall be any litigation or
proceeding, pending or threatened, which, in the reasonable judgment of the
Representatives, makes it impracticable or inadvisable to offer or deliver the
Firm Stock on the terms contemplated by the Prospectus; or (vi) if there shall
have occurred any of the events specified in the immediately preceding clauses
(i) - (v) together with any other such event that makes it, in the reasonable
judgment of the Representatives, impractical or inadvisable to offer or deliver
the Firm Stock on the terms contemplated by the Prospectus.
11. Reimbursement of Underwriters. Notwithstanding any other provisions
-----------------------------
hereof, if this Agreement shall not become effective by reason of any election
of the Company pursuant to
25
<PAGE>
the first paragraph of Section 10 or shall be terminated by the Representatives
under Section 8 or Section 10, the Company will bear and pay the expenses
specified in Section 5 hereof and, in addition to its obligations pursuant to
Section 6 hereof, the Company will reimburse the reasonable out-of-pocket
expenses of the several Underwriters (including reasonable fees and
disbursements of counsel for the Underwriters) incurred in connection with this
Agreement and the proposed purchase of the Stock, and promptly upon demand the
Company will pay such amounts to you as Representatives. However, in no way
shall said out-of-pocket expenses and counsel fees exceed an aggregate of
$175,000 less $60,000 previously paid to EBI Securities Corporation.
12. Substitution of Underwriters. If on the First Closing Date or the
----------------------------
Option Closing Date, as the case may be, any Underwriter or Underwriters shall
default in its or their obligations to purchase shares of Stock hereunder
(otherwise than by reason of default on the part of the Company, you, as
Representatives of the Underwriters, shall use your reasonable efforts to
procure within 48 hours thereafter one or more of the other Underwriters, or any
others, to purchase from the Company such amounts as may be agreed upon and upon
the terms set forth herein, the shares of Stock which the defaulting Underwriter
or Underwriters failed to purchase. If during such 48 hours you, as such
Representatives, shall not have procured such other Underwriters, or any others,
to purchase the shares of Stock agreed to be purchased by the defaulting
Underwriter or Underwriters, then (a) if the aggregate number of shares which
such defaulting Underwriter or Underwriters agreed but failed to purchase does
not exceed ten percent (10%) of the total number of shares underwritten, the
other Underwriters shall be obligated severally, in proportion to their
respective commitments hereunder, to purchase the shares of Stock which such
defaulting Underwriter or Underwriters agreed but failed to purchase, or (b) if
the aggregate number of shares of Stock with respect to which such default or
defaults occur is more than ten percent (10%) of the total number of shares
underwritten, the Company or you, as the Representatives of the Underwriters,
will have the right, by written notice given within the next 48-hour period to
the parties to this Agreement, to terminate this Agreement without liability on
the part of the non-defaulting Underwriters or the Company.
If the remaining Underwriters or substituted Underwriters are required
hereby or agree to take up all or part of the shares of Stock of a defaulting
Underwriter or Underwriters as provided in this Section 12, (i) the Company
shall have the right to postpone the Closing Dates for a period of not more than
five (5) full business days in order that the Company may effect whatever
changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement or supplements to
the Prospectus which may thereby be made necessary, and (ii) the respective
numbers of shares to be purchased by the remaining Underwriters or substituted
Underwriters shall be taken as the basis of their underwriting obligation for
all purposes of this Agreement. Nothing herein contained shall relieve any
defaulting Underwriter of its liability to the Company or the other Underwriters
for damages occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 12 shall be without liability on the part of
any non-defaulting Underwriter or the Company, except for expenses to be paid or
reimbursed pursuant to Section 5 and except for the provisions of Section 6.
13. Representatives' Warrant.
------------------------
26
<PAGE>
On the First Closing Date, the Company will issue to you, for a
consideration of $240.00 and upon the terms and conditions set forth in the form
of Representatives' Warrant (the "Representatives' Warrant"), annexed as an
exhibit to the Registration Statement, the Representatives' Warrant to purchase
240,000 Shares. In the event of conflict in the terms of this Agreement and the
Representatives' Warrant, the language of the Representatives' Warrant shall
control.
14. Notices. All communications hereunder shall be in writing and, if
-------
sent to the Underwriters shall be mailed, delivered or telegraphed and confirmed
to you, as their Representatives c/o Ladenburg Thalmann & Co. Inc. at 590
Madison Avenue, New York, New York 10022, attention: Mr. Michael Bauer, except
that notices given to an Underwriter pursuant to Section 6 hereof shall be sent
to such Underwriter at the address furnished by the Representatives or, if sent
to the Company, shall be mailed, delivered or telegraphed and confirmed
WorldQuest Networks, Inc., 16990 Dallas Parkway, Suite 220, Dallas, Texas 75248,
Attention: Mr. B. Michael Adler.
15. Successors. This Agreement shall inure to the benefit of and be
----------
binding upon the several Underwriters, the Company and their respective
successors and legal representatives. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person other than the
persons mentioned in the proceeding sentence any legal or equitable right,
remedy or claim under or in respect of this Agreement, or any provisions herein
contained, this Agreement and all conditions and provisions hereof being
intended to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations, warranties,
covenants, agreements and indemnities of the Company contained in this Agreement
shall also be for the benefit of the person or persons, if any, who control any
Underwriter or Underwriters within the meaning of Section 15 or the Securities
Act or Section 20 of the Exchange Act, and the indemnities of the several
Underwriters shall also be for the benefit of each director of the Company, each
of its officers who has signed the Registration Statement and the person or
persons, if any, who control the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act.
16. Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the laws of the State of New York without giving effect to the
choice of law principles thereof.
17. Authority of the Representatives. In connection with this Agreement,
--------------------------------
you will act for and on behalf of the several Underwriters, and any action taken
under this Agreement by you, as Representatives, or individually as a
Representative, will be binding on all the Underwriters.
18. Partial Unenforceability. The invalidity or unenforceability of any
------------------------
section, paragraph or provisions of this Agreement shall not affect the validity
or enforceability of any other section, paragraph or provision hereof. If any
section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
27
<PAGE>
19. General. This Agreement constitutes the entire agreement of the
-------
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and the Representatives.
20. Counterparts. This Agreement may be signed in two or more
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
WORLDQUEST NETWORKS, INC.
By: ____________________________________________
Name: B. Michael Adler, Chairman of the
Board and Chief Executive Officer
Accepted and delivered in_______________
as of the date first above written.
LADENBURG THALMANN & CO., INC.
KAUFMAN BROS., L.P.
JOHN G. KINNARD AND COMPANY, INCORPORATED
EBI SECURITIES CORPORATION
Each acting on its own behalf and as a
Representative of the several Underwriters
referred to in the foregoing Agreement.
By: LADENBURG THALMANN & CO. INC.
By:__________________________________
Name: Michael Bauer
Title: Managing Director
28
<PAGE>
SCHEDULE A
Number of
Name Firm Stock to be Purchased
- ------------------------------------------- --------------------------
Ladenburg Thalmann & Co. Inc...............
Kaufman Bros. L.P..........................
John G. Kinnard and Company Incorporated..
EBI Securities Corporation.................
Total...................................... ________
2,400,000
==========================
29
<PAGE>
SCHEDULE B
List of Officers, Directors, and Stockholders
Subject to Lock Up Provision
30
<PAGE>
EXHIBIT I
Matters to be Covered in
------------------------
Opinion of Glast Phillips Murray, P.C., Counsel to the Company/1/
--------------------------------------------------------------
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware; each of
the Subsidiaries has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation.
2. The Company has all corporate power and authority necessary to own,
lease, operate or hold its properties and to conduct its business (including,
without limitation, as conducted through the Subsidiaries) as described in the
Prospectus and to enter into and perform its obligations under this Agreement
and the Representative's Warrant; each of the Subsidiaries has all corporate
power and authority necessary to own, lease, operate or hold its properties and
to conduct their respective businesses as described in the Prospectus;
3. The Company and each of the Subsidiaries is duly qualified or licensed
to do business and is in good standing as a foreign corporation in each
jurisdiction in which the ownership or leasing of its properties or the conduct
of its business require such qualification, except where failure to so qualify
will not have a Material Adverse Effect, each of such jurisdictions as set forth
on a Schedule to the opinion; to such counsel's knowledge, the Company does not
own or control, directly or indirectly, any corporation, association or other
entity other than the Subsidiaries and to such counsel's knowledge none of the
Subsidiaries owns or controls, directly or indirectly, any corporation,
association or other entity;
4. All of the authorized, issued and outstanding shares of capital stock
of the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein; all of the shares of the
Company's outstanding stock requiring authorization for issuance by the
Company's Board of Directors have been duly authorized and validly issued, are
fully paid and non-assessable and conform to the description thereof contained
in the Prospectus; have not been issued in violation of or subject to any
statutory pre-emptive right, and, to such counsel's knowledge, have not been
issued in violation of or subject to any contractual preemptive right, co-sale,
right, registration right, right of first refusal or other similar right and,
except as set forth in the Registration Statement, to such counsel's knowledge,
there are no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, any shares of capital stock or other
equity interest in the Company; all the issued and outstanding shares of capital
stock of each of the Subsidiaries are owned of record and beneficially by the
Company, free and clear of any security interests, liens, encumbrances, equities
or other claims and there are
- ---------------------
/1/ Capitalized Terms used herein but not defined shall have the meanings
given such terms in the Underwriting Agreement.
I-1
<PAGE>
no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, any shares of capital stock or other
equity interest in any of the Subsidiaries.
5. The Common Stock and the Representatives' Warrant conform in all
material respects to the descriptions thereof contained in the Prospectus; the
Stock to be issued as contemplated in the Registration Statement and the
Underwriting Agreement have been duly and validly authorized by the Company for
issuance, and the Company has full corporate power and authority to issue, sell
and deliver the Securities, and, when the Securities are issued and delivered
against payment therefor in accordance with the terms hereof, they will be fully
paid and nonassessable, and will not have been issued in violation of or subject
to any statutory preemptive right, or to such counsel's knowledge, any
contractual preemptive right, co-sale right, registration right, right of first
refusal or other similar right other than those contemplated by the
Representatives' Warrant; and there are no restrictions upon the voting or
transfer of, any of the Stock pursuant to the Certificate of Incorporation (as
hereinafter defined) or By-laws, or pursuant to any agreement or other
instrument of the Company known to such counsel.
6. The certificates evidencing the Stock are in valid and proper legal
form; the Representatives' Warrant will be exercisable for shares of Common
Stock of the company in accordance with the terms of the Representatives'
Warrant and at the price therein provided for; the shares of Common Stock of the
Company issuable upon exercise of the Representatives' Warrant have been duly
authorized and reserved for issuance upon such exercise, and such shares, when
issued upon such exercise in accordance with the terms of the Representatives'
Warrant and when the price is paid shall be fully paid and non-assessable;
7. To such counsel's knowledge, except as set forth in the Prospectus,
there are no legal or governmental proceedings pending to which the Company or
any of the Subsidiaries is a party or of which any property or assets of the
Company or any of the Subsidiaries is the subject which, if determined adversely
to the Company or any of the Subsidiaries, could have a Material Adverse Effect
or prevent or adversely affect the transactions contemplated by the Underwriting
Agreement; and, to such counsel's knowledge, no such proceedings are threatened
by governmental authorities or other third parties and there are no such
proceedings which are required to be described or referred to in the
Registration Statement which are not so described or referred to.
8. The Underwriting Agreement and the Representatives' Warrant have been
duly and validly authorized by all necessary corporate action on the part of the
Company and have been duly executed and delivered by the Company and, assuming
due authorization, execution and delivery of the Underwriting Agreement by you,
are valid and binding agreements of the parties; the Company has full corporate
power and authority to enter into the Underwriting Agreement and the
Representatives' Warrant.
9. The execution, delivery and performance of the Underwriting Agreement
and the Representatives' Warrant, and the incurrence of the obligations as
therein set forth and the consummation of the transactions therein contemplated
will not result, with or without due notice or lapse of time or both, in a
breach or violation of any of the terms or provisions of or constitute a default
under, or give rise to any right of termination, cancellation or acceleration
under, the Company's Certificate of Incorporation (the "Certificate of
Incorporation"), by-laws or other
I-2
<PAGE>
organizational documents of the Company or any of the Subsidiaries, or any
material indenture, mortgage, deed of trust, note agreement or other agreement
of instrument known to such counsel to which the Company or any of the
Subsidiaries is a party or by which it or any of them or any of their properties
is or may be bound and will not result in a breach or violation of any law,
statute, order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of the Subsidiaries or any of their
properties or result in the creation of a lien.
10. To such counsel's knowledge, neither the Company nor any of the
Subsidiaries is presently (a) in violation of their respective charter or by-
laws, or (b), to such counsel's knowledge, in breach or default under any lease,
instrument, license, permit or any other agreement to which the Company or any
of the Subsidiaries is bound or to which any property or assets of the Company
or any of the Subsidiaries is the subject, where the consequences of such
violation, breach or default would have a Material Adverse Effect;
11. No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company of
the transactions contemplated by the Underwriting Agreement or the
Representatives' Warrant (except such as may be required by the NASD or as
required by the securities or "Blue Sky" laws or any jurisdiction as to which
such counsel need express no opinion) in connection with the purchase and
distribution of the Stock by the Underwriters or the issuance of the
Representatives' Warrant or the shares of Common Stock underlying the
Representatives' Warrant except such as have been obtained or made, specifying
the same.
12. The Registration Statement has become effective under the Securities
Act and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceeding
for that purpose is pending or threatened by the Commission.
13. The Registration Statement and the Prospectus and any amendments or
supplements thereto (except for the financial statements and notes thereto and
related schedules and other financial information as to which such counsel need
express no opinion) comply as to form in all material respects with the
requirements of the Securities Act and the Rules and Regulations.
14. There are no contracts, agreements or other documents, known to such
counsel, required to be described in the Registration Statement or Prospectus or
to be filed as an exhibit to the Registration Statement which is not described
or filed therein as required. All descriptions of any such contracts,
agreements or documents contained in the Registration Statement are accurate and
complete descriptions of such documents in all material respects.
15. The statements in the Prospectus under the captions "1997 Stock Option
Plan," "Description of Capital Stock" and "Shares Eligible for Future Sale," to
the extent they constitute a summary of documents referred to therein or matters
of law accurately summarize and fairly present in all material respects the
legal and regulatory matters described therein.
I-3
<PAGE>
16. Neither the Company nor any of the Subsidiaries is nor will they be
after receipt of payment for the Stock, an "investment company," or an entity
"controlled" by an "investment company" required to be registered under the 1940
Act, as such terms are defined in the 1940 Act.
17. To such counsel's knowledge, except as set forth in the Registration
Statement and the Prospectus, no holder of any securities of the Company or any
other person has the right, contractual or otherwise, to cause the Company to
sell or otherwise issue to such person, or to permit such person to underwrite
the sale of, any of the Stock or the right to have any Common Stock or other
securities of the Company included in the Registration Statement or the right,
as a result of the filing of the Registration Statement, to require registration
under the Securities Act of any shares of Common Stock or other securities of
the Company that has not been waived or lapsed.
18. The Company and each of the Subsidiaries possesses all authorizations,
approvals, orders, licenses, certificates, franchises and permits of and from,
and have made all declarations and filings with, all regulatory or governmental
officials, bodies and tribunals ("Permits") to own, lease or operate their
respective properties and to conduct their respective businesses described in
the Registration Statement and the Prospectus, except where the failure to have
obtained or made the same would not have a Material Adverse Effect and to the
knowledge of such counsel neither the Company nor any of the Subsidiaries has
received any notice of proceedings relating to the revocation or modification of
any such Permits.
19. The Company and each of the Subsidiaries owns, and/or possesses
adequate rights to use, free and clear of all liens, charges, encumbrances,
pledges, security interests of defects, all patents, trademarks, service marks,
logos, trade names, trade secrets, know how, copyrights, proprietary technology
and licenses, and rights with respect to the foregoing (collectively,
"Intellectual Property"), used in the conduct of their respective businesses as
described in the Registration Statement and the Prospectus, and to the knowledge
of such counsel neither the Company nor any Subsidiary has received a notice, or
knows of any basis, of any infringement of or conflict with the asserted rights
of others in any such respect.
20. To the knowledge of such counsel the Company and each of the
Subsidiaries is in compliance with, and conducts its business in conformity
with, all applicable federal, state, local and foreign laws, rules and
regulations, of each court or governmental agency or boding having jurisdiction
over the Company or any of the Subsidiaries, except where the failure to be in
compliance would not have a Material Adverse Effect; to the knowledge of such
counsel, otherwise than as set forth in the Registration Statement and the
Prospectus, no prospective change in any of such federal or state laws, rules or
regulations has been adopted which, when made effective, would have a Material
Adverse Effect.
21. To the knowledge of such counsel, neither the Company nor any of the
Subsidiaries is in violation of its respective charter or by-laws. To the
knowledge of such counsel, the Company and each of the Subsidiaries has
performed all obligations required to be performed by the Company or any such
Subsidiary under any material license, indenture, mortgage, deed of trust, note
agreement or other agreement or instrument known to such counsel to which it is
a party or by which it is or any of its properties may be bound, and neither the
I-4
<PAGE>
Company nor any of the Subsidiaries, nor to the knowledge of such counsel, any
other party to such material license, indenture, mortgage, deed of trust, note
agreement or other agreement or instrument is in default under or in breach of
any such obligations. To the knowledge of such counsel, neither the Company nor
any of the Subsidiaries has received or sent any notice of such default or
breach.
22. The Stock has been duly approved for quotation on the Nasdaq National
Market, subject to notice of effectiveness.
In addition to the matters set forth above, such opinion shall also include a
statement to the effect that nothing has come to the attention of such counsel
which leads them to believe that (i) the Registration Statement or any amendment
thereto, as of the time it became effective under the Securities Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Securities Act), contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, or (ii) that the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the First Closing Date or the Option Closing
Date, as the case may be, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading (except that such counsel need express no view as
to financial statements and notes thereto and schedules or other financial or
statistical information therein). With respect to such statement, such counsel
may state that their belief is based upon the procedures set forth therein, but
is without independent check and verification.
I-5
<PAGE>
EXHIBIT II
Matters to be Covered in
------------------------
Opinion of Thompson & Howison, LLP, Special Intellectual Counsel for the Company
- --------------------------------------------------------------------------------
1. The Company is listed in the records of the Patent and Trademark
Office as the holder of record of the patent application and the trademark
registration application to register the trademarks "WorldQuest" and "WorldQuest
Networks" listed on Schedule I to the opinion (the "Applications"). Except as
disclosed in the Prospectus, such counsel knows of no claims of third parties to
any ownership interest or lien with respect to the Applications. To such
counsel's knowledge, none of the Applications has been rejected.
2. The statements under the Prospectus captions "Risk Factors -- We Need
to Protect Our Intellectual Property and Other Proprietary Rights from
Infringement" and "Business --Intellectual Property and Other Proprietary
Rights" (collectively, the "Intellectual Property Portion") in the Prospectus
insofar as such statements constitute summaries of the Company's rights to the
Applications are in all material respects accurate summaries and fairly
summarize in all material respects the legal matters, documents and proceedings
relating to the Applications described therein; to the knowledge of such
counsel, the Company owns the rights to two (2) pending Applications.
3. Such counsel is not aware of any facts that would lead such counsel to
conclude that any patent or trademark issued in respect of an Application would
be invalid.
4. Except as disclosed in the Intellectual Property Portion, such counsel
is not aware that any valid patent is infringed by the activities of the Company
described in the Registration Statement or Prospectus or by the manufacture, use
or sale of any product, device, instrument, drug or other material made and used
according to the Applications.
5. Such counsel is not aware of any material defects of form in the
preparation or filing of the Applications on behalf of the Company. The
Applications are being diligently pursued by the Company.
6. Such counsel knows of no pending or threatened action, suit,
proceeding or claim by others that the Company is infringing or otherwise
violating any patents, copyrights or trade secrets.
7. Except as disclosed in the Prospectus, such counsel is not aware of
any pending or threatened actions, suits proceedings or claim by others
challenging the validity or scope of the Applications.
8. Such counsel is not aware of any infringement on the part of any third
party of the Applications, trade secrets, know-how or other proprietary rights
of the Company.
II-1
<PAGE>
9. Nothing has come to the attention of such counsel which causes such
counsel to believe that the information contained in the Intellectual Property
Portion of the Registration Statement, at the time the Registration Statement
became effective, contained an untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, or that, at the Closing Date, the information contained in
the Intellectual Property Portion of the Effective Prospectus and Final
Prospectus or any amendment or supplement thereto contained any untrue statement
of a material fact or omitted to state a material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
II-2
<PAGE>
SCHEDULE I
UNITED STATES PATENTS AND PATENT
AND TRADEMARK APPLICATIONS
United States Patent and Trademark Applications
Docket No. Title Serial No. Filing Date
- ------------ ----- ---------- -----------
II-3
<PAGE>
EXHIBIT III
Matters to be Covered in Opinion
--------------------------------
of Kelley, Drye & Warren LLP, Special Regulatory Counsel for the Company
------------------------------------------------------------------------
1. To the knowledge of such counsel, other than as described in the
Registration Statement, no legal, regulatory or governmental proceedings are
pending to which the Company is a party or to which the assets of the Company
are subject which, individually or in the aggregate, could reasonably be
expected to have a material adverse effect on the condition (financial or
otherwise), business prospects, net worth or properties of the Company, or
which, individually or in the aggregate, would have a material adverse effect on
the power or ability of the Company to perform its obligations under this
Agreement and the Representative's Warrant or to consummate the transactions
contemplated thereby or by the Registration Statement and no such material
proceedings have been threatened against the Company or with respect to any of
the Company's assets or properties.
2. To the knowledge of such counsel, the Company is not (A) in default
(or, with notice or lapse of time or both, would be in default) in the
performance or observance of any obligation, agreement, covenant or condition
contained in any contract, indenture, mortgage, deed of trust, loan agreement,
note, lease, license, franchise agreement authorization, permit, certificate or
other agreement or instrument to which it is a party or by which it may be
bound, or to which any of its respective assets or properties is subject, or (B)
in violation of any law, statute, judgment, decree, order, rule or regulation of
any domestic or foreign court with jurisdiction over the Company or the
Company's assets or properties, or other governmental or regulatory authority,
agency or other body other than such defaults or violations which, individually
or in the aggregate, could not reasonably be expected to have or result in, in
the case of clause (A) or (B), a material adverse effect on the condition
(financial or otherwise), business, net worth or properties of the Company.
3. To the knowledge of such counsel, the Company has obtained all
consents, approvals, orders, certificates, licenses, permits, franchises and
other authorizations of and from, and has made all declarations and filings
with, all governmental and regulatory authorities, all self-regulatory
organizations and all courts and other tribunals necessary to own, lease,
license and use their respective properties and assets and to conduct their
respective businesses in the manner described in the Registration Statement,
except to the extent that the failure to so obtain or file, individually or in
the aggregate, could not reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), business, net worth or
properties of the Company.
4. The statements set forth in the Registration Statement under the
headings "Risk Factors -- The Internet Industry May Become Subject to Increased
Government Regulation" and "Business -- Government Regulation," (collectively,
the "Regulatory Portion") insofar as such statements constitute a summary of
statutes, rules, regulations, legal matters, documents or
III-1
<PAGE>
proceedings referred to therein, provide a fair summary of such statutes, rules,
regulations, legal matters, documents and proceedings and the information with
respect thereto.
5. Nothing has come to the attention of such counsel which causes such
counsel to believe that the information contained in the Regulatory Portion of
the Registration Statement, at the time the Registration Statement became
effective, contained an untrue statement of a material fact or omitted or omits
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, or that, at the Closing Date, the information contained in the
Regulatory Portion of the Prospectus or any amendment or supplement thereto
contained any untrue statement of a material fact or omitted to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
III-2
<PAGE>
EXHIBIT 4.3
Option to Purchase 240,000
Shares of Common Stock
REPRESENTATIVES' WARRANT
------------------------
Dated: , 1999
THIS CERTIFIES THAT LADENBURG THALMANN & CO., INC., KAUFMAN BROS., L.P.,
JOHN G. KINNARD AND COMPANY, INCORPORATED AND EBI SECURITIES CORPORATION (herein
sometimes called the "Holders" or the "Representatives") are entitled to
purchase from WORLDQUEST NETWORKS, INC., a Delaware corporation (the "Company"),
at the price and during the period as hereinafter specified, up to Two Hundred
Forty Thousand (240,000) shares (the "Shares") of common stock, $.01 par value
per share (the "Common Stock") at a purchase price of $____ per share (155% of
the initial public offering price) subject to adjustment as described below, at
any time during the four-year period commencing one (1) year from the effective
date of the Registration Statement (as defined herein) (the "Effective Date").
This Representatives' Warrant (the "Representatives' Warrant") is issued
pursuant to an Underwriting Agreement between the Company and EBI Securities
Corporation, as Representatives of the several Underwriters set forth in
Schedule I to said Underwriting Agreement, in connection with a public offering,
through the Representative, of 2,400,000 Shares as therein described (and up to
360,000 additional Shares covered by an over-allotment option granted by the
Company to the Underwriters), and in consideration of $240.00 received by the
Company for the Representatives' Warrant. Except as specifically otherwise
provided herein, the Shares issued pursuant to the Representatives' Warrant
shall bear the same terms and conditions as described under the caption
"Description of Capital Stock-Common Stock" in the Registration Statement on
Form SB-2, File No. 333-82721 (the "Registration Statement") except that the
Holder shall have registration rights under the Securities Act of 1933, as
amended (the "Act"), for the Representatives' Warrant and the Shares issuable
pursuant thereto as more fully described in paragraph 6 herein.
1. The rights represented by the Representatives' Warrant shall be
exercised at the price, set forth in the first paragraph hereof subject to
adjustment in accordance with Section 8 hereof (the "Exercise Price"), and
during the periods as follows:
(a) During the period from the Effective Date to and through ____,
2000 (the "First Anniversary Date"), inclusive, the Holder shall
have no right to purchase any Shares hereunder, except that in the
event of any merger, consolidation or sale of substantially all
the assets of the Company as an entirety prior to the First
Anniversary Date (other than (i) a merger or consolidation in
which the Company is the continuing corporation and which does not
result in any reclassification or reorganization of any
outstanding shares of Common Stock or (ii) any sale/leaseback,
mortgage or other financing transaction), the Holder shall have
the right to exercise the Representatives' Warrant concurrently
with such event and into the kind and amount of shares of stock
and other securities and property (including cash)
<PAGE>
receivable by a holder of the number of Shares into which the
Representatives' Warrant were exercisable immediately prior
thereto.
(b) Between _______, 2000 and 2004, (five (5) years from the Effective
Date, i.e. the "Expiration Date") inclusive, the Holder shall have
the option to purchase Shares hereunder at the Exercise Price.
(c) After the Expiration Date, the Holder shall have no right to
purchase any Shares hereunder.
2. (a) The rights represented by the Representatives' Warrant may be
exercised at any time within the periods above specified, in whole or in part,
by (i) the surrender of the Representatives' Warrant (with the purchase form at
the end hereof properly executed) at the principal executive office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the Holder at the address of the Holder appearing on the
books of the Company); (ii) payment to the Company of the exercise price then in
effect for the number of Shares specified in the above-mentioned purchase form
together with applicable stock transfer taxes, if any; and (iii) delivery to the
Company of a duly executed agreement signed by the person(s) designated in the
purchase form to the effect that such person(s) agree(s) to be bound by the
provisions of paragraph 6 and subparagraphs (b), (c) and (d) of paragraph 7
hereof. The Representatives' Warrant shall be deemed to have been exercised, in
whole or in part to the extent specified, immediately prior to the close of
business on the date the Representatives' Warrant is surrendered and payment is
made in accordance with the foregoing provisions of this paragraph 2, and the
person or persons in whose name or names the certificates for the Shares shall
be issuable upon such exercise shall become the holder or holders of record of
such Shares at that time and date. The Shares and the certificates for the
Shares so purchased shall be delivered to the Holder within a reasonable time,
not exceeding ten (10) business days, after the rights represented by this
Representatives' Warrant shall have been so exercised.
(b) Notwithstanding anything to the contrary contained in paragraph
2(a), the Holder may elect to exercise this Representatives' Warrant in whole or
in part by receiving Shares equal to the value (as determined below) of this
Representatives' Warrant, or any part hereof, upon surrender of the
Representatives' Warrant at the principal office of the Company together with
notice of such election in which event the Company shall issue to the Holder a
number of Shares computed using the following formula:
X = Y(A-B)
------
A
Where X = the number of Shares to be issued to the Holder;
Y = the number of Shares issuable upon exercise of this
Representatives' Warrant;
2
<PAGE>
A = the current fair market value of one share of Common Stock;
B = the Exercise Price of the Representatives' Warrant;
As used herein, current fair market value of Common Stock
shall mean with respect to each share of Common Stock the average
of the closing prices of the Common Stock sold on the principal
national securities exchanges on which the Common Stock is at the
time admitted to trading or listed, or, if there have been no
sales on any such exchange on such day, the average of the
highest bid and lowest ask price on such day as reported by
NASDAQ, or any similar organization if NASDAQ is no longer
reporting such information, either (i) on the date which the form
of election is deemed to have been sent to the Company (the
"Notice Date") or (ii) over a period of five (5) trading days
preceding the Notice Date, whichever of (i) or (ii) is greater.
If on the date for which current fair market value is to be
determined the Common Stock is not listed on any securities
exchange or quoted in the NASDAQ System or the over-the-counter
market, the current fair market value of Common Stock shall be
the highest price per share which the Company could then obtain
from a willing buyer (not a current employee or director) for
shares of Common Stock sold by the Company, from authorized but
unissued shares, as determined in good faith by the Board of
Directors of the Company, unless prior to such date the Company
has become subject to a binding agreement for a merger,
acquisition or other consolidation pursuant to which the Company
is not the surviving party, in which case the current fair market
value of the Common Stock shall be deemed to be the value to be
received by the holders of the Common Stock for each share
thereof pursuant to the Company's acquisition.
3. The Representatives' Warrant shall not be sold, transferred, assigned,
or hypothecated for a period of one year commencing on the Effective Date except
that it may be transferred to successors of the Holder, and may be assigned in
whole or in part to any person who is an officer of the Holder to any members of
the selling group and/or the officers or partners thereof during such period.
This Representatives' Warrant must be executed immediately upon its transfer at
any time after one year from the Effective Date, and if not so executed, shall
lapse. Any such assignment shall be effected by the Holder by (i) executing the
form of assignment at the end hereof and (ii) surrendering the Representatives'
Warrant for cancellation at the office or agency of the Company referred to in
paragraph 2 hereof, accompanied by a certificate (signed by an officer of the
Holder if the Holder is a corporation) stating that each transferee is a
permitted transferee under this paragraph 3; whereupon the Company shall issue,
in the name or names specified by the Holder (including the Holder), a new
Representatives' Warrant or Warrants of like tenor and representing in the
aggregate rights to purchase the same number of Shares as are purchasable
hereunder at such time.
3
<PAGE>
4. The Company covenants and agrees that all Shares which may be
purchased hereunder will, upon issuance and delivery against payment therefor of
the requisite purchase price, be duly and validly issued, fully paid and
nonassessable. The Company further covenants and agrees that, during the
periods within which the Representatives' Warrant may be exercised, the Company
will at all times have authorized and reserved a sufficient number of shares of
its Common Stock to provide for the exercise of the Representatives' Warrant.
5. The Representatives' Warrant shall not entitle the Holder to any
voting rights or other rights, including without limitation notice of meetings
of other actions or receipt of dividends, as a stockholder of the Company.
6. (a) The Company shall advise the Holder or its permitted transferee,
whether the Holder holds the Representatives' Warrant or has exercised the
Representatives' Warrant and holds Shares, by written notice at least four weeks
prior to the filing of any new registration statement thereto under the Act, or
the filing of a notification on Form 1-A under the Act for a public offering of
securities, covering any securities of the Company, for its own account or for
the account of others, except for any registration statement filed on Form S-4
or S-8 (or other comparable form), and will, during the five (5) year period
from the Effective Date, upon the request of the Holder, include in any such new
registration statement (or notification as the case may be) such information as
may be required to permit a public offering of, all or any of the Shares
underlying the Representatives' Warrant (the "Registrable Securities"). For so
long as the Warrants remain outstanding and as long as required by the Act (so
long as the Holder's ability to exercise any Warrant is not adversely affected),
the Company currently intends to file post-effective amendments to the
Registration Statement (or any new registration statement filed by the Company)
setting forth or otherwise incorporating certain information contained in the
then most recent quarterly report on Form 10-Q or annual report on Form 10-K
filed by the Company (each such post-effective amendment, a "Quarterly
Amendment"). The parties hereby agree that if at any time during such five (5)
year period the Company receives written notice from the Holder at least two
weeks prior to the filing of any such Quarterly Amendment indicating such
Holder's intention to offer Registrable Securities in such Quarterly Amendment,
the Company will include in such Quarterly Amendment such information as may be
required to permit a public offering of such Registrable Securities. The
delivery by the Holder of any such notice shall not constitute a demand made
pursuant to Section 6(b). The Company shall supply prospectuses and such other
documents as the Holder may reasonably request in order to facilitate the public
sale or other disposition of the Registrable Securities, use its best efforts to
register and qualify any of the Registrable Securities for sale in such states
(i) as such Holder designates and (ii) with respect to which the Company
obtained a qualification in connection with its initial public offering; and do
any and all other acts and things which may be necessary or desirable to enable
such Holder to consummate the public sale or other disposition of the
Registrable Securities, all at no expense to the Holder or the Representative
(other than sales commissions, underwriting discounts or commissions, or other
expenses of such sale), and furnish indemnification in the manner provided in
paragraph 7 hereof. The Holder shall furnish information and indemnification as
set forth in paragraph 7.
4
<PAGE>
(b) At any time during the four (4) year period beginning one (1) year
after the Effective Date, a 50% Holder (as defined below) may request, on two
occasions, that the Company register under the Act any and all of the
Registrable Securities held by such 50% Holder, once at the Company's expense
and on the second occasion, at the 50% Holder's expense. Upon the receipt of
any such notice, the Company will promptly, but no later than four weeks after
receipt of such notice, file a post-effective amendment to the current
Registration Statement or a new registration statement pursuant to the Act, so
that such designated Registrable Securities may be publicly sold under the Act
as promptly as practicable thereafter and the Company will use reasonable
efforts to cause such registration to become and remain effective (including the
taking of such reasonable steps as are necessary to obtain the removal of any
stop order) within 120 days after the receipt of such notice, provided, that
such Holder shall furnish the Company with appropriate information in connection
therewith as the Company may reasonably request in writing. The 50% Holder may,
at its option, request the registration of any of the Shares underlying the
Representatives' Warrant in a registration statement made by the Company as
contemplated by Section 6(a) or in connection with a request made pursuant to
this Section 6(b) prior to acquisition of the Shares issuable upon exercise of
the Representatives' Warrant. The 50% Holder may, at its option, request such
post-effective amendment or new registration statement during the described
period with respect to the Representatives' Warrant and/or the Shares and such
registration rights may be exercised by the 50% Holder prior to or subsequent to
the exercise of the Representatives' Warrant. Within ten days after receiving
any such notice pursuant to this subsection (b) of paragraph 6, the Company
shall give notice to any other Holders of the Representatives' Warrant, advising
that the Company is proceeding with such post-effective amendment or
registration statement and offering to include therein the Shares underlying
that part of the Representatives' Warrant held by the other Holders, provided
that they shall furnish the Company with such appropriate information (relating
to the intentions of such Holders) in connection therewith as the Company shall
reasonably request in writing. All costs and expenses of the post-effective
amendment or new registration statement shall be borne by the Company, except
that the Holder(s) shall bear the fees of their own counsel and any other
advisors retained by them and any underwriting discounts or commissions
applicable to any of the securities sold by them. The Company will use its best
efforts to maintain such registration statement or post-effective amendment
current under the Act for a period of at least 180 days from the effective date
thereof. The Company shall supply prospectuses, and such other documents as the
Holder(s) may reasonably request in order to facilitate the public sale or other
disposition of the Registrable Securities, use its best efforts to register and
qualify any of the Registrable Securities for sale in such states (i) as such
Holder(s) designate and (ii) with respect to which the Company obtained a
qualification in connection with its initial public offering and furnish
indemnification in the manner provided in paragraph 7 hereof. Notwithstanding
the foregoing set forth in this paragraph 6(b), the Company shall not be
required to include in any registration statement any Registrable Securities
which in the opinion of counsel to the Company (which opinion is reasonably
acceptable to counsel to the Representative) would be saleable immediately
without restriction under Rule 144 (or its successor) if the Representatives'
Warrant was exercised pursuant to paragraph 2(b) herein.
5
<PAGE>
(c) The term "50% Holder" as used in this paragraph 6 shall mean the
Holder(s) of at least 50% of the Representatives' Warrant and/or the Shares
underlying the Representatives' Warrant (considered in the aggregate).
7. (a) Whenever pursuant to paragraph 6 a registration statement
relating to any Shares issued upon exercise of the Representatives' Warrant is
filed under the Act, amended or supplemented, the Company will indemnify and
hold harmless each Holder of the securities covered by such registration
statement, amendment or supplement (such Holder being hereinafter called the
"Distributing Holder"), and each person, if any, who controls (within the
meaning of the Act) the Distributing Holder, and each underwriter (within the
meaning of the Act) of such securities and each person, if any, who controls
(within the meaning of the Act) any such underwriter, against any losses,
claims, damages or liabilities, joint or several, to which the Distributing
Holder, any such controlling person or any such underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities, or actions in respect thereof, arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any such registration statement as declared effective or any final prospectus
constituting a part thereof or any amendment or supplement thereto, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading and will reimburse the Distributing Holder or such
controlling person or underwriter for any legal or other expense reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company will not
be liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in said registration statement,
said preliminary prospectus, said final prospectus or said amendment or
supplement in reliance upon and in conformity with written information furnished
by such Distributing Holder or any other Distributing Holder for use in the
preparation thereof and provided further, that the indemnity agreement provided
in this Section 7(a) with respect to any preliminary prospectus shall not inure
to the benefit of any Distributing Holder, controlling person of such
Distributing Holder, underwriter or controlling person of such underwriter from
whom the person asserting any losses, claims, charges, liabilities or litigation
based upon any untrue statement or alleged untrue statement of a material fact
or omission or alleged omission to state therein a material fact, received such
preliminary prospectus, if a copy of the prospectus in which such untrue
statement or alleged untrue statement or omission or alleged omission was
corrected has not been sent or given to such person within the time required by
the Act and the Rules and Regulations thereunder.
(b) The Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, and each
person, if any, who controls the Company (within the meaning of the Act) against
any losses, claims, damages or liabilities, joint or several, to which the
Company or any such director, officer or controlling person may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities, or actions in respect thereof, arise out of or are based upon any
untrue or alleged untrue statement of any material fact contained in said
registration statement, said preliminary prospectus, said final prospectus, or
said amendment or supplement, or
6
<PAGE>
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in said registration statement, said preliminary prospectus, said
final prospectus or said amendment or supplement in reliance upon and in
conformity with written information furnished by such Distributing Holder for
use in the preparation thereof; and will reimburse the Company or any such
director, officer or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action.
(c) Promptly after receipt by an indemnified party under this
paragraph 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof, but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
paragraph 7.
(d) In case any such action is brought against any indemnified party,
and it notifies an indemnifying party of the commencement hereof, the
indemnifying party will be entitled to participate in and, to the extent that it
may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
paragraph 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
8. The Exercise Price in effect at the time and the number and kind of
securities purchasable upon the exercise of the Warrant shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common Stock
(other than issuance of Common Stock pursuant to antidilution provisions set
forth in the Registration Statement), (ii) subdivide or reclassify its
outstanding shares of Common Stock into a greater number of shares, (iii)
combine or reclassify its outstanding shares of Common Stock into a smaller
number of shares, or (iv) enter into any transaction whereby the outstanding
shares of Common Stock of the Company are at any time changed into or exchanged
for a different number or kind of shares or other security of the Company or of
another corporation through reorganization, merger, consolidation, liquidation
or recapitalization, then appropriate adjustments in the number of Shares (or
other securities for which such Shares have previously been exchanged or
converted) subject to this Representatives' Warrant shall be made and the
Exercise Price in effect at the time of the record date for such dividend or dis
tribution or of the effective date of such subdivision, combination,
reclassification, reorganization, merger, consolidation, liquidation or
recapitalization shall be proportionately adjusted so that the Holder of this
Representatives' Warrant exercised after such date shall be entitled to receive
the
7
<PAGE>
aggregate number and kind of shares of Common Stock which, if this
Representatives' Warrant had been exercised by such Holder immediately prior to
such date, he would have been entitled to receive upon such dividend,
distribution, subdivision, combination, reclassification, reorganization,
merger, consolidation, liquidation or recapitalization. For example, if the
Company declares a 2 for 1 stock distribution and the Exercise Price hereof
immediately prior to such event was $______ per Share and the number of Shares
issuable upon exercise of this Representatives' Warrant was _________ , the
adjusted Exercise Price immediately after such event would be $_________ per
Share and the adjusted number of Shares issuable upon exercise of this
Representatives' Warrant would be ________. Such adjustment shall be made
successively whenever any event listed above shall occur.
(b) In case the Company shall fix a record date for the issuance of
rights or warrants to all holders of its Common Stock entitling them to
subscribe for or purchase shares of Common Stock (or securities convertible into
Common Stock) at a price (the "Subscription Price") (or having a conversion
price per share) less than the Exercise Price on a per share basis (the "Per
Share Exercise Price") on such record date, the Exercise Price shall be adjusted
so that the same shall equal the price determined by multiplying the number of
Shares by the Per Share Exercise Price in effect immediately prior to the date
of issuance by a fraction, the numerator of which shall be the sum of the number
of shares of Common Stock then outstanding on the record date mentioned below
and the number of additional shares of Common Stock which the aggregate offering
price of the total number of shares of Common Stock so offered (or the aggregate
conversion price of the convertible securities so offered) would purchase at the
Per Share Exercise Price in effect immediately prior to the date of such
issuance, and the denominator of which shall be the sum of the number of shares
of Common Stock outstanding on the record date mentioned below and the number of
additional shares of Common Stock offered for subscription or purchase (or into
which the convertible securities so offered are convertible). Such adjustment
shall be made successively whenever such rights or warrants are issued and shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such rights or warrants; and to the extent that
shares of Common Stock are not delivered (or securities convertible into Common
Stock are not delivered) after the expiration of such rights or warrants the
Exercise Price shall be readjusted to the Exercise Price which would then be in
effect had the adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
(c) In case the Company shall hereafter distribute to all holders of
its Common Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions and dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the number of Shares by
the Per Share Exercise Price in effect immediately prior thereto, multiplied by
a fraction, the numerator of which shall be the total number of shares of Common
8
<PAGE>
Stock then outstanding multiplied by the current market price per share of
Common Stock (as defined in Subsection (e) below), less the fair market value
(as determined by the Company's Board of Directors) of said assets, or evidences
of indebtedness so distributed or of such rights or warrants, and the
denominator of which shall be the total number of shares of Common Stock
outstanding multiplied by such current market price per share of Common Stock.
Such adjustment shall be made whenever any such distribution is made and shall
become effective immediately after the record date for the determination of
stockholders entitled to receive such distribution.
(d) Whenever the Exercise Price payable upon exercise of the
Representatives' Warrant is adjusted pursuant to Subsections (a), (b) or (c)
above, the number of Shares purchasable upon exercise of this Representatives'
Warrant shall simultaneously be adjusted by multiplying the number of Shares
issuable upon exercise of this Representatives' Warrant by the Exercise Price in
effect on the date hereof and dividing the product so obtained by the Exercise
Price, as adjusted.
(e) For the purpose of any computation under Subsection (c) above, the
current market price per share of Common Stock at any date shall be deemed to be
the average of the daily closing prices of the Common Stock for 30 consecutive
business days before such date. The closing price for each day shall be the
last sale price regular way or, in case no such reported sale takes place on
such day, the average of the last reported bid and asked prices regular way, in
either case on the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or, if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Board of Directors as set forth in Section 2(b)
herein.
(f) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least five cents ($0.05)
in such price; provided, however, that any adjustments which may by reason of
this Subsection (f) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment required to be made hereunder.
All calculations under this Section 8 shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be. Anything in this
Section 8 to the contrary notwithstanding, the Company shall be entitled, but
shall not be required, to make such changes in the Exercise Price, in addition
to those required by this Section 8, as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Common Stock, or any subdivision, reclassification or combination of Common
Stock, hereafter made by the Company shall not result in any Federal income tax
liability to the holders of the Common Stock or securities convertible into
Common Stock.
(g) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly cause a notice setting forth the adjusted Exercise Price
and adjusted number of Shares issuable upon exercise of the Representatives'
Warrant to be mailed to the Holder, at its address set forth herein, and shall
cause a certified copy thereof to be mailed to the Company's transfer agent, if
any. The Company may retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular accountants employed
by the Company) to make any computation required by this Section 8, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of such adjustment.
9
<PAGE>
(h) In the event that at any time, as a result of an adjustment made
pursuant to the provisions of this Section 8, the Holder of the Representatives'
Warrant thereafter shall become entitled to receive any shares of the Company
other than Common Stock, thereafter the number of such other shares so
receivable upon exercise of the Representatives' Warrant shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
Subsections (a) to (f), inclusive, above.
9. This Agreement shall be governed by and in accordance with the laws of
the State of New York without regard to conflict of laws provision.
IN WITNESS WHEREOF, WORLDQUEST NETWORKS, INC. has caused this
Representatives' Warrant to be signed by its duly authorized officers under its
corporate seal, and this Representatives' Warrant to be dated ____________,
1999.
WORLDQUEST NETWORKS, INC.
By:________________________________________
B. Michael Adler
Chairman and Chief Executive Officer
Attest:
_____________________________________________________
Michael R. Lanham
its President, Chief Operating Officer and Secretary
<PAGE>
PURCHASE FORM
-------------
(To be signed only upon exercise of Warrant)
The undersigned, the holder of the foregoing Representatives' Warrant,
hereby irrevocably elects to exercise the purchase rights represented by such
Warrant for, and to purchase thereunder, _______________ Shares of Common Stock,
$.01 par value per share (the "Shares") WORLDQUEST NETWORKS, INC., payment of
$_______ therefor, and requests that the certificates for the Shares issued in
the name(s) of, and delivered to ________________________, whose address(es) is
(are):
Dated: _______________, ____
By:________________________________
___________________________________
___________________________________
Address
<PAGE>
TRANSFER FORM
-------------
(To be signed only upon transfer of Representatives' Warrant)
For value received, the undersigned hereby sells, assigns, and transfers
unto ______________________________ the right to purchase Shares represented by
the foregoing Representatives' Warrant to the extent of __________ Shares, and
appoints _________________________ attorney to transfer such rights on the books
of _________________ ____________, with full power of substitution in the
premises. The undersigned believes that each transferee is a permitted
transferee under Section 3 of the Representatives' Warrant.
Dated: _______________, ____
By:________________________________
___________________________________
___________________________________
Address
In the presence of:
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF GLAST, PHILLIPS & MURRAY]
October 25, 1999
WorldQuest Networks, Inc.
16990 Dallas Parkway
Suite 220
Dallas, TX 75248
Re: Form SB-2 Registration Statement, Registration No. 333-82721 (the
"Registration Statement") of WorldQuest Networks, Inc.
Gentlemen:
We are acting as counsel for WorldQuest Networks, Inc., a Delaware
corporation (the "Company"), in connection with the filing under the Securities
Act of 1933, as amended, of the Registration Statement for the Company filed
with the Securities and Exchange Commission ("SEC"), covering an aggregate of up
to 2,760,000 shares (the "Shares") of common stock, par value $0.01 per share
(the "Common Stock"), of the Company (including up to 360,000 shares subject to
the underwriters' over-allotment option).
In that connection, we have examined the Registration Statement in the form
filed with the SEC as of the date hereof. We have also examined and are
familiar with the originals or authenticated copies of all corporate or other
documents, records and instruments that we have deemed necessary or appropriate
to enable us to render the opinion expressed below.
We have assumed that all signatures on all documents presented to us are
genuine, that all documents submitted to us as originals are accurate and
complete, that all documents submitted to us as copies are true and correct
copies of the originals thereof, that all information submitted to us was
accurate and complete and that all persons executing and delivering originals or
copies of documents examined by us were competent to execute and deliver such
documents. In addition, we have assumed that the Shares will not be issued for
consideration less than the par value thereof and that the form of consideration
to be received by the Company for the Shares will be lawful consideration under
the Delaware General Corporation Law.
Based on the foregoing and having due regard for the legal considerations
we deem relevant, we are of the opinion that the Shares, when issued as
described in the Registration Statement, will be validly issued by the Company,
fully paid and nonassessable.
<PAGE>
WorldQuest Networks, Inc.
October 25, 1999
Page 2
This opinion is limited in all respects to the laws of the United States of
America and the Delaware General Corporation Law.
We advise you that members of this firm own options to acquire 10,000
shares of Common Stock of the Company.
This opinion may be filed as an exhibit to the Registration Statement, and
we further consent to all references to us in the Registration Statement, the
prospectus constituting a part thereof and any amendments thereto.
Sincerely,
/s/ Glast, Phillips & Murray, P.C.
GLAST, PHILLIPS & MURRAY,
a Professional Corporation
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF WORLDQUEST NETWORKS, INC.
<TABLE>
<CAPTION>
State of Incorporation
Name Percentage Ownership or Organization
- ------------------------------- --------------------- ----------------------
<S> <C> <C>
Joint Venture with BDC, LLC 60% Texas
Red de Busqueda Mundial, S.A. 90% Costa Rica
(inactive)
</TABLE>
<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, except for Note 7, as to which the
date is September 16, 1999, in Amendment No. 4 to the Registration Statement on
Form SB-2 and related Prospectus of WorldQuest Networks, Inc. filed with the
Commission on October 25, 1999.
/s/ Ernst and Young LLP
Dallas, Texas
October 25, 1999
