UNITED STATES
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 AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998.
--------------
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _____
COMMISSION FILE NUMBER 0 - 26728
TEL-SAVE HOLDINGS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
DELWARE
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(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION
23-2827736
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(I.R.S. EMPLOYER IDENTIFICATION NO.)
6805 ROUTE 202, NEW HOPE, PA 18938
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES -- ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 215 - 862 - 1500
FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGES SINCE LAST
REPORT.
INDICATE BY CHECK 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
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS FILED ALL DOCUMENTS AND
REPORTS REQUIRED TO BE FILED BY SECTION 12,13, OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN
CONFIRMED BY A COURT
YES NO
APPLICABLE ONLY TO CORPORATE ISSUERS: INDICATE THE NUMBER OF SHARES OUTSTANDING
OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE
DATE.
Common Stock, $.01 par value, 64,727,490 shares outstanding as of August 12,
1998.
<PAGE>
TEL-SAVE HOLDINGS, INC.
FORM 10-Q
JUNE 30, 1998
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 1998
and December 31, 1997
Consolidated Statements of Operations for the three and six
months ended June 30, 1998 and 1997
Consolidated Statement of Stockholders' Equity for
the six months ended June 30, 1998
Consolidated Statements of Cash Flows for the six
months ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II - OTHER INFORMATION
Items 1-6
Signatures
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
CURRENT:
Cash and cash equivalents $ 33,148 $316,730
Marketable securities 566,307 212,269
Accounts receivable, trade net of allowance for
uncollectible account of $4,215 and $2,419,
respectively 57,735 44,587
Advances to partitions and note receivables 11,276 26,110
Due from broker 13,230 21,087
Prepaid AOL marketing costs - current 41,275 30,857
Deferred taxes - current -- 30,916
Prepaid expenses and other current assets 16,413 8,495
- ----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 739,384 691,051
Property and equipment, net 60,265 55,835
Intangibles, net 10,512 10,590
Prepaid AOL marketing costs -- 32,722
Other assets 63,247 24,693
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $873,408 $814,891
====================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT:
Margin account indebtedness $192,892 $ --
Accounts payable and accrued expenses:
Trade and other 34,178 16,858
Partitions 3,269 7,740
Interest and other 10,988 10,578
Securities sold short, at cost to purchase 13,230 21,087
- ----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 254,557 56,263
Convertible debt 500,000 500,000
Deferred revenue 32,100 35,800
Other liabilities 1,565 --
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 788,222 592,063
- ----------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 5,000,000 shares
authorized; no shares outstanding -- --
Common stock - $.01 par value, 100,000,000 shares
authorized; 66,934,635 and 67,249,635 issued
respectively 669 672
Additional paid-in capital 284,055 291,952
Retained earnings (accumulated deficit) (134,852) 3,097
Unrealized loss on marketable securities (6,730) --
Treasury stock (57,956) (72,893)
- ----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 85,186 222,828
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $873,408 $814,891
====================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------------------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $111,098 $75,032 $ 202,244 $146,192
COST OF SALES 93,058 73,521 169,638 131,715
- -------------------------------------------------------------------------------------------------------------
GROSS PROFIT 18,040 1,511 32,606 14,477
GENERAL AND ADMINISTRATIVE EXPENSES 10,195 4,660 19,823 7,953
PROMOTIONAL, MARKETING AND ADVERTISING
EXPENSES - PRIMARILY AOL 37,617 10,775 84,939 14,366
RESEARCH AND DEVELOPMENT COSTS 277 -- 21,595 --
- -------------------------------------------------------------------------------------------------------------
OPERATING LOSS (30,049) (13,924) (93,751) (7,842)
INVESTMENT AND OTHER INCOME (EXPENSE), NET 1,004 4,309 (3,810) 7,128
- -------------------------------------------------------------------------------------------------------------
LOSS BEFORE PROVISION FOR INCOME TAXES (29,045) (9,615) (97,561) (714)
PROVISION (BENEFIT) FOR INCOME TAXES 67,109 (3,750) 40,388 (279)
- -------------------------------------------------------------------------------------------------------------
NET LOSS $(96,154) $(5,865) $ (137,949) $ (435)
=============================================================================================================
NET LOSS PER SHARE - BASIC $ (1.49) $ (.09) (2.14) $ (.01)
=============================================================================================================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 64,486 63,898 64,320 63,171
=============================================================================================================
NET LOSS PER SHARE - DILUTED $ (1.49) $ (.09) $ (2.14) $ (.01)
=============================================================================================================
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING - DILUTED 64,486 63,898 64,320 63,171
=============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
RETAINED UNREALIZED
COMMON STOCK ADDITIONAL EARNINGS LOSS ON TREASURY STOCK
------------------- PAID-IN (ACCUMULATED MARKETABLE --------------------
SHARES AMOUNT CAPITAL DEFICIT) SECURITIES SHARES AMOUNT TOTAL
------------------- ---------- ---------- ------------ --------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 67,250 $672 $291,952 $ 3,097 $ -- (3,608) $(72,893) $222,828
Net loss -- -- -- (137,949) -- -- -- (137,949)
Issuance of warrants to AOL -- -- 27,208 -- -- -- -- 27,208
Exercise of common stock warrants -- -- (3,620) -- -- 250 5,053 1,433
Exercise of common stock options -- -- (22,068) -- -- 1,429 29,125 7,057
Purchase of treasury shares -- -- -- -- -- (1,341) (28,890) (28,890)
Exercise of AOL warrant -- -- (7,693) -- -- 381 7,693 --
Retirement of common stock (315) (3) 1,467) -- -- -- (1,470)
Common stock issued for bonuses -- (257) -- -- -- 97 1,956 1,699
Unrealized loss on marketable
securities -- -- -- -- (6,730) -- -- (6,730)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 66,935 $669 $284,055 $(134,852) $(6,730) (2,792) $(57,956) $85,186
====================================================================================================================================
</TABLE>
See accompanying notes consolidated financial statements.
5
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net Loss $(137,949) $ (435)
Adjustment To Reconcile Net Income To Net Cash (Used In)
Provided By Operating Activities:
Unrealized Loss On Securities 2,850 --
Provision For Bad Debts 1,996 1,025
Depreciation And Amortization 2,768 2,994
Vested Aol Warrants And Amortization Of Prepaid Aol Marketing Costs 49,513 14,366
Charge For Customer Acquisition Costs -- 11,550
Purchased Research And Development 21,034 --
Deferred Revenue (3,700) --
Valuation allowance for deferred tax assets 40,388 --
Income Tax Benefit Related To Exercise Of Options And Warrants -- 5,382
(Increase) Decrease In:
Accounts Receivable, Trade (14,943) (20,635)
Advances To Partitions And Note Receivables 14,834 (14,228)
Prepaid Expenses And Other Current Assets (7,918) (8,697)
Prepaid Aol Marketing Costs -- (100,564)
Other Assets (38,026) (1,956)
Increase (Decrease) In:
Accounts And Partition Payables And Accrued Expenses 13,581 11,483
Other Liabilities (1,587) --
- --------------------------------------------------------------------------------------------------------
Net Cash Used In Operating Activities (57,159) (99,715)
- --------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Acquisition Of Intangibles (285) (4,328)
Acquisition Of Symetrics Industries, Inc. (26,707) --
Capital Expenditures (6,836) (16,246)
Securities Sold Short (10,316) (867)
Due From Broker 7,856 867
Sale (Purchase) Of Securities, Net (361,157) 149,238
- --------------------------------------------------------------------------------------------------------
Net Cash (Used In) Provided By Investing Activities (397,445) 128,664
- ---------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Proceeds From Margin Account Indebtedness 192,892 --
Proceeds From Exercise Of Options And Warrants 8,490 10,574
Retirement Of Common Stock (1,470) --
Purchase Of Common Stock Warrants -- (4,400)
Acquisition Of Treasury Stock (28,890)
- ---------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 171,022 6,174
- ---------------------------------------------------------------------------------------------------------
Net (Decrease) Increase In Cash And Cash Equivalents (283,582) 35,123
Cash And Cash Equivalents, At Beginning Of Period 316,730 8,023
Cash And Cash Equivalents, At End Of Period $33,148 $43,146
=========================================================================================================
</TABLE>
See Accompanying Notes To Consolidated Financial Statements.
6
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements include the accounts of Tel-Save
Holdings, Inc. and its wholly-owned subsidiaries, and have been prepared as if
the entities had operated as a single consolidated group since their respective
dates of incorporation. All intercompany balances and transactions have been
eliminated.
The consolidated financial statements and related notes thereto as of June
30, 1998 and for the three and six months ended June 30, 1998 and 1997 are
presented as unaudited but in the opinion of management include all adjustments
necessary to present fairly the information set forth therein. These adjustments
consist solely of normal recurring accruals. The consolidated balance sheet
information for December 31, 1997 was derived from the audited financial
statements included in the Company's Form 10-K as amended. These interim
financial statements should be read in conjunction with that Form 10-K report.
The interim results are not necessarily indicative of the results for any future
periods.
Certain reclassifications of prior period data have been made to conform to
the current period classifications. The promotion, advertising and marketing
expenses related to the Company's Telecommunications Marketing Agreement (the
"AOL Agreement") dated as of February 22, 1997, with America Online, Inc.
("AOL"), as amended, have been reclassified from cost of sales to promotional,
marketing and advertising expenses - primarily AOL in the statements of
operations for the three and six months ended June 30, 1997, in order to conform
to the current period classifications.
2. Acquisition of ADS Holding Corporation (formerly Symetrics Industries, Inc.)
In January 1998, the Company acquired all of the outstanding stock of
Symetrics Industries, Inc. ("Symetrics"), a manufacturer of digital telephone
switching equipment and systems (the "Telephone Business") and electronic
equipment for the U.S. Department of Defense (the "Defense Business") for $26.7
million. The Company has completed the sale of the Defense Business for
approximately $10 million (including assumed liabilities). The transaction has
been accounted for under the purchase method. In connection with the sale,
Symetrics changed its name to ADS Holding Corporation ("ADS").
The Company's purpose for purchasing ADS was to obtain the technology for
the digital switch manufactured by the Telephone Business . The Company believes
that the digital switch requires substantial development in order to provide
state of the art features which would make the digital switch attractive for use
by local telephone companies operating in smaller cities and rural areas and
competitive local exchange carriers operating in metropolitan areas. The Company
plans to use the digital switch in its own operation as a competitive local
exchange carrier and in its planned entry into the college and university
telecommunication business. The net purchase price of $18.6 million exceeded the
book deficit of the Telephone Business by approximately $22.8 million. The
majority of this excess has been recorded by the Company as purchased research
and development and included in research and development expense in the first
quarter of 1998. The Company is still in the process of valuing the purchased
research and development and approximately $21.0 million is its current
estimate. The operations of the Telephone Business, which resulted in a loss in
1997 and 1996, are not material.
3. Other Assets
In connection with the Company entering into a Telecommunications Services
Agreement ("TSA") dated May 20, 1998 with Communications Telesystems
International d/b/a WorldXChange Communications ("WXC") a California
corporation, the Company has advanced $40 million to WXC which is due and
payable on October 15, 1999 ("WXC Note"). The Company recorded the WXC Note in
other assets in the consolidated balance sheet at June 30, 1998. Interest on the
WXC Note is payable quarterly commencing August 21, 1998 at a rate of 10% per
annum. The Company can purchase from WXC international telecommunication
services pursuant to the TSA.
7
<PAGE>
4. Income Taxes
Provision for Income Taxes. The Company reports the effects of income taxes
under FASB Statement No. 109, Accounting of Income Taxes, (SFAS 109). The
objective of income tax reporting is to recognize (a) the amount of taxes
payable or refundable for the current year and (b) deferred tax liabilities and
assets for the future tax consequences of events that have been recognized in
the financial statements or tax returns. Under SFAS 109, the measurement of
deferred tax assets is reduced, if necessary, by the amount of any tax benefits
that, based on available evidence, are not expected to be realized. Realization
of deferred tax assets is determined on a more-likely-than-not basis.
The Company considers all available evidence, both positive and negative,
to determine whether, based on the weight of that evidence, a valuation
allowance is needed for some portion or all of a net deferred tax asset.
Judgment is used in considering the relative impact of negative and positive
evidence. In arriving a these judgments, the weight given to the potential
effect of negative and positive evidence is commensurate with the extent to
which it can be objectively verified.
The Company had net deferred tax assets of approximately $76.5 million at
March 31, 1998. Those deferred tax assets primarily represented the tax
consequences of benefits attributable to net operating loss carryforwards and
$36.3 million related to deductions from the exercise of executive stock
options. The Company determined that no valuation allowance was necessary at
March 31, 1998 because, among other factors, income, which it believed would be
indicative of future operations, had been generated in recent years, with the
exception of 1997. The loss incurred in 1997 was primarily attributable to
amortization of the AOL marketing agreement.
During the second quarter ended June 30, 1998 the Company continued to
incur significant promotional, marketing and advertising expenses attributable
to its efforts to increase the customer base. Moreover, competitive factors
intensified during the period making gains in subscriber base more costly and
more time consuming. The Company established in July new marketing efforts and
expects to incur up to $190 million in marketing costs during the remainder of
fiscal 1998 and thus, will incur a significant operating loss for fiscal 1998.
Because (a) the Company expects to incur a significant loss for the current
fiscal year, and (b) uncertainties of the competitive marketplace, the Company
provided a valuation allowance during the three month period ended June 30,
1998. The valuation allowance eliminated the net deferred tax asset that had
been recognized in previous periods and in the three months ended June 30, 1998.
The valuation allowance increased the net loss for the period by approximately
$78.4 million. The income statement charge to establish the valuation allowance
includes approximately $26 million of the previously recognized tax benefits
from the exercise of executive stock options which had been reported in fiscal
1997 as a direct addition to paid-in capital.
5. Litigation
On June 16, 1998, a purported shareholder class action was filed in the
United States District Court for the Eastern District of Pennsylvania against
the Company and certain of its officers alleging violation of the securities
laws in connection with certain disclosures made by the Company in its public
filings and seeking unspecified damages. Thereafter, additional lawsuits making
substantially the same allegations were filed by other plaintiffs in the same
court. At this point, no classes have been certified. The Company believes the
allegations in the complaints are without merit and intends to defend the
litigations vigorously. The Company also is a party to certain other legal
actions arising in the ordinary course of business.
The Company believes that the ultimate outcome of the foregoing actions
will not result in liability that would have a material adverse effect on the
Company's financial condition or results of operations.
6. Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). The
adoption of this Statement had no impact on the Company's net loss or
stockholders' equity. SFAS 130 requires that all components of comprehensive
income and total comprehensive income be reported on one of the following: a
statement of income and comprehensive income, a statement of comprehensive
income or a statement of stockholders' equity. Comprehensive income is comprised
of net income and all changes to stockholders' equity, except those due to
investments by owners (changes in paid in capital) and distributions to owners
(dividends). For interim reporting purposes, SFAS 130 requires disclosure of
total comprehensive income.
Comprehensive income (loss) and its components consist of the following:
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------- --------------------------
1998 1997 1998 1997
------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss $ (96,154) $(5,865) $(137,949) $(435)
Other comprehensive loss:
Unrealized loss on marketable securities
available for sale (4,364) -- (6,730) --
------------- ------------- ----------- ----------
Comprehensive loss $(100,518) $(5,865) $(144,679) $(435)
------------- ------------- ----------- ----------
</TABLE>
8
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
As previously reported, the Company believes that it must either be, or
become part of, a larger organization in order to succeed in the long term. To
that end, also as previously reported, the Company has been exploring the
possibility of being acquired by larger entities and had discussion with a
number of potential suitors. Such discussions have not resulted in any
acquisition agreement and have ceased. The Company will continue to focus its
attention on the expansion of its business, primarily through continued
marketing and advertising to increase its subscriber base, the expansion of
services offered to the Company's online customer base and local services, as
well as through acquisitions and strategic partnerships. In this regard, the
Company regularly considers potential acquisition and strategic partner
candidates. The Company is currently discussing with Communications Telesystems
Internatinal d/b/a WorldxChange Communications, a privately held
telecommunications company with 1997 revenues of approximately $325 million, the
possible acquisition of such company for $500 to $600 million in Company stock.
However, no agreement has been reached on this or any other potential
acquisition and there can be no assurance that any agreement will be reached or
the terms of any such agreement.
RESULTS OF OPERATIONS
The following tables set forth for the periods indicated certain financial
data as a percentage of sales:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30,
-------------------------
1998 1997
---- ------
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 83.8 98.0
----- ------
Gross profit 16.2 2.0
Selling, general and administrative expenses 9.2 6.2
Promotional, marketing and advertising expenses - primarily AOL 33.8 14.4
Research and development costs 0.2 --
------ ------
Operating loss (27.0) (18.6)
Investment and other income (expense), net 0.9 5.8
------ -------
Loss before income taxes (26.1) (12.8)
Provision (benefit) for income taxes 60.4 (5.0)
-------- -------
Net loss (86.5)% (7.8)%
======= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
---- -----
<S> <C> <C>
Sales 100.0% 100.0%
Cost of sales 83.9 90.1
----
Gross profit 16.1 9.9
Selling, general and administrative expenses 9.8 5.5
Promotional, marketing and advertising expenses - primarily AOL 42.0 9.8
Research and development costs 10.7 --
---- -----
Operating loss (46.4) (5.4)
Investment and other income (expense), net (1.8) 4.9
-----
Loss before income taxes (48.2) (0.5)
Provision (benefit) for income taxes 20.0 (0.2)
----
Net loss (68.2)% (0.3)%
====== =====
</TABLE>
9
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Sales. Sales increased by 48.1% to $111.1 million in the second quarter of
1998 from $75.0 million in the second quarter of 1997. The increase in sales
resulted from the Company's marketing campaign under the AOL Agreement which
offset a decrease in the Company's non-AOL sales.
Although the Company expects sales to continue to increase by virtue of the
AOL Agreement, in view of the intense competition in this industry, there can be
no assurance that the Company will continue to increase sales on a
quarter-to-quarter or year-to-year basis. In addition, the Company's sales under
the AOL Agreement have continued to be adversely affected by the PIC freezes
implemented by the local telephone companies.
Cost of Sales. Cost of sales increased by 26.6% to $93.1 million in the
second quarter of 1998 from $73.5 million in the second quarter of 1997 as a
result of increased sales. In addition, the 1997 cost of sales includes a charge
of $11.5 million primarily related to the Company's change in its accounting for
customer acquisition costs.
Prior to 1997, network usage costs consisted solely of "bundled" charges
from AT&T. Beginning in 1997, the Company also incurred "unbundled" charges,
including local access fees, associated with the operation of OBN. Both
"bundled" and "unbundled" charges are directly related to calls made by the
Company's end users.
Until April 30, 1998, the Company acquired most of the services purchased
from AT&T for resale or use in OBN pursuant to AT&T Contract Tariff No. 5776.
The Company has signed a new three-year contract with AT&T that supersedes
Contract Tariff No. 5776 and provides a wide variety of services supporting the
Company's nationwide telecommunications network and resale operations. The
contract included a new offering (AT&T Network Connection Services, formerly
known as AT&T's Carrier Solutions Platform) that enables the Company to
accommodate greater numbers of additional customers on OBN by handling their
peak load or overflow traffic. The new contract also provides most of the other
services that the Company acquires from AT&T. The new contract includes certain
financial commitments by the Company, both in terms of minimum revenue
commitments and a minimum percentage of certain services that must be purchased
from AT&T if those services are also purchased from any other carrier. These
commitments expire at any time after the first year that total charges from
services purchased from AT&T during the term have reached $110 million. The new
contract also specifies various options for satisfying the financial commitments
in the event of a change in control of the Company. The Company and AT&T agreed
to guidelines for describing the Company's relationship with AT&T and,
specifically, how the Company may refer to that relationship in the marketplace.
Gross Margin. Gross margin increased to 16.2% in the second quarter of 1998
from 2.0% in the second quarter of 1997. The increase in gross margin was
primarily due to a charge of $11.5 million (described above) included in 1997
cost of sales. Price competition continues to intensify for the Company's
service and this trend can be expected to continue to put downward pressure on
gross margins.
General and administrative expenses. General and administrative expenses
increased by 118.8% to $10.2 million in the second quarter of 1998 from $4.7
million in the second quarter of 1997. The increase in general and
administrative expenses was due primarily to the costs associated with hiring
additional personnel to support the Company's continuing growth, the general
administrative expense incurred as a result of the acquisitions of Compco, Inc.
and ADS which were acquired in November 1997 and January 1998, respectively, and
increased fees for professional services.
10
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
In December 1997, the Company granted options to purchase 810,000 shares of
Company Common Stock at an exercise price of $17.50 per share to an executive
officer and two outside directors. The options granted are subject to the
approval of the stockholders and will be submitted for approval at the Company's
1998 stockholder meeting. To the extent the market value of the Company Common
Stock subject to these options on the date of such approval exceeds the exercise
price, approval of the option grants will result in compensation expense equal
to the amount of such excess.
Promotional, Marketing and Advertising Expense - Primarily AOL. During the
second quarter of 1998, the Company expensed approximately $8.5 million related
to the AOL Agreement based on the value of advertising and promotion provided by
AOL and approximately $5.2 million for the performance warrants issued to AOL
that vested on June 30, 1998. During the second quarter of 1997, the Company
expensed approximately $10.8 million for certain exclusivity rights under the
AOL Agreement. The Company made an initial payment of $100 million to AOL at the
signing of the AOL Agreement and issued to AOL at signing two warrants to
purchase shares of the Company's Common Stock at a premium over the market value
of such stock on the issuance date. Under an amendment of the AOL Agreement
dated as of May 14, 1998, among other things, the term of the AOL Agreement with
respect to the Company's long distance telecommunications services was extended
by one year to June 30, 2001, the Company's flexibility to engage for 90 days
in certain acquisition transactions that may otherwise have triggered a right of
termination by AOL under the AOL Agreement was increased and the Company issued
to AOL an additional, fully exercisable warrant to purchase up to 1 million
Company shares at an exercise price of $22.25. The $11.1 million value of the
new AOL warrant will be expensed consistent with the treatment of the initial
payment of $100 million. Of the prepaid AOL marketing costs, approximately $57.0
million was charged to expense in 1997 and approximately $33.4 million was
charged to expense in the first six months of 1998. The remaining portion of the
prepaid AOL marketing costs (approximately $41.3 million at June 30, 1998) will
be recognized over the balance of the term of the AOL Agreement, the initial
term of which expires on June 30, 2000 (extended as to long distance services to
June 30, 2001 by amendment as described above), as advertising services are
received. The AOL warrant for up to 7 million shares vests at the rate of 2
shares for each new user of the Company's services that subscribes through AOL
and will be valued and charged to expense as and when subscribers to the
Company's services under the AOL Agreement sign-up and the shares under such
warrant vest. Through June 30, 1998, approximately 1.7 million of the 7 million
shares under such warrant had vested, leaving up to 5.3 million shares that
could still vest under this AOL warrant and be charged to expense in the future.
The amount of such charges, which could be significant, will be based on the
extent to which such AOL warrants vest and the market prices of the Company's
Common Stock at the time of vesting and therefore such charges are not currently
determinable. Generally, the higher the market price of the Company's Common
Stock at the time of vesting, the larger the amount of the charge will be.
In addition to the prepaid AOL marketing costs and the warrant vestings
that were charged to expense in the second quarter, the Company incurred $23.9
million in marketing and advertising expenses directed primarily at generating
new subscribers under the AOL Agreement. The Company anticipates that it may
expend approximately $190 million for marketing and advertising in the third and
fourth quarters of 1998 to expand further its subscriber base under the AOL
Agreement, as well as to implement new initiatives to increase its non-AOL
subscriber base. Such expenditures, together with the expensing of the balance
of the prepaid AOL marketing costs, the expensing of AOL warrants as they vest
and any profit-sharing payments by the Company under the AOL Agreement, are
expected to result in significant losses in the third quarter and for 1998.
Investment and Other Income (Expense), Net. Investment and other income
(expense), net was $1.0 million in the second quarter of 1998 versus $4.3
million in the second quarter of 1997. During the second quarter of 1998,
investment and other income (expense), net consists primarily of investment
income offset by interest expense related to the Company's Convertible Notes.
Provision for Income Taxes. The Company had recorded net deferred tax
assets at December 31, 1997 and March 31, 1998 primarily representing net
operating loss carry-forwards and other temporary differences because the
Company believed that no valuation allowance was required for these assets due
to future reversals of existing taxable temporary differences and expectation
that the Company would generate taxable income in future years.
11
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
In July 1998, the Company decided to expend approximately $190 million in
the third and fourth quarters for marketing and advertising to expand the
Company's AOL and non-AOL customer basis. As a result, the Company anticipates a
significant loss in the third quarter and for 1998. In view of the anticipated
losses, the intense competition in the telecommunications industry and that
there can be no assurance that the Company will realize any of the tax benefits,
the Company also decided to provide a 100% valuation reserve for the previously
recorded deferred tax benefits and to provide a 100% valuation reserve for the
current and future tax benefits which may result from the anticipated 1998 loss.
The valuation reserves of approximately $78.4 million were included in provision
for income taxes in the statements of operations for the three and six months
ended June 30, 1998
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Sales. Sales increased by 38.3% to $202.2 million in the first six months
of 1998 from $146.2 million in the first six months of 1997. The increase in
sales resulted primarily from the Company's marketing campaign under the AOL
Agreement.
Cost of Sales. Cost of sales increased by 28.8% to $169.6 million in the
first six months of 1998 from $131.7 million in the first six months of 1997 as
a result of increased sales. In addition, the 1997 cost of sales includes a
charge of $11.5 million primarily related to the Company's change in its
accounting for customer acquisition costs.
Gross Margin. Gross margin increased to 16.1% in the first six months of
1998 from 9.9% in the first six months of 1997. The increase in gross margin was
primarily due to a charge of $11.5 million (described above) included in 1997
cost of sales.
General and administrative expenses. General and administrative expenses
increased by 149.3% to $19.8 million in the first six months of 1998 from $8.0
million in the first six months of 1997. The increase in general and
administrative expenses was due primarily to the costs associated with hiring
additional personnel to support the Company's continuing growth, the general
administrative expense incurred as a result of the acquisitions of Compco, Inc.
and ADS which were acquired in November 1997 and January 1998, respectively, and
increased fees for professional services.
Promotional, Marketing and Advertising Expense - Primarily AOL. During the
first six months of 1998, the Company expensed approximately $33.4 million
related to the AOL Marketing Agreement based on the value of advertising and
promotion provided by AOL and approximately $16.1 million for the performance
warrants issued to AOL that vested in 1998. During the first six months of 1997,
the Company expensed approximately $14.4 million for certain exclusivity rights.
In addition to the prepaid AOL marketing costs and the warrant vestings that
were charged to expense in the first half of 1998, the Company incurred $35.4
million in marketing and advertising expenses directed primarily at generating
new subscribers under the AOL Agreement.
Research and Development Costs. Research and development costs are
associated with the telephone business of ADS and include purchased research and
development costs of approximately $21.0 million (Note 2).
Investment and Other Income (Expense), Net. Investment and other income
(expense), net was $(3.8) million in the first six months of 1998 versus $7.1
million in the first six months of 1997. During the first six months of 1998,
investment and other income (expense), net consists primarily of investment
income offset by interest expense related to the Company's Convertible Notes and
a loss of $3.0 million incurred during the first quarter of 1998 on the sale of
its investment in US Wats, Inc., which was originally acquired in connection
with the Company's proposed acquisition of another telecommunications company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has since September 1995 raised capital primarily through
public and private distributions of its securities. In fall 1995 and spring
1996, the Company consummated public offerings of shares of the Company's Common
Stock and received net proceeds of $42.8 million and $139.1 million,
respectively.
12
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
In September 1997, the Company privately sold $300 million of 4 1/2%
Convertible Subordinated Notes which mature on September 15, 2002 (the "2002
Convertible Notes"). Interest on the 2002 Convertible Notes is due and payable
semiannually on March 15 and September 15 of each year. The 2002 Convertible
Notes are convertible, at the option of the holder thereof, at any time after
December 9, 1997 and prior to maturity, unless previously redeemed, into shares
of the Company's Common Stock at a conversion price of $24.61875 per share. The
2002 Convertible Notes are redeemable, in whole or in part, at the Company's
option, at any time on or after September 15, 2000 at 101.80% of par prior to
September 14, 2001 and 100.90% of par thereafter.
In December 1997, the Company privately sold $200 million of 5% Convertible
Subordinated Notes which mature on December 15, 2004 (the "2004 Convertible
Notes"). Interest on the 2004 Convertible Notes is due and payable semiannually
on June 15 and December 15 of each year. The 2004 Convertible Notes are
convertible, at the option of the holder thereof, at any time after March 5,
1998 and prior to maturity, unless previously redeemed, into shares of the
Company's Common Stock at a conversion price of $25.47 per share. The 2004
Convertible Notes are redeemable, in whole or in part at the Company's option,
at any time on or after December 15, 2002 at 101.43% of par prior to December
14, 2003 and 100.71% of par thereafter.
During 1997, certain options and warrants to purchase shares of the
Company's Common Stock were exercised and the Company repurchased certain Common
Stock Warrants, yielding to the Company net proceeds of $16.9 million. In
addition, during 1997 the Company repurchased approximately 3.5 million shares
of the Company's Common Stock, which were held as treasury shares for the future
issuance of shares upon the exercise of options, warrants and convertible
securities of the Company, for approximately $72.0 million.
During the first six months of 1998, certain options and warrants to
purchase shares of the Company's Common Stock were exercised yielding to the
Company proceeds of $8.5 million. Also, the Company repurchased approximately
1,341,000 shares of the Company's Common Stock, which are held as treasury
shares, for approximately $28.9 million.
The Company's working capital was $484.4 million and $634.8 million at June
30, 1998 and December 31, 1997, respectively. The significant increase in
working capital when compared to historical amounts is primarily a result of the
sale of the 2002 and 2004 Convertibles Notes, discussed above. At June 30, 1998,
the Company's marketable securities included approximately $300 million in a tax
exempt bond fund and approximately $245 million in government bond funds. In
addition, the Company incurre approximately $193 million of margin account
indebtedness in connection with these investments.
While the Investment Company Act of 1940, as amended (the "Investment
Company Act"), principally regulates vehicles for pooled investments in
securities, such as mutual funds, it also may be deemed to be applicable to
companies that are not organized for the purpose of investing or trading in
securities but nonetheless have more than a specified percentage of their assets
in investment securities. The Company is engaged in the telecommunications
business, and the availability of cash and liquid securities is important to the
Company's ability to take advantage of opportunities to acquire other
telecommunications businesses, assets and technologies from time to time. The
Company believes, therefore, that its activities do not and will not subject the
Company to regulation under the Investment Company Act. However, if the Company
were to be deemed to be an investment company within the meaning of the
Investment Company Act, the Company would become subject to certain restrictions
relating to the Company's activities, including, but not limited to,
restrictions on the conduct of its business, the nature of its investments, the
issuance of securities and transactions with affiliates. Therefore, the
characterization of the Company as an investment company would have a material
adverse effect on the Company. In the Indenture governing the 2002 Convertible
Notes, the Company has covenanted that it will not become an investment company
within the meaning of the Investment Company Act and that it will take all such
actions as are necessary in order to continue not to be deemed an investment
company.
The Company invested $6.8 million in capital equipment during the first six
months of 1998.
During the first six months of 1998, the Company purchased the outstanding
shares of Symetrics for $26.7 million.
13
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
In connection with the Company entering into the TSA with WXC, the Company
advanced $40 million to WXC which is due and payable on October 15, 1999 ("WXC
Note"). Interest on the WXC Note is payable quarterly commencing August 21, 1998
at a rate of 10% per annum. The Company can purchase international
telecommunication services pursuant to the TSA.
The Company generally does not have a significant concentration of credit
risk with respect to accounts receivable due to the large number of end users
comprising the Company's customer base and their dispersion across different
geographic regions. The Company maintains reserves for potential credit losses
and, to date, such losses have been within the Company's expectations.
The Company expects to expend approximately $190 million in the third and
fourth quarters for marketing and advertising to expand the Company's AOL and
non-AOL customer bases. The Company's Board of Directors has authorized the
expenditure, from time to time, of up to $300 million for the repurchase of the
Company's outstanding securities. It is anticipated that any repurchased shares
will be held in treasury for issuance upon exercise of outstanding options and
warrants and upon conversion, if any, of convertible notes, and for other
general corporate purposes.
The Company believes that its current cash position, marketable securities
and the cash flow expected to be generated from operations, will be sufficient
to fund its capital expenditures, working capital and other cash requirements
for at least the next twelve months.
The "Year 2000" issue refers to the potential harm from computer programs
that identify dates by the last two digits of the year rather than using the
full four digits. As such, dates after January 1, 2000 could be misidentified,
and such programs could fail. The Company has examined its computer-based
systems and believes that the "Year 2000" problem is not present on such
systems. However, the Company is dependent upon computer systems operated by
third parties, such as LECs, AT&T, AOL and other vendors. If those systems were
to malfunction due to the "Year 2000" problem, the Company's services could
fail, as well. Such failures could have a material adverse effect upon the
Company's business, results of operations and financial condition. The Company
is inquiring of such third parties to determine the effect, if any, of the "Year
2000" problem on the systems upon which the Company is dependent, and to obtain
appropriate assurance that no such problem exists.
* * * * *
Certain of the statements contained herein may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
statements are identified by the use of forward-looking words or phrases,
including, but not limited to, "estimates," "expects," "expected,"
"anticipates," and "anticipated." These forward-looking statements are based on
the Company's current expectations. Although the Company believe that the
expectations reflected in such forward-looking statements are reasonable, there
can be no assurance that such expectations will prove to have been correct.
Forward-looking statements involve risks and uncertainties and the Company's
actual results could differ materially from the Company's expectations.
Important factors that could cause such actual results to differ materially
include, among others, adverse developments in the Company's relationship with
AT&T or AOL, increased price competition for long distance services, failure of
the marketing of long distance services under the AOL Agreement, attrition in
the number of end users, implementation of PIC freezes by local telephone
companies, and changes in government policy, regulation and enforcement. The
Company undertakes no obligations to update its forward-looking statements.
14
<PAGE>
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 16, 1998, a purported shareholder class action was filed in the
United States District Court for the Eastern District of Pennsylvania against
the Company and certain of its officers alleging violation of the securities
laws in connection with certain disclosures made by the Company in its public
filings and seeking unspecified damages. Thereafter, additional lawsuits making
substantially the same allegations were filed by other plaintiffs in the same
court. At this point, no classes have been certified. The Company believes the
allegations in the complaints are without merit and intends to defend the
litigations vigorously. The Company also is a party to certain other legal
actions arising in the ordinary course of business.
The Company believes that the ultimate outcome of the foregoing actions
will not result in liability that would have a material adverse effect on the
Company's financial condition or results of operations.
Item 2. Changes in Securities
In connection with the Company's amendment dated May 14, 1998 to the AOL
Agreement, the Company granted an additional, fully exercisable warrant to AOL
to purchase 1,000,000 shares of the Company's Common Stock at an exercise price
of $22.25 per share.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Amendment No. 2, dated May 14, 1998 to
Telecommunications Marketing Agreement dated as of
February 22, 1997 by and among the Company, Tel-Save,
Inc. and America Online, Inc.*
Exhibit 11 Computation of Net Income Per Share
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Since March 31, 1998, the Company has not filed any Current Reports on
Form 8-K.
- --------
* Confidential treatment has been requested for portions of this Exhibit.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1998 TEL-SAVE HOLDINGS, INC.
----------------------------------------------
(Registrant)
By: /s/ Daniel Borislow
------------------------------------------
Daniel Borislow
Chairman of the Board,
Chief Executive Officer and Director
By: /s/ George P. Farley
------------------------------------------
George P. Farley
Chief Financial Officer, Treasurer and Director
By: /s/ Kevin R. Kelly
------------------------------------------
Kevin R. Kelly
Controller
16
["* * * " indicates that material has been deleted pursuant to a confidential
treatment request and filed separately with the Commission.]
AMENDMENT NO. 2
This AMENDMENT NO. 2 (this "Amendment"), dated May 14, 1998 (the "Amendment
Effective Date"), by and among Tel-Save, Inc. ("TS"), a Pennsylvania
corporation, and Tel-Save Holdings, Inc. ("Holdings"), a Delaware corporation,
with their principal offices at 6805 Route 202, New Hope, Pennsylvania 18938, on
the one hand, and America Online, Inc., a Delaware corporation with its
principal offices at 22000 AOL Way, Dulles, Virginia 20166 ("AOL"), on the other
hand (each a "party" and, collectively, the "parties").
WHEREAS, TS, Holdings and AOL are parties to the Telecommunications
Marketing Agreement, dated as of February 22, 1997, as heretofore corrected and
amended by letter, dated April 23, 1997, and amended by an Amendment No. 1,
dated as of January 25, 1998 (as so corrected and amended to the date hereof,
but without giving effect to this Amendment, the "Agreement"); capitalized terms
used in this Amendment without other definition are defined as in the Agreement.
WHEREAS, the parties to the Agreement wish to make certain changes therein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
A. Extension Warrant to AOL
1. Upon AOL's execution and delivery of this Amendment, TS shall issue
and deliver to AOL a warrant to purchase 1,000,000 shares of Holdings Common
Stock at an exercise price per share equal to $22.25, which warrant shall be in
the form of Appendix A to this Amendment. This new warrant shall be a "Warrant"
for all purposes of the Warrantholder and Stockholders Agreement.
B. Agreement Amendments. The Agreement is amended as follows, effective as
of the Amendment Effective Date:
1. The references in the Agreement to "this Agreement" or "the
Agreement" (including indirect references such as "hereunder," "hereby,"
"herein" and "hereof") shall be deemed to be references to the Agreement as
amended by this Amendment.
2. Section I.A.41. of the Agreement is hereby amended to substitute a
reference to "June 30, 2001 (June 30, 2000 with respect to the parties' rights
and obligations hereunder regarding Local Telecommunications Services and
Commercial Mobile Communications Services)" for the reference to "June 30, 2000"
therein.
<PAGE>
3. Section III.A.1.(c) of the Agreement is amended to read in its
entirety as follows:
"(c) Notwithstanding anything to the contrary in this Agreement,
the parties agree that, commencing * * * and ending * * * , AOL
shall provide the marketing and promotions set forth in Schedule
X to this Agreement."
and the Agreement is amended to add as Schedule X thereto the Schedule
X attached to this Amendment.
4. Section III.A.1. of the Agreement is amended to add the following
new subsection:
"(g) Notwithstanding anything to the contrary herein:
"(i) Section III.A.1(f) of this Agreement shall apply in
connection with all marketing efforts in connection with the
Services, including any * * * efforts directed to subscribers to
the AOL Service that may be provided under this Agreement.
"(ii) TS shall not contract formally or informally with or
otherwise make payments to vendors in connection with * * * in
connection with the Services. Except as otherwise agreed by AOL,
AOL shall retain sole oversight and control over such vendors' *
* * efforts, including any * * * .
"(iii) All AOL Service subscriber identity information
necessary to perform any * * * efforts in connection with the
Services shall be provided to * * * by AOL and shall not be
disclosed to TS, and TS shall not purposefully examine or take
possession of any such information or otherwise encourage any
vendor or other party to disclose such information, in each case
in a manner inconsistent with AOL's privacy policies (other than
by virtue of TS's contact with any such subscriber after such
subscriber becomes an End User).
"(iv) All marketing activities by TS in connection with the
Services shall be performed, and any subscriber information
obtained by TS in connection with the Agreement shall be handled
in accordance with applicable laws and regulations and in
compliance with AOL's policies, including, without limitation,
AOL's privacy policies and AOL's * * * procedures and
guidelines."
5. Section V.B. of the Agreement is amended to add the following new
subsections:
"7. Commencing with * * * and so long as AOL shall be providing
the marketing and promotions described in Schedule X hereto (including
from and after * * * , as AOL may elect), TS shall pay to AOL the
amount of * * * for each Qualified End User who subscribes to the Long
Distance Telecommunications Services, whether through the marketing
described on Schedule X or otherwise,
2
<PAGE>
after such commencement date, which amounts will be paid, with respect
to any month, on or before the last day of the next succeeding month."
"8. TS shall, upon AOL's request, (a) permit AOL to monitor TS's
compliance with the provisions of Section III.A.1.g hereof and (b)
provide to AOL reports, detailing Gross Revenues, Actual Services
Costs, Pre-Tax Profit, the gross numbers of End Users and Qualified
End Users, the gross numbers of Qualified End Users since the end of
the prior quarter and net End Users from the end of the prior period.
At AOL's request, given reasonably in advance, TS shall provide the
foregoing information at a frequency of no more than once every two
weeks with respect to End User information and no more than once every
45 days with respect to Gross Revenues, Actual Services Costs and
Pre-Tax Profit. In addition, TS shall provide the foregoing
information with respect to any quarter within 15 days following the
end of such quarter and will provide information regarding Qualified
End Users who subscribed during the last month of any calendar quarter
and became End Users within 35 days after the last day of such month.
AOL has the right to inspect TS's records with respect to the use and
treatment of all subscriber information in accordance with the
procedures set forth in Section V.B.4."
6. The second sentence of Section VII.A.5 is amended to substitute a
reference to "solely through AOL or AOL's agents" for the reference to "directly
or indirectly through a third party on its behalf."
7. Section X.B.2. of the Agreement is amended to provide that the
reference to "each of the first two Extension Periods" shall be deleted and
replaced with a reference to "the first Extension Period" and to the extent
required to reflect that there will be only one (1) "Additional Warrant".
8. Section X.C.1.c. of the Agreement is deleted in its entirety and
replaced with the following:
"c. Either AOL or TS may terminate this Agreement by thirty (30)
days prior written notice to the other in the event of an acquisition
of the other party, or all or substantially all of the assets of such
other party, through merger, asset acquisition, stock acquisition or
otherwise, by a competitor of the party giving such notice; provided
that, for purposes of this clause, neither * * * nor * * * (each, an
"Excepted Company") shall be deemed a competitor of AOL if, in
connection with any acquisition of TS by an Excepted Company, such
Excepted Company shall agree with AOL to actively sell or market the
AOL Service on a stand-alone basis, on terms and conditions providing
reasonable compensation and profit to such Excepted Company; provided,
that * * * shall be an "Excepted Company" for purposes of this clause
only in respect of a transaction effected pursuant to the terms and
conditions of a definitive binding agreement subject only to customary
closing conditions (e.g., legal opinions, regulatory and other
approvals and due diligence) that is executed on or before * * * ."
3
<PAGE>
9. Section X.D.4. of the Agreement is amended to replace the reference
therein to "June 30, 2000" with a reference to "June 30, 2001".
10. In the event of an acquisition of TS by * * * pursuant to Section
X.C.1.c of the Agreement , then, from and after such acquisition, Sections IV.E.
and X.C.1.d of the Agreement and the second sentence of Section IV.C.10 of the
Agreement shall be of no further force and effect; provided, however, that after
such acquisition all non-OBN traffic shall be carried on the AT&T or * * *
network or a network substantially equivalent to or better than the AT&T or * *
* network, and Sections IV.E., IV.C.10 and X.C.1.d of the Agreement are hereby
amended to reflect such agreement.
C. Amendment of Other Documents.
1. Upon effectiveness of this Amendment, the Warrant to Purchase
Common Stock of Tel-Save Holdings, Inc, dated as of February 22, 1997, No.
W-AOL-1 (the "Base Warrant"), and the Supplemental Warrant shall be amended to
read in their entireties as set forth in Appendices B-1 and B-2, respectively,
to this Amendment.
D. Miscellaneous.
This Amendment does not, and shall not be construed to, modify any
term or condition of the Agreement (including, without limitation, any
payment obligations under the Agreement) other than those specific terms
and conditions expressly referenced in this Amendment. Except as herein
provided, the Agreement shall remain unchanged and in full force and
effect. In the event of any inconsistency or discrepancy between the
Agreement and this Amendment, the terms and conditions set forth in this
Amendment shall control. Neither party shall be bound by, and each party
specifically objects to, any term, condition or other provision that is
different from or in addition to the provisions of this Amendment and the
Agreement (whether or not it would materially alter this Amendment or the
Agreement) and which is proffered by the other party in any correspondence
or other document, unless the party to be bound thereby specifically agrees
to such provision in writing in accordance with the terms of the Agreement.
This Amendment may be executed in multiple counterparts, each of which
shall be deemed an original, but all of which together shall constitute one
and the same document. This Amendment shall be governed by the internal
laws of the State of New York, without giving effect to the principles of
conflict of laws thereof.
4
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be signed
on their behalf as of the Amendment Effective Date.
AMERICA ONLINE, INC.
By /s/ David M. Colburn
----------------------------------
Name: David M. Colburn
Title: Senior Vice-President
TEL-SAVE, INC.
By /s/ Daniel Borislow
----------------------------------
Name: Daniel Borislow
Title: Chairman & CEO
TEL-SAVE HOLDINGS, INC.
By /s/ Daniel Borislow
----------------------------------
Name: Daniel Borislow
Title: Chairman & CEO
5
<PAGE>
Schedule X
* * *
6
<PAGE>
Appendix A
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS WARRANT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS
TEL-SAVE HOLDINGS, INC. RECEIVES AN OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO IT THAT SUCH SALE, TRANSFER OR ASSIGNMENT IS EXEMPT FROM ANY
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE SECURITIES ACT AND
ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND ANY SECURITIES
ACQUIRED UPON EXERCISE OF THE WARRANT ARE SUBJECT TO THE TERMS AND
CONDITIONS OF THE WARRANTHOLDER AND STOCKHOLDERS AGREEMENT AND THE VOTING
TRUST AGREEMENT, EACH DATED AS OF FEBRUARY 22, 1997.
NONTRANSFERABLE WARRANT TO PURCHASE
COMMON STOCK OF
TEL-SAVE HOLDINGS, INC.
Date of Grant: As of May 14, 1998.
Void after 5:00 PM. Eastern Standard Time on May 14, 2003
No. W-AOL-5
FOR VALUE RECEIVED, Tel-Save Holdings, Inc., a Delaware corporation
(together with its successors and assigns, the "Company") hereby certifies and
agrees that America Online, Inc., a Delaware corporation ("AOL" and, in its
capacity as the holder of this Warrant ("this Warrant"), together with its
permitted successors and assigns, the "Holder"), with its principal address at
22000 AOL Way, Dulles, Virginia 20166-9323, is entitled, subject to the terms,
conditions and adjustments hereof, to receive, in one or more exercises of this
Warrant, from time to time, from the Company such number of shares of Common
Stock, par value $.01 per share, of the Company (the "Common Stock") as is
determined under Paragraph 1 hereof, during the period commencing at 9:00 AM,
Eastern Standard Time on the date hereof (the "Commencement Date") and ending at
5:00 PM. Eastern Standard Time on the fifth anniversary of the date hereof (such
time on such date, the "Termination Date") and at such respective times and for
such numbers of Warrant Shares (as defined below) as are set forth in Paragraph
1 at an exercise price per share (the "Exercise Price") of U.S. $22.25. The
number of shares of Common Stock issuable upon exercise of this Warrant, the
number of shares vested and the exercise price per share shall be subject to
further adjustment from time to time upon the occurrence of certain events as
set forth below. This Warrant is one of the "Warrants" referenced in, and issued
in conjunction with, the Telecommunications Marketing Agreement, dated as of
7
<PAGE>
February 22, 1997 as subsequently amended as of January 25, 1998 and as of May
14, 1998 (as amended, the "Marketing Agreement"), among the Company, Tel-Save,
Inc. ("TS"), a Pennsylvania corporation and wholly owned subsidiary of the
Company and AOL.
The shares of Common Stock or any other shares or other units of stock or
other securities or property or any combination thereof receivable upon exercise
of this Warrant, as adjusted from time to time, are sometimes referred to herein
as the "Exercise Shares."
1. Exercise of Warrant: Issuance of Exercise Shares.
(a) Exercise of Warrant. This Warrant may be exercised as to the then
remaining Warrant Shares that have vested as provided herein by the Holder in
whole or in part from time to time on or after the Commencement Date and until
and including the Termination Date as provided below. For purposes of this
Warrant, "Warrant Shares" shall mean 1,000,000 shares of Common Stock (subject
to adjustment as provided in Paragraph 6 hereof and to successive reduction upon
any exercise of this Warrant as provided below in this clause (a)), all of which
Warrant Shares are deemed for all purposes hereof to have vested as of the date
hereof.
Following the Termination Date, in the absence of the exercise hereof, the
Holder shall have no rights herein to acquire any Exercise Shares and this
Warrant shall lapse as to such rights. This Warrant may be exercised on any
business day by delivering to the Company at its principal office, presently
located at the address of the Company set forth in Paragraph 9 hereof (or such
other office of the Company as shall theretofore have been designated by the
Company by written notice to the Holder), together with: (i) a completed and
executed irrevocable Notice of Warrant Exercise in the form set forth in
Appendix A hereto and made a part hereof, specifying therein the number of
Warrant Shares (which shall not exceed the number thereof then remaining as to
which this Warrant is then exercisable and as to which no Notice of Warrant
Exercise has previously been given) with respect to which the Holder is then
exercising its rights hereunder, and (ii) subject, as indicated below, to the
consent or election of the Company, within two (2) business days after receipt
by the Company of such Notice of Warrant, delivery to the Company of the full
Exercise Price as follows:
(A) if the Company shall not have elected that such exercise shall be a
"net issuance exercise" as provided in clause (C) of this Paragraph, payment of
the full Exercise Price therefor, in immediately available funds in which case
the Company, pursuant to such Notice of Warrant Exercise from Holder, (duly
completed, and in accordance with Subparagraph 1(c)), shall, upon receipt of
this Warrant and the original executed copy of such Notice of Warrant Exercise
and payment of such Exercise Price, issue, and deliver a certificate evidencing,
such number of Exercise Shares as to which this Warrant shall have been
exercised; or
(B) if the Company shall not have elected that such exercise shall be a
"net issuance exercise" as provided in clause (C) of this Paragraph, through
arrangements with a brokerage firm under which such brokerage firm, on behalf of
the Holder, shall pay the Company the Exercise Price, and the Company pursuant
to an irrevocable notice from the Holder (the form of which shall be
satisfactory to the Company), shall promptly deliver the Exercise Shares being
purchased to such firm; and
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(C) if the Company shall, upon receipt of a Notice of Warrant Exercise from
the Holder as to Warrant Shares, and in its sole discretion, so elect, the
Company may deliver a certificate evidencing such number of Exercise Shares as
shall equal the quotient of (x) the product of (1) the difference between the
Current Market Price (as defined in Subparagraph 6(e)) on the date of delivery
of such Notice of Warrant Exercise and the then Exercise Price, multiplied by
(2) the number of Warrant Shares specified in such Notice of Warrant Exercise as
to which this Warrant is to be exercised, divided by (y) the Current Market
Price on the date of delivery of such Notice of Warrant Exercise (a "net
issuance exercise"), in which event no payment in cash of the Exercise Price in
respect of the Warrant Shares as to which such "net issuance exercise" applies
need be made.
(D) Notwithstanding the foregoing subparagraphs (A), (B) and (C), in the
event of a Change of Control (as defined below), the Holder, and not the
Company, may elect in its Notice of Warrant Exercise that the exercise shall be
a "net issuance exercise", in which event the Company shall deliver a
certificate evidencing such number of Exercise Shares as shall equal the
quotient of (x) the product of (1) the difference between the Current Market
Price (as defined in Subparagraph 6(e)) on the date of delivery of such Notice
of Warrant Exercise and the then Exercise Price, multiplied by (2) the number of
Warrant Shares specified in such Notice of Warrant Exercise as to which this
Warrant is to be exercised, divided by (y) the Current Market Price on the date
of delivery of such Notice of Warrant Exercise, in which event no payment in
cash of the Exercise Price in respect of the Warrant Shares as to which such
"net issuance exercise" applies need be made. "Change of Control" shall be
deemed to have occurred upon the happening of any of the following events:
a. During any period of twelve consecutive months, individuals
who at the beginning of such period constituted the Board of Directors
of the Company (together with any new or replacement directors whose
election by the Board of Directors or whose nomination for election by
the Company's stockholders was approved by a vote of at least 66-2/3%
of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a
majority of the directors then in office;
b. At any time during any period of twelve consecutive months,
any "person" or "group" (each as defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), who
or which was not an "Affiliate" (as defined in the Exchange Act) of
the Company at the beginning of such period, becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of
shares representing more than 50% of the combined voting power of the
then-outstanding securities entitled to vote in the election of
directors of the Company; or
c. Any merger or consolidation of the Company with or into
another corporation, or any merger of any other person into the
Company unless the holders of shares of the Company immediately prior
to such transaction are the owners, directly or indirectly,
immediately following such transaction, of at least a majority of the
total voting power of the corporation resulting from such
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<PAGE>
transaction, or any sale of all or substantially all of the assets of
the Company or Tel-Save, Inc. to any person (other than to one or more
wholly owned subsidiaries of the Company);
provided that "Change of Control" shall in any event include any
transaction respecting TS that is referred to in Section X.C.1.(c) of
the Marketing Agreement.
Upon such exercise pursuant to a Notice of Warrant Exercise and issuance of
such Exercise Shares, the number of Warrant Shares automatically shall be
reduced by the number of Warrant Shares as to which this Warrant is to be
exercised specified in such Notice of Warrant Exercise.
In the event that this Warrant shall be duly exercised in part prior to the
Termination Date, the Company shall issue a new Warrant of like tenor evidencing
the rights of the Holder thereof with respect to the balance of the Warrant
Shares under the Warrant so surrendered.
No adjustments shall be made for any cash dividends on Exercise Shares
issuable upon exercise of this Warrant.
(b) Issuance of Exercise Shares; Delivery of Warrant Certificates. The
Company at its expense shall, as soon as practicable and in any event within
three (3) business days, after the exercise of this Warrant, issue in the name
of the Holder (or such other person or persons, if any, as specifically
permitted under the terms hereof and as the Holder shall have designated in the
Notice of Warrant Exercise) one or more certificates representing the Exercise
Shares to which the Holder (or such other persons or persons) shall be entitled
upon such exercise under the terms hereof. Such certificate or certificates
shall be deemed to have been issued and the Holder (or such other person or
persons so permitted and designated) shall be deemed to have become the record
holder of the Exercise Shares as of the date of the due exercise of this Warrant
(including payment of the Exercise Price therefor).
(c) Exercise Shares Fully Paid and Non-assessable. The Company agrees and
covenants that all Exercise Shares issued or delivered upon the due exercise
(including payment of the Exercise Price therefor) of this Warrant will, upon
issuance in accordance with the terms hereof, be duly authorized, validly
issued, fully paid and non-assessable and free and clear of all taxes (other
than those taxes that, pursuant to Paragraph 2 hereof, the Company shall not be
obligated to pay), liens, charges and security interests created by or in favor
of the Company with respect to the issuance thereof (other than the limitations
on such Exercise Shares imposed by applicable securities laws and limitations
expressly included in this Warrant).
(d) Fractional Shares. The Company shall not be required to issue
fractional shares of capital stock upon the exercise of this Warrant or to
deliver certificates that evidence fractional shares of capital stock. In the
event that any fraction of an Exercise Share would, except for the provisions of
this Subparagraph (d), be issuable upon the exercise of this Warrant, the
Company shall pay to the Holder exercising the Warrant an amount in cash equal
to such fraction multiplied by the Current Market Price of the Exercise Share.
2. Payment of Taxes. The Company will pay all documentary stamp taxes, original
issue or similar taxes if any, attributable to the issuance of Exercise Shares
upon the exercise of this
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Warrant; provided, however, that the Company shall not be required to pay any
tax or taxes that may be payable in respect of any transfer of this Warrant or
any transfer involved in the issue of any Warrant Certificates or any
certificates for Exercise Shares in a name other than that of the Holder of this
Warrant, and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax required to be
withheld or shall have established to the reasonable satisfaction of the Company
that such tax has been paid.
3. Mutilated or Missing Warrant. In case this Warrant shall be mutilated, lost,
stolen or destroyed, the Company may in its discretion issue, in exchange and
substitution for and upon cancellation of, this Warrant, if mutilated, or in
lieu of and in substitution for this Warrant if lost, stolen or destroyed, a new
Warrant of like tenor and in the same aggregate denomination (but reflecting the
number of Warrant Shares as to which this Warrant was then exercisable), but
only (i) in the case of loss, theft or destruction, upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction of
this Warrant and, in the case of AOL as the Holder, AOL's indemnity, and, in the
case of any other Person as the holder, indemnity or bond, if requested, in each
case also reasonably satisfactory to the Company, and (ii) in the case of
mutilation, upon surrender of this Warrant. The applicant for such substitute
Warrant shall also comply with such other reasonable regulations and pay such
other reasonable charges as the Company or its counsel may prescribe.
4. Rights of Holder. The Holder shall not, by virtue of anything contained in
this Warrant or otherwise, be entitled to any right whatsoever, either in law or
equity, of a stockholder of the Company, including, without limitation, the
right to receive dividends or to vote or to consent or to receive notice as a
shareholder in respect of the meetings of shareholders or the election of
directors of the Company or any other matter.
5. Notices of Corporate Action. In the event of a proposal by the Company (or of
which the Company shall have knowledge) for:
(a) any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a regular periodic dividend payable in cash)
or other distribution, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property, or
to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any statutory exchange,
consolidation or merger involving the Company and any other Person or any
transfer of all or substantially all the assets of the Company to any other
Person, or any voluntary or involuntary dissolution, liquidation or winding-up
of the Company, the Company will deliver to the Holder a notice specifying (i)
the date or expected date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution or right, or (ii) the date or expected date on which
any such reorganization, reclassification, recapitalization, statutory exchange,
consolidation, merger, transfer, dissolution, liquidation or winding-up is to
take place and the time, if any such time is to be fixed, as of which the
holders of record of Common Stock shall be entitled to exchange their shares of
Common Stock for the securities or
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<PAGE>
other property deliverable upon such reorganization, reclassification,
recapitalization, statutory exchange, consolidation, merger, transfer,
dissolution, liquidation or winding-up. Such notice shall with respect to
Subparagraphs (a) and (b) hereof, be furnished at least 20 days prior to the
date therein specified and, with respect to Subparagraph (c) hereof, be
furnished promptly upon the commencement of any event described therein.
6. Adjustment of Exercise Price Warrant Shares and Exercise Shares. The Exercise
Price, the number of Warrant Shares and the kind of Exercise Shares issuable
upon the exercise of this Warrant shall be subject to adjustment from time to
time upon the happening of certain events after the date hereof as hereinafter
provided. The Exercise Price in effect at any time, the number of Warrant Shares
and the kind of securities issuable upon exercise of this Warrant shall be
subject to adjustment as follows:
(a) If the Company shall after the date hereof (i) pay a dividend or make a
distribution on its shares of Common Stock in shares of Common Stock, (ii)
subdivide or classify its outstanding Common Stock into a greater number of
shares, or (iii) combine or reclassify its outstanding Common Stock into a
smaller number of shares, the Exercise Price in effect at the time of the record
date for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be proportionally adjusted so
that the Holder of this Warrant exercised after such date shall be entitled to
receive the aggregate number and kind of shares that, if this Warrant had been
exercised by such Holder immediately prior to such date, such Holder would have
owned upon such exercise and been entitled to receive upon such dividend,
subdivision, combination or reclassification. For example, if the Company
declares a 2-for-1 stock dividend or stock split and the Exercise Price
immediately prior to such event was $5.00 per share, the adjusted Exercise Price
immediately after such event would be $2.50 per share. Such adjustment shall be
made successively whenever any event listed above shall occur.
(b) In case the Company shall after the date hereof issue rights or
warrants to all holders of its Common Stock entitling them to subscribe for or
purchase shares of Common Stock (or securities convertible into Common Stock) at
a price (or having a conversion price per share) less than the Current Market
Price of the Common Stock (as defined in Subparagraph (e) of this Paragraph
below) on the record date mentioned below, the Exercise Price shall be adjusted
so that the same shall equal the price determined by multiplying the Exercise
Price in effect immediately prior to the date of such issuance by a fraction,
the numerator of which shall be the sum of the number of shares of Common Stock
outstanding on the record date mentioned below and the number of additional
shares of Common Stock that the aggregate offering price of the total number of
shares of Common Stock so offered (or the aggregate conversion price of the
convertible securities so offered) would purchase at the Current Market Price
per share of the Common Stock, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding on such record date and the
number of additional shares of Common Stock offered for subscription or
purchases (or into which the convertible securities so offered are convertible).
Such adjustment shall be made successively whenever such rights or warrants are
issued and shall become effective immediately after the record date for the
determination of shareholders entitled to receive such rights or warrants; and,
to the extent that shares of Common Stock are not delivered (or securities
convertible into Common Stock are not delivered) after the expiration of such
rights or warrants, the Exercise Price for Warrant Shares as to which no
exercise has been made shall be readjusted to the Exercise Price that would then
be in effect had
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<PAGE>
the adjustment made upon the issuance of such rights or warrants been made upon
the basis of delivery of only the number of shares of Common Stock (or
securities convertible into Common Stock) actually delivered.
(c) If, after the date hereof, there shall be any reclassification, capital
reorganization or change of the Common Stock (other than as a result of a
subdivision, combination or stock dividend provided for in Subparagraphs (a) and
(b) above), or any consolidation of the Company with, or merger of the Company
into, another corporation or other business organization (other than a
consolidation or merger in which the Company is the continuing corporation and
that does not result in any reclassification or change of the outstanding Common
Stock), or any sale or conveyance to another corporation or other business
organization of all or substantially all of the assets of the Company (referred
to in this Subparagraph (c) as a "Reclassification"), then, as a condition of
such Reclassification, lawful provisions shall be made, and duly executed
documents evidencing the same from the Company or its successor shall be
delivered to the Holder, so that the Holder shall thereafter have the right to
purchase, at a total price not to exceed that payable upon the exercise of this
Warrant in full, the kind and amount of shares of stock and other securities and
property receivable upon such Reclassification by a holder of the number of
shares of Common Stock that might have been purchased by the Holder immediately
prior to such Reclassification, and in any such case appropriate provisions
shall be made with respect to the rights and interest of the Holder to the end
that the provisions hereof (including, without limitation, provisions for the
adjustment of the Exercise Price and the number of shares issuable hereunder)
shall thereafter be applicable in relation to any shares of stock or other
securities and property thereafter deliverable upon exercise hereof.
(d) Whenever the Exercise Price payable upon exercise of this Warrant is
adjusted pursuant to Subparagraphs (a), (b) and (c) above, the number of Warrant
Shares that have vested as of such time and the maximum number of Warrant Shares
that may then be issuable pursuant to this Warrant shall each simultaneously be
adjusted by multiplying (x) each such number by (y) a fraction, the numerator of
which is the Exercise Price in effect just prior to such adjustment and the
denominator of which is the Exercise Price, as adjusted.
(e) For the purpose of any computation in this Warrant, the Current Market
Price per share of Common Stock at any date shall be deemed to be the average of
the daily closing prices for 10 consecutive business days before such date. The
closing price for each day shall be the last sale price regular way or, in case
no such reported sale takes place on such day, the average of the last reported
bid and lowest reported asked prices as reported by NASDAQ, or other similar
organizations if NASDAQ is no longer reporting such information, or if not so
available, the fair market price as determined in good faith by the Board of
Directors.
(f) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least ten cents ($0.10)
in such price; provided, however, that any adjustments that by reason of this
Subparagraph (f) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Paragraph 6 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything in this Paragraph
6 to the contrary notwithstanding, the Company shall be entitled, but shall not
be required, to make such additional reductions in the Exercise Price, in
addition to those required by this Paragraph 6, as
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<PAGE>
it, in its sole discretion, shall determine to be advisable in order that any
dividend or distribution in shares of Common Stock, subdivision,
reclassification or combination of Common Stock, issuance of warrants to
purchase Common Stock or distribution of evidences of indebtedness or other
assets (excluding cash dividends) referred to hereinabove in this Paragraph 6
hereafter made by the Company to the Holders of its Common Stock shall not
result in any tax to the Holders of its Common Stock or securities convertible
into Common Stock.
(g) Whenever the Exercise Price is adjusted as herein provided, the Company
shall promptly cause a notice, setting forth the adjusted Exercise Price and
adjusted number of Warrant Shares as to which a Notice of Warrant Exercise may
be given under this Warrant, to be mailed to the Holders, at their last
addresses appearing in the books of the Company, and shall cause a certified
copy thereof to be mailed to its transfer agent, if any. The Company may retain
a firm of independent certified public accountants selected by the Board of
Directors (who may be the regular accountants employed by the Company) to make
any computation required by this Paragraph 6, and a certificate signed by such
firm shall be conclusive evidence of the correctness of such adjustment.
(h) In the event that at any time, as a result of an adjustment made
pursuant to Subparagraph 6(a) above, the Holder of this Warrant thereafter shall
become entitled to receive any Exercise Shares of the Company, other than Common
Stock, thereafter the number of such other shares so receivable upon exercise of
this Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Subparagraphs (a) to (f), inclusive, of Paragraph 6
above.
(i) Irrespective of any adjustments in the Exercise Price, the number of
Warrant Shares or kind of Exercise Shares purchasable upon exercise of this
Warrant, Warrants theretofore or thereafter issued in exchange or substitution
for this Warrant or any part thereof may continue to express the same price and
number and kind of shares as are stated in this Warrant.
(j) Whenever the Exercise Price shall be adjusted as required by the
provisions hereof, the Company shall forthwith file in the custody of its
Secretary or an Assistant Secretary at its principal office and with its stock
transfer agent, if any, an officer's certificate showing the adjusted Exercise
Price determined as herein provided and, in the case of an Exercise Price
adjustment, setting forth in reasonable detail the facts requiring such
adjustment, including a statement of the number of additional shares of Common
Stock, if any, and such other facts as shall be necessary to show the reason for
and the manner of computing such adjustment. Each such officer's certificate
shall be made available at all reasonable times for inspection by the Holder and
the Company shall, forthwith after each such adjustment, mail a copy by
certified mail or such certificate to the Holder.
7. Restrictions on Transferability: Restrictive Legends: Indemnification.
(a) Neither this Warrant nor the right to exercise this Warrant or to
receive Exercise Shares upon any such exercise may be sold, assigned or
transferred by the Holder, except that this Warrant and such rights may be
transferred, upon compliance with the other Subparagraphs
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of this Paragraph 7, by AOL, as the Holder, to (i) any successor to AOL by
reason of a merger, consolidation or statutory exchange of AOL or any successor
to all or substantially all of AOL's assets if such successor assumes in writing
this Warrant and all of AOL's liabilities and obligations under the Marketing
Agreement; or (ii) any subsidiary or affiliate of AOL; provided that AOL owns
voting stock of such subsidiary or affiliate entitling AOL to at least 80% of
the voting power thereof in the election of directors. Any sale, assignment or
transfer of this Warrant in violation of this Paragraph 7 is null and void as of
the time of such transfer.
(b) No Exercise Share may be offered for sale or sold, or otherwise
transferred or sold in any transaction that would constitute a sale thereof
within the meaning of the Securities Act, unless (i) such security has been
registered for sale under the Securities Act and registered or qualified under
applicable state securities laws relating to the offer and sale of securities,
or (ii) an exemption from the registration requirements of the Securities Act
and the registration or qualifications requirements of all such state securities
laws are available and the Company shall have received an opinion of counsel
(which may be an opinion that covers multiple or all subsequent sales)
satisfactory to the Company that the proposed sale or other disposition of such
securities may be effected without registration under the Securities Act, such
counsel and such opinion to be reasonably satisfactory to the Company.
(c) Except as otherwise permitted by this Paragraph 7, this Warrant and any
Warrant issued upon direct or indirect transfer of or in substitution for this
Warrant or any part thereof shall be stamped or otherwise imprinted with a
legend substantially in the form of the legend with respect to transfer
limitation and securities acts at the head of this Warrant.
(d) Except as otherwise permitted by this Paragraph 7, each certificate for
an Exercise Share issued upon exercise of this Warrant or any Warrant issued
upon direct or indirect transfer of or in substitution for this Warrant or any
part thereof shall be stamped or otherwise imprinted with a legend in
substantially the following form:
The shares represented by this certificate are subject to
restrictions imposed by the federal Securities Act of 1933, as
amended, and applicable state securities laws. The shares may not be
sold or transferred in the absence of registration or an exemption
therefrom under such Securities Act of 1933 and such applicable state
securities laws. All shares represented by this Certificate are
subject to the terms and conditions of a Warrantholder and
Stockholders Agreement, dated as of February 22, 1997, and a Voting
Trust Agreement, dated as the same date both of which may be examined
at the offices of TelSave Holdings, Inc., New Hope, Pennsylvania.
(e) The Company shall, at the request of any registered holder of an
Exercise Share, exchange the certificate representing such security for a
certificate representing the same security not bearing the restrictive legend
required by Subparagraph 7(d) if the Exercise Shares may be sold or transferred
pursuant to the provisions of Rule 144(k) and, in the reasonable opinion of
counsel to the Company, such restrictive legend is no longer necessary.
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(f) The Holder agrees to indemnify and hold harmless the Company against
any loss, damage, claim or liability arising solely from the disposition of this
Warrant or any Exercise Share held by such Holder or any interest therein in
violation of the provisions of this Subparagraph 7(b).
(g) The Holder of this Warrant is entitled to the benefit of such
registration rights in respect of the Shares of Common Stock issuable to such
Holder upon exercise of the Warrants as are set forth in the Warrantholder and
Stockholders Agreement, dated as of February 22, 1997, among the Company,
Tel-Save, Inc., a Pennsylvania corporation and wholly owned subsidiary of the
Company and the Holder.
8. Company Representations and Warranties. Company hereby represents and
warrants to AOL as follows:
(a) Due Organization: Good Standing. Company (i) is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware; and (ii) has the corporate power and authority to own its properties
and assets and to carry on its business as now conducted.
(b) Authorization. The execution, delivery and performance by Company of
this Warrant are within its corporate powers and have been duly authorized by
all necessary corporate action.
(c) No Conflict. The execution, delivery and performance by Company of this
Warrant do not contravene any provision of its charter or by-laws, and do not
conflict with, result in a breach of, or constitute a default under, any
agreement, instrument, covenant or other restriction to which the Company is a
party or by which it or any of its assets is bound.
(d) Enforceability. This Warrant is the legal, valid and binding obligation
of Company, enforceable against Company in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization, or other laws affecting creditors' rights generally
or by the availability of equitable remedies.
(e) Capitalization. As of March 31, 1998, the authorized equity
capitalization of Company consists of 300,000,000 shares of Common Stock, par
value $.01 per share, of which 64,535,012 shares were issued and outstanding,
2,714,623 were held in treasury and 39,072,696 shares were reserved for issuance
upon the exercise of outstanding options or warrants or conversion of
outstanding convertible notes and 5,000,000 shares of undesignated Preferred
Stock, par value $.01 per share, of which no shares were issued and outstanding.
The Company agrees that, prior to the expiration of this Warrant, the Company
will at all times have authorized and in reserve, and will keep available,
solely for issuance or delivery upon the exercise of this Warrant, the shares of
the Common Stock and other securities and properties as from time to time shall
be receivable upon the exercise of this Warrant, the shares of the Common Stock
and other securities and properties as from time to time shall be receivable
upon the exercise of this Warrant. Upon issuance of the shares of Common Stock
upon exercise of this Warrant, such shares will have been duly authorized and
validly issued and will be fully paid and nonassessable
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shares of Common Stock of the Company, and not subject to preemptive rights or
rights to first refusal.
(f) Commission Filings. Company has made available to AOL copies of
Company's (i) Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as amended, and (ii) filings by Company under the Securities Act and other
filings by Company under the Exchange Act, in each case since January 1, 1998
and as filed with the SEC. Company has filed all reports, registration
statements and other documents (the "SEC Reports") required to be filed under
the Exchange Act and the rules and regulations thereunder, the SEC Reports
complied, in all material respects, with the requirements of the Exchange Act,
such compliance to be determined, to the extent applicable, in accordance with
the standards applied to the reports in the following two sentences. As of their
respective dates, the SEC Reports did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
9. Notices. All notices or other communications under this Warrant shall be in
writing and shall be deemed to have been given if delivered by hand or mailed by
certified mail, postage prepaid, return receipt requested, or delivered by
facsimile transmission (which shall be followed by delivery of an original
copy), addressed as follows:
If to the Company:
Tel-Save Holdings, Inc.
6805 Route 202
New Hope, PA 18938
Facsimile No. 215-862-1083
with a copy to:
Aloysius T. Lawn, IV, Esquire
General Counsel and Secretary
Tel-Save Holdings, Inc.
6805 Route 202
New Hope, PA 18938
Facsimile No. 215-862-1085
and to the Holder:
American Online, Inc.
22000 AOL Way
Dulles, VA 20166
Attn: General Counsel
with a copy to: Head of Business Affairs
Facsimile No. 703-265-2208
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Either of the Company or the Holder may from time to time change the address or
facsimile number to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Paragraph 9.
10. Supplements and Amendments. Except as otherwise provided herein, this
Warrant and any term hereof may be changed, waived, discharged or terminated
only by an instrument in writing signed by the party against which enforcement
of such change, waiver, discharge or termination is sought.
11. Severability. If for any reason any provision, paragraph or term of this
Warrant is held to be invalid or unenforceable, all other valid provisions
herein shall remain in full force and effect and all terms, provisions and
paragraphs of this Warrant shall be deemed to be severable.
12. Governing Law. This Warrant shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of said State.
13. Entire Agreement. This Warrant consists of all the terms and conditions
contained herein and all documents incorporated herein specifically by reference
and constitutes the complete and exclusive statement of the understandings
between the parties and supersedes all proposals and prior agreements (oral or
written) between the parties relating to the rights and obligations provided
hereunder.
14. Headings: Construction. Paragraph and Subparagraph headings used herein are
included herein for conveniences of reference only and shall not affect the
construction of this Warrant nor constitute a part of this Warrant for any other
purpose. The words "herein," "hereof," "hereby," "hereto," "hereunder" and words
of similar import refer to this Warrant as a whole and not to any particular
article, section, paragraph, subparagraph or other subdivision of this Warrant.
Defined terms shall include the plural and the singular as the context shall
require.
15. Consent and Acknowledgment of Holder. The terms and conditions of this
Warrant are agreed and consented to by the Holder, as evidenced by Holder's
signature on the line provided below. This Warrant shall bind and be enforceable
by and against the Holder and such Holder's successors, heirs, estates,
representatives and assigns and the Company and its successors and assigns.
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IN WITNESS WHEREOF, the Company and the Holder have caused these presents
to be duly executed as of the day and year written above.
TEL-SAVE HOLDINGS, INC.
By:/s/ Daniel Borislow
----------------------------
Name: Daniel Borislow
Title: Chairman & CEO
Accepted by:
AMERICA ONLINE, INC.
By:/s/ David M. Colburn
----------------------
Name: David M. Colburn
Title: Senior Vice President
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APPENDIX A
NOTICE OF WARRANT EXERCISE
Pursuant to the attached Warrant ("Warrant"), by and between the
undersigned and Tel-Save Holdings, Inc., a Delaware corporation (the "Company"),
dated as of May [ ], 1998, the undersigned hereby irrevocably elects to exercise
the Warrant with respect to ___________________ Warrant Shares (as such term is
defined in the Warrant) as provided for therein. [The undersigned hereby also
elects that the exercise shall be a "net issuance exercise" as provided in
Section 1(a)(D) of the Warrant.]
The undersigned requests that a certificate for the Exercise Shares
issuable in accordance with the terms of the Warrant upon the exercise as
requested above be issued in the name of:
- -------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name, address and social security number)
Dated:
-------------------------------------------------------------
Address:
-------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
Signature:
-------------------------------------------------------------
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Appendix B-1
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS AND
MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS TEL-SAVE HOLDINGS, INC. RECEIVES AN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO IT THAT SUCH SALE, TRANSFER OR
ASSIGNMENT IS EXEMPT FROM ANY REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES
LAWS. THIS WARRANT AND ANY SECURITIES ACQUIRED UPON EXERCISE OF THE
WARRANT ARE SUBJECT TO THE TERMS AND CONDITIONS OF THE WARRANTHOLDER
AND STOCKHOLDERS AGREEMENT AND THE VOTING TRUST AGREEMENT, EACH DATED
AS OF FEBRUARY 22, 1997.
NONTRANSFERABLE WARRANT TO PURCHASE
COMMON STOCK OF
TEL-SAVE HOLDINGS, INC.
Date of Grant: As of February 22, 1997 (as amended and restated as of May 14,
1998).
Void after 5:00 PM. Eastern Standard Time on February 22, 2002
No. W-AOL-3
FOR VALUE RECEIVED, Tel-Save Holdings, Inc., a Delaware corporation
(together with its successors and assigns, the "Company") hereby certifies and
agrees that America Online, Inc., a Delaware corporation ("AOL" and, in its
capacity as the holder of this Warrant ("this Warrant"), together with its
permitted successors and assigns, the "Holder"), with its principal address at
22000 AOL Way, Dulles, Virginia 20166-9323, is entitled, subject to the terms,
conditions and adjustments hereof, to receive, in one or more exercises of this
Warrant, from time to time, from the Company such number of shares of Common
Stock, par value $.01 per share, of the Company (the "Common Stock") as is
determined under Paragraph 1 hereof, during the period commencing at 9:00 AM,
Eastern Standard Time on the date hereof (the "Commencement Date") and ending at
5:00 PM. Eastern Standard Time on the fifth anniversary of the date hereof (such
time on such date, the "Termination Date") and at such respective times and for
such numbers of Warrant Shares (as defined below) as are set forth in Paragraph
1 at an exercise price per share (the "Exercise Price") of U.S. $15.50. The
number of shares of Common Stock issuable upon exercise of this Warrant, the
number of shares vested and the exercise price per share shall be subject to
further adjustment from time to time upon the occurrence of certain events as
set forth below. This Warrant is one of the "Warrants" referenced in, and issued
in conjunction with, the Telecommunications Marketing Agreement, dated as of
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February 22, 1997 as subsequently amended as of January 25, 1998 and as of May
14, 1998 (as amended, the "Marketing Agreement"), among the Company, Tel-Save,
Inc. ("TS"), a Pennsylvania corporation and wholly owned subsidiary of the
Company and AOL.
The shares of Common Stock or any other shares or other units of stock
or other securities or property or any combination thereof receivable upon
exercise of this Warrant, as adjusted from time to time, are sometimes referred
to herein as the "Exercise Shares."
1. Exercise of Warrant: Issuance of Exercise Shares.
(a) Exercise of Warrant. This Warrant may be exercised as to the then
remaining Warrant Shares that have vested as provided herein by the Holder in
whole or in part from time to time on or after the Commencement Date and until
and including the Termination Date as provided below. For purposes of this
Warrant, "Warrant Shares" shall mean 4,000,000 shares of Common Stock (subject
to adjustment as provided in Paragraph 6 hereof and to successive reduction upon
any exercise of this Warrant as provided below in this clause (a)), all of which
Warrant Shares are deemed for all purposes hereof to have vested as of the date
hereof.
Following the Termination Date, in the absence of the exercise hereof, the
Holder shall have no rights herein to acquire any Exercise Shares and this
Warrant shall lapse as to such rights. This Warrant may be exercised on any
business day by delivering to the Company at its principal office, presently
located at the address of the Company set forth in Paragraph 9 hereof (or such
other office of the Company as shall theretofore have been designated by the
Company by written notice to the Holder), together with: (i) a completed and
executed irrevocable Notice of Warrant Exercise in the form set forth in
Appendix A hereto and made a part hereof, specifying therein the number of
Warrant Shares (which shall not exceed the number thereof then remaining as to
which this Warrant is then exercisable and as to which no Notice of Warrant
Exercise has previously been given) with respect to which the Holder is then
exercising its rights hereunder, and (ii) subject, as indicated below, to the
consent or election of the Company, within two (2) business days after receipt
by the Company of such Notice of Warrant, delivery to the Company of the full
Exercise Price as follows:
(A) if the Company shall not have elected that such exercise shall be a
"net issuance exercise" as provided in clause (C) of this Paragraph, payment of
the full Exercise Price therefor, in immediately available funds in which case
the Company, pursuant to such Notice of Warrant Exercise from Holder, (duly
completed, and in accordance with Subparagraph 1(c)), shall, upon receipt of
this Warrant and the original executed copy of such Notice of Warrant Exercise
and payment of such Exercise Price, issue, and deliver a certificate evidencing,
such number of Exercise Shares as to which this Warrant shall have been
exercised; or
(B) if the Company shall not have elected that such exercise shall be a
"net issuance exercise" as provided in clause (C) of this Paragraph, through
arrangements with a brokerage firm under which such brokerage firm, on behalf of
the Holder, shall pay the Company the Exercise Price, and the Company pursuant
to an irrevocable notice from the Holder (the form of which shall be
satisfactory to the Company), shall promptly deliver the Exercise Shares being
purchased to such firm; and
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(C) if the Company shall, upon receipt of a Notice of Warrant Exercise from
the Holder as to Warrant Shares, and in its sole discretion, so elect, the
Company may deliver a certificate evidencing such number of Exercise Shares as
shall equal the quotient of (x) the product of (1) the difference between the
Current Market Price (as defined in Subparagraph 6(e)) on the date of delivery
of such Notice of Warrant Exercise and the then Exercise Price, multiplied by
(2) the number of Warrant Shares specified in such Notice of Warrant Exercise as
to which this Warrant is to be exercised, divided by (y) the Current Market
Price on the date of delivery of such Notice of Warrant Exercise (a "net
issuance exercise"), in which event no payment in cash of the Exercise Price in
respect of the Warrant Shares as to which such "net issuance exercise" applies
need be made.
(D) Notwithstanding the foregoing subparagraphs (A), (B) and (C), in the
event of a Change of Control (as defined below), the Holder, and not the
Company, may elect in its Notice of Warrant Exercise that the exercise shall be
a "net issuance exercise", in which event the Company shall deliver a
certificate evidencing such number of Exercise Shares as shall equal the
quotient of (x) the product of (1) the difference between the Current Market
Price (as defined in Subparagraph 6(e)) on the date of delivery of such Notice
of Warrant Exercise and the then Exercise Price, multiplied by (2) the number of
Warrant Shares specified in such Notice of Warrant Exercise as to which this
Warrant is to be exercised, divided by (y) the Current Market Price on the date
of delivery of such Notice of Warrant Exercise, in which event no payment in
cash of the Exercise Price in respect of the Warrant Shares as to which such
"net issuance exercise" applies need be made. "Change of Control" shall be
deemed to have occurred upon the happening of any of the following events:
a. During any period of twelve consecutive months, individuals who
at the beginning of such period constituted the Board of Directors of
the Company (together with any new or replacement directors whose
election by the Board of Directors or whose nomination for election by
the Company's stockholders was approved by a vote of at least 66-2/3%
of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a
majority of the directors then in office;
b. At any time during any period of twelve consecutive months, any
"person" or "group" (each as defined in Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")), who
or which was not an "Affiliate" (as defined in the Exchange Act) of
the Company at the beginning of such period, becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act) of
shares representing more than 50% of the combined voting power of the
then-outstanding securities entitled to vote in the election of
directors of the Company; or
c. Any merger or consolidation of the Company with or into another
corporation, or any merger of any other person into the Company unless
the holders of shares of the Company immediately prior to such
transaction are the owners, directly or indirectly, immediately
following such transaction, of at least
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a majority of the total voting power of the corporation resulting from
such transaction, or any sale of all or substantially all of the
assets of the Company or Tel-Save, Inc. to any person (other than to
one or more wholly owned subsidiaries of the Company);
provided that "Change of Control" shall in any event include any
transaction respecting TS that is referred to in Section X.C.1.(c) of the
Marketing Agreement.
Upon such exercise pursuant to a Notice of Warrant Exercise and issuance of
such Exercise Shares, the number of Warrant Shares automatically shall be
reduced by the number of Warrant Shares as to which this Warrant is to be
exercised specified in such Notice of Warrant Exercise.
In the event that this Warrant shall be duly exercised in part prior to the
Termination Date, the Company shall issue a new Warrant of like tenor evidencing
the rights of the Holder thereof with respect to the balance of the Warrant
Shares under the Warrant so surrendered.
No adjustments shall be made for any cash dividends on Exercise Shares
issuable upon exercise of this Warrant.
(b) Issuance of Exercise Shares; Delivery of Warrant Certificates. The
Company at its expense shall, as soon as practicable and in any event within
three (3) business days, after the exercise of this Warrant, issue in the name
of the Holder (or such other person or persons, if any, as specifically
permitted under the terms hereof and as the Holder shall have designated in the
Notice of Warrant Exercise) one or more certificates representing the Exercise
Shares to which the Holder (or such other persons or persons) shall be entitled
upon such exercise under the terms hereof. Such certificate or certificates
shall be deemed to have been issued and the Holder (or such other person or
persons so permitted and designated) shall be deemed to have become the record
holder of the Exercise Shares as of the date of the due exercise of this Warrant
(including payment of the Exercise Price therefor).
(c) Exercise Shares Fully Paid and Non-assessable. The Company agrees and
covenants that all Exercise Shares issued or delivered upon the due exercise
(including payment of the Exercise Price therefor) of this Warrant will, upon
issuance in accordance with the terms hereof, be duly authorized, validly
issued, fully paid and non-assessable and free and clear of all taxes (other
than those taxes that, pursuant to Paragraph 2 hereof, the Company shall not be
obligated to pay), liens, charges and security interests created by or in favor
of the Company with respect to the issuance thereof (other than the limitations
on such Exercise Shares imposed by applicable securities laws and limitations
expressly included in this Warrant).
(d) Fractional Shares. The Company shall not be required to issue
fractional shares of capital stock upon the exercise of this Warrant or to
deliver certificates that evidence fractional shares of capital stock. In the
event that any fraction of an Exercise Share would, except for the provisions of
this Subparagraph (d), be issuable upon the exercise of this Warrant, the
Company shall pay to the Holder exercising the Warrant an amount in cash equal
to such fraction multiplied by the Current Market Price of the Exercise Share.
2. Payment of Taxes. The Company will pay all documentary stamp taxes,
original issue or similar taxes if any, attributable to the issuance of Exercise
Shares upon the exercise of this Warrant; provided, however, that the Company
shall not be required to pay any tax or taxes that may be payable in respect of
any transfer of this Warrant or any transfer involved in the issue of any
Warrant Certificates or any certificates for Exercise Shares in a name other
than that of the Holder of this Warrant, and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax required to be withheld or shall have established to the reasonable
satisfaction of the Company that such tax has been paid.
3. Mutilated or Missing Warrant. In case this Warrant shall be mutilated,
lost, stolen or destroyed, the Company may in its discretion issue, in exchange
and substitution for and upon cancellation of, this Warrant, if mutilated, or in
lieu of and in substitution for this Warrant if lost, stolen or destroyed, a new
Warrant of like tenor and in the same aggregate denomination (but reflecting the
number of Warrant Shares as to which this Warrant was then exercisable), but
only (i) in the case of loss, theft or destruction, upon receipt of evidence
reasonably satisfactory to the Company of such loss, theft or destruction of
this Warrant and, in the case of AOL as the Holder, AOL's indemnity, and, in the
case of any other Person as the holder, indemnity or bond, if requested, in each
case also reasonably satisfactory to the Company, and (ii) in the case of
mutilation, upon surrender of this Warrant. The applicant for such substitute
Warrant shall also comply with such other reasonable regulations and pay such
other reasonable charges as the Company or its counsel may prescribe.
4. Rights of Holder. The Holder shall not, by virtue of anything contained in
this Warrant or otherwise, be entitled to any right whatsoever, either in law or
equity, of a stockholder of the Company, including, without limitation, the
right to receive dividends or to vote or to consent or to receive notice as a
shareholder in respect of the meetings of shareholders or the election of
directors of the Company or any other matter.
5. Notices of Corporate Action. In the event of a proposal by the Company (or
of which the Company shall have knowledge) for:
(a) any taking by the Company of a record of the holders of any class of
securities for the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a regular periodic dividend payable in cash)
or other distribution, or any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or property, or
to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any statutory exchange,
consolidation or merger involving the Company and any other Person or any
transfer of all or substantially all the assets of the Company to any other
Person, or any voluntary or involuntary dissolution, liquidation or winding-up
of the Company, the Company will deliver to the Holder a notice specifying (i)
the date or expected date on which any such record is to be taken for the
purpose of such dividend, distribution or right, and the amount and character of
such dividend, distribution or right, or (ii) the date or expected date on which
any such reorganization, reclassification, recapitalization, statutory exchange,
consolidation, merger, transfer, dissolution, liquidation or winding-up is to
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take place and the time, if any such time is to be fixed, as of which the
holders of record of Common Stock shall be entitled to exchange their shares of
Common Stock for the securities or other property deliverable upon such
reorganization, reclassification, recapitalization, statutory exchange,
consolidation, merger, transfer, dissolution, liquidation or winding-up. Such
notice shall with respect to Subparagraphs (a) and (b) hereof, be furnished at
least 20 days prior to the date therein specified and, with respect to
Subparagraph (c) hereof, be furnished promptly upon the commencement of any
event described therein.
6. Adjustment of Exercise Price Warrant Shares and Exercise Shares. The
Exercise Price, the number of Warrant Shares and the kind of Exercise Shares
issuable upon the exercise of this Warrant shall be subject to adjustment from
time to time upon the happening of certain events after the date hereof as
hereinafter provided. The Exercise Price in effect at any time, the number of
Warrant Shares and the kind of securities issuable upon exercise of this Warrant
shall be subject to adjustment as follows:
(a) If the Company shall after the date hereof (i) pay a dividend or make a
distribution on its shares of Common Stock in shares of Common Stock, (ii)
subdivide or classify its outstanding Common Stock into a greater number of
shares, or (iii) combine or reclassify its outstanding Common Stock into a
smaller number of shares, the Exercise Price in effect at the time of the record
date for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be proportionally adjusted so
that the Holder of this Warrant exercised after such date shall be entitled to
receive the aggregate number and kind of shares that, if this Warrant had been
exercised by such Holder immediately prior to such date, such Holder would have
owned upon such exercise and been entitled to receive upon such dividend,
subdivision, combination or reclassification. For example, if the Company
declares a 2-for-1 stock dividend or stock split and the Exercise Price
immediately prior to such event was $5.00 per share, the adjusted Exercise Price
immediately after such event would be $2.50 per share. Such adjustment shall be
made successively whenever any event listed above shall occur.
(b) In case the Company shall after the date hereof issue rights or
warrants to all holders of its Common Stock entitling them to subscribe for or
purchase shares of Common Stock (or securities convertible into Common Stock) at
a price (or having a conversion price per share) less than the Current Market
Price of the Common Stock (as defined in Subparagraph (e) of this Paragraph
below) on the record date mentioned below, the Exercise Price shall be adjusted
so that the same shall equal the price determined by multiplying the Exercise
Price in effect immediately prior to the date of such issuance by a fraction,
the numerator of which shall be the sum of the number of shares of Common Stock
outstanding on the record date mentioned below and the number of additional
shares of Common Stock that the aggregate offering price of the total number of
shares of Common Stock so offered (or the aggregate conversion price of the
convertible securities so offered) would purchase at the Current Market Price
per share of the Common Stock, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding on such record date and the
number of additional shares of Common Stock offered for subscription or
purchases (or into which the convertible securities so offered are convertible).
Such adjustment shall be made successively whenever such rights or warrants are
issued and shall become effective immediately after the record date for the
determination of shareholders entitled to receive such rights or warrants; and,
to the extent that shares of Common Stock are not delivered (or securities
convertible into Common Stock are not delivered) after the
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expiration of such rights or warrants, the Exercise Price for Warrant Shares as
to which no exercise has been made shall be readjusted to the Exercise Price
that would then be in effect had the adjustment made upon the issuance of such
rights or warrants been made upon the basis of delivery of only the number of
shares of Common Stock (or securities convertible into Common Stock) actually
delivered.
(c) If, after the date hereof, there shall be any reclassification, capital
reorganization or change of the Common Stock (other than as a result of a
subdivision, combination or stock dividend provided for in Subparagraphs (a) and
(b) above), or any consolidation of the Company with, or merger of the Company
into, another corporation or other business organization (other than a
consolidation or merger in which the Company is the continuing corporation and
that does not result in any reclassification or change of the outstanding Common
Stock), or any sale or conveyance to another corporation or other business
organization of all or substantially all of the assets of the Company (referred
to in this Subparagraph (c) as a "Reclassification"), then, as a condition of
such Reclassification, lawful provisions shall be made, and duly executed
documents evidencing the same from the Company or its successor shall be
delivered to the Holder, so that the Holder shall thereafter have the right to
purchase, at a total price not to exceed that payable upon the exercise of this
Warrant in full, the kind and amount of shares of stock and other securities and
property receivable upon such Reclassification by a holder of the number of
shares of Common Stock that might have been purchased by the Holder immediately
prior to such Reclassification, and in any such case appropriate provisions
shall be made with respect to the rights and interest of the Holder to the end
that the provisions hereof (including, without limitation, provisions for the
adjustment of the Exercise Price and the number of shares issuable hereunder)
shall thereafter be applicable in relation to any shares of stock or other
securities and property thereafter deliverable upon exercise hereof.
(d) Whenever the Exercise Price payable upon exercise of this Warrant is
adjusted pursuant to Subparagraphs (a), (b) and (c) above, the number of Warrant
Shares that have vested as of such time and the maximum number of Warrant Shares
that may then be issuable pursuant to this Warrant shall each simultaneously be
adjusted by multiplying (x) each such number by (y) a fraction, the numerator of
which is the Exercise Price in effect just prior to such adjustment and the
denominator of which is the Exercise Price, as adjusted.
(e) For the purpose of any computation in this Warrant, the Current Market
Price per share of Common Stock at any date shall be deemed to be the average of
the daily closing prices for 10 consecutive business days before such date. The
closing price for each day shall be the last sale price regular way or, in case
no such reported sale takes place on such day, the average of the last reported
bid and lowest reported asked prices as reported by NASDAQ, or other similar
organizations if NASDAQ is no longer reporting such information, or if not so
available, the fair market price as determined in good faith by the Board of
Directors.
(f) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least ten cents ($0.10)
in such price; provided, however, that any adjustments that by reason of this
Subparagraph (f) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Paragraph 6 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything in this Paragraph
6 to the
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contrary notwithstanding, the Company shall be entitled, but shall not be
required, to make such additional reductions in the Exercise Price, in addition
to those required by this Paragraph 6, as it, in its sole discretion, shall
determine to be advisable in order that any dividend or distribution in shares
of Common Stock, subdivision, reclassification or combination of Common Stock,
issuance of warrants to purchase Common Stock or distribution of evidences of
indebtedness or other assets (excluding cash dividends) referred to hereinabove
in this Paragraph 6 hereafter made by the Company to the Holders of its Common
Stock shall not result in any tax to the Holders of its Common Stock or
securities convertible into Common Stock.
(g) Whenever the Exercise Price is adjusted as herein provided, the Company
shall promptly cause a notice, setting forth the adjusted Exercise Price and
adjusted number of Warrant Shares as to which a Notice of Warrant Exercise may
be given under this Warrant, to be mailed to the Holders, at their last
addresses appearing in the books of the Company, and shall cause a certified
copy thereof to be mailed to its transfer agent, if any. The Company may retain
a firm of independent certified public accountants selected by the Board of
Directors (who may be the regular accountants employed by the Company) to make
any computation required by this Paragraph 6, and a certificate signed by such
firm shall be conclusive evidence of the correctness of such adjustment.
(h) In the event that at any time, as a result of an adjustment made
pursuant to Subparagraph 6(a) above, the Holder of this Warrant thereafter shall
become entitled to receive any Exercise Shares of the Company, other than Common
Stock, thereafter the number of such other shares so receivable upon exercise of
this Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Subparagraphs (a) to (f), inclusive, of Paragraph 6
above.
(i) Irrespective of any adjustments in the Exercise Price, the number of
Warrant Shares or kind of Exercise Shares purchasable upon exercise of this
Warrant, Warrants theretofore or thereafter issued in exchange or substitution
for this Warrant or any part thereof may continue to express the same price and
number and kind of shares as are stated in this Warrant.
(j) Whenever the Exercise Price shall be adjusted as required by the
provisions hereof, the Company shall forthwith file in the custody of its
Secretary or an Assistant Secretary at its principal office and with its stock
transfer agent, if any, an officer's certificate showing the adjusted Exercise
Price determined as herein provided and, in the case of an Exercise Price
adjustment, setting forth in reasonable detail the facts requiring such
adjustment, including a statement of the number of additional shares of Common
Stock, if any, and such other facts as shall be necessary to show the reason for
and the manner of computing such adjustment. Each such officer's certificate
shall be made available at all reasonable times for inspection by the Holder and
the Company shall, forthwith after each such adjustment, mail a copy by
certified mail or such certificate to the Holder.
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7. Restrictions on Transferability: Restrictive Legends: Indemnification.
(a) Neither this Warrant nor the right to exercise this Warrant or to
receive Exercise Shares upon any such exercise may be sold, assigned or
transferred by the Holder, except that this Warrant and such rights may be
transferred, upon compliance with the other Subparagraphs of this Paragraph 7,
by AOL, as the Holder, to (i) any successor to AOL by reason of a merger,
consolidation or statutory exchange of AOL or any successor to all or
substantially all of AOL's assets if such successor assumes in writing this
Warrant and all of AOL's liabilities and obligations under the Marketing
Agreement; or (ii) any subsidiary or affiliate of AOL; provided that AOL owns
voting stock of such subsidiary or affiliate entitling AOL to at least 80% of
the voting power thereof in the election of directors. Any sale, assignment or
transfer of this Warrant in violation of this Paragraph 7 is null and void as of
the time of such transfer.
(b) No Exercise Share may be offered for sale or sold, or otherwise
transferred or sold in any transaction that would constitute a sale thereof
within the meaning of the Securities Act, unless (i) such security has been
registered for sale under the Securities Act and registered or qualified under
applicable state securities laws relating to the offer and sale of securities,
or (ii) an exemption from the registration requirements of the Securities Act
and the registration or qualifications requirements of all such state securities
laws are available and the Company shall have received an opinion of counsel
(which may be an opinion that covers multiple or all subsequent sales)
satisfactory to the Company that the proposed sale or other disposition of such
securities may be effected without registration under the Securities Act, such
counsel and such opinion to be reasonably satisfactory to the Company.
(c) Except as otherwise permitted by this Paragraph 7, this Warrant and any
Warrant issued upon direct or indirect transfer of or in substitution for this
Warrant or any part thereof shall be stamped or otherwise imprinted with a
legend substantially in the form of the legend with respect to transfer
limitation and securities acts at the head of this Warrant.
(d) Except as otherwise permitted by this Paragraph 7, each certificate for
an Exercise Share issued upon exercise of this Warrant or any Warrant issued
upon direct or indirect transfer of or in substitution for this Warrant or any
part thereof shall be stamped or otherwise imprinted with a legend in
substantially the following form:
The shares represented by this certificate are subject to
restrictions imposed by the federal Securities Act of 1933, as
amended, and applicable state securities laws. The shares may not be
sold or transferred in the absence of registration or an exemption
therefrom under such Securities Act of 1933 and such applicable state
securities laws. All shares represented by this Certificate are
subject to the terms and conditions of a Warrantholder and
Stockholders Agreement, dated as of February 22, 1997, and a Voting
Trust Agreement, dated as the same date both of which may be examined
at the offices of TelSave Holdings, Inc., New Hope, Pennsylvania.
(e) The Company shall, at the request of any registered holder of an
Exercise Share, exchange the certificate representing such security for a
certificate representing the same security
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not bearing the restrictive legend required by Subparagraph 7(d) if the Exercise
Shares may be sold or transferred pursuant to the provisions of Rule 144(k) and,
in the reasonable opinion of counsel to the Company, such restrictive legend is
no longer necessary.
(f) The Holder agrees to indemnify and hold harmless the Company against
any loss, damage, claim or liability arising solely from the disposition of this
Warrant or any Exercise Share held by such Holder or any interest therein in
violation of the provisions of this Subparagraph 7(b).
(g) The Holder of this Warrant is entitled to the benefit of such
registration rights in respect of the Shares of Common Stock issuable to such
Holder upon exercise of the Warrants as are set forth in the Warrantholder and
Stockholders Agreement, dated as of February 22, 1997, among the Company,
Tel-Save, Inc., a Pennsylvania corporation and wholly owned subsidiary of the
Company and the Holder.
8. Company Representations and Warranties. Company hereby represents and
warrants to AOL as follows:
(a) Due Organization: Good Standing. Company (i) is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware; and (ii) has the corporate power and authority to own its properties
and assets and to carry on its business as now conducted.
(b) Authorization. The execution, delivery and performance by Company of
this Warrant are within its corporate powers and have been duly authorized by
all necessary corporate action.
(c) No Conflict. The execution, delivery and performance by Company of this
Warrant do not contravene any provision of its charter or by-laws, and do not
conflict with, result in a breach of, or constitute a default under, any
agreement, instrument, covenant or other restriction to which the Company is a
party or by which it or any of its assets is bound.
(d) Enforceability. This Warrant is the legal, valid and binding obligation
of Company, enforceable against Company in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization, or other laws affecting creditors' rights generally
or by the availability of equitable remedies.
(e) Capitalization. As of February 13, 1997, the authorized equity
capitalization of Company consists of 100,000,000 shares of Common Stock, par
value $.01 per share, of which 62,887,998 shares were issued and outstanding,
10,503,800 shares were reserved for issuance upon the exercise of outstanding
options or warrants and no shares were held in treasury and 5,000,000 shares of
undesignated Preferred Stock, par value $.01 per share, of which no shares were
issued and outstanding. The Company agrees that, prior to the expiration of this
Warrant, the Company will at all times have authorized and in reserve, and will
keep available, solely for issuance or delivery upon the exercise of this
Warrant, the shares of the Common Stock and other securities and properties as
from time to time shall be receivable upon the exercise of this Warrant, the
shares of the Common Stock and other securities and properties as from time to
time shall be receivable upon the exercise of this Warrant. Upon issuance of the
shares of
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Common Stock upon exercise of this Warrant, such shares will have been duly
authorized and validly issued and will be fully paid and nonassessable shares of
Common Stock of the Company, and not subject to preemptive rights or rights of
first refusal.
(f) Commission Filings. Company has made available to AOL copies of
Company's (i) Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as amended, and (ii) filings by Company under the Securities Act and other
filings by Company under the Exchange Act, in each case since January 1, 1998
and as filed with the SEC. Company has filed all reports, registration
statements and other documents (the "SEC Reports") required to be filed under
the Exchange Act and the rules and regulations thereunder, the SEC Reports
complied, in all material respects, with the requirements of the Exchange Act,
such compliance to be determined, to the extent applicable, in accordance with
the standards applied to the reports in the following two sentences. As of their
respective dates, the SEC Reports did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
9. Notices. All notices or other communications under this Warrant shall be in
writing and shall be deemed to have been given if delivered by hand or mailed by
certified mail, postage prepaid, return receipt requested, or delivered by
facsimile transmission (which shall be followed by delivery of an original
copy), addressed as follows:
If to the Company:
Tel-Save Holdings, Inc.
6805 Route 202
New Hope, PA 18938
Facsimile No. 215-862-1083
with a copy to:
Aloysius T. Lawn, IV, Esquire
General Counsel and Secretary
Tel-Save Holdings, Inc.
6805 Route 202
New Hope, PA 18938
Facsimile No. 215-862-1085
and to the Holder:
American Online, Inc.
22000 AOL Way
Dulles, VA 20166
Attn: General Counsel
with a copy to: Head of Business Affairs
Facsimile No. 703-265-2208
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Either of the Company or the Holder may from time to time change the address or
facsimile number to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Paragraph 9.
10. Supplements and Amendments. Except as otherwise provided herein, this
Warrant and any term hereof may be changed, waived, discharged or terminated
only by an instrument in writing signed by the party against which enforcement
of such change, waiver, discharge or termination is sought.
11. Severability. If for any reason any provision, paragraph or term of this
Warrant is held to be invalid or unenforceable, all other valid provisions
herein shall remain in full force and effect and all terms, provisions and
paragraphs of this Warrant shall be deemed to be severable.
12. Governing Law. This Warrant shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of said State.
13. Entire Agreement. This Warrant consists of all the terms and conditions
contained herein and all documents incorporated herein specifically by reference
and constitutes the complete and exclusive statement of the understandings
between the parties and supersedes all proposals and prior agreements (oral or
written) between the parties relating to the rights and obligations provided
hereunder.
14. Headings: Construction. Paragraph and Subparagraph headings used herein are
included herein for conveniences of reference only and shall not affect the
construction of this Warrant nor constitute a part of this Warrant for any other
purpose. The words "herein," "hereof," "hereby," "hereto," "hereunder" and words
of similar import refer to this Warrant as a whole and not to any particular
article, section, paragraph, subparagraph or other subdivision of this Warrant.
Defined terms shall include the plural and the singular as the context shall
require.
15. Consent and Acknowledgment of Holder. The terms and conditions of this
Warrant are agreed and consented to by the Holder, as evidenced by Holder's
signature on the line provided below. This Warrant shall bind and be enforceable
by and against the Holder and such Holder's successors, heirs, estates,
representatives and assigns and the Company and its successors and assigns.
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IN WITNESS WHEREOF, the Company and the Holder have caused these presents
to be duly executed as of the day and year written above.
TEL-SAVE HOLDINGS, INC.
By:/s/ Daniel Borislow
-------------------
Name: Daniel Borislow
Title: Chairman & CEO
Accepted by:
AMERICA ONLINE, INC.
By:/s/ David M. Colburn
-------------------------
Name: David M. Colburn
Title: Senior Vice President
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APPENDIX A
NOTICE OF WARRANT EXERCISE
Pursuant to the attached Warrant ("Warrant"), by and between the
undersigned and Tel-Save Holdings, Inc., a Delaware corporation (the "Company"),
dated as of May [ ], 1998, the undersigned hereby irrevocably elects to exercise
the Warrant with respect to ___________________ Warrant Shares (as such term is
defined in the Warrant) as provided for therein. [The undersigned hereby also
elects that the exercise shall be a "net issuance exercise" as provided in
Section 1(a)(D) of the Warrant.]
The undersigned requests that a certificate for the Exercise Shares
issuable in accordance with the terms of the Warrant upon the exercise as
requested above be issued in the name of:
- --------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name, address and social security number)
Dated:
-------------------------------------------------------------
-------------------------------------------------------------
Address:
-------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
Signature:
-------------------------------------------------------------
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Appendix B-2
THIS WARRANT AND ANY SECURITIES ACQUIRED UPON THE EXERCISE OF THIS
WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES LAWS AND
MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS TEL-SAVE HOLDINGS, INC. RECEIVES AN OPINION OF
COUNSEL REASONABLY ACCEPTABLE TO IT THAT SUCH SALE, TRANSFER OR
ASSIGNMENT IS EXEMPT FROM ANY REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES
LAWS. THIS WARRANT AND ANY SECURITIES ACQUIRED UPON EXERCISE OF THE
WARRANT ARE SUBJECT TO THE TERMS AND CONDITIONS OF THE WARRANTHOLDER
AND STOCKHOLDERS AGREEMENT AND THE VOTING TRUST AGREEMENT, EACH DATED
AS OF FEBRUARY 22, 1997.
NONTRANSFERABLE WARRANT TO PURCHASE
COMMON STOCK OF
TEL-SAVE HOLDINGS, INC.
Date of Grant: As of February 22, 1997 (as amended and restated as of May
14,1998).
Void after 5:00 PM. Eastern Standard Time on February 22, 2002
No. W-AOL-4
FOR VALUE RECEIVED, Tel-Save Holdings, Inc., a Delaware corporation
(together with its successors and assigns, the "Company") hereby certifies and
agrees that America Online, Inc., a Delaware corporation ("AOL" and, in its
capacity as the holder of this Warrant ("this Warrant"), together with its
permitted successors and assigns, the "Holder"), with its principal address at
22000 AOL Way, Dulles, Virginia 20166-9323, is entitled, subject to the terms,
conditions and adjustments hereof, to receive, in one or more exercises of this
Warrant, from time to time, from the Company such number of shares of Common
Stock, par value $.01 per share, of the Company (the "Common Stock") as is
determined under Paragraph 1 hereof, during the period commencing at 9:00 AM,
Eastern Standard Time on the date hereof (the "Commencement Date") and ending at
5:00 PM. Eastern Standard Time on the fifth anniversary of the date hereof (such
time on such date, the "Termination Date") and at such respective times and for
such numbers of Warrant Shares (as defined below) as are set forth in Paragraph
1 at an exercise price per share (the "Exercise Price") of U.S. $14.00. The
number of shares of Common Stock issuable upon exercise of this Warrant, the
number of shares vested and the exercise price per share shall be subject to
further adjustment from time to time upon the occurrence of certain events as
set forth below. This Warrant is one of the "Warrants" referenced in, and issued
in conjunction with, the Telecommunications Marketing Agreement, dated as of
February 22, 1997,
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as subsequently amended as of January 25, 1998 and as of May 14, 1998 (as so
amended, the "Marketing Agreement"), among the Company, Tel-Save, Inc., a
Pennsylvania corporation and wholly owned subsidiary of the Company ("TS"), and
AOL.
The shares of Common Stock or any other shares or other units of stock
or other securities or property or any combination thereof receivable upon
exercise of this Warrant, as adjusted from time to time, are sometimes referred
to herein as the "Exercise Shares."
Anything else herein to the contrary notwithstanding, if the "Effective
Date" (as such term is defined in the Marketing Agreement) shall not have
occurred by March 6, 1997, this Warrant automatically shall expire and shall be
of no further force or effect.
1. Exercise of Warrant; Issuance of Exercise Shares.
(a) Exercise of Warrant. This Warrant may be exercised as to the then
remaining Warrant Shares that have vested as provided herein by the Holder in
whole at any time or in part from time to time on or after the Commencement Date
and until and including the Termination Date as provided below. For purposes of
this Warrant, "Warrant Shares" shall mean at any time such number of shares of
Common Stock as shall have vested as of such time as follows:
(i) such number of shares of Common Stock as shall equal the product
of the Vesting Multiplier (as defined below) times the number (the "First
Quarter Number") of (x) End Users (as such term is defined in the Marketing
Agreement) for whom TS is providing Services, and (y) End Users as such
term is defined in a certain Telecommunications Marketing Agreement, dated
as of February 6, 1997, as amended, among the Company, TS, and CompuServe
Interactive Services, Inc., a Delaware corporation) as of December 31, 1997
(the "First Vesting Date"), shall vest and shall be Warrant Shares
hereunder as of such First Vesting Date;
(ii) such number of additional shares of Common Stock as shall equal
the product of the Vesting Multiplier times the amount by which (x) the
number of End Users (each, a "Subsequent Quarter Number") for whom TS is
providing Services as of the last day of each full calendar quarter (each,
a "Subsequent Vesting Date") after the First Vesting Date and on or before
the earlier of (x) the last day of the Term (as defined in the Marketing
Agreement) or any Extension Period (as defined in the Marketing Agreement)
and (y) the last day of the full calendar quarter in which the Marketing
Agreement is terminated prior to the end of such Term or Extension Period,
exceeds (y) the greater of the First Quarter Number and any prior
Subsequent Quarter Number, shall vest and shall be Warrant Shares hereunder
as of such Subsequent Vesting Date; and
(iii) notwithstanding the foregoing, all shares of Common Stock shall
vest and shall be Warrant Shares as of and upon a "Change of Control", as
defined below;
provided that, in no event will the aggregate number of Warrant Shares
exceed 7,000,000, subject to further adjustment as provided in Paragraph 6
hereof and to successive reduction upon any exercise of this Warrant as
provided below in this clause (a). For purposes hereof, the "Vesting
Multiplier" shall be two (2), provided that, from
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and after the "Multiplier Adjustment Date" (as defined in the Marketing
Agreement), the Vesting Multiplier as in effect as of such Date shall be
doubled for purposes of subsequent vestings. "Change of Control" shall be
deemed to have occurred upon the happening of any of the following events:
a. During any period of twelve consecutive months,
individuals who at the beginning of such period constituted
the Board of Directors of the Company (together with any new
or replacement directors whose election by the Board of
Directors or whose nomination for election by the Company's
stockholders was approved by a vote of at least 66-2/3% of the
directors then still in office who were either directors at
the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason
to constitute a majority of the directors then in office;
b. At any time during any period of twelve
consecutive months, any "person" or "group" (each as defined
in Section 13(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), who or which was not an
"Affiliate" (as defined in the Exchange Act) of the Company at
the beginning of such period, becomes the "beneficial owner"
(as defined in Rules 13d-3 and 13d-5 under the Exchange Act)
of shares representing more than 50% of the combined voting
power of the then-outstanding securities entitled to vote in
the election of directors of the Company; or
c. Any merger or consolidation of the Company with or
into another corporation, or any merger of any other person
into the Company unless the holders of shares of the Company
immediately prior to such transaction are the owners, directly
or indirectly, immediately following such transaction, of at
least a majority of the total voting power of the corporation
resulting from such transaction, or any sale of all or
substantially all of the assets of the Company or Tel-Save,
Inc. to any person (other than to one or more wholly owned
subsidiaries of the Company);
provided that "Change of Control" shall in any event include any transaction
respecting TS that is referred to in Section X.C.1.(c) of the Marketing
Agreement.
Following the Termination Date, in the absence of the exercise hereof, the
Holder shall have no rights herein to acquire any Exercise Shares and this
Warrant shall lapse as to such rights. This Warrant may be exercised on any
business day by delivering to the Company at its principal office, presently
located at the address of the Company set forth in Paragraph 9 hereof (or such
other office of the Company as shall theretofore have been designated by the
Company by written notice to the Holder), together with: (1) a completed and
executed irrevocable Notice of Warrant Exercise in the form set forth in
Appendix A hereto and made a part hereof, specifying therein the number of
Warrant Shares (which shall not exceed the number thereof then remaining as to
which this Warrant is then exercisable and as to which no Notice of Warrant
Exercise has previously been given) with respect to which the Holder is then
exercising its rights hereunder, and (2), subject, as indicated below, to the
consent or election of the Company, within
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two (2) business days after receipt by the Company of such Notice of Warrant,
delivery to the Company of the full Exercise Price as follows:
(A) if the Company shall not have elected that such exercise shall be a
"net issuance exercise" as provided in clause (C) of this Paragraph, payment of
the full Exercise Price therefor, in immediately available funds, in which case
the Company, pursuant to such Notice of Warrant Exercise from Holder, duly
completed, and in accordance with Subparagraph 1(c) hereof, shall, upon receipt
of this Warrant and the original executed copy of such Notice of Warrant
Exercise and payment of such Exercise Price, issue, and deliver a certificate
evidencing, such number of Exercise Shares as to which this Warrant shall have
been exercised;
(B) if the Company shall not have elected that such exercise shall be a
"net issuance exercise" as provided in clause (C) of this Paragraph,
arrangements with a brokerage firm under which such brokerage firm, on behalf of
the Holder, shall pay the Company the Exercise Price, and the Company pursuant
to an irrevocable notice from the Holder (the form of which is satisfactory to
the Company), shall, upon receipt of this Warrant, such irrevocable notice and
payment of such Exercise Price, promptly deliver the Exercise Shares being
purchased to such firm; and
(C) if the Company shall, upon receipt of a Notice of Warrant Exercise from
the Holder as to Warrant Shares, and in its sole discretion, so elect, the
Company may deliver a certificate evidencing such number of Exercise Shares as
shall equal the quotient of (x) the product of (1) the difference between the
Current Market Price (as defined in Subparagraph 6(e) hereof) on the date of
delivery of such Notice of Warrant Exercise and the then Exercise Price,
multiplied by (2) the number of Warrant Shares specified in such Notice of
Warrant Exercise as to which this Warrant is to be exercised, divided by (y) the
Current Market Price on the date of delivery of such Notice of Warrant Exercise
(a "net issuance exercise"), in which event no payment in cash of the Exercise
Price in respect of the Warrant Shares as to which such "net issuance exercise"
applies need be made.
(D) Notwithstanding the foregoing subparagraphs (A), (B) and (C), in the
event of a Change of Control (as defined above), the Holder, and not the
Company, may elect in its Notice of Warrant Exercise that the exercise shall be
a "net issuance exercise", in which event the Company shall deliver a
certificate evidencing such number of Exercise Shares as shall equal the
quotient of (x) the product of (1) the difference between the Current Market
Price (as defined in Subparagraph 6(e)) on the date of delivery of such Notice
of Warrant Exercise and the then Exercise Price, multiplied by (2) the number of
Warrant Shares specified in such Notice of Warrant Exercise as to which this
Warrant is to be exercised, divided by (y) the Current Market Price on the date
of delivery of such Notice of Warrant Exercise, in which event no payment in
cash of the Exercise Price in respect of the Warrant Shares as to which such
"net issuance exercise" applies need be made.
Upon such exercise pursuant to a Notice of Warrant Exercise and issuance of
such Exercise Shares, the number of Warrant Shares automatically shall be
reduced by the number of Warrant Shares as to which this Warrant is to be
exercised specified in such Notice of Warrant Exercise.
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In the event that this Warrant shall be duly exercised in part prior to the
Termination Date, the Company shall issue a new Warrant of like tenor evidencing
the rights of the Holder thereof with respect to the balance of the Warrant
Shares under the Warrant so surrendered.
No adjustments shall be made for any cash dividends on Exercise Shares
issuable upon exercise of this Warrant.
(b) Issuance of Exercise Shares; Delivery of Warrant Certificates. The
Company shall, as soon as practicable and in any event within three (3) business
days after the exercise of this Warrant, issue in the name of the Holder (or
such other person or persons, if any, as specifically permitted under the terms
hereof and as the Holder shall have designated in the Notice of Warrant
Exercise) one or more certificates representing the Exercise Shares to which the
Holder (or such other person or persons) shall be entitled upon such exercise
under the terms hereof. Such certificate or certificates shall be deemed to have
been issued and the Holder (or such other person or persons so permitted and
designated) shall be deemed to have become the record holder of the Exercise
Shares as of the date of the due exercise of this Warrant (including payment of
the Exercise Price therefor).
(c) Exercise Shares Fully Paid and Non-assessable. The Company agrees and
covenants that all Exercise Shares issued or delivered upon the due exercise
(including payment of the Exercise Price therefor) of this Warrant will, upon
issuance in accordance with the terms hereof, be duly authorized, validly
issued, fully paid and non-assessable and free and clear of all taxes (other
than those taxes that, pursuant to Paragraph 2 hereof, the Company shall not be
obligated to pay), liens, charges and security interests created by or in favor
of the Company with respect to the issuance thereof (other than the limitations
on such Exercise Shares imposed by applicable securities laws and limitations
expressly included in this Warrant).
(d) Fractional Shares. The Company shall not be required to issue
fractional shares of capital stock upon the exercise of this Warrant or to
deliver certificates that evidence fractional shares of capital stock. In the
event that any fraction of an Exercise Share would, except for the provisions of
this Subparagraph (d), be issuable upon the exercise of this Warrant, the
Company shall pay to the Holder exercising the Warrant an amount in cash equal
to such fraction multiplied by the Current Market Price of the Exercise Share.
2. Payment of Taxes. The Company will pay all documentary stamp taxes and
original issue or similar taxes, if any, attributable to the issuance of
Exercise Shares upon the exercise of this Warrant; provided, however, that the
Company shall not be required to pay any tax or taxes that may be payable in
respect of any transfer of this Warrant or any transfer involved in the issue of
any Warrant Certificates or any certificates for Exercise Shares in a name other
than that of the Holder of this Warrant, and the Company shall not be required
to issue or deliver such certificates unless or until the person or persons
requesting the issuance thereof shall have paid to the Company the amount of
such tax required to be withheld or shall have established to the reasonable
satisfaction of the Company that such tax has been paid.
3. Mutilated or Missing Warrant. In case this Warrant shall be mutilated,
lost, stolen or destroyed, the Company may in its discretion issue, in exchange
and substitution for and upon cancellation of, this Warrant, if mutilated, or in
lieu of and in substitution for this Warrant if lost,
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stolen or destroyed, a new Warrant of like tenor and in the same aggregate
denomination (but reflecting the number of Warrant Shares as to which this
Warrant was then exercisable), but only (i) in the case of loss, theft or
destruction, upon receipt of evidence reasonably satisfactory to the Company of
such loss, theft or destruction of this Warrant and, in the case of AOL as the
Holder, AOL's indemnity, and, in the case of any other Person as the holder,
indemnity or bond, if requested, in each case also reasonably satisfactory to
the Company, and (ii) in the case of mutilation, upon surrender of this Warrant.
The applicant for such substitute Warrant shall also comply with such other
reasonable regulations and pay such other reasonable charges as the Company or
its counsel may prescribe.
4. Rights of Holder. The Holder shall not, by virtue of anything contained in
this Warrant or otherwise, be entitled to any right whatsoever, either in law or
equity, of a stockholder of the Company, including, without limitation, the
right to receive dividends or to vote or to consent or to receive notice as a
shareholder in respect of the meetings of shareholders or the election of
directors of the Company or any other matter.
5. Notices of Corporate Action. In the event of a proposal by the Company (or
of which the Company shall have knowledge) for: (a) any taking by the Company of
a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a regular periodic dividend payable in cash) or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares of stock of any
class or any other securities or property, or to receive any other right, or
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, any statutory exchange,
consolidation or merger involving the Company and any other Person or any
transfer of all or substantially all the assets of the Company to any other
Person, or
(c) any voluntary or involuntary dissolution, liquidation or winding-up of
the Company,
the Company will deliver to the Holder a notice specifying (i) the date or
expected date on which any such record is to be taken for the purpose of such
dividend, distribution or right, and the amount and character of such dividend,
distribution or right, or (ii) the date or expected date on which any such
reorganization, reclassification, recapitalization, statutory exchange,
consolidation, merger, transfer, dissolution, liquidation or winding-up is to
take place and the time, if any such time is to be fixed, as of which the
holders of record of Common Stock shall be entitled to exchange their shares of
Common Stock for the securities or other property deliverable upon such
reorganization, reclassification, recapitalization, statutory exchange,
consolidation, merger, transfer, dissolution, liquidation or winding-up. Such
notice shall with respect to Subparagraphs (a) and (b) hereof, be furnished at
least 20 days prior to the date therein specified and, with respect to
Subparagraph (c) hereof, be furnished promptly upon the commencement of any
event described therein.
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6. Adjustment of Exercise Price, Warrant Shares and Exercise Shares. The
Exercise Price, the number of Warrant Shares, the Vesting Multiplier and the
kind of Exercise Shares issuable upon the exercise of this Warrant shall be
subject to adjustment from time to time upon the happening of certain events
after the date hereof as hereinafter provided. The Exercise Price in effect at
any time, the number of Warrant Shares and the kind of securities issuable upon
exercise of this Warrant shall be subject to adjustment as follows:
(a) If the Company shall after the date hereof (i) pay a dividend or make a
distribution on its shares of Common Stock in shares of Common Stock, (ii)
subdivide or classify its outstanding Common Stock into a greater number of
shares, or (iii) combine or reclassify its outstanding Common Stock into a
smaller number of shares, the Exercise Price in effect at the time of the record
date for such dividend or distribution or of the effective date of such
subdivision, combination or reclassification shall be proportionally adjusted so
that the Holder of this Warrant exercised after such date shall be entitled to
receive the aggregate number and kind of shares that, if this Warrant had been
exercised by such Holder immediately prior to such date, such Holder would have
owned upon such exercise and been entitled to receive upon such dividend,
subdivision, combination or reclassification. For example, if the Company
declares a 2-for-1 stock dividend or stock split and the Exercise Price
immediately prior to such event was $5.00 per share, the adjusted Exercise Price
immediately after such event would be $2.50 per share. Such adjustment shall be
made successively whenever any event listed above shall occur.
(b) In case the Company shall after the date hereof issue rights or
warrants to all holders of its Common Stock entitling them to subscribe for or
purchase shares of Common Stock (or securities convertible into Common Stock) at
a price (or having a conversion price per share) less than the Current Market
Price of the Common Stock (as defined in Subparagraph (e) of this Paragraph
below) on the record date mentioned below, the Exercise Price shall be adjusted
so that the same shall equal the price determined by multiplying the Exercise
Price in effect immediately prior to the date of such issuance by a fraction,
the numerator of which shall be the sum of the number of shares of Common Stock
outstanding on the record date mentioned below and the number of additional
shares of Common Stock that the aggregate offering price of the total number of
shares of Common Stock so offered (or the aggregate conversion price of the
convertible securities so offered) would purchase at the Current Market Price
per share of the Common Stock, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding on such record date and the
number of additional shares of Common Stock offered for subscription or
purchases (or into which the convertible securities so offered are convertible).
Such adjustment shall be made successively whenever such rights or warrants are
issued and shall become effective immediately after the record date for the
determination of shareholders entitled to receive such rights or warrants; and,
to the extent that shares of Common Stock are not delivered (or securities
convertible into Common Stock are not delivered) after the expiration of such
rights or warrants, the Exercise Price for Warrant Shares as to which no
exercise has been made shall be readjusted to the Exercise Price that would then
be in effect had the adjustment made upon the issuance of such rights or
warrants been made upon the basis of delivery of only the number of shares of
Common Stock (or securities convertible into Common Stock) actually delivered.
(c) If, after the date hereof, there shall be any reclassification, capital
reorganization or change of the Common Stock (other than as a result of a
subdivision, combination or stock
41
<PAGE>
dividend provided for in Subparagraph (a) and (b) above), or any consolidation
of the Company with, or merger of the Company into, another corporation or other
business organization (other than a consolidation or merger in which the Company
is the continuing corporation and that does not result in any reclassification
or change of the outstanding Common Stock), or any sale or conveyance to another
corporation or other business organization of all or substantially all of the
assets of the Company (referred to in this Subparagraph (c) as a
"Reclassification"), then, as a condition of such Reclassification, lawful
provisions shall be made, and duly executed documents evidencing the same from
the Company or its successor shall be delivered to the Holder, so that the
Holder shall thereafter have the right to purchase, at a total price not to
exceed that payable upon the exercise of this Warrant in full, the kind and
amount of shares of stock and other securities and property receivable upon such
Reclassification by a holder of the number of shares of Common Stock that might
have been purchased by the Holder immediately prior to such Reclassification,
and in any such case appropriate provisions shall be made with respect to the
rights and interest of the Holder to the end that the provisions hereof
(including, without limitation, provisions for the adjustment of the Exercise
Price and the number of shares issuable hereunder) shall thereafter be
applicable in relation to any shares of stock or other securities and property
thereafter deliverable upon exercise hereof.
(d) Whenever the Exercise Price payable upon exercise of this Warrant is
adjusted pursuant to Subparagraphs (a), (b) and (c) above, the number of Warrant
Shares that have vested as of such time, the maximum number of Warrant Shares
that may then be issuable pursuant to this Warrant and the then Vesting
Multiplier applicable to the calculation of the number of shares of Common Stock
that will vest after the date of such adjustment shall each simultaneously be
adjusted by multiplying (x) each such number and the Vesting Multiplier by (y) a
fraction, the numerator of which is the Exercise Price in effect just prior to
such adjustment and the denominator of which is the Exercise Price, as adjusted.
(e) For the purpose of any computation in this Warrant, the Current Market
Price per share of Common Stock at any date shall be deemed to be the average of
the daily closing prices for 10 consecutive business days before such date. The
closing price for each day shall be the last sale price regular way or, in case
no such reported sale takes place on such day, the average of the last reported
bid and lowest reported asked prices as reported by NASDAQ, or other similar
organizations if NASDAQ is no longer reporting such information, or if not so
available, the fair market price as determined in good faith by the Board of
Directors.
(f) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least ten cents ($0.10)
in such price; provided, however, that any adjustments that by reason of this
Subparagraph (f) are not required to be made shall be carried forward and taken
into account in any subsequent adjustment required to be made hereunder. All
calculations under this Paragraph 6 shall be made to the nearest cent or to the
nearest one-hundredth of a share, as the case may be. Anything in this Paragraph
6 to the contrary notwithstanding, the Company shall be entitled, but shall not
be required, to make such additional reductions in the Exercise Price, in
addition to those required by this Paragraph 6, as it, in its sole discretion,
shall determine to be advisable in order that any dividend or distribution in
shares of Common Stock, subdivision, reclassification or combination of Common
Stock, issuance of warrants to purchase Common Stock or distribution of
evidences of indebtedness or other assets (excluding cash dividends) referred to
hereinabove in this Paragraph 6 hereafter
42
<PAGE>
made by the Company to the Holders of its Common Stock shall not result in any
tax to the Holders of its Common Stock or securities convertible into Common
Stock.
(g) Whenever the Exercise Price is adjusted as herein provided, the Company
shall promptly cause a notice, setting forth the adjusted Exercise Price and
adjusted number of Warrant Shares as to which a Notice of Warrant Exercise may
be given under this Warrant, to be mailed to the Holders, at their last
addresses appearing in the books of the Company, and shall cause a certified
copy thereof to be mailed to its transfer agent, if any. The Company may retain
a firm of independent certified public accountants selected by the Board of
Directors (who may be the regular accountants employed by the Company) to make
any computation required by this Paragraph 6, and a certificate signed by such
firm shall be conclusive evidence of the correctness of such adjustment.
(h) In the event that at any time, as a result of an adjustment made
pursuant to Subparagraph 6(a) above, the Holder of this Warrant thereafter shall
become entitled to receive any Exercise Shares of the Company, other than Common
Stock, thereafter the number of such other shares so receivable upon exercise of
this Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Subparagraphs (a) to (e), inclusive, of Paragraph 6
above.
(i) Irrespective of any adjustments in the Exercise Price, the number of
Warrant Shares or kind of Exercise Shares purchasable upon exercise of this
Warrant, Warrants theretofore or thereafter issued in exchange or substitution
for this Warrant or any part thereof may continue to express the same price and
number and kind of shares as are stated in this Warrant.
(j) Whenever the Exercise Price shall be adjusted as required by the
provisions hereof, the Company shall forthwith file in the custody of its
Secretary or an Assistant Secretary at its principal office and with its stock
transfer agent, if any, an officer's certificate showing the adjusted Exercise
Price determined as herein provided and, in the case of an Exercise Price
adjustment, setting forth in reasonable detail the facts requiring such
adjustment, including a statement of the number of additional shares of Common
Stock, if any, and such other facts as shall be necessary to show the reason for
and the manner of computing such adjustment. Each such officer's certificate
shall be made available at all reasonable times for inspection by the Holder and
the Company shall, forthwith after each such adjustment, mail a copy by
certified mail or such certificate to the Holder.
7. Restrictions on Transferability; Restrictive Legends; Indemnification
(a) Neither this Warrant nor the right to exercise this Warrant or to
receive Exercise Shares upon any such exercise may be sold, assigned or
transferred by the Holder, except that this Warrant and such rights may be
transferred, upon compliance with the other Subparagraphs of this Paragraph 7,
by AOL, as the Holder, to (i) any successor to AOL by reason of a merger,
consolidation or statutory exchange of AOL or any successor to all or
substantially all of AOL's assets if such successor assumes in writing this
Warrant and all of AOL's liabilities and obligations under the Marketing
Agreement (ii) to any subsidiary or affiliate of AOL; provided
43
<PAGE>
that AOL owns voting stock of such subsidiary or affiliate entitling AOL to at
least 80% of the voting powers thereof at the election of directors. Any sale,
assignment or transfer of this Warrant in violation of this Paragraph 7 is null
and void as of the time of such transfer.
(b) No Exercise Share may be offered for sale or sold, or otherwise
transferred or sold in any transaction that would constitute a sale thereof
within the meaning of the Securities Act, unless (i) such security has been
registered for sale under the Securities Act and registered or qualified under
applicable state securities laws relating to the offer and sale of securities,
or (ii) an exemption from the registration requirements of the Securities Act
and the registration or qualifications requirements of all such state securities
laws are available and the Company shall have received an opinion of counsel
(which may be an opinion that covers multiple or all subsequent sales)
satisfactory to the Company that the proposed sale or other disposition of such
securities may be effected without registration under the Securities Act, such
counsel and such opinion to be reasonably satisfactory to the Company.
(c) Except as otherwise permitted by this Paragraph 7, this Warrant and any
Warrant issued upon direct or indirect transfer of or in substitution for this
Warrant or any part thereof shall be stamped or otherwise imprinted with a
legend substantially in the form of the legend with respect to transfer
limitation and securities acts at the head of this Warrant.
(d) Except as otherwise permitted by this Paragraph 7, each certificate for
an Exercise Share issued upon exercise of this Warrant or any Warrant issued
upon direct or indirect transfer of or in substitution for this Warrant or any
part thereof shall be stamped or otherwise imprinted with a legend in
substantially the following form:
The shares represented by this certificate are subject to
restrictions imposed by the federal Securities Act of 1933, as
amended, and applicable state securities laws. The shares may not be
sold or transferred in the absence of registration or an exemption
therefrom under such Securities Act of 1933 and such applicable state
securities laws. All shares represented by this certificate are
subject to the terms and conditions of a Warrantholder and
Stockholders Agreement, dated as of February 22, 1997, and a Voting
Trust Agreement, dated as of the same date, both of which may be
examined at the offices of Tel-Save Holdings, Inc., New Hope,
Pennsylvania.
(e) The Company shall, at the request of any registered holder of an
Exercise Share, exchange the certificate representing such security for a
certificate representing the same security not bearing the restrictive legend
required by Subparagraph 7(d) if the Exercise Shares may be sold or transferred
pursuant to the provisions of Rule 144(k) and, in the reasonable opinion of
counsel to the Company, such restrictive legend is no longer necessary.
(f) The Holder agrees to indemnify and hold harmless the Company against
any loss, damage, claim or liability arising solely from the disposition of this
Warrant or any Exercise Share held by such Holder or any interest therein in
violation of the provisions of this paragraph 7.
44
<PAGE>
(g) The Holder of this Warrant is entitled to the benefit of such
registration rights in respect of the Shares of Common Stock issuable to such
Holder upon exercise of the Warrants as are set forth in the Warrantholder and
Stockholders Agreement, dated as of February 22, 1997, among the Company,
Tel-Save, Inc., a Pennsylvania corporation and wholly owned subsidiary of the
Company and the Holder.
8. Company Representations and Warranties. Company hereby represents and
warrants to AOL as follows:
(a) Due Organization: Good Standing. Company (i) is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware; and (ii) has the corporate power and authority to own its properties
and assets and to carry on its business as now conducted.
(b) Authorization. The execution, delivery and performance by Company of
this Warrant are within its corporate powers and have been duly authorized by
all necessary corporate action.
(c) No Conflict. The execution, delivery and performance by Company of this
Warrant do not contravene any provision of its charter or by-laws, and do not
conflict with, result in a breach of, or constitute a default under, any
agreement, instrument, covenant or other restriction to which the Company is a
party or by which it or any of its assets is bound.
(d) Enforceability. This Warrant is the legal, valid and binding obligation
of Company, enforceable against Company in accordance with its terms, except as
such enforceability may be limited by applicable bankruptcy, insolvency,
moratorium, reorganization, or other laws affecting creditors' rights generally
or by the availability of equitable remedies.
(e) Capitalization. As of February 13, 1997, the authorized equity
capitalization of Company consists of 100,000,000 shares of Common Stock, par
value $.01 per share, of which 62,887,998 shares were issued and outstanding,
10,503,800 shares were reserved for issuance upon the exercise of outstanding
options or warrants and no shares were held in treasury and 5,000,000 shares of
undesignated Preferred Stock, par value $.01 per share, of which no shares were
issued and outstanding. The Company agrees that, prior to the expiration of this
Warrant, the Company will at all times have authorized and in reserve, and will
keep available, solely for issuance or delivery upon the exercise of this
Warrant, the shares of the Common Stock and other securities and properties as
from time to time shall be receivable upon the exercise of this Warrant, the
shares of the Common Stock and other securities and properties as from time to
time shall be receivable upon the exercise of this Warrant. Upon issuance of the
shares of Common Stock upon exercise of this Warrant, such shares will have been
duly authorized and validly issued and will be fully paid and nonassessable
shares of Common Stock of the Company, and not subject to preemptive rights or
rights of first refusal.
(f) Commission Filings. Company has made available to AOL copies of
Company's (i) Annual Report on Form 10-K for the fiscal year ended December 31,
1997, as amended, and (ii) filings by Company under the Securities Act and other
filings by Company under the Exchange Act, in each case since January 1, 1998
and as filed with the SEC. Company has filed
45
<PAGE>
all reports, registration statements and other documents (the "SEC Reports")
required to be filed under the Exchange Act and the rules and regulations
thereunder, the SEC Reports complied, in all material respects, with the
requirements of the Exchange Act, such compliance to be determined, to the
extent applicable, in accordance with the standards applied to the reports in
the following two sentences. As of their respective dates, the SEC Reports did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
Notices. All notices or other communications under this Warrant shall be in
writing and shall be deemed to have been given if delivered by hand or mailed by
certified mail, postage prepaid, return receipt requested, or delivered by
facsimile transmission (which shall be followed by delivery of an original
copy), addressed as follows:
If to the Company:
Tel-Save Holdings, Inc.
6805 Route 202
New Hope, PA 18938
Facsimile No. 215-862-1083
with a copy to:
Aloysius T. Lawn, IV, Esquire
General Counsel and Secretary
Tel-Save Holdings, Inc.
6805 Route 202
New Hope, PA 18938
Facsimile No. 215-862-1085
and to the Holder:
American Online, Inc.
22000 AOL Way
Dulles, VA 20166
Attn: General Counsel
with a copy to:
Head of Business Affairs
Facsimile No. 703-265-2208
Either of the Company or the Holder may from time to time change the
address or facsimile number to which notices to it are to be mailed hereunder by
notice in accordance with the provisions of this Paragraph 9.
10. Supplements and Amendments. Except as otherwise provided herein, this
Warrant and any term hereof may be changed, waived, discharged or terminated
only by an instrument in
46
<PAGE>
writing signed by the party against which enforcement of such change, waiver,
discharge or termination is sought.
11. Severability. If for any reason any provision, paragraph or term of this
Warrant is held to be invalid or unenforceable, all other valid provisions
herein shall remain in full force and effect and all terms, provisions and
paragraphs of this Warrant shall be deemed to be severable.
12. Governing Law. This Warrant shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of said State.
13. Entire Agreement. This Warrant consists of all the terms and conditions
contained herein and all documents incorporated herein specifically by reference
and constitutes the complete and exclusive statement of the understandings
between the parties and supersedes all proposals and prior agreements (oral or
written) between the parties relating to the rights and obligations provided
hereunder.
14. Headings; Construction. Paragraph and Subparagraph headings used herein are
included herein for conveniences of reference only and shall not affect the
construction of this Warrant nor constitute a part of this Warrant for any other
purpose. The words "herein," "hereof," "hereby," "hereto," "hereunder" and words
of similar import refer to this Warrant as a whole and not to any particular
article, section, paragraph, subparagraph or other subdivision of this Warrant.
Defined terms shall include the plural and the singular as the context shall
require.
15. Consent and Acknowledgment of Holder. The terms and conditions of this
Warrant are agreed and consented to by the Holder, as evidenced by Holder's
signature on the line provided below. This Warrant shall bind and be enforceable
by and against the Holder and such Holder's successors, heirs, estates,
representatives and assigns and the Company and its successors and assigns.
47
<PAGE>
IN WITNESS WHEREOF, the Company and the Holder have caused these presents
to be duly executed as of the day and year written above.
TEL-SAVE HOLDINGS, INC.
By:/s/ Daniel Borislow
-----------------------
Name: Daniel Borislow
Title: Chairman & CEO
Accepted by:
AMERICA ONLINE, INC.
By:/s/ David M. Colburn
----------------------
Name: David M. Colburn
Title: Senior Vice President
48
<PAGE>
APPENDIX A
NOTICE OF WARRANT EXERCISE
Pursuant to the attached Warrant ("Warrant"), by and between the
undersigned and Tel-Save Holdings, Inc., a Delaware corporation (the "Company"),
dated as of February 22, 1997(as amended and restated as of [ ], 1998), the
undersigned hereby irrevocably elects to exercise the Warrant with respect to
___________________ Warrant Shares (as such term is defined in the Warrant) as
provided for therein. [The undersigned hereby also elects that the exercise
shall be a "net issuance exercise" as provided in Section 1(a) of the Warrant.]
The undersigned requests that a certificate for the Exercise Shares
issuable in accordance with the terms of the Warrant upon the exercise as
requested above be issued in the name of:
- ------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name, address and social security number)
Dated:
-------------------------------------------------------------
Address:
-------------------------------------------------------------
-------------------------------------------------------------
-------------------------------------------------------------
Signature:
-------------------------------------------------------------
49
EXHIBIT 11
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------------------------
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net loss $(96,154) $ (5,865) $(137,949) $ (435)
========= ========= ==========
BASIC
Weighted average common shares outstanding - Basic: 64,486 63,898 64,320 63,171
========= ======== ==========
Net loss per share - Basic $ (1.49) $ (.09) $ (2.14) $ (.01)
========= ========== ==========
DILUTED
Weighted average common and common equivalent
shares outstanding - Diluted:
Weighted average shares 64,486 63,898 64,320 63,171
Weighted average equivalent shares -- -- -- --
Weighted average common and common equivalent
shares - Diluted 64,486 63,898 64,320 63,171
======== ======== ==========
Net loss per share - Diluted $ (1.49) $ (.09) $ (2.14) $ (.01)
========= ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE UNAUDITED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998 OF
TEL-SAVE HOLDINGS, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 33,148,000
<SECURITIES> 566,307,000
<RECEIVABLES> 61,950,000
<ALLOWANCES> 4,215,000
<INVENTORY> 0
<CURRENT-ASSETS> 739,384,000
<PP&E> 66,308,000
<DEPRECIATION> 6,043,000
<TOTAL-ASSETS> 873,408,000
<CURRENT-LIABILITIES> 254,557,000
<BONDS> 500,000,000
0
0
<COMMON> 659,000
<OTHER-SE> 84,517,000
<TOTAL-LIABILITY-AND-EQUITY> 873,408,000
<SALES> 0
<TOTAL-REVENUES> 202,244,000
<CGS> 0
<TOTAL-COSTS> 169,638,000
<OTHER-EXPENSES> 126,357,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,037,000
<INCOME-PRETAX> (97,561,000)
<INCOME-TAX> 40,388,000
<INCOME-CONTINUING> (137,949,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (137,949,000)
<EPS-PRIMARY> (2.14)
<EPS-DILUTED> (2.14)
</TABLE>
