<PAGE>
As filed with the Securities and Exchange Commission on May 11, 2000
Registration No. 333-94105
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
Form S-1
Registration Statement Under the Securities Act of 1933
Integrated Communication Networks, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Nevada
(State or Other Jurisdiction of Incorporation or Organization)
4813
(Primary Standard Industrial Classification Code Number)
33-0670130
(I.R.S. Employer Identification Number)
27061 Aliso Creek Road, Suite 100
Aliso Viejo, CA 92656
(949) 349-1770
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
David Chadwick, President and CEO
Integrated Communication Networks, Inc.
27061 Aliso Creek Road, Suite 100
Aliso Viejo, CA 92656
(949) 349-1770
(Name, Address Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service)
Approximate date of commencement of proposed sale to the public: From
time to time after this Registration Statement becomes effective as determined
by market conditions.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
<PAGE>
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
- ------------------------ ---------------------- ---------------------- ------------------------ --------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED TO BE REGISTERED SHARE (1) PRICE (1) FEE (1)
- ------------------------ ---------------------- ---------------------- ------------------------ --------------------
<S> <C> <C> <C> <C>
Common stock (2) 921,428 shares $4.50 $4,146,426 $ 1,095
- ------------------------ ---------------------- ---------------------- ------------------------ --------------------
Common stock (3) 350,000 shares $4.50 $1,575,000 $ 416
- ------------------------ ---------------------- ---------------------- ------------------------ --------------------
Common stock (4) 5,943,633 shares $2.32 $13,789,229 $ 3,641
- ------------------------ ---------------------- ---------------------- ------------------------ --------------------
Common stock (5) 80,000 shares $12.50 $1,000,000 $ 264
- ------------------------ ---------------------- ---------------------- ------------------------ --------------------
Common stock (6) 80,000 shares $15.00 $1,200,000 $ 317
- ------------------------ ---------------------- ---------------------- ------------------------ --------------------
Common stock (7) 2,500,000 shares $2.32 $5,800,000 $ 1,532
- ------------------------ ---------------------- ---------------------- ------------------------ --------------------
Common stock (8) 200,000 shares $13.75 $2,750,000 $ 726
- ------------------------ ---------------------- ---------------------- ------------------------ --------------------
Common stock (9) 5,000,000 shares $2.32 $11,600,000 $ 3,063
- ------------------------ ---------------------- ---------------------- ------------------------ --------------------
Total: 15,075,061 shares $41,860,655 $ 11,054
- ------------------------ ---------------------- ---------------------- ------------------------ --------------------
</TABLE>
<PAGE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
(1) Estimated solely for the purpose of calculating the registration fee based
on the average of the high and low prices of the common stock reported on the
National Quotation Bureau's "Pink Sheets" on May 05, 2000 and calculated in
accordance with Rule 457(g) promulgated under the Securities Act of 1933, as
amended.
(2) Issuable on exercise of the phoneXchange warrants. Includes an indeterminate
number of shares which may become issuable in the event of a stock split, stock
dividend or similar transaction involving the common stock pursuant to
antidilution provisions contained in the warrants.
(3) Issuable on exercise of the September 2004 warrants. Includes an
indeterminate number of shares which may become issuable in the event of a stock
split, stock dividend or similar transaction involving the common stock pursuant
to antidilution provisions contained in the warrants.
(4) Issuable on exercise of the February 2004 warrants. Includes an
indeterminate number of shares which may become issuable in the event of a stock
split, stock dividend or similar transaction involving the common stock pursuant
to antidilution provisions contained in the warrants.
(5) Issuable on exercise of the $12.50 warrants. Includes an indeterminate
number of shares which may become issuable in the event of a stock split, stock
dividend or similar transaction involving the common stock pursuant to
antidilution provisions contained in the warrants.
(6) Issuable on exercise of the $15.00 warrants. Includes an indeterminate
number of shares which may become issuable in the event of a stock split, stock
dividend or similar transaction involving the common stock pursuant to
antidilution provisions contained in the warrants.
(7) Issuable on conversion of the 4% Convertible Debentures and, at the
Company's option, shares that may be issued in payment of the annual 4% interest
payment. The actual number of shares issuable on conversion of the debentures
could be greater or less and is based on a conversion price equal to the 80% of
the averaged three lowest bid prices during the 20 trading days immediately
prior to the date of conversion, except that the conversion price cannot be
higher than $10.00 per share. Includes an indeterminate number of shares which
may become issuable in the event of a stock split, stock dividend or similar
transaction involving the common stock pursuant to antidilution provisions
contained in the debentures.
(8) Issuable on exercise of the May Davis warrants. Includes an indeterminate
number of shares which may become issuable in the event of a stock split, stock
dividend or similar transaction involving the common stock pursuant to
antidilution provisions contained in the warrants.
(9) Issuable on conversion of 500,000 shares of the Series A-1 12% convertible
redeemable preferred stock. Includes an indeterminate number of shares which may
become issuable in the event of a stock split, stock dividend or similar
transaction involving the common stock pursuant to antidilution provisions
contained in the Series A-1 12% convertible redeemable preferred stock.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated May 11, 2000
Prospectus
15,075,061 shares
Integrated Communication Networks, Inc.
Common Stock
The security holders listed on pages 15 and 16 of this prospectus may
offer and sell up to 15,075,061 shares of our common stock under this prospectus
plus such indeterminate number of additional shares issuable pursuant to certain
outstanding warrants and convertible securities. These shares are issuable on
the exercise of warrants or on the conversion of convertible debentures or
convertible preferred stock. There is no assurance that the selling security
holders will exercise any of the warrants or convert any of the debentures or
preferred stock.
The selling security holders named in this prospectus may offer and
sell the shares in varying amounts over a period of time as detailed in the
"Plan of Distribution" section starting on page 18. We will not receive any
proceeds from the sale of the common stock. If all of the warrants are
exercised, we will receive up to $20,894,475, subject to cashless exercise
rights available to some of the warrant holders. See "The Offering" on page 2.
Our common stock is listed on the National Quotation Bureau's "Pink
Sheets" under the symbol "ICNW." We have applied to list our common stock on the
NASDAQ SmallCap Market under the symbol "ICNW." On March 15, 2000, the closing
sale price of our common stock on the Pink Sheets was $ 6.50. In addition, our
common stock is listed on the Frankfurt Stock Exchange, Third Market Segment,
under the symbol "IGA.F." On March 15, 2000, the closing sale price of our
common stock on the Frankfurt Stock Exchange was 5.80 Euro.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. WE URGE
YOU TO READ THE "RISK FACTORS" SECTION OF THIS PROSPECTUS BEGINNING ON PAGE 5
WHICH DESCRIBES THE SPECIFIC RISKS ASSOCIATED WITH AN INVESTMENT IN OUR COMPANY
AS WELL AS WITH THESE PARTICULAR SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 2000.
<PAGE>
TABLE OF CONTENTS
Prospectus Summary............................................................1
The Offering..................................................................2
Capitalization................................................................3
Summary Financial Information.................................................4
Risk Factors..................................................................5
Special Note Regarding Forward-Looking Statements.............................14
Use of Proceeds...............................................................15
Selling Security Holders......................................................15
Plan of Distribution..........................................................18
Description of Securities.....................................................19
Description of Business.......................................................22
Description of Property.......................................................33
Legal Proceedings.............................................................34
Market for Common Equity and Related Stockholder Matters......................34
Selected Financial Data.......................................................35
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................37
Quantitative and Qualitative Disclosures about Market Risk....................45
Changes in and Disagreements with Accountants.................................45
Management....................................................................45
Executive Compensation........................................................48
Security Ownership of Certain Beneficial Owners and Management................51
Certain Relationships and Related Transactions................................54
Shares Available For Future Sale..............................................55
Legal Matters.................................................................55
Experts.......................................................................55
Where You Can Find More Information...........................................56
Index to Audited Financial Statements.........................................57
You should rely only on the information contained in this document or
to which we have referred you when you are considering the information in this
prospectus. We have not authorized anyone to provide you with information that
is different. This document may be used only where it is legal to sell these
securities. The information in this document may be accurate only on the date of
this document.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS" SECTION BEGINNING ON PAGE 5.
INTEGRATED COMMUNICATION NETWORKS, INC.
We are a provider of domestic and international long distance and
related telecommunications services. We have had very limited operations and
revenues, have incurred significant losses and expect to continue to incur
significant losses. In addition, we will have substantial capital requirements
in the future. We had no revenues for the period from January 16, 1997 to
February 28, 1999. We began material operations on February 28, 1999 when we
purchased a majority of the issued and outstanding shares of common stock of
phoneXchange, Inc. in exchange for shares of our common stock and warrants to
purchase additional shares of our common stock. See "Certain Relationships and
Related Transactions." From February 28, 1999 through December 31, 1999, our
revenues were $2.1 million, and we incurred a net loss of $10.9 million.
We operate our business through our majority owned subsidiary,
phoneXchange, Inc. phoneXchange is a publicly traded company that offers
domestic and international long distance services for both voice and data on a
wholesale basis, primarily to U.S. based carriers, agents and resellers.
phoneXchange provides long distance service to numerous foreign markets through
a combination of:
o termination relationships, which consist of agreements with other
carriers to complete the final segment of a telephone call,
o international gateway switches, which consists of switching equipment
that can interface with international networks,
o leased and owned transport lines or circuits that span large
distances, and
o resale arrangements with other long distance providers, which are
agreements to purchase wholesale telephone services to be resold under
phoneXchange's name.
We are continuing to expand the phoneXchange telecommunications network through
acquisitions and internal growth.
1
<PAGE>
In addition to the long distance services provided by phoneXchange, we
expect to be able to offer call center services through our other wholly owned
subsidiary, Internet Call Centers, Inc. We intend to form a joint venture by
issuing approximately 40% of Internet Call Centers, Inc.'s common stock to
Global Industry Development & Trade Ltd., a British Virgin Islands company. We
are developing Internet Call Centers to provide customer support and customer
management services to other companies. We believe that through Internet Call
Centers we may be able to offer these services for less than it would cost many
companies to develop and train support staffs of their own because we can
benefit from economies of scale by sharing labor and equipment costs across a
larger base of users. In addition, we could offer overflow services to companies
with existing customer support departments who would like to improve their
response time. We already have the facilities required for the launch of this
business and our joint venture partner has trained a staff of employees to
provide the call center services. We are currently negotiating the necessary
operating agreements and currently anticipate that Internet Call Centers will
commence operations in the third quarter of 2000.
Our executive offices are located at 27061 Aliso Creek Road, Suite 100,
Aliso Viejo, CA 92656. Our telephone number is 949-349-1770. Our website address
is www.icnwusa.com. The information on this website is not incorporated by
reference into this prospectus.
THE OFFERING
Under this prospectus, the selling security holders may sell shares of
our common stock. They may acquire these shares by conversion or exercise of
securities in the following manner:
<TABLE>
<CAPTION>
COMMON STOCK OVERLYING SECURITY
------------ ------------------
<S> <C>
921,428 shares phoneXchange warrants; exercisable at $4.50/share
350,000 shares September 2004 warrants; exercisable at $4.50/share
5,943,633 shares February 2004 warrants; exercisable at $1.72/share
80,000 shares $12.50 warrants; exercisable at $12.50/share
80,000 shares $15.00 warrants; exercisable at $15.00/share
2,500,000 shares 4% Convertible Debentures; convertible at a floating
ratio based on a 20% discount to the market price of
our common stock
200,000 shares May Davis warrants; exercisable at $13.75/share
5,000,000 shares Series A-1 12% convertible redeemable preferred stock
Total: up to 15,075,061 shares of common stock.
</TABLE>
2
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization on a
historical basis as of December 31, 1999 and as adjusted to reflect the issuance
and sale of the shares of common stock pursuant to this offering (see note "1"
below). The capitalization information as of December 31, 1999 was derived from
our audited consolidated financial statements included elsewhere in this
prospectus. This table should be read in conjunction with "Use of Proceeds,"
"Selected Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and our audited consolidated financial
statements and related notes and other financial data included elsewhere in this
prospectus.
<TABLE>
CAPITALIZATION
<CAPTION>
December 31,
-------------------------------
As Adjusted (1)
-------------- --------------
1999 1999
-------------- --------------
(Unaudited)
<S> <C> <C>
Long-term liabilities, net of current portion $ 5,244,649 $ 244,649
Minority interest - -
Redeemable, convertible preferred stock:
Series A 8% redeemable convertible preferred stock,
$.01 par value per share:
Authorized - 50,000 shares
Issued and outstanding - no shares at December 31, 1999 - -
Series A-1 12% redeemable convertible preferred stock,
$.01 par value per share:
Authorized - 7,500,000 shares
Issued and outstanding - 3,167,974 at December 31, 1999 4,847,000 4,082,000
Series A-1 preferred stock subscribed (218,500) (218,500)
Stockholders' equity:
Common stock, $.01 par value:
Authorized - 250,000,000 shares
Issued and outstanding 5,867,780 at December 31, 1999 58,677 133,677
Common stock subscribed (105,750) (105,750)
Additional paid-in capital 22,858,958 28,548,958
Accumulated deficit (18,996,555) (18,996,555)
Treasury stock (113,301) (113,301)
-------------- --------------
Total stockholders' equity 3,702,029 9,467,029
============== ==============
</TABLE>
(1) Adjusted to reflect:
o the issuance of 5,000,000 shares of our common stock on
conversion of 500,000 shares of our Series A-1 12% convertible
redeemable preferred stock, and
o the proceeds from the issuance of our 4% Convertible Debenture
and assumed conversion into 2,500,000 shares of our common
stock.
Does not include conversion of the remaining 2,667,974 shares of Series
A-1 preferred stock or outstanding options to purchase 1,000,000 shares of our
common stock or 3,000,000 shares of our common stock reserved for issuance under
our 2000 Omnibus Stock Incentive Plan.
3
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following summary financial information should be read together
with "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and our audited consolidated
financial statements and related notes and other financial data included
elsewhere in this prospectus. The consolidated statement of operations data for
the year ended December 31, 1999 and the consolidated balance sheet data of
December 31, 1999 as well as the statement of operations data for the period
from inception (January 16, 1997) through December 31, 1997 and the year ended
December 31, 1998 and the balance sheet data at December 1998 are derived from
our audited consolidated financial statements included elsewhere in this
prospectus.
<TABLE>
SUMMARY FINANCIAL INFORMATION
(IN DOLLARS)
<CAPTION>
The Predecessor The Company
------------------------------- ------------------------------------------------------
From inception (January
16, 1997) through
From inception December 31, Year ended December 31,
(April 7, 1998) Two month ----------------------- ------------------------------
through period ended Consolidated
December 31, February 28, ----------------------- -------------- ---------------
1998 1999 (unaudited) 1997 1998 1999
-------------- -------------- ----------------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues $ 183,000 $ 114,849 $ $ - $ 2,133,289
Total operating expenses 1,262,108 377,862 8,100,100 6,999 14,160,344
Loss from operations (1,079,108) (263,013) (8,100,100) (6,999) (12,027,055)
Net loss (1,127,221) (283,551) (8,100,100) (6,999) (10,889,456)
Basic and diluted loss per share $ (173.28) $ (0.00) $ (3.29)
Basic and Diluted Weighted average common
shares outstanding 46,747 5,262,206 3,307,829
OTHER FINANCIAL DATA:
Net cash used in operating activities $ (628,038) $ (92,137) $ (100.00) $ - $ (6,574,030)
Net cash used in investing activities $ (103,205) $ (1,645) $ - $ - $ (1,155,447)
Net cash provided by financing activities $ 790,413 $ 53,045 $ 100.00 $ - $ 10,281,590
December 31,
------------------------------
Consolidated
-------------- ---------------
1998 1999
-------------- ---------------
BALANCE SHEET DATA:
Working capital (deficit) $ (6,999) $ 1,296,313
Total assets - 15,456,016
Total long-term liabilities, net of current portion - 5,244,649
Accumulated Deficit (8,107,099) (18,996,555)
Stockholders' equity (deficit) $ (6,999) $ 3,702,029
</TABLE>
4
<PAGE>
RISK FACTORS
THE SHARES OF COMMON STOCK BEING OFFERED BY THIS PROSPECTUS ARE HIGHLY
SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER THE
RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE
DECIDING TO INVEST IN THESE SECURITIES.
WE HAVE A LIMITED OPERATING HISTORY, MAKING IT DIFFICULT TO PREDICT OUR
FUTURE GROWTH AND OPERATING RESULTS.
We were incorporated in January 1997 and began material operations on
February 28, 1999 when we purchased a majority of the issued and outstanding
shares of common stock of phoneXchange, Inc. Our management team and other
employees have worked for us for only a short period of time. As a result, we
have only a limited operating history with which you may evaluate our business.
Our success is largely dependent on our ability to establish and improve
operating efficiencies and overall capacity while generating substantial sales
revenues and cash-flows from operations. There is no assurance that we will be
successful in any of these areas. In addition, we have in the past and may again
in the future encounter unanticipated problems, including distribution,
marketing and technological difficulties. Some of these problems may be beyond
our financial and technical abilities to resolve. All of these factors make it
difficult to predict our future growth and operating results.
WE HAVE ACCUMULATED SUBSTANTIAL NET LOSSES AND WE MAY SUSTAIN
SUBSTANTIAL LOSSES IN THE FUTURE.
From our inception in January 1997 through December 31, 1999, we
generated $2.1 million in sales revenues. During the same period we had an
accumulated net loss of approximately $19.0 million. We expect to incur losses
through the third quarter of 2000 and there can be no assurance that losses will
not continue for the remainder of the year 2000.
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN, IN WHICH CASE YOU
MAY LOSE YOUR ENTIRE INVESTMENT IN OUR COMPANY.
In our 1999 financial statements, our auditors expressed doubt about
our ability to continue as a going concern. This resulted from our history of
significant losses. If we are not able to generate income or obtain adequate
financing to fund continuing losses, we may not be able to continue as a going
concern. If this occurs, we would be forced to slow or cease operations, or to
liquidate the company. In the event of a liquidation, it is very likely that we
would not recover the book value of our assets and our investors would lose the
entire value of their investment.
5
<PAGE>
WE RELY ON A LIMITED NUMBER OF CUSTOMERS AND THE LOSS OF ANY CUSTOMER
COULD SIGNIFICANTLY REDUCE OUR REVENUES.
While the list of our most significant customers varies from quarter to
quarter, four customers accounted for 90% of our revenues for the year ended
December 31, 1999. As a result, the loss of any significant customer could have
a significant negative impact on our revenues from operations. We could lose a
significant customer for many reasons, including:
o the entrance into the market of significant new competitors
with lower rates,
o downward pressure on the overall costs of transmitting
international calls,
o transmission quality problems,
o changes in U.S. or foreign regulations, or
o unexpected increases in our cost structure as a result of
expenses related to installing a global network or otherwise.
CONVERSION OF OUR OUTSTANDING CONVERTIBLE DEBENTURES MAY SUBSTANTIALLY
DILUTE OUR COMMON STOCK AND ENCOURAGE SHORT SELLING.
Our convertible debentures are convertible into common stock at a
floating ratio based on a 20% discount to the market price of our common stock
on the date of conversion. As a result, the lower our common stock price, the
more shares we must issue on conversion of the debentures. If a portion of our
debentures is converted and the common stock issued as a result is sold, the
price of our common stock may decrease due to the additional shares available in
the public market. This would allow the holders of the debentures to convert the
remaining portion of the debentures into even greater amounts of common stock,
which in turn can further depress the price of the common stock.
In addition, this effect may encourage a practice known as "selling
short," in which a person can sell shares that the person does not then own at
prevailing market prices, hoping to purchase shares later at a lower price.
Selling short can further depress the price of our common stock Holders of
convertible debentures may sell shares short in order to lower the price of our
common stock, increasing the number of shares of common stock they will receive
on conversion of their debentures. While the holders of our convertible
debentures have contractually agreed not to sell our stock short, there can be
no guarantee that other security holders will not do so.
6
<PAGE>
WE ARE REGISTERING A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK
WHICH COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR SHARES.
We are registering 15,075,061 shares of our common stock which are
issuable on the exercise of warrants and the conversion of convertible debt or
preferred stock. If the 15,075,061 shares are issued, they would represent 72%
of our total outstanding shares of common stock, as of March 15, 2000. In
addition, interest on the debentures may be paid in shares of common stock,
instead of cash, at our option. As a result, a significant number of shares of
our common stock may be issued, and if these shares are sold in the public
market the price of our common stock may decrease. The holders of the
convertible debentures have agreed to a 4.99% ownership limitation, which limits
the amount of shares of common stock that they may hold at any given time.
However, there is nothing to prevent a holder from converting a portion of its
debentures into an amount of common stock equal to less than 4.99% of the
outstanding common stock, selling such shares of common stock, and then
converting more debentures into additional shares of common stock to be sold in
the market.
OUR BUSINESS REQUIRES SUBSTANTIAL CAPITAL EXPENDITURES WHICH MAY RESULT
IN CONTINUED LOSSES IN THE FORESEEABLE FUTURE.
The development of our business requires substantial capital
expenditures. A substantial part of these expenditures are incurred before any
related revenues are realized. Capital expenditures and other operating
expenditures will result in negative cash flow and operating losses until and
unless we develop an adequate customer base and revenue stream. If we do not
generate enough revenues to offset our capital expenditures we may never become
profitable. There is no assurance that we will be able to obtain additional
capital on satisfactory terms, if at all. Our ability to obtain additional
capital may be dependent on the quotation of our common stock on the Nasdaq
Stock Market or a U.S. National Securities Exchange. We have applied to list our
common stock on the Nasdaq SmallCap Market. We have recently entered into two
separate voting trust agreements with shareholders holding a majority of the
voting power of our capital stock, to limit their ability to control us through
their shareholdings. See "Security Ownership of Certain Beneficial Owners and
Management". However, there is no assurance that our common stock will be
approved for listing on Nasdaq or any other U.S. Securities Exchange.
OUR CURRENT BUSINESS MODEL RELIES ON FINANCING FROM LUCENT TECHNOLOGIES
THAT MAY NOT BE AVAILABLE TO US. IF WE ARE NOT ABLE TO OBTAIN THIS FINANCING, WE
MAY NOT BE ABLE TO MAINTAIN OUR CURRENT AND PROJECTED GROWTH.
Our business strategy depends on our ability to lease a significant
amount of equipment from Lucent Technologies. On July 30, 1999, phoneXchange and
Lucent Technologies, Inc. InterNetworking Systems signed a Master Lease
Agreement pursuant to which Lucent agreed to provide us $3 million in credit for
leasing Lucent equipment. On February 7, 2000, Lucent amended this agreement to
increase our line of credit to $10 million. We are currently attempting to
negotiate an increase in the total financing to $25 million. However, there is
no assurance that any increase will be approved. If an increase is not approved,
we may not be able to maintain our current and projected growth.
OUR SALES AND OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY
AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS OR
INVESTORS, CAUSING OUR STOCK PRICE TO FALL.
7
<PAGE>
Our quarterly sales and operating results are difficult to predict and
have and may continue to fluctuate significantly from quarter to quarter. As a
result, a period-to-period comparison of our operating results may not be
meaningful and should not be relied on as an indication of future performance.
If our quarterly sales or operating results fall below the expectations of
securities analysts or investors, the price of our common stock could fall
substantially.
Revenues in any given period can vary due to factors such as:
o call volume fluctuations, particularly in regions with
relatively high per-minute rates;
o the addition or loss of major customers, whether through
competition, merger, consolidation or otherwise;
o the loss of economically beneficial routing options for the
termination of our traffic;
o financial difficulties of major customers; pricing pressure
resulting from increased competition; and
o technical difficulties with or failures of portions of our
network that impact our ability to provide service to or bill
our customers.
Our cost of services and operating expenses in any given period can
vary due to factors such as:
o fluctuations in rates charged by carriers to terminate our
traffic;
o increases in bad debt expense and reserves;
o the timing of capital expenditures, and other costs associated
with acquiring or obtaining other rights to switching and
other transport facilities;
o changes in our sales incentive plans; and
o costs associated with changes in staffing levels of sales,
marketing, technical support and administrative personnel.
In addition, our operating results can vary due to factors such as:
o changes in routing due to variations in the quality of vendor
transmission capability;
o loss of favorable routing options;
o the amount of, and the accounting policy for, return traffic
under operating agreements;
o actions by domestic or foreign regulatory entities;
8
<PAGE>
o the level, timing and pace of our expansion in international
and commercial markets; and
o general domestic and international economic and political
conditions.
Furthermore, a substantial portion of our transmission capacity is
obtained on a variable, per minute and short-term basis, subjecting us to the
possibility of unanticipated price increases and service cancellations. Since we
do not generally have long-term arrangements for the purchase or resale of long
distance services, and since rates fluctuate significantly over short periods of
time, our gross margins are subject to significant fluctuations over short
periods of time. Our gross margins also may be negatively impacted in the longer
term by competitive pricing pressures.
WE EXPECT TO EXPAND OUR OPERATIONS SIGNIFICANTLY, AND FAILURE TO MANAGE
THIS EXPANSION EFFECTIVELY COULD DISRUPT OUR OPERATIONS AND HARM OUR BUSINESS.
To succeed in our goal of expanding and enhancing our business
operations, we will need to:
o successfully implement our marketing strategies;
o continue to develop, expand and integrate our network;
o obtain satisfactory and cost-effective ownership interests and
lease rights from, and establish interconnection arrangements
with, competitors that own transport lines;
o hire, retain and motivate highly productive sales personnel
and independent sales agents;
o enhance and expand our service features and offerings; and
o continue to attract and hire experienced corporate
professionals.
If we fail to successfully implement our expansion plans, we might have
to reduce or delay our planned capital expenditures. In addition, any
significant expansion will strain our management, operational, financial and
technological resources, as well as the infrastructure for our services. Our
failure to manage our growth in a manner that minimizes these strains on our
resources could disrupt our operations and ultimately prevent us from generating
the revenues we expect.
DIFFICULTIES IN EXPANDING OUR NETWORKS COULD INCREASE OUR ESTIMATED
COSTS AND DELAY SCHEDULED COMPLETION.
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The expansion of our existing networks and the construction of networks
in new markets is a significant undertaking. We will be required to install,
purchase or lease, and operate additional facilities, switches and related
equipment. Administrative, technical, operational, regulatory and other problems
could arise that might be difficult to address and solve due to the scope and
complexity of our planned expansion. Our ability to expand will also depend on
timely performance by third-party suppliers and contractors, including suppliers
of network equipment. Many of these factors are beyond our control. As a result,
our network expansion might not be completed as planned, for the costs or in the
time frame that we currently estimate.
WE WILL NEED TO INCUR ADDITIONAL DEBT TO CONTINUE OUR OPERATIONS AND
FINANCING MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS OR AT ALL.
We believe that we must continue to enhance and expand our network in
order to maintain our competitive position and continue to meet the increasing
demands for service, quality, capacity and competitive pricing. This may require
us to purchase and lease additional network capacity, inventory, equipment and
possibly, to acquire other companies, which requires significant capital
expenditures. In addition, we believe that we will not have sufficient cash to
meet our currently anticipated working capital and capital expenditure
requirements for the next 12 months. There can be no assurance that we will be
able to raise needed capital on favorable terms or at all. If we are unable to
obtain additional capital on acceptable terms, if and when needed, we may be
required to reduce the scope of our anticipated expansion and may not be able to
take advantage of future opportunities.
THE LOSS OF ANY OF OUR MEMBERS OF SENIOR MANAGEMENT OR OTHER HIGHLY
SKILLED EMPLOYEES COULD HARM OUR BUSINESS.
Our success depends to a significant degree on the efforts of senior
management personnel and a group of employees with longstanding industry
relationships and technical knowledge of our operations. We do not maintain
keyman life insurance with respect to any of our executive officers. We believe
that our future success will depend in large part on our continuing ability to
attract and retain highly skilled personnel. Competition for qualified,
high-level telecommunications personnel is intense and there can be no assurance
that we will be successful in attracting and retaining needed personnel. The
loss of the services of one or more of our key individuals, or our failure to
attract and retain other key personnel, could strain our resources and disrupt
our business operations.
INTENSE COMPETITION IN THE INTERNATIONAL TELECOMMUNICATIONS INDUSTRY
COULD REDUCE THE DEMAND FOR OUR SERVICES AND HURT OUR SALES AND OPERATING
RESULTS.
The international telecommunications industry is intensely competitive.
International wholesale telecommunications providers compete on the basis of
price, customer service, transmission quality and breadth of service offerings.
Many of our competitors have substantially greater resources and are better
equipped than us. We compete directly with AT&T Corp., MCI WorldCom Corp. and
Sprint Corporation as well as other U.S.-based and foreign long distance
providers, including the Regional Bell Operating Companies. We also compete with
smaller, emerging carriers in both the prepaid card retail market and in the
wholesale market, including IDT Corporation, STAR Telecom, RSL Communications,
Pacific Gateway Exchange, Inc., FaciliCom International, Inc. and Telegroup,
Inc. Further, the number of competitors is likely to increase as a result of
opportunities created by the Basic Telecommunications Agreement concluded by
members of the World Trade Organization in February 1997. We may be unable to
compete successfully against these companies or their products and services.
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IF WE DO NOT SUCCESSFULLY ANTICIPATE AND ADAPT TO CHANGES IN OUR
INDUSTRY, OUR OPERATING RESULTS COULD SUFFER.
The telecommunications industry is in a period of rapid technological
evolution, marked by the introduction of competitive products and services, such
as the use of the Internet for international voice and data communications. We
are unable to predict which technological development will challenge our
competitive position and adapting to changes may require significant
expenditures of money. If we fail to respond to developments in our industry
quickly and in a cost effective manner, our technology could become obsolete and
we may lose existing customers and fail to attract new customers.
A significant portion of our sales relate to the prepaid card market,
which also faces rapid technological change, introduction of new products and
services, competition from new sales channels and evolving industry standards.
Our success will depend, in significant part, on our ability to make timely and
cost-effective enhancements and additions to our technology and to introduce new
products and services that meet customer demands. The proliferation of new
telecommunications technology, including personal and voice communication
services over the Internet, may reduce demand for long distance services,
including prepaid cards. There can be no assurance that we will be successful in
responding to these or other technological changes, evolving industry standards
or to new products and services offered by our competitors. If we are unable to
respond to these changes, we could lose customers and significant revenues.
WE PROVIDE SERVICES TO THE INTERNATIONAL MARKET, WHICH SUBJECTS US TO
RISKS FROM REGULATORY, FINANCIAL, OPERATIONAL AND POLITICAL SITUATIONS.
We expect to generate a substantial potion of our future revenues by
providing international telecommunication services to customers on a wholesale
basis. The international nature of our operations involve risks caused by:
o changes in U.S. and foreign government regulations,
o changes in U.S. and foreign telecommunications standards,
o dependence on foreign partners,
o changes in tariffs, taxes and other trade barriers,
o the potential for nationalization and economic downturns, and
o political instability in foreign countries.
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As we expand, we will increasingly rely on foreign partners. Our
arrangements with foreign partners may expose us to significant legal,
regulatory or economic risks and we may have limited recourse if our foreign
partners do not perform under their contractual arrangements. Any of these risks
could affect our ability to expand and could result in a loss of revenues.
In addition, the governments of many countries exercise substantial
influence over various aspects of the telecommunications market. In some cases,
the government owns or controls companies that are or may become competitors or
companies, such as national telephone companies, on which we and our foreign
partners may depend for required interconnections to local telephone networks
and other services. Accordingly, government actions in the future could have a
material adverse effect on our operations.
FLUCTUATIONS IN FOREIGN CURRENCY EXCHANGE RATES COULD EFFECT OUR
RESULTS OF OPERATIONS.
Our revenues and the cost of long distance services are sensitive to
foreign currency fluctuations. We expect that an increasing portion of our net
revenues and expenses will be denominated in currencies other than U.S. dollars.
If that becomes the case, changes in exchange rates may have a significant
effect on our results of operations.
DAMAGE TO OUR NETWORK COULD CAUSE INTERRUPTIONS OF SERVICE AND RESULT
IN REDUCED REVENUES AND HARM TO OUR REPUTATION.
Any system or network failure that causes interruptions in our
operations could have a material adverse effect on our business, financial
condition or results of operations. Our operations are dependent on our ability
to successfully integrate new and emerging technologies and equipment into our
network, which could increase the risk of system failure and cause a strain on
our networks. In addition, our hardware and other equipment could be damaged by
natural disasters, intentional acts of vandalism and other sources of power loss
and telecommunications failures. We have taken a number of steps to prevent our
network from being affected by natural disasters, including building redundant
systems for power supply to our switching equipment. However, there can be no
assurance that any of these systems will prevent our switches from becoming
disabled in the event of an earthquake, power outage or otherwise. The failure
of our network, or a significant decrease in telephone traffic resulting from
effects of a natural or man-made disaster, could result in the loss of existing
customers and could affect our reputation, harming our business
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD AFFECT OUR ABILITY
TO PROVIDE SERVICES.
As a provider of domestic and international long distance
telecommunications services, we are subject to varying degrees of regulation in
each of the jurisdictions in which we operate. In the U.S., we are subject to
the regulations of the Federal Communications Commission as well as state and
local laws and regulations. Currently, the FCC and state authorities regulate
ownership of transport facilities, provision of services and the terms and
conditions under which we provide services. If we do not comply with all the
legal and regulatory requirements, we may face liability and may not be able to
provide services in a particular jurisdiction.
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In addition, many foreign countries have adopted or may adopt laws or
regulations that concern our services. Compliance with these regulations may be
difficult or expensive, and could force us to choose more expensive routing
alternatives. We currently plan to provide a limited range of services in Mexico
and the Philippines and to expand our operations as these markets liberalize
regulations to permit competition. There can be no assurance that the regulatory
regime in these countries will provide us with practical opportunities to
compete in the near future, or at all. In addition, a reversal in the current
trend toward deregulation of telecommunications carriers could have an adverse
effect on our ability to provide or expand our services.
AN UNFAVORABLE OUTCOME IN THE J&W VENTURES LITIGATION MAY ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
An adverse ruling in the J&W Ventures litigation described in the
"Legal Proceedings" section below would have an adverse affect on our results of
operations. A monetary judgment could reduce or eliminate our working capital,
and a judgment requiring us to issue shares of common or preferred stock could
cause substantial dilution to our security holders.
WE HAVE NEVER PAID AND DO NOT EXPECT TO PAY DIVIDENDS, WHICH MAY HAVE
AN ADVERSE AFFECT ON THE PRICE OF OUR COMMON STOCK AND ON THE ABILITY OF
INVESTORS TO REALIZE A RETURN ON THEIR INVESTMENT IN OUR COMPANY.
We have not previously paid any dividends on our common stock and
intend to follow a policy of retaining all of our cash flow from operations, if
any, to finance the development and expansion of our business. Investors should
not expect to realize any return on their investment through the payment of
dividends. In addition, our policy of not paying dividends may have a depressive
effect on the price of our common stock.
A SUBSTANTIAL PORTION OF OUR ASSETS ARE INTANGIBLE.
In connection with our acquisition of a majority of phoneXchange, Inc.
and the acquisition of certain other assets in exchange for stock as described
in Note 2 to Audited Consolidated Financial Statements, we recorded
approximately $8.9 million in "goodwill (net)" based on the purchase method of
accounting. This "goodwill" represents approximately 57.6% of our total assets.
As a result, we may experience difficulty in raising additional capital
especially asset based financing. In addition, we may not be able to recover the
stated value of our assets in the event of a liquidation.
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<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains statements that are not historical facts,
including some statements made in the sections of this prospectus entitled "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Description of Business," are statements of future
expectations and other forward-looking statements pursuant to Section 27A of the
Securities Act of 1933. Words such as "believe," "expect," "intend," "plan,"
"anticipate," "likely," "will," and similar expressions are intended to identify
these forward-looking statements. These statements are based on management's
current views and assumptions and involve known and unknown risks and
uncertainties that could cause actual results, performance or events to differ
materially from those expressed or implied in those statements, including:
o the rate of expansion of our network and/or customer base;
o need for additional capital and potential inability to obtain
capital or satisfactory terms, if at all;
o inaccuracies in our forecasts of telecommunications traffic or
customers;
o loss of a customer that provides us with significant revenues;
o loss of sales representatives, dealers or agents;
o highly competitive market conditions;
o no assurance common stock will be quoted on Nasdaq or listed
on a U.S. National Securities Exchange;
o changes in or developments under laws, regulations, licensing
requirements or telecommunications standards;
o changes in technology;
o changes in the availability of transmission facilities;
o changes in retail or wholesale telecommunications rates;
o risks of government regulation;
o loss of the services of key officers; and
o general economic conditions.
This list of important factors is not exhaustive. We do not intend to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Our actual results could differ
materially from those referred to in these forward-looking statements as a
result of many factors, as described more fully in the "Risk Factors" section
and elsewhere in this prospectus.
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<PAGE>
USE OF PROCEEDS
If all the warrants to purchase common stock covered by this prospectus
are exercised for the maximum number of shares of common stock, we would receive
gross proceeds of approximately $20,894,475. This amount would be used by us for
working capital purposes and to finance our network expansion, including carrier
deposits. We are not currently negotiating any network expansion agreements. We
will not receive any proceeds from any sales by the selling stockholders of
common stock under this prospectus.
SELLING SECURITY HOLDERS
The following table sets forth the information as of March 15, 2000
concerning the security holders whose common stock, issuable either on exercise
of warrants or on conversion of our 4% Convertible Debentures and Series A-1
convertible redeemable preferred stock, is offered in this offering. The table
does not include those shares of common stock issuable on conversion of the
Series A-1 convertible redeemable preferred stock that are not registered under
this prospectus.
Please note that due to the conversion ratio of the debentures, the
lower the price of our common stock, the greater the number of shares issuable
on conversion. Accordingly, there is no ceiling on the number of shares that
could potentially be issued to Rebecca LLC on conversion of the debentures. If
the price of our common stock were to fall to $4.50, $3.00 or $1.50, the
debentures would be convertible into 1,388,889, 2,083,333 or 4,166,667 shares,
respectively.
<TABLE>
<CAPTION>
UPDATE
- ------------------------- ------------------------ ------------------------------- ----------------------------
Common Stock Common Stock Common Stock
Beneficially Owned Registered in Beneficially Owned
Before Offering This Offering After Offering
- ------------------------- ------------------------ ------------------------------- ----------------- ----------
Percent
NAME Number Owned Number Owned Number Owned of Class
- ------------------------- ------------------------ ------------------------------ ----------------- ----------
<S> <C> <C> <C> <C>
Rebecca LLC (2) 2,660,000 (3) 2,660,000 - -%
- ------------------------- ------------------------ ------------------------------ ----------------- ----------
May Davis Group, Inc. (4) 200,000 (5) 200,000 - -%
- ------------------------- ------------------------ ------------------------------ ----------------- ----------
Corporate Financial
Enterprises, Inc. (6) 1,000,000 5,078,633 (7) 1,000,000 17.0%
- ------------------------- ------------------------ ------------------------------ ----------------- ----------
American Equities, LLC
(8) - 1,130,000 (9) - -%
- ------------------------- ------------------------ ------------------------------ ----------------- ----------
Jamie Mazur - 1,695,000 (10) - -%
- ------------------------- ------------------------ ------------------------------ ----------------- ----------
Emily Mazur - 1,130,000 (9) - -%
- ------------------------- ------------------------ ------------------------------ ----------------- ----------
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Jennifer Mazur - 1,130,000 (9) - -%
- ------------------------- ------------------------ ------------------------------ ---------------- ----------
Trent Mazur - 1,130,000 (9) - -%
- ------------------------- ------------------------ ------------------------------ ---------------- ----------
David Chadwick 975,000 (11) 487,500 975,000 15.3%
- ------------------------- ------------------------ ------------------------------ ---------------- ----------
James E. Rott 363,036 (12) 126,786 363,036 5.9%
- ------------------------- ------------------------ ------------------------------ ---------------- ----------
Paul E. Hyde 126,786 126,786 126,786 2.2%
- ------------------------- ------------------------ ------------------------------ ---------------- ----------
Gary L. Killoran 363,036 (12) 126,786 363,036 5.9%
- ------------------------- ------------------------ ------------------------------ ---------------- ----------
Mike W. DuBrock 35,714 (13) 10,714 35,714 *
- ------------------------- ------------------------ ------------------------------ ---------------- ----------
Anna Marie Yates 15,714 (14) 10,714 15,714 *
- ------------------------- ------------------------ ------------------------------ ---------------- ----------
John C. Guthrie 10,714 10,714 10,714 *
- ------------------------- ------------------------ ------------------------------ ---------------- ----------
Adrian A. Merril 10,714 10,714 10,714 *
- ------------------------- ------------------------ ------------------------------ ---------------- ----------
Thomas Nelson 10,714 10,714 10,714 *
- ------------------------- ------------------------ ------------------------------ ---------------- ----------
Total: 5,771,428 15,075,061 2,911,428 30%
- ------------------------- ------------------------ ------------------------------ ---------------- ----------
</TABLE>
* Less than 1%
(1) Assumes that all registered common stock beneficially owned is fully
exercised and or converted, then sold. Of the common stock registered
pursuant to this prospectus, only these shares that underlie the
convertible debentures, Rebecca, LLC warrants and May Davis warrants
are deemed beneficially owned. All other shares underlie securities
that are not exercisable within 60 days.
(2) Voting and investment control is exercised by David Sims.
(3) Includes 2,500,000 shares issuable on conversion of the 4% Convertible
Debentures including shares that may be issued in payment of the annual
4% interest payment, 80,000 shares issuable on exercise of the $12.50
warrants, and 80,000 shares issuable on exercise of the $15.00
warrants.
(4) Voting and investment control is exercised by Owen Davis.
(5) Includes shares issuable on exercise of the May Davis warrants.
(6) Corporate Financial Enterprises, Inc. is a private investment banking
and consulting firm owned by Mr. Regis Possino. Effective March 30,
2000, all shares of capital stock beneficially owned by Corporate
Financial Enterprises, Inc. were transferred to a trust, as amended, a
copy of which is incorporated as an exhibit hereto. According to the
terms of the trust, David Chadwick, as President of the Company, was
appointed trustee and is required to vote the shares, with respect to
any election of directors, in favor of any individuals in the same
proportion as all other shares are validly voted in favor of such
individuals. In addition, David Chadwick (or his successor as trustee)
is required to vote the shares, with respect to each other matter,
"for", "against" or to abstain from voting in the same proportion as
all other shares are validly voted "for", "against" or abstain from
voting, as the case may be. In November 1999, we issued 1,000,000
shares of common stock pursuant to a notice of conversion of 100,000
shares of Series A-1 12% convertible redeemable preferred stock. The
purpose of the irrevocable trust was to limit the ability of Corporate
Financial Enterprises, Inc. and Mr. Possino from exercising voting
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<PAGE>
control over us through his share holdings during the term of the trust
agreement. We understand that Mr. Possino was convicted of a felony
involving the attempted sale of illegal drugs more than twenty years
ago. We understand that Mr. Possino was willing to enter into the trust
agreement to attempt to protect us from any adverse impact from his
share holdings. For the complete terms, see attached trust agreement, a
copy of which is incorporated as an exhibit hereto.
(7) Includes 350,000 shares issuable on exercise of the September 2004
warrants, 2,478,633 shares issuable on exercise of the February 2004
warrants, and 2,250,000 shares issuable on conversion of 225,000 shares
of the Series A-1 12% convertible redeemable preferred stock. None of
which are exercisable until December 31, 2000.
(8) Voting and investment control is exercised by Mr. and Mrs. Reid
Breitman.
(9) Includes 630,000 shares issuable on exercise of the February 2004
warrants and 500,000 shares issuable on conversion of 50,000 shares of
the Series A-1 12% convertible redeemable preferred stock. None of
which are exercisable until December 31, 2000.
(10) Includes 945,000 shares issuable on exercise of the February 2004
warrants and 750,000 shares issuable on conversion of 75,000 shares of
the Series A-1 12% convertible redeemable preferred stock.
(11) Includes 487,500 shares issuable on exercise of options.
(12) Includes 126,786 shares issuable on exercise of options.
(13) Includes 25,000 shares issuable on exercise of options.
(14) Includes 5,000 shares issuable on exercise of options.
Corporate Financial Enterprises, Inc. has provided consulting services
to us. On April 25, 2000, we cancelled our consulting agreement with Corporate
Financial Enterprises, Inc.
Jamie, Jennifer, Emily and Trent Mazur are siblings and are the
children of Sherman Mazur and Michele Mazur. Emily and Trent Mazur are minors,
and their shares are held by their mother, Michele Mazur, as guardian. Effective
March 30, 2000, all shares of capital stock beneficially owned by Jamie,
Jennifer, Emily and Trent Mazur were transferred to a trust, as amended.
According to the terms of the trust, David Chadwick, as President of the
Company, was appointed trustee and is required to vote the shares, with respect
to any election of directors, in favor of any individuals in the same proportion
as all other shares are validly voted in favor of such individuals. In addition,
17
<PAGE>
David Chadwick (or his successor as trustee) is required to vote the shares,
with respect to each other matter, "for", "against" or to abstain from voting in
the same proportion as all other shares are validly voted "for", "against" or
abstain from voting, as the case may be. The purpose of the irrevocable trust
was to limit the ability of the Mazur children and the members of their
immediate family from exercising voting control over us through their share
holdings during the term of the trust agreement. We understand that Mr. Sherman
Mazur was convicted of felonies involving bankruptcy and tax fraud more than
five years ago. We understand that the Mazur children were willing to enter into
the trust agreement to attempt to protect us from any adverse impact from their
share holdings. For the complete terms, see attached trust agreement, a copy of
which is incorporated as an exhibit hereto.
David Chadwick is our President, Chief Executive Officer and Chairman
of our board of directors, James Rott is our Chief Operations Officer, Paul E.
Hyde is a Vice President and member of our board of directors, Gary L. Killoran
is our Chief Financial Officer, Secretary, Treasurer and member of our board of
directors, Mike W. DuBrock is our Controller and Anna Marie Yates is our Carrier
Account Manager. John C. Gurthrie, Adrian A. Merril and Thomas Nelson are not
employed by us.
PLAN OF DISTRIBUTION
The selling security holders may offer their shares of common stock at
various times in one or more of the following transactions:
o in the over-the-counter market or such other markets or
exchanges as our common stock may be listed or quoted;
o in transactions other than in the over-the-counter market or
such other markets or exchanges as our common stock may be
listed or quoted;
o in privately negotiated transactions;
o in connection with short sales of our shares;
o by pledge to secure debts and other obligations;
o in connection with the writing of non-traded and
exchange-traded call options, in hedge transactions and in
settlement of other transactions in standardized or
over-the-counter options; or
o in a combination of any of the above transactions.
The selling security holders may sell their shares of common stock at
market prices prevailing at the time of sale, at prices related to the
prevailing market prices, at negotiated prices or at fixed prices.
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When the selling security holders sell their shares of common stock, we
will prepare a prospectus supplement if necessary. A prospectus supplement would
list the number of shares of common stock being offered and the terms of the
offering, including the proposed selling price to the public. The selling
security holders may use broker-dealers to sell their shares. If this happens,
broker-dealers will either receive discounts or commissions from the selling
security holders, or they will receive commissions from purchasers of shares for
whom they acted as agents.
In connection with this registration of common stock, we will pay all
of the expenses, including fees and expenses with respect to required Securities
and Exchange Commission and Nasdaq filings and in compliance with applicable
state securities or blue sky laws. We will not pay underwriting discounts and
selling commissions, if any, or the fees and expenses of any counsel or other
advisors for the selling security holders.
DESCRIPTION OF SECURITIES
The following is a summary of the material provisions of each of our
securities. Please refer to our articles of incorporation and bylaws, filed as
exhibits to this registration statement, for more detailed descriptions.
We are authorized to issue 250,000,000 shares of common stock, $.01 par
value per share, and 20,000,000 shares of preferred stock, $.01 par value per
share. Of the authorized preferred stock, 7,500,000 shares are designated as 12%
Convertible Redeemable Preferred Stock, Series A-1 and 50,000 shares are
designated as Series A Preferred Stock. On March 15, 2000, there were 5,867,780
shares of common stock issued and outstanding. This amount does not include:
o 7,575,061 shares of common stock subject to outstanding
warrants,
o 1,000,000 shares issuable on exercise of outstanding options,
o 2,500,000 shares issuable on conversion of convertible
debentures, and
o 31,679,740 shares issuable on conversion of the Series A-1 12%
convertible redeemable preferred stock.
o 3,000,000 shares reserved fir issuance under our 2000 Omnibus
Stock Incentive Plan.
As of March 15, 2000, 3,167,974 shares of Series A-1 12% convertible
redeemable preferred stock were issued and outstanding and no shares of the
Series A preferred stock were issued and outstanding.
COMMON STOCK
Our common stock is currently listed on the National Quotation Bureau's
"Pink Sheets" under the symbol "ICNW" and on the Frankfurt Stock Exchange under
the symbol "IGA.F."
Holders of common stock are entitled to one vote per share on all
matters submitted to a vote of stockholders. Holders of common stock are not
permitted to vote their shares cumulatively. As a result, the holders of a
majority of the shares of common stock can elect all of the directors to our
board, subject to the voting and other rights of the holders of any outstanding
shares of preferred stock.
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<PAGE>
All shares of common stock are entitled to participate ratably in
dividends when and as declared by the board of directors out of funds legally
available for the payment of dividends. Dividends may be paid in cash, property
or additional shares of common stock. Holders of common stock have no preemptive
or other subscription rights, conversion rights, redemption or sinking fund
provisions. In the event of our liquidation, dissolution, or winding up, holders
of our common stock are entitled to share ratably in any assets available for
distribution after satisfaction of all debts and other liabilities, including
any liquidation preferences held by holders of preferred stock.
PREFERRED STOCK
GENERAL
Our board of directors may issue up to 20,000,000 shares of preferred
stock with preferences, powers and rights, including voting rights, senior to
the rights of holders of common stock. Our board of directors may issue shares
of preferred stock in public or private transactions for any proper corporate
purpose, including issuances to obtain additional financing, and issuances to
our officers, directors and employees and our subsidiaries pursuant to benefit
plans or otherwise. The issuance of preferred stock could:
o adversely affect the voting power of holders of common stock
and reduce the likelihood that they will receive dividend
payments and payments on liquidation,
o adversely affect the rights of current holders of preferred
stock,
o decrease the market price of our common stock, or
o delay, deter or prevent a change in our control.
SERIES A PREFERRED STOCK
Our board of directors is authorized to issue up to 50,000 shares of
Series A preferred stock with a stated value of $3.00 per share. Subject to the
approval of the board of directors, the Series A preferred stock shall accrue
dividends at a rate of 8% per year, payable in shares of our common stock. The
Series A preferred stock is convertible into common stock at our option, at the
rate of one share of common stock for each share of Series A Preferred. The
Series A preferred stock can be redeemed at our option, at a price of $3.00 for
each share.
The Series A preferred stock has no voting rights, except as required
by the Nevada General Corporation Law. The Nevada General Corporation Law
requires that stockholders of any class or series of stock have the right to
vote on any proposal to amend the certificate of incorporation or to change the
number of authorized shares of any other class or series, if the proposal would
affect their preferences or rights. The Series A preferred stock is not entitled
to payment of any amount in the event of liquidation. As to dividends, the
Series A preferred stock is superior in right of payment to the common stock.
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SERIES A-1 PREFERRED STOCK
Our board of directors is authorized to issue 7,500,000 shares of 12%
convertible redeemable preferred stock, Series A-1. The Series A-1 12%
convertible redeemable preferred stock accrues dividends at a rate of 12% per
year, payable on a quarterly basis in shares of common stock, commencing June 1,
1999. The Series A-1 12% convertible redeemable preferred stock is convertible
at any time after December 31, 2000, at the option of the holder, into shares of
common stock at the rate of 10 shares of common stock for each share of Series
A-1 12% convertible redeemable preferred stock. At any time after January 1,
2000, the Series A-1 preferred stock is redeemable, at the option of the holder,
out of legally available funds, at an amount equal to 125 % of the purchase
price plus accrued and unpaid dividends, if any, to and including the date fixed
for redemption, whether or not earned or declared.
The holders of Series A-1 12% convertible redeemable preferred stock
are entitled to ten votes for each share of Series A-1 preferred stock on all
matters submitted to our stockholders. With respect to matters affecting only
the Series A-1 12% convertible redeemable preferred stock, each share shall be
entitled to one vote. The Series A-1 12% convertible redeemable preferred stock
is superior in right of payment in the event of liquidation and with respect to
dividends to the common stock and any other stock ranking junior to the Series
A-1 12% convertible redeemable preferred stock. The liquidation value of the
Series A-1 12% convertible redeemable preferred stock is $1.53 per share plus
any accrued and unpaid dividends.
WARRANTS AND OPTIONS
As of March 15, 2000, there were warrants and options outstanding to
purchase an aggregate of 8,575,061 shares of our common stock at exercise prices
ranging from $1.72 to $ 15.00. The phoneXchange warrants and the September 2004
warrants provide for anti-dilution adjustments if we issue common stock at less
than fair value, issue common stock as a dividend or other distribution, or
effect a forward stock split. The May Davis warrants, the $12.50 warrants and
the $15.00 warrants provide for anti-dilution adjustments if we issue stock as a
dividend or other distribution, issue stock purchasable from dividends paid in
cash, issue stock by a forward stock split, reverse stock split or
reclassification, or make a distribution of indebtedness or assets. In each case
the exercise price is adjusted so that the warrant holder will continue to pay
the same amount for the percentage of our outstanding common stock originally
contemplated by the warrant agreement.
Our 2000 Omnibus Stock Incentive Plan was adopted by the Board of
Directors on April 17, 2000 and recommended for approval by our shareholders.
The plan authorizes up 3,000,000 shares of common stock for issuance. Such
shares have been reserved. As of April 30, 2000, no grants were made under the
plan.
The warrants and options expire on various dates between November 22,
2001 and November 22, 2004. The holders of warrants are entitled to registration
rights on the underlying 7,575,061 shares of common stock. See "Selling Security
Holders."
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4% CONVERTIBLE DEBENTURES
As of March 15, 2000, there was an aggregate of $5.0 million principal
amount of our 4% Convertible Debentures outstanding. These debentures bear
interest at the rate of 4% per year, payable in cash or common stock, at our
option, on conversion. The debentures automatically convert into common stock on
December 2, 2004 at the conversion price in effect on December 2, 2004. The
holders of the debentures have the right, at any time after April 1, 2000, to
convert all or any portion of the debentures into common stock at the lesser of:
o 80% of the averaged three lowest closing bid prices, as
reported by Bloomberg, LP, for the common stock for the 20
trading days immediately preceding the conversion date, or
o $10.00.
We are required to pay liquidated damages of up to $100,000 per month
to the holders of the debentures if we fail to timely deliver common stock on
proper conversion, or if we fail to register the shares of common stock
underlying the debentures before March 2, 2000. We have the right to redeem the
debentures at any time for 120% of their principal amount, plus accrued interest
up to the date of redemption. If we breach any provision of the debentures, the
holders have the right to declare all amounts owing under the debentures
immediately due and payable.
DESCRIPTION OF BUSINESS
BACKGROUND
We originally incorporated under the name Theatre, Inc. on January 16,
1997. On April 16, 1998, Theatre, Inc. merged with Phonetime Resources, Inc. to
effect a domicile change and Theatre, Inc. was the surviving corporation. Upon
completion of the merger, Phonetime Resources, Inc ceased to exist and Theatre,
Inc. operated under the name Global Access Pagers, Inc. On May 8, 1998, Theatre,
Inc. merged with Global Access Pagers, Inc., a Nevada corporation. Theatre, Inc.
was the surviving corporation and changed its name to Global Access Pagers, Inc.
On January 27, 1999, the merger with Global Access Pagers was rescinded and
3,475,000 issued shares of common stock of the surviving entity were returned
and canceled. The rescission had no effect on us or our investors and we
retained the name Global Access Pagers, Inc. On February 10, 1999 Global Access
Pagers, Inc. changed its name to Integrated Communication Networks, Inc.
All of our operations are conducted through our majority owned subsidiary,
phoneXchange, Inc. Presently, we own approximately 65.6% of the outstanding
capital stock of phoneXchange and as of December 31, 1999, we hold approximately
$5,396,805 of debt which is convertible into common stock of phoneXchange. If we
converted the debt we will own approximately 94.6% of the outstanding capital
stock of phoneXchange as of February 29, 2000.
OUR COMPANY
We provide domestic and international long distance and related
telecommunications services for both voice and data to numerous foreign markets.
We have very limited operations and revenues, significant losses, substantial
future capital requirements, and an expectation of continued significant losses.
Our customers include facilities-based carriers and resellers of long distance
service as well as brokers, agents and resellers of prepaid long distance
services including prepaid phone cards. Our network includes switching equipment
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that we own, which connects to existing international transmission lines that we
lease. The final segment of each long distance call is completed by other long
distance providers according to agreements for termination relationships that we
have entered into with them. We believe that the structure of our network may
provide us with competitive advantages because our use of existing transport
lines and termination relationships with other long distance providers allows us
to limit the costs associated with creating an entirely new network. At the same
time, our use of switching, compression and conversion equipment that we own is
designed to allow us to guarantee reliability and high-quality service. Long
distance services are provided through our majority owned subsidiary,
phoneXchange, Inc.
In addition to the long distance services provided by phoneXchange, we
expect to be able to offer call center services through our other wholly owned
subsidiary, Internet Call Centers, Inc. We are developing Internet Call Centers
to provide customer support and customer management services to other companies.
We believe that through Internet Call Centers it may be able to offer these
services for less than it would cost many companies to develop and train support
staffs of their own because we can benefit from economies of scale by sharing
labor and equipment costs across a larger base users. In addition, we could
offer overflow services to companies with existing customer support departments
who would like to improve their response time. We already have the facilities
required for the launch of this business and our joint venture partner has
trained a staff of employees to provide the call center services. We intend to
form a joint venture by issuing approximately 40% of internet Call Centers,
Inc.'s common stock to Global Industry Development & Trade LTD, a British Virgin
Islands company. We arecurrently negotiating the necessary operating agreements
and we currently anticipate that Internet Call Centers will commence operations
in the third quarter of 2000.
LONG DISTANCE SERVICES - PHONEXCHANGE, INC.
THE MARKET
GENERAL. International telecommunications has become an increasingly
important segment of the telecommunications market. We believe that this growth
will continue as a result of the following industry trends:
o Deregulation and privatization of international
telecommunications markets
o Stable or declining international telephone rates
o Globalization of major carriers through market expansion and
mergers, and transition to a multilateral trading system
through joint ventures and strategic alliances
o Diversification of services through technological innovation
o Increased international trade and travel
Legislation and international agreements that have been adopted since
the beginning of 1996 are expected to lead to the liberalization of the majority
of the world's telecommunication markets and we hope to capitalize on current
market opportunities created by these initiatives. These initiatives include:
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o The U.S. Telecommunications Act signed February 1996, which
established parameters for the implementation of full
competition in the U.S. national long distance market.
o The European Union Full Competitive Directive, adopted in
March 1996, which abolished exclusive rights for the provision
of voice telephony services throughout the European Union and
public telecommunications operators of any member country by
January 1, 1998.
o The World Trade Organization Agreement, signed February 1997,
which created a framework under which over 69 countries
committed to liberalize their telecommunications laws in order
to permit increased competition and, in most cases, foreign
ownership in their telecommunications markets, beginning
February 5, 1998.
TARGET MARKETS. phoneXchange has initially targeted the following
markets based on information contained in the August 1998 Federal Communications
Report "Trends in the U.S. International Telecommunications Industry," the
perceived ease of entry into these markets and potential consumer demand.
o Mexico: This represented 12.5% of the international long
distance market in 1996 or 198 million minutes of use per
month with an annual growth rate of 17.6% since 1991. The 1998
forecast of the Mexican market contained in the Communications
Report is 400 million minutes of use per month or 19% of the
international market.
o South America: This represented 8.3% of the international long
distance market in 1996 or 132 million minutes of use per
month with an annual growth rate of 22% since 1991. The 1998
forecast of the South American market contained in the
Communications Report is 190 million minutes of use per month
or 9% of the international market.
o Asia, including Hong Kong, the Republic of Korea and the
Philippines: This represented 19.6% of the international long
distance market in 1996 or 313 million minutes of use per
month with an annual growth rate of 24.5% since 1991. The 1998
forecast of the Asia market contained in the Communications
Report is 467 million minutes of use per month or 22.1% of the
international market.
o Hong Kong: This represented 2.8% of the international long
distance market in 1996 or 45 million minutes of use per month
with an annual growth rate of 41.4% since 1991. The 1998
forecast of the Hong Kong market contained in the
Communications Report is 82 million minutes of use per month
or 3.9% of the international market.
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o Republic of Korea: This represented 2% of the international
long distance market in 1996 or 32 million minutes of use per
month with an annual growth rate of 15.7% since 1991. The 1998
forecast of the Republic of Korea market contained in the
Communications Report is 42 million minutes of use per month
or 2.2% of the international market.
o Philippines: This represented 1.8% of the international long
distance market in 1996 or 29 million minutes of use per month
with an annual growth rate of 13.8% since 1991. The 1998
forecast of the Philippines market contained in the
Communications Report is 42 million minutes of use per month
or 2% of the international market.
PHONEXCHANGE NETWORK DESCRIPTION
GENERAL. phoneXchange has established a network that relies on a
combination of leased transport lines and owned switching equipment. We believe
that this approach has provided us with significant cost and time-savings,
allowing us to offer services in a relatively short period after we began
operations. By owning their switches, phoneXchange can configure their network
to provide high quality, high reliability and cost-effective solutions to their
customers' needs. By leasing transport lines, phoneXchange has been able to
reduce initial costs. As traffic over the network increases, phoneXchange can
add switches or transport lines as needed. In the meantime, we regularly assess
alternate transport line providers for better cost savings.
The backbone of phoneXchange's network includes both a primary and
secondary system, and as a result is fully redundant and fault tolerant so that
if one route fails, alternate routes are available to transport its traffic
through its switching facilities and points of presence in Los Angeles, New
York, Dallas and Mexico City. phoneXchange has built a flexible and scalable
switch-based network using Asynchronous Transfer Mode Internet Protocol or
ATM/IP, which is a switch-based transmission standard used for mission critical
and time sensitive data, such as voice and video. phoneXchange's network uses
products and technologies that support a variety of standard network user
interfaces and will allow for expansion to meet future growth needs.
phoneXchange's network operations center uses technology and network
management solutions that allow it to control remote switching and transport
facilities. The ability to operate remotely allows technicians to manage the
entire network as a single entity. The network operations center is staffed
twenty-four hours per day, seven days per week.
SWITCHING SOLUTION. phoneXchange currently uses the NACT Specialty
Telecommunications Exchange (STX) switches to route calls through our network.
The NACT STX is a Class 4 tandem circuit switch that supports our prepaid and
wholesale calls. A circuit switch uses a physical connection for the full
duration of the call.
phoneXchange is currently installing Excel's EXS-ExchangePlus circuit
switches. The EXS ExchangePlus is a tandem international gateway switch that
provides a unique flexible scaleable open architecture. The EXS ExchangePlus
switch will allow phoneXchange to offer additional services and to expand its
network as revenues increase.
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The Excel EXS ExchangePlus switch is the stepping stone to Lucent's
Softswitch technology. Lucent's Softswitch supports both circuit switching and
the next generation technology called packet switching. Packet switching bundles
information, such as voice, data and video into small packets of information.
Each packet is given a unique identification and carries its own destination
address. Each packet may go by a different route and may also arrive in a
different order than they were shipped. The data is the reassembled in proper
sequence base on the identification and sequencing information on each packet.
The Lucent Softswitch is a programmable, distributed, switching-and-control
platform to set up point-to-point communication across multiple networks. The
ability of the Lucent Softswitch to operate across different networks supports a
wide range of signaling protocols. With the Lucent Softswitch, phoneXchange can
provide a range of IP-based communications services that are indistinguishable
in quality and variety from services on traditional circuit networks.
COMPRESSION SYSTEM. phoneXchange has chosen the Lucent PSAX 1250 and
2300 Series Access Concentrator to convert circuit based traffic to packet-based
traffic and to compress the packets at their origination point and decompress
them at their destination. This compression technology allows us to transport
more telephone traffic over the same leased transport lines than otherwise. This
platform offers multi-voice compression equipment that consolidates voice, data,
video and fax and allows for bandwidth optimization. By compressing data, the
Lucent PSAX 1250 and 2300 Series Access Concentrator provides dynamic routing
capabilities, international and multi-vendor-signaling compatibility,
sophisticated voice adaptation techniques and cost savings while delivering
carrier grade quality of service. The Lucent PSAX 1250 and 2300 Series Access
Concentrator provides combined packet compression and international gateway
communication functionality in a single integrated compression platform for
North America. The system also supports all key national and international
interfaces and is equipped with Lucent Aqueview and NavisAccess network
management systems for use with the next generation of enhanced services.
CONVERSION SYSTEM. The phoneXchange network uses the Cronus TSC 100
Trunk Signaling Converter to allow connections between incompatible switches or
network components. This converter provides full support for both protocol and
rate conversion, as well as crossover connection capability. It provides
increased flexibility by allowing for user configurable framing and signaling
parameters and diagnostic software. It has support for the multi-signaling
protocols used in over 60 countries, in addition to the ability to develop
custom protocols ensuring compatibility with the network's evolving
requirements.
FACILITIES AND POINTS OF PRESENCE. The deployment of phoneXchange's
network began in Los Angeles to serve the largest carrier and customer demand.
Los Angeles is currently on-line in the form of three NACT tandem switches,
currently used primarily as the switching solution for the pre-paid platform,
combined with the Lucent PSAX 1250 Access Concentrators. The Dallas network is
also on-line via the Lucent PSAX 1250 Access Concentrators. The Mexico City
network is currently on-line using the Lucent PSAX 1250 Access Concentrators and
the Cronus TSC 100 Trunk Signaling Converter. We are currently in the process of
expanding this network's capacity and termination relationships to accommodate
customer demand. The New York network is currently on-line using the Lucent PSAX
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1250 Access Concentrator and the Miami network is expected to go on-line using
the Lucent PSAX 1250 Access Concentrator by June 2000. We hope to implement
points of presence in the Philippines by June, 2000 and in Germany by September,
2000. To further improve service and increase capacity, we intend to upgrade all
of our switching facilities to Lucent's Soft Switch Signaling Source 7 (SS7) for
higher carrier grade access and greater efficiency. There can be no assurance,
however, that we will be able to successfully bring the Miami network on-line or
implement points of presence in Germany or the Philippines. Failure to
successfully launch any or all of these networks or points of presence could
have a material adverse effect on the business, operating results and financial
condition.
SERVICES/COMPETITIVE ADVANTAGES
SERVICES. phoneXchange sells domestic and international long distance
service on a wholesale basis to other carriers and resellers who seek high
quality service at competitive rates. phoneXchange provides domestic and
international long distance service to numerous foreign markets. In addition to
the wholesale carrier services, phoneXchange provides service to sellers of
prepaid domestic and international long distance services including prepaid
phone cards. These sellers include:
o Brokers who negotiate customer agreements for a percentage
commission.
o Agents who purchase prepaid calling cards directly from
phoneXchange for a percentage discount from the face value of
the calling card. If the rates for long distance services
increase, phoneXchange does not receive any additional money.
o Resellers who purchase prepaid calling card pins and actual
minutes from phoneXchange which they then resell. If the rates
for long distance services increase, the reseller has to pay
the higher price.
CUSTOMER SUPPORT. phoneXchange provides multilingual customer support
available twenty-four hours a day, seven days a week. phoneXchange uses a
state-of-the-art internal software system that provides real-time access to
on-screen call records, complete with historical detail, to track, resolve,
protect and support the individual needs of its customers. Some areas of high
customer demand include account histories, prepaid calling card balances,
wholesale and retail rate structuring, activity tracking, resolution of
technical problems and billing.
BILLING SERVICES. phoneXchange offers billing services that include
timely and accurate invoices, traffic management reports and weekly call detail
records. The management reports and call detail records include information that
customers can use to analyze their markets and profitability by destination and
origination. phoneXchange currently offers a variety of ways for delivery of
management reports, invoices and call records, as well as assistance in
interpreting the data provided.
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REPORTING SYSTEMS. The management team of phoneXchange uses a real-time
reporting system to determine traffic patterns and switch capacities in order to
terminate traffic cost-effectively. Monitoring customer usage and vendor trunk
reports allows phoneXchange to manage gross margins and pricing. The reporting
software compiles call, price and cost data into a variety of reports, which
both customers and phoneXchange's management team can use in these operations.
All call data, and resulting billing data, are backed up daily and stored
redundantly. The following reports can be generated as needed:
o Customer usage: detailing usage by destination, in order to
track sales and respond to any rating or routing variances for
a particular customer or destination.
o Country usage: detailing number of minutes, average cost and
call lengths.
o Vendor rate tables: Audited for contractual accuracy and
allows management to determine and establish least cost
routing.
o Vendor usage: Facilitates the auditing and verification of
vendor invoices.
In addition, all call data can be transported into third party software for
further analysis.
MARKETING. We market our services through a direct sales force and
account management team who leverage the long-term industry relationships of our
senior management. phoneXchange reaches its customers primarily through
relationships gained through years of experience in the telecommunications
industry, domestic and international trade shows and industry trade
associations. We target second and third-tier providers of international long
distance service who are unable to develop their own network and who desire to
diversify the vendors from which they obtain service for redundancy and quality
purposes.
phoneXchange believes it will be able to offer competitive prices by
aggregating the minutes of use from its various termination agreements and
through the use of leased international transport lines and compression
technology, while maintaining margins as the volume of traffic on its network
increases. The savings are expected to be offset by downward pressure on
wholesale prices to customers due to increased competition.
SALES. Customers enter into carrier agreements with phoneXchange
whereby they commit to a minimum amount of minutes of use per month, generally
from 1.0 million to 10.0 million minutes, or a minimum dollar requirement per
month. These contracts customarily have a term of one year subject to
termination on notice by either party. Upon execution of the carrier agreement
and prior to service, phoneXchange generally requires either a cash deposit or
letter of credit.
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CALL CENTERS SERVICES - INTERNET CALL CENTERS, INC.
THE MARKET
Call center services facilitate direct communication between companies
and their current and prospective customers. There are several forces that drive
corporations to outsource call center activities. Many corporations that rely
heavily on communicating with customers may be overwhelmed with the demands on
their internal systems. In addition, outsourcing eliminates a company's exposure
to rapidly changing computer telephony technology and often permits enhanced
customer service. Internet Call Centers will target small and medium sized
corporations that may not have the resources to implement call centers.
THE INTERNET CALL CENTERS NETWORK DESCRIPTION
GENERAL. Internet Call Centers is a development stage company that
anticipates offering a variety of call center services beginning in the third
quarter of 2000. The call center is evolving into a customer interaction center
where, in addition to calling, customers can send e-mail, conduct
videoconferences or shop on-line. Until recently, all telephony equipment for
call centers and business phone systems came in proprietary bundles of hardware
and software. To add a feature or function, customers had to wait for the vendor
to develop the feature or add an interface to another company's equipment.
Providing access to databases outside the call center was also complicated.
Internet Call Centers will use the network of its sister company, phoneXchange,
to transport voice and data traffic to its call centers. This network meets the
requirements of the Generally Accepted System Security Principles and will
incorporate the most recent technological advances in this business segment.
PLATFORM. Internet Call Centers intends to build its call centers
around each customer's sales and service needs. Internet Call Centers has
determined that the system that best meets its needs is Lucent's CentreVu(R)
Compact Call Center Software Suite and Internet Call Centers intends to
negotiate a purchase contract for this software. Internet Call Centers intends
to seek financing for this purchase from either Lucent or our joint venture
partner. There is no assurance, however, that financing will be available on
acceptable terms, if at all. Building on the performance and flexibility of
Lucent's software, Internet Call Centers can select from a powerful assortment
of features and capabilities, specifically designed to enhance call center
operations. These features allow agents to handle both inbound and outbound
calls and include "expected wait time" and sophisticated routing algorithms
designed to help customers reach the appropriate destination and agent best
qualified to handle their call. Lucent's technology combines Internet commerce
and customer service, allowing Internet Call Centers to save network costs and
agent time by off loading basic information requests to the Internet, while
allowing customers easy access to "live" agents when required. CentreVu(R)
allows customers to navigate ICCI's call center using a variety of interactive
menus and multimedia response capabilities and offers bulletin boards,
announcements and a variety of customer-directed routing options to deliver
quicker and more effective service.
To get the caller to the best agent at the least cost, Lucent's
software considers a range of variables such as the media the caller is using,
the skill set of the next available agents in all locations, caller location and
likely wait time, and the time and cost of routing the call and then selects the
best call center. We believe that our network will allow Internet Call enters to
provide customer service and floor supervisor staff from an overseas
multilingual speaking location at a fraction of the cost using U.S. based
operations to provide these services and staff. We intend, however, to keep all
critical systems, sales, client service support, help desks, monitoring,
billing, computer information systems and business infrastructure in our
domestic headquarters.
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SERVICES/COMPETITIVE ADVANTAGES
Internet Call Centers has not yet commenced operations. Internet Call
Centers expects to provide international multi-lingual call center services
starting in the third quarter of 2000 through its locations twenty-four hours a
day, seven days a week. The services to be offered include:
Inbound Outbound
------- --------
Customer Service Help Desk Marketing Research and Surveys
Catalog Orders Telemarketing/Telesales
Product Technical Information Direct Sales of Products and Services
New Product Information New Product Introduction
Consumer/Advertising Response Credit Card Applications
Order Processing Full Account Management
Direct Mail Support Lead Generation
Event Registration Trade Show Follow-up
Promotional Product Handling Fundraising
Third Party Verification
Internet Call Centers intends to offer both dedicated and overflow
services. Dedicated service will be available to customers who want to use
Internet Call Center's call center as its primary service. Overflow service will
be available to customers who want to use Internet Call Center's services to
fill their overflow capacity. We view the following industries as attractive
marketing targets: Internet, catalog, computer and data processing,
entertainment, financial services, health care providers, pharmaceuticals,
transportation, subscription and publishing.
By offering both inbound and outbound services, Internet Call Centers
believes it can offer customers the opportunity to increase revenues through
effective selling, cross-selling and up-selling on a global scale. We have
selected hardware and software applications for our network that we believe will
enhance the productivity of Internet Call Center's customer service
representatives. We expect that Internet Call Centers will be able to rapidly
respond to market conditions and coverage as well as provide clients with
enhanced market testing capabilities and account management.
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GOVERNMENT REGULATION
As a provider of domestic and international long distance
telecommunications services, we are subject to varying degrees of regulation in
each of the jurisdictions in which we operate. As a non-dominant carrier lacking
substantial power to influence market prices in the U.S., we are generally
subject to less regulation than a dominant carrier. In the U.S., our services
are subject to the provisions of the Communications Act, as amended by the
Telecommunications Act of 1996 and the resulting regulations of the Federal
Communications Commission, as well as the applicable laws and regulations of the
various states administered by the relevant state authorities. The recent trend
in the U.S., for both federal and state regulation of telecommunications service
providers, has been in the direction of reducing regulation. Nonetheless, the
FCC and relevant state authorities continue to regulate ownership of
transmission facilities, provision of services and the terms and conditions
under which our services are provided. Non-dominant carriers, like us, are
required by federal and state law and regulations to file tariffs listing the
rates, terms and conditions for the services they provide. We are also subject
to the FCC policies and rules discussed below.
FEDERAL REGULATION
FCC International Settlements Policy. The FCC International Settlements
Policy governs the permissible arrangements between U.S. carriers and foreign
carriers to exchange traffic and settle the cost of terminating traffic over
each other's networks. This policy requires that U.S. carriers receive an equal
share of the accounting rate and receive inbound traffic in proportion to the
volume of U.S. outbound traffic, which they generate. The policy is primarily
intended to deter dominant foreign carriers from discriminating against
competing U.S. carriers by, for example, favoring the foreign carrier's
U.S.affiliate. We may provide services over international private lines without
complying with the policy, but only between the United States and countries
specifically approved by the FCC for this activity. See "- FCC International
Private Line Resale Policy" below. Changes in these policies may require us to
change or eliminate some of our services, or change the countries in which we
provide services.
FCC International Private Line Resale Policy. The FCC's international
private line resale policy permits a carrier to connect international private
lines to the public switched telephone network at one or both ends to provide
switched services. This service is commonly known as international simple
resale. A carrier generally may only offer international simple resale to
foreign countries that meet FCC guidelines. On grant of an international simple
resale application to a given country, the FCC's rules permit us to provide
international simple resale service to that country. If the FCC were to
determine by its own actions or in response to the filing by a third party, that
we are in violation of its international private line resale policy, the FCC
could order us to terminate any non-conforming arrangements. In addition, we
could be subject to monetary forfeiture and to other penalties including
revocation of our FCC authorizations. Any such FCC action could have a material
adverse effect upon our business, operating results and financial conditions.
FCC Policies on Transit and Refile. We use both transit and refile
arrangements to terminate our international traffic. Transit arrangements occur
when traffic originating from one country and terminating in another is routed
through a third country with the consent of all three countries. The FCC
routinely approves transit arrangements by U.S. international carriers. Refile
arrangements occur when the destination country does not consent to receiving
traffic from the originating country and does not realize that it is receiving
traffic from the originating country. The FCC's rules currently permit carriers
in many cases to use International Simple Resale (ISR) facilities to route
traffic via a third country for refile through the public switched telephone
network. However, the extent to which carriers may enter into refile
arrangements consistent with the FCC's International Settlements Policy is
currently under review by the FCC. We currently terminate traffic only with
carriers authorized by this or the ISR policy. It is possible that the FCC
could find that certain of our arrangements with foreign operators were or
are inconsistent with the ISR policy. If the FCC were to determine by its own
actions or in response to the filing by a third party, that we are in
violation of the ISR policy, the FCC could order us to terminate any
non-conforming arrangements. In addition, we could be subject to monetary
forfeiture and to other penalties including revocation of our FCC
authorizations. Any such FCC action could have a material adverse effect upon
our business, operating results and financial conditions.
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FCC Policies on Use of Pay Phones. A portion of our customers use pay
phones to access services. The Communications Act requires long distance
carriers like us to compensate pay phone owners when a pay phone is used to
originate a telephone call through a toll-free number. Recent regulations
adopted under the Communications Act mandate compensation in the amount of
$0.284 per call, although the basis for this compensation is currently being
reconsidered by the FCC pursuant to a court order. We pass these costs on to our
customers who use pay phones. However, there can be no assurance that we will be
able to successfully pass these costs on to our customers or that these charges
will not have a material adverse effect on our business, operating results and
financial condition.
Recent and Potential FCC Actions. Regulatory action that may be taken
in the future by the FCC may intensify the competition we face, impose
additional operating costs, disrupt some of our transmission arrangements or
otherwise require us to modify our operations. The FCC is encouraging new market
entrants by implementing the World Trade Organization Basic Telecommunications
Agreement and through other actions. The FCC may approve pending mergers, which
could produce more effective competitors in our markets. The FCC may increase
regulatory fees charged to us and our competitors by eliminating the exemption
for carrier revenues obtained from other carriers from certain fees or through
other actions, which could raise our costs of service without assurance that we
could pass such fee increases through to our customers. Such increase or other
action could have a material adverse effect on our business, operating results
and financial condition.
STATE REGULATION
Our intrastate long distance telecommunications operations are subject
to various state laws and regulations, including prior certification,
notification, registration and/or tariff requirements. The vast majority of
states require that companies apply for certification to provide intrastate
telecommunications services. In most jurisdictions, companies also must file and
obtain prior regulatory approval of tariffs for intrastate services.
Certificates of authority can generally be conditioned, modified or revoked by
state regulatory authorities for failure to comply with state laws and
regulations. Fines and other penalties may also be imposed for violations of
state laws and regulations. As of the date of this report, we believe we are in
material compliance with all applicable state laws and regulations.
FOREIGN REGULATION
Foreign countries, either independently or jointly as members of the
International Telecommunication Union, or other supra-national organizations
such as the European Union or the World Trade Organization, may have adopted or
may adopt laws or regulatory requirements regarding our services. Compliance
with these regulations may be difficult or expensive, and could force us to
choose less cost-effective routing alternatives, which could have a material
adverse effect on our business, operating results and financial condition. We
currently plan to provide a limited range of services in Mexico and the
Philippines, as permitted by regulatory conditions in those markets, and to
expand our operations as these markets liberalize regulations to permit
competition in the full range of telecommunications services. There can be no
assurance that the regulatory regime in these countries will provide us with
practical opportunities to compete in the near future, or at all, or that we
will be able to take advantage of any liberalization of regulations in a timely
manner or at all.
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REGULATION OF CUSTOMERS
Our customers are also subject to domestic or foreign regulations that
may affect their ability to deliver traffic to us. Future regulatory actions
could materially adversely affect the volume of traffic received from a major
customer, which could have a material adverse effect on our business, operating
results and financial condition.
TAXATION OF SALE AND USE OF PREPAID CARDS
We have been required to and have collected a three percent (3%)
federal excise tax on sales of Prepaid Cards to our distributors. The taxation
of the sale and use of Prepaid Cards is evolving and is not specifically
addressed by the laws of many of the states in which we do business. In states
that do impose taxes on Prepaid Cards, the most common method of calculation and
payment is predicated on usage of the Prepaid Card and the revenues generated
from the underlying long distance service that is provided. Other states impose
taxes on the face value of the Prepaid Card when sold to consumers, with
collection and remittance made by the retailer at the point of sale. In the
states where we do the majority of our business, taxes on Prepaid Cards are
based on their usage. We believe that we have adequate reserves to pay any state
taxes we may ultimately be required to pay.
EMPLOYEES
As of March 15, 2000, we employed 28 employees on a full time basis. We
believe that our future success will depend on our continued ability to attract
and retain highly skilled and qualified employees. None of the employees are
currently represented by a collective bargaining agreement. We believe that our
relations with our employees are good.
DESCRIPTION OF PROPERTY
We lease our principle office at 27061 Aliso Creek Road, Suite 100, Aliso
Viejo, California 92656. The lease agreement is for a five (5) year term, which
expires April 1, 2005, and covers approximately 17,097 square feet. The current
monthly lease rate is approximately $23,772, which increases annually at the
rate of 4%.
We also lease a switching facility in Los Angeles. The lease agreement
is for a five (5) year term, which expires May 31, 2002, and covers
approximately 1,350 square feet. The current monthly lease rate is approximately
$2,705, which increases annually at the rate of 4%
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LEGAL PROCEEDINGS
On August 30, 1999, J&W Ventures, Inc. filed a claim against us in the
Superior Court of Los Angeles County, alleging that we were in breach of a
contract to purchase telecommunications equipment. The plaintiff is seeking
$4,685,000 in damages. We have filed a cross-complaint seeking rescission and
damages, asserting that J&W Ventures, Inc. breached certain representations and
warranties. We intend to vigorously contest the litigation and to pursue our own
remedies fully. While no assurance can be given regarding the outcome of this
matter, we believe that we have strong and meritorious defenses to the claims
asserted. However, a determination that we breached our contract with J&W
Ventures, Inc. could have a material adverse effect on our business, operating
results and financial condition.
Pursuant to the J&W Ventures Asset Purchase Agreement, we paid $300,000
in cash, issued 441,600 shares of common stock and were obligated to designate
and issue 850,000 shares of a new series of preferred stock, $2.50 par value.
Pending the outcome of the litigation between the parties, we have placed a stop
transfer order on the common stock issued, and have not designated or issued any
preferred stock to the J&W Ventures sellers. We have not made any reserve on our
balance sheet in connection with this litigation.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
GENERAL
Our common stock is traded on the National Quotation Bureau's Pink
Sheets under the symbol "ICNW." We have applied to list our common stock on the
NASDAQ Small Cap Market under the symbol "ICNW." On March 15, 2000, the closing
sale price of our common stock on the National Quotation Bureau's Sheets was
$6.50.
MARKET PRICE
The following table sets forth the range of high and low closing bid
prices per share of our common stock as reported by National Quotation Bureau,
L.L.C. under the symbol "ICNW" for the periods indicated.
Fiscal Year 1998 High Bid Low Bid
- ---------------- ------------ ------------
First Quarter $ 125.00 $ 25.00
Second Quarter $ 37.50 $ 5.00
Third Quarter $ 6.50 $ 4.75
Fourth Quarter $ 6.75 $ 3.75
Fiscal Year 1999 High Bid Low Bid
- ---------------- ------------ ------------
First Quarter $ 7.75 $ 4.875
Second Quarter $ 6.75 $ 4.00
Third Quarter $ 10.4375 $ 5.375
Fourth Quarter $ 11.00 $ 9.00
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The above prices have been adjusted to reflect a 1 for 40 reverse stock
split effective April 21, 1998 and a 1 for 10 reverse stock split effective June
11, 1998. Further, the above prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
HOLDERS
As of March 15, 2000, there were 5,867,780 shares of common stock
issued and outstanding, which were held by approximately 759 holders of record,
and 3,167,974 shares of Series A-1 12% convertible redeemable preferred stock
issued and outstanding, which were held by 6 holders of record. No shares of
Series A preferred stock were issued and outstanding.
DIVIDEND POLICY
We have not paid any dividends on our common stock and do not expect to
do so in the foreseeable future. We intend to apply our earnings, if any, to
expanding our operations and related activities.
The payment of cash dividends in the future will be at the discretion
of the board of directors and will depend on various factors including earning
levels, capital requirements, our financial condition and other factors deemed
relevant by the board of directors. In addition, our ability to pay dividends is
limited pursuant to the Series A-1 12% convertible redeemable preferred stock,
the Series A preferred stock, and may become limited under future series of
preferred stock or loan agreements which may restrict or prohibit the payment of
cash dividends.
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read
together with "Summary Financial Information", "Management's Discussion and
Analysis of Financial Condition and Results of Operations," our consolidated
financial statements and other financial data presented elsewhere in this
prospectus. The consolidated statements of operations data for the year ended
December 31, 1999, and the consolidated balance sheet data at December 31, 1999
as well as the statement of operations data for the period from inception
(January 16, 1997) through December 31, 1997 and the year ended December 31,
1998 and the balance sheet data at December 31, 1998 were derived from our
audited consolidated financial statements.
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
(IN DOLLARS)
<TABLE>
<CAPTION>
The Predecessor The Company
------------------------------- ------------------------------------------------------
From inception (January
16, 1997) through
From inception December 31, Year ended December 31,
(April 7, 1998) Two month ----------------------- ------------------------------
through period ended Consolidated
December 31, February 28, ----------------------- ------------- ----------------
1998 1999 1997 1998 1999
-------------- -------------- ----------------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Renenues $ 183,000 $ 114,849 $ - $ - $ 2,133,289
Operating expenses:
Data communications and telecommunications 262,093 169,905 - - 4,331,589
Selling, general and administative expense 940,019 179,262 300,100 6,999 6,481,611
Depreciation and amortization 59,996 28,695 - - 792,325
Write down of impared assets - - 7,800,000 - 2,554,819
------------- -------------- ----------------------- -------------- ---------------
Total operating expenses 1,262,108 377,862 8,100,100 6,999 14,160,344
------------- -------------- ----------------------- -------------- ---------------
Loss from operations (1,079,108) (263,013) (8,100,100) (6,999) (12,027,055)
------------- -------------- ----------------------- -------------- ---------------
Other income
Other income (48,113) (20,538) - - 1,137,599
------------- -------------- ----------------------- -------------- ---------------
Total other income (48,113) (20,538) - - 1,137,599
------------- -------------- ----------------------- -------------- ---------------
Loss before income taxes (1,127,221) (283,551) (8,100,100) (6,999) (10,889,456)
------------- -------------- ----------------------- -------------- ---------------
Income taxes - - - - -
------------- -------------- ----------------------- -------------- ---------------
Net loss $ (1,127,221) $ (283,551) $ (8,100,100) $ (6,999) $ (10,889,456)
------------- -------------- ----------------------- -------------- ---------------
Basic and diluted loss per share $ (173.28) $ (0.00) $ (3.29)
----------------------- -------------- ---------------
Basic and diluted Weighted average common
shares outstanding 46,747 5,262,206 3,307,829
======================= ============== ===============
OTHER FINANCIAL DATA:
Net cash used in operating activities $ (628,038) $ (92,137) $ (100.00) $ - $ (6,574,030)
Net cash used in investing activities $ (103,205) $ (1,645) $ - $ - $ (1,155,447)
Net cash provided by financing activitiies $ 790,413 $ 53,045 $ 100.00 $ - $ 10,281,590
December 31,
------------------------------
Consolidated
-------------- ---------------
1998 1999
-------------- ---------------
BALANCE SHEET DATA:
Working capital (deficit) $ (6,999) $ 1,296,313
Total assets - 15,456,016
Total long-term liabilities, net of current portion - 5,244,649
Accumulated Deficit (8,107,099) (18,996,555)
Stockholders' equity (deficit) $ (6,999) $ 3,702,029
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are an emerging multinational carrier focused primarily on the
international long distance market. We seek to offer highly reliable, low-cost
switched voice services on a wholesale basis, primarily to U.S.-based long
distance carriers. We provide international long distance service to various
foreign countries through our flexible network comprised of various foreign
termination relationships, international gateway switches, leased transport
lines and resale arrangements with other long distance providers.
The following discussion should be read in conjunction with our
consolidated financial statements and the other financial data appearing
elsewhere in this prospectus. Integrated Communication Networks, Inc., which was
incorporated on January 16, 1997 began operations through the acquisition of its
majority owned subsidiary phoneXchange, Inc. in February 1999. See "Certain
Sales of Equity Securities" for information regarding our majority ownership of
phoneXchange, Inc. We began offering long distance services on February 28, 1999
by reselling the services of other long distance carriers. We offer domestic and
international wholesale long distance services, including switched, private
line, special access and prepaid long distance services, to other
telecommunications carriers and agents and brokers of prepaid phone cards. We
operate long distance switching centers in Los Angeles, Dallas, Mexico City and
New York. For the year ended December 31, 1998 and for the period from inception
on January 16, 1997 to December 31, 1997, we had no revenues and no material
operations. The following is management's discussion and analysis of financial
condition and results of operations for the years ended December 1998 and 1999,
respectively.
REVENUES. Most of our revenues are generated by the sale of
international long distance services on a wholesale basis to other, primarily
domestic, long distance providers. We record revenues from the sale of long
distance services at the time of customer usage. Our agreements with our
wholesale customers are short-term in duration and the rates charged to
customers are subject to change from time to time, generally with five days
notice to the customer.
OPERATING EXPENSES. Our primary operating expenses include data
communications and telecommunications expenses and selling, general and
administrative expenses. We have pursued a strategy of attracting customers and
building calling volume and revenues by offering favorable rates compared to
other long distance providers. We continue to lower our data communications and
telecommunications expenses by (i) expanding our owned network facilities, (ii)
continuing to use our sophisticated information systems to route calls over the
most cost-effective routes and (iii) leveraging our traffic volumes and
information systems to negotiate lower variable usage-based costs with domestic
and foreign providers of transmission capacity.
Data communications and telecommunications expenses include those costs
associated with the transmission and termination of international long distance
services. Currently, a majority of the transmission capacity we use is obtained
on a variable, per minute basis. As a result, some of our current cost of
services is variable. Our contracts with our vendors provide that rates may
fluctuate, with rate change notice periods varying from five days to one year,
with certain of our longer term arrangements requiring us to meet minimum usage
commitments in order to avoid penalties. Such variability and the short-term
nature of many of the contracts subject us to the possibility of unanticipated
cost increases and the loss of cost-effective routing alternatives. Included in
our data communications and telecommunications expenses are accruals for rate
and minute disputes and unreconciled billing differences between us and our
vendors. Each quarter management reviews the data communications and
telecommunications expenses accrual and adjusts the balance for resolved items.
Data communications and telecommunications expenses also includes fixed costs
associated with the leasing of network facilities.
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Selling, general and administrative expenses consist primarily of
personnel costs, depreciation and amortization, tradeshow and travel expenses
and commissions and consulting fees. These expenses have been increasing over
the past year, which is consistent with our recent growth, accelerated expansion
into Latin America, and investment in systems and facilities. We expect this
trend to continue, and to include, among other things, a significant increase in
depreciation and amortization. Management believes that additional selling,
general and administrative expenses will be necessary to support the expansion
of our network facilities, our sales and marketing efforts and our expansion
into other international markets.
Prices in the international long distance market have declined in
recent years and, as competition continues to increase, we believe that prices
are likely to continue to decline. Additionally, we believe that the increasing
trend of deregulation of international long distance telecommunications will
result in greater competition, which could adversely affect our revenues per
minute and gross margin. We believe, however, that the effect of such decreases
in prices will be offset by increased calling volumes and decreased costs.
FOREIGN EXCHANGE. Our cost of long distance services is sensitive to
foreign currency fluctuations. We expect that an increasing portion of our
revenues and expenses will be denominated in currencies other than U.S. dollars,
and changes in exchange rates may have a significant effect on our results of
operations.
FACTORS AFFECTING FUTURE OPERATING RESULTS. Our quarterly operating
results are difficult to forecast with any degree of accuracy because a number
of factors subject these results to significant fluctuations. As a result, we
believe that period-to-period comparisons of our operating results are not
necessarily meaningful and should not be relied upon as indications of future
performance.
Our revenues, costs and expenses have fluctuated significantly in the
past and are likely to continue to fluctuate significantly in the future as a
result of numerous factors. Our revenues in any given period can vary due to
factors such as call volume fluctuations, particularly in regions with
relatively high per-minute rates, the addition or loss of major customers,
whether through competition, merger, consolidation or otherwise, the loss of
economically beneficial routing options for the termination of traffic,
financial difficulties of major customers, pricing pressure resulting from
increased competition, and technical difficulties with or failures of portions
of our network that impact our ability to provide service to or bill our
customers. Our cost of services and operating expenses in any given period can
vary due to factors such as fluctuations in rates charged by carriers to
terminate our traffic, the timing of capital expenditures, and other costs
associated with acquiring or obtaining other rights to switching and other
transmission facilities, changes in our sales incentive plans and costs
associated with changes in staffing levels of sales, marketing, technical
support and administrative personnel. In addition, our operating results can
vary due to factors such as changes in routing due to variations in the quality
of vendor transmission capability, loss of favorable routing options, the amount
of, and the accounting policy for, return traffic under operating agreements,
actions by domestic or foreign regulatory entities, the level, timing and pace
of our expansion in international markets and general domestic and international
economic and political conditions. Further, a substantial portion of the
transmission capacity we use is obtained on a variable, per minute and short
term basis, subjecting us to the possibility of unanticipated price increases
and service cancellations. Since we do not generally have long-term arrangements
for the purchase or resale of long distance services, and since rates fluctuate
significantly over short periods of time, our gross margins are subject to
significant fluctuations over short periods of time. Our gross margins also may
be negatively impacted in the longer term by competitive pricing pressures.
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RESULTS OF OPERATIONS
Years Ended December 31, 1998 and 1999
REVENUES. We generate the majority of our revenues from the sale of
wholesale long distance voice services, largely to other telecommunications
carriers seeking overflow capacity, and the sale of prepaid long distance voice
services to agents and brokers of prepaid phone cards. Revenues for the year
ended December 31, 1999 increased $2.1 million from $0 for the
year ended December 31, 1998. This increase is due to the fact that we began
operations in February 28, 1999. Revenues from prepaid long distance voice
services represented approximately 99% and 0% of our total revenues for the year
ended December 31, 1999 and 1998. During the past several years, market prices
for telecommunications services have been declining, which is a trend that we
believe will likely continue. This decline will have a negative effect on our
revenues and gross margin, which may not be offset completely by savings from
decreases in our cost of services.
OPERATING EXPENSES: Our primary operating expense categories include
data communications and telecommunications expenses and selling, general and
administrative expenses. Data and telecommunications include the fixed costs of
leased facilities, leased transport lines and the variable costs of origination,
termination and access services provided through local exchange carriers and
other long distance telecommunications companies. Selling, general and
administrative expenses include all infrastructure costs, such as selling
expenses, customer support, corporate administration, personnel network
maintenance, depreciation and amortization and a write-off of certain assets.
Selling expenses include commissions for our direct sales program. Selling
expenses also include commissions paid to our dealers and agents, which are
based on a fixed percentage of the customers' monthly billings.
Data communication and telecommunication expenses ended December 31,
1999 increased $4.3 million from $0 for the year ended December
31, 1998. This increase is due to the fact that we began operations on February
28, 1999. In addition to incurring the costs associated with the origination,
transmission and termination from other carriers, we have also incurred the
costs associated with establishing our own transmission network and termination
relationships primarily in the Latin America market. By establishing our own
transmission network and termination relationships, which became operational in
the fourth quarter of 1999, we will be able to carry a significant portion of
our international long distance traffic over our own facilities, thereby
reducing our costs of services by decreasing payments to other carriers for the
use of their facilities. We are continuing to install switching and transmission
equipment, which will allow us to increase the percentage of the long distance
services we provide on our own network, thereby improving our margins.
Selling, general and administrative expenses for the year ended
December 31, 1999 increased $ 6.5 million from $ 6,999 for the
year ended December 31, 1998. The increase in selling, general and
administrative expenses is largely attributable to the significant investments
in human resources and increased marketing and sales efforts associated with the
continued expansion of our services. Since these investments often occur before
we realize significant revenues from operations, they have the effect of
increasing selling, general and administrative expenses as a percentage of
revenues. These investments in infrastructure and support are intended to
provide us with the ability to continue to expand into new markets, maximize
customer retention and provide for growth. In addition, we have hired additional
personnel to facilitate the deployment of our network.
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<PAGE>
Depreciation and amortization is primarily related to switching
equipment, facilities, computer equipment and software and is expected to
increase as we incur substantial capital expenditures to continue the expansion
of our network facilities. Depreciation and amortization also includes the
amortization of goodwill related to our acquisition of phoneXchange, Inc. and
certain telecommunications equipment. Depreciation and amortization expenses for
the year ended December 31, 1999 increased $792,325 from $0 for the
year ended December 31, 1998. The increase in depreciation and amortization
during the 1999 year is largely attributable to the amortization of goodwill,
which increased $421,589 for the year ended December 31, 1999 from $0 for the
year ended December 31, 1998. In addition, depreciation has increased primarily
due to capital expenditures related to the establishment and expansion of our
network operations center and support infrastructure to accommodate increased
traffic volume and expanded service offerings.
IMPAIRMENT OF ASSETS: We wrote-down certain switching equipment
previously acquired in the amount of $ 2.5 million for the year ended December
31, 1999 as the result of an impairment of value.
INTEREST INCOME AND INTEREST EXPENSE: Interest expense is primarily
comprised of interest paid on our long-term debt and various capital leases.
Interest expense increased by $320,346 in 1999 from $0 in 1998. This
increase was attributable to the new borrowings under certain long-term notes,
the proceeds of which were primarily used for working capital. Interest income
is primarily composed of income earned on cash and cash equivalents. Interest
income increased by $13,986 in 1999 from $0 in 1998. This increase
was primarily attributable to increased interest earnings on our cash.
INCOME TAXES: We generated a net loss for the years ended December 31,
1997, 1998 and 1999. Based on our plans to expand through the construction and
expansion of our network, customer base and product offerings, we expect this
trend to continue. Given these circumstances and the level of taxable income
expected to be generated from reversing temporary differences, we have
established a valuation allowance for the deferred tax assets associated with
these net operating losses.
LIQUIDITY AND CAPITAL RESOURCES: Our principal capital and liquidity
needs historically have related to the development of our network
infrastructure, our sales and marketing activities and general capital needs.
Our capital needs have been met, in large part, from the net proceeds from
borrowings under long-term notes and the sale of our common stock and preferred
stock. As we placed greater emphasis on expanding our network infrastructure, we
have also sought to meet our capital needs through vendor leases and other
equipment financings.
Net cash provided by financing activities was $10.3 million for the
year ended December 31, 1999, $0 for the year ended December 31, 1998 and $100
for the year ended December 31, 1997. The amount is primarily attributable to
the net proceeds from the issuance of long term notes and the sale our common
and preferred stock.
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Net cash used in operating activities was $6.6 million for the year
ended December 31, 1999, $0 for the year ended December 31, 1998, and $100 for
the year ended December 31, 1997. Cash used in operating activities for all
periods resulted from net losses and increases in accounts receivable, deposits
and prepaids, which were partially offset by the write-off of certain assets,
compensation expense related to stock option grants, increases in accounts
payable and accrued liabilities.
Net cash used in investing activities was $1.2 million for the year
ended December 31, 1999, $0 for the year ended December 31, 1998, and $0 for the
year ended December 31, 1997. Cash used in investing activities was primarily
related to purchases of equipment.
In our 1999 financial statements, our auditors expressed doubt about
our ability to continue as a going concern. This resulted from our history of
significant losses. If we are not able to generate income or obtain adequate
financing to fund continuing losses, we may not be able to continue as a going
concern. To achieve the objectives outlined in our plan, we must obtain
sufficient financing to obtain and complete our long distance network facilities
and, ultimately, achieve a sufficient level of sales and profitability to
support our contemplated operations.
We believe that during 2000 depending on the rate of network
deployment, we will require at least $11.1 million in additional funding, of
which approximately $6 million is available under the Lucent Master Lease
Agreement and approximately $2.5 million was available in cash as of December
31, 1999. Subsequent to December 31, 1999 we invested $1.0 million in a
marketable security which was then sold for $2.0 million in cash and a note
receivable. We expect to meet currently known working capital requirements
through the third quarter of 2000 based on currently available funding. We are
currently pursuing various financing alternatives included but not limited to
debt securities, capital leases, operating leases and issuance of our common
stock or preferred stock. Any such financing could have substantial dilutive
effect on our common stock. However, no assurance can be provided that we will
be able to obtain financing on terms acceptable to us, or at all. If we are
unable to obtain the required financing, we would be forced to slow or cease
operations, or to liquidate the company. In the event of a liquidation, it is
very likely that we would not recover the book value of our assets and our
investors would lose the entire value of their investment.
DEBT: In November 1999, we sold $5.0 million principal amount of our 4%
Convertible Debenture, and received net proceeds of $4,480,000 on December 2,
1999. The Convertible Debenture is due on December 2, 2004. As of December 31,
1999, $5,000,000 of the convertible debentures was outstanding.
The holders of the Debentures have the right, at any time after April
1, 2000, to convert all or any portion of the Debentures into common stock at
the lesser of (i) 80% of the averaged three lowest closing bid prices, as
reported by Bloomberg, LP, for the common stock for the 20 trading days
immediately preceding the conversion date, or (ii)$10.00. The Debentures
automatically convert into common stock on December 2, 2004 at the then
effective conversion price. We have the right to redeem the Debentures at any
time for 120% of the principal amount of the Debentures, plus accrued interest
up to the date of redemption. The debt was incurred to raise capital.
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OPERATING LEASES: MASTER LEASE AGREEMENT WITH LUCENT TECHNOLOGIES: On
July 30, 1999, phoneXchange and Lucent Technologies, Inc. InterNetworking
Systems signed a Master Lease Agreement pursuant to which Lucent agreed to
provide us $3 million in credit for leasing Lucent equipment. On February 7,
2000, Lucent amended this agreement to increase our line of credit to $10
million. We have received equipment eligible to be financed under the Master
Lease Agreement valued at approximately $4 million but have not completed type
testing and acceptance of the equipment. Upon type testing and acceptance, the
equipment will be placed under an operating lease with 36 monthly payments. As
of December 31, 1999, we had no outstanding borrowings under the Master Lease
Agreement. We are currently attempting to negotiate an increase in the total
financing to $25 million. However, there is no assurance that any increase will
be approved. If an increase is not approved, we may not be able to maintain our
current and projected growth.
CAPITAL LEASES: We are obligated under various capital lease agreements
for certain computer software, telecommunications switching equipment and
desktop workstations.
In December 1997, we entered into a lease agreement for certain
communications equipment and licensed software. The equipment consists primarily
of a telephone switching system, which is a long distance, tandem telephone
switch. The purchase price for the system is $333,038. The lease agreement bears
interest at an annual rate of 30.3% and calls for 36 equal minimum monthly
payments of $7,119. The capital lease was secured by the related assets. As of
December 31, 1999, $ 135,857 was outstanding under this capital lease.
In November 1999, we entered into a lease agreement for certain
licensed software. The lease agreement bears interest at an annual rate of 25%
and calls for 36 monthly payments of $4,786. The capital lease is secured by the
software. As of December 31, 1999, $118,099 was outstanding under this capital
lease.
In July and August 1999, we entered into two lease agreements for
certain desktop computers and back office servers. The lease agreements bear
interest at an annual rate ranging from 13.2% to 13.4% and calls for 36 monthly
payments of $2,519. The capital leases are secured by the equipment. As of
December 31, 1999, $72,773 was outstanding under this capital lease.
In December 1999, we entered into a lease agreement for certain
communications equipment and licensed software. The lease agreement bears
interest at an annual rate of 12.25% and calls for 36 equal minimum monthly
payments of $12,000 and a deposit of $39,617. As of December 31, 1999, we had
not tested, accepted or recorded the equipment on the balance sheet. The capital
lease was secured by the related assets. As of December 31, 1999, there were no
amounts due under this capital lease.
In December 1999, we entered into various lease agreements for certain
licensed software. The lease agreements bear interest at an annual rate ranging
from 17.4% to 31% and call for 36 to 48 equal minimum monthly payments and
deposits totaling $18,341. As of December 31, 1999, we had not tested, accepted
or recorded the software on the balance sheet. The capital lease was secured by
the related assets. As of December 31, 1999, there were no amounts due under
this capital lease.
In February 2000, we entered into a lease agreement for certain
computer equipment and office furniture. The lease agreement bears interest at
an annual rate of 27.27% and calls for 36 equal minimum monthly payments of
$2,186 and a deposit of $4,939.
PREFERRED STOCK: In September 1999, we issued 3,267,974 shares of our
Series A-1 12% convertible redeemable preferred stock to certain investors
including Corporate Financial Enterprises, Inc., a related entity, in order to
raise $5,000,000 in capital. As of December 31, 1999, we received proceeds of
$4,781,500 and a receivable of $218,500 was recorded for the remaining proceeds.
The preferred stock is convertible anytime after December 31, 2000 into common
stock at the rate of 10 shares of common stock for each share of preferred
stock.
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COMMON STOCK: In November 1999, we issued 185,250 shares of our
restricted common stock in exchange for 185,250 shares of phoneXchange, Inc.
restricted common stock in order to increase our ownership of phoneXchange, Inc.
In November 1999, we sold 1,332,000 shares of our common stock for a
purchase price of $.75 per share to several overseas accredited investors to
raise capital.
In October 1999, we issued 23,500 shares of our restricted common stock
in exchange for broker fees in connection to our acquisition of phoneXchange.
The cost of the services in the amount of $142,763, has been charged to
operations and additional paid-in capital has been increased by $142,528,
representing the excess of the cost of the services over the par value of the
common stock issued.
In November 1999, we issued 1,000,000 shares of common stock pursuant
to a notice of conversion of 100,000 shares of Series A-1 12% redeemable
convertible preferred stock held by Corporate Financial Enterprises, Inc., a
related entity.
In September 1999, we issued 10,500 shares of restricted common stock
to three members of our Board of Directors as compensation for services. Prepaid
director fees are recognized to expense based on the term of the Director. The
balance of prepaid director fees as of December 31, 1999 was $35,500.
In September 1999, we sold 100,000 shares of our common stock to
Corporate Financial Enterprises, Inc., a related entity, for a purchase price of
$.75 per share in exchange for a receivable of $75,000 to raise capital.
In September 1999, we issued 921,428 shares of our common stock to
stockholders of phoneXchange. We acquired ownership of approximately 85% of
phoneXchange in exchange for our stock.
In September 1999, we sold 41,000 shares of our common stock to
Corporate Financial Enterprises, Inc., a related entity, for a purchase price of
$.75 per share in exchange for a receivable of $30,750 to raise capital.
In May 1999, we issued 25,296 shares of restricted common stock to pay
off the remaining balance on a note due by our subsidiary in the amount of
$132,804
In February 1999, we issued 441,600 shares of restricted common stock
for equipment and software.
WARRANTS TO PURCHASE COMMON STOCK: In November 1999, in connection with
the convertible debenture, we issued warrants to purchase 80,000 shares of our
common stock at an exercise price of $12.50 per share and warrants to purchase
80,000 shares of our common stock at an exercise price of $15.00 per share. The
warrants are exercisable until November 22, 2001. We also issued warrants to
purchase 200,000 shares of the Company's common stock at exercise price of
$13.75 per share and paid $500,000 in placement fees. The warrants expire
November 22, 2004.
In September 1999, we issued warrants to purchase 350,000 shares of
common stock at an exercise price of $4.50 per share to Corporate Financial
Enterprises, Inc., a related entity. The warrants were granted in exchange for
consulting services and are exercisable for a term commencing December 31, 2000
and expiring September 1, 2004.
43
<PAGE>
In February 1999, we issued warrants to purchase 921,428 shares of our
common stock pursuant to the terms of the Stock Purchase Agreement dated January
1, 1999, as amended on May 24, 1999, with phoneXchange, Inc. and its
stockholders. The warrants are exercisable anytime after December 31, 2000 and
expire February 22, 2004 at a purchase price of $4.50 per share.
In February 1999, we issued warrants to purchase 5,943,633 shares of
our common stock exercisable anytime after December 31, 2000 at a purchase price
of $1.72 per share in connection with the sale of 3,267,974 shares of its Series
A-1 12% convertible redeemable preferred stock to certain investors including
Corporate Financial Enterprises, Inc., a related entity, in exchange for
$5,000,000. The warrants expire February 22, 2004.
EFFECTS OF NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information", which are both effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 addresses reporting
amounts of other comprehensive income and SFAS No. 131 addresses reporting
segment information. In 1999, we implemented SFAS No. 130. There are no material
differences between net income and comprehensive income as defined by SFAS 130
for the periods presented. SFAS 131 uses a management approach to report
financial and descriptive information about a company's operating segments.
Operating segments are revenue-producing components of the enterprise for which
separate financial information is produced internally for our management. Under
this definition, we operated as a single segment for periods presented.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In June 1999, SFAS No. 133 was amended by SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS 133. As a result of this amendment, SFAS No. 133 shall be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. In accordance with SFAS No. 133, an entity is required to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement and requires that a company
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting. We do not expect the adoption of this standard to have
a material effect on our consolidated financial position or results of
operations.
On December 3, 1999, the Securities and Exchange Commission staff
issued SAB No. 101, Revenue Recognition in Financial Statements. The SAB spells
out four basic criteria that must be met before companies can record revenues.
These are: (a) persuasive evidence that an arrangement exists; (b) delivery has
occurred or services have been rendered; (c) the seller's price to the buyer is
fixed or determinable; and (d) collectibility is reasonably assured.
44
<PAGE>
Many of the examples in the SAB address situations that give rise to
the potential for recording revenues prematurely. They include transactions
subject to uncertainties regarding customer acceptance, including rights to
refunds and extended payment terms, and require continuing involvement by the
seller.
In March 2000, the SEC issued SAB 101A - Amendment: Revenue Recognition
in Financial Statements, that delays the implementation date of certain
provisions of SAB 101. Under the amendment, we are not required to restate our
prior financial statements provided that we report a change in accounting
principle no later than the second fiscal quarter (ending June 30, 2000) in
accordance with FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements. In accordance with FAS 3, for companies that adopt SAB 101
in the second quarter, financial information for the first quarter would be
restated by including a cumulative effect adjustment in that quarter (i.e., the
first quarter). We do not believe the adoption of SAB 101 would have a material
impact on our continuing operations.
INFLATION: We do not believe inflation has had a significant impact on
our operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
To date, we have not entered into any market risk sensitive instruments
or purchased any hedging instruments for trading purposes or otherwise that
would be likely to expose us to market risk, whether interest rate, foreign
currency exchange, commodity price or equity price risk. We have not purchased
options or entered into swaps of forward or future contracts. While our global
operations currently generate revenues in United States dollars, we are
evaluating the impact of foreign currency exchange risk on our results of
operations as we continue to expand globally.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
We selected Jack Olesk, CPA to audit our consolidated financial
statements for the fiscal year ended December 31, 1998 and 1997. Brad Haynes,
CPA audited the financial statements of phoneXchange for the fiscal year ended
December 31, 1998. We selected Mendoza Berger & Company, LLP to audit our and
phoneXchange's consolidated financial statements for the fiscal year ended
December 31, 1999. Both Mr. Olesk and Mr. Haynes were dismissed with the
approval of our Chief Financial Officer and our board of directors. Neither Mr.
Olesks' report nor Mr. Haynes' report contained any adverse opinion or
disclaimer of opinion. And neither was modified as to uncertainty, audit scope
or accounting principles. We believe that there were no disagreements with
either Mr. Olesk or Mr. Haynes on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the satisfaction of Mr. Olesk or Mr. Haynes,
respectively, would have caused him to make reference to the subject matter of
the disagreements in connection with his report.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our executive
officers and directors. All officers serve at the pleasure of our board of
directors. Directors serve until the next annual meeting of stockholders
and until the election and qualification of their successors.
45
<PAGE>
NAME AGE POSITION
- --------- ------ --------------
David J. Chadwick 40 President and Chief Executive
Officer and Chairman
Gary L. Killoran 34 Secretary, Treasurer, Chief
Financial Officer and Director
James E. Rott 57 Chief Operations Officer
Paul E. Hyde 41 Vice President and Director
Albert R. Kashani (1)(2) 31 Director
Joseph Vaughn-Perling (1)(2)(3) 32 Director
Ari M. Kaplan (1) 27 Director
Russell J. Hensley (3) 43 Director
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of 2000 Omnibus Stock Incentive Plan Committee
There are no family relationships among the directors and officers
indicated above.
David J. Chadwick has served as our President and CEO and member of our
board of directors since February 8, 1999. Since April 7, 1998, Mr. Chadwick has
also been President and CEO of phoneXchange, Inc. From 1997 to present, Mr.
Chadwick has been President and CEO of C/Net: Solutions, Inc. From 1994 to 1996,
he was co-founder, Vice President and Secretary of Chadmoore Wireless Group,
Inc., a publicly traded company. Corporate responsibilities included mergers and
acquisitions, procurement and consolidation of FCC licensed spectrum and
oversight of FCC regulatory requirements and SEC reporting. From 1993 to 1994,
Mr. Chadwick was Vice President of Engineering for American Digital
Communications, also a publicly traded company. Operational duties included path
engineering, frequency coordinating, FCC regulatory filings, network property
procurement, overseeing contract personnel and supervision of technicians. He
was involved from 1990 to 1993 in the engineering and implementation of analog
and digital microwave radio, multi-pair cable, coaxial cable and fiber optic
transmission media for Contel Cellular, Pac-Tel Cellular (AirTouch), U.S.
West/New Vector and L.A. Cellular. Mr. Chadwick is a network design engineer and
has been involved in development and operational management of satellite,
microwave, SMR/ESMR, PCS and cellular systems. Mr. Chadwick holds a Bachelor of
Arts degree in Public Administration Business from the University of
Mississippi, Oxford, Mississippi and has over 16 years of experience in the
telecommunications industry.
Gary L. Killoran has served as our Treasurer, Secretary and Chief
Financial Officer since February 8, 1999. He was elected to board of directors
on March 1, 1999. From January 1, 1999, Mr. Killoran has also been Secretary,
Treasurer and Chief Financial Officer of phoneXchange, Inc. From 1997 through
1998, Mr. Killoran operated Camden Financial Group, Inc., a company he founded,
which developed business plans, financial projection and pro forma financial
statements for various telecommunications companies. From 1995 to 1997, Mr.
Killoran was Secretary, Treasurer, Chief Financial Officer and Director for
Chadmoore Wireless Group, Inc. Mr. Killoran assisted with taking the Company
public and was responsible for SEC and state regulatory reporting. Mr. Killoran
was responsible for developing financial projections involving national
deployment strategies, negotiation and execution of purchase contracts, vendor
financing agreements and acquisitions. Mr. Killoran was also responsible for
financial controls, internal and external audits, risk management, treasury
management and tax planning and reporting, and employee benefits plans. From
1988 to 1995, Mr. Killoran began with Centel Corporation in the Financial
Reporting Department and quickly moved up to Sprint Cellular's Regional
Accounting Manager for the West Region. Mr. Killoran received his Bachelor of
Arts degree in Business Administration Accounting from the University of
Wisconsin at Madison in 1988 and has over 11 years of experience in accounting
and finance in both publicly traded and privately held companies in the
telecommunications industry.
46
<PAGE>
James E. Rott has served as our Chief Operations Officer since February
8, 1999. From April 7, 1998 until December 31, 1998, Mr. Rott was Chief
Operating Officer of phoneXchange. Mr. Rott is a certified public accountant and
has extensive experience and background in corporate, financial services and
public accounting environments. From 1992 to the present, Mr. Rott has also been
the Principal Financial Consultant for Southwind Financial Corporation in
Irvine, California, providing accounting, tax, debt financing and computer
system consultation services to corporate clientele. From 1985 to 1990, Mr. Rott
held the position of Senior Vice President and Chief Financial Officer of Beach
Savings Bank in Fountain Valley, California, directing all financial reporting
functions as well as the loan serving and saving operations. Mr. Rott was
responsible for the direction of the treasury, cash management, audit,
regulatory reporting and investments. In addition, he managed deposit
acquisition, bank borrowing relationships, investment and hedging activities and
asset liability monitoring. From 1983 to 1985, Mr. Rott was the Vice President
and Chief Financial Officer of Heartland Savings and Loan Association in El
Cajon, California. His affiliations include American Institute of CPA's,
California Society of CPA's, Washington Society of CPA's and Mortgage Banking
Association. Mr. Rott graduated from the University of Washington, Seattle, with
a Bachelor of Arts degree in Administration Accounting.
Paul E. Hyde has served as our Vice-President since February 8, 1999.
From April 7, 1998, Mr. Hyde has been Vice President of phoneXchange. On October
15, 1999, Mr. Hyde was elected to the board of directors. Mr. Hyde has more than
18 years of experience in the telecommunications industry, the past 13 years in
the cellular and SMR two-way radio industry. From 1996 to 1997, he was General
Manager and Vice President for Comserv, Inc. From 1993 to 1996, Mr. Hyde was
General Manager and Vice President of Operations for Chadmoore Communications of
Tennessee, who purchased General Communications in 1994. From 1984 to 1993, Mr.
Hyde was sales manager for General Communications Radio Sales and Service and
was responsible for marketing BellSouth's first cellular service in Memphis,
Tennessee and Ericsson's first digital system in Tennessee. Mr. Hyde was awarded
top salesperson nationally with Uniden America for two years and was able to
make General Communications the top dealer in its region for five years.
Albert R. Kashani was elected to our board of directors on September
11, 1999. Mr. Kashani is an attorney and since March 1998, he has specialized in
transactional and business litigation matters. From 1995 to 1998, Mr. Kashani
was a tax consultant at Ernst & Young, LLP in Los Angeles. From 1991 to the
present, Mr. Kashani has also been a principal executive officer of Menorah
Fusing & Services, Inc., a clothing interlining business, and its predecessors.
In 1988, Mr. Kashani founded Torina, Inc., a clothing manufacturing company. Mr.
Kashani received his Bachelor of Arts degree in Economics from California State
University, Northridge, in 1992 and graduated from the University of Southern
California Law Center in 1995.
Joseph Vaughn-Perling was elected to our board of directors on
September 11, 1999 and has over 15 years of experience in the telecommunications
and data processing industry. He has served as Senior Applications Architect,
Staff Support Manager, Senior Computer Scientist, Computer Technologist, Chief
Technical Officer, Computer Analyst and Technical and Software Consultant for
Global Fortune 500 companies. Since 1997 Mr. Vaughn-Perling has worked for
Infonet Incorporated where he is currently Senior Application Architect of
Marketing, designing and implementing global communication infrastructure
systems and the applications that power them. From 1995 to 1997 he was LAN/WAN
Technologist - Research and Development for Internet technologies for William
O'Neil & Co. From 1994 to 1995 he was Chief Technical Officer for Dolphin
Developments. He also serves on the board of advisors for Platt College, a
technical college with several campuses in Southern California. Mr.
Vaughn-Perling attended the University of California, Los Angeles and received
his Bachelors of Arts degree in Psychology and Cognitive Science.
47
<PAGE>
Ari M. Kaplan was elected to our board of directors on January 3,2000.
Mr. Kaplan is currently the Controller of TechSpace, LLC, a New York Limited
Liability Company. From December 1998 to July 1999, Mr. Kaplan was a Senior
Accountant and Auditor for David Berdon & Co., LLP, where he was responsible for
conducting audits, reviews and compilations, litigation support, taxation and
tax planning. From January 1997 to December 1998, Mr. Kaplan was a Staff
Accountant for Nugent & Haeussler, CPA's, P.C., where he was responsible for
audits, reviews and compilations for profit oriented, non-profit, and government
entities. Mr. Kaplan also prepared financial statements, audit reports,
conducted write-ups, O.M.B. a-133 audits, taxation and tax planning, estate
planning, and he established and accounted for pension and post retirement
benefit plans. Mr. Kaplan is a graduate of the State University of New York at
NewPaltz with a Bachelor of Science degree in Accounting. Mr. Kaplan maintains
membership with the American Institute of Certified Public Accountants and the
New York State Society of Certified Public Accountants.
Russell J. Hensley was elected to our board of directors on January 3,
2000 and has over 18 years of experience in the legal profession. Mr. Hensley is
currently the Managing Partner of The Bogatin Law Firm, PLC located in Memphis,
Tennessee. He is primarily a transactional lawyer specializing in acquisitions
and mergers. Mr. Hensley has been a Staff Attorney for the City of Memphis for
over 10 years handling matters involving Housing & Community Development,
International Contracts with various foreign governments for The Wonders Series
and the Memphis Depot Redevelopment Agency. Mr. Hensley is an Adjunct Professor
at Christian Brothers University teaching in the Masters Program. Mr. Hensley
graduated from the University of Mississippi with a Liberal Arts degree in
Political Science and a minor in Business and from the University of Memphis
Cecil C. Humphreys School of Law. Mr. Hensley maintains memberships in the
Shelby County and Memphis Bar Association and the Tennessee Bar Association.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation during fiscal
year 1999 we paid to our Chief Executive Officer and our three other most highly
compensated executive officers whose annual salaries and bonus exceed $100,000.
None of the executive officers of the registrant received any compensation in
1997 or 1998. The compensation described in this table does not include
perquisites and other personal benefits, securities or property received which
do not exceed the lesser of $50,000 or 10% of an executive's salary and bonus
reported in this table.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- ----------------
OTHER ANNUAL SECURITIES
FISCAL COMPENSATION UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) OPTIONS (#)
- --------------------------- ---------- ----------- ---------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
David J. Chadwick 1999 $ 195,000 $ 25,000 $ 33,228 (a) 487,500
Chief Executive Officer,
President and Chairman
of the Board
Gary L. Killoran 1999 $ 130,000 $ 17,500 $ - 236,250
Chief Financial Officer,
Secretary, Treasurer
and Director
James E. Rott 1999 $ 120,000 $ 10,000 $ - 236,250
Chief Operations Officer
Paul E. Hyde 1999 $ 120,000 $ 10,000 $ - -
Vice President and Director
- -------------
(a) Includes $32,870 car allowance.
</TABLE>
48
<PAGE>
OPTION GRANTS IN 1999
The following table sets forth information regarding options granted
during fiscal year 1999 to the executive officers named in the compensation
table above.
<TABLE>
<CAPTION>
Potential Realizable Value at Assumed
Annual Rates of Appreciate for Option
Individual Grants Term (b)
- --------------------- --------------------------------------------------- ------------------------------------------
Percent of
Number of Total
Securities Options
Underlying Granted To Exercise
Options Employees Price Expiration
Granted in 1999 ($/Sh)(a) Date 5% ($) 10% ($) 0% ($) (d)
- --------------------- -------------- ------------- ---------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
David J. Chadwick 487,500 (c) 44.3% $ 3.37 7/22/04 $ 1,856,928 $ 2,773,445 $ 1,099,316
- --------------------- -------------- ------------- ---------- ----------- ------------- ------------- --------------
Gary L. Killoran 236,250 (c) 21.5% $ 3.37 7/22/04 $ 899,896 $ 1,344,054 $ 532,744
- --------------------- -------------- ------------- ---------- ----------- ------------- ------------- --------------
James E. Rott 236,250 (c) 21.5% $ 3.37 7/22/04 $ 899,896 $ 1,344,054 $ 532,744
- --------------------- -------------- ------------- ---------- ----------- ------------- ------------- --------------
Paul E. Hyde 0 0% $ 0 0 $ 0 $ 0 $ 0
- --------------------- -------------- ------------- ---------- ----------- ------------- ------------- --------------
</TABLE>
(a) The exercise price may be paid in cash or, if permitted by the board of
directors, by tender of shares of common stock or a promissory note.
(b) The compounding assumes an exercise period equal to the expiration date
of the respective option. These amounts represent certain assumed rates
of appreciation only. Actual gains, if any, on stock option exercises
are dependent on the future performance of the common stock. The
amounts reflected in this table may not necessarily be achieved. The
options were granted at an exercise price of $3.37 at a time when the
market price was $5.625 per share.
(c) Represents options exercisable at any time commencing July 22, 1999 and
ending July 22, 2004.
(d) Represents the aggregate in-the-money value of the options on the grant
date, based on a market price of $5.625 per share.
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1999 AND
OPTION/SAR VALUES AT DECEMBER 31, 1999
The following table provides information concerning options exercised
during fiscal year 1999 by the executive officers named in the compensation
table above. The year-end value is based on the closing price of our common
stock on December 31, 1999 of $9.03.
<TABLE>
<CAPTION>
- ------------------------ ---------------- -------------- ----------------------------- -----------------------------
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options/SARs at Fiscal In-The-Money Options/SARs
Acquired on VALUE Year-End (#) Exercisable/ at Fiscal Year-End ($)
Name Exercise (#) Realized ($) Unexercisable Exercisable/Unexercisable
- ------------------------ ---------------- -------------- ----------------------------- -----------------------------
<S> <C> <C> <C> <C>
David J. Chadwick 0 0 487,500/0 2,759,250/0
- ------------------------ ---------------- -------------- ----------------------------- -----------------------------
Gary L. Killoran 0 0 236,250/0 1,337,175/0
- ------------------------ ---------------- -------------- ----------------------------- -----------------------------
James E. Rott 0 0 236,250/0 1,337,175/0
- ------------------------ ---------------- -------------- ----------------------------- -----------------------------
Paul E. Hyde 0 0 0 0
- ------------------------ ---------------- -------------- ----------------------------- -----------------------------
</TABLE>
49
<PAGE>
COMPENSATION OF DIRECTORS
Non-employee directors currently do not receive any cash compensation
for meeting attendance, but are entitled to reimbursement for their travel
expenses. We have, however, compensated directors for their services through the
grant of common stock and intend to continue this practice until we institute a
more formal compensation program. On September 13, 1999, we issued 5,000
restricted shares of our common stock to each of Joseph Vaughn-Perling and
Albert Kashani. On September 24, 1999, we issued 500 restricted shares of our
common stock to Charles McGuirk, who has since resigned from the board of
directors. Directors who are employees receive no additional compensation for
their services as directors.
EMPLOYMENT AGREEMENTS
Global Access Pagers, Inc., the predecessor to ICN, entered into three
year employment agreements made as of January 4, 1999 with each of David
Chadwick, James Rott, Paul Hyde, and Gary Killoran. Pursuant to these
agreements, David Chadwick was guaranteed an annual salary of $180,000 and each
of James Rott, Paul Hyde and Gary Killoran were guaranteed an annual salary of
$120,000. On October 1, 1999, David Chadwick's employment agreement was amended
to a guaranteed annual salary of $240,000 and on October 1, 1999, Gary
Killoran's employment agreement was amended to a guaranteed annual salary of
$160,000. These stated base salaries must be increased by at least 5% per year
for so long as we have positive net income from operations.
Each of the executives has agreed not to compete with us for a period
of two years following his termination of employment with us. We have agreed to
indemnify the executives against liabilities they incur in connection with their
service with us. In the event we materially breach any of the agreements, or if
we reduce an executive's position, status or duties, the executive will have the
right to terminate employment and receive his salary for a period of one year.
BENEFIT PLANS
On July 22, 1999, our board of directors authorized the grant of
options to purchase up to 1,000,000 shares of common stock at an exercise price
of $3.375 to various employees. These options all vested on grant and have a
five-year term.
Our 2000 Omnibus Stock Incentive Plan was adopted by the Board of
Directors on April 17, 2000 and recommended for approval by the stockholders.
The plan provides for grants of incentive stock options, nonqualified stock
options, performance awards, dividend equivalents, deferred stock, stock
payments, stock appreciation rights and restricted stock. Grants may be made to
any officer, director, employee, consultant or advisor of our company or any of
our subsidiaries. The plan authorizes up to 3,000,000 shares of common stock for
issuance, and no more than 1,000,000 shares in the aggregate may be granted to
any individual in any calendar year. Our stock incentive plan is administered by
our 2000 Omnibus Stock Incentive Plan Committee, which selects the individuals
to receive grants under the plan and determines the terms and conditions of each
grant including, without limitation, the number of shares, exercise or purchase
price, the effects, if any, of a change in control of the company and vesting
schedule of each award. The 2000 Omnibus Stock Incentive Plan Committee may
amend or terminate the stock incentive plan at any time, subject to stockholder
approval where required by applicable law, rule or regulation. As of April 30,
2000, no grants were made under the stock incentive plan. For additional
information regarding the stock incentive plan, please see the 2000 Omnibus
Stock Incentive Plan, a copy of which is filed as an exhibit hereto.
BOARD COMMITTEES; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We have an audit committee currently composed of Joseph Vaughn-Perling,
Albert Kashani and Ari Kaplan. The audit committee assists in selecting our
independent auditors and in designating services to be performed by and
maintaining effective communication with those auditors.
50
<PAGE>
We also have a compensation committee currently composed of Joseph
Vaughn-Perling and Albert Kashani. The compensation committee reviews and acts
on matters relating to compensation and benefits for our executive officers and
key employees, including salary and stock options. The compensation committee is
also responsible for granting stock options and other awards to be made under
incentive compensation plans. The compensation committee was established as of
January 1, 2000. There was no compensation committee in the fiscal years 1998 or
1999. All compensation decisions for 1999 were made by David Chadwick and the
entire board of directors. None of the current members of the compensation
committee is or was an officer or employee of our company or any of our
subsidiaries. None of our executive officers or employees serves or has served
as a director or as a member of the compensation committee of any entity that
has one or more executive officers serving as a member of our board of directors
or compensation committee.
We also have a 2000 Omnibus Stock Incentive Plan Committee currently
composed of Joseph Vaughn-Perling and Russell Hensley. The committee was created
on April 17, 2000 to administer the 2000 Omnibus Stock Incentive Plan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information concerning the beneficial
ownership of each class of our equity securities as of March 15, 2000 by:
o each person who is currently a director,
o each executive officer,
o all current directors and officers as a group, and
o each person known to us to be a beneficial owner of five
percent (5%) or more of any class of our outstanding equity
securities as of March 15, 2000.
Except as otherwise noted, we believe that all persons have full voting
and investment power with respect to the shares indicated. The table below does
not include:
o 7,575,061 shares of common stock issuable on conversion of
warrants, or
o 31,679,740 shares of common stock issuable on conversion of
the Series A-1 12% convertible redeemable preferred stock,
none of which is convertible or exercisable within the 60 days following March
15, 2000.
51
<PAGE>
<TABLE>
<CAPTION>
Share Beneficially Owned Percentage Beneficially Owned
-------------------------------- -------------------------------------
Common Stock Series A-1 Common Stock(1) Series A-1
Name and Address (1) Preferred Stock Preferred Stock
- ------------------------------ --------------- ---------------- ----------------- -------------------
<S> <C> <C> <C> <C>
David Chadwick 975,000 (2) - 15.3% *
27061 Aliso Creek Road Suite 100
Aliso Viejo, California 92656
Gary Killoran 363,036 (3) - 5.9% *
27061 Aliso Creek Road Suite 100
Aliso Viejo, California 92656
James Rott 363,036 (3) - 5.9% *
27061 Aliso Creek Road Suite 100
Aliso Viejo, California 92656
Paul E. Hyde 126,786 - 2.2% *
27061 Aliso Creek Road Suite 100
Aliso Viejo, California 92656
Albert R. Kashani 5,000 - * *
269 S. Beverly Drive # 185
Beverly Hills, California 90212
Joseph Vaughn-Perling 5,000 - * *
2100 E. Grand Avenue
El Segundo, California 90245
Ari M. Kaplan - - * *
26 East 13th Street, Apt. 4C
New York, NY 10003
Russell J. Hensley - - * *
1661 International Place Dr. #300
Memphis, TN 38120
Directors and officers as a 1,837,858 - 26.9% *
group (8 persons)
Corporate Financial 1,000,000 1,370,590 17% 43.3%
Enterprises, Inc. (4)
2224 Main Street
Santa Monica, California 90405
American Equities, LLC (5) - 326,797 * 10.3%
3172 Abington Drive
Beverly Hills, California 90210
Jamie Mazur (6) - 490,196 * 15.5%
2224 Main Street
Santa Monica, California 90405
Emily Mazur (6) - 326,797 * 10.3%
2224 Main Street
Santa Monica, California 90405
Jennifer Mazur (6) - 326,797 * 10.3%
2224 Main Street
Santa Monica, California 90405
Trent Mazur (6) - 326,797 * 10.3%
2224 Main Street
Santa Monica, California 90405
J&W Ventures 441,600 (7) - 7.5% *
16248 Gulf Boulevard
Reddington, Florida 33709
</TABLE>
52
<PAGE>
* Holdings represent less than 1% of all shares of each class of equity
securities outstanding.
(1) Includes shares of common stock subject to options and or warrants held
by a person that are currently exercisable within 60 days of March 15,
2000. These shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of any other person.
(2) Excludes 1,000,000 shares of common stock, 2,941,177 shares of Series
A-1 12% convertible redeemable preferred stock and warrants to purchase
5,663,633 shares of common stock that Corporate Financial Enterprises,
Inc., and Jamie, Jennifer, Emily and Trent Mazur transferred to two
irrevocable trusts effective March 30, 2000, as amended. According to
the terms of the trusts, David Chadwick, as President of the Company,
was appointed trustee and is required to vote the shares, with respect
to any election of directors, in favor of any individuals in the same
proportion as all other shares are validly voted in favor of such
individuals. In addition, David Chadwick (or his successor as trustee)
is required to vote the shares, with respect to each other matter,
"for", "against" or to abstain from voting in the same proportion as
all other shares are validly voted "for", "against" or abstain from
voting, as the case may be. See the actual trust agreements copies of
which are incorporated as exhibits hereto. Includes 487,500 shares of
common stock, which may be acquired by Mr. Chadwick pursuant to options
exercisable at or within 60 days after March 15, 2000.
(3) Includes 236,250 shares of common stock, which may be acquired pursuant
to options exercisable at or within 60 days after March 15, 2000.
(4) Corporate Financial Enterprises, Inc. is a private investment banking
and consulting firm owned by Mr. Regis Possino. Effective March 30,
2000, all shares of capital stock beneficially owned by Corporate
Financial Enterprises, Inc. were transferred to a trust, as amended, a
copy of which is incorporated as an exhibit hereto. According to the
terms of the trust, David Chadwick, as President of the Company, was
appointed trustee and is required to vote the shares, with respect to
any election of directors, in favor of any individuals in the same
proportion as all other shares are validly voted in favor of such
individuals. In addition, David Chadwick (or his successor as trustee)
is required to vote the shares, with respect to each other matter,
"for", "against" or to abstain from voting in the same proportion as
all other shares are validly voted "for", "against" or abstain from
voting, as the case may be. In November 1999, we issued 1,000,000
shares of common stock pursuant to a notice of conversion of 100,000
shares of Series A-1 12% convertible redeemable preferred stock. The
purpose of the irrevocable trust was to limit the ability of Corporate
Financial Enterprises, Inc. and Mr. Possino from exercising voting
control over us through his share holdings during the term of the trust
agreement. We understand that Mr. Possino was convicted of a felony
involving the attempted sale of illegal drugs more than twenty years
ago. We understand that Mr. Possino was willing to enter into the trust
agreement to attempt to protect us from any adverse impact from his
shareholdings. For the complete terms, see attached trust agreement, a
copy of which is incorporated as an exhibit hereto.
(5) American Equities, LLC is a private investment banking and consulting
firm owned by Mr. and Mrs. Reid Breitman.
53
<PAGE>
(6) Jamie, Jennifer, Emily and Trent Mazur are siblings and are the
children of Sherman Mazur and Michele Mazur. Emily and Trent Mazur are
minors, and their shares are held by their mother, Michele Mazur, as
guardian. Effective March 30, 2000, all shares of capital stock
beneficially owned by Jamie, Jennifer, Emily and Trent Mazur were
transferred to a trust, as amended. According to the terms of the
trust, David Chadwick, as President of the Company, was appointed
trustee and is required to vote the shares, with respect to any
election of directors, in favor of any individuals in the same
proportion as all other shares are validly voted in favor of such
individuals. In addition, David Chadwick (or his successor as trustee)
is required to vote the shares, with respect to each other matter,
"for", "against" or to abstain from voting in the same proportion as
all other shares are validly voted "for", "against" or abstain from
voting, as the case may be. The purpose of the irrevocable trust was to
limit the ability of the Mazur children and the members of their
immediate family from exercising voting control over us through their
share holdings during the term of the trust agreement. We understand
that Mr. Sherman Mazur was convicted of felonies involving bankruptcy
and tax fraud more than five years ago. We understand that the Mazur
children were willing to enter into the trust agreement to attempt to
protect us from any adverse impact from their shareholdings. For the
complete terms, see attached trust agreement, a copy of which is
incorporated as an exhibit hereto.
(7) J&W Ventures claims beneficial ownership to these shares pursuant to
the terms of an asset purchase agreement entered into with us. The
shares were issued but we issued a stop transfer order and are
currently suing to rescind the agreement and cancel the shares. See
"Legal Proceedings" above.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain of our officer, David Chadwick, Gary Killoran, Paul Hyde and
James Rott are part owners of C/Net: Solutions, Inc., a private company
formed on November 1997. On April 21, 1998, the parties entered into an Advance
Agreement pursuant to which C/Net agreed to continue to lend money to
phoneXchange without interest, and phoneXchange agreed to repay the entire
amount of the outstanding debt on demand at any time. In December 1999,
phoneXchange, Inc. advanced $300,000 plus $32,006 to C/Net: Solutions, Inc.,
which remained outstanding as of December 31, 1999.
Russell Hensley is a our director and is a partner of a law firm that
we have retained during the latest fiscal year and propose to retain during the
current fiscal year. Fees paid to this law firm did not exceed five percent of
the law firm's gross revenues for its last full fiscal year. Mr. Hensley is also
the President and a 10% owner of BHHC, LLC, a Tennessee limited liability
company. BHHC has entered into a contract with phoneXchange to provide
telecommunications services in the Mexican market. Based on a competitive
analysis of the market, we believe that our costs to BHHC are at least as
favorable to phoneXchange as market rates otherwise available. In addition, we
understand that Mr. Hensley's direct material interest of BHHC is less than
$60,000 in value.
54
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
5,867,780 shares of our common stock are outstanding as of March 15,
2000. In addition, we are registering 15,075,061 shares of common stock under
this prospectus for sale by the selling security holders listed on pages 15 and
16. These shares are issuable on the exercise of warrants or on the conversion
of convertible debentures or convertible preferred stock. Of the presently
outstanding shares of common stock, we estimate that approximately 2,274,012 are
available for immediate sale in the public market and the remaining 3,593,768
are restricted by Rule 144 of the Securities Act. In general, under Rule 144, a
person who has beneficially owned restricted securities for at least one year
would be entitled to sell within any three-month period a number of shares that
does not exceed the greater of:
o 1% of the number of shares of our common stock then
outstanding, or
o the average weekly trading volume of our common stock during
the four calendar weeks preceding the filing of a notice on
Form 144 with respect to the sale.
Rule 144 also allows, under certain circumstances, a person to sell our
common stock without any quantity or other limitation if they are not one of our
affiliates and if they have satisfied a two year holding period. Any sales of a
substantial amount of our common stock in the open market, under Rule 144 or
otherwise, could have a significant adverse effect on the market price of our
common stock.
LEGAL MATTERS
Kaye, Scholer, Fierman, Hays & Handler, LLP, Los Angeles, California
will pass on the validity of the common stock that may be sold by the selling
security holders in this offering. Reid Breitman is an associate employed by
Kaye, Scholer, and is also the owner of American Equities, LLC, which is a
selling security holder, and which owns 326,797 shares of our Series A-1 12%
convertible redeemable preferred stock and warrants to purchase 630,000 shares
of our common stock. See "Selling Security Holders" and "Security Ownership of
Certain Beneficial Owners and Management."
EXPERTS
Our consolidated balance sheet as of December 31, 1999, and the related
consolidated statements of operations, convertible redeemable preferred stock,
stockholders' equity (deficit) and cash flows for the year then ended included
in this prospectus and registration statement have been audited by Mendoza
Berger & Company, LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
55
<PAGE>
The balance sheet as of December 31, 1998, and the related statements
of operations, convertible redeemable preferred stock, stockholders' equity
(deficit) and cash flows for the period from inception (January 16, 1997)
through December 31, 1997 and for the year ended December 31, 1998 included in
this prospectus and registration statement have been audited by Jaak Olesk an
independent public accountant, as indicated in his report with respect thereto,
and are included herein in reliance upon the authority of said firm as experts
in giving said report.
The balance sheet as of December 31, 1998, for the subsidiary
phoneXchange, Inc., was audited by Brad B. Haynes an independent public
accountant and has been relied upon with the authority of said firm as an
expert.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1, including amendments thereto, relating to
the common stock offered by this prospectus. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference. This prospectus contains all material
information required to be disclosed by the Securities Act. For further
information regarding us and the common stock offered by this prospectus,
reference is made to such registration statement, exhibits and schedules. A copy
of the registration statement may be inspected by anyone without charge at:
<TABLE>
<CAPTION>
<S> <C> <C>
Room 1024 Northwestern Atrium Center New York Regional Office
Judiciary Plaza 500 West Madison Street Seven World Trade
450 Fifth Street, N.W. Center Suite 1400 13th Floor
Washington, D.C. 20549 Chicago, Illinois 60661 New York, New York 10048
</TABLE>
Copies of such material also can be obtained from the Public Reference Section
of the SEC, at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
at prescribed rates.
The SEC maintains a web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of the SEC web site is http://www.sec.gov.
We have applied for quotation of our common stock on the Nasdaq SmallCap Market,
and once approved, those reports, proxy and information statements and other
information also can be inspected at the office of Nasdaq Operations, 1735 K
Street, N.W., Washington, D.C. 20006.
56
<PAGE>
INDEX TO AUDITED FINANCIAL STATEMENTS
Report of Independent Public Accountants F-1
Balance Sheet as of December 31, 1998 and Consolidated Balance Sheet as
of December 31, 1999 F-2
Statements of Operations from inception (January 16, 1997) through
December 31, 1997, year ended December 31, 1998 and consolidated
statement of operations for the year ended December 31, 1999 F-3
Statement of Convertible Redeemable Preferred Stock and Stockholders'
Equity from inception (January 16, 1997) through December 31, 1997,
Year-ended December 31, 1998 and Consolidated Statement of Redeemable
Convertible Preferred Stock and Stockholders' Equity (Deficit) for the
year ended December 31, 1999 F-4
Statement of Cash Flows from inception (January 16, 1997) through
December 31, 1997, Year-ended December 31, 1998 and Consolidated
Statement of Cash Flows for the year ended December 31, 1999 F-5
Notes to Audited Consolidated Financial Statements F-6
57
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Integrated Communication Networks, Inc.
We have audited the accompanying consolidated balance sheet of Integrated
Communication Networks, Inc. (a Nevada Corporation) (Formerly, Global Access
Pagers, Inc.) and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, convertible redeemable preferred stock,
stockholders' equity (deficit) and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The financial statements of Integrated
Communication Networks, Inc. as of December 31, 1998 and 1997 and of the
subsidiary's as of December 31, 1998 were audited by other auditors, whose
reports dated February 3 and April 2, 1999, respectively, expressed unqualified
opinions with disclosures of uncertainties related to Company's continuance as a
going concern.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Communication Networks, Inc. and subsidiaries as of December 31, 1999 and the
results of their operations and their cash flows for the year ended December 31,
1999 in accordance with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1(a) to the
financial statements, the Company has suffered recurring losses from the
operations that raise substantial doubt about its ability to continue as a going
concern. The Company also has uncertainties relating to the litigation matters
as disclosed in Note 7(b). These conditions raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1(b). The consolidated financial statements
do not include any adjustments that might result from the outcome of these
uncertainties.
Mendoza Berger & Company, LLP
Laguna Hills, California
April 13, 2000
F-1
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC.
(Formerly, Global Access Pagers, Inc.)
BALANCE SHEETS
DECEMBER 31,
----------------------------
CONSOLIDATED
ASSETS 1998 1999
------------- -------------
Current assets:
Cash $ - $ 2,552,113
Receivable from related party - 332,006
Prepaid and other current assets - 293,032
------------- -------------
Total current assets - 3,177,151
------------- -------------
Property and equipment:
Operating equipment - 2,825,700
Equipment and software under capital leases - 549,685
Leasehold improvements - 114,490
Furniture, fixtures and equipment - 60,524
------------- -------------
- 3,550,399
Less - Accumulated depreciation and amortization - (459,428)
------------- -------------
- 3,090,971
------------- -------------
Goodwill, net - 8,907,517
Other noncurrent assets - 280,377
------------- -------------
Total noncurrent assets - 12,278,865
------------- -------------
$ - $ 15,456,016
============= =============
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 1,999 $ 823,860
Accrued expenses 5,000 526,074
Unearned revenues - 334,130
Long-term debt-current portion - 82,696
Capital lease obligations-current portion - 114,078
------------- -------------
Total current liabilities 6,999 1,880,838
------------- -------------
Long-term debt, net of current portion - 5,034,813
Capital lease obligations, net of current portion - 209,836
Minority interest (Note 6) - -
Commitments and contingencies (Note 7) - -
Redeemable, convertible preferred stock:
Series A 8% convertible redeemable preferred
stock, $.01 par value per share:
Authorized - 50,000 shares
Issued and outstanding - no shares at
December 31, 1998 and 1999 - -
Series A-1 12% convertible redeemable preferred
stock, $.01 par value per share:
Authorized - no shares and 7,500,000 shares at
December 31, 1998 and 1999, respectively
Issued and outstanding - no shares and 3,167,974
at December 31, 1998 and 1999, respectively - 4,847,000
Series A-1 preferred stock subscribed - (218,500)
Stockholders' equity (deficit):
Common stock, $.01 par value:
Authorized - 250,000,000 shares
Issued and outstanding 5,262,206 and 5,867,780
at December 31, 1998 and 1999, respectively 52,620 58,677
Common stock subscribed - (105,750)
Additional paid-in capital 8,047,480 22,858,958
Accumulated deficit (8,107,099) (18,996,555)
Treasury stock - (113,301)
------------- -------------
Total stockholders' equity (deficit) (6,999) 3,702,029
------------- -------------
$ - $ 15,456,016
============= =============
The accompanying notes are an integral part of these
consolidated financial statements
F-2
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC.
(Formerly, Global Access Pagers, Inc.)
STATEMENTS OF OPERATIONS
From inception
(January 16,
1997) through For the year ended
December 31, December 31,
------------- ----------------------------
CONSOLIDATED
------------- ------------- -------------
1997 1998 1999
------------- ------------- -------------
Revenues $ - $ - $ 2,133,289
Operating expenses:
Data communications and
telecommunications - - 4,331,589
Selling, general & administrative
expenses 300,100 6,999 6,481,611
Depreciation and amortization - - 792,325
Write-down of impaired assets
(Note 1 (k)) 7,800,000 - 2,554,819
------------- ------------- -------------
Total operating expenses 8,100,100 6,999 14,160,344
------------- ------------- -------------
Loss from operations (8,100,100) (6,999) (12,027,055)
------------- ------------- -------------
Other income (expense):
Interest income - - 13,986
Interest expense - - (320,346)
Legal settlement - - (40,000)
Gain on casualty loss, net - - 140,867
Write-off of assets (Note 3) - - (216,600)
Minority interest in losses of
subsidiary - - 1,624,517
Other income (expense), net - - (64,825)
------------- ------------- -------------
- - 1,137,599
------------- ------------- -------------
Net loss $ (8,100,100) $ (6,999) $(10,889,456)
============= ============= =============
Basic and diluted weighted average
common shares outstanding 46,747 5,262,206 3,307,829
============= ============= =============
Basic and diluted net loss per
share $ (173.28) $ (0.00) $ (3.29)
============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
<TABLE>
INTEGRATED COMMUNICATION NETWORKS, INC.
(Formerly, Global Access Pagers, Inc.)
CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FROM INCEPTION (JANUARY 16, 1997) THROUGH DECEMBER 31, 1997
AND FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1999
<CAPTION>
SERIES A 8% REDEEMABLE
CONVERTIBLE SERIES A-1 12% REDEEMABLE
PREFERRED STOCK CONVERTIBLE PREFERRED STOCK
---------------------------- -------------------------------------------
SHARES AMOUNT SHARES AMOUNT SUBSCRIBED
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, January 16, 1997 - $ - - $ - $ -
Common stock issued for
cash at inception - - - - -
Common stock issued and
subscribed for assets - - - - -
Assets contributed by
shareholders - - - - -
Net loss - - - - -
------------- ------------- ------------- ------------- -------------
Balance, December 31,
1997 - - - - -
------------- ------------- ------------- ------------- -------------
Common stock issued
for assets - - - - -
Net loss - - - - -
------------- ------------- ------------- ------------- -------------
Balance, December 31,
1998 - - - - -
------------- ------------- ------------- ------------- -------------
Stock to be issued for
assets acquired January
1999 - - - - -
Stock cancelled - - - - -
Stock issued for acquisition
of PhoneXchange, Inc. - - - - -
Common stock issued for
conversion of debt - - - - -
Stock issued for receivable - - - - -
Effective options issued for services - - - - -
Stock issued for cash and
receivable - - 3,267,974 5,000,000 (218,500)
Stock issued to Directors for services - - - - -
Stock issued for services - - - - -
Stock issued for cash - - - - -
Conversion of preferred
stock - - (100,000) (153,000) -
Purchase of common stock - - - - -
Stock issued for additional
shares in phoneXchange, Inc. - - - - -
Net loss - - - - -
------------- ------------- ------------- ------------- -------------
Balance, December 31, 1999 - $ - 3,167,974 $ 4,847,000 $ (218,500)
============= ============= ============= ============= =============
</TABLE>
(CONTINUED BELOW)
<PAGE>
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL RETAINED STOCK-
------------------------------------------- PAID-IN EARNINGS TREASURY HOLDERS'
SHARES AMOUNT SUBSCRIBED CAPITAL (DEFICIT) STOCK EQUITY
------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 16, 1997 - $ - $ - $ - $ - $ - $ -
Common stock issued for
cash at inception 10,000 100 - - - - 100
Common stock issued and
subscribed for assets 36,747 367 7,800,000 (367) - - 7,800,000
Assets contributed by
shareholders - - - 300,000 - - 300,000
Net loss - - - - (8,100,100) - (8,100,100)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31,
1997 46,747 467 7,800,000 299,633 (8,100,100) - -
------------- ------------- ------------- ------------- ------------- ------------- -------------
Common stock issued
for assets 5,215,459 52,153 (7,800,000) 7,747,847 - - -
Net loss - - - - (6,999) - (6,999)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31,
1998 5,262,206 52,620 - 8,047,480 (8,107,099) - (6,999)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Stock to be issued for
assets acquired 441,600 4,416 - 2,589,984 - - 2,594,400
Stock cancelled (3,475,000) (34,750) - 34,750 - - -
Stock issued for acquisition
of PhoneXchange, Inc. 921,428 9,215 - 6,440,788 - - 6,450,003
Common stock issued for
conversion of debt 25,296 253 - 132,550 - - 132,803
Stock issued for receivable 141,000 1,410 (105,750) 104,340 - - -
Effective options issued
for services - - - 2,250,000 - - 2,250,000
Stock issued for cash and
receivable - - - - - - -
Stock issued to Directors
for services 10,500 105 - 56,164 - - 56,269
Stock issued for services 23,500 235 - 142,528 - - 142,763
Stock issued for cash 1,332,000 13,320 - 985,680 - - 999,000
Conversion of preferred
stock 1,000,000 10,000 - 143,000 - - 153,000
Purchase of common stock - - - - - (113,301) (113,301)
Stock issued for additional
shares in phoneXchange, Inc. 185,250 1,853 - 1,931,694 - - 1,933,547
Net loss - - - - (10,889,456) - (10,889,456)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Balance, December 31, 1999 5,867,780 $ 58,677 $ (105,750) $ 22,858,958 $(18,996,555) $ (113,301) $ 3,702,029
============= ============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-4
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC.
(Formerly, Global Access Pagers, Inc.)
STATEMENTS OF CASH FLOWS
From inception
(January 16,
1997) through For the year ended
December 31, December 31,
------------- ----------------------------
CONSOLIDATED
------------- ------------- -------------
1997 1998 1999
------------- ------------- -------------
Cash Flows From Operating Activities:
Net loss $ (8,100,100) $ (6,999) $(10,889,456)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization - - 792,325
Write-down of impaired assets 7,800,000 - 2,554,819
Write-off assets due to casualty
loss - - 39,581
Compensation expense related to
stock option grant - - 2,250,000
Minority interest - - (1,624,517)
Shares issued for services - - 567,397
Decrease (increase) in assets:
Receivable from related party - - (332,006)
Prepaid expenses and other
assets - - (716,362)
Increase (decrease) in liabilities:
Accounts payable - 1,999 613,249
Accrued expenses - 5,000 365,919
Unearned revenues - - 331,120
Other advance 300,000 - (317,802)
Payable to related party - - (208,297)
------------- ------------- -------------
Net cash used in operating
activities (100) - (6,574,030)
------------- ------------- -------------
Cash Flows From Investing Activities:
Purchases of property and equipment - - (1,155,447)
------------- ------------- -------------
Net cash used in investing
activities - - (1,155,447)
------------- ------------- -------------
Cash Flows From Financing Activities:
Proceeds from issuance of short-term
debt - - 331,965
Principal payments of capital lease
obligation - - (47,347)
Proceeds from issuance of long-term
debt - - 6,560,621
Principal payments on long-term debt - - (262,649)
Proceeds from preferred stock
subscription - - 1,950,000
Proceeds from issuance of common
stock 100 - 1,749,000
------------- ------------- -------------
Net cash provided by financing
activities 100 - 10,281,590
------------- ------------- -------------
Increase in cash - - 2,552,113
------------- ------------- -------------
Cash at the beginning of the period - - -
------------- ------------- -------------
Cash at the end of the period $ - $ - $ 2,552,113
============= ============= =============
Supplemental disclosure of cash flow
information:
Cash paid during the year for
interest $ - $ - $ 62,737
============= ============= =============
Supplemental disclosure of noncash
investing and financing activities:
Equipment and software acquired
under capital lease obligations - - 185,114
============= ============= =============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(a) Formation and Description of Business
Integrated Communication Networks, Inc., and Subsidiaries (formerly,
Global Access Pagers, Inc.) (the "Company" or "ICN"), a Nevada corporation, was
incorporated on January 16, 1997 under the name Theatre, Inc. The Company is
currently engaged in the integration of various telecommunication networks
through acquisition and internal growth for the purpose of offering a variety of
reliable, high-quality, value-added telecommunication services at competitive
prices.
In April 1998, Theatre, Inc., a Nevada corporation, entered into an
agreement and plan of merger with Phonetime Resources, Inc., a Nevada
corporation. Pursuant to the agreement, Phonetime Resources, Inc. merged into
Theatre, Inc. and Theatre, Inc. was the surviving corporation. Upon completion
of the merger, Phonetime Resources, Inc. ceased to exist and Theatre, Inc.
operated under the name Global Access Pagers, Inc. The purpose of the merger was
to effect a domicile change.
In May 1998, Theatre, Inc., doing business as Global Access Pagers,
Inc., entered into an Agreement and Plan of Merger with Global Access Pagers,
Inc., a Nevada corporation. Pursuant to the agreement, Global Access Pagers,
Inc. merged into Theatre, Inc. and Theatre, Inc. was the surviving corporation.
Upon completion of the merger, Global Access Pagers, Inc. ceased to exist and
Theatre, Inc. changed its name to Global Access Pagers, Inc. The transaction was
accounted for using the purchase method of accounting. The transaction relating
to the merger was rescinded on January 27, 1999. Accordingly, 3,475,000 issued
common shares of the surviving entity were returned to the Company and
cancelled.
From January 16, 1997 through December 31, 1998, the Company had no
revenues and no operations. Operations began February 28, 1999.
In January 1999, Global Access Pagers, Inc. entered into a Stock
Purchase Agreement with phoneXchange, Inc., a Delaware corporation, whereby
Global Access Pagers, Inc. purchased 8,600,000 restricted shares or 85.14% of
the issued and outstanding shares of common stock of phoneXchange in exchange
for 921,428 restricted common shares of Global Access Pagers, Inc. and warrants
to purchase 921,428 shares of the Company's common stock at a purchase price per
share of $4.50. In September 1999, the Company issued the 921,428 shares of
restricted common stock pursuant to the Stock Purchase Agreement. The
transaction was valued at $6,450,003 and was effective February 28, 1999. In
addition, the Company entered into employment agreements with the officers of
phoneXchange effective January 1999. In February 1999, management of the Company
changed the name of the corporation from Global Access Pagers, Inc. to
Integrated Communication Networks, Inc. On February 28, 1999, management of
phoneXchange assumed responsibility for the management of the Company. The
transaction was accounted for using the purchase method of accounting.
F-6
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company began operations in February 1999 through the Company's
acquisition of phoneXchange, Inc. phoneXchange is a facilities-based wholesale
carrier that provides switched voice and data services, primarily to U.S.-based
carriers. phoneXchange provides domestic and international long distance service
through foreign termination relationships, international gateway switches,
leased and owned transport facilities and resale arrangements with other long
distance providers.
(b) Going Concern
Management has spent a significant amount of time identifying,
evaluating and pursuing strategic acquisitions to accomplish this objective. To
achieve the objectives outlined in its plan, the Company must obtain sufficient
financing to obtain and complete its long distance network facilities and,
ultimately, achieve a sufficient level of sales and profitability to support its
contemplated operations. Management is currently pursuing various financing
alternatives. However, no assurance can be provided that management will be able
to obtain financing on terms acceptable to the Company, or at all. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of
Integrated Communication Networks, Inc. and its majority-owned subsidiary,
phoneXchange, Inc. and its wholly owned subsidiary Internet Call Centers, Inc.
All significant inter-company transactions and balances have been eliminated.
Minority interest represents the minority shareholders' proportionate share of
the equity or income of the Company's majority-owned subsidiary phoneXchange,
Inc.
(d) Use of Estimates
The preparation of the 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. The Company reviews all significant estimates effecting the
financial statements on a recurring basis and records the effect of any
necessary adjustments prior to their issuance. Actual results could differ from
those estimates.
F-7
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
(e) Revenue Recognition
The Company records revenues for the sale of telecommunications
services at the time of customer usage. All services paid in advance by the
customer are recorded as unearned revenues. Revenues from the resale of minutes
is recognized in the period the service is provided.
(f) Concentration of Credit Risk
The Company maintains its cash balances in a major financial
institution. Accounts held with such institutions are generally insured by
government authorities up to certain maximum amounts. During the year the
Company may have cash balances in these institutions in excess of such limits.
At December 31, 1999, cash balances of the Company and its consolidated
subsidiaries were in excess of insurable amounts by approximately $2.4 million.
(g) Financial Instruments
The Company follows the guidance of Statement of Accounting Standards
("SFAS") No. 107, "Disclosure of Fair Value Financial Instruments," which
requires disclosure of the fair value of financial instruments; however, this
information does not represent the aggregate net fair value of the company.
Unless quoted market price indicates otherwise, the fair values of cash and cash
equivalents and deposits generally approximate market value because of the short
maturity of these instruments. The Company's notes payable and capital lease
obligations also approximate market value as the underlying borrowing rates are
similar to the other financial instruments with similar maturities and terms.
(h) Property and Equipment
Property and Equipment is stated at cost or fair value at the date of
acquisition and, in the case of equipment under capital leases, the present
value of minimum lease payments. Depreciation and amortization of property and
equipment is computed using the straight-line method over the following
estimated useful lives:
Estimated
Asset Classification Useful Life
-------------------- -----------
Operating equipment 5 years
Equipment and software under capital leases 3-5 years
Leasehold improvements 1-5 years
Furniture, fixtures and equipment 3 years
Replacements and improvements, renewals and extraordinary repairs that
extend the life of the asset are capitalized; other repairs and maintenance are
expensed.
Amortization of assets financed under capital leases was $71,016,
depreciation of purchased assets was $288,380 and amortization on leasehold
improvements was $11,341 for the year ended December 31, 1999.
F-8
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
(i) Goodwill
Goodwill represents the excess of the purchase price over the value
assigned top the net tangible assets of the businesses acquired (see note 2).
Goodwill is amortized on a straight-line basis over 15 years. The carrying
amount of goodwill is periodically reviewed using estimated undiscounted cash
flows of the businesses acquired over the remaining amortization period.
Management believes that there has been no impairment of the goodwill recorded
in the company's consolidated financial statements as of December 31, 1999.
(j) Other Assets
Other assets at December 31, 1999 consisted primarily of deposits and
prepaid expenses.
(k) Impairment of Long - Lived Assets
In accordance with SFAS No. 121, "accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," long-lived
assets to be held and used by the Company are reviewed to determine whether an
event or change in circumstances indicates that the carrying amount of the asset
may not be recoverable. For long-lived assets to be held and used, the Company
bases its evaluation on such impairment indicators as the nature of the assets,
the future economic benefit of the assets, any historical or future
profitability measurements, as well as other external market conditions or
factors that may be present. If such impairment indicators are present or other
factors exist that indicate that the carrying amount of the asset may not be
recoverable, the Company determines whether an impairment has occurred the use
of an undiscounted cash flows analysis of assets at the lowest level for which
identifiable cash flows exits. If impairment has occurred, the Company
recognizes a loss for the difference between the carrying amount and the
estimated value of the assets. Fair value is based on quoted market prices in
active markets, if available, if quoted market prices are not available, an
estimate of fair value is based on the best information available, including
prices, similar assets or the results of valuation techniques.
During the first quarter 1999, the Company recorded a non-cash, pre-tax
charge of $2.5 million associated with certain telecommunication switching
equipment acquired through an asset purchase agreement (see note 7(b)).
During 1997, the Company recorded a non-cash, pre-tax charge of $7.8
million associated with certain telecommunications equipment acquired through an
attempted and failed business combination. Considerable management judgment is
necessary to estimate future cash flows and estimated fair value. Accordingly,
actual results could vary significantly from such estimates.
F-9
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (continued)
(l) Income Taxes
The Company uses the liability method of accounting for income taxes
specified by SFAS No. 109, "Accounting for Income Taxes", whereby deferred tax
liabilities and assets are determined based on the difference between financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Deferred
tax assets are recognized and measured based on the likelihood of realization of
the related tax benefit in the future.
(m) Net Loss per Common Share
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share" which requires the Company to present
basic and diluted earnings per share for all years presented. The Company's net
loss per share calculation (basic and diluted) is based upon the weighted
average common shares issued. There are no reconciling items in the numerator or
denominator of the Company's net loss per share calculation. Stock options,
warrants, convertible debt and convertible preferred stock instruments have been
excluded from the net loss per share calculation because their effect would be
anti-dilutive.
(n) Stock-based Compensation
In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123, "Accounting For Stock-Based Compensation", which requires
the measurement of the fair value of stock options or warrants to be included in
the consolidated statements of operations or disclosed in the notes to
consolidated financial statements. The Company has determined that it will
account for stock-based compensation for employees under the intrinsic
value-based method of the Accounting Principles Board (APB) Opinion No. 25,
"Accounting For Stock Issued To Employees", and elect the disclosure-only
alternative under SFAS No. 123. The Company accounts for stock-based
compensation for non-employees under the fair value method prescribed by SFAS
No. 123. To date there have been no material grants to non-employees.
(o) Reclassifications
Certain reclassifications have been made to the 1997 and 1998 financial
statements to conform to the 1999 presentation.
2. BUSINESS COMBINATION
On January 1, 1999, Global Access Pagers, Inc. entered into a Stock
Purchase Agreement with phoneXchange, Inc., a Delaware corporation, whereby
Global Access Pagers, Inc. purchased 8,600,000 restricted shares or 85.14% of
the issued and outstanding shares of common stock of phoneXchange in exchange
for 921,428 restricted common shares of Global Access Pagers, Inc. and warrants
to purchase 921,428 restricted shares of the Company's common stock at a
purchase price per share of $4.50. The transaction was valued at $6,450,003 and
was effective February 28, 1999. In addition, the Company entered into
employment agreements with the officers of phoneXchange effective January 1,
1999. On January 29, 1999, management of the Company changed the name of the
corporation from Global Access Pagers, Inc. to Integrated Communication
Networks, Inc. On February 28, 1999, management of phoneXchange assumed
responsibility for the management of the Company. The transaction was accounted
for using the purchase method of accounting. On September 13, 1999, the Company
issued the 921,428 restricted shares of common stock pursuant to the Stock
Purchase Agreement. Goodwill from the transaction of the Stock Purchase
Agreement between the Company and phoneXchange, Inc. resulted from the purchase
of 85.14% of phoneXchange, Inc.'s stock and stockholder's equity as of February
28, 1999, which totaled $7,395,559 will be amortized over 15 years.
Subsequently, the Company's ownership of phoneXchange was diluted to 42.6%.
F-10
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
2. BUSINESS COMBINATION (continued)
Pursuant to a June 2, 1999 Asset Purchase Agreement, the Company's
subsidiary, phoneXchange, Inc., issued 185,250 shares of phoneXchange common
stock to a third party for the purchase of certain telecommunications switching
equipment. In November 30, 1999, the Company issued 185,250 restricted shares of
ICN's common stock in exchange for the 185,250 restricted common stock shares of
phoneXchange, Inc. Based on the closing bid price of the Company's common stock
of $10.44, the transaction was valued at $1,933,547 and recorded as an increase
in goodwill with a corresponding year-end amortization expense of $10,742. The
Company's ownership percentage of phoneXchange, Inc. increased from 42.6% to
65.6%.
The Company recorded a total of $9,329,106 in Goodwill and $421,589 in
accumulated amortization and amortization expense of goodwill at and for the
year ended December 31, 1999 from the previous transactions.
The following unaudited pro forma results of operations assumed the
stock purchase agreement occurred on January 1, 1999 and 1998:
UNAUDITED PRO FORMA INFORMATION
- -------------------------------
Year Ended (2) Year Ended (1)
December 31, 1998 December 31, 1999
----------------- -----------------
Revenues $ 183,000 $ 2,248,138
================= ================
Net Loss $ (1,375,489) $ (11,255,177)
================= ================
Basic and diluted net loss per share $ (.25) $ (2.85)
================= ================
(1) The pro forma financial information presented above shows the
Company's operating results for the year ended December 31,
1999 and the additional goodwill amortization expense in
amount of $82,168 that would have been recorded if the
transaction had occurred on January 1, 1999. In addition, the
weighted average common shares outstanding reflect the effect
of 921,428 shares issued in connection with the transaction
assuming that the transaction had occurred on January 1, 1999.
The pro forma financial information is not necessarily
indicative of the operating results that would have occurred
had the stock purchase been consummated on January 1, 1999,
nor are they necessarily indicative of future operating
results.
F-11
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
2. BUSINESS COMBINATION (continued)
(2) The pro forma financial information above includes the results
of operations of the Company for the year ended December 31,
1998 and the results of operations of phoneXchange, Inc. for
the period from April 7, 1998 (inception) through December 31,
1998. The pro forma adjustment reflects the additional
goodwill amortization in the amount of $369,762 that would
have been recorded assuming the stock purchase agreement
occurred on April 7, 1998. In addition, the weighted average
common shares outstanding reflect the effect of 921,428 common
shares issued in connection with the stock purchase agreement
assuming that the transaction had occurred on April 7, 1998.
The pro forma financial information is not necessarily
indicative of the operating results that would have occurred
had the stock purchase been consummated on April 7, 1998, nor
are they necessarily indicative of future operating results.
3. WRITE-OFF OF DEPOSIT
On November 1, 1998, the Company executed an Asset Purchase Agreement
to acquire certain customer sales contracts for domestic and international long
distance services, FCC International 214 license and certain office equipment.
The Company paid $216,600 as deposit on the asset purchase and subsequently
determined that the transaction was not in the best interest of the Company. The
Company cancelled the Asset Purchase Agreement and the Company wrote-off the
$216,600 deposit on purchase.
<TABLE>
4. LONG-TERM DEBT
Long-term debt consists of the following:
<S> <C>
(a) 7.5% note payable to a vendor. Principal and interest
are payable in monthly installments of $6,525, December 2001,
secured by related equipment. $ 75,209
(b) 10% note payable to the Company's landlord. Principal and
interest are payable in monthly installments of $948 through
July 2004, secured by leasehold improvements. 42,300
(c) In November 1999, the Company sold $5.0 million
principal amount of its 4% Convertible Debenture, and received
net proceeds of $4,480,000 on December 2, 1999. The Convertible
Debenture is due on December 2, 2004. 5,000,000
-----------
5,117,509
-----------
Less: Current maturities (82,696)
-----------
$5,034,813
===========
</TABLE>
F-12
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
4. LONG-TERM DEBT (continued)
Aggregate maturities of long-term debt over the next five years is as
follows:
Period Ending
December 31 Amount
------------- ------
2000 $ 82,696
2001 8,999
2002 9,213
2003 10,178
2004 5,006,423
-------------
$ 5,117,509
=============
Convertible Debenture
In November 1999, the Company sold $5.0 million principal amount
of its 4% Convertible Debenture, and received net proceeds of
$4,480,000 on December 2, 1999. The Convertible Debenture is due
on December 2, 2004.
The Debentures automatically convert into common stock on December
2, 2004 at the then effective conversion price. The holders of the
Debentures have the right, at any time after April 1, 2000, to
convert all or any portion of the Debentures into common stock at
the lesser of (i) 80% of the averaged three lowest closing bid
prices, as reported by Bloomberg, LP, for the common stock for the
20 trading days immediately preceding the conversion date, or (ii)
$10.00. The Company has the right to redeem the Debentures at any
time for 120% of the principal amount of the Debentures, plus
accrued interest up to the date of redemption.
F-13
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
5. INCOME TAXES
The Company's effective tax benefit on pretax loss differs from the U.S. Federal
Statutory tax rate for the fiscal year ended December 31, 1997, 1998 and 1999 as
follows:
<TABLE>
<CAPTION>
From inception
(January 16,
1997) through For the year ended
December 31, December 31,
--------------- -------------------------------
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Federal statutory tax (benefit) (34.0%) (34.0%) (34.0%)
State taxes, net of federal tax benefit (5.83%) (5.83%) (5.83%)
--------------- --------------- ---------------
(39.83%) (39.83%) (39.83%)
</TABLE>
Deferred income tax assets and liabilities are computed based on temporary
differences between the financial statement and income tax bases of assets and
liabilities using the enacted marginal income tax rate in effect for the year in
which the differences are expected to reverse. Deferred income tax expenses or
credits are based on the changes in the deferred income tax assets or
liabilities from period to period. The components of deferred tax liabilities
and assets at December 31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
From inception
(January 16,
1997) through For the year ended
December 31, December 31,
--------------- -------------------------------
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
DEFERRED TAX LIABILITIES
DEPRECIATION $ (639,000) $ - $ -
--------------- --------------- ---------------
TOTAL DEFERRED LIABILITIES (639,000) - -
--------------- --------------- ---------------
DEFERRED TAX ASSETS
STATE TAXES 575,000 243,000 6,000
NET OPERATING LOSS CARRY FORWARD 7,325,000 3,473,000 92,000
--------------- --------------- ---------------
TOTAL DEFERRED ASSETS 7,900,000 3,716,000 98,000
--------------- --------------- ---------------
VALUATION ALLOWANCE (7,261,000) (3,716,000) (98,000)
--------------- --------------- ---------------
NET DEFERRED TAX ASSETS $ - $ - $ -
=============== =============== ===============
</TABLE>
F-14
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
5. INCOME TAXES (continued)
The Company and its majority-owned subsidiaries report separately for
income tax reporting purposes. The Company had available approximately
$13,950,422 and $14,297,667 of unused federal and state operating loss carry
forwards, respectively, at December 31, 1999, that may be applied against future
taxable income. These net operating loss carry forwards expire for federal
purposes from 2017 to 2019 and will expire for state purposes in 2005. There can
be no assurance that the Company will realize the benefit of the net operating
loss carry forwards.
SFAS No. 109 requires a valuation allowance to be recorded when it is
more likely than not that some or all of the deferred tax assets will not be
realized. At December 31, 1997, 1998 and 1999, valuations for 100% of the net
deferred tax assets were recorded due to uncertainties as to the amount of
taxable income that will be generated in future years. No income tax benefit has
been recorded for all periods presented because of the valuation allowance.
Due to the "change in ownership" provisions in Internal Revenue Code
Section 382, the availability of the Company's net operating loss carry forwards
may be subject to an annual limitation against taxable income in future periods,
which could substantially limit the eventual utilization of these net operating
loss carry forwards.
6. MINORITY INTEREST
Minority interest is represented by the minority shareholder's
proportionate share of the equity and losses of the Company's majority-owned
subsidiary phoneXchange, Inc. The minority interest was reduced to zero during
1999 as the losses of the subsidiary exceeded the invested amounts.
7. COMMITMENTS AND CONTINGENCIES
(a) Leases
(1) Master Lease
On July 30, 1999, the Company and Lucent Technologies, Inc.
InterNetworking Systems signed a Master Lease Agreement pursuant to which Lucent
agreed to provide the Company $3 million in credit for leasing Lucent equipment.
On February 7, 2000, Lucent amended this agreement to increase the Company's
line of credit to $10 million. As March 31, 2000, the Company has received
equipment eligible to be financed under the Master Lease Agreement valued at
approximately $4 million but has not completed type testing and acceptance of
the equipment. Upon type testing and acceptance, the equipment will be placed
under operating leases. As of December 31, 1999, the Company had no outstanding
borrowings under the Master Lease Agreement.
F-15
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
7. COMMITMENTS AND CONTINGENCIES (continued)
(2) Operating Leases
The Company leases office space for its co-location space, dedicated
private telephone lines, equipment and other items under various agreements
expiring through 2005.
Rent expense included in the consolidated statements of operations was
approximately $0, $0 and $164,321, for the year ended December 31, 1997, 1998
and 1999, respectively.
(3) Capital Leases
The Company is obligated under various capital lease agreements for
certain computer software, telecommunications switching equipment and desktop
workstations.
In December 1997, the Company entered into a lease agreement for
certain communications equipment and licensed software. The equipment consists
primarily of a telephone switching system, which is a long distance, tandem
telephone switch. The purchase price for the System is $333,038. The lease
agreement bears interest at an annual rate of 30.3% and calls for 36 equal
minimum monthly payments of $7,119. The capital lease was secured by the related
assets.
In November 1999, the Company entered into a lease agreement for
certain licensed software. The lease agreement bears interest at an annual rate
of 25% and calls for 36 monthly payments of $4,786. The capital lease is secured
by the software.
In July and August 1999, the Company entered into two lease agreements
for certain desktop computers and back office servers. The lease agreements bear
interest at an annual rate ranging from 13.2% to 13.4% and calls for 36 monthly
payments of $2,519. The capital leases are secured by the equipment.
In December 1999, the Company entered into a lease agreement for
certain communications equipment and licensed software. The lease agreement
bears interest at an annual rate of 12.25% and calls for 36 equal minimum
monthly payments of $12,000 and a deposit of $39,617. As of December 31, 1999,
the Company had not tested, accepted or recorded the equipment on the balance
sheet. The capital lease was secured by the related assets.
In December 1999, the Company entered into various lease agreements for
certain licensed software. The lease agreements bear interest at an annual rate
ranging from 17.4% to 31% and call for 36 to 48 equal minimum monthly payments
and deposits totaling $18,341. As of December 31, 1999, the Company had not
tested, accepted or recorded the software on the balance sheet. The capital
lease was secured by the related assets.
In February 2000, the Company entered into a lease agreement for
certain computer equipment and office furniture. The lease agreement bears
interest at an annual rate of 27.27% and calls for 36 equal minimum monthly
payments of $2,186 and a deposit of $4,939.
Future minimum lease payments associated with the leases described
herein, including renewal options are as follows:
F-16
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
7. COMMITMENTS AND CONTINGENCIES (continued)
Dedicated Other
Year Ending Capital Private Operating
December 31, 1999 Leases Lines Leases
- ----------------- ------------ --------------- ---------------
2000 $ 171,616 $ 832,789 $ 379,777
2001 173,441 338,549 356,478
2002 71,619 191,556 329,528
2003 -0- 95,755 323,154
2004 -0- 63,837 302,855
Thereafter -0- -0- 40,442
------------- --------------- ---------------
Total minimum lease
payments $ 416,677 $ 1,522,486 $ 1,732,234
=============== ===============
Less: amount
representing interest (92,763)
Net present value of
minimum lease payments 323,914
-------------
Less: current portion (114,078)
-------------
Long-term capitalized
lease obligation $ 209,836
=============
(b) Legal Matters
The Company is subject to litigation from time to time in the normal
course of business. Although it is not possible to predict the outcome of such
litigation, based on the facts known to the Company and after consultations with
counsel, management believes that such litigation will not have a material
adverse effect on its financial position or results or operations.
On August 30, 1999, a claim was filed against the Company alleging that
the Company is in breach of a contract to purchase certain telecommunications
equipment. The plaintiff is seeking performance of the contract plus damages.
The Company has filed a cross-complaint seeking rescission and damages,
asserting that the plaintiff breached certain representations and warranties.
The Company intends to vigorously contest the litigation and to fully pursue its
own remedies. While no assurance can be given regarding the outcome of this
matter, the Company believes that it has strong and meritorious defenses to the
claims asserted. However, a determination that the Company breached its contract
with the plaintiff could have a material adverse effect on the Company's
operating results and financial condition.
Pursuant to the Asset Purchase Agreement, the Company paid $300,000 in
cash, issued 441,600 shares of common stock and was obligated to designate and
issue 850,000 shares of a new series of preferred stock, $2.50 par value.
Pending the outcome of the litigation between the parties, the Company has
placed a stop transfer order on the common stock issued, and has not designated
or issued any preferred stock. The Company has not made any reserve on the
Consolidated Balance Sheet as of December 31, 1999 in connection with this
litigation.
F-17
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
8. RELATED PARTY TRANSACTIONS
David Chadwick, Gary Killoran, Paul Hyde and James Rott are executive
officers of the Company and part owners of C/Net: Solutions, Inc., a private
company formed on November 1997. On April 21, 1998, the parties entered into an
Advance Agreement pursuant to which C/Net agreed to continue to lend money to
phoneXchange without interest, and phoneXchange agreed to repay the entire
amount of the outstanding debt on demand at any time. In December 1999, pursuant
to an Advance Agreement, phoneXchange, Inc. advanced $300,000 plus $32,006 to
C/Net: Solutions, Inc., which remained outstanding as of December 31, 1999.
Corporate Financial Enterprises, Inc. is a private investment banking
and consulting firm which is a significant shareholder of the Company. Effective
March 30, 2000, all shares of capital stock beneficially owned by Corporate
Financial Enterprises, Inc., including 1,000,000 shares of common stock,
1,370,590 shares of Series A-1 12% convertible redeemable preferred stock and
warrants to purchase 2,828,633 shares of common stock, were transferred to an
irrevocable trust, as amended. According to the terms of the trust, David
Chadwick, as President of the Company, was appointed trustee and is required to
vote the shares in accordance with the trust agreement, which limits the ability
of the shareholders party to the trust from exercising voting control during the
term of the trust agreement. For the year ended December 31, 1999, the Company
had paid $445,825 to Corporate Financial Enterprises, Inc. for investment
banking and consulting services.
9. EQUITY TRANSACTIONS
(a) Preferred Stock
The Series A-1 convertible redeemable preferred stock accrues dividends
at a rate of 12% per year, payable on a quarterly basis in shares of common
stock of the Company, commencing June 1, 1999. The Series A-1 12% convertible
redeemable preferred stock is convertible at any time after December 31, 2000,
at the option of the holder into shares of common stock at the rate of 10 shares
of common stock for each share of Series A-1 12% convertible redeemable
preferred stock. The Series A-1 12% convertible redeemable preferred stock is
redeemable at any time after January 1, 2000 at the option of the holder, at an
amount equal to $1.76, plus an amount equal to accrued and unpaid dividends, if
any, to (and including) the date fixed for redemption, whether or not earned or
declared.
The holders of Series A-1 12% convertible redeemable preferred stock
are entitled to ten votes for each share of Series A-1 12% convertible
redeemable preferred stock on all matters submitted to the stockholders of the
Company. With respect to matters affecting only the Series A-1 12% convertible
redeemable preferred stock, each share shall be entitled to one vote. The Series
A-1 12% convertible redeemable preferred stock is superior in right of payment
in the event of liquidation and with respect to dividends to the common stock of
the Company and any other stock ranking junior to the Series A-1 12% convertible
redeemable preferred stock. The liquidation value of the Series A-1 12%
convertible redeemable preferred stock is $1.53 per share plus any accrued and
unpaid dividends.
F-18
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
9. EQUITY TRANSACTIONS (continued)
In September 1999, we issued 3,267,974 shares of its Series A-1 12%
convertible redeemable preferred stock to certain investors including Corporate
Financial Enterprises, Inc., a related entity, in exchange for $5,000,000. As of
December 31, 1999, the Company received proceeds of $4,781,500 and a receivable
of $218,500 was recorded for the remaining proceeds. The preferred stock is
convertible anytime after December 31, 2000
(b) Common Stock
In November 1999, the Company issued 185,250 shares of restricted
common stock of the Company in exchange for 185,250 shares of phoneXchange, Inc.
restricted common stock
In November 1999, the Company sold 1,332,000 shares of its common stock
for a purchase price of $.75 per share to several overseas accredited investors.
The offering was made by the Company's management in compliance with Rule 504 of
Regulation D of the Securities Act of 1933, as amended. No commissions or other
remuneration was paid to anyone.
In October 1999, the Company issued 23,500 shares of its restricted
common stock in exchange for broker fees in connection to the Company's
acquisition of phoneXchange. The cost of the services in the amount of $142,763,
has been charged to operations and additional paid-in capital has been increased
by $142,528, representing the excess of the cost of the services over the par
value of the common stock issued.
In November 1999, the Company issued 1,000,000 shares of common stock
pursuant to a notice of conversion of 100,000 shares of Series A-1 12%
redeemable convertible preferred stock held by Corporate Financial Enterprises,
Inc., a related entity.
In September 1999, the Company issued 10,500 shares of restricted
common stock to three members of the Board of Directors of the Company as
compensation for services. Prepaid director fees are recognized to expense based
on the term of the Director. The balance of prepaid director fees as of December
31, 1999 was $35,500.
In September 1999, the Company sold 100,000 shares of its common stock
to Corporate Financial Enterprises, Inc., a related entity, for a purchase price
of $.75 per share in exchange for a receivable of $75,000.
In September 1999, the Company issued 921,428 shares of its common
stock to stockholders of phoneXchange. The Company acquired ownership of
approximately 85% of phoneXchange in exchange for its stock.
F-19
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
9. EQUITY TRANSACTIONS (continued)
In September 1999, the Company sold 41,000 shares of its common stock
to Corporate Financial Enterprises, Inc., a related entity, for a purchase price
of $.75 per share in exchange for a receivable of $30,750.
In May 1999, the Company issued 25,296 shares of restricted common
stock to pay off the remaining balance on a note due by its subsidiary in the
amount of $132,804
On May 8, 1998, Theatre, Inc., doing business as Global Access Pagers,
Inc., entered into an Agreement and Plan of Merger with Global Access Pagers,
Inc. The transaction relating to the merger was rescinded on January 1999.
Accordingly, 3,475,000 issued common shares of the surviving entity were
returned to the Company and cancelled.
In February 1999, the Company issued 441,600 shares of restricted
common stock for equipment and software.
(c) Warrants to Purchase Common Stock
In November 1999, in connection with the convertible debenture (Note
4(c)), the Company issued warrants to purchase 80,000 shares of the Company's
common stock at an exercise price of $12.50 per share and warrants to purchase
80,000 shares of the Company's common stock at an exercise price of $15.00 per
share. The warrants are exercisable until November 22, 2001. The Company also
issued warrants to purchase 200,000 shares of the Company's common stock at
exercise price of $13.75 per share and paid $500,000 in placement fees. The
warrants expire November 22, 2004.
In September 1999, the Company issued warrants to purchase 350,000
shares of common stock at an exercise price of $4.50 per share to Corporate
Financial Enterprises, Inc., a related entity. The warrants were granted in
exchange for consulting services and are exercisable for a term commencing
December 31, 2000 and expiring September 1, 2004.
In June 1999 the Company issued warrants to purchase 100,000 shares of
its common stock in exchange for consulting services. The warrants are
exercisable at a purchase price of $7.50 per share for a term of 18 months. The
warrants were subsequently cancelled in July 1999.
In February 1999, the Company issued warrants to purchase 921,428
shares of its common stock pursuant to the terms of the Stock Purchase Agreement
dated January 1, 1999, as amended on May 24, 1999, with phoneXchange, Inc. and
its stockholders. The warrants are exercisable anytime after December 31, 2000
and expire February 22, 2004 at a purchase price of $4.50 per share. See Note
(1(a))
In February 1999, the Company issued warrants to purchase 5,943,633
shares of its common stock exercisable anytime after December 31, 2000 at a
purchase price of $1.72 per share in connection with the sale of 3,267,974
shares of its Series A-1 12% convertible redeemable preferred stock to certain
investors including Corporate Financial Enterprises, Inc., a related entity, in
exchange for $5,000,000. The warrants expire February 22, 2004. See Note 9 (a)
F-20
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
9. EQUITY TRANSACTIONS (continued)
(d) Options to Purchase Common Stock
On July 22, 1999, the Board of Directors of the Company authorized the
grant of options to purchase up to 1,000,000 shares of the Company's common
stock at an exercise price of $3.375 to various employees. The options all vest
on grant and have a five-year term. The Company recorded compensation expense of
$2,250,000 for the year ended December 31, 1999.
Information regarding the Company's compensatory stock options since
inception, (January 16, 1997) and December 31, 1998 and 1999 and changes during
the years ended on those dates is summarized as follows:
Weighted-
Average
Shares Exercise Price
-------------- ---------------
January 16, 1997 (Inception)
Granted - $ -
Exercised - $ -
Forfeited - $ -
-------------- ---------------
December 31, 1998 - $ -
-------------- ---------------
Granted 1,000,000 $ 3.37
Exercised - $ -
Forfeited - $ -
-------------- ---------------
December 31, 1999 1,000,000 $ 3.37
============== ===============
Information about stock options outstanding at December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding
-----------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Outstanding Contracted Execise Exerciseable Execise
Range of Exercise Price at 12/31/99 Life Price at 12/31/99 Price
- ----------------------------- -------------- -------------- --------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
$ 3.37 1,000,000 4.6 $ 3.37 1,000,000 $ 3.37
</TABLE>
F-21
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
9. EQUITY TRANSACTIONS (continued)
The Company has determined that it will account for stock-based
compensation for employees under the intrinsic value-based method of the
Accounting Principles Board (APB) Opinion No. 25, "Accounting For Stock Issued
To Employees", and elect the disclosure-only alternative under SFAS No. 123. The
Company accounts for stock-based compensation for non-employees under the fair
value method prescribed by SFAS No. 123. To date there have been no grants to
non-employees. Under APB No. 25, the Company recognized compensation expense
relating to the issuance of compensatory stock options to certain employees in
the amount of $2,250,000 for the year ended December 31, 1999. Had the Company
recognized compensation expense consistent with the methodology of FASB No. 123,
the Company's net loss and basic and diluted net loss per share for the year
ended December 31, 1999 on a pro forma basis would have been as follows:
1999
Net Loss ------
As Reported $ (10,889,456)
Pro forma $ (13,394,368)
Basic and Diluted Net Loss Per Share
As Reported $ (3.29)
Pro forma $ (4.05)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions: expected volatility of 105%, risk-free interest rate of 5.77%,
expected life of five years for the options and no dividends would be issued
during the option term.
(e) Treasury stock
In August and September 1999, phoneXchange issued 17,364 shares of its
restricted common stock in exchange for 17,923 shares of restricted common stock
of the Company. The transaction was valued at the closing bid price of the
Company's common stock and has been recorded as treasury stock as of December
31, 1999.
10. BENEFIT PLAN
In September 1999, the Company adopted a qualified 401(k) retirement
plan under which employees may voluntarily contribute. All full-time employees
with ninety (90) days continuous service are eligible for participation in the
plan. The plan does not include company matching or discretionary contributions.
The plan may be modified at any time at the Company's discretion.
F-22
<PAGE>
INTEGRATED COMMUNICATION NETWORKS, INC. AND SUBSIDIARIES
(Formerly, Global Access Pagers, Inc.)
Notes to Audited Consolidated Financial Statements
December 31, 1999
11. SEGMENT AND GEOGRAPHIC INFORMATION
The Company has adopted SFAS No. 131, "Disclosures About Segments Of An
Enterprise And Related Information", in the fiscal year ended December 31, 1999.
SFAS No. 131 establishes standards for reporting information regarding operating
segments in annual financial statements and requires selected information for
those segments to be presented in interim financial reports issued to
stockholders. SFAS No. 131 also establishes standards for related disclosures
about products and services and geographic areas. Operating segments are
identified as components of an enterprise about which separate discrete
financial information is available for evaluation by the chief operating
decision maker, or decision-making group, in deciding how to allocate resources
and assess performance. The Company's chief decision-maker, as defined under
SFAS No. 131, is a combination of the Chief Executive Officer and the Chief
Financial Officer. To date, the Company has viewed its operations and manages
its business as principally one segment, long distance telecommunication
services. Associated services are not significant. As a result, the financial
information disclosed herein represents all of the material financial
information related to the Company's principal operating segment.
12. SUBSEQUENT EVENTS
On January 24, 2000, the Company purchased 1,000,000 shares of Series
A, 5% Convertible Preferred Stock, $.01 par value of OMNI Neutraceuticals, Inc.
for $1,000,000.
On March 1, 2000, the Company sold its interest in 1,000,000 shares of
Series A, 5% Convertible Preferred Stock, $.01 par value of OMNI
Neutraceuticals, Inc. for $325,000 in cash and a short term, non interest
bearing note receivable of $1,675,000 due at the end of each month commencing on
April 30, 2000 in the amount of $325,000 with the remaining payment of $375,000
due on August 30, 2000.
On January 5, 2000, the Company filed a Registrations Statement on Form
S-1 (Registration No. 333-94105) registering up to 13,675,061 shares of Common
Stock issuable upon conversion of certain securities of the Company. The Company
intends to use the proceeds, if any, for capital expenditures, working capital
and general corporate purposes.
F-23
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by us in
connection with the issuance and distribution of the securities being registered
hereunder. No expenses shall be borne by the Selling Stockholders.
All of the amounts shown are estimates, except for the SEC Registration
Fees.
SEC registration fee $ 37,165
Accounting fees and expenses 15,000
Legal fees and expenses 75,000
Blue Sky fees and expenses 10,000
NASDAQ SmallCap Listing fees 50,000
Transfer Agent fees 2,500
Miscellaneous expenses 2,335
----------
TOTAL $ 192,000
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.7502 of the Nevada Revised Statutes provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any litigation by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, against expenses,
including attorneys' fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with the action if he
acted in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. Any indemnification made under section 78.7502 must be determined
to be proper, on a case-by-case basis, by either our stockholders, a quorum of
our Board of Directors (excluding any directors named in the action) or by the
written opinion of our legal counsel.
Our articles of incorporation include a provision eliminating the
personal liability of our directors to the fullest extent permitted by the
General Corporation Law of the State of Nevada (the "GCLN"). In addition, our
articles of incorporation includes a provision indemnifying any and all persons
whom we have the power to indemnify under the GCLN from and against all
expenses, liabilities or other matters covered by the GCLN, including under
circumstances in which indemnification is otherwise discretionary. This
indemnification is not exclusive of any other rights and shall continue after
such person has ceased to be a director, officer, employee or agent. These
provisions do not affect the availability of equitable remedies for a breach of
duty of care, such as an action to enjoin or rescind a transaction involving a
breach of fiduciary duty. However, in certain circumstances equitable remedies
may not be available as a practical matter. While these provisions may be
amended or repealed in the future, only change would only have an effect on
liabilities arising after such change.
II-1
<PAGE>
We have entered in to Indemnity Agreements with each of Paul Hyde,
Albert Kashani, Joseph Vaughn-Perling, David Chadwick and Gary Killoran, as
agents. Under the terms of the Indemnity Agreements, we agree to hold harmless
and indemnify each agent to the fullest extent authorized or permitted by our
articles of incorporation and by the GCLN, as the same may be amended from time
tom time (but only to the extent that any amendment permits us to provide
broader indemnification rights than the articles of incorporation and the GCLN
permitted prior to such amendment).
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is information concerning the sale of equity securities
during the last fiscal year that were not registered under the Securities Act.
In each case any proceeds received were used for working capital purposes and to
finance the Company's network expansion.
<TABLE>
<CAPTION>
Date of Sale/ Consideration Exemption from
Purchaser Issuance Title and Amount of Securities Received Registration
- ------------------------- ------------ ------------------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
SEL Group 11/30/99 185,250 shares of restricted 185,250 shares of Section 4(2)
common stock phoneXchange
common stock
Rebecca, LLC 11/22/99 Warrants to purchase 80,000 $4,480,000(4) Section 4(2)
shares of common stock (1),
Warrants to purchase 80,000
shares of common stock (2),
4% Convertible Debentures (3)
May Davis Group, Inc. 11/22/99 Warrants to purchase 200,000 Placement agent Section 4(2)
shares of common stock (5) services
Henry & Monroe, LLC 10/29/99 23,500 shares of restricted Broker Services Section 4(2)
common stock
6 Accredited investors 10/7/99 1,332,000 shares of common stock $999,000 Regulation D
Section 504
Charles McGuirk 9/24/99 500 shares of restricted common Board of director Section 4(2)
stock services
Albert Kashani 9/11/99 5,000 shares of restricted common Board of director Section 4(2)
stock services
Joseph Vaughn-Perling 9/11/99 5,000 shares of restricted common Board of director Section 4(2)
stock services
American Equities, LLC, 9/11/99 3,267,974 shares of Series A-1 $5,000,000 (8) Section 4(2)
Corporate Financial 12% convertible redeemable
Enterprises, Inc., preferred stock (6) and Warrants
Jamie Mazur, Emily to purchase 5,943,633 shares of
Mazur, Jennifer Mazur common stock (7)
and Trent Mazur
II-2
<PAGE>
Corporate Financial 9/10/99 Warrants to purchase 350,000 Consulting services Section 4(2))
Enterprises, Inc. shares of common stock (9)
Corporate Financial 9/1/99 141,000 shares of restricted $105,750 receivable Section 4(2)
Enterprises, Inc common stock
FM Computer 5/27/99 25,296 shares of restricted Equipment Section 4(2)
Technologies, LLC common stock
phoneXchange 2/23/99 921,428 shares of common stock 85.14% interest in Section 4(2)
stockholders and Warrants to purchase phoneXchange, Inc.
921,428 shares of common stock common stock
(10)
J&W Ventures 2/3/99 441,600 shares of restricted Equipment Section 4(2)
common stock
</TABLE>
(1) Exercisable anytime commencing November 22, 1999 and expiring
November 22, 2001 at an exercise price of $12.50 per share.
(2) Exercisable anytime commencing November 22, 1999 and expiring
November 22, 2001 at an exercise price of $15.00 per share.
(3) Convertible anytime commencing April 1, 2000 into shares of common
stock based on a conversion price equal to 80% of the averaged three
lowest bid prices during the 20 trading days immediately prior to the
date of conversion, except that the conversion price cannot be higher
than $10.00 per share. The debentures automatically convert into
common stock on December 2, 2004.
(4) $5,000,000 less costs associated with the offering.
(5) Exercisable anytime commencing November 22, 1999 and expiring
November 22, 2004 at an exercise price of $13.75 per share.
(6) Convertible at any time after December 31, 2000 at the option of the
holder, into shares of common stock at a rate of 10 shares of common
stock for each share of Series A-1 12% convertible redeemable
preferred stock.
(7) Exercisable anytime commencing December 31, 2000 and expiring
February 22, 2004 at an exercise price of $1.72 per share.
(8) As of December 31, 1999, $4,781,500 had been paid, $218,500
receivable.
(9) Exercisable anytime commencing December 31, 2000 and expiring
September 1, 2004 at an exercise price of $4.50 per share.
(10) Exercisable anytime commencing December 31, 2000 and expiring
February 22, 2004 at an exercise price of $4.50 per share.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
3.1* Articles of Incorporation of Theatre, Inc. filed January 16, 1997
3.2* Certificate of Amendment of the Articles of Incorporation of Global
Access Pagers, Inc. filed February 10, 1999
3.3* Bylaws of Theatre, Inc.
4.1* Certificate of Designation of Series A Preferred Stock
4.2* Certificate of Designation of 12% convertible redeemable preferred
stock, Series A-1
4.3* Amendment to Certificate of Designation of 12% convertible redeemable
preferred stock, Series A-1
4.4* Form of Warrant Agreement
5.1** Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP
9.1+ Irrevocable Trust Agreement dated March 30, 2000, as amended, between a
stockholder of Integrated Communication Networks, Inc. and David
Chadwick, Trustee
9.2+ Irrevocable Trust Agreement dated March 30, 2000, as amended, between
certain stockholders of Integrated Communication Networks, Inc. and
David Chadwick, Trustee
10.1* Stock Purchase Agreement dated as of January 1, 1999 by and among
Global Access Pagers, Inc. and phoneXchange, Inc., David Chadwick,
James Rott, Paul Hyde and Gary Killoran
10.2* First Amendment to Stock Purchase Agreement by and among Global Access
Pagers, Inc. and phoneXchange, Inc., David Chadwick, James Rott, Paul
Hyde and Gary Killoran
10.3* Employment Agreement between the Company and David J. Chadwick
effective as of January 4, 1999
10.4* Employment Agreement between the Company and Gary L. Killoran effective
as of January 4, 1999
II-4
<PAGE>
10.5* Employment Agreement between the Company and James E. Rott effective as
of January 4, 1999
10.6* Employment Agreement between the Company and Paul E. Hyde effective as
of January 4, 1999
10.7* Employment Agreement between the Company and Thomas C. Scott effective
as of October 11, 1999
10.8* Master Lease Agreement with Lucent Technologies, Inc. InterNetworking
Systems dated July 30, 1999
10.9* Lease made as of April 23, 1999 between phoneXchange and CarrAmerica
Realty Corporation
10.10* Lease dated June 1, 1997 between Quinby Building, LLC and Global
Network Providers
10.11* Letter of Intent for Joint Venture Between Integrated Communication
Networks, Inc. and Global Industry Development & Trade Ltd. ("GIDT")
effective June 1, 1999
10.12* Form of 4% Convertible Debenture
10.13 Form of 1999 Stock Option Agreement, filed herewith
10.14 2000 Omnibus Stock Incentive Plan, filed herewith
11.1 Statement Re: Computation of Per Share Earnings (see Consolidated
Statement of Operations and Notes to Audited Consolidated Financial
Statements, I (m))
21.1 Subsidiaries, filed herewith
23.1 Consent of Jack Olesk, filed herewith
23.2 Consent of Brad Haynes, filed herewith
23.3 Consent of Mendoza, Berger and Company, LLP, filed herewith
27.1 Financial Data Schedule
* Filed as an exhibit to the Company's Registration Statement on Form
S-1(Registration No. 333-94105) on January 5, 2000 and incorporated by
reference herein.
** To be filed by amendment.
+ Filed as an exhibit to the Company's current report on Form 8-K filed
April 14, 2000 and incorporated by reference herein.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table on the effective registration statement;
(iii) Include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bonafide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business owner has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
II-6
<PAGE>
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the small
business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business owner in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the small business
issuer will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Aliso
Viejo, state of California, on May 11, 2000.
INTEGRATED COMMUNICATION NETWORKS, INC.
Date: May 11, 2000 /s/ DAVID J. CHADWICK
---------------------------------------
David J. Chadwick
President, Chief Executive Officer
and Chairman of the Board of
Directors
Date: May 11, 2000 /s/ GARY L. KILLORAN
---------------------------------------
Gary L. Killoran
Secretary, Treasurer, Chief Financial
Officer (principal accounting officer)
and Director
Date: May 11, 2000 /s/ PAUL E. HYDE
---------------------------------------
Paul E. Hyde
Vice President and Director
Date: May 11, 2000 /s/ RUSSELL J. HENSLEY
---------------------------------------
Russell J. Hensley
Director
II-7
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
3.1* Articles of Incorporation of Theatre, Inc. filed January 16, 1997
3.2* Certificate of Amendment of the Articles of Incorporation of Global
Access Pagers, Inc. filed February 10, 1999
3.3* Bylaws of Theatre, Inc.
4.1* Certificate of Designation of Series A Preferred Stock
4.2* Certificate of Designation of 12% convertible redeemable preferred
stock, Series A-1
4.3* Amendment to Certificate of Designation of 12% convertible redeemable
preferred stock, Series A-1
4.4* Form of Warrant Agreement
5.2** Opinion of Kaye, Scholer, Fierman, Hays & Handler, LLP
9.1+ Irrevocable Trust Agreement dated March 30, 2000, as amended, between a
stockholder of Integrated Communication Networks, Inc. and David
Chadwick, Trustee
9.2+ Irrevocable Trust Agreement dated March 30, 2000, as amended, between
certain stockholders of Integrated Communication Networks, Inc. and
David Chadwick, Trustee
10.1* Stock Purchase Agreement dated as of January 1, 1999 by and among
Global Access Pagers, Inc. and phoneXchange, Inc., David Chadwick,
James Rott, Paul Hyde and Gary Killoran
10.2* First Amendment to Stock Purchase Agreement by and among Global Access
Pagers, Inc. and phoneXchange, Inc., David Chadwick, James Rott, Paul
Hyde and Gary Killoran
10.3* Employment Agreement between the Company and David J. Chadwick
effective as of January 4, 1999
<PAGE>
10.4* Employment Agreement between the Company and Gary L. Killoran effective
as of January 4, 1999 10.5* Employment Agreement between the Company
and James E. Rott effective as of January 4, 1999
10.6* Employment Agreement between the Company and Paul E. Hyde effective as
of January 4, 1999
10.7* Employment Agreement between the Company and Thomas C. Scott effective
as of October 11, 1999
10.8* Master Lease Agreement with Lucent Technologies, Inc. InterNetworking
Systems dated July 30, 1999
10.9* Lease made as of April 23, 1999 between phoneXchange and CarrAmerica
Realty Corporation
10.10* Lease dated June 1, 1997 between Quinby Building, LLC and Global
Network Providers
10.11* Letter of Intent for Joint Venture Between Integrated Communication
Networks, Inc. and Global Industry Development & Trade Ltd. ("GIDT")
effective June 1, 1999
10.12* Form of 4% Convertible Debenture
10.13 Form of 1999 Stock Option Agreement, filed herewith
10.14 2000 Omnibus Stock Incentive Plan, filed herewith
11.1 Statement Re: Computation of Per Share Earnings (see Consolidated
Statement of Operations and Notes to Audited Consolidated Financial
Statements, I (m))
21.1 Subsidiaries, filed herewith
23.1 Consent of Jack Olesk, filed herewith
23.2 Consent of Brad Haynes, filed herewith
23.3 Consent of Mendoza, Berger and Company, LLP, filed herewith
27.1 Financial Data Schedule
* Filed as an exhibit to the Company's Registration Statement on Form
S-1(Registration No. 333-94105) on January 5, 2000 and incorporated by
reference herein.
** To be filed by amendment.
+ Filed as an exhibit to the Company's current report on Form 8-K filed
April 14, 2000 and incorporated by reference herein.
STOCK OPTION AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER (THE "1933 ACT"), AND MAY
NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO REGISTRATION UNDER OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT.
OPTION TO PURCHASE _______ SHARES OF
COMMON STOCK OF INTEGRATED COMMUNICATION NETWORKS, INC.
Exercisable Commencing July 22, 1999;
Void after July 22, 2004
THIS CERTIFIES that, for value received, ___________________ or its
assigns (the "Optionee") is entitled, subject to the terms and conditions set
forth in this option, the option to purchase from Integrated Communication
Networks, Inc., a Nevada corporation (the "Company"), _________ fully paid, duly
authorized and nonassessable shares (the "Shares"), of Common Stock, $.01 par
value per share, of the Company (the "Common Stock"), at any time commencing
July 22, 1999 and continuing up to 5:00 p.m. Los Angeles time on July 22, 1999
(the "Exercise Period") at an exercise price of $3.37 per share (the "Option").
This Option is subject to the following provisions, terms and
conditions:
Section 1. TRANSFERABILITY.
1.1 REGISTRATION. The Options shall be issued only in registered form.
1.2 TRANSFER. This Option shall be transferable only on the books of
the Company maintained at its principal executive offices upon surrender thereof
for registration of transfer duly endorsed by the Optionee or by its duly
authorized attorney or representative, or accompanied by proper evidence of
succession, assignment or authority to transfer. Upon any registration of
transfer, the Company shall execute and deliver a new Optoin or Options in
appropriate denominations to the person or persons entitled thereto.
1.3 COMMON STOCK TO BE ISSUED. Upon the exercise of any Option and upon
receipt by the Company of a facsimile or original of Optionee's duly filled in
and signed Election to Exercise (See Exhibit A), Company shall instruct its
transfer agent to issue stock certificates, subject to the restrictive legend
set forth below, in the name of Optionee (or its nominee) and in such
denominations to be specified by Optionee representing the number of shares of
Common Stock issuable upon such exercise, as applicable. Company warrants that
no instructions, other than these instructions, have been given or will be given
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to the transfer agent and that the Common Stock shall otherwise be freely
transferable on the books and records of the Company. It shall be the Company's
responsibility to take all necessary actions and to bear all such costs to issue
the certificate of Common Stock as provided herein, including the responsibility
and cost for delivery of an opinion letter to the transfer agent, if so
required. The person in whose name the certificate of Common Stock is to be
registered shall be treated as a shareholder of record on and after the exercise
date. Upon surrender of any Option that is to be converted in part, the Company
shall issue to the Optionee a new Option equal to the unconverted amount, if so
requested by Optionee. Certificates representing Common Stock issued upon
exercise of this Option will contain the following legend, if required by law:
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED, AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER (THE "1933 ACT"), AND MAY
NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO REGISTRATION UNDER OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE 1933 ACT.
Section 2. EXCHANGE OF OPTION CERTIFICATE. Any Option certificate may
be exchanged for another certificate or certificates of like tenor entitling the
Optionee to purchase a like aggregate number of Shares as the certificate or
certificates surrendered then entitle such Optionee to purchase. Any Optionee
desiring to exchange a Optoin certificate shall make such request in writing
delivered to the Company, and shall surrender, properly endorsed, the
certificate evidencing the Option to be so exchanged. Thereupon, the Company
shall execute and deliver to the person entitled thereto a new Option
certificate as so requested.
Section 3. TERMS OF THE OPTION: EXERCISE OF OPTION.
(a) Subject to the terms of this Agreement, the Optionholder shall have
the right, at any time and from time to time after July 22, 1999, until 5:00
p.m., Pacific Time, on July 22, 2004, to purchase from the Company up to the
number of fully paid and nonassessable shares to which the Optionee may at the
time be entitled to purchase pursuant to this Agreement, upon presentment to the
Company the Election to Exercise form attached hereto, duly filled out and
executed and accompanied with applicable payment in the aggregate amount equal
to the Exercise Price multiplied by the number of shares of Common Stock being
purchased. At the option of the Holder, payment of the Exercise Price may be
made either by (i) personal or business check payable to the order of the
Compajy (ii) surrender of certificates then held representing, or deduction from
the number of shares issuable upon exercise of the Option, of that number of
shares which has an aggregate Fair Value determined in accordance with this
Agreement on the date of exercise equal to the aggregate Exercise Price for all
shares to be purchased pursuant to the Option, (iii) by a promissory note
bearing interest at six percent (6%) per annum and payable in five equal annual
installments commencing on the first anniversary of the exercise of the Option,
or (iv) by any combination of the foregoing methods. Within five business days
of the Company's receipt of the Election to Exercise Form and the requisit
payment (if any), the Company shall issue and deliver (or cause to be delivered)
to the exercising holder stock certificates aggregating the number of shares of
the Option Agreement.
(b) Partial Exercise. In the event of a partial exercise of the Option,
the Company shall issue and deliver to the Holder a new Option at the same time
such stock certificates are delivered, which new Option shall entitle the Holder
to purchase the balance of the Exercise Quantity not purchased in that partial
exercise and shall otherwise be upon the same terms and provisions of the
Option.
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(c) Such exercise shall be effectuated by surrendering to the Company,
or its attorney, the Options to be converted together with a facsimile or
original of the duly filled in and signed Election to Exercise which evidences
Optionee's intention to exercise those Options indicated. The date on which the
Election to Exercise is effective ("Exercise Date") shall be deemed to be the
date on which the Optionee has delivered to the Company a facsimile or original
of the duly filled in and signed Election to Exercise, as long as the original
Options to be exercised are received by the Company or its designated attorney
within eight business days thereafter. As long as the Options to be exercised
are received by the Company within eight business days after it receives a
facsimile or original of the signed Election to Exercise, the Company shall
deliver to the Optionee, or per the Optionee's instructions, the shares of
Common Stock within three business days of receipt of the Options to be
converted.
(d) Nothing contained in this Option shall be deemed to establish or
require the payment of interest to the Optionee at a rate in excess of the
maximum rate permitted by governing law. In the event that the rate of interest
required to be paid exceeds the maximum rate permitted by governing law, the
rate of interest required to be paid thereunder shall be automatically reduced
to the maximum rate permitted under the governing law and such excess shall be
returned with reasonable promptness by the Optionee to the Company.
(e) The Company shall at all times reserve and have available all
Common Stock necessary to meet exercise of the Options by all Optionees of the
entire amount of Options then outstanding. If, at any time Optionee submits an
Election to Exercise and the Company does not have sufficient authorized but
unissued shares of Common Stock available to effect, in full, a exercise of the
Options (an "Exercise Default", the date of such default being referred to
herein as the "Exercise Default Date"), the Company shall issue to the Optionee
all of the shares of Common Stock which are available, and the Election to
Exercise as to any Options requested to be converted but not converted (the
"Unconverted Options"), upon Optionee's sole option, may be deemed null and
void. The Company shall provide notice of such Exercise Default ("Notice of
Exercise Default") to all existing Optionees of outstanding Options, by
facsimile, within two (2) business days of such default (with the original
delivered by overnight or two day courier), and the Optionee shall give notice
to the Company by facsimile within five business days of receipt of the original
Notice of Exercise Default (with the original delivered by overnight or two day
courier) of its election to either nullify or confirm the Election to Exercise.
(f) In the event the Optionee exercises its piggy-back registration
rights as set forth in Section 14 of this Option, the Company shall furnish to
Optionee such number of prospectuses and other documents incidental to the
registration of the Common Stock underlying the Options, including any amendment
of or supplements thereto.
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(g) Each person in whose name any certificate for shares of Common
Stock shall be issued shall for all purposes be deemed to have become the holder
of record of the Common Stock represented thereby on the date on which the
Option was surrendered and payment of the purchase price and any applicable
taxes was made, irrespective of date of issue or delivery of such certificate,
except that if the date of such surrender and payment is a date when the Common
Stock transfer books of the Company are closed, such person shall be deemed to
have become the holder of such Shares on the next succeeding date on which such
Share transfer books are open. The Company shall not close such Common Stock
transfer books at any one time for a period longer than seven days.
Section 4. PAYMENT OF TAXES. The Company shall pay all documentary
stamp taxes, if any, attributable to the initial issuance of the Common Stock;
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable, (i) with respect to any secondary transfer of this
Option or the Common Stock issuable upon exercise hereof or (ii) as a result of
the issuance of the Common Stock to any person other than the Optionee, and the
Company shall not be required to issue or deliver any certificate for any Common
Stock unless and until the person requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have produced evidence that
such tax has been paid to the appropriate taxing authority.
Section 5. MUTILATED OR MISSING OPTION. In case the certificate or
certificates evidencing this Option shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Optionee, issue and deliver
in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Option certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence satisfactory to the Company of such loss, theft or
destruction of such Option and of a bond of indemnity, if requested, also
satisfactory to the Company in form and amount, and issued at the applicant's
cost. Applicants for such substitute Option certificate shall also comply with
such other reasonable regulations and pay such other reasonable charges as the
Company may prescribe.
Section 6. RESERVATION OF SHARES. The issuance, sale and delivery of
the Option has been duly authorized by all required to take corporate action on
the part of the Company and when issued, sold and delivered in accordance with
the terms hereof for the consideration expressed herein, will be duly and
validly issued, fully paid, and non-assessable and enforceable in accordance
with their terms, subject to the laws of bankruptcy and creditors' rights
generally. The Company shall pay all taxes in respect of the issue thereof. As a
condition precedent to the taking of any action that would result in the
effective purchase price per share of Common Stock upon the exercise of this
Option being less than the par value per share (if such shares of Common Stock
then have a par value), the Company will take such corporate action as may, in
the opinion of its counsel, be necessary in order that the Company may comply
with all its obligations under this Agreement with regard to the exercise of
this Option.
Prior to exercise of all the Options, if at anytime exercise of all the
Options outstanding results in an insufficient number of shares of Common Stock
being available to cover exercise of this Option in full, then in such event,
the Company will move to call and hold a shareholder's meeting within thirty
(30) days of such event for the purpose of authorizing additional Shares to
cover exercise of this Option in full. In such an event the Company shall: (1)
recommend its current or future officers, directors and other control people to
vote their shares in favor of increasing the authorized number of shares of
Common Stock and (2) recommend to all shareholders to vote their shares in favor
of increasing the authorized number of shares of Common Stock to the extent
permitted by law. As for any shareholders who do not vote on the issue of
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increasing the authorized number of shares of Common Stock, such failure to vote
shall automatically be taken as a vote in favor of increasing the authorized
number of shares of Common Stock. The proxy sent out by the Company to all
shareholders shall provide that if no vote is received a consent to action will
be executed on behalf of those shares of Common Stock for which no vote was
received, in favor of increasing the authorized number of shares of Common Stock
of the Company to the extent permitted by law. Company represents and warrants
that under no circumstances will it deny or prevent Optionee from exercising the
Options as permitted under the terms of the Options and by law.
Section 7. OPTION PRICE. The price per Share (the "Option price") at
which Shares shall be purchasable upon the exercise of this Option shall be
$3.37, subject to adjustment pursuant to Section 8 hereof.
Section 8. ADJUSTMENT OF OPTION PRICE AND NUMBER OF SHARES. The number
and kind of securities purchasable upon the exercise of this Option and the
Option Price shall be subject to adjustment from time to time after the date
hereof upon the happening of certain events, as follows:
8.1 ADJUSTMENTS. The number of Shares purchasable upon the exercise of
this Option shall be subject to adjustments as follows:
(a) In case the Company shall (i) pay a dividend on Common Stock in
Common Stock or securities convertible into, exchangeable for or otherwise
entitling a holder thereof to receive Common Stock, (ii) declare a dividend
payable in cash on its Common Stock and at substantially the same time offer its
shareholders a right to purchase new Common Stock (or securities convertible
into, exchangeable for or other entitling a holder thereof to receive Common
Stock) from the proceeds of such dividend (all Common Stock so issued shall be
deemed to have been issued as a stock dividend), (iii) subdivide its outstanding
shares of Common Stock into a greater number of shares of Common Stock, (iv)
combine its outstanding shares of Common Stock into a smaller number of shares
of Common Stock, or (v) issue by reclassification of its Common Stock any shares
of Common Stock of the Company, the number of shares of Common Stock issuable
upon exercise of the Options immediately prior thereto shall be adjusted so that
the holders of the Options shall be entitled to receive after the happening of
any of the events described above that number and kind of shares as the holders
would have received had such Options been converted immediately prior to the
happening of such event or any record date with respect thereto. Any adjustment
made pursuant to this subdivision shall become effective immediately after the
close of business on the record date in the case of a stock dividend and shall
become effective immediately after the close of business on the effective date
in the case of a stock split, subdivision, combination or reclassification.
(b) In case the Company shall distribute, without receiving
consideration therefor, to all holders of its Common Stock evidences of its
indebtedness or assets (excluding cash dividends other than as described in
Section (8)(a)(ii)), then in such case, the number of shares of Common Stock
thereafter issuable upon exercise of the Options shall be determined by
multiplying the number of shares of Common Stock theretofore issuable upon
exercise of the Options, by a fraction, of which the numerator shall be the
closing bid price per share of Common Stock on the record date for such
distribution, and of which the denominator shall be the closing bid price of the
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Common Stock less the then fair value (as determined by the Board of Directors
of the Company, on the record date whose determination shall be conclusive) of
the portion of the assets or evidences of indebtedness so distributed 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.
(c) Any adjustment in the number of shares of Common Stock issuable
hereunder otherwise required to be made by this Section 8 will not have to be
adjusted if such adjustment would not require an increase or decrease of one
percent (1%) or less in the number of shares of Common Stock issuable upon
exercise of the Option. No adjustment in the number of Shares purchasable upon
exercise of this Option will be made for the issuance of shares of capital stock
to directors, employees or independent contractors pursuant to the Company's or
any of its subsidiaries' stock option, stock ownership or other benefit plans or
arrangements or trusts related thereto or for issuance of any shares of Common
Stock pursuant to any plan providing for the reinvestment of dividends or
interest payable on securities of the Company and the investment of additional
optional amounts in shares of Common Stock under such plan.
(d) Whenever the number of shares of Common Stock issuable upon the
exercise of the Options is adjusted, as herein provided the Option Price shall
be adjusted (to the nearest cent) by multiplying such Option Price immediately
prior to such adjustment by a fraction, of which the numerator shall be the
number of shares of Common Stock issuable upon the exercise of each share of the
Options immediately prior to such adjustment, and of which the denominator shall
be the number of shares of Common Stock issuable immediately thereafter.
(e) The Company from time to time by action of its Board of Directors
may decrease the Option Price by any amount for any period of time if the period
is at least 20 days, the decrease is irrevocable during the period and the Board
of Directors of the Company in its sole discretion shall have made a
determination that such decrease would be in the best interest of the Company,
which determination shall be conclusive. Whenever the Option Price is decreased
pursuant to the preceding sentence, the Company shall mail to holders of record
of the Options a notice of the decrease at least 15 days prior to the date the
decreased Option Price takes effect, and such notice shall state the decreased
Option Price and the period it will be in effect.
8.2 MERGERS. ETC. In the case of any (i) consolidation or merger of the
Company into any entity (other than a consolidation or merger that does not
result in any reclassification, exercise, exchange or cancellation of
outstanding shares of Common Stock of the Company), (ii) sale, transfer, lease
or conveyance of all or substantially all of the assets of the Company as an
entirety or substantially as an entirety, or (iii) reclassification, capital
reorganization or change of the Common Stock (other than solely a change in par
value, or from par value to no par value), in each case as a result of which
shares of Common Stock shall be converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
holder of Options then outstanding shall have the right thereafter to exercise
such Option only into the kind and amount of securities, cash and other property
receivable upon such consolidation, merger, sale, transfer, capital
reorganization or reclassification by a holder of the number of shares of Common
Stock of the Company into which such Options would have been converted
immediately prior to such consolidation, merger, sale, transfer, capital
reorganization or reclassification, assuming such holder of Common Stock of the
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Company (A) is not an entity with which the Company consolidated or into which
the Company merged or which merged into the Company or to which such sale or
transfer was made, as the case may be ("constituent entity"), or an affiliate of
a constituent entity, and (B) failed to exercise his or her rights of election,
if any, as to the kind or amount of securities, cash and other property
receivable upon such consolidation, merger, sale or transfer (provided that if
the kind or amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer is not the same for each share of Common
Stock of the Company held immediately prior to such consolidation, merger, sale
or transfer by other than a constituent entity or an affiliate thereof and in
respect of which such rights or election shall not have been exercised
("non-electing share"), then for the purpose of this Section 8.2 the kind and
amount of securities, cash and other property receivable upon such
consolidation, merger, sale or transfer by each non-electing share shall be
deemed to be the kind and amount so receivable per share by a plurality of the
non-electing shares). If necessary, appropriate adjustment shall be made in the
application of the provision set forth herein with respect to the rights and
interests thereafter of the holder of Options, to the end that the provisions
set forth herein shall thereafter correspondingly be made applicable, as nearly
as may reasonably be, in relation to any shares of stock or other securities or
property thereafter deliverable on the exercise of the Options. The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers, capital reorganizations and reclassifications. The Company shall not
effect any such consolidation, merger, sale or transfer unless prior to or
simultaneously with the consummation thereof the successor company or entity (if
other than the Company) resulting from such consolidation, merger, sale or
transfer assumes, by written instrument, the obligation to deliver to the holder
of Options such shares of stock, securities or assets as, in accordance with the
foregoing provision, such holder may be entitled to receive under this Section
8.2.
Section 8.3 STATEMENT OF OPTIONS. Irrespective of any adjustments in
the Option Price or the number or kind of shares purchasable upon the exercise
of this Option, this Option certificate or certificates hereafter issued may
continue to express the same price and number and kind of shares as are stated
in this Option.
Section 9. FRACTIONAL SHARES. Any fractional shares of Common Stock
issuable upon exercise of the Options shall be rounded to the nearest whole
share or, at the election of the Company, the Company shall pay the holder
thereof an amount in cash equal to the closing bid price thereof. Whether or not
fractional shares are issuable upon exercise shall be determined on the basis of
the total number of Options the holder is at the time exercising and the number
of shares of Common Stock issuable upon such exercise.
Section 10. NO RIGHTS AS STOCKHOLDERS: NOTICES TO OPTIONEES. Nothing
contained in this Option shall be construed as conferring upon the Optionee or
its transferees any rights as a stockholder of the Company, including the right
to vote, receive dividends, consent or receive notices as a stockholder with
respect to any meeting of stockholders for the election of directors of the
Company or any other matter. If, however, at any time prior to 5:00 p.m., Los
Angeles time, on July 22, 2004, (the "Expiration Time") and prior to the
exercise of this Option, any of the following events shall occur:
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(a) any action which would require an adjustment pursuant to Section
8.1; or
(b) a dissolution, liquidation or winding up of the Company or any
consolidation, merger or sale of its property, assets and business as an
entirety;
then in any one or more of said events, the Company shall give notice in writing
of such event to the Optionee at least 10 days prior to the date fixed as a
record date or the date of closing the transfer books for the determination of
the shareholders entitled to any relevant dividend, distribution, subscription
rights, or other rights or for the effective date of any dissolution,
liquidation of winding up or any merger, consolidation, or sale of substantially
all assets, but failure to mail or receive such notice or any defect therein or
in the mailing thereof shall not affect the validity of any such action taken.
Such notice shall specify such record date or the effective date, as the case
may be.
Section 11. SUCCESSORS. All the covenants and provisions of this Option
by or for the benefit of the Company or the Optionee shall bind and inure to the
benefit of their respective successors and permitted assigns hereunder.
Section 12. APPLICABLE LAW. This Option shall be construed and enforced
in accordance with and the rights of the parties shall be governed by the laws
of the State of California.
Section 13. BENEFITS OF THIS AGREEMENT. Nothing in this Option shall be
construed to give to any person or corporation other than the Company and the
Optionee any legal or equitable right, remedy or claim under this Option, and
this Option shall be for the sole and exclusive benefit of the Company and the
Optionee.
Section 14. PIGGY-BACK REGISTRATION RIGHTS. The Company agrees to
register the Common Stock underlying this Option in and when the Company decides
to file a registration statement for its common stock.
Section 15. DEFINITIONS.
"COMMON STOCK" shall mean (i) Common Stock, $.01 par value per share,
of the Company and (ii) any other security purchasable upon the exercise of this
Option upon the happening of certain events.
IN WITNESS WHEREOF, the parties have caused this Option to be duly
executed, all as of the day and year first above written.
INTEGRATED COMMUNICATION NETWORKS, INC.
By:_____________________________________
Chairman and CEO duly authorized
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EXHIBIT A
INTEGRATED COMMUNICATION NETWORKS, INC.
ELECTION TO EXERCISE
INTEGRATED COMMUNICATION NETWORKS, INC.
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the within Option for, and to purchase thereunder, _______shares
of Common Stock (the "Share") provided for therein, and requests that
certificates for the Shares be issued in the name of:*
Name:_____________________________________________________________
Address:__________________________________________________________
Social Security No._______________________________________________
or Tax ID Number:_________________________________________________
and, if such number of Shares shall not be all of the Shares purchasable under
the Option, that a new Option certificate for the balance of the Shares
purchasable under the within Option be registered in the name of the undersigned
Optionee or his Assignee* as indicated below and delivered to the address stated
below:
Dated:________, 19___
Name of Optioneer or
Assignee (Please Print)___________________________________________
Address:__________________________________________________________
Signature:________________________________________________________
Signature Guaranteed:_____________________________________________
Signature of Guarantor
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* The Option contains restrictions on sale, assignment or transfer.
** Note: The above signature must correspond with the name as written on the
face of this Option certificate in every particular, without alteration or
enlargement or any change whatever, unless this Option has been assigned.
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FORM OF ASSIGNMENT
------------------
(To be signed only upon assignment of Option)*
-------------------------------------------
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Name and Address of Assignee must be Printed or Typewritten)
the within Option, hereby irrevocably constituting and appointing
_________Attorney to transfer said Option on the books of the Company, with full
power of substitution in the premises.
Dated:______________, 19____
________________________________**
Signature of Registered Holder
Signature Guaranteed: ________________________________
Signature of Guarantor
- --------------------
* The underlying Option contains restrictions on sale, assignment or transfer.
** Note: The signature of this assignment must correspond with the name as it
appears upon the face of the Option in every particular, without alteration or
enlargement or any change whatever.
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INTEGRATED COMMUNICATION NETWORKS, INC.
2000 OMNIBUS STOCK INCENTIVE PLAN
The name of this plan is the Integrated Communications Networks, Inc. 2000
OMNIBUS Stock Incentive Plan (the "Plan"). The Plan was adopted by the Board on
April 17, 2000, subject to the approval of the stockholders of the Company,
which approval was obtained on May 3, 2000. The purpose of the Plan is to
promote the long-term success of the Company and the creation of stockholder
value by (a) encouraging Employees, Outside Directors and Consultants to focus
on critical long-range objectives, (b) encouraging the attraction and retention
of Employees, Outside Directors and Consultants with exceptional qualifications
and (c) linking Employees, Outside Directors and Consultants directly to
stockholder interests through increased stock ownership. The Plan seeks to
achieve this purpose by providing for Awards in the form of Restricted Shares,
Stock Units, Options (which may constitute incentive stock options or
nonstatutory stock options) or stock appreciation rights.
ARTICLE I
DEFINITIONS
The following terms shall have the meaning specified below, unless the context
clearly indicates otherwise.
TYPES OF AWARDS UNDER THE PLAN
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1.1 "AWARD" means any of the specific types of stock-based incentive
awards defined below.
1.2 "OPTION" means an option to acquire Common Stock granted under
Article III of the Plan.
1.3 "INCENTIVE STOCK OPTION" means an Option which conforms to the
applicable provisions of Section 422 of the Code and which is designated as an
Incentive Stock Option by the Administrator.
1.4 "NON-QUALIFIED STOCK OPTION" means an Option which is not an
Incentive Stock Option, including any Option determined by the Administrator not
to be an Incentive Stock Option.
1.5 "STOCK APPRECIATION RIGHT" means a stock appreciation right granted
under Article VIII of the Plan.
1.6 "RESTRICTED STOCK" means an award of Common Stock subject to
restrictions as provided in Article VI of the Plan.
1.7 "DEFERRED STOCK" means Common Stock awarded under Article VII of
the Plan.
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1.8 "PERFORMANCE AWARD" means a cash bonus, stock bonus or other
performance or incentive award that is paid in cash, Common Stock or a
combination of both, awarded under Article VII of the Plan.
1.9 "STOCK PAYMENT" means (i) a payment in the form of shares of Common
Stock, or (ii) an option or other right to purchase shares of Common Stock, as
part of a deferred compensation arrangement, made in lieu of all or any portion
of the compensation, including without limitation, salary, bonuses and
commissions, that would otherwise become payable to an Eligible Recipient in
cash, awarded under Article VII of the Plan.
1.10 "DIVIDEND EQUIVALENT" means a right to receive the equivalent
value (in cash or Common Stock) of dividends paid on the Common Stock, awarded
under Article VII of the Plan. Plan Participants
1.11 "ELIGIBLE RECIPIENT" means any officer, director, Employee,
Consultant or Advisor of the Company, any Subsidiary, any Parent Corporation of
the Company or any majority owned subsidiary of such Parent Corporation.
1.12 "PARTICIPANT" means any Eligible Recipient who has been granted an
Award under the Plan.
1.13 "EMPLOYEE" means any employee (as defined in accordance with
Section 3401(c) of the Code) of the Company, any Subsidiary, any Parent
Corporation of the Company or any majority owned subsidiary of such Parent
Corporation.
1.14 "CONSULTANT" has the meaning set forth in Rule 701 under the
Exchange Act.
1.15 "ADVISOR" has the meaning set forth in Rule 701 under the Exchange
Act.
1.16 "OPTIONEE" means any Participant who has been granted an Option
under the Plan. Administrative Definitions
1.17 "ADMINISTRATOR" means the Board, or if and to the extent the Board
does not administer the Plan, the Committee in accordance with Article IX.
1.18 "BOARD" means the Board of Directors of the Company.
1.19 "COMMITTEE" means the Compensation Committee of the Board, or
another committee of the Board appointed as provided in Section 9.1.
1.20 "COMPANY" means Integrated Communication Networks, Inc., a Nevada
corporation.
1.21 "SUBSIDIARY" means any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing 50 percent
or more of the total combined voting power of all classes of stock in one of the
other corporations in such chain.
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1.22 "PARENT CORPORATION" means any corporation in an unbroken chain of
corporations ending with the Company if each of the corporations in the chain
(other than the Company) then owns stock possessing 50 percent or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
1.23 "COMMON STOCK" means shares of the common stock, par value $0.01
per share, of the Company, and any other securities issuable in respect of or
exchangeable for such shares.
1.24 "FAIR MARKET VALUE" of a share of Common Stock as of a given date
shall be (i) the mean between the highest and lowest selling price of a share of
Common Stock on such date as reported on the principal exchange (including any
Nasdaq market) on which shares of Common Stock are then trading, or if shares
were not traded on such date, then on the closest preceding date on which a
trade occurred; or (ii) if the Common Stock is not traded on an exchange, the
mean between the closing representative bid and asked prices for the Common
Stock on such date as reported on any national quotation system, as determined
by the Administrator; or (iii) if the Common Stock is not publicly traded, the
Fair Market Value of a share of Common Stock on such date as established by the
Administrator acting in good faith. Statutory References.
1.25 "CODE" means the Internal Revenue Code of 1986, as amended from
time to time, or any successor thereto, or the rules and regulations thereunder.
1.26 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor thereto, or the rules and
regulations thereunder.
1.27 "QDRO" means any qualified domestic relations order as defined by
the Code or Title I of the Employee Retirement Income Security Act, of 1974, as
amended from time to time, or any successor thereto, or the rules and
regulations thereunder.
1.28 "RULE 16B-3" means that certain Rule 16b-3 under the Exchange Act,
as such Rule may be amended from time to time, or any successor thereto.
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ARTICLE II
SHARES SUBJECT TO PLAN; LIMITATIONS ON AWARDS; ADJUSTMENTS
2.1 NUMBER OF SHARES SUBJECT TO PLAN. The aggregate number of shares
issuable in connection with Awards under the Plan shall not exceed 3,000,000
shares of Common Stock, subject to adjustment as provided in Section 2.6. The
shares of Common Stock issuable under the Plan may be either previously
authorized but unissued shares or treasury shares.
2.2 SHARES SUBJECT TO UNEXERCISED OPTIONS OR FORFEITED AWARDS AVAILABLE
FOR RE-GRANT. To the extent that an Award expires or is otherwise terminated
without being exercised or vested, or is otherwise forfeited, the shares of
Common Stock subject to such Award shall again be available for issuance in
connection with future Awards under the Plan. If any shares of Common Stock have
been pledged as collateral for indebtedness incurred by a Participant in
connection with the exercise of an Option and such shares are returned to the
Company in satisfaction of such indebtedness, such shares shall again be
available for issuance in connection with future Awards under the Plan.
2.3 ANNUAL LIMITATION UNDER CODE SECTION 162(M). To the extent
applicable under Section 162(m) of the Code, the maximum number of shares which
may be subject to Awards granted under the Plan to any individual in any
calendar year shall not exceed 1,000,000. To the extent required by Section
162(m) of the Code, shares subject to canceled or forfeited Awards shall
continue to be counted against such limitation.
2.4 CHANGES IN COMMON STOCK OR ASSETS OF THE COMPANY. In the event that
the outstanding shares of Common Stock are hereafter changed into or exchanged
for cash or a different number or kind of shares or other securities of the
Company, or of another corporation, by reason of reorganization, merger,
consolidation, recapitalization, reclassification, stock splitup, stock
dividend, combination of shares or other change in the Common Stock, or in the
event of a "spin-off" or other distribution of assets of the Company having a
material effect on the Fair Market Value of the Common Stock, appropriate
adjustments shall be made by the Administrator, in its absolute discretion, in
(i) the aggregate number of shares reserved for issuance under the Plan, and
(ii) the number, kind and exercise or purchase price of shares issuable in
respect of outstanding Awards under the Plan. In addition, as applicable,
appropriate adjustments shall be made to the limitations set forth in this
Article II. In connection with any event described in this paragraph, the
Administrator may provide, in its absolute discretion, for the cancellation of
any outstanding Awards and payment in cash, securities or other property
therefor.
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ARTICLE III
GRANTING OF OPTIONS
3.1 ELIGIBILITY. Any Eligible Recipient may be granted an Option, but
only Employees of the Company, a Subsidiary of the Company or a Parent
Corporation of the Company may be granted an Incentive Stock Option.
3.2 GRANTING OF OPTIONS.
(a) The Administrator shall from time to time, in its absolute
discretion:
(i) Select which Eligible Participants shall be granted
Options;
(ii) Determine the number of shares subject to each Option and
its exercise price and vesting schedule;
(iii) Determine whether the Option is to be an Incentive Stock
Option or a Non-Qualified Stock Option; and
(iv) Determine the other terms and conditions of the Option,
consistent with the Plan, including the effect of the termination of employment
or service of a Participant and the effect, if any, of a change in control of
the Company. (b) The Administrator shall instruct the Secretary of the Company
to issue such Options and may impose such conditions on the grant of such
Options as it deems appropriate. Without limiting the generality of the
preceding sentence, the Administrator may, in its discretion and on such terms
as it deems appropriate, require as a condition on the grant of an Option that
the Optionee surrender for cancellation some or all of the Awards previously
granted to the Optionee under this Plan or otherwise. An Option, the grant of
which is conditioned upon such surrender, may have an option price lower (or
higher) than the exercise price of such surrendered Option or other Award, may
cover the same (or a lesser or greater) number of shares as such surrendered
Option or other Award, may contain such other terms as the Administrator deems
appropriate, and shall be exercisable in accordance with its terms, without
regard to the number of shares, price, exercise period or any other term or
condition of such surrendered Option or other Award.
3.3 SPECIAL RULES APPLICABLE TO INCENTIVE STOCK OPTIONS.
(a) Only Employees of the Company, a Subsidiary of the Company or a
Parent Corporation of the Company may be granted an Incentive Stock Option.
(b) No person may be granted an Incentive Stock Option under this Plan
if such person, at the time the Incentive Stock Option is granted, owns stock
possessing more than ten percent (10%) of the total combined voting power of all
classes of stock of the Company or any then existing Subsidiary or Parent
Corporation unless such Incentive Stock Option conforms to the applicable
provisions of Section 422 of the Code.
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(c) Any Incentive Stock Option granted under the Plan may be modified
by the Administrator at any time and in its absolute discretion to disqualify
such Option from treatment as an "incentive stock option" under Section 422 of
the Code.
(d) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422 of
the Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an Optionee during any calendar year (under the Plan and all
other incentive stock option plans of the Company and any Subsidiary or Parent
Corporation) exceeds $100,000, such Options shall be treated as Non-Qualified
Options to the extent required by Section 422 of the Code. The rule set forth in
the preceding sentence shall be applied by taking Options into account in the
order in which they were granted. For purposes of this Section 3.3(d), the Fair
Market Value of such stock shall be determined as of the time the Option with
respect to such stock is granted.
ARTICLE IV
TERMS AND CONDITIONS OF OPTIONS
4.1 OPTION AGREEMENT. Each Option shall be evidenced by a written stock
option agreement, which shall be executed by the Optionee and an authorized
officer of the Company and which shall contain such terms and conditions as the
Administrator shall determine, consistent with the Plan.
4.2 OPTION PRICE. The price per share of the shares subject to each
Option shall be set by the Administrator; provided, however, that (i) such price
shall be no less than the par value, if any, of a share of Common Stock, (ii)
such price shall be no less than the minimum price, if any, required from time
to time under applicable Blue Sky Laws (currently, under California law, in
general, 85% of the "fair value" of the Common Stock on the date of grant, but
110% of the fair value in the case of Optionees holding 10% or more of the
voting power of all classes of stock of the Company or its Subsidiaries or
Parent Corporations), and (iii) in the case of Options intended to qualify as
Incentive Stock Options or as performance-based compensation as described in
Section 162(m)(4)(C) of the Code such price shall, to the extent required by law
at the time of grant, be no less than 100% of the Fair Market Value of a share
of Common Stock on the date the Option is granted (110% of the Fair Market Value
of a share of Common Stock on the date an Incentive Stock Option is granted in
the case of an individual then owning (within the meaning of Section 424(d) of
the Code) more than 10% of the total combined voting power of all classes of
stock of the Company or any Subsidiary or Parent Corporation).
4.3 OPTION TERM. The term of an Option shall be set by the
Administrator in its discretion; provided, however, that, in the case of
Incentive Stock Options or any Option subject to applicable Blue Sky Laws, the
term shall not be more than ten (10) years from the date the Option is granted,
or five (5) years from such date if an Incentive Stock Option is granted to an
individual then owning (within the meaning of Section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of stock of the
Company or any Subsidiary or Parent Corporation.
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4.4 OPTION VESTING AND EXERCISABILITY. Options shall be exercisable at
such time or times and subject to such terms and conditions as shall be
determined by the Administrator at or after grant. The Administrator may
provide, in its discretion, that any Option shall be exercisable only in
installments, and the Administrator may waive such installment exercise
provisions at any time in whole or in part based on such factors as the
Administrator may determine, in its sole discretion, including but not limited
to in connection with any "change in control" of the Company, as defined in any
stock option agreement. Notwithstanding the foregoing, to the extent required by
applicable Blue Sky Laws, the minimum vesting schedule shall be at the rate of
no less than 20% per year over five years from the date of grant.
4.5 EFFECT OF TERMINATION OF EMPLOYMENT. The Administrator shall
determine the extent, if any, to which an Option may be exercisable following
the termination of employment or service of a Participant under any
circumstances.
ARTICLE V
EXERCISE OF OPTIONS
5.1 PARTIAL EXERCISE. An exercisable Option may be exercised in whole
or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Administrator may require that a partial exercise be
with respect to a minimum number of shares.
5.2 MANNER OF EXERCISE. All or a portion of an exercisable Option shall
be deemed exercised upon delivery of all of the following to the Secretary of
the Company or the Secretary's office:
(a) A written notice complying with the applicable rules established by
the Administrator stating that the Option, or a portion thereof, is to be
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion;
(b) Such representations and documents as the Administrator, in its
absolute discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any other
federal or state securities laws or regulations. The Administrator may, in its
absolute discretion, also take whatever additional actions it deems appropriate
to effect such compliance including, without limitation, placing legends on
share certificates and issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to Section
10.1 by any person or persons other than the Optionee, appropriate proof of the
right of such person or persons to exercise the Option; and
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(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised. However, at
the discretion of the Administrator, the terms of the Option may (i) allow a
delay in payment up to thirty (30) days from the date the Option, or portion
thereof, is exercised; (ii) allow payment, in whole or in part, through the
delivery of shares of Common Stock owned by the Optionee for at least six months
prior to the date of delivery, duly endorsed for transfer to the Company, having
a Fair Market Value on the date of delivery equal to the aggregate exercise
price of the Option or exercised portion thereof; (iii) allow payment, in whole
or in part, of the aggregate exercise price of the Option or exercised portion
thereof through a broker or other cashless exercise procedure;(iv) allow
payment, in whole or in part, through the delivery of property of any kind which
constitutes good and valuable consideration; (v) allow payment, in whole or in
part, to the extent permitted by law, through delivery of a promissory note
payable upon such terms and conditions as may be prescribed by the Administrator
in its absolute discretion; or (vi) allow payment through any combination of the
foregoing. In the case of a promissory note, the Administrator shall prescribe
the form of such note, the extent to which the note shall be recourse against
the Optionee, the security to be given for such note (and the terms of any
related pledge agreement), the rate of interest, if any, that the note shall
bear, and the schedule of payments of principal and interest on the note. Any
such note or loan shall comply with all applicable laws, regulations and rules
of the Board of Governors of the Federal Reserve System and any other
governmental agency having jurisdiction.
5.3 CONDITIONS TO ISSUANCE OF STOCK CERTIFICATE. The Company shall not
be required to issue or deliver any certificate or certificates for shares of
stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations of
the Securities and Exchange Commission or any other governmental regulatory body
which the Administrator shall, in its absolute discretion, deem necessary or
advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Administrator shall, in its absolute
discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the exercise
of the Option as the Administrator may establish from time to time for reasons
of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax. [what are our tax
requirement]
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5.4 RIGHTS AS STOCKHOLDERS. The holders of Options shall not be, nor
have any of the rights or privileges of, stockholders of the Company in respect
of any shares purchasable upon the exercise of an Option unless and until
certificates representing such shares have been issued by the Company to such
holders.
5.5 OWNERSHIP AND TRANSFER RESTRICTIONS. The Administrator, in its
absolute discretion, may impose such restrictions on the ownership and
transferability of the shares purchasable upon the exercise of an Option as it
deems appropriate. Any such restriction shall be set forth in the respective
stock option agreement and may be referred to on the certificates evidencing
such shares.
ARTICLE VI
AWARD OF RESTRICTED STOCK
6.1 AWARD OF RESTRICTED STOCK. The Administrator shall from time to
time, in its absolute discretion, select which Eligible Recipients shall be
awarded Restricted Stock, and determine the purchase price, if any, and other
terms and conditions applicable to such Restricted Stock, consistent with the
Plan. The Administrator shall instruct the Secretary of the Company to issue
such Restricted Stock and may impose such conditions on the issuance of such
Restricted Stock as it deems appropriate.
6.2 RESTRICTED STOCK AGREEMENT. Restricted Stock shall be issued only
pursuant to a written restricted stock agreement, which shall be executed by the
Participant and an authorized officer of the Company and which shall contain
such terms and conditions as the Administrator shall determine, consistent with
this Plan.
6.3 RIGHTS AS STOCKHOLDERS. Upon delivery of the shares of Restricted
Stock to the escrow holder pursuant to Section 6.5, the Participant shall have,
unless otherwise provided by the Administrator, all the rights of a stockholder
with respect to said shares, subject to the restrictions in the restricted stock
agreement, including the right to receive all dividends and other distributions
paid or made with respect to the shares; provided, however, that in the
discretion of the Administrator, any extraordinary distributions with respect to
the Common Stock shall be subject to the restrictions set forth in Section 6.4.
6.4 RESTRICTIONS. All shares of Restricted Stock issued under the Plan
(including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall be subject to such restrictions as the Administrator
shall provide in the restricted stock agreement, which restrictions may include,
without limitation, restrictions concerning voting rights and transferability
and restrictions based on duration of employment with the Company, Company
performance and individual performance; provided, however, that by a resolution
adopted after the Restricted Stock is issued, the Administrator may, on such
terms and conditions as it may determine to be appropriate, remove any or all of
the restrictions imposed by the terms of the restricted stock agreement.
Restricted Stock may not be sold or encumbered until all restrictions are
terminated or expire.
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6.5 ESCROW. The Secretary of the Company or such other escrow holder as
the Administrator may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
restricted stock agreement with respect to the shares evidenced by such
certificate expire or shall have been removed.
6.6 LEGEND. In order to enforce the restrictions imposed upon shares of
Restricted Stock hereunder, the Administrator shall cause a legend or legends to
be placed on certificates representing all shares of Restricted Stock subject to
restrictions under restricted stock agreements, which legend or legends shall
make appropriate reference to the conditions imposed thereby.
ARTICLE VII
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS,
DEFERRED STOCK, STOCK PAYMENTS
7.1 PERFORMANCE AWARDS. Any Eligible Recipient selected by the
Administrator may be granted one or more Performance Awards. The value of such
Performance Awards may be linked to the market value, book value, net profits or
other measure of the value of the Common Stock or other specific performance
criteria determined by the Administrator.
7.2 DIVIDEND EQUIVALENTS. Any Eligible Recipient selected by the
Administrator may be granted Dividend Equivalents based on the dividends
declared on the Common Stock during the period between the date an Award is
granted and the date such Award is exercised, vests or expires, as determined by
the Administrator. Such Dividend Equivalents shall be converted to cash or
additional shares of Common Stock by such formula and at such time and subject
to such limitations as may be determined by the Administrator.
7.3 STOCK PAYMENTS. Any Eligible Recipient selected by the
Administrator may receive Stock Payments in the manner determined from time to
time by the Administrator. The number of shares shall be determined by the
Administrator and may be based upon the Fair Market Value, book value, net
profits or other measure of the value of Common Stock or other specific
performance criteria determined by the Administrator.
7.4 DEFERRED STOCK. Any Eligible Recipient selected by the
Administrator may be granted an award of Deferred Stock in the manner determined
from time to time by the Administrator. The number of shares of Deferred Stock
shall be determined by the Administrator and may be linked to the market value,
book value, net profits or other measure of the value of the Common Stock or
other specific performance criteria determined by the Administrator. Common
Stock underlying a Deferred Stock award will not be issued until the Deferred
Stock award has vested, pursuant to a vesting schedule or performance criteria
set by the Administrator. Unless otherwise provided by the Administrator, a
Participant shall have no rights as a Company stockholder with respect to such
Deferred Stock until such time as the award has vested and the Common Stock
underlying the award has been issued.
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7.5 PERFORMANCE AWARD AGREEMENT, DIVIDEND EQUIVALENT AGREEMENT,
DEFERRED STOCK AGREEMENT, STOCK PAYMENT AGREEMENT. Each Performance Award,
Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be
evidenced by a written agreement, which shall be executed by the Participant and
an authorized officer of the Company and contain such terms and conditions as
the Administrator shall determine, consistent with the Plan.
7.6 TERM. The term of a Performance Award, Dividend Equivalent, award
of Deferred Stock and/or Stock Payment shall be set by the Administrator in its
discretion.
7.7 PAYMENT ON EXERCISE. Payment of the amount determined under Section
7.1 or 7.2 above shall be in cash, in Common Stock or a combination of both, as
determined by the Administrator. To the extent any payment under this Article
VII is made in Common Stock, it shall be made subject to satisfaction of all
provisions of Section 5.3.
ARTICLE VIII
STOCK APPRECIATION RIGHTS
8.1 GRANT OF STOCK APPRECIATION RIGHTS. Any Eligible Recipient selected
by the Administrator may be granted one or more Stock Appreciation Rights. A
Stock Appreciation Right may be granted (i) in connection and simultaneously
with the grant of an Option, (ii) with respect to a previously granted Option,
or (iii) independent of an Option. A Stock Appreciation Right shall be subject
to such terms and conditions not inconsistent with the Plan as the Administrator
shall impose, and shall be evidenced by a written stock appreciation right
agreement, which shall be executed by the Participant and an authorized officer
of the Company. Without limiting the generality of the preceding sentence, the
Administrator may, in its discretion and on such terms as it deems appropriate,
require as a condition of the grant of a Stock Appreciation Right that a
Participant surrender for cancellation some or all of the unexercised Awards or
other rights which have been previously granted to the Participant under this
Plan or otherwise. A Stock Appreciation Right, the grant of which is conditioned
upon such surrender, may have an exercise price lower (or higher) than the
exercise price of the surrendered Award, may cover the same (or a lesser or
greater) number of shares as such surrendered Award, may contain such other
terms as the Administrator deems appropriate, and shall be exercisable in
accordance with its terms, without regard to the number of shares, price,
exercise period or any other term or condition of such surrendered Award.
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8.2 COUPLED STOCK APPRECIATION RIGHTS.
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a
particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
(b) A CSAR may be granted to a Participant for no more than the number
of shares subject to the Option to which it is coupled.
(c) A CSAR shall entitle the Participant (or other person entitled to
exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying (i) the excess of the Fair
Market Value of a share of Common Stock on the date of exercise of the CSAR over
the Option exercise price, by (ii) the number of shares of Common Stock with
respect to which the CSAR shall have been exercised, subject to any limitations
the Administrator may impose.
8.3 INDEPENDENT STOCK APPRECIATION RIGHTS.
(a) An Independent Stock Appreciation Right ("ISAR") shall be unrelated
to any Option and shall have a term set by the Administrator. An ISAR shall be
exercisable in such installments as the Administrator may determine. An ISAR
shall cover such number of Shares of Common Stock as the Committee may
determine. The exercise price per share of Common Stock subject to each ISAR
shall be set by the Administrator.
(b) An ISAR shall entitle the Participant (or other person entitled to
exercise the ISAR pursuant to this Plan) to exercise all or a specified portion
of the ISAR (to the extent then exercisable pursuant to its terms) and to
receive from the Company an amount determined by multiplying (i) the excess of
the Fair Market Value of a share of Common Stock on the date of exercise of the
ISAR over the exercise price of the ISAR, by (ii) the number of shares of Common
Stock with respect to which the ISAR shall have been exercised, subject to any
limitations the Administrator may impose.
8.4 PAYMENT AND LIMITATIONS ON EXERCISE. Payment of the amount
determined under Section 8.2(c) and 8.3(b) above shall be in cash, in Common
Stock (based on its Fair Market Value as of the date the Stock Appreciation
Right is exercised) or a combination of both, as determined by the
Administrator. To the extent such payment is effected in Common Stock it shall
be made subject to satisfaction of all provisions of Section 5.3 hereinabove.
ARTICLE IX
ADMINISTRATION
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9.1 COMPENSATION COMMITTEE. The Compensation Committee (or a
subcommittee of the Board assuming the functions of the Committee under the
Plan) shall consist of two or more Directors appointed by and holding office at
the pleasure of the Board. To the extent applicable, the members of the
Committee shall each be a "Non-Employee Director" as defined under Rule 16b-3
and an "outside director" as defined under Section 162(m) of the Code.
Appointment of Committee members shall be effective upon acceptance of
appointment. Committee members may resign at any time by delivering written
notice to the Board. Vacancies in the Committee may be filled by the Board.
9.2 DUTIES AND POWERS OF ADMINISTRATOR. It shall be the duty of the
Administrator to conduct the general administration of this Plan in accordance
with its provisions. The Administrator shall have the power to interpret this
Plan and the agreements pursuant to which Awards are made, and to adopt such
rules for the administration, interpretation, and application of this Plan as
are consistent therewith and to interpret, amend or revoke any such rules. The
Administrator shall have the power, consistent with the terms of the Plan, to
establish the terms and conditions of each Award under the Plan, including
without limitation (i) the effect of the termination of employment or service of
a Participant under any circumstances and (ii) the effect, if any, of a change
in control of the Company on such Award. Awards under this Plan need not be the
same with respect to each Participant. Any such interpretations and rules with
respect to Incentive Stock Options shall be consistent with the provisions of
Section 422 of the Code. In its absolute discretion, the Board may at any time
and from time to time exercise any and all rights and duties of the Committee
under this Plan except with respect to matters which under Rule 16b-3 or Section
162(m) of the Code, or any regulations or rules issued thereunder, are required
to be determined in the sole discretion of the Committee.
9.3 MAJORITY RULE. The Administrator shall act by a majority of its
members in attendance at a meeting at which a quorum is present or by a
memorandum or other written instrument signed by all members of the
Administrator.
9.4 COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS. Members
of the Board or Committee shall receive such compensation for their services as
may be determined by the Board. All expenses and liabilities which Board or
Committee members incur in connection with the administration of the Plan shall
be borne by the Company. The Administrator may, with the approval of the Board,
employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Administrator, the Company and the Company's officers and directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Administrator in good faith shall be final and binding upon all
Participants, the Company and all other interested persons. No members of the
Board or Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or Awards granted
under the Plan, and all members of the Board or Committee shall be fully
protected and indemnified by the Company in respect of any such action,
determination or interpretation.
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ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 NOT TRANSFERABLE. Except as may otherwise be authorized in writing
by the Administrator in accordance with applicable law, Awards granted under the
Plan may not be sold, pledged, assigned, or transferred in any manner other than
by will or the laws of descent and distribution, unless and until such Awards
have been exercised, or the shares underlying such Awards have been issued, and
all restrictions applicable to such shares have lapsed. No Award or interest or
right therein shall be liable for the debts, contracts or engagements of any
Participant or his or her successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment or
any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect; provided
however, that this Section 10.1 shall not prevent (i) transfers by will or by
the applicable laws of descent and distribution, (ii) the designation of a
beneficiary to exercise any Option or other right or Award (or any portion
thereof) granted under the Plan after the Participant's death, or (iii)
transfers to a Participant's alternate payee pursuant to a QDRO. During the
lifetime of the Participant, only the Participant or an alternate payee under a
QDRO may exercise an Option or other right or Award (or any portion thereof)
granted under the Plan. After the death of the Participant, any exercisable
portion of an Option or other right or Award may, subject to the terms of such
Award, be exercised by the Participant's personal representative or by any
person empowered to do so under the Participant's beneficiary designation, will
or living trust or under the then applicable laws of descent and distribution.
10.2 AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. The Plan shall
terminate on the tenth anniversary of the Board's adoption of the Plan. The Plan
may be wholly or partially amended or otherwise modified, suspended or
terminated at any time or from time to time by the Administrator. Shareholder
approval shall be required as a condition of such action only (i) to increase
the limits on the number of shares that may be issued under the Plan pursuant to
Section 2.1 (but only to the extent required by applicable law, regulation or
rule), (ii) to amend the limitation on annual grants under Section 2.5
(excepting in each case adjustments made pursuant to Section 2.6), or (iii) as
otherwise required by applicable law, regulation or rule. No amendment,
suspension or termination of the Plan shall, without the consent of the holder,
alter or impair any rights or obligations under any outstanding Award, unless
the Plan or the Award Agreement otherwise expressly so provides. No Awards may
be granted during any period of suspension or after termination of the Plan.
10.3 TAX WITHHOLDING. The Company shall be entitled to require payment
in cash or deduction from other compensation payable to each Participant of any
sums required by federal, state or local tax law to be withheld with respect to
the issuance, vesting or exercise of any Award. The Administrator may in its
discretion and in satisfaction of the foregoing requirement allow such
Participant to elect to have the Company withhold shares of Common Stock (or
allow the return of shares of Common Stock) having a Fair Market Value equal to
the sums required to be withheld.
14
<PAGE>
10.4 LOAN. The Administrator may, in its discretion, extend one or more
loans in connection with the exercise or receipt of an Award granted under the
Plan. The terms and conditions of any such loan shall be set by the
Administrator in its sole discretion.
10.5 LIMITATIONS APPLICABLE TO SECTION 16 PERSONS AND PERFORMANCE-BASED
COMPENSATION. Except as otherwise determined by the Administrator, any Award to
a Participant subject to Section 16 of the Exchange Act shall be subject to any
additional requirements set forth in any applicable rule under Section 16 of the
Exchange Act to the extent necessary to qualify the Award for an applicable
exemption, and the Plan shall be deemed amended to the extent necessary to
conform to such requirements. Furthermore, any Award intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
shall be subject to any additional limitations set forth in Section 162(m) of
the Code or any regulations or rulings issued thereunder that are requirements
for qualification as performance-based compensation as described in Section
162(m)(4)(C) of the Code, and the Plan shall be deemed amended to the extent
necessary to conform to such requirements.
10.6 EFFECT OF PLAN UPON OPTIONS AND COMPENSATION PLANS. The adoption
of the Plan shall not affect any other compensation or incentive plans in effect
for the Company or any Subsidiary or Parent Corporation. Nothing in the Plan
shall be construed to limit the right of the Company (i) to establish any other
forms of incentives or compensation for employees of the Company or any
Subsidiary or (ii) to grant or assume options or other rights otherwise than
under this Plan in connection with any proper corporate purpose, including but
not by way of limitation, the grant or assumption of options in connection with
the acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, firm or association.
10.7 COMPLIANCE WITH LAWS. The Plan, the granting and vesting of Awards
under the Plan and the issuance and delivery of shares of Common Stock and the
payment of money under the Plan or under Awards granted hereunder are subject to
compliance with all applicable federal and state laws, rules and regulations
(including but not limited to state and federal securities law and federal
margin requirements) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the Company, be
necessary or advisable in connection therewith. Any securities delivered under
this Plan shall be subject to such restrictions, and the person acquiring such
securities shall, if requested by the Company, provide such assurances and
representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal requirements. To the extent
permitted by applicable law, the Plan and Awards granted hereunder shall be
deemed amended to the extent necessary to conform to such laws, rules and
regulations.
15
<PAGE>
10.8 UNFUNDED STATUS OF THE PLAN. The Plan is intended to constitute an
"unfunded" plan for incentive compensation. With respect to any payments not yet
made to a Participant by the Company, nothing contained herein shall give any
Participant any rights greater than those of a general creditor of the Company.
10.9 TITLES. Titles are provided herein for convenience only and are
not to serve as a basis for interpretation or construction of the Plan.
10.10 GOVERNING LAW. The Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Nevada without regard to conflicts of laws thereof.
I hereby certify that the foregoing Plan was duly adopted by the Board of
Directors of Integrated Communication Networks, Inc., on April 17, 2000.
Executed on this 17thday of April, 2000.
/s/ David J. Chadwick
--------------------------------
Name: David J. Chadwick
Title: President and CEO
Integrated Communication Networks, Inc.
Subsidiaries
May 11, 2000
phoneXchange, Inc.
Internet Call Centers, Inc.
C3.com, Inc.
INDEPENDENT AUDITOR'S CONSENT
I consent to the use in this Registration Statement of Integrated Communication
Networks, Inc., on Amendment No. 1 to Form S-1 of my report dated February 3,
1999 appearing in the Prospectus, which is part of this Registration Statement,
and of my report dated February 3, 1999 relating to the financial statement
schedules appearing elsewhere in this Registration Statement.
I also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
/s/ Jaak (Jack) Olesk
- ---------------------
JAAK (JACK) OLESK
Certified Public Accountant
Beverly Hills, California
May 8, 2000
INDEPENDENT AUDITOR'S CONSENT
I consent to the use in this Registration Statement of Integrated Communication
Networks, Inc., on Amendment No. 1 to Form S-1 of my report dated April 2, 1999
appearing in the Prospectus, which is part of this Registration Statement, and
of my report dated April 2, 1999 relating to the financial statement schedules
appearing elsewhere in this Registration Statement.
I also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
/s/ Brad B. Haynes
- ------------------
BRAD B. HAYNES
Certified Public Accountant
Los Angeles, California
May 8, 2000
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Integrated Communication
Networks, Inc., on Amendment No. 1 to Form S-1 of our report dated April 13,
2000, appearing in the Prospectus, which is part of this Registration Statement,
and of our report dated April 13, 2000 relating to the financial statement
schedules appearing elsewhere in this Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such Prospectus.
/s/ Mendoza Berger & Company, LLP
- ---------------------------------
MENDOZA BERGER & COMPANY, LLP
Laguna Hills, California
May 8, 2000
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<FISCAL-YEAR-END> DEC-31-1999
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