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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period to
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Commission file number 0-27751
WORLDQUEST NETWORKS, INC.
(Name of small business issuer in its charter)
Delaware 75-2838415
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16990 Dallas Parkway, Suite 220, Dallas, Texas 75248
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (972) 818-0460
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
YES NO X
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ X]
The issuer's revenues for its most recent fiscal year were: $5,649,236.
The aggregate market value of the voting common stock held by non-affiliates of
the issuer, based on the closing sales price of $27.00 per share, was
$89,674,317 as of March 15, 2000.
At March 15, 2000, the registrant had outstanding 6,359,199 shares of par value
$.01 common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-KSB incorporates certain information
by reference from the definitive Proxy Statement for the registrant's 2000
Annual Meeting of Stockholders.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
ITEM 1. DESCRIPTION OF BUSINESS......................................... 1
ITEM 2. DESCRIPTION OF PROPERTY......................................... 11
ITEM 3. LEGAL PROCEEDINGS............................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............. 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........ 12
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION....... 12
ITEM 7. FINANCIAL STATEMENTS............................................ 23
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............................. 23
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL............ 24
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT...... 24
ITEM 10. EXECUTIVE COMPENSATION.......................................... 24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.. 24
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................. 24
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K................................ 24
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WORLDQUEST NETWORKS, INC.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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General
We were incorporated in October 1996 as a Texas corporation. We
reincorporated in Delaware in October 1999. 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 Form 10-KSB.
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 also recently began to market and sell our WebOrganizer, an
intelligent address book and calendar that enables customers to make domestic
and international phone calls and send faxes on line with two clicks of a
computer mouse from anywhere in the world. We advertise, sell and deliver our
products worldwide through the Internet.
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 and the WebOrganizer 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.
Forward Looking Statements
This Form 10-KSB includes certain statements that are not historical facts
and are deemed to be "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. See Item 6 - "Management's
Discussion and Analysis or Plan of Operations -- Forward Looking Statements" for
a further discussion of these "forward-looking statements."
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. 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
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bandwidth. This greater efficiency creates network cost savings that can be
passed on to the consumer in the form of lower long distance rates.
Prepaid Calling Card Industry. The market for prepaid calling cards has
grown significantly since 1993. 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.
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.
Historically, substantially all of the minutes purchased on our virtual calling
cards have been used within 31 days of purchase. 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.
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.
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 their WebOrganizer. On the
world access page, a virtual card is displayed and the customer enters the
telephone number where he or she is, the telephone number he or she wants to
call and his or her PIN and then "clicks" on the call button. This information
is transmitted over the Internet to our platform. The platform determines the
virtual calling card is valid and has a sufficient balance and then routes a
call to the customer at the number where he or she is. When the customer
answers, the platform completes the call by connecting to the number the
customer wanted to call. From their WebOrganizer, these features allow 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.
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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.
WebOrganizer/TM/. A new service we have developed and made available on
our Web site in the fourth quarter of 1999 is our WebOrganizer/TM/. The
WebOrganizer is an intelligent electronic address book and calendar with names,
telephone numbers and scheduled events which is maintained by us on our secure
Web site. This service is a membership club and is interactive so the customer
can add and delete names, numbers and events. The WebOrganizer enables 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, or domestic calls or PC
facsimile transmissions within the United States, by simply accessing our Web
site and following the prompts to the page for the WebOrganizer 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. As of March 1, 2000, we had strategic alliance
agreements with one Internet service provider ("ISP") and two Internet portals,
Mosaic Communications, a Philippine ISP (www.mozcom.com), and India World
(www.samachar.com) and Probity Research & Services Pvt Ltd
(www.indiainfoline.com), both Indian portals. These agreements call for these
ISPs or portals to promote our WebOrganizer to their customers and for us to
provide the long distance service and the software. We pay a commission to the
ISP or portals for the business they generate.
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 70.5% of our revenues for the fiscal year ended
December 31, 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 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.
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Our Internet Gateway Network. As of March 1, 2000, we had international
gateways operational in Mexico, Indonesia, Sri Lanka and India. As of such date,
we also had 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. This agreement allows us additional Internet gateway terminations in
28 countries and traditional leased line terminations in 205 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 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
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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 our recently
completed initial public 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, and at March 1, 1999 had strategic
alliances with three 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
80,000 prior purchasers as of March 1, 2000 and Internet customers of our local
Internet service providers in other countries. We currently average sending more
than 40,000 e-mail messages each month announcing new rates, new countries, new
products and new features.
Electronic Mail to Select Mailing Lists. We also plan to deliver e-mail
broadcasts to certain select mailing lists from time to time announcing
pertinent information, including the addition of a new country, new products and
rates.
Other Methods. We will continually review other potential cost-effective
methods of advertising and marketing our products and services through the
Internet. Such methods may include the use of an affiliate program, chat rooms,
video e-mail and other methods.
WebOrganizer/TM/. During the fourth quarter of 1999, we released
WebOrganizer/TM/. WebOrganizer/TM/ is an intelligent address book and calendar
that enables customers to make domestic and international phone calls and some
faxes online with two clicks of a computer mouse from anywhere in the world.
Customer Support and Service
We believe that our ability to establish and maintain long-term
relationships with our customers and encourage repeat purchases is dependent, in
part, on the strength of our customer support and service operations and staff.
Our customer support and service personnel are available from 9:00 a.m. to 5:00
p.m. Central Time, five days a week to provide assistance via e-mail or
telephone. They are responsible for handling all customer inquiries.
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We provide pre- and post-sales support via both e-mail and telephone
service during business hours. If a customer has encountered a problem in
ordering or using our products, our customer service department will take the
call, or the e-mail, and respond immediately. If the virtual calling card is
from our own inventory and operates on our enhanced services platform, problems
can be resolved immediately and usually 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 two or more 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 software development engineers and
consultants. We historically have developed and expect to continue to develop
proprietary software internally. Our engineering strategy focuses on the
development of our Web site, which includes the enhancement of features and
functionality of our existing software components, the development of additional
new software components, and the integration of off-the-shelf components into
our systems.
Commercially Available Licensed Technology. Our strategy has also been to
license commercially available technology whenever possible rather than seek a
custom-made or internally-developed solution. We believe that this strategy
enables us to reduce our operating costs and to respond to changing demands due
to growth and technological shifts. This strategy also allows us to focus our
development efforts on creating and enhancing the specialized, proprietary
software applications that are unique to our business. Listed below are some of
our key architectural components:
- High speed links to the Internet through MCI Worldcom/UUNET's and SAVVIS's
backbones;
- Dell 2300 and 4300 Servers for Web and data base application running
Windows NT and Oracle;
- Microsoft Internet Information Server 4.0 has been chosen for its ability
to secure sensitive customer information through SSL encryption; and
- Oracle 8i and Microsoft SQL Server 7.0 are the relational database
providers. All customer names and addresses, PINs, number of purchases and
call records are stored within these data bases.
We depend on Internet service providers to provide Internet access to us and
our customers. As of March 1, 2000, we had 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
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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.
Government Regulation
Regulation of the Internet. The United States Congress and the Federal
courts have taken actions that, in some cases impose some forms of regulation on
the Internet, and in other cases protect the Internet from regulation. For
example, Congress has recently adopted legislation that regulates certain
aspects of the Internet. This includes restrictions on some forms of content.
These regulations have had mixed success in the Federal courts. The Supreme
Court has struck down some restrictions on indecent content, but has upheld
other restrictions on harassing Internet messages. Conversely, Congress last
year passed legislation that imposes a moratorium on the imposition of new taxes
on internet transactions for three years. At the same time, numerous new bills
have been proposed that would further regulate various aspects of Internet
commerce, and ensure the continued deregulation of others. It is impossible to
say at this time whether and to what extent the Internet may ultimately be
regulated by the United States government.
The European Union has also enacted several directives relating to the
Internet, one of which addresses online commerce. As with the United States
Congress, the European Union, and the governments of individual foreign
countries, are actively considering proposed legislation that could result in
new regulations on the Internet. Increased regulation of the Internet may
decrease its growth, which may negatively impact the cost of doing business via
the Internet or otherwise materially adversely affect our business, results of
operations and financial condition. In addition, applicability to the Internet
of existing laws governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel, obscenity and personal
privacy is uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and related technologies. As a result, these laws do not
contemplate or address the unique issues of the Internet and related
technologies.
Potential Regulation of Internet Telephony. To our knowledge, there are
currently no domestic and few international laws or regulations that prohibit
the transmission of voice communications over the Internet. If Congress, the
FCC, state regulatory agencies or governments of other countries impose
substantial regulations relating to Internet telephony, the growth of our
business could be adversely affected. In the United States, several efforts have
been made to enact federal legislation that would either regulate or exempt from
regulation telecommunication services provided over the Internet. State public
utility commissions may also attempt to regulate the provision of intrastate
Internet telephony services. In late 1998 and early 1999, however, the FCC
issued two decisions that suggest that all transmissions over the Internet may
be jurisdictionally interstate, and these decisions may restrict the ability of
state public utility commissions to regulate Internet telephony.
Internationally, a number of countries that currently prohibit competition in
the provision of voice telephony have also prohibited Internet telephony. Other
countries permit but regulate Internet telephony.
On April 10, 1998, the FCC issued a Report to Congress concerning its
implementation of the universal service provisions of the Telecommunications
Act. In the Report, the FCC indicated that it would examine the question of
whether any forms of "phone-to-phone" Internet Protocol telephony are
information services, which are unregulated, or telecommunications services,
which are fully regulated. The Report noted that the FCC did not have, as of the
date of the Report, an adequate record on which to make any definitive
pronouncements. The FCC did, however, note that the record before it suggested
that some forms of phone-to-phone Internet telephony appear to have the same
functionality as non-Internet Protocol telecommunications services.
While the FCC found that it needed a more complete record to establish new
rules, it tentatively concluded that providers of phone-to-phone Internet
telephony services should be treated like other providers of telephone service.
This means that they should be required to make payments into Federal universal
service subsidy programs. To date, the FCC has taken no further action, and has
not imposed this obligation on Internet telephony providers. It may do so at
some time in the future, however, and such a decision could have a material
adverse effect on our business, increasing our costs, and the price at which we
can offer our Internet telephony services.
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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 in 1998.
The tax moratorium will be in effect only for three years. The same legislation
that imposed the moratorium also established an Advisory Commission to consider
methods by which states could impose sales taxes on Internet transactions. If
the moratorium expires at the end of its three-year term, there can be no
assurance that the moratorium will be renewed at the end of such period. Failure
to renew the moratorium could allow various states to impose taxes on Internet-
based commerce. The imposition of such taxes could have a material adverse
effect on our business, financial condition and operating results.
Competition
With respect to prepaid calling cards, we compete with many of the largest
telecommunications providers, including AT&T, MCI WorldCom, Cable & Wireless and
Sprint. These companies are substantially larger and have greater financial,
technical, engineering, personnel and marketing resources, longer operating
histories, greater name recognition and larger customer bases than we do. We
also compete with smaller, emerging carriers in the prepaid calling card market,
including Destia Communications, Inc., RSL Communications, IDT Corp., Pacific
Gateway Exchange, Inc., FaciliCom International, LLC and PRIMUS
Telecommunications Group, Incorporated. 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
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a number of companies that have introduced services that make Internet telephony
solutions available to businesses and consumers. Net2Phone, Delta Three, ITXC
Corp., iBasis, Inc. 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, Nuera Communications and Dialogic
Corp. offer or plan to offer server-based Internet telephony products. These
products are expected to allow communications over the Internet between parties
using a multimedia PC and a telephone and between two parties using telephones.
We believe that the principal competitive factors affecting our market in no
particular order are:
- price and rates;
- quality of transmission;
- product accessability and ease of use;
- customer service;
- brand recognition;
- Web site convenience and accessibility;
- targeted marketing directly to probable users of the services;
- quality of search tools; and
- system reliability.
Increased competition may result in reduced operating margins, loss of market
share and diminished value in our brand. We cannot assure you that we will be
able to compete successfully against current and future competitors. As a
strategic response to changes in the competitive environment, we may, from time
to time, make certain pricing, service or marketing decisions that could have a
material adverse effect on our business, financial condition and operating
results.
New technologies and the expansion of existing technologies may increase
competitive pressures by enabling our competitors to offer lower-cost services.
Certain Web-based applications that direct Internet traffic to other Web sites
may channel users to services that compete with us. In addition, companies that
control access to transactions through network access or Web browsers could
promote our competitors or charge us substantial fees for inclusion. The
occurrence of any of these events could have a material adverse effect on our
business, financial condition and operating results.
Intellectual Property and Other Proprietary Rights
Our success depends in part upon our ability to protect our proprietary
technology and other intellectual property rights. We rely on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect our proprietary rights in our products and
services. We protect our proprietary software through United States copyright
laws, and the source code for our proprietary software is protected under trade
secret laws. In December 1996, we applied to the United States Patent and
Trademark Office to register the
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trademarks: "WorldQuest" and "WorldQuest Networks." We received a registration
for the trademark "WorldQuest" from the U.S. Patent and Trademark Office on
November 23, 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 September 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," "click2call.net," "phone-2-
phone.com," "click-n-dial.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.
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.
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Research and Development
During the last two fiscal years, we have spent approximately $160,000 and
$187,000, respectively, for research and development relating to our software
and technology.
Environmental Matters
Environmental contingencies are not expected to have a material adverse effect
on our results of operations or financial condition.
Employees
As of December 31, 1999, we had 12 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.
ITEM 2. DESCRIPTION OF PROPERTY
- --------------------------------
Our executive offices are presently located in Dallas, Texas, where we lease
approximately 4,000 square feet under a lease at a monthly rental of
approximately $6,500. The lease expires January 31, 2002. We believe our space
is adequate for our current needs. As we expand, we expect that suitable
additional space will be available on commercially reasonable terms, although no
assurance can be made in this regard. We also believe our property is adequately
covered by insurance.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -----------------------------------------------------------------
WorldQuest's Common Stock has been traded on the Nasdaq National Market under
the symbol "WQNI" since February 4, 2000, the effective date of our registration
statement, filed on Form SB-2 under the Securities Act of 1933 (no. 333-93019)
relating to our initial public offering of our Common Stock.
As of March 1, 2000, there were approximately 20 stockholders of record of our
Common Stock and approximately 1,900 additional beneficial owners of our Common
Stock.
Dividend Policy
We have never paid cash dividends on our Common Stock and anticipate that we
will continue to retain our earnings, if any, to finance the growth of our
business.
Use of Proceeds of Initial Public Offering
As noted above, the effective date of our first registration statement, filed
on Form SB-2 under the Securities Act of 1933 (no. 333-93019) relating to our
initial public offering of our Common Stock, was February 4, 2000. A total of
3,162,500 shares of our Common Stock were sold at a price of $13.00 per share to
an underwriting syndicate led by Kaufman Bros., L.P., John G. Kinnard and
Company Incorporated and WestPark Capital, Inc. The offering commenced on
February 4, 2000 and the sale of 2,750,000 shares was closed on February 9, 2000
and the sale of an additional 412,500 shares, representing the over-allotment
option, was closed on February 22, 2000. The initial public offering resulted
in gross proceeds of $41.1 million, $3.1 million of which was applied toward the
underwriting discount. Expenses relating to the offering, including a non-
accountable expense reimbursement to the underwriters, totaled approximately
$1.6 million. Net proceeds to WorldQuest were $36.4 million. From the time of
receipt through February 29, 2000, the net proceeds were applied toward:
- repayment of indebtedness, $2,819,523;
- equipment purchases including additional back-up systems, $97,281; and
- general corporate purposes, including payment of outstanding payables,
development of strategic relationships and research and development of
new products, $605,346.
The remaining proceeds are being used as working capital or are being held in
high quality, short-term investment instruments such as short-term corporate
investment grade or United States Government interest-bearing securities.
Of the $2,819,523 paid for repayment of indebtedness, $867,647 was paid to
Eagle Venture Capital, LLC, which owns approximately 42% of our Common Stock and
is controlled by B. Michael Adler, our Chairman of the Board and Chief Executive
Officer.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------
Except for historical information, the discussion in this Form 10-KSB 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 below under "Risk Factors That May Effect
Results of Operations and Financial Condition."
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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 December 31, 1999, no
telephone company accounted for more than 10% of total accounts receivable, but
a telephone company accounted for 59% of total accounts receivable at December
31, 1998. At December 31, 1999, a credit card processing company accounted for
64% 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 receivable at December 31, 1998. No individual customer
accounted for more than 10% of total sales either for 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.
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 1999, our capital expenditures and payments on
capital leases totaled $395,000. 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.
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Since inception, we have incurred significant losses and, as of December 31,
1999, had an accumulated deficit of $(5.8) million. We expect operating losses
and negative cash flow to continue through at least the second quarter of 2000.
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;
- the hiring of additional personnel; and
- the payment of commissions to various Internet portals and Internet
service providers for marketing our address book/calendar product to
their customers.
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.
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 stockholders 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.
Results of Operations
The following table sets forth statement of operations data as a percentage of
revenues for the periods indicated:
Year ended
December 31,
------------
1998 1999
---- ----
Retail prepaid calling card revenue.................... 79.6% 92.5%
Wholesale traffic and other(1)......................... 20.4 7.5
------ ------
Total revenue.......................................... 100.0 100.0
Cost of sales.......................................... 108.9 84.6
------ ------
Gross margin (deficit)................................. (8.9) 15.4
Selling, general and administrative.................... 70.1 40.9
Research and development............................... 10.1 2.8
------ ------
Operating loss......................................... (89.1) (28.3)
Interest expense....................................... (8.8) (7.7)
Other income........................................... 2.7 ---
------ ------
Net loss............................................... (95.2)% (36.0)%
====== ======
- -------------------
(1) Wholesale traffic represents the sale of excess line capacity and other
revenue represents facsimile transmission revenues in 1998.
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Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenue
Revenue increased to $5.6 million for the year ended December 31, 1999 from
$1.8 million for 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 $5.6 million revenue for the year ended December
31, 1999, $5.2 million represents prepaid virtual calling card revenue and the
remainder represents wholesale traffic of $391,000 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 $4.8 million for the year
ended December 31, 1999 from $2.0 million for 1998. This $2.8 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 $2.3 million
for 1999 from $1.3 million for 1998, but decreased significantly as a percentage
of revenue. Selling, general and administrative expenses for 1999 included a
write off of $300,000 of deferred costs associated with a previous public
offering registration statement which was withdrawn. Selling, general and
administrative expenses are expected to continue to decrease as a percentage of
revenue in future periods 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 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 decreased to $160,000 for the year
ended December 31, 1999 from $187,000 for 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, borrowings under a credit facility with our principal stockholder
and to unsecured subordinated convertible promissory notes issued in a private
offering in December 1999. The increase to $438,000 for the year ended December
31, 1999 from $162,000 for 1998 is attributable to increased borrowings under
the credit facility, new promissory notes and new equipment leases entered into
after the end of the 1998 period.
Other Income
Other income consists of license fees received from our previous fax services
business model. Other income was zero for the year ended December 31, 1999 as
compared to $50,000 for 1998.
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Net Loss
We incurred a net loss of $(2.0) million for the year ended December 31, 1999
as compared to $(1.8) million for 1998. Net loss for 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.
Income Taxes
As of December 31, 1999, we had approximately $4.4 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
Our initial public offering of Common Stock closed in February 2000. We sold
3,162,500 shares of Common Stock at a price of $13.00 per share. After
underwriting discounts and expenses of the offering, the net proceeds to us were
$36.4 million.
On December 10, 1999, we entered into a consulting agreement pursuant to which
we agreed to grant options to a consultant exercisable at an exercise price of
$6.00 per share for up to 250,000 share of Common Stock upon execution of
Internet portal agreements between us and select Internet portals introduced to
us by the consultant. Effective March 16, 2000 we granted to the consultant
options to acquire 50,000 shares of Common Stock upon our execution of an
Internet portal agreement. The fair value of these options of $1.3 million will
be recognized as additional non-cash expense all or a portion of which will be
taken as an expense in the first quarter of 2000.
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 debt and cash generated from operations. As of December 31, 1999, we had
approximately $1.2 million 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, obligations under our private placement of unsecured subordinated
convertible promissory notes and our credit facility with our principal
stockholder.
Outstanding amounts owed to our principal stockholder as of December 31, 1999
and 1998 were $2.0 million and $1.7 million, respectively. 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.
In December 1999, we raised $1.9 million through the private placement of
units consisting of promissory notes with a face value of $1.9 million and
common stock purchase warrants. The notes bear interest at 8% per annum and
mature and became immediately due and payable upon closing of our initial public
offering. The fair value of the stock purchase warrants of $1.5 million is
being recognized as additional interest expense over the term of the promissory
notes. These notes were fully repaid during February and March 2000 from the
proceeds of our initial public offering. The remaining unamortized amount of
the fair value of the stock purchase warrants of approximately $1.4 million will
be recognized as additional interest expense in the first quarter of 2000.
Net cash used in operating activities was $1.1 million for the year ended
December 31, 1999 and $661,000 in 1998. Net cash used in operating activities
for 1999 and 1998 primarily consisted of net operating losses as well as
increases in other assets, offset by increases in accounts payable, accrued
expenses and accrued interest.
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 $223,000 for
the year ended December 31, 1999 and $148,000 in 1998. During 2000, we expect
to spend
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approximately $1.3 million in capital expenditures, of which $800,000 will be
for gateway servers, $100,000 for data base servers, $200,000 for software and
$200,000 in miscellaneous other equipment.
Net cash provided by financing activities was $2.5 million for the year ended
December 31, 1999 and $841,000 for 1998. Net cash provided by financing
activities for 1999 and 1998 was affected by higher levels of borrowings under
our credit facility with our principal stockholder and proceeds from the private
placement of common stock and the issuance of unsecured subordinated convertible
promissory notes.
We currently anticipate that the net proceeds of our initial public offering,
together with our other 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 December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, which provides guidance on revenue recognition and
certain lease arrangements. This statement is effective for fiscal years 2000
and is not anticipated to have a material effect 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.
Year 2000
We made the transition through the change to the year 2000 without service
interruption to our customers and with no apparent effects from the year 2000
change. We will continue to monitor our systems and those of our vendors and
suppliers to attempt to identify latent problems and to correct them before they
interrupt service to our customers. Based upon our analysis to date, we do not
believe it is necessary to develop and write a formal contingency plan to
address situations that may result if our vendors or we are unable to maintain
year 2000 compliance because we currently do not believe that such a plan is
necessary. However, 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. During 1999, we expended
approximately $10,000 testing, evaluating and correcting our systems for year
2000 compliance. We do not expect to make material expenditures in 2000 in this
regard.
Risk Factors That May Effect Results of Operations and Financial Condition
You should carefully consider the risks and uncertainties described below and
the other information in this Form 10-KSB. 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. We may also encounter risks and difficulties frequently encountered by
early stage companies in
-17-
<PAGE>
new and rapidly evolving markets. We cannot assure stockholders 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 December 31,
1999, we had an accumulated deficit of $(5.8) million. We incurred net losses of
$(2.0) million and $(1.8) million for the fiscal years ended December 31, 1999
and 1998, respectively.
We expect operating losses and negative cash flow to continue through at least
the second quarter of 2000. However, there can be no assurance that we will be
profitable beginning in the third quarter of 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 stockholders 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.
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 stockholders that future failures will not occur.
-18-
<PAGE>
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.
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 stockholders of our ability to efficiently manage a large
number of simultaneous calls. If we are not able to maintain an appropriate
level of
-19-
<PAGE>
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
stockholders 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 stockholders 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 stockholders 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.
-20-
<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.
Competition for personnel is intense, and we cannot assure stockholders 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 stockholders 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 our common stock may be volatile, which could cause
stockholders to lose substantial portions of their 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 stockholders that these
trading prices and valuations will be sustained. Broad market and industry
factors may materially and adversely affect the market price of our common
stock, regardless of our operating performance.
-21-
<PAGE>
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 received a
registration for the trademark "WorldQuest" from the U.S. Patent and Trademark
Office on November 23, 1999. We have a pending trademark application on file
with the Patent and Trademark Office for "WorldQuest Networks." 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. We 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 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 our
initial public offering will be sufficient to meet our anticipated needs through
at least the next 18 months. Thereafter, we may need to raise additional funds.
-22-
<PAGE>
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 the rights and ownership in our company by existing stockholders
may be reduced.
We cannot assure stockholders 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.
ITEM 7. FINANCIAL STATEMENTS
- -----------------------------
The financial statements required by this item begin at Page F-1 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
-23-
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- -------------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
- -------------------------------------------------
The information regarding the directors and executive officers of WorldQuest
in the Proxy Statement relating to WorldQuest's 2000 Annual Meeting, which will
be filed with the Commission within 120 days after December 31, 1999, is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
- -----------------------------------
The information regarding executive compensation in the Proxy Statement
relating to WorldQuest's 2000 Annual Meeting, which will be filed with the
Commission within 120 days after December 31, 1999, is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ---------------------------------------------------------------------------
The information regarding the security ownership of certain beneficial
owners and management in the Proxy Statement relating to WorldQuest's 2000
Annual Meeting, which will be filed with the Commission within 120 days after
December 31, 1999, is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -----------------------------------------------------------
The information regarding certain relationships and related transactions in
the Proxy Statement relating to WorldQuest's 2000 Annual Meeting, which will be
filed with the Commission within 120 days after December 31, 1999, is
incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
- -------------------------------------------
(a) The following documents are filed as part of this Annual Report on Form
10-KSB:
1. Financial Statements: The financial statements filed as part of
this report are listed in the "Index to Financial Statements" on Page F-1
hereof.
2. Exhibits required to be filed by Item 601 of Regulation S-B:
Exhibit
Number Description of Exhibits
- ------ -----------------------
*1.1 Underwriting Agreement dated February 4, 2000 between WorldQuest and
Kaufman Bros., L.P., John G. Kinnard and Company Incorporated and
WestPark Capital, Inc.
3.1 Certificate of Incorporation of WorldQuest, filed as Exhibit 3.1 to
WorldQuests' Form SB-2 Registration Statement, File No. 333-82721 (the
"Prior Registration Statement"), and incorporated herein by reference.
3.2 Bylaws of WorldQuest, filed as Exhibit 3.2 to the Prior Registration
Statement, and incorporated herein by this reference.
4.1 Specimen common stock certificate, filed as Exhibit 4.1 to the Prior
Registration Statement, and incorporated herein by this reference.
4.2 Amended and Restated Note dated May 5, 1999 payable to WorldQuest
Networks, LLC (now known as Eagle Venture Capital, LLC), filed as
Exhibit 4.2 to the Prior Registration Statement, and incorporated
herein by this reference.
*4.3.1 Representatives' Warrant dated February 4, 2000 granted to John G.
Kinnard and Company Incorporated for 68,750 shares of common stock.
*4.3.2 Representatives' Warrant dated February 4, 2000 granted to Kaufman
Bros., L.P. for 178,750 shares of common stock.
-24-
<PAGE>
Exhibit
Number Description of Exhibits
- ------ -----------------------
*4.3.3 Representatives' Warrant dated February 4, 2000 granted to WestPark
Capital, Inc. for 27,500 shares of common stock.
4.4 Amended and Restated Note date August 15, 1999 payable to Eagle
Capital Venture, LLC, which replaces the Amended and Restated Note
filed as Exhibit 4.2, filed as Exhibit 4.4 to the Prior Registration
Statement, and incorporated herein by this reference.
4.5 Form of Unsecured Subordinated Convertible Promissory Note issued in
the private placement closed in December 1999 (the "Private
Placement"), filed as Exhibit 4.5 to WorldQuest's Form SB-2
Registration Statement, file no. 333-93019 (the "Second Registration
Statement"), and incorporated herein by this reference.
4.6 Form of Warrant issued in the Private Placement, filed as Exhibit 4.6
to the Second Registration Statement, and incorporated herein by this
reference.
10.1 Joint Venture Agreement dated April 9, 1999 between WorldQuest and
BDC, LLC, filed as Exhibit 10.1 to the Prior Registration Statement,
and incorporated herein by this reference.
10.2 Amended 1997 Stock Option Plan, filed as Exhibit 10.2 to the Prior
Registration Statement, and incorporated herein by this reference.
10.3 Stock Option Agreement dated December 7, 1998 granted to Michael R.
Lanham by WorldQuest, filed as Exhibit 10.3 to the Prior Registration
Statement, and incorporated herein by this reference.
10.4 Stock Transfer Agreement dated December 7, 1998 between WorldQuest
Communications, Inc., WorldQuest Networks, LLC and WorldQuest, filed
as Exhibit 10.4 to the Prior Registration Statement, and incorporated
herein by this reference.
10.5 Amendment and Clarification Agreement dated September 27, 1999 between
WorldQuest Communications, Inc., WorldQuest and Eagle Venture Capital,
LLC amending and clarifying the Stock Transfer Agreement filed as
Exhibit 10.4, filed as Exhibit 10.7 to the Prior Registration
Statement, and incorporated herein by this reference.
10.6 Form of Registration Rights Agreement executed in connection with the
Private Placement, filed as Exhibit 10.6 to the Second Registration
Statement, and incorporated herein by this reference.
21.1 List of Subsidiaries, filed as Exhibit 21.1 to the Prior Registration
Statement, and incorporated herein by this reference.
*27.1 Financial Data Schedule.
- -----------------------
* Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1999.
-25-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
WORLDQUEST NETWORKS, INC.
March 27, 2000 By: /s/ B. Michael Adler
----------------------------------------
B. Michael Adler, Chief Executive Officer
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
March 27, 2000 /s/ B. Michael Adler
--------------------------------------------
B. Michael Adler
Director (Chairman)
March 27, 2000 /s/ Michael R. Lanham
--------------------------------------------
Michael R. Lanham
Director
March 27, 2000 /s/ E. Denton Jones
--------------------------------------------
E. Denton Jones
Director
March 27, 2000 /s/ Hugh E. Humphrey, Jr.
--------------------------------------------
Hugh E. Humphrey, Jr.
Director
March 27, 2000 /s/ Nabil N. El-Hage
--------------------------------------------
Nabil N. El-Hage
Director
March 27, 2000 /s/ Mark C. Levy
--------------------------------------------
Mark C. Levy
Chief Financial Officer (Principal Financial
and Accounting Officer)
-26-
<PAGE>
WorldQuest Networks, Inc.
Index to Consolidated Financial Statements
Contents
<TABLE>
<S> <C>
Report of Independent Auditors............................................................................... F-2
Consolidated Balance Sheet as of December 31, 1999........................................................... F-3
Consolidated Statements of Operations for the two years in the period ended December 31, 1999................ F-4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the two years in the period ended
December 31, 1999......................................................................................... F-5
Consolidated Statements of Cash Flows for the two years in the period ended December 31, 1999................ F-6
Notes to Consolidated Financial Statements................................................................... F-7
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
WorldQuest Networks, Inc.
We have audited the accompanying consolidated balance sheet of WorldQuest
Networks, Inc., as of December 31, 1999 and the related consolidated statements
of operations, consolidated changes in stockholders' equity (deficit), and cash
flows for the two years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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, 1999, and the consolidated results of their
operations and their cash flows for the two years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
March 1, 2000
Dallas, Texas
F-2
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1999
----
ASSETS
Current assets:
<S> <C>
Cash and cash equivalents..................................................... $ 1,159,995
Accounts receivable........................................................... 113,688
-----------
Total current assets............................................................... 1,273,683
Property and equipment, net........................................................ 574,573
Other assets....................................................................... 1,144,777
-----------
Total assets....................................................................... $ 2,993,033
===========
LIABILITIES
Current liabilities:
Accounts payable.............................................................. $ 1,532,293
Accrued expenses.............................................................. 466,083
Deferred revenue.............................................................. 159,201
Notes payable................................................................. 266,814
Line of credit from principal stockholder..................................... 888,725
Current portion of capital lease obligation................................... 98,815
Subordinate promissory notes.................................................. 494,568
-----------
Total current liabilities.......................................................... 3,906,499
Term loan.......................................................................... 1,100,000
Accrued interest................................................................... 199,814
Capital lease obligation........................................................... 28,660
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, par value $0.01 per share:
Authorized shares--10,000,000; none issued and
outstanding at December 31, 1998 and
December 31, 1999........................................................... --
Common stock, par value $.01 per share:
Authorized shares--50,000,000; issued and
outstanding shares--3,000,000 at December 31, 1998 and 3,196,699 at
December 31, 1999........................................................... 31,967
Additional capital............................................................ 3,571,622
Accumulated deficit........................................................... (5,845,529)
-----------
Total stockholders' equity (deficit)............................................... (2,241,940)
-----------
Total liabilities and stockholders' equity (deficit)............................... $ 2,993,033
===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
1998 1999
----------- -----------
<S> <C> <C>
Retail prepaid calling card revenue......................................... $ 1,466,322 $ 5,223,523
Wholesale traffic and other................................................. 375,117 425,713
----------- -----------
Total revenue............................................................ 1,841,439 5,649,236
Cost of sales............................................................... 2,005,631 4,776,487
----------- -----------
Gross margin (deficit)...................................................... (164,192) 872,749
Selling, general and administrative......................................... 1,290,131 2,309,779
Research and development costs.............................................. 186,638 160,009
----------- -----------
Operating loss.............................................................. (1,640,961) (1,597,039)
Interest expense............................................................ (162,466) (438,447)
Other income................................................................ 50,000 --
----------- -----------
Loss before income taxes.................................................... (1,753,427) (2,035,486)
Income tax benefit.......................................................... -- --
----------- -----------
Net loss.................................................................... $(1,753,427) $(2,035,486)
=========== ===========
Weighted-average common shares outstanding--basic
and diluted.............................................................. 3,000,000 3,130,653
=========== ===========
Net loss per share--basic and diluted....................................... $(0.58) $(0.65)
=========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For the years ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
Common Common Stockholders'
Stock Stock Additional Accumulated Equity
Shares Amount Capital Deficit (Deficit)
------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997.............. 3,000,000 $30,000 $ 682,000 $(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 30,000 1,265,253 (3,810,043) (2,514,790)
Fair value of services provided
by shareholder.......................... -- -- 145,833 -- 145,833
Compensation and other expense
on stock options........................ -- -- 56,310 -- 56,310
Conversion of line of credit
from shareholder........................ 60,061 601 199,399 -- 200,000
Sale of common stock..................... 136,638 1,366 453,634 -- 455,000
Fair value of warrants issued in
connection with capital lease
and note payable........................ -- -- 396,256 -- 396,256
Cancellation of stock purchase
warrants................................ -- -- (408,253) -- (408,253)
Fair value of warrants issued in
connection with the subordinate
promissory notes.................. -- -- 1,463,190 -- 1,463,190
Net loss................................. -- -- -- (2,035,486) (2,035,486)
--------- ------- ---------- ----------- -----------
Balance at December 31, 1999.............. 3,196,699 $31,967 $3,571,622 $(5,845,529) $(2,241,940)
========= ======= ========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
WORLDQUEST NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Operating Activities
Net loss.................................................................... $(1,753,427) $(2,035,486)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation.............................................................. 141,833 204,488
Amortization.............................................................. 121,222 354,171
Goodwill write-off........................................................ -- 139,747
Fair value of shareholder services........................................ 175,000 145,833
Compensation and other expense on stock
options.................................................................. -- 56,310
Changes in operating assets and liabilities:
Accounts receivable....................................................... (193,529) 121,556
Accrued interest.......................................................... 84,427 175,456
Accounts payable and accrued
expenses................................................................. 747,384 726,187
Deferred revenue.......................................................... 95,965 63,236
Other assets.............................................................. (79,594) (1,058,812)
----------- -----------
Net cash used in operating activities....................................... (660,719) (1,107,314)
Investing Activities
Net additions to property and equipment, net................................ (148,047) (222,647)
----------- -----------
Net cash used in investing activities....................................... (148,047) (222,647)
Financing Activities
Proceeds from line of credit, net........................................... 919,294 450,629
Payments on capital leases.................................................. (53,519) (161,506)
Payment on notes payable.................................................... (25,000) (173,000)
Proceeds from promissory notes.............................................. -- 1,900,000
Sale of common stock........................................................ -- 455,000
----------- -----------
Net cash provided by financing activities................................... 840,775 2,471,123
Increase (decrease) in cash and cash
equivalents................................................................ 32,009 1,141,162
Cash and cash equivalents at beginning of
period..................................................................... (13,176) 18,833
----------- -----------
Cash and cash equivalents at end of period.................................. $ 18,833 $ 1,159,995
=========== ===========
Supplemental Disclosure of Cash Flow
Information
Interest paid............................................................... $ 54,075 $ 13,062
=========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 1998 and 1999
1. Organization and Description of Business
WorldQuest Networks, Inc. (WorldQuest or the Company) was incorporated as a
Texas corporation effective October 14, 1996. As of the balance sheet date, 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. Effective October 28,
1999, the Company reincorporated as a Delaware corporation. See Note 10.
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 1999 wholesale traffic and other revenues include approximately
$221,000, 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, 1999 tangible assets located in foreign locations
totaled 3% 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.
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)
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, 1998 and 1999, was $46,528 and
$157,944, 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 455,841 and 865,031 shares of the
Company's common stock for the years ended December 31, 1998 and 1999,
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.
F-8
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 card
processing companies relating to prepaid phone card sales, and amounts owed by
telephone companies for processed call traffic. At December 31, 1999, a credit
card processing company accounted for 64% of total accounts receivable.
Customers purchase the Company's prepaid calling cards primarily using major
credit cards which are reimbursed by credit card processing companies.
Accordingly, the Company does not routinely perform on-going credit evaluations
of its customers but does perform evaluations of its credit card processors.
Additionally, the Company does not require collateral.
Significant Customers
For fiscal 1998 and 1999, 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 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. The Company
adopted SOP 98-1 in 1999.
In December 1999, the Securities Exchange Commission issued Staff
Accounting Bulletin No. 101, which provides guidance on revenue recognition and
certain lease arrangements. This statement is effective for fiscal year 2000 and
is not anticipated to have a material effect on our results of operations,
financial position or cash flows.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Similar
Financial Instruments and for Hedging Activities" (SFAS 133), which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The Company will be required to adopt SFAS
133 at the beginning of fiscal 2001. The Company has not assessed the impact
this standard will have on its results of operations, financial position or cash
flows.
F-9
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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 December 31, 1999:
<TABLE>
<CAPTION>
Estimated
Useful
Lives
(Years)
---------
<S> <C> <C>
Leasehold improvements.............................. 5 $ 17,442
Switch and other network equipment.................. 2 to 3 1,047,226
Furniture and fixtures.............................. 5 37,721
Capitalized software................................ 5 230,120
----------
Total............................................. 1,332,509
Less: accumulated depreciation and
amortization................................ (757,936)
----------
$ 574,573
==========
</TABLE>
Included in the above net total for property and equipment in 1999 is
approximately $328,788 relating to assets under capital leases.
4. Other Assets
Other Assets consists of the following as of December 31, 1999:
<TABLE>
<S> <C>
Capitalized initial public offering costs (see Note 10)........................... $ 630,422
Promissory notes offering costs (see Note 7)...................................... 239,104
Deposits.......................................................................... 164,517
Other............................................................................. 110,734
----------
$1,144,777
==========
</TABLE>
In the fourth quarter of 1999, the Company expensed approximately $300,000
of capitalized initial public offering costs associated with a previous
registration statement, which was withdrawn. In February 2000, in connection
with the closing of the Company's initial public offering, the remaining
capitalized initial public offering costs were reclassified to additional
capital. See Note 10.
F-10
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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 net realizable value or will be used in other
Company operations.
6. Accrued Expenses
Accrued Expenses consist of the following as of December 31, 1999:
<TABLE>
<S> <C>
Accrued interest....................................... $111,420
Deposits received...................................... 111,629
Other.................................................. 243,034
--------
$466,083
========
</TABLE>
7. Debt
In December 1996, the Company entered into a $2,000,000 line of credit
agreement with Eagle. The outstanding amount as of December 31, 1999 totals
$1,988,725. 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 February 2000,
the Company paid $780,000 of principal and $87,647 of accrued interest on the
line of credit from Eagle.
In March 1999, the Company converted vendor accounts payable totaling
$252,000 into an interest bearing promissory note. Principal and accrued
interest on the note is due, as amended, in November 1999. Telecommunication
equipment, which had been fully depreciated as of December 31, 1999, was pledged
as collateral against the note. In December 1999, the Company further extended
the note maturity date to February 15, 2000 and paid the vendor $60,000 on the
outstanding note. This note was paid off in February 2000 with the proceeds of
the Company's initial public offering. See Note 10. In conjunction with the
amended promissory note, on September 16, 1999 the Company granted the vendor a
warrant to acquire 30,000 shares of its common stock, which expires on December
31, 2000. The warrant vests immediately and is exercisable at the initial public
offering price. The fair value of the warrant is being recognized as additional
interest expense on the promissory note.
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 $11,275
is available for future borrowings as of December 31, 1999. 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.
F-11
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In December 1999, the Company raised $1.9 million before offering costs of
$255,000 through the private placement of units consisting of 8% unsecured
subordinated convertible promissory notes and common stock purchase warrants.
The notes mature and become immediately due and payable upon the earlier of an
initial public offering or December 31, 2000. The fair value of the stock
purchase warrants of approximately $1.5 million is being recognized as
additional interest expense over the term of the subordinated convertible
promissory notes. These notes were repaid during February and March 2000, from
the proceeds of the Company's initial public offering. See Note 10. The
remaining unamortized amount of the fair value of the warrants of approximately
$1.4 million will be recognized as interest expense in the first quarter of
2000.
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 2.7 million outstanding
shares of the common stock of the Company as of December 31, 1999.
Additionally the founder and CEO had elected to forego a cash salary until
November 1999, at which time he began receiving an annual salary of $175,000.
$35,000 of CEO Salary expense was recorded in 1999. 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.
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 1998 and 1999 a relative of the CEO was paid $61,500 and $5,500,
respectively, for providing consulting services to the Company.
F-12
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
deferred tax assets and liabilities are as follows as of December 31, 1999:
<TABLE>
<S> <C>
Deferred tax assets:
Deferred revenue...................................... $ 54,128
Depreciation and amortization......................... 97,264
Net operating loss carryforwards...................... 1,500,451
Other................................................. 148,395
-----------
Total deferred tax assets......................... 1,800,238
Valuation allowance....................................... (1,800,238)
-----------
Net deferred tax assets................................... $ --
===========
</TABLE>
The Company has U.S. net operating loss carryforwards of approximately $4.4
million as of December 31, 1999, which expire beginning in 2011. The Company's
total deferred tax assets have been fully reserved due to the uncertainty of
future realization. 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.
During 1999, the valuation allowance increased by approximately $650,000.
10. Stockholders' Equity (Deficit)
Common and Preferred Stock
On October 14, 1996, the Company was incorporated with authorized share
capital consisting of 10,000,000 shares of common stock with par value of $0.10
per share, and 5,000,000 shares of preferred stock with par value of $0.10 per
share. As of the incorporation date, 10,000 shares of Common Stock, with $.10
par value were issued and outstanding.
On October 28, 1999 the Company reincorporated as a Delaware corporation,
with authorized share capital consisting of 50,000,000 shares of common stock
with par value of $0.01 per share, and 10,000,000 shares of preferred stock with
par value of $0.01 per share. The impact of the Company's reincorporation has
been retroactively reflected in the financial statements for all periods
presented.
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 $29,900
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.
F-13
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In February 2000, the Company completed a successful initial public
offering, selling a total of 3,162,500 shares of common stock at a price of $13
per share. The offering commenced on February 4, 2000, with the closing of
2,750,000 shares on February 9, 2000 and the sale of an additional 412,000
shares, representing the over-allotment option, closing on February 22, 2000.
The initial public offering resulted in net proceeds of approximately $36.4
million to the Company.
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. As more fully discussed in Note 11, these warrants were canceled on
August 31, 1999.
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.
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 1999, the Company granted options to employees under the Option Plan, to
purchase 36,164 shares of common stock 21,164 of the options were granted at an
exercise price of $3.33 and 15,000 were granted at the initial public offering
price. These shares vest ratably over a three year period.
In July 1999, the Company issued options under the Option Plan to its Chief
Financial Officer to purchase 100,000 shares with an exercise price equal to its
initial public offering price.
In November 1999, the Company granted 30,000 options to directors,
exercisable at the initial public offering price. The options granted vest on
the first anniversary of the grant date.
The weighted average exercise price included in the table includes the
price at which the Company's initial public offering closed on February 9, 2000.
F-14
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee stock option transactions under the Option Plan for the years
ended December 31, 1998 and 1999 are summarized below:
<TABLE>
<CAPTION>
Weighted
Shares Weighted Average
Under Average Remaining
Option Exercise Contractual
Plan Price Life
------------ ------------ ------------
<S> <C> <C> <C>
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..................................................................... 166,164 11.77 7 years
Exercised................................................................... -- -- --
Canceled.................................................................... (1,500) 1.0 --
-------
Outstanding at December 31, 1999............................................ 293,164 $ 7.89 6.8 years
=======
Available for granting in future periods.................................... 206,836
=======
</TABLE>
At December 31, 1998 and 1999, 66,950 and 72,233 options were exercisable
under the Option Plan, respectively.
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 vested immediately upon the
closing of the Company's initial public offering on February 9, 2000.
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 as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Net loss:
As reported......................................... $(1,753,427) $(2,035,486)
Pro forma........................................... (1,754,955) (2,087,552)
Net loss per share:
As reported -- basic and diluted.................... $ (0.58) $ (0.65)
Pro forma -- basic and diluted...................... $ (0.58) $ (0.67)
</TABLE>
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 1999,
respectively: risk-free interest rate of 5% and 6%, dividend yield of zero and
an expected option life of 4 years. The options granted during 1998 and 1999 had
a weighted average fair value of $.60 and $.86 per share, respectively.
F-15
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reserved Capital Shares
The Company has reserved the following shares of common stock as of
December 31, 1999:
<TABLE>
<S> <C>
Stock Option Plan....................................................... 500,000
Stock Purchase Warrants................................................. 60,000
Options issued outside of Stock Option Plan............................. 188,867
-------
Total................................................................... 748,867
=======
</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, 1999, 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>
2000................................................................. $180,449 $ 63,486
2001................................................................. 99,007 63,486
2002................................................................. 54,918 5,291
2003................................................................. -- --
2004................................................................. -- --
Thereafter........................................................... -- --
-------- --------
334,374 $132,263
========
Less amount representing interest...................... 206,899
--------
Present value of minimum lease payments................ 127,475
Less current portion................................... 98,815
--------
Long-term portion of obligations under capital leases.. $ 28,660
========
</TABLE>
Rental expense under operating leases was approximately $75,185 and $60,663
for fiscal years 1998 and 1999, 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 $10,000 and $7,000 for 1998 and 1999, respectively.
F-16
<PAGE>
WORLDQUEST NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 transaction was recorded in the third quarter of 1999
and effectively reversed the amounts previously recognized.
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 December 31, 1999, the Company had utilized $296,750 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 warrants to
purchase 30,000 shares of its common stock. These warrants have a five year term
and are exercisable at the initial public offering price. The Company will grant
the 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. At December 31, 1999, warrants to purchase 29,675
shares of common stock had been issued.
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 the Company's 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.
14. Subsequent Events (unaudited)
In December 1999, the Company entered into a consulting agreement pursuant
to which the Company agreed to grant options to a consultant exercisable at an
exercise price of $6 per share for up to 250,000 shares of common stock upon
execution of Internet portal agreements between the Company and select Internet
portals introduced to the Company by the consultant. Effective March 16, 2000,
the Company granted the consultant options to acquire 50,000 shares of common
stock upon the Company executing an Internet portal agreement. The options have
a five year term and are immediately exercisable on the grant date at an
exercise price of $6 per share. The fair value of the options granted of
approximately $1.3 million will be recognized as additional non-cash expense all
or a portion of which will be taken as an expense in the first quarter of 2000.
F-17
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EXHIBIT 1.1
UNDERWRITING AGREEMENT
2,750,000 Shares of Common Stock
of
WORLDQUEST NETWORKS, INC.
February 4, 2000
Kaufman Bros., L.P.
John G. Kinnard and Company Incorporated
WestPark Capital, Inc.
As Representatives of the
several Underwriters named
in Schedule I attached hereto
800 Third Avenue - 25th Floor
New York, New York 10022
Dear Sirs:
The undersigned, WorldQuest Networks, Inc., a Delaware corporation (the
"Company"), hereby confirms its agreement with the several underwriters named in
Schedule I hereto (collectively, the "Underwriters") for whom you have been
authorized to act as Representatives (in such capacity, the "Representatives"),
as set forth below.
1. Introduction. The Company proposes to issue and sell to the
Underwriters 2,750,000 shares (the "Stock") of the common stock, par value $.01
per share, of the Company (the "Common Stock"). In addition, solely for the
purpose of covering over-allotments, the Company proposes to grant the
Underwriters the option to purchase from it, on a pro rata basis, within 45 days
from the date of the initial public offering of the Common Stock, up to 412,500
shares of Common Stock to be initially purchased from the Company (the
"Additional Stock") at a purchase price equal to the Purchase Price (as
hereinafter defined). The Common Stock is more fully described in the
Prospectus (as hereinafter defined).
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the several Underwriters
that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") under the Securities Act of 1933, as amended (the
"Act"), a registration
<PAGE>
statement, and may have filed one or more amendments thereto, on Form SB-2
(File No. 333-93019) (the "Original Registration Statement"), including in
such registration statement and each such amendment a related Preliminary
Prospectus (as hereinafter defined), for the registration of (i) the Stock,
(ii) the Additional Stock, (iii) the common stock purchase warrants
referred to in Section 5(r) hereof (the "Representatives' Warrants"), and
the (iv) the shares of Common Stock underlying the Representatives'
Warrants (the "Warrant Stock") (the Stock, the Additional Stock, the
Representatives' Warrants and the Warrant Stock are collectively referred
to as the "Securities"). After the execution of this Agreement: (i) if the
Original Registration Statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, then the Company
will file with the Commission (A) if the Company relies on Rule 434 of the
Act, a Term Sheet (as hereinafter defined) relating to the Securities, that
shall identify the Preliminary Prospectus that it supplements containing
such information as is required or permitted by Rules 434, 430A and 424(b)
under the Act, or (B) if the Company does not rely on Rule 434 under the
Act, a prospectus in the form most recently included in an amendment to the
Original Registration Statement (or, if no such amendment shall have been
filed, in the Original Registration Statement), with such changes or
insertions as are required by Rule 430A under the Act or permitted by Rule
424(b) under the Act, and, in the case of either clause (i)(A) or (i)(B) of
this sentence, as shall have been provided to and approved by the
Representatives prior to the execution of this Agreement, or (ii) if the
Original Registration Statement, as it may have been amended, has not been
declared by the Commission to be effective under the Act, then the Company
will file with the Commission an amendment to the Original Registration
Statement, including a form of prospectus, a copy of which amendment shall
have been furnished to and approved by the Representatives prior to the
execution of this Agreement, which approval shall not be unreasonably
withheld. The Company, with the prior consent of the Representatives, may
have also filed a related registration statement with the Commission
pursuant to Rule 462(b) under the Act for the purpose of registering a
portion of the Securities (a "Rule 462(b) Registration Statement"), which
shall become effective upon filing. As used in this Agreement, the term
"Registration Statement" means collectively, (i) the Original Registration
Statement, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus, and if any post-effective amendment thereto
becomes effective prior to the Closing Date (as defined in Section 3
hereof), such registration statement as so amended, and (ii) any related
Rule 462(b) Registration Statement which may have been filed with the
Commission pursuant to the Rule 462(b) under the Act (including the
Original Registration Statement and any Preliminary Prospectus or
Prospectus incorporated therein at the time such Rule 462(b) Registration
Statement becomes effective); the term "Preliminary Prospectus" means each
prospectus subject to completion filed with the Commission with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or
any amendment thereto at the time it was or is declared effective); the
term "Prospectus" means:
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(A) if the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Securities that is first filed with the
Commission pursuant to Rule 424(b)(7) under the Act, together
with the Preliminary Prospectus identified therein that such Term
Sheet supplements;
(B) if the Company does not rely on Rule 434 under the Act, the
prospectus first filed with the Commission pursuant to Rule
424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under
the Act, the prospectus included in the Registration Statement;
and the term "Term Sheet" means any term sheet that satisfies the
requirements of Rule 434 under the Act. Any reference herein to the
"date" of a Prospectus that includes a Term Sheet shall mean the date
of such Term Sheet.
(b) When any Preliminary Prospectus was filed with the Commission it
(i) contained all statements required to be stated therein in accordance
with, and complied in all material respects with the requirements of, the
Act and the rules and regulations of the Commission thereunder, and (ii)
did not include any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
When the Registration Statement or any amendment thereto was or is declared
effective, as the case may be, it (i) contained or will contain all
statements required to be stated therein in accordance with, and complied
or will comply in all material respects with the requirements of, the Act
and the rules and regulations of the Commission thereunder, and (ii) did
not or will not include any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not
misleading. When the Prospectus or any Term Sheet that is a part thereof
or any amendment or supplement to the Prospectus is filed with the
Commission pursuant to Rule 424(b) (or, if the Prospectus or any part
thereof or such amendment or supplement is not required to be so filed,
when the Registration Statement or the amendment thereto containing such
amendment or supplement to the Prospectus was or is declared effective) and
on the Closing Date and any Additional Closing Date (both as hereinafter
defined in Section 3), the Prospectus, as amended or supplemented at any
such time, (i) contained or will contain all statements required to be
stated therein in accordance with, and complied or will comply in all
material respects with the requirements of, the Act and the rules and
regulations of the Commission thereunder, and (ii) did not or will not
include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading. The
foregoing provisions of this paragraph (b) do not apply to statements or
omissions made in any Preliminary Prospectus, the Registration Statement or
any
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<PAGE>
amendment thereto or the Prospectus or any amendment or supplement thereto
in reliance upon and in conformity with written information furnished to
the Company as stated in Section 8(b) with respect to any Underwriter
through the Representatives specifically for use therein.
(c) If the Company has elected to rely on Rule 462(b), then (i) the
Company has filed a Rule 462(b) Registration Statement in compliance with
and that is effective upon filing with the Commission pursuant to Rule
462(b) and has received confirmation of its receipt, and (ii) the Company
has given irrevocable instructions for transmission of the applicable
filing fee in connection with the filing of the Rule 462(b) Registration
Statement in compliance with Rule 111 promulgated under the Act or the
Commission has received payment of such filing fee.
(d) Neither the Commission nor the "blue sky" or securities authority
of any jurisdiction has issued an order (a "Stop Order") suspending the
effectiveness of the Registration Statement, preventing or suspending the
use of any Preliminary Prospectus, the Prospectus, the Registration
Statement, or any amendment or supplement thereto, refusing to permit the
effectiveness of the Registration Statement, or suspending the registration
or qualification of any of the Securities, nor has any of such authorities
instituted or threatened to institute any proceedings with respect to a
Stop Order.
(e) Any contract, agreement, instrument, lease, or license required
to be described in the Registration Statement and the Prospectus (or if the
Prospectus is not in existence, the most recent Preliminary Prospectus) has
been properly described therein. Any contract, agreement, instrument,
lease, or license required to be filed as an exhibit to the Registration
Statement has been filed with the Commission as an exhibit to or has been
incorporated as an exhibit by reference into the Registration Statement.
(f) The Company has no subsidiaries (as defined in the general rules
and regulations promulgated under the Act (the "Regulations")) other than
Red de Busqueda Mundial, S.A., an inactive Costa Rican corporation and a
joint venture with BDC, LLC, dated April 9, 1999 (together, the
"Subsidiaries"). The Company is a corporation duly organized, validly
existing, and in good standing under the laws of its jurisdiction of
incorporation, with full power and authority, and all necessary consents,
authorizations, approvals, orders, licenses, certificates, and permits of
and from, and declarations and filings with, all federal, state, local, and
other governmental authorities and all courts and other tribunals, to own,
lease, license, and use its properties and assets and to carry on the
business in the manner described in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). Each of the Subsidiaries has been duly
incorporated or organized, as applicable, and is validly existing as a
corporation or joint venture, as applicable, in good standing under the
laws of the jurisdiction of its incorporation or organization, with full
corporate or other 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
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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 and is in good
standing in every jurisdiction in which its ownership, leasing, licensing,
or use of property and assets or the conduct of its business makes such
qualification necessary. Except as otherwise disclosed in the Registration
Statement, the Company does not own, and at the Closing Date and any
Additional Closing Date will not own, directly or indirectly, any shares of
stock or any other equity or long-term debt securities of any corporation
or have any equity interest in any firm, partnership, joint venture,
association or other entity.
(g) The authorized capital stock of the Company consists of (i)
50,000,000 shares of Common Stock, of which 3,196,699 shares are
outstanding, and (ii) 10,000,000 shares of preferred stock, par value $.01
per share (the "Preferred Stock"), of which no shares are outstanding.
Each outstanding share of the Company's capital stock has been validly
authorized, issued, fully paid, and nonassessable, without any personal
liability attaching to the ownership thereof, has not been issued and is
not owned or held in violation of any preemptive rights of stockholders.
There is no commitment, plan, or arrangement to issue, and no outstanding
option, warrant, or other right calling for the issuance of, any share of
capital stock of the Company or any security or other instrument which by
its terms is convertible into, exercisable for, or exchangeable for capital
stock of the Company, except as may be set forth in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus). Except as set forth in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), there is
outstanding no security or other instrument which by its terms is
convertible into or exchangeable for capital stock of the Company.
(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 Date, 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
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<PAGE>
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) The consolidated financial statements of the Company included in
the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) fairly present the
financial position, the results of operations, and the other information
purported to be shown therein at the respective dates and for the
respective periods to which they apply. Such financial statements have
been prepared in accordance with generally accepted accounting principles
(except to the extent that certain footnote disclosures regarding any stub
period may have been omitted in accordance with the applicable rules of the
Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) consistently applied throughout the periods involved, are
correct and complete, and are in accordance with the books and records of
the Company and the Subsidiaries. The accountants whose report on the
audited financial statements is filed with the Commission as a part of the
Registration Statement are, and during the periods covered by their
report(s) included in the Registration Statement and the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary Prospectus)
were, independent certified public accountants within the meaning of the
Act and the Regulations. No other financial statements are required by Form
SB-2 or otherwise to be included in the Registration Statement or the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). There has at no time been a material adverse
change in the financial condition, results of operations, business,
properties, assets, liabilities, or future prospects of the Company or the
Subsidiaries from the latest information set forth in the Registration
Statement or the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), except as may be properly described in
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). None of the Company or any of the Subsidiaries is
currently planning any probable acquisition for which pro forma financial
information would be required by the Act.
(j) There is no litigation, arbitration, claim, governmental or other
proceeding (formal or informal), or investigation pending, or, to the best
of the Company's knowledge, threatened, or in prospect (or any basis
therefor) with respect to the Company, the Subsidiaries or any of their
respective operations, business, properties, or assets except as may be
properly described in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) or such as individually
or in the aggregate do not now have and will not in the future have a
material adverse effect upon the operations, business, properties, or
assets of the Company. Neither the Company nor the Subsidiaries is in
violation of, or in default with respect to, any law, rule, regulation,
order, judgment, or decree except as may be properly described in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or such as in the aggregate do not now have and
will not in the future have a material adverse effect upon the operations,
business, properties, or assets of the Company or the Subsidiaries; nor is
either the Company or the Subsidiaries required to take any action in order
to avoid any such violation or default.
-6-
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(k) Each of the Company and the Subsidiaries has good and marketable
title in fee simple absolute to all real properties and good title to all
other properties and assets which the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus) indicates are
owned by it, free and clear of all liens, security interests, pledges,
charges, encumbrances, and mortgages (except as may be properly described
in the Prospectus, or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) or such as do not materially affect the
value of such property and do not interfere with the use made of such
property by the Company and the Subsidiaries. No real property owned,
leased, licensed, or used by the Company or the Subsidiaries lies in an
area which is, or to the knowledge of the Company or the Subsidiaries will
be, subject to zoning, use, or building code restrictions which would
prohibit, and no state of facts relating to the actions or inaction of
another person or entity or his or its ownership, leasing, licensing, or
use of any real or personal property exists or will exist which would
prevent, the continued effective ownership, leasing, licensing, or use of
such real property in the business of the Company or the Subsidiaries as
presently conducted or as the Prospectus indicates it contemplates
conducting (except as may be properly described in the Prospectus, or if
the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(l) Neither the Company nor the Subsidiaries, nor to the knowledge of
the Company, any other party, is now or is expected by the Company to be in
violation or breach of, or in default with respect to, complying with any
material provision of any contract, agreement, instrument, lease, license,
arrangement, or understanding which is material to the Company or the
Subsidiaries, and each such contract, agreement, instrument, lease,
license, arrangement, and understanding is in full force and is the legal,
valid, and binding obligation of the parties thereto and is enforceable as
to them in accordance with its terms (subject to applicable bankruptcy,
insolvency and other laws affecting the enforceability of creditors' rights
generally). Each of the Company and the Subsidiaries enjoys peaceful and
undisturbed possession under all leases and licenses under which it
operates. Except as may be properly described in the Prospectus (or if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
neither the Company nor the Subsidiaries is a party to or bound by any
contract, agreement, instrument, lease, license, arrangement, or
understanding, or subject to any charter or other restriction, which has
had or may in the future have a material adverse effect on the financial
condition, results of operations, business, properties, assets,
liabilities, or future prospects of the Company or the Subsidiaries. The
Company is not in violation or breach of, or in default with respect to,
any term of its certificate of incorporation (or other charter document) or
by-laws. The Subsidiaries are not in violation or breach of, or in default
with respect to, any term of its charter documents, operating agreement or
by-laws, as applicable.
(m) All patents, patent applications, trademarks, trademark
applications, trade names, service marks, copyrights, franchises, and other
intangible properties and assets (all of the foregoing being herein called
"Intangibles") that the Company and the Subsidiaries own or have pending,
or under which they are licensed, are in good standing and
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uncontested. Each of the Company and each of its Subsidiaries owns and/or
possesses all rights to any Intangible necessary to the business of the
Company or the Subsidiaries as presently conducted or as the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) indicates each of the Company and its Subsidiaries contemplates
conducting (except as may be so designated in the Prospectus, or, if the
Prospectus if not in existence, the most recent Preliminary Prospectus).
Except as disclosed in the Prospectus, neither the Company nor the
Subsidiaries has infringed, is infringing, and has received notice of
infringement with respect to, asserted Intangibles of others. To the
knowledge of the Company, there is no infringement by others of Intangibles
of the Company or the Subsidiaries. To the knowledge of the Company, there
is no Intangible of others which has had or may in the future have a
materially adverse effect on the financial condition, results of
operations, business, properties, assets, liabilities, or future prospects
of the Company.
(n) None of the Company, the Subsidiaries, nor any director, officer,
agent, employee, or other person associated with or acting on behalf of the
Company or the Subsidiaries has, directly or indirectly (i) used any
corporate funds for unlawful contributions, gifts, entertainment, or other
unlawful expenses relating to political activity, (ii) made any unlawful
payment to foreign or domestic government officials or employees or to
foreign or domestic political parties or campaigns from Company funds,
(iii) violated any provision of the Foreign Corrupt Practices Act of 1977,
as amended, or (iv) made any bribe, rebate, payoff, influence payment,
kickback, or other unlawful payment.
(o) The Company has all requisite power and authority to execute
deliver, and perform both this Agreement and the certificate evidencing the
Representatives' Warrants (the "Representatives' Warrant Agreement" and
together with this Agreement, the "Company Documents"). All necessary
corporate proceedings of the Company have been duly taken to authorize the
execution, delivery, and performance of each of the Company Documents by
the Company. This Agreement has been duly authorized, executed, and
delivered by the Company, is the legal, valid, and binding obligation of
the Company, and is enforceable as to the Company in accordance with its
terms (subject to applicable bankruptcy, insolvency and other laws
affecting the enforceability of creditors' rights generally). The
Representatives' Warrant Agreement has been duly authorized by the Company
and when executed and delivered by the Company, will be the legal, valid,
and binding obligation of the Company, enforceable against the Company in
accordance with its terms (subject to applicable bankruptcy, insolvency and
other laws affecting the enforceability of creditors' rights generally).
No consent, authorization, approval, order, license, certificate, or permit
of or from, or declaration or filing with, any federal, state, local, or
other governmental authority or any court or other tribunal is required by
the Company for the execution, delivery, or performance by the Company of
any of the Company Documents (except filings under the Act which have been
or will be made before the Closing Date and such consents consisting only
of consents under "blue sky" or securities laws which have been obtained at
or prior to the date of this Agreement). No
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consent of any party to any contract, agreement, instrument, lease,
license, arrangement, or understanding to which either the Company or the
Subsidiaries is a party, or to which any of its respective properties or
assets are subject, is required for the execution, delivery, or performance
of the Company Documents; and the execution, delivery, and performance of
any of the Company Documents will not violate, result in a breach of,
conflict with, or (with or without the giving of notice or the passage of
time or both) entitle any party to terminate or call a default under any
such contract, agreement, instrument, lease, license, arrangement, or
understanding, or violate or result in a breach of any term of the
certificate of incorporation (or other charter document) or by-laws of the
Company or the Subsidiaries or violate, result in a breach of, or conflict
with any law, rule, regulation, order, judgment, or decree binding on the
Company or the Subsidiaries or to which any of their respective operations,
businesses, properties, or assets are subject.
(p) The Stock and the Additional Stock are validly authorized and,
when issued and delivered in accordance with this Agreement, will be
validly issued, fully paid, and nonassessable, without any personal
liability attaching to the ownership thereof, and will not be issued in
violation of any preemptive rights of stockholders. The Underwriters will
receive good title to the Stock and Additional Stock purchased by them,
respectively, free and clear of all liens, security interests, pledges,
charges, encumbrances, stockholders' agreements, and voting trusts.
(q) The Warrant Stock is validly authorized and reserved for issuance
and, when issued and delivered upon exercise of the Representatives'
Warrants in accordance with the Representatives' Warrant Agreement, will be
validly issued, fully paid and non-assessable, without any personal
liability attaching to the ownership thereof, and will not be issued in
violation of any preemptive rights of stockholders; and the holders of the
Representatives' Warrants will receive good title to the securities
purchased by them, respectively, free and clear of all liens, security
interests, pledges, charges, encumbrances, stockholders' agreements, and
voting trusts.
(r) The Common Stock, the Securities, and the Representatives'
Warrant Agreement conform in all material respects with all statements
relating thereto contained in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus).
(s) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus) and
except as may otherwise be properly described in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
neither the Company nor the Subsidiaries has (i) issued any securities or
incurred any liability or obligation, primary or contingent, for borrowed
money, (ii) entered into any transaction not in the ordinary course of
business, or (iii) declared or paid any dividend on its capital stock.
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(t) None of the Company, the Subsidiaries, nor any of their
respective officers, directors, or affiliates (as defined in the
Regulations), has taken or will take, directly or indirectly, prior to the
termination of the underwriting syndicate contemplated by this Agreement,
any action designed to stabilize or manipulate the price of any security of
the Company, or which has 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, to facilitate the
sale or resale of any of the Stock or the Additional Stock.
(u) The Company has obtained from each of its directors, officers,
affiliates (as defined in the Regulations) and each other person who
beneficially owns any share of Common Stock and the holders of outstanding
options and warrants to purchase up to 865,031 shares of Common Stock, such
director's, officer's, affiliates's or other person's enforceable written
agreement, in form and substance satisfactory to counsel for the
Underwriters, that for a period of 180 days from the effective date of the
Registration Statement such individual will not, without the prior written
consent of the Representatives, offer, pledge, sell, contract to sell,
grant any option for the sale of, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any security or other instrument
which by its terms is convertible into, exercisable for, or exchangeable
for shares of Common Stock or other securities of the Company, including,
without limitation, any shares of Common Stock issuable under any
outstanding stock options or warrants.
(v) No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company because of the
filing or effectiveness of the Registration Statement.
(w) Except as may be set forth in the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus),
the Company has not incurred any liability for a fee, commission, or other
compensation on account of the employment of a broker or finder in
connection with the transactions contemplated by this Agreement.
(x) The Company is not, and does not intend to conduct its business
in a manner in which it would become, an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940, as amended (the
"Investment Company Act").
(y) No officer, director, or, to the knowledge of the Company, any
beneficial owner of the Company's securities has any direct or indirect
affiliation or association with the National Association of Securities
Dealers, Inc. (the "NASD") or any member thereof.
(z) the Common Stock has been approved for quotation on the Nasdaq
National Market, subject to official notice of issuance;
(aa) The Company has appointed at least two independent directors to
the Company's Board of Directors, as required by the Nasdaq Stock Market
Marketplace Rules,
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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.
(bb) To the extent necessary to comply with the regulation of Internet
telecommunications services providers and telecommunications carriers, the
Company has all 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.
(cc) 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, Sale, and Delivery of the Stock and the Additional Stock.
On the basis of the representations, warranties, covenants, and agreements of
the Company, but subject to the terms and conditions herein set forth, the
Company agrees to sell to the several Underwriters, and the Underwriters,
severally and not jointly, agree to purchase from the Company, the numbers of
shares of Stock set opposite the respective names of the Underwriters in
Schedule I attached hereto.
The purchase price per share to be paid by the several Underwriters to the
Company shall be $12.03 (the "Purchase Price"). The initial public offering
price per share of the Stock shall be $13.00.
Payment for the Stock by the Underwriters shall be made by certified or
official bank check or checks drawn upon or by a New York Clearing House bank,
or by wire transfer, and payable in next-day funds to the order of the Company
at the offices of Kaufman Bros., L.P., 800 Third Avenue - 25th Floor, New York,
New York, or at such other place in the New York City
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metropolitan area as you shall determine and advise the Company by at least two
full days' notice in writing, upon delivery of the Stock to you for the
respective accounts of the Underwriters. Such delivery and payment shall be made
at 10:00 a.m., New York City time, on February 9, 2000 (unless such time and
date is postponed in accordance with the provisions of Section 9(c) hereof), or
at such other time as shall be agreed upon between you and the Company. The time
and date of such delivery and payment are herein called the "Closing Date."
Certificates for the Stock shall be registered in such name or names and in
such authorized denominations as you may request in writing at least two full
business days' prior to the Closing Date. The Company shall permit you to
examine and package such certificates for delivery at least one full business
day prior to the Closing Date.
In addition, the Company hereby grants to the several Underwriters the
option to purchase all or a portion of the Additional Stock as may be necessary
to cover over-allotments, at the same purchase price per share to be paid by the
several Underwriters to the Company for the Stock as provided for in this
Section 3. The Additional Stock shall be purchased by the several Underwriters
from the Company as provided herein, pro rata in accordance with the ratio which
the number of shares of Stock set forth opposite such Underwriter's name on
Schedule I bears to the total number of shares of Stock, subject to adjustment
to avoid fractional shares. This option may be exercised only to cover over-
allotments in the sale of shares by the several Underwriters. This option may
be exercised by you on the basis of the representations, warranties, covenants,
and agreements of the Company herein contained, but subject to the terms and
conditions herein set forth, at any time and from time to time on or before the
forty-fifth day following the effective date of the Registration Statement, by
written notice by you to the Company. Such notice shall set forth the aggregate
number of shares of Additional Stock as to which the option is being exercised
and the time and date, as determined by you, when such Additional Stock is to be
delivered (such time and date are herein called an "Additional Closing Date");
provided, however, that no Additional Closing Date shall be earlier than the
Closing Date nor earlier than the second business day after the date on which
the notice of the exercise of the option shall have been given nor later than
the third business day after the date on which such notice shall have been
given.
Payment for the shares of Additional Stock by the Underwriters shall be
made by certified or official bank check or checks drawn upon or by a New York
Clearing House bank, or by wire transfer, and payable in next-day funds to the
order of the Company at the offices of Kaufman Bros., L.P., 800 Third Avenue,
New York, New York, or at such other place in the New York City Metropolitan
Area as you shall determine and advise the Company by at least two full days'
notice in writing, upon delivery of the shares of Additional Stock to you for
the respective accounts of the Underwriters.
Certificates for the Additional Stock shall be registered in such name or
names and in such authorized denominations as you may request in writing at
least two full business days' prior to the Additional Closing Date with respect
thereto. The Company shall permit you to examine and
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package such certificates for delivery at least one full business day prior to
the Additional Closing Date with respect thereto.
4. Offering. The Underwriters are to make a public offering of the Stock
as soon, on or after the effective date of the Registration Statement, as you
deem it advisable so to do. The Stock is to be initially offered to the public
at the initial public offering price as provided for in Section 3 hereof (such
price being herein called the "public offering price") and upon the terms and
subject to the conditions set forth in the Prospectus. After the public
offering, you may from time to time increase or decrease the public offering
price, in your sole discretion, by reason of changes in general market
conditions or otherwise.
5. Covenants of the Company. The Company covenants that it will:
(a) Use its best efforts to cause the Registration Statement, if not
effective at the time of execution of this Agreement, and any amendments
thereto, to become effective as promptly as possible. If required, the
Company will file the Prospectus or any Term Sheet that constitutes a part
thereof and any amendments or supplements thereto with the Commission in
the manner and within the time period required by Rules 434 and 424(b)
under the Act. During any time when a prospectus relating to the Stock
and the Additional Stock is required to be delivered under the Act, the
Company (i) will comply with all requirements imposed upon it by the Act
and the Regulations to the extent necessary to permit the continuance of
sales of or dealings in the Stock and the Additional Stock, in accordance
with the provisions hereof and of the Prospectus, as then amended or
supplemented, and (ii) will not file with the Commission the Prospectus,
Term Sheet or the amendment referred to in the second sentence of Section
2(a) hereof, any amendment or supplement to such Prospectus or Term Sheet,
or any amendment to the Registration Statement of which the Representatives
shall not have given its reasonable consent. The Company will prepare and
file with the Commission, in accordance with the Regulations, promptly upon
request by the Representatives or counsel for the Underwriters, any
amendments to the Registration Statement or amendments or supplements to
the Prospectus that may be necessary or advisable in connection with the
distribution of the Stock and Additional Stock by the several Underwriters,
and will use its best efforts to cause any such amendment to the
Registration Statement to be declared effective by the Commission as
promptly as possible.
(b) Notify you immediately, and confirm such notice in writing, (i)
when the Registration Statement and any post-effective amendment thereto
becomes effective, (ii) of the receipt of any comments from the Commission
or the "blue sky" or securities authority of any jurisdiction regarding the
Registration Statement, any post-effective amendment thereto, the
Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto, and (iii) of the receipt of any notification with respect to a
Stop Order or the initiation or threatening of any proceeding with respect
to a Stop Order. The
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Company will use its best efforts to prevent the issuance of any Stop Order
and, if any Stop Order is issued, to obtain the lifting thereof as promptly
as possible.
(c) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Stock or the Additional Stock is required to be
delivered under the Act or the Regulations, or (ii) the Additional Closing
Date, any event occurs as a result of which the Prospectus, as then amended
or supplemented, would include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or if for any other reason it is necessary at any time to amend
or supplement the Prospectus to comply with the Act or the Regulations, the
Company will promptly notify the Representatives thereof and, subject to
Section 5(a) hereof, will prepare and file with the Commission, at the
Company's expense, an amendment to the Registration Statement or an
amendment or supplement to the Prospectus that corrects such statement or
omission or effects such compliance and in case any Underwriter is required
to deliver a prospectus relating to the Stock or the Additional 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; 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.
(d) The Company will, without charge, provide (i) to the
Representatives and to counsel for the Underwriters a signed copy of the
Original Registration Statement filed with the Commission with respect to
the Securities and each amendment thereto (in each case including exhibits
thereto) or any Rule 462(b) Registration Statement, (ii) to each other
Underwriter, a conformed copy of the Original Registration Statement, any
Rule 462(b) Registration Statement, and each amendment thereto (in each
case without exhibits thereto), and (iii) so long as a prospectus relating
to the Stock and Additional Stock is required to be delivered under the Act
and the Regulations, as many copies of each Preliminary Prospectus or the
Prospectus, or any amendment or supplement thereto, as the Representatives
may reasonably request; without limiting the application of clause (iii) of
this sentence, the Company, no later than (A) 6:00 p.m., New York City
time, on the date of determination of the public offering price, if such
determination occurred at or prior to 12:00 Noon, New York City time, on
such date, or (B) 6:00 p.m., New York City time, on the business day
following the date of determination of the public offering price, if such
determination occurred after 12:00 Noon, New York City time, on such date,
will deliver to the Representatives, without charge, as many copies of the
Prospectus, and any amendment or supplement thereto, as the Representatives
may reasonably request for purposes of confirming orders that are expected
to settle on the Closing Date.
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(e) Endeavor in good faith, in cooperation with you, at or prior to
the time the Registration Statement becomes effective, to qualify the Stock
and the Additional Stock for offering and sale under the "blue sky" or
securities laws of such jurisdictions as you may designate; provided,
however, that no such qualification shall be required in any jurisdiction
where, as a result thereof, the Company would be subject to taxation as a
foreign corporation doing business in such jurisdiction to which it is not
then subject. In each jurisdiction where such qualification shall be
effected, the Company will, unless you agree in writing that such action is
not at the time necessary or advisable, file and make such statements or
reports at such times as are or may be required by the laws of such
jurisdiction. 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 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.
(f) Make generally available (within the meaning of Section 11(a) of
the Act and the Regulations) to its security holders as soon as
practicable, but in no event later than 90 days after the end of 12 months
after its current fiscal quarter, an earnings statement (which need not be
certified by independent certified public accountants unless required by
the Act or the Regulations, but which shall satisfy the provisions of
Section 11(a) of the Act and the Regulations) covering a period of at least
12 months beginning after the effective date of the Registration Statement.
(g) For a period of six months from the effective date of the
Registration Statement, not, without the prior written consent of the
Representatives, offer, issue, sell, contract to sell, grant any option for
the sale of, or otherwise dispose of, directly or indirectly, any shares of
Common Stock or other securities of the Company (or any security or other
instrument which by its terms is convertible into, exercisable for, or
exchangeable for shares of Common Stock or other securities of the Company)
except for the issuance of (i) the Securities; (ii) stock options which may
be granted pursuant to the Company's 1997 Stock Option Plan (as such terms
are defined in the Prospectus) and the Common Stock issuable upon the
exercise thereof, as set forth in the Prospectus; (iii) shares of Common
Stock issuable upon the exercise of warrants and options outstanding on the
date hereof, as set forth in the Prospectus; and (iv) shares of Common
Stock issuable upon conversion of convertible notes outstanding on the date
hereof, as set forth in the Prospectus.
(h) For a period of five years after the effective date of the
Registration Statement, furnish to the Representatives, without charge, the
following:
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(i) within 90 days after the end of each fiscal year, three
copies of financial statements certified by independent certified
public accountants, including a balance sheet, statement of income,
and statement of cash flows of the Company and its then existing
subsidiaries, with supporting schedules, prepared in accordance with
generally accepted accounting principles, as at the end of such fiscal
year and for the 12 months then ended, which may be on a consolidated
basis; 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
under the Act;
(ii) as soon as practicable after they have been sent to
stockholders of the Company or filed with the Commission, three copies
of each annual and interim financial and other report or communication
sent by the Company to its stockholders or filed with the Commission;
(iii) as soon as practicable, two copies of every press release
and every material news item and article in respect of the Company or
its affairs which was released by the Company; and
(iv) such additional documents and information with respect to
the Company and its affairs and the affairs of any of its subsidiaries
as you may from time to time reasonably request.
(i) Apply the net proceeds received by it from the offering in
substantially the manner set forth under "Use of Proceeds" in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(j) Furnish to you as early as practicable prior to the Closing Date
and any Additional Closing Date, as the case may be, but no less than two
full business days prior thereto, a copy of the latest available unaudited
interim consolidated financial statements of the Company and its
consolidated subsidiaries which have been read by the Company's independent
certified public accountants, as stated in their letters to be furnished
pursuant to Section 7(g).
(k) Comply in all material respects with all registration, filing,
and reporting requirements of the Exchange Act which may from time to time
be applicable to the Company.
(l) Comply in all material respects with all provisions of all
undertakings contained in the Registration Statement.
(m) Prior to the Closing Date or any Additional Closing Date, as the
case may be, issue no press release or other communication, directly or
indirectly, and hold no press
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conference with respect to the Company, the financial condition, results of
operations, business, properties, assets, liabilities of the Company, or
this offering, without your prior written consent, which consent shall not
be unreasonably withheld.
(n) File timely with the Commission an appropriate form to register
the Common Stock pursuant to Section 12(g) under the Exchange Act.
(o) File no amendment or supplement to the Registration Statement or
Prospectus at any time, whether before or after the effective date of the
Registration Statement, unless such filing shall comply with the Act and
the Regulations and unless the Representatives shall previously have been
advised of such filing and furnished with a copy thereof, and the
Representatives and counsel for the Underwriters shall have approved such
filing in writing.
(p) If the principal stockholders, officers, or directors of the
Company are required by the "blue sky" or securities authority of any
jurisdiction selected by you pursuant to Section 5(e) hereof to escrow or
agree to restrict the sale of any security of the Company owned by them for
the Company to qualify or register the Common Stock for sale under the
"blue sky" or securities laws of such jurisdiction, cause each such person
to escrow or restrict the sale of such security on the terms and conditions
and in the form specified by the securities administrator of such
jurisdiction.
(q) 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 years from the date of this Agreement. Within ten days after the
Effective Date, the Company shall cause the Company to be listed in the
Moody's Industrial Manual and cause such listing to be maintained for five
years from the date of this Agreement.
(r) On or prior to the Closing Date, sell to the Representatives (or
its designees), individually and not as Representatives of the
Underwriters, for a consideration of $1.00, the Representatives' Warrants
to purchase 275,000 of the shares of Common Stock (not including the
Additional Stock) offered to the public (the shares of Common Stock
underlying the Representatives' Warrants being herein referred to as the
"Warrant Stock"), which Representatives' Warrants shall be evidenced by the
Representatives' Warrant Agreement in the form set forth as an exhibit to
the Registration Statement.
(s) Until expiration of the Representatives' Warrants, keep reserved
sufficient shares of Common Stock for issuance upon exercise thereof.
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(t) 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 and Additional Stock under the Act.
(u) Deliver to you, without charge, within a reasonable period after
the last Additional Closing Date or the expiration of the period in which
the Underwriters may exercise the over-allotment option, five bound volumes
of the Registration Statement and all related materials. The Company shall
use its best efforts to deliver such volumes within six months of the
Closing Date.
(v) If the Company elects to rely on Rule 462(b), the Company shall
both file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) and pay the applicable fees in accordance with
Rule 111 promulgated under the Act by the earlier of (i) 10:00 p.m. eastern
time on the date of this Agreement, and (ii) the time confirmations are
sent or given, as specified by Rule 462(b)(2).
(w) 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.
6. Payment of Expenses.
(a) The Company hereby agrees to pay all expenses and such additional
fees, as provided in Section 6(a)(iii) below) in connection with (i) the
preparation, printing, filing, distribution, and mailing of the
Registration Statement, any Preliminary Prospectus, the Prospectus and the
printing, filing, distribution, and mailing of this Agreement, any
Agreement Among Underwriters, any selected dealers agreement, and all other
documents related to the offering, purchase, sale and delivery of the
Securities, including the cost of all copies thereof and of the Preliminary
Prospectuses and of the Prospectus and any amendments or supplements
thereto supplied to the Underwriters in quantities as herein above stated,
(ii) the issuance, sale, transfer, and delivery of the Stock and the
Additional Stock, including any transfer or other taxes payable thereon,
(iii) the qualification of the Stock and the Additional Stock under state
or foreign "blue sky" or securities laws, including the costs of printing
and mailing the preliminary and final "Blue Sky Survey" and the fees of
counsel for the Underwriters and their disbursements in connection
therewith, (iv) the filing fees payable to the Commission, the NASD, and
the jurisdictions in which such qualification is sought, (v) the quotation
of the Common Stock on the Nasdaq Stock Market's National Market,
respectively, (vi) the fees and expenses of the Company's transfer agent
and registrar, (vii) the fees and expenses of the Company's legal counsel
and accountants, (viii) all travel and lodging expenses incurred in
connection with the Company's initial public offering, and (ix) the costs
of placing a "tombstone" advertisement in such publications as the
Representatives shall determine. In addition, the Company
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hereby agrees to pay to the Representatives a non-accountable expense
allowance equal to 2% of the aggregate gross proceeds received by the
Company from the sale of the Stock and the Additional Stock, which amounts
(shall be paid to you on the Closing Date (with respect to Stock sold by
the Company on the Closing Date) and, if applicable, on the Closing Date
and any Additional Closing Date (with respect to Additional Stock sold by
the Company on the Closing Date or such Additional Closing Date).
(b) In addition to its other obligations under Section 8(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 8(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 8(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 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
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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 6, 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 6 and
would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of
Section 8.
7. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Stock and the Additional Stock,
as provided herein, shall be subject, in their discretion, to the continuing
accuracy of the representations and warranties of the Company contained herein
and in each certificate and document contemplated under this Agreement to be
delivered to you, as of the date hereof and as of the Closing Date (or the
Additional Closing Date, as the case may be), to the performance by the Company
of its obligations hereunder, and to the following conditions:
(a) If the Registration Statement or any amendment thereto filed
prior to the Closing Date has not been declared effective as of the time of
execution hereof, the Registration Statement or such amendment shall have
been declared effective not later than 11:00 a.m., New York City time, on
the date on which the amendment to the registration statement originally
filed with respect to the Securities or the Registration Statement, as the
case may be, containing information regarding the public offering price of
the Stock and the Additional Stock has been filed with the Commission, or
such later time and date as shall have been consented to by the
Representatives; if required, the Prospectus or any Term Sheet that
constitutes part thereof, and any amendment or supplement thereto, shall
have been filed with the Commission in the manner and within the time
period required by Rules 434, 462(b)(2) and 424(b) under the Act; no Stop
Order suspending the effectiveness of the Registration Statement or any
amendment thereto shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of
the Company or the Representatives, shall be contemplated by the
Commission; and the Company shall have complied with any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise).
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(b) At the Closing Date and any Additional Closing Date, as the case
may be, the Representatives shall have received the favorable opinion of
Glast, Phillips & Murray, counsel for the Company, dated the date of
delivery, addressed to the Underwriters, and in form and scope reasonably
satisfactory to counsel for the Underwriters, with reproduced copies or
signed counterparts thereof for each of the Underwriters, to the effect set
forth in Exhibit I hereto.
(c) The Representatives shall have received from Howison & Handley,
LLP special intellectual property counsel for the Company, an opinion dated
each of the Closing Date and the Additional Closing Date, to the effect set
forth in Exhibit II hereto.
(d) The Representatives shall have received from Kelley, Drye &
Warren, LLP special regulatory property counsel for the Company, an
opinion dated each of the Closing Date and the Additional Closing Date, to
the effect set forth in Exhibit III hereto.
(e) On or prior to the Closing Date and any Additional Closing Date,
as the case may be, the Underwriters shall have been furnished such
information, documents, certificates, and opinions as they may reasonably
require for the purpose of enabling them to review the matters referred to
in Section 7(b), (c) and (d) and in order to evidence the accuracy,
completeness, or satisfaction of any of the representations, warranties,
covenants, agreements, or conditions herein contained, or as you may
reasonably request.
(f) At the Closing Date and any Additional Closing Date, as the case
may be, you shall have received a certificate of the chief executive
officer and of the chief financial officer of the Company, dated the
Closing Date or such Additional Closing Date, as the case may be, to the
effect (i) that the conditions set forth in Section 7(a) have been
satisfied, (ii) that as of the date of this Agreement and as of the Closing
Date or such Additional Closing Date, as the case may be, the
representations and warranties of the Company contained herein were and are
accurate, and (iii) that as of the Closing Date or such Additional Closing
Date, as the case may be, the obligations to be performed by the Company
hereunder on or prior thereto have been fully performed.
(g) At the time this Agreement is executed and at the Closing Date
and any Additional Closing Date, as the case may be, you shall have
received a letter from Ernst & Young LLP, certified public accountants,
dated the date of delivery and addressed to the Underwriters, in form and
substance satisfactory to you, with reproduced copies or signed
counterparts thereof for each of the Underwriters.
(h) All proceedings taken in connection with the issuance, sale,
transfer, and delivery of the Stock and the Additional Stock shall be
reasonably satisfactory in form and substance to you and to counsel for the
Underwriters, and the Underwriters shall have received from such counsel
for the Underwriters a favorable opinion, dated as of the Closing Date and
the Additional Closing Date, as the case may be, with respect to the
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<PAGE>
incorporation of the Company, the validity of the Stock, the Registration
Statement and the Prospectus and with respect to such other related
matters, as you 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, such counsel 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
Section 7(b), (c) and (d).
(i) The NASD, upon review of the terms of the public offering of the
Stock and the Additional Stock, shall not have objected to the
Underwriters' participation in such offering.
(j) The Nasdaq National Market shall have approved the Common Stock
for quotation, subject to official notice of issuance.
(k) Prior to or on the Closing Date, the Company shall have entered
into the Representatives' Warrant Agreement with the Representatives.
(l) Prior to or on the Closing Date, the Company shall have provided
to you a copy of the agreements referred to in Section 2(t) hereof.
Any certificate or other document signed by any officer of the Company and
delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company hereunder to the Underwriters as to
the statements made therein. If any condition to the Underwriters' obligations
hereunder to be fulfilled prior to or at the Closing Date or any Additional
Closing Date, as the case may be, is not so fulfilled, you may on behalf of the
several Underwriters elect to terminate this Agreement or, if you so elect, in
writing waive any such conditions which have not been fulfilled or extend the
time for their fulfillment.
8. Indemnification and Contribution.
(a) Subject to the conditions set forth below, the Company agrees to
indemnify and hold harmless each Underwriter, its officers, directors,
stockholders, members, managers, partners, employees, agents, and counsel, and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act, against any and all loss,
liability, claim, damage, and expense whatsoever (which shall include, for all
purposes of this Section 8, but not be limited to, reasonable attorneys' fees
and any and all expense whatsoever incurred in investigating, preparing, or
defending against any litigation, commenced or threatened, or any claim
whatsoever and any and all amounts paid in settlement of any claim or
litigation) as and when incurred arising out of, based upon, or in connection
with (i) any untrue statement or alleged untrue statement of a material fact
contained (A) in any Preliminary Prospectus, any Term Sheet, the Registration
Statement or the Prospectus (as from time to time amended and supplemented), or
any amendment or supplement thereto, or (B) in any application or other document
or communication (in this Section 8 collectively called an "application")
executed by or
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<PAGE>
on behalf of the Company or based upon written information furnished by or on
behalf of the Company filed in any jurisdiction in order to qualify any of the
Securities under the "blue sky" or securities laws thereof or filed with the
Commission or any securities exchange; or any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, unless such statement or omission was made in
reliance upon and in conformity with written information furnished to the
Company as stated in Section 8(b) with respect to any Underwriter by or on
behalf of such Underwriter through the Representatives expressly for inclusion
in any Preliminary Prospectus, any Term Sheet, the Registration Statement or the
Prospectus, or any amendment or supplement thereto, or in any application, as
the case may be, or (ii) any material breach of any representation, warranty,
covenant, or agreement of the Company contained in this Agreement: 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
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 foregoing agreement to
indemnify shall be in addition to any liability the Company may otherwise have,
including liabilities arising under this Agreement.
If any action is brought against an Underwriter or any of its officers,
directors, stockholders, members, managers, partners, employees, agents, or
counsel, or any controlling persons of an Underwriter (an "indemnified party")
in respect of which indemnity may be sought against the Company pursuant to the
foregoing paragraph, such indemnified party or parties shall promptly notify
the Company in writing of the institution of such action (but the failure so to
notify shall not relieve the Company from any liability it may have pursuant to
this Section 8(a) or otherwise) and the Company shall promptly assume the
defense of such action, including the employment of counsel (satisfactory to
such indemnified party or parties) and payment of expenses. Such indemnified
party or parties shall have the right to employ its or their own counsel in any
such case, but the fees and expenses of such counsel shall be at the expense of
such indemnified party or parties unless the employment of such counsel shall
have been authorized in writing by the Company in connection with the defense of
such action or the Company shall not have promptly employed counsel satisfactory
to such indemnified party or parties to have charge of the defense of such
action or such indemnified party or parties shall have reasonably concluded that
there may be one or more legal defenses available to it or them or to other
indemnified parties which are different from or additional to those available to
the Company, in any of which events such fees and expenses shall be borne by the
Company and the Company shall not have the right to direct
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<PAGE>
the defense of such action on behalf of the indemnified party or parties.
Anything in this paragraph to the contrary notwithstanding, the Company shall
not be liable for any settlement of any such claim or action effected without
its written consent, which shall not be unreasonably withheld. The Company shall
not, without the prior written consent of each indemnified party that is not
released as described in this sentence, settle or compromise any action, or
permit a default or consent to the entry of judgment in or otherwise seek to
terminate any pending or threatened action, in respect of which indemnity may be
sought hereunder (whether or not any indemnified party is a party thereto),
unless such settlement, compromise, consent, or termination includes an
unconditional release of each indemnified party from all liability in respect of
such action. The Company agrees promptly to notify the Underwriters of the
commencement of any litigation or proceedings against the Company or any of its
officers or directors in connection with the sale of the Stock or the Additional
Stock, any Preliminary Prospectus, the Registration Statement or the Prospectus,
or any amendment or supplement thereto, or any application.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who shall
have signed the Registration Statement, and each other person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, to the same extent as the foregoing indemnity from
the Company to the several Underwriters, but only with respect to statements or
omissions, if any, made in any Preliminary Prospectus, the Registration
Statement, or the Prospectus (as from time to time amended and supplemented), or
any amendment or supplement thereto, or in any application in reliance upon and
in conformity with written information furnished to the Company as stated in
this Section 8(b) with respect to any Underwriter by or on behalf of such
Underwriter through the Representatives expressly for inclusion in the
Registration Statement, or the Prospectus, or any amendment or supplement
thereto, or in any application, as the case may be; provided, however, that the
obligation of each Underwriter to provide indemnity under the provisions of this
Section 8(b) shall be limited to the amount which represents the product of the
number of shares of Stock and Additional Stock underwritten by such Underwriter
hereunder and the public offering price per share set forth on the cover page of
the Prospectus. For all purposes of this Agreement, the amounts of the selling
concession and re-allowance set forth on the cover page of Prospectus, the
material set forth under the caption "Underwriting" and the identity of counsel
under the caption "Legal Matters" constitute the only information furnished in
writing by or on behalf of any Underwriter expressly for inclusion in any
Preliminary Prospectus, the Registration Statement or the Prospectus (as from
time to time amended or supplemented), or any amendment or supplement thereto,
or in any application, as the case may be. If any action shall be brought
against the Company or any other person so indemnified based on any Preliminary
Prospectus, the Registration Statement, or the Prospectus, or any amendment or
supplement thereto, or in any application, and in respect of which indemnity may
be sought against any Underwriter pursuant to this Section 8(b), such
Underwriter shall have the rights and duties given to the Company, and the
Company and each other person so indemnified shall have the rights and duties
given to the indemnified parties, by the provisions of Section 8(a).
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<PAGE>
(c) To provide for just and equitable contribution, if (i) an indemnified
party makes a claim for indemnification pursuant to Section 8(a) or 8(b)
(subject to the limitations thereof), but it is found in a final judicial
determination, not subject to further appeal, that such indemnification may not
be enforced in such case, even though this Agreement expressly provides for
indemnification in such case, or (ii) any indemnified or indemnifying party
seeks contribution under the Act, the Exchange Act, or otherwise, then the
Company (including for this purpose any contribution made by or on behalf of any
director of the Company, any officer of the Company who signed the Registration
Statement, and any controlling person of the Company), on the one hand, and the
Underwriters, in the aggregate (including for this purpose any contribution by
or on behalf of an indemnified party), on the other hand, shall contribute to
the losses, liabilities, claims, damages, and expenses whatsoever to which any
of them may be subject, so that the Underwriters are responsible for the
proportion thereof equal to the percentage which the underwriting discount per
share set forth on the cover page of the Prospectus represents of the initial
public offering price per share set forth on the cover page of the Prospectus
and the Company is responsible for the remaining portion; provided, however,
that if applicable law does not permit such allocation, then other relevant
equitable considerations such as the relative fault of the Company and the
Underwriters in the aggregate in connection with the facts which resulted in
such losses, liabilities, claims, damages, and expenses shall also be
considered. The relative fault, in the case of an untrue statement, alleged
untrue statement, omission, or alleged omission, shall be determined by, among
other things, whether such statement, alleged statement, omission, or alleged
omission relates to information supplied by the Company or by the Underwriters,
and the parties' relative intent, knowledge, access to information, and
opportunity to correct or prevent such statement, alleged statement, omission,
or alleged omission. The Company and the Underwriters agree that it would be
unjust and inequitable if the respective obligations of the Company and the
Underwriters for contribution were determined by pro rata or per capita
allocation of the aggregate losses, liabilities, claims, damages, and expenses
(even if the Underwriters and the other indemnified parties were treated as one
entity for such purpose) or by any other method of allocation that does not
reflect the equitable considerations referred to in this Section 8(c). In no
case shall any Underwriter be responsible for a portion of the contribution
obligation imposed on all Underwriters in excess of its pro rata share based on
the number of shares of Stock underwritten by it as compared to the number of
shares of Stock underwritten by all Underwriters who do not default in their
obligations under this Section 8(c). No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 8(c), each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act and each officer, director, stockholder, member,
manager, partner, employee, agent, and counsel of an Underwriter shall have the
same rights to contribution as such Underwriter and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement, and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to the provisions of
this Section 8(c). Anything in this Section 8(c) to the contrary
notwithstanding, no party shall be liable for contribution with respect
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<PAGE>
to the settlement of any claim or action effected without its written consent.
This Section 8(c) is intended to supersede any right to contribution under the
Act, the Exchange Act, or otherwise.
9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Stock or Additional Stock hereunder, and if the number of
shares of Stock or Additional Stock to which the defaults of all Underwriters in
the aggregate relate does not exceed 10% of the number of shares of Stock or
Additional Stock, as the case may be, which all Underwriters have agreed to
purchase hereunder, then such shares of Stock or Additional Stock to which such
defaults relate shall be purchased by the non-defaulting Underwriters in
proportion to their respective commitments hereunder.
(b) If such defaults exceed in the aggregate 10% of the number of shares
of Stock or Additional Stock, as the case may be, which all Underwriters have
agreed to purchase hereunder, you may in your discretion arrange for yourself or
for another party or parties to purchase such shares of Stock or Additional
Stock, as the case may be, to which such default relates on the terms contained
herein. If you do not arrange for the purchase of such shares of Stock or
Additional Stock, as the case may be, within one business day after the
occurrence of defaults relating to in excess of 10% of the Stock or the
Additional Stock, as the case may be, then the Company shall be entitled to a
further period of one business day within which to procure another party or
parties satisfactory to you to purchase such shares of Stock or Additional
Stock, as the case may be, on such terms. If you or the Company do not arrange
for the purchase of the Stock or Additional Stock, as the case may be, to which
such defaults relate as provided in this Section 9(b), this Agreement may be
terminated by you or by the Company without liability on the part of the Company
(except that the provisions of Sections 6, 8, 10, and 13 shall survive such
termination) or the several Underwriters, but nothing in this Agreement shall
relieve a defaulting Underwriter of its liability, if any, to the other several
Underwriters and to the Company for any damages occasioned by its default
hereunder.
(c) If the shares of Stock or Additional Stock to which such defaults
relate are to be purchased by the non-defaulting Underwriters, or are to be
purchased by another party or parties as aforesaid, you or the Company shall
have the right to postpone the Closing Date or the Additional Closing Date, as
the case may be, for a reasonable period but not in any event more than seven
days in order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus or in any other documents and
arrangements with respect to the Stock or the Additional Stock, and the Company
agrees to prepare and file promptly any amendment or supplement to the
Registration Statement or the Prospectus which in the opinion of counsel for the
Underwriters may thereby be made necessary. The term "Underwriter" as used in
this Agreement shall include any party substituted under this Section 9 as if
such party had originally been a party to this Agreement and had been allocated
the number of shares of Stock and Additional Stock actually purchased by it as a
result of its original commitment to purchase Stock and Additional Stock and its
purchase of shares of Stock or Additional Stock pursuant to this Section 9.
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<PAGE>
10. Representations and Agreements to Survive Delivery. All
representations, warranties, covenants, and agreements contained in this
Agreement shall be deemed to be representations, warranties, covenants, and
agreements at the Closing Date and any Additional Closing Date, and such
representations, warranties, covenants, and agreements of the Underwriters and
the Company, including the indemnity and contribution agreements contained in
Section 8, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of any Underwriter or any indemnified person,
or by or on behalf of the Company or any person or entity which is entitled to
be indemnified under Section 8(b), and shall survive termination of this
Agreement or the delivery and the payment of the Stock and the Additional Stock
to the several Underwriters. In addition, the provisions of Sections 6, 8, 10,
11, and 13 shall survive termination of this Agreement, whether such termination
occurs before or after the Closing Date or any Additional Closing Date.
11. Effective Date of This Agreement and Termination Thereof.
(a) This Agreement shall become effective at 9:30 a.m., New York City
time, on the first full business day following the day on which the Registration
Statement becomes effective or at the time of the initial public offering by the
Underwriters of the Stock, whichever is earlier. The time of the initial public
offering shall mean the time, after the Registration Statement becomes
effective, of the release by you for publication of the first newspaper
advertisement which is subsequently published relating to the Stock or the time,
after the Registration Statement becomes effective, when the Stock is first
released by you for offering by the Underwriters or dealers by letter or
telegram, whichever shall first occur. The Representatives or the Company may
prevent this Agreement from becoming effective without liability of any party to
any other party, except as noted below in this Section 11, by giving the notice
indicated in Section 11(c) before the time this Agreement becomes effective.
(b) In addition to the right to terminate this Agreement pursuant to
Sections 7 and 9 hereof, you shall have the right to terminate this Agreement at
any time prior to the Closing Date or any Additional Closing Date, as the case
may be, by giving notice to the Company if any domestic or international event,
act, or occurrence has materially disrupted, or in your opinion will in the
immediate future materially disrupt, the securities markets; or if there shall
have been a general suspension of, or a general limitation on prices for,
trading in securities on the New York Stock Exchange, the American Stock
Exchange, the Nasdaq Stock Market's National Market, the Nasdaq Stock Market's
SmallCap Market, or in the over-the-counter market; or if there shall have been
an outbreak of major hostilities or other national or international calamity; or
if a banking moratorium has been declared by a state or federal authority; or if
a moratorium in foreign exchange trading by major international banks or persons
has been declared; or if there shall have been a material interruption in the
mail service or other means of communication within the United States; or if the
Company shall have sustained a material loss by fire, flood, accident,
hurricane, earthquake, theft, sabotage, labor dispute, legal or governmental
proceeding or other calamity or malicious act which, whether or not such loss
shall have been insured, will, in your opinion, make it inadvisable to proceed
with the offering, sale, or delivery of the Stock or the Additional Stock,
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<PAGE>
as the case may be; or if there shall have been such material adverse change in
the condition of the Company, or such change in the market for securities in
general or in political, financial, or economic conditions as in your judgment
makes it inadvisable to proceed with the offering, sale, and delivery of the
Stock or the Additional Stock, as the case may be, on the terms contemplated by
the Prospectus.
(c) If you elect to prevent this Agreement from becoming effective, as
provided in this Section 11, or to terminate this Agreement pursuant to Section
7, 9, or this Section 11, you shall notify the Company promptly by telephone,
facsimile transmission, telex, or telegram, confirmed by letter. If the Company
elects to prevent this Agreement from becoming effective, as provided in this
Section 11, or if the Company elects to terminate this Agreement pursuant to
Section 9 of this Agreement, the Company shall notify you promptly by telephone,
facsimile transmission, telex, or telegram, confirmed by letter.
(d) Notwithstanding anything in this Agreement to the contrary other than
Section 11(e) hereof, if this Agreement shall not become effective by reason of
an election pursuant to this Section 11 or if this Agreement shall terminate or
shall otherwise not be carried out within the time specified herein by reason of
any failure on the part of the Company to perform any covenant or agreement or
satisfy any condition of the Agreement by it to be performed or satisfied, the
sole liability of the Company to the several Underwriters, in addition to the
obligations the Company assumed pursuant to Section 6, will be to reimburse
promptly the Representatives upon presentation to the Company of a statement of
account of all other expenses incurred by the Representatives with regard to
preparation for the initial public offering or incurred by the Underwriters in
connection with the initial public offering, including, but not be limited to,
out-of-pocket expenses, reasonable fees and disbursements of their counsel and
travel costs, up to a maximum of $150,000, less any amounts previously paid by
the Company to the underwriters or their counsel pursuant to Section 6.
(e) Notwithstanding any election hereunder or any termination of this
Agreement, and whether or not this Agreement is otherwise carried out, the
provisions of Sections 6, 8, 10, and 13 shall not be in any way affected by such
election or termination or failure to carry out the terms of this Agreement or
any part hereof.
12. Notices. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered or transmitted via facsimile
transmission, telex or telegraph and confirmed by letter, to such Underwriter,
to Kaufman Bros., 800 Third Avenue - 25th Floor, New York, New York 10022, Fax
(212) 292-8101, Attention: Corporate Finance Department; and if sent to the
Company, shall be mailed, delivered or transmitted via facsimile transmission,
telex or telegraph and confirmed by letter, WorldQuest Networks, Inc., 16990
Dallas Parkway, Suite 220, Dallas, Texas 75248, Fax (972) 818-0978, Attention:
Chief Executive Officer. All notices hereunder shall be effective upon receipt
by the party to which it is addressed.
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13. Parties. You represent that you are authorized to act on behalf of
the several Underwriters named in Schedule I hereto and the Company shall be
entitled to act and rely on any request, notice, consent, waiver, or agreement
purportedly given on behalf of the Underwriters when the same shall have been
given by you on such behalf. This Agreement shall inure solely to the benefit
of, and shall be binding upon, the several Underwriters and the Company and the
persons and entities referred to in Section 8 who are entitled to
indemnification or contribution, and their respective successors, legal
Representatives, and assigns (which shall not include any buyer, as such, of the
Stock or the Additional Stock), and no other person shall have or be construed
to have any legal or equitable right, remedy, or claim under or in respect of or
by virtue of this Agreement or any provision herein contained. Notwithstanding
anything contained in this Agreement to the contrary, all of the obligations of
the Underwriters hereunder are several and not joint.
14. Construction. This Agreement shall be construed in accordance with
the laws of the State of New York, without giving effect to conflict of laws.
TIME IS OF THE ESSENCE IN THIS AGREEMENT.
15. Consent to Jurisdiction. The Company irrevocably consents to the
jurisdiction of the courts of the State of New York and of any federal court
located in such State in connection with any action or proceeding arising out of
or relating to this Agreement, any document or instrument delivered pursuant to,
in connection with or simultaneously with this Agreement, or a breach of this
Agreement or any such document or instrument. In any such action or proceeding,
the Company waives personal service or any summons, complaint or other process
and agrees that service thereof may be made in accordance with Section 12.
Within 30 days after such service, or such other time as may be mutually agreed
upon in writing by the attorneys for the parties to such action or proceeding,
the Company shall appear or answer such summons, complaint or other process.
Should the Company fail to appear or answer within such 30 day period or such
extended period, as the case may be, the Company shall be deemed in default and
judgement may be entered against the Company for the amount as demanded in any
summons, complaint or other process so served.
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If the foregoing correctly sets forth the understanding between you and the
Company, please so indicate in the space provided below for that purpose,
whereupon this letter shall constitute a binding agreement between us.
Very truly yours,
WORLDQUEST NETWORKS, INC.
By: /s/ Michael R. Lanham
---------------------------------------------
Michael R. Lanham
President and Chief Operating Officer
Accepted as of the date first above written.
New York, New York
KAUFMAN BROS., LLP
JOHN G. KINNARD AND COMPANY INCORPORATED
WESTPARK CAPITAL, INC.
Each acting on its own on behalf and as
Representatives of the other several
Underwriters named in Schedule I hereto.
By: KAUFMAN BROS., L.L.P.
By: /s/ Craig D. Kaufman
---------------------------------------
Name: Craig D. Kaufman
Title: Chairman and Chief Executive Officer
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SCHEDULE I
<TABLE>
<CAPTION>
Number of Shares of
Stock to be Purchased
Underwriter from the Company
- ----------- ----------------------
<S> <C>
KAUFMAN BROS., L.P. 1,010,000
JOHN G. KINNARD AND COMPANY 1,010,000
INCORPORATED
WESTPARK CAPITAL, INC. 305,000
BANC OF AMERICA SECURITIES LLC 50,000
DONALDSON, LUFKIN & JENRETTE 50,000
SECURITIES CORPORATION
ING BARINGS LLC 50,000
PAINEWEBBER INCORPORATED 50,000
SG COWEN SECURITIES CORPORATION 50,000
FAHNESTOCK & CO., INC. 25,000
JEFFERIES & COMPANY, INC. 25,000
PACIFIC CREST SECURITIES INC. 25,000
SCOTT & STRINGFELLOW, INC. 25,000
SOUTHWEST SECURITIES, INC. 25,000
C.E. UNTERBERG, TOWBIN 25,000
FIRST SECURITY VAN KASPER, INC. 25,000
TOTAL 2,750,000
</TABLE>
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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.
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 the Company
Documents.
3. The Company 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 change in the condition (financial or otherwise), properties, business,
management, net worth or results of operations of the Company, individually or
in the aggregate (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.
- --------------------
/1/ Capitalized Terms used herein but not defined shall have the meanings
given such terms in the Underwriting Agreement.
I-1
<PAGE>
5. The Common Stock and the Representatives' Warrants 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' Warrants; 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' Warrants will be exercisable for shares of Common
Stock of the Company in accordance with the terms of the Representatives'
Warrants and at the price therein provided for; the shares of Common Stock of
the Company issuable upon exercise of the Representatives' Warrants 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' Warrants 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 is a
party or of which any property or assets of the Company or any is the subject
which, if determined adversely to the Company, 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 Company Documents 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 Company Documents.
9. The execution, delivery and performance of the Company Documents, 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
organizational documents of the Company, or any material indenture, mortgage,
deed of trust, note agreement or other agreement of instrument known to such
counsel to which the Company is a party or by which it or any of its properties
is or may
I-2
<PAGE>
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 its properties or result in the creation
of a lien.
10. To such counsel's knowledge, the Company is not presently (a) in
violation of its Certificate of Incorporation 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 is bound or to which any
property or assets of the Company 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 Company Documents (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' Warrants or the shares of Common Stock
underlying the Representatives' Warrants except such as have been obtained or
made, specifying the same.
12. The Registration Statement has become effective under the Securities
Act and, to 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.
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,
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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. To such counsel's knowledge, the Company 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 its
properties and to conduct its business 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;
provided, however, such counsel gives no opinion as to any matters hereunder
covered by legal opinions provided to you by Howison & Handley, LLP and Kelley,
Drye & Warren LLP.
19. To the knowledge of such counsel the Company 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, 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; provided, however, such counsel gives no opinion as to
any matters hereunder covered by legal opinions provided to you by Howison &
Handley, LLP and Kelley, Drye & Warren LLP.
20. 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 Closing Date or the Additional 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
I-4
<PAGE>
belief is based upon the procedures set forth therein, but is without
independent check and verification.
I-5
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EXHIBIT II
Matters to be Covered in
------------------------
Opinion of Howison & Handley, 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 -- Our
business may be adversely affected if we are not able 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.
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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.
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
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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 Representatives' Warrants 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 governmental license, franchise, authorization, permit or
certificate 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 its properties and assets and to conduct its business 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 which could have a negative effect on our operations" and
"Business -- Government Regulation,"
III-1
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(collectively, the "Regulatory Portion") insofar as such statements constitute a
summary of statutes, rules, regulations, legal matters, documents or 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.
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<PAGE>
EXHIBIT 4.3.1
Option to Purchase 68,750
Shares of Common Stock
REPRESENTATIVES' WARRANT
------------------------
Dated: February 4, 2000
THIS CERTIFIES THAT JOHN G. KINNARD AND COMPANY, INCORPORATED, (herein
sometimes called the "Holder" or the "Representative") is entitled to purchase
from WORLDQUEST NETWORKS, INC., a Delaware corporation (the "Company"), at the
price and during the period as hereinafter specified, up to Sixty-Eight Thousand
Seven Hundred Fifty (68,750) shares (the "Shares") of common stock, $.01 par
value per share (the "Common Stock") at a purchase price of $20.80 per share
(160% 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 Kaufman Bros.,
L.P., John G. Kinnard and Company, Incorporated and WestPark Capital, Inc., as
Representatives of the several Underwriters set forth in Schedule I to said
Underwriting Agreement, in connection with a public offering, through the
Representatives, of 2,750,000 Shares as therein described (and up to 412,500
additional Shares covered by an over-allotment option granted by the Company to
the Underwriters), and in consideration of $1.00 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. 333-93019
(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 February
4, 2001 (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
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the Representatives' Warrant concurrently with such event and
into the kind and amount of shares of stock and other securities
and property (including cash) receivable by a holder of the
number of Shares into which the Representatives' Warrant were
exercisable immediately prior thereto.
(b) Between February 4, 2001 and 2005, (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;
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<PAGE>
Y = the number of Shares issuable upon exercise of this
Representatives' Warrant;
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
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<PAGE>
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.
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
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<PAGE>
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.
(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 or any
other Holders of the other Representatives' Warrant issued of even date herewith
by the Company which, together with this Representatives' Warrant, represent
warrants to purchase 275,000 shares of the Company's Common Stock (collectively,
with this Representatives' Warrant, the "Combined Representatives' Warrants"),
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 Combined Representatives' Warrants 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
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<PAGE>
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.
(c) The term "50% Holder" as used in this paragraph 6 shall mean the
Holder(s) of at least 50% of the Combined Representatives' Warrants and/or the
Shares underlying the Combined Representatives' Warrants (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
6
<PAGE>
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 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:
7
<PAGE>
(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
distribution 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 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 $20.15 per Share and the number of Shares
issuable upon exercise of this Representatives' Warrant was 68,750, the adjusted
Exercise Price immediately after such event would be $10.25 per Share and the
adjusted number of Shares issuable upon exercise of this Representatives'
Warrant would be 137,500. 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
8
<PAGE>
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
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
9
<PAGE>
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.
(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 February 4, 2000.
WORLDQUEST NETWORKS, INC.
By: /s/ Michael R. Lanham
-------------------------------------------
Attest: Michael R. Lanham
President and Chief Operating Officer
/s/ Mark C. Levy
- --------------------------
Mark C. Levy
Chief Financial Officer
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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 4.3.2
Option to Purchase 178,750
Shares of Common Stock
REPRESENTATIVES' WARRANT
------------------------
Dated: February 4, 2000
THIS CERTIFIES THAT KAUFMAN BROS., L.P., (herein sometimes called the
"Holder" or the "Representative") is entitled to purchase from WORLDQUEST
NETWORKS, INC., a Delaware corporation (the "Company"), at the price and during
the period as hereinafter specified, up to One Hundred Seventy-Eight Thousand
Seven Hundred Fifty (178,750) shares (the "Shares") of common stock, $.01 par
value per share (the "Common Stock") at a purchase price of $20.80 per share
(160% 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 Kaufman Bros.,
L.P., John G. Kinnard and Company, Incorporated and WestPark Capital, Inc., as
Representatives of the several Underwriters set forth in Schedule I to said
Underwriting Agreement, in connection with a public offering, through the
Representatives, of 2,750,000 Shares as therein described (and up to 412,500
additional Shares covered by an over-allotment option granted by the Company to
the Underwriters), and in consideration of $1.00 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. 333-93019
(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
February 4, 2001 (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
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the Representatives' Warrant concurrently with such event and
into the kind and amount of shares of stock and other securities
and property (including cash) receivable by a holder of the
number of Shares into which the Representatives' Warrant were
exercisable immediately prior thereto.
(b) Between February 4, 2001 and 2005, (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;
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<PAGE>
Y = the number of Shares issuable upon exercise of this
Representatives' Warrant;
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
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<PAGE>
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.
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
4
<PAGE>
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.
(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 or any
other Holders of the other Representatives' Warrant issued of even date herewith
by the Company which, together with this Representatives' Warrant, represent
warrants to purchase 275,000 shares of the Company's Common Stock (collectively,
with this Representatives' Warrant, the "Combined Representatives' Warrants"),
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 Combined Representatives' Warrants 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
5
<PAGE>
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.
(c) The term "50% Holder" as used in this paragraph 6 shall mean the
Holder(s) of at least 50% of the Combined Representatives' Warrants and/or the
Shares underlying the Combined Representatives' Warrants (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
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<PAGE>
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 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:
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(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
distribution 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 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 $20.15 per Share and the number of Shares
issuable upon exercise of this Representatives' Warrant was 178,750, the
adjusted Exercise Price immediately after such event would be $10.25 per Share
and the adjusted number of Shares issuable upon exercise of this
Representatives' Warrant would be 357,500. 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
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<PAGE>
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
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
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<PAGE>
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.
(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 February 4, 2000.
WORLDQUEST NETWORKS, INC.
By: /s/ Michael R. Lanham
-------------------------------------------
Attest: Michael R. Lanham
President and Chief Operating Officer
/s/ Mark C. Levy
- -------------------------------
Mark C. Levy
Chief Financial Officer
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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 4.3.3
Option to Purchase 27,500
Shares of Common Stock
REPRESENTATIVES' WARRANT
------------------------
Dated: February 4, 2000
THIS CERTIFIES THAT WESTPARK CAPITAL, INC., (herein sometimes called the
"Holder" or the "Representative") is entitled to purchase from WORLDQUEST
NETWORKS, INC., a Delaware corporation (the "Company"), at the price and during
the period as hereinafter specified, up to Twenty-Seven Thousand Five Hundred
(27,500) shares (the "Shares") of common stock, $.01 par value per share (the
"Common Stock") at a purchase price of $20.80 per share (160% 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 Kaufman Bros.,
L.P., John G. Kinnard and Company, Incorporated and WestPark Capital, Inc., as
Representatives of the several Underwriters set forth in Schedule I to said
Underwriting Agreement, in connection with a public offering, through the
Representatives, of 2,750,000 Shares as therein described (and up to 412,500
additional Shares covered by an over-allotment option granted by the Company to
the Underwriters), and in consideration of $1.00 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. 333-93019
(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
February 4, 2001 (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
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the Representatives' Warrant concurrently with such event and
into the kind and amount of shares of stock and other securities
and property (including cash) receivable by a holder of the
number of Shares into which the Representatives' Warrant were
exercisable immediately prior thereto.
(b) Between February 4, 2001 and 2005, (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;
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<PAGE>
Y = the number of Shares issuable upon exercise of this
Representatives' Warrant;
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
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<PAGE>
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.
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
4
<PAGE>
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.
(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 or any
other Holders of the other Representatives' Warrant issued of even date herewith
by the Company which, together with this Representatives' Warrant, represent
warrants to purchase 275,000 shares of the Company's Common Stock (collectively,
with this Representatives' Warrant, the "Combined Representatives' Warrants"),
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 Combined Representatives' Warrants 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
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<PAGE>
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.
(c) The term "50% Holder" as used in this paragraph 6 shall mean the
Holder(s) of at least 50% of the Combined Representatives' Warrants and/or the
Shares underlying the Combined Representatives' Warrants (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
6
<PAGE>
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 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:
7
<PAGE>
(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
distribution 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 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 $20.15 per Share and the number of Shares
issuable upon exercise of this Representatives' Warrant was 27,500, the adjusted
Exercise Price immediately after such event would be $10.25 per Share and the
adjusted number of Shares issuable upon exercise of this Representatives'
Warrant would be 55,000. 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
8
<PAGE>
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
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
9
<PAGE>
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.
(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 February 4, 2000.
WORLDQUEST NETWORKS, INC.
By: /s/ Michael R. Lanham
---------------------------------------------
Attest: Michael R. Lanham
President and Chief Operating Officer
/s/ Mark C. Levy
- ------------------------------
Mark C. Levy
Chief Financial Officer
10
<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
11
<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:
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENT
OF OPERATIONS AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,159,995
<SECURITIES> 0
<RECEIVABLES> 113,688
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,273,683
<PP&E> 1,332,509
<DEPRECIATION> 757,936
<TOTAL-ASSETS> 2,993,033
<CURRENT-LIABILITIES> 3,906,499
<BONDS> 1,328,474
0
0
<COMMON> 31,967
<OTHER-SE> (2,273,907)
<TOTAL-LIABILITY-AND-EQUITY> 2,993,033
<SALES> 5,649,236
<TOTAL-REVENUES> 5,649,236
<CGS> 4,776,487
<TOTAL-COSTS> 4,776,487
<OTHER-EXPENSES> 2,469,788
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 438,447
<INCOME-PRETAX> (2,035,486)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,035,486)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,035,486)
<EPS-BASIC> (0.65)
<EPS-DILUTED> (0.65)
</TABLE>
