SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number 333-8807
GST TELECOMMUNICATIONS, INC.
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(Exact name of Registrant as Specified in its Charter)
CANADA NOT APPLICABLE
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(State or Other Jurisdiction (IRS Employer Identification
of Incorporation or Organization) Number)
4001 MAIN STREET, VANCOUVER, WA 98663
- ----------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (360) 906-7100
--------------
N/A
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(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes /X/ No / /
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date: At May 8,
1998, there were outstanding 35,938,584 Common Shares, without par value, of the
Registrant.
<PAGE>
GST TELECOMMUNICATIONS, INC.
INDEX
Page(s)
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheet - March 31, 3
1998 (unaudited) and December 31, 1997
Consolidated Condensed Statements of Operations 4
- Three Months Ended March 31, 1998 and 1997
(unaudited)
Consolidated Condensed Statements of Cash Flows 5
- Three Months Ended March 31, 1998 and 1997
(unaudited)
Notes to Consolidated Condensed Financial 6-7
Statements (unaudited)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 8-12
CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Required
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 13-14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
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GST TELECOMMUNICATIONS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
(IN THOUSANDS)
March 31, December 31,
1998 1997 (1)
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 239,904 $ 199,053
Restricted cash and investments 32,184 31,731
Accounts receivable, net 17,568 27,324
Investments 373 7,619
Inventories 788 3,412
Prepaid expenses and other current assets 12,076 13,127
--------- ---------
Total current assets 302,893 282,266
--------- ---------
Restricted investments 103,013 112,719
Property, plant and equipment 472,290 433,680
less accumulated depreciation (31,630) (26,785)
--------- ---------
440,660 406,895
Other assets 123,283 117,908
less accumulated amortization (21,728) (21,614)
--------- ---------
101,555 96,294
--------- ---------
$ 948,121 $ 898,174
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 16,752 $ 14,798
Accrued liabilities 42,693 30,869
Current portion of capital lease obligations 4,128 6,286
Current portion of long term debt 5,053 4,579
Other current liabilities 304 993
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Total current liabilities 68,930 57,525
--------- ---------
Other liabilities 6,732 3,551
Capital lease obligation, less current portion 17,264 13,994
Long term debt, less current portion 770,422 763,292
Minority interest in subsidiaries -- 12,732
Preference shares 54,635 54,635
Shareholders' equity (deficit):
Common shares 239,612 221,105
Commitment to issue shares 302 604
Deficit (209,776) (229,264)
--------- ---------
Total shareholders' equity (deficit) 30,138 (7,555)
--------- ---------
$ 948,121 $ 898,174
========= =========
(1) The information in this column was derived from the Company's audited
financial statements as of December 31, 1997.
See accompanying notes to consolidated condensed financial statements.
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GST TELECOMMUNICATIONS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------------------
1998 1997
-------------- --------------
Revenue:
<S> <C> <C>
Telecommunication services $ 29,180 $ 19,619
Telecommunication products 864 5,073
------------ ------------
30,044 24,692
------------ ------------
Operating costs and expenses:
Network expenses 21,128 16,929
Facilities administration and maintenance 3,955 3,120
Cost of product revenues 689 1,863
Selling, general and administrative 20,410 15,391
Research and development -- 616
Depreciation and amortization 8,669 4,481
------------ ------------
54,851 42,400
------------ ------------
Loss from operations (24,807) (17,708)
------------ ------------
Other expenses (income):
Interest income (4,935) (538)
Interest expense 21,275 5,384
Other (60,635) (6,928)
------------ ------------
(44,295) (2,082)
------------ ------------
Income (loss) before income taxes
and minority interest 19,488 (15,626)
------------ ------------
Income taxes -- (118)
Minority interest in income of subsidiary -- (40)
------------ ------------
-- (158)
Net income (loss) $ 19,488 $ (15,784)
============ ============
Net income (loss) per share:
Basic $ 0.56 $ (0.68)
============ ============
Diluted $ 0.46 $ (0.68)
============ ============
Weighted average shares outstanding:
Basic 35,035,130 23,158,334
============ ============
Diluted 44,714,589 23,158,334
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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GST TELECOMMUNICATIONS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-----------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 19,488 $ (15,784)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Minority interest in income of subsidiary -- 40
Loss on investments in affiliates 593 562
Accretion of interest 6,601 4,535
Depreciation and amortization 9,990 4,831
Stock compensation 943 286
Gain on sale of fixed assets (221) --
Gain on sale of subsidiary shares (61,292) (7,424)
Changes in non-cash operating working capital:
Receivables (2,788) 677
Inventory (190) (182)
Prepaid expenses and other 1,828 (1,238)
Accounts payable and accrued liabilities 12,387 (3,019)
Other liabilities 4,491 (208)
--------- ---------
Net cash used in operating activities (8,170) (16,924)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of subsidiaries, net of cash acquired (12,418) --
Proceeds from sale of subsidiary shares, net 85,074 27,365
Cash disposed of in sale of subsidiary (5,252) --
Purchase of marketable securities -- (2,000)
Change in investments restricted for fixed asset purchases 8,011 --
Purchase of fixed assets (39,214) (57,189)
Purchase of other assets (116) (972)
Proceeds from the sale of fixed assets 772 --
--------- ---------
Net cash used in investing activities 36,857 (32,796)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt -- 15,916
Principal payments on long term debt and capital leases (2,473) (2,287)
Deferred financing costs (1,519) (1,475)
Change in investments restricted to finance interest payments 1,242 --
Issuance of common shares, net 14,914 11,276
Issuance of preferred shares -- 50,000
--------- ---------
Net cash provided by financing activities 12,164 73,430
--------- ---------
Net increase (decrease) in cash and cash equivalents 40,851 23,710
Cash and cash equivalents at beginning of period 199,053 13,363
--------- ---------
Cash and cash equivalents at end of period $ 239,904 $ 37,073
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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<PAGE>
GST TELECOMMUNICATIONS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles. However, certain information or
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed, or
omitted, pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the statements include all adjustments
necessary (which are of a normal and recurring nature) for the fair presentation
of the results of the interim periods presented. The results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full fiscal year or for subsequent periods. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the three months ended December 31, 1997, as included
in the Company's Transition Report on Form 10-K for the three month transition
period ended December 31, 1997.
2. NET INCOME (LOSS) PER SHARE
For the three months ended March 31, 1998, diluted net income per share
excludes $901 of interest expense related to convertible notes. Net income
(loss) per share is computed using the weighted average number of common and
dilutive common equivalent shares assumed to be outstanding during the period.
For the three months ended March 31, 1998, diluted weighted average shares
outstanding includes the following components:
Weighted average shares outstanding, basic 35,035,130
Options to purchase common shares 1,115,494
Warrants to purchase common shares 175,559
Debt convertible into common shares 3,455,327
Preference shares convertible into common shares 4,933,079
---------
Weighted average shares outstanding, diluted 44,714,589
==========
For the three months ended March 31, 1997, common stock equivalents
were antidilutive and were not included in diluted weighted average shares
outstanding.
3. SHAREHOLDERS' EQUITY
Shares issued and outstanding are as follows:
March 31, 1998 December 31, 1997
-------------- -----------------
Common shares, no par value 35,863,008 34,564,898
Unlimited number of
common shares authorized
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<PAGE>
4. SUPPLEMENTAL CASH FLOW INFORMATION
Three Months
Ended March 31,
--------------------
1998 1997
---- ----
Cash Transactions:
Cash paid for interest 4,194 1,605
Cash paid for income taxes - 105
Non-Cash Transactions:
Recorded in business combinations:
Assets 17,378 -
Liabilities 2,612 -
Common shares 2,348 -
Disposition of subsidiary:
Assets 35,480 -
Liabilities 4,218 -
Minority interest 12,732 -
Assets acquired through capital leases 3,289 -
Amounts in accounts payable and accrued
liabilities for the purchase of fixed assets
at period end 20,027 15,305
5. DISPOSAL OF SUBSIDIARY
In February 1998, the Company completed the sale of its remaining 63% interest
in NACT Telecommunications, Inc. for net proceeds of approximately $85.0 million
and recorded a gain of approximately $61.3 million on such sale.
6. ADOPTION OF NEW ACCOUNTING STANDARD
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." The adoption of
SFAS No. 130 did not materially impact the presentation of the accompanying
financial statements, and as such, no additional disclosure is included.
7. RECENT DEVELOPMENTS
In April 1998, the Company acquired ICON Communications Corp., a switch-based
reseller of long distance and local services located in Seattle, Washington, for
approximately $23.8 million in cash.
In May 1998, the Company completed a private placement of $500.0 million
principal amount at maturity of 10.5% senior secured discount notes due 2008
(the "1998 Notes"). The 1998 Notes will fully accrete to face value on May 1,
2003. From and after May 1, 2003, the 1998 Notes will bear interest, which will
be payable in cash, at a rate of 10.5% per annum on each May 1 and November 1,
commencing November 1, 2003. The net proceeds from the sale of the 1998 Notes of
approximately $288.5 million are restricted for the purchase of
telecommunications equipment and network infrastructure.
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<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial
condition and results of operations contains forward looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward looking statements as a
result of certain factors discussed herein.
OVERVIEW
GST Telecommunications, Inc. (the "Company") provides a broad range of
integrated telecommunications products and services, primarily to business
customers located in the western continental United States and Hawaii. As a
facilities-based competitive local exchange carrier ("CLEC"), the Company
operates state-of-the-art, digital telecommunications networks that provide an
alternative to incumbent local exchange carriers. The Company's full line of
products, which offer a "one-stop" solution to customers' telecommunications
services requirements, include local dial tone, long distance, Internet, data
transmission and private line services.
The Company's digital networks currently serve 40 markets in Arizona,
California, Hawaii, Idaho, New Mexico, Texas and Washington. In addition, the
Company has networks under construction which, when completed, will expand its
regional footprint to Oregon. The Company also constructs, markets and manages
longhaul fiber optic facilities in Arizona, California and Hawaii. The Company's
longhaul fiber optic facilities currently extend over 900 miles and
approximately 1,700 route miles are under construction and expected to become
operational over the next 12 months.
Management believes that the formation of an integrated regional
network through the interconnection of the Company's individual networks with
the longhaul fiber optic facilities will provide significant competitive and
economic advantages. In addition to providing the Company with a larger
addressable market, the interconnection of its networks is expected to allow the
Company to a carry a portion of its intra-regional telecommunications traffic
on-net, thereby improving operational margins by reducing payments to other
carriers for use of their facilities. In addition, increasing demand for high
bandwidth capacity has created opportunities for the Company to sell or lease
capacity on its network to other communications carriers.
RESULTS OF OPERATIONS
REVENUES. Total revenue for the three months ended March 31, 1998
increased $5.3 million, or 21.7%, to $30.0 million from $24.7 million for the
three months ended March 31, 1997. Telecommunications services revenue for the
three months ended March 31, 1998 increased $9.6 million, or 48.7%, to $29.2
million from $19.6 million for the three months ended March 31, 1997. The
increase in telecommunications services revenue resulted primarily from
increased local service revenue generated by the Company's networks and from
increased long distance service revenue. To a lesser extent, the increase in
telecommunications services revenue resulted from the acquisitions of Action
Telcom Co. ("Action Telcom") in May 1997 and the Guam operations of Sprint
Corporation ("Sprint") in October 1997. Product revenue for the three months
ended March 31, 1998 decreased $4.2 million, or 83.0%, to $.9 million from $5.1
million for the three months ended March 31, 1997. The decrease in product
revenues resulted from the sale of the Company's 63% interest in NACT
Telecommunications, Inc. ("NACT").
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<PAGE>
OPERATING EXPENSES. Total operating expenses for the three months ended
March 31, 1998 increased $12.5 million, or 29.4%, to $54.9 million from $42.4
million for the three months ended March 31, 1997. Network expenses, which
include direct local and long distance circuit costs, increased $4.2 million, or
24.8%, to $21.1 million, or 72.4% of telecommunications services revenue for the
three months ended March 31, 1998 compared to $16.9 million, or 86.3% of
telecommunications services revenue for the three months ended March 31, 1997.
The primary reason for the decrease in network expenses as a percent of revenue
is the increase in revenues for traffic carried on the Company's network as a
percent of total revenues. Facilities administration and maintenance expenses
(consisting primarily of costs related to personnel providing maintenance,
monitoring and technical assistance for the Company's networks) for the three
months ended March 31, 1998 increased $.9 million, or 26.8%, to $4.0 million, or
13.6% of telecommunications services revenue, compared to $3.1 million, or 15.9%
of telecommunications services revenue, for the three months ended March 31,
1997.
Cost of product revenues for the three months ended March 31, 1998
decreased $1.2 million, or 63%, to $.7 million from $1.9 million for the three
months ended March 31, 1997 as a result of the sale of NACT. For the three
months ended March 31, 1998, cost of product revenues consists of the costs
associated with product revenue of Action Telcom. The decrease in research and
development costs, from $.6 million for the three months ended March 31, 1997 to
$0 for the three months ended March 31, 1998 also resulted from the sale of
NACT.
Selling, general and administrative expenses for the three months ended
March 31, 1998 increased $5.0 million, or 32.6%, to $20.4 million, or 67.9% of
total revenue, from $15.4 million, or 62.3% of total revenue, for the three
months ended March 31, 1997. The increase is due to the expansion of the
Company's CLEC and enhanced services operations, the acquisition of four
companies between May 1997 and March 1998 and the hiring of a significant number
of marketing, management information and sales personnel to implement the
Company's integrated services strategy. Such increases were offset by a decrease
of $1.2 million resulting from the disposition of NACT.
Depreciation and amortization for the three months ended March 31, 1998
increased $4.2 million, or 93.5%, to $8.7 million from $4.5 million for the
three months ended March 31, 1997. The increase was attributable to
newly-constructed networks becoming operational and to the amortization of
intangible assets related to the Company's acquisitions. The Company expects
that depreciation will continue to increase as it expands its networks and
longhaul fiber optic facilities and installs additional switches. Depreciation
and amortization was 28.9% of total revenue for the three months ended March 31,
1998 compared to 18.1% for the three months ended March 31, 1997.
OTHER INCOME/EXPENSE. For the three months ended March 31, 1998, net
other income increased $42.4 million to $44.3 million from $1.9 million for the
three months ended March 31, 1997. The primary reason for the increase was a
$61.3 million gain from the sale of the Company's remaining interest in NACT.
Such increase was partially offset by increased interest expense resulting from
the issuance in May 1997 of $265.0 million of 13.25% senior secured notes due
2007 (the "Secured Notes") and the issuance in November 1997 of $144.0 million
of 12.75% senior subordinated accrual notes due 2007 (the "Accrual Notes"). For
the three months ended March 31, 1998, minority interest and income tax expense
were $0 due to the disposition of NACT.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses as a
result of the development
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<PAGE>
and operation of its networks. The Company expects that such losses will
continue as the Company emphasizes the development, construction and expansion
of its networks and builds its customer base. Cash provided by the Company's
operations will not be sufficient to fund the expansion of its networks,
longhaul fiber optic facilities and services.
The Company's net cash provided by (used in) operating and investing
activities was $28.7 million and $(49.7) million for the three months ended
March 31, 1998 and 1997, respectively. During the three months ended March 31,
1998, the Company completed the sale of its remaining 63% interest in NACT for
net proceeds of approximately $85.0 million. Net cash provided by financing
activities from borrowings and equity issuances to fund capital expenditures,
acquisitions and operating losses was $12.2 million and $73.4 million for the
three months ended March 31, 1998 and 1997, respectively.
Capital expenditures for the three months ended March 31, 1998 and 1997
were $41.8 million and $62.5 million, respectively. The Company estimates
capital expenditures for fiscal 1998 and fiscal 1999 of approximately $325
million and $400 million, respectively. The majority of these expenditures is
expected to be made for the construction of network and longhaul fiber optic
facilities and the purchase of switches and related equipment to facilitate the
offering of the Company's services. Continued significant capital expenditures
are expected to be made thereafter. In addition, the Company expects to continue
to incur operating losses while it expands its business and builds its customer
base. Actual capital expenditures and operating losses will depend on numerous
factors, including the extent of future expansion, acquisition opportunities and
other factors beyond the Company's control, including economic conditions,
competition, regulatory developments and the availability of capital.
In addition to the Company's capital expenditures, in March 1998, the
Company acquired KLP, Inc. (d/b/a Call America), a Phoenix-based reseller of
long distance, for approximately $3.8 million in cash and the business of Whole
Earth Networks, LLC, a San Francisco-based Internet service provider, for
approximately $9.0 million in cash and the assumption of certain liabilities. In
April 1998, the Company acquired ICON Communications Corp., a switch-based
reseller of long distance and local service located in Seattle, for
approximately $23.8 million in cash.
In November 1997, the Company completed a public offering of 6,440,000
common shares at $12 per share and $144.0 million of Accrual Notes. Semi-annual
cash interest payments on the 1997 Accrual Notes will not begin until May 2003.
In May 1998, the Company completed a private placement of $500.0
million principal amount at maturity of 10.5% senior secured discount notes due
2008 (the "1998 Notes"). The 1998 Notes will fully accrete to face value on May
1, 2003. From and after May 1, 2003, the 1998 Notes will bear interest, which
will be payable in cash, at a rate of 10.5% per annum on each May 1 and November
1, commencing November 1, 2003. The net proceeds from the sale of the 1998 Notes
of approximately $288.5 million are restricted for the purchase of
telecommunications equipment and network infrastructure. The indenture related
to the 1998 Notes, and the indentures associated with previously issued notes,
include restrictive covenants which, among other items, limit or restrict
additional indebtedness incurred by the Company, investment in certain
subsidiaries, the sale of assets and the payment of dividends.
At March 31, 1998, the Company had approximately $796.9 million of
indebtedness outstanding and $54.6 million of mandatorily redeemable preference
shares. In addition, as of March 31, 1998, the Company had $30.5 of availability
under a credit facility with Tomen America Inc. (the "Tomen
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<PAGE>
Facility") and $108.1 million of availability under a loan agreement with
Siemens Telecom Networks (the "Siemens Loan Agreement"). Although the Company's
liquidity was substantially improved as a result of proceeds received from the
sale of senior and convertible notes in December 1995 (the "1995 Notes"), the
Secured Notes, the Accrual Notes and the 1998 Notes, the Company will have
significant debt service obligations. The Company will be required to make
principal and interest payments of approximately $52.5 million (of which $35.1
million will be made from funds securing the Secured Notes), $63.3 million (of
which $35.1 million will be made from funds securing the Secured Notes), $66.1
million (of which $17.6 million will be made from funds securing the Secured
Notes), $115.9 million and $114.2 million in the remainder of 1998 and in 1999,
2000, 2001 and 2002, respectively. In addition, the Company anticipates that
cash flow from operations will be insufficient to pay interest in cash on the
1995 Notes when such interest becomes payable in June 2001 and on the Secured
Notes starting in November 2000 once the amount pledged to fund the first six
interest payments on the Secured Notes is paid and to repay the 1995 Notes, the
Secured Notes and the Accrual Notes in full and that such notes will need to be
refinanced. The ability of the Company to effect such refinancings will be
dependent upon the future performance of the Company, which will be subject to
prevailing economic conditions and to financial, business and other factors
beyond the control of the Company. There can be no assurance that the Company
will be able to improve its operating results or that the Company will be able
to meet its debt service obligations.
At March 31, 1998, the Company had cash, cash equivalents, and
investments, including restricted cash and investments of approximately $375.5
million. The Company believes that the amounts on hand together with the
proceeds from the sale of the 1998 Notes and borrowings expected to be available
under the Tomen Facility and the Siemens Loan Agreement, will provide sufficient
funds for the Company to expand its business as presently planned and to fund
its operating expenses through September 2000. Thereafter, the Company expects
to require additional financing. The extent of additional financing will depend
on, among other things, the rate of the Company's expansion and the success of
the Company's businesses. In the event that the Company's plans or assumptions
change or prove to be inaccurate, or its cash resources, together with
borrowings under the current financing arrangements prove to be insufficient to
fund the Company's growth and operations, or if the Company consummates
additional acquisitions, the Company may be required to seek additional sources
of capital (or seek additional capital sooner than currently anticipated). The
Company may also seek to raise additional capital to take advantage of favorable
conditions in the capital markets. There can be no assurance that additional
financing will be available to the Company or, if available, that it can be
concluded on terms acceptable to the Company or within the limitations contained
within the Company's financing arrangements. Failure to obtain such financing
could result in the delay or abandonment of some or all of the Company's
development or expansion plans and could have a material adverse effect on the
Company's business. Such failure could also limit the ability of the Company to
make principal and interest payments on its outstanding indebtedness. The
Company has no material working capital or other credit facility under which it
may borrow for working capital and other general corporate purposes. There can
be no assurance that such a facility will be available to the Company in the
future or that if such a facility were available, that it would be available on
terms and conditions acceptable to the Company.
YEAR 2000 PROGRAM
Many computer systems will experience difficulty processing dates
beyond the year 1999 and will need to be modified prior to the year 2000.
Failure to make such modifications could result in
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<PAGE>
system failures or miscalculations causing disruptions of operations, including
among other things an inability to process transactions, send invoices or engage
in normal business activities. The Company's core internal systems that have
been recently implemented are year 2000 compliant. The remaining core internal
systems are scheduled to be replaced by the second quarter of 1999 and are
expected to be year 2000 compliant when installed. The Company is also
completing a preliminary assessment of year 2000 issues not related to its core
systems, including issues surrounding systems that interface with those operated
by unrelated parties. Based on its initial evaluation, the Company does not
believe that the cost of remedial actions will have a material adverse effect on
the Company's results of operations and financial condition. There can be no
assurance, however, that there will not be a delay in, or increased costs
associated with, the implementation of changes as the program progresses, and
failure to implement such changes could have an adverse effect on future results
of operations.
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<PAGE>
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Item 3 "Legal Proceedings" of the Registrant's
Transition Report on Form 10-K for the three months ended December 31, 1997, and
to the descriptions therein of an action commenced by US WEST Communications,
Inc. ("US WEST") against members of the Arizona Corporation Commission (the
"ACC"), the ACC, American Communications Services Inc., Brooks Fiber Properties
Inc. and the Registrant in the United States District Court in Arizona. On March
31, 1998, several other CLEC defendants' motions to dismiss the US WEST
complaint were granted in their entirety. Many of the counts in the US WEST
complaint against the Registrant are identical to those dismissed by the court
in the other CLEC defendants' cases. The Registrant is negotiating with US WEST
to determine how to give effect to this order of dismissal in the Registrant's
related case. Should US WEST prevail in its suit, it could have an adverse
impact on the Registrant's operations in Arizona.
ITEM 2. CHANGES IN SECURITIES
On March 19, 1998, the Registrant issued an aggregate of 19,568 Common
Shares to four individuals as an installment payment in consideration for the
Registrant's acquisition in September 1996 of Tri-Star Residential
Communications Corp.
There were no underwriters involved in the foregoing issuance of equity
securities and such issuance was exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, as transactions not involving a public
offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant held its Annual Meeting of Shareholders on March 4,
1998. The following matters were voted upon at such meeting:
1. The election of John Warta, Stephen Irwin, Joseph A. Basile,
Thomas E. Sawyer, Peter E. Legault, Jack G. Armstrong, Joseph G. Fogg III,
Mitsuhiro Naoe and A. Roy Megarry as directors of the Registrant to serve until
the next annual meeting or until their successors are duly elected and
appointed.
2. The approval of an amendment to the Registrant's 1996 Stock
Option Plan to increase the number of Common Shares that may be subject to
options under such plan from 700,000 to 1,000,000.
3. The approval of the Registrant's 1997 Stock Option Plan.
4. The approval of the Registrant's Amended and Restated By-Laws.
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<PAGE>
5. The approval of the issuance of Common Shares upon conversion
of the outstanding Series A Preference Shares issued by the Registrant in a
February 1997 private placement.
6. The appointment of KPMG Peat Marwick LLP as the Registrant's
auditors until the next annual meeting.
All of such matters were approved by a majority of the
Registrant's shareholders based upon a showing of hands at the annual meeting
pursuant to the requirements of Canadian corporate law.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2 Agreement and Plan of Merger dated April 14, 1998, by
and among GST Telecommunications, Inc., GST Merger
Sub, Inc. and ICON Communications Corp.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
On January 6, 1998, the Registrant reported on Form 8-K in "Item
5. Other Events," the announcement of an agreement for the sale by the
Registrant of its interest in NACT Telecommunications, Inc. ("NACT").
On February 27, 1998, the Registrant reported on Form 8-K in "Item
2. Acquisition or Disposition of Assets," the consummation of the sale by the
Registrant of 5,113,712 shares of the common stock of NACT, representing
approximately 63% of the outstanding common stock of NACT.
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<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Date: May 13, 1998 GST TELECOMMUNICATIONS, INC.
(Registrant)
/s/ Daniel L. Trampush,
---------------------------------------------
Daniel L. Trampush,
(Senior Vice President and Chief
Financial Officer)
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AGREEMENT AND PLAN OF MERGER
BY AND AMONG
GST TELECOMMUNICATIONS, INC.
GST MERGER SUB, INC.
ICON COMMUNICATIONS CORP.
April 14, 1998
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I
TERMS OF THE MERGER............................1
1.1 Merger .................................................................1
1.2 Time and Place of Closing................................................1
1.3 Effective Time...........................................................2
1.4 Articles of Incorporation................................................2
1.5 Bylaws .................................................................2
1.6 Directors and Officers...................................................2
1.7 Treatment of Shares......................................................2
ARTICLE II
PAYMENT FOR SHARES.....................................3
2.1 Exchange Procedures......................................................3
2.2 Rights of Former Shareholders of ICON....................................4
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ICON......................4
3.1 Corporate Organization; Requisite Authority to
Conduct Business; Articles of Incorporation and
By-Laws..................................................................4
3.2 Capitalization and Shareholdings.........................................5
3.3 Subsidiaries, Etc........................................................6
3.4 Authority Relative to and Validity of
Agreements...............................................................6
3.5 Required Filings and Consents; No Conflict...............................7
3.6 Financial Statements.....................................................7
3.7 Absence of Certain Changes and Events....................................7
3.8 Taxes and Tax Returns....................................................9
3.9 Employee Benefit Plans..................................................10
3.10 Labor Matters...........................................................12
3.11 Properties..............................................................13
3.12 Trademarks, Patents and Copyrights......................................14
3.13 Legal Proceedings, Claims, Investigations, Etc..........................15
3.14 Licenses, Permits, Etc..................................................15
3.15 Insurance...............................................................16
3.16 Material Contracts......................................................16
3.17 Broker..................................................................17
3.18 Compliance with Laws; Environmental Matters.............................17
3.19 Illegal Payments........................................................18
3.20 Banks; Safe Deposit Boxes...............................................18
3.21 Complete Disclosure.....................................................18
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<PAGE>
PAGE
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF GST AND GST SUB.............18
4.1 Corporate Organization; Certificate of
Incorporation and By-Laws...............................................18
4.2 Authority Relative to and Validity of
Agreements..............................................................18
4.3 Required Filing and Consents; No Conflicts..............................19
4.4 Legal Proceedings, Claims, Etc..........................................20
4.5 Broker..................................................................20
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS OF ICON...............20
5.1 Representations and Warranties True.....................................20
5.2 Performance of Covenants................................................20
5.3 No Proceedings..........................................................21
5.4 Agreements..............................................................21
5.5 Consents and Approvals..................................................21
5.6 Opinion of Counsel to the GST Companies.................................21
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE GST COMPANIES...........21
6.1 Representation and Warranties True......................................21
6.2 Performance of Covenants................................................22
6.3 No Proceedings..........................................................22
6.4 Agreements..............................................................22
6.5 Consents and Approvals..................................................22
6.6 Opinion of ICON's Counsel...............................................22
6.7 Material Changes........................................................22
6.8 Achievement of Minimum EBITDA...........................................22
6.9 Customer List...........................................................22
6.10 Corporate Records.......................................................22
6.11 Approval by Shareholders................................................23
6.12 Appraisal Rights........................................................23
6.13 Resignations............................................................23
6.14 Letters of Transmittal..................................................23
6.15 Repayment of Loan.......................................................23
ARTICLE VII
INDEMNIFICATION.............................23
7.1 Survival of Representations, Warranties and
Agreements..............................................................23
7.2 Indemnification.........................................................23
7.3 Limitations on Indemnification..........................................25
7.4 Disposition of Escrow Amount............................................26
7.5 Procedure for Indemnification with Respect to
Third-Party Claims......................................................26
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<PAGE>
PAGE
7.6 Procedure For Indemnification with Respect to
Non-Third-Party Claims..................................................27
ARTICLE VIII
COVENANTS................................27
8.1 Covenants of ICON Regarding Conduct of Business
Operations Pending the Closing..........................................27
8.2 No Other Negotiations...................................................29
8.3 Regulatory Approvals....................................................29
8.4 Employment Matters......................................................30
8.5 Additional Covenants of ICON and the GST
Companies...............................................................30
ARTICLE IX
TERMINATION................................32
9.1 Termination by Any Party Hereto.........................................32
ARTICLE X
MISCELLANEOUS...............................32
10.1 Expenses................................................................32
10.2 Notices.................................................................32
10.3 Entire Agreement........................................................33
10.4 Binding Effect, Benefits, Assignments...................................33
10.5 Applicable Law..........................................................33
10.6 Consent to Jurisdiction.................................................33
10.7 Headings................................................................33
10.8 Counterparts............................................................34
10.9 Waiver; Consent.........................................................34
10.10 No Third Party Beneficiaries...........................................34
10.11 Gender.................................................................34
10.12 Access to Records......................................................34
10.13 Knowledge..............................................................34
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<PAGE>
INDEX OF DEFINITIONS
TERM SECTION
- ---- -------
Additional Documents.........................................................7.1
Affiliate....................................................................7.2
Agreement................................................Introductory Paragraphs
Articles of Merger...........................................................1.3
Audited Financial Statements.................................................3.6
Business.....................................................................3.1
Buyer Documents..............................................................4.2
Closing......................................................................1.2
Closing Date.................................................................1.2
COBRA.....................................................................3.9(f)
Code.....................................................Introductory Paragraphs
Cole Employment Agreement....................................................3.4
Contest Notice...............................................................7.6
Crowe Employment Agreement...................................................3.4
Damages...................................................................7.2(a)
DGCL.........................................................................1.1
Effective Time...............................................................1.3
Employee Benefit Plans....................................................3.9(a)
ERISA.....................................................................3.9(a)
Escrow Agent..............................................................1.7(c)
Escrow Agreement..........................................................1.7(c)
Escrowed Consideration....................................................1.7(c)
Exchange Agent...............................................................2.1
GAAP.........................................................................3.6
Governmental Authority.......................................................3.4
GST......................................................Introductory Paragraphs
GST Companies............................................Introductory Paragraphs
GST Parties...............................................................7.2(a)
GST Sub..................................................Introductory Paragraphs
ICON.....................................................Introductory Paragraphs
ICON Documents...............................................................3.4
ICON Rights..............................................................3.12(a)
ICON Stock................................................................1.7(b)
Indemnifiable Claim(s)....................................................7.2(a)
Indemnification Agreement....................................................3.4
Indemnification Notice.......................................................7.5
Indemnified Party.........................................................7.3(c)
Indemnifying Party........................................................7.3(c)
Liabilities..................................................................3.7
Liens.....................................................................3.2(a)
Material Adverse Effect......................................................3.1
Merger.......................................................................1.1
Merger Consideration......................................................1.7(c)
Non-Third Party Claim Indemnification Notice.................................7.6
Permits.....................................................................3.14
Restrictive Covenant Agreements..............................................3.4
Service...................................................................3.8(b)
Shareholders..............................................................1.7(c)
Shareholders' Agent..........................................................7.4
Surviving Corporation........................................................1.1
Taxes.....................................................................3.8(a)
Tax Return................................................................3.8(a)
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<PAGE>
Termination Date.............................................................8.2
WBCA.........................................................................1.1
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<PAGE>
INDEX TO EXHIBITS
-----------------
EXHIBIT
A.......................................................Form of Escrow Agreement
B..................................................Form of Letter of Transmittal
C.....................Form of Restrictive Covenant and Confidentiality Agreement
D..............................................Form of Indemnification Agreement
E....................................Form of Leslie N. Cole Employment Agreement
F......................................Form of Donald Crowe Employment Agreement
G..........................................Opinion of Counsel to GST and GST Sub
H.....................................................Opinion of Counsel to ICON
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<PAGE>
INDEX TO SCHEDULES*
------------------
SCHEDULES
3.1.......................................................Foreign Qualifications
3.2...........................Capitalization; Allocation of Merger Consideration
3.5................................................Required Filings and Consents
3.6....................................................ICON Financial Statements
3.7...................................................Certain Changes and Events
3.9.......................................................Employee Benefit Plans
3.10...............................................................Labor Matters
3.11..................................................................Properties
3.12.................................................................ICON Rights
3.14.....................................................................Permits
3.15...................................................................Insurance
3.16..........................................................Material Contracts
3.20...................................................Banks; Safe Deposit Boxes
4.3................................................Required Filings and Consents
- --------------
* In accordance with Item 601 of Regulation S-K, the Registrant has not filed
the schedules to this Agreement with the Securities and Exchange
Commission. The Registrant undertakes to supplementally provide a copy of
such schedules to the Securities and Exchange Commission upon request.
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<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated this
14th day of April, 1998, by and among GST Telecommunications, Inc., a federally
chartered Canadian corporation ("GST"), GST Merger Sub, Inc., a Delaware
corporation ("GST Sub"), and ICON Communications Corp., a Washington corporation
("ICON"). GST and GST Sub are collectively referred to herein as the "GST
Companies."
W I T N E S S E T H:
WHEREAS, the Boards of Directors of the GST Companies and ICON
are of the opinion that the transactions described herein are in the best
interests of the parties hereto and their respective stockholders; and
WHEREAS, the transactions described herein have been approved
by GST, the sole stockholder of GST Sub; and
WHEREAS, the parties hereto intend that the transactions
described herein qualify for federal income tax purposes as a "reorganization"
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code");
NOW, THEREFORE, in consideration of the premises and the
representations, warranties, covenants and agreements herein contained, each of
GST, GST Sub and ICON hereby agrees as follows:
ARTICLE I
TERMS OF THE MERGER
Section 1.1 MERGER. Subject to the terms and conditions of
this Agreement, at the Effective Time (as hereinafter defined), GST Sub shall be
merged with and into ICON, in accordance with the provisions of the Washington
Business Corporation Act (the "WBCA") and the General Corporation Law of the
State of Delaware (the "DGCL") and with the effect provided in the WBCA and the
DGCL (the "Merger"). ICON shall be the surviving corporation of the Merger (the
"Surviving Corporation"), and it shall be a wholly-owned subsidiary of GST and
shall continue to be governed by the laws of the State of Washington. The Merger
shall be consummated pursuant to the terms of this Agreement, which has been
approved and adopted by the respective Boards of Directors of each of the GST
Companies and ICON.
Section 1.2 TIME AND PLACE OF CLOSING. The closing of the
transactions contemplated hereby (the "Closing") shall take place on the date
that the Effective Time occurs or at such other time as the parties, acting
through their authorized officers, may mutually agree (the date on which such
closing occurs being hereinafter referred to as the "Closing Date"). The Closing
shall
<PAGE>
be held at the office of the GST Companies, 4001 Main Street, Vancouver,
Washington 98663 or at such other place or in such other manner as the parties,
acting through their authorized officers, may mutually agree.
Section 1.3 EFFECTIVE TIME. The Merger and other transactions
contemplated by this Agreement shall become effective on the date and at the
time the Articles of Merger reflecting the Merger (the "Articles of Merger")
shall become effective with the Secretary of State of the State of Washington
(the "Effective Time"). Subject to the terms and conditions hereof, unless
otherwise mutually agreed upon in writing by authorized officers of each party,
the parties shall use their reasonable efforts to cause the Effective Time to
occur three business days following the date upon which the last of the
conditions set forth in Articles V and VI of this Agreement is satisfied or
waived.
Section 1.4 ARTICLES OF INCORPORATION. The Articles of
Incorporation of ICON in effect immediately prior to the Effective Time shall be
the Articles of Incorporation of the Surviving Corporation until otherwise
amended or repealed.
Section 1.5 BYLAWS. The Bylaws of ICON in effect immediately
prior to the Effective Time shall be the Bylaws of the Surviving Corporation
until otherwise amended or repealed.
Section 1.6 DIRECTORS AND OFFICERS. Subject to Section 6.13
hereof, the directors and officers of ICON in office immediately prior to the
Effective Time, together with such additional persons as may thereafter be
elected, shall serve as the respective directors and officers of the Surviving
Corporation from and after the Effective Time in accordance with the Bylaws of
the Surviving Corporation.
Section 1.7 TREATMENT OF SHARES. Subject to the provisions of
this Section 1.7 and Sections 2.1 and 2.2 hereof, at the Effective Time, by
virtue of the Merger and without any action on the part of ICON, the GST
Companies or the stockholders of any of the foregoing, the shares of the
constituent corporations to the Merger shall be converted as follows:
(a) Each outstanding share of capital stock of GST issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding from and after the Effective Time.
(b) All of the shares of Common Stock, $.01 par value per
share, of GST Sub issued and outstanding immediately prior to the Effective Time
shall cease to be outstanding and shall be converted in the aggregate into 100
shares of Common Stock, without par value, of ICON (the "ICON Stock").
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<PAGE>
(c) All of the shares of ICON Stock issued and outstanding
immediately prior to the Effective Time shall cease to be outstanding and shall
be converted, in the aggregate, into the right to receive the sum of U.S.
$23,800,000 (the "Merger Consideration"), payable as hereinafter provided. The
Merger Consideration shall be allocated among each of the shareholders of ICON
(the "Shareholders") in accordance with each Shareholder's proportionate share
of the total number of outstanding shares of ICON Stock at the Effective Time.
The Merger Consideration to be delivered on the Closing Date to the Exchange
Agent (as hereinafter defined) shall be reduced by:
(i) 8% of the amount thereof (the "Escrowed
Consideration") in connection with the indemnification by ICON set forth in
Section 7.2 hereof (such reduction to be allocated among all of the Shareholders
in proportion to the number of shares of ICON Stock owned by each Shareholder at
the Effective Time), which shall be deposited with Tousley Brain, PLLC, as the
Escrow Agent (the "Escrow Agent"), to be held and applied pursuant to the terms
and conditions of the Escrow Agreement to be entered into by and among GST, GST
Sub and the Shareholders' Agent (as hereinafter defined), a copy of which is
attached hereto as Exhibit A (the "Escrow Agreement");
(ii) $99,998.00 to pay the Shareholders' Closing costs,
which amount shall be deposited into a segregated account maintained by ICON,
provided that any moneys remaining in such account on September 1, 1998 shall be
deposited with the Escrow Agent for investment and distribution pursuant to the
terms of the Escrow Agreement; and
(iii) $2,123,900.00 to fund the Call Option (as
hereinafter defined), which amount shall be deposited into a segregated account
maintained by ICON.
ARTICLE II
PAYMENT FOR SHARES
Section 2.1 EXCHANGE PROCEDURES. Prior to the date hereof,
ICON has mailed to all of the Shareholders letters of transmittal in the form of
Exhibit B hereto (the "Letters of Transmittal"), which ICON shall cause to be
delivered to Montreal Trust Company of Canada (the "Exchange Agent"). The
Exchange Agent may establish reasonable and customary rules and procedures in
connection with its duties hereunder. After the Effective Time, each holder of
shares of ICON Stock issued and outstanding at the Effective Time shall
surrender the certificate or certificates representing such shares to the
Exchange Agent and shall upon surrender thereof and the occurrence of the
Effective Time, be entitled to receive in exchange therefor, subject to Section
1.7(c) hereof, such holder's proportionate share of the Merger
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<PAGE>
Consideration. GST shall not be obligated to deliver the proportion of the
Merger Consideration to which any former holder of ICON Stock is entitled as a
result of the Merger until such holder surrenders such holder's certificate or
certificates representing the shares of ICON Stock for exchange as provided in
this Section 2.1. The certificate or certificates of ICON Stock so surrendered
shall be duly endorsed as the Exchange Agent may require. Any other provision of
this Agreement notwithstanding, neither the GST Companies nor the Exchange Agent
shall be liable to a holder of ICON Stock for any amounts paid or property
delivered in good faith to a public official pursuant to any applicable
abandoned property law. Execution and delivery by the Shareholders to the
Exchange Agent of the Letters of Transmittal and their certificates for shares
of ICON Stock shall constitute ratification of the appointment of the Exchange
Agent.
Section 2.2 RIGHTS OF FORMER SHAREHOLDERS OF ICON. At the
Effective Time, the stock transfer book of ICON shall be closed as to holders of
ICON Stock immediately prior to the Effective Time and no transfer of ICON Stock
by any such holder shall thereafter be made or recognized. Until surrendered for
exchange in accordance with the provisions of Section 2.1 of this Agreement,
each certificate theretofore representing shares of ICON Stock shall from and
after the Effective Time represent for all purposes only the right to receive
the proportion of the Merger Consideration to which the holder thereof shall be
entitled, subject, however, to the Surviving Corporation's obligation to pay any
dividends or make any other distributions with a record date prior to the
Effective Time that have been declared or made by ICON in respect of such shares
of ICON Stock in accordance with the terms of this Agreement and that remain
unpaid at the Effective Time.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF ICON
ICON hereby represents and warrants to the GST Companies as
follows:
Section 3.1 CORPORATE ORGANIZATION; REQUISITE AUTHORITY TO
CONDUCT BUSINESS; ARTICLES OF INCORPORATION AND BY- LAWS. ICON is a corporation
duly organized and validly existing under the laws of the State of Washington.
ICON has provided the GST Companies with true and complete copies of its
Articles of Incorporation (certified by the secretary of State of the state of
Washington and By-laws (certified by the Secretary of ICON) as in effect on the
date hereof. The minute books of ICON heretofore made available for inspection
and copying by the GST Companies and its representatives contain true and
complete records of all meetings and consents in lieu of meeting of ICON's Board
of Directors and of the Shareholders since the incorporation of ICON,
-4-
<PAGE>
which accurately reflect in all material respects all transactions referred to
in such minutes and consents in lieu of meeting. ICON has all corporate power
and authority to own, operate and lease its properties and to carry on its
business as the same is now being conducted (the "Business"). ICON is duly
qualified or licensed to do business and is in good standing as a foreign
corporation in those jurisdictions listed on Schedule 3.1 hereto, which are all
of the jurisdictions in which the conduct of its business or the ownership or
leasing of its properties requires it to be so qualified or licensed, other than
such jurisdictions in which the failure to be so qualified or licensed would not
have a material adverse effect upon the business, operations (as now conducted
or as presently proposed to be conducted), assets, properties, prospects, rights
or condition (financial or otherwise), of ICON (a "Material Adverse Effect").
Section 3.2 CAPITALIZATION AND SHAREHOLDINGS.
(a) The authorized capital stock of ICON consists of 5,000,000
shares of ICON Stock, of which 3,010,842 are issued and outstanding on the date
hereof, and are owned of record and beneficially as set forth on Schedule 3.2
hereto. Schedule 3.2 hereto also sets forth the proportion of the Merger
Consideration to be received by each Shareholder (such proportion also
representing the proportion of the Escrowed Consideration to be withheld from
each Shareholder). There are no other shares of capital stock authorized, issued
or outstanding, nor are there any shares of capital stock held in treasury. The
Shareholders own all of the ICON Stock free and clear of all liens, claims,
charges, encumbrances and security interests of any kind or character whatsoever
(collectively, "Liens"). The Shareholders have full right, power, legal capacity
and authority to transfer and deliver the ICON Stock in the Merger and none of
the Shareholders or ICON is a party to or bound by any agreements, arrangements
or understandings restricting in any manner the sale or transfer of any shares
of ICON Stock. The capital stock of ICON is duly authorized and all issued
capital stock has been duly and validly issued and is fully paid and
non-assessable and free of preemptive rights. Except as set forth on Schedule
3.2, there is not outstanding, and none of the Shareholders or ICON is bound by
or subject to, any subscription, option, warrant, call, right, contract,
commitment, agreement, understanding or arrangement to issue any additional
shares of capital stock of ICON, including any right of conversion or exchange
under any outstanding security or other instrument, and no shares of ICON Stock
are reserved for issuance for any purpose.
(b) ICON has properly exercised in its entirety the Call
Option (as defined in that certain Investors' Rights Agreement dated as of March
26, 1997, by and among ICON and the investors named therein).
-5-
<PAGE>
Section 3.3 SUBSIDIARIES, ETC. ICON does not own (directly or
indirectly) any equity interest in any corporation, partnership, limited
liability company, joint venture, association or other entity.
Section 3.4 AUTHORITY RELATIVE TO AND VALIDITY OF AGREEMENTS.
ICON and each of the Shareholders, to the extent a party thereto, has full power
and authority, corporate and otherwise, to execute and deliver this Agreement,
the Escrow Agreement, the Restrictive Covenant and Confidentiality Agreements
among GST, GST Sub and certain of the Shareholders to be dated the Closing Date
and in the form of Exhibit C hereto (the "Restrictive Covenant Agreements"), the
Indemnification Agreement among GST, GST Sub and certain of the Shareholders to
be dated the Closing Date and in the form of Exhibit D hereto (the
"Indemnification Agreement"), the Employment Agreement between Leslie N. Cole
and ICON to be dated the Closing Date and in the form of Exhibit E hereto (the
"Cole Employment Agreement") and the Employment Agreement between Donald Crowe
and ICON to be dated the Closing Date and in the form of Exhibit F hereto (the
"Crowe Employment Agreement" and together with this Agreement, the Escrow
Agreement, the Restrictive Covenant Agreements, the Indemnification Agreement
and the Cole Employment Agreement, the "ICON Documents") to which it is party
and to assume and perform all of their respective obligations hereunder and
thereunder. The execution and delivery of the ICON Documents and the performance
by ICON and the Shareholders of their respective obligations hereunder and
thereunder have been duly authorized by ICON's Board of Directors and no further
action or authorization on the part of or with respect to ICON including,
without limitation, any action or authorization by the Shareholders, is
necessary to authorize the execution and delivery by them of, and the
performance of their obligations under, the ICON Documents. There are no
corporate, contractual, statutory or other restrictions of any kind upon the
power and authority of ICON and each of the Shareholders to execute and deliver
the ICON Documents to which they are party and to consummate the transactions
contemplated hereunder and thereunder and no action, waiver or consent by any
foreign, federal, state, municipal or other governmental department, commission
or agency (a "Governmental Authority") is necessary to make the ICON Documents
valid and binding upon ICON and the Shareholders parties thereto in accordance
with their respective terms. At Closing, the ICON Documents shall have been duly
executed and delivered by ICON and the Shareholders parties thereto and
constitute the legal, valid and binding obligations of ICON and the
Shareholders, enforceable against ICON and the Shareholders in accordance with
their respective terms, subject to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws of general application
affecting the enforcement of creditors' rights and the fact that equitable
remedies or relief (including, but not limited to, the remedy of specific
performance) are subject to the discretion of the court from which such relief
may be sought.
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<PAGE>
Section 3.5 REQUIRED FILINGS AND CONSENTS; NO CONFLICT. Except
as set forth on Schedule 3.5 hereto, neither ICON nor any of the Shareholders
are required to submit any notice, report or other filing to or with any
Governmental Authority in connection with the execution, delivery or performance
of the ICON Documents. The execution, delivery and performance of the ICON
Documents by ICON and the Shareholders parties thereto and the consummation of
the transactions contemplated thereby do not and will not (a) conflict with or
violate any law, regulation, judgment, order or decree binding upon ICON or the
Shareholders, (b) conflict with or violate any provision of the Articles of
Incorporation or By-laws of ICON or (c) conflict with or result in a breach of
any condition or provision of, or constitute a default (or an event that with
notice or lapse of time or both would become a default) under, or result in the
creation or imposition of any Lien upon any properties or assets of ICON or the
Shareholders, including the shares of ICON Stock, pursuant to, or cause or
permit the acceleration prior to maturity of any amounts owing under, any
indenture, loan agreement, mortgage, deed of trust, lease, contract, license,
franchise or other agreement or instrument to which ICON or the Shareholders are
a party or which is or purports to be binding upon ICON or the Shareholders or
by which any of their respective properties are bound. The execution, delivery
and performance of the ICON Documents by ICON and the Shareholders parties
thereto and the consummation of the transactions contemplated thereby will not
result in the loss of any license, franchise, legal privilege or permit
possessed by ICON or give a right of termination to any party to any agreement
or other instrument to which ICON is a party or by which any of its properties
are bound.
Section 3.6 FINANCIAL STATEMENTS. Attached hereto as Schedule
3.6 are (a) balance sheets of ICON at December 31, 1995, 1996 and 1997 and
related statements of income and retained earnings and changes in cash flows for
the years then ended (collectively the "Audited Financial Statements"), all of
which have been certified by Arthur Andersen LLP as having been prepared in
accordance with generally accepted accounting principles ("GAAP") consistently
applied throughout the periods indicated, and (b) a balance sheet of ICON at
February 28, 1998 (the "Interim Balance Sheet"), certified by the President of
ICON as having been prepared in accordance with GAAP consistently applied. The
Audited Financial Statements and the Interim Balance Sheet (i) are true, correct
and complete in all material respects, (ii) are in accordance with the books and
records of ICON, and (iii) fairly, completely and accurately present the
financial position of ICON at the dates specified and the results of its
operations for the periods covered.
Section 3.7 ABSENCE OF CERTAIN CHANGES AND EVENTS. Since
December 31, 1997, except as set forth on Schedule 3.7 hereto, there has not
been with respect to ICON:
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<PAGE>
(i) any Material Adverse Effect;
(ii) any strike, picketing, work slowdown or labor
disturbance;
(iii) any damage, destruction or loss (whether or not
covered by insurance) with respect to any material assets or properties;
(iv) any redemption or other acquisition by it of ICON
Stock or any declaration or payment of any dividend or other distribution in
cash, stock or property with respect thereto other than cash distributions to
the Shareholders in an amount (not to exceed $150,000) equal to taxable income
of the Shareholders based on earnings of ICON during the period beginning
January 1, 1998 to the Closing Date multiplied by the highest maximum Federal
income tax rate applicable to each such Shareholder, all as accurately reflected
on Schedule 3.7 hereto;
(v) any entry into any material commitment or transaction
(including, without limitation, any borrowing or capital expenditure) other than
in the ordinary course of business or as contemplated by this Agreement;
(vi) any transfer of, or rights granted under, any
material leases or ICON Right (as hereinafter defined) other than those
transferred or granted in the ordinary course of business and consistent with
past practice;
(vii) any Lien on any assets or properties except in the
ordinary course of business; any payment of any debts, liabilities or
obligations (the "Liabilities") of any kind other than Liabilities currently
due; any cancellation of any debts or claims or forgiveness of amounts owed to
ICON;
(viii) any change in accounting principles or methods
(except insofar as may have been required by a change in GAAP); or
(ix) other than in the usual and ordinary course of
business, any increase in amounts payable by ICON to or for the benefit of or
committed to be paid by ICON to or for the benefit of any officer, director,
Shareholder, consultant, agent or employee of ICON, in any capacity, or in any
benefits granted under any bonus, stock option, profit sharing, pension,
retirement, deferred compensation, insurance, or other direct or indirect
benefit plan with respect to any such person, except for (A) severance payments
to employees of ICON who are parties to agreements with ICON in existence at or
prior to the date hereof and which agreements require such payments to be made,
which payments shall aggregate no greater than $900,000 and (B) such reasonable
employee bonuses which the Board of Directors of ICON shall, in its reasonable
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judgment, elect to pay, in the case of (A) and (B) as set forth on Schedule 3.7
hereto showing the use and allocation of such funds.
Since December 31, 1997, ICON has conducted its business only in the ordinary
course and in a manner consistent with past practice and has not made any
material change in the conduct of its business or operations. Without limiting
the generality of the foregoing, since December 31, 1997, ICON has not made any
payments (except in the ordinary course of business and in amounts and in a
manner consistent with past practice and the terms of such Plans) under any
Employee Benefit Plan (as hereinafter defined) or to any employee, independent
contractor or consultant, entered into any new Employee Benefit Plan or any new
consulting agreement, granted or established any awards under any such Employee
Benefit Plan or agreement, in any such case providing for payments of more than
$5,000 or adopted or otherwise amended any of the foregoing.
Section 3.8 TAXES AND TAX RETURNS.
(a) For purposes of this Agreement (i) the term "Taxes" shall
mean all taxes, charges, fees, levies, customs, duties or other assessments
including, without limitation, income, gross receipts, excise, property, sales,
license, payroll and franchise taxes, imposed by the United States, or any
state, local or foreign government or subdivision or agency thereof whether
computed on a unitary, combined or any other basis; and such term shall include
any interest and penalties or additions to tax; and (ii) the term "Tax Return"
shall mean any report, return or other information required to be filed with,
supplied to or otherwise made available to a taxing authority in connection with
Taxes.
(b) ICON has (i) duly filed with the appropriate taxing
authorities all Tax Returns required to be filed by or with respect to it, or
such Tax Returns are properly on extension, and all such duly filed Tax Returns
are true, correct and complete in all material respects, and (ii) ICON has paid
in full or made adequate provisions for on the Interim Balance Sheet (in
accordance with GAAP) all Taxes shown to be due on such Tax Returns. There are
no Liens for Taxes upon the assets of ICON except for statutory Liens for
current Taxes not yet due and payable or that may thereafter be paid without
penalty or are being contested in good faith. ICON has not received any notice
of audit, is not undergoing any audit of its Tax Returns, and has not received
any notice of deficiency or assessment from any taxing authority with respect to
liability for Taxes of ICON which has not been fully paid or finally settled.
There have been no waivers of statutes of limitations by ICON with respect to
any Tax Returns that relate to ICON. ICON has not filed a request with the
Internal Revenue Service (the "Service") for changes in accounting methods
within the last two years, which change would affect the accounting for tax
purposes, directly or indirectly, of ICON.
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Section 3.9 EMPLOYEE BENEFIT PLANS.
(a) Listed on Schedule 3.9 is a true, accurate and complete
list of all pension, retirement, profit-sharing, deferred compensation, bonus,
stock option or other incentive plan, or other employee benefit program,
arrangement, agreement or understanding, or medical, vision, dental or other
health plan, or life insurance or disability plan, or any other employee benefit
plan as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), (whether or not any such employee benefit plans
are otherwise exempt from the provisions of ERISA, whether or not legally
binding), adopted, established, maintained or contributed to by ICON or under
which it would otherwise be a party or have liability and under which employees
or former employees (whether or not retired employees) of ICON (or their
beneficiaries) are eligible to participate or derive a benefit (collectively,
the "Employee Benefit Plans"). There shall be included within the meaning of
ICON, solely for this purpose and for the purpose of the representations in this
Section 3.9, all "affiliates," whether or not incorporated, within the meaning
of Section 407(d)(7) of ERISA.
(b) Full payment has been made of all amounts that ICON is
required, under applicable law or under any Employee Benefit Plan or any
agreement relating to any Employee Benefit Plan to which it is a party, to have
paid as contributions to or benefits under any Employee Benefit Plan as of the
last day of the most recent fiscal year of such Employee Benefit Plan ended
prior to the date hereof. ICON has made adequate provisions in accordance with
GAAP for liabilities to meet current contributions or benefit payments.
(c) Except as provided in Schedule 3.9, a favorable
determination letter has been issued by the Service with respect to the
qualified status of each of the Employee Benefit Plans intended or required to
be qualified under Section 401(a) of the Code, and with respect to the tax
exempt status under Section 501(a) of the Code of (i) any trust through which
such Employee Benefit Plans are funded and (ii) any trust or other entity
established with respect to an Employee Benefit Plan and intended to be
qualified as a tax exempt organization under Section 501(c) of the Code. Since
the date of the most recent determination letter, each such qualified Employee
Benefit Plan has been, or can be (within 120 days of the Closing Date), filed
with the Service within the time required to preserve the rights of ICON to
adopt such amendment as may be required by the Service in order to issue a
favorable determination letter with respect to each such Plan's continued
tax-qualified and/or exempt status. No act or omission has occurred since the
date of the last favorable determination letter issued with respect to an
Employee Benefit Plan that resulted or is likely to result in the revocation of
the Plan's tax-qualified or exempt status.
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(d) ICON has performed all material obligations required to be
performed by it under the Employee Benefit Plans. ICON has not engaged in any
transaction with respect to the Employee Benefit Plans that would subject it or
the GST Companies to a tax, penalty or liability for a prohibited transaction
under Sections 406, 407 or 502(i) of ERISA or Section 4975 of the Code, nor have
its directors, officers, employees or agents, to the extent they or any of them
are fiduciaries under Title I of ERISA. ICON and any "administrator(s)" (as
described in Section 3(16)(A) of ERISA) of the Employee Benefit Plans have
complied in all material respects with the applicable requirements of ERISA, the
Code and all other statutes, orders, rules or regulations, specifically
including, without limitation, material compliance with all reporting and
disclosure requirements of Part 1 of Title 1 of ERISA and of the Code in a
timely and accurate manner, and no penalties have been or can reasonably be
expected to be imposed, nor is ICON or any administrator liable for any
penalties imposed, under ERISA, the Code or otherwise with respect to the
Employee Benefit Plans or any related trusts. ICON is not delinquent in the
payment of any federal, state or local taxes with respect to the Employee
Benefit Plans. There is no pending litigation, arbitration, or disputed claim,
settlement adjudication or proceeding with respect to the Employee Benefit
Plans, and neither ICON nor any administrator knows of any threatened
litigation, arbitration or disputed claim, adjudication proceeding, or any
governmental or other proceeding, or investigation with respect to the Employee
Benefit Plans or with respect to any fiduciary or administrator thereof (in
their capacities as such), or any party-in-interest thereto (with respect to
their relationship as such). There is no multiemployer plan to which ICON has
been a party or has been required to make any contributions at any time during
the last 10 years. Except as provided in Schedule 3.9, since January 1, 1992,
ICON has not terminated any Employee Benefit Plan.
(e) ICON has delivered or caused to be delivered to the GST
Companies, true and complete copies of (i) all Employee Benefit Plans and any
related trust agreements, custodial agreements, investment management
agreements, insurance contracts or policies, and administrative service
contracts, all as in effect, together with all amendments thereto which will
become effective at a later date; (ii) the latest Summary Plan Description and
any modifications thereto for each Employee Benefit Plan requiring same under
ERISA; (iii) the latest Service determination letter obtained with respect to
any such Employee Benefit Plan qualified under Section 401 or 501 of the Code;
(iv) the Summary Annual Report for the current and prior fiscal years for each
Employee Benefit Plan requiring same under ERISA; (v) each Form 5500 and/or Form
990 series filing (including required schedules and financial statements) for
the current and prior fiscal years for each Employee Benefit Plan required to
file such form; and (vi) the most recent actuarial evaluation, analysis or other
report issued with respect to any Employee Benefit Plan. From the date of the
most
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recent actuarial evaluation to the Closing Date, for each defined benefit plan,
there has been no increase in the unfunded actuarial liability under any such
defined benefit plan, assuming the years of the same actuarial assumptions as
used in the most recent applicable actuarial evaluation. Neither ICON nor any
officer, employee representative or agent thereof, has made any written or oral
representations or statements to any current or former employees, dependents,
participants or beneficiaries or other persons that are inconsistent in any
material manner with the provisions of these documents.
(f) With respect to any of ICON's employee welfare plans (as
defined in Section 3(1) of ERISA and including those Employee Benefits Plans
that qualify as such) that are "group health plans" under Section 162(k) or
Section 4980B of the Code and Section 607(1) of ERISA and related regulations
(relating to the benefit continuation rights imposed by the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended ("COBRA")), there has been timely
compliance in all material respects with all requirements imposed thereunder, as
and when applicable to such plans, so that ICON has no (and will not incur any)
material loss, assessment, penalty, loss of federal income tax deduction or
other sanction, arising on account of or in respect of any failure to comply
with any COBRA benefit continuation requirement, that is capable of being
assessed or asserted directly or indirectly against or against the GST Companies
or any of them, with respect to any such plan.
Section 3.10 LABOR MATTERS. None of ICON's employees is
represented by any labor union, association or other organization. ICON has not
received any notice from any labor union, association or other organization that
it represents or intends to represent ICON's employees. ICON has complied in all
material respects with all applicable laws affecting employment and employment
practices, terms and conditions of employment and wages and hours. ICON has not
received any notice of and there is no complaint alleging unfair labor practices
against ICON pending, or to the knowledge of ICON, threatened before the
National Labor Relations Board or any other charges or complaints pending, or to
the knowledge of ICON, threatened before the Equal Employment Opportunity
Commission, any state or local Human Rights Commission or any other state or
local agency in respect of labor or employment matters. Except as set forth on
Schedule 3.10, no labor strike, material dispute, slowdown or stoppage has
occurred with respect to ICON's employees and there is no labor strike, material
dispute, slowdown or stoppage pending or threatened with respect to ICON's
employees. Schedule 3.10 sets forth all pending grievances or arbitration
proceedings against ICON with respect to the operation of the Business.
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Section 3.11 PROPERTIES.
(a) ICON has good and marketable title, or valid leasehold
rights (in the case of leased property), to all real property and all personal
property purported to be owned or leased by it or used in the operation of the
Business, free and clear of all encumbrances, excluding (i) Liens for taxes,
fees, levies, imposts, duties or governmental charges of any kind which are not
yet delinquent or are being contested in good faith by appropriate proceedings
which suspend the collection thereof; (ii) Liens for mechanics, materialmen,
laborers, employees, suppliers, lessors or others which are not yet delinquent
or, in the case of liens for mechanics, materialman, laborers, employees or
suppliers, are being contested in good faith by appropriate proceedings; (iii)
Liens created in the ordinary course of business in connection with the leasing
or financing of office, computer and related equipment and supplies; (iv)
easements and similar encumbrances ordinarily created for fuller utilization and
enjoyment of property; and (v) Liens or defects in title or leasehold rights
that either individually or in the aggregate do not and cannot reasonably be
expected to have a Material Adverse Effect. All of such owned or leased property
with a book value in excess of $5,000 is listed or described on Schedule 3.11.
Each lease of ICON for personal property is legal, valid and binding as between
ICON and the other party or parties thereto.
(b) Except as set forth on Schedule 3.11 hereto, inventory
reflected on the Interim Balance Sheet was determined and valued in accordance
with GAAP consistently applied, stated, on an aggregate basis, at the lower of
cost or market value and consists or will consist solely of merchandise usable
or salable in the ordinary course of business. Proper recognition has been given
in the Interim Balance Sheet.
(c) Except as set forth on Schedule 3.11 hereto or adequately
reserved against on the Interim Balance Sheet, each account receivable reflected
on the Estimated Balance Sheet constitutes a bona fide receivable resulting from
a bona fide sale to a customer in the ordinary course of business, the amount of
which was or will be actually due and has been or will be collected (net of an
amount equal to the reserve and allowance for bad debts set forth on the Final
Balance Sheet) in the ordinary course of business. The books and records of ICON
state correctly the facts with respect to each account receivable of ICON and
the balance due thereon. There are no defenses, claims of disabilities,
counterclaims, offsets, refusals to pay or other rights of set-off against any
such accounts receivable and there in no threatened, intended or proposed
defense, claim of disability, counterclaim, offset, refusal to pay or other
right of set-off with respect thereto. Except to the extent of appropriate
reserves and allowances that ICON has established specifically for doubtful
accounts (which reserves and allowances are set forth on Schedule
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3.11), each account receivable reflected on the Interim Balance Sheet and each
account receivable established after such Interim Balance Sheet will be paid in
full by not later than the 120th day after the Closing Date. Any such reserves
and allowances for bad debts reflected on the Interim Balance Sheet have been or
will be established on the basis of historical experience in accordance with
GAAP consistently applied.
(d) Schedule 3.11 attached hereto is a complete and correct
list of (i) all real property or premises owned in whole or in part by ICON
together with, in each case, a brief description of such property or premises,
including the area and the current uses thereof, the record title holder
thereof, the location thereof, the material improvements thereon and all
indebtedness secured by a lien, mortgage or deed of trust thereon and (ii) all
real property or premises leased in whole or in part by ICON, together with, in
each case, a brief description of such property or premises, including the area
and the current uses thereof and the name of the lessor thereof. Complete and
correct copies of all such deeds, mortgages, deeds of trust, leases, guarantees
of leases and other documents concerning such real property and the interests of
ICON therein have been heretofore delivered to the GST Companies. ICON has legal
and valid occupancy permits and other required licenses or government approvals
for each of the properties and premises owned, leased, used or occupied by ICON
(copies of which have been heretofore delivered to the GST Companies). Each
lease of ICON for real property is legal, valid and binding as between ICON and
the other party or parties thereto and ICON is a tenant or possessor in good
standing thereunder, free of any default or breach whatsoever and quietly enjoys
the premises provided for therein.
Section 3.12 TRADEMARKS, PATENTS AND COPYRIGHTS.
(a) For purposes of this Agreement, the term "ICON Rights"
shall mean all worldwide industrial and intellectual property rights, including,
without limitation, each patent, patent rights, license, patent application,
trade name, trademark, trade name and trademark registration, copyright,
copyright registration, copyright application, service mark, brand mark and
brand name, trade secrets relating to or arising from any proprietary process,
formula, source or object code, owned, possessed or licensed by ICON. ICON owns
or has the right to use, sell or license all ICON Rights and such ICON Rights
are sufficient for the conduct of the Business as being conducted as of the date
hereof. Schedule 3.12 hereto lists each patent, patent right, patent
application, tradename registration, trademark registration, copyright
registration, copyright application, service mark, source and object code owned,
licensed or possessed by ICON.
(b) Except as set forth on Schedule 3.12, the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby will not constitute a breach
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of any instrument or agreement governing any ICON Rights, will not cause the
forfeiture or termination or give rise to a right of forfeiture or termination
of any ICON Rights or impair the right of ICON to use, sell or license any ICON
Rights or any portion thereof.
(c) Neither the manufacture, marketing, license, sale or
intended use of any product currently licensed or sold by ICON or currently
under development by ICON violates any license or agreement between ICON and any
third party relating to such product or infringes any intellectual property
right of any other party, and there is no pending or, to the best knowledge of
ICON, threatened claim or litigation contesting the validity, ownership or right
to use, sell, license or dispose of any ICON Right nor, to the best knowledge of
ICON is there any basis for any such claim, nor has any Shareholder or any
officer or director of ICON received any notice asserting that any ICON Right or
the proposed use, sale, license or disposition thereof conflicts or will
conflict with the rights of any other party, nor, to the best knowledge of ICON,
is there any basis for any such assertion.
(d) No current or prior officers, employees or consultants of
ICON have claimed an ownership interest in any ICON Rights as a result of having
been involved in the development of such property while employed by or
consulting to ICON or otherwise nor, to the best knowledge of ICON, is any such
claim contemplated.
Section 3.13 LEGAL PROCEEDINGS, CLAIMS, INVESTIGATIONS, ETC.
There is no legal, administrative, arbitration or other action or proceeding or
governmental investigation pending, or to the knowledge of ICON, threatened,
against (i) ICON or (ii) any director, officer or employee thereof or any
Shareholder relating to the Business. ICON has not been informed of any
violation of or default under, any laws, ordinances, regulations, judgments,
injunctions, orders or decrees (including without limitation, any immigration
laws or regulations) of any court, governmental department, commission, agency,
instrumentality or arbitrator applicable to the Business. ICON is not currently
subject to any judgment, order, injunction or decree of any court, arbitral
authority, administrative agency or other Governmental Authority.
Section 3.14 LICENSES, PERMITS, ETC. Schedule 3.14 lists all
material franchises, licenses, permits, consents, authorizations, approvals and
certificates of any Governmental Authority used in conducting the Business
(collectively, the "Permits"). Each of the Permits is currently valid and in
full force and effect and the Permits constitute all material franchises,
licenses, permits, consents, authorizations, approvals and certificates of any
Governmental Authority necessary to the conduct of the Business. ICON is not in
violation of any of the Permits and there is no pending or, to the best
knowledge of ICON, threatened proceeding that could reasonably be expected to
result
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in the revocation or cancellation of, or inability of ICON to renew, any Permit.
Section 3.15 INSURANCE. Schedule 3.15 hereto sets forth a list
and brief description of all existing insurance policies maintained by ICON
pertaining to its business properties, personnel or assets. ICON is not in
default with respect to any provision contained in any insurance policy and has
not failed to give any notice or present any claim under any insurance policy in
due and timely fashion. Each such policy is in full force and effect. All
payments with respect to such policies are current and ICON has not received any
notice threatening a suspension, revocation, modification or cancellation of any
such policy.
Section 3.16 MATERIAL CONTRACTS.
(a) Except as set forth on Schedule 3.16 hereto, ICON is not a
party to and is not bound by any contract or has any commitment, whether written
or oral, that has a term in excess of one year and will result in payments to or
from ICON in excess of $10,000 or require material performance on the part of
ICON, other than (i) contracts or commitments entered into in the ordinary
course of business with vendors and customers and (ii) contracts or commitments
cancelable upon not more than 30 days' notice. Each of the contracts and
commitments set forth on Schedule 3.16 hereto is valid and existing, in full
force and effect and enforceable in accordance with its terms (subject to
equitable principles, bankruptcy, reorganization, insolvency and moratorium laws
and limitations on creditors' rights generally) and there is no material default
or claim of default against ICON or any notice of termination with respect
thereto. ICON has complied in all material respects with all requirements of,
and performed in all material respects all of its obligations under, such
contracts and commitments. In addition, no other party to any such contract or
commitment is, to the best of ICON's knowledge, in default under or in breach of
any material term or provision thereof, and there exists no condition or event
which, after notice or lapse of time or both, would constitute a material
default by any party to any such contract or commitment. Copies of all the
written documents and a synopsis of all oral contracts and commitments described
in Schedule 3.16 hereto have heretofore been made available to the GST Companies
and are true and complete and include all amendments and supplements thereto and
modifications thereof to and including the date hereof.
(b) Except as set forth on Schedule 3.16 hereto, ICON is not a
party to any oral or written (i) agreement with any consultant, executive
officer or other key employee the benefits of which are contingent, or the terms
of which are materially altered, upon the occurrence of the transactions
contemplated by this Agreement, or (ii) except as set forth in this Agreement
and reflected on Schedule 3.7 hereto, Employee Benefit Plan, including
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any stock option plan and the like, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by the
occurrence of the transactions contemplated by this Agreement.
Section 3.17 BROKER. No broker, finder or investment banker is
entitled to any brokerage or finder's fee or other commission in connection with
the transactions contemplated hereby based on arrangements made by or on behalf
of ICON or the Shareholders.
Section 3.18 COMPLIANCE WITH LAWS; ENVIRONMENTAL MATTERS.
(a) ICON is in compliance in all material respects with all
laws, ordinances, regulations and orders applicable to the Business and has no
notice or knowledge of any violations thereof, whether actual, claimed or
alleged.
(b) ICON is not the subject of, or, to the knowledge of ICON,
being threatened to be the subject of (i) any enforcement proceeding, or (ii)
any investigation, brought in either case under any Federal, state or local
environmental law, rule, regulation, or ordinance at any time in effect or (iii)
any third party claim relating to environmental conditions on or off the
properties of ICON. ICON has not been notified that it must obtain any permits
and licenses or file documents for the operation of the Business under federal,
state and local laws relating to pollution or protection of the environment.
Neither ICON nor the Shareholders has been notified of any conditions on or off
the properties of ICON that can reasonably be expected to give rise to any
liabilities, known or unknown, under any Federal, state or local environmental
law, rule, regulation or ordinance, or as the result of any claim of any third
party relating to environmental conditions. For the purposes of this Section
3.18, an investigation shall include, but is not limited to, any written notice
received by ICON and the Shareholders that relates to the onsite or offsite
disposal, release, discharge or spill of any waste, waste water, pollutant or
contaminants.
(c) There are no toxic wastes or other toxic or hazardous
substances or materials, pollutants or contaminants that ICON (or, to the
knowledge of ICON, any previous occupant of ICON's facilities) has used, stored
or otherwise held in or on any of the facilities of ICON, which are present at
or have migrated from the facilities, whether contained in ambient air, surface
water, groundwater, land surface or subsurface strata. Such facilities have been
maintained by ICON in compliance in all material respects with all environmental
protection, occupational, health and safety or similar laws, ordinances,
restrictions, licenses, and regulations. ICON has not disposed of or arranged
(by contract, agreement or otherwise) for the disposal of any material or
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substance that was generated or used by ICON at any off-site location that has
been or is listed or proposed for inclusion on any list promulgated by any
Governmental Authority for the purpose of identifying sites that pose a danger
to health and safety. There have been no environmental studies, reports and
analyses made or prepared in the last five years relating to the facilities of
ICON. ICON has not installed any underground storage tanks in any of its
facilities and, to the best of ICON's knowledge, none of such facilities
contains any underground storage tanks.
Section 3.19 ILLEGAL PAYMENTS. Neither ICON nor any
Shareholder has, directly or indirectly, paid or delivered any fee, commission
or other sum of money or item of property, however characterized, to any finder,
agent, government official or other party, in the United States of America or
any other country, that is in any manner related to the business or operations
of ICON, which ICON or the Shareholder knows or has reason to believe to have
been illegal under any federal, state or local laws or the laws of any other
country having jurisdiction. ICON has not participated, directly or indirectly,
in any boycotts affecting any of its actual or potential customers.
Section 3.20 BANKS; SAFE DEPOSIT BOXES. Schedule 3.20 lists
the names and locations of all banks or other financial institutions at which
ICON has an account and/or safe deposit box, the numbers of any such accounts
and boxes and the names of all persons authorized to draw thereon or to have
access thereto.
Section 3.21 COMPLETE DISCLOSURE. No representation or
warranty made by ICON in this Agreement, and no exhibit, schedule, certificate
or other document or instrument delivered by ICON at the Closing contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements contained herein and therein not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF GST AND GST SUB
GST and GST Sub hereby jointly and severally represent and
warrant to ICON as follows:
Section 4.1 CORPORATE ORGANIZATION; CERTIFICATE OF
INCORPORATION AND BY-LAWS. Each of GST and GST Sub is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. Each of GST and GST Sub has provided ICON with
true and complete copies of its certificate of incorporation and By-laws as in
effect on the date hereof.
Section 4.2 AUTHORITY RELATIVE TO AND VALIDITY OF AGREEMENTS.
Each of the GST Companies has full power and
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authority, corporate and otherwise, to execute and deliver this Agreement, the
Escrow Agreement, the Restrictive Covenant Agreements and the Indemnification
Agreement (collectively, the "Buyer Documents") and to assume and perform all of
its obligations thereunder. The execution and delivery of the Buyer Documents
and the performance by each of the GST Companies of their respective obligations
hereunder and thereunder have been duly authorized by their respective Boards of
Directors and no further action or authorization on the part of or with respect
to the GST Companies including, without, limitation any action or authorization
by their respective shareholders, is necessary to authorize the execution and
delivery by them of, and the performance of their obligations under, the Buyer
Documents. There are no corporate, contractual, statutory or other restrictions
of any kind upon the power and authority of the GST Companies to execute and
deliver the Buyer Documents and to consummate the transactions contemplated
thereunder and no action, waiver or consent by any Governmental Authority is
necessary to make the Buyer Documents valid and binding upon the GST Companies
in accordance with the respective terms. The Buyer Documents have been duly
executed and delivered by the GST Companies and constitute their respective
legal, valid and binding obligations, enforceable against them in accordance
with their respective terms, subject to applicable bankruptcy, insolvency,
reorganization and moratorium laws and other laws of general application
affecting the enforcement of creditors' rights generally, and the fact that
equitable remedies or relief (including, but not limited to, the remedy of
specific performance) are subject to the discretion of the court from which such
relief may be sought.
Section 4.3 REQUIRED FILING AND CONSENTS; NO CONFLICTS. Except
as set forth on Schedule 4.3 hereto, neither of the GST Companies is required to
submit any notice, report or other filing to or with any Governmental Authority
in connection with the execution, delivery or performance of the Buyer
Documents. The execution, delivery and performance of the Buyer Documents by the
GST Companies and the consummation of the transactions contemplated thereby do
not and will not (a) conflict with or violate any law, regulation, judgment,
order or decree binding upon the GST Companies, (b) conflict with or violate any
provision of the Certificate of Incorporation or By-laws of the GST or GST Sub
or (c) conflict with or result in a breach of any condition or provision of, or
constitute a default (or an event that with notice or lapse of time or both
would become a default) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any properties or assets of the GST Companies
pursuant to, or cause or permit the acceleration prior to maturity of any
amounts owing under, any indenture, loan agreement, mortgage, deed of trust,
lease, contract, license, franchise or other agreement or instrument to which
the GST Companies are parties or which is or purports to be binding upon the GST
Companies or by which any of their respective properties are bound. The
execution, delivery and
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performance of the Buyer Documents by the GST Companies and the consummation of
the transactions contemplated thereby will not result in the loss of any
license, franchise, legal privilege or permit possessed by the GST Companies or
give a right of termination to any party to any agreement or other instrument to
which the GST Companies are parties or by which any of their respective
properties are bound.
Section 4.4 LEGAL PROCEEDINGS, CLAIMS, ETC. There is no legal,
administrative, arbitration or other action or proceeding or governmental
investigation pending, or to the knowledge of the GST Companies, threatened,
against either of the GST Companies, any director, officer or employee thereof
either relating to this Agreement or the transactions contemplated hereunder or
could reasonably be expected to have an adverse effect on GST or GST Sub's
ability to perform their respective obligations hereunder. Neither of the GST
Companies is currently subject to any judgment, order, injunction or decree of
any court, arbitral authority, administrative agency or other Governmental
Authority that would have an adverse effect on their ability to perform their
respective obligations hereunder.
Section 4.5 BROKER. No broker, finder or investment banker is
entitled to any brokerage or finder's fee or other commission in connection with
the transactions contemplated hereby based upon the arrangements made by or on
behalf of the GST Companies.
ARTICLE V
CONDITIONS PRECEDENT TO OBLIGATIONS OF ICON
The obligations of ICON under this Agreement are subject to
the satisfaction, on or prior to the Closing Date, unless waived in writing by
ICON, of each of the following conditions:
Section 5.1 REPRESENTATIONS AND WARRANTIES TRUE. The
representations and warranties of the GST Companies contained in this Agreement
shall be true and correct in all material respects as of the date when made and
at and as of the Closing Date, except as and to the extent that the facts and
conditions upon which such representations and warranties are based are
expressly required or permitted to be changed by the terms hereof, with the same
force and effect as if made on and as of the Closing Date, and ICON shall have
received a certificate to that effect and as to the matters set forth in Section
5.2 hereof, dated the Closing Date, from the President or Chief Executive
Officer of each of the GST Companies.
Section 5.2 PERFORMANCE OF COVENANTS. The GST Companies shall
have performed or complied in all material respects with all agreements,
conditions and covenants required by this
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Agreement to be performed or complied with by them on or before the Closing
Date.
Section 5.3 NO PROCEEDINGS. No preliminary or per- manent
injunction or other order (including a temporary restraining order) of any
federal, state or local court or other governmental agency or of any foreign
jurisdiction that prohibits the consummation of the transactions that are the
subject of this Agreement shall have been issued or entered and remain in
effect.
Section 5.4 AGREEMENTS. The Escrow Agreement, the Restrictive
Covenant Agreements and the Indemnification Agreement shall have been executed
and delivered by the GST Companies and GST shall have caused the Cole Employment
Agreement and the Crowe Employment Agreement to have been executed and delivered
by GST Telecom Inc.
Section 5.5 CONSENTS AND APPROVALS. All filings and
registrations with, and notifications to, all Governmental Authorities required
for consummation of the transactions contemplated by this Agreement shall have
been made, and all consents, approvals and authorizations of all Governmental
Authorities and parties to material contracts, licenses, agreements or
instruments required for consummation of the transactions contemplated by this
Agreement shall have been received and shall be in full force and effect.
Section 5.6 OPINION OF COUNSEL TO THE GST COMPANIES. ICON
shall have received an opinion of counsel to the GST Companies in the form of
Exhibit G attached hereto.
ARTICLE VI
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE GST COMPANIES
The obligations of the GST Companies under this Agreement are
subject to the satisfaction, on or prior to the Closing Date, unless waived in
writing by the GST Companies, of each of the following conditions:
Section 6.1 REPRESENTATION AND WARRANTIES TRUE. The
representations and warranties of ICON contained in this Agreement shall be true
and correct in all material respects as of the date when made and at and as of
the Closing Date, except as and to the extent that the facts and conditions upon
which such representations and warranties are based are expressly required or
permitted to be changed by the terms hereof, with the same force and effect as
if made on and as of the Closing Date, and the GST Companies shall have received
a certificate to that effect and as to the matters set forth in Sections 6.2 and
6.8 hereof, dated the Closing Date, from the President or Chief Executive
Officer of ICON.
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Section 6.2 PERFORMANCE OF COVENANTS. ICON shall have
performed or complied in all material respects with all agreements, conditions
and covenants required by this Agreement to be performed or complied with by it
on or before the Closing Date.
Section 6.3 NO PROCEEDINGS. No preliminary or per- manent
injunction or other order (including a temporary restraining order) of any
federal, state or local court or other governmental agency or of any foreign
jurisdiction that prohibits the consummation of the transactions that are the
subject of this Agreement or operation of its business shall have been issued or
entered and remain in effect.
Section 6.4 AGREEMENTS. The Cole Employment Agreement, the
Crowe Employment Agreement, the Restrictive Covenant Agreements, the Escrow
Agreement and the Indemnification Agreement shall have been executed and
delivered by ICON and the Shareholders party thereto.
Section 6.5 CONSENTS AND APPROVALS. All filings and
registrations with, and notifications to, all Governmental Authorities required
for consummation of the transactions contemplated by this Agreement shall have
been made, and all consents, approvals and authorizations of all Governmental
Authorities and parties to material contracts, licenses, agreements or
instruments required for consummation of the transactions contemplated by this
Agreement shall have been received and shall be in full force and effect.
Section 6.6 OPINION OF ICON'S COUNSEL. The GST Companies shall
have received an opinion of counsel to ICON in the form of Exhibit H attached
hereto.
Section 6.7 MATERIAL CHANGES. Since the date hereof, there
shall not have been any Material Adverse Effect.
Section 6.8 ACHIEVEMENT OF MINIMUM EBITDA. There shall have
been demonstrated to the reasonable satisfaction of the GST Companies that
earnings before interest, taxes, depreciation and amortization of ICON for the
fiscal year ended December 31, 1997 shall have been not less than $1,565,000.
Section 6.9 CUSTOMER LIST. The GST Companies shall be
satisfied in their sole discretion with the complete list of ICON customers
provided to them prior to the Closing Date.
Section 6.10 CORPORATE RECORDS. ICON's minute books, stock
certificate books, corporate records, books of account, deeds, leases,
indentures, contracts, agreements, evidence of indebtedness, securities,
correspondence, bank accounts and records, documents pertaining to all assets,
claims, rights and liabilities and other existing documents and records (unless
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otherwise requested by the GST Companies, delivery of the foregoing has not been
effected by physical delivery at the Closing, but by surrendering to the GST
Companies access to the premises containing the foregoing).
Section 6.11 APPROVAL BY SHAREHOLDERS. This Agreement shall
have been approved and adopted by the requisite affirmative vote of the
Shareholders in accordance with the WBCA.
Section 6.12 APPRAISAL RIGHTS. The holders of ICON Stock who
shall have properly exercised, and who shall not have failed to take any steps
theretofore necessary to perfect or who shall not have otherwise subsequently
withdrawn or lost, their appraisal rights with respect to such shares, shall
hold ICON Stock representing not more than 2% of the aggregate of outstanding
shares of ICON Stock.
Section 6.13 RESIGNATIONS. The GST Companies shall have
received the resignations, effective as of the Effective Time, of such directors
and officers of ICON as it shall have identified to ICON.
Section 6.14 LETTERS OF TRANSMITTAL. Except as otherwise
contemplated by Section 6.12 hereof, the Letters of Transmittal shall have been
executed by each of the Shareholders and delivered to the Exchange Agent.
Section 6.15 REPAYMENT OF LOAN. Leslie N. Cole shall have
executed and delivered an instruction to the Exchange Agent authorizing the same
to pay to ICON (out of the portion of the Merger Consideration otherwise payable
to Cole) the amount of $254,912.88, representing payment in full of all
outstanding indebtedness evidenced by that certain Promissory Note dated March
19, 1997, made by Cole in favor of ICON.
ARTICLE VII
INDEMNIFICATION
Section 7.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS.
Subject to the limitations set forth in this Article VII and
notwithstanding any investigation conducted at any time with regard thereto by
or on behalf of any party hereto, all representations, warranties, covenants and
agreements of GST, GST Sub and ICON in this Agreement and the documents and
instruments delivered pursuant to this Agreement (the "Additional Documents")
shall survive the execution, delivery and performance of this Agreement.
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Section 7.2 INDEMNIFICATION.
(a) Subject to the limitations set forth in this Article VII,
ICON indemnifies and holds harmless the GST Companies and their Affiliates (as
such term is defined in Rule 405 under the Securities Act of 1933, as amended)
(collectively, the "GST Parties") from and against any and all losses,
liabilities, damages, demands, claims, suits, actions, judgments or causes of
action, assessments, costs and expenses including, without limitation, interest,
penalties, reasonable attorneys' fees, any and all reasonable expenses incurred
in investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation (collectively, "Damages"), asserted against,
resulting to, imposed upon, or incurred or suffered by any of GST Parties,
directly or indirectly, as a result of or arising from the following
(individually an "Indemnifiable Claim" and collectively "Indemnifiable Claims"
when used in the context of the GST Parties as the Indemnified Party (as defined
below)):
(i) Any inaccuracy in, omission from or breach of any of
the representations, warranties or agreements made by ICON in this Agreement or
any Additional Documents or the non-performance of any covenant or obligation to
be performed by ICON under this Agreement or any Additional Documents;
(ii) Any claims of any former employee of ICON including,
without limitation, in respect of or relating to severance, pension, welfare or
medical benefits or injuries or disabilities sustained while an employee of
ICON;
(iii) Any claims of any present employee of ICON that
relate to or arise out of, in whole or in part, periods prior to the Closing
Date; and
(iv) The claims of any broker, finder or investment
banker engaged by ICON, the Shareholders or their respective Affiliates.
(b) Subject to the limitations set forth in this Article VII,
the GST Companies shall indemnify and hold harmless ICON from and against any
and all Damages asserted against, resulting to, imposed upon, or incurred or
suffered by ICON directly or indirectly, as a result of or arising from the
following (individually an "Indemnifiable Claim" and collectively "Indemnifiable
Claims" when used in the context of ICON as the Indemnified Party):
(i) Any inaccuracy in, omission from or breach of any of
the representations, warranties or agreements made by GST or GST Sub in this
Agreement or any Additional Documents or the non-performance of any covenant or
obligation to be performed by either of GST or GST Sub under this Agreement or
any Additional Documents; and
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(ii) The claims of any broker, finder or investment
banker engaged by the GST Companies or their respective Affiliates.
(c) For purposes of this Article VII, all Damages shall be
computed net of any insurance coverage with respect thereto that reduces the
Damages that would otherwise be sustained; PROVIDED, HOWEVER, that in all cases,
the timing of the receipt or realization of insurance proceeds shall be taken
into account in determining the amount of reduction of Damages.
Section 7.3 LIMITATIONS ON INDEMNIFICATION. Rights to
indemnification hereunder are subject to the following limitations:
(a) The obligation of indemnity provided herein with respect
to the representations and warranties set forth in Section 3.8 shall terminate
on the third anniversary date hereof.
(b) The obligation of indemnity provided herein with respect
to all other representations and warranties set forth in this Agreement shall
terminate upon the earlier to occur of (i) April 30, 1999 and (ii) 30 days after
the completion by GST of an audit that includes the financial statements of the
Business for the twelve month period ended December 31, 1998.
(c) If, prior to the termination of any obligation to
indemnify as provided for herein, written notice of a claimed breach is given by
the party seeking indemnification including in detail the basis therefor (the
"Indemnified Party") to the party from whom indemnification is sought (the
"Indemnifying Party") or a suit or action based upon a claimed breach is
commenced against the Indemnified Party, the Indemnified Party shall not be
precluded from pursuing such claimed breach or suit or action, or from
recovering from the Indemnifying Party (whether through the courts or otherwise)
on the claim, suit or action, by reason of the termination otherwise provided
for above.
(d) Anything in this Agreement to the contrary
notwithstanding, the obligation of indemnification under this Article VII by
ICON shall be satisfied solely from the Escrow Amount.
(e) No party shall be entitled to indemnification hereunder
with respect to any Indemnifiable Claim (or, if more than one Indemnifiable
Claim is asserted, with respect to all Indemnifiable Claims) unless the
aggregate amount of Damages with respect to such Indemnifiable Claim or Claims
on behalf of such party exceeds $240,000; and after the $240,000 threshold is
reached, each indemnified person shall be entitled to be indemnified for the
amount of all claims arising hereunder in excess of $240,000; PROVIDED, HOWEVER,
that anything set forth in this Agreement to the contrary notwithstanding, the
provisions of this Section 7.3(e) shall not be applicable to any Damages
directly
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or indirectly related to any shares of ICON stock owned of record by Stanley R.
Schill.
Section 7.4 DISPOSITION OF ESCROW AMOUNT. On the third
anniversary date hereof, the parties to the Escrow Agreement shall instruct the
Escrow Agent to pay over to Leslie N. Cole, as agent for the Shareholders (the
"Shareholders' Agent"), the Escrow Amount then being held pursuant to the Escrow
Agreement (which amount shall be inclusive of interest earned on the Escrow
Account) less an amount equal to the amounts paid, if any, pursuant to the
Indemnification Agreement (which amounts shall be paid directly to the party
making any such payment), unless at such time there is pending against ICON one
or more Indemnifiable Claims, in which case the Escrow Amount shall continue to
be held by the Escrow Agent in accordance with this Agreement and the Escrow
Agreement. If and to the extent that from time to time pursuant to the
provisions of this Agreement, it is determined in accordance with this Article
VII that the GST Companies are entitled to indemnification with respect to
Indemnifiable Claims, the parties to the Escrow Agreement shall instruct the
Escrow Agent to pay over to the GST Companies the Escrow Amount, or portion
thereof, necessary to satisfy, to the extent possible, such Indemnifiable
Claims.
Section 7.5 PROCEDURE FOR INDEMNIFICATION WITH RESPECT TO
THIRD-PARTY CLAIMS. The Indemnified Party will give the Indemnifying Party
prompt written notice of any third party claim, demand, assessment, suit or
proceeding to which the indemnity set forth in Section 7.2 applies, which notice
to be effective must describe said claim in reasonable detail (the
"Indemnification Notice"). Notwithstanding the foregoing, the Indemnified Party
shall not have any obligation to give any notice of any assertion of liability
by a third party unless such assertion is in writing and the rights of the
Indemnified Party to be indemnified hereunder in respect of any third party
claim shall not be adversely affected by its failure to give notice pursuant to
the foregoing unless and, if so, only to the extent that, the Indemnifying Party
is materially prejudiced thereby. The Indemnifying Party will have the right to
control the defense or settlement of any such action subject to the provisions
set forth below, but the Indemnified Party may, at its election, participate in
the defense of any action or proceeding at its sole cost and expense. Should the
Indemnifying Party fail to defend any such action (except for failure resulting
from the Indemnified Party's failure to timely give the Indemnification Notice),
then, in addition to any other remedy, the Indemnified Party may settle or
defend such action or proceeding through counsel of its own choosing and may
recover from the Indemnifying Party the amount of such settlement, demand, or
any judgment or decree and all of its costs and expenses, including reasonable
fees and disbursements of counsel. The Indemnified Party will not compromise or
settle any claim without the prior written consent of the Indemnifying Party
which consent shall not
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be unreasonably withheld; PROVIDED, HOWEVER, if such approval is unreasonably
withheld, the liability of the Indemnified Party will be limited to the total
sum represented in the amount of the proposed compromise or settlement and the
amount of the Indemnified Party's reasonable counsel fees incurred in defending
such claim, as permitted by the preceding sentence, accrued at the time said
approval is unreasonably withheld. Notwithstanding the preceding sentence, the
foregoing limitation on the liability of the Indemnified Party shall only be
applicable if (i) a complete release of the Indemnifying Party is contemplated
to be part of the proposed compromise or settlement of such third party claim
and (ii) the Indemnifying Party withholds its consent to such compromise or
settlement.
Section 7.6 PROCEDURE FOR INDEMNIFICATION WITH RESPECT TO
NON-THIRD-PARTY CLAIMS. In the event that the Indemnified Party asserts the
existence of an Indemnifiable Claim (but excluding claims resulting from the
assertion of liability by third parties), it shall give prompt written notice to
the Indemnifying Party specifying the nature and amount of the claim asserted
(the " Non- Third Party Claim Indemnification Notice"). If the Indemnifying
Party, within 30 days (or such greater time as may be necessary for the
Indemnifying Party to investigate such Indemnifiable Claim not to exceed 60
days), after receiving the Non-Third Party Claim Indemnification Notice from the
Indemnified Party, shall not give written notice to the Indemnified Party
announcing its intent to contest such assertion of the Indemnified Party (the
"Contest Notice"), such assertion shall be deemed accepted and the amount of
claim shall be deemed a valid Indemnifiable Claim. During the time period set
forth in the preceding sentence, the Indemnified Party shall cooperate fully
with the Indemnifying Party in respect of such Indemnifiable Claim. In the
event, however, that the Indemnifying Party contests the assertion of a claim by
giving a Contest Notice to the Indemnified Party within said period, then if the
parties hereto, acting in good faith, cannot reach agreement with respect to
such claim within 30 days after such notice was first given to the Indemnifying
Party, such parties may seek any remedy available to them at law or in equity.
ARTICLE VIII
COVENANTS
Section 8.1 COVENANTS OF ICON REGARDING CONDUCT OF BUSINESS
OPERATIONS PENDING THE CLOSING. ICON covenants and agrees that between the date
of this Agreement and the Closing Date, it will carry on its businesses in the
ordinary course and consistent with past practice, and will use its best efforts
to (i) preserve its business organizations intact, (ii) retain the services of
their present employees, and (iii) preserve the goodwill of its suppliers and
customers, and will not, except in the ordinary
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course of business, purchase, sell, lease or dispose of any property or assets
or incur any liability or enter into any other extraordinary transaction. By way
of amplification and not limitation, between the date of this Agreement and the
Closing Date, ICON will not do any of the following without the prior written
consent of the GST Companies:
(a) (i) issue, sell, pledge, dispose of, encumber, authorize,
or propose the issuance, sale, pledge, disposition, encumbrance or authorization
of any shares of capital stock of any class, or any options, warrants,
convertible securities or other rights of any kind to acquire any shares of
capital stock, or any other ownership interest, of ICON; (ii) amend or propose
to amend the Articles of Incorporation or By-laws of ICON; (iii) split, combine
or reclassify any of the outstanding shares of ICON, or except as provided in
Section 3.7 hereof, declare, set aside or pay any dividend or other distribution
payable in cash, stock, property or otherwise with respect thereto; or (iv)
redeem, purchase or otherwise acquire any shares of capital stock of ICON;
(b) (i) make any acquisition (by merger, consolidation, or
acquisition of stock or assets) of any corporation, partnership or other
business organization or division thereof; (ii) except in the ordinary course of
business and in a manner consistent with past practice, sell, pledge, dispose
of, or encumber or authorize or propose the sale, pledge, disposition or
encumbrance of any of its assets; (iii) incur any indebtedness for borrowed
money, assume, guarantee, endorse or otherwise become responsible for the
obligations of any other individual, partnership, firm or corporation, or make
any loans or advances to any individual, partnership, firm, or corporation, or
enter into any contract or agreement to do so, except in the ordinary course of
business and consistent with past practice, other than for the renewal by ICON
of its credit and term loan facility with Imperial Bank on terms no less
favorable to ICON than the terms of its current credit facility; (iv) authorize
any single capital expenditure or series of related capital expenditures each of
which, individually or in the aggregate, is in excess of $10,000; PROVIDED,
HOWEVER, that ICON may acquire a new switching frame and module for an amount
not to exceed $300,000 without the prior written approval of the GST Companies;
or (v) release or assign any indebtedness owed to it or any claims held by it,
except in the ordinary course of business and consistent with past practice;
(c) take any action other than in the ordinary course of
business and in a manner consistent with past practice (none of which actions
shall be unreasonable or unusual) with respect to the grant of any severance or
termination pay (otherwise than pursuant to its policies in effect on the date
hereof or as provided in Section 3.7 hereof) or with respect to any increase of
benefits payable under its severance or termination pay policies in effect on
the date hereof;
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(d) make any payments (except in the ordinary course of
business and in amounts and in a manner consistent with past practice) under any
Employee Benefit Plan to any employee, independent contractor or consultant,
enter into any new Employee Benefit Plan or any new consulting agreement grant
or establish any awards under such Employee Benefit Plan or agreement, or adopt
or otherwise amend any of the foregoing;
(e) take any action except in the ordinary course of business
and in a manner consistent with past practice (none of which actions shall be
unreasonable or unusual) with respect to accounting policies or procedures,
other than such actions deemed necessary to comply with GAAP (including without
limitation its procedures with respect to the payment of accounts payable);
(f) enter into or terminate any material contract or agreement
or make any material change in any material contract or agreement of ICON, other
than (i) in the ordinary course of business and (ii) agreements, if any,
relating to the transactions contemplated hereby; or
(g) waive any rights of material value or cancel any material
debts or claims; or
(h) make any significant organizational or executive personnel
changes, including but not limited to the entry into employment agreements, the
material modification of existing employment agreements, or any general or
executive officer compensation increases not in accordance with past practices;
or
(i) take, or agree in writing or otherwise to take, any of the
foregoing actions or any action which would make any of their respective
representations or warranties contained in this Agreement untrue or incorrect in
any material respect as of the date when made or as of a future date.
Section 8.2 NO OTHER NEGOTIATIONS. Between the date hereof and
the termination of this Agreement pursuant to the provisions of Article IX
hereof (the "Termination Date"), ICON will not (i) enter into any agreement with
a third party with respect to the acquisition, directly or indirectly, of shares
or other securities of ICON or a material part of its assets, (ii) enter into
negotiations with a third party regarding such an agreement, or (iii) provide a
third party with general access to the books, records or employees of ICON for
the purpose of enabling such third party to conduct a purchase investigation of
its legal, financial or business condition.
Section 8.3 REGULATORY APPROVALS. ICON shall cooperate with
the GST Companies and proceed diligently and use its best effort to take or
cause to be taken all actions, to sign such applications and to do or cause to
be done all such other things
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reasonably requested by the GST Companies in connection with obtaining the
approvals of the Governmental Authorities referred to in Schedule 3.5 hereto.
Section 8.4 EMPLOYMENT MATTERS. ICON shall be permitted to pay
to employees of ICON who are employed on the Closing Date and who continue to be
employed subsequent thereto, and who subsequently leave such employment, the
following severance benefits:
(i) if such severance occurs within six months after the
Closing Date, such employee shall receive up to three
weeks base salary to be finally determined by Cole
(or if Cole is no longer employed by ICON) by the
then chief executive officer of ICON),
(ii) if such severance occurs subsequent to six months
after the Closing Date, severance in accordance with
the policy of GST applicable for employees of GST as
if such employee had been employed by GST prior to
the Closing Date
In addition, the chief executive officer of GST and the chief executive officer
of ICON shall have joint discretion over employment related issues during the
six month period following the Closing Date, as such issues relate to
termination and transfer.
Section 8.5 ADDITIONAL COVENANTS OF ICON AND THE GST
COMPANIES. Each of ICON and the GST Companies covenants and agrees:
(a) BEST EFFORTS. To proceed diligently and use its best
efforts to take or cause to be taken all actions and to do or cause to be done
all things necessary, proper and advisable to consummate the transactions
contemplated by this Agreement, including the execution and delivery of the
Escrow Agreement, the Restrictive Covenant Agreements, the Indemnification
Agreement, the Cole Employment Agreement and the Crowe Employment Agreement.
(b) COMPLIANCE. To comply in all material respects with all
applicable rules and regulations of any Governmental Authority in connection
with the execution, delivery and performance of this Agreement and the
transactions contemplated hereby; to use all reasonable efforts to obtain in a
timely manner all necessary waivers, consents and approvals and to take, or
cause to be taken, all other actions and to do, or cause to be done, all other
things necessary, proper or advisable to consummate and make effective as
promptly as practicable the transactions contemplated by this Agreement.
(c) NOTICE. To give prompt notice to the other party or
parties of (i) the occurrence, or failure to occur, of any event
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whose occurrence or failure to occur, would be likely to cause any
representation or warranty contained in this Agreement to be untrue or incorrect
in any material respect at any time from the date hereof to the Closing Date and
(ii) any material failure on its part, or on the part of any of its officers,
directors, employees or agents, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any such notice shall not limit or
otherwise affect the remedies available hereunder to the party receiving such
notice.
(d) ACCESS. To cause its affiliates, officers, directors,
employees, auditors and agents to afford the officers, employees and agents of
the other party hereto complete access at all reasonable times and upon
reasonable notice to its properties, offices and other facilities and to all
books and records, and shall furnish such other party with all financial,
operating and other data and information as the other party through its
officers, employees or agents, may reasonably request, provided that the party
providing such access and furnishing such data and information to the other
party incurs no cost in doing so.
(e) CONFIDENTIALITY. To hold in strict confidence all data and
information obtained from the other party hereto or any subsidiary, division,
associate, representative, agent or affiliate of any such party (unless such
information is or becomes publicly available without the fault of any
representative of such party, or public disclosure of such information is
required by law in the opinion of counsel to such party) and shall insure that
such representatives do not disclose information to others without the prior
written consent of the other party hereto, and in the event of the termination
of this Agreement, to cause its representatives to return promptly every
document furnished by the other party hereto or any subsidiary, division,
associate, representative, agent or affiliate of any such party in connection
with the transactions contemplated hereby and any copies thereof which may have
been made, other than documents which are publicly available.
(f) ANNOUNCEMENTS. That all public announcements, statements
and press releases concerning the transactions contemplated by this Agreement
shall be mutually agreed to by ICON and the GST Companies before the issuance or
the making thereof and, subject to the advice of counsel, no party shall issue
any such press releases or make any such public statement prior to such mutual
agreement, except as may be required by law. Copies of any such announcement,
report, statements or press release, including any announcement or disclosure
required by law or by any Governmental Authority, shall be delivered to each of
the parties hereto prior to release.
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ARTICLE IX
TERMINATION
Section 9.1 TERMINATION BY ANY PARTY HERETO. This Agreement
may be terminated and cancelled at any time prior to the Closing by the GST
Companies on the one hand, or ICON on the other hand, upon written notice to the
proper party or parties if: (i) any of the representations or warranties of the
party or parties receiving such notice contained herein shall prove to be
inaccurate or untrue in any material respect and such representation or warranty
shall continue to be inaccurate or untrue in any material respect for a period
of five days after written notice thereof to the party making such
representation or warranty; (ii) any obligation, term or condition to be
performed or observed by the party or parties receiving such notice hereunder
has not been performed or observed in any material respect at or prior to the
time specified in this Agreement and such non-performance or non- observance
shall continue for a period of five days after written notice thereof to the
party failing to perform or observe such obligation, term or condition; or (iii)
the Closing has not taken place on or before April 15, 1998; PROVIDED, HOWEVER,
that the termination of this Agreement pursuant to this Section 9.1 shall have
no effect on whatever rights and remedies the parties hereto may have against
one another by reason of such termination.
ARTICLE X
MISCELLANEOUS
Section 10.1 EXPENSES. All costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
paid by the party incurring such costs and expenses regardless of the
termination of this Agreement or the failure to consummate the transactions
contemplated hereby.
Section 10.2 NOTICES. All notices, requests, demands and other
communications that are required or may be given under this Agreement shall be
in writing and shall be deemed to have been duly given when delivered personally
(which personal delivery shall include delivery by responsible overnight
courier), or five days after being sent by registered or certified mail, return
receipt requested, postage prepaid:
(a) IF TO THE GST COMPANIES TO:
GST Telecommunications, Inc.
4001 Main Street
Vancouver, Washington 98663
Attention: Chief Executive Officer
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<PAGE>
WITH A COPY TO:
Olshan Grundman Frome & Rosenzweig LLP
505 Park Avenue
New York, New York 10022
Attention: Stephen Irwin, Esq.
(b) IF TO ICON TO:
ICON Communications Corp.
c/o Leslie N. Cole
2001 Sixth Avenue, Suite 500
Seattle, Washington 98121
or to such other address as any party shall have specified by notice in writing
to the other in compliance with this Section 8.2.
Section 10.3 ENTIRE AGREEMENT. This Agreement, together with
the Schedules and Exhibits hereto, constitutes the entire agreement among the
parties hereto with respect to the subject matter hereof and thereof and
supersedes all prior agreements, representations and understandings among the
parties hereto including the letter of intent dated February 24, 1998 relating
to the sale of the capital stock of ICON.
Section 10.4 BINDING EFFECT, BENEFITS, ASSIGNMENTS. This
Agreement shall inure to the benefit of and be binding upon the parties hereto
and their respective successors and assigns; nothing in this Agreement,
expressed or implied, is intended to confer on any other person, other than the
parties hereto or their respective successors and assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement. This Agreement
may not be assigned without the prior written consent of the other parties
hereto.
Section 10.5 APPLICABLE LAW. This Agreement shall be governed
by and construed in accordance with the laws of the State of Delaware, without
regard to principles of conflicts of law.
Section 10.6 CONSENT TO JURISDICTION. Each of the parties
hereto hereby irrevocably submits to the non-exclusive jurisdiction of any
Washington state court or Federal court sitting in the City of Seattle,
Washington over any action or proceeding arising out of or relating to this
Agreement and the transactions contemplated hereby and each of the parties
hereto hereby irrevocably agrees that all claims in respect of such action or
proceeding shall be heard and determined in such Washington state or Federal
court. Each of the parties hereto hereby irrevocably waives, to the fullest
extent legally possible, the defense of an inconvenient forum to the maintenance
of such action or proceeding.
Section 10.7 HEADINGS. The headings and captions in this
Agreement are included for purposes of convenience only and shall not affect the
construction or interpretation of any of its provisions.
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<PAGE>
Section 10.8 COUNTERPARTS. This Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
Section 10.9 WAIVER; CONSENT. This Agreement may not be
changed, amended, terminated, augmented, rescinded or discharged (other than by
performance), in whole or in part, except by a writing executed by each of the
parties hereto and no waiver of any of the provisions or conditions of this
Agreement or any of the rights of a party hereto shall be effective or binding
unless such waiver shall be in writing and signed by the party claimed to have
given or consented thereto. Except to the extent that a party hereto may have
otherwise agreed to in writing, no waiver by that party of any condition of this
Agreement or breach by any other party of any of its obligations,
representations or warranties hereunder shall be deemed to be a waiver of any
other condition or subsequent or prior breach of the same or any other
obligation or representation or warranty by such other party, nor shall any
forbearance by the first party to seek a remedy for any noncompliance or breach
by such other party be deemed to be a waiver by the first party of its rights
and remedies with respect to such noncompliance or breach.
Section 10.10 NO THIRD PARTY BENEFICIARIES. Subject to Section
8.5 hereof, nothing herein, expressed or implied, is intended or shall be
construed to confer upon or give to any person, firm, corporation or legal
entity, other than the parties hereto, any rights, remedies or other benefits
under or by reason of this Agreement.
Section 10.11 GENDER. Whenever the context requires, words
used in the singular shall be construed to mean or include the plural and vice
versa, and pronouns of any gender shall be deemed to include and designate the
masculine, feminine or neuter gender.
Section 10.12 ACCESS TO RECORDS. Subsequent to the Closing and
subject to that certain Confidentiality Agreement dated October 27, 1997 by and
between ICON and GST, GST shall afford the Shareholders reasonable access to
ICON's books and records as may be required by the Shareholders in connection
with any liabilities asserted by others against the Shareholders as officers,
directors or shareholders of ICON or in connection with the performance of
ICON's obligations under this Agreement.
Section 10.13 KNOWLEDGE. For purposes of this Agreement, (a)
the phrase "to the best knowledge of ICON" or words of similar effect shall mean
the actual knowledge of Leslie N. Cole and Donald Crowe and (b) the phrase "to
the best knowledge of the GST Companies" or words of similar effect shall mean
the actual
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<PAGE>
knowledge of the Chief Executive Officer and Chief Financial Officer of GST.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the day and year hereinabove first set forth.
GST TELECOMMUNICATIONS, INC.
By:/s/ John Warta
--------------------------
Name: John Warta
Title: Chairman of the Board
and Chief Executive Officer
GST MERGER SUB, INC.
By:/s/ Stephen Irwin
--------------------------
Name: Stephen Irwin
Title: Vice President
ICON COMMUNICATIONS CORP.
By:/s/ Leslie N. Cole
--------------------------
Name: Leslie N. Cole
Title: President and Chief
Executive Officer
-36-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 239,904,207
<SECURITIES> 32,556,969
<RECEIVABLES> 20,892,594
<ALLOWANCES> (3,324,252)
<INVENTORY> 787,809
<CURRENT-ASSETS> 302,893,155
<PP&E> 472,289,309
<DEPRECIATION> 31,629,670
<TOTAL-ASSETS> 948,120,621
<CURRENT-LIABILITIES> 68,930,133
<BONDS> 653,416,740
<COMMON> 239,612,012
54,632,707
0
<OTHER-SE> (209,474,043)
<TOTAL-LIABILITY-AND-EQUITY> 948,120,621
<SALES> 30,044,470
<TOTAL-REVENUES> 30,044,470
<CGS> 21,817,847
<TOTAL-COSTS> 54,851,595
<OTHER-EXPENSES> (65,571,513)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,275,448
<INCOME-PRETAX> 19,488,939
<INCOME-TAX> 0
<INCOME-CONTINUING> 19,488,939
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,488,939
<EPS-PRIMARY> .56
<EPS-DILUTED> .46
</TABLE>
